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Banking & Finance

MENA stocks tips

by Executive Editors October 24, 2011
written by Executive Editors

With the European sovereign debt crisis taking center stage last month, the United States economy still in tatters and uprisings continuing in parts of the Middle East, uncertainty prevailed in the markets. Surrounded by such volatility, what is a Middle Eastern investor to do?

For an expert opinion on how to navigate the markets, Executive spoke to Ammar Bakheet, head of asset management at Audi Bank, and Khaled Zeidan, general manager at MedSecurities, a BankMed subsidiary.

The scoop

Bakheet remains very conservative in his approach, as he believes that the market turbulence will persist at least until the end of the year. However, he sees significant opportunities in the current environment and recommends buying high quality, fixed-income instruments rated triple B or better, and big blue chip companies with high dividend yields. Zeidan also favors fixed-income and equities; he believes equities are very cheap and advises to buy defensive names — such as telecommunications and utilities — as they have been beaten down badly along with the growth sectors like technology. Both Bakheet and Zeidan say they would avoid gold. Bakheet believes buying gold now is a gamble, and Zeidan prefers investing in productive assets.

Both Bakheet and Zeidan are optimistic about the investment opportunities they see in the Middle East and North Africa. According to Zeidan, the interesting thing about the region is that it offers solid names with high dividend yields. Saudi Telecom Company (STC), as an example, is one of the largest telecom companies in the region and in emerging markets generally, and has had a consistent dividend yield of 7.5 percent on a currency that is pegged to the US dollar. Zeidan pointed out that this is better than buying a corporate or government bond as the yield is more attractive. His favorite regional countries to invest in are Saudi Arabia and Turkey, as both countries have solid growth, relative political stability and a young population. According to Bakheet, with oil prices still holding high, the region is raking in revenue and many infrastructure projects are being announced. His favorite MENA countries to invest in are Saudi Arabia, the United Arab Emirates and Qatar.

As for long-term stock recommendations, Bakheet suggests buying Mobily, the second mobile telecommunications company in Saudi Arabia. He would also buy Maaden, the largest mining company in Saudi Arabia. Zeidan on the other hand would buy leading Turkish banks due to the fact that their stock prices have been severely beaten down, yet they have great balance sheets and no exposure to Europe. He would also buy into the telecommunications sector in Saudi Arabia, such as Mobily and STC.

October 24, 2011 0 comments
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Banking & Finance

For your information

by Executive Editors October 24, 2011
written by Executive Editors

Gold boosts BDL assets

Total assets at Banque du Liban (BDL), Lebanon’s central bank, rose 6.2 percent in August to reach $72.75 billion, mainly due to an increase in the international price of gold. The value of BDL’s gold reserves increased by 12.5 percent to $16.75 billion, accounting for 44 percent of the rise in total assets. Lebanon plans to keep its gold reserves at around $17 billion as it tries to protect its economy from domestic unrest in neighboring countries, according to BDL Governor Riad Salameh. The central bank’s foreign assets (excluding gold) rose by 5.6 percent in August to $32.14 billion due to an increase in confidence in the Lebanese currency. On the liabilities side, private sector deposits increased 3.7 percent to $48.6 billion, while public sector deposits went up around 7 percent to $6.08 billion.

HSBC axes Lebanon branches and jobs 

HSBC is closing three branches in Lebanon, consolidating its network by half, not including its headquarters. The move is part of an ongoing global effort of the HSBC Group to “improve efficiency”. The bank plans to cut 30,000 jobs by 2013, which amounts to approximately 10 percent of HSBC’s total workforce. As well as the job cuts, HSBC is closing its retail banking operations in Russia and Poland and selling three insurance businesses as part of pre-announced plans to save $2.5 billion to $3.5 billion by 2013. HSBC recently sold 195 retail branches in the United States, primarily in New York, to First Niagara Bank for approximately $1 billion.

Lebanon moves up the global competitiveness ranks

Lebanon is ranked 89th in The World Economic Forum’s global competitiveness report for 2011-2012, up three places year-on-year. Qatar is the most competitive country in the Middle East and ranked number 14 overall, up three places from a year ago, followed by Saudi Arabia (17), which enters the top 20 for the first time and gained four places on the year before. The United Arab Emirates (27) fell two slots. The most competitive country in the world is Switzerland, followed by Singapore, which overtook Sweden for second position. Northern and Western European countries dominate the top 10.

Iran’s banking scam reaches Ahmadinejad

Several Iranian banks have been targeted in one of the biggest frauds in the Islamic republic’s history, losing nearly $2.6 billion over more than two years. The financial scandal involved the forging of documents to secure credit from various financial institutions, including Bank Saderat, one of the largest in the Middle East. The proceeds were then used to purchase state-owned enterprises, such as the Khuzestan Steel Company, as the government implemented its controversial privatization scheme, which began in 2004. Iran’s Minister of Economic Affairs and Finance Shamseddin Hosseini said on September 18 that the chief suspect of the banking scam had been detained but gave no further information. Kayhan, a conservative newspaper under the direct supervision of the Office of the Supreme Leader, identified the suspect as billionaire mogul Amir-Mansour Aria and alleged complicity on the part of President Mahmoud Ahmadinejad’s top ally, chief of staff Esfandiar Rahim Mashaei. Ahmadinejad denies Mashaei’s link to the scandal.

Growth forecast in Syria hit by ongoing unrest

The International Monetary Fund (IMF) cut its growth forecast for some countries in the Middle East and North Africa due to the continuing social unrest in the region and the volatility in the oil price. According to the report, “the outlook is subject to large downside risks”. Lebanon is expected to grow 1.5 percent in 2011 and 3.5 percent in 2012. For oil-exporting economies, the IMF expects a 5 percent growth in 2011 and 4 percent growth in 2012. Qatar will continue to lead the way, followed by Iraq (which has the highest growth forecast in 2012) and Saudi Arabia. For oil importers in the MENA, the forecast is grim, as the IMF expects average growth of 1.5 percent in 2011 and 2.5 percent in 2012. Syria has the worst growth forecast in the MENA region, as it is expected to contract by 2 percent this year (down from an April forecast of 3 percent growth) due to the more than six month uprising and European sanctions.

Qatar investing in Greek banks

EFG Eurobank and Alpha Bank, the second and third largest banks in Greece, respectively, are to merge with the help of Qatar. The merger will take place via an all-share swap with a 1.25 billion euro [$1.68 billion] rights issue, followed by a 500 million euro [$672.7 million] convertible bond to be covered by Qatar. Alpha will offer Eurobank investors five new shares for each seven they hold. The expected deal will result in the formation of the biggest bank in southeast Europe. Qatar, which already owns 4.5 percent of Alpha, will become the largest shareholder with a 17 percent stake in the combined bank. Banks are not the only assets in Greece that Qatar seems interested in. According to the Greek Reporter, the ruler of Qatar, Sheikh Hamad bin Khalifa al-Thani, is interested in acquiring two islands, including Scorpios, which was originally bought by Greek billionaire Aristotle Onassis and whose granddaughter is now looking to sell the land. But according to Theodoros Varikos, mayor of the region, the elder Onassis specified in his will that the island could not be sold. 

US targets Israeli banks

In its effort to pursue offshore tax evaders, the United States is now targeting Israel, as three of its largest banks are suspected of helping American clients evade taxes through their Swiss outposts. The banks targeted by the US Justice Department’s criminal tax division are Bank Hapoalim, Bank Leumi le-Israel B.M. and Mizrahi-Tefahot. The inspection of the three Swiss branches of the Israeli banks comes during a wide-ranging campaign by the Justice Department to force nearly a dozen Swiss banks now under scrutiny to pay collectively billions of dollars in fines and to admit to criminal wrongdoing.

October 24, 2011 0 comments
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Special Feature

KNOW YOUR FOOD

by Executive Editors October 24, 2011
written by Executive Editors

At the table

the consumer is master of the feast

A transparent food system is hard to find. Even in the world’s most developed economies, giant food companies keep their tactics and techniques under wraps under the pretense of keeping their intellectual property safe and their production lines untainted.

But food is a fundamental ingredient of our lives and our health, following only air and water in its importance, and consumers have a right to know how the food they buy is produced. Every country needs to ensure the transparency of its food system, though governmental monitoring need not be the only force at work. Consumers have the opportunity every day to vote with their fork, as food writer and activist Michael Pollan says.

Creatures of habit

The Lebanese Broadcasting Corporation’s Marcel Ghanem, in addressing the issue of food safety on the Kalam El Nas program this past July, generated strong backlash from the Lebanese public, but these reactions have been largely misguided. When food is shown to contain unsafe levels of bacteria, when people are getting sick, and even dying, from eating out, and when we know that some farmers are using wastewater for irrigation, what is the proper reaction? Though fear may be the knee-jerk response, outrage and action are much more likely to produce productive results.

Some would suggest that we hound our government officials to fix these problems for us. Indeed, government action seems to be what Ghanem’s program was calling for most prominently. But as we know too well, endeavors like this can take years and have already fallen through the cracks between successive governments on several occasions. What consumers can do right now is perhaps a more necessary discussion.

When faced with a food safety or food quality scare, one need not throw their hands up in the air and say, “Nothing is safe, so I will go on eating as I always have”. Instead one can ask: “What can we do?”

It is a good question and it has a simple answer. Be the regulator. Consumers are creatures of habit. We shop in rituals, often sticking to the same brands of canned goods, chicken, candy, etcetera. So why not investigate these habits?

Packaged and prepared foods have become a godsend in a time of two working parents. But in their quest for market share and the bottom line, food manufacturers have turned to chemicals to keep shelf lives longer and tastes more intense. The ingredients on the label can have a serious effect on our health, not to mention those that are not disclosed [see story page 62].

Lebanon’s poultry industry is one of the country’s success stories, producing enough chicken to satisfy private consumption and exporting frozen product around the region as well. But what is the difference between the big three poultry producers? Just because the price is capped does not mean that all Lebanon’s chicken is created equal [see story page 66].

Market power

Then there is organic agriculture, which is growing worldwide, including here in Lebanon. Though a tiny sector at present, organic agriculture is growing fast and brands and distributors are multiplying by the day. But as usual, the devil is in the details [see story page 74].

For this report Executive played consumer. We looked at some sectors of Lebanon’s food industry and investigated the fundamentals. Naturally, we were not always well received, but a door held closed often says as much as a door opened. And if consumers were able to take control over the food they consume, shifting the tide of a free market food system toward quality and health might come faster than waiting for regulation — and could outlast any government.

ADDED EXTRAS

Small amounts can have large effects

For discerning food shoppers, the label is king. Whether figure or frugality is paramount, food labels are the place to start when becoming a conscious consumer. But the ubiquity of the E-number (the international classification system for food additives) coded ingredients, and long, technical terms outside of the traditional food lexicon, can lead consumers into a false comfort with the familiar where the additives in packaged foods are concerned.

Nancy Hobeika, a licensed nutritionist and clinical dietician who works in tandem with a clinical psychologist on some of her cases, sees frequently in her practice the link between additives in food and behavioral disorders in children.

“Nutrition plays a 20 to 40 percent part in ADHD [Attention Deficit Hyperactivity Disorder]; this has been proven by scientific research,” says Hobeika. Though scientists remain unclear as to whether behavioral disorders such as ADHD and its little brother, Attention Deficit Disorder, can be caused by food additives (particularly artificial coloring), the link between additives and the exacerbation of existing behavioral conditions has been known since 1980.

Some European governments have either banned or called for a gradual ban on some of the most potent artificial colors such as ‘Tartrazine,’ ‘Sunset Yellow’ and ‘Allura Red’, and the United States Federal Drug Administration requires warnings to be printed on packages containing these colors, as they can not only affect behavior but are also highly allergenic.

And beyond this, there are tales of sweets containing the illegal and highly carcinogenic colorant ‘Sudan Red’ creeping into the Lebanese market every few years.

Colors are just the beginning. Though government action has not kept up with research in most jurisdictions around the world, some flavor enhancers have been found to cause heart complications and central nervous system-related problems such as strokes, Alzheimer’s and Parkinson’s; artificial sweeteners have been found to be carcinogenic, and certain preservatives can cause long-term respiratory problems, DNA mutations and cancer — just to name a few.

Subtracting the additives

Some private actors are beginning to recognize the potential effects of additives. Sesobel, a small, non-profit school in Keserwan for handicapped and mentally challenged children, also has a small factory in Jezzine where it produces  batches of natural products without additives.

“We work for people who are handicapped. We should make the food more healthy so we decided to make food without additives,” says Sesobel Plant Manager Paul Kattar.

The staff at Sesobel adopted the policy of clean products for sale and clean food for its children due to the growing but not yet widely recognized belief that additives in food can encourage behavioral disorders in children. The preserves sold by Sesobel in their own stores are free of preservatives, artificial colors and any other additives and are made from fruits grown by the organization’s farm. The farm is not certified organic due to the cost and length of the certification process, but Dr. Joseph Haddad, director of research at Sesobel and president of the Lebanese Pediatric Association, says the produce is tested for chemical residues before use. This means that in his opinion Sesobel’s products are as healthy as they can be.

