Executive Magazine

Battle of the drones

by Nicholas Blanford November 1, 2012

written by Nicholas Blanford

The unmanned aerial vehicle (UAV), or drone, Hezbollah dispatched to fly over southern Israel in October carried a couple of messages.

First, it was intended to remind Lebanon and Israel that Hezbollah’s main focus remains the confrontation with the Jewish state and not the conflict in Syria. The drone’s flight occurred amid increased reports of Hezbollah’s alleged assistance to the regime of President Bashar al-Assad, including sending fighters to Syria to fight the rebel Free Syrian Army (FSA) and train the regular Syrian army in urban warfare. This assistance would contradict the Lebanese government’s policy of disassociation with the war in Syria, though Hezbollah is not the only Lebanese faction operating there — several hundred Sunni Lebanese have reportedly joined the FSA and there are logistical support networks for the Syrian rebels in parts of the northern Bekaa and Akkar regions of Lebanon.

Still, amid such controversy, Hezbollah appears to have decided to switch attention away from Syria and redirect it toward Israel. It worked, at least in the sense that the drone captured headlines for a few days.

The drone’s flight over southern Israel was also a demonstration of Hezbollah’s evolving technical capabilities. It flew a drone for the first time in Israeli airspace in November 2004. That drone, an Iranian Ababil-T, was launched near Naqoura, crossed undetected into Israel and reached near Haifa during its 18-minute flight before returning to Lebanon. The Israelis never spotted it.

Hezbollah sent a second drone over Israel six months later; it also used them in the 2006 war with one drone shot down off the Israeli coast and another off the Tyre peninsula.

However, the drone that ploughed the skies above southern Israel was far more sophisticated than the Ababil-T, which lacks the range to reach the Negev desert from Lebanon — if indeed that was the origin of the UAV. Although Sayyed Hassan Nasrallah, Hezbollah’s secretary-general, admitted that his group was responsible for the flight and Hezbollah-affiliated Al Manar broadcast graphics indicating part of the flight path, the incident remains dogged by uncertainty. Nasrallah said that the drone was launched from Lebanon but did not pinpoint the precise location. The United Nations Interim Force in Lebanon (UNIFIL) said it did not detect the drone, neither on its ground radars in south Lebanon nor on the shipboard radars of the Maritime Task Force, the naval component of the peacekeeping force. That suggests that the drone was small enough or flying low enough to avoid detection. Alternatively, it never flew from Lebanon in the first place.

The guidance system remains unknown as well. Drones are usually controlled by one of two means: either by an operator using radio or satellite signals to directly steer the UAV on its course or by installing a preprogrammed flight plan. The UAV, if launched from Lebanon, was operating beyond the range of radio control, suggesting it was following an autonomous preprogrammed flight plan or it was being guided by satellite signals. If the latter, that would suggest a whole new level of technological advancement for Hezbollah and Iran.

The Israelis said that they picked up the drone when it was still flying over the Mediterranean but decided to tail it until it crossed over empty terrain before shooting it down. Iran and Hezbollah claimed that the drone in fact slipped into Israeli airspace undetected, thus proving the inadequacy of Israel’s air defense systems. As usual, it is difficult to be certain which version is correct. If Israel really detected the drone over the sea and chose to follow it, that would be a first. Usually, Israel shoots down unauthorized aircraft.

It has been speculated, however, that the Israelis attempted to interfere electronically with the UAV to bring it down safely so that it could be examined. Hezbollah is believed to have done something similar a year ago when an Israeli drone mysteriously vanished over south Lebanon after UNIFIL radars saw it floating to the ground. The Israelis appear to have been not so lucky as their Hezbollah foes. When the Israeli cyber interception failed, the drone was shot down so that at least the debris could be salvaged for inspection.

The unusual incident goes to show that even though the Lebanon-Israel border has remained relatively calm for more than six years, the conflict between Hezbollah and the Jewish state continues to rage on the technological front of cyber-warfare and signals intelligence.

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

November 1, 2012 0 comments

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Tweeted into shame

by Paul Cochrane November 1, 2012

written by Paul Cochrane

Social media’s role in bringing about progressive change is a hot topic in the Middle East as much as, if not more than, elsewhere given the ongoing debate about its use in the Arab uprisings. On a collective level it is hard to gauge due to the multitude of factors that contribute to people taking to the streets — mass demonstrations can and of course have happened without any social media — but when it comes to smaller, localized events social media’s power is clear. The online exposure last month of a Middle East Airlines (MEA) employee’s racist remarks toward Asian passengers is a clear case, and one that other companies should take heed of if they don’t want their name or brand dragged through the mud.

In early October, passengers were waiting in Rafiq Hariri International Airport at a departure gate for a flight to Dubai, including a group of Nepalese women, when a MEA employee got on the public announcement system and said, “Filipino people, stop talking.” The woman told the “Filipinos” to stop talking twice more, giggling as she did so and goaded on by a male colleague.

