Dubai has made headway despite some challenging economic conditions over recent years. Although political tensions in the region, the 2007-08 global financial crisis and the decline in oil prices from late 2014 have put downwards pressure on the emirate’s economic expansion, a range of new policies and the stimulus of Expo 2020 have eased this strain in 2019, and the emirate’s business sentiment has improved accordingly. With the long-anticipated Expo 2020 set to take place beginning on October 20 of that year, attention is already turning to the question of how the emirate will sustain its current economic momentum over the medium term.
The Big Picture
Dubai’s economy is the second largest in the UAE, and its broad base makes it a principal driver of economic diversification in the country. The emirate will host Expo 2020, a world expo awarded to Dubai in November 2013 in which 192 nations will participate. Preparation for the event has dominated economic discussion over recent years. According to the government, the gross value added generated by the preparations for the event between 2013 and 2021 will amount to Dh38bn ($10.3bn), with the majority of this investment expected to directly benefit the construction, business and financial services, transport, storage, and communications sectors. The event itself is expected to add an additional Dh23bn ($6.3bn) to gross value added through on-site and off-site expenditure.
As an economic catalyst, Expo 2020 has helped to mitigate the effects of the oil price decline that began in late 2014. Nevertheless, Dubai has been negatively affected both directly and indirectly by the uncertainty in oil markets: a GDP growth rate of 4.5% in 2014 fell to 3.1% in 2016 and just under 2% in 2018, according to data from the Dubai Statistics Centre (DSC). The declining trend has raised concerns regarding the emirate’s property market, which has seen real estate prices decline by more than 25% since their 2014 peak. The debts of government-related entities, meanwhile, have returned to levels similar to those that precipitated the global economic downturn of 2009, amounting to $60bn, or 50% of the emirate’s GDP, according to IMF data.
More recently, however, steady oil prices and government policy initiatives aimed at reducing the cost of doing business, boosting the liquidity of small and medium-sized enterprises (SMEs), and supporting targeted sectors have resulted in an uptick in economic performance. Proxy indicators show encouraging and positive trends: during the first three months of 2019 the emirate issued 6709 new business licences, representing a 29% increase over the same period in 2018, while the Composite Business Confidence Index was up 10.2 points yearon-year (y-o-y) and 7.7 points quarter-on-quarter in the first three months of 2019.
These trends are likely to grant the government some relief from the fiscal pressure it recently faced. Assessing Dubai’s fiscal stance is complicated by the fact that budgets are produced both at the national and emirate level, although both governments tend to follow the same approach in reacting to the economic cycle. Responding to the slower growth caused by declining oil prices, the federal government pursued a policy of stimulus that resulted in a string of fiscal deficits, which by 2018 the level was equivalent to 1.8% of GDP. The federal budget for 2019 accelerated this expansionary trend: its projected spending of Dh60.3bn ($16.4bn) was the largest in the nation’s history, up 17.3% on the previous year. More than 60% of total expenditure was allocated to education and social development, in keeping with the federal government’s strategy of boosting non-oil activity.
At the emirate level, Dubai is permitted by the constitution to control its natural resources and formulate its own economic policy. The government of Dubai can therefore implement a fiscal strategy just as the national government does, issuing a public sector budget and pursuing fiscal objectives through changes in government expenditure and revenue targets. Like the federal government, the government of Dubai has historically reacted to periods of economic stress by adopting a countercyclical stance. Its response to the global financial crisis of 2007-08 was a succession of expansionary budgets that, while consistent with the strategies of other advanced and emerging economies, resulted in a budget deficit above the 3% of GDP broadly accepted as sound fiscal practice. A period of fiscal tightening thus followed, and by 2015 Dubai had succeeded in balancing its budget. This allowed the government to return to an expansionary stance in order to respond to the low oil price environment in 2016 and 2017: expenditure in the 2017 budget increased by 2.6% on the previous year, while revenue fell by 2.8% to produce a deficit of Dh2.5bn ($680.5m).
