FDI projects in the United Arab Emirates are holding up well in the wake of the announcement of the Dubai World debt restructuring at the end of November 2009.
Financial investors in the UAE have had a nervous few months. Although both the Dubai and Abu Dhabi stock markets ended in positive territory for 2009, the indices have fallen significantly since the end of November 2009. At the same time, the cost to protect against default has risen and rating agencies have revised down their assessment of a number of corporate entities.
With regards to FDI, the latest figures from greenfield investment monitor fDi Markets show that the UAE as a whole continues to attract more than half of the FDI projects in the Gulf Co-operation Council (GCC) region. There were 363 FDI projects for the year until November 2009 – a number which is lower than 2008, but more than the total number of ventures recorded for 2007. Greenfield project numbers during this period dropped 20% for the country – not a cataclysmic drop, all things considered.
Placing the UAE’s recent achievement in perspective, Unctad’s FDI Performance Index provides a useful measure for growth. It divides a country’s share of global inward FDI by its share of world GDP. An index score higher than one suggests the country is attracting a greater share of FDI than its economic size would suggest. The UAE’s inward FDI performance remains strong, with an index of more than 2.5 for 2008. The UAE’s FDI Performance Index rating has been above one every year since 2003 and is the second highest in the GCC region, after Bahrain.
As for the expectations for future projects, a number of positive developments are taking place. First, the fall in property prices in Dubai and their stabilisation in Abu Dhabi is lowering the cost of business after a period of severe property shortages and skyrocketing prices. Second, the rebound in oil prices means there is still plenty of money to be invested in the region. Third, the country’s new Federal Foreign Investment Law is expected to be adopted during the first half of 2010.
This new legislation will clarify, stabilise and liberalise the regulatory framework for attracting international investors. In particular, the region’s position regarding majority foreign ownership of companies and ownership of land will be redefined in the new legislation.
These steps should further improve the UAE’s position on rankings such as the World Bank’s Doing Business Index and the World Economic Forum’s Competitiveness Index. The UAE’s ranking went up in 2009 to be among the world’s top 10 economic reformers, to a large extent because of the abolition of a minimum capital requirement for any new business. The overall entrepreneurial environment has been enhanced in order to develop a more dynamic private sector.
The financial support provided by Abu Dhabi to Dubai and the Federal Foreign Investment Law are expected to strengthen the federation. With Dubai extending to the south and Abu Dhabi to the north, the two main centres of the UAE are now less than an hour’s drive apart, enabling an ever greater economic integration. It is therefore becoming more appropriate than ever to analyse the FDI environment at the UAE level rather than for specific emirates. However, some differences persist between them that are worth highlighting.
For Dubai, improvements in infrastructure continue at the same time that the Dubai World debt is being restructured. With the opening of the Dubai Metro in 2009, the Burj Khalifa tower this year, the extension of the airport and improvements in the road system, Dubai’s infrastructure will continue to make the emirate attractive for investors as a centre for trade and services and as a hub for the wider region, including not only the GCC but also countries such as Iran and India. Given Dubai’s debt situation, FDI is welcome for both the financial resources it brings as well as the accompanying knowledge brought in by the incoming business.
Attracting FDI is important for Dubai, as a statement made in December 2009 by Fahad Al Gergawi, chief executive officer at the emirate’s foreign investment office (FIO), illustrates: “One of the focal areas of Dubai’s government is to ensure that the emirate serves as a robust and business-friendly destination offering utmost ease in setting up and managing businesses. [The] FIO is dedicated to attracting regional and international foreign investment to Dubai, and one of its key objectives is to develop closer co-operation with key international investment partners.”
Abu Dhabi’s diversification
Given its vast oil reserves, Abu Dhabi’s situation is somewhat different from the other emirates. Its Economic Vision 2030 has been developed to diversify the economy away from oil and improve its offering in a number of key industries. Mohammed Omar Abdullah, undersecretary of the Abu Dhabi Department of Economic Development, explains the logic behind the vision: “Abu Dhabi is using its existing capital and petroleum resources to be the lead investor in capital and energy-intensive industries. The strategy is to use these large initial investment projects as platforms from which to develop downstream industries, bringing in global expertise and technology. Current manifestations of this strategy include the extensions of the Khalifa Port and industrial zone, Abu Dhabi airport as well as investments in petrochemicals, renewable energy, semiconductors and aluminium.”
In December, Emal, a joint venture between Emirates Aluminium and Abu Dhabi’s Mubadala, launched the largest greenfield aluminium smelter project in the world.
Mr Abdullah adds: “In addition to the new legislation at the federal level, Abu Dhabi is working on its own industrial law which is expected to clarify the position regarding economic free zones.”
Investment promotion plays a key role in Abu Dhabi’s economic strategy. Hamad Abdullah Al Mass, executive director of international economic relations of the Department of Economic Development, says: “We identified a need for an investment promotion agency that will play a strong role in attracting strategic FDI. This will focus on high added-value, innovative and technological investments that will drive the transformation of the emirate from an oil-based economy towards a knowledge-based one.”
Overall, FDI in the UAE is in a relatively healthy state, despite continuing instability in global and regional financial markets and strong regional competition for projects from Saudi Arabia, Turkey and Bahrain. According to Tarek Fadlallah, executive director of Nomura Investment Banking, continued deregulation and increasing transparency will be critical in maintaining the momentum of FDI.
If the UAE succeeds in managing to provide an attractive regulatory framework during 2010, then its infrastructure and strategic location will continue to offer good opportunities for investment.
Beyond the big two
The UAE consists of seven emirates and each one is promoting its attractions to foreign investors. Fujairah expects to benefit from the new federal legislation as there is presently no investment law that serves as a framework for foreign investors. The emirate aims to leverage its strategic location by the Gulf of Oman and its natural assets to attract investment.
Elsewhere in the UAE, the Ras Al Khaimah Free Trade Zone has been ranked the number one in the Middle East during 2009, and Sharjah has announced construction of a new dry dock and a major port expansion in order to attract FDI.
Of course, the independent promotion of FDI into each emirate does mean there is competition between them and even individual free zones for FDI projects, but this competition should also serve to attract FDI into the UAE rather than other countries in the region.