Managerial Economics - The Eurozone Crises Implications on the UAE Economy and what actions were...

8/11/2019 Managerial Economics - The Eurozone Crises Implications on the UAE Economy and what actions were taken by t

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Eurozone Crises Implications on the U E Economy

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The Eurozone Crises Implications on

the U E Economy and what actions

were taken by the U E to recover

A review of the eurozone economic crisis and what are the main reasons

behind it, and its impact on the United Arab Emirates economy

By: Ahmed Mohamed Fawzy AbdElRaouf

ESLSCA - MBA 45D

May 2014


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Table of Content

Executive Summary

Definition of the Eurozone, and what Countries it consist of.

How the monetary policy is managed across the union.

The EuroAdvantages and Disadvantages.

Crises rising in the Euro zone and its consequences.

o How did the crisis begin?

o Why do bonds yields go up in response to this type of crisis, and what are the

implications?

o What did European governments do about the crisis?

o Why is default such a major problem? Couldn't a country just walk away from its debts

and start fresh?

o How has the European debt crisis affected the financial markets?

o

What were the political issues involved?o Is fiscal austerity the answer?

Introduction on the UAE economy.

The three Strategic Characteristics to descript the UAE economic power.

o A key commercial and trading hub.

o Economic diversification fueling growth.

o Abu Dhabi and Dubai visions.

United Arab Emirates Economic Indicators

The Effect of the Euro crises and Recovery actions taken.

o Introduction.

o

Impact on UAE employment market.o Impact on UAE savings.

o Impact on investments.

o Impact on the UAE society.

o Economic key issues that was focused on during the improvement plan.

o Recent Economic Developments.

o UAE Economy (2009).

o Short term expectations in 2010.

o Conclusion.

UAE Economy Back On Track.

References.


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Executive Summary

The Eurozone Crises Implications on the UAE Economy and what actions were

taken by the UAE to recover

The European debt crisis is the shorthand term for Europes struggle to pay the debts it has built up inrecent decades. Five of the regions countries Greece, Portugal, Ireland, Italy, and Spainhave, tovarying degrees, failed to generate enough economic growth to make their ability to pay backbondholders the guarantee it was intended to be.

The crisis hit Dubai hardest, as it was heavily exposed to depressed real estate prices , Dubai lackedsufficient cash to meet its debt obligations, prompting global concern about its solvency.

The UAE Central Bank and Abu Dhabi-based banks bought the largest shares.

The UAE's strategic plan for the next few years focuses on diversification and creating moreopportunities for nationals through improved education and increased private sector employment

In the below research, I will go through an introduction to the Eurozone area, the monetary policy in theunion, its advantage and disadvantage, and the Economic crises that hit this region.Also I will go through an introduction to the United Arab Emirates strong economy, and how it wasaffected by the euro crises, and what action was taken by the UAE to recover.And finally a summery by the economic figures during 2013 after the UAE Economy Back on Track


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Definition of the Eurozone, and what Countries it consist of

The collective group of countries which use the Euro as their common currency. The Eurozone came

into being in 1999, and originally consisted of 11 countries. Now 17 countries are members of the

Eurozone.

The Eurozone does not include every country in the European Union (some countries are not yet

using the Euro), and does not include every country who is using the Euro (to become part of the

Eurozone, the country must use the Euro as its sole legal currency).

The Eurozone, officially called the euro area, is an economic and monetary union (EMU) of 18

European Union (EU) member states that have adopted the euro () as their common currency andsole legal tender.

The eurozone currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany,

Greece, Ireland, Italy, Latvia, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia,

and Spain.

Other EU states (except for the United Kingdom and Denmark) are obliged to join once they meet

the criteria to do so. No state has left and there are no provisions to do so or to be expelled.

Monaco, San Marino, the Vatican City and Andorra have formal agreements with the EU to use the

euro as their official currency and issue their own coins. Other states, like Kosovo and Montenegro,have adopted the euro unilaterally, but these countries do not formally form part of the eurozone and

do not have representation in the ECB or the Eurogroup.


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How the monetary policy is managed across the union

As a currency union, monetary rules are created and maintained by the European Central Bank.Monetary policy of the zone is the responsibility of the European Central Bank (ECB) which isgoverned by a president and a board of the heads of national central banks.

When the European Monetary Union was established, each member country had to give up somesovereignty by ceding the European Central Bank the authority to create money.

The principal task of the ECB is to keep inflation under control. Though there is no common

representation, governance or fiscal policy for the currency union, some co-operation does take place

through the Eurogroup, which makes political decisions regarding the eurozone and the euro. The

Eurogroup is composed of the finance ministers of eurozone states, but in emergencies, national leaders

also form the Eurogroup.

