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Economy
Finding ways to manage the challenges of rapid growth
Trade and GDP continue to rise quickly
New financial exchanges and products are major boosts
Trade with East Asia increasing at a brisk pace
Topping a list of competitive economies in the Arab world
30                                ECONOMY OVERVIEW




                               The emirate’s iconic buildings are viewed as symbols of its ambitions




                               Ahead of the pack
                               Managing expansion with a view towards the long term
After the success of such      Every so often, something happens in Dubai which                        The new zones all work on the same basis of allow-
projects as the Jebel Ali      forces people to take notice. That moment came in                       ing foreign investors 100% ownership, supported by
Free Zone, the number and
                               July 2007 when the Burj Dubai became the world’s                        long-term tax and duty-free privileges, quality infra-
scope of similar
commercial centres has         tallest building at 141 storeys. The Burj Dubai had                     structure and minimal bureaucracy.
been multiplying.              garnered plenty of criticism when the ambitious                            The approach originates from the idea of simulta-
                               plan was initially announced, but perhaps the event                     neous horizontal and vertical expansion. The suc-
                               helped to wipe away lingering doubts about Dubai’s                      cesses of the pioneering DIC has given rise to a
                               ambition to become a world-class centre for busi-                       string of allied ventures, including Dubai Media
                               ness, finance and tourism. “It’s a symbol of Dubai as                   City, Dubai Knowledge Village, Dubai Outsource
                               a city of the world,” the project director for Emaar                    Zone, Dubai Biotech, Dubai Studio City and the
                               Properties told the press. Dubai has “resisted the                      International Media Production Zone.
                               usual and has aspired to build a global icon,” Emaar’s                     Dubai Multi Commodities Centre has been estab-
                               chairman, Mohammed Ali Alabbar, added.                                  lished to build on Dubai’s existing strength as a gold
                                  The Burj Dubai represents Dubai’s outsized ambi-                     trading centre but is now chasing business in a
                               tion and ability to follow through on its plans.                        range of other commodities, including metals, food
                               Building a global city was at the heart of the vision                   and beverages, and energy. An early offshoot was
                               of Sheikh Rashid bin Saeed Al Maktoum, Dubai’s for-                     the Dubai Tea Trading Centre and the Dubai Gold
                               mer ruler, who established the emirate’s modern                         and Commodities Exchange. Other ventures cover
                               economic development with Jebel Ali Port in the                         almost every economic sector, ranging from the
                               1970s and then Jebel Ali Free Zone in 1980.                             Dubai Textile City, Dubai Healthcare City and Dubai
                                  The long-standing target has been to diversify                       Humanitarian City to Dubai Properties, Dubai Silicon
                               Dubai’s economy, and capitalise on its history as a                     Oasis and Dubai Investments Park.
                               trading hub. It was believed that a knowledge-based                     PROVEN TRACK RECORD: This model has proved
                               economy was the best assurance for lasting                              successful, as Dubai now has a significant role in
                               progress after the emirate’s oil runs dry. That vision                  trade, especially re-exports, as well as services and
                               has only accelerated under Dubai’s current ruler,                       the aluminium industry in the Middle East. This posi-
                               Sheikh Mohammed bin Rashid Al Maktoum.                                  tion is likely to hold. According to the government of
                                  The administration’s development plan has been                       Dubai’s Department of Statistics, the economy
                               focused on areas where Dubai has an advantage,                          grew 20% in 2006 as GDP reached Dh168.8bn
                               said Soheir El Sabae, an economic advisor on the                        ($49.96bn), up from Dh140.2bn ($38.18bn) in 2005.
                               Executive Council, which is charged with making the                     More importantly, the non-oil sector represents a
                               emirate even more business-friendly. These areas                        huge portion of GDP, and has been the primary driv-
The non-oil sector
presently makes up 95% of      include financial services, professional advisory,                      er of growth for several years now. The non-oil sec-
the emirate’s GDP, which       logistics, construction systems and tourism. “Each                      tor’s contribution to GDP in 2006 was 95%.
grew 20% in 2006 to reach      one enriches the other,” El Sabae said. “They are                       Wholesale and retail trade; manufacturing; trans-
almost $50bn. Although         linked, and all sectors are tackled in parallel.”                       portation and storage; communications; construc-
high oil prices added to the
                                  The model for this approach involved a broad mix-                    tion; real estate; and financial services were the
value of the petroleum
industry, its share of GDP     ture of free zone developments, starting with the                       economy’s leading sectors according to value.
dropped due to the gaining     Dubai Internet City (DIC) and expanding to a dozen                         High oil prices boosted the petroleum industry
strength of other sectors.     more centres of ever-increasing variety and scope.                      as well, which grew 14% to Dh8.5bn ($2.31bn),

                               Oxford Business Group
                                                              ECONOMY OVERVIEW                                                                              31




although its contribution to GDP actually dipped
slightly, from 5.3% to 5%. The oil windfall enjoyed by
the UAE has in turn generated significant invest-
ment from both the public and private sectors for
use in infrastructure and a variety of other new proj-
ects. An investor-friendly climate has been the hall-
mark of Dubai’s commercial character for years, and
international businesses just keep flowing in. Some
13,170 businesses obtained licences from the
Department of Economic Development in 2006, an
11% increase on 2005. Of the 170 licences issued to
foreign companies, British firms led the way, with
24; followed by German companies, with 13; the
British Virgin Islands, with 11; and 10 licences issued
to Indian companies. The services industry had the
highest number of new licences, at 9803.
   But it is not just businesses which have flocked to
Dubai. Tourists are drawn to the emirate for its fam-
ily-friendly environment, world-class shopping and
beaches. Last year, 6.5m visitors came, generating
                                                            In 2006 shopping helped drive tourism revenue of $3bn
revenue of around $3bn. Tourism provides a signifi-
cant part of the emirate’s GDP, with the energy and         demand and put pressure on prices in all of the Gulf                 Living costs will likely be up
real estate sectors also important. The ratio of            Cooperation Council (GCC) countries. Rising costs                    again in 2007, the fourth
                                                                                                                                 consecutive year of
tourists to residents in Dubai is approaching 5:1.          have hit everyone in the pocket, from construction
                                                                                                                                 increases. Accommodation
   Although Dubai’s economy has distinct attributes,        workers to executives. Part of the inflation is                      is a large part of this,
it is still part of that of the UAE. As such, it benefits   imported, economists report, but it is primarily                     though residential projects
from many government services, and is the main              home-grown. A shortage of housing units and high                     being completed should
contributor, along with Abu Dhabi, to the federal           rents are pushing rates up quickly. A rental cap rule                ease the demand.
budget. The UAE amassed a budget surplus of                 limiting rent rises to 7% per year went into effect,
Dh72.5bn ($19.74bn) in 2006 on the back of rev-             but the provision does not apply to new tenants and
enues of Dh201bn ($54.73bn). In 2007 the surplus            the daily influx of expatriate workers.
is estimated to reach 7.8% of GDP. In 2005-06, GDP             Living costs are expected to increase for a fourth
rose 26.4% from Dh485.5bn ($132.2bn) to                     straight year in 2007, as demand far exceeds supply
Dh599.2bn ($163.16bn). This will likely slow a bit to       for accommodation, education and health, accord-
11.6% because thus far in 2007 the UAE’s average            ing to a report by Kershaw Leonard, a Dubai recruit-
has been around 2.5m barrels per day (bpd), which           ment consultancy firm. In 2006 rents for two-
is slightly below the 2006 average.                         bedroom apartments increased by 47%; the cost of
   The UAE as a whole has garnered much of its suc-         primary education by 28%; and the expense of visit-
cess due to its reputation as a good place for busi-        ing a physician at two of Dubai’s biggest hospitals
ness. This is evidenced by its ranking as the most          has more than doubled in the past two years.
competitive Arab economy, according to the World            Building materials prices have risen amidst a con-
Economic Forum. The UAE was 29th out of 40                  struction boom that shows no sign of abating. The
nations considered at the most advanced stage of            amount of building materials imported from China
development, and is also the second-largest foreign         increased 10-15% in August 2007, according to the
investment destination in the Gulf, after Qatar.            UAE-based Danube Building Materials. The price of
MANAGING GROWTH: Dubai has also made itself a               imports such as plywood have sharply increased,
highly desirable place to work. The UAE’s Ministry of       due to the Chinese government’s decision to cut
Labour has reported the number of foreign workers           rebates to export firms from 11% to 5%. China sup-
in the country rose from 2.6m in 2005 to nearly             plies about one-third of all of the UAE’s materials.
2.9m by the end of 2006. These workers fuel Dubai’s            The official consumer price index increased by
economy, providing necessary manpower to a small            9.3% year-on-year in 2006. A closer look confirms
native population. However, Dubai’s leaders are
aware that this growth, if not managed properly,               Dubai GDP, 2002-06 (Dh bn)
risks undermining the emirate’s quality of life.                                   2002              2003             2004          2005            2006
   As living costs spiral upwards, plans are being             Nominal GDP          80.5             97.7            118.4         140.2           168.8
implemented to improve health care, education and              % growth              -               21.4             21.2          18.4            20.4
worker rights, as well as to conserve the city’s archi-        Non-oil GDP          75.6             92.5            111.9         132.7           160.3
tectural heritage and increase the amount of green             % of GDP             93.9             94.7             95.1          94.7             95
space. These targets should then enhance Dubai’s               % growth              -               22.4              21           18.6            20.8
competitiveness. One primary area being addressed
                                                               SOURCE: Government of Dubai
is inflation. Economic expansion has created high

