United Arab Emirates 

 United Arab Emirates 

EFIC Country profile - map of United Arab Emirates

The UAE has benefitted enormously from the commercialisation of its petroleum resources. Oil and gas export revenues have enabled this formerly disparate collection of nomadic clans to attain per capita income and wealth levels above those of many advanced economies. They have also provided the resources to diversify the economy and secure a future beyond hydrocarbons.

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Contact: Roger Donnelly, Chief Economist Efic

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May 2011

The UAE has benefitted enormously from the commercialisation of its petroleum resources. Oil and gas export revenues have enabled this formerly disparate collection of nomadic clans to attain per capita income and wealth levels above those of many advanced economies. They have also provided the resources to diversify the economy and secure a future beyond hydrocarbons.

However, the global recession and financial crisis has exposed some flaws in the UAE’s approach to economic diversification, or at any rate Dubai’s. Its heavy borrowing for projects of untested commercial value in the days of easy credit has led to a large debt hangover that will exert a drag on growth for some years. Still, once the excesses have been worked off, the economy should still show competitive strength as a business, financial and transport hub, and energy supplier.

The UAE outranks advanced economies on two key dimensions of economic performance – GDP growth and income per head – but its business climate and creditworthiness are broadly on par (Chart 1).

Two key risks facing exporters and investors are difficulty enforcing contracts (very high) and business cycle risk (high). Enforcing contracts is both more time-consuming and costly than the OECD average. GDP growth has recently experienced a big bust and rebound (Chart 2).

United Arab Emirates chart 1: At a glance

United Arab Emirates chart 2: Key risks for exporters and investors

Interpreting Chart 2

Business cycle risk. A volatile business cycle can be a special headache for exporters and investors, because it means that downturns will be steep – and corporate casualties will be high.

Currency risk. In today's world of widely floating exchange rates and sophisticated currency hedging techniques, some degree of currency volatility is quite acceptable, and presents little risk. But where a country has a weak balance of payments or is prone to wide swings in capital flows, it can suffer sudden and dramatic currency moves that can bankrupt large swathes of its corporate and banking sectors.

Currency inconvertibility risk. If the country suffers from a weak balance of payments, not only is it prone to steep currency depreciation, but there is a temptation for the government to impose exchange controls that prevent importers from converting local currency into foreign currency in order to make trade payments.

Systemic banking risk. Weak balance sheets and poor lending practices can sometimes trigger sector-wide banking crises.

Sovereign default risk. Fiscal mismanagement can put governments under financial strain to which they respond by running up arrears with, or defaulting on, overseas suppliers and creditors. With the sovereign cut off from credit, a sovereign default also increases the likelihood of sharp downswing in the economy, currency inconvertibility and a systemic banking crisis.

Difficulty/cost of enforcing contracts. If you get into a contractual dispute, will the country's legal and judicial system help or hinder you in pursuing a claim? Drawing upon World Bank data on the cost and time involved in enforcing contracts (at www.doingbusiness.org) we seek to measure the degree of help or hindrance.

The measure scale runs from negligible to extreme.


May 2011

Of the UAE’s seven emirates, only Abu Dhabi and Dubai are economically significant. Thanks to its large oil and gas reserves, Abu Dhabi is the richest, accounting for 60% of GDP.

Both Dubai and Abu Dhabi are pursuing a state-led, if still capitalistic, development strategy. A large network of public and quasi-public companies, with strong links to the UAE’s ruling families, have been investing heavily in infrastructure, real estate, tourism, manufacturing and financial services.

Thanks to strong oil and gas export revenues and overseas investor appetite, the economy prospered during 2002 08: GDP grew strongly; foreign reserves climbed; and sizeable current account surpluses were achieved (Chart 3 and Chart 4).

But this development model came under pressure during the recent crisis, and Dubai’s debt crisis has been a severe setback to the overall UAE economy and banking system. The construction sector, one of the main growth drivers, was hit particularly hard; in the wake of the downturn, builders delayed or cancelled projects worth about US$330 billion mostly in Dubai. As a result, the economy contracted by 3.2% in 2009 and the banking sector, which was heavily exposed to construction and real estate, required state capital injections of about US$16 billion as well as central bank liquidity support.

The crisis also exposed a large build up of public (and quasi-public) debt in Dubai equivalent to 140% of the emirate’s GDP, well above normally accepted sustainability thresholds.

Dubai has managed to stave off default thanks to support from Abu Dhabi. But many companies are having to renegotiate their debts with creditors and will probably have to grind through an extended repayment process. As a result, investment spending will be kept to a bare minimum. Thus it could be several years before projects completed at the height of the boom generate substantial positive cash flow.

The economy recovered through 2010, recording GDP growth of 3.2% and the IMF foresees growth of 3.3% in 2011. Dubai’s debt and property market problems will probably continue to constrain its pace of expansion, as they did in 2010, while Abu Dhabi should experience stronger growth on the back of oil exports and public investment spending.

