management

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Effects of current global financial crisis

Introduction

The existing Global Crisis has hit every nation in the world in some form or the other leaving no exception whatsoever. One of the major issues that UAE has encountered due to this global financial crisis is over its development which has gone through a devastating era. Over the past few years, both the capital Abu Dhabi and Dubai became a central hub for investors in order to attain optimum returns over the money they have put into the market. Some of the major fields of attraction that were available in this nation were real estate, luxury shopping and most importantly tourism. But as a result of this economic hold back, all these fields seem to move towards a leeward side. This can very well be explained with a practical example of a real estate company called Nakheel. The company is supposed to be the largest employing company in the commercial capital of UAE, Dubai yet it had put its employee strength down by over five hundred. Such was the impact of the global financial crisis on the country. (What does the global financial crisis mean for Dubai real estate?, 2008)

If we move our discussion to the banking sector, the expected returns in the third and the fourth quarter of the year 2009 were just not impressive as they were in the previous quarters. As commercial institutions like banks control the economy of a country, failures of this kind reveal the tremendous effect that the economic slowdown has had over United Arab Emirates. The interest rates with respect to loan and also the ever increasing insurance rates have been a pain in the neck as well. The Government of the country has also undergone major decrement in its savings with the effect of this severe amount of bail outs tendered to undergo liquidity.

If one talks about the UAE economy, one of the most vital factors which affect it is the total amount of goods that are being traded in on a usual scale. With an effect of this financial crisis the amount of goods which some of the other countries were trading in from UAE markets have gone down or at places completely declined which if seen indirectly, it is affecting the local market of the country. The total amount of gains that are being made has come down because of the global crisis but the market has managed to stay prominent because of the consistent growth in the number of investors in the nation. In order to improvise further upon these factors; the Government of UAE is now inviting new and capable organizations to make a base in the country.

Reasons for the Global Financial Crisis

The economic crisis started from the economic slowdown in United States of America. Now that the concept of Globalization has become so strong, every country is interlinked at least in terms of finances in some way or the other. Therefore, the financial crisis had a considerable effect in United Arab Emirates as well. If one looks broadly at the reason that caused this crisis; he would analyse that there was a huge degree of sale of property on loans in USA. But as time passed by, the rates of the loans went up to great extents and reciprocally the prices of houses started to go down. As a result of this fate, refinancing became a tough task and this very situation became the root-cause of the global financial crisis that a country like UAE which is miles away from USA is suffering. Even the Government of the country has gone on the same side that has lead to the global financial crisis. It did not take into account the risks go along with giving loans to people. There was a shortage of market based regulations which resulted into the basic cause of this market failure. It allowed the companies to be moving the steps of a turtle in the corporate world, at the same time hoping to have a success like that of a race horse. If we take examples from UAE, we can't miss out on Emaar that boasts of being the financial market leader in the country. So, it was inevitable that the company would be affected due to the global financial crisis. It is important to understand here that Emaar controls much of the financing activities in the UAE stock market. So, a financial effect on it was bound to move towards the interior of the country. The crisis has lead to a fall of more than 28% in the prices of property. High capital companies like Emaar would not be affected by the global economic crisis but the financial problem that the country is facing is that the sales volume as an effect has gone down tremendously. In fact all the minority investors which contributed to a large extent started to diminish as the slowdown started taking a big leap in the country. The level of investment funds has gone down considerably as a result of the shortages of such minority investors. So, if one sees the impact of this on the earnings per share of Emaar; it is expected to go down to about 0.20 by the end of this year. Such a degraded financial ratio in a company as big as Emaar shows the weakness that the financial crisis has formed in UAE. (Global Economic Crisis Hits Dubai, 2009)

The above graph explains the economic crisis with respect to UAE along with the reasons of that led to the fate at different times in the chronology. One can also see that the recovery is probably expected by the year 2011. The graph also suggests that there are chances of stability by the end of this year but at the same time, one can see the effect that it had over the economy of the country.

Effects of the Crisis on Different Sectors in UAE

The recent surveys that have been done of late make a clear indication that the UAE economy has certainly had effects of the financial crisis in some magnitude or the other. The only fact that saved some companies from facing the consequences of the financial crisis is that the Government did not follow the policy of giving loans to even those loan contenders who did had a considerably poor records from the perspective of the bank. In this respect one can take examples of Islamic banks that have become so prominent in UAE. As far as these Islamic banks are concerned, they do not even follow the policy of interest in loans, hence they stayed away from the effects of the crisis. This is one of the very few areas that have had the elusion from the aftermath of a disaster that was never seen in the history of formation of UAE.

Another research done to understand the effect of economic crisis on the country states that those institutions which began to target the upper-sized industries have been the major sufferers of the financial effect. This is because even if the percentage losses are small, the magnitude of the loss has been quite huge. We have seen this for a company like Emaar. So, with the exception of Islamic banks, this crisis would certainly have its effect on the other major areas of trade in the nation. One of the researches had initially predicted that the UAE economy is highly flexible hence long-term financing is not required. But the growing desires of the employees went so huge that they followed a contradictory policy and had to face the after effects of the disastrous economic crisis. Some of these researches have also found out that more than 10% of the assets in the UAE banks belong to foreign countries. As a result the chances of an economic crisis added on. (UAE banks skirting global financial crisis, 2008)

The recent research had also made a prediction that with the scarcity of liquidity in the infrastructure sector, there would be a decrement in the demand along with it. There was also an expectation that if the prices remain stable then it would be very difficult for the infrastructure industry to make the level of profits that they had been making in the past. This could have an effect on banks and other institutions that govern the financial health of the nation. Here, the reason would be that the construction companies like Nakheel have a vital role to play in such financial institutions. So, with recession setting in; the mutual conditions of the financial institutions and the companies like Nakheel started to get from bad to worse. Now there would be two sectors in the form of being on rent and the other on the side of development.

