RIYADH: Business confidence is partly about market psychology; and markets and businesses alike have become rather more optimistic. No doubt the stock market plays an important role, but it is not the only benchmark. Global equities have rallied since early March and although the Saudi stock market lagged behind, it picked up during April and May.
This has somewhat altered the prevailing negative feeling and resulted in a slowdown in the fall of the index.
Saudi businesses and their owners are affected by global events. In fact, that is the biggest downside risk to economy. The exposure of big family businesses is among the single most important risks we see on the horizon.
It seems that the market rallies in global and local equities, together with the avoidance of a global financial collapse, have kept many business groups above water. One noteworthy businessman -- in the Central Province -- has been able not only to stay above water, but also -- despite market rumors -- to clear most of his bank borrowings. But the picture might not be quite so positive for others.
Downward movement in global, regional and local equities would bring additional pressure on to some of these business groups. The fact that many have faced challenges as the local and global rebound unfolded does demonstrate possible structural problems, which could be compounded by the extent of their leverage in local and international markets, as well as in equities. International finance has not been readily available since the global credit crunch unfolded which impacts on the domestic flow of credit.
The impact of the crisis has forced international lenders to be the first to exit relationships or reduce their exposure. A high risk appetite is something that some family-owned businesses in Saudi Arabia, as well as in other parts of the Gulf, have been willing to exhibit. There were some family businesses that were considerably risk averse. Such risk aversion is not without good reason, as a fair number of large businesses recorded considerable losses on their "exotic-turned-toxic" investment portfolios. The duration of the global slowdown is also an unknown variable, but it is becoming clear -- at least to us -- that 2010 will be another challenging year for the world economy.
As for the global equity story, we believe that the rally has been overplayed and a lot of money is chasing the same products, leading to overpricing. We have been proven wrong over the past few weeks, but we continue to argue that we are in a global equities "dead cat bounce" situation; only time will tell. Finally, business groups over the years have followed a pattern in their over exuberance: acquisitions have abounded, often to the detriment of core competences within these groups.
Although this has improved their diversity and versatility, at the same time it led them to increase their exposure and risk appetite away from their core competences. And as many of these groups have grown over the years, their challenges have increased. Businesses shifted from the first to the second generation, and some from the second to the third, with all the associated leadership challenges facing family businesses the world over. It is worth noting that 90 percent of companies in Saudi Arabia are family-owned and only 5 percent survive into the third generation throughout the Middle East.
Most family businesses in the Middle East are less than 65 years old. Many of them began as trading houses and have now become diversified conglomerates. However, a host of challenges facing many family businesses in Saudi Arabia and the Gulf which are worth considering:
Succession issues and transferring effective control and knowledge from one generation to the next is a challenge and, as shareholders (family members) become numerous, they impact on efficiency of decision-making
Attracting outside talent and relinquishing control when necessary are always important. Recruitment needs to reflect the size of the group. Over the years, family groups have grown into multi-billion-dollar conglomerates, sometimes without commensurate skill resources
Family businesses need to shift from being purely operational to thinking in more strategic terms.
Separation of management and ownership.
Family groups need to re-evaluate their existing portfolio of businesses and learn to relinquish control of those that do not fit within its long-term strategy or cost structure.
Diversification into multiple businesses can lead to over-extension beyond the group's core knowledge and competences.
However, the risks which businesses have undertaken, and which have become publicly exposed, heighten the level of concern. Lack of corporate transparency exaggerates the unknown. The need for additional efforts toward improved corporate transparency is paramount.
There are two important and inter-related issues here. Firstly, the bank-wide exposure to these business groups, as lending is carried out on a name basis; secondly, the level of exposure, risk and ratings which banks experience in the event of system-wide difficulties. There is no doubt that, at the macro level, Saudi Arabia is on a very healthy trajectory against those who were basing their macroeconomic outlook simply on a real GDP contraction, erroneously placing Saudi Arabia on par with the contracting world of the G-7.
There is no doubt that the economy in Saudi Arabia will witness a slowdown in both oil and non-oil, but the macro picture looks sounder than in most other economies.
Oil at $60+ per barrel is providing enough budgetary support to maintain good fiscal health for this year, and may even produce a small surplus -- so there are no evident sovereign risks.
If oil averaged $40 per barrel, Saudi Arabia would be able to support its spending. And if oil prices returned to $75 by this year's Q3 or Q4, as the Saudi oil minister recently predicted, then the average oil income will create enough surplus to start replenishing the Kingdom's declining foreign assets.
Inflation will come down more substantially than the consensus view suggests. Inflation data shows that prices have been coming down by nearly 1 percent each month since January, and we forecast average inflation of 5.2 percent for 2009.
Although everyone is talking the same deflationary language, the thing which could make matters far more complicated is the risk of inflation. Dollar weakness would impact on the region and on inflation, in particular real dollar revenues for the heavily dependent oil exporters, but it would also benefit those who have dollar exposure and debt obligations.
By John Sfakianakis
Arab News 2009
