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Dubai in International Context

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Siyang Shen

on 24 January 2015

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Transcript of Dubai in International Context

IN
INTERNATIONAL CONTEXT

XueYun Ma
Madara Rudzīte
Andrea Schmidtová
Siyang Shen

OVERVIEW
Brief overview

International comparisons

Doing Business Report

Forecasts

Zayed bin Sultan Al Nahyan
Three Arab Worlds
United Arab Emirates
Number crunching
GDP per capita (developed)
GDP per capita (Middle East)
Oil&gas
Doing Business Report (2014)
rankings
GDP real growth
Exports (% of GDP)
Inflation
Economics
Number crunching
Financial
Reserves
Foreign direct investment
Bank capital to assets ratio
Strength of legal rights
Number crunching
Social
Mortality rate
Life expectancy (male)
Life expectancy (female)
Incidence of tuberculosis
Middle East and North Africa
High Income
Behind UAE: Netherlands, Japan, France, Spain, Qatar, Kuwait
Forecasts
Fiscal situation
Intro of the crisis
what went wrong
Excessive real estate bubble
Property prices plunge by 60% in 2009 and 2010
What UAE, Abu Dhabi and Dubai did
2009 - bailout by Abu Dhabi $10 billion through two state-owned banks, and $10 billion of bonds issued to the UAE central bank

2009 - IMF mission
Present situation
 Growth again
Nakheel profits up 54% in the first half of 2014
Domestic stock index up 81% in 2013
5.2% GDP growth in 2013 (expected to be about 4.75% in 2014 and 4.5% later on)
CA surplus down from 18% to 16.5% in 2012, set to further decrease
Increased deposits, boosting liquidity

 Contra cyclical fiscal policy
The fiscal stance tightened by around 1% of nonhydrocarbon GDP, about half of what had been你expected (2013)

Fiscal surplus 6.5% of GDP (down from 8.9% in 2012)
 Prudent loan markets
 Debt restructuring
2014 - Nakheel pays before maturity

Danger of mounting new debt due to Expo2020
 Limits on real estate market
Attracts investors, but could pose new threats to growth sustainability
Increase from property registration fee from 2% to 4%
Completion of 40% of the project before reselling
Domestic issues
 Peg
 Subsidies on food
Strong domestic demand and rising food prices will add to inflationary pressure in 2014-18.
The government will maintain subsidies, owing to fears of prompting unrest, but they might be scaled.
 Emirate workforce
Plans to encourage domestic work force
Future outlook
Sovereign wealth fund estimated at $975 billion (second highest in the world after China, followed by Norway)
$64bn outstanding debt maturing by 2015
Total debt is estimated at $142 billion (141 % of Dubai GDP) with $92 billion falling due in 2014–19.
Overheating risks
Expo 2020
Falling oil price
Developments depend on OPEC's medium term plans and international situation, such as Venezuela and Russia issues
Acceleration of Dubai's population
Public Economics
How do government policies affect the economy? How should policies be designed to maximize welfare?
Price intervention: taxes, welfare, social insurance. Regulation: Min wages, education/labour laws.
Provision of Emirati citizens vs immigrants
Dubai and UAE vs other developed countries
Sections: Healthcare, Education, Benefits/Welfare, Social Security
Public Economy
 Healthcare

Emirati citizens
Health care is free for all nationals and there is a compulsory health insurance scheme in place in Abu Dhabi to be extended.
Many planned projects in progress.
Medical tourists will also be encouraged, projected to grow by about 15 per cent annually.
Total health-care spending in the UAE will raise the sector's contribution to GDP from 2.8 per cent to 3.4 per cent.
Pre and post-natal care, immunization, life expectancy have reached levels similar to those in Europe and North America.
Other nationals
No access to healthcare
500 Dhs (89) for health cards, Dubai are required to pay 60 Dhs for a note from the Dubai Health Authority to validate their sick leaves.
Mandatory insurance costs often not borne by employer
New Scheme in Dubai: mandatory insurance policy that will require all employers to provide health coverage for all their employees.
Insurance companies interested in providing the package to employees with salaries below Dh 4,000 (710) will have to undergo further qualifying criteria.
The premium for this package will range between Dh 500-700 (90-125) per person per year.
Certain deadlines to be met.
 International Comparison
It can be argued that the UAE has high health standards compared with other developing countries and even with some developed countries. Measures of malnutrition, mortality and morbidity show impressive improvement in the last two decades.
 Education
Emirati citizens
During the 2013–14, approximately 1/3 attended 685 government schools, whilst ⅔ students were enrolled in 489 private establishments.
Free education to all UAE citizens, and arabic-speaking children of expats in the public sector
Immigrants
Average school fees in the UAE ranged from Dh22,042(4000) in the Indian school system to Dh50,678(9000) in the British system, with year 12 annual fees as high as Dh94,215 (16700)
Various loans and credit cards geared at paying school fees, even specialist credit cards
Non nationals often return to their home country for education
 International Comparison
 Benefits/Welfare
Emirati citizens
Average male Emirati receives benefits worth about 204,000 dirhams ($36000) a year. Other benefits include a 12,000 payment toward wedding costs.
Welfare takes the form of social security benefits, Ministry-supported social centres run by the General Women’s Union, and the g social welfare and rehabilitation centres providing assistance to the disabled.
Social welfare assistance is also provided to 14,075 older people, representing 37 percent of the total number of older people in the country
Generous welfare benefits in case of death
Housing
UAE citizens are eligible for free or subsidised housing since access to modern comfortable housing is considered to be the right of every citizen
The UAE has three types of housing programmes
Non nationals
Very little to none
International Comparisons
Supposedly taking half of the government budget
 Pensions/Social Security
Emirati citizens
There is provision “for those who are genuinely unable to work”. But, “there is no unemployment insurance fund for those who are fit to work”
No social security taxes on immigrants, employers contribute 12.5% to pensions from contribution calculation salary.
Up to $545 million a year is spent on 13,500 pensioners and beneficiaries in Abu Dhabi alone
Non nationals
Expatriates are not entitled to social welfare benefits. They will receive a service gratuity payment at the end of their employment.

