Society

Snap, crackle and pop-ups

by Ellen Hardy
written by Ellen Hardy

Life is tough for Lebanese designers. Despite unreliable spending and tourist numbers in a contracting economy, retail rents per square meter per year range from $400-$2,000 in malls, and are totally unregulated elsewhere. Multi-brand stores are reluctant to support local names, and even established retailers rely on holiday seasons to boost slack sales. This makes setting up shop a daunting prospect for small local businesses that need to boost their brand presence and client bases while running on minimal staff and overheads.

Some brands are therefore operating ‘limited edition’ or seasonal stores, which are as blink-and-you’ll-miss-them as Lebanese profit margins themselves. They are inspired by the trend in America and Europe for ‘pop-up shops’, which in some cities have become ubiquitous in their popularity. Opening sometimes for days or even hours, these stores offer unique products and experiences, from Hermès pitching its scarves and swimwear to summer crowds in the Hamptons, to ‘Alcoholic Architecture’ by Bombas & Parr, which filled a venue in London with vaporized gin and tonic. Brands love the marketing buzz and sales hike — qualities that are exceptionably valuable to Lebanese designers struggling for a foothold.

Temporal retail

“It’s not that sales increase twofold during the holiday period like Christmas and August, it’s that they increase seven to eight times,” says Nayla Assaf, whose casual contemporary clothing line En Ville has been selling wholesale to multi-brand stores in Beirut and Amman from a studio in Ain El Mreisseh since early 2010. She convinced Solidere to let her and six other brands take over a line of empty shops in the Souks for six weeks over Christmas and the New Year. 

“At this point in time it did not make sense for me to open a permanent shop,” says Assaf. “So I wanted to tap into that holiday buzz and holiday crowd… by choosing a really prime location with lots of tourists.” Unlike other locations that were overpriced and whose owners were reluctant to draft temporary contracts, Solidere listened to Assaf’s case that “we’re entrepreneurs, we’re Lebanese, those shops are empty… but equally we’re going to bring people. We have our own mailing lists, we have our own contacts.”

For a “symbolic” rent, these retailers could test the location and market, meet new clients and boost sales. Compared to her sales for the same period the previous year, Assaf scored an increase of around 150 percent, offset by incidental expenses like staff, décor, packaging and the DJs and catering that were an essential part of the “buzz”. Two of the pop-ups — jewellery designers Joanna Laura Constantine and Smartiz handbags and accessories — decided to extend their contracts on the site across Valentine’s Day and Mother’s Day. Joanna Laura Constantine, 90 percent of whose customers are in the United States, says that “the potential of the market in the Middle East had low expectations for me until I opened the pop-up store,” which exceeded her predictions “20 times over”. 

Elsewhere, Rouba Mortada’s paper products and homeware brand Choux à la Crème sells in a few local outlets, in Monocle stores worldwide and at Liberty in London, but she is not ready to commit to a Beirut boutique of her own. Instead, she opened her fourth-floor Clemenceau design studio to the public for two weeks in December, selling her standard and Christmas collections with special packaging and snacks on offer. A couple of posters and a Facebook group advertised “for two weeks only” and “limited edition pretty things”, generating 22 percent of her annual turnover. Simply, Mortada says, “it makes more sense and more money for me to sell on my own,” and the use-by date on a retail space can intensify this advantage. “It’s a whole experience,” says luxury brand consultant Marie-Noelle Azar from the agency Whyte Mulberry. “You’re selling them the product that they might not necessarily need but… because they know that in a week you won’t have it, they need to buy it now.” Mortada sees this potential as unexplored by established Lebanese brands: “One of the frustrations about Beirut is that it tends to run in the same circles… so I wouldn’t be surprised by any of the creatives doing a pop-up shop here.”

Seductive synergies 

For Nour Sabbagh and Nur Kaoukji, their ‘Beirut Loves’ pop-up experience is an end in itself rather than a test run or a boost to an existing brand, opening for 15 days a year and focusing on products from a different country each time, starting in 2011 with ‘Beirut Loves Jaipur’. 

“We both knew that we wanted something ephemeral, something that was a store and an event mixed into one,” says Kaoukji. “We imagine the store to be a kind of suitcase, something exciting we bring back from our travels.” They, too, scored a deal on a Downtown location. “People were initially surprised that we were only going to be present for 15 days, but that factor pulled them back. We received a lot of client’s details who were keen to be notified about our next pop-up.” For them, consumers are in a mood to be seduced by such projects. “One can sense their longing for this personal connection and we believe that this is going to affect businesses in the long run, the trend of the ‘one off’ or the handmade is growing stronger.”

Azar sees the pop-up trend in Beirut as an underdeveloped tool that, done properly, can bring together the best in online media, marketing and creative sales. “In terms of maturity… it’s still who you know that’s going to come and who you know that’s going to buy, it’s not commercial,” she says. “When pop-up stores started in Europe and the US they started in the main street where they know that they have traffic and they know that if they get the right product to this traffic they’re going to sell — you don’t have that here.” In an environment that lacks syndication, low-cost retail space or a healthy market for carefully crafted, locally branded goods, entrepreneurial artisans have always relied on exhibitions and exhibits to spread the word about their work; pop-up stores work on the same principle but with significantly more business benefits.

And when the store itself is the must-have limited-edition accessory, the possibilities are endless. Sara Darwiche at Chouchic.com, an invitation-only online boutique for the Middle East that deals in luxury labels, describes her marketing strategy as “a continuous virtual pop up store for a variety of high-end brands and trend setting styles [and] themes with a twist”.  

Daily sales at noon are driven by membership and email alerts that cause “a daily flood of transactional traffic,” she says, for a “business model based on scarcity, selection and urgency,” where “hundreds of thousands of shoppers compete online for the limited inventory… we expect the majority of the ‘hot’ items to be sold within the first 10 minutes, with the bulk of sales occurring within the first 90 minutes.” 

