Executive Magazine

No end to injustice

by Ahmed Moor December 3, 2012

written by Ahmed Moor

For the Palestinians the passage of time offers little reprieve. While their circumstances have changed this past year, they have only changed for the worse. Israel has systematically worked to isolate them and hem them into smaller spaces. Governments worldwide seem prepared to accept their continued deprivation and Israel’s steroidal apartheid. The latest salvo between Palestinians in the Gaza Strip and Israel ended with more than 150 dead Palestinians, the majority of whom were civilians, and five Israelis killed. The conflict is deepening.

Some analysts continue to insist that there is a two-state blueprint that is workable for the Palestinians and Israelis. In fact, reality has moved sharply away from any such accommodation. The settlements in the West Bank and around Jerusalem have altered the ‘reality on the ground’ in irreversible ways. Jerusalem is being ethnically cleansed. Palestine has been colonized into nothing. That’s the reality.

At this stage it is worth evaluating what the overall Israeli policy in Jerusalem and the West Bank appears to be. While decision-making in Israel appears to be driven by short-term considerations, there is a long-term outlook, and it is becoming more evident daily. Nir Barkat, the Jewish Israeli mayor of West Jerusalem, has been very effective at restricting the growth of Palestinian neighborhoods in occupied East Jerusalem. In some cases, public works projects are cynically announced with the object of forestalling Palestinian development. For instance, a large tract of private Palestinian land near the neighborhood of Silwan has recently been designated as “state property”. The Jerusalem municipality has declared that a park will be constructed on the site, a claim that some observers regard as a pretext for continued Israeli colonization of East Jerusalem.

In Jerusalem, Palestinian life is so circumscribed that many of the city’s indigenous residents are forced to live elsewhere. The lack of development in Palestinian neighborhoods along with the refusal to grant building permits work to drive the Judaization of the city.

Processes in the West Bank follow the dominant Jerusalem strategy. More than 60 percent of that occupied territory, the Oslo process’s “Areas B and C”, is off-limits to Palestinians. They are not granted building permits in their rural villages — a policy that forces many people into the Palestinian Authority (PA) administered “Area A”. In other words, a West Bank version of ‘bantustanization’ — the apartheid-era South African policy dividing up the territory of black inhabitants — is developing with few impediments.

Essentially then, the Israeli strategy is to Judaize Jerusalem through ethnic cleansing while doing the same to Areas B and C of the West Bank. The “Gaza solution” — isolating Palestinians in shrinking cantons — is being adapted to the particular geography of the other Palestinian territories.

Historically, the PA leadership has demonstrated its profound impotence in the face of persistent Israeli apartheid and occupation. But that may be changing.

President Mahmoud Abbas’ decision to seek a status upgrade at the United Nations on November 29 is the most concrete challenge the PA has posed to the Israelis in years. In fact, the move poses a serious threat to the Israeli leadership because it could provide the Palestinians with access to international adjudicatory bodies. In particular, the International Criminal Court could be called upon to intervene in cases where sufficient evidence of Israeli crimes exists. Analysts have speculated that the Israeli decision to attack Gaza in November is linked in part to the Palestinian Authority’s decision to petition the United Nations for upgraded status. The Israeli elections in January and the fact that the other three Knesset elections this past decade were all preceded by massive military operations against Palestinian areas provides additional context for understanding the extent of the airstrikes.

The context of the attacks in Gaza — indeed, the broader context of what’s happening to the Palestinians — has changed. The Middle East is no longer ruled by programmable autocrats. Egypt and Turkey in particular may produce a ceasefire in the short term and a change in European policy — if not American policy — in the long term. Egypt and Turkey succeeded in enhancing their diplomatic clout after brokering a ceasefire between Hamas fighters and the Israeli government; that trend is likely a sustainable one.

It is far too early to know what the different constellation of powers in the Middle East means for the Palestinians in the long term. As for the short term, the safest assumption is that 2013 will bring no real change; apartheid and arbitrary war are the twin governors of the Palestinian territories. The Palestinians will continue to suffer into the near future.

Ahmed Moor is a master of public policy candidate at the Harvard University Kennedy School of Government

December 3, 2012 0 comments

Comment

One pharaoh for another

by Dalia Rabie December 3, 2012

written by Dalia Rabie

It seemed to many that President Mohammed Morsi was paving the way for his own dictatorship at the end of November when he issued a game-changing constitutional declaration radically expanding his authority, and further deepening the divide in an already polarized society.

The seven-article declaration effectively immunized all presidential decisions from formal oversight, whether parliamentary or judicial. Following the declaration, Muslim Brotherhood offices around the country were ransacked and thousands flocked to Tahrir Square denouncing the move, while others rallied at the presidential palace in support of Morsi. As Executive went to print, both Morsi supporters in the Muslim Brotherhood and opposition figures were rallying Egyptians to the streets for mass protests.

