Executive Magazine

Lessons of hindsight

by Gareth Smith April 4, 2013

written by Gareth Smith

The diplomatic pond rippled when Hossein Mousavian, the former Iranian nuclear negotiator, visited London’s Chatham House in February. Home of the Royal Institute for International Affairs, Chatham House famously has rules whereby proceedings are not reported, although some were streamed on the Internet to members.

Suffice to say that Mousavian, now a research scholar at Princeton, thinks opportunities were lost in nuclear talks between Iran and three European states from 2003 to 2005. I recently heard the same from Sir Richard Dalton, associate fellow at Chatham House and British ambassador to Tehran from November 2002 to March 2006.

The 2003-05 talks took Tehran closer to a substantial diplomatic agreement with Western powers than at any time since the 1979 Islamic Revolution. During the talks, Iran suspended uranium enrichment and signed up for intrusive United Nations inspections. However, former diplomats chatting does little. What is moving the ripples is that both Mousavian and Dalton sense a return to a serious search for an agreement under which Iran would limit its program beyond its obligations under the Non-Proliferation Treaty (NPT).

They are encouraged, in other words, by the current series of talks: February’s meeting of Iran and world powers (the so-called ‘P5+1’, the permanent members of the United Nations Security Council plus Germany) and a conclave of senior officials in Istanbul late last month.

The P5+1 has asked Tehran to limit enrichment to 20 percent and offered to ease sanctions. Details are complex and there are differences from 2003-05: Iran has expanded its program and advanced its technology. Sanctions are more punitive, and the domestic situation in Iran is more charged. But at least some of those who in the 2003-05 talks looked into the whites of their counterparts’ eyes believe that there are lessons for today. Arguably, the crux is the same: Iran would limit its program beyond the NPT and below ‘break-out capacity’ to quickly weaponize; and would accept intrusive UN inspections. All in return for economic and other benefits, largely unlinked to the nuclear program.

Looking back, a possible deal in 2003 can seem a no-brainer in that it would have curbed the program far more than what would seem possible today. But we should remember that things then were far from easy. The ‘exposure’ of Iran’s program by the opposition group Mujahedin-e Khalq in 2002 added to calls in the United States to ‘deal with’ Tehran. The following year’s collapse of Saddam Hussein’s Iraq in the face of American might sparked a ‘real men go to Tehran’ slogan among neo-conservatives.

Europe was wary of the Bush administration’s desire to refer Iran to the UN Security Council over the nuclear program as a possible step towards force, and this led foreign ministers of Britain, France and Germany (dubbed the EU3) to Tehran in October 2003, when at the Saadabad palace, Iran agreed to suspend enrichment during negotiations and improve UN inspectors’ access.

While suspension was partly to allay concern over the program and to split Europe from the US, Iranian negotiators, including Mousavian, thought a sustainable agreement was possible. Iran’s problem was that the EU3 maintained a formal condition that suspension should be extended, and that they only offered ill-defined political and trade incentives as a carrot.

Hence talks had run their course before Mahmoud Ahmadinejad was elected in June 2005, after which his messianic enthusiasm for the program made it harder for talks to progress and the US persuaded the International Atomic Energy Agency (IAEA) in 2006 to refer Iran to the Security Council, leading to UN sanctions and tougher sanctions from both the US and European Union.

Part of the 2003-05 talks were informal. Paul von Maltzahn, German ambassador from July 2003 to September 2006, told me recently of conversations between European ambassadors and Mousavian where ideas bounced around. That was consistent with word I received at the time in Tehran of proposals “discussed” in which Europe would accept some enrichment. But part of the failure of the talks was the US. When this changed, after Barack Obama came to power willing to ‘engage’ Iran, things were different in Tehran. Von Maltzahn told me that a big lesson of 2003-05 was that ultimately the nuclear program is a bilateral Iran-US matter.

In the end, all politics is local. Much whispering in the run up to Iran’s presidential election in June centers on matters of nuclear and what to do about Washington. If there is focus in the P5+1talks, it is partly because, 10 years after Saadabad, time is running out.

Gareth Smyth has reported from around the Middle East for nearly two decades and is the former Financial Times correspondent in Tehran

April 4, 2013 0 comments

The Buzz

Morning briefing: 3 Apr 2013

by Executive Staff April 3, 2013

written by Executive Staff

Economics and Politics

Egypt hopes to finalise a $4.8 billion loan agreement with the International Monetary Fund this month.

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Lebanon’s Internet connection speeds could leap to 20 megabits per second within the next three months, the chairman of a major ISP has said.

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Syria's government decided on Tuesday to issue an "exclusive" tax exemption on fuel imports from Iran until the end of June, state news agency SANA said.

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Lebanese banks are reluctant to lend any new Cabinet more money until they see concrete efforts to reduce waste.

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Nissan has announced the appointment of Samir Cherfan to the role of managing director, Nissan Middle East, with immediate effect.

