Can Investors Bet on a Broad Emerging Markets Recovery?

Can Investors Bet on a Broad Emerging Markets Recovery

  • Following the 2008 financial crisis, emerging economies rebounded. But since 2011 things have changed.
  • Emerging economies are now richer than ever. And while these countries still have an opportunity to grow in the future, their growth rates are likely to be slower than in the past. 
  • As advanced economies recover and their monetary policies return to more conventional policies, further weakness in emerging markets’ equities and bond markets is expected.

During the global financial crisis the world economy stabilized thanks to vibrant emerging markets. Now, emerging economies are weakened by slower growth, rising financial vulnerabilities, and outflow of capital attracted by higher interest rates in the U.S.

What happened after the financial crisis?
Following the 2008 financial crisis, emerging economies rebounded. But since 2011 things have changed. In 2013 growth was 4.5 percent, compared with 6.5 percent two years earlier. Except for Arica, all emerging market regions were marked by some form of economic slowdown. These were the growth rates of the following areas in 2013 : Russia (1.5%), developing Asia (6.5%), Latin America (2.6%), MENA (2.4%), and Central and Eastern Europe (2.5%).
Emerging economies are now richer than ever. And while these countries still have an opportunity to grow in the future, their growth rates are likely to be slower than in the past. This is normal when a country’s catching-up process succeeds in raising its per capita income and its economy approaches a steady state. For example, Chinese GDP per capita tripled in a decade. At 7.5% in 2013 and 7.3% in 2014, China’s growth is lower than during the past decade, but it remains strong for a country where the GDP per capita is about to reach $10,000 this year.
The problem is that Chinese growth is unbalanced. China’s economy continues to rely on high investment and too much credit. In contrast, consumption is weak; it only represents 35% of the GDP. This low level of consumption reflects the macroeconomic challenges faced by the world’s second largest economy—as it redistributes income in a way that enables sustainable growth—and a larger middle class that benefits the economy by enabling more people to be consumers.
In other emerging and developing countries the problem is reversed. Consumption is too dynamic compared to production capacities, and growth is blocked by supply constraints and a lack of investment. Thus, in places like India, Brazil, Turkey, Indonesia, and South Africa current account deficits have widened to alarming levels .
These external imbalances in emerging countries indicate a contradiction between the aspirations of a growing and educated middle class—looking for more consumption—and production whose development is impeded by the lack of investment and inefficiency of the administration. Lately, these contradictions have resulted in growing political tensions (in Brazil, Turkey, and Ukraine) and increased financial fragility.
Countries with high external deficits are usually vulnerable to unexpected monetary shocks, leading to capital outflows. When the U.S. Federal Reserve hinted at its intention to put an end to its accommodative monetary policy last summer, many emerging markets—particularly those with weak fundamentals—experienced strong reversals of capital inflows as investors reacted to the expected “tempering” by reducing their investments in riskier assets (including the assets of emerging markets).
What to expect?
Renewed troubles and retrenchments of capital flows have certainly not led to a new financial crisis, and none of the emerging countries have defaulted on their debt or called for the IMF’s support (which was often the case in the 1990s).
Whereas this is a strong sign that emerging economies have become stronger, the cost of external financing for these countries increased, their currencies depreciated, and their monetary authorities had to raise interest rates (to contain inflationary pressures). All the same, equities and bond markets dropped.
Fighting inflation and preventing a currency from depreciating require tighter monetary policies. But this hampers domestic demand and weakens growth. Moreover, currency depreciations aggravate public deficits and create the sentiment that emerging countries are less able to service their debts denominated in foreign currencies.
As advanced economies recover and their monetary policies return to more conventional policies, further weakness in emerging markets’ equities and bond markets is expected. Emerging markets will face challenging headwinds this year.

The article is written by Dr. Charbel Cordahi for Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

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Unemployment Paradox in the MENA Region

Unemployment Paradox in the MENA Region

  • High and increasing unemployment rates in the MENA region are a concern for governments and economy.
  • We have at our hands a peculiar situation where we lack employment opportunities, as well as a lack of qualified candidates who can meet specific job requirements
  • This article deals with the common employment paradoxes faced by employers in the region.

One of the challenges that face any economy is its unemployment percentage and the MENA region is not an exception; where these rates are not only high…But unfortunately increasing!

Unlike most people claims; unemployment is not mainly attributed to unavailability of employment opportunities, but surprisingly enough, employers are also facing the challenge of scarce caliber resources who can meet minimum requirements of a specific job. Companies need workers who can do their jobs perfectly or at least do the minimum requirements needed for the job to be productive; while employees are mainly focusing on job rewards.

Therefore there is a paradox between the 2 claims, one which states that the market does not have enough jobs and the other that claims that many jobs can’t find candidates to fill! Well actually both are true!

While investors are not investing enough (Development and Money), also workers are not working hard enough!

The following chart shows different unemployment rates across the global regions (2014-Q2):

Unemployment Paradox in the MENA Region1

Common Unemployment Paradoxes

A) Attitude vs. Skills:

  • Most employers are eager to realize positive performance results and therefore seek in their interviews to hire employees with “technical” experience with low focus on attitude and behavior; thus leaving a lot of “Inexperienced” or “fresh graduate” candidates unemployed. The more we have employers like these, the higher will be the salaries of experienced workers and the lower will be the chance for potential good calibers.
  • ​MNC expansions through the past 2 decades has dramatically influenced the general market trend for people development in 2 ways:
  • Exported good candidates who are seeking better packages (Especially Managers) to local companies.
  • They directly forced their competitors to provide people with better development path and financial packages to avoid high employee turn-over.
  • MNC invasion was not all so good also; some employees would just leave because they are perceived below expectations at their former companies where the performance bar is really high, while they know they can get a better salary and job title at another organization that is not so very much sophisticated! This was one of the reasons for salary bubbles raising the gap between different company ranks.

