Real estate

A short reprieve

by Executive Editors
written by Executive Editors

Beirut real estate witnessed never-before-seen levels of building activity in 2010. The average value per property sale shot up a staggering 22 percent in the first nine months of last year compared to the same period in 2009, according to Bank Audi, pricing much of the middle class out of the market.

But calm came after the storm and property sales started to slow in August and dropped 9.3 percent year-on-year in October 2010. Experts agree that the market has reached a plateau, and prices will remain steady for at least a year, specifically in Beirut. For the long term, it’s a different story; the scarce supply of prime land, increasing demand from locals and expats and underlying legal issues threaten to bump builders’ costs. The result is another storm brewing in the distance, as developers will likley pass their higher costs on to the consumer, pumping up prices yet again. The only question is when.

Elie Sawma, who says he represents nearly 1,400 developers as president of the Building Promoters Federation of Lebanon (BPFL), said the group is “making efforts to keep construction at a steady level to keep a window of opportunity for citizens to buy, because the price will experience another wave [upwards] after this period of calm, at the end of 2011.” Sawma says the rising prices seen since 2008 were a fully expected “natural market correction.”

Problems on the horizon

Land costs have shot up in the past two years, estimated by some developers to have risen from 30 to 50 percent of their project costs. Thus, despite surging overall home sales and prices since 2008, the proportion of developers’ profit margin per project has generally decreased.

In addition, the BPFL say the 2011 budget proposal crafted by the Ministry of Finance could mar their bottom line. Developers may face a tax increase from zero to 1 percent on the total revenue amount of a transaction, a proposal that is expected to bring Lebanon’s cash-strapped government between $133 million and $200 million in revenue, according Minister of Finance Raya Hassan. The BPFL says taxes like this proposed by the finance ministry are weighing heavily on the minds of industry players.

“In every other country, the government imposes a tax on the seller’s profit, but not on the total sales amount,” says Sawma, who is working with the ministry and cabinet to block this clause.

There is also a proposed new tax on unoccupied apartments developers own (as, commonly, when a developer’s asking price is not met for a new unit, rather than lower the price to market value, he will hold on to the flat and wait until the market value increases). Though details are murky, Sawma says, “[the tax] could reach as high as $10,000 a year on some of the larger apartments downtown.” Developers are unlikely to absorb these charges out of their own profits, and will instead charge the end-user the extra costs.

Nader Obeid, partner at Lebanese law firm Alem and Associates, believes the initiatives will help the “real users” of residences. Though the proposals may hinder some types of real estate investment, the authorities should control investment, via taxes, when it burdens the citizens. “[Lebanon] is barely big enough for housing its people; accordingly the community’s need to provide accommodation for… citizens is greater than its benefit from investment in real estate,” said Obeid. “The solution to this dilemma is to give priority to housing and to force the real estate owners to use it for this purpose, not for speculation.”

Whether the proposals break through or not, many experts agree that prices can only shoot up in Beirut. When they do, it’s likely they will rise at a faster rate than we have witnessed this year due to the scarcity of land supply.

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Real estate

For your information

by Executive Editors
written by Executive Editors

Lebanon on fire

A forest fire re-erupted one week after it had first started in Fitri, 45 kilometers north of Beirut, affecting a total of 150,000 square meters of forest area near homes. The Dec 5 fire was the largest of as many as 120 smaller ones that erupted during the first weekend of December, due to dry air, hot soil and a lack of rain after an unusually long summer period. Interior Minister Ziad Baroud confirmed that 57 fires had started that day across the country. Simultaneously, another fire in Baabda forced hundreds of families to flee their homes. The municipality president Imad Daou told Agence France Presse that firefighters were not able to effectively put out the flames because of the rough terrain and lack of roads and city planning, making it difficult to reach the affected area.  President Michel Sleiman remarked at the scene that the town’s unsatisfactory urban planning meant the fires spread much more than they would have otherwise.  The increase in forest fires is a serious problem for Lebanon as much of its verdant land has been compromised in recent years. With global warming seen as the culprit, this is the first time Lebanon has experienced so many forest fires in such a concentrated period of time.

