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UAE: financial report.

Amidst a crisis of confidence across the leading emerging markets of Asia and Latin America, the UAE's good macroeconomic fundamentals, sound banking sector and first-world infrastructure clearly stand out. With a small but highly vibrant and diversified economy, the UAE holds almost 10 per cent of the globe's proven oil reserves, equivalent to 98 billion barrels and enough to sustain output for the next 100 years.

The economy, of which the non-oil sector constitutes 70 per cent of GDP, the highest in the Gulf Cooperation Council (GCC) region, has expanded strongly in the 1990s, underpinned by higher oil/gas output in Abu Dhabi and rapid commercialisation in Dubai, the business capital of the Gulf region.

The emirate's GDP in real terms has grown by over two-thirds within a decade, with increasing contribution from commerce, real estate and tourism. With a per capita income of $19,000 in 1997, the UAE ranks as the Arab world's richest nation and one which plays an important role in the socio-economic developments of the Middle East.

However, in contrast to the so-called feel-good factor evident in the 1995-97 period, business confidence last year was less buoyant. This was reflected in sluggish activities in construction and trade sectors.

The economy dipped into technical recession as plunging government revenues led to lower capital spending. The oil sector accounts for 30 per cent of GDP, but a much higher contribution (80 per cent) of federal government revenue. According to the Planning Ministry's estimates, nominal GDP growth in 1998 fell by 5.5 per cent, largely due to a slump in oil prices, stagnation in oil and gas output and slower growth in international trade. The latter reflects the economic downturn in Asia, Russia and the central Asian republics.

The UAE's quota is 2.157 million b/d, equivalent to nine per cent of OPEC's total. However, a further indication of the government's successful diversification strategy was evident by an impressive 4.7 per cent growth in non-oil output in 1998.

The government is projecting a rebound in GDP growth to 3.5 per cent in 1999, fuelled by mostly continued expansion in non-oil GDP and a modest recovery in oil prices (though still lower in real terms). Private consumption and business spending remain resilient, helped by lower interest rates-which are pegged to the US interest rates.

Notwithstanding weak oil prices, there is still ample liquidity in both public and private sectors. Rumours of imminent payment arrears to contractors, severe austerity measures, or wide-ranging cuts in public current spending have not materialised. However, government departments this year will be forced into belt-tightening, leading to lower volume of state contracts. Consumption and fixed investment will remain subdued over the year.

Growth-stagnation is particularly affecting Dubai, the commercial hub of the seven emirate federation. Abu Dhabi has maintained ongoing investments in gas exploitation and development and petrochemicals/oil refining; the emirate sits on four per cent of the world's gas reserves, equivalent to 5.8 trillion cubic metres.

Depressed import-prices of manufactured goods, especially from the Asia-Pacific region, and of food/beverages, slowing domestic demand, coupled with firmer exchange rates have helped to contain inflationary pressures.

Consumer prices surged by only two-three per cent in 1998. The federal budget last year recorded a deficit of UAE Dirhams (Dh)1,756 million, equivalent to one per cent of GDP.

The overall pace of economic reform is slow, even by the cautious standards of GCC governments. So far, Abu Dhabi's government has recently allowed private sector participation in utilities, such as water and electricity. But a comprehensive privatisation programme involving large-scale divestment's of the state's industrial holdings including the hydrocarbon sector, is highly unlikely for the foreseeable future.

This is because there is no real financial pressure on the federal government, even in times of low oil revenues.

The IMF advised the government to improve its fiscal position by imposing income tax and cutting subsidies on mostly public utilities. But the government is reluctant to implement radical fiscal reforms, largely for political reasons, maintaining that higher oil output and exports, relative to a small indigenous population of below 800,000 and sizeable foreign net assets, provide a valuable cushion as the economy readjusts to lower world oil prices.

