While most GCC countries are barely weathering the impact of the low commodity price environment, the UAE stands out as an exception in the region. Melodie Michel reports.
Diversification was the buzzword of the GTR Mena Trade and Export Finance Week in Dubai in February. In a region where most countries depend on oil revenues for 75 to 90% of their fiscal earnings, the fight to maintain market share at all costs is having consequences, and governments are looking for alternative sources of income. But diversifying takes time, and some countries – Saudi Arabia in particular – are lagging behind.
In fact, it seems there’s only one star student in the class: the UAE. Despite being the world’s sixth-largest oil exporter, with US$123bn of hydrocarbon revenues in 2013 and production still growing, the country relies on the sector for less than 30% of its fiscal earnings.
In a 2015 UAE economic report, Bank Audi points out: “Leading economic and financial indicators actually all point to continued strong non-hydrocarbon growth driven by tourism, transportation, trade and the real estate sector.”
The share of non-hydrocarbon in total GDP keeps rising, having gone from 53% in 2000 to over 70% today, and non-oil exports now represent over two-thirds of total exports – the highest rate among oil-exporting countries in the region. “Dubai is now a services hub for the region, while the economic diversification strategy in Abu Dhabi continues to rely on manufacturing, petrochemicals and renewable energy,” the report adds.
What’s more, the UAE’s political stability has earned it major capital influx from other Mena countries since the start of the Arab Spring, and this is likely to go on as conflicts in Syria and Yemen continue to shake the region. Its favourable tax system is attracting young talent and its common law legislation makes it a destination of choice for financial institutions.
“The UAE has strong buffers that enable it to continue on its path of gradual fiscal consolidation and minimise the drag [of low oil prices] on economic growth,” the report concludes.
Commodity trading infrastructure
Speaking at the GTR conference, Dubai Multi-Commodities Centre (DMCC) CEO Gautam Shashittal said: “Dubai’s location at the crossroads of the world, with China and the Far East well within easy reach, and the quality of our infrastructure, are vital.”
Indeed, as of 2014, Dubai International Airport is the world’s busiest airport by international passenger traffic, and sixth-busiest by cargo traffic.
Shashittal expects it to “take the crown of the world’s busiest airport in 2015”, though it is unclear by which standards.
The UAE also plans to capitalise on the development of China’s One Belt One Road initiative, since it operates two of the five busiest container ports in the Middle East, which connect over 140 ports worldwide.
“Dubai and the UAE have worked tirelessly and invested heavily to improve commodity trade. This is why DMCC was formed. The strength of the UAE economy shows the success of its economic diversification strategy,” he added.
Infrastructure is an important aspect of this diversification: not only does the country have excellent transport infrastructure in place, it also delivers in terms of financial infrastructure.
Chirag Shah, executive vice-president, strategy and business excellence at the Dubai International Financial Centre (DIFC), told delegates: “Dubai is ideally placed for infrastructure, and has built the financial infrastructure to support projects. You can come and do business from wherever in the world, financiers all have a presence here. In fact, raising money here for an international project is much more cost-effective than raising money in some of the banks’ home countries.”
Indeed, new financial institutions set up in the DIFC almost every week – including the two UK branches of Nigerian banks Zenith Bank and Access Bank in the past six months. Dubai is also working hard to form partnerships with the world’s export credit agencies (ECAs): the Dubai Economic Council has signed agreements with US Exim – to support US$5bn of US exports to the country – as well as the China Development Bank and, more recently, Bancomext and Eximbank of Etihad.
Sace just announced that it is also opening an office in Dubai to tap Middle East opportunities, proving that the country’s strategy of focusing on financial excellence is paying off. In fact, the financial services sector represented 15% of Dubai’s GDP in 2013 – the majority of which coming from the DIFC.
Yet, there is still room for improvement in the banking infrastructure, particularly when it comes to technology. “With the accelerating advancements in Dubai’s depth of trade, it is time to explore how digitisation can catalyse trade in our market,” added Shashittal at the event.
Like other GCC countries, the UAE appears to be behind the US, Europe and even Asia when it comes to adopting new technologies for trade. While e-bills of lading are growing in popularity for global commodity traders, there doesn’t seem to be much awareness in the Middle East. Conversations in the market reveal that UAE banks’ innovation strategies don’t tend to be very forward-thinking: while American, European and Asian banks are investing heavily in blockchain research, their UAE counterparts are still updating relatively basic supply chain finance platforms.
But this looks set to change: on the consumer front the UAE is leading the digitisation drive, with the UAE Banks Federation having launched a mobile wallet project – which offers mobile payments and a money transfer platform for smartphones, and will in the future be available to visitors in the UAE – after receiving the green light from the central bank at the end of 2015. The government is on a campaign to push the country to go digital, and attendance at a session on blockchain applications for trade at GTR’s conference suggests that interest is growing.
Anirudha Panse, executive director and head of value-added trade products at National Bank of Abu Dhabi (NBAD), explained: “I think Dubai has the financial infrastructure to be instrumental in the east-west corridor. There is investment in product suites to give clients access to the same technology as what global banks are offering. There’s a lot of thought process going into Middle East banks as well.”
“I’m confident that trade will continue to capitalise on the UAE’s unique position. We will closely collaborate with our trade finance partners to create standards, and I expect 2016 to be even more fruitful,” added Shashittal.
Implications of lifting of Iranian sanctions
The UAE is currently Iran’s largest non-oil trading partner, and represents almost 97% of GCC exports to the country. It is also Iran’s largest source of imported goods, worth about US$27bn. As Iran’s largest trade partner in the Gulf, the UAE could benefit from the lifting of Iranian sanctions and the subsequent economic boost this will give the country.
However, two things could cloud that picture in the long term: first, diplomatic tensions between Saudi Arabia and Iran, with the UAE politically aligned with the Saudi kingdom, could make business more difficult. GTR witnessed a prime example of that when one of the speakers on its Iran panel – an Iranian energy consultant – was unable to obtain a visa to visit Dubai in time for the conference, despite applying longer in advance than usual. If Iranians struggle to enter the country, and potentially vice-versa, they will look for alternative business destinations.
Secondly, part of the reason why the UAE has been so instrumental in Iranian trade is that the sanctioned country was unable to send goods directly to its partners and used the UAE as an intermediary for re-exports. With the lifting of sanctions, Iran will be able to send goods directly from its own ports, removing the need for a third party, and reducing its dependence on the UAE. This natural evolution will take time though, as Iran will first need to upgrade its transport infrastructure.