UAE Economy Back On Track

The UAE economy has staged a recovery in the last 18 months, aided by an inflow of business and investors seeking a safe haven from unrest elsewhere in the Middle East. Buoyed by robust oil prices and brisk trade and tourism, the Arab world’s second-largest economy saw growth accelerate to 4.4 per cent in 2012, according to its statistics office, its fastest pace since 2006.

The Gulf state has made efforts to curb state spending, which increased sharply in the wake of the financial crash and Arab Spring uprisings. Expenditure hit $52.6 billion in the year to July 17, 2009, according to a Grail Research tracker, as the government sought to cushion the economy and calm investors.

In 2012, spending as a total percentage of GDP fell to 26.9 per cent, according to the Washington-based IMF, and is likely to shrink further to 26.3 per cent this year. The UAE last year doubled its total fiscal surplus – the combined surplus of the federal government and the seven emirates – to close to nine per cent of gross domestic product, up from 4.1 per cent in 2011. This cut its break-even oil price to $74 a barrel, down from $84
in 2011, leaving it less exposed to any volatility in the energy markets.

The IMF said further fiscal consolidation is planned in 2013 of around two per cent of non-oil GDP. “[This] is expected to be driven by a rationalisation of capital spending, and subsides and transfers, while spending on goods and services, defence and security and the wage bill are expected to increase,” the fund said in a June 11 report.

Economic diversification is a priority for the UAE. Abu Dhabi, which generates more than half of the national GDP, has injected billions of dollars into industry, tourism and infrastructure to generate jobs and lessen its reliance oil. The emirate last year opened Khalifa Port, built at a cost of $7.1 billion, and is constructing the world’s largest aluminium smelter and a financial free zone. A new terminal underway at Abu Dhabi’s main airport is set to add capacity for a further 30 million passengers a year, following its launch in 2017.

The impact of this vast investment is clear. Abu Dhabi’s non-oil industries grew 7.7 per cent in 2012, generating about 48 per cent of GDP at constant prices, preliminary government data shows. At Dhs325 billion, Abu Dhabi’s non-oil economy alone was Dhs7 billion more than Dubai’s entire GDP of Dhs318 billion.

Dubai’s fortunes have also improved. The collapse of the city-state’s property bubble in 2008 saw house prices nosedive, pressing state-backed Dubai World into a painful $25 billion debt restructuring and forcing Dubai to seek a $20 billion lifeline from Abu Dhabi. The emirate’s economy is now rebounding, expanding 4.4 per cent last year, according to its statistics office, the most in three years.

This uptick has been underpinned by a rebound in the property and tourism sectors, reflecting Dubai’s safe haven status amid regional turmoil. Residential rentals grew by more than 30 per cent in the 12 months to June, property consultants CBRE said, outpacing wage levels. Real estate sales reached Dhs53 billion in the first half, according to Dubai Land Department.

The IMF in July warned the government might need to step in to prevent the inflation of a fresh property bubble, should prices continue to surge.

Dubai continues to carry a substantial debt burden. IMF data puts the total debt of Dubai government and its government-related entities (GREs) at $142 billion, or 102 per cent of the GDP of Dubai and the smaller northern sheikhdoms. Of the estimated $93 billion owed by state-linked entities, $60 billion will fall due between now and 2017, the fund said. “Although Dubai’s operating environment improved markedly, these large rollovers, particularly for the GREs, could still prove challenging.”

Hydrocarbons

The UAE houses about six per cent of the world’s proven oil reserves and 3.3 per cent of its gas reserves, with most of the crude held in Abu Dhabi. Hydrocarbons play a vital role in the OPEC member’s economy, providing the dominant source of government revenue.

The UAE’s oil production was estimated to be about 2.65 million barrels a day (b/d) in 2012, up from 2.5 million b/d in 2011, according to International Energy Agency data. Strong oil prices allied with increased output drove record hydrocarbons revenues of $124.7 billion in 2012, the US-based Institute of International Finance said in April, marking a 5 per cent rise on the previous year’s income.

Abu Dhabi is striving to raise output to 3.5 million b/d by 2017 to supply foreign buyers and keep pace with increased domestic demand. Its current capacity is estimated at 2.8 million b/d. Oil prices are expected to stay above $100 a barrel – they averaged $112 last year, according to the UAE’s National Bureau of Statistics – which bodes well for the federal budget.

Abu Dhabi National Oil Co (Adnoc) is halfway through a five-year $40 billion investment plan aimed at boosting oil and natural gas output, the state-owned energy producer told Bloomberg in July. The company plans to double processing capacity at its 400,000 b/d Ruwais plant by the end of 2014.

