GCC oil earnings may exceed $4.7 trillion by 2020, says Ernst and Young

This will be 2.5 times their oil earnings over the last 14 years, according to 'Global Megatrends 2009', a report by Ernst & Young. Middle East economies are predicted to be a real growth story for the next few years, even as the region has not been immune to the effects of the global downturn.

"Regional economies are well-placed to capitalize on opportunities emerging from the crisis, despite the fact that there are some concerns over issues related to the tightening of the credit markets and softening of property prices. These increased earnings will allow GCC economies to buy additional assets globally or finance local infrastructure developments as many other economies stall. Their relatively moderate regulation and tax regimes will be even bigger attractions as European and US business environments tighten under the pressure of the ongoing global recession,"

says Phil Gandier, Head of Transactions Advisory Services at Ernst & Young Middle East.

Shift of power from west to east

Countries like Egypt, Iran and Vietnam have been identified as potential rivals to BRIC countries (Brazil, Russia, India, China), as well as some developed economies in future. The study indicates that the global economic landscape is changing and emerging markets are playing an increasingly significant role. Economic power is moving from developed to emerging economies — from West to East and North to South.

Emerging economies accounted for 44% of global GDP in 2007. While projected GDP growth rates for major developed markets in 2009 are now predicted to lie between - 0.2% and 0.5%, emerging markets are expected to grow at 6.1% on average, with China (9.3%) and India (6.9%) performing even better.

The growth of emerging economies may be less than was projected before the financial crisis, but they still demonstrate considerably stronger growth than the developed world. Their hunger for growth, alongside their rapidly industrializing economies and growing populations should set them on the path to recovery more quickly. In the case of China and Russia, their huge accumulated reserves (China with $1.9 trillion and Russia with $560bn) are expected to ease the pain.

Multinationals (MNCs) in emerging markets, previously little-known outside their own countries or regions despite their colossal size, are now challenging the mega corporations of the West. They are seen as becoming global champions in many industries. Attributing the growth to the confidence and scale of MNCs in emerging markets, the study says that ten largest emerging market companies had combined revenues of $1 trillion in 2008 — more than the GDPs of Australia or The Netherlands.

The changing financial landscape

Other trends include the rise of sovereign wealth funds, private equity and hedge funds as the new power brokers. Their combined assets quadrupled between 2000 and 2007 to reach $11.5 trillion. However, in the short-term, hedge funds and private equity firms will be under pressure.

"We expect private equity and sovereign wealth funds to first stabilize after dealing with the immediate impact of the credit crisis and then to take bold positions in various industries and economies with a long term view. The funds that overcome the current challenges of economic uncertainty and its impact on their holdings and develop a clear strategy for putting money to work in difficult credit conditions will have bird's eye view of the emerging macroeconomic landscape. Investors might well follow the investment patterns of these funds, adding to their influence on global investment flows," said Fouad Alaeddin, Managing Partner, Ernst & Young Middle East.

Regulatory environment

In an overhaul and globalization of the regulatory environment, the study looks at two key trends in regulation — the move towards greater regulation and towards more globally consistent regulation. The global financial crisis has shown the need for more robust, globally consistent regulation and an overhaul of the existing regulatory setup appears inevitable.

"Global Megatrends 2009 stresses that out-dated banking regulation, overlapping regulatory US agencies and limited international regulatory coordination are causes for concern. Across the globe, audit committees are revisiting financial plans and analysing year end issues while ensuring that controls remain robust. They are broadening analysis of short term risk and considering all implications for enterprise risk management. The corporate World and its stakeholders need to better understand fair value accounting procedures and their economic impact to fully appreciate the risks their businesses face and how they need to be addressed," said Noor Abid, Head of Assurance at Ernst & Young, Middle East.

Energy and sustainability

Energy supply and demand is likely to represent the biggest challenge of the 21st century. More than any other issue, it is at the mercy of global economics, geopolitics, war, fiscal policy and the battle between growth and sustainability.
The increasing environmental, social and ethical expectations and obligations on businesses and their associated opportunities and risks, and the possible impact of the financial crisis on them also have come under the scanner. Companies are urged to seek out opportunity and ask what their business strategy should be in light of sustainability, instead of asking what their sustainability strategy should be for their business.

Managing & developing talent

In the increasing challenges of managing and developing talent, the study looks at difficulties in attracting, managing and developing a global workforce — a challenge compounded by changing demographics, different demands of young generation and increasing diversity — and brings forward the impact this has on businesses worldwide. While Human Resources (HR) functions will feel the pressure of operating more effectively during the economic downturn, businesses may start to take a more strategic view of talent and HR in the long run.