The emirate’s budget for 2019 was its largest ever, up some Dh400m ($108.9m) on the previous year’s budget, which was itself a record-breaking budget. The extra spending, most of which was directed towards infrastructure, resulted in a total expenditure projection of Dh56.8bn ($15.5bn), while revenue was estimated to reach Dh51bn ($13.9bn).
Over the course of 2018 and for the majority of 2019 there were relatively minor changes to budget inputs. The most significant was the introduction of a 5% value-added tax (VAT) across the UAE on January 1, 2018. While revenue from the new tax is shared by the federal government across the seven emirates, its low rate, in addition to a number of cuts in taxes and fees, means that its effect on tax revenue has been somewhat limited. As a result, Dubai froze administrative fees on companies in 2018 in an effort to stimulate growth, while scrapping 19 fees related to the aviation industry in order to attract foreign investment. “The introduction of VAT has encouraged the emirates to focus on attracting company registration, as VAT is collected in the emirate in which the company is registered,” Jigar Sagar, managing director of Creative Zone, a Dubai business setup advisory firm, told OBG.
Inflation & Monetary Policy
Since January 2018 the emirate’s inflation environment has remained benign. Upward pressure from the introduction of VAT in 2018 has been mitigated by weak demand and falling housing costs, and the IMF anticipates a continued decline in the consumer price index over the next couple of years until it levels off to sit around the 2% range by 2022. This prediction is broadly in line with the forecasts of local institutions, such as Dubai’s largest bank, Emirates NBD, as well as Abu Dhabi Commercial Bank, which see the oversupply of housing, and low energy and food prices supporting a low-inflation prognosis.
Dubai’s currency, the dirham, is pegged to the US dollar at a rate of $1:Dh3.67 as of 1997, the result being that the monetary policy of the Central Bank of the UAE (CBU) closely follows that of the US Federal Reserve. The CBU’s ability to expand or contract the money supply by using policy interest rates to stimulate growth or control inflation is therefore constrained. The dollar peg means that the exchange value of the US currency against other international trading currencies and regional currencies is of significant interest to stakeholders in the domestic economy, as it affects trade, namely, the relative cost of Dubai’s imports and exports. While the weakening of the US dollar against the euro in 2017 led to a reduction in the purchasing power of the dirham, it increased the global competitiveness of the emirate’s exports. In 2018 and most of 2019, however, the pattern was reversed, with the strengthening of the dollar against the euro leading to a boost in the purchasing power of the dirham and impacted the competitiveness of Dubai’s exports.
Dubai is particularly exposed to currency risk as a result of the importance of trade to its economy. In 2017 the ratio of the foreign trade to GDP stood at 321%, according to Dubai’s Department of Economic Development (DED), a factor that has helped to establish to the local economy as the fourth-most open worldwide.
The emirate is a centre for regional and global trade, a contributing factor to its recurring trade deficit. Its imports are dominated by three commodities: machinery, tools, equipment, and electronic and electrical appliances; precious and semi-precious gemstones, minerals and imitation jewellery; and transport equipment. The emirate’s three most important exports, meanwhile, are: precious and semi-precious gemstones, minerals and imitation jewellery; chemical products and related industries; and processed food, beverages and tobacco.
Both imports and exports show high degrees of concentration in terms of trading partners, with China, India, the US and Saudi Arabia accounting for nearly one-third of total trade. Broadening the range of import and export markets is a strategic priority – and one that is facilitated by a number of trade agreements between the UAE and foreign markets. The UAE joined the World Trade Organisation (WTO) in April 1996, and in April 2016 it became the first WTO member from the Arab region to ratify the WTO Trade Facilitation Agreement – a framework that contains provisions for expediting the movement of goods in transit and increasing Customs cooperation. As a leading member of the GCC negotiation team, it is at the forefront of talks to establish free trade zones with a number of significant markets, such as the EU, Japan, China, India and the South American trade bloc, Mercosur, which includes Brazil, Argentina, Paraguay and Uruguay.
