The recent contraction in the economy, poor performance of SMEs and large layoffs in the UAE has made clear that 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 around one 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 future.
If this is the case then growing true non-oil GDP requires a re-think. One path to growth that is relatively independent of the domestic markets is exports. Export demand is dependent on the economies of 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. Exchange rates can provide such important advantages that it has been the source of a long running row between the USA and China.
The pinnacle in 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’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 564 billion dirhams. To give this number context, if oil averaged 100 US dollars in that year and the UAE exported 2.5 million barrels per day then the revenue would have been about 335 billion dirhams. That means that with oil exports the UAE had a negative trade balance of 230 billion dirhams. 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 over 136 billion dirhams. The UAE in 2014 had net imports of jewelry that was over 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 5 billion dirhams. 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 dollars per pair. Let us also assume that umbrellas, wigs and feather products imported were valued at 1 billion dirhams. That would imply that the UAE imported over 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.
This article was originally published in The National.