Politics holds sway over markets in US, Saudi Arabia and Europe

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.

The first economic pillar is taxes, and whether to cut them, allowing the private sector to keep more of the profits and stimulate job creation that way. Or to increase them and allow the government to have a larger budget for fiscal expansionary policy.

The second pillar is the actual structure of any fiscal expansionary policy, in particular which industries will be supported. The third pillar is trade, revolving around the argument of whether or not freer trade helps or harms American job creation.

The xenophobic pillar is immigration and its effect on jobs.

As we come up to the last days of the election campaign, the global markets are reacting to whether Hillary Clinton is likely to win, something that investors, traders and analysts see as a positive thing, or whether Donald Trump has a chance of winning, a negative for the markets. Based on market commentary, it seems that the markets are not interpreting any policy proposals by the candidates, but are focused solely on one dimension – the sanity of the candidates. The effect of public policy on fin­ancial markets is not restricted to the US. In Saudi Arabia, deputy crown prince Mohammed bin Salman has been marketing to the world his economic vision for transforming the Saudi economy to be more diversified and resilient to oil price movements.

World leaders, the media and many financial analysts were extremely sceptical. But when it came time for the people with the money to vote, they voted strongly in favour of the deputy crown prince’s plan – Saudi Arabia’s debut US$15 billion bond issuance was oversubscribed. With investor orders of $67bn, Saudi in the end issued $17.5bn in bonds, the largest emerging market bond issuance in history. The people with the money clearly believe in the policy initiatives in Saudi Arabia.

This brings us back to the most troubled market, politically and economically, and that is the European Union. In a previous article I wrote about how the market had probably overreacted to concerns about Britain’s prospects after Brexit. I now would like to make the case that EU 1.0 is close to dead and that if handled competently, EU 2.0 could provide a global engine for growth.

Briefly, the EU was initially created as one way to avoid any more European wars, in particular on the scale of the First and Second World Wars. The EU currently comprises 28 member states. The first crack in the EU’s structure as an actual union was the abhorrent mishandling of the Greek crisis and, in particular, the treatment of Greece, a sovereign nation, like a child and insisting on punishing it. That never bodes well, especially when it is shrouded by the idea that rules must be followed blindly. The response by the EU to the Brexit vote has been horrifying. The president of the European Commission, Jean-Claude Juncker, has actually been quoted as demanding punishment for Britain for wanting to leave the EU.

The message to member states is absolutely not that being part of the EU is a good thing – that is simply Mr Juncker’s fan­tasy. Any rational person would see two member states being bullied and wonder when they will be next. Oh wait, Angela Merkel, Germany’s chancellor, has rejected Italy’s requests to allow the government of Italy to restructure some of its banks. Mrs Merkel pointed out that there were rules and they had to be followed. Never mind that America successfully bailed out its banks through intervention.

What Mrs Merkel doesn’t understand is that Italy now holds an ace in the hole. If it even signals that it is considering leaving the EU, the collapse of the euro will be instant.

But Italy does not have to destroy the EU just because it is broken. It can build EU 2.0 and it can do that by teaming up with Britain.

Let us return to the fantasy that London will stop being a financial centre and look at how ­human beings act. The decision-makers of all these financial services firms are all in their 50s and above, and tend to be fluent in English only.

Do you know who makes the decision as to move or not? The wife. Do you think the wife wants to uproot from London where her children, grandchildren and friends probably live? No. London’s masters of the universe are going to do what their wives tell them – and that is to stay put.

So let’s say Italy announces EU 1.0 is not working, time for EU 2.0 and it leads the way in bilateral talks with Britain. First one to strike a financial market and passporting deal with Britain wins after all. Italy enters into trade deals with Britain. The dam will break.

Breaking up the EU is in nobody’s interest. Remaining in denial that it is broken and disintegrating doesn’t help either. If regulations and policy are not working, it is time to review them and from an economic and financial perspective – this needs to be done urgently.

Perhaps a push by America, say preferential treatment for EU 2.0, might help things along.

Sabah Al Binali is an active investor and entrepreneurial leader with a track record of growing companies in the Mena region. You can read more of his thoughts at al-binali.com. His columns also appear in our Arabic-language sister paper Aletihad.

business@thenational.ae

Follow The National’s Business section on Twitter

Three years ago Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai, committed the emirate of Dubai to the vision of becoming the global capital of the Islamic economy. This month Dubai hosted the Global Islamic Economy Summit. This is a good point at which to review how Dubai, which has usually been successful in managing its economic projects, has progressed.

When such a challenging vision is set the technocrats must first interpret this vision into a set of key performance indicators (KPIs) that everyone agrees upon. I have searched for such KPIs and have only been able to find newspaper reports from this month that give the growth of the sukuk market in Dubai: from Dh26 billion to Dh496bn in the past three years.

