The long view: According to government plans, growth will be supported by added development in selected sectors

Thanks in large part to high oil prices and an increase in its hydrocarbons production, Abu Dhabi continued its economic recovery in 2011. Hydrocarbons remain at the centre of the emirate’s economy, accounting for nearly half of its GDP and almost 90% of government revenues in 2010. However, the government has a different vision for the future of Abu Dhabi, with far-reaching plans to develop fledgling areas of activity such as manufacturing and tourism. To this end, the emirate has been actively re-channelling its significant oil earnings into other sectors such that it will be able to reduce its dependence on hydrocarbons in the longer run.

AMBITIOUS DEVELOPMENT: Since 2008 the government has been at the centre of an ambitious development plan, with the state helping to finance projects that have literally changed the landscape of the emirate in a few short years. However, despite its continued growth and steadily increasing oil revenues since 2009, Abu Dhabi has not been immune to the larger global economic challenges that have prevailed of late, including Europe’s sovereign debt troubles and a slow recovery in the US.

Perhaps for this reason, in 2011 the government temporarily put on hold some of its more ambitious plans, but in early 2012 it announced that it had approved a number of investments in new and continuing projects. This seems to have bolstered confidence in the emirate and bodes well for Abu Dhabi’s ongoing economic development and diversification.

CONTINUED GROWTH: The emirate’s GDP increased by 29.9% in nominal terms in 2011, reaching Dh806bn ($219.5bn), according to preliminary data released by the Statistics Centre – Abu Dhabi (SCAD) in its Statistical Yearbook of Abu Dhabi 2012. Growth in real terms, that is, after factoring in inflation, at 2007 constant prices was Dh607bn ($165.4bn) while the National Bureau of Statistics has calculated this figure for the UAE as growing by 4.2% in 2011.

In a statement accompanying the 2011 data release, SCAD said that the figures confirmed that Abu Dhabi had overcome the repercussions of the global financial crisis, posting significant growth in all activities and sectors, both oil and non-oil. The former grew by an impressive 53.1% in nominal terms, fuelled in part by the rise in global oil prices. An increase in oil output also contributed to the jump in GDP, according to Giyas Gökkent, the group chief economist at National Bank of Abu Dhabi (NBAD), the emirate’s largest bank. “The boost in growth in 2011 was driven largely by a rise in oil production, as the GCC countries, including the UAE, stepped in to make up for Libya’s reduced capacity in the wake of political instability in that country,” he told OBG.

LONG-TERM GOALS: The oil and gas industry continues to play a central role in the economy of Abu Dhabi, accounting for 58.5% of GDP in 2011, according to SCAD, but the non-oil sector has exhibited growth in recent years as well, rising by 5.4% in 2010 and 7% in 2011, reaching Dh334.3bn ($91.1bn) in the latter year. Indeed, one of the key objectives of Abu Dhabi Economic Vision 2030, the emirate’s long-term economic development plan, is to diversify the economy and reduce dependence on oil, targeting for it to comprise a 36% share of GDP by 2030.

Published in 2008, Economic Vision 2030 identifies the priorities to achieve the government’s goals: building an open and globally integrated business environment; adopting a disciplined fiscal policy that is responsive to economic cycles; establishing a resilient monetary and financial market environment with manageable levels of inflation; improving labour market efficiency; laying infrastructure capable of supporting economic growth; developing a highly skilled and productive workforce; and enabling financial markets to become the key financiers of economic sectors and projects.

PRIORITY SECTORS: According to this road map for development, economic growth and diversification will be supported by the expansion of 12 sectors: oil and gas; petrochemicals; metals; aviation, aerospace and defence; pharmaceuticals, biotechnology and life sciences; tourism; health care equipment and services; transportation, trade and logistics; education; media; financial services; and telecoms services. In order to realise the expansion of these sectors and support economic diversification, the government has invested heavily in infrastructure and other development projects. This has been achieved partly thanks to the activities of fully owned government entities, such as Abu Dhabi National Oil Company, General Holding Company, Mubadala Development Company, and the Tourism Development and Investment Company (TDIC), among others.

