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Thu 30 Dec 2010 06:24 PM

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The Gulf in 2011: forecasting the year ahead

Sir Richard Branson, Sir Martin Sorrell, James Hogan, Ibrahim Dabdoub reveal their predictions about the coming twelve months

The Gulf in 2011: forecasting the year ahead
Etihad CEO James Hogan said the airlines key goal for 2011 is to break even
The Gulf in 2011: forecasting the year ahead
The Gulf in 2011: forecasting the year ahead
Founder of Virgin Atlantic Airways, Sir Richard Branson
The Gulf in 2011: forecasting the year ahead
Gulf analyst Eckart Woertz predicts a tentative recovery in 2011

“Nobody could possibly have seen it coming” is what everyone says after every crisis or shocking event. The only thing that can be said with certainty about the future is that no one knows what will happen.

Arabian Business approached some of industry leaders for their thoughts about the coming twelve months. Here are their predictions:

Rami Sidani, Head of MENA Investments, Schroders

A couple of factors will determine what is going to happen next year. First, we need to continue seeing stability on the global financial markets. That is very important for our markets to flourish, although we do have different growth drivers, which are mostly domestic. They are driven mostly by government spending and petrodollars trickling down. But, even so, the performance of our regional markets will continue to be affected by what is happening on the global scene, so any deterioration on the sovereign risk in Europe, or any slowdown in the US, will definitely have an impact on the sentiment that will prevail in 2011 over our markets. If we continue to see stabilisation, I think everything is pointing towards a very positive 2011. Oil prices are flirting with the $90 level, which is extremely positive for the region. Oil prices are set at $50 in the GCC budgets, so we are operating at a substantial buffer from the breakeven point. That means regional governments will be encouraged to adopt more expansionary budgets going into next year, and maybe even overspend, above what is planned as long as oil prices remain at such high levels. Governments will be encouraged to proceed with their planned mega infrastructure projects.

The second thing that will give a good boost to the region and what will generate a lot of business for all regional companies is Qatar winning the rights to host the 2022 World Cup. That is clearly very positive. We are talking about massive government spending that will take place in the next ten years in Qatar. $60-70bn is expected to be spent by the government to get ready for this event.

Eckart Woertz, Visiting Fellow, Princeton University

2010 saw a tentative recovery of the global economy, if this was to continue it would bode well for oil prices and outward oriented diversification sectors in the Gulf like petrochemicals, trade and logistics. However, debt levels are still at historic and unsustainable peaks compared to GDPs. There was only a certain shift from private to public sector debt issuance and the latter has faced increasing problems in 2010, be it in California or Greece. People who uncritically hail the growth potential of China and other emerging markets may think twice: their growth model has relied on exports and deficit spending in the US and other OECD countries — if the latter crumbles, they will face problems as well. Thus, the picture might not be as rosy as some predict and the overextended real estate sector in some GCC countries like the UAE will remain in the doldrums. But even if oil prices may face pressure from the demand side, drastic corrections below $50-60 are unlikely due to supply constraints. The Gulf region will be also in a relatively privileged position in global comparison because of substantial assets and manageable public debt levels.

Sir Richard Branson, Founder, Virgin

I think if it wasn’t for the Far East the recession would be continuing, but because the Far East is doing so well, I don’t think we will see a double dip recession.  I think we are through the worst.

I like Obama immensely and I suspect that he had to bail the banks out, but I actually think cost cutting is needed. If we were a company in that sort of debt we would definitely be cutting costs, you just can’t go on year after year getting more and more into debt. In the UK, I think the medicine that’s being dosed out is a Mrs Thatcher type of medicine. But yes, I agree with it, I think it had to be done. It’s a risk in the short term but long term the country will be better for it.

I’ve been through a few recessions and you generally come out stronger from it. We are much better prepared than we used to be because we are getting old hats it. The fact that Virgin is so strong now, I don’t have to sweat about surviving all the time; we have climbed over the wall. We have a fantastic group of companies all over the world and people want to partner with us. It makes life more fun than when you are struggling.

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Guido de Wilde, Middle East director, Starwood Hotels and Resorts

The Middle East was one of the most resilient markets for the hospitality industry in 2010. Leisure travel came back in early 2010 and by the middle of the year, business travel had returned to near normal levels after almost two years. Towards the end of 2010, our RevPAR was accelerating around the globe and average occupancies were above 70 percent in the Europe, Africa and Middle East region.

