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Macroeconomic overview of UAE
عام ة [مكروكنومي] نظرة حدة المّت ة العربّي اإلمارات
ب يقد م10 فريق
Macroeconomy – Overview
United Arab Emirates
حدة المّت ة العربّي اإلماراتPresented by
Team 10
History
• UAE is a constitutional federation of seven emirates:– Abu Dhabi (capital and the largest city of the federation)
– Dubai
– Sharjah
– Ajman
– Umm al-Qaiwain
– Ras al-Khaimah
– Fujairah
• The federation was formally established on 2nd December, 1971
Facts
• Area : 83,600 sq km• Four-fifths of UAE is a desert • One of the world's fastest growing tourist destinations• President : HH Sheikh Khalifa bin Zayed Al Nahyan• Population : 4.106 million (December, 2005)
– Only 20% UAE nationals, 80% expatriates
• Environment - current issues: lack of natural freshwater resources compensated by desalination plants; desertification; beach pollution from oil spills
• Strategic location along southern approaches to Strait of Hormuz, a vital transit point for world crude oil
Economic Overview
• Officially proved crude oil reserves of about 97.8 billion barrels – almost 8.5% of the world crude oil reserves
• Petroleum accounts for nearly 30% of GDP, 45% of export earnings and 40% of government revenue
• Diversification efforts• Legislation now allows 100% foreign ownership in Free
Trade Areas• The UAE has traditionally struck a delicate balance between
maintaining strong ties with the US and other Western allies and appeasing Islamist sentiment.
Inflation
Inflation• Improvement expected because of diversification • UAE is not as much dependent on oil for revenues as other
GCC’s• Big risk for budget revenues - hydrocarbons constitute
around 80% of revenues• Consumer Price Inflation flared up at 10.1% in 2006
compared to 7.8% in 2005, attributed to increase in prices of non-oil imported goods priced in Euro or Yen, increasing domestic demand pressures
• Higher oil revenues, strong liquidity, and cheap credit in 2005-2006 led to a surge in asset prices and consumer prices
• UAE being an open economy and the national currency pegged to the US Dollar, the fluctuation of the US Dollar directly affects the UAE currency
GDP
Real GDP grow th (%)
2.6
11.9
9.78.2 8.9
0
2
4
6
8
10
12
14
2001-02 2002-03 2003-04 2004-05 2005-06
Year
Oil – GDP
Growth
• One of the highest economic growth rates in the Arab region because of its growing oil and gas exports and on-going economic diversification programs
• Second largest economy of the GCC region, following Saudi Arabia
• The nominal GDP grew at a robust yearly rate of 29.2% in 2006 to US$168.26 billion compared to US$130.26 billion in 2005.
GDP - Sectorwise
Currency and Exchange Rate
• Currency – AED (Arab Emirates Dirham)• AED – Currency is pegged to US Dollar• Conversion Rate – 3.67
• Advantages of pegging– Hedging against oil price volatility
• Disadvantages– Dependence on US monetary policy leaving real interest rate too
low– Imports are not from US, hence doesn’t give benefits in terms on
imports; cost of imports increased with appreciation of Asian currencies against Dollar.
Monetary Policy
Tools to control inflation • Interest Rates - Nominal UAE interest rate follow US interest rate
Monetary Policy• Open Market Operations - High reserves, hence not used by govt. to issue public debt
• Minimum Reserves Requirements– 14 percent of current, savings and call accounts.– 1 percent of time deposits.– Goals: to encourage longer-term dirham deposits, to repatriate dirham
deposits with offshore banking units, and to discourage placing inter-bank dirham deposits abroad.
