Trade & Export Middle East - May 2013 by Trade Export

ISSUE 17 | may 2013

BUSINESS INTELLIGENCE FOR INTERNATIONAL TRADE

How to

Read about how innovation can help SME exporters beat the competition

Finance

Get to know about working capital management

PUBLICATION LICENSED BY IMPZ

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CountRy focus

Trade and invest with the largest economy in the world â&#x20AC;&#x201C; USA trade

We bring you the highlights from the ICC World Trade Agenda Summit

EDITOR’S LETTER

Publisher Dominic De Sousa

Where does the road lead?

Chief Operating Officer Nadeem Hood Managing Director Richard Judd richard.judd@cpimediagroup.com +971 4 440 9126 EDITORIAL Senior Editor Aparna Shivpuri Arya aparna.arya@cpimediagroup.com +971 4 440 9133 Contributing Editors Tamara Pupic tamara.pupic@cpimediagroup.com +971 4 440 9130

Last month I got the opportunity to attend the ICC World Trade Agenda Summit, which was held on the first day of the 8th World Chambers Congress in Doha. It was an ironic experience – to be in Doha twelve years after the Doha Round of trade negotiations was initiated and to be discussing the same issues and trying to find a common ground. What got me wondering is that if moving forward on issues of trade facilitation and trade in services would generate millions in revenue and jobs then why have countries been reluctant?

PRODUCTION AND DESIGN

If it is this logical and simple then why after 12 years we are still trying to justify it all and struggling to save the multilateral trading system. However, it was absolutely refreshing to listen to the international trade experts talk about how this is impacting businesses in the real world and linking the issues of trade facilitation, subsidies, and services with everyday trade.

Production Manager James P Tharian james.tharian@cpimediagroup.com +971 4 440 9146

Well, since I have studied international trade, I can go on and on about it- but I suggest you rather turn to page 16 and read all about being between hope and reality!

Jenny Kassis jenny.kassis@cpimediagroup.com +971 4 440 9116

Database and Circulation Manager Rajeesh M rajeesh.nair@cpimediagroup.com +971 4 440 9147 Head of Design Fahed Sabbagh fahed.sabbagh@cpimediagroup.com +971 4 440 9107 Designer Froilan A. Cosgafa IV froilan.cosgafa@cpimediagroup.com +971 4 440 9107 Photographer Jay Colina Abdul Kader Pattambi

Moving on, in our country focus section, we highlight the bilateral trade relations between the US and the UAE and what rules Middle Eastern businesses need to keep in mind while investing in the largest economy in the world. And of course, as always, we have some very interesting and informative features to help you trade – so turn to page 40 to read how the USD, Euro and GBP will fare in the month of May- this will definitely help you plan your transactions better. So as we welcome the summer, sit back and enjoy our May issue and don’t forget to get in touch with us.

DIGITAL SERVICES www.tradeandexportme.com

Till then, Digital Services Manager Tristan Troy Maagma Web Developer Abey Mascreen online@cpidubai.com +971 4 440 9100 Published by

Aparna Shivpuri Arya, Senior Editor, Trade and Export Middle East Registered at IMPZ PO Box 13700, Dubai, UAE Tel: +971 4 440 9100 Fax: +971 4 447 2409

Talk to us: E-mail: aparna.arya@cpimediagroup.com

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MAY 2013

10 20

20 4

trade talk

MAY 2013

updates

ISSUE 17

News: International and regional news which can impact your trade.

EVENTS CALENDAR: A snapshot of exhibitions and conferences around the region, which can help you spend less time planning and more time attending.

ABOUT TOWN: We bring you coverage from the events that took place in the month of April.

EXPERT OPINION: In his column, Raed Safadi, Deputy Director of the Trade and Agriculture Directorate, OECD, discusses pressing trade issues with us, every month.

FINANCE:

WORKING CAPITAL MANAGEMENT: The importance of working capital management in todayâ&#x20AC;&#x2122;s business world cannot be over emphasised as companies operate in an ever more competitive environment. Ezhil Venugopal, Senior Trade Sales Manager,Abu Dhabi Commercial Bank, gives an indepth explanation on this issue.

INFLATION: Given how tough 2012 was for most economies, 2013 brings forth a ray of hope. Euromonitor highlights the overall outlook for all economies when it comes to inflation and then gets into the details for the Middle East and Africa region.

HOW TO: INNOVATION: Dr. Ashraf Mahate, Head of Market Intelligence, Dubai Exports, explains to us how innovation can be the key to success for exporters.

trade talk

CONTENTS

focus

COUNTRY FOCUS: USA INTERVIEW: With bilateral trade touching USD 22.57 billion in 2012, bilateral trade and investment relations between the US and the UAE have been going from strength to strength. Danny Sebright, President, USUAE Business Council, speaks to Aparna Shivpuri Arya about this and much more.

SECTOR WATCH: A new study commissioned by the US-UAE Business Council found that the US-UAE commercial aviation relationship is the worldâ&#x20AC;&#x2122;s fastest growing at 1,500 percent over the past decade. In this article, the organisation gives us the details about this sectoral relationship and what are the prospects for trade and investment.

INVESTMENT: Direct investment in the United States from the Middle East is generally unproblematic even by state-owned companies or by sovereign wealth funds, but nevertheless requires careful consideration of U.S. national security controls. Guillermo Christensen and Gregory J. Golden from Baker Botts LLP, talk to us about this issue.

INTERNATIONAL TRADE ISSUES ECUADOR: Ecuador is among the countries with the best economic performance in Latin America with inflation lower than the Latin American average. Hussam Hassan, Head of Commercial Office, Pro Ecuador, tells us what makes this country special.

COMMODITIES: Global commodities markets continue to grow in size and offer potentially rewarding opportunities. However, investors should consider under what circumstances commodity prices are likely to outperform other investments. John Butler, CIO, Amphora, believes such a set of circumstances could develop during 2013.

CURRENCY: Western Union Business Solutions gives us their forecast on how major currencies will fare in the month of May. Read this to know how that could affect your foreign exchange.

COMMERCIAL PRESENCE: Carl Dowling and Wayne Merrick, from The Links Group of Companies, explain to us how it is important to ensure that your business has the correct commercial presence in the UAE and Qatar.

MAY 2013

Updates global watch

Mexico to improve trade with Indonesia In an effort to boost bilateral trade and investment, Mexico is intending to build an economic partnership agreement (EPA) with Indonesia. Improving trade with Indonesia is in line with Mexico’s renewed focus on fast-growing Asia. This move is relevant because Mexico, along with other members of La Alianza del Pací�fico or the Pacific Alliance trade bloc such as Chile, Colombia and Peru, also plans to synergise with the Association of Southeast Asian Nations (ASEAN).

$65 BILLION Green investments in China in 2012

Global merchandise exports stagnated in 2012

Global merchandise exports in 2012 grew by only 0.2% in value, after having expanded significantly in 2010 and 2011, UNCTAD statistics indicate. Among developing countries, merchandise exports climbed by 3.6%, the organisation reported, but much of that improvement was confined to petroleum- and gas-

MAY 2013

exporting nations. Countries that are primary exporters of commodities other than fuels saw exports drop by 2.54%. Developed nations registered a 2.75% drop in merchandise exports. The total value of merchandise exports in 2012 was USD 18.325 trillion, as compared to USD 18.292 trillion in 2011, UNCTAD stat reported. Developing economies continued a trend in which their share of world trade has improved year by year. At the end of 2012, these economies accounted for 44.4% of the global export market. By contrast, in 2005 their share stood at 36.2%.

Qatargas delivers first ever cargo of LNG to Singapore Qatargas has delivered its first ever cargo of liquefied natural gas (LNG) to Singapore. The cargo was delivered on board the Q-Max LNG carrier “UMM SLAL” to Singapore LNG Corporation Pte Ltd’s (SLNG) first LNG receiving terminal at Jurong Island.

Germany will rely on India’s “intent and assurance” to economic reform Germany, India’s largest trade partner in the European Union, will push for a successful conclusion to the India-EU talks on a free trade pact in Brussels, without insisting on higher FDI in insurance coming into effect, a development that could lead to a breakthrough in the talks that have been on since 2007. Instead, the Eurozone’s dominant economy will rely on the Indian government’s “intent and assurance” with regard to the reforms process. Further, New Delhi has agreed to reduce import duties on cars in a phased manner over the next few years to as low as 5%, thus meeting a key demand of the European Union, which has insisted on lower tariffs on cars and wine.

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Updates REGIONAL TALK

Promoting China!

China Sourcing Fair is set to facilitate its seventh year of successful and productive sourcing platform for global buyers and suppliers at the Dubai World Trade Centre in Dubai from May 28-30, 2013. Throughout the MENA region, traders, buyers, distributors and purchasing teams from large-scale, multinational retailers have been turning to manufacturers in China as the first stop in their product-buying process. When considering price and quality, China is the benchmark by which all other markets are compared. For the past few years, buyers in the MENA region have been participating in Dubai’s China Sourcing Fair as a way to meet with a large selection of China suppliers without having to travel to Asia to do it. Now in its seventh year, the Fair is the largest Chinaproducts exhibition in the Middle East. ONE OF ITS KIND Launched in Shanghai in 2005, the China Sourcing Fairs quickly caught on in other key markets around the world. Today they are some of the largest China-products events in the markets where they are organised, including Hong Kong, India, South Africa and certainly Dubai. Though organised in different parts of the world, the events have one focus: To provide buyers with direct, face-to-face access to a large

number of Greater China (China, Hong Kong, Taiwan) suppliers.

Dubai: The center of trade in MENA According to the organisers, Global Sources, Dubai was the logical city in which to organise the event five years ago. Dubai follows only Hong Kwong and Singapore to be the worlds third-largest re-export market. “For this side of the earth, much of the region’s international trade goes through Dubai,” says Bill Janeri, General Manager at Global Sources. “So to meet our objective of organising the show closer to where buyers in MENA are or want to be, Dubai was the logical choice. It is centrally located, has a strong multicultural business community, and has an international-trade focus.” Many markets in the region are already importing a significant amount of products from China. But in more developing markets here, this trade with China is really just taking off. “As an economy stabilises and expands so does its middle class. A growing middle class brings more disposable income and growing demand for consumer products – like mobile phones, large-screen TVs, and nice items for the house,” says Janeri. “For nearly 10 years, we’ve been exporting to buyers in the MENA region, including Dubai, Doha and Oman,” says Shengyang Chen, General Manager at Zhejiang Ruiming Energy-saving Doors & Windows. International trade has never been easier With the emergence of the Internet over the past 15 years, trade around the globe has never been easier. Trade shows, however, still play a critical role in the product-sourcing and supplier-evaluation process. For the past 42 years, Global Sources has built its business on bringing together the

MAY 2013

world’s buyers with Asian manufacturers. “Email and the Internet have certainly made trade easier and faster,” says Janeri. “However, when you’re investing thousands, hundreds of thousands or even millions of USD with a supplier, ultimately you want to sit across the table from them and look them in the eye. By bringing these suppliers to the buyer, the China Sourcing Fairs make that part of the process so much easier than it has even been in the past,” added Janeri. The brands behind the brands China produces a dominant share of many of the world’s consumer products. Over the past 20 years, the quality of those products has improved exponentially. Today, many of China’s exporters operate at ISO standards and have various international productsafety certifications. “It is no longer the case of ‘Can China produce it?’ – China already produces it. The question today is about what level of quality the buyer wants. And what quality level that buyer’s customers are demanding or are willing to accept,” says Janeri. “We’ve been exporting around the world for more than 22 years, but we’ve only just recently started to focus on the MENA market,” says Guanqun Wu, Sales Manager at FuJian Quanzhou Peak Sports Products, which produces for multinational brands, including PEAK sports apparel.

Community events calendar

Save the date!

We know that you are a busy trader with a demanding events diary. Therefore, we are providing you with a snapshot of exhibitions and conferences in the region and around the world, so you spend less time planning and more time attending. Date

Event

Location

1-3

Dubai International Property and Investment Exhibition & Conference

Dubai International Convention & Exhibition Centre

4-10

IIHE - IDEAL HOME EXHIBITION

Dammam- Dhahran International Exhibition Centre

5-7

Gulf Bid

Bahrain International Exhibition & Convention Centre (BIECC)

5-7

Kuwait Environment, Water & Energy Exhibition

Kuwait International Fairs Ground

6-8

Airport Show

Dubai International Exhibition Centre

6-8

ITE Qatar 2013

Qatar National Convention Centre

6-9

ATM- Arabian Travel Market

Dubai World Trade Centre

6-9

Project Qatar

Doha Exhibition Centre

6-9

Qatar Stonetech

Doha Exhibition Centre

6-9

HeavyMax

Doha Exhibition Centre

6-9

Makinat Qatar

Doha Exhibition Centre

6-9

Energy Qatar

Doha Exhibition Centre

8-9

Arabian Social Media Conference and Exhibition

Kuwait Radisson Blu Hotel

8-9

Kuwait Info Security Conference and Exhibition

Kuwait Radisson Blu Hotel

13-15

Kuwait World Travel Expo

Kuwait Inernational Fairs Ground

14-16

QITCOM Conference and Exhibition

Qatar National Convention Centre

14 -15

Prepaid Cards Middle East

Abu Dhabi National Exhibition Centre

14-15

The Mobile Show

Dubai International Convention & Exhibition Centre

14-15

Near Field Communications World Middle East

Dubai International Convention & Exhibition Centre

14-15

The Middle East Event Show

Dubai International Convention & Exhibition Centre

19-21

Petrochem Arabia

Dammam- Dhahran International Exhibition Centre

19-21

WE, Power

Dammam- Dhahran International Exhibition Centre

19-21

Izdehar SME

Jeddah Hilton Hotel

19-22

Saudi Food, Hotel and Hospitality Arabia

Jeddah International Exhibition & Convention Centre

19-22

Metal and Steel Saudi Arabia

Riyadh International Exhibition Centre

20-23

Index Dubai

Dubai World Trade Centre

20 -23

The Office Exhibition

Dubai World Trade Centre

21- 23

PALME

Dubai International Exhibition Centre

22-23

Kuwait Quality Summit

Kuwait Radisson Blu Hotel

26-29

Makinat Saudi Arabia

Riyadh International Exhibition Centre

26-29

Saudi Elenex

Riyadh International Exhibition Centre

26-29

Saudi Energy

Riyadh International Exhibition Centre

26-29

Saudi Luminex

Riyadh International Exhibition Centre

26-29

Saudi Water Technology

Riyadh International Exhibition Centre

Kuwait Industries Exhibition

Kuwait International Fairs Ground

27-29

Cityscape Qatar

Doha Exhibition Centre

E-Crime Dubai

Dubai

PCI Dubai

Al Murooj Rotana Hotel

28-30

Electronics Fair Dubai

Dubai International Exhibition Centre

28-30

China Sourcing Fair: Gifts and Premiums

Dubai International Exhibition Centre

MAY 2013

Get in touch! Would you like to list your event here? Or better still, list your detailed event profile? If yes, then please contact: aparna.arya@cpimediagroup.com