“It is well known that some of the additives may provoke chemical reactions in the food and can lead to toxicity. To avoid this cascade of toxicity it is better that you develop healthy food. That was our aim,” says Haddad.

For additives, as with almost any substance, the poison is in the dose and herein lies the rub. The Lebanese Standards Institution LIBNOR has standards dictating the appropriate usage of many additives, capping their presence in food products at levels deemed to be safe. However, as diplomatically explained by Lena Dargham, director general of LIBNOR, the relevant authorities do not coordinate well to make sure that standards are being followed and that food is safe.

Standards set by LIBNOR exist for the usage or non-usage of many additives, but many, if not most, of these are not mandatory because a standard published by LIBNOR has no enforcement mechanism without a ministerial decree making it obligatory.

Clear definitions for words like ‘natural,’ ‘lite,’ ‘low fat’ and ‘healthy’, along with many other health claims, do exist but are also not mandatory, and are therefore not enforceable by any of the authorities responsible for food safety. 

As Executive went to print, LIBNOR had published 550 food-related standards, most of which are not compulsory. But even when standards are made mandatory, Rita Abou Obeid, managing partner of Specifico & Co, a regional food safety consultancy, is sure that no Ministry of Economy and Trade staffers are pulling items off the shelves to check how faithfully they are labeled or whether they adhere to LIBNOR standards.

Dargham said that manufacturers are starting to clean up their acts because of the potential for export to countries with stricter regulations. And in an attempt to give their standards more efficacy, LIBNOR is now offering a mark or seal to be printed on packaging to signify that a product is compliant with their standards — even those that are not mandatory. So far no food products have been granted the seal since the organization is still working out the kinks in the auditing process, but this has the potential to be a positive step in terms of consumer education and choice.

A new food safety law is in the works which will most likely leave the issue of food additives and labeling in the hands of the newly formed food safety authority [see page 82]. It should be noted, however, that what is of equal, if not greater importance to the rules and regulations the law will enact is the funding and resources necessary to enforce accurate labeling and the exclusion of forbidden substances.

So what to do?

Beyond learning to make condiments, candies and soups at home so as to avoid buying pre-made ones in the store, there are few options to avoid additives altogether, though there are some that are more dangerous than others (see chart) depending on the individual concerned and the additive concentration, which in Lebanon can scarcely be confirmed.

Furthermore, the Ministry of Economy and Trade has set up a consumer protection hotline where consumers can report products they believe should be investigated. If colors seem too bright, if children have an allergic reaction to their food or if headaches occur after eating a specific food, a call to the hotline may just get to the bottom of it.

But Obeid is not holding her breath: “We are not used to having our rights in this part of the world… In other places [these] things are taken for granted.”

“It is well known that some of the additives may provoke chemical reactions in the food and can lead to toxicity”

Paltry room to move

…for birds and producers alike

Lebanon’s poultry industry is the only sector within the food system in which production is sufficient to satisfy domestic demand. It produces 135,000 tons of meat per year, according to the Food and Agriculture Organization’s 2007 statistics (the most recent available). You would think, then, that the government would want to keep a close eye on it, as Lebanese chicken is exported in increasing quantities all over the region and is a staple food at home as well. But alas, experts say that practices in the poultry industry remain as unchecked as in any other. So Executive sought to find out if the quality of Lebanese chicken matches the price.

“It’s not like you have a margin; there is no margin for error. You have to follow the competition”

Out with the old

It is the big three poultry brands, Hawa, Shuman and Tanmia, that have raised Lebanon’s poultry production to such a high volume, with the big three alone producing more than 27 million birds per year, according to their own reports. But the quality of chicken meat and the nutrition it provides is directly related to the feed the animal consumes, the space in which it lives and even the conditions in which it is slaughtered. Best practices in this regard are currently being debated around the world as modern methods champion consistency, while more traditional methods offer a more natural process.

All three main chicken producers have been gradually modernizing and expanding over the past decade. Though they started out using traditional methods of farming, they all now primarily use closed-system farming operations. This means that the chickens live in a closed house with forced ventilation and specially designed lighting to keep the chickens calm. The closed system is meant to insulate the animals from all pathogens in the ground and air outside so that the chickens are as protected as possible from disease and contamination. The birds never leave the houses and are generally packed around 15 birds to a square meter.

“When you have a closed system the bio-security is 100 percent better,” said Ralph Freiha, vice president of Youssef Freiha and Sons, parent company of the Lebanese Poultry Company (LPC), which owns Shuman.

In most cases, contract farmers are also required to outfit their farms with closed-system technology. In the case of Shuman, few traditional farms remain.

All three companies also have their own, automated slaughterhouses and have either obtained or are in the process of obtaining the International Organization for Standardization 22000 certification for food safety standards — a comfort in a country plagued by horrifying slaughterhouse images.

Though all three companies claim that the closed-system factory farm is the safest way to grow chickens, there is an expanding view in the world of animal husbandry that the welfare of the animal is directly related to the taste and the quality of the meat. The closed system, at least in the eyes of concerned consumers in Western markets, is falling out of favor.

A 2002 report by the Department of Animal Sciences at Colorado State University in the United States stated that everyday stresses of confined living, and especially the acute stresses preceding slaughter, can have an ill effect on the quality of the meat. Acute stress causes the chicken to secrete stress hormones, which alters the taste of the meat, and chronic stress can cause depletion of muscle glycogen, decreasing the size of the meat and darkening its color.

When owned by the Shuman family, Shuman Farms was known for having an open-system, more traditional way of operating, but, said Freiha, “The competition is really very fierce in the market. And you work on cents; it’s not like you have a margin — there is no margin for error. You have to follow the competition.”

Consumer poultry, meaning the chickens sold in grocery stores and bought by private consumers, has a price ceiling implemented by the Ministry of Agriculture, as it is seen as an essential food product along with bread and certain oils. This means that poultry producers cannot raise their prices and must produce at a cost below approximately $3.45 per kilogram if they want to turn a profit. Freiha says that the ceiling is so low that he does not even turn a profit from the chickens he sells in supermarkets.

The Shuman family controlled operations for the brand until 2003, but by 2008 LPC, a subsidiary of Freiha Holding, had completely taken over operations for the brand and owned 30 percent of the name.

Two of the three big companies herald their good practices right on the package, saying they do not use antibiotics in poultry raising. Administering antibiotics to sick animals meant for human consumption is common practice all over the world. As long as proper protocols are observed, the end product will not contain any residues of the medication and the farmer will not lose an animal to disease.

The improper use of antibiotics, however, is a serious concern. When antibiotic residues are ingested, it is essentially like taking a small dose of unnecessary medication. Over-prescription of antibiotics and unintended extraneous doses can cause the very bacteria the antibiotics are meant to fight to mutate and become antibiotic resistant. This is of particular concern in Lebanon as both Zeina Kassaify, professor in the American University of Beirut (AUB) department of nutrition and food sciences and Dr. Rana Sharara, practicing pediatrician and assistant professor of pediatrics at AUB, said that Lebanon has a drastically overmedicated population.

Both Tanmia and Hawa told Executive that they do not use any antibiotics whatsoever because their closed-system facilities keep pathogens from reaching the birds.

“We don’t give antibiotics to the chickens. We give vitamins,” said Ziad Aoun, marketing manager for Hawa Chicken. “In Lebanon there are too many open system farms, but our farms are closed system. And this system will decrease the relation with the outside because viruses are in the air… This is why we don’t have the diseases that chickens get when they are in open system farms.”

Executive took supermarket samples from Hawa, Tanmia and Shuman to the Industrial Research Institute’s  (IRI) certification lab in Hadath in order to be sure. IRI tested for a chemical commonly found in antibiotics and found no traces in any of the samples from any of the companies. Though desirable, these results are not necessarily definitive. While it was professionally administered, the testing did not investigate every possible antibiotic used in poultry and experts consulted by Executive expressed strong skepticism at the possibility of any large-scale poultry producer operating without any antibiotic use.

“It is a general practice on poultry farms of Lebanon to use antimicrobial agents whenever mortality starts rising and gross lesions appear on the internal organs, such as the liver, heart, kidney, air sacs, etcetera…” said Elie Barbour, professor of veterinary microbiology at AUB. “However, the respect of withdrawal periods — making sure the antibiotics have time to get out of the chicken’s system before slaughter — is important and very serious.”

Ralph Freiha of Shuman said that despite his closed system he does sometimes require antibiotics in his operation. The feed for his chickens contains a small amount of antibiotics, which is stopped 10 days before slaughter. Further, sick birds are quarantined and administered antibiotics, whose use must be stopped seven days before slaughter.

Barbour said that this is the point where the Ministry of Agriculture needs to show its teeth.

“The only way for the ministry to make sure is to sample marketed carcasses randomly from each farm, and to analyze it for antimicrobial residues and give significant fines for those that badly manage drug administration,” he said.

“Making sure the antibiotics have time to get out of the chicken’s system before slaughter is important and very serious”

Crying Fowl

Unfortunately, a lack of proper monitoring of Lebanon’s poultry purveyors is not the most worrying aspect of eating white meat in Lebanon. Capped consumer prices do not mean that Lebanon’s restaurants and caterers are not going to try to increase their margins by decreasing costs. And the way in which they do this when it comes to poultry can be downright scary.  That is, by allegedly buying illegally imported meat.

“When you get chicken parts coming to Lebanon in a taxi and the heat is maybe 30 degrees and it is cleaned — dipped in water and chlorine — and sold as fresh, then you get people going to hospitals,” said Freiha, who estimates that domestic supply makes up just 65 percent of the poultry on the market.

Illegal imports come into Lebanon without proper storage, proper cooling, proper handling and without any verifiable expiration date — all of which invite spoiling and contamination. Wadih Nasrallah, general manager of Tanmia, believes that illegal imports have gotten so out of hand that they are driving down the market share of local suppliers.

“With no serious measures by the government to stop the illegal imports, the percentage of the chicken meat produced will dwindle down to below 50 percent of the consumption level,” said Nasrallah.

Legal imports do exist from Brazil, where the poultry industry is heavily subsidized. The LPC, owners of the Shuman brand, import Brazilian chickens to sell to hotels and caterers, but do not sell them branded under the Shuman name unless they are grown in a Shuman farm.

It is this kind of transparency that consumers deserve when buying food, but too often it is not what they get. In fact, even the claim above regarding where a chicken was raised is incredibly difficult to verify. The only things to do then are to ask questions, use best judgment and do not buy chicken out of the back of a taxi.

“Illegal imports come into Lebanon without proper storage, proper cooling, proper handling and without any verifiable expiration date”

The next big thing

All the rage in the metropolises of the west are phrases like “organic,” “free-range,” “cage-free,” and “pastured.” Such words have also been turning up on egg cartons in Lebanon’s supermarkets with growing frequency. But do these words have any place in Lebanon’s poultry industry? Opinions regarding the feasibility of these niche types of farming on a large scale seem to differ between practitioners and academics.

Free range is a phrase that must be given meaning by an enforcing agency or it falls into the category of nebulous claims such as “low fat” and “diet.” In the United States, free range only indicates that animals have had access to an outside environment. But on Lebanon’s limited land, converting to free range practices and maintaining current production levels would be impossible.

“Free range in Lebanon is not feasible. You don’t have enough land to have free range. Imagine 20,000 birds roaming around. And free range costs you about double. And since you have limitation on the price of chicken in Lebanon…” said Freiha rhetorically.

The organic trend is picking up speed in Lebanon, but organic in the world of animal husbandry is a tough nut to crack. So far the only certified organic animal operation is Biomass’s organic eggs and dairy production, which debuted in June.

Doing their best to give chickens a better life and customers an alternative to factory-farmed chicken is the B. Balady project in Jezzine. Started by the World Rehabilitation Fund with funding from the United States Agency for International Development to give opportunities to land mine survivors in Jezzine, B. Balady sells eggs in supermarkets all over Lebanon and whole and partial chickens in their own outlet in Jezzine and the Healthy Basket store in Beirut.

The chickens live in naturally ventilated and lit houses with access to small outdoor areas in various farms in Jezzine.

AUB’s Barbour, an advisor on the project, sees it as a benefit to Lebanon, not just at the consumer level but also on a larger scale.

“This project is within the international strategies of food safety and food security, since the Middle East imports 50 percent of [its] needed foods, and climate change might reduce our local and the international production of foods, thus affecting our security,” he said. “We have to be prepared, creating new niches for production under climate change.

Planet Organic

Seeking perfection in an imperfect field

The price of organic produce is about to go through the roof. Recent media focus on food safety and the ever-present Lebanese desire to move with international trends translates into a boon for the organic food industry; but it is still in its infancy in Lebanon, having only been around since 2002, and only really selling since 2009. And, like children, young industries take wobbly, faltering steps to reach maturity, after which they may not bear much resemblance to their former selves. Still, it is important for the consumer to understand the way in which the industry currently works, and what it really means to be organic in Lebanon, if we are to make prudent consumer decisions in the current climate of fear over food safety.