B) Able to Work vs. Willing to Work:

  • While some people can’t find a job, some others are not willing to work unless in very specific jobs or even unwilling to work at all!
  • Some insist on finding jobs in their specific education field, while others are not willing to work unless with a specific salary or a specific position.
  • The main issue is not the perception itself, but rather their willingness to improve their knowledge, skills and attitude… Some workers just don’t and won’t upgrade any of those three, but still are demanding specific jobs that can’t be matched by their current set of skills and will (Most probably) stay unemployed!

C) Gap between Education and Actual Required Market Experience

  • While employers are still valuing technical and functional skills, millions of fresh graduates are out in the market getting frustrated from the amount of job applications and interviews replied to negatively or even none replied to at all! I always face this question from frustrated young people “How can I have experience if nobody is willing to provide me with this experience without having prior experience?!”

D) Perceived vs. Actual Skills:

  • Another paradox that invaded the job market is how a candidate perceives the skills required to perform adequately in a given job. If an employee is given a negative feedback from his / her direct boss, most commonly they will seek another job where they are perceived as better candidates to fill the required positions

E) Low Caliber

  • It is very common that company X is looking for a senior manager and 100 people apply for the job, then the number reaches 10 candidates after the initial screening and then 2 at the final interview them 0 accepted, then company X looks for a specific senior manager to hire later by direct head hunting.

What we are facing currently is a multifaceted “unordinary” issue; therefore the solution also should be “unordinary”

Real change of: Perception – Attitude – Creative Solutions.

The article is written by Sherif Taha for Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

Trade the Market like the Pros Do

Trade the Market like the Pros Do

 

  • Day traders, Speculators, and Hobbyists today have access to various Internet and Mobile based trading platforms that can help them trade like professionals.
  • The reality of the market place is that your broker might not necessarily trade on your behalf, but theirs. The pros know how to trade, but we all had to start with the basics and will have to learn how to control your emotions.
  • With the history and basic knowledge it is obvious that no one can explain how the market works or strategies in a couple of paragraphs but to learn how to trade like the pros you have to understand the market. You have to begin with the proper mindset to trade like a market pro and you must practice, practice, and practice. 

Today’s investor has a wealth of tools at their disposal that were unavailable to previous generations. With the use of the Internet based and mobile trading platforms, “Day Traders” ,”Speculators”, and Hobbyists are better equipped to wage battle on their own terms rather than be at the mercy of the market. A professional is one who has taken the time to perfect as best they can their methods of trading from which they derive their income. However for the average investor out there the waters that enter into are a vast ocean infested with not only delectable and compelling treats but its also filled with dangerous creatures looking for their next prey. We won’t jump into the deep end just yet as there has to be training in the shallows to ensure that you’ll have a fighting chance to survive in the vast ocean known as the marketplace.

We’ve all seen the brokers trading in the “pit” or on the trading floor in an open outcry system bidding and buying and selling all types of contracts. Understand that brokerage firms are not necessarily trading on your behalf, but of course on trading on theirs. In the case of the futures market brokers are not ever cheering for you to have a winning trade unless you are in the same positions as themselves. Just like in a casino the odds are not in your favor. This isn’t meant to scare you off or deter you from trading it is just the reality of the marketplace. There is a “zero sum” game afoot here and just like in the casino when you are winning its probably best not to press your “luck” for too long. Sooner or later the house will recover their losses due to payouts.

The pros know how to trade as we have been doing it for many years, but we all had to start with the basics and although I know many of the major players in this market and honestly like me they put their pants or skirts on one leg at a time and there aren’t too many “experts” only those with years of experience under their belts. So you must understand the basics and you will have to learn how to control your emotions as they will motivate you to act in a way that will usually make you very very sorry you didn’t keep them under control.

With the history and basic knowledge laid out before you it should be obvious that no one can explain how the market works or strategies in a couple of paragraphs but to learn how to trade like the pros you have to understand the market. One of the best authors to learn from is Cornelius Luca. Once you have the basics of the market then you have to learn trading strategies which can be complex. One of the best teachers out there is Raghee Horner. Both authors are quite active and you can find their work quite easily. You have to begin with the proper mindset to trade like a market pro and you must practice, practice, practice. Take it from me

Options trading involve significant risk of loss and may not be suitable for everyone. Options & cash markets are separate and distinct and do not necessarily respond in the same way to similar market stimulus. A movement in the cash market would not necessarily move in tandem with the related options contract being offered.

The article is written by Greg Heath for Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

The Dutch Disease that plagues Rentier Iraq

The Dutch Disease that plagues Rentier Iraq

 

  • Some of the symptoms of Dutch disease are that it creates very rich countries but poor citizens, and high financial revenues with few job opportunities.
  • Oil export increase raises the value of the local currency but it makes the national industry less competitive with goods of other countries.
  • To worsen the situation, the government of oil-producing country is not linked to citizens as it does not need them, because it receives its vast resources from oil industry. 
  • Getting rid of the resource curse that has hit the economy of Iraq and infected its political system requires several solutions including the diversification of the country’s exports to be free of the single-source economy, which depends on oil. 

