UAE Report v.2

8/3/2019 UAE Report v.2

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United Arab Emirates:

A Financial Overview

Jesus Caro

Finance 490: International Finance

Dr. Sachdeva

Country Analysis Report

Section XX: Tuesday 7-945



Table of Contents



History of United Arab Emirates

The semblance of colonialism pervades all aspects of modernity. The global rise of once

colonized states allows us to analyze history for new methods of economic success. After

achieveing independence from Britain the Trucial States formed a federation in 1971. The newly

formed federation was called the United Arab Emirates and since its inception has furrowed

itself deep into the psyche of global finance. CountryWatch explains the process of autonomy

and rule in the Emirates, “although each state maintains a large degree of independence, the

UAE is governed by a Supreme Council of Rulers made up of the seven emirs, who appoint the

prime minister and the cabinet”(Youngblood-Coleman 2011; History). The power of each

emirate is reflected in the number and status of position in the federal government. The current

polity is run by two ruling families - the al-Nahyans of Abu Dhabi and the Maktoums of Dubai.

Civil government in the emirates is run more by nepotism and political affiliations than

representative government.

Currency Profile

The currency of the United Arab Emirates was introduced during the same period of the

country’s outset. The dirham, UAE currency, replaced the Qatar and Dubai riyal. In an attempt to

stabilize its currency the Emirates pegged the dirham to the IMF’s Special Drawing Rights.

However, the Central banks’ operating practice portrays a different peg the dirham is pegged to,

the US dollar. This peg to the US dollar is an attempt to maintain price stability between itself

and one of its larges foreign investors. Additionally, as its currency is newly formed there is little

history to provide adequate assurances to investors. A soft currency indicates a currency whose

value investors believe will behave erratically. Soft currencies appear in countries with political



turmoil, fiscal instability, or other socio-cultural problems. The Emirates currency, the dirham, is

perceived as a soft currency because of its newly-formed capital markets, continuing labor

imbalances, and risks of hyperinflation. The Emirates ensure the dirham is hedged against this

perception by ensuring that its currency is easily convertible in the global market. A hard

currency is considered, by investors, to be a currency that is a reliable and stable store of value.

Hard currencies are often used as reserve currencies for international central banks. Continuing

its monetary policy will ensure the dirham maintains price stability and foreign direct investment

Central Banking Authority

The United Arab Emirates as a nascent polity has the advantage of history to reference as it

begins to builds itslef as a global competior in the global century. The economic development of

the UAE has largely been led by large national investments by the central government of UAE.

The central government has effictively been able to boost growth in the region because of its

coordinated efforts with its central banking authority. According to the Central Bank website,

“The Central Bank formally commenced its functions on 11 December 1980 in pursuance of the

provision of Union Law No. (10) of 1980, which superseded Union Law (2) of 1973,

establishing the former Currency Board in the United Arab Emirates” (United Arab Emirates).

The central bank is aptly named the Central Bank of the United Arab Emirates. The bank does

not provide a unique address to its location, however, it’s latitudnal and longitdunal coordinates

are Lat: 25.121439 Longs: 56.336045, respectively.

Central Bank Profile

Traditionally the role central banks has included maintaining currency stability and

sustained rates of growth, or inflation. Central banks have also been used for the development of



monetary policy in most countries. The begginings of the United Arab Emirates is cast amidst a

background of rising US influence and the fall of communism. United Arab Emirates has had to

balance large natural resource reserves and its development as a global actor. The primary

objective of its central banks is, “formulation and implementation of banking, credit and

monetary policies, to ensure the growth of the national economy of the UAE in a balanced

manner”(United Arab Emirates). The Central Bank also takes additional measures to ensure

price stability between itself and the United States. This initial overview of the the Central Bank

guides us towards the national identity of the UAE. The Emirates are not afraid to use

governmental intervention, when necessary, to smooth imbalances within its economy.

The Emirates Central Bank also behaves in a typical fasion to other central banks. The

Central Bank has the authority to, “Issue Currency, Support the currency, maintain its stability

internally and externally and ensure its free convertibility into foreign currencies; Direct credit

policy to achieve balanced growth of the national economy; Supervise over the effectiveness of

the banking system; Undertake the function of the bank of the government; Advise the

government on financial and monetary issues”(United Arab Emirates). The large powers

explicitly given to the Central Bank may be partly due to the familial system currently in place.

The close relationship, necessisated by the politics between them, between the emirates seems to,

also, influence its view of the role of government in economic policy.

Development in A Globalized World

An analysis of the Emirates in context of globalization requires us to look to the history

of the United Emirates. Oil was not discovered in the Emirates until the 1950s and the economy

was primarily dependend on seafaring industries, such as fishing and pearling. Since the

discovery of oil in the 1950’s the government has developed a sophisticated governmental



solution to the complex economic problems of the new global world. According to

CountryWatch, “Strong economic fundamentals and a pro-business approach to economic

management have led to high levels of domestic and foreign investment in the manufacturing,

services, and real estate sectors”(Youngblood-Coleman 2011; Economic). Over the medium

term, the Emirates have approached a balanced and sustainable path to growth. CountryWatch

explains, “A slowdown in global trade and oil demand remains a risk to re-exports. Reliance on

oil, a large expatriate workforce, and increasing inflation pressures are significant long-term

challenges. The UAE's strategic plan for the next few years focuses on diversification and

creating more opportunities for nationals through improved education and increased private

sector employment”( Youngblood-Coleman 2011; Economic). The signal, however, remains

clear the Emirates will continue to develop as a business friendly country with highly diversified

and talented business sectors.

