Transcript uae economics

The United Arab Emirates:
economic principles of a
model emergent economy.
PROF.DR. SAAD OTHMAN
COLLEGE OF BUSINES STUDIES
AL GHURAIR UNIVERSITY
1
Introduction
UAE's GDP, very dependent on oil prices,
has followed a roller coaster pattern,
soaring during the 1970s and declining
precipitously throughout the
1980s,1990s till now. Even though the
development of non oil economy has
been impressive , oil still comprises
70% of export revenues and is crucial
to the balance of payments.
2
Development models
Each Emirate has so far followed its own
economic path ,there is not yet a UAE
global and comprehensive strategy
implemented. Dubai has followed a
resource based strategy based on
services and tourism, Abu Dhabi has
followed an industrial model based on
hydrocarbons , the other emirates are
following somehow the path taken by
Dubai and launching similar initiatives.
3
Modernization
The UAE has so far attained a high level of
modernization according to western
standards .This has attracted a qualified
skilled workforce which has challenged the
local workforce and needed formal
government intervention through the so
called Emiratization policies ,criticized by
WTO as being a clear form of labor market
subsidies.
4
Economic activity
The UAE has been running high fiscal
deficits and has reined in public spending
while not compromising the development
of the private non oil economy through a
combination of deregulation, public private
partnerships and other government
initiatives. Fiscal deficit has fallen from 6%
of GDP in 1998,to 5% in 1999 and 4% in
2000.
5
Non oil sector
Consists mainly of aluminium production,
tourism,aviation,information technology,
and the reexport sector now contributes
2/3 of total GDP,although oil is important to
the economy as it contributes to 70% to
total exports.
6
Diversification
These swings in income have
caused the authorities to look
for ways to diversify the
economy, particularly in Dubai,
where oil production is
declining. The search for
diversification has been only
partially successful.
7
Oil revenues
Oil revenues remain the engine
that powers the UAE economy.
Oil revenues in fact provide 80
percent of fiscal revenue and
about 60 percent of export
earnings in the current period.
8
Financial solvency
The UAE is in better financial condition
than its immediate neighbors. The
government is not delaying payments
to contractors or borrowing from
foreign commercial banks to pay its
debts. It is, however, drawing upon its
own overseas assets and borrowing
from domestic commercial banks in
which it has an ownership share.
9
Economic Indicators
• GDP (DH millions)
:147.5
• Real GDP Growth
(percent):3.03
• Consumer Prices
(percent average
change):6.0
• Fiscal Balance
(percent of GDP):2.2
• Current Account
(US$ billions):6.2
10
Economic growth
The UAE economy is growing by
an estimated 9 percent. The
rise was due in part to the 20
percent increase in oil income,
the strong economic growth in
the non-oil sector. Inflation is
about 3.5 percent.
11
Oil reserves
The UAE has nearly 100 billion barrels of
proven oil reserves, or about 10
percent of total proven world oil
reserves, most of it in the Emirate of
Abu Dhabi, and 5.7 trillion cubic meters
of proven gas reserves, which amounts
to 4.6 percent of total world proven gas
reserves, again, most of it in Abu
Dhabi, which makes the UAE the fourth
largest gas reserve country in the world
after Russia, Iran and Qatar.
12
Oil production
UAE oil production is at the level of
the UAE's OPEC quota, 2.16 million
barrels a day (b/d), with about 0.3
million b/d coming from Dubai and
the rest from Abu Dhabi.
13
Abu Dhabi oil
While Dubai produces at maximum
capacity, Abu Dhabi has completed
a US$ 5 billion capacity expansion
program that has raised capacity
to 2.5 million b/d by early 2000.
14
Oil revenues
Largely because of flat or declining oil
prices, oil's share of GDP in the UAE
has declined from 44.2 percent in 1992
to 33.2 in 1994. Despite this, there is
considerable growth potential in this
sector in 2000s.
15
Gas reserves
Abu Dhabi also is in the process of
increasing income from its enormous
gas reserves. Abu Dhabi was until
recently the only producer and exporter
of liquefied natural gas (LNG) in the
region. Back in 1994, it doubled the
capacity of its LNG plant on Das Island
to five million tons per year. LNG
accounts for about 5 percent of total
UAE export earnings.
16
Non-Oil Sector
Several factors have contributed to the
growth of the non-oil sector in recent
years including government
investments in electricity, water, and
other infrastructure, development of
financial services, and strong demand
for re-exports.
17
An Open economy
An open economic system, free
movement of capital and financial
stability have also contributed.
Government support through provision
of incentives and subsidies, along with
a high level of government expenditure
in housing, have also played an
important role.
18
GNP
The largest contributors, as a percentage
of GNP, after oil (about 33 percent) are,
in descending order, government
services (12 percent), trade (11
percent), construction (10 percent),
manufacturing (8.6 percent), real estate
(6.7 percent), transportation, storage
and communications (6.2 percent) and
finance and insurance (5.6 percent).
19
Ports
Dubai Port Authority's container traffic
increased by 10 percent in 1995, from 1.88
million teu in 1994 to 2 million teu. Transshipment business also increased to 1.04
teu, a 9 percent rise compared with 1994.
