Abu Dhabi diversifying the economy

Recent decades have seen the GCC become increasingly connected to the wider global economy through trade and investment links. Over the years capital flows between the Gulf and the rest of the world have deepened significantly, a process first driven by trade and investment with the historically important blocs of Europe and North America, and more recently by strengthening ties with emerging market economies such as India, China and Brazil. In 2015 a slowdown in emerging economies and the hesitant recovery in some more established markets led to a more mixed picture in terms of investment patterns, but one which the outward-looking jurisdiction of the UAE continues to benefit from.

Trading Activity

Foreign trade plays an important role in Abu Dhabi’s economy, as it is considered one of the main pillars of economic development in the emirate, leading to an improved standard of living and economic well being. The foreign trade of the emirate of Abu Dhabi constitutes more than 48% of GDP at current prices, with net trade in goods reaching an equivalent of 25.8% of GDP in 2014, according to the Statistics Centre - Abu Dhabi (SCAD). Given the emirate’s status as a globally significant producer of hydrocarbons, it is not surprising that oil and gas export activity accounts for the majority of goods exiting Abu Dhabi; in 2014 oil and gas products worth around Dh309.5bn ($84.2bn) left the emirate for markets around the world, representing approximately 87.5% of total exports.

The Abu Dhabi National Oil Company (ADNOC) controls the extraction, production and export of the emirate’s oil and gas via 16 subsidiaries, which include both the pipeline and tanker operations that underpin the trading of these resources (see Energy chapter). This infrastructure continues to develop, the most recent significant addition being the Abu Dhabi Crude Oil Pipeline (ADCOP), opened in 2012 and running 380 km from Habshan to Fujairah. The construction of the pipeline gave the UAE a direct connection between the oil fields of its western desert and the Gulf of Oman – and from there to markets around the world. With a capacity of 1.5m barrels per day (bpd), ADCOP allows the nation to export a sizeable proportion of its production capacity via the Emirate of Fujairah, bypassing the Strait of Hormuz, thereby granting the nation a degree of protection against any blockage of this strategically important channel.

Beyond Oil

While oil and gas exports will remain the chief source of trading activity for decades, one of the more interesting trade trends of recent years is the relative increase of non-oil exports from Abu Dhabi as a percentage of total trading activity. In 2014 around Dh18.96bn ($5.1bn) of non-oil exports left the emirate, up from Dh15.99bn ($4.3bn) the previous year. With non-oil imports taken into account, the total value of non-oil foreign merchandise trade was Dh169.11bn ($46bn) in 2015, an increase of 11%, or Dh16.8bn ($4.6bn), compared with 2014. Since 2005 the contribution of non-oil exports to total trading activity (including imports) has grown from 1.4% to 4.1%. The largest contributor to non-oil exports in 2014 was the manufactured goods category, which accounted for 51.2% of the total, of which 47 percentage points came from base metals and associated products. The Dh1.1bn ($299.4m) increase of manufactured goods leaving the emirate over the year represented a 13% increase for a total of Dh9.7bn ($2.6bn) on 2013, and was driven largely by the non-ferrous metals segment, according to SCAD. This continuous increase in non-oil exports is consistent with the government’s decision to make radical changes in the structure of the economy through a deliberate policy of economic diversification.

Moreover, it stands testament to the emirate’s success in executing such policy, a process in which the manufacturing of steel and aluminium, and their downstream products, plays a central part (see Industry chapter). Abu Dhabi’s well-developed petrochemicals industry has also played a prominent role in the growth of non-oil exports, with chemicals and related products, (including plastic, rubber and articles thereof, which account for Dh6.7bn, $1.8bn) accounting for 36.8% of the total in 2014, establishing it as the second-largest category. In terms of growth rate, it outpaced manufactured goods to post a year-on-year (y-o-y) gain of Dh1.8bn ($490m), or 33.9%. The third-largest contributor in 2014 was machinery and transport equipment, which accounted for 5.7% of the total. In terms of geography, the bulk of Abu Dhabi’s non-oil exports in recent years have been destined for the growing economies of Asia, which accounted for 84.5% of all exports in 2014. Africa was the second-largest destination (claiming 6.8%), followed by Europe (6.3%) and North America (1.8%).