Established by the government of Abu Dhabi in 2002, Mubadala is a catalyst for the economic diversification of Abu Dhabi. According to the company, its mission is to generate sustainable financial returns and build businesses, clusters of expertise and whole new industries. Mubadala manages a diverse portfolio of opportunities, investing for the long term as an active and diligent partner. It is focused on investment and development across multiple sectors, including priority industries such as aerospace, aluminium and semiconductors, as well as areas that deliver clear socio-economic benefits such as health care and real estate. Key social infrastructure projects from Mubadala include Cleveland Clinic Abu Dhabi (see Health chapter) and the development of Al Maryah Island as a new central business district (see Construction and Real Estate chapter).

STILL THE MAIN PLAYER: As its activities via Mubadala demonstrate, the government very much remains the enabler of growth, although the longer-term plan is for it to play an increasingly smaller role as the private sector strengthens.

For now, however, the economy remains largely tied to the actions of the government. Indeed, Abu Dhabi went through a period of some economic uncertainty during the second half of 2011, as the Executive Council, the primary decision-making body in the emirate, put on hold certain development projects while it reassessed its priorities.

Among the projects that were delayed was the development of Saadiyat Island, a natural island off the coast of Abu Dhabi that is being developed by TDIC as a cultural centre and touristic destination for the emirate. The island has already been partially developed, with the necessary infrastructure in place, as well as two luxury hotels that opened in late 2011, the Park Hyatt Abu Dhabi Hotel and Villas and the St Regis Saadiyat Island Resort. But the planned main attractions of the island – three new museums, including local branches of the Guggenheim and the Louvre – remained undeveloped beyond the planning stages as of late 2011.

However, in January 2012 the Executive Council announced that it was reactivating a number of government-led projects, including the museums on Saadiyat Island, with the Louvre Abu Dhabi now scheduled to open in 2015, followed by the Zayed National Museum in 2016 and the Guggenheim Abu Dhabi in 2017. At the same time, the Executive Council revealed that it had approved several big-ticket infrastructure projects, including a new terminal for the Abu Dhabi International Airport; roads and a light rail network; the expansion of maritime facilities; 24 new schools and 14 health centres; the development of Kizad; and the construction of two new industrial zones in the Al Gharbia region.

This was welcome news for the economy as a whole but particularly for construction firms, which to an extent rely on contracts from government-owned developers such as TDIC. With a surplus of real estate already on the market, both in the office and residential segments, commercial opportunities are expected to be limited for some time. Moreover, according to the IMF, this excess supply of real estate continues to burden the economy, and the expected completion of additional projects in the coming months and years will add to this pressure.

FINANCIAL SECTOR: The resumption of the development projects announced in January could also boost demand for private sector loans. According to the IMF, lending in the UAE overall has been fairly sluggish since 2009, but Gökkent told OBG that Abu Dhabi’s lenders grew more rapidly than the overall UAE banking sector in 2011, with assets held by the emirate’s publicly listed banks increasing by approximately 10% during the year. Gökkent has attributed the lending expansion in 2011 to the continued implementation of the Economic Vision 2030 plan and a rise in oil receipts, which in turn were partly funnelled back into the economy. It is unlikely that growth in the bank credit market will reach its pre-financial crisis levels, though expansion at a more moderate pace is expected and may ultimately be more beneficial to the economy. As Salem Al Noaimi, the CEO of the Abu Dhabi-based investment company Waha Capital, told OBG, “It is important that everyone has learned the lessons from having an overheated market, particularly as it relates to the financial services industry. While there may be some uncertainty about the UAE lending environment, we still think that the underlying fundamentals of the economy remain very strong.”

If demand for loans were to increase, Abu Dhabi’s banks are relatively liquid, stable and well positioned to expand their loan books. Official statistics do not exist for Abu Dhabi alone, but the IMF has reported that the UAE banking system as a whole has a capital adequacy ratio of 20% for regulatory capital and 15.3% for Tier 1 capital. This places the country’s banks well above the UAE central bank’s regulatory minimum of 12% (at least 8% of which must be Tier 1) that has been in place since June 2010.

PUBLIC FINANCE: While growth in bank lending has been limited since 2009, spending and investment by the government has in part offset a slowdown in private sector credit growth. The UAE as a whole has carried out an expansionary fiscal policy for the past few years, with the consolidated government non-hydrocarbons primary deficit (which reflects the budgets of the federal, Abu Dhabi, Dubai and Sharjah governments) increasing to approximately 42% of non-hydrocarbons GDP in 2011, up from 36% in 2010, according to the IMF.

