Strategy & highlights Saudi Vision 2030 goals to reform economy

Updated 18 July 2016

Strategy & highlights Saudi Vision 2030 goals to reform economy

DUBAI: GCC countries are facing budgetary problems, which could result in long-term deficits if not addressed.

While every GCC government has announced spending cuts to conserve budgets, conventional cost-cutting is only a short-term fix and could potentially slow a country’s growth over time, according to a recent study by management consultancy Strategy&, formerly Booz & Company.
For GCC governments to cut costs and grow simultaneously, Strategy& recommends adopting a Fit for Service framework. This approach would allow GCC government entities to achieve sustainable reductions in their budgets while also reinforcing investment in the services that are essential to long-term security and robust growth.
Fadi Adra, partner with Strategy& and a member of the public sector practice in the Middle East, said: “The GCC’s budgetary problems are not a cyclical condition that will resolve themselves with time. The price of oil for example, which contributes to three-quarters of GCC government revenues, has fallen to its lowest levels in over a decade, while the cost and demand for core public services continues to rise.”
Adra added: “Oil-based budgets however are also not viable over the long-term, whether or not the price of oil rebounds. To put this into perspective, even if GCC governments can grow non-oil revenues by 10 percent annually over the rest of this decade and the average price per barrel of oil returns to $50, their budgets would still need to be reduced by approximately $100 billion on an annual basis— this is 7 percent of the GCC’s total GDP — in order to eliminate fiscal deficits. This is why adopting a Fit for Service approach is critical for GCC nations.”
According to Strategy&, adopting a Fit for Service approach is driven by four actions — articulating a strategy, transforming the existing cost structure, building critical capabilities needed to execute the strategy funded by cost savings and reorganizing the operating model for optimal performance.
“For example, every GCC government should be able to articulate clearly a coherent way to service its constituents, quickly find savings to reduce deficit spending and release funds needed, maintain a multitude of capabilities to execute its strategy and develop the appropriate operating models aligned with the strategy,” said Ashish Labroo, principal with Strategy& and a member of the firm’s energy, chemicals and utilities practice in the Middle East.
Rawia Abdel Samad, director of the Ideation Center, a major think tank for Strategy& in the Middle East, said: “By adopting a Fit for Service approach, GCC governments for example can achieve 20 to 40 percent reductions in their cost structures.”
Some GCC governments have already taken steps to adopt initiatives aligned with a Fit for Service approach. In Saudi Arabia, for example, the government’s national transformation plan — Saudi Vision 2030 — has ambitious goals to reform various aspects of government.
Sevag Papazian, principal with Strategy& and a member of the digital business and technology practice in the Middle East, said: “It is easy to see why conventional cost-cutting has become the default solution to budgetary shortfalls in the public and private sectors.”

Emirates NBD profit surges on asset sale and forex gains

Updated 17 July 2019

Emirates NBD profit surges on asset sale and forex gains

  • Dubai’s largest bank reports 80 percent rise in net profit for second quarter

DUBAI: Emirates NBD, Dubai’s largest bank, reported an 80 percent rise in second-quarter net profit helped by the sale of a stake in Network International and strong non-interest income on foreign exchange gains.

The result included a gain of 2.1 billion dirhams ($572 million) from the sale of a stake in digital payment provider Network International in an initial public offering in London in April.

The earnings showed that top banks in the UAE have still withstood strains from a sluggish economy and a property downturn in Dubai.

Second-quarter net profit jumped 80 percent to 4.74 billion dirhams. EFG Hermes had expected a net profit of 4.06 billion in the second quarter.

The bank said net interest income rose 6 percent in the second-quarter from a year earlier, as growth in assets offset a drop in net interest rate margins.

Non-interest income surged 23 percent, helped by gains in foreign exchange income and investment banking activities.

Provisioning for bad debts more than doubled to 656 million dirhams in the second quarter from a year earlier.

The bank said the cost of risk had increased in 2019 to a more normalized level from relatively better credit quality conditions in 2018.

Cost of risk reflects the price a lender pays to manage its risk exposure. In 2018, Emirates NBD signaled that it expected cost of risk to revert to a long-term level of 80-100 basis points from the 63 basis points seen in 2018.

“The increased cost of risk of 82 basis points in H1 2019 is a result of an expectation of a reversion of credit quality to more normalized levels from the benign conditions in 2018, coupled with the expectation of lower write-backs and recoveries,” it said.

Credit-rating agency Moody’s had warned earlier this year provisioning charges for top banks in the UAE will increase in 2019 owing to pressure in the property and the retail sectors.

The Dubai lender said its net profit surged 49 percent in the first half of the year. “Core operating profit advanced 8 percent compared to the first half of 2018, helped by loan growth, higher foreign exchange income and increased investment banking activity,” the bank’s chief executive Shayne Nelson said in a statement.

Nelson said that the bank continued to make progress on the acquisition of Turkey’s Denizbank and expects this transaction to close in the third quarter of 2019.

Emirates NBD said in April that it was buying Denizbank from Russia’s Sberbank at a roughly 20 percent discount to a previously agreed price, after a steep fall in the Turkish lira.