Which Economies Are Exacerbating the Global Trade Imbalance - Assignment Example

Introduction After showing impressive resilience during the international financial crisis, UAE is still going strong making stronger fiscal expansionary policies. The economic forecast in The economist Intelligence Unit show some exceptional growth in non-oil export sector as well as some reforming financial policies (tapping into bond sector) to attract international as well as domestic investors. Here are some opinions on the economic forecasts till year 2015. Describe the economic outlook of the UAE for the next 3 to 4 years (economic growth, unemployment forecast, inflation forecast, budget surplus or deficit...) (In other word: trends of economic growth rate (past and forecasted) trends unemployment rate (past and forecasted), trends of inflation forecast, current and forecasted budget surplus or deficit. 20 marks  Real GDP growth rate is forecasted to remain at the level of 4.9% for the period of 2011-2015. World trade itself is forecasted to slow down in the period 2011-2015 but it will give a boost to non-oil exports of UAE to make their mark. Real GDP growth rate for the year 2010 remained 2.1% and is forecasted to rise to 3.1% in the year 2011 and this trend is forecasted to continue till 2015 when it will reach 4.9%. This trend is made possible due to various mega investment projects bearing fruits in the following years. The UAE’s federal budget as well as the individual budgets of Dubai and Abu Dhabi is in the process of some major restructuring. The federal spending budget for the year 2011 remained at Dh41bn (US$11.2bn) which was 6% lower than that of 2010 Dh43.6bn. Inflation remained at 0.8% in the year 2010 but forecasts of inflation rate of UAE predict an increase; reaching to 2% for the period 2011-2015. One major reason for this rise is due to the increase in the housing costs. Budget deficits are not looking very bright in the coming years. The trend in 2012 will not be of increasing budget surplus, in fact, it will shrink the surplus and by 2015, UAE government will be posting budget deficits. A new advisory council will be overseeing financial policies. It is believed that by the end of 2011, financial stability is evident and policy makers and the Central Bank will shift their policies from liquidity-increase to controlling inflation. The Emirates is seeking to balance its budget. Federal budget is partly funded by direct contribution from Abu Dhabi. But for the year 2011, finance ministry remained the most significant contributor by contributing Dh16bn (US4.4bn). For the year 2012, Abu Dhabi’s contribution towards federal budget will be reduced by 19%. While UAE is making progress in solving its debt issues, public debt is also looking healthy in the forecast. The net public debt is forecasted to decrease in the year 2012 from nearly 40% to 35.3% of GDP. Overall external debt in stocks is also predicted to reduce from $121,889m to $120,878m in the year 2012. Identify one economic sector that you feel is strategic to continuous economic growth of the UAE and explain & defend you selection, Rationale is economically. 12 marks  One economic sector that stands out is the probability of investing in bond market. The UAE is looking to introduce Bond investments in its financial markets to curb various economic deficits. These will probably the most important decision (strategically) because this way the UAE can save the trouble of liquidating its assets to curtail its economic deficits. This economic strategy can have various long term benefits for Dubai investments. Very recently, Axiom Telecom cancelled its IPOs in Dubai over liquidity concerns. This has served as a financial setback for UAE as international investors have become more skeptical of Dubai-NASDAQ. Recapturing foreign investment is one or the prime targets for UAE and tapping into the bond market is certainly one safe route to achieve that. The major hindrance for making investor friendly policies for both domestic and foreign investors are the domestic oppositions. When these issues will be resolved, major flux of foreign investment is expected in UAE which will solve many problems including the debt that is haunting the policy makers. Define fiscal policy and describe the fiscal policy trends in the next couple of years and explain the goal sought by the government to pursue such policy.14 marks  Fiscal policy refers to policies of the government that are directly influence revenue and expenses to stimulate country’s economy. Fiscal policy of UAE will remain expansionary not only for the next couple of years but for the next five years. This policy has been constructed to support the