The Economies of the UAE and Australia - Essay Example

? BACKGROUND Dynamics of the last decade, with economic turmoil to be d as the leading, had most prominent impact on economies of the entire world. The wave led the unexpected picture of world economies. Developed countries such as US and European countries felt the strongest shocks much more than that could have been predicted and economies ran on the ventilating situation with bail out plans to ensure their survival and growth within these regions fell below 2% (Das, 2012). For instance, worldwide treasuries issued new public debt totaling $6.5 trillion since 2008 to manage the condition the payments while these are apart from the fiscal bailout packages (Index Mundi, 2012). Within similar era, followed by Arab up-spring and Greek debt crises, the situation worsened for the economies to stimuli growth and sustain when problem compounded with issues of unemployment, budget deficits, shattered economies’ resilience to get back on growth track etc. During these crises, still there had been economies that featured sustainability and growth. Growth of BRIC countries is no exception. Among the growing economies, Australia also featured sustainability and growth with the support from its rich mineral resource base mainly and sound economic policies while UAE has sustained against the devastating impact of Arab up spring. Based on these facts of sustenance, the purpose of this report is to examine two countries on the economic front exploring similarities and differences in their economic mechanism. Two countries selected for the purpose, includes Australia and UAE as these two countries have made sound efforts in retaining the performance of the economies. INTRODUCTION TO ECONOMIES AND CRITICAL BACK GROUND Australia, country comprising entire continent and 48 states, has in the recent past transformed itself as among the internationally competitively advanced market economies. Country is rich with natural resources and hence, attracts huge foreign investment such as US$40 billion Gorgon Liquid Natural Gas project being among the huge investments in the country (CIA, 2012a). As quoted by The Australian Mines and Metals Association projects estimate of $427 billion of resources in pipeline and stated projects include $146 billion project related to liquefied natural gas only (Das, 2012). The country has managed to escape the global financial crises with boomed commodity demand that increased Aussie export by 42% since 2004 only; exports mainly to China (23% of Australian direct export to China) and diversion of investment in commodity due to lost confidence in financial instruments. All these external factors supported by government policies mainly by managing its debt position; reducing annual interest rate from 7.25% to 3.0% managed to minimize the impact of global financial crises. Despite Australian economy has managed to escape the global financial crises; however, the basis that provided country ground to take off flight from financial turmoil are dampening. For increased investment in the commodity by China was resultant of its capacity and need to the balance the risk it (China) had from its investment of US. 3.2 trillion in US dollars, euro- and yen financial securities (Das, 2012). Hence decline in the capacity of China, European banks diverting their investment to domestic market to boost local economy and external funded investment in resource taking sizable portion of the return from to investor leaving less for the country. Moreover, increased debt rollover capacity has also increased the concern for the country and it probability to take off flight, similarly as it did in times global financial crises, are not similarly high. Currently, GDP of the country for the third quarter of 2012 has been 3.10% (as compare to similar period of Y-o-Y basis); overall near to average that country has been maintaining (Trading Economics, 2012a). (International Monetary Fund, 2012) ECONOMIC VARIABLES FOREIGN DIRECT INVESTMENT (FDI) Australia has managed position among the top ranking countries in fetching FDI from large number of countries round the world. Based on the A.T. Kearney’s 2012 FDI Confidence Index the country maintains the position of an ideal place for investment with the healthy economy, strategic location with rich opportunities in various sectors; strong and renowned ties with global traders and investors; and sound track record innovative opportunities to investors. Hence, stands on position among the top 10 leading countries suitable for investment. Total FDI stock in Australia has reached A.$507 billion in 2011 , record level with growth of 6.6% (Australian Government, 2012) (Australian Government, 2012) Countries in order of their investment in Australia are: (Australian Government, 2012) Notable statistics from above refer increase in investor’s confidence in Australia as investment has shown sturdy growth in previous half decade. Investment from the foreign investors are mainly directed approximately 60% to the top five sectors; sales and marketing leading the group of business activity with 35% while notably customer contact centre witnessed growth of 142%. Chart below provide further detailed segregation of FDI in Australia with sector wise, business activity and source country: (Australian Government, 2012) PUBLIC SECTOR SPENDING To combat financial crises, governments gear up public sector spending to generate stimuli in the economy. Public sector funding accounts for 35% of the GDP amounting to $354.6 billion (AUD) in 2010-2011.The ratio of governments spending is lower than many countries in relation to its less tax charge of 10% percentage than comparative countries charging higher. Year on year trend of government spending show the average yearly spending of about A.$ 30590.70 million while reached record high in the second quarter of the current  year with A.