Let private sector take front seat

If the prevalent cry at the Menasa Forum that concluded last week was 'Eastward Ho!', there is no doubt the gateway to emerging giants like India and China is Dubai. The Dubai International Financial Centre (DIFC) sits at the heart of the financial industry in the region and as its chief economist, Dr Nasser Saidi is one of the key voices on business and fiscal policy in the Middle East.

With the euro zone crisis snapping at the heels of a fragile global recovery, the UAE in general and Dubai in particular will need to be at top of its game to keep growth on track. Speaking to Dubai One's Emirates Business 24/7 weekly TV show, Dr Saidi surveys the economic landscape and looks at key issues – from Dubai Government companies selling stakes to GDP and the DIFC reaching critical mass.

In the wake of the Menasa Forum, what was the overall message as regards the financial industry at the moment?

It starts with the name – Middle East, North Africa and South Asia… with the idea there has been a big shift in both the economic geography of the world as well as the financial markets – eastward. So this is really affirming that Menasa is developing as a region in its own right.

There was much talk at the forum of the Crown Jewels of Dubai – the top performing government-related entities – and perhaps the need to sell stakes in some of them. Is that the way to go?

Well, Dubai has grown very rapidly over this period, with some MNCs emerging. It may be time to start looking at how do you involve the private sector more in your activities. One way to do so is through divesting, in one form or another. It could be public utilities, it could be some of the larger corporations. I'm sure it would attract enormous international as well as regional investment interest.

Do you think it is inevitable that this will happen?

I don't think it's inevitable, it's appropriate that it should happen. The state has been at the forefront of economic development of Dubai throughout this period. It might be useful now to take a back seat and let the private sector go ahead.

When will the next big Dubai entity re-structuring take place?

I don't think we need to speculate on that. Dubai World and in particular Nakheel had very special circumstances. Those have been appropriately dealt with. The markets have reacted favourably to the restructuring. We now need to think of the operational / organisational restructuring of Dubai World and some of its entities. For other entities, the situations are vastly different. They are more portfolio-type of investments and we're living in a very uncertain global economic environment. So one should wait and see how that develops before taking any quick steps.

Without speculating then – in terms of how it will be received by the market, in terms of the impact another major restructuring could potentially have – how do you think it will be received in the wake of Dubai World?

The market is expecting some form of reorganisational restructuring. I don't think it will come as a shock, on the contrary it will be well viewed by the markets as an appropriate response to changing global circumstances that are effecting all the Gulf countries, including Dubai, because it is by far the most open of the economies of the region. When you're open you bear the consequences of that openness. Both, the positive ones as we have over the past eight years, and the less attractive ones. That effects economic activity. Dubai is a tourism hub, it's a commercial hub, it's a transport and logistics hub and therefore, that openness means that it is exposed to changes and global circumstances and we've had them. In a very familiar way to the impact on Singapore and Hong Kong, which were affected in fact more heavily than Dubai.

In terms of real estate, it's been one of the main drivers of Dubai's growth. Do you feel that has changed forever?

People need to distinguish between two types of real estate. There's investment and infrastructure real estate. The ports, transport facilities, airports and the like, bridges and all the rest. Those are critically important to the development of Dubai and we have to have them there. They enable all the activity that we see.

Tourism in Dubai would not been feasible had it not been for the large investments that were made in infrastructure. Now there's the office and housing space. Much of that was built in anticipation of the high rate of growth of population and remember, population was growing at a rate of six to seven per cent during this period. We are now looking forward to lower population growth rates. Probably three to four per cent. That's much more sustainable. We don't need to grow at double-digit rates. We are not China and we do not have the problems that China has. Therefore, one can look at a more sustainable lower rate of growth of population. So, based on that you need to absorb the housing and office space which will be coming on stream in the next two to three years. If you look at the prices, they seem to suggest that we're going towards some equilibrium. People who have left Dubai because they felt it was overpriced and went to Sharjah and Ajman, are now coming back. Similarly, businesses in Abu Dhabi are locating their office space as well as their employees to Dubai. There is much more understanding of what sort of returns you will get out of investment and real estate. Having said that remember that the UAE was the first country in the Gulf to allow foreigners to invest in real estate and that, of course, was very attractive, very enticing and that is the reason real estate boomed during this period. Real estate will continue to be attractive to foreign investors. However, we need to think of reforms and we need to think of incentives. Take the example of Cyprus. Cyprus developed the concept of retirement homes and that led to a boom in the real estate industry there, with many people coming from Europe and the UK and retiring in Cyprus, given that it has an attractive climate and all the rest. I'm sure if Dubai was to open the concept of retirement homes for expatriates and people from across the world, that would prove a very attractive formula. So there are many ways really of addressing the demand side, we've been focussing too much on the supply side. If you look at the demand side, giving incentives for the existing expatriate population to set down roots and establish themselves in some form of long-term residency, that is something that should be considered.

There have been calls from some quarters for Dubai to return to its 'fundamental' economy, which some see as trade and tourism. Do you feel this is the way to go?

Moving forward, the drivers of economic growth will be things like tourism, it will be things like trade, transport and logistics. It does not mean mass tourism. That does not mean we need to have thousands and thousands of people coming in buses and cruise ships. We need to think of high value-added tourism. We need to think of tourism that comes to Dubai and transits to other countries in the region. The other point, of course, is that trade is changing very rapidly. Trade is not simply commodity trade. What you need to think of is adding value and that is why free zones are so important. Given that you've integrated the free zones, Jebel Ali and the airports, it means you can now bring goods in semi-processed, raw materials, add value to them and export them either by land, by sea or by air. That is a unique combination. So it's not simply trade because you can add lots of production and therefore, manufacturing as an industry. But a high value-added industry. Renewable energy is another area. The UAE now hosts the International Renewable Energy Agency (Irena). We're developing in the DIFC a cluster to finance renewable energy, because nobody does that in the world. These synergies are what the economy calls economies of scope. You start diversifying your production base and your activity base are happening now. They're a reality so it's not a matter of going back to the past.

