United Arab Emirates Food and Drink Report Q2 2008

Inflation continues to be a major concern in the UAE economy, and the food and drink sector in particular, as discussed in BMI's recently published UAE Food & Drink Report for Q208. With all of the Gulf oil-producing States looking to offset inflation by introducing price controls on rents, raising wages and increasing food subsidies, the UAE government has been considering giving its citizens discounts on basic food products. Under the proposed scheme, UAE nationals will be able to purchase rice, bread, tea, sugar, milk, butter and other basic food items at cost, by presenting an identification card. While economies worldwide have had to deal with major food price inflation, the Gulf region has been hit particularly hard due to its major negative food and drink trade balance, and the local currency's peg to the dollar, which has been plummeting against a wide range of currencies, particularly the euro, making imports far more expensive.

In February the government of the emirate of Dubai announced its plans to establish a chain of supermarkets, giving few details, apart from saying that the name of the new chain will be Aswaaq and that it will raise a part of the capital for this new project by selling shares in an initial public offering in which it will sell the equivalent of 55% of the new company. As many of the country's flashy Westernstyle MGR outlets focus on the higher end of the market, with a noticeable lack of discount stores, there are not many established chains that would be interested in carrying very low-end products, for fear of damaging their image and looking 'cheap'. Therefore the government's decision to establish these stores may be a means of catering to this lower end of the market at a time when food prices inflation is expected to continue. Then, the government made an even bigger move, with the Ministry of Economy sending out a maximum price list for a number of basic goods, saying that it will fine retailers AED100,000 (US$2,724) for selling above these prices. Following this announcement the Union Co- Operative Society agreed to fix the retail price of 16 basic goods at their 2007 levels in its stores, and has recommended that other retailers follow suit.

The nuisance of high inflation will continue to hang over the UAE economy in 2008. Although we do forecast a slight easing in inflationary pressure in 2008 to an average of 7.9% year-on-year (y-o-y), down from 9.7% y-o-y in 2007, this is still elevated by historic standards and inflationary expectations remain high. Inflation is also becoming a major political issue, with the falling real value of wages, particularly among unskilled workers, fuelling discontent, with migrant workers having staged riots last November in Dubai. Inflation is also discouraging highly skilled workers from relocating to the UAE, thereby impacting the business environment, highlighting what a serious concern this is for the country.