What Morsi’s detractors see is a power grab, with articles in the declaration ominously reminiscent of deposed President Hosni Mubarak’s notorious emergency law under which arbitrary arrests were common on the pretense of protecting national security. Morsi supporters say his declaration is a necessary measure to protect the revolution and preserve national stability.

Either way, it caps off a year beset by turmoil. The unrest of 2011 continued straight into 2012 when, on February 1, fans of the Al Masry football club attacked fans of the rival Al Ahly club in Port Said Stadium, killing 74 and injuring thousands. Accusations abounded that the security services had been complicit in the massacre. Anger amplified towards the then de-facto rulers of the country, the Supreme Council of the Armed Forces (SCAF), triggering a vicious cycle of public protests and violent repression, which resulted in at least 11 further deaths.

The country then shifted attention to the first free election for a head of state since the end of Mubarak’s 30-year autocratic rule. The Presidential Elections Committee, however, disqualified some of the most prominent candidates mid-campaign, spurring another round of protests that left at least 10 dead when Salafi candidate Hazem Salah Abu Ismail was barred from running.

SCAF then weighed in, dissolving parliament — based on a Supreme Constitutional Court ruling that the 2011 parliamentary elections were unconstitutional — and then issuing a constitutional declaration broadening its powers and stripping the president’s office of much of its executive authority, only hours before the preliminary election results were announced. Somewhere in the middle of all this, Mubarak ‘awoke’ from a questionable coma to begin serving a life sentence in prison. All this, on top of an ailing economy, lax security and widening fractures between the country’s different factions.

Sadly, hopes of seeing old regime elements purged from Egypt’s different institutions after Morsi took the presidential oath were short-lived. While among his first orders of business was to replace Hussein Tantawi, head of the armed forces, and the chief of staff, Sami Anan, as well as to cancel SCAF’s constitutional declaration, these ‘bold moves’ were seen by many as the outcome of closed-door deals guaranteeing SCAF’s ‘safe exit’.

Morsi has since faced a series of domestic crises — the most painful of which was a bus crash south of Cairo that took the lives of 49 schoolchildren in early November — to which he was generally seen to have reacted poorly, and he has largely failed to live up to the ambitious 100-day program he set for himself.

Even some of the most basic human rights and standards of transparency, which were expected to take hold after the revolution and set the new Egypt apart from its predecessor, still seem out of reach. Human rights groups criticize the current government’s unwillingness to abandon repressive tools and guarantee citizen rights in the draft constitution. A report prepared by El Nadim Center for the Rehabilitation of Victims of Violence, assessing Morsi’s first 100-days in office, says that arbitrary arrests, torture and ill-treatment of citizens continued unabated.

Morsi’s recent declaration, however, does reopen investigations into the crimes against protesters last year. This, on top of foreign policy successes — most notably helping to broker the ceasefire which ended Israel’s recent assault on Gaza — are among the new president’s few shining achievements in the eyes of Egyptians. Thus, with the second anniversary of the January 25 Revolution approaching, many wonder whether the shadow of another pharaoh looms over Egypt. With little positive change materializing on the ground, the same chants will likely echo through Tahrir Square in future months, with people still demanding “bread, freedom and social justice.”

Dalia Rabie is a Cairo-based journalist

December 3, 2012 0 comments

Economics & Policy

Powering the grid

by Georges Pierre Sassine December 3, 2012

written by Georges Pierre Sassine

Rolling blackouts have become a symbol of the political crisis affecting the Lebanese government. According to the World Bank, Lebanese citizens incur on average 220 interruptions of electricity per year, which is the worst performance in the Middle East.

Today, electricity production stands at around 1,500 megawatts (MW) while demand exceeds 2,400MW at peak times, resulting in rationing cuts from between 3 to 20 hours a day, depending on where you are in Lebanon. Although the government signed a $360 million deal to lease electricity-generating barges from a Turkish company in July, which is expected to generate 270 MW, this will mainly offset losses as restoration works are carried out on existing power plants.

Building a few facilities to bolster generation capacity should not be too challenging, knowing that China builds plants at the rate of one per month. Instead the problem lies in the sector’s governing system: Lebanon’s electricity sector is dominated by the state-owned Électricité du Liban (EDL), which has thus far proven inept in addressing the country’s energy shortfall.

Moving forward, solutions to Lebanon’s electricity crisis are constrained by a limited government budget, a heavily subsidized electricity sector, low collection of electricity bills, an ageing infrastructure, human resources challenges and various interest groups resisting change.

Politicians are discussing various options, including different models of privatization and even the decentralization of Lebanon’s power generation. The fundamental debate drills down to two key questions. The first is a choice of regulation versus deregulation, which addresses the degree of government involvement in Lebanon’s electricity sector. The second is whether electricity generation should be centralized or decentralized.

These choices are in line with the debates occurring today in the global energy system. As such Lebanese policymakers can learn from the successes of others and adapt them to local conditions.

