The following section provides details regarding the economic environment present in the United Arab Emirates. The economic indicators listed below help us conclude what state the economy is in and whether or not a Harris expansion into the UAE is a good business decision. Overall, the UAE has an economy that is comparable to that of the United States. This is beneficial for Harris because there will be less risk moving into a sturdy economic environment. The UAE dirham is pegged to the currency of the US and has not fluctuated in many years. This reduces much of the exchange rate risk that Harris would normally face as a company looking to expand internationally. As demonstrated below, the UAE is an economically stable country that has good trade relations with the US and has a strong and capable workforce. Historical Economic Aspects – The Discovery of Oil
The United Arab Emirates (UAE) formed in 1971 after obtaining its independence from Britain. Before the 1950s’ discovery of oil, the UAE’s economy greatly relied on fishing and was stuck in a declining industry. The oil discovery transformed an undeveloped, impoverished region into an upscale modern state with a high standard of living. In 1962 Dubai became the first of the emirates to begin exporting oil. Since then, the country’s society and economy have transformed (“United Arab Emirates,” 2012). The president of the UAE at its beginning, Sheikh Zayed, was quick to seize the potential of the oil industry. Zayed supervised the emirates and concentrated oil revenues into improving healthcare, education, and the national infrastructure. The growing oil industry affected the population of the UAE by attracting a large entry of foreign workers. Together with the colonials, these foreigners now make up three fourths of the population. The discovery of oil has allowed the UAE to develop into one of the Middle East’s most important economic centers (“United Arab Emirates,” 2012). Description of the Economy
The UAE’s gross domestic product per capita has remained fairly steady since 2009. In US dollars, the GDP per capita was $48,900 in 2009, $47,900 in 2010, and 48,800 in 2011. The 2011 estimate ranks the UAE as number 12 compared to the rest of the world; this is only one spot below the United States with $49,000 GDP per capita. The world’s GDP per capita is estimated at $11,800 for 2011. UAE’s average is well above the world average (“The World Factbook:,” 2012). See figure 1 in the appendix for a graph plotting the comparison of GDP per capita between the US, UAE, and world.
As one of the primary indicators of economic performance, we can use UAE’s GDP per capita to see that the country is doing very well. By comparing UAE’s GDP to the US’s GDP we can see that the UAE is performing as well as the United States in its endeavors. By ranking 12 out of 226 countries, the UAE is outdoing 214 countries in terms of productivity and economic performance (“The World Factbook:,” 2012). With the exception of a few hiccups, the UAE’s GDP has increased steadily since the 1970s. Figure 2 in the appendix shows the increase in GDP from $14.7 billion in 1975 to $360.2 billion in 2011 (Google, 2012). As figure 3 in the appendix demonstrates, the UAE’s GDP is steadily increasing, but the country ranks low on the charts compared to the United States and the world. The sharp decline in GDP in 2009 should not negatively influence the prospects for the UAE’s future success because the world as a whole experienced a decrease due to the global financial crisis (Google, 2012). Various Rates
In 2011, the inflation rate in the UAE was low at 0.9 percent. The UAE ranks at number 8 when compared to the world and has less inflation than the United States who has a 3.10 percent inflation rate. A low inflation rate indicates that there is little decline in the purchasing power of the money in the UAE. Although a low inflation rate is good for a country and its consumers, changing inflation rates cause uncertainty. Because of the volatility of the data, we must consider the stability of the rates in addition to the rate at a given point in time. By looking at figure 4 in the appendix, we can see that the UAE’s inflation rates are not steady, nor have they ever been. Fluctuating rates make it difficult for us to gauge the risk involved with investing in the UAE. The inflation rate was low in 2011 but in 2008 was at 12.2 percent; this shows how quickly the rate can fluctuate (Index Mundi, 2011). The high inflation rate decreasing purchasing power, increases interest rates, lowers competitiveness, and leads to high uncertainty and labor unrest (eToro Online, 2012). Unemployment Rate
The unemployment rate in the UAE has slowly, but steadily, increased since 2007. It was at 3.45 percent in 2007 and has now increased to 4.6 percent today. Compared to the United States’ jump from 5 percent in 2007 to 7.8 percent currently, the UAE looks good. A low and balanced unemployment rate indicates an economy that is operating at capacity (Trading Economics, 2012). Rate of Industrial Production
IPI measures the amount of output from the manufacturing, mining, electric, and gas industries. An increasing IPI is a sign that companies in an industry are performing well. The UAE’s IPI is 3.2 percent and is comparable to the United States’ IPI at 4.1 percent (Index Mundi, 2011). This is a good rate to look at depending on what type of firm plans to invest in the UAE. Government Budget Deficit
The UAE government is running a budget surplus of 5 percent of GDP. UAE should have few problems raising funds to finance expenditures (“The World Factbook:,” 2012). This is good business for a firm looking to expand into the UAE. Trade
The UAE has been a member of the World Trade Organization since 1996 and supports open trade. The UAE has stable trade relations with countries throughout the world and has emerged as a key international trade center between the East and West. The UAE’s primary exports are crude oil, natural gas, re-exports, dried fish, and dates. Its primary imports are machinery and transport equipment, chemicals, and food (Embassy of the United Arab Emirates, 2012). Charts 5 and 6 in the appendix from summarize the UAE’s top five import and export trade partners. Natural Resources
The UAE is home to the world’s fifth-largest natural gas reserves and holds 10 percent of the total world supply of conventional oil reserves. These reserves provide a steady production of crude oil in the UAE. Figure 7 in the appendix compares the amount of oil produced versus the amount consumed by the UAE. The large amount of oil production will allow the UAE to continue to be a top export partner between the East and West (Index Mundi, 2011). The UAE ranks seventh amongst the worlds proved oil reserves and natural gas reserves (“The World Factbook:,” 2012). The UAE also has good national trade relations. The demand for crude oil mixed with the support of open trade, makes the UAE a reliable place of choice for conducting business. Trade relations with the United States
