Impact of World Financial Crisis in the UAE Economy - Report Example

Impact of World Financial Crisis in UAE Economy Name Institution Date Abstract This report covers the study and analysis of Economic GDP of UAE in line the global crisis and the consequences of this crisis in the various sectors such as the employment sector, tourism sector, real estate and the banking sector. The report therefore, deals with the positive and the negative impacts of the crisis as well as the statistical analysis of the crisis based on annual statistical book of UAE. This financial crisis did not only hit UAE economy but also major economies of countries in the Gulf Cooperation Council (GCC). Among the negative impact of the financial crisis were the salary cut-off, laying off of employees by companies, ineffective liquidity management requirements of banking Central Bank of UAE, stagnated average lending of UAE banks, inability of constructors and developers to buy real estates, and high cost of hotel facilities as well as that for the corporate and leisure travelling facilities. These consequences of the financial crisis are UAE are going to be expounded further in the paper. Table of Contents Abstract 2 Table of Contents 3 Introduction 4 Data Analysis 6 Impact in the employment sector 6 Impact to the banking sector 8 Impact in the real estate sector 10 Impact on the tourism sector 11 Recommendations 13 Conclusion 13 Introduction Economic turning point all over the world was witnessed in the year 2008 and originated from the Wall Street of the United States of America. United Arab Emirates can be regarded as the Arab Gulf economic powerhouse and with the world highest GDP per capita. In history, UAE has had an annual growth rate of 4.7% from the year 2000 until 2012 but recorded the lowest of -4.8% in 2009 December. In December 2006 its GDP growth rate hit a high record of 9.8%.United Arab Emirates economy is driven by the fact that, it is still ran by a commodity- based economy where natural gas and oil shipment accounts for 40% of the total product export and 38 percent of the countries GDP (Canuto, Giugale & World Bank, 2010). Global financial economic crisis which led to the price collapse of crude oil and natural gas to less than $34 per barrel dipped UAE GDP. Nevertheless, GDP contribution from non- oil sectors attain a value of Dhs577.5billion in 2008 when compared with Dhs467.9 in 2007 but contribution from these sectors declined to 62.1% during the 2008 period of economic melt down as compared to the preceding year of 2007 when it was 64.1%.On contrary, UAE GDP contribution from the oil sector rose by 2% between 2007 and 2008. This increase was driven by hiked oil revenues which resulted from increased price value of crude oil (Sirkeci, Cohen & Ratha, 2011). Precisely, during the 2004-2008, the economy of UAE more than doubled i.e. 145% to reach $261.2billion which was driven by hydrocarbon and non-oil sectors. The nominal GDP for the same years however reduced by -12% to a value of $230billion which was caused by the slump in world oil market. The nominal GDP of UAE is projected that, it will rebound and grow at 9.9% and 7.4% in the preceding years after the 2008 economic melt down in a bit to recover from the crisis. Real GDP of UAE had a decrease of -0.7% in the year 2009 when compared to 2008 when it increased by 5.1% but it was expected to grow by 1.3% and 3.1% in 2010 and 2011 because of stability witnessed in the oil prices and expected recovery of the economy (Canuto, Giugale & World Bank, 2010). Each Emirate was affected and the president of acknowledged in a statement that: “Being open to the world’s economies no doubt the UAE has been affected by the global economic crisis” He singled out low oil prices which ranks third in the organization of petroleum exporting Countries(OPEC) . Despite the economic turmoil, UAE has established strong economic and financial situation to curb the crises. Declining investment and low prices UAE has rejuvenated GDP by diversifying its economic market base which include among others venture into the tourism sector. Boosting of a Gross Domestic Product of $395 billion, UAE is the Middle East region major growth contributor (Sirkeci, Cohen & Ratha, 2011). Graphs showing UAE central banks % exchange in 20004 - 2010 Data Analysis Impact in the employment sector The damaging effect of the global financial crisis in UAE led many companies to suggest on the strategy of laying off their employees while others decided that they will cut-off the salaries of their employees but the worst scenario was the companies which went a notch higher of completely discharging their employees of duty in seeking ways to reduce financial crisis negative effects. The government sector of each Emirate however did not discharge any of their employee duty. The decision was seen as a way of acknowledging that, the employees played important roles in the previous successes and by retaining them it reflects a sort of corporation and mutual assistance in times of crisis. Also, they seem to understand that, by laying off experienced employees would prove catastrophe as they are the ones who would rescue assist in drafting way out of