By Jennifer Bell
No matter how much revenue VAT generates, it does not negate the UAE’s need to find other revenue streams
When flux is a dominant feature of the economic landscape, calmness and clarity are commodities that increase in value. Bob Moritz possess plenty of both.
Soft-spoken on hard issues, the chairman of PwC, one of the world’s largest professional services firms, is neither bullish nor bleak when discussing the weightiest economic issues facing the Middle East.
More than 30 years into his PwC career, the past eight of which have been as chairman and senior partner, Moritz speaks with the precision that comes with experience. And in the GCC there is definitely no shortage of material — taxation, digitisation, e-commerce, economic adaptability and agility — to talk about.
Given his insight from decades of dealing with complex and crucial issues, Moritz’s confidence in what lies ahead for the GCC is perhaps reassuring. Take VAT, for example. The 5 percent tax on most goods and services is due to be implemented across the GCC on January 1, 2018, and many questions remain unanswered. One of these: will the public accept or resent it?
Moritz argues it will be the former if residents can see where the new revenues — potentially $6.5bn in the UAE in its first year — are spent. “Where we’ve seen negativity around VAT, it’s not necessarily about the tax itself; it’s about what is being done with the revenues raised,” he tells Arabian Business.
“This is a relatively small, albeit new, tax. The question is, how much of its revenue is going to be productively invested back into the system for economic growth and sustainable, long-term change? The effect of taxation is negative when its revenue and its economic benefit shrinks due to administration and bureaucracy. You have to look at both sides of the equation — not just the tax, but how the cash it generates is redeployed. That’s where the focus should be.”
A new tax requires transparency, says Moritz, a father-of-two who resides in New York.
“Investment and a value proposition justify the implementation of taxation for the first time,” he says. “Coupled with other revenues, it allows governments to invest in job creation, innovation, education, skillsets, the cities of the future — things that make people’s lives better and easier.
“There is an opportunity to develop a VAT system that is effective, efficient, and does not necessarily replicate what some European countries have done, where there is a very process-heavy approach. That takes time and energy, and potentially takes away the net capital, the benefit and the purpose of implementing a new tax.”
Moritz does not pretend this will be easy. The months between now and when the VAT hits consumers’ pockets will, he says, require “a lot of work” for businesses and the government. Any denial that the tax would be introduced has been dashed and firms need to urgently implement infrastructure and technology, and meet regulations.
“Companies have to be ready for it, and so does the government — finalising rules and regulations, ensuring efficiency, preventing leakage, determining what the revenue will go towards,” he says. “But in the UAE, and the GCC as a whole, there is an opportunity here to rethink the system.”
No matter how much revenue the tax generates, Moritz warns that it does not negate the UAE’s need to find other revenue streams and areas of economic activity.
One obvious new sector for the region is e-commerce, which has hit headlines due to Amazon’s agreement to buy the GCC’s biggest platform, souq.com, for a reported $580m and the impending launch of new competitor noon.com.
The future of e-commerce in the GCC visibly energises the chairman, who talks about the possibilities the emerging trend can bring to the region.
“Is it a big opportunity? Yes,” he says. “A lot of very smart people have bid on it, and I believe you have to follow the capital and see what happens.
“When you look at the demographics of this region, it’s likely that the impact of e-commerce will be felt quicker here than in some of the other markets it has hit. In developed markets, it took a long time for e-commerce to evolve and the implications to be felt. But in the GCC, there is a relatively young age group that is very adaptable and active in terms of using their smartphones and mobile devices.”
But he also has a warning to sound.
“The only aspect that may slow down the impact of e-commerce in this region is the social aspect — what are the transformative implications of it when set against the experiential social activity of commerce?” he says.
“How do we combine it with the well-developed retail space and the various malls we already have? How do we think about the delivery of goods and services? What will be the impact of having more logistics companies involved in commerce, as opposed to going into a store and physically buying an item?
“None of these are negatives at all, but e-commerce has the potential to shift the market in the UAE and the GCC, and probably at a faster pace than we have seen in other parts of the world.”
These themes of transformation and technology, and how they influence the way business is being done and societies are being shaped are at the forefront of PwC’s thinking. The GCC’s prosperity, Moritz says, has not come without instability, with a population explosion bringing huge economic benefits and allowing such cities as Dubai to become global hubs, but also straining resources and infrastructure. Youth unemployment rates in the Arab world are among the highest globally, while climate change and scarcity of resources have created challenges that will not simply solve themselves.
Technological breakthroughs could be part of the solution, he says, but there are substantial hurdles to overcome if the region is to maximise its impact while also preventing higher unemployment.
“The disruption that digitalisation is bringing to today’s organisations requires new skills that are in short supply in the Middle East,” he says.
