3. 3
ContentFINANCIAL OUTLOOK
CONTENT
EDITOR’S DESK
VAT IN THE UAE:
What DO
businesses
need to do?
BANKING FEATURE:
UAE SHIFTS FROM
BORROWERS TO A
LENDERS MARKET
WILL PRICES OF
PRODUCTS AND
SERVICES GO UP IN
THE UAE?
your questions,
answered
How Does
VAT Work?
UAE FINANCE NEWS
4
GCC ECONOMIC
UPDATES
13
5
7
8
19
12
10
4. 4
EDITOR’S DESK FINANCIAL OUTLOOK
Dear Readers,
W
e are happy to inform you that we have given our newsletter a complete makeover. It
has a new name, looks great, and the content is amazing. It has happened only because
of your continuous support and guidance. Our newsletter from the Emirates Chartered
Accountants Group (12th edition onwards) will henceforth be known as Financial Outlook. We
expect your continuous association with us for all our future issues as well.
On June 23rd, 2016, the people in the UK voted to exit from the European Union. In the aftermath
of Brexit, uncertainty is the only certainty. The global market immediately lost $2.1 trillion in
value. Still, most of the economists concluded that this phenomenon would not lead to a major
economic downturn.
If we look into the GCC perceptive, the top three concerns are the value of the British Pound,
its effect on the investments made in the UK and trade relations between the GCC and the UK.
British currency fell down to a 30 years record low against USD, the peg for GCC currencies.
GCC-based investors made a lot of investments in the UK, especially in its property market. The
decrease in currency value will lead to a substantial decline in value of investments and return
from such investments. But if we look into the trade between UK and GCC, imports to GCC is more
than double of the exports. In this context, the weaker British Pound will help the importers to
improve their business by introducing high quality of products with better price. Since UK has
lost its free trade access with EU, it will be focusing to build trade ties with wealthier and more
safe countries in the Middle East i.e. GCC. So, if we look into the overall impact of Brexit on GCC, it
seems that the positive impact is higher than the negative facts.
For the cover story of this newsletter, we will be talking about the upcoming VAT in the UAE, its
likely effects on the UAE economy and counteractive measures for the business community. My
partner Pradeep Sai has written an article on changes seen recently in the money lending market
in the UAE under the article “UAE shifts from borrowers market to lenders market”. Partner
Ragesh Mattummal has answered queries related to the company incorporation in the UAE. In
addition to this, there are summarized GCC economic updates as well as latest news updates in
the UAE.
I am sure the new version of our newsletter “Financial Outlook” which covers more analysis on the
latest trends on the business world will definitely help you in your day-to-day business activities.
We expect your continued support. I wish everyone to have a good read ahead.
E D I T O R ’ S D E S K
CA. Manu Nair, FCA, CMA
CEO, Emirates Chartered
Accountants Group
5. 5
VAT in the UAE
What do businesses need to do?
V
alue Added Tax (VAT) is a tax on consumption
and it applies to almost all goods and services.
Most managements are aware that the GCC
governments have decided to adopt VAT as an effort
to diversify the economy and generate revenue. UAE
will also adopt VAT which applies to almost all goods
and services except basic food items, healthcare and
education. So, it will not only impact consumers but
also businesses across the region.
VAT is a widely discussed topic among business
owners that raises an important query – how should
they be prepared for VAT before it hits them? Their
concern is the impact of increase in cost of doing
business in the region. It might require more time for
business owners to get accustomed with the new
system and make a shift from the existing operating
structure. They may have to screen their existing
suppliers and invest more in manpower to ensure
that the right talent is available in the organization.
Though the burden normally lies on the ultimate
consumer, the business entities need to change
the systems, processes and procedures to comply
with the new legal requirement expected to be
implemented by the government effective from 1st
Jan 2018.
COVER STORYFINANCIAL OUTLOOK
6. In the UAE, the SME
business sector does’nt
have a stringent financial system
and operating policies. SMEs
are going to face challenges
implementing the new tax laws
as compared to the larger
organizations which are
operated with proper operating
policies and structures.
Normal requirements under VAT system that
companies need to comply with:
• At the time of purchase of goods or availing of
services – ensure that in case of taxable items, the
tax has been properly charged (input tax) by the
supplier and details given in the invoices.
• At the time of sale or provision of services – apply
the rate on the sale value and reduce the amount of
input tax to arrive at the amount to be paid.
• Pay the tax due to the Govt. within the stipulated
time.
• File VAT returns with the Govt. authorities by
providing relevant information requested within the
stipulated period.
• Maintain proper stock, invoices, accounts, VAT
returns and other relevant records to justify the tax
paid at the time of purchase.
The above requirements demand more control and
safety on stock, invoices and records, ensure proper
filing system, modification/ upgradation of software,
compliance of due dates for collection, payment and
remittance of tax, filing of VAT returns to Govt. etc.
In the UAE, the SME business sector does not have
a stringent financial system and operating policies.
As a result, SMEs are going to face challenges
implementing the new tax laws as compared to the
larger organizations which are normally operated
with proper operating policies and structures. It
will be a massive effort for the SMEs to cope with
the requirements of the provisions of the new law.
Every businessman need to maintain proper books
6
FINANCIAL OUTLOOK
Every business will needto
maintain proper books of
accounts and will need to
incorporate VAT into their
accounting systems. They will
need to keep accurate records
to demonstrate that they have
correctly applied the VAT rules.
of accounts and incorporate VAT into their accounting
systems. They need to keep accurate records to
demonstrate that they have applied the VAT rules
correctly. The role of the accountant will be very
important for the compliance of VAT. Maintenance of
accounts and records is very important as per new the
commercial company law.
