Back to Basics
One of the factors that distinguishes Dubai from many other regional economies is its comparatively low reliance on petroleum revenues. Although Dubai’s economy was built off the back of the oil and gas sector in the 1960s and 1970s, it now accounts for less than 2% of its GDP, and Dubai contributes less than 2% to the UAE’s total petroleum revenue, compared to more than 96% from Abu Dhabi, which generates nearly half of its GDP from oil and gas. This stands in contrast to the strength of Dubai’s non-oil sector, which accounts for more than 76% of non-oil GDP in the UAE. Indeed, Dubai’s role as a regional hub for business, finance, retail, and tourism is one of the main reasons it is expected to spearhead economic growth in the UAE in the coming years. While the petroleum sector, fueled by rising international oil prices, has led the initial recovery in the UAE, Abu Dhabi is now approaching maximum oil production capacity, and analysts are looking to Dubai, as the region’s non-oil economic leader, for the next wave of growth that will take the country’s economy through the next decade.
Prior to the global financial crisis, Dubai’s economic growth was fueled largely by its real estate and construction sectors, which accounted for nearly 30% of GDP in 2007. At that time, Dubai’s property sector was the fastest growing in the world, with construction and real estate reaching 23% and 30% growth, respectively, in 2007. Now, as Dubai looks set to spearhead regional recovery with the strength of its non-oil economy, the government is making remarkable strides in promoting economic diversification and sustainable, long-term investment. Dubai has renewed its focus on being a regional hub for business and trade and working to promote growth. As Hamad Buamim, Director General of the Dubai Chamber of Commerce and Industry (DCCI), told TBY in an interview, “the main lesson learned was about stability… and [the need to] focus on achieving sustainable growth over a longer period… the city is geared toward helping companies prosper with business-friendly laws, modern infrastructure, and a diverse and predominantly young workforce.” The success of Dubai’s efforts has been demonstrated by the extraordinary growth that the DCCI has experienced in the past few years. In 2011, the Chamber added over 10,000 new members, boosting by nearly 10% the current membership, a trend that already looks set to continue with an additional 2,000 members having joined the organization in 1Q2012.
The main drivers of growth in Dubai’s economy are now the Emirate’s traditional industries of shipping and logistics, tourism and retail, manufacturing, and financial services, all of which have rebounded to their pre-crisis levels and are now leading the way toward sustainable, long-term growth. As Sami Al Qamzi, Director General of Dubai Department of Economic Development (DED), explained to TBY, “the progressive build-up of dynamism and confidence visible across our key sectors demonstrates that 2012 will energize growth in Dubai.” In addition, many developers have now resumed construction projects that were halted in 2008 and 2009, which means that, despite the hit they have taken, the construction and real estate sectors still accounted for more than 20% of overall GDP in 2011.
Tourism, hospitality, and retail are some of Dubai’s largest industries, and the Emirate is often referred to as the shopping capital of the Middle East, drawing in huge numbers of shopping tourists from across the region and from as far afield as Eastern Europe, Africa, and South Asia. Taken all together, hospitality, along with wholesale and retail trade, accounted for nearly 34% of Dubai’s GDP in 2011. The two sectors showed strong growth in 2011, with wholesale, retail, and repairing services growing by 5.8% and the restaurant and hotel industry growing by 14.7%. The sectors look set for future growth with 9 million tourists expected to visit the UAE in 2012 and 16,000 hotel rooms under development to support the thriving MICE tourism industry.
The shipping and logistics sector is also playing a leading role in the growth of Dubai’s economy, with transport, storage, and communications accounting for nearly 14% of GDP in 2011. For centuries, Dubai has been known as a city of merchants, and in the past half-century, the Emirate has become a re-export hub for the region, serving as a gateway between the Middle East and the world. As Fahad Al Gergawi, CEO of the Foreign Investment Office of Dubai FDI, explained to TBY, refocusing the economy on Dubai’s shipping and logistics sector is an important element of returning to long-term, stable growth in Dubai. “Dubai is a trading hub with strong logistics facilities and infrastructure. Focusing on those fundamentals is what brought Dubai back, and of course with new sectors developing we are seeing new avenues and potential for growth,” said Al Gergawi. One positive step has been the UAE’s entry into the ATA Carnet system, which makes it easier to import goods for re-export. As Hamad Buamim explained to TBY, “the ATA Carnet is an international customs document that permits the duty-free and tax-free temporary import of goods for up to one year… [The] system will make importing products and goods for display much simpler and more affordable [and] will be a major boost for companies working in the sector.”
