Outlook for 2011-15

• The outlook for the domestic political scene will remain broadly stable, although there is a risk of the UAE becoming embroiled in the dispute over Iran's nuclear programme and being affected by the Arab regime crisis.
• The budget surplus will increase substantially in 2011 owing to a rise in oil prices, boosted by the unrest in the region, before narrowing in 2012. The fiscal account is forecast to post deficits in 2013-15.
• We expect the Central Bank of the UAE to remain focused on increasing liquidity in 2011, but it will also seek to control inflation. It will review future policy under the guidance of a new advisory council.
• We estimate that real GDP grew by 2.1% in 2010. We expect GDP growth to reach 3.6% in 2011 in light of higher oil prices and production. Real GDP growth is forecast to average 5% in 2011-15 as large projects come to fruition.
• Inflation averaged 0.9% in 2010. It is forecast to average 2.2% in 2011-15, well below the highs of 2005-08, owing to a fall in housing costs.
• The current account will remain in surplus in 2011-15, at an average of 4.3% of GDP. The surplus will widen considerably in 2011 as the UAE benefits from unrest in Bahrain. The growth in non-oil exports will increase in 2012-15.

Monthly review

• In late April the crown prince of Abu Dhabi, Sheikh Mohammed bin Zayed al-Nahyan, met the US president, Barack Obama, to discuss the volatile situation in the Middle East.
• The UAE's art scene came under the spotlight in early April after the ruler of Sharjah sacked the curator of the long-standing art biennial because one of the exhibits was offensive to local tastes.
• The Abu Dhabi Urban Council has awarded US$5.7bn worth of contracts during Cityscape, an annual property show. The funds will be used to build 7,500 homes for Emiratis.
• The Dubai government has amended the laws governing the Dubai International Financial Centre (DIFC). The new laws are aimed at improving transparency and co-ordination between the different DIFC entities.
• Mubadala, Abu Dhabi's investment fund, has launched a US$1.5bn bond and announced plans to increase spending fourfold in 2011, to US$16.3bn.
• The Abu Dhabi National Oil Company (ADNOC) and US-based Occidental Petroleum have signed a deal to develop jointly the Shah gasfield. In spite of delays, ADNOC insists that the field will be fully operational by 2014.

The political scene will remain broadly stable in the forecast period; there is a risk that some political protests will be held, but these are likely to be limited and non-violent. The president of the UAE and the ruler of Abu Dhabi, Sheikh Khalifa bin Zayed al-Nahyan, has the backing of the ruling families in the other six emirates, including the ruler of Dubai and prime minister of the UAE, Sheikh Mohammed bin Rashid al-Maktoum. Sheikh Khalifa enjoys the support of his half-brother and designated crown prince, Sheikh Mohammed bin Zayed al-Nahyan, a younger, more dynamic figure. However, the protests in Egypt, and more importantly, those in Bahrain, have unnerved the authorities. There have recently been calls on online social media such as Facebook for rallies, but there have been no public demonstrations so far.

Power will remain concentrated within the large ruling families, although relations within these families are sometimes fractious. Moreover, there is no formal structure for determining family seniority or claims on power. Sheikh Khalifa and Sheikh Mohammed bin Rashid are both young for Gulf rulers and are therefore expected to remain in power throughout the forecast period. Both have crown princes named as next in line, and there is little risk of problems with the succession processes. The key risk to political stability, during a heightened period of unrest in the region, stems from growing discontent among the northern emirates. The benefits of economic development in the UAE in the past decade have mainly been enjoyed by Dubai and Abu Dhabi. The smaller northern emirates remain underdeveloped, with infrastructure development lagging behind their wealthier neighbours. This has resulted in a widening wealth gap between Emiratis in Dubai and Abu Dhabi and those in the northern emirates. Although the small Emirati population has long been the beneficiary of generous state patronage, the northern emirates remain a key risk to political stability.

The UAE will also remain at risk from violent attacks by Islamist extremists. Its proximity to Iran and its status as a regional services hub render it vulnerable to regional security threats.

The UAE is governed by the Supreme Council, which comprises the leaders of the seven emirates. The Federal National Council (FNC) is an advisory body to the Supreme Council, and has 40 members, who are UAE nationals. The FNC has a supervisory role and is responsible for examining proposed federal legislation.

Apparently prompted by the social unrest in the region, the UAE president, Sheikh Khalifa, announced the creation of a committee to oversee the FNC election-the current term expired in mid-February. The election will be held in September 2011. However, the committee is made up of many of the same officials as the body that oversaw the previous election in 2006. In that year, half of the 40-member FNC was elected by 6,689 hand-picked Emiratis. The membership of this electoral college has been increased under the new rules. The new announcements fall short of the aspirations of some Emiratis for greater political participation, and 160 members of society, including doctors and lawyers, have signed a petition calling for direct elections to the FNC.

