The UAEs Economic Policy and the Current Global Meltdown: An Appraisal

Samir Pradhan Gulf Research Center

August 2009 Working Paper Series No. 09-04

The UAEs Economic Policy and the Current Global Meltdown: An Appraisal

The UAEs Economic Policy and the Current Global Meltdown: An Appraisal

Samir Pradhan Gulf Research Center August 2009

The Dubai School of Government Working Paper Series is designed to disseminate ongoing research of potential interest to individuals and institutions interested in the development of public policy in the Arab world. Working papers are not formal publications of the Dubai School of Government. Circulation is designed to stimulate discussion and comment, often leading to further revision prior to formal publication. Findings and conclusions are solely those of the authors, and should not be attributed to the Dubai School of Government.

Samir Pradhan is Senior Researcher in the Economics and Gulf-Asia Program, Gulf Research Center, Dubai, United Arab Emirates

Correspondence P O Box: 80758, Dubai, UAE Tel: (office) + 971 4 324 7770, ext. 434 Fax: (office) + 971 4 3247771 E-mail: spradhan@grc.ae; samir_347@hotmail.com

The UAEs Economic Policy and the Current Global Meltdown: An Appraisal

Abstract
Within a span of less than four decades, the United Arab Emirates (UAE) has undergone an impressive transformation from a small desert economy depending on pearl trading and fishing to an oasis of opportunity with booming economic sectors such as real estate and construction, tourism and hospitality, mass communications, shipping and logistics, retail and finance. The UAEs economic miracle epitomizes the success of an innovative state-led capitalist growth model. The main objective of this paper is to critically assess the economic policies of the UAE from the perspective of the ongoing financial crisis. It is argued that even though the UAEs dependence on oil has lessened with intense economic diversification and innovative policy regimes that provide new avenues of growth, the main sectors driving growth besides petroleum are highly cyclical in nature. As a result, the economy is bound to fluctuations depending on the business cycle of these sectors, which happened with the current financial crisis. In addition, looking at the comparative strengths of each emirate, this paper makes a strong case for an integrated approach for holistic national economic development.

Keywords: UAEs Economic Policy, Financial crisis, Development model

This paper was originally presented at the National Seminar on Contemporary UAE and Emerging Indo-UAE Relations organized by the Gulf Studies Program, School of International Studies, Jawaharlal Nehru University, New Delhi, India on March 23, 2009.

Dubai School of Government Working Paper 09-04

Introduction
Prior to the start of oil exports in 1962, the main economic activities of the small desert principalities comprising the modern United Arab Emirates (UAE) were pearl production, fishing, agriculture and herding. With the 1973 oil boom, oil became a dominant factor in UAEs economic growth and provided substantial investible surplus for accelerating economic development. The UAEs growth is unique and peculiar in the sense that it did not pass through the hypothetical development stages that most developed countries seem to have experienced. The UAEs massive oil revenues allowed bypassing the conventional stages of development to reach the current stage of high mass consumption. The UAEs growth is not based on the conventional growth drivers of saving and capital accumulation rather based on resource based development strategy. The deployment of a large oil windfall, largely targeted at a once-and-for-all boost to the social and economic infrastructure during the oil bonanza of 1973-1982, enabled the UAE to achieve a spectacular degree of economic development. Today, the UAE has achieved an income level comparable to that of the most industrialized nations. The UAE is an open market economy with a high per capita income and a huge trade surplus. The process of economic diversification is ongoing at a brisk pace. The primary goal of the diversification process is to create high value added jobs in a wider array of sectors in order to make the growth momentum more sustainable. Successful efforts of economic diversification during the past decades have resulted in a declining dependence on oil. It is important to note that there is an increasing shift from the public sector to the private sector as the main engine of growth through channeling huge investments in key sectors for diversification. Highly liberal and market-oriented policies such as the Free Trade Zones - offering 100% foreign ownership and zero taxes have attracted huge foreign investments. Apart from investment in highly sophisticated physical infrastructure, UAE government is also stepping up investments in social infrastructure-health care, education, training and innovation- in its attempt to incubate knowledge based economic structure in order to integrate better with the rapidly globalizing world economy. During the last three years (2005-2007), higher oil revenues, burgeoning liquidity, cheap credit and housing shortages resulted in higher asset prices (shares and real estate) and flared up consumer inflation. However, with the global financial crisis spreading contagion into the real economic sectors, asset prices have deflated continuously and the economic growth for the current year is set to slow down.

A Brief Economic History1

From the 19th century to early 20th century, pearling industry in the UAE and Gulf region was thriving and was a major source of income and employment. The semi-nomadic inhabitants were pearling in the summer and tending date gardens and other agricultural activities in the winter. The Great Depression in the late 1920s and early 1930s, and most importantly the cultured pearl invention by Japan, dealt a severe blow to the local industry.

This section is based on various sources; primary among them are the UAE Yearbook, and Web site of the UAE Embassy in the United States (http://uae-embassy.org/).

The UAEs Economic Policy and the Current Global Meltdown: An Appraisal

As a result, the emirates vied for avenues to secure income and raise revenue. With geological surveys conducted in 1930s to prospect oil reserves, Abu Dhabi exported the first cargo of crude oil in 1962. With growing oil revenues in succeeding years, Sheikh Zayed bin Sultan Al Nahyan became the ruler of Abu Dhabi in 1966 and undertook a massive program of construction of physical infrastructure like schools, housing, hospital, and roads. It is important to note that one of Sheikh Zayeds early steps was to increase contributions to the Trucial States Development Fund to facilitate the establishment of the federation in 1971. Simultaneously, Sheikh Rashid bin Saeed Al Maktoum, the de facto ruler of Dubai since 1939, also undertook economic development programs. Dubai started exporting oil in 1969 and the ruler was able to use oil revenues to foster economic development with special emphasis on infrastructure. Noteworthy is the vision of Sheikh Rashid who, being aware of the small resource base, developed the shipping industry. In 1971, the UAEs total population was a mere 180,000 people spread across an area of 83,600 square kilometers. There were substantial differences among the individual emirates in terms of size, population, economic resources and degree of development. The process of economic development gathered momentum in the larger emirates of Abu Dhabi and Dubai with the start of oil exports. However, the small emirates like Ajman and the East Coast emirate of Fujairah were highly underdeveloped in terms of infrastructure.

The UAE Economic Development Model

Being a loose federation, each emirate retains considerable autonomy over economic and financial affairs and has adopted different development strategy contingent upon their resource endowments and core competencies. So the economic development model of the UAE is not unified. Whilst vast oil resources allowed Abu Dhabi to focus on oil-based industrialization, with dwindling oil reserves Dubai is focused on transport, logistics, tourism, hospitality, financial services and real estate and construction. Other small emirates are also catching up fast in terms of accelerating growth of non-oil sectors, especially trading and tourism, replicating the success of Dubai. So from a macro perspective, the UAE model of economic development is solely based on innovative business strategy of the Dubai, Inc.style development paradigm 2 that has successfully transformed a barren desert sheikhdom of yesteryear into an ultra-modern city state. Dubais transition from a de-industrialized oil economy to the expression economy speaks volumes about the development strategy. It is therefore logical to examine whether the Dubai model is based on the conventional development strategy adopted elsewhere in the world or is an innovation by itself.