The incident outraged fellow passenger Abed Shaheen, who tried unsuccessfully to make a complaint. In the past Shaheen might have told just family, friends and colleagues about the incident, and his complaints would have had minimal if any effect. In our new world of social media, Shaheen wrote about the experience on Facebook and Twitter. The story was quickly shared and within three days 1,600 people had signed a petition on change.org, calling for “MEA to apologize publicly for their staff’s behavior.”

The media promptly picked up the story as well, initially in Lebanon and then abroad. Under fire, MEA eventually came out to say they had launched an investigation, and the employee was first “disciplined,” then reportedly fired.

While justice has arguably been done, and a strong message sent to MEA staff to think before they speak, MEA’s reputation has been negatively impacted. A scroll through the 200 plus comments following the airline’s apology on its Facebook page shows a great deal of animosity toward MEA: “service sucks,” “airline crew impolite” and, more worryingly for the carrier in these difficult financial times, is the number of people that wrote they would “vote with their feet” by no longer flying with MEA. Judging from the comments, many Lebanese opt for MEA out of solidarity with the nation’s carrier, despite its invariably higher ticket price. But patriotism only goes so far, and this incident will no doubt lose the airline old as well as potentially new passengers.

MEA, and subsidiary MEAG that runs the airport, say they have gone beyond “damage control” mode and made effective changes that can be immediately seen; this includes mandating that staff be trained to treat everyone equally and respectfully, as paying customers. Numerous times on flights to the Gulf and East Africa, acquaintances and I have seen African and Asian passengers seated together at the back of the plane away from passengers despite numerous seats being available. This happens too often to be coincidence and the check-in staff, by designating seats in this way, creates segregation. Such a policy is racist, and even more insulting when it occurs on the national airline of the segregated passengers, such as Ethiopian Airlines. This has to change.

Then there is the small boxy room that domestic workers are forced to wait in upon arrival at Beirut airport until their new employers come to collect them, rather than being met like everybody else in the arrivals lounge. It is reminiscent of a prison with inmates awaiting bail. For many of these women, it is the first time out of their country; they are unsure, scared perhaps about what’s next, and they should be treated in a more dignified manner. Both MEA and the airport are, after all, people’s first impressions of the country, no matter where a passenger is from, and customer service should reflect that.

Ultimately, MEA has now put itself under the spotlight of social media, and activists will be on the lookout for further misdemeanors. It is a useful lesson for MEA to change its policies and better manage employee behavior, as well as for other companies to realize the power of social media to hold them to account.

Paul Cochrane is the Middle East correspondent for International News Services

November 1, 2012 0 comments

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An offer they can’t refuse

by Farea al-Muslimi November 1, 2012

written by Farea al-Muslimi

In gangster movies, a classic scene is for a mafia boss to greet someone warmly with his right hand, then wink to one of his bodyguards on the side and say “kill him”. Minus the cinematography, this is how many Yemenis perceive the international community’s role in the transition of their country today.

Earlier this year, Yemenis generally welcomed the role of the international community — via the Gulf Cooperation Council (GCC) sponsored deal that saw former President Ali Abdullah Saleh exit power and thereby avert an imminent civil war — because they thought it paralleled their national interest. Since then, however, the realization has come for many that the international community’s commitment to Yemen’s interests, unity, democratic development and prosperity does not extend beyond press releases; rather, foreign powers now seem to be paralyzing progress and hijacking Yemen’s nation building.

Publicly, Western countries, the GCC and others have voiced much hope — as have Yemenis — in the country’s National Dialogue conference, which is meant to bring together representatives from all of Yemen’s various groups and factions to come up with a road map for the country’s future. To this end the international community has provided political and technical support, mainly through United Nations agencies, to prepare for the conference (previously scheduled for mid-November, but now postponed to a later date). However, other actions (and inactions) by foreign powers are at the same time sabotaging this attempt at national reconciliation.

Powerful local stakeholders — including former President Saleh himself, the influential Ahmar tribe, and others — remain able to hinder the country’s transition in order to preserve their own power, and while the United Nations Security Council (UNSC) has threatened them with sanctions, none have been forthcoming. In fact, member countries of the UNSC continue to actively deal with these sorts of local players. The GCC-sponsored agreement this year also succeeded, in large part, because it went out of its way to address the concerns of powerful local players, rather than the concerns of average Yemenis; this had the effect of empowering these divisive groups with local clout that they will be able to exercise at the upcoming national dialogue.

One of the Yemeni revolution’s core goals was the restructuring of the military, which became a key article in the GCC deal. The United States has taken a lead role in this task, but in such a way that the Yemeni military is looking more like an extension of the US army in Yemen. This is both because of an intense American public relations campaign, as well as the Yemeni military’s facilitation of un-manned American drone strikes and US and British special operations in parts of Yemen under the guise of ‘counter-terrorism’.

