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Eurozone Crises Implications on the UAE Economy


The Eurozone Crises Implications on
the UAE Economy and what actions
were taken by the UAE to recover

A review of the eurozone economic crisis and what are the main reasons
behind it, and its impact on the United Arab Emirates economy

By: Ahmed Mohamed Fawzy AbdElRaouf

May 2014

Eurozone Crises Implications on the UAE Economy

Table of Content
Executive Summary
Definition of the Eurozone, and what Countries it consist of.
How the monetary policy is managed across the union.
The Euro Advantages and Disadvantages.
Crises rising in the Euro zone and its consequences.
o How did the crisis begin?
o Why do bonds yields go up in response to this type of crisis, and what are the
o What did European governments do about the crisis?
o Why is default such a major problem? Couldn't a country just walk away from its debts
and start fresh?
o How has the European debt crisis affected the financial markets?
o What were the political issues involved?
o Is fiscal austerity the answer?
Introduction on the UAE economy.
The three Strategic Characteristics to descript the UAE economic power.
o A key commercial and trading hub.
o Economic diversification fueling growth.
o Abu Dhabi and Dubai visions.
United Arab Emirates Economic Indicators
The Effect of the Euro crises and Recovery actions taken.
o Introduction.
o Impact on UAE employment market.
o Impact on UAE savings.
o Impact on investments.
o Impact on the UAE society.
o Economic key issues that was focused on during the improvement plan.
o Recent Economic Developments.
o UAE Economy (2009).
o Short term expectations in 2010.
o Conclusion.
UAE Economy Back On Track.

Eurozone Crises Implications on the UAE Economy

Executive Summary
The Eurozone Crises Implications on the UAE Economy and what actions were
taken by the UAE to recover
The European debt crisis is the shorthand term for Europes struggle to pay the debts it has built up in
recent decades. Five of the regions countries Greece, Portugal, Ireland, Italy, and Spain have, to
varying degrees, failed to generate enough economic growth to make their ability to pay back
bondholders the guarantee it was intended to be.

The crisis hit Dubai hardest, as it was heavily exposed to depressed real estate prices , Dubai lacked
sufficient cash to meet its debt obligations, prompting global concern about its solvency.

The UAE Central Bank and Abu Dhabi-based banks bought the largest shares.

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

In the below research, I will go through an introduction to the Eurozone area, the monetary policy in the
union, its advantage and disadvantage, and the Economic crises that hit this region.
Also I will go through an introduction to the United Arab Emirates strong economy, and how it was
affected by the euro crises, and what action was taken by the UAE to recover.
And finally a summery by the economic figures during 2013 after the UAE Economy Back on Track

Eurozone Crises Implications on the UAE Economy

Definition of the Eurozone, and what Countries it consist of

The collective group of countries which use the Euro as their common currency. The Eurozone came
into being in 1999, and originally consisted of 11 countries. Now 17 countries are members of the
The Eurozone does not include every country in the European Union (some countries are not yet
using the Euro), and does not include every country who is using the Euro (to become part of the
Eurozone, the country must use the Euro as its sole legal currency).
The Eurozone, officially called the euro area, is an economic and monetary union (EMU) of 18
European Union (EU) member states that have adopted the euro () as their common currency and
sole legal tender.
The eurozone currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany,
Greece, Ireland, Italy, Latvia, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia,
and Spain.
Other EU states (except for the United Kingdom and Denmark) are obliged to join once they meet
the criteria to do so. No state has left and there are no provisions to do so or to be expelled.
Monaco, San Marino, the Vatican City and Andorra have formal agreements with the EU to use the
euro as their official currency and issue their own coins. Other states, like Kosovo and Montenegro,
have adopted the euro unilaterally, but these countries do not formally form part of the eurozone and
do not have representation in the ECB or the Eurogroup.

Eurozone Crises Implications on the UAE Economy

How the monetary policy is managed across the union
As a currency union, monetary rules are created and maintained by the European Central Bank.
Monetary policy of the zone is the responsibility of the European Central Bank (ECB) which is
governed by a president and a board of the heads of national central banks.
When the European Monetary Union was established, each member country had to give up some
sovereignty by ceding the European Central Bank the authority to create money.
The principal task of the ECB is to keep inflation under control. Though there is no common
representation, governance or fiscal policy for the currency union, some co-operation does take place
through the Eurogroup, which makes political decisions regarding the eurozone and the euro. The
Eurogroup is composed of the finance ministers of eurozone states, but in emergencies, national leaders
also form the Eurogroup.
Since the late-2000s financial crisis, the eurozone has established and used provisions for granting
emergency loans to member states in return for the enactment of economic reforms. The eurozone has
also enacted some limited fiscal integration, for example in peer review of each other's national budgets.
The issue is highly political and in a state of flux as of 2011 in terms of what further provisions will be
agreed for eurozone reform.

