Monday, September 5, 2011

Taxes: UK - Swiss tax agreement, what it means for UK Citizen and Europe (includes advice for UK non-doms)

Continuing news coming from the Euro zone keep us alert that the shocks that we have forecasted coming over the next few months are going to be on time.

As countries, especially European one are coming to terms with their mounting debts, the same are focusing more and more resources into uncovering and taxing financial resources that their citizen have traditionally kept in “safe” places such as Switzerland, Lichtenstein and Luxemburg.

It is therefore not surprising the latest news with regards to the UK/Swiss tax deal that was initialed on August 24, 2011. Please note that this deal follows a similar deal again between Switzerland and Germany initialed on August 10.

The concept is simple: both deals impose a withholding tax; the UK deal includes a withholding tax just below its top marginal tax rates of income, dividends and capital gains. The German deal includes a withholding tax rate of 26.375%, corresponding to its flat tax rate for income and capital. Both of these agreements include a one-off taxation between 19% and 35% depending on the value of the account at a specific point in time.
In essence: the Swiss authorities have agreed to tax the “illicit” funds held by UK and German citizen and share the proceeds while not divulgating the identity of account holders. In other words Swiss authorities will collect the taxes and remit them to the UK and German authorities. Please note that under the UK agreement there is a “one off” fee for UK citizen that want to retain their privacy.

Further note that according to these agreements the UK revenue service can request the details of up to 500 accounts per year versus the German agreement allows for up to 999 account requests per year.

For whoever is not familiar with this matter please note that the European’s Union Savings Directive (EUSD) in place since 2005 already includes provisions for a withholding tax. The latest unilateral moves by the UK and the German government with Switzerland are obviously moving away from the perspective of a concerted European Union effort, putting into question whether a EUSD is going to see revisions added very soon or whether given the current economic climate each country is going to move forward by itself in regulating its tax relationships with Switzerland. A recent comment by senior of officials of the HM Revenue & Customs (HMRC) to Accountancy Age

With regards to the UK: this latest agreement takes precedence over the EUSD. What does it mean for the investors? Well, savings will be taxed at 48%, but the agreement covers more than liquid assets and it includes: shares, commodities, interest, dividends or capital gains (27%) that are generated in Switzerland.

The commitment on sharing records by the number per year is also an important signal to keep in mind. Further, I am unclear on how the accounting system is going to be managed between the Swiss authorities that collect the information but don’t share them and the HMRC or German authorities that receive them.

The US approach
The US government has stepped up the pressure "on" the Swiss authorities but followed a separate path which is consistent with its quest for full disclosure.
The US made it clear that it has no interest in a deal including a withholding tax with Switzerland, it wants full disclosure of US citizen’s accounts instead.
The US Foreign Account Tax Compliance Act (FATCA) requires all banks to disclose information about accounts held by US citizen of businesses. Such Compliance Act is going to be unilaterally imposed on July 1, 2013. Foreign banks that don’t comply with the Act will face sanctions, including large financial liabilities that will affect their operations in the US (see USD denominated transactions). This follows the famous UBS inquiry by US government authorities, the investigation has been ongoing since 2007 and that forced UBS to disclose more than 4,500 customer names and received a settlement of $780M USD.

The US government puts pressure on foreign banks and its citizen alike. Recently a Federal appeal last week ruled out that the Fifth Amendment doesn’t apply to non-disclosure of offshore accounts. Please note that the Fifth Amendment gives US citizen the right to remain silent on issues that incriminate themselves.

Although there are serious doubts over the legality of FATCA, given its extraterritorial nature, it is clear that the USA have the necessary “might” to force the situation since banks, Swiss or not, have the necessity to operate in the US. Small boutique banks will have more latitude in their operation if they succeed in carving out niche markets for themselves.

Options for the UK non residents/domiciled or better called “Non Doms”
Many of the non-doms in the UK are American and their status is perhaps the most intriguing. Unlike UK domiciled individuals, non-doms are not necessarily taxed on their whole worldwide income. Therefore, if they wish to maintain the secrecy of the account, the one-off charge might not be appropriate, as it would be taxing income that is not subject to UK tax.

