Abu Dhabi's investment portfolio supported by financial services offerings

In both Abu Dhabi and the wider UAE, diversification away from the hydrocarbons sector is a key component of economic planning, and the emirate is moving to increase the role of non-oil exports in its trading profile. This will be largely supported by continued investment in the emirate’s port infrastructure, industrial and free zones, and the connectivity between the two. Agreements with Chinese authorities are expected to both boost port capacity in the emirate and help to build a foreign direct investment (FDI) pipeline from China.

Diversification

Abu Dhabi is working alongside fellow emirates such as Dubai on this economic diversification project. The latter is planning to host Expo 2020, for example, at a cluster of purpose-built sites roughly halfway between the downtowns of the two cities. Those facilities will then be converted for use in high-tech manufacturing and research, said Mohammad Helal Al Muhairi, the director-general of the Abu Dhabi Chamber of Commerce. “There is a drive to attract research and development investment, and there will be tax incentives,” he told OBG.

Plans to diversify include more than just high-tech manufacturing and research. Financial services are also a key element of the strategy, building off Abu Dhabi’s experience in managing wealth and leveraging large-scale pools of institutional capital.

Size & Scope

Abu Dhabi is perhaps best known by global investors for its petroleum wealth and the institutions that oversee that capital. The Sovereign Wealth Fund Institute counts the Abu Dhabi Investment Authority (ADIA) as the third-largest sovereign-wealth fund in the world, with $828bn in assets under management. That figure is surpassed only by the Norwegian Government Pension Fund— Global, which has $1.04trn in assets, and by the China Investment Corporation, which has $900bn.

ADIA was established in 1976 and has a mandate to invest the emirate’s oil wealth overseas, primarily in developed-country equities, in which it seeks to invest between 32% and 43% of its portfolio. Both emerging-market equities and government bonds are to range from 10% to 20% of the whole, with all other asset classes to be kept below 10%. They include credit, real estate, private equity, infrastructure, cash and small-market capitalisation equities.

Abu Dhabi’s second-largest investment vehicle is Mubadala, which was established in 2002, and has invested in 13 economic sectors across 30 countries. Two other investment arms, the International Petroleum Investment Company and the Abu Dhabi Investment Council, have been folded into Mubadala in recent years. The latter deal was announced in March 2018, and will give Mubadala $248bn in assets. That is expected to boost it from 14th on the Sovereign Wealth Fund Institute’s rankings to 11th.

Inward Bound

According to the Statistics Centre - Abu Dhabi (SCAD), overall foreign investment (FI) has nearly doubled since 2012, when the emirate attracted Dh250.32bn ($68.14bn) in investments. The total value of FI in Abu Dhabi reached Dh491.03bn ($133.56bn) in 2017 – up from Dh459.53bn ($125.01bn) in 2016, according to SCAD figures released in November 2018.

Meanwhile, inward FDI made up 20% of this total, at Dh99.84bn ($27.18bn) in 2017 – a slight decrease from Dh100.89bn ($27.45bn) recorded in 2016, but up 39% from 2012 figures. Foreign investment as a factor in the emirate’s economy has been on the rise, as the overall value of FDI has climbed from 6.7% of GDP in 2012 to 11.99% in 2017. Similar growth trends apply at the federal level – the UAE became the ninth-largest FDI recipient in Asia in 2017, according to the UN Conference on Trade and Development, which highlighted the country among the most promising economies for the 2016-18 period.

The highest amount of FDI in 2017 came from Austria, which contributed Dh14.5bn ($3.95bn) to make up 14.5% of the total – an increase from 14.2% recorded in 2016. The UK came in second, contributing Dh12.8bn ($3.48bn, or 13% of the total), followed by Japan, which contributed Dh7.31bn ($1.99bn), and France, with Dh6.5bn ($1.77bn).

By the Numbers

The financial services market was the main attraction for foreign investors, accounting for 61.2% of overall FI in 2017. Real estate was the second highest, making up 7.77% of FI and 29.1% of FDI in 2017, up from 27.71% of FDI recorded in 2016. In terms of FDI, the manufacturing sector accounted for the second-highest percentage, at 20.1%, up from 18% in 2016. This was followed by mining and quarrying (17.5%), financial services (10.63%) and the electricity, gas, water and waste management (9.8%).

Trade

Abu Dhabi’s trade relationships are dominated by crude oil and set by global market terms, so the emirate tends to focus on non-oil trade as an indicator of economic development and diversity. The value of non-oil trade slipped by 6.3% in 2017, and was valued at Dh159.9bn ($43.52bn), according to SCAD data. Both non-oil imports and non-oil exports fell in value, at 1.9% and 20.27%, respectively. Inward shipments of industrial supplies accounted for onethird of imports during the year.

For 2016, non-oil imports were valued at Dh117.81bn ($32.06bn), and non-oil exports at Dh28.03bn ($7.63bn). The value of exports of oil, gas and other hydrocarbons in 2017 was Dh174.89bn ($47.6bn), up from Dh140.14bn ($38.15bn) in 2016.