On January 1, 2015 a free trade agreement (FTA) between Singapore and the GCC entered force. While an FTA between the EU and the GCC has proved elusive, the region has made better progress with the European Free Trade Association (EFTA), which comprises Norway, Ireland, Liechtenstein and Switzerland. A long-anticipated EFTA-GCC FTA came into force in July 2014, introducing a wide-ranging framework, which includes trade in goods and services, government procurement and competition. The agreement also established the EFTA-GCC Joint Committee, which first met in January 2015, and which has been mandated to supervise the application of the FTA. Other important components include a provision for dispute settlement through arbitration and a number of bilateral arrangements on agricultural products between three individual EFTA states and the GCC. Looking towards the southern hemisphere, FTA negotiations with important markets such as Australia, Malaysia and New Zealand are ongoing, and are at various stages of completion.
As well as its status as a trading centre, Dubai is also a significant global investment destination. Foreign direct investment (FDI) inflows to the emirate have remained strong since the beginning of 2018, despite a trend of FDI outflows from emerging economies. According to the DED’s Dubai FDI Monitor, total FDI in the emirate reached a record Dh38.5bn ($10.5bn) in 2018, an increase of more than 41% over the 2017 level. This rose even further to Dh46.6bn ($12.7bn) in the first half of 2019 alone. Dubai has also performed consistently well in the fDi Benchmark surveys, ranking first globally in the “Top fDi Performers 2018” report, first globally in the “Top-20 Destination Cities for Renewable Energy Investments” report for 2013-18, and second globally in the “fDi Global Cities of the Future 2018/19” report. The US is the leading investor in terms of FDI capital, accounting for 37% of the total in 2018, followed by India with 12%, Spain (9%), China (7%) and the UK (5%). In terms of sectors, accommodation and food services claim the largest share of FDI in 2018, at 46%, followed by non-residential building construction (15%); residential building construction (8%); arts, entertainment and recreation (4%); and finance and insurance (4%).
The most significant recent change to the investment environment is the implementation of the new FDI law in October 2018. The long-anticipated legislation opens the door to 100% ownership of local companies, removing the 49% cap that had limited the ability of international investors to engage with the domestic economy. The law also established an FDI Committee and an FDI Unit, that – together with the federal Cabinet – are determining the procedures which foreign investors will be required to follow in order to secure majority shareholdings.
The FDI Unit is also responsible for establishing a positive list of economic activities approved for full foreign ownership. In July 2019 it produced its first iteration of the list, identifying 122 economic activities across 13 sectors: administrative and support services; agriculture; arts and entertainment; construction; educational activities; health care; hospitality and food services; information and communications; manufacturing industry; professional, scientific and technical activities; renewable energy; space; and transport and storage. The evolution of this list remains an important matter to the investment community. While its contents are set at the federal level, each emirate has some discretion with regard to the precise share by which each economic activity is to be opened up to foreign investment.
The 2018 law also establishes a so-called negative list of sectors that cannot be opened up to full foreign ownership without a special dispensation from the FDI Committee, including, but not limited to: the defence and security sector; oil exploration, drilling and production; telecommunications; banking; insurance; water and electricity; Hajj and Umrah services; printing and publishing; road and air transport; and medical retail, including pharmacies.
The new FDI law reinforces Dubai’s reputation as a globally competitive investment destination. Other recent measures aimed at boosting the UAE’s global competitiveness include the introduction of long-term residence visas for professionals and retirees, and a reduction of electricity tariffs for the industry sector. The UAE has a strong record in the area of intellectual property rights and is ranked 23rd out of 180 nations in Transparency International’s Corruption Perceptions Index. Dubai is the Middle East’s highest-ranking city in Mercer’s Quality of Living survey, and one of only six cities in the region to make the top 100 for city sanitation. The emirate was the first within the UAE to open its real estate market to foreign investors, and it regularly overhauls its legal framework with a view to attracting foreign investment.
