How inward investment is boosting diversification in Abu Dhabi

Abu Dhabi has leveraged its hydrocarbons wealth to pursue a sovereign investment strategy that spans the globe, establishing itself as one of the largest overseas investors in the world. To strengthen the exchange of capital and ideas, the government has worked to create free zones to capture foreign direct investment (FDI), benefitting the emirate’s economic diversification strategy. Abu Dhabi’s status as a trading power, meanwhile, is supported by large export volumes of crude and refined oil bound for destinations as diverse as the Netherlands and Japan, and the emirate’s expansive logistics infrastructure has helped it become a primary intake point for imports to GCC countries.

Outbound Investment

In 2018 outward FDI from the UAE amounted to $15bn, according to the UN Conference on Trade and Development, placing it among the top-20 investing economies. The investment arms of the Abu Dhabi government play an important role in this activity. The emirate’s sovereign wealth fund (SWF), the Abu Dhabi Investment Authority (ADIA), is the third-largest SWF in the world according to the SWF Institute, with around $697bn in assets as of early 2020. Founded in 1976, ADIA has been a crucial tool in the development of the emirate, and roughly 70% of any budget surplus has historically been transferred to the fund. Abu Dhabi’s robust external buffers are largely attributable to the careful investment of this capital over more than four decades, and the emirate’s strategic positioning abroad allows it to mitigate fiscal deficits that have periodically resulted from lower global oil prices without much discomfort in the short or medium term. This is seen as a particular strategic advantage given the drop in oil prices seen in early 2020. ADIA’s portfolio is diversified across 24 asset classes and subcategories, with the principal tools being equities, fixed-income instruments, alternative investment vehicles, real estate, private equity funds and infrastructure interests. The fund has traditionally channelled capital to developed markets in the West, but in recent years has shown an increased interest in Asian countries, particularly China and India.

Other government bodies complement ADIA, including the Abu Dhabi Investment Council (ADIC), which was spun off from ADIA in 2007 to take over the SWF’s involvement in domestic institutions such as Abu Dhabi Commercial Bank and First Abu Dhabi Bank. In 2019 ADIC became part of Mubadala Investment Company, which is also owned by the government of Abu Dhabi.

Mubadala Investment Company was established in 2002 and differs from traditional SWFs in that it is partially self-financed through a debt issuance programme, and is therefore classified by the SWF Institute as a strategic development SWF. As of 2020 it had assets under management of $229bn, distributed across businesses and investments in more than 50 countries, which it manages through five global offices. The company also invests within Abu Dhabi. For example, Mubadala Investment Company helped develop the Abu Dhabi Global Market (ADGM), a 450,000-sq-metre financial free zone that opened in October 2015 on Al Maryah Island (see Capital Markets chapter).

Inflow Trends

Various factors combine to make Abu Dhabi an attractive destination for global capital, including the emirate’s long-term sovereign issuer and senior unsecured ratings of “Aa2” from credit ratings agency Moody’s, and “AA” from both Fitch and Standard & Poor’s. Portfolio investment – measured by the amount of equity and debt securities purchased – is an important component of overall foreign investment inflows. According to the “Statistical Yearbook of Abu Dhabi 2019” published by Statistics Centre - Abu Dhabi (SCAD), portfolio investment amounted to Dh131.4bn ($35.8bn) in 2016. Inward FDI for the same year was Dh100.9bn ($27.5bn) and rose to Dh108bn ($29.4bn) in 2017 – an expansion of 7.1%.

FDI inflows were dominated by three sectors in 2016: real estate, which accounted for 27.7% of the total; manufacturing (18%); and mining and quarrying (17.3%). Other important recipients were finance and insurance (10.4%), utilities (9.8%) and construction (7.9%). Similarly in 2017 the top-three sectors were real estate (27.7%), followed by manufacturing (17.8%), and mining and quarrying (16.9%). European countries have traditionally been the biggest sources of FDI in the emirate, with the latest breakdown from SCAD showing that in 2016 the UK was the largest investor, with 15% of total inflows, followed by Austria (14.2%) and France (7.7%). The largest non-European investors that year were Japan (6%) and South Korea (3.9%).

The federal and emirate-level governments have each adopted strategies to increase inward FDI and boost private sector activity in a bid to diversify the economy. At the federal level the promulgation of a new investment law in 2018 forms part of this effort. The law opened the door to 100% foreign ownership of companies in approved sectors, and represents a historic shift in national policy (see analysis).

