As 2018 draws to a close and I look to the results of the most recent Oxford Business Group Business Barometer surveys, it makes for interesting reading against a backdrop of increased global economic and political uncertainty.
From talk of the trade war between the US and China, to oil prices dropping by 30% in the fourth quarter of 2018, to wobbling eurozone finances and of course to my own dear country’s Brexit shambles, market jitters can be excused. Add to this the political challenges afoot – Russia’s belligerent positioning, China’s projectionism, Venezuela’s economic crisis, tension in the GCC and Iran’s ongoing provocations – my only surprise is that markets have not been impacted more adversely.
OBG CEO surveys are designed to track sentiment in the countries we cover. Our signature brand colouring has always been yellow, and we have come to start internally referring to these markets as Yellow Slices of Pie. This is a useful title for a portfolio of countries that all fall on the frontier or emerging market spectrum.
We cover these countries not because they are all posting stellar growth figures – not all of them are. Rather, we cover them because they have made significant progress in getting their finances in order – controlling inflation, managing debt – and are actively pursuing policies aimed at attracting foreign investors and businesspeople.
The state of emerging markets
The emerging market growth story has taken a bashing over the past few years. From rising US interest rates making their debt obligations more costly and difficult to service, to fluctuations in the commodity markets emerging economies so often rely on for significant proportions of their revenue.
However, OBG remains strongly of the opinion that these markets are here to stay over the long term; they are going to play a much greater role in the economy of the future than they currently do, and in many cases service the new powerhouses of China and India.
Furthermore, the fact that they have begun to address the systemic challenges facing their economies is placing them in a strong position – just look at the debt-to-GDP ratios of the world’s leading economies in comparison!
Yes, they will be buffeted by global winds because they are increasingly becoming part of international markets through trade agreements and supply chains. So, it is inevitable that our markets will be affected, and it is precisely for this reason that plans to ensure economic stability and sustainability in the face of these exogenous shocks are so important.
Diversification away from oil
The UAE has pursued a policy of diversification both at the federal and emirate level for some time now in a bid to reduce its reliance on the hydrocarbons that have fuelled its rise. In many senses it is a success story; the emirates of Dubai and Sharjah are among the most diversified in the region. Meanwhile, the largest emirate by land mass and home to the bulk of the UAE’s oil and gas resources, Abu Dhabi, has made significant progress in increasing its non-oil economy.
As I have written before, the shift from state-led growth to economic activity driven by the private sector will take time, as will the change in mindset necessary for this to happen. The period of lower oil prices that began in 2014 has brought the urgency for diversification to the fore, and although prices rose significantly in 2018, price reductions of up to 30% in the fourth quarter show that the pressure has not been relieved entirely.
But it has not only been hydrocarbons that have driven the UAE’s growth; the real estate sector has played a vital role, too. Perhaps apocryphally, it is said that Dubai was once home to more construction cranes than anywhere else in the world. While the emirates have been reliant on real estate development and the “if you build it, they will come” mantra, property price fluctuations demonstrate that a clear diversification away from this is necessary.
Real estate market prices drop while sentiment rises
The real estate market and the construction sector, the health of which are contingent on demand, have been weighing on the UAE’s finances recently. In the second quarter of 2018 Dubai property prices dropped by 5.8% year-on-year, while Abu Dhabi prices fell by 6.9%, according to figures from the Central Bank of the UAE.
Property prices in Dubai and Abu Dhabi have long been said to be bloated and over-inflated. In both markets, the corrections seen in 2018 might be welcome by some, such as individuals looking to buy, but the broader reflection is of economic uncertainty, albeit for differing reasons.
So, the results of our survey are more positive than one might have imagined, with over 60% of respondents saying that they would likely or very likely make a significant capital investment over the coming 12 months, which is a similar outcome to the same question on last year’s UAE CEO survey.
The CEOs we spoke with were also overwhelmingly positive about the comparative level of transparency in the UAE vis-à-vis the rest of the region. This will be welcome news to the authorities and foreign businessmen looking to the country as a potential investment destination.
Tech investment to contribute to non-oil growth
Talking of investment, the finding that just under 80% of those surveyed say that their company would increase spending on smart technology and research and development struck me as particularly interesting. We hear so much about the disruptive nature of new technology, such as artificial intelligence and big data, it is perhaps obvious that businesses would be looking to stay ahead of the curve on this front.
This will be music to the ears of young entrepreneurs and tech-savvy Emiratis, as well as to established businesses within the sector. It may not shift the dial significantly in terms of bolstering non-oil economic growth, but it looks set to be a growing contributor.
Concerns over regional political volatility and interest rate hikes
Unsurprisingly, regional political volatility was identified as the overwhelming concern of businesspeople when it came to the top external factors that could impact the UAE economy. Ever considered a hotspot for volatility, the Middle East remains a region of tension and uncertainty, with key players continuing to pursue controversial policies that have often increased the negative rhetoric rather than reduced it. This is clearly not only a concern domestically, but internationally too.
The next biggest concern was multiple US Federal Reserve interest rate hikes, which was selected by 16% of respondents. Recent news of a further rise underscored this rather poignantly. The US economy has been posting growth by most metrics until recently, and therefore tightening fiscal policy can be expected. However, this has coincided with a period of slower growth for many emerging markets, such as the UAE, where looser policy can be used as a stimulus, or at least as a mitigating measure.
It will be interesting to see what 2019 brings on the interest rate front. Any of us who watch the financial press will by now be familiar with the talk of the slower growth and trade tensions tipping over to recession in the new year. That may slow down interest rate rises, but more broadly, should a downturn materialise, this would be bad news for everyone. Though businesspeople in the UAE remain upbeat on the whole, it is clear that they are well aware of geopolitics and both the domestic and global ramifications of economic policy.