May

ABOUT TOWN

Watch where you invest! The second edition of the “Bloomberg Doha Conference”, hosted by Bloomberg Link in association with the Qatar Financial Centre Authority, was held on 8th and 9th April 2013 at the St. Regis Hotel in Doha. Read all about the discussions at the conference.

he main goal of the two-day conference was to examine the biggest challenges faced by asset managers within the process of globalisation. The event brought together over 300 CEOs, asset managers, investors and prominent regional decision makers to discuss the region’s fast-growing infrastructure and rising influence in investments around the world. Nearly 16 panel discussions and one-on-one interviews covered real estate development and investment activities, development of the post revolution economies of Libya, Tunisia and Egypt, the growing appetite for Islamic finance in Asia and the Middle East, the emergence of women in prominent positions and the new private wealth client. On 8th April 2013, the conference was opened by Abdulrahman Al Shaibi, Board Member and Managing Director, Qatar Financial Centre (QFC), who addressed the participants on behalf of H.E. Yousef Hussain Kamal, Minister of Economy and Finance for the State of Qatar. He stated,”Economically, Qatar is one of the world’s fastest growing economies. Growth averaged 13%

MAY 2013

a year between 2008 and 2012. Our performance translates into Qatar having one of the world’s highest per capita incomes, highest proportions of high net worth individuals and highest percentages of millionaire households. Moreover, the country’s standard of living has risen to a level comparable to the leading industrial nations. Among the main international credit rating agencies, Standard & Poor’s has given the country a stable sovereign rating of AA+ and Moody’s has given it a stable sovereign rating of AA2. Both ratings are among the best in the world.” He further added that Qatar is also seeking to raise its credit rating by two levels to AAA, which their economic and financial strength justifies. The World Economic Forum Global Competitiveness Report 2012-2013 ranked Qatar as the world’s 11th most business-friendly country, which is the highest ranking in the Middle East and three places up from last year. In the most recent Doing Business Index 2013, published by the World Bank, Qatar was ranked 40th in the world. The same report also ranked Qatar as the second most tax-friendly country in the world.”

Speaking about Qatar’s investment goals, Mr. Al Shaibi explained that Qatar is becoming a source of investment opportunities, which are supported by its strategic location between the mature markets of the West and the emerging economies of Asia and Africa. In line with that, he pointed out that Qatar intends to exploit this considerable potential while asset management is vital to the future development of Qatar’s economy and financial markets. Following up on this, Shashank Srivastava CEO and Board Member, QFC Authority, stated, “The role of the QFC Authority, the strategic and commercial arm of the QFC, is to help make the choice of a financial centre easier for asset managers.” Speaking about the asset management industry, he said, “The recent MENA Asset Management Survey 2012 from the National Bank of Abu Dhabi, of which the QFC Authority was a sponsor, noted that the number of asset managers in the MENA region had grown fourfold.”

Invest wisely! Later during the first day of the conference, the QFC Authority published the first edition of its MENA Asset Management Barometer, which is based on 45 indepth telephone interviews with senior personnel at banks, fund management firms, sovereign wealth funds and pension funds across eight MENA countries (the GCC region, Egypt and Morocco). The barometer provides a regional overview and a detailed country-by-country breakdown of views on the different asset classes and market participants. Key findings from QFC Authority’s MENA Asset Management Barometer include: • 70% of managers are confident about the continued growth of the MENA financial markets • 38% believe political unrest to be the largest negative impact on local markets • 80% believe the increased spending of governments is the largest positive impact on local markets • 42% believe equities will be the best performing asset class of 2013

Abdulrahman Ahmad Al-Shaibi, Managing Director and Board Member QFC Authority

• 77% believe the largest operational expense will come from regulation and compliance

During the “MENA Asset Management Barometer” press briefing, Yousuf Mohamed Al-Jaida, Chief Strategic Development Officer, QFC Authority, said that the stock and real estate markets in Qatar received a lot of investments which increased the 2012 prices to the precrisis levels. The reason for this recovery is in the fact that the majority of Qatari wealth has been invested in the country. Speaking about Sharia compliant finance, Yousuf explained that, in spite of the investors’ increased appetite for Sharia products, the regulatory framework is not as much in favour of Islamic finance as it is for conventional banks. However, there is a positive sign with the recent QCA regulation which envisages that the commercial banks will no longer be allowed to offer Islamic finance products. This solution will provide for the growth of Islamic financial institutions. In his opinion undergoing discussions for establishment of MENA Islamic bank will further facilitate a major move towards these products.

Interesting points were raised during the session, “Post Revolution Economies: Libya, Egypt and Tunisia” which addressed the possibilities for economic reforms under the new leaderships in these countries. Hashem Montasser, Chief Executive and CIO, Aventicum Capital Management (Qatar), expressed concern that all fundamental economic indicators in these countries are worrisome. He added that the solution is not just in obtaining adequate help from the International Monetary Fund (IMF), but in the political will to identify and implement economic drivers which will lead to further growth. In order to increase investors’ confidence, these countries should ensure political stability and visibility of their future economic paths. He further added that regional transitional governments have a narrow political mandate which does not enable them to establish longterm strategies. Following up on that, Tarek M. Yousef, CEO, Silatech, stated that the IMF didn’t take conditions for change in these countries seriously enough and, thus, failed to support long-term reform. In his opinion, the IMF and other international institutions should avoid imposing additional pressure on these MAy 2013

ABOUT TOWN

countries. Furthermore, he stated that the rich Arab countries, with an exception of Qatar, will need to do more in helping these transitional economies. Speaking about unemployment issues affecting the youth in the region, Tarek clarified that youth unemployment is exactly the reason why the Arab spring happened in the first place. Therefore, Mr. Yousef suggested that political stability and economic and legal reforms will consequently open more

rights for those interested in building.” The discussion further pointed out that the real estate sector has several hidden risks since most of the investors base their decisions only on the current data. Consequently, they are willing to invest only when the market is reaching it peaks. Karim El Solh, Co-Founder and CEO, Gulf Capital, briefly described their experience in the regional real estate market, “We scan each of the regional markets to determine

Currently, the prices of raw materials in Doha are the highest in the region. Going further, we assume that extensive infrastructure spending will increase prices even more. Therefore, development of the new port is crucial for control of prices. employment opportunities for the regional youth. During the special session dedicated to Mohammed Al-Shroogi, President, Gulf Business, Investcorp, he shared some valuable advice on investing with the participants, “We scan 30 to 40 companies to find the best one. Once we decide which one will be our final choice, we screen all details of its business properly. The reason is that you are buying or investing in your future and, therefore, need to do due diligence to determine whether that company will bring proper ROI. In line with that, please note that we conclude only three to four deals a year since a lot of research is done for each of them.” Real eState of our future The next panel “Real Estate from Dubai to Baghdad”, addressed the growth of the regional real estate markets, about which Nicholas Maclean, Managing Director, Middle East Region, CBRE, said, “The arrival of investors from the US, Europe and South East Asia to the region has increased the demand within the commercial real estate sector for 30%. However, they face difficulties due to the lack of landing 12

MAY 2013

where are the niche opportunities which should provide for the highest return on investment (ROI). For example, in Abu Dhabi it is in the retail sector. The main feature of the region is that investors require higher returns to enter the deal since they fear of political instability. For that reason, we need to ensure 15% to 20% of ROI in order to attract global investors.” Regarding the real estate sector in Qatar, the panelists expressed concern that preparations for the FIFA World Cup 2022 will absorb a lot of resources and might put Qatar’s real estate market at risk if the country doesn’t find another driver for the economy after this event. Similar opinions were exchanged during the “Qatar 2022 World Cup Infrastructure” panel since Eng. Nabeel Mohammed A R Al Buenain, Project Executive Director, New Doha Port Project, pointed out, “The New Doha Port Project has various components which are important not only for FIFA World Cup 2022, but also for realisation of the goals of Qatar National Vision 2030. However, we don’t want to see the development of the FIFA World Cup 2022 related projects without development of the involved Qatari businesses.”

The New Doha Port will enable linkage between regional ports and increase confidence among regional countries that their ports will be able to utilise transshipments. He further supported this expectation by conveying that meetings of heads of regional ports are being held regularly, “We help and complement each other through our ports. We meet on a regular basis to ensure that our ports are built in a manner which will ensure future cooperation. Therefore, I have already modified some aspects of our project in order to comply with our future business cooperation plans.” He concluded by saying that all the projects’ contractors have already committed to operate through the port since 2016. Stressing the importance of the New Doha Port, Dr. Tarek Coury, Chief Economist, Tanween, said, “Economic growth in Qatar will be driven by the nonhydrocarbon sector which is still heavily reliant on retained earnings from the oil and gas sector. So, the main question is how to develop economic diversification which is not reliant on the oil and gas sector? I believe that the infrastructure and transportation developments envisaged through the New Doha Port project, will bring more income from sources other than oil and gas.” Dr. Coury also pointed out that the vast investments in the infrastructure carry the risk of price escalation in Qatar. In more details, he said, “Currently, the prices of raw materials in Doha are the highest in the region. Going further, we assume that extensive infrastructure spending will increase prices even more. Therefore, development of the new port is crucial for control of prices. Basically, the port will provide for the opportunity to consolidate warehouse and logistic services and, thus, prevent price escalation.” The conference assured us that the regional asset managers have every reason to be confident about their future projects. Furthermore, the discussions confirmed their positive contribution to Qatar’s economy and financial markets.

ABOUT TOWN

Be safe! Coface Emirates Services, in partnership with UAE Insurer National General Insurance (NGI) hosted its annual MENA Country Risk Conference at Atlantis, The Palm in Dubai. The conference was an opportunity for members of the business and financial community to meet with experts in these sectors, and to get their opinion on the latest trends in the regional economy.

t this occasion, Coface confirmed the stability of GCC countries’ economies, while many European countries continue to face a worsening economic situation, following the example of Spain and Italy, both downgraded to B last January. UAE maintained its A3 country risk assessment, while Saudi Arabia and Qatar were also stable at A4 and A2 respectively. Julien Marcilly, Senior Economist at Coface, said, “Growth will remain robust in the GCC countries this year. In addition, they will continue to benefit from strong fiscal and current account surpluses in the short-term. However there is a growing sovereign risk in some oil importer countries of the MENA region”. Elaborating further on the macroeconomic outlook in the UAE and the region, Khatija Haque, Senior Economist, Emirates NBD said, that tourism and 14

MAY 2013

hospitality have been the major drivers of growth in the UAE. According to Khatija, even though hotels and restaurants contribute only 4% to UAE’s GDP, the trend is positive. Also, there has been a 40% year on year increase on tourists from the region, especially KSA. Talking about the construction sector she said that government spending on this sector in the UAE has been considerable less than the GCC, as the government has been cautious about the new projects plus wants to clear the debts as well. Moving on to trade, Khatija remarked that even though they expected UAE’s trade to shrink because of the global economic crisis, but it has expanded because of the increase in the intra-GCC trade. It was close to 40% in 2012. “The fastest growth in bilateral trade has been between the UAE and Oman,” she remarked.

Elaborating on this, she said that UAE has not been impacted by the Eurozone crisis partly because Europe contributes only 12% to UAE’s trade unlike Qatar which is the most exposed in the region, because of it’s oil and gas imports. According to Gregory Le Henand, Country Manager of Coface Emirates Services, “The UAE has become the hub of the Middle East and Africa Region, with over 65% of Fortune 500 companies establishing their regional HQ in the country. In 2012, over 70% of the UAE GDP has been exported to the Middle East, Africa and Asia region through Emirati companies, it is therefore crucial for the development of the economy to support this effort through the trade instrument that constitutes Trade Credit Insurance”. The conference provided a very interesting overview of how the region is doing and what does the future hold for the UAE.

