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• Banks see great value in becoming strategic advisers to corporate partners, rather than remaining transaction processors
• Corporates and banks are putting themselves ahead of the field by being willing to take risks in exchange for higher returns
• Low oil prices and the UAE’s trailblazing example are pushing Saudi Arabia and others to diversify economically and promote new industries
• Training and retaining talent is the biggest challenge facing leading banks and corporates across the region
• Banks face increasing demand from corporate clients to act quicker and more efficiently, and to identify tailor-made solutions to problems
• Non-oil GDP growth is picking up, led by a better business climate and a pick-up in infrastructure investment ahead of Expo 2020 Dubai
• A 5% sales tax, set for introduction by the UAE in January 2018, is slated to add 1.6% to GDP and lessen reliance on oil revenues
• Export credit agencies from Asia and Europe are showing interest in the region, led by rising inward investment from China
Elliot WIlson, Euromoney What are the main macroeconomic challenges facing the UAE and the wider region?
Monica Malik (MM), ADCB We are still facing challenging conditions at the moment, with the region’s economies continuing to restructure to cope with lower oil prices. When we look around the GCC [Gulf Cooperation Council] region, we see two different types of economies. On the one hand, there are hydrocarbon-richer-per-capita nations like the UAE, Kuwait and Qatar, with lower budgeted break-even oil prices, smaller fiscal deficits and higher net foreign assets. On the other, there are hydrocarbon-poorer-per-capita countries like Saudi Arabia, Bahrain and Oman, with larger fiscal deficits.
The UAE has arguably been the most proactive country in terms of starting to introduce fiscal reforms as soon as oil prices started to fall, from liberalizing fuel prices to reducing subsidies. We expect that the UAE will post a very small fiscal deficit in 2017. We also see a moderate improvement in non-oil GDP growth in the UAE in 2017, with some signs of a pickup in economic activity.
Two factors are driving this: first, a better global environment, which is supporting trade, mostly east-west rather than regional demand; and second, a pick-up in investment activity largely led out of Dubai ahead of Expo 2020. Dubai continues to expand its economic base.
A key factor next year will be the introduction of a nationwide value-added tax [VAT], which will impact inflation and consumer spending and boost non-oil revenue. On the other hand the new sales tax will diversify the government’s revenue base, adding 1.5% to 1.6% to GDP. Consumer activity however is expected to weaken in 2018 with the rise in prices.
Meanwhile, Saudi Arabia is in the midst of a large national transformation plan. We saw last year a large shift in fiscal reforms resulting in a sharp slowdown in economic activity. The pace of reform has since moderated, while demand in the real economy remains weak. Saudi Arabia is looking to upgrade infrastructure and widen its economic base, in terms of tourism and housing. The sale of up to 5% of oil producer Aramco will be vital to providing the government with fresh funding.
Euromoney How do corporates here view the region’s strengths and weaknesses?
John Joseph (JJ), DWTC For the region, 2017 was a tough year. This was due to various geopolitical issues and fallout from the lower oil price. Corporates have reacted with hiring freezes and even some headcount reductions. I am more optimistic about 2018, particularly for the UAE. This is primarily due to two factors: first, ongoing real estate development; and second, the planned drive to enhance tourism both for business and leisure.
The UAE and more particularly Dubai have always tried to create demand rather than wait just for organic demand to grow. All of this infrastructure and real estate development is part of the demand-building process, as are all the initiatives to enhance tourism across the country. This focused approach is building optimism for 2018.
Regional uncertainty is definitely a concern, led by the geopolitical situation in Qatar and Iran. I don’t think anyone could have foreseen the Qatar situation, and the future of the global relationship with Iran again seems to be up in the air. Investments decrease when geopolitical uncertainty rises. While inward investments from south Asia are holding up well, investments from Europe and the rest of world have been impacted.
Ulrich Schiessl (US), Siemens Siemens’ geographic footprint in the Middle East reaches from Libya to Pakistan. We have been present here for more than 140 years, so having a long-term view on the region is a given. The GCC region is a strong market, where we are highly active in infrastructure development. We are proud to be a Premier Partner of Expo 2020 Dubai, focusing on intelligent infrastructure and operations, as well as leveraging our internet of things (IoT) operating system, called Mindsphere.