Looking to imports, the domestic demand for personal transport, construction machinery and new mass transit options means that machinery and transport equipment is the largest single import category, accounting for 47.2% of the total in 2014. This was followed by manufactured goods (with 22.2% of the total) and chemicals and related products (10%). The bulk of these imports, some 44.3% of the total, originated in Asia, with Europe (30.1%) and North America (13.9%) the next largest sources of goods. Abu Dhabi, then, can be categorised as an importer of goods from the economies of the West and an exporter of goods to the emerging markets of the East. In the case of Abu Dhabi’s trading partners, there is a record of stability in both trade and economic relations. For four consecutive years Saudi Arabia has occupied first place on the list of trading partners of the emirate of Abu Dhabi, with total trade amounting to Dh22.45bn ($6.1bn), accounting for 14.74% of the total merchandise trade of non-oil products for the emirate. The US maintained its second place position, with total trade with the emirate worth Dh14.06bn ($3.8bn).

Trade Agreements

Beyond its advantageous location, the trade policy of the emirate of Abu Dhabi is based on the economic policy of the UAE. The UAE believes that free trade is a necessary condition for enhancing competitiveness and increasing productivity in the long term. The UAE also views protectionist policies as enabling the establishment of an incompetent and inefficient private sector. The country’s free trade policy has led to an expanding array of trade agreements which influences the trade volumes entering and exiting its ports. Since 2002 the trade policy of the emirate of Abu Dhabi and the UAE has been based on the unified trade policy of the GCC, and as part of the UAE, the emirate enjoys the benefits of the 2002 Economic Agreement signed between the nations of the GCC, while the UAE’s membership in the Greater Arab Free Trade Area (GAFTA) provides it with privileged access to markets in 17 states in the Middle East and North Africa. The UAE has been a member of the World Trade Organisation since 1996, and as a leading member of the GCC negotiation team, it is at the forefront of talks to establish free trade agreements with a number of significant markets, such as the EU, Japan, China, India and the South American Mercosur bloc which includes inter alia Brazil and Argentina. On January 1, 2015 the free trade agreement (FTA) between Singapore and the GCC entered force – the culmination of a process that began in 2006. The new FTA removes the tariffs from 93.9% of tariff lines on Singaporean goods imported to the GCC, with a further 2.7% to be removed by 2018. All GCC imports to Singapore are, in return, granted zero-tariff status. The agreement also established a lower value-added content threshold for Singaporean manufacturers to meet in order to qualify for preferential market access, as well as a commitment from the UAE, Kuwait, Oman and Qatar to recognise Singapore’s halal certification standards.

Many in the business community hope that 2016 will see the full implementation of one of the longest-running trade negotiations entered into by the GCC. The possibility of an FTA with the European Free Trade Association (EFTA), comprised of Norway, Iceland, Liechtenstein and Switzerland, has been explored since the 1990s, and by the year 2000 the two blocs had signed a declaration of cooperation. Progress on ratifying a deal was slow, with the EFTA-GCC Free Trade Agreement finally coming into force in June 2015. The deal encompasses a wide range of areas, including trade in goods and services, government procurement and competition. The agreement also establishes an EFTA-GCC Joint Committee, which first met in January 2015, and will in future supervise the application of the FTA.

Other important components include a provision for dispute settlement through arbitration and a number of bilateral arrangements on agricultural products between three individual EFTA states and products between three individual EFTA states and the GCC. However, while the FTA has been ratified by both parties, technical issues on the GCC side prevented its full implementation on schedule. In October 2015, the member states of the GCC informed EFTA that the agreement was not yet being applied by their various national authorities, and therefore preferential treatment for goods originating in EFTA states was not being granted – a situation which may be resolved over the coming months.

The UAE stands to benefit from the GCC’s focus on emerging markets to the East. In June 2015, Datuk Seri Mustapa Mohamed, Malaysia’s minister of international trade and industry, announced that negotiations between his country and the Gulf states would shortly resume, rekindling a process which was first set in motion in 2011. While a framework agreement to boost economic, commercial, investment and technical cooperation already exists between the two parties, talks to establish an FTA were put on hold due to unrest in the Arab region. Expectation is also building around the prospect of renewed trade talks with Australia. Discussions aimed at establishing a GCC-Australia FTA came to a halt in 2009, but a visit to the region in 2015 by Andrew Robb, the Australian minister for trade and investment, has raised the possibility of a fresh effort. Adding to the recovering momentum, the Australian Trade Commission hosted a series of events to promote bilateral trade, including one in Abu Dhabi. More interest is coming from the New Zealand government. Its minister of trade, Tim Groser, stated in 2015 that he was confident a deal would be reached “as soon as possible”. According to the minister, the terms of the FTA have already been agreed upon, and the ratification of the deal awaited only the agreement of the parties’ legal experts on the final text. The commitment of Abu Dhabi’s government to enhancing economic ties with its partners is a key element in achieving its vision.

