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by Executive Editors May 28, 2011

written by Executive Editors

ABL adjusts benchmark lending rates

The Association of Banks in Lebanon (ABL) has recommended an adjustment of local and foreign currency benchmark lending rates to its member banks. In a circular dated April 12, ABL urged Lebanese banks to lower the Beirut Reference Rate (BRR) on lending in Lebanese lira (LL) from 7.27 percent to 7.21 percent. At the same time, it recommended raising the BRR on US dollar (USD) lending to 4.79 percent from 4.72 percent. The BRR on USD lending replaced the London Interbank Offered rate (LIBOR) as the national reference rate for lending in foreign currency in 2009, after the ABL had judged the LIBOR to no longer reflect the cost of funding and lending in Lebanon. The new benchmarks were adopted on both USD and LL lending in March and May 2009, respectively. Both BRRs constitute the basis to calculate the Beirut Prime Lending rate. ABL’s latest recommendations are part of efforts by Banque du Liban, Lebanon’s central bank, and the association to stimulate lending in local currency. The proposed adjustments will be effective as of May 2011.

El Zein group acquires controlling stake in MedGulf

Lutfi El Zein (LFZ) Holding, the investment vehicle owned by the insurance sector personality of the same name, has acquired a 51 percent stake in Mediterranean and Gulf Insurance and Reinsurance Group (MedGulf Group) in a transaction valued at $400 million. El Zein, long-time chairman and chief executive officer of MedGulf Group and previous holder of a minor shareholding in the group, purchased the stake from Saudi Oger, the conglomerate owned by the family of Lebanese caretaker Prime Minister Saad Hariri. The acquisition is the largest leveraged buy-out (LBO) in the Middle East since 2007 and the largest ever insurance LBO in the Middle East and North Africa region. A consortium of 16 banks arranged the deal, which includes a $175 million syndicated loan facility, part of a multi-tranche financing package. Lead arranger on the acquisition was Bank Audi; Deutsche Bank was the book runner. MedGulf Group, which is Lebanon based, is stakeholder in MedGulf Bahrain, which in turn owns 32 percent of MedGulf Saudi, a listed company.

Moody’s raises DP World debt to investment grade

Moody’s ratings agency raised the credit ratings of DP World, a leading global port operator and subsidiary of Dubai World, to investment grade with a stable outlook, citing the company’s rapid recovery in terms of operating performance in 2010 and into 2011. The upgrade to Ba1 from Baa3 includes DP World’s long-term foreign and domestic currency ratings, and the rating on its $1.5 billion Sukuk Islamic bond, due in 2017, with a total of $3.25 billion in debt affected. The positive rating action follows DP World’s late March announcement of 35 percent increase in 2010 net profits to $450 million, buoyed largely by strong volume growth in the second half of the year. According to Moody’s, the ratings are sustained by the company’s diversified global operations, expected growth in container traffic, as well as solid profitability and a strong liquidity profile.

Auction for Syria’s third mobile license postponed

Syria has suspended plans to auction off the country’s third mobile license due to political tensions and changes in its government. Scheduled for April 17, the license auction could not proceed due to a change in the supervisory committee overseeing the auction after Syrian President Bashar al-Assad replaced his prime minister and cabinet and promised to introduce new electoral and media laws in response to popular revolts. By the time of the auction’s suspension, the number of bidders had already shrunk from five to two companies. In March, the United Arab Emirates’ mobile giant Etisalat pulled out of the bidding, stating disappointment with the stipulated 25 percent revenue share allocation to the Syrian government. Etisalat’s bid was estimated at $122 million. Also citing Syria’s revenue terms, potential bidders France Telecom and Turkcell quickly followed suit and dropped out. By early April, Qatar Telecom Company (Qtel) and Saudi Telecom Company (STC) were the only bidders left. At the time, both companies reconfirmed their bidding commitments. Following postponement of the auction, Qtel said it was still firmly interested in pursuing the license despite the delay.

Plastic payment

on the rise in LebanonFigures released by Banque du Liban (BDL), Lebanon’s central bank, for February 2011 show that payment cards are still gaining favor with Lebanese consumers. According to BDL, the number of payment cards in the country reached 1.69 million in February 2011, up by 7.3 percent from the same time last year. Of all plastic payment methods, credit cards experienced the highest year-on-year increase in February of 15.4 percent, now totaling 395,000, or around 23 percent of all issued cards. Prepaid and charge cards were up 9 percent from the year before, amounting to 10 percent of all payment cards. Debit cards still held 66 percent of the market — with 1.12 million in all — though they recorded just a 4.5 percent increase year-on-year. Point of sale purchases in February jumped 24 percent year-on-year.

Kafalat guarantees fall

Guarantees issued under the Lebanese Kafalat loan guarantee program dropped 23.21 percent year-on-year in first quarter of 2011. However, the average value per guarantee rose to $139,200, up 17.76 percent from an average of $118,200 a year earlier. The face value of guarantees issued in the first quarter of 2011 reached $41.9 million. Allocation of loans by sector saw the industrial sector in the lead with 39.87 percent of total guarantees. Loans to the agricultural sector, comprising 37.21 percent of total guarantees, took the biggest hit as they declined 41.97 percent from a year earlier. In contrast, tourism sector guarantees increased by a yearly 38.10 percent since end-March 2010, accounting for 19.27 percent of total guarantees. Geographic distribution of loans at the end of the first quarter showed that companies in Beirut and Mount Lebanon accounted for 50.5 percent of Kafalat loans. The Kafalat scheme has been noted internationally for its quality, including praise as best performing credit guarantee scheme in the Middle East and North Africa in a March 2011 report by the World Bank.

