Executive Magazine

The monster beneath us

by Thomas Schellen June 3, 2012

written by Thomas Schellen

A monster stirred under Lebanon last month. Not everyone felt it, but across the country came various reports on May 11 of buildings wobbling briefly like twigs in a breeze. The earthquake, measuring 5.5 on the Richter Scale, was only a reminder, however, for the people in Saida, Beirut and Tripoli, that the greatest potential threat they face is not civil strife, war or revolution, but rather it is a monster sleeping beneath the sea not 20 kilometers from Lebanon’s population centers. Unknown until 2004, the monster’s existence has been proven with sonar by an Italian expedition and its potential wrath was mapped one year ago by scientists of the American University of Beirut (AUB).

The geological surveyors dryly called the monster “Mount Lebanon Thrust”. The term describes a reverse fault system, a type of crack in the earth’s crust that has the reputation to cause particularly destructive earthquakes. This discovery raises the seismic hazard level for Lebanon’s coastal region from moderate to high according to recognized international standards, with a substantial tsunami hazard thrown in for good measure. The Mount Lebanon Thrust “runs from near Saida in the south to slightly below Tripoli in the north and it is only about 15 to 20 kilometers away from the coastline. We also found out that this fault system is not vertical. It is oblique and it connects with the Yammouneh fault line, like a V,” explained Mohammed Harajli, professor of civil engineering at AUB, who was part of the team that published the study on Lebanon’s increased seismic hazard risk in 2011. [See map]

Scientists had been studying fault lines in Lebanon for a long time and considered the Yammouneh fault, named after a village nestled between the Lebanon and Anti-Lebanon mountain ranges, to be the country’s most active among several seismic faults, all located inland. None of these faults is anywhere near as extensive as the Mount Lebanon Thrust. According to Harajli, the newly discovered system’s length and location means that the entire area from the coast to the Bekaa plains is situated above a major fault and “very vulnerable to earthquakes.”

“We therefore reassessed the earthquake hazards and came up with new parameters especially for the coastal areas where the capital investments are the heaviest,” he said. While the magnitude, or overall energy, of earthquakes is measured on the well-known Richter scale, the devastation that a tremor can cause depends on many factors, including depth of the epicenter, soil structure and population density in the most directly affected areas.

These factors influence the earthquake’s intensity, or locally experienced impact. One method to gauge earthquake intensity is peak ground acceleration (PGA), or the speed with which the ground moves vertically and/or horizontally. This movement (often measured in g-forces or meters per second) is a crucial consideration in designing buildings so as to withstand an earthquake. The 2011 reassessment of earthquake hazards in Lebanon was significant, enough to raise the hackles of the international reinsurance companies that have a vested interest in assessing the economic risks associated with an earthquake.

Lebanon earthquake map

“What worries me is that according to the study by AUB, you have more or less an increase [in PGA] from 1.5 meters per second to three. This means a lot,” said Italian earthquake risk consultant Marco Stupazzini, who works for global reinsurance firm, Munich Re. “Lebanon needs to review the design standards that we are using. That is a matter of the building code but this may not be enough. We may have to assess certain buildings, for example hotels, which host larger numbers of people, and you have to make these buildings perform better.” Although the region is not nearly as vulnerable as the Pacific Ring of Fire that includes Japan, New Zealand, Chile, and the US state of California, earthquakes are anything but a new or rare threat in the Mediterranean. In fact, Italy has suffered from two earthquakes that struck the Emilia-Romagna region this past month. More than 20 have been killed and priceless historic buildings have been destroyed.

Shared shakedown, varying responses

Italy, Turkey, and Lebanon are three Mediterranean countries whose histories abound with earthquakes. Each has its own seismic story as the fault systems in the three countries represent collision zones between different pieces of the global tectonic puzzle underlying our so-called “terra firma”. But there is also a distinctly non-geological difference between earthquake risks that people are exposed to in each of the three countries.

Italy has a long-established natural catastrophe response system. Turkey pushed through a national catastrophe response framework, including an insurance pool, with emergency legislation within weeks after the 1999 Marmara earthquake killed 13,000. Lebanon has a draft law on disaster response, a building code that needs updating to meet the new hazard levels, and no catastrophe insurance pool, not to mention monitoring shortfalls and widespread corruption in real estate licensing.

“We are preparing the establishment of a disaster management unit. A law to that respect is now being discussed in Parliament.” said the chairman of the Parliament’s committee on Public Works, Water, and Energy, Mohammed Kabbani. As to the concept of a national catastrophe insurance pool, Kabbani said no initiative in that direction exists of yet.

Emergency response legislation and disaster recovery planning are essential in creating a system of preparedness that can reduce the loss of lives in a major earthquake. The absence of a law as a starting point of a coordinated national effort is worrying, and it is no help that the Nejmeh Square area of Beirut has a Bermuda Triangle reputation when it comes to draft laws — they tend to vanish.

Getting concerned? Consider this: Building quality in Lebanon is in itself tending toward a game of hazard. After the famous collapse of a single decrepit apartment building in the Beirut neighborhood of Fassouh in January of this year, the media quoted Kabbani as saying that 20,000 buildings in Beirut are not safe and could crumble like the one in Fassouh that crushed 27 persons to death.

“I did not say 20,000,” Kabbani clarified his assessment to Executive. “I said 20 percent and this is not only in the capital. It is in all of Lebanon.” Based on an estimated population of four million and assumed average household size of five persons, the prospect of one in five buildings being unsafe, means simply that hundreds of thousands of dwellings are prone to become death traps for their inhabitants if the Mount Lebanon Thrust ever gives us another earthquake of magnitude 7.5 on the Richter scale.

Tremors releasing this amount of energy have been observed in 551 and 1202 AD. The frequency of such highly destructive quakes is not high and the likelihood has not increased through the discovery of the Mount Lebanon Thrust, but experts Stupazzini and Harajli equally emphasized that such an event can occur at any time.

Depends on where you live

Starting to wonder if your home is safe? There is some good news. Since 2004, building codes in Lebanon have been upgraded and engineering standards of new, high-end residential structures are more likely than not to include a reasonable measure of earthquake-proofing.

According to AUB’s Harajli, the reconstruction and development of parts of Beirut, notably the downtown and the pricier areas of West and East Beirut, have been carried out in compliance with engineering standards for earthquakes, at least up to the standards that were incorporated in the 2004 building code and which were calculated for the moderate hazard level known at the time.

Solidere, moreover, responded to the recent higher risk assessment by raising the seismic building standard requirements for buildings in the downtown by 50 percent, more than the 25 percent increase recommended by the AUB study, Harajli said.

