THE ECONOMY IN 2010 – AN OVERVIEW

The year 2010 proved to be a year of a two-speed economic recovery. Weighed down by debt and high unemployment, the economies of the developed world dawdled along in the slow lane. In contrast, the more nimble economies of the emerging world accelerated at a far brisker pace.
For its part, the UAE's recuperation has proved robust, with its economy bolstered by higher oil prices and progress in resolving debt issues.

Perhaps one of the most positive developments within the UAE in 2010 was the speedy resolution of state-controlled Dubai World's Dh91.4 billion debt restructuring deal. The agreement of the complex process in only ten months helped to restore investor confidence and remove a cloud of uncertainty about the emirate's debt issues. It was a measure of the importance of the October agreement, that it helped to coax both the emirate and other government-related entities back to the capital market with bond sales.

GDP
Forecasts for the UAE's economy in 2010 steadily brightened after the success of the Dubai World restructuring and as the country benefitted from stronger signs of growth in other parts of the world. In October, the International Monetary Fund (IMF) raised its outlook, forecasting economic expansion to reach 2.4 per cent, faster than the 1.3 per cent it previously predicted. The Washington-based fund credited reasons for its upgrade as Asia’s economic rebound and Dubai World's debt agreement, which would resolve market uncertainties and contribute to boosting property-related sectors.

Sultan Al Mansouri, Minister of Economy, predicted in November that the economy would expand between 2 and 3.2 per cent in 2010. GDP would reach a record high of Dh 1 trillion by the end of the year, he said.

Other forecasts have also estimated growth to be around a similar level in 2010. The Economist Intelligence Unit (EIU) expected the economy to grow by around 2.6 per cent in 2010, with ratings agency Fitch forecasting growth of 2.4 per cent. Nonetheless, these forecasts are below Standard Chartered's estimate of 3 per cent growth but higher than the Arab Monetary Fund's outlook of 2 per cent.

A main driver of the UAE's resurgence has been the hydrocarbon sector, with oil production rising sharply to meet a pick-up in demand after a contraction during the global crisis. As one of the leading suppliers of crude oil, the UAE has benefitted from the strong rebound in oil prices to end the year 15 per cent up at just over US$90 a barrel.

Oil accounts for the single largest component of the UAE economy, accounting for around 30 per cent of GDP. A recovery in the trade sector has also been crucial. As one of the main arteries in the global trade network, the UAE and, Dubai especially, has benefitted from stronger demand for goods and services around the world.

Growth in the private sector also recovered well in 2010. A new Purchasing Managers' Index (PMI) launched by HSBC showed that manufacturing, services and retail were all showing healthy signs of expansion. The headline PMI reached 53 points in December, indicating a revival of business confidence in the economic outlook.

The economy's recovery was able to gain traction in 2010 after a challenging previous year. A decline in oil prices from their peak of US$147 in July 2008 to an average of US$60 a barrel in 2009 was one of the direct ways the country's was exposed to the financial crisis at the end of that year. In addition, the economy was hurt by an outflow of foreign investment and a decline in the value of global assets held by sovereign wealth funds and other investment vehicles.

Increased public expenditure by the Government helped to steady the economy after the global crisis. From around Dh254 billion in 2008, the consolidated financial account, involving the federal budget and spending by each emirate, grew by nearly 14 per cent to a record high of around Dh289 billion in 2009. The Abu Dhabi government supplied a Dh36.7 billion rescue package to support Dubai's economy in that year.

In a report published in October 2010, the IMF expressed its belief that the global crisis had a more serious impact on the UAE economy in 2009 than it had previously anticipated, claiming that it shrank by 2.5 per cent, not 1 per cent as forecasted earlier. The Institute of International Finance (IIF) also said the economy shrank by 2 per cent in 2009, with the slowdown aggravated by a contraction of 3 per cent in Dubai's economy.

As noted, economic recovery in 2010 was robust and forecasts for 2011 point to an increasingly brightening economic outlook, thanks in part to strengthening oil prices. Mr Mansouri said in November that the economy would expand between 3 per cent and 3.5 per cent in 2011. Faster growth is also anticipated by the IMF: it expects growth of 3.2 per cent in 2011. The IIF's outlook is similar, with expansion of 3.3 per cent. It believes the main catalyst to a stronger recovery 2011 is the expected improvement in the real estate market after the middle of the year. HSBC expects growth of 3.6 per cent in 2011.

Tourism
Tourism has emerged as one of the star performers of the economy following the global downturn. An improvement in the economies of the West and the financial health of consumers has helped increase the number of international holidays and business trips taken by people.

The travel and tourism sector made up 20.2 per cent of the UAE's GDP in 2009. It is expected to become an increasingly important source of employment over the next decade, with around 18 per cent of the country's workforce anticipated to work within the sector by 2020, up from 13.8 per cent in 2010.

