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Bloomberg Daybreak: Middle East Interview, 7 Oct 2018

Author:  admin

Published on:   2018-10-08 10:19:54

In the 7th October, 2018 edition of Bloomberg Daybreak: Middle East, Dr. Nasser Saidi comments on the importance of Saudi Crown Prince's interview with Bloomberg (the delayed Aramco IPO, diversification policies, managing of expectations re Vision 2030 etc.), US unemployment rates, and the ongoing US-China trade wars.

Watch the interview below.

The original link to the full episode (Dr. Nasser Saidi speaks from 07:30 onwards): https://www.bloomberg.com/news/videos/2018-10-07/bloomberg-daybreak-middle-east-full-show-10-07-2018-video  

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Comments on the "Amazon effect" in The National, 5 Sep 2018

Author:  admin

Published on:   2018-09-07 12:10:09

Dr. Nasser Saidi’s comments appeared in The National's article titled “Will the 'Amazon effect' take hold in the Middle East?”, on September 5, 2018. The full article is copied below (comments highlighted) and can be accessed here.  

Will the 'Amazon effect' take hold in the Middle East?

With the rise of e-commerce keeping a lid on prices and inflation in the US, consumers may benefit in this region too  
More frequent price changes for consumer goods in the United States along with increasing consistency in pricing due to the rapid growth of online retailers may be affecting inflation, a recent academic paper found. But is the so-called "Amazon effect" also impacting the Middle East? “Not yet,” says Nasser Saidi, the former chief economist of Dubai International Financial Centre. “Even the effect in the United States is a relatively recent phenomenon because of the scale of e-commerce and big companies like Amazon and eBay going into the retail sector.” The US academic paper on the topic was written by Alberto Cavallo, an associate professor at Harvard Business School, who analysed how multi-channel retailers - those with brick-and-mortar and online outlets, such as Walmart - have reacted to the rise of Amazon. It found the Amazon effect was not only keeping prices low due to the higher volume of e-commerce platforms, but that traditional retailers had become more nimble on price, changing them more frequently and offering more consistency for the same items across different locations. The study went one step further, indicating that Amazon’s ability to keep a lid on prices was also contributing to the low levels of US inflation seen in recent years. Analysts say it will take time for a similar trend to happen in this region, mainly because pricing in this part of the world is handled very differently. “The Amazon effect won’t happen here for some time because there needs to be a whole piece of work done here on pricing in general,” says Louise Conroy, general manager, e-commerce and digital, at Sun and Sand Sports, a UAE medium-to-large sports and lifestyle e-tailer. “The reason retail has suffered here is because it has not fallen in line with European, UK or US prices,” Ms Conroy says brands have a different mark-up per region with UAE consumers charged more because market research has indicated that shoppers are more affluent. “That illusion has now been shattered by the growth of e-commerce in this region because people can now see what others are paying for the same product in other markets. And with the freedom to ship across borders, consumers are starting to buy from overseas, so it was affecting local businesses.”   A June poll from global payments company Visa found that more than two thirds of UAE shoppers are now comfortable making purchases and paying bills online, with card payments the top method for online purchases. However, many consumers are turning to overseas shopping sites, taking advantage of services such as Aramex’s Shop & Ship where users are given a postal address overseas to ship items, cutting the cost of delivery. “Many global retailers now offer a direct delivery service to the UAE, with excellent courier service and low prices, opening the international retail space yet further to UAE customers,” says Camilla Hassan, the founder and managing director of the premium baby and kids store Five Little Ducks. Ms Hassan, who spent 10 years working for e-commerce and retail for brands such as Souq.com and Dubizzle before setting up her own entity, says local retailers must factor this in when setting prices. “There are still retailers whose prices remain typically high on international brands – assuming local customers will choose convenience and speed of getting their products over a lower price, but this is short-sighted,” she says. While many UAE customers still do not trust the e-ecommerce experience, so swallow the higher price, says Ms Hassan, those open to online shopping are securing better deals. “Many customers who travel frequently also stock up abroad. In previous years, customers may have begrudgingly accepted the price differential and paid it; now, with all the online options, they are becoming more choosy." According to a report by Fitch Solutions Macro Research, a unit of Fitch Group, the Middle East’s e-commerce sector is growing at the fastest pace globally with online sales expected to double to $48.8 billion by 2021. The study, released last month, also found that the sector will expand further thanks to a rise in grocery spending – a new segment of growth for regional e-commerce players. The UAE is set to be one of the leaders, with e-commerce spending in the country increasing 170 per cent to $27.1bn in 2022, from $9.7bn in 2017. But that does not necessarily translate into lower