So if you paid more than $2,000 or $3,000 for every square meter of your newly-built abode in the past five years, your potential earthquake experience may be limited to seeing the chandelier swing and cleaning up the shards of a Ming-dynasty vase or two. However, if your children go to school in Lebanon, or if you attend the prayers on Friday or church on Sunday, consider this: “We have been given the recommendation that public buildings and buildings with a lot of traffic should be strengthened.” Kabbani said. “This includes of course schools and hospitals and buildings where lots of people congregate, such as malls and mosques and churches. We are recommending for something to be done in that respect.” The MP’s comment fits seamlessly with what Harajli told Executive. “There is a committee on public safety and it has recommended strengthening schools against earthquakes. We are recommending that certain buildings which are critical should be strengthened and prepared, [beginning with] public buildings which will accommodate people in the aftermath of an earthquake. But this costs money and the politicians are more concerned about their own interests,” he said.

“Incorporating earthquake resistant design into a new building is much cheaper than making an existing building earthquake proof,” added Harajli. In his estimate, earthquake engineering in a new construction adds about 5 percent to total building cost or, when calculated from the cost of the skeleton, increases cost by 10 or 15 percent.

Literally unstable

Making an existing building more resistant to earthquakes is possible if tenants of a building commission an engineer to strengthen the structure, Harajli said, but the costs can easily run into the hundreds of thousands of dollar for an apartment building with 20 or 30 units.

What is perhaps more worrying is that even if buildings are up to scratch they may not be spared from the effects liquefaction, the process by which solid ground that is not made of bedrock is transformed during an earthquake into a substance that acts like falling water. According to Stupazzini there is a major risk of this in Lebanon. Harajli adds that several parts of Beirut have clay and sand foundations that could cause liquefaction, including parts of Ashrafieh, and at present no detailed studies on this exist. But with awareness lacking and in the absence of legal pressures or financial incentives, landlords and residents of old substandard buildings are extremely unlikely to pursue such steps — in other words, ignoring the potential for disaster until it is possibly too late. “We hope that over the next 20, 50, or 100 years we will not be struck by an earthquake so that these buildings will become very old and be replaced,” Harajli mused, with a note of strain in his voice but added, “We are now forming the Lebanese Association for Earthquake Hazard Mitigation and we hope that we can get a minor earthquake that will bring the politicians to their senses,” as people are more prone to take action if they feel they are in danger.

Aiming to conduct research and raise awareness for making Lebanon safer for earthquakes, the new civil society organization will have a full plate to work with. In the meantime, there are plenty of issues waiting. Geological surveys of soil conditions in densely populated areas where the new seismic map shows increased hazard levels would be in order, and so would be measures to better protect economically vital infrastructure, like the Beirut Port, against the risk of a tsunami. Policy makers would be prudent to concern themselves with urgently updating the building codes, initiating tighter quality supervision of materials actually used in building construction, and institute disaster recovery preparations and, perhaps, a national catastrophe insurance pool.

MP Kabbani recognized these needs with a truly political statement in his discussion with Executive: “We are working slowly and we should work harder and quicker in finding solutions for these problems and I hope that our discussion will be an incentive for me to push harder,“ said Kabbani. “But I am sorry to say that in Lebanon, nobody cares and therefore almost nothing is being done.”

Turkish Catastrophe Insurance Pool

A model that Lebanon could emulate in mitigating earthquake impacts and enhancing preparedness is the Turkish Catastrophe Insurance Pool (TCIP), recommended by European reinsurance experts in April at a seminar for Lebanese insurance companies in Beirut. TCIP provides a national safeguard to help home owners and tenants of buildings restore their basic living environment if they become earthquake victims.

TCIP was created under a national disaster response law passed within one year after Turkey suffered a horrific earthquake in the city of Izmit in August 1999 that cost 13,000 lives and damaged 120,000 homes beyond repair. The pool is designed to cover all private residences located within the jurisdiction of municipalities.

Publicly owned and managed by an insurance company on rotational basis, TCIP is a mandatory insurance scheme with low premiums and indemnities that currently have a ceiling of 150,000 Turkish Lira ($83,000) per insured home. Premiums are determined by construction type and location of a house on a national earthquake risk map. The average annual cost of premiums per insured home was the equivalent of $52 and the average coverage was just under $30,000, the TCIP 2010 annual report said.

The reach of the TCIP climbed to 3.3 million homes in 2010, representing 27 percent of all homes that fall under the mandate. The key purpose of TCIP is to support the continued functioning and resilience of society in case of catastrophe. A core benefit of the program is that it entails awareness building and training for public officials and the general public.

June 3, 2012 0 comments

Finance

Chained to the debt

by Maya Sioufi June 3, 2012

written by Maya Sioufi

The story of how Lebanese commercial banks effectively finance the country through buying government debt has been told so many times that it is cliché — but even after all these years, it rings no less true.

As of the end of March 2012, the Association of Banks in Lebanon reported that the sovereign had rung up a tab of some $29 billion at the country’s banks, having issued them some $13 billion in Eurobonds (70 percent of the government’s Eurobonds portfolio) and $16 billion in Treasury bills (49 percent of the government’s Treasury bills portfolio). While this figure represents only 20 percent of the banking sector’s total assets, it fails to take into account deposits placed with the central bank, which stood at $50 billion as of the end of March, taking commercial banks’ overall exposure closer to 55 percent of assets.

All this is relative to total Lebanese government debt, which at the end of 2011 stood at some $54 billion; that’s an awful lot for an economy worth just $39 billion, working out to a whooping debt-to-gross-domestic-product ratio in the range of 140 percent. Those new to Lebanese economics should note, however, that this is actually an improvement relative to six years ago, when debt-to-GDP peeked around 180 percent.

“The debt itself is not a major problem,” says Fadi Osseiran, general manager of BlomInvest Bank. “The point is how much we will increase it every year relative to GDP, that’s the real story.”

The ‘drop’ in the debt-to-GDP ratio is actually due to the increase in GDP. With a weaker economy — the IMF recorded 1.5 percent economic growth in 2011 and forecasts 3 to 4 percent this year on condition of internal reform and external stability, neither of which seems likely — the debt component of the ratio would need to lose some fat for the ratio to continue dropping and alleviate concerns
regarding the bank’s weighty sovereign exposure.

One thing banks are voicing dissatisfaction with are the current rates on Eurobonds and Treasury Bills. “It does not make sense that Lebanon has a ratio of debt to GDP at 137 percent, a credit rating below investment grade and the interest rate on bonds is much better than on investment-grade bonds,” says Osseiran. The average yield on Eurobonds stands at 4.3 percent, and 5.82 percent on a two-year Treasury bill. In what was perhaps a slight correction, yields on Treasury bills were raised by 50 basis points across the board in March of this year, a move cheered by bankers.

In the national interest

“The government should understand that a higher rate will give comfort to banks to buy more government debt,” says Najib Semaan, general manager of First National Bank.

