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Oil vs Copper – How two emerging economies reinvent themselves to stimulate their GDP growth and diversify their economy for the future

The recently opened “BurjKhalifa” in Dubai is just the peak of the iceberg that indicates the rising economic and financial power of thePersian Gulf region. In the heart of the Middle East, where showing off is a daily business among citizens, the “Emirates Place” in Abu Dhabi and the “Dubai World Central Airport” with an estimated capacity of 160 million passengers by 2027 even reinforce the assertive way of thinking that dominates the UAE since oil was found in the 1970s.

The UAE are after Saudi Arabia the second biggest economy in the Persian Gulf region and expect a GDP growth of 4 per cent for 2014. According to a report from the EIA, the government is planning an increase of oil production by a fourth to 3,5 million barrels/day by 2019.

Abu Dhabi alone owns almost 94 % of the country’s resources (around 92 billion barrels). Due to that, the 6 other Emirates have already launch a bunch of plans to transform the structure of the economy into a more sustainable direction.

Chile’s boom after the Asian crisis

If you exclude 2009 (in terms of the financial crisis where almost no country faced a positive GDP growth), Chile with its export-driven economy has had a constant growth rate around 5 - 6 % since 2004 according to the World Bank. The recent accession to the OECD is just an indicator of the growing attractiveness for foreign investors.

For years, Chile has dominated the world copper market. With a production of more than 5 million tons (34 % worldwide) every year, it exceeds the second-placed competitor China (1,5 million tons) by more than 3 times.

Since the Chinese population is moving to the cities and needs copper for pipes and wires of their new homes, demand has risen and stimulated Chile’s economy. BHP Billiton, world’s biggest mining company, is only one company on a long list to invest heavily in Chile. The following table illustrates the rising FDI in Chile in 2012.

Source: United Nations Conference on Trade and Development

Source: United Nations Conference on Trade and Development

Truly thriving economies

The UAE is said to have a CPI of 121 in 2015 while the inflation rate will rise from 1,01 % to 1,42 %, according to the National Bureau of Statistics in Abu Dhabi. The indices for Chile (CPI 118; Inflation rate 3 %) present more or less similar data for 2015 (Comparison: Germany (December 2013): CPI 106,5; Inflation rate: 1,5 %). So both countries are rather to increase their interest rates soon to maintain the economic balance and counteract the upward trend (South American and the Middle Eastern Council currently do not have a substitute like the Maastricht Criteria, which set such strict rules about the convergence level of the respective country). Hence the upcoming political, economic and social reforms by the new Chilean government and high energy costs, the economic growth is expected to slow down slightly.

With the economic numbers considered, it turns out that – apart from Brazil – Chile claims for the role of the economic leader in South America with a GDP of US$ 270 billion. So does the UAE in the Gulf region (US$ 349 billion). Chile is labeled by many indexes and institutions - like of IMF - an emerging market, yet the UAE has not been approved to all. The international index equity compiler S&P Dow Jones recently announced an upgrade for Qatar and the UAE as emerging market, due to their efforts in the area of foreign ownership limits. The MSCI is following S&P’s step. From September (May) 2014 on, they will be the first ones in their region to be upgraded to the emerging market status. Just to mention, the introduction of an compulsory health insurance in 2014 is also just a small step that enforces the attempt to reach an industry-nation level.

IMF’s government gross debt index results

Another major advantage of Chile and the UAE is the low public debt. In October 2013, the International Monetary Fund published a report about the general government gross debt, where Chile’s gross debt is expected grow slightly from 12,9 % to 13,9 % by 2018. The UAE’s gross debt is estimated to grow from 16,7 % to 17,5 % at the same time.

Moody’s has rated both as stable with a score of Aa3 (Chile) and Aa2 (UAE). This advantage given, the countries will face low interest rates for bonds and a high creditworthiness for the future, which increases the economic stability and stimulates the realization of state-driven projects.

Similar results in the most recent corruption perceived index

When it comes to corruption, there is still a lot to do in South America and the MENA countries. The results of the yearly published corruption perceived index of Transparency International can be seen in detail online. A value of 50 in the statistics is considered as a crucial point (<50 stands for a serious corruption problem). Chile is placed on 22nd rank with a score of 71, the UAE follows as the 26th worldwide (score: 69).

Almost all other countries in the regions have values below 50 (e.g. Saudi Arabia: 46, Argentina: 34). This does not appear out of nowhere, if one has a look at Chile's ongoing fight against corruption. In 1997, President Frei proposed a Judicial reform and created an autonomous Public Prosecutor Office, which later on formed an anti-corruption unit. A successor, Michele Bachelet, launched in 2006 a Probit Agenda to increase transparency and probity in public administration. The same development can be seen in the UAE where they lately launched an anti-corruption law.

Diversification from oil has already started

The UAE was in 2012 the 2nd biggest exporter of all the OPEC member countries with a total value of US$ 350 billion. As the tablet below reveals, petroleum exports counted only for a third of the country’s exports, which means that the economy seems to have already mastered the shift away from the dependency of the black gold into a diversified economy - in comparison to the big neighbor Saudi Arabia.

Source: OPEC Annual Statistical Bulletin 2013

Source: OPEC Annual Statistical Bulletin 2013

The small Emirate has taken several steps to lower the dependency on oil. The most promising in the areas seem to be logistics, air travel/cargo, tourism and trade. The IATA announced that Dubai will be the 6th largest air cargo hub for international freight worldwide until the end of this year (2,75 million tons).

