Private Investors Boosting The Non-oil Economy Of UAE

Growth of Non-oil Sector

Question:

Discuss about The Economic Development of the UAE.

The report gives an overview of the substantial role of the private investors in the growing non-oil economy of United Arab Emirates. The non-oil economy heavily depends on the oil exports and helps in financing government revenues, focuses on smaller size of the private sector, scarcity of mineral and agricultural resources and the shortage of the work force and their skills. The report begins with a discussion on the growth of non-oil sector. There is also discussion on the laws that helped in boosting private investment in the sector. The report also focuses on the factors that determine private investment in UAE. One can also develop an idea about the role of investors on boosting the non-oil UAE economy. 

The non-oil private sector of UAE grew at faster pace since the year February 2015. According to the National Bank of Dubai (El Mallakh 2014), the new output and orders boosted the growth of the sector. The latest UAE Purchasing Manager Index (PMI) of the bank climbed to 57.3 in the month of August from 56.0 in July that represented a 30-month high figure. PMI is a composite indicator that gives an overview of the operating conditions prevailing in non-oil private sector of the economy. The UAE saw a marginal increase in the export orders compared to the other countries belonging to the Gulf Cooperation Council (GCC).

The ongoing upturn in the new businesses led to the creation of newer jobs in the non –oil private sector. The output requirements however prompted the firms to get involved in purchasing activity that contributed to the record rise in the stock of inventories. The condition that prevailed in UAE was that newer clients won newer projects, there prevailed marketing initiatives, good quality products, and the existence of ideal economic conditions. According to the head of Middle East and North Africa (MENA) research, Khatija Haque (Ennis 2013), the PMI that prevailed in August showed a stronger expansion in the non-oil private sector that was underpinned new orders, higher output and inventories.

There was an indication by the firms that the competitive pricing and new projects supported activity and demand in the non-oil sector. This indication went in line with the view that investment ahead of the Expo2020 will be the sole driver of non-oil growth sector of UAE over the next years. In UAE, the scenario in the non-oil sector gradually changed where firms no longer faced the upward pressures of cost that primarily emanated from the higher purchasing cost (Niblock 2015). The output charges stabilized as the firms were unable in passing the higher cost burden amidst the intensive competition. There was also an acceleration of the investment activity in the year 2017 along with some external recovery. Further, the investment activity related to Expo 2020 helped in driving project awards both on a direct as well as indirect basis. Thus, an increase in the value project awards by 14.5 percent in the year 2016 expected to translate into stronger implementation of investment. 

Laws Boosting Private Investment in Non-oil Sector

The Ministry of Economy works on a number of laws that helps to increase the economy’s productivity and thereby contribute in boosting the non-oil sector to 80 percent from the present 70 percent by the year 2021(Schiliro 2013). Investment law was one such law that included the foreign direct investment. The draft of this law was completed and thereby submitted to the legislative bodies for approval.

The Foreign Investment law aimed at the promotion and development of the environment for investment that helped in attracting foreign capital and was in line with development policies regarding the establishment of the state as a major destination for global and regional investment. The law also focused on expansion and diversification of the production base, attract and transfer technology and facilitate knowledge and training.  

Moreover, the law also focused on improving the least developed areas of the country, ensured the growth of the UAE nationals, ensured creation of the job opportunities, ensured best returns on the available resources and the attainment of high value addition in the economy of the state. However, in terms of benefits, the law will allow the investor to gain from the incentives and experience exemption for economic activities at the federal level (Sommer et al. 2016). The law will also enable increasing the percentage of the foreign ownership of the projects in the specific activities and sectors determined by the law.

The investment law also aims at enhancing the growth rate of the national economy and thereby helps in achieving the goals targeted by UAE vision 2021. The law also has an accompanying national agenda for boosting the GDP share to the foreign direct investment to about 5 per cent. This will ensure an ease in doing business and subsequently an achievement of higher position. Further, the law will also facilitate an investment environment supported by advanced laws and legislation. This will help in reducing obstacles of the foreign investors and thereby help in enhancing the global competitiveness of the economy of UAE.

The factors determining Private Investment in United Arad Emirates (UAE) includes (Forstenlechner et al. 2012):

1. GDP of the Non-oil sector: This refers to the level of the economic activities and acts as proxy for the aggregate demand.
2. Expenditure of the Real Public: A primary tool for stimulating economic activities financed with the help of oil revenues
3. Government and Public Investment: Represents gross fixed capital formation in the government and public sectors for examining whether it represents a substitute or complement to private investment.
4. Value addition of Manufacturing Industries: Represents the gross domestic product in the manufacturing industries that also refers to the degree of diversification of the economy.
5. Value addition of Construction Sector: This refers to the consideration of GDP in the construction sector as a provider of capital goods
6. Employee Compensation: This refers to the wages that acts as a reward for the labor.
7. Operation of Surplus: Refers to the profits that acts as a reward for the capital
8. Imports of Services and Goods: This refers to the provider of the capital goods
9. Availability of Real Credit: Implies the loans provided to the private sector
10. Rate of Interest: This refers to the cost of borrowing money for financing newer projects
11. Consumer Price Index: This is a tool representing the price index covering a basket containing consuming goods.

