Category Archives: Economy

On governance and denial, from the UAE to Wall Street

March 7, 2017 By in Corporate Governance, Economy Tags: 3 Comments

Last week Arabtec announced a recovery plan, as detailed in a stock market filing. There was no report on how corporate governance would be enhanced for a company that had a loss of Dh2.3 billion in 2015 and Dh3.4 billion in 2016. It is my humble opinion that if things keep going wrong and neither the shareholders nor the board seem to change then changing executive management every couple of years isn’t a strategy, it is random action.

More fascinating was that on the same web page of The National was an article on how Expo 2020 would improve the job market this year. It would seem to me that the sector that would benefit the most from Expo 2020 is construction. And yet Arabtec is saying it will stabilise in 2017, prepare in 2018 and grow only in 2019 – which is really too late to be getting construction orders for the massive project that is Expo 2020.

So the recovery plans – one for a company, one for the economy – seem inconsistent with each other.

Denial isn’t just a river in Egypt folks.
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Venture capital as a substitute for oil in driving economic growth

February 7, 2017 By in Venture Capital, Entrepreneurship, Economy, Oil, Government Tags: , , , ,

Venture capital is critical to the future success of not only the UAE but also the GCC. To understand this we first need to understand the historic formula for our success – oil leads to financial capital, which leads to real estate development, which creates social and business communities that attract people. Repeat.

Even if oil prices had not collapsed, sooner or later the size of the economy would reach a level at which oil alone could not deliver growth. We have not reached a point of reckoning because oil prices halved, that only accelerated the inevitable.

The conventional argument is that SMEs are the engine for growth in any economy. Some might argue that the global conglomerates coupled with global trade are the engines for growth. Whatever idea you subscribe to, in the end one has to accept that whether you believe SMEs drive economic growth or whether it is large companies, the first step is starting that company. Put simply, without start-ups an economy cannot normally achieve sustainable growth.

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Oil, Opec, Economic Reform and Venture Capital

January 17, 2017 By in Oil, Entrepreneurship, Economy Tags: , , ,

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.

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Kick-start the UAE’s venture capital ecosystem to boost the economy

January 10, 2017 By in Economy, Finance Tags: , , , 7 Comments

So why, if everyone is telling us that the oil price is going up, are rental taxes, sorry fees, being applied? Don’t get me wrong, fiscal reform is necessary, but if oil is going back up, let us give the common man a breather. Here’s an idea – let’s start with taxing everyone who has a monopoly agency. You know, the rich.

Speaking of announcements, I would like to introduce a new statistic, similar in importance to GDP, CPI (inflation), the unemployment rate, etc. I call this statistic the Reality Based Ratio. It is the ratio of the number of projects announced to the number of projects completed. Of course this needs to be adjusted for size of project and time needed to complete, but you get the idea. The higher the ratio, the lower the reality basis of the economy. People need to stop applauding projects announced and start applauding projects completed. Well, they don’t need to, they just should if they want any sort of economy in the future.

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A challenge we can meet

January 2, 2017 By in Economy, Finance Tags:

A vision for what the coming year will bring should include scenarios and actionable ideas. My vision will focus on what might affect the UAE and the wider GCC the most. These are forward-looking statements that can be wrong.

The factor that affects our economy the most is the price of oil and our level of production. The change in our level of production is unlikely to be material, even if one considers the agreed Opec cut decisions of late November. The question is the price of oil.

The main influence in 2017 on the price of oil is unlikely to be demand, which anyway will probably soften if America turns inward, but supply. In late November Opec and non-Opec countries agreed to oil production cuts that are unprecedented in breadth, depth and cooperation. It is that last bit that is the problem. If Russia breaks from the agreement, a likely scenario signalled by Rosneft and its chief executive, Igor Sechin, or if Saudi-Iran tensions flare up and cause a rift then we will see oil drop to between US$30 and $45. Shale oil will never allow the oil price to go over $65, probably lower. That means that our economic contraction will at best slow down in terms of the effect from oil.

Our economy will continue to show cracks in its ability to function without massive government spending.

