Why the UAE is a sound investment market

On the ranking of the best destinations for direct foreign investment, the United Arab Emirates regularly scores within the Top 15*. The reasons for this are foresight, excellent planning and a unique ability to understand investor needs. [16 Nov 2013] UAE’s achievement in becoming one of the most important economic centres in the Gulf region within four decades is due primarily to the forward-thinking of its leaders. They have built a fully integrated investment environment with all the components of a competitive and knowledge-based economy: advanced infrastructure, diversified economy and a dynamic open market approach.

UAE’s thriving economy

The country runs a free market economy that’s based on oil and natural gas production. Together these comprise over a third of GDP. However since the 1990s the UAE has diversified into many other non-oil sectors: Oil & Gas – 33.6% Manufacturing – 12.6% Commerce and hotels – 11.4% Real estate – 9.1% Construction – 8.6% Transportation – 7.3% Finance and insurance – 6.4% Government services – 11%

Open market access

The Government has taken many steps to create an open market environment that’s convenient for foreign investors. The UAE is a member of the World Trade Organization (WTO), the Gulf Cooperation Council (GCC) and a signatory to the Great Arab Free Trade Agreement (GAFTA). It has signed Bilateral Investment Treaties (BIT) with 38 countries and Double Taxation Agreement (DTAs) with 49 countries. The UAE also signed an agreement with the OECD to harmonize taxation issues. The pathways for investors are highly accessible.

UAE economy indicators in 2013**

  • The population reached 5.7 million
  • GDP Growth (constant prices, national currency) is 3.136%
  • GDP Per Capita (current prices, US Dollars) is US$ 64,780
  • Investment (% of GDP) is 23.156%
  • Inflation (average consumer price change %) is 1.585 %

Political stability

The UAE achieves a good balance between regional independence and central control. While each of the seven Emirates – Abu Dhabi, Dubai, Sharjah, Ajman, Umm Al Quwain, Ras Al Khaimah and Fujairah – has its own leader, the nation is governed by a Supreme Council of Rulers made up of the seven Rulers, who appoint the prime minister and the cabinet. This spirit of cooperation creates political stability and stimulates economic growth.

Highlights in regional investment***

Foreign investors will find unique opportunities in each of the Emirates. Among them are the following:

Abu Dhabi – This, the largest of the Emirates, represents a third of the UAE’s economy. The Abu Dhabi 2030 Strategic Plan seeks to enhance non-oil revenues. One development is building the world’s largest solar energy plant. Another is to develop the aluminum and steel industries. The specialized industrial zones arising in Abu Dhabi are expected to attract more than $35 billion of foreign investment.

Dubai – The second largest Emirate is the country’s commercial centre. Dubai represents another third of the UAE’s economy, based on the pillars of trade, tourism, real estate and logistics. Dubai’s trade revenues constitute 80% of overall non-oil revenues. There are 20 Free Zones in various sectors, providing highly attractive benefits to the many foreign companies. Ambitious infrastructure projects are a world eye-opener, including Palm Jumeirah and the tallest tower Burj Khalifa. The retail sector is also a strong driver, with around 100 shopping malls including the world’s largest, Dubai Mall.

Sharjah – Apart from oil exports, the third largest Emirate focuses on food processing, especially in fertile oases such as Al Dhaid.

Ajman – The Free Zones here provide lucrative investment opportunities at lower costs compared to the Southern emirates and have attracted industrial growth. In addition, agriculture and fishery are two areas with high potential.

Umm Al Quwain – The Emirate’s sandy beaches surrounded by mangrove forests are a major attraction to Real Estate developers. Examples of major developments are Iceland and Dream Park, two of the UAE’s largest water parks. A new marina is being planned on the city’s waterfront.

Ras Al Khaimah – This Emirate is focusing on diversifying its economy. It is the UAE’s largest cement producer and also home to a flourishing ceramics industry. The Gulf’s first pharmaceutical company is based here.

Fujairah – The Emirate has initiated a number of major projects in the energy sector. It is building two oil refineries with a 300,000 ton capacity and will also be building the new Habchan-Furaijah oil pipeline.

Country risk assessment****

One of the factors affecting foreign investment is to evaluate country risk. According to the European Journal of Business and Management in 2012, the risk in the UAE for foreign investors is rated as low-to-moderate. This has particular relevance when considering long-term and direct investments as opposed to exchange market investments. The risk matrix is composed of six categories of risk: sovereign, currency, financial, banking sector, political and economic structure.

The first category, Sovereign risk, relates to possible changes in foreign exchange regulations. The UAE with its high oil reserves is trusted to meet its debts and obligations, so the risk here is rated as ‘Stable’.

In the case of Currency risk (fluctuations in the price of one currency against another), the rating is also ‘Stable’ due to the confidence in the Government being able to maintain the UAE’s currency price.

A key category is Financial risk – the ability of a corporation or government to stand by its bonds, as well as having sufficient cash flow to cover debts. The UAE has numerous regulations and controls to safeguard investor confidence – so risk is rated as ‘Moderate’.

In the Banking sector risk category (the ability to repay loans), the UAE is rated as ‘Stable’.

One of the most important categories, especially in the Middle East, is Political risk, related to stability in power. The Emirates have a mutually-supportive system whereby each Emirate is ruled by its own Ruler and all meet to confer in consultative sessions. The UAE is rated as ‘Stable’.

Finally, there’s the Economic structure risk, which is especially relevant when a country is focused in one dominant sector such as oil. High oil prices are a strong supporter for the UAE’s economy. However the Government is stimulating numerous non-oil sectors such as trade, finance and real estate. So the economic rating is set as ‘Low to Moderate’.

A promising place to do business

Taking all factors into account, the composite picture is very encouraging. The UAE is progressing on many levels and in many directions to increase its influence on the world. Many ambitious projects are in progress and the opportunities for astute investment have never been better.

www.atkearney.com/research-studies/foreign-direct-investment-confidence-index
** www.economywatch.com/economic-statistics/country/United-Arab-Emirates
*** www.uaeim.ae/the-seven-emirates
**** www.iiste.org/Journals/index.php/EJBM/issue/view/447