An Economic Profile of the UAE - Research Proposal Example

Individual Assignment B1 Project Course Code: ECON 610 Cycle C: Course Name: Macro Environment of Business Student Name: Instructor’s Name: 1. Introduction The increasing economic development in UAE has made it an excellent nation for people interested in foreign direct investment or expanding overseas. Globalization helps strengthen their distribution channels and economy. The country has strived to eliminate several trade barriers and have adopted free market systems which attracts several businessmen globally who look for consumers and target markets globally too (Nasser, 2005). This paper analyses the qualitative and quantitative data relating to the various economic indicators of the country including the balance of payments, the GDP, government policies and associated financial markets and use the information to come up with a simple economic model with its accompanying prospects. 2. Results and Discussion I. The UAE Balance of Payment Because of huge reserves of wealth and the strong financial position, UAE has never required financial aid from the International Monetary Fund or the World Bank despite a being member of the same. The balance of payments (BoP) records all the financial transactions between one country and the rest of the nations by comparing the difference in the value of exports and imports of fiscal transactions, products and services in terms of dollars for a specified period of time usually per year. In the case of the UAE, the BoP stood at $10,065,799,904 for the year 2014 driven by the oil, real estate, construction and the tourism industry. The BoP of the country has to be made considering three major accounts. The current account tracks the country’s assets encompassing trades of services and goods and transactions to the country from foreign countries (Nasser, 2005). The diagram below shows the current account of UAE over a period of time. As could be seen from the graph below, the current account balance fell sharply in 2015 and it is expected to fall further in 2016 due to the dynamic oil prices whose price is now a fourth of that in 2013. It is projected that oil prices will remain low till the mid of 2017 whereby as uniform rate of $45 per barrel is expected. Secondly, there is the capital account which monitors the flow of payments of capital items and was reported to have been 135, 063 million UAE capitals of electricity, medical and machinery in 2011. This yielded an export value of 877 million AED with a trade surplus of $19 billion. Thirdly, the financial account handles currency transactions and stock bonds and was projected to be to be 96.3 billion AED in 2012 with the total deposit of the 392 commercial banks in the UAE depositing a total of 991,553 million AED. It is projected that there will be an increases in trade between UAE and SA, Iran and the US while the growth of the tourism, airport transport expansion and the boost of the hotel industry will strengthens the country’s position in the balance of payment. It is evident that the imports were increasing at 8% whereas the exports were declining at 6% in 2009 but projected to grow by 12% in 2016. The current account balance is more than 20% of the GDP and is meant to increase due to the increasing trade relations. By comparison, the BoP of UAE decreased from 22% in 2007 till 2009 and increased to 25.2% in 2011. The re-exporting capabilities of the UAE is a goof prospect for the BoP of the country. II. UAE Gross Domestic Product (GDP) The GDP of UAE has grown faster than the world’s average since 2003. Both that of the world and that of the UAE declined in 2009 but the -0.7% growth rate of UAE was way better than the world’s -1.9%. According to the UAE government website, the declined can be attributed to the decline in the oil prices. The price per barrel of oil had decreased from $95 in 2008 to $60 in 2009. The UAE’s government expected a growth of 2.5% of the GDP in 2015. Currently, the country has a GDP of The government projected a real GDP growth of 2.5% for 2010. As compared to 2010 when the country was ranked 35th in the world in GDP at around $230 Billion according to World Bank, that of 2013 was $403 billion showing a steady growth (United Arab Emirates, 2016). The trends in the per capita GDP can also be viewed to follow the same path as could be seen that it rose steadily from $23,523 in 2003 to $58,272 in 2008 but a drop was experienced in 2009 where it fell to $50,070 when the world’s per capita dropped generally. The country currently ranks 7th in the per capita income currently (UAE Central Bank, 2015). This results imply that the economy of UAE is growing faster than the rest of the rest of the world. In 2009, the GDP distribution was as shown in the pie chart. The following non-oil sector industries make up the UAE’s GDP currently (UAE Central Bank, 2014). Manufacturing accounting for 16.2% Construction accounting for 10.7% Repairing services, retail trade and wholesale at 9% Household services at 0.5% Water, gas and electricity at 1.6% Agriculture at 1.7% Hotels and restaurants at 1.8% Financial services at 5.8% Communication, storage and transportation at 7.1% Government services at 8% Real estate at 8.2% A real growth in the GDP was experienced in 2004 at 7.8% which is influenced by the 10% augment in the different type of non-oil GDP (The World Factbook, 2011). At this time, economists calculated GDP, as exceeding US$ 103 million. They reflected that during 1990’s the UAE’s per capita GDP was higher than that of other Arab countries and stood at $24,000 (UAE Central Bank, 2014). In the same hand, the real GDP of the year between 1991 and 2006, the real GDP growth was very strong driven by the growth in the non-oil sectors besides the large