Attempting this sort of daily rush in the physical world, Hania Yaffawi from local multi-brand store Depeche Mode opened concept store 6:05 Downtown in January. Rather than spending money on traditional marketing, the store relies on the media and buzz generated by a daily cocktail hour with a DJ and weekly events with artists and musicians. If every day offers a unique or unusual experience, the theory goes, the clientele will be more diverse.

Big players in the industry are also waking up to the benefits of limited-edition, unusual events to hook customers. Retail rents at ABC Dbayeh might run at an estimated $1,000-$1,200 per square meter per year, but 205 square meters have been dedicated rent-free to temporary stalls for Lebanese designers for three months of 2012. The designers promote their wares in a new forum, and ABC benefits from corporate social responsibility brownie points, plus a percentage of the sales and publicity. As Azar says, it is a “win-win situation.”

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Society

Colored by uprising

by Executive Contributor
written by Executive Contributor

As headlines are dominated by the Syrian political crisis, new exhibitions in Damascus have drawn to a halt. But the city’s art gallery doors are still open. 

The conflict seems unlikely to deter the Syrian contemporary art boom that has lit up the market over the last five years. In 2007, a major work by Safwan Dahoul, a leading and much coveted Syrian painter, sold for $10,000. Today it reaches $150,000. The post-9/11 appetite for Arab culture may have played its part; as titles on Islam and the Middle East flew off the virtual shelves of amazon.com, art from the Middle East also experienced unprecedented international attention. 

Compared to artists from Lebanon, Morocco and Egypt, who were already relatively exposed to global galleries and collectors, Syria revealed itself to be an oil well of untapped talent, paint being the asset. Artwork prices soared, contemporary art galleries mushroomed and reports such as “Syrian Art Sizzles” (Time Magazine, Sept 2008) and “Damascus Evolves Into a Hub of Mideast Art” (New York Times, Nov 2010) saluted the awakening. 

“The talent hiding over the last five or six years was the surprise factor, the shock factor, that made them globally interesting,” says Khaled Samawi, the owner of Ayyam Gallery, a blockbuster art enterprise with a roster of some of the most highly-valued Arab artists — the majority from Syria — and a triad of exhibition spaces in Damascus, Beirut and Dubai. “When we first opened in 2006 to 2007, in Damascus, it was absolute golden years. I’d say once a week a private jet would land from the Gulf or somewhere, who had come to Damascus just to visit Ayyam.” Samawi, a former hedge fund manager, has spearheaded the rise of Syrian contemporary art, with a smaller cluster of galleries, such as Damascus’ Tajalliyat Art Gallery, and auction houses Christie’s and Sotheby’s following suit.  Most of Ayyam’s artists, such as Asaad Arabi and Oussama Diab, have seen their paintings rocket in value five to 10-fold, thanks to Ayyam’s polished and well-publicized exhibitions, record-breaking auctions and young artist competitions. By providing their artists financial stability and access to an international hit list of collectors, the market has grown so much that Edge Capital, a venture capital and private equity holding company, is now choosing to invest in Ayyam’s expansion. New galleries in London and New York will open in the next two to three years, a major triumph for Middle Eastern art. Samawi sees it as a “vote of confidence”, both for the artists and collectors, giving “the scoop” to Executive before the official press announcement. 

Fearless expression

The investment strikes at the right time. The political uncertainty embroiling Syria is inspiring a new drive in contemporary art: angry, poignant and provocative. “They’re painting the best art they’ve ever produced. It’s painful, humanitarian art,” Samawi describes it. 

“For years people have been living under fear, and now the fear is gone. Now artists can express themselves. There are no more taboos. They can talk about the president, the power, the party,” says Ammar Abd Rabbo, a Paris-based Syrian photojournalist who exhibited “Coming Soon”, a series of portraits of pregnant women, in Beirut last February. He believes there is a new, powerful generation of young Syrian artists in the making, “born from the crisis and revolution.” 

Some art has already left Damascus’ citadel. “In Army We Trust”, a radical set of paintings by Thaier Helal, sold positively at Ayyam’s Dubai gallery earlier this year, despite its provocative title. Established artists Mohannad Orabi, Mouteea Murad, Kais Saman and Omran Younes have abandoned their solitary ateliers and transformed the empty Damascus gallery — which stopped hosting new exhibitions four months ago — into a remarkable shared workspace. The ferocious art being produced, both in quantity and subject matter, is broadcasted on a live feed from Ayyam’s website. “It’s probably the busiest the gallery has ever been,” says Samawi, who has offered the space as a cultural refuge to citizens surrounded by violence.

“We started the workshop to see this situation in a different way. There is a huge power inside us, and we have to make these ideas and feelings visual,” says young Damascus-born painter Mohannad Orabi, whose work is becoming “more realistic, more emotional.” The eerie, blackened eyes of his human figures are unmistakable, but Orabi now paints them “open.” “Now,” he says, “you can see the detail inside and the sparkle. This sparkle is a kind of hope.”

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Society

Banquet on the bay

by Ellen Hardy
written by Ellen Hardy

Even by the standards of a city where you can dine at the tables of multi-Michelin-starred chefs one night (Yazhou, S.T.A.Y.) and be seen eating out at global trendsetters the next (Momo at the Souks, Gaucho), Zaitunay Bay is piquing interest. Pitching as it does a complex of 17 new restaurants, five retail outlets and a public promenade into the heart of the commercial district at a cost of $160 million, the brainchild of Beirut Waterfront Development (BWD) is a bold attempt to recreate the area’s pre-war sense of glamour and community. But what is it like for the local businesses whose hopes are riding on the project’s success? 