Because of this, the agreement makes specific provisions for them. They have the option to fully disclose or retain their privacy and pay the one-off fee, the same as all taxpayers. However, non-doms have two more options. First, they can self-assess their UK taxable funds in the account as of 31 December 2010 on which they will be charged 34%. The benefit of this is that they will not have 19% to 34% of their whole funds taken out. Second, they can also opt out of this part of the agreement. This is, of course, not without controversy. The Telegraph quotes one expert who says: "It's no secret that Switzerland houses non-doms' cash and this immunity looks very unfair for everyone else."

HMRC has been keen to stress that non-doms who opt out of the agreement or self-assess and are later found to have had undeclared UK taxable funds will be treated with severe penalties, including criminal prosecution.

There is no opting out on the withholding tax. Non-doms on the remittance basis will face a withholding tax on their UK-sourced income and remitted income. Of course, they would have to remove their privacy so that the taxman knows they are on the remittance basis. However, unlike UK-domiciled individuals, when non-doms remove their privacy, they will only be charged the withholding tax rates and not the UK top rate of tax – for example, 48% on income as opposed to 50%.

Having said all this, non-doms are in a better position than UK-domiciled individuals as they have more choice available. But, contrary to some reports, this does not represent a complete immunity. Perhaps to hammer this point home, we can expect to see HMRC focusing on non-doms who have self-assessed or opted out. More than anything, a prosecution along these lines would be a public relations coup and would dampen down the understandable criticisms of non-doms getting an easy ride.

Advice to applicable UK taxpayers
Although there is choice available to non-doms, the overwhelming advice from tax professionals to all taxpayers is to fully disclose through Liechtenstein. The Liechtenstein Disclosure Facility (LDF) allows taxpayers to become fully compliant with a fixed penalty of 10% plus interest on all past liabilities since 1999 and, importantly, immunity from prosecution.

Switzerland banking secret and its role as a tax heaven is obviously becoming part of the past, as so it is for Liechtenstein.  The recent UK and German agreements seem to me more a transitory step towards the type of full transparency that European countries and the USA require given the necessity to recovery as much funds as possible to manage the growing debt related concerns.

As always in life, I am sure that other jurisdictions will take leading roles in filling the void. It is also clear though that the same pressure coming down to Switzerland will be asserted against other obvious traditional tax heavens like BVI (British Virgin Islands, Cayman Islands, etc.), although the effectiveness of such pressure is yet to be measured.

Current trends highlight the strategic role of jurisdictions such as the United Arab Emirates that rather than a tax heaven is a country with a solid economy and thriving trade but still retain a tax-free regime. I expect to see more and more investors and retiree to opt for residency in the Emirates to take advantage of the friendly lifestyle, tax-free regime and the advantageous bilateral trade agreements. Further note that the UAE is neither a signatory to the relevant directory, nor agreeing to cooperate with the Organization of Economic Cooperation and Development (OECD).

Don't hesitate to contact me directly if you are interested in any further information about this topic or you would like to discuss any related problem or strategy.

Sunday, July 17, 2011

Critical juncture - Euro & USD

Dear all, I was preparing the new blog article on a completely separate topic when I started to pick up from the press the convergence of a series of issues that require immediate attention.
I will therefore leave on this occasion the general analysis of the emerging market economies to focus on the impending "perfect storm" that is brewing across Europe and the USA.

We are in fact fast approaching a series of events that if not carefully thread could have a profound impact on the global economy the way we know it, more specifically:

  1. the Euro crisis is spreading and it has INEVITABLY included Italy;
  2. the USA is about to vote on a structural piece of their economic system and its timing is indicative of a very fragile system; 
Let's briefly analyze each item separately and then try to make sense of what is happening.

The Eurozone debt crisis
In talks with friends and clients we have sustained for the past 2 years two fundamental claims: the Euro was an experiment that unless strong political changes supported couldn't be supported long term.
We also claimed that the critical moments in which the crisis would have accelerated was the moment in which Italy was going to become the focal point of the crisis, or the tipping point. The issue is a matter of size: while Greece barely represents the GDP of a German Land, the Italian economy is the 4th largest economy in Europe and the 8th largest economy in the World. An Italian bailout is bound to create significant ripple effects both politically and financially.