ABOUT TOWN

Between hope and reality! The ICC World Trade Agenda Summit was held on 22nd April, which was the first day of the World Chambers Congress in Qatar. It provided a very dynamic platform for discussions and deliberations on how to move the Doha Development Agenda forward. Trade and Export Middle East brings to you some snippets of the interesting discussions.

ith the theme of “Beyond Doha” the ICC World Trade Summit Agenda brought together business leaders, government officials and trade experts to deliberate on what steps need to be taken to revive the Doha round. Held on the first day of the 8th World Chambers Congress, the first ever congress to be held in the Middle East, the Summit was an opportunity for the delegates to give their stamp of approval to a final set of business priorities that would provide a debt-free stimulus to the global economy. The Summit was opened by His Excellency, Ahmad Bin Abdullah Al Mahmoud, Deputy Prime Minister, Qatar, who said that constructive dialogue between all parities is needed in a way that we put the interest of all before the interests of the individual. He also emphasised on 16

MAY 2013

the importance of the private sector and its involvement since it is this sector that has the knowledge to indentify key investment opportunities. He further added that the Doha Development Agenda was launched in 2001 with the aim to integrate the developing countries and LDCs into the global economy. However, the developed countries have stuck to their protectionist measures and as a result the developing countries and LDCs have also not reciprocated. Therefore, the aim of the initiative taken by the ICC is that countries should reach new goals for trade and investment and create a balanced economy. The sentiment was also echoed by Remy Rowhany, CEO, Qatar Chamber of Commerce, who said that peace and prosperity are the core objectives of

the ICC and one way of achieving that is through trade. “This is why the QCCI along with the ICC has come up with the World Trade Agenda, which asks for involving the private sector to solve the trade stalemate,” he remarked. Elaborating on the World Trade Agenda, Victor K. Fung, Honorary Chairman, World Trade Agenda (WTA) said that today the world faces two challenges – first, the DDA is stalled, even though all the members agree on 80% of the agenda. Second, WTO needs to evolve to have a trading system fit for the 21st century, as science, technology and commerce have evolved and WTO needs to catch up. The five business priorities identified under the WTA are: • Conclude a trade facilitation agreement • Implement duty-free and quota-free

market access for exports from least developed countries • Phase out agricultural export subsidies • Renounce food export restrictions • Expand trade in IT products and encourage the growth of e-commerce worldwide

Victor highlighted that by simplifying customs procedures, through trade facilitation measures alone, member countries would deliver global job gains of 21 million, with developing countries gaining more than 18 million jobs. Another issue that was discussed over and over again was the liberalisation of trade in services. It is estimated that the pay off for liberalising trade in services could generate trade gains of USD 1.1 trillion, which could translate into global employment gains of nine million jobs. All the panelists agreed that it was lack of political which was responsible for blocking the DDA. The plenary on “what power shifts in the global economy means for world trade and business”, the panelists discussed how the global economic integration and ICT revolution have altered the patterns of world trade. Speaking on this issue, worldrenowned economist, Jagdish Bhagwati, Professor, Columbia University, said that Doha Round is in the ICU and no one seems

H.E Sheikh Khalifa bin Jassim Al Thani

to be talking about it. He also pointed out that countries need to lay off from criticising outsourcing – since outsourcing is a part of trade and what is export for one country, is import for another. He also remarked that the WTO is like a tripod with three legs – the multilateral trading system, rule making and dispute settlement. If the first leg is broken then the tripod won’t be stable. Success, when it comes to trade and investment, is defined only through one word – growth, said Prof. Bhagwati. In the next session on, “What business needs from trade and the WTO,” discussions

centered on finding alternate ways to get around the trade impasse. It was pointed out that the WTO has not been able to perform its legislative functions and RTAs have grown, thus hindering the multilateral trading system. According to David C. Chavern, COO, US Chamber of Commerce, business is the answer and not the problem. He also said that the US is excited about International Services Agreement (ISA) and that if it is signed then it’ll create more jobs, revenue and market access. David also stressed on the importance of protecting IP rights. Speaking on these issues from an Indian perspective, R.V Kanoria, Chairman, Kanoria Chemicals and Industries, and President of FICCI, remarked that in India is emphasis is on distribution of wealth rather than creation of wealth since the gap between the rich and poor has grown. This makes it difficult to make a case for an open economy. “The Indian economy has grown but 60% of the GDP comes from services, which means it’s a jobless growth,” stated Mr. Kanoria. The sessions ended, with one of the speakers making a very interesting statement – Hope is not a strategy! Therefore while we can hope that the Doha Round will move forward, we definitely need to have another strategy in place to make this a reality. MAy 2013

TRADE TALK EXPERT OPINION

The Arab world and global trade – achieving the potential Is the cost of doing trade high in the Arab region? Raed Al Safadi from OECD give us his opinion on what can the countries in the region do to make trade faster and easier.

tudies find that a typical Arab country exports less than half and as little as one quarter of its potential. For example, three years ago, the combined exports of Arab countries made up 1.2 % of world’s exports of non-oil goods and services. This was 0.2% higher than what Arab countries have registered 15 years ago. During these 15 years period, the region’s share in world exports of services grew by nearly 30%, double the level reached by other middle income countries (excluding China). This over-performance in services was offset by under-performance in the exports of non-oil goods, which registered an increase of only 17%, well below the 26% attained by the comparator group of middleincome economies. 18

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One major reason for this lackluster performance can be attributed to costs of doing business in the region, including importantly trade costs. Examining the latter reveals that a major component driving trade costs high is border procedures that engender delays and transactions costs. According to the World Bank’s Doing Business data, it takes three times as many days, nearly twice as many documents, and six times as many signatures to import goods into your average Arab country than it does in rich ones. These and other trade costs that heavily tax supply chains affect trade potential and growth. And it is the prevalence and height of these trade costs that has inhibited trade expansion that was expected to follow the trade liberalisation

efforts that many countries in the region have embraced during the last two decades. Reducing trade costs is a crucial element in the cocktail of policies designed to improve competitiveness. And this is more important in today’s world that is increasingly being dominated by global value chains (GVCs). Production that once was primarily located near sources of major input supplies or near consumers in the final market is now commonly located in segments across several countries. One indication of production fragmentation is the rising proportion of world trade that is intermediate inputs – which amounted to 56% of goods trade and 73% of services trade in OECD countries in the period from 1995 to 2005.

The emergence of GVCs has major policy implications for trade integration and economic growth in the Arab countries. For many industries, the global spread of integrated production segments across countries has lowered the costs of production of associated final goods, and increased productivity of associated labour and capital. This has had two consequences for our countries – On the one hand, it has created an avenue through which countries can industrialise at a much earlier stage of development as producing firms choose to off-shore fragments of the production value chain to countries where labor is cheaper or where other locational advantages confer a competitive cost advantage on the whole GVC. A common key to these cost advantages is speed: every day delay in the movement of goods in the value chain linking several producing countries raises the price to the final consumer and diminishes

ABOUT Raed Safadi is the Deputy Director of the Trade and Agriculture Directorate of the OECD. Prior to assuming his current position in 2009, he was the Chief Economist for the Government of Dubai. Dr. Raed specialises in the empirical and policy analysis of international trade. Dr. Raed has previously worked for the World Bank and as a consultant for numerous governments, regional development banks and UN agencies.

countries as a group have sharply outpaced high income countries in economic growth over the last quarter century. However, the second consequence of a world of GVC-dominated trade in which production is allocated to the location with lowest cost, is that countries that try to industrialise through import-substitution policies prevalent in the pre-1990

For example, three years ago, the combined exports of Arab countries made up 1.2 % of world’s exports of nonoil goods and services. This was 0.2% higher than what Arab countries have registered 15 years ago. competitiveness. This means importing has to be as efficient as exporting, and services have to be competitive. Those countries that learn how to develop these logistics can become participants in GVCs. Participation in GVCs confers considerable benefits. It may allow suppliers in the Arab world to meet standards and regulations that permit them to access rich country markets; it may allow imports under privileged tariff treatment for intra-firm trade; or it may permit the utilisation of network technology that would not otherwise be available; and finally, it may open up new sources of capital. All of these elements figure in the spectacular growth of trade in intermediates, exports generally, and economic growth in Asia – a phenomenon that has become the “Factory Asia” story. This, together with sustained improvements in policy environments, is arguably one reason why developing

period are unlikely to ever reduce their costs to the point of being competitive on global markets. In general, the more technologically sophisticated the product is (or production process), the greater the role of the brand name, and the greater the market share of the lead firm, the more difficult is it for new entrants to gain entry into the chain (or final market) without following the protocols of the lead firm. Stated differently, GVCs raise the penalties to countries that seek to expand exports through using domestic industrial policy to build competing production networks domestically; high border barriers will only result in high cost local production and poor connectivity to the global market. Poor “connectivity” can occur either because natural barriers, such as being landlocked, impede ready access to global markets, because infrastructure

makes transportation costly, because institutions function poorly, or because policies impose barriers (such as trade restrictions). Coordinating delivery times and multiple inputs into production at a given stage means that a wide variety of both public and private services are critical to global connectedness. In short, GVCs would appear to create opportunities for fast growth, but they also raise the penalties for maintaining inefficient border procedures: high tariff and nontariff barriers that unnecessarily constrain goods or services trade, restrictions on the flow of information, impediments to FDI, and restrictions on movement of people. Participants in GVCs also share a political interest in reducing policy-induced delays and inefficiencies in the value chain – and in that sense can be powerful allies for reducing trading costs. Arab governments should turn their attention and focus on the policy-induced bottlenecks throughout the supply chains: they could achieve this by setting up a national mechanism, involving both government and firms, to identify policy priorities for improving supply-chain efficiency. The terms of reference for this body should include a review of all regulations that directly affect supply chain efficiency. This publicprivate partnership should also include representatives from small and mediumsized enterprises whose interests and concerns in the policy prioritisation process should be taken into account, including finding particular solutions to address specific issues that impact disproportionately on these businesses. MAY 2013

TRADE TALK FINANCE

Unlocking the Potential The importance of working capital management in today’s business world cannot be over emphasised as companies operate in an ever more competitive environment with the strain on bottom line getting higher and higher. Ezhil Venugopal, Senior Trade Sales Manager, Abu Dhabi Commercial Bank, gives an indepth explanation on this issue. Introduction As companies combat the twin challenges of global recession and local competition, they are forced to look into avenues where they can cut costs and improve their working capital cycle. Amidst this scenario, there is a growing sense of cautious optimism in UAE that the economy is recovering from the depths of 2009-10. This is greatly fuelled by the improved liquidity in the market and the banks starting to lend to businesses again.

Working capital management Recent research has shown that for every USD 1 bn in revenue, USD 41 mn can be freed up if the company were to manage their workving capital more efficiently. A survey of the top 850 companies in the Middle East has shown that they failed to use up to USD 833 bn in working capital due to inefficient cash flow practices. 20

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When setting out on a working capital improvement initiative, one will do well to get the following myths out of the mindset. Working capital improvement is only for distressed companies – Though working capital improvement can give a much needed lease of life for distressed companies, any company would undoubtedly benefit from such an initiative. It is Treasury’s job! – Working capital improvement cannot be achieved without the involvement of many functions such as finance, accounts, sourcing, sales, and so forth. It requires massive investments in IT Systems – Many people falsely believe that working capital improvements can be made possible only with improving the IT infrastructure. It can be achieved by a simple revision of the terms of sale and purchase.

And with more and more banks rolling out sophisticated technology platforms to clients, information can be managed with minimal investment in technology. It is only for large corporates – Working capital improvement is beneficial for any business. A lot of mid corporates and even SMEs have benefitted hugely from such initiatives. Benefits are short term – Continuous improvement of working capital management helps companies to sustain their margins and brings a lot of discipline to the organisation as a whole. It is little surprise then that most successful companies are obsessed with their WC management.

How can banks help? Tough economic conditions in the last few years have forced companies to look inwards and improve cost efficiency and shift the

focus clearly to the bottom line. This is where the banks can play an important role by helping CFOs and financial controllers streamline their working capital cycle. For the banks, it means they need to know the client’s businesses in detail and understand their cycle thoroughly. Over the last few years, banks are trying to act as working capital advisors to its clients, creating value and optimising the working capital cycle. Today a lot of companies are trying to minimise debt and maximise profit by optimising their cycle. When a company decides to improve the working capital cycle, the three main ways it can do is by • Reducing Days Sales Outstanding (DSO) • Reducing Days Inventory Outstanding (DIO) • Increasing Days Payables Outstanding (DPO) Achieving any or all of the above can directly result in significant capital being released for day-to-day management of business. Procurement managers try to negotiate longer payment terms and the sales function strives to realise the proceeds as early as possible. This coupled with an aggressive inventory management always results in the company streamlining their entire supply chain. Thus the improved working capital management not only infuses fresh cash flow into the business but also reduces cost at

ABOUT Ezhil has been with Abu Dhabi Commercial Bank (ADCB) since Nov 2010. Ezhil manages the trade sales function for Abu Dhabi Corporate Clients within Transaction Banking in ADCB. Prior to this he has served with Standard Chartered Bank (SCB), Dubai where he was a Transaction Banking Product Sales Manager handling the Dubai and Sharjah segments in different roles. Ezhil is a trade finance professional since 2003 having started his career in American Express Bank, India.

every level making the company competitive at the market place. Imagine the finance function offering the marketing team more leeway to price products more competitively in the market. The benefits are all-round and visible.

Trade products aligned with the working capital cycle Banks play an important role in structuring working capital solutions for corporates. It

the company’s business, it is good to have a good understanding of the industry and its outlook. Getting to know the industry standards will greatly help in analysing a client’s working capital cycle as it gives an indication of the standing of the company. Once we know the industry and the working capital practices in the region, it is easy to explore the company’s needs. It starts with asking the right questions about the company’s suppliers, buyers, payment

There are a number of tools available to mitigate the various risks involved in trade and include LCs, Guarantees, SBLCs, Credit Insurance. A good solution need not be a trade finance product always – it can be a cash management solution too since simple techniques such as cash pooling and cash collection can go a long way in cutting costs.

Figure 1: A Typical Working Capital Cycle needs to be emphasised again that a proper structuring of solution can be achieved only with a thorough understanding of the working capital cycle. There are a number of trade finance products that can suit every stage of the cycle but it will differ from client to client depending on the industry and terms of purchase and sales. Figure 2 maps a bank’s trade finance products in line with the working capital cycle of a client.

Working Capital Cycle (in days)

DIO + DSO – DPO

Structuring solutions A well structured working capital solution involves exploring the available options and choosing the best. Before going into

terms, sales terms, production cycle, inventory period, and more. In addition to arranging financing solutions for the working capital, one should also be aware of the clients’ needs on risk management. There are a number of tools available to mitigate the various risks involved in trade and include LCs, Guarantees, SBLCs, Credit Insurance,. A good solution need not be a trade finance product always – it can be a cash management solution too since simple cash management techniques such as cash pooling and cash collection can go a long way in cutting costs. A few examples are shown below to illustrate how a good working capital MAY 2013

TRADE TALK FINANCE

solution by the bank can help the company manage their working capital better.