This is a generic model where the overall economic good of the national entity is the overriding goal. This involves developing a comprehensive growth strategy in which the whole is designed to be greater than the sum of the parts, but where each of those parts evolves into a commercial entity in its own right.

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Table 1: UAE Macroeconomic Indicators Historical averages (%) Annual data 2007a Population (million) 5.3 Population growth GDP (US$ bn; market exchange 198.7b Real GDP growth rate) GDP (US$ bn; purchasing power 146.8 Real domestic demand parity) growth GDP per head (US$; market 37,687 Inflation exchange rate) GDP per head (US$; purchasing 27,837 Current-account balance (% power parity) of GDP) b Exchange rate (av) Dh:US$ 3.67 FDI inflows (% of GDP) Notes: a estimate, b actual. Source: UAE Central Bank, February 2009

2003-07 7.0 9.4 . 9.8 16.5 7.4

Barring cataclysms, Dubai Inc. is a best case of the success of state-led capitalism. Premised on locational advantages as a hub and a critical channel to facilitate commercial interaction between the east and the west, Dubais magnificent growth within a span of few decades bears testimony to the success of the model. This needs more appreciation, given the resource constraints of the small emirate that speaks volumes about visionary leadership. Most importantly, this model has more symbolic value not only for UAE as an emerging market, but also for the Arabian Gulf and the greater Arab world. This showcases the stupendous success of an indigenous Arab state capitalist model that can be a learning experience for other compatriots that struggle to carve a niche in the increasingly competitive globalized world. In the world view where the whole region is christened as the worlds most troubled political and security faultline, Dubais success symbolizes the emergence of an oasis of modernity and prosperity, thereby influencing world opinion and making a case for the regions soft power. The Dubai model is innovative and unique in the sense that its foundations and strategies not only capture the dynamics of various existing development model idealtypes3 (such as the Anglo-Saxon, the Continental European model and the East Asian Model), but also demonstrates the success and efficacy of harnessing locational and comparative advantage to excel in the modern era of incipient globalization. Since a development model does not emerge overnight, but over time and as the outcome of a broad range of contextual features that involve historical, external, locational/size, cultural, institutional and political factors, the Dubai model is truly a process in progression. This is bound to have its ups and downs, as both internal and external events and developments exert considerable influence on the systemic factors that make up the model. The model is premised on the basic economic doctrine that supply creates its own demand4. In simple terms, the Dubai
Martin Hvidt, The Dubai Model: AN outline of key components of the development process in Dubai, Center for Contemporary Middle East Studies, University of Southern Denmark, Working Paper No.12, October 2007, available at https://www.sdu.dk/Om_SDU/Institutter_centre/C_Mellemoest/Forskning/Forskningspublikationer/Wor king_papers.aspx , retrieved on 21 January 2009. 4 Samir Pradhan, Dont Let Dubai Inc. Lose Confidence, The World Magazine, Dubai, February 2009, available online at http://www.theworldonline.ae/?p=1168.
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The UAEs Economic Policy and the Current Global Meltdown: An Appraisal

model mobilizes investment to produce supplies that then meet its ultimate demand. As the process involves a time lag, there are cyclic factors that determine the outcome. This is currently happening with the main drivers of the Dubai model such as service-oriented industrialization and state-of-the-art infrastructure that would pay off in succeeding periods.

Growth and Economic Diversification

Economic growth in the UAE has been spectacular over the last 15 years. Nominal gross domestic product has increased from 133.2 billion AED (36.3 billion dollars) in 1993 to 321.8 billion AED (87.7 billion dollars) in 2003, and further increased to 729.7 billion AED (198.8 billion dollars) in 2007. It is important to note that non-oil GDP has increased considerably over the same period - from 85 billion AED (23.1 billion dollars) in 1993 to 229.6 billion AED (62.5 billion dollars) in 2003, and to 467.0 billion AED (127.2 billion dollars) in 2007 (see Table 2). Table 2: UAEs Oil and Non-Oil GDP, 1993-2008 (Billion Dirhams) Year Oil GDP Non-Oil GDP GDP 1993 47.3 85.9 133.2 1994 44.6 97.4 141.9 1995 47.9 109.0 156.9 1996 57.1 118.7 175.8 1997 55.8 131.8 187.6 1998 37.4 140.0 177.4 1999 49.8 152.0 201.8 2000 86.7 171.3 258.0 2001 90.3 179.2 254.2 2002 88.1 200.3 272.9 2003 109.9 229.6 321.8 2004 145.0 263.3 386.5 2005 185.1 328.0 513.1 2006 224.1 400.5 624.6 2007 261.8 467.9 729.7 Source: UAE Ministry of Economy, National Accounts, 1993-2008 Economic growth in the UAE, like the countrys other Gulf neighbors, is directly linked to the trends and prospects of the international oil market. With oils contribution to the gross domestic product (GDP) being substantial, economic growth is intrinsically linked to the fluctuations in the oil prices. As evident, growth rates of GDP are highly fluctuating till 2001, after which the growth seems to be more or less stabilized. The primary reason for this trend has been the declining dependence on oil and intensified diversification including oil-based industrialization and service oriented industrialization. This can be substantiated from the impressive growth rate of non-oil GDP. During the last decade (1997-2007), in nominal terms, the UAEs GDP has grown at a rate of 31.1 percent annually and non-oil GDP has grown at a rate of 23.4 percent annually. In the last two years, the growth of both GDP and nonoil GDP seems to be converging (see Figure 1).

Dubai School of Government Working Paper 09-04

Figure 1: Growth of GDP (Y-o-Y), 1997-2007 35 30 25 20 Percent 15 10 5 0 -5 -10 GDP Non-Oil GDP 1997 1998
-5.4 11.0 6.7 8.6 6.2 4.6 -1.5 13.8 12.7 11.7 7.3 17.9 14.6 20.1 14.7 21.7 27.8 32.7 24.6 22.1 16.9 16.8

1999

2000

2001

2002

2003

2004

2005

2006

2007

Source: UAE Ministry of Economy, National Accounts, 1993-2008 However, real GDP growth has also picked up since 2004 with higher international oil prices and continued economic diversification, though medium term projections show a decline in the current year (See table 3). Table 3: Real GDP Growth, 2001-2007 (Percentage change) Year Real GDP (at factor Real oil and gas Real non-oil GDP cost) GDP 2001 1.7 0.9 2.5 2002 2.6 -7.6 7.7 2003 11.9 13.6 11.2 2004 9.7 2.9 12.6 2005 8.2 1.6 10.8 2006 9.4 6.5 10.4 2007 7.4 5.7 10.1 2008E 6.9 5.3 9.8 2009P 6.01 --2010P 5.5 --Notes: E: estimated; P: projected; -- not available Source: UAE Ministry of Economy, 2008 and IMF WEO Database, October 2008 Before detailing the ongoing process of economic diversification in the UAE, it is apt to analyze the sectoral distribution of GDP and the growth pattern of each emirate and their contribution to the countrys GDP. As shown in Table 4, in the last seven years, non-oil sectors such as real estate and construction, financial services, wholesale and retail trade, electricity and water, small and medium manufacturing, transport, communication and storage have registered higher growth contributing substantially to the GDP. With world class infrastructure and an open business environment, these non-oil sectors have become the main driver of high growth.

