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Banking & Finance

For your information

by Executive Editors November 30, 2010
written by Executive Editors

Capital makes a venture

Middle East Venture Partners (MEVP), one of Lebanon’s few venture capital (VC) firms, made its first investments last month. As Executive reported in September MEVP has already closed its first fund, the Middle East Venture Fund, at $10 million, and has targeted a treasure chest of $20 million. The first of the young firm’s investments is in Pin-Pay, a platform that looks to transform mobile devices into payment tools. The second is iLevel, which claims to be Lebanon’s first “shopper marketing” agency. And the third is Multilane, a tech firm specializing in optical communication. Tarek Sadi, managing director at MEVP said: “We believe that the efforts of MEVP and other VCs in the region will give entrepreneurs more clarity into the benefits of institutional investors, galvanizing a deep ecosystem.” In other VC news, Berytech Fund, a competing VC firm, bought a 35 percent stake in technology start-up Dermandar last month. Dermandar works in digital image processing and is creating a tool to ease the production of panoramic photos. Dermandar is owned by Elie-Gregoire Khoury and Elias Khoury.  Berytech is reported to have funds of more than $6 million and tends to prefer tech companies. Though the value of the 35 percent stake has not been released, the fund’s investments usually range from $100,000 to $1.2 million.

Lebanese banks hold up in regional roundup

Seventeen Lebanese banks have made the Union of Arab Banks’ top 150 Arab Banks list. The banks on the list, published last month in Al-Iktissad Wal A’amal magazine, have been ranked based on their consolidated assets. Bank Audi Saradar, the first ranked among Lebanese banks, came in 26th place in the entire region. Bahraini banks had the largest showing on the list with 25 banks, followed by the UAE with 20, Lebanon with 17, Egypt with 15 and Saudi Arabia with 11.

Ranking of Lebanese banks among the top 150 Arab banks

Source: Credit Libanais Research, Al-Iktissad Wal A’amal

Soaking up Islamic liquidity

The United Arab Emirates will soon begin issuing Islamic certificates of deposit (CDs) in an effort to absorb excess liquidity, according to Afaq Khan, chief executive of Standard Chartered’s Islamic banking arm Saadiq. Khan told Maktoob Business that the CDs will be used as “a tool to absorb the excess liquidity in the Islamic money market.” The Islamic banking sector faces a lack of sharia-compliant tools to absorb excess liquidity, as CDs issued by the country’s central bank are not acceptable in Islamic law. Although 16 percent of the UAE’s banking assets are in Islamic finance accounts, the country currently has no liquidity management tools in place, while Pakistan — whose Islamic banking sector makes up 5 percent of assets — already has a local currency Islamic treasury, according to Khan. The move is the result of a liquidity management committee set up by the UAE central bank, which will also be considering an Islamic repurchase facility. The Islamic CDs will be offered up for auction daily and will work on a commodity-based murabaha plan, meaning that the profit will be based on the buying and selling of commodities and not interest. They will at first only be available to Islamic banks, but will eventually be available to conventional banks as well.

Insurance potential

Zurich Financial Services Group announced on October 11 that it would soon acquire a 99.98 percent stake in Compagnie Libanaise D’Assurances, a privately owned Lebanese insurance company with operations in the United Arab Emirates, Kuwait and Oman. Compagnie Libanaise D’Assurances posted gross written premiums of $49.1 million and a net income of $5.1 million at the end of 2009. Lebanon’s struggling insurance sector suffers from antiquated legislation and a lack of tax incentives to encourage the use of life insurance as a savings tool. Lebanese Minister of Economy and Trade Mohammad Safadi said that the insurance sector needs to take steps to ensure that informed human resources are available to Lebanon’s growing insurance market, at a conference in late September. He further said that regional cooperation and new legislation were on the way.

“Lebanese insurance companies are poised to grow if the economic free zone between Lebanon, Syria, Jordan and Turkey is formed. This will open a commercial and consumer market to 120 million inhabitants,” said Safadi. He continued: “We have complete confidence that the modernization of legislation and implementation of laws will provide protection for the holders of insurance policies and organize the work of all those who are involved in the insurance field.” Safadi also announced that his ministry would begin to publish insurance sector statistics to encourage transparency. Currently the only insurance statistics published in Lebanon are in Lebanon’s Al-Bayan magazine, which gets its information through an exclusivity agreement with the ministry.