Please note how the debate on the global media with regards to the Eurozone crisis has started to include Italy no more than a month ago. Nowadays all newscast globally, other than the one in Italy of course, seem to have recognized the size of the problem looming.

For the first time I have noticed going "mainstream" some of the "what-if" scenarios that we have been kicking around for quite some time now: the idea of multiple euro currencies: a "core euro" and a "peripheric" euro. I think that the fact that these scenarios are reaching mainstream talk is a sign that time is maturing for some bigger event. For additional information about scenarios like the one mentioned above please follow this posting by Izabella Kaminska of July 15.

As predicted earlier the list of "endangered" countries now comprises:
- Greece
- Spain
- Portugal
- Ireland
- Italy

Long before than the media investors have started moving, please look at the latest spreads.
From Bloomberg:

"Italian two-year note yields surged the most in over a year, as the nation’s borrowing costs rose at a debt sale and contagion from Greece’s debt crisis spread across the 17-nation euro region.
Yields on notes from Ireland, Portugal and Greece soared to euro-era records, while German bunds advanced for the fifth time in six weeks as Europe’s politicians clashed over how to craft a new rescue plan for Greece involving private bondholders. Spanish and Italian 10-year bonds slumped, sending yields to the most since the euro’s inception in 1999, as borrowing costs rose to a three-year high at a sale of five-year Italian securities. France, Spain and Germany plan to sell debt next week."

Italy’s two-year yield climbed 75 basis points over the week to 4.26 percent as of 4:40 p.m. in London yesterday. That’s the biggest weekly increase since the five trading days ending May 7, 2010, the week before Europe’s leaders announced a $1 trillion backstop for the euro. Yields on 10-year notes advanced 48 basis points to 5.75 percent. They reached 6.02 percent on July 12, the most since 1997.

Ireland’s two-year bonds plunged after Moody’s Investors Service cut the nation to Ba1 from Baa3 on June 12, saying it is likely to need a second bailout. The country’s two-year yields climbed 6.9 percentage points to a record 23.12 percent, while its 10-year bond yields advanced 1.13 percentage points.

Greek 10-year yields climbed 71 basis points over the week, while the nation’s two-year bond yields soared 2.69 percentage points. Fitch Ratings slashed Greece’s credit rating on July 13 to CCC, its lowest grade, and said that a default is a “real possibility.”

Spain’s 10-year bonds dropped, pushing the yield up 39 basis points to 6.06 percent. Spanish debt may continue to fall next week as the nation prepares to auction 5.5 percent securities maturing in 2021 and 2026 on July 21. It will also sell 12- and 18-month bills on July 19.

What does it mean the trending of the spreads for Italians? It means that the 40B Euro in economic cuts and additional taxes will be all but wiped out by higher borrowing costs that the country will need to face in the future. More corrections will be required. 

Let's take additional data from Italy: the money supply over the past 6 months has fallen drastically. M1 and cash deposits over the last 6 months has contracted at an annual rate of 7%. To put this in perspective: this is faster than the build up leading to the great recession of 2008. Such dramatic figures typically indicate an economic contraction approximately 6 to 10 months away. What is also important to report is that the numbers in the core eurozone has started to deteriorate as well, and in spite of this ECB has recently increased interest rate. It does seem that the leadership of the ECB is battling political and financial issues but the end result is that there is still a fundamental denial about the gravity of the situation that is building up.

Remember: once the situation will be mature, we will require a small event to unravel the euro and send shockwaves across the global economy. Will China commit to save the Euro? Please remember that China has been one of the supporters of the Euro note over the past year.
My prediction is that the "endangered" countries of the Euro will turn the issue political sooner rather than later and that economic matters may take a backseat.

Now let's briefly take a look at what is happening on the other side of the Atlantic.

US debt ceiling debate
Raging right now in the US is the debate to change the debt amendment and raise the current deficit ceiling. In essence Congress must raise the $14.3 trillion limit on US borrowing by Aug. 2nd. If that doesn't happen the US may face a downgrade in his credit rating and send significant shockwaves across the the financial system, or at least many believe so. 
President Obama and the Republican opposition have been fiercely fighting over two fundamentally different approaches towards this matter.

