Private sector will need a booster shot for recovery

Businessmen say banks and government in the Emirates must nurture the beginnings of a rebound with effort to boost lending and cut costs.

The tide of tourists from the West flooding into Dubai's flashy malls has ebbed since the global economic downturn started to bite. Large companies such as Al Ghurair Retail, which has several of the biggest shopping names in its stable, have been hard hit. The cash that foreign visitors splashed out in its stores helped propel the firm's rapid expansion.

"For our retail businesses in the big, touristy malls, 50 per cent of our trade comes from tourists, and that's dwindled to 10 per cent since the recession started," says Keith Flanagan, the general manager of Al Ghurair Retail, which manages brands such as Springfield clothing stores. The drop in tourists was partly responsible for a sharp decline in retail sales in the Emirates by as much as 40 per cent last year.

"Dubai has been taking a whacking across Europe recently in the press," he says. "Maybe the Government has to push Dubai more as an international destination once again." Launching advertising campaigns to promote tourism in Dubai should be at the top of the Government's in-tray this year as it looks to spur growth in the private sector after a sluggish past 12 months, Mr Flanagan says. On the whole, last year would be best forgotten for the private sector. Projects were cancelled, sales slowed, credit dried up and job losses mounted as investor and consumer confidence crumbled.

The global financial crisis was a significant setback to strategic plans to raise the value of the private sector, which is viewed as the key to weaning the economy off a reliance on oil and gas. The Government pins its hopes on a more expansive private sector as it looks to whittle down the contribution to the economy of the hydrocarbon sector to approximately 20 per cent in the next 10 to 15 years.

Reaching this target will first involve taking further steps to reinvigorate the flagging private sector. With many businesses struggling for cash, ensuring banks reduce interest rates should be a priority, says Colin Smith, the general manager of Abu Dhabi Vegetable Oil. "All of the banks charge rates well above the official interbank rate as they try to recover from the past," he says. "Most businesses use working capital and that's funded from banks, and so we have to absorb that extra cost."

The price of borrowing rose steadily during the financial crisis as banks passed on the extra costs of funding they incurred to customers. In an effort to stimulate lending, the Central Bank last year rejigged the system that set the Emirates interbank offered rate (Eibor). Despite the three-month Eibor rate dropping to 1.9 per cent from 4.8 per cent in October 2008, customers and businesses have continued to complain that interest rates charged by banks are too high.

Ensuring any annual rental increases in economic free zones are kept to a minimum is another measure that would help relieve the strain on cash-strapped firms, says Mr Smith. He is unhappy the rent on his factory in Mina Zayed in Abu Dhabi climbed by 10 per cent this year, above the annual rental cap of 5 per cent. He says he managed to negotiate the increase down from an even higher proposed rental hike.

Relaxing rules on foreign ownership of companies should also be a top priority for the Government if it wants to encourage more private companies to establish themselves in the country, says Gisele Stolz, the business development manager at the French Business Group in Abu Dhabi. One of the biggest stumbling blocks for any foreign firms considering a move to the UAE is the limit to a maximum of 49 per cent ownership of any enterprise they establish.

Ms Stolz, whose group has 225 members in Abu Dhabi including the French oil major Total, believes some French companies who want to be based in the capital find the prospect of taking on an Emirati partner troubling. The Government is implementing a new companies law, which would allow foreigners 100 per cent ownership of their firms. Exceptions to the current regulations are at the free zones, where foreign companies enjoy complete ownership.

Easing import duty on re-exported goods between free zones and the rest of the UAE would help French businesses in the UAE, says Ms Stolz. The Mohammed Bin Rashid Establishment for SME Development, which supports Dubai's burgeoning small business sector and budding entrepreneurs, highlights reforming credit information regulations as an important step it would like the Government to take towards improving credit transparency.

"Greater transparency in credit information will enable greater access to finance and liquidity, especially for SMEs," says a spokesman for the organisation. The foundation also supports measures to reform bankruptcy laws in the country. Officials are in the process of updating insolvency regulations, which remain largely undeveloped. Last year saw the Government take steps to help revive the private sector. Dubai received a total of US$20 billion (Dh73.46bn) in support funding from Abu Dhabi, its banks and the Central Bank to help ease a cash crunch in the emirate. The Government also abolished the Dh150,000 minimum capital requirement to launch an SME, while a draft SME law is expected to be put before Cabinet for approval in June.

But if this year is to see the private sector rebound further from a challenging period, more initiatives may be needed to stimulate increased growth.