UAE emerging onto yellow BRIC road

August 7, 2014 10:27 am

By Philip P. Merrell

Having been upgraded by index provider MSCI to “emerging markets”, the UAE attracts significant foreign investments from its emerging peers, a leading investment firm has revealed.

The report by Fortress Investments found that Brazil, Russia, India and China, or BRIC, are contributing to more capital flow in the UAE, than in the neighbouring Mena region.

Hamed Mokhtar, managing director at Fortress, explained: “the UAE is becoming more important on a global scale, in addition to emerging as an unparalleled investment hotspot. The capital invested in the UAE from the Mena region is more in the form of individual property assets, whereas the UAE’s role in attracting capital flow from BRIC countries is the result of progressive government measures and global partnerships.”

India’s historical and economic links with the UAE are deep-rooted and, therefore, it is little surprise that it holds the lion’s share of the capital flow from the emerging countries.  For instance, throughout the 19th century the emirates, under the control of the British Raj, were administered from India, even adopting the Rupee as its currency. Today, Indians make up almost half of the UAE’s population with several large businesses under Indian ownership, including the Lulu Group and Choithrams.

However, economic ties with Brazil or Russia, for instance, are far less obvious, which begs the question why there is a consolidated effort from the BRIC states in relation to the UAE.

Sure, emerging markets have become prime targets for global investors due to their growth potential, and both Dubai and Abu Dhabi have particularly proven to be successful in attracting capital. However, due to historic political and economic ties, the UAE has, in previous years, overwhelmingly depended on investment and trade with Western countries. For instance, a report by AMEInfo last week showed that low trade levels between the GCC and Russia means that the UAE will hardly feel the effects of Western sanctions on Moscow.

Nonetheless, the current geopolitical implications may still have tremendous implications on the region, and this is where BRICS (with the inclusion of South Africa) come in. Representing over three billion people, or 40 per cent of the world’s population and with a combined GDP of $16 trillion (20 per cent of global GDP) there are signs to suggest that the major emerging powers are ready to challenge the Western-dominated economic system, as we know it.

Namely, in July 2014, BRICS leaders announced in Sao Paulo that they would be pledging up to $100 billion to the New Development Bank, an institution that they hope could soon rival the World Bank and IMF as a source of funds for infrastructural projects and fiscal support across the developing world.

Moreover, while the goal will be to cooperate with other developing states, best illustrated by the rising investments in the UAE, there has also been mention of integrating other emerging powers into the BRICS initiative. Most notably, Argentina, Indonesia and even Turkey have expressed an interest in joining, which begs the question whether a GCC state could also see its economic interests best met within the emerging family in the near future.

Without speculating too far as to what we may expect, it is important to recognise signs that, indeed, major emerging powers are penetrating the local economy, from all angles.

Speaking to AMEInfo, the CEO of the Dubai Gold and Commodities Exchange, Gary Anderson, explained that, having recently introduced the Indian Rupee, the DGCX would expand to offer the Russian Rouble, South African Rand and the Korean Won. “Our aim is to expand access for regional market participants to the world’s emerging currencies, and provide them a chance to hedge their exposure to markets that are increasingly relevant within global business flows. Globally, there is a growing demand for these currencies, and we certainly believe that holds true for GCC based participants,” he said.

Regarding the Chinese Renminbi, which a HSBC survey claimed would be used by 41 per cent of businesses in the UAE in future trade, Anderson agrees that “we are expecting the RMB to become more widely used among UAE businesses in the medium to long term.”

He declined to comment whether he felt emerging powers are seeking a global alternative to the US Dollar.

It may well be a coincidence that, along with the increased investment, four of the five BRICS currencies are about to further penetrate the UAE market. It may also be naive to assume that major economic decisions are a result of coincidence.