I personally believe that like the ex chairman of the Federal Reserve Paul Volker: "reason will prevail" and the politicians will find a compromise. In fact history leads us to believe that it will be so: in the past 30 years the limit has been raised already a significant amount of times.

The real important issue for me is timing and the fact that uncertainty at this time in the global economy, and especially uncertainty surrounding its largest economy, is adding onto very negative investor sentiments. The message here is economical as much as political: the transition between a world dominated by the G7++ economies into a world led by China & India is fast in the making. While the trends are undeniable the transition is froth of peril for such an interconnected world and the aftershocks of a new order may excerpt sacrifice on many parties.

Again, pragmatically: what does it mean for the investors right now?
My advice in the short term is to stay liquid, please look at currencies like the Swiss Franc and the UK Pound. Leave the equity market to its woes and play out some of the uncertainty unless you are a good trader. 

In the long run evaluate different type of investments altogether: food commodities are a sure bet in the long run but you need to brace yourself for a bit of a roller coaster ride. In some of the most uncertain countries or where financial instruments are limited, focus on building business ventures that satisfy local needs.

Related posts on this blog that explained the fundamentals of what is happening:
Geopolitical & economic shift eastbound: underlying trends fueling long term growth in an economy - December 19, 2009
- emerging markets: by choice or mandatory evolution? - December 27, 2009

Related posts from other sources:
Italy money supply plunge flashes red warning signals - The Telegraph, July 14, 2011
U.K. Pound Approaches One-Month High Versus Euro Before Bank Stress Tests - Bloomberg, July 15, 2011
Barack Obama’s extravagant Ancien RĂ©gime tells the American people: let them eat taxes - The Telegraph, July 15, 2011
Moody's: U.S. faces default on debt payments not 'technical', - Reuters Video
Volcker: Common sense must prevail in U.S. debt debate - Reuters Video

Sunday, May 15, 2011

Georgia: an emerging economy in the heart of the Caucasus, a player of the new Silk Road

I have recently answered the call of a friend of mine that asked me to take a closer look at country system that could benefit some of my existing and new clients: Georgia.

I therefore took the time to study the macroeconomic data available via secondary sources prior of the trip and planned to visit the country first hand to match the data sourced with first hand experience.

Following is a high level summary of findings that I would like to share with the audience of my blog.


Located in the hart of the Caucasus, Georgia is a country with 4.6M people and a size of 70,000 Km2, comparable to the state of South Carolina in the USA. Mostly known to neighbors for its wine production, fine mountains and beautiful seaside, for the past 7 years this country has been undergoing profound legislative and economic changes that de facto make it the most liberal and less corrupted country in the Caucasus.

Georgia borders with Russia to its North side, the Black sea to the West, Turkey and Armenia to the South and Azerbaijan to the South East.

Since 2004 after the victory of the so called Rose Revolution, Georgia was able to jump start the economy by virtue of drastically reduce the red tapes necessary to build infrastructure, start businesses and favor foreign direct investment.
Taxes were reduced, tax law simplified and a strong movement against corruption, including in the judiciary system, initiated.

While the methods adopted by the government led by President Saakashvili have been the object of criticism by a fragmented opposition the results have been very encouraging.
Till the conflict with Russia in 2008 the GDP was growing at an average of 9%. The conflict with Russia: Georgia?s main trading partner and the global economic crises stopped growth and in 2009 Georgia has posted a net decline in its GDP by 4% according to the IMF.
Still at the end of 2009 the same IMF officially declared that Georgian economy was on the verge of restarting its growth: a remarkable result given the circumstances.
Of the same opinion was the report published by the Economist Intelligence Unit of March 2010 and in the same year Standard & Poor's has raised from B to B+ the sovereign debt of the country with an outlook rated "stable" due to its particularly friendly business environment (29th rank globally).

Further, according to surveys promoted by the World Bank, the level of perceived corruption has been reduced to only 1/4 as compared to 2002: 11% of the companies declares to resort to corruption practices as compared to 44% in 2002.

"Business Freedom" Graph in comparison to Italy and Russia:

The country's leadership is maintaining a clever political balance with all partners and neighbors. The visa regime is very liberal and favorable, for example both Europeans and Iranians receive free visa on arrival.

