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

Processed Frozen Food in the Gulf

Processed Frozen Food in the Gulf

  • The growth of processed frozen food industry in the Gulf is driven by convenience, as more and more families are now having both partners who are full time employed there is a growing demand for quick and easy cook meal solutions.
  • Going forward the growing health and wellness trend is expected to positively influence the eating habits of consumers who will be seeking fresher and leaner meat, lower-fat chicken and gluten-free products, as well as more vegetables.
  • Frozen processed food will remain more affordable than fresh produce, hence, consumers will still be willing to purchase frozen processed food even if they have to compromise on the health benefits.

The process of freezing food in order to preserve it is an age old practice, it freezes all the moisture present in the food to ice. This in turn slows down the growth of bacteria which is responsible for food degeneration. The method is mainly used in preserving food such as meats, seafood and vegetables.

In Processed Frozen Food industry the various products are frozen at extremely low temperature (- 40 degrees) through a method called flash freezing or blast freezing. Food Products frozen in the above manner do not require any further preservative to be added. Since microorganisms do not grow at temperatures’ below -9.5 degrees and the standard for storing and transporting frozen food products is -18 degrees, the products continue to maintain their original state so long as the cold chain remains intact.

In the Gulf this is a growing category and convenience seems to be the key driver of this growth. As more and more families are now having both partners who are full time employed there is a growing demand for quick and easy cook meal solutions. Processed Frozen Food is being seen as a key category which is fulfilling this need cutting across all nationalities.

The Product Group with its various sub groups & segments is highlighted below:

Product Groups Meat Seafood Dough Vegetable
Product Sub Groups Chicken Beef Shimps Fish Flat Breads Other Dough Prod. Vegetable Others
Product Segments Chicken Beef IQF Shrimps Fish Fillets Paratha Croissants IQF Vegetables Samosas
Burgers Burgers Breaded Shrimps Whole Fish Chappati Filled Puff Pastry SpringRolls
FrankFurters Kebabs Marinated Shrimps Fateera Pastry Sheets
Kebabs Meatballs Bread Sticks
Nuggets Pizza Base
Breaded Fillets Muffins & Cakes
Meatballs
Samosas
SpringRolls
IQF Cuts

The Frozen Food category in the GCC consists primarily of the above Product Groups, Sub Groups and Segments. However based the contribution of these Sub Groups and segments may vary from country to country in the region.

While Chicken Frankfurters is the biggest category contributing almost 45% of Processed Meat Group in UAE and Oman, Mince is the biggest contributor to the group in Saudi Arabia. However between Frankfurters, Mince, Burgers, Nuggets, Breaded Fillets & Kebabs they contribute more than 75% of the Processed Frozen Meat category throughout the region.

Processed Frozen Food in the Gulf1

Processed Frozen Food in the Gulf2

Frozen Sea food is another major category in most of the countries of GCC because of the strong consumer preference for seafood like Shrimps & Fish Fillet etc. Although its contribution to the overall Frozen Food market is not as big as Meat.

In the Frozen Dough Group flat breads sell across countries in the region due to the large population from South Asia, followed by others categories consisting of Croissants, Bread Sticks, Muffins & Cakes, and Pizza Base, etc which are mainly used by the Foodservice sector. The sales of Puff Pastry Sheets is predominantly during the Ramadhan season by both Foodservice and end Consumers.

In terms of the brands that are available in GCC we can classify them as follows:

  • International Brands
  • Regional/ Local Brands
  • In House Brands

Amongst the International brands we have Sadia from Brazil at the top of the list followed by Doux from France and Emborg from Denmark offering an assortment of products. There are also a host of other international brands present only in the Chicken Franks segment from Brazil, Denmark, France, Turkey, etc.

Regional brands are those which are produced within the region and have a region wide presence, like Americana, Al Kabeer, Al Areesh, Khaleej, Al Islami, etc. Then there are some local brands that are available in a select few countries of the region like As Saffa(Oman & UAE) and number of local brands in Saudi Arabia & Qatar. These brands offer an assortment of various products mainly in the frozen meat Group.

Processed Frozen Food in the Gulf3

Processed Frozen Food in the Gulf4

A number of major retailers have also extended their In-house brands into the Frozen Food category and are gradually taking over large part of the frozen food shelf. All major regional retailers like LULU, CARREFOUR, CO Ops, PANDA, etc have now got their in house brands contract manufactured and are occupying prime shelf space, however they are restricted to their own out lets only.

Going forward the growing health and wellness trend is expected to positively influence the eating habits of consumers who will be seeking fresher and leaner meat, lower-fat chicken and gluten-free products, as well as more vegetables. Vegetables are likely to replace carbohydrates, which will boost sales of frozen processed vegetables.

Furthermore, the convenience factor will continue to drive this Segment as consumers will lead busier lifestyles and seek easier meal options. The product offering of Frozen Food is likely to see a change from the current “Ready to Cook” products to “Ready to eat” or “Heat & Eat” kind of options so we are likely to see a growth in Flash Fried products in the meats subgroup or Pre baked Parathas etc. in the Dough sub group.

Frozen processed food will remain more affordable than fresh produce, hence, consumers will still be willing to purchase frozen processed food even if they have to compromise on the health benefits. However the demand for lower-fat and organic frozen processed food items is likely to grow steadily over time.

