Dubai - A Regional Treasury Centre
Dubai offers international investors access to the region’s growing wealth and liquidity, and is a prominent centre for Shariah-compliant (Islamic law) products, with more than 20% of the US$20bn of Islamic bonds listed globally. Dubai’s tax-free status, liberal trade policies, modern infrastructure, geographic location, transparent regulatory system, ample liquidity, multicultural environment and proximity to North Africa, Levant and the Gulf (an area with a combined gross domestic product of more than US$876bn and total population of more than 240 million) has attracted several global players to establish their treasury centres in the city. Today Dubai offers a challenge to international financial centres such as London, New York, Frankfurt and Brussels while competing actively with Singapore and Hong Kong. With international trade between the region and the rest of the world growing at more that 10% a year it makes sense for global treasurers to assess the viability of Dubai as a location for establishing their regional operations.
Amid major social, technological and trade changes, the global economy is becoming increasingly integrated. The countries of the Middle East, on the back of high, sustainable oil revenues, are similarly undergoing rapid economic development and social transformation, creating opportunities comparable to those in the developing economies of China and India.
Country ratings for the region’s key markets, particularly the Gulf, have been upgraded. Bahrain and Oman, for example, are rated A3; Kuwait, Qatar and the United Arab Emirates (UAE) are rated Aa3; and Saudi Arabia is rated A2. Governments in the region are introducing reforms aimed at boosting the role of the private sector in economic development and promoting greater participation by their people in local, state and federal administrations.
The global economy’s heavy reliance on oil from the region will further drive its economic integration with fast-growing markets in Asia and Africa. The UAE follows a prudent and balanced foreign policy that supports co-existence and mutual respect as its cornerstones, and an investment policy that is founded on economic viability rather than politics. Such a policy is paramount for a small country with 1.3 million nationals and 3.6 million expatriates to ensure security and international deterrence.
The UAE is a federation of seven emirates established in 1971. The Supreme Council of the Federation is the highest political authority. The Federal National Council, comprising representatives of each of the emirates, discusses laws to be enacted by the Supreme Council. The President and Vice President are elected by the Supreme Council, and the President appoints the Prime Minister with its consent. The Prime Minister nominates the ministers of the federal government. The UAE is a member of the Gulf Cooperation Council (GCC) and there is close coordination among the emirates in formulating economic, monetary and trade policies.
Economic policy is founded on strategies aimed at strengthening the resources available for development and offering opportunities for investors. Investing earnings from natural resources in capital expenditure (infrastructure development) and overseas helps diversify the economy. According to the United Nations Conference on Trade and Development’s World Investment Report 2006, the UAE has received US$12bn in foreign-direct investment in 2005 with outflows of more than US$15bn.
Among the key considerations in establishing a treasury centre are market size, access to a skilled workforce, the regulatory environment, geographic location and infrastructure.
The per capita GDP of the UAE is US$22,000 and its annual economic growth rate is 8%. This, added to oil prices holding at high levels (US$60 a barrel) and a favourable investment climate, ensures that the emirates provide a major pool of liquidity for an international financial centre. The forward-looking approach of the government and rulers and the diversification of the economy, with little reliance on external debt, combine to offer entrepreneurs greater opportunities than possibly anywhere else in the world. National and regional investors have repatriated assets from international markets, creating enormous liquidity and a hunger for quality investments – opportunities that are available to international companies.
Dubai boasts a well-developed financial system, providing an ideal environment in which to test some of the most modern products and financial structures in the world. The emirate is known for pioneering and creating markets for derivatives (including commodities), structured finance, capital-market products and a growing range of Islamic finance offerings. The range of products may not be as wide as those on offer in London and New York, but Dubai – whose fundamental economic transformation began only five years ago – offers more than established centres in Asia such as Singapore and Hong Kong.
The Dubai International Financial Centre (DIFC), the Dubai International Financial Exchange (DIFX), the Dubai Gold and Commodities Exchange (DGCX) and the Dubai Mercantile Exchange (DME) are modelled on similar international institutions. In Dubai, these institutions offer international investors and wealth managers access to the growing wealth and liquidity of local markets.
