Why the U.A.E. Is Turning to Expats to Boost Growth: QuickTake

(Bloomberg) -- The United Arab Emirates is easing rules on the foreign ownership of companies as the country seeks to attract investment and boost an economy battered by lower oil prices. Under the new rules, non-Emiratis will be able to control a company outright, and specialists in medical, scientific, research and technical fields as well as top students will be able to get a residency of up to 10 years.

Officials hope that the moves will attract new businesses to the country, driving future growth, and giving a much-needed boost to its real-estate market. Still, many questions remain about how exactly the new laws will work and the benefits they will bring. Here we try to answer some:

1. What's changing?

Currently, expatriates who want to set up a business outside of a free zone have to partner with an Emirati or local entity. U.A.E. citizens must own 51 percent of the joint venture and receive an annual fee or share of the profit. The changes will help start-ups and entrepreneurs set up businesses by cutting costs, according to Khaldoon Tabaza, founder of technology investment firm iMENA. The moves will boost growth by attracting more foreign direct investment, mainly into non-oil sectors, said Ehsan Khoman, head of Middle East and North African research at Mitsubishi UFJ Financial Group Inc.

2. Why now?

A plunge in oil prices in 2014 squeezed Gulf countries' budgets and spurred efforts to reform economies and become less dependent on crude. While prices have recovered and are now close to $80 a barrel, nations are planning for a post-oil era. “The region as a whole has been grappling with this issue for many years, but when oil was at $100 a barrel for several years, there wasn't that much need to attract foreign investment,” said Khatija Haque, head of MENA research at Emirates NBD. “Clearly, that has changed now.”

3. Are other Gulf countries making similar moves?

The U.A.E. amendments follow similar changes in Qatar and Saudi Arabia. Qatar in August said it plans to introduce permanent residency to attract investors and some skilled workers amid a regional boycott. Saudi Arabia announced a plan for a green card-like program in 2016 to be implemented over five years and Oman is studying proposals for expatriates to set up a business without a local partner.

4. How will this impact property prices?

The moves are “very positive” for real estate, according to Ali Adou, head of asset management at Daman Investments. A downturn in the property market is lasting longer than expected. S&P Global Ratings said in February that it doesn't expect a recovery before 2020, when Dubai hosts the World Expo. The new visa changes “will certainly mean a turnaround is on the cards, perhaps sooner than we first envisaged,” said Faisal Durrani, global head of research at Cluttons LLC.

5. Is this the first step towards more taxes?

Many expatriates are drawn to the U.A.E. -- not only for its year-round sunshine -- but also for tax-free salaries and low corporate tax. But things are changing. In January, the country introduced a 5 percent valued-added tax. “After years of austerity and economic slowdown, the emphasis in on supporting growth and providing a boost to the next phase of development,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank PJSC. “At this stage, it seems about supporting the economy.”

6. What will be the fate of free-trade zones?

Free-trade zones are dedicated economic zones set up with the objective of attracting foreign companies by allowing exemptions to local laws. “While it may be early to comment on the full impact of the new foreign ownership rules on free zones, we expect that many of the well-developed free zones in the U.A.E. will continue to attract foreign investors, professionals and entrepreneurs because of their various other offerings in terms of infrastructure and legal environment," said Abeer Jarrar, corporate/M&A managing associate at Linklaters LLP.

7. What's been the initial reaction?

The changes could be a long-awaited trigger for investors looking at stocks in Dubai and Abu Dhabi, with the real-estate sector benefiting the most, according to investors and analysts. Real-estate and financial stocks represent almost 70 percent of Dubai's main index, and about 65 percent of the gauge in Abu Dhabi. Emaar Properties PJSC and Damac Properties Dubai PJSC contributed the most to the increase of Dubai's benchmark on Monday.

The Reference Shelf

• Bloomberg Intelligence analysis on Abu Dhabi and Dubai growth
• IMF expectations on the U.A.E. economy
• Bloomberg Intelligence on how the Middle East outlook this year

--With assistance from Filipe Pacheco and Matthew Martin.

To contact the reporter on this story: Archana Narayanan in Dubai at anarayanan16@bloomberg.net

To contact the editors responsible for this story: Stefania Bianchi at sbianchi10@bloomberg.net, Claudia Maedler

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