the crisis (Gorgenländer, 2010). With private sector commanding a big percentage of employment opportunities at 80%, employment dropped significantly simply because government can only employ 20% in their sector. Migrant workers from Asia and Middle east to Dubai were mostly affected by the global financial crisis of Emirates severe credit problems and that migrant workers were being sent home. The UAE ministry of labor would have to consider making an initiative lest unemployment rate in the country would rise which would further scale up the effect of recession (Sirkeci, Cohen & Ratha, 2011). UAE can only take an initiative to remedy this financial crisis in this sector by considering Arab exchange of labor between the GCC countries which will encourage flexible labor assignment to enable it meet industry needs with ease. Consequently, Emiratization taking toll in UAE should be mitigated so that human resource labor exchange can be used to fight this financial global crisis (Khamis, 2010). Due to higher resentment of expatriates in the corporate world, UAE government has embarked on serious training programs so as they increase the probability of filling its companies with natives and reduce dependency on foreign labor. In doing so, the budget proposal for these training is huge in itself and many other companies might not be in apposition to afford. Therefore, most companies in UAE have considered productivity and efficiency as the major driving force in staff recruitment which was not the earlier procedure of recruitment before the economic meltdown (Canuto, Giugale & World Bank, 2010). Impact to the banking sector United Arab Emirates banking sector was hard hit by 2009 worldwide recession although with a bigger banking assets of $488billion. The UAE financial and banking system is integrated and exposed to the global financial development and is the reason why the real estate industry collapsed in Dubai. The banking sector of UAE comprises of 51 banks where 28 of them are foreign while 23 are domestic. Foreign banks had limited abilities to access lo cost wholesale funding because of the weakened loan demand and low confidence of the investors despite the UAE federal government helped banks receiving funds to confront the crisis (Gorgenländer, 2010). With the top four banks in UAE being ENBD, NBAD, ADCB, and FGB the regions banks have fared well with limited rating downgrade because they are in control of about 50% of the region banking assets and 86.6% of the sectors assets. Despite this promising value, the asset growth in this sector fell from 29% in 2009 to 7% at the third quarter of 2010. A total of AED 1.666trillion of assets was recorded at the end of the year 2009 where 69% were given out as net loans with 16% as liquidity and 9% in form of investment (Sirkeci, Cohen & Ratha, 2011). Liquidity management requirements by the Central Bank of UAE proofed ineffective during the crisis period. This was as a result of speculative deposits outflow in the summer of 2008 which crippled the long-term funding in UAE. Therefore, The Central bank was forced to introduce an emergency- liquidity support facility allowing banks to repo their certificates for deposits whether it had matured or not (Christensen, 2010). The average lending growth of UAE banks stalled in the year 2009 with contraction in loan levels and at the same time, the total growth of loan fell from 19% to 10%.Also, the banking system in UAE during and after the financial crisis was partly affected by sizeable exposure to Dubai GRI’s where it did not effect the restructuring agreement between it and the creditors of 99% in line with market considerations (Gorgenländer, 2010). Many UAE banks during the crisis increased their provisioning levels that exceeded their normal NPL rates and thus recorded the weakest portfolio in 2009 with 22% amount of NPL rate. The rock-bottom global interest rates and the market turmoil hit the stock markets sector of Dubai with heavy drop in the shares of HSBC and Standard Chartered. In a bid to counter attack the problem, the government of Dubai stemmed down interest rates and created new electronic money and gave reprieve to budget deficits to reach high levels. In general, the banking sector of UAE and its markets was hardly hit by the global economic melt down but has displayed some resilience to its effects (Canuto, Giugale & World Bank, 2010). Impact in the real estate sector Real estate investment has been a key sector in contributing to the economy of UAE which include household welfare urban development and construction. This is because affordable housing is achievable courtesy of a robust lending system. Since real estate is used in gauging financial stability in emerging economic countries, UAE major economic growth was mainly from real estate. Bank loans are the major sources of financing this sector and since most banks were unable to lend loans during the economic meltdown, the sector stalled because the developers, constructors and those who were to buy real estates kept off. Due to this crisis, UAE at some points stopped selling of real estates by assuring the concerned parties of the stability of economy in the near future