Regulation versus deregulation

The electricity sector’s restructuring has featured on the Lebanese government’s agenda since 1998 when a revised electricity law emphasizing privatization was first proposed. Following that an electricity decree was passed by parliament in 2002, more than 60 consultant reports were prepared, and the Council of Ministers, Lebanon’s cabinet, adopted different policies in 2002, 2006 and 2010. But very little progress was made on implementing any of these initiatives due to disagreements across the political spectrum around privatization. Some believe that utilities are the business of the government, while others argue for different forms of private sector involvement — spanning from full privatization to various models of public-private partnerships.

The truth is that in Lebanon some form of private sector participation is inevitable. More than 20 percent of the country’s electricity needs are already covered by private generation. Due to crippling public debt, the Lebanese government cannot single-handedly provide the required investment to reform the sector. Complicating matters, any plans to directly privatize EDL would be difficult to implement in the short to medium term, as private investors would be reluctant to invest before operational and managerial capacities are improved.

As Lebanese policymakers continue their deliberations, they seem to be drawing little from other countries’ experiences. The fact is that the electricity industry in many countries has seen a movement from heavy state involvement towards a greater reliance on market processes. The main rationale being that competitive markets raise investments, improve efficiencies and lower electricity prices.

However, the evidence on the success of electricity reform is mixed. In countries such as the UK, Australia and Chile, liberalization reduced electricity prices by as much as 35 percent. Yet, deregulation caused, for example, Sweden’s electricity prices to spike to one of the highest in Europe. The key lesson is that deregulation’s success depends on proper design and implementation of competition laws. Getting market structure right at the opening of new power markets is crucial for the success of any electricity reform; this requires a deep understanding of sophisticated regulation and market dynamics in order to be effective.

Thus, as Lebanese policymakers consider various options for private sector involvement they need to understand the requirements to properly design and implement such a transition. Failure could lead to deteriorating electricity provision and higher prices.

Centralization versus decentralization

Another proposal put forward by Lebanese politicians suggests a decentralized electricity sector. The Ministry of Energy and Water would cede control to regions or municipalities. Supporters of such an initiative believe it will help tackle corruption, reduce political bickering and improve governance. However, this raises political sensitivities as some fear that regional electricity production could lead to political decentralization and, in a worst-case scenario, to the countries’ undeclared partition.

In a centrally planned system, electricity is produced at large generation facilities, transmitted and distributed to millions of consumers over large geographic areas. It achieves economies of scale, and has been successful in providing consumers with a continuous and reliable flow of electricity. However, today the trend is reversing. Priorities have shifted, and the conditions that created centralized systems no longer hold true.

Renewables and distributed technologies emerged and are becoming more cost competitive, while policymakers’ concerns are increasingly focused on climate change and energy security challenges. This has driven energy planners in the EU and other nations to consider the transition from centralized to decentralized energy systems.

However, decentralized energy systems do not come without their challenges. Technical and engineering challenges abound when integrating large shares of distributed generation into the grid, and could adversely impact the protection and safety of the electric network.

Scoping the map, degrees of decentralization vary from country to country. Brazil has a strong centralized electricity system, whereas Canada’s is decentralized. India and Australia are currently transitioning from a decentralized to centralized structure. There is no unanimity on a universal model. Each provides different benefits and challenges, and needs to be assessed within the local context. In Lebanon, however, the motivation behind decentralization remains solely political and fails to account for technical, economic, environmental and energy security dimensions.

In its current form, Lebanon’s electricity sector already has some components of a hybrid centralized and decentralized model. EDL provides only 75 percent of the country’s electricity needs through six large, centrally controlled power plants; the rest is supplied through a network of small-scale backup generators. The only loophole is that these private generators are technically illegal and as such are not integrated into a wider regulated system.

A pragmatic approach would entail the Lebanese government leveraging the existing infrastructure of private generators across the country and adopting a policy of cooperation and coordination in the medium term, recognizing its inability to fully cover Lebanon’s electricity needs overnight.

In the longer run, a hybrid system combining the best attributes of both the centralized and decentralized structures is possible. It is a matter of finding the appropriate mix that best suits Lebanon and the political will to implement it.
In conclusion, some form of private sector participation in Lebanon’s electricity sector is inevitable under government oversight. But the success of public-private partnerships will be heavily linked to the design and implementation of competition laws. This is particularly pertinent in Lebanon considering existing draft anti-trust and competition laws have been left unimplemented for years on government shelves.

A realistic approach would also require the government to synchronize and leverage existing private generators.

This is a stopgap solution until the most suitable mix of central and decentralized structure for Lebanon is agreed upon. However, this proposal and any other attempt to reform Lebanon’s electricity sector can only be meaningful in the presence of strong political will.

Georges Pierre Sassine is an energy policy expert and holds a master's degree in public policy from Harvard University's John F. Kennedy School of Government. He writes about Lebanon's public policy issues at www.georgesassine.com

December 3, 2012 0 comments

Finance

The uncomfortable gaze of Uncle Sam

by Maya Sioufi December 3, 2012

written by Maya Sioufi

Lebanese banks had their fair share of challenges to deal with in 2012 : a stagnant economy; the ongoing turmoil in neighboring Syria; increased scrutiny from the United States; increased regulatory requirements; America’s upcoming Foreign Account Tax Compliance Act (FATCA); the anti-Iranian lobby urging foreign institutions to drop their holdings of Lebanese debt; cyber attacks on Lebanese bank accounts, and the list goes on.

