ECONOMY OF ABU DHABI
Mar 12 - 18, 2012
Economy of Abu Dhabi, the federal capital and one of the seven Emirates in UAE, has become a landmark among regional Gulf economies, especially after the drastic reforms taken throughout the past few years, ranging from privatizing government institutions with the intent of boosting the role of the private sector to liberalizing economic policies for more diversified sources of income.
The oil and gas industry remains fundamental to the UAE economy, and particularly that of Abu Dhabi, which has the majority of the UAE's oil and gas reserves. Abu Dhabi sits on 10 per cent of global oil reserves. Despite its substantial gas reserves, Abu Dhabi is currently a net importer of gas, which is used mainly for producing power and desalinated water.
Abu Dhabi has a budget deficit for the past three years, partly due to doubling of spending on development work started in 2009 mainly in education, health, and infrastructure sector. Government has a long-term target growth rate of six per cent but it is expected that Abu Dhabi's economy will expand by up to five per cent to reach 750 billion dirham ($204 billion) in 2012, according to the Abu Dhabi Chamber of Commerce and Industry.
The Government of Abu Dhabi is adopting policies, plans, regulations, and incentives for the private sector. Abu Dhabi has plans for economic restructuring with the aim of bolstering the socioeconomic role of the private sector so as to expand and diversify economic base.
Abu Dhabi's financial and economic indicators showed little improvement in 2011, yet it is still a sign of economic strength in the face of a gloomy economic situation elsewhere. Initially, it was thought Abu Dhabi, the world's sixth largest oil producer, would escape untouched by the financial crisis. But, 2011 has been particularly difficult for the construction companies working in the emirate. There has been a slowdown in the value of work awarded, companies have not been paid, and a growing number of people have lost their jobs as a result.
$9.1 billion worth of construction contracts were awarded in Abu Dhabi during 2011 which is about 30 per cent less than the $13.3 billion of awards made during the same period in 2010.
However, Abu Dhabi made significant progress in 2011 towards its long-term goal of economic diversification, with major developments in the fields of industry, transport, and tourism. It remains in a strongly positive macro-economic environment despite concerns of a double-dip recession in the global economy and widespread political protests in the region. The emirate's economic development is further boosted by a government commitment to diversification and job creation.
High oil prices throughout 2011 delivered economic growth of about four per cent last year. Whereas long-term rising energy demand worldwide ensures that Abu Dhabi's economy will remain strong for the years to come.
The macro-economic backdrop still poses numerous threats to regional stability with Greece's sovereign debt crisis and Iran's nuclear program among the key concerns. In addition, Dubai's stocks retreated the most recently in more than two years, the worst-performing equity market in the world today, ahead of Arabtec Holding Co (the biggest UAE construction company) estimated a 57 per cent drop in 2011 profit and on concerns over the success of Greece's debt swap.
Abu Dhabi came to Dubai's rescue with a last-minute bailout which helped it avert default on an Islamic bond of $20 billion, a debt at its flagship conglomerate named Dubai World in the wake of a property collapse in 2009.
As the bailout money came directly from the Abu Dhabi government, and not from the federal government thus it showed that Dubai's wealthiest neighbor was more engaged with Dubai's debt problems. As a goodwill gesture, Dubai (sometimes also called Abu Dubai) changed the name of the world's tallest building from Burj Dubai to Burj Khalifa.
Dubai has performed remarkably well not to depend on oil revenue. Aside from tourism, the Dubai government is getting revenues come from customs duties, various local taxes, road fees, and government investments. But, Abu Dhabi is likely to open its checkbook again as more debts will mature in 2012, including Dubai Holding Commercial Operations Group's looming $500 million debt repayment. It's an object lesson that will dictate the economic future of the two emirates, many analysts believe.
In comparison to Dubai, Abu Dhabi has taken a more aggressive approach in specializing in science, technology, and education. Abu Dhabi is making significant efforts to create a business-friendly environment for the private sector as part of the emirate's plans and ambition to associate with the top 20 economies in the world. Based on a recently published report by the World Bank on the comprehensive assessment of the business environment in the emirate, the government has taken several initiatives to improve the current business environment.
In order to promote business in the state, government has introduced a new law, which will allow small foreign companies to start their business in Abu Dhabi. The minimum capital for the start-up of business is reduced to Dh150,000 ($40,838), which will make it easier for the businesses, particularly smaller enterprises, to establish their business in the state. In addition, foreign companies are being allowed to take the stake above 49 per cent as well. At present, for businesses located outside the emirate's free trade zones, foreigners are limited to a 49 per cent stake, which is a concern for investors.
Government is planning to increase the share of non-oil sector to the economy to 64 per cent from less than 50 percent today through multibillion dollar investments in metals manufacturing, aerospace, tourism, healthcare and other sectors.
The emirate's government should also work on new methods of doing business and bringing in necessary reforms in rules and policies so as to meet the challenges that lie ahead. Technology, civil aerospace, basic industries, media, renewable energy, transportation and logistics and petrochemical, along with other emerging and traditional sectors, can be identified as highly promising sectors.
The state should adopt best practices to regulate trade licenses and give utmost attention to the importance of speeding up the licensing process and reducing the cost (time and money) associated with it. This is a vital part to achieve an efficient, transparent and investor friendly business environment in the emirate. In short, Abu Dhabi should focus on strategic growth sectors; encourage increased participation of the private sector; reduce dependence on oil; and create a competitive business environment to attract increased flow of international capital.