Trading Infrastructure

The facilities established by Abu Dhabi in order to conduct its trading activity are central to its future expansion. The UAE was the highest-ranked MENA country in the World Economic Forum’s “The Global Enabling Trading Report 2014”, which placed the country 16th out of 138 nations. The report drew attention to the UAE’s success in establishing itself as a logistics, trade and tourism hub, and credited its well-developed transportation system as one of the key enabling factors of this status. Within the wider UAE, Abu Dhabi is playing a leading role in the continued development of the nation’s transport infrastructure. Major new road projects include a 62-km expansion of the existing highway between the capital and neighbouring Dubai, while the minor road network continues to grow and now stands in excess of 18,000 km. While the road network is presently the only form of land transport in Abu Dhabi, the emirate will soon be connected to the nation’s first rail system. The Dh40bn ($10.9bn) Etihad Rail Network is a 1200-km scheme in which Abu Dhabi holds a majority-ownership stake of 70%, with the remainder held by the UAE federal government. The development is being undertaken in three stages, the first of which is 264 km in length and will see more than 22,000 tonnes of granulated sulphur transported daily from the sour gas fields of Shah and Habshan, to the Port of Ruwais for export.

In December 2015 the Federal Transport Authority issued the final safety approvals that will allow Etihad Rail to begin commercial operations on the first leg of its route. The second phase of the project was due for completion in 2016, with preliminary engineering already completed. However, as of late January 2016, the company had decided to temporarily suspend building the 628-km second phase of the project. When the second phase of the construction process is completed, it will see a line run from Mussafa to the Gulf ports of Khalifa and Jebel Ali and to the Omani and Saudi borders (see Transport chapter).

Abu Dhabi’s expansive air transport links are also being upgraded. Abu Dhabi International Airport already records in excess of 16m passenger movements per year, and is currently undergoing a major redevelopment in the form of the Midfield Terminal Building. The new terminal will have an initial capacity of 30m passengers per year, expandable to 40m, thereby tripling the airport’s current annual passenger capacity to around 60m in total.

The project is being developed on a 700,000-sq-metre site – making it the largest building in the emirate – and is due to be completed in 2017. Abu Dhabi also boasts world-class sea transport infrastructure in the form of Khalifa Port.

The new port, which opened in 2012, is the first semi-automated container port in the region and has taken over the handling of Abu Dhabi’s cargo and container traffic. Covering an area of 2.7 sq km, it already has an annual capacity of 2.5m twenty-foot equivalent units (TEUs) and 12m tonnes of general cargo, and when all of its development phases are completed it will be capable of handling 15m TEUs and 35m tonnes of general cargo per year.

Foreign Direct Investment

The development of the investment environment in the emirate along with the trade agreements and transport infrastructure that have helped to drive the growth of trading activity in Abu Dhabi are some of the key factors underpinning the emirate’s attractiveness as a destination for foreign direct investment (FDI). Other powerful draws for foreign capital are its political stability, derived from its part in a federal system for over 40 years that has carefully pursued an open diplomatic policy, and a robust economy which has earned the UAE “AA” sovereign ratings from S&P and Fitch, and an “Aa2” rating from Moody’s. Advanced health care and education systems also act as pull factors, thanks in large part to the presence of leading health care facilities such as the Cleveland Clinic and Johns Hopkins Hospital, plus a raft of local institutions have partnered with global universities, such as the Sorbonne, INSEAD, NYU and MIT. Abu Dhabi has also sought to attract foreign investment by providing a wide range of specialised locations in which industrial and manufacturing activity can take place. These take a number of forms, from the simplest industrial areas such as those at Mafraq and Madinat Zayed, which cater to modest, local enterprises in segments such as light industry, packaging and building materials, to the four specialised zones operated by the Higher Corporation for Specialised Economic Zones (known as Zonescorp) and the Khalifa Industrial Zone Abu Dhabi (KIZAD) being developed by Abu Dhabi Ports.

