Favourable Forecasts for UAE Economy
A number of reports published recently have stressed that the UAE economy is recovering well from the effects of the global crisis. These forecasts are broadly in line with figures released by the Ministry of Economy (www.economy.ae).
The Economist Intelligence Unit (EIU) has predicted that the UAE’s nominal gross domestic product (GDP) will reach an all-time high of Dh1 trillion in 2010 and will continue to grow further in 2011, reinforcing the UAE’s position as the second largest Arab economy after Saudi Arabia and the second in terms of GDP per capita income.
The EIU’s trillion-mark GDP projection for the UAE is based on an anticipated nominal gross GDP rise of 9.3 per cent in 2010. The EIU expects the UAE’s real GDP to rise by around 2.6 per cent in 2010, close to the 2.5 per cent growth rate projected by UAE Ministry of Economy and the 2.4 per cent prediction by international rating agency Fitch.
However, these GDP growth estimates are below Standard Chartered’s (SCB) projection of 3 per cent in its Global Focus report and higher than the Arab Monetary Fund’s 2 per cent forecast for 2010.
Fitch believes that the expansion in the UAE economy will be led by rising hydrocarbon production, increasing petrodollar revenues and Abu Dhabi’s massive spending programme, with a modest improvement in the private sector.
The EIU forecasts that the UAE’s economy will rise by 15 per cent to Dh1.15 trillion in 2011 as oil output and crude prices are expected to be higher than in 2010. It added that stronger oil prices would also boost the UAE’s trade surplus to nearly Dh143 billion in 2010. In 2011, the trade surplus is projected to hit a new peak of Dh157 billion on a further anticipated rise in oil output and prices.
NCB Capital expects that higher oil prices and output will widen the UAE's fiscal surplus from 0.4 per cent of GDP in 2009 to 5.6 per cent in 2010, 9.6 per cent in 2011 and 12.2 per cent in 2012 and that the country's current account balance, which experienced a deficit of 2.7 per cent in 2009, is forecast to achieve a surplus of about 5.9 per cent in 2010 and nearly 13.1 and 20.3 per cent in 2011 and 2012 respectively.
However, MarketResearch.com predicts that the UAE current account surplus will recover to US$36 billion or 13 per cent of GDP in 2010. This reflects, it said, a 26 per cent increase in the oil price, a 2 per cent increase in oil exports, a continuation in the global recovery and only a modest rise in imports. The current account forecast is nearly double the IMF’s estimate of US$19.7 billion for 2010.
Whilst acknowledging that higher oil prices have a significant impact on the country’s GDP, since the oil sector accounted for almost 30 per cent of UAE GDP in 2009, Standard Chartered Bank (SCB) also pointed to the positive news emanating from the non-oil sectors of the economy. In particular, it added, the trade sector is significant for Dubai, with the ‘trade and wholesale’ component making up close to 40 per cent of Dubai’s GDP. Indeed, the emirate, which accounts for around 80 per cent of the total UAE non-oil trade, showed a vibrant second quarter growth in all three sectors — exports, re-exports and imports — of the foreign trade to record a total trade valued at Dh259.5 billion in the first half of 2010.
The Ministry of Economy expects inflation to fall to 1.1 per cent in 2010, down from 1.56 per cent in 2009. The SCB report indicated that inflation in the UAE has remained subdued, at 0.9 per cent year-on-year and 0.3 per cent month-on-month in July, as higher domestic fuel prices caused the transport component of the Consumer Price Index (CPI) to rise by 3.5 per cent. The bank said housing costs continue to fall, with the housing and energy component (39 per cent of the basket) dropping by 0.2 per cent in July.
SCB believes that the housing component of the CPI does not accurately reflect deflationary dynamics in the UAE housing market — in 2009, this component rose by 0.42 per cent, lifting the overall index by 1.56 per cent, which, it claims, was surprising given the sharp property-market correction during the year. SCB forecasts that this component of the CPI basket is likely to face further disinflationary pressures, keeping UAE inflation subdued in 2010.
NCB Capital, on the other hand, pointed out that consumer confidence in the UAE stabilised during the second quarter of 2010, with 43 per cent of the respondents surveyed in a poll by Bayt Com indicating positive expectations. It said that the UAE's Consumer Confidence Index (CCI) dropped by only around 0.5 points over the previous quarter while its fellow GCC members, excluding Qatar, recorded a decline in the range of 1.7–4 points. Also, it claims, inflationary pressures are edging up as the UAE remains committed to a permissive fiscal stance.
MarketResearch.com agrees that UAE inflation is likely to remain low despite the pick-up in world food prices and an expected jump in December on base effects. ‘Rents and house prices are set to fall further and, along with weak domestic demand, US dollar strength and positive real interest rates should keep inflation close to 1 per cent this year, before rising to 2.5 per cent in 2011,’ it said.
The report was somewhat subdued on the Dubai economy, forecasting a contraction of a further 1 per cent in 2010 due to continuing debt and real estate issues. But on the positive side, it stated that, trade, logistics and services are benefiting from the revival in world trade, as evidenced by a surge in hotel guests and airport traffic.
Recovery in Trade
Figures released by the Federal Customs Authority in September indicate that the UAE is capitalising on the worldwide recovery in trade. In the UAE, non-oil trade rose to Dh351.9 billion in the first half of 2010, a growth of 9 per cent on the same period in 2009. By the end of June 2010 imports had risen by 3 per cent to Dh231.03 billion from Dh224.04 billion during the first half of 2009. Exports grew 32 per cent during the same period, from Dh28.76 billion in the first half of 2009 to Dh37.95 billion in the first half of 2010. Re-exports rose by 17 per cent during this period to Dh82.92 billion, up from Dh70.91 billion.