The process & the product

The word “organic” refers to the process more than to the product. In most cases, a conventionally grown apple and an organically grown apple look exactly the same. In fact, organic fruit and vegetables may even have more flaws or individualities than their conventional counterparts because invasive and synthetically based measures are not taken to ensure uniformity.

Organic does win when shelf life is the matter at hand. “The thing is, with organic vegetables, once you pick it, its shelf life is longer because it has no chemicals to hold it. With chemicals [it] is shorter because once you pick it, you take all the chemicals from it and it’s going to start deteriorating,” said Hadi el-Solh, an organic farmer who sells his produce in Saida.

Essentially, organic farming means being free of all synthetic materials, including hormones and synthetic pesticides, herbicides and fertilizers. Organic farms must also use clean water for irrigation — an especially salient issue in Lebanon.

This type of farming leads to produce that is free of chemical residues and is as toxin-free as possible. In a world where conventional farming has become more chemistry than horticulture, keeping to this standard takes more defense than offense. Boundaries must be set and buffer zones created to keep neighboring conventional farms from contaminating organic ones.

This fact poses geographic challenges in Lebanon, where some locales are virtually impossible to protect against contamination. “We have some operators who want to go into organic certification in the Bekaa but we cannot accept them because we know that the irrigation water is not very clean, so we don’t certify farmers in the Bekaa. Also [the land] is very open and you cannot do any buffer zones,” said Khalil Haddad, general manager of LibanCert, the only Lebanese organic certification body.

The biggest organic player in Lebanon currently is Biomass, a brand that is becoming more ubiquitous by the day. The fast-emerging organic producer and distributor began on the Massoud family farm in Batroun in 2007. Today, the company sells more than 200 products in supermarkets all around the country from certified farms across Lebanon. Biomass also recently expanded into organic dairy production and is growing fast, though, according to commercial director Mario Massoud, they have yet to break even.

And though Biomass may be one of the most prominent players in the organic field, its proclivity for perfection is a frustration to some growers. Agriculturalists report that Biomass requires their product be uniform in size, so that even if four tomatoes in a box may have come from different farms they must all look exactly the same; this type of strict selection then creates a consumer perception and expectation.

“The problem is that what you find on the market is the elite product. The consumer is willing to pay more but they want the best product. And when you want to give them this… you are obliged to eliminate or destroy the rest, and you have a lot of waste,” said Roula Fares, Middle East representative for FiBL, a Swedish research institute for organic agriculture.

To rectify this issue, which helps to keep prices high and environmental benefits low, the market mentality — on both the producer and consumer end — will have to change.

Why go organic?

The benefits of buying organic are two-fold. Synthetic herbicides and pesticides are both chemicals meant to kill organisms. They are therefore toxic to the body, and even if they do not cause direct symptoms they have a taxing effect on the immune system, leaving vulnerable populations like children and the elderly at risk whilst also exacerbating existing conditions such as autoimmune diseases and allergies.

Though a tougher sell, the environmental impact — or lack thereof — of organic farming is perhaps a more important reason to buy organic whenever possible. Firstly, there is the problem of runoff; the effects of conventional agriculture are felt throughout the country as pollutants do not stay put where they are first applied. When it rains, chemicals flow into groundwater and are then swept into the country’s streams, rivers and sometimes into the sea, not to mention into the public water supply. Secondly, there is the health of the soil itself. Lebanon is a small country with land that is regionally prized. Conventional agriculture does not require crop rotation, as synthetic means can be used to prop up the soil and kill any bad bacteria or organisms that have taken root.

“In organic farming, crop rotation is necessary. The soil talks and it will tell you what it needs. But a conventional farmer who just grows tomatoes and tomatoes and tomatoes — he doesn’t care because he is using chemicals,” said Solh, who sells his wares under his own label and is also a supplier for Biomass.

But topsoil does not last forever, and it is widely believed that conventional agriculture, partnered with erosion and the geological stresses of civilization, mean that topsoil all over the world is degenerating faster than it can replete itself.

Certified organic

An organic product is as good as its certification, and in Lebanon this is where it gets tricky.

There are two certification bodies in Lebanon with the aim of giving the word ‘organic’ a standardized meaning. LibanCert and Instituto Mediterraneo di Certificazione (IMC) are both accredited by foreign bodies (as Lebanon lacks an agency that oversees the certifiers) and follow the standards for organic cultivation of the European Union.

“Once standards are adopted by the [Ministry of Agriculture] and become law, the local certification body will be very important,” said LibanCert’s Haddad. 

As happens in any industry, the virtue of the certifiers is questioned by market players, who accuse them of complacency in their monitoring. More than once-yearly visits to farms, including surprise visits, should be a large part of a certifier’s work, and the farmers Executive consulted for this story all acknowledged the potential for noncompliance, but also affirmed the commitment of farmers and certifiers to the validity of the industry.

“Can someone cheat? Yes, but I believe that anyone really involved in the organic industry would never do that because they have everything to lose,” said Biomass’s Massoud.

The competitiveness of the organic market in Lebanon and the small amount of consumers with the funds and the inclination to pay for organic products means that mud throwing is perhaps more prevalent than noncompliance.

Rami Chemaly, a professor in the agriculture department at the American University of Beirut, said that the certifiers are doing their best but that the nature of certification does come with a certain leap of faith.

“Certification is voluntary. It means that the farmer requests certification to make sure that they are doing things properly and not as a way of granting a certificate of good health,” he said. “All farmers can cheat; you are not sitting on top of the farmers… But essentially the company relies on [their] good will.”

And though most of the industry players consulted for this report expressed faith in Lebanon’s certifiers, Nancy Hobeika, a licensed nutritionist, clinical dietician and owner of an organic meal delivery service and diet center, holds that the only way to know for sure is to have a relationship with your farmer or grow yourself. 

“I tell my clients to go fetch organic labels that come from the United States or from Europe. I recommend them to grow their own inside their houses. It is not that difficult to grow some green leafy vegetables. Everybody in Lebanon has houses and land outside of Beirut,” she said.

The price of production

Contrary to logic, organic farming is not inherently more expensive. Yes, any materials such as minerals and fertilizers must be certified organic and imported, as none are produced in Lebanon, but by banishing the many chemicals conventional farmers use to produce bigger fruits and larger yields out of tired soil, overhead costs are actually cut. But here in Lebanon costly obstacles do remain.

When soil is not ‘on steroids’, the output is naturally much smaller and less dependable. As Solh, the farmer, explained, when a conventional farmer plants 1,000 tomato plants, he knows that he will get 10 tons of tomatoes when it is time to harvest. When an organic farmer plants 1,000 tomato plants he will only get four to six tons.

Furthermore, organic farmers are more susceptible to the forces of nature, such as droughts and extreme heat, as they cannot use chemical measures to combat these problems.

And for a farmer looking to make the leap, going organic is a big financial commitment. The conversion process takes two to three years. While a farmer is waiting for his soil to regenerate and cleanse itself of chemicals, he may grow and sell his produce, but not under the label of organic, meaning he is operating organically but must adhere to conventional market prices.

Furthermore, organic certification does not come cheap. Solh, for one, is certified by LibanCert and pays $180 per hectare. With 17 hectares, that is a yearly expenditure of $3,060 before the costs of labor and all the necessary materials for farming enter the picture.

And though the other substances required to keep the farm going are fewer than they are with conventional methods, the small population of organic farmers and the lack of centralization makes for small orders and high prices.

“It is such a small industry that you don’t have big suppliers importing for the whole country. It is each operator trying to import for himself,” said Massoud.

Another major driver of cost is transportation, as most of the market for organic products is still in Beirut. Solh sells his product in Saida, and Biomass is expanding its distribution both north and south, but for independent farmers transportation exerts an upward pressure on prices.

Packaging also takes a toll. Organic vegetables are often bagged or boxed and wrapped in plastic, with the reason for this two-fold. Packaging lessens the probability of tampering or contamination from conventional vegetables and supermarket owners who might decide to put conventional tomatoes in the organic boxes, while it also offers a crucial opportunity for branding in a market where prestige is premium.

Furthermore, as very few restaurants in Lebanon serve organic produce, organic farmers depend on everyday consumers who follow the unique Lebanese seasonal patterns of behavior that greatly affect sales.

“It’s well known now that in organic sales, the season starts in September and ends in May. June, July and August are dead months because schools are done, people are up in the mountains… they go to the beach, they go to restaurants, and restaurants don’t buy organic because they want the cheapest [goods],” said Solh.

Prices could be slightly lowered if there was more cooperation among players but the effort to form an official organization halted years ago, and recent attempts have borne no fruit.

Looking ahead

Organic agriculture is not going to solve any of Lebanon’s food security problems any time soon, as right now it represents only a small niche in the overall market. But it is growing fast, and if Western trends are any lesson it is not something to write off.

Too many cooks…

Who’s carrying the can over Lebanon’s food policy?

Stated with as much trepidation as is needed vis-à-vis any remark regarding an undertaking dependent on the Lebanese government, it is reasonable to assume that there will be a food safety law on the books shortly. And where food safety is concerned, Lebanon has nowhere to go but up.

Currently, the duties performed in other countries by a central body, such as the United States Food and Drug Administration, are being done by a plethora of different ministries with several layers of authority that overlap and collide in a manner that perhaps only Lebanese legislation could have conjured up.

Even industry players and government employees will say that the duties of ensuring food safety are so sporadically spread throughout the ministries of health, agriculture, interior, industry and economy and trade that coordination is next to impossible.   Furthermore, the funds and skilled manpower needed to support activities such as testing products for labeling accuracy are next to nil. The food safety law, which is currently undergoing a revision by several ministers — who have already had at least one extraordinary cross-ministerial meeting as Executive goes to print — creates just such an authority.

“In Lebanon in particular [an independent authority] is really important because, the way that it is now, the responsibilities are fragmented among all of the ministers,” said Zeina Kassaify, professor of nutrition and food sciences at the American University of Beirut and president of the Lebanese Association for Food Safety.

The Lebanese Food Safety Authority will theoretically be able to function unhindered by the territorial posturing of the ministries and the glacial pace of cabinet decisions.

Unified authority

The authority will have jurisdiction over the farming, production, makeup, packaging and storage of all food items produced or distributed in Lebanon where and whenever their safety is of concern. The authority will also have control over labeling requirements and investigations into the accuracy of labeling, and will also be in charge of inspecting the supply chains of operators and ensuring that proper records are kept.

The food safety authority will also have the opportunity to make regulations regarding genetically modified food — a controversial issue in Europe and the United States and a legislatively nebulous one in Lebanon.

Advising the authority will be a council of experts from public and private sector organizations such as the Lebanese Standards Institution, the Federation of Lebanese Chambers of Commerce and the Consumer Protection Association.

The authority will be governed by a managing board made up of experts from a variety of existing government offices, which points to perhaps the most radical and the most important structural element of the food safety authority: it belongs to no ministry. The authority falls under the tutelage of the Council of Ministers and receives an allocation in the government’s budget just like any ministry, although it is not subject to oversight by the Civil Service Board or the Central Inspection Board as per the initial draft law.  

Though this arrangement may be a good thing where autonomy is concerned, the authority is also at the mercy of the Council of Ministers’ leisurely decision-making schedule, as any measure must be ratified by decree from the Council of Ministers.

The designers of this law have, however, kept emergencies in mind and given the authority the power to take immediate decisions regarding item recalls and import restrictions during times of crisis. These decisions need only be alerted to the Council of Ministers.

Kassaify describes the authority in these cases as a facilitator, linking the ministries under one authority, assigning response work and coordinating information from each ministry.

“An outbreak is not just people getting sick. You have to go follow the source, you have to see who is responsible, you have to go and close down places, you have to follow it in the courts and you have to prevent things from happening again,” she said.

An unknown quantity

If the scheme sounds like it will shake things up within some ministries, it will. And there has been a marked amount of pushback from related ministers who believe that they are losing power and influence by forfeiting some of their responsibilities. As Executive went to print, these very ministers were making changes, and only when the law is resubmitted to the Council of Ministers and then moves on to Parliament will we know if its spirit has remained intact.

Kassaify, who was not consulted in the drafting of the law, was a supporter of the original scheme, but is wary about the most recent round of changes and said she could not throw her support behind the new version until she has seen it.

Guidelines and regulations for individual sectors and distribution points will be decided by the authority’s many departments if the original scheme survives, and though the formation of the authority will be a good sign, these will show how serious the government is about making Lebanon a safer place to eat.

