The UAE has diversiﬁed more than any other Mena economy thanks to Dubai seizing on services as the natural sector to develop when its oil stopped ﬂowing. But can the rest of the region match its accomplishments? Sarah Rundell reports.
The Burj Khalifa has been the jewel in Dubai’s tourism crown since it opened in 2010. Now a mini replica of the world’s tallest building is also a main attraction at Dubai Legoland. One of four new theme parks to open their turnstiles in the Emirate last year, it underscores Dubai’s efforts to attract more family tourism, particularly from Asian visitors. It is part of a strategy to develop an offering beyond shopping and business within the UAE’s growing services exports, which includes sectors like ﬁnance and transport too. HSBC estimates that services account for just under a quarter of UAE total exports, out of which tourism already leads and is set to jump further to 62% of total services exports by 2030.
Dubai’s services are getting another boost from the UAE’s Vision 2021 National Agenda, which pledges to reduce the contribution of the oil sector to 20% of GDP by 2021, driving investment in innovation and high value-added sectors targeting SMEs particularly.
“For real economic diversiﬁcation in the Middle East and North Africa you need to talk about services and things that affect trade. The region will ﬁnd it harder to develop manufacturing or, say, a pharmaceutical industry because it is limited in terms of its own resources,” says Rebecca Harding, co-founder and CEO of Equant Analytics.
Now other economies in the region are pushing the services model as low oil prices force them to look again at cutting their oil addictions. Government-led diversiﬁcation strategies include Saudi Arabia’s Vision 2030, which encompasses a ‘National Transformation Programme,’ and Qatar’s Education City, as well as tourism and transport investment ahead of hosting the 2022 FIFA World Cup. Elsewhere, Bahrain is carving itself a niche at the forefront of the international Islamic ﬁnancial services industry.
But in a catch-22 situation, investing in economic diversiﬁcation when oil prices are low is difﬁcult. It makes catching up with the UAE quite a challenge.
Dubai’s ﬁnancial services sector is particularly coveted by its Mena neighbours. Until recently, few ﬁnancial services were anchored in the region. Now global banks seeking to ﬁnance trade and projects in the Middle East and Africa from within the market are settling in the Dubai International Financial Centre (DIFC), which aims to treble in size over the next decade. Already, four of the top ﬁve Chinese banks base regional operations out of the DIFC, which currently boasts 1,445 registered companies and a 20,000-strong workforce.
The UAE’s dominance in ﬁnancial services will only increase once Abu Dhabi Global Market (ADGM), Abu Dhabi’s new ﬁnancial centre an hour and a half down the road from the DIFC, attracts more ﬁnancial services.
“I used to be based out of Egypt, but now work out of the UAE which has become the region’s hub for legal services. I can serve clients in Egypt, Jordan, Kuwait and Saudi best from the UAE,” says Tim Armsby, a partner in law ﬁrm Eversheds’ energy and infrastructure department.
Recent consolidation in the UAE’s banking sector promises leaner and more efﬁcient national champions. Last year’s merger between National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB) creates a bank with a combined market capitalisation of US$29bn and some US$175bn of assets. Still called NBAD, the bank will respond to new sources of growth such as servicing the emerging trade and ﬁnance ﬂows predicted along the west-east corridor stretching from Lagos to Shanghai, which will include many of the world’s next mega-cities. The bank will have the capital strength and liquidity to increase investment in the non-oil economy, spanning tourism, construction, chemicals and strategic infrastructure.
Insurance providers are the latest to set up shop. “We are led by our clients, many of which have operations in the GCC,” says Harriet Smith, who heads up specialist political risk and credit insurance broker BPL Global’s new DIFC-based representative ofﬁce.
“On the new business side we are targeting ﬁnancial institutions in the region, as well as corporates, traders and local export credit agencies (ECAs). It’s all about raising the proﬁle of what credit and political risk insurance can do. There is lots of opportunity as regional banks become increasingly sophisticated,” she says, adding that demand to insure risk from the service sector is still nascent.
New wealth also promises new opportunities for ﬁnancial services. Consultancy PwC estimates that assets under management in the Mena region will grow by 12% per year to US$1.5tn in the decade to 2020. A 2015 report by the Boston Consulting Group found that private wealth in the Mena region increased by more than 7% to surpass US$8tn in 2014 and is projected to rise to nearly US$13tn by 2019.
Banks’ ability to innovate their export offering around digital services like new payment methods will also help success. It is something Harding notes is happening given the jump in information and communications technology (ICT) imports into the region. “There has been a big increase in ICT imports into the region and this will boost data security in the ﬁnancial sector,” she says.
Of course, DIFC and ADGM aren’t the only ﬁnancial hubs in the region. Qatar has a ﬁnancial centre and Bahrain has developed a niche in Islamic ﬁnance, second only to Malaysia. As of July 2015, 24 Islamic banks were licensed to operate in Bahrain, with the country’s Islamic lenders offering a wide range of sharia-compliant products. “Bahrain has a very speciﬁc niche in providing Islamic ﬁnance and has seen high growth, albeit from a low base,” says Harding.