The article is written by Subbooh Moid for Arab Business Review

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

Mall Medicine

Mall Medicine

  • This article contains a brief description and brief outline of the history of retail medicine as well as future trends of retail medicine in the US and the UK, including both recent success and failures.
  • The article then goes on to describe how the concept could be quite lucrative in the GCC and what are the milestones needed to bring retail medicine to the Gulf. 

There is an interesting new trend sweeping the western world; healthcare is moving away from hospitals and setting up shop in malls and other large retail outlets.

I was first introduced to the concept of retail medicine at the 2007 World Innovation Forum in New York City. Seen by many medical doctors as the scourge of traditional primary care, retail medicine has revolutionized the delivery of medicine through its own unique interpretation of disruptive innovation.

It all started on a wintry weekend in 1999, when American entrepreneur Rick Krieger took his sick son to an urgent care center in Minneapolis, Minnesota. Rick knew his son needed his throat tested and soon enough, after a two-hour wait, a strep throat test was finally done.

Like many parents before him, Rick believed that there had to be a quicker, more convenient way for experienced parents and patients to get quick healthcare diagnoses, so he teamed up with a physician and a nurse to put the limits of traditional medicine to the test.

Started as QuickMedx (and soon rebranded as the Minute Clinic), Krieger’s convenience care concept was simple – treat the 20% of disease that cause 80% of the visits to primary health centers (an essential extension of Paraeto’s 80/20 principle).

To keep costs down, Krieger and his team decided to staff these ‘mini clinics’ with resident nurses instead of physicians (pushing the boundaries of clinical practice) and locate the clinics within large retailers (thereby forgoing much of the costs such as building and servicing of restrooms).

Today, with over 500 clinics and close to 2 million mostly walk in, cash paying customers with a 99% satisfaction rate, the Minute Clinic (through its partnership with CVS Caremark Corporation) has opened up the US market to a whole new age of medicine. Even traditional medical power players such as the Mayo Clinic, have extended their brands into the retail medicine space, in this case via the Mayo Express Clinic.

More significant is box retailer Wal-Mart efforts, which started with a pilot program in 2005 for 75 clinics in 12 US states and and has since expanded to include plans for 6,600 medical clinics by 2012 through a partnership with various retail medicine companies such as RediClinic. Across the Atlantic, British supermarket giant J Sainsbury will also be adding government-paid doctors to some of its stores, where shopping patient will be alerted by a pager when their appointment arrives.

The ability now exists to put your next medical checkup on your grocery list.

The popularity of retail medicine lies in the trend of patient convenience. People want to have flexible visiting times. This is the millennium of multitasking and retail medicine is moving fast up the healthcare continuum as a complement to larger primary care clinics and hospitals.

In the UK, employees spend around 3.5 million working days a year traveling to and from doctors, costing the British economy close to $2 billion (estimated by the Confederation of British Industry). In the US, insurers have also advocated for increased healthcare options through retail medicine as evident by CIGNA Healthcare members in Dallas, Texas being offered convenience through the insurer’s addition of MedBasics Family Health Centers to its network.

However, the success of retail medicine is not without its share of skepticism. Many people and institutions (American Medical Association, American Academy of Pediatrics,) are concerned about quality of care, hygiene issues and the limited scope of the clinicians running these ad hoc facilities. These issues, coupled with an inability to maintain the salaries of healthcare professionals, have forced retail medicine corporations such as CheckUps and Take Care Health Systems to shut down multiple walk-in clinics in both Wal-Mart and RiteAid respectively.

Industry experts estimate that a company can consume $300,000 to $600,000 to finance and maintain a retail clinic, breaking-even at about 25 to 30 patients a day. This should be no problem for retailers within the GCC, where the desert heat pushes the average consumer to frequent the mall over 70 times per year (according to Dubai based market researcher GRMC).

The GCC retail industry is an extremely attractive sector globally, according to At Kearnery’s 10th annual Global Retail Development Index (GRDI) which ranks seven countries from the MENA region make it into the top 20 in the 2011 index of top ranked emerging markets for global retail expansion, including Kuwait (5th place internationally), Saudi Arabia (ranked 7th) and the UAE (ranked 9th).

With over five million square meters of retail space currently available in the GCC (worth over $100 billion and expected to treble in the next nine years according to Retail International), proprietors of retail medicine should have no problem carving out a niche for themselves with the right strategy and scope.

Developing a retail medicine concept specifically for the GCC would require significant investment and expertise. A number of detailed assessments need to be taken into account, starting with scope of service where the individual retail clinics must have a well-defined and limited scope of clinical services that falls within the local government regulations and is catered to local cultural norms. Also, an evidence-based medicine approach to clinical services and treatment must be implemented and quality improvement-oriented, in addition to the selection of the highly specialized staff.

Once the scope and staffing have been completed, an international partnership may be necessary to bring international best practices to the GCC.

The operations of the facility must be also carefully considered, with a team-based approach encouraged. Even retail walk in clinics should have a formal connection with physician practices in the local community, preferably with family physicians, to provide continuity of care. Other health professionals, such as nurse practitioners, should only operate in accordance with local regulations, as part of a team-based approach to health care and under responsible supervision of a practicing, licensed physician.

