Executive Magazine

Executive Insight – Carbon neutral skies in Middle East Aviation

by Alessandro Borgogna April 3, 2011

written by Alessandro Borgogna

Like many other industries, the global aviation sector is preparing for a future in which increasing financial and political pressureswill be brought to bear on the issue of climate change.

Airline operators are putting together plans to cut emissions of carbon dioxide and other greenhouse gases, and these changes may squeeze consumers and businesses in the Middle East, through higher fares, reduced routes and fewer services. But focusing only on these short-term pain points ignores the tremendous economic opportunities the industry’s transformation could bring to those nations that act first to reposition themselves for competition in a carbon-constrained world. Developing countries have unprecedented access to financial support to help them begin this transition and offset rising costs. The extent to which they take advantage of these funds may determine whether the region can capitalize on the new industries and jobs that will likely result.

The European ETS deadline

The carbon conversation has been slow to reach the aviation sector, due to its relatively small contribution to global emissions (some 2 percent, according to the United Nations), but a near-term deadline has captured the industry’s attention. In January 2012, aviation will be held accountable for its emissions under the European Union Emission Trading Scheme (ETS). The only global effort so far to attempt to include the aviation sector in a carbon-compliance trading system, the ETS mandates that any airline operators flying in and out of the continent — regardless of where they are based — will have to offset their related carbon emissions above a fixed allowed amount.

Air transport emission growth

If extension of the ETS goes on as planned, Middle Eastern airline operators will have to choose between passing on their higher costs to passengers, mitigating them through voluntary offsets purchased by passengers or reducing their profits for the sake of price competitiveness. The global air transport industry has filed a legal challenge to the EU’s plan — but regardless of its outcome, Middle Eastern airlines are still likely to face pressure due to growing global recognition of the sector’s rising importance in the fight against climate change. In 2009, the International Air Transport Association (IATA) pledged to achieve carbon-neutral growth beginning in 2020; the International Civil Aviation Organization (ICAO) followed last year with a similar goal.

While the 1997 Kyoto Protocol exempted aviation when it affirmed the ETS as the most efficient and effective way to achieve global greenhouse emission reductions, consistent 4 percent to 5 percent annual growth in global air passenger traffic over the last decade has put the sector very much in the spotlight as countries work toward a post-Kyoto agreement.

Opportunities in low-emission

Fortunately, the international accords reached in Copenhagen in 2009 and Cancun in 2010 supported low-carbon investments in developing nations. The platforms for these initiatives are called low-emission development strategies (LEDS), which involve short-term mitigation steps (called ‘nationally appropriate mitigation actions,’ or NAMAs) and more structural mid-to-long-term changes (‘national adaptation programs of action,’ or NAPAs). The LEDS platform represents a tremendous opportunity for the Middle East, and particularly for its aviation industry. Airline operators can now implement emission-reducing projects and receive marketable carbon credits in return, or they can coordinate a larger scale transformation and apply for funding through the NAMA framework. Thanks to these new efforts, emissions-reducing projects don’t have to break the bank. Projects can either be co-financed or fully financed through a growing pool of internationally available funds. The Copenhagen accord of 2010 established $30 billion in fast-start financing for such projects, and delegates meeting in Cancun last year committed to expanding that amount so that $100 billion in new and additional funds are made available every year by 2020.

Plan of action

Rather than wait to see if they will be forced to comply with the European ETS next year, aviation operators in the Middle East should start laying the groundwork now to get ahead of coming regulations and to investigate the possibilities of breakthrough changes in the fast-growing market for alternative fuels. This can be accomplished through three broadsteps:

Take short-term actions to “clean house”

Fleets operated by Middle East airlines are newer, and hence more efficient, than their European counterparts’, which will help to blunt the impact of the ETS if it is enforced. Still, there is ample room to improve the overall efficiency of the air-traffic system and ensure that all carbon waste is eliminated. Flight delays and aircraft congestion are principal contributors to the aviation sector’s inefficient energy use; these can be dramatically reduced by enhanced cooperation between civil and defense aviation organizations, alongside other regional efforts to optimize aircraft routing. In addition, existing aircraft lease contracts should be reviewed to eliminate the most inefficient parts of the fleet.

Enhance government-industry ties

Operators should engage their governments to ensure that they assume an active role in formalizing a LEDS for the sector that is focused on activities that qualify for NAMA or NAPA support. This will allow the industry to realize carbon credit returns on capital invested and, where applicable, access international carbon finance funds. Ideally, designing a LEDS should be a country’s first step, laying the foundation for future activities, but this may not always be possible. Developing a LEDS is a long and evolving process, and it may make more sense to weave the LEDS approach into existing carbon-reducing activities and use it as the basis for future growth.

Define the business case for bio-fuels

Barring any quantum-leap breakthroughs in aircraft design, the most promising opportunity for emissions reductions in the aviation sector is in bio-fuels, which produce up to 80 percent fewer carbon emissions than fossil fuels over their lifecycle (provided they are grown locally). At least 10 airlines outside of the region have already conducted successful flight tests with feedstocks ranging from sugarcane to jatropha (a type of shrub) to coconuts. Jatropha, in particular, holds immense promise for the region, as it is a non-food crop that can grow in desert climes and does not require much irrigation. Middle East airline operators are right to be concerned about their profits and competitiveness as the deadline looms next year for compliance with the European ETS. But there are bigger forces in play, and focusing on this factor alone may cost them the chance to seize the opportunities that are emerging with the evolution of carbon finance markets. Middle Eastern airlines have been growing at a much faster pace than global benchmarks, if that growth is to continue then the region’s operators and regulators will need to plot a course for competing —and prevailing — in a carbon-constrained future.