Eurozone Crises Implications on the UAE Economy

The Euro Advantages and Disadvantages
The Euro was introduced on New Years Day 1999 as an electronic trading currency, on January
1 2002 the came into being an actual currency, freely usable in all cash transactions throughout the
Euro zone. For individuals the effect was that they can use the Euro as a common currency throughout
the Euro zone.
As a concept creating a Single European Currency, the is not new, since the founding of the EU,
Europe has been working to towards this end, i.e. the . At present Britain, Denmark and Sweden are the
only EU member states that have no intention to join the Euro-area.
As part of continuing efforts to promote prosperity within all the regions of European Union, the Euro is
part of efforts by EU member states to implement policies that will encourage the creation of a Single
European Market throughout the European Union.
The implementation of the Euro further assists in the removal of the current trade barriers that divide EU
economies; this is especially the case in the labor, finance and movement of goods in the markets of
There appear to be many groups that are against the Euro within and out of the Euro-area.
The Disadvantages of the Euro
1. The impact of the Euro could be a reduced market share for local businesses due to greater
competition from elsewhere.
2. Increased potential for price wars, especially as large firms enter local markets, previously
served by smaller companies.
3. European consumers did fear that they would be cheated when the new notes and coins are
introduced price changes were obvious!
4. 4.The biggest criticism is not one of economics, but loss of political control of monetary policy
and the fear of a heavier tax burden, because member states might find this the only way they
can manage rising inflation (especially in the non-Euro countries Great Britain, Sweden and

The Advantages of the Euro are manly in the economic sense:
1. Both consumers and firms would are able to make significant savings in the cost of transactions
within the Euro-zone, leading to the development of Europe wide markets for goods and services
as a result of not having to convert currencies. This is already benefiting many poor regions of
2. Firms within the Euro zone are already finding it easier and cheaper to raise money to invest,
enabling businesses to improve their competitiveness on the world markets.

Eurozone Crises Implications on the UAE Economy

3. The introduction of the was already demonstrating savings for business in reducing the cost of
transactions between member Euro-zone states. The enables cash received from several
different countries to be lumped together instantly and without conversion and deposited in the
highest interest earning country.
4. Clearer and better information on input costs and competitors prices enable improved
opportunities for long term planning and strategy formulation, as there will be less uncertainty
concerning prospective returns on foreign EU operations.
5. Euro zone economies are as part of a massive market are not expected to fluctuate as
dramatically as in the past from boom to bust. This added stability is expected to reduce
inflationary pressure and stimulate the economy of Europe.
Unfortunately there is no clear balance of advantages and disadvantages of the Euro; it appears to be
more a question of your own personal economic and political preferences, such as how governments
approach managing their monetary policy. For governments the question of joining the Euro is a trade
off on having higher unemployment and low inflation or lower unemployment with higher inflation;
while some governments see price stability as their objective.

Crises rising in the Euro zone and its consequences.

The Eurozone crisis (referred to as the Euro crisis) is an ongoing crisis that has been affecting the
countries of the Eurozone since early 2009, when a group of 10 central and eastern European banks
asked for a bailout.
At the time, the European Commission released a forecast of a 1.8 per cent decline in EU economic
output for 2009.
One researcher has held that this was a combined government debt crisis, a banking crisis and a growth
and competitiveness crisis.
Eurozone Crises Implications on the UAE Economy

The crisis made it difficult or impossible for some countries in the Eurozone to repay or refinance their
government debt without the assistance of third parties like the ECB or IMF. Moreover, banks in the
Eurozone were undercapitalized and have faced liquidity and debt problems. Additionally, economic
growth was slow in the whole of the Eurozone and was unequally distributed across the member states.
Governments of the states most severely affected by the crisis have coordinated their responses with a
committee dubbed "the Troika" formed by three international organizations: the European Commission,
the European Central Bank and the International Monetary Fund.
This is one of most important problems facing the world economy, but it is also one of the hardest to

Below is a Q&A to help familiarize you with the basics of this critical issue.

How did the crisis begin?
The global economy has experienced slow growth since the U.S. financial crisis of 2008-2009,
which has exposed the unsustainable fiscal policies of countries in Europe and around the globe. Greece,
which spent heartily for years and failed to undertake fiscal reforms, was one of the first to feel the pinch
of weaker growth.

