On Shifting Sands

GCC countries face a number of challenges as they move towards the post-oil era.

Attracting capital from abroad to rebuild the economies of the Gulf Cooperation Council for the post-oil era will require adopting a culture of compliance and good corporate governance. While efforts to introduce transparency and accountability have improved since the 2008 financial crisis, the rule of law remains in a state of flux. Government- and family-owned businesses in the Gulf lack experience in balancing the interests of shareholders, customers, suppliers and the community.

Those concerned about a lack of transparency cite last November’s arrest of hundreds of businessmen, government officials and members of the royal family in Riyadh’s crackdown on corruption. The government extracted more than $106 billion from some of Saudi Arabia’s most prominent corporate and political leaders, many of whom were detained at the luxury Ritz-Carlton hotel until they agreed to turn over their assets. Meanwhile, inward investment in Saudi Arabia collapsed last year.

While the neighboring United Arab Emirates boasts new rules to promote robust corporate governance, recent events at private-equity firm Abraaj are troubling. The firm’s Cayman Islands-based holding company filed for liquidation in June, after foreign investors, including the Bill & Melinda Gates Foundation, accused it of misusing funds. A report by Deloitte found a “lack of adequate governance, including segregation of duties, and overall weakness in the control framework.”

Meanwhile, the rise in oil prices this year has given GCC governments some breathing room, and many have chosen to slow the pace of reform. Following angry anti-austerity protests in neighboring Jordan and the consequent downfall of its government, four GCC countries pledged $3 billion to Amman. Jordan backed away from new taxes; but Saudi Arabia and the UAE already have introduced value-added taxes, and companies are struggling to comply with tax registration and other related issues.

The ongoing privatization of state-owned assets, including the planned record IPO of Saudi Aramco, will require further evolution of the region’s capital markets. New rules and procedures are being rushed out, but a new compliance culture will not spring up overnight. It will take time.

At a time when the region’s economic structure is changing dramatically, this is an opportunity for GCC banks to upgrade their capabilities, not only to meet regulatory requirements, but also to create a bank of the future. One ultimate goal is to make legal compliance and ethical practices part of companywide culture rather than a dedicated department.

In this issue, we also take a look at Oman, one of the least known and understood members of the GCC. With its new Muscat International Airport, the country is enjoying a boom in tourism that is helping it to diversify and reduce its heavy debt. There is also hope that Oman’s neutral position could help it mediate the dispute between Saudi Arabia, the UAE and Qatar. The longer the blockade continues, the more it becomes an existential issue for the entire GCC and efforts to create an important, unified market in an unstable region.