$ 62741 million in May of 2012 (Trading Economics, 2012b). (Trading Economics, 2012b) Moreover the comparison with world average, Australia shows healthy picture of government spending. Notable is increased investment in the current year when all rests are declining: (Heritage Foundation, 2012a) However, the comparison with China highlights the facts that to maintain similar growth will be less supported by Chinese commodity demand. China’s increased domestic investment asserts less money available for investment worldwide. Hence, being the major contributor in commodity boom in Australia would have to face the impact; irrespective of size. Given below is the break-up of revenue inflow and outflow by government: (Government Australia, 2012) EXTERNAL DEBT ANALYSIS The external debt position of Australia is showing steep rise in last decade and specifically in second half of the decade. (Index Mundi, 2012c) Increased external debt increases debt servicing taking sizable portion of income. For instance, Australia is generating finance from covered bonds (constituting Australian financing) charge 1.50% to 2.50% in addition to interbank rates. Further, Australia needs to finance its current account deficit of about US$ 30 to 40 billion accounting almost 2% to 3% of GDP. European banks earlier provided almost 35% of these loans have fallen to 16% in the current year and is expected to further decline as these banks are withdrawing from Asian economies for lending in their domestic market. Currently, Australia is under pressure to refinance its loan of A$.80.00 billion maturing this year. INFLATION AND INTEREST RATE Y-o-Y inflation in Australia in 1980’s remained near to catch the double digit while on entering last decade of the 20th century country managed to retain it within generally first half of counting. (Index Mundi, 2012e) While interest rate has been following given below trend: (Trading Economics, 2012c) Most recently, Australia cut interest rate from 4.25% to 3.75% ; hitting greater slash than expected reasoning it to give boost to weaker economic condition and reduction in the demand of its resource (BBC, 2012) Hence in all Australia though managed to beat the warm winds of global financial crises and is now making effort to maintain the growth stimuli in post era of global financial crises. UNITED ARAB EMIRATES (UAE) United Arab Emirates, commonly known as UAE, ranks as the second largest among Gulf Arab economy and also holds position among the fastest-growing economies in the world. The GDP growth within last 40 years has witnessed rapid increase from Dh6.5bn in 1971 to Dh1248bn in 2011 approximately; almost increase of 192 folds. It has high per capita of around Dh174, 000 (2011) income along with considerable trade surplus (Emirates 247, 2011) Economy of UAE was more characterized with oil and gas related activities with the state being in principal dependent on the oil related activities. Government led efforts resulted in diversification; development of the state of art cities with high standards of living and the reduction of economic dependency from the oil and gas activities to 25% - 27% of the GDP; resulted in success with developing the economy structure with 71% GDP generated from non-oil sector (Emirates 247, 2011). This transition in the structure of the economy is considered as the main reason for the promoting the stability of the national economy. Resulted from the stated diversification, the accelerated growth of the states has been characterized with businesses friendly policies like Free- Trade Zones with offering zero tax and full foreign ownership made UAE the center of world trading activities (Index Mundi, 2012b). Among dimensional growth that states featured is the expansion of state airline Emirates that continued growth not only in itself in times of financial crises but also resulted in development of the state mainly Dubai making it central and pass through destination for business activities. Also large number of trade agreements with various countries worldwide has been increasing its trade turnover with 133 times since 1975 (Emirates 247, 2011). Furthermore, the development of the tourism industry contributing 6.2% to the GDP with 15 million tourists landing in to the state increasing the position of UAE as leading on advancement among middle eastern countries and 30th among 139  countries worldwide (Emirates 247, 2011). The global financial crises had considerable impact on the state economy mainly affecting state of Dubai that moved the real estate investment into bubble that burst-off contributing to crises. Dubai government received support from federation and maintains solvency with high loans and stake sold. The economy on the whole managed to rebound but at very slow rate. Government provided banks with increased liquidity to cater the detrimental impact of global financial crises. Dubai government with focus to rebound its commitment to restructure, invested in infrastructure spending while generating revenues from tourism; service of exports; boosting domestic growth with retail sector development and finally viewed some improvement in the condition of residential property prices (Williams, and Martin, 2012). However, government spending were though not as high as the neighboring country of Saudi Arabia the expanded public spending to meet decline in economic prosperity with decline in demand of oil. Moreover, the country is highly dependent on the external debt increasing its vulnerability on the financial conditions out there (CIA, 2012b). Moreover, government is now cutting its spending on the infra-structure to curtail the over-supply of money to property market that was aimed mainly to combat the devastating impact of Global financial crises and leading to prioritizing of the projects under construction. Followed by the global crises against which economies were rebounding their growth, the event of Arab upspring hit the Middle East. However, since UAE does not share similarity of political and economic structure of the economy, the state has benefitted greatly with the trade; business and tourism spill over from the states in crises. Given below are important statistics of the UAE economy as well as in combination with some close and distant neighboring countries for comparison: (Williams, and Martin, 2012) (Williams, and Martin, 2012) As evident from the above economic statistics and comparison the since the UAE is heading economic growth with calculated mechanism. For instance, GDP growth of Kingdom of Saudi Arabia is higher than UAE but at the same time country is facing the problem of high inflation where as UAE has managed to maintain the control over the economic growth with increased interest rate by 0.75% higher than KSA. ECONOMIC VARIABLES FDI The economic condition rebound in UAE has shown revival of investor confidence. Given below is the schedule for total investment and FDI year on year in UAE along with comparison with other Middle Eastern countries: After receiving hit by global financial crises, the real estate hit that dropped total investment in 2009 and followed government increased spending to support the crises; withdrawal of FDI (fall in FDI to 2.8 in 2011) has gained growth momentum far above than forecasted 3.0 bn. US.