When growth slows, so do tax revenues making high budget deficits unsustainable. The result was that
the new Prime Minister George Papandreou, in late 2009, was forced to announce that previous
governments had failed to reveal the size of the nations deficits. In truth, Greeces debts were so large
that they actually exceed the size of the nations entire economy, and the country could no longer hide
the problem.

Investors responded by demanding higher yields on Greeces bonds, which raised the cost of the
countrys debt burden and necessitated a series of bailouts by the European Union and European Central
Bank (ECB). The markets also began driving up bond yields in the other heavily indebted countries in
the region, anticipating problems similar to what occurred in Greece.

Why do bonds yields go up in response to this type of crisis, and what are the implications?
The reason for rising bond yields is simple: if investors see higher risk associated with investing
in a countrys bonds, they will require a higher return to compensate them for that risk.

This begins a vicious cycle: the demand for higher yields equates to higher borrowing costs for the
country in crisis, which leads to further fiscal strain, prompting investors to demand even higher yields,
and so on.

A general loss of investor confidence typically causes the selling to affect not just the country in
question, but also other countries with similarly weak finances an effect typically referred to as

Eurozone Crises Implications on the UAE Economy

What did European governments do about the crisis?
The European Union has taken action, but it has moved slowly since it requires the consent of all
nations in the union. The primary course of action thus far has been a series of bailouts for Europes
troubled economies.
In spring, 2010, when the European Union and International Monetary Fund disbursed 110 billion euros
(the equivalent of $163 billion) to Greece. Greece required a second bailout in mid-2011, this time worth
about $157 billion. On March 9, 2012, Greece and its creditors agreed to a debt restructuring that set the
stage for another round of bailout funds. Ireland and Portugal also received bailouts, in November 2010
and May 2011, respectively.

The Eurozone member states also created the European Financial Stability Facility (EFSF) to provide
emergency lending to countries in financial difficulty.

The European Central Bank also has become involved. The ECB announced a plan, in August 2011, to
purchase government bonds if necessary in order to keep yields from spiraling to a level that countries
such as Italy and Spain could no longer afford.

In December 2011, the ECB made 489 ($639 billion) in credit available to the regions troubled banks
at ultra-low rates, and then followed with a second round in February 2012. The name for this program
was the Long Term Refinancing Operation, or LTRO.

Numerous financial institutions had debt coming due in 2012, causing them to hold on to their reserves
rather than extend loans. Slower loan growth, in turn, could weigh on economic growth and make the
crisis worse. As a result, the ECB sought to boost the banks' balance sheets to help forestall this
potential issue.

Although the actions by European policy makers usually helped stabilize the financial markets in the
short term, they were widely criticized as merely kicking the can down the road, or postponing a true
solution to a later date. In addition, a larger issue loomed: while smaller countries such as Greece are
small enough to be rescued by the European Central Bank, Italy and Spain are too big to be saved. The
perilous state of the countries fiscal health was therefore a key issue for the markets at various points in
2010, 2011, and 2012.

In 2012, the crisis reached a turning point when European Central Bank President Mario Draghi
announced that the ECB would do "whatever it takes" to keep the Eurozone together. Markets around
the world immediately rallied on the news, and yields in the troubled European countries fell sharply
during the second half of the year.

Eurozone Crises Implications on the UAE Economy

Why is default such a major problem? Couldnt a country just walk away from its debts and start
Unfortunately, the solution isnt that simple for one critical reason: European banks remain one
of the largest holders of regions government debt, although they reduced their positions throughout the
second half of 2011.

Banks are required to keep a certain amount of assets on their balance sheets relative to the amount of
debt they hold. If a country defaults on its debt, the value of its bonds will plunge. For banks, this could
mean a sharp reduction in the amount of assets on their balance sheet and possible insolvency.

Due to the growing interconnectedness of the global financial system, a bank failure doesnt happen in a
vacuum. Instead, there is the possibility that a series of bank failures will spiral into a more destructive
contagion or domino effect.

The best example of this is the U.S. financial crisis, when a series of collapses by smaller financial
institutions ultimately led to the failure of Lehman Brothers and the government bailouts or forced
takeovers of many others. Since European governments are already struggling with their finances, there
is less latitude for government backstopping of this crisis compared to the one that hit the United States.

