Oil, Opec, Economic Reform and Venture Capital

Last week the Minister of Energy for the UAE was reported in an article as saying that it is too soon to extend the oil supply deal, and then shortly afterwards there was a report that Saudi Arabia’s minister of energy had said the deal could be extended after the first six months. I am known to be pessimistic about Opec cooperation, but given the close relationship enjoyed by Saudi and the Emirates, I thought about the perceived discord in communication and was led to an intriguing idea.

As described in an article in The National on Monday, Norway is facing challenges in diversifying away from oil. If Norway, with its more developed economy, is facing challenges then clearly diversification for a less developed oil-exporting country must be even more challenging. This would lead to the idea that differing challenges faced by each country could lead to different strategies and signalling of these strategies with regards to oil production.

If Opec is trying to cooperate on the oil production side, would it not make sense to also cooperate on the oil diversification side? First, the exchange of experience would be invaluable. Second, understanding each other’s issues can make negotiating on the oil side a little eas­ier thanks to a fuller understanding of each other’s economic context. This could lead to the third point – that non-oil issues, specifically trade agreements, could complement oil discussions and lead to better compliance. When it comes to oil cuts the incentive is to cheat. When it comes to diversification the incentive is to cooperate.

Following up on my article last week discussing venture capital, that venerable magazine The Economist this week published an article on start-ups in the Arab world. One interesting titbit is that according to the World Bank it is easier to launch a start-up in Egypt and Morocco than it is in the UAE. I applaud Egypt and Morocco for unleashing their human pot­ential, especially Egypt, which has seen quite a bit of political and economic turmoil recently. I am not as familiar with the North African markets as I am with the GCC markets, but my experience has been that neither Egypt nor Morocco provide the levels of government support to their economy as we do in the UAE. I wonder if maybe in our attempt to support our economy we have become a crutch, and if it might not make sense to consider allowing the private sector to lead in building the economy and have the government support that entrepreneurial leadership.

The American president-elect Donald Trump has managed to turn the highest executive office of the most powerful country on Earth into a reality TV show. This unpredictability means figuring out the direction of the markets could be difficult. But perhaps going long volatility might be the answer. Also, as he raises the pol­i­tical risk across the rest of the world, particularly with China, it means the relative perceived political risk in Mena is likely to drop. In other words, it should become easier to attract investments to the region as the rest of the world becomes perceived as riskier. Let’s see if Mr Trump can offset the drop in oil price.

One thing I learnt in the past week is that there is a large number of entrepreneurs in the UAE, when they contacted me through several channels regarding their projects and their frustration at not finding a source of funding. I want to be clear here, these wonderful people were not complaining about being turned down for funding. They were frustrated that they could not find the appropriate sources of capital to pitch to. That is sad. It is sad for our entrepreneurs. It is sad for our economic future.

Perhaps the new venture capital law announced on January 7 will help. It makes it cheaper to start a VC fund because of deregulation. I hope that the lic­ensing process is fast tracked. It is important to note that while it helps small players set up more easily, large players could always afford to set up but they chose not to. I still maintain that if a fraction of the funds invested in property projects was allocated to venture capital then we will become a global player in terms of attracting and nurturing entrepreneurs.

What I love about what was announced regarding the new VC law is that it will allow VC funds to lend to companies. The Central Bank of the UAE has so far been the regulator regarding lending, but a central bank regulates to protect depositors of a bank and they are usually and understandably reticent to allow banks to lend to start-ups. VC funds would usually take funds from sophisticated investors, thus allowing the lending market to higher risk companies to open up. This is a great step forward, one that gives me much hope that we will reach an enriching start-up ecosystem, and I look forward to being one of the first to take advantage of it.

This article was originally published in The National.