United Arab Emirates

THE United Arab Emirates, a federation of seven emirates, has around 10pc of the world’s total proven oil reserves, of which over 90pc are in Abu Dhabi — the base of the federal government.

Dubai, the second most powerful emirate in the federation, has developed into a regional trading and financial powerhouse over the past decade. The UAE has tried to reduce its dependency on oil exports by diversifying its economy, creating booming business, tourism and construction sectors. While Abu Dhabi has opted for a relatively conservative approach, Dubai, which has far smaller oil reserves, has been bolder in its diversification policy.

The oil sector is controlled by local state-owned companies and generally closed to foreign investors. The oil industry has attracted a large influx of foreign expatriates who make up more than three quarters of the population. An ‘Emiratisation’ policy designed to reduce the UAE’s dependence on expatriate workers and providing job opportunities to a growing number of nationals has somewhat slowed. However, it still relies on foreign workers to sustain most industries.

The UAE emerged as the top Arab capital exporter from 1980 to 2011. During the period, it pumped nearly $55.5bn into global markets, accounting for nearly 31pc of total Arab FDI outflow of about $175.8bn.

Its tourism, trade and the retail sector have remained buoyant, despite the global economic downturn. Higher oil prices, increased government spending and a noteworthy resurgence in tourism, transport and trade have contributed to the upswing in the economy.

Real GDP growth was estimated to be 4.2 pc in 2012 due to 6.6pc growth in oil GDP and 3.1pc in non-oil GDP. UAE’s economy grew 5.2pc in 2013, the fastest pace since 2006. Its GDP for 2014 is set to grow at 4pc, fuelled by construction sector upturn and support from the oil and gas sector.

The UAE’s non-oil sectors are driving the economy and outperforming oil sectors, according to Arjuna Mahendran, chief investment officer of Emirates at National Bank of Dubai. This includes new industries such as manufacturing and tourism. The IMF forecasts the economy to grow at 4.8pc in 2014 and 4.5pc in the coming years as tourism continues to flourish and new large-scale construction projects are being launched.

According to Ashwin Matabadal, Country Risk Analyst at Rabobank Group, UAE’s per capita GDP is now on par with those of leading Western European nations. Oil output growth is expected to remain flat in 2014, at around 2.7m barrels per day, after output growth of 5.9pc in 2012 and 2.7pc in 2013.

Meanwhile, Dubai’s Expo 2020 is expected to result in $24.2bn in additional economic activities. Expo 2020 will provide 277,000 new job opportunities and will have a positive impact on small and medium enterprises (SMEs). The event lifted business confidence in the first quarter of 2014.

At the same time, Dubai’s real estate sector continues to be a source of concern. The IMF has identified potential risks from rapidly rising residential real estate prices. According to a Reuters report, the UAE central bank has also warned that low residential rental yields in Dubai and Abu Dhabi may indicate growing imbalances, and that overheating in the real estate sector is developing into a property bubble. House prices in Dubai are up 27.7pc in the first quarter this year from a year ago. Current average rental yields in Dubai and Abu Dhabi are approximately 70 and 130 basis points below historical averages, which could indicate growing imbalances.

Bahrain

BAHRAIN is one of the most diversified economies in the GCC region. It possesses the lowest proven oil reserves among the GCC countries at 125m barrels. Currently, it is producing 49,000 barrels of oil per day, which accounts for 11pc of its GDP, 60pc of export earnings and 70pc of government revenue. Despite low oil reserves, Bahrain serves as a hub for services and trade between the Middle East and the rest of the world. It has emerged as a major financial centre, especially in the areas of Islamic banking and financial services. At present, the private sector accounts for more than half of Bahrain’s GDP.

The kingdom has been in a state of political turmoil since tensions between its Sunni ruling class and its Shia majority erupted into civil unrest in 2011. Growth in its financial industry remains sluggish, while the unrest impeded Bahrain’s efforts to market itself as a logistics and tourism hub. Some foreign financial firms have started shifting to Dubai. However, the authorities have managed to contain the outflow and are still extending licences to banks and financial institutions and attracting new arrivals. Yet, it is struggling to retain its position in the face of tough competition from wealthier rivals such as Dubai and Qatar.

Bahrain’s GDP grew 5.3pc in 2013, fastest since 2008, and up from 3.4pc in 2012. But the outlook reveals a less promising picture, as most growth is coming from the oil industry, which is vulnerable to swings in global prices.

The Economic Development Board forecasts significant non-oil sector growth for 2014. Increased activity in the construction sector will in turn stimulate other sectors, including manufacturing, finance, and retail. Sound growth in private sector activity should boost consumer and investor confidence. The oil sector is expected to remain mostly flat this year, with growth expected at around 0.1pc. Overall GDP is forecast to remain around 3.5pc this year.

Meanwhile, the Kingdom has enjoyed a very low inflation rate for a long period of time. Headline inflation is expected to slow from an annual average of 3.2pc in 2013 to 2.5pc in 2014.

The budget deficit, which almost doubled to $1.1bn or 3.3pc of GDP in 2013, is expected to widen to around 5pc over the next two years, as current expenditures continue to rise and softening oil prices drive revenues lower. Outstanding debt amounted to $13.3bn in 2013.

Published in Dawn, Economic & Business, July 21st, 2014