In spite of recent signal of ease the most difficult relationship remains the one with Russia. After the war of 2008 the situation has recently improved: reopening of the of the border pass of Kazbegi-Lari and the reactivation of the Moscow-Tbilisi flights. The government has deployed a new strategy for what are defined as the Occupied Territories of Abkhazia and Ossetia and it includes the re-establishment contacts with individuals and the re-connection of economic ties although at certain determined conditions.

Worth noting is the "Economic Freedom Act" that includes a series of constitutional reforms aimed at:
  • containing public expenses and manage the debt to GPD ratio (debt not to exceed 30% of GDP);
  • regulating the activities of government authorities
  • and try to impede the participation of the state in the banking system.
It is important to note that some foreign institutions, such as the EU, have expressed some doubts with regards to the content and extent of deregulation envisaged.  It is my personal opinion that such foreign organization already suffer of over regulating everything and the results are far from encouraging, I personally hope that the Georgian government will resist these attempts and find its own Georgian way of developing keeping the balance among the so many different parties at play.

The renowned Georgian hospitality and the beautiful landscape made it easy to match business with pleasure.

During my time in Georgia I was able to connect with the country leaders in the political, economic and art fields. 

Spending time on the ground is not only essential to develop workable professional relationships but also to experience first hand what any investor would experience when trying to establish a business or simply live and explore the country: the ease of communicating with taxi drivers to go from location to location, ability to open a business without any institutional help or recommendation, opening of a bank account, ability to feel safe when walking in the streets, access to primary goods, pharmacies, etc.

Since the Rose Revolution the government leadership has been focused on enacting legislative changes to liberalize the economy and reduce ex Soviet style corruption. The end result has been a sweeping generational change that has propelled to power a new generation of young, generally Western educated, politicians and business people.

One of the significant and consistent feelings that I experienced across my entire set of meetings has been the significant desire for progress that animated all parties I came into contact with. 

Walking the streets of Tbilisi felt safe at every time of the day. I walked by myself the entire center city in the morning, afternoon and evening.
While English is still not widely known most of the young generation has a working knowledge of English and it is easy to get by for all basic operations including banking.
Taxi drivers or people over 45 find it easier to communicate in Russian and a basic knowledge of this language is useful to get by in the country.

Over various conversations with government officials and representatives of the economic world I narrowed down the sectors of most interest for foreign investors to:

Energy: hydro electric
In 2005 Georgia exported 122,000 KWh of electricity valued at only $3M USD; in 2010 1B kWh were exported valued at $37M. Hydro electric power supplies 85% of the country?s needs and the ministry has identified approximately 300 rivers around the country powerful enough to generate 15,000 Megawatts. The entire sector has been privatized including the distribution system. In 2007 18% of the total FDI in the country was dedicated to the energy sector.

Note: further opportunities exist in the oil & gas related activities such as logistics and pipelines.

While it employs 50% of the labor force it only contributes to 10% of the country GDP. The ownership is particularly fragmented preventing access to credit and economies of scale. Technology is antiquated and needs additional investment. During Soviet Union time as recently as the 80s agriculture was a sector growing at 10% a year. Foreign direct investment in this sector would benefit from a ready made local market that is currently more and more dependent on expensive goods coming from abroad. While a new strategy by the Minister of Agriculture is about to be drafted there is an untapped resource that looks interesting: 150,000 hectares of state owned agricultural land that is available to investors. Please note that Italian Ferrero S.p.A has already acquired land to grow hazelnut for its Nutella product.

Although Georgia is a relatively small country it has been blessed with access to pristine nature suitable for 5 star tourists: beautiful mountains and seaside. Both represents untapped opportunities to cater to tourists in the region and outside. The combination of nature and the rich history of the country: remember the memorable tales of the Silk Road and the numerous historical sites sprinkled all over the country are able to provide tourists with "smart" vacations where relaxation meets art and history. Particularly worth noting is the focus to develop ski resorts in Mestia and Khulo in the Adjara district. Further, numerous sites on the Black Sea are available to resorts. To favor the development of tourism the private sector and the government have partnered to create the necessary supporting logistics infrastructure: the airports of Mestia and Batumi are fully functioning and able to cater to both national and international traffic.