The accessibility of a third of the world population within a 4 hours flight provides an excellent return on investment for aviation infrastructure and cargo facilities. It is not that already over 100 companies of the Fortune 500s operate in the Jebel Ali Free Zone (JAFZA) – due to the tax free environment - or the vision to be the leading global provider of logistics infrastructure solutions. The more astounding is the fact that with the JAFZA, Dubai has established the world’s largest free trade zone in less than 30 years (starting with 19 companies in 1985).

With the geographical location considered, it seems more or less obvious that the United Arab Emirates follow the strategy of being the main hub for Africa, Asia and Europe. This refers not only to logistics and air traffic, but soon to medical tourism as well.

Opening in 2017, the University Hospital in Dubai Silicon Oasis (hosting 700 000 patients annually) will not only boost medical tourism to the region, but also addresses the shortage of medical graduates.

Apart from that, the UAE plans to establish itself as a world leader in green economy with the long term national initiative "Green Economy for Sustainable Development". Therefore, heavy investments are expected in the areas of energy, agriculture and sustainable transport. The Prime Minister of the UAE, HH Sheikh Mohamed bin Rashid al Maktoum, lately proclaimed that there lies a future key competency of the 7 Emirates, which were united only 43 years ago.

Chile’s problem to diversify the export structure

To maintain a well-balanced economy means also to diversify exports which are a key point on the way to an industrialized nation.

As mentioned earlier, Chile is producing a third of all copper worldwide.On the other hand, China is demanding about 40 % of the world copper production each year. What seems to be a perfect deal turns out to be a high risk for the economy of Chile. If the Chinese economy faces a downturn, the demand for copper plummets, thus the imports tumble and Chile faces lower export rates (which influence the GDP by a fifth).

In a recent article, the Santiago Times named 9 non-mining export items in which Chile led the world in. Among these were grapes with revenues about US$ 1,5 billion, frozen salmon and blueberries with each around US$ 400 - 500 million. In relation to the total exports of US$ 78 billion, thisseemsunremarkable.

After copper, Chile lists agricultural products as the 2nd biggest export source, taking a fourth of total exports. However, it exported 3-fold more agricultural products than industry products.Severe droughts and water scarcity are the biggest enemies of this steady growing industry. With an annual use of approximately 78% of the total freshwater in the country, the agricultural industry is the main consumer of Adam´s ale. For small-scale farmers, it is even more difficult to plan ahead without reliable information about future water supplies since they cannot afford water rights (and effectively are stealing it from aquifers or rivers).

The manufacturing industry (export share: 13,3 %) has quality standard problems that still have to be overcome. The markets in Europe and the US may be more receptive to products in the high-end niche markets.Another factor is the length of the country which makes energy transports more difficult. To keep energy expenses low, there have to be found new ways to provide the factories with sufficient power.

What is to mark as positive is the intention of easing international trade. Chile has contracted FTAs with countries of 86 % of the world´s population, which boosted the export industry.

Enforcing the Tourism Industries

While the UAE is setting up impressive hotels, extravagant luxury resorts and imposing infrastructure to promote its tourist industry, Chile just has to spot the marvelous natural places (which are all around the country, e.g. Patagonia, Atacama Desert). Therefore it seems to be just a logical consequence that in the beginning of 2013, former president Piñera launched a 7-year-plan to become the world leader in Tourism by the year 2020.

A key concept could be cheap inland flights to make travelling throughout Chile more attractive. Trains are almost impossible to operate given the jeopardy of earthquakes. A supportive role is played by the dense bus system.

UAE thinking big for the future

Dubai and Abu Dhabi have either launched long-term strategic plans. This seems a logical conse-quence in relation to the gigantic projects yet to be realized in the small kingdom. Recently, Dubai got elected to host the Expo 2020. The BBC states that the government will spend US$ 6,5 billion just to upgrade the infrastructure. In return, revenues are expected to exceed US$ 23 billion.

”In a strong and safe union, knowledgeable and innovative Emiratis will build a competitive and resilient economy” praises the first part of the national vision for 2021, by which not only home-grown entrepreneurship, but also national consciousness should be promoted.

In its chapter “Building a Sustainable Economy”, Abu Dhabi has defined 3 key objectives to be reached by 2030:

  • Reduce GDP volatility through diversification
  • Enlarge the enterprise base
  • Enhance competitiveness

Whether these objectives can be reached or not is still unclear. What stands out is the importance of creating competitive advantages in other industries like the capital-intensive, export-oriented sectors to diversify successfully. The highly oil-dependent capital wants to diminish the percentage of oil-exports of the GDP by 2030 to 36%.

Source:Abu Dhabi Statistical Yearbook 2005; Abu Dhabi Economic Vision 2030 Team Analysis

Source:Abu Dhabi Statistical Yearbook 2005; Abu Dhabi Economic Vision 2030 Team Analysis

To sum it up, Dubai's strategic goals appeal more to Emiratis, because of the high percentage of expatriates in the city, meanwhile Abu Dhabi is heading for more growth and diversification from the oil until 2030.

Outlook

So with the low corruption rate and the low gross debt, the 2 countries are not only attractive places to invest for foreign investors, but as well have set the basis for sustainable growth if the governments can lead their economies into the right direction.

Tag(s) : #International vision

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