Foreign business leaders in UAE must be careful what they wish for

Something is not quite right in the economy of the UAE, and policymakers in the country are increasingly looking to intervene with stimulus packages to lift it out of the rut it has fallen into over the past couple of years.

In June, the first tranche of stimulus was announced in Dubai and Abu Dhabi, with measures decreed to make the UAE more attractive to foreign investors and the foreign expatriates it depends on.

Now, there is much talk in Dubai financial circles that policymakers in both cities have decided there is a need for further action, and that another package of economic incentives is being prepared for the autumn.

There is something of a disconnect between the official public position and the private deliberations of policymakers. On the face of it, economic growth is forecast at a robust 3.4 percent for this year by the International Monetary Fund, fueled by the rise in oil prices.

But that rosy outlook is at odds with much of the on-the-ground evidence which suggests a rather different picture. 

Stock market indices, for example, tell a different story, with the Abu Dhabi exchange apparently unable to break out of a range it has occupied since 2014, while the Dubai market has been among the worst performers over the past year.

Property prices are still showing double-digit falls, with both sales prices and rents stuck in a vicious circle of declines since late 2014. The real estate market is so crucial to the economic livelihood of the UAE, especially in Dubai where a lot of new property is being built ahead of the Expo 2020, that this is an urgent area of action.

The hotels are under pressure with regard to occupancy and revenue. Airport passenger numbers in Dubai and Abu Dhabi are falling or flat.

In the malls, footfall is declining along with tourist numbers and the growth in e-commerce, though this has not deterred Dubai from recently announcing plans to build another “world’s biggest mall.” Credit card spending on consumer goods is also down.

Something is not quite right in the economy of the UAE, and policymakers in the country are increasingly looking to intervene with stimulus packages to lift it out of the rut it has fallen into over the past couple of years.

Frank Kane

Anecdotal evidence suggests that more and more expatriates are deciding that the UAE is not the place they want to be long term. New business licenses have fallen sharply from a peak in 2016.

The schools — which cater overwhelmingly for the children of expatriate children — are worried about the coming year, as many have invested big time in new build and now have to see the increase in enrolment numbers to justify that investment.

One positive business sector has been the removals business, which was said to be booked solid in early summer moving people’s households back to their home countries. How many new arrivals will take their place is uncertain.

For an economy forged on the principle of “if you build it, they will come,” these are worrying trends. What happens when it’s already built, and they stop coming?

Before the summer, policymakers were obviously on alert for these signals. In a top-level, invitation-only gathering in Dubai, Emirati political and business leaders met their expatriate counterparts, in a candid exchange of views about what was wrong with the economy and what should be done to put it right.

The result was the series of stimulus measures announced in June, almost simultaneously in Dubai and Abu Dhabi, in what amounted to a radical “reboot” of the economy.

Long-term visas were allowed for talented entrepreneurs and professionals; foreign companies would be allowed to start up with full ownership outside the free zones to which they have been restricted; a raft of business charges were scrapped or capped; school fees were frozen for this academic year.

All these measures seemed targeted at the expatriate business leaders’ core complaint — that the cost of living and doing business in the UAE was too high, and had to be checked. The introduction of VAT last January was history, and in any case has had only a limited affect on the inflation rate in the UAE, but there were many other charges and levies that were hurting business, and reducing the UAE’s appeal to foreign investors and workers.

The challenge for the UAE government is to ease the burden on expat businesses without impacting its budget, which depends to a great extent on the fees and charges for government services.

The challenge for businesses is that they might not welcome some of the next raft of reforms. There was much speculation when the new rules for on-shore incorporation of foreign business were announced that the quid-pro-quo might be the introduction of corporation tax for more foreign businesses.

Outside the banking and oil industry, the UAE has never sought to tax businesses directly, but now the tax taboo has been broken with VAT, corporation tax is the logical next step.

There may be a further indication of the UAE government’s thinking on this after the summer, along with another series of stimulus measures. Foreign businesses in the UAE must be careful what they wish for.

 

• Frank Kane is an award-winning business journalist based in Dubai. Twitter: @frankkanedubai