Foreign investment in these key areas comes with government exemption from taxes for a number of years. And the usage of Georgia as a logistic platform to reach out to other countries can be done using free trade zones that also reduce taxes to zero for foreign investors (1 free zone is available right now, 2 other free zones will be created shortly).

Last but not least the art scene is vibrant and diverse. The theater and the opera have rich programs and the quality of the performers is very high. It is not by chance that many Georgian performers are sought after internationally: they offer high quality at a cheaper price point than Europe and North America.
In consideration of the generational change it is also clear that Tbilisi and Georgia in general are becoming a point of reference in the Caucasus art world with performers and talent from the neighboring countries reaching out to Tbilisi to take advantage of the "scene" and the network that the city is developing internationally.
It is worth noting how the private sector is starting to integrate seamlessly with the arts creating an important example for the neighboring countries.


It means that while the consumer product market is relatively small in consideration of the population and the average income level, this country offers great opportunities for what concerns infrastructure, energy,  logistics, art and agricultural projects.

Further, its location in the heart of the Caucasus in connection with its liberal laws makes it the ideal place to set up a base to reach out to other countries part of the new Silk Road. 


Lastly, please note that detailed reports are available from our company for each of the sector and opportunitie that have been noted in this summary. Don't hesitate to contact me directly if you would like to know more.


A particular thanks goes to ALL that welcomed me to Georgia and went the extra mile to make me feel at home and comfortable, especially:
  • David Sakvarelidze, General Director of Tbilisi State Opera and Ballet Theater;
  • Gianluca Marciano', Director of Orchestra, Tbilisi Opera;
  • Franco Impala', DHoM, Ambasciata d'Italia a Tbilisi;

Thursday, March 10, 2011

Middle East & North Africa unrest - a perspective

Over the recent weeks many friends, mostly Europeans and North Americans called me to get an opinion about what has been happening in the Middle East and North Africa.
I have refrained from publicly sharing any of my views since events were unfolding very fast and needed some time to analyze them and formulate an opinion.

The following is a summary of my thoughts and humble opinions hoping to be nothing more than a perspective from someone that has been operating in these markets for years and that has a first-hand appreciation for the commonalities and the differences that these diverse cultures share.

Let's get out of the way few important notions:

  • Origins of conflict: first and foremost with the exception of Bahrain the events in Tunisia, Libya, Egypt, Saudi Arabia and Oman have been driven by socio economic factors and not religious ones.
  • Oman: secondly, Omani protesters haven't requested for a change of the ruling family but rather a set of changes that improve the ability of employment and changes in some of the government posts.
  • Bahrain: remains an exception because we have a Sunni government in country that is vastly Shi'ites and some of protests took a religious connotation especially after the clashes that took place about 10 days ago.

The risk of simplifying an analysis and group all these countries together, while useful for some reasons and to certain people, does not represent reflect the truth about the profound diversities among these countries.

Tunisia, Libya and Egypt saw a long deterioration of the conditions of the masses leading up social unrest that took many years in the making. Take Egypt as an example: the economy has been growing fast over the past few years in spite of the global recession: 5.3% in 2010, 4.6% i 2009 & 7.2% in 2008, unfortunately such growth didn't benefit the fast growing population: 20% of the population remains below poverty line, and this looks like a rather conservative estimate. It is not by chance that the majority went to the streets asking for radical changes and that the protests turned violent.

While regime changes were long in the making in Tunisia and Egypt, the unrest in some of the other Middle Eastern countries may have taken some of their governments by surprise. 

Unemployment rates among the local population breeds unrest, especially youth unemployment. At sign of first trouble the answer given by the ruling families in Saudi Arabia, Oman, Bahrain has been to prepare a package of handouts in form of government salaries increases, and to create new government jobs (Bahrain: 20,000 new jobs promised -, in a country of 1,000,000 approximately it is a significant increase). King Abdullah of Saudi Arabia returned home and immediately implemented a $37 billion social welfare package: pay rises, unemployment benefits and affordable housing.