Lebanon’s life premiums up 15 percent in 2010

Total life insurance premiums in Lebanon increased 14.8 percent to $356.7 million in 2010, according to the annual insurance sector survey by Al Bayan magazine. The report said the 2010 growth was double the 7 percent increase achieved the previous year, adding that life insurance penetration in Lebanon stood at 0.9 percent of gross domestic product for 2010, at an insurance density of $89.2 per capita. Firms reporting higher life premiums vastly outnumbered losers as 27 out of 33 life providers posted gains, led by two firms claiming triple-digit gains. Market share concentration by Lebanon’s top five life insurers dropped by about five percentage points year-on-year to 59 percent in 2010, representing an aggregate value of life premiums of $210.3 million. Metlife ALICO ranked first in life premiums volume with $70.7 million, or 19 percent market share. The other companies in the top five for 2010 were Allianz SNA, Bancassurance, Arope and LIA with life premiums of $40.8 million, $37.5 million, $36.5 million and $24.8 million, respectively. Arabia Insurance reported the biggest growth, an 829 percent leap that propelled it from 15th to 7th place in one year. MedGulf saw the sharpest decline among the country’s top 10 insurers; its life premiums dropped 14.4 percent in 2010.

UAE IPOs rising, but slowly

In signs of life for Gulf Cooperation Council primary markets, three companies in April announced plans to sell shares through Initial Public Offerings (IPOs) in 2011. Between May 1 and May 11, United Arab Emirates’ Eshraq Properties will be offering 55 percent of the company in an IPO worth $220 million, the first IPO on a UAE exchange by a real estate developer since Dubai’s Deyaar in 2007. Funds raised are expected to finance Eshraq’s developments, including the $2 billion Marina Rise on Al Reem Island. After a dry spell of no public offerings in more than two years in the UAE, the Eshraq flotation will be the Abu Dhabi Exchange’s third IPO in 2011, following two insurance-related offerings in February and April. While financial observers judge the return of primary markets positively, international firms have warned recently that political risk could deter investors. In the two other new IPO announcements, Saudi Integrated Telecommunication Company (ITC) received approval from the country’s Capital Market Authority to offer 35 percent of its shares between May 2 and 8 in a bid to raise $93 million. In Oman, electricity producer SMN Power Holding said it is planning a 35 percent offering on the Muscat Securities Market in 2011; further details on the offering’s size and timing were not available.

May 28, 2011 0 comments

Comment

Iraq emerging

by Riad Al-Khouri May 28, 2011

written by Riad Al-Khouri

Eight years after the American-led invasion of Iraq, the country’s business climate seems to finally be showing some substantive improvements. Granted, the essential quality for the country to re-emerge as a target for investors is physical safety and stability, and on that score the numbers at first sight don’t appear encouraging; the level of violence in Iraq in March more than doubled compared with February. According to statistics from official Iraqi sources, in March, 136 civilians and 111 Iraqi police and soldiers died in attacks across the country; in Baghdad alone, 79 civilians and 31 security personnel were killed: more than twice the previous month’s total. The current level of violence is, however, still far below what Iraq saw during the sectarian warfare peak of 2006-2007; and a suggestion as to why the violence grew recently is that relaxed security forces, over-confident that the situation is calm, are making their searches less vigilant. Hopefully, neither this nonchalance nor the violence will become a trend.

Despite the security slips in Iraq of late, in recent months there have been rising numbers of international organizations and foreign businesses heading for the country’s capital to set up shop. Among the former is the United Nations Development Program for Iraq — previously based in Amman — which is due to begin relocation to Baghdad this month. And the lifting of a travel ban to Iraq on officials of the Paris-based Organization of Economic Co-operation and Development (OECD) is a further indication of a potential ‘Baghdad Spring.’ In the private sector, interest in Iraq on the part of big multinational banks is also growing: at an OECD workshop on Iraqi infrastructure development, held in Jordan in March, the Hong Kong and Shanghai Banking Corporation (HSBC) Group, Citibank and J.P. Morgan showed a keen interest in doing more business in Iraq. HSBC is already in the country through a majority holding in a local bank, and Citi has also been focusing more on Baghdad in the past few months.

Whatever political contortions and security issues may arise in Iraq, more business is certainly coming to the country. For example, the OECD event looked at vast projects to be undertaken, including an Iraqi Ministry of Agriculture plan to set up market complexes for the storage and distribution of farm produce. The recent announcement of an Islamic Development Bank grant for a feasibility study indicates that the project is under serious consideration.

Agriculture in particular could be the country’s new center of business attention (after the always-present focus on oil). Recovery in Iraq generally has not been matched by a revival of agriculture, once a mainstay of the country’s rural economy. Government wholesaling through the country’s creaky public distribution system is now increasingly recognized as problematic and technology, human capital and machinery in the sector lag behind as well. The scope for Iraq’s food production is enormous, and a focus on this kind of business would provide attractive solutions to internal migration, among other key issues plaguing the country.

Though a full recovery is not going to happen automatically or overnight, indications are now positive for the first time in decades — and certainly since the US invasion of Iraq in 2003 — that an improved business climate in the country is beginning to attract interest in non-oil investment, which in turn will help businesses to prosper and reinforce a positive cycle. Physical security is of course crucial, so before rushing to book a flight to Baghdad (where planes no longer land in a “corkscrew” pattern dictated by security concerns) one must remember that this is still no Disney Land. However, the recent economic and political momentum means that the risks of doing business in Iraq are slowly being outweighed by the potentially enormous benefits. Investment climate tipping-points are difficult to spot and to analyze but Baghdad is now heading in the right direction.