Most importantly, a steady referral stream also needs to be established where the clinic must have a referral system to physician practices or to other entities appropriate to the patient’s symptoms beyond the clinic’s scope of work. The clinic should encourage all patients to have a “medical home.”

Finally, it is also essential to have electronic health records set up to gather and communicate the patient’s information with the local healthcare providers.

The article is written by Dr. Mussaad Al Razouki for Arab Business Review

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

Embracing Solar Power – What can MENA nations learn from the World?

Embracing Solar Power

  • MENA countries have come out with ambitious solar energy targets that can created a stir in the global solar markets.
  • The targets are justified considering the advantages of solar energy adoption of these countries
  • However, with solar energy revolution loosing direction at the global level, the MENA countries have the luxury of learning from the mistakes made by early adopters. 

As discussed in our previous article on renewable energy in Middle East, the region has come alive to the idea of adopting renewable energy and solar energy is the form of renewable energy which most countries are keen on investing-in in a big way. According to the Mena Solar Energy Report 2014, published by MEED, the region is expected to have solar capacity of 15,000 MW of solar energy by the end of the decade. This is significant growth compared with current installed capacity of 271 MW as of January 2014.

Embracing Solar Power1Source: GreenProphet.com

Adoption of solar energy brings along many advantages for Arab countries, some of which are:

  • Long term energy security
  • Efficient utilization of higher irradiance
  • Environment friendly energy
  • Employment generation
  • Attract foreign investment
  • Access to latest technology

The solar power revolution in the region was started mainly by net-oil importing countries such as Turkey, Morocco, Tunisia, and Lebanon and now nearly all the countries have joined in led by Saudi Arabia. Most countries have pretty ambitious targets, and see solar power taking a meaningful place in their energy mix. While these targets underline the right intent of MENA governments towards solar energy, achieving these targets in the most beneficial way is going to be a challenge for most of these countries.

Globally, the solar power revolution is sort of loosing direction, with projects in several countries failing due to poor economics, policy instability, and quality issues. Big solar power promoters such as Germany, US, Japan, and Australia are discovering that successful, profitable and sustainable adoption of solar power is easier to talk about than to achieve.

  • Germany, the world’s flag bearer for solar power adoption is already witnessing a decline in newly installed capacity as the subsidies phase out in the coming years. According to a Forbes article, even after years of solar power subsidies Germany’s residential electricity cost is about USD 0.34/kWh, one of the highest rates in the world. About USD 0.07/kWh goes directly to subsidizing renewables, which is actually higher than the wholesale electricity price in Europe. To make matters worse, billing rates are expected to rise another 40% by 2020. As a result, more than 300,000 households per year are seeing their electricity shut off because they cannot afford the bills. The subsidizing approach has clearly not worked for Germany.
  • United States where the solar panel generating capacity exploded from 83 megawatts in 2003 to 7,266 megawatts in 2012 is now discovering that the poor quality solar PV panels from China are failing raising a big question on quality and sustainability of the installed capacity. SolarBuyer, a company based in Marlborough, Mass., discovered defect rates of 5.5% to 22% during audits of 50 Chinese factories during 2012 and 2013.
  • In Japan, when public confidence in nuclear energy weakened after Fukushima disaster in 2011, the government turned to solar energy giving huge subsidies which led a rush of developers with plans to deliver solar energy equivalent to 21 nuclear reactors. However, due to lack of experience and expertise the developers are now facing issues such as lack of funds, grid capacity limitations, land permit issues, wait lists for Japanese brand equipment and a shortage of qualified technicians. As a result only around 20% of the projects are able to supply energy to the grids and the deficit is expected to cost the utilities USD 3.5 billion annually on coal and gas imports.
  • In Australia, another proponent of solar energy for a long time, the government is looking to withdraw its earlier announced renewable energy targets midway. This policy instability has killed investor confidence in Australian renewable energy sector and several projects and under a risk of being scrapped or lay unfinished due to lack of investment.

As the MENA governments start to traverse the solar path it is essential for them to learn from these global experiences and they have in place proper policies and initiatives that can help them avoid known failures. The major check-points that come out of the above examples are:

  1. The policy focus should be on increasing efficiency of solar power projects and not solely rely on subsidies through feed-in tariffs. Achieving this should be easier than in countries such as Germany and Italy, because the Arab region gets one of the best solar irradiance in the world.
  2. The quality of solar installations should not be compromised for cost, and there should be proper control over the quality of equipment being used. Qatar Solar Energy Company has presented the perfect example in this case by setting a solar PV manufacturing plant which will satisfy local demand as well as give them complete control over quality of equipment.
  3. Transparent tendering and ongoing monitoring process is essential, to ensure that projects are awarded to only capable vendors are completed within planned time and cost.
  4. Policy stability is required to attract and sustain investor confidence.

The Sun has always shown brightly over the Arab world and it has the potential to remain an energy leader in the world – only if realized properly.

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

Renewable Energy Adoption: Why it means much more than a simple diversification of energy base for the Arab nations

Renewable Energy Adoption

 

  • The abundance of renewable resources in the region, coupled with negligible environmental impact, are the key enablers for renewable energy adoption in the region.
  • Most Arab nations have announced big ticket renewable energy projects and have set ambitious renewable energy targets to reduce dependence on the oil economy.
  • However, apart from diversifying their energy base, Arab governments can utilize this opportunity to address macro issues such as youth unemployment, and lack of entrepreneurial and R&D ecosystems in the region, and build a more sustainable future.