Information System will have to take an important
role in this. Accounting software needs to comply for
ease of business flow and maintain a stringent legal
compliance.
Every organization should properly educate their
employees, well in advance before VAT is imple-
mented.
Remember that VAT is going to be considered all
across the region but at different dates. That’s why
companies operating in other GCC countries should
keep track of VAT and understand the tasks that
need to undertake for a smooth transition. They must
examine the impact of the special rules on intra-GCC
supplies and ascertain whether the current business
models need to be restructured according to the
provisions of the VAT rules.
VAT can add an extra cost to the business. There
can be instances where the VAT paid to suppliers
is not refunded from the supply chain downstream.
Furthermore, non-compliance with tax laws may
also attract severe penalties. All businesses must
undertake a review of their current contracts to
determine if VAT has been appropriately addressed or
not.
An implementation of VAT law would require a
complete revamp of present practices and will insist
on a higher degree of financial transparency and
accounting discipline.
COVER STORY
7. 7
COVER STORYFINANCIAL OUTLOOK
WILL PRICES OF PRODUCTS
AND SERVICES GO UP IN the UAE?
T
he first question that comes up whenever the
introduction of VAT is discussed among the UAE
residents is whether their cost of living will go
up.
According to a recent survey conducted by CFA
Society Emirates, the association for financial
and investment professionals in the UAE, the
introduction of VAT in the UAE by 2018 is likely
to lead to higher inflation rates. The hike in price
depends upon the sector of the product and service
which is taken into account. The burden of VAT or
any other form of taxation needs to be borne either
by the business or consumers or both. The market
will decide whether the consumer will bear the
cost or the trader/manufacturer. In sellers’ market,
traders will automatically impose the tax burden on
the end consumers as a result of which, the cost of
living of the individuals will go up. But, in the case of
buyers’ market, the cost of VAT will have to be borne
by the trader/manufacturer and cannot be passed on
to the consumers.
WILL VAT BE A COST TO THE
BUSINESS?
If you are engaged in the supply of goods or services
that are subjected to VAT (including at the zero rate)
you will be entitled to reclaim VAT you incur on costs.
If you are engaged in activities that are exempt from
VAT and you cannot reclaim VAT incurred on costs,
VAT will be a cost to your business (as suppliers will
charge VAT that you cannot reclaim).
Will it affect prices/margins?
VAT is a tax on consumption and is levied on the
price charged to the customer. Therefore, it is
expected that prices will increase by the amount
of VAT. However, it is ultimately the suppliers who
determine the price of their goods/services. The
price needs to take account of VAT, i.e. whether you
charge 100 or 105, the amount will be deemed to
include VAT. For example, if a supplier charges 105
now and 105 after the introduction of VAT (at say
8. 8
COVER STORY FINANCIAL OUTLOOK
How Does
VAT Work?
VAT is levied at each stage in the chain of
production and distribution and is collected by
businesses on behalf of the VAT authorities. VAT is
ultimately paid by the end consumer.
5%), then the supplier will only retain 100 after
the introduction as 5 would be due as VAT to the
tax authority. If the supplier wants to retain 105,
then the price needs to be increased by the amount
of VAT (say 5%) to 110.25. If the supplier does not
increase the selling price when VAT is introduced,
then this will affect margins as VAT will be due on
the amount received.
Conclusion:
VAT will increase prices for the end consumer at least
by the amount that the VAT rate is specified by the
Government. It may increase further if the suppliers
decide to include the cost of administration and
compliance into the end price. The longer the supply
chain of any product or service, the more the price
will go up.
9. 9
FINANCIAL OUTLOOK
• CASE ONE
Transaction Total Invoice Value VAT
…………….. …………………… …………..
Sales 10,000/ 500 (5%)
Purchases 7,000/ 350 (5%)
--------
Net VAT payable to the VAT authority 150
• CASE TWO
Transaction Total Invoice Value VAT
…………….. …………………… …………..
Sales (4%) 7,500/ 300 (4%)
Purchases 7,000/ 350 (5%)
--------
Net VAT refundable from the VAT authority 50
STRUCTURE OF VAT
PURCHASE
200 210 10 10
210 300 315 10 15 5
315 400 420 15 20 5
420 500 525 20 25 5
45 70 25
FACTORY
WHOLE SALER
RETAILER
CONSUMER
Assumption Both raw materials and finished goods have same percentage of VAT i.e.@ 5%.
TAXABLE SALES
INVOICE
EXCLUDING
VAT
INCLUDING
VAT
TAX ON
PURCHASE
TAX ON
SALES
TAX TO BE
PAID TO
AUTHORITY
From a commercial point of view, busi-
nessmen will get maximum benefits if they
maintain proper books of accounts with
supporting documents and submit the
relevant information to the tax authority as
per the provisions of law. Else, once the set
off/refund options of VAT are not utilized
properly; the cost of doing business will
go up and will invite a penalty for violating
provisions of the law which will be in place.
It is important to maintain VAT control
accounts in the accounting software. There
could be instances where the amount paid
to the suppliers on account of VAT cannot
be claimed for refund from the further
supply chain because they were not properly
monitored, recorded, and filed.
COVER STORY
10. 10
BANKING FEATURE FINANCIAL OUTLOOK
UAE SHIFTS FROM BORROWERS TO
A LENDERS MARKET
I
f we look into the UAE banking sectors in the
year 2016, it is quite clear that compared to
previous years, banks are now prefering asset
based fundings. They have become more prudent in
lending as deposits have shrunk which is primarily
because of a prolonged period of lower oil prices
and increasing bad debts. The main focus of banks
are now controlling operating costs and maintaining
asset levels and quality rather than targeting growth
in their business portfolios.
