Executive Magazine

The price of purgatory

by Yasser Akkaoui January 14, 2011

written by Yasser Akkaoui

To sign the Taef accord in 1989, which helped bring to an end the civil war, every Lebanese member of Parliament and warlord was paid between $2 million and $8 million, depending on the size of their party representation and, of course, fire power. More recently in Qatar, in May 2008, the scenario was repeated but took much more cash — given conflict-adjusted inflation — to convince our warlords-disguised-as-politicians to call off their thugs from fighting in our streets.

The ability of our political class to manipulate fear in the population using sectarianism and segregation seems to be what determines their price tag for either inflaming or restraining the Lebanese propensity to hate. This is parasitic leadership.

As a governance equation, the Lebanese have got the algorithm all wrong. In the world as it should be, politicians are rewarded according to their ability to create a prosperous environment where society can thrive, and inspire that other great Lebanese propensity — that of living the good life.

Since spring 2010 we have been kept in anticipation for the next confrontation. Each month the threats increase in frequency, as politicians from each side get more creative in articulating what they are ready to do if things don’t go their way. Conflict predictions are high for January. International observers have joined the regional and local chorus of concern regarding our security should indictments in the United Nations’ Special Tribunal for Lebanon be announced.

By now, however, much of the public has become inured. Many live in denial, others have lost interest, while others have simply decided to look on the brighter side of life and to avoid concerning themselves with things that seem beyond their control.

And it’s just this sort of learned helplessness and disenfranchisement that makes pawns of the populous in the politicians’ game of chess.

In the absence of a sober, disimpassioned voice to call us to our senses and lead us from this valley of threats, we can only hope someone, somewhere, is stuffing Samsonite cases with cash to courier to Lebanon’s many mansions at a moment’s notice.

January 14, 2011 0 comments

Finance

The only way is up

by Thomas Schellen January 12, 2011

written by Thomas Schellen

The term ‘stock market’ has quite a ring to it, particularly in the mouths of emotionally-invested stock market officials. Listening to them explaining the appeal and importance of securities trading is more like reading poetry: “the stock exchange has made our hearts beat faster” and the securities market is “the main mirror of the economy.”

Others have recognized the thrill factor in bourse trading, but have been reluctant to chase big profits based on the tenuous idea of ‘reading the market right’.

The skepticism long predates 2008’s financial crash and even the Great Depression and the Wall Street stock market crash of 1929. Don’t gamble on share movements in October, the once-bankrupt American novelist Mark Twain warned famously a century and a half ago. “This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.”

Investors willing to take a risk or, heaven forbid, gamble in United Arab Emirates stock markets, however, have one clear advantage heading into 2011. There is little downside risk when buying stocks, as markets have already been “punished too much.” Analysts have confirmed that equity investors can expect to face at the very least not a negative and, more probably, a positive year.

“I think it is going to be a positive year in terms of overall index performance and that is primarily because of the significantly low base that we are in right now,” said Walid Shihabi, head of equities at UAE-based investment firm Shuaa Capital. A realistic approach is called for, he added, but whereas the market “can go lower, it is certainly unlikely to go any lower simply because of the deep, deep discounts we are getting right now.”

Bullishness in abundance

“My opinion on the region on the equity side is quite bullish,” said Tareck Farah, chief executive officer of FFA Dubai, a financial services unit of Lebanon’s FFA Private Bank. The ground has been prepared for positive movement in UAE equity markets in 2011, he added, by a cleanup that has taken place in a number of sectors, especially banking and, to some extent, among development and construction companies.

“A lot of provisions have been taken,” he said. “Restructuring has happened in many companies, and any good news and new contracts that any company or bank [can announce] will automatically have positive impact.”

Entering 2011, the bedrock supporting UAE equity markets are the company valuations in terms of asset and book multiples, Shihabi said. “The other positive element I anticipate to happen in 2011 is that the international pool of money might be enticed to become more active in UAE markets.”

Foreign institutional investors have had a great impact on the Emirati stock markets for the past four years, acting as the markets’ “determinant of direction,” Shihabi said. “Local investors have, over the past few years, taken their cues from international investors in the local market. If in 2011 international money arrives as anticipated, it might cause a broader activity cycle and as the liquidity of the market improves, the performance of the underlying stocks will also improve.”

Foreign banks and fund managers are also high on Farah’s watch list for positive market stimulants. “Institutional investors are watching us and bankers are coming to the region on a weekly basis, meeting companies and studying their balance sheets. Perhaps one big [local] bank needs more time to be clean but, overall, things are improving and we notice this on the ground,” Farah said, citing renowned fund manager Mark Mobius’ positive views about the UAE.

Mobius, director of Singapore-based Templeton Asset Management and aficionado of emerging markets, voiced his optimism on UAE stock markets when visiting the country and in recent media interviews.

He is bullish on the BRIC (Brazil, Russia, India and China) markets and keen on frontier markets such as Abu Dhabi and Dubai, along with Nigeria, Vietnam, Kazakhstan and Ukraine, according to an article in Singapore’s Business Times in December.

Another international nod of encouragement came in December from HSBC asset managers at the bank’s New Frontiers Fund; they were quoted by Reuters as saying that they saw investment opportunities in Abu Dhabi banks for 2011 but were still cautious about Dubai banks.

Beyond the stimulus role of international investors, positive transformations of behavior by participants in UAE markets may also produce some impetus to support growth. According to Shihabi, retail investors have become more alert to the impact of significant research findings on the market behavior of institutional money.