How has the European debt crisis affected the financial markets?
The possibility of a contagion has made the European debt crisis a key focal point for the world
financial markets in the 2010-2012 periods. With the market turmoil of 2008 and 2009 in fairly recent
memory, investors reaction to any bad news out of Europe was swift: sell anything risky, and buy the
government bonds of the largest, most financially sound countries.

Typically, European bank stocks and the European markets as a whole performed much worse than
their global counterparts during the times when the crisis was on center stage. The bond markets of the
affected nations also performed poorly, as rising yields means that prices are falling.

Once Draghi (European Central Bank President) announced the ECB's commitment to preserving the
Eurozone, markets rallied worldwide. In fact, the second half of 2012 brought none of the crisis-related
disruptions that had characterized the prior two years.

What were the political issues involved?
The political implications of the crisis were enormous. In the affected nations, the push toward
austerity or cutting expenses to reduce the gap between revenues and outlays led to public protests in
Greece and Spain and in the removal of the party in power in both Italy and Portugal.

On the national level, the crisis led to tensions between the fiscally sound countries, such as Germany,
and the higher-debt countries such as Greece. Germany pushed for Greece and other affected countries
to reform the budgets as a condition of providing aid, leading to elevated tensions within the European

After a great deal of debate, Greece ultimately agreed to cut spending and raise taxes. However, an
important obstacle to addressing the crisis was Germanys unwillingness to agree to a region-wide
solution since it would have to foot a disproportionate percentage of the bill.
Eurozone Crises Implications on the UAE Economy

The tension created the possibility that one or more European countries would eventually abandon the
euro (the regions common currency). On one hand, leaving the euro would allow a country to pursue its
own independent policy rather than being subject to the common policy for the 17 nations using the
currency. But on the other, it would be an event of unprecedented magnitude for the global economy and
financial markets.

This concern contributed to periodic weakness in the euro relative to other major global currencies
during the crisis period.

Is fiscal austerity the answer?
Not necessarily. Germanys push for austerity (higher taxes and lower spending) measures in the
regions smaller nations was problematic in that reduced government spending can lead to slower
growth, which means lower tax revenues for countries to pay their bills. In turn, this made it more
difficult for the high-debt nations to dig themselves out.

The prospect of lower government spending led to massive public protests and made it more difficult for
policymakers to take all of the steps necessary to resolve the crisis. In addition, the entire region slipped
into a recession during 2012 due in part to these measures and the overall loss of confidence among
businesses and investors.

Eurozone Crises Implications on the UAE Economy

Introduction on the UAE economy

The UAE has an open economy with a high per capita income and a sizable annual trade surplus.
Successful efforts at economic diversification have reduced the portion of GDP based on oil and gas
output to 25%. Since the discovery of oil in the UAE more than 30 years ago, the country has undergone
a profound transformation from an impoverished region of small desert principalities to a modern state
with a high standard of living.

The government has increased spending on job creation and infrastructure expansion and is opening up
utilities to greater private sector involvement. In April 2004, the UAE signed a Trade and Investment
Framework Agreement with Washington and in November 2004 agreed to undertake negotiations
toward a Free Trade Agreement with the US; however, those talks have not moved forward.

The country's Free Trade Zones - offering 100% foreign ownership and zero taxes - are helping to attract
foreign investors.

The three Strategic Characteristics to descript the UAE economic power

A key commercial and trading hub
The UAE has established itself as a regional strategic trade hub, known for its business friendly
environment and a rapidly growing economy that has experienced significant expansion and
diversification over the last 10 years.

The UAE has ten percent of world's proven oil reserves and the world's fifth largest proven natural gas
reserves. While oil production contributes significantly to generating income and spending,
diversification remains the key governmental policy in achieving sustainable growth.

The government is focused on encouraging the private and non-oil sectors to maintain and grow their
roles in the economy. This diversification policy can be traced to the founding of the UAE, in 1971, with
revenue from oil and gas exports invested into hydrocarbon and other energy related industries.

The policy lead to the growth of related aluminum and petrochemical industries and as the UAE moved
forward, the pure dependency on oil and gas exports has significantly decreased.
Eurozone Crises Implications on the UAE Economy

Economic diversification fueling growth
Consequently, oil exports now account for only 30 percent of the country's total gross domestic
product (GDP). In addition to being an important supplier of energy, the UAE is now becoming an
increasingly relevant consumer of energy.

As the country further moves from dependency on oil exports, it will maintain its tradition of
responsible energy stewardship as it develops its economy accelerates the development of additional
hydrocarbon reserves and emphasize the necessity of alternative sources of energy.
Recently, local governments in the UAE have released policy documents.