Since the late-2000s financial crisis, the eurozone has established and used provisions for granting

emergency loans to member states in return for the enactment of economic reforms. The eurozone hasalso enacted some limited fiscal integration, for example in peer review of each other's national budgets.

The issue is highly political and in a state of flux as of 2011 in terms of what further provisions will be

agreed for eurozone reform.


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The EuroAdvantages and Disadvantages

The Euro was introduced on New Years Day 1999 as an electronic trading currency, on January

1 2002 the came into being an actual currency, freely usable in all cash transactions throughout the

Euro zone. For individuals the effect was that they can use the Euro as a common currency throughout

the Euro zone.

As a concept creating a Single European Currency, the is not new, since the founding of the EU,

Europe has been working to towards this end, i.e. the . At present Britain, Denmark andSweden are the

only EU member states that have no intention to join the Euro-area.

As part of continuing efforts to promote prosperity within all the regions of European Union, the Euro is

part of efforts by EU member states to implement policies that will encourage the creation of a Single

European Market throughout the European Union.

The implementation of the Euro further assists in the removal of the current trade barriers that divide EU

economies; this is especially the case in the labor, finance and movement of goods in the markets ofEurope.

There appear to be many groups that are against the Euro within and out of the Euro-area.

The Disadvantages of the Euro

1. The impact of the Euro could be a reduced market share for local businesses due to greater

competition from elsewhere.

2. Increased potential for price wars, especially as large firms enter local markets, previously

served by smaller companies.

3. European consumers did fear that they would be cheated when the new notes and coins are

introducedprice changes were obvious!

4. 4.The biggest criticism is not one of economics, but loss of political control of monetary policy

and the fear of a heavier tax burden, because member states might find this the only way they

can manage rising inflation (especially in the non-Euro countries Great Britain, Sweden and

Demark).

The Advantages of the Euro are manly in the economic sense:

1. Both consumers and firms would are able to make significant savings in the cost of transactions

within the Euro-zone, leading to the development of Europe wide markets for goods and services

as a result of not having to convert currencies. This is already benefiting many poor regions ofEurope.

2. Firms within the Euro zone are already finding it easier and cheaper to raise money to invest,

enabling businesses to improve their competitiveness on the world markets.


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3. The introduction of the was already demonstrating savings for business in reducing the cost of

transactions between member Euro-zone states. The enables cash received from several

different countries to be lumped together instantly and without conversion and deposited in the

highest interest earning country.

4. Clearer and better information on input costs and competitors prices enable improved

opportunities for long term planning and strategy formulation, as there will be less uncertainty

concerning prospective returns on foreign EU operations.

5. Euro zone economies are as part of a massive market are not expected to fluctuate as

dramatically as in the past from boom to bust. This added stability is expected to reduce

inflationary pressure and stimulate the economy of Europe.

Unfortunately there is no clear balance of advantages and disadvantages of the Euro; it appears to be

more a question of your own personal economic and political preferences, such as how governments

approach managing their monetary policy. For governments the question of joining the Euro is a trade

off on having higher unemployment and low inflation or lower unemployment with higher inflation;

while some governments see price stability as their objective.

Crises rising in the Euro zone and its consequences.

The Eurozone crisis (referred to as the Euro crisis) is an ongoing crisis that has been affecting the

countries of the Eurozone since early 2009, when a group of 10 central and eastern European banks

asked for a bailout.

At the time, the European Commission released a forecast of a 1.8 per cent decline in EU economic

output for 2009.

One researcher has held that this was a combined government debt crisis, a banking crisis and a growth

and competitiveness crisis.


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The crisis made it difficult or impossible for some countries in the Eurozone to repay or refinance their

government debt without the assistance of third parties like the ECB or IMF. Moreover, banks in the

Eurozone were undercapitalized and have faced liquidity and debt problems. Additionally, economic

growth was slow in the whole of the Eurozone and was unequally distributed across the member states.

Governments of the states most severely affected by the crisis have coordinated their responses with a

committee dubbed "the Troika" formed by three international organizations: the European Commission,

the European Central Bank and the International Monetary Fund.

This is one of most important problems facing the world economy, but it is also one of the hardest tounderstand.

Below is a Q&A to help familiarize you with the basics of this critical issue.

How did the crisis begin?The global economy has experienced slow growth since the U.S. financial crisis of 2008-2009,

which has exposed the unsustainable fiscal policies of countries in Europe and around the globe. Greece,

which spent heartily for years and failed to undertake fiscal reforms, was one of the first to feel the pinchof weaker growth.

