UAE’s Economic Progress to Extend Beyond Post-Oil Era

Nearly seven years ago, President His Highness Sheikh Mohamed bin Zayed Al Nahyan provided a glimpse of what the future holds for the UAE.

UAE: Dubai

“In 50 years, when we might have the last barrel of oil, the question is: When it is shipped abroad, will we be sad?” he asked the crowd of the 2015 World Government Summit. “If we are investing today in the right sectors, I can tell you we will celebrate at that moment.”

That optimistic foresight has steered the country towards a more diversified economy that will deliver sustainable and inclusive growth. Far from pumping the last drop of oil, the UAE is well-placed as a model of economic development and stability as its economic diversification strategy gathers pace — especially in terms of foreign trade and industrial exports.

The federal government’s emphasis on supporting export has resulted in a historic rise in the UAE’s non-oil foreign trade, which reached $144bn by the end of the first quarter of 2022. Exports grew around 18 percent year-on-year to $24.7bn over the same period — doubling over five years — while non-oil imports grew 25 percent to $79.5bn.

But with the unstoppable drive to align with the Centennial 2071 plan to position the UAE as a leading global trading hub, the country will never rest on its laurels.

His Highness Sheikh Mohammed bin Rashid Al Maktoum, vice-president and prime minister of the UAE and Ruler of Dubai, said non-oil sectors contribute over 70 percent of the national economy, and the aim is to increase the UAE’s national exports by 50 percent over coming years.

“In the UAE,” he added, “we work as one team to boost our national economy and reinforce the UAE’s leading position.”

A Recipe for Success

Strengthening SMEs, which constitute around 94 percent of the UAE’s total businesses, is one of the key pillars of the quest to enhance the manufacturing and export sector.

But SMEs are highly vulnerable to any fluctuation in the marketplace, whether caused by the pandemic fallout, supply chain disruptions, or skyrocketing prices of raw materials and machinery.

According to data from the US Bureau of Labour Statistics, around 20 percent of small businesses won’t survive their first year, and 30 percent go to the wall by the end of the second. About half will have failed by the end of the fifth year, and only 30 percent will remain when a decade is over — a 70 percent failure rate.

So, how can SMEs be protected to navigate these challenges? How can new companies enter such a volatile marketplace? The greatest hardship most encounter in their operation cycle is the difficulty of obtaining finance. Banks and financial institutions are hesitant to lend to small businesses, considered risky due to their limited cash flow, low equity reserves, and high dependence on receivables.

The lack of adequate liquidity threatens the survival of a small business, and they are in a disadvantaged position in contrast with large firms. The situation worsens when collateral is required as a guarantee of repayment. Entrepreneurs may have no physical assets to offer, and bad credit — or lack of credit history —may lead to loan rejection.

SMEs have a tough time dealing with the increasing cost of materials and labour. While bigger competitors can alleviate the impact with their reserves, small businesses often find themselves running the risk of diminishing margins or losing their customer base — or both.

State-backed trade finance becomes significant at this juncture. Guarantees, export credit insurance and other trade finance support from the government equip SMEs to defend themselves against non-payment. These act as stimulus for bank lending and give businesses the confidence to extend credit to new and existing customers with better terms. This increases their competitiveness in domestic and international markets, enabling them to employ more people and enhance production and sales.

Emirati Success Stories

The launching of the UAE Federal export credit company, Etihad Credit Insurance, signifies the proactive vision of the UAE leaders in bolstering the national production capacity and export sector through a range of bespoke trade credit insurance and project-financing solutions. Many UAE companies have succeeded even in challenging economic cycles — protected by ECI guarantees.

Emirates Steel, part of the Arkan Group and the leading integrated steel plant in the Middle East, saw an almost 50 percent increase in its export markets across Europe, America, Asia, and the Middle East and North Africa over the past two years. The company’s expansion plans are aligned with the objectives of the UAE’s industrial strategy, Operation 300bn, which is poised to increase the contribution of the industrial sector to the country’s GDP from AED 133 billion ($32.61bn) to AED 300 billion ($81.68bn) by 2031.