Gas developments will account for $25 billion of the planned investment, as Abu Dhabi battles to stave off a potential shortage. The emirate wants to raise gas output to provide feedstock for power plants and fuel its growing metals and petrochemicals industries, which are critical to its diversification and job creation efforts.

Adnoc in April signed a 30-year deal with Shell to develop the Bab sour gasfield in Abu Dhabi. The project is expected to yield more than 500 million standard cubic feet per day for the local market.

Demographics

The UAE’s population has grown steadily in recent years, aided by an influx of foreign workers, but estimates as to its size vary wildly. The IMF gauges the population at about 5.7 million people in 2013, while the most recent estimate from the UAE’s own statistics agency puts the figure at 8.3 million people. Based on this calculation, foreign workers comprise roughly 88.5 per cent of the population, largely through the presence of blue-collar workers from South Asia, the Philippines and other Arab states.

Boasting one of the world’s highest per capita incomes at nearly $49,000 in 2012, the oil-rich UAE has escaped the violent turmoil seen in other GCC and Arab states in the past two years.

Nonetheless, the country bolstered public spending along with its fellow oil exporters in the wake of the Arab Spring, to further shore up its cradle-to-grave welfare system for citizens.

Part of this spending targeted the country’s five poorer northern emirates, where economic growth has lagged that seen in the two powerhouses Abu Dhabi and Dubai. In March 2011, the UAE government pledged $1.6 billion to fund infrastructure projects in the sheikhdoms, in an effort to improve living conditions. In March, more than Dhs243 million ($66.2 million) was approved for use in education, employment and housing schemes in the northern emirates. The largest slice, Dhs160 million ($43.6 million), will be used to fund education and training for unemployed Emiratis in Ras Al Khaimah.

Abu Dhabi has also pressed ahead with social housing and other development projects. The cash-rich emirate said in January it planned to spend Dhs330 billion to fund major projects in the emirate over the next five years, to include constructing more than 12,500 houses, schools, roads and other critical infrastructure. The sum will include some Dhs 3 billion worth of housing loans for local residents.

Geopolitics

The UAE is one of the region’s most politically stable nations, with close ties to the West. The country is governed by the Supreme Council, which comprises the rulers of the seven emirates. The 40-member Federal National Council acts as an advisory board to the government, and is responsible for examining draft federal legislation.

Half of the FNC’s 40 members are elected, and the remainder appointed by the rulers of the country’s seven emirates. Political parties are not permitted.

The Gulf state, primarily led by Abu Dhabi, has leveraged its vast oil wealth to forge strategic links with both emerging and developed markets. The UAE is home to one of the world’s largest sovereign wealth funds, the Abu Dhabi Investment Authority (ADIA), with assets valued at $328 billion at the end of 2008, according to the US-based Council on Foreign Relations. Its investments include stakes in Britain’s Gatwick Airport, Citigroup, and Germany’s biggest gas- transmission system.

Though the UAE has sidestepped much of the political unrest seen in other Arab states, it has cracked down on Islamist groups, which it fears may have been emboldened by popular uprisings in Egypt, Tunisia and Libya. In July, the Gulf state jailed 69 people convicted of plotting to seize power, sentencing 56 of them to 10-year terms. Five others were jailed for seven years, and a further eight were convicted in absentia, getting 15-year terms, the state news agency said. Another 25 people were acquitted, including 13 women. Among those sentenced were members of prominent UAE families, academics and lawyers.

The trial and subsequent verdict drew criticism from human rights groups, which accused the Gulf state of widespread violations, a claim rejected by authorities.

In June, UAE officials said they would try 30 Egyptian and UAE suspects for alleged coup plots linked to Egypt’s Muslim Brotherhood.

As with many GCC states, the UAE has struggled to entice nationals into the private sector. More than 80 per cent of Emiratis are employed by the state or related entities, attracted by the higher pay, shorter working hours and longer holidays. This has raised fears of rising youth unemployment, should job creation fail to keep pace with the number of school leavers entering the labour market.

In the wake of the youth-driven protests of the Arab Spring, the UAE has ramped up its efforts to tackle unemployment, dubbing 2013 the ‘year of Emiratisation’. In June, the government said it would pay up to 30 per cent of wages for Emiratis in the public sector and up to Dhs10,000 towards professional on-the-job training, in a bid to encourage more private sector firms to hire nationals. Other measures under consideration include standardised holidays between the public and private sector and a minimum salary entitlement for Emiratis.