Executive Magazine

Q&A – Ali Rashed Lootah

by Thomas Schellen March 3, 2011

written by Thomas Schellen

Nakheel, the master developer of Dubai’s trademark Palm Islands and many other ambitious projects, has recently restarted a portion of its developments after a difficult period of two years. Fully owned by the state of Dubai via parent company Dubai World, Nakheel had to restructure and refinance. The restructuring is near completion, with separation of the company from Dubai World planned before the end of this quarter. Nakheel Chairman Ali Rashed Lootah agreed to elaborate on the scope and pace of the company’s turnaround in an exclusive interview with Executive.

In the past few months, Nakheel has announced the resumption of work on several developments. What is the rationale behind this?

As a real estate company, we are committed to deliver what we have promised to [our] investors. After the approval of our restructuring and the approval of our business plan by the authorities, we had to go ahead and implement it. That is the rationale behind it.

In restarting your projects, how much could you restore the confidence of your investors and of the market?

We have different partners. From the side of our contractors, who are partners with us, I am sure there is trust in Nakheel. We are paying them ahead of time and the most important thing, you know, is to pay people.

In all of the projects that we have re-launched, most of the contractors are back. I can tell you that 90 percent of our contractors have not changed. We offered them a lot of incentives, we gave them additional advance payments to bring them back to the sites, but for the 10 percent with their own problems we had to find alternative contractors to complete the projects and enable us to deliver to our investors. We had, to my recollection, only two cases where a contractor could not go back. By now we have about a 9,000-person labor force on site.

Did the large number of contracting relationships and the involvement of numerous developers and sub-developers cause extra pressures or increase your cost in restarting the projects?

Let me say one important thing: without the support of the government we would not have been able to restart. The government gave us financial support, legal support, all the support we need. That enabled us to meet all our requirements. We don’t have any financial issues. The government is committed and we are meeting all our obligations. But some of the sub-developers are having some issues and don’t want to meet their commitments. We are trying to accommodate them as much as possible, giving them different scenarios, different payment plans, but they have to be committed to their contracts. There is give and take, but up to a certain extent.

You said previously that Nakheel is preparing to become a stand-alone entity by the end of this quarter. What is the reason for this revision of your corporate structure?

It is public knowledge that we will be separated from Dubai World. The reason is that Nakheel on its own is a real estate entity and I think, simply speaking, that the best way to manage Nakheel is to have it totally separated, financially and practically.

Will the restructuring affect ownership in any way?

There will be no change in ownership through this restructuring and the shareholders won’t be changed.

The board of directors will be chaired by you?

Yes, and the board will remain as it is.

Nakheel is so big in the real estate sector of Dubai that people tend to blame you for everything, from a leaking faucet to a swimming pool that has not been maintained or a parking lot that is not clean. How do you deal with this?

I take this always in a positive way. If we are talking about our clients, to me the customer is always right. We have to make them happy. People will not complain unless there is some ground for the complaint. They might exaggerate the complaint but there cannot be groundless complaint. Some people have suffered in the previous three years because of the stand still situation and they think things will change overnight. That is not possible. But the feedback we are getting includes a lot of communication from our customers where they thank us and recognize that there are changes.

What has Nakheel done to mitigate risks for investors going forward, such as global risk, local risk or internal controls risk?

The global risk was not about Nakheel; it stemmed from what you can call the global incident. I think the solution we are offering the people is really an excellent solution. Nakheel, or the government, had the choice of declaring [our company’s] bankruptcy. We didn’t choose to go that way.

How do you view opinions that the underlying risk existed before the crisis and should have been managed differently?

In a free economy you cannot control anything.

But when we look back at 2006 — 2007, many research reports on the real estate outlook for Dubai were published and all of them were positive, to the point that they sounded like they were trying more to please than to assess…

I will disagree and agree with you. If the Lehman Brothers case didn’t happen we might still be going at the same rate as before. The Lehman Brothers crisis triggered the global economic crisis and if the United States government dealt with it in a different way we might still have the same abnormal growth. Dubai was cheaper and still is cheaper than any destination, so people were willing to take this so-called risk, if you want to call it that.

Dubai is certainly more competitive today than during the final bubble period before the global crisis…

Yes. It was crazy and it was a good thing that there was a cleaning up. Only the serious people will stay.

People who purchased villas and homes in Nakheel developments before the crisis included both individual buyers and large-scale investors who bought properties for financial gain or even speculation. How do you differentiate in treating the two groups?

To individual investors who bought homes we are giving alternative solutions. We are giving them alternative properties.

How many buyers have accepted the proposal for shifting to a different property than they originally signed their contracts for?

We have actually managed so far to relocate about 50percent. About 50 percent of the people in what we call long-term projects have accepted to be relocated into short-term projects. I think we mitigated over4.5 billion dirhams ($1.22 billion).

Do you see yourself as setting an example for the whole real estate sector in Dubai in your practice of mitigating and relocating people?

I don’t know about that. I cannot speak about [other developers]. But if we can manage to relocate such a big number, people are happy, and keep in mind it was done in less than one year. The restructuring started in early April [of 2010] and that is a short period for 4.5 billion dirhams in transactions.

What is your vision for 2015 – 2020?

I think we can say the worst is over. We have achieved the business plan and are doing much better than what is envisioned in that plan. I am confident to say that.

In the portfolio of your long-term projects, you cancelled some, such as the Trump Tower.

I probably said canceled in the last brief but it is, in the current market situation, not logical to go and develop more real estate.

So the reason was not the cost of any individual project but the market?

The market for sure. We have to be realistic and see the market.

Do you expect that projects like Trump Tower or Tiger Woods Golf Course could be implemented five or 10 years from now?

I doubt it.

So you were appointed because you have the strength…

…Of saying ‘No’. I am going after people to collect money(laughing). But believe me, I’m not after the individual investor. I am really very sympathetic toward the individual investor and I am sometimes even harsh on my people because I always put myself in the poor investor’s place. But [the individual buyers] have to also accept that they could have faced a worse scenario. The government really did a good job by keeping the commitment of Nakheel. At the end of the day, the reputation of Dubai is at stake.

And the reputation and credibility of Dubai…

…That’s our capital. I feel there is a positive feeling in the city. I think there were a lot of speculators in the city and they have runaway. As I said, Dubai is here to stay. If you exclude the real estate, other sectors in the economy are really growing.

There was talk of some new developments?

We will be developing retail business on the Palm and the Dragon Mart; we are planning to drastically increase the size of the mall, more than doubling it. On the Palm, a mall is needed. We will be tendering all these projects in the second half of the year.

What are the biggest challenges you see in the coming 18months for the real estate market in Dubai?

