Download Excellent Prospects for the Middle East`s Major Trading Hub

The United Arab Emirates:
Excellent Prospects for the
Middle East’s Major Trading Hub
December 2015
Martin C. Schulz, J.D.
Managing Director
International Equity
When we think about the Middle East, we often focus on the turmoil and conflict
in the region. While that’s only natural, it doesn’t do justice to the segments of the
region that are thriving economically and creating wealth. We just returned from a
visit to the Middle East and found a country that is definitely open for business and
an oasis in the region: the United Arab Emirates (UAE). In spite of the headwinds
from lower oil process, our meetings with a broad range of companies including
consumer, transportation, finance, real estate, telecom, and hospital managers
highlight the long-term prospects of this economic and political oasis.
We believe that the UAE possesses unique characteristics that make it promising from a longduration investment perspective. Importantly, the Emirates are a free-trade zone and maintain
a strong trade surplus, a prized feature in PNC Capital Advisors International Growth Equity’s
top-down investment strategy. The UAE has an open economy and is taking steps to decrease
its reliance on fossil fuel production by diversifying its businesses and revenue streams.
Located on the Persian Gulf coast of the Arabian Peninsula directly across from Iran, the UAE
is comprised of seven principalities, the most prominent of which are Abu Dhabi and Dubai.
Since its formation in 1971, it has transformed itself from an impoverished region of small
desert principalities to a modern state. The UAE is the sixth-largest petroleum producer in
the world, and the country holds the seventh-largest proven reserves of oil in the world. The
UAE also has the seventh-largest reserves of natural gas in the world. Recognizing the UAE’s
advances, investment index compiler MSCI reclassified UAE indices from Frontier Markets to
Emerging Markets in 2014, facilitating more access to funds from around the globe.
The country’s high oil revenues have enabled it to play a prominent role in the Middle East and
its per capita income now rivals the levels achieved by leading Western European nations.
Along with Saudi Arabia, Oman, Kuwait, Qatar, and Bahrain, the UAE is a member of the Gulf
Cooperation Council, or GCC, a loose political and economic alliance. Another advantage
– one that may produce significant benefits for the country – comes from the prospective
normalization of Iran’s international relations. The UAE is the major trading hub in the region,
and Iran is a short distance across the Persian Gulf. As a result, it is ideally positioned to
benefit as Iran returns to the world stage and ramps up its business with the world.
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UAE Have A Trade Surplus Even Without Oil Export Revenues
50
40
% of GDP
30
20
5% surplus
10
0
-10
-20
2002
2004
2006
2008
2010
2012
2014
— UAE: Trade Balance — UAE: Trade Balance Excluding Hydrocarbon Exports
Source: BCA Research
THE UAE: A TALE OF
TWO EMIRATES
From an economic perspective, Abu
Dhabi and Dubai are far and away
the powerhouses among the seven
Emirates. The largest of the seven
Emirates in land mass and home to
the Federation’s capital, Abu Dhabi
accounts for about 90% of the country’s
oil production, 94% of the nation’s oil
reserves, and 60% of its GDP. By itself,
Abu Dhabi would be the world’s eighthlargest producer of oil.
Oil makes up the vast majority of the
revenues of the Abu Dhabi government, which in turn bears a large share of the federal government’s
financial burden. The Emirate is diversifying into other key sectors such as manufacturing, tourism
(especially of the medical type), aerospace, defense, and finance to reduce its dependence on
hydrocarbons in the future. In addition, we met with both the Cleveland Clinic and another local
hospital chain in the Abu Dhabi region, both of which are growing and thriving.
On the other side of the UAE with little in the way of oil resources (less than 2%), Dubai for years has
focused on diversifying its economy beyond petroleum and gas. Today, Dubai is the center of finance,
commerce, transportation, and tourism in the UAE. The city of Dubai is a cross between Singapore and
Las Vegas: It’s a place to work and play hard in the Middle East, and its sizzling nightlife and recreation
serve as a magnet for tourists, many of whom are from the region. Gleaming skyscrapers dominate the
skyline of Dubai, which is home to the only seven-star hotel on the globe and Burj Khalifa, the planet’s
largest structure. Dubai is still building — once home to 25% of the world’s construction cranes, it
continues to be labeled the crane capital of the world.