                                                                                                         THE REPORT Dubai 2007
32                               ECONOMY OVERVIEW



The UAE dirham’s peg to        the anecdotal evidence that rising rental costs is the     four-year peg to the dollar in an effort to contain
the dollar has been under      primary driver behind inflation. Some moderation is        inflation. The likelihood that the UAE would face the
discussion of late,            forecast for 2007, but the average could still be          prospect of higher inflation if the US decided to cut
especially in the context of
                               more than 9%, experts say. The governor of the UAE         interest rates in the wake of the sub-prime mort-
the GCC’s efforts to form a
currency union.                Central Bank, Sultan Nasser Al Suwaidi, has said he is     gage crisis has only stoked the debate. However,
                               expecting lower inflation in 2007, once more hous-         experts agree that it is very unlikely that the UAE will
                               ing units come onto the market. Still, money supply        follow suit and de-link the dirham. Officials, includ-
                               (M2) rose by 23.2% to Dh399.3bn ($108.73bn) in             ing Suwaidi, have dismissed the possibility.
                               December 2006, largely due to the high oil prices             Analysts have also pointed to energy consump-
                               and repatriated investment.                                tion as a concern. The electricity and water
                                  The growing inflation has stirred a debate about        demands in Dubai are tremendous, but the emirate
                               whether the UAE should de-peg or revalue its cur-          is working to assure those needs are met. It is plan-
                               rency against the dollar if inflation levels do not cool   ning to build one of the world’s largest power and
                               next year. The dirham’s peg to the weakening dollar        desalination complexes, a multibillion-dollar plant
                               has pushed up import costs, as many imports come           producing nearly as much power as New York City’s
                               from Japan and the EU, and as this has combined            capacity. The plant would be capable of producing
                               with housing costs, is helping to fuel inflation.          9000 MW of electricity and 600m gallons a day of
                                  Rising inflation in some Gulf countries over the        desalinated water. The new complex will be located
                               past year has also cast doubt over the GCC’s plans         next to Dubai World Central and Jebel Ali’s port and
                               for a currency union, scheduled for 2010. GCC              free zone – where most of the emirate’s power gen-
                               states had pegged their currencies to the US dollar        eration capacity of about 5000 MW is located.
                               to prepare for monetary union in 2010. This was            EXCHANGES GROW: Another challenge on the
                               highlighted by Kuwait’s May 2007 decision to end its       horizon is realising Dubai’s ambition to become a


                                   ADDRESSING DEVELOPMENT CHALLENGES
                                   A comfortable lifestyle is an integral part of         some aspects were inadequate, such as social,
                                   Dubai’s appeal and is partially responsible for        legal and regulatory frameworks, partly because
                                   the emirate’s success, as it has made it easier        the calls for these did not arise in the 1980s and
                                   for firms to bring in the minds and muscle they        1990s. This is the reason for focusing on regula-
                                   need. But the swells of people who have moved          tion and responsibility towards the population,
                                   to Dubai or come to visit for holiday also place       especially foreign workers, and the environment.
                                   a strain on the city’s resources. This is the emi-        The plan is divided into five sections: economic
                                   rate’s dilemma: how will Dubai maintain its eco-       development; social development; infrastructure,
                                   nomic expansion without undermining its                land and environment; safety, security and justice;
                                   famously high standard of living?                      and public sector excellence. It also addresses other
                                      With this mind, the government has estab-           public concerns such as traffic, rent hikes, inflation
                                   lished the “Dubai strategic plan 2015”. It is          as well as labour disputes, all of which have influ-
                                   expected to engineer 11% annual growth in              enced the everyday lives of residents.
                                   GDP to Dh396.3bn ($108bn) by 2015. This                   The key policy highlights include: revising immi-
                                   would translate to a 41% growth in per capita          gration policies; increasing the use of public trans-
                                   GDP to $44,000, up from the present $31,140,           portation; improving roads and traffic safety;
                                   and create some 882,000 new jobs.                      creating a mechanism for rental disputes; facilitat-
                                      The plan’s objective is to structure the emi-       ing an awareness and interest in cultural activities;
                                   rate’s ongoing growth in a managed and                 and optimising land use through the improved
                                   responsible manner that helps its population           integration of urban planning.
                                   and has only a limited impact on the environ-             “The Dubai strategic plan, despite having its own
                                   ment. “In 2000-01, we had laid out some                specific goals, is fully integrated into the UAE fed-
                                   strategic objectives under Vision 2010, which          eral strategic plan, which is being prepared by the
                                   we have already achieved,” Sheikh Mohammed             Council of Ministers, under the direction of
The “Dubai strategic plan          bin Rashid Al Maktoum, the ruler of Dubai, said        President His Highness Sheikh Khalifa bin Zayed Al
2015” has five pillars
                                   when making the announcement. “This                    Nahyan [of Abu Dhabi],” Sheikh Mohammed said.
targeting sustained
economic development and           required a new strategic plan that will take us           The plan has also called for enhanced accoun-
its challenges, which              to a new level in development.”                        tability among government officials, as well as fur-
include: economic                     Vision 2010 was responsible for many of the         ther development of the UAE’s human capital
development; social                massive development projects, such as Dubai            through improving education. The directors-
development;
                                   Internet City and Dubai Healthcare City, and           general of each of the government’s depart-
infrastructure, land and the
environment; safety,               their subsequent economic growth in 2001               ments have been tasked with developing their
security and justice; and          and 2002. But as this growth accelerated,              own schemes in line with Dubai’s strategic plan.
public sector excellence.


