Boom economic conditions in the region are here to stay: is your business ready ?
The region is enjoying boom economic conditions not seen since the early 1990's, with double-digit growth rates for the Gulf countries and above 5 percent growth for the rest of the region.
The strong uptrend is likely to continue with average growth of 6 percent forecast for the coming three years. |
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All sectors are doing well especially banks, insurance companies, investment and brokerage firms, telecommunications and IT companies, construction and related manufacturing (e.g. steel, cement, aluminum, air conditioning and furniture), petrochemicals, fertilizers, pharmaceuticals, fast food, consumer durables, transportation, hotels and companies providing a wide range of professional services.
Managers of companies operating in the region have not been accustomed to running their businesses during boom economic conditions, which are likely to prevail. The thinking of senior management has until now been profoundly affected by such regional risk factors as instability in Iraq and the Palestinian territories and the sharp stop-and-go cycles of the past 25 years. During these periods, managers have learned to steer their businesses opportunistically, expanding only when needed and looking for cover at the first sign of trouble. Business plans have been based on annual budgets, and very few companies actually had a long-term strategy in place. Managing a business during times of uncertainty and slow growth necessitates being reactive, putting in place such policies as tight cost-control, expanding only when there is genuine market growth and remaining cautious about developing long term obligations.
Talking to CEOs of various companies in the region, I have found a high level of optimism toward the future. Many believe that strong economic growth conditions are sustainable at least for 2005-2006, with oil prices trading above $30 a barrel during this period. Most businesses had an excellent year in 2003, and intern results for the first nine months of this year suggest they are now doing even better. This is the time of the year when 2005 budgets are being prepared. Businesses have been digesting the strong growth indicators coming out of the region and should factor these into their next year's budgets and future investment plans.
Governments in general are following expansionary fiscal policies, and most of them are sufficiently liquid to maintain capital investment even if there is a substantial fall in oil prices from their current high level. However, domestic investors and consumers remain the key for future growth prospects. With a fast growing youthful population and per capita income on the rise, domestic demand for every thing from fast food to electronics and cars is surging. The demand for services such as private and public education at all levels, health care, telecom, IT, insurance, transportation, entertainment and tourism is also growing fast. Personal and corporate borrowing have been surging as well, boosting the demand for banking services.
The booming Arab stock markets, with the Shuaa Capital Arab Composite index up51.5 percent so far this year, is another major indicator of revived business confidence. Profits of the top 30 companies listed on the region's stock exchanges, accounting for more than 90 percent of market capitalization, rose by around 35 percent in the first three quarters of the year. Earnings could surge an additional 20 percent next year. The region's construction sectors, with their strong forward and backward linkages to the rest of the economy, have been racing ahead. Ample liquidity in the system is fueling a boom in the region's real estate sectors. Domestic interest rates while edging higher in line with dollar rates are unlikely to chock off the current uptrend.
All this will have profound implications on businesses and the way they need to be managed in such a high growth environment. The question that each CEO and president of company in the region should ask himself is the following: do I have the team, the financial resources, the strategic plan and the leadership needed to seize the opportunity?
During periods of strong economic growth, competition for qualified staff will be intense. Now is the time to build a strong team with a sense of belonging to the company. The key to succeed is to design compensation schemes that reward good performance (bonus, profit sharing, stock options etc.), and to delegate authorities to give senior employees the opportunity to deliver and excel. In tight market conditions for qualified and experienced staff, as it is the case in most Arab countries, it is not always possible to recruit all the personnel that a company needs. The best alternative is to take risk on competent employees and use more of the profits being generated to pay for their training. If the company avoided spending money on marketing and advertising in the past, then it is time to reconsider that. The competition, both existing and new entrants lured by the promise of strong growth will snatch your market share if you remain hesitant.
Restructuring and capital injection might be needed to facilitate growth and expansion of the business. If you want to avoid moving to new premises every few years, you better make sure you have enough space to accommodate up to twice your present staff in the next five years. But above all, senior management needs to change both its outlook and approach. Managing in a low growth environment is different than when economic growth conditions are surging and expected to be sustainable. Instead of being opportunistic and reactive, management needs to be forward looking and proactive. Hiring of staff and the firm's expansion plans should be based on long term considerations. Each company should have its strategic plan in place, with annual budgets constituting an inherent part of it.
Business people today are in a better position to assess the risk/return profile of the Middle East, putting more emphasis on the region's growth potential and less on regional risks. While the economies of the region will remain sensitive to adverse developments and uncertainties in the short term, nevertheless the economies of the Gulf and the region as a whole are much more resilient when assessed on a medium to long term perspective, given the current outlook for the world oil market. One should not dismiss the possibility of further chaos some where in the region, but it would be a mistake to delay investment plans based on the present risk profile.
To conclude, we at Jordinvest are positioning ourselves to benefit from further growth in demand for investment banking services in the domestic and regional markets. We think other companies in the region should press ahead with expansion plans in anticipation of further growth in their respective marketplace.
Henry T. Azzam is chief executive officer at Jordinvest in Amman
Beirut
29-11-2004
Henri T. Azzam
The Daily Star
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