Introduction
The country risk analysis involves an evaluation of economic, political, and business risks of a particular country which may pose a significant influence on businesses. The county risk analysis is conducted to find out the risks associated with capital investment in a foreign country (Shapiro, 2009). Thus, in order to evaluate a country risk, a detailed study is carried out covering economic, financial, and political concerns of the selected country. The current paper evaluates the determinants of risk factors of the UAE by discussing its economic, political and business setup, and the analysis of risks is performed to form an overall assessment of the country risk and make recommendations for businesses.
Country Profile
The United Arab Emirates (UAE) comprises of seven emirates including Abu Dhabi, Sharjah, Dubai, Ajman, Ra’s al-Khaimah, Umm al-Qaiwain, and Fujairah with a total area of 83,600 km². An “Amir governs each emirate’ and the president leads the country. The capital of UAE is Adu Dhabi.” The country has a strong economy, and it is one of the most productive countries in terms of hydrocarbon and fuel production. The government comprises of both local and federal governments and the law governing bodies including the Supreme Council, the Federal National Council, the Council of Ministers, and the Federal Supreme Court. The economy of UAE is mainly based on oil exports as it has the sixth largest oil reserves in the world.; however, in the recent years, there has been a considerable development in travel, tourism, and construction sectors of the country. The UAE economy grew rapidly at 23.2% in 2008; however, the economic downturn in 2009 decreased its Gross Domestic Product (GDP) growth to 11.99%, and it only grew by 7.05% in 2010 (“FITA; United Arab Emirates: Introduction” 3). The UAE is one of the most vibrant economies which offers investor friendly policies and conditions. The country offers great opportunities for investors, which attract signficant investment every year in its high profit generating sectors such as banking and real estate. Abu Dhabi is the largest emirate of the UAE covering 87% of the total area, and it has the largest oil reserves. On the other hand, Ajman is the smallest emirate, and it is mostly a residential area. Dubai has the largest harbor of the country with 650 km long coastline. There are other ports in different emirates of UAE.
Political Risk
Political risks cover risks that are associated with the decisions undertaken by the political parties of a country that could affect the outcome of businesses and investments. Political risk may be referred to as the willingness of a country to maintain a cordial environment for potential international businesses and new ventures. If a country has a strong financial structure but political factors are not favorable then it is not suitable for international investment (Ramady 27). The political environment of a country has a significant role in establishing and supporting a business whether it is local or foreign. Therefore, political factors including government policies are of great importance to asses a country’s risk level with respect to investment. The UAE federation is composed of seven monarchies and has no parliament. Dubai is the financial and trade hub of the UAE. The financial recession of 2009 greatly influenced the real estate sector and asset and risk restructuring of the financial sector due to which investors withdrew their investments from the country. However, the domestic unrest in UAE is lower than other Arab countries. However, there is a potential of political instability arising from the five northern emirates that are less privileged as compared to Dubai and Abu Dhabi.
The political relations between UAE and other countries has played a critical role in the economic prosperity of the country. Keeping in view the strong reliance on other countries and economies particularly the United States and European economies, any unfavorable developments in these relations may result in negative fallouts for businesses operating in the UAE. There are several threats that have been reported by the regional Islamic militancy groups in the UAE. Until now, UAE has not faced any Al-Qaeda threats and the security forces in UAE have a strong control. The tightened economic sanctions against Iran have caused the Arab countries to become restless to a great extent.
Economic risks
The economic structure of the country is the basic factor that led to the high level financial profits earned by UAE businesses in the recent years. Countries with strong economic infrastructure offer better chances of growth and return on investment whereas, countries with weak economies are not reliable from the perspective of international investments. Therefore, the economic risk is related to the ability of a country to reimburse its debts. Economic risks of a country entail monetary instability, strict fiscal and monetary policies, government restrictions, high economic debts, slow GDP growth, increasing inflation and many other factors associated with the economic instability of the country.
After the economic recession, the UAE economy has eventually improved providing better investment opportunities. The UAE is a mixed free economy; a quarter of its gross domestic product is generated through oil and natural gas production. The non-oil sectors have made significant constributions to the UAE’s GDP as follows.
- Government services 11%
- Oil & Gas 30%
- Commerce and hotels 11.4%
- Real Estate 9.1%
- Construction 8.6%
- Transportation 7.3%
- Finance and Insurance 6.4%
Additionally, the UAE has emerged to be one of attractive economies for the technology sector and in the recent high profile firms such as Microsoft, IBM, HP, etc. have made an entry into this country. However, fluctuations in the oil prices remain the dominant factor due to which government revenues are greatly influenced (Wagner 113). Dubai has also become one of the attractive business hubs for tourism, trade, construction and other activities. Thirty percent of the UAE’s GDP is dependent on its oil revenues. The decline in the consumption of oil during the 2008-9 recession led to a reduction in the production of crude oil which decreased to 2.9 million barrels per day (Kosmidou, Doumpos and Zopounidis 67). With the passage of time, the economy stabilized, and it is predicted that oil prices will rise in the coming periods. The increase in the demand of crude oil could be an effective way to increase oil revenues of the country that are expected to increase by 24 percent by the year 2030.
