Flip through the latest issue of Gulf Weekly.
The GCC countries, which have an oil bounty of $300 billion (BD116 billion) and $1.2 trillion of assets parked with sovereign wealth funds (SWFs) and central banks, seem relatively well-positioned to manage the downturn.
In fact, this global recession could be an opportunity for GCC countries to carve out an even greater role in the world economy.
To achieve this the countries need to focus their local investments, leveraging some of their reserves to drive local economies and pursuing selective acquisitions to strengthen and drive the creation of economic regional leaders and global challengers, says the Boston Consulting Group (BCG) in its latest global report 'Collateral Damage: Preparing for a Tough Year Ahead: The Outlook, the Crisis in Perspective, and Lessons from the Early Movers'.
The current global financial crisis also offers potential opportunities for growth to GCC companies that respond early and decisively.
Many of the fundamental drivers in the region continue to be strong. The last three years' oil revenue inflows will provide a comfortable cushion for GCC economies.
The main GCC economies are only lightly leveraged and the reserves held at SWFs and central banks provide the necessary back-up if and when needed. The fact that GCC economies are government-driven is a critical stabilising factor in downturns and turbulent times, the reports says.
The governments of the Gulf need to redefine the strategic objectives of their sovereign wealth funds, and realign the reserves with the objectives of the local economies.
"There is no need to create more capacity (in some real estate and some service sectors); rather there is a need to focus on the competitive advantage as well as innovation and some natural areas for investment such as logistics and knowledge industries. There are a good set of leaders here that will be able to focus on helping companies make this diversification into new (non-oil) sectors successfully, and then entrepreneurs will follow suit."
Governments had to distinguish between those investments which only bring unnecessary capacity to the market (and which are vulnerable to global recession), and those that are not so correlated to global growth, such as technology, and knowledge industry-enhancing investments such as research, education and ICT.
Despite limited sub-prime exposure, with banks in the Gulf region only exposed to one per cent of the worldwide reported losses, GCC banking shares are diving. Short-term measures, such as more stringent loan conditions, are of course important, but BCG experts think that banks need to question if the current market structure - with relatively small fragmented players and high branch density - is sustainable. The UAE market is the most fragmented in the GCC.
Successful international expansion has always been built on robust local platforms. In the short-run, banks are first required to double-check their local credit portfolios and funding scenarios. In addition, they have to find feasible ways to increase customer stickiness and move toward more relationship banking. Even more importantly, they shall not repeat mistakes made by banks in other markets, such as across-the-board cost cutting, pretending, that last year's expenses were of no value, the report says.
Real estate is another sector of focus for BCG. With many investors deeming the impact of the global property crisis on the GCC as a 'perfect storm', BCG predicts a transformation of the real estate industry in the region.
The current crisis will spark an innovation of business models. Developers will increasingly develop and hold assets for longer-term investment. In the short-term the real estate industry needs to focus on mitigating risks, improving operations and managing cash flows. A correction - a normal correction - was long overdue.
The major players in GCC real estate have been in a position of financial strength, relative to the global norms, and they are still only slightly reliant on debt financing, to the tune of 10 per cent or 15 per cent of debt in their balance sheet.
Then why did the stock prices of real estate firms plummet?
This is because of a fear of the loss of the primary customer, as the market shifts more to end users. There is a fear that financing costs might increase significantly in the future, and this is especially significant to the Gulf, where customers had to make only a small down payment to secure a mortgage. This increases the customer risk, and especially for projects still in development, the report says.
However, in the long run that the new regulations such as the strata law and more transparency and protection for home buyers will help future growth.
Referring to the oil and gas sector, the report says there are several opportunities for GCC oil and gas companies to take advantage of during the downturn. Essential is to strike the right balance between protecting the existing business and managing for the long term.
Also there is a need for energy firms to look at managing production volumes and delay E&P (exploration and production) growth so as to minimise excess capacity. There is a need to quickly renegotiate E&P contracts to take advantage of the lower costs, and this can be done across all regions and all aspects of the value chain.
