Sunday, October 23, 2011

‘Bahrain needs to invest more’

 V L Srinivasan

Manama, Bahrain:
 
Bahrain, which has positioned itself as a regional business, financial and tourism hub, needs to invest more to compete with Dubai, a highly acclaimed financial expert said.
 
In an exclusive interview with DT, the US-based International Institute of Management (IIM) President Med Jones, who accurately predicted the US economic crisis of 2008, was in Bahrain recently, said that the global recovery would help in the increase in oil prices and have a positive impact on the GCC region. Following is the first of the three-part series of the interview. Excerpts:

Q: Can you give an overall picture and outlook for the GCC region?

A: Last year (2010) was challenging for the GCC and especially for UAE, but it was nevertheless a year of economic recovery.
I estimate 2010 growth at about 3-4 per cent and expect a growth rate of 4-5 per cent for 2011 as a whole. Growth in the GCC in 2011 will be driven by energy, infrastructure and private sector investments and trading.
A global recovery will help to raise the oil prices, thus having positive impact on the region. However, oil production in most of the GCC is unlikely to increase significantly, as they are bound by OPEC quotas.
The two exceptions are Oman and Bahrain who are non-members. Bahrain is investing in its production capacity and can get benefits from higher production. Both countries have limited oil reserves and will be focusing on diversification of economic development. Bahrain has
positioned itself as a regional financial, business and tourism hub, but needs to invest more to compete with Dubai.
The financial sector, which contributes 25 per cent of GDP suffered a downturn during the crisis and is still on way the way to full recovery. However, confidence should pick up and we expect the private sector to drive much of the recovery.
On the labour front, Bahraini's nationals hold about 15-20 per cent of private-sector jobs versus about 80 per cent of public-sector jobs, but this imbalance will persist amid continuing mismatches in skills and type or quality of labour.
An education policy to develop entrepreneurship and small enterprises will serve to lift the productivity of the economy and the standards of living of its population. Also, Bahrain’s policies as business friendly destination by allowing workers to move between companies without the employer’s consent will improve its position as a competitive regional services hub.
I expect Saudi Arabia’s economic growth to accelerate to 4 per cent in 2011 driven by the growth in capital investments in infrastructure and hydrocarbon sector, both downstream and upstream, as well as by the development and diversification related spending. About US$500bn is earmarked for infrastructure investments by 2020.
Qatar’s oil and gas sectors are the largest contributors to its GDP, accounting for a total 50% in 2010. Government services made up about 11 per cent of GDP, the construction sector accounted for about10 per cent and manufacturing made up five per cent.
Heavy investment in liquefied natural gas (LNG) production capacity and increases in LNG production over the last couple of years have been the main drivers of robust growth. Hosting World Cup in 2022 is a strategic event that can boost the inspiration and perspiration in Qatar's economy and its standing in the world.
Kuwait's oil constitutes more than 90 per cent of its total revenues. The US$100bn plan approved in February 2010 is a first step towards positioning Kuwait as a trade and financial hub. Though they are a bit late behind UAE and Bahrain, their rich oil resources can help them quantum leap the competition if they execute the plan properly. Their development budget can benefit from higher oil prices and at the same time will be vulnerable to oil-price shocks. Diversification projects should be a more urgent priority.
The achievement of  their goals can be delayed because of political issues and budget waste. Kuwait Stock Exchange (KSE) needs better governance in order to boost trust and growth in private sector investments and businesses.

When it comes to the UAE, the GDP of Abu Dhabi is highly dependent on hydrocarbon sector which makes about 60 per cent. According to Abu Dhabi's development plans, their goal is to increase the GDP contribution of its non-oil sector to 64 per cent by 2030.
Investment in non-oil projects will be critical to achieving this goal. Several projects were either delayed or cancelled in 2010. As for Dubai, I expect the real estate sector to decline another 20-30 per cent.
The disclosed Dubai and its state-owned companies carry about US$130bn of debt, of which US$50bn is owed by Dubai World and US$30bn by Dubai Government, ICD and Dubai Holding carry the remaining US$50bn. The government allocated about 20 percent of the budget to complete previously approved infrastructure projects. Dubai faces about US$30bn of maturities in 2011-12, the agreement to restructure part of Dubai’s debt has allowed Dubai to regain access to international markets and eased liquidity pressures.
In the medium term, Dubai will focus on debt management, not allowing it to support strong economic growth. I would not be surprised if it issue bonds in the midterm. The economic recovery will be driven by the logistics, retail and hospitality sectors. I expect US interest rates to remain low for the next two years, together with the Fed’s decision to proceed with further quantitative easing, which will improve the attractiveness of GCC bonds to investors looking for yield.

Q: Dubai was hit the hardest by the global financial crisis, how can they recover and how long it will take them?

A: When I was visiting Dubai last month, I saw the occupancy of the buildings at about 20-30 per cent. With more buildings being completed and more inventories coming to the market, the supply and demand mismatch will result in huge downward pressure on the real estate
prices. The continuous experimentation with labor and business laws and the rising cost of doing business in Dubai does not help the economic recovery.
The best strategy to attract strong capital inflow, accelerate the recovery, reverse the real estate decline, and supercharge the economy is to implement several new policies at the same time, (1) reduce the restrictions on foreign labor and movements, (2) reduce business incorporations costs and cost of doing business, (3) Grant investors and rich  expats permanent residence cards. Investors and expats are more likely to invest what they earn in the place that they and their families can live in, (4) relax student and tourist visa requirements, (5) Invest further in the quality
of the financial institutions and improve governance standards and transparency.
The DIFC and the establishment of Hawkamah (governance) institute is a good step in that direction, but requires more support and implementations, (6) Create a government bank to lend to the distressed assets and real estate development at very low rate to reduce bankruptcies and if those investors fail to pay their loans, the property becomes owned by the government at a bargain and (7) Do not participate or get dragged into regional political conflicts that can become actual conflicts that threaten the economic development. 
As for the recovery timeframe, the faster they implement these policies the faster they will recover, if they wait, they will lose to other economies.

(To be concluded)

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