This change between 2010 and 2011 largely reflects a rise in spending by Abu Dhabi, due not only to a general rise in current and investment expenditures, but also to the sizeable financial support the government extended to Aldar Properties, a local real estate developer in which it holds a stake, in 2011. As reported by the IMF, in 2011 total Abu Dhabi government spending stood at Dh182bn ($49.6bn), a rise of 14% over the Dh159bn ($43.4bn) recorded in 2010. Looking further back, the increase is more pronounced, with expenditures in 2008 standing at Dh105.4bn ($28.7bn), or 60% of their 2011 level.

CONSOLIDATION: However, fiscal policy is now shifting to a consolidation phase, both at the federal level and for individual emirates. The IMF reported that Dubai has cut its public spending and plans to balance its accounts by 2014, while Abu Dhabi will start implementing a fiscal consolidation plan. The government has made no formal announcements to this effect, but the fact that it temporarily put on hold certain projects in late 2011, with others delayed indefinitely, seems consistent with the IMF’s statement. Abu Dhabi’s motivation for consolidation at this time remains unclear. However, a reduction in spending now would certainly help build in an extra buffer in the event of materialising downside risks, such as a decline in oil prices.

The finances of the emirate remain largely dependent on oil revenues. In 2010 the government took in Dh192.2bn ($52.3bn), of which oil accounted for around 88%. Similarly, in 2011 state-earned revenues amounted to Dh280.9bn ($76.5bn), with oil representing 93% of this figure.

As long as its hydrocarbons revenues remain high, Abu Dhabi will almost certainly maintain a positive fiscal balance, Gökkent told OBG, adding that he expects a surplus of approximately 4% in 2012.

SOVEREIGN BONDS: Thanks predominantly to its oil earnings, in general the government has not needed to borrow money to finance its direct operations. It has issued three sovereign bonds since 2007 with a total face value of $4bn. However, this has been for the purpose of establishing a yield curve, Saeed Almazrouei, the director of the Debt Management Office (DMO), a unit within Abu Dhabi’s Department of Finance that was set up in 2009, told OBG (see analysis). Nonetheless, a few of the government’s 100% state-owned entities (SOEs), such as TDIC, Mubadala and the International Petroleum Investment Company (IPIC), have tapped into international capital markets to a certain extent. Mubadala has outstanding bonds with a face value of $3.5bn and, according to the IMF, the figure stood at some $10.5bn for IPIC and $2bn for TDIC.

In the past these issuances were largely uncoordinated, but more recently the DMO has begun to organise monthly meetings between government officials and representatives of the SOEs that sell bonds. The primary purpose of these events is to avoid a situation in which all are going to the market at the same time. Moreover, the DMO and the SOEs work together in terms of providing consistent information to investors, at least when it comes to the broad macroeconomic data from a variety of sources. This greater degree of involvement on the part of the government regarding the SOE bond issuances was warmly received by the IMF, which noted that this increase in coordination and oversight should allow for better risk management.

MONETARY POLICY: Whether it chooses to directly finance its spending or turn to international capital markets, the government of Abu Dhabi has access to sufficient funds to be able to carry out an expansionary fiscal policy should it wish to.

However, the emirate has less flexibility when it comes to the matter of monetary policy, for two reasons. First, interest rates are set at a federal level by the Central Bank of the UAE. Second, and more importantly, the dirham is pegged to the US dollar, which means that the UAE’s central bank generally needs to synchronise its monetary policy decisions with those of the US Federal Reserve.

INTEREST RATES: In the wake of the global economic crisis, the primary concern in terms of interest rates has been keeping them low to stimulate private sector activity, and to this end, the policies of the US and the UAE have been aligned since that time. The Federal Reserve has kept interest rates at near zero since 2008, which in turn has meant that the cost of borrowing in the UAE has remained low. On the other hand, should the economy start to overheat, the peg to the dollar also means the UAE central bank would have limited ability to respond to inflationary pressures were the US to maintain low interest rates.