“An outbreak is not just people getting sick. You have to go follow the source, you have to see who is responsible, you have to go and close down places

October 24, 2011 0 comments
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Feature

Lebanon’s fault line

by Executive Editors October 24, 2011
written by Executive Editors

Since the first news of protests emerged from Syria in March, EXECUTIVE has followed the impacts of the upheaval, which have spread across the border into Lebanon. From refugees fleeing the conflict, to protests both supporting and deriding the regime of President Bashar al-Assad, the uprising next door is a Lebanese reality as well

1) A pro-regime demonstrator displays his allegiance outside the Syrian embassy in Beirut by means of rough tattoos depicting Syrian President Bashar al-Assad (L) and his elder brother Bassel, who died in 1994 

2) A candle-light vigil in Martyrs’ Square is held to show solidarity with the people of Syria

 3) Leftist Assembly for Change activist Farah Koubaissy leads an anti-regime rally in downtown Beirut

4) After violent attacks on anti-regime protesters in West Beirut in early August, in which people carrying cameras were actively targeted, pro-Assad demonstrations took on a somewhat more ‘media-friendly’ approach

5) A soldier watches over a small anti-regime protest in downtown Beirut 

6) An anti-regime demonstrator holds a sign, which reads ‘Bashar should Fall’ at a rally in Martyrs’ Square, Beirut 

7) A Syrian family prepares dinner at a refugee station set up in a school in Lebanon’s northern region of Wadi Khaled The family fled from the Syrian border town of Tell Kalakh, where Amnesty International reported “a devastating security operation” in which “scores of men were arbitrarily arrested, tortured and at least nine died in custody”

8) Syrian workers gather in support of their president outside the Syrian embassy in Beirut

9) After being smuggled across the border, Syrian cyber-dissident Rami Nakhle spent some nine months in Lebanon coordinating efforts to disseminate reports and footage taken by activists within Syria. He fled to America after a tip-off that it was no longer safe for him in Beirut and is now a member of the opposition Syrian National Council

10) A Baath Party member who was coordinating a pro-Assad demonstration outside the Syrian embassy in Beirut shows off a lapel pin displaying the president’s image

12) Mohammed Khoder Waloum displays scars he says were caused by Syrian security services during a protest in his hometown, Tell Khalak. He and his family subsequently fled to Lebanon 

13&14) Islamists from Tripoli demonstrate against Assad’s regime outside the Syrian embassy in Beirut. Many supporters of Assad fear instability from Islamist influences should the regime fall 

15) Riot police look on at a pro-Assad demonstration. Security was stepped up after three anti-Assad demonstrators were hospitalized with critical injuries after clashing with Assad supporters in early August

October 24, 2011 0 comments
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The slow crush of attrition

by Executive Editors October 18, 2011
written by Executive Editors

Eleven years of gradual economic reform have sputtered to a halt in Syria over the past six months amid nationwide revolts against the regime of President Bashar al-Assad. Gone are the halcyon years of a booming tourism industry, the headway made by the region’s youngest stock exchange and the foreign direct investment that had spiked since 2005 to reach $2.9 billion in 2010. Meanwhile, the expatriate Syrians lured back from corporate jobs in the Gulf and the West to join the fledgling financial sector have, by and large, packed their bags and left as the crackdown on demonstrators escalates. Between 2,600 and 5,400 have been killed, according to varying estimates, as Executive went to print.

The short-lived economic renaissance of sorts steered by Assad and Abdullah Dardari, a London School of Economics graduate and now former deputy prime minister, took a further blow when the United States and the European Union slapped multiple sanctions on prominent members of the Syrian regime and close economic partners in May, and imposed further rounds of sanctions in August and September that included the oil sector .

Tightening the screws

The EU has been selective in what individuals and entities it has targeted for sanctions.

On May 9 and May 23, members of the regime were designated, including President Assad and his maternal cousin, billionaire businessman Rami Makhlouf, whose portfolio includes Cham Holding and mobile operator Syriatel, and who the EU stated was targeted because he “bankrolls the regime allowing violence.” On September 2, the EU listed prominent businessmen and businesses for providing “economic support to the regime”, such as the presidents of the Damascus and Aleppo chambers of industry — respectively, Tarif Akhras, head of the Akhras Group, and Issam Anbouba, president of Issa Anbouba Establishment for agro-industry — as well as Cham Holding and certain subsidiaries, and the state-run Real Estate Bank.

On September 23, a further 15 regime members were added (bringing the total to 43 members of the regime and associated businessmen), as well as five Syrian intelligence and military directorates. A further six entities were added to the ‘banned’ list, including Addounia TV and Syriatel, as its licensing contract “pays 50 percent of its profits to the government.”

The EU moves allow for the freezing of the European assets of the individuals targeted and prohibits their travel to Europe. The latest sanctions also prohibited the selling, buying and export, directly or indirectly, of new Syrian banknotes and coinage printed or minted in the EU, to the Central Bank of Syria, as large amounts of Syrian currency had, until then, been produced in Austria. The September sanctions also prohibited financial loans, credit or joint ventures with listed persons or entities.

The US sanctions, issued May 27 and September 1, focused on military-linked businesses, Syrian hydrocarbon companies and Cham Holding, and prevent American companies from doing business with the figures in question. Sanctions were also renewed against the state-run Commercial Bank of Syria (initially blacklisted by the US in 2004 for financing terrorism), and Syrian-issued MasterCard and Visa cards have been frozen. The US and EU-blacklisted companies and individuals contacted by Executive refused to comment.

Hardly foolproof

“Sanctions are not a silver bullet,” said Andrew Tabler, a Next Generation Fellow at the Washington Institute for Near Eastern Policy (WINEP) and author of recently published “In The Lion’s Den: An Eyewitness Account of Washington’s Battle with Syria.”

“They are more like ways you can find to ratchet up the pressure in very specific ways to try and bring about some breaks in the regime, for instance, in getting elites to move away from [it],” he said.

The economic sanctions are an obvious psychological blow to the regime and its cadres, but do not have the same impact as those on the oil sector, which accounts for an estimated 20 to 30 percent of the country’s gross domestic product.

That said, while the latest sanctions have not directly targeted international trade outside of oil, wariness on the part of international shippers to trade with Syria and a sharp drop in domestic demand has seen cargo shipments at the port of Lattakia plummet, dropping 13 percent since the beginning of the unrest in March on the year before and 36 percent year-on-year in June alone, according to statistics published by the port’s operating authority. Reuters last month quoted shipping sources as saying volumes at the ports of both Lattakia and Tartous have shrunk as much as 40 percent in the first eight months of 2011, relative to last year.

Trade with strategic partner Turkey has also plunged, with Syrian exports to Turkey in June dropping 59.3 percent, to $48 million, from the same period last year, while Turkish exports to Syria declined by 18.1 percent to $113 million, according to Turkish government figures.

Trade with the US, however, has been negligible for years, with 2010 bilateral trade estimated at $928 million, or 2.4 percent of all trade, following the Syria Accountability and Lebanese Sovereignty Restoration Act of 2003 that banned all exports except food and medicine, prohibited American businesses from operating or investing in Syria, blocked transactions on Syrian property and tightened the aviation sanctions first imposed in 1984. However, Syria was able to successfully bypass these earlier sanctions by re-exporting American goods through Jordan, Lebanon and the United Arab Emirates. Where the US has hurt Syria is by limiting the leverage of Syrian banks internationally, and it could deliver a huge blow should it succeed in its efforts to put pressure on Turkey to also impose sanctions.

A bigger blow to Syria is the impact on trade with the EU; the economic bloc is the country’s largest trade partner and aid donor, accounting for 22.5 percent of Syria’s foreign trade in 2010.

But as a trade partner, Syria ranks low down on the major import and export list for the EU, accounting for just 0.2 percent of imports and 0.3 percent of exports in 2010, and ranked 50th of the EU’s trade partners, according to International Monetary Fund (IMF) statistics. Nonetheless, the sanctions have had an effect.

“While EU trade sanctions are limited to the oil sector, non-oil trade with Europe has been affected as European companies have been limiting their trade with Syria, and the Syrian government itself is encouraging Syrians not to trade with Europe,” said Nabil Sukkar, a former World Bank economist and head of the Syrian Consulting Bureau for Development and Investment in Damascus.

No investment ban

The EU sanctions have not included an investment ban on European companies doing business in Syria, although this could be the next step. “I think an investment ban is coming. But what impact will it have? The largest investment [by the EU] is in the petroleum sector,” WINEP’s Tabler said.

Italy, whose bilateral trade with Syria was worth $2.69 billion in 2010 and which is Syria’s fourth largest import partner, has managed to delay the enforcement of EU oil sanctions until November. The European Investment Bank has stopped all loans to Syria and EU aid programs totaling $185 million have been slashed by 62 percent. The aid had gone towards funding infrastructure projects and providing expertise to the private sector.

But Sukkar believes such a move by the EU is disingenuous. “The cut in EU aid to Syria, intended originally to support economic liberalization, will strengthen the tendency of the new government to bring back controls. So sanctions will be counterproductive, they will hurt citizens’ livelihoods and will help the reversal of Syria’s liberalization policies,” he said.

For the sanctions to work beyond the oil sector, other revenue streams need to be targeted, said Tabler, hitting more prominent businesses in Damascus and Aleppo, particularly those with ties to Western firms such as the Joud Group, which manufactures and distributes Pepsi under license, and the Attar Group, which handles distribution for multinational pharmaceutical companies and electronic and software companies Sony, IBM and Lexmark, as well as being the country sales agent for Alitalia.

Other businessmen that could be targeted — listed in a report by the US Congressional Research Service but so far not sanctioned by Washington — are Majd Suleiman, head of media conglomerate United Group and son of Bahjat Suleiman, a former General Security Director officer, as well as Firas Tlass, the son of former Defense Minister Mustafa Tlass and head of the MAS Economic Group. Reducing the profit margins of major companies paying taxes to the regime would dent the Syrian treasury.

While Sukkar is against the sanctions, he suggested that such specific targeting would make a mark.

“The impact on specific companies and individuals… will deter others from establishing business relations with establishment figures,” he said. “But the imposed sanctions will not topple the regime and will not cripple the economy. Instead it will create economic and social damage, affecting both government finances and citizens’ livelihoods.”

“We will forget that Europe is on the map”

The Syrian government has, unsurprisingly, played down the impact of the sanctions. At a press conference in Damascus in June, Foreign Minister Walid al-Mu’allem responded to the first round of EU sanctions by saying: “We will forget that Europe is on the map, and we will turn to the east, to the south and all directions that extend a hand to Syria.”

The Syrians have lived up to their word to look elsewhere for alternative trade partners. Over the summer, Syrian officials went on a mission to get trade agreements with Ukraine, Kazakhstan, Belarus and Russia. Grain, for instance, has been purchased from Ukraine; a necessary import as Syria no longer produces enough food for its domestic consumption and agriculture output has not been as high as expected this year due to the ongoing drought in much of the country.

Russia has criticized the EU sanctions, and as of August continued to supply arms to Syria. In early September, Prime Minister Dmitry Medvedev said Russia was “a great friend of Syria” and “a country with which we have numerous economic and political contacts.”

Closer to home, the Arab League at the end of August called for an “end to the spilling of blood and for Syria to follow the way of reason before it is too late,” but has not gone as far as calling for an economic boycott or annulling Syria’s membership in the Greater Arab Free Trade Area. Damascus rejected the league’s statement, as did Beirut, signaling that bilateral trade with Lebanon will continue. Such support from Beirut, Moscow and its allies, albeit limited, does dampen the effectiveness of the US and EU sanctions.

“Syria will be able to mitigate the impact of sanctions through deepening economic ties with Iraq, Iran, Russia and other Asian countries. Also Lebanon will always accommodate Syrian business needs for financial transfers,” said Sukkar.

According to shipping sources in Beirut, trade with Syria has not been affected and is very much ‘business as usual’. Lebanese banks hold accounts for Syrian officials, including Rami Makhlouf, according to a banking source, although banks agreed, unofficially at a Union of Arab Banks meeting, not to carry out international transactions on behalf of Syrians, or provide alternative names or addresses. Meanwhile, Finance Minister Mohammed al-Safadi said following meetings in Washington and with the IMF in late September that it was not in the interest of Lebanon to be the financial hub of Syria, and that Lebanese banks have taken measures to align with the international sanctions. If upheld, this could also affect foreign remittances on behalf of Syrians.

If ties with Iraq cool, as Baghdad has recently hinted at, and Turkey joins in on the sanctions — Ankara has already intercepted arms shipments — the Assad regime will find itself increasingly isolated. “Syria would be surrounded. And it is not like Jordan has a lot of love for Syria,” said Tabler. Indeed, if Jordan closed its borders, this would have a major effect on Syrian trade with the Hashemite kingdom and Saudi Arabia, Syria’s third largest trade partner. The loss of Iraq as an export destination would be equally devastating, accounting for 30.3 percent of total exports, or $4.6 billion, in 2010.

Sound as a pound?

