Politics often plays a major role in influencing global economies and financial markets. Because of the size of its economy, the US takes the lead in political influence, and in seven days the most significant event in American politics, the election of the next president, takes place.
One of the main tenets of any American presidential campaign is the creation of jobs by improving the economy. These days the campaigns seem to resort to three economic pillars – and a xenophobic one.
This article was originally published in The National.
This article is published in Arabic in Al Ittihad as نصائح دون طلب .
I often hear advice given by the likes of the IMF and other national economy research institutions that the UAE has too many Emiratis working in the Government, and that the Government should incentivise them to work in the private sector. Someone reading such conclusions from world-respected researchers might automatically think that this makes good sense. I, on the other hand, am automatically suspicious of foreign institutions giving unsolicited advice.
The trouble with looking at a single statistic is that it is like driving by looking only at your rear-view mirror. It is important but certainly not enough to drive safely.
The idea behind the advice to incentivise Emiratis to work in the private sector is that, first, it reduces the budget burden on the Government and, second, that private enterprise is more efficient at commercial activities than government institutions.
The first point only makes sense if the proportion of Emiratis employed by the Government is greater than the Government’s share of GDP. In our country, it is clear the Government has a much higher proportion of GDP than countries with less commodities, and which are not growing as fast. The idea of advising that there are too many Emiratis employed by the Government needs to at least be compared with the statistic of the Government’s share of GDP.
If such a statistic exists, it certainly isn’t in the IMF report.
I am in New York, the primary financial centre in the world, visiting asset managers. The smallest of these managers has a total of about US$500 billion under management. According to the World Bank, the total market capitalisation of domestic listed companies in the UAE was about $195bn at the end last year. The UAE has two primary stock markets, a federal level market regulator in the SCA and at least two offshore financial centres in the DIFC and ADGM, each of which is regulated independently of the other and the SCA.
Maybe looking at total numbers doesn’t make sense as different countries have different GDPs. Fortunately for us the World Bank provides market size as a percentage of GDP. For the UAE, the total market cap of domestic listed companies is 53 per cent of GDP as of the end of last year; for the US it was 140 per cent. For Singapore, a country often held up as a model for the UAE to learn from if not emulate, market cap is 219 per cent of GDP.
For Saudi Arabia, which many assume lags the UAE in financial innovation, the number is 65 per cent. What saddens me is that the world average is 99 per cent and in terms of the size of our markets relative to GDP we are roughly half the global average.
Eid Mubarak.
It has been difficult this year to find topics on the economy or business to be positive about. For Eid Al Adha I feel that a more optimistic article is called for. So let us look to the future and to what might be.
One happy future is having oil prices to return to US$100+ and remain there. That would have an immense positive effect on the economy. But then that isn’t looking to the future. With, among many other factors, shale oil production costs dropping and Iran increasing output capacity, this isn’t an optimistic future. It is a fantasy.
I, however, believe that we can have an optimistic future without the need for massive oil price increases. I am not saying that it is an easy path but it is a realistic one. It consists of bringing together a host of solutions and interweaving them into a single integrated plan for the economy. You will recognise individual ideas that I have discussed in detail already. Now it’s time to put these pieces together into a plan.
Last week saw some interesting news reports. A leading one was around Emirati Women’s Day. A raft of announcements in support of Emirati women declared the appointment, or intention to appoint, women to senior positions across the public and private sectors. Such decisions are welcome but are not enough to ensure gender equality. This requires the enactment of laws that criminalises gender discrimination and the creation of support departments for women who have been discriminated against. This is good for the economy. I have hear that women make up around 50% of the Emirati population and are therefore an important demographic.
The news on the economy continues to be grim. I went searching for data to help us understand what is going on. I was surprised at what I found. You’ll have to read the article to find out if the surprise was pleasant or not.
In the absence of a team of research analysts to mine the data that I need (free marketing anyone?) I need to use what is available. One of the best sources of aggregate economic information is provided by the Central Bank of the UAE, available for free on their website.
As a start I took a look at their monthly statistical bulletin for June 2016, which they note is preliminary. I decided to look at some of the more oft repeated mantras and see if the data matched. Looking at what is happening with the banks should give us a good idea at what is happening generally.
One of the scariest pontifications is that the government is withdrawing its deposits, thus squeezing the economy by limiting the ability of banks to lend. Government deposits increased to 184 billion dirhams up 14% from 161 billion one year ago in June 2015. So, no, the government is not withdrawing deposits, it has added to them substantially. Pleasant surprise.
In April, news of a municipal fee was announced on residential rents for expatriates. Since the fee is a percentage of rent, this is, by definition, a real estate tax. This comes on top of the value-added and corporate taxes announced earlier. I wonder if there is some confusion between maximising taxes and maximising tax revenue. The difference is important.
The former US president Ronald Reagan oversaw one of the strongest economic growth periods in America. His plans, dubbed Reaganomics, were and remain hotly debated by economists. Understanding them is instructive. But first, let us agree on some terms.
Brexit drove me to review the European Union and see if there are lessons to be learnt, especially in light of the economic challenges some of the member states have faced. The conclusion I have come to is that it is frighteningly easy to make well-meaning mistakes that can destroy an economy.
It is instructive to compare the United States and the European Union and see what light it sheds on how the UAE might make decisions about its economy. A full analysis would require a book; I will focus on a few directional ideas that might inspire.
Britain’s referendum result on exiting the EU has been met with a flurry of responses from politicians and financial markets. The almost uniform negativity of the responses would, by itself, alarm the average global citizen. But I smell a rat.
I have a simple maxim that has served me well in life – when you want to know who won and who lost, listen for the most negative response. They are the losers.
The recent contraction in the economy, poor performance of SMEs and large layoffs in the UAE has made clear that the oft cited statistic that two-thirds of the UAE’s economy is non-oil related is incorrect. At least it is indirectly related to the price of oil. So how can the private sector further diversify away from oil? The answer is exports.
The economy of the UAE can never be independent of oil if it remains insular. With around one million nationals the size of the UAE’s economy, even with its ability to attract expats, will always be dwarfed by oil income in the near and medium future.
If this is the case then growing true non-oil GDP requires a re-think. One path to growth that is relatively independent of the domestic markets is exports. Export demand is dependent on the economies of international markets most of which will have low correlation to our markets.