With massive reserves of capital, huge deposits of oil and a rapidly developing private sector, the UAE is likely to ride out the year in good shape, despite unstable oil and political problems in the region.
The performance of the UAE's economy in 1997 means the country is in a good position to deal with whatever this year has to throw at it. A combination of reasonably high oil prices and steady growth in trade and manufacturing conspired to keep government officials and pundits alike content with the way things have been going.
According to a report from Emirates Bank International the Emirates posted Gross Domestic Product (GDP) growth of two per cent in 1997. This might be lower than expected by UAE residents; daily surrounded by the massive road works, building sites, and the hustle and bustle of trade that have become the hallmark of the UAE's larger cities. But it is consistent with a steady movement away from oil toward a genuinely diversified economy.
Oil continues to be the bedrock of state finances, be they those of the Abu Dhabi Government, or those transferred from that government to the smaller emirates in the north of the country under the federal system. But this belies the strength of private sector activity elsewhere in the economy, particularly in the emirates of Dubai and Sharjah.
A two per cent increase in GDP translates into total GDP of Dh167 billion, from Dh163.7 billion in 1996 -- already huge for a population of around 2.5 million. But Emirates Bank estimates the contribution of the oil sector dropped by Dh5 billion in 1997 to Dh52 billion, or 31 per cent of GDP against 35 per cent in the previous year. Growth in the non-oil sectors made up the shortfall; contributing Dh115 billion against Dh106.7 billion in 1996 -- or 69 per cent of GDP against 65 per cent in 1996. (With over two thirds coming from private sector non-oil activity). This suggests the private sector is finally capable of taking up at least some of the slack caused when inevitable fluctuations in the price of oil hit state finances.
The Abu Dhabi Government has not been slow to diversify its revenue base from state-owned resources -- particularly with new buildings and expansions to existing developments in its refining industry, to help avoid shocks from downswings in the price of crude.
In hindsight this has been wisely done, 1997 oil prices remained above average for the last decade but their collapse in the last quarter to a 45-month low, due in part to the domino effect of the Asian economic crisis, was the main reason for the poorer showing in the UAE's GDP stakes. Unlike some of its OPEC brethren, the UAE has abided by its production quotas, with only relatively small overproduction last year.
Emirates Bank estimates that such frugality cost the UAE a nine per cent decline in oil revenues hence the reduction of the oil sector's share in total GDP.
The UAE received a 9.5 per cent production increase from 2.05 million barrels/day (b/d) to 2.37 million b/d for its good behaviour under last November's OPEC agreement to raise quota levels for its members. But the combined increase in OPEC's total production levels to 27.5 million b/d, sent oil prices tumbling even further, despite the fact that OPEC was unofficially producing around 28 million b/d already.
New refining projects therefore make good sense -- they are not OPEC related and have no quota restrictions. Recent announcements for new refining capacity include plans being laid by the UAE for a joint venture oil refinery in China to cater to the growing demand on the Chinese mainland. This would come on the back of an earlier $886 million joint venture project with Pakistan, and the beginning of work on the Ruwais petrochemical project. Abu Dhabi already has a 25 per cent stake in the European petrochemicals giant Borealis, ensuring access to the European market for its petrochemical products.
Abu Dhabi is not alone...