prices for consumers on the shop floor because of the way retail has been set up in this region, says Mark Pilkington, an advisory board member for Smart Stores Expo, group chief executive of U-Mark and the author of Retail Therapy: Why the Retail Industry Is Broken - and What Can Be Done to Fix It due out in January. Mr Pilkington says the historical supply chain that has existed since the industrial revolution had factories selling to brands, brands selling to retailers, then retailers selling through shops to customers. “At each stage of the supply chain the company would mark up the product so that the product that ends up stores had a price of 7 to 8 times the factory cost,” he says. “In the [Arabian] Gulf, that is even more extreme because an additional step was added in - the cost of franchising - meaning products cost about 30 per cent more in the Gulf than they do in London and New York.” While companies such as Amazon in the US miss out the retail portion of the supply chain, which is how they undercut brick and mortar shops, this places downward pressure on all retailers as they attempt to compete – with some firms going bankrupt in their drive to keep up. "Then you have the big boys like Walmart and Target fighting back by reducing their prices putting further pressure on suppliers and that’s why inflation has been lower in the US because there is that price pressure,” says Mr Pilkington. Despite internet penetration in the region sitting at 64.5 per cent, as of March this year, higher than the global average of 54.5 per cent, according to Statista, Mr Pilkington says e-commerce as a percentage of retail is still not as high in the Middle East as it is in the US and Britain. “It’s much smaller in the gulf but growing extremely fast, so it’s only a matter of time before it puts the same pressure on as it’s done in the US,” he says. “The difficulty for the regional retailers that have their franchise pricing is that products will come into the region via Amazon and Alibaba dramatically cheaper. Therefore, the current price level will become unsustainable, putting downward pressure on prices over the next three to five years.” There have been some big changes in e-commerce in the UAE and wider region recently. Emaar Properties chairman Mohamed Alabbar set the ball rolling in November 2016 with the unveiling of Noon, a $1bn e-commerce venture for the UAE and Saudi Arabia. It went live last year but has yet to raise its profile amid fierce competition. In March last year, Amazon acquired Souq.com, the region's largest e-commerce venture, for $580 million, with many customers expecting a wider array of products and lower prices. While Souq has retained its name to date, Ms Conroy says it is in a transition phase with Amazon planning to have all of its systems integrated within the next 18 months, “They are starting to sell products from Amazon US on the Souq portal but until they are fully integrated they will still trade as Souq,” she says. “Once Amazon fully enters the market – it will have a rippling effect in general because it means you’ve moved from the status of an emerging market to a more established market.” However, some regional economies may be better insulated against the force of Amazon. While the Gulf economies rely more on the franchise model, Mr Pilkington says others such as Egypt have a thriving local production scene and local brands in place. “Certainly in Egypt the international brands have very low market share because the Egyptian spending power is lower and people just can’t afford international brands,” he says, adding that local stores offer better pricing. He cites another big market, Morocco, where in a previous role as chief executive of the retail group Kamal Osman Jamjoon, the company went in with its ladies underwear brand Nayomi. “There were only 12 international lingerie stores in the whole of Morocco for 40 million people so you had to reckon that 95 per cent of the market were buying Moroccan brands,” he says. This focus on local brands in those countries is something Mr Pilkington believes the Gulf economies will also have to adopt to stay competitive. “The big retail groups, the families, will realise that they are overpaying for product from the franchises and will have to start doing their own thing,” he adds. Ms Conroy says it is also the responsibility of premium retail brands to adjust their global pricing strategy. “Brands will have to realise they will not be able to achieve the margins in this market they have done through traditional retail because now people have had a lot more exposure to online and are able to do price comparisons market to market.” While for now the Amazon effect is yet to show its true colours in this region, Mr Saidi says he would welcome it. “It would mean greater transparency and introduce much more competition across the retail space,” he says. “In particular, it would be very good for Abu Dhabi and Dubai because they are big tourist destinations.” While the hotel industry has global price aggregators that allow customers to shop around to find the best deal, Mr Saidi says the same needs to happen on the retail side in the UAE. “Tourists do international comparisons … so, you have to be careful that the UAE remains competitive from that point of view.”View all Articles!

Preparing for the next global financial crisis, Article in The National, 1 October 2018

Author:  admin

Published on:   2018-10-03 11:11:53

The article titled “Preparing for the next global financial crisis” appeared in The National’s print edition on 1st October, 2018 and is posted below. Click here to access the original article.