Riad al Khouri is dean of the business school at the Lebanese French University in Erbil, Iraq, and a senior economist at the William Davidson Institute in the Ross School of Business of the University of Michigan, Ann Arbor

May 28, 2011 0 comments

Comment

The tale of two Ammans

by Peter Speetjens May 28, 2011

written by Peter Speetjens

Jordan is often said to be divided, both demographically and politically, between so-called “real” Jordanians and those of Palestinian descent. Yet that is hardly the only fault line lurking below the relative peace that has reigned over the Hashemite Kingdom in recent decades.

The capital, Amman, for example, is like an apple split into two unequal halves. West Amman is rich and spacious, dotted with grand villas complete with lavish lawns and pools. Here one finds French supermarket chains, luxury hotels and foreign embassies. Here live the diplomats, aid workers and just about every Jordanian who “made it”. Here when they eat, the choice is between sushi, steak or pizza.

East Amman, on the other hand, is a giant beehive of cheap concrete in desperate need of a lick of paint. Here live most of Amman’s 2.8 million people on a variety of bread and beans. The city’s east and west meet at the Husseini Mosque in downtown which, though not even 100 years old, is one of the oldest buildings in the young capital. The mosque was also the center of recent demonstrations that have attracted a few thousand people — and nearly as many policemen. Yet so far people have not taken the streets en masse.

“I have no time for politics. I have three kids to feed,” said a taxi driver, Ahmad. To do so, he works an average of 10 hours per day, 6 days a week. Every morning, he rents his yellow cab for JD 24 ($33.8) and buys petrol for around $22. On a good day he goes home with nearly $30 in profit, on a bad one with about $10. “You know the difference between Bahrain and Jordan?” he asked. “In Bahrain people have money but no freedom. In Jordan they have freedom but no money.” Still, as if to illustrate the limit of liberty à la Jordanienne, he insisted that his full name not be used.

Based on 2008 figures, the 2010 Jordan Poverty Report determined the national poverty level as below an income of $80 a month for an individual, and below an income of $5,473 annually for an average family of 5.7 members. The average annual family income in 2008 in Jordan was just $8,706. The report concluded that the number of people living in extreme poverty in 2008 increased by 0.3 percentage points to 13.3 percent, despite the fact that gross domestic product that year increased by no less than 7.6 percent, prompting economist Yusuf Mansur to conclude that “economic growth has nothing to do with poverty reduction.”

Purchasing power in the different spheres of spending becomes clear at a market in east Amman, where one Jordanian dinar (equal to $1.4) will buy four pairs of large underwear, six pairs of socks, 10 kiwis or 10 kitchen knives “made in China”; for the same amount in west Amman one can buy half a hamburger in an American fast food joint. The rift between east and west, rich and poor, is perhaps more profound than between “real” Jordanians and “Palestinian” Jordanians, given that these groups live on either side of the city’s socio-economic divide.

However, the divide between haves and have-nots is also linked between capital and country, said Nawaf Tell, head of the Center for Strategic Studies (CSS) at the Jordan University. A recent CSS study concluded that the tribal regions of Ma’an in the south and Mafraq in the north of Jordan are by far the country’s poorest. For people living there, west Amman is like another planet, with even poor east Amman a step up the social ladder. According to Tell, the government’s development policy and constant focus on Amman is only exacerbating the divisions; the provinces have seen hardly any development and the north and south threaten to become a “chain of ghost cities” as the poor continue to migrate to the capital city.

“Amman does not have the resources to absorb such growth,” he said. In this era of regional unrest, one can only wonder how long this increasingly lopsided tale of two Ammans can remain a stable one.

PETER SPEETJENS is a Beirut-based journalist

May 28, 2011 0 comments

Economics & Policy

Rendez-vous with the rebellion

by Sam Tarling May 26, 2011

written by Sam Tarling

A Free Syrian Army fighter rests in a hill-top hideout near the Syrian city of Idlib [Photo: Executive/Sam Tarling]

The men are short of rocket propelled grenades, a key weapon in the FSA's arsenal [Photo: Executive/Sam Tarling]

FSA soldiers observe heavy fighting on a neighboring hilltop [Photo: Executive/Sam Tarling]

A member of the Free Syrian Army looks on as heavy fighting erupts on a hillside during an attack by his unit in the mountains of Idlib [Photo: Executive/Sam Tarling]

An FSA lieutenant assembles a remote trigger which will detonate the improvised explosive devices seen here [Photo: Executive/Sam Tarling]

An FSA fighter collects his weapons before heading out on an attack [Photo: Executive/Sam Tarling]

High demand and short supply has pushed prices for ammunition and weapons sky-high [Photo: Executive/Sam Tarling]

FSA soldiers go to great lengths to re-supply their base without being spotted by the Syrian Army [Photo: Executive/Sam Tarling]

An FSA fighter surveys his home in the town of Chatouriea [Photo: Executive/Sam Tarling]

An FSA soldier rests at a base near the Turkish border. Turkey, along with America, has recently pledged 'non-lethal' support for the Syrian opposition [Photo: Executive/Sam Tarling]

From the northern Syrian province of Idlib, a moment in the uprising

May 26, 2011 0 comments

Real Estate

Q&A – Joseph Mouawad

by Rayya Salem May 3, 2011

written by Rayya Salem

Joseph Mouawad, chairman of Mouawad Investment Group (MIG), has gradually earned his place among Lebanon’s top developers of residential properties, country clubs and mixed-use offices since the start of Lebanon’s post-civil war reconstruction effort. Two of his major ongoing projects, covering almost 90,000 square meters in Faqra, will soon put his footprint on the famous Lebanese resort town. Executive chatted to the developer about his latest resort operations and his sway toward hospitality projects in Beirut.