The biggest buyer of non-oil export goods is China, which purchased Dh4.13bn ($1.12bn) in goods from the emirate in 2017. Though this number was down from Dh5.19bn ($1.41bn) in 2016, it remained steady at 18.5% of total non-oil exports. Saudi Arabia was second at Dh2.74bn ($745.83m), or 12.3%, while nonoil exports to the US increased significantly — from Dh767.1m ($208.8m) in 2016 to Dh2.34bn ($636.9bn) in 2017. India and Oman accounted for 7.9% and 5.3% of the 2017 total, respectively, and no other country exceeded the 5% threshold.

As in 2016, the US accounted for the biggest share of goods imports to Abu Dhabi in 2017, with the goods valued at Dh16.9bn ($4.6bn), or 15.1% of the total. Saudi Arabia was second, at Dh11.93bn ($3.06bn) and 10.6% of the total. Three other countries exceeded 5% market share: Japan (9.1%), South Korea (5.6%) and Germany (5.4%).

Spending Cuts

Abu Dhabi is in the midst of a financial overhaul that will impact both its own spending, as well as that of the UAE, and import volumes. Lower oil prices since 2014 have the emirate convinced of the need to ensure more-efficient spending. Moves to ensure this include merging public entities that perform similar functions, such as the recent moves to consolidate some of the investment vehicles under Mubadala. The emirate is also looking to cut spending, and this has been reflected in recent trade figures. Imports in January 2018 fell to Dh8.6bn ($2.34bn) from Dh12.4bn ($3.38bn) in January 2017. The value of non-oil exports jumped 32.9% in the same period, from Dh1.52bn ($413.74m) to Dh2bn ($544.4m), according to data from SCAD.

Incentives for Investment

Attracting more inward FDI will require a shift in mindset and economic model, as historically the government has taken the lead in investing in economic priorities through its various commercial arms. The policy now has shifted to supporting investors and tailoring incentive packages to make it easier for private commerce to help achieve these goals, according to Khalifa Al Mansouri, the undersecretary of the Abu Dhabi Department of Economic Development (ADDED). Officials from ADDED have worked at both levels of government to smooth the way.

The UAE ranked 21st on the World Bank’s 2018 “Doing Business” report, which order countries by the ease of acquiring licences, land, legal protection, accessing finance, complying with regulations, and other common commercial concerns. In the ranking the UAE was placed first among nations in the areas of paying taxes and getting electricity, and second in the category of dealing with construction permits. Meanwhile, in the World Economic Forum’s Global Competitiveness Index the UAE placed 17th for 2017-18, down from 16th in the previous period, even though its overall assessment from the group improved. It was the top-ranked Arab country.

The emirate has been working to put mechanisms in place to ease investment processes for foreigners. The Abu Dhabi Investment Office (ADIO), established in early 2018, is tasked with providing investor services and helping businesses access the licences, permissions and local contacts they need. Foreign investors in the UAE pay no direct taxes outside the financial and energy sectors, but doing business onshore will require a local partner with a majority stake in share capital until the anticipated changes to investment laws are officially passed.

KIZAD

The creation of a new free zone for export, however, has played a major role in helping foreign companies work around these regulations. Abu Dhabi has been developing the Khalifa Industrial Zone (KIZAD) as its main industrial business park, and a major plank in its economic diversification strategy. KIZAD is a 417-sq-km site next to Khalifa Port, Abu Dhabi’s main option for sea connections. Both KIZAD and the port are overseen by the government’s Abu Dhabi Ports. It is the region’s first industrial zone that offers companies the ability to operate either within a free zone or within the domestic economy. For the free-zone option, licences are granted by the Abu Dhabi Free Zone Authority; outside of that, the relevant authority is the Higher Corporation for Specialised Economic Zones, a body within ADDED.

As of the first half of 2018, KIZAD was accommodating 92 tenants, 19 of which had already commenced operations. It is expecting 12 new investors in 2018, and anticipates reaching full capacity by 2022. As of April 2018 the zone had attracted more than $1bn in new investment in the previous 12-month period, led by Chinese companies.

New Laws

In May 2018 the UAE announced a major and long-awaited development for FDI, in the form of a new investment law that is expected to significantly ease restrictions. The new law, which had not yet been passed in December 2018, is expected to allow 100% foreign ownership outside free zones. It remained unclear at the time of writing to which economic sectors the law would apply, or whether there would be any exceptions.

The change has been on the table for years, and was for a time expected to be a part of the updated Commercial Companies Law, which was passed in 2015. In the fourth quarter of 2018 UAE Minister of Economy Sultan bin Saeed al Mansoori said the new law would be passed in early 2019. He has also said that the federal government is working on a law on public-private partnerships, which would open up greater opportunities in infrastructure.

