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Painful lessons learnt, brighter days ahead

05-Sep-11

Toby Simpson - The National

It was around this time in 2008 that I was gazing out of my top storey office window at the bustling, vibrant streets and towers of Dubai below me. The majestic QE2 was anchored in the shining Arabian Gulf business was good and the whole country seemed to give off a sense of invincibility; an oasis of ever-lasting good times awash with opportunity.

Of course storm clouds were gathering in the West. The boom was turning to bust and the global media was doing its best to make light of just what was happening to the financial system. We all heard about it, but the general consensus was that we were somehow incubated in the GCC from the brunt of the global financial tsunami by the pedestal of petro dollars that formed the base of this “economic miracle”.

How wrong we were. The regional stock markets started to tumble around this time of the year, but it took a while before liquidity in the banks dried up, and with it the engine of Dubai’s growth; real estate The growth capital being injected into nascent industries in the region was rapidly withdrawn and people were losing their jobs everywhere with slim hope of a quick return to work. The confidence that was once a hallmark of UAE executives had disappeared overnight, and the wheels of this vibrant economy stopped turning.

Contrast this with today. The West is in a new round of debt crises, albeit a more protracted affair, and the Eastern bubble may be ready to burst with both China and India cooling spending whilst wrestling with soaring inflation. Earlier this month stock markets in Abu Dhabi and Dubai slumped to lows not seen since February while the Saudi market shed 5.6% in one day on the news of the US downgrade.

Yet according to a recent Yougov & Bayt.com survey 51% of UAE residents are bullish about the country’s economy for the year ahead, against only 13% of naysayers. A whopping 29% of people are confident enough to believe that they will splash out on a new vehicle over the next 12 months and 19% believe they will be buyers in the UAE’s much maligned property market.

So is this a case of lessons not learnt, or is there a rational case for optimism in the UAE for the year ahead despite recent tremors?

The case for optimism is a compelling one; if the primary engine for growth in 2008 was residential and corporate real estate funded by cheap credit, the engine for 2012 will be a different kind of construction; infrastructure. The advantage of this is that the massive funding will come from the more reliable coffers of oil rich GCC governments rather than the global markets. In fact Shuaa Capital expected public capital spending in the GCC to reach 10% of GDP in 2011 up from circa 6% in 2008 with the largest economy, Saudi Arabia, leading the way with an eye opening 18% of GDP versus 7% in 2008 with an impressive US$385bn committed to infrastructure over 5 years.

Roads, bridges, ports, railways and power stations across the region will be followed by schools, hospitals and housing, benefiting the UAE as the regional hub for a wide range of services, logistics and trade. The Emirates remains the most attractive and wealthy market in the GCC in terms of professional human capital, and therefore its’ competitiveness in terms of attracting jobs in the service sector is likely to remain.

However there are very real risks that should concern all of us, and require a certain amount of pragmatism in boardroom planning for the year ahead. Much of the work that needs completing will still require some level of bank financing, and there are very real threats to liquidity from the fragile global economy around us. If the policy makers in the US fail to decide on how to further cut spending in the US by the end of the year the markets could react badly with further downgrading of US debt, the Eurozone is by no means back on track and if shocks emerge to sectors such as the Indian real estate market it could wipe billions off the value of investments held on balance sheets globally in treasuries, shares, bonds and other investments.

The knock on effect in the UAE is that the commercial banks will need to reserve more of their funds to meet the shortfall in the value of their investments to achieve their capital adequacy requirements as opposed to lending to construction firms, healthcare groups and the general public. Banks in the UAE have had a great year, helped in some way by the Arab Spring, where capital from around the region fled to the safe haven of the UAE amidst the turmoil. As those countries return to stability so will their cash further exacerbating a new UAE credit crunch.

These nerves are well recognised amongst investors, and a flight to safety to Swiss Francs has actually hurt the economy they are seeking refuge in by making their exports more expensive. Gold prices have soared, but with weak fundamental value in real terms this price could tumble overnight. Stock market activity in the UAE remains anemic meaning that the private equity funds and investment banks who would normally drive growth in new businesses have a much weaker source of capital to work with.

Analysts have forecasted oil prices to average more than US$80 a barrel, which currently looks pessimistic, but if a slowdown in the US and Europe drives demand down, coupled with supply returning from Libya and pressure on governments to pump more supply to reach their revenue needs, a target of less than US$80 a barrel is not unrealistic.

So where does this leave the job market? Our view is that it is dependent on both sector and profession with some real winners and losers in 2011-2012. Sectors such as engineering, healthcare, education, corporate banking, insurance, logistics, aggregates, FMCG and pharmaceuticals could offer a surge of roles in civil engineering, medicine, sales, risk management, project finance, marketing, supply chain and project accounting. Amongst the “losers” we might expect high end electronics, property, investment banking, asset management, automotive and leisure sectors to experience slow to little growth in roles such as M&A advisory, administration, retail sales, hotel management and estate agency.

All in all there is cause for reasonable optimism about the year ahead, and we have all learned a lot since 2008. Intelligent employers will seek to capitalise on genuine demand with confidence by hiring professionals with the skill or potential to thrive. Long gone are the days of hiring with reckless abandon for the sake of growth itself and with no eye for sustainability, and good riddance.

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