These strategic policy plans reflect the major economic imperatives listed within the UAE Federal
Government Strategy, which is aimed at stimulating economic growth, strengthening the
competitiveness of the UAE economy, and upgrading regulations and legislation to match current and
forecasted economic growth. Implicit within the federal government's policy is empowering UAE
citizens to take the lead in developing the economy.

In order to successfully implement such policy, the government has initiated a comprehensive program
that prioritizes leadership development and project management for Emiratis.

Initiatives under the strategy include the establishment of a national competitiveness council known as
the Emirates Competitiveness Council, a national statistics office, and a vocational training unit.

The strategy also commits to formulate policies for assisting small and medium-sized enterprises in
cooperation with local governments, and to prepare a framework for less intrusive regulation in both the
free zones and special economic zones.
This framework would attend to issues such as labor conditions and environmental conservation.

Abu Dhabi and Dubai visions
As an example, the UAE's two largest economies, Abu Dhabi and Dubai, have both put together
local policy documents that complement the vision set by the UAE Federal Government Strategy. With
over 90% of the UAE's oil reserves, Abu Dhabi nonetheless has launched several plans to move towards
economic diversification.

Such plans are laid out in the Abu Dhabi Policy Agenda 2007-2008, the Abu Dhabi Strategic Plan 2008-
2012 and the Abu Dhabi 2030 Plan. These plans are not simply aimed at moving away from the oil and
gas sectors, but are mechanisms by which profits generated through these industries are used
strategically to achieve and support broad diversification and a more well-rounded economy.

Dubai's economy on the other hand receives a percent input from oil and gas, with its main sources of
revenue coming from tourism, transport, trade, construction and financial services. Dubai's policy
document with regards to socioeconomic growth and expansion is outlined in the Dubai Strategic Plan

Eurozone Crises Implications on the UAE Economy

United Arab Emirates Economic Indicators

Eurozone Crises Implications on the UAE Economy

The Effect of the Euro crises and Recovery actions taken
In 2009, the U.A.E. witnessed a significant slowdown in growth and strains in the banking
system as a result of the global financial crisis, the decline in oil prices, and the continuing fallout from
the bursting of the Dubai property bubble.

The ramifications of the DW debt event will depend on the scope and modalities of the debt
restructuring, its impact on the financial sector, and the strategy being developed by the Government of
Dubai (GD) to put Dubai World (DW) and possibly other corporate entities on a viable economic and
financial footing.

Improved global conditions, especially out of Asia, will fuel Dubais logistics and service sector.
However, the correction in the over-extended property and construction sector renders the overall
outlook highly uncertain.

With foreign investor confidence shaken and international capital markets less accessible, Abu Dhabis
policy of selective support to Dubai will play an important role in limiting contagion to the U.A.E.
economy and the banking system.

Impact on UAE employment market
The UAE is still fairly secretive with regards to official economic data and it is very difficult to
obtain accurate unemployment figures.

Indeed it is also worth noting that this is an area of the world where unemployment benefit is not
available although many politicians are pushing for the introduction in the future. Unofficial estimates
with regards to unemployment in the UAE are anything up to 13% which is obviously a major concern
and not a figure which local governments will be comfortable with.

However, we must also balance this speculation with detailed information available on the Dubai
economy which grew by 2.5% in 2010, in excess of 3% in 2011 and is expected to grow by around 4.5%
in 2012.

Against this backdrop it is difficult to see how short-term unemployment can go anywhere but down
although it is the discrepancies and inaccuracies within official data which mean any forecasts are not
necessarily made on a confident basis.

In many ways you could argue that the UAE, and in particular Dubai, has already experienced a major
financial meltdown and is now beginning to slowly pull itself back into positive ground. It is still an area
of the world which is still popular with expats, it is an area of the world which will eventually attract
more overseas investment and there is potential for the future.

Eurozone Crises Implications on the UAE Economy

Impact on UAE savings
A review of interbank lending rates would suggest that interest rates across the UAE are
extremely low at around 1.375% which is just off an eight year low.

This is a major concern for expats in the region because there are very few areas of the worlds offering
an interest rate on savings accounts which match or beat local rates of inflation. Indeed the cost of living
continues to increase relentlessly around the world and while many people had in the past been able to
live off the interest on their savings more and more are now dipping into their capital reserves.

It is rather perverse that those who have saved for a rainy day are the ones whove been impacted most
by the worldwide economic downturn which has seen Central bank interest rates fall to record lows.

