Federal model boosts northern UAE growth

02 June 2014

The UAE’s five northern emirates are attempting to diversify their economies to encourage economic growth, but will still benefit from federal spending programmes

The contribution of the UAE’s northern emirates to the Gulf state’s economy is often overlooked when compared with Dubai’s headline-grabbing development boom and Abu Dhabi’s vast oil wealth, but all five northern emirates have played some important roles in the country’s development.

Sharjah, Ajman, Ras-al-Khaimah (RAK), Fujairah and Umm al-Quwain together comprise just 8 per cent of the UAE’s geographical area, about 10 per cent of GDP and generally lag behind the larger emirates in terms of economic development.

Sharjah, the largest of the five northern emirates, has benefited from the economic rise of neighbouring Dubai. The two cities, along with Ajman, form the UAE’s largest conurbation, with residents travelling between the three emirates for work.

Containing about 10 per cent of the country’s population and accounting for about 5 per cent of national GDP in 2013, Sharjah has a diverse economy combining services with small-scale industry, manufacturing and port facilities.

Sharjah GDP growth

While Sharjah holds an estimated 1.5 billion barrels of oil reserves – tiny compared with Abu Dhabi – the emirate’s government pushed through a programme to diversify the emirate’s economy from the 1980s.

Sharjah’s biggest four sectors by percentage of GDP; are real estate and business services (20 per cent); manufacturing (16 per cent); mining, quarrying and energy (13 per cent); and wholesale and retail trade (12 per cent).

US ratings agency Standard & Poor’s (S&P)estimates Sharjah’s GDP per capita at $25,000. This compares with a national level of about $50,000, which is driven by the weight of Abu Dhabi’s hydrocarbon sector. S&P expects Sharjah’s GDP per capita to expand by about 5 per cent this year, in line with neighbouring emirates, and forecasts per capita GDP growth at an average of 4 per cent for the 2008-17 period.

The disparity in wealth between the UAE’s two largest emirates and the poorer northern emirates has widened in tandem with the rapid development of Abu Dhabi and Dubai.

The federal government has allotted special funding to the northern emirates, wary of the kind of civil disorder that spread through the wider Arab world in 2011.

Unrest is seen as more likely to develop in the northern emirates, which have received fewer benefits from revenues generated by UAE oil exports and have sporadically been hit by power and water shortages in recent years. Small protests in RAK in 2011 were quickly stamped out by the federal government.

In March 2011 the federal government announced it would invest $1.6bn in improving infrastructure in the northern emirates. After a tour of the country, UAE President Sheikh Khalifa bin Zayed al-Nahyan made the decision to improve water and electricity networks in the north.

S&P in May 2014 affirmed its A/A-1 rating on Sharjah on robust economic growth, with a stable outlook, saying external risks were low due to the potential of extraordinary financial support from the UAE government.

“As for other GCC sovereigns, the ratings on Sharjah are constrained by its underdeveloped political institutions and highly centralised policymaking, which we think can undermine policy predictability,” S&P said in its report.

Sharjah’s policymaking depends heavily on its ruler Sheikh Sultan bin Mohammed al-Qasimi, who has been in power for 42 years.

“Sheikh Sultan has been instrumental in implementing the emirate’s long-term economic and social development objectives. We do not expect any significant changes in the government’s policy stance,” S&P added.

In late 2012, the Sharjah Investment and Development Authority (Shurooq) announced it had chosen four sectors to drive economic growth: travel and tourism; transport and logistics; healthcare; and the environment.

Ras al-Khaimah outlook

Prospects are seen as less strong for RAK, the federation’s fourth-largest emirate, bordering the Omani enclave of Musandam on the Strait of Hormuz.

In early May, S&P revised its outlook for RAK to negative from stable, saying that “the depth of key personnel is limited, and supporting organisational structures in some of Ras al-Khaimah’s institutions are weak, which results in a lack of continuity and predictability”.

GDP per capita is estimated to be at between $17,500 and $24,500 depending on the population of the emirate which, due to the lack of reliable official data, has been estimated at both 413,000 and 279,000 in 2010.

Despite a perceived weakness in some of RAK’s institutions, the emirate is seen to have little fiscal risk. This is because most of the emirate’s public spending is handled at federal level. Like Sharjah and the other northern emirates, RAK will continue to benefit from indirect financial support from central government in Abu Dhabi.

Historically, RAK has used its limestone and clay deposits to develop an industrial footprint in cement, ceramics and building materials. There are at least six cement plants in the emirate with a combined capacity of more than 12 million tonnes a year, representing about a third of the UAE’s total capacity.

RAK’s cement producers were hit hard in the aftermath of the 2009 crisis, which saw major projects cancelled and put on hold throughout the UAE.

