UAE assets enough to cushion oil price falls

Holdings of $458bn are on hand if world recovery is reversed.

The UAE's large pool of foreign assets should provide a cushion if oil prices sink on the back of any deterioration in the world economy, a government report says. "The UAE's large official assets accumulated abroad since the 1980s provide a sizeable and steady flow of income that could dampen the negative effects of a weakening of oil prices, and thus reduce the economy's vulnerability to oil markets," said the UAE Trade Policy Review, produced by the Ministry of Foreign Trade.

The UAE has built up substantial foreign assets through its sovereign wealth funds and other overseas investments. Foreign assets were expected to be worth almost US$458 billion (Dh1.68 trillion) at the end of last year, up from $378bn at the end of 2008, according to estimates in December by the Institute of International Finance (IIF). Abu Dhabi Investment Authority, the country's main wealth fund, holds about Dh1.83tn, while the Central Bank's foreign assets holdings stood at Dh78.3bn at the end of March, data from the regulator showed.

Recent declines in oil prices have come amid signs of a deceleration in economic growth in the US, the world's largest economy. Historically, oil demand wanes in the third quarter after the end of the summer driving season in the US, a period of peak crude consumption. Income from foreign assets softened the blow of a sharp dip in oil prices at the peak of the recession when prices slid to below $34 a barrel from their peaks of around $147.

The value of the UAE's foreign assets slid by $132bn two years ago from their heights of $510bn at the end of 2007, the IIF has estimated. Large fiscal and external current account surpluses were projected to persist for the country, said the review. The country's economic growth should be supported by the large number of new projects being completed, it said. Tourism, transport and construction were among the non-hydrocarbon sectors to benefit from large public investments.

Saadiyat Island in Abu Dhabi and Al Maktoum International Airport in Dubai are among the projects under development. The UAE is keen to attract foreign investment as it attempts to harness the power of the private sector in driving economic growth. "However, the UAE's long-term success in attracting foreign investment will require improved ownership rights for foreigners and a more efficient legal and institutional framework within which claims relating to foreign investment can be effectively addressed," said the report.

The Federal Government has taken steps to further boost its investment regime, it said. Legislation is expected to be passed soon, which is expected to relax the ownership rules on foreign companies setting up businesses outside the country's free zones. At present, foreign ownership of companies based in the UAE is limited to 49 per cent. [e-mail]