Local and re-export business now accounts
for 50 percent of the total container volume
handled by the DPA. Overall growth is
attributed to the strong import and export
markets in Dubai which rose 13 percent and
21 percent, respectively.
20
Reexport
Most of the incoming traffic is destined
for re-export, although Dubai's growing
population, expanding consumer
market and construction booms are
taking an increasing share of imports.
21
Free zones
Jebel Ali Free Zone has significantly
reduced the UAE's dependence on
trans-shipment. Nearly 1,000
companies from over seventy countries
and major corporations such as Sony,
Aiwa, Black & Decker, Nissan, Honda
and Coleman are present in the zone.
Recent investors include Japan's
Shivaki and the US-based General
Motors
22
Ports extension
To attract even more investment, major
upgrades are underway, including the
addition of another 52,000 square
meters of container stacking runway.
By the year 2003, the DPA had its two
ports, Jebel Ali and Mina Rashid, who
have thirty ship-to-shore cranes.
23
Agriculture
The local food processing industry
continues to expand off export
opportunities for semi-processed
agricultural products. Major growth
sectors are beverages (juices and soft
drinks), dairy products (ice cream and
yogurt), snack foods and biscuits.
24
Public Finance
The UAE has a mixed economy, with the most
productive assets owned by the government
of the individual Emirates, but considerable
scope is given to private enterprise. Its legal
regime favors UAE nationals over foreigners.
In both Abu Dhabi and Dubai, international
oil companies maintain equity interests in
their operations.
25
Banks
Some banks are privately owned. They
represent one of the principal types of
commercial establishment in which
stock is sold to the public. Although
foreign banks are numerous Islamic
Banking is taking the lead.
26
Trade
Foreign contractors or service
businesses require UAE nationals
sponsors, one for each Emirate in
which they do business. Foreigners are
not allowed to own land in Abu Dhabi
or Dubai except in free zone areas.
Residential and commercial foreign
ownership is not on the agenda.
27
Budget
The government sector includes the
accounts of the federal government as
well as accounts of the seven
individual Emirate governments. Only
the federal budget, a small part of the
total, is published.
28
Reexport
The UAE enjoys a booming re-export trade,
34 percent of all exports are re-exported.
Traditional re-export markets are the Gulf
Co-operation Council (GCC) states and
Iran.
29
New markets
UAE traders have aggressively sought
out new markets in such areas as
Russia, the newly independent states
of central Asia and in South Africa.New
real estate developers such as EMAAR
and DAMAC are entering strongly in
new markets.
30
Privatization
All six members of GCC
currently have privatization
plans of some form as a
means to reduce government
expenditures and to turn
around unprofitable stateowned businesses.
31
Privatization
The UAE especially has been
testing plans for privatization
on small agricultural
enterprises and now hopes to
open strategic sectors of its
economy, such as the
petrochemical industries, to
private investors.
32
Privatization
As part of the UAE's ongoing
commitment to the privatization
process, in 1996 Abu Dhabi sold shares
by public subscription in Food Co., a
food products retailer and floated
majority stake in the joint-stock
company Abu Dhabi Shipbuilding Co.
33
Privatization
In 1997, shares were publically sold for
al- Kanza Insurance Company and
Oasis International Leasing Company.
The General Industrial Corporation, a
diversified Abu Dhabi-owned company,
is also slated for sale, although the
Emirate would prefer local citizens to
be the major purchasers.
34
Joint venture
Unlikely to ever be sold are government
holdings in the oil sector. Foreign
companies Nestle and Statoil have formed
a joint venture with Abu Dhabi National Oil
Company in the Ruwais project. Giat
Industries has proposed buying the
Taweelah power and desalinization
complex as part of its offset obligations.
35
Stock Exchange
Public stock companies are registered in
the UAE, there is a stock exchange at
the present time in Dubai and Abu
Dhabi. Shares of public companies are
bought and sold through private
brokerage agencies, and share price
information is based on the latest
transactions.
36
Stock exchange
The UAE has opened a formal stock
exchange in 1999. A proposed law
provide the regulatory framework for
the exchange. The UAE stock market is
believed to currently have a market
capitalization of more than DH 67
billion, and the primary market is also
expected to become very active in the
future.
37
Stocks
The Emirates Bank group has currently
established the Emirates Equity Index
(Emnex), a composite of thirty-one
actively traded UAE stocks.
38
Exchange
There are also sub-indices for the three
main market segments-banking,
services and insurance. Official reports
state that the UAE has set up an
exchange to absorb planned
privatization of service sector
companies and shares in new
commercial joint ventures.
39
Current and Projected Projects
The Dubai strategic plan has earmarked
US$ 9 billion to be invested in the Jebel
Ali free zone over the coming five
years.
40
Projects
Development projects which are already
underway include the construction of a
US$ 200 million unit for the Jebel Ali
topping plant now being planned by the
Dubai-based Emirates National Oil
Company (ENOC) and the possible US$
400 million expansion of the Ruwais
Fertilizer Company (Fertil) plant in Abu
Dhabi.
