UAE Forecast – Executive Summary(Economic, Political)

The UAE is one of the most prosperous and stable countries in the Arab world despite the death of Sheikh Zayid, the architect of the federation. Internal tensions that exist tend to centre on family rivalries within and between the individual emirates. These rivalries have remained mostly behind the stage and are unlikely to cause any serious disruption to political stability while the two strongest emirates, Abu Dhabi and Dubai, appear to have conceded to each other’s status – Abu Dhabi as the political capital and Dubai the commercial capital.

Bowing to mounting pressure by the US and other countries since the 11 September terrorist bombings in the US in 2001, the UAE has taken a series of measures to combat money laundering and deny access of funds to suspected terrorists. The UAE was singled out for such demands given its open and liberal financial system and the presence of a large, mainly Asian, foreign community. The first move was to introduce the type of anti-laundering laws that have been virtually non-existent in the country and most other Middle Eastern nations. The enactment of this legislation was followed by a series of measures, including arrests of laundering suspects, the freezing of many suspected bank accounts and the closure of some money exchange shops. The Central Bank, which oversees the implementation of that law, has also tightened control over bank accounts and money transfers, requiring those who transfer more than AED2,000 (USD545) to prove their identity. The anti-laundering law includes tough prison terms and heavy fines against persons and banks involved in such operations. According to the law, the Central Bank has the powers to order a freeze on the funds of any suspected institution or individual for a period not exceeding seven working days. It should inform the account holder immediately of the freeze decision and demand him to provide his bank with all necessary documents proving that the account or the financial transaction is legal. The Central Bank measures also included tightened control of Hawala, a money transfer system outside the known banking service, suspected of being a channel for the illict funding of Al-Qaeda and other groups. In the wake of and in response to these new regulations there are now concerns that Al-Qaeda may well try to take advantage of the diamond trading industry following the launch of the Dubai Diamond Exchange in March 2004.

• The outlook for the domestic political scene will remain broadly stable, although there is a risk of the UAE becoming embroiled in regional tensions over Iran’s nuclear programme.

• The budget surplus will continue to narrow until 2012, owing to higher public spending. We forecast that the government will post deficits in 2013-15.

• We expect the financial sector to have stabilised by 2011, and the Central Bank will shift focus from increasing liquidity to controlling inflation. It will also review future policy under the guidance of a new advisory council.

• We estimate that real GDP grew by 2.1% in 2010. Real GDP growth is forecast to rise to 3.1% in 2011 and to continue to increase throughout the forecast period as several large investment projects come to fruition.

• We estimate that inflation averaged 0.8% in 2010. Inflation is forecast to average 2% in 2011-15, well below the highs of 2005-08, owing to a fall in housing costs.

• The current account will remain in surplus in 2011-15, at an average of 2.9% of GDP. The impact of a fall in oil prices in 2012-15 will be offset by strong growth in non-oil exports.

• Five members of the ruling family were removed from the Abu Dhabi Executive Council, which shrank in size from 18 to 14 members. Sheikh Hazza bin Zayed al-Nahyan was appointed as vice-chairman. • The two-day GCC summit ended with member countries predictably backing the UAE in its dispute with Iran over the Tunb islands and Abu Mousa.

• The Economist Intelligence Unit’s 2010 democracy index ranked the UAE 148th out of 167 countries, a fall of one place since 2009.

• Dubai’s leading government officials openly discussed the possibility of asset sales to service Dubai’s enormous debt, during the emirate’s first quarterly update on its economy.

• The UAE federal budget and the budgets of Dubai and Abu Dhabi are in the process of being finalised. The 2011 federal spending budget of Dh41bn (US$11.2bn) is 6% lower than the 2010 budget of Dh43.6bn.

• Axiom Telecom, a Dubai-based mobile-phone retailer, has cancelled its IPO, the first in two years in the UAE, owing to weak market conditions.

• Abu Dhabi has completed the construction of a 400-km pipeline to transport most of its oil overland, bypassing the Strait of Hormuz, which Iran has threatened to block in the past.

POLITICAL

The political scene will remain broadly stable in the forecast period. The president of the UAE and the ruler of Abu Dhabi, Sheikh Khalifa bin Zayed al-Nahyan, has the backing of the ruling families in the other six emirates, including the ruler of Dubai and prime minister of the UAE, Sheikh Mohammed bin Rashid al-Maktoum. Sheikh Khalifa also enjoys the support of his half-brother and designated crown prince, Sheikh Mohammed bin Zayed al-Nahyan, a younger, more dynamic figure, whose influence over policymaking is apparent in his reappointment as chairman of the Abu Dhabi Executive Council in the latest cabinet reshuffle in December. The UAE has no formal legal structure for determining seniority, but strong family ties between Abu Dhabi and Dubai should ensure smooth political transitions in the future.

Power will remain concentrated within the large ruling families, although relations within these families are sometimes fractious. Moreover, there is no formal structure for determining family seniority or claims on power. Sheikh Khalifa and Sheikh Mohammed bin Rashid are both young for Gulf rulers and are therefore expected to remain in power throughout the forecast period. Both have crown princes named as next in line, and there is little risk of problems with the succession processes when they are eventually required. However, the ruling family of Abu Dhabi is relatively large compared with that of Dubai, making succession more complicated, as demonstrated by the recent reshuffle of the Abu Dhabi Executive Council, which removed five members of the ruling family. In the smaller northern emirates, there is always a small risk of power struggles: for instance, the recent succession of Sheikh Saud bin Saqr al-Qasimi as ruler of Ras al-Khaimah was contested by his brother, Sheikh Khalid bin Saqr al-Qasimi. The rulers also have the backing of the small Emirati population, mainly owing to the government’s wealth-distribution programme. However, such programmes will probably be scaled back, albeit slowly, as they have put immense pressure on government budgets. This, in turn, may prompt the local population to push for greater consultation in government affairs.

