Regional Focus

GCC: what should treasurers know about this region?

Published: Mar 2020

In April 2019, the IMF had forecast real gross domestic product growth in the six members of the Gulf Cooperation Council at 2.1%. By October 2019, that figure had dropped to 0.7%. The growth for 2018 was 2%, so what do these fluctuating figures mean for treasurers in the region and those looking to enter it?

Newtons cradle swinging to the left

The IMF reported that the deceleration of GDP growth “mainly reflect[ed] oil production cuts in line with Opec+ agreements”. The World Bank published its Gulf Economic Update in December 2019, noting that economic growth in the GCC is “likely to recover over the medium term to 2.2% in 2020 and 2.6% in 2021”. But, the report adds, this is conditional on a “gradual recovery in oil prices and continued spending on mega projects as well as continued growth in non-hydrocarbon sectors.”

Fitch Solutions published its MENA Monthly Outlook: Key Themes for 2020 in December 2019, theorising that the GCC will “face its own set of challenges in the year to come.” It claims that oil prices are exerting pressure on the countries and will likely result in a “resumption of fiscal consolidation and a renewed focus on enticing foreign capital.”

The current environment

The GCC region is often described as one of the fastest growing in the world. Indeed, David Aldred, Head of Corporate & Public Sector Sales TTS at Citi, explains that there are some areas where the GCC is “leapfrogging” some developed economies. Adam Boukadida, SVP Treasury, Tax & Finance at Etihad Aviation Group, gives SWIFT gpi and the practical use of blockchain as good examples of the countries working to digitise processes.

However, Aldred notes that when it comes to the current environment in the GCC region, “you can’t comment without acknowledging the current geopolitical tensions,” and that treasurers need to be mindful of that. “But it’s a very resilient region,” he says, adding that the mentality is simply “business as usual”.

This resilience is a necessary trait for any organisation in the region – both corporates and banks. Boukadida explains that access to funds can still be a challenge for SMEs and start-ups. “These companies often have no choice but to accept short-term loans with high margins and fees, while larger corporates with good credit ratings are in a better position,” he says. Additionally, those large corporates can arrange for funding outside of the GCC region.

However, he adds, as currencies in the region are pegged to the US dollar, any change in LIBOR will affect those markets immediately. “Last year, we saw continuous rate cuts by the Fed, which has spiralled into the GCC markets. The low interest rate environment has given a boost to lending in both the retail and corporate sectors, and also to the stock market.”

The booming tourism industry

When it comes to businesses in the GCC, many countries are looking to diversify beyond oil. As demand for sustainable and renewable resources grows, the demand for fossil fuel falls. Thus, countries in the region look to develop other industries: Expo 2020 Dubai and the 2022 FIFA World Cup in Qatar are just two examples of branching into the tourism industry.

The cost of Expo 2020, and projects related to the event, is estimated at around US$10-15bn, according to Deloitte, which includes the site, an extension of the metro line, and a new Museum of the Future. Meanwhile, Qatar is reportedly forecast to spend over US$200bn on preparations – not only on stadiums, but also on a new airport, hospitals and roads.

Outside of oil and gas, infrastructure, tourism, transport and logistics are by far the largest areas that GCC countries are investing in, and Aldred explains that the United Arab Emirates (UAE) “was ahead of the game” with it. “Anyone operating here or coming here should not think that the GCC is going to remain as it was for the last 50 years,” he says. The rapid acceleration seen in just the past five years is showing no signs of slowing down, and Aldred says that treasurers therefore need to keep a strong view on “corporate agility and strategy”.

Becoming global hubs

For several consecutive years now, Dubai has been the busiest airport in the world in terms of passenger traffic. With almost 90 million passengers in 2018, it’s no surprise that aviation is expected to be 37.5% of Dubai’s GDP in 2020. For Aldred, the GCC’s position as a global hub is what organisations should be looking at when considering treasury centre locations.

Meanwhile, Gary Slawther, Interim Group Treasurer at Eddie Stobart Logistics Limited, points out that the city of Salalah in Oman is the tenth biggest trans-shipment port in the world. “Everything comes from the East – you’ll have a ship full of Toyotas from Japan and a ship full of toys from China, and something else from South Korea. That cargo will be going to ten different destinations. So they’ll stop at Salalah, swap freight and then each ship will go to their final destination with the required mixed load,” he explains.

Indeed, shipping giant Maersk quotes Salalah to Newark in the US as taking around just 20 days, and the port was made into a main transhipment hub in the company’s global network. This only makes sense when you consider the GCC’s position in the world – arguably in the centre – especially with regards to Asian and Western Europe time zones, says Aldred.

Educating the masses

Randy Bell, Director of the Atlantic Council Global Energy Centre, wrote that “diversification of the economy cannot be measured by comparing oil to non-oil GDP alone. Instead, countries need to examine how connected their oil economy is to the rest of their economic activities and work to develop sectors that will thrive independently.” He specified that GCC countries should be making efforts to attract “tech talent and build innovation hubs”.

Indeed PwC’s paper, The Lost Workforce: Upskilling for the Future in conjunction with the World Government Summit, notes that “The GCC must urgently upskill for the future”, and that “Designing a robust organisational structure that prepares the company for the future is a key priority for CEOs from the Middle East.”

Slawther notes that there is a huge effort in the GCC to try and build the skills of the local population and encourage them to join the private sector. A report by management consulting firm, Oliver Wyman, Maximising Employment on Nationals in the GCC, explains that “the availability of an affordable foreign workforce willing to occupy blue-collar jobs, combined with attractive public sector jobs, enabled GCC nationals to limit their employment within the private sector, or only consider the more suitable opportunities within it.”

