Dubai is the second-largest of the seven emirates that comprise the UAE in terms of economic size, and the main driver of economic diversity in the country. Its tourism, logistics, manufacturing and services sectors provide opportunities for growth beyond oil and gas, the industry upon which many economies in the region are dependent. Dubai’s ability to branch out into new areas, as well as its capacity to draw in foreign tourists and investors, makes the UAE the most diversified economy in the region. At the country level hydrocarbons account for 30% of GDP and oil exports for less than 40% of revenues.
Economic growth has been more modest than usual in the past few years, due to the fall in global oil prices beginning in 2014 and the indirect impacts that filter through to Dubai’s economy. While it is not heavily invested in the hydrocarbons industry, oil prices impact state spending, tourist arrivals and the real estate market in Dubai. However, in 2018 recovering prices saw liquidity increase across the region, and with Dubai’s hosting of Expo 2020 nearing, sentiment was on the rise in the emirate. Economic development programmes for the emirate have been designed to leverage its strategic location between Europe and Asia, and the airline Emirates has played a significant role in bringing foreigners to Dubai, which accounts for two-thirds of tourist arrivals in the country.
Economic growth strategies have also focused on trade. Dubai has historically been a trade centre in the region, and the modern version of this comparative advantage can be seen in the emirate’s free trade zones, including the emerging financial hub at the Dubai International Financial Centre and Jebel Ali Port, the largest facility of its kind in the region and the ninth-largest in the world.
Growth Indicators
According to the Dubai Statistics Centre, the emirate’s GDP at constant prices grew by 2.8% in 2017 to Dh389.4bn ($106bn), the latest data available at the time of publication. Meanwhile, foreign non-oil commodity trade rose by 2% to Dh1.3trn ($353.9bn). In the same year the UAE as a whole expanded by 0.8% from Dh1.41trn ($383.8bn) to Dh1.42trn ($386.5bn), according to the Federal Competitiveness and Statistics Authority. The non-oil economy at the federal level grew by 2.5%, below the 3% growth forecast by the Central Bank of the UAE (CBUAE) at the end of 2017.
National GDP was projected to grow by 2.1% in 2018 by ratings agency Moody’s and by 2.9% by the IMF.
Pace of Activity
While the economy expanded in 2017, the emirate and the UAE as a whole experienced a slowdown in certain areas of economic activity in 2018. Passenger arrivals to Dubai, for example, numbered 8.10m in the first half of the year – nearly flat on the 8.06m recorded in the same period of 2017. Meanwhile, throughput volumes at Jebel Ali decreased by 6.7% year-on-year in the third quarter of 2018, after hitting a record of 70.1m twenty-foot equivalent units the year prior. Moreover, output costs as measured by the UAE’s purchasing managers’ index indicate that the new value-added tax (VAT), implemented at the beginning of 2018, is weighing on non-oil growth. The new tax appears to be having an impact on consumer choices as well.
“The introduction of VAT and the dampening of crude oil prices in 2018 have adversely impacted consumer purchasing power,” Priyanka Mittal, director of India-based agricultural commodities firm KRBL, told OBG. “The value rice segment has witnessed growth in volume this year, indicating new consumers. Premium brands, however, continue to sustain their levels.”
Furthermore, the 5% VAT led to inflation climbing by 2.2% in July 2018, as well as to a 17% rise in transport costs and 11.9% for restaurants and hotels. The Dubai Economy Tracker Index, an indicator created by Emirates NBD, the emirate’s largest bank, dropped to 52.5 in October 2018. This was its lowest value since March 2016, although any figure above 50 represents growth. Although the aforementioned indicators suggest that economic growth will be moderate in 2019, business leaders have signalled their optimism for the future. The OBG Business Barometer: UAE CEO survey 2018 found that 79% of respondents had positive or very positive expectations about local business conditions for the year. Participants in the survey were C-suite executives from a variety of businesses, including small and medium-sized enterprises (SMEs). SMEs dominate Dubai’s economy, accounting for 95% of companies operating in the emirate.
Key Contributors
Dubai’s history as a trading hub remains seen today, as wholesale and retail trade – which includes automotive repair – was the largest economic activity in 2017, accounting for 25.8% of GDP. Transportation and storage was the second-largest contributor to GDP, at 11.3%. The third sector to contribute at least one-tenth of the total was financial and insurance services, at 11.1%.
