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21 April 2024

No quick revival in sight but downside will be less going forward


By Shuchita Kapur

Economic expectations have not worsened in the past few weeks in light of more rounds of significant layoffs and falling stock prices, say experts, who believe that the downside will be less as we go forward.

According to MR Raghu, Senior Vice-President-Research at Kuwait Financial Centre (Markaz), the current round of layoffs and stock price fall is the effect of an economic contraction that has already happened. "From here, the downside is less in my assessment," he told Emirates Business.

An increasing number of executives view their economies as bad but, in a change from recent months, do not see them getting much worse, as per an Economic Conditions Snapshot, a part of McKinsey Global Survey Results in February.

However, there may not be any quick revival in sight and the pain will be long felt. According to the McKinsey Global Survey, three-quarters of all respondents, and more than 90 per cent of those in the eurozone, expect their nations' GDP to fall in 2009. This is an increase from November, when 59 per cent of all respondents expected GDP to fall.

"Given that opinion, it's not surprising that executives indicate that their nations' economies are bad and that they have low expectations for the near term. Notably, however, those views have remained fairly stable between December and January, after falling markedly between November and December. This may indicate a belief that the economy has hit bottom and that even tens of thousands of layoffs and continued steep losses in shareholder value aren't worsening the situation. Some 40 per cent of respondents expect an upturn to begin by the end of this year," the survey reveals.

On a regional basis, experts seem unanimous that most of this year may be in the red. "There appears to be a consensus that the economic woes will stay with us throughout 2009. We don't know when exactly we will hit the bottom but the GCC is in a better position than most markets as we have shielded ourselves from many of the elements that brought about this crisis. Having said that, I'd like to add that there are a lot of variables at play. We hope that we should come out of these crises by the end of 2009 or by the first quarter of next year," said Omar Fahoum, Chairman and Chief Executive of Deloitte Middle East.

Experts also refute claims that suggest the region is just at the onset of economic woes and things will worsen as the year progresses. "I don't think so," said Raghu. "The region, in my view, has the strongest background to come back at the earliest. However, the coming one to two years will be really testing. But I feel they have the necessary resources to go through this and emerge stronger," he added.

Many believe that government actions have helped in the current crisis, and government interventions will play a decisive role in the future as well.

"Globally, especially in the US, the government is unleashing a major spending drive as consumers have stopped spending. However, remember that the US is a consumer driven economy. Hence, I am not so sure how this new experiment will pan out for the US. In the region, government spending as part of budgetary process will play a key role in the economic revival. However, its effectiveness will depend on how they sort out the banking mess. Banks are the most important conduits for transmitting liquidity. They seem to be in a freeze mode now," said Raghu.

In the McKinsey survey, overall, 43 per cent of respondents say governments' actions have helped. Furthermore, a majority says that, compared with before the crisis, they now think governments should be more active in business and markets at least some of the time.

"Strong fiscal policies but direct support of the government to the banking system will save the day. Government should make sure that they not only keep up the spending [especially infrastructure] but also make sure that banks start functioning normally. It may mean guaranteeing all new loans for a fixed time frame, which the government should be prepared to do. The question here is one of confidence and this should be restored by the government back to the business," said Raghu.

Experts also believe that at this juncture governments need to focus on helping existing companies or industries rather than fostering innovation.

"Fostering innovation would be effective only when things are normal. In abnormal and extreme situation like these, the first task is to make things all right. Hence, it is imperative that the focus is only on bringing companies and industries back into track," added Raghu.

As far as individual companies are concerned, most believe that they are adapting themselves and sticking to those very tactics they identified during the last fall as helping them manage the global economic turmoil.

"A higher proportion of companies are now taking longer-term actions such as restructuring, hiring talent, or leaving markets altogether, perhaps indicating the turmoil is creating long-term structural changes."

"We are doing both. We are cutting costs as well as focusing on seizing long-term opportunities," said Raghu, while speaking of the tactics deployed by his own company in the current economic turmoil.

But despite the different tactics being used to beat the downturn, most believe that their companies will shrink rather than grow this year. According to McKinsey, more executives expect their companies to shrink than grow in 2009 in terms of profits and workforce size; however, most have not changed prices and do not expect to. Just under half of all respondents say their profits fell in the second half of 2008 but even those who saw profits increase are not necessarily well placed.

Nearly 49 per cent of them expect profits to rise again in the first half of 2009, but 29 per cent expect profits to fall. For those already doing poorly, the news gets worse. More than two-thirds of those that saw profits fall in 2008 expect earnings to continue dwindling in 2009, said the survey. Most companies that Emirates Business approached refused to comment on this subject.

On the employment front, the figures are not happy. In the region, it will be the expats taking the maximum hit.

"Regarding unemployment, we should understand that this will be a problem more for expats than for nationals. The governments will go all out to safeguard the jobs of nationals. We are already seeing signs of this in Kuwait, where the government is insisting on 50 per cent Kuwaitisation in return for the economic stimulus package. However, unemployment among expats especially white collar will be severely hit," said Rahgu.

According to recent media reports, UAE is considering law to ban termination of Emiratis. Draft proposals could see private companies banned from making Emiratis redundant have been submitted to the Ministry of Labour and the National Human Resource Development and Employment Authority (Tanmia) has drawn up the plans, which if agreed, would make it illegal for nationals to lose their jobs unless for a violation of the labour laws.