Speaking to the Dubai School of Government about economic recovery in the GCC, Ali al Shihabi, Rasmala founder and chairman, said one of the weaknesses in the GCC economy is the lack of human talent in the public and private sectors.

He said: “In the GCC economy, one of the main acute weaknesses is a shortage of human talent. A shortage of management capabilities and that extends from the private to the public sector. People get surprised sometimes when you come into a government ministry, you see this beautiful building and you assume that it is going to be populated with a huge body of talent. But there isn’t that much talent.

“In Rasmala today we are looking for a PhD in economics who has good command of Arabic language and we are searching the whole region and we can’t find one.”

Shihabi said the economic infrastructure of the region in terms of policy making, be it central banks or ministries of finance or economics, “really doesn’t have a huge body of talent compared to any relatively advanced economy”.

He said: “Many people get surprised by the quality of policy making and wonder how some decisions get made and they try to find complicated reasons to explain that. And actually in some cases it is a simple answer, it is that the talent is not there. A smart minister by himself cannot commit miracles, he needs a body of people – think tanks, policy making staff, people to generate ideas, people to collect data. Without that in many cases he is flying blind. In the region we suffer from that lack of talent and we don’t really recognise it.”

Shihabi said a clear indication that the region has not recognised the shortage of talent is the number of new entities opening up in the GCC. He said:  “One of things that has happened in the past three or four years is this obsession with setting up new entities instead of reducing the number of entities and recognising that we have limited human talent. Whether its new companies, new government ministries or departments.

“This acute shortage of human talent is something we face and we suffer from and the solution to it is a long-term solution. In the interim we should recognise it and build our structures accordingly. The depth of talent that you need, you don’t have that.”

He also alluded to lack of transparency and an undeveloped legal infrastructure as two other major weaknesses for the region. He said the underdeveloped legal infrastructure in the Middle East is deterring international banks from setting up in the region.

“Another weakness is the undeveloped legal infrastructure. What that does is increase the risk premium, particularly for the banks. One of the big engines of economic development are banks and yet banks are very reluctant to lend in this region because the legal infrastructure is undeveloped and the chances of quick recovery of your money if you have a dispute are not very high.”

Slow credit activity and pressures in the financial and banking industries are hampering the Middle East’s economic recovery, the IMF said on Tuesday.

“Growth is gathering momentum in 2010, helped by the pickup in capital inflows and resurgence in domestic consumption. However, this positive perspective is clouded by some stress in the banking system and lethargic credit activity across the region,” said Masood Ahmed, the director of the IMF’s Middle East and Central Asia department.

While striking a cautionary note in IMF’s latest economic report on the region, Ahmed added that the outlook had improved considerably since 2009.

Oil exporters are expected to rake in US$140bn collectively this year as prices rise and crude output increases – a significant upswing from $53bn in 2009.

A 4.3 per cent contribution from oil-related activities to the region’s GDP was also forecast. Last year, the figure fell 4.7 per cent as oil prices dropped.

“The region’s oil exporters still face challenges in their banking systems, however, where credit to the private sector remains sluggish and losses on non-performing loans have yet to be fully recognised,” Ahmed said.

Elsewhere, activity in the region’s non-oil sector is set to grow 4.1 per cent in 2010, according to the IMF report.

And the Central Bank is expected to advise UAE banks on the levels of provisions they will have to provide following the $23.5bn debt restructuring deal that government-owned Dubai World struck with its creditors last week.

Their exposure to Dubai World’s debts has prompted UAE banks to cut credit lines and restrict lending to businesses.

EMIRATES NBD CHIEF EXECUTIVE RICK PUDNER

Bank confident in 2010 outlook, despite reporting yearly Q1 profit fall.

Emirates NBD has posted a 12 per cent net profit drop in this year’s opening quarter, the bank revealed on Monday.

The UAE’s third largest bank by market value generated AED1.1bn between January and March this year compared to AED1.26bn for the corresponding period in 2009.

Its latest quarterly results, however, have improved from Q4 2009 when the bank reported AED178 million net profit.

Despite seeing Q1 net profits fall from 2009 levels, Emirates NBD’s CEO Rick Pudner said the bank had maintained a steady performance in this year’s opening quarter.