Local Destinations

In addition to legislative reform, Abu Dhabi has sought to spur investment by providing a range of specialised locations capable of attracting both domestic and international capital. Industrial zones such as those in Mafraq and Madinat Zayed cater to small and medium-sized enterprises involved in light industry, packaging and building materials. More specialised sites, such as the four zones operated by the Higher Corporation for Specialised Economic Zones – known as ZonesCorp – and the Khalifa Industrial Zone (KIZAD) developed by Abu Dhabi Ports, target larger-scale and international investment. Some locations serve a single sector, such as the 6-sqkm Rahayel City that is being developed by ZonesCorp for the automotive industry. Others have a broader mandate: the 417-sq-km KIZAD, for example, attracts investors in activities such as aluminium, automotive, engineered metals, port logistics, food processing, pharmaceuticals, packaging, polymer conversion and other industries that rely on the nearby Khalifa Port.

Financial Zone

Abu Dhabi has also operated ADGM, a financial free zone, since 2015. The zone is a destination for investment in private banking and wealth management. ADGM is currently being developed as a financial technology (fintech) centre following the establishment of the Regulatory Laboratory in 2016 – a tailored framework created by ADGM to enable fintech players to conduct their activities in a controlled and cost-effective space. More recently the zone has sought to attract and regulate cryptocurrency entities, including exchange houses, to provide an alternative asset class for the investment community. The free zone has an independent companies registrar, its own regulatory framework and an independent legal system based on UK common law, chosen because it is the most widely used system for resolving commercial disputes and is continuously updated by the courts of leading global jurisdictions. At the beginning of 2020 ADGM was home to over 100 companies, including Citibank, BNP Paribas, Aberdeen Asset Management, Bank Lombard Odier and Banque Richelieu GCC.

Hydrocarbons Trade

Abu Dhabi’s trading activity is benefitting from the broadening of its investment base. Hydrocarbons, however, continue to dominate the emirate’s export portfolio: in 2018 oil and gas products accounted for Dh217.4bn ($59.2bn) of the Dh329.9bn ($89.9bn) worth of goods exported, according to SCAD. The most important markets for Abu Dhabi’s oil are Japan, which accounted for 31.4% of crude exports in 2018, followed by India (16.7%), South Korea (10.3%) and China (9.3%). Abu Dhabi is home to one of the largest refineries in the world, which means refined petroleum products also play an important part in export activity. The Netherlands was Abu Dhabi’s largest customer in this category in 2018, accounting for 14.7% of the total volume, followed by Japan (13%) and South Korea (11%). It remains to be seen what impact the Covid-19 pandemic will have on demand in top destination markets.

Non-Oil Exports

While oil exports remain central to public finances, boosting non-oil exports is also a priority. Abu Dhabi has achieved considerable success over the past decade in this regard: the share of exported non-oil goods increased from 3.9% of the total trade in goods in 2010 to 19.5% in 2018, according to the most recent SCAD data. The largest contributing category in 2018 was pearls, stones and precious metals, which accounted for Dh17.1bn ($4.7bn) of the Dh64.4bn ($17.5bn) total. The next biggest was base metals and articles of base metals (Dh17bn, $4.6bn), followed by plastic, rubber and related articles (Dh10.9bn, $3bn). Re-exports comprised the final piece of the Dh329.9bn ($89.9bn) worth of goods exported, recording Dh48.1bn ($13.1bn). The largest categories of re-exports were transport vehicles, at Dh16.9bn ($4.6bn), or 35.1% of the total, and machinery, sound recorders, reproducers and parts, at Dh10.6bn ($2.9bn), or 22.1% of the total.

The bulk of non-oil exports in recent years were destined for Asia, which purchased 78.3% of the total in 2018. Europe (12%) was the second-largest destination, followed by North America (5%), Africa (4.3%), and Australia and Oceania, and South America (0.2% each).

Imports

In terms of incoming goods, the two most significant categories of the total Dh112.9bn ($30.7bn) import bill were transport vehicles (23.5%), and machinery, sound recorders, reproducers and parts (19.3%). Base metals and articles of base metals comprised the third-largest import category, at 19% of the total. Just over half of all imports came from Asia in 2018, while nearly 25% came from Europe and 12.6% from North America. The emirate’s trade surplus of Dh217.1bn ($59.1bn) in 2018 was roughly equal to 23% of GDP, while the total amount traded (Dh442.8bn, $120.5bn) expanded by 12.5% from 2017.