Whatever the military justification, American drone strikes have killed hundreds of civilians and injured many more. Yemen’s new president, Abdu Rabbu Mansour Hadi, rather than condemn the strikes has in fact endorsed them, marring his legitimacy amongst Yemenis and making him look like an American puppet. That he reports to the ‘international community’ that brought him to power, rather than his citizenry, is a definite problem. Hadi remains, however, generally favored among the population relative to possible alternatives; his presidency, along with the appointment of Morocco’s Jamal Benomar, a former human rights campaigner, as UN envoy to Yemen, constitute the most positive initiatives of the international community to date.

US support for the “Public Committees”, or civilian militias, in South Yemen, is also dangerously shortsighted. While America’s aim is to enlist local help in the battle against Al Qaeda in the Arabian Peninsula, supporting powerful non-state actors and armies implicitly undermines the state, especially in South Yemen where there is a fervent secessionist movement that will turn that same support against the central government.

South Yemen is also now a battleground in a wider geopolitical struggle. The frequency of sectarian clashes — mainly between Houthi groups and the Islah (or Muslim Brotherhood) — have been on the upswing as Iran and Saudi Arabia escalate their proxy war through local tribal and political groups, each offering cash, support and media backing.

With all this foreign money flowing in, one has to wonder why humanitarian aid organizations in Yemen are still suffering a funding crisis, reporting that cumulatively they have less than 50 percent of the cash they need to run their operations; this leaves, among other things, 10 million Yemenis going to bed hungry every night.

There is little wonder why then, when the international community comes with its hand extended, Yemen braces for the wink.

Farea al-Muslimi is a Yemeni activist and writer for Almasdar

November 1, 2012 0 comments

Economics & Policy

Everyone’s watching the dollar

by Natacha Tannous November 1, 2012

written by Natacha Tannous

United States currency policy concerns almost everyone: the Chinese, who hold some $876 billion in US treasury bills; the Middle East and North Africa, where nearly every nation’s currency is pegged to the dollar; and financial markets the world over. But only one of these concerned parties from around the globe is actually responsible for setting US currency policy: The US Federal Reserve (Fed).

Lately there has been speculation in global markets that a hike in the Fed funds rate is imminent — talk from which the Fed itself is remaining aloof.

“The Federal Reserve Bank extended the low borrowing costs period after looking at the state of the economy and the [9.7 percent] unemployment rate,” said the chairman of the Federal Reserve Bank of Chicago, Charles Evans, to Executive at the 2010 Summit on Financial Literacy & Education in Chicago, Illinois, hosted by Visa.

Fed funds rate and inflation

Given the prevailing winds the economy is weathering, rates are likely to remain in the zero to 0.25 percent range — a world of zero interest-rate policy or “ZIRP” in Fed-speak — which the US has been in since December 2008.

Inflation, an appealing tool but no solution

Because it would lead to a higher nominal GDP while keeping the same level of debt, inflation can actually help temper the urgency of America’s debt-to-GDP ratio, likely to “balloon to more than 100 percent of GDP” by the end of 2020, as Fed chief Ben Bernanke told the US Congress’ Joint Economic Committee. But even if it were desirable to inflate in the short-term, such a policy would also harm the economy down the road. After monetizing the debt, returning to an acceptable level of inflation is not easy and might initiate a problematic economic spiral with downside risks of escalating the debt when the central bank raises interest rates (increasing debt interest payments), while slowing GDP growth.

“There isn’t much inflationary pressure [with inflation at 2.3 percent], hence we can afford that monetary policy,” indicated Evans. “However, if economic conditions change quickly, we will respond appropriately.”

The last time inflation was a major concern to the US economy was in the early 1980s; the Keynesian model, which predicted alarming inflation resulting from such a low Fed funds rate, is not in use today because demand has not yet rebounded, as the US moved from a consumer society to a savings one after the global economic crisis.

“Although the Fed added $1.5 trillion…to the economy by freeing up some money to the banks or through large-scale asset purchases, it did not trigger inflation, just as Chairman Ben Bernanke expected, because real estate prices went down, along with the stock market,” explained Yervant Demirjian, managing director and board member of Interaudi Bank in New York.

Inflation therefore remained contained as a result of a fall in prices, low consumption levels and limited economic growth. Nevertheless, markets currently expect an increase in inflationary pressure by September, along with a change in the state of the economy.

Backing the Benjamins

In the 1980s, the dollar only regained its strength when inflation declined. But today, although it’s a ZIRP world, we have not attained the kind of inflationary pressure that could be bearish for the dollar.