Analysis reveals that a drop in deposits is also
promoting a more conservative lending policy and
hence the profit margin for the banks will be harder
to sustain. As a result of this policy, the market
in general and the SME sector in particular will be
adversely impacted as they are more volatile to
banking norm fluctuations.
If we look at recent history, subsequent to the global
financial downturn during the 2008-2010 period,
liquidity began to flow back into the banking system
in 2010- 2011, aided by the strong price of oil. For
the past four to five years, UAE banks have had a
consistent growth run, in which they have had no
substantial credit losses, a better asset quality and
Pradeep Sai,
Partner, Emirates Chartered
Accountants Group
11. 11
FINANCIAL OUTLOOK
Banks have tightened
their credit policy for
customers in the current year
and choose their customers
after a stringent screening
process.
funding as well as growing profits.
Plunge in Deposits
The UAE is the world’s sixth-largest oil producer. It
uses revenue from sale of crude oil to fund more
than 60% of the federal budget. Since the year
2014, the price of crude oil has come down by more
than 70% of its peak value and the slowdown in
economic growth resulted in less demand and more
supply. The reduction of oil prices also resulted
in less spending on infrastructure compared to
previous years. Referring to central bank statistics,
S&P noted that government and public sector
deposits fell 14.2% to $94.1 billion (Dh 346 billion)
towards end of 2015 from $109.7 billion (Dh 403
billion) in the previous year. This has been a key
factor in tightening business lending.
Screening borrowers
Banks are now more risk-averse when choosing who
to lend to avoid credit losses. They have tightened
their credit policy for customers in the current
year and choose their customers after a stringent
screening process. The UAE Central Bank said in the
beginning of the year; “In the past, the main challenge
for the banks was that they had a lot of liquidity
in place and they had to place it into yield-earning
assets, which was why the retail side of the business
was strong.” But now the situation is different. Banks
are now more conservative since it is harder to pump
in liquidity into the system.
Tightening liquidity will probably lead to higher
interest rates as the amount of money in banks
decreases. Local interest rates are dependent
on two things — an increase in US dollar
rates, it flows into this region because
the dirham is pegged to the dollar and
the Federal Reserve’s monetary policy.
In addition to this, the rates also reflect
current liquidity conditions in the local
market.
Though economic headwinds are
strengthening, the experience of UAE
banks in implementing stringent controls
during global financial meltdown in
2008-10 gives them confidence. UAE is
in the process of paradigm shift from
oil driven economy to non-oil driven,
consumption oriented economy. The
results of this have already started
reflecting in different sectors and this
will help the banks to regain their
lending swagger within a short period of
time when liquidity increases.
BANKING FEATURE
12. need not have an office space or even a residential
visa under this license with this cost.
As of now, the authorities of UAQ Free Trade
Zone & Dubai South Free Zone do not insist the
shareholders holding employment visa to submit an
NOC from their existing employers. All other free
zones ask for it.
Are side agreements between the partners of
LLC companies valid? I have an LLC company
registered in Dubai and hold 49% of its shares.
The UAE national is not an active partner and has
made no investment in the company. I pay a fixed
amount as a sponsorship fee to him every year. Can
we make a side agreement stating the same, so that
all company assets belong to me? Can I do notary
attestation of this agreement?
Suresh Kumar, Sharjah
A: Any agreements between the partners of the
company outside the MOA of the company commonly
called as side agreements are valid; provided it
doesn’t violate the provisions of the law, i.e. UAE
Commercial Company Law.
As per the UAE Commercial Company Law (now
New CCL), the MOA of the company should be
in accordance with the provisions of the CCL.
However, if you draft an agreement stating that the
entire assets of the company belong to only one
shareholder and the other doesn’t have any right
on the assets and no value for his share, it is clearly
against the provisions of the law and therefore,
invalid. So you cannot make such an agreement and
no question arises about a notary attestation of the
same.
Notary attestation is possible only for those
agreements which are within the provisions of the
law. However, if you have any concern on the long
term business relationship with your existing partner,
you can look for another UAE national as the major
shareholder or a company 100% owned by UAE
national/s. Of course, he should be willing to sell his
51% shares of the company and sign in presence of a
notary to mark his consent.
12
Q&A FINANCIAL OUTLOOK
A UK national, residing in the UK, wants to set
up a company in Dubai. Can he do it without
coming to the UAE? And if so, how can you
help us register a company in the Dubai Free Zone?
David Christopher, Dubai
A: Dear David, there are many options to set up
companies in the UAE without the physical presence
of the shareholders. The physical presence of
the shareholder is not mandatory in any of the
UAE offshores to set up offshore companies.
Moreover, Umm Al Quwain Free Trade Zone and
Dubai South Free Zone allow investors to set up
companies without them being physically present
there. However, physical presence is mandatory
for opening bank accounts in the UAE. But, if he
can provide us the power of attorney (certified and
attested by the UAE embassy or the consulate in UK)
in someone’s name who is physically present here,
we can set up the company both in main land as well
as in all other free zones.
For setting up a company in Dubai, we will prepare
the entire documentation such as Application for
opening the company, Memorandum of Association,
Articles of Association, Specimen Signature, Cards
etc. and get it signed from the shareholders. Then
they can send these back to us through courier for
submitting to the free zone. In certain free zones
we can complete the whole procedure within 24
working hours.