Direct And Indirect Exchange Rates Between Currencies.

Country CurrencyDirect Rates Indirect Rates

1. Australia AUD-Dollar($)2.686490455 0.372231756

2. Canada CAD-Dollar($)3.160792952 0.316362943

3. England (U.K.) GBP-Pound(£)6.339207048 0.157745635

4. Euro EUR-Euro(€)4.374082232 0.228623573

5. Japan JPY-Yen(¥)0.03085536 32.40990439

6. IMF SDR- XDR(5.261013216 0.190079268

7. Switzerland FF-Franc(₣)2.788179148 0.35866634

8. USA USD-Dollar($)3.671071953 0.272397919



The United Arab Emirates Stock Market

The largest financial centers have traditionally been in the western world either in

Turkey, Europe, or the United States. With the fast-paced development of new types of

technoligies previous centers of power, financial or political, are being decentralized because of

the sheer ease of the technology. The Emirates are no different in the context of financial

prowess. The nascent capital markets in region have sprouted two official indices the,”United

Arab Emirates has two official indices, The Abu Dhabi index and Dubai Financial Market Index.

The whole market is also indexed under S&P Index and GCC Index”(Saleh 2008). The location

and national affiliation of the indeces is indicative of the political relationship between the two

oil-wealth countries of Abu Dhabi and Dubai.

Abu Dhabi Index

The first index, “the Abu Dhabi Securities Exchange (ADX) was established on 15

November 2000 by Local Law No. (3) of 2000, the provisions of which vest the Market with a

legal entity of autonomous status, independent finance and management, and give ADX the

necessary supervisory and executive powers to exercise its functions”(“Market Establishment”).

Local Law No. (3) gives ADX the opportunity to, “[conduct] studies and issuing

recommendations in order to ensure that savings are invested in productive sectors”( “Market

Establishment”). This section is important to highlight because it reaffirms the Emirati national

identity. The Emirates are uniquely concerned with fundamentalist notions of free-market

capitalism. This section under Local Law No. (3) actively pursues a method for disbursing

perfect information to the markets. The Abu Dhabi Index also affirms their belief in free markets

by allowing ADX to regulate itself, “Ensure financial and economic stability and develop trading



methods in order to ensure liquidity and stability of prices of Securities listed on the market”

(“Market Establishment”).

Dubai Financial Market

The second Index, the “Dubai Financial Market was established as a public institution

having its own independent corporate body by a Resolution from the Ministry of Economy No

14 of 2000”(DFM). The market functionally operates a secondary market for financial

instruments accepted by the market. One needs only to look at the inception of DFM and ADX to

see the competitive nature between the emirates. Both Abu Dhabi and Dubai were eager

participants to join the group of nations willing to open up their financial markets to foreign

investors. During the 2000’s the Dubai Financial Market maintained a strong hold on the

majority of capital inflows from the global financial system. The stated mission of DFM is, “to

create a fair, efficient, liquid and transparent marketplace that provides choices through the best

utilization of available resources in order to serve all stakeholders”(DFM). The DFM functions

similar to the ADX in that it allows it to be self-regulated. However, the ADX is more

progressive in its stance on perfect information.

A Reversal of Roles

The large capital inflows that went into the Dubai Financial Market were infected with

different types of subprime debt. In additon to holding toxic assets the trend of declining oil

prices hurt all oil-producing countries, including the UAE. The agressive governmental

intervention of Abu Dhabi in diversifiving its local economy seems to establish a firm economic

base for future development. Real estate also proved to be harmful for the Dubai Model, Even

the real estate bubble which proved to be the weakest link in the Dubai model is recovering



gently”(Abdullah 2009).The major economic events of the last decade seems to have reversed

the finacial hiearchy between Dubai and Abu Dhabi.

General Observations

Current Economic State

The global financial crisis of 2008 highlighted the increasing recognition of our

interconnectivity. It has also left most developed countries looking foolish as the financial

instruments they’ve created continue to infect the global financial system. The restructuring of

global financial systems to redistribute economic power is exemplified by the shift in the global

regulatory framework, “The global economy is now run by G20, after having been under the

control and management of G7. There has been a greater role for...the Emirate of Abu Dhabi ...

[the] in global economy through strong participation in international investment (Musaed,

2010)”. Additionally, the Emirates oil-based economy, regardless of diversification efforts, is

expected to continue to grow. Growing oil demand by it’s proximal neighbor China means they

can guarantee a consistent revenue stream, “China's …energy consumption has… increased

dramatically…China is now the second largest importer of oil in the world, having overtaken

Japan in 2003...And that growth is expected to continue. With ever-more Chinese consumers

buying cars” (Dyer). The Ministry Director General confirms that despite volatile oil revenue

streams a diversifying UAE will ensure growth for both the short-term and longterm, “The

United Arab Emirates economy is currently in a growth phase, ...with average real gross

domestic product seen increasing by 2.5 percent in 2010 and aims to boost industrial

production...over the next five years” (UAE Economy 2010).



