United Arab Emirates – the Rise of Abu Dhabi and the Recovery of Dubai

Whilst Dubai was building its utopian world, which Estonians should also visit between their traditional trips to Egypt, Abu Dhabi observed this construction boom quietly from the side. However, the neighbouring emirate is now filling the gap that appeared in Dubai’s property market.

The United Arab Emirates (UAE) consist of seven emirates. Dubai and Abu Dhabi are of course the best known of these – Dubai is famous for its man-made islands and huge skyscrapers (e.g. the 800-metre Burj Dubai), while Abu Dhabi is known for hosting sports events (e.g. a Formula 1 race). However, people know very little about the large ports and logistics centres in Dubai and Abu Dhabi, the financial centre and tourism industry of Dubai, the energy reserves of Abu Dhabi. In addition to this, almost no attention at all has been paid to the other five emirates. The total population of the seven emirates is 8.3 million (38% of them live in Abu Dhabi and 30% in Dubai), the official language is Arabic and the capital is Abu Dhabi.

The other five emirates that belong to the UAE in addition to Dubai and Abu Dhabi are Sharjah, Umm al-Quwain, Ras al-Khaimah, Fujairah and Ajman. All these emirates together comprise the third-biggest economy in the Middle East after Saudi Arabia and Iran. Only Qatar has a higher GDP per capita in the region. Most of the oil and gas reserves of the UAE are found in Abu Dhabi – the UAE has the seventh-largest oil and gas reserves in the world.

In comparison to the other countries of the Gulf Cooperation Council (GCC) the economy of the United Arab Emirates is one of the most dispersed and the least dependent on the energy sector, although the revenue generated by sales of oil and gas comprise a significant proportion of the budget of the Emirates. This dependence is particularly strong in Abu Dhabi, which earns 55% of its budget and GDP from sales of carbohydrates. However, Abu Dhabi wants to reduce this proportion to 35% by 2030 through the diversification of its economy. It is already down to 25–30% in the UAE as a whole.

Map of the seven emirates of the UAE:

 

The unrest in Libya, Egypt, Syria, Yemen, Bahrain and other poorer African and Middle-Eastern countries has made foreign investors appreciate the stable economic and living environment of Dubai and Abu Dhabi more and they would be the most obvious locations of choice for companies looking to expand in the region. This means that the unrest is strengthening the UAE’s status as a financial centre in the Middle East.

The quantity of goods passing through the ports of the United Arab Emirates comprises more than 60% of the quantity of goods in GCC countries. The average increase in the quantity of goods per year from 2004 to 2008 was 13%. The financial crisis of 2008 and 2009 had a negative impact on the increase in quantities, but growth resumed fast in 2010. The Port of Jebel Ali in Dubai is the seventh-largest port in the world, which is currently undergoing active expansion and by 2030 the quantities of goods passing this port should increase more than seven times, making it possible for the port to overtake both the ports of Shanghai and Singapore. The great location of the Middle East between Europe and Asia has made logistics and ports a highly stable and profitable business for the United Arab Emirates in the long term. Citigroup forecasts that the increase in Dubai’s GDP will grow from 2.2% in 2010 to 3.5–4% in 2011 and as high as 6% in 2012. The driving engines of this growth are infrastructure investments, trade, logistics and tourism. The Government of Dubai itself is expecting a 4% increase this year. 

The resumption of growth in Dubai that survived the property bubble and in Abu Dhabi, where it is supported by extensive investments in infrastructure, supports local companies listed on the stock exchange – the results of the first quarter of 2011 in the UAE generally met expectations, which is undoubtedly positive when we consider the low valuation indicators of companies over there. In April we considerably increased the proportion of listed UAE companies in the LHV Persian Gulf Fund – from 14% in the end of March to 24% by the end of April.

The investments made by the LHV Persian Gulf Fund in the United Arab Emirates that deserve to be mentioned are the First Gulf Bank and the Abu Dhabi Commercial Bank. The profit of the First Gulf Bank in Q1 increased 18% in comparison to the same period a year ago. The 20% Tier I indicator makes the company one of the strongest banks in the UAE; it earns a 15–20% return on equity, offers a dividend rate of 3% and trades on 7.5 times of its expected profit for 2011 and 1.2 times of its book value. Such valuation leaves the share ample room to move upwards when economic growth recovers in the UAE. The results of the Abu Dhabi Commercial Bank in Q1 were also a positive surprise – the profit figures reported by the company are more than twice the amount achieved in the first quarter of the previous year. Shares trade at ca 0.9 times of the book value and 11 times of the profit expected in 2011. The share climbed more than 5% after the results were released.

Movements of the share of the First Gulf Bank in the last year:

We would like to remind you that all existing and new investors can enter the LHV Persian Gulf Fund (links here and here), which invests in the energy-rich countries of the Middle East, without the usual 2% entry fee, i.e. free of charge, from 8 April to 8 June (incl.).

Joel Kukemelk

Fund Manager, LHV Persian Gulf Fund

Read earlier articles about the energy-rich countries in the Middle East:

Qatar – the biggest exporter of liquid gas in the world 

This article is published for informative purposes only and does not constitute a recommendation to sell or buy the securities mentioned.