Executive Summary

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With high levels of political stability in a volatile region, abundant liquidity thanks to oil revenues, a favourable business environment, along with high levels of growth, the UAE is set to continue to lead the way in the Middle East region in attracting FDI in 2007 and beyond. It was the country of choice for foreign investors in the region, and ranked number 15 in the world out of 144 economies ranked in the UN’s Conference on Trade and Development (UNCTAD)’s inward FDI performance index. Indeed, attracting FDI is part of the UAE’s strategy of diversification away from dependence on oil. Real GDP growth looks set to average over 5% over the forecast period and with the increasing maturity of the country's capital markets there will be plentiful opportunities going ahead.

According to the latest UNCTAD figures in the 2006 World Investment Report, the number of Greenfield projects in the UAE has risen by 144%, from 88 in 2002 to 215 in 2005. FDI inflows on the other hand rose to US$12bn in 2005, up from US$8.4bn in 2004 and US$4.3bn in 2003. The UAE is the clear leader in attracting FDI, dwarfing inflows into Saudi Arabia of US$4.5bn and US$1.5bn into Qatar. Reflecting the UAE's investment in overseas assets and diversification efforts, FDI outflows have also seen a major climb from US$0.9bn in 2003, to US$1.0bn in 2004 and US$6.7bn in 2005. Moreover, FDI flows as a percentage of gross fixed capital formation (GFCF) have more than doubled since 2003, from 21.4% to 51.8%. Meanwhile, FDI stocks as a percentage of GDP have risen from 2.2% in 1990 to 21.2% in 2005, though the UAE has some catching up to do here compared to Bahrain's 64.1% and Lebanon's 68.5% in 2005.

While it is very difficult to predict FDI inflows, we believe that this trend is set to continue in 2007 and over the forecast period. Facilitating a favourable business environment and attracting FDI (alongside investing abroad) has been key to the UAE’s diversification strategy and global brand in order to wean itself away from dependence on the hydrocarbons sector. To augment the country's attractiveness further, Minister of Economy Shaikha Lubna al-Qasimi has announced that the ministry will draft a new foreign investment law. The new law is set to deal with FDI regulations and best practice rules and also provide a 'one-stop' shop in terms of a legal framework for investors. In her speech at the first National Investment Reform Workshop of the UAE, the minister also emphasised the exceptionally light tax burden - there are no corporate, income or sales taxes in the UAE - and ‘the cost efficiencies in power, gas and water that renders. We have low tariffs, low currency risk, extremely low financial risk, no restrictions on repatriation of profits or capital, and numerous double taxation agreements.’

However, inflation remains a significant concern, despite our 6.5% average CPI forecast for 2007, down from an estimated 10% in 2006. Moderating oil prices and administrative controls on rent, and potentially on juice and dairy, will provide short-term respite, but structural issues persist. US dollar weakness has fostered rising imported inflation, particularly given the growing importance of the EU and East Asia as trading partners. However, in the longer-term, exchange rate reforms, such as an upward revaluation, remain plausible, while our core scenario does not foresee substantial further dollar declines.

The Commercial Banking Sector
Like the economy in general, the banking sector is growing quickly. Total banking assets reached US$207bn by September 2006, with a growth rate of 25%. This is the 15th highest rate of growth among the 59 countries surveyed.

BMI is forecasting assets and deposits to grow at an average 25% per annum throughout the forecast period, with loans growing at 25%. At this rate, total assets will reach over US$632bn in 2010. To September 2006, loans grew by 34% and deposits by 25% – so the loans/deposits ratio reached 112.3%, and is continuing to trend upwards. The loans/assets ratio, on the other hand, is a relatively conservative 57.4%.

What is important about the increase in loans is that the largest growth (194% since 2003) has been in personal loans for business purposes, representing investment where the economy most needs it. Private investment is a critical driver for sustainable growth.

Press Releases
The Islamic and private banking sector reported large increases in profits to the first quarter of 2007. However, other profit reports are conflicting. While the National Bank of Abu Dhabi (NBAD), the largest lender in the United Arab Emirates, posted its fourth consecutive decline in quarterly profit, the Commercial Bank of Dubai (CBD) recently reported an increase of 11% in its first quarter profit to AED218mn compared to AED197mn in the same period of 2006. Domestic rivals National Bank of Dubai and Emirates Bank International recently hired Goldman Sachs to advise on merging to create the Gulf's biggest lender by assets, and compete more effectively against regional and international banks. Despite losses, NBAD is planning to open as many as 20 branches in the UAE this year. Banks are also opening employment opportunities to graduates and UAE nationals. This coincides with reports of results of a country-wide survey suggesting that banks in the UAE are not doing enough to help young entrepreneurs set up new businesses.