The UAE economy can be divided into three clear geographic areas. First is the Dubai area, which is going through the classic emerging-economy growing pains. Construction everywhere and you cannot go anywhere without the word 'boom' following you around. Complete with its set of traffic problems, Dubai is the most mature and developed of the UAE geographic areas.

Not far behind is the giant Abu Dhabi, which has only recently unleashed its economic prowess and started spending billions on infrastructure, energy, construction, tourism and culture. In that sense, Abu Dhabi is the emerging Arab tiger within the UAE economy, and has the potential of easily outpacing Dubai's growth.

The third geographic area is that of the Northern Emirates, which are benefiting from the prosperity spilling over from Dubai. Clearly in an early stage of development, these emirates offer cheaper, viable business alternatives and are emerging as the hub for small to medium enterprises (SMEs). Together, the UAE's seven emirates, at various stages of their development cycle, present a formidable set of business opportunities for the investor community.

Among oil-rich nations, the UAE holds a special place as it has actively looked to move away from its oil dependence. A classic example of it was recently made evident when Abu Dhabi - which alone sits on 10 per cent of the world's oil reserves never mind sizeable gas deposits - launched plans for the world's first carbon-free city.

The new six-square kilometre energy, science and technology community is set to open in late 2009, and feature an integrated 'Green Community' in the heart of Abu Dhabi, using traditional planning principals of a walled city, together with existing technologies to achieve zero-carbon and zero-waste sustainable development. Projects such as these are setting the UAE apart from its Gulf counterparts, which are pursuing similar, although less successful, policies of diversification.

And while all seven emirates have been pursuing their own investment-driven strategies over the past few years, HH Sheikh Mohammed bin Rashid Al Maktoum, the UAE's Prime Minister and Vice-President, and Ruler of Dubai, recently announced the combination of all these disparate efforts into one cohesive unit called the UAE Federal Government Strategy until 2010.

"The strategy is based on HH Sheikh Khalifa bin Zayed Al Nahyan's National Programme established in December [2006]," said Sheikh Mohammed at the launch of the programme earlier this year. "This strategy is first and foremost executable as it is thorough, stems from reality and is built around the needs and aspirations of the nation," he noted. This is the first federal master blueprint that aims to chart the growth of the UAE. Its six areas of focus are: social development, economic development, government sector development, justice and safety, infrastructure and rural areas development.

Great progress
While the UAE government is ensuring that the country remains one of the world's most competitive economies, it is important to see what it has achieved over the past few years. The Ministry of Economy recently stated the country's nominal gross domestic product (GDP) rose 23.5 per cent to Dhs599 billion ($163.22 billion) last year from Dhs485 billion ($132.15 billion) in 2005 on the back of surging oil revenue and the blossoming of the real estate, manufacturing and trade sectors.

The UAE's Minister of Economy, Sheikha Lubna Al Qasimi has forecast that the economy should grow by more than 6.2 per cent in 2007. The International Monetary Fund (IMF) is even more bullish, expecting nominal GDP to reach Dhs684 billion ($186.38 billion), or a growth of 8.2 per cent in 2007. Non-oil GDP is expected to rise by 10 per cent, says the IMF. The country's crude oil exports stood at Dhs178 billion ($48.5 billion) as oil prices rose 21.5 per cent in 2006 to $65 per barrel over its average price of $53.50 per barrel in 2005.

But it is the country's nominal GDP of non-oil sectors that holds the key to future success. The sector grew to Dhs376 billion ($102.45 billion) in 2006 from Dhs212 billion ($57.77 billion) in 2005, contributing 63 per cent to overall GDP. The country's total trade reached Dhs873 billion ($237.87 billion) in 2006. Commodity imports in 2006 stood at Dhs359 billion ($97.82 billion) while commodity exports, including exports from free zones, rose to Dhs514 billion ($140.05 billion), helping the country achieve a trade surplus of Dhs155 billion ($42.23 billion).

"Judging from these indicators, we can say that the UAE economy is vibrant and strong. This performance also proves the correctness of our vision and strategy, which is based on diversification of our economic base," said Shaikha Lubna. The country's domestic investments stood at Dhs127.7 billion ($34.8 billion), achieving a 28.3 per cent growth, while per capita income rose to Dhs139,000 ($37,875) compared to Dhs110,000 ($29,973) in 2005, a ministry report noted.

Clear winds?
It is not smooth sailing all the way, though. The growing pains of an emerging economy are all too evident in the UAE, especially Dubai, which is at the core of the commercial developments. From the irritating urban congestion to the more serious high cost of living, the authorities have enough challenges to remain far from complacent about Dubai's economic strides. Similar issues are also emerging in Abu Dhabi as it faces higher rents and congestion.

