The Gulf Co-operation Council (GCC) countries are well equipped to master the challenges of global financial crisis and take advantage of the opportunities it presents despite the fact that it is not decoupled from the global economy, said analysts at The Boston Consulting Group (BCG).
The analysts said the region could not remain immune from the crisis – particularly those Gulf countries, which are closely correlated to the global economy.
Dr Klaus Kessler, Partner and Managing Director of The Boston Consulting Group, said most of the diversified sectors – such as tourism and real estate – of regional states have correlation to recession, which is having a negative impact on the region.
However, the $1.2 trillion (Dh4.40trn) worth of assets owned by the sovereign wealth funds (SWFs) and central banks and $300 billion of petrodollars accumulated last year will cushion in the region from the crisis, he said. Furthermore, another strong point is that the Gulf region enjoys the lowest leverage in the world.
"These [GCC] are government-driven economies and this will be a critical stabilising factor amid the ongoing financial crisis," Dr Kessler said.
He said regional governments should reprioritise investments to focus on creation of competitive advantage platforms, realign SWF investment objectives to support local economies, and proactively drive the creation of regional champions and global challengers. The analysts said five leading companies from the Middle East – including etisalat and Emirates airlines from the UAE – are among the 19 new entrants to BCG's annual list of global corporations shaking up the traditional world order.
Dr Kamel Maamaria, Partner at the BCG Dubai office, said: "Many of the fundamental drivers in the region continue to be strong. The past three-year oil revenue inflows provide a comfortable cushion for GCC economies. The main GCC economies are only lightly leveraged and reserves held at SWF and central banks provide the necessary back-up if and when needed. This global recession could be an opportunity for GCC countries to carve out an even greater role in the global economy. They could achieve this by refocusing their local investments, leveraging some of their reserves to drive local economies."
Commenting on the banking sector, Dr Kessler said lenders should review existing exposure; answer vague economic outlook with service and quality; ensure communication consistency; review most critical balance sheet positions and apply segment of one marketing; avoid across the board cost cutting; target low hanging fruits (procurement, real estate, marketing); check scalability of processes and resources. This will help ensure growth in the future, he added.
Banks in the region should also step up best practices' standards, Dr Kessler said.
"They need to develop clear understanding about future value pockets; align market plans with internal resources and competencies; carefully manage scarce resources [capital, people, ideas[; deposit gathering strategies [to safeguard balance sheet financing]; and sustainability-oriented controlling and bonus systems."
And BCG said that despite limited sub-prime exposure – with the region only exposed to one per cent of the worldwide reported losses – GCC banking shares are diving. Short term measures, such as stringent loan conditions are important, but analysts at BCG, said far more levers need to be pulled to establish some of the local banks as regional challengers.
Dr Sven-Olaf Vathje, a CBG Partner and Gulf real estate expert, said most of the developers in the region are entering 2009 from a position of financial strength.
He said the decline in property prices is cyclical and natural because what goes up always comes down. "Hong Kong and Singapore have already experienced these cycles," he said.
Dr Vathje said property companies have lost Dh130 billion or 82 per cent of their market capitalisation during December and January. He said Emaar, Aldar, Sorouh and Union Properties have lost market capitalisation of 87 per cent, 78 per cent, 71 per cent and 88 per cent, respectively.
Dr Vathje said property firms should carefully manage leverage ratios and liquidity position; secure funding layers – from lines of credit to bond programmes and capital; establish risk cockpit and embed metrics in decision-making; safeguard client base and secure collections through smart (client-friendly) solutions; and critically review development portfolio and manage completion scheme.
In order to improve operations, he said developers should empower sales teams; attract talent and improve staff skills; and establish best practice processes. He said transformation of GCC real estate industry is imminent. "The property majors will develop business models with sustainable competitive advantage; achieve vertical integration – develop and hold assets [own to lease]; create value through smart projects instead of riding the wave – more mixed-use properties and lifestyle developments; diversify revenue streams; build new functional skills [asset management, lease management[; expand geographically; diversify use-types; explore new revenue levers; create operational scale; grow externally through acquisitions [companies, portfolios, teams]; engage in partnerships, leveraging skills and capital; and focus on core capabilities."
Analysts at BCG expect the oil price will average $40 per barrel this year.
They said Oman, Bahrain and Saudi Arabia would face budgetary challenges as they have budgeted oil at $50 and $70 per barrel. But the UAE and Qatar will remain safe because they have budgeted at lower price.
Martin Manetti, Partner and Head of the Energy and Utility Practice in the Middle East for The Boston Consulting Group, said the crisis is impacting the entire oil and gas value chain.
He said the downturn and structural issues will result in lower crude and product demand, excessive production spare capacity due to recent build-out, structural limits to Opec's ability to reduce production, limit access to financial and increase cost of capital.
Manetti advised oil and gas companies in GCC to focus on operational excellence and cost reduction and take advantage of lower demand for services and lower commodity prices. He said companies should renegotiate EPC contracts for large downstream projects; postpone non-essential projects to save cash (downstream) and prevent excess capacity; recruit top international talent in core and supporting businesses; accelerate efforts to exit unattractive markets; pursue attractive M&A opportunities; capitalise on weak demand to secure attractive international E&P assets; consider acquisitions in-lieu of greenfield downstream opportunities.
"Oil and gas firms should opt for inorganic growth to take advantage of undervalued firms and assets," Manetti said.
In its outlook for the global economy for 2009, BCG said in its report "Collateral Damage: Preparing for a Tough Year Ahead: The Outlook, the Crisis in Perspective, and Lessons from the Early Movers", that the real economy will continue to deteriorate, earnings will be negative, consumers and financial companies will default, and there is risk of deflation, trade wars and protections.
Citing an example, Dr Kessler said the upcoming US bailout package incorporates some provision under which the US Government is turning protectionist.
In the post-crisis world, Boston Consulting said the role of the government will be stronger and there will be more regulations. Industries will also accelerate restructuring, faster destruction of weaker business models, consolidation and breakthrough innovations. Companies will have lower profit levels, lesser leverage and stronger cash positions and investors will be conservative and have low-risk appetite and greater risk discrimination and rational. Customers will also be conservative, risk averse with lesser debt, more savings-oriented and value conscious.
BCG analysts said there is a tectonic shift in the global economy and green is the buzzword. They said that renewables and biotech are the next industries to drive the global economy and attract a lion's share of investment in the coming years.