Egypt, where we’ve had a continual presence since 1901, is another of our most-important regional markets. Despite recent challenges, notably pressure on the Egyptian pound, we maintain a positive view that challenges are being met. Austerity measures do impact all market participants, so the banking landscape has changed for every corporate. The Central Bank of Egypt’s decision to cut the group lending limit to 20% from 25% led to a build-up of bank relationships, which again adds complexity to a treasurer’s operations.
Euromoney Ashish, how is the banking sector looking?
Ashish Sharma (AS), ADCB We have been through a lot of changes recently. The opportunities are there; we continue taking transactions to the market and we are constantly being innovative with structures. So, I am generally optimistic – though that’s not to say there will be no further challenges next year.
The reality is that at the start of the summer in 2017, oil was at $45 a barrel level; now, we are looking at $50 to $60, and even though we have a more diversified economy, oil prices going up or down do impact us and how we operate.
Euromoney What are the big changes for you as a lender now versus one or two years ago, in terms of how you serve corporates and what they want you to do?
AS, ADCB Recently there is a lot more credit available, especially for well-credentialed clients, but also there is demand from clients for us to do things better, faster and more efficiently. And ‘more efficient’ doesn’t have just to be about reducing costs and/or pricing, it can also mean a service enhancement or a tailor-made solution, so the challenge is to balance these two factors.
Isaac Thomas (IT), ADCB From a pure transaction banking perspective, there are lots of opportunities here. First up is the importance of technology and how it is affecting our lives collectively. The challenge is to do things better and to move away from being transaction processors, to being more focused on strategic advice.
There is a lot more demand for clients to reach out and connect with their value-chain providers and for us to ensure we make the most of new technologies such as blockchain, to provide value in terms of credit checks and service trade transactions, and to effect fully transparent payment mechanisms. As we move forward, technology and digitization will unlock a lot of the things that occupy treasurers’ minds, with technology driving initiatives and making sense of them.
Euromoney How are companies around the table preparing for a more digital future?
JJ, DWTC Our digital strategy is a crucial part of our planning process, and this is reflected in the amount of investment that we channel every year into this area. The focus for us is on our front-line businesses and our customers. Our strategy is around enhancing our ability to get and leverage customer data to come up with tailored solutions. Our customers are spread across the world, so it’s about trying to capture that information and maximize the commercial benefit.
Euromoney Siemens has always been at the forefront of technology and new thinking. Is technology changing you at the regional level, or globally, or product by -product?
US, Siemens All of the above. We are and always have been a technology firm. Siemens is at the forefront of the IoT, trying to connect industrial applications together and something we developed into a much larger application called Mindsphere. We are selling IoT technology, trying to connect and enable the fourth Industrial Revolution, as it is often referred to.
This is where blockchain, a technology thought up by individuals, is combined with industrial technology. Look at efforts to link solar panels to power transmission lines, to ensure the energy you produce when you’re not at home flows into the grid. My department, which represents the corporate treasury function across the Middle East, has recently assumed the title of ‘centre for excellence for blockchain’.
There is a big digitalization programme running throughout the group, with different work streams and centres of excellence, covering blockchain, robotics, AI and data analytics. We co-create as a virtual group across the globe.
Great blockchain technology can save us in markets where we have a smaller workforce compared with Europe. It is quite exciting to see the likes of the UAE and Bahrain making good moves and creating initiatives to attract fintech companies and to learn about new technology. While Siemens is a conglomerate and fintech is not our core business, that does not mean we do not need to co-create with our businesses.
Euromoney Do banks that you work with provide the level of service you need?
JJ, DWTC Picking up on what Isaac said earlier, we look to banks in their advisory capacity. Of course we want money from them and need their transaction banking capabilities, but advisory capability adds value and differentiates one bank from another. Can they do more and can we do more? Yes, of course. We have tried to get more feedback and knowledge about the markets in which we operate and want to operate, and this is where the best bankers really shine through. Enhancing knowledge exchange is something banks need to continue to do more.
