Lev Cribb's Blog

The confidence of markets

Back in London, I have been talking to a very good friend of mine who works for one of the big UK banks. As we were talking about which bank just posted what kind of loss (or profit) and who was paying out bonuses I got thinking about the nature of the UK market place in comparison to Dubai and others.

Having just returned from a two-year stint in Dubai, my memory is fresh with the dire situation the market place is in, especially in terms of confidence, (marketing) budgets and the availability of qualified and experienced employees.

Already during my last visit back to London it had struck me that, in true British stiff-upper-lip-fashion, people were getting on with life, work and business in genera, despite the recession. There was no sense of panic or paralysis. While I have no doubt that the British economy is in one of the worst states for a long time, I can also see that there is still enough entrepreneurial spirit and (marketing) budgets going around to keep the economy going.

In contrast, Dubai appears to have entered its hibernation period around January this year and has refused to wake up from it – at all. It had started dozing off around October time, about 9 months after everyone else and the refusal to stand up and be counted equals the refusal to wake up.

I remember listening to an interview in February this year, during which a Middle East commentator had said that the region would do well in making on big cut and subsequently try to recover, instead of dying a death by a thousand cuts. Unfortunately, the latter appears to have happened – and continues to happen.

Four reasons

Of course there are multiple reasons for this:

1.    The Middle East has never experienced a recession – at least not as strong as this.
2.    Funds were pulled from the region to fight fires elsewhere
3.    Many countries in the Middle East are ruled purely for the benefit of their citizens

These three points combined have an add-on effect, which constitutes the fourth reason:

4.    A lack on confidence in the Middle East market

I would like to take the opportunity to take a closer look at these four points, and I would invite you to comment below about the market you operate in. What have you observed? What is your subjective experience? Does it mirror my observations or contradict it? Maybe you work in the Middle East and disagree with my observations? Either way, I would love to hear from you.

1.    The Middle East has never experienced a recession – at least not as strong as this.

To my knowledge the Middle East, as a region, has never experienced a recession. That is not to say that crises during Middle East times of war and conflict have not had a temporary negative effect on the Middle Easter economies. But with Dubai’s dramatic growth and property explosion, in particular  over the last 6-8 years, its exposure fell well outside of previous recessionary years and was thus buffered by the regional market strength.

Now, with a truly global recession, the Middle East is experiencing the impact of globalization for the very first time – and it is lacking the experienced experts to keep the economy going. Sure, there are experts and many people working in the Middle East have had extensive exposure to financial crises and recession, but there are not enough of them and they are not at all levels of the company and economy to influence the overall frame of mind – socially, nor commercially.

2.    Funds were pulled from the region to fight fires elsewhere

When it became apparent that Lehman Brothers wasn’t on its own and that the financial collapse was going to affect all companies in all sectors, finances were pulled from around the world to prop up their main business units.

Subsidiaries and secondary markets were exactly that – secondary. Priority was given to trying to rescue the main business and in doing so funds were withdrawn from emerging markets, including the Middle East. Marketing budgets were reduced to zero over night and expenditure was reduced to a minimum with many waves of redundancies.

Unfortunately, decisions over these redundancies were affected by point 1 above, which meant that many experienced employees lost their jobs based on the fact that they had only recently joined the company or had been with the company for a long time and therefore had a high salary grade. What many companies failed to realize is that by making these particular redundancies they were also getting rid of some of their best assets in their effort to try and overcome the crisis.

3.    Many countries in the Middle East are ruled purely for the benefit of their citizens

This point may sound controversial, but I believe it to be true. Many countries in the Middle East are run first and foremost for the benefit of their citizens. And it is understandable that this is the case.

For example, in Dubai only approximately 20% of its residents are Emirati citizens. The UAE’s business sectors have grown so quickly that it required outside assistance to sustain this growth. It is predicted that the figure of 20% will continue to decrease as Dubai grows – if the amount of apartments and villas being built is anything to go by then it is only a matter of time.

Sheikh Rashid bin Saeed Al Maktoum’s master plan for Dubai was created to diversify the state away from a dependency on oil. Indeed many of the semi-government investment companies in the UAE are mandated with this same task. And it is the only way to ensure prosperity and wealth for future generations.

Yet in doing so, the steady footing required for doing business, in particular the reliability, transparency and support to recover from a financial crisis and recession is restricted. Only being accountable to citizens contradicts the principle of globalization.

It is important to note at this point that this article is not intended to favour one economy’s approach over another – my intention is merely to observe the differences between two markets I have worked in. In the most extreme it should be seen as constructive criticism.

Which brings me to my fourth and last point – the lack of confidence in the Middle East market place.

I have no doubt that confidence in the Middle East market place will return, fuelled by tremendous growth and the opportunity of high-yield investments on all levels. Yet at this point in time, confidence appears to be lacking. I think this is indicative of an emerging market, and it is indicative of the three points I discussed earlier.

Let’s assume that you are an investor (or maybe you are). Any investment in an entity or market that has little experience in crisis management, with reduced financial backing from other investors and that is not transparent in its information disclosure must be considered a high-risk investment.

Of course, the opposite is also true. Investment in an entity or market that is fuelled purely by capitalism, where bonuses arguably fuel the race towards the next recession and where the social support structure and employment laws have a limiting effect on corporate flexibility must equally be considered high-risk.

Yet the fact remains that money talks, which is why at this point of the economic cycle mature markets are doing better overall, while emerging markets will grow considerably faster at the later point in the economic cycle.

Conclusion

In conclusion then, it can be said that there is no right or wrong – especially as we are all affected by the same crisis. But if we can learn anything from our experiences, it is this: Exposure to globalization requires a full embrace for it work, yet globalization may not be the best way forward. Much of what I have heard about Islamic finance principles appears to suggest that it is a safer alternative to some capitalist financial instruments. Equally, disclosure and transparency and longevity may hold the key to confidence in emerging markets.

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Filed under: Economy, Middle East, Recession, , , , , , , , , , , , , ,

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