World Business Year

Capital Intelligence Ratings (CI Ratings), the international credit rating agency, announced that it has affirmed Iran’s long-term foreign and local currency sovereign ratings of ‘BB-’, and its short-term foreign and local currency sovereign ratings of ‘B’. The outlook for Iran’s ratings remains ‘stable’.
CPI Financial reported on Sunday the ratings reflect the improved short- to medium-term outlook for the economy following the recent lifting of international economic and financial sanctions related to the country’s nuclear program. As a result, Iran has begun to repatriate previously frozen external financial assets, export more hydrocarbons, and re-access international financial and banking markets. The removal of sanctions has also facilitated trade diversification, thereby improving the country’s medium-term economic growth prospects.
CI Ratings expects the combination of higher oil production, lower costs for trade and financial transactions, as well as restored access to foreign assets to support real GDP growth of about 3.8 % in FYE 2017-18. Improved terms of trade and renewed access to foreign assets and capital are also expected to increase the stability of the exchange rate and possibly help contain inflation, bringing it down to around 6% in FYE 2018, compared to a record high of 40% in 2013 when President Hassan Rouhani was elected.
Public finances are expected to improve as well, albeit at a slower pace in view of the steep decline in oil prices since mid-2014, and amid fierce competition for market share, especially with (P)GCC member states. The budget is expected to post a small deficit in 2016, and to register a small surplus of 0.5 % of GDP in FYE 2017-18, based on the assumption of average oil prices of $50 a barrel.
Iran’s public debt remains low and official foreign assets remain sizeable, estimated by CI Ratings to be equivalent to around 14.5 months of imports of goods and services and around 12 times as high as external debt payments falling due in 2016, although there is still some ambiguity regarding the liquidity and usability of these assets.

Sovereign Ratings Constrained

CI reckons the internal political situation is reasonably stable, and a victory for supporters of the current government in recent legislative elections has raised the prospect of greater economic reform going forward. Geopolitical risk remains a material rating factor, however, given the escalating conflict in neighboring Iraq, as well as in Syria and Yemen, and in addition to the ongoing tension with the (P)GCC member states, namely Saudi Arabia.
Notwithstanding the above positive developments, Iran’s sovereign ratings remain constrained by the heavy reliance on oil (the price of which is currently below the break-even fiscal level), by the limited disclosure of data, and fundamental weaknesses in the economy which have been aggravated by the long period of economic sanctions. The ratings are also constrained by continued expenditure rigidity, as well as the weak financial system, institutional shortcomings and complex internal politics.
The outlook for the ratings is ‘stable’. This indicates that Iran’s sovereign ratings are likely to remain unchanged within the next 12 months provided that key metrics evolve as envisioned in CI Ratings’ baseline scenario and no other credit quality concerns arise.
The ‘stable’ outlook balances the projected positive outcome of lifting the sanctions against the prolonged period of low oil prices and the concerns of spillover from the conflict in neighboring countries.

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Published: 25 April 2016

China is facing the difficult task of managing a soft economic landing, after decades of spectacular expansion. Naysayers abound, but never mind them. China has an advantage that other countries in today’s troubled global economy lack: a clear path forward. If China carries out a sustained, comprehensive effort to raise productivity, it can address its growth challenges, reduce the risks of financial crisis, and complete its transition to a consumption-driven, high-income economy with a large and affluent middle class. If it does, its annual GDP could be an estimated $5 trillion larger by 2030 than it is likely to be if policymakers continue to pursue investment-led growth.

And, in fact, China may have little choice. The traditional drivers of its economy – a vast pool of surplus labor and massive investments in infrastructure, housing, and industrial capacity – are becoming exhausted. The working-age population has peaked, urbanization is slowing, and the steel and cement industries are suffering from overcapacity. Returns on capital have declined, so China cannot rely on investment spending to generate sufficient growth.
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Fortunately, however, China has substantial room for gains in labor productivity, which is only 10-30% of the level in advanced economies. When the McKinsey Global Institute analyzed more than 2,000 Chinese companies in industries ranging from coal and steel to auto manufacturing and retail, it found opportunities to raise productivity by 20-100% by 2030.

Consider China’s service sector. Though the sector has grown rapidly and now accounts for about 50% of GDP, low-value-added businesses still dominate. On average, service businesses in China are just 15-30% as productive as their counterparts in OECD countries. In addition to streamlining existing operations (for example, by introducing self-checkout systems in retail businesses), China has opportunities to complement its manufacturing sector with high-value-added business services in areas such as design, accounting, marketing, and logistics.

In manufacturing itself, China can do more to automate its factories. China is the world’s largest purchaser of robots, but it still has only 36 robots per 10,000 workers, compared with 164 in the United States and 478 in Korea. Chinese companies have already shown that they can mix automated and manual assembly lines. They also can raise productivity by rationalizing operations and improving energy efficiency, bringing their performance closer to that of their global peers.

