Ras Al Khaimah drives diversification by expanding high-priority sectors

Home to sizeable reserves of clay, limestone and sand, but few petroleum resources and fewer than 500,000 residents, Ras Al Khaimah holds a unique position among the UAE’s seven emirates, maintaining a less frenetic pace of life even as its GDP growth rises above the national average.

RAK’s path towards economic diversification started early, and has seen it transform into an industrial and manufacturing hub, supported by targeted resource development, a fast-expanding network of free zones, and government efforts to promote and incentivise investment.

RAK’s challenges are largely related to its fast expansion and demographics. Rapid economic expansion has strained the emirate’s existing power and water supply. Although RAK benefits from federal support and spending, falling oil prices have also dimmed the UAE’s outlook in 2015.

RAK’s direct dependence on oil revenues remains limited, and major regional events, including Dubai’s World Expo 2020 and the 2022 FIFA World Cup in Qatar, are expected to drive demand for cement, ceramics and glass, underpinning expansion in a host of sectors. RAK’s uninterrupted growth path, rising attractiveness as an international investment destination and dramatically lower business costs should see GDP and foreign investment remain robust in 2015, lending an optimistic outlook to near- and long-term growth prospects.

Local Benefits

The emirate’s varied topography has given it a considerable competitive advantage. The Hajar Mountain range runs through the emirate, offering a significant supply of limestone to support a large and maturing cement industry, which will be especially beneficial in the lead-up to major, infrastructure-intensive events in the region. At the same time, an abundance of local clay has enabled RAK Ceramics, established in 1991 by RAK’s ruler, Sheikh Saud bin Saqr Al Qasimi, to become the world’s largest supplier of ceramic tiles, while vast quantities of sand have led to a robust portfolio of glass manufacturing companies, many of which operate out of the RAK Investment Authority’s (RAKIA) network of industrial parks.

Free zone development has been extremely beneficial to ongoing economic diversification efforts, and today the emirate’s free trade zone (FTZ) network, under development by RAK FTZ, RAKIA and RAK Maritime City, stands as one of the fastest-growing globally, with rapid expansion leading to an influx of international tenants and billions of dollars in new investment in recent years.

By capitalising on its natural resources and focusing diversification efforts on the industrial, manufacturing and mining segments, the emirate created a springboard for future expansion into the high-priority education, health care and tourism segments. RAK also continues to benefit from its location as the closest emirate to the major trade routes through the Strait of Hormuz, hosting five port facilities, one of which will be connected to the planned GCC national railway network, which is expected to be operational by 2018.

Recent Growth

The RAK Department of Economic Development (RAK DED), the official authority for statistics and the authority for business licensing and inspections, reported that total GDP rose by 7.6% in 2013 to reach Dh25.9bn ($7.05bn), or 1.8% of the UAE’s total GDP, which stood at Dh1.47trn ($400.1bn) in the same year. In 2013 RAK DED also published GDP figures that take FTZ income into account for the first time, and reported that in total RAK’s GDP reached Dh30.95bn ($8.4bn) in 2013, or 2.1% of the UAE total. Although RAK-specific details have not yet been released, the UAE’s Ministry of Economy (MoE) reports that the UAE’s total GDP rose by 4.8% to reach Dh1.54trn ($419.2bn) in 2014. As of mid-May 2015 ratings agency Fitch expected RAK’s real GDP growth to slow from 6.5% in 2014 to 4-5% over 2015 and 2016.

RAK DED reports strong economic GDP growth in the years to 2013, and the emirate was largely unaffected by the global financial crisis of 2009. That year the UAE’s GDP fell by 5.24% before recovering to reach 1.64% in 2010, 4.9% in 2011 and 4.68% in 2012. For its part, RAK was able to sustain GDP growth of 4.4% in 2009, 6.03% in 2010, 29.9% in 2011 and 5.3% in 2012, according to RAK DED data, although the 2011 spike was primarily the result of an increase in available data overall.

Population & Inflation

RAK’s estimated population was up significantly, from 267,000 in 2009 to 413,000 in 2010, the result of a population adjustment at the federal level.

Growth rose by an annual average of 2% between 2011 and 2013 to reach 438,000, according to RAK DED’s “2014 Statistical Yearbook”. Although population estimates remain difficult to obtain – the UAE has not conducted a national census since 2005, and many RAK residents divide their time between the emirate and Dubai – population growth has certainly accelerated since 2009.

