This is How Small Businesses in Abu Dhabi Should Think About Low Oil Prices

Given the recent volatility in global energy markets, we thought it would be pertinent to contemplate how these macro events might be relevant to small and medium sized businesses (SMEs) in the United Arab Emirates (UAE), particularly in Abu Dhabi, and of course, how GlassQUBE Coworking can then best serve SMEs and entrepreneurs here in Abu Dhabi during this period of energy pricing uncertainty.

First, it is important to preface this as a highly simplified anecdotal analysis. That said, here it goes…

In 2011, the oil and gas sector in the United Arab Emirates represented 75% of GDP. As of 2014, the sector account for 30% to 50% of GDP, depending on the source. It may appear that there has been a substantial diversification away from the energy sector since 2011, however these figures obscure the fact that many sectors of the domestic economy are in fact directly or indirectly supported by the government and can therefore be considered beneficiaries of the energy sector or “subsectors” of it. Since these are blended national figures, it can be assumed that the economic contribution of oil and gas is much higher in Abu Dhabi than in the other Emirates.

In 2011, the Statistics Center Abu Dhabi (SCAD) reported that the private sector accounted for 66% of total employment with the construction industry being the single largest employer followed by the Government, employing 31% and 15% of the total work force respectively. The UAE is an OPEC member so clearly the public sector is a direct beneficiary of oil and gas revenues. However, it should be noted that domestic construction and real estate development is dominated by sovereign or quasi-sovereign entities and are thus also proxies of the energy sector. Therefore, the energy sector plays a much larger role in the domestic economy than the face value of officially reported economic indicators.

We believe (anecdotally) that the sector accounts for at least 60% of GDP.  

Whether you agree with us or not, as direct stakeholders in the global energy market, all OPEC member’s national balance sheets rise and fall with the price of oil. On October 21, 2014 the forward contract price for a barrel of Brent oil was $86.22. Meaning it would cost you $86.22 to secure a single barrel of Brent oil (the benchmark type of oil used by OPEC versus West Texas Intermediate (WTI) typically referenced in the US. At the time of writing, that same barrel of Brent oil cost $44.49 or 44% less than a year ago. A simplistic interpretation of this price contraction means that an oil exporting country such as the UAE has had its forward contract gross oil export revenues reduced by 44%, assuming that Brent sets regional export pricing contracts, which it mostly does. If we assume that oil exports account for 60% of domestic GDP including the described “trickle down”, this infers that the decline in oil export revenues alone contributed to a 26% declined in nominal domestic GDP or approximately $105 billion over the past 12 months.

Again, we qualify all of the above with the caveat that this is a layman’s anecdotal analysis based on our “fuzzy math”, but we believe that is both directionally and proportionally correct.

How does this potentially effect businesses operating in Abu Dhabi or the UAE in general?

With the exception of the Great Recession of 2008, capital and operating risks are at historic highs for businesses across all sectors and scale operating within the UAE. For example, a typical small – medium sized business or SME setting up a 100sqm office in Abu Dhabi would incur the following estimated costs in the first year of operations:


SME Startup Cost Table

 

A typical, efficiently managed SME targets a median annual office occupancy cost of approximately 15% of annual gross revenues including amortized non-reimbursable tenant expenditures and administrative payroll costs. In the example above, this implies that an SME occupying a 100sqm office must generate a minimum annual gross revenue of AED 600,000 just to cover first year startup and occupancy costs. The added contractual risk of a 3 - 5 year lease commitment significantly compounds the total operating risk faced by the SME. Therefore, it is abundantly clear that setting up and operating a business in the UAE in today’s economic environment is not for the risk averse.

Now compare the described risks to an alternative solution; operating the same SME out of the GlassQUBE Coworking building. In this scenario, startup and occupancy costs would simply be represented by the Membership fee since all other services and costs are covered by GlassQUBE Coworking. In this scenario, Membership fees for 100sqm of finished, fully serviced private office space are estimated to be approximately AED 400,000 annually or AED 33,000/month and represents an annual savings of AED 200,000 or 33% compared to the conventional direct leasing option. Additionally, the total operating risk is concurrently reduced since Membership at GlassQUBE Coworking is on a month-to-month basis, avoiding the contractual risk of a long term lease obligation.

In summary, locating a business in the GlassQUBE Coworking business center is a highly effective risk mitigating strategy that provides a low cost – low risk alternative for businesses seeking commercial access to the UAE. This results in stronger cash flows, drives down the operating risk premium and the related cost of capital, creating a better performing, more competitive business. And irrespective of energy pricing, GlassQUBE Coworking’s actively managed collaborative ecosystem and formal business mentoring programs provide like-minded businesses a platform to network and create opportunities out of uncertainty. Whether Brent oil is $30 or $80 (Insha’Allah), locating your business in the GlassQUBE Coworking business enter is a strategically sound, cost effective option that warrants serious consideration.

So get ready Abu Dhabi because GlassQUBE Coworking is coming in 2016. We look forward to helping your business grow.