Chinese companies are major producers in a broad range of industries, but they have yet to take over the steps that add the most value. When it comes to semiconductors, for example, Chinese companies mostly serve as foundries for companies that design and sell chips (and, in doing so, capture the most value). Similarly, generics account for 90% of Chinese pharmaceutical sales.

China can support innovation in many ways, including by developing research-and-development clusters and helping inventors reap rewards through stronger intellectual property protection and reforms to the process of bringing firms to market. In the pharmaceutical industry, for example, a crop of innovative companies is developing a distinctively Chinese approach to drug discovery: massive scale and low-cost technical talent. These firms may be on their way to cracking the more lucrative business of brand-name drugs.

Some of China’s biggest productivity opportunities are in sectors suffering from overcapacity. Over the past decade, overcapacity has reduced annual returns on capital in the country’s coal and steel industries from 17% to 6%. The Chinese auto industry is capable of building 40 million cars per year for a market that currently consumes 26 million. Restructuring industries like steel, by letting uncompetitive players fail and encouraging consolidation, could raise productivity dramatically without compromising the ability to meet demand.

As companies move into higher-value-added activities, millions of better-paying jobs will be created, which should raise household incomes and move more Chinese into the middle class. In the first two or three years, however, before the income boost from rising productivity kicks in, the massive reallocation of resources could result in considerable pain and dislocation. Millions of low-skill workers will need to be retrained and redeployed, and GDP may grow more slowly than expected, before assuming a moderately rapid, steady pace through 2030.

The alternative is a continuation of the status quo, with poorly performing companies propped up in the name of job preservation and social stability – even as they raise risks for Chinese banks. The country would use its resources unproductively, and its firms would become less globally competitive.
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China’s history provides reason to believe that its leaders will make the right choice. In the 1990s, ailing state industries and the Asian financial crisis risked dragging down the country’s economy. But, rather than attempting to use fiscal and monetary stimulus to provide a short-term economic boost, the government carried out wrenching reforms and put the country on the path to two decades of awe-inspiring, double-digit growth.

Today, China faces a similar decision. It can settle for temporary fixes that will ultimately make the problem worse. Or it can seize the opportunity and press ahead with reforms that will boost productivity and create economic prosperity for years to come.

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Published: 19 April 2016

Dubai attracted Dh28.6 billion in greenfield foreign investments in 2015, according to the emirate's newly launched FDI Monitor.
The Dubai Investment Development Agency (Dubai FDI), an agency of the Department of Economic Development - Dubai, revealed new achievements for Dubai's global FDI rankings in its first 'Dubai FDI Monitor' reports series.
According to Financial Times Markets data quoted in the report, Dubai attracted Dh28.6 billion in greenfield FDI in 2015. The emirate witnessed 16 per cent growth in the number of greenfield FDI projects to 279, compared with 240 in 2014, and nearly Dh20 billion ($5.3 billion) of FDI inflows.
"Dubai continued to enhance its position as a preferred global FDI destination in 2015 by climbing global FDI rankings to fourth position in number of greenfield projects and sixth in foreign capital attracted, according to FT Markets," said Sami Al Qamzi, director-general of the DED.
The Dubai FDI Monitor report shows that Saudi Arabia, US, UK, India and Kuwait were the top five source countries for FDI to Dubai in 2015, generating Dh14.9 billion or ($4 billion) and representing 76 per cent of total FDI for the whole year.
As for the largest number of projects in 2015, the top five source countries were US, UK, India, Germany and Switzerland, generating a total of 168, or 60 per cent, of total FDI projects.
Pointing to a strong technology component in capital inflows to the emirate, the Dubai FDI Monitor reveals that 71 per cent of FDI projects in 2015 qualified as high and medium tech, generating 59 per cent of total FDI.
Fahad Al Gergawi, CEO of Dubai FDI, said: "Dubai has been successful in attracting investments in smart city technologies, renewable energy and green buildings among other high-tech sectors that improve productivity and efficiency while accelerating the transition to a green and sustainable economy."
The Dubai FDI Monitor also reaffirms Dubai's ability to facilitate business and serve an expanding consumer market across the Middle East, Africa and South Asia through business services, trade and tourism.
Top industries by number of projects in 2015 were professional services, IT services, transportation and warehousing, finance and retail. The top five industries generated 164 projects, representing 59 per cent of total projects in 2015.
The Dubai FDI initiative to establish an FDI Monitor at a city level sets a precedent among investment promotion agencies globally. The FDI monitor was developed in partnership with Wavteq, an FDI technology and consulting company, and aims to map out the investment landscape in Dubai through analysing FDI flows.