I am working as a Sales Manager in one of the
private companies in Dubai. Can you please tell
me in which Free Zone in the UAE, I can set up
a company at lowest cost and how much will it cost?
Also, should I submit a no objection certificate (NOC)
from my existing employer?
Hussain Shaikh, Abu Dhabi
A: There are more than 50 free zones in all over the
UAE as of now. The selection of a free zone to start
a company depends upon many factors, mainly on
the activity which you are planning to do under the
license. However, to answer your question, in UAQ
Free Trade Zone and RAK Free Trade Zone you can
set up a company at a cost of around AED 15,000.
The license can be a trade license or a service
license; it depends on your requirements. You can
also operate bank accounts under this license. You
your questions,
answered Ragesh Mattummal,
Partner,
Emirates Chartered
Accountants Group
13. 13
ECONOMYFINANCIAL OUTLOOK
GCC ECONOMIC UPDATES
HOW DO CREDIT RATING
AGENCIES LOOK AT GCC
COUNTRIES?
Credit agencies have restated their rating outlooks
on the GCC countries. Moody's Investors Service has
downgraded the Government of Saudi Arabia's long-
term issuer ratings to A1 from Aa3 and assigned a
stable outlook. It is the first ever downgrade since
it commenced rating the country over 20 years
back. The reason cited by Moody’s was a deepening
concern over the country’s precarious fiscal position
and ability to diversify away from oil revenues.
The rating looks stable, which means there is no
imminent danger of a further downgrade. Oman
came down from A3 to Baa1 and is just three points
above a junk rating - the reason being the negative
impact that Oman’s sovereign credit profile faced
due to an extended period of low crude oil prices.
It's the second time that Oman has fallen after a
downgrade in February from A1 to A3. Bahrain’s
rating fell further into junk territory to Ba2 with a
negative outlook. The other three GCC countries,
Qatar, Kuwait and the UAE, were put on a negative
watch, meaning that there can be a cut in their
rating in the next 18 months if the credit profile
weakens further. Moody’s expects that the Abu
Dhabi government’s vast reserves will help the UAE
government face the challenges of a slow economy.
The Credit Sentiment Survey released by the UAE
Central Bank shows that the demand for credit has
rebounded, both for personal and business, in the
first quarter of 2016. Though the corporates and
small businesses showed an increased interest in
credit, financial institutions were unwilling to extend
their business loans. It is a typical phenomenon in
economic cycles where banks become extremely
cautious in lending during slumps and are a bit laid-
back during upturns. On the retail side, individual
14. demands showed an increase, reflecting a positive
sentiment after a dip in demand in Q4 of 2015.
Further, the World Bank revised its growth forecast
for the UAE by 1.1% to 2% this year in the midst
of low oil prices and budgetary spending cutbacks.
Initially, the growth was estimated @ 3.4%. As
per the World Bank, the Arabian Gulf nations'
The only month when
prices were set higher was in
August last year. The prices
showed an upward trend
again in April 2016.
14
ECONOMY FINANCIAL OUTLOOK
efforts to raise cash to make up for the budgetary
shortfalls would not block the gap completely.
Though an attempt to expand revenue have also
been implemented, including raising corporate and
consumption taxes (including VAT), that would not
be able to cover up the losses from the oil price
immediately. In short, the governments will rely on
domestic and international debt to fund the deficits.
OIL SECTOR
Fuel prices are poised for a sharp jump of over 10%
in April as per the pricing details announced by the
Ministry of Energy. UAE announced deregulation of
prices in July 2015, and we have witnessed seven
consecutive months of decline in prices, spurred by a
fall in global crude oil prices. The only month, when
prices were higher, was in August 2015, and April
2016 will be only the second month with high prices.
The UAE’s economy minister is expecting the crude
oil price to reach $60 this year with demand and
production moving more in line. It is a very positive
sign for the region. However, if the oil price remains
lower than $75 per barrel, Bank of America Merrill
Lynch (BAML) estimates that the peak global oil
demand will rise only beyond 2050.
CL*1:48.52
2000000
1000000
Vol: 992106
54.00
52.00
50.00
48.52
46.00
44.00
42.00
40.00
38.00
36.00
34.00
Mar 16 Apr May Jun Jul Aug
CLU16 - Crude Oil WTI (NYMEX)
15. BANKING SECTOR
The fall in crude oil revenues, the primary source of
liquidity in the GCC region, has led to a slight liquidity
crunch. Banks across the region are collecting
loans from the market to bolster funding. The UAE
interbank EIBOR rates have tightened with the one-
year rate increasing from 1.48% to 1.62% in Jan this
year. This change may not impact borrowing costs for
corporates as several banks in the UAE had included
their internal cost of funding to the EIBOR rates
during the financial crisis, most of which persist till
now. The Loan to Deposit rates have gone over 100%
for the system as a whole indicating a stress in the
system itself.
National Bank of Abu Dhabi, the largest bank by
assets in the UAE, has reported an 11% drop in
net profits for its first quarter. The impact of the
slowing economy has resulted in higher provisions
for bad debts and a lower non-net interest income.
The Abu Dhabi Commercial Bank reported an 18%
drop in net profits in its first quarter resulted by
higher provisions for bad loans and a compressed
net interest rate margin. First Gulf Bank, the third
largest bank in Abu Dhabi, also reported a 6% drop in
its Q1 profits, primary reasons being lower fees and
commission income with provisions just a little better.
Big banks are constantly under pressure to hold on
to profit levels. As a result, in a slowing environment,
both retail and corporate clients, feel the pressure
of higher credit costs; more so in the coming months
when banks set aside larger amounts for bad debt
provisions. Banks in the UAE have also cut jobs,
though marginal, to limit costs.
