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Dubai economy showed solid performance in 2015

 
 

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Oxford Business Group, 24 January 2016

The year was led by solid performance in established sectors of the economy, including financial services, transport, manufacturing and construction, which helped Dubai weather the knock-on effects of lower oil prices throughout 2015.

The emirate is expected to record full-year GDP growth of around 4%, according to estimates from the Department of Economic Development released in early December. Inflation cooled somewhat in the latter half of the year, as the consumer price index fell from 4.68% year-on-year (y-o-y) in May to 3.07% in November.

Looking ahead, Dubai’s drive to create a knowledge-led economy is set to gather further steam, bolstered by legal reforms and project rollouts that took place in 2015 against the backdrop of the UAE’s “Year of Innovation”.

Smart ambitions
Innovation and its role as a driver of entrepreneurship remained high on the agenda in 2015, with progress made on the Dubai Smart City (DSC) initiative. The programme, which plans to integrate all government services and facilities with the internet and mobile devices in the coming years, forms part of Dubai’s broader plan to extend connectivity and encourage investment in the emirate’s digital infrastructure.

The DSC programme was supported by related developments, including the launch of the Dubai Open Data Law, which will increase public access to non-sensitive government information.

Additionally, during a high-profile event in November entitled “Innovation Week”, around Dh300bn ($81.7bn) worth of innovation-oriented projects were announced.

Trade and investment expectations
Other milestones from 2015, aimed at physical rather than digital infrastructure, are also expected to spur investment and trade.

The Public-Private Partnership (PPP) Law, introduced in late October, will give infrastructure development greater flexibility, as projects in preparation for World Expo 2020 gain pace. The law codifies various models of PPP activity, including build-own-operate-transfer and design-build-operate schemes.

Investment in Dubai is also set to benefit from the new UAE Commercial Companies Law released in July, which aims to lower the bureaucratic hurdles for foreign firms looking to expand their footprint in the country.

Despite recent regional tensions, the easing of sanctions against Iran in mid-January signals further good news for Dubai, with the IMF predicting that the resumption of trade with its neighbour, particularly in non-hydrocarbons sectors, will add one percentage point to the UAE’s GDP growth between 2016 and 2018.
Dubai could see its trade reach extended further in the coming years, as the UAE continues negotiations on a possible free trade agreement with China.


The emirate also continued to strengthen its position as a global Islamic economic hub in 2015, buoyed by growing investor interest in sharia-compliant finance. Its efforts received a boost in December with the issuing of a law establishing the Emirates Global Centre for Accreditation.

Market indicators
While Dubai’s banking sector recorded 8.7% y-o-y credit growth in the third quarter of 2015, attributed in part to the lead up to World Expo 2020, Moody’s warned in early December that a liquidity crunch was expected in both the UAE and the broader GCC region.

The growth in international passengers at Dubai’s main airport over the past decade has also given other industries from tourism to retail a boost, and they are expected to continue to thrive on the aviation sector’s expansion this year even after the recent plunge in oil prices, economists said.

Dubai International Airport announced yesterday that it expects 79 million passengers this year, becoming the world’s busiest in terms of international traffic last year, overtaking London’s Heathrow.

“To have that position as a regional strategic hub, you need to have good transportation, good access to the rest of the region and the world,” said Razan Nasser, a Dubai-based economist at HSBC. “Dubai has that geographic and time zone advantage and it has played quite well upon that with the airport story. It makes it very strategic for businesses to locate their headquarters here. And it’s also definitely played into the tourism and the trade stories.”

The UAE economy has been given a push in the past couple of years by government spending on infrastructure that has included not only airports but other civil projects such as roads, hospitals and museums.

Last year the economy of the UAE grew by more than 4 per cent, and while this year it may be slowed by lower oil prices, economists say the part of the country’s GDP that is not heavily dependent on hydrocarbons to make money will still flourish, including transport and tourism.

The aviation industry is expected to contribute 32 per cent to Dubai’s GDP by 2020, according to government estimates.

“Dubai’s economy is much more diversified [than others in the Arabian Gulf,” said Alp Eke, a senior economist at National Bank of Abu Dhabi. “Lower oil prices are going to have a multidirectional effect. While it will lead to contraction in the oil-related sector, it will have a positive boost in retail, tourism and the transportation sectors.”

Since June, the price of crude has declined by 60 per cent amid waning demand from emerging markets and an increase in production from North America. Oil revenue pays for some 60 per cent of the federal budget.

Rapidly expanding airport hubs in Dubai, Abu Dhabi and Doha are not only grabbing market share from Heathrow but other longer-established rivals in Europe as more international air traffic is routed through the Arabian Gulf.

“This announcement reflects the success of Dubai’s economic strategy,” said Carla Slim, the Middle East and North Africa economist at Standard Chartered bank. “It cements Dubai’s position as a major tourist destination in the region but also as a gateway for trade, logistics and regional services.

“Given that these are the core sectors and drivers of Dubai’s economy, we are not surprised to see that the emirate is receiving dividends from its investments.”

Bond prices and credit default swaps saw relatively little movement in 2015, reflecting continuing investor confidence in Dubai’s sovereign debt, though market optimism waned somewhat towards the end of the year. The Dubai Financial Market General Index fell to a two-year low in the second week of December amid concerns over energy prices.

Dubai’s property market also cooled over the year, with residential sale prices falling by around 10% y-o-y in the third quarter of 2015, according to real estate consultancy JLL. Rental costs have also declined, albeit at a slower rate.

Major projects progress
While some markets softened in 2015, growth in the emirate was buoyed by the continued roll out of mega-projects, including the $545m phased Dubai Water Canal Project, which was 61% complete as of early January. Once the project is concluded, likely in late 2016, it will connect the Business Bay development with the Gulf.

Work is also advancing on other major initiatives, including the $1.6bn Bluewaters Island project, Dubai Creek Harbour, and the creative hub and free zone Dubai Design District, or d3. In the year ahead, ground is expected to be broken on additional ventures, such as Aladdin City.

Transport mega-projects also progressed in 2015, with approval given in April for Route 2020, a 14.5-km extension to Dubai Metro’s Red Line that will connect strategic hubs to the World Expo 2020 exhibition site. The project plans to break ground in April, according to the Roads and Transport Authority.

The drive to improve connectivity ahead of World Expo 2020 also saw Dubai International Airport (DIA), now the world’s busiest in terms of international travellers, record higher passenger traffic in 2015.

Ground operations firm Dnata said it handled a combined 256,000 passengers at DIA and Dubai World Central on December 18 – the busiest day of the year at both hubs – marking a 4% increase over 2014.

Meanwhile, the extension of the Al Maktoum International Airport, scheduled to be completed in early 2022, also moved ahead, with annual passenger-handling capacity set to rise from 5m in 2015 to 7m by early 2016, before scaling up to 130m upon completion.
Oxford Business Group
25 January

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