Pumping the portfolio

The net investment portfolios of Lebanese financial institutions in foreign debt and private equity reached $5.3 billion as of March, according to Byblos Bank. This marks a 24.4 percent increase from the March 2009 figure, which was $4.2 billion. Of the $5.3 billion, 51.8 percent ($2.7 billion) is in equities; long-term debt securities constitute 45.3 percent ($2.4 billion) and short-term debt securities representing 2.9 percent, or $153.5 million.

Destination of equity investments

Destination of long-term debt investments

Source: Byblos Bank

HSBC Islamic bond issue

HSBC is in the final stages of launching its first Islamic bonds exchange traded fund (ETF). The fund is largely aimed at international investors who have been rushing to booming emerging market funds, primarily in Brazil, Russia, India and China. The Middle East has been largely left out of this rush, which totaled $49.4 billion in investments according to financial data provider EPFR Global. Desirable international investors have largely ignored the region due to ongoing debt struggles and caps on foreign participation.

Raya’s debt roll over

The Lebanese Finance Ministry will be refinancing $800 million in maturing Eurobonds this month and will seek to swap $3.48 billion in additional Eurobonds due to mature in 2011 for longer maturities. Finance Minister Raya Hassan announced the plan at a conference late last month, where she also stated that the ministry is studying the market to achieve the optimum results from future swaps. She said that rolling over all debt maturing this year, and most if not all debt maturing in the first quarter of 2011, is advantageous because of the low interest rates expected to continue through the first half of 2011. Hassan stated that she expects 5 percent GDP growth in 2011 and 7 percent in 2010. The budget deficit will increase to $3.5 billion next year from $3.4 billion in 2010, said the minister. The weighted interest rate on Lebanese Eurobonds was 7.34 percent at the end of July, according to Byblos Bank.

November 30, 2010 0 comments
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Feature

A sea of plenty?

by Executive Editors November 26, 2010
written by Executive Editors

Projections indicate that over the next 30 years, the outlook for the water situation in the Mediterranean zone — including the Levant — is dire. Over the past century or so, most of the area witnessed a clear trend involving a decline of up to 3 millimeters (mm) per year in annual precipitation.

And things are not set to get any better in the future: the International Center for Agricultural Research in the Dry Areas predicts a 10 percent drop in precipitation in the region during the next three decades compared to the average over the past 100 years. Moreover, most of the decline will take place during winter and spring, when decreases of up to 20 percent are expected, which means that the growth cycle of the vast majority of major field crops will be affected with potentially disastrous consequences.

At the same time, the mean annual temperature of the region is expected to increase by 0.5-1.5 degrees over the coming 30 years, with most of the change occurring in the summer (when it will be approximately one to two degrees hotter). The most affected areas will be Syria and Jordan, where 30 percent of the land will deteriorate from a steppe to a desert, while Lebanon and the West Bank will also witness substantial, if less drastic, change. This will lead to shorter growing periods, with much of the region experiencing reductions of up to 15 days and the decline in parts of Syria, the West Bank and Cyprus more pronounced. Only in some of the high mountain areas of Lebanon will the length of the growing period actually increase due to the rise in temperature, as this will reduce the number of days when cold weather limits growth.

Such trends will thus be highly significant for the economy in most of the Levant. Climate change — whatever its cause — means that more frequent and severe droughts can be expected in the near future, and that desertification is a greater threat than ever. Drought may not be preventable, but actions can be taken to adapt water demands and mitigate the impact.

Turkish temptation

The countries of the Levant may look west, where Turkey bathes in apparent aquatic abundance. But with a growing population and difficulty harnessing supply to its full potential, the Turkey of the future may have its own problems to solve.

For the last few decades the country has been touted as the lifeline and reservoir of the Fertile Crescent, that arc of relative greenery that stretches from the end of the Persian Gulf through Iraq and the Levant to the western tip of Egypt.