Emirates NBD’s UAE Purchasing Managers Index (PMI)
rebounded in March to 54.5, up from February’s
53.1. Overall, as a reflection of the slowdown in Q1,
improvement in business conditions was the weakest
at 53.4. There were positives in the report with
increased employment in UAE’s non-oil private sector.
Equities have posted a strong rebound over the last
two months after posting lows in late January. The
RETAIL SECTOR
A.T. Kearney's 2016 Global Retail Development Index
(GRDI) places the UAE and Saudi Arabia among
the world's top 10 developing retail markets. The
UAE, led by Dubai, is 7th on the list and has the
highest sales per capita in the region making it an
attractive and relatively low-risk market for the
retailers. According to CBRE’s latest Global Shopping
Centre Development Report, Abu Dhabi and Dubai
are together in the top 17 of most active cities for
shopping centre development. In the global rankings
for shopping centres developed over the last year,
Dubai and Muscat are in the top 30, with Muscat
paving the way for the GCC region. The 2016 report
confirms that the Middle East retail market is a
very attractive destination for international brands.
Dubai, with its high per capita income, significant
growth potential and a high spending consumer
base, is ranked second for international brand
presence.
Dubai has always maintained its high position by
attracting the rest of the world for tourism and
shopping. The Emirate has retained its position as
the second most important international shopping
destination for the fifth consecutive year, closely
behind London. This information was shared by
real estate consultancy firm CBRE and reported by
Arabian Business recently.
15
ECONOMYFINANCIAL OUTLOOK
16. DFM Index is up 31% from its low of 2590.72 traded
on Jan 21 as crude oil prices have recovered to
around $40 a barrel level.
Not done with the sovereign rating, credit agency
Moody’s projected an outlook of negative for five
Abu Dhabi banks while retaining their ratings.
NBAD remains at Aa3, ADCB, UNB and Al Hilal Bank
at A1 and ADIB at A2. The turtle-pace of the GCC
economy (due to lower crude oil prices) is getting to
the banking sector. The banking industry, which is
a representation of a nation's economic growth, is
faltering from lower deposit accretion. On the other
hand, with the economy slowing down, bad debts
have started to increase putting pressure on bank
balance sheets. Moody’s mentions the capacity and
willingness of the Emirate of Abu Dhabi that has
helped the banks in retaining their ratings.
As per the UAE Central Bank data, loans in the
banking industry has increased by Dhs11.80 billion
($3.21 billion) with the loans to the private sector
increasing by Dhs8.2 billion ($2.23 billion). In the
first two months of the year, loans have increased
by Dhs18.20 billion ($4.96 billion). Deposits in the
system were stagnant and in the first two months
it has fallen marginally by Dhs0.50 million. The
impact of low crude oil prices and a consequent
plunge in government spending, which is the key
factor for deposit accretion, is pretty evident in the
current system. The loan to deposit ratio in the
system has increased further to 102.22%, and the
tighter liquidity is feeding through higher rates in
the system. Interbank EIBOR rates have steadily
increased over the last year with the one year
EIBOR rate increasing to 1.57% from 1.02% at the
beginning of 2015.
Some small business owners that had fled the
country fearing imprisonment due to unpaid debt
have begun to return following a concerted effort
by lenders. According to a top banker, “In some
cases [when a business defaults], there’s not much
the banks can do, and in other cases the banks
have obviously tried very hard to work together to
address those cases, particularly when you can see
that this is not a case of a company that was doing
anything wrong – they’ve just got impacted by the
overall market."
REAL ESTATE
Saudi residential market
slowdown continues:
Saudi Arabia's residential real estate remains slow
in 2016, though transaction volumes and sale
prices are declining at a slower rate compared to
2015. A reduction in government spending, due to
the drop in oil prices, will most likely impact the
financing of real estate projects. Many projects have
been delayed and scaled back which will further
aggravate the minimal availability of housing across
the kingdom. As per Knight Frank’s Saudi Arabia
Residential Market Report:
• Main Saudi Arabian cities have seen a shift in
demand from sales to rentals
• Rental rates have increased in 2015 and are
16
ECONOMY FINANCIAL OUTLOOK
17. expected to maintain their growth levels in 2016.
• A 2.5% white land tax and a revised mortgage law
are expected to increase demand in sales.
• 2016 might see a re-prioritization of projects with
an emphasis on affordable housing.
Dubai apartment prices continued to drop marginally
during April, bringing the annual values down by
7.3%. ReidIn's Dubai Residential Property Sales Price
Index decreased from 259.0 to 257.6, a difference of
1.4 points last month, which represents a decrease
of 0.53%. The report showed that apartment sales
prices fell 0.75% during the month and by 7.3%
year-on-year while Villa sales prices registered an
increase in April of 0.40% but decreased 8.2%
annually.
“However, in the UAE real estate market, there is a
trend of shift from rented apartments or commercial
buildings to owning a property. As per experts, the
upward trends are witnessed in the month of June.”
Source: Colliers International /globalproperty.com
HISTORY OF PROPERTY PRICE IN UAE.
(http://www.globalpropertyguide.com/Middle-East/
United-Arab-Emirates/Price-History)
In the UAE real estate
market, there is a trend of
shift from rented apartments or
commercial buildings to owning
a property.