Normally the activity of a financial market is measured by two main statistics: the size of the market as a percentage of the global market and the value traded as a percentage of the size of the market. The newspaper reports gave the size of the market but without referencing the total global market.

For value traded I went to the website of the relevant exchange, Nasdaq Dubai. The total value traded for Thursday, October 20, 2016, the last trading day of last week, was given on the website as zero. This is because almost all global trade in sukuk is over the counter rather than via an open market platform.

The exchange is developing a sukuk trading platform and this month it launched a global sukuk index in an effort to bring more clarity to the market. This should in time develop the necessary liquidity, which is the most important KPI.

I decided to try a different method to understand how the Islamic economy is developing. Two ideas that seemed worthy of investigation were: 1. Sukuk are just a way of borrowing, so why not look at the main lending channel in the country – banks; and, 2. One would think that Saudi Arabia might be the primary candidate for the global capital of the Islamic economy. It is hard to argue with the location of The Holy Kaaba, Islam’s most sacred site, which sits in the centre of Al Masjid Al Haram, Islam’s most sacred mosque.

Clearly the relevant statistic was to compare the size of Sharia-compliant bank lending in Dubai with that of Saudi Arabia. The UAE Central Bank does not differentiate between banks in different emirates but does separate the reporting of conventional banks from that of Islamic banks. According to its August monthly statistical bulletin, which it says are preliminary numbers, the total assets of Islamic Banks was Dh493bn.

The Saudi Arabian Monetary Authority does not segregate banks the same way, so I started adding up the assets of the banks that are Islamic according to their second-quarter financial reports for this year. Three banks combined – Al Rajhi, with the equivalent of Dh331bn; Al Inma, Dh98bn; and Al Jazira, Dh68bn – are equal in size to the whole Islamic banking sector of the UAE. Saudi Arabia has nine other banks, some of which are pure Islamic, some of which have Islamic operations. It seems clear that Sharia-compliant lending in Saudi dwarfs the UAE, let alone Dubai.

However, Saudi’s Islamic financial activity does not end with their domestic banks. The Islamic Development Bank represents everything that one would want in an Islamic economy centre, and it is based in Saudi.

The IDB has an asset base of about Dh76bn. It has two subsidiaries focused on Sharia-compliant trade. It has regional offices in Morocco, Malaysia, Kazakhstan and Senegal. It has a membership of 56 countries from four continents. It has a Waqf (Islamic Trust) foundation. It has an education programme that has been in operation for 40 years.

Not only is the IDB based in Jeddah, but Saudi Arabia is the most important of its 56 members. The bank’s website shows that Saudi Arabia holds 23.5 per cent of shares in the bank, while the UAE holds 7.5 per cent.

It took me less than half an hour to find all of these facts, and they do not provide much hope. They are also solely focused on the financial sector of an Islamic economy. The approach by the Dubai execution team reminds me of the execution of the DIFC. Some beautiful buildings. Some overpriced cafes. But an anaemic market compared with Saudi Arabia’s.

Nothing can be global or international if it is not connected to its neighbours. We still haven’t connected our equity markets inside the UAE. How are we going to connect to the rest of the world?

We can overreact and treat an honest analysis with hostility or we can break out of our denial, accept reality and remember that we are a single nation.

Sabah Al Binali is an active investor and entrepreneurial leader with a track record of growing companies in the Mena region. You can read more of his thoughts at al-binali.com.

business@thenational.ae

Follow The National’s Business section on Twitter

Three years ago Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai, committed the emirate of Dubai to the vision of becoming the global capital of the Islamic economy. This month Dubai hosted the Global Islamic Economy Summit. This is a good point at which to review how Dubai, which has usually been successful in managing its economic projects, has progressed.

When such a challenging vision is set the technocrats must first interpret this vision into a set of key performance indicators (KPIs) that everyone agrees upon. I have searched for such KPIs and have only been able to find newspaper reports from this month that give the growth of the sukuk market in Dubai: from Dh26 billion to Dh496bn in the past three years.

Normally the activity of a financial market is measured by two main statistics: the size of the market as a percentage of the global market and the value traded as a percentage of the size of the market. The newspaper reports gave the size of the market but without referencing the total global market.

For value traded I went to the website of the relevant exchange, Nasdaq Dubai. The total value traded for Thursday, October 20, 2016, the last trading day of last week, was given on the website as zero. This is because almost all global trade in sukuk is over the counter rather than via an open market platform.

The exchange is developing a sukuk trading platform and this month it launched a global sukuk index in an effort to bring more clarity to the market. This should in time develop the necessary liquidity, which is the most important KPI.

I decided to try a different method to understand how the Islamic economy is developing. Two ideas that seemed worthy of investigation were: 1. Sukuk are just a way of borrowing, so why not look at the main lending channel in the country – banks; and, 2. One would think that Saudi Arabia might be the primary candidate for the global capital of the Islamic economy. It is hard to argue with the location of The Holy Kaaba, Islam’s most sacred site, which sits in the centre of Al Masjid Al Haram, Islam’s most sacred mosque.

