Eighteen months ago in April 2007, before the onslaught of the US subprime crisis and global credit crunch, Sheikh Mohammed bin Rashid Al Maktoum, the United Arab Emirates vice-president and prime minister, and ruler of Dubai since 2006, delivered a key speech in Abu Dhabi. His message has been described in a new book by regional commentator Edmund O’Sullivan* as a “declaration of the start of a new era for the UAE and the region and the announcement to the world of the coming of the New Gulf”.
Sheikh Mohammed declared: “I can see myself visiting government departments and seeing satisfied customers and employees with enthusiasm and passion to excel and overcome challenges. I can see our government departments as the hot spot for world delegations which come to learn from our experiences and follow our practices. I can see myself passing by harbours, airports, factories and malls and see great achievements. I see international cities, throbbing with activity and vibrancy.”
The sheikh explains: “The vision is clear and the goal is set. The future does not wait for the hesitant. We do not have the luxury of time. And we were never used to hesitating and waiting. This is a call to join hands, combine our efforts and set off to make this vision come true.”
Sheikh Mohammed’s vision for the UAE, and for Dubai in particular, is not just empty rhetoric. The UAE is one of the world’s most successful small nations. Thanks to oil and gas it has the second-largest economy in the Middle East, with GDP estimated in 2007 at Dh729.3bn ($200bn) and per capita GDP, at more than $30,000 and rising fast, among the highest outside the OECD.
Mr O’Sullivan believes the sheikh’s approach provides a useful model for the region. “The UAE government is now committed to a programme of unprecedented structural and policy reform. Stable, prosperous and tolerant, the UAE provides a compelling vision of what the New Gulf might be.” In short, under the robust leadership of Sheikh Mohammed, the UAE and Dubai are enjoying rapid change and development that is providing a clear lead in the Gulf. And although major challenges exist, such as inflation, the current global credit crunch does not seem to represent the problem in the UAE that it does in many developed markets.
According to the Abu Dhabi-based Arab Monetary Fund, the UAE’s real GDP grew by a healthy 7.4% in 2007. “This good performance will be a result of strong oil prices and the high growth in such sectors as construction, real estate, trade and foreign investment inflow,” the AMF report said last month.
Building blocks
Sheikh Mohammed’s approach and vision can best be seen in developments in Dubai which are based on six key building blocks that include tourism, trade, transportation and finance. Last year he launched the Dubai Strategic Plan – 2015 which is set to maintain double-digit economic growth (13% between 2000 and 2007), achieve a GDP of $108bn and increase GDP per capita to $44,000 by 2015. He added that the aim of the plan is to increase productivity by 4% per year and to create new sectors of growth with sustainable competitive advantage.
The sheikh emphasised the focus on developing the emirate’s most dynamic economic sectors, adding that the plan would not be affected by oil price fluctuations.
“Dubai has succeeded in diversifying its sources of income , and reducing its dependence on oil, so that, today, oil’s contribution to (Dubai’s) GNP is a mere 3%,” he said. “When I announced my vision for Dubai in 2000, I spoke of economic aims for the year 2010. The reality is that not only these aims have been realised but they have been realised in half the time. In the year 2000 the plan was to increase GNP to $30bn by 2010, in 2005 that figure was exceeded, with GNP reaching $37bn.”
Much of Dubai’s success earlier this decade stems from this visionary leadership, which is mainly driven by government policies aimed at improving the business and investment environment in addition to initiatives to establish specialised zones and mega projects such as Internet and Media City, Healthcare City, The Palm and Dubailand, along with the Dubai International Financial Centre (DIFC) launched in 2004. Between 2000 and 2005, Dubai achieved an annual real GDP growth rate of 13.4%, with the non-oil service sector (including financial services) being the key driver of economic growth with an annual growth rate in the period of 21%, accounting for 74% of Dubai’s current GDP in 2005.
Carry on regardless
In looking to the 2015 plan, Dubai’s diversified structure, based around tourism, transportation, construction and financial services, is well placed to achieve its strategic goals and sustain a real GDP growth rate of 11% for the next eight years or more.