Arab region has been a late but strong starter on renewable energy bandwagon: While the developed countries of the Western world have a significant head-start when it comes to embracing renewable energy technologies, the Arab world has been late to join the race. This lack of initiative was largely driven by easy availability non-renewable energy resources, which get heavy government subsidies creating an entry barrier to ‘relatively expensive’ alternate energy sources. This was also backed by lack of technological knowledge and policy framework in many countries.

In the last few years, the region has made strong progress towards adopting renewable energy and many countries in the MENA region have acknowledged the potential of renewable energy to ensure sustainable energy sources for many years to come. The major factors that are driving the growth of Renewable energy in the region:

1. Energy security for net-oil importers: With growing population and rapid urbanization, energy demand in the region is increasing faster than ever. The demand growth is driven by increasing need for electricity for domestic use and devices, heating, cooling, and desalination of water. Meeting this demand will become even more difficult for most countries considering the rising oil prices. Therefore, investing in alternate sources of energy can help these countries ensure energy security for future. This is the key driver for growth of renewable energy in countries that are net-oil importers.

Chart 1: Renewable Energy Investments – Oil Importers vs Oil Exporters

Renewable Energy Adoption 1

Source: Arab Business Review, REN21

Net-Oil Importing countries: Djibouti, Israel, Jordan, Lebanon, Malta, Morocco, Palestinian Territories, and Tunisia

Net-Oil Exporting countries: Algeria, Bahrain, Egypt, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Syria, UAE, Yemen

2. Substitute for domestic oil usage for net-oil exporters: For countries that are net-exporters of oil such as Saudi Arabia, Kuwait, and UAE renewable energy sources can be used to substitute the oil used for domestic electricity generation. With the declining cost of modern renewable energy technologies this investment makes even more sense as it can boost present oil-export volumes, while ensuring a sustainable solution for domestic energy consumption for future.

3. Abundance of renewable resources: While the Arab region is characterized by its rich oil and gas reserves, the abundance of renewable resources in the region had gone unnoticed until very recently. Due to its geographical location, the region gets highly concentrated sunlight and has several sites with suitable wind speeds for developing highly efficient wind farms.

4. Favourable policy frameworks: As per REN21, by mid-2013 all 21 MENA countries had set renewable energy policy targets, and 18 countries had introduced renewable energy promotion policies to help achieve their respective targets. If all the countries are able to meet their targets, the renewable energy capacity of the region will reach a massive 107 GW up from 2012 levels of approximately 1.7 GW.

Chart 2: Projected Non-Hydro Renewable Energy Capacity in the MENA Region

Renewable Energy Adoption 2

Source: REN21

5. Reducing environmental footprint: According to World Bank, 85% of GHG emissions in the MENA region come from energy production, transformation and use. Gradual substitution of oil based domestic energy – which has significantly high carbon emissions – with renewable energy is definitely the right prescription for MENA economies, which are often criticized for doing little towards pushing the sustainability agenda.

With all these factors combining to create an ecosystem that will drive renewable energy growth in the region, governments in the region have the opportunity to build a local supply-chain for the renewable energy industry.

This will enable them to address several macro challenges by taking steps such as:

  • Breeding local entrepreneurs: The governments should create more business opportunities for local entrepreneurs, so that they can be a part of this growth story and reduce dependence on expats in the long run. For example: The Saudi Government has created an environment. For example, the Tunisian Government launched the PROSOL programme in 2005 aimed at building local solar energy supply chain, while revitalizing the solar thermal market in the country. Encouraged by the Government’s initiative TuNur Ltd. – a joint partnership between a group of Tunisian investors and UK-based Nur Energie, aimed at constructing a 2,000 megawatt Concentrated Solar Power (CSP) plant in 2015. This project is expected to create 1,500 direct and 20,000 indirect jobs for the manufacturing and operation of the plant.
  • Creating an efficient R&D ecosystem: While extensive R&D programs related to the renewable energy are being undertaken across the globe and the governments have an option to buy the solutions, there is still scope for improvising and localising the available technologies to deliver best results in the atmospheric conditions that prevail in the Arab region. The Government can take this opportunity to facilitate local R&D by investing in the required infrastructure.
  • Skilled employment: The government can also invest in institutions that can support the demand for skilled workforce required by this industry. This will help them address the problem of youth unemployment which most of the MENA countries are facing right now.

Case Study: Local Content Promotion by Saudi Arabia

In 2012, Saudi Arabia unveiled its renewable energy targets of installing 54 GW of renewable energy by 2032, which break down as 25 GW of concentrated solar power (CSP), 16 GW of solar photovoltaic (PV), 9 GW of wind 3 GW of waste to energy, and 1 GW of geothermal energy.