Abu Dhabi Global Market

Open for business since 2015, the Abu Dhabi Global Market (ADGM) is a primarily financial-services-oriented offshore free zone. ADGM has experienced rapid growth in the three years since its launch (see analysis). The number of registered licenses nearly tripled in the past year, from 430 in 2017 to about 1300 in 2018. ADGM has approved a total of 92 financial entities and added another 20 local and foreign funds, bringing assets under management $23bn – more than five times the $4.2bn recorded in 2017 – and including many sharia-compliant funds and services. The zone is host to a number of prominent financial services firms, including Citibank, UniCredit and BNP Paribas.

The centre’s status as a free zone means it is exempt from local laws covering foreign investment, and ADGM entities can be wholly owned by a foreign investor. As with other free zones in the UAE, there is no direct taxation. The ADGM offers an enclave legal and regulatory environment based on English common law, which is meant to provide investors with a clear and familiar operating environment, similar to what they might experience in global financial centres such as London, Hong Kong and Singapore.

The Wider UAE

At the federal level, the UAE is one of the world’s 16-largest exporters, and one of the 20-largest commodities importers. Trade was valued at 173% of GDP in 2017, according to the World Bank. Total non-oil trade in the first half of 2018 reached Dh784.2bn ($211.7bn) – on track to surpass the Dh1.08trn ($291.6bn) total for 2017, according to the Federal Customs Authority.

The main buyer of UAE non-oil exports was India, which accounted for 15% of the total in the first half of 2017, according to the Central Bank of the UAE’s 2017 annual report. India was followed by Turkey at 11%, Saudi Arabia at 7%, Oman at 6% and Iraq at 5%. The UAE’s main sources of imports were China and India, which were each responsible for 11% of total goods brought in. The US came in third, at 10%, and Japan and Germany each had a 5% market share.

Trade & Tax Agreements

The UAE is a party to double-taxation treaties and free-trade agreements (FTAs) on multilateral and bilateral levels. These include 87 double-taxation treaties already signed and an additional 28 still being negotiated. Through the Greater Arab Free Trade Area agreement it also has reciprocal access to markets in Syria, Lebanon, Iraq, Morocco and Jordan. The GCC itself has a Customs union, and an FTA with Iceland, Liechtenstein, Norway and Switzerland. Negotiations on an EU-GCC FTA have been ongoing for years, but are now stalled, as is a US-GCC agreement.

The question of whether GCC countries should negotiate FTAs as a group or be able to make deals on their own has been a contentious matter in the past. Bahrain signed an FTA with the US in 2006, leading to objection from Saudi Arabia, which claimed that individual deals would make group negotiations more difficult. The UAE has bilateral FTAs and other trade agreements with Singapore and New Zealand.

Bilateral Trends

The UAE has been the largest export market for US merchandise in the Middle East for nine years. In 2017 the bilateral trade relationship was valued at $24.3bn, double the $12.1bn figure recorded a decade earlier. The bilateral relationship is largely an exchange of high-value goods, with major imports into the UAE including aircraft and parts, electronic and television equipment, and machinery. The US is a buyer of UAE aluminium, which may leave the country’s Emirates Global Aluminium exposed to tariffs as part of President Donald Trump’s embrace of economic protectionism. The UAE’s exports are of high technical standards and used in the US defence industry, however, leaving the US-UAE Business Council hopeful that the product could win an exemption from long-term tariffs.

Within the GCC region, the UAE’s main trading partner is Saudi Arabia. Trade between the two countries will now be subject to the 5% value-added tax that both countries have recently introduced, but the government of Abu Dhabi has also recently introduced incentives to attract more Saudi investment.

Though Abu Dhabi and China have successfully collaborated on several government-to-government projects and are planning more, the emirate and the UAE have also pursued links with others in the Pacific-Rim region, notably South Korea. There have been nine bilateral summits featuring the two countries’ political leaders since 2009, including three trips to South Korea by Sheikh Mohamed bin Zayed Al Nahyan, the crown prince of Abu Dhabi and the deputy supreme commander of the UAE armed forces. In the first half of 2017 UAE imports from South Korea grew 4% to $2.95bn compared with the same period a year earlier, and exports to the country jumped 47% to $4.29bn. One of the key deals came in 2009, an agreement between Korea Electric Power Corporation (KEPCO) and Emirates Nuclear Energy Corporation (ENEC) to develop a nuclear power plant in Abu Dhabi’s Al Dhafra region. The 5.6-GW Barakah Nuclear Power Plant was progressing towards completion as of early 2018, but no specific date has been set for commercial operations to begin.

Outlook

With trade volume growing – in particular in the all-important non-oil-exports category, which serves as a measure of economic diversity – Abu Dhabi is working its way toward its long-term goals of an efficient, resilient, multifaceted and globally integrated economy. The emirate continues to attract new tenants to its signature economic enclaves, ADGM and KIZAD, and has been cultivating a multi-pronged approach to deals between governments.

The next major change on the horizon appears to be slated for 2020, when the Expo 2020 event will end and Abu Dhabi and Dubai will have a stock of buildings on offer to investors for research and development. Drawing in new investors in what is a highly desirable sector will pit the emirates and their country against some of the world’s global powerhouses for high-tech research, and success would ratify the overall approach to trade and investment.