The FNC, despite being only an advisory body, is becoming more assertive on legislative issues. Some members of the previous body had accused the government of appearing to accept the FNC's recommendations without changing anything in practice. The recent announcement indicates a willingness to broaden political participation but does not address the issue of enhancing the powers of the FNC.

The UAE will deepen its relations with the US and major Western powers, as the risk of conflict over Iran's nuclear programme persists. The UAE's relationship with Asia, especially China and India, will play an increasingly prominent role in trade, security and investments in the region. Relations between South Korea and the UAE have also increased since South Korea won the contract to build four nuclear power stations in 2009.

The unrest in the Middle East has created the potential for strains to appear in the UAE's traditionally close relations with the West. The UAE has shown through its participation in the NATO-led military intervention in Libya that it is committed to playing an active role in the international policy response to political crises in the region. However, the UAE has been reluctant to join in Western criticism of some regimes that have responded to protests with repressive measures, notably Bahrain and Syria. These topics were the focus of discussion between the crown prince, Sheikh Mohammed bin Zayed, and the US president, Barack Obama, during a meeting in Washington in April. In Bahrain, UAE security forces are part of the Saudi-led contingent that intervened in March as part of the Peninsula Shield Force of the Gulf Co-operation Council (GCC). The GCC claimed that the purpose of this intervention was to safeguard security in a member state in the face of an external threat, ostensibly posed by Iran. In practice, the intervention was a robust gesture of support for the Bahraini ruling family's decision to use force to suppress the protest movement, whose core demands were for reforms to the system rather than the overthrow of the regime. The US had indicated that it was in favour of dialogue, but the Obama administration has desisted from any overt criticism of the Bahraini authorities or of the GCC intervention. The UAE and other GCC member states, in particular Kuwait, have maintained contact with the regime of Bashar al-Assad in Syria, and are unlikely to heed calls from the West for them to take an overtly critical stance, for example through the GCC. The UAE and fellow Gulf Arab states appear to be concerned about the wider implications for regional security were the Assad regime to fall.

The UAE will remain reliant on the hydrocarbons sector, which will be the main engine of growth during the forecast period. That said, the government will continue to pursue its diversification programme through large-scale investment in infrastructure, industry and services. The Abu Dhabi Urban Planning Council awarded tenders worth US$5.7bn to real estate developers at Cityscape, an annual property show, to build 7,500 homes for Emirati families. Other Abu Dhabi government-related entities (GREs) have also announced spending for large-scale real estate projects. The Dubai government, in contrast, will concentrate on paying off its debts and will reduce government spending in 2011-15. Dubai will refocus its efforts on promoting important sectors such as trade and tourism. The Dubai government recently amended the laws governing the Dubai International Financial Centre to improve transparency and improve co-ordination between its main bodies.

The UAE will also aim to recapture foreign investment that took flight when Dubai's debt problems surfaced last year. New laws to stimulate both domestic and foreign investment in the private sector have been at the draft stage for some time and are facing domestic opposition. The foreign business community and the UAE's counterparties in free-trade negotiations have argued that the limit of 49% on foreign ownership of companies in most sectors outside of free zones should be lifted, and some move in this direction is expected. Dubai's stock exchanges have also introduced new rules for initial public offerings aimed at improving liquidity and encouraging more businesses to go public.

Labour policy will continue to focus on increasing the employment of Emiratis in the private sector. The government recently amended the sponsorship system to allow all workers, skilled and unskilled, to leave their employers if contractual arrangements or other employment standards are not met. At the same time, the government also announced that UAE nationals should make up a minimum of 20% of a company's workforce, irrespective of sector. The economy will remain dependent on immigrant labour in the long term.

Fiscal policy will remain expansionary during the next five years, with expenditure projected to increase considerably to support the diversification programme. Mubadala, Abu Dhabi's investment fund and primary vehicle for economic diversification, issued a US$1.5bn bond and announced a fourfold increase in planned investment this year to US$16.3bn. The government will also increase social spending, mainly by increasing subsidies for basic food items. The Economist Intelligence Unit expects a 30% rise in global food prices in 2011. Much of the increase in spending will come from Abu Dhabi, as Dubai will concentrate on repaying its debt. Although Dubai World (DW), one of three major state-owned companies in Dubai, concluded restructuring talks with creditors in September, further restructurings may put pressure on the federal budget as Abu Dhabi may be required to provide additional support for other Dubai GREs.