While achieving these targets, the government also plans to address the larger goal of boosting the local economy, and has come out with a white paper detailing the proposed competitive procurement process. The procurement has been designed to not only get the most competitive price for the projects, but it also has check-in mechanisms to ensure promotion of local content. Some of the salient features of the procurement programme are:

  1. Project bids will be assessed based on price as well as “rated criteria,” which include the developer’s financial capability, experience, development status, and the project’s local content. The rated criteria will have 30% weightage in the overall bid score.
    • The local content will be evaluated as a percentage of local spend from the overall project budget, and bidders achieving 60% local content will be rated highest.
    • The local content requirement will encourage bidders to launch joint ventures with local players and establish manufacturing plants, which will give a fillip to the local economy.
  2. The project winners will also be required to invest back in the local economy through training facilities, research advice, and procurement from local manufacturers.
  3. Two separate funds sourced by taxing project revenue have been created to train local employees on solar PV and CSP technologies, and fund local renewable energy R&D projects.
  4. Developers are incentivized for employing local labour – employers who are top 5% in terms of local jobs will be compensated higher than average for every employee.

We believe that these features can help Saudi Arabia address its larger problems of unemployment and lack of entrepreneurship culture, to a certain extent and other MENA countries facing similar problems can learn from them.

SourceREN21, K.A.CARE

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

Seven Tips for Doing Business in the Middle East

Seven Tips for Doing Business in the Middle East

 

If you are moving to the Middle East for a job or business, keeping these points in mind point can help increase your chances of success:

  • Do not rush while greeting people
  • Building trust is important since personal and professional relationships are not separate
  • Verbal commitment is honored and valued more than contracts and agreements
  • Patient is a great virtue – both before and during business meetings
  • Negotiations will be tough and sales cycles will be long
  • Best way to communicate is to have face-to-face meetings
  • Avoid business talk at social gatherings

Any plans of moving to the Gulf region to pursue your dream job or start a new business venture or partnership? If yes, then before you do so, there are a few things you should bear in mind — these are related to business culture, business etiquette, meeting protocol, negotiation techniques, etc. all specific to the region. Business in the Middle East runs on a very different track as compared to other regions worldwide, especially the Western world. In the points below, we will offer you some tips that will prove helpful for you while conducting business the Middle East.

1. Do not rush while greeting people: While meeting and greeting people in the Middle East, do not mind if the handshakes last for a longer duration or if your hand is held while you are being led to a different place. This is because one should wait for the other individual to withdraw their hand first as per Islamic etiquettes. And yes, always use your right hand to eat, shake hands or hand over any item to anyone. If you are a male member of the team and are being introduced to a female colleague, it is advisable to wait and see if a hand is being extended. If not, then one should not try to shake hands. In terms of addressing people, Arabs are informal with names while doing business and like to be addressed by their first names.

2. Building trust is important since personal and professional relationships are not considered separate: In the Middle East, business is carried in a very different manner as compared to the Western nations. Business relationships are formed on mutual friendship and trust, and personal matters are prioritized over everything else. Arabs prefer to do business with people they know and like.  So, if you have friends working at the right places at the right time, the road to a successful business trip is laid out for you.

3. Remember that verbal commitments are valued more than contracts and agreements: Middle East’s culture accords more value to someone’s word as compared to a written agreement. So before you make a promise to deliver something, be sure that you will be able to complete it, since failure to do so can lead to a loss of respect and reliability.  Contracts are merely a memorandum of understanding rather than fixed binding agreements.

4. Have patience before and during business meetings: Do not schedule meetings too ahead of the actual date as changes in personal circumstances of your Middle East counterpart can impact your appointment.  Also, the initial meetings will revolve around knowing each other; so, it’s only after several meetings that the actual business talks would start once the trust and compatibility factors are established. Do not mind if meetings are chaotic. People will take phone calls during meetings and might enter the meeting room unannounced and start discussing their own agenda items.

5. Negotiations will be tough and sales cycles will be long: Arabs are excellent negotiators. Bargaining can be seen everywhere, be it a shopping outlet or a board room.  Decision making is slow with bureaucratic formalities increasing the delay further. Also, sales cycles are a lot longer in the region as compared to the West. You should not expect immediate results from initial meetings and make sure that you follow up, arrange further meetings and maintain correspondence. Refrain from using high pressure business tactics as they can backfire. Be flexible and patient! In fact, patience is the most valued virtue in the Gulf and if you can demonstrate it in the most frustrating business situations, you will surely reap the rewards.

6. Best way to communicate is face-to-face: Verbal communication is preferred over written communication in the Middle East. The written word is treated as less personal and hence you can find your emails receiving no response for some time if you do not follow up through phone calls. A few countries such as Saudi Arabia do not prefer to do serious business with Western people over phone and thus a personal meeting is the only option you have!

7. Avoid business talk at social gatherings: If your Gulf business partner invites you to a house party, do not try to discuss business at any point of time. You can bring something small as a token of thank you. Do not gift alcohol as it is not consumed by Muslims. There will be a lot of socializing and small talks before the meals are served to the guests. It is considered good manners to reciprocate the hospitality that you receive. Hospitality is held in high regard throughout the Middle East and people take great pride in lavish shows of hospitality — never ever refuse it as it can be considered offensive!

While you keep these tips in mind, take care of some of these points as well:

  • During Ramadan (the holy month of fasting for Muslims), do not eat or drink in front of Muslims
  • While eating, do not use your left hand; it’s considered unclean
  • Do not cross your legs and display the sole of your foot towards anyone
  • Never interrupt Muslims during namaaz (prayers), a religious ritual they perform five times in a day

Just remember these tips and you will not face much difficulty while doing business in the Middle East!