These challenges have not left the sector unscathed. Deposits and assets of the sector, while still up in 2012, are growing nowhere near the rates enjoyed a few years ago. End-of-year profits are expected to drop in 2012 with several general managers expecting falls at double-digit rates.

The big nasty

First and foremost on bankers’ list of concerns is the ongoing unrest in Syria and its spillover into Lebanon and its economy. There are currently seven Lebanese banks present in Syria with total assets standing at $5.2 billion as of the end of June 2012, though this amounts to a meager 3 percent of Lebanese banks’ balance sheets. Profits generated from these Syrian affiliates stood at $30 million for the first six months of the year, just below 4 percent of the total sector profits. To stay on the safe side, banks allocated $293 million in collective provisions — held against unidentified losses on a portfolio of loans — in the first nine months of 2012, after allocating $232 million in 2011. “Our profits in Syria are allocated as provisions; there are no contributions from Syria to our earnings,” says Freddie Baz, chief financial officer of Bank Audi.

But the impact of Syria’s ongoing chaos on Lebanese banks goes beyond their presence inside Syria. With international sanctions placed on Syria, US regulators have kept a close eye on Lebanese banks to ensure they don’t become a funnel for Syrian cash. Officials from the US treasury have visited Lebanon on numerous occasions in 2012: US Deputy Secretary of the Treasury Neal Wolin met with Lebanese government officials in September and David Cohen, the Treasury’s under secretary for terrorism and financial intelligence, warned banks back in May to be extra cautious when dealing with Syrian transactions, saying, “We want to be as careful as possible that the regime, its cronies and its allies that may be trying to shield their assets might not be able to do so.”

Several experts Executive spoke to said they believe that the international scrutiny imposed on the banks is excessive. “I believe the business of banking is changing dramatically; we investigate deposits rigorously as if in a police state,” says Anwar Jammal, chairman of Jammal Trust Bank. “A lot of US and European banks have made far bigger mistakes and gotten away with a slap on the wrist, keeping in mind that to err is only human.”

He adds that his bank has just finished implementing a new anti-money-laundering software program that makes the 17 different ways of spelling the name ‘Mohammad’ into one word. “If you spell it in one way or one of the 17 different ways, it will tell you it is ‘Mohammad’,” explains Jammal.

“There was an accident or two in Lebanon but the scrutiny is exaggerated,” says Rami el-Nemr, chairman of First National Bank. “There were lots of rumors; it became the talk of the town. I think it was not fair for the banks.”

FATCA fears

For a segment of the Lebanese population, this scrutiny is bound to get personal. The upcoming FATCA requires all foreign institutions to disclose the holdings of their clients with a US nationality, or face paying hefty penalties; this has already led several local banks to lose business. “We have already lost some clients but we have to deal with FATCA and Lebanese banks have to deal with it too,” says Jean Riachi, chairman of FFA Private Bank. The total number of Lebanese Americans with accounts in Lebanon is hard to come by, but several chairmen of Lebanese banks say it is a small percentage of total accounts — “definitely single digit,” according to Saad Azhari, chairman of Blom Bank.

A sigh of relief came in October when the implementation of FATCA was delayed by a year, until January 2014, giving foreign banks additional time to set up the software and teams necessary to comply. And comply they must. With two thirds of the sector’s balance sheet in dollar deposits, “the US rule is ‘my dollar, my rule’; you want to deal with the US dollar, you have to abide by my rule,” says Bank Audi’s Baz.

Online exposure

The compliance department is not the only one receiving more bank resources. The information technology (IT) department has seen its budget buffed up in order to deal with a different type of threat: a cyber one. In August, a cyber virus dubbed ‘Gauss’ attacked bank accounts in the Middle East. Kaspersky Lab, a Moscow-based IT security vendor, discovered the virus and claimed it began operating in September 2011, attacking some 2,500 machines in the Middle East, of which 1,600 were in Lebanon. “It is a lot more destructive than war,” says Jammal. “It has the ability to wreck havoc around the world. It mushrooms and it is something that is very serious and we take it very seriously.”
It’s been a rough ride for banks in 2012 with challenges continuing to pile up. The prospects for 2013 don’t look much rosier with the Syrian horizon still unclear, and with “a lot more open issues in the region; if I had to hierarchize what does not make me sleep at night, it’s the Israeli threats on Iran which can generate a hell of a lot of problems everywhere,” says Baz.

The banks, having survived Lebanon’s history marked with strife and unrest, are accustomed to dealing with challenges, and know how and when to reinforce the fortress.