“During the first quarter of 2010 we have continued to deliver stable and robust financial results.

“We have maintained revenues at similar levels to the same period in 2009 and have continued to reduce operating expenses from ongoing rationalisation and our ability to leverage off the completion of the integration in 2009.”

Pudner added the bank’s capitalisation was strong, with investment in Emirates NBD’s private banking business and Abu Dhabi expansion ongoing.

When announcing its results, Emirates NBD executives said an economic recovery was on the cards in 2010, fuelled by activity in the tourism, traditional and manufacturing sectors.

“Q1 2010 has witnessed early signs of stability, increased economic activity and improved consumer sentiment and business confidence in the UAE resulting from improving economic fundamentals globally and the progress made locally in resolving market uncertainties,” the bank said.

While the global economy shows slight signs of life after ‘intensive care’ Fed Reserve treatments, the road to sustainable recovery is a long and as yet unknowable one, particularly as politicians are rosying the picture.

The unexpected rise of the discount rate by the US Federal Reserve on Feb 18 marks the end of the massive emergency reaction to the tsunami triggered by the bankruptcy of Lehman Brothers. The next phase entails a return to a sustainable modus operandi of the American economy and by extension of the global economy. Taking a medical analogy, the intensive care is over and the rehabilitation is starting for an organism stricken by a severe blow and debilitated by the exceptional doses of drugs injected. To assess the path of this rehabilitation, what milestones need to be passed and when the cure could be declared successful it is fundamental to look back to the process that led to the crisis. This retrospection is a useful exercise to assess whether the obstacles towards the normalisation have been tackled and removed. So far the exceptional emergency measures have averted a meltdown but hardly defused the key threats.

Burst bubbles
The roots of the crisis took hold at the end of last century at the time of the dotcom bubble. Profound technological advances combined with the epochal effects of the internet revolution led to an over-investment in the US hi-tech sector. Capital flowed from all over the world to Silicon Valley through Wall Street producing a protracted jump in US economic growth, investment, consumption and wealth. Those were the years of the goldilocks: low inflation, high growth, full employment, impetuous financial globalisation. When the bubble exploded, the US government shunned the idea of engineering an orderly readjustment of the economy with the inevitable fall in standard of living to more sustainable levels (ie levels compatible with long-term growth patterns, not those artificially boosted by the euphoria). Instead the authorities went in the opposite direction, substituting the abnormal stimulus from private investments with an equally abnormal boost to private consumption supported by lower taxes and higher indebtedness of the families. In this policy response the US government was fully supported by the Federal Reserve which maintained low interest rates, fuelling a high level of debt and leverage across all financial institutions. In essence, in the early years of this century while the corporate sector was rebuilding its balance sheet to purge its debt overhang, the household sector was led to increase its consumption sustained by home equity loans and mortgage refinancing. The public sector followed in this path with budget deficits soaring due to large tax cuts and later to ballooning expenditure for the wars in Afghanistan and Iraq.

War time
Before 2001 a lively debate in the US focused on how to use the budget surplus, but just a few months later public finances were sinking in an ocean of red ink. At present the estimates of the independent Congressional Budget Office show that the US government budget will never be balanced again for decades and the debt to GDP ratio is heading towards triple digits.

The reaction to September 11 and the priority by the US presidency to ensure that the US economy would emerge unscathed after the terrorist attack played a decisive role in building the deficit. The flood gates of liquidity and public expenditure were kept fully open in the attempt to show that the US economic dominance was not in question. The US assumed the role of consumer of last resort for the world economy while, as a result, its current account deficit ballooned. The ensuing stimulus to the world economy allowed the large exporter countries, mired in their mercantilist mentality, to maintain their own imbalances: in Germany (and other European countries) a bloated social security system cum subsidies, in China a lack of social protection and advanced public services such as health and education.

Smoke and mirrors
A parallel phenomenon which led to the crisis was the systemic failure of the financial sector governance. Reckless behavior by banks and financial intermediaries, lax regulation and weak supervision, plus widespread conflicts of interests marred the sequence of crises in the past decade.

With regard to the latter, those between stock analysts and investment bankers in the creation of the dot com bubble, the consultants and auditors in the corporate scandals (Enron, WorldCom, Parmalat), rating agencies in the sub-prime and toxic assets debacle had vicious consequences.

