There has been a lot of concern on the impact of oil prices on the UAE economy and on asset values. To be sure, as oil prices plumbed new depths, capital markets throughout the world — and particularly in the Middle East — plunged as investors fretted over the consequences of restrained fiscal spending in the years ahead.

Even as budgetary allocations have reduced in some countries, the UAE has led the way towards a counterculture by announcing increased budgetary spending for 2016. It is the nature of this spending — and the light the data reveals — that needs to be examined to gauge the impact of economic growth in the medium term.

An analysis of capital inflows into the real estate markets in 2015 reveals that nearly half of the quantum emanates from countries that actually benefit from an oil price decline. This is contrary to markets ranging from Texas to Calgary that have witnessed a precipitous drop in economic activity as inflows were mostly due to the oil industry that sustained high prices over a prolonged period.

This is perhaps the single biggest factor in the recent uptick of transaction activity in Dubai that occurred in the last quarter of 2015 and in the first quarter of this year. Investors have snapped up properties that are trading at discounted levels.

A similar trend has been observed in the capital markets as well. In the backdrop of these investment flows has been the confidence that has been expressed in the reforms that have already been enacted in the domestic economy, as well as the visibility of infrastructure spending increases already allocated for this year. And this will be an effect that will be witnessed in the run up to the World Expo 2020.

Future economic growth

Perhaps, the most significant signal in the rise of investment flows is the acknowledgement that it is fiscal policy that will likely contribute to future economic growth. And that the flexibility of enacting such policies will be dependent not only on the efficiency of the underlying economy, but also in channelling domestic savings towards capital formation.

For it is only in this channelling can the potentially deleterious impact of oil be mitigated. The flexibility of the economy is the key variable in this regard. If capital formation is to occur in the quest for spurring growth, then the most likely repository for this to actualise is through pension reform, both at the corporate and at the government level.

This will facilitate capital market growth as well as stimulate the underlying engine of economic activity.

To be sure, pension reform, in the form of defined contribution schemes will aid in unlocking the high savings rate and reduce repatriation that occurs due to the high cost of medical care and education. Having such as a defined contribution pension plan that is mandatory allows for these savings to be unlocked.

And even if it leads to some fiscal impact (in the form of matched contributions, which will only occur in the government sector, as most pension schemes will likely be run at the corporate level), it will likely lead to a multiplier effect as investment flows into the capital and real estate markets in a systematic manner allowing for capital formation and plugging the leaks via repatriation.

Fall in oil price

Empirical evidence suggests that these pension schemes are the most efficient and the least burdensome way of implementing and fostering capital growth formation. And Dubai perhaps more than any other city is poised to introduce such legislation as it seeks to catapult itself further into the ranks of the most desired cities to live and work in.

We are living in perhaps one of the great hinge periods of history. The fall in the price of oil has triggered uncertainty and a threat of economic instability as budgetary pressures build up. Equally, it also opens up the door for structural reform, as fiscal policy takes over the baton to sustain economic growth.

Introducing structural pension reform in the region not only has the potential for being the silver bullet in terms of allocating savings in an efficient manner into the economy, but it also facilitates an optimal allocation of budgetary resources in a way that fosters sustainable growth in the medium term.

This quest of reform will remain the focal point in the minds of investors as countries in the region race to restructure their economies. It is such reforms that will dictate the pace of investment flows and economic growth in the years ahead.

The writer is Managing Director of Global Capital Partners.