                               Oxford Business Group
                                                              ECONOMY OVERVIEW                                                                    33




financial hub for the region. The cornerstone is the        2007, the Dubai Mercantile Exchange (DME) is a              In June 2007 the Dubai
Dubai International Financial Centre (DIFC), estab-         joint venture between Tatweer, a member of Dubai            Mercantile Exchange
lished in 2004. The government has said it hopes            Holding, the New York Mercantile Exchange and               opened as a joint venture
                                                                                                                        between Tatweer, the New
the DIFC will become a centre for asset manage-             Oman Investment Fund. At present, Dubai prices its
                                                                                                                        York Mercantile Exchange
ment, reinsurance, Islamic finance, private and back-       oil exports against the DME Oman crude futures              and Oman Investment Fund.
office operations, as well as the leading financial         contract. Dubai is the second Middle East oil pro-          It is the first energy futures
exchange in the Gulf region.                                ducer to back the DME contract after Oman.                  and commodities exchange
   Dubai Bourse, the holding company for the gov-           Producing around 100,000 bpd, in the past Dubai             in the Middle East.
ernment’s stake in the DIFC and Dubai Financial             has used Platts in pricing its oil exports.
Market, grabbed headlines when it made a $4bn                  Establishing the new benchmark crude price is
cash bid for Nordic and Baltic share markets opera-         significant because it bridges the time zone
tor OMX, topping Nasdaq’s previous price of $3.7bn.         between EU and Asian markets. “This is an historic
The bid, at $32.80 a share, was made via Bourse             and long-awaited day, and marks the culmination of
Dubai’s Sweden-based subsidiary, BD Stockholm. In           almost three years of intensive planning and prepa-
September 2007 OMX officials had yet to settle on           ration,” DME’s chairman, Ahmad Sharaf, told OBG.
an offer. Not resting on its laurels, Dubai Bourse has      “The DME is now establishing a global benchmark
been gearing up for roadshows in New York to                for the pricing of Middle East sour crude oil through
showcase at least 14 companies to investors in              the trading of our Oman crude oil futures contract.”
November 2007, including Emaar Properties, the                 The Dubai Gold and Commodities Exchange also
largest Arab real estate developer by market value.         reported its best-ever month in March 2007, with
   Another blockbuster event was the opening of             85,813 contracts worth $2.72bn traded. Gold con-
the Middle East’s first international energy futures        tracts accounted for more than 71,000 trades, while
and commodities exchange. Established in June               about 14,400 currency futures contracts were




   Another major initiative is meant to address con-        as spending on scientific research, which
cerns about the relatively low level of education           amounts to an average of 0.2% of GDP, while
and small amount of research being conducted                the US and European countries spend between
across the region. The Mohammed bin Rashid Al               2.5% and 5%. According to international organ-
Maktoum Foundation was established in May 2007              isations’ human development reports, literary
with an endowment of Dh37bn ($10.08bn).                     and intellectual works published in Arab coun-
   The foundation will provide university scholar-          tries represent only 0.08% of the world’s total
ships and fund research centres across the region.          output of such work. To compare, this is far less
In addition, it will provide leadership programmes          than those published in Turkey alone.
for youth in government, the private sector and in             Unemployment in the region is 14% and it
non-governmental organisations. Scholarships and            has been estimated that 15m jobs are needed
funding for research will be given to academics             right now in the Arab world. About 74m-85m
and researchers in the region. It is the largest ini-       new jobs will be needed over the next 20 years.
tiative of its kind in the Middle East. “The founda-        The business environment in the Arab world
tion’s mission is to invest in knowledge and human          needs to be improved if these jobs are to be
development, focusing specifically on research,             created, but there are challenges that will need
education and promoting equal opportunities for             to be overcome, Sheikh Mohammed said.
the personal growth and success of our youth,”                 The foundation will undertake concrete ini-
Sheikh Mohammed said. “The foundation’s pro-                tiatives to encourage innovation and entrepre-
grammes are also aimed at enhancing the standing            neurship throughout the region, thus creating
of scholars and intellectuals in the Arab world.”           significant new employment opportunities and
   “There is a wide knowledge gap between the               providing hope for the region’s youth.
Arab world and the developed world in the West                 “We have a population in which half of its
and in Asia,” said Sheikh Mohammed. “Our only               members are under the age of 20, and it is our
choice is to bridge this gap as quickly as possible,        responsibility to develop this human capital to             The Sheikh Mohammed bin
                                                                                                                        Rashid Al Maktoum
because our age is defined by knowledge.”                   the best of our ability,” Sheikh Mohammed said.
                                                                                                                        Foundation was established
   Outside of the Gulf, illiteracy is still a major chal-   “We have the vision and the will to set the                 in May 2007 with an
lenge in the Middle East, and this in turn is limiting      stage for the benefit of future generations                 endowment of more than
economic growth and wider development. Perhaps              through the development of this foundation,                 $10bn. It is aimed at
the most alarming indicators are the 18% illiteracy         which will provide the prerequisites for moving             addressing development
                                                                                                                        concerns in Arab countries,
rate in the under-15 age group and the 43% illiter-         our region forward.” The foundation will be
                                                                                                                        including research
acy amongst females in the region. Other indica-            based in the UAE and will start implement-                  capabilities, creative work,
tors apply more evenly across the Arab world, such          ing its programmes in late 2007 or early 2008.              educational gaps and rising
                                                                                                                        employment needs.