I think the big challenge is to cope with the existing oversupply and encourage more people to move to Dubai. I think this is happening by having the real estate value reduced by 50 percent. That is really encouraging a lot of people to move. I don’t really know the size of the oversupply — nobody can really have a figure — but the good thing is that there are no new projects.

From what you are saying, now is the time to buy in Dubai.

For sure. We are also really working hard to bring our service charges down. That will also make Dubai more affordable. We are in negotiations with all our services’ providers.

Do you have a target figure in percentage reduction of service charges?

I am squeezing my people every day. They come with a proposal and I reject it. I keep challenging them because I always put myself in the investors’ shoes. People will be happy if you reduce [service charges] by 10 or 20 percent, but I want people to be even happier

Have you stepped up the Emiratization of Nakheel’s staff?

The percentage [of Emirati employees] is higher because if we have redundancies we release expatriates whom we don’t need. We are identifying the good ones whom we have to keep. Practically speaking, I am dealing with Nakheel in the same way in which I would be dealing with my private business; when it comes to business, you keep only the people you need.

March 3, 2011 0 comments

Comment

Upheaval and institutional capital

by Fabio Scacciavillani March 3, 2011

written by Fabio Scacciavillani

In an article published in the July 2010 issue of Executive, I wrote that although economic reforms that foster an entrepreneurial spirit are important for improving the livelihood of emerging countries, the critical ingredient for sustainable growth and the strengthening of social cohesion is the institutional capital of a country.

By that I meant the complex tangle of governance tools, primarily in the legal and judicial areas, which form the foundations of a level playing field for all — not only for those who happen to be in a position of privilege and have access to decision makers. It is interesting to note that the countries being swept by public unrest, or where political opposition is gaining strength, had been quite resilient to the global financial crisis thanks to the effects of structural reforms during the past decade. In a number of cases they had enjoyed a rather successful record in terms of macroeconomic indicators, such as gross domestic product, foreign investment, currency stability and central bank reserves.

The macroeconomic picture, however, tends to hide a grimmer reality. For example, the gains in efficiency in privatized companies and banks translate into job losses as the state-owned companies, which are traditionally overstaffed, slim down. If new jobs are not created in other sectors, the overall effect on the general population is dim. In other words, there are asymmetric effects of economic reforms that need to be addressed to create a broad-based improvement in living standards.

For political stability it is crucial that the improvements reach the lowest income brackets and guarantee a real chance for social mobility. People are more willing to accept sacrifices if they bear fruit for themselves or for their families; less so if they are perceived as perpetuating a permanent hopeless condition.

The process of liberalization must not favor a few to the detriment of many. To avoid widespread resentment, small enterprises must be nurtured; above all, social services, health and education must improve. Redistributive measures through public handouts, on the other hand, are the typical response to popular angst: in Egypt, civil servant wages doubled between 2005 and 2009. But such moves tend to favor selected groups already seen as beneficiaries of patronage while at the same time nurturing a culture of dependence.

The political backlash of resentment and cynicism can be delayed where rulers are not subject to a voting public, but the lid cannot be kept on indefinitely. The Tunisian uprising that triggered the “Arab Spring” was brewing for years; it took a relatively minor detonator with powerful emotional impact — a street vendor’s self-immolation — to ignite the popular anger.

Economic and financial liberalization represents a necessary condition to promote opportunities and welfare, but hardly a sufficient one. To ensure that everyone has a concrete possibility to benefit from the progress, an adequate system of economic governance must be established, in particular an efficient and independent legal system. When individual rights, property rights and access to a legal system are denied, economic freedom is meaningless and is perceived as perpetuating an oligarchy.

In Egypt, few homeowners have property titles; very few households have a bank account, let alone a credit card. A social safety net is virtually non-existent; most are subject to the greed of corrupt officials and law enforcement is arbitrary. These factors help make up the frustration that turned into visible manifestations of anger. Now that Mubarak and Ben Ali have abandoned the scene, a new phase can begin. But pragmatism should be observed because the illusion following the upheaval is dangerous. Remember the fate of the orange revolution in Ukraine; years of convulsion ended up with the power returning to the ousted autocrat.

In Egypt, where the military retains its political clout and economic influence, as well as in Tunisia and other countries that are shaking off serfdom, the road toward real enfranchisement will be long and bumpy. Rights and freedoms need to be nurtured continuously. Entrenched privileges enjoyed by the elite will not disappear unless they are put in check at every step.

Fabio Scacciavillani is chief economist at the Oman Investment Fund

March 3, 2011 0 comments

Comment

Israel’s preference for Arab oppression

by Riad Al-Khouri March 3, 2011

written by Riad Al-Khouri

The drastic changes in Egypt, and the unrest throughout the region, have left Israel with a new sense of strategic vulnerability. Though the Egyptian military says that Cairo will respect existing international treaties, alarm in Israel over the fate of the 1978 Camp David accords is evident.

Israel has not been in a rush to forge new peace agreements since its 1994 treaty with Jordan, believing the continuation of the status quo to be tolerable. Now, however, Cairo’s uncertain political direction has Israelis questioning their external security.

These feelings were evident at the prestigious Interdisciplinary Center (IDC) Herzliya Conference in early February. IDC, established in 1994 as Israel’s first private university, has for the past 11years hosted this annual policy gathering, which brings together Israeli and international politicians, policymakers and analysts to discuss regional security challenges. The tone for this year’s event was set by Knesset Foreign Affairs and Defense Committee Chairman Shaul Mofaz, who said that “the Egyptian affair reveals a grave mistake [by the United States in giving military aid to Arab regimes].”

On the future of the Middle East peace process, Mofaz added that Israel had been caught off guard by the wave of protests that shook the region in recent weeks. “Israel and the world were taken by surprise by the earthquake that began in Tunisia, Egypt and the rest,” he said.

As if to prove his point, a look at the preliminary conference schedule released weeks before showed a focus on Iran. After the Tunisian uprising, a regional panel was altered in January to discuss destabilization and reform in the Arab world. Then came Tahrir Square, and perceived threats to the Camp David 1978 peace accord — the cornerstone of Israel’s regional strategy — permeated the conference. In the end, almost every panel discussion touched on the subject of Egypt. Israelis are concerned that Cairo’s re-orientation will bring back the era before Camp David when a quarter of Israel’s gross national product went to the military (as opposed to 9percent today).