The UAEs Economic Policy and the Current Global Meltdown: An Appraisal

Table 4: Real GDP Growth by Economic Sector, 200106 2001 2002 2003 Sectors Crude oil production (incl. gas) 0.0 -7.6 13.6 Other production 2.5 7.7 11.2 Agriculture -2.2 0.8 0.3 Industry 1.5 7.7 11.6 Mining and quarrying 2.9 2.3 2.8 Manufacturing* 0.9 3.5 7.9 Electricity and water 4.9 1.0 18.1 Construction 2.0 18.4 17.0 Services 3.5 8.2 11.8 Trade 1.2 17.3 17.3 Wholesale and retail trade 0.5 20.2 20.0 Restaurants and hotels 3.9 4.9 4.1 Transportation, storage, and 6.1 7.1 7.8 communication Finance and insurance 12.1 0.9 12.8 Real estate 1.6 11.2 8.1 Government services 3.1 -1.3 8.5 Other services 7.0 22.7 9.9 Social and personal services 3.3 32.2 13.3 Domestic household services 15.8 2.7 0.9 Less: imputed bank charges 22.9 7.9 1.2 Note: * includes oil refining and natural gas. Source: UAE Ministry 2007

2004 2.9 12.6 9.7 13.1 7.0 16.3 11.0 8.5 12.6 17.1 18.0 12.2 10.1

2005 1.6 10.8 6.0 9.0 7.0 5.1 12.5 15.0 12.1 16.0 16.0 16.0 14.0

2006 6.5 10.4 5.0 14.5 17.0 13.5 15.0 16.0 8.7 9.9 10.5 6.0 12.0

16.3 15.0 12.0 16.2 14.0 7.0 4.6 2.0 4.0 6.6 6.0 5.0 8.2 6.0 5.0 1.8 6.0 5.0 12.3 10.0 10.0 of Economy, IMF,

The UAE has 9.7 per cent of the worlds crude oil reserves and 4.1 per cent of its natural gas reserves. Abu Dhabi holds 94 per cent of the UAEs oil reserves, with more than 100 years production at current levels. Abu Dhabi also provides 80 per cent of the UAEs budget and generates 55 per cent of its GDP. Dubais oil output is declining rapidly, with reserves likely to be exhausted by 2015. Dubai accounts for 33 per cent of UAE GDP, and is a regional trading hub for re-exports. Sharjah contributed nearly 10 per cent of UAE GDP, and the other smaller emirates contribute between 0.4 and 1.9 per cent each. Endowed with low oil and gas reserves and production, these emirates are also developing trading and tourism sectors. This process has been supported by the UAE's heavy investment in infrastructure, principally in Dubai with world class airports and naval ports to cater to its strategic geographical location as a trading hub at the middle of three continents. Table 5 shows the GDP of individual emirates and Figure 2 depicts the share of each emirate in the UAEs GDP over the last seven years.

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Table 5: Nominal GDP by Emirate (Billion Dirhams) Emirate 2001 2002 2003 2004 2005 2006* 2007** Abu Dhabi 148.4 150.1 178.8 218.1 290.3 341.3 400.0 Dubai 66.0 80.5 97.7 118.4 150.7 193.1 226.5 Sharjah 24.1 25.4 27.0 30.4 47.7 60.6 68.5 Ajman 4.2 4.5 4.9 5.2 6.3 7.9 9.5 Umm 1.4 1.5 1.6 1.7 2.1 2.6 3.2 AlQuwain Ras Alkhimah 6.3 6.8 7.2 7.8 9.8 11.9 13.6 Alfujeirah 3.7 4.1 4.4 4.8 6.1 7.3 8.5 Source: UAE Ministry of Economy, National Accounts, 2001-2008
Figure 2: Share of each Emirate in UAE GDP
70 60

Share in Percent

50 40 30 20 10 0 2001 2002 2003 Dubai Ras Alkhimah 2004 2005 Sharjah Alfujeirah 2006* 2007** Ajman

Abu Dhabi Umm AlQuwain

Source: UAE Ministry of Economy, National Accounts, 2001-2008

Proactive government policy has also played a key role in the growth of the UAE as a regional economic leader. As per the Global Competitiveness Report for 2008/09, in terms of global competitiveness, the UAE is ranked 31st in the world out of 134 countries and is the second highest ranked economy in the Arabian Gulf after the Kingdom of Saudi Arabia. Moreover, the UAE is highly diversified in comparison to the other Gulf countries in terms of economic concentration and economic diversification indicators (see Figure 3). As per one study, the UAE has recently experienced some relative improvement in its non-oil sectors, largely as a result of Dubais efforts toward economic diversification, such as the development of the Jebel Ali port and harbor, various free zones (i.e., enterprise zones) throughout the city, and extensive real estate complexes catering to the travel and tourism industry. In 2005, only five percent of Dubais GDP came from the oil and gas sectora strong testament to the UAE as a paragon of an oil economy that has successfully diversified into productive non-oil sectors5.
5 Richard Shediac, et al, Economic Diversification: the Road to Sustainable Development, Booz & Co., available online at http://www.ideationcenter.com/40556321/ideation_article/42064066 , retrieved on 12th February 2009.

The UAEs Economic Policy and the Current Global Meltdown: An Appraisal

Figure 3: Economic Concentration and Economic Diversification in GCC, 2005

Source: Richard Shediac, et. al (2008) Let us examine briefly the current trends of economic diversification in each emirate to substantiate the remarkable economic growth of the UAE.6

Abu Dhabi
In recent years, Abu Dhabi's GDP has registered impressive growth primarily due to strong oil revenues and huge investment in infrastructure, real estate, industry and tourism. Although overwhelming dependence on the energy sector (which contributes 90 percent of government revenue, 95 percent of total exports and 60 percent of the GDP) continues, economic diversification into non-oil activities has increased in recent years. As per the five-year strategic plan of successful economic diversification and global integration program, the Department of Planning and Economy announced in May 2008 to spend an estimated $200bn on the new infrastructure needed to boost GDP growth and attract foreign investment. In addition, it created a specialized cell in February 2009 the Department of Economic Development to serve as a single window for facilitating various investment proposals in a public-private framework. In the real estate sector, state-owned and mixed state-private companies such as Aldar and Sorough are carrying out major large-scale development projects intended to enhance the Emirate's attractiveness as a cultural, tourism and business destination. One such project is in the Western region of Al Gharbia, which comprises about 83 percent of the Emirate with its largest oil refinery, a developed agriculture industry and fertile farmlands. In addition, the private sector is being encouraged to take over the provision of public services while the major government
6

This section is based on various issues of UAE Yearbook and Oxford Business Group Country Reports.

