Uae Macroeconomics

‫مكروكنومي[ نظرة عامّة [‬ ‫المارات العربيّة المتّحدة‬

‫‪10‬‬

Macroeconomy – Overview

United Arab Emirates ‫المارات العربيّة المتّحدة‬ Presented 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 (%) 14 12 10 8 6 4

11.9 9.7

8.2

8.9

2004-05

2005-06

2.6

2 0 2001-02

2002-03

2003-04 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 interbank 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

23.20981

29.58311

38.82834

55.08447

70.14714

Total Exports of Hydrocarton

NA

NA

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 300 250 200 150 100 50 0 1

2

3 Oil exports

4 Non oil exports

5

6 trade balance

7

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 Main Export destinations 2006

Thailand 13%

South Korea 22%

Im port Destinations 2006

India 10%

Germany 16%

Japan 55%

US 29%

India 26% China 29%

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

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

Real GDP growth (%)

Key predictions • The government will continue to boost spending in 200711 • 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

‫شكرت أنت‬

Shukran