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Economy & Finance

Not Just Petrodollars: The UAE Economy

It has been 50 years since the UAE’s offshore oil fields were discovered, and the "black gold" has made the Emirates into one of the wealthiest countries worldwide. However, the UAE has also been trying to diversify its economy. Find out more about sectors and industries, issues and opportunities.

With regard to the UAE economy, the first thing to come to mind is — oil. However, the UAE’s booming oil and gas sector is of relatively recent date.

Before the Emirates became independent from the UK, their economy mainly relied on subsistence-level agriculture, fishing, pearl diving, and maritime trade in the Persian Gulf. The discovery of offshore oil fields in 1966, only five years before the emirates’ status as a British protectorate was to end, changed the situation drastically.

Today, the UAE economy is among the largest national economies in the Arab world, second only to neighboring Saudi Arabia, and the largest consumer market in the Middle East. Its natural resources have also transformed the UAE into one of the world’s richest countries, with a high per capita income. It still has some of the biggest oil and gas reserves worldwide, and they keep literally fueling the UAE economy.

However, the country’s reliance on the petroleum sector is also its weakest point. Not only are the reserves, no matter how abundant, bound to run out at some point, but the falling oil prices of the last few years have been hurting the UAE economy.

The Emirates are already increasing the variety of economic sectors, products, and services, though: the country’s strategic location as a trading hub for re-exports, its well-developed infrastructure, an open and transparent economy, and a politically stable environment are all advantages to benefit the more diversified UAE economy of the future.

A Brief Summary by Economic Sectors

Unsurprisingly, the oil and gas industry accounts for a considerable part of the UAE’s gross domestic product (GDP) — but not for quite as much as you might assume: due to said diversification strategy, fewer than 30% of the GDP come from extracting and exporting crude oil and natural gas. However, Abu Dhabi’s economy in particular strongly depends on its petrodollars, which have made the most populous emirate the richest one as well.

In total, about 60% of the UAE’s GDP are owing to the secondary sector (i.e. the petrochemical industry, construction, ship repair, selected light industries such as textile production, etc.). As agriculture and fishing make a negligible contribution of barely 1%, the rest of the country’s GDP comes from its flourishing service sector, for example finance, real estate, logistics, and tourism.

The tertiary sector also provides most jobs in the UAE economy: nearly four-fifths of the labor force (78%) are working in the service industry; 15% are employed in manufacturing, and the remaining 7% earn their living in agriculture or fishing.

A Decreasing GDP Growth

Lately, the growth of the UAE economy has slowed down somewhat: as mentioned above, the declining prices for crude oil hamper its economic development. But it’s not only Abu Dhabi’s oil revenues that have been affected.

Since Dubai relies to a large extent on service industries like finance and real estate, it was hit particularly hard by the global financial crisis of 2008/2009. In fact, the service hub of the UAE still hasn’t quite recovered from the fallout —but now it can no longer count that easily on petrodollars to pay off its huge public debt of a whopping 140 billion USD.

Thus, the GDP growth has been decreasing gradually. The growth rates for 2014 and 2015 are estimated to be 3.6% and 3.2%, respectively, while the prognosis for 2016 forecasts a growth rate of approximately 3%.

At least, the reduced growth of the UAE economy will probably not impact the inflation rate any further, after it rose to 2.3% in 2014 and to an estimated 3.7% in 2015. The slowed-down GDP increase isn’t expected to lead to more unemployment, either, but how it might influence planned investment in infrastructure projects remains to be seen.

A Business-Friendly Investment Climate

Despite the above-mentioned issues with the UAE economy, as well as other weaknesses, like its small domestic market and its dependence on imports, the Emirates still have a lot of potential. The government has invested huge parts of the oil-related revenues in sovereign-wealth funds and foreign-exchange reserves, and the UAE remain committed to exploring other energy sources in the long run, be it solar power or nuclear energy.

Moreover, the UAE economy is open to foreign direct investment, attracting entrepreneurs with the many free zones and their benefits for expatriate investors (e.g. tax exemptions, freedom from customs duty, full foreign ownership, holding property). Accordingly, the UAE does really well in several international rankings, such as the Ease of Doing Business Index 2015 (22 out of 189 countries), the Global Competitive Index 2015/16 (17 out of 140), and the Corruption Perceptions Index 2015 (23 out of 167).

A Diversifying Economy

Considering that Dubai is going to host the Expo 2020, this also means that essential infrastructure projects to improve public transportation can’t just be abandoned. Furthermore, the Expo 2020 could result in renewed activity in the construction sector and a general uptake in business tourism. A construction boom would also strengthen those local manufacturing industries that produce various construction materials, for example, cement, glass, or ceramics.

In addition to the Expo 2020 stimulating business tourism and building activities for hotels and conference centers, the UAE — especially Dubai — focuses on medical tourism as well. This may, in turn, lead to a greater interest in the healthcare sector and medical technology. In the service sector beyond tourism and theme parks, IT and telecommunications profit from locations like Dubai Internet City and Dubai Media City.

Last but not least, diversifying the UAE economy means more support for its chemical industry other than oil refineries (the country already produces chemical fertilizers and polymers), its steel and aluminum production, and its light industries. The current deficit with regard to sustainability topics such as waste management and recycling could also open up opportunities for branching out economically.

A Booming Job Market for Expats — And Its Dark Side

The UAE economy will need to address the issues with its workforce sooner or later. In the private sector, Emiratization has failed so far, and the economy still depends to a great extent on expat employees and migrant labor: an estimated 85% of its 4.9 million workforce are foreign residents.

On the one hand, this strengthens the UAE’s international ties. Partly owing to the huge influx of overseas worker from South Asia, India is among its most important trading partners.

On the other hand, though, migrant workers in blue-collar jobs often have to deal with abuse and exploitation. There aren’t any trade unions and the first anti-discrimination laws were only introduced very recently, in 2015. More importantly, work visas are usually sponsored by the employer.

Organizations like Human Rights Watch or the International Trade Union Confederation have repeatedly criticized practices such as withholding workers’ wages or confiscating their passports to hinder them from leaving the country. The harsh working conditions, especially in the construction sector and in domestic service jobs, are the dark side of the UAE economy.

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