Bearish euro

Various factors weigh on the euro, which reached a one-year low of 1.32 against the dollar on April 23. In addition to a restrictive European fiscal policy, the Greek debacle and its contagion effect on other European countries are also having an adverse effect on the euro. Greece asked the European Central Bank, the European Union and the International Monetary Fund to activate a bail-out as the five-year Greek credit-default swap spread reached a record high of 650 basis points on April 22, increasing borrowing costs and working against Greece’s efforts to reduce its budget deficit. Hence, the euro will probably not gain momentum in the short-term. According to Makram Abboud, managing director at Nomura Holdings in London, the euro even “appears overvalued… considering the macroeconomic situation of some EU members, or to a smaller extent, the European air travel disruption following Iceland’s volcano eruption… the airlines will possibly need a bail-out at a moment where governments are already over-leveraged.” This is in line with Morgan Stanley Research’s estimate of the euro dropping to 1.24 by year’s end, a lower forecast compared to other brokers.

First, the relative strengthening of the dollar stems from the diverse roles of the currency. It is not only a medium of exchange but, most importantly, a reserve currency, a safe haven through US Treasuries, a unit of account for commodities and trades, an anchor for pegging currencies and a carry trade currency (previously limited to the yen), given its low interest rates.

Secondly, economies in 2008 did not want to increase their US dollar exposure, placing a stronger interest in the euro and the British pound as oil prices and commodity prices were peaking. But this tend reversed at the end of 2009, when portfolios had to re-align their investment strategy and currency positions due to lower commodity prices and a more complex correlation between the dollar and oil prices (as opposed to a purely negative correlation). Finally, the US labor market is showing relative growth prospects and improving productivity, thus the overall market sentiment is positive toward the dollar.

GCC rides greenback

From a pure trading perspective within the Gulf Cooperation Council’s dollar-pegged economies, goods imported in currencies other than dollars became more expensive as the dollar weakened in the last five years.

But today, the relatively resurgent greenback – with a 5 percent to 6 percent increase year-to-date against the euro and British pound – translates positively because imports of, for example, European goods and services, as well as workforces, become cheaper. Meanwhile the main GCC exports, oil and gas, are denominated in dollars the world over (except for Iran,) meaning that despite the fact that they will be more expensive for consumers, they will be more expensive everywhere they shop, so there is no loss of competitive advantage.

Where things are not so rosy is in areas with an increasingly diversified economy that have exports paid in a cheaper currency, or non-oil economies such as Dubai. The Emirate will see a decrease in both real estate buyers and tourists whose home currency is not dollars and a stronger dollar will reduce competitiveness.

Economically, the GCC was growing so fast in 2007 and 2008 that the double-digit growth, along with the increase in commodity prices and the cheap dollar, fueled an “oil bubble” and created uncomfortable levels of inflation. Qatar and the United Arab Emirates even reached consumer price index inflation levels of 15 percent and 12.3 percent respectively in 2008.

“Problems started to occur because the GCC was compelled to follow relatively low Fed funds rates while meanwhile, inflation was skyrocketing,” said Florence Eid, founder and chief executive officer of Arabia Monitor research and advisory firm. “Whereas in 2009, the Gulf entered a deflationary period, today the dollar peg — coupled with current low interest rates — is no longer a drawback for the GCC economy.”

These things are all cyclical of course, and they will change again,” she added.

However, the relative strengthening of the dollar against the euro has two major economic advantages. It is, first, an effective tool for inflation stabilization in the Gulf area, which, as mentioned above, is extremely important for the state of the economy. Furthermore, it eliminated concerns surrounding the dollar peg.

“GCC countries, with 95 percent of assets in dollars, would have suffered from de-pegging from a weak dollar, running high risks of weakening their own currencies even further,” said Makram Abboud, managing director at Nomura Holdings in London. “Now with a stronger dollar that discussion [of de-pegging] has gone away.”

On the monetary front, the peg to the dollar “implies that, by design, the GCC interbank rates should not diverge,” as stated by an IMF paper on regional financial integration. Consequently, the region responded fast to Fed discount rate cuts as GCC central banks also reduced their borrowing rates, with cuts of 250 basis points in Bahrain and 175 basis points in Saudi Arabia. Such monetary policy is a useful tool to push demand, along with pumping money into local banks, encouraging citizens to borrow again, while governments continued to spend in key areas such as infrastructure.

In Saudi Arabia, the 2010 budget will likely reach $144 billion, and “even though main growth drivers in the Gulf are government expenditures [highly related to the level of oil prices], all things being equal, an appreciation of the US currency will tend to improve local purchasing power, fueling consumer demand and investment with a positive impact on growth” said Michel Cordahi, head of Capital Markets at Gazprombank Invest (MENA).

JP Morgan effective exchange rate indices

Thus, a stronger dollar will, overall, improve economic conditions already facilitated by monetary policies and will directly lead to a rebound in consumption, fostering a positive economic spiral. Such assumptions led the International Monetary Fund to forecast a real gross domestic product growth of 4.5 percent in the MENA region for 2010, doubling 2009 growth.