Rising rents, a shortage in supply of raw materials and strained infrastructure is impacting on the emirates' growth path. Although Dubai has managed to shrug off these limitations, registering double-digit growth over the past few years, analysts are worried about constraints to the economy. Dubai has already announced a number of initiatives to combat the challenge, but rising costs continue to persist.

The government has issued a blanket cap of 15 per cent on rents, which offers short-term relief, but is a double-edged sword as it may dissuade investors who are buying into Dubai properties attracted by its high rental values. On the other side of the spectrum, forecasts also suggest that Dubai could face a supply glut over the next few years in the areas of hotels, retail, commercial and residential property, which have been announced over the past few years and are gradually coming on to the market.

Free wheeling
Regardless of the trials and tribulations of demand and supply, Dubai's success in attracting investments in its free zones is serving as the template for others in the region. The success of Jebel Ali Free ZoneJebel Ali Free Zone and Dubai Internet and Media Free Zones have now been extended to initiatives such as the Dubai International Financial CentreDubai International Financial Centre, Dubai Studio CityDubai Studio City, Dubai Healthcare CityDubai Healthcare City and Dubai Industrial CityDubai Industrial City, among others, all of whom have attracted investments in billions of dollars.

Last year, the UAE succeeded in attracting 60 per cent of the $26 billion foreign direct investment into the GCC, according to United Nation Conference on Economy and Trade (UNCTD). This came at a time when the total grown fixed capital formation reached Dhs121 billion ($32.97 billion) that comprises 20 per cent of total GDP in which the private sectors form 43 per cent, according to Ministry of Economy.

Free zones are not the only attraction. Bawadi, the massive hotel strip inside Dubailand, is set to generate investments of Dhs200 billion ($54.5 billion) over the next few years as the emirate aims to leave regional competition far behind in the tourism industry. With the increased investment, the number of hotels in the project will increase from 31 to 51, more than doubling the number of hotel rooms from 29,000 to 60,000, according to Saeed Al Muntafiq, Executive Chairman of TatweerTatweer, which is sponsoring the project.

The expansion is in line with Dubai's plan for tourism, which is set to contribute 11 per cent in annual growth to achieve a GDP of $108 billion by 2015. The decision comes close on the heels of the recent launch of the world's largest shopping area in Bawadi, with more than 40 million square feet of gross leaseable area within the mega project.

"Doubling the investment will secure Bawadi's position as a must-visit destination for tourists. The increase in both hotels and rooms will ensure that Dubai's hospitality industry can meet the projected demand," said Mohammad Gergawi, Chairman of Dubai Holding, the parent company of TatweerTatweer. When completed, Bawadi will have the highest concentration of hotels linked with the biggest shopping area in the world.

Dubai has outlined tourism as one of its cornerstones of development, according to the Dubai Strategic Plan 2007-2015, which targets an annual 13 per cent increase in GDP over the next eight years, with a real per capita GDP of $44,000 by 2015. "The Economic Development Plan will focus on those sectors that have made the most significant contribution to GDP, historically, and the continued exploitation of Dubai's 'first-mover' advantage, as well as the influx of significant levels of Foreign Direct Investment (FDI)," according to Sheikh Mohammed.

The initiative is being supplemented by massive programmes and projects such as Emirates airlineEmirates airline's 47-unit order for the superjumbo A380, and the Dhs130 billion Dubai World Central airportDubai World Central airport complex that aims to be one of the largest airport developments in the world, complete with logistics city, aviation city and residential areas.

A number of key tourism developments such as the Palm trilogy which will feature 210 hotels at the last count, the Tiger Woods Dubai community featuring a golf course designed by the world's most famous golfer, Universal City ($2.18 billion), City of Arabia featuring dinosaurs ($1.96 billion), the $3 billion Dubai Sport CityDubai Sport City, and $1 billion Marvel Comics theme park featuring comic heroes such as Spiderman, are some of the many high-profile projects that have been announced.

And it is not just superheroes coming to Dubai. Some of the world's most established institutions such as Lehman BrothersLehman Brothers, Carlyle GroupCarlyle Group, Goldman Sachs, MoodyMoody's and Standard & PoorStandard & Poor's now call Dubai their regional headquarters. HalliburtonHalliburton, the controversial but influential American energy construction company, has also moved its head office to Dubai, complete with CEO and key personnel.

All this hype, hoopla and buzz surrounding Dubai has taken its toll on the emirate. While the buzz has helped the city rank high on many competitive and global lists, it has also meant that the emirate has emerged as one of the more expensive cities to conduct business in. There are real dangers that the city, a victim of its own success, is pricing itself out of the market, as more inexpensive alternatives such as Manama, Doha or even Ras Al Khaimah (RAK), emerge.