The UAE will remain at risk from violent attacks by Islamist extremists. Its proximity to Iran and its status as a regional services hub render it vulnerable to regional security threats.

Election:

The UAE is governed by the Supreme Council, which comprises the emirs of the seven emirates. The Federal National Council (FNC) is an advisory body to the Supreme Council, and has 40 members, who are UAE nationals. The FNC has both a legislative and a supervisory role and is responsible for examining all proposed federal legislation. In December 2006 half of the FNC was elected by 6,689 hand-picked Emiratis. Its term had been set to expire in February 2009, but was extended by two years by the Supreme Council. The next election is expected to be held in February 2011, although the government has not implemented any measures to start the process. Members of the FNC have called for the creation of a fund financed by the government and private companies to ensure that all candidates have access to funding to campaign for elections, irrespective of emirate. The FNC, despite being only an advisory body, is becoming more assertive on legislative issues. Some members of the body have recently accused the UAE government of accepting the FNC’s recommendations without changing anything in practice. Nevertheless, the Economist Intelligence Unit does not expect significant change in the upcoming election, and progress on political reform during the forecast period will remain slow.

International Relations

The UAE will deepen its relations with the US and major Western powers over the forecast period, as the risk of conflict over Iran’s nuclear programme persists. The UAE will also continue to be an important ally of Western powers, as many of them have access to military facilities in the country, but Asia, especially China and India, will play an increasingly prominent role in the region.

At the same time, the UAE will try to maintain cordial relations with neighbouring Iran. The two-day Gulf Co-operation Council (GCC) summit in Abu Dhabi in December concluded with the member states publicly backing a peaceful resolution of the dispute over Iran’s nuclear activities through dialogue and negotiation, although, if confidential cables released by WikiLeaks, a whistle-blowing website, are to be believed, opinions on how to deal with the perceived threat of Iran’s nuclear programme are expressed more trenchantly behind closed doors. The Abu Dhabi leadership is concerned about a prospective Iranian nuclear weapons capability and will persuade other emirates, including Dubai, to be more vigilant about suspected illicit trading activity with the Islamic Republic. General mistrust of Iran and tensions in the region have pushed Abu Dhabi to complete the pipeline between Habshan and Fujairah, which will enable the emirate to transport its crude oil overland, bypassing the Strait of Hormuz. The UAE has reportedly taken a number of steps to tighten supervision of trade with Iran and has stated its intention to comply fully with the latest round of UN sanctions. However, it has also said that it is not interested in restricting Iranian businesses in the country beyond what it is legally obliged to do under the latest round of sanctions.

The UAE’s relations with its Gulf neighbours will remain good over the forecast period. Nonetheless, the UAE’s decision to pull out of the GCC monetary union project—following the decision to locate the proposed joint central bank in Riyadh, the Saudi capital—has soured relations between the UAE and Saudi Arabia. The decision by the GCC members to postpone the final stage of the customs union by a few years only serves to highlight the fractious and complex political relations between the GCC members. In addition, border disputes between the UAE and Saudi Arabia could re-emerge. Abu Dhabi has never accepted the 1974 border deal under which the large Shaybah oilfield and coastal region between Qatar and Abu Dhabi were defined as belonging to Saudi Arabia.

Economic Forecast

Dubai World gets new management

In mid-December Dubai’s ruler, Sheikh Mohammed bin Rashid al-Maktoum, appointed Sheikh Ahmed bin Said al-Maktoum as chairman of Dubai World (DW), replacing, Sultan Ahmed bin Sulayem, the beleaguered conglomerate’s chairman since its founding in 2006. The move further removes Mr Sulayem from the emirate’s business empire, and is a just one in a series of such moves initiated in late 2008. Mr Sulayem’s fall from grace has gone through several stages. In September 2009 he stepped down as the chief executive of DW, and two months later he was removed from the board of the Investment Corporation of Dubai (ICD), the strongest of the three state-owned entities that make up Dubai Inc. In April 2010 he was also ejected from the board of Nakheel, the property arm of DW.

The new board brings Dubai World under control of the inner circle

Sheikh Ahmed is best known for his role as chairman of Emirates, Dubai’s flagcarrier airline, as well as his involvement in managing Dubai’s debt crisis as chairman of the Supreme Fiscal Committee, which has oversight of the US$20bn support fund created in early 2009 with finance from the Abu Dhabi government. He is part of Sheikh Mohammed’s chosen few, who have been given the responsibility of restoring Dubai’s financial health. Other members of the board included Mohammed al-Shaibani, the director-general of the ruler’s court; Ahmed Humaid al-Tayer, a member of one of Dubai’s leading merchant families; Abdul-Rahman Saleh, the director of the Dubai Department of Finance; Hamad Mubarak Bu Amin, the director-general of the Dubai Chamber of Commerce and Industry; Saadi Abdul Rahim Hassan al-Rais (position not specified) and Sun Yong Chang, an adviser to the ICD. The restructuring seems to be, in effect, a takeover of DW by the ICD. The new board should provide some assurance to the financial markets as Dubai grapples with its debt pile. The timing of the move also seems logical as DW had been under the control of a chief restructuring officer, Aidan Birkett from Deloitte, a consultancy, for most of 2010. Mr Birkett’s role was, in effect, made redundant when DW’s creditors agreed to the proposed restructuring plan in September this year.

Sources: EIU, Jane’s