Discussions with bankers, businessmen, professionals reveal a pervasive sense of confusion as to what to make of the UAE economy and where it is headed. This leads to the question permanently on everyone’s lips: When will the economy rebound?
Unfortunately, this is the wrong question.
That economic headwinds are being faced is the obvious conclusion drawn, with no real insight into deeper and more fundamental shifts the economy is experiencing. There are tectonic movements involving right sizing, reinvention and innovation going on before our eyes, with the government having recognised the need for all three, apparently well before the private sector.
We need to go back, briefly, in history, to set the context. The years 2002–2015 witnessed spectacular growth, buoyed by high oil prices and copiously fuelled by prodigious investments into the property sector, resulting in a dizzying multiplier effect, buoying a spectrum of industries, particularly in Dubai. Banks, not to be left behind, and embarked on a sustained credit binge all the way up to 2015.
The economy cracked on during this period, and everyone made money, inefficient and dated business models included, subsidised by a surfeit of liquidity and credit, with fraudsters making merry as well. Loss makers borrowed to fund losses, aided by falsified accounts.
Tectonic changes
Meanwhile, whilst business was busy making money, there were tectonic changes underfoot. Economic headwinds, brought on by falling oil prices, cessation of lending by banks in 2016, shifting geopolitical alliances and priorities, massive changes in trade and investment patterns and so on were slowly making several trades irrelevant. This is only the beginning of what one might call a rightsizing of the economy where inefficient, poorly capitalised, over-leveraged and irrelevant business models are being exposed and slowly collapsing.
Several Middle Eastern economies effectively built rentier economies, first built on oil extraction, and extending over time to a variant of the rentier model focused on achieving growth, driven by expatriate-owned businesses. A laserlike focus on providing a high level of security, political stability and ease of doing business resulted in remarkable growth and development.
This has been particularly demonstrated in Dubai. The model basically involves an open invitation to investors and businessmen alike, to move to the country, bringing with them equity and intellectual property/know-how/skills and the like, in return for a safe haven, and a fertile environment that fosters business, innovation and growth in income. This fertile environment became particularly febrile in Dubai, from 2002 onwards when a brilliant new addition to the rentier economy — property — resulted in explosive growth and enrichment.
The right environment
A successful rentier model thus becomes self-fulfilling, providing increasing opportunities as long as investors continue to find them.
Economies built on a rentier model are usually reliant on a few productive resources and a small domestic population, with growth and development predicated on increasing populations and concomitant opportunities. Countries like Singapore, Macau and several GCC economies come to mind.
The core of such economies is the provision of the right environment, usually supported by one or more industries — tourism, oil, gambling, etc — with the rest being up to the “renters”. It is therefore incumbent upon business to remain relevant, constantly look for new opportunities, incessantly and persistently reinvent to survive and grow.
And herein lies the answer to the wrong question being asked by all.
Slow to react
Businesses have failed to react quickly enough to the changing environment. One example is that of the UAE property and related trades. The signs of a fall in property prices, slowdown in offtake and in overseas investment into the sector were all seen a few years ago, indeed predicted by several analysts.
Businesses dependent on the continual growth of any one sector are exposed to serious risk. If that one sector experiences explosive growth and then falls back to more normal levels of activity, then all ancillary, dependent and limpet-like businesses will shrink too.
This is why the question of “when will the economy rebound” is the wrong one. A model (like that of Dubai) that is largely based on the creation of a platform for the exploitation of opportunity is predicated on the rebound being driven by its participants, not the providers of the platform.
The obligation of the provider is to ensure the platform is at the very least contemporary and relevant if not forward looking. This, the Dubai government has done admirably. This model will not and cannot work with traditional fiscal or monetary policy solutions — increased public spending, loosening bank credit, reduction of interest rates and so on.
The right question to ask
Therefore, there is no “rebound” or “revival”. The right question, therefore, how quickly will the business community reinvent itself? The government is doing all it can by once again focusing on the creation of the right environment and fostering a culture of innovation. Think of all recent government initiatives and one can see this steadily unfolding – the relaxation of visa rules, focus on smart government, further easing of doing business, relaxing working rules, and so on.
The private sector, in my view, has been a laggard and reactive with government and semi-government entities moving much faster. Take banking for instance. The wave of consolidation has been led by the government controlled/owned Abu Dhabi based banks, whose boards have realised that size and long-term strategy do matter.
The creation of two large banks in Abu Dhabi is a smart move and it can be argued that one will focus on regional and international growth and the other on dominance in the local economy. This trend is not restricted to the UAE. The smaller banks resistant to consolidation will be squeezed into being niche players, with all its attendant pros and cons.
Economies such as the UAE, Singapore, Bahrain and Oman will need to perennially transform and mutate, faster than the large, populous and diversified ones. The UAE government has proved to be nimble and quick in its cognisance of trends and has demonstrated its ability to tweak its offering.
The private sector needs to realise this, rather than wait for some panacea for all evils to be miraculously poured into the economy. The answer, as they say, lies within.
Vikram Venkataraman is managing director of Vianta Advisors.