Doha takes the cup

Fifa’s announcement that Qatar will host the 2022 World Cup games — a month-long event that will require a whole new construction topography for the already booming nation — has construction firms eyeing the $57 billion to be doled out to prepare hotels, roads, stadiums, a metro system and other infrastructure projects, according to Arabian Business (AB). Some $4 billion is needed to build 12 air-conditioned stadiums. The $11 billion New Doha International Airport should be complete within the next two years. The $5 billion to repair existing roads is a small fix compared to the $35.6 billion required for the most ambitious of the infrastructure projects: the new metro rail system, to be fully complete by 2019, which plans to link Qatar internally as well as with the rest of the GCC countries. To deflect some of the cost, the Ministry of Business and Trade is currently researching public-private initiatives. Booz & Co partner Ulrich Koegler told AB, “While they will be actively looking — and discussions with our clients show that this is happening — they will also be diligent in trying not to produce failures that would hurt their reputations ahead of the World Cup.” Drake & Scull International DSI, based in Dubai, and Arabtec Construction, the largest construction firm in the GCC, are already established in Qatar and expected to be the frontrunners for contract awards. Thomas Barry, Arabtec’s CEO, told the daily, “We would expect to be in a position to win a higher share of such a market as we have the correct experience both in stadiums, hotels, residential and retail projects and the like — we are optimistic about our chances.” Industry experts agree that most of the contracts will be awarded to regional firms as Qatar doesn’t have the local expertise for such  infrastructure implementation.  On December 6, Arabtec shares jumped 9.1 percent and Drake & Scull (DSI) shares jumped 6.5 percent to a 12-month high amid expectations for both firms to win contracts in Qatar.

Industrial real estate creeping up the ranks

In contrast to the residential and commercial sectors of real estate, light industrial and logistics will carry a higher rate of return, on average, for investors looking to place their money in real estate in the MENA region, according to a December 12 report by Jones Lang LaSalle. Light industrial real estate is often overlooked and has the most growth potential, with demand rising. Usually controlled by government entities in the GCC, opportunities for the private sector are opening up. There are about 65 million square meters of industrial space in Dubai, making it the most promising industrial market in the region, followed by Abu Dhabi, Riyadh, Cairo and Jeddah. Citing an increase in demand from logistics specialists in Europe and Asia over the last two years, the report predicts the sector “will provide significant potential to generate increased sales activity in this market over the next few years.”

And the award goes to…

Middle Eastern firms are gaining global recognition, with several winning top prizes at the 17th annual International Property Awards gala in late November. Qatar was in the spotlight, as Barwa Financial District won the “International Office Development” top award. Chairman and managing director of Barwa, Ghanem bin Saad al-Saad, said in the firm’s December 6 press release, “Barwa Financial District stands out as a key development for Doha and demonstrates the diversity of our approach to real estate development, from high-end projects to those which meet the needs of all sectors of society and the Qatari economy.” Damac Properties, the region’s largest luxury developer, won in the category of ‘Best High Rise Architecture’ for their upcoming Damac Tower in downtown Beirut. Bahrain’s Pegasus Real Estate was voted the best property development marketer. Turkey’s first LEED-registered project, the $1 billion Varyap Meridian, won in the ‘Best International Architecture – Multiple Units’ category. The mixed-use project, which is under development by Varya, includes a 5-star hotel, residences and office buildings. Located in the Atasehir district of Istanbul, it will comprise 107,000 square meters, 90 percent of which will be green space.

Sales keep rising

The number of sales transactions for properties in Lebanon reached 77,360 during the first 10 months of the year, a 20.6 percent increase compared to the first 10 months of 2009, and a record high for that time period, according to figures from the Directorate of Real Estate, as reported by Bank Audi. Total revenues from the sales reached $7.7 billion in this period, a 51.4 percent increase from the first 10 months of 2009. The average value per sale in this 10-month period grew 25.5 percent to reach LL149.5 million ($99,666). The growth in the number of transactions started to level off in July of 2010, in parallel with declining levels of capital inflows.