After the success of Park Tower Suites in Ashrafieh, you seem to be gravitating towards more hospitality projects in Gemmayze, Saifi and Monot…

In our new residential project Monot 38 on Monot Street on land we acquired about a year ago, we will also have a boutique hotel, Monot Suites, of about 25 rooms, along with the residential tower of about 20 floors, which will consist of small to medium-sized residential units of 100 to 300 square meters, of which 35 percent is sold.

And in October of this year, Saifi Suites will function as a boutique hotel, offering 70 suites. From our previous experience at Park Towers, we were able to put up a good [internal] management team to manage the new hotels that are coming up.

Why hotels? Is the profit margin higher? Is there a gap in supply?

We believe there is shortage in hotel supply in Beirut. Even before the [civil] war, we had more rooms. We believe that building a hotel will be an added value for a long-term investment, especially when you have a prime location.

You have signed with Rotana to manage an upcoming Gemmayze hotel project, correct?

We are developing a new hotel project with Rotana’s new brand Centro, as the manager, on Rue Pasteur in Gemmayze. It will have a view to the port, and it’s a nice area that allows visitors to walk to trendy shops, bars and pubs. The restaurant in the hotel will cater to both hotel clientele and the Gemmayze crowd.

And why did you choose Rotana to run operations?

I found an opportunity in the new brand they’re putting up: the Centro brand. It is a trendy budget business hotel that will cater mainly to business people and tourists, and Beirut has few three and four-star hotels so this will garner much demand, and their reservation system will help fill the 170 rooms. [In March, Rotana Hotels became the first Middle East hotel operator to sign an agreement with Google to display Rotana rates and availabilities on Google platforms.]

In Beirut,since [MIG’s] The Palladium building [near Starco center] was finished three months ago, are there any new tenants?

Bank Audi rented around 7,000 square meters of office space, which will accommodate around 400 employees of the bank. But in terms of retail space, just recently, Santiago [womans clothing boutique] opened [in addition to Lanvin, Balmain, and Isabel Marant, which belong to the same owners, as well as Manasseh, the renowned Silverware store]. In terms of restaurants, in addition to Kampai [Asian restaurant] already open, we will also have Le Cocteau that is expected to open in June 2011. ..We are partners in both of them. We are now in the process of closing some other retail shops.

How much do you want to grow the hospitality wing of your activities?

We want, eventually, 50 percent of our activities to be under the umbrella of hotels and restaurants.

Since the banks are tightening their fists, how has your financing strategy changed overthe last few years?

Our debt-to-equity-ratio will start changing from now on because banks are demanding higher equity in the projects, as they believe the market is saturated. They are requiring 50 percent equity compared to 20 to 25 percent previously. Now we cannot count on presales as much, so we have to put in more equity.

The Oakridge residential resort is probably your largest residential project to date, sitting on about 46,000 square meters of land, 100 meters from Faqra Club. Is this kind of resort setup new to Faqra?

To me, there is nothing similar in the area to what we are delivering. [Oakridge] is different. We saw an opportunity to create a resort, not [just] chalets. The resort will consist of residences, town houses, villas, and it will have about 12,000 square meters of touristic facilities. That includes a spa, club, hotel, furnished apartments, indoor and outdoor pools, a restaurant, bar and children’s playground. We started construction about two years ago after buying the land in August 2008 and plan to deliver at the end of 2012. Today, around 60 percent of the project is already sold.

In a resort project like Oakridge, how do you anticipate how much demand there will be for the different residential facilities — villas, townhomes, chalets?

We try to anticipate demand from the existing market, so we look at the existing demand in the area of Faqra, and we try to meet this demand. But at the same time we bear in mind that we need to cater to all budgets; we don’t want to limit ourselves. In Faqra club, 10 years ago, the demand was only for big chalets and villas, but now the young generation is showing more interest and looking for smaller chalets so we try to cater to both budgets. In Faqra, most people buy a piece of land and then build for their own use. Very few are building commercial projects, the only project that was built in Faqra club is Clouds.

What does the price range look like for units in Oakridge?

We have an increase average price of $3600 per square meter now. There are some villas and townhouses, which we priced by unit not by square meter, so $2.2 million for the townhouse and around $3.2 million for the villas. These are sold on core and shell.

What is the plan for the Silver Rocks plot in Faqra?

Silver Rocks is a land development project, on a plot of about 40,000 square meters that we bought at the same time [as the Oakridge plot], in summer of 2008. It consists of 39 plots for sale and we already sold 60 percent. We decided to have a closed gated community and build a small clubhouse and swimming pool to be used by the residents. We are mainly selling plots to people who will build their own chalets, but of course, the design has to be approved by our company.

What’s the incentive to develop land and sell off plots, instead of building residences and selling them?

Many people prefer to buy a plot instead of a chalet. They consider a land purchase a safer investment for the long term.

What are these two large projects costing?

The total project cost for Oakridge is $45 million including land and construction. Silver Rocks costs around $10 million.