Clearly the relevant statistic was to compare the size of Sharia-compliant bank lending in Dubai with that of Saudi Arabia. The UAE Central Bank does not differentiate between banks in different emirates but does separate the reporting of conventional banks from that of Islamic banks. According to its August monthly statistical bulletin, which it says are preliminary numbers, the total assets of Islamic banks was Dh493bn.

The Saudi Arabian Monetary Authority does not segregate banks the same way, so I started adding up the assets of the banks that are Islamic according to their second-quarter financial reports for this year. Three banks combined – Al Rajhi, with the equivalent of Dh331bn; Al Inma, Dh98bn; and Al Jazira, Dh68bn – are equal in size to the whole Islamic banking sector of the UAE. Saudi Arabia has nine other banks, some of which are pure Islamic, some of which have Islamic operations. It seems clear that Sharia-compliant lending in Saudi dwarfs the UAE, let alone Dubai.

However, Saudi Arabia’s Islamic financial activity does not end with its domestic banks. The Islamic Development Bank represents everything that one would want in an Islamic economy centre, and it is based in Saudi.

The IDB has an asset base of about Dh76bn. It has two subsidiaries focused on Sharia-compliant trade. It has regional offices in Morocco, Malaysia, Kazakhstan and Senegal. It has a membership of 56 countries from four continents. It has a Waqf (Islamic Trust) foundation. It has an education programme that has been in operation for 40 years.

Not only is the IDB based in Jeddah, but Saudi Arabia is the most important of its 56 members. The bank’s website shows that Saudi Arabia holds 23.5 per cent of shares in the bank, while the UAE holds 7.5 per cent.

It took me less than half an hour to find all of these facts, and they do not provide much hope. They are also solely focused on the financial sector of an Islamic economy. The approach by the Dubai execution team reminds me of the execution of the DIFC. Some beautiful buildings. Some overpriced cafes. But an anaemic market compared with Saudi Arabia’s.

Nothing can be global or international if it is not connected to its neighbours. We still haven’t connected our equity markets inside the UAE. How are we going to connect to the rest of the world?

We can overreact and treat an honest analysis with hostility or we can break out of our denial, accept reality and remember that we are a single nation.

Sabah Al Binali is an active investor and entrepreneurial leader with a track record of growing companies in the Mena region. You can read more of his thoughts at al-binali.com.

This column is also appearing in our sister paper, Aletihad.

business@thenational.ae

Follow The National’s Business section on Twitter

For UAE economy, picture will become clearer with more statistics

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.

The second idea that private enterprise is more efficient than the Government is something I discussed in a previous article based on an IMF country report on the UAE. One response to my article is that the goals of a government are not commercial in nature, but include many other factors such as quality of life. That is a valid point. One example is the Cleveland Clinic Abu Dhabi, which offers world-class service for me individually. I do not know how it is doing commercially, but non-financial metrics such as quality of life should be included in measuring the overall success of such projects. I look forward to see how the Minister of Happiness helps create statistics that measure the well-being of the nation.

The Central Bank of the UAE provides excellent statistics. Its last published statistics, for example, show how the banking system increased its overall loans to the market. On first inspection this seems a good thing. But to be sure, it is important to know whether these are new loans, which would grow the economy, or old loans that couldn’t be repaid and have been restructured, which would indicate a less optimistic outlook. Perhaps Al Etihad Credit Bureau could team up with the Central Bank to expand on what is already an excellent start to the statistical understanding of the banking system.

A major statistic for the health of the economy is GDP per capita. I have previously compared our GDP per capita (US$43,048) with Singapore’s ($55,182) and concluded that we were lagging.

Using the thinking above, how might such a comparison be improved? One thought is that we are a much younger country and we are still developing a lot of physical infrastructure such as buildings and roads. This requires a large number of blue-collar workers relative to a country like Singapore. Once our physical infrastructure reaches our full potential, this large number of blue-collar workers will reduce substantially, which in turn will automatically increase the GDP per capita.

The foreigners giving advice mean well, but they can never understand us or our country as well as we do. If we are to understand where we are going and how we are performing, we have to continue asking the questions that are relevant to our unique situation, and then collect the statistics to answer those questions.

If the Federal Competitiveness and Statistics Authority continues its work with the enthusiasm it has shown so far, I have high hopes that our way will become clearer much sooner.

Sabah Al Binali is an active investor and entrepreneurial leader with a track record of growing companies in the Mena region. You can read more of his thoughts at al-binali.com

This column is also being published in our sister paper, Aletihad

business@thenational.ae

Follow The National’s Business section on Twitter

Business is challenging. Being successful at business is extremely challenging. It takes a tremendous amount of time and energy to acquire new clients, retain existing clients, manage your team, manage your portfolio of projects and deliver the high-quality products and services that you need to remain competitive in the market.