Agreements

Abu Dhabi, as part of the UAE, benefits from a number of trade agreements. The UAE joined the World Trade Organisation (WTO) in 1996, and in 2016 it became the first member from the Arab world to ratify the new WTO Trade Facilitation Agreement – a framework that contains provisions for expediting the movement of goods in transit and increasing Customs cooperation. GCC membership also means that the UAE applies the Common Customs Law, the Unified Guide for Customs Procedures at First Points of Entry, the Common Law on Anti-Dumping and Countervailing Measures, the Common External Tariff and other standardised rules relating to trade. As a leading member of the bloc, the UAE is at the forefront of talks to establish free trade agreements (FTAs) with markets such as the EU, Japan, China, India and the South American Mercosur bloc, which includes Brazil, Argentina and Uruguay.

An FTA has been in place between the GCC and Singapore since 2015, removing tariffs from around 95% of Singaporean goods entering the bloc and entirely removing tariffs on goods exported by the GCC to Singapore. An FTA between the EU and the GCC, meanwhile, has been under negotiation for a number of years. In May 2017 a structured, but informal, EU-GCC dialogue on trade and investment was launched. Even so, as of mid-2020 the framework for economic cooperation between the two regional entities was the 1988 EU-GCC Cooperation Agreement, which entails annual discussions on trade, among other topics.

The GCC has made more progress with the European Free Trade Association (EFTA), made up of Norway, Ireland, Liechtenstein and Switzerland. An EFTA-GCC FTA came into force in June 2015. The agreement is a wide-ranging framework that covers trade in goods and services, government procurement and competition. The agreement also established an EFTA-GCC Joint Committee, which first met in January 2015 and has a mandate to supervise the application of the FTA.

Infrastructure

Abu Dhabi’s efforts to boost nonoil trade are supported by one of the most advanced logistics networks in the region. At the federal level the UAE ranks among the top countries in the world for its road network, according to the “Global Competitiveness Report 2019” by the World Economic Forum. Moreover, in 2016 Etihad Rail began commercial operations on a 264-km standard-gauge line that runs from the gas fields at Shah and Habshan to the Port of Ruwais.

At the emirate level Abu Dhabi International Airport is expected to open its new Dh10bn ($2.7bn) Midfield Terminal Building in 2020, which will boost capacity from around 20m passengers to 45m a year. Cargo capacity is to be increased as well, with the upgrade of Etihad Cargo’s terminal on the south side of the airport. Announced in the third quarter of 2019, the upgrades are due for completion in the third quarter of 2020.

Meanwhile, Abu Dhabi’s Khalifa Port container terminal, which opened for business in December 2012 with capacity to handle 2m containers per year, launched its multi-year expansion strategy in 2016. Within one year the site received a new quay wall that granted it 600,000 sq metres of space to accommodate larger ships. To support additional expansions, partnerships have been formed in recent years between the port’s operator, Abu Dhabi Ports, and Hong Kong’s COSCO Shipping Ports and Switzerland’s Mediterranean Shipping Company (see Transport chapter).

Outlook

While the economic headwinds engendered by the Covid-19 pandemic in early 2020 are sure to weigh on trade – with the WTO forecasting between a 13% and 32% drop in global merchandise trade in 2020 – underlying fundamentals remain key to identifying and capitalising on longer-term trends. Both the federal government and the Abu Dhabi government continue to work on developing the legislative frameworks and infrastructure to support trade and investment in the emirate. In February 2020 Abu Dhabi’s General Administration of Customs announced a plan to improve the trading environment by boosting the number of items pre-cleared by the Customs system from 8% to 15% of the total. Meanwhile, the new federal FDI law that allows for 100% foreign ownership of companies in approved sectors grants individual emirates the ability to define their own positive and negative lists. Abu Dhabi’s decisions on this matter will be of interest to the investment community in the coming years.

In terms of trade, Abu Dhabi’s status as a significant oil producer means that hydrocarbons products will continue to occupy a dominant position in the export basket. However, the development of downstream manufacturing and other industrial activities will enable greater economic and thus export diversification.