Concerned with their exposure to the sovereign risk, banks are trimming their holdings in government securities, with the gap being filled by the central bank. “All Lebanese banks are reducing their exposure to the government,” says Alain Wanna, deputy general manager and head of Group Financial Markets at Byblos Bank, but he highlights that “banks, rather than investing directly in government securities, are placing deposits with the central bank and the central bank is buying the securities so in the end it is the same.”

Debt score card

His observation concurs with that of central bank Governor Riad Salameh’s statement at the Arab Economic Forum in May this year, during which he said “the reduction in the banks’ exposure to the government created a gap that we filled as a central bank”. The irony is that the central bank is also the issuer of government debt, meaning that effectively it is buying from itself. The more it does so, the more the debt is monetized and the lines between who owns it and who issues it become blurry.

No place like home

But with low rates in international markets, keeping the dough at home seems like the most suitable option for now. “In this environment in which interest rates abroad are so low, banks will subscribe in the forthcoming issues because they need to grow their interest margins,” says Marwan Barakat, chief economist at Bank Audi.

More debt issuance is on the government’s agenda. Minister of Finance Mohamad Safadi announced in May the government’s intention to raise $2 billion in new foreign-currency-denominated bonds this year for infrastructure projects, which the banks will be expected to line up for yet again.

Being the prominent financiers of the republic’s coffers, however, it would seem that the banking sector ought to be able to twist the government’s arm into implementing structural reforms essential to reduce the borrowing needs of the country.

According to Nassib Ghobril, chief economist at Byblos Bank, “the political class is taking the banking sector for granted,” given that if they sought funding from abroad they would not get the same rates. “Unfortunately the banking sector has not used its leverage to put significant pressure on the authorities. If representatives of the banking sector say we will stop funding altogether until you start implementing reforms and not just talking about them, then things will be different.”

This article was published as part of a special report in Executive's June 2012 issue

June 3, 2012 0 comments

Real estate

History under siege

by Jeff Neumann May 6, 2012

written by Jeff Neumann

In the arena of Lebanese architectural heritage some combatants are better at the game than others. Today activists, archaeologists, politicians and real estate developers have entered the stadium to battle it out over what is probably Lebanon’s oldest sporting venue. At issue is the fate of a Roman-era hippodrome downtown in Wadi Abu Jamil. Unchecked construction and the rush to build mega-sized steel and glass towers have taken a toll on historical sites in the city for nearly 20 years. The hippodrome site is privately owned and most of it has already been developed and built over, but a remaining plot of land in the middle of the former track has become the focus of many interests, all angling for different outcomes.

Some two thousand years ago the hippodrome hosted horse and chariot races. Today, it sits neglected in the heart of Beirut’s rebuilt downtown of exclusive villas and upscale shopping areas. Overgrown with tall grass and littered with garbage from nearby construction sites, it is almost impossible to imagine the hippodrome’s former glory. Assuming that you can get past the heavy security to even approach the site, the hippodrome today is virtually indistinguishable from any other neglected ancient ruins. But in spite of its current state, it has great significance: Lebanon is home to two out of five Roman hippodromes in the Levant — one in Tyre, and its twin in Beirut. The hippodromes of Lebanon are unique because they are the only ones in the world adjacent to Roman baths.

The great irony of the situation is that some of the loudest critics are largely responsible for the current state of the hippodrome. In March, former culture ministers Tamam Salam and Tarek Mitri held a press conference denouncing plans to build over the open remainder of the site. But the sale and development of various plots at the site in the preceding years were approved by both of them. Solidere, the private company in charge of reconstructing Beirut Central District, justified this earlier development using in-house archaeology experts. Development started by moving Roman-era baths to a different location nearby [see map], and progressed to the point where former Prime Minister Saad Hariri built a large private residence and garden squarely on top of the hippodrome.

So tight is the security at the site that current Culture Minster Gaby Layoun and his top advisor, Michel de Chadarevian, were not allowed past the rusty metal walls that have long encircled the area. “I went there with the minister last month and they would not allow us to even have a look,” de Chadarevian says. “We asked Saad Hariri’s office to let us look around, but we were denied access. We are not even allowed in to remove the grass.” Executive was directed by Hariri’s office to Future Movement Members of Parliament Salam and Nabil de Freige for comment, but neither was available for comment.

Build over, preserve under?

After signing off on development of much of the site, in 2009, Salam, then culture minister, placed the hippodrome on a list of protected historical sites, but the damage was already done. An area surrounding the reconstructed Maghen Abraham Synagogue was all that was left and today represents the plot of contention.

According to the culture ministry, the owner of the undeveloped plot, Nazem Ali Ahmed, consulted Italian architects to find a solution that would generate revenue, while also meet the requirement of having the ruins available for public viewing. His solution, while still in the early stages of development, is to construct a roofed, open air museum. The ruins would be viewable underneath thick glass flooring from walkways and landings. A second level would be reserved for retail and commercial space. Its height will be limited by the current regulations laid out by Solidere, the ministry says. Solidere did not respond to repeated requests for comment.

De Chadarevian says that the current plan to preserve the hippodrome is based on similar efforts in Greece to enclose ruins under glass and install modern walkways and viewing areas. He explains to Executive that the ministry is “happy to have an investor interested in creating and building a museum for free. We will not pay anything. He will do everything and we will all benefit.” (There have been unconfirmed media reports of a $30 million Kuwaiti-funded hotel and museum on the plot.)

This plan set off a public outcry from preservationists and archaeologists. Josef Haddad, founding member and current secretary of the Association for the Protection of the Lebanese Heritage, disputes the notion that a glass enclosure would preserve the ruins. “The glass will trap the heat and humidity and accelerate the deterioration of the site,” he says, pointing to the fact that Rome’s ancient ruins are largely out in the open and exposed to the elements. Under the current plan, portions of the ruins downtown, excluding the fragile section that was once spectator seating, will be removed during construction and replaced when the building is complete.

“We are surprised that out of all ministries, the Ministry of Culture is working the hardest to destroy the hippodrome,” Haddad says. “It belongs to the Lebanese people, not private landowners.” Haddad says that he and the Association for the Protection of the Lebanese Heritage “are doing our best to halt the process,” but adds that a real solution can only come from Solidere, Nazem Ali Ahmed, and the culture ministry.

Jeanine Abdul Massih, professor of archaeology at the Lebanese University, does not believe that constructing what would essentially be a shopping mall over the ruins would do the site justice. “If you want to really preserve it you need to take the whole thing, not just a part of it,” she says. “If you only preserve part of it, what do you really have left of this beautiful stadium? You cannot preserve just a part of a stadium to give an idea of what it was like.” Abdul Massih suggests protecting and restoring the entire site, and adding it to a Beirut historical walking trail. “We need to connect the people with the history,” she says.

