On The Top of the World
Dubai’s economy is on the rise again, with indicators suggesting various positive developments over the course of 2015. The Dubai Statistics Center (DSC) recorded 3.1% GDP growth in 2014, at fixed and current prices, while predictions for the coming year signpost growth of 4.4%, despite lower overall forecasts for the UAE as a result of reduced oil prices. Again in contrast with prospects for the broader national economy, which will run a fiscal deficit in 2015, Dubai is aiming for 9% more spending and no deficit in its budget for the year. The Emirate’s dynamic diversification strategy, which has been rolled out rapidly over recent decades, affords it the luxury of a diminished reliance on oil revenues, which constitute just 2% of GDP. Tourism, retail, real estate, commerce, and manufacturing will all sustain the economy into the near future, while investment in advance of the 2020 Expo offers further opportunities for economic expansion.
Historically, Dubai survived on a healthy fishing trade and pearl industry, but its fortunes, like those of its neighbors in the Gulf and the UAE, changed upon the discovery and effective exploitation of its oil reserves. The Emirate cannily redefined its economic policies to forestall the onset of so-called “Dutch Disease” by employing the newly flowing oil revenues to develop logistics and transportation capabilities unparalleled in the region. The international connections and infrastructure established during this period allowed Dubai to convince companies from around the world to launch operations from the Emirate, transforming the city into a critical center for global business.
PEAKS AND TROUGHS
However, due to the rapid rate at which the Emirate developed and solidified its international reputation, some challenges emerged. The property and construction sectors were badly affected by the financial crisis of 2008, but resourceful emergency management by authorities soon restored stability, and Dubai has successfully recovered in the period since. Continued fostering of innovative new technologies, high-tech businesses, and services have preserved a steady flow of investment into the economy.
Though concerns over the real estate sector resurged over 2014, with housing prices rising to pre-crisis levels, and by over 50% in the previous two years, the market is set to strike a better balance in 2015 as lower oil prices render some areas unaffordable. One assessment by Jones Lang LaSalle estimated an average 10% drop in prices will occur across the sector. However, construction firms are confident about the robustness of the sector, which grew at 3.5% in 2014, compared with 2% in 2013. Major infrastructure programs are underway in preparation for the Expo and in response to the expansion of the hospitality sector. Multi-billion dollar megaprojects such as Jumeirah Gardens, Dubailand, and Dubai World Central will continue to drive growth in the economy and attract investment. Other segments that indicate encouraging growth are manufacturing, which grew at 6.5% over 2014, and air travel, which recorded a 13% rise in passengers.
DEFICIT IN ORDER
The approved budget for 2015 came in at over $11 billion, with a 9% rise in spending. In 2014, spending was increased by $10.3 billion, growing by 11%, following the official decision to continue spending instead of closing the deficit. This year, however, the government has chosen to end the deficit, while maintaining funding for infrastructure projects, transportation development, and support for the economy. Healthcare has also received over a third of the allotment, while security spending will comprise the bulk of the remainder. Approximately three quarters of revenues are accrued from charges for state services. Tax revenues from corporation tax and customs duties on foreign banking institutions are expected to rise by 12% in 2015.
Inflation stands at 0.62%. The DSC also indicates that the Consumer Price Index had risen by over 4% in the first two months of 2015 compared with the same months of 2014. This was driven in large part by housing and utility costs, which represent over 40% of consumer expenses. Though this is the highest increase since 2009, the consolidation of the dollar and the likelihood of lower rent costs over the course of the coming year will keep inflation in check. “The depreciation of the euro is also likely to reduce inflationary pressures, as prices of imported goods, including consumer durables and capital goods, will decline or stabilize throughout 2015,” stated HE Sami Al Qamzi, Director General of the Department of Economic Development (DED), in conversation with TBY. “Given this outlook, Dubai will be able to avoid the inflationary spiral, but again the government counts on playing an active role if inflationary pressures persist,” he continued.
BUYING AND SELLING
Direct foreign trade imports totaled $71.9 billion in 1H2014, while exports came to around $13.6 billion over the same period. The former contributed 66.1% to direct foreign trade, while the latter represented just 12.5%. The remainder of this trade consisted of re-exports, which came to a value of over $23 billion, contributing 21.4% to the total according to DSC data. The bulk of this trade was in semi-precious and precious stones and metals, as well as imitation jewelry, while machinery, electrical, and electronics equipment and vehicles, aircraft, and transport equipment also contributed substantially to imports and re-exports. The principal export product category was also semi-precious and precious stones and metals, with base metals and related products coming in as the second most exported product type. Custom warehouse trade was dominated by imports over the first six months of the year, with a total of approximately $2.34 billion compared with $0.19 billion in exports being recorded by the end of the period. Free zone trade imports amounted to over $37 billion, while re-exports were valued at just under $28 billion.
A total of approximately $7.8 billion in foreign direct investment came into Dubai over the course of 2014. The vast majority of these inflows were designated for the real estate, financial services, ICT, hospitality, and alternative energy segments, and came from the US, the UK, India, the Netherlands, Germany, and Italy. Over 80% of the dozens of projects that received FDI over the year were directed toward regional markets, indicating the importance of the Emirate as a base for multinational corporations seeking to reach markets in Africa and Asia, and to avail of the world-class shipping and logistics infrastructure in place.
The domestic market is also showing promise, with consumer confidence on a high. The retail sector is expected to grow, with tourism driving much of the spending on fashion items and other non-grocery goods. The steady immigration of foreign nationals to the Emirate also suggests positive trends for domestic consumption and investments in this area. Of Dubai’s 2.35 million population fewer than 15% are Emirati, with many of the newcomers that are affecting the demographic balance arriving in anticipation of the 2020 Expo.
FOUNDATIONS FOR THE FUTURE
The Emirate’s winning bid was celebrated in November 2013 with an extravagant fireworks display at the 829m Burj Khalifa, the world’s tallest building, in downtown Dubai. The city’s dedicated pursuit of innovative new forms of development will be showcased over the six-month event, and to this end a theme entitled “Connecting Minds, Creating the Future” has been selected. The three additional sub-themes of mobility, sustainability, and opportunity have been designated to further promote the Emirate’s unique contribution to the world. As the first Expo to be held in the Middle East, North Africa, and South Asia regions, the bid foregrounded Dubai’s important role as a connector of peoples and countries. Officials claim that the event will attract over $20 billion in investment, while the cost of running it and preparing the required infrastructure will come to over $8 billion.
Dubai’s unmatched business environment is the reason why investors have not lost confidence. A commercial infrastructure that is based on innovation and services continues to serve as the cornerstone of its economy, with sector-specific support in terms of funding, legislation, and facilities guaranteeing the Emirate’s role as a center of operations for numerous businesses long into the future. A network of over 20 free zones has been established to provide bases for multinationals from numerous sectors, creating hundreds of thousands of jobs. The Dubai International Financial Centre and the Jebel Ali Free Zone, for example, each offer unique competitive advantages for around 20,000 firms, the former intended to bolster banking and investment activities, and the latter based on its integrated logistics platform which includes the largest and deepest manmade port in the region. Complete ownership by foreign corporations is permitted in these free zones, which contribute over $20 billion to the Emirate’s GDP.
The shrewd planning of Dubai’s administration and progressive vision of its ruler HH Sheikh Mohammed Bin Rashid Al Maktoum have created a destination in which foreign businesses can thrive. In the Ease of Doing Business ranking for 2015, the UAE was listed at 22, climbing three positions since 2014. And as oil prices remain in flux, Dubai can be glad that its strategies for diversification have borne fruit, as proven by the economy’s swift recovery from the financial crisis.
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