Example 1 A sight LC can be converted into an Usance LC by an offer by the issuing bank to pre-pay

a number of risk management tools (like Trade credit insurance) and generating liquidity from the receivables. A solution like this not only helps in managing the working capital better but also improves the balance sheet.

Figure 2: Trade products vis-à-vis working capital cycle Order

Production

• L/Cs (Sight/Usance) • Pre-shipment Finance • Invoice Financing • Financial G’tees/ SBLCs • Advance payment against Pro-forma Invoice

• Import Loans/ Loans Against Trust Receipts (LATR) • Pre-shipment Finance • Usance L/Cs • Purchase Invoice Financing

Sales / Collection

Stock Holding

• Bills under Export LC • Outward Collection • Bill/ Invoice Discounting • Cheque Purchase/ BOE • Discount • Factoring

• Import Loans/Loans Against Trust Receipts • Pre-shipment Finance • Usance L/Cs • Purchase Invoice Financing • Loan Against Imports • Warehouse Financing • Finance against Commodity Receipts

under the LC. This solution, for instance, does not alter the facility structure or payment terms to the supplier but still extends the payables of the company easing the cash flow to a great extent. Example 2 A good cash concentration and pooling solution can greatly help the company in maximising the returns from the total cash available for the company on any given day thereby maximising interest returns and minimising interest costs. Example 3 Credit sales of a company can be financed to reduce the day’s sales outstanding using 22

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The above are only a sample of the multiple ways in which a bank can act as a working capital advisor.

Cash management solutions for increasing efficiency in WCC Enhanced liquidity Liquidity for the corporate is enhanced by shortening the Day Sales Outstanding (DSO), ensuring receivables are immediately accounted for and by real-time balances in accounts. Reduced settlement risk Risk associated with the transactions are reduced by providing timely and accurate information via online channels

Improved returns Optimal returns on surplus funds by providing structured liquidity solutions.

Superior cash projections Efficient reconciliation process of A/P and A/R backed by customised reports leads to better cash flow projections. Administrative ease Streamlining of internal processes, by outsourcing of the payables and receivables processes.

Online channels The banks’ online channels play a critical role in reaching out to customers and help them manage their WC with hands-on accessibility and visibility. The online channels help the clients, among other things, • 24/7 availability of information • Transact payments from the comfort of their desks • Apply trade finance instruments like LCs and guarantees online • View MIS of outstanding balances • Manage payroll of the company • Initiate supply chain transactions like raising an invoice, PO, online • Auto-reconciliation systems • Integration with ERP systems • H2H setups, and so forth.

Clients are increasingly using their banks’ technology platforms to manage cash flows and information. This saves a great deal of cost to the company which would otherwise have been spent in setting up their own systems and technology infrastructure.

Conclusion Corporates at a strategic level can implement these best practices in improving efficiency of the cash flow cycle. The collaborative approach to optimise working capital management can drive revenue and profitability, which would lead to enhanced shareholder value with bottom-line benefits for the entire financial supply chain.

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Our services include Corporate Governance, Business Establishments (Franchises, Small and Medium Enterprises), Market Due Diligence, Joint Ventures, Corporate Policies, Corporate Restructuring, Product Restructuring and Intellectual Property. Office Wing D-709, Dubai Silicon Oasis (DSO) Authority Building PO Box 444854, Dubai, United Arab Emirates Tel: +971 4 372 4422, Fax: +971 4 372 4423 Email: info@principle-consultants.com Website: www.principle-consultants.com

D-709 444854 +971 4 372 4423 +971 4 372 4422 info@principle-consultants.com www.principle-consultants.com

TRADE TALK FINANCE

Dealing with inflation Given how tough 2012 was for most economies, 2013 brings forth a ray of hope. Euromonitor highlights the overall outlook for all economies when it comes to inflation and gets into the details for the Middle East and Africa region.

n 2013, global inflation will cool on its 2012 level, going from 4.0% to 3.9% as the effects of the economic slowdown in 2012 continue, albeit to a lesser extent. Developed countries will see inflation rise from 2.1% in 2012 to 2.3% in 2013 as slightly faster real GDP growth boosts prices, while emerging markets will see inflation fall to 4.4% from 4.5% in 2012 as their growth patterns become more sustainable and the threat of overheating wanes.

Overall Outlook Given the difficult year faced by most economies in 2012, 2013 will be less tumultuous, at least as far as inflation is 24

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concerned. Inflation is a key indicator in terms of deciphering how consumers and business will spend their money, when they’ll spend it as well as what they’ll be spending it on, so the trends we’re forecasting for 2013 are slightly more reassuring than those seen in 2011 and 2012. However, volatility in food commodity prices and higher annual oil prices will put upward pressure on prices in 2013 and these are key threats that may impact consumer and business expenditure in 2013. Developing economies on the whole will see inflation ease slightly, as the high real GDP growth rates seen in recent years cool down. For the more mature emerging

markets such as India and Mexico, this is a good thing as it means growth rates are becoming more sustainable and we’re less likely to see countries overheating which has the potential to result in hyperinflation. The Middle East and Africa will have the fastest rising prices in the world in 2013 as a region, with inflation of 9.3% forecast. This is a 1.6 percentage point increase on the 2012 figure going against the overall trend for developing economies in 2013, but with so many frontier economies in the region these price rises will help to boost real economic growth and inflation in the region is expected to fall back again in 2014. Developed countries, on the other hand, are looking to kick-start real economic

ABOUT Euromonitor International has established a strong presence in the Middle East over the past 5 years. Our robust research methodology, supported by 800 researchers and in-country analysts across 80 countries has distinguished us as the world leader in strategy research for consumer markets. For more information, please contact kim.perks@euromonitor.com

is a situation whereby price levels actually fall due to an overvalued currency and uncompetitive labour and exports. Western Europe and North America will both see inflation levels dip slightly in 2013 as prices are forced downward by the on-going turmoil in the eurozone, the threat of a triple dip

the country in 2010, have put significant upward pressure on prices and will continue to do so throughout 2013 and 2014; • According to forecasts, Nigeria will see slower inflation levels in 2013 and 2014 indicating more stable real GDP growth

Japan is an extreme case but it will be the only economy in the world that will actually see deflation in 2013, which is a situation whereby price levels actually fall due to an overvalued currency and uncompetitive labour and exports.

growth in 2013 following the downturn in 2012, particularly in North America and Western Europe. Output was so poor in some countries that prices stayed static or even fell in 2012. Japan is an extreme case but it will be the only economy in the world that will actually see deflation in 2013, which

recession in the UK and the fragile recovery taking place in the USA. The Middle East and Africa will see the highest regional inflation rates in the world in 2013, going from 7.7% in 2012 to 9.3% in 2013. The second fastest growing region in the world in 2013 in terms of real GDP, the Middle East and Africa has high price levels due to high food and energy prices which makes the region particularly sensitive to volatile commodity prices. • Iran will have the highest inflation in the region in 2013 thanks to sanctions placed on the country’s oil exports by the USA and the European Union (EU) in a bid to deter Iran’s nuclear arms development programme. The sanctions, teamed with the end of subsidies on energy and food in

levels in the country. A resource rich country, oil prices have a big impact on inflation levels so the fall in energy prices seen through the second half of 2012 also explains the slightly lower inflation levels expected in 2013; • The United Arab Emirates (UAE) will see the lowest inflation levels of the key economies in the Middle East & Africa in 2013 and 2014. Again, a resource rich country, the country is nearing capacity in terms of the amount of oil it can physically produce and export, which will dag both prices and real GDP growth down over the medium term. High unemployment and an oversupply of property are also negatively impacting price levels in the UAE. MAY 2013

TRADE TALK HOW TO

Find the right key! In the modern business world three factors determine the success of a company especially that of small and medium sized enterprises (SMEs), namely the ability to deliver a good or service cheaper, faster or better than other firms in the market. Dr. Ashraf Mahate, Head of Market Intelligence, Dubai Exports, explains to us how innovation can be the key to success for exporters. 26

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he competitiveness of a company comes down to the speed with which they can bring new products onto the market place or the cost-saving improvements they can make. This in turn is dependent on the speed at which inventions can be converted into products or services to be delivered in the marketplace. This does not necessarily imply that the firm needs to achieve scientific and technological breakthroughs but the ability to generate a financial return from new ideas or ways of doing things. In other words it’s the ability to combine new ideas which may or may not involve technology with finance and business skills so as to deliver market relevant products and services. Despite the importance of innovation to SMEs to gain competitive advantage and grow their business they all too often argue that they lack the resources to make it happen. Such a belief is founded on the premise that innovation is an activity restricted only for larger companies. The reality is that this is not only shortsighted but also not true as the various examples in business history have shown that far greater number of innovations is carried out by SMEs compared to larger firms. In reality innovation does not necessarily require the use of expensive and complex technologies but it’s the manner in which an SME perceives itself and its environment. As the experience of many firms shows that it’s the market that determines the business success or failure of innovation and not only the research capabilities and output. When it comes to innovation SMEs actually have a number of advantages that are not necessarily shared by larger firms. For instance, the smaller size of SMEs implies that they are more able to

react to new ideas and trends as they tend to be more in-touch with market changes. Also, smaller firms are able to develop and implement product or services changes them in relatively little time due to the direct involvement of the owner in the decision making process. At the same time the direct hands on approach of the owner and managers that is so typical in SMEs implies that any innovation receives strong support from key decision makers. This usually implies that sufficient resources are invested in the innovation to make it successful. SMEs with their flatter and more cost-effective structures tend to have lower overheads and hence are able to carry out innovations at much lower

of pricing products or services. To carry out marketing innovation requires little in the way of technological breakthrough and simply needs the SME owner to spend time on the 4Ps namely price, product, promotion and place of distribution. The next level of innovation is product which requires a company to either introduce a new product or significantly enhance an existing one. Again, if an SME is customer driven then it will receive continuous feedback from its buyers so as to make the necessary changes to its product portfolio. In some cases the new products may require investment so as to develop proto types but to a large extent if innovation is incremental then the

Third, and perhaps the most important is that SMEs tend to suffer from innovation inertia – the reluctance to make change. This is because by and large SMEs tend to be risk averse organisations that do not wish to take a chance on innovation in the fear that it will be a failure. costs than larger firms. The closer working relationship with customers implies that a key decision maker within a SME tends to have a stronger customer focus. As such SMEs tend to be more aware of what customers want more so than larger firms. Small or micro sized firms can carry out inexpensive innovation the most common form of which is in the area of marketing. Marketing innovation is rethinking through the design or product packaging and can also include the manner in which the merchandise is displayed. In some cases it can also involve developing new distribution channels for selling goods and services or even reassessing the method

costs involved are limited. Incremental innovation also reduces the risks involved in bringing out new products onto the market. The next level of innovation is process and organisational change which for SMEs tends to be less common largely because they are smaller organisations with flat structures. The highest level of innovation is to invest on research and development and to patents. Due to the higher level of investment and uncertain returns from research and development this tends to be the least common form of innovation among SMEs. With such a large set of advantages the question that arises is why many SMEs do MAY 2013

TRADE TALK HOW TO

not participate in innovation? Anecdotal evidence suggests that SMEs are hindered by three key factors when it comes to innovation. First, innovation is about realising that a particular opportunity exists which can be exploited. Second, SMEs tend not have the appropriate information in order to make effective decisions. Third, and perhaps the most important is that SMEs tend to suffer from innovation inertia â&#x20AC;&#x201C; the reluctance to make change. This is because by and large SMEs tend to be risk averse organisations that do not wish to take a chance on innovation in the fear that it will be a failure. Of course risk itself is dependent on the SME owner characteristics. Various academic studies have shown that there is an inverse relationship between the age of the owner and the level of innovation. The rationale for this is that younger owners have greater motivation, energy and commitment towards the business as well as the willingness to take risks. Interesting there appears to be little difference between the two genders as far as innovation is concerned. More relevant is the level of education whereby studies show that a degree seems to stimulate the growth of the firm as well as on the survival and growth rates of the firm. Experience is also important and owners that have prior familiarity with business issues tend to be more innovative and achieve greater growth. Finally, there is a strong relationship between the age of the firm and the level of innovation induced growth. In other words older and much more established firms are more likely to innovate. Academic research is very useful in highlighting the situation as it is and pointing out the factors that are relevant in creating innovation focused SMEs. However, there is no reason as to why even if the SME falls under one or more of the negative cases listed above it cannot reverse its situation. All SMEs regardless of their current situation can 28

MAY 2013

ABOUT Dr. Mahate received his doctorate from Cass City University Business School in London (UK). He read Economics at University College London, followed by a Masters in International Economics and Banking at the University of Wales in Cardiff. Dr. Mahate is a professional educator and received his training at the Institute of Education (University of London). He is a member of the Chartered Institute of Managers (UK) and a Member of the Institute of Commercial Management (UK). He is also a member of the Association of Certified Anti-Money Laundering Specialists (ACAMS). He can be reached at ashraf.mahate@dedc.gov.ae..

take small steps in order to become more innovative and help grow their business especially into global markets. Although, innovation is important in domestic markets it becomes particularly relevant in overseas markets where products and services are competing with a whole host of competitors some of which have certain advantages such as being domestically produced, lower in prices, benefit from export subsidies and more. The first step to any innovation has to be to create a culture that fosters and rewards creativity. This culture often requires a fundamental change in the risk attitude of the company and thereby allowing a certain level of risk-taking mentality. As such the business should not totally gamble its future but should allow a culture of risktaking without the fear of failure or reprisal. A creative culture does not exist in a vacuum and requires creative staff. The SME needs to invest in upgrading the skills and knowledge of its staff so that they are able to reassess their products, processes, prices and promotion towards developing creative and innovative solutions. At the same time the SME needs to be inclusive through allowing anyone in the firm to make suggestions or contribute creatively. In fact, a number of companies have found that suggestions and voluntary contributions are the most effective mechanism in developing a creative culture as some of the best ideas come

about when they are least expected in the most unusual of circumstances. Instead the SME needs to foster collaboration within a company so that different people with differing viewpoints and experiences tackle a common problem. Through collaboration the SME will arrive at more creative and innovative solution to problems and challenges. After all, innovation is a dynamic process where different thinking through a situation or problem needs to be explored so as to arrive at the best solution. In the rare event that a SME has no problems or challenges the owner can kick-start the creative process within the firm through posing certain questions. If firm growth is important then the owner can pose the question as to what it needs to do in order to sell more products or services more profitably. If the firm is looking to exporting then the owner can pose the question how can we enter a particular market in a more successful manner compared to the other competitors. Each particular strategic direction can allow the owner to pose various questions leading the SME to reassess the manner in which it carries out its activities. Any SME that wants to grow and expand into global markets needs to be innovative so as to develop the next generation of products or services, processes, promotional methods and prices that entice an ever growing consumer base.