Little room left to fight

“We are preserving this place — if the ministry could destroy all that Solidere has done in order to regain all of our antiquities, we would be very happy,” de Chadarevian says, striking a somewhat populist tone. In preservationist circles that might normally be a welcome statement, but he does not hide his contempt for activists seeking to reach a new deal for the hippodrome. “All the campaigns on Facebook, this is rubbish,” he says. “I asked them, ‘do you know what this is? Have you ever gone there and had a look around?’ No, they have not. So why are they even talking about this?”

According to de Chadarevian, the root of the problem is the location of Hariri’s home, and his former cabinet members using their influence to steer development deals. “The only problem is that new construction will block the view from Saad Hariri’s residence,” he claims, and points blame squarely at the two previous culture ministers: “[Tarek Mitri and Tamam Salam] agreed to destroy what remained of the hippodrome years ago.” Several members of Hariri’s Future Movement have rejected this claim.

Professor Abdul Massih suggests a land swap between the Beirut municipality and Nazem Ali Ahmed could resolve the dispute and come as close to satisfying all parties as possible. But the prime location of the hippodrome means this is a highly unlikely outcome. The current construction plan for the hippodrome site has top-down blessing, from Prime Minister Najib Mikati to the Ministry of Culture, as well as Solidere and the Beirut Municipality. Now, the municipality’s final approval of the building plans is all that stands in the way of commercial development at the hippodrome site. [No one from the Beirut Municipality was available for comment].

For those seeking full preservation, the overall outlook is grim. It is also nothing new, says Abdul Massih. “So many other beautiful things here have been destroyed, so nothing would surprise me,” she says. “But I will fight to preserve it.”

May 6, 2012 0 comments

Real estate

For your information

by Executive Editors May 6, 2012

written by Executive Editors

Real estate market “flat”

The overall number of real estate transactions in Lebanon dropped 4.29 percent between January and February. But while the number of overall transactions was down — 5,156 in February from 5,387 in January — the nationwide average value per transaction rose 6.66 percent over the same time period. The total number of real estate transactions fell by 12.02 percent last year to 82,984, compared with 94,320 transactions in 2010. Over the same year, the value of real estate transactions fell to $8.84 billion, compared to $9.48 billion in 2010. According to a Bank Audi report, Lebanon’s property market has shown “a somewhat flat performance” during the first two months of the year. According to year-on-year data, the total number of transactions fell 0.82 percent in the first two months of 2012, while the total value of transactions dropped $40 million to $1.16 billion. Using figures provided by the Order of Engineers, the report also notes a 3.5 percent overall rise in the number of construction permits issued across Lebanon this year. The data shows a 9.1 percent drop in new permits in Beirut and a 19.2 percent rise in the Mount Lebanon region.

Rent-to-own law passes cabinet

The Council of Ministers, Lebanon’s cabinet, approved a new draft rental law in late April, which would allow low-income families to buy property by making yearly or monthly payments. The Cabinet also agreed to amend a controversial rental law that, if passed, would allow landlords to raise rents by 20 to 80 percent over a four-year period [see page 30]. The Association of the Owners of Rental Buildings issued a statement the following day praising the passage of draft law 767, but also asked the Administration and Justice Committee of Parliament to “enter a new stage that ends the accumulated injustice against old landowners on the issue of rents” by quickly passing the law on to the General Assembly, and to establish a government fund to assist low-income renters who intend to buy residential property.

MENA construction drops

The value of construction projects awarded in the first quarter of 2012 across the Middle East and North Africa (MENA) has fallen more than 30 percent from the first quarter in 2011, according to Citi Research and Analysis. Approximately $18.5 billion in projects have been awarded between January 1 and March 31 in the MENA region, the research unit of Citigroup Global Markets said in its MENA Construction Project Tracker, a monitor that tracks projects from announcement to completion. The comparison figure for the first quarter of 2011 was $27 billion. The cumulative value of projects awarded in March was $4.3 billion, the lowest figure for the year-to-date according to Citi Research. With 76 projects awarded in the year so far, the number of projects was similar to the same period in 2011. “Project awards are generally lumpy,” the report says, while forecasting spending to show “ongoing strength” because of MENA governments’ “desire to avoid unrest” in the wake of the Arab Spring. Kuwait accounted for 38 percent of project values in the first quarter, followed by Saudi Arabia and the United Arab Emirates with 16 percent, or $2.9 billion, each. However, the report noted that Kuwait’s leading share is derived mainly from one single $5.9 billion aviation-related project.

Needing more malls

An apparent dearth of retail space in new residential areas across Abu Dhabi is dragging down property prices, according to a report by UK-based property consultancy Cluttons. “A shortage of retail facilities at many of the new residential developments needs to be addressed, the lack of which is seen as a culprit to falling values,” the report said, before the opening of Cityscape Abu Dhabi last month. According to Cluttons, “Apartment values have been affected the most, with Al Reem and Marina Square apartments falling 7.4 percent and 7.3 percent, respectively, on third-quarter 2011 prices.” Abu Dhabi-based real estate consultancy CBRE also released data that shows residential apartment rents in the city are down 18 percent in the first quarter over the same period last year, and are down 3.5 percent since last quarter. Also at Cityscape, the National Bank of Abu Dhabi (NBAD) announced that its new wholly-owned subsidiary, NBAD Investment Management (DIFC) Limited, had been approved to start a real estate investment fund focused on “income-generating properties.” Zain Abdullah, senior executive officer of NBAD’s new unit said in a statement, “We believe that this fund will offer regional and international institutional investors a diversified avenue to access the UAE real estate market within a strong regulatory environment.”

UAE banks boost credit, offer 100% mortgages

As the United Arab Emirates’ property market continues to struggle, Emirates Islamic Bank announced in mid-April that it would offer 100 percent mortgages to UAE nationals. “For most people, owning a home is one of the biggest lifetime investments and provides an opportunity to build equity in real estate,” said general manager Faisal Aqil, speaking to The National in April. The new loans will be available for first time buyers or for buying off-plan, and can be approved within 24 hours. Variable rates will start at 4.99 percent. Home prices throughout the UAE have been trending downward in recent years, with Dubai as the exception, posting a meager 0.5 percent rise in home prices in 2011. In a statement to reporters, Abu Dhabi’s Aldar Properties announced a $1.09 billion credit facility from the 70 percent state-owned National Bank of Abu Dhabi. In addition to helping the developer manage its liquidity, the deal will be a three-year revolving facility to cover everyday operating costs.