Iraq seems to be hit by many curses. Among those, the most serious is the resource curse, or what is so called (Dutch Disease).

This word was first used as a term in 1977 and can be defined as a set of negative effects that badly influence the establishment of proper economy. Some of the symptoms of Dutch disease are that it creates very rich countries but poor citizens.

It also provides greater financial revenues with few job opportunities. That’s applied in Iraq. This disease has previously struck other countries in addition to Netherlands, such as Spain, Australia and Nigeria.

Oil export increase raises the value of the local currency but it makes the national industry less competitive with goods of other countries. On the other hand, the oil market is unstable with volatile prices. Also this industry is one of those, which doesn’t absorb unemployment, requires intensive and immense capital and labor at professional level of skills.

Perhaps the most serious symptoms of Dutch disease are those related to the side effects of the disease, as the crisis transit from the field of economics to the field of political practice. Rentier states and those countries, whose economy depends entirely on oil, suffer from some governments that give all their efforts to the perpetuation of the existing political regime at the expense of the fundamental goals of the state.

In addition to this, the government of oil-producing country is not linked to citizens as it does not need him, because it receives its vast resources from oil industry. When citizens do not pay taxes, they have that feeling of separation along with their government, especially when the state/ Government turned into a shop that sells oil.

The government, then, is not afraid of citizen accountability, because citizen does not supply the country’s economy. Thereof, it is reflected in the political performance of the governments of such Rentier states. That actually leads to a political climate in which the authoritarian tendencies and dictatorial aspects are vivid in addition to mating between wealth and power.

So Dutch disease contributes to the creation of a more centralized state, through which the government spending is doubled. Moreover, it makes the citizen’s capability of formulation of public policies shrinks and that generates an atmosphere of discontent among those who are marginalized- the people, and helps the government to enhance its repressive means to keep the situation unchanged. This situation has plagued Iraq since several decades when oil was discovered. Current and previous governments of Iraq have abused the oil fortunes to create regimes and to ensure their stay in power as long as possible. These governments are used to distributing donations to those who are close and loyal to them neglecting the vast majority who is getting crumbs in their rich country.

Although the new political system in Iraq, after the fall of the former regime, is based on a democratic basis and a constitution, which guarantees the independence of the three powers (Legislative, Executive and Judiciary) and allow those powers to derive their legitimacy from the people as the source for all authorities, influential political blocs are formed. Those blocs collected fortunes through their political status, and acquired huge privileges concerning oil, as well as the exploitation of public money in the purchase of consciences especially in the election season to get the votes of the electorates, in addition to widespread administrative and financial corruption.

Getting rid of the resource curse that has hit the economy of Iraq and infected its political system requires several solutions including the diversification of the country’s exports to be free of the single-source economy, which depends on oil. It also requires a policy of decentralization in the organization of the oil industry and the applying the principle of transparency in handling this industry, in addition to the establishment of an oil fund that ensures a fair distribution of oil profits to the citizens along with developing a tax system in order to re- link the citizens to their government.

The article is written by Falah Mousa for Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

Amazon is stealing your customers by paying their employees to leave

Amazon is stealing your customers

  • Regional competition for customers shows focus on customer satisfaction as the key business driver
  • Developing a customer centric corporate culture is essential for success
  • Motivate employees to care and be creative to keep customers happy and develop employee growth
How committed to your customer are you?

No company wants to say that, do they?  And while the Region sorts out logistical, cultural, and human capital specifics, Amazon.com and their CEO Jeff Bezos are already doing a growing business here.

Now, while you may say the GCC and Regional organizations have adopted a steep learning curve to meet customer needs and things are improving; the reality is simply this: you’re customers are there already and they’re waiting with high expectations for you to take care of them.   And if you don’t, Jeff et almost certainly will.

Today, commitment to the organization’s success is expressed directly as commitment to the customer.  And in our Region and around the world, it has to be.  Otherwise you won’t survive for long in today’s highly competitive marketplace.

The secret is to bring smart and creative customer driven employees and timely value based solutions to customers so they are happy and continue to buy from you. Simply said, you need a customer-centric culture to drive organizational success.  Commitment to your customer must be paramount.

Take Zappos, which has been acquired by Jeff Bezos’ amazon.com, and how they both feel about the importance of customer service and the need for staff to buy into their concept.  For Tony Hsieh, Zappos’s CEO, this meant taking his customer-centric philosophy to another level. Zappos employee training and orientation process sought to retain only the best employees with the most customer oriented mindset.  This paradigm was so engrained in its culture,  Zappos designed a program unheard of in the industry.  Hsieh referred to it as the “walk-away option” where newly trained employees were offered up to one month’s salary to walk away after completing their intensive training program.

That’s right, after finishing Zappos’s comprehensive and intensive training, newly hires were given the option of leaving the company to pursue other job possibilities.  About 2-3% would take the offer, but the vast majority, or upwards of 97-98% decided to stay.  For Hsieh, this method created an internal culture driven to be the best and drove out anyone who wasn’t as committed to their programme’s customer-based ideals.

This unorthodox approach, along with Zappos strong brand attributes, caught the eye of Amazon’s CEO, Jeff Bezos.   After Bezos acquired Zappos, he tweaked Hsieh’s idea and adapted it to the Amazon culture.   Bezos has adopted a similar pay-to-leave program aiming to copy its subsidiary’s selective recruitment and retention strategies.

Once a year, Amazon’s front line employees have a chance to reflect on their work, their company, and their coworkers to decide if they are committed or if they wish to take a pay-to-leave package.  Those who choose to stay and forego the quick cash remain a more closely tied group of committed employees.