Abu-Dhabi and Growth

The lessons of 2008 remind us of the lessons learned in the 2000’s and even the 1980’s;

Asset bubbles tend to cause large market crashes devaluing all other assets and even worse

financial asset bubbles tend to depress currency appreciation in any meaningful way. Dubai

learned this lesson very succintly when its real estate market crashed alongside the global

mortgage-debt crisis. This has, temporarily, closed the debate on the economic driving force in

the region, naming Abu-Dhabi as its chief economic driving force. Abu-dhabi has focused its

economic model towards diversifying its economic base and providing a model for sustainable

development without relying on natural rsources, like oil, “At the same time as oil prices and

exports are declining Abu Dhabi’s non-oil economic activities achieved satisfactory growth rates

during the same year...This reinforces the emirate’s strategy to diversify the economic base,

reduce dependence on oil as the main propellant of the economy and furthers progress towards

achieving sustainable development”(Jabeen 2011). This approach is unique to understand

because of the political context that the Emirates finds itself in. It is a kingdom that is not

democratically elected, its highest positions are tainted with blatant depictions of cronyism.

However, the authoritarian style monarchy is taking active steps to democratize its people

by providing opportunities to prosper economically and educate themselves. The Emirate

government has also taken steps to ensure that the quality of life for the Emirate people continues

to rise. Each Emirate has provided a unique addition to the United Arab Emirate Culture,

however, with its continued focus on growth and its vastly deep treasury Abu-Dhabi maintains

its position as a trendsetter in the region. Abu-Dhabi has implemented a practical model for

modernization that others can follow, “the Emirate took advantage of the crisis in the area of

protection and empowerment of the national economy through the modernization of laws and



legislations, where it worked for the institutions concerned (federal and local) to update a

number of legislation to cope with recent economic developments”(Musaed, 2010). Regardless

of the political situation in the Emirate it seems that Abu Dhabi will continue to stabilize the

region and maintain an economic model of sustainable growth.

Major Challenges

Despite the many opportunities in the UAE there still exis some challanges. The

challenges the UAE faces include labor imbalances and inter-emirate relations. The main

domestic challenge that the Emirates face is that of major labour imbalances. It is estimated that

over three quarters of its population is foreign and despite governmental attempts at regulation

the privtae sector finds non-Emirates less costly and more qualified. According to the Business

Monitor International, “60% of UAE nationals working in the private sector have resigned from

corporate positions due to 'a lack of career progression and the absence of a mentoring culture

among others'”(UAE Business Forecast Report). This seems to imply that the construction sector

is finding foreign workers less costly while its professional jobs, which require mentorship, are

leaving many Emirates dissatisfied. The quality of education in the UAE is necessary to increase

the competitiveness of the local labor market. The second major challenge will be inter-emirate

relations. After the financial melt-down Abu Dhabi funded a bailout of Dubai World, which

helped to solidify the power dynamics between the two ruling families. This reconfiguration

could provided added economic benefits, “Abu Dhabi and Dubai currently have separate stock

markets, issue debt separately and have their own economic policies...bringing the stock markets

together...under a coherent... economic policy should reduce confusion and increase stability”

(UAE Business Forecast Report). The only concern will be the local interpolitical conflicts that



may arise from the Maktoum family, which, considering the present economic state, should

considerably be few.

Tools for Growth

The UAE continues to be an enigma in the global financial system by advocating a model

for free trade in the region while simultaneously supporting investment in sovereign wealth

funds. The free trade zones in the Emirates are financed with public funds and in the process

discover a model for economic success,“The UAE zones quickly grasped ... that, although their

free zones were financed by the public sector, they had to be run as though they were private

enterprises. The Jebel Ali Free Zone has been a trendsetter...to other emirates” (Ryan 2007). The

Emirates continue to adequately walk the line between market intervention and free markets. The

use of Sovereign Wealth Funds seems, to some, an overreach of the state in economic affairs. Ian

Bremmer, President of Euraisa Group, reminds us that the largest energy reserves are held by

governments and those closely aligned with government. He continues by explaining the

function of sovereign wealth funds, “‘Sovereign wealth funds’ a recently coined term for state-

owned investment portfolios, account for one-eighth of global investment, and...these trends are

reshaping international politics and the global economy by transferring increasingly large levers

of economic power and influence to the central authority of the state”(Bremmer 2009). Despite

some of the alarmist rhetoric used by Mr. Bremmer it is important to understand the impact that

this could have on the geopolitical world. Small countries with large capital balances may be

able to impose their will on countries with a relatively larger population based on ethnic,

cultural, or political events. The ultimate approach that Abu Dhabi seems to be using is a results

based approach. It has had successes with both its SWF and its free trade agreements. It seems

that it will continue using this model until its usefulness becomes suspect.



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