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 Surge in Online Classifieds

The Surge in Online Classifieds

  • Recent data reveals that classifieds ads are migrating to the Internet. The number of printed classifieds ads in MENA is shrinking, while Arabic language online classifieds websites are booming. 
  • The shift to online classifieds has improved the experience of consumer-to-consumer and business-to-consumer selling and buying. It also created billions of dollars in value for start-up founders and their investors.
  • Globally, online classifieds is a business that is mostly local or regional, where global websites are usually of low value outside their geographical area. For this reason, the region’s homegrown online classifieds companies have high growth potentials.

If you like to get your hands dirty with an inky, fat and heavy print classifieds newspaper made out of dead trees on a Friday or Saturday morning, and circle classifieds that are of interest using that bold red pen, over a cup of coffee, then you must have noticed that the number of classified ads has shrunk. This is especially true in the autos and real-estate segments, as the volume of ads has fallen over the past couple of years and even more so during the last 12 months.

Where did the classified advertisements go? You won’t have to look far. Just pick up your computer or smart device, do a quick search, or download a regional classifieds app, and you’ll find all you’ve missed and much more.

Between 2000 and 2010, US newspaper classifieds revenue fell from $19.6 billion to less than $6 billion. In fact, today most cities in the US don’t have a classifieds print newspaper.

Europe did not need long to follow. A couple of years ago, France’s most iconic classifieds paper –which was the inspiration behind many of the classifieds prints in the Middle East– decided to stop printing. While we are yet to see leading classifieds newspapers in the region shut down, it’s easy to predict that this may happen in less than 5 years.

A look into the regional print classifieds industry reveals that business from classifieds listings has stopped growing 2 or 3 years ago, while most titles have witnessed 20 to 30 percent decline in revenues and volume of ads last year. This year seems to be following suit.

While this may be bad news for publishers who made a bet on print classifieds, and set a blind eye to the obvious shift to online classifieds, the migration of classified advertising to the Internet has been a win-win for all. This includes consumers, small and medium-sized companies, and online classifieds start-ups and their investors.  The shift drastically improved the experience of consumer-to-consumer and business-to-consumer selling and buying. It also created billions of dollars in value for start-up founders and their investors around the world, which made-up -multiple times- for the lost value in print classifieds. Despite starting mostly with a free offering, online classifieds have been able to prove their success in monetizing users infinitely more than print classifieds, in a far more scalable manner, and with much higher margins.

It is not an exaggeration that more than 50 percent of the 135 million Internet users in the Arab world rarely use a print classifieds newspaper. From a seller or service provider’s perspective, one can get immediate gratification and results by posting ads for free, or paying a small fee, to get premium exposure without having to leave the comfort of his couch or wait for the newspaper print date. For example if you want to sell your car or house, all you’d have to do is pull out your smartphone, take few photos, tick a few boxes, and boom, your advertisement would be online.

From a user’s perspective, spending hours going through print pages and circling ads, setting-up comparison tables, writing down phone numbers and waiting for next week’s edition for new options is now replaced by a sophisticated search that allows you to look for cars by brand, year, body type, fuel type, and price, get in touch by email or phone, and set-up alerts in case what a user wants is not available now, but could become available in the next minutes or hours. The same great experience applies to real-estate, jobs, electronics, services, and whatever buy/sell category you can imagine.

To understand the seismic nature of the shift that happened in the past few years, approximately 25 percent of Internet users in the Arab world have used online classifieds. This put the total audience of top regional classifieds websites at an estimate of more than 35 million users per month by mid-2014. This includes varying using habits from daily to weekly or more, which far exceeds not only the audience of print classifieds, but that of all print media in the Arab world –be it daily, weekly, or monthly.

On a country basis, a leading classifieds website in Saudi Arabia for example reaches 250-400 thousand users a day, depending on the day of the week, while the leading newspaper and leading classifieds weekly in the country prints no more than half this number on their best day. In terms of depth, classifieds websites usually have tens of thousands of postings per day, compared to a maximum of several hundred posts in the daily, and low one-digit thousand posts in weekly print classifieds.

Online classifieds have become so popular in the Arab world that in some countries the leading classifieds website is more popular than Facebook. This is the case for leading Arabic classifieds website OpenSooq.com, which is a leader in its category in several countries including Saudi Arabia, Kuwait and Jordan. With a simple, easy to use website and popular iOS and Android apps, OpenSooq is not only leading in countries that have mature online audiences, but also in countries where the number of Internet users is growing very quickly via smartphones, such as Iraq and Libya.

In expat-dominated countries such as UAE, Qatar, and Oman, English-language generic classifieds website Dubizzle has done well by focusing on business-to-consumer advertising in sectors such as real estate, offering advanced search functionalities, and a more elaborate user interface.

OpenSooq.com and Dubizzle are joined by category leaders who have focused on specific verticals, such as Propertyfinder, focused on real estate in the UAE, and Haraj, the undisputed leader in automotive classifieds in Saudi Arabia.

Globally, online classifieds is a business that is mostly local or regional, where global websites are usually of low value outside their geographical area. The sector is also usually one of the first categories to mature with emergence of regional leaders. This has been the case indeed in MENA, with the business leaders in online classifieds mostly being home-grown start-ups that are now valued at tens of millions of dollars. That’s just for starters, as they have tremendous growth potential ahead of them.  I’d advise you to keep an eye on this sector.