The UAE is expected to maintain its attractive tax environment, which will enable it to keep its competitive edge and draw in foreign investment. To bridge the funding gap, the government is likely to increase charges for transport and public services in an effort to augment revenue. The UAE's fiscal position will be much weaker in the forecast period than in 2006-10. We forecast that the federal surplus will widen in 2011 as concerns over oil supply drive oil prices higher, but the surplus will contract in 2012. The federal budget is forecast to move into deficit in 2013-15, with the shortfall averaging 2.6% of GDP. As Dubai resolves its debt problems, we expect net public debt to fall from an estimated 42.5% of GDP in 2010 to 27.8% of GDP in 2015.

It should be noted that the UAE's official fiscal data understate the real strength of the public finances, as a portion of Abu Dhabi's oil earnings are not reported as current revenue, but instead paid directly into reserve accounts. The official federal budget accounts for only about one-quarter of revenue and expenditure. The bulk of spending is at emirate level, with Abu Dhabi covering certain national expenses, particularly defence. Dubai is the only other emirate to contribute to the federal budget. Expenditure does not include funds used to bolster the balance sheets of loss-making GREs. The figures also exclude the substantial income generated by the UAE's stock of publicly owned foreign assets.

Monetary policy will continue to focus on protecting the banking sector and increasing liquidity in 2011, but the Central Bank of the UAE will also monitor inflation closely. It announced, in early October 2010, a one-month extension to the temporary repo (repurchase) rate of just 1%, in order to increase liquidity in the financial system. However, the repo rate remains at 1%. The introduction of a new system to calculate the Emirates interbank offered rate (Eibor) has also eased pressure on the banks. Several Dubai GREs, as well as the Dubai government, have managed to raise capital through bond issues. This reflects the increasing appetite for high yields from international investors.

As a result of the recession, the Central Bank increased the minimum capital-adequacy ratio to 12% in June 2010. This requirement will be reviewed in 2011. As the economy gradually recovers and inflationary pressures re-emerge, the Central Bank will turn its attention to controlling price rises. An increase in US interest rates from the second half of 2012 will help the authorities in this task.

In May 2010 the UAE withdrew from the project to establish a GCC single currency. The move has no direct economic implications for 2011-15, as the single currency is not expected to be launched within the forecast period.

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The National Bureau of Statistics (NBS) has revised historical real and nominal GDP data. This revision will affect forecasts that rely on GDP growth.

According to the revised data, real GDP fell by 1.6% in 2009. We estimate that the economy grew by 2.1% in 2010 and forecast that GDP growth in 2011 will pick up strongly, to 3.6%, owing to high oil prices and production. Real GDP growth is forecast to average 5% in 2011-15, much higher than the estimated rate of 3.4% in 2006-10-which has changed owing to the revisions in historical GDP data. We have maintained a cautious stance on increasing our oil price forecasts drastically, a view that is supported by the decline in oil prices on May 5th. We estimate that oil prices averaged US$79.6/barrel in 2010 but forecast that they will increase sharply in 2011, to US$101/b. Oil prices will decline gradually thereafter, to US$76/b in 2015, mainly as a result of increased supply from Brazil and Iraq, as well as some OPEC member states, including the UAE. We estimate that world trade grew strongly in 2010, and although it is forecast to slow in 2011-15, it will lead to an increase in non-oil exports for the UAE. The diversification programme will boost the output of the industrial sector, with some major projects expected to come on stream in the forecast period. However, the UAE will continue to rely heavily on the hydrocarbons sector.

High government spending, especially in Abu Dhabi, and improved consumer confidence will help to boost private consumption. Expenditure on infrastructure projects, industry, ports and airports will facilitate non-oil exports towards the end of the forecast period as some projects near completion. An almost tax-free environment, good infrastructure and the opportunity to save will lead to a return to high levels of growth in the immigrant workforce in the forecast period, after a fall in the expatriate population in 2009.

The services sector will also register solid growth. The political uncertainty in the North Africa region will increase tourism to the UAE, partly from tourists who were previously going to Egypt. In the near term, government and oil-related services will continue to expand. In addition, Abu Dhabi will continue to invest in real estate and will also expand its tourism and infrastructure sectors, albeit at a more reasonable pace than originally planned in its long-term strategic plan. Other emirates such as Sharjah and Ras al-Khaimah are also developing tourism. The outlook for financial services, however, remains uncertain in spite of DW securing agreement for its restructuring proposal.

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Revision to historic growth data

The National Bureau of Statistics (NBS), which is a newly created entity tasked with consolidating the economic data of all emirates, has announced a revision of the historical growth data. The methodology and the reasons for these revisions have not been stated. The historical data for nominal GDP has been revised back to 1975. The base year has been changed to 2007 (from 2000 previously), but this only applies to revisions in real GDP data from 2001 to 2009. The data prior to 2001 has been provided with different base years, making it difficult to compare real growth levels. The Economist Intelligence Unit has therefore only used the revised real GDP levels from 2001 to 2009, although it has used all the revised growth rates.