However, the outlook for construction in the UAE and the wider region has strengthened in recent years. Robust cement demand will be created by projects associated with football’s World Cup tournament being hosted in Qatar in 2022 and Dubai’s winning the right to host the World Expo in 2020.

Projects investment

Between January 2010 and May 2014, almost $20.5bn was spent on engineering, procurement and construction (EPC) contracts in the five northern emirates, representing about 11 per cent of total spending in the UAE.

According to regional projects tracker MEED Projects, $10.2bn was spent in the general construction sector. Other sectors receiving major investment were transport with $4.3bn, power with $3.1bn and water with $1.7bn.

Ajman was the leading northern emirate in terms of total contract value, with awards totalling $6.7bn in the four-year period. This is largely down to the construction of the $3.3bn Ajman International airport, however. This project has been delayed several times since 2010.

The airport is designed to serve at least 1 million passengers a year and handle 400,000 tonnes of cargo.

Ajman was followed by Sharjah, with $6.3bn of contracts awarded, dominated by the construction sector.

Fujairah, which awarded about $6bn in the same period, had the most diverse spend, with contracts split between the power, water, construction and oil industries.

Fujairah is likely to overtake the other northern emirates by the end of 2014, as it prepares to award the main contracts on the new $3.5bn refinery being developed by Abu Dhabi group International Petroleum Investment Company.

Its geographical position, outside the Strait of Hormuz bottleneck to the Gulf, has propelled Fujairah’s development into an international bunkering and oil storage hub.

Federal benefit

At this stage, the northern emirates are unlikely to see the same level of development as their larger neighbours, but will continue to grow at a steady pace with the national economy.

The more urbanised emirates, such a Sharjah and Ajman, will continue to diversify their economies by investing in industries such as hospitality, logistics and tourism. Meanwhile, Fujairah’s strategic position as an oil hub should see it expand quickly relative to its small population.

The northern emirates will continue to benefit from the union with Abu Dhabi and Dubai; reaping the benefits of federal spending and the potential of extraordinary financial assistance from the central government, should it be required.

Northern emirates push ahead with Energy schemes

The vast majority of oil reserves in the UAE are located in the largest and richest emirate Abu Dhabi, while Dubai has been winding down production from a significant output in the mid-1990s. The northern emirates, however, still have scope for some new strategic oil and gas projects.

Sharjah is currently in a similar position to Dubai, with oil and gas production from its main offshore Mubarak field and the onshore Sajaa field having plummeted over the past 15 years.  The local Crescent Petroleum started production from Mubarak in 1974. The field has processing capacity of 60,000 barrels a day and 150 million cubic feet a day of gas, but output is well below this level.

In 2008, Crescent moved onshore by signing a major exploration agreement with the government for 12 blocks. Russia’s Rosneft farmed into the acreage in 2010, although to date there has been no news of any commercial discoveries.

Dana Gas, also based in Sharjah, is developing the offshore Zora gas field – a joint project with the emirates of Sharjah and Ajman. The company will drill horizontal wells and install an offshore platform to process the gas through a new 33-kilometre pipeline.

MEED revealed in April that Dana Gas had signed letters of intent with US-based Exterran and Abu Dhabi’s National Petroleum Construction Company to build an onshore gas processing facility and pipelines for the project.

In November 2013, Dana Gas awarded a $17m contract to Adyard Abu Dhabi to build an offshore platform at the Zora field. Dana Gas has earmarked an investment of $160m in the project, which is expected to start up in 2015.

The UAE’s other emirates – Ajman, Fujairah, Ras al-Khaimah and Umm al-Quwain – have no upstream oil production. This has not stopped Ras al-Khaimah from setting up Rak Petroleum in 2005 to undertake exploration at home and abroad. Meanwhile, Fujairah’s role as a major oil storage hub is set to be expanded with several new tank farms in the pipeline.

The largest schemes under development in the northern emirate are a new refinery and an onshore liquefied natural gas terminal, both backed by Abu Dhabi’s International Petroleum Investment company, with the latter a joint venture with Mubadala Development Company.

Both projects are on uncertain timelines. The main engineering, procurement and construction packages for the refinery were tendered in the third quarter of 2013, but sources tell MEED that no deadline is currently in place for bids.

The 200,000 barrel-a-day facility is designed to meet rising demand for fuels in the UAE and enable the export of oil products from Fujairah’s port.

Meanwhile, contractors are waiting for the retender of the LNG regasification and storage terminal projects. The Emirates LNG joint venture was initially planning to construct a floating facility for the first phase of the project, but this has now been scrapped in favour of a fully land-based terminal, causing delays to the start of the construction phase.

Key fact

The northern emirates comprise 8 per cent of the UAE’s geographical area and 10 per cent of GDP

Source: MEED

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