The article is written by Khaldoon Tabaza for 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

A Banker’s Primer to Saudi Arabian Family Offices

A Banker’s Primer

 

  • Major global banks have established a presence in the Kingdom, only a few years ago, though with an almost exclusive focus on corporate and private banking.
  • The predominant banking business model involves a partnership between a local bank with an International partner, where critical areas such as risk and asset management are under the purview of International partner.
  • At the apex of the wealthy client pyramid are Family Offices, vehicles established to formally manage the day-to-day investment affairs of the richest families.
  • There are several type of family offices in Saudi Arabia, and they are constantly evolving due to the influence of the Western world.

The Kingdom of Saudi Arabia was never a banking hub for the GCC in the tradition of Bahrain, and later Dubai. That is, foreign banks were never historically established in Riyadh, Jeddah and Dammam with active mandates in servicing the local economy or with the intent to be utilized as a springboard for access to other nations in the GCC. Instead, the commercial linkages between the seat of Islam’s holiest sites and the rest of the world were first based on the general trade in goods, and later—the defining moment in the nation’s history—the discovery of crude oil occurred in the early twentieth century. In the wake of oil’s discovery was the founding of the energy behemoth Saudi Aramco (the Saudi Arabian Oil Company), having begun operations in 1933 as the California-Arabian Standard Oil Company.  With the technological advances and labor-intensive expertise required to extract and manage the world’s most precious tradable commodity came legions of skilled workers from the United States and other nations, critical in establishing what was once considered the consummate American outpost in the Middle East.

The Aramco camps in Eastern province were akin to transplanted Midwestern US cities.  Based on this model in the utilization of crude oil and the reliance on its financial dividends for economic development and later growth, no absolute national consensus was ever formulated on the internationalization and broad-based opening of the Kingdom’s market to foreign banks with the aim of establishing bricks-and-mortar presence.  It is only in the last several years that a few of major global banks established a presence in the Kingdom, with an almost exclusive focus on corporate and private banking.

Historically, the predominant banking business model in Saudi Arabia has been for local banks to include a non-Saudi partner institution, typically with a stake of 40 percent. Critical areas of bank management, including, heads of finance, risk management, asset management—just to name a few—were within the purview of the banking partner by contract. Over time, wealthy Saudi clients have become accustomed to dealing with their local banks for corporate loans and regional brokerage and investment services. When it comes to sophisticated investments, packaged as funds for example, the reliance continues to be on US and European private banks—many of which have been reliant on the “briefcase banker” approach. This entails flying bankers to the Kingdom for a few days of marathon one-on-one client meetings to introduce a product and collect a tidy sum of money—with the hope that the fees generated from client investments will ultimately cover the banker’s costs.

At the apex of the wealthy client pyramid are Family Offices, vehicles established to formally manage the day-to-day investment affairs of the richest families. In Saudi Arabia there are several types of these entities and it is worth our while to outline them.

The Mega Family Office:

The minute a foreign banker lands at an airport in the Kingdom, these family offices are the first few stops to make as they represent the wealthiest fifty families in the Kingdom. By their very nature, they were established decades ago and have highly sophisticated departmental structures, for example splitting managerial investment functions among Equity, Fixed Income and Private Equity teams. There is a formal investment committee process in which new proposals are discussed on voted on and IT expenditure to support detailed reports and investment analysis are standard. In a few cases, these billionaire families have offices in Dubai, Europe (primarily London and Geneva) and the US to complement their Saudi presence. The logic behind this is approach is to remain closer to their investments abroad while vetting ideas from the source. But also from a practical standpoint, many senior investment staff members are precluded from leaving their families due to personal obligations in their home countries.

Multi-Generational Office:

This structure supports various owners from many branches of the family. In the Kingdom Due to the participants in this office structure, the internal challenge is to accommodate various points of view regarding investments (type, time horizon and risk). These types of offices at times allow other families, generally maternal relatives, to participate while functioning as a multi-family office to increase the purchasing power of the owning family group. In effect, multi-generational offices reflect the current state of Saudi Arabian family businesses with young sons and daughters, typically freshly minted university graduates, being brought into the family business in the hope of an inter-generational succession proceeding smoothly one day.

The Corporate Group:

This type of entity supports the shareholders of operating business. The primary role is to maintain business control through effective wealth transfer, providing strategies for internal stock transactions among shareholders or leverage as needed to generate liquidity for owners. The office also supports owners’ financial needs for income, diversification of assets, and risk management.   A head of finance for these groups will typically handle both the company’s day-to-day affairs as well as individual investment management for the Chairman and associated family members.

The Single Provider Office:

In the last few years, some families have decided to stop granting bankers calling for an appointment to hold sales meetings, as a matter of policy. Instead, they have relied on an internal staff member to vet various product providers and settle on a single institution to manage the office’s affairs. It then becomes the mandate of the bank advisory professional handling the relationship to suggest investments from third party banks or investment houses. This “gatekeeper” approach has a major benefit for the families involved as there is a simplification of the process and reporting is handled by the hired bank, an ostensible cost savings.