At first glance, Turkey would seem to be water-rich: it has some 120 natural lakes, the largest and deepest of which is Van, with a surface area of more than 3,700 kilometers square and a depth of over 100 meters. The Turks also have hundreds of large dam reservoirs, of which the biggest is the 817 square-kilometer lake behind the Ataturk Dam, one of the world’s largest projects of its kind. Moreover, the country is well endowed with rivers, many of which rise and empty into seas within Turkey’s borders, though others such as the Tigris, Euphrates and Orontes are shared with Arab neighbors.

All of this bounty is renewable thanks to extensive rain and snowfall. Turkey’s mountainous coastal regions receive abundant precipitation of up to 2,500 millimeters per year, though areas away from coastal fringes get less: 500 to 1,000 millimeters per year in the Marmara and Aegean regions and in the plateau of East Anatolia, while most of the central and southeastern zones receive only 350 to 500 millimeters annually. Snow falls all over Turkey, and is retained in high mountain areas —  in spring, the meltwater feeds rivers and ground water sources.

Climate change may make inroads into all this, but Turkey is in better shape than its southern neighbors. With such an abundance of water, sending some of the stuff to slake the thirst of a parched Levant may at first glance seem simple. In fact, well before growing regional drought and desertification became widely recognized, various schemes to pump Turkish water south were touted.

These included two pipeline projects for which preliminary feasibility studies were completed late in the late 1980s. The first was the ‘West Line,’ a 2,650 kilometer long route to transfer 3.5 million cubic meters daily from Turkish rivers to Syria and Jordan, and on to the Saudi cities of Tabuk, Yanbu, Medina, Mecca and Jeddah. It was to be matched by a ‘Gulf Line’ carrying 2.5 million cubic meters over 3,900 kilometers through Syria, Jordan, and Saudi Arabia to the Arab Gulf states. The projects never got off the ground.

In only two decades, Turkey could become a water-poor state

Thirst for efficiency

But the Turkey of today is not the same as that of the mid-20th century in terms of water supply and demand.

Countries are “water-poor” if annual available water volume per capita is less than 1,000 cubic meters, or “stressed” if the figure is between 1,000 and 2,000 cubic meters. According to this common international norm, Turkey is now water-stressed; the annual available volume of water has recently been approximately 1,500 cubic meters per capita, whereas in 1960, when the population was only 28 million, it was 4,000.

The official State Institute of Statistics has estimated that Turkey’s population will reach 100 million by 2030; so, all things remaining equal, the annual amount of water per capita available to the Turks will be about 1,000 cubic meters. In only two decades, Turkey could become a water-poor state. Under these conditions, it is more important than ever for the Turks to develop and allocate water resources efficiently before thought is given to sending it south to supply the parched Levant or Gulf regions.

Inside the country, a lot still has to be done to make the best use of water wealth; despite implementation of some ambitious plans to dam and otherwise better store and utilize water, Turkey in recent years has only been using 37 percent of the available exploitable potential of 112 billion cubic meters.

One problem is that distribution of precipitation in the country is uneven: water is not always in the right place at the right time to meet needs. For example, the average number of days on which it snows and the duration of cover vary considerably among regions, from less than one day a year in the Mediterranean zone to over 40 in Eastern Anatolia. The trouble here is Turkey’s settlement patterns are the opposite; people and industry tend to be located in the dryer Mediterranean region. Another issue is that rivers have irregular regimes and natural flows cannot always be diverted directly.

These problems could be addressed through massive new investments which would allow the country to make better use of its water, in which case it could conceivably export some of it to thirsty southern neighbors.

Otherwise, the water wealth of Turkey will continue to be underexploited, to the detriment of Turks and Arabs alike.

November 26, 2010 0 comments
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Feature

The specter of Solidarity

by Executive Editors November 26, 2010
written by Executive Editors

For the past four months, former workers have been staging a sit- in at the gates of the Future Pipe Industries (FPI) factory in Akkar, Lebanon’s underdeveloped northernmost region. FPI, a global manufacturer of fiberglass pipes announced in July that it would be closing the Akkar plant, citing adverse operating conditions.

But many of the factory’s 200 contracted workers, and up to 140 daily workers, are crying foul. They say that some of the employees, who are unionized, were so skilled that they were sent to some of FPI’s 10 other factories around the world to train others and that the company had just supplied the Akkar plant with new machines worth millions, suggesting that the factory was not losing money. The workers also claim to have been dismissed without proper consultation or compensation.