However, this potential constraint seems to be of little concern for now, with inflation remaining at relatively subdued levels. According to SCAD, the consumer price index (CPI) rose from 119.3 in 2010 to 121.6 in 2011, equivalent to about 1.9% inflation. This represents a moderate decline since 2010, when this figure stood at 3.1%, and an even steeper drop since 2008, when inflation hit 14.9%.

Inflation in 2011 was primarily driven by the rising cost of imported food, with the “food and nonalcoholic beverages” group exhibiting the largest increase in prices. The second-greatest contributor to the uptick in the CPI was the “housing, water, electricity, gas and other fuels” group. While prices for this latter group exhibited only a small increase, this category is accorded the largest weight in the index such that even a small rise can significantly affect the CPI. The overall picture for the first eight months of 2012 was largely similar to 2011, with the price index increasing by 1.3% compared to the same period in 2011, according to SCAD. The food and nonalcoholic beverages group was again the primary cause for the rise in the CPI, although the price of housing, water, electricity, gas and other fuels actually fell slightly instead of rising. However, this decline was not sufficient to offset an overall rise in prices.

TRADE FLOWS: Abu Dhabi’s long-term economic development plan has called for a reduction in the contribution of oil to the emirate’s economy as a proportion of GDP, but for now hydrocarbons still account for the vast majority of exports and trade more generally. According to the most recent data from SCAD, exports of oil, gas and oil products hit Dh393.4bn ($107.2bn) in 2011, equivalent to 94.5% of total exports, which reached Dh416.5bn ($113.5bn) that year. Otherwise, non-oil exports and re-exports amounted to Dh11.5bn ($3.1bn) and Dh11.6bn ($3.2bn), respectively. Non-oil exports have steadily risen over the past several years, more than tripling since 2005, when they stood at Dh3.2bn ($871m), suggesting that the emirate’s economic diversification efforts are starting to have an effect.

Exports of crude oil are predominantly sent to Asia, with Japan accounting for 35.6% of the total in 2010, followed by South Korea, Thailand and India. Meanwhile, the largest importer of refined oil products is the Netherlands, which purchased 16.9% of the 10m tonnes of refined oil products exported in 2011, followed by Japan. Rounding out the hydrocarbons category is natural gas, with Abu Dhabi selling liquefied natural gas mainly to Japan.

The top purchasers of non-oil exports in 2011 were Canada (23.1%), Saudi Arabia (17.9%) and Brazil (14.5%). In terms of non-oil goods exported, the three largest categories were transport vehicles (39.5%); plastic, rubber and articles thereof (21.3%); and base metals and articles of base metals (22%).

The value of imports is generally significantly smaller than that of exports, with the former amounting to Dh116.4bn ($31.7bn) in 2011. The three largest categories of imports in 2011 were machinery, sound recorders, reproducers and parts (29.5%); transport vehicles (19.3%); and base metals and articles of base metals (21.1%). Major sources of imports for this same period included the US (11.5%), Saudi Arabia (10.5%), Japan (8.5%) and South Korea (10.1%).

INVESTMENT FLOWS: Information regarding capital flows to and from the emirate is generally older and more limited than the trade data that the government makes publicly available. According to the most recent report from SCAD, foreign direct investment (FDI) in Abu Dhabi amounted to Dh43.2bn ($11.8bn) in 2009. The largest component of FDI was real estate and business services activity (which includes real estate sales to non-residents), at Dh17bn ($4.6bn), followed by financial institutions and insurance, with investments amounting to Dh6.4bn ($1.7bn). Electricity, gas and water comprised Dh5.9bn ($1.6bn) of investment, placing third. Major foreign direct investors included the UK ($1.2bn), France ($871m), Australia ($844m) and Kuwait ($762m). Portfolio investment into Abu Dhabi was around $2.07bn in 2009, with investments confined to three sectors: construction, financial institutions and insurance, and real estate and business services. Other investments totalled $53bn, most of which was accounted for by capital flows into financial institutions and the insurance sector.