“Given the resilience of the Lebanese people, the banking sector will come through ok, inshallah,” says Pik Yee Foong, chief executive of Standard Chartered Bank Lebanon.

December 3, 2012 0 comments

Comment

A bitter pill to swallow

by Gareth Smith December 1, 2012

written by Gareth Smith

The death last month of Manouchehr Esmaili-Liousi, a 15-year-old boy suffering from hemophilia, has been reported in the Iranian media as the first fatality caused by the latest financial sanctions imposed by the United States and European Union.

While sanctions do not directly target Iranian pharmacies or the wider medical sector, 75 percent of the medicines for treating hemophilia are made in the US and the EU, and supplies have dropped by two-thirds. Drugs are also in short supply for patients suffering from cancer and multiple sclerosis.

The problem is that Iran’s central bank, the only official channel for transferring money abroad, is a major target of sanctions. Many international private banks are increasingly loath to handle transactions or accounts in any way linked to Iran, given the risk of attracting attention from the US Treasury Department.

Without a doubt, 2012 has seen an unprecedented tightening of the noose around Iran. US and EU measures against third-party buyers have halved Iran’s crude oil exports to between 1.1 million and 1.3 million barrels per day, undermining government revenues and helping send the rial into a decline that has seen its international value halved in a year. What’s more, the US congress is intent on legislation that would further reduce President Barack Obama’s room for maneuver in loosening sanctions as a quid pro quo in any negotiations.

The military stand-off, especially in the Persian Gulf, has become an accepted day-to-day reality. Iran’s shooting at a US surveillance drone early in November reflects a trend that saw 2012 begin with extensive Iranian naval exercises in the Persian Gulf and threats from senior officials — including the first vice-president, Mohammed Reza Rahimi — to close the Strait of Hormuz if there were any move against Iran’s oil exports.

Talks between Iran and the permanent members of the UN Security Council plus Germany, which were revived in May after a lapse of over a year, failed to get beyond generalities. Real progress will not be made through such an unwieldy structure, and it is significant that Sergey Ryabkov, Russia’s deputy foreign minister and point-man on Iran, made it clear last month for the first time that Moscow accepts the need for direct contact between Washington and Tehran.

Reports that senior US and Iranian officials met quietly in Qatar in October may indicate the two sides accept this. The word in Washington is that a window of opportunity has opened with the re-election of Obama as president and will last until preparations begin for the Iranian new year, Nowruz, a festival that closes down the country for several days before March 21.

The window may close then because when Iran goes back to work after Nowruz, politics will be dominated by the presidential election scheduled for June 14, when voters choose a successor to Mahmoud Ahmadinejad on the expiry of his maximum second term. But the window could then re-open, especially if, as widely expected, the new president has a better relationship with the rahbar (‘leader’), Ayatollah Ali Khamenei, and a clearer unity of purpose replaces the current rivalries between the foreign ministry, the president’s office and the leader’s office.

Loud whispers in Washington refer to a ‘more for more’ process in which the US would seek verifiable nuclear curbs from Iran in exchange for US concessions, including sanctions relief. But where the US bottom line lies — would Iran have to ship out all its 20 percent-enriched uranium? — is unclear, and considerable political opposition exists on both sides to any kind of deal.

Another problem for US would-be peacemakers is the perception abroad that the Islamic Republic is vulnerable and even in danger of collapse. Despite sanctions, this is far from true. June’s presidential election will probably have a higher turnout than the 65 percent in the March 2012 parliamentary elections and will no doubt be hailed by the authorities as a victory over the scheming foreigners.

In fact, it may be that tighter sanctions, in ‘heating up’ politics, were partly responsible for March’s turnout being comfortably higher than parliamentary elections in 2004 and 2008, when it barely reached 50 percent.

Continuing coverage of Iranians dying for lack of medicines may help the authorities to motivate voters. With the US claiming ‘success’ with the sanctions and the Iranian leadership ‘victory’ in its defiance, 2013 is unlikely to make either side any keener on compromise.

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

December 1, 2012 0 comments

Finance

Private versus public exposure

by Maya Sioufi December 1, 2012

written by Maya Sioufi

With $42 billion tied up in loans to the private sector, accounting for 28 percent of commercial banks’ balance sheet, the dismal performance of the economy has banks reassessing their lending strategy.

“Banks are being flexible with some clients in terms of extending maturities,” says Ghassan Assaf, chairman of BBAC. Anwar Jammal, chairman of Jammal Trust Bank, notes that, given the dismal tourism season, “We scrutinized lending to projects involving hotels and restaurants as any feasibility or payback program they give you needs to be revisited.”

Loans in decline

For now, there has not been a significant rise in default rates, according to the chairmen of Lebanese banks that spoke with Executive, but if the deteriorating economic situation does not start improving soon, this scenario is bound to change. “Hopefully, we will have a smooth Christmas. It is important for tourism and for sectors linked to tourism,” says Saad Azhari, chairman of Blom Bank.