The bearish fundamentals for oil markets, suggesting a price range of $18-$20 a barrel, may prove unsustainable even over the next two to three years. But the federal government has the luxury of annual earnings in the form of interest, profits and dividends (IPDS) on overseas investments-estimated at between $7-$10 billion and these cash-flows can be deployed to fund budget deficits without resort to a drawdown in state assets, as happened in Kuwait, in the post-Gulf war period.


After a sustained period of strong external surpluses, the UAE saw a deterioration in its balance of payments in 1998. According to official figures, the trade surplus plummeted to $2,287 million, the lowest in 20 years, compared with $6,592 million in 1997, or a peak of $10 billion in 1996. Consequently, the current account is estimated to have shrunk to well below $1 billion.

Besides a collapse in the value of oil exports to below $9.5 billion, the devaluation of the Russian rouble in 1998, and a downturn in the Commonwealth of Independent States (CIS) economies, principally Russia and the central Asian republics, as well as subdued demand for consumer/manufactured goods in GCC countries and Iran, led to a decline in Dubai's re-export trade, which constitutes over 30 per cent of total exports. About two-thirds of the UAE's total exports in 1997 went to the Asia-Pacific region.

Thus lower energy consumption in Japan, South Korea, Singapore and Thailand, if continued into 1999-2000, will hit oil exports, unless new markets in Europe and North America can be found to compensate for weak Asian markets.

The volume and value of oil exports may be static this year, while re-export flows will be affected by a decline in intra-regional trade, reflecting deflationary conditions in Saudi Arabia and Iran, two of the UAE's main trading partners.

A modest improvement in the external position may be expected in 2000, as oil prices having hit bottom, pick up, assuming higher global economic growth and energy consumption and an increase in re-export flows.

The UAE's international liquidity remains healthy; the central bank's FX reserves have doubled since early 1990s, and as of end September 1998, these totalled $8.65 billion. Reserves were equivalent to an import-cover of almost four-months.

In contrast to other developing countries, FX reserves are not a true indicator of the UAE's financial might. The UAE is in effect, among the world's wealthiest nations, measured on a per capita GDP/foreign investment basis. The overseas assets (including both direct and portfolio investments) of both Abu Dhabi and Dubai are estimated by fund managers at between $150-$200 billion (excluding sizeable private offshore assets). The bulk of official assets are controlled by the Abu Dhabi Investment Authority.

Furthermore, according to the Bank for International Settlements, the UAE possesses the highest net foreign currency bank deposits of any GCC member. As of June-1998, net deposits with OECD-based banks totalled $35 billion, exceeding $34 billion for Saudi Arabia. Amid continued pressures on other emerging markets' currencies, the dirham's peg to the US dollar at its prevailing rate of 3.67:$1 remains solidly underpinned by huge federal government foreign assets and confidence in the Central Bank to maintain macroeconomic stability.

The US credit agency, Moody's Investor Services has assigned an investment-grade of A2 for foreign currency denominated debt, on a par with the OECD economies and the highest in the Middle East.

The UAE's strong creditworthiness in international capital markets reflects a combination of favourable domestic and external variables. These are perennial annual surpluses averaging $4-5 billion on current account, between 1990-97, a low and manageable external debt (non-guaranteed) of $11.9 billion, equivalent to 26 per cent of GDP in 1998, and a proven record of competent economic governance coupled with massive and growing foreign investments.


The UAE's fledgling stock market may takeoff following the Cabinet's approval last November for setting up a formal stock exchange, with proper regulatory controls, replacing the present over-the-counter (OTC) market. This informal OTC bourse was capitalised at $29.5 billion and is ranked second-largest in the GCC, after Saudi Arabia, but the annual turnover of shares is extremely modest. There are two share indices, The Emirates Financial Services EMNEX 36-share index, and The National Bank of Abu Dhabi index of 27 most-actively traded stocks. The opening of an official exchange will give impetus for the growth of capital markets and provide a channel for public-quoted companies planning capital-raising, via right-issues or initial public offerings (IPOs). It can also encourage the privatisation process, as in Oman and attract foreign portfolio investment, initially from other GGG countries.