A city of 2.1 million people, Dubai is fast becoming the region’s financial hub as major international banks
relocate there to service both the region and all of Africa. For example, Deutsche Bank is merging its
African business into its Middle Eastern operations. Tourism is also a major attraction. The world’s
busiest airport for international travel, Dubai’s Al Maktoum International Airport, already serves 70
million travelers annually, and a $32 billion expansion project will enable it to accommodate more than
200 million passengers a year. Halfway between Europe and Asia, the port at Jebel Ali is ranked the
ninth-largest container port globally and by far the busiest in the Middle East. In addition, Jebel Ali was
the Middle East’s first big free-trade zone where foreign firms can operate with less red tape and lower
taxes than in the rest of the UAE. Dubai now has 22 free zones in total and Jebel Ali is the world’s largest.
Both Abu Dhabi and Dubai rely heavily on foreign labor to keep their projects and economy running. Abu
Dhabi’s Statistics Center indicates that the non-citizen population has increased 243-fold from 1960,
and 90% of the Emirate’s 2015 population is made up of expatriates, or expats, most of whom come
from Southeast and Southwest Asia. The Dubai Statistics Center estimates that no more than 15% of
its population is composed of nationals. As a result, UAE citizens are increasingly exposed to external
influences and ideas that produce both opportunities and challenges to its native society .
ECONOMIC GROWTH IN A DIFFICULT ENVIRONMENT
The UAE generated an impressive 4.8% average annual real GDP growth rate between 2000 and 2011,
which is even more remarkable because that’s a period that includes the financial crisis and recession.
The economy expanded a stunning 7.2% in 2012 and settled into growth rates of 4.3% in 2013 and 4.6%
2 The United Arab Emirates: Excellent Prospects for the Middle East’s Major Trading Hub
in 2014. Reflecting the weakness in energy prices, the IMF has projected a moderation in the UAE’s real
GDP growth to 3.0% in 2015 and 3.1% in 2016.
The UAE has long maintained a strong trade position, posting current account surpluses of 21.3% (2012),
18.4% (2013), and 13.7% (2014) of GDP. Unsurprisingly, oil exports play a major part in the country’s
foreign trade success and now account for about 30% of total UAE gross domestic product. While the
value of oil exports is adversely impacted by low petroleum prices and the global economic slowdown,
the current account is still projected to show a surplus of 2.9% in 2015, 3.1% in 2016, and 7.3% in 2020,
according to the International Monetary Fund (IMF).
The UAE’s currency, the dirham, has been officially pegged to the U.S. dollar since 1997. The peg
supports currency stability, and the current strong dollar helps the UAE to maintain its international
purchasing power against a backdrop of lower oil prices, while keeping import inflation weak.
At the World Economic Forum Global Agenda Council Summit in October – which coincidentally was held
in Abu Dhabi – UAE leadership said that the country aims to increase non-oil revenue from innovation
and efficiencies in industrial processes, financial services, a focus on new manufacturing industries such
as chemicals and polymers, and an expansion of tourism. The goal is to reduce the proportion of GDP
derived from energy revenue from about 30% to 20% in the next 10 to 15 years.
The IMF has noted that the UAE has more fiscal flexibility than many of its neighbors, thanks to an
economy that is successfully diversifying. The recent elimination of subsidies on fuel and deregulation
of fuel prices also gives the Emirates an advantage over its regional peers. Still, overall government
spending in the future is expected to be constrained in light of lower oil prices and the global slowdown.