The Dubai authorities are determined to clamp down on inflation and have put in place a number of checks, but acute supply of housing, commercial space and hotels means that suppliers continue to dictate terms. Inflation has impacted all of the UAE, but the IMF estimates that the price monster is expected to fall to eight per cent this year from its estimate of 10 per cent in 2006.

"We believe inflation will slow down in the UAE," Mohsin Khan, IMF's regional head said, adding that any declines will be marginal. Inflation in the UAE stood at 13 per cent in 2006, according to Standard Chartered Bank. "We initially expected inflation to drop more, but now we believe it will only drop marginally," said Khan.

Northern lights
Dubai's prosperity has spilled over to its northern neighbours who have seized the opportunity that have come their way. Sharjah has also seen its rental values increase and its GDP rise to Dhs42.8 billion ($11.7 billion), an increase of nearly 20 per cent over 2005. The emirate continues to be the hub for SMEs and is estimated to host 40 per cent of the country's industrial activity.

Last year, the manufacturing sector contributed Dhs7 billion ($1.91 billion) to the emirates, nearly a 16 per cent improvement over the previous year. That figure is set to rise as new manufacturing developments come on stream. Emirates Industrial City, sponsored by Al Hanoo GroupAl Hanoo Group, is expected to offer space to 3,000 light and medium industrial facilities along with retail and residential area, when fully complete. The Sharjah Investment Centre is also being developed as a greenfield site for light and medium industrial factories, looking to capitalise on the UAE economy, without paying Dubai prices.

Real estate developments along the Al Khan and Lagoon areas are also bolstering the emirate's claim as a family-oriented destination for tourists and residents alike. In fact, Sharjah, not known for its tourist spots, has seen hotel occupancy rates rise to record highs. The Sharjah Commerce and Tourism Department figures show that the volume of tourists to the emirate last year reached 1.3 million, compared to 600,000 in 2001. The overall occupancy rate in the emirate's hotels and hotel apartments reached 82 per cent.

While the total number of hotels and hotel apartments increased to 74 in 2006 (24 hotels and 50 hotel apartments), the first quarter of this year saw 15 new hotels enter the market (two hotels and 13 hotel apartments) taking the total number of hotel facilities in Sharjah to 89 hotels and hotel apartment (26 hotels and 63 hotel apartments). These new hotels have taken the total number of rooms in the entire emirate to over 7,000.

The emirate has already scored a hit with the low-cost carrier Air ArabiaAir Arabia, which is in the middle of a stock flotation, and has also announced plans to launch a new Dhs250 million ($68 million) airport at Sir Abu Nu'air, an island off the emirate's coast. Other figures also suggest that the emirate's business horizon is growing. In the first three months of this year, the Sharjah Economic Development Department issued more than 1,400 new business licenses and renewed 9,626 others while the Sharjah Airport Free ZoneSharjah Airport Free Zone registered 121 new operations during the same period.

Further north, RAK is punching above its weight, with a string of initiatives revolving around investments, tourism and real estate. The emirate is looking to raise its five-star hotel room count of 1,190 with the launch of nearly 40 news hotels over the next few years. In the last year, tourist arrivals increased from 156,639 in 2005 to 500,000 in 2006. The increase can be directly linked to the concerted local and international marketing efforts being made by the RAK Government.

The Dhs850 million ($232 million) RAK AirwaysRAK Airways, set for launch this year, will no doubt increase that tourist flow as the emirate emerges as an alternative tourist destination. Rakeen, the master planner for RAK, is currently working on 14 developments. Significant among them are Al Marjan Islands, RAK Financial City and Gateway City. RAK PropertiesRAK Properties has the Mina Al Arab and Julphar Towers, all of which feature hotels and resorts, residential and commercial centres.

Capital rising
It is perhaps the Abu Dhabi economy that is billing up to be one of the most rife for opportunities in the region. Key drivers of the Abu Dhabi economy are Etihad AirwaysEtihad Airways, Aldar PropertiesAldar Properties, Tourism Development and Investment Centre (TDIC)Tourism Development and Investment Centre (TDIC), MubadalaMubadala and SorouhSorouh, all of which are initiating projects that will turn Abu Dhabi's economy on its head. Clearly, the emirate wants to ensure that its oil reserves are monetised and its energy strategy remains central to its economic forecast.

Investment bank Lehman BrothersLehman Brothers explains Abu Dhabi's strategic energy policy: "[Abu Dhabi] has used three government-owned entities, two of which have been in place for a while (IPIC, or International Petroleum Investment CoIPIC, or International Petroleum Investment Co; and Mubadala GroupMubadala Group), and a new one, TAQA (Abu Dhabi National Energy)TAQA (Abu Dhabi National Energy), which was pieced together from local companies and reborn as an international entity, helping the emirate to place a good portion of the $1 billion it is investing each week. The three are buying assets, some passively, some actively in regional and global markets, upstream, downstream, midstream and in related areas, including power generation.

