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: UAE FreeZone Newsletter - Issue 41 -
August 2007 |
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Dubai's economy to cushion UAE's diminishing oil reserves
Dubai's impressive diversification programme, including the expanding tourism and commercial infrastructure, and Abu Dhabi's hydrocarbon wealth are fuelling growth and helping the UAE prepare for the future restrain in oil prices and the "gradual depletion of domestic hydrocarbon reserves".
The London-based Business Monitor International (BMI), a leading print and online publisher of specialist business information on global emerging markets, said in a report: "Our bullish outlook is based on the fact that the United Arab Emirates will continue to be a primary beneficiary of the ongoing hydrocarbons price boom for some time yet."
It described as "less promising" the proposed UAE-US free trade agreement, but expressed optimism on the lengthy FTA negotiations between the European Union and the six-member Gulf Cooperation Council (GCC), a regional bloc and free trade zone. "Success on the EU front would boost the UAE business environment, partly by facilitating ongoing diversification away from the hydrocarbons sector," it said.
Entitled "The UAE Business Forecast Report: Q4 2007", the study, which includes five-year forecasts to end-2011, said that while it is upbeat on the UAE's increasing trade re-exports, it also sees the rising cost of living in key emirates and the perceived real estate-induced economic volatility as potential risks. "We continue to expect robust economic growth in 2007 and beyond, with stubborn inflation and a projected moderate decline in oil prices presenting only mild risks," BMI said in a 52-page report. "Indeed, thanks to a concerted diversification programme, the UAE is fairly well-insulated from oil price volatility, relative to other regional states..."
Oil and gas account for 37pc of nominal GDP
But it noted that the oil and gas sector accounted for 37 per cent of nominal gross domestic product of Dh574.85 billion last year compared to the 35.7 per cent of nominal GDP in 2005. Preliminary data released by the UAE Ministry of Economy show a Dh599-billion nominal GDP in 2006.
Nominal GDP is the money values in different periods of the sum of products and services produced within an economy in a given period. Real values adjust for differences in the price levels in those periods. The report said the 9.3-per cent inflation rate recorded by the UAE government in 2006 could be "understated", stressing that "a range of prices are being constrained by government imposed caps"."Although we see major inflation risks, gas and non-oil sector expansion will keep the economy on a positive footing, and we think it can survive this challenging period, thanks in no small part to buoyant activity in Dubai," the report said.It noted that the UAE government caps key prices, from dairy and rents to cinema tickets, suggesting that capacity constraints and a weak US dollar are part of economic risks.
It said that rental fees on some properties had jumped by 18 per cent in January to March, prompting the imposition of price controls as a short-term remedy. The government had also capped recently the price of cement at Dh295 per tonne, in line with the supply constraints in the construction sector. "Indeed, the effects of surging investment and demand for commodities are being felt on multiple levels," the report said. "Cement makers, now restricted by price caps, are stoking furnaces with coal, due to price and supply issues with the gas market." In its SWOT (strengths, weaknesses, opportunities, threats) analysis, the BMI report said the UAE attracts strong capital flows from fellow members of the GCC, which is targeting a common currency by 2010. The country is also increasingly expanding its economy, thus making it less vulnerable to oil price movements. However, its non-oil sector remains vulnerable to oil price volatility because the UAE has the other GCC members for its main trading partners. And being a part of a volatile region, the country's risk profile could be affected by issues concerning regional and international relations.
The report said the US concerns about regional militant groups and Iran's nuclear programme, for instance, could affect investor perceptions on the UAE over the medium-term. The other threats to the UAE economic outlook are the heavy government subsidies on utilities and agriculture and its obsolete tax system, the report said. "There are fears that bubbles could be forming in the construction sector," it added. It is worth noting, though, that the oil prices are seen to remain reasonably high over the forecast period. Domestic and foreign investments also continue to drive the construction, tourism and financial sectors.
UAE sees increase in international trade
The report said the UAE is seeing increases in international trade with the recently improved bilateral trade with the US, Iran and South Africa, among others. It also noted the drive to boost the tourism industry through major expansion projects in hotels and airports. It said this should boost the UAE's already-strong position in balance of payments (BOP), which measures the payments that flow between any individual economy and all other economies. BMI sees UAE imports growing steadily at eight per cent year-on-year over the forecast period, while export growth will slow down to six per cent in 2009 but pick up again to 11 per cent by 2011.
Balance of payments to come at 22.2pc of GDP
UAE's BOP will generally be lower than last year's surplus and come in at 22.2 per cent of GDP this year. This will continue to decrease until 2009, but rise to 25.2 per cent by 2011. "We see the current account surplus remaining above 20 per cent of GDP over the forecast period, buoyed by improving trade relations and a burgeoning tourist industry," the report said. The report stressed that the UAE-US FTA talks had been stalled because the parties could not continue negotiations under the existing Trade Promotion Authority. But a trade and investment framework agreement (TIFA) between the two parties, which met in July to discuss the proposal, will be good for bilateral trade relations.
The National US-Arab Chamber of Commerce said US exports to the UAE had increased by 40 per cent between 2005 and 2006. Recent developments are also going in the director of greater imports from the US for the next few years. "Given the UAE's rapidly expanding role as a re-export centre (re-exporting to Morocco, South Africa and India, among others), this is not necessarily bad news for the balance of payments position," the report said. It likewise noted improvements in the UAE trade with Iran and South Africa. Iran had agreed to ease trade regulations and allow foreign banks to operate in its free zones on Kish and Qeshm islands. This could dent the UAE's capital account because the islands, following the footsteps of Dubai, are offering free zones incentives such as tax-free income and 100 per cent company ownership to foreigners.
Earlier, the Dubai Chamber of Commerce and Industry (DCCI) vowed to promote South Africa's Northern Cape Province as a good area for Emirati investors. "If the promotion is successful, it will likely dent further the UAE's capital account," the report said. "With profits flowing back into the UAE through the current account, however, this is not a cause for concern." |
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Courtesy Khaleej Times
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