So while the year may have started on a slower note, things certainly picked up and we have finished the year on a high. The recovery is continuing to play out better than expected and we are optimistic for the year ahead.

In 2011, we will continue to see a change in source markets with an increased number of visitors coming from China and India, both of which are set to be major feeder markets for the Middle East region over the next ten years.

In addition, we will see a major increase in the number of guests coming from the Y Generation, which is set to be the largest consumer group in history and will outspend the Baby Boomers by 2017.

Samer Majali, CEO, Gulf Air

Global air travel grew strongly in 2010.  IATA estimates 2010 net profit for the industry to be $15.1bn, a 70 percent upward revision from their previous forecast.  However, IATA expects net profits for 2011 to weaken considerably, falling to $ 9.1bn, due in large part to rising oil prices. Despite this, the Middle East will continue to emerge as a global aviation powerhouse. Regional carriers will add substantial capacity to the market over the next seven years, with nearly 50 percent of new global fleet-orders coming from the region, equating to approximately 500 aircraft scheduled for delivery. Within this challenging economic environment, Gulf Air will continue with the implementation of its new strategy, which has seen significant achievements in 2010. In 2011, we will continue to identify and launch services to under-served, niche markets in the region while expanding into select destinations across the Middle East, Africa, Asia and Europe, beginning with five destinations to be launched in early 2011. We welcome the New Year with cautious optimism and look forward to continuing to reinforce our leadership position as the carrier with the largest network in the Middle East.

Hisham Farouk, International Practice Partner, Grant Thornton

The UAE and the wider Middle Eastern region were not as greatly impacted by the financial crisis as some of the Western economies, but we still felt a significant slowdown. However, we are seeing a slow return to growth and I expect to see a continuation of this trend into 2011. The UAE will remain a key economic and financial hub due to its unique mix of world class infrastructure and its geographical proximity to the growing Middle Eastern, Indian and Asian markets. The pioneering approach that the government took in regards to investment in infrastructure and developing the business community will stand the UAE in good stead. As the East gains greater power and influence over the global marketplace, foreign companies will continue to use the UAE as a base for reaching these markets.

A crucial factor in reviving the economy is lending from the banks. SMEs are the lifeblood of the economy and found it difficult to raise finance during the downturn. Increased support for these businesses will be key in redeveloping capital markets. Greater regulation would also be beneficial to both SMEs and the banks, as businesses with reliable and accurate financial statements stand a better chance of gaining finance and banks will be more confident in providing funds.

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Colin Chapman, President, Euro Petroleum Consultants

As the Middle East region looks to produce and export more refined products, predominantly ultra low sulphur diesel (ULSD) that meet the latest environmental specifications, radical changes are taking place in the established refining infrastructure. Middle East refiners are taking a fresh look at their existing assets and the options open to them in order to meet the increased production and product quality demands for the future.

Fuel oil is presently used in many locations for power generation and there could be a shift to start to use natural gas for power generation. Global gas markets are expected to change over the next decades with the production of non conventional gas such as shale gas. Gas producers will be looking to alternate uses for gas, for example the production of petrochemicals and fuels or power production. Technology developments will continue to help improve margins and help companies differentiate themselves from the competition in this ever changing market environment.

Sir Martin Sorrell, CEO, WPP

2011 should be similar to 2010 in overall growth rate for the advertising and marketing services industries at around four to five percent.

However, there will be re-balancing. America has been impossibly or inexplicably strong, as Rupert Murdoch has said, and traditional media has bitten back too, across the globe. This was due to a ‘dead cat’ bounce: categories coming back like autos, retail, travel and financial services. Surplus traditional media inventory reduced relative prices. And there was a feeling online is more about deal and price and traditional media more about brand. There was also a willingness to invest surplus cash and liquidity in variable marketing, rather than fixed capacity.

Next year, in terms of advertising and marketing services, we should see the BRICs and Next Eleven (Asia excluding Japan, Latin America, Africa and the Middle-East and Central and Eastern Europe) taking up the slack, as the USA and Western Europe grow, but at a slower rate. Similarly, digital will reassert itself against traditional media.

