Dubai Economic Outlook: Openness, Diversification to Boost Growth in 2018

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  • 3.5% growth expected in 2018, thanks to domestic and external factors
  • Dubai third after Luxembourg and Hong Kong in terms of openness to trade
  • Manufacturing accounts for 9.5% of Dubai’s GDP; wholesale& retail largest employer
  • Expo 2020 and Dubai Industrial Strategy chief drivers of future prospects

Diversification and the high degree of openness in Dubai along with the positive impact of global trends will boost economic growth in the emirate in 2018 and beyond, according to the ‘Dubai Economic Outlook’ report released on the sidelines of the ‘UAE Economic Outlook’ forum, which concluded today in Abu Dhabi. The report says that Dubai will achieve 3.5% growth in 2018, also drawing on the continued recovery in global trade and the highest growth rates in most developed economies.

The report reviews the major macro and sectoral levels developments in Dubai in 2016 and 2017, and points to the prospects for 2018 in the context of foreign direct investment, Expo 2020 and other transformational initiatives aimed at the sustainable development of the emirate in the medium term as well as regional and global trends. Macroeconomic factors such as GDP per capita, fiscal and monetary policy as well as developments in the wholesale, retail, banking, transport & storage, real estate & construction, manufacturing and hospitality sectors are captured in the report.

In terms of openness, Dubai ranks third in the world after Luxembourg and Hong Kong, with a high degree of dependence on foreign trade for income. Dubai’s openness ratio was 321% in 2016, meaning that trade flows were more than three times higher than the net value added in the economy. The total value of Dubai’s trade in non-oil goods was AED 1.28 trillion in 2016, but its trade balance has been characterised by a permanent deficit as Dubai is a global hub for global and regional trade. Dubai’s imports are much more than its total exports as most imports are transported to other emirates and to neighbouring countries without them being registered as re-exports. Dubai’s unique geographic location as a link between Asia and Europe, as well as its excellent cargo and air transport links and free zones, make it an attractive location for international companies to participate in global value chains (GVCs).

Foreign Investment

The extent of a country’s involvement in GVCs determines its attractiveness and ability to attract foreign direct investment, which plays a key role in promoting the country’s economic growth and development.

Total FDI into Dubai stood at AED 270.8 billion between 2011 and 2015 and in 2016, the emirate ranked 7th among the leading cities of the world attracting AED 25.5 billion in FDI. As an open economy, Dubai is affected by global trends but FDI receipts are expected to recover in 2017-2018.

It is important that Dubai continues to attract more foreign direct investment to maintain the growth of key sectors of its economy. The Dubai Industrial Strategy unveiled in 2016 to boost its industrial output and thus participate in GVCs require FDI in high-tech manufacturing industries. Industrial FDI into Dubai grew relatively slowly compared to other sectors and accounted for 4.2% of total investment in 2015. The wholesale and retail trade sector was the largest sector attracting FDI, accounting for 38.2% of the total in 2015, followed by the finance and insurance sector (22.1%) and the real estate sector (21.7%).

Dubai’s economy in 2016-2017

Dubai’s real GDP grew to AED 376.8 billion in 2016, up 2.9% from 2015. The Government of Dubai has in recent years adopted a fiscal policy to rationalise public spending by reducing budget deficit as a percentage of GDP from 2% in 2010 to 0.4% by 2013. Dubai has since maintained balanced accounts in 2015 and 2016 following which the government adopted an expansionary fiscal policy to stimulate the economy. The emirate’s success in reducing the budget deficit helped stabilise macroeconomic factors and resume growth in various sectors, especially banks, financial markets, trade, tourism and real estate.

One of the factors that boosted Dubai’s ability to balance its budget was a drop in public investment spending as many major projects were completed. The ratio of investment to total public spending has dropped from a peak of 36% in 2010 to about 17% in 2016, passing a low ratio of 11% in 2014. Government revenues, totalling AED 46.1 billion in 2016, came from tax revenues (customs duty and taxes on banks), fees and fines, oil revenues and investment returns.

Inflation in Dubai fell from an annual rate of 3.7% in 2015 to 2.9% in 2016 after rising steadily from 1.3% in 2013, due to slower price inflation in the housing, water, electricity, fuel and health sectors. In contrast, other major spending groups such as restaurants, hotels, food, non-alcoholic beverages, education and entertainment saw higher inflation rates in 2016. Rising interest rates in 2017 coupled with a liquidity contraction suggest that inflationary pressures will remain moderate in 2018.

Dubai’s official statistics are divided into 19 independent sectors and seven of these accounted for 77.2 per cent of Dubai’s GDP of AED 376.8 billion in 2016. The sectors include wholesale and retail trade, transport and storage, financial services and insurance, manufacturing, real estate activities, construction, accommodation and food services, ranked according to their respective GDP contribution.