April 3, 2011 0 comments

Economics & Policy

Executive Insight – OIF

by Fabio Scacciavillani April 3, 2011

written by Fabio Scacciavillani

For those eager to engage in predictions as to where the events that have rocked North Africa, the Middle East and beyond will lead, it would be wise to remember that these are uncharted political waters, and the long wave of repercussions will run for decades as the old post-colonial order crumbles.

Our perceptions and expectations are somewhat distorted by history books that condense in a few pages an account of events that took years to develop and fully come to fruition. Even upheavals which some of us witnessed during our lifetimes leave memories that focus on the climax and exclude the lull. So when our internal equilibrium is shaken, we unrealistically expect a swift ending.

The collapse of the Soviet Union and the Warsaw Pact started with Gorbachev’s ascent and perestroika, then the break-up throughout Eastern Europe and finally the indelible image of Yeltsin on a tank declaring the end of the Empire. But it took several years. And the aftermath was not a smooth transition, but years of hyperinflation, mass unemployment, subsidy cuts, institution building, uprooting of state monopolies and judicial reforms.

In essence, historical processes so profound to reshape entire continents often follow a “drunkard’s walk” — two steps forward, one step back and maybe a few sideways. The vicissitudes of the “Arab Spring” will likely follow such a pattern. Hence in the months and years to come we will need a framework to evaluate the direction, the pattern and the likely outcome of this process. As economic exclusion leads to the mounting resentment that caused the turmoil, fiscal interests and redistribution will be dominant factors in shaping the course of history.

The convulsions have been especially acute in countries which depend on earnings from renting energy commodities (and also tourism). Rents provide the state with a cache of resources, but little incentive to build modern institutional capital, a pre-condition for social and material advancement. When governments can obtain conspicuous resources without having to resort to taxation it is hard for them to resist the temptation to eschew checks and balances; officials feel immune to scrutiny, deeming a partial distribution of these resources to powerful interest groups sufficient to retain power.

In the long run, the lack of modern public institutionsa trophies the ability of a society to progress, wastes the energies of the youth, spreads bitterness and often spurs a withdrawal toward tribal or sectarian splits. Resources are rarely eternal and in any case their size tends to shrink relative to the growing population. Unless the revenues are invested to diversify the economy into new sectors and enlarge the pie for all, eventually hand outs alone will not be enough ensure decent living standards.

Protests and riots should be interpreted not only by a call for redistribution but also for a social contract which fosters economic inclusion, upward social mobility and betterment opportunities. Unfortunately, this transformation cannot be delivered overnight and so the undercurrent of unrest will not abate instantly.

Still, it is a very positive sign that at least in the Gulf Cooperation Council the rulers have grasped what is at stake and have launched the so-called ‘Gulf Marshall Plan.’

One hopes that it will constitute the first step in a new economic strategy which desists from adding cadres to an already bloated and often utterly inefficient bureaucracy and focuses on skill creation and entrepreneurial talent. Likewise, one hopes that awareness spreads among decision makers that political survival is not only a matter of throwing a few handouts around, but devising a set of rules hinging on rights and not on privileges, on fairness and not on proximity to elites, on competence and not on favors. It will be a long road because it will clash with entrenched bad habits and long-established traditions — a good reason not to delay the journey and stick to newfound determination.

Fabio Scacciavillani is chief economist at the OmanInvestment Fund

April 3, 2011 0 comments

Finance

Harvesting higher prices

by Vanessa Khalil April 3, 2011

written by Vanessa Khalil

If anything can be reliably forecast amid the growing upheaval in the Middle East and North Africa, it is the direction of global food prices. They have currently settled at record highs and are certain to increase in the future.

According to the United Nations Food and Agriculture Organization (FAO), an index of 55 food commodities rose 2.2 percent in February, the eighth consecutive month that food prices have increased and a record high since 1990. FAO’s cereal price index, which includes main food staples such as wheat, rice and maize rose 3.7 percent in the same month, the highest increase in one month since July 2008. Meanwhile, the International Monetary Fund’s statement that “the world may need to get used to higher food prices” did little to downplay concerns about further price increases. Soaring food prices were among the factors playing into the uprisings in Egypt and Tunisia, further unrest elsewhere in the Middle East and North Africa is only helping to push these prices upward. Sifting through the wider implications of the unrest, among other factors, is crucial in understanding the current world food situation and to get a sense of what is to come.

What goes up…

Food is not the only commodity that’s getting more expensive; one side effect of the “Arab Spring” has been the recent crude oil price-jump to more than $100 per barrel, which will likely serve only to drive up food prices even higher.

Crops were among the commodities that beat stocks, bonds and the dollar in gains for a third straight month. “Probably the most important implication of this oil shock is on financial markets,” said Abdolreza Abbassian, senior economist at FAO.

If oil supply disruption concerns persist, food prices will continue to set records. Uprisings in Libya have already led the African nation to halt its production of 1.6 million barrels per day. Saudi officials’ statements that the country would compensate for Libya’s oil shortfalls calmed markets to some extent but the price impact was limited on fears that Saudi Arabia might exhaust its spare capacity.

“The problem is that transportation costs are up, which trickles down to food prices”, said Simon Neaime, section chief of economic analysis at the Economic and Social Commission for Western Asia (ESCWA).

For grain producers, the oil shock automatically implies higher costs of production. According to a recent report by the Organization for Economic Cooperation and Development, energy accounts for over one-third of grain production cost.

On the macro-economic level, however, it is tightened supply and unforeseen demand that moves food prices upward. The first three months of 2011 saw MENA governments hoarding staple crops in bulk in anticipation of the trouble ahead. In February 2011, the Egyptian government bought 175,000 tons of wheat from the United States and Australia, while Saudi Arabia stockpiled a year’s worth of wheat.