Philanthropy/Foundation Office:

The Kingdom has an immense number of philanthropic institutions that families have established apart for their corporate alms-giving that is compulsory in Islam. Many of these offices are distinct from the family’s investment arm and, as would be expected, their investment universe is typically more limited. When it comes to the plethora of foundations which dot the Arabian landscape, the majority that bankers deal with are affiliated with religious or university funds. Bankers visiting Saudi Arabia are frequently surprised by the risk-return profile of these investors, with many delving into products that are far more esoteric than one would expect. Of course Sharia-compliance remains of paramount importance.

The Royal Family Office:

The trend today within these offices is launching new businesses and offering value-added projects for the benefit of Saudi society. Most of the initiatives undertaken by these investors will target a particular rate of return on a project or a feeder fund to a project, instead of seeking an income-generating fund investment—for example. The due diligence on the banker at the beginning of an introductory meeting is critical and being asked for a return visit is not assured. Knowledge of local market deal flow is key in these relationships.

The evolution of the family office unit, much like business itself, relies on constant change. There are trends in Europe and the US that are having an impact both on the vision and operational aspects of establishing, managing and growing a family office. Despite the influence of corporate practices and financial institutions on the most sophisticated investors in the Kingdom, most of them continue to hold sacred one slogan: “Made in Saudi Arabia.”

 

[1] (Source:  https://www.familyoffice.com/understanding-family-office/types-family-offices)

 

The article is written by Ragheed Moghrabi for Arab Business Review

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

Countries Leading the Second Wave of Corporate Governance in the Middle East

Countries_Second Wave of Corporate Governance

  • Corporate governance (hawkamah in Arabic) in Middle East is no longer a term that requires defining, or has an unclear business case
  • All Middle East countries except Iraq have issued a General Corporate Governance Code, with Egypt, Saudi Arabia and UAE being the front runners.
  • UAE has emerged as one of the least corrupt and most globalised economies in the Middle East, ranking 26th out of 177th in the Transparency International’s 2013 Corruption Perceptions Index.

Middle East is making consistent progress in the implementation of corporate governance initiatives. In part 1 of our Corporate Governance article series, we had talked about the meaning of corporate governance and emergence of a second wave of corporate governance reforms in the Middle East. And now, in this second part, we will look at the progress made on actual implementation of corporate governance practices by Middle East nations.

Corporate governance (or hawkamah in Arabic) in the Middle East is no longer a term that requires defining, or has an unclear business case. Even from the perspective of a family-controlled business, the case for better governance requires much lesser justification today as compared to a decade ago, as discussed in our first article. Moreover, over the past few years, regional regulators have been abolishing the voluntary nature of corporate governance standards — The Emirati, Saudi, Jordanian, Omani and the Qatari securities regulators have moved to a mandatory corporate disclosure requirement regarding compliance with local corporate governance codes.

All Middle East countries except Iraq have issued a General Corporate Governance Code, with Egypt, Saudi Arabia and UAE being the front runners. Saudi Arabia and the United Arab Emirates (members of the GCC (Gulf Cooperation Council)) and Egypt were among the first few Middle East nations who developed and issued Corporate Governance Codes and Guidelines for companies in their territory. The Egyptian Institute of Directors was the first in the region to launch a corporate governance code targeted specifically at state-owned entities in 2005, based on OECD Guidelines on Corporate Governance of State-Owned Enterprises. While Saudi Arabia published its Corporate Governance code in 2006, the UAE published corporate governance guidelines in 2007 for joint-stock companies and in 2011 for small and medium enterprises. The table below gives a quick snapshot of the region’s progress so far:

Countries_Second Wave of Corporate Governance1Table 1:  Corporate Governance Codes and Guidelines in Various Middle East Countries

Source: OECD

The UAE has emerged as one of the least corrupt and most globalised economies in the Middle East, ranking 26th out of 177th in the Transparency International’s 2013 Corruption Perceptions Index. Qatar followed at 28th, with Bahrain, Oman and Saudi Arabia not too far behind. If we look at the actual steps taken to control corrupt practices, we find that while corporate governance centers and institutes of directors have been established in most countries of the region, UAE has more than one corporate governance institute i.e. the Hawkamah Institute, the Abu Dhabi Corporate Governance Center, GCC and BDI.

Despite progress made by the countries, corporate governance still leads the list of factors required for improving investor trust and confidence. The importance of corporate governance was highlighted in a recent survey conducted by the CFA Institute to evaluate opinions on key issues currently facing investment markets in the Middle East and North Africa (MENA). The results showed that investment professionals believe political stability and good corporate governance can have the most positive impact on MENA’s economy. Similarly, the majority of respondents (70%) reported that improved corporate governance practices can improve investor trust and confidence across markets in the MENA region. Interestingly, this issue garnered the highest support among all issues in the whole survey.

Question: What do you think would improve investor trust and confidence across markets in the MENA region? Select all that apply. (N=188)

Countries_Second Wave of Corporate Governance2

 

Chart 1: Corporate Governance leads the list of Factors for Improving Investor Trust and Confidence

Source: CFA Institute, MEIC Pre-Conference Survey

We believe that growing awareness at a country level, and increasing investor demand for transparent corporate governance practices will drive adoption among corporates in the region. In the next and final part of our coverage on corporate governance in the region, we will look at case studies of companies in the Middle East that overcame hurdles and improved their governance practices in ways that boosted their performance and growth.

 

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