ECONOMY
REVIEWED INTERNATIONAL JOURNAL
Determinants of Private Investment in United Arab Emirates
(Dosen pengampu: Kadek Wiwin Dwi Wismayanti, SE., MAP)
Made By:
DWI SUKMA RAHMAYANTI
1521205020
Public Administration
Faculty of Social and Political Science
Udayana University
2016/2017
International Journal of Economics, Commerce and Management
United Kingdom
Vol. I, Issue 2, 2013
DETERMINANTS OF PRIVATE INVESTMENT
IN UNITED ARAB EMIRATES
Al-Jundi, Salem A. Al Ain University of Science & Technology
Hijazi, Rafiq H. Al Ain University of Science & Technology
The United Arab Emirates is one of the leading economies in the Gulf with the oilproducing sector playing an important role in the countrys economy. The non-oil is however,
assuming more influence with significant growth in trading. The UAE has long maintained a
policy of encouraging foreign investment. From a financial perspective, the stable UEA
Dirham and lack of exchange restrictions, coupled with the ability to repatriate capital and
profits makes the UEA a very attractive proporsition when considering setting up a business
in the region. The UAE is an important producer of natural gas and oil, ranking seventh
globally in total proven reserves of both. Abu Dhabi, the countrys capital and also the largest
emirate in the federation, possesses the majority of oil and natural gas reserves followed by
Dubai, with small amounts in Sharjah and Ras Al-Khaimah. The country is also a member of
the Organization of Petroleum Exporting Countries (OPEC).
The UAE is one of the most attractive destinations for investment in the Middle East
and North Africa (MENA) region given its integrated supply chain network, openness to
international trade and foreign investment and liberal tax regime. The country stands out
among its regional peers due to its stable and secure operating environment, which offers a
relatively low risk of crime and terrorism and strong legal protection for foreign investors.
Much of the UAEs improved economic performance over the recent years is a result
of positive steps taken to diversify its economy. Generally, non-oil GDP has sustained
positive growth rates but without high volatility like the oil sector. The economic volatility
resulting from the oil wealth is being offset by positive productive returns from greater
economic diversification. The countrys impressive economic performance during the year
led to a GDP growth rate of 25.6 per cent at current prices, while real GDP growth is
estimated at 8.2 per cent. Key factors were the strong oil market, active development of
public joint stock companies, increased involvement of free zones and buoyant local stock
markets, together with launches of a number of significant new projects. Astute economic
policies provided solid foundations for impressive growth in all sectors with GDP at current
prices reaching Dirham 485.5 billion in 2005 compared to Dirham 386.5 billion in 2004
(based on Ministry of Economy figures and Central Bank Annual Report).
Economic diversification has become a strategy for the government and the whole
society (Al-Jundi, 2012). Then, the performance of a large and empowered private sector will
determine the future of the UAE economy as stated in the Abu Dhabi Economic Vision 2030
(Abu Dhabi, 2008, p. 5). As a result, the government has invested oil revenues to build and
expand infra-structures and finance basic economic activities. The private sector has enjoyed
the positive investment climate. Comprehensive development process and political stability
resulted in reducing oil contribution from 66% (1975) to 31% (2010) (UAE National Bureau
of Statistics, 2013). However, the contribution reached a minimum level of 21% (1998)
(UAE Ministry of Economy, 2013).
As this section will consistently explain, investment is associated with decreasing marginal
rates of return due to the low concentration on the productive sector in the UAE. Subsidies
and price distortions create bias in investments, therefore skewing the excessive
concentration of capital, producing inefficiency. There is a fine line between investments by
the UAE government and investments by the private sector. Labor plays an important role
indetermining the form of investment which yields more efficient results. Private investment
is a key for economic growth rate which the government takes a role for building infrastructures (Bakare, A theoretical analysis of capital formation and growth in Nigeria, 2011).
The private sector in the United Arab Emirate activates in the non-oil economy in
addition to public sector. As non-oil economy expanded, the future of the whole economy
will depend on the private investment. Private investments are significantly more productive
than public ones and should increase the Emirates. Private investment as a ratio to non-oil
GDP fluctuated due to the business cycles. The ratio for the whole period of 1990-2010
estimated more than 16%.The minimum level was 11.5% in 1992 and the estimated
maximum level was 26% in 2010. To have a sight of the trend, the average of 1990-1995 was
14.6% and it became 15.9% during 1995-2000. Then, it dropped back to 14.8% during 20002005, while it reached 21% during 2005-2010 because of the rapid expansion of the
construction sector. In general, private investment is too sensitive to changes in environment
and becomes a source of instability.
But, how can we increase the ratio of private investment to non-oil GDP? A general
and simple answer to this question is economic and political stability. However,
understanding other determinants of private investment may help in finding ways to
restructure economic policies and therefore private investment. The UAE National Bureau of
Statistics along with local centers of statistics should cover and collect data on new variables
such as: the categories of investment into residential investment and components of nonresidential investment, operating surplus at fixed prices and annual averages of interest rates
on loans given to the private sector. Public expenditure stimulates the private investment
more than the non-oil GDP. More specifically, ceteris paribus, a ten-million Dirham increase
in the real public expenditure stimulates private investment by 3.16 million Dirham; however
a ten-million Dirham increase in the non-oil GDP will result only in a 1.11million Dirham
increase in the private investment.
A significant part of an increase in aggregate demand or expenditures goes as a leak
from the circular flow of economic activities. Imports in oil economies, such as the UAE,
represent a high ratio to GDP and more increasingly to non-oil GDP. Imports of goods and
services ratio to GDP represents 40.7% (2001) and increases to 74.5% (2012) (UAE National
Bureau of Statistics, 2013). Overall GDP growth is engulfed by capital and investments, but it
does not accurately show the problems of the oil curse and its effects in the form of low
productivity. The multiplier must be so low in such economy. The production capacity is still
small and the whole economy is still exposed to international crises.
Private investment, over the past 10 years, has fluctuated around 16% of the non-oil
GDP. Economic growth away from oil by raising private investment rates; strengthening local
technological capacities and skills; and improving the competitiveness of their exports in
world markets, creating more and better employment opportunities away from government
sector. But in certain situations, private investment is too sensitive to changes in environment
and becomes a source of instability. Since private investment depends first of all on real
public expenditures, the fiscal policy should play a role to stimulate investment and smooth
the business cycle.