Fueling the fitna

by Moe Ali Nayel April 3, 2013

written by Moe Ali Nayel

On a quiet Sunday night last month the fraying coexistence that is Lebanese society suffered another tear. Two scholars from Dar Al Fatwa, Sheikh Mazen Hariri and Sheikh Ahmed Fakhran, were assaulted while walking in the Khandaq Al Ghamiq neighborhood of Beirut, while simultaneously, two other Sheikhs were beaten in the Chiyah area of the city’s southern suburbs.

In Lebanon they say bad news arrives faster than good and that it did. Angry protesters blocked roads in the Beirut areas of Tariq Al Jedideh, Qasqas and Corniche Al Mazraa, as well as the entrance to the southern city of Saida and Al Masnaa in the eastern Bekaa. Anger built to such intensity that some Sunni protesters were calling out for jihad.

The two Sheikhs in Khandaq Al Ghamiq were assaulted on Shar’a Al-Harameyeh, or “Street of Thieves”. This name has been earned, for close to a decade now a group of zouran, or thugs, have made this alley their haunt. Locals I spoke with after the incident say the gang runs a small-time criminal network there. Many are wanted felons and most have spent time in jail.

People in Khandaq Al Ghamiq generally seemed to disown and despise this street, saying the thugs are not from their society, and that Sunni and Shia coexist peacefully here. Locals I spoke with washed their hands of the “embarrassing incident”, as some called it, and insisted that it was organized by outsiders to stir a fitna — meaning discord or chaos — between the Sunni and Shia in Lebanon.

Indeed, the gruesome videos of beheadings and sectarian killings posted to the Internet from the war in Syria and the vitriolic public diatribes of sectarian leaders here in Lebanon have incited much of the tension brimming across the country.

But on that night, just as belligerents on both sides began calling for blood, these same agitating politicians, perhaps shocked by the violent street reaction, scrambled to curb the rush toward sectarian vengeance. In an unprecedented display of professionalism and efficiency, the Lebanese Army had, within 45 minutes, arrested five alleged perpetrators of the attacks, with residents of Khandak Al Ghamiq praising the efforts of the major Shia parties — Haraket Amal and Hezbollah — for assisting the Lebanese army in the arrests. On the other side, in Tariq Al Jedideh, the chants for jihad amongst some Sunni demonstrators were met with calls for calm and self restraint by local politicians and the Mufti.

The sectarian battle also took to social media with two Facebook pages leading the virtual clash. Ashbah Al Daheyeh and Tariq Al Jedideh News Network swapped sectarian insults, threats and vows of revenge online. Luckily, a number of secular Lebanese youth worked through the night, reporting both pages to Facebook administrators until they were taken down, silencing the virtual showdown before it manifested in realilty.

But while cooler heads managed to tame the outrage that night, the cumulative toll on Lebanese society is showing. Tariq Al Jedideh, better known these days as a ‘Sunni stronghold’, has historically also been home to many Shia families and business owners. Khodor Khalefeh, for one, has worked in clothing shops in the neighborhood since he was a boy, learning the craft of commerce here and eventually becoming a small-time trader himself. When I met Khodor, 35, he was packing to relocate his clothing business.

“My trader neighbors are telling me to stay under their protection but I’m tired, things have been unbearable lately,” he said. “Zouran have been harassing us; they say they don’t want Shia amongst them. They super-glued my business locks four times, they sprayed insulting graffiti on my door, and each time [Sheikh Ahmed] al-Assir incites hate, I lock my business and go home to avoid becoming a victim of his outraged supporters.”

While Khodor says he knows these thugs in no way represent the majority of people in Tariq Al Jedideh, the growing hostility has prompted an exodus of Shia families over the past year.

A handful of hoodlums beating up a couple of religious figures should not, in itself, risk the eruption of armed sectarian street battles. That it did is a testament to how much tolerance has thinned to sectarian provocations, whether intended or perceived. As is fashionable these days, one could reasonably assume someone recorded the thugs shaving the beard of one of the two Sheikhs on their camera phone. If, or perhaps when, that video is uploaded to social media, expect another round of sectarian fury.

Moe Ali Nayel is a freelance journalist based in Beirut

April 3, 2013 0 comments

The Buzz

Student voices vital to education reform

by Leila Hoteit & Mounira Jamjoom April 3, 2013

written by Leila Hoteit & Mounira Jamjoom

There is a palpable sense of urgency in the Middle East to improve employment levels and job options for the region’s growing youth population. Half of the Middle East’s population is under the age of 25, a quarter of whom are unemployed — one of the highest youth unemployment rates in the world.

One reason for widespread unemployment is the mismatch between the skills businesses need and the skills being taught in schools. Indeed, even the most educated suffer high unemployment. In Saudi Arabia, for example, more than 40 percent of those with university or vocational school education are unemployed, while in Morocco and the United Arab Emirates the rate is over 20 percent.

To their credit, governments around the Middle East are aware of the youth employment challenge and some seek to address the problem by making “human capital development” core to their policy agendas. Governments of the Gulf Cooperation Council states have increased education spending and introduced regulatory and governance reforms. Nevertheless, problems persist, and one particular problem is in stakeholder engagement.

