Report card: Dubai can do better still

Despite its obvious success in pursuing diversification of the economy, there is plenty yet to be done, Hamad Mubarak Buamim tells Financial Review

How is Dubai coping with the pressures of fast economic growth?
Recent macroeconomic indicators for Dubai indeed depict a rapidly expanding non-oil sector. The UAE's non-oil annual average real GDP has recorded a growth rate of 6.5 per cent during the last decade.

In fact, since the year 2000, Dubai's real GDP growth has reached a compound rate of 13 per cent. However, a careful consideration of the underlying mechanisms determining this economic development pinpoints possible weaknesses in the economy that need to be addressed properly.

For example, although
Dubai's technology progress is triple the rate in other Middle East countries, the estimated annual contribution of technology change to economic growth of the emirate is only 0.8 percentage points, or less than half of the 1.8 percentage points noted for the NICs (newly-industrialised countries of East Asia).

Sustaining the competitiveness of Dubai requires urgent policies at all levels to enhance technological progress.

The evolution of gross fixed capital formation, which can be used to estimate capital stock, shows some instability, which suggests the need for a higher investment management quality to ensure sustainable future development.

At DCCI, research is ongoing to come up with policy recommendations targeting diversification of investments and institutional support such as investment insurances and guarantees, legislation, property rights, etc.

The cost of labour is another component of economic development that has been growing at an inconsistent rate with capital. Estimates of growth which assume a balanced growth rates of both factors have indicated that economic growth would be at least 1.5 percentage points higher.

Thus, consistency between labour and capital is an issue that we need to watch out for.

We understand that DCCI is preparing an inflation index. Can you tell us how that is proceeding, and what is its relevance?
DCCI believes that a sound and internationally-accepted CPI such as DCCI-CPI is of utmost importance for Dubai. It will provide users with a timely and more frequent measure.

Quarterly estimates are based on more than 7,000 price quotations on about 1,000 specific products and services consumed by households in Dubai. Once ready, the results will certainly be announced publicly.

Presently, DCCI has computed quarter-to-quarter inflation rates for Dubai, from the fourth quarter of 2005 onwards.

Although inflation was relatively higher towards the end of 2005, it has stabilised since then, bringing down the estimated rate in 2006 to a much lower level than presumably estimated by the public.

We hear a lot about non-oil economic development. Can you give an account of how it is progressing in the case of Dubai?
Dubai has diversified successfully away from the oil sector, which currently contributes less than three per cent to the economy.

To talk about Dubai's economy now is to talk about services-based growth.

In more detail, the trade, restaurants and hotels sector is expected to contribute 23 to 25 per cent to Dubai non-oil GDP up to 2010, transport, storage and communication to contribute 20 to 21 percent, the finance and insurance sector 13 per cent, real estate and business services nine per cent.

Leaving service sectors aside, manufacturing is expected to grow steadily to reach by 2010 a GDP share of more than 20 per cent.

Except for agriculture, livestock and fishing sector, which is very small, all non-oil sectors have been expanding rapidly. Manufacturing posted 32 per cent growth in 2005.

The services and financial sectors all posted double-digit growth. Estimates for 2006 are not yet available, but early indications for the year point to sustained growth.

What comparisons would you make in terms of Dubai's competition in the region? How concerned are you for relative competitiveness?
Trading is one of the pillars of Dubai's economy, and in external trading Dubai remains the leader in the region.

Recent indications show that despite the rising cost of rents, the efficiency of trading facilities and services in Dubai remains a key factor in keeping Dubai at the forefront.

The reported share in exports of exporters in the region shows Dubai exporters to be more internationalised; i.e., they have higher export shares but lower employment.

Although exporters in Bahrain are relatively close to the performance of Dubai exporters, they have significantly
lower expectations for further expansion.

However, there are also indications of 'catching up', notably in Saudi Arabia, where property rentals are much lower. Thus, Dubai must ensure that rising costs of operations must be compensated by efficiency, leading to increased overall welfare for traders.

Do recent financial market trends such as the decline of the dollar (and therefore UAE dirham and other GCC currencies), and the weakened stock market, have any significant impact in local economic development?
Although the UAE dirham has recently been deemed 'undervalued', mainly due to being pegged to the sliding US dollar, the recent strong increase in the UAE economy shows that its sliding has had no negative
impact.

The impact of imported inflation from Europe due to the appreciation of the euro is more than compensated for by imports from the rest of the world in depreciated US dollars, and the loss of oil exports due to US dollar depreciation is being compensated for by the increase of the oil price.

The remaining effects are inflationary shocks due to psychological and speculative pressures, but these are more of short-term phenomena.

As regards the stock market, it is weakened not because of weakening economic fundamentals, but merely due to those psychological and speculative pressures, which are very common in highly-dynamic markets.

Some listed companies are making profits in billions, with high returns on equity and investment, but still the prices of their shares are falling. Moreover, the stock market is not really so well- embedded into the economy, meaning that its impact is not felt so far, and is not expected to be felt in the future.

Economic figures show that while the stock market has been declining, GDP is growing, which confirms the weakness of that link, at least in the short run.

Moreover, despite the recent decline in oil prices, the level of growth remains high. Lower oil prices could translate to delays in projects conceived on the basis of the earnings from high oil prices, but these would not be substantial enough to dampen economic development.

What is your assessment of the relevance of GCC monetary union to UAE and regional economic development?
The GCC's economic integration has been proceeding for years now, the most recent major programme being Customs Unification (CU).

While developments in UAE's trade pattern could not be specifically attributed to the CU, there has been increased trade activity among members, pointing to 'trade creation', a reaction that brings about 'welfare gains' to participating economies.

No significant evidence of 'trade diversion' leading to a negative effect on welfare can be gleaned from available trends.

The next step is monetary union, targeted to be implemented by 2010. More than the CU, this step requires greater preparation, as differentials across member states exist in the level of development of their respective financial sectors.

The benefit of monetary union hinges on the elimination of exchange rate risk and necessary intermediate transactions in movement of capital across member economies, and expansion of the market leading to greater attractiveness to foreign trading and direct investments.

However, safeguards must be in place in opening the financial sectors of weaker participating economies to the larger and more efficient financial sectors of the more advanced economies.

Bank mergers are already being pursued, as an option to strengthen their capacities. But differential stances are emerging on the merging of the central banks.

Already, Oman and Bahrain have signified their intention not to join the union by 2010,mainly on the issue of a cap on budget deficit of three per cent of the GDP.

With dwindling oil reserves, both countries are (aiming?) to diversify their economy. The planned conversion to a single GCC currency through a link to the US dollar would make it easy for the UAE to get into the union.

The UAE has a relatively strong financial sector and is better prepared for the merging of the financial markets.

Are there any other specific, business-related trends which you feel should be highlighted, for instance in respect of particular sectors or micro-economic evolutions?
There has been a delay in bringing to market the properties that have been under construction; leading to continued constriction of the expansion of business capacity.

Also, current construction is more concentrated on high-end residential and commercial units; there is still an
acute shortage for mid- and low-range spaces for businesses.

Whereas the recently released export data of the Ports, Customs and Free Zones Corporation show that manufacturing is expanding, with exports growing significantly over the previous year's record, there is a significant slowing down of re-exports.

This should be a cause for concern. We await the detailed statistics to determine the reasons for the
slowdown.

Interview by Andrew Shouler, Financial Editor