AS, ADCB As we embark on a journey into digitization, it also a journey of combining technology and service. As a large regional bank, we have the resources and the capacity to work with our clients to help them achieve their objectives. That is something we strive to do together. It’s not just about what we want but about what our customers want.
US, Siemens We talk about our banks as our partners. A few years ago, a partner for us meant a bank that could meet our global needs. Well, the picture on that has changed since 2008: it’s not as clear as it used to be and the thinking within the group has changed. On an overall perspective, the banking market is changing – there is no doubt about that. We trade with different banks – it’s just a matter of where you set the value limits and where you set the thresholds.
In over a decade working for multinationals, I found that centralization follows decentralization, and this also rings true for banks. I firmly believe banking is a business built on personal relationships. The relationship manager, the treasurer, the CFO and the CEO – it’s all about how this community interacts and how networking events distinguish one bank from another.
In terms of technology, it’s not an absolute differentiator between banks any more. Many banks, whatever their size, have invested heavily and well in technology. ADCB has done this very well for instance. Ten years, ago, maybe a US bank would have been at the forefront of technology, but the difference in technology terms between banks is not as great as it once was.
Euromoney Is that how ADCB feels – that the gap between banks has narrowed, certainly in terms of the technology you offer customers?
AS, ADCB I do. As the future becomes more opportunistic and disruptive, and as organizations continue to invest in technology, the gaps between lenders – especially between us and global lenders – will reduce even further, simply because it’s all about meeting local requirements, and each local requirement is different. It’s easier for us to invest in and provide solutions that are unique to customers in this geographic delivery area.
US, Siemens Something that will distinguish banks and corporates from one another is their willingness to accept and to make mistakes. When we talk about new technology, such as blockchain, we venture into new territory. We are getting used to ‘proof of concept’ terminology and minimum viable products. Business culture is adapting to a new culture where it is considered more acceptable to make mistakes. In my language, this translates as fehlerkultur, a term that, rather than denoting something negative, now means the ambition to succeed rather than the fear of making a mistake.
So, what I really need on the financial side is a banking partner that is willing to go the extra mile with me on this. I have seen operations where everyone wants to make money from the first successful proof of concept, but that is not always feasible. The UAE as a country and ADCB as a bank are seemingly interested in working on these new technology projects. New technology must not be perceived as threat but as opportunity.
AS, ADCB Banks are facing interesting challenges as well. Some of the relatively smaller banks in the region do not have deep pockets or the risk appetite to fail, and this is difficult for them. A key challenge is how you adapt to technology, how you experiment and keep experimenting; and that experimentation has to have the client in front of you, providing constant validation of what they are doing and what they need.
Banks have to constantly seek to find out what works and what does not, and to scrap the things that don’t. So, it’s about testing the paradigm as it forces us to become partners rather than just being a provider of financial solutions. We all fail and succeed together, and it’s as if you are participating in that risk. This is a way of thinking that banks are being forced to adopt in order to change. Banks by their nature keep their cards close to their chest, in terms of what they are willing to reveal. So, the question becomes how you open up your environment, and this is where technology comes in. If Bank X and Bank Y have a key client in common, they could work together to provide them with the best possible service.
JJ, DWTC Digitization helps in the transition from consumer to customer. Digitization allows us to reduce the time spent on administrative matters and focus our time and efforts to better analyze customer data and provide solutions to them. In a similar manner, digitization has helped us to work better with our banking partners. Less time is spent on transactional aspects of the banking business and the focus is on the exchange of value-added information. This has gone a long way in developing strong banking relationships.
Euromoney The UAE is on track to implement a nationwide VAT-style sales tax from January. How will this change how you do business on a daily basis?
AS, ADCB We will get used to it. There’s no issue, but then there is no choice. Clients are at different stages of acceptance and readiness. I imagine a few will take time to get used to it, that’s just the way it is. Eventually things will settle down.
IT, ADCB VAT will affect the transaction banking business, but it is for us to manage the business in ways that make sense for the bank and the client.
MM, ADCB The overall impact on the UAE economy from the new sales tax will likely be short-lived. We expect to see a one-off impact: following the introduction, consumption activity is expected to weaken, though we see an increase in spending ahead of VAT. We are already seeing corporates in industries from retail to hospitality to airlines engaging in price discounting to support demand, and we see the new tax adding three percentage points to headline inflation.
