By: Meir Javedanfar - meepas.com

06/06/2005

Introduction

Although there are no diplomatic relations between Israel and the UAE, nevertheless reports of meetings between Israeli and UAE officials and academics have recently been increasing in numbers. First was the report of the Dubai property billionaire Muhammad Ali Alabbar who visited the Palestinian authority and Israel last year when he held meetings with deputy Prime Minister Shimon Peres. There were also recent calls made by the UAE based Gulf Research Centre for increase in dialogue between Israeli and UAE academics. This was followed by Israeli and UAE officials sitting at the same panel at Tourism development conference in the World Economic Forum, something which would not have happened before.

The Israeli government has stated openly that it wishes to set up a diplomatic office in the UAE. However this request has not been fulfilled yet due to the fact that the UAE does not currently wish to break ranks with other Arab countries who refuse to have relations with Israel. This is especially true with regards to Saudi Arabia who is UAE's senior partner in the Gulf Co-Operation Council. Nevertheless the possibility for improvement in relations between the UAE and Israel do exist in the near future. This is in line with our prognosis at meepas© that Israel's withdrawal from the Gaza strip in August will be met with a softening of approach towards Israel by non-front line Arab countries. Although this will not mean full blown diplomatic relations, nevertheless it is our view that there exists a strong possibility for establishment of Israeli trade representations in a number of countries, including the UAE.

“ Chance favours the prepared mind ” Louis Pasteur

As a company specialising in the provision of business intelligence information to potential investors in the Middle East, the following piece by meepas© will serve as an initial groundwork and a guide to the UAE economy for the potential Israeli exporter / investor . Using the analogy of a coiled spring this information can be used as preparation with the long term goal of enabling the Israeli company to enter the UAE market as soon as agreements have been finalised by both government.

More detailed business intelligence information regarding opportunities and investment in the UAE can be obtained by contacting meepas. You can obtain our contact details by clicking here .

Political snapshot

The UAE consists of seven emirates which are Abu Dhabi, Dubai, Sharjah, Ras Al-Khaima, Ajman, Umm Al-Qwuain, and Fujairah. Each emirate has a certain degree of autonomy over its financial, political and economic affairs. The emirate of Abu Dhabi is the wealthiest in terms of oil resources as it holds 90% of UAE's oil reserves.

Positions of Political Authority

Federal Supreme Council

UAE's supreme political authority is the Federate Supreme Council (FSC) which comprises of a leader from each of the 7 emirates in the country. The Emirs who are members of the FSC are chosen through a hereditary system. One of the important tasks of the FSC is to choose a president and a vice president, and subsequently the president chooses the country's prime minister and his deputy. The FSC meets four times a year and its tasks are: establishment of general policies and sanctioning of federal legislation.

Veto power in the FSC is held by members from Abu Dhabi and Dubai.

The current UAE President is Sheikh Khalifa bin Zayed Al Nahyan. The former ruler of Abu Dhabi, he was elected as the new President of the United Arab Emirates on 3rd November 2004 to succeed his father the late Sheikh Zayed bin Sultan Al Nahyan.The phenomenal economic progress seen in UAE for the last 20 years has been attributed to the late Sheikh Zayed bin Sultan Al Nahyan's successful economic and social plans. According to reports the new leader of UAE Sheikh Khalifa has committed himself to continue in the footsteps of his late father.

There are no elections or political parties in UAE.

Bordering Saudi Arabia and Oman, UAE is a member of the Gulf Co-operation Council consisting of Oman, Qatar, Bahrain, Kuwait, Saudi Arabia as well as UAE. UAE's only outstanding border dispute is with Iran over the capture of the UAE islands of Abu Musa, little and greater tunb by the Iranian army in 1972 under the auspices of the Shah. Iran has claimed the islands as its sovereign territory since then.

UAE is a stable country. There are no major opposition forces in the country. A number of Al Qaeda operatives have been captured in the country, although no Al Qaeda attacks have taken place in UAE.

All non Islamic religions and faiths (such as Bahai, Hindu and Christian minorities) are allowed to freely practice their religious beliefs and traditions.

Women in UAE are allowed to work and to hold government positions. Currently Sheikha Lubna al-Qasimi, a member of the Sharjah royal family is occupying the post for economics and planning minister.

Economic Snapshot

The UAE controls roughly 10 percent of the world's oil supply and nearly 5 percent of the world's proven natural gas reserves. Oil and gas production provides about 30% of the country's GDP. This is a marked improvement in the country's diversification plan as twenty years ago 65% of the GDP was being generated through oil. The UAE GDP figure for the year 2004 was $65 billion. With a population of approximately 2,565,000 (plus 1.5 million temporary foreign workers) the UAE has a high GDP per capita of $25,500. This is $5000 more per head than Israel's GDP per capita figure.