Corruption ties and net loss for Egypt’s SODIC

Egypt’s third-largest property developer, Six of October Development and Investment (SODIC), posted a net loss of $32 million for 2011, after registering a profit of $22.4 million one year prior. In a statement, the company offered a stronger assessment of its operations, saying, “During a tough 2011 SODIC preserved the strength of its balance sheet, improved cash collection delinquency rates, increased receivables and maintained healthy levels of cash on hand.” Prior to the report, SODIC issued a statement about its former chairman Magdi Rasekh, who in April of last year was sentenced to five years in prison and fined $388 million for his role in an illegal land deal under the Mubarak regime, saying the ruling would not affect “the firm’s assets or the assets of the rest of its shareholders.” Also, last month, the Egyptian government announced a plan to sell nearly 8,000 plots of city land and certificates of deposit to expatriates living in the Gulf. By appealing to wealthy Egyptians living outside the country, the government hopes to raise some $4.5 billion with the new plan, which would also allow Egyptian joint stock companies to purchase land with a guaranteed 4 percent, one-year return on the investment. Additionally, any financing for the properties must be done through financial institutions based outside of Egypt.

Saudi prince seeks big tower loan

Kingdom Holding Co, Saudi Prince Alwaleed bin Talal’s investment company, is seeking a loan worth as much as $533 million by this summer to help pay for the construction of the Kingdom Tower in Jeddah, according to a Bloomberg report last month. According to plans, the Kingdom Tower will be more than 1,000 meters tall, with an estimated finishing cost of $1.2 billion. The building plans, drafted by Saudi Binladen Group — a 16.63 percent stakeholder in the project’s owner, Jeddah Economic Co — were approved by municipal authorities in February, and the project is expected to take over five years to complete after construction starts. When finished, the Kingdom Tower will become the world’s tallest building, surpassing Dubai’s Burj Khalifa, which stands at 829.84 meters.

May 6, 2012 0 comments

Banking & Finance

Financial quotes of the month

by Executive Editors May 6, 2012

written by Executive Editors

“How can we grant bills of health from these [government run] labs when rats are running everywhere?”

Mohammad Choucair, head of the Beirut Chambers of Commerce

“The country will manage well, even if we don’t sell a single barrel of oil for two or three years.”

“In Silicon Valley, there’s still too much money chasing too few ideas. If your idea is brilliant and your timing is right, you can become a multimillionaire overnight.”

Paul Saffo, Silicon Valley forecaster on Facebook’s $1 billion acquisition of popular photo application Instagram

“Spain is not going to be rescued; it’s not possible to rescue Spain, there’s no intention to, it’s not necessary and therefore it’s not going to be rescued.”

“God willing, we will take the loan before a president for Egypt is in place.”

Mumtaz al-Saeed, Egyptian Finance Minister, on the proposed $3.2 billion International Monetary Fund loan

“Tonight, Senate Republicans voted to block the Buffett Rule, choosing once again to protect tax breaks for the wealthiest few Americans at the expense of the middle class.”

Barack Obama, President of the United States

“I feel great — as if I were in my normal excellent health. And my energy level is 100 percent.”

Warren Buffett, billionaire investor legend when diagnosed with prostate cancer

“Investments in tourism are extremely good despite the fall in the number of tourists entering Lebanon through Syria.”

Fadi Abboud, Lebanon’s Minister of Tourism

“At times, elections can lead to uncertainties and, for investors, to a changing configuration of opportunities and risks. We are entering such a phase in Europe.”

Mohamed el-Erian, CEO of Pimco, the world’s largest bond investor, on the upcoming French, Greek and Irish elections in Europe

“If you wake up the morning after and still feel like the gazelle is running from the lion, or the lion is running for the gazelle, then everything is ok.”

Fadi Ghandour, after resigning as CEO of Aramex, the delivery and logistics company he founded and managed for 30 years

May 6, 2012 0 comments

Banking & Finance

The expert opinion MENA stock tips

by Executive Editors May 6, 2012

written by Executive Editors

Black is still the dominant color on the market screens this year as equities continue their upward drift. In the midst of first-quarter corporate earnings season, which so far have proved resilient, investors are increasingly concerned that a correction is on the horizon as macroeconomics headlines remain frail. For this month, Executive speaks to Elie Khoury, cheif executive of Berytus Capital and Nour Eldeen al-Hammoury, chief market strategist at Amana Capital for their investment recommendations.

Elie Khoury

Bullish or bearish?

Khoury is conservatively bullish on the markets in the United States and slightly bearish on Europe, as the US enjoys much better fundamentals than Europe. He believes equities will continue their upward trend because, “With central banks from the US to Europe to England pumping all this money, they are inflating everything which is why equity markets performed so well since beginning 2012 until today.” He adds that if the US unemployment and housing picture improves, he will be buying equities more aggressively.

Main concerns?

Khoury’s greatest concern is banks’ exposure to derivatives. “At $188 trillion, this exposure is 14 times the size of the United States’ [gross domestic product]” he warns. In the short term, Khoury is mainly concerned with the economic issues in Spain and Italy; he adds that issues in Greece might resurface in May during the upcoming elections.

Favorite asset classes?

Khoury favors equities. “The summer time will provide us with many opportunities. Markets will correct and investors will get the opportunity to invest,” he says. Khoury’s top sectors to invest in are technology and consumer products.

Specific names?

He likes Pfizer in the pharmaceutical sector, Kraft in the non-cyclical consumer goods sector and Microsoft, Intel and Qualcomm in the technology sector. Khoury also highlights Costco, Home Depot, McDonalds and Starbucks as stocks he would be buying on the basis of their relative weakness to benefit from lower entry points.

MENA equities?

While deterred by the unrest in the region he notes that it is “putting a floor on the price of crude which is good for Saudi Arabia so it is the only country in the region we could be positive on.”

Nour Eldeen al-Hammoury

Bullish or bearish?

Hammoury warns against buying aggressively due to the very slow economic growth and the fact that the United Kingdom is back in recession. “The crisis is not over yet and it needs a minimum of 10 years to solve,” says Hammoury. He does not expect the recent rally in equities to continue and he is awaiting a correction in the markets, as “the waves of the tsunami are still rolling.”

Main concerns?

Hammoury’s largest concern is the oil market, as a “higher oil prices are not good for the global economy.” He is also concerned with the sovereign debt crisis in Europe and the lack of transparency from politicians. “We saw an ‘Arab Spring’, we could see something of the sort in Europe as well,” warns Hammoury.

Favorite asset class?

He would stick to gold and recommends buying between $1610 and $1625 per ounce. Within equities, Hammoury would remain in defensive sectors (such as utilities, consumer goods and telecoms).

MENA equities?

He is not interested in investing in the region at this point, but he does highlight that the abundant cash reserves in MENA governments’ coffers provide support in these turbulent times and “the continuous high prices of oil that will carry on stimulating reserve cash for governments.”

Specific buy?

His top stock globally is Apple. He sees it going to $700 or to $800.

Any name in the MENA region?

He likes Dubai-based Tabreed, also known as the National Central Cooling Company.