Notably out of the lot during these troubled times have been the United Arab Emirates, Kuwait and Qatar where there was little to no sign of discontent. 
These countries have been able to share in a relatively less inequitable way the wealth of the country and last but not least the population is differently composed: a majority of expatriates workers at every level of society together with a 15-20% of passport holders.

Without getting deeper in the analysis of each single case I would like to highlight some of the risks on hand and some of the opportunities:

  • Egypt controls the Suez canal and therefore the traffic of oil derivatives and container into the Mediterranean. It is essential to have a stable Egypt to guarantee free flowing of the goods. Further Egypt is one of the most populous countries of the Arab League and presents phenomenal opportunities for growth: large and young population, need for infrastructure and good combination of agriculture and services industries;
  • Saudi Arabia: any unrest in this country would send oil skyrocketing to levels never seen before. Saudi Arabia has acted as additional supplier in times of need for the West. Since the second oil shock Saudi Arabia has intervened with additional oil supply any time there was necessity to stabilize the market.
  • Some forces in the West could characterize the current situation along religious lines further exacerbating the contrapposition between Islam and Christianity that seems so useful to some lobbies.
  • Gulf countries: some of the measures that have been put in place to quell the unrest may prove harmful in the long run. Government jobs and subsidies hardly seem the way to create long term competencies much needed in these countries. Government jobs may prove a way to employ the youngsters short term and a way to redistribute the wealth coming from natural resources (oil & gas) but it breeds inefficiencies and promote bureaucratic tendencies. It is known in the UAE for example that many Emirati passport holders don't like to work in private enterprises and hold out of the work force to be employed by the government which provides a secure job, indexed salaries and easy advancements.
  • Since the USA and many European allies actively sustained many of the families ousted during this last round of discontent it is possible that the new forces shaping up to take control in these countries may be less friendly than their predecessors towards the West. (Remember: US 6th fleet is anchored in Bahrain, Saudi Arabia is a key ally of the US, Egypt received armaments and economic support from the US and allies: Italian Prime Minister Mr. Berlusconi called him one of the wisest leaders in the world just two weeks prior of him leaving Egypt for good).

  • Increased internal development: this unrest is a stepping stone in the development of a country. This could be seen as an alarm bell for many ruling families in the region that could put additional resources in the development of the country and in the creation of a better leveled field for its citizen. This in turn can create a virtual circle of business opportunities for all: locals and foreign investors alike;
  • SME sector: a more balance redistribution of wealth in certain countries could mean an accelerated development of economic sectors other than the one of the natural resources which in fact has been on the agenda of many Gulf countries for many years. The next step is promoting the development of a strong private sector independent from the government owned conglomerates that have been fueling the development already for many years.
  • UAE as the most stable country in the region: what may be an issue for some it can be an opportunity for others. Capitals as well as tourist require stability. Since Egypt has proved unstable all tourists have been redirected to the UAE resorts: try booking a room in Ras Al Khaimah these days… Let's look at relative advantages to uncover opportunities.
Useful marco-economic data:

Country Ranking GDP per capita GDP per capita (PPP) GDP Ranking Nominal GDP Population
Tunisia 82 9,488 76 43,863 10,549,100
Egypt 103 6,367 40 216,800 79,890,000
Saudi Arabia 39 23,742 23 434,440 27,136,977
Oman 34 26,197 68 53,782 2,694,094
Bahrain 33 26,807 96 21,733 807,000

Macroeconomic Data from:
  • CIA World Factbook;
  • International Monetary Fund;

Tuesday, January 25, 2011

SMEs entering emerging markets, an example: Italian company sets up manufacturing facility in Sharjah, United Arab Emirates

This month I would like to focus my attention on the backbone of many economies: SMEs and I would like to share information about a real life example. SMEs often represent the large majority of a country GDP and in spite of the countless volumes written by governmental authorities with regards to their support to this sector, entrepreneurs often find themselves alone when facing new markets and tough choices.

Therefore this month I want to share with you the experience of a company that has been successful in setting up in the United Arab Emirates and has overcome all challenges brought about and it is now well on its way to be a leader in its industry.