The necessary changes in the education system in the GCC currently involve a range of stakeholders such as governments, local authorities, schools, academia and the private sector. Yet students, the most important stakeholders, are often overlooked.

This is a grave error. Bringing students into the process of improving education is good policy and effective practice. They are, after all, the ones seeking gainful, satisfying employment in just a few short years. And, as a practical matter, reforms are more likely to succeed with student “buy-in” and enthusiastic participation.

The pupil’s point of view

Experience from around the world shows that bringing students into the process of improving education is good policy and effective practice. Places as different as Alberta province in Canada and Shanghai in China regularly survey and consult with their students. The government of Alberta operates “Speak Out”, an online and offline platform that gives students a greater voice through blogs, podcasts and real-time surveys as well as forums and conferences. Shanghai uses student evaluation instruments, such as the National Survey of Student Engagement-China and the High School Survey of Student Engagement-China, to measure student engagement at undergraduate and high school levels respectively, which were developed by Indiana University in the United States. We recommend for all GCC states to emulate best practices of student engagement in upgrading their education systems.

As a first step, Booz & Company recently commissioned a survey of high school and university students in the GCC to help education leaders and policy makers understand student perceptions of the education system. The findings are currently being compiled into a white paper, but through Executive we provide you with a first look at the results. We are confident that policy makers can use them to great benefit to engage with students and anticipate changes in students’ needs and attitudes.

YouGov, a research and polling firm, conducted close to two dozen in-person interviews along with a broad survey of over 1,300 students in Saudi Arabia, the UAE, Kuwait and Qatar. The male and female students included nationals, Arab expatriates and Asian expatriates who attended public, private local and private international schools.

The theoretical “maximum sampling errors”, that is assuming that half of those surveyed chose a particular response, come in at a 95 percent confidence level for the various samples in the study with a margin of error of plus or minus 3.1 percent.

The students have strong and surprising opinions. On the issue of choice, GCC students told us that the range of courses is too narrow and few regard available education offerings as very relevant to their career goals. The result is that students do not deeply engage with the subject matter. Students are particularly upset by the lack of opportunities to study English, which they believe is crucial to their future success. Only 17 percent of students from Saudi Arabia are satisfied with their English options.

The desire to have better trained teachers is particularly strong among GCC students. Unfortunately, teacher quality suffers because the profession lacks prestige and teachers receive little professional development or support. Poor quality training is perhaps the greatest hindrance to good teaching. Most GCC training programs create “lecturers” who talk at students, not “facilitators” who inspire students with creative methods, such as new technologies.

Students also want schools to treat extracurricular activities as an essential part of their education. Rote learning will not prepare them for the changing, knowledge-based economy in which they will compete. Hence, students need a well-rounded education that puts creativity at the heart of academia. They want more activities related to arts and literature, such as drawing, poetry, digital technologies, writing, drama, music and dancing. In the same vein, students want more field trips for education and entertainment.

The students’ desire for more creativity fits well with the official desire to base the economy more on knowledge than natural resources. Education providers should therefore consider embedding creative subjects in the classroom alongside traditional academic subjects, to inspire the next generation of creative talent and provide a boost to job creation.

For example, the fusion of computer science, arts, design, along with creative subjects (such as music, film, or photography), can develop the skills needed for the creative and digital industries that the region needs. These activities lend themselves to the eventual establishment of small and medium-sized firms, again an area that governments want to see thrive.

Looking beyond school to the workplace, roughly a third of students told us they want to work in the public or government sector, while another third hope to land a job at an international private company. Only 11 percent are interested in working for a local private company, with an equal number focused on starting their own business. Men were more likely to be aspiring entrepreneurs than women (14 percent compared to 9 percent).

Having a role in reform

The focus on public sector jobs may be because schools provide little, if any, academic advice and career counseling for students. As a result, students simply don’t know their options and rely mostly on parental advice and aspirations. They told us that it would be helpful to have access to career advisors, career fairs and other forums to learn about the pros and cons of public and private employment, along with the chance to meet business people who might serve as role models.

What is heartening is that students want to play a role in reforms through school student councils, as well as through social media such as blogs, Facebook and Twitter. Indeed, 60 percent told us that social media has already made it easier for them to personally influence education reform. This view is especially prevalent among UAE residents (25 percent), compared to Saudi Arabia and Kuwait (19 percent each) and Qatar (8 percent). Policy makers and educators must seize on this youthful enthusiasm.

Today, nearly two thirds of the in-depth interviewees in our survey trust the leaders of the education system to provide good secondary schooling. However, students also grumble that school officials don’t want to listen to them and they give low scores to their interactions with administrators. In fact, 26 percent of those from Saudi Arabia and 22 percent of those from the UAE complained that they have no influence at all over school reform.

According to our survey, leaders still have students’ trust, but they must act now by including them in reform efforts before it is too late.