"Taqa's approach has been far more direct and assertive since its founding in 2005 as the company whose assets are in the emirate's desalination plants and power generating capacity. It is already becoming an upstream European company, having bought Talisman and BP oil and gas assets in the North Sea. It has become a power generator in the US and North Africa, and is targeting asset growth from $14 billion at the start of this year to doubling that by the end of 2007 and doubling it again by the end of the decade."

MubadalaMubadala is similarly focusing on passive as well as active investments, sometimes in conjunction with the other Abu Dhabi enterprises and sometimes on its own, including upstream projects in North Africa (Libya), Oman and Qatar. MubadalaMubadala also has a stake in Aldar PropertiesAldar Properties, which is expected to revolutionise real estate development in Abu Dhabi, similar to what EmaarEmaar did for Dubai.

Aldar's project portfolio includes the $40 billion Yas Island, which occupies 25 million square metres, featuring the world's first 'Ferrari World' themed park, water park, and retail development of 3.2 million square feet retail area, parkland golf courses, lagoon hotels, marinas, polo clubs, apartments and villas, as well as food and beverage outlets. The first phase of the project is due for completion in 2008 while the entire project is due for completion by 2014.

Aldar is also developing the $18 billion Al Raha Beach development, covering 5.2 million square metres of natural beachfront providing residential, commercial, cultural, entertainment and public facilities. The development, due for completion by 2016, consists of eight districts housing 120,000 residents. The property giant will also develop 30 hotels in seven years. The company is also involved in developing labour cities for 35,000 workers in Abu Dhabi and another in Al Ain for 15,000 workers before the end of year 2007.

It is Abu Dhabi's Tourism Development and Investment Authority, which is leading the capital's tourism initiative with a string of projects, including the eight-piece Desert Islands. The 87-square kilometre Sir Bani Yas Island, which lies eight kilometres off the mainland, is the heart of the destination. Sir Bani Yas is approximately the same size as the South Atlantic Ocean's Ascension Island or Guernsey in the Channel Islands.

The tourism industry in Abu Dhabi last year generated Dh8.68 billion in revenue from 1.35 million hotel guests, representing a per capita average spend of Dh6,430 per visit, according to government statistics. Abu Dhabi has 10,000 guest rooms, which is expected to grow by 60 per cent by in two years and 150 per cent by 2015.

As the capital builds its tourism infrastructure, Etihad AirwaysEtihad Airways is responsible for fetching tourists and has an aggressive route network planned for the next few years. But the airline is already making an impact, with international tourist arrivals growing 12 per cent to 1.35 million last year compared to 1.21 million in 2005.

But the capital is conscious that it does not want to be seen as a mirror to the Dubai model, and has initiated a strong cultural bent, which will pepper its $54 billion investment in tourism. This has been showcased especially at the $27 billion Saadiyat (Happiness) Island, a 26 sq/km offshore development. The development will feature one of France's most famous museums exhibited in a new arts centre, the Louvre Abu Dhabi, scheduled to open in 2012.

Under the deal, which covers 30 years, artworks from museums such as the Louvre, the Georges Pompidou Centre, the Musée d'Orsay and Versailles, designed by French architect Jean Nouvel. The overall project is expected to cost $2 billion to the Abu Dhabi exchequer. The Louvre will have to share the limelight with New York's Guggenheim Museum also on Saadiyat Island. The $400 million museum, the Guggenheim Abu Dhabi, will cover 30,000 square metres, making it the largest of the five Guggenheim museums.

But is all of this too much? Has Dubai overestimated its tourism target, has Abu Dhabi built one mixed-use island too many, will the Northern Emirates build their golf resorts, but nobody will come? Such speculation and conjecture continues to shadow the UAE's success.

As Sheikh Mohammad noted in his Dubai Strategic Plan speech: "When I announced my vision for Dubai in the year 2000, I spoke of economic aims for the year 2010. In fact, not only have these aims been realised, but they have been exceeded in half the time... In 2000, the plan was to increase GDP to $30 billion by 2010. This figure was exceeded in 2005, with GDP reaching $37 billion dollars.

"The plan also included an increase of GDP per capita to $23,000 by the year 2010. In 2005, the average GDP per capita reached $31,000. In other words, in five years we exceeded the economic targets that were originally planned for a 10-year period." The smart money is on the UAE meeting its target, or at the very least coming very close to it.

© Gulf Business 2007

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