Two concepts, Cro Magnon Steakhouse & Bar and St Elmo’s Seaside Brasserie, are the work of one set of five Lebanese investors, and for them, the location sealed the deal. Though rental prices in Hamra and Ashrafieh may have been anywhere from 10 to 20 per cent cheaper, “We wouldn’t have come on board if it wasn’t Zaitunay Bay,” says one of the investors, Mazen Fakhoury. Employing some 100 people between the two restaurants, Cro Magnon is a high-end, glamorous steak house, and St Elmo’s a more casual brasserie with a slew of theme nights. Putting together the $4.5 million initial investment required a special chemistry between the five shareholders, who came together through casual meetings and are mostly newcomers to the hospitality industry. Operations manager Joey Ghazal is the most experienced restaurateur of the group, with over 14 years in the restaurant industry in Montreal and London. He is joined by engineering and financial investment services CEO Houssam Batal, nightclub public relations and communications veteran Ramzi Traboulsi, oil and gas expert Mazen Fakhoury and finance professional Rami Batal. 

Ghazal and Traboulsi first met with the BWD in February 2010, when they proposed a casual seaside brasserie. Learning that the landlord was also insisting on having a steakhouse in the project, they ended up signing the leases for two restaurants in December. “There are a lot of back office and operational expenses that you incur,” explains Ghazal, “and it’s obviously better to take those on over two profit centers.” On this day February, as the five settled into their distressed leather armchairs at Cro Magnon to sample their own menu of prime steaks and seafood, single malts and cigars, more than a desire to make a quick, high return on their investments ties them together. “You have to feel that there’s a measure of trust, a foundation of business understanding,” says Ghazal. All the investors contribute their business wherewithal; Rami Batal, for example, already has accounting and finance infrastructure in place for his other companies, so can manage the back office, while Traboulsi contributes PR expertise. “They’re their own number one clients,” winks Traboulsi. Established businessmen with a taste for the finer things in life, they came on board for the chance to bring a type of restaurant to Lebanon that they’ve admired abroad. “We are people who travel a lot and… appreciate the best class restaurants in the world,” says Houssam Batal. As such, he explains, they are long-term investors, not out to make a quick buck. They “hope to be able to pay back our investment in three years… you expect to double your money at least within the first five years maybe.”

Working with Zaitunay Bay ensured that there would be no competing concepts on the site; the most intense negotiations were over the specific concept briefs. After that, says Ghazal, apart from external design issues, the BWD was surprisingly hands-off — though citing problems with ventilation and delivery access, he notes wryly that the complex overall “could have been designed by someone who has some knowledge of the restaurant industry. It wasn’t.” Other niggles of opening a restaurant in Beirut — such as a lack of qualified staff and the terrible truism that political uncertainty hangs over everything — are a standard part of the deal. Just two months into operation, it is too early for Zaitunay Bay to release meaningful footfall and revenue figures, but Ghazal will say that “the landlord assured us they were going to do everything in their power to ensure a certain amount of footfall per week or per day, and the project has kept its promise.”  

Like most restaurant businesses, the shareholders are open to including other investors and franchising the concepts to other territories in the future. As Zaitunay Bay looks ahead to spring, its many partners will be hoping to see their investments flourish. “It’s a high risk, high reward country,” concludes Houssam Batal, and one that is unlikely to lose its appetite.

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Society

A crown for the wrist

by Michael Karam
written by Michael Karam

Ask anyone on the street what he or she thinks the world’s most luxurious watch brand is, and they will probably say Rolex. They’d be wrong. But perception is everything, and the timepiece that is regarded as the sign that you have made it — a person to be reckoned with, a person imbued with a hint of rugged glamour — is indeed a Rolex. There are more accurate watches, more expensive brands and more prestigious brands, but Rolex has captured our imagination like no other.

Don’t get me wrong. There is no sleight of hand here. They are not, in luxury watch terms at least, overpriced (unlike some brands I could name). They are supremely well made and they will last forever. I should know; I have a steel Rolex Oyster Perpetual Datejust made in 1963. It still keeps immaculate time and has been serviced a maximum of four times in its life. It also looks almost identical to the current model — the only difference is an extra 2mm in the diameter, a sapphire glass and a quick date changer. So in a global luxury watch market that has gone bonkers in the last 20 years, Rolex has both pedigree and consistency.

The company was founded in London in 1905 by Hans Wilsdorf and Alfred Davis and moved to Switzerland in 1919 after the First World War. By 2003, Rolex was earning revenues of $3 billion annually, according to Stern Business, with BusinessWeek ranking it the 71st most valuable brand in the world in 2007. Like Patek Philippe, arguably the most prestigious watch brand in the world — and unlike other luxury brands such as Vacheron Constantine and Jaeger Le Coultre, both of whom are owned by the Richemont Group — Rolex is still a private company, a factor that arguably adds to its aura of distinction.

So what is it about Rolex’s enduring appeal? Luxury aside (Rolex caters to all tastes, even producing some eccentric designs for those who like a bit of diamond-encrusted bling), I would wager it is the fact that no other watch has as much history, glamour, sex appeal and adventure, allied to reliability and looks, wrapped up in one brand. 

 Take the Rolex Submariner, the iconic diving watch that was worn by Sean Connery’s Bond on a fabric NATO strap — to lady-killing effect — or the Explorer, the equally famous black-faced chronometer. You aren’t just buying a watch, you are buying into the very fabric of 20th century achievement. Omega is the only watch brand that comes close to matching this heritage (its Speedmaster was famously worn on the moon) but Rolex, with its functional designs and almost onomatopoeic name, has captured more of the public’s imagination, allying itself with sports stars, musicians and scientific pioneers the world over. Not surprisingly, Rolexes are among the few brands with a strong resale value, especially for the iconic Daytona Cosmograph with its famous Zenith “El Primero” movement, and the other professional models. 

