Capital Markets and Portfolio Investment

UAE government efforts to create an environment that fosters economic growth and attracts foreign investment has resulted in:  i) no taxes or restrictions on the repatriation of capital; ii) free movement of labor and low barriers to entry (effective tariffs are five percent for most goods); and iii) an emphasis on diversifying the economy away from oil, which offers a broad array of investment options for FDI.  Key drivers of the economy include real estate, energy, tourism, logistics, manufacturing, and financial services.

The UAE has three stock markets:  Abu Dhabi Securities Exchange, Dubai Financial Market, and NASDAQ Dubai.  The regulatory body, the Securities and Commodities Authority (SCA), classifies brokerages into two groups:  those which engage in trading only while the clearance and settlement operations are conducted through clearance members, and those which engage in trading clearance and settlement operations for their clients.  Under the regulations, trading brokerages require paid-up capital of USD 820,000, whereas trading and clearance brokerages need USD 2.7 million.  USD 367,000 in bank guarantees is required for brokerages to trade on the bourses.

The UAE issued investment funds regulations in September 2012, known as the “twin peak” regulatory framework designed to govern the marketing of investment funds established outside the UAE to domestic investors, and the establishment of local funds domiciled inside the UAE.  This regulation gave the SCA, rather than the Central Bank, authority over the licensing, regulation and oversight of the marketing of investment funds.  The marketing of foreign funds, including offshore UAE-based funds, such as those domiciled in the DIFC, requires the appointment of a locally-licensed placement agent.  The UAE government has also encouraged certain high-profile projects to be undertaken via a public joint stock company to allow the issuance of shares to the public.  Further, the UAE government requires any company carrying out banking, insurance, or investment services for a third party to be a public joint stock company.

In 2019, SCA issued a number of capital-related decisions.  In May 2019, SCA issued a decision concerning the Capital Adequacy Criteria of Investment Manager and Management Company, which stipulates that the investment manager and the management  company must allocate capital to constitute a buffer for credit risk, market risk, or operational risk, even if it does not appear as a line item in the balance sheet.

In 2019, SCA also issued a decision concerning Real Estate Investment Fund control, which stipulates that a public or private real estate investment fund shall invest at least 75 percent of its assets in real estate assets.  According to this decision, a real estate investment fund may establish or own one or more real estate services companies provided that its investment in the ownership of each company and its subsidiaries shall not be more than 20 percent of the fund’s total assets.

Credit is generally allocated on market terms, and foreign investors can access local credit markets.  Interest rates are usually very close to those in the United States considering the local currency is pegged to the dollar.  There have been complaints that GREs crowd out private sector borrowers.

Money and Banking System

The UAE has a robust banking sector with 49 banks, 27 of which are foreign institutions.  The number of national bank branches declined to 656 at the end of 2019, compared to 743 at the end of December 2018, due to bank mergers and an ongoing transition to online banking.

Non-performing loans (NPL) comprised 6.2 percent of outstanding loans in 2019, compared with 5.7 percent in 2018, according to figures from the Central Bank of the UAE (CBUAE).  Under a new reporting standard, the NPL ratio of the UAE banking system for the year-end 2018 stood at 5.6 percent, compared to 7.1 percent under the previous methodology.  The CBUAE recorded total sector assets of USD 839 billion as of January 2020.

There are some restrictions on foreigners’ ability to establish a current bank account, and legal residents and Emiratis can access loans under more favorable terms than non-residents.

Foreign Exchange and Remittances

Foreign Exchange Policies

According to the IMF, the UAE has no restrictions on making payments and transfers for international transactions, except security-related restrictions.   Currencies are traded freely at market-determined prices.  The UAE dirham has been pegged to the dollar since 2002.  The mid-point between the official buying and selling rate for the dirham (AED or Dhs) is fixed at AED 3.6725 per USD.