The data for 2009 are preliminary and subject to revision. The revised data show that real GDP fell by 1.6% in 2009. Although this is more realistic than the previous growth estimates of 1.3% (and is more in line with our estimate of a fall of 2.7%), the data for 2009 require further explanation. The revised data show growth of 3.9% in real GDP in the hydrocarbons sector in spite of a fall in both oil production and oil prices. Gas production also fell in 2009. Therefore, it must be assumed that the rise in growth in the hydrocarbons sector is attributable to a specific formula used by the NBS. Nominal growth in the hydrocarbons sector fell by almost 33%, which more accurately reflects the fall in production and prices.

We have reflected the revisions in our reports. This will result in changes to forecasts. The revised data have been released by the NBS on its website, which we will continue to monitor closely.

The NBS compiles monthly statistical data at a federal level and has changed its base year for inflation to 2007 for data from 2008 onwards. Official estimates indicate that average annual inflation was by 0.9% in 2010. As the economy recovers and oil and international commodity prices increase, we expect inflationary pressures to re-emerge gradually, especially in light of the projected expansion in infrastructure development. We expect inflation in 2011 to average 2.5% owing to an increase in prices of grains, sugar and other basic items. However, low housing costs will keep inflation at a manageable level, at an average of 2.2% in 2011-15. The official basket used by the UAE government is representative of prices faced by the local Emirati population-who benefit from extensive subsidies-rather than the expatriate community, who make up almost 90% of the labour force. The authorities have announced that the composition of the price basket is under review.

The UAE dirham's peg to the US dollar (at Dh3.673:US$1) is expected to remain in place in the forecast period. However, questions about its effectiveness will re-emerge, as the Central Bank has established a panel of international experts to advise it on future policy. The Central Bank remains committed to the existing system. The peg has provided stability for decades, and, having ridden out the problems that a fixed currency brings for this long, the authorities seem keen not to change the system. The UAE's withdrawal from the GCC monetary union project has no immediate implications for the exchange rate over the forecast period. Critics of the currency peg have argued that it restricts monetary policymaking by tying domestic interest rates to US rates. Despite the peg, the cost of living in the UAE will increase substantially in 2011-15, as the purchasing power of the dirham declines.

We estimate that the merchandise trade surplus narrowed in 2010 but expect it to widen sharply in 2011 as both oil prices and production increase and growth in non-oil exports picks up. The value of exports will grow robustly in 2011-15, reflecting the increasing importance of non-oil exports as a result of the UAE's diversification programme. However, the rapid growth in the value of imports, especially in the second half of the forecast period, will restrict the increase in the trade surplus. The trade surplus will average a healthy 13.5% of GDP in 2011-15, although this is lower than in the historical period (2006-10).

The UAE will benefit from the unrest in Bahrain as banks move foreign staff into offices in the UAE, and, in some cases, relocate offices to the UAE. Services credits (mainly from tourism, business and financial services) are set to increase substantially. Income credits (mainly returns on the government's foreign assets) will also grow strongly but will be below the average in 2006-10. Economic diversification will also result in a strong increase in services imports. The growth in remittance outflows will remain modest in 2011 but will increase steadily over the remainder of the forecast period.

We expect the current account to remain in surplus throughout the forecast period. We estimate that the surplus narrowed to 2.1% of GDP in 2010 but expect it to widen to an average of 4.3% of GDP in 2011-15.

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The increasingly powerful crown prince of Abu Dhabi, Sheikh Mohammed bin Zayed al-Nahyan, held talks with the US president, Barack Obama, in late April. His representation of all seven of the UAE emirates at such a high-level meeting was striking, even though he is the deputy commander of the country's armed forces. Likewise, it has been noted that he recently toured the poorer northern Emirates, including Sharjah, dispensing UAE financial largesse as if he were a national leader.

Mr Obama and Sheikh Mohammed bin Zayed discussed the upheaval in the Arab world, and specifically the role of the UAE in Bahrain, where a contingent of Emirati "police" are supporting the authorities against Shia protests, and in Libya, where a small number of Emirati F-15 strike planes are supposed to be contributing to the NATO-led policing of the UN-backed no-fly zone, as well as the federation's attitude toward the newly emerging government in Egypt. The US and UAE governments have to some extent found themselves on opposing sides in relation to events in Bahrain: attempts by the US administration to promote dialogue between the Bahraini government and the protesters were shattered by the entry into Bahrain of Saudi and UAE troops. In Libya they appear more closely aligned in political terms, given the UAE's very public involvement in meetings of the "contact group" on Libya-which was formed in March and includes European powers, the US, the West's allies in the Middle East and international organisations. On Egypt, relations between the US-backed government in Cairo and Abu Dhabi are relatively cool. Notably, the new Egyptian prime minister, Essam Sharaf, did not visit the UAE in late April, despite spending time in neighbouring Saudi Arabia and Kuwait. The UAE foreign minister, Sheikh Abdullah bin Zayed al-Nahyan, visited Hosni Mubarak before he was ousted as president of Egypt in what was interpreted in the country and the region as a show of support for the long time ally of the UAE. Mr Sharaf denied that there were any problems in relations with the UAE, or that the UAE, along with Saudi Arabia, had pressured Egypt to give Mr Mubarak immunity from prosecution.

