Re-Exports Provide Upside Risks To Bullish Dubai Outlook

BMI View: The potential for a gradual loosening of Iranian sanctions places upside risk to our already bullish forecast for the UAE and, in particular, Dubai. Whilst we do not expect sanctions on Iran to be lifted anytime soon, there is significant potential for constructive talks to see a slight easing of restrictions on the country. This could predicate a return for Dubai's once significant re-export sector.

Negotiations between Iran and the 5+1 powers (the United States, Russia, China, France, Britain and Germany) on the Islamic Republic's nuclear programme have significant implications for the UAE's economy, specifically Dubai's re-export sector. Whilst talks ended short of a deal on November 10 and we do not expect a sudden breakthrough, there appears to be potential for a gradual relaxation in Iranian sanctions (See: Potential For Progress In Nuclear Talks Remains November 10). Any agreement would have significant implications for the rest of the Middle East on both a political and economic level. Economically, it is clear that Iran has most to benefit from a relaxation in sanctions, however the implications for the UAE and in particular Dubai are substantial.

Historically, the UAE has been a key centre of re-exports serving the Iranian economy due to its proximity, the presence of substantial Iranian communities in the country and its role as a conduit for trade around the Middle East. Dubai has been the focal point for this trade, and we estimate the re-export sector to have accounted for approximately 8% of the emirate's GDP in 2011, before sanctions started to bite in earnest. Other emirates, notably Sharjah and Fujairah, relied on Iran for a slightly lower, but still significant share. The UAE has therefore been significantly affected by sanctions on the Iranian regime, as pressure from the West and Abu Dhabi has restricted Dubai's willingness to trade with Iran, whilst Iran's problems with accessing trade finance has restricted its ability to trade with Dubai.

Sanctions Take Effect
UAE - Re-Exports by Destination in 2011 (RHS) and 2013, % of Total

BMI View: The potential for a gradual loosening of Iranian sanctions places upside risk to our already bullish forecast for the UAE and, in particular, Dubai. Whilst we do not expect sanctions on Iran to be lifted anytime soon, there is significant potential for constructive talks to see a slight easing of restrictions on the country. This could predicate a return for Dubai's once significant re-export sector.

Negotiations between Iran and the 5+1 powers (the United States, Russia, China, France, Britain and Germany) on the Islamic Republic's nuclear programme have significant implications for the UAE's economy, specifically Dubai's re-export sector. Whilst talks ended short of a deal on November 10 and we do not expect a sudden breakthrough, there appears to be potential for a gradual relaxation in Iranian sanctions (See: Potential For Progress In Nuclear Talks Remains November 10). Any agreement would have significant implications for the rest of the Middle East on both a political and economic level. Economically, it is clear that Iran has most to benefit from a relaxation in sanctions, however the implications for the UAE and in particular Dubai are substantial.

Sanctions Take Effect
UAE - Re-Exports by Destination in 2011 (RHS) and 2013, % of Total

Historically, the UAE has been a key centre of re-exports serving the Iranian economy due to its proximity, the presence of substantial Iranian communities in the country and its role as a conduit for trade around the Middle East. Dubai has been the focal point for this trade, and we estimate the re-export sector to have accounted for approximately 8% of the emirate's GDP in 2011, before sanctions started to bite in earnest. Other emirates, notably Sharjah and Fujairah, relied on Iran for a slightly lower, but still significant share. The UAE has therefore been significantly affected by sanctions on the Iranian regime, as pressure from the West and Abu Dhabi has restricted Dubai's willingness to trade with Iran, whilst Iran's problems with accessing trade finance has restricted its ability to trade with Dubai.

Re-Exports Losing Ground
UAE - Non-Oil Trade Figures, Jan-Oct, AEDbn

We do not expect a sudden relaxation of sanctions on Iran, which would see a significant jump in re-exports. However, there is significant potential for a modest reduction in restrictions, which could see significant growth in exports (albeit from a low base). Indeed, from accounting for 32.1% of Dubai's re-export sector in 2011, Iran accounts for less than 7% according to the latest data from the Federal Customs Authority. Whilst there is likely to be some trade from Dubai which avoids the sanctions and reaches Iran, we do not think this is significant. Any re-emergence of the re-export sector places significant upside risk to our already bullish forecast for Dubai. We currently forecast Dubai's real GDP growth to reach 3.8% in 2014 and 4.2% in 2015, following 4.4% in 2012.

Potential Impact Across Emirates
UAE - Re-Exports By Emirate (2012)

The downturn in Dubai's re-export sector is not unique, with other states across the GCC also seeing a sharp drop off in trade with Iran in recent quarters. Latest data from Oman's National Centre for Statistics and Information shows re-exports to Iran collapsing 31.1% y-o-y between January-October 2013. However, in a sign that Oman may have realised the dangers of relying too heavily on Iran as a source of external demand, re-exports to China through the same time period surged 184% y-o-y, making the Asian heavyweight the second largest destination behind the UAE for Oman's re-exports. Going forward, Dubai's ability to diversify its export partners, even in the event of Iranian sanctions being eased, will be crucial to sustaining the trade sector's long-term growth potential.

In Need Of Diversification
UAE - Share of Re-Exports, 2012

In terms of non-oil exports, semi-precious stones and jewellery account for 63% of the total, which according to the Dubai Economic Council, is a relatively new phenomenon, as such goods represented only 5% of total exports in 2005. Nevertheless, it is clear that at the moment the emirate suffers from a distinct lack of trade diversification, in terms of both export partners and products.

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Sector: Country Risk
Geography: United Arab Emirates
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