The fatigued economy has not prevented banks from continuing to extend their lending arm but the growth in lending has been declining in the past two years. “We are not lending to tourism and hospitality. We are lending to people who can export, unless it is something essential for the local market,” says Rami el-Nemr, chairman of First National Bank. For the first eight months of the year, banks lent an additional 6 percent to the private sector, down from an 11 percent increase in the same period last year and 17 percent in the same period in 2010. The private sector still swallows a larger share of banks’ lending capacity than the government — a strategy the banks have slowly been implementing in order to reduce their hefty exposure to the country’s sovereign.

While European banks knock on their governments’ doors for bailouts, in Lebanon the sovereign owes its local banks $30 billion as of August 2012, 20 percent of the banking sector’s balance sheet. But the growth in lending to the sovereign has been slowing — for the first eight months of the year it increased just 2 percent, following a 6 percent decrease in the same period of last year.

As Executive went to print, Lebanon was still in the process of raising $2 billion in Eurobonds to refinance $1.5 billion worth of debt maturing in 2013, while using the rest for treasury expenditures. In June, the country issued Eurobonds worth another $2 billion for the early redemption of Lebanese lira treasury bills and two months prior to that, in April, $950 million worth of Eurobonds were issued. So if the latest issue goes according to plan, Lebanon would have raised a total of $5 billion in 2012, as it had originally planned at the beginning of the year.

Balance the budget

Due to attractive interest rates, the government has been able to depend on the country’s banks to fund its expenses year after year — a situation that becomes less tenable as growth rates of deposits flowing into the banking sector drop (see overview page 88).

Lebanon’s debt-to-gross domestic product ratio has been consistently falling: from a jaw dropping 180 percent in 2006 to around 130 percent today. With GDP no longer growing at the high single digit rates that were enjoyed in the past — as the year ends the IMF expects a 2 percent growth for 2012 — the debt component needs to come down for the ratio to continue on falling.

“I believe banks will exert pressure on the government to balance the budget,” says Assaf. With deposits unlikely to start flowing back into the banks’ vaults at supersonic rates any time soon, the sector will likely continue conservatively allocating its resources favoring the fatigued, yet more lucrative, private sector over the heavily indebted public sector; unless the well overdue reforms are implemented.

“If reforms which should have started years ago are implemented, it will create opportunities; they have to happen one day,” says FNB’s Nemr.

December 1, 2012 0 comments

Comment

After Ahmadinejad

by Gareth Smith November 30, 2012

written by Gareth Smith

As president of Iran, Mahmoud Ahmadinejad has been nothing if not controversial. Internationally, he has goaded the Israelis and their American allies with his views about the Jewish holocaust, while his government’s populist economic policies have stirred domestic controversy unknown since the 1979 Islamic Revolution.

But with a presidential election due next June, Ahmadinejad is well into his last year in office, given the two-term constitutional limit. The change will be welcomed by most of Iran’s establishment, including senior clerics and close associates of Ayatollah Ali Khamenei, the rahbar (leader).

The election comes at a crucial time, with tightening Western sanctions that have halved Iran’s oil exports to around 1.1 million barrels a day and have helped spark depreciation of the nation’s currency, the rial, that accelerated dramatically last month.

Khamenei will be keen to see the poll pass off peacefully and won by a less volatile figure than Ahmadinejad. But recent Iranian presidential elections have been unpredictable — Ahmadinejad’s victory in 2005 was a surprise, and his re-election in 2009 produced the largest street protests since the Revolution.

Iranian presidential elections are partly managed, firstly because the Guardian Council, a constitutional watchdog body, vets candidates. But Iran has weak political parties, and the voting system is almost haphazard; if no one wins 50 percent, the two best-placed candidates enter a run-off, and with many contenders — there were seven in 2005 — 20 percent or so of votes can take a candidate through.

For Khamenei, one priority will be to avoid a repeat of 2009, when reformist candidates alleged the poll was rigged and the suppression of street protests sent Iran into a period of tightened political control.

The Guardian Council may well bar reformist candidates, as it did in 2005 before Khamenei intervened to reinstate Mustafa Moein and Mohsen Mehrali-Zadeh. But it may concern the leader that blocking reformists, who might then call a boycott, would hardly restore the legitimacy the system lost in 2009.

It is widely expected, however, that the Guardian Council will bar Esfandiar Rahim Mashaei, or any other associate of Ahmadinejad. Mashaei has been at the center of Ahmadinejad’s tension with Khamenei — indeed the leader overruled the president in 2009 when he appointed Mashaei as first vice-president, instead appointing him chief of staff. Later spats over Ahmadinejad’s removal of the intelligence minister originated in the maneuvering of Mashaei, whom one senior cleric accused of sorcery. In any case, Ahmadinejad and Mashaei have failed to create a sustainable political current that could propel an Ahmadinejad ally into the president’s office. Their efforts to sponsor lists for local and parliamentary elections have fared poorly.

