Economy

The Great Push

A diversified economy and commitment to education and innovation has seen Dubai scale heights unimaginable mere decades ago.

Dubai’s rapid evolution into a hugely diversified economy and global trade, manufacturing, tourism, and financial hub is almost vertiginous. It has thrived on regulation, flexible response to prevailing and likely circumstances, and systematic innovation. The steps taken to achieve this, and the economic rewards of being an oasis of stability in a frenetic region, continue to pay dividends. For example, to ramp up efficiency, Dubai’s economic team will provide twice-yearly updates on its economic outlook in January and October. And meanwhile, an economic team spanning all 13 of the Emirate’s government departments will serve as an early warning mechanism. Eminently logical, too, is state support of science and technology, and an educated population to fuel economic diversification into significant industries, which preceded oil troughing at USD30 per barrel. Dubai’s private sector is also supported by dedicated facilities conducive to local competitiveness and the attraction of foreign interest alike.

Incidentally, one gauge of innovation is the number of licenses issued to new businesses through the Intilaq Program, which assists Emirati residents in Dubai to enter the entrepreneurial start-up arena for the vital first three years. The license, costing a modest USD289, allows holders to pursue more than one activity related to the core business, thus encouraging good ideas that as yet lack capital. In 2015, the number had risen to 334 from 293 YoY, and from 226 in 2013, according to the Dubai Statistics Center.

An Impressive Performance

Dubai’s economy grew 2.7% in real terms in 2016 in spite of weak oil and dented global trade, albeit down from the previous year’s 4% print. Non-oil sectors are earmarked to contribute a full 80% of GDP over the coming 15 years. Official projections for growth this year are at 3.1%, fueled by the Emirate’s vibrant investment appeal, plus ongoing infrastructure commitments, while the IMF last year forecast growth of 3.6% for Dubai. Middle East Economic Digest (MEED) notes that the UAE overall accounted for an estimated 35% of projects in the GCC from 2006 to 2015, at a total of USD507 billion. In May of this year, subsequent to OPEC’s nine-month production cut move, Moody’s upgraded its credit-worthiness outlook for the UAE, based, too, on resilience to shocks due to diversification. For the nation overall, it forecasts 1.7% GDP growth, while the government deficit declines to a healthy 1.9%. The retail sector was somewhat buffeted by inflation and consumer sentiment in 2016. Yet, consumer prices in the UAE climbed 2.2% YoY in April of 2017, following March’s 3% rise. Encouragingly, this was the lowest print since December 2016, as price rises decelerated for housing and utilities (1.6% from 1.7% in March) and transport (6.6% from 14%). Food inflation fell further (-0.5% from -0.4%). In the UAE, inflation has averaged at 2.19% from 1990 to 2017, peaking at 12.3% in December 2008 and troughing at -0.4% in October 2009.

FDI, Global Reach…

Dubai’s ready adoption of free market policy has entailed the swift development of a stable and well-regulated financial services sector to underpin broader economic activity in trade, manufacturing, and services. This has encouraged the arrival of global businesses and the FDI all-important for GDP growth. In 2016 FDI amounted to USD6.9 billion, maintaining Dubai’s ranking in seventh place among the top-10 global recipients. The Emirate furthermore attracted 247 new investment projects, ranking third behind London and Singapore for the year, according to the Dubai Investment Development Agency (Dubai FDI). HE Hani Al Hamli, Secretary General of the Dubai Economic Council (DEC), explained the Emirate’s global significance with reference to China and the new Silk Road project. “Dubai has established itself as one of the main transit points for expanding the Gulf commercial dealings with Asia, the Middle East, Africa, and Western Europe,” and “is considered a logistic hub for China because of its geographic location and the strength of its infrastructure.”

Meanwhile, fiscal and monetary policy focuses on job creation and price stabilization in pursuit of sustainable growth. This has been supportive by creating conditions for further government spending on the transport, energy, telecommunications, and tourism infrastructure essential for diversification, as well as key sectors such as aviation, prime for export, again in turn GDP growth accretive in nature. In addition, Dubai, or “Dubs” as British tourists affectionately refer to it, has gained a reputation as a year-round tourism and events destination, soon to attract 20 million annual visitors.

…and Expo 2020

A key reward reaped by Dubai in 2013 was winning the right to host Expo 2020, a first for the Middle East. And while prestige was immediate, its slow-burn economic benefit is an ultimate USD38 billion contribution to GDP from related activities. Around 277,000 new jobs are estimated, too, while an infrastructure spend of USD6.8 billion underlines long-term state commitment. Anticipating huge rises in arrivals, in mid-2016 the government launched an USD9.54 exit tax on all passengers leaving Dubai by air, which, incorporated into air ticket prices, was estimated to raise an additional annual USD381 million in revenues, in part toward the cost of Expo 2020 infrastructure.