Three Trade Great client experiences are what helped us be named Canada’s top trade finance bank for three years in a row.* From Alberta to Abu Dhabi, we have the expertise to help you navigate global markets. Joseph E. Georgie General Manager Bank of Montreal Regional Representative Office – Abu Dhabi +971 2 659 4276

* BMO Capital Markets, the investment and corporate banking arm of BMO Financial Group, voted Best Trade Bank in Canada – Trade Finance Magazine 2010-2012 ® Registered trademark of Bank of Montreal in the United States, Canada and elsewhere.

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he GCC region continues to grow in importance as an economic and trading hub, making it an increasingly important trading partner as well as investor for international markets. With one of the fastest-growing populations in the world, predicted to increase by onethird to 53 million people in 2020, rising affluence and abundant natural resources, the GCC region will continue to enjoy strong market demand, which in turn helps to make the GCC countries attractive prospects for foreign investors. For foreign investors who have got the GCC in their business development sights, the UAE and Qatar are among the hottest growth destinations. According to the 30

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International Monetary Fund (IMF), the UAE’s GDP is expected to increase 2% to reach USD 394 billion in 2013. In 2017, the UAE’s GDP is expected to increase 14% to reach USD 448 billion. With the third-largest proven reserves of gas in the world and as the world’s largest producer of liquefied natural gas, Qatar, is expected to witness dramatic growth in all sectors, especially with the country gearing up to host the 2022 FIFA World Cup. According to the Economic Intelligence Unit (EIU), Qatar’s GDP is expected to increase 2.4% to reach USD 206.7 billion in 2013. In order to capitalise on these market opportunities you need to make sure you have set up your business the right way.

Identify the right legal presence for your needs First and foremost, foreign investors need to decide what type of legal presence best suits their business requirements. Currently, in the UAE foreign investors are required to establish a legal presence through any of the following means: incorporating a local entity under the Commercial Companies Law, registering a branch or representative of a foreign company, establishing a free zone entity, entering into a commercial agency relationship. In Qatar, the richest country in the world in terms of per capita GDP, foreign companies can choose from the following options: incorporating a local entity

under the Commercial Companies Law; obtaining a license for a branch office or trade representative office; entering into a commercial agency relationship; incorporating or registering with the Qatar Financial Centre; and setting up a Free Zone entity within the Qatar Science and Technology Park.

Speak to the experts However, not all these entities will have free reign to trade wherever and with whomever they like. It is also important to understand ownership requirements for any legal presence. For instance, if you are looking to establish a legal presence in the UAE to have full access to the UAE market and work on an unlimited number of projects, then you would be best to incorporate a Limited Liability Company (a type of entity under the Commercial Companies Law). This means appointing a local Emirati partner who holds a minimum 51% of the company’s shares. There is no doubt that finding the right local partner, either an individual or a company, is absolutely essential to the success of the business. Investors looking to establish a local entity under the Commercial Companies Law will also need to consider which type of entity best suits their current and future needs. Expanding into new markets is always challenging and it is natural for business owners to want to keep their overheads as low as possible. However, investing in the right company license and structure from the outset can save money and frustration over the long term. Get advice from a trusted and experienced company formation specialist. Share your business plan with them so they can recommend the most appropriate way for you to incorporate a commercial presence. Start the legal process After choosing the right company structure and license for your business, you will need to appoint a lawyer to prepare the necessary legal documentation in order to incorporate your business and become commercially

ABOUT Wayne joins Links Group with a background in Sales & Marketing and in Business Development in the UK and the Middle East. Wayne joined Links Group early in 2011 as a Consultant before being appointed as Country Manager for Qatar in October 2011.

ABOUT Carl Dowling joins the company with an impressive track record in retail and in the customer service sector including eight years as the manager for a large retail chain in Australia. In August 2011, Carl was appointed as Business Development Manager for Links Group and is responsible for the continued business expansion of the company across Dubai and Abu Dhabi. Carl also serves as a Committee Member for the Australian Business Council in Dubai.

registered. The type of documentation required will again vary according to the company structure and license which you are seeking. All documentation should follow the formatting guidelines provided by the compliance bodies in the UAE or Qatar. Each document must also be notarised and attested at the foreign party’s Ministry of Foreign Affairs and Embassy in their country of origin. Registration of the company will differ depending on the jurisdiction. Getting registered in the UAE Once the legal documentation is completed, the next step is to obtain initial approval from the ministerial bodies in the UAE for the name of the company and the activity of the company. In the UAE, foreign investors need to reserve a company’s name and submit the company registration application to the Department of Economic Development (DED). If the Licensing Section at the DED approves the business activities, trade name and the partners, then the company’s Memorandum of Association need to be signed at the notary public. A common practice is for the investor’s

lawyer to get a preliminary approval from the notary beforehand so that the client can arrive at a specified time and have the documents notarised immediately. Afterwards, foreign investors will need to submit some original documents to the DED - Commercial Registration Department. The documents are: prescribed application form signed by the company managers or their legal representative; copy of the Memorandum of Association, a certified attested copy of the foreign companies registration, formation documents and resolution to open the new company in the UAE; a letter issued by the DED attesting to the company name approval; original letter of company approval; and passport copy of each partner. If Commercial Registry officials deem the documentation to be in order, the company name will be entered into the Commercial Register. A Trade license fee will be generated, and once settled the License will be produced. If registering a branch office of a foreign Company, the commercial register and accompanying documentation will need to be submitted to the Federal Ministry of Economy to arrange for registration of the foreign branch. The publication may take several weeks as all branches must deposit MAY 2013

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a large bond prior to being registered. However, this time frame is not important as the authorities will accept a copy of the Ministry’s receipt of publication fee payment allowing the business to start trading. It is important to note that all application forms must be filed in Arabic, dual text versions are not valid. There is no doubt having a company formation specialist and a law firm for these steps will help avoid critical errors. Once the original trade license and commercial registration certificates are obtained, foreign investors can go and apply for the “Establishment Card” at the Ministry of Labour and then register the employees of the company.

Getting registered in Qatar In Qatar, once the legal documentation is completed, foreign investors will need to obtain the approval of the Commercial Companies Inspection Department. This is done to ensure the articles of association satisfy the laws and regulations in place in Qatar. The department will also need to approve the name of the company. This is a relatively straightforward process with the application now lodged online to the Commercial Registry Department and the Trademarks Department. Investors should know, however, that there is a difference in fees according to the language of the company’s name. If your company has an 32

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Arabic name, then the fees will be less than if you only register a non Arabic name. If the articles of association and company name are approved, the Commercial Companies Inspection Department will then issue the bank certificate for depositing the

the Qatar Chamber of Commerce, the foreign company must then obtain a Municipality License and Signage License. The latter is only secured after signing a one-year lease at an approved commercial office. Before the trade license is granted, the municipality will inspect the commercial premises to ensure the correct signage is installed. It is important to note that all signage must be written in Arabic before any other language is added. The property must also be zoned as commercial premises. Failure to comply with both these requirements may result in your trade license being declined. In Qatar, a company’s labour and immigration services are conducted online using its Computer Card. It is important that all the relevant people are authorised to use this card or sign for immigration services on behalf of the foreign company. The foreign company will also need to apply for the company labour quota in order to obtain the desired number of employment visas. Once

$448 BILLION expected GDP of the UAE in 2017 capital of the company at the bank. After that, the foreign company will need to open a bank account and deposit the mandatory minimum share capital amount. The minimum share capital requirement varies according to the company structure and license being obtained. Once the minimum share capital is deposited, the bank will issue a letter to the Ministry of Business & Trade stating that funds have been received into the company’s bank account. This share capital can later be withdrawn for the purposes of running the company, but only once the entity has been incorporated and the commercial registration is issued. Once the company is registered with the Ministry of Business and Trade as well as at

the labour quota is received the company can then start applying for work permits for its staff, including that of the General Manager.

Get on the right path The UAE and Qatar remain among some of the fastest growing economies in the world, albeit at different stages of maturity. While the roadmap may seem complicated, a trusted company formation specialist will be able to set you on the right path and help you avoid potentially costly roadblocks along the way. Foreign investors that position themselves correctly via the most suitable means of legal incorporation will be well placed to capitalise on the lucrative opportunities offered by the UAE and Qatar.

Bennett Jones in the Middle East Commitment to Serve

Bennett Jones is the only Canadian-based firm to have established a legal practice in the United Arab Emirates and Qatar. We have assembled a team of GCC-resident senior advisors with 100 years of experience on the ground in the Gulf.

Understanding the Middle East

Our lawyers understand Middle East business practices and cultures, and provide pragmatic and effective advice. We provide advice on issues of U.K., U.S., and Canadian law, as well as the laws of the UAE and Qatar.

Experience around the World

The three Bennett Jones Middle East offices are fully integrated with our international network in Toronto, Calgary, Edmonton, Ottawa and our representative offices in Beijing and Washington. Our lawyers have worked on a vast range of regulatory, transactional and litigation matters in countries around the world.

Lawyer Contacts: Abu Dhabi Tel +971 2 493 9000 James J. McDermott, Managing Partner mcdermottj@bennettjones.com

Doha Tel +974 4 433 7366 George Vlavianos, Managing Partner vlavianosg@bennettjones.com

Dubai

Tel +971 4 454 0800 Timothy N. Ross, Managing Partner rosst@bennettjones.com

Traditional Areas of Strength

The firm’s traditional strengths are in key sectors for regional economies: oil and gas, renewable energy and clean-tech, health care, financial services, real estate, international trade, infrastructure and project development, as well as arbitration and disputes resolution. We combine deep industry understanding with world class technical skills in a broad range of legal disciplines.

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The all-rounder

Ecuador is one of the best economically performing countries in Latin America with inflation lower than the Latin American average. Hussam Hassan, Head of Commercial Office, Pro Ecuador, tells us what makes this country special.

cuador, a democratic republic nation in South America (GDP per Capita-PPP of USD 8,600 -2011 est.) with a population of over 15 million spread over an area of nearly 284 thousand square kilometers, is bordered by Colombia on the north, Peru on the east and south, and by the Pacific Ocean to the west. With the Andes Mountains and the Galapagos Islands, Ecuador is one of the top tourist destinations in South America. Trade and Economy The legal currency is the USD, which provides security to investors, with no risk of devaluation. Following the economic complementarily agreement it has with the MERCOSUR countries, Ecuador can export 34

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about 4,000 products duty-free to Brazil and Argentina and is currently negotiating an association agreement with the EU for preferred access to Ecuadorian products. Ecuador’s economy is strongly supported by the exports of its flagship products like bananas, oil, shrimp, gold, cocoa, coffee, wood, fish and other primary agricultural and processed products. It is the world’s largest exporter of bananas and a major exporter of shrimp. Exports of non-traditional products such as flowers and canned fish have grown exponentially in recent years. Ecuador is substantially dependent on its petroleum resources, which have accounted for more than half of the country’s export earnings and approximately two-fifths of public sector revenues in recent years. Not surprisingly, the industrial production growth rate is currently estimated at 10.1% with the industries of petroleum, food processing, textiles, wood products, chemicals leading the sector. Ecuador’s exports, (valued at nearly USD 24 billion in 2012) are exported primarily to the US (> 37%), Russian Federation, Japan and Europe. Ecuador’s imports, standing at USD 25 billion in the year 2012 were mostly industrial materials, fuels and lubricants and nondurable consumer goods, mainly from the US, China, South Korea and surrounding South and Latin American countries. It’s main exports to the UAE include shrimps, tuna, bananas, flowers, processed food and wood/wood products, while imports mainly aluminum, electrical & electronic goods as well as machinery from the UAE. Trade relations have evolved dramatically, especially in the last couple of years between the two countries based on the wise policies and visions of the countries’ leaders. In terms of products traded, while earlier exports from Ecuador focused on its traditional fruits and crustaceans, Ecuador is now encouraging diversification of the trade through various services

provided by PRO ECUADOR. Similarly while earlier imports from the UAE focused mainly on oil and its products, Ecuador now imports an assorted range of products from the UAE ranging from machinery, electrical and electronic goods to aluminum. Ecuador has been a trading partner with the UAE now for more than 30 years. Both countries share friendly relations and strong economic and trade relations since many years. With the opening of the new PRO ECUADOR Office in Dubai, UAE last October and with the strong support of the Department of Economic Development, Dubai, we look forward to enhanced and reciprocal business relations.