                                                                                                THE REPORT Dubai 2007
34                                  ECONOMY OVERVIEW



                                                                                                       and yen – combined to contribute to the surge in US
                                                                                                       imports. The UAE will likely remain the US’s largest
                                                                                                       trading partner in the Arab world for the third
                                                                                                       straight year in 2007, as it is expected to import
                                                                                                       almost $14.8bn worth of US goods, according to a
                                                                                                       government report. In 2006 UAE residents spent
                                                                                                       about $2500 per capita on goods from the US, and
                                                                                                       this is set to pass the $3000 mark in 2007.
                                                                                                          The US and UAE established a bilateral business
                                                                                                       group in May to help boost trade between the two
                                                                                                       countries. The US-UAE Business Council was
                                                                                                       launched at a ceremony in Washington, which was
                                                                                                       attended by executives from some of the US’s
                                                                                                       largest corporations, including Boeing and
                                                                                                       ExxonMobil, which are both sponsoring the council.
                                                                                                       Free trade negotiations have faltered over a number
                                                                                                       of obstacles, but the two countries have said they
                                                                                                       still want to forge closer trade links.
                                                                                                          Meanwhile, the GCC is likely to sign a free trade
                                                                                                       agreement (FTA) with the EU. The EU and the GCC
                                  Gold contracts accounted for more than 71,000 trades in March 2007
                                                                                                       signed an economic cooperation agreement in
Non-oil trade rose from           processed. These were led by trades in British                       1988. The agreement laid the framework for the
$76.4bn in 2005 to $86.2bn        pounds. According to figures from the World Gold                     expansion into a bilateral FTA, which has been in
in 2006. Exports increased
                                  Council, global demand for gold jewellery reached a                  negotiation for the past 18 years.
by more than 62% and
imports jumped from               record $14.5bn in second-quarter 2007, 37% higher                       The sticking points were issues such as market
$51.8bn to $86.2bn in the         than second-quarter 2006. Some have reported                         access, government procurement rules and intellec-
same period.                      that Dubai might also launch a gold exchange-trad-                   tual property rights. Reports have indicated that
                                  ed fund (ETF) in 2008. An ETF would offer investors                  most of these issues have been resolved, and the
                                  a dollar-based gold price without taking physical                    FTA could be signed by November 2007. The deal is
                                  delivery. The sharia-compliant fund could be listed                  expected to increase GCC exports to Europe and
                                  on the Dubai Gold and Commodities Exchange or                        attract more foreign investment in the member
                                  the Dubai International Financial Market.                            countries. GCC countries import EU goods worth
                                  TRADE COMPONENT: Gold is one of Dubai’s major                        €47.4bn, thus making the GCC Europe’s fifth-largest
                                  exports, along with aluminium and refined sugar.                     market in the world. GCC imports include cars, air-
                                  Non-oil trade surged from Dh280.5bn ($76.4bn) in                     craft, machinery and building materials. The GCC
                                  2005 to Dh316.4 ($86.2bn) in 2006.                                   exports crude oil, petrochemicals and aluminium
                                     Within this total, exports increased by more                      products worth €35.2bn to Europe.
                                  than 62%, and imports jumped from Dh190.4bn                          OUTLOOK: Most would agree that an economic
                                  ($51.8bn) to Dh220bn ($59.9bn), as major con-                        boom is hardly a curse. Many cities would clamour
                                  struction projects and a growing population fed                      for prolonged double-digit growth and a reputation
                                  demand. Dubai’s role as a trading hub was con-                       as a global hub for trade, logistics, finance and
                                  firmed by a rise in re-exports from Dh29.6bn                         tourism. While high oil prices have pumped massive
                                  ($8.1bn) in 2002 to Dh78.3bn ($21.3bn) in 2006.                      amounts of liquidity into the region, Dubai’s success
                                     While India, China and Pakistan are major trading                 rests on a long-term vision to create a diversified
                                  partners, the US and Europe remain key. The UAE                      economy that creates its own wealth.
                                  imported $11.9bn worth of US goods in 2006, more                        At the same time, there is a flipside to such rapid
                                  than any other Middle Eastern country. According to                  economic growth which threatens to undermine the
                                  a National US-Arab Chamber of Commerce report,                       affordable and attractive lifestyle that has drawn
                                  UAE imports from the US rose by over 40% between                     hundred of thousands of workers from both East
                                  2005 and 2006, more than double the level in 2004.                   and West to Dubai. Whether it is inflation, traffic
                                  The rapidly growing and diversified economy and                      jams or a housing shortage, the challenge going for-
                                  the declining US dollar – compared to a strong euro                  ward will be preserving and improving the quality of
                                                                                                       life for those working in the emirate.
  Trade (Dh bn)                                                                                           It may just be a matter of time before housing
                                                                                                       supply catches up with demand. Most who have vis-
                         2002             2003            2004            2005           2006
                                                                                                       ited Dubai are aware of the massive amounts of
  Imports                  90              109            149.05         190.41         219.87
                                                                                                       ongoing construction. Prices could ease once those
  Exports                 6.38             6.58            9.64           11.23          18.26
                                                                                                       homes are put on the market, but the government is
  Re-exports             29.62            37.75           57.04           78.82          78.31
                                                                                                       not taking any chances. Through a series of strate-
  Total non-oil trade    126.26           153.07          215.73         280.46         316.44
                                                                                                       gic plans, it is working to assure that the neces-
  SOURCE: Dubai Chamber of Commerce & Industry
                                                                                                       sary regulatory and legislative framework is in place.

                                  Oxford Business Group
                                                            ECONOMY ANALYSIS                                                                             37




                                                          Emerging markets in Asia may increase DIC’s investment returns




Looking East
The public and private sectors move to boost trade with Asia
Perhaps it was only a matter of time before Dubai’s          Another area of future cooperation could be the                    The UAE is China’s second-
government and business leaders began to develop          capital markets. While no Chinese companies have                      largest trade partner in the
                                                                                                                                Middle East, with current
closer economic ties with China. Current trade            listed on the Dubai International Financial Exchange
                                                                                                                                trade valued at about
between China and the UAE is worth Dh52bn                 (DIFX), there are signs of interest in China among                    $14.2bn per year. This is a
($14.2bn) per year. It has grown sixfold since 2000,      Dubai’s investors. For instance, Dubai International                  sixfold increase since 2000.
registering an increase of 31.8% in 2006 over the pre-    Capital (DIC), part of government-owned Dubai
vious year. The UAE is China’s second-largest trade       Holding, has indicated that it will invest more heavily
partner among the Gulf Cooperation Council (GCC)          in China in the future. DIC began in October 2004 as
countries and is the largest market for Chinese           a private equity company that focused largely on
exports in the region. Dubai’s officials, however, are    mature markets, mainly in Europe and the US. It plans
saying that is not enough and pressure is mounting to     to increase its assets from about $7.5bn to $25bn by
do more. They are urging investors to diversify trade     2010 by adding investments overseas, particularly in
and to engage in more long-term projects which can        emerging markets. By the time DIC’s assets hit $25bn,
pay dividends for years to come.                          the company aims for close to a 50:50 split between
   In April the UAE’s minister of economy, Sheikha        emerging and mature markets, and a significant por-
Lubna Al Qasimi, held talks with Chinese officials over   tion of that would be in China.
enhancing bilateral trade and economic cooperation.          Other UAE entities are similarly interested in China.
Sheikha Lubna said the $14.2bn worth of trade             Investment holding company Istithmar, which recent-
between the two countries was short of what could         ly had its $942m bid on luxury clothing chain Barneys
be achieved, and she asked Chinese technology firms       New York approved by US anti-trust authorities, has
to look at possible investments in the UAE.               pointed to the growing consumerism in China and its
   China is not simply a manufacturer of cheap, low-      new-found hunger for high-end goods.
quality goods but is increasingly producing electron-        China is a piece, albeit a large one, of a strategy to
ics and high-end goods. That was the core of the          tap into emerging economies, particularly in Asia. A
message in September 2007 at the China-Middle             recent report by Emirates Industrial Bank highlighted
East Investment Forum held in Dubai just days after       the increasing role of emerging markets in the 18.6%
Sheikh Mohammed bin Rashid Al Maktoum, the vice-          growth of UAE’s non-oil foreign trade during 2006.
president and prime minister of the UAE, as well as       The amount reached Dh340bn ($92.58bn), compared
the ruler of Dubai, visited Beijing. Trade between        with the Dh286.8bn ($78.1bn) registered in 2005.
China and Dubai alone is already at $11.5bn. GCC             Although tiny by comparison, Vietnam is represen-
countries, and the UAE, in particular, are seen as cen-   tative of the dynamic, relatively untapped markets
tres for China to trade with the wider Middle East,       which hold potential for Dubai. Vietnam has recorded
India and Pakistan, due to strong ties.                   an annual growth rate of more than 8% for years, and
   There will need to be several changes in order to      joined the WTO in early 2007. In September 2007
transform China from simply a trading nation to a         business delegations from Dubai and Vietnam met in
strategic partner. Increased trade flow with the UAE      Hanoi during a visit by Sheikh Mohammed. The visit                    Emerging markets
                                                                                                                                represented a 18.6% rise in
relies upon greater transparency, and Chinese mar-        was the first by a UAE leader since the two countries
                                                                                                                                the UAE’s non-oil foreign
kets are continuing to open up. In addition, political    established diplomatic ties in 1993.                                  trade in 2006, up from
and cultural exchange between the Middle East and            The trip was aimed at boosting trade and invest-                   $78.1bn in 2005 to
East Asia need to be improved before moving ahead.        ment with the fast-growing economy in South-east                      $92.58bn in 2006.


