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Dubai: The UAE will remain the main regional destination for foreign direct investment (FDI) inflows in 2019 supported by political stability and a friendly business environment, and a relatively diversified economy, according to the Institute of International Finance (IIF).
According to the IIF statistics, the country attracted $10.4 billion in FDI, accounting for 20 per cent of the Middle East North Africa and Pakistan (Menap) total.
Improving capital inflows into the country is expected to support external reserves of the country.
“The UAE’s external position remains in an enviable position. With lower oil exports, we expect the current account surplus to narrow to a still-sizeable $23 billion (Dh84.47 billion) in 2019, equivalent to six per cent of GDP. We see public foreign assets continuing to increase to 200 per cent of GDP by 2020,” said Garbis Iradian, chief economist for the Middle East and North Africa at the IIF.
According to the IIF estimates, public foreign assets (official reserves plus funds with sovereign wealth funds) will peak at about $900 million in 2020 (200 per cent of GDP). These assets are invested in diversified portfolios of public equities, fixed-income securities, and minority shares in global companies.
While the country’s GDP is forecast to remain around three per cent in 2019 and 2020, the public sector is expected to pick up, supported by the $13.6 billion stimulus package (3.1 per cent of GDP) introduced in June 2018 for a period of three years. However, the IIF sees private sector activity, particularly in Dubai, remaining weak due to regional uncertainty, sanctions on Iran and overvalued currency.
The UAE’s Vision 2021 has set its sights on a competitive knowledge economy, and a target FDI-to-GDP ratio of 5 per cent has been set for 2021.
“A comprehensive strategy is being prepared that aims to encourage foreign direct investment outside free zones and energy sectors and expand non-bank and capital market financing options for small and medium enterprises, which could boost private sector growth and promote diversification,” said Iradian.
Recently, authorities stated their intention to allow non-GCC nationals to own 100 per cent of companies in the UAE. In addition, efforts are being made to further reduce the cost of doing business, and to revamp visa requirements to attract highly skilled foreign labour.
IIF forecasts show a significant pick-up in private capital inflows driven by both portfolio investments and FDI during the current year.
“We see private non-resident capital inflows to the GCC increasing by $20 billion to $148 billion in 2019 driven by portfolio investments,” Iradian said. “The more dovish Fed rate outlook should keep GCC credit spreads low, given their investment grade rating and stable outlook.”
Capital outflows from the GCC, at $234 billion in 2019, will continue to exceed non-resident capital inflows, despite the narrowing of the current account surplus to $90 billion.
The stock of gross foreign assets of GCC is estimated at around $3 trillion, about 70 per cent of which is managed by sovereign wealth funds with diversified portfolios of public equities, fixed-income securities, and shares in global companies. The other 30 per cent is in official reserves and is invested in liquid assets, notably highly rated government debt securities and deposits with banks abroad.