May 6, 2012 0 comments

Banking & Finance

For your information

by Executive Editors May 6, 2012

written by Executive Editors

Banking secrecy exceptions

Banking secrecy was lifted on 18 accounts in Lebanon last year according to the annual report of the Special Investigation Commission (SIC), an independent entity established 10 years ago by the Banque du Liban (BDL), Lebanon’s central bank, to fight money laundering. Of the 18 cases, five were referred from abroad and 13 were from domestic sources. In 2011, the SIC received 335 suspected cases, up from 245 in 2010 and 202 in 2009. Of the suspected cases, 100 were from foreign sources and 235 from local sources and the SIC investigated 285 cases. Counterfeiting, accounting for 13 percent of all reported cases, was the most common crime, followed by terrorism funding at 8.5 percent of reported cases, fraud of private funds at 6 percent, narcotics trade at 4.5 percent and embezzlement of public funds at 3 percent. Sixty five percent of the cases were not categorized. “Reporting entities were assessed via extensive on-site examinations and follow-up corrective measures were imposed,” according to central bank Governor Riad Salameh.

Eurobond oversubscribed

A $700 million Lebanese Eurobond issued last month was 30 percent oversubscribed, resulting in a boost to the finance ministry’s coffers. The first tranche of the Eurobonds brought in $600 million, up from the original plan to raise $350 million. It carries a 5 percent yield and matures October 12, 2017. The second tranche brought in $350 million as originally planned. It carries a 6.4 percent yield and will mature on April 27, 2026. Non-Lebanese accounted for 30 percent of the subscribers with the remaining issuance taken up by the local banks, holders of the majority of Lebanon’s hefty debt. Byblos Bank and Bank of America-Merrill Lynch were the lead managers on the Eurobond. The proceeds of this issue are to refinance $293 million and 115 million euros ($151 million) in Eurobonds which matured in March and April 2012, respectively. Lebanon’s finance ministry revealed earlier this year that it will be issuing $5 billion worth of Eurobonds and treasury bills to cover the public debt in 2012.

Qatar-Swiss mining mega merger

Qatar’s sovereign wealth fund, Qatar Investment Authority (QIA), has invested a whopping £1.7 billion ($2.7 billion) into Switzerland-based mining giant Xstrata. With a five percent holding, QIA now becomes Xstrata’s third largest investor after Glencore, the largest publicly traded commodities supplier, with a 34 percent stake, and asset manager Blackrock, with a five percent stake. This aggressive move comes ahead of a planned £23 billion ($36 billion) mega merger between Xstrata and Glencore and increases the chances of the deal tilting in Glencore’s favor. Aside from Blackrock, most of the top 10 investors are critical of the deal and want better terms from Glencore. Under the proposed deal, Xstrata shareholders would receive 2.8 Glencore shares for every share they own, but many shareholders want at least 3.6. Ivan Glasenberg, chief executive officer of Glencore and Mick Davis, CEO of Xstrata, are going on a global road show in the coming weeks to convince investors to agree to the “merger of equals”.

Egypt close to IMF loan

Egypt’s finance ministry expects to secure a $3.2 billion loan from the International Monetary Fund (IMF) by May 15, before a new president is elected to run the country at the end of June. However, the deal, which has already been delayed from March, faces a significant obstacle. The Freedom and Justice Party, the Muslim Brotherhood’s political arm that holds almost half the seats in the new parliament, is heavily critical of the IMF loan, and has suggested several other options, such as collecting overdue taxes or re-evaluating gas export deals. The party says it is not outright opposed to the loan, but wants either better terms or the creation of a new government — not due until after the presidential elections — to oversee the distribution of the funds. According to Egypt’s finance minister Mumtaz al-Said, “Egypt needs $10 billion to $11 billion in the next 18 months to bring back economic stability.” Egypt has hemorrhaged more than $20 billion in currency reserves since the February 2011 revolution, which overthrew former president Hosni Mubarak. Whether Egypt succeeds in securing the loan remained unclear as Executive went to print.

Kafalat loans drop

The loan guarantee company Kafalat gave out $33 million loans to small and medium enterprises in the first three months of the year, down 21 percent from the same period last year. The number of loans dropped 20 percent to reach 240. The industry sector accounted for 36.7 percent of the total guarantees; the agriculture sector took 36.3 percent of total guarantees, while tourism accounted for the next 20 percent of the guarantees. Geographically, Mount Lebanon accounted for the majority of borrowing, taking up 44 percent of the loans, followed by North Lebanon at 16.3 percent, Bekaa at 15.4 percent and South Lebanon at 10 percent. Beirut accounted for just 7 percent of the loans.

$100 million for MENA infrastructure

The International Finance Corporation (IFC), part of the World Bank Group, and the Islamic Development Bank (IDB) plan to invest $100 million in infrastructure projects in the Middle East and North Africa region. Each institution will be investing $50 million into the Arab Infrastructure Investment Vehicle, part of the Arab Financing Facility for Infrastructure (AFFI), an initiative led by the World Bank, the Islamic Development Bank and IFC. The AFFI assists in financing and technical issues for cross-border infrastructure projects and encourages governments and the private sector to contribute to the development of these projects. The purpose of the investments is to spur economic growth in the region. MENA countries need to invest $70 billion annually in infrastructure to sustain their growth rates, according to the IFC, which invested approximately $2 billion in the region in 2011.

Financing Tunisia

Qatar has agreed to lend Tunisia $500 million at an interest rate of 2.5 percent, to be repaid in five years. The Gulf state was one of the main foreign backers of the revolution which overthrew longtime president Zine el-Abidine Ben Ali and resulted in the Ennahda party coming to power in Tunisia in October last year. Earlier this year, Turkey opened a $500 million credit line to Tunisia, repayable over 10 years. The United States recently announced that it aims to help finance the economic recovery in Tunisia by providing “several hundred million dollars” of loan guarantees before the end of June, according to the US Department of the Treasury. The Tunisian economy is still struggling following the political upheaval that shook the country last year. The International Monetary Fund forecasts 2.2 percent gross domestic product growth in 2012 and 3.5 percent in 2013, while expecting the unemployment rate to drop 2 percent this year to 17 percent.

Aabar dumps Daimler

Abu Dhabi’s Aabar Investments, a government-owned company engaged in investing across sectors and countries, is reviewing its portfolio of overseas investments and intends to completely exit its investment in Daimler, as well as in the Formula One cooperation and Tesla Motors, the luxury electric carmaker, according to Germany’s Manager Magazin. Aabar acquired a 9 percent stake in the luxury carmaker by injecting 1.95 billion euros ($2.56 billion) in March 2009, which it reduced to a 3 percent holding in February after the surge in the price of the shares. The share price at the time of the investment stood at 20.27 euros ($27); as of 21st of April it was trading at 41 euros ($54), up 100 percent from the price that Aabar paid. Abu Dhabi National Energy (TAQA), an oil explorer and power supplier majority owned by the government, sold its 7 percent stake in Tesla Motors in April, making a profit of $113 million. In April, Aabar nearly doubled its stake in Dubai builder Arabtec to 10.45 percent.

