The Global Recession

Years ago people who sacrificed their sleep, family, food, laughter and other joys of life were called ‘Soldiers’ but today they are called ‘Shareholders’. Shareholders across the globe are in peril including Prince Walid Bin Talal, who had, at one stage lost about 5 billion dollars. The Foreign Institutional Investors (FIIs) withdrew 11 billion dollars from the Indian stock market during the crisis and left the stock market reeling.

The global financial crisis is sucking countries into a world of deep recession. The effects seem to be, actually, beyond the imagination of political leaders of major economies. There are conflicting statements from economists on how long the crisis is expected to last or if we have reached the end of the tunnel; most analysts and economists are noncommittal. Governments are taking some serious, unseen actions but we need to wait and watch for the outcome.

THE CAUSE
In general, analysts have started talking about recession since the sub-prime crisis hit the US markets; created out of NINJA loans; loans to borrowers with No Income, No Job and No Assets. This crisis was not a result of ignorance of financial experts, rather it originated in highly professional enterprises, served by knowledgeable and competent boards, complemented by a talent pool drawn from the best business schools and supported by the latest risk management models, systems and tools. Comparing this situation to that of Mohammed Yunus’ Gramin Bank in India; the bank was set up in 1976 to lend micro credit to the impoverished without requiring collaterals. It currently has an outstanding loan portfolio of US $ 313 billion with a loan recovery ratio of 98%.
The main difference between sub-prime loans and the Gramin Bank micro credit is that the latter is based on ‘no greed’, high standards of governance and higher degree of accountability. The deadly combination of financial engineering, innovative and complex financial products, colluding rating agencies, lack of governance principles and accountability and above all ‘greed’ at all levels, has triggered the current global recession; the first time from the financial services sector.

THE EFFECT
In general, the entire world has been affected – the severity and impact depends on how vulnerable and exposed the respective economies have been with the US economy. Among the GCC countries UAE, Kuwait and Saudi Arabia are the most affected, whereas Oman & Bahrain have shown some sluggishness and Qatar has still not shown any symptoms of a recession. The key contributor to the slow-down in the GCC economies is the fall in oil & gas prices. The UAE has been additionally affected due to the crash of the real estate market, on which the economy was riding and there was significant inflow of foreign funds which was ballooning the market. The crash resulted in a severe liquidity crunch in the banking channels and private investors started withdrawing their stakes.

Banks have cut back their lending to individuals and businesses, a result of lack of confidence on their own assets built over the last 2 – 3 years. This reaction has cascaded into the business environment, creating an atmosphere of panic and mistrust. The Government has reacted with some corrective measures; pumping liquidity into the banking system, establishing a task force to review the situation periodically and introducing enduser friendly payment plans in the real estate sector.

Having mentioned the obvious effects of the global financial crisis on the UAE economy, it is important to mention that traditional trading and service entities with sound and well established business models have been affected a great deal lesser than the real estate and associated construction industries. It is true that the drop in business tourism has affected the hospitality industry in the last six months, however, overall the recovery of the tourism and hospitality industry can be much faster than the real estate industry. Continued focus on infrastructure development in the UAE has kept the construction sector still alive and the recession has also contributed in reducing the cost of such mega – infrastructure projects.

SMEs AND THE CRISIS…
Large corporate houses in the UAE are badly hit by the melt down; the key sectors which are affected are the real estate, construction and its value chain sectors, tourism and hospitality. On the other hand, SMEs in the UAE, whose traditional areas were in trading and other core activities which were the key focus areas for the UAE till the real estate boom occurred, are much better placed. The slowdown in international trade will definitely affect the SME trading companies in the UAE and previously envisaged turnover targets may be tough for most. However, business sustenance is not likely to be a major cause of concern, since overheads in these entities are well controlled. The continuity, however, will depend on support from banking institutions by continuing to fund these sound business model entities through this financial crisis.


DO’S & DON’TS
Having looked at the global causes and the local effects of the economic recession let us summarize a few Do’s and Don’ts which can help weather the recession in the UAE, especially for SMEs.
Recession brings opportunities too. Recession also sows seeds of entrepreneurship all around. Investments which are normally out of bounds during a boom are more easily available at attractive valuations. Making a bold decision to acquire sound investments during a recessionary period will give good returns; look at long term sustainable returns when evaluating such options. It is the most opportune time for people with ‘cash in hand’. The flow of cash from such individuals to others will trigger the recovery process. A cascading effect from such transactions both among individuals, corporate and bankers will aid the recovery process to percolate across industries and suddenly, we see an atmosphere of panic and mistrust changing to that of optimism and trust and we enter the next cycle of growth and economic boom.

CA. Raju Menon
Chairman & Group Managing Partner