A few years ago, things were looking straightforward for Ras al-Khaimah. An economy that had been founded on quarrying and supplying construction materials to the rest of the region was quickly diversifying and healthy growth levels were anticipated.

A new airline, Rak Airways, was set up in 2006. A year later, property developer Rakeen Development was established with plans to create Al-Marjan Islands, a cluster of four artificial islands off the emirate’s coast. A series of new university campuses were being built and free zones created to attract international investors.

It was reminiscent of the development model being pursued in another emirate to the southwest – Dubai – albeit on a far smaller scale.

Changed market in the UAE

Yet the economic landscape has become more complicated in the past three years, and too often Ras al-Khaimah’s successes have been quickly followed by problems. Rak Airways was forced to ground its small fleet of aircraft in late 2008 due to financial difficulties. The flagship of the education programme – a campus of the US’ George Mason University – was shut in May 2009, with the US partner citing difficulties over budget and control. Even the prize of hosting the 2010 America’s Cup sailing competition was taken away from the emirate in late 2009 by a US court, after one of the teams objected to the location.

We’d been a bit concerned about the growth in debt, but they’re bringing that down now

Charles Seville, Fitch Ratings

Perhaps the biggest problem of all, however, has been the recession in Dubai, which effectively shut off one of the key markets for Ras al-Khaimah’s construction materials industry. Companies such as Stevin Rock, Rak Rock, Union Cement Company and Guardian Zoujaj International Float Glass Company formed the basis of the emirate’s economy for many years, making use of the plentiful limestone and other raw materials stored in the Hajar mountains. Although they are no longer the emirate’s main source of jobs and profits, these companies still play a critical role in the economy.

“Ras al-Khaimah has resources, they’re just not as glamorous and expensive as others’ oil and gas,” says Kai Stukenbrock, senior analyst at Standard & Poor’s (S&P), a credit ratings agency. “It has a strong reliance on the construction products sector, deriving from its resource endowment.”

With all these problems coming in quick succession, the question now for the emirate and its new ruler, Sheikh Saud bin Saqr al-Qasimi, is how quickly it can adapt to what is a far more complex economic environment. Sheikh Saud took over following the death of his father Sheikh Saqr bin Mohamed al-Qasimi on 27 October 2010. He had been de facto ruler for some time before and is well versed in the issues that the emirate faces.

The evidence to date suggests Ras al-Khaimah is acclimatising well to the more challenging conditions. The emirate’s economy has continued to expand, with gross domestic product (GDP) growth averaging almost 6 per cent since 2004, according to S&P.

With a local population of just 240,000, the economy depends on exports and innovation for growth and it is susceptible to shocks. But it has also proved adaptable. “You’re already seeing a revamp of the strategy to come to terms with the new reality,” says Stukenbrock.

Profits rebound in Ras al-Khaimah

Revenues among some key local companies have fallen sharply, but most have managed to stay profitable by shifting their focus to other Gulf markets, which have not suffered as much, such as Abu Dhabi, Qatar or Bahrain.

Sales at the government-controlled Rak Cement Company fell in the first half of 2010, for example. This pushed the company into a loss of AED4.2m ($1.1m) in the second quarter of 2010, but it managed to book a small profit of AED1.1m in the third quarter. The firm blamed the weakened performance on falling demand for cement, together with the lower prices.

Local rival Gulf Cement also made a loss in the second quarter of 2010 before bouncing back in the subsequent period. Likewise, Rak White Cement Company saw profits fall heavily in the second quarter, before climbing again.

Among companies in other sectors, Rak Airways resumed flights in October 2010, with a focus on cities in India and Bangladesh most useful to the emirate’s expatriate labour force. Drug manufacturer Gulf Pharmaceutical Industries (Julphar), which was the first of its kind in the region when it was set up in 1980, has also been growing steadily over the past few years.