How would you characterize the swelling of supply in Faqra now as around nine residential and hotel projects are underway?

There are still plots of land in Faqra, but there are too many projects being built, so project development will definitely slow down and many projects under planning will be put on hold. The demand will pick up again once the political situation gets better.

Do you think prices will dim?

Cost of construction in Faqra area is high due to the weather conditions that allow only seven months of work per year and also due to higher cost in labor and transportation. The cost is at least 20 percent higher than [the cost of building in] Beirut. Prime lands are limited, which also led to a high land cost, so prices will not decline since the profit margin is not significant.

May 3, 2011 0 comments

Economics & Policy

Executive Insight – Welcoming Chinese inflation

by Fabio Scacciavillani May 3, 2011

written by Fabio Scacciavillani

The spectacular rebound of emerging markets after the recent recession was driven in no small part by China’s emergency stimulus package in late 2008, arguably the timeliest and the largest in the world (relative to gross domestic product). The pull of Chinese demand was powerful enough to revitalize international trade — severely curtailed by the crunch in trade finance — and to drag out of the hole many of the economies well integrated in the Chinese supply chain, from Malaysia to Korea, and Australia to Germany.

The flip side of this stimulus has been a worrisome boom in real estate prices (which has led many to scream “Bubble!”) and persistent inflationary pressures which have extended across Asia (excluding Japan),complicating the macro picture at the national and global level. Asian central banks (and also Latin American ones) until late last year were reluctant to aggressively raise interest rates, lest they clip the green shoots of recovery. But with the upturn in emerging markets, food and commodities prices world wideresumed their surge; since the beginning of this year this surge has been exacerbated by oil price reaction to the turmoil in North Africa. Amplifying this effect is the premature end, after Japan’s Fukushima disaster, of the much touted “nuclear renaissance” that was supposed to substantially curtail hydrocarbons in the world energy mix.

China remains to-date the epicenter of inflationary pressures, despite the fact that authorities were the first to react decisively by increasing reserve requirements up to 20 percent for top lenders, restricting credit to the real estate sector and hiking interest rates four times since October. Nevertheless, in March, Chinese inflation hit a three-year record of 5.4 percent per annum, while in India, which is also experiencing a generalized price surge, it reached almost 9 percent; across the emerging markets generally, from Korea to Brazil, price levels are overheated.

Conventional wisdom and mainstream policy advice suggests that the Chinese authorities should act even more aggressively to counter further price hikes, and indeed solemn pledges to this effect figure prominently in public statements by senior politicians. But China generally defies conventions and an alternative course of action appears to be gathering consensus within policy circles. The new five-year economic plan sets a 4 percent inflation target for this year, and Chinese authorities have signaled that in the medium term they would be comfortable with inflation between 4 percent and 5 percent, which represents a substantial increase compared to previous years.

Furthermore, national and local governments have enacted a spate of hefty salary increases: since the beginning of the year, 12 Chinese provinces and provincial-level municipal cities have raised their minimum wages. The average adjustment over the 12 provinces was 21 percent with the highest hike, 28 percent, being decreed in Chongqing, in central western China (outside the coastal belt where manufacturing is concentrated). Incidentally, thanks to a 20 percent rise, Shenzhen replaced Shanghai to become the city with the highest minimum monthly wage in China (approximately $203). If we consider a longer horizon, since last year 30 provinces raised the minimum wage, often by double digits.

These measures were justified by the need to attract labor from the inner regions and to improve living standards, an issue that had taken center stage in domestic politics after strikes and workers unrest spread across the country, threatening to become a widespread phenomenon.

Whether by happenstance or by design, it seems that an unorthodox policy recipe is emerging. One of the foremost issues confronting the Group of 20 countries is the rebalancing of the current-account surplus by China and Germany and other mercantilist oriented countries. The most vocal critique of China’s export-led strategy has been the United States, which (stirred by Congress) has used such criticism to push for a revaluation of the yuan.

The Chinese government and central bank are aware that an ever-increasing current-account surplus is not sustainable (the foreign exchange reserves have reached a walloping $3 trillion), but might be contemplating an alternative route; instead of revaluing the nominal exchange rate (as demanded by the US and others) they are increasing the real exchange rate.

By raising domestic wages they boost domestic inflation, thereby losing competitiveness, but Chinese workers feel the benefits more than foreign competitors. In essence, the Chinese government seems to be pursuing a redistributive policy in favor of the domestic population with the aim of boosting internal demand and reducing the current account surplus.

It is hard to say how this policy will turn out; it certainly carries risks, as once a price/wage spiral is triggered it becomes hard to control, but a few implications for the global economy and the Middle East are clear.

Over the pastthree decades China has become the world manufacturer and has been the mostpowerful force behind a relentless deflation in traded goods — reveled in bythe rest of the world — thanks to an almost inexhaustible supply of cheaplabor. This process is reverting, and with China’s inflation on the rise it isonly a matter of time before a global reverberation is felt.

If one adds the effects of money printing in the US and the need to monetize at least in part public debts in mature countries, foremost in the Eurozone, the next few years will present serious challenges for monetary policy; the word ‘stagflation’ is likely to make a comeback in everyday parlance.

This change will not be a temporary adjustment, but will represent a structural shift in the global economic environment, affecting greatly the smaller economies in the Middle East and elsewhere. In particular, the Gulf Cooperation Council countries will find themselves again ensnared, like in 2006-2008, in a monetary policy determined by the US Federal Reserve to serve its domestic goals, but utterly inadequate for the conditions of GCC economies.