The economic environment has also matured in other ways, he said. The system, having developed a thicker skin, is less likely to over-react to any sudden event, and stakeholders in the UAE economy have demonstrated their resourcefulness in working around shortages in liquidity and funding sources.

Traders working in Wall Street, in New York at the beginning of the 1929 Stock Market Crash. Within the first few hours the stock market was open, prices fell so far as to wipe out all the gains that had been made in the previous year

A key expectation for the future of UAE stock markets is consolidation. For FFA’s Farah, a merger of the UAE exchanges could be announced at any moment. “We cannot predict a date, but logically this will happen and it will boost liquidity in the market,” he said.

Shuaa Capital’s Shihabi agrees that a merger is a good idea, which indeed appears to be a widespread sentiment in the financial industry, both locally and regionally. The consolidation of securities exchanges, he said, “seems to have become a priority with the powers-that-be and there is a rational driver in that the UAE needs one exchange and the unification of the exchange.”

He cautioned, however, that the process could prove more difficult than some people anticipate, adding: “I would be somewhat surprised though, if the actual final product arrives in 2011.”

Consolidation is more likely to occur in the realm of financial intermediaries in 2011, Shihabi told Executive. For brokers, 2010 was a “horrible year,” mainly because of the effect very low trade volumes had on their earnings, “but the flip side is that the market has cleaned up — the year will drive a lot of consolidation,” he said. “The cleaning up is actually positive for the companies that have the staying power and can survive the lean period. I think you will see more consolidation in 2011 as a lot of [exit or merger] decisions have been made and you will see the implementation of those decisions and a reduction in the number of brokerages,” he said.

It can’t be worse…

Trading in new classes of financial instruments, such as Exchange Traded Funds, is expected to contribute to expansion of trading activity in the UAE, particularly in the longer term. Also, the activity of primary markets should increase in 2011. There is zero probability that initial public offerings on the Abu Dhabi or Dubai stock exchanges will be less in value or number in 2011 versus 2010: you can’t go below nil with IPOs. To the contrary, there is almost an optimism dawning with the new year that a resurgence of the region’s primary market activity will follow from fundamental economics.

Salim Chahine, professor of finance at the American University of Beirut, told Executive that the downturn in primary markets after the equity boom-years has been within economic cyclicality, pointing out that, “The bubble in IPO markets has taught investors the price of risk. IPOs will come back as economies are cyclical by definition.”

There is a positive outlook for IPOs in the UAE in 2011 in the view of Shuaa Capital, which has a strong interest in the growth of primary markets. “I am optimistic and we have expectations of IPOs coming in,” said Shuaa’s Shihabi, adding, however, that current regulations such as a requirement to list a minimum of 55 percent in an IPO in the UAE are slowing the prospects for faster growth.

How many IPOs does he expect to see realized in 2011? “Realistically? – Two.” For investors who would like a stock pick at the start of 2011, FFA’s Farah recommended Emaar as his top favorite, saying that the developer “completed most of their projects and delivered them. They are getting rent and fees; their convertible bond issue [in Q4, 2010] was oversubscribed within a few hours; Emaar is a very good buy.”

“I am also bullish on logistics,” he added.

Saying he viewed Emaar as a good name but did not feel particularly enthused about them at the moment, Shihabi still offered a positive view on the battered real estate and construction sector. “The market overall has been punished a little too much, including the names in the real estate space and in the construction space. From my perspective, names such as Arabtec and Drake & Skull are actually quite attractive. At the current time, these are among my favorite stocks in the market,” he said. Other interesting themes for 2011 could include telecoms, with a slant to the domestic UAE market, and insurance, he added.

However, investors may do well to temper their enthusiasm and remember the risks associated with greeting the new year with a phalanx of predictions and positive assumptions. While limited like all forecasts, research-driven predictions by experienced and knowledgeable market participants that do not promise omniscience are as good as it gets in anticipating the future.

January 12, 2011 0 comments

Economics & Policy

Executive insight – S2C

by Salem Osseiran January 3, 2011

written by Salem Osseiran

As we take a long hard look at Lebanese society, we cannot help but grimace at the prevalent corruption. It is a painful reality that corruption is deeply entrenched in our country.

Bribery, nepotism and embezzlement are not simply the way we do business, nor only a matter of political economy; they are integrated into our social and cultural norms to the extent where we glorify the cunning Lebanese citizen who manipulates the system.

Upon asking a government employee about his income, the half-tragic,

half-comedic response is that he usually classifies it under two categories: his salary and everything else he makes “on the side,” as if the latter is an inherent benefit that comes with the job.

In response to this national epidemic, the government, civil society and even the private sector are all playing a part in trying to find a cure. But what about our other major pillar of society? Where do the media find themselves in this process? It isoften said that “the media is the mirror of society.” But when the reflection becomes this twisted, the media can no longer be content to simply reflect reality, to simply be a silent and passive witness to the bitter situation. In a country where the other three powers are struggling to counter corruption, it becomes the duty of the “fourth power” to institute positive change in order to enable a better society.

Of course, one cannot deny the efforts made by some media outlets that are trying, through their investigative reporting, to act as the watchdog of democratic society. However, the strengths of the media in fighting corruption and bribery far exceed its mere reporting role. Indeed, in a society that condones rule breaking and short cuts, the media must act both as a critic and a conscience.

