Financial Sector in the UAE - Assignment Example

Student’s Name Your Instructor’s name The Course 14 January 2012 Part A Discuss the financial sector in the UAE The economy in UAE is exceedingly developed with GDP per capital income serving as the main indicator. The banking industry is fully grown with about 50 banks among them half are foreign banks. Through IMF report, the banks provide credit facilities to both public and private projects (Brenner 3). The interest developed from the profits on loans help in lowering interest rates and exchange rates hence facilitating affordable life to the residents. Stock market in UAE is so grown with NASDAQ Dubai and Abu Dhabi securities serving as the main stock exchanges. With the grown banking and stock market industry, UAE has been able to attract so many investors and business personnel’s. It has proved to be one among the best business stands in the globe. For decades, UAE has had a great overseas investment. Their assets are spread all over the world since they are dynamic in their investment strategy. Through the government, UAE has been an active partaker in the global financial market. This has been a great boost to the economic development hence the reason for UAE doing well financially. However like every other country, UAE’s financial sector is not perfect. It has its own struggles in the equity markets. When the global inflation hit, UAE felt it more due to the openness it had to investors. According to IMF report, the market for a long time lacked diversity which has made it so unstable (Brenner 3). There is need for UAE to open up further to foreign participation in financial market so that their debt implement could get some security. This will avoid panic like it happened when inflation hit and Dubai had not cleared its debts. There is therefore a great need for expansion in the capital markets to improve corporate governance and a safer environment for large investors. What is the significance of it? The financial sector in UAE has so much significance to both global and local economy. The high GDP per capital income has been serving best to stabilize the lives of the citizens locally. This makes it easy for all the citizens to access financial capital for development. With the banks doing well in deposits from the citizens, major losses on lending have been avoided as all the borrowers have enough to repay loans (Hunter 1). This is an aspect of a stable economy that has the capacity to attract a significant number of foreign investors. With a surety of rapid growth as far as business is concerned, the foreigners have opened up to trade with UAE. The significant success in financial sector and major investments in assets locally and internationally has been a great indicator of a growing and open economy. With few buts like in equity market, it has been able to attract a big number of workers from outside UAE hence making a significant impact to both local and international economy. Internationally they manage to widen their trade zone and locally, their GDP gets stable by each day. This impact has led to growth that has seen their sectors of involvement like oil and gas productions flourish. Discuss the impact and role of the financial sector in funding investments to non-oil sector UAE economy. Before discovery of oil UAE’s economy was majorly on fishing and pearling. After the discovery the government had to think of how to grow non-oil related sectors since they still remain part of the economy. The financial sector has been supportive in funding and sustaining tourism, healthcare, education, training, real estates and logistics industry in efforts to make non-oil sector overgrows the oil-sector. This is because the over reliance on oil could lead to difficult economic times when the global economy slows down. The lesson on investing in non- oil products stems from 2009 global inflation that almost collapsed UAE economy. Dubai was almost declared a defaulter since it was built on heavy debts. Dubai issue and the prediction that the oil reserves could run out by 2015, the only way out is to make sure that the non-oil sector is functional. This will be able to support the economy in the non-oil producing areas. The government should take up its role of being a regulator rather than a service provider to ensure that the plans put in place work and are effective to everybody. Discuss the impact of foreign investment and multinational organizations on the UAE economy. UAE has been awarded a global leader in foreign investment regardless of the many conditions that have been set by the federal government. Abu Dhabi being one of the UAE Emirates have had strong stand on foreign investments. This has made it clear to the international market that their stand is not to use their investments organizations as foreign policy tool. Such a stand is allowed since they stand at a high level to dictate what they want for their government as the natives. However for purposes of security implications, the government as the regulator accepts foreign investors on conditions that the process taken to invest is clear, timely and to the advantage of UAE (UAE Embassy 1). The conditions dictate that apart from free trade zone that is 100% owned by the investor, 51% of the investment should be for the local partner in any other sector. So investment is only allowed through partnership in order to protect UAE from loosing so much to the foreign counties. Accepting CFIUS (Committee of Foreign Investment in the United States) was one way of showing a diversification of investments as long as the set procedures were followed to the latter. Through diversification, the economy has recorded a major rise since trade has been enhanced. With the joint trade deals, UAE has had a surplus in production which has been positive in enhancing foreign investments and trade inflows. The result has been seen in the doubled nominal GDP. By 2007, UAE was ranked top among the Arab countries