Furthermore, the central banks and the sovereign wealth funds that manage the accumulated export revenues are typically exposed to fixed income securities denominated in US dollars. At present, the safe haven status and the anemic credit conditions have held bond prices remarkably stable (excluding of course troubled countries such as Greece or Portugal). But when markets realize that higher inflation is not a blip, the adjustment could be traumatic for fixed income securities. There are no simple solutions to this kind of tectonic shift, but a revamping of the GCC’s common currency project could not be more timely. A degree of flexibility in monetary policy and a new strong international currency would be in the best interests of the oil exporters and also indirectly, those of other countries in the region.

The surge in Chinese wages will also lead domestic consumption to replace exports as an engine of growth. This swing has a long course to run as private consumption represents a remarkably low percentage of China’s GDP. The effects of the Chinese boom have thus far benefited countries and companies embedded in China’s supply chain, but from now on the effects of the stimulus could reach those countries and companies that cater to Chinese consumers, in particular in the provision of durable goods for the expanding middle class — washers, cars, furniture and high end services, such as tourism, healthcare and financials.

A benevolent interpretation posits that, far from being a serious worry, inflation spurred by the loose wage policy tolerated — and often encouraged — by the Chinese authorities could be another step in the long march toward better quality of life within China and the harbinger of a great leap forward for the world economy.

Fabio Scacciabillani is chief economist at the Oman Investment Fund

May 3, 2011 0 comments

Society

Book review: America’s Kingdom

by Paul Cochrane May 3, 2011

written by Paul Cochrane

Saudi Aramco, valued anywhere from $2 trillion to $7 trillion and employing more than 55,000 people, is the world’s largest unlisted company. How it got there is a story that has been told before — from the first discovery of oil to the entrance of the American oil majors, to the development of the so-called “special relationship” between Saudi Arabia and the United States.

But Robert Vitalis’s newly updated book, the product of a decade of research and writing, charts the history from a different perspective, viewing Aramco as a microcosm of the colonial order. It describes an ‘oil-garchy’, the partnership that began decades ago with some of the largest oil companies in the world —Socal, later renamed Chevron, Standard Oil of New Jersey, later Exxon, and Socony-Vacuum Oil, later Mobil — and the relations between Washington DC and Riyadh until Aramco was fully nationalized in 1980, becoming known in 1988 as the Saudi Arabian Oil Company or Saudi Aramco.

It is not a telling of history financed by Aramco or seeking to enter the good books of the Saudis or the oil industry — an independence that aids its veracity. As Vitalis notes: “Companies are like authoritarian countries. They keep records hidden…They open their archives only to those they hire [and] insist on the right to approve what is written… There are no sunshine laws and no Freedom of Information Acts against corporate privilege.”

Indeed, like other tomes exposing the costs of oil development, America’s Kingdom is blacklisted in Saudi Arabia.

Vitalis blasts commercially successful accounts of Aramco and Saudi Arabia that conveniently gloss over the company’s less than exemplary past and uncritically repeat Aramco’s creed that it acted differently from other oil companies; the company claims to have helped Saudi Arabia modernize through what Aramco President Frank Jungers called its “far sighted policies” and a “55-year record of cooperation and mutual respect.”

Vitalis exposes the situation of Saudi and non-American workers, their decades-long struggles for better accommodation, wages and rights, how protests were squashed, and the eventual ending of a system that divided labor based on race, imported from the US and similar to the ‘Jim Crow’ laws used in America to pay white workers more than African Americans and Hispanics.

He also exposed as myths many claims that Aramco still expounds; the company’s website states that, “Since 1940, Saudi Aramco schools have provided educational services to dependents of Saudi Aramco employees.” Infact, Aramco’s management worked to prevent Saudis and their dependents from being educated, arguing “the company should not engage in a general educationprogram,” despite a 1942 Labor Law that required Aramco to do so. It was not until 1955 that the labor movement and the Saudi government forced Aramco to “pay for a system of schools, training institutes, and, ultimately, an engineering college.”

The book debunks the notion of Saudi “exceptionalism” — the doctrine that its leadership steered the fledgling kingdom through the miasma of empire and imperialism without external influence; while Saudi Arabia became a state in 1932, what “everyone seems to forget is that (the Saudi Emir, later king) Ibn Saud signed a treaty in 1915 with Great Britain that conceded sovereignty rights for protection,” writes Vitalis. The kingdom has been keen to downplay such reliance on outsiders for its survival ever since, whether on Britain or later on Aramco and the US.

America’s Kingdom is an important contribution to the often-neglected field of oil history, and a powerful critique of the US-Saudi relationship and of Aramco, a company with monumental sway over the world’s energy markets.

May 3, 2011 0 comments

Society

Executive Insight – Post-revolution communication

by Mark Helou, Zeina Loutfi & Ramsay G. Najjar May 3, 2011

written by Mark Helou, Zeina Loutfi & Ramsay G. Najjar

The sweeping social changes and revolutions rocking the Middle East and North Africa in recent months have indeed taken the world by surprise. Although many analysts and experts agree that these movements will result in a lasting change that will drastically modify the region’s geo-political landscape, no one knows yet in which direction this change might head. As the French philosopher and political scientist Raymond Aron said, “Men make history without knowing the history that they are making.”

Will these revolts give rise to true democracies or give birth to new authoritarian societies? History provides numerous examples of revolutions that “devour their own children” and culminate in large-scale oppressions and exactions, starting from the most famous – namely the French revolution — and ending with the Soviet, Chinese, Iranian and Latin American revolutions of the 20th century.