Obviously it should inform, but more importantly it should educate, inspire and call for collective action; corruption is omnipresent in Lebanon, but its hold on the norms of our society is not evenly matched by our awareness of the wide-ranging social, political and economic implications of this problem. Examples of these implications are numerous, from the discouragement of potential foreign investors to the exodus of qualified Lebanese professionals, who leave the country in droves because, though they have merit, they do not have waste to aid them in gaining meaningful employment. The result is a brain drain and a lack of investment that Lebanon can ill afford, either economically or socially.

The media has a role to play in helping to deter corruption by highlighting these negative outcomes and encouraging citizens to reflect on their behavior and its consequences. If it chose to do so, the media could assume its proper place as a powerful tool, not only for greater transparency, but also for increasing our understanding of the acuteness of the problem.

With the rising trend in online users, another approach for the media is to tap into this community when discussing corruption, especially considering the need to connect with the younger generation. Examples abound of anti-corruption campaigns that turn the public into active participants in reporting instances of corruption, debating the causes, and solving the problem.

Such a network, if properly mobilized and mediatized, would prompt stronger public opposition to corruption as more and more citizens join in. More importantly, this cooperative action system establishes public ownership of these anti-corruption efforts.

By rolling out similar initiatives, the media could provide the public space necessary to debate the issue of corrupt practices, while explaining to citizens how their decisions about corruption are influencing issues ranging from the amount of money in their pocket to their general safety. This effort would also entail building strategic coalitions and partnerships with civil society, government and the private sector.

The media’s presence in every household in Lebanon grants it an unrivalled ability to communicate with the public directly. But this capability entails a tacit agreement with the audience to move beyond mere sensationalism and reflect a sincere commitment to serve as a catalyst for change.

By informing and educating, the media can empower the people, ultimately creating the conditions necessary for bringing about fundamental change in our system of values. It is only then that we can have the courage to look at our reflection in the mirror once more.

January 3, 2011 0 comments

Real Estate

Q&A – Salvatore Saker

by Rayya Salem January 3, 2011

written by Rayya Salem

Green Precast, a global precast-concrete manufacturer and contractor, offers a unique on-site automated construction procedure that builds by pouring concrete into pre-designed housing molds to make customized, one-piece frames that can be stacked. This process reduces human error and cuts construction time by over 50 percent and cost by between 5 and 30 per cent when compared to conventional methods. The firm was founded in Australia 65 years ago and operates globally, with Lebanon being its most recent market entry. Executive spoke to Salvatore Saker, the company’s chief executive officer, about concrete and the Middle East’s construction industry.

E Why is Green Precast investing in Lebanon now, and how much is the initial investment?

Lebanon became a strategic market for us after venturing into the Middle East [United Arab Emirates] about a year ago. We found [the Lebanese] extremely receptive to new construction methods. It helps because we spend less time explaining and more time on implementation. We have found a niche market that hardly anyone else is catering for. When we first came to Lebanon, we didn’t realize the market size; we were working on investing between $5 million to $10 million and watching it grow organically. However, now our level of entry is going to be around a $20 million investment. We will be [building] thousands of residential units. Almost 80 percent of our [construction] products will be sold here.

E What is the size of your upcoming project portfolio in Lebanon?

In the last two months, we have accumulated over 10 projects totaling over 2 million square meters of construction. More than 70 percent [of our portfolio] will be on the outskirts of Beirut; this is where the real demand is. At the moment, we expect 70 percent of construction to be catering to the residential market, 25 percent commercial — hotels, hospitals, universities, schools — and 5 percent industrial. In the last few years, we have been looking toward development so now we are looking to acquire our own land and develop upon it. We are looking at 31 sites in Lebanon. We have secured the land, are in the process of design, and will be delivering in six to eight months.

E What makes your system different?

We benefit from value engineering. It creates a building that is almost four times more sustainable and superior in speed and quality than conventional precast methods. For example, we delivered a mock up 500square meter built up area dwelling within 24 hours, whereby it took other [conventional precast systems] two weeks to deliver.

We achieve this speed by minimizing the labor traditionally used for construction and combining our technology with heavy equipment. The module that comes out of the mold is manufactured using a pre-prepared steel cage of reinforcement and has all [electrical and plumbing] conduits positioned and cast in. The procedure allows for four walls and a roof to be made in one pour with no joints between the parts.

E So you rely on advanced technology rather than labor?

We use a lot less labor in our system, so o one Green Precast labor unit is equal to 10 workers in other firms because we don’t require a lot of labor to actually manufacture the product through our molding technology system.

E Are there certain projects that this kind of system favors?

Our system is designed to cater for large-scale projects. The smallest project is 50,000 square meters of built up area, up to 10 million square meters per annum per market. That requires a lot of mobilization, manpower and preparation. We eliminate the margin of human error by providing [specialized molding] equipment.

E What kind of cost savings are we talking about?

On average, on anything from 5,000 square meters upwards, if design and value engineering is done properly, you should come up with 5 to 10percent cost savings on the building. You can have access to the building within six months instead of it taking two to three years to complete. So for a commercial building, it means you have started earning money two years ahead of a conventional program, plus you have saved at least 15 percent on your holding cost.

Your construction method provides thermal insulation – is that relevant in the Middle East?