                                                                                                        THE REPORT Dubai 2007
38                             ECONOMY ANALYSIS



Vietnam and South Korea      Asia. The two sides signed memoranda of under-               “Many countries show great interest in SMEs, as
are also on the UAE’s list   standing on cooperation in industry, securities trad-     they are the most effective driver of the economy in
for building commercial
partnerships in emerging
                             ing and product standardisation.                          several emerging and developing countries,” Abdul
markets. Eastern Europe         Bilateral trade between the UAE and Vietnam            Rahman Saif Al Ghurair, Dubai Chamber’s first vice-
may be a target for closer   reached $165m in 2006, recording a growth rate of         chairman, said. “Dubai realised this fact and set
cooperation.                 46.2% during the past four years. The potential is high   strategic plans to boost SMEs through many contri-
                             for boosting bilateral trade, according to a Dubai        butions, initiatives and services that are still being
                             Chamber of Commerce and Industry study released           offered by Dubai Chamber to maintain the growth of
                             shortly before Sheikh Mohammed’s visit. It said that      such institutions.” He pointed out that the Chamber
                             the greatest potential investment opportunities in        supported SMEs by issuing certificates of origin to
                             the UAE and Vietnam exist through establishing joint      exporters and providing services to business groups
                             ventures in infrastructure and in sectors such as         and councils that represent different sectors.
                             tourism, manufacturing and financial services.               Dubai’s total non-oil trade with South Korea
                                Dubai Ports World already operates a container         reached Dh13.3bn ($3.62bn) in 2006. This represents
                             terminal in Vietnam, and Dubai-based Kingdom Hotel        90% of total UAE trade with Korea, as the UAE’s major
                             Investments said in January 2007 it planned to devel-     imports from Korea include machinery, vehicles and
                             op a $65m Raffles beachside resort in central             equipment. There are more than 122 Korean firms
                             Vietnam. In addition, about 4500 Vietnamese now           operating in Dubai and registered with the Chamber.
                             work in the UAE, so labour cooperation holds high            While Europe and the US are still key trading part-
                             potential for the two countries, as the UAE is in need    ners, Dubai is looking to diversify. There is plenty of
                             of workers for construction and other industries.         capital to spread around, given the ample liquidity in
                                Dubai’s business leaders are also adopting closer      the Gulf. Diversification is particularly important
                             ties with Korea, in particular working with small and     now, as uncertainty looms over the strength of the
                             medium-sized enterprises (SMEs). A delegation from        US economy. Countries such as China, Vietnam and
                             Dubai Chamber signed a memorandum of under-               South Korea represent the types of emerging markets
                             standing with the Korea Federation of Small and           which offer opportunity for investment, while mar-
                             Medium Business to boost economic and trade rela-         kets in Eastern Europe are also being explored.
                             tions and establish stronger economic partnerships        The key challenge now is how quickly all sides can
                             between the business communities in both countries.       gain the knowledge needed to maximise this potential.
                                                             ECONOMY VIEWPOINT                                          39




                                                           Sultan Ahmed bin Sulayem




Global aspirations
Sultan Ahmed bin Sulayem, Chairman, Dubai World, on the emirate’s
diversification and the appeal of Islamic investment vehicles
Dubai has developed an uncanny ability to maintain         ing property in New York, London and South Africa.
pole position in a region awash with energy and cash,      In a matter of just months, Istithmar has astutely
and not all of the emirate’s success can be attributed     positioned itself as an investment-holding compa-
to petrodollars. In addition to oil-based income,          ny, a private equity company and a real-estate
Dubai’s government has built itself a $1trn interna-       investor with enhanced international presence. It
tional investment portfolio, proving that its irrepress-   is planning offices in Shanghai and New York.
ible upward mobility is underpinned by its knowledge          Dubai World, which manages and supervises the
of the global nature of today’s business environment.      portfolio of businesses and projects for the Dubai
   Dubai has come into its own in the past five years,     government, pursues a carefully crafted business
launching wholeheartedly into measures to diversify        plan that places it in a rarefied league of the top-
the economy and divest state holdings. One major           10 global investors. 2007 is likely to see Dubai aim-
development was Dubai World, a multi-billion-dollar        ing even higher. The appetite is for direct equity
holding company created to consolidate the various         buyouts and value-added investments. While the
large-scale infrastructure and investment projects         investment limits are kept flexible, considerable
that underpin Dubai’s economic development.                emphasis is being placed on increasingly popular
   Dubai World spans five continents. With more than       Islamic or sharia-compliant products. The Dubai
50,000 employees and offerings in over 100 cities,         International Financial Exchange (DIFX), a year old
Dubai World is involved with development, hospitali-       now, has emerged as the world’s largest market for
ty, investment, commodities, marine services and           sukuk, the Islamic-compliant bonds. Recently,
ports, and free zones. The group’s expansion strategy      Dubai World’s property development arm, Nakheel,
is simple: increase international assets from 30% to       announced the world’s largest sukuk – a $3.52bn
50-60% in five years, even as assets at home contin-       Sukuk Al Ijarah listed on DIFX.
ue to grow. Dubai sees greater potential in Asia than         Dubai is positioning itself as the largest base for
Europe, and particularly in India and China.               Islamic banking and sharia-compliant financial
   Dubai World’s flagship company, DP World,               institutions west of Malaysia. Conservative esti-
serves as a good case study. It drew attention in          mates suggest that over $500bn of assets are now
December 2005 when it outbid the solidly estab-            managed according to Islamic principles.
lished Temasek Holdings owned PSA for P&O.                    To meet its ambitious expansion plan, Dubai
However, DP World subsequently ran headlong                World has joined hands with Dubai Islamic Bank to
into controversy over P&O’s US port operations.            launch a $5bn sector-specific family of private
This was quite a difficult moment for all in Dubai,        equity funds. We hope to leverage these funds to
especially when erroneous security concerns were           eventually complete transactions in excess of
being used for political capital by US politicians.        $10bn. Numerous external advisors, including
After careful consideration, DP World decided to           Norton Rose and Baker McKenzie as legal advisors,
exit the US fulfilling its promise to sell by divesting    Ernst & Young as auditors and The Bank of New
the assets to AIG in mid-December 2006.                    York as escrow agent, will support the funds. Dubai
   Dubai World’s investment arm, Istithmar, is even-       World intends for the sector-specific funds to
tually preparing to enter the Shanghai real estate         attract world-class talent and leading institutions
market but is waiting to time the move well. The           to the emirate, thereby contributing to the over-
company has spent the better part of 2006 acquir-          all development and enhanced visibility of the UAE.

