The UAE, the world’s eighth largest oil producer, maintains a free-market economy with minimal restrictions on private-sector activities, international trade and capital movements. Despite the impact of the global economic downturn, the UAE’s economy has proved to be remarkably resilient.
Higher oil prices, increased government spending and a noteworthy resurgence in tourism, transport and trade have contributed to the upswing in the economy. In addition, the successful restructuring of debt owed by high-profile companies, solidarity among the emirates and accommodative monetary and fiscal policies have all played a role in bringing stability to the market.
Political turmoil in the Middle East and North Africa has not impacted unfavourably on the UAE’s economic upturn since it is considered to be one of the most politically stable and secure countries in the region and a relative safe haven for tourism and investment.
Having contracted by 4.8 per cent at constant prices in 2009, led by a fall in manufacturing and real estate, real GDP growth has shown marked improvement in recent years. In 2011, the UAE achieved respectable GDP growth of 1.3 per cent. With the UAE maintaining its robust competitive edge as the region's premier commercial hub and second largest economy, real GDP growth was estimated to be 4.2 per cent in 2012 due to 6.6 per cent growth in oil GDP and 3.1 per cent in non-oil GDP.
The economic environment for 2013 is very positive amidst renewed confidence and encouraging signs in many sectors, including real estate. (The average house price in Dubai rose by 19 per cent in 2012, a rate of increase that is second only to Hong Kong.) The IMF expects GDP to increase from Dh1.416 trillion (US$386 billion) in 2012 to Dh1.445 trillion (US$394 billion) in 2013. A growth rate of 3.6 per cent is estimated for 2013, 3.7 per cent in 2014 and 3.8 per cent in 2015.
As far as inflation is concerned, UAE Central Bank estimates are in the region of 1.5 per cent for 2012, having fallen from an average of 11.7 per cent in 2007–08 to close to zero during 2011 (+0.2 per cent) due to pressure on the real estate sector. IMF estimates are 0.7 per cent in 2012, compared to 0.9 per cent in 2011, rising to 2 per cent in 2013, 2.4 per cent in 2014 and 2.5 per cent in 2015.
According to the UAE Central Bank, high oil prices and the performance of non-hydrocarbon exports were the drives behind an increase in the trade account surplus from Dh154.6 billion in 2009 to Dh179.9 billion in 2010 and Dh292 billion in 2011. The balance of services and transfers, we are informed, are traditionally negative in the UAE (i.e. the related flows of funds leaving the country are higher in value than the flows coming in) and as a result the current account surplus was much lower than that of the trade balance in these years, reaching Dh28.8 billion in 2009, Dh26.6 billion in 2010 and Dh112.7 billion in 2011. The financial account, having suffered a deficit of Dh35.6 billion in 2009 and a surplus of Dh18.5 billion in 2010, was again in deficit in 2011 to the tune of Dh60.4 billion, due to an outflow of funds by the public sector amounting to Dh95 billion. However, the overall balance of payments, which was in deficit in 2009 by Dh22.5 billion, turned positive in 2010 (Dh26.9 billion) and in 2011 (Dh16.6 billion), adding to the net foreign assets of the Central Bank.
The World Bank has predicted that the UAE will register a financial surplus of up to 5 per cent of GDP in 2012, up from 2.9 per cent in 2011. The surplus is expected to rise to 7 per cent of GDP in 2013. The World Bank also predicts that the UAE's current account surplus is likely to reach 10.3 per cent of GDP in 2012 compared with 9.2 per cent in 2011 and around 7.7 per cent in 2010. The surplus is expected to rise to 10.4 per cent of GDP in 2013. However, IMF figures calculate the current account surplus at 17 per cent in 2012.
On the fiscal front, the UAE is implementing a number of reforms at the federal level, including the adoption of a medium-term framework and a switch to programme budgeting and zero-based budgeting.
The 2013 zero-deficit federal budget, which was approved in October 2012, prioritises health, education, social welfare and the development of government services. The budget is part of the three-year budget plan for 2011–13 with a total expenditure of Dh133 billion. Expenditure for 2013 is set at Dh44.6 billion, Dh22.7 billion or 51 per cent of which has been earmarked for social development and social welfare. Education, health, labour, social affairs, Islamic affairs, culture, youth and community development, the Sheikh Zayed Housing Programme and other social welfare programmes fall under this category. Education was allocated the largest single share, Dh9.9 billion or 22 per cent of the total.
Government affairs, including defence, interior, justice, foreign affairs and other federal departments, accounted for 41 per cent of the federal budget with total allocations standing at Dh18.3 billion. Infrastructure will benefit most in this sector with the Federal Electricity and Water Authority being allotted Dh5.2 billion to keep pace with rising demands for water and electricity services in the Northern Emirates. The budget will also fund development projects, especially in new residential areas.
In April 2013, the Federal Cabinet approved an increase of Dh413 million in the annual budget.
Although oil clearly contributes significantly to the UAE's economic revival (oil GDP at current prices represented 26.4 per cent of total GDP in 2009, 30.9 per cent in 2010 and 38.4 per cent in 2011), the Central Bank estimates that the non-oil sector will have grown by 3.9 per cent in 2012 compared with 3.8 per cent in 2011, and is predicted to increase by around 4.2 per cent in 2013. In 2011, mining and quarrying remained the top growth sector, accounting for 41.7 per cent of total GDP, followed by manufacturing industries with 16.6 per cent, construction at 15.6 per cent, down from 18.8 per cent in 2010. The number of workers was up by 3.5 per cent from 1.413 million in 2010 to 1.463 million in 2011, the greatest number employed in construction.