The year proved another significant milestone in the country's aim to strengthen its position as an international tourism destination by developing a range of cultural, entertainment, leisure and sporting attractions. Perhaps the biggest boost for the country's tourism industry was the opening in November 2010 of Ferrari World, the world's largest indoor theme park, with more than 20 rides under a 200,000 square metre red roof. After more than three years in the making, the park in Abu Dhabi will be a significant addition to the country's attractions with a capacity of 10,000 visitors a day.

For the second year running, Abu Dhabi hosted the final round in the Formula 1 Grand Prix at Yas Marina Circuit. The event proved a thrilling climax to the international racing season, with a host of supporting events scheduled around the weekend. Other notable sporting events hosted in the UAE were the FIFA Club World Cup (football), Dubai World Championship (golf), Louis Vuitton Trophy Dubai (sailing), the FINA World Swimming Championships (25m), and Formula One powerboat racing.

Expansion of the country's international airlines including the main carriers Etihad Airways and Emirates Airline have also proved beneficial to the tourism sector by attracting more visitors to the country. The aviation sector achieved growth of 12.5 per cent in the first half of 2010 compared to the previous year.

Abu Dhabi is striving to increase its hotel capacity to meet rising demand from international visitors. Its capacity is expected to rise to 25,000 rooms and 2.7 million guests by 2012 from 12,700 rooms and 1.5 million guests in 2008. Dubai's hotel room capacity stood at 43,400 in 2009, with 6.1 million guests.

Trade
The UAE has benefitted from a resurgence in global trade flows. Complete figures from the UAE for 2010 are not yet available. However, the World Trade Organisation has forecast global trade to rebound by 9.5 per cent in 2010 as the economy solidifies.

Non-oil trade in the UAE expanded by 9 per cent in the first half of 2010 to Dh351.9 billion from the same period in 2009, according to figures from the Federal Customs Authority. Exports rose 32 per cent during the same period to Dh37.9 billion. Re-exports rose by 17 per cent during the period to Dh82.9 billion. More sluggish domestic demand meant imports advanced to Dh231 billion across the same period, a rise of 3 per cent.

As a result of the financial crisis, the UAE's export and re-export sector declined by 19 per cent in 2009 compared to the previous year. Domestic demand also led to a reduction in imports by 16 per cent. Imports in 2009 were valued at Dh447 billion, with India, China, the US, Germany and Japan the main providers of goods. Machinery and transportation equipment, along with chemicals and food were the principal imports.

As a result of these factors, the UAE's trade deficit improved, declining by 45 per cent to Dh59.1 billion in 2009 compared to the previous year.

The IMF forecasted that the UAE's exports of goods and services would grow by 9 per cent annually in 2010 to Dh809.1 billion. It expected imports of goods and services to expand by 5 per cent to Dh725.8 billion. In 2011, the IMF anticipates further improvement in trade, with exports of goods and services rising by another 8 per cent annually to Dh876 billion. Imports of goods and services would pick up by 9 per cent to Dh794 billion.

Although oil remains by far the most valuable commodity exported by the UAE, other goods and services, particularly those requiring high energy use such as petrochemicals and aluminium are becoming increasingly important contributors to trade. Free zones scattered across the emirates, particularly Jebel Ali Free Zone in Dubai, are the main sources of the country's non-hydrocarbon exports, accounting for nearly 60 per cent of such exports.

In a bid to further boost the value of non-oil exports, Abu Dhabi plans to establish an export credit agency, which would issue loans to overseas companies that import goods produced in the emirate. It hopes to establish by the end of 2011 an export promotion agency, to provide funding for private sector firms to secure export buyers overseas. Dubai launched in 2010 its own version of the scheme called an export assistance programme.

In another significant development within the trade sector in 2010, the Ministry of Foreign Trade released the UAE Trade Policy Review, the first such report since 2006. It aims to analyse the country's latest developments in the field of trade.

Inflation
The inflation rate in the UAE crept up by 1.04 per cent in the first 11 months of 2010 compared to the same period the previous year. The consumer price index increased by 1.45 per cent in November 2010 from November 2009, according to data from the National Statistics Bureau. Inflation had reached an 18-month high of 1.9 per cent the month before compared to October 2009.

Rising global food prices have been the main culprits behind a slight uptick in inflation in 2010. Prices began to rise sharply in the second half of 2010 due to the combination of poor harvests in Russia and Pakistan, stockpiling by large countries such as China and India, and trade barriers leading to supply pressures.

The slide in the US dollar from May 2010 also contributed to pushing food inflation up as commodity prices are mostly quoted in dollars. Nonetheless, consumer price rises were still a long way short of the inflationary pressures that built up in the economy prior to the financial crisis. At its peak, inflation reached 12.3 per cent in 2008.