Thermal insulation is becoming a must. It applies for cold and hot weather. The cost to apply the thermal insulation, in our system, is absorbed into the construction cost, while you still save 5 to 10 percent on construction cost. On a 100,000 square meter [project], your savings can vary10 to 30 percent on the whole building, compared to conventional methods. We have proven studies that say, if you have external thermal insulation and combine it with an outer coating of [ultraviolet and infrared] reflector paint, you can save on 50 to 70 percent of air conditioner usage in Gulf countries. In Lebanon, you would hardly ever have to use AC if this was applied.

E Is green construction a growing trend in the Middle East?

Dubai and Abu Dhabi have LEED and Estidama certification [incentives]. [In Lebanon] it should be mandatory in order to obtain a construction permit. Why do we have Lebanese groups and consultants implementing green technology outside Lebanon but not in their home country? However, today they are starting to zone different areas of Lebanon. We are already saying you can’t cut trees or pollute in certain areas. This is much tougher than requesting certification of LEED.

E Do you predict labor and material costs will rise in the near future?

When demand eases, prices should drop, but labor costs haven’t dropped at all and in some areas [in the region] have increased. We do try to outsource most of our labor to third parties. We expect construction materials to always increase in price, but I don’t predict a rise in 2011.Hotspots like Saudi Arabia, Pakistan and India may drive up the cost of steel for neighboring countries. It was $1,700 per ton earlier this year and now it’s back to $2,700 per ton.

E What is the main concern for those working in Lebanon’s construction industry?

When it comes to the quality of construction and materials, it’s up to every developer but there aren’t high standards on all levels. Also, the [poor] infrastructure in Lebanon is far more challenging than in other countries in the region. No other country in the Middle East has the mountains, snow, sea and the natural resources. It’s important that the right construction methods are used to preserve this natural wealth.

January 3, 2011 0 comments

Finance

Executive insight – Gazprom

by Executive Contributor January 3, 2011

written by Executive Contributor

It is now an accepted fact that global warming is one of the most pressing threats facing the world today. The unusual weather patterns that result not only cause natural disasters and health hazards, they also impact production, productivity and efficiency. The industries affected by weather volatility are countless, from agriculture and construction to transport, energy, travel, leisure, retail and events.

The Intergovernmental Panel of Experts on Climate Change(IPCC) is well aware of the problem and of its consequences. Indeed, taking into account various demographic, technological and geopolitical hypotheses, the IPCC states in its recent report that the average increase in temperature on earth will be between 1.5° C and 4° C by 2100; a situation which is undoubtedly alarming.

In a world of increasing weather extremes, the question no longer is whether climate change is actually happening, but rather how can businesses protect themselves from it.

Weather derivatives were, as a result, created for the purpose of reducing the volatility of turnovers created by weather risk. The first weather derivatives deal was introduced in August 1996 in the context of a purchase of electric power from Aquila by Con Edison that was dependent on the August weather situation. Following that small introduction in the market, weather derivatives started to be traded in 1997 on the over-the-counter market and on the Chicago Mercantile Exchange (CME).

Weather derivatives are financial instruments that enable the management of risk associated with adverse weather conditions. There are different types of products: options, futures, swaps and more.

The products are based on a range of weather conditions in more than 47 cities in the United States, Europe, Canada, Australia and Asia, with hurricane products geared to nine US regions. Weather derivatives don’t take into account the damages but enable companies or individuals to hedge themselves according to their own predictions.

In fact, just like all the other options, weather derivatives are a sort of bet that you make on the upcoming weather according to your own expectations, based on the underlying temperature, cloudiness or the rainfall data. They are therefore potentially subject to individual speculation.

How does this product work? Let’s concentrate on the most commonly used product, the weather option. The trickiness in these products lies in their underlying asset, which is absolutely random and not scientifically predictable and very risky because of the controversy surrounding the climate change/global warming debate. This underlying asset has another issue as well: it is non-tradable, and thus inapplicable to the Black Scholes valuation model used for the other options. Therefore, weather options are valued either through the Burn analysis, which is based on historical data, or Monte Carlo-based statistical computer simulations.

Weather derivatives also enable protection against production cost increases. For example, a factory that uses some water in its process of production can protect itself against un favorable rainfall levels.

To trade weather options the following parameters must be determined:

• The contract type (call or put)

• The contract period

• The underlying index

• An official weather station from which the data is obtained

• The strike level

• The tick size

• The maximum payout (if there is any)

It is very similar to an insurance product. There are two types of weather options indices: “cooling degree day” (CDD) and “heating degree day” (HDD).

The number of CDDs on a single day is the difference of the daily average temperature from 65 degrees Fahrenheit. CDDs and HDDs are never negative. If the daily average temperature is less than 65° F, then the difference between the daily average temperature and 65° F is the number of HDDs. Over the course of a month, one might accumulate both CDDs and HDDs. The CME contracts therefore are based on the total number of HDDs or CDDs in the month.

Weather derivatives, now a multi-billion dollar industry, were originally created and traded in the US. Despite their use globally, these products have still not caught on in the Middle East and North Africa (MENA)region and no major contract has been launched in the area.

Catching on

Nevertheless, since weather derivatives are increasingly attracting energy companies, it has been said that the Organization of Petroleum Exporting Countries (OPEC) countries are starting to consider them in order to manage the increase in global demand resulting from the world’s changing weather conditions.

But the fact remains that energy companies are not the only ones concerned by weather shocks. The food sector is perhaps the most affected, through the impacts on agricultural production and decreasing supply coupled with increasing demand. It will therefore be important for African nations to consider weather derivatives to manage their food crises. In 2008, the World Bank launched a $1.2 billion financing facility to help developing countries in the region to overcome food shortages. This facility was meant to grant support mainly to Djibouti, Haiti, Liberia, Togo, Yemen, Malawi and Tajikistan by investing in multiple risk management tools.