International Comparison
Emiratis pay just 5 percent of their salary toward retirement pensions. The minimum monthly pension is at least $2,800 a month, though it can go much higher for people who earned top pay before retirement. By contrast, Americans pay nearly 8 percent of income up to $117,000 for an average monthly Social Security disbursement of $1,294.
Whereas the average age of retirement in the United States is 62, in Abu Dhabi the average is 45 for women and 55 for men
Social security entitlements constitute 1–2 percent of gross domestic product. 4-6 percent US, 13 percent UK
Discussion
End of US QE translating in increased interest rate might be beneficial, decentivizing private credits
External issues
 Oil price
Break even oil price $84
Today's oil price is $46.25 (WTI) and $47.67 (Brent crude)
 Volatile demand from developing economies
China
Africa has replaced traditional commercial partner Iran
A growing chunk of African trade carried out by Chinese companies
 Regional unrest
Dubai can be perceived as a safe haven relative to other Middle Eastern countries with internal unrest
Loan-to-mortgage ceiling
The University of Edinburgh
MONETARY ASPECTS
Brief overview on the financial system

Monetary policies

Securities markets
The UAE Currency Board was set up in 1973, introducing UAE dirham

The dirham replaced the Qatari Riyal, Dubai Riyal and Bahraini Dinar which were variously used as legal tender in the several emirates until then

The board was not given the power to conduct monetary policy until it was replaced by the Central Bank in 1980

A bit of history
IMF Financial Stability Assessment
Includes Reports on Observance of Standards and Codes (ROSC)
Focuses on monetary policy transparency, banking supervision and payment system
Banking system
Appears to be strong

Buttressed by strong banking supervision
Stress Test
Low interest rate risk
Low foreign exchange rate risk
Ample liquidity
Overall the CBU ranked among those banks with best banking practices
Policy transparency
Lack of transparency
Urged to publish more information on the Central Bank and its operation
Improving: Statistical Bulletins, Annual Reports and the constantly updated CBU website
Securities and insurance market
Small and underdeveloped
Plagued with problems such as insider trading
SECURITIES MARKETS
MONETARY POLICIES
Interest rate
Exchange rate
The Central Bank will retain a loose monetary policy for now, given low official inflation and low US interest rates

CBU Gov. Sultan Bin Nasser Al Suwaidi (2010) reaffirms the bank’s role in maintaining the peg

Monetary policy remains focused on protecting the banking sector and ensuring liquidity

Three-month interbank offered rate continued to fall, below 0.8%, indicating high liquidity in the market

Further tighten banking regulations
The Central Bank remains committed to the existing peg of the UAE dirham to the US dollar, USD/AED = 3.67

The peg has provided stability for decades

Despite the problems associated with a fixed currency, including a lack of monetary flexibility, the CBU is committed to the system

The peg is not expected to come under threat
Abu Dhabi Securities Exchange (ADX) and Dubai Financial Market (DFM) were founded only in 2000
Astonishing growth rate before the global financial crisis
Efficiency of the Securities Markets
Mature markets are generally weak-form efficient
Emerging markets are mixed
Abdmoulah (2010) studies weak-form efficiency of 11 Arab stock markets over periods, rather than at a given point of time as commonly done
Time paths of betaβcoefficient and the 95% confidence interval obtained through Kalman Filter state–space estimations
Beta converges towards 0 in the NYSE (AMEX) case, while fluctuates in the DFM and ADX cases
Despite the regulatory improvement, the two financial markets in the UAE are far from being efficient compared to developed market
Underdeveloped: thin trading, inadequate regulatory monitoring
Full transcript