FDI Patterns

The total stock of FDI in Abu Dhabi has grown steadily over recent years, from Dh60.9bn ($16.6bn) in 2012, to Dh71.9bn ($19.6bn) in 2013 and Dh81.1bn ($22.1bn) in 2014, according to SCAD. The real estate sector still constitutes the highest percentage of FDI in the emirate of Abu Dhabi, a trend that has been underpinned by the UAE’s status as a “safe haven” country during a time of regional political disturbance. In 2014 real estate accounted for Dh23.5bn ($6.4bn) of total FDI. Abu Dhabi’s industrial zones, transport infrastructure and access to regional markets have helped to establish the manufacturing sector as the second-largest recipient of FDI, accounting for Dh15.5bn ($4.2bn) of the total in 2014. The emergence of Abu Dhabi Securities Exchange (ADX) as an institution of global significance and the presence of sizeable banking, financial investment and insurance sectors in the emirate, mean that the financial institutions and insurance category attracts a significant share of the country’s FDI, worth a total of Dh2.7bn ($734.9m) in 2014. Other key sectors with regard to FDI include mining and quarrying (which includes the important oil and gas segments), utilities, construction and transport. In terms of FDI origin, European countries have traditionally directed the single largest share of capital to Abu Dhabi, accounting for Dh33bn ($9bn), or 40.7%, of the total in 2014, according to the most recent data from SCAD. Over the same period, FDI from non-GCC Arab countries claimed the second-largest share, with Dh6.6bn ($1.8bn), followed by non-GCC Asian countries (Dh8bn, $2.2bn), GCC countries (Dh2.8bn, $768m) and North America (Dh1.8bn, $489m).

Abu Dhabi Chamber Of Commerce & Industry

A key vehicle for fostering foreign investment in Abu Dhabi is the Abu Dhabi Chamber of Commerce and Industry, an independent organisation that promotes the private sector interests of businesses in the Abu Dhabi emirate. Founded in 1969, the organisation is headed by Mohamed Helal Al Muhairi. The chamber promotes Abu Dhabi as a centre for global business and maintains close ties with a diverse group of partners, including the Singapore Business Federation and the China Council for the Promotion of International Trade. These partnerships reflect the growing importance of Abu Dhabi’s trade with Asia. Bilateral trade volume between China and the UAE as a whole has grown from $100m in 1984 to $54bn in 2014. The chamber regularly hosts high-profile delegations from China in partnership with the China Council for Promotion of International Trade and has helped arrange trips for Abu Dhabi business people to China. Singapore has often been a model for the UAE. In June 2015, the Abu Dhabi Chamber of Commerce announced plans to open a representative office in Singapore. This decision was influenced by the chamber’s ties to the Singapore Business Federation and the UAE’s position as Singapore’s second-largest trading partner in the Middle East. The group also hosts functions, which bring together investors from countries with strong trading ties to Abu Dhabi. Besides working to promote Abu Dhabi’s interest abroad, the chamber serves as a centre of information for those interested in working in the emirate, and it organises important events such as various business forums for foreign investors in Abu Dhabi.

In the summer of 2015, the Abu Dhabi Chamber of Commerce, in close collaboration with the Abu Dhabi Technology Development Committee (TDC), organised an event on promoting joint ventures between Korean and Abu Dhabi IT companies. Ten leading Korean IT companies, with global expertise ranging from software development to internet security, visited the chamber, during which they gave detailed presentations on their advanced products and services. These companies were then put in direct touch with the management of twofour54, the Abu Dhabi media free zone, which in turn explored cooperation opportunities in the IT sector.