In 2009, Malawi chose to use these funds to access the international weather derivatives market with the World Bank acting as an intermediary. In this context, Malawi was protecting its cereals production from projected harsh weather conditions. The new weather derivatives product created in June 2009 for Malawi was structured as an option based on a rain fall index. If rainfall drops under a certain level, a payout occurs; if rain fall doesn’t go beyond that certain level there is no payout. The amount was set to a maximum of $4.385 million as a start in order to test the market.

As African countries and the international weather derivatives market start becoming more familiar with each other, the World Bank is expecting more individual transactions of that type to occur in the region within the framework of global risk management strategies.

Eventually, the MENA region will have to embrace weather risk management tools in order to offset their weather correlated risks, particularly in the energy and food sectors.

Neyla Merheb is an associate in investment banking at Gazprombank-Invest

January 3, 2011 0 comments

Finance

Executive insight – DIFC

by Fabio Scacciavillani January 3, 2011

written by Fabio Scacciavillani

As we enter 2011, the mature economies of the world seem headed toward the doldrums once more. Hopes of a quick rebound are fading, especially in the United States, while in Europe the fiscal crisis in peripheral countries is threatening to spread to the core. Only Germany has performed well, thanks to the external stimulus received from emerging markets imports of its goods, while Japan remains mired in political indecisiveness after two decades of gradual decline, hastened by the global financial crisis.

Looking forward, we see the European Union’s policy rudder firmly set on fiscal consolidation and the design of the Stability Pact 2.0, sustained by a European Fund. A major political focus will be the design of a permanent framework for dealing with sovereign crises, which will be undergoing an “on the road” test with Ireland’s collapse and contagion to Portugal and Spain. So it is unlikely that much stimulus for global growth will come from the Old Continent.

But the main uncertainty hangs over the US economy. Since taking office, President Barack Obama’s administration has essentially followed the strategy conceived by his predecessor and has skirted policy actions that would tackle the fundamental causes of the crisis: lagging productivity, crumbling infrastructure, poor education, declining innovation and financial imprudence. The indecisiveness and the stalemate with Congress on fiscal and structural policies, compounded by the setbacks in Afghanistan, have generated a malaise that is deterring investments.

Following the midterm elections, in which the Republicans took the House of Representatives, the confrontation on economic policy is likely to escalate, starting with the extension of the tax cuts enacted by former President Bush. With major policy decisions and regulatory reforms on standby, the task of reviving the economy has been taken up by the US Federal Reserve. As interest rates are already near zero, the strategy conceived for the next few months hinges on a second round of ‘quantitative easing’ or, as the media dubs it, QE2.

The Fed will inject money by purchasing long-term government bonds, in the hope that the financial institutions will lend the money to corporates and savers will spend on goods and services.

Printing money to pay for government liabilities is hardly an original move. It was a widespread habit in Latin America when the continent was experiencing double, and occasionally triple, digit inflation in the 1970sand 1980s. In more recent history, from March 2001, it was adopted by the Bank of Japan to counter deflation and stagnation, with scant success. During the acute phase of the financial crisis, as interest rates moved close to zero, QE became popular in many of the advanced economies including the US, the Euro zone and United Kingdom. As a lifeline to banks it has worked, but as a stimulus it had, at best, a limited effect.

The US embarked on the second round of QE in November. The Federal Reserve’s meeting on November 3 outlined that, “economic conditions…are likely to warrant exceptionally low levels for the federal funds rate for an extended period” and “the committee intends to purchase a further $600billion of longer-term treasury securities by the end of the second quarter of2011, a pace of about $75 billion per month.”

The statement indicated that the Fed is keeping the door open for additional purchases if necessary, noting that the Federal Open Market Committee (FOMC) will “adjust the program as needed to best foster maximum employment and price stability.”

The Fed touted this measure even before the formal announcement, so long-term interest rates and the dollar exchange rate had plunged in reaction. Then the Irish crisis provoked a flight to the safety of US Treasury bills, thereby reversing the currency movements.

It is rather worrisome that for the next six months, while the Obama administration deals with the new Congress, monetary policy will be the only ingredient in the policy kitchen. The case for QE rests on the hopes that monetary policy and ultra low interest rates will induce corporations to invest.

But doubts abound. Professor of economics at New York University’s Stern School of Business and chairman of Roubini Global Economics, Nouriel Roubini, for example, pointed out that banks already have close to US$1trillion in excess reserves, yet they refuse to lend while earning only 25basis points. More liquidity will not help. He argues that there is a “continued credit crunch on the supply side, exacerbated by the comatose state of the securitization system.”

Furthermore, the private sector is still de-leveraging while corporations are holding hundreds of billions of dollars in cash and up to $2trillion according to some estimates. It is very unlikely that they will be induced to invest by even lower interest rates. In essence, it is the uncertainty over the future direction of policy, the fiscal measures to stabilize the public debt and the persisting troubles in real estate that holdback market forces.

The counterargument, espoused by the Nobel Laureate economist Paul Krugman, holds that higher inflation will induce companies that are sitting on cash to invest, while the real burden of the public debt will shrink. However, inflation is essentially a tax on money holders and those whose salaries are fixed; plus it represents transfer of wealth from creditors to debtors. It is highly uncertain where such a gamble could end, and in fact, historically, inflationary policies have been hard to reverse.