Slawther explains that this could prove challenging because of just how attractive the public sector is in the region: the hours are often less demanding, and the pay and benefits are generally much better. Additionally, GCC citizens are accustomed to the wealth distribution strategies and therefore governments need to adjust these to incentivise the citizens to build their own.

For Boukadida, industries like tourism, transportation, healthcare, banking and investment are now the top tier sectors in the GCC. He believes that “the opportunities that are coming from this transition are great, creating a healthy environment for treasury professionals to pursue a career in the GCC countries.” However, like Aldred, he notes that this rapid change and focus on automation means that treasury professionals need to look for the opportunities to upskill themselves. “Today’s world calls for professionals who are adaptive and those who welcome change,” says Boukadida.

There are other developments too, particularly bureaucratic reform. For example, Qatar’s visa-free entry programme was expanded to include Indian and Ukrainian nationals; Bahrain introduced a wage protection scheme to end the exploitation of staff – and for Saudi Arabia’s Saudi Vision 2030, the country has implemented more business-related reforms to boost international investment than any other GCC country.

What are free zones?

Also known as ‘free economic zones’ or ‘free economic territories’, free zones are a class of special economic zone. They are areas in which companies are either taxed very lightly or not at all to encourage business. In the GCC, free zones often allow expatriates to have 100% ownership of a company, while elsewhere they may require a majority (51%) be owned by nationals.

Regulatory differences

Slawther, who spent eight years working in the region – only leaving in November 2019 – has witnessed these changes first-hand. “The economy, or the banking system, does suffer from a lack of transparency and credit information, but steps are being taken to address that,” he says. This is largely due to the fact that in the region, unless a company is listed on a stock exchange, there is no obligation to release financial information. This is changing though, explains Slawther. For example, companies in the UAE are now required to submit financial information to the Etihad Credit Bureau.

Boukadida has also found that “There is pressure on banks and service providers to prioritise regulation changes and updates, to digitise their processes and develop solutions that emphasise security and transparency.”

Additionally, Slawther notes that the rapid expansion of countries, and more specifically, banks within those countries – such as Abu Dhabi Commercial Bank and Emirates NBD – means that they have to have an international level of transparency and corporate governance.

Business is getting easier

For Aldred, “Governments have to be the enabler” when it comes to making inward foreign direct investment (FDI) easier. Things like free zones make investing in a notoriously tricky region more accessible to foreign investors. The Fitch Solutions report notes that “tighter fiscal space will encourage GCC governments to focus on business environment reform”, and that although the GCC states have improved in recent years, they still lag behind others by a considerable margin.

One notable example is that of Saudi Arabia, where a recent focus on reform saw it move 30 places up the World Bank’s Doing Business Index in 2019, now at 62 out of 190 countries. The UAE, meanwhile, is in the top 20 at 16 and Bahrain is at 43. Oman sits at 68, Qatar at 77, and Kuwait at 83.

The report cites Saudi Arabia as the economy that improved the most across three or more areas measured. These areas include: starting a business, dealing with construction permits, getting electricity, getting credit, protecting minority investors, trading across borders, enforcing contracts, and resolving insolvency. The only two areas Saudi Arabia did not improve on were registering property and paying taxes.

Similarly, Bahrain implemented the highest number of regulatory reforms and the only area missing was starting a business. Aldred has noticed the improvements Bahrain has made with initiatives like Fintech Bay and Fawri+ which aim to make the area more attractive to potential businesses and investors. Similar initiatives include the Dubai International Financial Centre, Fintech Hive in Dubai and Abu Dhabi Global Market.

Keeping culturally aware

One of the most important things to keep in mind when working in the GCC region, according to Slawther, is the difference in culture. This isn’t just to show respect for the citizens, but also because the culture dictates a different way of working. “It’s a very conservative region,” he explains. This extends to the banks too, and in his experience, that’s something a treasurer might find a bit frustrating.

“In the construction sector, for example, you’ll find that the bonding requirements (protection against non-performance) are quite substantial and the risk transference is a very different way of doing it from how we would have in the UK, Europe, Far East and Australia. Elsewhere the risk transference will be using surety, whereas the Middle East works on bank bonding and they won’t touch sureties,” explains Slawther.

From his banking role in the region, Aldred is aware of these challenges, and recommends that treasurers “embrace new ways of doing business but be very cognisant and respectful of traditional ways of doing business.” For example, for things like payables and receivables, where cash and cheque has been dominant, have one eye on the new digital ways of doing business, because there is a “real desire for economic and digital progress”.

To help navigate these unfamiliar waters, Slawther recommends leaning on colleagues are local to the region and who will be able to help understand the customs. Other key relationships, says Boukadida, include those with banking or technology partners. “It is crucial for corporates to carefully and strategically select their partners to ensure they receive a service that is appropriate for their specific business needs. If you find a banking partner or a technology provider who is an industry leader in their own right, typically the service that you will receive follows a standard benchmark,” he says.

Despite the challenges, Boukadida explains why he likes the region: “Its diversity is unapparelled, with more than 200 nationalities living and working here. Not only it is a great place to build and progress your career, it is also one of the safest countries, where you will have access to world-class healthcare, education and activities catering for all interests. While the UAE is a leader in promoting peace and tolerance, it is important to be sensitive and considerate in respecting each countries culture and traditions – as when we are anywhere else in the world.”

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