The financial crisis 2008 in major global economies led to a significant decline in oil prices and a reduction in the demand for oil and petrochemicals products was observed, which led to both economic and financial crisis in the UAE. The high debts and unemployment decreased the development of UAE. In addition, the withdrawal of a large amount of foreign investments expose UAE towards extreme financial crisis (“The Handbook of Country Risk: 2009-2010” 21). Moreover, the state-backed investment also decreased in global assets. In order to stabilize the economy, the government took initiatives to increase public expenditures to 14 percent. The recovery of the UAE economy set in 2010 in the reconstruction plan casted a positive impact on the UAE economy. The main factor that improved the country’s debt position was the increase in oil prices. It can be suggested that global economic crisis casts a negative impact on foreign investments in any country. However, the GDP of UAE steadily grew in the last five years; it indicated healthy financial positioning of UAE in the global market.
The trade and investment environment of UAE encourages foreign direct investment and exemption from import duties and taxes attract investors from all over the world. The foreign companies can have ownership stakes of about 49 percent in local businesses, but they are free to take full ownership in free zones. By analyzing the economic indicators of UAE, it could be observed that the growth of the country has improved due to major foreign investments. The increase in the government’s spending and growing consumption of households could lead to an increase in the country’s GDP. However, the real estate sector in Abu Dhabi recently faced severe challenges due to which the related industries suppressed the growth of the emirate. The growth in construction and the real estate sector was observed after the decline in property prices and purchase activity in the last four years. The increased investment activity due to Expo 2020 has greatly contributed to the economy. In the short term, a decline in the economic growth rate could be observed due to the decline in oil prices. Moreover, the geopolitical risks related to the involvement of Iran in its neighboring countries could affect foreign direct investments in the UAE (“FITA; United Arab Emirates: Introduction” 5).
It could be analyzed that the economic risk in UAE is low as 90 percent of the oil production is located in Abu Dhabi that had taken over the political and economic decision making role in the UAE. The hydrocarbon accounts contribute to 80 percent of the government’s revenues. The overall increase in the GDP growth rate has been observed. It is expected that the decline in oil prices and demand would slow down the growth to about 2 to 3 percent of GDP that could lead to the political unrest (“FITA; United Arab Emirates: Introduction” 6).
Financial risk
Dubai is an international financial center and is designated as a free trade financial zone. It has gained attention of international multimedia organizations to establish their businesses in the UAE. After the recession, the UAE faced severe crisis to meet its debt obligations that had to be recovered. The credit availability in UAE slowly improved as the banking sector increased its investment in the real estate business. The banking sector of UAE remains strong and profitable; however, bank’s credit activities have reduced significantly. The central bank of UAE has imposed limits on banks that have reduced their exposure to certain businesses and real estate companies due to which credit activities in the UAE have declined in the recent times. The country has a flexible monetary policy and its current is pegged to the US dollar (“The Handbook of Country Risk: 2009-2010” 33).
Major Macro Economic Indicators.
From the above information, it could be observed that the UAE has a feasible environment. The infrastructure quality, government effective, regulation, and policies make UAE a favorable region for foreign investments. However, a lack of transparency in the public accounts, status of public entities, financial sectors, and businesses may lead to severe economic issues. The economic growth of UAE in 2014 appears to be in line with 2013 as the country promotes private capital investment and consumption. Major revenues are expected from hydrocarbons and fuels particularly from Abu Dhabi, Moreover, due to the active diversification policy, the non-hydrocarbon activity would also be dominant. The major industries, which would play an important role, are construction, property, and banking industries in Dubai, which encountered severe crisis in 2009, but they are recovering swiftly. Other important sectors from the investment point of view are trade, transport, and tourism.
Many projects that were withdrawn in 2009 due to the economic downturn are expected to be resumed entailing a mega national railway project, construction of 100 hotels and the world’s largest shopping mall are expected to be completed by 2014-2015. The diversification process has affected all states of UAE also except Dubai and Abu Dhabi. World Expo 2020 is going to be hosted by Dubai, which is a high appeal business event for the entire world. As far as the inflation is concerned, the prices of property and public services are likely to increase after the end of the deflationary process in 2012 (“FITA; United Arab Emirates: Introduction” 5). The demand is expected to raise the prices, but the overall inflation would be moderate as compared to the pre-economic crisis. There are expectations of the real estate gaining its momentum and property prices are likely to increase in the coming years. Due to the expected growth in domestic demand, inflation is likely to increase but it is expected to remain moderate as compared to the pre-crisis level.
Works Cited
“The Handbook of Country Risk: 2009-2010”. London: Blue Ibex Limited, 2009.
“FITA; United Arab Emirates: Introduction”. 2014. Web.
Kosmidou, Kyriaki, Michael Doumpos and Zopounidis. Country Risk Evaluation: Methods and Applications. Crete: Springer, 2010. Print.
Ramady, Mohamed. Political, Economic and Financial Country Risk: Analysis of the Gulf. Berlin: SpringerScience & Business, 2013. Print.
Shapiro, Alan. Multinational Financial Management. 9th. New Jersey: John Wiley & Sons, 2009. Print.
Wagner, Daniel. Managing Country Risk: A Practitioner’s Guide to Effective Cross-Border Risk Analysis. London: CRC Press, 2012. Print.