The more active members of the FPI union, having been left in a jobless limbo, are insisting that they will camp outside the factory, blocking the company from removing the machinery, until they have received adequate compensation or get their jobs back.

“I have six kids who are all in school, except one that works at General Security,” says Jamil Abou Chakra, 46, who had worked in the factory for 13 years. “We are willing to die or go to prison because we have nothing left.”

The unity of the former factory workers is far from absolute, however, as the company has actually hired a number of them as security guards to prevent the strikers from entering the factory.

Unions bygone

“Compared to [the union movement] before the war, you now have a miserable corpse of what it once was,” says Fawwaz Traboulsi, professor of politics and history at the American University of Beirut and the Lebanese American University, as well as the author of “A Modern History of Lebanon.”

Traboulsi was an activist in his day, mobilizing teachers and students and supporting the union movement in the 1960s and early 1970s when it was agile, energetic, increasingly powerful and largely independent.

Now, he speaks like a preacher who has lost his flock, obviously capable of passion and energy but no longer motivated to summon either. The unions he once championed are now husks of their former selves, weak, divided and in the thrall of sectarian political masters.

At the end of the 1975 to 1990 Lebanese Civil War, Traboulsi says that almost no one was interested in bolstering the trade union movement. Strong unions would slow reconstruction by demanding wage hikes and politically independent unions would be of no use to Lebanon’s sectarian leaders.

“[Former Prime Minister Rafiq] Hariri wanted docile trade unions, but more important than Hariri were the Baathists, the Syrian intelligence and the Syrian Socialist Nationalist Party (SSNP), as well as labor ministers, who interfered very strongly in the trade unions,” he explains.

First off, a strong union movement is hindered by regulatory infringements on what should be — according to the International Labor Organization (ILO) — inalienable rights.

ILO Convention 87, established in 1948, reads: “Workers and employers, without distinction whatsoever, shall have the right to establish and, subject only to the rules of the organization concerned, to join organizations of their own choosing without previous authorization.”

The Lebanese government has refused to ratify Convention 87 under the pretext that doing so will allow the trade unions to become a direct reflection of the sectarian divisions within the country. But many of those interviewed for this article agree that this is the case despite not ratifying the convention. 

“In our mind it is already divided like this,” says Walid Hamdan of the ILO’s Regional Office for Arab States. Refusing to comply with Convention 87 allows the Lebanese government to deny public employees, including teachers, the right to organize into unions as well as to require every new union, strike or protest to be approved by the labor minister. And with much of Lebanon’s large-scale industry destroyed in the war, new unions that were formed after 1991 became smaller and more localized than their pre-war equivalents. The unions then became an extension of the country’s sectarian system.  “The period where thousands of people thought that their interests could be served by resorting to the trade unions was a pre-war phenomenon. Now, sects take care of people’s interests,” says Traboulsi.

The unions are now husks of their former selves, weak, divided and in the thrall of sectarian political masters

Politics in Akkar

Political interference is also one of the complaints of the workers at FPI’s factory in Akkar.  The company was founded by Fouad Makhzoumi, leader of the fringe National Dialogue Party, which has no seats in parliament. Most of the workers had formerly been supporters of the Future Movement before, they claim, they were either “forced” or “encouraged” to join the National Dialogue Party. The assertion of being forced to switch political parties, however, means little to the ILO’s Hamdan, who sees the whole ordeal as a weakening of resolve on the workers’ behalf, rather than a grievance to be included in the complaints.

“This is where the problem is. From the beginning I shouldn’t align myself with anybody,” says Hamdan. “I’m an independent entity and my only concern is how to best defend the interests of my workers.” After the strike began, the men had hoped to turn to the ruling March 14 coalition for support as the Future movement currently holds sway in the region with a majority of Akkar’s parliamentary seats — that was before August 6, when Makhzoumi held a dinner in honor of Future Movement leader, Prime Minister Saad Hariri.

The FPI workers now find themselves in the difficult position of being without a political patriarch interested in maintaining their support.