When growth slows, so do tax revenuesmaking high budget deficits unsustainable. The result was thatthe new Prime Minister George Papandreou, in late 2009, was forced to announce that previousgovernments had failed to reveal the size of the nations deficits. In truth, Greeces debts were so largethat they actually exceed the size of the nations entire economy, and the country could no longer hidethe problem.

Investors responded by demanding higher yields on Greeces bonds, which raised the cost of thecountrys debt burden and necessitated a series of bailouts by the European Union and European Central

Bank (ECB). The markets also began driving up bond yields in the other heavily indebted countries inthe region, anticipating problems similar to what occurred in Greece.

Why do bonds yields go up in response to this type of crisis, and what are the implications?The reason for rising bond yields is simple: if investors see higher risk associated with investing

in a countrys bonds, they will require a higher return to compensate them for that risk.

This begins a vicious cycle: the demand for higher yields equates to higher borrowing costs for thecountry in crisis, which leads to further fiscal strain, prompting investors to demand even higher yields,and so on.

A general loss of investor confidence typically causes the selling to affect not just the country inquestion, but also other countries with similarly weak financesan effect typically referred to ascontagion.


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What did European governments do about the crisis?

The European Union has taken action, but it has moved slowly since it requires the consent of allnations in the union. The primary course of action thus far has been a series of bailouts for Europestroubled economies.In spring, 2010, when the European Union and International Monetary Fund disbursed 110 billion euros(the equivalent of $163 billion) to Greece. Greece required a second bailout in mid-2011, this time worth

about $157 billion. On March 9, 2012, Greece and its creditors agreed to a debt restructuring that set thestage for another round of bailout funds. Ireland and Portugal also received bailouts, in November 2010and May 2011, respectively.

The Eurozone member states also created the European Financial Stability Facility (EFSF) to provideemergency lending to countries in financial difficulty.

The European Central Bank also has become involved. The ECB announced a plan, in August 2011, topurchase government bonds if necessary in order to keep yields from spiraling to a level that countriessuch as Italy and Spain could no longer afford.

In December 2011, the ECB made 489 ($639 billion) in credit available to the regions troubled banksat ultra-low rates, and then followed with a second round in February 2012. The name for this programwas the Long Term Refinancing Operation, or LTRO.

Numerous financial institutions had debt coming due in 2012, causing them to hold on to their reservesrather than extend loans. Slower loan growth, in turn, could weigh on economic growth and make thecrisis worse. As a result, the ECB sought to boost the banks' balance sheets to help forestall thispotential issue.

Although the actions by European policy makers usually helped stabilize the financial markets in theshort term, they were widely criticized as merely kicking the can down the road, or postponing a true

solution to a later date. In addition, a larger issue loomed: while smaller countries such as Greece aresmall enough to be rescued by the European Central Bank, Italy and Spain are too big to be saved. Theperilous state of the countries fiscal health was therefore a key issue for the markets at various points in2010, 2011, and 2012.

In 2012, the crisis reached a turning point when European Central Bank President Mario Draghiannounced that the ECB would do "whatever it takes" to keep the Eurozone together. Markets aroundthe world immediately rallied on the news, and yields in the troubled European countries fell sharplyduring the second half of the year.


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Why is default such a major problem? Couldnt a country just walk away from its debts and start

fresh?

Unfortunately, the solution isnt that simple for one critical reason: European banks remain oneof the largest holders of regions government debt, although they reduced their positions throughout thesecond half of 2011.

Banks are required to keep a certain amount of assets on their balance sheets relative to the amount ofdebt they hold. If a country defaults on its debt, the value of its bonds will plunge. For banks, this couldmean a sharp reduction in the amount of assets on their balance sheet and possible insolvency.

Due to the growing interconnectedness of the global financial system, a bank failure doesnt happen in avacuum. Instead, there is the possibility that a series of bank failures will spiral into a more destructivecontagion or domino effect.

The best example of this is the U.S. financial crisis, when a series of collapses by smaller financialinstitutions ultimately led to the failure of Lehman Brothers and the government bailouts or forcedtakeovers of many others. Since European governments are already struggling with their finances, there

is less latitude for government backstopping of this crisis compared to the one that hit the United States.

How has the European debt crisis affected the financial markets?The possibility of a contagion has made the European debt crisis a key focal point for the world

financial markets in the 2010-2012 periods. With the market turmoil of 2008 and 2009 in fairly recentmemory, investors reaction to any bad news out of Europe was swift: sell anything risky, and buy thegovernment bonds of the largest, most financially sound countries.

Typically, European bank stocksand the European markets as a wholeperformed much worse thantheir global counterparts during the times when the crisis was on center stage. The bond markets of theaffected nations also performed poorly, as rising yields means that prices are falling.