Yet the MENA’s frantic purchases to boost stockpiles had a one-time impact on the market. “All that these countries did was stay on the safe side rather than wait a month or two when food prices would be much higher, or when they [might not] have governments,” FAO’s Abbassian said.

Currency exchange rates are also contributing to high food prices, specifically for imports in the MENA region. “Another factor we are talking about here is the euro,” said ESCWA’s Neaime, who adds that the euro won’t be going down anytime soon. “Many North African countries trade mostly with the [Eurozone]. Whenever the euro is appreciating, they are importing inflation.”

Fickle weather also remains a long-term driving force behind high food prices. Russia’s ban on grain exports that had started in summer 2010might be extended until year-end 2011. Climate threats are also a factor for 2011; at a March conference on Near East, FAO raised concerns of drought, floods and soil degradation in the region. Meanwhile, the La Nina weather pattern is forecasted to lead to heavier rainfall in the northern United States and Canada, possibly washing out harvests and tightening supplies on corn andwheat.

Weather aside, Japan’s triple disaster is also curbing food supply. The 8.9 magnitude earthquake and the tsunami that followed destroyed close to 20 percent of the agricultural and food industry in Northeast Japan. Meanwhile, the nuclear crisis that resulted from Japan’s Fukushima reactor meltdowns led to food restrictions on Japanese exports. The US, Australia, Singapore and Hong Kong banned food imports from some regions of the country after high levels of radioactive iodine were detected in some samples.

…Must come down?

Among the downward price pressures on food are the expectations that spring wheat crops will boost supply. “Wheat is one crop that is easier to predict right now because plantings have just taken place this spring. We do see a strong expansion,” Abbassian said. Likewise, the US Department of Agriculture’s “Supply/Demand” March report forecasts world wheat crop to reach 668 million tons for 2011-2012, up 21 million tons on the yearearlier.

Cereal production

As supply increases, the stockpile in the MENA region could damper demand, namely in Egypt and Saudi Arabia. “That could take away some of the spring and summer purchases and correct prices,” said Abbassian.

Meanwhile, some experts in the foodstuffs industry exporting to Gulf Cooperation Council countries expect lower demand through the rest of the spring, as a wait-and-see mood prevails among consumers and government buyers.

Preemptive government subsidies in the MENA may also hold down prices consumers pay on the shelf. As an example, the United Arab Emirates recently agreed with the Union Cooperative Society supermarket chain to reduce prices, mainly on rice and bread, back to their 2004 figures starting this April and running until year’s end.

“Higher prices now pressure macroeconomics rather than consumers who are poor and still receiving subsidies. OPEC [Organization of Petroleum Exporting Countries] can afford to help consumers,” Abbassian said. But Neaime has his doubts about less wealthy Middle Eastern countries following the trend. “Countries like Lebanon and Egypt don’t have enough fiscal space to deal with price shocks and subsidies. They have their debts and deficits to worry about,” he said.

Growing pains

But, natural disasters and political turmoil are pieces of a much bigger mosaic. The world’s population is growing at an alarming rate, and resources are getting scarcer. “It’ll take a lot to feed nine billion people in the future,” said Neaime. The IMF asserted that record food prices would persist in line with economic growth and rising living standards.

The pain will be felt especially by the poor, particularly in Africa’s most impoverished countries. According to Neaime, despite economic progress in the developing world, the benefits have not been distributed throughout.

“Economies are growing and so is GDP [gross domestic product] but nothing is happening on a social level,” said Neaime. This means severe repercussions for those who can’t afford food at the current price levels, let alone at future ones. “If you are poor, then that 50 or 60 percent of your income will suddenly not be enough,” added Abbassian.

The repercussions of rising food rises are that they tend to foster greater general social inequity and instability, given that the poor are less able to afford their daily bread while the wealthy cash in on rising food prices through investing in commodities. This often leads to further price hikes and the perpetuation of a cycle that becomes more unpleasant and unsustainable the longer it persists; in the absence of a global calamity to stunt future growth prospects in emerging economies, food price increases seem all but foretold.

So, while the unrest sweeping the MENA region came unexpectedly to many, the unrest down the road, both here and beyond, should not.

April 3, 2011 0 comments

Finance

Executive Insight – Only real demand counts

by Bertrand Carlier April 3, 2011

written by Bertrand Carlier

Behind the current short-term fluctuations linked to shifting growth prospects lies a powerful uptrend in commodity prices. A deep-seated change in lifestyles in emerging countries is creating new needs in a self-sustaining process that generates ever more demand.

At its latest plenary session at the beginning of March, China’s National Assembly confirmed the direction in which markets are moving: industrial metal prices are likely to continue a rally that started a decade ago.

Nobody can or should invest in commodities unless they are convinced of the potential demand for capital goods and infrastructure needed to underpin endogenous economic growth, as opposed to export-driven expansion alone.

According to the Appliance Manufacturers and China Building Association, copper consumption already amounts to 41 kilograms per home. Looking at China’s 12th five-year plan, the proportion of the country’s population living in urban areas will expand from 47.5 percent today to 51.5 percent in 2015; this urbanization will require tens of thousands of kilometers of railways, roads and piping. It will also require new power stations to meet energy demand, and copper and copper derivatives will be needed here as well.

Whatever the sector, requirements are staggering and the figures speak for themselves. According to the International Copper Study Group, China accounted for 7.87 million tons of the 22 million tons of copper used worldwide in 2009. By comparison, Western Europe, the planet’s second-largest consumer, accounted for “only” 3.13 million tonnes. A few figures from the production side put this trend in perspective: Escondida, the biggest copper mine in Chile, can produce a maximum 1.3 million tonnes per year, and 1.09 million tonnes were actually extracted in 2010. Chile’s total output increased 0.5 percent last year.