Leila Hoteit is a principal at Booz & Company and Mounira Jamjoom a senior research specialist at the Ideation Center, Booz & Company’s think-tank in the Middl

April 3, 2013 0 comments

Finance

Why its time to invest in gold

by Ziad Abou Jamra April 2, 2013

written by Ziad Abou Jamra

Investors in gold have to be on alert today. After a secular bull market with more than 10 years of new highs, the gold price has been in correction since spiking at an all-time high of $1,920 per ounce in late 2011. Measured from peak to trough, gold prices fell some 19 percent between then and now. However, a secular bull market will include bear periods and a drop of such a scale is common for a correction, which we have witnessed in the past 12 years with gold prices.

In contrast, gold equities are in a deep bear market. Gold stocks usually overreact to swings in bullion prices and that is exactly what we are currently witnessing. After dropping around 17 percent in 2011 and more than 10 percent in 2012, gold equities have plunged a whopping 20 percent in the first two months of 2013.

This latest, prolonged correction of gold equities has tested the resolve of even the staunchest believers in the inherent value of gold stocks. We believe nonetheless that gold stocks today are a compelling investment proposition, basing our view on two concepts that are crucial for consistent, long-term investment performance, namely value investing and contrarian investing.

Value investing is defined as the purchase of an underlying asset that is extremely undervalued. This value gap is commonly measured by either using profitability as benchmark or by gauging the asset’s existing discount to Net Asset Value. In contrarian investing, an investor’s decision is based on simply betting against the crowd or the prevalent “common wisdom”.

In our view, gold stocks today provide for value investment and contrarian investment strategies. To elaborate on this, we examine the gold price in the context of global monetary trends, under the notion that gold is a currency — one that has been around long before paper money existed.

We are currently in an environment of huge additions in money supplies in three major economies: the United States, Japan and the United Kingdom.

Hot off the presses

In the US, the aggressive quantitative easing (QE) program targeting mortgage-related securities (QE3, announced in September 2012) was followed swiftly by a new program (QE4) targeting US government bonds. The result of these two open-ended programs is the creation of a monetary base at the rate of more than $1 trillion per year.

This amount of liquidity created by the Federal Reserve Bank out of thin air is sufficient to fund the US government’s annual trillion dollar budget deficit. In propelling assets higher and stimulating growth in the economy, the American QE programs have found imitators in other parts of the world.

The Bank of Japan (BOJ) has, since early 2000, implemented eight rounds of quantitative easing to no visible effect as they are still suffering from deflationary forces. Nonetheless, the Japanese government has been signaling further easing as the new Prime Minister, Shinzo Abe, came to office on the promise of uninhibited and unlimited money printing.

In the UK, the Bank of England (BOE) is on QE round number six (around $700 billion in total) in an environment where the latest numbers indicate a still very weak economy. As long as this weakness persists, we can expect new rounds of QE.

The dollar is still strong against the yen and the pound. The new wave of money printing from the BOE and BOJ, with the aim of giving their national companies (especially exporters) a competitive edge in a beggar-thy-neighbor approach, has resulted in driving their currencies lower. As other economies have been using the same approach, the world is faced with the constant danger of currency wars.

In conclusion, as a currency holder earning negligible interest rates on the dollar, pound, yen or any other currency, we advocate including gold as a currency in your portfolio. When bullion crossed $1,900, everyone was talking about a target of $2,500. Now when it is at $1,600, sentiment has turned extremely negative and talk is that it could be headed into the vicinity of $1,000.

Judging from recent sales of gold equities, investors are betting on the probability that gold is headed to that low target. Should this prove erroneous — and we strongly believe it will — gold stocks have significant catching up to do and investing in them now could prove to be extremely profitable.

To capture this potential in gold mining companies, we recommend two electronically traded funds that are sufficiently, inherently diversified; namely, GDX (big cap gold miners) and GDXJ (junior mining companies).

Ziad Abou Jamra is the deputy general manager of Fidus, an affiliate of Societe Generale de Banque au Liban

April 2, 2013 0 comments

Comment

Sponsoring slavery

by Paul Cochrane April 2, 2013

written by Paul Cochrane

Every minute, one person is sold over an international border. Human trafficking is now the fastest growing international crime; it is second in size only to the drug trade and ahead of arms trafficking, according to the United Nations Office on Drugs and Crime.

Due to its nature as a hidden crime, there are no precise figures on human trafficking, but profits are estimated to be $32 billion annually — $4 billion from forced economic exploitation and $28 billion from forced sexual exploitation. In terms of trafficked people, some 20.9 million people are victims of forced labor, of which 9.1 million, or 44 percent, are moved either within or outside of their country and therefore likely to be trafficked, according to 2012 data from the International Labor Organization (ILO).

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Shocking though such numbers may seem, they are just the tip of the iceberg. Part of the problem is defining exactly what human trafficking is, while a United Nations resolution was inked in 2003, many countries do not have a precise definition, yet alone laws criminalizing the trade. Getting the legislation right is essential to tackling this crime. Furthermore, there needs to be increased focus on targeting the financial side of what is a low-risk, high-reward activity.