Sheikh Mohammad Bin Rashid Al Maktoum, Vice President of Dubai, has been a main advocate for setting up a formal bourse, which will have two trading floors in Abu Dhabi and Dubai. Andersen Consulting have advised on establishment of the market's infrastructure including share depository and settlement clearing system. The clearing house will be in Dubai.
The UAE(*) Key Macroeconomic Indicators

 1997 1998 1999(F)

CDP(US$Mn) 49,006 46,284 47,917
Nominal GDP growth(%) 9.8 -5.5 3.5
Consumer price inflation(%) 4.4 2-3 2.-2.5
Oil Output(Mn b/d) 2,250 2,160
Exports, FOB(US$Mn) 33,560 29,730
Imports FOB(US$Mn) 26,968 27,443
FX Reserves, including gold 8,635 8,882 (Sep)
Central Bank's foreign assets 8,633 8,923 (Sep)
Country deposits in western banks 46,258 46,929 (June) 1999(F)

Population: 2.77Mn(1998), nationals(25-30% of total)

Sources: The Planning Ministry (UAE), Petroleum Economist, Bank for
International Settlements, & International Financial Statistics

The UAE boosts a vast pool of untapped private wealth, which could be invested in domestic, rather than overseas, markets. According to the private banking unit of Merrill Lynch, about $160 billion are held by 59,000 individuals-mostly in Abu Dhabi and Dubai.

A fully developed capital market will improve the emirate's investment profile and underpin the growth of the non-oil private sector.


The US credit rating agency, Thomson BankWatch says that among Gulf banks, the UAE banking sector is less vulnerable to weak oil prices. Standard & Poor's (S&P) notes its national banks have diversified loan portfolios and limited external exposures. Though Thomson BankWatch warns that excess real estate lending or over-exposure to the unofficial stock market and a decline in the re-export trade in 1998 increased the overall risk-profile of most banks. Nonetheless, the sector remains basically healthy, as banks reported higher net profits in 1997-98.

The average return on total assets of UAE banks are respectable by international standards-exceeding two per cent in 1997.

After strong growth in assets and profits in the 1996-98 period, 1999 will be a year of consolidation, but reduced consumption and investment by the public sector will have some impact on banks' earnings.

The UAE is, in effect, over-banked with 47 banks serving a market of 2.77 million people. At the end of 1998, there were 20 locally registered banks and 27 foreign institutions (including representative offices). The total banking assets as of September 1998 were Dh193.51 billion ($52.69 billion).

The big five - National Bank of Abu Dhabi, National Bank of Dubai, Emirates Bank International (EBI), Mashreq Bank and Abu Dhabi Commercial Bank account for over 50 per cent of aggregate assets. Major banks are strongly capitalised - with an average capital asset ratio of 12 per cent.

Banks are also active in portfolio services; the EBI Group is marketing mutual funds like Emirates Banking Stock Fund and Emirates Balanced Equity Fund. Banks have been the prime beneficiaries of the continued diversification drive. This has led to a more vibrant private sector, hence new opportunities for banks.

In essence, the UAE is financially resilient to weather the present deflationary climate gripping the entire GCC area. Capital Intelligence (Cyprus) says: "The UAE is better placed than many other countries in the region to withstand not only the current downturn but a prolonged period of low oil prices."

Economic prosperity and socio-political stability have turned the UAE into a prime location for regional manufacturing and reexport centre, as well as a growing market for private-corporate banking and tourism linked to trade fairs and international sporting events.
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Title Annotation:United Arab Emirates
Comment:The United Arab Emirates (UAE) is financially capable of surviving the deflationary climate that has gripped the entire Gulf Cooperation Council region in 1998.
Author:Siddiqi, Moin A.
Publication:The Middle East
Geographic Code:7UNIT
Date:Apr 1, 1999
Previous Article:UAE fights to withstand the downturn.
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