The implications of the largest of Israel’s neighbors returning to a status of belligerency, or even Turkish-style tacit support for resistance against Israel, would have an enormous effect on the Israeli economy. For example, as military costs rise, spending on social services might be cut, with potentially grave consequences. Former Israeli minister Yitzhak Herzog’s opening remarks at the conference angrily criticized a 20 percent poverty level in Israel (mostly among Arabs) that has not been sufficiently addressed. The overarching theme at Herzliya this year was hostility to Arab democracy, based on the assumption that it will lead to heightened dangers for Israel. “In the Arab world, there is no room for democracy,” Israeli Major General Amos Gilead told the conference, adding: “We prefer stability.” Israelis brag that their country is the only democracy in the Middle East and, as Matthew Duss wrote in The Nation, “from the reaction at Herzliya to Egypt’s freedom fever, it’s clear that quite a few influential Israelis would prefer to keep it that way.”

The problem is that “stability vs. democracy” is a false choice; in reality, democracy comes much closer to producing real stability. Supporting dictators may work for a time, but democracies can adapt better to changing times and the aspirations of the people. The US now rightly asserts that the regional status quo is unsustainable. However, Martin Kramer of Israel’s conservative Shalem Center (echoing other speakers) suggested to the conference that, “In Israel, we are for the status quo,” adding that “not only do we believe [it] is sustainable, we think it’s the job of the US to sustain it.” True, Israeli reliance on the status quo is only possible in the long-term with US assistance, but the terms of that support will change in light of the new regional reality. A reality which may be leveraged to make Israel soften its intransigence in regard to negotiations with the Palestinians.

Instead of denying the sea change, perhaps the next conference can consider how to strengthen Arab democracy so that Cairo and others can become true partners in a just, lasting and comprehensive peace.

RIAD AL-KHOURI is dean of the business school at the Lebanese French University in Erbil, and a senior economist at the William Davidson Institute in the University of Michigan

March 3, 2011 0 comments

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Spinning a revolution

by Gareth Smith March 3, 2011

written by Gareth Smith

Early last month, the website of Mir-Hossein Musavi, co-leader of Iran’s opposition Green Movement, presented two pictures. One from Egypt showed police beating a protester, under the heading ‘heroic’. The second was a similar scene in Iran, from the 2009 anti-government protests, under the heading ‘agent of imperialism’. Musavi and his ally, Mehdi Karrubi, have compared Egypt’s elections of recent years, won by the Hosni Mubarak’ National Democratic Party, to Iran’s 2009 presidential election, after which the Greens disputed the victory of Mahmoud Ahmadinejad. They have also highlighted the role of new means of communication used by protestors in both countries.

But the implications for Iran of events in Egypt and Tunisia are not straightforward: if the demise of presidents Hosni Mubarak and Zine el-Abidine Ben Ali has unnerved the rulers of Saudi Arabia, Sudan, Syria, the United Arab Emirates, Yemen and even the West Bank, the authorities in Tehran have visibly relished the discomfort of so many Western-inclined Arab regimes.

At the outbreak of protests in Cairo and Alexandria, Ayatollah Ali Khamenei, Iran’s supreme leader, insisted that Egypt was experiencing an Islamic Revolution of its own, marking what he called the “irreparable failure for the American and the Zionist regimes [and]… an earthquake” that would undermine “arrogant governments” across the region. Addressing Friday prayers in Tehran, Ayatollah Khamenei was jubilant in noting that the Egyptians “begin their movements from Friday prayers and mosques, and they shout religious slogans, especially ‘allahu akbar.’”

The irony was not lost on the Green Movement, which adopted rooftop shouts of “allahu akbar” in 2009 when street protests were outlawed and dispersed by security forces.

The animosity of Iran’s current leaders toward the Egyptian regime stems from the friendship between former Egyptian President Anwar el-Sadat and the late Shah of Iran, Mohammad Pahlavi, in the 1970s, when both embraced the United States and Israel. Diplomatic relations between the two ended after Iran’s 1979 Islamic Revolution; after Sadat was assassinated in1981 the Iranian authorities named a central Tehran street after his assassin, Khaled Islambouli. Since the 1979Islamic Revolution, Iran’s rulers have been more successful than Egypt’s infusing nationalism with egalitarianism, and in mobilizing the population behind goals of defense and development.

But the main prism through which Iranian leaders view the world has been their rivalry with the US and opposition to Zionism. The Green Movement rejects this, arguing that Iranian politics can no longer be shaped solely by resistance to the US and Israel. But ardent loyalists of Ayatollah Khamenei and supporters of President Ahmadinejad are more and more convinced regional developments are moving in their favor, and that a more assertive foreign policy, including the nuclear program and support for Palestinian resistance, is popular both at home and in the wider Muslim and Arab worlds.

This is not entirely a matter of faith. One calculation in Tehran is that more representative Arab governments would be less hostile to Iran. American diplomatic cables leaked last year by the WikiLeaks website suggested that leaders in Saudi Arabia, Bahrain and the UAE were sympathetic to US military attacks on Iran — whereas a poll by the Washington-based Brookings Institution found that only 10 percent of respondents in the general population of Egypt, Saudi Arabia, Morocco, Jordan, Lebanon and the UAE viewed Iran as a threat.

Public officials, along with the Iranian media, have also expressed a positive view of Mohamed El Baradei, the Egyptian opposition figure who, as head of the United Nation’s International Atomic Energy Agency, resisted much US pressure to condemn Iran’s nuclear program. They have also been supportive of the Muslim Brotherhood, which has had a close relationship with Iranian Islamists since as far back as the 1970s. One Brotherhood official, Kamal al-Halbavi, warmly welcomed Ayatollah Khamenei’s Friday prayer sermon and also told the BBC Persian service he wanted Egypt to have “a good government, like the Iranian government, and a good president like Mr Ahmadinejad, who is very brave.”

Gareth Smyth is the former Tehran correspondent for the Financial Times

March 3, 2011 0 comments

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Trial of the secular sentinels

by Peter Grimsditch March 3, 2011

written by Peter Grimsditch

“Oh, what a tangled web we weave, when first we practise to deceive.”

These famous lines, first penned by Sir Walter Scott for his soap opera poem “Marmion” in 1808, have been given new meaning by the twists and turns of Turkey’s Ergenek on trial, which grows messier by the day.

In Scott’s otherwise-largely-forgettable tale, Lord Marmion fancies a rich woman, Clara de Clare, and, with the help of his mistress, a lascivious nun, he forges documents implicating Clare’s fiancé in treason, successfully sending him into exile. In the end, Marmion’s mistress confesses to the forgery, the Lord is killed on the battlefield and Clare is reunited with her knight.

The convoluted deception and double-dealing has been mirrored in the Turkish courts — although to this point without the treacherous nuns — since a plot was discovered in 2003 to allegedly overthrow the government of the Justice and Development Party (AKP).

More than 400 people, mostly military officers and journalists, are accused in the scheme designed to sew mayhem throughout Turkey by blowing up mosques and shooting down a Turkish military aircraft — an attack that would have been blamed on Greece. Increasingly, the mass of evidence introduced in the trial is being called into question, making a tidy conclusion a la Scott’s “Marmion” seem less and less likely.

