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.
Tag Archives: Economy
A Random Walk through UAE Economic Data
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.
GREs versus the Private Sector in the UAE
Every once in a while I decide to torture myself and rummage through the IMF’s databases looking for interesting research and analysis. When I found a Selected Issues UAE Country Report by the IMF, I thought I’d try my luck.
The report, published this month, begins by looking at government-related entities (GREs), which is anything that the government owns shares in. It is important to note that the IMF repeatedly warns that it does not have all information on all GREs. It looks at about 60 companies, although one should bear in mind that the government holdings in some are too small to have any influence.
One of the early IMF comparisons that is striking is the return on assets (ROA) of the non-financial corporate sector across GCC countries over the period from 2007 to 2014. The UAE at 8.1% a year is higher only than Kuwait. Saudi Arabia at 9.6 per cent is about a fifth higher and Oman’s 13.3% is more than three-fifths higher. How then are we the commercial hub of the GCC?
A Little Reaganomics Please: Expansionary not Contractionary Policies
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.
Austerity doesn't work, we need an expansionary budget
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.
Amid the Brexit hysteria: keep calm and cash in
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.
Trade is critical to diversifying the economy away from oil
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.
Dismantling GCC Monopolies for a more Efficient Economy
A good rule of life is that there is no free lunch. The examples offered as proof to the contrary are simply misunderstood as they are pure luck, which would be clear if the many comparative failures are also taken into account. In a country – indeed a region – that has had meteoric growth over the past half-century, far too many participants seem to have confused a long-term economic bull market with corporate success.
To use the vernacular of investors, there was no alpha, which is value creation by individual companies, and it was all beta, which is company growth due to growth of the economy.
Foreign investment could make low-oil belt tightening easier to bear
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.
The GCC's Pension Funding Challenges and Silver Linings
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.