UAE Economy Continues to Diversify

Economic News

22 Jul 2010
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According to a report by the Emirates Industrial Bank in early January, the UAE's GDP fell by around 2.5% in 2001, largely as a result of falling oil prices since September 11th. Dependence on oil revenue will naturally continue for the foreseeable future, but economic diversification on the basis of hydrocarbons is gaining ground. On January 29th the UAE began exporting polyethylene from the country's new plant, the first such major chemical investment in the UAE. Meanwhile Dubai has become a hub for regional travel, with passenger numbers at the airport climbing 10% in 2001, according to the Dubai Department of Civil Aviation in early February. Much of the basis for this hub concept comes from oil income, as is the case with the telecommunications project Thuraya, largely owned by the UAE telecoms provider Etisalat.

As the price of oil has fallen by around one third since the attacks on September 11th through fears of a global recession the economies of oil exporting countries have suffered. Subsequent efforts by OPEC members to cut production have not halted the price decline, with the OPEC basket price steadfastly remaining below $20 per barrel. UAE GDP fell by 2.5% in 2001 from 2000 to bring it to around Dh236bn ($64.3bn). The decline in oil prices was reflected in the contribution of the oil sector, which contracted 24% in 2001 on the previous year, to the UAE GDP. In 2000 it had contributed 34% to overall GDP, a percentage that fell in 2001 to 28%.

Since January 1st the UAE has a new production quota agreed upon in Cairo at the end of last year, which allows it to produce 1.89m barrels per day (bpd). Compliance amongst the OPEC members has been slack, with production cut by only 190 000 bpd amongst the members, excluding Iraq which has no production quota, in December from November. This left the group of 10 having to cut their January production by almost 2.1m bpd to reach their new quota.

The UAE has stuck closest to its quota, over producing by only around 5000 bpd, but it is still planning on increasing its production capacity in the long term. According to reports in early February the Abu Dhabi National Oil Company (Adnoc) is looking to increase capacity from the current 2.45m bpd to around 2.85m bpd by 2005.

In other related developments the Abu Dhabi petrochemicals producer Borouge in late January started exports from its $1.2bn plant in the emirate, the first such plant in the UAE. The construction of the facility, which produces polyethylene, marked a continuing effort by the UAE to diversify its economy from simply oil and gas exports. Officials at the company, a joint venture between Adnoc and a Denmark-based company Borealis, itself 25% owned by Abu Dhabi, are confident that in time Borouge will become a market leader for pipes, wires and cables. They hope to have a 30% market share in the Middle East and in most of Asia. Currently the plant is still not working at full capacity, as operations only began in November. A vast majority of the product is consumed within the UAE, and chief executive Hubert Puchner claimed recently that 30% of the first year's production of 450 000 tonnes of polyethylene has been ordered.

Oil is used in the production of petrochemicals, and the UAE uses gas in its power generation plants. The Minister of Water and Electricity Hamid Nasser al-Oweiss said on February 3rd that the UAE was looking to increase its generation capacity by around 8000 megawatts in the next ten years. He also announced that the UAE would begin planning a $177m national grid to finally link all the seven emirates, as part of an extended plan to link all GCC countries into one system. The concept has been on the table since 1991, but it was only last year that the first phase of the project- to link Bahrain, Saudi, Qatar and Kuwait- was approved.

But much of the concentration on diversification throughout the UAE economy has come from a focus on tourism, mainly in Dubai. Although hotel operators admit that the events of September 11th did have an impact on hotel occupancy, figures from airport traffic indicate that Dubai remains a regional hub. According to officials at the Dubai Department of Civil Aviation (DCA) on February 7th traffic through the airport increased by 10% to 13.5m passengers in 2001 over 2000. This was despite a 5% drop in the autumn, and officials remain optimistic that that this year will see equal growth.

As Dubai has promoted itself on the world stage so has the UAE-based satellite telecommunications company Thuraya. Established in 1997 and 26% owned by the UAE state-owned telecoms monopoly Etisalat, Thuraya began operations across Europe, Africa and much of Asia in the summer of 2001. On January 20th it signed an agreement with the US company Boeing, signalling its full acceptance of a $1bn satellite communications system, effectively indicating that Thuraya was entering full operational service.

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