May 6, 2012 0 comments

Economics & Policy

For your information

by Executive Editors May 6, 2012

written by Executive Editors

Popped for pills

The Pharmaceutical Research and Manufacturers of America (PhRMA), which represents most of the major pharmaceutical corporations in America, has petitioned the United States Trade Representative to put Lebanon on the 2012 Priority Watch List. They have complained that there is a lack of adequate intellectual property protection in the Lebanese pharmaceutical market. While it was noted that the new industrial property law passed in 2000 represented a major step forward from the 1924 law, PhRMA claim it does not provide sufficient pipeline or transitional patent protection and gives an incomplete definition of confidential information. Another point of contention the US body raised was the ministry of public health’s failure to implement sound regulation practices to distinguish between innovative and generic medicines. The Ministry of Public Health was also mentioned for having failed to successfully crack down on parallel imports, which result in a ‘grey’ market of counterfeit medicinal products in the country. Lebanon was one of 17 countries from the region recommended for the black list, including Israel and Algeria.

Figures for thought

The most recent figures from the Ministry of Finance indicate that the total fiscal deficit for 2011 of LL3.5 billion ($23 million) was LL833 million ($555,333) less than its 2010 equivalent. These figures are the result of a LL1.37 trillion ($924 million) increase in revenues, or 11 percent, which offset the 3 percent increase in expenditures of LL553 billion ($368.7 million). It is important to note that the fiscal deficit saw a healthy decrease in November 2011 when the budget surplus from the telecoms ministry was paid, which was LL2.3 trillion ($1.53 billion) compared to LL957 billion ($638 million) in 2010. Despite the growth in total revenues, the tax contribution to the public purse actually decreased mainly due to a slowdown in the taxes on international trade, with decreases in excises and customs by LL590 billion ($393.3 billion) and LL33 billion ($220 million), respectively. Lebanon’s loss-making electricity company significantly increased its burden on the public purse, requiring an extra 46 percent in transfers reaching LL2.6 billion ($173 million) in 2011. Gross public debt continued to creep up over the same period, rising by just less than 2 percent to LL80,869 billion ($53.6 billion) in 2011.

Lebanon failing its women

Lebanon ranked 6th in a survey on women’s socio-economic advancement from a selection of 8 Middle Eastern countries. The MasterCard Worldwide Index on Women’s Advancement used indicators such as tertiary education, employment, business ownership and leadership positions to assess the standing of women in society in comparison to their male compatriots. Only Egypt and Saudi Arabia scored lower than Lebanon, while Bahrain, the United Arab Emirates, Qatar, Kuwait and Oman were deemed to have a better record in women’s advancement. Interestingly, Lebanon had the lowest proportion of female business and government leaders. Conversely, Lebanon had the highest rate of regular employment opportunities for women.

Prizing open the bandwidth

Lebanon’s Internet capacity will be increased from the current 23 Gigabits per second (Gbs) to 33Gbs within two months and to 43 Gbs within four months, according to plans unveiled by the Ministry of Telecommunications (MoT). The government intends to increase capacity by making increased use of the India-Middle East-Western Europe (IMEWE) submarine cable, which runs from Mumbai to Marseille. Lebanon became a member of IMEWE consortium in December 2010 and started limited use of the fibreoptic cable in June 2011. What’s more, Lebanon and Cyprus agreed in February on the principles of cooperation for the Europa submarine cable, which would complement the IMEWE, but Lebanon’s cabinet is yet to endorse financing of the project. With regards to the tariff structure, MoT proposals for unlimited nighttime usage between 12:00 am and 7:00 am have been approved.

The MENA’s stunted growth

Growth has stalled and the outlook is uncertain in the Middle East and North Africa (MENA) region, according to the International Monetary Fund’s (IMF) 2012 World Economic Outlook. Among oil exporters, high oil prices contributed to growth of 4 percent, while among oil importers growth was only 2 percent in 2011, even after the exclusion of data from Syria. Looking forward the baseline forecast is for growth of 4.25 percent in 2012 and 3.75 percent in 2013. Among the oil importing nations, strong oil prices, anemic tourism associated with social unrest, and lower trade and remittance flows reflecting ongoing problems in Europe are the major challenges that lay ahead. The IMF identifies the reorientation of fiscal policies toward poverty reduction and the promotion of productive investment as a key medium-term fiscal policy objective.

Less tourists spending more money

The number of tourists coming to Lebanon in the first quarter of 2012 decreased nearly 8 percent on the same period in 2011. However, despite the fact the number of visitors to Lebanon fell, the amount of money they spent actually increased. According to Global Blue, the VAT refund operator for international shoppers, total tourist spending increased by 36 percent in the first three months of 2012 compared to the same period in 2011. The rise in spending by visitors was in a large part due to the fact that there had been a severe contraction in tourism in 2011, especially in the first half of the year. In early 2012 visitors from the Gulf flashed the most cash, with guests from Saudi Arabia accounting for 22 percent of total tourist spending in January.

Fueling the future

Starting in 2015, Lebanon looks set to turn to Liquid Natural Gas (LNG) to meet its growing energy demand. In early April, The Ministry of Energy and Water, launched a call for expressions of interest to build, own and operate a floating storage and regasification unit (FSRU), which is recommended to be at least 125,000 cubic meters (m³) in size with a regasification capacity of up to 3.5 million tons per annum (mtpa), according to the tender document. The deadline for companies’ proposals, which can be used for a new FSRU, existing FSRU or a vessel conversion, is June 4. Lebanon already has two combined cycle gas turbines (CCGT), but according to the MoEW the country also plans to increase the number of gas-fired power plants, which will gradually lift its LNG requirement from 1.2 mtpa in 2015 to 1.7mtpa in 2016, and up to 3.5mtpa by 2022. The FSRU will be located in the north of the country near the majority of its current and planned CCGT capacity and it is slated to operate on a tolling structure, whereby MoEW would pay a fixed monthly capacity fee to the FSRU owner, and then a monthly throughput fee for operating costs incurred for actual usage.

May 6, 2012 0 comments

Editorial

Parliament’s reckoning

by Yasser Akkaoui May 6, 2012

written by Yasser Akkaoui

Given the opaque functioning of the Lebanese state, it is good that sessions of the Parliament are open for the public to see. Unfortunately, they are akin to vultures tearing apart a carcass. In some 62 speeches and 28 hours of debate that took place over the three-day session last month, there were screams and accusations, name-calling and finger pointing, with hardly an allusion to progressive public policy.

In utopia, parliamentarians represent their constituents’ demands before the convention of government, which then attempts to fulfill these demands within resource constraints. In Lebanon, the Parliament is utterly detached from the lives of the Lebanese, its members asserting the interests of their sectarian overlords and the public purse fought over for plunder.