Lighting the path

With this in mind, what role can communication firms play in helping to direct the winds of change in a positive direction? The question is all the more pertinent as these revolts have shown the extent to which communication has become a driving force in society through its multitude of channels, from global media outlets to online social networks. It is onlylogical to assume that this same force that helped to spawn these movements can ultimately steer their course in the right direction, toward a beneficial and lasting change for the people of the region.

The first crucial role to be played by communication outlets is to fill the void created after decades of despotism and an effective absence of meaningful political participation. As the revolutionary movements in Egyp tand Tunisia unfolded, one of the themes that recurrently surfaced was that they lacked powerful and effectiveleadership to guide and federate them. However romantic the image of a spontaneous and unplanned revolution might be, political reality dictates that in order to ensure its sustainability and to reach its objectives such a movement eventually must be channeled through a visible and empowered leadership. This has not yet occurred, delayed by the fact that these countries have been living for decades in a state of autocracy deprived of substantial opposition leadership. Proper communication can ultimately lay the groundwork for the natural emergence of an enlightened leadership by advocating the values that the society wishes to adopt and identify within the post-revolution era.

Contrary to the paradigm within the many surviving totalitarian societies, it is not the leader’s role to impose a system of values on his or her people. Ideally, it is the set of values determined by the people that ultimately gives rise to a leadership that embodies and defends them. In the case of the newly born Arab democracies still in search of leadership, the media and civil society should seek to communicate with all stakeholders to create a consensus toward a common system of values, which may include, for example, the protection of individual freedoms, secularism or social justice. It is then, by upholding these values and being held accountable by their standards, that citizens would raise political players to leadership status, offering them the blessings of the populace.

By entrenching a truly national set of values emanating from the people’s will, communication outlets could ensure that future leadership would be attuned to citizens’ aspirations. They would also set in place a unified and consistent vision for the country that ensures that citizens and leaders work toward the same national objectives; even if opinions diverge, they would still be grounded in the principles set forth by the people. Only then would the revolutions have transcended their original social demands to forge a national identity and set the tone for the full-fledged rebuilding of the national political system.

Closing the cycle

For all of this to happen, communication outlets must develop the political maturity of the people and entrench a sense of democratic responsibility. Decades of authoritarianism have suppressed awareness of the rights and the duties that a mature democracy offers and demands from its citizens. In this respect, the role of communication would be to effect a shift in mentality from the previous reactionary state of mind to a positive and constructive mindset in which citizens are ready to make sacrifices and build a system reflecting their aspirations.

Though the revolutionary spirit was necessary to break the people’s shackles, the post-revolutionary role of communication would be to ensure that this fervor does not give rise to a state of “permanent revolution” that would flare up every time a sacrifice — such as an increase in taxes or the removal of subsidies — is necessary.

Well-crafted communication would therefore be essential to make citizens fully aware of their responsibility in holding the new leadership accountable by empowering them and sharpening their political sense. By acting as the guardian of government transparency, communication mediums have the potential to ensure that the people and the government work as a team rather than as adversaries. Most importantly it will set the background for political stability by protecting against repeat revolutionary earthquakes which could arise from an inadequate resolution of the original issues.

By playing a largely informative role during the period of unrest, communication channels and social media networks contributed greatly to the development of the revolutionary movements and acted as the logistical backbone of popular action. As this phase has successfully come to an end, communication should take on a whole new level by moving from a reactive informative trend to a proactive constructive one by which it pursues the noble cause of shaping the post-revolution society at its best. To reach this end, media outlets and civil society players will have to work hand in hand to encourage dialogue with the various stakeholders and spark the emergence of a consensus concerning national values and constants, while raising the level of political awareness.

As media and communication outlets begin to reach their objective of establishing national values, they can begin to move toward effectively becoming the “Fourth Estate” by ensuring scrutiny and accountability with respect to the national principles that they would have helped establish and consolidate. Communication outlets would thus have successfully “closed the cycle” by helping to spark the revolution, accompanying it, establishing the social and political contract of the post-revolution era and, finally, acting as the guardian of this contract and the values that its stands for.

Leaders and governments are mere transitory players in the lives of nations, whereas the true cornerstones are the values on which these nations are built. Today, nascent Arab democracies should reflect back on the lessons of the French revolution and understand that once they establish a common set of national values, they will be setting the platform on which modern, just and perennial states can be built to prosper.

May 3, 2011 0 comments

Society

Executive Insight – Lebanese brands weak on the home front

by Joe Ayoub May 3, 2011

written by Joe Ayoub

As a general rule, it’s difficult to trust someone that you don’t know. Extending this rule to the commercial level, how can consumers be expected to choose Lebanese brands when so little is known about them?

A recent advertising campaign asked consumers to do just that. “You love your country, love its products”, read the campaign slogan — a suggestion that attempts to inspire consumers to purchase something based on its manufacturing origin alone. Certainly consumers would have had every right to respond to the recent campaign by providing a challenge of their own: “You want me to buy Lebanese brands? Then tell me more about them.” In truth, we would be hard pressed to know much about any of our local manufacturers. What is lacking is public knowledge of financial indicators (which can provide telling signals for consumer confidence), the people behind the brand, how the products are manufactured, what quality standards are enforced, how employees are treated, and so on. Why is this important? Because the more information a brand communicates about itself, the more familiar it becomes to consumers, thus empowering it to enjoy greater consumer preference.