Syria’s Finance Minister, Mohammad Jleilati, was trying to put on a brave face when he said on the sidelines of a meeting of Arab finance ministers in Abu Dhabi in early September that the economy will grow by 1 percent this year.  A recent IMF report estimates Syria’s economy will contract by 2 percent, while the Institute of International Finance estimated the economy will contract at least 4 percent this year and the fiscal deficit will widen to more than 6 percent of GDP.

But Tabler and other sources Executive spoke with suggest the Syrian economy could shrink as much as 20 percent; tourism revenue (worth more than $8 billion last year) has almost completely vanished, the cities of Homs, Hama, Deir ez Zor and Daraa have been at a virtual economic standstill for months, banks are reporting steep declines in assets and trade is falling off. Syria has seen roughly $2 billion in capital flight this year, and the Central Bank of Syria (CBS) has had to spend at least $2 billion defending the Syria pound (SYP), according to CBS Governor Adib Mayaleh, though the official exchange rate has still slipped slightly, from SYP46 to the dollar in March to SYP48.41 in September.

CBS foreign reserves are officially at $18 billion, although sources peg that number nearer $15 billion, and Mayaleh said Syria has a $5 billion fund created several years ago for the specific purpose of supporting the currency during crises, although he did not make clear whether it was included in the total reserves. Syria also has an estimated 25.8 tons of gold reserves, according to the World Gold Council data, worth roughly $1.4 billion at average world gold prices at the end of last month.

The currency reserves will allow Syria to cover import needs for over 20 months, according to the finance ministry, but that also depends on countries staying friendly with Damascus and remaining willing to trade.  Furthermore, international currency rates could cause Syria more fiscal woes than it is already facing, having lost access to the dollar on the global markets.

“Restrictions on money transfers in dollars, initiated from outside as well as by the CBS, have disrupted trade,” said Sukkar. “There will be further disruptions in trade if the EU imposes restrictions on transfers in euros. Then Syria will have to go to other convertible currencies, such as the [British] pound and the Japanese yen, both of which have been as volatile as the dollar and the euro over the past year.”

How well the central bank handles these challenges will be key to the continued funding of the Syrian regime amid increased economic isolation and the possibility of further sanctions.

A faltering economy and diving business prospects would undoubtedly erode support for the regime among middle class Syrians and the business elite — groups which, to this point, have largely backed the Assad government. But in the war of attrition that sanctions amount to, whether they have the desired effect of shaking the regime’s iron grip on power, or whether they harm everyday Syrians more than anyone else, are still open questions. 

“[It] all depends on agricultural production, oil prices and how much overall economic demand has dropped,” said Tabler. “The real challenge is for the sanctions to hit the regime more than anyone else.”

October 18, 2011 0 comments
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Feature

Draining the autocrat

by Executive Editors October 18, 2011
written by Executive Editors

As Damascus struggles to repress widespread protests across the country, now in their seventh month, it will also have to contend with a comprehensive sanctions package from the United States and the European Union on Syria’s oil sector.

The sanctions prohibit purchases of what until now has been Syria’s 145,000 barrels per day (bpd) export regime, with the International Monetary Fund valuing these oil receipts at $4 billion annually, amounting to some 25 percent of total government revenue. Sanctions also ban all new investment into the country’s hydrocarbon sector.

The EU represents 96 percent of the export market for Syria, with Germany, Italy and France alone accounting for more than 70 percent. But the sanctions will not be enforced immediately, as the EU vote on September 2 stipulated an implementation date of November 15 — a compromise deal with a coalition of members, chief among them Italy, under domestic pressure from refiners that had been affected by the disruption in oil supply from Libya this year.

While Europeans have been outspoken in their criticism of President Bashar al-Assad’s brazen repression of dissent, for many the sanctions come as a surprise. Because of a tight supply market, especially in the Mediterranean, as well as longstanding European involvement in the Syrian energy sector by super-majors Shell and Total (and a litany of newcomers), the official line in Brussels was that US-style sanctions would hurt the people, rather than the regime. However, persistent lobbying by representatives of the Syrian opposition in exile, who made a simple yet compelling case advocating a ban on imports, may have had the desired effect. Anti-regime lobbyists noted that the Assad regime may be in too precarious a position to maneuver the levers of power and bureaucracy required in finding new markets for its relatively unattractive oil, much less respond to a multitude of disruptions across the entire supply chain.

A minnow in the ocean

Syria does not have a significant oil industry to wield as a political tool with the West. Historically, relations with the West have been fraught with tension over Syria’s antagonism toward Israel, its involvement in Lebanese politics and its alleged support for the insurgency in Iraq. But while the country may punch above its weight ideologically, it is considered a minnow in the global oil arena and has few resources from either a technical or market perspective to weather a sustained and serious embargo from the West.

Syria’s oil output in 2010 was estimated to be 385,000 barrels per day, which represented a victory for the sector as the first time in a decade that the country was able to buck a year-on-year decline (often at rates as high as 5 percent) that had many analysts writing Syria off as an exporter by 2020. Syria benefitted, however, from the flurry of global exploration and production activity that was spurred by the dramatic rise in the price of oil from $35 in 2000 to $147 in the summer of 2008. The newfound incentives saw companies aggressively pursuing opportunities using technologies that had until then been deemed uneconomical.

President Assad and former deputy prime minister for economic affairs Abdullah Dardari responded to the changes in the market by embracing western firms and instituting a series of laws that made the Syrian play (the country’s market and resource opportunities) “the best of any country in the Middle East”, according to Ken Judge, an official with Gulfsands Petroleum, whose main production assets are in Syria.

Super-majors Shell and Total, producers of the country’s premium Syrian Light grade, declined to expand operations in the country, focusing instead on marketing refined products to the rapidly growing Syrian demand and using the country as a platform for entry into the post-Saddam Iraq. A litany of independents, however, entered the trade and began an aggressive drilling campaign, particularly in the heart of the country, but also in the northeast Deir ez Zor region. Companies such as Dove Energy, Loon, Stratic and France’s Maurel & Prom invested millions of dollars in the play, encouraged by a global market that was rewarding risk and a Syrian market that had already paid off for at least one independent, United Kingdom-based Gulfsands. The company discovered oil in 2007 and by 2009 was posting impressive production gains, with profits jumping some 160 percent from $18 million in 2008 to $48 million in 2009.

At the same time, a regional shift towards utilizing associated gas production, by either bringing it to market or by re-injecting it into aging oil fields, allowed the state-owned Syrian Petroleum Company — which controls the sector through independent production and joint ventures with foreign producers — to gradually arrest declining output. Through its marketing arm Sytrol, the method allowed for a 15-year export plan that would offset the gradual decline of its premium Syrian Light blend with substantial growth of its primary export blend, Soueideh (also known as Syrian Heavy), which would allow the country to maintain current export levels until 2025. Syrian Heavy is a low quality and technically challenging oil to process, sold at a discount to benchmark Dated Brent. It can only be processed by a minority of refineries in the world, which are generally concentrated in Europe and the US, as well as in Syria. As has been a pattern in the region, the government invested its inflated revenues from increased crude output into manufacturing and heavy industry.  This boosted domestic demand for refined oil to the point where, by the mid-2000s, it outstripped domestic supply. Syria was left increasingly reliant on imports of refined oil it purchased with precious foreign currency when, had the country instead prioritized expenditure on its own refining capacity in the last decade, it could theoretically be supplying to its own market. Syria’s refining capacity had long stood at 240,000 barrels per day which, outstripped by domestic energy consumption, forced Damascus to begin an import regime that now stands at approximately two to three cargos a month to meet its gasoil and liquefied petroleum gas (LPG) needs. It buys these cargos at market value, which it then sells domestically at deeply subsidized prices. According to the US Energy Information Administration, the practice cost the government $3 billion in 2010, but will likely remain in place as the government seeks to retain popular support.

Both ends of the sanctions

Syria’s proven reserves have generally remained around 2.5 billion barrels, the lowest of any Middle Eastern oil exporter, and accounting for just 0.2 percent of the world total.

In 2010, BP estimated the country’s reserve-to-production (R/P) ratio — the amount of time it would take to exhaust oil at current production levels — to be 18 years. It is indicative of the diminutive size of Syria’s export stream, in global terms, that their top buyer, Italy, has imported an average of 41,500 barrels per day this year, which is less than 3 percent of their total import mix.  Its major buyer, Eni, is confident that they can source supply elsewhere.

Similarly, although major US investment had been halted in 2004, the latest sanctions formally and entirely cut the cord with Syria’s oil sector. Though the vast majority of Syria’s domestically refined crude is consumed in-country, the US had been taking in 9,300 barrels per day of refined Syrian petroleum products, contributing to the $400 million in payments to Damascus in 2010, according to US trade data. The US was Syria’s largest single purchaser of refined petroleum products, yet accounted for less than 0.004 percent of America’s 2.6 million barrels per day of total imports of petroleum products. By contrast, Libyan oil reserves of light sweet crude, highly sought after by European refiners, stood at 46 billion barrels with a R/P ratio of 78 years at 2010 production levels. The loss of Libya’s 1.4 million barrels per day on the market compelled Saudi Arabia to increase output and US President Barack Obama to authorize a rare 30 million barrel sale from America’s strategic reserves. The loss of Syrian supply would be unlikely to engender such moves.

Although Assad did get somewhat of a reprieve with the November 15 implementation date, the regime is expected to have difficulty finding new markets to keep up its export schedule. Kate Dourian, Platt’s Middle East bureau chief, believes that “countries will voluntarily stop working with Syria.” Indeed, both Danish Maersk Oil and French giant Total voluntarily cancelled scheduled deals in September, with Maersk spokesman Michael Christian Storgaard attributing the stoppage to “US sanctions”. Traders Vitol and Trafigura, on the other hand, continued with planned sales of one cargo of gasoline each, to Syria’s state-owned Sytrol in August.

Though Vitol and Trafigura, both based in non-EU Switzerland, would not be required to comply by the EU standards, an email from Vitol’s press office to Executive stated that the company “has been and will remain in full compliance with all local and international sanctions legislation relating to Syria.” Dourian believes that the “reputational risk” involved with the Syrian market is not worth it for Western traders — who have no infrastructure or long-term deals at stake with the country — to continue their dealings with Damascus even ahead of the November 15 deadline.  Heavies such as Shell, who are still dealing with Damascus, are under pressure from grassroots campaigns by Syrian activists and non-governmental organizations.

At the same time, an expected price collapse of Syrian oil after the sanctions take effect may make Syria’s crude attractive to buyers in the east, who tend to be less influenced by Western politics in the oil industry. A number of logistical obstacles, however, would have to be overcome. Syria’s shipping capacity is designed for Mediterranean markets and short trips. Loading ports in Baniyas and Tartous are limited to Aframax class tankers, with a capacity around 600,000 barrels. They can technically make the journey to Asian and Indian markets but would do so at a higher cost per mile than larger tankers, which would offset the discounted prices. China and Russia my be tilted towards buying from Syria by political considerations but India, the closest east-of-Suez destination that would potentially accept Syrian Heavy, traditionally favors political neutrality in its oil dealings in the Middle East.

Additionally, the premiums paid for the financial instruments necessary to secure these deals and guarantee tanker costs, have also been rising. According to the UK-based Worldscale guide for tanker rates, Syria pays around $18,000 per day to ship a full Aframax load to the EU, but a Reuters report in March of this year noted that rates had gone up by 26.5 percent, concurrent with the first round of EU sanctions. The price hike is due to the risks perceived by traders in handling the cargo and is likely to rise further as sanctions drag on.

China, with recent acquisitions through its state-owned China National Petroleum Corporation, does have a 35 percent interest in Syria Shell Petroleum Development, but this represents less than 10,000 barrels per day of the company’s 2.8 million daily production.

Russia, however, has long standing plans to build a major naval facility in Tartous.  Ambitions of a blue water base in the Mediterranean are , according to IHS Jane’s analyst David Hardwell, “as old as the hills”.  This isn’t necessarily dependent on Assad; an opposition visit to Moscow late last month no doubt included assurances as to the viability of the project in a post-Assad Syria.

The extent of Russia’s, China’s, and perhaps India’s willingness to step up and support the regime in the face of increasingly unified and diverse pressure on the country is unclear.

Although indications from Moscow and Beijing are that they will not stand for another Libyan style intervention, both countries would need to go out of their way to serve as substitute markets for Syrian oil in the medium term. Russia, for example, is invariably the largest, or second largest (running neck and neck with Saudi Arabia) net oil exporter, and imported just 1,000 barrels per day in 2010, according to BP. Though a price collapse of Syrian Heavy after the November 15 moratorium on EU imports is certain, China’s heavy refineries are already enjoying a decidedly buyer’s market, which has seen sharp discounts in heavy oil for east-of-Suez deliveries.

Structurally, it is potentially much easier to thwart Syrian efforts to sidestep the embargo than augment them. Organization of Petroleum Exporters (OPEC) powerhouse Saudi Arabia, who in August withdrew its ambassador to Damascus to protest the regime’s crackdown, demonstrated its willingness to dip into its spare production capacity, in response to supply disruptions from Libya, by increasing output by 300,000 barrels per day in June. 

