UAE the Fiscal Paradise

When Sheikh Mohammed gave the green light to his project managers to construct the Burj Khalifa, a Dubai skyscraper 40 percent taller than the world tallest building, it became fairly apparent that the Sheikh had some big global ambitions for his oil rich bit of turf, the United Arab Emirates (UAE). 

While the Burj may be reaching for the Arabian stars another manmade construction was already well underway in the UAE, a fiscal paradise.  Indeed, the Dubai International Free Zone (DIFC), which has managed to lure 313 authorized lenders, insurance firms, asset management companies and fund firms. Among them are 22 of the 25 biggest banks in the world. In figures what this all means is an inflow of foreign direct investment of 30 billion Dirham or $8.2 billion into the UAE in 2012, which is up from $7.68 billion compared to the year before.

There are already 38 free zones in the UAE and already there are plans to construct another nine free zones.  There are several fiscal advantages for doing business in these free zones. For example, registered businesses are exempt from taxes when they repatriate their capital, registered companies don’t have to pay import or export duties. Free zone companies are even exempt from paying municipal taxes. Moreover, each zone is treated as an “offshore jurisdiction” under UAE law and they are virtually autonomous with their own administration, legal system and favorable tax incentives with the intended aim of luring top financial institutions and other companies from around the world to set up shop there.   

The federal government of the UAE has also made, Abu Dhabi, the capital of the Emirates, a free zone last year.  The name of the new free zone, “Global Marketplace Abu Dhabi” (“GMAD”), underscores Abu Dhabi’s ambition for this new free zone to act as a hub for financial services. GMAD will be based on Al Maryah Island in Abu Dhabi and will be treated as an offshore jurisdiction.

The recent appoint of a senior executive, Jan Bladen, with extensive experience legal and regulatory experience, to run GMAD further highlights the UAE’s ambition to be a major player in global financial services.   Ahmed Ali Al Sayegh, chairman of Abu Dhabi Global Market, said: “Jan Bladen is ideally positioned to address our key priorities which are to develop the legal, regulatory and operational platforms that will provide the foundation for the growth of The Global Market.”  Indeed GMAD is a huge strategic initiative for Abu Dhabi, which is intended to become a significant contributor to the UAE economy, according to Bladen.
Chief Economist at National Bank of Abu Dhabi is optimistic that the Abu Dhabi World Financial Market can help Abu Dhabi to recycle its petrodollars. In other words, reinvest the funds earned from the export of its oil within the UAE and the Middle East.  Certainly there are a lot of petrodollars to recycle, Abu Dhabi contains approximately 7 percent of the world’s oil and has huge Sovereign reserves.

Cash and gas rich Qatar, a sovereign Arab emirate, has also set up a financial district the Qatar Financial Centre. Furthermore, what was meant to be a sober Saudi Arabian alternative to the UAE’s financial free zones the Saudi’s have also recently completed their new financial district, King Abdullah Financial District. The district will contain 42 buildings and 900,000 square meters of office space—similar in scale to London’s Canary Wharf.

A question worth pondering over is with all this spare capacity in financial services, as a result of these financial free zones mushrooming in the emirates and beyond what impact will this have on the traditional global financial centers, like London, New York and Frankfurt. Perhaps we are going to see an increase in competition amongst the world’s financial centers as they compete with each other to attract a finite demand for global financial services.

Geographically and to some extent culturally, these financial free zones maybe well placed to service the requirements of their customers in the Middle East and North Africa. Undeniably, both regions have relatively young and well educated populations. Normally, these attributes are a catalyst for economic growth.  If this region takes off it would certainly pick up demand for financial services. The Spring Arab uprisings, a series of anti-government protests and armed rebellion that spread across the Middle East in early 2011 appears to have blown over.  A few months ago the Tunisia President issued a decree to lift a State of Emergency beginning on March 5, 2014, three years after it was imposed.  Critics argue that the move was merely a symbolic gesture to try and kick start Tunisia tourism industry, which is a sizable contributor to the country’s GDP. Before the uprising 7 million tourists came to Tunisia and recent estimates now but the figure to under 6 million tourists.

Then there is Egypt with already three elections in as many years. Observers are now waiting to see what impact these new elections will have on the country’s economy and security situation. But some voters are showing signs of election fatigue and downright cynicism over the electoral process.  A BBC reporter notice a young man loitering in a crowd, “Don’t you want to vote,” the journalist asked the young man.  "I didn't take part in the revolution and watch my friends die to then vote in an election that is nothing but a show," replied the young man. The country’s former army chief has been tipped to win.

So the extent to which these emirate financial free zones triumph may also depend on how the delicate situation in North Africa and parts of the Middle East unfold. Time will tell.

Darren Winters