This kind of environment  is one wherein Amazon and Zappos are not only saying “there’s the door if you don’t like it”, but “here’s how much we care for our customers.  If you’re not fully on board, here’s the door and cab fare as well to take you home.  Thanks for coming.”

Creative retention and employee training programs like these may be a key driver to attract people to your company.   Furthermore, this could be key in developing an internal brand identity whose hallmark is serving customers’ needs.  And of course, no matter what your business is, when customers’ needs are met or surpassed, business succeeds.  We can thank Zappos for a creative option to building a culture of customer service and yes, Jeff Bezos for building on a solid construct in customer-centric thinking.

The article is written by Jonscott Turco for Arab Business Review To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

UAE – Innovating to Grow & Diversify

UAE – Innovating to Grow & Diversify

  • The UAE has been able to quickly and successfully transform itself from an oil-based economy into an innovative, knowledge-based economy; actively promoting innovation through policies and initiatives aimed at developing the three pillars of the innovation ecosystem – human, financial and technological capital
  • Being the first-ever World Expo to be held in the MENA region and themed as ‘Connecting Minds, Creating the Future’, Dubai Expo 2020 is expected to strengthen the innovation ecosystem in the region.
  • UAE’s private sector will need to play an increasingly important role in supporting the government’s agenda and promoting the national innovation ecosystem to ensure that the UAE is able to maintain and strengthen its position as a hub for innovation, not just in the Middle East, but across the world.

The United Arab Emirates (UAE), which used to be known as an oil-based economy, has been able to quickly and successfully transform itself into an innovative, knowledge-based economy over the past decade. In fact, knowledge-based revenues now constitute a greater proportion of the nation’s GDP than oil revenues, having grown from 32.1% in 2001 to 37.5% in 2012. In its move towards becoming a knowledge-based economy, the UAE has diversified its economy, becoming a key player in the real estate and renewable energy sectors, in addition to becoming a global hub for trade, financial services and tourism. This vision to become a knowledge economy is evident in the UAE’s Vision 2021, which aims to build a nation where ‘knowledgeable and innovative Emiratis will confidently build a competitive and resilient economy’.

The nation has been actively promoting innovation through policies and initiatives aimed at developing the three pillars of the innovation ecosystem – human, financial and technological capital. 

Let’s talk about the human capital first as it is the most critical and fundamental pillar for all innovative changes. UAE has advanced its human capital on numerous fronts. Thanks to consistent investments across all education levels, UAE boasts one of the most advanced education systems in the MENA region. Moreover, advancing women’s education and economic participation has led to women taking up leadership roles throughout the country.

The UAE government’s budget allocation to education makes up more than 20% of the overall budget amount — this is way above than the benchmark average of 13%. Besides overhauling primary, secondary, and higher education systems, the nation is facilitating expansion of higher education institutes by establishing world-class local universities, attracting foreign universities to open branches in the nation, and entering into international partnerships. For instance, the Masdar Institute was established in 2007 in close cooperation with the Massachusetts Institute of Technology (MIT). All these efforts have paid off, with the UAE’s rank on the Education sub-pillar of the Global Innovation Index going up from 65th in 2011 to 15th in 2013.

Second key element of knowledge economy is the financial capital because even the highly skilled human capital can fail to perform to its full potential without sufficient funds. Several sources of funding are available in the nation, including government funds, equity investing and crowd funding. Government funds typically provide early-stage funding and include the Khalifa Fund, the Expo 2020 fund, among others. In terms of equity investment, venture capital is the most accessible, despite the low risk tolerance of VC funds. The number of regional VC funds actively investing in the region is going up. Also, the number of VC deals has increased by 50% between 2010 and 2012, with 47% of the investment focused on technology.

Along with human capital and financial capital, technology accounts for another critical element for facilitating ground-zero innovation.  Although the UAE’s R&D expenditure as a percentage of its GDP (0.47% in 2011) is still below international benchmarks (global average of 2.08% and the OECD average of 2.32%), it is launching several targeted initiatives to develop its R&D efforts. Besides driving R&D in universities, the UAE government is keen to establish scientific hubs, for example, TechnoPark was set-up as a science and technology park managed by the Dubai Institute of Technology (DIT). Also, the Masdar Institute is developing a technology for desalinating sea water using renewable energy sources, and building the London Array, the world’s largest offshore wind farm.

The UAE’s innovation ecosystem has been encouraging many residents to become entrepreneurs. UAE-based technology start-up launches are expected to increase at a faster rate than the MENA average. By 2015, the UAE is expected to witness 185 new technology-based start-ups. Furthermore, the UAE government has reviewed its intellectual property and copyright laws with an aim to align them with international standards.

Exhibit 1: Snapshot of Some UAE Start-ups

UAE – Innovating to Grow & Diversify 1

Source: The Global Innovation Index 2014: The Human Factor in Innovation, Cornell University, INSEAD, and the World Intellectual Property Organization (WIPO)

The UAE topped the World Bank’s Knowledge Economy Index (KEI) among Arab countries, ranking 42nd globally with a score of 6.94. On all the four pillars of the knowledge economy—the economic and institutional regime, education, innovation, and information and communication technologies (ICTs), UAE was ranked among the top four Arab nations.

While the UAE leads the Middle East with a global ranking of 46 in overall innovation performance, Dubai is the first city in the region to establish first knowledge centers, including Dubai Internet City, Dubai Media City and Knowledge Village.