Woes of the workplace

The strikers claim that the working conditions in the plant were hazardous, with fiberglass dust constantly in the air and no masks or aspirators provided, causing respiratory problems, eye infections and even cancer.

“The fiberglass, while we are grinding it, makes a cloud inside the factory and makes infections in the eyes,” said FPI union president, Abbas al-Badan, 53, who worked at the factory for 12 years. At FPI’s Egypt factory workers have also accused the company of workplace malpractice, presenting a report in August to the Egyptian Attorney General claiming that the unsafe use of toxic materials in the factory resulted in a worker’s death.

FPI has called all of the Akkar union’s accusations “calumnious.” When contacted by Executive, FPI’s head of communications said the company would not grant interview requests. A written company statement on the matter reads: “The company holds since 2004, the International Organization for Standardization 14001 accreditation for its compliance with the strongest environmental requirements and is subjected to continual audit in this connection twice per year.”

But the workers argue that, in the case of Lebanon, inspectors were bribed and the factory management was given advance warning of inspections, giving them the opportunity to temporarily improve working conditions. Despite the many grievances of FPI’s workers, the strike has resulted in little progress since it began in July, and union experts are pessimistic about its success. The protest’s removed location limits media attention and the organizers have struggled to arrange more visible events in Beirut. And despite their efforts, the workers have not been able to gather in such numbers as to make a strong and un-ignorable stand.

But as the workers sit at the factory’s gate, taking shifts and waiting for a wave of public support they can only hope is on its way, they beg the questions: why are they doing it alone? And, if conditions were as egregious as they say they were for 15 years, why are they only just now bringing up the subject?

Systematic fragmentation and politicization of the trade unions as a whole have weakened them almost to ineptitude

State of the unions

The FPI union in Akkar is just one example of how systematic fragmentation and politicization of the trade unions as a whole have weakened them almost to ineptitude.  The natural place for the Akkar protestors to look for support would be up the ladder of the union system to the confederation. Lebanon’s General Labor Confederation (GLC) is the parent organization of all of Lebanon’s 52 trade unions, but the oddly unfinished lobby in the confederation’s building is not the only thing giving the organization a derelict air. The GLC suffers from structural defects that make it ill-equipped to help small causes like the strike in Akkar. The confederation, for example, does not require its member unions and syndicates to pay dues. Some of the wealthier sub-organizations do contribute, but Ghassan Ghosn, president of the GLC, says that it is impossible for the smaller organizations to do so, as they struggle to fund even their own operations.

The GLC is largely funded by the government and is included in the Ministry of Finance’s budget, as is the case in most countries.

“When the union movement depends solely on government funding, that can be used as leverage to pressure them here and there,” says ILO’s Hamdan. “If [they] don’t have other sources of funding then [they] lose [their] independence.”

Ghosn says even with government money, the GLC’s funding is inadequate. The GLC did provide the Future Pipe union with a lawyer to help in their efforts, but funding for further legal counsel or efforts to generate awareness through paid media are nowhere to be found.

Ghosn claims, however, that further funding is unnecessary in the case of the FPI workers. “Their problem is not a question of money. Publicity does not need money. The newspaper and other media is free,” he said. “Even if they have a lot of money they will not be on the level of Makhzoumi.”

Outside of individual union activities, the GLC also lobbies on behalf of all workers in Lebanon. In March, Ghosn and representatives from the GLC met with the Minister of Labor in order to present grievances regarding just taxation, social security benefits, and the provision of electricity and water.

It is these general demands that most frustrate Hamdan: “If I were in the leadership of the [confederation] one of my major priorities would be to have the right of all workers to associate and organize. They make only shy demands.”

The yearly meeting between the GLC and the Ministry of Labor yielded little results and meetings continued throughout the summer. A general strike was planned for June but Ghosn called it off in when promised a ministerial committee dedicated to GLC issues. He also said the GLC did not want to interfere with the tourism season. After months without progress, Ghosn threatened again in September to call for a general strike if his concerns were not addressed.

This is effectively the only card he has to play, but it has nowhere near the punch it would have had prior to the civil war. No general strike since the war has drawn the thousands of workers they used to. When crowds do form, they usually don sectarian colors and flags — whatever the real reason for the protest. The clashes and street battles between government and opposition supporters in May 2008, after all, began with a labor strike. A general strike might then be perceived as more a threat of civil unrest than a protest.

