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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT APRIL 2007 ABU DHABI SECURITIES MARKET ECONOMIC AND POLITICAL DEVELOPMENTS Economic and Political Environment Political stability appears assured during the near term. This favorable forecast has been underpinned by the smooth transfer of power following the death of the emir of Dubai, Sheikh Maktoum bin Rashid al-Maktoum, in early 2006 and the death of the president of the UAE and ruler of Abu Dhabi, Sheikh Zayed bin Sultan al-Nahyan, in late 2004. Sheikh Zayed had been president of the UAE since its foundation and ruler of Abu Dhabi since 1966, raising the prospect that his demise could have been destabilizing. However, power transferred smoothly to the longserving crown prince, Sheikh Khalifa, who has firmly established his authority as the new ruler. Sheikh Khalifa enjoys support from within the ruling families of the seven emirates, and most UAE nationals appear satisfied with family rule in the country, particularly at a time of high oil prices and rising public largesse. The UAE's pro-Western orientation will not change, although the government remains concerned over some aspects of US policy in the region, particularly its strong support of Israel in the recent conflict in Lebanon, as well as its management of the situation in Iraq and the prospect of full-scale civil war there. It is also very uneasy about the possibility of US military action against neighboring Iran. This latter development would have particularly harmful consequences for both the political and the economic future of the UAE. The UAE's pro-US stance is out of step with regional popular opinion (and, to an extent, domestic sentiment too), which is hostile to US policy in the Middle East. Although the economy has ridden out regional conflict in recent years, its geographical proximity to Iran makes it more likely that it will experience negative repercussions from any conflict there. The federal economy and planning minister, Sheikha Lubna al-Qassimi, will continue to promote a progressive economic agenda, built around economic liberalization, diversification and enhancing the role of the private sector. With support from Sheikh Khalifa the government is also expected to take steps to promote foreign investment further, including the possible abolition of the sole agency law and regulations that restrict foreigners to minority stakes in local firms. However, these measures will be hotly contested by prominent local families with business interests. There has already been lobbying against the possible revocation of the commercial agencies law, which grants UAE companies local monopolies to distribute imported goods. In August 2006 the federal government scrapped the monopoly distribution rights for some essential goods, mainly food items, but it now appears unlikely that any further significant dilution of the commercial agencies law will be forthcoming–at least in the near-term. Economic Performance It is forecasted that the UAE economy will expand by an average annual rate of around 7% in real terms. Industrial growth will be the mainstay of the overall expansion, underpinned by continued–albeit modest– rises in oil production. Growth in non-oil industrial output will be perhaps an equally important direct driver, however, as investment in manufacturing and heavier industrial projects (focused mainly on energyintensive sectors such as petrochemicals and metals) brings new capacity on stream and the competitiveness of UAE exports is bolstered by the weakness of the US dollar, particularly in 2007. Both domestic and foreign investment in new projects are expected to remain strong, and capital spending on real estate and infrastructure schemes (including new roads and highprofile programs such as the Dubai metro project and airport expansion) will also stay high. The services sector should also attract substantial investment. Current demand for services is likely to pick up, led by the tourism industry, especially in Dubai. Continued rapid growth in the population, fuelled largely by increases in the size of the expatriate workforce, will also underpin robust domestic demand. Inflation has picked up over the past 18 months, as the surge in domestic demand has generated price pressures, particularly in real estate and some parts of the services sector. This has begun to drive up wage demands in the private sector. The weakness of the dollar is also adding to inflationary pressures. Official data show that price growth averaged around 6% in 2005. However, the official data are indicative only of the price trends experienced by the minority Emirati population, which continues to benefit from a range of subsidies on core goods and services. There is little prospect of a change in the exchange-rate regime, and the UAE dirham is expected to remain pegged to the US dollar at the current value of Dh3.67:US$1. Confidence in the peg remains high, bolstered by the Central Bank of the UAE's long track record of maintaining the dollar value of the dirham and its absolute commitment to holding the peg in place.* * The Economic Intelligence Unit Ltd., October 2006 Key Information Contacts Abu Dhabi Chamber of Commerce and Industry www.abudhabichamber.ae Central Bank of UAE www.uaecb.gov.ae Ministry of Finance and Industry www.uae.gov.ae/mofi Ministry of Planning www.uae.gov.ae/mop Ministry of Economy and Commerce www.uae.gov.ae/moec 2005-ORIGINS OF GROSS DOMESTIC PRODUCT (%) 2005-COMPONENTS OF GROSS DOMESTIC PRODUCT (%) Industry Agriculture Services Private consumption Fixed investment Government consumption Change in stocks Exports of goods & services Imports of goods & services 50.6 46.5 2.9 100 80 60 40 20 0 -20 44.1 11.1 21.3 1.2 89.3 -40 -60 -80 -66.0 PAGE 26
FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT APRIL 2007 ABU DHABI SECURITIES MARKET UAE ECONOMIC CHARTS AND TABLES 2002 (a) 2003 (a) 2004 (a) 2005 (a) 2006 (b) GDP at market prices (Dh billions) 272.9 321.8 386.5 485.5 551.8 GDP (US$ billions) 74.3 87.6 105.2 132.2 150.2 Real GDP growth (%) 2.6 11.9 9.7 8.2 (b) 10.2 Consumer price inflation (av; %) 2.9 3.1 7.0 12.5 (b) 10.0 Population (million) 3.8 (b) 4.0 (b) 4.3 (b) 4.6 (b) 4.9 Exports of goods fob (US$ billions) 52.2 67.1 91.0 115.4 136.7 Imports of goods fob (US$ billions) 37.6 45.8 63.4 71.1 88.9 Current-account balance (US$ billions) 3.4 7.6 10.6 26.5 26.5 Foreign-exchange reserves excl gold (US$ billions) 15.2 15.1 18.5 21.0 25.5 Total external debt (US$ billions) 20.5 (b) 24.0 (b) 30.6 (b) 33.9 (b) 39.1 Debt-service ratio, paid (%) 2.2 (b) 1.7 (b) 1.5 (b) 1.7 2.1 Exchange rate (av) Dh:US$ 3.67 3.67 3.67 3.67 3.67 (a) Actual. (b) Economist Intelligence Unit estimates. ECONOMIC FORECAST SUMMARY 2006 2007 2008 2009 2010 2011 Real GDP growth (%) 10.2 8.5 6.3 6.1 5.4 5.3 Consumer price inflation (av; %) 10.0 8.0 7.0 5.5 4.0 3.0 Budget balance (% of GDP) 13.6 13.4 12.4 10.8 9.6 8.3 Current-account balance (% of GDP) 17.6 12.3 8.2 6.2 4.0 3.1 Exchange rate Dh:US$ (av) 3.67 3.67 3.67 3.67 3.67 3.67 Exchange rate Dh:[euro] (av) 4.59 5.00 4.91 4.75 4.63 4.64 2005-PRINCIPAL EXPORTS (FOB) (US$ millions) Crude oil 43.5 Re-exports 38.0 2004-PRINCIPAL IMPORTS (CIF) (US$ millions) Machinery & electrical equipment 12.4 Precious stones & precious metals 10.4 Vehicles & other transport equipment 6.4 2005-MAIN DESTINATION OF EXPORTS (%) 2005-MAIN ORIGINS OF IMPORTS (%) Japan South Korea China UK USA Thailand India Other India Other 25.6 9.3 5.8 9.9 9.7 9.6 5.1 8.9 61.9 54.2 The Economic Intelligence Unit Ltd., November 2006 PAGE 27
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