Emirati authorities arrest political campaigners

The Emirati authorities have been tightening control in the country in the context of regional unrest and concerns that the perceived "virus" of popular revolt could prove contagious. The arrest of four renowned human rights activists and bloggers, three of whom remain in detention without charge, the reputed sackings of others and the shutting down in its present form of the Jurists Association (JA), a non-official body that had sought to represent members of the judiciary, are evidence of this.

The JA, which, according to the US-based Human Rights Watch, has had its board replaced by state appointees, had been one of several organisations that had backed the online petition calling for direct elections to the country's advisory body, the Federal National Council (FNC). Previously, in 2010, some JA members were prevented from travelling abroad.

The arrests followed growth in support for the petition. Ahmed al-Mansoor, who was arrested in early April and taken to an Abu Dhabi prison, is a Dubai telecoms engineer who helped launch www.uaehewar.net, a discussion forum, in 2009, which has been shut down by the UAE authorities. The forum served as a means for issues of human rights and civil concerns to be raised online within the country by an educated and relatively liberal group of nationals. Mr Mansour's friend, Fahad al-Shehhi, from Ras al-Khaimah, who helped with the website, was also arrested. Mr Mansour commented on another Emirati blog, www.emaratikatib.org, which is still accessible outside the country, that he was arrested without a warrant by state security officers who were pretending to be concerned about the contents of his car. The arrest followed a number of alleged death threats. Nasser bin Ghaith, an economics academic, who has taken part in discussions organised by the semi-governmental Dubai School of Government, and defended the emirate's so-called economic model, was arrested in late April after comments he made on his blog in support of reform.

It should be noted that the fourth activist arrested, Abdullah al-Shehhi, also from Ras al-Khaimah, has been arrested before, just as websites have previously been shut down for raising uncomfortable political issues. However, it is plain that the UAE government's existing sensitivity to criticism has been heightened by the regional clamour for change, and specifically by domestic demands aired in the petition that have gained support from former members of the FNC as well as recently by well-connected public figures such as Abdul-Khaleq al-Abdullah, a renowned academic.

In early April the ruler of Sharjah, Sheikh Sultan bin Mohammed al-Qasimi, sacked the Palestinian-American curator of the emirate's long-standing and controversial modern art biennial in early April after some Emirati families complained that an exhibit was insulting to Islam. Jack Persekian had curated the art exhibition since 2006 and helped greatly to raise its regional and international profile. He is no stranger to controversy: indeed, the current exhibition, which runs from mid-March to mid-May, saw some displays either removed before it opened or amended to avoid offending locals, and was being overtly presented by many of its foreign Arab organisers and contributors as a statement about political oppression internationally. Opening at a time of Arab upheaval this only added to the discomfort.

The Sharjah biennial has long been the cause of mutterings of discontent in Abu Dhabi, Sharjah's pre-eminent paymaster, and among members of Sharjah's ruling family where there is discomfort at even the idea of such an event in a highly conservative emirate that has long fostered strong links with Saudi Arabia. Sheikh Sultan himself was the subject of a polite, but for him highly embarrassing, protest by exhibiting artists when he opened the biennial in mid-March. Some of them held up pieces of paper in his presence with the names of those killed by the Bahraini authorities in protest at the Emirati troops being deployed there that week in support of the government.

The biennial was first staged in 1993-long before the recent wave of high grossing art exhibits in neighbouring Dubai and the decision to build a branch of the Guggenheim, a US gallery, in Abu Dhabi. The ruler's daughter, Sheikha Hoor, is the head of the Sharjah Art Foundation, the governmental body that runs the biennial, and it appears that the ruler was acting to protect her embarrassment as much as his own. She had worked closely with Mr Persekian but strongly condemned the exhibit and the director for its display after he was dismissed. The exhibit, by an Algerian artist, Moustapha Ben-Fadl, was placed outside the Sharjah Art Museum in a public area easily visible to passers by. It depicted headless footballers whose shirts included explicit sexual comments in Arabic, mixed with references to Allah and to the Prophet Mohammed. The objective of the exhibit was to draw attention to mass rapes during Algeria's civil war, some of which were allegedly committed by militant Islamists. The sacking of Mr Persekian came immediately after controversy concerning the Guggenheim Abu Dhabi, which had been very publicly petitioned by foreign artists to improve its treatment of foreign labourers.