Only recently has the financial side of human trafficking become a focus, with the intergovernmental Financial Action Task Force issuing a report in 2011 on human trafficking and including it as a predicate offense in its latest anti-money laundering recommendations for countries to adopt.

Non-governmental organizations (NGOs) are also increasingly active, such as Finance Against Trafficking, which is soon to release a manual for businesses to identify suspicious financial activity and human trafficking. The delay in taking on human trafficking at the financial level is by and large political. Since September 2001, the major focus by the world’s de facto regulator — the United States — on tackling financial crime (after the drug trade and money laundering) has been countering terrorist financing during the “War on Terror” years. A ‘war on human trafficking’ has not yet started, but the momentum is building. As the focus grows, the Middle East and North Africa will inevitably come under the spotlight, with the Gulf Cooperation Council (GCC) countries in particular.

In Lebanon, the parliament, under American pressure, passed an Anti-Trafficking Law (No. 164) in 2011, adding a section to the criminal code prohibiting and punishing all forms of human trafficking; enforcement, however, has been lackluster. The GCC, on the other hand, is lagging seriously behind on the legislative and enforcement side, and a primary reason is the sponsorship or kafala system. Under kafala, foreign laborers have to have a sponsor, who typically charges the worker for the privilege and takes the worker’s passport until he or she is allowed to leave the country.

It is a big business, with the ILO estimating there are 15 million guest workers in the GCC. In Kuwait, for example, a sponsor normally charges between $5,260 to $8,770 per worker, depending on the nationality. Sponsor 100 people, and you are making some seriously easy money. According to Jamal Abdul Raheem, founder of the Business Crime Bureau in Kuwait and an outspoken critic of the kafala system, the sponsor is in effect breaking the law by not declaring the source of income, therefore committing a money-laundering crime.

The ILO has urged “major reform” of the kafala system and human rights groups have called for GCC states to designate foreign laborers as migrant workers not as guest workers. Changing the designation is important to provide more legal rights for workers. Additionally, while migrant workers are not initially trafficked persons, as they leave countries such as India, Pakistan, Sri Lanka and the Philippines voluntarily, many become trafficked persons by being deceived and exploited by sponsors, which fits into the ILO criteria of forced labor: debt bondage, where a worker is not paid but works to pay off a debt; restriction of movement; and retention of passports or identity documents so a worker cannot leave or prove his or her identity. Tackling this issue is going to be a long and hard process as it goes to the very foundations on which many of the GCC’s skyscrapers and economies are built.

As income inequality continues to rise around the world, human trafficking is likely to only grow as an international crime. Getting the financial community on-board to red flag suspicious transactions related to human trafficking is essential to tackle the monetary reward and help curb this nefarious trade.

Paul Cochrane is the Middle East correspondent for International News Services

April 2, 2013 0 comments

Comment

Seizing a Golan chance

by Nicholas Blanford April 2, 2013

written by Nicholas Blanford

Israel has had an easy time on the Golan Heights since 1974, when a United States-brokered ceasefire arrangement came into effect and a United Nations observer force deployed in a demilitarized zone between the Israeli and Syrian armies. Israeli settlers moved onto the basalt plateau, planted grape vines and apple orchards and turned the southern slopes of Mount Hermon into a ski resort. In 1981, the territory was formally annexed into the state of Israel, a move that flouted international law but failed to raise much international opposition.

Militarily, the Israeli-occupied Golan has been perhaps Israel’s quietest border, with the Assad regime — both father and son — preferring to wage their battles against the Jewish state in Lebanon.

Now, the calm may be drawing to a close. In recent months there have been several incidents of cross-border fire from the Syrian side into the Israeli-occupied territory. Most of the mortar fire and machine gun shooting appears to have come from the Syrian army, but it is not altogether clear whether the incidents were accidental or deliberate. Fighting between the regime forces and rebel groups has flared lately along the edge of the Golan. Israel has built a new security fence along the edge of the demilitarized zone and adopted a policy of retaliating against all sources of fire emanating from the Syrian side. But these stray rounds may only be the opening shots in a broader struggle in the Golan in the months or years ahead.

In mid-March, a Syrian rebel fighter delivered a video-taped message in which he harangued former President Hafez al-Assad and his son, Bashar, the current leader, for failing to seek the liberation of the Golan.

“These lands are blessed and the despicable Assad family promised to liberate them, but for 40 years the Syrian army did not fire a single bullet,” he said. “We will open a military campaign against Israel. We will fire the bullets that Assad did not and we will liberate the Golan.”

True, these were the off-the-cuff comments of a man riding in the back of a truck. But his is a sentiment that would resonate with many Syrians, whether they are for or against the Assad regime. The Lebanese Resistance, namely Hezbollah, managed to liberate South Lebanon from Israeli occupation so why can’t the Syrians do the same for the Golan?

Clearly, the Israelis are gearing up for an imminent end to the calm on the Golan front. In July last year, Major General Aviv Kochavi, the head of Israeli military intelligence, warned that foreign jihadists were flocking to Syria and moving into areas adjacent to the Golan.