Wholesale and retail trade

The wholesale and retail trade sector (which also includes the motor vehicles and motorcycles repair) is the largest sector in the economy of Dubai with an added value of AED 103.4 billion and 27.5% of GDP in 2016. The sector is the most heavily employed sector in Dubai and accounted for 22.4% of the workforce in 2015. It plays an important role in supporting consumer spending in the economy and h its backward and forward linkages sustain economic activities in other sectors such as transport, warehousing, food and accommodation. Real value added by the sector was 1.3%, less than the overall growth rate in 2016.

Foreign investment has helped turn Dubai into a global shopping and tourism destination. Gross fixed capital formation in wholesale and retail trade was AED 17.1 billion between 2013 and 2015 and total investment in the sector was AED 76 billion between 2011 and 2015. A labour-intensive but relatively low wage sector, wholesale and retail ranked seventh in terms of productivity in Dubai.

Transformative Industries

The manufacturing sector added AED 35.7 billion in 2016 – 9.5% of GDP – and employed 250,854 workers in 2015. It is the fourth largest sector in terms of value added and employment in the economy. The value added per worker amounted to AED 142,000 in 2015, 10th compared to other sectors. The related and smaller industrial sectors, such as mining, quarrying, electricity, steam and gas generation that have high levels of capital per worker, ranked first and second in terms of productivity, at AED 1.42 million and AED 910,000 respectively In 2015. The manufacturing sector saw a rebound in growth in 2016 with real output growing at 3.4%, higher than the real GDP growth rate of emirate in the same period.

The Dubai Economic Outlook report identifies a number of key factors influencing the future of growth in Dubai in the coming period. The most important of these are the hosting of Expo 2020, the implementation of the Dubai Industrial Strategy 2030 and the Dubai 2021 Plan.

Expo 2020

The expo is expected to create 270,000 new jobs and attract around 25 million visitors to Dubai. The construction, transportation and storage sectors will benefit from the additional infrastructure required to accommodate the visitors. Aggregate demand will be boosted by an additional AED 15 billion expected to be spent on roads and transport for Expo 2020 in government projects. The Dubai budget for 2018 has allocated AED 5 billion for 2018 and an equal amount for 2019 too.

Dubai’s tourism sector will also benefit from Expo 2020 as the hotel and restaurant sector will generate additional revenues during the event period. The wholesale and retail sectors also stand to gain. According to the International Expo Bureau, the cost of Shanghai Expo was about $ 4.2 billion and the profit achieved was $ 158 million. The six-month event drew 73 million visitors, including 4.25 million foreign visitors.

Industrial City

The Dubai Industrial Strategy 2030 has set a vision for Dubai to become a global platform for innovative, sustainable and knowledge-based industries based on five strategic objectives: to be a growth engine, to be innovation-based, to be a home for global businesses, to be environmentally sustainable supporting the green economy; and to adopt Islamic standards to manufacture halal products in order for Dubai to become the capital of Islamic economy. The challenge for Dubai is to transform the labour-intensive production sector and take a quantum leap to join the industrialised countries through productivity growth. The approach is based on intensifying the use of technology in manufacturing at the expense of labour, especially unskilled labour. Dubai Industrial Strategy 2030 has identified six industrial sectors to spearhead its economic transformation: aviation, maritime, pharmaceutical and medical equipment, aluminum and metallurgy, machinery and equipment, and consumer goods.

Export promotion

Growth in exports of high-tech products can be achieved through active participation in global value chains that will help them gain competitiveness in world markets. There are many consumer products produced and marketed within GVCs that allow companies in many different geographic locations around the world to collaborate with each other to manufacture one product. Dubai’s logistics network and excellent air, sea and land transport capabilities, as well as its strategic location between East Asia and Western Europe, will facilitate its economic transformation.

Global competitiveness

The Doing Business 2018 report of the World Bank ranks the UAE, represented in the survey with data from the emirate of Dubai, 21st behind Germany. The ranking though low compared to cities such as second-placed Singapore and fifth-placed Hong Kong, the UAE stands way ahead of its Gulf neighbours – Bahrain is 66th, Oman 71st, Qatar 83rd, Saudi Arabia 91st and Kuwait 96th.

Overall, the high rating received by the UAE is a proof of the country’s economic flexibility in terms of domestic capital mobilisation and FDI attraction. However, the examination of individual indicators may lead to areas for improvement, including regulatory reforms for added competitiveness. The UAE ranked first in terms of ease of paying taxes and access to electricity and received an above-average rating in dealing with construction permits, registering property tax, and protecting minority investors and enforcing contracts.

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