UAE has no income tax, no corporate tax, and no other significant taxes, where as Israel's top income tax rate is 50% whilst the top corporate tax rate is 35%, down from the 36% in the year 2003.

In 2004 the real GDP growth figure for the UAE was 7%, compared to Israel's figure of 4.3%. The high UAE GDP figure is partly due to the fact that last year's high oil prices generated a whopping $30 billion for its economy. UAE government holds assets worth of $300 billion abroad.

One of the major drivers of the UAE economy is the country's business friendly regulations and the secure legal environment created by the government to protect the rights of the local and international investor. This is indicated by UAE's economy being ranked as “mostly free” by the Heritage Foundation/Wall Street Journal Index of Economic Freedom for the year 2005. Israel's economy was ranked in the same category.

In terms of level of corruption the transparency international corruption index for 2004 places UAE at number 30, 4 places below Israel which is ranked as 26. This ranking places the UAE as the third least corrupt whilst Israel is recognised as the least corrupt country in the Middle East.

The relative low levels of corruption, low taxes (non existent in many cases), reduced government intervention in business and the drive to improve the country's physical and technological infrastructure have crowned the UAE as the most competitive economy in the Middle East by the World Economic Forum survey for the year 2004. This is indicated by the UAE economy being ranked as the 16 th most competitive economy in the world. Israel's economy follows closely as the second most competitive economy in the Middle East and the 19 th most competitive economy in the world.

UAE government drive to improve the country's technological infrastructure were recognised by the ranking of 23 awarded to the country by the World Economic Forum Global Information Technology Report 2004-2005.

Main export commodities of the UAE are crude oil, natural gas, re-exports of goods, dried fish, dates and are sold to exporting destinations such as: Japan, South Korea and Iran. UAE's main import commodities (machinery and transport equipment, chemicals, food) are imported mainly from China, Japan, Germany, US, and France.

UAE continues to play a role in the Petroleum market as a member of the OPEC, as well as a member of the GCC Customs and tariffs Union. The country's strategic position on the shores of the Persian Gulf and its proximity to the straight of Hormuz have placed it on the map of many shipping companies as well as trading organisations as an important trading point. UAE's important position in the region is likely to continue owing to its economic strength.

Areas of potential investment and trade

Construction and Real Estate Sector

The aforementioned sectors are the fastest growing parts of the UAE economy, especially in the two states of Dubai and Abu Dhabi. Evidence of the phenomenal growth of this sector can be witnesses by anyone visiting both emirates. Architectural giants such as the Burj Al Arab hotel which is designed to resemble a billowing sail. The hotel soars to a height of 321 metres dominating the Dubai coastline are a testimony to the phenomenal growth of this sector. Other projects include the multi billion dollar palm island which consist of two massive man made islands shaped like a palm trees. The islands will house 82 luxury hotels, 4,000 residential villas, shopping malls, cinemas and a marine park. Marinas with the capacity to berth 150 yachts and 50 "super yachts" will also be built and available for property owners.

According to the latest estimates investment in the real estate sector of Dubai alone is currently running at over 20% of the emirate's GDP. Further signs of the growth potential for this sector were illustrated by the fact that the IPO of Abu Dhabi based Addar properties was oversubscribed by 400 times. Demand is expected to continue for the construction sector due to factors such as growth of the tourism and energy sectors. This is illustrated by the $696 million power generator contract awarded by the UAE government to Hyundai Construction & Engineering Co.

Another key driver of this sector is population increase. A report by a leading German Real estate specialists estimate that 45,000 new residential units will have to be built in Dubai every year until 2012 to meet the demand for accommodation. Meanwhile other parts of UAE are also seeing an increase in the number of local and foreign residents. Mortgage availability and low rates are also responsible for fuelling the growth of this sector. International participation in this sector has been increasing through participation in construction projects and investment in UAE based property companies. Since 2002 foreign investors have been permitted to buy property without any restrictions in specially designated "freehold" areas.

Free Trade Zones (re-export sector)

The re-export sector has become one of the key drivers of the UAE economy, especially in government plans to diversify the economy away from oil. In total the UAE re-exported $10 billion worth of goods in the year 2004. This figure is expected to rise due to a number of factors such as the Free Trade Agreement currently being discussed with the US and the EU, both of which are expected to be in place by 2008 -latest. As a member of the Gulf Co-operation Council UAE also has a FTA with Lebanon and is in the midst of negotiating FTAs with Turkey, India and the Mercosur countries (Brazil, Argentina, Paraguay and Uruguay). Meanwhile the recent rise in the price of oil has translated into increased in trade with neighbouring countries, especially Iran as it is one of the major regional customers for the UAE re-export sector.