and position 29 out of 40 among the most advanced countries (UAE Embassy 1). With such kind of an award, the world could not fail to recognize UAE since it was as a result of foreign investments and diversification. Since then growth has been the key characteristic of UAE and a realization of hidden potential has continued to be established. The impact has been seen through the high migration of people who are out for employment and investment. Analyze the impact and role of foreign investments to non-oil sector UAE economy. Majority of the investors go to non-oil sectors. The sector has proved to contribute greatly to the steady increase in economic growth. Through sectors like tourism, agriculture, real estates, service, manufacturing and transport industry, UAE has been able to attract bigger population than itself. With the many activities that go around tourism in UAE, the hotel industry does so well with above 90% booking a better part of the year (Farra 5). Through their reliability, tourism has made a thrilling effect in UAE as they meet the needs of the tourist. Real estate has had a big impact in the UAE with Dubai leading in the sector. UAE records to have taken 25% of the world best cranes to work on their projects. It is only in UAE that one can find the most creative, tallest and the biggest buildings. With continued construction projects even in the islands, this indicates that real estate is doing pretty well and a key indicator to UAE positive economic growth. Agriculture is doing well in UAE despite the minimum amount of rainfall received per year. According to ICDT, the government’s heavy investment in this sector has yielded fruits since the country is self sufficient in food production (ICDT 2). This has had a 2% increase in GDP since some products are exported and a 5% impact in labor force. With foreign investors having a part in this sector, products marketing has been enhanced internationally. Manufacturing industry has shown great growth as many of the products get exported. Their sell has been adding so much to the economy that the sector has remained one of the largest. Specialization in manufacturing and purchasing of raw materials from outside UAE has lead to growth of loyalty to their customers that have made sure UAE has remained busy and productive. Part B Foreign Investments Analysis of Foreign Investments and the important macroeconomic indicators UAE opening to foreign investment has been a great boost to the economy. Through that, UAE have managed to be ranked best among the advanced economic areas in the region. The key indicators have been on the GDP per capital income. The stability and growth in GDP has been a proof of sound policies in economic management hence creating a macroeconomic environment that is power to the private and public institutions (UAE Embassy 1). UAE has shown a great increase in green field investments over the years. For example in between 2002 and 2006, a 144% growth was recorded in green field (Farra 9). With such an investment increase, UAE has shown a great potential and therefore making it the leader in public and private green field investment projects round the globe. UAE receive a big portion of FDI inflows with the major one being in Dubai. In Dubai projects alone, UAE received $12 billion in 2005. This was quite a lot and ranked UAE top in receiving FDI around the globe. Such can only happen if a country has been proved to have a stable investment policy that guarantees economic growth to the parties involved. How much does Foreign Investments contribute to the GDP? Foreign investments have proved to be one of the key indicators of growth in the UAE. Its produce from oil and non-oil products has yielded a high growth in the GDP. With a thieving tourism industry, transport and hotel industry have been greatly favored. As many tourist visit UAE for various reasons, the emirates GDP growth has been significant. Hotel industry has recorded 90% occupancy throughout the year, which indicates good income. This has been favorable in accommodation of the foreigners in their time in UAE. Agriculture contributes 2% and manufacturing though still growing contributes 10% to the GDP. This has had a positive impact in reducing the amount of food imported since the production has been sufficient. With the little they export to America, the revenue collected from the businesses is massive as compared to when diversification had not happened Does it affect the aggregate supply parameters of technology, labor, physical capital, human capital, and natural Resources? Foreign investments greatly affect supply of technology. With increased business, communication has become crucial hence the need for high speed and reliable communication channels. Technology has come in handy through phones and internet to facilitate continuation of business. The service providers have recorded a high growth in business as many people go for the best tariffs that fit their communication needs. One such company is ETISALAT Telecommunication Company that has been there for many years. With the growth in technology industry, revenue collected contributes to the GDP. With the growth and economic stability investors have seen UAE as the best place to invest in. Among other investments, construction, manufacturing and real estate’s industry have been in the fore front in utilization of foreign physical and human capital. These sectors have hired 25% of world cranes and machines to facilitate their projects. The projects and investments come with a need for labor that UAE population cannot provide sufficiently. Therefore to take care of the need, UAE has been importing labor and professionalism from outside. They import experts in different fields to work for the companies and organizations around. With few regulatory requirements employment has been made flexible hence many people make their way into UAE labor market. The natural resources however have been greatly affected. To take