The UAE and U.S. have outstanding trade relations. Three years in a row, the UAE has been the largest export market in the Middle East for the United States (“The World Factbook:,” 2012). The relationship between the U.S. and the UAE is one of the most valued for the UAE. More than 30,000 Americans call the UAE home and 750 American-owned businesses enjoy the opportunities of growth and expansion offered by the UAE (UAE Ministry of Foreign Trade, 2011). The solid relationship between the two countries is expected to continue and will provide mutually rewarding business opportunities for both nations. Demographics
The UAE has a strong labor force of 4.111 million people, 85 percent of which are expatriates (“The World Factbook:,” 2012). The labor participation rate, the proportion of the population that is economically active, has been steadily increasing in the UAE since the early nineties (Google, 2012). The bulk of the population in the UAE is comprised of people between the ages of 15 and 64. The population is growing at a rate of 3.055 percent per year, contributing to a continuous supply of labor. However, the level of education amongst the population is fairly low. Of ages 15 and over, 77.9 percent of the population can read and write. The school life expectancy from primary to tertiary education is an average of 13 years (“The World Factbook:,” 2012). The low level of education sends up a red flag for business expenditures in the UAE because it doubts whether or not there are enough educated working people to meet the needs of businesses. Prospects for United Arab Emirates’ Economy
The short-term forecasts for the UAE look positive. The GDP is increasing at a steady rate and the country has experienced significant economic growth. The UAE has earned its spot as an important supplier of energy and will continue to be one until the reserves run dry. The UAE is developing and diversifying its economy so it will remain a stable trading partner later in life. Relying on oil is working for now, but the diversification program the UAE recently launched will transform the economy to one based on knowledge, technology, and skilled labor. This launch will stabilize the UAE’s economy for long-term success (Embassy of the United Arab Emirates, 2012). The interest in technology and skilled labor is especially promising for expansion to the UAE by Harris Corp. Harris’ vast product line will open the doors for many new economic stabilizers and provide the foundation for the start of a stronger economy. Once Harris establishes creditability, there will be an increased demand for the skilled labor force the UAE supports.
The government has begun investing heavily in more renewable sectors such as aluminum production, tourism, aviation, re-export commerce and telecommunications. The diversification will create trade opportunities that will last for years to come (Embassy of the United Arab Emirates, 2012). From an economic stand point, the UAE is very comparable to the United States. In multiple areas of economic indicators, the UAE outperforms the United States. The UAE has also built a strong relationship with the United States and as long as it fosters this connection, the relationship should continue to benefit the UAE. The UAE has come a long way since its discovery of oil, and with the innovative plans it has, we should see continued economic growth and sustainable long-term success. Exchange Rate Behavior and Forecasting
The United Arab Emirates formed in 1972 when six states merged to form one country. Prior to the formation of the UAE, the states did not have their own currency so they used other foreign currencies. With the formation of the UAE, the UAE dirham was made the official currency of the country. At first the United Arab Emirates currency board issued the currency, but since 1982 only the United Arab central bank has the authority to issue currency. Since 2002, the UAE dirham has been officially pegged to the U.S. dollar (CRN India). At its induction in 1973, the exchange rate of the UAE dirham to the U.S. dollar was 1 US dollar=3.94737 AED. Below is a timeline summarizing the currency modifications.
The Emirati dirham is divided into subunits called fils. One unit of the currency can be divided into 100 equal subunits. For denominations smaller than one dirham coins are issued in six different face values: 1, 5, 10, 25, 50 fils and 1 dirham. The engraving on the coin is in Arabic numerals and language. For denominations above one dirham, bank notes of the currency are issued. The bank notes are issued in 8 denominations: 5, 10, 20, 50, 100, 200, 500, and 1000 dirhams. The front sides of the bank notes are printed in Arabic numerals and language. The back side of the notes are printed in Hindu Arabic numerals and the text is in English (CRN India). The Dirham and the U.S. Dollar
The current exchange rate between the U.S. dollar and the UAE dirham is 1 U.S. dollar=3.67 UAE dirham. The exchange rate has not fluctuated much since its induction. The fixed rate with the United States has not been very advantageous for the UAE lately because of the deprecation of the U.S. dollar. The depreciation is negatively affecting the purchasing power parity of the dirham against other currencies. Below is a chart from Google plotting the annual average of the UAE dirham relative to its exchange rate value to the U.S. dollar. As noted above, the exchange rate is very stable and has not fluctuated much since 1973 when the dirham became the official currency of the UAE (Google, 2012).
It seems that pegging its currency to the U.S. is working for the UAE. The UAE’s economy is small, open and is exposed to nominal domestic shocks resulting from large monetary expansion. Because of these volatilities, the pegged currency helps protect the value of the dirham and helps keep inflation in check. The stability of the currency makes for simplified trade with its partners, especially the U.S. Along with trade partners, the pegging of the dirham to the dollar is beneficial to potential investors and diminishes much risk. Currency Forecast
As it stands, and has stood for the past 30 years, the dirham is a stable currency and has a consistent exchange rate with the United States. Given the history of the currency, the next six months holds no change for the currency. The UAE has figured out a system that works for them, and should not change it anytime in the near future. This being said, the currency should still be holding steady at its current fixed exchange rate with the United States in the next year. Some research suggests that the increasing diversification of the UAE’s economy will warrant a switch to flexible exchange rates in the future (Department of Finance, 2010). Three years should be enough time for the UAE government to toss around the idea of a flexible exchange rate and realize that it’s not for them. Realistically, I don’t see any currency changes for the UAE in the near future.