While SCAD has not published FDI data for more recent years, anecdotal evidence certainly suggests that Abu Dhabi has continued to attract the interest of foreign investors. This is, in part, due to the widespread perception that the emirate is a relatively safe option in a region that has experienced some political instability in recent times. Indeed, Abu Dhabi is seen as a stable location in which to establish a point of entry for larger markets in the GCC, the broader Middle East, Asia and East Africa, Peter Michelmore, a senior partner at international law firm Reed Smith, told OBG. He added that the areas of primary interest to foreign investors in 2012 include transport (particularly the new railway line and the airport expansion) and the defence sector.

PULL FACTORS: For foreign investors, Abu Dhabi has several attractive features. These include a lack of foreign exchange controls and a fully convertible currency, zero personal and corporate income taxes, 100% repatriation of capital and profit, and the availability of energy at a low cost.

The emirate has also established free zones that have additional incentives for investors, although Abu Dhabi has been generally slower to embrace this concept than its neighbour, Dubai. Advantages of Abu Dhabi’s free zones include 100% foreign ownership (outside of these special areas, this figure is capped at 49%), an absence of import and re-export duties, and no restrictions on hiring foreign employees.

The oldest free zone in the emirate, the twofour54 free zone, which was designed as a media and content development centre, is home to the regional offices of CNN and the BBC, and has been in operation since 2008. Then in January 2011, the government granted free-zone status to the properties of Abu Dhabi Airports Company, which will develop zones around Abu Dhabi International, Al Bateen and Al Ain International. Certain parts of Kizad, a new 420-sq-km industrial zone currently under development, have also been granted free-zone status, while Mubadala subsidiary Masdar also operates a free zone as well.

Launched in 2010, Kizad is a part of the larger Khalifa Port and Industrial Zone (KPIZ), which is a multipurpose complex being developed by the Abu Dhabi Ports Company and located in the Al Taweela area, about equidistant between Abu Dhabi City and the Jebel Ali Port in Dubai. The first phases of Kizad will accommodate various types of light, medium and heavy industries, targeting sectors that include petrochemicals, steel, pharmaceuticals, life sciences, chemicals, biotechnology, metals, food and beverages, logistics and transportation.

Beyond free zones, Abu Dhabi has also set up industrial zones of a “special economic nature”, including the Industrial City of Abu Dhabi and Al Ain Industrial City. While these areas do not have all of the advantages of a free zone (for example, foreign ownership is limited to 49%), tenants in these special zones benefit from services designed to make it easier to establish an industrial project, such as a one-stop-shop programme that has streamlined the licensing process. These zones are managed by the Higher Corporation for Specialised Economic Zones, better known as ZonesCorp, which is also responsible for the establishment, management and operation of the specialised economic zone at KPIZ.

COMPANIES LAW: As noted above, businesses that set up outside of the emirate’s free trade zones are subject to a law that limits foreign nationals to holding 49% of a company’s share capital. However, with the UAE Cabinet having approved a new draft companies law in December 2011, the country has moved one step closer to allowing majority, if not 100%, foreign ownership. While the draft law does not specify a new cap, it does include an enabling mechanism that will allow for this limit to be raised in the future. At the request of the minister of economy, the Cabinet may issue a resolution determining the forms or classes of firms for which a non-national can hold more than 49% of the share capital, up to 100% ownership. The draft law also specifies that the Cabinet can issue a resolution to identify classes of activities that are limited to UAE nationals.

However, the draft law is not limited to a discussion of foreign ownership – in fact it revises many other parts of the current companies law, which has been in place since 1984. For example, it introduces a number of other changes related to the structure of companies, including new shareholding rules. Other developments include a legal requirement that a firm’s management and board of directors work in good faith for it, and firms will no longer be able to grant their directors exemption from the personal liability that they bear in their capacity as an officer of the company. These types of rules will help improve corporate governance and likely make it easier for firms to operate in the UAE, which in turn can make the country more attractive to investors.

LABOUR: One reason to encourage FDI in Abu Dhabi is to enable economic diversification, as evidenced, for example, by the emirate’s efforts to attract industrial projects to its specialised economic zones. But foreign investment can also create employment opportunities for Emiratis in the private sector, another objective that the government has identified in its Economic Vision 2030 (see analysis).