But it’s an advantage over the UAE that Bahrain may struggle to hold onto, predicts Armsby. “Dubai has made a strong play to take some of this business away from Bahrain and political instability has worked in the UAE’s favour.” He also believes that DIFC and ADGM will complement, rather than compete with, each other. “Abu Dhabi is a different economy to Dubai because it is much more dependent on government spending. I don’t think they will be direct competitors,” he says.
The capacity of smaller, emerging ﬁnancial centres to comply with global compliance around anti-money laundering, anti-bribery and corruption and KYC regulation is challenged by a shortage of regulatory expertise. Tackling the legal skills deﬁcit is something Armsby believes is ﬁnally beginning to happen in the UAE. “There is a growing requirement for education and training for lawyers,” he notes. “More regulation and the ongoing requirement to undertake training is a positive development for legal ﬁrms operating out of the UAE.”
Oil price challenge
Yet the UAE’s growing ﬁnancial services sector is not immune to low oil prices. The oil price is slowing government spending on which banks rely, says Krishnakumar Duraiswamy, head of trade ﬁnance at Abu Dhabi Commercial Bank (ADCB). “The low oil price is limiting growth because governments are spending less. There are fewer payments from the ministries and everyone is effected from a cashﬂow basis.”
It will have a knock-on effect in the wider services sector, predicts Duraiswamy, whose clients are split 50:50 between services – mostly shipping and logistics – and trading or manufacturing. “Banks are more reluctant to ﬁnance SMEs, many of which are looking at ways to better manage their cashﬂow and working capital. SMEs need banks to provide balance sheet solutions in response to payment dates being stretched from 90 to 150 days. They want much longer-tenor ﬁnancing from banks, yet these longer cycles involve more risk for banks.”
Encouragingly, he believes trade ﬁnance providers perceive corporates involved in the services sector as less risky than they have in the past. A jump in fraud cases amongst UAE-based goods trading companies has shifted the balance in favour of banks’ lending to ﬁnance trade in the services sector more. “The UAE has seen a lot of fraud on the general trading and manufacturing side. It means banks are looking at the services sector more positively,” he says.
It’s a welcome development given the fact that service sectors often struggle to attract trade ﬁnance without a hard asset for collateral to enforce client payment. The compliance burden is partly to blame again, as Harding explains. “There is an extra layer of compliance and know your customer risk to ﬁnancing trade in the services sector. The region’s banks are less well integrated into the global trade sector and it is holding services back.”
In Egypt, transport and tourism also drive services exports, yet both have ﬂagged in recent years as visitor numbers from the US, Europe and Russia have fallen on security fears. And despite 2015’s colossal investment in the expansion of the Suez Canal, the slowdown in global trade has hurt revenue here too. HSBC predicts the value of Egypt’s services exports will creep higher again, averaging 6% a year in 2016-20 and over 9% a year in 2021-30. Visitor numbers will increase from newer markets including Saudi Arabia and Turkey, the UAE and India, it adds. “A rebound in tourism and a modest increase in Suez Canal revenues in line with global economic growth will help the services account to return to surplus from 2017 onwards,” says the bank.
Cross the Red Sea, and Saudi Arabia is banking on religious tourism. Low oil prices may have hit corporate travel, but the number of pilgrims heading to Mecca has tripled over the last decade to 8 million. Now the government is targeting an increase to 15 million by 2020, and to 30 million by 2030. Demand will be met by expanding the Two Holy Mosques, modernising and increasing the capacity of Saudi’s airports and a new Mecca Metro to complement railroad and train projects. New museums and other tourist, cultural and historical sites will also boost the offering.
Yet, Saudi has struggled to diversify its economy in the past. “In 2015, exports of services were US$16.3bn, just 7% of total exports of goods and services,” says HSBC. That’s only modest growth from 2000 when the share of services exports to total exports was 6%. Government policies could also conﬂict with efforts to boost tourism, for example the decision to introduce high visa fees for non-GCC nationals this year and new international airline passenger fees.
Vibrant transport sectors are another pillar in the region’s services exports. Abu Dhabi will open a new airport terminal this year and Dubai, which already serves 70 million air travellers a year, now targets 200 million by 2020. It is pushing ahead with a US$32bn expansion plan of its second airport, Dubai World Central, which includes a new cargo corridor between the desert airﬁeld and the nearby Jebel Ali port and free zone, the region’s largest logistics hub. Ports operator DP World has established itself as a global player in container terminals, eyeing an 18% increase in throughput by the end of the decade.
But in other countries the oil price has already impinged on investment in transport services. Government spending has faltered and projects have been delayed or cancelled through 2016. It has seen GCC governments and corporates reach for the international capital markets to raise cash. Last year, sovereign borrowing surged from the region: Saudi, Qatar, Bahrain and Oman issued debt that should ultimately ﬁlter down to increased government spending, including around infrastructure and transport. Oman, for instance, is raising US$2.5bn from its ﬁrst international bond sale in two decades to plug its budget deﬁcit from the oil price decline last June. Some of that should ﬂow to its ongoing building out of the ports of Duqm, Sohar, and Salalah, a new free trade zone that emulates Jebel Ali 15 years ago.