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firms are looking to expand abroad. TAQA and Mubadala are just some of the companies that have already bought substantial assets across a range of sectors in the US, Europe and Asia.

Ajman
The small emirate of Ajman is experiencing a rapid transformation with an average annual GDP growth of 11 percent in the last decade. In 2007, it contributed 1.25 percent to the UAE's overall GDP. Recent developments in key sectors like real estate, tourism, banking, education, health care and industrial plants have also become very beneficial. Increasing real estate prices and cost of construction have also attracted many developers to this emirate for less expensive and more convenient locations. Currently there are nearly 2115 companies in the Ajman Free Zone.

Dubai
Dubai is the epitome of the UAEs economic diversification, primarily leveraging its strategic geographical location and a highly liberalizing government with proactive market-oriented economic policies for diversification away from oil dependence. The mainstay of Dubais economic model is the services sector, with real estate and tourism being the two prime movers among many other globally service-oriented entities. The banking sector has played a vital role in turning Dubai into a thriving global financial centre for the region. With strong performance in both the retail and corporate segment locally, domestic banks as well as international banks have mushroomed to cater to a growing banking-savvy population. In 2007 and the first two quarters of 2008, Dubai's capital markets performed well primarily due to low returns in other global equity markets and worldwide interest in Dubai, spurring overseas investment. With issuance of a number of IPOs and a growing debt market and sukuks, the Dubai International Financial Exchange (DIFX) is emerging as the world's largest sukuk exchange by establishing the first state-of-the-art product platform in the GCC to offer sharia-compliant structured products. Sharia-compliant insurance products, or takaful, are also increasingly penetrating to the mass consumer base of both life insurance and non-life insurance. The Dubai government is also actively promoting Islamic finance in Dubai, and this sector is projected to have a 50 percent market share of the UAE's total banking assets by 2020, centering on the burgeoning project financing segment in the UAE and other GCC countries. Since 2003, the construction sector and the real estate market in Dubai has witnessed unprecedented growth, driven by a growing population, rapid economic expansion and increasing interest from foreign investors following the liberalization of the sector. Despite rising costs and labour and materials shortages, the sector has more than $1.1trn of projects underway as of 2008. Dubai's tourism sector contributed an estimated 18 percent of the Emirate's direct GDP and 30 percent of its indirect GDP in 2007. Dubai's hotels and apartments attracted around 6.5m visitors, in 2007, generating more than $3.5bn in revenues. Dubai's tourism sector is powering ahead in every segment: retail, through events such as the annual Dubai Shopping Festival; sports, through the likes of the Desert Classic Golf Tournament; 11

The UAEs Economic Policy and the Current Global Meltdown: An Appraisal

meetings, incentives, conferences and exhibitions (MICE), are set to receive a boost when the Dubai Trade Centre Jebal Ali is completed in 2010; and, medical tourism. Demand for healthcare services in Dubai has increased quickly over a relatively short period of time due to rapid population growth, and it is projected that the demand for hospital beds would double by 2025. In the face of this, the UAE government has overhauled the public health infrastructure at the primary, secondary and tertiary levels, and there are nine major hospital projects underway at a value of $596m. Dubai's education sector is expanding off the back of some heavy government investment alongside increased private sector involvement at all levels through the creation of education and research free zones, attracting some of the best known institutes from around the globe. Dubai Knowledge Village, for example, is host to some 20 international universities from 10 countries. The UAE government has now localized education efforts to some extent, with each of the seven emirates encouraged to establish bodies to liaise between local educators and the federal government on the implementation of modernization programmes. To this end, Dubai has created the Knowledge and Human Development Authority (KHDA).

Sharjah
Sharjah's economic growth is moving forward with a robust manufacturing sector, which contributes almost half of the UAE's total industrial capacity, and a well-developed infrastructure. According to Sharjah Economic Development Department (SEDD) statistics, economic growth was 19.9 percent in 2006. The main contribution came from the 10m-sq-metre Hamriyah Free Zone, which is home to 1100 companies. This kind of project has attracted huge foreign investment due to a law that permits 100 percent foreign ownership of businesses and properties, as well as complete import and export tax exemption. The government is also focusing increasingly on public-private sector partnerships for expanding growth in the future.

Ras Al-Khaimah (RAK)

With limited hydrocarbon reserves, RAK boasts fertile land for agriculture and an abundance of minerals that are used for the Emirate's local industries, particularly cement and ceramics manufacturing. With a business-friendly environment that is open to both local and foreign players, RAK has a strong and relatively diverse economy. While many economic policies come from the federal government, RAK's local offices play a key role in determining how the Emirate should develop. Several sectors have recorded excellent growth in recent years, with tourism, construction, manufacturing, real estate and financial services accounting for 57 percent of GDP in 2006. As evident from the above, the most important aspect of the trends of economic diversification in the UAE is that the non-oil sectors have not fully matured. There are also pervasive structural rigidities such as inefficiencies in labor, capital, knowledge and technology. In a way, this implies that oil revenues have not been invested effectively in the past, especially in the case of Abu Dhabi. And Dubais stupendous success in diversification has to depend on external financing as it has low oil revenue. This is noteworthy from the point of view of analyzing the impact of the ongoing financial crisis. Therefore, it can be argued that as the economy moves away from oil revenue, its diversification strategy should focus on economic activities 12

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with potential for high valued-added productivity growth. Real-estate and tourism have created many jobs, but low productivity gains suggest that diversification toward these sectors is showing its limits7. Since sustained economic growth (in real per capita income) requires substantial investment in higher education and sustained technological progress and transfer of technologies, the long-term challenge for the UAE is the transition toward a higher value-added productivity landscape.