Tourism Ecuador is one of the world’s most environmentally diverse places and its many destinations offer travelers a range of attractions to explore. A unique landscape

awaits visitors as Ecuador hosts warm sunny beaches of the Pacific, to impressive mountain villages in the Andes, to the Amazon Rainforest, to the world’s ecological wonder the Galapagos Islands. UAE citizens are permitted visa on arrival. Infrastructure and investment: Ecuador has a modern physical infrastructure and road communication. Currently promoting the project to build the interoceanic corridor Manta Manaos (Brazil) to allow direct communication between the Atlantic and Pacific oceans. It has four stateowned strategically located commercial ports: Guayaquil, Manta, Esmeraldas and

ABOUT Hussam has previously worked with the Gulf countries’ first trade promotion organization in Dubai (Dubai Export Development Corporation) and has headed two major divisions of the organization, viz. Marketing & Communications and the International Alliances Divisions. In both capacities, he has been actively involved with strategic trade promotion initiatives and global partnership building of the Arab World with the Americas as well as the Far East, enhancing Dubai’s position as a regional trade hub that bridges both the East and the West.

Bolivar. It also has 17 private ports under construction and Posorja (Guayaquil). It has two international airports, one in Quito and one in Guayaquil. The latter has been rated the best in Latin America and recently Quito has inaugurated its new airport. Ecuador has more sophisticated access to telecommunications services. It is connected to the fiber optic network that

manages the Telefónica International Wholesale Services, around South America and then connect with the United States and Spain. That creates opportunities for technological innovation and development of products with higher added value. Nature plays in favour of Ecuador. Its climatic conditions provide that agricultural products are harvested throughout the year without interruption. Good light can help to cultivate all fruits, legumes, vegetables and aquaculture (shrimp, tilapia, lobster.) that are demanded in the international market and can also be processed in the country. Ecuador, being part of the Andean Community has tariff preferences to enter

their products to Colombia, Venezuela, Peru and Bolivia. The validity of the ATPDEA allows duty-free entry over 6,000 products to its main market, which is the United States. Currently we are negotiating an association agreement with the European Union, which will improve the conditions of access for Ecuadorian products, thus providing an ideal investment platform for Arab companies. There are several tools to support entrepreneurship and productive investment in Ecuador as Funds support specific incentives, promotion of investment projects, among others. The production code has five types of incentives: general, sectorial specific innovation, export and green production to improve production of MSMEs, and territorial development. PRO ECUADOR PRO ECUADOR UAE is Ecuador’s national trade, tourism and investment promotion agency in the UAE. It operates under the umbrella of the Ecuadorian Ministry of Foreign Affairs, with the objective of enhancing the competitiveness of Ecuador as a preferred trading and investment partner. Established as a commercial office since 2012, PRO ECUADOR facilitates sourcing of superior products from Ecuador that cater to importer/ re-exporter and buyer needs, facilitate direct and institutional investments into Ecuador and help potential tourists visit and experience the sensations and flavours of this country at the centre of the world. The PRO ECUADOR Office in the UAE will be assisting the Ecuadorian exporters to explore the UAE market, moreover using Dubai, UAE as the business hub for MENASA Region (Middle East North Africa and South Asia), apart from promoting investment and tourism into Ecuador. MAY 2013

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Know your market Global commodities markets continue to grow in size and offer potentially rewarding opportunities. However, interested investors should have an understanding of what factors drive commodity prices. Most important, investors should consider under what circumstances commodity prices are likely to outperform other investments. John Butler, CIO, Amphora, believes there is some compelling evidence to suggest that just such a set of circumstances could develop during 2013.

ommodities investment has become popular in recent years for a variety of reasons. In response to growing demand there are now ETFs for specific commodities, groups of commodities and indices, as well as the traditional futures contracts that trade on major exchanges. There are also structured notes that are linked in some way to the above and which may include capital guarantees, for example. However, in 2011 and 2012, global commodity prices did not generally rise. Moreover, commodity prices have been unusually highly-correlated to the global equity markets during this period. Any investment that neither outperforms nor diversifies existing investments serves no obvious purpose in a portfolio. Should investors expect more of the same in 2013 and reduce or eliminate commodity investments? To answer this question, we need to consider what factors drive commodities prices and to what extent these factors are, or are not themselves correlated to the equity markets. We can then apply such factors to our expectations for 2013 specifically. As with all market-determined prices, the decisive factors are some combination of supply and demand. Prices are set at the margin, however, so even if supply and demand are mostly stable, a small shift are around the margin can have a disproportionate impact on price. As an example, consider the surge in grains prices in the summer of 2012. As weather patterns became somewhat extreme in multiple parts of the world,

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the supply outlooks for soya beans, wheat and corn all deteriorated somewhat, with expected harvests falling perhaps 30-40% in some cases. However, prices subsequently rose by much more than 30-40%. This is because demand for basic foodstuffs is highly ‘inelastic’, which means that the quantity demanded changes little with prices. For the market to ‘clear’ under these circumstances, that is, with supply constrained yet demand fairly stable, prices must rise disproportionately. Price inelasticity is observed in many commodities markets. There are good reasons for this. Commodities are inputs into sometimes highly complex production processes and, for many commodities, there are few, if any, substitutes. Take oil for example. Yes, natural gas is a theoretical substitute for many uses of oil, but it is a poor substitute for others. Global transportation networks, for example, run overwhelmingly on crude distillates and cannot be easily converted to gas, if at all. Therefore, when crude oil and distillate supplies become constrained relative to demand, there is some substitution into natural gas but there remains a high degree of price inelasticity overall. High inelasticity implies potentially high volatility and the occasional spikes in grains or energy prices provide the clear evidence of this. Indeed, the high volatility of commodities prices in general is one reason why, historically, direct commodity investment has been tiny relative to that in financial assets and property.

MAY 2013

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The two examples above also help to illustrate why some commodity prices are normally correlated to the equity markets and others less so. Demand for crude oil and distillates tends to follow the business cycle relatively closely. But extreme weather in normally productive arable regions of the world has no obvious relationship with the global business cycle. Therefore, grains prices tend to be less correlated to the equity markets than crude oil, distillates and natural gas. Other agricultural products are also relatively uncorrelated whereas industrial metals are even more highly correlated with the global business cycle than oil, oil distillates or natural gas. Finally, while high elasticity may result in the occasional large spike higher in prices, commodity-producing businesses respond to the higher prices by finding ways to increase supply. While this is difficult with certain commodities, in particular those that must be dug out of or pumped out from deep in the ground, in other cases a supply response can impact the market within months, bringing prices right back down again or, perhaps, resulting in even lower prices than were observed prior to the original spike. This sort of boom and bust is frequently observed with grains, for example. In the event that poor harvests send prices higher and reduce stockpiles, farmers have a clear incentive to plant and produce more during the next growing season. But with agricultural production increasingly global and occupying many arable regions in both the northern and southern hemispheres, the gap in time between one growing season and another can be quite short. For this reason, the bulk of supplydriven price spikes in grains markets tend to be quite short-lived. In the case of some commodities they can persist for years, but these are quite rare and normally follow from a changed market structure than from natural factors. A classic historical case in point is the formation of OPEC, which led to a prolonged elevation of crude oil and distillate prices. 38

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ABOUT John Butler is a founding partner and the CIO of Amphora, a commodity-focused hedge fund. He has 19 yearsâ&#x20AC;&#x2122; experience in the global financial industry. Prior to founding his independent investment and advisory firm, he was Managing Director and Head of the Index Strategies Group at Deutsche Bank in London. Prior to joining DB in 2007, John was Managing Director and Head of Interest Rate Strategy at Lehman Brothers in London. He is the author of The Golden Revolution (John Wiley and Sons, 2012), and author and publisher of the popular Amphora Report investment newsletter.

For the most part, however, commodity price out-performance tends to be shortlived, is specific to one commodity or to related groups, such as grains or industrial metals, and therefore investors without early, high-quality information about these specific markets are at a disadvantage. Moreover, many commodities â&#x20AC;&#x2DC;rollâ&#x20AC;&#x2122; negatively, that is, there is a negative carry cost associated with holding them. Investors cannot normally

prices tend to surge only temporarily before falling back. Investors without sufficient early information on such developments are at a disadvantage as they will miss most if not all of these opportunities. Third, many commodity prices are correlated to the equity markets, providing little diversification. Fourth, long-term commodity investment returns have lagged behind those of the global equity markets,

First, commodity prices are highly volatile. Second, we have seen that commodity prices tend to surge only temporarily before falling back. Investors without sufficient early information on such developments are at a disadvantage as they will miss most if not all of these opportunities.

benefit from sustained investments in negative-carry instruments. For commercial producers and consumers, the issue of negative carry is irrelevant. They use these markets as part of doing business and, where there are costs, businesses can normally pass some of this along to consumers. But investors should be concerned. UNDER WHAT CONDITIONS DO COMMODITIES MARKETS OUTPERFORM? As discussed above, at first glance commodities investing appears to consist of more disadvantages than advantages: First, commodity prices are highly volatile. Second, we have seen that commodity

with only occasional exceptions, due in large part to the negative carry mentioned above and the fact that corporations pay dividends that can be reinvested. But what of the exceptions? Is there as consistent set of conditions under which commodities outperform? And can these conditions be predicted in advance? If so, investors could in fact benefit from an occasional, opportunistic overweight in commodities and also, if structured correctly, realise the diversification benefits they can provide. There is indeed a set of conditions in which commodities tend to outperform the equity markets for a sustained period. These are the conditions normally

associated with a weak-growth, rising price environment, colloquially known as ‘stagflation’. While coined during the 1970s, this term is also applicable to a number of other multi-quarter or multiyear historical periods While traditional, Keynesian economic models consider ‘stagflation’ to be an aberration isolated to highly unusual economic conditions such as negative supply shocks, other types of economic theory can in fact predict stagflationary outcomes. In particular, a large private sector investment bust met with large amounts of fiscal and monetary stimulus has historically resulted in stagflation. The reasons why can be complex in their specifics but the general explanation, following more from micro- than from macroeconomic theory, is that if firms have overinvested in uneconomic capacity, as occurs during a bubble, this capacity then needs to be reduced through depreciation and deleveraging, which takes time and depresses economic activity. While theoretically price deflationary—as net private sector demand declines quickly while excess capacity depreciates only slowly—if met with public policy stimulus, the overall price level need not decline and, in fact, if stimulus is sufficient the price level can continue rising. This brings us to the critical point: While the supply of capital is reduced via depreciation, so is the purchasing power of money as a result of artificial economic stimulus. Therefore, given such a set of conditions, while corporate revenue growth may be weak or even negative, thereby weighing on equity market valuations, commodity prices nevertheless rise as the purchasing power of money declines.

WHAT TO EXPECT IN 2013 In 2013, we are beginning to see the longer-term effects of the 2008 investment bust: In the US, Europe and Japan, investment net of depreciation is close to zero and in some European countries outright negative, a consequence of their

massive debt problems and associated economic uncertainty. Yet in all cases unprecedented fiscal and monetary stimulus has prevented a general decline in the price level. With leading indicators in aggregate suggesting weak if positive global demand growth in 2013, yet with growing capacity constraints as a result of sustained low private sector investment, a potential surprise will be that commodity prices surge disproportionately to any bounce

with corporate profit margins, due to their highly complex international production and distribution processes. Imagine what happens to a modern multinational requiring commodity inputs from one country for processing and production in another country and then on to wholesale or retail distribution in yet another, when suddenly there are new taxes or tariffs or quotas springing up between all of them. A highly efficient multinational can

Another aspect of what could be termed ‘de-globalisation’ is that currency and trade disputes are becoming somewhat more common. in corporate profits. Sure, profit margins may currently be elevated in a historical comparison, but that only means that a further increase is unlikely. Another way to think about this is that, with capital investment not driving revenue growth, corporations must depend more on labour. But labour costs in most of the developing world have risen rapidly in recent years, including in China, where wage rates have been rising in the double-digits since the mid-2000s. This is but one aspect in which the ‘golden era of globalisation’ may be coming to an end. Sources of cheap labour across the developing world, so vast two decades ago, are now far fewer in number. Indeed, wage pressures are so severe in some developing economies that strikes and other labour disputes are becoming more frequent. This does not bode well for corporate profits. Another aspect of what could be termed ‘de-globalisation’ is that currency and trade disputes are becoming somewhat more common. While only natural during times of economic stress and high unemployment, such as that observed in much of Europe and in the US today, sadly such disputes are economically counterproductive and can wreak havoc

become inefficient and unprofitable overnight if sufficient barriers are put up between their international operations. Now I’m not predicting anything as destructive to international trade as happened in the 1920s and 1930s, for example, but even something comparatively milder could provide a rude shock for corporations and their equity market investors in 2013. Consider, however, that commodity prices surge when their supply chains are disrupted by trade barriers. Final demand is still there, to be sure, but satisfying that demand is more complex and therefore more expensive. Facing higher input costs on the one hand yet relatively weak final demand growth on the other, corporate profits get squeezed in the middle. Investors who share these views or at a minimum see a material possibility that such conditions come about during 2013 should thus consider an allocation to commodities and possibly a corresponding reduction in certain equity market holdings. In Part II I will discuss what I believe are some specific commodities for which the 2013 outlook is particularly bright, as well as some thoughts on how to extract maximum diversification benefits out of commodities. MAY 2013

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Money talks

Foreign exchange is what makes trade in goods possible. The team at Western Union Business Solutions brings you the movement in three major currencies- the Euro, GBP and the US Dollar.

