Tag Archives: Economy

How Interest Rates Will Affect the UAE

October 6, 2015 By in Economy Tags:

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.

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China Crisis? Risk-parity meltdown? Or financial gravity at work?

September 8, 2015 By in Investments Tags: , , ,

The last few weeks have seen equity markets around the world register significant losses. Sudden downward price movements can be stressful and the conflicting analysis and advice can be confusing. Although I cannot give specific advice on what to do, perhaps I can point out some issues that might have been overlooked and would be useful to consider.

The general consensus is that the current market woes began with a crash of China’s equity markets on Monday, 24 August. The 8.5 per cent drop in the Shanghai Composite Index is what many market commentators agree triggered the global wave of selling. What is not made clear is why the Shanghai tanked and why this would trigger a global crash. The answers proffered are that China’s economy is slowing, and that this in turn will trigger a slowdown in the global economy. This is puzzling because the slowdown has been common knowledge for quite a while now, and anyway Chinese growth is still running at about 7 per cent a year. So what news came out to trigger the price plunge? Nobody seems to have an answer.

Even more perplexing is the effect of China’s economy on the world. The narrative that a brake on China’s economy would slow down global growth has things backwards. China is a supply side economy and depends on robust global demand. It is only if global demand, in particular the United States, were to slow down that we would expect a slowing in the global economy, including China.

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UAE VAT Positive for the Economy

August 25, 2015 By in Government Tags: , 1 Comment

The announcement of the planned introduction of a federal value-added tax (VAT) and a corporate tax in the UAE has stimulated a lot of discussion on what this means for the country and its residents.

I have a slightly different view to the current mainstream opinions, and would like to share it.

The overall premise of the conventional wisdom is that the federal government of the UAE is introducing new taxes to offset a decline in oil revenue due to lower oil prices. The problem is that the federal government does not generate its revenue from oil sales, as it does not own or sell oil. The majority of oil is to be found in the emirate of Abu Dhabi, and oil price changes would affect the emirate’s revenue, not that of the federal government.

What this means is that the tax receipts generated would not be to replace revenue lost to oil price declines, but would instead be additional revenue available to the federal government to spend and invest in the country. That means an expansionary budget at the federal level, a good thing.

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Greece's Problem is that the European Union is Speaking Greek

July 12, 2015 By in Economy Tags:

The language used in discussing Greece’s economic dilemma is getting in the way of a solution. In business negotiations it is usually quite useful to look at the major issues and try to reframe them. This is no different when talking about economies.

Issue 1: The Greeks “rejected austerity.”

Reframe 1: The Greeks rejected the controlled austerity offered by the EU in favour of the chaos that the current Greek government has ensured for its citizens. This reframe is extremely important as the structure of the Greek government’s referendum was negligent and potentially fraudulent: they did not offer their citizens an explicit choice between two courses of action, instead they allowed one of the choices to be implicit. By doing so the Greek government betrayed their own people by hiding the risks from them.

What comes out of this reframe is that the gap in reality as understood by the Greek government and its citizens needs to be narrowed and even eradicated. This will take a lot of courage from the Greek government.

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Dear Forbes: Dubai is more than alcohol and bikinis on the beach

July 3, 2015 By in Economy Tags: ,

A recent article in Forbes asks whether the Dubai government is entrepreneurial in nature and if so whether the government is more entrepreneurial than the people. These are important points to consider and are a frequent topic of conversation. Unfortunately the Forbes article got it wrong.

The article lists four points as to why the Dubai government is entrepreneurial. I will rebut each one and then make my argument as to what is happening.

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UAE Labour Policy and the Health of the Economy: Ying & Yang

June 2, 2015 By in Economy Tags:

The phrase “UAE dependence on foreign labour” is a mainstay of any discussion about the UAE’s economy. It sounds self-evident, doesn’t it? I, however, refuse to believe an opinion that is stated as fact, regardless of how authoritative the statement might sound.

The implication in the statement is that if foreign labour were to leave the UAE then the economy of the UAE would be negatively impacted. This misses the point that the factors affecting an economy are many, and are dynamic. For example, the statement does not address how easy to it is to replace labour. But that is for another article.

In this article I’ll look at what the relationship between foreign labour and the economy are, which of these leads and which of them follows and what this means to the UAE.

So how should we investigate this? I have heard it said that a picture is worth a thousand word. Let me present three.

Source: The World Bank

Source: The World Bank

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The Intricacies of a Productive Economy

February 3, 2015 By in Economy Tags:

From the point of view of a national economy, what does it mean to be a successful company? Is it contribution to GDP?

GDP is an attempt at measuring the production of an economy. It is not an efficiency measure, but a measure of overall economic strength.

GDP is of course difficult to measure. First, how does one collect the necessary information? In most countries the tax authority can provide this information since all commercial transactions must be reported to the authority. In the UAE there is no such authority and this creates a challenge.

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Lack of SME Lending Harms Large Corporates, Creates Shadow Banking

November 20, 2014 By in SME Tags: , , ,

The existence of an SME credit gap, the difference between demand for loans by SMEs and provision of those loans by commercial banks, and its effects on SMEs has been discussed in detail in a separate article on this blog. The effects on large corporates is no less serious. Using some simple statistics from the earlier article, if SMEs are the source of greater than 50% of GDP and their share of bank lending is only 4% then either SMEs are super efficient, big corporates are super inefficient, or somebody else is financing these SMEs. I think that we can safely agree that it is highly unlikely for the SME sector to be super efficient or big corporates to be super inefficient. That leaves some, or all, of the USD 260 billion SME credit gap funded by a segment of the economy other than banks. Let’s unravel this mystery.

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Saudi Oil Price, the Global Economy and Correcting Media Economists

October 29, 2014 By in Economy Tags: ,

The hysteria surrounding Saudi Arabia’s increase in oil production and a subsequent drop in oil price to the mid-eighties and possibly lower is non-sensical. It’s nearly as bad a media reaction as if oil prices had moved the same amount upwards. Reports in the media have focussed on the possible political machinations of such a ‘dastardly’ move and the economic effect on oil producing countries not least of which is Saudi Arabia. Personally, the first thing that comes to my mind is that oil has dropped around 30% in the last few months and that is great news for the global economy and the world’s population. Why aren’t people rejoicing?

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