care of the high population, the resources have been running out. The greatest threat is in the tightening of the oil market in the global market. This is approximated to lead to an oil crunch by 2015 where oil prices will be so high and with no spare production, UAE may not meet the demands (Peak Oil 1). This leave the question of what will happen to the economy since oil has been a major source of funds for UAE. The way out is to make sure by 2015, the non- oil sector is thriving to raise more that 50% of the required capital. How much does Foreign Investment impact on employment in the UAE for all UAE residents and nationals in specific Increase in foreign investment has lead to increase in labor need. With a very small population, the way out for UAE is to import labor. This has been positive in reducing levels of unemployment not only worldwide but also in the UAE. The residents have been having employments since they are in their mother land and foreigners with expertise skills benefit from the same. To facilitate their movement, UAE has made it easy to obtain visa and work permits as long as one is out for labor market, business or investments. Does Foreign Investments impact on the money supply and does the UAE monetary policy impact on Foreign Investments According to ICDT, transfer of funds in and out of UAE has no restrictions (6). Every currency is allowed to be traded without necessarily having a license to do so. This is because the UAE acknowledge the fact that the majority of expatriates are not natives and so will need to send and receive money abroad. Since Investments abroad are not restricted, the expatriates have a free will on where to invest their money. This shows the flexibility in UAE to accommodate everybody. However through central bank, a sound banking system has been used to work on the monetary policies. To avoid getting into bad debts, the central bank through the commercial banks has the mandate to evaluate terms related to non- performing loans, personal loans and risk assessment. This helps in the control of bank liabilities to ensure that the economy still grows (Hassanain 37). This monetary policy has an impact in both the public and private sectors. Foreign investments get affected through ensuring that their monetary operations are in line with the set conditions. The growth of money supply being restricted enhances monetary security since the inflation level decreases. For foreign investors, it serves as a positive move since profits are guaranteed and therefore the cost of the economy proves to be worth paying. This pulls up the demand for goods and services, a positive gesture in investment. With such a high demand, the investors get security for their investment and can therefore pull more resources to investment. With free money transfers, the policy ensures that expatriates can still invest in their homelands and internationally. Does the UAE fiscal policy affect Foreign Investments? UAE fiscal policy is highly aimed at restoring confidence and credibility to UAE. Through the private sector that is largely owned by foreign investors, UAE diversification plays a major role in the growth of foreign investments. In the banking industry, low fiscal cost on guarantees work to promote low liquidity on facility that is key to investors. With the self independence in each emirate, the power to control wealth and the budget remains secure. This reduces the percentages on taxes to places like Abu Dhabi. With such a policy, foreign investors will opt to invest in Abu Dhabi and Dubai. The choice of investing in Abu Dhabi since it controls the largest wealth in the UAE is high for investor to enjoy largest fiscal space. This influences the choice of where to invest and where not to in efforts to avoid fiscal risks (Sensenbrenner, Cevik, Da Silva, & Guzzo 35). Does Foreign Investments influence the overall trade balance of the UAE? Foreign investment has been a great support to trade balance in the UAE. With bilateral trade balance, foreign investors have been able to enjoy joint production with the UAE. With the restrictions that foreign investment is only based on partnership, the market has been able to experience stability as far as supply is concerned. Investors experience has been positive as UAE gets to meet the demands of the growing market. UAE opening to diversification is as a result of foreign investments. This has lead to positive trade drive in industry, financial and assets trade freedom. This openness has given UAE a regional advantage and great prices over performance. With foreign investments, the emirates have been rated the highest in economic growth, trade development that has made it a financial hub. Works Cited Brenner, Patricia. United Arab Emirates: Financial Systems Stability Assessment. IMF Country Report, No. 07/ 357. October 2007. Washington, DC: International monetary fund publication services, 2007. 1-30. Farra, Aref, Ali. Investment Reforms in the UAE. Amman, 4 Sep, 2007. Web. 13 Jan 2012. Hassanain, K. “Monetary Controls in the UAE” Middle Eastern Finace and Economics: EuroJournals Publishing, Inc. 1. 1 (2007): 36-41. Web. 13 Jan 2012. Hunter, Gregory. UAE’s big Banks give financial sector something to cheer. The National, 27 April 2011. Web. 12 Jan 2012. ICDT. United Arab Emirates (UAE). ICDT’s Member States Business Guide. < http://www.icdt-oic.org/Ressources/www.icdt-oic.org/Documents/Biz_Guide_AE.pdf> Peak Oil. UAE-World likely to face severe oil crunch by 2015. Peak Oil News & Message Boards. < http://peakoil.com/production/uae-world-likely-to-face-severe-oil-crunch-by-2015 / > Sensenbrenner, Gabriel, Cevik, Serhan, Da Silva, Arthur ,Ribeiro & Guzzo, Vincenzo. United Arab Emirates: Selected Issues and Statistical Appendix. IMF Country Report, No. 11/112. May 2011. Washington, DC: International Monetary Fund publication Services. 1-70. UAE Embassy. The UAE Financial Sector. < http://www.uae-embassy.org/uae/economy/financial-sector> Read More