Once Draghi (European Central Bank President) announced the ECB's commitment to preserving theEurozone, markets rallied worldwide. In fact, the second half of 2012 brought none of the crisis-relateddisruptions that had characterized the prior two years.

What were the political issues involved?The political implications of the crisis were enormous. In the affected nations, the push toward

austerityor cutting expenses to reduce the gap between revenues and outlaysled to public protests inGreece and Spain and in the removal of the party in power in both Italy and Portugal.

On the national level, the crisis led to tensions between the fiscally sound countries, such as Germany,

and the higher-debt countries such as Greece. Germany pushed for Greece and other affected countriesto reform the budgets as a condition of providing aid, leading to elevated tensions within the EuropeanUnion.

After a great deal of debate, Greece ultimately agreed to cut spending and raise taxes. However, animportant obstacle to addressing the crisis was Germanys unwillingness to agree to a region-widesolution since it would have to foot a disproportionate percentage of the bill.


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The tension created the possibility that one or more European countries would eventually abandon theeuro (the regions common currency). On one hand, leaving the euro would allow a country to pursue itsown independent policy rather than being subject to the common policy for the 17 nations using thecurrency. But on the other, it would be an event of unprecedented magnitude for the global economy andfinancial markets.

This concern contributed to periodic weakness in the euro relative to other major global currenciesduring the crisis period.

Is fiscal austerity the answer?Not necessarily. Germanys push for austerity (higher taxes and lower spending) measures in the

regions smaller nations was problematic in that reduced government spending can lead to slowergrowth, which means lower tax revenues for countries to pay their bills. In turn, this made it moredifficult for the high-debt nations to dig themselves out.

The prospect of lower government spending led to massive public protests and made it more difficult for

policymakers to take all of the steps necessary to resolve the crisis. In addition, the entire region slippedinto a recession during 2012 due in part to these measures and the overall loss of confidence amongbusinesses and investors.


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Introduction on the UAE economy

The UAE has an open economy with a high per capita income and a sizable annual trade surplus.Successful efforts at economic diversification have reduced the portion of GDP based on oil and gas

output to 25%. Since the discovery of oil in the UAE more than 30 years ago, the country has undergonea profound transformation from an impoverished region of small desert principalities to a modern statewith a high standard of living.

The government has increased spending on job creation and infrastructure expansion and is opening uputilities to greater private sector involvement. In April 2004, the UAE signed a Trade and InvestmentFramework Agreement with Washington and in November 2004 agreed to undertake negotiationstoward a Free Trade Agreement with the US; however, those talks have not moved forward.

The country's Free Trade Zones - offering 100% foreign ownership and zero taxes - are helping to attractforeign investors.

The three Strategic Characteristics to descript the UAE economic power

A key commercial and trading hubThe UAE has established itself as a regional strategic trade hub, known for its business friendly

environment and a rapidly growing economy that has experienced significant expansion anddiversification over the last 10 years.

The UAE has ten percent of world's proven oil reserves and the world's fifth largest proven natural gasreserves. While oil production contributes significantly to generating income and spending,diversification remains the key governmental policy in achieving sustainable growth.

The government is focused on encouraging the private and non-oil sectors to maintain and grow theirroles in the economy. This diversification policy can be traced to the founding of the UAE, in 1971, withrevenue from oil and gas exports invested into hydrocarbon and other energy related industries.

The policy lead to the growth of related aluminum and petrochemical industries and as the UAE movedforward, the pure dependency on oil and gas exports has significantly decreased.


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Economic diversification fueling growth

Consequently, oil exports now account for only 30 percent of the country's total gross domesticproduct (GDP). In addition to being an important supplier of energy, the UAE is now becoming anincreasingly relevant consumer of energy.

As the country further moves from dependency on oil exports, it will maintain its tradition of

responsible energy stewardship as it develops its economy accelerates the development of additionalhydrocarbon reserves and emphasize the necessity of alternative sources of energy.Recently, local governments in the UAE have released policy documents.

These strategic policy plans reflect the major economic imperatives listed within the UAE FederalGovernment Strategy, which is aimed at stimulating economic growth, strengthening thecompetitiveness of the UAE economy, and upgrading regulations and legislation to match current andforecasted economic growth. Implicit within the federal government's policy is empowering UAEcitizens to take the lead in developing the economy.

In order to successfully implement such policy, the government has initiated a comprehensive program

that prioritizes leadership development and project management for Emiratis.

Initiatives under the strategy include the establishment of a national competitiveness council known asthe Emirates Competitiveness Council, a national statistics office, and a vocational training unit.