 But at the end of the day, it’s all about owning the item that you love. And as my wife found out, Rolex watches are very desirable. She does not share my obsession with watches, but over the years has faithfully tramped round showrooms or stood patiently as I peered in shop windows like an excited schoolboy. For her a watch is a watch. It tells the time. Who cares if it’s manual, automatic or quartz, or if it’s a 36mm or a 45mm? But on New Year’s Eve, while I tried on a new Explorer II (now 42mm and with an orange 24 hour hand, if you must know) in the Rolex showroom in Beirut, she pointed to an Air King in brushed steel with subtle blue numeral batons on an off-white face. “I like that a LOT,” she said. It was the first time she had ever really expressed a genuine interest in a watch. What could I do?

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Economics & PolicyEnergy Wars

The most dire of straits

by Paul Cochrane
written by Paul Cochrane

The prospect of a war against Iran has been on the cards for decades. Since 2005, innumerable media reports have proclaimed that war is imminent, and this year will be the year it will happen. Think tanks, war strategists, risk consultancies and the various militaries have all compiled papers on how a conflict in the Gulf could play out. The headline of a 2009 article on the website of the United States Army sums it up: “Future Gulf War: Arab and American Forces against Iranian Capabilities.”

What is fundamentally different now is that there has been a sustained covert war by unknown actors against Iranian nuclear facilities and scientists over the past few years — from scientists killed by car bombs on the streets of Tehran to mysterious “accidents” and cyber attacks at nuclear facilities — and that an economic war has essentially been declared through the heightened sanctions by the US and European Union (EU) in recent months. 

Crucially, the oil sanctions, meant to hit Iran where it hurts given its budgetary reliance on hydrocarbons, have removed a major logistical obstacle to conflict, in that the EU, which imports 4 to 5 percent of its oil from Iran — some 600,000 barrels per day (bpd) — will not have to scramble for alternative energy sources in the advent of war; they are already doing so now.

While the sanctions are to go fully into effect by July, countries are already starting to abide by the decision; Britain, Austria, Poland and Portugal, for instance, cut their imports of Iranian crude to zero in the third quarter of 2011. Iran unilaterally halted exports to France and Britain last month and most international oil companies, with the exception of Asian firms, have also pulled out of Iran to abide by the new sanctions. 

The US has not imported Iranian oil since the overthrow of the Shah in 1979, and its reliance on Middle Eastern oil is the lowest it has been in decades. From 2005 to 2011, the US’ overall oil imports have fallen from 60.3 percent of consumption to 47 percent, while from the Persian Gulf it has dropped by 26.7 percent to 18 percent of total imports by 2011, according to the US’ Energy Information Administration (EIA) figures.

But with the 30km-wide Strait of Hormuz the conduit for more than 20 percent of the world’s oil and 40 percent of traded oil on the markets, it is essential to the global economy that this oil keeps flowing. With almost 17 million bpd passing through the passage in 2011, the Iranians’ threat to block the Strait is taken very seriously. As oil expert Daniel Yergin notes in “The Quest”, his recent bestselling book: “the Strait is the number one choke point for global oil supplies.”

It has been a long-term goal of the US to ensure the Strait remains open, spending an estimated $6.8 trillion (including baseline costs such as training, pensions, long-term debt repayments and military base usage globally connected to the Gulf) between 1976 and 2008 projecting military force in the Persian Gulf, according to research by Princeton’s Energy Policy department, averaging $492 billion annually between 2003 and 2008.

The US imported 663.2 million barrels from Saudi Arabia, Iraq and Kuwait in 2011. Through a rough calculation for 2011 using the five year annual average calculated above — $492 billion divided by 663.2 million barrels per year (b/y) — the US is paying $742 per barrel to ensure that this oil reaches its shores. When taking into consideration the 6.2 billion b/y that passes through the Strait annually, it is costing the “the world’s policeman” $79 a barrel to keep itself and everyone else in Gulf oil. 

The US Department of Defense’s January paper “Sustaining US Global Leadership: Priorities for 21st Century Defense” states, “US policy will emphasize Gulf security, in collaboration with Gulf Cooperation Council countries when appropriate, to prevent Iran’s development of a nuclear weapon capability and counter its destabilizing policies. The United States will do this while standing up for Israel’s security and a comprehensive Middle East peace.” The recent build up of naval activity can therefore be interpreted as the US reasserting its military dominance over the Gulf. But with the oil supplies for the main cheerleaders for confronting Iran — the US, EU and Israel —  largely cushioned  to any disruptions in the Strait (not least due to massive stockpiles in the US and EU), this has, more than ever, helped pave the way for the possibility of war.

Starving Asia

For Asian countries the situation is far more serious. Three-quarters of the Gulf’s oil exports are destined for the East; the closure of the Strait or a Gulf conflict would effectively starve Asia of energy, which would have serious economic ramifications regionally and globally. How to placate China, Japan, South Korea and India has therefore been a stumbling block in the West’s strategy to isolate Iran. Yet there is more at stake than energy imports. Russia and China were among the nine nations (out of 35) that voted against the International Atomic Energy Agency’s (IAEA) Iran file in November which said the Islamic Republic had carried out activities “relevant to” acquiring a nuclear weapon. While Iranian and Gulf energy supplies were a likely factor behind China’s “no”, Beijing is officially opposed to nuclear proliferation and has adopted a “studied neutrality” on Iran.  China is concerned with US encroachment in what it perceives as its own back yard, according to Kerry Brown, head of the Asia Programme at the Chatham House in London. He adds that there is a deep conviction in China that American policy in the Gulf aims to keep Chinese interests at bay, causing the country to feel increasingly contained. Furthermore, by controlling the Gulf, the US is able to use energy as a bargaining chip with China and other Asian countries. 