Global fallout

In today’s interlinked world, the impact of QE will not be limited to the US economy: it will also cause excessive liquidity in emerging markets, including the Middle East and North Africa (MENA) region. Freely floating currencies have already appreciated in response to capital inflows from investors seeking higher returns. Warnings of a bubble in emerging market assets were rife even before the announcement of QE2. Now the red lights are flashing in front of many senior policy makers.

South Korea’s finance ministry announced that it would consider limits to capital flows, while Brazil and Thailand already raised taxes on foreign investment in government bonds. Thailand’s Finance Minister Korn Chatikavanij acknowledged “discussions with central banks of neighboring countries, which are ready to impose measures together, if needed, to curb possible speculative money flowing into the region.”

QE2 will have an even greater impact on those economies that have a fixed peg to the dollar and allow free capital movements, such as the Gulf Cooperation Council (GCC) countries or Lebanon. In fact, the central banks would not be in a position to tighten monetary policy to cool down the economy while the dollar depreciation will spur imported inflation, especially if the weak dollar translates into higher food commodities prices.

Furthermore, speculative investments induced by cheap money expose the receiving country to a sudden outflow if global risk aversion rises. So, for the Middle East and the GCC, two kinds of scenarios could occur in2011. One is a more benign one, where anemic growth in mature economies will be offset by the push from emerging Asia and public investments. In such a case the real growth rate in the GCC would not be too far from the average growth rate in countries from the Organization for Economic Cooperation and Development (OECD) and emerging Asia, (i.e. 3 to 4 percent).

The less benign scenario will be dominated by currency instability, bouts of risk aversion and international credit market frictions. It is hard to predict which one will prevail because the second scenario would be ignited by a traumatic event, such as a sovereign default, which depends crucially on political developments rather than purely economic ones. In essence, the usual cloud of uncertainty is unusually thick because the precarious historical phase we are experiencing has no precedent that can provide guidance.

There are no easy prescriptions for these testing times, but economies that are developing an internal capacity to grow through major infrastructure upgrades and expansion of capacity are better placed to withstand shocks. In other words, medium-term policy efforts should be concentrated on decoupling from the performance of the mature economies.

In this context we should welcome the successful bid to host the FIFA World Cup in Qatar, which will offer a major boost to economic activity in the entire Middle East.

FABIO SCACCIAVILLANI is director of microeconomics and statistics, and AATHIRA PRASAD is an economist at the Dubai International Financial Center Authority

January 3, 2011 0 comments

Finance

Q&A – Christos Papadopoulos

by Emma Cosgrove January 3, 2011

written by Emma Cosgrove

Christos Papadopoulos has been six months on the job as regional chief executive officer for the Middle East and North Africa at Standard Chartered. He recently sat down with Executive to discuss what we can expect from both Lebanese and regional banks in the new year.

E What will be the drivers of regional asset growth in 2011?

The picture in the region is going to be somewhat diverse. There are some markets where on the wholesale banking side, especially in those markets where there are significant infrastructure investment plans, the wholesale banking assets will significantly grow. And then there are other markets where, just by virtue of large populations and ongoing healthy [gross domestic product] growth, we are going to have consumer assets growing —markets like Egypt — but it is not going to be uniform.

E Why is wholesale banking part of your Lebanon strategy for 2011?

Standard Chartered is extremely good at connecting trade corridors and FDI [foreign direct investment] flows, so we have a significant role that we can play in Lebanon in providing those kinds of solutions, especially for those corporates that have regional or even [outside]businesses. And that means that we are bringing to the market something that the local banks cannot provide, or at least cannot provide to the extent that we can. What we are very successful at doing is bringing Asian investors and Asian money into this part of the world. So what we’ve done in the Gulf is we have had as much as up to 40 percent of new money coming out of Asia.

Historically Europe used to be a significant supplier of finance to this part of the world, but now Europe is going through its challenges so in many respects when it comes to refinancing, they are not looking to participate, they are looking to get their money back. The extent to which Asia steps in and fills that gap means that you have a successful fundraising effort. Increasingly the Middle East is looking into Asia — whether it is to raise funding or to engage and do business.

When you look at the big trade corridors, whether it’s companies importing from China, whether it’s Korean contractors coming and doing business here, or whether it’s Chinese contractors coming in and working in the region, there is a significant engagement.

You have FDI flows going from the region to Asia, for example when the Qatar Investment Authority bought a significant stake in Agricultural Bank of China, so the world has changed in terms of the shift of economic growth and the emergence of Asia — a shift from West to East. And to a certain extent there has been a shift from North to South — whether it’s moving to the Brazils of this world or moving into Africa because of their commodities story. So you’re building corridors between Asia, Africa, the Middle East and Latin America.

E What are your expectations for mergers and acquisition (M&A) activities in the region?

We have seen some big deals. We have seen very recently the deal with Zain and Etisalat, which was a significant transaction. Here in Lebanon you have the deals with Bank Audi and EFG-Hermes, so I think good deals that are available will be happening. I don’t think you will see a frenzy of activity, but there will be opportunistic deals as people seek to take advantage of those economies that increasingly provide more attractive returns.

If you want to be in a market that is otherwise unavailable to you, Libya for example, you might consider an M&A type entry into the financial sector. In the nonfinancial sectors, you will increasingly see[activity in] the telecoms sector.