The strategy also commits to formulate policies for assisting small and medium-sized enterprises incooperation with local governments, and to prepare a framework for less intrusive regulation in both thefree zones and special economic zones.This framework would attend to issues such as labor conditions and environmental conservation.

Abu Dhabi and Dubai visions

As an example, the UAE's two largest economies, Abu Dhabi and Dubai, have both put togetherlocal policy documents that complement the vision set by the UAE Federal Government Strategy. Withover 90% of the UAE's oil reserves, Abu Dhabi nonetheless has launched several plans to move towardseconomic diversification.

Such plans are laid out in the Abu Dhabi Policy Agenda 2007-2008, the Abu Dhabi Strategic Plan 2008-2012 and the Abu Dhabi 2030 Plan. These plans are not simply aimed at moving away from the oil andgas sectors, but are mechanisms by which profits generated through these industries are usedstrategically to achieve and support broad diversification and a more well-rounded economy.

Dubai's economy on the other hand receives a percent input from oil and gas, with its main sources of

revenue coming from tourism, transport, trade, construction and financial services. Dubai's policydocument with regards to socioeconomic growth and expansion is outlined in the Dubai Strategic Plan2015.


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United Arab Emirates Economic Indicators


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The Effect of the Euro crises and Recovery actions taken

Introduction

In 2009, the U.A.E. witnessed a significant slowdown in growth and strains in the bankingsystem as a result of the global financial crisis, the decline in oil prices, and the continuing fallout fromthe bursting of the Dubai property bubble.

The ramifications of the DW debt event will depend on the scope and modalities of the debtrestructuring, its impact on the financial sector, and the strategy being developed by the Government ofDubai (GD) to put Dubai World (DW) and possibly other corporate entities on a viable economic andfinancial footing.

Improved global conditions, especially out of Asia, will fuel Dubais logistics and service sector.However, the correction in the over-extended property and construction sector renders the overalloutlook highly uncertain.

With foreign investor confidence shaken and international capital markets less accessible, Abu Dhabis

policy of selective support to Dubai will play an important role in limiting contagion to the U.A.E.economy and the banking system.

Impact on UAE employment market

The UAE is still fairly secretive with regards to official economic data and it is very difficult toobtain accurate unemployment figures.

Indeed it is also worth noting that this is an area of the world where unemployment benefit is notavailable although many politicians are pushing for the introduction in the future. Unofficial estimateswith regards to unemployment in the UAE are anything up to 13% which is obviously a major concernand not a figure which local governments will be comfortable with.

However, we must also balance this speculation with detailed information available on the Dubaieconomy which grew by 2.5% in 2010, in excess of 3% in 2011 and is expected to grow by around 4.5%in 2012.

Against this backdrop it is difficult to see how short-term unemployment can go anywhere but downalthough it is the discrepancies and inaccuracies within official data which mean any forecasts are notnecessarily made on a confident basis.

In many ways you could argue that the UAE, and in particular Dubai, has already experienced a majorfinancial meltdown and is now beginning to slowly pull itself back into positive ground. It is still an area

of the world which is still popular with expats, it is an area of the world which will eventually attractmore overseas investment and there is potential for the future.


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Impact on UAE savings

A review of interbank lending rates would suggest that interest rates across the UAE areextremely low at around 1.375% which is just off an eight year low.

This is a major concern for expats in the region because there are very few areas of the worlds offeringan interest rate on savings accounts which match or beat local rates of inflation. Indeed the cost of living

continues to increase relentlessly around the world and while many people had in the past been able tolive off the interest on their savings more and more are now dipping into their capital reserves.

It is rather perverse that those who have saved for a rainy day are the ones whove been impacted mostby the worldwide economic downturn which has seen Central bank interest rates fall to record lows.

While the UAE interbank rate is around 1.375%, and well above base rates in the UK at 0.5% forexample, it is really of minimal benefit when looking at the overall return available on savings accounts.It may well be that more and more people are now being tempted back into the investment and theproperty arenas in the UAE which has been reflected in economic growth over the last three years.

It will be interesting to monitor the situation going forward to see whether savers are in fact leavingbanks en masse and looking at investing again.

Impact on investmentsAs we touched on above, there has been renewed economic growth across Dubai for example

ranging from 2.5% in 2010, to over 3% in 2011 with expectations of economic growth in the region of4.5% for the current year. This would seem to suggest that maybe savers are looking at investing theircash rather than watching the real value of their assets fall because of relatively low savings rates whencompared to inflation.

It is quite ironic that the UAE economy as a whole seems to be stronger than the worldwide economy

when you bear in mind that many investors immediately repatriated their funds at the first sign oftrouble back in 2008/09. This did cause a major sell-off of UAE assets, a reduction in economic activityand ultimately plunged the area into a very dark and difficult period.