Urbanization & income, country comparisons

The 8 percent increase seen in world demand in 2010 should be compared with a 4 percent increase in output. “Shortfall” is a euphemism, and prices are bound to rise further even without consideration of strategic stocking. Having surged to almost $10,200 per ton, copper prices are now fluctuating just above the $9,000 mark. This level looks attractive in the long term.

The emerging-country demand argument may be a cliché, but it represents the stark reality of the situation, especially given China’s latest development plans. Identifying demand factors is the best means of evaluating changes in prices.

Cashing in on calamity

Since February 15, 2011, issues relating to world growth have weighed on all commodity prices. The Japanese disaster has followed instability in the Middle East and North Africa (MENA), clouding the prospects for activity and fuelling price volatility. Yet while instability effectively creates a tax on consumption via crowding-out effects, Japan’s predicament actually strengthens the upswing in commodity prices. After all, reconstruction efforts will require purchases of copper over and above the country’s 1.22-million-ton consumption in 2010. Short-term volatility should not mask a long-term trend bolstered by rising demand for a product of limited supply.

Copper use by region in 2009 (millions of tons)

Copper use by country 2009

In terms of the upheaval currently rocking the MENA region, the outcome is uncertain due to the social factors that are contributing to these crises. The movement of revolt, which derived its power from the ever-widening gaps within these societies, has taken a turn that could threaten stability across the region. None of the main producers has been affected for the time being. The action taken by the Gulf Cooperation Council and conciliatory gestures in the form of handouts are sure signs that the regimes in place are feeling the pressure and acknowledging the risk of social unrest.

Copper use by business sector and region in 2009

The increase in real demand masks a political dimension, too. Just imagine the social unrest if, for want of basic materials, China fails to deliver the 38 million new homes it has promised under the current five-year plan. Access to such resources is vital and readily explains Chinese and Indian commodity-related acquisitions and equity stakes.

That said, premia for high-probability events are rising, as the case of the insurance market shows. Soaring oil prices against a backdrop of instability in the Middle East and North Africa are a salutary reminder of that fact. In an inversion of the usual relationship on the commodity markets, volatility recently rose in line with a sharp increase in crude oil prices. This insurance premium is apparently $10-$15 per barrel, a stark pointer toward geopolitical uncertainty.

The synchronization of growth cycles is reflected in a combined surge in energy demand. As with copper, the factors driving up energy prices depend above all on growth. Commodity prices are often set by marginal demand, with the disappearance of a few hundred barrels of oil per day out of a total of around 87.5 million barrels consumed per day triggering immediate price adjustments to the upside, with the size of the move depending on the quality of the oil concerned.

The 2008 crisis probably boosted awareness among major consumers such as India and China that they have to invest if their populations are to benefit from endemic growth. In the present recovery phase, demand for commodities is now increasing among the major developed countries. This amounts to a long-term demand shock in the context of insufficient pre-crisis investment, compounded recently by geopolitical risk.

This is an explosive mixture that is likely to drive commodity prices higher still, amid heightened volatility that reflects wavering growth expectations.

Bertrand Carlier is the manager of Bel Air Fixed Income & Commodity Funds at Credit Agricole Suisse

April 3, 2011 0 comments

Comment

No queen for the tribes

by Peter Speetjens April 3, 2011

written by Peter Speetjens

These are not the easiest of days for Jordan‘s King Abdullah II. The “Arab Spring” has reached Amman and is putting his throne under pressure from two sides. Every Friday, which has been dubbed the national “day of rage,” thousands of leftists and Islamists of mainly Palestinian descent take to the streets to demand political reform. On the other side of the spectrum, the Jordanian tribes have grown ever more vocal in their demands to curb the growing Palestinian influence in the country.

The focal point of their criticism has been none other than Queen Rania, herself of Palestinian descent. In February, 36 tribal representatives sent an open letter to the king in which they accused his wife of “building power centers for her interests that go against what Jordanians and Hashemites have agreed on in governing, and [she] is a danger to the nation, the structure of the state and the political structure of the throne.”

The letter furthermore criticized her frequent presence in the international media, and even accused her of having registered former tribal land in the name of her family. The letter hit the country like a bomb. After all, it is by law forbidden to criticize any member of the royal family. Yet the royal court could do little against the signatories, as they represented some of the country’s largest tribes, including the Bani Sakhr, which in early March blocked the airport road in protest against the state’s ongoing confiscation of tribal lands.

The royal court did act, however, when Agence France Presse Bureau Chief Randa Habib dared share fragments of the letter with an international audience. Habib had to bear the brunt of the royal anger. The court threatened to sue both her and the press agency for “slander,” as she had referred to “tribal leaders,” when in fact they were only representatives. Habib was also fired as columnist for the state-owned daily The Jordan Times.

Among the signatories was the well-known right-wing dissident and former Member of Parliament Ahmad Ouweidi Abbadi, the chairman of the Jordan National Movement, who in 2007 was sentenced to two years in jail for accusing former Interior Minister Eid el-Fayez of corruption. According to him, the “true” Jordanians are today second-class citizens within their own country.

While some of letter’s accusations seem exaggerated, the fundamental sentiment behind the criticism is shared by a considerable part of the population and touches upon the very essence and split nature of Jordan. The country’s original inhabitants mainly consist of tribal Bedouins. It was only after the establishment of Israel in 1948 and the 1967 Six-Day war that hundreds of thousands of Palestinian refugees entered the kingdom.