One of the reasons why inflation has not picked up to those levels is continuing weakness within the housing market. The main household category is one of the biggest contributors to the index, making up about 40 per cent of the consumer price basket. The upward pricing pressure from housing remained largely absent with the sector, particularly in Dubai, still in recovery mode from the crisis.

A strengthening dollar may help to keep inflation in 2011 under control. The dirham's peg to the currency means fluctuations in its value directly impact how much importers in the UAE pay for goods from overseas.

Industry and Diversification
Diversification is a crucial lynchpin in the UAE's economy as it attempts to wean itself off a reliance on oil. A significant step was reached towards achieving that goal when the non-oil sector rose to a record high of 71 per cent in 2009, with the oil sector accounting for 29 per cent of GDP. The UAE is hoping to further cut the contribution of the hydrocarbon sector to around 20 per cent in the next decade or so through promoting growth elsewhere in the economy.

Abu Dhabi is striving to achieve its 2030 Economic Vision, setting out a roadmap for achieving greater economic diversification. The plan intends to loosen the capital's dependence on the oil sector as a source of economic revenue, and, instead instill a greater focus on knowledge-based industries.

Dubai too has its own economic vision. Trade, tourism, transport, logistics and manufacturing are the focus under the Dubai Strategic Plan 2015. The impact of the global financial crisis prompted the emirate to downgrade financial services and construction as core focuses for expansion whilst manufacturing continues to be an important component in the country's diversification strategy.

The semiconducting industry is destined to be one of the crown jewels in Abu Dhabi's plans to develop the high-tech sector. The year 2010 saw the unveiling of more detailed proposals to build a plant in the capital by Globalfoundries, the microchip-maker controlled by Advanced Technology Investment Company (ATIC) of Abu Dhabi. The industry is expected to create up to 6,000 jobs in the capital over the next decade and, in the process, turn Abu Dhabi into a vital part of the global microchip supply chain. ATIC bought a majority stake in Globalfoundries from Advanced Micro Devices in March 2008 for Dh7.7 billion.

The capital has also set its sights on establishing itself as a leading centre for aviation manufacturing. In a significant development within that industry, 2010 marked the start of production by an aircraft parts plant in Al Ain. Strata, a parts manufacturing business, has begun supplying components as part of orders worth Dh9.91 billion from aircraft makes such as Airbus. Strata is owned by Mubadala Aerospace, a unit of the Abu Dhabi-government investment company Mubadala Development.

Dubai's deep central geographic location between Europe and Asia makes it a prime location for the trade of goods and services. That favourable position was enhanced in October 2010 with the inauguration of Dubai Logistics Corridor.

Free-trade zones scattered across Dubai have acted as important cornerstones in the emirate's drive to attract foreign investment and diversify its economy. Jebel Ali Free Zone, the largest free zone, was anticipating stronger growth in the number of new businesses registrations in 2010. More than 6,400 companies operate within the area, spanning manufacturing, industry, logistics and trade. Ra’s al-Khaimah scored a significant coup in December 2010, when Ashok Leyland, India's second-largest lorry maker, launched a vehicle manufacturing plant in one of the emirate's free zones.

Real Estate
The real estate market remained under pressure in 2010. One of the main challenges, especially in Dubai, was an overhang of vacant properties as new buildings hitting the market outstripped demand. As a result, property prices in parts of Dubai have fallen by about half since the peak in 2008.

Reduced prices and increased choice represented good news for residents and companies. However, it has also presented problems for the country's developers. Many projects remained on hold during the year as developers waited for signs of improvement in the market before proceeding. Aldar, the property company that built the Yas Marina Formula One circuit, began talks with the Abu Dhabi Government about its cash needs after announcing in November that it had lost Dh1.5 billion in the first nine months of 2010. The company's work is mainly involved with government developments such as Yas Island and Raha Beach, and is 55 per cent floated on the Abu Dhabi Securities Market. Mubadala, the government-owned strategic investment company, owns 19 per cent.

Nonetheless, the Government used the downturn to push through reform of the industry. Legislation plans were introduced aimed at giving more powers to property owners. Dubai unveiled fresh guidelines for the implementation of Strata Law, which prescribes how owners jointly pay for the maintenance of all common areas of buildings. For its part, Abu Dhabi announced plans for a new property law making it easier for landlords to evict low-paying tenants at the end of their lease period.

Other signs of progress helped to lift the gloom surrounding the industry. Tamweel, the Islamic home finance company, restarted its mortgage business in November after a two-year freeze. Nakheel, the developer constructing artificial islands off Dubai’s coastline, progressed with paying trade creditors owed money from before the downturn in the market. The developer said in January 2011 that it had paid Dh3.9 billion to creditors as it sought an agreement to delay payments on at least Dh38.5 billion of loans and bills. Dubai’s government said in March that it would offer Dh29.4 billion in cash to Nakheel to help ease its payments and finish delayed property projects. In addition, it would convert Dh4.4 billion of loans to the company into equity (see Financial Services for more information).