contribution of the oil sectors. The figure below shows the current trend in the real and the nominal GDP. The UAE government is endeavoring to move from being an oil dependent economy to that is more diversified economy having sets of regulations and rules favoring large influx of capital. For instance, the creation of free zones where investors are able to run businesses without paying taxes. There is always a good incentive when the investors know that they have an opportunity cost which is the same as the tax rate of a given country like the 30% in Australia. The former president of UAE, Sheikh Zayed took a bright step in investing all key sectors such as the increasing government expenditure, infrastructure, education and health (The World Factbook, 2011). This resulted in the increase in the population of the foreigners giving rise to a domino effect whereby higher needs are attributed to higher population and hence, demand of services and goods and services will increase with the sustenance of the trend. III. Economic Policies and their impacts on the financial markets Despite the fact that UAE is taken to be the least corrupt nation in the Middle East, decisions are usually made by the emirate’s ruling families. The UAE judiciary is not independent and the court rulings must be approved by the political leadership but it is also interesting to note that the rule of law is well maintained (United Arab Emirates, 2016). Each emirate is entitled to making decisions on how land ownership will be transferred within the borders and hence, how space for rental will be taken up by the local and international investors. For the seven years represented in the chart below, the UAE has an average score of 69.7 in terms of property rights. The UAE has no federal level corporate tax nor the income tax considering that different tax rates in some emirates. There exists no general sales taxes with the overall tax burden being 22.4% of the total. The government spending stands at 28% of the total domestic output with the tremendous oil revenues keeping the country in surplus with the public debt being kept below 15% of the GDP (United Arab Emirates, 2016). The fiscal freedom scores 95% and the government spending scores 76.1% higher than the previous years. This implies that the uptake of foreign investments increases due to lowered tariffs which can be presented as an incentive (UAE National Statistics Bureau, 2016). Investments from China and US have increased and consequently the cash inflow to the country. The economic policies in UAE has increased the business regulatory efficiency. Licensing requirements have been streamlined whereas the minimum capital requirements for the establishment of a business has been scrapped out. This has seen the labor regulations become relatively flexible with the non-salary cost of employing workers becoming average. Although the UAE reduced the energy subsidies in 2015, commercial airlines in Europe and the US postulate massive and obvious state subsidies to Etihad and Emirates airlines. IV. Financial markets Financial markets defines the financial growth of a nation as they offer a common platform for sellers and buyers to trade financial securities such as commodities, stocks and bonds in such a manner that regardless of transaction cost, traders benefit from the trade. UAE is a haven for several business activities both individual and organizational which deal with several facets especially oil-based in a generalized or a specialized manner. Several financial markets exists in UAE to help traders maximize profit. Such markets include the Dubai Financial Market (DFM), Abu Dhabi Securities Exchange ADX, and Dubai International Financial Exchange (DIFX) (Securities and Commodities Authority (UAE), n.d.). Dubai Financial Market was established in 2000 with an aim of providing a fair system to trade in commodities, bonds and equities. Considering that DIFX deals with securities of global companies only, DFM gets most listings from the Middle East regions and the UAE. It plays a key role in the financial activities of the country for the public joint stock companies, government bonds and investment institutions. It has developed greatly but only accounts for 0.3% of global trading (UAE Central Bank, 2015). It currently provides a trading interface for major companies in the country by dedicating itself to the gulf companies. It has helped in attracting global investors which have contributed to the development of the country. The large scale infrastructural development, changing focus of revenue generation is becoming possible due to investment in these sectors (Securities and Commodities Authority (UAE), (n.d.). ADX was established in 2000 to provide a platform for companies to trade shares. Companies can trade the shares of ADX trough agents of DFM though they are different financial markets. There exists a lot of forecasting of the development of the UAE defined using the ADX considering that it is the source through which money is channeled to the economy and hence, an important aspect of ADX (Symes, n.d.). It is an interface between foreign investment and the economy. This market also ensures that the money invested is channeled properly to help in avoiding default cases (Securities and Commodities Authority (UAE), n.d.). In absence of this ADX, the money coming from Middle East region was at higher risk and hence, investors were not willing to invest their money despite the potential of Dubai DIFX is an international exchange created for the provision of a larger and a more liquid securities market in existence in any of the regional national exchange for the investors and the issuers. It trades on entities such as equities, funds, derivatives and binds. It is regulated by the Dubai Financial Services Authority charged with the responsibility of security trading, Islamic finance, banking, reinsurance and asset management. The importance of this market comes out clearly that it creates a link with various exchanges enabling investors to deal directly with the businesses and hence attracting several investors who get a good opportunity to get more profits. From the foregoing, this solves liquidity problems considering that the highly liquid assets are solved in this case. This is also solves the ambiguity that comes with the highly liquid assets which necessitates more regulations and checks. 