Heads up for the UAE growth outlook

You can't have too much of a good thing, they say. Yet, reports of how well the UAE economy is doing, in the well-known context of an oil-endowed region, may seem superfluous.

The chart here showing the share of oil in total revenues among the Gulf states tells its own story. A benchmark point of understanding though that is, there needs to be something else worthwhile to observe.

If such a report runs to 57 pages, the busy reader might pass on by. At the same time, a burst of bullet points simply reeling off the growth and balance of payments data might not seem enough to pay attention to.

That's the dilemma faced by the likes of research units like Business Monitor International of London, which actually has some worthwhile material to convey. The latest quarterly forecast document (dated third quarter 2007) contains a variety of noteworthy points.

Let's get the basics out of the way. UAE's long-term economic risk (or 'structural') rating at 79.9 on BMI's scale of 1-100 is the highest of the six GCC states. That's a function of "concerted diversification", making the country "fairly well-insulated from oil-price volatility". Tourism, financial services, property development and re-exports feature in that positive outlook, and the picture is enhanced further with the assumption of free-trade talks advancing, albeit with elements of compromise, in the period ahead.

Even so, the oil and gas sector represented 37 per cent of nominal GDP according to preliminary 2006 data, marginally up over 2005, although for Dubai the figure is only three per cent, "impressively" down from 10 per cent in 2000.

Outlook

Looking forward five years, BMI suggests that, while the size of the overall economy will grow substantially, from an estimated Dh575 billion ($157 billion) in 2006 to Dh970 billion ($264 billion) in 2011, real growth will ease to 4.5 per cent by 2009, and GDP per capita tend to plateau around $37,000 around the same time, as population growth proceeds apace, reaching 6.9 million in 2011 from perhaps 4.8 million last year (see table).

The backdrop in terms of business environment to the UAE's progress specifically is favourable relative to the other GCC countries, according to BMI's ranking at 61.7 (compared to the other five ranging from Saudi Arabia on 51.7 to Kuwait on 56.8). In respect of the legal framework, the UAE is considered "firmly established" as a regional business hub, but still for foreign companies "dispute resolution can be an arduous and uncertain process", and the ratification last year of the 1958 New York Convention has not entirely resolved the issue of arbitration.

Against a benchmark ideality, the BMI report notes too that, as regards property rights, "the issue of ownership of a building is still a grey area", and, despite signing the UN's Anticorruption Convention of 2005, UAE-owned parastatal bodies lack transparency. The report notes the qualified advancement of labour law reforms.

Meanwhile, the foreign investment climate has become more "clement", even while the oil windfall has disincentivised the search for foreign direct investment (FDI), which has nevertheless surged into real estate and construction. The absence of an income tax, the UAE's "free and open" trade regime, and the welcoming foreign labour policy have provided a bulwark to the growth environment. Thus, the principal challenge remains how to manage success, since the oil-price shift is structural rather than cyclical, BMI says, both because of Chinese and Indian demand and the higher cost of discovery and extraction affecting supply.

In particular, infrastructure capacity in the Gulf has lagged expansion of the regional economy, for instance in power generation, with per annum demand growth of 15 per cent expected for Dubai. In the construction sector, raw material cost inflation has been seen in cement and steel, and staff shortages.

Quasi-diversification

Moreover, BMI highlights the issue of 'quasi-diversification', meaning that heavy investment into, for example, luxury tourism projects and financial centres still relate implicitly to regional economic demand, and therefore derive from oil-market strength. Investment into industrials, by contrast, taps broader global dynamics, and exploits the region's cost advantage, even if still depending on energy development.

Then there is the vexed issue of monetary union, where, given the inconsistencies appearing in recent months in official pronouncements and market behaviour, BMI's outlook is "far from sanguine". Here the research house can only guess as others do, maintaining its view that the currency union "will eventually take place", though probably pegging to abasket rather than just the US dollar.

It takes a stronger view about the project's viability than these 'teething issues', insofar as the record among members on fiscal prudence is discouraging. The fair point is made that not only is budgetary policy expansionary now (with monetary policy - it is inferred - already unable to contain growth and restrain inflation), but in some countries it has stayed so when the finances do not support it. Clearly, BMI is suggesting that policy is biased ('asymmetric', in the economics jargon) rather than the balanced, or even potentially restrictive, strategy that it might need to be to get monetary union off the ground and sustain it.

In all, the report appears an even-handed account of the UAE's obvious rise as an economic force, set against the template of Western economic liberalism, albeit quantitatively-expressed, and not necessarily itself a definitive guide.

It doesn't shirk the tougher topics of the single currency and corporate governance, as well as highlighting the structural paradox presented by oil's shift. Still, it identifies the UAE as "ahead of the crowd", and that's where those of us plying a local trade, even with reservations, find ourselvesback with a comfortablefamiliarity.