x Abu Dhabi, UAEMonday 22 January 2018

Business a very public affair

The global downturn and financial crisis has led to a reliance on the public sector, born of necessity, that threatens the expansion of the Gulf's private sectors and diversification of economies away from oil.

Halcrow contractors dig the Diftar Shis tunnel through the Hajar mountains, which is part of a road project that would connect Sharjah to the main port of Khor Fakkan.
Halcrow contractors dig the Diftar Shis tunnel through the Hajar mountains, which is part of a road project that would connect Sharjah to the main port of Khor Fakkan.

The UK engineering company Halcrow has a business strategy for this year that is typical of many companies in the Gulf. Companies, from contractors to banks and investment firms, are increasingly relying on government contracts to tide them through the global downturn after being hit by a slowdown in projects by private developers and a shortage of financing from banks and investors.

"We are looking to maintain our presence in the public sector and will be super-selective about the private sector," says David Yaw, the managing director of Halcrow for the Middle East. But the reliance on government spending and financing threatens to slow the drive in the region to expand the private sector and diversify economies, analysts say. They warn that an over-dependence on governments is starting to unravel decades-old efforts to reduce the reliance of Gulf economies on hydrocarbon revenues by moving towards gradual privatisation.

"We are going back to the 1980s, unfortunately," says Henry Azzam, the chief executive of Deutsche Bank for the MENA region. "We are asking our governments to step in and do more; not only to be regulators but lenders of last resort, owners of last resort and uplift the economy." The Qatar-Bahrain Causeway, the Lusail city development in Qatar, and the US$45 billion (Dh165.28bn) mixed-use Yas Island in Abu Dhabi are among the state-backed projects Halcrow is involved in and which are seen as vital to reviving economic prospects across the region.

Growth in the private sector is expected to remain sluggish this year against a backdrop of limited access to credit. In its absence, economic recovery is likely to spurred by the expansionary fiscal budgets of GCC states. Saudi Arabia, the biggest economy in the Gulf, expects to run its second consecutive budget deficit this year. In December it approved the largest budget on record to generate economic growth and create jobs.

The huge spending programme shows no sign of waning. The kingdom is expected to spend $400bn over the coming years to 2013. The UAE has said it plans to increase federal spending by 3.4 per cent this year, with education, health, social services and infrastructure among the sectors to benefit from the Dh43.6bn expenditure programme. Kuwait's expenditure under its 2010-2011 budget may surpass its current expenditure of $42bn, officials say. The country also recently launched a four-year, $104bn spending plan for infrastructure projects.

Qatar has indicated it will announce a record budget for the coming fiscal year as it focuses on the promotion of infrastructure projects. Oman, too, raised spending by 12 per cent in this year's budget to help finance infrastructure. Dubai has proven an exception. Last week it emerged that the Government had ordered its departments to cut spending by 15 per cent to help plug a budget shortfall that has swelled to about 2 per cent of GDP.

While the counter-cyclical fiscal spending has been necessary to soften the effects of the financial crisis, attention is now turning to when and how states can effectively withdraw additional funding as economies begin their return to health. "If the ratcheting up of government expenditure is not reduced when the crisis eases it will undo some of the gains made in recent years to develop the private sector," says Jarmo Kotilaine, the chief economist at NCB Capital, the investment banking arm of Saudi Arabia's National Commercial Bank (NCB). "After the financial crisis there's some possibility of the political climate shifting against the public-private partnership model that has been pursued over the past five years."

The UAE has been an active proponent of that model in recent years. Its tax-efficient economy and business-friendly regulations mean it has been at the forefront of efforts in the region to bolster the private sector. Other GCC states have made similar moves in recent years. The UAE, along with Bahrain, Saudi Arabia and Qatar all featured in the top 40 of the World Bank's Doing Business 2010 report, which assesses the ease of conducting business in different countries.

But the competitive economic advantage gained could be undermined. Some economists argue that a bigger role for the government, in addition to inhibiting private-sector growth, could also affect job creation. Unemployment among nationals remains a headache in the region, with an estimated 10 per cent of men and 27 per cent of women out of work in Saudi Arabia. Unemployment among Emiratis in Abu Dhabi has reached 14 per cent, official data this year showed.

"By and large, the way the state drives the economy is not comparable to the private sector," says Mr Kotilaine. "This region is still lagging behind other parts of the world in the strength of the private sector and that has implications for efficiency, competitiveness and job creation." While the region has not witnessed the same degree of bailouts of banks and other financial services firms as seen in the West, there have been notable examples of governments providing emergency financial support, further increasing the role of the public sector in regional economies.

The possibility of the Dubai Government-controlled conglomerate Dubai World defaulting on $26bn of debt led Abu Dhabi to supply the second tranche of a $20bn support fund late last year. The Government and the Central Bank had previously pumped the first tranche into Dubai's economy to help state-owned companies make debt payments and pay contractors. And starting in late 2008, the UAE made available a total of Dh120bn to shore up its banks after the financial crisis.

In Bahrain, the central bank last year took control of The International Banking Corporation and Awal Bank after they defaulted on financial obligations. The banks are owned by the troubled Saudi family conglomerates, Ahmad Hamad Al Gosaibi and Brothers and the Saad Group, Consumers have also been handed lifelines. Kuwait's parliament in January approved a bill forcing the government to buy $23.3bn of consumer loans.

Some of these policy responses, however, have drawn criticism. "If the problem does not have a systemic risk impact on the people on the sidelines then the government should not interfere," says Mr Azzam. But while the fiscal support extended by governments in the West have stretched their budget deficits and greatly increased debt levels, GCC states have a sufficient capital cushion. Oil prices nudging higher again mean that even with higher expenditure, most GCC states will be well placed to overturn budget deficits built up during the global financial crisis.

"Even if it's desirable to anchorage a bigger role for the private sector, during a crisis counter-cyclical fiscal stimulus is the only way to pick up the slack from a drop in consumption in the private sector," says Philippe Dauba-Pantanacce, a senior economist at Standard Chartered. As economic recovery gains momentum it is crucial for governments to demonstrate their commitment to building the private economy, Mr Kotilaine says.

"They need to get the rhetoric right for investors and show they're an enabler, rather than the lead player," he says. "Putting some public companies up for sale would be a positive first sign and would support the stabilisation of the capital markets." Embarking on further public-private partnership projects would be another positive move to help bring the private sector into the fold. Companies such as Halcrow would no doubt welcome such efforts.