Overall, the BRICs and Next 11 and digital (pc, mobile, video content, social networking) remain in Division One. The USA and Germany (the strong man of Europe) and television in Division Two — all big and never to be underestimated. And Western Europe (France, Spain, Italy and the UK) and newspapers and magazines in Division Three — although the UK could rise given the Coalition government’s willingness to deal with the deficit and a platform for growth.

All in all, a much better scenario than we ever thought possible on September 14, 2008, post-Lehman, as companies in the face of unprecedented uncertainty cut costs mercilessly and conserved liquidity.

Ibrahim Dabdoub, CEO, National Bank of Kuwait

Despite a slowdown in the region’s economic growth rates over the past two years, the outlook remains promising by international standards. The GCC region will continue to grow, thanks initially to the stimulus packages initiated by governments, eventually supported by strengthening private sector demand. The banking sector remains vital for business activity and will continue to play a major role in regional economic development. There is ample liquidity and banks are in a good position to tap into the various government development plans that are underway and which will be key contributors to economic growth and job creation.

The oil and gas industry remains by far the region’s most important sector, despite ongoing efforts towards economic diversification. By its nature therefore, it will remain an important recipient of regional investment. Other than the oil and gas sector, infrastructure development is playing an ever more important role in the region’s growth outlook, especially transportation infrastructure. As the region grows and becomes more interconnected, the upgrade of transportation facilities will benefit not just domestic businesses and consumers, but also cross border trade flows. Within infrastructure, the utilities industry is another very important and promising sector that is attracting the attention of both governments as well as private sector. As the region develops, further spending on the utilities industry will be required to keep up with current and future economic growth.

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Kishore T Pagarani, Group Director, T Choithram and Sons Worldwide

Global food inflation is currently about fifteen percent per year and is expected to rise in 2011. It’s very difficult to predict how climate change will continue to create volatility in agro-commodity markets.

The value of staple foods, such as wheat, corn, soya, is likely to remain high, since both the USA and Russia aren’t expecting good wheat crops.

There’s additional pressure on prices from competition between food and bio-fuel production. Nowadays grain crops command higher prices as bio-fuel rather than food. But fortunately India and Pakistan have had good rice crops, so those prices will fall next year.

I think the leading supermarket chains will open more stores in 2011 in order to increase market share. This is one method of enhancing growth and making it easier for customers to shop in their local neighbourhoods. Also smaller convenience outlets will see expansion. I don’t foresee international chains having a greater impact on the current retail trade.

At Choithrams we genuinely make every effort to keep our prices as low as possible for our customers, with even better special offers and a focus on quality and choice.

Mohamed Amiri, Deputy chief executive, Ajman Bank

2011 will be the year when the UAE banking sector demonstrates renewed dynamism. Since 2008, the sector has been very conservative in its approach to lending. With the economy now entering a phase of increased stability, lending activities should increase. In turn, as day-to-day banking business gathers pace, so will the profitability of banks.

The UAE banking sector will be helped by the landmark law creating a federal credit bureau. Providing the sector with a comprehensive understanding of a customer’s total credit exposure will improve risk assessment and lending decisions.

For Ajman Bank, the SME sector will be an area of particular focus in 2011. The finance needs of this crucial sector have been under-served for too long. It is Ajman Bank’s goal in 2011 to ensure that SME’s across the UAE have access to the finance needed for growth.

Dr John Sfakianakis, Chief Economist, Banque Saudi Fransi

Saudi Arabia’s 2011 budget has been endorsed by the Council of Ministers and indicates the government is committed to continue raising expenditures at a healthy pace while reducing its debt burden.

Expenditure allocations were raised almost eight percent from 2010 levels to $154.6bn (SAR580bn), which should be enough to spur solid economic growth and encourage greater private sector participation. The budget emphasises infrastructure and social spending, with education and training accounting for 26 percent of the total allocation.

While the budget demonstrates the state’s willingness to continue steering the economic recovery, it also reduces the pace of budget expansion in a bid to tame overspending, which remained high in 2010 at sixteen percent. Expenditure allocations for 2011 grew at the slowest pace since 2003.

 The 2011 budget demonstrates that the kingdom is dedicated to continuing stimulatory spending to develop the economy and persuade private investors to do the same as they gradually emerge from a phase of deleveraging.

A slowdown in the pace of budget growth, however, also signals the state’s goal to rein in overspending and employ more prudent and efficient fiscal policies in the coming years. The private sector is showing signs of a healthy comeback, assisted by the government’s commitment to invest and a guarded pick up in bank credit growth.