January 3, 2011 0 comments

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Vanquish visas and they will come

by Paul Cochrane January 3, 2011

written by Paul Cochrane

Over the past decade the Middle East has shaken off its ‘danger zone’ reputation of being a place where only the foolhardy or “conflicted tourists” would plan a holiday. Since 2000, the number of tourists visiting the region (excluding Turkey and Israel) has more than doubled, from 24.9 million to more than 53 million. And while 2009 saw a 5 percent slump in international tourist arrivals, the region was only behind Northeast Asia globally in the rise in tourists in 2010, up 16.1 percent, according to the United Nations World Tourism Organization.

Perceived heightened stability, investment, infrastructure development and marketing campaigns have all contributed to tourism in places other than long-term favorites Egypt, Turkey and the Holy Land.

The rise has partly been fuelled by wary Westerners warming to the Middle East as an attractive vacation destination, after being swayed by the flurry of advertising campaigns and travel articles extolling old Damascus’s charms, Dubai’s palatial hotels and Beirut’s infamous ‘phoenix rising from the ashes’ reputation. However, inter-regional tourism has been a key driver for the sector and has corresponded with the emergence of low cost air carriers and the aggressive expansion of Middle Eastern airlines in general.

The rise in tourism has also dove-tailed with a resurgent middle class with the desire and funds to take a trip within the region but not quite enough cash to splurge on a family holiday to Europe or America. Syria has become a regional poster child in this regard, with its tourism sector exploding since the economy was opened up at the beginning of this century; visitor numbers have surged from two million in 2004 to nearly six million in2010. What is notable is that the majority of tourists are from the Gulf, with2.9 million Arabs visiting in 2010, compared to 1.35 million tourists from other, primarily European, countries.

It has been the increased openness of countries that has really encouraged the inter-regional tourism boom, with Damascus scrapping visas for Iranians and Turks and Turkey abolishing visas in 2010 for Syrians and Lebanese. Once the regulations changed, there was a 117 percent rise in Iranian visitors to Syria, while the Turkish-Syrian agreement encouraged482,000 Syrian holidaymakers to stream into Turkey, an 113 percent increase, and an 170 percent rise in Turks heading to their southern neighbor. This sensible bi-lateral move resulted in the largest jump worldwide in visitors between two countries in 2010.

Meanwhile, Ankara’s decision led to 73 percent more Lebanese visiting Turkey than in 2009, and easier visas and marketing campaigns led to74 percent more tourists from the United Arab Emirates, a 60 percent rise from Iran and a 47 percent increase from Saudi Arabia. While Arab and Iranian tourist numbers surged, Ankara’s strained relations with Tel Aviv resulted in a41 percent drop in Israeli tourists, to 80,000 visitors.

That’s not much of a surprise though, as politics and outbreaks of violence frequently cause the region’s tourism figures to yo-yo from one year to the next. But with all the development and infrastructure investment underway — from airport expansion in the Levant and the colossal aviation hubs in the UAE and Qatar, to the new resorts and hotels being built —the region is on track to becoming a top global travel and tourism destination. Indeed, according to the World Travel and Tourism Council, the Middle East’s tourist and travel economy is forecast to rise 149 percent by 2020 from the current $173 billion to $430 billion.

What should be addressed is the scale and feasibility of tourism projects. Mass tourism — as compared to more sustainable tourism that is not primarily seasonal — can have negative social and environmental ramifications. Now is the time for the public and private sectors to plan ahead.

The easing of border and visa restrictions should also expand further to bolster regional travel for Middle Eastern citizens and foreigners; as Turkey and Syria have clearly demonstrated, scrapping visas makes visitor figures jump. In Syria’s case, the country received $2 billion more in tourism revenues in 2010 than the year before.

PAUL COCHRANE is the Middle East correspondent for International News Services

January 3, 2011 0 comments

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Erdogan lumps the leaks

by Peter Grimsditch January 3, 2011

written by Peter Grimsditch

Turkey’s fiery, if thin-skinned, Prime Minister Recep Tayyip Erdogan has a love-hate relationship with the press. He loves the organizations that show appreciation of his policies and seems to hate those that don’t. Heis prone to threaten the offending publications with lawsuits, while urging their boycott by advertisers and readers alike.

Little surprise then that Erdogan should bristle at many of the stories emanating from the Wikileaks disclosure of diplomatic cables over the past few weeks. The notoriously hard-working premier wanted to sue a former United States ambassador to Turkey, Eric Edelman, for claiming, according to some of the press reports, that he had secret bank accounts in Switzerland.

If any such accounts could be found, he proclaimed to the media, he would donate the total deposits to the main political opposition, the Republican People’s Party (CHP). In addition to Edelman, he also wanted to sue the US State Department for uttering such a calumny. The excitable Turkish press debated for days the practicalities of putting such a threat into practice, seeking opinions from senior members of the legal establishment.

While the threat of legal action made for lurid headlines, it somewhat misses the point. The content of the cable was not that he had Swiss bank accounts but that the ambassador had been told by two sources that they existed. The cable did not include an opinion about the likely truth of the claims. It was also a confidential document — essentially a private conversation — between the envoy and his bosses in Washington. Edelman also described Erdogan as having “unbridled ambition stemming from the belief God had anointed him to lead Turkey” and an “overweening desire to stay in power.”The latter comment, of course, is less an insightful piece of news for the home base than a glimpse of the blindingly obvious regarding any political leader.