                                                                                                THE REPORT Dubai 2007
40     ECONOMY INTERVIEW




     David Rubenstein




     Untapped potential
     OBG talks to David Rubenstein, Co-Founder and Managing Director,
     The Carlyle Group
     Could you elaborate on the role of private equity           region. We expect the trend to continue in this direc-
     in the economies of the UAE and the Middle East?            tion and eventually make the economies of the region
     RUBENSTEIN: Carlyle has built a global platform with        on a par with those of developed countries.
     33 offices in 21 countries and is one of the first glob-       Carlyle’s expanding team of 12 investment profes-
     al private equity firms to take an interest in the Middle   sionals is exploring opportunities throughout the
     East and North Africa (MENA) region. Carlyle brings a       Middle East, North Africa, Turkey and Pakistan. We are
     global presence, capital, industry expertise and man-       currently considering several investments in a variety
     agement know-how to companies that seek to devel-           of sectors including energy, transportation, logistics,
     op their products, expand into new markets, and             financial services, banking, health care and manufac-
     grow their revenue and profit margins. Investments in       turing. We hope to invest in a few of these transac-
     the MENA region will include leveraged buyouts,             tions in the coming months. Carlyle’s MENA team will
     growth capital, majority and minority stakes in private     invest primarily in healthy, growing companies from
     companies, and stakes in publicly listed companies.         offices in Cairo, Dubai and Istanbul. The team lever-
        We are a global investor. Our investor base includes     ages Carlyle’s expertise in various sectors, particular-
     some of the most prominent institutions within the          ly energy, financial services, health care, industrial,
     region, as well as other parts of the world. We believe     infrastructure, technology and transportation.
     people will work with us because we are capable of
     adding value where other players cannot. We bring           Since the pace of change is faster in Dubai, do you
     not just funding, but enormous experience across            foresee greater sophistication in the market?
     many core industry areas, and we have more than             RUBENSTEIN: The establishment of the Dubai
     180 companies in our global portfolio.                      International Financial Centre and the Dubai Financial
        The fact that population growth and economic             Services Authority have, and will continue to foster
     growth in the region exceed the global average is           greater sophistication in the broader MENA region.
     very attractive. We are making investments where,           We were delighted to open an office in Dubai, a
     five or 10 years down the line, those parameters will       dynamic and cosmopolitan city at the crossroads of
     be very important. That is essentially why the Middle       international business. Opening in Dubai is an impor-
     East market is so significant. The countries Carlyle is     tant part of our global expansion strategy and serves
     focusing on have strong economic fundamentals and           as the platform and hub from which we will build our
     are welcoming of direct foreign investment.                 local and regional investments. The Carlyle Group is
                                                                 keen to participate in the growing investment oppor-
     How would you gauge the potential for private               tunities inside the Middle East, a region that is home
     equity in the UAE and in the Middle East?                   to some of our most important investors.
     RUBENSTEIN: As a global firm with successful invest-
     ments in various economies, we combine local                How might the region best manage its relatively
     expertise with strong investment principals. This           new influx of superabundant liquidity?
     combination has resulted in a long history of consis-       RUBENSTEIN: Private equity is a logical place for
     tently exceptional returns to our investors. One of the     institutions and individuals to invest because it pro-
     factors we find particularly attractive about the           vides above market-value returns. For example, since
     MENA region is the ongoing liberalisation and mod-          Carlyle’s founding in 1987, we have returned to our
     ernisation of legal and regulatory systems across the       investors 26% net profit of fees on an annual basis.

     Oxford Business Group
                                                              ECONOMY ANALYSIS                                                                             41




                                                            The WEF praised the UAE’s transport and infrastructure improvements




Getting competitive
How the title “most competitive Arab economy” was won
A recent report by the World Economic Forum (WEF)           states. Tarek Youssef, a co-author of the report and                  The World Economic
gave credence to the observation that the UAE has           dean of the Dubai School of Government, told OBG,                     Forum’s annual economic
                                                                                                                                  competitiveness study
the most competitive economy in the Arab world,             “Unless we do something, it is possible that education
                                                                                                                                  ranked the UAE 29th out of
ranking the UAE 29th out of 40 nations considered to        can be a bottleneck in Dubai’s global aspirations. In                 40 fully developed
be at the most advanced stage of development. It            the global game, education, research and develop-                     countries. This put it ahead
was followed by Qatar and Kuwait. The WEF’s 2007            ment – these are big concerns.” This extends to high-                 of all other Arab countries.
“Arab World Competitiveness Report” credited the            er education and beyond. Very little research and
UAE for its sound economic management, which has            development is undertaken, and there are no major
further strengthened public institutions, infrastruc-       research centres linked to universities.
ture and technological readiness. It also noted that           Excessive inflation, unofficially as high as 15% in
the Ministry of Economy has made considerable               Dubai, was also tagged as a concern. It is hoped that
improvements in regard to the rule of law and corpo-        the housing shortages in Dubai and Abu Dhabi, which
rate governance in the past two years.                      are a major source of inflation, will be eliminated in
   “The United Arab Emirates continues to make great        the first quarter of 2008. And while Dubai has been
strides in diversifying its economy to become less          lauded for its hassle-free approach to dealing with
dependent on hydrocarbons,” the report stated. In           bureaucracy, the report warns of the growing amount
terms of infrastructure, it noted Dubai has an excel-       of red tape, primarily outside of the free zones. It says
lent road network, despite traffic problems. It also        businesses often have to deal with three levels of
notes the massive airport expansions underway in            government: the federal government, the emirate’s
Dubai and Jebel Ali. Electricity generation is also being   government and the municipality.
expanded with international partners, and there are            The report highlighted the considerable growth in
plans to create a national electricity grid.                the financial sector, with the well-established Abu
   The UAE does extremely well with the macroeco-           Dhabi Securities Market and Dubai Financial Market
nomic factors, ranking fifth out of 128 countries.          leading the way and the newer markets, such as
Specific areas of strength are the government sur-          Dubai International Financial Centre and Dubai
plus, low government debt and national savings. Yet         International Financial Exchange starting to gain trac-
the report goes on to state some of the challenges          tion, resulting in a high ranking on market efficiency.
that lie ahead. “Its performance is uneven and it still        The UAE also enjoys excellent IT infrastructure and
has major challenges and constraints to confront.           bandwidth, but prices for telecommunications servic-
These include its modest performance in all areas of        es are among the highest in the world. The arrival of
education and innovation, its lack of entrepreneur-         a second telecoms firm, du, in March 2007, however,
ship, and its high inflation rate,” it said.                has boosted competition and improved services. In
   The report emphasises that educational reforms           early September du reported that it expanded its net-
are needed at the primary and secondary levels. The         work coverage across the UAE.
federal government is responsible for primary educa-           On the whole, the report commended the UAE for
tion and secondary education, but new reforms will          rapidly diversifying its economy, building on already
devolve more responsibility to school districts, it said.   solid public institutions, infrastructure and techno-
   Education, of course, has important economic ram-        logical readiness. Going forward, it said, major chal-
ifications. “[A] lack of an educated workforce could        lenges will lie in upgrading education and providing
put current diversification efforts at risk,” the report    the incentives for business to increase R&D activity.

