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Despite the ongoing global recession, the Middle East “is still one of the better places to be,” according to Joe Saddi, chairman of Booz & Company and managing director of the firm’s Middle East business. In an interview with Knowledge@Wharton conducted during the recent Wharton Global Alumni Forum in Dubai, Saddi noted that although sectors such as real estate and tourism have been hit hard, the region’s underlying growth fundamentals remain positive. And although Gulf Cooperation Council (GCC) companies will need to be prudent and maintain enough cash to weather the current storm, now is the perfect time for them to “go on the offensive” and “take advantage of the recession to acquire or stake out a stronger strategic position.”
T R A N S C R I P T :
Knowledge@Wharton: We are speaking today with Joe Saddi of Booz & Company. Mr. Saddi oversees Booz & Company’s services in the Middle East and was recently elected chairman of its global board of directors. Mr. Saddi, welcome and thanks for joining us today. Can you tell us how the economic downturn is affecting businesses in the Middle East?
Joe Saddi: One thing that has become clear over the last few months is that there is no decoupling as far as the economies in any country are concerned. A few months ago, everybody was thinking this region would be decoupled from what’s happening in Europe or in the U.S., and clearly it’s not.
Having said that, the impact of the global crisis differs by region. We do see GDP contraction as we speak in the U.S. and in some countries in Europe. If you look at Asia or the Middle East, what we are seeing is a slowdown of growth. We are not seeing GDP contraction. China expects a growth rate of 7 to 9 percent this year, down from 12 to 15 percent. True, there is a lot of stimulus money being put to use to generate that growth, but nevertheless the GDP grows. The same is true for India. The latest estimate is that India will grow by 6 to 7 percent.
In the Gulf, the estimates are that the economy is still going to grow, albeit at a modest rate of a couple percentage points. So, again, the Middle East is still, despite the global crisis, one of the better places to be in at this stage.
Knowledge@Wharton: Which sectors have been hit the hardest, and why?
Joe Saddi: As far as the GCC [Gulf Cooperation Council] is concerned, the sectors that have been hit hardest are, on one side, real estate and construction. We see it in some countries of the GCC where projects have been slowed down or others have been postponed. So, yes, from a real estate and construction point of view, there is some slowdown. On the tourism side, I think there is a generalized slowdown worldwide. Given that tourists come from all over the world to our region, it is no surprise that tourism and travel is being impacted as well.
And, finally, the financial-services industry: This is the one industry that is truly global as far as the implications are concerned, and again there are differences within GCC countries. Some countries’ financial services are hit maybe a bit harder than in others, but that’s also one industry that’s being affected.
Certainly, the reserves the GCC countries have accumulated over the last few years, thanks to higher oil prices, are going to help them weather the current storm. In fact, one such example is Saudi Arabia, where the government has announced a very ambitious budget — going through with the infrastructure projects that they had committed to, going through with spending on social programs and education programs. So it is clear the reserves are allowing these countries to, I would say, complete the projects they have announced. They may not announce new projects, but at least for whatever commitments or projects they have announced, they generally have the means to deliver on.
Knowledge@Wharton: Does that put them in a better position than some of the other countries?
Joe Saddi: Certainly. If you’re flush with reserves — thanks to very high oil prices over the last four years — that gives you a good cushion to weather the current storm. The question is, How long the storm will last? But I would say GCC countries are generally in a much better place than many, many other countries.
Knowledge@Wharton: What kind of strategies should the region’s companies adopt to help them survive the downturn?
Joe Saddi: The region’s companies have to make sure, first and foremost, that they are resilient when it comes to prudence on the cost side, on the cash side — make sure that they have the cash and financial means to weather the current slowdown. At the same time, it is in times of recession that companies that have the means can afford to take a much longer view of their industry, a much longer view of the endgame, and boldly act by acquiring talent or acquiring businesses or activities when prices are depressed, when talent is available, and when they have the [resources]. This is a great time for the larger of the regional corporations to be on the offensive, in fact, and think boldly in terms of using the downturn, when everyone else is hurting, to come out stronger.
So, these are two things: build resilience and take advantage of the recession to acquire or stake out a stronger strategic position.
Knowledge@Wharton: So, you recommend that companies adopt a more aggressive stance now?
Joe Saddi: If they have the means to do so, yes. This is the time, again, [to think] about acquiring talent, about acquiring businesses, about acquiring positions in sectors or countries. This is as good a time as any to think about that. It’s a unique time for companies in the region that are strategically sound and financially sound to go on the offensive and try to change the game to their advantage.
Knowledge@Wharton: And what about the ones who are not that well off at this point? What should they do?
Joe Saddi: Well, it’s really [about] taking an objective view of where they stand. And it’s either making sure that they can weather the storm, concerning cash and costs, and wait it out. Or in some cases, maybe they can say, “Well, we may be better off doing something else, changing our strategies, or selling ourselves to a stronger actor.” But I truly believe that there are a bunch of companies out there in the region that are on sound footing strategically and on sound footing financially that can use the current downturn to go on the offensive. I know it sounds counterintuitive, but it is a good time to be thinking along those lines if you can capitalize on it.
Knowledge@Wharton: Looking ahead a few years, what kinds of changes do you see in the region’s business landscape?
Joe Saddi: It’s hard to think too far ahead. Let me comment maybe on the next year or two.
I think in 2009 the region should be fine, by and large. There is visibility as far as 2009 is concerned. On one hand, oil prices have gone down to the [US]$40-or-so level. If they stabilize around that level, then the region will squeeze by. Inflation has gone down quite dramatically. In the last two years, the region has been suffering from increasing inflation, higher material cost, higher labor cost, higher real estate cost, and what have you. The inflation has gone down dramatically now. That’s a good thing for consumers, and it’s a good thing for the [region’s] countries. Governments have committed to deliver on the initiatives and projects that they have announced. So I think in the very short term, the region will be fine.
Beyond that it’s a bit more difficult to tell, because it’s going to depend on oil prices — whether they stay or decrease or increase — and whether governments maintain their spending posture that they have for 2009. A lot of the private-sector companies are dependent on that kind of spending. So, I think I would wait a little bit more before I venture an opinion on what 2010 is going to look like.
Knowledge@Wharton: The debt and growth strategy of Dubai has come under some criticism. Do you believe Dubai could have done things differently, and do you foresee Dubai doing things differently going forward?
Joe Saddi: I personally believe that Dubai has achieved a lot over the last few years by putting itself on the map and creating this hub, which was a clear need in the region. The business model of Dubai has been questioned a lot over the last few weeks and months, but I, for one, believe that the concept and the business model in general are fine. It’s a matter of pacing the initiatives now to get to the endgame. I think we’ll be seeing more privatization and pacing of the investments, but also the emergence of policies to make sure that there is resilience at all levels of the economy.
Knowledge@Wharton: Last question: Do you believe that the current crisis will hurt or help the economic and corporate reform process in the region?
Joe Saddi: I am one of those who think that it’s going to spur corporate reform. Take the private sector: From our own clients, we see a lot of attention being paid over the last few months to corporate governance, and that is a good thing. So this is one example where the current turn of events globally is encouraging reform. And it’s not only for the corporate sector, but it’s also in the public sector as well.