diversification programme (UAE is looking forward to reduce its dependence on oil exports and diversify in real estate and the service industry). Despite such a growth oriented fiscal policy, there are certain hindrances that UAE has to face, number one of which is the budget deficit. Both federal and Abu Dhabi budget policies are indicating a slowdown in their expenditures as Dubai will need to pay its debts. Despite the fact that Dubai World (DW), one of the largest state owned business entities is talking about restructuring its indentures with the creditors, it will still put more pressure on Abu Dhabi to contribute towards this department. Other than taking care of this sector, Abu Dhabi will possibly need to contribute in other Dubai Government related entities. This is one of the main reasons why forecasted fiscal position of UAE does not look very promising as compared to previous fiscal position of 2006-2010. Federal budget will remain in surplus at an average of 1.5% of GDP but after 2012 it will move into deficit - things don’t look very bright in 2013-2015 as this shortfall can reach up to 2.1% of GDP. But debt problems will be less severe in the year 2015 because of Dubai will considerably resolve its debt problems and debt will be reduced from 45% of GDP (reported in 2010) to 26.7% of GDP by 2015. Define the current account, report on the status of the UAE current account deficit or surplus and explain why the UAE is experiencing either the surplus or deficit in its current account. 12 marks The current account is the sum of balance of trades, net factor income and net transfer payments. For the year 2010, the three year average of UAE’s current account surplus remained 5.8% of GDP. The annual current account balance jumped from 3.0% of GDP to 7% in the year 2010. The Economist Intelligence Forecast predicts that for the year 2012, the current account balance for UAE will be US $12,010 million. This positive looking forecast showing a surplus is because of significant increase in the exports of UAE that are predicted to be over $230,980 million by 2012. Other than the increase in its exports, service balance is also predicted to increase and will jump from just over $6,135 million to over $7,655 million. The current account is forecasted to remain in surplus at an average of 2.9% of GDP. The contribution to this surplus will be increase in non-oil exports as oil prices are forecasted to drop in the period 2012-2015 due to increased oil exports from Brazil and Iraq in the international market. Identify the UAE major trading partners in the areas of exports and imports.(top 3 export partners, top 3 import partners) 12 marks  The three major trading partners in the export sections for UAE are Japan, South Korea and India. 17.9% of UAE’s total exports go to Japan, making him the most crucial trading partner. South Korea takes 10.1% of UAE’s exports followed by India which taking 9.6% of UAE’s exports. India has more importance in the future as both China and India are potential trading partners for UAE. On the imports side, India again has a significant role. UAE takes 15% of its imports from India which slightly less than China who is the biggest trading partner for UAE contributing 15.04% to UAE’s imports. The United Arab Emirates imports 8.3% of all its imports from U.S which is the third largest importing partner for UAE. Major Export Partners for UAE 1. Japan (17.9%) 2. South Korea (10.1%) 3. India (9.6%) Major Import Partners for UAE 1. China (15.04%) 2. India (15.0%) 3. United States (8.3%) Overall, things are looking bright for UAE economy despite the fact that a drop in oil prices is looming in by the year 2015. UAE’s major economic dependence is on oil exports that is why major restructuring in its investment policies (to attract both domestic and foreign investors) as well as increasing its non-oil exports are a major challenge for UAE. Economically speaking, Iran is a major threat for UAE’s interests. Strait of Hormuz has always been a dangerous trade route because of Iran. That is why it is only wise for UAE not to rely only on oil exports and start restructuring its financial operations. Time will prove that these strong economic strategies will pay off both in the near and distant future. Works Cited "Current Account." Wikipedia, the Free Encyclopedia. Web. 08 Jan. 2012. . Economist Intelligence Unit. Country Report; United Arab Emirates. Rep. London: Economist Intelligence Unit, 2011. "Fiscal Policy." Wikipedia, the Free Encyclopedia. Web. 08 Jan. 2012. . "United Arab Emirates | Current Account Surplus Watch." Current Account Surplus Watch | Which Economies Are Exacerbating the Global Trade Imbalance? Web. 08 Jan. 2012. . Read More