In an indication of renewed appetite for developer debt, in September Emaar raised Dh1.8 billion through a five-year convertible bond it would use to repay short-term debt.

Inward Investment
Foreign direct investment into the UAE fell by over 70 per cent to about Dh14.7 billion in 2009 as the global recession squeezed business activity around the world.

Between 2003 and 2008 the UAE was the third largest recipient of foreign direct investment (FDI) in West Asia, behind Saudi Arabia and Turkey, according to the UN Conference on Trade and Development (UNCTAD).

The Government has been active in its efforts to improve conditions to meet with the aspirations of international investors. A planned new companies law is expected to lead to a relaxation of foreign ownership rules. Once implemented, the law will enable international firms in certain sectors, such as industry, to be allowed to own a greater stake in businesses they establish in the Emirates. The law now requires foreigners to have an Emirati as a sponsor and limits them to a maximum 49 per cent ownership of businesses. The exceptions are free zones, where foreign companies can have 100 per cent ownership.

Outward Investment
Investment in overseas markets has long been vital to the UAE's strategic drive to create a security net for future generations who at some point are likely to face the prospect of a depletion of the country's hydrocarbon wealth. Among the major international investment bodies in the Emirates are:

Abu Dhabi Investment Authority (ADIA)
ADIA's mission is to secure and maintain the current and future prosperity of the emirate through management of its investment assets. ADIA is a leading international investor and for the past 34 years has established itself as a responsible and trustworthy investor and a strong supplier of capital. ADIA oversees a substantial global diversified portfolio of assets across varying sectors, regions and asset classes, including public listed equities, fixed income, private equity and property. It does not seek active management of the companies it invests in, only long-term sustainable financial returns.

Abu Dhabi Investment Council (ADIC)
Responsible for investing part of Abu Dhabi's surplus financial resources, ADIC employs a globally diversified investment strategy focused on gaining positive capital returns across a range of asset classes.

Invest AD
A subsidiary of Abu Dhabi Investment Council, Invest AD, a government investment vehicle similar to ADIA, was established in1977 as Abu Dhabi Investment Company. In 2007, its mandate and its name changed when the Council decided to allow outside investors to put their money in alongside it, making it perhaps the only sovereign fund in the world to welcome external funds. Invest AD's business now includes a proprietary investment arm that continues to invest on behalf of the government and a third-party investment division for attracting capital from external investors.

The Investment Corporation of Dubai
Investing to create stability and foster diversification, the body owns 60 per cent of Borse Dubai, a holding company that in turn acts as a holding company for Dubai Financial Market and NASDAQ Dubai.

Dubai Holding
One of Dubai's major holding companies, Dubai Holding is divided between the Dubai Holding Commercial Operations Group (DHCOG) and the Dubai Holding Investment Group (DHIG), formed in 2009 when Dubai Group and Dubai International Capital (DIC) were combined.

Dubai Holding Commercial Operations Group (DHCOG)
Property developers Dubai Properties Group, Sama Dubai and Tatweer fall under DHCOG. In addition, DHCOG holds the hotel operator Jumeirah Group and the business park operator TECOM Investments. DHCOG in December 2010 agreed with creditors to convert Dh2.03 billion of debt into a new five-year loan (see Financial Services for more information).

Dubai Holding Investment Group (DHIG)
DHIG was formed as a result of combining the previously separate entities of Dubai Group and Dubai International Capital (DIC). DHIG also now controls six financial companies that are under the responsibility of Dubai Group including Dubai Capital Group, Dubai Financial Group, Dubai Investment Group, Dubai Banking Group, Dubai Insurance Group and Noor Investment Group.

Focused on the private equity asset class, DIC operates through global buy-outs specialising in secondary LBOs in Europe, North America and Asia. It also focuses on MENA investments including LBOs, funds and co-investments, infrastructure, growth and development capital. DIC signed an agreement in December 2010 with its creditors to move ahead with a Dh9.5 billion debt restructuring. In addition, Dubai Group, is also believed to be working on a restructuring (see Financial Services for more information).

Dubai World
The year 2010 proved a watershed year for Dubai World. The former engine of Dubai's rapid growth finalised a Dh91.4 billion debt restructuring agreement in October with its creditors. Nearly a year earlier the diversified conglomerate had requested a rescheduling of its debts. Nakheel, the property developer behind The Palm Islands and The World, was also part of the restructuring. Nakheel, was pledged Dh29.4 billion in financial support by Dubai’s government in March 2010. Limitless, another development unit of Dubai World, is also engaged in a plan to reschedule debt repayments.

Dubai World's restructuring agreement did not include other parts of the company's portfolio namely Infinity World, Istithmar World, and Dubai Ports World and Free Zones World.

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