Many received passports and, on paper at least, are today full-fledged Jordanians. Some 1.2 million among them, however, only have a residency permit. The tribes are extremely worried that the royal court aims to offer them the Jordanian nationality. “King Abdullah must choose: Rania or the throne,” Abbadi told me bluntly. “If she will not disappear we will sooner or later have a civil war.” Harsh words from a bitter man, yet Abbadi is not alone. Some analysts have described the current tense situation as “a Black September without arms,” referring to the 1970 fighting between the PLO and King Hussein’s troops.

Former general Ali Habashneh, the widely respected chairman of the National Committee for Retired Servicemen (NCRS), did not sign the petition. Nor did he accuse Queen Rania of improper behavior or transaction. However, he too believes she has too much of a say at the Royal Court. As early as May 1, 2009, Habashneh offered the King, on behalf of the NCRS, a petition expressing the organization’s concerns. On March 15 this year NCRS again made headlines by publicly claiming that the royal court over the past decade has issued some 130,000 passports to Palestinian refugees.

Habashneh furthermore accused the government of being “weak” in the face of “United States and Israeli pressures to settle Palestinian refugees in Jordan.” According to him, Israel’s right-wing government has killed the idea of an independent Palestinian state, with the (financial) help of Washington, by turning Jordan into Palestine. In this scenario, he warned, the Black September without arms would likely begin to gather weapons.

Peter Speetjens is a Beirut-based journalist

April 3, 2011 0 comments

Comment

Resistance on the high seas

by Nicholas Blanford April 3, 2011

written by Nicholas Blanford

The stakes are growing in the looming confrontation between Lebanon and Israel over the suspected existence of massive fossil fuel deposits in the eastern Mediterranean. The delight in Israel at the recent discovery of two large gas fields off its northern coastline has given way to concerns that it could provide the pretext for a new war with Hezbollah.

That anxiety has hardened with the uncertainties regarding Israel’s arrangement to purchase Egyptian gas following the collapse of Hosni Mubarak’s regime and calls in Cairo to annul the agreement. The upshot is that the potential oil and gas wealth in the eastern Mediterranean could provide an economic windfall for the countries in the area — Lebanon, Israel, Syria and Cyprus — but it also represents a colossal security headache.

The two gas fields off the northern Israel coast — Tamar and Leviathan — contain an estimated 237.8 billion cubic meters and 453 billion cubic meters, respectively, sufficient to satisfy Israel’s energy needs for the next half century. Last year, the United States Geological Survey estimated that the Levantine Basin Province, which encompasses parts of Israel, Lebanon, Syria and Cyprus, could contain as much as 122 trillion cubic feet of gas and 1.7 billion barrels of recoverable oil.

Key to the tensions between Lebanon and Israel over the gas deposits is that their joint maritime border has never been delineated. Beirut has asked the United Nations to help mark a temporary sea boundary between Lebanon and Israel, a maritime equivalent of the “Blue Line” established by the UN in 2000, which corresponds to Lebanon’s southern land border. The UN has agreed to assist and the Israelis are studying the proposal. But the UN faces a potentially thankless task. The demarcation of the Blue Line 11 years ago was mired in mutual distrust and wrangling with neither the Lebanese nor the Israelis willing to concede an inch of territory to the other. Without goodwill from both sides, the maritime boundary could be even more difficult to define given the complicated geography of the coastline. Some have described the dispute over the gas fields along the Lebanon-Israel border as another “Shebaa Farms” — a source of manufactured tension with Israel.

But one European diplomat in Beirut said that parallels between the Shebaa Farms and the off-shore gas fields are misplaced. “Forget the Shebaa Farms,” the diplomat said, “the Lebanese are not being difficult [over the maritime boundary], because they have real economic interests here. Unless there is a pragmatic arrangement you could have a confrontation.” It is perhaps no surprise then that the sudden interest in the potential fossil fuel wealth off the Israeli and Lebanese coastline has turned the Mediterranean into a potential new theater of conflict between the Israelis and Hezbollah.

Hezbollah’s ability to target shipping — and possibly offshore oil and gas platforms — was demonstrated in the month-long war with Israel in 2006 when the militants came close to sinking an Israeli naval vessel with an Iranian version of the Chinese C-802 missile. Hezbollah fighters have since hinted that they have acquired larger anti-ship missiles, double the 72-mile range of the C-802 variant. Last year, Hezbollah Secretary General Sayyed Hassan Nasrallah warned that his organization now possesses the ability to target shipping along the entire length of Israel’s coastline. In January, Israeli Prime Minister Benjamin Netanyahu described the offshore gas fields as a “strategic objective that Israel’s enemies will try to undermine,” and vowed that “Israel will defend its resources.”

In February, the Israeli navy reportedly presented to the government a maritime security plan costing up to $70 million to defend the gas fields. Upping the ante even further, Nasrallah promised in March that if Israel threatens future Lebanese plans to tap its oil and gas reserves, “only the Resistance would force Israel and the world to respect Lebanon’s right.”

Then there is the recent passage of two Iranian navy vessels through the Suez Canal into the Mediterranean and the Israeli navy’s subsequent discovery in March of a smuggled consignment of arms and ammunition, including six C-704 anti-ship missiles believed destined for Hamas in the Gaza Strip. The missiles, though smaller than the C-802, could target Israeli shipping off Gaza as well as Israel’s Yam Tethys oil rig off the coast of Ashkelon. The oil and gas fields off the Lebanese and Israeli coasts look set not only to become a potential long-term source of wealth — but also a source of conflict in the years ahead.

