Overseas Market Profiles - United Arab Emirates

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

Posted on: 1 Jul 2012

Recent Developments
•Supported by higher oil prices, the UAE1 economy expanded 4.9% in 2011. The IMF expects the UAE to grow 2.3% in 2012, with regional instability and moderating oil output seen as hampering growth.
•The UAE is Hong Kong's largest export market in the Middle East. Hong Kong exports to the UAE rose 22.8% year-on-year (YoY) to US$1.36 billion in the first four months of 2012.
•With a significant recovery in the trade, retail and tourism sectors, the Dubai government succeeded in issuing US$1.25 billion of Islamic bond (sukuk) in June 2012, marking a return to the bond market in almost one year.
•The UAE Central bank indicated that the total assets of UAE banks had increased by nearly AED 38 billion (US$10.4 billion) in the first two months of 2012, allowing the UAE to retain the largest base of banking assets in the Middle East.

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 4.9% in 2011, the UAE is expected to see real GDP growth of 2.3% in 2012 as per an IMF estimate. On the other hand, the UAE economy is expected to grow by 2.8% and 3.3% in 2013 and 2014 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, with non-oil trade of the UAE making a remarkable improvement in recent years. According to the UAE Federal Customs Authority, the UAE's non-oil exports in 2011 hit AED 114.1 billion (US$31.1 billion) compared to AED 83.1 billion (US$22.6 billion) in 2010, expanding 37%. Hong Kong was its 5th largest re-export destination for non-oil exports. In this regard, Dubai, the largest container handler of the region, has played as an important role as a trading and transportation hub. Its container throughput more than doubled from 6.4 million TEUs to 13 million TEUs between 2004 and 2011, placing it as the 9th busiest seaport in the world in 2011.

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.

The UAE government will continue to encourage foreign investment through tax incentives. While the Dubai government keeps focusing on downsizing its debts and fiscal expenditure, most of the large-scale infrastructure projects in the UAE will take place in oil-rich Abu Dhabi, the country’s capital.

Despite diversification achievements, growth of the UAE will continue to be driven by the hydrocarbons sector over the next few years.

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 by 42% from 38,729 in 2006 to 55,032 in 2010. Moreover, the number of guests staying in Dubai increased by 9% in the first three months of 2012.

As part of the emirate's US$8 billion master plan to cement its position as the Middle East's largest aviation hub, Dubai will use some of the proceeds from its recent bond issuance to fund the expansion of Dubai International Airport. The opening of a new concourse in 2013 is expected to boost Dubai's flagship airline, Emirates Airline, whose profits slumped in 2011 due to the high fuel costs.

Financial Development

With the economy gradually recovering and inflationary pressures re-emerging, the UAE Central Bank has turned its attention to controlling price rises. The minimum capital adequacy ratio was increased to 12% in June 2010. Deposits with UAE banks have picked up since November 2011. In 2011, deposits grew by 2%, while loans increased by 3.8%, indicating that banks remain reluctant to lend. The UAE Central bank indicated that the total assets of UAE banks had increased by nearly AED 38 billion (US$10.4 billion) in the first two months of 2012, allowing the UAE to retain the largest base of banking assets in the Middle East. Nevertheless, as the UAE Dirham (AED) remains pegged to the US dollar at US$1:AED 3.67 and the US dollar’s interest rate is unlikely to rise until 2014, the UAE Central Bank’s ability to manage inflation may appear limited.

In June 2012, the Dubai government issued Islamic bonds (sukuk) totalling US$1.25 billion, marking its return to the bond market in almost a year to take advantage of the emirate’s recent economic rebound, especially in the trade, retail and tourism sectors, and lower financing costs. Since the peak of the Dubai World debt crisis in 2010, the cost of insuring the emirate’s debt has dropped by one-third. With the sukuk issuance of US $4 billion, the Dubai government has greater room for managing its budget deficits and refinancing plans. In 2012, the Dubai government and related entities have US$15 billion in debt outstanding, while the Jebel Ali Free Zone and Dubai International Financial Centre Investments will need to repay US$3.25 billion in total.

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 formed a customs union, which 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.

In 2011, Dubai's trade record US$299.5 billion, up 22% from 2010. The number of trade licences issued by the Dubai Department of Economic Development (DED) in Q1 2012 rose by 27%, indicating a recovery of investor confidence.

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Posted: 01 July 2012

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