If we were to summarise, we could assert that the crisis resulted from an attempt by the US authorities to maintain living standards above the means through a buildup of households’ liabilities and government deficit. The smoke and mirrors that maintained the illusion of sustained growth hinged on the extension of leverage and expansion of risk in the western financial system.

Where are we now on the recovery map? Certainly another free fall is not on the cards. But relationships between credit crunch, asset price movements, unemployment and economic activity in recessions are not well understood because the interaction and the dynamics are too complex and variegated. Furthermore the magnitude of the crisis has been unusual because it affected every sizeable economy and every market. In essence predicting the emergence of a sustainable recovery is an act of faith rather than scientific prediction.

True, the US economy is growing again although unemployment remains at record levels; China has maintained a robust growth rate and even Germany and Japan whose economies can hardly be described as dynamic are regaining strength. Based on these elements markets have priced in a durable recovery that would absorb the imbalances.

Setting the rules
But this rosy picture is fundamentally blurred because the massive adjustment process that would purge the world economy from the debris accumulated has barely started. Few are grasping the implications of the colossal adjustment by the global private sector (deleveraging, higher saving rates), and an equal and opposite retrenchment from financial deficit in (most of) the global public sector. And few are aware that this adjustment will require declining living standards in most advanced economies, which is a political hot potato. The decline of Obama popularity is a harbinger of a potentially virulent backlash. So governments, wary of voters’ reaction, are downplaying the extent of hardship down the road. And markets are sitting on the brink of uncertainty, with daily sudden swings in stocks, currencies and commodities.

So the key question that we must focus on is how economic and financial variables move as these flow imbalances (and the resulting stocks) evolve. And what the time frame for these adjustments might be. Anyone expecting a quick fix might keep in mind that Japan has been mired in a high private financial surplus/government deficit quandary for more than a decade.

And let’s not forget that the reform of global financial architecture, despite the rhetoric, has barely started. We have learned that markets are not self regulating, rules are rarely self enforcing, leverage of financial intermediaries must be capped, liquidity must be preserved and regulation must be enforced with effective action not through a bureaucratic tick box approach. But the decision makers have yet to decide what to do about all this.

Dr Fabio Scacciavillani is director of macroeconomics and statistics at Dubai International Financial Centre. The opinions expressed are his own.

Mideast companies that share authority throughout their organisations stand a better chance of recovery, Deloitte claims.

In order for the region’s firms to be nursed back to health post-recession, it’s vital that authority is shared throughout the organisations, says a senior manager at Deloitte Middle East.

“There is a disconnect within some firms where all the power and information lies with only a few.” said James Babb, CFO programme leader and clients and markets leader for the region.

“Sometimes even the CFO that signs the audited financial statements doesn’t have the authority, which allows them access and participation in all aspects of the company’s processes and activities. But if you’re going to put your name on something, you should have the authority that goes with it.”

Babb is referring to local work culture where authority can be very much based on trust and ‘seeing with your own eyes’, in place of transparent systems that run through the organisation.

When an organisation’s authority balance is skewed, it can negatively affect companies turnover and cause both information and operational blockages.

“Sometimes there’s the attitude of ‘I don’t know this person’ so they can’t have access to information or they can’t have too much authority.

“But this approach means that hands are tied. Policies and procedures should drive a company, and this means transparency and systems,” said Babb.

Predicting the end of the financial crisis is nothing more than a guessing game, says economist.

Timings for a global economic recovery cannot be predicted, according to Dr Fabio Scacciavillani, director of macroeconomics and statistics at DIFC.

“The magnitude of the crisis has been unusual because it affected every sizeable economy and every market. In essence predicting the emergence of a sustainable recovery is an act of faith rather than scientific prediction,’” he said.

While the US economy is growing again, China has maintained a robust growth rate and Germany and Japan are regaining financial strength, this picture is fundamentally blurred because the adjustment process necessary to purge the world economy from its debris has barely started, according to the doctor.

“Where are we now on the recovery map? Another free fall is not in the cards. But relationships between credit crunch, asset price movements, unemployment and economic activity in recessions are not well understood because the dynamics are too complex,” he said.