through government funding both the nationals and the residents (Christensen, 2010). Impact on the tourism sector United Arab Emirates especially Dubai was hard hit by the economic meltdown as far as the tourism sector is concerned. This was shown by high cost of hotel facilities as well as that for the corporate and leisure travelling facilities. Its average room rate ranged the highest in the global standing with $375 in October 2009.Cutbacks on corporate travel to Dubai is another factor which led to decline occupancy in the hotels. Mega projects of tourism faced a setback due to global credit crisis thus the lingering question of how these projects would be financed. Not only recreation is a major activity that attracts visitors to UAE but also to look for an excellent investment opportunity commonly referred to as business tourists. Since the Dirham is pegged against the dollar, visitors were likely to pay up to 25% more for accommodation because euro and pound had declined against the US dollar. Consequently, travelers in the major feeder markets to UAE from European countries and UK who was suffering from the weakening economies of their states and prospect job losses, leisure travel to hem was a liability (Sirkeci, Cohen & Ratha, 2011). Tourism in UAE contributes about 14% of its GDP and with the decline in visitors the Emirates in 2009, the sector performed dismally contributing less than 10% of the total GDP. This is normally calculated by multiplication of foreign tourism nights with the average tourist expenditure per night. Employment in the tourism sector also declined during the recession period. The labor force in this sector is normally aggregated to a unitary stock therefore the sector from decrease in the hiring rate and the attrition rate. This led to managers proposing to eliminate temporary surplus employees due to the negative inflow of the tourist.According to Business monitor International a decrease in the number of hotel guest in 2008 and a fall in occupancy rates translated to around 9.7 million arrivals while in 2009 the figure slumped to 7.5 million where Abu Dhabi alone recorded a drop of 3% translating to 1.5 million visitors (Canuto, Giugale & World Bank, 2010). Recommendations It is therefore recommended that, UAE diversifies and develop a strong economic program apart from oil, gas, and real estate. These include manufacturing, government services hotels and commerce and finally transportation. By improving these sectors, UAE will have a broad economic base to raise its GDP and avoid over reliance on foreign investors. Development and improvement of free zones is another key element that UAE should look up to. This will assist such companies as Jabel Ali Free zone in Dubai so that employment sector is expanded to provide employment to the natives and the foreigners as well. Technology sector need to be improved in UAE. This ca be noted in the sense that, contribution to the national economy by this sector is insignificant and cannot even be recorded in the GDP grid. This will attract more companies to set up their bases in UAE apart from Microsoft, IBM and HP (Christensen, 2010). Also, UAE should encourage local investors to invest in various economic sectors. This will reduce the influx of foreign investors who when faced with such an economic melt down they withdraw their investment. Such moves further worsen the crisis because people will lose their jobs and reduce revenue collection. Finally state owned financial lending institutions and investment funds should venture into various risks as sovereign risk, currency risk, and financial risk so that they are not exposed much to foreign development. Conclusion As discussed throughout these researches it is quite evident that, UAE pillar of economy is the oil and gas sector with emerging sector as tourism and real estate supplementing their economy though not fully developed. The over dependence on one source of economic source can lead higher exposure to economic risk as witnessed with UAE when the oil and gas price s fell globally. Also over confidence in the economic resource strength like oil or gas is a mistake that cost UAE because they could not imagine of any possibility of economic recession. Therefore in order to avoid such a similar recession in the future, diversification of economic sectors should be considered and lastly, despite the strength of a sector, threats to it should also be considered. References: Canuto, O., Giugale, M., & World Bank. (2010). The day after tomorrow: A handbook on the future of economic policy in the developing world. Washington, D.C: World Bank. Christensen, S. (2010). Frommer's Dubai. Chichester: John Wiley. Gorgenländer, V. (2010). A strategic analysis of the construction industry in the United Arab Emirates: Opportunities and threats in the construction business. Hamburg: Diplomica- Verl. Khamis, M. (2010). Impact of the global financial crisis on the Gulf Cooperation Council countries and challenges ahead: An update. Washington, DC: Internat. Monetary Fund. Sirkeci, I., Cohen, J. H., & Ratha, D. (2011). Migration and remittances during the global financial crisis and beyond. Washington, D.C: World Bank. Read More