3. Economic Growth Model A simple growth model for UAE can be coined and modified from the Harrod-Domar Growth Model which has two components: increased savings and increased capital investment. However, labor, and technology are also key components of development. This is based on the fact that economic growth depends on the amount of capital and labor. Net investments result into more capital accumulation which generates higher income and output and from the foregoing, higher income allows higher savings. Therefore, the following economic model serves the growth of UAE’s economy. Economic Growth= Labor +Policy + Capital + Technology + Diversity. Realignment of fiscal and monetary policies to lower the taxes and make it easy for the access of the property will attract more foreign investors which will pump in more capital for development. The immigration policies should also be streamlined to allow foreign mix of professionalism which will boost the capital investments. Technology will increase the way processes are handled considering that automation and high-speed communication systems are what drive the economies currently (United Arab Emirates, 2011). Diversification of the economy from the oil-based economy is very critical considering that in case that the oil-price fall, the government will get the revenue for growth from sectors such as manufacturing, transport and the service industry. UAE has a capability of investing in the telecommunication industry which is very instrumental to their development. When the national savings and income increase, it implies that some levels of improvement in the access to basic necessities for average citizen in the developing country. This implies that there is more access to greater access to investment and capital by entrepreneurs (Symes, n.d.). The more the investment the more the productivity and income for those venturing into the emerging service and industrial sectors and hence, economic growth. The rise in income mean that there is a rise in mean tax revenues for governments whose spending in public goods result in the improvement in standards of living. 4. Future Prospects According to World Bank, the growth forecast of the UAE will be 2.9% in the subsequent years. The investment activity, and hence, the GDP will weaken as the emirate tries to redefine its economic objectives. As the country tries to reduce its rates of inflation, unemployment will rise according to Philip’s curve and in the long run, the monetarist view can also be put into consideration when the government will try to reduce its unemployment rates (United Arab Emirates, 2011). The offered higher raised wages will increase the cost of production and increasing inflation in the long run which leads to falling income levels and higher rates of unemployment. Economists show that the above economies will try to reduce their inflation rate in UAE which may reduce unemployment and raise the income levels providing high living. 5. Summary and Conclusions The UAE is a rich country due to its large population, hard work and a base of huge oil resources which is a key driver of their economy. The large budgets of the country are surpluses and are achieved so as to enable the UAE to accumulate a big current type of current type of account balances held mainly by the governments of particular emirates and to a small extend, some kinds of private establishments. Such progress has been favorable for the economic success of the country. This successful type of implementation of the human development policies with the current deflection to non-oil sectors coupled with modernization and urbanization comes as a unique type of government which used income from big natural resources successfully for its long-term development and establishment. The first two decades has seen the country have positive balance of payments, increase in real GDP and the expansion of the financial markets which, with correct input of manpower, capital, technology, policy and manpower comes the success of the country. 6. References Nasser, M. D. (2005). An economic profile of the UAE, retrieved on http://unstats.un.org/unsd/newsletter/unsd_workshops/country/UAE_Country%20Prof ile.pdf Securities and Commodities Authority (UAE). (n.d.). Retrieved February 2011, from http://www.sca.ae/English/sca/Pages/mission.aspx Symes, P. (n.d.). The Bank Notes of the Qatar and Dubai Currency Board. Retrieved March 26, 2011, from Reference for Islamic Banknotes: http://www.islamicbanknotes.com/Q&Dhistory.htm The World Factbook (2011). United Arab Emirates. Retrieved March 26, 2011, from CIA Library: https://www.cia.gov/library/publications/the-world- factbook/geos/ae.html UAE Central Bank. (2015). Quarterly Economic Report UAE Central Bank. (2014). Financial Stability Report UAE National Statistics Bureau. (2016). GDP, Balance of Payments & Fiscsal Balance Reports United Arab Emirates. (2011). Retrieved March 26, 2011, from Encyclopedia Britannica: http://www.britannica.com/EBchecked/topic/615412/United-Arab-Emirates United Arab Emirates. (2016). 2016 Index of Economic Freedom. http://www.heritage.org/index/country/unitedarabemirates Read More