Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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. pnccapitaladvisors.com 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 been verified and cannot be guaranteed. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice. Statements in this material should not be considered investment advice, a forecast or guarantee of future results. To the extent specific securities are referenced herein, they have been selected by the author on an objective basis to illustrate the views expressed in the commentary. Such references do not include all material information about such securities, including risks, and are not intended to be recommendations to take any action with respect to such securities. The securities referenced are not representative of all securities, purchased, sold or recommended by the manager, are not necessarily held in the manager’s portfolio, and it should not be assumed that any referenced securities were or will prove to be profitable. Indices are unmanaged and not available for direct investment. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. Past performance is no guarantee of future results. This publication is the property of PNC Capital Advisors and is intended for the sole use of its clients, consultants, and other intended recipients. It should not be forwarded to any other person. Contents herein should be treated as proprietary information. This material may not be reproduced or used in any form or medium without express written permission. PNC Capital Advisors, LLC is an SEC-registered investment adviser, offering an array of investment strategies. PNC Capital Advisors, LLC is an indirect subsidiary of The PNC Financial Services Group, Inc. IN V E S T MEN T S: NOT F DIC IN S URED - NO B A NK OR F EDER A L G O V ERNMEN T GUA R A N T EE - M AY LO SE VA LUE pnccapitaladvisors.com