Impact on the UAE society

Just the merest of glimpses around the UK, Spain, Greece, etc shows that there is significantfriction between local governments and the local populationspecifically with regards to austeritymeasures which are hitting everybody hard. There is no such social unrest within the UAE primarilybecause of very strict government controls on demonstrations and protests but also the fact that the UAEnow appears to be back on the economic growth track.

There has been unrest in the overall region although Dubai has managed to avoid any major issues. Thetruth is that if the economy is growing, if life in the UAE is still relatively comfortable then what exactlydo the local expat population have to complain about? Perhaps this view is slightly tempered by the factthe authorities arrested activists and protestors en masse at the first sign of trouble although theeconomic situation in the UAE appears to show little resemblance to the Euro and the Eurozone and theimpact at this moment in time is minimal.


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Economic key issues that was focused on during the improvement plan

The contrast between growth based on hydrocarbon resources and that based on non-

hydrocarbon diversification funded by maturity-mismatched leverage. The spillover effects and financial support structures in the federation. The volatility of markets in response to a lack of information disclosure and transparency.

In particular, the debt announcement undermined the widely held market perception of implicitgovernment support, including from Abu Dhabi

The authorities responded to the global financial crisis in a comprehensive and prompt manner. Also, theincreased spending on strategic infrastructure projects, mainly in Abu Dhabi, to reduce the contraction inconstruction activity, and provided support to quasi-public entities and national banks, has done a largergood for the UAE economy as a whole.

However, recent developments in Dubai, while material, should be viewed in the wider perspective ofthe U.A.E. as a whole. Although the need to roll over part of Dubais substantial external borrowing inthe post-Lehman environment has highlighted the risk embedded in the financing strategy of some

Dubai entities, the U.A.E. has a net external creditor position well in excess of 100 percent of GDP,among the largest in the Funds membership.

Recent Economic DevelopmentsAfter the Global downturn, it hit simultaneously all of the U.A.E.s three growth engines in

2009; Oil receipts plummeted, global trade and logistics contracted, and property development all butground to a halt as incomes fell and property prices plunged.

Actions taken by Abu Dhabi boosted the fiscal stance via equity injections and loans.

The central bank deployed bank liquidity support facilities and lowered interest rates.

The federal government rolled out large scale recapitalization measures and provided AED 50 billionterms funding to the banks.Finally, the GD announced a support package of $20 billion (half provided by the central bank and theother half by Abu Dhabi) to finance the needs of Dubais GREs, and established the Dubai FinancialSupport Fund (DFSF) to manage the support program.


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UAE Economy (2009)

Notwithstanding the compensatory measuresadopted by the authorities, overall real GDP ofDubai is estimated to have contracted by about percent in 2009.

Hydrocarbon GDP declining by 6 percent.Crude oil production averaged only 2.4 millionbarrels per day in 2009 lower than a average of2.6 million barrels per day in 2008

Non Hydrocarbon growth, which had averaged8 percent in the three previous years, isestimated to have slowed to about 1 percent.

Inflation declined to 1 percent in 2009,reflecting lower import prices (-10 percent in2009) and a reduction in rents as an increasedshare of rental contracts got renewed at thedeflated market prices and new buildings cameon stream.

The external current account balance isestimated to have shifted to a deficit of 2.7percent of GDP in 2009, the first deficit in

decades.

New external borrowing, mainly by Abu Dhabientities, helped stabilize the reserves by the endof 2009, which stood at central bankinternational reserves to $31 billion by yearsend.


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Short term expectations in 2010

The fiscal and monetary policy mix will need to show adaptability over the medium term in order tosustain a further diversification of the economy within a more uncertain environment.

Given Dubai's share in U.A.E.'s non-oil GDP (above 50 percent) real GDP growth for the U.A.E.

as a whole will be low (about percent), despite the authorities' support packages and AbuDhabi's investment projects that will help offset the contraction in Dubai.

Growth would recover starting in 2011 owing to higher activity in the oil and trade sectors in

response to the recovery in Asia; and orderly restructuring of Dubai's GREs.

Medium-term non hydrocarbon growth is projected to average about 4 percent a year over the

medium term, or 4 percentage points lower than before the crisis, a reflection of less activity inDubai's property sector and higher costs to access international capital markets.

CPI inflation is expected to reflect higher import prices and the impact of Abu Dhabi's large

investments in infrastructure.

Based on the WEO's oil price projections, the overall fiscal position is projected to return to a

surplus of about 10 percent of GDP in 2010. Over the medium term, the overall surplus willincrease to about 15 percent of GDP, mainly due to a gradual increase in non-oil revenuesassociated with the introduction of the VAT.

