Saturday, December 26, 2009

2010: What happens next?

After the turbulence of 2009, human nature expects the new year to be one of positive difference. If 2008's ending weeks were tinged with the hope that the GCC economies would survive unscathed 2009 proved them wrong, as the Al Gosaibi debt issue, the Dubai World surprise and the general battering of UAE credit ratings by rating agencies brings 2009 final days with a gloom that focuses ofcourse on the hope all will be well. Yes I have mentioned the silver linings that accrue in this over cast moment of the regions financial landscape. While we can all hope for the best, there has to be a concerted effort to put into place the elements the will change the financial topography for the region. This does imply what are the likely events or processes that will change the economic outlook.

Here is a mind map of what perhaps will happen.

1. The Dubai World Debt.

Indeed this has been and will be the prime issue that the financial and media world will focus upon. It is crucial to the well being of the economic system for the region, and most importantly, it is where the confidence of the financial community can be best restored. I believe it is important that the banks and lenders agree to the restructuring of the Dubai World debt, whether through their negotiations with the company or through some prodding from the government, both Dubai and the Federal government. Indeed, Abu Dhabi assistance is already implicitly tied to the lenders agreeing to a restructuring and thus I do feel bankers and lenders will not be so short sighted as to scuttle a settlement merely to get brownie points. I believe there might be a few hiccups but in the end the settlement will be hammered out and a restructured debt will provide the breathing space to improve the repayment capacity down the road. I believe also that a successful deal with the lenders will allow either Abu Dhabi, Dubai government or the Federal Government, or a combination of them all, to be more forthcoming about their plans in a restructured environment.

2. Oil Prices.

The current bet is that an oil price hike would slow down the recovery in the US and Europe and hence derail any recovery that we have seen thus far. My own opinion is that a better economic performance from India and China will bring in a higher demand for oil, and a gradual up tick in the US and European economy will also add to the demand side of oil. I foresee a $15 increase, on average, for the price of oil in 2010, with a possibility in the summer for even a higher spike based of inventory management and constraints in stockpiles. Added there could be tensions between Iran and the West that could well add to the upward pressure on oil prices. The political dimension to oil prices is hard to follow and while most predict Iraqi oil production improvement could well keep a lid on oil prices, my own feeling is that we are a bit complacent about oil prices and it could well be a benefit for the region adding to the reserve pools of the sovereign wealth funds.

3. Increased Government spending.

I do believe Saudi Arabia, UAE and Qatar within the GCC, and Iraq and even Iran, outside the GCC, will be investing more into infrastructure, health and education. The first two countries have already announced major plans for power, railway and roads and health care upgrades. These are massive investments which will become the base of economic recovery for the region. Though it may well be that the fruits of these spending programs may not show up immediately there is no denying that it will set the stage for the decade. UAE's announced investment into nuclear based power generation already promises to benefit the region and indeed the US and European suppliers of technology.

4. Revenue Leaders.

If property was the revenue leader for the region in the past decade it is clear that new revenue leaders will emerge. I feel the service industry and the trading sector will come back into the limelight, with tourism becoming a new major revenue earner for the region. The model of an enabling economy in the UAE, through which the service and trading sector can thrive has been a tried and tested model and all we have to see is the return to those values as the prime drivers of the economy. In addition the attention that has been put into creating tourism as a destination driver for UAE there is the promise that this could well be the new bright star for economic performance. Countries like Oman who have a very rich tourist content will also begin to play this card more effectively, resulting in a broad based attraction for the region. I also feel in some ways manufacturing will become more important as more electric power is available in the years ahead, allowing the strategic advantages of the region coming into play.

5. Financial Performance.

I do believe banks will continue to be burdened in their performance through the effects of the past two years. There is alot of clean out of these balance sheets and that may well be the focus for the years ahead. I know that banks are in better shape than our rating agencies would like us to believe, but their focus on asset management will be more crucial then trying to get run away performance numbers each year. I also believe banks will have to change the way they compensate their senior staff as some bonus schemes only implied that the more risk they took the higher their bonus. I do however feel that the stock markets will do better than they have recently and while the maturity of these stock markets is still doubtful with true depth and two way liquidity still down the road attention towards superior performance compared to other markets is on the cards.

I do feel in addition some important steps need to be taken for the year ahead. Paramount to this would be the setting up of a 'think-tank', perhaps sponsored by the banks, to bring in the mind power to frankly and openly discuss the issues that face the economy. I also believe that people within the UAE government also recognize that there are many here, both Emirati and expatriates, who may not agree with some of the ways things are handled, but their sincerity and care for the country should not be questioned. I believe a broader base of discussion is what will improve the understanding.

Yet we have to understand that there will always be the cynics, like some of my banker friends who call me to tell me how bleak things are, and there will be the over enthusiastic admirers who will pretend there was no problem. Perhaps the truth is squarely in the middle, and this is perhaps why I ask for balance, not hysteria, for understanding rather than idiocy, for patience rather than panic, and most of all, when in doubt 'ask' do not 'guess'.

My single line call for 2010: 'Will be an anxious year, with more reasons to cheer than weep."

1 comment:

Andrew said...

Ah yes, sound words, back to the original fundamentals trade, tourism, events and conferences. Nevertheless, what assists the economic recovery is a direct undertow of foreign investment via a greater number of expatriates in full-time work of a resonably remunerated nature.

Revenues from visas, office rental, staff housing rentals, healthcare, education fees; regular consumer spending above and beyond groceries: clothes, cars, insurance, entertainment and leisure etc.

The other factor essential to economic resurgency is maintenance of a reasonable cost base. Romping up the charts of most expensive cities in the world is counter-productive egotism.

Also the inclination to raise prices as soon as people start returning represents a false dawn, the continuity factor is bargain based. If a hotel room at 80 dollars pulls in the crowds on a regular basis then that is the formula! When most consumer items were significantly cheaper than fiscal zones, i.e. remove the VAT and the consumer is already in profit, more people came.

Let us face it the biggest attractions is a tax free environment, the absence of freezing temperatures, good infrastructure and a way of life operating within the context of law and order.

Yet businesses will only come to UAE for two reasons if they have consumers, customers, clients call them what you wish with money in their pockets and costs are kept sufficiently low to make decent margins.

Real estate is back to rentals and ONLY for investors who are happy to realise modest capital gain over time and for that they must see evidence of long term room for growth in terms of entry level pricing.

Keep costs under control for 18 months and the working population will undoubtedly creep back up. Persecution of businesses and borrowers who withered under the onslaught of the economic crisis is not the way to attract humanity.

All this is still subject to the geopolitical situation in and around the Gulf States. A beligerent Iranian administration, confrontation with miltants in Yemen, yet more Israeli action in Gaza do not promote stability. However, for those of us who have spent decades in this environment these are not considered deterrents.

Remember, everybody plans to make a comeback. It may well not be entirely achieved in 2010, in fact unlikely, but please those that did not run away could use some slack. We are going forward but how soon. Small business grants with reasonably extended terms could well be an answer.

Andy McT