The Financial Crisis and Contagion Channels

If September 2001 is considered a turning point in world politics, September 2008 may be recorded as a defining moment in the world financial sector. The United States sub-prime crisis slowly but malignantly catapulted the world into a global financial crisis that has not been seen since the Great Depression of the 1930s. Covertly manipulated financial ratings, coupled with allured mortgage incentives not in sync with prudent norms of investment banking, resulted in the growth of massive toxic assets that led to insolvency and the premature death of numerous financial giants in the US. Repercussions were felt across the globe. Despite rhetoric about decoupling, emerging market economies such as Asia and the Gulf region are increasingly exposed to the global financial threat. Importantly, the negative spillovers have not been confined to the financial sector alone, as the impacts on the real economy are clearly evident. However, given sound macro fundamentals and developing banking and financial sectors, the impact would be limited on the emerging markets depending on the durability and spread of the crisis. While the UAE, like other Gulf oil exporting countries, was thriving on record oil revenues and the consequent economic boom until mid-September 2008, the current scenario was juxtaposed with subdued confidence and a moderated economic outlook. The primary factor has been the continuing downsliding of oil prices as a result of the global recession. This is aptly reflected in the continuous decline of share prices and the overall stock market index. While it seems that there is no acute problem of liquidity, panic selling has become a major worry for the government to restore confidence in the stock market. Moreover, despite ample surpluses and consequent government expenditure, project financing has been difficult given the global credit squeeze and increasing cost of borrowing. As of now, the contagion effects of the global financial crisis seem to be fast spilling over to all economies in the world. The key channels to spread the contagion can be identified as (i) direct exposure of commercial banks to global toxic assets, (ii) reversal in FDI and FII inflows, (iii) global credit squeeze and limited inter-bank leverage, (iv) declining oil prices, and (v) weaker growth of energy-intensive industrial product exports.

Richard Shediac, et al.

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The UAEs Economic Policy and the Current Global Meltdown: An Appraisal

The Direct Impact: Exposure of UAE Banks8

The most visible effects of the current global meltdown have not been caused by direct exposure to troubled assets per se, but in an indirect form, as the UAE and regional project financing market have been affected due to the credit squeeze and rising costs of borrowing. Dubai, being the epicenter of numerous projects and fully dependent on international financing, has been hardest hit. However, few commercial banks in the UAE have publicly declared their exposure to the sub-prime crisis. Abu Dhabi Commercial Bank has announced an exposure of $272 million and has sued Morgan Stanley and other banks for wrong advice in the case of an ill-fated SIV deal. 9 Though anecdotal evidence suggests that the UAEs overall subprime exposure is limited, it is a fact that a lack of financial transparency makes it difficult to make any concrete judgment. Table 6: Officially Announced Subprime Losses of GCC Banks Bank Write-downs in $ million Abu Dhabi Commercial Bank 272 Gulf Investment Corp. 246 (another 200 expected) Gulf International Bank 966 Arab Banking Corporation 1200 Source: various financial media reports However, in the wake of the bankruptcy of the US-based Lehman Brothers, the UAE Central Bank asked UAE banks to declare their exposure. This resulted in no formal public announcements by banks. In mid-September 2008, UAE Central Bank Governor Nasser Al-Suwaidi ruled out a systematic risk exposure of the UAE in the context of the financial crisis in the US. As argued by Eckart Woertz, altogether the hitherto announced subprime exposure of GCC banks of about $2.7 billion seems to be small compared to more than $500 billion in Europe and the US. Part of this may be attributable to a lack of transparency with more exposure likely to surface over time, for sure; on the other hand, anecdotal evidence suggests that GCC banks have been relatively conservative compared to their American and European peers. In many cases, the investment criteria of banks did not allow the purchase of non-investment grade bonds or complicated structured products and an occasional lack of sophistication may have proven to be beneficial for some banks, now that such products are literally discredited. However, the majority of assets are not managed by banks but by Sovereign Wealth Funds (SWFs) like Abu Dhabi Investment Authority (ADIA). The SWFs invest in a broader range of securities, but public data about the size and composition of their assets is not available, and one has to rely on estimates. As they are sophisticated investors with a considerable equity component of 40 percent and more, according to estimates, their exposure to the current market turmoil must have been considerable. They probably have also invested more in riskier debt
This section is adapted from a comprehensive study by Eckart Woertz, Impact of Financial Crisis on the GCC, Gulf Research Center, Dubai, October 2008. This is freely available on the Web at http://www.grc.ae/index.php?frm_module=contents&frm_action=detail_book&frm_type_id=&pub_type =85&publ_id=&sec=Contents&publang=&frm_title=GRC%20Reports&book_id=55304&p_id=&frm_pa geno=5&op_lang=en 9 http://www.gulfbase.com/site/interface/NewsArchiveDetails.aspx?n=70534
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Dubai School of Government Working Paper 09-04

structures like collateralized debt obligation10 (CDOs) than the regions banks. Unlike banks they do not have to act when the values of these assets decrease on a mark to market basis; in case these assets do not default, they have the luxury of holding them until maturity or until the storm has hopefully passed. Still, unlike 2007, the losses of 2008 must have hurt the SWFs to a considerable extent, although they have diversified portfolios and have enjoyed continuous inflows because of relatively high oil prices. Larger overseas investments of UAE companies, like Emaars $1.05 billion investment in John Laing Homes, the second largest privately held home builder in the US have not been faring too well either and will have an impact on the foreign asset position negatively for the time being. Moreover, it is widely believed that high net worth individuals must have suffered loss with continuous decline in asset prices that was probably invested in riskier debt structures like CDOs11.

The Indirect Financial Effect: Rising Costs of Finance and Tight Liquidity
The real problem for the banking sector was due to their indirect exposure to increased costs of funding amidst maturity mismatches and credit exposure to local consumer, project and real estate financing. With double digit inflation and very lower interest rate and importantly negative real interest rates, there was not enough incentive to save and as a result bank deposits were inadequate to mobilize credit Simultaneously, speculative funds attracted earlier to cash on the possible revaluations of local currency, got withdrawn with strengthening of the dollar. Thus the only source for UAE banks was the capital market for refinancing, but there the cost of credit rose tremendously and the corporate bond spreads in the UAE rose higher than the LIBOR 12 and the EIBOR- the Emirates inter banking rate, approximately doubled since June 2008. A major reason for this distressed scenario is the deterioration of Dubairelated credit that constitutes a large part of the GCC bond market universe. The Emirate borrowed extensively to finance its development projects, and Dubai, Inc. companies were among the most prominent issuers in the GCC. While on October 10, credit default swaps for Saudi Arabia traded at 125, for the UAE at 174, for Samba at 265 and for Abu Dhabi National Bank at 216, Emirates Bank and Dubai Ports World traded at 580 and Nakheel signaled severe caution on the part of investors as it traded close to a staggering 2000 amid doubts about its sukuk, which was to expire in December 2009. 13 According to JP Morgan Dubai will need to refinance $16 billion of debt in 2009,.14 The CDS market clearly shows increased concern about debt funding of local projects and the real estate market. As a vast

10

Collateralized debt obligations (CDOs) are a type of structured asset-backed security (ABS) whose value and payments are derived from a portfolio of fixed-income underlying assets. 11 Eckart Woertz, 2008. 12 The London Interbank Offered Rate (LIBOR) is a daily reference rate based on the interest rates at which banks borrow unsecured funds from banks in the London wholesale money market (or interbank market). 13 Bloomberg data. 14 Dubais CDS Widen amid Concern over $22B Refinancing, Zawya Dow Jones, October 12, 2008