MAY 2013

he Euro The European Central Bank (ECB) has a broken transmission mechanism for monetary policy, and there has been limited progress towards either a banking union or closer fiscal ties between euro area members. Moreover, recent economic data has hardly favoured the Euro. Add to this the lack of structural reforms in member states, weakened political leadership, and a poorly capitalised bank system, and there should be no question as to where the Euro is headed for the month of May. Sadly, trade in financial markets and in the euro is not so simple. Let’s reflect… Over the course of a few months, the Yen lost nearly 25% of its value; in the course of three trading days, gold lost 18% of its value; And Italian short-term bond yields moved to record lows, despite the possibility of elections. These are

If this is the distortion, then what makes trade in the Euro worse is that this is taking place during a leadership vacuum. The good old days of Merkozy are gone. Germany’s Chancellor Merkel is seen as the lone leader of the Eurozone. President Hollande of France is too busy grappling with record low approval ratings and a budget minister caught red-handed with a Swiss bank account, which many used in the past as a way to avoid paying taxes. Italy’s situation may be even more farcical, with the 87year old Italian president just re-elected to stand for a seven-year term. Making matters worse is the challenge Merkel may face as she heads into September elections. Germany has seen the formation of a new political party, Alternative for German, which runs on the platform of leaving the Euro, and has given credence to speculation that the repatriation of the country’s gold may just be in preparation

Potential rate cuts and a leadership vacuum in distorted financial markets make trade in the Euro anything but usual. examples of the extreme distortion seen recently in financial markets. Over the past six months the Euro has gained nearly 8% against the USD, before peaking on February 1 and then suffering a reversal of those gains. Investors mostly blame central banks, that have embarked upon quantitative easing measures the likes of which the world had never seen, for this distortion. In theory, quantitative easing measures taken up by the Bank of Japan recently were expected to “crowd out” private investors, forcing domestic dealers to look abroad for assets to add to their portfolios. So far, according to the data, it doesn’t look like this is actually happening, but the fact that the theory exists helps to distort markets, giving the euro support where it might not have had any, as investors have anticipated the move.

for such a move. While no one expects the new party to gain much support, it could disrupt enough votes within the coalition to challenge Merkel’s stronghold on power. Poor leadership in France, nearly nonexistent leadership in Italy, and investors placed “on hold” until September to learn the leadership in Germany will only work to amplify the distortion already taking place in the euro for May. Lastly, economic data remains less than encouraging. April’s flash Purchasing Managers’ Index (PMI) estimates for the service and manufacturing sectors— and a first glance at Q2 data—does not support the view that a recovery is coming. Contraction was seen in both sectors of the economy, opening the way for additional rate cuts at the ECB. A rate cut will be used as a last-resort measure, but will fool no one, since its impact

will likely be short-lived and strictly psychological. Potential rate cuts and a leadership vacuum in distorted financial markets make trade in the Euro anything but usual. Upcoming critical events May 02: EUR April Manufacturing PMI May 02: EUR ECB Monetary Policy Committee meeting May 03: EUR March PPI May 06: EUR April Services PMI May 06: EUR March Retail Trade May 14: EUR March Industrial Production May 15: EUR Q1 GDP May 15: EUR April Final HICP May 16: EUR March Trade Balance May 30: EUR May Business Climate Index EUR Economic Indicators 3-Month Deposit Rate 0.25% GDP (annual rate) -0.9% Inflation (annual rate) 1.7% Unemployment 12.0% Trade Balance +10.4bln €

USD: United States It might not take long to gauge the USD’s prospects in May, with the Fed set to render a policy decision on day one, and the next US jobs report on tap two days later. No changes in Fed policy appear on the cards this month—or anytime soon— given that unemployment remains high and growth low. That puts the main focus on the bankers’ accompanying statement. Dollar bulls would find fodder in any hint that the Fed’s door is subtly opening wider to a reduction in stimulus this year. The USD should find another influential driver in the next US employment report, which comes due May 3. The greenback lost steam in early April, after the March jobs report fell short of forecasts, squelching talk of an early tapering of the Fed’s USD 85 billion-a-month bond-buying spree to lower longer-term lending rates. Faster hiring in April would be dollarpositive, as would any upgraded revisions to previous jobs reports. MAY 2013

TRADE TALK INTERNATIONAL TRADE

Across the Atlantic, data from the euro zone will come under closer scrutiny after a prominent European Central Bank (ECB) official, arch-hawk Jens Weidmann, in April hinted that continued weakness could warrant a rate cut from 0.75%. The ECB’s governing council holds its next policy review on May 2, with a rate cut seen on the table. If the outlook for monetary policy were to diverge in the favour of the U.S. compared to Europe, it would serve as a good recipe for a weaker Euro and a stronger greenback. Lower borrowing rates in the Eurozone, although promising for future growth, would deal a blow to the euro’s allure. Japan may prove to be another instrumental driver for the greenback this month. Should the USD rise to new heights against the Yen, the upward momentum could drag it higher versus other peers. Still, US data, as much as anything, is seen holding the keys to the USD’s fate. The effects of US government sequestration of spending cuts have been evident in recent soft data. So don’t be surprised if Memorial Day rolls around and some currencies have traversed little from the outset of the month. Investors may choose to keep toward the sidelines and wait for more concrete signs on the health of the global economy before placing bolder bets.

Upcoming critical events May 01 May Federal Open Market Committee Monetary Policy Announcement May 03 April Non-farm Payrolls May 03 April Unemployment May 13 April Retail Sales May 22 Federal Open Market Committee meeting minutes (April 30/May01) Economic Indicators 3-month Deposit Rate: 0.28% GDP: 2.5% Q1 (y/y) Inflation: 1.5% March Unemployment: 7.6% March Trade Balance: - USD 730.2bn February 42

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GBP Strong growth in Britain’s leading services sector ensured the UK economy outperformed in the first quarter, a result most analysts did not envisage and why currency investors around the globe may start restoring their ties with the British currency through May. It’s been quite an explosive year so far for sterling, which dropped to three-year lows against the USD in March on fears that a triple-dip economic recession would force the Bank of England (BoE) to adopt a more aggressive approach to monetary easing. However, Britain’s first quarter GDP result blew estimates away to some extent, with

sector on May 03. Currency investors will pay close attention to that report as the services industry more or less singlehandedly propped up the UK economy in Q1. Another factor behind sterling’s recent recovery is that while many investors got Britain’s first quarter performance wrong, concerns are growing about other mislaid bets as well. The global economy appears to be losing some steam. Data this month on the US jobs market may be the clearest sign yet that investors have gotten ahead of themselves in expecting the Federal Reserve to taper its dollar-negative stimulus programme

The global economy appears to be losing some steam. Data this month on the US jobs market may be the clearest sign yet that investors have gotten ahead of themselves in expecting the Federal Reserve to taper its dollar-negative stimulus programme anytime soon.

the economy expanding by a better-thanexpected 0.3% and thus ending threats of a third UK recession in under five years. The pound’s surge to two-months highs against the USD following the release of the Q1 GDP results suggests that markets expect the result to ease pressure on the BoE to shift course on quantitative easing, which has been a big worry for currency investors. No change from the BoE in its May 09 policy decision is now more likely, leaving the focus this month in terms of monetary policy on the central bank’s Quarterly Inflation Report on May 15. Should Governor Mervyn King make another attempt at reversing earlier comments about sterling weakness, and also offer investors an optimistic picture about the UK economy in the report, it may convince investors that the pound’s bounce in late-March and April is a sign of things to come in the next month or two; at least until Mark Carney revives policy uncertainty with he arrives to take up his post as the new Governor of the Bank of England in July. Before that, however, the Pound must tackle the latest data on Britain’s services

anytime soon. With the Bank of Japan at full speed on monetary easing and the European Central Bank expected to loosen its policy as early as this month, it now seems that both internal and external forces are pointing the compass north for sterling in the near-term. Key GB Events May 01 GB April Manufacturing PMI May 03 GB April Services PMI May 09 GB May Bank of England Monetary Policy Announcement May 15 GB Bank of England Quarterly Inflation Report May 21 GB April Consumer Price Inflation May 22 GB Bank of England Meeting Minutes (May 08/09) May 23 GB Q1 GDP 2nd Estimate Economic Indicators 3-month Deposit Rate: 0.56% GDP: 0.3% Q1 (q/q) Inflation: 2.8% Mar Unemployment: 7.9% Jan Trade Balance: £-9.4bn Feb

Country

focus

USA

INVESTMENT

SECTOR WATCH

Interview

MAY 2013

COUNTRY FOCUS Interview

Trade with the best!

UAE is the single largest export market for American goods in the MENA region. With bilateral trade touching USD 22.57 billion in 2012, bilateral trade and investment relations between both the countries have been going from strength to strength. Danny Sebright, President, US-UAE Business Council, speaks to Aparna Shivpuri Arya about this and much more. Please give us a brief background about the US-UAE Business Councilits inception, its goals, members and so forth.

The US-UAE Business Council is a progressive business advocacy organisation solely committed to the advancement of the trade and commercial relationship between the United States and the United Arab Emirates. The Business Council actively works to ensure that the US and UAE remain attractive destinations for foreign direct investment by conducting effective policy advocacy, undertaking various trade promotion initiatives, providing ongoing 44

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updates on the business climate in both countries, and helping develop strategic relationships between US and UAE business and government officials. Launched in May 2007, the Council was inaugurated by His Highness, Abu Dhabi Crown Prince, Sheikh Mohammed bin Zayed Al Nahyan and His Highness, UAE Foreign Minister, Sheikh Abdullah bin Zayed Al Nahyan and is comprised of over 100 members from a broad range of US and UAE commercial sectors. Our advocacy and work priorities for 2013 reflect our membership and include specific focus in the areas of: Commercial

Trade and Foreign Direct Investment; Energy Development (Renewable, Nuclear, Oil & Gas); Aerospace, Defense, Security; Infrastructure Development & Green Build; Media, Tourism and Culture; and Medicine and Education. Further, these sectors reflect the UAEâ&#x20AC;&#x2122;s overarching areas of federal economic development focus in high-growth and desired markets. Likewise, the UAE has established strategic benchmarks in each of these sectors and recognises that the United States is a leader in corporate knowledge and innovation. By facilitating both business communities, the US-UAE

Business Council continues to promote and strengthen the bilateral trade relationship between both countries.

ABOUT Danny Sebright serves as president of the U.S.-U.A.E. Business Council and a counselor at The Cohen Group, both based in Washington, D.C.

How has the US-UAE relations evolved in the last decade or so?

It is important to note that the United States was one of the first countries to recognise the UAE as a sovereign nation when the country was founded in 1971. Subsequently cultivated as a strategic defense relationship following the Iraq War, US-UAE ties have evolved in recent years to include partnership in areas such as trade and commerce, education, financial services, hospitality, and especially aviation — an industry which accounted for close to 30% of all US exports to the UAE in 2012. In recent years and in light of regional geopolitics, the UAE has become a strong partner to the US in the maintenance of regional trade and energy security and is a beacon of stability in an otherwise turbulent region. Additionally, the UAE remains the top destination for American exports in the entire Middle East North Africa (MENA) region since 2009 with US exports to the UAE totaling USD 22.57 billion (out of the total USD 24.8 billion trade relationship) in 2012. This is more than US exports to Saudi Arabia, Israel, and Egypt. Finally, with the advent of Emirates Airline, Etihad Airways, and the UAE’s world-class airport infrastructure, the country has become a centrally-located global transit point for international business and leisure travelers from the U.S. and around the world. The breadth of the US-UAE relationship is tremendous today and will only get stronger as economic and regional stability in MENA remains a top priority for both countries. Beyond the deepening economic relationship, the US and UAE are key strategic partners who continue to cooperate closely on military and intelligence matters preserving regional and international security.

How do you see the trade relations between the two countries? Which goods are exported and imported? The UAE is the top destination for American

exports in the entire Middle East North Africa (MENA) region — a position the country has held since 2009. As was previously mentioned, the US and UAE experienced a record growth in bilateral trade with over USD 24.8 billion last year. US exports to the UAE in 2012 totaled USD 22.6 billion and included goods originating from every part of the country, with aviation exports — aircraft, engines, and parts — comprising the largest sub-set of US exports at USD6.44 billion. Conversely, UAE exports to the U.S. totaled USD 2.24 billion last year and notably did not include any crude oil. The US-UAE trade and commercial relationship is growing, with the U.S. leveraging the UAE’s geographic centrality and world-class infrastructure to transport goods to the country both for consumption and re-export to key global markets; and with the UAE’s confidence in the quality of American-made products. Our analysis indicates that growth will continue to rise over the next five years as the UAE continues to meet its economic development diversification targets and continues to invest in its infrastructure, education, and health care institutions.

You have identified certain areas that you work on? What have been the developments in those sectors?

Economic growth and development has occurred in every sector we focus on: commercial trade and foreign direct investment, energy (oil & gas, renewable, nuclear), infrastructure and greenbuild, commercial aerospace and defense, hospitality and tourism, media and culture, and education. In each of these sectors, the emphasis of US-UAE partnerships is focused on knowledge transfer, training, and human capital development. The Business Council takes a strategic approach to each sector, tailoring our engagement to best suit each business

area, to optimise success for each of our member companies, and to complement efforts to advance the greater US-UAE bilateral trade relationship. The largest growth industry at the moment is aviation, which accounted for close to 30% of all US exports to the UAE in 2012. In fact, in a new report recently released by the US-UAE Business Council, the United States and the United Arab Emirates were found to enjoy the fastest growing commercial aviation relationship in the world (growing 1,500% over the past decade). But, growth figures in other areas like heavy industry with aluminum, in high tech with microchips and composites, in communications, IT, and media, and as well in travel and tourism has been very impressive.