Consumer power

The advent of the digital age has made the need even stronger for brands to open up, reach out and engage with consumers. In today’s world, brands can be crippled in a matter of seconds by virtually anything and anyone. For example, it only takes one anonymous ‘tweet’ on a company’s mishandling of employee affairs or revelation of malpractice to wipe value off a million dollar enterprise. This is why brands can no longer afford to stick their heads in the sand. Instead it is imperative that they place themselves in the hands of consumers and open up a two-way dialogue that takes in feedback. Importantly, being open with customers is key to reinforcing trust and can empower local industries to compete not just at home but abroad.

The only way is up

There are three levels on which industry branding in Lebanon could, and should, be improved. The first is on the industry level itself. The point here is to focus on industries that have strengths — in Germany one would think of the auto industry, for example — and to promote these industries collectively. In Lebanon, it could be jewelry or olive oil that are targeted for promotion.

Next there is the level of the corporate image, where companies need to communicate their values. Are they an exemplary employer, for example?

Lastly, there is the level of the brand image itself. Many brands don’t communicate their own story: the description that sums up the essence of where the brand comes from as well as what it delivers. And the brand story is just the beginning; beyond this there are many touchpoints which have to be aligned with the brand values and communicated with consistency.

One touchpoint, and a crucial area in which local industries fall short, is product packaging. Go to any supermarket and compare similar products from Europe and those from local manufacturers and you will see an immediate difference. Local manufacturers assume that customers want cheaper packaging to give them an affordable price, failing to realize this shows disrespect to the consumer. Beyond packaging, often the second big disappointment is the product itself, with low or inconsistent quality.

The way to go

We know that Lebanese services have the ability to reflect a positive image of the country and to compete on a regional and international level. The hospitality industry and banking are two prime examples of this. Yet, for manufacturing, we only have to look at the level of imports versus exports to realize that there is a still a long way to go before Lebanese manufactured goods become the strong competitors they could be, either here or abroad. To get consumers to believe in their products, local manufacturers need to wake up to the power of branding and take the first steps to unlock their full potential.

Joe Ayoub is the CEO of Brandcell

May 3, 2011 0 comments

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Assad’s dungeons

by Nadim Houry May 3, 2011

written by Nadim Houry

Marwan had trouble sitting down during our interview. He had bruises all over his body and bandages on his head from the beating security officers subjected him to during his two-day detention by the Amn Al Dawla — one of Syria’s notorious mukhabarat, or secret security services. His crime was participating in a peaceful protest in Douma on April 1, calling for reforms.

Marwan’s case is not unique. Syria’s mukhabarat have detained more than a thousand anti-government protesters since mid-March and many of those recently released have reported that security forces tortured them in detention. Often, like Marwan, they have the scars to prove it.

Particularly disturbing is the pervasiveness of ill treatment by security forces, the routine beatings, torture and humiliation that hundreds of protesters incurred in dozens of security detention facilities. Of the 22 released protesters interviewed by Human Rights Watch, almost all reported being beaten and tortured. Three of them were children, who were treated no differently from the adults. One protester detained at an unknown facility in Damascus vividly recalled that he could not sleep during his first three days of detention because of screams emanating from the interrogation room next door. “The screams pierced my ears. I could not sleep, could not eat,” he recalled.

A shopkeeper from the coastal village of Banias, one site of anti-government protests, described his treatment at the local military security facility: “They beat me during each one of my four interrogations. I think it was with sticks and with whips but I don’t even know; I couldn’t see anything. They beat me on my head, on my back, on my shoulders. They especially beat me on my face. With every word, they would beat me. They asked me why I was trying to destroy the regime.”

A protester from Al Tal, a suburb of Damascus, reported that officers of the Palestine Branch of Military Intelligence used electric shocks to torture him. Another protester from the town of Douma felt lucky that his Amn Al Dawla interrogators just beat him with cables. “Many others in my cell told me that they had used electric batons on them,” he said. In one particularly gruesome testimony, a detainee described how he helped his cellmate, another protester, walk to the bathroom after his cellmate’s toe-nails had fallen off following a vicious session of beatings on the soles of his feet.

The beatings were meant to punish the protesters and elicit information. Released protesters repeated that interrogators kept asking them about who paid them to protest. “They simply did not believe that we were doing this out of our own free will,” a Douma resident told me over the phone. After most interrogation sessions, protesters had to sign a confession that they could not read. Some detainees even reported being filmed by state television crews while they confessed to being “terrorists and killers.”

Brutality by Syria’s mukhabarat is not new. Human rights groups have documented such practices for years, prompting the UN Committee against Torture, tasked with monitoring compliance with the Convention against Torture, to say in May 2010 that it was “deeply concerned about numerous, ongoing and consistent allegations concerning the routine use of torture by law enforcement and investigative officials” in Syria.

What is new, however, are the increasing numbers of people across the Arab world who will no longer keep silent about this brutality. The revolutions in Egypt and Tunisia were both sparked by abuses committed by security forces. And Syria is no exception — it was the mukhabarat’s torture of a group of Daraa school children who had scribbled graffiti criticizing President Bashar al-Assad that originally drove people to the streets. And now that they are on the streets, we hope that their chants once and for all will end the screams emanating from the mukhabarat’s dungeons. For if this ‘Arab Spring’ is to usher in a new era, the torture chambers of today need to become a relic of the past — or better yet, museums that bear witness to the crimes committed against ordinarycitizens.

Nadmim Houry is director of the Beirut office of Human Rights Watch

May 3, 2011 0 comments