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Saudi Vision 2030 must tap rich parts of the private economy

December 27, 2016 By in Economy, Finance Tags: ,

Using Saudi Vision 2030 as an example, in a previous article I pointed out that economic reform is difficult to get perfectly right on your first try, but I also pointed out that complaining about it without trying to provide solutions is usually an ineffective strategy for providing feedback to the decision makers. Especially since Thursday, when the Saudi government unveiled its budget in a manner providing a large increase in transparency and comprehensibility. The state continues to improve its part in achieving Vision 2030.

The Arab Spring, Brexit and the probable demise of EU 1.0, and Donald Trump’s plans are a product of the mismanagement of economic reform. This is not an article about politics and I take no sides here. This is an article about economic reform and how it has the power to change history. The idea here is to provide different ways of looking at economic reform to create tools that might be useful to all stakeholders.

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Oil, Opec and the Revenge of Rosneft's Sechin

December 13, 2016 By in Oil, Finance, Economy Tags: , 2 Comments

Wednesday, November 24, 2014: Ali Al Naimi, the former Saudi oil minister, signals that Saudi Arabia was changing its oil production strategy from oligopolist – as the main swing producer that keeps oil prices high – to capitalist, and would go for market share. This would lead to lower crude oil prices. The Venezuelan foreign minister, Rafael Ramirez, replied that the prices at the time of about US$62 per barrel would not allow for the necessary investment in oil production capability and would lead to a massive price surge when oil demand increased in the future and that there wasn’t enough spare capacity to meet that demand.

This has been an oft quoted warning by many others over the years.

May, 2015: the Rosneft chief executive and close Putin adviser Igor Sechin states that Opec is dead. Rosneft is Russia’s main state-owned oil company. Opec being “dead” means that Mr Sechin does not believe that oil prices can be managed. Keep this in mind – the most powerful man in Russian oil said a little over a year ago that oil prices cannot be managed.

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A review of my financial analysis

November 29, 2016 By in Economy, Finance Tags: ,

One of the problems with news articles is that it is easy to write something and then not be held responsible for it as the story develops. I will try to change that with this article.

I wrote an article recently on how the consequences of Brexit were overblown and how the idea of an EU 2.0 might make sense. The idea of EU 2.0 evolving the current framework against Germany’s wishes to match today’s economic realities could be triggered by Italy.

Recent reports show that France is also jumping into the fray but on Italy’s side, basically over the issue of bank regulation. With Britain on the way out and Italy and now France unhappy with Germany’s overly conservative stance, we may see the more constructive evolution of the EU to version 2.0 rather than the complete meltdown that the current path is heading for, a national equivalent of Lord of the Flies.

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The Trump Trade

November 22, 2016 By in Economy Tags: 1 Comment

As the US president-elect Donald Trump begins assembling his team, it is becoming clearer what his proposed policies might look like. This in turn allows us to begin fleshing out an investment plan.

To begin with, the election of a president of the world’s most influential nation in politics, economics and culture always creates uncertainty. A relatively known politician who has held several political positions over a long time, such as Bill Clinton, creates the least uncertainty as one can usually extrapolate his behaviour.

A less well-known politician with a short political life, such as Barack Obama, will cause an increase in uncertainty. Relevant for us is the example of his attempted disengagement of America as global policeman, or, in political jargon, the beginning of the end of America as the indispensable nation. This was a bit of a shock in our region.

Mr Trump is a complete game changer in the sense that he does not have a political career that investors can review to glean information from, he did not outline any detailed policies instead giving his vision, and he was courting what appears to be a completely new demographic that is focused on issues the traditional two parties have ignored. These three issues create tremendous uncertainty and therefore the first conclusion is that geopolitical and economic risk premiums need to go up. If they don’t then you are not being paid properly for your risk.

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‘Learnt hopefulness’ will keep us from success

November 8, 2016 By in Economy Tags:

We’re coming in for a hard landing on the economy – sadly it isn’t external events, such as the drop in the price of oil. It is our ingrained habits, learnt over the past decades and difficult to change.

Martin Seligman, a psychiatrist whom I have written about before, coined the term “learnt helplessness”. Basically, his analysis started with an experiment in which two groups of dogs where subjected to pain.

One set could stop the pain simply by moving from one area to another. The other set were subjected to pain regardless of what they did. In the end, the latter group simply gave up, lay down and did nothing.

I believe that we suffer from learnt hopefulness. Whatever happens we, unlike Mr Seligman’s subjects, have been rewarded.

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