Another beneficiary of ECI’s state-guaranteed support, RAK Ceramics, reported that its total revenue increased 21.8 percent to $780m. RAK Ceramics serves clients in 150 countries through hubs in Europe, the Middle East and North Africa, Asia, North and South America and Australia. ECI’s support in securing receivables helped RAK Ceramics to register an outstanding performance last year, despite rising input costs and supply chain disruptions.

Since the onset of the pandemic, the role of export credit agencies has increased to fill widening financing gaps left by the private market — especially in meeting the businesses’ short-term working capital needs. It’s common for trade- and export-related businesses to face finance issues due to increased costs of short-term financing and mounting rejection rates.

Government-backed ECAs have increased trade finance support to businesses. While the appetite for lending was low, ECAs filled that gap. Etihad Credit Insurance’s support to UAE exporters in the non-oil sector rose by 260 percent in 2021 to $4.9bn, compared to $1.36bn the previous year.

Protection against Default

In unfamiliar market territories, companies are at the risk of non-payment, through client bankruptcy or unforeseen commercial and political perils. Any little ripple in the global economy can spark adverse outcomes anywhere, at any time.

ECAs support protects the business community from going down this path. During the peak of Covid, Emirates Fiber — a subsidiary of the leading textile companies and a major exporter in the UAE Safetex —had been supplying its products to Hollander, the largest global producer of utility bedding products based in North America.

If Hollander were to go bankrupt, millions of dollars would be at stake. And unfortunately, the American company with over 100 years of history did just that. The $1m Safetex gave to Hollander’s open account seemed irretrievable — but the company was covered through a revolving limit by ECI. The firm jumped into action, working with legal partners in the US to secure part of the debt and ensuring the company was a secured creditor. Emirates Fiber was able to recover a substantial portion of the debt — and ECI indemnified the remaining unpaid balance.

As the CEO of Safetex Group said: “It could have been a huge setback, enough to make us go bust. That coverage from ECI saved us from an impending fall.”

Improving Lives

Public-private partnerships (PPP) were proposed by the United Nations as a tool for achieving its Sustainable Development Goals (SDGs). These provide the means and opportunity to stimulate the private sector to innovate and create effective solutions to infrastructure and service-related challenges.

As the UAE Federal export credit company, Etihad Credit Insurance’s support to various private entities underscores the country’s effort to foster PPP, especially following the economic challenges caused by the pandemic. ECI was involved in ambitious infrastructure projects that transformed millions of lives.

Last year, it collaborated with the Iraqi Ministry of Finance and global energy giant GE to complete the financial close of the Power Up Plan 4 (PUP4) to strengthen Iraq’s electricity sector. It was a landmark achievement for the UAE’s sustainability drive, where key stakeholders from government ministries joined with financial institutions, export credit agencies and commercial banks to power-up a nation, empower people, and unite industries.

ECI provides reinsurance coverage to JP Morgan, the lender in the project that will enable the production and reliable generation of up to 2.7 gigawatts of electricity for the Iraqi people. Just one megawatt can provide power to as many as 900 homes. Through the concerted efforts of governments and the private sector, the project can provide electricity to 2.5 million homes each year.

ECI and its Israeli counterpart, ASHRA, recently entered into a partnership to provide buyers’ credit guarantees to the funding bank for Ghana’s $147m healthcare project, the construction of four hospitals and the first main central medical storage facility in the country. The agreement is the first PPP project between the UAE and Israel since the signing of the historic Abraham Accords in 2020. It sets the stage for greater economic and trade collaboration following another historic milestone: the signing of the UAE-Israel Comprehensive Economic Partnership Agreement (CEPA).

So, in the post-pandemic era, UAE people and businesses are empowered to sell domestically made products around the world. Companies big and small have fewer concerns about access to the funds that can make their dreams true. Large-scale investments are promoted for enduring infrastructure development — clean energy or healthcare — to save, sustain and strengthen current and future generations.

About the Author

Massimo Falcioni

Sir Massimo Falcioni is CEO of Etihad Credit Insurance.