Do you want an idea of how busy you are while running your existing business? How many unread emails do you have? Hundreds? Over a thousand? How old is the oldest email?

What about meetings? Excluding time reading and composing emails, what percentage of your day is taken up by meetings regarding existing business, for example, with clients or employees about existing products and services on offer? If you include travel time I have never even seen this percentage below 50 per cent and it is usually much higher, around the 75 per cent mark.

Now let’s get to the crux of this article. What percentage of the time do you spend learning, thinking or developing new business lines? What percentage of your resources are dedicated to evolving the business? I am talking about actual time and energy spent here, not wishful thinking. Is it 0 per cent? 1 per cent?

Let us take a step back. Whenever there is a discussion, article or book on business, the words most often used as foundational concepts are entrepreneurial, innovation, disruption. I do not ever recall a book with the title Keep Doing What You Are Doing.

I am a big fan of doing what works. I am not here to debate whether it is better to stay with what works or whether to change. What I would like to do is address the gap between the wishes of companies to innovate, usually considered a priority, and what they are actually doing about it, usually very little.

Let us start with some easy points. Managers are working hard. They are, by and large, not being lazy when they remain focused on current business. First, it is only human to keep doing what you have been doing, a human form of Newton’s first law of motion. Carrying that analogy further, it takes a new force in a different direction to change the trajectory of the manager.

The second major point is that managers are usually incentivised to avoid developing new business lines. Anything new has a long lead time to profitability. It also usually needs a considerable upfront investment. Companies might talk a long-term strategic game, but in truth they act based on a short-term basis. In fact, many listed companies have a three-month horizon as they need to report quarterly.

I have seen two approaches to this problem, both of which are ineffective. The first is to place the responsibility to innovate with the strategy department. Although strategy clearly plays a planning role, the entrepreneurial execution of the business clearly falls outside of their remit. The second approach is usually called a New Business department. The problem here is that the role of this department is execution of the operational elements, eg get an office, get the relevant licences, put in place the relevant legal contracts, etc. Again there is no entrepreneurial element.

The answer is to actually have an Entrepreneurial Leader role with the necessary resources to fulfil that role. Technology companies usually do not need this given the speed of innovation in that sector. Everyone else does.

An Entrepreneurial Leader will have a higher risk appetite than his regular business colleagues, a necessary requirement given the higher risk of developing new business lines. An Entrepreneurial Leader will be able to adapt and exploit new opportunities without necessarily being an expert. No single person can be an expert in everything, yet an entrepreneurial leader needs to be able to review and evaluate business opportunities across the board.

This concept is not new. In an age when companies predominantly delivered products, the Entrepreneurial Leader and his team used to be called the research and development department. In a world that is fast transitioning to knowledge-based economies driven by service companies, the idea of an R&D department has not translated well. The need for such a function, on the other hand, remains acute.

Sabah Al Binali is an active investor and entrepreneurial leader with a track record of growing companies in the Mena region. You can read more of his thoughts at al-binali.com.

This column also appears in our sister paper Al Ittihad.

business@thenational.ae

Follow The National’s Business section on Twitter

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, who 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.

I am sure that there are many indicators that would cast a more positive light on the development of the UAE’s capital markets. I find it difficult to believe, however, that the above analysis can be completely explained away by positive arguments. Something is seriously wrong between the picture that we are presented, usually involving looming skyscrapers, and real­ity. A famous journalist thinks that DIFC stands for Dubai International Food Court, meant not as a derogatory statement but as an assessment that the retail hospitality sector seems to do more business in the DIFC than the financial services sector. To be even-handed, ADGM seems to be going in the same direction, although the five-star hotels came earlier and it boasts a world-class hospital.

Worse, the DIFC Court’s expansion law harmed the local economy by allowing an asymmetrical conduit of enforcement of UK court judgments by using the DIFC as a conduit into the local Dubai court system, bypassing the local courts while not allowing for a reciprocal system to directly enforce ­Dubai court judgment in the UK. Thankfully, Justice Al Madhani of the DIFC Courts ruled that enforcement could happen only within the DIFC.

The problem is, why was such a loophole allowed to exist? There is no problem in introducing laws and subsequently realising that they might need adjustment. There is a serious issue when we see foreign entities use a loophole to enforce foreign court rulings blindly and then do nothing about it. When we connect to the global economy it should be to our benefit, or at least an equitable relationship should exist. We’re going backwards – it’s like December 2, 1971, never happened.

Back to the financial sector. CNBC published a ranking of the world’s largest asset managers as of the end of last year. You may have heard of the No 1 spot, the Vanguard Group, with $3 trillion under management. You might not have heard of the No 2, Pacific Investment Management, with $1.7tn under management, or of the No 3, Capital Research and Management, with $1.4tn. How are we even going to get close?