Inflation has also been rising in RAK, albeit at a slower pace than the national average, and reached 2.9% in September 2014, the highest inflation rate in five years. RAK DED reports that the emirate’s consumer price index (CPI) rose by 2.7% in 2010, increasing from 111 to 114. Inflation hit 2.6% in 2011 and 2.8% in 2012, before moderating to stand at 1.4% in 2013. Quarterly economic reports issued by RAK DED show that inflation gained pace again throughout 2014, however, with the CPI rising from 122 in 2013 to 125.3 in 2014, a 2.7% y-o-y increase.

Credit Rating

RAK is considered an attractive and safe investment destination, and in May 2015, Standard & Poor’s (S&P) affirmed its “stable” outlook for the emirate, assigning it “A/A-1” long- and short-term foreign and local currency sovereign credit ratings. The agency said this decision was supported by robust prospects for economic growth, the vast supply of materials for building and infrastructure projects in the GCC region and the diversification of RAK’s export markets.

Indeed, the emirate’s trade balance has become increasingly favourable in recent years; RAK DED reports robust export growth between 2009 and 2014, with exports more than doubling from Dh3.23bn ($879.2m) in 2009 to Dh7.07bn ($1.9bn) in 2014. S&P also cited the emirate’s limited direct reliance on oil as a positive factor, as well as the government’s strong balance sheet, with a sovereign Islamic bond (sukuk) issuance expected to further bolster government coffers (see analysis).

In May 2014 S&P downgraded its outlook for the emirate to “negative” as a result of the many federal statistical adjustments, but upgraded RAK back to “stable” in November, though the issue remains a concern. Fitch affirmed its rating for RAK at “A” in November, two notches below the UAE’s overall rating of “AA+”. The agency reported that RAK benefits from low debt and a strong fiscal surplus, as well as the UAE’s overall economic strength, but emphasised that institutional weaknesses, which have led to a limited availability of data in the emirate, continue to constrain RAK’s rating. The agency highlighted lack of data on national accounts, balance of payments and monetary data as areas in need of improvement, with the government already moving to establish a dedicated government statistics centre in a bid to improve its transparency and attractiveness to foreign investors.

Rising Investment

RAK benefits from broader national growth, and the UAE’s standing as a top global investment destination has helped bring a sizeable amount of new businesses to the emirate. The UAE rose three places on the World Bank’s 2015 ease of doing business survey, and stands as the only Middle East economy in the top 25 of the 189 countries surveyed. The UAE ranks first worldwide in the paying taxes category and fourth place globally in dealing with construction permits, getting electricity and registering property.

In addition to these competitive advantages, RAK offers significantly lower costs of living and of doing business – the cost of establishing a new company in RAK FTZ, for example, is lower than it is in other emirates (see analysis).

The emirate’s attractiveness as a rising industrial, manufacturing and mining centre has resulted in a surge of new businesses and investment in recent years, and RAK DED reported issuing 1791 non-FTZ new business licences in 2014, a five-year high; the issuance of new licences had previously peaked at 1790 in 2010, before falling to 1474 in 2011, 1465 in 2012 and 1377 in 2013.

Industrial Strength

Industry remains RAK’s greatest strength, and RAK DED reports that the mining, quarrying and manufacturing segments collectively accounted for 34.3% of total GDP at production factor cost in 2013, meaning the total value of all goods and services produced in the emirate excluding subsidies and indirect taxes. Of this, manufacturing stands as the single largest economic sector in the emirate, contributing 25.1% of GDP, followed by retail, wholesale and repair (12.1%), government services (9.9%), financial services (8.6%), construction (7.5%), real estate (6.9%) and transportation (6.4%).

According to the department, the number of industrial firms in the emirate has grown significantly in recent years, rising from 168 firms in 2009 to 2164 in 2013. Total investment by these firms was estimated at some Dh3.16bn ($860.2m) in 2013, a 3.9% increase over Dh3.04bn ($827.5m) in 2012.

The manufacturing sector is poised for significant future expansion. The ongoing preparations for Dubai’s World Expo 2020, which will entail an estimated $6.9bn worth of new development projects, are set to drive demand for construction materials, with the first wave of building expected to kick off in late 2015.