Like many other economies in the GCC, Abu Dhabi has historically employed a large number of expatriate workers, with nationals accounting for 8.3% of the workforce in 2011, according to the latest data from SCAD. The public sector has traditionally been the employer of choice for Emiratis, with 60% of Abu Dhabi’s nationals employed in the public administration or defence sectors in 2011. However, with a growing Emirati population, it has become increasingly difficult for the government to absorb all of these potential workers. As of 2011, the unemployment figure for nationals stood at 11.8%.

To address the rising unemployment rate – which the government called “relatively high” in its Economic Vision 2030 – and to help ensure that Emiratis benefit from continued economic growth in Abu Dhabi, policy-makers have focused on increasing the number of nationals who work in the private sector.

The government has taken a multi-pronged approach to meeting this objective, investing in education and training initiatives to reduce any skills gap that may exist, as well as developing job placement programmes that help Emiratis find work. These are steps that, in the longer run, will support further economic development and diversification.

SMALL IS BEAUTIFUL: The government has also encouraged private sector employment of Emiratis by supporting the development of small and medium-sized enterprises (SMEs). The nurturing of local small businesses is also part of Abu Dhabi’s drive towards economic diversification and the positioning of the private sector as the primary engine of growth, as laid out in the Economic Vision 2030.

KHALIFA FUND: The government’s most significant tool for fostering the establishment of SMEs has been the Khalifa Fund for Enterprise Development. Launched in 2007, the fund works to create a culture of investment and entrepreneurship among young people, providing a support system for new businesses that encompasses training, development, data and consulting services.

In addition, financing is available for viable projects through a number of programmes. These include Khutwa, a microfinance scheme that offers loans of up to Dh250,000 ($68,000) for small enterprises; the Bedaya programme, which supports new SMEs with loans of up to Dh3m ($817,000); Zeyada, through which early-stage SMEs can apply for expansion loans of up to Dh5m ($1.36m); and Tasnea, a venture that places more emphasis on industrial projects requiring larger investments.

For each loan, the borrower must provide a down payment of 10% as a sign of their commitment to the project. Funds are lent at zero interest unless the amount exceeds Dh5m ($1.36m), in which case 3% annual interest is charged. The total volume of financing supplied by the Khalifa Fund has been significant. Since its establishment in 2007, the fund has provided nearly Dh612m ($167m) to some 350 projects. In 2011 alone, the organisation approved financing of Dh151m ($41m) for 78 projects.

The government’s commitment to the Khalifa Fund was underscored by its March 2011 decision to double the organisation’s capital from Dh1bn ($272m) to Dh2bn ($544m), which allowed the fund to expand the scope of its services beyond Abu Dhabi and into the other emirates. In January 2012 Hussain Jassim Al Nowais, the chairman of the Khalifa Fund, announced that it would be focusing on supporting the development of businesses in the Northern Emirates in the coming year. Al Nowais also noted a shift in priorities towards micro-businesses and away from larger projects, although he said that the fund would continue to support the latter through its Bedaya, Zeyada and Tasnea programmes.

As in other markets, entrepreneurs can also turn to more traditional sources of small-business financing, such as friends and family, as well as banks. The latter have been more receptive to SMEs in recent years, and are now offering a variety of services ranging from company registration to credit facilities and investment advice. A few of the larger banks have also invested in specialised business units that focus on these clients. However, according to Abdullah Al Darmaki, the CEO of the Khalifa Fund, the private sector’s role in financing small businesses remains limited. “SME development in the region is quite nascent so the infrastructure, particularly as it relates to the financing cycle, for start-up companies is still being established. But there is a high level of demand for funding,” Al Darmaki told OBG.

OUTLOOK: While it may take some time to realise the benefits of investments in SMEs, in the more immediate term the outlook for the Abu Dhabi economy is quite positive. Growth in 2012 will likely not be as great as it was in the previous year, for the simple reason that oil production is unlikely to receive the boost that it did in 2011. According to the IMF, real GDP growth in the UAE is expected to decline to about 2.3% in 2012 from 4.9% in 2011.

Nonetheless, while the hydrocarbons sector of the economy may be slowing, other areas look set to do well in the future, with the approval of major development projects by the Executive Council in January 2012 likely to contribute to economic expansion in the emirate. Future fiscal consolidation could put the brakes on growth in the coming years, but any reduction in spending and investment is expected to come at a gradual pace such that it is unlikely to affect the economic recovery to a major extent.