Let’s go back to Singapore with a GDP of $293bn and population of 5.5 million versus our GDP of $371bn and population of 9 million. So not only is their market cap four times larger than ours as a percentage of GDP, but their GDP per capita is about $53,000 versus our $41,000. And a large part of their GDP doesn’t come gushing out of the ground. They have to work for it, efficiently and effectively.

I am a big believer in dreaming big. But here’s a little secret. We have to work with discipline, focus and, most of all, effectiveness if we are to even take a single step towards our goals.

Sabah Al Binali is an active investor and entrepreneurial leader with a track record of growing companies in the Mena region. You can read more of his thoughts at al-binali.com

business@thenational.ae

Follow The National’s Business section on Twitter

I arrived at the airport at 10.50pm. My flight was scheduled for a 1:45am departure but I like to arrive early. It gives me time to sort out any issues, especially as I had a connecting flight with a three-hour window. And if there were no issues, well that was the perk of flying business – relaxing in the lounge.

I walked into the check-in area for first and business class. I didn’t see a counter for my airline open. It happens sometimes, they don’t start at exactly the three-hour pre-departure mark. So I sat and waited.

What transpired next was a complete breakdown in the operational effectiveness of the airline.

The airline was British Airways, and I was scheduled to transit through its home Heathrow hub on my way to New York.

By way of background, I had flown BA for a couple of hundred thousand miles at least from 2005 to 2010, before I became intoxicated by Emirates. I flew BA in business and first class and had, at that time, a great experience. Then I went Awol on them until the fateful night of September 15.

Shortly before I left home for the airport, I received on BA’s amazing iPhone app a notice that the departure had been delayed by about three hours. I hit the “contact us” button on the app. The only way to reach customer service was through an international call. Not the fault of the staff that there was no local number, that is an operational failure of the chief operating officer of BA. The customer service representative was wonderful but kept insisting that their systems showed an on-time departure. I believed him and went to the airport.

I waited for a counter with BA staff to open. Time went by. No BA staff. People started to get agitated. I stayed calm, evaluating options. I called the customer service centre. It was closed. BA not only did not have a local emergency number – and here I mean emergencies generated by them – they did not have a 24-hour emergency number anywhere in the world that I could find. Again, not a BA staff issue, but yet another failure by the chief operating officer and the chief executive who hired him.

As departure time came and went, members of the airport staff informed us that the flight had been delayed until at least noon the next day. These people, who do not work for BA, managed irate passengers with supreme professionalism.

I looked over at the Etihad Airways counters. I counted at least eight staff. Makes you think.

I tried using my BA app and the interactive phone system. They had options for changing flights. They had options for upgrading. They had no options for what happens if a BA plane has technical issues but no human beings are present to help. This, for a supposedly global airline. Global does not just mean you fly globally but that you provide services globally. Operational failure. Again. A COO problem. Again.

My app finally confirmed what the airport staff were saying. Except that the flight was now delayed until 4.45pm. A problem for me, as I would miss my connecting flight.

I went home dejected. At 6pm I received an SMS confirming what the app had said. But no news about my connecting flight. Technical operational efficiency at its best.

Later in the morning the European customer service centre opened. I made yet another international call and a wonderful lady spent time helping with my connecting flight. My phone carrier made a lot of money off my misery.

More than 17 hours later, as I write this, I am on the flight. My layover went from three hours to 12, an overnight stay. I don’t even know what I will do at BA’s hub. Are the lounges open? Is there a hotel?

The staff on the flight have been extremely attentive and are trying to help me. But I know one thing. The airlines complaining about Emirates, Etihad and Qatar Airways are not losing to the GCC airlines because of alleged subsidies. Subsidies have nothing to do with service levels. How hard is it for the COO of a company to ensure that his staff are present to manage the company’s clients, especially when the problem belongs to the company? How hard is it for a chief executive to ensure he has such a COO?

Before I close, I want to say something pertinent but that some commentators might be shy about. Dubai has no oil or gas to create non-commercial income to support Emirates. Not only that, but Dubai’s challenges in restructuring its external debt are a testament to the fact that the miracle of Emirates, and Dubai in general, is commercially sound decision making that cannot depend on subsidies.

Last week I wrote about how the UAE can strengthen its economy. Sitting in BA’s business class seats, they are by far the best that I have ever tried for business class. The crew is top-notch. The failure is clearly in the C-suite of the company. Money cannot buy service. Focus, discipline and a persistent march towards a vision are necessary.

We have done this in airlines. We can do this in anything.

Emirates was entrepreneurial and innovative. Qatar and Etihad were more cautious but moved fast as they saw the opportunity. Nobody else is moving. This opportunity exists and allows three young airlines to dominate the global long-haul travel market because other carriers took their positions for granted. Many of them now refuse to take responsibility for their mistakes.