                                                                                                          THE REPORT Dubai 2007
42     ECONOMY VIEWPOINT




     Mohsin S Khan




     Moving forward
     Mohsin S Khan, Director, IMF Middle East and Central Asia Department,
     on the forces at work behind the fast-growing UAE
     In just five years, the UAE has become one of the      companies seeking to service regional markets.
     fastest-growing economies in the world, pulling up     Halliburton’s announcement, that it will shift its
     alongside the likes of China, India and Singapore.     corporate headquarters to Dubai, is just one recent
     Outward-oriented strategies, market-friendly poli-     example of multinationals choosing Dubai as a base
     cies, and fiscal prudence have been the primary        for their Middle Eastern operations.
     catalysts behind the country’s rapid economic             Private sector development has also been aided
     development and diversification. Since 2003, the       by abundant liquidity in the region and a large influx
     economy has grown at an average real rate of about     of expatriate labour – which by some estimates has
     10%, the highest among Middle East countries. In       reached about 25,000 workers per month – that
     fact, it is now the second-largest economy in the      has formed the basis for the boom in Dubai’s serv-
     Arab world, after Saudi Arabia, with GDP in 2006       ice industry, including trade, tourism, and financial
     reaching $170bn (about half of Saudi Arabia’s GDP).    services. Foreign direct investment has also con-
        The UAE’s swift expansion is not all about oil      tributed to a transfer of technology and expertise
     either – though it is, of course, true that over the   that has bolstered the emirate’s competitive envi-
     past three years, oil production increased by nearly   ronment and benefitted local companies.
     12% while oil prices soared from $29 per barrel in        The competitive positioning of the emirate’s large
     2003 to over $64 per barrel in 2006 – a whopping       quasi-public companies – such as Dubai Holding
     120% increase. Nevertheless, the economy contin-       and Dubai World – has played a key role in launch-
     ues to diversify away from hydrocarbons, driven by     ing Dubai onto the global map. For example, Dubai
     strong growth in the service industries. Whereas oil   Ports World (an affiliate of Dubai World) now man-
     contributed about 42% of real GDP in 1995, it now      ages about 43 terminals worldwide and maintains a
     accounts for only one quarter. The fact is that in     presence in more than 28 countries, including
     recent years the main engine of growth in the UAE      Australia, China and Germany, while Emaar Prop-
     has been the private, non-oil sector.                  erties has launched multibillion-dollar infrastruc-
        Since 2003, the non-oil sector has been expand-     ture and real estate projects in numerous countries
     ing at an average rate of 11.5% per year, again the    around the world. The contribution of these firms to
     highest in the Middle East and close to China’s for-   the UAE economy is quite substantial. For instance,
     midable growth rates. Manufacturing and construc-      the combined 2006 revenues of just two of the
     tion have been rising at record rates, but it is       biggest Dubai companies, Dubai Ports World and
     primarily the service industry, which now accounts     Emirates Airlines, are estimated at around $12bn, or
     for nearly half of real GDP, that is responsible for   about 7% of the UAE’s entire GDP.
     most of the expansion in the non-oil sector.              Dubai has also benefitted greatly from the estab-
        The heart of the UAE’s service industry is Dubai.   lishment of economic free zones that offer foreign
     Over the past two decades, Dubai has been trans-       investors considerable tax advantages and the
     formed into a vibrant, service-oriented economy        lucrative possibility of 100% ownership. The long-
     that has taken full advantage of globalisation. With   run economic impact of these zones will be sub-
     an efficient government system, a hospitable busi-     stantial. A good example is the Jebel Ali Free Zone,
     ness environment, and a laissez-faire approach to      which has already developed into a global trade
     private sector regulation, the emirate has devel-      centre. Its port currently handles more than
     oped into a major commercial hub for foreign           8m containers a year (almost twice the volume

     Oxford Business Group
                                                          ECONOMY VIEWPOINT                                          43




processed through all of India’s ports) and its gross   had declined by about 55% and 52% from their
profits are expected to exceed $180m in 2007. On        peaks in May and November 2005, respectively.
the financial side, there is the Dubai International    Speculative demand and overvaluation of shares, as
Financial Centre (DIFC). Although still quite young,    well as oversubscriptions to initial public offerings
the DIFC has already succeeded in attracting some       were among the many factors that contributed to
of the world’s largest financial institutions, while    the markets’ spectacular earlier performance. A
encouraging others, such as Standard Chartered, to      correction had to come, but fortunately it did not
relocate their regional headquarters to the DIFC.       significantly affect the soundness of the banking
   The future looks bright, although like other fast-   sector that, thanks to the strong supervisory struc-
growing economies, the UAE now faces multiple           ture put in place and managed by the UAE Central
challenges. Sustaining its high rates of growth over    Bank, continues to be very well capitalised and
the medium term is one. Inflation is another. The       strong. Moreover, the government has recognised
rapid expansion of the non-oil sector has resulted in   the need for capital market reforms in certain areas
supply bottlenecks, wage pressures, and asset and       and is already introducing a new securities law
consumer price increases as the country’s absorp-       based on the best international practices. Never-
tive capacity has yet to keep pace with the rapid       theless, the markets are relatively small and, in this
expansion in certain sectors, such as construction      respect, lifting restrictions on foreign ownership
and real estate. Signs of overheating started to        and increasing the role of institutional investors
emerge in 2005, and the trend continued in 2006         would help to foster the deepening of capital mar-
with inflation reaching 9% for the year.                kets where asset prices are closely aligned with
   Inflationary pressures have largely come from        their fundamental economic values, thus boosting
sharp increases in rents, especially in and around      investor confidence.
Dubai, where strong demand for housing has far             Overall, the UAE has had a remarkably successful
exceeded the supply of new housing units. Inflation     economic development and diversification experi-
has to be tackled because of the negative, long-        ence. Looking forward, the driving force behind
term effect that it may have on growth and the          future economic growth will continue to be the
competitiveness of the non-oil sector. Given the        non-oil, private sector. The service industries will
country’s fixed exchange-rate policy and free           remain competitive and continue to grow, support-
movement of capital, monetary policy has limited        ed by a diversified and talented pool of national and
effectiveness. However, with a large number of          expatriate workers and by the transfer of knowl-
housing units soon coming to market, inflation is       edge and expertise from investments by foreign
expected to stabilise in 2007 at about 6%. If this      companies. Although recent signs of overheating
does not turn out as expected, the UAE authorities      should be closely monitored, the easing of supply
may have to turn to fiscal policy and slow down gov-    bottlenecks over the medium term and the govern-
ernment spending to lower inflation.                    ment’s continued drive to implement market-ori-
   The capital markets also have to be watched.         ented reforms should foster an environment of
Although markets remain above their 2004 level,         macroeconomic stability and solidify the UAE’s posi-
they have still not fully rebounded from the correc-    tion as a regional hub for international business.
tion that started in 2005. As of March 2007, the Abu    The UAE and Dubai have already come quite a long
Dhabi Securities Market and Dubai Financial Market      way since 2003 and the sky appears to be the limit.