Dani Rodrik, son-in-law of retired General Cetin Dogan, supposedly the mastermind of the plot, claims that some of the information on the prosecution’s “11th CD” — one of many disks containing trial evidence — has to have been planted by authorities after Dogan’s arrest. Despite the fact that the plot was discovered in 2003, according to Rodrik there is mention of a pharmaceutical warehouse that did not operate under that name until 2008, along with references to people who were not employed in 2003 by the institutions with which they are associated on the disk.

Dogan, former commander of Turkey’s 1st Army, maintains the evidence has been distorted to depict a routine military contingency plan as a genuine plot to overthrow the government. With three coups since 1960, the claim of another military intervention in Turkey is less outrageous than it might initially sound and even Rodrik admits some questionable comments were made during a recorded meeting about the military drill. That would leave the only explanation for doctoring the “11th CD,” if true, as a clumsy attempt to guarantee Dogan’s conviction.

It is not the only example of alleged evidence tampering in the case. Police confiscated a mobile phone belonging to another of the accused, Lieutenant Mehmet Ali Celebi and added 139 new numbers to its contacts. Celebi is accused of joining Hizb ut-Tahrir, a group of mostly Salafists intent on establishing a global Islamic caliphate. Many of the newly inserted numbers belonged to members of the group, two of which were labelled in the phone’s address book as “my wife” and “my mother-in-law” to disguise their true identities. Such a ruse, whether by Celebi or the police, wasperhaps not too well thought out given that Celebi is not married. He maintain she infiltrated the group “to defend the republic and hand its members over to the justice system.”

The lieutenant surrendered to police on September 18, 2008after discovering he was being investigated in relation to the Ergenekon case. The following day, his phone was sent on to the Istanbul Police Department. According to a court-ordered telecommunications report, the mobile was switched on that night for one minute and 23 seconds, with signals coming from the same location as the police department. In response, police said the phone had been switched on for technical staff to register its data in official records. It was possible, a statement added, that the 139 numbers, identical to those on a phone belonging to a known member of Hizb ut-Tahrir, had been added “by mistake.”

The case against journalists accused of involvement in the plot has also been rife with abnormalities. Prosecutors claim that a bomb attack on the offices of Cumhuriyet newspaper in 2007 was planned by its own Editor-in-chief Ilhan Selcuk, so other murky forces could be blamed. Selcuk, however, is safe from the tangled Ergenekon web. He died of natural causes last June at 85.

Peter Grimsditch is EXECUTIVE’s Istanbul correspondent

March 3, 2011 0 comments

Finance

Riad Salameh speaks to Executive

by Emma Cosgrove March 2, 2011

written by Emma Cosgrove

With praise from international media raining in for his steadiness at Lebanon’s financial helm, Executive sat down with Central Bank Governor Riad Salameh to discuss the current and future state of Lebanese Banks.

E As a foil to the rest of the world, Lebanese banks have actually struggled to find profitable uses for their excess liquidity, especially in local currency. Do you believe that the banks have enough tools to keep this liquidity from becoming a burden?

Well, as you know, the amounts that came to the banking sector after the collapse of Lehman [Brothers], and between September 2008 and July 2009, were very large amounts compared to the size of deposits already existing in the banking sector. Plus they were mostly converted into Lebanese pounds. It is normal that the banking sector can’t find immediate use for such amounts when they total around $16 billion. The credit market in Lebanon usually increases by $2 billion to $3 billion a year.

So the central bank issued 5-year certificates of deposit (CDs) in Lebanese pounds in order to mop up some of that liquidity, and the

Ministry of Finance also issued more treasury bills in Lebanese pounds than needed, in order to keep discipline, prevent bubbles, speculation and inflation. And this money will be gradually used again in the economy in Lebanon.

Therefore, we have to face the positive aspect of not having been touched by the crisis and embrace the confidence in our system, and we thought that it was an opportunity for Lebanon to receive and keep all these funds, as there will be a need for them in the future, whether to finance the public sector or the private sector.

E Why did the central bank stop issuing five-year CDs?

We have issued circulars to enhance credit in Lebanese pounds and we have given incentives to lend for housing without placing price ceilings, so you can now see the banks competing to lend money at rates that are around 5 percent for medium-term [loans].

We have also given incentives for the financing of new projects, not only those covered by the previous circulars, which means that any project besides industry, tourism, agriculture, or technology that is launched between now and June 2010, and we’re going to extend it until June 2011, will be able to be funded with low rates of interest. We have also launched student loans and environmental loans using those same incentives.

Given this package, we thought that we had to leave some liquidity in the hands of the banks in order to motivate them to lend according to these circulars. As we look forward, we can have good growth in 2010 if the credit activity is maintained and intelligently directed. So, the markets started to find a certain equilibrium despite the fact that we stopped these CDs.

We still had conversions from dollars to Lebanese pounds. We still had a balance of payments that showed a positive balance of $6 billion by the end of October, which is a record for any year in Lebanon for the first 10 months. Therefore, we thought that we can now afford now some gradual decrease in rates.

Nonetheless, if we see that our management of the liquidity in the market requires us to reenter by selling CDs, we will do that, and we have announced that we might come back with 7-year and 10-year maturities.

The idea is to acquaint the market with longer maturities in Lebanese pound denominated papers, and that the government later on can also issue bonds for 7-year and 10-year maturities in Lebanese pounds.

By extending the maturities on debt we will have less pressure on the refinancing of that debt on a yearly basis, and that will help maintain a more acceptable structure of interest rates.

E As interest rates decline, do you expect the dollarization of deposits to remain around 66 percent?

We think the market is keeping that ratio. This is one of the equilibriums that we are starting to see. And today we have approximately $27 billion in liquid foreign currency on our balance sheet at the central bank, which is also a historical high. This means that out of the capital inflows coming to the country, 66 percent remain in dollars, while the rest are converted to Lebanese pounds. We find that it’s up to the market to define the equilibrium, but I believe we have seen the markets at this level for the past three or four months.

E Both the prime minister and the finance minister have stated that they are keen to implement Paris III initiatives that include raising taxes on interest earned in local banks from 5 to 7 percent. Do you think this will actually happen in this government’s term?

The tax on the interest on deposits is not, I think, a priority for the time being, especially in that this tax was envisaged before the international crisis. And even though it is presented as a law to be voted, there is an understanding that this cannot be implemented before we have stability in the banking sector worldwide and in the region.

The tax approach is also not the priority, as I understand, because the priority is going to be given to more growth in the economy and to fix activities that are creating large deficits for the government, like Electricite du Liban.