As with some of my other postings I think that the experience that I am about to share is confirming the trends that I have been signaling all along in this blog:

  1. Geopolitical balance of the world shifting east bound from Europe towards the Indo-Chinese part of the world;
  2. Competitiveness loss of key European countries;
  3. Subsequent delocalization of manufacturing from Europe towards emerging markets and know-how transfer along with it;
  4. Rise of manufacturing quality standards from emerging markets, especially India & China to increase the competitive pressure in point (2).

Below is the experience of a company of Italian DNA that has made the strategic decision to manufacture its products in Sharjah, United Arab Emirates to take advantage of the favorable business environment its key location  enabling efficient flow of goods in and out of a high-growth geographical area.

Company Name: Floor System Company
Location: Hamriyah Free Zone - Sharjah (

Floor System Company is a manufacturing enterprise of raised access floor intentionally wanted and placed in what today is considered the world?s hub and the focal point of International commerce.
The Company is new born but with roots that all the way back to the late 70?s when the concept was bravely introduced in Italy.
The whole concept allows all the commercial buildings to adapt to a fast turnover of tenancy and therefore seen as a flexible space layout where the raised floor is a plenum for all power distribution and underfloor air conditioning today seen as a very GREEN concept.

Following is an interview with Mr. Augusto Di Pietro, managing director and shareholder of Floor System Company that has been an integral part of the project of creating and commercializing his company in the Middle East.
This adventure presented him with new challenges and problems that he overcame with a lot of hard work and patience.

I am sharing Mr. Di Pietro's experience on this blog so that additional companies can benefit from it. In fact, regardless of industry, many of the problems faced by start-ups are common to all.

1. Mr. Di Pietro, when did you mature the idea of setting up a business in the Middle East? And what were the drivers of your decision?
The problem arose when NESITE (the mother Company) was loosing market share to it?s competitors who had already delocalized in China, therefore the need to make a strategic choice on behalf of the Holding. Why the choice of the UAE? Well , I was acquainted with the area and the Emarati community and furthermore today we sit in the middle between the two major manufacturers of  raised Access Floor (China & Europe), this gives us a great advantage of lead time with the upcoming projects in the whole of the middle east being able to supply a product on a Just On Time basis .

2. Did you find good support and knowledge of the emerging markets in your country of origin?
We have had no support or help whatsoever from Italian Governmental institutions: neither in Italy nor in the UAE.  I am ashamed of it because I love my country but it is not a surprise that we are the first manufacturing Italian company in the UAE.

3. What challenges did you face at the beginning?
The fear of not knowing the local legislations , the rules, the regulations and the way of doing business in this area.

4. Are there any challenges that came your way that you really didn't expect?
Most of them because it was a discovery everyday and having to adapt and align the to the system.

5. Now that the start up phase is over are you planning to expand your presence here? Are there plans that you can share with us?
Yes we do have expansion projects and very ambitious ones but we have to take it one step at a time. I would love to here that more businessmen in Italy would have the courage to delocalize production because the difficulties are now known and can easily be overcome.

6. What surprised you the most throughout your experience?
The friendship and the availability shown on behalf of the Hamriyah Authorities, the Sharjah Chamber of Commerce and various other Government Institutes who are proud to have us in their Emirate and have taken us under their umbrella.

7. Having made the move yourself and living now in a new country, what do you recommend to the companies that are considering entering the emerging market economies?
To hurry up or they will be latecomers.

8. If you had to redo this experience all over again, what would you change or do differently?
It was a hard experience but taught me many other aspects of life so I wouldn't change absolutely anything.

9. Given your on the ground experience and the macro economic changes in place: how do you see the future for this region?
I always want to think that what will give us the leading edge for the next ten years will be the fact that we were not here when the economy was booming but arrived in the midst of the crisis therefore we know how to deal with the survival mode. The way of doing business is changing and only the Companies that readapt will survive.

10. During my trips in Europe I often get the vision from European companies that the technology gap between the old Continent and the rest of the world remains far and wide, vice versa my on the ground experience tells me that Indian and Chinese companies are leapfrogging very fast. What is your experience in this matter?
I'm not back in Europe sitting and waiting for them to take over, I'm fighting back and succeeding because we can do better. This is the centre of the world and we have to be here.

I will be happy to provide additional information to any reader interested in knowing more about Mr. Augusto's experience or settling in the emerging markets.