“The Golan area is liable to become an arena of operations against Israel in much the same way the Sinai is today, and that’s a result of the increasing entrenchment of global jihad in Syria,” he said.

That makes it all the more curious that Israel only now has decided to begin offering oil and gas exploration contracts in the Golan region. In February, the Israeli government granted a permit to Genie Energy, an Israeli-American company headed by Effie Eitam, a hawkish former Israeli cabinet minister and army general, to begin drilling for oil in the Golan. Shareholders include the media tycoon Rupert Murdoch. Dick Cheney, the former US vice-president under George W. Bush, is an advisor. The process began with geological surveys of the Golan last year that discovered the potential for sizable oil deposits at the southern end of the plateau.

Oil permits for the Golan were dropped in the early 1990s with the advent of the 1991 Madrid Middle East peace process. It was assumed at the time that within a few years a peace deal would be reached between Israel and Syria entailing the return of the Golan to Damascus. The peace never materialized of course, but it is only now that the Israeli government has renewed permission for oil exploration licenses.

Other than the security implications of drilling for oil and gas in an area that could soon become a new theater of conflict, there are significant legal ramifications too. The Golan is recognized internationally as an illegally occupied and colonized territory. Therefore, any company exploiting the plateau’s oil reserves could face punitive legal measures. One wonders what advice Cheney might proffer to Genie Energy as it prepares to pump Syrian oil from the southern Golan.

Nicholas Blanford is the Beirut-based correspondent for The Christian Science Monitor and The Times of London

April 2, 2013 0 comments

The Buzz

Morning briefing: 2 Apr 2013

by Executive Staff April 2, 2013

written by Executive Staff

Economics and Politics

Qatar plans to boost the government spending by 18 percent to QAR210.6bn (US$57.8bn) in the 2013/14 fiscal year that began on Monday, the QNA state news agency quoted Finance and Economy Minister Youssef Kamal as saying.

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But elsewhere in the Gulf, Bahrain’s economic growth slowed sharply in the final quarter of 2012 as growth in hydrocarbon output stalled and two years of social unrest weighed on the banking sector.

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Sudanese president Omar Al Bashir has claimed that he will release all political detainees, a move welcomed by the opposition as tensions ease with South Sudan.

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Despite the demand for oil, Saudi Arabia has begun deporting thousands of Yemeni labourers following new regulations requiring foreigners to work only for their sponsors, a Yemeni official said on Monday, a move that could “significantly damage” the poor country’s economy.

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Turkish authorities have developed a plan to assume unprecedented control over revenues from Iraq's northern oil exports.

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Organizers are canceling or delaying conferences in Lebanon, including a major international oil and gas exhibition, because of political and security instability in the country.

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Sharjah Islamic Bank has picked four banks to arrange meetings with fixed income investors ahead of a potential Islamic bond or sukuk issue, a lead manager said on Tuesday.

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April 2, 2013 0 comments

Real Estate

Lending homeowners a hand

by Thomas Schellen April 1, 2013

written by Thomas Schellen

They are not actually new-new. They give banks smaller margins than they did in their previous incarnation. They are tightly controlled with very little to no wiggle room on interest rates for most of the duration of the loan.

Yet the central bank’s current offering of housing loan subsidies was met with tremendous enthusiasm at commercial banks, which told Executive that they presented the subsidized loans to their customers within days of the issuance of a Banque du Liban (BDL) circular that announced the terms at which banks could rush to the subsidy pots.

Banque Libano-Francaise (BLF) and Bank Audi are but two examples for the high speed with which the lending programs were rolled out throughout the banking sector. When the central bank issued its circular on January 16, Bank Audi was ready to go within 48 hours, Head of Retail Banking Grace Eid told Executive. BLF also took all of two days to introduce its BDL-subsidized home loan. “We were waiting for this circular so we launched directly,” said Ronald Zirka, BLF’s head of retail and marketing.

Bank of Beirut added an extra incentive to its application of the subsidies, said Antoine Chamoun, the general manager of Bank of Beirut Invest and a top real estate finance expert at the bank. According to him, the bank lowered its interest demand to home loan customers by using financial engineering tools. “The interest rate is fixed according to BDL stipulations, which means the maximum interest rate is 5.44 percent based on the one-year Treasury Bills. Bank of Beirut has offered a special loan based on the 5.44 rate but due to certain manipulations on the amount of the down payment and the loan, the interest rate drops from 5.44 to 2.5 if we are talking a 20-year duration of the loan,” he said.

Old dressed as new

The rapidity with which commercial banks posted the new home loans is a telltale sign that the housing-loan support of the central bank stimulus program is in many ways a reiteration of a previous program, where banks could extend similar offers at comparable interest rates, although under a different funding formula that allowed the banks to tap into their own reserves, rather than use central bank funding as under the new terms.

