Vikas Papriwal, Partner, Head of Markets, KPMG Lower Gulf shares his thoughts on the prevailing economic conditions and its ramifications for countries and corporates
Can you give us a brief profile of yourself and your responsibilities?
I head markets for the firm; in addition, I am responsible for determining the strategy for the sectors that we are focusing on and the strategy regarding which managed accounts we are going to go in for and which partners and directors should lead them.
All of that thinking evolves within markets as a function. This is my day job, apart from this I also have a rich portfolio of clients that I personally look after. This trip to Muscat is to further the thinking on that strategy for the new financial year and to continue meeting clients, seeing what their needs are and how KPMG can gear itself up to meet those challenges. We are venturing into four to five new areas within the lower Gulf and also the wider GCC, as the challenges to the regional economies get more pronounced.
Given the prevailing economic scenario, what are the challenges and opportunities for governments and businesses across the GCC region?
The last 12 to 15 months have been a bit unprecedented as oil prices have been stable at a low level for a while. During the financial crisis of 2008, oil went down to $36 per barrel, but it spiked back to $100 per barrel, but this time around we have not seen that spike. Most commentators feel that oil prices will be range bound in the mid-term, giving a very different dimension to challenges. For example, government revenues are constrained across the region, but there is a socio need for them to continue spending. The question is – what can governments and businesses do in such a scenario. Governments are looking at ways in which they can optimise their spending, while at the same time looking at alternatives to broad base their revenue. Value added tax or VAT is expected to be introduced from January 18 in different parts of the GCC, and companies need to know ways in which to meet that challenge, they need to know what to do on day one and how to gear up for it. They need handholding wherein someone who has done something similar elsewhere and come and help them with that transition. We see a number of bank consolidations happening because economies are not growing at the same pace as they were historically and this is putting a lot of pressure on their cost-to-income ratio and balance sheets. Bank mergers usually generate value, but the question is how to extract value. Customer experience and digitalisation are very high on the agenda of most banks. While a number of people may think that digitalisation is a fad, as an organisation we strongly believe that digitalisation in banks or for that matter in any organisation directly helps in reducing costs. KPMG has invested significantly in this area and we have got a partner from IBM, who leads our practice in this field across the region. If you look at areas like cyber and as the internet of things becomes more pronounced, one is going to find an increase in hacking type of situations.
Another important area is technology-led transformation. This part of the world is dominated by family businesses and as generations are changing and the complexity of business is increasing, for a number of businesses to remain relevant they need to transform. Technology is disrupting things in a very fundamental way and we see a lot of demand coming in that area. So we see a number of trends, which have been enabled by the low price of oil, which is changing a number of business models and throwing up a number of opportunities. A number of companies which were not organised in a capital efficient way are now trying to reorganise themselves more efficiently, restructuring their debt, income streams etc. and all that thinking is happening in a number of companies. Overall, people are recalibrating their thinking.
How can companies negotiate such unprecedented change?
People are looking at ways in which they can tap into additional revenue sources, in terms of a different demographic or markets. Secondly, they are bringing in efficiencies through digitalisation, technology, outsourcing etc. People are looking at various levers which will not strain the day to day operations of their company. The other aspect is leverage and how people are using leverage on their balance sheets. The uniqueness about the situation right now is that while we have low oil prices we also have a historically low rate of interest, which is helping companies do things and do things slightly differently, than a situation where economies were not growing rapidly and there was high inflation and hence high interest rates. We expect interest rates to remain low in the short term.
Is this a secular trend across countries or are different countries at different levels of preparedness?
The baseline trend is the same which is low oil prices, but the way each economy is responding is different. Putting Oman in context, the good thing that Oman is doing is that it is looking into areas where it can diversify. The focus is becoming sharper if you see tourism, trade, hospitality, agriculture etc. These are areas where Oman has an advantage. The other area is PPPs (public private partnership), because in Oman there are already very good examples of these in power, utilities, ports etc. and that trend is going to continue. The per capita infrastructure development happening in Oman is very commendable. The country is not overbanked and has a stable banking system, and this is a great enabler to accelerate the diversification process. Various economies in the region are at different levels; like for example Saudi Arabia is working on Vision 2030, but all of them are working towards the same end goal of diversification but the way they have been going about it is different.
What are your thoughts on 2017 and its prospects?
The business environment is going to remain challenging, and there are a number of mega trends going on at this point. As the business gets more complex the one thing that is going to be big is the war for talent, both upskilling the local population and attracting and retaining the right skills are what people need to think about. The main takeaway is that this is the new normal and we will continue to see both disruption and diversification and the businesses that adapt to the change fast will perform well.
The PPP laws that are coming into effect in most countries will enable more private sector investment in projects. Then there are new banking regulations coming to effect, some of which are being driven by international regulation such as changes in lending norms, credit monitoring bureaus, central banks benchmarking; and learning from each other is making the industry more streamlined, and this will help more private activity. In the UAE there is a new bankruptcy law that has been announced recently and the idea behind it is also to help private businesses to flourish. Legitimising a bankruptcy kind of an environment is going to help businesses as it is a more fostering environment and I expect a lot more economies to follow suit. VAT is going to be a game changer and companies will start operating around a supply chain thinking and there will be more discipline; it will also diversify the pace and source of revenue for most governments. Government being in governance is fine, but gradually they will start sharing space with the private sector when it comes to driving growth in the economy.