Portfolio Investment

Abu Dhabi has long been associated with buy-side investment activity, thanks in part to the large number of high-net-worth investor residents there and the fiscal surpluses that the government has traditionally been able invest via a range of entities. The Abu Dhabi Investment Authority (ADIA) was established in 1976 as the principal instrument through which the government of Abu Dhabi invests its sovereign wealth, with a view to creating long-term value, and in June 2015 it held around $773bn in assets, according to the Sovereign Wealth Fund Institute, making it the second-largest sovereign wealth fund (SWF) in the world after Norway’s Pension Fund Global, with around $873bn. Over the years it has established a broad portfolio, the largest single component of which is equities derived from developed markets (which ADIA’s risk profile targets at between 32% and 42% of the total), followed by emerging market equities (10% to 20%) and government bonds (10% to 20%). In all, the fund invests in around 24 asset classes, which also include real estate, small-cap equities and private equity. In terms of geography, ADIA’s investment policy is weighted towards North America (which it targets at between 35% and 50% of its portfolio), followed by Europe (20% to 35%), developed Asia (10% to 20%) and emerging markets (15% to 25%). More domestically targeted sovereign wealth is also channelled by the government through the Abu Dhabi Investment Council, which was spun off from ADIA in 2007, and the Mubadala Development Company – an Abu Dhabi-based investment and development company, which has been instrumental in the development of some of the most strategically important projects in the emirate (see Economy chapter). Abu Dhabi’s individual investors, meanwhile, gain access to global and regional assets through the investment arms of domestic banks, such as National Bank of Abu Dhabi Securities and Abu Dhabi Commercial Bank’s Investment and Protection Division, as well as a range of investment companies licensed by the Central Bank of the UAE, such as The National Investor, ADS Securities, Invest AD and Al Ramz Capital. Between them they offer a full range of asset management and merchant banking services to both individual and institutional investors, operating a wide array of funds focused on the MENA equity markets.

Domestic Focus

The larger investment story of today, however, is not Abu Dhabi’s sizeable interests around the globe, but the increased interest with which the international investment community is viewing Abu Dhabi. In part, this is a region-wide phenomenon: according to UK-based investor relations advisors Fairvue Partners, international equity investment in the GCC plus Jordan and Lebanon increased from $5bn in June 2012 to almost $10bn by April 2014. The UAE has played an important role in this trend, with 80% of investment into the region’s equities directed towards the UAE and Qatar as of September 2014, compared to just 62% at the close of 2011. Much of this increased activity can be explained by the decision by first MSCI and then S&P Dow Jones to reclassify the two countries from frontier market to emerging market status in their respective indices. Implemented in 2014, these decisions have increased the amount of index investments some of the ADX’s listed companies are exposed to. It is estimated that some $1bn of total equity tracks the MSCI Frontier Market Index, while this increases significantly to $88.6bn for the MSCI Emerging Market Index. As a result of the UAE’s reclassification Abu Dhabi will see an increase in focus on the ADX (see Capital Markets chapter). The recent promotion of the UAE represents a considerable boost for the ADX’s long-term development prospects, but in the shorter term the emirate’s investment landscape is undergoing a significant structural change that is likely to claim the majority of interest over the coming year.

The new Abu Dhabi Global Market (ADGM) is taking shape on the capital’s Al Maryah Island, and will be the emirate’s first financial free zone. Centred on private banking, wealth management and asset management, ADGM has its own regulatory structure, and independent companies registrar, and independent legal system. In 2016, it is registering its first financial companies. The development promises to significantly add to Abu Dhabi’s inward and outward investment activity over the coming years. “The establishment of the ADGM is a very positive step for the emirate as it will benefit the banking sector more than anything as Abu Dhabi has truly become the banking hub in the region,” Jassim Alseddiqi, CEO of Abu Dhabi Financial Group (ADFG), told OBG.

Outlook

Abu Dhabi’s status as a major oil exporter will remain central to its trade activity over the long term, supplemented by its expanding metals exports in the form of steel and aluminium (see Industry chapter). The downstream manufacturing processes that are enabled by these anchor industries are to add further export potential. This growing industrial and manufacturing base will continue to attract FDI, thanks to supportive government policy that has seen the implementation of investor-friendly incentives and state investment in new infrastructure. The weightings granted to UAE firms in emerging market indices exposes them to more substantial capital pools, and raises the prospect of further gains in international investment. Finally, a new investment law – the first draft of which was approved by the UAE’s Ministry of Justice Committee and the Cabinet in 2015 – promises to re-shape the patterns of FDI in the country. Should it be ratified, the legislation will allow more than 49% ownership of companies by foreigners in selected sectors. While the precise areas of the economy that this development will make accessible to foreign investors remains to be seen, social infrastructure sectors such as health and education are potential starting points for the government as it sets about this process of economic diversification.