The Islamic banking sector now accounts for about 20% of the world banking market. Dubai is a prominent centre for Shariah-compliant (Islamic law) products, with US$4.11bn worth of sukuks (Islamic bonds) listed with the DIFX – more than 20% of the US$20bn listed globally. (The total value of sukuks issued globally is about US$43bn.) Dubai’s Islamic-banking institutions are known for their innovation and vast liquidity.
Companies are free to recruit and employ people of any nationality. As well, there is a growing pool of highly educated local graduates entering the workforce. Numerous international universities and research institutions have been attracted to the emirate to help develop its knowledge infrastructure, which accounts for 25% of the national education budget.
The commercial companies law and the financial services regulatory environment are modelled on English law and its Financial Services Act guidelines. Although state courts enforce Shariah, parties to contracts can choose their preferred jurisdiction. English is widely used in contracts, and courts are bilingual. The government’s pro-business policy typically favours investors, and there have been no adverse reports about verdicts in UAE courts. Most of the world’s largest legal firms have practices in the emirates.
There is continual discussion between business and policy-makers, enabling swift remedial action where necessary and early settlement of grievances. As well as the UAE’s existing corporate-governance guidelines and monitoring authorities, standards are being further improved in line with recommendations by the Institute of International Finance (IIF), including: corporate governance reforms of state enterprises; the establishment of a corporate governance task force for the GCC to assist regional integration and make mandatory the provision of financial information. Currently local corporations are not obliged to provide or publish financial information of their businesses. (This is a recommendation from IIF that may or may not be implemented.)
The UAE central bank, which regulates financial services, has one of the world’s best anti-money laundering policies and monitoring systems, which have been adopted as a model by other countries. The UAE is a member of the Financial Action Task Force (an inter-governmental body established by the G7 in 1989 to help combat money laundering and terrorism) and has strong relations with regulators in other countries. The DIFC, a zero-tax free zone, is regulated by the Dubai Financial Services Authority, based on UK law.
Dubai’s Commercial Companies Law requires companies operating within the emirate to have a local partner with a 51% shareholding, although a proposal to ease this restriction is being considered. Companies operating within free zones can be 100% foreign owned. A variety of different companies can be set up, including representative offices, with all licences to operate being issued by the Department of Economic Development.
There are no foreign exchange restrictions, with capital and profits being freely transferable, and exchange rates are in line with international market quotes. The local currency, the dirham (AED), comprises 100 fils and is pegged to the US$ (US$1 = AED3.673). The member countries of the Gulf Cooperation Council plan to integrate their economies further by adopting a common currency pegged to the US$ by 2010.
The UAE has no company, personal, value added or withholding taxes. However, oil and gas exploration companies and financial institutions, including insurance companies, are liable for company tax based on income. Companies operating in free trade zones are also excluded from customs duties and requirements for their workforces to include a certain percentage of locals.
Located between the East and the West, Dubai is ideal for accessing the world’s emerging markets. Its time zone is particularly convenient for serving markets in Africa, Asia, Europe and the Americas. Its historical links with emerging markets in Asia and Africa and well established role in their trade routes make it conductive to growing business activities.
Dubai has raised its global profile by building world-class infrastructure and strategically marketing itself, as a result of which a large number of Fortune 500 companies have established regional hubs in the emirate. Specialist free trade zones have been established for a variety of economic and social welfare activities, including the Dubai Gold and Diamond Park, the Dubai Aid City, Techno Park, Logistics City, Media City, Studio City, Academic City, Knowledge Village, Healthcare City, the Dubai International Financial Centre and the Dubai Multi Commodity Exchange.
Dubai is continuing to grow at a remarkable rate, quickly becoming an increasingly significant global financial centre. With its innovations, value-added services and cost effectiveness, it already plays a key role as a regional centre for trade, technology and financial services. With major reforms of its regulatory environment and enhancing corporate governance to world class standards, Dubai continues to attract international investors and entrepreneurs. Further easing of restrictions on foreign ownership of onshore operating entities and privatisation of some family-owned businesses will boost investor confidence and invigorate the capital markets. Dubai is on the way to becoming a financial centre of excellence.