While the UAE interbank rate is around 1.375%, and well above base rates in the UK at 0.5% for
example, it is really of minimal benefit when looking at the overall return available on savings accounts.
It may well be that more and more people are now being tempted back into the investment and the
property arenas in the UAE which has been reflected in economic growth over the last three years.

It will be interesting to monitor the situation going forward to see whether savers are in fact leaving
banks en masse and looking at investing again.

Impact on investments
As we touched on above, there has been renewed economic growth across Dubai for example
ranging from 2.5% in 2010, to over 3% in 2011 with expectations of economic growth in the region of
4.5% for the current year. This would seem to suggest that maybe savers are looking at investing their
cash rather than watching the real value of their assets fall because of relatively low savings rates when
compared to inflation.

It is quite ironic that the UAE economy as a whole seems to be stronger than the worldwide economy
when you bear in mind that many investors immediately repatriated their funds at the first sign of
trouble back in 2008/09. This did cause a major sell-off of UAE assets, a reduction in economic activity
and ultimately plunged the area into a very dark and difficult period.

Impact on the UAE society
Just the merest of glimpses around the UK, Spain, Greece, etc shows that there is significant
friction between local governments and the local population specifically with regards to austerity
measures which are hitting everybody hard. There is no such social unrest within the UAE primarily
because of very strict government controls on demonstrations and protests but also the fact that the UAE
now appears to be back on the economic growth track.

There has been unrest in the overall region although Dubai has managed to avoid any major issues. The
truth is that if the economy is growing, if life in the UAE is still relatively comfortable then what exactly
do the local expat population have to complain about? Perhaps this view is slightly tempered by the fact
the authorities arrested activists and protestors en masse at the first sign of trouble although the
economic situation in the UAE appears to show little resemblance to the Euro and the Eurozone and the
impact at this moment in time is minimal.

Eurozone Crises Implications on the UAE Economy

Economic key issues that was focused on during the improvement plan

The contrast between growth based on hydrocarbon resources and that based on non-
hydrocarbon diversification funded by maturity-mismatched leverage.
The spillover effects and financial support structures in the federation.
The volatility of markets in response to a lack of information disclosure and transparency.
In particular, the debt announcement undermined the widely held market perception of implicit
government support, including from Abu Dhabi

The authorities responded to the global financial crisis in a comprehensive and prompt manner. Also, the
increased spending on strategic infrastructure projects, mainly in Abu Dhabi, to reduce the contraction in
construction activity, and provided support to quasi-public entities and national banks, has done a larger
good for the UAE economy as a whole.

However, recent developments in Dubai, while material, should be viewed in the wider perspective of
the U.A.E. as a whole. Although the need to roll over part of Dubais substantial external borrowing in
the post-Lehman environment has highlighted the risk embedded in the financing strategy of some
Dubai entities, the U.A.E. has a net external creditor position well in excess of 100 percent of GDP,
among the largest in the Funds membership.

Recent Economic Developments
After the Global downturn, it hit simultaneously all of the U.A.E.s three growth engines in
2009; Oil receipts plummeted, global trade and logistics contracted, and property development all but
ground to a halt as incomes fell and property prices plunged.

Actions taken by Abu Dhabi boosted the fiscal stance via equity injections and loans.

The central bank deployed bank liquidity support facilities and lowered interest rates.

The federal government rolled out large scale recapitalization measures and provided AED 50 billion
terms funding to the banks.
Finally, the GD announced a support package of $20 billion (half provided by the central bank and the
other half by Abu Dhabi) to finance the needs of Dubais GREs, and established the Dubai Financial
Support Fund (DFSF) to manage the support program.

Eurozone Crises Implications on the UAE Economy

UAE Economy (2009)

Notwithstanding the compensatory measures
adopted by the authorities, overall real GDP of
Dubai is estimated to have contracted by about
percent in 2009.

Hydrocarbon GDP declining by 6 percent.
Crude oil production averaged only 2.4 million
barrels per day in 2009 lower than a average of
2.6 million barrels per day in 2008

Non Hydrocarbon growth, which had averaged
8 percent in the three previous years, is
estimated to have slowed to about 1 percent.

Inflation declined to 1 percent in 2009,
reflecting lower import prices (-10 percent in
2009) and a reduction in rents as an increased
share of rental contracts got renewed at the
deflated market prices and new buildings came
on stream.