In any case, a more likely target for lawsuits than the State Department would have been either Julian Assange, the founder of Wikileaks, or the myriad media outlets that published the cables. In a political environment as beset with gossip, rumour and mendacity as Turkey’s, the prime minister’s tetchiness understandable, even if the tendency to use some of his boundless energies in pursuing the authors of published criticism is perhaps as wasteful as it is unrewarding.

More significant than the tittle-tattle tales of tabloid headlines is the general picture that the US diplomatic service, overall, rejects the notion that the ruling Justice and Development Party (AKP) is hell-bent on turning Turkey into an Islamic state similar to Iran or Sudan, or even that it is unreasonably turning its back on the West and switching its allegiance eastwards. What the cables do suggest is that Turkey has been redefining its place in the world ever since it realised that its importance as the eastern flank of NATO diminished after the collapse of the Soviet Union.

Especially since 2002, when the AKP came to power, the country’s security policy has been integrated with its economic transition and growth. Turkey’s strength is better illustrated by the size of its economy than the number of soldiers in its army. The cables may be tiresome and embarrassing but are not even news for the most part.

If Erdogan wants an example of real toughness in the face of adversity, maybe his aides could show him one leaked cable that doesn’t even mention him or the AKP. In January of last year, a 75-year-old American, Hossein Ghanbarzadeh Vahedi, walked into the consular section of the US Embassy in Ankara after a dramatic escape from Iran, where he had been held for seven months. Vahedi, according to the cable, had travelled to the country to visit the grave of his parents when, for reasons he never discovered, the authorities confiscated his passport. Vahedi rejected the offer of handing over $150,000for its return and opted instead to pay people to smuggle him out of Iran. After three days of furtive flight, including a nightmare 14 hours on horseback over a freezing mountainous trail, Vahedi reached Turkish soil where he took a bus for Ankara. That’s real fortitude in the face of adversity.

Peter Grimsditch is Executive’s Istanbul correspondent

January 3, 2011 0 comments

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An outpost obstinate & obsolete

by Adam Pletts January 3, 2011

written by Adam Pletts

Command Outpost (COP) Spera is located 800 meters from the border with Pakistan in Afghanistan’s Khost province. The platoon section that occupies the COP can only come and go by helicopter and they have no vehicles based here. As the lieutenant in charge explains, “all we got here is our legs and as you can see everything is higher than us.”

One of the peaks that occupies the high ground around the COP is code named “New York” and another, “the Taliban Hotel”, but the coalition’s enemy here is not actually the Taliban but rather the Haqqani network who, although allied with the Taliban, retain their own identity and considerable influence in the Khost border region and beyond, emanating from their power base at Miran Shah on the Pakistan side. Set up in 2003 and originally used as a Special Forces base, the COP was handed over to regular United States army units in 2005 with the intention of controlling insurgent infiltration from Pakistan to Afghanistan. Within my first five minutes on the base the lieutenant has compared the well-established infiltration routes that the insurgents use on a seasonal basis to the Ho Chi Minh trail, an apt analogy given that cutting supply lines of insurgent support now in Pakistan has proved little more successful than it did decades ago in Vietnam.

In fairness, the border traverses a vast and barren mountain range; since Spera is the only COP for miles along the frontier it is hardly surprising that the insurgents have simply changed their routes.

As one officer put it, “They just walk around the COP.”Another confided that “[COP Spera] is kind of a stupid base to have; the enemy attack it simply because it’s there but it doesn’t really serve a purpose.”

With this in mind, requests have been made at the brigade level to have the COP closed down but the US military sees it as a delicate subject, given how such a move could play into the propaganda war: the US would say it was a strategic withdrawal while the Haqqani network and the broader Taliban would claim to have forced the Americans out. This is perhaps why the Commander of US Forces in Afghanistan, General David Petraeus, will have to sign off on shutting Spera down.

You might have thought that the difficulty of controlling borders had been understood following the experience of insurgent infiltrations from Syria to Iraq, not to mention the problems that the US has on its own border with Mexico, or for that matter Europe has with human trafficking from the East and Africa. But the situation here is particularly complex.

The coalition would like to see Pakistan do more to secure the border but Pakistan is a volatile ally with mixed motivations. It has long been accused of attempting to destabilize Afghanistan, thereby mitigating the risk of being sandwiched between two potentially aggressive neighbors, while at the same time maintaining what they think of as “strategic depth” in Afghanistan in the worst case scenario of an Indian land invasion.

Whatever the decision on the closure, those who might be saddest to see it go are, strangely, the very soldiers who are based there and endure regular attacks and mortar shelling roughly twice per week. While I was there, the call “incoming” woke me from a brief afternoon nap as the mortar rounds were detected by radar, giving a few precious seconds to grab body armor and take cover. I’m not suggesting that anybody likes being fired at but the soldiers I spoke to all said they enjoyed their deployment. A public affairs officer put it this way: “At Spera they’re actually doing the job they signed up to do, not stuck in a TOC (Tactical Operations Centre) staring at a computer screen.”

It must be said that the atmosphere at Spera is one of close camaraderie. One Lieutenant said, “Here the guy to your left or right is your security — your survival depends on him.” It’s also true that the closer you are to the war, the more some of the rules break down. As one of the younger enlisted soldiers told me, “When I leave here I gotta go back to that bullshit saluting.”

ADAM PLETTS is a freelance journalist currently embedded with coalition
forces in Afghanistan.

January 3, 2011 0 comments