United Arab Emirates
The Government of the United Arab Emirates (UAE) is pursuing economic diversification to promote the development of the private sector as a complement to the historical economic dominance of the state. The country’s seven emirates have implemented numerous initiatives, laws, and regulations to develop a more conducive environment for foreign investment. The UAE maintains a position as a major trade and investment hub for a large geographic region which includes not only the Middle East and North Africa, but also South Asia, Central Asia, and Sub-Saharan Africa. Multinational companies cite the UAE’s political and economic stability, population and Gross Domestic Product (GDP) growth, fast-growing capital markets, and a perceived absence of systemic corruption as positive factors contributing to the UAE’s attractiveness to foreign investors.
While the UAE implemented an excise tax on certain products in October 2017 and a five percent Value-Added Tax (VAT) on all products and services beginning in January 2018, many investors continue to cite the absence of corporate and personal income taxes as a strength of the local investment climate, relative to other regional options.
While foreign investment continues to grow, the regulatory and legal framework in the UAE continues to favor local over foreign investors. There is no national treatment for investors in the UAE, and foreign ownership of land and stocks remains restricted. In September 2018, the UAE issued Decree-Law No. 19 on Foreign Direct Investment (FDI), which grants licensed foreign investment companies the same treatment as national companies, within the limits permitted by the legislation in force. A negative list of economic sectors restricted from 100 percent foreign ownership includes 14 major industries. On March 3, 2020, the Cabinet approved a positive list of economic sectors eligible for 100 percent foreign ownership. This list covers activities in 13 sectors, including renewable energy, space, agriculture, manufacturing, transport and logistics, hospitality & food services, information and communications services, professional and scientific and technical activities, administrative and support services, education, health care, arts and entertainment, and construction. The Cabinet confirmed that it will allow individual emirates to set foreign investor ownership limits in each activity.
Foreign investors expressed concern over spotty intellectual property rights protection, a lack of regulatory transparency, and weak dispute resolution mechanisms and insolvency laws. In 2020 the Cabinet approved a resolution concerning combating commercial fraud. This resolution established a unified federal mechanism to deal with commercial fraud across the UAE and outlined a process for removal and destruction of counterfeit products. Labor rights and conditions, although improving, continue to be an area of concern as the UAE prohibits both labor unions and worker strikes.
Free trade zones form a vital component of the local economy and serve as major re-export centers to other markets in the Gulf, South Asia, and Africa. U.S. and multinational companies indicate that these zones tend to have stronger and more equitable frameworks than the onshore economy. For example, in free trade zones foreigners may own up to 100 percent of the equity in an enterprise, have 100 percent import and export tax exemptions, have 100 percent exemption from commercial levies, and may repatriate 100 percent of capital and profits. Goods and services delivered onshore by free zone companies are subject to the five percent VAT.
|TI Corruption Perceptions Index||2019||21 of 180||http://www.transparency.org/
|World Bank “Ease of Doing Business” Report||2019||16 of 190||www.doingbusiness.org/rankings|
|Global Innovation Index||2019||36 of 129||https://www.globalinnovationindex.org/
|U.S. FDI in partner country ($B USD, stock positions)||2018||$17.3||https://apps.bea.gov/
|World Bank GNI per capita||2018||$40,880||http://data.worldbank.org/
6. Financial Sector
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.
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.
7. State-Owned Enterprises
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.
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.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
* Economic Report: Ministry of Economy
|Direct Investment from/in Counterpart Economy Data|
|From Top Five Sources/To Top Five Destinations (US Dollars, Millions)|
|Inward Direct Investment||Outward Direct Investment|
|Total Inward||Amount||100%||Total Outward||Amount||100%|
|“0” reflects amounts rounded to +/- USD $500,000.|
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.