41
New projects
Southern Petrochemical Industries
Corporation of India has already
received approval to construct the US$
165 million Jebel Ali fertilizer plant,
which produces urea and ammonia.
Other plants currently being
considered for massive expansion
include the Taweelah A and Jebel Ali D
power stations and the Al- Awir sewage
treatment plant.
42
Projects
Additional major projects include the
establishment of the 400-kilometer link
from the Taweelah power complex to
Abu Dhabi island, a ship repair and
construction yard for Abu Dhabi Ship
Building and a new Abu Dhabi naval
base.
43
New projects
Other projects include the US$ 530 million expansion
of Dubai Airport, a US$ 500 million expansion of Abu
Dhabi and Al-Ain airports, the building of a number
of new hotels, including a new 280-room Hyatt
between Umm al-Nar and Shahama and a 416-room
Park Plaza hotel near the Dubai World Trade Center,
as well as two office towers in Dubai of 305 and 350
meters respectively and a new Sharjah world trade
center, which will include a 320-meter tower and a
20,000 square-meter exhibition hall. Hospitals and
housing projects are also being planned and should
be open for tender anytime from now.
44
Projects
1998 is likely to see the beginning of
consultancy work on a project to expand the
capacity of the Mirfa power and desalination
operations. The General Projects Committee
(GPC) is currently discussing what form the
expansion should take. One option is to
install back pressure turbines at the A station
to produce additional power and desalination
output. An alternative is to go for a much
larger development of 400 to 500 MW of
power and forty to fifty million gallons a day
(g/d) of desalinated water.
45
Investments
The government has said it plans to
invest up to US$ 300 million in the
recently-formed Saadiyat Free Zone,
including the construction of a six
kilometer bridge to the mainland.
46
Build Operate Transfer
One of the first BOT projects in the water
treatment sector is the Ajman wastewater
project. Concessionaires are Black & Veatch
US International. and the Abu Dhabi-based
KEO International Consultants. One hundred
million dollars will be invested in the first
phase of development and the overall project
is expected to require an investment of US$
600 million.
47
Ajman project
The concession will extend for twentyfive years, and the operators are
expected to recover their outlay
through house connection charges as
well as through the treatment of waste
water.
48
New projects
Another waste water treatment plant to be built
on a BOT basis will be located in Salalah.
The British partner of this British/Omani joint
venture is North West Water International, a
subsidiary of the North West Water Group.
According to the terms of the award, the
operating company will be responsible for
building the city's wastewater transportation
system as well as for operating a sewage
plant, currently being built by ABB USA.
49
New concession
The concession is to extend for thirty
years and will include responsibilities
for billing and collection of water
connection fees. Other income is to be
secured through the sale of treated
effluent back to the municipality and
the sale of water to other interested
buyers.
50
Franchising
Currently, franchises are operating in the
fast foods industry; dine-in restaurants
and clubs; auto leasing; apparel; soft
drink bottling; beauty products; hotels;
toys; photography; jewelry; vending
machines; dry cleaning; furniture;
hardware; natural health products;
publishing; and sporting goods.
51
Franchising
The largest segment is the fast food
franchise group which is highly sought
after by local companies. Most of the
major US fast food companies are
already established in the market.
52
Restructuring
The industry, however, is currently going
through a major restructuring with
several major franchises being sold to
new owners. These changes are seen
as a positive change from weaker to
stronger management, and not as a
reflection of weakness in the market.
There remains considerable potential
for franchises of all kinds.
53
Regulation
There is no special legislation for
franchises in the UAE. General contract
and commercial law apply to franchise
agreements. UAE law mandates that
only UAE citizens or corporations
wholly owned by UAE citizens are
allowed to conduct retail operations,
the most common type of franchise.
Foreign businesses must work through
a local partner as licensee or enter into
a joint venture.
54
Franchises
Franchisees usually prefer to own 100
percent of the franchise themselves. In
other cases, the franchisee enters into
a joint venture with the franchiser to
operate all outlets as company-owned
stores employing local managers.
55
Operations
As with other types of business
operations in the UAE, the selection of
the local partner is critical. One
common practice used by franchisers
in the past that has, in many cases,
caused considerable problems and
significant lost sales is the selection of
a master distributor to cover the entire
Gulf through the use of subdistributors in each country.
56
Different markets
Each market is different and
requires qualified local partners to
exploit its opportunities. Free
zones are extended to include all
possible services such as
health,IT,education and research.
57
WTO and integration
WTO Negotiations are still on the way even
after the failing Doha summit . US-UAE
free trade area and EU-UAE free trade
area as well as the GCC integration
efforts aiming the setting up of a single gulf
currency are also on the way.
58
Conclusion
The UAE economic structures have proven over
the years their flexibility and adaptability to
internal and external variations. The UAE
development and growth model has been an
inspiration to many but its replicability is difficult
as it is a mix of politically sound leadership,
conducive business environment, tax free open
economy, attractive lifestyle, state of the art
infrastructures, innovations and best practices’
friendly environment.
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I THANK you,,,
Dr.saad othman
Dean agu
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