Manufacturing has also been a strong leader in Dubai’s post-crisis growth, with the manufacturing sector growing by nearly 12% in 2011 to account for more than 14% of GDP, and a further 6% expansion expected for 2012. Although Dubai’s manufacturing and industrial sector is known for big names like DUBAL and Ducab, the sector is, in fact, dominated by SMEs, which account for 95% of the enterprise population and 42% of the workforce. In fact, in the economy as a whole, SMEs account for 40% of GDP. As a result, the government has made SME promotion a priority. As Al Qamzi explained, “our SME strategy focuses on enabling SMEs in Dubai to move to the next level of growth and compete on a global level through better access to capital and government incentives.” One new SME promotion initiative is the recently announced “Dubai SME 100,” which will identify top SME performers in Dubai and provide a measure of success to help them grow sustainably. Another recent initiative is the creation of the Dubai Center for the Amicable Settlement of Disputes, which DED set up in cooperation with the Dubai court system. For many SMEs that have difficulty affording the legal costs involved in settling disputes through the court system, the center will provide a fast and affordable alternative, which, according to Al Qamzi, is necessary to enable “an investment environment that meets the needs of SME owners.”
Dubai’s strong recovery has led to a resurgence of foreign investment in 2011 and 1H2012, fueled in part by active efforts from the government to shift the focus of the economy away from real estate and construction and instead promote diversified investment in Dubai’s traditional growth sectors. The Emirate attracted $7.4 billion in FDI inflows in 2011. As Al Gergawi told TBY, “In 2011 we saw an increasing number of investment enquiries compared to the previous year. This is because people are seeing more encouraging news, receiving better economic data, and realizing the uniqueness of Dubai as a global center.” At the same time, many of Dubai’s large family-owned conglomerates are showing an increasing amount of interest in forming joint ventures with foreign investors, making it even easier for entrepreneurs to enter the economy. Dubai has also benefited from the unrest caused by the Arab Spring movement and the eurozone crisis, as investors look for a safe haven. However, as Al Gergawi explained, “it is important to note that Dubai has been a safe haven for investment for many years, and will continue to be a preferred investment destination… because of the underlying fundamentals driving the economy.” This has not stopped Dubai’s government from working hard to further enhance its appeal to investors and reinforce its role as a regional hub. The Emirate has made significant strides in moving to upgrade its legal and regulatory framework to ensure an investor-friendly business environment. As Al Qamzi at the DED explained, “the global developments have enhanced our commitment to integrating international best practices in laws and regulations, and upholding the principles of transparency and excellence.” One major reform being undertaken is the new UAE bankruptcy law, which is set to be approved by end-2012. The law is aimed at simplifying bankruptcy processes, specifically for Dubai’s many listed and family-owned businesses, in order to make it easier for businesses to be rescued and for creditors to be paid. As Hamad Buamim explained to TBY, “this will have the effect of easing restructuring and offering out-of-court negotiations, which in turn will help attract more overseas investments.” As the economy has continued to grow and these policies make Dubai an even more attractive investment destination, 1Q2012 has already seen a substantial increase in investment applications, with FDI increasing by 50% to reach over $1 billion.
It is not surprising that the UAE, which became a WTO member in 1996 soon after the organization was founded, has historically geared itself toward an open trade policy. As Sheikha Lubna Bint Khalid Al Qasimi, the UAE Minister of Foreign Trade, explained to TBY in an interview, the country’s trade strategy in recent years of keeping tariffs low and non-tariff barriers simple has helped “to float us above the global crisis without compromising our trade liberalization.” Indeed, Dubai has seen remarkable export growth in 2011 as it works to diversify its trading partners. In 2011, the value of Dubai’s direct exports (not including re-exports or free zone exports) saw a 44% increase year-on-year, from $18.5 billion to $26.7 billion. According to Al Qasimi, Dubai is looking to expand its export presence in emerging markets such as Latin America, Africa, and Central Asia, as well as to expand its already strong ties with India, China, and South Korea.