That suits Khamenei, whose priorities are a quiet election and a president with a safe pair of hands. The leader would like a new president to calm Iranian politics by mending relations with parliament, the leader’s office, senior clerics and the central bank. This might also improve economic management in the face of sanctions. It could also tighten co-ordination over the nuclear program between the presidency, the Supreme National Security Council and the leader’s office. Iran is open to compromise but has red lines over its ‘right’ to enrich uranium, and any agreement will require skillful negotiating, as well as carrying domestic opinion. Given the election’s importance, the media is already weighing up potential candidates. Ali Larijani, parliamentary speaker and establishment insider, is liked by Khamenei, but lacks charisma and won only 5.9 percent of the 2005 vote.

Mohsen Rezaie, Islamic Revolutionary Guards Corps (IRGC) commander from 1981 to 1997, has also been suggested. But he appeared in 2005 even less appealing than Larijani, and withdrew shortly before polling.

Other names bandied about are Gholam-Ali Haddad-Adel, former parliamentary speaker; Manuchehr Mottaki, former foreign minister, and Saeed Jalili, the security official who has led Iranian negotiators in talks over the nuclear program.

A more effective candidate could be the charismatic Mohammad-Bagher Ghalibaf, Tehran’s mayor since 2005 and a former senior IRGC officer, though he received only 13.9 percent of the vote in 2005. In an interview in September with the Italian newspaper Corriere della Sera, Ghalibaf spoke of “moderation” in foreign policy while keeping “firm lines” on “fundamental questions”; as well as diverting oil revenue from current spending into productive investment.

This is exactly what Khamenei needs. This far out from June 2013, Ghalibaf looks like the man to beat.

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

November 30, 2012 0 comments

Comment

The Kurds quietly ascend

by Josh Wood November 30, 2012

written by Josh Wood

Past the sand berm marking the border between northern Iraq and northeastern Syria, a small military outpost sits amid the oil derricks that dot the parched landscape of this country at war. A few months ago, the flag of the Syrian regime flew here. Today, it is replaced with a green, yellow and red tricolor banner, flying above a few Kurdish fighters and a pickup truck with a mounted DShK machinegun.

This is Kurdish land now, mostly.

While the eyes of the world and the Assad regime turned to Aleppo this summer as fighting engulfed the city, Kurdish groups moved aggressively to wrest control of parts of their northeastern heartland in Syria’s Hassake province from the government, corralling the regime’s presence to a few towns and checkpoints along the highways.

The endgame here for many is autonomy. Under Syria’s Baath Party, Arabization policies alienated the Kurds by limiting the use of their language, stripping many of citizenship and for the most part refusing to acknowledge that the ethnic group existed. Chronically mistreated, ignored and sitting on top of much of Syria’s oil (which generated some $4 billion in annual exports before the uprising and subsequent war), most feel entitled to a post-conflict deal that at least matches that of the Kurdistan Regional Government in Iraq, if not better.

And so they are getting ready: Signs are being changed from Arabic to Kurdish, local governments are being set up, armed forces are being trained. In Derek, which the regime called Al Malikiyah as part of its Arabization policies, there is a certain afterglow of liberation. One evening in late September, scores of youth gathered downtown cleaning the city’s streets, smiles on their faces as previously banned nationalistic Kurdish music blared through truck-mounted loudspeakers.

There is exuberance and hope here, but also danger.

The Kurdish experience in Syria made many distrustful of those outside the community and there is a strong aversion to again submitting to Arab authority. The militias being readied here — most notably the Popular Protection Units or YPG — seem to be preparing themselves as much for a fight against President Bashar al-Assad’s forces as they are for a possible fight with the rebel Free Syrian Army, should it try to enter their territory.

While Kurdish groups are currently trying to stay on the sidelines of the conflict and are not attacking the remaining Assad forces, continued government occupation of the major oil fields in the Rmeilan area could bring the war to their doorsteps eventually.

There are also sharp internal divisions in Syrian-Kurdish politics. The Democratic Union Party — known by its Kurdish-language acronym PYD — is the most dominant party in Hassake. Despite publicly denying links to the militant Kurdistan Workers Party (PKK) in Turkey, offices of the Syrian group often feature portraits of PKK founder Abdullah Ocalan and Kurds martyred in battles against Ankara’s authority.

Opponents of the PYD — primarily those Syrian Kurds who identify with Massoud Barzani, president of Iraqi Kurdistan — accuse the group of working with the Assad regime, cracking down on dissent and ensuring PYD control of the area through its near monopoly on weapons. The PYD responds to its detractors — some of them not as hostile to the Free Syrian Army as they are — by calling them traitors.

In northeastern Syria, the PYD is currently able to keep dissenters confined to grumbling under their breath. But in Kurdish areas elsewhere in the country closer to the conflict — such as Aleppo’s Sheikh Maksoud neighborhood, the nearby town of Efrin and Kobane in Al Raqqa province — guns are easier to get a hold of and limited battles between Kurdish groups have already occurred.