Anyway, the government is presently discussing the economic program that they want to present to the Parliament or at least a declaration on that, and we will wait to see what will be approved. But I know that growth is the priority and for that, everything is going to be done to facilitate growth.

E You’ve been successful in swapping the short-term debt for long-term debt with more maturity. How do you see Lebanon coming out of its debt situation?

Our priorities really are to reduce the yearly deficit because the present stock of debt that is in the market is perfectly sustainable, due to the high liquidity that we have and also to the increased confidence in the financials of the country. As you can see, the credit default swap that is quoted internationally for Lebanon for the past five years has declined to reach 2.3 percent, at certain times it was at 7 and even at 10 percent. So there is demand on the Lebanese paper, and interest rates in the secondary market have substantially decreased.

The future expectations of inflation are going to diminish the real value of that debt, which is stated today at around $48 billion. And the present value or the real value of that debt will look less important in the next four or five years, as the purchasing power of currency is going to be depleted worldwide. So what the market requires are signals showing that the deficit is declining, and for that purpose we hope that the originators of this big deficit be addressed in the reform program of the government. The most important sector to reform is the energy sector in general and electricity in particular.

We have to wait for the government declaration in order to see if the program of privatization is going to be implemented fully or partially and in what ways.

E In light of the likelihood of the dollar decreasing in value, is the central bank changing the ratio of its foreign currency reserves?

No. We have the same ratios because we intervene in US dollars, so by departing too much from our structure of reserve in the dollar, we will incur risks on the Forex markets, dollar vis-à-vis euro or sterling or yen, which is not good for a central bank.

We cannot be speculators on the exchange markets, but we have created a model that preserves the real values of our reserves and don’t forget; the central bank, on its balance sheet, has a large stock of gold that represents around 30 percent of that balance sheet today. So the country is well hedged against any future development in terms of inflation internationally or a weaker dollar if this trend continues.

E Is the devaluation of the dollar going to help us get to a higher balance of payments now that our exports are going to be more attractive?

You know, the dollar is decreasing in value against all of the currencies and most economic activity, whether in terms of production or services, is dollarized. This gives a competitive advantage to the country. And we have seen that in the correlation between the growth in the economy in Lebanon and the decline in value of the dollar. Of course we are talking about the economy in general. We are not talking about savings and the purchasing power of savings but this is an issue that concerns the people, the owners of capital, not the central bank. At the central bank, we have a diversified portfolio in terms of currency. We have a large stock of gold. But our transactions will remain related to the US dollar as long as the markets are dealing in that currency. If the markets change to another currency, then we will change as well.

E To what extent are banks in Lebanon compliant with Basel II?

They are fully compliant to the criteria of Basel II; the solvency ratio in the country is around 12 percent. As you know, most banks worldwide are struggling to get to 8 percent, which is the norm. And this 12 percent is by applying all the criteria of Basel II. We are also working on the governance issue and on the risk and transparency issues along with the banks. We issued circulars in that regard and we have created, at the central bank, a unit for good governance that is going to work in the field to make sure that good governance is implemented, and we will start by a strict analysis of the composition of the board of directors and their prerogatives in the bank’s management.

The group is within the central bank so effectively it will give its recommendation to the governor. The governor will present it to the central board and there will be a decision that has enforcing powers. This is a follow-up activity, nonetheless there is also the banking control commission that is empowered and has the teams that are in the field working to see how our circulars are being implemented in the banking sector.

E The sentiment at the Union of Arab Banks conference in November was that Basel II is insufficient to prevent a crisis like we are seeing right now from happening again. Do you agree with that?

The crisis happened after Basel II had been approved, so Basel II is not enough to prevent a crisis. Here, we added to Basel II the liquidity factor that did not exist before. So in Lebanon, the banks have to constitute a liquidity of 30 percent on their balance sheets, 15 percent as a reserve requirement with the central bank and 15 percent on their own books. The fact that we have low leverage and high liquidity has helped the sector refrain from going into adventurous credit, and Basel II is more on the capital side than on the liquidity side. So it has to be developed more. Anyway, Basel II is just guidance because the major countries did not even implement it, like the United States or India. There is no better protection for a bank than its management because they know what is really happening in the bank, and for a banking sector, the local central bank should be aware and prudent, to moderate leveraging in the sector.

March 2, 2011 0 comments

Finance

Embracing evolution

by Peter Daou March 1, 2011

written by Peter Daou

In an economy such as the United Arab Emirates, where the government has significant stakes in several of the largest banks, it is hard to isolate successes and attribute them fairly. Still, the success of UAE banks at surviving what have been trying times earns them at least part of the financial accolades of the emirates in 2010; the orderly restructuring of nearly $25 billion of debt was a major achievement on the part of the UAE banking sector and September’s announcement that all 90 of Dubai World’s (DW) creditors had agreed to a restructuring agreement sent positive waves across financial markets.

“Common sense prevailed, and it was therefore an achievement to get all the banks to agree to the restructuring terms, which reflects the pragmatic structure of the agreement,” says Jeremy Parrish, chief executive officer of Standard Chartered UAE. Emirati banks also withstood exposure to a still-ailing real estate sector and what Parrish describes as “very tight liquidity” in 2010.

Return to liquidity

After the DW debt rescheduling, liquidity was scarce for Dubai’s banks. But in the second half of 2010, banks and sovereign authorities were able to tap into international capital markets. Dubai’s Department of Finance raised $1.25 billion in 5-year and 10-year bonds in September. Emirates NBD raised $221 million in August through securities backed by auto loans, a first in the Middle East, and then followed through in November by raising $410 million in 5-year multi-currency notes. At the same time, banks have actively sought out solutions and new strategies to mitigate the dismal financial and credit conditions.

EFG Hermes banking analyst Murad Ansari points out that UAE banks, namely in Dubai, offered competitive returns on deposits and organized road shows to raise deposits.

This national increase resulted in an improvement in the loans-to-deposits (LTD) ratio, which slipped into positive territory again at the end of October and is another indicator bankers view as an achievement in a country that has historically been highly leveraged.

Michael Tomalin, CEO of National Bank of Abu Dhabi (NBAD) attributes the decline in the LTD ratio to proceeds from corporate bond issuances and to the attractiveness of interest rates on dirham deposits, especially given the fixed exchange-rate regime. Tomalin adds that “some of the banks in the country — not NBAD, but other banks in the region — have been quite aggressive at going out into international markets and raising institutional deposits through programs offering relatively high rates of interest in dollars.”

Banks have been actively adopting strategies to align themselves to a new operating environment. Many are focusing on growth sectors such as trade finance, tourism and project finance for infrastructure. Standard Chartered is targeting small and medium-sized enterprises to mitigate exposure to large real estate developers, while Emirates National Bank of Dubai and NBAD are also focusing on their fee-based business.