In terms of growth, the accommodation and food services sector more than tripled from a rate of 2.5% to 8% in 2017, while the transport and storage sector jumped from 2.8% to 4.5%. At the national level, hydrocarbons extraction accounted for 22.3% of economic activity in 2017, followed by wholesale and retail trade at 12.3%, financial services (9.6%) and construction (8.7%). The fastest growth that year was recorded in the electricity, gas, water and waste management sector, at 9.4%, followed by food services (8.5%), and health and social services (6.3%).
Structure & Oversight
The emirate’s chief economic policy body is the DED, whose sub-agencies include Dubai Exports, Dubai Investment Development Agency, Dubai SME and the Dubai Competitiveness Office. The emirate’s 22 free zones host a range of clusters, from cultural and technological to finance and logistics, and are overseen by multiple bodies.
The main zones include the Dubai International Financial Centre for finance, the Jebel Ali Free Zone and the Dubai Airport Free Zone for industry and logistics, and Dubai Media City for publishing and multimedia. All entities are overseen by the Dubai Executive Council, the main decision-making body within the emirate’s government.
Federal Level
Economic policy-making is the responsibility of each individual emirate in the UAE, and the national constitution endows each emirate with control over their own natural resources and the revenue derived from them. Monetary and fiscal policy, financial services regulation, trade policy and taxation are under federal control. With budgets of roughly Dh56bn ($15.2bn) and Dh60bn ($16.3bn), respectively, the emirate and the federal government share responsibility for funding education, health care and pensions; individual emirates such as Dubai have also mandated that employers buy health care plans for their workers. Utilities in Dubai, for their part, are administered locally through the Dubai Electricity and Water Authority to all users in the emirate.
Public entities in the UAE largely act in line with peer institutions in other countries. The CBUAE, for example, was a lender of last resort during the global financial crisis of 2008-09, as central banks typically are in similar situations. However, in the event of a solvency crisis, bailouts in the past have mostly come from the individual emirate in which a given bank is based. Financial service providers are regulated at the federal level by the CBUAE and can operate across the country, but many were founded to serve a specific emirate and are capitalised by its leadership.
The governor of the CBUAE is Mubarak Rashed Al Mansoori, who oversees the bank in a dual-leadership structure shared with Khalifa Mohammed Al Kindi, chairman of the CBUAE. The former handles the day-to-day operations and represents the bank at international events, while the latter’s responsibilities include chairing board meetings and ultimate policy authority. Monetary policy is generally guided by the dirham’s peg to the US dollar, and the CBUAE follows interest rate moves from the US Federal Reserve.
Although the history of the UAE suggests that it is the emirates themselves that would handle troubles at systemically important financial institutions in the case of a crisis, some major players have indicated that they expect federal support would be offered if ultimately needed. Global credit ratings agency Moody’s cited the likelihood of federal support as a reason for its stable outlook for the country’s banking sector in a report published in November 2018.
Foreign Investment
Foreign investors can either invest in the onshore or offshore economy. In the onshore economy foreign investors must find a local partner to own at least 51% of the equity in any investment. Offshore, such as in Dubai’s free zones, there are no restrictions on foreign ownership.
As part of what has been a closely watched legal reform process, the federal government announced in April 2018 that it will likely lift these onshore restrictions in at least some sectors of the economy. In October that year a new foreign direct investment law came into force, with the federal government aiming to publish a list of approved sectors by the first quarter of 2019. The new legislation allows foreigners to hold up to a 100% stake in UAE-based businesses.
Another sign of increased openness to foreign investment is the move to make 10-year visas available to certain investors and professionals. In early January 2019 the UAE Cabinet begun the process of implementing the 10-year visas and 100% foreign ownership reforms. These and other decisions, such as lowering or waiving some fees for government services and licensing, and a forbearance programme for companies late in paying those fees, are part of a coordinated strategy to provide stimulus to multiple areas of the economy (see analysis).
Global Competitiveness
The UAE has prioritised the creation of an efficient and competitive economic landscape for investors, and its reform efforts have been validated by external analysts. In the World Bank’s “Doing Business Report 2019” the UAE ranked 11th out of 190 economies worldwide, up 10 spots from 21st place in 2018. Its score of 81.28 out of 100 on the ease of doing business index put it well above the MENA regional average of 58.3.
In the World Economic Forum’s 2018 Global Competitiveness Index, the UAE jumped two spots on the previous year to place 27th out of 140 nations globally, ranking it the highest in the region. The country placed first in the efficiency of government spending category, ahead of the US and Singapore. The UAE’s rise in global rankings has been driven by improvements in the process of setting up a new business, resolving insolvency and enforcing contracts.