“Asian demand is rising exponentially; the US having oversight of the Persian Gulf means an inside track when it comes to the Asian powers, and a prize the US is not going to give up like Britain following the 1958 Suez Crisis; the US has learned its lessons,” said Professor Anoush Ehteshami, head of the School of Government and International Affairs at Durham University in England. “Indicative is the US is buying less oil from Saudi Arabia than in the past 20 to 30 years but the relationship is stronger than ever.” 

Annoying the neighbors

The formidable Russian bear has been vexed and unsettled by some US regional strategies, facing encroachment in Eastern Europe from NATO’s planned deployment of a missile defense system, and in Central Asia from the large US military presence in Afghanistan. While Russia does not rely on Gulf oil and would stand to gain from rising oil prices upon the closure of the Straits, regime change in Tehran would equal the loss of a geo-strategic and non-aligned partner, and open the way for Russia to be circumvented as an energy corridor to the Caspian Sea and Central Asia, home to 48 billion barrels of oil and 449 trillion cubic feet of natural gas, according to statistics from BP. 

Such a scenario would likely raise the hackles of Moscow and Beijing alike. Their grievances would only be compounded by their strategic setbacks in Libya where they curried particular favor with the former Gaddafi regime, and the current risk, especially to Moscow, of the fall of Bashar al Assad. Already the Russians have lost $4.5 billion in weapons contracts in Libya, according to the Moscow-based Center for Analysis of World Arms Trade (CAWAT), while $18.8 billion worth of contracts with Chinese companies are now in jeopardy, according to official Chinese statistics. Furthermore, the Russians could have already lost $13 billion from the effect of a United Nations arms embargo on Iran according to CAWAT, and face billions in losses from cancelled weapons contracts with Syria where it has already invested more than $20 billion in the infrastructure, energy and tourism sectors, according to the global analysis and advisory firm Oxford Analytica. That’s enough to make any bear irate enough to start a fight, and arguably the main reason why there is a lot more at stake than just the flow of oil out of the Gulf being interrupted.

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Comment

Assessing the damage

by Executive Staff
written by Executive Staff

 

The annual meetings of the International Monetary Fund and World Bank offer a relatively informal atmosphere for finance ministers, central bank governors and private sector executives to discuss the previous year and set a direction for the next. In Istanbul last month, the meetings reviewed a year of economic turmoil and vast change in government policies. Representatives from the Middle East recalled that the 2008 annual meetings in Washington occurred in a week when crude oil prices dropped 17 percent, the United Arab Emirates federal government guaranteed bank deposits and intra-bank lending and the Saudi stock exchange dropped to their lowest level in four years.

This year’s affair was far calmer. The broad consensus in Istanbul was that the worst was over and that the Middle East had survived the global crisis better than most of the world. Lebanon and Saudi Arabia were praised by many, including Mohsin Khan, the former regional IMF chief, for their conservative banking policies. “Both countries didn’t allow their banks to hold structured products, and this was a very smart move,” he told me. But whatever the successes they may claim for the past year, representatives in Istanbul acknowledged that major challenges remain, especially over unemployment and poverty.

The region already has relatively high jobless figures. The World Bank projects unemployment will rise by 25 percent in 2009 and 2010 in the Middle East and by 13 percent in North Africa, despite regional growth second only to Asia.

“The message, globally, is that, yes, there are signs of recovery, but it [the situation] hasn’t settled deeply,” said Shamshad Akhtar, the World Bank vice-president for the Middle East and North Africa (MENA). “We already had 20 million people unemployed [in MENA], and we have new entrants to the labor force [due to high population growth], so we have a problem.” The IMF’s Regional Economic Outlook, launched in Dubai on October 11, projects regional growth will fall from 5.4 percent in 2008 to 2 percent in 2009, before rebounding to 4.2 percent in 2010. A particular danger is that a disproportionate number of people, especially in Egypt and Morocco, live just above the $2-per-day income threshold for poverty, meaning the region cannot afford complacency over joblessness. This has been the major factor behind the World Bank’s increased lending in MENA from $1.8 billion in 2008 and 2009 to over $3 billion in 2009 to 2010. “Demand is steep,” said Akhtar. “Our clients need [to finance] reforms – and not just at the macro-level. Countries want to strengthen their financial structures, they want more microfinance. They want affordable mortgages and pension reform. They want to restructure social safety nets.”

The World Bank’s 2009: Economic Developments and Prospects, launched in Istanbul, drew attention to the opportunity presented by the economic crisis for governments to “ease infrastructure bottlenecks and restructure ineffective — yet expensive — subsidies programs.”

Iran is the clearest case, with around 30 percent of GDP going into subsidies. Egypt’s food and energy subsidies are around 30 percent of government spending and 10 percent of GDP, while in Morocco 90 percent of subsidies go to groups other than the poor.

At the macro-management level, the annual meetings generally endorsed the region’s approach to the economic crisis, although there was also a clear sense that governments had much left to assess in their performance.

The region’s monetary reaction to the crisis was “unprecedented,” especially in guarantees to banks, explained Khan, now senior fellow at the Peterson Institute for International Economics in Washington. “Back in 2007, there was a lot of worry about the inflation rate. There was talk of reining in monetary expansion, the revaluation of exchange rates…that has changed.”

Governments, much like in developed countries, have lowered interest rates as inflationary pressures have eased. Although inflation is considered a danger in Egypt — where the IMF projects a rise to 16.2 percent in 2009 from 11.7 percent in 2008 — representatives at Istanbul agreed it would not become a regional issue in the near future. Their greater fear is that the global economic recovery could falter and depress the price of oil.