                                                                                             THE REPORT Dubai 2007
44                               ECONOMY ANALYSIS




                              Though still manageable for many, the cost of living in Dubai is rising




                              A hefty price tag
                              Addressing the soaring rents and generally high cost of living
                              Dubai may evoke an image of a place for working,                          markets in Dubai – one for existing tenancies and one
                              advancing a career, enjoying a comfortable lifestyle                      for new ones. There is no cap on how much landlords
                              and even saving some money. While much of this is                         can increase rent for new tenancies, so differences
                              still true, residents and visitors have noticed a steady                  between these and previous agreements can be as
                              increase in costs in the past few years. Wages, for                       high as 100%. One impact of these rising rental costs
                              some people, are not keeping pace with rising living                      is that residents are turning their sights to areas out-
                              costs, and some fear that unless addressed, Dubai                         side Dubai, particularly Sharjah, the report stated.
                              risks eroding its hard-earned reputation.                                    As the driving force behind Dubai’s inflation, spi-
                                 For a fourth straight year in 2007, living costs are                   ralling property prices have had an impact on all
                              expected to see a significant increase as demand                          aspects of life in the emirate, including education,
                              exceeds supply for accommodation, education and                           which in terms of price inflation is second only to
                              health care, according to a report by Kershaw                             accommodation. Again, rising rental costs are a factor,
                              Leonard, a Dubai-based recruitment consultancy. A                         because schools do not own the land their buildings
                              recent IMF report on inflation in the Gulf estimated                      occupy. The cost of education for expatriate families
                              the rate of inflation at around 10% across the UAE,                       is likely to continue rising, the study stated, especially
                              but stated that it could be much higher in Dubai.                         with the arrival of elite international schools.
                              Another study, by consultancy ECA International,                             Dubai is still affordable for people working in cer-
                              ranked the emirate as the 14th most expensive city to                     tain industries, but research has shown that in some
                              rent accommodation out of the 92 it surveyed. The                         sectors salaries and employee benefits are no longer
                              Kershaw Leonard study found rental costs in Dubai                         keeping up with the cost of living. One study found
                              are now on a par with Geneva, one of the most                             that while the cost of living in the UAE has risen by
                              expensive cities in Europe. For instance, a four-bed-                     28% in the past year, salaries rose on average by just
                              room villa in the Meadows development costs $6000                         15%. The sectors that registered the lowest salaries in
                              a month, while a similar villa in Geneva costs $6275.                     the region were education and academics; electron-
                                 Experts have said rocketing property prices are                        ics; and health service industries. By contrast those
                              having the biggest impact on the cost of living in                        working in law, gas and petrochemicals, banking and
                              Dubai. Many expatriates receive allowances for                            finance are best able to meet the cost of living, enjoy-
                              accommodation from their employers so they can                            ing the highest salaries.
                              afford the increases. Simply put, demand for housing                         According to experts, one reason why companies
                              continues to outstrip supply. Much property will be                       may have started to cut salaries is Dubai’s recent shift
                              coming on stream in 2007 and 2008, but it is uncer-                       from being a hardship post to a highly desirable place
                              tain whether demand will continue to rise further.                        to live and work. This means that employers no longer
Rental caps and a slew of        The biggest move made by the government to curb                        have to attract talented personnel to the region using
new property should           rental inflation was to introduce the rental cap, which                   only large paychecks. Some professionals are moving
temper Dubai’s                is having a real impact, the Kershaw Leonard study                        to other parts of the Gulf that are regarded as hard-
skyrocketing rental prices,
                              found. Across the city, increases in existing tenancy                     ship posts, such as Saudi Arabia or Kuwait, where they
which according to a study
by Kershaw Leonard, are       contracts have been capped at around 7%, with the                         can still command impressive salaries. But many still
reaching those of Geneva,     result that many have stayed the same as they were                        find it worth it to live in Dubai for the beaches,
one of the most expensive     in 2006. However, according to the study, this has cre-                   nightlife and security, and for the career opportuni-
cities in Europe.             ated a situation where there are two parallel rent                        ties, even if the bottom line is not what it used to be.

                              Oxford Business Group
                                                            ECONOMY VIEWPOINT                                          45




                                                          Belaid Rettab




Social responsibility is not a fad
Belaid Rettab, Executive Director, Dubai Ethics Resource Centre
(DERC), on the advantages of corporate social responsibility (CSR)
Interest in CSR has increased in the past six decades;    when entering markets in developed countries and
especially so in recent years. It has become an           when seeking to achieve premium prices.
increasingly salient feature of business strategy and        Firms with a good CSR programme can improve
something managers are expected to deliver. CSR is        relations with customers, investors, bankers, suppli-
becoming an essential part of corporate culture.          ers and competitors. It can also assist firms and their
   CSR can have positive effects on employee morale       employees build community ties, become socially
and commitment to the firm. Socially responsible          integrated and build a positive reputation. Reputation
employment practices, such as providing fair wages, a     may be destroyed when stakeholders withdraw their
clean and a safe working environment, training            support with threats of rogue behaviour from
opportunities, and health and education benefits for      employees, threats of misunderstanding from cus-
workers and their families, can reduce absenteeism        tomers, threats to value from investors, threats of
and staff turnover. Firms can also save on costs of       defection from partners, threats of legal action from
recruitment and training new employees. A recent          regulators, threats of illegitimacy from the communi-
National Business Events Study (NBES) survey indi-        ty and threats of exposure from the media.
cates that 79% of employees agree CSR is important           Customer satisfaction is integral to a successful
when considering whether or not to stay with an           business strategy. Hence, customer trust is essential
employer. DERC is working on a research programme         to maintaining good long-term relationships between
about employee attitudes toward CSR.                      the company and consumers. Consumer attitudes to
   Employees can be a company’s best ambassadors          CSR initiatives are nearly always positive. The
in terms of advertising. Training them to convey a par-   Millennium Poll of 25,000 citizens in 23 countries
ticular message about the brand to consumers can          found that almost 60% of people put social responsi-
be a valuable communication tool, especially when it      bility above brand reputation or financial factors
comes to explaining complex CSR issues that cannot        when forming impressions of companies. Other
easily be conveyed through simple advertising.            research has shown that the proportion of people
   CSR may also lead to more efficient processes,         who consider an organisation’s social responsibility
improvements in productivity, lower costs of compli-      “very important” when selecting a product has
ance and open up new market opportunities.                risen from 28% in 1998 to 46% in 2007. A CSR
Pollution prevention and the associated reorganisa-       Europe/MORI study in 2000 showed that 70% of
tion of production processes, material flows and sup-     European consumers say that a company's commit-
plier relationships create opportunities for the          ment to social responsibility was an important con-
company to strategically alter its production.            sideration when buying a product or service, and one
   A socially responsible company may benefit from        in five would pay more for those products.
savings associated with greater energy and raw-              DERC is preparing to conduct research and create a
material efficiency, as well as lower costs of waste      large survey to gauge consumer attitudes of CSR. The
handling and disposal. Dow Chemical Company has           results can potentially benefit a wide range of busi-
set a target of reducing production of 26 toxic chem-     ness activities. CSR enables firms to innovate and dif-
icals, which will save them €5.4m ($7.4m) per year.       ferentiate their products, which then leads to new
Being recognised as a socially responsible firm           markets and product developments. This innova-
through a CSR certification, such as the one we offer     tion can strengthen and sustain the reputation of
at Dubai Ethics Resource Centre, can be important         the firm and add value. And value translates to profit.

                                                                                               THE REPORT Dubai 2007

				
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