The UAE has a highly developed transport network, and Dubai plays a dominant role in cargo and re-export activity that has emerged due to its two major ports, Port Rashid and Jebel Ali Port. Dubai operates more than 30 free zones, ranging from the 57-sq-km Jebel Ali Free Zone – home to more than 7500 global companies – to smaller, specialised zones focused on activities that have broadened the emirate’s economic base, including Dubai Studio City, Dubai Media City, Dubai Silicon Oasis, and Dubai Gold and Diamond Park. One of the most important free zones in terms of the emirate’s global brand is the Dubai International Financial Centre (DIFC), which is a major offshore hub for the Middle East, Africa and South Asia (see Capital Markets chapter). Home to Nasdaq Dubai, which has emerged as a global leader in the debt securities market, the DIFC reached eighth in 2018, its highest-ever ranking in the Global Financial Centres Index in 2018.
Within the World Bank’s “Doing Business 2020” report, the UAE ranked 16th out of 190 globally. This places it at the head of the Middle East and North Africa region, and at a comparable level with Australia and Lithuania. The nation performed particularly well in areas such as enforcing contracts (ninth), getting electricity (first), registering property (10th), dealing with construction permits (third) and protecting minority investors (13th). Areas with room for improvement include getting credit (48th), resolving insolvency (80th) and trading across borders (92nd).
The DED has also taken steps to ensure that it can more closely monitor the emirate’s attractiveness as a business destination. In September 2018 it revealed its plans for the Future of Competitiveness Platform, an interactive digital platform that will benchmark Dubai’s competitiveness against worldwide indicators. The new platform relies on six key global indices related to: the IMD World Competitiveness Centre, the Global Cities Talent Competitiveness Index, the Global Talent Trends Study, the Innovation Cities Index, the World Bank’s ease of doing business index and other internationally recognised indices.
Dubai’s efforts to generate both domestic and foreign investment are aided by its status as the most diverse economy in the region. The most recent GDP data from the DSC shows the wholesale and retail trade as the biggest economic activity in the emirate, accounting for 26.4% of the total in 2018. A growing population over the past decade has driven domestic consumption, while Dubai’s emergence as a shopping and lifestyle destination has enabled it to attract consumers from around the world: visitor numbers to the UAE are increasing at a rate of 8.7% per year, according to the DED. Research published in 2018 by US commercial real estate services and investment firm CBRE Group showed Dubai to be the world’s top shopping destination in terms of international retail presence, with 62% of international retailers doing business in the city in 2017 (see Retail chapter).
Transportation and storage, accounting for around 12.3% of GDP in 2018, is the next biggest economic sector. The emirate is home to two of the region’s most successful airlines, Emirates and flydubai, while Dubai International Airport is a globally significant transport hub. Dubai is also an important marine cargo destination, and in July 2019 it was named one of the top-five maritime hubs worldwide by the International Shipping Centre Development Index. Dubai benefits from a UAE-wide road network, with it being ranked first for road quality globally by the World Economic Forum in 2017-18. Recent years have seen some major investments, most notably in the Dubai Metro and Dubai Tram systems, which began operations in 2013 and 2014, respectively. The emirate’s metro and trams form part of a wider public transport system that also includes taxis and buses, and carries approximately 1.6m travellers daily (see Transport chapter).
Dubai’s third-biggest economic driver is the financial services sector, accounting for 10.2% of GDP. Around one-third of the GCC’s banking assets are concentrated in the UAE, making it the biggest banking sector within the region. Dubai is home to some of the sector’s most prominent institutions, including the second-largest bank in the country, Emirates NBD, and the second-largest shariah-compliant institution in the world, Dubai Islamic Bank (see Banking chapter). The UAE insurance market has maintained the number one ranking in the MENA region for 10 consecutive years, and has continued its expansion despite an increasingly challenging regulatory environment (see Insurance chapter).