The external current account balance is
estimated to have shifted to a deficit of 2.7
percent of GDP in 2009, the first deficit in

New external borrowing, mainly by Abu Dhabi
entities, helped stabilize the reserves by the end
of 2009, which stood at central bank
international reserves to $31 billion by years

Eurozone Crises Implications on the UAE Economy

Short term expectations in 2010

The fiscal and monetary policy mix will need to show adaptability over the medium term in order to
sustain a further diversification of the economy within a more uncertain environment.

Given Dubai's share in U.A.E.'s non-oil GDP (above 50 percent) real GDP growth for the U.A.E.
as a whole will be low (about percent), despite the authorities' support packages and Abu
Dhabi's investment projects that will help offset the contraction in Dubai.

Growth would recover starting in 2011 owing to higher activity in the oil and trade sectors in
response to the recovery in Asia; and orderly restructuring of Dubai's GREs.

Medium-term non hydrocarbon growth is projected to average about 4 percent a year over the
medium term, or 4 percentage points lower than before the crisis, a reflection of less activity in
Dubai's property sector and higher costs to access international capital markets.

CPI inflation is expected to reflect higher import prices and the impact of Abu Dhabi's large
investments in infrastructure.

Based on the WEO's oil price projections, the overall fiscal position is projected to return to a
surplus of about 10 percent of GDP in 2010. Over the medium term, the overall surplus will
increase to about 15 percent of GDP, mainly due to a gradual increase in non-oil revenues
associated with the introduction of the VAT.

In 2010, the non-hydrocarbon deficit is projected to contract by about 4 percentage points, to 30
percent of NHGDP, owing mainly to a slowdown in project implementation in Abu Dhabi, and
to improve over the medium term because Abu Dhabi is not expected to continue providing
support to its GREs

The external current account is expected to shift to a surplus of about 7 percent of GDP in 2010,
and to increase gradually in subsequent years. In the financial account, capital outflows would
resume, reflecting official outward investment, but the Central Bank of the United Arab
Emirates' (CBU) gross official reserves would increase steadily.


The UAE, and perhaps the most recognizable emirate Dubai, is showing signs of impressive
economic recovery having grown 2.5% in 2010, in excess of 3% in 2011 and expected to grow by
around 4.5% in 2012.

The ramifications of the Dubai event are still unfolding, as it will take some time for the GD to develop
a strategy to restructure its GREs. Downside risks could materialize if the Dubai debt restructuring were
to generate additional uncertainty.

Eurozone Crises Implications on the UAE Economy

It is important that uncertainty be removed regarding the financial viability of DW entities, the extent of
implicit government guarantees to GREs, and the insolvency regime. If uncertainties remain in these
areas, ramifications could include sustained lack of market access for even stronger Dubai entities and a
more permanent loss of confidence in Dubai as a reliable business location.

The Dubai authorities stressed that they were committed to working with creditors in achieving an
orderly and cooperative debt restructuring. They also indicated that they were working on improving
transparency and corporate governance. This was regarded as important for viable companies to
maintain access to international capital markets. The scope of the corporate restructuring and the debt
restructuring options were still being defined.

Restructuring would seek to ensure economic and financial viability while protecting systemically
important entities. So far the debt restructuring is limited to the announced $22 billion, but the
authorities recognized that other property GREs may have to enter a similar process.

The spillover effects of the Dubai event on the GCC, the wider region, and advanced economies appear
manageable. However, the event may have a lasting impact on the availability and cost of external
capital as creditors likely will further discount notions of implicit guarantees in pricing quasi-sovereign
and private risk.

UAE Economy Back On Track
UAE has the second largest economy in the Arab world (after Saudi Arabia), with a gross domestic
product (GDP) of $377 billion (AED1.38 trillion) in 2012. A third of the GDP is from oil revenues. The
economy was expected to grow between 4-4.5% in 2013, compared to 2.3-3.5% over the past five years

The UAE economy has staged a recovery in the last 18 months, aided by an inflow of business and
investors seeking a safe haven from unrest elsewhere in the Middle East. Buoyed by robust oil prices
and brisk trade and tourism, the Arab worlds second-largest economy saw growth accelerate to 4.4 per
cent in 2012, according to its statistics office, its fastest pace since 2006.

The Gulf state has made efforts to curb state spending, which increased sharply in the wake of the
financial crash and Arab Spring uprisings. Expenditure hit $52.6 billion in the year to July 17, 2009,
according to a Grail Research tracker, as the government sought to cushion the economy and calm

In 2012, spending as a total percentage of GDP fell to 26.9 per cent, according to the Washington-based
IMF, and is likely to shrink further to 26.3 per cent this year. The UAE last year doubled its total fiscal
surplus the combined surplus of the federal government and the seven emirates to close to nine per
cent of gross domestic product, up from 4.1 per cent in 2011.