Service levels have to do with process and systems. Technology helps, but is useless without the aforementioned systems. People help, but cannot fix broken systems. Emirates, Qatar and Etihad showed us how it can be done. Let’s copy that into other sectors and keep going global.

Sabah Al Binali is an active investor and entrepreneurial leader with a track record of growing companies in the Mena region. You can read more of his thoughts at al-binali.com.

business@thenational.ae

Follow The National’s Business section on Twitter

A long-term plan for a stronger UAE economy

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.

How can our economy grow? Our population is too small to replace oil and related income with consumer spending. That basically leaves exports. In 2014, the UAE’s non-oil trade balance was a deficit of Dh564 billion – that is, we imported Dh564bn more than we exported, excluding oil. If we are spending more than we are earning then we are going in the wrong direction. How can we reverse this? There are two sides to this equation: decrease imports and increase exports.

I am a firm believer in free market capitalism, although I do believe there has to be some social responsibility applied either voluntarily by the private sector or enforced via regulation. Therefore trade barriers are not a desirable solution to the issue of decreasing imports. Free market capitalism is about having an even playing field.

This is where fiscal policy comes in. By taxing imported goods it puts the brakes on spending, as opposed to investing. The beautiful thing here is that a VAT on luxury goods has been announced and is in the works. The faster and higher that number, the better for the economy. Influential family groups owning agencies for luxury goods might be tempted to argue for a lower luxury tax but I have full faith that in the end they will reject such a self-centered position and instead adopt the patriotic decision of supporting the overall economy.

What about exports? Our most famous export after oil is tourism. Yes, a service can be an export. Which should remind us that although it might not be as famous but transport is a massive export. Think Etihad Airlines and Emirates airline. So, what else can we export?

Extending the idea of service exports, capital flows is an excellent candidate. The DIFC has not hit its full potential in terms of the “International” part. The ADGM is in its early stages. How can they help the UAE economy? The knee-jerk reaction is to have sovereign wealth funds use their assets to support these institutions via outward investment. But what if we learn from Etihad and Emirates and decide to become a financial capital hub? What that means is that just like the airlines became experts in all the global destinations that were ignored by the incumbents, the DIFC and ADGM can develop the same type of strategy but with respect to financial capital flows. If we had the top sub-Saharan asset managers based here I promise you that the capital flows will be huge. No Trump intended. Then think about Eastern Europe, the Stans, the neglected parts of South-East Asia. That is a single idea.

The hub and spoke model can continue. The announced mergers of FGB-NBAD and IPIC-Mubadala will create the size of company that can have strong global reach. OK, IPIC and Mubadala already did, but together they are stronger. We have to start building regional expertise locally, and building assets, ie buying companies, regionally. The regional expertise attracts business and capital locally and the regional assets imports financial returns.

For all of this to happen we need to deregulate further. I have spoken about the Telecom Regulatory Authority’s official ban on Skype and how this protects the telecom oligopoly while harming the consumer, the exact opposite of what a regulator usually does.

Recently I read about Uber and Careem being sanctioned for breaching regulations, as they should be. However, I was a little shocked that two of these regulations included a minimum price of their services and a maximum number of drivers per company. Increasing prices and decreasing service really is not the way to go.

And don’t get me started on security cheques. There is a personal bankruptcy law announced in the making, but although telling entrepreneurs and innovators that they no longer face jail time if their business venture fails is a good thing, replacing jail with personal bankruptcy as the risk of business failure is not an incentive for these entrepreneurs and innovators to invest in our economy. Let’s just ban banks from asking for personal guarantees for a corporate loan. Will this harm banks? Absolutely not. How is someone in jail going to pay a bank back?

I have no doubt that the intentions behind these decisions are sincere but clearly there is a disconnect between the analysis provided to the decision makers and economic reality.

The final piece of deregulation is the monopolies on agencies. Monopolies always hurt the economy, effectively levying a tax on the national economy that is paid to the monopolist instead of the government. Let’s just abolish them, after all with 40 years of a monopoly how much more can a decent person want?

Finally we come to the human resources part of this plan. There are two parts to this: expats and Emiratis. The rich expats have nothing to complain about. It is the majority of middle and low-income expats that need attention. As The Economist reported, the GCC does more on a per capita basis to decrease global income inequality than rich OECD countries by choosing to make it easy to enter to work but hard to get citizenship, as opposed to the more common stance adopted by the rest of the world of hard to enter to work but once done easier to get citizenship. Basically we employ far more foreigners per capita than rich OECD countries.

Our problem is not rights. It is the enforcement of rights. This myth that the government is responsible for the mistreatment of workers needs to be corrected so that we can continue to attract workers. The abuse is not by our government, it is by the private companies, especially construction companies. Funnily enough, Emiratis are rarely involved in the senior management of such companies. I would suggest that severe civil penalties on a corporate as well as personal level, against executives and the board, be levied for such abuses and that criminal penalties be considered. Or how about making the entire board and senior management of these companies spend a week in these camps for each company license renewal?