17
ECONOMYFINANCIAL OUTLOOK
PROJECTS, INFRASTRUCTURE &
OTHER DEVELOPMENTS
Qatar, UAE among most
investment-friendly states:
A key report from Arcadis, a leading global design
and consultancy firm says that despite low oil
prices are hindering investment into infrastructure
Qatar, and the UAE are the second and third
most attractive countries for infrastructure
investment globally. Nations with secure business
environments, stable financial sectors, and strong
growth potentials remain the top most attractive
markets for infrastructure investors. The top 10
countries of 2016 for long-term infrastructure
investment are: Singapore, Qatar, UAE, Canada,
Malaysia, Norway, Sweden, US, UK and The
Netherlands.
Dubai’s diversification into tourism and aviation
through its well-connected Dubai International
Airport continues to provide results. In February,
passenger traffic increased to 6.38 million (an
increase of 6.9% annually). For the first two
months of 2016, the total passenger traffic was at
13.7 million which is up 6.5% for the same period in
2015. The benefits of this passenger traffic accrue
to the tourism and retail sector, which are holding
up in spite of the broad slowdown across the region
due to lower crude oil prices.
New solutions required to fund
GCC capital projects:
Lower oil prices will limit the amount of funding
available to the GCC governments to back capital
projects, forcing them to make tough choices such
as cuts in public spending and an introduction of
structural reforms and developments. “Spending
in the region will need to be better prioritized
in order to ensure it meets social and economic
development. Governments will have to seek for
Quarterly House Price Change (%)
Overall Apartment Villa Townhouse
Source: Collier International
50
40
30
20
10
0
-10
-20
'07 '08
18. the private sector involvement, innovate and
find alternative funding sources to fund their
project requirements,” explained Cynthia Corby,
Audit partner and the Middle East Infrastructure
and Capital Projects leader at Deloitte, a leading
provider of audit, consulting, financial advisory,
risk management, tax and related services. She
was speaking about Deloitte Middle East’s newly
released annual publication: “GCC Powers of
Construction 2016: The funding equation." The
report acts as a comprehensive review of the
construction industry in particular for the sector’s
leaders and shareholders. It is based on data
collected from surveys and supported by interviews
with some of the most prominent leaders from
the construction industry as well as articles and
interviews examining key industry trends.
$2 trillion projects in the
pipeline in GCC:
The pipeline of projects planned in the Gulf
Cooperation Council (GCC) states amounts to $2
trillion, as of May 2016. It was revealed at a summit
of construction sector leaders in Dubai, UAE.
Leading professional services firm Deloitte informed
that Saudi Arabia leads the region in terms of the
value of projects in the pre-execution stage, with
38.91% of the total value, followed by the UAE
with 34.84%. Qatar is next with 8.57% and Kuwait
with 8.22%. Oman follows with 6.48% with Bahrain
having a 2.97% share of the market. Besides the
oil price slump, the growth of the projects sector
depends on several factors, like the speed of
enacting legislation, restructuring, project plans
prioritization, and the ability to secure funding,
says Ed James, Director of content and analysis,
Meed Projects. “But more importantly, governments’
commitment to maintain spending in the face of
18
ECONOMY FINANCIAL OUTLOOK
falling revenues to keep the economy moving will be
a key factor in driving the industry forward through
the challenging times,” he said. Experts predict
that there still will be huge project investments
between now and the end of this decade. The ever-
growing economies across the Gulf region require
improved infrastructure for cities to function and
expand as planned, but there's also the need to
explore innovative financing models to fulfill the
funding gaps that may arise due to deficits in the
government budget.
Gulf governments expected to raise $390bn in
funding by 2020: Gulf governments are expected
to raise between $255bn to $390bn by 2020 by
selling both local and international debt as low oil
price continues to put pressure on public finances.
The GCC countries are expected to post a total fiscal
deficit of $318 billion between 2015 and 2016,
according to the GCC Sovereign Debt 2016 Report.
Despite spending cuts announced across the GCC,
Qatar expects to post a deficit of $13 billion this
year, its first budget deficit in 15 years; while Saudi
Arabia reached a deficit of $99 billion in 2015, with
an estimate of $88 billion for 2016. Qatar will seek
to raise up to $5 billion from a planned bond sale as
early as this month, its first since 2011, Bloomberg
reported. Meanwhile, Abu Dhabi expects to post
a wider budget deficit of $10.1 billion in 2016 and
plans to minimize the gap mainly with international
bond issues.
Saudi Arabia forges ahead with
$442bn construction projects:
Saudi Arabia’s project market in 2016 boasts of
$500 billion worth of schemes in the pre-execution
phase covering the power and water, transport,
hydrocarbons and construction sectors, said a
report. Under the ambitious reform agenda being
driven by Deputy Crown Prince Mohammed bin
Salman, within its recently announced Vision 2030
framework, Saudi Arabia is seeking to drive the non-
oil economy and stimulate private investment in
state activities, reported Arab News, citing a study
by Meed, a leading source of Middle East business
19. 19
ECONOMYFINANCIAL OUTLOOK
intelligence. A report, "Saudi Arabia Strategies
2016: Adapting to a new economic reality" provides
precise information about the kingdom’s plans to
execute these projects and also observes how its
latest Vision 2030 strategy will change the business
landscape of the country.
Dubai launches International
Centre for 3D Printing:
Dubai Holding has launched the International
Center for 3D printing which aims to make Dubai
an international destination for 3D printing by the
year 2030. The project, situated at Dubai Industrial
City, will create a suitable atmosphere and provide
the best infrastructure to bring a network of
design and technology suppliers as well as factories
under a single roof. It will include laboratories and
research centres for testing materials used in 3D
printed products within an integrated environment
dedicated for construction, medicine, and consumer
products sectors. It will also involve the academic
sector, which will add innovation and educational
value to this initiative through research and
development.
saudi Arabia 2030 vision:
Saudi Arabia announced its blueprint for “Saudi
Arabia 2030” which will give its economy a
makeover and make it less dependent on crude oil.
