August 2019 / ENTREPRENEUR.COM / 59THE NEW NORMAL | INVESTING IN THE UAE AND KSAWHILE THE INTRODUCTION OF VAT WAS A
LONG AWAITED AND EXPECTED MOVE, ITS
TIMING FURTHER HIT THE CONSUMER, AND
RETAILERS’ MARGINS. MORE THAN A YEAR ON,
VAT IS NOW PART OF EVERYDAY LIFE, AND ITS
FINANCING OF THE GOVERNMENT BUDGETS
SHOULD BENEFIT THE BROADER ECONOMY AT
SOME STAGE.SINCE 2017, WE HAVE SEEN THE OIL PRICE
TRENDING HIGHER, REACHING AN AVERAGE
OF $65 IN 2018, VERSUS AN AVERAGE OF $50
IN 2017. IT IS NOW FORECASTED TO BE STABLE
BETWEEN $55 AND $65 IN 2019 AND TO
AVERAGE $63.THE IMPLICATION FOR OPERATORS AND INVESTORS IS AS FOLLOWS: TO SURVIVE AND THRIVE,
CONSUMER-FACING BUSINESSES NEED TO BE MANAGED MUCH MORE PROFESSIONALLY AND TIGHTLY
THAN THEY WERE IN THE PAST.
THE SLOWDOWN
NO NEWS IS GOOD NEWS
The difficult years we saw since 2015 were
not induced by external factors, such as
was the case in the great financial crisis
of 2008. Indeed, these were the result
of mostly local and regional factors, in
addition to the oil prices fluctuations,
which are always the biggest drivers of
our regional economies. Just a look at the
events which had a negative effect on the
regional economies puts into perspective
how idiosyncratic this recent slowdown
has been:The fall in oil prices
It all started in the second half of 2014
when oil fell from a peak of US$115 per
barrel in June 2014, to under $35 at the
end of February 2016. It then stayed be-
tween $45 and $55 for a year. Since 2017,
we have seen the oil price trending higher,
reaching an average of $65 in 2018, versus
an average of $50 in 2017. It is now fore-
casted to be stable between $55 and $65
in 2019 and to average $63.The war in Syria and Iraq
The war in Syria started in 2011, and
reached its most extreme point in 2016,
with it now thought to be in its final
stages. Much like was the case with Iraq,
the economic impact of this war should
not be underestimated. Syria and Iraq
are substantial markets with 56 million
consumers. These consumers were rising,
and these countries have the potential to
be great markets for GCC exporters as well
as trading partners. The reconstruction
of Syria and Iraq opens great avenues for
companies across the region.Introduction of VAT
While this was a long awaited and
expected move, its timing further hit
the consumer, and retailers’ margins.
More than a year on, VAT is now part
of everyday life, and its financing of the
government budgets should benefit the
broader economy at some stage.The expat tax
In 2017, KSA introduced a series of
measures to further boost Saudization
by both reducing expatriate employment
and encouraging local employment.
These objectives are absolutely sound
in the long-term. However, the economy
has had to adjust to the new measures in
the short term. With regard to the “tax
on expatriates,” it has had a number of
negative implications:> The actual tax reduces the liquidity
available for spending by companies and
the expatriate employees
> Many expats and their employers are
not able to cope with the tax, hence
resulting in an exodus of expatriates
returning to their countries, and hence
reducing the pool of local consumers
> In certain cases, a solution has been for
the expat bread earner to stay in KSA,
while sending their taxed dependents
back home. This has the unintended
effect of reducing the number of
consumers in the country, while not
always creating new job openings for
Saudi nationals.While the above list may seem gloomy
and more could be added to it, its purpose
is to explain the slowdown that we have
seen in consumer related businesses. The
positive news, however, is that we do not
see any further bad news on the horizon.
Indeed, some of the reform measures
should be starting to bear positive fruits
on the economy, while the oil price is sta-
bilizing, and the global economy remains
broadly stable.THE FUNDAMENTALS ARE AS GOOD
AS EVER (AND ECONOMIC REFORM IS
STARTING TO BEAR ITS FRUITS)
When it comes to the positive fundamen-
tals of our region, these can be listed, in
short, as follows:
> Vast natural resources
> Strategic geographic location
> Young and growing populations
> Increasing levels of wealth
> First class infrastructure
None of these factors have gone away.
Together, they combine to making this
region a very attractive destination for
investment. To this list, we can now add:
accelerating economic reform. >>>