In the Gulf Cooperation Council, fiscal policies — especially with the vast reserves of Abu Dhabi and Saudi Arabia — have been at the forefront of the response to the downturn. But many in Istanbul pointed out that fiscal stimuli have been less innovative than monetary changes, as several state infrastructure projects in the Gulf are already in the pipeline.

The shadow of politics, as ever, loomed over discussion at the annual meetings of the regional outlook. Both Saudi Arabia and the UAE moved quickly to squash a poorly-sourced story in The Independent that secret meetings were underway to abandon the dollar as the currency in which oil contracts are made.

But their anger at the report reflected a sense that the region can ill afford any further disruption — and that any serious sharpening of tensions, especially over Iran, could quickly upset a mood of cautious optimism.

GARETH SMYTH has reported from the Middle East since 1992, mainly for The Financial Times

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Banking & Finance

Financial quotes of the month

by Executive Editors
written by Executive Editors

“Looking at the present situation in the Eurozone area one has to be more optimistic than one would have been six or seven months ago.”

Mario Draghi, European Central Bank president

“There will be no more ‘Kodak moments’ — after 133 years, the company has run its course.”

Don Strickland, a former Kodak vice-president

“Our wish and hope is [that] we can stabilize this oil price and keep it at a level around $100.”

Ali al-Naimi, Saudi Arabia’s oil minister

 “We want to be number one.”

Sheikh Mohammed bin Rashid al-Maktoum, ruler of Dubai and prime minister of the UAE

“This battlefield is not limited by borders; it is fought behind the scenes. You can’t see it and blood isn’t spilled, but there is a battle in new and developing worlds.”

Dan Meridor, Israel’s minister of intelligence and atomic energy, following the hacking of the websites of the Tel Aviv Stock Exchange and El Al airline

“We expect to increase revenues from the region this year… There are very few places in the world today [where] I can … [readily] write a big cheque and this is one of them.”

John Vitalo, Barclays’ chief executive officer for the MENA region

“Right now, the US Congress is considering legislation that could fatally damage the free and open Internet.”

Warning on Wikipedia’s home page on January 18 when it shut down the site to protest proposed piracy bills in the United States

“If the content industry would like to take advantage of our popularity, we are happy to enter into a dialogue. We have some good ideas.”

On Megaupload’s homepage, one of the Internet’s largest file sharing sites, after the arrest of seven individuals including founder Kim Schmitz

“We are confident that the privatization of the stock exchange will be of a great benefit to Kuwait’s economy, investors and the listed companies.”

Abdullah al-Gabandi, head of the exchange privatization committee at Kuwait’s Capital Markets Authority

“We will have a partial managed float, allow the rate to be determined by the market and intervene when necessary.”

Adib Mayaleh, governor of Syria’s central bank
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Banking & Finance

For your information

by Executive Editors
written by Executive Editors

RBS closing Middle East M&A arm

Royal Bank of Scotland, majority owned by the government of the United Kingdom, is in talks to sell its Middle East merger and acquisition business as part of a global restructuring at the bank. RBS did not give a timeframe for the sale or details on the possible buyers. RBS is currently working on four M&A deals in the Middle East, which include the sale of 50 percent of Saudi Arabia-based Aujan Industries to Coca-Cola for $980 million, and aims to close these deals in 2012. The exit by RBS from the region follows moves by other investment banks such as France’s Credit Agricole, which closed its regional offices for Middle East M&A and relocated the business to Paris. Lloyds Banking group, another UK bank, is in talks to close down its operations in the United Arab Emirates. Several European investment banks struggling to cope with the European sovereign debt crisis are looking to exit non-core businesses such as those in the Gulf region.

Kuwait privatizes bourse

Kuwait has hired British multinational bank HSBC to help with the privatization of its stock exchange, the third largest by market capitalization in the Gulf Cooperation Council, after Saudi Arabia and Qatar. The privatization plan, outlined in the new Capital Markets Authority (CMA) law, calls for an initial public offering of 50 percent of the stock exchange to Kuwaiti citizens and an auction of the remaining 50 percent to listed companies, with a maximum ownership per listed company of 5 percent. Currently the Dubai Financial Market is the only publicly traded exchange in the GCC. The CMA law in Kuwait was established in March 2011, more than 30 years after the formation of the Kuwait Stock Exchange, and it is the first stock market regulator in the country. “This will make Kuwait one of the first countries in the region to privatize its exchange and we are confident that the privatization will be of great benefit to the Kuwaiti economy, investors and the listed companies,” said Abdullah al-Gabandi, head of the exchange privatization committee at the CMA.

News Corp invests in Dubai’s media

News Corp, which is at the center of a phone hacking scandal in the United Kingdom, wants to boost its presence in the Middle East media industry. It is acquiring a minority stake in Dubai-based MOBY Group, the largest media company in Afghanistan and owned by the Mohseni family. Under the terms of the deal, News Corp gives up its 50 percent ownership of Broadcast Middle East, a Farsi-language television company owned by both News Corp and MOBY. In exchange, News Corp receives a minority stake in MOBY. No financial details were provided. News Corp already has a solid presence in Middle East media through its 15 percent stake in Rotana Media Group, majority-owned by Saudi billionaire Prince alWaleed bin Talal.  “Merging our Farsi joint venture into MOBY allows us to expand our activities with what is surely one of the most dynamic and exciting media businesses in emerging markets anywhere,” said James Murdoch, deputy chief operating officer at News Corp.