This cut its break-even oil price to $74 a barrel, down from $84 in 2011, leaving it less exposed to any
volatility in the energy markets.

Eurozone Crises Implications on the UAE Economy

Economic diversification is a priority for the UAE. Abu Dhabi, which generates more than half of the
national GDP, has injected billions of dollars into industry, tourism and infrastructure to generate jobs
and lessen its reliance oil.

The emirate last year opened Khalifa Port, built at a cost of $7.1 billion, and is constructing the worlds
largest aluminum smelter and a financial free zone.

A new terminal underway at Abu Dhabis main airport is set to add capacity for a further 30 million
passengers a year, following its launch in 2017.

The impact of this vast investment is clear. Abu Dhabis non-oil industries grew 7.7 per cent in 2012,
generating about 48 per cent of GDP at constant prices, preliminary government data shows. At Dhs325
billion, Abu Dhabis non-oil economy alone was Dhs7 billion more than Dubais entire GDP of Dhs318

Dubais fortunes have also improved. The collapse of the city-states property bubble in 2008 saw house
prices nosedive, pressing state-backed Dubai World into a painful $25 billion debt restructuring and
forcing Dubai to seek a $20 billion lifeline from Abu Dhabi.

The emirates economy is now rebounding, expanding 4.4 per cent last year, according to its statistics
office, the most in three years.

This uptick has been underpinned by a rebound in the property and tourism sectors, reflecting Dubais
safe haven status amid regional turmoil. Residential rentals grew by more than 30 per cent in the 12
months to June, property consultants CBRE said, outpacing wage levels.

Real estate sales reached Dhs53 billion in the first half, according to Dubai Land Department.

The IMF in July warned the government might need to step in to prevent the inflation of a fresh property
bubble, should prices continue to surge.

Dubai continues to carry a substantial debt burden. IMF data puts the total debt of Dubai government
and its government-related entities (GREs) at $142 billion, or 102 per cent of the GDP of Dubai and the
smaller northern sheikhdoms.

Of the estimated $93 billion owed by state-linked entities, $60 billion will fall due between now and
2017, the fund said. Although Dubais operating environment improved markedly, these large
rollovers, particularly for the GREs, could still prove challenging.

Eurozone Crises Implications on the UAE Economy

The UAE houses about six per cent of the worlds proven oil reserves and 3.3 per cent of its gas
reserves, with most of the crude held in Abu Dhabi. Hydrocarbons play a vital role in the OPEC
members economy, providing the dominant source of government revenue.

The UAEs oil production was estimated to be about 2.65 million barrels a day (b/d) in 2012, up from
2.5 million b/d in 2011, according to International Energy Agency data. Strong oil prices allied with
increased output drove record hydrocarbons revenues of $124.7 billion in 2012, the US-based Institute
of International Finance said in April, marking a 5 per cent rise on the previous years income.

The UAEs population has grown steadily in recent years, aided by an influx of foreign workers,
but estimates as to its size vary wildly. The IMF gauges the population at about 5.7 million people in
2013, while the most recent estimate from the UAEs own statistics agency puts the figure at 8.3 million
people. Based on this calculation, foreign workers comprise roughly 88.5 per cent of the population,
largely through the presence of blue-collar workers from South Asia, the Philippines and other Arab

Boasting one of the worlds highest per capita incomes at nearly $49,000 in 2012, the oil-rich UAE has
escaped the violent turmoil seen in other GCC and Arab states in the past two years.

The UAE is one of the regions most politically stable nations, with close ties to the West. The country
is governed by the Supreme Council, which comprises the rulers of the seven emirates. The 40-member
Federal National Council acts as an advisory board to the government, and is responsible for examining
draft federal legislation.

Half of the FNCs 40 members are elected, and the remainder appointed by the rulers of the countrys
seven emirates. Political parties are not permitted.

The Gulf state, primarily led by Abu Dhabi, has leveraged its vast oil wealth to forge strategic links with
both emerging and developed markets.

The UAE is home to one of the worlds largest sovereign wealth funds, the Abu Dhabi Investment
Authority (ADIA), with assets valued at $328 billion at the end of 2008, according to the US-based
Council on Foreign Relations.

Its investments include stakes in Britains Gatwick Airport, Citigroup, and Germanys biggest gas-
transmission system.

Eurozone Crises Implications on the UAE Economy


End of Report