ABU DHABI - The Economic Base.

The Abu Dhabi and Kuwaiti stock exchanges allow global custodian accounts which circumvent curbs on foreign ownership and facilitate trading.

The breakneck economic growth of the UAE continues to attract attention, but the headlines are no longer dominated by extravagant real estate projects or high-profile foreign acquisitions. Of far greater interest are lasting developments such as the financial industry and capital markets. But the star of the attention is still oil - the font from which the UAE's rampant economic growth flows.

High crude oil prices are driving stellar GDP growth and swelling government coffers. Petroleum revenues account for about 35% of GDP, 80% of state income and 90% of exports. And while prices have fallen by more than $20/b since the summer, they remain about $60/b and are expected to remain strong for some time to come.

As a result, nominal GDP growth is expected to ease to about 15% in 2007 - a considerable deceleration from the highs of 2006 - still a remarkable rate. Oil revenues could fall off further in 2007.

The three-year glut of output and price highs was brought to an end on Oct. 20, when OPEC agreed collective production cuts of 1.2m b/d to stem the price slide. The UAE has already reduced sales by some 100,000 b/d and further restraint is possible in 2007. But longer-term projections of global demand and non-OPEC supply augur well for fresh capacity finding a thirsty global market in the years to come.

A multi-billion-dollar investment programme is under way to boost Abu Dhabi oil and condensate production capacity to 3.5m b/d by 2010, from about 2.9m b/d now.

In common with other GCC governments, Abu Dhabi is deploying its oil income more prudently than during the 1970s. This was the thrust of an IMF report earlier in 2006 and was the main explanation offered by Moody's Investors Service for upgrading all six GCC sovereigns in October, which saw the UAE's long-term foreign currency government bond rating raised to Aa3 from A1.

Tristan Cooper, sovereign analyst at Moody's, was on Dec. 1 quoted as saying: "A higher proportion of these oil receipts has been saved than previously, while extra expenditure has been focused more on capital than on current spending. Most [GCC] governments, including that of the UAE, are also proceeding with structural reforms aimed at boosting the role of the private sector despite the jump in government revenues".

The UAE's situation is slightly different from that of its neighbours. In Dubai and the northern emirates in particular, limited oil output has encouraged authorities to develop alternative sectors to drive growth. But in the federation as a whole, the economic base is being expanded and reformed - with impressive results. Non-oil growth has averaged some 10% annually over the past three years and is to remain at about the same level in 2006 and 2007.

Abu Dhabi is planning domestic investment of some $170,000m over the next five years and is increasingly vying with Dubai as the focus of non-oil activity. Steve Brice, regional head of research at Standard Chartered Bank (SCB), says: "Dubai's private sector will continue to grow at a rapid pace, but Abu Dhabi is becoming the key growth driver overall because of its economic size and the level of spending planned - which is more than twice Dubai's GDP".

A host of massive real estate projects are taking shape, while major economic restructuring is gathering momentum centred on public/private partnerships and outright privatisations, in the transport and utilities sectors for example. Dubai continues to be the focus of the non-petroleum economy as it consolidates its position as a regional services hub.

However, Abu Dhabi and the smaller emirates are increasingly drawing from the "Dubai model" through economic liberalisation.

Diversification efforts are taking the emirates into a host of newer areas. Tourism, manufacturing and financial services are being joined by niche ventures such as biotechnology and logistics. Private sector investment, both foreign and domestic, is expanding on the back of economic liberalisation and low interest rates - imported through the US dollar currency peg.

A free trade agreement with the US will provide a further fillip to investment. Overseas investment, a useful insulator against regional economic swings, is accelerating. High-profile acquisitions by Dubai have been accompanied by the less publicised activities of Abu Dhabi Investment Authority (ADIA) in the international equities, bond and real estate markets. Consequently, the UAE enjoys a massive and growing net external asset position.

The UAE Central Bank recorded net foreign assets of AED 166,820m at end-2005, while the current account surplus in 2005 amounted to 25% of GDP and was to expand to about 28% in 2006. Neither figure takes into account the activities of ADIA, the world's second largest institutional investor, with more than $300,000m under its belt, or the slew of Dubai purchases.