Factoring in the complexities of democracy and stability in the market
Since the last quarter of 2010, what I have been hearing repeatedly is how Egypt has some of the best prospects for sustained growth in construction activity.
Many of my contacts have been going there in the last year to work on major developments, and touting Egypt’s potential. Here at Construction Week we considered doing a conference in Cairo this spring, based on the strengths seen in that market.
Despite the uncertainty and instability now facing Egypt, with many developments halted and staff evacuated, the same people now claim that they foresaw the recent developments and the fall of Mubarak. The merits for their forecast of Egypt as a fundamentally sound market for growth remain essentially valid.
It is dauntingly easy to get overconfident on the information we base assumptions on – and it would seem this is increasingly true depending on how complex the situation is. Our perception of everything, market potential included, is highly dependent on everyone else around us.
In the current wake of the unprecedented complexities facing the MENA region, predicting its future demand and growth has probably never been more difficult.
The heart of the problem is the difficulty of gauging future demand, as it rarely follows a set pattern. Macro-economic shifts are particularly difficult to forecast; predicting how they will impact individual businesses even more so.
In the larger context of business forecasts, it is important to remember how insufficient our information is on a macro level. For instance, as the eighties began, the idea of millions unemployed in Britain and the fall of the Soviet bloc in due course would have been considered highly unrealistic.
As the nineties began, few believed in nearly full employment in Britain by the end of that century, or a whole new force to reckon with from the Asian economies.
The reality in terms of macro-economic factors being faced now in the MENA region has never been more complex. We should not lose focus on how integral a high oil price was for explaining the construction boom in the Middle East.
And regardless of the leaps forward in diversifying these oil-rich economies, it is probably wise to assume that the oil price will continue to play an increasingly important role.
On a geopolitical scale, it is anyone’s guess as to what leadership, and stability, that democratisation will bring now to the MENA region, and add a few more factors such as China and its insatiable thirst for resources, together with water access.
Regardless of how much we welcome democracy along with its allure of a free-market economy, it is risky to automatically equate it with growth and improved business.
Markets are never as straightforward as they are in textbooks. It can be very soothing to listen to the gospel of infallible economic theories backed by empirical data and mathematical models.
Yet I think there might be only one truism in economic theory: markets dislike uncertainty and political instability.
Over 50% of Egypt’s GDP is accounted for by tourism; try and guess how uncertainty in the nation’s political realm will impact demand in that market and, by extension, demand for construction. This can be compared to the entire exports of Egypt, slightly over $30billion.
To put that figure into context, the revenue of the US confectionary giant Mars is roughly the same. My point is that achieving the financial welfare that many expect from democratisation will require a little more than organising an election.
Companies fail due to grossly underestimating risk and volatility. While predicting the future is often futile, more crucial to success is to focus on your own balance sheet and business model to ensure they remain viable.
Rather than relying on overall trends, make decisions based on the individual merit of each project and client. Your primary concern then is that your products and services are delivered at better value to than your competitors.
Oscar Wendel, MSc (Econ), MA (Am Lit), is conference manager for Construction Week.