“We are a local bank that has connections and access, can guide, help and advise on how best to structure a project and so on,” says Tomalin. “Our international lending activities are directed to advance our client who wants to invest abroad, or an overseas client who wants to sell something, so we support him in that sale.” Tomalin adds that while interest income relative to fee-based income is currently at a ratio of 70:30, he would like to see it at 60:40.

Taking on the big boys

The local banks’ new strategies mean pitting themselves against international banks who have historically dominated the lucrative fee-based businesses such as investment banking and corporate finance. Tomalin admits that local banks have to be smart and realistic in that regard.

“We have to ask ourselves, if we want to compete with Goldman Sachs, Barclay’s or Deutsche Bank, etc, how are we effectively going to compete with these people? They are huge, we are a little bank,” says Tomalin. “Our point of differentiation is that we are a bank in the Arab world. We are here in Abu Dhabi. That makes us different.”

Emirates interbank offered rates

At the same time, expanding deposit bases may prove to be expensive, especially when many banks are rushing to cut their LTD ratio and add more lending capacity. According to Tomalin, “some banks… have been paying very high rates of interest for deposits to get their ratios sorted out. We haven’t been paying this sort of interest [at NBAD] but other banks have.”

Nonetheless, banks may be able to attract deposits through other means than interest rates. Sanjoy Sen, Citibank’s Middle East Consumer Bank Head, believes that customers are increasingly sensitive to the reputation, brand name, financial stability and strength of their bank. “Banks that are in a comfortable liquidity position will not necessarily need to pay high rates for mobilizing retail deposits,” says Sen.

In parallel, fears of rising competition for deposits between international and local banks appear unfounded. “There is an increase in competition between banks but it is a level playing field and all players have equal opportunities to get a ‘share of the wallet,’” says Sen. Parrish adds that “there has always been a healthy competition between international and local banks, but we do not see any shift in the paradigm.”

On the other hand, the sought-after deposits have already begun to affect profitability. Banks usually seek to attract retail deposits first because they are cheaper compared to their corporate counterparts, which are more interest rate sensitive. But retail deposits are notoriously harder to attract, and given the pressing need to raise long-term debt in order to finance maturing obligations and increase lending, some banks have been aggressive, at the expense of their operating margins.

What make matters even more complicated are speculative capital inflows. Although hedge funds are happy to park their money in high-interest dirham deposits, banks are all too familiar with the 2008 scenario and will not lend against hot money, thus creating an added cost.

As a result, and despite discernible improvements in the ability of UAE banks to counter credit and economic crises, the list of concerns continues to cloud what many bankers view as the emirates’ strong fundamentals.

Tight liquidity is a major concern at banks looking to refinance and lend. Widening credit default swap spreads and expectations of a stable emirates interbank offered rate spread do not support an increase in liquidity. There seems to be a general consensus among bankers and analysts that a continued orderly restructuring and refinancing of large corporates without massive and surprising provisions will go a long way in re-establishing confidence in financial markets and especially banks.

Analysts are carefully tracking developments in asset quality, especially at Dubai banks whose non-performing loan ratios are among the highest in the country, given their tilt toward the embattled real estate sector. Still, the shift to the resilient sectors of the economy such as tourism, trade finance and government, should improve overall asset quality at UAE banks.

However, fear of additional provisioning and general weakness across some of the largest sectors in the economy, especially in Dubai, may shift the focus of banks more toward stabilizing their balance sheet and liquidity ratios than toward taking on additional risk, unless on a highly selective basis.

At the same time, a 98 percent national LTD ratio, which goes even higher by the central bank’s loans to stable deposits, does not provide much leeway for banks to grow their loan books in 2011. But there is room for measured growth, according to Parrish, who says: “The drop in the LTD ratio is not a signal for the flood gates to open, but we will see a measured increase in loans after what so far has been a flat growth in the last 18 months.”

The general mood of investors and analysts covering UAE banks remains largely skeptical, with several exceptions in the banks and some economic sectors. Nevertheless, the rush of positive news, including airport and port traffic in the second half of 2010, has boosted confidence at the business and consumer levels, generating strong support for the belief that today’s concerns, such as asset quality deterioration and profitability, may form the achievements of 2011.

March 1, 2011 0 comments

Banking & Finance

Regional equity markets

by Executive Editors February 28, 2011

written by Executive Editors

Beirut SE

Current year high: 1,180.99 Current year low: 939.02

> Review period: Closed Jan 26 at 1,024.00 Points Period Change: 5.3%
The Beirut Stock Exchange had a positive entry into 2011 and the MSCI Lebanon index rose to a 6-month high on January 11. Volatility appeared as the nation and BSE were exposed to the newest twist in the power bickering of Lebanese politics. During the Jan 12 to 26 period, shares of real estate firm Solidere fluctuated between $18 and $20. Bankers affirmed there was no flight of money. In terms of the BSE’s reaction, the uproar over a new PM on the Jan 25 “day of rage” was but a tantrum.

Amman SE

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

> Review period: Closed Jan 26 at 2,424.62 Points Period Change: 1.2%

The first significant uptrend in several months for the Amman Stock Exchange benchmark index — 125 points, or 5.3% between Dec 19, 2010 and Jan 17, 2011 — fizzled out with the eruption of political protest in Tunisia. The index dropped 2.2% in the following week but there was nary an immolation of Jordanian stock prices by the Jan 26 close. Industrial stocks were involved in driving the market higher and the industrial index was the best performer in the review period, closing Jan 26 up 3.85% on the month. The banking sector index lagged slightly behind the benchmark.

Abu Dhabi SM Current year high: 2,931.67 Current year low: 2,471.70

> Review period: Closed Jan 26 at 2,668.66 Points Period Change: -1.9%

Amid broadly negative sentiment affecting most sectors on the Abu Dhabi Securities Exchange, real estate and construction were the sectors that dragged the benchmark index even lower. The industrial index was the upward outlier. The newsmaker among listed companies was developer Aldar, which embarked on a long expected restructuring, including placement of a $760 million convertible bond, a $2.9 billion impairment charge, and a $3 billion transfer of infrastructure assets. The stock subsequently slumped to its lowest quotations ever, beneath the AED 2 mark ($0.54).

Dubai FM Current year high: 1,880.62 Current year low: 1,461.80

> Review period: Closed Jan 26 at 1,627.97 Points Period Change: -0.2%

Index movements on the Dubai Financial Market lacked clear direction at the start of 2011. Among sector indices, telecommunications and transportation closed the review period on positive notes banking, investment, real estate and insurance sector indices were bearish. Down 12.1% year-to-date at Jan 26 close, the utilities sector was the DFM’s underperformer. District cooling firm Tabreed fell 9% and Emaar Properties gave up 3.4%. Gainers included telecoms operator Du, up 9.4%, contractor Drake and Skull, up 7.7%, and multi-sector investment company Dubai Investments, up 5.4%.