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The UAEs Economic Policy and the Current Global Meltdown: An Appraisal

amount of long-term projects have been financed with short-term funds, this maturity mismatch put additional pressures in current tight capital markets.15 Table 7: 5-Year CDS Spreads on UAE Entities as of February 23, 2008. Entity 5Yr CDS 1-Day 1-Month Spreads Change Change 1) Abu Dhabi Commercial Bank 435.0 (10.3) 90.0 2) Abu Dhabi National Energy 422.5 (18.6) 82.3 3) DP World Ltd 1,021.5 (280.2) 181.1 4) Dubai Holding Commercial Operations Group 1,400.0 (300.0) 347.4 5) Emirate of Abu Dhabi 401.4 (8.6) 109.9 6) Emirates Bank International 718.9 (149.8) 3.9 7) Government of Dubai 719.8 (178.1) 14.8 8) Mashreqbank 722.4 (162.6) (2.7) 9) National Bank of Abu Dhabi 430.0 (15.0) 135.0 Source: Bloomberg

Moreover, the UAE bond markets was overall weak in 2008, with major issues like Abu Dhabis First Gulf Banks $3.5 billion Eurobond program being postponed because of unfavorable market conditions. Equally, the $1 billion sukuk of Sharjahbased Dana Gas had to be postponed initially, and could only be placed after a convertible component was added. The syndicated loan market got disrupted, with the constrained financing conditions of 2008. International banks, which are a dominant force in the local project finance market as they have larger capitalizations than the local banks, were reluctant to extend their commitments with severe liquidity problems. Postponements, modifications and drawdowns of loans became widespread in the UAE.16 According to Reuters, the Middle East has borrowed 16.5 percent less in the third quarter of 2008 (down to $91 billion from $109 billion a year ago), a trend that continued in the fourth quarter.17 Out of GCCs total $35 billion of foreign currency debt (loans and bonds) which is to be repaid in 2009, half of the outstanding debt will come from the UAE alone.18 Among those debts will be $6.5 billion in bond issues which will need to be refinanced, such as the ones of Emirates Bank and Mashreq bank.

Government Stimulus Package and its Impact

While the UAE Central Bank had been preoccupied with runaway credit growth and inflation during the first half of 2008, it started to react to the liquidity crunch by monetary easing and other stabilizing efforts. The UAE was the first GCC country whose government announced guarantees for bank deposits, thus echoing similar measures in the US and Europe, and the UAE Central Bank has tried to alleviate liquidity bottlenecks by providing an additional Dh50 billion short-term facility to banks. Initially this has done little to ease tight liquidity in UAE markets, and
15

Also see Andrew England and Simeon Kerr, Gulf Markets Suffer Heavy Losses, Financial Times, October 6, 2008, http://www.ft.com/cms/s/0/ad4ad756-93d5-11dd-b277-0000779fd18c.html. 16 Gulf Syndicated Loan Market Severely Disrupted: Bankers, Reuters, October 2, 2008. 17 Christopher Mangham, Large Lending Deals to the Gulf Dry Up, The National, October 2, 2008. http://www.thenational.ae/article/20081002/BUSINESS/920528081/1049/BUSINESS. 18 Merrill Lynch, GCC Quarterly, Research Note, October 9, 2008

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Dubai School of Government Working Paper 09-04

the EIBOR has continued to rise. The terms offered were deemed too expensive, and against the backdrop of deteriorating international markets, skepticism persisted. This led to an additional injection of Dh 70 billion on October 15, which was well received by local equity markets. However, the major thrust in terms of government stimulus came in February 2009, when the UAE Central Bank wholly subscribed to bonds worth of US$10bn of the total proposed US$ 20 bn launched by the Dubai Government to meet immediate debt obligations and expenditure for developmental plans. On July 21 2009, His Highness Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai, issued Decree 41 of 2009 to establish the Dubai Financial Support Fund as an independent legal entity to manage the proceeds of the Dubai Government's $20 billion (Dh73.5 billion) bond programme, or any other bond issues. As per anecdotal reports, at the end of 2008, the total debt of corporations and agencies wholly or partly owned by the government of Dubai was US$80bn and US$13bn is slated to be paid back during 2009. Dubai government successfully refinanced US$3.8bn Borse Dubai debt in January 2009. Although there is no valid information, yet as per widely recognized sources, the debt financing of several Dubai entities has been under control with deliberate government intervention. It is to be noted that since the beginning of the crisis and government intervention in terms of stimulus, the markets have reacted very positively. Between July 2008 and July 2009, the UAE government announced a stimulus package of nearly $52.6 billion19, which is 32.2 per cent of the country's GDP of $163.3bn in 2008. As per one study this makes UAE as a country with the highest bailout-GDP ratio in the world. However, Dubais 20 billion bond issue which is part of the financial stimulus is technically a loan issues on market interest rate. Nevertheless, due to these positive interventions, Dubai shares surged in the first three months after the monetary stimulus (see figure 4 and 5). Moreover, The Dubai Financial Market (DFM) ended the day 7.9 percent up to close at 1652.98 points while the Abu Dhabi Securities Exchange (ADX) Index was up 1.1 percent, advancing for a fourth day. Government-linked companies like real estate developer Emaar Properties Co. (Emaar) and Dubai Financial Market Co. paced the advance in DFM. Emaar shares gained 14.8 percent (highest since Nov 08), while Dubai Financial Market Co. also soared 14.8 percent (highest since Oct 08). Abu Dhabi major real estate companies, Sorouh and Al Dar too were up by 5.3 percent 6.0 percent respectively. This is a clear signal that despite the international liquidity crunch, the federal government of the UAE and the Central Bank are well positioned to take care of the financial obligations if and when it is required.

For details see, Global Bailout/Stimulus Tracker, Grail research, available on line at http://www.grailresearch.com/pdf/ContenPodsPdf/Global_Bailout_Tracker.pdf

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The UAEs Economic Policy and the Current Global Meltdown: An Appraisal

Figure 4: One year Dubai Financial Market Index

Source: Bloomberg Figure 5: One year Abu Dhabi Market Index

Source: Bloomberg Most importantly, credit default swaps (CDS) 20 spreads also tightened significantly. According to CMA DataVision prices, 5-year CDS on Dubai fell by 178.1 basis points to reach 719.8 basis points and Abu Dhabi 8.6 basis points tighter at 401.4 basis points. The cost of insuring Dubai's debt in the credit default swaps market had started falling as it fell by 50 basis points to 950 basis points on news of Borse Dubai refinancing. The loan deal was seen as a test of the ability of Dubai's state companies to refinance their own debt. Moreover, the cost of protecting bonds
20

A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument - typically a bond or loan - goes into default (fails to pay).