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

April 3, 2011 0 comments

Comment

Time to rethink a nuclear Middle East

by Paul Cochrane April 3, 2011

written by Paul Cochrane

Three days after an earthquake measuring 9.0 on the Richter scale critically damaged Japan’s Fukushima Daiichi nuclear power plant (NPP), the president of South Korea and the crown prince of Abu Dhabi attended a ground-breaking ceremony of the Braka NPP in the United Arab Emirates; it is the first of four to be built under a $20 billion contract inked in 2009 between the Emirates Nuclear Energy Corporation and a consortium of South Korean and American companies.

The inauguration celebration could hardly have been more inopportune. In the course of a week the incident at the Fukushima NPP went from being rated four on the International Atomic Energy Agency’s (IAEA) International Nuclear and Radiological Event Scale, “an accident with local consequences,” to level five, “an accident with wider consequences.” The Fukushima disaster is the only level five rating since the Three Mile Island meltdown in the United States in 1979. There has only been one level seven, the highest rating, in Chernobyl in 1986, which, according to research by New York’s Academy of Sciences published last year, resulted in the deaths of 985,000 people from cancer and related diseases.

The global “nuclear renaissance” touted just a few years ago seems far less secure, a fact reflected in investor sentiment: uranium prices on the spot market following the Japanese calamity plunged 27 percent to $50 per pound as countries started reconsidering the construction of new NPPs.

If there were ever a time to rethink nuclear power it is now, certainly before the dozen Middle Eastern and North African countries that have signed nuclear cooperation agreements start building NPPs. And the risks need to be seriously assessed, not just in terms of security, the logistics of storing spent fuel for thousands of years and so on, but also in terms of earthquake risk.

The Middle East is chock full of tectonic plates, with the Arabian plate in the middle flanked by the Eurasian, African and Indian plates. One of the most seismically active continental regions on earth is just across the sea from the United Arab Emirates, the Zagros Thrust in Iran. Of equal concern is the fact that modern systems to measure seismic activity have only recently been introduced in Saudi Arabia and Oman, while the UAE set one up just this year.

While there is little chance of a tsunami, an earthquake of a magnitude of 5.1 shook the emirate of Fujairah in 2002, and repeated seismic activity in the locality suggests that other, more sizable earthquakes are likely in the future. “When?” is of course the question, and the world can only hope that those building NPPs will do so with the worst-case scenario in mind; the Fukushima NPP was built at a time when the thought of it having to withstand a 9.0 magnitude earthquake was considered unlikely.

Braka was chosen as the site for the UAE’s first NPP as it is “an area with a very low probability of earthquakes — what is called low seismicity,” Ambassador Hamad al-Kaabi, UAE Permanent Representative to the IAEA, told the press after the Fukushima disaster. Yet it is not just unexpected earthquakes that are a concern when it comes to nuclear power. Transparency has been a major issue in the nuclear industry globally; in a 2008 US diplomatic cable released by WikiLeaks, a Japanese politician said the country’s Ministry of Economy, Trade and Industry, the department responsible for nuclear energy, has been “covering up nuclear accidents and obscuring the true costs and problems associated with the nuclear industry.”

The UAE hardly has a sterling reputation for transparency and accountability — think back to how the Dubai debt imbroglio was handled in 2009. If the Japanese, with 54 nuclear reactors, cannot be relied upon to be transparent, can we be sure the UAE will be?

Let us hope the UAE’s decision to go ahead with nuclear power, just as news of Fukushima’s fallout was dominating headlines, will not be retold through history as the epitomic example of a warning unheeded.

Paul Cochrane is the Middle East correspondent for International News Services

April 3, 2011 0 comments

Banking & Finance

Money matters bulletin

by Executive Editors March 28, 2011

written by Executive Editors

Regional stock market indices

Regional currency rates

UAE developers down at end 2010

Real estate firms in the United Arab Emirates suffered from poor earnings results in the fourth quarter of 2010. Abu Dhabi-based Aldar Properties reported a net loss of $3 billion in the quarter, accounting for its overall $3.07 billion loss for the year. Sorouh Real Estate, Abu Dhabi’s second largest developer by market value, also posted a net loss of $54.18 million compared to a net profit of $7.65 million a year earlier, as its revenues for the last quarter of 2010 fell 51 percent to $58.26 million. Moving to Dubai, Emaar Properties, UAE’s biggest developer by market value, registered a 62 percent decline in net income during the fourth quarter of 2010 to $74.6 million, down from $196.03 million a year earlier. Union Properties’ fourth quarter net loss increased as well, climbing fivefold to $211.8 million compared to a loss of $40.29 million registered in the same period last year, due to losses on property valuations.

Saudi oil production to rise 15.4 percent by 2020

Saudi Arabia’s government stated that local oil production increased significantly during December 2010 to a two–year high of 8.365 million barrels-per-day (bpd), recording a 1.3 percent increase since November. Separately, Business Monitor International (BMI) forecasted a 15.4 percent rise in Saudi oil production between 2010 and 2020, with output reaching 11.4 million bpd by 2020. BMI also expects oil consumption in the Kingdom to increase 40.1 percent during the same period, to 3.91 million bpd. In the near term, BMI believes local oil demand will climb from an estimated 2.79 million bpd in 2010 to 3.38 million per day in 2015, accounting for 38.8 percent of the Middle East’s regional oil demand.