Further, the Dubai Expo 2020 is expected to benefit several sectors of the economy such as hospitality, tourism, trade, shipping logistics and real estate; nearly $7 billion (Dh25.7 billion) has been allocated for development and infrastructure projects in Dubai so far. Being the first-ever World Expo to be held in the MENA region, the Expo will also add more than Dh140 billion to Dubai’s GDP, create nearly 277,000 new jobs and draw over 25 million visitors.  The theme of Dubai Expo 2020, Connecting Minds, Creating the Future emphasizes the importance of partnerships and innovation for building a sustainable world today and in the future­. Especially Dubai Expo’s new 100-million-euro Expo Live initiative will help drive innovation by uniting research institutes, companies, citizens and entrepreneurs across the globe in finding solutions to global challenges.

Exhibit 2: World Bank’s Knowledge Economy Index (KEI) Ranking of Arab Nations

UAE – Innovating to Grow & Diversify 2

Source: IMF, MRD/Orient Planet

Overall, if we look at the UAE’s innovation ecosystem, it seems that the pieces of the puzzle are falling into the correct places. The nation now boasts a number of unique advantages, such as strong education system, a diverse talent pool, a growing innovation culture, and a number of targeted R&D initiatives. While the UAE government has been capitalizing on these strengths and issuing relevant policies that address the issues of talent, funding and stakeholder cooperation, the private sector will need to play an increasingly important role in supporting the government’s agenda and promoting the national innovation ecosystem to ensure that the UAE is able to maintain and strengthen its position as a hub for innovation, not just in the Middle East, but across the world.

The article was originally published at: Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

Opening-up of Saudi Stock Exchange to Foreign Investors

Opening-up of Saudi Stock Exchange to Foreign Investors

  • The decision of the Saudi Capital Market Authority (CMA) to open the Saudi stock exchange to foreign investors has induced a lot of excitement and optimism in the market. In this article, we discuss what the change is all about, why it is important, how it is likely to be implemented, and what will be its impact on various stakeholders.

What? Why? How?

So what exactly is going to happen? On July 22, 2014, the Saudi government announced that the Tadawul All Shares Index (TASI) will be open to direct foreign institutional investment from the first half of 2015. This would mark a welcome departure from the current state of affairs, where foreigners can purchase Saudi stocks only via trades conducted through international banks and by making a small number of costly and time-consuming exchange-traded funds (ETFs). As a result of these restrictions, foreign investors currently own less than five percent of the Saudi market, and account for a meagre one percent of the volumes traded on the TASI, which is dominated completely by local retail investors. But once these restrictions are eased in 2015, foreign investors will be able to participate much more freely in the Saudi market, and own and trade stocks of public companies in the kingdom.

Why is the change important? With a capitalization of $530 billion, the Saudi capital market is much bigger than its regional peers (Dubai and Abu Dhabi combined have a market cap of about $235 billion, Qatari listed companies are worth $196 billion and Egypt’s market is about $69 billion), and also boasts of superior liquidity – the daily average turnover at TASI is $2 billion, which is once again much ahead of the trading volume in other Arab nations. And to add to these points is the fact that the Tadawul is home to the some of the largest companies & IPOs in the region, belonging to diverse sectors ranging from petrochemicals to banking to telecommunications to retail and real estate. Therefore, from an investor standpoint, the TASI is one the biggest market which is currently closed to foreign money; therefore, its proposed opening to foreign investors is perhaps the most significant investor-friendly step taken by a Middle East or GCC nation in many years.

However, the Saudi government is not taking this step simply to appease investors. Instead, this move is a part of the kingdom’s long-term strategy to reduce dependence on oil revenues, and strengthen the non-oil sector of the largest economy in the Middle East. The decision also comes close on the heels of Qatar and the UAE getting included in the MSCI emerging market index, and Saudi authorities surely don’t want to be left behind on this front, so an indirect aim would be to get the TASI listed on the MSCI frontier or emerging market index.

The importance attached by the market to this move can be gauged from the fact that the TASI jumped 2.8 percent to a six-year high on the day the announcement was made. Also, the IMF boosted its 2015 GDP growth forecast for KSA from 4.1% to 4.6%, based on expectations of strong private sector performance.

How will the change be implemented? The CMA is yet to come out with a definite plan, but it is obvious that the roll-out to foreign investors will a slow and gradual process to avoid volatility in the market, and also to test waters in a phased-out manner.

One of the reasons that this change has taken so long to come is that Saudi authorities have been very protective of the companies in the kingdom, and have been averse to foreign investors taking control of key listed companies. Therefore, we can expect the CMA to impose caps on the amount being invested. While official numbers are yet to be announced, the market expects that foreign institutions will not be allowed to own more than 10% of the Saudi market and more than 20% of a Saudi company.

Further, to start with, a limited number of investment licenses are likely to be granted to qualified investors only, in order to avoid a sudden influx of foreign money into the Saudi companies. Such investors likely to be chosen based on the size of their assets under management (AUM) and global investment management experience, with most expectations pointing to an AUM bar of at least $5 billion. Retail investors are unlikely to be given licenses for buying and trading in the first phase of the roll-out.

Finally, most experts believe that the KSA is likely to follow the route adopted by emerging markets like China and Taiwan, where a free and open market is regulated by government officials. Also, oil and gas companies may be kept out of the purview of the initial roll-out to ensure that the Saudi government retains control over firms currently generating majority of the national revenue.

What are the implications of opening-up of the market to foreign investors?

