Bullish outlook for the UAE this year

Momentum is the current buzzword in the Emirates. Maintaining and building on the current momentum in the economy is the key objective of the government and local businesses.

While investment has slowed in the world's major economies, the reverse has happened in the UAE. The step up has come as UAE strives to cement its position as the regional services and manufacturing hub.

The emphasis in Abu Dhabi is on development of its extensive oil and gas resources. Over the next two years over USD7bn will be invested by the state owned Abu Dhabi National Oil Company and its subsidiaries, making Abu Dhabi's hydrocarbon sector amongst the most active in the Gulf.

On the oil side the implementation of several projects will increase oil production by 600,000 barrels a day, bringing the emirate a step closer to its target of an output of 3m b/d by 2005. Substantial investment is also planned in the gas sector. Late 2003 will see the tender for the second stage of the Asab gas development scheme and the second quarter of the Qatar-UAE pipeline, part of the Dolphin project.

The Abu Dhabi government continues to lead the way in its privatisation programme. The latest proposal to be considered is the Emirate's first independent water project, the Taweelah reverse osmosis contract. Abu Dhabi's success in opening up the utility sector is being replicated by Ajman and Sharjah and watched closely in Dubai.

Dubai's focus remains creating the prime commercial location of the region. Two recent decisions in particular will have far reaching implications. Dubai became the first state in the Gulf to allow non-GCC nationals to buy property. This will transform the real estate sector and partly explains the strong interest in the premium residential projects such as Palm Island.

The creation of the Dubai Executive Council and Dubai Economic Council, both of which will be staffed primarily by local industry leaders, represents an important effort to give businesses a stake in the development of the economy. Dubai continues to set up free trade zones with imagination. Dubai's internet and media cities are set to be joined by a textile, healthcare and festival city.

The most high profile addition will be the creation of the Dubai International Financial Centre (DIFC), which represents Dubai's ambitions to establish itself as the regional banking and insurance hub.

Given the high level of investment going into the economy the outlook for 2003 is positive despite geopolitical concerns and the uncertain outlook for oil prices. Big-ticket investment has paid off before. The UAE has successfully diversified its economy. The oil and gas sector accounted for less 25% of GDP in 2001. But risks remain.

Oil continues to provide a major support to the economy and directly or indirectly underpins much of the local investment. Given the reliance of both external and fiscal accounts on oil revenues a steep fall in oil prices would inevitably lead to belt tightening.

Another concern is that the current wave of spending may lead to over capacity in the non-oil economy, particularly in residential real estate and tourism. So far demand has kept up with supply but current plans point to a huge expansion in both sectors.

Given the possible backdrop of higher global interest rates and a sustained fall in oil prices, the economy could be hit by both shrinking margins and slowing demand. These challenges are balanced by opportunities. Over the next few years the Middle East may change beyond recognition. The Gulf War in 1991 highlighted the UAE's position both as safe haven and as the regional entrepot for the subsequent reconstruction of Kuwait. A similar role could beckon again.

The outlook for 2003 is bullish. An oil price collapse and/or a big hike in international interest rates remain key risks.