2017 Budget Highlights

The government of Dubai targets growth through spending and job creation, as evidenced in the USD12.9 billion innovation-oriented 2017 budget. Reflecting the Dubai Strategic Plan 2021, it envisions a 27% rise in infrastructure spend (17% of total budget). The official deficit forecast of USD680 million, at 0.6% of Dubai’s total GDP, explains this rise. A full 34% of total spending is dedicated to the social development sector, encompassing health, education, housing, and community development. Compulsory private health insurance, made obligatory for foreign residents in mid-2016, may yet enable savings in the healthcare component going forward. Oil revenue is projected to represent 6% of total government revenue, with government fees at 76% and 16% coming from tax and customs.

Supportive Legislation

Diverse legislation supportive of growth and diversification at the federal UAE level includes the introduction of a new national labor code as of January 1, 2016. The objectives were greater flexibility, transparency, and most importantly, freedom of movement for foreign workers, while facilitating the acquisition of new work permits. Small wonder then, that in the World Bank’s Ease of Doing Business for 2016, the UAE ranked 31st out of 189 economies, rising one place on 2015, while for the third consecutive year ranking first in the MENA region for doing business. In a first, the Federal Tax Authority (FTA) is to introduce a VAT of 5% across the UAE as of January 2018. Meanwhile, Dubai has announced a selective tax of 100% on tobacco and energy drinks, and 50% on carbonated drinks scheduled for 4Q2017 in contribution to the post-oil era. Dubai Law No. 22 of 2015 regulates public-private partnerships to ensure that quality and efficient public services or infrastructure-related services arise cost-effectively. What’s more, HE Hani Al Hamli stated, through PPPs, “the granting agencies can transfer significant risks to the private-sector partner (resulting in) cost-saving and greater efficiency.” This, he concluded was “especially relevant in terms of unsolicited proposals (where) private entities (can) propose projects directly to government entities, bypassing the tender process.”

Special Economic Zones (SEZs)

Fundamental to the economy is Dubai’s pioneering policy of free trade zones—essentially sector-specific tax-free havens. It boasts 22 free zones, or SEZs, where minimal bureaucracy enables large firms and SMEs’ ease of business. The government-regulated Free Zone Authority (FZA) oversees and manages the entities across the country (in total 20,000 companies are registered in 41 FTZs across the UAE). The thinking has been that allocating a dedicated zone to each specific sector fosters synergies. Established in 1985, Jebel Ali was the Middle East’s pioneering zone of its kind. Today the largest, it primarily accommodates logistics and shipping companies, and features over 6,000 companies, including 800 from India. Elsewhere, the Dubai International Financial Centre (DIFC) operates its own judicial system based on English Common Law. In fact, a highlight for DIFC in 2016 was the transfer of the HSBC Bank Middle East Limited (HBME) head office from Jersey to the DIFC, whereby it is now regulated by the Dubai Financial Services Authority (DFSA). The DIFC also became one of the founding members of the Global Blockchain Council, established with the Dubai Museum of the Future Foundation to encourage innovation and promote the UAE as key knowledge economy. Other zones of note are the Dubai Airport Free Zone, with 1,300 companies; Dubai Media City, with 1,200 companies; and Dubai Internet City, with just over 1,000 companies as of 1Q2016. In terms of total direct foreign trade for 2016, Dubai’s imports were at USD146 billion, with exports of USD35 billion and re-exports of USD45 billion.
Ahmad Bin Byat, Director General of the Dubai Creative Clusters Authority (DCCA), established 15 years ago, explained that, to date, the organization’s knowledge and academic clusters “have attracted 2,600 international students, (making for a pool of talent attractive for) the 4,5000 companies that operate in our special economic zones.”

SMEs and Long-term Thinking

It says something about local government policy that, while globally 80% of SMEs go to the wall, in Dubai the figure is roughly 65%. Today the Emirate is home to around 350,000 SMEs, and HE Abdul Baset Al Janahi, the CEO of Dubai SME, pointed to the new bankruptcy law as spurring the ecosystem “for both the lenders and the borrowers (as) both sides will undergo a major restructuring of how they operate.” In short, the law will oblige rigorous financial planning from firms and scrutiny from financial institutions situation, with “a positive effect on the economy and entrepreneurship as people will be less afraid to fail.”

Dubai is working to become a fully digital community where high-tech solutions enable better government-public interaction and industrial innovation. The 2017 budget has dedicated 8% to championing the so-called excellence, innovation, and creativity sectors in step with the Dubai Industrial Strategy 2030. The latter promotes the competitive transformation into “an international hub for knowledge-based, innovation, and sustainable industrial activities.” Dubai, then, can look forward to a vibrant future, having covered all its economic bases.