Some warning signs

However dollar bullish one may be in the short-to-medium term, the situation is perhaps less that of a stronger dollar than a cheaper Euro, all the more since the dollar has weakened against most emerging market currencies in the last six months. Moreover, “with a US deficit worsened by the healthcare bill, a high level of federal debt and a renminbi [yuan] revaluation likely to redirect capital inflows to Asia and cause sells on the USD, the dollar might lose its temporary bullish tone,” forecasts Stefan Teufer, coverage director at Deutsche Bank.

True, Bernanke’s Fed has saved the US economy from a depression, sparing a global financial Armageddon in the world’s interconnected economies, but the GCC should neither be blinded by what may be a short-term resurgence in the greenback, nor neglect monitoring closely their inflationary pressure.

Even if they are committed to the dollar peg, central banks should be cautious when aligning their monetary policies to future Fed hikes, especially for countries that have not reached their desired inflation rates, or if an interest rate hike would risk a relapse into a credit crunch. In the short term, it may be a wise idea to count their lucky stars — or dollars.

November 1, 2012 0 comments

The Buzz

Morning briefing: 1 Nov 2012

by Executive Staff November 1, 2012

written by Executive Staff

Oil and gold

Gold traded flat on Thursday, shrugging off data showing China's economy was perking up, as investors waited on the sidelines of the market for US employment data due on Friday.

More from Arabian Business

Brent crude edged down toward US$108 a barrel on Thursday as investors focused on concerns that storm Sandy's rampage across the US East Coast could reduce fuel demand and shrugged off data pointing to a recovery in China.

More from Arabian Business

Economics

The European Investment Bank and the French Development Agency are interested in funding natural gas pipelines in Lebanon, Finance Minister Mohammad Safadi said on Wednesday following a meeting with European officials.

More from Arabian Business

Companies

Dana Gas shares jumped 4.8 per cent as markets began trading after the company said it had missed a payment deadline for a $920m bond.

The sukuk matured at midnight on Tuesday, but Dana Gas remains in negotiations with creditors.

More from AME Info

US-based Emerson has announced it is investing $33m to expand its Middle East and Africa headquarters campus in the Jebel Ali Free Zone in Dubai.

More from Arabian Business

November 1, 2012 0 comments

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A third way

by Moe Ali Nayel November 1, 2012

written by Moe Ali Nayel

Armed thugs attacking demonstrators protesting against the regime was a hallmark of the early months of the Syrian revolution. The thugs were at it again early this fall in the Syrian city of Homs; this time, however, the demonstration was in the opposition stronghold of Wa’ar, and the armed men who roughed up the crowd and yelled at people to go home were Islamist rebel fighters who were provoked by protesters’ chants for a peaceful and secular future for their country.

“It felt as if our revolution was stolen,” said a friend who was there. In the beginning it was simple enough to say you were against the regime, it was the people against their oppressor — in the suburbs of Damascus, in downtown Homs and elsewhere people were demanding freedom, reforms, an end to corruption and a united Syria for all sects. The Syrian people were the ones who sparked their own peaceful revolution, without any support from the world’s so-called champions of freedom and democracy. Now, however, the intensity of foreign meddling has fragmented the unity around their cause.

Syria has become an arena for a geopolitical battle of global proportions: on the one hand there is the Syrian regime backed by Russia, China and Iran, and on the other hand we have the various insurgent groups being armed, aided and inflated by Saudi Arabia, Qatar, Turkey and Western nations. The Syrian people, by and large, have been forced to choose between supporting the regime or partisans of the revolution. In this game of thrones, those who actually started the revolution, and their message, have been largely swept aside. Some of those supposedly fighting for Syrian freedom also seem to be adopting the same practices as the regime they are trying to topple.

Ghaith Abdul Ahad recently reported in The Guardian about a young man who was stopped at a checkpoint in Aleppo manned by the Free Syrian Army (FSA). He was taken by the FSA for a torture and interrogation session; when he offered them nothing of value he was taken by “the Islamists” who didn’t allow anyone to see him after. How dissimilar is that to stories one hears of regime practices? Had it been the regular Syrian army who stopped the young man, he would have likely been interrogated and tortured on the spot, and later transferred to the dark cells of the mukhabarat (secret service), where he would vanish. The Guardian story shows revolutionaries, supposedly the fighters for change, mimicking age-old regime practices.

Twenty months into the uprising and Syrian society is splitting in many ways — between the religious and secular; deepening divisions between sects and communities; rich and poor; even men and women. With the raging internal conflict and greater geopolitical battle clearly polarizing the country, the need for the emergence of a khat thaleth, — a ‘third line’ or a ‘third way’ — is paramount, and indeed, these voices do exist. They are people who are trying to awaken the public consciousness and bring the essence of the revolution back to its early stages, when the quest for a better life for all was the hope.