A vital contribution that the research made was that a lot of the effect of the economic crisis in the UAE Islamic banks would depend on the price of oil. The region has been moving ahead incessantly on the oil prices which have been the basis of liquidity. But with the drop of oil prices as we have seen, recession has set. So, the research has concluded that even though there are chances of the effect of financial crisis to be less on some of the middle-sized companies but at the same time there are chances that it gives a reason to think for situations in the future. The Government is required to mitigate policies like Emiritization so that the best possible human resource can improve the quality having lesser requirement of training and wasting budget in the same.

The UAE ministry of labour is one of those bodies that would have to take the initiatives in so as to ascertain that there is no unemployment in the nation. The reason for the same is that, once the degree of unemployment starts, the chances of the effect of recession would move further. A number of researches in the recent past have shown economic disasters in a number of developing and developed nations across the globe. In fact many of researches had felt in the month of April'2009 that the country could have an adverse effect in the times to come because of the serious global financial slowdown. One of the remedies could be to have Arab exchange of labour between the GCC countries. This would mean that the country needs to have flexibility over its labour assignments so that it could meet the needs of the industry with ease. Even though, UAE had started to believe in the policy of Emiritization, but it would have to think about exchanging labour amongst countries in the region so as to mitigate the effect of this global financial crisis. (Rumaithi, 2010)

Responses to the Impact of Global Economic Crisis

In such times of distress, the biggest weapon with which the country has been fighting is by clinging on to every opportunity they see at hand. The country has been an ardent follower of Islam ever since. This is a reputation that the country has made of itself. So, we have seen positive responses from many countries like Qatar, Saudi Arabia etc so as to respect the policy of Islam followed by UAE. This has played a positive part in relieving the country from much of the stress laid by the global financial crisis. One has also seen that after the error that the country made with respect to the interest rates, any type of financial help from the financial institutions in the country has been diminished. The post-global recession has also proved that now there are very few risks in investing in these financial institutions. So, the country is likely to get over from the bad effects that the financial crisis has laid on it in the nearest possible time. This will serve as an incentive for the financial institutions to put an end to any plans of funds decrement in them.

Other than this, it was only after the global financial slow down that 1 trillion dollars fund that was given to Islamic banks started to show its effect. This was the fund that started to be used in the most effective manner so as to get rid of the problems. It is also recommended that this money is used effectively in the future so that the country does not have to worry about the future disasters that can occur in some of the lesser privileged countries.

One of the major changes that have resulted from the financial slow down in the country is that the ideas behind recruitment have been changed completely. The companies in the country have started to allow productivity and efficiency as the most important issue in job recruitment throughout the nation. The reason for the same is that the practicalities are now different from what was the case in earlier times, so similar procedures of job recruitment are not as effective to the companies anymore. If for instance, the company CEO decides to resign, the current state of employment would not be able to find a substitute taking place without being of any financial losses to the company. As such a situation is can happen any time in the future, so the company so the recruitment procedure has been made in such a way that such resignations are avoided. (Hess, 2008)

Many companies even those that have been high in their equity have decreased the overhead costs that have become a part of the financial proceedings. The companies are now using the concept of virtual team management so as to decrease the investment involved in holding meetings which unnecessarily raises the expenses of the companies' management. The reason for the same is that the aftermath of the economic has not been favourable for the companies from the financial point of view. So, as predicted, there has been a decrement in the daily expenses of top companies followed by those that have a lesser scale of operation.

It is a well-known fact that the Government of UAE has been following the policy of Emiritization in the recent past. Especially after the economic slowdown, the threat of expatriate resentment in the corporate world has grown higher. So, as the UAE Government is now training much of its native population, it is looking forward to get the vacancies filled by them. This will also increase the probability of having the percentage of natives in the companies to be increased. As these companies follow the principles of Islam in a broader scope, this would certainly be a religious initiative. But the only problem here is that the natives might not be able to do the job as efficiently as the expatriates which can degrade the quality of services. Now, there has to be a larger budget planned for training purposes which can't be afforded by all the companies that have had to face the after effects of the financial crisis. This would require the companies to use the best available technology so as to decrease the cost of training in the long run.

References

  1. What does the global financial crisis mean for Dubai real estate?(2008), Retrieved on 6th March'2010 from http://www.ameinfo.com/171697.html
  2. Global Economic Crisis Hits Dubai. (2009), Retrieved on 6th March'2010 from http://www1.voanews.com/english/news/a-13-2009-03-05-voa28-68772492.html
  3. UAE banks skirting global financial crisis. (2008), Retrieved on 6th March'2010 from http://www.ameinfo.com/151722.html
  4. Rumaithi, Sadik Al .(2010). Impact of the global financial crisis still causing jitters for UAE, Retrieved on 6th March'2010 from http://topnews.ae/content/21158-impact-global-financial-crisis-still-causing-jitters-uae
  5. Hess, Ursula. (2008). Recruitment under pressure INTRODUCTION: The global financial crisis could hinder recruitment of the best talent. To counter this, companies will need to be innovative and to adopt smart techniques, Retrieved on 6th March'2010 from http://www.allbusiness.com/trade-development/economic-development/11839727-1.html