Abu Dhabi’s Economic Vision 2030 and Dubai’s Strategic Plan 2015 are leading the drive towards diversification. The strategy is to attract foreign capital into the industrial and other export-oriented sectors, including heavy industry, transport, petrochemicals, tourism, information technology, telecommunications, renewable energy, aviation and oil and gas services. Although short-term priorities have been altered to accommodate changing realities, this long-term strategy remains the same. On the federal level, the UAE is pursuing its 2021 Vision, which aims to place innovation, research, science and technology at the centre of a knowledge-based, highly productive and competitive economy by the time of the federation’s golden jubilee.
Figures released by the Inter-Arab Investment Guarantee Corporation (IAIGC) indicated that in 2011 the UAE maintained its position as the top Arab country in terms of trade, accounting for Dh1.8 trillion (US$490.5 billion) or 24.3 per cent of the region's total trade of about US$2.013 trillion. Imports amounted to Dh763.36 billion (US$205 billion) in 2011, the highest in the Arab region, while exports stood at Dh1.045 trillion (US$285 billion), the second largest after Saudi Arabia.
The World Trade Organisation (WTO) ranked the UAE as the world's twentieth biggest exporter of merchandise trade in 2011, surpassing countries such as Australia, Brazil, Switzerland and Sweden. According to the WTO, the UAE's exports of US$285 billion (Dh1.045 trillion) in merchandise trade in that year amounted to 1.6 per cent of the world's exports, which stood at US$18.215 trillion. The WTO also lists the UAE as the world's twenty-fifth importer based on UAE imports of Dh752.35 billion (US$205 billion) in 2011, 1.1 per cent of the world's imports of US$18.38 trillion.
The UAE Ministry of Foreign Trade, for its part, estimates that in 2011 UAE foreign trade grew by 23 per cent against 14 per cent in 2010. In line with economic conditions worldwide, this slowed to 15 per cent in 2012 and its predictions for 2013 are that total trade will increase from Dh3.60 trillion to Dh3.7 trillion.
Continued growth in trade can be attributed to the UAE's determined policies of opening new markets, engagng new trade partners and increasing economic diversification. Figures released by the UAE National Bureau of Statistics highlight that in the first nine months of 2012 non-oil trade increased from Dh684.9 billion in the same period in 2011 to Dh782.7 billion in 2012, up 10.5 per cent. Exports were up by 61 per cent from Dh84.4 billion to Dh136.6 billion and imports rose by 12.3 per cent (from Dh439.9 billion to Dh494.5 billion) in the same period. The value of re-exports, on the other hand, dropped by 5 per cent to Dh152.6 billion. Non-Arab Asian countries (45 per cent), maintained their position as leading partners in UAE non-oil trade, the EU came second (23 per cent), America was ranked third (9.3 per cent) and the GCC fourth (8 per cent).
Gold tops both the import and exports with diamonds leading re-exports. Other significant exports are polyethylene, polypropylene and crude aluminium.
A study by the Ministry of Foreign Trade highlights the significant role of plastics in UAE trade. According to the report, the UAE came third globally in the re-export of plastics in 2011, re-exporting US$444 million worth of the product – constituting a 3 per cent share of the world's re-exports of plastics. The study indicates that exports of plastics from the UAE increased by 127 per cent (US$2.2 billion) from the first six months of 2011 to the same period in 2012. Regionally, the study stated that the UAE produces 25 per cent of all plastics produced within the Gulf Cooperation Council (GCC), pointing out that the country has over 600 plastics factories spread out across the seven emirates. Borouge, the largest, is expected to produce 2.5 million tons of plastics in 2014 from the current capacity of just over 2 million tons.
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The UAE's enabling economic environment has assisted the development of innovative and fast-growing businesses like DP World, Emaar, Etisalat and Jumeirah that have become regional and global leasers. This economic muscle has turned the UAE into an investment hub.
IAIGC data indicate that the country has attracted more than US$76 billion in foreign direct investment (FDI) since it was formed, confirming it as the second largest foreign capital target in the Arab world after Saudi Arabia. FDI flow into the UAE, it claims, amounted to nearly 12.6 per cent of the total Arab FDI flow of US$603 billion. The UAE also accounted for nearly 24 per cent of FDI into the six-nation Gulf Cooperation Council (GCC) and 0.4 per cent of the world's direct capital. This trend is set to continue, it says, as large amounts of capital fled Egypt, Tunisia, Syria, Yemen and other Arab countries in search of safe havens after political and economic turmoil erupted in those countries in early 2011.
Figures released in mid-2013 by the UN Conference on Trade and Development (UNCTAD) back up this prediction, establishing the UAE as West Asia's third largest recipient country. In 2012, FDI into the UAE increased by 25 per cent to US$9.6 billion, continuing a recovery initiated in 2010 but still remaining below the level of US$14 billion that was reached in 2007. According to UNCTAD, high public spending by Abu Dhabi and a strong performance by Dubai's non-hydrocarbon sectors helped rebuild foreign appetites for FDI.
Organisations such Tawazun Economic Council (previously known as the UAE Offset Programme Bureau), which promotes joint ventures between the UAE private sector and foreign defence contractors, have also assisted greatly in attracting FDI into the country, at the same time furthering strategic industrial capabilities and the goal of economic diversification.
The UAE has also emerged as the top Arab capital exporter over a 32 year period from 1980 to 2011. Figures released by UNCTAD show that over this period, the UAE pumped nearly US$55.5 billion into global markets accounting for nearly 31 per cent of the total Arab FDI outflow of about US$175.8 billion.
The UAE in general, and Abu Dhabi in particular, have extensive sovereign wealth funds (SWFs), established to secure and maintain the future welfare of Emiratis. With assets worth US$627 billion, the UAE's Abu Dhabi Investment Authority (Adia) is the second richest SWF in the world, investing in a wide range of assets, from equities and fixed-income securities to infrastructure. It also plays a leading role in the development and governance of the industry.