Concerned Syrians — average citizens, activists, artists, journalists and others — are trying to open a window, a space for a third line to grow, though their efforts up to this point have been scattered. An image from an opposition protest, widely circulated on Facebook, sums up the situation; in it there is a placard depicting a man with the Syrian revolutionary flag on his chest being torn to pieces from all directions by hands holding dollar bills; at the top it reads: “Support for loyalty.” The awareness that Syria is being fragmented by external forces is clear. Another sign at a protest last month in the city of Kafr Nabl called for “the support of the revolution to get back on track”, while another stated: “To the opposition: Do not tire yourself, our revolution will produce its own leaders”, as opposed to foreign support choosing who has the power to lead.

Until now, outside intervention in Syria — from all sides — has amounted to dumping huge amounts of arms into the fray to fuel the bloodshed while outside powers bicker over a political settlement. This situation is reminiscent of Lebanon’s civil war — a war Lebanon has yet to recover from — that left the country with a divided society, a dysfunctional government and ultimately a monopoly on power for local elites backed by foreign powers. Neither this, nor a new regime in old clothes, will justify the sacrifices Syrians have endured, and have yet to endure. A third line must be taken.

Moe Ali Nayel is a freelance journalist based in Beirut

November 1, 2012 0 comments

Economics & Policy

Governing our oil

by Valerie Marcel November 1, 2012

written by Valerie Marcel

Following the recent gas discoveries off shore from Israel and Cyprus, Lebanon is keen to kick off exploration activities in its waters. Like many other prospective oil and gas producers around the world, it must draft contract terms, regulations and laws to direct investment behavior in the country and set up institutions that effectively control the actors involved in its nascent petroleum sector. Of course, it will want to do it right.

Successful governance of the petroleum sector is only possible with capacity. The state needs qualified people and competent institutions to design the terms of oil and gas investment and to steer the petroleum sector according to the government’s broader resource development plan. Capacity is also critical for monitoring the performance of oil companies, assessing their development plans, auditing costs and collecting revenues from the sector.

Prospective petroleum producers must focus on building this capacity. But the hitch is that they must do so at a minimal cost. After all, their resource base is still unknown. They do not yet have an accurate picture of their reserves to know whether, how much, when and for how long oil revenues will flow to the treasury.

If general state institutional capacity is high enough, they can draw on these people and processes to build up an existing ministry of natural resources. The experience of countries like Trinidad and Tobago show that in countries where state and human capacity were relatively high at the beginning of petroleum development, the ministry of petroleum has successfully managed the sector.

Conversely, in countries where state institutions are weak, concentrating power in the ministry has not brought about successful governance. For instance, in Gabon, the Democratic Republic of Congo and Sierra Leone, accountability has been poor and the technical and financial performance of the sector has also been low.

The World Bank’s Governance Indicators rank Lebanon in a somewhat similar position to Uganda, a new African oil producer. Both countries rank in the mid-range percentile globally for government effectiveness (Lebanon 43rd and Uganda 37th,) and regulatory capacity (53rd and 49th), but they score a low 19th percentile for control of corruption. In such a context, Uganda’s major discoveries and new production justify — and even require it — to build up its petroleum, legal and accounting capacity. In contrast, in Lebanon, building administrative and regulatory capacity is desirable, but significant investments will only be warranted when discoveries are made.

The existing state institutions are capable enough to devise the terms of exploration activities, with select inputs from sector experts. Clearly, in the immediate term, Lebanon’s strongest efforts in terms of capacity building will have to be focused on establishing strong processes of transparency and accountability. An oil sector in which decision-making and executive bodies are accountable, both to the country’s leadership and to the public, is most likely to promote broad-based national development and avoid some of the most serious governance maladies that often stem from oil.

Accountability is strengthened by a clear, formal delineation of roles and responsibilities among actors involved in the sector, with strong processes for data collection, auditing and public disclosure; and the ability of government institutions to exercise effective control over the activities of public officials and other actors with responsibility for the sector.

As was Uganda’s experience, the interest of both government and the public in the governance of the sector rises exponentially with the size of discoveries made. Strong accountability processes are best implemented before discoveries. A political commitment to getting it right sets the tone for the future.
At the beginning of 2012, Lebanon’s Minister of Energy and Water Gebran Bassil promised the appointment of the board for the Petroleum Administration (PA) within a month, the beginning of the tender process within three months and for the first contracts for exploration to be enacted within the year.

As yet, come November, the sector is stuck in a stasis without the PA; due to political bickering and horse-trading, Lebanon’s political oligarchy is yet to name the board. This does not bode well for the future of this nascent sector.