For years now Lebanon’s enterprising and entrepreneurial private sector has been surrogate mother to a people abandoned by the state, spurring new business and generating new wealth and employment. But even the private sector can only slow Lebanon’s current slide. Among many other issues, Beirut has become expensive well beyond the means of most of its residents.

Paying “old rent” has allowed hundreds of thousands of Lebanese to scrape by and afford their other costs of living, but it has effectively been a subsidy the private sector pays in place of government policy to address public housing needs. This warped rental market has led to dangerously dilapidated buildings, the decay of heritage structures and stunted economic development. A draft rental law that has resurfaced after lying dormant for years would phase out old rents, but its vagaries on public housing mean it will almost certainly fail to help people afford homes.

In utopia, parliamentarians would engage in earnest debate and develop legislation that would leave a lasting legacy. In Lebanon, pursuing policy development seems far from parliamentary minds, but at least they let us know.

Their reckoning may be nigh, however, with increasing public protests in the country showing a gathering rage that may soon force accountability upon those who were elected to serve the public good.

May 6, 2012 0 comments

Economics & Policy

Failing the Arab people

by Zak Brophy May 3, 2012

written by Zak Brophy

Arab states have failed to successfully translate their material wealth into human welfare, according to a new study by the United Nations (UN). Were it a school report card it may well have read: “Has great potential, but must try harder.”

Taking 1970 as the base year, the Arab Development Challenges Report 2011 found that the Arab region made some considerable gains in human development throughout the 1970s and 1980s. This was due both to the very low starting point and the large investment in social services undertaken by most Arab governments. However, the rate of progress on human development has slowed considerably since 1990.

While the usual culprits of poor governance and ineffective accountability frameworks receive their share of the blame, the report also lays bare structural defects and policy blunders that have contributed to the reality that “the region has patently failed to transform its wealth into a commensurate improvement in human welfare.”

Poverty is an important indicator in assessing human development and, at least on the surface, the Arab region has managed respectably. On the human poverty index — the UN's measure of living standards in a country — the Arab region as a whole improved 24 percent in the decade between 1997 and 2007, while, perhaps unsurprisingly, Gulf Cooperation Council countries registered a 45 percent improvement over the same period.

However, measuring poverty is notoriously complex and initial impressions can be deceptive. In 2009, 36 percent of the population across all Arab states were living on between the $1.25 per day and $2.75 per day. The implication of this is that any small shock to disposable income levels or income distribution could have a massive impact on more than a third of the region. This precarious existence for such a large proportion of the Arab world means, while the Middle East and North Africa has so far remained relatively unscathed by the global financial crisis it, “may suffer more than any other region if growth falters,” the report stated.

Afloat on oil, if nothing else

A structural weakness within the economies of the Arab region is that their vitality is dependent on the vagaries of the oil markets. Following peak oil prices in 1980, average real gross domestic product per capita in the MENA hobbled along at 0.1 percent. Conversely, the uptrend in oil prices since the early 1990s has resulted in relatively high and stable average GDP growth per capita of 2.4 percent.

The report outlined, however, how oil dependent growth has retarded the structural transformation processes that normally occurs during sustained increases in per capita real GDP. It may be a cliché to say oil is both a blessing and a curse, but it still rings true, for while black gold may have bought exorbitant wealth to some Arab states and driven growth numbers across the whole region, it has also propagated a service led path of economic development at the expense of the productive sectors, such as agriculture and manufacturing.

Today, the Arab world is now the least industrialized among the developing regions, including sub-Saharan Africa, increasingly becoming import orientated and service based. What is more, the UN says the nature of most services found in Arab countries are at the lower end of the value chain, such as travel and transport, whereas services that use and advance the knowledge base of the societies, such as communications and financial services have, for the most part, made little progress.

Structurally retarded

Trade is pivotal to the economies of the Arab region and the meager developments realized in industry, along with the relatively low quality but high quantity of services emerging from its economies, has resulted in a somewhat primitive export structure compared to a relatively diversified import structure. The UN report concludes that the very slow rate of increase in high value-added exports is, “a reflection of the structural retardation of the region.”

Considering that, according to data from the World Bank and United Nations Statistics Divison, trade accounted for 84 percent of the Arab world’s GDP in the 2000s, this is a cause for concern. The study goes further in stating that for much of the region, “the transition to indiscriminate premature liberalization at a time of low productivity levels has rendered manufacturing uncompetitive and exports concentrated in primitive products and natural resources.”

Lining up for work

The tumultuous upheavals across the Arab world this past year and a half have cast an unforgiving light on the lack of opportunity for huge swathes of the region’s youth. This is in a large measure due to an unhappy confluence of economics and demographics: the Arab world is at a relatively early stage of its demographic transition, meaning it can expect a sustained increase in its working age population.

Although Arab countries managed impressive average annual growth in employment between 1991 and 2009 of 3.3 percent, the region still maintains one of the highest unemployment rates in the world. The burden is highest among the youth, with data from the International Labor Organization and the UN indicating rough a quarter of all Arab youth were out of work between 2005 to 2011, more than double the world average of 11.9 percent.

The distortion of the Arab economies away from the productive sectors results in a failure to stimulate “job creating” growth, the report states. Moreover, the education system and vocational training available are creating a divergence between educational outcomes and market demand.

The UN report put the price tag on the investment needed for the MENA (excluding the GCC) to reach “full and productive employment” by 2030 at an ominous $4.4 trillion (in 2005 constant prices). This entails an average annual investment bill of $220 billion for the region outside the GCC, or roughly half these countries' collective GDP in 2009. This is in contrast to their actual average investment-to-GDP ratio of 27.8 percent for 2004 to 2009.

Finding new revenue

According to the report Arab states have “fiscal space” to contribute to the necessary “employment centered transformation” and certain policy choices can increase the margin for stimulus. However, Jordan, Egypt and Lebanon are singled out as having to “urgently address the budgetary burden of their subsidies and interest payments in order to free up meaningful fiscal space for needed capital investments.”

The UN also suggested that the Arab world could benefit from considerable tax revenue expansion. Comparing the Arab world with Latin America, the Caribbean and South East Asia, the UN concluded that the taxes to per capital income were still much lower on average. The argument follows that the Arab states could undertake fiscal reform to increase tax revenues to facilitate “positive structural transformation and at the same time reduce distortions inherent to excessive dependence on non-tax revenues.” Of course, with higher taxes would come greater implicit obligations to the public, something policy makers may be weary of in a region that has shown itself ripe for unrest.

The massive task at hand

While a failing of the study is that it does not factor in the huge upheavals that have shaken the economic, social and political strata of the Arab world over the past year and a half, its findings help give insight into the economic dysfunctions and societal malaise that precipitated the uprisings. What it does most, however, is illustrate the magnitude of the task ahead that cannot be met without serious, and long overdue, structural reforms.

May 3, 2012 0 comments