“Few are grasping the implications of the colossal adjustment by the global private sector – deleveraging and higher saving rates; plus the equal  retrenchment from financial deficit in the global public sector. Few are aware that this adjustment will require declining living standards in most advanced economies.”

He added that the decline of US President Barack Obama’s popularity is a harbinger of a potentially virulent backlash. So governments, wary of the voters’ reaction, are downplaying the extent of hardship down the road.

“Let’s not forget that the reform of global financial architecture despite the rhetoric has barely started. We have learned that markets are not self-regulating, rules are rarely self enforcing, leverage of financial intermediaries must be capped, liquidity must be preserved and regulation must be enforced with effective action not through a bureaucratic tick box approach. But the decision makers have yet to decide what to do about all this.” he said.

Confidence among global companies for a 2010 recovery is in short supply.

A survey of senior executives at nearly 900 major companies worldwide by Ernst & Young revealed that companies for most part are still nervous about recovery in 2010.

Ernst & Young’s Lessons from change – findings from the market revealed that over half of the companies agreed surviving 2010 would remain a challenge, compared to nearly three quarters who said they were focused on securing the survival of their present business 12 months ago.

However, the percentage looking to pursue new opportunities this year has also risen to 34% from 19% in January 2009.

Companies focused on improving the performance of their current assets were down from 39% to 27%, and the proportion still restructuring their business also declined from 37% to 27% over the year.

Tariq Sadiq, Middle East Markets Leader, Ernst & Young Middle East said:  “The region has, in varying degrees, bucked the more extreme after-effects of the downturn.

“Organisations may be less worried about survival over the next 12 months, but the return to a healthy operating environment is still some way off. The overwhelming view is that most companies are still focused on securing the present, which means that companies are still at the early stages of responding to the current environment.”

Dubai may be swamped under a mountain of debt, but at least residents are no longer paying through the nose for property – unlike folk living in Abu Dhabi.

Championing the Dubai cause, Saudi developer Tanmiyat Group said last week that there was no better place in the region to invest.

Tanmiyat’s group executive director Dr Rasim Kaan Aytogu hailed the emirate as a “major business, financial and leisure hub”, adding it would bounce back strongly following a market correction.

With projects at Dubailand, Business Bay and Dubai Marina, it’s clearly in Tanmiyat’s interest to heap praise on the emirate. That, at least, is how the cynics see it. But few can argue with claims that Dubai, like most other cities around the world, will see better days.

Few, if any, economies have stood firm during the financial storm and Dubai is no exception. Yes, mistakes have been made and no one should turn a blind eye to the emirate’s unsustainable spending policy on building the biggest and brightest attractions. But even the UK and US economies, which have been around far longer than the UAE, are still making huge blunders today. Prior to the downturn, their respective governments failed to restrain banks from throwing money around like confetti on bad loans and investments. Such reckless spending helped plunge the world into the worst global downturn for more than 70 years.

Dubai has taken a battering in recent weeks and months (.Commerce has certainly taken its pound of flesh), but there are upsides to the downturn. Property prices are far cheaper than they were three years ago when the boom was in full swing. Rent has also dropped drastically during the same period, making housing more affordable for the masses. And general attitude to money has changed, with fewer people living excessively, having seen thousands abandon these shores after racking up huge debts.

Just a short drive away, Dubai’s big brother Abu Dhabi has coped far better with the financial crisis. No doubt, the royal family’s vast wealth has ensured the UAE capital’s stability during uncertain times. To say everything is rosy is, however, inaccurate. While Dubai residents are benefiting from lower rents, people living in or visiting Abu Dhabi are victims of the emirate’s success.

A recent survey revealed that Abu Dhabi is second only to Moscow as the world’s most expensive destination. The average hotel room rate per night is $349, while a recent study revealed property prices climbed 36% in last year’s fourth quarter. In its Cost of Living report, recruitment and HR consultancy Kershaw Leonard said undersupply had caused property prices to rocket. In contrast, Dubai’s housing costs were down more than 50% compared to September 2008.

Such disparity reveals that for all its faults, Dubai offers more bang for your property buck than Abu Dhabi. But that won’t last forever. It stands to reason that once investors return and the market recovers, rental fees and general valuations will rise again. That’s the price residents can expect to pay when Dubai emerges from the financial doldrums.