Knickers in a twist

Kuwaiti retailer Alshaya, one of the largest retail companies in the Middle East, invested in struggling United Kingdom lingerie company La Senza by acquiring 60 of its domestic stores as well as the brand in the UK, from KPMG the administrator of the now bankrupt chain. The remaining 84 stores and 18 concessions were shut down. La Senza was owned by private equity firm Lion Capital, which acquired it in 2006 from Theo Paphitis, famous for his BBC business investment show “Dragons’ Den”. Alshaya, which operates several British retail brands such as Debenhams, Mothercare and Next, intends to invest $156 million in the business. It already works closely with Limited Brands, the United States-based owners of the lingerie brand through franchise agreements for the Victoria’s Secret, Bath & Body Works and La Senza brands. The stores in the Middle East will not face closures as Limited brands confirmed that “our businesses in other territories, including the Middle East, is [sic] not impacted in anyway and it is very much business as usual.”

Qatar goes nutty

Al Rifai International Holding, a Lebanese based manufacturer of nuts, has sold a 15 percent stake at an undisclosed amount to Qatar First Investment Bank (QFIB), a Doha based Islamic investment bank established in 2009. Al Rifai sells nuts, kernels and Middle Eastern delicacies throughout the Middle East and Europe and its sales in 2011 grew by 50 percent. QFIB’s move is its first into the food and beverage industry and it provides the bank with access to new international locations. “From the outset, our strategy was to focus on sectors that benefit from key drivers of economic change,” said Emad Mansour, CEO of QFIB as he expects the fast growing global savory snack market to reach $85.4 billion in 2012.  “The partnership will also allow us access to multiple sources of funding and risk mitigation tools, thus helping our group implement and further develop its growth and improvement plans,” said Mohammad Rifai, CEO of Al Rifai. The holding previously raised $15 million in September 2010 through a private placement led by MedSecurities, a subsidiary of BankMed.

Lebanon’s risky debt

The cost of protecting against default on Lebanon’s debt rose further in 2011 as spreads on the country’s five-year credit default swaps widened by 150 basis points (bps) last year, compared to only 28 bps in 2010, and ended at 447.5 bps according to CMA Datavision, a CDS and bond-pricing firm. The widening of the spreads in 2011 mainly occurred in the first two quarters of 2011 due to the turbulent political situation in Lebanon and revolutions that shook the Arab world. The spread performed better in the fourth quarter relative to the rest of the year as it only widened by 17.8bps. The worst performing countries in this quarter were Greece, with spreads widening by 57 percent, followed by Slovenia at 46 percent, and Egypt at 35 percent.

A binary battle at the bourse

Unidentified pro-Palestinian hackers attacked the websites of the Tel Aviv stock exchange and El Al Israel Airlines, as well as the marketing websites of three banks (First International Bank of Israel and two subsidiary banks, Massad and Otzar Hahayal). Stock trading and flights were unaffected. The hacker group, which goes by the name “Nightmare”, warned of an impending attack the night before the hacking through an email to Ynet, a popular Israeli news website. Ynet reported that the email was sent by OxOman identifying himself as a Saudi hacker who has also exposed the numbers of thousands of Israeli credit cards in recent weeks. In retaliation, Israeli hackers calling themselves IDF team, named after the Israeli Defense Forces, attacked the website of the stock exchanges of Saudi Arabia and Abu Dhabi. Both exchanges, however, denied the claims that their sites had been attacked, with Abu Dhabi blaming the slowdown of its exchange on technical faults. “If the lame attacks from Saudi Arabia will continue, we will move to the next level which will disable these sites longer term,” the IDF-Team wrote. “You have been warned.”

Lebanese dynasties among the region’s billionaires

The  Lebanese Hariri and Hayek families made it to Arabian Business’ list of top Arab 50 billionaires. Saad Hariri, former prime minister of Lebanon, was ranked 28th richest Arab, down one spot from 2010, with an estimated fortune of $3.8 billion, up from $3.7 billion in 2010. His older brother Bahaa is ranked 32nd, up seven places from last year with an estimated wealth of $3.35 billion, up from $3 billion in 2010. His younger brother Ayman also made the list, ranked 36th, up from 44th place in 2010, with an estimated fortune of $3.15 billion, up from $2.4 billion last year. The two other Lebanese on the Arab rich list, Nick and Nayla Hayek, are newcomers to the list and amassed fortunes running Swatch group, the world’s largest manufacturer of watches. They ranked 38th place with a fortune estimated at $3.1 billion.

Kafalat loans down 3 percent in 2011

Kafalat loans, extended by commercial banks to small and medium enterprises and supported by the Lebanese government, decreased by 2.6 percent in 2011 to reach $165 million. The number of loan guarantees amounted to 1,272 in 2011, down from 1,404 in 2010, while the average loan size increased to $129 in 2011 from $120 in 2010. The agriculture sector received the most Kafalat loans as it had 41 percent of the total guarantees. It is followed closely by the industrial sector at 38 percent. Tourism received 17 percent of the total Kafalat loans.

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Economics & Policy

For your information

by Executive Editors
written by Executive Editors

Fishing for phonelines

Lebanon’s telecom sector is set for a tumultuous month as the operating contracts of both mobile network operators Alfa and mtc are set to expire. Last month Prime Minister Najib Mikati confirmed to the press that a decision to renew the management contracts of Alfa, owned by Orascom Telecom, and mtc, owned by the Kuwaiti telecom company Zain, was anything but assured. Speaking at a press conference after meeting with the telecommunications minister, Mikati said that a decision to renew the contracts which were to expire on January 31 had not been taken and that the government was considering three options: renew the contracts with the same companies, adopt contracts with other companies or bring the sector back into the government’s fold. A new tender, however, would take between three and six months, during which time the existing contracts would be renewed, the premier said. Mikati also announced that a $47 million project to increase the number of available landlines by some 7,000 lines would need another two years to be implemented.

