x Abu Dhabi, UAESunday 21 January 2018

For the next half-century, the UAE's challenge is to diversify

Oil built the foundation of the economies of Abu Dhabi and the UAE, but looking to the future, diversification is the key

Diversity has been the watchword of the UAE's economic growth since the first drops of oil were discovered more than half a century ago.

Even in the heady days of the early oil rush, policymakers were quick to realise that the precious resource would need to be closely managed if it was to benefit generations of Emiratis to come.

The economy today bears the fruits of that careful approach.

Revenue from oil has been ploughed into building new industries to help to diversify the economy and attract foreign investment. Hospitality, manufacturing and financial services are some of the segments that have sprung up.

As a result, the share of the national economy accounted for by the oil and gas sector has fallen more rapidly than in most other hydrocarbon-rich GCC states.

But the strategy has not been without its challenges.

Last year, the contribution of the non-oil sector to the economy fell to just below 62 per cent from 69 per cent the year before. The data reflected a rise in crude output to offset lower production from Libya after it was dragged into civil war.

The diversification drive has brought risks too. As the economy has become more open, its vulnerability to external shocks has increased.

The most high-profile example of the pitfalls of diversification was the US$24.9 billion (Dh91.4bn) restructuring of debt by Dubai World, the investment vehicle owned by the Government of Dubai. Dubai World's difficulties sprang from investments in property and other assets that soured during the global financial crisis of 2009.

A scaling down of the excesses of the pre-2008 boom years means that the non-oil economy now is better placed to deal with the fallout from the debt crises engulfing the euro zone.

In fact, the euro crisis increases the urgency to diversify and offset the risk of oil shocks. Crude prices have fallen about $30 in the past three months.

With less oil wealth, Dubai has been at the forefront of the drive into new sectors.

The emirate's government pioneered the creation of free zones, business areas where international firms can hold 100 per cent ownership of their operations. Offering no withholding tax and a tailor-made regulatory system, the Dubai International Financial Centre attracted global banks and helped turn the emirate into a regional centre for finance.

Abu Dhabi's economy is also diversifying. Under Abu Dhabi's Economic Vision 2030, officials plan to cut the emirate's reliance on oil to 36 per cent of GDP by 2030.

As a result, it is investing billions of dirhams in stimulating growth sectors such as tourism, finance, industry and property.

Abu Dhabi is building its own financial centre as part of the Maryah Island project managed by Mubadala.

It is also gaining a foothold within high-tech manufacturing. Mubadala Aerospace, a business unit of Mubadala, has signed agreements with Boeing and Airbus for its manufacturing subsidiary Strata to build and supply aircraft components.