Also, the media industry is vastly underestimated. The potential for cinema, media and related industries to take Dubai forward to the next stage of growth is very much there. Arab media in general is severely under-developed. If you look at the film industry… it's located in Egypt. But the scope for developing a film industry in Dubai is certainly there.

What about the banking and financial industry?

I view that as being extremely attractive. We, at the DIFC, estimated that just in 2008 the GDP of this little city that we have in the DIFC was something like $2.8 billion (Dh10.28bn). That is about 3.4 per cent of Dubai's GDP and that got established in a short space of five years. That tells you something about the need for developing capital markets and financial services in the region. The sector will grow very rapidly and it will grow on a regional-international basis out of the DIFC.

What is your view on consolidation in the banking sector outside the DIFC?

There has to be consolidation in the banking sector across the GCC and in the UAE. We have a large number of banks. We need to think of consolidating them and getting stronger banks. I like to believe that in the next five years if we do so, some of our banks could be among the top 50 of the world. There is no reason we should not be able to do so. Which requires a strong capital base, which requires us to be able to go across boarder, better corporate governance, more transparency and disclosure. Tighter regulation and better risk management. All those are feasible. We know how to do it. Another thing we need to do is consolidate our markets. We have fragmented stock markets. We have three in the UAE. The total size of the stock markets in the Arab World, together with India, is something like $1.3 trillion. That's about the size of Hong Kong or a little bit bigger than Hong Kong. That gives you an idea of how small the markets are on a global scale. So, in order to move forward, we need to consolidate, starting with the UAE. If the UAE consolidates its stock markets and has a single stock exchange for the whole of the country, that would be an extremely attractive proposition for foreign investors. I have no doubt that if you do that you would introduce a great deal of liquidity. It would allow for your companies to expand. I've proposed for developing a second-tier market, what's called an alternative investment market. The same is true for family-owned businesses, which we need to attract to the market. There are many things we need to do at that level, which will help grow the banking and financial industry and the capital markets.

What is the DIFC's growth strategy in the light of the current economic situation? What changes are being made to draw in new businesses?

Well, the DIFC has reached critical mass. We've now well over 800 active companies within the DIFC… some 300 banking and financial industry and the balance being ancillaries and services. This is a financial community in its own right, able to provide services going all the way from commercial banking to capital markets and asset wealth management, investment banking, reinsurance as well as Islamic finance across those varying types of services. Now, given that critical mass what you need to do is two things, first you have to deepen it. Look at attracting companies and letting them develop across back office, middle office and the front office. I'm a strong believer that we should grow our capacity to manage and grow our own wealth. The history of our region has always been that we're rich and we send our capital abroad, to be managed and controlled out of London, Europe, Zurich... That model is a broken model. If there is one lesson that we have learned from this international financial crisis, it is that you should start controlling your own wealth and managing your own wealth. Therefore, we should be repatriating our financial wealth and managing it and controlling. We might choose to invest it internationally. That is part of portfolio diversification and good risk management. But we also want to use our financial wealth and capital for the development of our own region and our economy. The bottom line is the capital markets should be there and the banking and financial industry should be there to serve the economy. That is to help productive investment and to create jobs. That is the object. The object is not derivatives trading and the rest, although that could be a useful complement. Those are deep lessons from the crisis. So moving forward for us means helping the banking and financial industry that already exists to widen the scope of services that it offers. Islamic finance is attractive. Asset and wealth management are extremely attractive. The whole fund management industry is under-developed. There are also new areas. I mentioned that renewable energy finance. Infrastructure finance will be very large over the time to come. If you look across the Gulf at the moment, they have infrastructure projects planned for the next 10 years worth some $2.8trn. Those are large sums and they require financing. You look at India next door. India in the next 10 years is in principal planning $1trn worth of infrastructure projects. India does not have the capital and the finance for those projects. It can usefully tap the liquidity and financial wealth of the other Gulf countries. All of those are great opportunities for us and we'll be looking into developing those.

You mentioned growth rates of 2-2.5 per cent for the UAE. Any revision to that?

With higher oil prices and the expansion of trade and tourism, we should be able to achieve between three and 3.5 per cent in the UAE.

Are we heading towards a double-dip recession?

If you look at the volatility, we have now what is similar to the levels achieved at the time of the Lehman Brothers collapse. So, quite high. The markets are jittery, they're nervous. They are worried about the state of public finances in Europe. Budget deficits have been growing. If there is no adequate European Central Bank intervention and if there is no decisive joint intervention by the IMF as well as by EU governments, the danger of a double-dip becomes higher.

PROFILE: Dr Nasser Saidi Chief Economist, DIFC Authority

Dr Saidi is also the Executive Director of the Hawkamah Institute for Corporate Governance, DIFC. He is also the co-Chair with the OECD of the Mena Corporate Governance Working Group and established the Lebanon Corporate Governance Task Force. He was a member of the UN Committee for Development Policy for two mandates.

He has written several books, including his most recent, Corporate Governance in the Mena Countries: Improving Transparency & Disclosure.

Dr Saidi is from Lebanon and has served his country in several top key political and economic capacities. These include minister of economy and industry and the vice-governor for Lebanon's central bank for several terms.

He holds a PhD and an MA in economics from the University of Rochester in the USA, a MSc from University College, London University and a BA from the American University of Beirut.

Dr Saidi served as a professor of economics at the Department of Economics of the University of Chicago, the Graduate Institute of International Studies (Geneva, Switzerland), and the Université de Genève.

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