Beyond puppy fat

New studies released last month show a worrying trend among the Lebanese who seem to be piling on the pounds as the years progress. Research from a three-year collaborative study conducted by the National Center for Scientific Research, the American University of Beirut, Saint Joseph University and Universite Saint-Esprit de Kaslik, showed that obesity among children and adults has almost doubled over the past 15 years, thus increasing the risk of diseases such as diabetes and cardiovascular disorders, according to researchers. “Research has shown that diet in the first two years of a child’s life sets the stage for chronic diseases and other health problems later on in life,” said Professor Nahla Hwalla, lead researcher and the dean of the Faculty of Agricultural and Food Sciences at AUB. According to the new set of data, which was collected in 2009, one in six children younger than 10 years old are now obese, while only one in 10 children under 10 was obese in 1997.

World Bank and IMF diverge in their gloom

Leading global economic bodies were seen to take a divergent stance on Lebanon’s economic prospects last month when the World Bank posited an estimation of last year’s growth twice that of its sister organization, the International Monetary Fund. According to the World Bank, Lebanon’s gross domestic product should have grown by 3 percent last year, while the IMF maintained a 1.5 percent estimation, a figure also touted by government officials. In the Middle East as a whole, growth in 2011 was weighed down by the effect of the unrest across the region, while higher oil prices buoyed the growth of oil exporting countries, which added $200 billion in revenues on 2010. Flows of foreign direct investment across the region, and mostly in the countries of the Gulf Cooperation Council, were seen to have fallen by nearly 40 percent. Going forward the Bank added that the Middle East and North Africa is “highly exposed to an exacerbation of the European crisis, with strong and broad links through trade, tourism arrivals, migrant remittances, and to a lesser degree, finance.” The net effect of oil was also seen to be one of the factors weighing down growth this year with GDP impacts ranging between -0.8 and -1.2 percent for oil importers and -0.2 and -0.6 percent for oil exporters.

Inflation flummox

Figures released by different economic institutions last month point to a common theme, that prices are still on the rise. But just how much prices have risen continues to be a matter where no consensus can be reached. According to official figures from the Central Administration for Statistics, the Consumer Price Index (CPI), the major indicator of inflation, rose just 3.1 percent over the course of 2011. The main drivers of the rise were prices of food and non-alcoholic beverages, which rose 5.8 percent and constitute one fifth of the weight of the total consumer basket used to compile the index. The only item that saw a fall in prices was transportation, dropping 2.6 percent. Many economists have criticized the government’s figures, which are relative to December 2007 baseline prices. Conversely, the privately owned Consultation and Research Institute which has been monitoring prices since the 1970s, said the CPI had risen 4.6 percent because of a rise in prices in every item except for housing.

Tourist numbers tumble

Figures released by the tourism ministry last month indicate that the country received nearly a quarter less visitors in 2011 than 2010, with 1.7 million and 2.2 million arrivals in those years, respectively. The figure represents the first decline since 2005 and 2006 when the assassination of former Prime Minister Rafiq Hariri and a 34-day war with Israel, respectively, tarnished the industry. Arab visitors constituted 35.1 percent of all those coming to Lebanon while 29.3 percent came from Europe and another 14.8 percent from Asia. The nationalities that visited Lebanon most were Jordanians and Germans, both constituting 7.8 percent of total visitors.

Minimum wage up… finally

After months of political wrangling a decision to raise the minimum wage and salaries across the country was taken by the cabinet. According to two decrees issued by the cabinet, the minimum wage will rise from LL500,000 ($331.67) to LL675,000 ($447.76). Salaries between LL500,000 and LL1 million ($663.34) will receive a salary increase of LL200,000 ($132.67), while wages ranging between LL1 million and LL1.5 million ($995.02) will rise by a maximum of LL250,000 ($166.67). Salaries more than LL1.5 million can rise by up to LL299,000 ($198.34). Pay raises will be dependent on any other rises granted since the last correction of wages in 2008. The move comes after the finance minister reneged on his promise not to approve the measure until a long standing draft law on competition was passed. The labor minister has also refused to sign a third cabinet decree to increase transportation and education allowances because, he claims, it was technically illegal.

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Feature

Syria’s rebel army

by Executive Staff
written by Executive Staff

Outnumbered, outgunned and isolated, the defected soldiers of the ‘Free Syrian Army’ are still managing to hound the forces of Syrian President Bashar al-Assad. From one desperate day to the next, these rebels claim to protect demonstrations and conduct skirmishes on government forces, while living in constant fear for the safety of themselves and their families.

1) Defecting Syrian soldiers gathered under the umbrella of the Free Syrian Army (FSA) are contributing to a growing armed resistance to the regime in Damascus.

2) The rebels live a furtive existence, holed up in abandoned farm houses, hidden away in the Syrian countryside.

3) The body of a demonstrator, freshly killed by security forces in the town of Qusayr, is cleaned by FSA members and sympathetic locals. The FSA have tried to assert their role as armed protection for civilian demonstrators against attacks from government forces.

4&5) Despite reports of a dramatic rise in arms smuggling into Syria, the FSA soldiers outside the village of Qusayr said that most of their weapons were bought from sympathetic soldiers still serving in the regular Syrian army. 

6) A defected security agent tells his story to a journalist in a safe house outside of Homs. So far, defections from the ranks of the security forces have been limited, but this deserter said that if a ‘safe zone’ was arranged, those “without blood on their hands” would flee in droves.

7) An FSA soldier stands guard on a misty night outside a countryside hideout.

8) The next morning, FSA fighters modify a pickup truck in order to mount it with a heavy machine gun, in a similar fashion as those widely used by the rebel fighters in Libya last year. Similar to Libyan rebels, the FSA are calling for a NATO imposed ‘no-fly’ zone.

9) However, with international intervention looking unlikely, the FSA seem set for an uphill struggle as they continue to launch operations from farmyard hideouts such as these.

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