In 2010, the non-hydrocarbon deficit is projected to contract by about 4 percentage points, to 30percent of NHGDP, owing mainly to a slowdown in project implementation in Abu Dhabi, andto improve over the medium term because Abu Dhabi is not expected to continue providing

support to its GREs

The external current account is expected to shift to a surplus of about 7 percent of GDP in 2010,

and to increase gradually in subsequent years. In the financial account, capital outflows wouldresume, reflecting official outward investment, but the Central Bank of the United ArabEmirates' (CBU) gross official reserves would increase steadily.

Conclusion

The UAE, and perhaps the most recognizable emirate Dubai, is showing signs of impressiveeconomic recovery having grown 2.5% in 2010, in excess of 3% in 2011 and expected to grow by

around 4.5% in 2012.

The ramifications of the Dubai event are still unfolding, as it will take some time for the GD to developa strategy to restructure its GREs. Downside risks could materialize if the Dubai debt restructuring wereto generate additional uncertainty.


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It is important that uncertainty be removed regarding the financial viability of DW entities, the extent ofimplicit government guarantees to GREs, and the insolvency regime. If uncertainties remain in theseareas, ramifications could include sustained lack of market access for even stronger Dubai entities and amore permanent loss of confidence in Dubai as a reliable business location.

The Dubai authorities stressed that they were committed to working with creditors in achieving an

orderly and cooperative debt restructuring. They also indicated that they were working on improvingtransparency and corporate governance. This was regarded as important for viable companies tomaintain access to international capital markets. The scope of the corporate restructuring and the debtrestructuring options were still being defined.

Restructuring would seek to ensure economic and financial viability while protecting systemicallyimportant entities. So far the debt restructuring is limited to the announced $22 billion, but theauthorities recognized that other property GREs may have to enter a similar process.

The spillover effects of the Dubai event on the GCC, the wider region, and advanced economies appearmanageable. However, the event may have a lasting impact on the availability and cost of external

capital as creditors likely will further discount notions of implicit guarantees in pricing quasi-sovereignand private risk.

UAE Economy Back On Track

UAE has the second largest economy in the Arab world (after Saudi Arabia), with a gross domesticproduct (GDP) of $377 billion (AED1.38 trillion) in 2012. A third of the GDP is from oil revenues. Theeconomy was expected to grow between 4-4.5% in 2013, compared to 2.3-3.5% over the past five years

The UAE economy has staged a recovery in the last 18 months, aided by an inflow of business andinvestors seeking a safe haven from unrest elsewhere in the Middle East. Buoyed by robust oil prices

and brisk trade and tourism, the Arab worlds second-largest economy saw growth accelerate to 4.4 percent in 2012, according to its statistics office, its fastest pace since 2006.

The Gulf state has made efforts to curb state spending, which increased sharply in the wake of thefinancial crash and Arab Spring uprisings. Expenditure hit $52.6 billion in the year to July 17, 2009,according to a Grail Research tracker, as the government sought to cushion the economy and calminvestors.

In 2012, spending as a total percentage of GDP fell to 26.9 per cent, according to the Washington-basedIMF, and is likely to shrink further to 26.3 per cent this year. The UAE last year doubled its total fiscalsurplusthe combined surplus of the federal government and the seven emiratesto close to nine per

cent of gross domestic product, up from 4.1 per cent in 2011.

This cut its break-even oil price to $74 a barrel, down from $84 in 2011, leaving it less exposed to anyvolatility in the energy markets.


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Economic diversification is a priority for the UAE. Abu Dhabi, which generates more than half of thenational GDP, has injected billions of dollars into industry, tourism and infrastructure to generate jobsand lessen its reliance oil.

The emirate last year opened Khalifa Port, built at a cost of $7.1 billion, and is constructing the worldslargest aluminum smelter and a financial free zone.

A new terminal underway at Abu Dhabis main airport is set to add capacity for a further 30 millionpassengers a year, following its launch in 2017.

The impact of this vast investment is clear. Abu Dhabis non-oil industries grew 7.7 per cent in 2012,generating about 48 per cent of GDP at constant prices, preliminary government data shows. At Dhs325billion, Abu Dhabis non-oil economy alone was Dhs7 billion more than Dubais entire GDP of Dhs318billion.

Dubais fortunes have also improved. The collapse of the city-states property bubble in 2008 saw houseprices nosedive, pressing state-backed Dubai World into a painful $25 billion debt restructuring and

forcing Dubai to seek a $20 billion lifeline from Abu Dhabi.

The emirates economy is now rebounding, expanding 4.4 per cent last year, according to its statisticsoffice, the most in three years.