As a result of the new formula, margins are tighter for banks, said Zirka. He explained that the costs of funds to the banks are today 1 percent instead of zero percent under the BDL program that was launched in 2009. “We can take only 0.3 from the customer, which means our profits are lower by 0.7 points. Having said that, it is still profitable. That is why we launched this product,” he said.

Bank Audi’s Eid emphasized that the new loans augment existing home loan offerings and are addressing different demand profiles than, for example, the loan offerings supported by the Public Corporation of Housing (PCH). “You can’t compare PCH and BDL-subsidized loans; while they are both subsidized, they are addressed to different market segments. The bottom line is, home buyers will be definitely better off if they take these subsidized loans whether the subsidies come from the PCH or the BDL,” she said.

For consumers, the loan subsidies can translate into substantial savings on the financing cost, and some home buyers could save up to 25 percent this year when compared with taking a loan last year that did not benefit from the central bank stimulus package, said Hanadi Saad, head of retail at Credit Bank. “With the new BDL product, we will definitely have more demand, because this is addressed to low to medium-income consumers who will look for products that can help them save a lot, especially since these are long-term products.”

For Credit Bank, this translates directly in higher expectations from the home loan business. “We anticipate housing loans to account for approximately 20 percent of the total retail lending portfolio. This ratio has gone up in 2010 and 2011 but dropped back in 2012 [to 10 percent] from where we expect it to double in 2013,” she added.

BLF, whose target market comprises Lebanon’s mid- to high-end earners, equally expects a boost to its home financing activities. “We want to have a 100 percent increase in the number of housing loans,” said Zirka, telling Executive that BLF had expected the home loans to stay at the levels of last year until the details of the stimulus package were released by BDL.

A level pitch

The ceilings and exclusions in the new home loan program are straightforward and easy enough to understand — the maximum allowable amount is LL800 million ($533,300), down payments are a must and the home buyers cannot combine the BDL-subsidized loan with other bank borrowing, for example.

Comparing the terms of 20 or 30 BDL-subsidized home loan offerings of Lebanese commercial banks may hardly yield more than minimal variances in interest rates and fees. However, this is an advantage rather than a disadvantage for lenders with a smaller franchise than the top five retail banks, said Credit Bank’s Saad. “When you have a fair game where the conditions are the same, your know-how and expertise and personalized service come to play a greater role,” she said.

On the other hand, the overall growth of the housing loan segment in Lebanese banking has not been felt positively by Iskan Bank (also known as Banque Habitat), which used to be one of two specialized providers in the home loan segment. According to a senior official at Iskan Bank, who declined to be identified, until 2010 the bank used to be, next to the PCH, one of the country’s two natural addresses for home buyers to seek finance. However, as a small bank with this specialization it today faces overwhelming competition from the big lenders. This is “better for the country,” because competition makes banks offer more flexible rates, but not necessarily better for Iskan Bank, he said.

Feeding the bubble

For developers, the loan subsidies come at a time when the engines of property demand are sputtering worse than at any time in the past five years. While half-year figures suggest that 2012 may still have generated substantial-enough borrowing from home buyers to keep the year’s issuance of new home loans at respectable rates, when seen within the five-year trend, 2013 could have been trending toward frigid climates for banks, borrowers and developers, had there not been the giving hands of the central bank.

Sampling the main trading floors in the property market, meaning developers and real estate intermediaries, the new financing opportunities are naturally and definitely welcome, but will not necessarily have a direct impact for all.

In the premium areas of Beirut, where real estate intermediary Ramco does most of its business, the lending ceilings of subsidized loans mean that few properties will be eligible.

Focused on apartment sizes of at least 150 to 180 square meters with prices at $4,000 per square meter (sqm), a minimum budget to buy an apartment will be around $600,000, said Ramco director Karim Makarem.

He was appreciative of the likelihood that the BDL-subsidized loans will incentivize some buyers but pointed out how buyers in general face other barriers before they come to the annual interest rate hurdle. “Incomes are limited so the big question is if people can afford the down payment,” he said.

Another developer focused on Beirut, a niche player with a foible for the unusually located flat, saw little demand since the beginning of the year but asserted “the first question is about a subsidized loan” when people are interested in buying a unit.

Georges Zard Abou Jaoude, the developer of the BeitMisk project said that the stimulus package will be helpful, but within the restrictions of a recent drop in demand.

So what’s new?

A main difference between the current stimulus package and the previous edition in 2009 seems to be that the first round of BDL-subsidized lending was fueling demand in a period of overall expansion of the Lebanese economy. The 2013 package is more a response to tough economic times and its stimulus of home loans signals possible redemption for professions that rely on the real estate market’s vibrancy, from developers and construction-related professionals right down to advertising agencies and real estate media.

“It is a very good initiative by Banque du Liban and will help developers which have finished their projects and need to sell them,” said Chahe Yerevanian, chairman and chief executive of Sayfco.

Early signs from the 2013 subsidies are positive and banking players told Executive that they encountered expanding demand for home loans from their customer bases. “The home loan product, whether subsidized or non-subsidized, is very important for the community, the bank and the individual,” emphasized Bank Audi’s Eid. “What the central bank did this year was make funds available to banks in order to build momentum in the economic cycle where real estate and apartment sales are a key factor.”