Architecture party

On December 11, Beirut-based Loft Investments, founded by Mark Doumet and Ayad Nasser, launched, in partnership with BLOM Bank, their first award show for young Lebanese architects. More than 500 people attended the event in Ashrafieh, where the top prize for contemporary loft design went to Joanne Hayek and Zeina Koreitem. The purpose of the awards, Nasser said, is to encourage young designers to stay in the country, adding, “We have plenty of opportunity here.”

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Banking & Finance

For your information

by Executive Editors
written by Executive Editors

Lower rates for green hot water

Lebanon’s banks began offering lowered rates on loans to finance the purchase of solar water heaters on December 15, as announced by Banque du Liban, Lebanon’s central bank, earlier in December. Lebanon’s Energy and Water Minister Gibran Bassil, President of the Association of Banks in Lebanon Joseph Torbey and committees from both organizations met on November 29 to discuss potential collaborations between the government and the banks regarding renewable energy initiatives. Torbey said after the meeting that the banks would be looking into financing other products in an effort to decrease electricity consumption, as current energy production does not meet demand. 

Ja, das ist eine libanesische Bank…

Deutsche Bank began coverage of both Bank Audi and BLOM Bank this month, offering an in-depth report on the health of the Lebanese banking sector. The German bank gave both Audi and BLOM “buy” recommendations, suggesting a target price of $9.75 per share for Bank Audi and $13.75 for BLOM Bank. The report predicted that the Lebanese banking sector could maintain 8 to 10 percent asset growth for the next few years, but challenges remain. Deutsche Bank said that rigorous restrictions from Banque du Liban, Lebanon’s central bank, have limited the ability of Lebanese banks to turn ample deposits into profitable lending, as 15 to 25 percent of deposits must be kept at the central bank. This has left the loan-to-deposit ratio in the country at a very low (yet low-risk) 32 percent. The report acknowledged that profits have grown in recent years but said that further improvement of cost-to-income ratios and increased international expansion would help the sector’s profitability ratios. The report also concluded that Lebanon’s banks’ income is earned mainly from interest. Commission income represents only 20 percent, and other non-interest income (such as trading fees) represents only 10 percent, of total income. Deutsche Bank suggested that this be corrected through diversification, in line with larger banks.  Ratings agency Standard & Poor’s (S&P) upgraded the ratings on both BLOM and Audi last month, raising the rating of both banks from “B” to “B/positive.” S&P credited the upgrade to Lebanon’s perceived intention to reduce the public debt through structural reforms. The ratings of Lebanon’s banks continue to be hindered by the below-investment grade rating of the Lebanese sovereign, as Lebanese banks hold a significant part of the country’s enormous public debt. The exposure of Bank Audi to government debt stood at 4.3 times common shareholders’ equity at the end of June 2010, which has recently been lowered by the sale of some Lebanese Eurobonds in favor of international bonds, according to BLOMInvest Bank research. BLOM Bank’s exposure to the sovereign represented 5.4 times common shareholder equity at end-June.

Head start on Basel III

Lebanese banks are slowly working to apply recommendations of the most recent Basel Accords, or Basel III, according to Joseph Torbey, President of the Association of Banks in Lebanon (ABL).  “We have applied most of the recommendations of Basel I and II over the past few years and we intend to do the same in Basel III with the help of the regulatory and monetary authorities,” said Torbey on December 3, at a lunch hosted by the ABL to honor a visiting Turkish delegation.  “Our economy is small but it is wide open to the international markets. We fully abide by the international rules and this will be our firm vision,” he said. Basel III recommendations involve higher standards for tier-one capital adequacy and common liquidity requirements, among other suggestions.  Speaking about Lebanon’s preparedness to meet the Basel III guidelines, Riad Salameh, governor of Banque du Liban, Lebanon’s central bank, said in a September 27 speech at the Standard Chartered Thought Leadership Bankers’ Conference: “Our banks have an average [tier-one capital] ratio of over 6 percent, therefore meeting the 7 percent [requirement] in the coming four to seven years as scheduled by Basel III… is not going to be a problem for our banking sector.”

