Is UAE Economic Productivity Declining?

Economic production, usually measured using gross domestic product (GDP) or gross national product (GNP), is not the same as economic productivity. Production is creating goods and services. Productivity is what you do with goods and services. To gain insight into the difference let’s look at a simple example.

GDP is a flawed measure

Simplistically, if you produce a widget that nobody uses then you’ve produced something but it is not productive. A little more realistically if you build a building at a cost of AED 60 million and valued in the market at AED 100 million then you have contributed AED 40 million to GDP (local resources involved that contributed to GDP would be counted in the AED 60 million cost). However this contribution to GDP is the same regardless of what is happening with the building. Regardless of whether you fully rent out the building or if it remains empty the GDP contribution remains the same. A reasonable person might argue that a GDP whereby the economy uses the production is healthier than the same GDP whereby the economy does not use the production.

So although GDP growth is often used as the main measure of the health of an economy it is clear that this does not give the full story. How can we clarify the picture further? One way to measure productivity, or if goods and services are being used, is by looking at the total value of transactions in an economy. The idea is that the greater the value of transactions the greater economic activity and, presumably, the greater use of goods and services.

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Predictions for UAE Business

My economic, business and financial predictions for 2018 and beyond. These are forward looking statements that should not be relied on to make decisions.

  1. The US Federal Reserve will continue to raise interest rates. The Fed already signaled it will tighten monetary policy, which is what raising interest rates does, due to the expansionary fiscal stimulus of the US President and Congress in reducing taxes. This prediction is of high probability given the Fed’s announcements late last year. The effect of tightening on the UAE will make a challenging economic environment even more challenging as US tightening is imported into the UAE’s economy via the dollar – dirham currency peg. Companies with large net interest bearing liabilities, such as bank debt, will especially feel the pressure.
  2. The real estate sector will transition in a big way to off balance sheet financing and will grow tremendously. Traditionally real estate is backed by debt or a mortgage to generate the necessary yields. The increased interest payment burden will make this difficult if not prohibitive. The result will be the use of funds for real estate managers. One such structure is a REIT and the number and size of these REITS has increased dramatically. This growth will be driven by two main drivers. The first driver is a hunger for yield, for investments that pay a regular amount of cash such as rent. The second driver is the need for asset managers to keep the yield spread relative to deposits constant. As interest rates increase the yields on lower risk, bank deposits increase and interest payments by leveraged managers also increase. The latter point is true of investment managers in any asset class. Continue reading

US Fed rate rise signal to re-examine the dirham’s peg to the dollar?

The UAE’s fiscal and monetary policy needs are in direct opposition to those of the USA. The problem, however, is that since the UAE dirham is pegged to the US dollar, American monetary policy is in effect being imported into the UAE, to the detriment of our economy.

As a reminder, a country’s fiscal policy has to do with government expenditure – which stimulates the economy – and taxes, which rein in the economy. The US government looks like it has come to the conclusion that tax cuts would spur their economy. The US Federal Reserve, which just increased interest rates for the third time this year, has signalled that it would need to counter the expansionary fiscal policy of the US government by increasing interest rates. The Fed’s reasoning is that the US economy is doing well, but because of this any fiscal stimulus will therefore lead to inflation. Hence their conclusion that they will need to aggressively increase interest rates to keep prices in check.
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EU's tax blacklist of UAE questionable It is not clear if the UAE is violating something it agreed to or if the EU is trying to unilaterally enforce rules on the UAE

Earlier this year an ambassador from an EU country asked me if I invested in the EU. I informed him that I didn’t.

When he asked me why, I pointed out that the EU had treated two of their members, Greece and Britain, abhorrently, and had tried to punish both countries in ways that made no sense to me. I explained that if the EU could treat its own members in such a way then how could I trust the EU not to treat me similarly?

It seems like my analysis was prescient as last week the EU included the UAE in a so called blacklist of tax havens. As an investor and a businessman, let me explain how the EU mishandled this and what the impact might be.

In terms of handling the situation the EU was reported as only saying that the UAE was not participating in some information agreements. Interestingly, the EU never mentions whether the UAE is a signatory to these agreements. So it is not clear if the UAE is violating something it agreed to or if the EU is trying to unilaterally enforce rules on the UAE. This needs to be cleared up. It is ironic, if not hypocritical, for the EU to publicly accuse the UAE of opacity but for the EU not to similarly provide transparency to these public accusations. Publicly announcing that the UAE is on a so called blacklist and then sending a private letter to the UAE Government is, quite simply, unethical. It either all stays private or it all becomes public. Continue reading

Your health depends on a balanced healthcare playing field

It is my opinion that one of the greatest moves to support free market capitalism in the UAE is the cancellation for Abu Dhabi Thiqa insurance beneficiaries of the 20% co-pay for treatment at private healthcare facilities.  The 20% co-pay was introduced in June 2016 and at that time there was discussion on the effect on patients.  There was also, however, a massive impact to the economy, but I felt that at that time the personal and social issues should take precedence over the economy. I think that now might be a good time to review that impact of that decision with respect to the economy and the positive effects of the cancellation of the decision.

Why is the co-pay issue important? As a first pass, clearly applying a 20% co-pay to private hospitals would incentivise beneficiaries to choose public hospitals. Money isn’t the only issue for a patient in determining which healthcare facility to visit but in the absence of specialisation issues it is clear that money becomes one of the predominant deciding factors.

