Be happy! It is 2007, really

29 December 2008

The oil price crash and lower demand will hammer Gulf economies in the new year. But we shall only be going back to 2007.

According to analysis in a report to be published by MEED in January, the dollar value of the GCC’s gross domestic product (GDP) at current prices will fall by 25 per cent in 2009, principally - although not exclusively - because of lower oil demand and prices.

This will be one of the biggest contractions ever recorded in macroeconomic aggregates. GCC balance of payments surpluses will be eliminated and some GCC governments will record budget surpluses.

The good news is that GCC governments have saved at least $500bn in the past five years. Aggregate current account surpluses since the start of the decade are more than $1 trillion. So no matter how low oil prices go, GCC governments and economies will remain solvent in 2009.

GCC businesses, in contrast, are not in the same happy position. Most are poorly capitalised and have relied on internally-generated resources to expand in the past five years. Corporate cash flows will be radically squeezed in 2009 by falling demand and payment delays.

Gulf capital markets are effectively closed for those seeking relief by selling shares and the banks will probably lend less in the year to come. The spectre of insolvency is already haunting the construction industry and other sectors that rely on discretionary spending by households and corporations.

Long Gulf boom interrupted

At an end-of-year dinner in the UAE, Gulf business people unanimously concluded that 2009 was going to be a very bad year for some economies. Abu Dhabi, Kuwait, Qatar and Saudi Arabia will continue to offer opportunities, but there is little prospect that many Gulf businesses will report increased earnings. Some will suffer serious losses. A few will go out of business.

But there is another way of looking at the year to come. Even if the forecast of a 25 per cent GCC GDP contraction is accurate, the region’s aggregate economy will only reduce to the size it was in 2007. Was 2007 a bad year for Gulf business? Absolutely not. So why the gloom this December?

The answer is that it is only partly because the market is going to contract. It is also due to the fact that most GCC businesses assumed the long Gulf economic boom would proceed without interruption.

After five consecutive years where revenue annual revenue growth of more than 20 per cent has not been unusual, they have developed structures that require high growth to continue indefinitely. As a result, GCC businesses, with few exceptions, probably employ 25 per cent more people than they will need to address their customers’ needs in 2009.

The MEED report’s forecast is that the downturn in GCC economies will be a shock and a sharp one. But it will be short. An oil price rebound will take place in 2010 as the US economy recovers on the impact of federal government support for the banking system and higher government spending. This, in turn, will stimulate global economic activity and world oil demand.

Increase revenue per employee

The challenge for Gulf business is dealing with the shock of 2009. The big question is: how can they reduce their cost base without undermining their capacity to satisfy their customers’ requirements beyond the downturn?

Each company will have to develop its own answer, but a considered approach rather than knee-jerk reaction is always advisable. Firing highly-skilled people because they were the last ones hired simply to make the profit and loss statement look better in the short-term will lead to lost opportunities in the future.

The strategic priority is to increase the revenue for each permanent employee. This can only be done by increasing the competences of the people you employ and demanding higher skills from those you hire.

Perversely, there is probably no better time to achieve both than during a recession. Those you want to keep will rise to the challenge presented by a more challenging environment. And it will be easier to hire good people in 2009.

But the harsh truth is that practically no one will have more money to spend next year. Most will have less. Recognising that fact and adapting to it will be the key to success in 2009. It will also lay the foundations for more strong growth when the bust finally comes to an end, as it must and will.

* Order the full MEED Insight report, A Short, Sharp Shock: Economic Outlook for the GCC in 2009-10, by emailing MEED Insight.

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