The PYD’s alleged links to, and ideological inspiration from, the PKK also land the group in a tough spot regarding Turkey. The country’s prime minister, Tayyip Erdogan, has threatened to take action in Kurdish areas of Syria if Turkey deems that groups which have risen up there are a threat. Calls for autonomy on some level or another are also likely to be frowned upon by Turkey, a key supporter of Syria’s rebels, as it faces rising Kurdish dissent at home and increased fighting with the PKK in northern Iraq and southeastern Turkey this year.

For Kurdish groups in Syria to retain or expand the autonomy they have gained, it will likely entail a good deal of diplomatic brinkmanship and horse-trading — fail that, they will be at war.

Josh Wood is a regular contributor to The International Herald Tribune and Esquire Middle East

November 30, 2012 0 comments

The Buzz

Morning briefing: 30 Nov 2012

by Executive Staff November 30, 2012

written by Executive Staff

Economics

Oil prices are expected to fall slightly over the next year as high production feeds softening demand at a time of slowing global economic growth, a Reuters poll shows.

Offshore ineptitude

by Zak Brophy November 30, 2012

written by Zak Brophy

Lebanon entered 2012 with the resolute promise to tap “huge wealth” from offshore hydrocarbons. Determined to ride in the new year on a wave of applauding headlines, the Minister of Energy and Water Gebran Bassil announced the creation of the Petroleum Administration, paving the way for the sector’s evolution.

In January the ministry announced that the board of the Petroleum Administration would be made public by the end of the month, the first licensing round for exploration launched within three months and the first contracts inked on paper by the end of the year. The bulk of the nation’s press obliged the minister, lauding a new page in Lebanon’s history, drunk on the promise of energy independence and untold wealth. However, as 2012 draws to a close the rhetoric rings hollow and the lofty plans remain stuck in the starting blocks.

The initial clamor was not without some justification. The odds are stacked in favor of the prospect that Lebanon is sitting on a tidy offshore treasure trove. A 2010 report by the United States Geological Survey estimated an average of 1.7 billion barrels of recoverable oil and 3.5 trillion cubic meters of recoverable gas in the Levant Basin Province, a geological formation in the Eastern Mediterranean extending from Syria to the Sinai.

What’s more, Israel and Cyprus have made impressive discoveries in recent years, which will have considerably whetted the appetite of international oil companies to tap into Lebanon’s seabed. In 2009, Tamar, a 237 billion-cubic-meter (BCM) gross natural gas field, was successfully drilled off the coast of Israel, and an additional 453 BCM of natural gas were discovered in the Leviathan field in late 2010 — the world’s largest deep water gas discovery in the last 10 years. In December 2011, the Cypriots tapped into what could amount to 226 BCM of natural gas in the Aphrodite field.

Sitting idle

Lebanon, meanwhile, has been left on the sidelines. “Israel’s and Cyprus’ relationship has been developing well, to the detriment of Lebanon,” says Malek Takieddine, a Lebanese lawyer specializing in the oil and gas industry. “The Ministry of Energy and Water wanted to pick up on the relationship with Cyprus but you need to have much more practical steps for that to happen, especially with regards to the appointment of the Petroleum [Administration] and the launching of the licensing round.”

In early July, industry bigwigs from around the globe came to the Lebanon International Petroleum Exploration Forum & Exhibition to see what the nation had to offer. The answer was sadly, not much. “Triggered by the success in Israel and Cyprus we cannot afford to idly sit by,” remarked Fadi Nader, advisor to the energy minister. Yet the impression was exactly that once the attendees had wafted through the hot air. Minister Bassil promised the Petroleum Administration within a few weeks and then the Ministry of Finance gave a 45-minute presentation revealing pretty much nothing about the tax scheme to which prospective companies would have to adhere to.

While several International Oil Company representatives expressed a skeptical caution to Executive about the ability of Lebanon’s politicians to actually get moving, others have thrown in their lot and aligned themselves with local partners (only consortiums of three or more companies in an unincorporated joint venture can actually bid for tenders). For example the Scotland-based firm Cairn Energy has joined Cove Energy and Consolidated Contractors in anticipation of the race to the ocean floor.

The eleventh hour

Minister Bassil took the opportunity to score some local cheers by maintaining, “we will not compromise on our right to the full 860 square kilometers.” However, such grandstanding did little to inspire investor confidence and seriously irked the Americans, who had been working behind the scenes to negotiate a settlement to Lebanon and Israel’s disputed Exclusive Economic Zones (EEZs); Lebanon has since dismissed the proposal.

Having stumbled and tripped at every step of the way, there was little reason to anticipate the creation of the Petroleum Administration before the year was out. And then in true theatrical style Minister Bassil pulled the rabbit out of the hat at the 11th hour — actually the 11th month, with the government agreeing upon the six appointees in mid-November.

“The [Petroleum Administration] must now start preparing the acreage pre-qualifications and tenders and lay the groundwork for the production sharing agreements once the companies and the consortiums are short listed,” says independent energy consultant Roudi Baroudi. In short: Now the real work begins.

November 30, 2012 0 comments