Dubai’s economic and financial systems have matured significantly since the financial crisis of 20082009 and the ensuing property crash. The government has controlled its outlays and cut subsidies for
gas. Banks are generally well positioned to withstand the effects of the oil shock, although profits could
further come under pressure. Property prices are down, in part because of government actions to
prevent another bubble by capping loan amounts and imposing new rules on speculators. While activity
in the UAE’s construction sector is not at the level anticipated before the sharp decline in oil prices, major
projects are still in progress. In addition to the massive airport expansion, for example, the Abu Dhabi
National Chemicals Company is constructing a major chemicals hub in the Emirate, and large-scale,
mixed-use projects are underway in Dubai. In addition, the UAE won the right to host the World Expo in
Dubai in 2020, an event expected to attract an additional 25 million visitors, 70% of whom will be from
overseas. The construction sector will benefit significantly during the run-up to Expo 2020. Other sectors
in the UAE such as Consumer Staples and Telecommunications are performing reasonably well.
IRAN TO OPEN UP: OPPORTUNITIES?
Iran offers the UAE the potential to reap significant benefits following the successful conclusion of
nuclear talks with the major world powers. The third-largest economy in the Middle East, Iran has a GDP
of $400 billion and a young, educated populace with money to spend. If all goes as planned, economic
sanctions against Iran will gradually be lifted, opening up a large new market for the West.
Many businesses are moving to exploit those opportunities. For example, Mercedes-Benz, Peugeot, and
Renault have already announced plans to start selling to Iran’s huge auto market. French hotel chain
Accor is set to open a hotel and airlines in Dubai are planning new routes to meet growing demands. The
UAE already has strong economic ties with Iran. As noted earlier, it lies directly across the Persian Gulf
from Iran, and it will be even busier as a major trading hub when business ramps up.
RISKS TO THE UAE’S OUTLOOK
Depressed oil process, as well as terrorism and unrest in the Middle East represent real risks to the
UAE’s prospects, as is true for any nation in the region. On the positive side, the UAE has actually been a
3 The United Arab Emirates: Excellent Prospects for the Middle East’s Major Trading Hub
The United Arab Emirates:
Excellent Prospects for the Middle East’s Major Trading Hub
veritable safe haven in the region: It has no history of terrorism and avoided wrenching upheavals during the
Arab Spring. But no country is immune to acts of terror, and the UAE’s proximity, wealth, and openness to
the West may make it an inviting target.
On our recent trip, we saw a lot of military contractors in Dubai. The Gulf Cooperation Council (GCC) states
– the most vocal of which is Saudi Arabia – have demanded additional political and security assurances
from the U.S. Expectations are that Washington will lavish further military aid on the GCC in the form of
technology, weapons, and training.
The future path of oil prices and the prospects for global growth also present the UAE with additional
uncertainties. The shale revolution in the U.S., the decision by OPEC to keep production levels high, and the
expected lifting of sanctions on Iran are applying downward pressure on prices. From the demand side,
sluggish global growth arising from concerns over slowing expansion in China and weakening in other
emerging markets are contributing to lower oil prices.
THE OASIS REPRESENTS MORE THAN JUST A “FRONTIER” OPPORTUNITY
We believe that the UAE’s longer-term prospects are bright in spite of continuing weak energy prices. The
nation’s commitment to diversification contributes to the UAE’s considerable appeal. The Emirates have
posted solid growth numbers over the last several years, and UAE’s economy successfully rebounded from
the crisis in 2008 and 2009. The UAE’s position as the Middle East’s major trading hub will enable it to benefit
from the opening of Iran and the potential of increasing trade with its neighbor across the Gulf. Its consistent
trade surplus is an important source of strength, and its open economy and excellent infrastructure are
significant competitive advantages. And it has a relatively better outlook than many of its emerging-market
peers. As we continue to search for growth and longer-term investment prospects around the globe, the
UAE is no longer just a “frontier” market that is reliant only on hydrocarbons, but one that is well diversified
and presents an opportunity for our clients.
This publication is for informational purposes only and reflects the current opinions of PNC Capital Advisors, LLC. Information contained herein is believed to be accurate, but has not
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