Valerie Marcel is an Associate Fellow at Chatham House, where she leads a project on Governance Challenges for Emerging Oil and Gas Producers. She is also the author of ‘Oil Titans: National Oil Companies in the Middle East’

November 1, 2012 0 comments

Economics & Policy

A decline into uprising

by Jihad Yazigi November 1, 2012

written by Jihad Yazigi

While there is a general consensus that the uprising gripping Syria since March 2011 is part of the broader regional movement for better governance and more freedoms, there has been little debate as to the extent to which the economic and social conditions prevailing in the country contributed to the uprising. The question of whether Syrians revolted because of their thirst for freedom, justice and dignity or whether they did so because of their poor economic and social conditions remains, however, important if one wants to understand the reasons that led to the uprising and produce viable economic reconstruction plans.

At the beginning of 2011, Syria had been witnessing for several consecutive years an average annual growth in its gross domestic product (GDP) of between 4 and 5 percent, limited current account, trade and fiscal deficits, a stable foreign exchange rate, rising foreign investments and a curtailed inflation rate. These positive macroeconomic data hid, however, many imbalances that lay behind them, and other longer-term trends must be taken into account in order to better understand the dynamics of the revolution.

The level of GDP growth, for instance, may be high by Western standards but is wholly inadequate by Syrian ones. Indeed, according to most analysts, an average growth of 8 percent is required to generate enough jobs for new labor-market entrants. For more than three decades GDP growth has fallen short of that level, meaning an uninterrupted increase in unemployment for some 30 years in a row.

The fiscal deficit may be limited but this is largely a result of government investment expenditures lagging, thereby contributing to long-term infrastructural shortfalls. As for the trade balance, it remains highly dependent on oil exports, which, in 2010, represented 46 percent of Syria’s total exports. With the volume of crude reserves rapidly declining, there are serious longer-term concerns. Meanwhile, private sector investment is largely geared toward real estate and the services sector, away from more long-term labor-intensive industries such as textiles, which has seen the closure of scores of factories in the last decade. Finally, the foreign direct investment Syria attracts every year may be on the rise but it remains below Jordan’s, a country with a population a fifth of the size as Syria’s, and none of its vast natural resources.

Booms and busts

A look at longer-term trends helps puts things in perspective. In 1946 Syria was a founding member of the General Agreement on Tariffs and Trade (GATT), the predecessor of the World Trade Organization — out of only 23 countries in the world. In the 1950s, when Algeria was still under French rule and the majority of ‘third world’ countries were still fighting for independence, Syria had a buoyant economy and a vibrant political life. Then, three decades of strong state investment in the country’s physical infrastructure and in its health and education services helped boost the country’s development indicators. In the 1970s, Syria’s Human Development Index — a composite statistic of life expectancy, education and income calculated by the United Nations — was growing at a rate among the highest in the world. In 1983, Syria’s per capita GDP, at $1,901, was higher than that of Turkey — $1,753 — and almost on par with that of South Korea ($2,187). That was only 30 years ago.

Surveying what followed in the 1980s is important in order to trace back the economic challenges the country now faces. At the beginning of that decade the Syrian economy contracted sharply, partly as a consequence of the fall in global oil prices and the decline in remittances and aid from Gulf countries. The foreign currency reserves dried up, leading to a rapid devaluation in the value of the Syrian Pound starting in 1986; this year marked the beginning of the implosion of Syria’s middle class. This was only further compounded by a rapid decrease in spending and investment by the government, which, at the time, played an overwhelming role in the economy. The country never fully recovered.

In the last part of the decade oil began to be extracted from new fields in the country’s northeast, around the city of Deir-ez-Zor. A short boom followed, fueling hopes that the state would lead the recovery by investing in infrastructure and by opening up the economy. The opposite came to bear: revenues from oil income gave new fiscal margins of maneuver for the government as well as a new source of foreign currency earnings, and as a consequence reduced the pressure on the authorities to open up — Syrian economists call the 1990s the lost decade.

Starting in the 2000s, and coinciding with Bashar al-Assad succeeding his father as president, the decline in oil production again threatened the government’s fiscal position and serious economic reforms finally began. Geared toward the services sector, the gradual liberalization of Syria’s economy improved with a modernized legislative framework for investment, reduced taxation on private corporations, an unfencing of trade borders and increased private sector investments in new industries.

These developments spurred the creation of modern and relatively sophisticated banking and insurance sectors with the entry of some two dozen regional banks and financial institutions in the market. The expansion of retail trade and of the tourism industry was evidenced with the construction of large malls and the entry of global hotel operators. What is more, concessions were awarded to private international companies for the management of the country’s two ports of Tartous and Lattakia and there was a general boom in the services sector.

However, this policy of economic liberalization was marred with mistakes typical of similar processes in other developing countries.

The downside of opening up

The free trade agreements signed with Turkey and Arab countries, for instance, were implemented with little safeguards to protect or promote Syrian manufacturers. The reduction in customs tariffs led to an invasion of foreign products that put countless industrial plants and workshops out of business and, consequently, thousands of people out of work, while only limited mechanisms were established to promote exports and improve competitiveness.