This was accompanied by a statement from its Oil Minister at the time Ali Naimi indicating that any disruption to global oil production from the unrest in Libya, or any other producing country, would be met by swift action from Riyadh. Furthermore, although less likely in the short term, Barack Obama reserves the right to penalize any company with US interests that does business within the Syrian oil sector. Washington has successfully wielded a similar threat in discouraging many international oil companies from doing business with Iran.

Even if the Syrian government does get its oil to market, the earnings derived may be diverted into ensuring that the imports of LPG and Gasoils remain on track to keep the country functioning.

A September 23 report from Reuters quoted unnamed traders as saying that Damascus was making overtures on the international market to swap crude oil in return for refined product that the country needs to meet consumption.

The same report went on to detail the difficulties that Syria was facing in concluding contracts, even ahead of the November 15 deadline, primarily because the financial instruments necessary to facilitate such deals — such as insuring shipments and payments — have also been impacted by the sanctions. The report concluded that Damascus would likely eventually find a willing partner to finance the operations, but that its premiums to underwrite the risk would be extraordinarily high.

Even if Assad can keep some of the oil revenue flowing to prop up his embattle regime, this lifeline will be thin. 

“It is potentially much easier to thwart Syrian efforts to sidestep the embargo than augment them”

October 18, 2011 0 comments
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Finance

Fadi Khalaf – Arab Federation of Exchanges

by Maya Sioufi October 3, 2011
written by Maya Sioufi

Lebanon’s capital market is entering a new era, at least in legislative terms, with parliament’s approval of the long awaited capital market law in August 2011. In a next step, an independent regulatory authority with oversight of the Beirut Stock Exchange (BSE) is to be created and headed by the central bank governor, the indomitable Riad Salameh. Fadi Khalaf, secretary general of the Union of Arab Stock Exchanges and former BSE chairman, talks to Executive about the new law, imbalances in Lebanon’s financial markets and the BSE’s new prospects and challenges.

The BSE has not had a president since you left in August 2009. Do you know of any plans to have a new president?

I am not aware of any plans regarding the election of the next president. This is government politics. There are over 50 vacant positions in the Lebanese government and this is just one of them. It is the government’s decision to find a new president. When I left in August 2009, I never thought that we would be in September 2011 and still without a president, but some posts in Lebanon stay vacant for three to four years.

What are the most important issues that the BSE faces?

We don’t have enough companies listed. Most of the companies in Lebanon are family owned and they avoid listing because they don’t want foreign investors to own a stake in their company. Listing implies fiscal taxes and transparency, and in Lebanon, companies have several books. If companies list and don’t disclose their entire income, their stock price will be hit. If they disclose their income, then they have to pay taxes. So some companies will avoid listing.

There is also a lack of liquidity. The BSE is not a priority for the government. It has always been secondary. The government wants to encourage the BSE but it needs the liquidity to cover the government expenses and the government deficit. If there remains excess liquidity, then it will see if it will be directed to the exchange. If the banking sector needs liquidity, then the government needs to keep it there. Many exchanges in the world have enjoyed a strong boost due to the privatization of state owned enterprises, which also gives incentive for other companies to list. We have not had this in Lebanon. Take the privatization of the telecom sector for instance, if a strategic investor wants to pay a good price and not be listed, the government accepts. So the BSE was never a priority.

Do banks encourage companies to list?

Capital markets and the banking sector are usually complementary but [in Lebanon] they are in competition. Investors put their money either in a bank or in the capital markets. When companies need funds, they either take it as debt from banks or equity from capital markets. Since the banking sector is 10 times the size of the capital markets, it has a much stronger influence and it will not encourage companies to list since it is not in their interest.

For example, I had once convinced a very large Lebanese company to list on the exchange and sent them the necessary [documents]. Two to three months later, the CEO tells me that his banker, who is also a shareholder in the company, advised him against listing and provided him with a loan to cover his financing despite the fact that his bank has a brokerage firm and its duty is to convince companies to list.

How about the fees that banks would receive from advising companies to list on an exchange?

Banks earn more fees by providing companies with loans as it provides them with regular payments of interest, whereas listing on the exchange only generates a one off fee. When a company’s debt to capital ratio reaches a certain limit, then the banks might advise them on considering the capital markets. The exchange is just a tool. It is living on the crumbs of the banking sector.

Will there be more interest in the stock exchange following the capital markets law signed in August?

Yes there will be more interest. The governor of the central bank will head the capital markets authority and he has the most influence in the banking sector. This is a good step for the exchange. He can direct the banking sector to inject liquidity into the capital markets. He can also influence the banking sector into encouraging companies to list. In the exceptional case of Lebanon, the banking sector’s market capitalization is around $120 billion whereas the exchange is a mere $11 billion so if the banking sector is not convinced, the only other way to boost the exchange is through privatization of the telecom industry and it does not look like that will happen anytime soon.

When do you think the law will be implemented?

I am not sure if it will be implemented by the end of the year. No one knows how long it will take in Lebanon.

How about the initiative to privatize the stock exchange?

It gives the exchange independence from politics. The private sector is the driving force in Lebanon. Privatizing the exchange will give it a boost but it is not the key factor; if companies are not convinced of listing, privatizing… it is not going to change anything.

One issue that needs to be addressed regarding privatization is how to implement it. The law says the stock exchange should be privatized but it doesn’t say how. It says that after the formation of the capital markets authority, the exchange has one year to have the legislation in place to become a [registered] company as opposed to a public institution and one year after that to be become private.

What initiative could be put in place to increase liquidity? Would it help for example to provide incentives to local banks to buy stocks on the BSE?

What is the point of going to the supermarket with plenty of money in your pocket if there is not much on the shelf for you to buy?

How about incentivizing companies to list? Should the government encourage mergers?

When I was head of the BSE, we did a study on the Lebanese market and we found that there were 50 companies sizeable enough to list on the exchange and they were not listing. Mergers mean putting family businesses together. It is a problem on a whole different level. It could help but it is not enough. Besides, we shouldn’t want the exchange to live on incentives only.

What can the Beirut Stock Exchange do to improve?

It cannot do much… The evolution of the exchange has already taken place in the past ten years with the implementation of measures such as an increase in the type of instruments that can list (stocks, bonds, preferred shares, GDRs,  etcetera) ,a move from fixed pricing to continuous pricing, a reduction of the taxes on dividends and an update of the trading system. All these steps helped increase the volume of shares traded from $200,000 per day in 2000 to 8 to 10 million dollars per day today.

The exchange has done what it can do. The rest remains in the hands of the other players of the Lebanese economy. Unfortunately, the correct step they are taking with the capital markets law is happening during a time when the biggest Arab bourses are complaining of low volumes, so the timing is not great, but at least the exchange will be ready for the next wave of investment in the Middle East.

 

October 3, 2011 0 comments
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Economics & Policy

Electricity: Crumbling Behind the Country

by Sami Halabi October 3, 2011
written by Sami Halabi

Officially charged with powering the nation, Electricité du Liban (EDL) is today perhaps the epitome of Lebanon’s political ineptitude, and one that nearly pulled the plug on the fledgling cabinet last month.

EDL started with promise in the mid-1960s when architect Pierre Neema modeled headquarters in East Beirut’s Mar Mikhael district in a ‘Brazilesque’ architectural style, symbolizing the progressiveness of the sector and the hope that it would host a catalyst of economic growth for decades to come. Today, illusions have dissipated, and the building, with its few working elevators, its dusty façade and its aging workforce, is nothing less than the embodiment of the dilapidated electricity sector in a country where power cuts are the norm and not the exception.

At present, the sector’s output capacity is roughly half it needs to meet current peak consumption demand, and by 2016 will be less than a third of what it needs to be. Supply, transmission, distribution and collection will also have to be improved to counteract the 40 percent annual financial losses the electricity sector accumulates, according to the energy ministry. Those are comprised of 15 percent technical losses due to outdated networks and supply lines, 20 percent in non-technical losses attributed to such things as theft of electricity, as well as another 5 percent from the much-politicized issue of unpaid bills that make headlines every time a collector gets a thumping from neighborhood thugs. The magnitude of the problem notwithstanding, the government has done little to nothing in order to develop the sector since the civil war. Instead, it has spent approximately $16 billion on subsidies, maintenance and the construction of a few insufficient power plants. According to Bank Audi, in the past three years alone the government has spent an average of $1.5 billion on covering the deficit of EDL, mostly as a result of a lack of natural gas supplies and high oil prices. EDL cannot adjust its prices — which are set according to an oil price of just $21 — without a cabinet decision.  Losses to the economy due to blackouts and related electricity woes are estimated at around $2.5 billion every year, or about 6 percent of gross domestic product. This year alone the government has already paid out almost $684 million from the public purse to EDL, according to figures released by the finance ministry last month.

To add insult to injury, the combination of these factors has resulted in another political debacle that has gripped the nation and delayed the affairs of parliament — all for a stopgap solution to the country’s most precarious public policy predicament.

The general’s plan

In August, Member of Parliament and Free Patriotic Movement(FPM) leader Michel Aoun submitted a one-page law to Parliament asking the government to budget $1.18 billion for the production, transmission and distribution of 700 megawatts (MW) of electricity capacity to augment the current output capacity of 1500MW, as well as the funding of required consultants, over a period of four years.

The proposal immediately set off political fireworks amongst both the opposition and the parliamentary majority, who decried the proposal as too limited in scope and/or oversight, thus putting it in Lebanon’s overstuffed inbox: the cabinet. But it was when Aoun’s bloc threatened to resign that things became particularly heated and the ‘one color cabinet’ became somewhat kaleidoscopic.

Of course, an additional 700MW is just the tip of the iceberg when it comes to addressing Lebanon’s electrical shortfall. Back in 2009, when FPM Minister of Energy Gebran Bassil unveiled his five-year strategy for the sector, Lebanon’s average consumption stood between 2000MW and 2100MW, peaking at somewhere around 2450MW in the summer months. According to the energy ministry, demand growth in 2009 was around 7 percent annually, or 170MW at peak consumption. Last month, the minister said that demand grows around 200MW to 300MW per year. Do that math and peak consumption today should stand at around 2900MW, meaning the difference between the capacity to be added (700MW) and what is still needed will be roughly same. Factor in another four years before production comes online and it becomes a small drop in the bucket. “It’s not about the [additional] 700MW; it’s about the 5000MW [projected to be needed after 2015],” says Albert Khoury, deputy general manager of the Electrical Utility of Aley, a concession that distributes electricity to the district of Aley. According to Cesar Abu Khalil, advisor to the Minister of Energy and Water, the reason this plan was proposed was because it could be the most easily implemented. It was the only one ready to go to tender, as the pre-qualification standards and conditions had already been completed, and the $1.8 billion budget had already been agreed upon by the previous cabinet and included as part of the draft budget for 2011, even before the five-year strategy was passed.

Although not mentioned in the proposed legislation —something opposition MPs were quick to note — Abou Khalil explained that the project is in line with the original five-year strategy approved in 2010. According to the energy ministry, the total budget for the project came to $850.4 million for installing Combined Cycle Gas Turbines (CCGT), $247 million for the transportation of power, $38.5 million for distribution and $40 million for consulting. Abou Khalil also stated that these figures are “estimates,” and do not necessarily reflect the money that will actually be spent because tenders have not yet occurred. “The accurate numbers will be released and everybody will know [them] when the tenders are done and the contracts won.” Contrary to what had been reported in the Lebanese press, another power plant in a new location will not actually be built, says Abou Khalil. The additional 700 MW will come from an additional CCGT “set”, the term in the power industry for a subunit of a CCGT power plant, at the Deir Ammar power station, generating between 400MW and 450MW and reciprocating engines in Jiyeh and Zouk. The project will also include the rehabilitation and the addition of power units in Zouk, Jiyeh and Deir Ammar to get to the final 700MW.

Deal or bust

While those 700MW may be able to at least account for some of the shortfall, the political fiasco over the project can be seen as a sign of things to come on the road to 24-hour power, which will not be reached for another four or five years even if everything goes as planned.

All other cabinet items were delayed and sessions put off due to the ruckus between Aoun’s 10-member bloc, which insisted the measure be passed as it is, and MP and chairman of the Progressive Socialist Party Walid Jumblatt’s bloc. This prompted mediation efforts from Prime Minister Najib Mikati’s ministers, as well as others from the Amal Movement and Hezbollah.

The reasons for opposition to the matter were unclear but revolved around funding the plan from the treasury rather than from international donors offering lower interest rates. It was eventually agreed that this issue would be discussed at a later stage and the debate then turned to the amendment of the existing electricity law, oversight from the cabinet and the creation of the legally mandated regulator, the Electricity Regulatory Authority (ERA).