The emirate has been helped by a number of internal and external factors as it has grappled with the tougher economic conditions, not least the relatively broad-based economy it has managed to create. Although the construction supplies industry was by far the most important element of the economy in the past, today it accounts for a only small share of GDP.  Agriculture forms a larger part of the economy than in most emirates, contributing 7 per cent of GDP in 2008. The biggest sector by far is the services sector, which accounts for 43 per cent of GDP. Finance is also increasingly important. Even as the construction firms have been struggling, National Bank of Ras al-Khaimah (Rakbank) has continued to grow strongly. Its AED730m profit for the first three quarters of 2010 were more than twice the combined total for the three cement companies and Rak Ceramics for the same period.

“The whole emirate is run in a very business-like way,” says Charles Seville, a director in the sovereign group at Fitch Ratings, who recently returned from a fact finding visit to the emirate. “It’s a bit like a conglomerate. One part might be doing badly, but another part will pick up the slack. The original basis of the economy was quarrying, but that’s now quite a small contributor to the budget.”

Cutting debt in Ras al-Khaimah

Ras al-Khaimah has also been helped by the relatively cautious and prudent nature of the development plans it has followed. This has meant that it has been far more successful than Dubai at keeping its debt levels in check. Although public debt levels had risen as high as 32 per cent by the end of 2009, they have now fallen back to 28 per cent, according to Fitch Ratings. “We’d been a bit concerned about the growth in debt, but they’re bringing that down now,” says Seville.

Such factors have helped the emirate to gain a credit rating of A from both S&P and Fitch Ratings, putting it on a par with the likes of Oman and Bahrain.

The government has also been more cautious than Dubai in its involvement with real-estate projects. It may have decided to develop artificial islands, such as Al-Marjan Island, but it sold the land to developers rather than getting directly involved in taking on the risk of development, as Dubai did with government-linked groups such as Limitless and Nakheel.

And while Dubai may be struggling, the continued vibrancy of its international airport means that Ras al-Khaimah is relatively, if indirectly, well connected to the wider world.

Ras al-Khaimah also leans heavily on the federal government in Abu Dhabi to cover the costs of education, healthcare and other social services, as well as for infrastructure such as power, water, roads and rail. This frees up the emirate to do what it wants with the money it has, secure in the knowledge that basic amenities will be provided for.

Even so, the emirate has some catching up to do with its neighbours. GDP per capita remains at about half the UAE average, at AED75,368 in 2009. As a result, further efforts to diversify the economy and bring in more tourists and business investment will continue.

The tourism market continues to suffer from limited capacity, with few hotels and an airport which offers only a small number of flight connections. However, there is speculation that a third Hilton hotel could soon be opened and Rak Airways is planning to expand its route network. Oman Air began regular flights to the emirate in 2010, which could help to prove the viability of the destination to other airlines.

The emirate is also said to be trying to attract Japanese companies to its free trade zones, where firms such as Indian truck manufacturer Ashok Leyland and Kuwaiti logistics firm KGL already have operations.

The key figure in all these efforts is Sheikh Saud, who has been a reforming figure in the emirate since he became crown prince in June 2003, replacing his older half brother Sheikh Khalid bin Saqr al-Qasimi. As crown prince, Sheikh Saud played a key role in setting up the airline, as well as the Ras al-Khaimah Investment Authority (Rakia) and other bodies, which lie at the heart of the emirate’s ambitions to evolve. “Apart from developing education, we must invest in research that will propel us to a new era,” he told an advanced materials industry conference in Ras al-Khaimah in February 2010.

Political stability in Ras al-Khaimah

Investors will have been reassured by the political stability that was evident last year when Sheikh Saud took over. Although he had been de facto ruler for some time before then, there had been lingering fears that Sheikh Khalid, who disputed Sheikh Saud’s right to be crown prince, could cause problems.

In the end the handover of power went smoothly, not least because of the speed with which the other emirates recognised Sheikh Saud as the legitimate successor, which made it all but impossible for any effective opposition to get under way.

With the issue of succession resolved, the focus for the emirate must now be on developing a long-term vision for the economy, with a wider spread of industries and employers to shield it against other economic shocks in the future. It is clear Ras al-Khaimah is likely to approach that task cautiously.