The kingdom plans to increase the share of non-
oil exports in GDP with large scale privatization
and create the world’s largest sovereign fund with
assets of over $3 trillion. The move away from
oil will involve amongst other initiatives; use of
renewable energy, focus on industrial equipment
and mining sector and creating high-quality tourist
attractions. To quote the website quantumauditing.
com, "There is also a plan to have a “green card” for
overseas workers. Deputy Crown Prince Mohammed
bin Salman addressed a press conference where
he mentioned that to achieve this vision a price of
$30 a barrel will be sufficient. The IPO of Aramco
is part of this plan and less than 5% of its stake
is expected to be sold to investors and this could
be as early as next year. Currently, Apple has the
largest market cap globally at around $500 billion
(was $580 before the poor results this week), in
comparison Aramco which controls about 15% of
global crude oil reserves is estimated to have a
market cap of over $2 trillion. The world’s largest
oil company Exxon Mobil has a market cap of about
$365 billion. Aramco’s IPO when it happens in Q4
this year or sometime next year will take center
stage in global financial markets and make it the
world’s largest company."
With the fall in crude oil prices, Saudi Arabia gave
some indication that they are ready to buckle down
for the long run, with large changes in the anvil
for the economy. Last week, Saudi Deputy Crown
Prince’s announced the proposed $2 trillion Public
Investment Fund (PIF) which will be the source of
future revenues for the Saudi government. This
week Saudi Capital Market Authority Chairman,
Mohammed Al Jadaan stated that the number of
listed companies will increase to 250 from about 170
now, and the market cap would grow to equal the
size of Saudi GDP in seven years’ time. The market
cap at about $385 billion is just under 60% of Saudi
Arabia’s GDP. The first of these listings is expected
to be Saudi oil giant Aramco which controls about
15% of all crude oil reserves globally. New listings
will come from a combination of privately owned
companies as well as divestment of stakes in
Government owned entities. The interesting part
in this was the intention to develop new products
like derivatives trading in the equity & debt
markets. This could be a path breaking event when
implemented as today most GCC markets are “long
only” markets & with no Index futures available for
trading, it is quite expensive and impractical to short
the market using instruments structured by private
institutions. In a move to attract foreign investors
the Capital Markets Authority is also working on
rules and regulations to give easier access to foreign
investors.
Saudi Arabia’s net foreign assets declined by 1.7%
in February to $548 billion - lowest since May 2012.
From an all-time high of $737 billion in August
2014 it is down to 21% or about $153 billion in
a year and a half. At this rate, reserves could be
precariously low in two years. The situation can only
be reversed with higher oil prices or if the Saudi
government cuts some of the huge subsidies in the
economy. The Saudi Central Bank also operates
as its Sovereign Wealth Fund and these assets are
being liquidated to cover the large budget deficit,
which in turn has been due to lower crude oil prices.
In a move to boost revenue, every passenger leaving
the UAE from any of Dubai’s airports will be charged
Dhs35 ($9.52). With 85 million passengers expected
to use the airport, this charge could garner about
$400 million in 2016 with the move being effective
from June 30.
20. 20
NEWS FINANCIAL OUTLOOK
Credit Bureau users
double in 2015
The number of institutions using the services of Al
Etihad Credit Bureau (AECB) doubled during 2015,
with a significant increase in credit data enquiries
UAE FINANCE NEWS
also being noted.
“The number of subscribers with Al Etihad Credit
Bureau doubled in 2015 to reach a total of 59, whilst
the average monthly enquiries tripled in the fourth
quarter of 2015 compared to the first quarter of of
the same year,” said Marwan Ahmad Lutfi, CEO of
Al Etihad Credit Bureau at its first annual subscriber
forum held recently. Officials from the bureau as well
as a number of representatives from the banking
and financial services sector attended the forum.
According to Manoj Chawla, chief risk officer at
Emirates NBD, “Underwriting has become more
informed, thereby substantially adding to efficiency
and also managing risk and serving the customer.
Al Etihad Credit Bureau has helped banks in better
managing the risk-reward equation and can be seen
as driving a responsible behaviour in the market that
is beneficial overall for all participants. The bureau’s
reports have become one of the key drivers in the
retail underwriting process.”
21. 21
NEWSFINANCIAL OUTLOOK
GCC introduction of VAT to
create 5,000 new tax jobs
Gulf Arab states’ introduction of value-added tax
(VAT) in 2018 will create more than 5,000 new jobs
for tax and accountancy executives, with some large
consultancy firms already starting to increase their
headcount, according to industry experts.
Finance ministers from the six Gulf Cooperation
Council (GCC) countries formally agreed on June 16
at a meeting in Jeddah to introduce tax across the
bloc from 2018. The full details of the process have
not been announced and it is not yet clear whether
all the countries will introduce VAT on January 2018.
The United Arab Emirates (UAE) and Qatar will be
the first to adopt the new tax regime, but all six
members of the GCC, which also includes Kuwait,
Saudi Arabia, Oman and Bahrain, are expected to
implement VAT by the end of 2018, according to a
tax alert issued in February by consultancy firm EY.
In preparation for this, many of the ‘Big 4’
international accountancy firms – including PwC,
Deloitte, EY and KPMG – have already started hiring
in order to have enough staff in place to manage
their clients’ tax obligations.