The United Arab Emirates (UAE) accounted for private equity investment activity of about 62 percent in the Middle East and North Africa (MENA) in the year 2016 (Hesse and Poghosyan 2016). The figures represented a substantial increase from the year 2015 as per personal equity and annual report on the venture capital of private association of MENA. Thus, UAE was the biggest market of 2016 in terms of volume with deal concentration of about 34 percent. With growth and development of the regional economy, private equity played a vital role in aiding the good companies in becoming better ones. UAE showed a considerable rise in the appetite for the investments in the technology related sectors like the Information Technology (IT) and E commerce.

Determinants of Private Investment in UAE

There was an upsurge trend in the private equity investment during the year 2016. The number of disclosed transactions reached a figure close to 244 that represented the highest since the year 2008(Khatib 2014). However, there was a decrease in the value of the investment. The value reduced to about 25 percent that was close to $1.1 billion that reflected more challenging environment for investment.

For instance, in Saudi Arabia there was a decrease in deal volume and value in the year 2016 due to the persisting low oil prices and uncertainty of the regulatory and fiscal reform. According to investors (Daniel 2012), the future results of potential investee become difficult thereby leading to lower percentage of deals. A similar condition prevailed in Egypt that also experienced a fall in the investment due to influence of political factors and foreign exchange instability. 

The non-oil economy of UAE expected to reach a growth rate of about 4.6 percent by the year 2020 because of the robust private investment undertaken in the non-oil sector of UAE especially the infrastructure (Shayah 2015). The expansion and the revitalization of the sector of UAE influenced through the development of modern infrastructure that helped in stimulation of the investment and thereby business growth. There were other factors as well that included improved legislative framework, enhanced economic and administrative environment and strategic projects that enhanced the process of development and were in accordance with the standards that were globally recognized.

In this regard, announcements in Dubai and Sharjah projected upticks in spending of infrastructure. However, the federal budget for the upcoming years also focused on an increase in expenditure. There are higher chances of growth of investment Management spending on the strategic projects. In UAE private investors motivated to make investment in health, energy, water, education, transport and technology sectors.

In Dubai, the budget focused primarily on the creation of thousands of Jobs that will act as a motivating factor for the private investors.  The construction sector will also receive a major boost of around 27 percent on the infrastructure spending, the major reason for boosting private investors.

The investment undertaken by the private investors of Sharjah showed an increase in the overall expenditure of about 3 percent compared to the previous year. Encouragement towards private investment increased the overall growth of UAE to about 2.5 percent this year (Callen et al. 2015). The ministry also works on boosting the participation of the medium and small sized enterprise for attracting the private investors.

Role of Private Investors in Boosting Non-oil Economy

The outlook of UAE is in a state of improvement due to the stronger than expected recovery of the construction sector which led to the drive in private investment (Sbia, Shahbaz and Hamdi 2014). Private investment not only in construction activity but also in sectors travel, tourism, retail as well as wholesale boosted the economy as a whole.

Conclusion:

The report ends with a discussion on the role of investors in boosting a non-oil economy of United Arab Emirates. There is also discussion on the private equity investments in the Middle East and North Africa. The report also discusses about the determinant of the private investment undertaken in UAE. Through the report, one also comes to know about the introduction of various laws for boosting Management >investment in the Non-oil sector of the economy. There is also discussion regarding the growth of the non-oil sector of the UAE. 

References:

Callen, M.T., Cherif, R., Hasanov, F., Hegazy, M.A. and Khandelwal, P., 2014. Economic diversification in the GCC: Past, present, and future. International Monetary Fund.

Daniel, S., 2012. Situating private equity capital in the land grab debate. The Journal of Peasant Studies, 39(3-4), pp.703-729.

El Mallakh, R., 2014. The Economic Development of the United Arab Emirates (RLE Economy of Middle East) (Vol. 13). Routledge.

Ennis, C., 2013. Rentier 2.0: Entrepreneurship Promotion and the (Re) Imagination of Political Economy in the Gulf Cooperation Council Countries.

Forstenlechner, I., Madi, M.T., Selim, H.M. and Rutledge, E.J., 2012. Emiratisation: determining the factors that influence the recruitment decisions of employers in the UAE. The International Journal of Human Resource Management, 23(2), pp.406-421.

Hesse, H. and Poghosyan, T., 2016. Oil prices and bank profitability: evidence from major oil-exporting countries in the Middle East and North Africa. In Financial Deepening and Post-Crisis Development in Emerging Markets (pp. 247-270). Palgrave Macmillan US.

Khatib, H., 2014. Oil and natural gas prospects: Middle East and North Africa. Energy Policy, 64, pp.71-77.

Niblock, T. ed., 2015. Social and economic development in the Arab Gulf (RLE economy of Middle East). Routledge.

Sbia, R., Shahbaz, M. and Hamdi, H., 2014. A contribution of foreign direct investment, clean energy, trade openness, carbon emissions and economic growth to energy demand in UAE. Economic Modelling, 36, pp.191-197.

Schiliro, D., 2013. Diversification and development of the UAE’s economy.

Shayah, M.H., 2015. Economic diversification by boosting non-oil exports (case of UAE). Journal of Economics, Business and  Management (JOEBM), 735.

Sommer, M.M., Auclair, M.A., Fouejieu, M.A., Lukonga, M.I., Quayyum, S., Sadeghi, A., Shbaikat, M.G., Tiffin, M.A. and Versailles, M.B., 2016. Learning to Live with Cheaper Oil: Policy Adjustment in MENA and CCA Oil-Exporting Countries. International Monetary Fund.