In terms of imports, the UAE dealt mostly with India, China, the United States, Germany, Japan, the United Kingdom, South Korea, Italy, Saudi Arabia and France. The main commodities imported up to June included motor vehicles, telephone sets and gold.
Trade Policy Review
The Ministry of Foreign Trade issued the 2010 UAE Trade Policy Review in August. The review includes a detailed analysis of the UAE's foreign trade-related developments from 2006, the date of the first WTO review (UAE 2006 WTO Trade Policy Review) up until June 2010.
The Ministry indicated that the publication of the review is a voluntary exercise undertaken to promote transparency and as part of the Ministry’s preparations for the WTO’s second report on UAE trade policy, which is due in 2012.
In her introduction to the review, Sheikha Lubna bint Khalid Al Qasimi, Minister of Foreign Trade, said that the UAE's trade policy remains one of the pillars of the country's economic development. This policy, she commented, is based on plans to diversify UAE exports and international trade partners, and encourage industrial sectors with a high added value to increase their export abilities, thus expanding and diversifying the foreign markets that are accessible to UAE exports, and increasing the volume of commercial exchange with those markets.
Quoting from the 2006 WTO Review, Sheikha Lubna pointed to the success of this policy: ‘The free and diverse economy of the UAE, coupled with the importance of trade to the State's economic performance, and its growing economic capabilities, make the UAE an important performer for the multilateral trading system’.
The Ministry’s 2010 Review affirms the UAE's continued adoption and execution of a trade policy framework that is attuned to its regional and international obligations whilst also being in line with the visions and strategic priorities of the country's plans to build a diverse and sustainable economy and to attain a unique global standing.
The report contains four sections: the first discusses the state's economic environment, highlighting the main features of the national economy and its foreign partnerships and investments, followed by an examination of the prospects for the economy; the second section features the institutional framework, outlining the process of formulating and executing the state's trade policy, the goals of this policy, and the trade agreements that the UAE has entered into; the third section focuses on clarifying the practices and procedures that are related to the trade policy, indicating the practices that have a direct impact on imports and exports as well as production and trade; while the fourth and final section details the state's trade policy by economic sector, highlighting the features, tools, and commercial policy frameworks of the agricultural, mining, energy, water, manufacturing and services sectors.
Log on to www.moft.gov.ae/en/ for more information.
Foreign Direct Investment
Figures released by the UN Conference on Trade and Development (UNCTAD) in August 2010 stated that foreign direct investment (FDI) by the UAE into global markets totalled around US$53.5 billion during 1990–2009, by far the largest capital flow out of the Arab region and ranking the UAE as thirtieth in the world. The figures did not include capital channelled by the Abu Dhabi Investment Authority (ADIA), one of the world's largest sovereign wealth funds..
The report showed FDI flow out of the UAE climbed to a record high of around US$15.8 billion in 2008 from US$14.5 billion in 2007 before falling to nearly US$2.7 billion in 2009. UNCTAD figures indicated that the bulk of the UAE's FDI flow targeted other Arab countries, with nearly US$62 billion invested in the region between 1990 and 2009, accounting for more than a third of the total inter-Arab capital during that period. Saudi Arabia was the recipient of nearly 70 per cent of the UAE's investments while Egypt, Morocco, Lebanon, Libya and Tunisia were also major recipients. During the same period, the country received around US$13.1 billion in capital from fellow Arab nations.
Statistics from UNCTAD also indicate that the UAE has attracted US$73.4 billion in foreign direct investment (FDI) during 1990-2009 to emerge as the second top capital recipient in the region. This figure is nearly 26 per cent of the combined foreign capital received by the six-nation Gulf Cooperation Council (GCC),
Saudi Arabia remained the largest Arab destination of FDI, attracting nearly US$147.1 billion. Taken together, FDI by the UAE and Saudi Arabia accounted for around 80 per cent of the total FDI of nearly US$278 billion received by the 29-year-old GCC.
The report showed FDI flow into the GCC declined in 2009 for the first time in many years because of the 2008 global fiscal crisis. From around US$60 billion during 2008, FDI into GCC dropped to nearly US$50 billion in 2009.
A breakdown showed the UAE was the main victim of the downturn, with FDI inflow falling from around US$13.7 billion in 2008 to nearly US$4 billion in 2009, one of its lowest levels over the past 15 years.
The UAE Government is on course to balance its budget after spending about half its projected Dh43.6 billion (US$11.87 bn) annual allocation in the first six months of 2010. A rise in receipts from Federal Government ministries compared with 2009 contributed to improved revenue.
Federal spending is up 3.4 per cent on 2009. Over two-thirds of the budget was allocated to social services (38.3 per cent) and defence and security (35.8 per cent). Infrastructure projects constituted 5.1 per cent while 1.6 per cent was earmarked for economic affairs and 3.1 per cent for foreign affairs.
From 2011, the Ministry of Finance will no longer release a budget on an annual basis: a move towards long-term planning for economic growth means that three-yearly budgets will be the norm. Although the budget will run for three years, it will include annual expenditure and revenue plans and will be open to adjustment if there is a decline or increase in revenue during the period.
The federal budget accounts for around 15 per cent of total UAE government expenditure, most of which is made by the individual emirates, which contribute to the joint budget.