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WIKI ANALYSIS
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This article describes a geographic region that covers various exchanges, currencies, indices and stocks. View articles referencing this region. |
The UAE is one of thirteen nations belonging to the Organization of the Petroleum Exporting Countries (“OPEC”), who have become very prosperous as a result of high oil prices. Large amounts of sovereign wealth are being deployed into local infrastructure projects, lead by the Abu Dhabi Investment Authority with an estimated US $500-900B Assets Under Management. [1]
In addition to a close proximity to more than three-quarters of the world’s oil reserves [2], Dubai is also located relatively close to Russia, India, and China, which are among the world’s most rapidly expanding countries. In fact, “within 4 hours from Dubai, is 29% of the world’s population” according to Bob Johnson, CEO of Dubai Aerospace.[3]
Demographic Environment
The United Arab Emirates has a population of around 4.6 million people and is expected to grow by 3.8% in 2008. According to CIA.gov’s 2008 World Factbook, nearly 74% of the population between 15-64 years old is non-national.[4] Of this 15-64 age group, there are 2.74 males for every female and the median age among all males is 32 years old.
A majority of UAE’s labor force (3.1 million laborers) is comprised of non-national males who migrate from Asia to secure jobs. Of these foreign workers, an estimated 1.5 million migrate from India to work as contract laborers in the construction industry.[5] Many of these laborers receive very low wages ($109/mo for unskilled workers), live in highly criticized labor camps, and are subject to the excruciating summer-time temperatures.
This unique population-mix poses many new opportunities and threats for the construction industry. The large supply of cheap labor, for example, decreases costs for constructing new buildings. Furthermore, labor unions don’t exist in the UAE and without substantial human rights regulations; workers are commonly overworked till exhaustion.
Cheap labor, though seemingly advantageous, also poses many significant threats to the construction industry. Labor strikes are becoming more frequent and exacerbate the problem of delayed construction projects. Such strikes are undoubtedly a threat to the industry, but pail in comparison to the threat of declining wage gaps between the UAE and the rest of Asia.
Simply put, many Indian expats are actually earning less in Dubai than they would back home. Salaries in India grew by 14.8% in 2007, compared with only 10.7% growth in the UAE.[6] Fluctuating currency rates compound the problem of decreasing UAE laborer wages. In the UAE, the Dirham (Dh) is pegged to the U.S. Dollar whereas the Indian Rupee (INR) is not. (See Exhibit 1 for a 5-yr chart of the Dirham vs. Rupee). Though 2008 has been a favorable year for the Dirham vs. Rupee, its peg to the volatile U.S. dollar is a major concern. Inflation is another chief complaint among UAE laborers. Consumer prices rose an astonishing +9% in the UAE during 2006, versus 5.5% in India during the same period. All these factors are diminishing the salaries of UAE laborers, and unless Dubai’s construction industry can adapt by increasing real wages and enhancing laborers’ conditions, the emirate will lose significant appeal among foreign workers.
Economic Environment
Economic activity in the Middle East and Central Asia has been quite robust in recent years. Real GDP grew by 6.5% during 2007, marking the best 5-year performance since the 1980s. Rising commodity prices have undoubtedly benefitted UAE and other OPEC nations, but non-oil GDP growth within these regions has increased substantially as well. (Exhibit 2 charts the oil and non-oil GDP growth among oil exports for 2007).
Supporting this non-oil GDP growth among oil exporters is the substantial increase in spending, particularly towards infrastructure. Imports to the Middle East as a percentage of global imports rose from 2.5% to 4% between 2001-2008.[7] The major contribution to spending has been the growth of budgetary expenditures, which have grown in excess of 20% annually in recent years. Exhibit 3 charts oil income and imports among GCC nations between 2001-2008. Although imports have more than tripled during this period, GCC nations continue to accumulate budget surpluses.
Historical budget surpluses among GCC nations have created substantial amounts of wealth for Sovereign Wealth Funds (“SWF’s”). The IMF estimates that SWFs will rise from $2-$3 trillion today to about $6-$10 trillion within 5 years, with GCC countries holding about ½ of these assets.[8] Exhibit 4 estimates the amount of Assets Under Management for SWF’s.