Private wealth in the UAE
poised TO reach $1tr in 2020
Private wealth in the UAE is projected to post
a compound annual growth rate (CAGR) of 14.1
per cent to reach almost $1 trillion in 2020; over
the next five years, private wealth held by ultra-
high-net-worth households in the Emirates is also
expected to increase by a staggering 20 per cent,
according to a new report by The Boston Consulting
Group (BCG).
In the UAE, the growth of private wealth was driven
primarily by cash and deposits. In fact, between
2014 and 2015, the amount of wealth held in cash
and deposits increased by 16.7 per cent across the
nation, compared with 0.7 per cent for bonds, and
3.8 per cent for equities according to BCG’s report,
Global Wealth 2016: Navigating the New Client
Landscape.
Based on BCG’s study, the UAE is set to show solid
growth in the next five years, with the wealth
breakdown anticipated to be 19.2 per cent in
equities, 12.1 per cent in cash and deposits, and 4.8
per cent in bonds.
“Segmentation approaches based mainly on wealth
level continue to be used by the majority of wealth
managers, neglect what clients are truly willing to
pay for,” said Markus Massi, Partner & Managing
Director of BCG Middle East’s Financial Services
practice. “Such approaches no longer allow wealth
managers to capitalise on the full potential of the
market.”
Abu Dhabi government to
merge Mubadala and IPIC
Abu Dhabi plans to merge state investment funds
Mubadala Development Company and International
Petroleum Investment Company. The combined
fund would have assets worth around $135 billion,
according to Reuters calculations based on both
funds' latest financial statements.
"The merger of the two companies augments the
investment advantages and economic revenue for
Abu Dhabi, and creates a body capable of achieving
the highest level of integration and growth in
22. 22
FINANCIAL OUTLOOK
multiple sectors, including energy, technology and
space industry," the agency said.
NBAD-FGB merger to lead to
substantial cost savings
The merger of Abu Dhabi’s NBAD and FGB banks
could lead to cost savings of 28 percent, according
to a senior banker.
Sanjay Uppal, who helped oversee Emirates NBD’s
merger in 2007, said: “When we look at domestic
mergers, we typically look at revenue synergies of
somewhere in the region of 6 to 12 percent and cost
synergies of somewhere in the region of 15-25 to
28 percent.”
Uppal, who was CFO when Emirates Bank and
National Bank of Dubai merged to form Emirates
NBD in 2007, told Bloomberg TV that NBAD and FGB
“should be targeting synergies somewhere close to
these benchmarks.”
National Bank of Abu Dhabi and First Gulf Bank held
preliminary talks on a merger that would create the
largest bank by assets in the Middle East and Africa.
Abu Dhabi Financial Group to
acquire Shuaa Capital stake
Alternative investment firm Abu Dhabi Financial
Group has reached an agreement to acquire Dubai
Banking Group’s 48.36 percent stake in Shuaa
Capital.
In a bourse statement, Shuaa confirmed the deal
saying it was subject to regulatory approval. No
value for the transaction was given.
Reuters reported at the end of last month that
ADFG, Al Mal Capital and Arqaam Capital were among
the bidders for the stake.
It said the stake was worth around $91m based on
the company’s closing price on May 31.
The stake sale comes as the Dubai Group subsidiary
looks to sell assets to help fun repayments on a
$10bn debt restructuring.
Dubai bank Emirates NBD in
Dhs 500m digital push
Dubai’s biggest bank Emirates NBD announced that it
will invest Dhs 500m over the next three years into
improving its digital services.
The bank’s investment will focus on five areas
including: end to end process transformation;
faster and more responsive customer interface;
omnichannel experience, fortification of
cyber security and anti-fraud capabilities; and
enhancement of data management and analytics.
Emirates NBD also revealed plans to launch the
United Arab Emirates’ first so-called ‘digital bank’
targeted at millennials.
The initiative will use digitisation and social inputs
to offer customers self-service money management
with useful tools and applications, a statement said.
Emirates NBD group chief executive officer Shayne
Nelson said: “We are making a commitment to the
future with our digital transformation plan.
“Our focus on technology innovation and adoption
to create digital-only products is creating a new
paradigm in the way people bank in the UAE.”
Currently, the bank offers digital banking initiatives
such as e-payment capabilities for 25 service
providers including telecom, utilities, transportation,
card schemes and education providers.
NEWS
23. ISBREXITTHEFIRSTOFMANYDOMINOES?
UK and the rest of Europe brace for an uncertain future
THE FINAL TALLY
WHO ELSE WANTS A REFERENDUM?
WINNER
48% 52%REMAIN LEAVE
NORTHERN
IRELAND
SCOTLAND
ENGLAND
IRELAND
WALES
47.5% 52.5%
46.6% 53.4%
WALES
Wales, despite
receiving 500m
of EU funding
annually, voted
to leave
ENGLAND
ITALY FRANCE SWEDEN BELGIUM POLAND GERMANY SPAIN HUNGARY
London was the
only major area
in England to vote
heavily in favor
of remaining in
the EU (60%)
60%
50%
40%
30%
20%
10%
62.0% 38.0%
55.8% 44.2%
SCOTLAND
A second Scottish
independence
vote is "highly
likely" according
to First Minister
Nicola Sturgeon
N. IRELAND
Deputy First
Minister is calling
for a vote on a
united Ireland
after Brexit
23
SOURCES:IposMori,Bloomberg;ElectricalCommission
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Disclaimer: The views and opinions expressed in the Financial Outlook Newsletter are those of authors only
and not necessarily the opinion of Emirates Chartered Accountants Group.
For Private Circulation only.
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Accountants, Emirates Accounts Services UK.