As the gloves came off, the divisions in cabinet were clear, with reports of the prime minister slamming the table and screaming at the energy minister, levying counter threats that he too would leave the cabinet for good if there was no settlement. “You taught us to sit on the table and say ‘either you give us what we want, or we go.’ Now, I am using the same thing with you, Gebran: Either you go for the proposal, or I go,” Mikati was reported to have said, according to An Nahar newspaper.  Obviously he did not go, and a compromise was reached. When the premier emerged from the secret session he announced that the law had been approved, with amendments. One change was to the allocation of money, which it was determined would be spent over four years — $247 million in 2011, $305million in 2012, $277 million in 2013 and $252 million in 2014. The prime minister also announced an agreement over a regulatory authority to supervise the sector within three months and the appointment of a new board of directors of EDL within two months.

Regulation or removal of authority

But it was not all celebrations and champagne bottles for the energy minister and his party, as the hangover is sure to come. In theory, there is a law that was passed in 2002 that sets out how the sector ought to be restructured and regulated. Law 462, or the electricity law, is meant to replace the existing legal structure that grants EDL a monopoly over production, transmission and distribution of electricity. The law proposes that the sector be unbundled — separated into generation, transmission and distribution functions — and possibly partially privatized so that the private sector would be allowed to generate and distribute electricity to then sell to the government.

Overseeing all of this would be the ERA, which would set standards, give out licenses for production and distribution and set price ceilings and perform tenders. At least that was the rosy picture.

The reality is that since then there has not been one minister or cabinet that sought to introduce the regulator to the sector, as was supposed to happen. Nor were the implementation decrees issued, which should have taken place three months after the law was published in the Official Gazette almost a decade ago.

“We started drafting it in 1996 and it came out in 2002,” says Roudi Baroudi, an independent energy consultant and secretary general of the World Energy Council’s (WEC) Lebanon Member Committee, who worked on drafting the original law. “We should have had an electricity regulator since 2002. The implementation decrees were ready, the [cabinet] appointments were ready.”

While it may be global best practice, the issue of a sector regulator flares tempers amongst politicians. After Lebanon’s Taef agreement, which ended the civil war, most executive powers were transferred to the individual ministers under Article 66, effectively giving them a legal basis to choose to implement or not implement laws. 

In his previous post as telecommunications minister, Bassil was involved in a bureaucratic dogfight with the Telecommunications Regulatory Authority over the jurisdictions of each of their mandates. The issue ended up in Lebanon’s supreme court on several occasions. Eventually, the ministry won out and today the TRA is little more than an advisory body to the ministry and practices very few of its legal functions.

The apparent root of the problem in both the telecom and electricity laws is the way they were written, granting the minister the right to set the ‘general policy’ of the sector.

“The difficulty that we have faced in the Lebanese public administration has been: What is general policy?” says Ziad Hayek, secretary general of the Higher Council for Privatization. Abou Khalil adds that there is no specific political ideology held by the minister opposing the formation of the regulator (which PM Mikati announced should be established three months after an agreement on the 700MW law was reached, per the proposal of Bassil) but “under the present constitution, the minister is the head of his ministry and we cannot create any other body that can shackle him or prevent him from exercising his prerogatives.” Khalil called the time limit for establishing a regulator, “not a deadline [but] an encouragement”. 

Mohamad Alem, managing partner of Alem & Associates law firm, who specializes in public sector dispute resolution, said that if, after a period of three months, the minister does not propose the names of those persons who would head the ERA, the premier basically has two options: he either assigns the power to appoint the board of the ERA to the cabinet or removes the minister. Either option would be cataclysmic for the cabinet. Minister Bassil is one of the foremost, if not the foremost, minister of the FPM and the bloc controls a third of the cabinet; thus, the loss of one more minister would bring the whole apparatus crumbling down once again. The press office of the Council of Ministers could not be reached for further clarification.

        

      Amending the law

Generally, there is an agreement amongst most political circles that Law 462 will need to be amended. One of the agreements made at the September 7 cabinet session was that a committee comprised of PM Mikati, as well as the ministers of finance, health, justice, public works and transport, social affairs, energy and economy and trade would look at the introduction of amendments to Law 462.

According to Hayek there are two major areas where amendments are needed: one is the ERA, the second is the corporatization of EDL. When asked by Executive what the amendments he sought to impose were, Minister Bassil refused to comment in detail, saying only that the proposals were related to distribution, production, the ERA and alternative energy. Abou Khalil also declined to comment but did say that the discussions would begin with the proposed amendments already sent to the previous cabinet by Bassil.

With the issue of the 700MW law out of the cabinet, it is now in the hands of a much less amicable body. As Executive went to print, the bill was making its rounds at the joint parliamentary committees before hitting the general assembly.  In the first session there was a heated debate between opposition MPs headed by former Premier Fouad Siniora, who reportedly gave a presentation outlining the opposition’s position (namely that there is no mention of international concessionary loans in the law and no mention of the ERA) and then left the room without hearing Bassil’s response.

Already, the ministry’s arch-nemesis, opposition MP Mohammed Kabbani, is threatening further action against the ministry. Kabbani told Executive that if the ERA is not appointed within three months he will demand a vote of no confidence against the energy minister in parliament.

No end in sight

What all this means for the consumer is that they should not expect to be relieved of paying for electricity once to the government, twice to private generators, third in the form of a subsidy and fourth, whenever power surges destroy appliances. The political morass that has obstructed the implementation of any electrical progress for decades has not been cleared. Even if the current project is implemented, there will be no impact for four years; all the while the country’s aging infrastructure continues to deteriorate. In short, “there is no conspiracy,” says Khoury. “There is just rotten politics.”

Distributing a problem

Asked whether he would block the cabinet’s electricity bill in parliament, MP Mohammed Kabbani insisted that, if it reached parliament in the form agreed by the cabinet, he would not. However, he is not particularly happy with the overall five-year strategy, which he would seek to “improve and protect”, as its initiatives make their way through the budget process necessitating parliamentary approval.

Part of the five-year strategy is to restructure how electricity is distributed throughout the country. The Distribution Service Provider (DSP) project, carried out under the auspices of EDL, will split Lebanon into three areas where electricity distribution, maintenance and collection operations will be allocated to three contract winners over a four-year period. The DSP is a turnkey project where planning, design, asset management, construction of distribution facilities, meter reading, bill collection and project management are integrated, according to the energy ministry. The project is budgeted in the five-year plan at an estimated $361 million and scheduled to take place between 2011 and 2014, with an additional $50 million budgeted for the upgrade and rehabilitation of the system in 2015.

The tender for the project, which was not announced by the ministry’s media office and only mentioned in passing by the minister last month, has already been completed amongst seven principal bidders: the Arabian Construction Company (ACC), ACE, Batco, Butec, Caporal & Moretti, Debbas and Mercury. Each company has entered into a joint venture with a local partner, such as Khatib & Alami and ACC, as well as E-Aley and Batco.

According to Kabbani, however, the project is “definitely illegal… was it done in a way that allows for oversight? It was a tabkha,” or a cooked up deal.
According to Kabbani, the project involves public funds that will be spent without approval from the parliament, in contravention to the public accounting law, while there is nothing in the contracts that assures the government’s revenue will be protected.

He says because the companies are contractually obligated to install, manage and collect payments from consumers, but do not actually get paid a fee directly from the government, they will have to borrow the money from banks to fund their operations. However, to make back their investments Kabbani says that they will take a percentage of the money they collect from consumers, which should go to the government. That percentage is not yet approved by parliament and forms the crux of his objection. Kabbani, however, admitted that he had not seen the tender.

“There are already contractors for collection at EDL. I have always witnessed MP Kabbani emitting his opinion according to his political stance, not technical stance,” says Cesar Abu Khalil, advisor to the Minister of Energy and Water. “I reiterate for him to read the tender books, and the project, before emitting political opinions on a technical matter.”

According to the energy ministry, payment to service providers will be made up of a direct, set payment from EDL’s budget, and another sum determined by the amount of money saved by allowing the DSP to perform functions, such as installation of meters and collection of bills that EDL would normally do or contract out. “Each component [is] based on unit prices adjusted by key performance indicators which were well-defined during the bidding process and able to be accurately calculated during the implementation process,” the ministry says. The five-year strategy also reiterates this point, stating “the recovery of capital and cost of financing will be paid from improved collection.”
“Our remuneration is dependent on how well we perform or on how badly we perform, [with] huge penalties [if] we do not,” says Albert Khoury, deputy general manager of the Electrical Utility of Aley, a concession that distributes electricity to the district of Aley and who is the local partner on the Butco bid. “We need to have results.” In any case, the final call on the legality of the matter will be decided both by the Minister of Finance and the Audit Court before the contracts can be awarded.

 

October 3, 2011 0 comments
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Economics & Policy

High Hopes and Higher Hurdles

by Sami Halabi October 3, 2011
written by Sami Halabi

Recent history would show that perhaps the only thing slower than Lebanon’s Internet speed is the process the politicians have undertaken to bring about faster Internet speeds. But just as web pages do, eventually, load onto laptop screens in Beirut, it may be that Lebanon’s online evolution from the Stone Age to the modern day will not take another millennia.

Former Minister of Telecommunications Charbel Nahas promised as much when he announced on January 28 of this year that third generation Internet services (3G) “will be available to the Lebanese in all areas within seven months” — alas, such was not to pass, though the country’s telecommunications sector has not been entirely devoid of new life.

The light at the end of the tunnel

3G technology is a means of incorporating high speed Internet with mobile devices such as “smart phones,” but subscribers will also be able to attach a simple device called a “dongle” to their computers and use the service the same way they currently use other wireless Internet products on the market such as the pervasive Mobi and Wise Box. The speed promised by Nahas, who is now the country’s labor minister, was to average 7 megabits per second (mbps) and reach speeds “up to” 21 mbps. That would be a speed 27 times faster than those currently available via a digital subscriber line (DSL) (the current fastest possible Internet connection in the country), 70 times faster than those available using the general packet radio service (GPRS) and 500 times faster than those available to ordinary cell phone subscribers, according to Nahas.

Of course, the August 28 kick-off date has come and gone, but work on the 3G network has been underway, and by September 20 the first round of testing was launched by two state-owned Mobile Interim Companies — MIC1 and MIC2 — managed by Alfa and MTC Touch, respectively.

New prices, same story

Another promise put forth was from the current Telecommunications Minister Nicolas Sehnaoui for a new list of speeds, prices and download/upload caps. Under his plan, speeds would increase between four and eight times their present snail’s pace. Such a measure requires approval from the cabinet, which was confirmed in the official gazette on September 15.

The decree details the new pricing and capacity structures for consumers and data service providers (DSPs) looking to increase their services, and was due to come into effect on October 1.

The reason such an advance in conventional and 3G Internet use has become possible at this point is because an undersea Internet cable dubbed the India-Middle East-Western Europe 3 (IMEWE3) has finally been opened up, after having originally been scheduled to go online in March 2010. 

The IMEWE3 cable has a total capacity, for the many countries connected, of 3.84 terabytes per second. Lebanon’s allocation is 120 gigabits per second (gbps), with the potential to be upgraded to some 300 gbps, a game changer for Lebanon, whose legal bandwidth transmitted over the Cadmos cable was around 2 gbps before the IMEWE3 opened up. The problem with the cable was, perhaps predictably, political in nature.

As Executive reported in July, Abdulmenaim Youssef, the head of Lebanon’s fixed line operator, Ogero, refused to hand over the administration of the cable to Minister Nahas. Coincidentally, Youssef also occupies the post in the ministry that is supposed to oversee Ogero. Youssef, who in the past was close to the current opposition and is now believed by many to be supported by the Premier Najib Mikati, is in charge of doling out the needed international capacity to companies like service providers MIC1, MIC2, the DSPs and the Internet service providers (ISPs). This is done by distributing E1s, or bandwidth packages equal to 2 mbps, to those who request them.

The government recently decreased the price of an E1 from $2,700 to $420, ostensibly to facilitate the expected consumption increase. As Executive went to print, 10 gbps of extra capacity had already been opened up through the IMEWE3 cable, according to Firas Abi-Nassif, advisor to the telecommunications ministry.

According to Habib Torbey, head of the Lebanese Telecom Association (LTA), president of GlobalCom Data Services and owner of Internet provider IDM, “The 10 gbps is needed for the initial phase [of the fixed Internet upgrade], but directly afterwards there should be 20 gbps ready [for use].” He added that the government has promised to increase the bandwidth to 100 gbps by the end of the year.

“We have signed all requests for E1s from private sector companies,” said Abi Nasif, when asked if the providers had received their requested capacity. “Once the minister signs, the execution is in the hands of Ogero. If this does not take place, kul hadis illu hadis,” an Arabic expression that roughly translates as a veiled threat that there will be consequences. Youssef did not respond to Executive’s request for comment. But at press time, several ISPs had confirmed that they still had not received their requested E1 lines.