The US and the UAE have been collaborating on energy - can you please tell us a bit more about that? The energy sector plays several roles in the UAE’s economic development plans for the future. Currently, between 60-70% of the UAE’s GDP comes from oil and gas, however, MAY 2013

COUNTRY FOCUS Interview

the country is endeavoring to diversify its economy and explore alternative energy solutions to decrease this number to around 30% by 2030. The energy industries the UAE are currently developing includes renewables, nuclear, and solar energy. In each of these sub-sectors, the United States is playing a supporting role in providing infrastructure, training, and peripheral services to help the UAE develop its internal capabilities. This support is both practical and academic with American companies and institutions working in tandem with UAE counterparts to achieve energy sector diversification. A flagship example of this collaboration is the Masdar Institute of Science & Technology, a research-driven academic partnership between the UAE’s leading sustainable energy company, Masdar, and the Massachusetts Institute of Technology (MIT). The facility is located in Masdar City – the UAE’s carbon neutral development currently under construction in Abu Dhabi – and boasts a growing global faculty and student population. In fact, the International Renewable Energy Agency (IRENA) chose Abu Dhabi as the agency’s first headquarters, a strong testament to the UAE’s prowess in the renewable field. In the nuclear space, technology from the US-based Westinghouse Corporation is being used to design and construct nuclear reactors under construction in the Western Region of Abu Dhabi. Westinghouse is working within a coalition of companies led by South Korea’s KEPCO. With the first reactors set to join the UAE’s power grid in 2017 and a strict adherence to both the US-UAE 123 Peaceful Nuclear Energy Agreement and International Atomic Energy Agency (IAEA) standards, the UAE’s nuclear industry is positioned to set an example for the broader region and developing countries looking for alternative energy solutions. These are just a few of the many examples of how the UAE is using its financial resources gained from the oil and gas sector to develop other important energy-related industries in partnership with the US and other countries. 46

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For US businesses looking to enter the UAE market- do you provide any services? The US-UAE Business Council is a membership-based organisation that provides several useful services to advise US businesses looking to enter or strengthen their presence in the UAE market, these include: • Introductions to key government officials and private sector executives, • Match-making and due diligence for potential local agents • Policy programming, business networking, and reporting to provide U.S. businesses with sector-specific information as well economic and risk analysis • Daily media clips designed to highlight trends and developments The US-UAE Business Council also provides tailored business counsel that is focused

its kind for 3,000 miles in any direction. Moreover, the UAE’s geographic position is ideally situated to doing business anywhere in the world. A majority of locations are within six hours flying from the UAE.

How do you see the business and investment relations in the coming years?

The US-UAE business and investment relationship is strong and rapidly growing. In fact, the relationship is supported at the highest levels by both the US and the UAE governments who have each placed a renewed policy focus on developing economic ties between the two countries. The US Department of State and the UAE Ministry of Foreign Affairs established the biannual US-UAE Economic Policy Dialogue in March of 2012 to raise the profile of business and investment within the context of overall US-UAE diplomatic relations. This government-to-government effort is

In the nuclear space, technology from the US-based Westinghouse Corporation is being used to design and construct nuclear reactors under construction in the Western Region of Abu Dhabi. directly on specific member needs and priorities, in addition to meeting the overall goal and objective of raising awareness about the strengths of the bilateral trade and commercial relationship.

Are there any logistical issues in doing trade with a region that isn’t geographically that close?

With 28 non-stop flights traveling between the US and UAE daily as of March 31st, 2013 and a globally connected business community, there are fewer logistical issues today than there ever have been. The UAE is strategically investing in their overall infrastructure with ease-of-business in mind. Jebel Ali port is already one of the largest in the GCC and Khalifa Port in Abu Dhabi will be the only fully-automated port of

supported by interagency cooperation on both sides and relies on substantive input from thought-leaders in the private and public sectors to drive the working agenda and advance bilateral commercial relations. From a broader regional trade perspective, the US views the Gulf Cooperation Council (GCC) countries as viable and strong trading and investment partners. Accordingly, the United States and its counterparts in the region set up the US-GCC Strategic Cooperation Forum at the ministerial level and are actively working towards a US-GCC Free Trade Agreement. The UAE is heavily involved in these discussions and shares the United States’ commitment to the cultivation of stronger economic and diplomatic ties with the region.

COUNTRY FOCUS Sector watch

Fly away! A new study commissioned by the US-UAE Business Council found that the US-UAE commercial aviation relationship is the world’s fastest growing at 1,500% over the past decade. In this article, the organisation gives us the details about this sectoral relationship and what are the prospects for trade and investment.

he United Arab Emirates (UAE) has emerged as a key player in the global commercial aviation sector. By expertly leveraging its geographic location to connect diverse communities around the world — approximately 60% of the world’s population lives within a six hour flight of the UAE — the country’s three international airports have emerged as global transit hubs, between east and west as well as north and south. Additionally, a key initiative underpinning the UAE’s success in the sector is also the swift expansion of its two national carriers, Abu Dhabi’s Etihad Airways and Dubai’s Emirates Airlines. Although they are independent airlines, Emirates Airline and Etihad Airways have equally ambitious plans to launch new routes to several of the world’s top global markets. Further, both airlines have judiciously allocated resources to invest in newer, more advanced aircraft that can travel nonstop over longer distances and offer an enhanced passenger experience. This bodes well for increased commercial aviation partnership and investment between the United States and the UAE. 48

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The US-UAE commercial aviation relationship is the world’s fastest growing at 1,500 % over the past decade. This monumental growth can be directly attributed to the successful expansion of non-stop travel options from the UAE to new US markets, the rapid development of the UAE’s infrastructure and emergence as a global hub for business, trade, and tourism, and the UAE’s commitment to the cultivation of a local aerospace industry destined to create and sustain jobs throughout the MENA region — as well as around the world. According to the report, the four airlines that offer nonstop flights between the US and UAE — Emirates, Etihad Airways, Delta, and United— helped generate more than USD 5.8 billion in positive economic benefit in 2012 (combining overseas visitor expenditure and airline impact, such as purchases, and indirect and induced effects). At the nine US gateways, each nonstop flight to the UAE has been calculated to generate approximately 200 airport jobs and USD 80 million in annual economic activity. Currently, there are 182 nonstop flights each week between the U.S.

and UAE. In 2013 alone, these flights are expected to carry 2.4 million passengers between the UAE and US, and the number is expected to grow in the coming years. For its part, the UAE serves as America’s top export market in the Middle East North Africa (MENA) region and a key gateway to Asian markets including China and India. The country is an emerging contributor to the rapid globalisation of these industries and the development of sustainable American jobs in general. Further, Abu Dhabi, the largest emirate in the UAE, has emerged as the catalyst behind the country’s growth in these sectors. Indeed, commercial aviation and aerospace are key economic priorities highlighted by Abu Dhabi’s leadership in the Abu Dhabi Economic Plan 2030, a strategy designed to drive the emirate’s economic diversification away from a dependence on oil over the next two decades. According to this plan, Abu Dhabi aims to build and expand current infrastructure to support airplane manufacturing by 2019. Abu Dhabi also plans to increase the capacity at Abu Dhabi International Airport (AUH) to close

to 50 million passengers a year with the new Midfield Terminal Complex set for completion by 2017. In the future, Abu Dhabi endeavors to become a nerve center for global aviation, joining Seattle and Toulouse as a leader in component manufacturing, aircraft production, and aviation technological innovation. Abu Dhabi made strides toward this goal in April of 2012 by holding its inaugural Global Aerospace Summit hosted by Mubadala Aerospace, a subsidiary of Mubadala Development Company and Abu Dhabi’s flagship aerospace investment firm, under the patronage of His Highness General Sheikh Mohammed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces. The two-day conference brought close to one thousand industry representatives, including a U.S. Department of Commercecertified trade delegation of American aerospace executives, led by the Aerospace Industries Association (AIA) and the USUAE Business Council, to exchange ideas on the future of global aerospace. During the conference, Emirati companies underscored a desire to work with international partners to achieve Abu Dhabi’s objective to become a commercial hub for aviation research, development, innovation, and manufacturing in the Middle East. This ambitious goal presents American companies, particularly SMEs, with an opportunity to contribute significantly to the successful development of the UAE’s nascent aerospace sector and supply chain capabilities. Moreover, it is an opportunity to develop important relationships with expanding UAE companies that have viable business plans and impressive investment portfolios. In fact, Emirati companies have made and continue to make investments that directly support American jobs spanning the entire commercial aviation sector. For instance, the two national carriers of the UAE boast expanding fleets of Boeing airplanes fueled by General Electric and Pratt & Whitney engines, and order ledgers indicating ambitious growth plans and

ABOUT The US-UAE Business Council is a progressive business advocacy organization solely committed to the advancement of the trade and commercial relationship between the United States and the United Arab Emirates. Launched in May 2007, the US-UAE Business Council was inaugurated by His Highness, Crown Prince, Sheikh Mohammed bin Zayed Al Nahyan and His Highness, Foreign Minister, Sheikh Abdullah bin Zayed Al Nahyan and is comprised of nearly 100 members from a broad range of US and UAE commercial sectors. To read the full US-UAE Business Council commercial aviation report, “US-UAE Commercial Aviation: Taking Flight,” visit: http://usuaebusiness.org/wp-content/ uploads/2013/03/US-UAE-aviation-report_Published.pdf

delivery schedules. Further, both airlines have placed U.S. expansion near the heart of their development plans. For its part, Boeing recently awarded Strata Manufacturing, a subsidiary of Mubadala Aerospace, a ten year contract to serve as a tier one regional supplier of advanced aero structures for Boeing’s 777 and 787 Dreamliner planes. The contract is a clear testament to the confidence Boeing

and investors to secure future business to sustain jobs and to support the growth of their commercial aviation and aerospace industries. Consequently, American companies — both large and small to medium-sized enterprises (SMEs) — looking for future sustainable business and investment opportunities should set their sights globally; namely toward the Middle East and Asia. Here, demand is

has in Strata’s ability to deliver quality products and in Abu Dhabi’s potential to develop as a regional, and eventually global, aerospace manufacturing, repair, and overhaul (MRO) center. Other key sectors that support US-UAE commercial aviation relations include: information technology, travel and tourism, airport facilities management, air traffic control (ATC) technology, manufacturing and infrastructure, and energy. Today, the epicenter of commercial aerospace demand is shifting eastward as countries recover from the global financial crisis and airlines from the Middle East and Asia emerge as dynamic players in the international marketplace. To compensate, American companies are increasingly looking abroad to international partners

growing at a rapid pace and a common thirst for innovation is supported at the highest levels of government and industry. As the commercial aviation sector evolves into a truly globalised engine of commerce, airlines from the UAE, the broader Middle East, and Asia continue to place recordbreaking aircraft orders to support growing populations, fill gaps in international air traffic demand, and expand route networks. Many countries are working tirelessly to develop internal manufacturing capabilities to take advantage of this opportunity and compete internationally. Accordingly, it is in the interest of American industry to set aside competitive tensions and secure mutually beneficial commercial footholds in the UAE’s emerging aerospace markets in both Abu Dhabi and Dubai.

Other key sectors that support US-UAE commercial aviation relations include: information technology, travel and tourism, airport facilities management, air traffic control (ATC) technology, manufacturing and infrastructure, and energy.

MAY 2013

COUNTRY FOCUS INVESTMENT

Tread with care

Direct investment in the United States from the Middle East is generally unproblematic even by state-owned companies or by sovereign wealth funds, but nevertheless requires careful consideration of U.S. national security controls. Guillermo Christensen and Gregory J. Golden from Baker Botts LLP, talk to us about this issue.

oncerns that state-owned companies may have to address in clearing such regulatory hurdles include, perceived threats to U.S. energy infrastructure; concerns regarding terrorism and political instability; concerns about political and economic ties to regimes and transfer of critical or sensitive technologies; perceived risk to US jobs/economic security. Middle Eastern companies looking to do business in the United States should prioritise their investment objectives and tread carefully and purposefully toward fulfillment of those objectives, with the expectation that their activities will be subject to a high degree of U.S. government and public scrutiny. Under U.S. federal law, the President has the authority to suspend or prohibit any

Guillermo Christensen

Gregory J. Golden

foreign acquisition, merger, or takeover of a U.S. business where the transaction is determined to threaten the national security of the United States. These laws are implemented and administered by the Committee on Foreign Investment in the United States (CFIUS), an inter-agency committee that reviews the national security implications of foreign investments in U.S. companies or operations. Parties to a prospective acquisition, merger, or takeover may voluntarily notify CFIUS of the transaction and secure U.S. government approval before the transaction is completed. Where parties to a prospective transaction do not provide voluntary notice to CFIUS, the Committee has the authority to initiate its own review of the transaction, including after the transaction has closed. Once notified, CFIUS will conduct a 30-day review to determine whether the proposed acquisition could impair the national security of the United States. If the Committee determines that the transaction

ABOUT Mr. Christensen is an attorney with Baker Botts’ International trade practice in Washington DC, and formerly has held several positions in the U.S. National Security Establishment. Mr. Golden is the Partner in Charge of the Abu Dhabi office of Baker Botts. He also serves as the Chairman of AmCham Abu Dhabi.

MAY 2013

raises significant national security issues, it will undertake a more thorough 45-day investigation, after which a report will be issued to the President. The President then has 15 days to decide whether or not to block the acquisition. The applicable federal laws do not cover most “greenfield” investment by foreign persons, i.e. starting a new venture from the ground up. Thus, foreign companies may create new U.S. businesses without the need to undergo CFIUS review, but CFIUS may in some situations request reviews even in some types of hybrid greenfield investment situations when, for example, the acquisition is closely proximate to a sensitive U.S. government facility. In practice, most transactions will be able to clear CFIUS review without significant complications. In 2011, for example, CFIUS reviewed 111 transactions, almost double the number in 2009. Of those transactions that were notified to CFIUS in 2011, 40 were subject to a full investigation, a significant increase from the prior two years. In contrast, for the first time since CFIUS came into being, in 2012 President Obama blocked a transaction involving a Chinese company. Key CFIUS considerations regarding the acquiring entity • The ownership of the foreign acquirer (including all companies in the ownership chain), and in particular whether there is control or ownership by a foreign government. • The foreign acquirer’s long term plans for the business and strategic purpose for the acquisition. Key CFIUS considerations regarding the target company include, whether the target: • works in or has access to secret government data, or whether it has U.S. Government contracts. • produces technology, software or goods that are controlled under US export laws. • owns/has access to/operates critical infrastructure. • operates in a domestic sectors that is considered to affect the capability and capacity of the U.S. to meet national security requirements.

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