18

Dubai School of Government Working Paper 09-04

issued by DP World Ltd., the state-owned port operator, fell to 1,021.5 basis points from 1,301.7 basis points on Feb. 20, the most in at least a year while that of Dubai Holding Commercial Operations Group fell to 1,400 basis points from 1,700 basis points on Feb 20.
Figure 6: Government of Dubai CDS spreads Figure 7: Abu Dhabi Government Bond CDS spreads

Source: Bloomberg

Despite the proven willingness and ability of the UAE federal government to provide support to Dubai, markets continue to differentiate sharply between oil rich Abu Dhabi and resource poor Dubai. This is reflected in the current 300 basis point difference in their CDS spreads. As a result only Abu Dhabi has so far been able to take advantage of the thawing in international capital markets, with the government and some of its related state-owned corporations successfully issuing international bonds (see Figure 8). This fact, combined with the dearth of international bank financing, continues to pose a challenge to the UAE, as Dubai related entities account for the bulk (about 80 percent) of the estimated $20 billion in syndicated loans and bonds maturing this year. Figure 8: 5 Year CDS Levels of the UAE

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The UAEs Economic Policy and the Current Global Meltdown: An Appraisal

However, despite the still difficult external financing environment, the UAE will not allow any defaults. Armed with large proportion of the oil windfall, substantial public funds are still available to meet all debt obligations, and recovering oil revenues will swell resources further. Recent developments suggest that the authorities are aiming to use the strong creditworthiness of the UAE federal government (which has an Aa2 rating from Moodys) to raise funds and/or guarantee borrowing by corporate entities and banks (See Table 8). Table 8: Selected Credit Ratings by Moodys Entities Ratings UAE federal government Aa2 Abu Dhabi government Aa2 National Bank of Abu Dhabi Aa3 Aldar A3 Mubadala Aa2 Dubai government n.a. Emirates NBD A1 Dubai Holdings A3 Emaar Properties Baa1 DP World A1 Source: Moodys Moreover, in response to the still strained financing conditions, the authorities are introducing measures to facilitate development of bond markets for local companies and banks. Having passed new legislation regulating the issuance of government debt21, the authorities now plan to issue federal government bonds, both in international and local markets, for the first time. These will be designed to create a benchmark against which other local borrowers can issue bonds, and potentially open up a new source of long-term corporate finance. There is also the possibility that the UAEs sovereign wealth funds, particularly the Abu Dhabi Investment Authority (ADIA), may be potential investors in the new bonds. In a further effort to make it easier to raise funds, recent reports also suggest that the federal government plans to offer guarantees for bonds and medium-term notes issued by local banks. This should help banks refinance maturing debt, and deal with the maturity mismatch between their deposits and longer term project and real estate lending commitments. Thus, the withdrawal of foreign deposits and curtailed access to international capital and wholesale markets continued to weigh on UAE banks in the first half of 2009. However, the situation is slowly improving in response to liquidity injections by the authorities, deposit guarantees, and strong countercyclical fiscal policies. Interbank lending rates have fallen back from their highs of late last year, although at 2.4 percent for 3 months in early July, remain elevated compared with similar US rates (0.6 percent) and the UAE central bank base rate of 1 percent.

21 Reports indicate that the federal government will be allowed to borrow up to 45 percent of the UAEs GDP from local and international markets, or to a maximum of $81.7 billion, whichever is the smaller.

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Dubai School of Government Working Paper 09-04

Effects on the Real Economy

With the cataclysmic effects of the financial crisis percolating into the real economy, there are major concerns and adverse impacts that set to drag down the positive growth of the UAE economy. The notion that was held by some until recently that emerging Asia or the GCC countries could decouple from this trend must be deemed futile. The effects on the UAE and other GCC countries are far from negligible, and not confined to the financial sector, but the real economy as well. Despite government support, the economy is now expected to contract by 1 percent this year, led by a decline in the oil sector as production drops in line with agreed OPEC cuts. Increased state spending will provide support to the non-oil sector, although activity will be seriously curtailed by the reduction in private demand and investment. Most notably, the demand for crude oil and products of the UAEs heavy industries like petrochemicals and aluminum have suffered. The real economic impact of the financial crisis can be seen in the continuous decline of oil prices due to demand destruction based on the apprehensions of a global recession as well as seasonal weak demand. Spot Dubai crude oil prices have plummeted by almost $100/barrel, from a record high of $140.77/b on July 4, 2008, to $46.62/b on November 18, 2008, the lowest level on record for three and a half years (see Figure 9). Figure 9: Spot Dubai Crude oil Prices ($/barrel)

Source: Prepared from World Bank Commodity Price Data, 2009. Similarly, petroleum product exports, especially to Asia, have also declined due to weak industrial demand. As emerging Asian nations account for the bulk of demand for UAE and GCC crude oil, aluminum and petrochemical products, and as their export-led growth models are hurt by the ongoing recession, negative impacts on demand for export goods can be expected. To take aluminum as an example, in 2006 China accounted for 25 percent of worldwide aluminum consumption and 55

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The UAEs Economic Policy and the Current Global Meltdown: An Appraisal

percent of its global demand growth. Thus there will be impact on UAEs economic diversification based on these highly value added sectors for the time being. Besides, large project finance will not be as readily available as in the past, and might affect the cost structure or even the feasibility of some mega industrial projects. The crash in the Dubai real estate sector continues to be a major drag on the economy. Available data is patchy, but there appears to be a consensus that prices and rents are currently down between 20-50 percent from their peaks. In addition, according to Meedprojects, as of April this year, an estimated $364 billion worth of projects (28 percent of the $1.3 trillion pipeline) have been put on hold or cancelled in the UAE, almost all of which are in construction (see Appendix). Although government support has ensured banks remain sound, credit growth has slowed sharply, and many businesses are under strain, prompting a scaling back of investment programs, a streamlining of operations and some mergers, particularly among the many government owned corporations. The retail, trade, and tourism sectors have also been hard hit by the global recession, and this is being exacerbated by an outflow of expatriate workers who have lost their jobs, leading to a further compression of demand for goods, services, and real estate. Thus, the current economic environment is likely to be a sharp reality check for the UAE, prompting a healthy re-prioritisation of the huge project pipeline, a correction in the overheated real estate market, and a wake-up call for banks. However, although the large exposure to Dubai real estate may continue to act as a drag, positive interventions by the authorities, banks, and corporations to strengthen and rebalance their positions, will ensure that the UAE is well placed to take advantage of improving global conditions in 2010.