We foresee a possibility that some corporates won’t be able to pass on the full amount of VAT to the end customer. However, the impact should be relatively contained, as the new 5% rate is low on a global basis. It is all part of a wider journey across the GCC region to transition away from the hydrocarbon sector, toward a more diversified economy, including in terms of the composition of government revenues. Also important will be the preparedness of companies to deal with the new VAT rules and framework.
Euromoney What will the composition of the regional economy look like in 10 years’ time, factoring in waning dependence on hydrocarbon-based revenues?
MM, ADCB It will vary a lot from country to country. We see the UAE remaining the most diversified economy; and there is a continued focus to look at new areas of development, whether that means building new tourist attractions or in the technology space. Other regional countries are seeing slower progress towards diversification, such as Kuwait. Despite a pickup in investment activity, much of this is to do with catching up on infrastructure, with limited signs of diversification. However, the economy benefits from large foreign exchange reserves and a very small deficit.
Developments in Saudi Arabia will be of particular interest as it progresses in its transformation process. This is especially vital in the light of Saudi Arabia’s large youth population – and given that the hydrocarbon and petrochemical sectors will not be able to provide enough new jobs. Saudi Arabia is seeing a pickup in the reform momentum, which initially started with fiscal reforms, but we are also now seeing wider social changes.
Euromoney Turning to talent. Is attracting it and training and retaining it one of the biggest pressures you face in the region?
US, Siemens Absolutely. Egypt for instance has invested well in education. It’s a big country of nearly 100 million people, many of whom are bilingual and even trilingual and who work around the region. We have a hub function here, and I see our hub treasuries seeking to bring in fresh talent, and that process is not so much simply about money these days, but more about how interesting the job sounds, and about providing individuals with new opportunities.
In recent times, I have employed IT developers and engineers, attracting them to the treasury by making the job sound interesting.
At the end of the day it’s all about leadership – putting the right people in place and training them. We had a discussion yesterday with our human resources function about how to attract millennials and individuals who may want to be freelance and who want to work on a project-by-project basis. Questions we raised included what we could offer someone who doesn’t simply want to live a standard corporate life until they retire? Maybe it’s not enough to put a billiard table or beanbags in the office environment. Maybe if we let our workforce travel more and learn more, it doesn’t matter if they work from home or at the office.
MM, ADCB Do you see a difference here between generations?
US, Siemens Definitely. It is not about the money or the title as much anymore, particularly among millennials, as these young native blockchain evangelists don’t care about titles so much.
Euromoney Isn’t that something that comes with age? Isn’t the younger generation going to care about titles when they are in their 40s and married with children?
US, Siemens They grow up in an environment where if they change jobs or roles or projects every six or nine months, it’s up to them to sort out their health insurance or their pension. They will accept that risk. For me, the risk is whether I can have someone working with me for six months on a confidential project. I have to screen them, to work out technically speaking where the intellectual property sits, where the non-compete is and so on. If this is indeed the future, these are important questions.
MM, ADCB From an economist’s point of view, it’s not just about managing human capital but about how society develops, what that means for the demand base of the economy and how we adapt to all of that.
AS, ADCB We are constantly embarking on journeys with customers that may have no defined end-point. The key here then is how to retrain and re-motivate members of one’s team to go on these journeys, as we have for so long, as corporates, been objective-driven. Keeping young talent in particular motivated and provided with fresh challenges will not be easy.
US, Siemens You need those individuals as personal networks get built over time, particularly in the Middle East, a region with large and diverse markets. Saying that, you will always have the traditional workers who build long careers, so you cannot simply be focused on pleasing new talent that wants to work from home and who may be constantly posting things on Facebook or Instagram. That may upset some people, so it is a case of finding the right balance. First and foremost, we need to hire the right people, and then see them work and communicate within the team.