The depth of the emirate’s capital markets, meanwhile, establishes it as the first financial hub in the region. The principal equities exchange is the Dubai Financial Market, established as a government-owned platform in 2000. In 2010 it was augmented by the Nasdaq Dubai platform, located within the DIFC. Other important trading platforms located within the emirate include the Dubai Gold and Commodities Exchange, established in 2005, and the Dubai Mercantile Exchange, located in the DIFC (see Capital Markets chapter).
Manufacturing activity accounts for 9.2% of GDP, making it the fourth-largest economic sector in Dubai. The emirate has been an aluminium producer since 1975, and is home to the world’s fifth-largest primary aluminium production facility. An ambitious industrial strategy has added steel and chemicals to the heavy industry mix, as well as lighter industries such as processed food and beverages (see Industry chapter). In 2016 the emirate launched Dubai Industrial Strategy 2030, which identifies 75 areas of activity as targets for growth, including aerospace, maritime, pharmaceuticals and machinery and equipment. The plan aims to channel some Dh165bn ($44.9bn) to the sectors over the next decade.
Further economic diversification remains a key strategic priority for Dubai. This effort is led by the DED and its agencies, established in 1992 to drive the emirate’s economic agenda. Dubai is currently implementing a number of sector-specific development strategies, including 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; Dubai Industrial Strategy 2030; and Smart Dubai 2021, which aims inter alia to digitise all government functions.
In September 2019 vice-president and prime minister of the UAE, and ruler of Dubai, Sheikh Mohammed bin Rashid Al Maktoum, called for a new real estate strategy to tackle the challenges facing the sector. The announcement was followed by the establishment of a Higher Real Estate Planning Committee, which, as well as formulating a 10-year plan, will ensure that semi-government real estate companies will not compete with private investors.
The longer-term development of Dubai is being undertaken according to the 50-Year Charter, revealed by Sheikh Mohammed in January 2019. The charter, which will be released every year to announce exceptional projects in Dubai, does not replace the individual strategies, but establishes a number of visions for the future that the government will work towards, including the Dubai Silk Road, that aims to capitalise on the emirate’s logistics capacities (see analysis); a geo-economic map of Dubai that establishes economic and investment zones for different areas of the city; and free zones in public and private universities that allow students to carry out business and creative activities. The charter also reaffirms the emirate’s fundamental policy principles as a free and open market economy, and a preferred destination for foreign and domestic investment.
After a period of fiscal stimulus in the run-up to Expo 2020, the federal government is expected to return to a stance of fiscal consolidation in the short term in order to preserve the nation’s oil wealth for future generations. The ability of the private sector to carry forwards the economic growth that has been generated by government spending is therefore central to the long-term expansion of the domestic economy. The capacity of Dubai’s more vulnerable sectors to respond to this pressing challenge remains to be seen. A subdued real estate market, which has seen declining property and rental prices over recent years, is a particular area of concern, although it will receive a short-term boost with the commencement of Expo 2020 in October, as well as attract foreign-born nationals with the introduction of a new 10-year residency visa in the UAE.
Dubai faces other downside risks as a result of its open economy, which renders it vulnerable to financial market volatility and trade disruptions. Nevertheless, the outlook for the emirate over the medium term is broadly positive. The UAE is starting to recover from the 2015-16 slowdown caused from the decline in oil prices that began in late 2014, thanks, to improving oil market conditions, a range of new policy measures, more encouraging growth prospects of key trading partners and increased investment ahead of Expo 2020. Accordingly, the IMF anticipates a strengthening growth momentum over the coming years that will see non-oil expansion rise from 3.9% in 2019 to 4.2% in 2020. Government estimates, meanwhile, foresee GDP growth of 2.1%, 3.8% and 2.8% for 2019, 2020 and 2021, respectively.
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