Abu Dhabi To Challenge Dubai's Financial Prowess

BMI View : The move by Abu Dhabi to become a financial centre is, on the whole, negative for Dubai. Whilst we do not expect Dubai to lose its pre-eminence in the near future, it is likely that Abu Dhabi's move will mean the emirate competes, rather than complements, Dubai's standing. Outside of the UAE, we expect similar challenges from Qatar and Saudi Arabia to be less successful, but will have the overall effect to reducing Dubai's dominance.

Abu Dhabi's plans to construct a new financial centre will have a negative impact on Dubai's financial dominance of the region over the long term, but is unlikely to make a significant impact in the near future. In early May Abu Dhabi announced plans to develop a full-service financial zone on Al Maryah Island, creating a zone which will be exempt from federal civil codes, possessing its own administration, court system and tax incentives.

The move by Abu Dhabi is not necessarily a zero sum game for the UAE, as companies could have a presence in both emirates or the centres could serve different types of clients. However, this solution begs the question whether it is feasible for a country with fewer than eight million people to have two financial districts, a question which could similarly be levelled at the country's two major international airports and three stock exchanges. When it comes to long-term development strategies aimed at boosting the role of non-oil economy, it appears that Abu Dhabi and Dubai continue to prefer competition, rather than co-operation.

We expect Dubai to remain the key financial centre in the Middle East for the foreseeable future. As well as its entrenched status, Dubai is a leader in the region in terms of cosmopolitan life which attracts expats to the relatively liberal emirate, an area in which Abu Dhabi cannot and does not want to compete. Over the longer term, however, it appears as though Dubai's dominance of Middle East finance has peaked, and relative decline will set in as Abu Dhabi, and others make strides.

A Lot Of Catching Up To Do
UAE - Comparison Of Business Districts

Abu Dhabi has several advantages over Dubai, which should make some relatively easy gains possible. Abu Dhabi produces approximately 90% of the country's oil and has a GDP over twice that of Dubai, ensuring that access to capital should be slightly more abundant. In addition, the emirate has the governmental clout which could force companies to relocate to the emirate or else miss out on government contracts. Whilst this may not be the best way to encourage a thriving financial centre, such a move is possible if the emirate is serious about becoming a financial hub. Base effects should mean that Abu Dhabi records faster growth rates in its financial sector as the Abu Dhabi business district is currently home to 1,500 people and 46 multinationals. The DIFC, in contrast, boasts a working population of over 14,000 and almost 1,000 businesses.

Regional Competition To Add To Woes

Dubai has been the Middle East's top financial centre for the past decade following the establishment of the Dubai International Financial Centre (DIFC) in 2004. However, outside of the UAE, there is further competition on the horizon. Saudi Arabia and Qatar are looking to establish themselves as Middle Eastern financial centres and get a share of Dubai's pie. Saudi Arabia is developing the King Abdullah Financial District in Riyadh with 900,000 square metres of office space. Enthusiasm for the district has been lacklustre with only 10% of the office space leased thus far. Indeed, whilst Saudi Arabia's economy is the largest in the region, the banks largely service the domestic economy, with little multinational presence. Furthermore, Riyadh is likely to struggle compared with Dubai when it comes to expatriate lifestyle, especially for women. That said, Riyadh does possess some significant strengths. The city has the largest stock market in the region and the government's US$500bn stimulus programme launched in 2011 to stave off any future popular discontent will likely make it an easier source of public financing in part icular for construction firms.

Qatar is making similar moves by offering cash from its sovereign wealth fund to asset managers who set up business in the country. Given the undeveloped state of financial markets in the rest of the region, and the presence of substantial government support, it appears inevitable that Dubai, whilst retaining its pre-eminence, will see its relative dominance decline.

Dubai Looking To Expand Offering

Any growth in financial services industries outside of Dubai will be of significant detriment to the emirate. Unlike Abu Dhabi, Saudi Arabia and Qatar, Dubai cannot fall back on oil production, with finance making up over 11% of the emirate's GDP, compared to 3% in Saudi Arabia and 4.7% in Qatar, according to Bloomberg. Indeed, Dubai may be looking to diversify its financial offering having stated in January that it would create an Islamic finance council to regulate equity and fixed income markets. Indeed, according to Bloomberg, sales of Islamic bonds in the emirate have risen almost 50% in this year.

This article is tagged to:
Sector: Country Risk
Geography: United Arab Emirates, United Arab Emirates

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