Longer term uncertainties loom, notably the sustainability of the state led development and economic diversification initiatives. Significant oil and gas reserves means that Abu Dhabi is in a better position if the diversification strategy underperforms. In contrast, Dubai’s reliance on non petroleum economic activity and heavy debt load means it has less of a cushion and is more vulnerable to shifting risk perceptions.

United Arab Emirates chart 3: Real GDP and inflation

United Arab Emirates chart 4: External balance


May 2011

The UAE is a confederation of seven emirates, each governed by a sheikh and a ruling family. Individual emirates have considerable powers, including control over mining rights and investment incentives.

At a federal level, power is typically shared between the rulers of Abu Dhabi and Dubai – since the UAE’s formation in 1971, the ruler of Abu Dhabi has occupied the presidency, while the ruler of Dubai has occupied the vice-presidency. In practice, Abu Dhabi’s economic weight means it plays a more dominant role in federal affairs, a role which has only been reinforced by its 2009 bailout of Dubai.

Freedom House, the political and civil rights monitor, rates the Emirates as ‘Not Free’. Unlike in some other Gulf states, high and rising living standards have so far restrained the demands of Emiratis for greater political representation.

Despite the presence of some intra ruling family and inter emirate rivalries, the UAE ranks fairly highly on World Bank measures of government effectiveness and political stability. However, its bottom quartile ranking on voice and accountability highlights some of the limitations of family based government (Chart 5).

United Arab Emirates chart 5: Political indicators


May 2011

The UAE is generally regarded as having a favourable commercial environment, which is reflected in its top quartile ranking on the World Bank’s ease of doing business metric and two sub metrics: hiring and firing workers and starting a business.

But the UAE also has a reputation for slow and lengthy commercial dispute resolution, which probably dovetails with the country’s relatively poor rankings on aspects such as enforcing contracts and protecting investors (Chart 6, left hand panel).

On factors that matter the most to foreign investors - controlling corruption, rule of law and regulatory quality - the UAE ranks in the first or second quartile of countries. It also outranks its regional peers on all three factors (Chart 6, right hand panel).

United Arab Emirates chart 6: Business climate indicators*


May 2011

As a ‘high income’ country with a per capita GDP of US$46,900, the UAE has living standards on par with developed countries such as Australia, Austria and Finland (Chart 7). But this high level obscures large disparities between the economically weighty emirates of Abu Dhabi and Dubai and their less dynamic counterparts.

Rapid modernisation and a large influx of expatriate workers mean that the UAE is more heterogeneous than it was even a decade ago. Foreigners account for around 80% of the 4.8 million population and 99% of the private sector labour force. Apart from some highly-paid white-collar expatriates, the majority are lowly paid South Asians working in the construction and service sectors. This mix, coupled with the troubles in the Emirates’ property, construction and financial sectors, is fuelling tensions such as labour unrest and youth discontent.

United Arab Emirates chart 7: Per capita GDP


May 2011

Iran and the UAE have an unresolved territorial dispute over the Tunb and Abu Musa islands, but this is unlikely to lead to conflict.

Foreign embassies warn of a high terrorist threat. As a highly westernised Muslim society, with a large non-Muslim population and US partnership role in anti terrorist initiatives, the UAE makes a tempting target for jihadists. That said, the Emirates have not experienced a successful terrorist attack and the security services are ubiquitous and vigilant.

Occasional protests by foreign construction workers over pay and conditions have involved little bloodshed and property damage. The fact that foreigners can be deported at any time acts as a deterrent to labour militancy.

United Arab Emirates - Selected indicators*

May 2011

Population 5.1
Official language Arabic
UN Human Development Index** Very High

GDP ($US bn) 302
GDP per capita ($US) 59717
Real GDP growth (15 year average, %) 5.9
Fiscal balance -0.2
Public debt 28.7
Foreign direct investment 1.3
Current account 7.7
External debt 62.5
Foreign reserves 42.8
S&P foreign currency debt rating AA
OECD country risk rating 3

World Bank - Ease of doing business 40/183
Freedom House - Political rights and civil liberties Not Free
Transparency International - Corruption Perception Index 28/178

*All 2010 figures unless specified

**The HDI is composite measure of human development: long & healthy life (life expectancy), education (literacy & education enrolment) and income (GDP per capita)

***Expressed as % of GDP unless specified

This report is published for general information and does not comprise advice or a recommendation of any kind. Readers should consider their own circumstances and rely on their own enquiries in relation to matters contained in this report. While Efic endeavours to ensure it is accurate and current at the time of publication, Efic makes no representation or warranty as to the reliability, accuracy or completeness of this report. To the maximum extent permitted by law, Efic will not be liable to you or any other person for any direct or indirect loss or damage suffered or incurred by you or any other person arising from any act or failure to act on the basis of information and/or the opinions contained in this report.

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