Preparing for the next global financial crisis

Public debt in advanced economies rose by more than 30 percentage points of GDP, with total global debt reaching some $250tn by the second quarter of 2018 The Fed’s quarter point rate increase to 2.25 per cent last week is the eighth hike in the past two years, a continuing reversal of the unprecedented monetary easing following the Great Financial Crisis (GFC) as the regulator pivots to a course of higher interest rates and Quantitative Tightening (QT). The GFC had led to concerted efforts to stimulate economies using monetary policy and bailing out of failing banks. The result was a sharp build-up of global debt. With central banks lowering nominal (and real) rates to unprecedented levels and injecting liquidity through unconventional monetary policies (QE), the world went on a borrowing spree effectively driving up real estate and asset prices on financial markets. Public debt in advanced economies rose by more than 30 percentage points of GDP, with total global debt (including government, household, financial and non-financial corporates) reaching some $250 trillion by the second quarter of 2018. The assets of the world's largest central banks (US, UK, EU, and Japan) have increased to $15.3tn (an unprecedented 38 per cent of GDP), of which about two-thirds comprise government bonds. The large global debt build-up now threatens a new financial crisis. Higher interest rates and QT is leading to a growing vulnerability of emerging markets economies. Over $200 billion of dollar-denominated bonds and loans issued by emerging market governments and corporates will mature during 2018 and they will need to repay or refinance about $1.5tn in debt in 2019 and in 2020. Emerging and middle-income countries with high debt levels, large fiscal and current account deficits and US dollar denominated debt maturing over the near term will face rollover risk. Lessons from the Twin Oil and Financial Shocks of 2008-2009 At the onset of the Great Financial Crisis (GFC) of 2008, banks in the Middle East, especially the GCC, were not highly leveraged and did not have any direct linkage or exposures to the US sub-prime crisis. Financial instruments like mortgage backed securities and other instruments that became toxic assets, were absent from the markets. Ten years later, banks in the region remain well-capitalised, and largely compliant with the latest BIS requirements. Similarly, the region’s financial markets were not directly exposed. The bottom line is that the lack of international integration of the financial markets in the region meant limited spill-over effects from developed markets. But under-developed domestic financial markets generate an imbalance in regional banks’ US dollar balance sheets. They rely heavily on less-stable funding such as short-term interbank deposits, wholesale sources, bonds and swaps. When the crisis hit in 2008, these sources of funding melted like ice in the desert. Banks and financial institutions found their correspondent bank lines and facilities evaporated. Similarly, the market meltdown meant that sovereign wealth funds and central banks found their 'liquid assets' turned illiquid; prices plummeted and there were no counterparts. These financial and liquidity shocks were compounded by the sharp decline in oil prices with the onset of the Great Recession. For GCC economies there was downward pressure on wages, incomes and on domestic asset prices, including real estate, which fell sharply. But the GCC banking sector was spared a full blown crisis. Policy responses included sustained government spending, lower interest rates (in tandem with the Fed), an easing of liquidity through direct injections in the money market and /or access to new central bank facilities, reductions in reserve requirements and relaxation of prudential loan-to-deposit ratios. Kuwait, Saudi, the UAE and other countries in the wider Arab world introduced deposit guarantees which helped stem capital outflows. In the aftermath, the GFC did lead to a strengthening of the regulatory framework and oversight in the GCC countries through the implementation of Basel III requirements, which improved risk management and operational efficiency, and the establishment of credit information bureaus to enhance credit risk assessment and management. Room for improvement remains, corporate governance needs to be strengthened further along with greater disclosure and transparency. Strong corporate governance is core to mitigating the microeconomic, internal risks of banking and financial crises. Another Financial Crisis is Brewing The next financial crisis will likely be triggered as central banks starting with the Fed end QE and initiate QT. The large overhang of global debt, rising international interest rates along with QT, a contraction of liquidity and credit growth, increase the risk of a recession in 2019. These risks are being compounded by Trumpian trade wars, that can derail the recovery of growth of international commerce and severely dampen investment. The warning signs are there: trade volumes are declining along with dampened business confidence and delays in investment decisions. The expectation of a downturn and recession can trigger a global financial crisis in advance of the downturn. Three policy reforms can help prepare the GCC countries in advance of the next financial crisis.
  1. Build local currency financial markets. A major lesson from the GFC and from the Asian crisis, is the danger of over reliance on foreign currency bank financing for cyclical sectors like housing, real estate and long gestation infrastructure investment. Developing local currency financial markets which includes government debt to finance budget deficits, infrastructure and development projects along with housing finance/mortgage market will help the GCC.
  2. Establish a modern and credible legal and regulatory financial infrastructure: Enhance debt enforcement regimes by decriminalising bounced cheques and building the capacity of the courts; develop insolvency frameworks to support out-of-court settlement and corporate restructuring. Introduce laws to facilitate mergers & acquisitions, as well as securitisation to support the development of asset backed and mortgage backed securities and other structured debt instruments.
  3. Develop a counter-cyclical fiscal policy tool box for economic stabilization. This requires reforming budget laws to allow for deficit financing, along with the institution of fiscal rules for long-term fiscal sustainability.
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