This uptick has been underpinned by a rebound in the property and tourism sectors, reflecting Dubaissafe haven status amid regional turmoil. Residential rentals grew by more than 30 per cent in the 12months to June, property consultants CBRE said, outpacing wage levels.

Real estate sales reached Dhs53 billion in the first half, according to Dubai Land Department.

The IMF in July warned the government might need to step in to prevent the inflation of a fresh propertybubble, should prices continue to surge.

Dubai continues to carry a substantial debt burden. IMF data puts the total debt of Dubai governmentand its government-related entities (GREs) at $142 billion, or 102 per cent of the GDP of Dubai and thesmaller northern sheikhdoms.

Of the estimated $93 billion owed by state-linked entities, $60 billion will fall due between now and2017, the fund said. Although Dubais operating environment improved markedly, these largerollovers, particularly for the GREs, could still prove challenging.


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Hydrocarbons

The UAE houses about six per cent of the worlds proven oil reserves and 3.3 per cent of its gasreserves, with most of the crude held in Abu Dhabi. Hydrocarbons play a vital role in the OPECmembers economy, providing the dominant source of government revenue.

The UAEs oil production was estimated to be about 2.65 million barrels a day (b/d) in 2012, up from

2.5 million b/d in 2011, according to International Energy Agency data. Strong oil prices allied withincreased output drove record hydrocarbons revenues of $124.7 billion in 2012, the US-based Instituteof International Finance said in April, marking a 5 per cent rise on the previous years income.

DemographicsThe UAEs population has grown steadily in recent years, aided by an influx of foreign workers,

but estimates as to its size vary wildly. The IMF gauges the population at about 5.7 million people in2013, while the most recent estimate from the UAEs own statistics agency puts the figure at 8.3 millionpeople. Based on this calculation, foreign workers comprise roughly 88.5 per cent of the population,largely through the presence of blue-collar workers from South Asia, the Philippines and other Arabstates.

Boasting one of the worlds highest per capita incomes at nearly $49,000 in 2012, the oil-rich UAE hasescaped the violent turmoil seen in other GCC and Arab states in the past two years.

Geopolitics

The UAE is one of the regions most politically stable nations, with close ties to the West. The countryis governed by the Supreme Council, which comprises the rulers of the seven emirates. The 40-memberFederal National Council acts as an advisory board to the government, and is responsible for examiningdraft federal legislation.

Half of the FNCs 40 members are elected, and the remainder appointed by the rulers of the countrys

seven emirates. Political parties are not permitted.

The Gulf state, primarily led by Abu Dhabi, has leveraged its vast oil wealth to forge strategic links withboth emerging and developed markets.

The UAE is home to one of the worlds largest sovereign wealth funds, the Abu Dhabi InvestmentAuthority (ADIA), with assets valued at $328 billion at the end of 2008, according to the US-basedCouncil on Foreign Relations.

Its investments include stakes in Britains Gatwick Airport, Citigroup, and Germanys biggest gas-transmission system.


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References

http://www.eurozone.europa.eu/

http://www.about.com/

http://en.wikipedia.org/

www.investopedia.comhttp://www.investopedia.com/

http://www.eurozone.europa.eu/

http://www.tradingeconomics.com/

http://dubai.ae/

http://www.dubaitrade.ae/

http://gulfbusiness.com/

http://www.uaeinteract.com/

End of Report
http://www.eurozone.europa.eu/http://www.eurozone.europa.eu/http://www.about.com/http://www.about.com/http://en.wikipedia.org/http://en.wikipedia.org/http://www.investopedia.com/http://www.investopedia.com/http://www.investopedia.com/http://www.investopedia.com/http://www.eurozone.europa.eu/http://www.eurozone.europa.eu/http://www.tradingeconomics.com/http://www.tradingeconomics.com/http://dubai.ae/http://dubai.ae/http://www.dubaitrade.ae/http://www.dubaitrade.ae/http://gulfbusiness.com/2013/10/uae-economy-back-on-track/#.U1PAgFd9JZghttp://gulfbusiness.com/2013/10/uae-economy-back-on-track/#.U1PAgFd9JZghttp://www.uaeinteract.com/http://www.uaeinteract.com/http://www.uaeinteract.com/http://gulfbusiness.com/2013/10/uae-economy-back-on-track/#.U1PAgFd9JZghttp://www.dubaitrade.ae/http://dubai.ae/http://www.tradingeconomics.com/http://www.eurozone.europa.eu/http://www.investopedia.com/http://www.investopedia.com/http://en.wikipedia.org/http://www.about.com/http://www.eurozone.europa.eu/

Managerial Economics - The Eurozone Crises Implications on the UAE Economy and what actions were...

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