Growing regional turmoil challenges UAE’s safe haven status

Foreign direct investment (FDI) flows were on the rise since 2011, aided by an economic revival in the larger markets and rapid growth in the emerging markets. But 2014 has effectively halted that trend.

Global FDI flows fell by eight per cent to reach $1.3 trillion last year, down from $1.4 trillion in 2013 amidst slowing economic growth, according to a report issued at the Annual Investment Meeting in Dubai (AIM).

The year marked an interruption in the recovery of global Fdi flows, which were gradually rising back towards an all-time high of $1.9 trillion in 2007.

Although global FDI prospects were gloomy, local prospects for foreign investment showed promise. According to UAE’s minister of Economy, Sultan Saeed Al Mansouri, FDI in the UAE rose by 25 per cent to reach $13 billion last year. This growth mirrored a trend which saw FDI flows to emerging markets increase despite a global lull.

However, foreign investments to the country fell short of the $14.4 billion predicted by the UAE’s Ministry of Economy, and could be impacted further by the ongoing geopolitical tensions in Yemen and oil price volatility.

“The UAE has been able to cement its position as a stable and business friendly destination in the region,” said Phil Gandier, MENA Transaction Advisory Services leader at audit firm EY.

“However, while the UAE may attract increased interest from Middle Eastern investors, investors from outside the region will exercise a significant amount of calculated caution in the context of the widening regional instability.”

Regardless, the UAE has no plans to be idle, and is actively trying to woo investors. Al Mansouri said in his opening speech that the country aims to raise the contribution of FDI to five per cent of GDP over the next few years. Gandier too does not write off the country, suggesting slowing economic conditions in developed markets could be in the Emirates’ favour.

“We anticipate an improved outlook in the EU this year, so that may prove beneficial for FDI prospects into the UAE. But with China slowing and other Asian economies suffering from capital outflows owing to the strong dollar and the expectation of rising interest rates in the US, FDI from Asia may slow. That said, a slowing China and the current conditions in many emerging markets may make the UAE relatively more attractive to global investors.”

BEING FDI FRIENDLY

A large part of attracting FDI is investor friendly regulation, which the UAE has priortised.

The country recently passed the long awaited company’s law, reducing the minimum percentage of shares that a firm needs to list in the stock market to 30 per cent from 55 per cent previously. Investors have lauded the move, saying that it will encourage more listings in the country and be instrumental in drawing more FDI to the UAE.

UAE officials, who previously left out the clause of foreign ownership in the company’s law due to concerns among Emiratis, are also planning to partially bring it back to improve FDI friendliness.

Al Mansouri announced at the AIM that the UAE is planning a law to allow 100 per cent foreign ownership in some sectors. The legislation will aid innovation and technology transfer, mandating firms with 100 per cent foreign ownership to support those sectors, and is expected to come into effect by the end of this year, Abdullah Al Saleh, undersecretary, UAE Ministry of Economy, confirmed to Gulf Business.

“Creating an enabling business environment is vital to attract FDI. The easier the government makes it for investors to enter the market and the more opportunities it creates will undoubtedly help attract greater FDI flows,” noted Gandier.

Although some suggest the country could attract FDI even without new regulation.

“We have been performing very well even without such laws,” said Fahad Gergawi, CEO of Dubai FDI said.

“They just add to the overall investment environment. We say that it is a strong step by the government to show its commitment towards the private sector, by facilitating different models for the private sector to use.”

DUBAI, THE LONE BRIGHT SPOT

Out of all emirates, Dubai netted around Dhs28.6 billion ($7.8 billion) in FDI over the last year, figures from Dubai FDI showed.

Real estate, financial services, hotels and tourism, renewable energy, business services, software and IT services accounted for 78 per cent of the total FDI to the emirate last year, amounting to Dhs22 billion and around 133 projects.

“Our model is to have double digit on yearly growth somewhere between 10 to 15 per cent,” said Dubai FDI’s Gergawi. Such a growth figure is not far-fetched with the emirate gearing up to host Expo 2020, an event expected to push Dubai’s foreign trade value to Dhs4 trillion. But Gergawi is tight-lipped when quizzed about any strategy that the agency has to prepare for the Expo.

“We will wait for the Expo committee to inform everyone about their strategy. We will be involved once things are ready to start. I prefer to wait for the committee to inform the plans.”

Although an investor friendly city, Dubai is also known for its high cost when doing business. Will that discourage those looking to set up in the emirate?

“It will for some companies,” said the head of Dubai FDI.

“For some who looks at a cheaper model that fits their value, they will not find Dubai cost competitive. Dubai cannot fit with every company to come and set up here. “This is where the model comes in, it is not the cheapest but it is the most advanced and efficient model.

“Dubai is a service-based economy. We do not have a large industrial base but we know that we are helping a lot of industries with our services. Our model fits with what we want to do.”