I have been writing predominantly about the management of other people and have for the most part neglected the equally important issue of managing oneself. Today, I begin rectifying that.
There are two main popular approaches. The first and older one is espoused by Stephen Covey in his seminal book The 7 Habits of Highly Effective People. The book is a little dense but imparts great value, and I highly recommend reading it – perhaps on an annual basis.
When you come right down to it, the emirate of Abu Dhabi can be characterised from an economic point of view by three things – not enough local human capital, massive natural resources (read oil) and massive financial resources (read sovereign wealth funds).
These are the three main economic assets that need to be considered when the future strategy of Abu Dhabi is developed.
In this article I will outline the important financial themes that I see for the GCC for this year. It starts with oil, which is at about US$38 per barrel. Estimates for the break-even price for shale oil production vary, but the consensus appears to be at least $60.
Examining these two pieces of information, it becomes hard to understand the crowd who believe that Saudi Arabia is trying to crush shale oil. The oil price is about $19 below where it needs to be to achieve this objective. For Saudi Arabia, which pumps 10 million barrels of oil per day, that is about $200m a day of unnecessary loss in this scenario, or an unnecessary loss of $73 billion a year.
One could argue that going this low, is the kingdom being safe? Surely there is some middle ground that would starve shale and inflict less pain on the kingdom? Oil at $38 a barrel is overkill.
I think that it is arrogant to assume that the Saudis do not know what they are doing, especially with oil. It seems clear that shale oil is not the target, or at least not the main one.
That leaves only one other credible target, and that is Iran, Saudi Arabia’s main adversary in the region. The timing, which comes with the US president Barack Obama’s push on the Iran nuclear issues that allowed sanctions to be lifted against Iran, is telling.
Iran’s pleas to big oil companies to develop its infrastructure so it can increase its capacity above its current 2.5 million barrels per day (bpd) have fallen on deaf ears. Why? Because it is uneconomical to invest in oilfields today after the glut of investments over the years when oil was $100 per barrel.
Critics also say Saudi Arabia cannot survive oil this low for more than three years. The country’s budget deficit is about $100bn to $150bn a year. Saudi Arabia has about $500bn in foreign reserves today. If that is all the maths that you are willing to do, then yes there are four to five years left. But anyone who thinks in this way simply does not understand Saudi Arabia.
The kingdom can and has previously borrowed large amounts locally. It can easily borrow enough to finance the current deficit for at least three years, if not five. It did exactly that in the 1980s and 1990s. This means that Saudi Arabia can withstand current oil prices for seven to 10 years to counter its adversary Iran. It is likely we will see a longer period of low oil prices.
But this takes a lot of belt tightening across the GCC. There are two main countermeasures that have been proposed and enacted – taxes and a smaller government budgets. The usual response to an increase in taxes is flight of capital, especially as a low oil price means most of the rest of the world will grow. This is the opposite of what the region needs. Shrinking budgets automatically lead to shrinking economies.
To actually complete and complement the above two actions, the GCC needs to make itself attractive to foreign capital. This begins with developing the rule of law and applying it in a consistent manner. Special exemptions, say for an IPO, need to stop. The regulation should be either applied equally or scrapped.
The next step to level the playing field is to continue to improve corporate governance. It can be appealing in times of stress to ignore the tenets of corporate governance in the name of speed or priority, but the cost will be the continued flight of capital.
The third step is liberalisation. Think if in the past 30 years all expatriates were allowed to invest freely in the UAE. Our economy would be much bigger, and as a result much healthier. In the UAE we have taken some steps in allowing ownerships of some listed shares and we have created free zones. But 100 per cent ownership of companies on federal land still does not exist. Saudi Arabia allows 100 per cent foreign ownership in most sectors. If we want to attract money, let’s give foreigners the ability to invest.
The final step is a subset of corporate governance – transparency. When things are going well, transparency is in full swing. But when there is a problem, everything becomes opaque. Corporations need to be open and honest in good times, and especially in bad ones. Anything less will lose investor confidence
Fiscal policy alone – shrinking budgets and raising taxes – will not lead to balanced budgets but will destroy the economy. Fixing the legal and governance structure of the economy might just be what the doctor ordered.
This article was originally published in The National.
I have been involved in downsizing at many companies and have been exposed to both the theory of downsizing and the horror of the reality. In today’s business environment we are seeing faster downsizing than usual, but in many cases still not the most effective approaches.
Where senior managers and business owners make the biggest mistake is in understanding their biggest risks in these scenarios – morale. The problem with morale is that it takes time to build and is easy to shatter. The idea that damage to corporate morale can be quickly regained is false and leads to counterproductive strategies.
My co-author today is Karl Happe, chief investment officer of Allianz Global Investors’ Insurance Related Strategies. Although the strategies developed and deployed by Allianz are aimed at the insurance market, there are many important lessons that most investors would benefit from, in particular family offices.
The family business invariably grows from a single operating company. As the original business grows and matures, throwing off tremendous amounts of cash, the question becomes: what next? There seems to be three main strategic ideas: 1. Grow the same business geographically, 2. Financial investment programs or 3. Enter into new businesses locally. These strategies are not mutually exclusive.
Developing and emerging economies go through a known cycle: export of local products and commodities, FDI including agencies and technology transfer.
But what about human operating skills? What use are large amounts of foreign investments, the factories and infrastructure that they build and the advanced technology that is imported if worker operating efficiency does not increase to match the advances in all of the other facets of the economy?
The effect of demographics on the economy has been one of increasing concern for countries with ageing populations. The poster child for this issue is Japan although an increasing number of countries in the Western Hemisphere are beginning to take notice as well. The main issue is that declining population growth rates and in some cases negative population growth rates are severely challenging the historical funding of retirees with tax revenue collected from a working population that is greater in number.
The Federal Open Market Committee (FOMC) of the United States Federal Reserve recently decided not to increase interest rates. This is significant because US interest rates affect not only the economy of the US but every single economy in the world in quite a material way.
Much of the analysis on how the actions of the FOMC will affect the UAE’s economy mirror the analysis for emerging markets as a whole. There is much one can learn by looking at other economies but emerging economies are not identical to each other and each has unique characteristics that simply do not fall within the norms of the emerging markets as a whole.
When companies fail, the investigative eye of audit usually looks at fraud issues, scenarios whereby executives or other stakeholders benefit financially. The key issue investigated is conflicts of interest. The company in which you serve as Chairman entered into a transaction with a company in which you have beneficial interest? Well, let us take a look into that!