Perhaps more promisingly, the 2022 FIFA World Cup will be hosted in Qatar, which is preparing to spend an estimated $70bn on new construction projects. It has already reported rapid inflation in the cost of construction materials, putting RAK in a favourable position to capitalise on surging demand for cement, glass and ceramics. Industrial growth has also been driven by efforts to promote and incentivise RAK’s free zones.

Free Zones

RAK’s free zones contributed a combined Dh5.04bn ($1.4bn), some 16.3% of total GDP in 2013, and are a significant growth driver for the emirate, with new investment in these zones totalling well over $1bn between April and November 2014. RAK offers three free zones to foreign investors – RAK FTZ, RAKIA’s Al Ghail and Al Hamra industrial parks, and RAK Maritime City.

RAK FTZ was established in 2000, and today offers four specialised free zone parks: the Business Park, for office clients; the Technology Park, for trading and light to medium manufacturing; the Industrial Park, for heavy manufacturing; and the RAK Academic Zone, for educational institutions. The authority’s portfolio of clients has doubled in the past four years to more than 8000 international firms from over 100 countries.

RAKIA has developed and managed free zone and non-free zone jurisdictions in RAK since 2005. At two industrial parks in Al Ghail and Al Hamra, RAKIA is home to over 7500 companies and manufacturers in various sectors, including metal, chemicals, food, plastics and automotives, a 22% increase over the 5718 firms operating there in 2012.

RAK Maritime City is the youngest of the emirate’s free zones, having opened in May 2011 with the aim of providing easy port access to industrial exporters. The site will host a port facility covering 8m sq metres, and including a 5-metre quay wall and deep harbour entrance. Special areas are designated for operations including warehousing, tank storage, general cargo handling, industrial production, and shipbuilding or repairs.

Stakeholders at all three free zones have been active in promoting the available benefits, which include tax exemptions and 100% foreign ownership rights. RAK FTZ, in a bid to target new tenants from East Asia, has also established a new window with dedicated language services for prospective East Asian tenants, while RAKIA established a new tenants’ committee in 2014 to facilitate better communication between tenants and its executive management (see analysis).

A number of new tenants have established a presence in the emirate as a result, most recently when the UAE-based recycling firm, Asian Fibres, announced that it plans to invest $100m to build the MENA region’s largest regenerated polyester staple fibre production facility in November 2014. The facility, which will be located in RAKIA’s Al Ghail Industrial Park, is expected to create 600 new jobs when construction finishes in 2015.

Earlier in June 2014, French and Belgian firm PGS Group, a global manufacturer of wooden pallets, expanded into the Middle East with the establishment of a subsidiary in RAK FTZ.

The firm, which achieved consolidated turnover of €170m in 2013, aims to reach €500m in turnover during the next five years by expanding its RAK FTZ facilities. India’s Zuari Agro Chemicals, meanwhile, announced plans to invest Dh3.5bn ($952.7m) in RAK Maritime City in April 2014.

The investment will see the construction of an integrated di-ammonium phosphate manufacturing facility (see Industry chapter).

Utilities Challenge

Access to reliable, affordable electricity has been a concern for free zone tenants. In an effort to reduce the electricity tariff, an agreement with Federal Electricity and Water Authority (FEWA) and RAKIA was finalised giving FEWA the full responsibility for providing power to RAKIA’s tenants in the Al Hamra and Al Ghail industrial parks, which will ensure the availability of a stable power supply at competitive rates.

RAK FTZ announced in February 2015 that it had built eight new substations and a new switching station to connect all warehouses in its technology cluster to FEWA’s national grid. The emirate has also announced plans to significantly increase available power and desalinated water supply, with a number of new projects expected to take place in partnership with the private sector. For example, utility provider Utico has plans to invest over $450m in new utilities infrastructure in the emirate – as well as a 270-MW clean coal power plant.

Despite the positive signs, several major planned projects have been delayed in recent years, and federal authorities have reported a decline in electricity and desalination production at the same time. Construction of new utilities infrastructure will be critical for the emirate, and represents perhaps the most pressing challenge to future industrial investment and expansion (see Energy chapter).

E-Dirham System

In August 2015 the government announced it would be shifting to an electronic system to facilitate the payment of government fees for certain services.

The e-Dirham system, launched through a partnership with the National Bank of Abu Dhabi and the Ministry of Finance, will reduce the time required to deliver services to end users and strengthen the collections process for government agency providers. According to the ministry, the e-Dirham will enable fee collection for authentication services pertaining to certificates of origin and invoices for imported goods that are provided by the Ministry of Foreign Affairs.