The consequence, of course, is material negative impact on the finances of these private hospitals. The effect was quickly felt at three long-term healthcare centres in the Emirate of Abu Dhabi who quickly had their co-pay requirements waived in January 2017,  and the quick government response allowed these institutions to continue providing important healthcare services.

The positive social impact is clear. But what is the positive economic impact? It is the strengthening of the healthcare sector, not because Thiqa is willing to pay for the full cost but because giving private institutions the same economic opportunities as public institutions allows them to not only thrive but to also take risks that only private companies take. Risks such as acquisitions that lead to consolidation in the health care sector and thereby a strengthening of the sector. Continue reading

Zombie companies can be harmful

The term “zombie company” has recently entered people’s lexicon as the phenomenon manifests itself in China. Yet this issue did not start with China, it is closely linked to the problems faced by Japan that started in the early 90’s, called Japan’s Lost Decade and sometimes the lost two decades, which arrested the development of their economy for at least a decade, even though the nation is known to be hard working and efficient. After all, Japan is the home of global super-companies such as Toyota and Sony so understanding how the economy stagnated could yield important lessons.

There are many closely related definitions for zombie companies but I will use one defined in the academic paper Zombie Lending and Depressed Restructuring in Japan published in the American Economic Review 2008. The definition that they give is:

A company with poor productivity and profitability that should have withdrawn from the market but continues to do business only thanks to support from creditors or the government.

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SWFs as endowments

Different sovereign wealth funds (SWFs) have different mandates. The largest are presumed to have a mandate similar to that of an endowment. The idea is that the state owns a large but fixed amount of a valuable commodity, usually oil, and that this oil is the property of not just the living citizens but also of all future citizens. Therefore, some of the income from today’s sale of the commodity needs to be saved for the future. So in effect the SWF is a future generation fund.

The question becomes, how much needs to be saved to make this all fair? Well, one way to define fair is that the government expenditure per citizen across all time should remain the same, adjusting for the time value of money. Another way to state this is that the purchasing power per capita remains constant. I think that most reasonable people would consider this fair. Continue reading

Real alternatives to the game of monopolies in the GCC

As the economy continues to be under contractionary pressure, it is high time we took an in-depth look at one of the major constraints to its growth. As we know, it is entrepreneurs building start-ups that form the foundation of any economy. However, as I have argued before, monopolies stifle entrepreneurship. The greater the number of monopolies, the greater the value destruction in the economy.

I have argued this many times. Now I’d like to show exactly how much all these monopolies, the agencies on electronics, restaurants, medicine, etc might cost the economy in dollar terms. You will be shocked.

Before we get to pricing let us understand the value of a commercial licence to operate a business. In a free market capitalism framework, the value is close to zero. For example, in the GCC, most businesses require a licence that costs a few thousand dirhams at most. If you pay much more than that then you are paying for a regulated activity or something exclusive. This insight allows us to understand the value of monopolies.

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Nike's CSR, Shuaa's acquisitions, and the Fed's impact on our economy.

I am once again in New York. The energy of this city is phenomenal. No show, no PR, just execution. One interesting experience is the discussion that people are having with me regarding Nike’s What will they say about you? campaign, which shows a video montage of Muslim women in hijab playing sport. The effect on Americans that I have met with is clear: Nike, a global American merchandising group, has unequivocally stated that wearing a hijab is neither a bad thing nor does it imply that women are inferior. Talk about corporate social responsibility (CSR)!

The genius of Nike is that their CSR is not limited to charitable work, important as such contributions are. Nike used their global brand to reverse an unfortunate wave of prejudice. While mayors in France are banning the hijab, Nike is celebrating the hijab in the most powerful way possible. Nike’s genius is thinking out of the box and blending CSR with commercial acumen that led to the announcement of a Nike hijab. You don’t have to be a brand expert to understand the power of a Muslim hijab emblazoned with one of the most powerful western commercial symbols on earth, a symbol not of consumption and excess but one of strength and power. There are, as usual, people offended on all sides. But that doesn’t change the effect, it just proves Nike’s strength of character in doing the right thing.

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Trust but verify: a deeper dive into the UAE’s latest business news

Etisalat’s preliminary 2016 financial statements are available at the Abu Dhabi Securities Exchange. Earnings per share for 2016 operations? Dh0.97. Proposed dividends per share? Dh0.80. This gives a payout ratio of 82 per cent. Rationally, your payout ratio is high when you do not believe that there are any opportunities to invest in and so return cash generated to the shareholders.

Etisalat’s dividend policy would suggest that it does not see growth opportunities and therefore expects to simply be a yield play. This refers to business operations and not market price movements. Whether Etisalat is being rational in expecting the economy to stagnate, or worse, and is therefore taking a defensive cash position, or on the other hand is in denial and simply continuing to pay a historical dividend even though the payout ratio is high will be revealed by its stated strategy that it presents at the shareholders’ meeting.

If the strategy is defensive, closing certain operations or at least remaining steady, then the stated strategy will be consistent with the dividend strategy. If, on the other hand, Etisalat presents a transformation strategy or even an expansionary strategy, then this will be inconsistent with its dividend policy.

The suspense is unbearable.

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