For Dubai specifically, the “Dubai Competitiveness Report 2018”, issued by Switzerland’s IMD World Competitiveness Centre in a joint effort with the Dubai Competitiveness Office, found that the emirate topped the Arab world and placed fourth out of 63 countries globally for economic performance. Furthermore, Dubai ranked first in the Arab world on points such as inward direct investment flows and tourism receipts, while ranking third globally in public finance and seventh in government efficiency.
Development Plans
Dubai is in the midst of implementing multiple sector-specific development strategies that are based on visioning exercises. Among them include Dubai Plan 2021, which addresses the urban environment; Dubai Health Strategy 2016-21, which attempts to transform health care across multiple areas; Dubai Tourism Strategy 2020, which aims to attract 20m visitors by that year; and Smart Dubai 2021, which aims to digitise all government functions. In the near term, however, the main focus is on gearing up to host Expo 2020. This involves ensuring that pavilions, hotels and other facilities are built on time, and that SMEs in Dubai’s tourism services sector are well positioned to handle requests.
Once the international event is over, economic planning will focus on conceptualising the emirate’s development post-2020. For example, some of the buildings constructed for the international event are intended to be converted into laboratories for research and development (R&D). The Dubai 3D Printing Strategy aims to position the emirate as a leader in the technology by 2030, and the Dubai Industrial Strategy 2030 plans to attract and incubate knowledge- and innovation-focused businesses to bolster value-added manufacturing and research.
“We are looking at how we can develop advanced R&D, as well as R&D-based manufacturing,” Alexandar Mathew Williams, director of business development at the DED, told OBG in an interview. “We are also looking at how we can become a part of the value chain for new devices and trends.”
Fiscal Policy
Dubai approved a record budget for 2018, with expenditure increasing by 19.5% to Dh56.6bn ($15.4bn). Government revenue rose by 12.5% to Dh50.4bn ($13.7bn), implying a proposed deficit of Dh6.2bn ($1.7bn), or 1.5% of GDP – wider than the previous year’s shortfall of 0.6%. Past shortfalls have been covered through bond issuance and loans. The budget increase is in large part thanks to the necessary ramp-up in spending to prepare for Expo 2020. Authorities included a 46.5% increase in infrastructure spending, accounting for 21% of total expenditure in the 2018 budget.
Spending on projects related to Expo 2020 is expected to amount to roughly Dh5bn ($1.4bn) in 2018 and to Dh25bn ($6.8bn) in total. In addition to this spending the government has also earmarked Dh10.6bn ($2.9bn) for the extension of the existing metro system to Expo 2020’s pavilions, which will be clustered in the north of the emirate.
The second-biggest area of spending in the 2018 budget was social development, at 33% of the total. It includes health, education, housing, community and innovation programmes. Education is an area expected to receive an increased focus, as the National Strategy for Higher Education 2030 was approved in September 2017 to help the domestic education system in its effort to provide Emiratis with the skills needed to meet Dubai’s development goals, such as growth in high-value manufacturing and a migration of domestic workers from public sector jobs to private companies. The National Agenda 2021, formulated in 2014, is an earlier policy document that also includes plans to boost the national workforce in the private sector. Emiratis have historically preferred to work in government, and that has made it difficult for private companies to attract and retain talent.
The third-largest area of public spending in 2018, meanwhile, was security, justice and safety, accounting for 16% of the total budget.
Surplus
In January 2019 the authorities announced that Dubai achieved a surplus of Dh850m ($231.4m) in 2018 owing to the adoption of strict fiscal policies. On the back of that, the 2019 budget saw public spending increase moderately by 0.35% to Dh56.8bn ($15.5bn), with Dh9.2bn ($2.5bn) allocated to fund infrastructure projects as Expo 2020 nears even closer. The government expects to generate Dh51bn ($13.9bn) in revenue, up 1.2% on the previous year, of which non-tax accounts for 64%, tax 25%, oil 8% and revenue from government investment 3%.
Revenue in Dubai has historically been dominated by fees, as the emirate levies no personal or corporate income tax. The revenue mix is expected to change over time after the UAE introduced a 5% value-added tax in 2018. The federal government also introduced an excise tax in 2017, which applies to most carbonated drinks at a rate of 50%, and to energy drinks and tobacco at a rate of 100%. The excise tax and VAT together are projected to raise revenue equivalent to 1.5% of GDP.