• Certificates of Deposits (CDs)– Main instrument to control domestic liquidity– Maturity period increased from 18 months to 3yrs
How does it affect?– Absence of independent & active monetary policy– Dollar pegging leads to import price inflation– De-pegging scheduled for 2010 for GCC states
Fiscal Policy
• TAX: No income tax / consumption tax• Fiscal performance directly correlated with oil prices• High oil prices offsets govt. expenditure leading to revenue surplus • Investment vehicles of govt.-
– Abu Dhabi Investment Authority (ADIA)– Dubai International Capital (DIC)
• Govt. follows expansionary fiscal policy• Abu Dhabi accounts for about 65 % of expenditures and 80 % of
revenues• Huge investments being made to increase crude oil capacity
Fiscal Policy
• Huge investments being made on non-oil diversification arenas like tourism, real estate, energy
• Development of new free zones – Dubai Airport Free Zone, Dubai Media City, Ajman Free Zone, Dubai Techno City, Gold & Diamond park
• Oct 2000: Opening of “Dubai Internet City”, a new free export zone developed with a $250m investment
• The Jebel Ali Free Zone established in 1985 has been a key element of the economic transformation of the U.A.E.; it now hosts 2,200 companies
• Nov 2000: Opening of the Abu Dhabi Security Markets and the Dubai Financial Markets Stock Exchange
Balance of Payment
2000 2001 2002 2003 2004* 2005* 2006
Current Account Balance 13.76022 8.754768 3.408719 7.555858 10.59673 27.25613 35.17984
Trade Balance (FOB) 14.83379 10.2861 14.64033 21.32425 27.58311 46.35695 56.42234
Total Exports of Hydrocarton NA NA 23.20981 29.58311 38.82834 55.08447 70.14714
Total of Non Hydrocarbon Exports 11.29155 12.55858 10.63488 14.14986 18.3297 25.93733 26.42779
Total Exports and Re-Exports (FOB) 49.86921 47.6049 52.19891 67.18256 91.05995 115.7357 142.6022
35.0327 37.3188 42.6812 52.10899 72.13079 91.22343 97.92916
Total Imports (CIF) -35.0327 -37.3188 -42.6812 -52.109 -72.1308 -91.2234 -97.9292
Services (NET) 2.891008 2.681199 -7.72752 -9.0654 -12.0708 -14.594 -17.782
Investment Income (NET) 5.095368 5.06812 0.926431 -0.03815 0.722071 2.888283 4.741144
Transfers (NET) -3.96458 -4.21253 -4.42779 -4.66485 -5.67847 -6.73025 -8.20163
Capital of Financial ACC. -10.9237 -8.26975 -1.49864 -6.6921 -6.50409 -26.8774 0
Net Errors & Omissions -10.049 -7.27793 -2.32425 0.433243 -0.91553 -7.11444 -12.5995
Overal Balance: (+)/(-) 2.836512 0.485014 -0.41417 1.288828 3.495913 2.588556 6.509537
Figures in Billion USD
Increase in current account balance
• UAE has a current account surplus since 2000 mainly attributed to trade surplus
• Exports grew almost three folds since 2000 from around 50 Billion to 150 Billion
• Imports also grew almost 2.7 times since 2000 from 35 Billion to 95 billion
Trade Surplus• Oil exports grew more than 3 times from 23 billion in 2003 to 70 billion
in 2006
• Oil sector exports grew from 44% of total exports in 2003 to 50% of total exports in 2006
• Non-oil exports also more than doubled since 2000 from 11 billion in 2000 to 26 billion in 2006
0
50
100
150
200
250
300
1 2 3 4 5 6 7
Oil exports Non oil exports trade balance
Growth in oil exports• Thanks to oil prices worldwide!!!
• As oil prices went down in 2002, overall balance went down
Growth in non-oil exports
• Attempts to reduce its dependence on crude exports and create jobs for its growing population.
• Numerous Free Trade zones in the country• Third most important re-export center in the world (after
Hong Kong and Singapore) – one third of trades • Investment in tourism, real estate and financial services • Construction increased 16%, manufacturing 13%, electricity,
gas and water 15% - Growth in year 2006
Recycling of petrodollar Growth in imports
• UAE on spending spree
• Substantial growth in commodity imports – mainly attributed to population increases
• Imports grew from 35 billion in 2000 to 95 billion in 2006
• Principle imports are machinery and electrical equipment, precious stones, precious equipments, transport equipment.
• Money is recycled back to the world economy – Main imports from US, China, India and Germany
Export - Import
Import Destinations 2006
US29%
China29%
India26%
Germany16%
Main Export destinations 2006
Japan55%South
Korea22%
Thailand13%
India10%
FDI
• Favourable sectors for FDI– Energy– Infrastructure– Hospitality
• UAE ranks first in attracting FDIs. Right now foreign national can hold only 49% in the companies in UAE.
• In FTA, its 100% ownership• UAE has 23 Free zones, mostly in Dubai
FDI contd…
• Development setting the foreign direct investment (FDI) average in the UAE at only US$18 million per year from 1998 to 2002, increasing to US$8.4 billion in 2004 and to US$12 billion in 2005.
• According to the UAE government, FDI was valued at US$10 billion in 2005
Growth Projections
Key indicators 2006 2007 2008 2009 2010 2011
Real GDP growth (%) 8.9 8.2 8.6 8.2 7.4 7.2
Consumer price inflation(av; %)
13.5 12 9.5 7.5 6 5
Budget balance (% of GDP) 11.8 9.9 8.9 7.4 6.1 6.6
Current-account balance (% of GDP)
21.4 18.6 15.3 13.5 11.7 12.9
Exchange rate Dh:US$ (av) 3.67 3.67 3.67 3.67 3.67 3.67
Exchange rate Dh:€(av) 4.61 4.95 5.06 4.85 4.69 4.63
Key predictions
• The government will continue to boost spending in 2007-11
• Monetary policy will continue to be dictated by the UAE Dirham's peg to the US dollar
• Relatively robust growth in non-oil goods and services earnings and persistently high international oil prices
• The government will continue to attempt to attract investment during 2007-08 by offering low tax rates, imposing few trade or exchange controls, providing solid infrastructure and projecting a positive attitude to private-sector investment.
References
• http://www.emirates.org/• http://uae.gov.ae/Government/economy.htm• http://www.centralbank.ae• http://www.state.gov/r/pa/ei/bgn/5444.htm• http://economist.com/• http://www.gcc-g.org/gccstatvol15/toc/chapter3e.htm• http://library.gcc-sg.org/Arabic/Books/• The CIA World Factbook