Jad Abi Haidar, financial analyst at Credit Libanais bank, whose research department publishes a number of real estate reports, said figures on the weak performance in property transactions this January are not indicative of the impact of the new BDL subsidies and results from the stimulus package should materialize over the course of 2013 and more clearly in 2014.

He cautioned, however, that the market’s decisive influences are not economic. “If the political situation worsens, the stimulus effect may not be as large as expected. But on the other hand, if the political situation improves dramatically the impact of the stimulus plan may be magnified,” he said.

The well-established vagaries of the current market notwithstanding, Bank of Beirut’s Chamoun blew a horn for optimism. “I think it is a great time to apply for a home loan, because the market is very slow now and prices did neither decrease nor increase. Now is a moment to buy and a moment to give loans.”

April 1, 2013 0 comments

Finance

Local fund invests abroad

by Thomas Schellen April 1, 2013

written by Thomas Schellen

A recent homegrown option for rich Lebanese to invest in a fund with global reach is being pushed into the market by Banque Libano-Francaise (BLF) — in fact, it is the only such locally founded fund, according to the bank. Domiciled in Luxembourg but managed by the BLF Fixed-Income Desk in Beirut, the fund comes with a track record of six-plus percent annual returns and, more interestingly, with a three-person board whose chairman is an independent director.

Incepted in September of last year, BLF’s Total Return Global Bond Fund has been marketed to BLF clients since January and has just completed formalization of disclosure and governance practices, which include four annual board meetings and compliance with regulatory regimes in Luxembourg, Switzerland and Lebanon. Besides its promise on governance, the investment paper comes with a hope to co-create a local asset management industry, says Jamil Koudim, head of Fixed Income at BLF.

Participation in the open-ended fund requires a minimum subscription of $100,000. Above that threshold, the fund is open to any investor who values the opportunity to invest in global credit markets. Emphasizing the fund managers’ direct accessibility, BLF is targeting the product to high-net-worth individuals that are Lebanon-based or expatriate Lebanese, Koudim says. “We are not comparing ourselves to the big names in the global funds industry like the Templetons or Pimcos, except for the advantage of having the fund manager based in Beirut and knowing the institution, BLF,” he adds.

Koudim’s team honed their strategy for the fund in proprietary trading with BLF’s own money, using the same methodology with a 6.4 percent annual return over two years from mid-2010; BLF then seeded the fund last September with $10 million, becoming a co-investor. The bank obtained approval of the fund from Banque du Liban, and also took the steps for compliance and registration with Swiss financial market supervisor FINMA and Luxembourg’s Commission de Surveillance du Secteur Financier, including adherence to Risk Management and Conflicts of Interests policies and a clear board structure for fund governance.

In formal terms, the BLF team is the fund’s investment advisor, and Libano-Francaise Finance, a Geneva-based unit of BLF, is the investment manager and monitors all decisions for compliance with the fund’s statutes. These terms say that the fund can allocate no more than 20 percent to non-investment grade bonds and must also limit exposures per issuer.

Preservation first

In the same spirit as those written stipulations, the team follows a conservative approach. However, the fund is not a capital-guaranteed product, Koudim emphasizes. “Capital preservation is a main objective,” he says. “The second aim is to generate moderate return, for anywhere between four and seven percent.”

The strategy is international with geographic emphasis on Europe, the United States and the Gulf countries. The heaviest allocations have been to European countries and cash, as per the published fact sheets in the last quarter of 2012. Allocations by sectors are focused on banking, insurance, utilities and telecoms.

In designing the fee structures, the managers oriented themselves more toward international than local standards, because of the lack of reference points in the Lebanese fund management scene. “The management fee is 0.75 [percent] and there is a performance fee of 10 percent of any return above 5 percent, the hurdle rate. There is a high watermark provision, which is also to the benefit of investors. We thought this was a fair deal,” Koudim says.

BLF wants to build on the first product and add new fund offerings, but it is giving itself time. According to Koudim, the aim is to grow the fund’s assets under management to $50 million and then launch new funds with different strategies in roughly two years.

Tapping the expertise

The new BLF fund is a young product by an ambitious team, judging from the impression conveyed by Koudim, who joined the Lebanese bank three years ago following a stint with Credit Suisse in London. He envisions the product as forerunner of a local asset management industry even as institutional investors are still missing regionally.

Koudim acknowledges that concerns over transparency and problematic infrastructure in Lebanon have made it difficult to warm up European and American investors to the idea of basing fund management in Lebanon, despite the high expertise that Lebanese demonstrate in the financial industry worldwide.

This notwithstanding, Koudim is enthusiastic that the creation of the BLF bond fund can find many followers in Beirut’s financial community. “We hope that this grows and gets the appeal that it deserves under the aim of developing an asset management industry in Lebanon,” he says, “whether from a front office perspective, the fund management perspective or from the research side.”

April 1, 2013 0 comments