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

> Review period: Closed Jan 26 at 6976 Points Period Change: 0.3%

Movement on the Kuwait Stock Exchange in January stayed loyal to the same point range that had been the theme of the last quarter in 2010, dallying in the 6,900s and not breaking into 7,000 territory but not softening to 6,800 either. Except for the banking sector, which outperformed the benchmark index performance by six percentage points, the domestic sub-indices remained range bound. The index for non-Kuwaiti share values slipped 4.8% during the review period.

Saudi Arabia SE

Current year high: 6,929.40 Current year low: 5,760.33

> Review period: Closed Jan 26 at 6,697.80 Points Period Change: 1.2%

Based on a 360-point gain in December, the TASI ascended to an eight-month high on Jan 16 before profit taking in the latter part of the review period curtailed its January gains. Industrial investment was the top gaining sector index at 7.6%. Transport and agriculture stocks saw sector index drops of 4% and 3.8%. At the top, supermarket retailer Othaim climbed 16.5%. Heavy-weight Sabic retreated from a 28-month high after 27% year-on-year improved Q4 profits that narrowly undercut forecasts.

Muscat SM

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

> Review period: Closed Jan 26 at 6,943.10 Points Period Change: 2.8%

Enjoying five closes above 7,000 points, the Muscat Securities Market’s H2, 2010 rally with a cherry on top lasted until January 17, a day that apparently nudged investors across the GCC to think about profit taking. All three sector indices on the Omani bourse closed the review period higher, with the services and insurance index showing the best gains at 9%. Banking and industrial indices added 2.8% and 1.7%, respectively. Incompatible liquids were a happy, if most likely not interconnected, theme as Maha Oil and National Mineral Water each gained more than 18%.

Bahrain SE

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

> Review period: Closed Jan 26 at 1,460.67 Points Period Change: 2.0%

The benchmark index of the BSE recorded notable gains near the end of the review period, propelling the market to the number three spot in the GCC, after Qatar and Oman. Sector indices for investment, services and industry moved north; banking, insurance and hotels headed south. At the extreme points of individual share price movements, Ahli United Bank advanced 12.7%. Bahrain Islamic Bank, announcing Q4 losses, fell 23.3%. The bourse listed a $530 million Bahraini sovereign bond on Jan 20, expanding the number of listed bonds and sukuk to 12.

Doha SM Current year high: 9,242.63 Current year low: 6,558.45

> Review period: Closed Jan 26 at 9020.24 Points Period Change: 3.9%

True to the form of recent months, the Qatari market was again the Gulf’s best gainer in January 2011. But even on the World Cup-delighted QSE, where economic prospects were buoyed last month through government reconfirmations of immense infrastructure investment intentions, days of profit taking emerged in mid-January. First, however, the QSE benchmark rallied to highs unseen since the maelstrom of the 2008 crisis. All sectors followed the benchmark trend of rise and retreat. Only banking, up 4.7% by Jan 26, closed the review period higher than the general index.

Tunis SE Current year high: 5,681.39 Current year low: 4,534.88

> Review period: Closed Jan 26 at 4,552.80 Points Period Change: -12.7%

From sideways trading in December, the Tunis Stock Exchange crashed in January, losing 665 points in only one week of trading to Jan 14 before the TSE shuttered its gates and remained closed for the remainder of the review period to avoid being fully submerged in political chaos and panic selling. Prices dropped for nearly all stocks that were traded during the period, without indication of any sector or industry being at the center of selling. The upheaval set the TSE back to index levels last seen in January 2010 with a wholly indeterminate outlook.

Casablanca SE

Current year high: 13,397.47 Current year low: 10,846.39

> Review period: Closed Jan 26 at 13,183.91 Points Period Change: 4.4%

The MASI index started 2011 with a 740-point rise to a new historic market peak on Jan 12. This turned into a 3% slide in the wake of the unexpected crisis in Tunisia but investor sentiment stabilized toward the end of the review period; the Moroccan bourse was the period’s best performer in North Africa. Market cap leader Maroc Telecom climbed 6%. Ennakl Automobiles, the Tunisian car distributor cross-listed in Tunis and Casablanca, dropped only slightly on the CSE but bled much more on the TSE.

Egypt CASE

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

> Review period: Closed Jan 26 at 6310.44 Points Period Change: -11.64%

Crash and bang but no boom was the tenor on the Egyptian Exchange, whose indices were driven down sharply during the morning of Jan 26 after violent demonstrations the day before stoked investor fears of national political instability. The benchmark EGX 30 index dropped 6% that day but the wider EGX 70 and EGX 100 indices fell about 10% each. Banking, financial, and real estate sector indices were all heavily involved in the January drops as were food and leisure.

February 28, 2011 0 comments

Feature

Hard Numbers

by Executive Editors February 21, 2011

written by Executive Editors

In a much publicized and internationally heralded move in August 2010, the Lebanese government passed “right to work” legislation for the country’s Palestinian refugee population. For those who thought that this would usher in a new era for the refugees and alleviate the poverty of the Palestinian community, nearing its 62nd year in exile in Lebanon, the unfortunate reality is that little has changed.

While Lebanon’s economy has made gains in recent years (recent incidents notwithstanding), it is glaringly apparent that little, if any of this has reached what remains one of the country’s most disenfranchised communities. Lebanon’s 12 official Palestinian refugee camps are still mired in destitution: in south Beirut’s Shatila Camp sewage runs through the alleys, secondary school drop-outs and unemployed men in their 20s idle in the market and only a minority of homes have access to natural sunlight.

While clearly visible to the eye, the poverty that dominates the economic situation of Lebanon’s Palestinian refugees — estimated by various organizations at anywhere between 260,000 and 400,000 — has been largely difficult to quantify due to a shortage of reliable data. In late December, the American University of Beirut (AUB) released a report called “Socio-Economic Survey of Palestinian Refugees in Lebanon,” commissioned by the United Nations Relief and Works Agency (UNRWA) and funded by the European Commission, which claims to be the most comprehensive survey of the population in the past decade. The last major benchmark study on the subject was carried out by the Norwegian foundation FAFO, using data collected in 1999.

The AUB report offers a rare statistical quantification of the socio-economic realities and hardships of Palestinians in Lebanon.

Dire poverty

The survey found that 66.4 percent of Palestinians in Lebanon live under the poverty line of spending $6 per day – deemed enough money to cover basic food and non-food items. Of these, 6.6 percent fell under the extreme poverty line, spending less than $2.17 per day, enough to cover food items alone.