The increasing fiscal strength among oil exporters, coupled with growing concerns about asset quality in developed nations, will likely lead to more localized investments by SWF’s. The Abu Dhabi Investment Authority, for example, will likely invest closer to home after a failed $7.5B investment into Citigroup in late November 2008 [9]. Even with an 11% dividend yield, the Abu Dhabi Investment Authority could likely lose money on its investment. The rising number of investments into local infrastructure by SWF’s, coupled with rising oil and non-oil surpluses, will have a substantial impact on both the size and scope of construction projects throughout the Middle East.
Natural Environment
Oil has been the main contributor towards prosperity and growth in the Middle East. In fact, it’s estimated that 40% of the world’s oil supply passes through the Straight of Hormuz (see Exhibit 5 for maps). If the Straight of Hormuz were closed, it would cause a severe disruption to the world’s oil supply and would have a very negative effect on both oil revenues and construction projects throughout the region. The world’s reliance on the Straight of Hormuz to deliver oil will remain in constant jeopardy unless an alternative distribution route is discovered.
Understanding the importance of worldwide oil flows; the Dubai government is planning to build a $200B canal that will allow oil tankers to bypass the Straight of Hormuz. The new 112-mile canal would link the Gulf coast with the port of Fujairah on the Indian Ocean coast (see Exhibit 6).
Dubai’s proposed canal directly affects the company, since a substantial amount of construction equipment will be needed for excavation. But perhaps more importantly, the proposed canal ensures continued prosperity throughout the Middle East, even in the wake of a Straight of Hormuz closure.
Debates surrounding the Straight of Hormuz give way to a much bigger issue- the Middle East’s reliance on oil revenues. If a substitute for oil were discovered, construction growth throughout the region would be crippled. Even in places like Dubai, where oil accounts for only 6% of revenues, the discovery of a substitute for oil would have a devastating effect since Dubai’s growth is reliant upon the prosperity of the entire region.
Political/Legal Environment
Jebel Ali Free Zone (Jafza) one of the world’s largest and fastest growing free zones. Jafza is the leading driver of the rapidly expanding UAE economy, and is home to about 6000 companies from 120 countries across the world.[10] The biggest advantage of doing business in Jafza is that companies aren’t subject to either income or personal taxes. Additional benefits according to Jafza's website include:
- No import/export duties
- 100% foreign ownership
- 100% repatriation of profits
- access to modern, efficient communications
Social/Cultural Environment
This mentality to build the best is led by Sheikh Mohammed, the Ruler of Dubai. Entrepreneurs worldwide admire his vision and charisma, and the success he’s brought to Dubai is being emulated in surrounding countries. In Saudi Arabia, for instance, Prince Al-Walid Bin Talal is planning the $10.7B Mile High Tower, which could become the new world’s tallest tower upon completion. If such entrepreneurial fever to design the “biggest and best” continues to spread throughout the Middle East, the construction industry will remain prosperous for the foreseeable future.
Trading plays a significant role in Arabic history, and continues to be a major part of Arab culture in the form of souks. A souk is an Arabic word for market, and some of the most popular souks in the world are in Dubai, including the spice souk (where you can get fragrances, spices, incense and rugs) and the gold souk (also known as the City of Gold).
Exhibits
Exhibit 1. Dirham vs. Rupee Currency Exchange Rate (2003-2008)
Exhibit 2. Oil and Non-Oil GDP Growth Among Oil Exporters
Exhibit 3: Oil Income and Imports in GCC Nations (2001-2008)
Exhibit 4. Sovereign Wealth Funds Assets Under Management
Exhibit 5. Straight of Hormuz Map
Exhibit 6. Proposed 112-Mile Canal Between Dubai and Fujuirah
References
- ↑ International Monetary Fund, Regional Outlook, May 2008
- ↑ OPEC Official Website
- ↑ Hoisted Sail Productions
- ↑ CIA World Factbook
- ↑ Business 24/7 Article 7/16/08
- ↑ Hewitt Associates
- ↑ International Monetary Fund, Regional Outlook, May 2008
- ↑ International Monetary Fund, Regional Outlook, May 2008
- ↑ Bloomberg Article, Will McSheehy
- ↑ Jebel Ali Free Zone Official Website
Companies in the Investing in the United Arab Emirates Industry (1)
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