  • On the KSA economy: Saudi Arabia’s economy is likely to get a double boost from this move. First, the influx of foreign capital will boost the overall GDP, and push along the diversification to non-oil revenues that will ensure sustenance of growth. Secondly, a well-diversified and growing economy will help tackle the high level of unemployment, especially among the youth, in the country. As cited earlier, the IMF has already increased its 2015 growth forecast from 4.1% to 4.6%, expecting economic diversification to drive growth.
  • On the Tadawul Index (TASI) and the overall capital market in the kingdom: The index will become the gateway to foreign fund inflow worth ~$50 billion into the country, strengthening its case for inclusion into MSCI’s emerging market index. Even though such an inclusion unlikely to take place before 2016, the TASI will account for three to five percent of the index, when eventually included. The move will also boost trading and IPO activity on the TASI, and will also result in production of higher quality equity research in the region.
  • On Saudi Companies: Most large Saudi companies are cash rich, so obtaining additional funding will not be the biggest gain for them. Instead, such companies will benefit from shareholder activism and improved corporate governance and accounting standards that are likely to be implemented to meet the high standards expected by foreign investors. These companies will also benefit from receiving guidance and expertise from globally experienced investors, on operational as well as strategic issues. For medium-sized companies, influx of foreign capital will lead to lower financing costs and improved valuation. Further, working with global investors will allow companies in the KSA to think global, and will help them execute their international expansion plans (regional or global) in a better manner.
  • On Investors: The move will give investors much awaited access to the largest economy in the GCC and in the Middle East. Huge foreign reserves, a low-risk sovereign credit quality, and an emerging-market like growth potential make the KSA an especially attractive destination for foreign investors.  Additionally, through the TASI, it will give them access to leading firms across industries, such as Samba Bank, Saudi Basic Industries, Saudi Industrial Investment Group, and Yanbu National Petrochemical Company. Not only do these companies have a huge “upside” potential, most Saudi companies also have better corporate governance standards as compared their peers in the Middle East.
  • On Other Asset Classes: The current move is aimed at opening-up of the equity market. However, if the move is successful, it could prompt the government to open even the bond (or Sukuk) market to such investors. Even though such a follow-up move will take a long time before being implemented, the opening-up of the local Sukuk market would give foreign investors access to companies that sold 42 billion riyals ($11.2 billion) through a dozen sales in the past year, according to Bloomberg.

Overall, if implemented well, this move has huge positive implications not just for the KSA, but also for all other countries in the GCC and the Middle East, as discussed above. However, investors are keeping a close eye on the announcement since policymakers in the kingdom have put off such plans in the past. Therefore, it is important that the CMA comes out with a well-defined roll-out plan with actual dates and timelines to alleviate investor concerns, and implement what will be a landmark change in the way capital markets operate in the Arab World.

The article was originally published at: Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

The Arab Digital Divide and the March towards a True Arab Knowledge Economy

The Arab Digital Divide

  • Most Arab nations have made significant progress towards becoming knowledge-based economies by making major improvements in ICT diffusion since the mid-1990s
  • However, the difference in ICT use across the region is so wide that it almost creates a digital divide with the Gulf Cooperation Council (GCC) countries on one side and the rest of the MENA countries standing on the other side of the divide.
  • Therefore, despite making significant progress towards becoming a knowledge-based economy, a lot needs to be done for expanding broadband capacity and spreading ICT usage in non-GCC Arab nations to create a true Arab Knowledge Economy.

In today’s fast progressing information era, numerous countries are focusing on knowledge creation and advanced technological development—together termed as ‘Knowledge Economy’.  In order to remain competitive in the global economy of the 21st century, most Arab nations are also utilizing the power of high-quality knowledge. They are laying out relevant policies and taking important steps to meet all requirements that define a knowledge economy and these efforts have yielded positive results as well. Since 2001, the Arab World has recorded the largest growth in Internet users across the regions in the world. There has been more than a 600% increase in the number of citizens accessing the Internet in the region. Some Arab countries have also launched initiatives for improving their education system and Information and Communications Technology (ICT) infrastructure.

A dynamic ICT infrastructure is a pre-requisite for a nation to fully participate in the global knowledge economy and to accelerate economic growth – it is measured by the extent of mobile telephony, computers, Internet access, and new electronic applications, all supported by a dynamic IT industry that boosts employment and economic growth. There is enough evidence that information and communication technology (ICT) plays an increasingly significant role in economic growth. According to a World Bank’s report, every 10 percentage-point increase in broadband penetration in low- and middle- income countries accelerates their economic growth by 1.38 percentage points.

Majority of the Arab countries have made significant progress towards becoming knowledge-based economies by making major improvements in ICT diffusion since the mid-1990s — the mobile cellular segment has grown from almost nothing in 2000 to 87 subscriptions per 100 people in 2010; during the same period, the number of Internet users in the MENA region increased tenfold to more than 100 million, with wide variation across nations, ranging from 12 users per 100 people in Algeria to 81 per 100 in Qatar. ­ According to a report by Madar Research and Development and Orient Planet, the number of Arab internet users is expected to increase to nearly 197 million users by 2017, with the internet penetration rate jumping from about 32% in 2012 to over 51% in 2017 — this would be nearly 3% above the world average at that time.

However, the difference in ICT use across the region is so wide that it almost creates a digital divide with the Gulf Cooperation Council (GCC) countries on one side and the rest of the MENA countries standing on the other side of the divide. The figure below shows the disparity between GCC and non-GCC countries. Libya is the only exception among non-GCC nations, with mobile broadband penetration of nearly 43 per 100 people, a rate comparable with GCC nations. Growth in Libya is driven by strong government support, which compensates for the low fixed broadband penetration, and Libya having a GNI per capita of $16,400.