Remittance Policies

The Central Bank of the UAE initiated the creation of the Foreign Exchange & Remittance Group (FERG), made up of various exchange companies, which is registered with the Dubai Chamber of Commerce & Industry.  Unlike their counterparts across the world that deal mainly in money exchange, exchange companies in the UAE are the primary conduits for transferring large volumes of remittances through official channels.  According to migration and remittance data from the World Bank, in 2018 the UAE had migrant remittance outflows of USD 42.2 billion.  The Central Bank reported migrant remittances totaling USD 44.9 billion in 2019.  Exchange companies are important partners in the UAE government’s electronic salary transfer system, called the Wage Protection System, designed to ensure workers are paid according to the terms of their employment.  They also handle various ancillary services ranging from credit card payments, to national bonds, and traveler’s checks.

Sovereign Wealth Funds

Abu Dhabi is home to two sovereign wealth funds—the Abu Dhabi Investment Authority (ADIA), and Mubadala Investment Company—with estimated total assets of approximately USD $1 trillion as of June 2019.  Each fund has a chair and board members appointed by the Ruler of Abu Dhabi.  President Khalifa Bin Zayed Al Nahyan is the chair of ADIA and Abu Dhabi Crown Prince Mohammed Bin Zayed Al Nahyan is the chair of Mubadala.  Emirates Investment Authority, the UAE’s federal sovereign wealth fund, is modest by comparison, with estimated assets of about USD 15 billion.  The Investment Corporation of Dubai (ICD) is Dubai’s primary sovereign wealth fund, with an estimated USD 264 billion in assets according to ICD’s June 2019 financial report.

UAE funds vary in their approaches to managing investments.  ADIA generally does not actively seek to manage or take an operational role in the public companies in which it invests, while Mubadala tends to take a more active role in particular sectors, including oil and gas, aerospace, infrastructure, and early-stage venture capital.  ADIA exercises its voting rights as a shareholder in certain circumstances to protect its interests, or to oppose motions that may be detrimental to shareholders as a body.  According to ADIA, the fund carries out its investment program independently and without reference to the government of Abu Dhabi.

In 2008, ADIA agreed to act alongside the IMF as co-chair of the International Working Group of sovereign wealth funds, which eventually became the International Forum of Sovereign Wealth Funds (IFSWF).  Comprising representatives from 31 countries, the IFSWF was created to demonstrate that sovereign wealth funds had robust internal frameworks and governance practices, and that their investments were made only on an economic and financial basis.

State-owned enterprises (SOEs) are a key component of the UAE economic model.  There is no

published list of SOEs or GREs, at the national or individual emirate level.  Some SOEs, such as the influential Abu Dhabi National Oil Company (ADNOC), are strategically important companies and a major source of revenue for the government.  Mubadala established Masdar in 2006 to develop renewable energy and sustainable technologies industries.  A number of SOEs, such as Emirates Airlines and Etisalat, the largest local telecommunications firm, have in recent years emerged as internationally recognized brands.  Some but not all of these companies have competition.  In some cases, these firms compete against other state-owned firms (Emirates and Etihad airlines, for example, or telecommunications company Etisalat against du).  While they are not granted full autonomy, these firms leverage ties between entities they control to foster national economic development.  Perhaps the best example of such an economic ecosystem is Dubai, where SOEs have been used as drivers of diversification in sectors including construction, hospitality, transport, banking, logistics, and telecommunications.  Sectoral regulations in some cases address governance structures and practices of state-owned companies.  The UAE is not party to the WTO Government Procurement Agreement.

Privatization Program

There is no privatization program in the UAE.  There have been several listings of portions of SOEs, on local UAE stock exchanges, as well as some “greenfield” IPOs focused on priority projects.

* Economic Report: Ministry of Economy

Data from the Annual Report of the Ministry of Economy (2019) indicates that the GDP for 2018 in real prices (base year 2010) were approximately USD $392.7 billion, while the estimated GDP at current prices was about USD $414.1 billion in 2018.

According to the UAE Ministry of Economy’s Annual Economic Report 2019, the net annual FDI inflows to the UAE in 2018 were $10.4 billion, similar to 2017.  The largest investors in the UAE were:  India, United States, UK, Japan, China, Saudi Arabia, Germany, Kuwait, France and the Netherlands.

Table 4: Sources of Portfolio Investment
Data not available.