As Burj Dubai, the world’s tallest structure, continues to add to its current 160 floors, the UAE financial sector also continues to motor ahead, almost oblivious to the financial crises facing many Western nations. According to the latest statistics from the UAE Central Bank, the profits of local and foreign banks in the UAE for the first half of 2008 reached a record Dh16.008bn ($4.4bn) and look set to easily surpass the profits of 2007 of Dh24.4bn, which were a 23.6% increase on 2006.
Banking is booming in the UAE with strong growth in all areas. With an estimated $2000bn in projects reported in the pipeline in the region there is no shortage of opportunities, and during the first half of this year total bank assets rose 15.9% to Dh1428.7bn while total deposits grew 16.3% to Dh837.7bn. Assets in June this year were two and a quarter times what they were at the end of 2005, with deposits almost double the size.
Consumer loans
One highlight of this growth surge has been the massive growth in consumer lending. This year consumer loans to the 4.5 million people in the UAE jumped to Dh54bn ($14.8bn) at mid-year, 46% higher than the same period last year. This follows 40% growth in 2007, and the current total is almost double the figure at the end of 2005.
Consumer lending is definitely booming, but can the market cope with this new growth or is this a consumer bubble about to burst? While some bankers have expressed concerns, especially with the lack of credit data from a credit bureau, others are convinced that the regulations put in place by the UAE central bank are adequate to cope with the growth.
Mohammad Kamran Wajid, global head of financial institutions at Emirates NBD, the UAE’s largest bank, told The Banker that the Dh250,000 cap imposed on consumer lending by the central bank and the link to salary provide useful protection against a consumer lending bubble. He believes adequate protection is in place to allay concerns and Emirates NBD is also confident there is further growth potential in this consumer area.
Market confidence
Emirates NBD has such confidence in the market that it obtained a new licence from the central bank in July to establish a new consumer finance company called Emirates Money Consumer Finance, which is expected to redefine this segment over the coming months with new loan products and services.
In the same way that banking business is accelerating, banks, especially local banks, are radically expanding their branch networks. At the end of 2005, national and foreign banks had 370 and 83 branches respectively. But just 30 months later, at the end of June 2008, while the number of foreign branches had stayed the same, at 83, the number of national bank branches had dramatically increased by 219 branches, or 59%, to 589.
Many of these new branches are part of the rapid expansion of Islamic finance in the region, which is growing at about 30% annually and bringing with it not only new banks but new branch networks. Noor Islamic Bank, established last year in Dubai with the ambitious goal of becoming the most recognised Islamic banking brand and the largest global financial institution in its field, has set up a large network of branches this year.
And in Abu Dhabi, Al Hilal Bank was launched in June with Dh1bn in paid-up capital and similar big dreams. Chief executive Mohamed Berro plans to open 11 branches this year across the country and sees huge prospects in the retail and wholesale markets along with a clear strategy to develop an international network in time.
Distant horizon
How well these new Islamic institutions perform remains to be seen, but there is increasing enthusiasm to establish more and larger Islamic financial institutions. Last month, Dubai Bank, the 12th largest banking group in the country, established a $5bn financing programme to develop its plans to become a major global Islamic lender over the next five years through acquisitions and organic growth. Like Noor, Dubai Bank is aiming to be the pre-eminent Islamic institution and is looking to expansion in Asia and Africa as well as Europe and the other Gulf Co-operation Council states.
Clearly Noor, Hilal and Dubai Bank, among many others, see a strong future in Islamic finance, but they are all also taking a long-term investment perspective. As Faisal Aqil, general manager, retail banking at Emirates Islamic Bank, explained: “New Islamic banks will not be profitable in the short run. They need three years to break even.” But despite this long investment horizon, the owners of these banks, who happen to be the rulers of Dubai and Abu Dhabi, are happy to take the long view.
And it is this long view that is attracting huge international interest and commanding increasing attention. It is not just the Abu Dhabi Investment Authority (ADIA), the world’s largest sovereign wealth fund (SWF) with estimated assets of $875bn, the growing band of Islamic financial institutions and mega projects in both Dubai and Abu Dhabi, but also the bold schemes such as the recent takeover of Manchester City Football Club in the UK by the Abu Dhabi United Group, that are capturing imaginations and showing what the UAE model can do on the world stage.
