The recent contraction in the economy, poor performance of SMEs and large layoffs in the UAE have made clear the oft-cited statistic that two-thirds of the UAE’s economy is non-oil related is incorrect. At least it is indirectly related to the price of oil. So how can the private sector further diversify away from oil? The answer is exports.
The economy of the UAE can never be independent of oil if it remains insular. With about 1 million nationals, the size of the UAE's economy, even with its ability to attract expats, will always be dwarfed by oil income in the near and medium term.
If this is the case then growing true non-oil GDP requires a rethink. One path to growth that is relatively independent of the domestic markets is exports. Export demand is dependent on international markets, most of which will have low correlation to our markets.
So what leads to exports? For emerging markets it is usually excess supply of production, often agriculture but sometimes commodities such as – surprise – oil. As countries become more developed, their exports become driven by lower production costs, higher efficiency and exchange rate advantages. An exchange rate can provide such important advantages that it has been the source of a long-running row between the US and China.
The pinnacle of export drivers is innovation. Think Apple.
Growth in exports allows a nation to become much richer than if it depended on its local economy only. The parallel is a person who sells more than he buys. It is important, then, to understand that the difference between exports and imports, known as the trade balance, is the important number.
The trade balance is not only integral to a nation’s GDP, it also affects its currency’s exchange rate. If the trade balance is positive and more goods are exported, gaining more foreign currency, than imported, selling less local currency, then the national currency strengthens. If the trade balance is negative then there is pressure on the national currency to devalue.
This means that the much vaunted dirham peg to the dollar will come under tremendous pressure to devalue when oil runs out and if there is no export-based economy. This is precisely why there is pressure on the Saudi riyal to devalue – lower oil prices mean lower exports, weakening Saudi Arabia’s trade balance.
This brings us to the question of how the UAE is doing on this front. The Federal Competitiveness and Statistics Authority provides us with some data. I will provide a directional discussion for 2014 on the non-oil trade balance and will ignore re-exports, which have a tertiary effect.
For 2014, the UAE’s non-oil trade balance was a deficit of Dh564 billion. To give this number context, if oil averaged US$100 in that year and the UAE exported 2.5 million barrels per day, then the revenue would have been about Dh335bn. That means that with oil exports the UAE had a negative trade balance of Dh229bn. That is cause for concern.
Looking at the breakdown, the greatest deficit comes from “pearls, stones, precious metals and its articles” for a total of more than Dh136bn. The UAE in 2014 had net imports of jewellery that was more than half the total oil sales in that year.
What I found fascinating was the entry “footwear, umbrellas, articles of feather & hair”, where we had net imports in excess of Dh5bn. We live in the desert so I assume umbrella imports are minimal. Hair would be wigs and hair extensions. Feathers, believe it or not, are far more versatile than you would think but still not a luxury item.
Which brings us to footwear. Let us assume, for illustrative purposes, that the only footwear imported in 2014 were Jimmy Choo pumps averaging $1,000 a pair. Let us also assume that umbrellas, wigs and feather products imported were valued at Dh1bn. That would imply that the UAE imported more than 1 million Jimmy Choo pumps. If we accept that women are not only buying Jimmy Choo pumps and that men are not into stiletto heels but more sensible, and cheaper, shoes then we are faced with the horrifying proposition that the population of the UAE might just have a shoe fetish.
The bottom line is that talking about GDP alone, even if we clarify non-oil related versus non-oil dependent, is not enough to diversify our economy. We need to look at exports. And we are way behind.
Sabah Al Binali is an active investor and entrepreneurial leader with a track record of growing companies in the Mena region. You can read more of his thoughts at al-binali.com.
business@thenational.ae
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