Angels invest in sausages

The Lebanese Business Angels (LBA) announced this week that it would be investing $100,000 in a startup agro-food business called OVIS. The company makes casings for foods such as sausage and expects to create 100 jobs in the medium term. LBA will take a 15 percent stake in OVIS for their investment. LBA was started by the Bader Young Entrepreneurs Program and consists of individuals and companies willing to invest in local startup efforts. Saad Azhari, chairman and general manager of BLOM Bank leads the group.

Chinese accounts for MENA banks

Both of Lebanon’s biggest international banks are working on forming closer ties between Lebanon and China through business and trade opportunities.  HSBC held an event on December 6 bringing together business leaders from both China and Lebanon in an effort to spur business between the two countries. Speakers mentioned the Shanghai Electric Power Generation Group projects in Saudi Arabia and Iraq as an example of the potential business to be done between the Middle East and North Africa (MENA) and Chinese players. “Companies such as Shanghai Electric… generate a huge amount of subsidiary business when they establish a presence in a country,” said Francois-Pascal de Maricourt, chief executive officer of HSBC Lebanon. “We see a direct impact on FDI [foreign direct investment], employment and trade rise, as well as bringing their expertise to the contracted project.” Standard Chartered has also been looking for ways to ease business between China and its regional clients. On September 29, the bank announced that it had signed in Beirut renminbi (RMB) cross-border trade-settlement account agreements with five MENA banks. Alnima Bank Saudi Arabia, Bank Al Falah Pakistan, BankMed Lebanon, Habib Metropolitan Bank Pakistan and Union Bank Jordan can now settle customer invoices in RMB.  Farooq Siddiqi, regional head of transaction banking for the MENA region at Standard Chartered said this option would present “many opportunities” to the banks’ corporate clients, adding: “As the trade volume between China and the MENA region continues to grow significantly year-on-year, we feel that banks in the region should be prepared to meet the increasing RMB requirements of their corporate clients.”

Syria’s first bond

The Syrian government sold local currency bonds and treasury bills for the first time ever on December 13, worth a relatively modest $21 million. Just a few days before the sale, Adib Mayaleh, governor of Syria’s central bank, told Bloomberg that he expected to have “no problem” selling the bonds to willing buyers. The bonds were conventional in nature rather than Islamic and were only available to registered banks. The sale is meant to add to the funds Syria is spending to develop its energy production and tourism, including the construction of a 5,000-megawatt power facility and a new terminal at Damascus Airport. Also toward these ends, Abdallah Dardari, deputy prime minister for economic affairs, said in September that the country would receive $55 billion in foreign direct investment over the next five years.  According to a recent report from ratings agency Capital Intelligence, Syria has “comparatively strong solvency and liquidity indicators and a demonstrable commitment to gradual economic reform,” but its “economic structure and institutional frameworks are relatively weak and the financial system underdeveloped.” The country’s public debt is held largely (90 percent) by Syria’s central bank and other state-owned banks, with 63 percent of the debt held in local currency.

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Editorial

The price of purgatory

by Yasser Akkaoui
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.

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Finance

The only way is up

by Thomas Schellen
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.

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Finance

Executive insight – DIFC

by Fabio Scacciavillani
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

 

 

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Q&A – Christos Papadopoulos

by Emma Cosgrove
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.

 

 

 

 

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Vanquish visas and they will come

by Paul Cochrane
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

 

 

 

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Erdogan lumps the leaks

by Peter Grimsditch
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

 

 

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An outpost obstinate & obsolete

by Adam Pletts
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.

 

 

 

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