Fierce competition will see shakeout in UAE printing industry
The UAE's printing and publishing industry is set to grow up to eight per cent this year even though the global financial crisis is likely to slow the economic growth.
Ahmed bin Hassan Al Shaikh, Managing Director of Modern Printing Press and Vice-Chairman of Emirates Islamic Bank, sees the global downturn as an opportunity for the UAE, particularly Dubai.
"I am very optimistic because the UAE has always benefited during crises," he told Emirates Business. "Historically the UAE has been able to achieve expansion and growth during crises and periods of international tension. The UAE, especially Dubai, seized opportunities during the first and second Gulf wars, the crash of the Asian markets in the late 1990s and the collapse of the Soviet Union. During these crises the UAE increased its market share in trade and commercial services around the world, and I am optimistic it will be able to seize opportunities during this financial crisis."
Do you think the current economic slowdown is a natural development after the UAE economy's long period of continuous growth?
Some people say the downturn in the UAE economy was expected, but this is not true because the current crisis is of a global nature and the country is not isolated from global events. If we look at the giant US, European and Japanese economies and the size of the crash in different areas we see that the impact on the UAE is far less than the impact on those leading economies. The impact is limited to slowdown in the economic growth rate and job cuts, but this is far less than the sufferings of the major economies. However, I do not want to give the impression that everything is normal. We still have some negatives and some sectors are suffering because of the crisis. But we should assess the situation in a fair way rather than exaggerating it. Some sectors of the UAE economy are suffering, especially real estate and banking, the sectors that have been hit hardest around the world.
Do you think there has been an excessive reaction to the financial crisis?
The UAE economy has reached a very developed level and this has resulted in increasing correlation with the global economy. The current impact on the UAE means that this economy has developed to international standards and is facing the same positives and negatives as the global economic system. Some countries have not felt any impact of the financial crisis, not because they are strong but because they are isolated from global economic development. The budgets announced by the UAE and Dubai governments are a strong response to the sceptics who predicted a decline in the budgets. Recent reports and ratings by international groups predict economic growth of between two and 3.5 per cent in the UAE, while they predict negative growth in the global economy. Even the most optimistic reports predict 0.9 per cent growth in the global economy. So the UAE economy will be able to expand by at least three times the growth rate of the global economy.
How would you assess the impact of the crisis on the UAE's banking system?
The financial sector was marginally hit by the crisis and if we look at the developed economies we see that governments interfered heavily to support their financial institutions, even acquiring stakes in banks or taking over whole banks in some cases. The UAE government intervened with a Dh120 billion package of deposits or loans and there is an essential difference between the two actions. We do not have any collapse in our banking system but we have a problem and we are managing this matter according to its needs. Our situation is strong enough to limit government intervention to supporting the system, not taking over banks.
The openness of the economy led to the problem of hot money, which harmed the banking sector. What is your view?
We are taking a free economy approach by allowing the free movement of capital in and out of the country and we will continue with this strategy. There is a lot of talk about hot money and the withdrawal of between Dh200bn and Dh280bn from the UAE in a very short period of time. This had a negative impact on our banking system, but we should look at the positive side. This money entered the country and played an essential role in the development of investment projects. If we had taken a protectionist stance and prevented this money from entering the country we would have lost a lot of benefits. So we will continue to take the free economy approach because in the end it will benefit our economy, despite the possible negatives.
What is the impact of hot money on liquidity in banks?
I think hot money has a marginal impact on bank liquidity because they have a lot of cash. But after this money left the country the banking system's loan book exceeded deposits and the banks are trying to lower their loan book to match deposits. Banks are very conservative when it comes to expanding their loan books and this is affecting the cycle of cash flow in the markets. This will have a negative impact on the expansion of businesses because most institutions will face difficulties in financing their new projects. The high economic growth rates of the past few years, which reached more than 25 per cent annually in some sectors, will not be repeated because of the shortage of finance.
What is the outlook for the printing and publishing sector?
This sector is interrelated with all the economic sectors in the country and will continue to grow by six to eight per cent this year despite the slowdown in economic growth. The sector will face a number of challenges this year. The first will be a decline in the number and value of deals, especially in the real estate sector that was the main driver of the rapid expansion of the printing and publishing business. However, we expect retail businesses will increase their orders for marketing purposes to maintain their market share. This will narrow the impact of the problems in the real estate sector. There are signs that the retail sector will be able to cover and exceed the decline in the real estate sector, so the printing industry will be able to achieve growth. Another challenge is the sharp decline in marketing services and advertising. Several magazines are reducing the size of their editions due to the lack of advertising and this is affecting our business.
How would you assess the competition in the market?
There is fierce competition, especially from a number of new companies that entered the market last year. The printing and publishing industry expanded sharply during the past few years because of the increasing demand, and a lot of companies entered the market to meet the demand rather than offer quality. Those companies are highly leveraged and are facing difficulties in repaying their debt, so they are willing to agree deals at very low margins to collect any available cash. This is creating fierce competition in the market, especially with the decline in demand and the number of available orders. We expect this competition will continue for a few months until they are unable to run their businesses any longer and then the market will stabilise. We will see also a number of these companies closing down because of the lack of professionalism. They lack the strong and efficient administrative skills required to manage a business through a downturn in demand.
How do you expect growth despite the decline in demand?
We have seen exaggerated prices for raw materials, especially paper and ink, due to speculation in global markets. Then prices declined sharply because speculators were trying to liquidate their holdings to cover their positions, and this created large fluctuations in the market The price of paper surged to about $1,200 [Dh4,407] per tonne and has now declined to $850. This will lead to a decline in the value of deals because the basic materials have become cheaper. We will notice a critical point here as the value of deals will decline but their size will increase, because if a printing house was processing 10,000 tonnes of paper last year it will be able to process 12,000 tonnes this year at lower cost. This situation will increase the profits of the printing industry.
What will be the impact of such developments on the labour market?
There will be changes in the market, not only in the printing industry but in all sectors as companies are cutting their staff. In the past few years companies were appointing two people to carry out one job due to the lack of skilled professionals. We saw other countries offering high salaries to professionals due to increasing demand. For example Indians were returning home because of new opportunities there, and this impacted the market here. Now the trend has changed and companies have started to search for available skilled people in the market and this will reduce the number of staff sharply.
PROFILE: Ahmed bin Hassan Al Shaikh Managing Director, Modern Printing Press, Vice-Chairman, Emirates Islamic Bank
Ahmed bin Hassan Al Shaikh completed his school education in Dubai before obtaining a degree in political science and management from Al Ain University. He acquired a master's degree in business management from Dundee University, UK, and is currently undertaking research for a PhD with Coventry University.
Al Shaikh is Managing Director of Modern Printing Press, Chairman of the DCCI Printing and Publishing Group, Chairman of Ducab, Vice-Chairman of Emirates Islamic Bank and a member of the Dubai Economic Council. He is a member of the Dubai Export Development Corporation and the Dubai Rent Committee.
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