Reform and development beyond oil

As non-oil diversification proceeds apace, backed by better statistics the UAE can look forward to an economic future based on higher value-added, Abdullah Al Saleh tells Financial Review

How does the government make its economic plan in relation to the evolution of oil prices?
Opec officials express concern that oil prices may slip below $50, yet these are still very high levels compared to past eras.

Oil prices are significant, but oil revenues constitute a mere third of our GDP, as the UAE has successfully diversified away from oil. The adoption of free-market policies and regulations has led to impressive growth rates and a trend towards sustainable development.

The precise data for 2006 are not yet ready, but the three non-oil sectors that led the way in 2005 were (i) manufacturing, where growth was a result of both increased export-oriented supply (with the expansion of the free zones and foreign direct investment) as well as increasing demand (due to high purchasing power and a rapidly rising population), (ii) restaurants and hotels, an internationally-used proxy for measuring tourism effects, and (iii) construction, which, hiring the low income segment of our population (blue-collar workers) is the one with the highest multiplier effect.

Can you explain how important the US dollar is as a linchpin to the functioning of the economy? How significant are the pressures which arise now that it is weaker against many other currencies?
The depreciation of the US dollar vis-à-vis other world currencies over the last few years has, indeed, led to imported inflation, given that we import quite a significant chunk of our consumer and producer goods.

It has affected the UAE dirham, which, for instance, lost 27 per cent of its value during 2002-2005. Inflation is a global phenomenon, and will increasingly become exogenously-determined as the world heads to larger interconnectedness with globalization and larger flows of capital.

The debate relating to changing the exchange rate system is the domain of the central banks of the GCC. It is not so relevant to the UAE, however, given that all GCC countries are currently pegged to the US dollar and that the GCC is working towards a unified currency by 2010.

Can you give some background about fiscal reform to deal with the issue of budget transparency?
The (budget) information exists but it is scattered. Most of it exists at the emirate level; what is needed is consolidation at the federal level.

This is one of our mandates at the moment. We have a high committee that includes heads of all economic departments. I am sure that we will be able to collaborate and produce better statistics soon.

We are also trying to reduce the time gap in which information is made public, so both government and the private sector will have more up-to-date information at their disposal to make better-informed decisions.

There has been much discussion and debate about measuring inflation. Can you explain the challenges in respect of the comparative data?
Different inflation measures are counterproductive, and will only lead to confusion and disinformation. Instead of working separately, (those working on it) should work together to agree on indicators that are meaningful for all.

Under the Federal Law, the Ministry of Economy is the sole institution responsible for producing several macroeconomic variables that include inflation and other indicators.

To this effect, we are recently starting working on a Household Expenditures Survey that should give us precise estimates for the constituents of a consumer price index at the Federal level.

This survey is extremely important, as the weights we currently use in the calculation come from the late 1990s when several products and services did not exist or were not a large part of average household consumption
patterns (e.g. mobile phones, internet costs).

This survey will take at least a year to complete, however, as it involves extensive data collection, data entry and analysis. We request all institutions to cooperate with us in this important endeavour.

What is your impression of the general tendency of inflation now, especially in terms of what people consider to be the cost of living trend?
Global economic growth has meant increasing demand for raw materials and particularly, for our region of the world, hydrocarbon resources.

Overheating is a recent phenomenon in the UAE, as evidenced by an increased inflation rate of around 10 per cent in 2006.

Major causes behind inflation over the last few years include high domestic demand for goods and services due to rapid population growth, expanding bank credit, the weakening of the dollar and imported inflation, and the increased inflows of national, regional and international capital due to the attractive nature of the UAE economy and its positive outlook.

The cost of living index is largely determined by the price of rent, which constitutes, according to our estimates, at least 36 per cent of average household expenditures.

The introduction of rent restriction laws at the Emirate levels to prevent property owners from excessive rent increases is expected to reduce (those) exorbitant increases. Other steps, such as the drafting of a competition law at the Federal level should assist in the reduction of prices.

Do you have any comment on the relevance of the real estate market and the evolving supply-demand balance?
Some are sceptical, arguing that the supply boom is much larger than expected demand, and that these residential and non-residential houses will not find people to live and work in.

The private sector cannot all be wrong! In fact, buildings are often sold out one or two years before construction is complete. Regional and international investors have
joined local investors in investing in the real estate market in the UAE.

This is a strong vote of confidence in the economic future of the country.

Does the recent weakness of the UAE and regional stock markets have any significant economic relevance?
Financial markets are very important, but (their trends) do not necessarily go hand in hand with real economic development, as speculators often take the financial market above or below its "fair" economic valuation.

It is only natural that the nascent stock market should have teething problems. Investors here, as in other countries in the region, still rely on word-of-mouth to make their investment decisions. This leads to excessive speculation and increases volatility.

We are proud that the UAE government did not interfere in the stock market correction - the minute you do that you lose credibility and engender complacency in investors.

We saw it as a reality check, what we may call a dose of humility. Investors had experienced too much euphoria and thought they were immune to disaster.

That said, I do know that the ESCA is currently actively working with other stakeholders to see what can be done to avoid repeating this (experience) in the future.

Can you summarise the latest developments in UAE or GCC trade patterns and agreements? What are the key areas of improvement which can be made?
The GCC in 2006 has been quite active in FTA negotiations with a host of regions and countries. We had several negotiation rounds with the EU, EFTA countries, Turkey, Japan, China, India, Pakistan, Mercosur, Pakistan, and the US.

We hope to conclude some of these agreements in
2007.

Our trade surplus with the rest of the world is largely due to oil exports, which are vulnerable to international oil price fluctuations that are, in return, a function of externalities that are not necessarily in our hands (e.g. increasing demand in China and India, geopolitical factors, and other considerations).

Consequently, and through these free trade agreements, we hope to get larger market access for our industrial and service exports.

How do you assess the development and relative importance now of the UAE's non-oil economy?
The emphasis of the UAE has always been to diversify its economy. It is evidenced by the export mix, where non-oil exports have risen relative to the early 1970s. In parallel, the growth of services has also helped.

Dubai is definitely emerging as the services hub for the region. DP World, Emirates airline, Emaar and other mammoth companies are already worldwide brands; others will soon join this impressive list.

Abu Dhabi is emerging as a strong manufacturing hub for petrochemical industries, fertilisers and other industries. Sharjah is focusing, among other things, on culture and higher education. Other emirates are diversifying into tourism and other sectors.

The UAE has created a bold impression on the world stage. How do you expect the UAE to be perceived in 10 or 20 years' time?
FDI inflows have advanced rapidly since 2000, and IMF estimates that net FDI inflows reached about $11 billion in 2005.

The World Economic Forum puts the UAE 32nd in its 2006 Growth Competitiveness Index, as well as awarding the country the highest rank among developing countries in its 2005 Technology Index. For these reasons and others, the UAE of tomorrow will be extremely different from today.

Industrial and service sectors, with high value-added, will become the main engine. As our investments in school and university education bear fruit, we will witness the emergence of internationally-oriented and increasingly- savvy UAE professionals.

Growing up in the UAE, in this day and age, provides one with a remarkable opportunity to integrate anywhere in the world, simply because 79 per cent of our population is international!

I can boldly put it as such: for one to be a true world citizen, one needs to grow up here. In short, the sky's the limit.

Interview by Andrew Shouler, Financial Editor