During Cityscape, an annual property show held in Abu Dhabi, the Abu Dhabi Urban Council (UPC), part of the government of the emirate, announced the award of US$5.7bn worth of contracts. The deals were granted to four developers, including Sorouh, the second-largest property company in Abu Dhabi, and involved the delivery of 7,500 homes for Emirati families. The planned completion of all tendered projects is 2012-14. The heavy government intervention in the property market in Abu Dhabi aims to address the shortage of residential premises and the inability of the private sector to shoulder any significant new projects because of tight financing conditions.

The real estate sector in the UAE, but particularly in Dubai and Abu Dhabi, has suffered heavy losses over the past couple of years and continues to experience cancellations, delays and funding difficulties as a result of the reluctance of banks to lend. The onset of a global recession in 2008 triggered the UAE property collapse, causing a slump in prices. Prices are not falling as sharply as in 2009, but demand remains sluggish. According to a rare set of data on the UAE real estate published by the National Bank of Abu Dhabi, the price per square foot for Abu Dhabi residential properties fell by 50% from a peak of Dh2,200 (US$600) in September 2008 to about Dh1,100 in April. The fall (of 64%) was even greater for Dubai residential sales over the same period, where the price plunged from Dh2,200 to just under Dh800 in March 2011. Rents fell dramatically in several residential areas across Dubai, with the decline ranging from 45% to 72%. No similar data on rents were compiled for Abu Dhabi.

Several government-related entities in Abu Dhabi will be investing billions of dollars in residential and commercial projects. In addition to the UPC, Abu Dhabi General Services (Musanada) announced a US$1.9bn housing project, and the Abu Dhabi National Exhibition Centre declared it will deliver 80 waterfront villas for Emirati nationals in the capital.

The government of Dubai, the emirate most affected by the property bubble burst in 2008, created its own scheme to help the real estate sector. In 2010 the Tayseer programme was established, which aims to assist stalled projects in acquiring financing from banks by stamping them as viable ventures and ensuring transparency between financial institutions and developers. Dubai's landscape is plagued by half-finished buildings, whose developers have little chance of negotiating with banks and receiving fresh capital.

Following a consultative governance review, the Dubai government amended the Dubai International Financial Centre (DIFC) law. This is the first modification of the law enacted in 2004, which established the DIFC as the first financial free zone in the UAE. The amended law is seen as more conducive to dynamic growth of the banking and financial sectors in Dubai, both of which develop in and through the DIFC.

The revision introduces more transparency into the working of the centre, clarifies responsibilities between the three DIFC bodies-the DIFC Authority (DIFCA), the Dubai Financial Services Authority (DFSA) and the DIFC Courts-and specifies relations between the centre and other Dubai government entities. It also introduces some of the most recent best practices and good governance concepts into the legal framework of the institution.

The law confirms the independence of the three institutions making up the DIFC. It also creates the Higher Board, a body on which the DIFCA, the DFSA and the DIFC Courts will be represented. The board's main mandate will be to monitor the co-operation of these bodies, while respecting their independence, and ensuring that their activities are in line with the overall purpose of the institution. The board will be headed by the president of the DIFC and the deputy ruler of Dubai, Sheikh Maktoum bin Mohammed bin Rashid al-Maktoum, and will meet at least twice every year.

The amended legislation includes provisions regarding the appointment of the governor of the DIFC. The holder of the position would be appointed by the ruler of Dubai, acting on a proposal from the president of the DIFC, for a renewable term of four years.

According to the new law, the DIFCA will be in charge of establishing and regulating the DIFC's payments system. It will co-ordinate with the Central Bank of the UAE in its role as a supervisor, regulator, operator and user of the wholesale, large-volume payment system. It will also be responsible for the foreign-currency clearing and settlement of payments, including the real-time gross settlement (RTGS) system in the DIFC.

The new law specifies the application of Dubai's legal, governmental and financial regulations to the DIFC. The lack of clarity in this area has been criticised previously, and was highlighted during the Dubai financial crisis. After the onset of the emirate's debt troubles, the shortcomings of the DIFC's systemic solutions became apparent. As several restructurings were handled by the centre and a number of cases were brought before the DIFC Courts, the authorities have taken the decision to set in motion a consultation and to improve the legal set up. The amended law comes into force with immediate effect.

In mid-April Mubadala, the Abu Dhabi government-owned investment fund, launched a US$1.5bn bond. The placement was equally divided into two tranches; a US$750m five-year bond and a US$750m ten-year bond, paying 180 basis points and 210 basis points over US Treasury bonds respectively.