$10 billion flowed in 2011 making it leading destination for investment in the region of middle East and Africa. Moreover, in 2011 number of projects launched were 328 that are 13% higher than 2010 despite the Arab Crises in the region. UAE witnessed 12% in increase in expansion of projects already started from FDI (FT Business, 2012) (FT Business, 2012) Sector-wise breakdown of investment follow the more or less the similar trend based on the competency of the land to host investment in sectors. UAE follows the given below trend with real estate, financial institutions and transportation leading the sector: (UAE Ministry of Economy, 2011) GOVERNMENT SPENDING Public finances arrangement for UAE on y-o-y basis along with comparison with other regional countries is as follows: Further break down for the public finances is as follows: (Heritage Foundation, 2012b) With overall increase in government spending; UAE has attempted to increase rationalized spending showing decline by US$ 5.6 billion in current year. This rationalization strategy took UAE on the top position of most efficient country in the managing its expenditure with UAE’s no-tax regime; and well managed social security policy and pension schemes; hence overall government spending. Expenditures have been cut by managing to roll out some mega projects such as Formula one race track; Ferrari theme park (Abu Dhabi) and to the artificial palm-shaped islands (Dubai) in view of anytime down side risk oil prices (Arnold, 2012). Moreover, government spending diverted to medical, education and infrastructure are initiated to sustain the economy and public sector in case of any other economic shock (John, 2012). EXTERNAL DEBT ANALYSIS UAE also had sizable external debt as compare to it neighboring countries even much higher than Saudi Arabia. KSA is investing high in public sector spending but has comparatively lower external debt. UAE’s condition refers that despite sizable income generated from its own most income had to be transferred in debt servicing account. Notable is the fact that external financing inflated in the year 2005 steeply and grew in multiples in later years. This steep increase has been mainly from UAE’s state Dubai piling up huge debts. Dubai remained talk of town for its capacity to ensure repayment as it has already remained under pressure for the reason; however, backing of strong federation that is among the financially among wealthiest entities in the world dampens the intensity of pressure (EIS Asset Management, 2012). (Index Mundi, 2012d) INFLATION INTREST RATES Inflation in UAE has managed to catch the acceptable domain in past years than first half first decade of new century. Inflation Trend in UAE has been as follows: The policy rate in UAE has been as follows over years: Visible from above trends is the fact that government has been using its tool most effectively in order to get affairs gets well managed and policy rate slash curtailed the inflation and brought it within the range suitable for the economy. Hence, overall management of the government has been strategic in their attempt to control the economic conditions. Moreover, the financial soundness that UAE government as a federation has built lent considerable support in countering the winds of crises. COMPARISON ANALYSIS In-depth analysis of the economies explored the fact that there exists quiet similarity between the two countries and so led both countries to gain the position of attractive investment avenue. Further, it is can also be confidently stated that it is differences in strategic action of two countries that led UAE on the top position for most efficient management of its fiscal affairs while Australia has also managed to gain the attractive position. For similarities, both destinations have managed to gain positions of priority lands for investment where UEA has been lead among within the region. Two countries have higher government spending as compare to world average. UAE have been more aggressive; however, notable was the fact mentioned earlier in the report also that UEA has been more rational in its decisions regarding its spending. Regarding the external debt financing, similarity exist on the part that both governments increased their dependency on the external financing with steep increment and within same time frame. Well utilization of external financing; the two countries have managed drag back their deteriorating inflation and interest rate within control. On the front of differences; UEA has been found to more strategic in its management of economic condition. For instance, Australia escaped the hit of global financial crises with commodity boom; however, is currently under pressure for it’s piled up debt that requires refinancing where European countries are taking the back seat in facilitating the need of the country whereas UAE’s state Dubai with height of debt has less pressure mainly for the reason of being backed by sound federation. Hence, the more strategic approach of UAE has managed to lead. SUITABILITY FOR DOING BUSINESS UAE has though gained sound economic front; however, the environment of Australia is more conducive for business as visible given below The picture provides more clarity for the fact that Australia is now employing the strategy that UEA had on 1990’s. The country welcomed investor; facilitated environment for business and since has reached its need of business activity to keep the business cycle running the country has stricken its regulatory condition and suitability of environment for doing business dropped. On the other hand, Australia has eased its regulatory matters and facilitating business round the globe; hence gained the ranking among top 10 for doing business. This is also witnessed from breakdown of business activity in Australia that referred to highest business activity of sales and marketing while call centre business growing at pace of 1.5x. Hence, Australia ranks on 10th position while UAE is on 26th position among 185 countries ranking by world banks (IFC, 2012). One can cautiously state that once the Australia will meet its requirement of global business to its economy it will also slash ease of doing business by tightening its policy; as shall be to sustain the growth. List of references Arnold, T. 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