VOL. XLIV
No. 13
26 March 2001 

Transparency Through Technology: Nowhere Left To Run

"To prosper and grow we need strong policy – we need a revolution in the Middle East and it’s happening. Leaders realize that there is nowhere left to run. There has been dependence on oil as a wealth creator, but wealth without knowledge is a very poor model. Economic policy has to cover all issues including the legal system. We need independent, clear legal systems that protect the investor. Transparency is a very important issue and is driven by technology. Industry standards need evaluating, we need to privatize to increase competition and decrease the size of the government in the economy. We need to streamline the regulation of our financial infrastructure. We need a region-wide electronic trading system. E-commerce is something for today and the future. It is crucial if we are to participate in the world economy."

These were the forceful words of one of Dubai’s most prominent economic players – Muhammad al-'Abbar, Director General of the Dubai Department of Economic Development and Vice Chairman of Dubai Aluminum Company Limited (Dubal) – and they set the tone of the debate at EuroFinance’s second annual conference entitled Trade, Treasury and Cash Management In The Middle East, held in the UAE on 13-15 March. Sponsored by ABN Amro, HSBC, Standard Chartered and Citibank, the conference united regional finance officers and treasurers to discuss the latest tools in risk management and their applicability in the new economy. The debate highlighted the huge benefits to Middle East institutions – financial or otherwise – in strategically embracing technology to reduce costs, stimulate growth, breed innovation and bring a new level of transparency to the region. MEES Banking and Finance Editor Clare Woodcraft reports from Dubai.

Speaking on behalf of the UAE’s Finance Minister, Jamal Nasir Lootah, Assistant Undersecretary for Properties and Purchasing at the Ministry of State for Finance and Industry, opened the conference with an affirmation of the UAE’s commitment to fostering economic integration into the world system through market-based liberalization. Countries that encourage foreign investment, he said, will benefit from improvements in productivity and efficiency. Mr Lootah underscored the efforts of the UAE to provide the necessary infrastructure in order to be part of a new globally integrated economy and noted current plans to introduce into government e-systems such as e-tenders, which will allow bidding over the Internet.

Mr Lootah’s faith in the technology route was echoed throughout the three-day event as bankers, corporate treasurers and finance officers spoke of the benefits. John Ahearn, Senior Vice President, Global Trade and Advisory at ABN Amro, said that the major shift to electronic platforms for trade finance that is beginning in Europe and Asia will start in the Middle East and that those states that actively build IT infrastructures will benefit most. "There are major shifts in how people are doing business," he said. "In the US 10 years ago, trade was paper based, now there is a virtual market place with much more transparency…trade finance is still paper based globally but this is changing rapidly." Countries that fail to invest in an IT infrastructure will be left behind, he said. As international corporates focus on their core competences, there are opportunities for the Middle East to fill the gap. "The Middle East can be the middleman to the world as international companies exit from business lines no longer considered core," he said. However, being a partner to global integration demands a high level of transparency and the ability to move product fast and in real time. "The UAE should play a lead role in this respect," he said, "due to the attitude of the government."

Stuart Nivision, Regional Manager Trade, Cash Management and E-Commerce, HSBC Middle East, Dubai, called the current level of changes "revolutionary," explaining that e-commerce will radically alter the structure of trade. "The global cost of producing paper shipping documentation," he said, "amounts to $420bn, and 7% of the cost of international trade is wasted on transaction costs." The use of the Internet, he noted, can significantly reduce costs even if it increases the bank’s expenditure on technology (he noted that HSBC spent a total of $2bn last year on technology.) Internet based electronic systems such as Bolero, which allows for paperless trade finance transactions, are increasingly the norm (MEES, 20 March 2000). The use of Identrus, a rapid deployment security infrastructure, is growing as a risk management tool providing fast access to credit data for financial institutions. Amlan Shah, CEO of the UAE-based Amgulf Polymers and Chemicals Limited, noted how he is already able to operate from a virtual office, given that the company’s trade partners from the petrochemical producer to the customer, the ship owner, the shipping brokers, the surveyor and the bank, all operate online.

Developments in international accounting standards will force the issue, bringing new, highly complex, layers of disclosure. Nitin Khanna, Director of PriceWaterhouseCoopers, UAE, explained that the new International Accounting Standard (IAS39) "is revolutionary" and "sweeping in breadth and impact." Its implementation, he noted, both regionally and globally, will require considerable resources and extensive new disclosure practices. This in turn will necessitate changes in internal risk management policies and the reclassification of assets including the search for embedded derivatives.

The Middle East has a less than strong record of compliance with IAS, but as banks and corporates are forced to adopt more sophisticated risk mitigation, compliance is likely to increase. Wasim Saifi, the regional head of Cash Management and Trade for the Middle East and South Asia at Standard Chartered Bank in Dubai, noted that compared to the global economy, cash management in the Middle East is less widespread, but there is a gradual move to outsourcing of non-core cash management functions. This trend, he said, is likely to continue as markets develop, the use of the Internet increases, capital market activity is enhanced and multinational corporations become more commonplace in the region. As corporates move towards ERP (Enterprise Resources Planning) systems and aim to integrate the non-Gulf Middle East, North Africa and CIS states into the region, this will continue. The growing number of Western-educated Arabs operating family businesses will be another driving factor, he said.