IT, ADCB Part of it is also the challenge as we get more opportunities for other value-added services from a banking perspective. There is a lot of focus on reducing costs, making clients more engaged with technology and how, for instance, to convert repetitive activities into artificial intelligence. As machines are trusted with completing tasks, human talent is being forced to upskill itself. From the point of view of a bank or a corporate, the challenge is how to work with new technology, how to deal with machines and AI, how to upskill ourselves. More people are happy moving from one project to another, particularly millennials. The onus is on corporates to make them attractive to talent and vice versa.
AS, ADCB Digitization can ensure that even if talent leaves, we can get newcomers who replace them up-to-speed quickly. It has been successful in many areas. We have a management-training programme where we hire 15 to 20 people in each of our key markets, then train them step-by-step to be skilled at every operational level. There is plenty of talent out there in the market and there are people who want to work. So the question is whether they want to work like we want them to. The new generation of workers has earnestness: they want to work and boost their skill levels. We see this hunger everywhere.
US, Siemens One’s ability to attract talent to a job or a project or a corporate changes from country to country. Siemens has taken a long-term view of sponsoring talent through various colleges and universities, and training individuals up in areas like IoT. As a technology firm we still see great value-add being built here. The region is filled with opportunities, from Dubai’s 2020 Expo, to UAE Vision 2021, to Saudi Arabia’s Vision 2030. There are so many visions here, and the region is growing more coordinated and joined-up and driven by a burgeoning services sector.
Take the example of Saudi Arabia, which is developing a new industrial base that will require a huge number of qualified and capable engineers. Siemens is building and operating digital factories – our digital factory unit generates 13% of all group-wide annual revenues, or around $13.5 billion. In turn, digital factories require a highly skilled workforce.
It is our responsibility to define the impact so we don’t lose highly skilled personnel along the way. Certain industries will grow in and around the region. We will need engineers as much as we need bankers, and we also need vocational training to establish a skilled labour force that is able to build competencies beyond the service industry.
AS, ADCB In terms of our approach to mentoring, there is no one-size-fits-all approach here; rather we aim to encourage talent and skills to develop. Banking is ultimately about relationships. Technology is important and we talk about it a lot – relationships will always be there when it comes to banking.
Euromoney After the financial crisis, many global lenders left the region, before slowly returning. Does foreign interest in the region – financial and otherwise – remain high?
JJ, DWTC There is a lot of foreign interest in the region. Take the example of export credit agencies (ECAs), which are showing ever-greater interest in the region. Each of these ECAs is pushing the benefits of the country and its exported goods. Looking ahead, this region will always be a net importer. So you will see a lot of ECAs increasingly showing interest in the region. The countries with strong ECA activity in the region include the UK, France, Belgium, Italy, China and South Korea.
US, Siemens I fully share your view. Project financing is becoming a trend and a mandatory sales provision. It is required for everyone doing business here to hire professionals who know about ECAs in order to continue to expand across the region. Take train manufacturing, which is increasingly dominated in the Gulf by Chinese corporates, who are becoming world leaders in areas like hard infrastructure, manufacturing and power transmission. A host of mainland Chinese brands, from Huawei, Lenovo and on, are increasingly powerful conglomerates with strong brands and a rising sustainable revenue base.
AS, ADCB What we are seeing is that multinational corporates are increasing in importance at ADCB, helped by the fact that many global lenders have retreated to various degrees. We are seeing some re-engagement by global banks, but this is still in its early stages. We are seeing not only more investment flowing into the region, seeking to profit from rising east-west and west-east trade flows but also global firms coming in to design, build, and engineer major infrastructure projects within the GCC in general and the UAE in particular.
Contractors have done well recently and there is further evidence of increasing involvement from national ECAs. We are also seeing a lot of interest from multinationals in terms of how they look at receivables in the region and discounting them and monetizing them, mainly as we understand the counterparty risks within the region better than global lenders. It is clear that multinational interest in the region is increasing and that we are benefiting directly as a result of that.
MM, ADCB Alternative funding sources, such as from ECAs, is one of the factors keeping system-wide credit growth weak this year. Through the first eight months of 2017, total credit growth grew just 0.3% year on year, despite stronger growth and a pick-up in economic activity – and that is due to many factors, such as deleveraging by government-related entities and weak consumer credit demand.