Fixed and Mobile Broadband Internet Subscription Rate in Select Arab Countries

The Arab Digital Divide-1

 Source: International Telecommunications Union, ICT Adoption and Prospects in the Arab Region 2012

Overall, despite the progress made, a lot needs to be done for expanding broadband capacity and spreading ICT usage in the region. Just looking at the basic technology statistics, one can easily make out the inadequacy of the region’s ICT infrastructure. For instance, the average bandwidth in the Arab region is low at around 1 Mb/1,000 people, compared with 40 Mbs/1,000 people in the U.K. and 30 Mbs/1,000 people in France.

High costs of ICT services, driven by monopolies in certain segments, act as inhibitors in the Arab world. In 2008, Egypt, Lebanon, Syria, and Tunisia still had monopolies over international long-distance communication; Lebanon continued to have a monopoly on mobile services. Also, if we glance through World Bank’s report, only four Arab countries (UAE, Bahrain, Oman and Saudi Arabia) rank in the top 50 on the Knowledge Economy Index, as there is a lack of a coherent strategy among the Arab nations to support growth based on knowledge and innovation. The region continues to face many challenges in pursuit of transforming into an information-based economy, which requires implementation of key cross-sector reforms in education, innovation, ICT infrastructure, etc.

Thus, there is much more that can be done for ensuring that ICTs are used as the tool for increasing productivity, growth and employment, and that digital growth in the Arab world is inclusive. As this is done, MENA governments should introduce and implement policies for improving the ICT skills of their workforce, which will make them more employable, more innovative and an effective contributor to the development of a strong and inclusive Arab Knowledge Economy.

The article was originally published at: Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

Caution is the word of the day GCC Economies

Caution-GCC Economies

 

  • We live in an interconnected world and geopolitical developments in Ukraine and Syria are bound to add volatility in global geopolitical environment and influence small and large economies around the world.
  • Further, the economic environment is undergoing an unusual shift, through unorthodox and new policy making in Japan, US and Europe.
  • In such a situation small sized GCC economies, which are also dependent heavily on commodity prices and transit of goods, should exercise caution, and not get swayed by the rosy pictures stock markets around the world are painting.

 

Recent events in Ukraine and the long term unresolved situation in Syria have been the source of many questions about long term effects to the geopolitical and economic environment. Needless to say we live in a very interconnected and globalized world and such events are bound to add to an increasing volatility in the global geopolitical environment that is bound to influence economies around the world. 

Such events come on the back of a very unusual economic environment whereby we are witnessing the unfolding of unorthodox and new policy making: Japan’s monetary policy, Fed’s unwinding or fiscal stimulus, the Euro ever present crisis and a US stock market that seems to no longer relate to the real economy. Therefore, regardless of the personal opinions we may hold on any particular event it is necessary to process these events and reconcile their potential effects with the economic decisions that we make today or that we plan to make tomorrow.

CAUTION is therefore the word that comes to mind when I reconcile geopolitical events in progress with economic indicators coming out of several G7 economies. And therefore CAUTION applies to smaller size economies like the UAE or the GULF that are much dependent on both commodities prices and transit of goods. The recent over-subscription of the Dubai IPO of Marka is a sign that ought to be evaluated carefully.

I would like to motivate my CAUTION advice by aggregating some key facts from around the globe as it is often difficult to cut through the clout of main stream media and especially the halo effect of the new Dow Jones records. Following are some of the warning signs around the globe:

  • Japan: Abenomics shock economic therapy is generating concerning effects: the plunging yen has crushed the Japenese purchasing power in spite of the growth in the stock market may have given the illusion for someone to get richer. The recent 15% correction may make the illusion disappear, especially if the USD/JPY breaks below 102. At the end all that will be left for the Japanese people is a soaring energy bill and ever increasing food prices. Japanese wages have been falling for 22 straight months with a fall of 0.4% in March only. In the latest news, Sony slashes profit outlook by 70% thanks to Abenomics.
  • China: The official Chinese PMI index misses expectations. As a correlated ripple effect: Australian PMI (greatly correlated to China) declined by more than 3 percentage points to its lowest point in nine months (6 consequent months of contraction);
  • USD: While the Dow Jones seems to continue its rally some of the fundamentals of the US economy don’t seem very rosy, signaling once again a strong decoupling between the stock market and the “real” economy. The below data doesn’t give us much confidence in US consumer spending and overall US demand.
    • During the “recovery” period 2010-14 employment gains have taken place only in low-wage industries while during the recession employment losses took place mostly in high to mid wage industries
    • While the US population has kept growing since 2007 there are approximately 1.3 million jobs less
    • 20% of US families don’t have at least a family member employed
    • Consumer spending for durable goods in the USA has dropped 3.23% since last November 2013
      • Lower-wage industries constituted 22 percent of recession losses, but 44 percent of recovery growth.
      • Mid-wage industries constituted 37 percent of recession losses, but only 26 percent of recovery growth.
      • Higher-wage industries constituted 41 percent of recession losses, and 30 percent of recovery growth.
    • As of today 56% of US citizen own subprime credit
    • 90% of the jobs in the USA pay an average of less than 35,000 USD per year
  • Ukraine: the instability is bound to generate a more rigid contraposition between Russia on one side and the USD & Europe on the other. While sanctions so far have been more formal than substantial the rhetoric is increasing on both sides and there may be instability pass onto the economic system increasing its volatility and impacting energy prices.
  • EU parliamentary elections: while the EU periphery keeps on evidencing clear signs of weakness (Italy, Greece, Spain, Portugal) new elections are looming. Word from the street is that parties against the EURO are gaining significant strength and are bound to acquire a sizeable stake in the new European parliament. If that turns into reality there may be some hard questions put on the plate of the European Union leadership and whether fundamental union regulations are to be readdressed.