As for employment of Emiratis, I’ve been through this, so I will summarise. If you are a private company and you face challenges hiring Emiratis, don’t intentionally circumvent the law, don’t just complain about Emiratis. Find solutions. Innovate. Take some responsibility. Because an economy without full employment of Emiratis has no place in the UAE. And a private company that takes from its host nation without giving back, well, that’s called a parasite.

I firmly believe that the idea for a plan that I have outlined above would lead to a long-term sustainable economy. Will there be short-term pain as we continue to deleverage? Yes. Is this the best plan? Perhaps not. But if it isn’t, that just means there is a better plan out there and therefore more reason to be optimistic.

Sabah Al Binali is an active investor and entrepreneurial leader with a track record of growing companies in the Mena region. You can read more of his thoughts at al-binali.com.

business@thenational.ae

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 needed 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 its website.

As a start I took a look at its monthly statistical bulletin for June this year, which it notes is preliminary. I decided to look at some of the more often 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 Dh184 billion, up 14 per cent from Dh161bn in June last year. So, no, the Government is not withdrawing deposits, it has added to them substantially. Pleasant surprise.

But if the Government is supporting the economy through bank deposits, why all the brouhaha about banks not lending? One argument has been that banks might be panicking and therefore refusing credit. Let’s check.

Over a single year, total bank domestic credit is up 7.7 per cent to Dh1.4 trillion from Dh1.3tn. In real terms that is an extra Dh100bn of credit that the banks gave in one year. Cynics might point out that banks have been known to restructure bad loans into new loans, making it look as if they are giving credit when in reality they are rolling over bad debt with interest. I’ll grade this a semi-pleasant surprise.

Related to the above two points is that the Government or its related entities, the GREs discussed in my previous article, might be crowding out private lending. Government lending increased by Dh132 million, a 0.1 per cent increase. No change.

The public sector, though, increased to Dh20bn, a 12 per cent increase compared to the private sector’s Dh70bn, or 7 per cent, increase. The public sector in absolute terms grew at little more than a quarter of the private sector, but in relative terms the growth was two-thirds that of the private sector. Not a big deal for a single year, quite worrying if this is a trend. Pleasant surprise for the Government, neutral to negative for the public sector.

How about this flight of expatriates from the region we keep hearing about? The total expat deposits increased by Dh21.4bn, a 13.7 per cent increase. But this includes expat corporates as well, which increased deposits by Dh19.7bn, a 32.2 per cent increase. Retail expat deposits increased by Dh1.7bn, a smaller 1.8 per cent increase. The foreign corporate deposit increase is a pleasant surprise. The retail expat question is a different matter. The small increase could be because of off-shore remittances or simply that the less well to do feel the pinch first and leave first. So on this issue we remain uncertain.

Overall, what we’ve seen so far seems to point to positive economic indicators. This seems to conflict with the dropping profits and the continuing layoffs. What gives?

The Monthly Statistical Bulletin of the Central Bank looks primarily at the aggregate balance sheets of the banks but not the income statement or cash flow statement. It also does not look at the rest of the economy.

What this means is that the above analysis has by and large ruled out a major credit contraction existing. It can have an effect on the economy by banks increasing interest rates and changing their risk profiles by increasing lending to large corporates and decreasing to the SMEs that provide more than 50 per cent of the country’s GDP.

So what gives? A bit of digging in the substantial databases of The Federal Competitiveness and Statistics Authority uncovered something interesting. The key culprit is Gross Fixed Capital Formation (GFCC), which measures how much was invested in fixed, durable assets such as plants, machinery, equipment, buildings, roads and drains.

Percentage growth in spending or GDP shows the picture for the year – for example, if the Government spends Dh100 one year and this grows 5 per cent then it spends Dh105 the following year. If GFCC is Dh100 one year and this grows by 5 per cent, then the total output potential the following year is not equivalent to Dh105 of assets, but Dh205 of assets. Spending is annual, GFCC is cumulative. What this means is that if the economy contracts, it is very difficult for the fixed assets to contract. Worse, the loans used to invest in these fixed assets need to be serviced.

The moral of the story? The private sector shouldn’t expect its free lunch to last forever.

Sabah Al Binali is an active investor and entrepreneurial leader with a track record of growing companies in the Mena region. You can read more of his thoughts at al-binali.com.

business@thenational.ae

Follow The National’s Business section on Twitter

Preserving the UAE's wealth requires clear direction

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 per cent a year is higher only than Kuwait. Saudi Arabia at 9.6 per cent is about a fifth higher and Oman’s 13.3 per cent is more than three-fifths higher. How then are we the commercial hub of the GCC?