Federal Budget
At the federal level the fall in oil revenue beginning in 2014 turned surpluses into deficits, as fees collected from oil companies and contributions received from emirates dropped considerably: a surplus equal to 10.4% of GDP in 2013 became a deficit equal to 4.3% three years later. Revenue at the federal level dropped by 26% in 2015, and then recovered with a 42% surge in 2016. For the first nine months of 2017 the figure was 38.5% higher than in the same period of 2016. To balance the budget the UAE government has adopted an austere approach to cost cutting; for example, the Dh51.4bn ($14bn) budget for 2018 featured no deficit spending. The yearly plan is part of the larger budget for 2018-21, which foresees a total of Dh201.1bn ($54.7bn) in expenditure for the period. In 2018, 43.5% of spending was earmarked for social services.
The consolidated budget deficit was seen narrowing from 2.7% of GDP in 2017 to 1.5% of GDP in 2018, according to research from Emirates NBD. The bank’s analysts projected a break-even oil price of $63 per barrel, which is a regional low, and an end to deficit spending in 2019, which will likely result in a balanced budget at the federal level. In addition to the 5% VAT, the federal government has also worked to plug the gap by lowering energy spending. Federal authorities set prices for consumer fuels such as petrol, diesel and kerosene, and decided earlier in the decade to allow prices to rise and fall with market movements, a move that lowered the state’s energy spending by 30% to about 3% of GDP between 2013 and 2015.
Over the long term the federal government plans to eliminate all subsidies on energy, water and other utilities. “We are trying to remove all forms of subsidy, including for gas and electricity,” Suhail Mohamed Faraj Al Mazroui, the UAE minister of energy and industry, said at a conference in April 2018.
Monetary Policy
Monetary policy is guided by the dirham’s peg to the US dollar, the currency in which oil, the main export and source of revenue for the UAE, is denominated. The dollar peg is the standard approach across the region, and is expected to keep imported inflation low, according to Monica Malik, chief economist at Abu Dhabi Commercial Bank. She also added that this is particularly important for the country now because of the implementation of VAT in early 2018. “The GCC’s stable currency outlook is positive for capital and portfolio flows into the region,” Malik told local media in August 2018.
Given the peg policy, the CBUAE tracks the US Federal Reserve in setting benchmark lending rates, which leaves investors looking to Washington for clues about monetary policy. In March 2018 the chairman of the US Federal Reserve indicated that there will be a gradual increase in rates as inflation in the US rises. The expectation is that there will be three rate hikes in 2019; however, a look at past predictions suggests a degree of uncertainty. The US Federal Reserve entered both 2015 and 2016 with expectations of four rate hikes in each of those years, but ended up seeing only one in each period.
TRADE: According to the Dubai Statistics Centre, the emirate’s total trade value in the first three quarters of 2018, comprising imports, exports and re-exports, stood at Dh564.43bn ($153.6bn). Full-year 2017 trade was valued at Dh828.69bn ($225.6bn).
The top-three largest import categories were pearls, precious stones and metals, at Dh125.71bn ($34.2bn), or 36% of the total; machinery, sound recorders, TV and electrical equipment, at Dh61.33bn ($16.7bn, 17.6%); and vehicles, aircraft and vessels, at Dh31.99bn ($8.7bn, 9.2%). Dubai is also a major importer of unrefined food, chemicals and textiles.
The majority of exports were comprised of pearls, precious stones and metals; base metals and articles of base metals; and prepared foodstuffs. These values and shares of the total were Dh36.41bn ($9.9bn, 43.5%), Dh18.82bn ($5.1bn, 22.5%) and Dh5.08bn ($1.4bn, 6.1%), respectively. Re-exports, for their part, once again saw pearls, precious stones and metals take first place, with Dh55.47bn ($15.1bn) and 41.9% of the total. This category was followed by vehicles, aircraft and vessels, at Dh26.85bn ($7.3bn, 20.3%), and machinery, sound recorders, TV and electrical equipment at Dh25.52bn ($6.9bn, 19.3%). Total re-exports for the first three quarters of 2018 stood at Dh132.48bn ($36.1bn), compared to Dh83.72bn ($22.8bn) worth of exports.
OUTLOOK: Top-line figures provide data that portrays a mixed picture, and though the emirate is only indirectly impacted by oil prices, its fortunes are still expected to rise and fall with the commodity price. According to Emirates NBD, the uneven recovery of 2017 and 2018 has been the result of weak employment levels and low growth in wages, combined with an increasing cost of living.
Nevertheless, the path ahead for the emirate appears positive, and business leaders across the UAE have indicated favourable expectations for the near future. Eased policy restrictions to encourage foreign investment and the 2019 budget’s continued commitment to infrastructure development ahead of Expo 2020 are expected to stimulate economic activity and consolidate Dubai’s status as a trading hub for the region. Based on these opportunities, the IMF forecast GDP to grow at a rate of 4.2% in 2019.
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