Torbey also stated that the minister’s office had informed him that private DSPs will be allowed access to more of Ogero’s central offices (COs), distribution centers in each neighborhood that are needed to dole out DSL to customers. In 2006, when DSL Internet was being introduced to the market, the telecommunications ministry signed a memorandum of understanding with private sector players stating that the government intended to compete with them on a level playing field. Ogero, under Youssef, opened up the initial 35 COs to the private sector but later rescinded that privilege and eventually blocked them from entering any of the 171 total COs that were created. Ogero capitalized on their market position and scooped up the lion’s share of potential customers around the country, leaving the private sector unable to compete.

If progress is not achieved in the current environment, the minister could technically ask the cabinet to remove Youssef from one or both of his posts. The fact that he is both head of Ogero and head of Ogero oversight, as far as the telecommunications minister’s party leader Michel Aoun is concerned, is already illegal. With a cabinet that, at least until recently, was described as ‘one color’, putting pressure on Youssef may be much more feasible than at any time since Youssef was held in jail for several months on charges of wasting public funds and illegally using official telephone lines in 2004, though he was eventually cleared and released.

Aoun has already hinted that Prime Minister Najib Mikati is protecting government officials who are violating regulations. Aoun and Mikati recently came to loggerheads over the electricity file currently before cabinet, and there has been speculation that if Youssef does not implement the planned expansion of the network, then Aoun’s party, the Free Patriotic Movement, will lobby the cabinet to have Youssef removed.

Faulty framework

Even if everything goes according to plan, come October 1 there are other potential roadblocks in the way of an efficient telecommunications network. According to studies carried out by private sector operator Cedarcom, the majority of subscribers will choose either plan two (1 mbps with a 10 GB cap) or plan three (2 mbps with a 20 GB cap). But even if the bandwidth becomes available, there are doubts about Lebanon’s infrastructure.

“The situation of our ground networks is very catastrophic,” said Riad Bahsoun, an expert at the International Telecommunications Union, the United Nations agency for information and communications technology. “In its present state the [local] network cannot cope with any expansion.”

The government currently does not have a standard and functional quality of service system to monitor if breaks and outages are occurring on a regular basis and where. While a new fiber optic network is being built around the country — and will take at least another year to become functional — the present outdated network relies on a mix of fiber, coaxial cables (made for voice, not data) and old copper wires.

Indeed, last year saw several outages that cut off entire swathes of the country from the Internet access for days. “There will be more and more cases where people ask for the 6 mbps and they cannot get it,” said Imad Tarabay, chief executive of Cedarcom, which distributes the Mobi wireless service, and secretary general of the LTA, which represents the country’s private sector Internet providers.

Even so, Abi-Nassif, who specializes in Internet traffic engineering, said the network will be “fine”, although he admitted “things will not be 100 percent smooth on October 1.” 

Bahsoun, however, called the much-publicized plans to upgrade an effet d’annonce, a French term for an announcement made for effect whose veracity is in doubt.

“The media was sold the issue of the Internet [upgrade] under Sehnaoui but all he did was apply the things that have been around since [former telecom minister] Gebran Bassil,” he said. “But it is good that he went forward and did it.”

Private sector exclusion

So with faster and cheaper fixed Internet a possibility this October, or some time thereafter, the option of mobile Internet is still on the table. The ministry has not yet set pricing for the service, but according to Abi-Nassif it will be announced on October 20 when the minister will unveil the coverage areas, details and dates. He said that the process of covering the country would take roughly a year and the rollout would be gradual.

As Executive reported last March, Cedarcom was planning to bring forward a lawsuit against the telecom ministry at the Shura Council, Lebanon’s highest court, seeking to halt the 3G project, not because they are against it in principle, said Tarabay, but because it would effectively neutralize the private sector and nationalize the telecommunications industry. That lawsuit has since been submitted and is being considered by the Shura Council.

The thrust of the allegation is that MIC1 and MIC2 have been granted neither the licenses nor the frequencies required to legally provide 3G service — yet they are proceeding with plans to do so anyway — while private sector players are being disallowed from entering the 3G market because they do not have licenses to do so. The initiation of a wholly public sector 3G service would almost immediately price the private sector out of the market because of the large fiscal imbalance between the two in terms of taxation and operating costs.

Tarabay said that as part of the legal proceedings both Cedarcom and the ministry were asked to present their operating licenses to Shura Council. Accordingly, Cedarcom did so, while the ministry did not present the licenses of Alfa and MTC within the timeframe allotted. A copy of the Shura Council decision obtained by Executive indeed declared that the decision to launch 3G by the ministry was not in line with legal standards for a number of reasons: that the decision was taken during a caretaker government, that it is the job of the TRA and the cabinet to issue the licenses, and even that the decision contradicts the principles of fair competition. The decree furthered that the 3G projects should be halted for a period of a month and the ministry given 15 days — starting September 15 — to renege on its decision to proceed.

When Executive asked Abi-Nassif to confirm this information he said he was not aware of the issue but would transfer this and all other legal questions to the person in charge. Several days later, he called back to say that the ministry would “rather not” comment on legal issues at the time.

Despite the Shura Council ruling the minister has claimed on his Facebook page that he will proceed with the plans, because, “no one can stand in the way of change and reform [and] the minister will show the weakness of those trying to slow down this project”.

As such, when it becomes time for the cabinet to price the service for the public, it may technically be pricing a service that is illegal.

Compromise or cop out?

There may be a compromise solution to the public-versus-private sector dispute over 3G, however. According to Abi-Nassif, ISPs could serve as mobile virtual network operators (MVNO), an industry term for a company in agreement with the owners of a telecom asset that performs services ranging from complete resale with separate branding to merely offering a back office service such as billing. Abi-Nassif confirmed that this was the ministry’s “orientation” at the moment but did not confirm that this was the final policy.

The LTA’s Torbey confirmed that he was in talks with the ministry on this very subject. “If the government gives me an MVNO that would be enough for me,” he said. But he will not accept to be “just a reseller,” seeking instead to be a “real added value service provider.”

“At the end of the day we started Internet in this country, we know more than anyone what our customers want. Why would they put restrictions on us and say ‘you can install this but not that?’ It’s not right,” said Torbey. “We shall see what we will do if they don’t let us [install what we want]. That’s why there are negotiations.”

Even if an MVNO is agreed upon it would not necessarily solve the problem. If 3G is launched in its full capacity before the MVNO, then the same thing that happened with DSL — public sector control of market share —could happen again, leaving the private sector out to dry.

“We are pressuring the ministry so that we start at the same time as Alfa and MTC. Otherwise there will be a conflict,” Torbey said. “There are people on the other side who are pushing in the opposite direction, saying ‘why should you give the ISPs the right to sell on 3G? We as MTC and Alfa want to sell on our own.’ There is a conflict of interest for sure,” he concluded, while saying that he will accept no less than to be allowed to have an MVNO that gives them “everything but infrastructure.”

 

October 3, 2011 0 comments
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Economics & Policy

Executive Insight – Stronger but not immune

by Fabio Scacciavillani October 3, 2011
written by Fabio Scacciavillani

After months of burying their heads in the sand, markets and policy makers are waking up to the reality of a double dip in many mature economies. The logic of the recovery was quite simple: the massive bank bailouts, the fiscal stimulus and the monetary injections were supposed to provide temporary support to avoid depression while the deeper underlying causes of the crisis were addressed and resolved.

The reality has been utterly disappointing. As soon as a timid recovery materialized in mid-2009, world leaders, financers and central bankers patted each other on the back, hailing the “green shoots of growth” in a self-congratulatory ritual. Hence difficult but unavoidable decisions were postponed day after day while the stock market was inflated by the liquidity injected by the United States Federal Reserve and, to a lesser extent, the European Central Bank.

Once the ‘quantitative easing’ programs expired, stock markets lost steam, and by the second quarter of 2011 all major economies were close to stagnation.

Faced with evidence of declining economic activity, most media and analysts started to drum up the “soft patch” rhetoric, suggesting the slowdown was a mere pause in the global recovery. Yet by the summer, with the intensification of the fiscal crisis in Spain and Italy, the smoke and mirrors were wiped away, revealing a chronic lack of leadership and policy direction, laid bare by the squabbles over the debt ceiling in the US. Investors were forced to realize there was no long-term plan to tackle the crisis.

Belatedly, the reality of an impending double-dip recession has sunk in, although the extent and the duration are still being debated. But it will not be a matter of a few months given that there is no catalyst for growth in sight. Nor are current policies going to rectify the situation in the short-term. It is unlikely that the structural reforms that are key to boosting long-term growth prospects — including revamping fiscal systems, European Union governance, financial regulations and welfare programs —  will be enacted before the end of the year. In the meantime risks of a large sovereign default or other disruptions loom.

Buoyed by barrels

So far the Gulf Cooperation Council (GCC) has emerged relatively unscathed from the global economic crisis, not withstanding the effects of the Arab uprisings this year. But how long can this last? The resilience results from healthy growth in the emerging markets — above all in China —  which has maintained high oil prices and international trade. If the recession deepens, we could experience a situation similar to that in early 2009 when the oil price plunged below $50 a barrel.  

GCC states remain obviously reliant on oil revenues, which account for close to 78 percent of total exports. Saudi Arabia in particular has embarked on a program of increased social spending to defuse political tensions. Standard Chartered estimates that Saudi Arabia will incur budget deficits if the oil price falls below $106 per barrel.

Break-even oil prices have increased in the rest of the GCC, although they are still below current market prices. The UAE and Kuwait need oil prices at $80 per barrel to balance their budgets, while Qatar based its $6.1 billion surplus budget projections for 2011 on an oil price assumption of $55 per barrel. Oman’s 2011 budget was drafted with a slightly higher figure, at $58, and while higher spending has been incurred the high average oil prices of $106 so far in 2011 gives them a fairly comfortable cushion. 

Even the International Monetary Fund in its latest World Economic Outlook, issued in late September, underscores that growth in the MENA oil exporters will be almost 5 percent in 2011, gliding to almost 4 percent in 2012. The IMF mentions downside risks from political unrest and a deeper fall in commodity prices (in the baseline scenario oil prices are expected to fall by only 3 percent on average in 2012), but overall the picture is rather positive, especially if compared to mature economies.

If the global picture were to deteriorate, there are two elements to keep in mind. The lessons from 2009 have been internalized: commitment to public spending kept the economies going then and will again act as an anchor of stability in 2011/12.

Actually, governments would be wise to reiterate their commitment to expenditure on infrastructure now, without waiting for the situation to worsen. This will reinforce confidence, thereby sustaining credit, private investment, consumption and the job market.

Lessons learnt

There is an even more important factor compared to 2009: financial markets have improved markedly. High-grade credit from the GCC has been buoyant, with Abu Dhabi and Qatar outperforming most sovereign benchmarks from emerging markets. International portfolio managers have developed a more insightful knowledge of the region, whereas in 2008 there was hardly any significant fixed income market.

During 2011 regional bonds withstood the bouts of global volatility, in contrast to 2009 after the Nakheel default. Traders for example recall that Qatar sold $7 billion in bonds in November 2009, subscribed mainly by investors in the United States and the United Kingdom, and as a result of the turmoil ensuing the Dubai World debt moratorium, some portfolio managers sold them on the belief that the Emirate was part of the UAE.

The notable progress made in the past two years in creating a fixed income market and some central banking facilities has paid off: liquidity is improving dramatically, with several benchmark issues now gettingt he attention of large funds with the analytical resources to assess the economic situation professionally and not hysterically. Crucially, GCC paper finds better acceptance in the repurchase (repo) market with low haircuts. This is of the utmost importance because in crises heightened risk aversion affects dramatically those securities that do not provide liquidity and that cannot be used as collateral in repo operations.

The Lehman bankruptcy was essentially a run on the international repo market and hit the GCC banking system because short-term financing became difficult. If such an extreme event were to take place again the lines of defense are stronger. Additionally, commercial banks have painstakingly cleaned their balance sheet of non-performing loans, while name lending after the Algosaibi-Saad affair is being replaced, albeit sluggishly, by careful assessment of balance sheets and business plans.

Not everything is rosy: corporate governance remains patchy, macroeconomic statistics in some areas are far below emerging market standards (in the UAE especially) and stock markets remain extremely fragmented and illiquid. Sovereign bonds from the region are not included in emerging market indices; hence the GCC bonds are an off-index choice for most international funds. This means they are the first to be dumped by investors whose portfolios track broader indices.

In conclusion, thanks to solid fundamentals and an improved financial landscape, the GCC can reasonably withstand another mild recession lasting two or even three quarters, but the ripple effects of a deeper downturn or a traumatic sovereign default would be felt on Gulf shores. Accumulated wealth is a strong bulwark, not total protection.

 

 

 

October 3, 2011 0 comments
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Since its first edition emerged on the newsstands in 1999, Executive Magazine has been dedicated to providing its readers with the most up-to-date local and regional business news. Executive is a monthly business magazine that offers readers in-depth analyses on the Lebanese world of commerce, covering all the major sectors – from banking, finance, and insurance to technology, tourism, hospitality, media, and retail.

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