Unlike previous surveys, the AUB report measured spending rather than income as a measure of poverty, which authors of the report argue is more accurate. From these statistics, the study estimates that approximately 160,000 Palestinian refugees live in poverty.

Inside the refugee camps — which are often isolated from urban areas and job opportunities — three out of four residents live below the poverty line, compared to one in two Palestinians who live in gatherings outside of the official camps. Remaining Palestinians not living below the poverty line are by no means affluent: the report mentions that no individual surveyed reported a monthly expenditure of more than $600.

The average monthly expenditure was revealed to be $170; those living in informal gatherings spent an average of $200 per month while those living in camps spent only $150. Little change then, from data collected in 1999 by FAFO, which found that 44 percent of Palestinian refugees in Lebanon made less than $2,400 per year, or $200 per month.

No jobs to go around

The most obvious contributing factor to the poverty facing Palestinian refugees in Lebanon is that most of them do not have jobs. The AUB report shows that only 37 percent of the working age (15 to 64 years old) Palestinian refugee population is employed. The study’s authors assert that widespread discrimination on the part of many Lebanese employers makes finding jobs difficult.

“If a secretary [applies for a job] with a CV that says Shatila Camp [under] residence, they will not employ her,” says Sari Hanafi, an associate professor at AUB and one of the contributors to the report.

Of Palestinians who do have jobs, very few have contracts — prerequisites for obtaining elusive work permits that give the employee legal standing and rights. This leads many Palestinians to work illegally, exposing them to labor abuses.

“Those who are interested in employing Palestinians are exploiters,” says Hanafi. “A few days ago I found three Palestinians working with a construction company. I got the details and found they work without work permits and they work for half the price that their Lebanese colleagues can get from this company.”

Legal issues remain the largest issue facing Palestinians who want to work, and so far the lauded “right to work” legislation of August 2010 has done little to help the employment situation facing Palestinians.

“[It had] zero impact. I am not exaggerating,” says Hanafi.

As evidence, Hanafi points to the fact that, in the past six months, the Lebanese Ministry of Labor has granted only three work permits to Palestinians. In 2009, 99 permits were issued to Palestinians. Foreign workers from other countries — primarily domestic workers from Asia and Africa, along with non-Lebanese Arabs — were issued a total of nearly 150,000 permits in 2009.

“The Ministry of Labor is supposed to take some implementing measures. Those measures have not been taken yet,” says Salvatore Lombardo, director of UNRWA in Lebanon, adding that the country’s current political crisis is “likely to delay even further the implementation measures.”

With the stagnation of the process, Hanafi says, “the main factor [contributing to unemployment] is really related to the lack of a legal framework allowing Palestinians to get jobs in the private sector.”

Rather than a step toward more equal rights, the report says “the amended law constitutes an institutionalization of discrimination.”

While in theory it would make it easier for Palestinians to obtain work permits, the law did little to help Palestinian professionals trying to enter liberal professions, many of which are syndicated and reserved for Lebanese nations. For unskilled jobs, permits are not as helpful as it might seem, given the reluctance of employers to issue Palestinians contracts and thereby give up the current low labor costs and freedom from worker protection regulations.

The fear of tawtin — the naturalization of Palestinians — upsetting Lebanon’s delicate sectarian balance has made many Lebanese hesitant toward granting further rights to Palestinians. In a narrow Lebanese job market already saturated by low-wage workers from other Arab countries and further afield, some fear that additional working rights would worsen the situation for Lebanese job seekers.

“A very important conclusion of the study is that [Palestinian refugees] do not represent a threat to Lebanese nationals in terms of job searches,” says Lombardo, taking into account that Palestinians primarily compete with non-Lebanese Arabs and other unskilled foreign laborers for jobs. The sheer number of Palestinians in Lebanon would put the community in a position to be a strong positive economic force in the country, if only they were better integrated into the economy through proper employment.

School’s out forever

The inability to keep students in school is a driving factor behind the undereducated Palestinian workforce. While elementary and preparatory schools that Palestinian children go to enjoy high attendance numbers, enrollment rates crash to 51 percent for secondary school. However, this is an improvement from FAFO’s 2006 study, which found that 74 percent of the Palestinian labor force in Lebanon had less than a secondary education.

Post-graduate opportunities are bleak throughout the Palestinian community: “When these kids see their older brother unemployed after a few years in private university, they have no incentive to go to school,” says AUB’s Hanafi.

For Lebanon’s Palestinians, the path to a brighter economic picture is largely out of their own hands. Their high levels of unemployment and poverty will likely continue as long as there are no serious efforts to integrate the refugees into their host country’s economy. With the country’s politicians currently handling their own problems, it could be some time before a helping hand is given to the Palestinians.

February 21, 2011 0 comments

Editorial

Willfully ignorant of the imminent

by Yasser Akkaoui February 21, 2011

written by Yasser Akkaoui

In the first month of 2011 a storm of popular rage swept across the Arab world. Protests from Morocco to Yemen have brought millions out into the streets to demonstrate against the once-feared powers that be, toppling one long-time titan of autocracy in Tunisia and leaving another clinging to power in Egypt as January ends.

One must remember that Tunisia and Egypt were the North African darlings of international investors looking for high returns in developing markets. Both had been regarded as stable macroeconomic environments right up until their collapse, with proven track records of strong growth and stellar potential. Who could have foreseen these revolts?

Economists and the like have a nice term for an event of such radical departure from the expected: a ‘black swan’ – a freak of nature, unforeseeable, unavoidable and of devastating consequence.

But were the events of the last month really so unexpected? We have known for years that wealth has failed to trickle down in Egypt and Tunisia, that corruption is rampant, that education has failed to match the needs of the economy and that brutal police repression has stymied legitimate protest.

The soaring Tunisian stock exchange led business and political leaders to assume the social economy was also thriving, and that Egypt’s long years of political stability and growing middle class were signs that all was well on the banks of the Nile.

Perhaps it is human nature for greed to settle us softly into irresponsible complacency, where we take for granted the status quo will remain and we blind ourselves from the fires growing around us. Perhaps, then, many ‘black swans’ are not unforeseeable at all –– rather, we ignore obvious threats because wanton disregard seems to make sense when profits are easy. But then the crash comes, and again we claim we’ve been wronged by wicked fate.

In the cases of Tunisia and Egypt, we were simply focused on the wrong indicators. Gross domestic product growth and stock market performance do not tell the health of a nation; to assess the stability of any society you must assess the level of satisfaction of its people.

In the future, analysts will have to revise the indicators they use to assess a country’s risk and investment potential if they want to avoid looking like the archetypal jilted lover, always claiming they never saw it coming.

February 21, 2011 0 comments