More significant is the divestment of the state from the agricultural sector. While the sector had for decades been a major contributor to economic output and to the labor market, it had to face a steep decline in subsidies at the worst of times — amid a severe drought.

In 2008, after three consecutive years of drought, the government announced a threefold increase in the price of gasoil — which is used by farmers to fuel their irrigation pumps — and an increase in the prices of fertilizers to world market levels. The combination of these factors — a drought and poor policy decisions — played a major role in the staggering decline in the share of agriculture in the economy, from 25 percent of GDP in 2003 to 16 percent in 2010, or a decline of a third in its contribution to the country’s economic output in some seven years. At one point, the production of wheat, a major staple food for the population, fell by half.

The crisis of Syria’s agricultural sector led to the migration of hundreds of thousands of people from eastern parts of the country, in particular around the city of Deir-ez-Zor, to the working suburbs of cities located further west, including Damascus, Daraa and Homs.

These twin crises in the agriculture and industrial sectors — or the crisis of the “working world” as one Syrian intellectual put it — converged in many of Syria’s rural and suburban areas; the geographical roots of the current uprising very much mirror the impact. Protests began in the city of Daraa, which lies at the center of a large farming area to which fled many of the people living in the drought-affected northeast. The wildfire of popular discontent soon spread to the rural areas of Idlib and Aleppo provinces, where livelihoods depend largely on agriculture, and to the working suburbs of Homs and Damascus — home to many of the artisans who lost out from the process of trade liberalization.

But the state divestment from this “working world” is also a reflection of a more subtle generational change in the composition of the governing elite in Damascus. While farmers, for instance, historically represented a pillar of the ruling Baath Party and a large share of its rank and file — Bashar’s father, President Hafez al-Assad, called himself a peasant — the current generation of Syrian officials were largely born and raised in the cities, disconnected and therefore insensitive to the plight of rural areas.

While there is little doubt that the struggle of Syrians for a better life was driven, before anything else, by their thirst for dignity, justice and freedom, one should make no mistake: The dispossession and injustice felt by large segments of the population cannot be understood without taking into account their economic shades. Poverty, forced displacement, loss of assets and property, and gradual deterioration of living conditions are all major contributing factors to the sense of lost dignity and justice, and hence, in the eruption of the Syrian revolt.

November 1, 2012 0 comments

The Buzz

Morning briefing: 31 Oct 2012

by Executive Staff October 31, 2012

written by Executive Staff

Economics

The prime minister of the United Arab Emirates has announced approval of a 2013 federal budget that is heavy on social spending but without the deficits of the last two years.

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The Egyptian government has decided to allow residents of Sinai to own their land in the peninsula, state media has reported. According to Prime Minister Hisham Qandil, applicants need to prove they do not have a second nationality, and confirm that both their parents are Egyptian.

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Iran banned the export of around 50 basic goods, its media said on Tuesday, as the country takes steps to preserve supplies of essential items in the face of tightening Western sanctions. The Islamic Republic is under intense financial pressure from US and European trade restrictions imposed over its disputed nuclear programme.

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Lebanese state electricity company Electricite du Liban has warned against the increasing phenomenon of cable theft, saying in the long run it would affect power rationing in areas where it is on the rise.

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Starbucks Coffee has launched a bilingual website for the Middle East and North Africa.

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District cooling firm Tabreed, part-owned by Abu Dhabi state fund Mubadala, reported a 35 percent rise in quarterly net profit on Wednesday, helped by growth in its core chilled water business and lower financing costs.

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October 31, 2012 0 comments

The Buzz

Morning briefing: 30 Oct 2012

by Executive Staff October 30, 2012

written by Executive Staff

Economics

Gold edged down on Tuesday, heading for its biggest monthly loss since May, after disappointing corporate earnings prompted investors to sell holdings to cover losses in other markets, which have been hurt by global economic uncertainty.

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Construction labor costs in Saudi Arabia are the highest in the GCC, a new research report has said. Labor costs in the Kingdom are on average 18 per cent higher than in the UAE, and 51 per cent greater than in Qatar, says the Q3 construction costs report by MEED.

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Most Arab oil exporting countries in the Gulf should plan to reduce growth in government spending to make their budgets more sustainable, as their combined surplus could turn into a deficit around 2017, the International Monetary Fund said on Monday.

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Fitch Ratings put Kuwait on warning that a further escalation of political protests there could put its AA sovereign credit rating under pressure for a downgrade despite the nation’s strong balance sheet.

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A consortium of Turkish, Saudi and Bahraini businessmen have received the necessary approval to proceed with a multimillion dollar marina development on the Muharraq coastline.

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Bank of Sharjah has released its financial results for the January to September period showing a one per cent rise in net profit on last year.

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Politics

Two Iranian warships docked in Sudan on Monday, Iran's official IRNA news agency reported, less than a week after Khartoum accused Israel of attacking an arms factory in the Sudanese capital.

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October 30, 2012 0 comments