The region’s idiosyncratic unemployment enigma

The number of unemployed in the Arab world is forecasted to reach 19 million by 2020, according to Kuwait-based think tank, Arab Planning Institute (API). The Middle East and North Africa region has been suffering from sluggish labor markets for some time, despite the fact that the workforce is generally young and shows 3.5 percent growth per year, relative to an average 3.1 percent population growth since the 1980s. This favorable employment dynamic has, however, not been used to benefit the region’s development and most MENA countries still lag behind in female employment rates, with less than 40 percent of women eligible for work employed in the labor force. North African countries, however, generally score better in this category, as up to 65 percent of the female population is in the labor force. Another factor contributing to high unemployment in the Arab world is the few job opportunities available for the educated. For instance, up to 50 percent of the unemployed in Tunisia and 44 percent in Morocco have secondary and tertiary degrees, according to API. Under these conditions, a large percentage of people eligible for work become discouraged, excluding themselves from the labor force. Unemployment rates in MENA countries are thus somewhat skewed and expected to remain in the range of 11 to 15 percent over the next decade.

March 28, 2011 0 comments

Banking & Finance

Regional equity markets

by Executive Editors March 28, 2011

written by Executive Editors

Beirut SE

Current year high: 1,180.99 Current year low: 935.56

> Review period: Closed Feb 28 at 936.99 Points Period Change: -5.3%

More turmoil in the region, no cabinet and a real surprise in the United States going after a (non-listed) Lebanese bank for money laundering in a manner reminiscent of a B-movie: February was a month of few positives for Lebanese stock market investors. However, the BSE’s year-to-date performance of minus 3.6% is not too depressing, given the circumstances. Of the three largest stocks, developer Solidere closed the month in the mid $18s, Bank Audi came in at $7.11 and BLOM Bank at $9.14.

Amman SE

Current year high: 2,648.36 Current year low: 2,223.30

> Review period: Closed Feb 28 at 2251.73 Points Period Change: -5.1%

With Libya and Yemen attracting the caravans of revolution-watching media, Jordan in February was not in the front row of international speculations over its future. The Amman Stock Exchange did not have an easy month, however. In the February review period, all sector indices pushed lower in tandem with the ASE general index, which is down 6% for 2011 so far. According to local media, a handful of investors took their cue from the popular protest handbook and staged a sit-in demanding dismissal of the head of the Jordan Securities Commission.

Abu Dhabi Exchange

Current year high: 2,931.67 Current year low: 2,471.70

> Review period: Closed Feb 28 at 2,588.90 Points Period Change: 0.1%

The richer emirate in the UAE was the only market in the GCC that did not drop in February. When seen across sectors, performance on the ADX was mixed; telecommunications ended the review period 4.3% higher while banking weakened 2.9%. But the real estate index suffered badly, dropping 19.9% and construction fell 12.2%. RAK Properties, Aldar Properties and Sorouh Real Estate all suffered double-digit share price losses, as did three financial stocks and Abu Dhabi Ship Building Co. Market cap leader Etisalat gained 3.9% but showed no progress on buying Zain.

Dubai FM

Current year high: 1,880.62 Current year low: 1,470.70

> Review period: Closed Feb 28 at 1410.70 Points Period Change: -8.1%

Even directly after the Dubai World debt trauma, the DFM index did not slump as low as it did at the end of February 2011. With rampant talk of contagions from regional crisis spots, all DFM sector indices tended negative, with transport dropping 12% and real estate 13.3%. Utilities was the worst underperforming sector on the DFM for the review period, down 19.6%. Banking was a brighter spot, weakening only 1.8%. Market volatility in February reached 26.7%. On the year, the DFM index had given up 13.5% by Feb 28 close.

Kuwait SE

Current year high: 7,575.00 Current year low: 6,319.70

> Review period: Closed Feb 24 at 6,481.10 Points Period Change: -5.5%

The KSE benchmark index turned totally south in February. The regular market’s sector indices dropped on all fronts, led down by the investment index (-7.9%) and the industrial index (-7.7%). Bahrain’s Arab Insurance Group, which is cross-listed on the KSE, was also here a top gainer, up 21.1%. Shares in Mena Holding, a real estate firm with subsidiaries and projects in Egypt, lost more than 53%. The trading month in Kuwait was truncated Feb 24 as the country celebrated its 50th Independence Day.

Saudi Arabia SE

Current year high: 6,929.40 Current year low: 5,538.72

> Review period: Closed Feb 28 at 5,941.63 Points Period Change: -6.5%

Until Feb 14, the SASE Index stood firm but then the TASI fell nearly 700 points to the end of the month. For the year to date, this translated into a fall of 10.3%, the second worst year-to-date Gulf market performance after Dubai. Telecommunications and banking indices showed the weakest sector performances, falling 9.9% and 9% respectively. King Abdullah’s return from hospitalization abroad and his announcement of economic measures toward the end of the month had no visible positive impact.

Muscat SM

Current year high: 7,027.32 Current year low: 6,058.11

> Review period: Closed Feb 28 at 6,142.42 Points Period Change: -10.2%

The MSM fell victim to political unrest and showed the worst drop of all GCC markets in February, wiping out the modest gains from January. Notably, the bourse’s average daily turnover was slightly higher than last month but losing stocks vastly outnumbered gainers. Volatility was substantial, at 21.5%. Within the MSM’s shock-induced downturn the banking sector fared worst, closing the month 18.6% lower. While there were no surprise gainers, investors in poultry specialist A’Saffa Food showed the biggest scare as the scrip fell 28.5%.

Bahrain Bourse

Current year high: 1,605.98 Current year low: 1,361.19

> Review period: Closed Feb 28 at 1,430.77 Points Period Change: -1.2%

It is an irony that will not escape careful observers: while Bahrain is being viewed as the GCC member with the greatest exposure to political protests and internal dissonance in Feb 2011, the BB remains the GCC exchange to drop the least in the year to date, at -0.1%. Even in February, market losses remained modest. However, turnover for the month fell about two thirds from January. Arab Insurance Group was the period’s best gainer, up 17.1%. Inovest, a real estate investment firm, slipped 39.6%.