Mubadala, which is not publicly traded, plans to invest around Dh60bn (US$16.3bn) this year, close to four times the amount spent annually since 2008. The bulk of projected expenditure is earmarked to finance Mubadala's subsidiary, the Advanced Technology Investment Company (ATIC)-the cornerstone of Abu Dhabi's emerging high-tech sector. Funds for Mubadala GE Capital, the Masdar project-a high profile renewable energy venture-several real estate developments and private-public partnerships are also included in the figure. Since its inception in 2002, Mubadala has received Dh61bn from the government. Other sources of the company's funding include cash flow generated internally by the firm and borrowings from third parties.

The issuance was preceded by roadshows in Europe, Asia, the US and the UAE to gauge investors' interest. The demand was estimated at between US$1.5bn and US$4bn, indicating confidence in the company's prospects. The prospectus for the bond contained economic projections for Abu Dhabi and references to the emirate's development blueprint-Economic Vision 2030.

According to the document, Abu Dhabi is forecast to grow at an average annual rate of 7% until 2015 and of 6% between 2015 and 2030. Economic development is intended to be backed by diversification of the economy away from hydrocarbons. A balance between oil and non-oil trade is planned to be achieved by 2028. Mubadala, being the chief vehicle for Abu Dhabi diversification strategy, will play a key role in carrying out Economic Vision 2030.

Shortly after the successful launch of the bond, Mubadala published its annual report for 2010. The company posted a Dh351m (US$96m) overall loss, resulting from investment impairments. Operational results, before impairments, showed a profit of Dh1.1bn, 77% down on 2009, the year when the company turned the corner, after recording a loss of Dh11.8bn in 2008. In spite of the loss in 2010, revenue increased by 22% across diverse sectors, and a significant part of growth materialised in non-oil ventures. Mubadala's oil and gas investments in the past accounted for around 80% of its revenue; this number declined by more than half to 38% in 2010. The company's assets rose by 14% year on year, to Dh101.5bn. Mubadala received a Dh13bn government equity injection in 2010.

The highlights of the 2010 annual report included Emirates Aluminium reaching full production capacity, the launch of Strata, the Al Ain-based aerospace materials production venture, and the first profitable year for Mubadala's healthcare business.

According to Mubadala's chief operating officer, Waleed al-Mokarrab al-Muhairi, the company has been virtually unaffected by the regional unrest even though it owns an oil concession in Libya and is part of a joint venture developing and producing energy in Bahrain. Both these investments are not key parts of the company's energy portfolio.

Mubadala's bond is the second issued by Abu Dhabi this year, following the International Petroleum Investment Corporation's US$43bn sterling- and euro- denominated bonds in March.

At the end of March the Abu Dhabi National Oil Company (ADNOC) and Occidental Petroleum of the US signed a US$10bn deal to develop jointly the Shah gasfield. According to the agreement, the two partners will hold 60% and 40% respectively in Al Hosn Gas, a company set up in 2010 to manage and operate the Shah project. Occidental replaced ConocoPhillips, another US firm, which withdrew as a strategic partner in the venture in April 2010.

High oil prices over most of the past decade have fuelled rapid economic growth in the UAE and encouraged dynamic development of the downstream hydrocarbons and manufacturing sectors. With gas demand projected to grow by 6-7% a year, from 7.5bn cu ft/day at present, the gas requirement of the country will double by 2020 according to government sources. Despite being an oil powerhouse, and sitting on the world's sixth-largest proven natural gas reserves, the UAE has been slow to develop its gas output, and in 2007 the federation became a net gas importer, mainly via a pipeline from Qatar.

Although the Shah field, discovered in 1966, plays a key role in the UAE's plans to meet rapidly rising domestic demand, its exploration has been characterised by a certain lack of momentum. Development of the Shah field has been problematic for several reasons. The site is located in the Empty Quarter, nearly 180 km south of Abu Dhabi, close to the border with Saudi Arabia, among some of the highest dunes in the world. The Shah's gas is buried thousands of metres below the desert and contains a high percentage of toxic hydrogen sulphide, which presents a challenge for treatment and handling. The presence of hydrogen sulphide poses specific technological and profitability problems, and the inaccessibility of the gas requires the building of costly infrastructure such as the world's longest pipeline for liquid sulphur and a new rail line to link the field with exporting facilities at Ruwais some 200 km away.

The withdrawal of ConocoPhillips a year ago was followed by an intense search for a new partner to take on the role. The search lasted nine months, during which time, ADNOC awarded eight out of ten contracts to develop the site and build infrastructure for exploration of gas. ADNOC maintains that the project is on track despite the change of the strategic partner and will be completed as planned in 2014.