Patrick Hayati, Regional Director, Financial Services Industry, Hewlett-Packard, Middle East, agreed that the process is inevitable, explaining that e-business is a universally applicable concept and no different in the Middle East than anywhere else in the world. "E-business is the overall strategy" he explained to the audience. "It is e-commerce – buying and selling over digital media – plus front- and bank-office applications that form the engine for modern business. E-business is not just about e-commerce transactions, it’s about redefining old business models, with the aid of technology, to maximize customer value."

The region’s notorious lack of transparency is an obstacle in a world of electronic transactions. Rajeev Bhatnagar of Continental Marine Services in Dubai noted how the regional corporate credit risk management environment is characterized by large corporate bankruptcies, payment defaults, slow payments and a lack of local credit rating agencies. Risk mitigation is hampered by the absence of transparency, the absence of exchange of information, the lack of general credit awareness and the absence of local credit insurance. And given the increasing volatility of global markets, strengthening risk management is essential. Vasan Shridharan, Treasury Economist at Standard Chartered Bank, explained to the audience that the new economy has brought with it a shorter global business cycle and a greater amplitude, meaning that the disparity between year-on-year GDP growth rates is increasing. He also noted the greater volatility of oil prices in recent years, making economic management more challenging and a more judicious use of boom proceeds essential. "The velocity of the new economy generates its own structural risk premium," he told the audience. "Higher oil volatility alters fundamental valuation landscapes of Middle East assets. The regional authorities have further reason to diversify away from oil and the GCC’s privatization efforts are a step in the right direction."

Indeed, the GCC is no stranger to technology and the UAE has taken a lead role in pioneering e-business and the associated infrastructure. Dubai is host to Dubai Internet City (DIC), which although still far from a fully independent cyber-zone and still largely dependent on the service provision capacity of the state telecoms monopoly, Etisalat, has secured the presence of several international software giants. Several told MEES that the primary attraction of the DIC for the time being was a real estate one since being based inside the city gives foreign companies the right to 100% ownership. But as UAE officials pointed out, it is a step in the right direction and "better than nothing." Not far away is the Dubai Ideas Oasis, an incubator for start-up businesses offering venture capital finance. The UAE also hosts Tejari.com, a Dubai-based online trade exchange backed by the government, initiated by the Dubai Ports Authority and powered by Oracle. But even DIC’s Chief Executive Officer Ahmad bin Bayat admits that there are still significant challenges facing the Middle East when joining the new economy: limited access to technology, limited infrastructure, the low adoption of technology in education, the limited job opportunities for IT specialists, the lack of a legal framework for the new economy and market size limitations leading to the lack of role models.

There is growing recognition that these challenges are largely created by policy inadequacies – both economic and social – which threaten to marginalize the region’s economies rather than integrate them. Mr 'Abbar acknowledged the efforts of Dubai to address this issue, but he said that more must be done given the low level of economic growth rates in the region and the slow pace of change. "The Middle East is starting to preach liberalization. But it is very important that this preaching period doesn’t last too long," he said. "Society needs to react and governments should fix their acts quickly. We need reforms in banking, in investment laws, in property rights. It is very difficult to think of areas where we don’t need reforms just to behave in an internationally accepted manner. Many of our economic policies need to be adjusted for investors, and society has to be prepared for that. People need to understand change and participate in it."

Competition is increasing and is essential if the region is to compete globally said Mr 'Abbar. He noted Oman’s efforts to challenge its neighbors in the field of tourism by abolishing visa requirements for 60 nationalities and termed it a "threat to tourism in Dubai". He also said that the government must accelerate diversification away from oil and away from the "yoyo life" that oil price volatility brings. "We need to stabilize, diversify, privatize, develop capital markets and develop human resources. The Middle East has been talking about diversification for the past 20 years, but few have had the courage to actually do something about it." Timeliness in this respect is crucial. The Middle East used to contribute 10% of the world’s exports, said Mr 'Abbar, but now contributes only 2.5%. Import levels have fallen, annual GDP growth rates have been low and the region’s economies are still closed and still protected. Trade balances have deteriorated with, according to Mr 'Abbar, surpluses of around 25% of GDP in the 1980s becoming deficits of around 5% today. Intra-regional trade – the backbone of successful economic blocs such as in Europe and Asia – has declined from 11.5% of total regional trade in 1989 to 6% in 1997.

According to Mr 'Abbar, regional political conflicts have played a role in undermining economic performance. However, the main reason for these trends, he said, is the policy adopted. "Government policies are the biggest reason why our numbers are going the wrong way. We are less integrated with the world economy because our behavior and laws are not internationally accepted. This is a very serious issue. As a result of government policies and an atmosphere that is bureaucratic and not transparent, we have lost foreign investment. In Dubai we are trying to promote a knowledge economy and the use of technology in all aspects of society and especially the education systems. Education has failed in our region and it is a tremendous challenge. We now have some of the highest high school drop out rates in our history in the Middle East. The longer we delay being part of the new world order, the more difficult it is for our children to participate."