Qatar SE

Current year high: 9,242.63 Current year low: 6,647.18

> Review period: Closed Feb 28 at 7932.84 Points Period Change: -9.3%

Like Saudi Arabia, Qatar was not a scene of unrest in February but like the TASI, the QSE Index took a steep downturn in the middle of the month, save for a brief respite on Feb 24. Owing to a share-price surge in early February, Masraf Al Rayan closed the month 8.5% up but the month’s unsuspected best gainer was Qatar Oman Investment Company. The bilateral company, with stake holdings by the two governments, gained 9%. Barwa Real Estate and National Leasing Holding Co underperformed the market with respective losses of 20.8% and 25.6%.

Tunis SE

Current year high: 5,681.39 Current year low: 4,058.53

> Review period: Closed Sept 23 at 4,058.53 Points Period Change: -10.86%

The price of real freedom is never too high and even if the benchmark Tunindex of the TSE closed February 28 down 22.2% since the start of 2011 and 29.6% down from its year high in October 2010, it is far too early to open a cost-benefit calculation on the changes Tunisians initiated in January. The TSE, which had been closed for half a month until Jan 31, could easily have tumbled worse in Feb and there seems to be no historic benchmark for an average post-revolutionary stock market performance.

Casablanca SE

Current year high: 13,397.47 Current year low: 10,938.64

> Review period: Closed Feb 28 at 12,805.81 Points Period Change: 1.72%

Isn’t Casablanca in revolutionary North Africa? Political prospects on the region notwithstanding, Morocco’s benchmark MASI ended the review period with an upswing that made February into a typical V-month for its investors. The index lost 500 points in the third week of the month and regained them in the fourth. No trouble on the real estate front, it seemed, where Groupe Addoha climbed 5.9%.

Egypt SE

Current year high: 7,603.04 Current year low: 5,647.00

> Review period: Closed at 5,467.00 Points (Jan 27) Period Change: N/A

The only events of record in the EGX during the month of February were postponements; there were several announcements that the bourse would reopen shortly, only to be rescinded before their implementation. The market, which recorded its last session close to date on January 27, has been shuttered for more than 20 regular sessions. The central bank kept pressure on the Egyptian Pound in check throughout Feb and banks returned to serving customers, but with increased controls on transfers.

March 28, 2011 0 comments

Advertising Special Report

Cooperate to elevate

by Executive Editors March 28, 2011

written by Executive Editors

Over the years I’ve come to the conclusion that the ad industry has endured a lot of finger-pointing but not enough autopsy; a tendency for mudslinging instead of progress through cooperation.

Our region lags behind on so many practices prevalent in more mature and sophisticated markets, the per capita ad spending remains to be among the lowest across the globe and the level of confidence among marketers that advertising relates to growth remains timid.

However, the interesting aspect of this region is in its opportunities: it sits conveniently at the cross-roads of the rising East and the experienced West, with strong economic capabilities and young dynamic populations. Furthermore, the longer term positive effects of the current political change sweeping key Arab states will bring with it better governance, healthier business environments and hopefully a fairer distribution of wealth.

This begs the question of whether the advertising industry, with all its disciplines, will be able to lead and contribute to the process of change or will this industry remain hostage to the transactional cage built by lingering practices of the 1980s and the rising power of procurement, thereby leading to another “lost decade”?

Crafting the answer is the equal responsibility of all stakeholders.

The recent developments in data mining technology, as well as the transfer of frameworks from the science of operations research, has proven beyond a doubt that advertising can and will affect growth — and not just in consumer packaged-goods industries.

Concurrently, agency networks for the past few years have been showing solid commitment to the region by increasing equity holding in the local entities that carried their trademarks. That can only be good news, because if anything it means a “system upgrade” in various ways:

• Upgrade of agency services by transferring learning and experiences from mature markets while offering multinational corporations the ability to sync local activities with global.

• Upgrade of the financial practices and corporate governance, ushering-in higher levels of accountability with the implementation of global best-practice and tools.

• Upgrade of the terms that govern a client-agency relationship, ensuring a fine balance between trading strength and ideas that deliver business solutions.

As the agency reform takes shape it is acting as a catalyst for change. In order for it to take full swing, it requires an embrace from the other side of the spectrum: the marketing community. For advertising to contribute to growth it has to be measured; the good news is that agencies have developed the know-how to do that. Now it’s up to the marketers to increase investment in measuring every aspect of their activities and develop a much greater confidence in entrusting their agencies with access to such gems.

Eventually as we move toward an environment of “advertising that works,” marketers will want to measure value and not just efficiencies. The practice of advertising will become more focused on business results and less focused on the mundane marketing and advertising key performance indicators.

More importantly, when selecting their agency partners, marketers would want to differentiate between those that only offer a transactional solution and those that are capable of contributing to growth — this is key to the success of the partnership, as agencies that understand and contribute to growth cannot survive or operate on remuneration schemes prevalent in a trading/procurement environment that is focused on driving efficiencies in paid media.

Against all odds, and despite the fact that the industry still suffers from underdevelopment on a number of fronts, this region has always been credited for being entrepreneurial. In fact we’ve seen over the years many a high-profile marketer willing to experiment in unchartered territories.

In avoiding the fate of the “lost decade,” the advertising industry, with the participation of all its stakeholders, has the golden opportunity of experimenting with a reformed relationship that focuses on growth as the basis for all conversations.

If this proves to be successful — and it will — it carries the potential of being a global best practice exported out of this region.

SHADI KANDIL is managing director of OMD UAE

March 28, 2011 0 comments