“Digitalisation is important not just to PwC, but to all industries, including manufacturing. The question is how organisations can succeed in this area, or even accelerate the curve of change, such as by enhancing digital IQ, making sure a plan is in place for customer adaptability, and recognising the need for radical change in terms of supply chains, professional services, manufacturers, pricing and business models.
“And then there is the human factor. While the concept of robotics and artificial intelligence generates excitement, the human element must still be brought to the table. Two-thirds of the population in the Middle East are under 30, and that youthfulness allows for much quicker adaptability and for digitalisation to be brought into every back office, streamlining its operation.”
When it comes to catalysing transformation, Moritz feels the Middle East, a place the American admits to being constantly impressed by due to its rapid and continual evolution, is “quite a bit ahead of the rest of the world” because it does not have the ingrained methodologies that he believes hold back other countries. Also, its changing landscape — including the recognition that the days of oil and gas driving the economy are numbered — makes new approaches necessary, not optional. The region can work quickly, he says, because it has to.
“There is huge opportunity for scalability on a more accelerated basis in the GCC,” says Moritz, adding that the opportunities available in the Middle East and North Africa have seen PwC double its staff numbers to 4,000 in the past few years, a trend that is likely to continue.
“[The region] is like a clean slate. Also, many trends — shifting demographics, rapid urbanisation, consumer and residential needs of citizens, scarcity of resources combined with a dependency on oil and gas — are more pronounced and unfolding at a faster rate in the GCC, so businesses are having to think of new ways of doing things.”
Transformation can be influenced by factors beyond the GCC’s boundaries, of course. Having provided audit and advisory services to European and US-based organisations operating across Asia, Moritz is well-placed to offer perspectives on the global economic ecosystem and how some of the seismic political shifts of the past 12 months may impact on the MENA region. Brexit, perhaps unsurprisingly, is high on the list.
Trade between the UK and the UAE alone is forecast to more than double to $33bn by 2020, and amid all the claim and counter-claim over what Brexit will mean for Britain, there is no debate over how its leaders view the GCC: as a prime market for trade and investment deals, particularly given the long-standing economic ties between the two global players in such sectors as defence and aerospace. The UK is expected to use its already warm relations with Gulf states to quickly strike bilateral trade deals that the country was unable to do while still a member of the European Union.
“The reality is that, even if the consequences of Brexit are somewhat uncertain, the flow of trade and capital investment between the UK and the GCC has to continue, and it has to be beneficial for both sides,” Moritz says.
“I believe we will see changes, and it’s too early to say what those changes will be and how trade agreements will look going forward. But what I feel we will see is greater interest in one-to-one trade arrangements, and as GCC nations seek broader diversification of revenue streams and growth opportunities, the UK and others will see that as an opportunity.
“Efforts to diversify the UAE’s and the GCC’s economies will not be solely focussed on what happens within the region; it will be supplemented by what happens in the rest of the world and the flow of trade that can stem from this. The reality is that regardless of political agendas and aspirations, nations are always going to have to focus on commercial aspects if they want to achieve growth.”
Growth is supported by momentum, and the aftershock of the oil price crash has, as far as many businesses and workers are concerned, snatched away the GCC’s momentum. Cost-cutting, hiring freezes, lay-offs and a slowdown in investment and spending have become part of the region’s economic furniture. Does it suggest confidence has drained away? A quick shake of his head shows Moritz does not think so.
“Our survey of CEOs in the GCC showed their level of economic confidence is higher than the global average and is continuing to rise,” he says. “Soundbites from speeches can still cause market volatility, but the trend line is going in a very good direction, because the fundamentals are still there and the consumer need and demand is still there, which goes back to the underlying demographic trends that really drive a domestic economic agenda.”
Even if confidence is showing an upturn, Moritz is adamant the turbulence has shown GCC businesses they cannot stand still; they must embrace change with smarter, more focussed and more streamlined approaches.
The message is being heeded, Moritz says, and with the oil market stabilising, Expo 2020 drawing closer and organisations more in line with the size required for the current climate, clouds are lifting.
“A one-size-fits-all approach to cost and investment isn’t going to work anymore,” he says.
“What we recommend to organisations, in our advisory role, is being a lot smarter about your spend and the way you adjust. Focus on your core capabilities that differentiate you from your competitors and that fuel more investment for transformation at greater speed.
“People talk about slowdown in some areas, but you really have to step back and consider whether that is a broad-brush slowdown, or whether it is simply taking place to enhance investment elsewhere.
“The GCC experienced a very difficult time in 2016, and that created some short-sightedness. But organisations have to right-size first, then redirect, and I believe that in the second half of 2017 we will see more redirection into core areas that are fit for purpose. When people talk about fit for growth, it’s about reducing non-essentials so you can invest more heavily in areas where that investment will really go long.”