The breakeven price for the 2011 budget is estimated at West Texas Intermediate (WTI) $58 a barrel.

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Dr Mohammed A Raouf, Programme manager Environment Research, Gulf Research Centre

Gulf governments will care more about the environment in 2011, for many reasons. There is international pressure and then there is image. And they care a lot about image.

Green initiatives in the Gulf are in a better position than they were before. There is greater awareness now among the leaders and among the population.

In 2011 the emphasis in the Gulf will be on a clean, green economy.

New green buildings will be important. But of course it will take some time — to learn from mistakes as well. It’s a step-by-step process, but it will be an integral part of any development.

Colm McLoughlin, Managing director, Dubai Duty Free

Dubai Duty Free is expecting to close the year with sales in excess of $1.25bn which is up from $1.14bn last year. For the past two years, Dubai Duty Free’s turnover has resulted in the operation being named the largest single airport retailer in the world, ahead of London Heathrow and Seoul Incheon, and we are optimistic that we will continue to hold the number one spot based on 2010 sales.

Our top ten selling categories have not changed dramatically since last year, but what is very evident is the fact that there has been a good solid return in the ‘luxury’ categories, which had dipped slightly last year.

Perfumes, which accounts for fourteen percent of total sales at Dubai Duty Free, held on to the top position with sales of $127m for the first nine months of the year representing sixteen percent increase over the same period last year. While liquor, which recorded sales of $123m, showed an increase of thirteen percent and held on to the number two spot. Gold sales rose by eleven percent to reach $96m and retained the third position.  We are obviously delighted that we have maintained a high penetration level of around 42 percent of all travellers (ie 42 percent of all departing passengers shop at Dubai Duty Free) and that our average spend continues to be above $40 (per person) for departing passengers. There is definitely greater consumer confidence, although the Western travellers in general are still understandably cautious and may opt for an ‘affordable luxury’ as opposed to a major purchase.

We have seen particular spikes in spend from our Asia Pacific passengers and the Chinese passengers in particular are an important and growing group.

Abdel Wahed Bendoua, Head of Enterprise Business at Google for Middle-East, Africa, Eastern and Central Europe

This year the cloud went mainstream and we have seen an acceleration in the number of organisations moving away from on-premise resources. In 2011, we will continue to build bridges to the cloud and increase the recognition that it’s a more secure and reliable solution than standard operations.

In 2011, we will see a lot of innovation happen in the mobile space as we are expecting Android adoption in business to take off. Today 300,000 new Android devices are activated every day and we will continue to invest in our mobile Apps to provide the best experience across all devices to create a new version of the platform that will address tablet use.

We will focus on making access to the web more efficient so businesses can run on just a web browser. Today, our own Chrome is now 300 percent faster than the original beta version. We will see a growing interest in Google App Engine with companies wanting to move more internal legacy apps to the cloud and run them on our servers. So far, over 250,000 developers developed 150,000 different Apps using App Engine, with more than one billion page views per day across all apps.

There is a growing need for new business contextual social networking tools to be developed. Our efforts to make our products more social will also resonate in the enterprise space, making it easier to share and discover information in a business context.

James Hogan, CEO, Etihad

The aviation industry has continued to experience many challenges in 2010, which has seen airlines deal with the volcano ash disruption, unrest in Bangkok, the continued effects of the global recession, airport strikes in Europe and, more recently, the closure of Heathrow due to severe weather.

One theme stands out within the industry: the emergence of the Arabian Gulf as a global hub and the emergence of Etihad among the world’s best airlines.

Despite the value to travellers offered by the Middle East aviation industry, additional pressures are still experienced here such as accusations of receiving fuel subsidies, restricted landing rights around the world, and debate around the availability or otherwise of export credits guaranteed finance. We hope 2011 will see a fairer, more balanced analysis of the competitive landscape.

Etihad’s key goal for 2011 is to break-even, leading to sustainable profitability from 2012 onwards. All indicators show that we will hit these targets. Etihad will focus on increasing revenue growth and the quality of its revenue to help achieve profitability.

In terms of product and service, Etihad will continue its investment in these areas and the rollout of our new, updated First, Business and Economy cabins across all aircraft.

The airline will focus on promoting its award-winning Inspired Service concept, which offers a personalised and tailored service for guests and is a key point of differentiation for the airline.