United Arab Emirates – Image Issues May Blunt Impact of FDI Law

The UAE is navigating turbulent regional waters as international opprobrium rains upon its closest ally, Saudi Arabia. As in Saudi Arabia, the de facto head of government in the UAE is the crown prince, Mohammed bin Zayed (popularly known as MBZ), who, acting in his ailing father’s stead, is also the commander of the federation’s armed forces. In the latter capacity, he has embraced the militarized foreign policy strategy of his Saudi counterpart, Mohammed bin Salman (MBS), who is the Gulf kingdom’s minister of defense.

Until recently, the close identification between MBZ and MBS served to bolster the former’s goal of positioning the UAE as a key player in Middle East geopolitics. However, following the latter’s implication in the murder of Jamal Khashoggi, a Saudi journalist who highlighted the abuses committed by the Saudi-led military coalition fighting against Iran-backed Houthi rebels in Yemen, the UAE faces the awkward task of distinguishing itself from the Saudi regime without harming its relations with Riyadh.

Cultivating a positive impression of the UAE is essential to the emirates’ strategy for diversifying an oil-dependent economy, which focuses on the development of tourism, services, and manufacturing. The government is heavily invested in convincing foreigners that the UAE is a politically stable and secure environment in which to conduct business, live, or take a vacation, a point policy makers have sought to underscore by making available western-style amenities, such as the recently opened Louvre Abu Dhabi.

In terms of the substantive steps taken to create a more inviting climate for investment, the government took a very important step in October by issuing a long-awaited federal law on FDI. As hoped, the legislation provides a framework for easing a prohibition on majority shareholding by foreign investors included in the Commercial Companies Law. Exactly which industries will be liberalized, and by how much, will be determined by a committee made up of members of the Cabinet, based on such criteria as the potential for job creation, profit generation, economic value-added, and adverse impact on the competitiveness of existing domestic entities, as well as the reputation of investing companies, the quality of the technology involved, and the impact on the environment.

Under the new law, the committee reserves the right to add to or remove industries from a negative list at its discretion. In addition, individual emirates have the freedom to enforce less restrictive requirements. In November, for example, the Abu Dhabi Executive Council approved a proposal to permit 25% foreign ownership in the Abu Dhabi Islamic Bank.
Economy Minister Sultan Al-Mansouri has indicated that a positive list of industries in which majority foreign ownership is to be allowed will be released sometime in the first quarter of this year, and predicted that inflows of FDI will increase by 20% in 2019, compared to average growth of a little more than 6% over the last three years. Already a dozen industries are said to be gaining waivers from existing restrictions. However, the government is notorious for slow-walking economic reforms, and a delay in issuing the positive list would obviously blunt the immediate impact of the FDI law.

Since 1979, The PRS Group, Inc. has been a global leader in quant-based political and country risk ratings and forecasts. This excerpt is from our latest Political Risk Letter publication, for more information please contact us at (315) 431-0511 and sales@prsgroup.com

Back to Insights