The UAE model, energised by Sheikh Mohammed, provides an alternative growth approach that continues to produce significant results, as the Dubai 2015 strategic plan shows. But it is also underpinned by considerable oil and hydro-carbon wealth and critical shifts in regional and global power centres.
The long-term UAE approach that is exemplified in Dubai is not based on short-term returns, as is often seen in the Western capitalist model that is largely focused on quarterly results. Dubai’s philosophy has been to create its own destiny without oil and has focused on the fundamentals of investing. Through this strategy Sheikh Mohammed has created a diversified investment structure which handles both the Investment Corporation of Dubai (ICD), the investment arm of the government of Dubai, and Dubai Holding, the ruler’s personal portfolio of private (non-government) investments.
Alternative income
What appears clear is that Dubai is being built on a very different financial and political model than the traditional Western capitalist model seen in the US and Europe. While it is unashamedly capitalist, the Dubai approach has particular local characteristics, which, like China, give it a unique flavour. The Dubai strategy makes no pretence of pandering to be a democracy in the US style but is designed “to make the UAE number one in the world”, according to Sheikh Mohammed, and incorporate the best globalisation has to offer for the benefit of UAE nationals.
At this stage of the 21st century and over a year into the global credit crunch, Sheikh Mohammed is demonstrating that, like Brazil, Russia, India and China, the US model is not the only viable way forward. Will the sheikh’s strategy come to grief?
Curiously, the Dubai approach through ICD and Dubai Holding emerged because Dubai knew it could not rely on oil indefinitely and had to seek alternative income sources. Also, although Abu Dhabi has a lot of oil now, it is also well understood that it is a finite resource and hence through ADIA and other investments, the overall UAE model is based on conservative, diversified, long-term investment principles well aware that the oil will run out. Yes, there are risks – but the risks appear well spread and based around a long-term vision.
Negative perceptions
One interesting aspect of the UAE strategy is that in recent years the world’s global financial structure has shifted significantly and the importance of sovereign wealth funds, such as ADIA, has grown dramatically in international financial terms.
| According to the IMF’s John Lipsky in a speech on SWFs in Chile last month: “Assets under management of SWFs currently total $2000bn to $3000bn, thereby exceeding assets managed by hedge funds ($1900bn). In fact, such funds today account for between one quarter and one third of all foreign assets held by sovereigns. SWF assets are projected to surpass the stock of global foreign exchange reserves in the not-so-distant future and to top $7000bn to $11,000bn by 2013.” |
While Mr Lipsky acknowledges the important role of SWFs in today’s new financial structure, the IMF deputy chief also warned that “negative perceptions” could hurt SWFs’ ability to invest and may raise protectionist hackles. An important document – the Generally Accepted Principles and Practices for SWFs (GAPP) – is due to be presented at the IMF/World Bank this month, but the outcome from the recent discussions is not clear.
One possible outcome from GAPP, which worries some Gulf officials, is, like the US Patriot Act, an increase in adverse regulation which would inhibit investment in US-related areas. In short, US fears of the role of SWFs and their unproven political motives could run the risk of a protectionist backlash. The SWF issue is in danger of splitting the world into two camps, a US and a non-US camp, with the US camp much weaker than it was just a decade ago.
A new order
If the US believes it can force adverse regulation on SWFs such as ADIA or on China, then it may be in danger of overplaying its hand. The UAE central bank governor, Sultan Al Suwaidi, said in late August that added new regulations for SWFs could push funds into more sympathetic regions.
The UAE model and the emergence of the new Gulf represents a manifestation of a new world economic order that traditional models, such as those in the US and Europe, have been slow to fully acknowledge. The UAE is laying the foundation for its long-term future on its own terms and by creating its own destiny. This has required considerable vision, patience and longevity, qualities some traditional models may have forgotten.
* The New Gulf – How Modern Arabia is Changing the World for Good, by Edmund O’Sullivan.
