Economic Outlook

An Expert's View about Business Environment in the United Arab Emirates

Posted on: 31 Dec 2011

Recent Developments
•Supported by the steadily growing oil price, the UAE1 continues to achieve gradual economic growth in 2011. The IMF expects the UAE’s real GDP to grow at 3.3% in 2011.
•The Dubai government has managed to raise sufficient capital through bond issues in the wake of the debt crisis in 2009, reflecting in part the restored confidence of international investors.
•The UAE is Hong Kong's largest export market in the Middle East. Hong Kong exports to the UAE rose 41% year-on-year (YoY) to US$2.96 billion in the first ten months of 2011.
•The UAE withdrew from the Gulf Monetary Union in May 2009, following Oman in 2006. The other four members of Gulf Cooperation Council (GCC)2, namely, Saudi Arabia, Kuwait, Bahrain and Qatar, however, have abandoned the initial plan of issuing common notes and coins in 2010. Gulf government officials suggest that it will be five years before the currency is issued.

Current Economic Situation

With the oil and gas sector accounting for over 31% of the country’s GDP, higher oil and gas prices as well as the increasing oil production capacity will continue to support the UAE’s economic growth despite the uncertain global economic climate.

In particular, after growing by 1.4% in 2010, the UAE is expected to see real GDP growth of 3.3% in 2011 as per an IMF estimate. On the other hand, the UAE economy is expected by the EIU to grow by 3.8% and 4.6% in 2012 and 2013 respectively.

Of the seven emirates in the UAE, Abu Dhabi and Dubai account for the lion’s share of the country’s GDP. The two emirates are very different in terms of economic development. Abu Dhabi, which owns around 10% of the world’s oil reserves and over 90% of the country’s oil and gas reserves, focuses on energy-based industries. Dubai is known for its commercial and financial services, tourism, logistics and trading. Dubai’s oil and gas sector is relatively insignificant to its economy.

Economic diversification

With an aim to reduce the contribution from the oil-related sectors (for example, Abu Dhabi aims to reduce such contribution from over 50% of its GDP in 2011 to 36% in 2030), the UAE strives to diversify its economy by developing trading, financial and technological industries as well as tourism. To achieve goal, the UAE government has invested a massive amount of capital in infrastructure projects in a bid to make the UAE a tourism, business and financial centre in the region.

The UAE government's diversification effort has achieved some encouraging results. For example, non-oil trade of the UAE has made a remarkable improvement over the recent years. According to the UAE Federal Customs Authority, the UAE's non-oil exports for the first five months of 2011 hit Dh43.4 billion (US$11.8 billion) compared to Dh31 billion (US$8.4 billion) in the prior period, a YoY increase of 40%. Hong Kong was the 10th largest importer for non-oil exports from the UAE in May 2011, as well as its 5th largest re-export destination. In this regard, Dubai, the largest container handler of the region, has played as an important trading and transportation hub. Its container throughput rose from 6.4 million TEUs to 11.6 million TEUs between 2004 and 2010, up over 80%, placing it as the 9th busiest seaport in the world in 2010.

While the UAE is well known of its rapid infrastructure and construction development, a lot of privately-funded projects have been either put on hold or cancelled, particularly those in Dubai, which was deeply hit by the global financial tsunami in late 2008 and 2009. In the face of tighter financial liquidity due to European sovereign debt crisis, the Dubai government has managed to raise sufficient capital through bond issues in the wake of its own debt problems in 2009, reflecting in part the restored confidence of international investors. The Dubai government is now planning to cut its spending by 20-25% in nominal terms by 2013 to strengthen its financial position.

Abu Dhabi’s construction sector is also hampered by the downturn of real estate sector as well as its plan to cut back on infrastructure spending. For instance, Abu Dhabi has recently cancelled the tender for constructing the Guggenheim Abu Dhabi Museum, one of the three museums to be built in the cultural district of Saadiyat Island.

As part of its diversification program, the UAE government continues its free zone development. Currently, there are more than 30 free zones in the UAE (and over 10 more free zones are currently under development or to be developed) and many of them have specialised themes such as finance, logistics, media, healthcare, textiles and automobile. Companies in free zones can usually enjoy 100% foreign ownership and profit repatriation, no corporate tax, no custom duty, no currency restrictions, no labour restrictions and no trade barriers or quotas. Dubai’s Jebel Ali free zone (JAFAZ), for example, is one of the largest and most successful free zones. In 2010, JAFAZ attracted more than 6,400 companies across the world to set up office, creating more than 160,000 jobs. JAFAZ accounts for more than 50% of Dubai’s total exports, 25% of the emirate’s GDP, as well as 20% of all FDI inflows into the UAE.

Dubai has also made remarkable achievements in its tourism industry in the recent years. For example, the average occupied beds in Dubai increased from 38,729 in 2006 to 55,032 in 2010, up 42%.

Monetary policy

With the economy gradually recovering and inflationary pressures re-emerging, the UAE Central Bank has turned its attention to controlling price rises. After increasing the minimum capital adequacy ratio to 12% in June 2010, it will review it by the end of 2011. As of September 2011, deposits with UAE banks had increased by 5.3% YoY whilst loans had only increased by 3.5% YoY, indicating that banks remained reluctant to lend. Nevertheless, as the UAE currency, Dirham, remains pegged to the US dollar at US$1:Dh3.67 and the US dollar’s interest rate is unlikely to rise until 2013, the UAE Central Bank’s ability to manage inflation may appear limited.

Except for Kuwait, the other members of GCC maintain similar currency regime by pegging their currencies to the US Dollar. However, the UAE withdrew from the Gulf Monetary Union in May 2009, following Oman in 2006.

Trade Policy

The UAE is a member of the World Trade Organisation (WTO), and maintains a rather liberal trade regime. Imports are subject to few controls except for the import of arms and ammunition, alcoholic beverages, agricultural pesticides, narcotics and pork products. Israeli goods are also prohibited. There are no exchange controls in the UAE. However, all importers have to apply for a licence, and an importer can import only those goods specified in the licence.

Customs duty is calculated on the CIF value at the rate of 5% for most products. Imports of intoxicating liquors, however, are subject to a 50% customs duty on their CIF value, while the rate for tobacco products is 100%. CIF value will normally be calculated on the declared value of the shipment. But the UAE Customs is not bound to accept the figures shown, and may set an estimated value on the goods, which shall be final, as far as the duty is concerned.

There is no specific labelling requirement on goods in general, but food labels have to contain product and brand names, production and expiry dates, country of origin, name of the manufacturer, net weight in metric units, and a list of ingredients and additives in descending order of proportion. All fats and oils used as ingredients must be specifically identified on the label. Labels should be in Arabic, or both Arabic and English.

The tie between the UAE and its fellow members of the GCC is strong. In November 1999, the GCC agreed to form a customs union. The customs union took effect from 1 January 2003. The accord establishes a single tariff of 5% on 1,500 imported items from non-member countries. It also provides a list of other essential items that can be imported duty-free. Under the accord, goods imported into the GCC area can be freely transported subsequently throughout the region without paying additional tariffs.

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Posted: 31 December 2011

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