Euromoney How does the region’s place on the map stand to benefit it in the long term, thanks to rising trade, stronger economies in central and south Asia and east Africa, not to mention its position in China’s Belt and Road Initiative?
AS, ADCB The reality is that the UAE is a fairly large trading country, so there will always be large trade flows going through here from west to east or east to west. A handful of Chinese firms are becoming significant, mainly in areas such as hard infrastructure. There is rising inward investment into the region from China, but it has mainly been in hard-infrastructure areas. This is expected to accelerate due to China’s Belt and Road Initiative.
JJ, DWTC The region will benefit considerably from its geographical location. The region as a whole and the UAE in particular are busy promoting themselves as a business hub, connecting the eastern and western hemispheres. A huge amount of investment is flowing into the construction of new airports and the extension of old ones. The region’s leading carriers are among the largest buyers of new aircraft in the world. Emirates in particular is buying new long-haul jets and positioning itself to be the leading global airline. The UAE is ideally situated on the map. Many large trading partners are a mere five-hour flight away. These include economies in central Asia and eastern Africa, as well as Russia and India.
Dubai’s Expo 2020 will focus on traditional trading partners in the Americas and Europe. However, there is also a huge focus on smaller markets, particularly in Africa, east and southeast Asia and Latin America. Some of these countries may be small in terms of their economic scale, but over time they will become vital customers and partners to the UAE and other GCC states. This will benefit the region and will accelerate the economic diversification strategy that the UAE government has in place. Fast-forward 10 or 20 years and you will see Dubai and the UAE emerge as a global trading hub, equidistant from and comparable to the likes of London and Hong Kong.
US, Siemens Siemens gave a very clear answer to this a few months ago when we publicly announced plans to set up our global logistics centre in the UAE. We just received the licence for that holding company. This doesn’t mean we are building huge new warehouses here – what we are focusing on through the hub is building baggage, postal and transportation systems, and automated transport systems. From now on all of that business will flow out of here.
More trade is flowing through this region and markets are stretching out from here, in India, China, the Middle East, Saudi Arabia, to support Expo 2020 – this is where new airport infrastructure is really needed. This is where the music is playing and you have to align this with that. The UAE is going to be one of the major trade hubs of the future.
Euromoney How important is the decision to set up your global logistics centre in Dubai from Europe, not just for you but also for the UAE government’s global image?
US, Siemens We want to have a major engineering presence in the region over the long term, and to that end we are bringing in engineers, competence and technology – and we are doing it to stay. This is a long-term strategic decision taken many years ago, and the main factor underpinning the original decision was the growth of the oil and gas sector. Everyone flies through the UAE, all the time. We call it a strong commitment to the region and it makes sense for us, for the UAE and for the wider region.
Middle East transaction banking debate participants
|John Joseph (JJ) is chief financial officer and vice-president of finance at Dubai World Trade Centre, a leading destination for events and exhibitions in the Middle East. Before joining the firm, he worked at General Electric for eight years, including a three-year stint at global professional services provider Genpact.|
|Monica Malik (MM) is chief economist at Abu Dhabi Commercial Bank. She has over 15 years’ experience as an economist, specializing in the Middle East and North Africa region. Before joining ADCB, Malik was chief economist at investment bank EFG-Hermes and a senior economist at Standard Chartered Bank in Dubai. |
|Ulrich Schiessl (US) is regional treasurer for the Middle East region at Siemens. His career at the German industrial conglomerate started in Cairo in 2006, where he was appointed Egypt country treasurer after graduating with a BBA in banking and financial support services from the American University in Dubai. |
|Ashish Sharma (AS) is head of wholesale banking, Dubai and Northern Emirates, at Abu Dhabi Commercial Bank. His 21-year career started in Asia, where he worked for ANZ in the Philippines, Vietnam and Singapore and Australia. He joined ADCB in 2010 as head of Abu Dhabi government client coverage. |
|Isaac Thomas (IT) is head of transaction banking at Abu Dhabi Commercial Bank. He joined the UAE-based lender’s wholesale banking group in 2010. Before that, he spent eight years specializing in cash management and trade services in Dubai, first at Standard Chartered Bank, then with Deutsche Bank. |
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