As the UAE and other GCC economies continue to increase, surpassing many developed and other emerging markets, economic risks are also rising substantially in the region.
Speaking on Economic Risk Management during the Annual Investment Meeting 2014, Massimo Falcioni, CEO of Euler Hermes GCC, said these economic risks would have to be managed intelligently and strategically for companies to sustain healthy profitability.
AIM Congress is the region’s first emerging markets foreign direct investments-focused event which will feature practices and principles corporate and individual companies can follow so as to help them invest better in the region in the future. The conference has been and will be attended by high government officials, private investors, investment managers, and project promoters from across the globe.
Small and Medium Enterprises (SMEs) are expected to feel more pressure in accessing finance due to intensified competition. According to Mohammed Bin Rashid Establishment for SME Development (MBRE), SMEs comprise more than 90% of UAE businesses.
An MBRE report shows that a third of SMEs do not make it in the business world and this is primarily due to the common challenge most entrepreneurs face – access to finance. A white paper on the SME sector in MENA, commissioned by Citi Foundation and Shell Foundation, found that lending to SMEs averages about 2% in the GCC countries and 13% in non-GCC countries, and that only 20% of SMEs have a loan or line of credit.
To mitigate this risk, Falcioni highlighted the vital importance of trade credit for SMEs. He said: “To compete in the local, regional and global market, a company has to trade on credit. Over 60% of company assets can be reflected in its receivables. And Trade Credit Insurance (TCI) is one of the most effective services offered to SMEs that want to trade and export. TCI increases rating of a company and also guarantees to protect business against payment defaults.”
Currently, the GCC is underpenetrated in terms of insurance and even more so for TCI, but this is growing fast. The GCC has an enormous GDP of Dhs9.6 trillion but the total TCI premium in the region is only around Dhs218m – a penetration of just 0.004%, four times lower than the US and six times lower than Europe.
“The reasons for this are culturally related because as of today, there is still not much awareness on TCI and the most common tool used is Letter of Credit, which will not be sustainable in the long run due to its high cost and time consuming procedure,” Falcioni added.
In addition, as re-exports from the UAE continue to increase, thanks to being a cost-effective haven for logistics and trade, the insolvency index of the UAE is also expected to rise. Official figures from Dubai Customs show that Dubai exports and re-exports have grown by 4% from Dhs498bn in 2012 to Dhs518 in 2013.
Falcioni commented: “The UAE and the GCC countries optimal strategic location is another factor contributing to an accelerated growth in the volume and value of cross border trade. This has led the region to become an ideal centre for re-exports. But this also exposes traders to additional risk when trading on open credit terms.
“These increased levels of risks are boosting demand for trade credit insurance solutions which is what Euler Hermes is able to provide from its offices in Dubai, DIFC, Riyadh and Jeddah.”
Falcioni added: “We would like to thank the wise leadership of HH Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE, Ruler of Dubai under whose patronage the 4th Annual Investment Meeting has become another testimony of the UAE’s pioneering role in enhancing foreign investments in the region and the world.
“We also would like to express our thanks to the UAE Ministry of Economy for organising this event, which is truly an international platform, effectively boosting foreign investment and enhancing closer cooperation between public and private sectors.”
The plenary session was moderated by Tim Rogmans, Ph.D, Assistant Professor at the College of Business, Zayed University, Dubai and was also attended by the following speakers – Yasser Al-sharif, CEO and board member, Manafea Holding Company, Saudi Arabia; Ambassador Adam Ereli, vice chairman, Mercury, Washington DC, USA; Mahendra Siregar, chairman of Investment Coordinating Board (BKPM), Indonesia; Andreas Dressler, managing director of Terrain, Berlin, Germany and Jeroen Nijland, commissioner for Foreign Investments Netherlands Foreign Investment Agency (NFIA).
Euler Hermes GCC (Dubai)
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Wednesday, April 9- 2014 @ 14:38 UAE local time (GMT+4) Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Mediaquest FZ LLC.