Appraisal and the Way Forward

Like other emerging economies, UAE is in the midst of a serious global financial crisis, although there is no major direct impact on the financial sector; yet, the impact on real economy is fast emerging. The direct subprime exposure of UAE banks has been limited thus far, although proper information is scarce. Presumably, the exposure of the UAEs Sovereign Wealth Funds (SWFs) has been higher as they have been more sophisticated in their asset allocation, although data are not available due to the relative opacity of such funds. But, as they have enjoyed large inflows due to high oil prices and have diversified portfolios, the impact is probably manageable. Much more important than the direct impact of the international financial crisis is its indirect effect on the UAE and on Dubai in particular, as financing becomes scarce and its costs soar. Large-scale project finance and real estate has been hardest hit by this credit crunch. The demand for the UAEs main export items (crude oil, petroleum products and petrochemicals) has been negatively affected, as the recession takes its toll on the emerging Asian markets. With the government intervention in terms of financial stimulus, there are no major concerns about financing ongoing big projects, yet the increasing cost of borrowing has a negative impact on new projects, and the government as well as industry may scrutinize and prioritize financing for urgent projects instead of going for new greenfield projects for economic diversification and job creation. Moreover, with continuous decline in oil prices and consequent drop in revenue flows, there will 22

Dubai School of Government Working Paper 09-04

not be much flexibility in government expenditure to increase liquidity for all projects in the medium term. Importantly, with liquidity becoming a concern for commercial banks, the SME sector would be grossly affected as small and medium investors in the private sector largely depend on commercial bank lending. While at the same time, UAE is experiencing the best conditions for augmenting economic growth. This might seem paradoxical, but the macro fundamentals of the UAE as a whole are loosely interlinked with the global market and hence there is a cushion in the form of conservative financial market and record oil revenues of Abu Dhabi that may help smooth sailing. Nevertheless, there are issues of liquidity and project financing and their impact on economic diversification that need to be managed pragmatically. Thus it seems that while there are signs of economic weakness in the UAE due to the global financial turmoil, an economic slowdown is definitely on the horizon. Nevertheless, there are issues that need policy priority in order to realize the coveted grand visions of economic development designed by the entrepreneurial ruling regime. Most important is the issue of prioritizing investment and the development of entities that can optimize the comparative advantages of the UAEs economy. This implies that, though competition among existing entities demonstrates the maturity of a truly internationalizing market, regulation of competition becomes imperative to enable a level playing field. In other words, efforts should be made to develop those economic sectors that are internationally competitive to carry forward overall economic growth and simultaneously have the capability to absorb periodic shocks. As a corollary, in order to build and project a reputable international brand image, which Dubai has successfully done so far, it is also necessary to give clear market signals. This calls for more transparency and information sharing that not only helps in restoring the confidence of stakeholders, but also enhances the UAEs commercial soft power. This crisis provides an opportunity to strive for integrated design of development parameters that can contain entities and institutions that are complementary as well as competitive across the emirates. This is called cooperative competition, a classical symbiosis where different complementary entities cooperate and compete together for the larger goal of the development of the whole, while simultaneously increasing their international presence in their specific domain of business. Until now, policy makers have highlighted the unified resilience of the UAEs economy to overcome and grow out of the present financial crisis. They only need to showcase and substantiate the inherent strengths of the model to restore confidence in the market. This calls for better pragmatic brand building based on scientific studies rather than conventional PR exercises.

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The UAEs Economic Policy and the Current Global Meltdown: An Appraisal

Appendix
Table 1: Announced project cancellations and suspensions in the UAE Project Value Client (US$mn) Nakheel Harbour and Tower 38,000 Nakheel Al Salam City 8200 Al Rajhi Group, Tameer Holding Asia-Asia Hotel 3270 Tatweer Al Salam City (Phase 1) 2700 Al Rajhi Group, Tameer Holding Dolphin City 1700 Emirates German Group Western region Aluminium Smelter Power 1500 Abu Dhabi Water and Plant Electricity Authority Nad El Sheba Racecourse 1300 Meydan LLC Redevlopment of Mina Rashid 1000 Nakheel Aqua Dunya (Dubvailand): Phase 2 950 Aqua Dunya Aqua Dunya (Dubvailand): Phase 1 950 Aqua Dunya Investment Corporation of Dubai (ICD) 817 Investment Coprporation of Dubai High Rise Boulevard 817 High Rise Real Estate Anara 800 Tameer Holding Plaza Mayor (Jumeirah Village) 800 Tasees, Makaseb Holding, Ishraqah Falcon City of Wonders (Dubailand) 680 ETA Star Atrium Project 654 Sunland Group Palm Deira: Mixed-use Building Project Palm Trump Hotel and Tower The Vantage Light Rail and Tramway (Dubai Waterfront) Rotating Tower (Jebel Ali) Tiara United Towers 600 600 545 500 500 480 Nakheel Nakheel, Organization Cirrus Developments Nakheel Merjen Group Zabeel Investments, United Group Holdings n/a Sama Dubai (Dubai Holding) Muzoon Holdings Nakheel Tourism Development and Investment Co Dubai Properties Al-Tuwairqi Group Status On hold On hold On hold On hold On hold On hold Cancelled On hold On hold On hold On hold

On hold On hold On hold

Cancelled On hold (for redesign) On hold Trump On hold On hold On hold On hold On hold

Dubai Exhibition City Jumeirah Hills Esplanade Cactus Theme Lagoon Club Hotel and Residences

450 450 422 420 400

Cancelled On hold On hold On hold On hold

Signature Towers (Business Bay) DRI and Meltshop Plant 24

400 400

On hold On hold

Dubai School of Government Working Paper 09-04

Emivest - DSO - Towers

400

International Powers/Mitsui - Umm Al Nar RO Plant Replacement of Infirld Pipelines (Zakum Field) Desert Gate Hotels and Towers X2 Towers Borouge - Melamine Plant

350 350 350 300 300

Ain Al-Fayda Sharjah Sports City Tatweer Towers Dubai Healthcare City - Phase 2 Forbidden City Residential Towers on Plot 39 Porsche Design Towers (Business Bay) Pilkington Emirates - Float Glass Factory Sienna Square Sea Gull Tower Image Residences Canal Point Seascape Topwer Dubai Marina - Ice Tower

300 250 250 235 222 210 200 200 150 145 137 136 135 130

Waters Edge (Busienss Bay) 125 Mina Rashid - Mixed-use Tower 110 West End Tower 1 and 2 (Jumeirah Village 110 South) Business Bay - Burjside Boulevard 100 Dolphon Towers 100 West Bay Tower (Business Bay) 88 Al Odaid - Palm Tower 80 Nadra Tower (Business Bay) 70 Jumeirah Village - Green Park 50 Palm Island Hotel Resort 50 Source: HSBC Global Research, February 2009.

Emirates Investment and Development PSC Abu Dhabi Water and Electricity Authority Abu Dhabi Marine Operating Company Bawadi Al Odaid Abu Dhabi Polymers Company Ltd (Borouge) Al Qudra Real estate Government of Sharjah Mizin Tatweer Nakheel Emaar Dubai Properties Pilkington Emirates Cirrus Developments East & West Properties Al Fara'a Properties Istithmar East & West Properties Mada'in Properties Abyaar Real Estate Investment Damac Properties Azizi Investments Al Rashid Investments Damac Properties Damac Properties Snasco, International Investment Bank Al Odaid Tamweel Damac Properties Al Fardan Group

On hold

On hold On hold Cancelled On hold On hold

On hold On hold On hold On hold On hold On hold On hold Cancelled On hold On hold On hold On hold On hold On hold

Cancelled On hold On hold On hold Cancelled On hold On hold Cancelled On hold On hold

25