It is projected that the Shah gasfield will produce around 1bn cu ft/day of sour gas (containing significant amounts of hydrogen sulphide), which would be processed to 500m cu ft of fuel and 10,000 tonnes of sulphur a day. With the additional sulphur output from the Shah field, the UAE is bound to become the world's biggest exporter of the mineral. The federation is well positioned to take over the markets for Canadian sulphur-Canada has for decades supplied sour gas from fields and sand deposits. The representatives of the Shah project are optimistic that, despite the persisting global sulphur glut, their product will find buyers, especially among major Asian fertiliser consumers.

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Land area

83,600 sq km; 77,700 sq km excluding islands, of which 97% is desert

Population

5.6m (at end-2008; Economist Intelligence Unit estimate)

Member states

Percentage of population in each emirate (2008; Economist Intelligence Unit estimates)

Dubai: 34 Ajman: 5

Abu Dhabi: 33 Fujairah: 3

Sharjah: 19 Umm al-Qaiwain: 1

Ras al-Khaimah: 5

Capital

Abu Dhabi city

Climate

Coastal areas: home to the bulk of the population; very hot and humid in summer (May-October) with temperatures of up to 46°C and humidity of up to 100%; mild winter (December-March) with temperatures of between 14°C and 23°C. Interior: desert climate, with cool winter and hot arid summer. Average annual rainfall is 42 mm, but Ras al-Khaimah is more temperate, with 150 mm average annual rainfall

Language

Arabic; English is widely understood and Hindi and Urdu are common among immigrants

Measures

Metric and UK (imperial); local measures are also in use

Currency

UAE dirham (Dh) = 100 fils. The dirham is pegged to the US dollar at a rate of Dh3.67:US$1

Time

4 hours ahead of GMT

Public holidays

All Islamic holidays are observed in accordance with the lunar calendar, and so the following dates are approximate: Mawlid al-Nabi (the birthday of the Prophet, February 15th 2011); Eid al-Fitr (end of Ramadan, August 30th 2011); Eid al-Adha (Feast of the Sacrifice, November 6th 2011); Al Hijra (Islamic New Year, November 26th 2011)

Fixed secular holidays include January 1st (New Year's Day); August 6th (Accession of Sheikh Zayed, the late ruler of Abu Dhabi-Abu Dhabi only); December 2nd (UAE National Day)

Official name

United Arab Emirates

Form of state

Federation of seven emirates: Abu Dhabi, Dubai, Sharjah, Ajman, Ras al-Khaimah, Umm al-Qaiwain and Fujairah

Legal system

Based on the 1971 constitution

National legislature

Unicameral Federal National Council of 20 appointed and 20 elected members representing the separate emirates; it has a consultative role only

Head of state

The Supreme Council, comprising the seven emirs, elects the president from among its members. On the death of his father in November 2004, Sheikh Khalifa bin Zayed al-Nahyan became ruler of Abu Dhabi and was elected president of the UAE

National government

The Council of Ministers (cabinet), led by the prime minister, is appointed by the Supreme Council of Rulers. Each state is represented by at least one minister, with senior posts allocated to the larger emirates. The Council of Ministers initiates legislation for ratification by the Supreme Council of Rulers, which is also a policymaking body and meets formally about once a year. The latest cabinet reshuffle was in February 2008

Main political parties

Political parties are not permitted

The government

President: Khalifa bin Zayed al-Nahyan

Prime minister & vice-president: Mohammed bin Rashid al-Maktoum

Deputy prime minister & interior minister: Saif bin Zayed al-Nahyan

Deputy prime minister & presidential affairs minister: Mansour bin Zayed al-Nahyan

Ministers of state

Federal National Council affairs: Mohammed Anwar Gargash

Financial affairs: Obaid Humaid al-Tayer

Foreign affairs: Mohammed Anwar Gargash

Key ministers

Cabinet affairs: Mohammed al-Gergawi

Culture, youth & community development: Abdelrahman Mohammed al-Owais

Defence: Mohammed bin Rashid al-Maktoum

Economy: Sultan bin Said al-Mansouri

Education: Humaid Mohammed Obeid al-Qattami

Energy: Mohammed bin Dhaen al-Hamli

Environment & water: Rashid Ahmed bin Fahad

Finance: Hamdan bin Rashid al-Maktoum

Foreign affairs: Abdullah bin Zayed al-Nahyan

Foreign trade: Lubna al-Qasimi

Health: Hanif Hassan Ali

Higher education & scientific research: Nahyan bin Mubarak al-Nahyan

Justice: Hadef bin Juaan al-Dhaheri

Labour: Saqr Ghobash Said Ghobash

Public works & housing: Hamdan bin Mubarak al-Nahyan

Social affairs: Mariam Mohammed Khalfan al-Roumi

Central Bank governor

Sultan bin Nasser al-Suwaidi