Complex Made Simple

Analysis: ADFD launches credit agency ADEX to boost UAE non-oil exports

The Abu Dhabi Exports Office (ADEX) will provide financing and guarantees to overseas buyers from the public and private sectors seeking to import goods and services from the UAE.

ADEX aspires to contribute to raising the volume of non-crude oil national exports and facilitate entry into new markets ADEX aims to protect UAE exporters from the from the potential risk of non-payment It aims to achieve the objectives lined up in UAE Vision 2021, Abu Dhabi Economic Vision 2030, and the vision of UAE Centennial 2071.

Aiming to accelerate the UAE’s economic growth, the Abu Dhabi Development Fund (ADFD) launched “a new era in financial services” with the announcement of the all-new Abu Dhabi Exports Office (ADEX) under the patronage of His Highness Sheikh Mansour bin Zayed Al Nahyan, Deputy Prime Minister and Minister of Presidential Affairs, and Chairman of the Board of Directors at ADFD, and His Highness Sheikh Abdullah bin Zayed Al Nahyan, Minister of Foreign Affairs and International Cooperation, and Deputy Chairman of ADFD’s Board of Directors.

As part of its Vision 2021, the UAE has embarked on a mission to enhance its pivotal role as the prime business hub in the region by achieving economic sustainability through its drive toward economic diversification. Furthermore, Abu Dhabi’s Vision 2030 aims to ensure that its non-oil GDP growth outperforms that of the oil sector. 

Toward this end, the nation is looking to expand local export-based businesses, increase non-oil exports, enhance international trade, and cement its leading position in commodity exports worldwide through the establishment of the Abu Dhabi Exports Office (ADEX)

“The new direction will support our national economy by financing national exports and providing competitive financial solutions to open new markets for them around the world. It will also expand horizons for the industrial and service sectors, and also stimulate foreign trade, in line with the upward trajectory of the national economy. It will help maintain the UAE’s position as a leading hub for attracting business and investment regionally as well as globally,” said His Excellency Mohammed Saif Al Suwaidi, Director General, ADFD at the launch of ADEX.

ADEX will provide financing and guarantees to overseas buyers from the public and private sectors seeking to import goods and services from the UAE. By doing so, it will protect UAE exporters from the potential risk of non-payment.

Stimulating non-oil exports

Already, Abu Dhabi has begun stimulating non-oil sectors by focusing on export-oriented businesses. In time, such moves intend to lower volatility in the region’s economic growth.

“As a result of its policy of economic diversification, the UAE has achieved some significant economic milestones. In 2018, the value of non-oil foreign trade in the UAE reached nearly AED 1.6 trillion, while the value of non-oil exports amounted to AED 212 billion, showcasing growth of nearly 2 percent,” HE Mohammed Saif Al Suwaidi said.

With the establishment of the Abu Dhabi Exports Office, the UAE joins an elite club of fewer than 40 countries in the world who have export credit agencies (ECAs). 

In 2018, total exports and re-exports in the UAE represented about 80 percent of the country’s GDP, HE Mohammed Saif Al Suwaidi confirmed, while non-oil exports accounted for close to 29 percent of its GDP. 

The addition of an ECA in the form of ADEX could boost non-oil exports even further.

“There have been a lot of empirical studies and academic studies that show how export credit agencies boost exports. One of them recently, a long-term study, looked at the last 40 years of various export credit agencies in more than 20 countries showed that export credit agencies do indeed boost exports. It’s like a turbo option in the engine of a car,” explained Nenad Pacek, Economist, Founder & President of Global Success Advisors.

“If you look at the examples of those 20 countries when they launched their ECAs, their exports were about 27 percent of their GDP. Nine to 10 years later, their exports accounted for about 40 percent of their GDP,” Nenad Pacek added.

The UAE envisions to emulate such growth targets in its non-oil GDP growth by 2030.

With reference to the modes of financing that ADEX will provide, HE Mohammed Saif Al Suwaidi said, “We have defined three ways to start-up this program. One of them is to go directly and finance the entity that is buying from our local market. Or we can provide that entity with guarantees to borrow from other financial institutions.  Or they can go to a bank in the importer country, and provide them with a line of credit, provided that they take the risk of the credit itself.”

Based on the type of funding, the risks involved, and the type of transaction, the financing ratio of ADEX could reach up to 100 percent. The prime criteria of eligibility are that the products and services imported must be not related to crude oil, and must be locally produced in the UAE while meeting creditworthiness requirements. 

Context: Need for an Export Credit Agency

The simple answer to the need for an export credit agency is that overseas buyers importing local UAE goods may need financing.

Over the last 15 years, a number of countries around the globe have struggled to grow and develop properly. 

“What happens in an African nation? When the commodity prices are high, they do well. They earn enough forex through export activities and credit rating algorithms. As portfolio capital comes in, currencies become stronger; the nation feels richer, and you have a wonderful time for business. And sometimes, they don’t even need financing in those nice days when the commodity prices are high. However, when the commodity prices drop, it’s the exact opposite. Credit rating agencies downgrade them; portfolio investments leave; currencies fall; inputs become expensive; banks start to call in their loans; and business becomes extremely difficult. In these days, export credit financing becomes absolutely essential. 

“This has been happening in longer, and longer periods. We have not seen a proper recovery of commodity prices, which means many countries are struggling with finance. They will welcome this [ADEX] tool that we are creating. In the future, this will not change. There will be only a few countries that will escape the commodity curse. Other than that, it will continue to be a roller coaster ride. For as long as any of us are alive, financing [ECAs] will be needed for buyers overseas,” Pacek said.

Fallout of the U.S.-China trade war 

It is no secret that the trade tariff war between the U.S. and China is adversely affecting the global economy. Apart from the obvious target of China, the countries that are indirectly getting affected the most are the emerging markets that are looking to sell to China. 

“The global trade wars and rising protectionism, more than anything else in the short term, justify the existence of credit rating agencies,” Pacek concluded.