The card will reduce inter-agency bureaucracy for individuals and companies conducting import/ export business, as they will be able to pay for authentication services for certificates of origin and invoices, as well as other related fees, via the new electronic e-Dirham card.

Ongoing Diversification

Although industrial activities remain the engine of RAK’s economy, the government has been active in promoting and developing further economic diversification, and is putting added emphasis on the tourism, education and health care sectors, which currently comprise a relatively small proportion of total GDP.

RAK DED does not measure health and education’s standalone total contribution to GDP, and hospitality comprised some 2.8% of GDP at production factor cost in 2013.

The RAK Tourism Development Authority (RAK TDA) has targeted raising the sector’s contribution to GDP to 9% in 2016, and the emirate appears to be on track to meet this goal. In February 2015 RAK TDA announced that tourism revenues in the emirate exceeded the Dh1bn ($272.2m) mark in 2014, while the total number of hotel nights spent by visitors to the emirate rose by 72% to reach 2.14m.

This growth was driven by an influx of new hotels coming on-line, most notably facilities on Al Marjan Island, a cluster of four man-made islands extending 4.5 km into the Gulf and slated for future development. In 2014 the islands welcomed the 315-room Marjan Island Resort and Spa, Double Tree Hilton’s 484-room resort and spa, and the 655-room Rixos Bab Al Bahr Resort. As a result of these and other facilities, the emirate’s total supply of hotel beds rose by two-thirds between September 2013 and September 2014, reaching 5000.

Regional GCC visitors, including UAE nationals, continue to constitute the largest proportion of tourists, with visitor arrivals set to rise further in the wake of new activity at RAK International Airport, after low-cost carrier Air Arabia, based in Sharjah, began offering services in May 2014.

Company officials announced plans to extend services beyond the initial routes to Jeddah, Cairo and Muscat. Air Arabia is expected to launch new routes to Pakistan, Bangladesh and India in the near term, while longer-term plans include launching new routes to Kuwait and Bahrain. Qatar Airways will also start services to RAK in February 2016. Passenger numbers at the airport are forecast to reach 600,000 by the end of 2015.

Health Care

In addition, the government is also targeting value-added tourism through renewed efforts to develop its medical tourism industry, in line with the UAE’s broader strategy to transform into a global medical tourism hub, with more than 1m medical tourists expected to visit the country annually by 2020. The emirate’s leading private hospital, RAK Hospital, for example, is increasingly targeting new foreign patients from Asia with a range of specialty services, moving in January 2015 to partner with India’s Shalby Hospitals to offer a new knee replacement surgery which will cut operating and recovery times substantially – patients will spend 15 minutes or less on the operating table and walk within three hours of the surgery.

Perhaps most significantly for future health care and health tourism efforts, the long-awaited Sheikh Khalifa Specialty Hospital (SKSH) was officially inaugurated in February 2015. The six-storey, Dh1bn ($272.2m) facility focuses on tertiary treatment, cancer and heart care, speciality services that had been largely unavailable in RAK. When fully operational, the authorities expect SKSH will not only keep patients from travelling abroad for treatments, but eventually serve as a regional hub for this type of care (see Health chapter).

Education

The education sector is also poised for expansion over the coming years, following several years of robust growth at both private K-12 schools and in RAK FTZ’s dedicated education zone, where the majority of private post-secondary institutions are concentrated.

Efforts to focus on science- and math-based education and renewable energy have seen a host of new research and development facilities established in recent decades, most recently when Google unveiled its first-ever UAE-based innovation hub, located in RAK, which is expected to serve around 500 students annually. As is the case across many other sectors, RAK’s lower cost of living will support growth, with private primary, secondary and post-secondary tuition fees standing considerably lower than elsewhere in the UAE.

Outlook

Its industrial, manufacturing and mining sectors are its greatest strength, particularly in the lead-up to Expo 2020 and the FIFA 2022 World Cup, but RAK’s rising population and economic fundamentals have allowed it successes in knowledge-based diversification. With investment in other sectors rising, the emirate’s health, education and tourism sectors are poised to increase their contribution to GDP in the coming years. The emirate’s expansion is linked to the UAE’s national growth and RAK is set to benefit; projections for the country stand at 4.5% in 2015, and the emirate is expected to continue outpacing national growth.