In a continuing discussion of whether the government is crowding out the domestic non-financial private sector and the implications that has, the IMF calculates the representative GRE ROA over the period at 2.5 per cent a year. The private sector, consistent with all theory and research, at an 8.1 per cent ROA has outperformed the government by 225 per cent a year. Now there are plenty of arguments to be made that the IMF’s computation of the GRE’s ROA is not completely accurate, but one has to draw the line at believing that the IMF could be wrong by 225 per cent.

The IMF is diplomatic in its conclusion – leave business to businessmen.

There is some good news. The total GRE debt as a percentage of GDP has dropped strongly in Abu Dhabi and to a lesser extent in Dubai. Importantly for Abu Dhabi, the percentage of GRE debt that is loans as opposed to bonds dropped to 33 per cent from 68 per cent. This is important, as it allows private companies more room to borrow.

Abu Dhabi is showing a clear corporate governance push to stop GREs from crowding out the private sector in the loan markets.

For some fresh news, Mubadala is buying 20 per cent of Investcorp. Why? The Ipic-Mubadala merger just announced is a lot of work. And Mubadala already owns 10 per cent of Carlyle, arguably the top private equity firm in the world.

This is probably forward thinking by the team at Mubadala, a global investor. Merging with Ipic means also acquiring Aabar. Investcorp, with its long history, blue chip name and seasoned team, could make a perfect match for Aabar. A reverse takeover would make Aabar liquid again through an equity swap for Investcorp shares. As a result, the 20 per cent would go higher. But what do I know?

Maybe that’s the answer for GREs. If you cannot build a business servicing a portfolio of countries with a combined GDP of at least 30 per cent of global GDP, then do not do it.

The largest Abu Dhabi sovereign wealth fund, the Abu Dhabi Investment Authority (Adia), recently announced its results with the 20-year average return dropping to 6.5 per cent from 7.4 per cent and the 30-year average dropped to 7.5 per cent from 8.4 per cent the previous year. The drop was attributed to historical returns dropping off the rolling average, financial speak for saying the 1995 and 1985 returns were outsize ones that had pulled the average up and were now no longer being counted.

We have to make some assumptions which might not give the exact answer but should give the correct direction. The first is that it is commonly accepted best practice to use a benchmark for investment returns. A return of 40 per cent might seem high, but it isn’t so great if the market as a whole grew by 60 per cent. Similarly, a 2 per cent return might not seem so good, but it is great if the market lost 20 per cent.

One decent benchmark to use is the MSCI World Index (WI). Adia is clearly a global investor given its size and sophistication, so looking at a world index developed by the global leader in investment indexes makes sense. Last year’s return on the WI was minus 0.3 per cent. We’ll call it 0 per cent for our purposes. If we assume that Adia matched the index performance last year, then mathematically the drop-off returns for 1995 and 1985 had to be 18 per cent and 29 per cent, respectively, to alter the rolling 20-year and 30-year returns to the extend they did. The 1995 WI return was 21.3 per cent in 1995 and 41.7 per cent in 1985. This supports Adia’s assertions and points to an outperformance last year.

But what about performance across the years? The WI has a 30-year return on investment of about 9.6 per cent a year compared to Adia’s 7.5 per cent. That means that US$100 billion invested with Adia would be about $775bn today. The same amount invested in the WI would be about $1.4 trillion today. That’s nearly double. On a 20-year basis the index again yields a better return, but not by as much.

Some might argue that the WI is the wrong index to use to benchmark Adia’s portfolio. But maybe it was the wrong portfolio to construct given the sizeable outperformance of the passive index. Post hoc ergo propter hoc, anyone?

The available data indicates that passive index investing might be the more effective strategy. But how does Adia stack up against other SWFs? It is hard to do an exact comparison, as different SWFs have different mandates. But if we look at Norway’s SWF, the largest in the world, it provides an 18-year history. If we use the WI to plug in the extra two years so that we can compare to the 20-year Adia return we get an annual rate of return of 6.5 per cent. So about the same.

As an aside, I saw the names of two UAE asset managers that Norway invested in – Ajeej Capital and Rasmala Asset Management. Well done.

The analysis of everything in this article, as the IMF likewise admits in its report, is less than perfect because of the understandable lack of full information. It is another reason for an effective governance body to oversee, coordinate and direct the individual and collective performance of the larger GREs and SWFs, as well as their effect on the domestic economy. After all, the boards of these entities overlap in many cases, so reducing their size to become effectively executive subcommittees and concentrating the main board members in the overall governance body could be more efficient, and it would make further rationalisation such as the Ipic-Mubadala merger much more effective.

I do believe someone once mentioned the idea of a Supreme Investment Council?

Sabah Al Binali is an active investor and entrepreneurial leader with a track record of growing companies in the Mena region. You can read more of his thoughts at al-binali.com.

business@thenational.ae

Follow The National’s Business section on Twitter