Further growth in this sector is forecasted due to government incentives which aim to encourage the number of foreign and local companies investing in this sector. Example of incentives include: 100% foreign ownership of the enterprise, 100% import and export tax exemptions, 100% repatriation of capital and profits, no corporate taxes for 15 years, renewable for an additional 15 years, no personal income taxes, assistance with labour recruitment and additional support services such as sponsorship and housing.

To date 12 Free Trade Zones have been established in UAE which have attracted substantial foreign and local investment (estimated 4000 companies operating in the FTZ areas). The share of free zones in non-oil exports increased from 22% in 1999 to 60% in 2004.

Stock Exchanges

There are two major stock exchanges in the UAE. The largest is the Abu Dhabi Securities Market whose market capitalisation value in March 2005 reached US$100 billion. This valuation makes it the second highest among Arab stock markets after Saudi Arabia. In comparison the Tel Aviv Stock Exchange is valued at $84 billion.

Meanwhile UAE authorities are planning to expand the financial sector with the opening of the Dubai International Finance Centre (DIFC) in September 2005.

Substantial investment has been made by the UAE authorities to ensure that DIFC will have the same level of legal framework and financial transparency as the London and New York stock exchanges.

The DIFC will operate in dollars, and will have its own exchange market the Dubai Regional Exchange (DRX). The DIFC has signed an agreement for a partnership with Euronext which is a leading Western stock exchange. It is planning to offer insurance and reinsurance, Islamic banking and asset management. Many international companies have started to show interest, as illustrated by the 30 leading international financial institutions including Deutsche Bank, Credit Suisse and Standard Chartered which have applied for licences at the exchange.

Purchase of shares in both markets is possible through licensed brokerage firms.

Meanwhile the New York Mercantile Exchange (the world's biggest energy bourse) has stated that it hopes to sign a deal with the Dubai government in the next few weeks to set up a commodity market there.

Telecommunications sector

The biggest telecom company in the UAE is state controlled company Etisalat (60% of shares owned by the government). The company operates all information and communications networks in the country, serves all communications service users, and acts as the de-facto regulatory body for telecommunications. There have recently been reports pointing to government plans to liberalise the UAE telecommunication market.

This is in line with UAE's commitments to the World Trade Organisation.

Progress is apparent in all of Etisalat's key sectors. Etisalat has over 2.4 million mobile subscribers (up from 43,000 in 1992), representing a penetration rate of 70%. At the same time Internet subscriptions have grown by over 280,000 representing more than a million users. This takes the UAE to the 19th position in the world in terms of Internet penetration.

Etisalat International has extensive presence in Saudi Arabia (it is one of the two mobile operators in the country). It also listed its shares in the Saudi stock exchange which were oversubscribed by 18 times.

Etisalat also has operations in Sudan and Yemen. Recently it acquired a 50% stake in the West African mobile operator Atlantique Telecom which as a result expanded Etisalat's reach into Benin, Burkina Faso, Gabon, Niger, Togo and the Ivory Coast.

As the current sole operator in the UAE the size of the country's telecommunication sector can be estimated by looking at Etisalat's results. In 2003 Etisalat's net profits were $782 million and market capitalisation peaked at nearly $13.49 billion, compared with $10.5 billion at the end of 2002. In 2004 Etisalat's net profits reached almost $1 billion.

Etisalat has one of the largest market caps on the Abu Dhabi Securities market.

Transport sector

The UAE government has made investment in the country's transportation sector one of its major economic policies for the last 15 years. As a result UAE has some of the most modern ports and airports anywhere in the region. This is illustrated by the 100 airlines using Dubai airport. To encourage further growth in the aviation sector the UAE government has introduced a open skies policy. At the same time Dubai's ports which are some of the most sophisticated in the region witnessed a throughput of 41m container tonnes last year. UAE's ports continue to play a leading role in the Free Trade sector of the economy.

Meanwhile investment in the UAE transport sector continues. Mitsubishi Heavy Industries lead consortium was recently awarded a $3.4 billion deal to build a 69.7km (43.5-mile) rail link in Dubai which is to be completed by 2010. Meanwhile Emirates which is UAE's biggest airlines is investing in the expansion of its fleet with the purchase of state of the art Airbus 380 super jumbo aircraft. Furthermore the UAE Sharjah based Air Arabia has become one of the first and leading no frills airlines of the Middle East serving over 18 destinations in the Middle East and Asia region.

Other sectors of the UAE economy also offer opportunities for the potential investor due to rising demand as well as government backing and incentives. These include the Tourism, Technology, Gas sector and others. These are covered in more details by the meepas© UAE country profile in the section entitled opportunities .

In conclusion economic relations with UAE would offer ample opportunities for trade and investment for Israeli companies. Until relations become a reality it is important to keep abreast of the economic development in UAE as it is one of the region's most vibrant and promising economies.

End of Analysis

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