Ascent of Abu Dhabi

Few economies can have been so well placed to weather the financial crisis as that of Abu Dhabi. With control of about 90 per cent of the UAE's energy resources, which account for close on 8 per cent of the world's oil reserves and 3.5 per cent of its natural gas reserves (BP Statistical Yearbook 2009), the emirate has been able to buildhuge financial reserves, enabling it to withstand the global downturn, and to a certain extent even capitalise on it.

Farouk Soussa, Head of Middle East government ratings at Standard & Poor's (S&P), says, "Abu Dhabi government's balance > sheet is among the strongest in the world, with the benefit of high oil prices having accrued substantially over the past six years."

The emirate's resource-based wealth is, of course, well known. In some sense, however, it's how it has been handled that matters.

As many of the mature economies of the world struggle with high debt-to-GDP ratios, Abu Dhabi's net asset position is at over 300 per cent of 2009 GDP. The rating agency states, with understatement, that that figure provides "Abu Dhabi with significant fiscal flexibility".

Like Norway, for example, Abu Dhabi is one of the few economies blessed with significant natural resources but a small population. While not stinting on developing a major modern metropolis, demonstrating affluence in the form of modernist futuristic designs, and attracting leading architects such as Zaha Hadid and Norman Foster, the emirate is acknowledged as having maintained prudent fiscal management of its rich endowment.

Wealthiest SWF

At the forefront of that application is the sovereign wealth fund (SWF), the Abu Dhabi Investment Authority (Adia). Established in 1976, it is considered to be the world's wealthiest SWF, with assets estimated to be more than $400 billion (Dh1,469 billion).

Adia's strategy is clear, that is to maintain a highly diversified investment portfolio while focusing on long-term trends. Examples of its successes are manifold, but to take just one: in November 2008 it invested £5 billion (Dh27.8 billion) in Barclays Bank at possibly the lowest point in the history of banking, and is now reported to have made a profit of £3.1 billion on the transaction. A case of fortune favouring the bold — or the astute.

Plans to diversify

Long-term planning indeed is at the heart of government policy. While the oil and gas sector will remain the backbone of the economy, a key element of the Vision 2030 plan unveiled in 2008 is proactive diversification. A focal target is to lower the contribution of oil to GDP to 36 per cent over the next 20 years by encouraging investment in other sectors.

The all-encompassing, strategic socio-economic plan targets a broad range of sectors, from education and health to media and telecommunications, tourism to aviation, aerospace and defence. All these areas require high levels of investment, which according to S&P has not slowed, despite the economic downturn, owing to the reserves available.

One sector mentioned in the Vision 2030 plan is already firmly established in the emirate, namely banking and finance. Partly driven by the Islamic banking segment, Abu Dhabi's banking sector forms one of the most dynamic in the region, in terms of recent growth.

While the sub-prime crisis has prompted >a marked slowdown, combined with a material increase in non-performing loans, the exposure to toxic assets is only limited compared to counterparts in the Western world. Despite the difficulties of the sector globally, foreign banks and brokerage firms have not been slow to see Abu Dhabi's potential, given the high level of funding requirements locally. Only last month, Deutsche Bank opened an office in Abu Dhabi, seeking a slice of that business.

Tourism, another key element in the plan, is transforming the emirate from essentially a business destination to an up-market holiday venue.

At the end of last year Abu Dhabi roared onto the global scene as it staged its first Formula One grand prix, showcasing itself to the world.

But that's only the beginning. The combination of cultural attractions including high-profile projects such as the Louvre and Guggenheim museums in the Cultural District of Saadiyat Island, together with impressive new shopping malls and hotels and luxurious resorts under construction, should all contribute toAbu Dhabi achieving its five-year plan (2008-12) of attracting 2.3 million visitors by 2012, upfrom about 1.5 million in 2008.

This myriad of projects has sheltered the emirate's construction sector from the worst ravages of downturn. Driven by increasing visitor numbers and a rapidly growing population, the construction of hotels, shopping malls and infrastructure projects is reflecting increasing demand, rather than being purely speculative.

While knowledge-based sectors such as telecoms and IT form essential parts of the diversification programme, the areas where Abu Dhabi has an obvious competitive advantage are petrochemicals, plastics and metals — all energy-intensive industries. Emirates Steel Industries, for example, with the largest steel plant in the UAE, is expanding both by organic means and through acquisition, fearlessly anticipating upturn.

No task is too daunting, it seems, not even building a highly capital-intensive industry from scratch. Abu Dhabi is building the world's largest chemicals complex, set to begin production in 2015. The head of the government's flagship chemical company, Chemaweyaat, claimed that the cluster of chemical plants planned will add as much to the emirate's wealth as increasing crude oil output by more than a third. There's certainly no shortage of confidence.

Focus on renewable energy

But Abu Dhabi is thinking beyond its abundance of hydrocarbons in other ways. The emirate is positioning itself as a world leader in renewable energy and green technology through the Masdar Initiative. At the centre of this project is Masdar City, a zero-carbon, zero-waste mixed-use development to eventually house 40,000 people. It is hoped that the renewable energy sector will account for 7 per cent of power production capacity by 2020.

The impression is that Abu Dhabi has the foresight as well as the wherewithal to plan beyond short-term economic trends. That is not to say it has been immune to the current economic downturn. Falling oil prices, diminishing investment values overseas, not to mention the need to support a neighbouring emirate, have meant that its GDP growth — which in nominal terms has been averaging a staggering 25 per cent over the past five years — is expected to show a more modest 7 per cent last year.

It is a telling fact that this number is likely to be a negative blip.

Abu Dhabi's positive story is captivating. But it hasn't happened by itself. To find yourself sitting on such natural resources is good fortune. To prudently manage that treasure requires something considerably more.