Therefore, CAUTION must be the word of the day. In the post 2008 world we have accepted as systemic a much higher volatility index which makes it a bit more difficult to evaluate wider base economic and stock market swings. We just need to analyze the speeches of the heads of the Central Banks to realize that they are leaving for themselves wide arrays of options sometimes at odds with each other. Economic indicators are more difficult to read. In such an environment positions should be short, optimism measured and cash an invaluable asset to give investors the ability to ride with profits both the “bull” and perhaps the “bear” coming our way. 

Sources:

http://economyincrisis.org/content/all-sign-point-to-a-servant-economy

http://www.nelp.org/page/content/lowwagerecovery2014/

http://time.com/2742/nearly-half-of-america-lives-paycheck-to-paycheck/

http://www.bls.gov/news.release/ocwage.nr0.htm?_ga=1.73666065.22471688.1396473081

 

The article is written by Luca Gorlero for Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

Needed: A Strong Patent System & An Innovation Friendly Culture in the Arab World

Needed_A Strong Patent System1

  • The on-going transition from oil to non-oil based economy has heightened the pace of patent development in the Arab World, with Saudi Arabia leading the region.
  • However, patent development activity in the region pales in comparison to other countries worldwide, and is reflective of a lack of innovation friendly culture in the Arab world.
  • The pace of innovation and patent development needs to increase rather quickly in order to protect new technology being developed by Arab countries, and also to attract more foreign investments.

The on-going transition from oil to non-oil based economy has heightened the pace of patent development in the Arab World. In the past 3-4 decades, most of the economic output in the MENA region was generated from the hydrocarbon sector, and other sectors were undeveloped leading to low levels of innovation and patent development. However, the trend has started to change in recent years as MENA nations (especially GCC) look to diversify their revenue base by increasing focus on non-oil sectors like technology, hospitality, tourism, infrastructure development, etc. This has led to increased patent filing in the region, which has gone up from 41 in 2003 to 403 in 2013, a jump of nearly 10 times, as per a recent report by Orient Planet and MADAR Research & Development.

Saudi Arabia has consistently led the region in patent filings and continued its dominance in 2013 as well with 237 patents. The kingdom is currently home to ~50% of the patents in the Arab world, followed by Kuwait and Egypt with 272 and 212 patents respectively. UAE, which has the most vibrant non-oil sector in the region, stands fourth with 120 patents. Comparing the number of patents issued per million of a country’s population makes the above numbers more significant and drives home the dominance of GCC nations. In 2013, Kuwait had 21.24 patents per million, while Saudi Arabia followed with 7.79 patents per million and UAE was placed third with 1.90 patents per million. Qatar, which is gearing-up to host the 2022 FIFA World Cup, currently has 3.42 patents per million, and this number is likely to go-up as it plans to invest USD 200 billion on infrastructure development over the course of next 8-10 years.

Utility Patents by Country and Year

Needed_A Strong Patent System2

Source: USPTO, Orient Planet, MADAR Research & Development

Now the above numbers may seem impressive on a standalone basis, but pale in comparison to the patent development activity in other countries worldwide, and are reflective of a lack of innovation friendly culture in the Arab world. The US alone has 133,593 patents, ~75 times the 1,818 patents in all Arab countries combined. Therefore, it is not surprising that most of the next generation technology development happens to take place in the US, leading to birth of disruptive business models and companies. The US is followed by Japan, Germany and South Korea as shown below. Saudi Arabia is the only Arab country in the top 30, indicative of a lack of innovation friendly culture in the region.

Number of Utility Patents Granted – 2013

Needed_A Strong Patent System3

Source: USPTO, Orient Planet, MADAR Research & Development

The pace of innovation and patent development needs to increase rather quickly in order to protect new technology being developed by Arab countries, and also to attract more foreign investments. Arab nations are currently undertaking massive projects that will require new technology development and it is imperative that these technologies are patented to ensure competitiveness of Arab nations and companies at a global scale. Some of these include Saudi Arabia’s King Fahd City, UAE’s Dubiotech research park, Masdar City Project in Abu Dhabi, and multiple infrastructure projects (special economic cities, carbon neutral climate technology, railway, metro, airport, power plant, hotels, etc.) being developed in Qatar and Dubai in the build to World Cup 2022 and Dubai Expo 2020, respectively.

Also, patented technology is essential to attract foreign investment. As per the latest UNCTAD 2014 World Investment Report, FDI inflows to West Asia have declined from USD 71.9 billion in 2009 to USD 44.3 billion in 2013. While part of the decline can be attributed to global recessionary conditions and geo-political volatility in MENA nations, slow pace of innovation and high dependence on oil revenues is also a key contributing factor that is keeping foreign investors at bay, thereby reducing the growth prospects of companies in the Arab world.

Therefore, it is imperative that Arab countries learn from other leading nations to develop a strong patent system and nurture an innovation friendly culture. Till they do it, opportunities in the Arab region will remain unused leading to a loss of billions of dollars.

The article was originally published at: Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review