No general strike since the war has drawn the thousands of workers they used to. When crowds do form, they usually don sectarian colors

Still waiting

Sitting under their tent on a smoldering summer day, the former workers of FPI in Akkar admit that they allowed the union to weaken and almost disappear before their dismissal. After years of letting management pick the union leader, of turning their heads when the factory was kept from working at full capacity on “surprise” inspection days, for accepting the hours, the conditions and the pay they now think was so unfair, they say they feel a shard of remorse and even shame.

At present, it is looking unlikely that the workers of Future Pipe will get what they want, as they have been effectively abandoned to their fate by the country’s union leaders and the Lebanese state.

“Whatever pretext is being used for throwing these people out I think they have the right to decent jobs and the right to discuss their own future,” says the ILO’S Hamdan. “Whenever there is some sort of summary dismissal, whatever pretext, whether economic or technical, it should be negotiated with the workers, which did not happen.” He sighs: “I am very supportive of their demands, but it’s not the commune of Paris.” 

November 26, 2010 0 comments
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Editorial

The road carnage must end

by Yasser Akkaoui November 26, 2010
written by Yasser Akkaoui

Last month the son of good friends of mine was killed, hit by a car as he crossed the street on the way to school – his life cut short at just 17 years of age. The same week he was killed I heard that at least another half dozen others were also killed in vehicle accidents. As a conservative estimate, almost 7,000 people have lost their lives on Lebanon’s roads since 2000, and thousands more injured.

Were the roads kept up properly, and even the most basic safety rules enforced by the authorities and adhered to by drivers, the vast majority of these individual tragedies could have been avoided. 

The human cost of this carnage is incalculable.

Where we can begin to quantify the loss, however, is in strain on the medical and insurance sectors, and the loss of economic productivity. Antiquated cars speeding down badly paved roads is also bad for the environment. On many levels, the malaise on our roadways impacts our lives.

It also helps steer away foreign investment and foreign human capital – who wants to move to a place where their family is threatened daily by a nation of irresponsible morons playing bumper tag?

And while foreigners can choose to stay away, most Lebanese have little choice but to remain here and run the gauntlet each and every day they venture out on our lawless roads.

In the same week as the fatalities were piling up, Lebanon’s Internal Security Forces General Directorate issued figures showing traffic fatalities had dropped somewhat compared to previous years. With fatalities still ludicrously high, however, this is no reason celebrate.

Ironically, it is only the fact that our roads are in such bad condition that the body count is not higher. Imagine the death toll if we had European-style highways on which Lebanese drivers could give full expression to their juvenile need for speed.

The government must act. Lebanon should not be a country where children have to risk so much just to cross the street, fearing drivers who, by and large, conform to no road regulations and who know that law enforcement agencies will do nothing to oblige them to. This must end.

How many people have to die before the state wakes up?

November 26, 2010 0 comments
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Economics & Policy

Less water every day

by Sami Halabi November 3, 2010
written by Sami Halabi

 

Pierre may be covered in grease, but he is a happy man. Since he joined the family business five years ago, this has been his best year to date. “Actually, it’s been one of the best years ever,” he says. Pierre and his family are in the water transport business, and through the summer and into the autumn he has been busier than ever, shuttling from one side of the capital to the other cashing in where successive governments’ lack of policy formulation has left the state unable to adequately provide a basic human necessity.

This year has been particularly dry due to the low amount of snowfall last winter. The season for private water supply typically starts around July and, in theory, ends in October when the first rains start to fall. As Executive went to print at the end of October, Pierre’s business was still booming. Last year, he bought a new water truck and says he has easily covered his investment. That’s because over the course of the peak summer season when water is sparse, prices have risen from a minimum of $6.60 per cubic meter (CM)  (depending on whether the water tank is on the ground or on the roof) to reach at least $13.30 per CM and up to $20 per CM at the end of last month, says Pierre with a smirk.

Pierre’s continuing success is not surprising given that the World Bank (WB) estimates that 75 percent of total household water expenditure in Lebanon is spent on water provided by the private water market. The sector as a whole is estimated to rake in some $87 million per year.

In theory, all households should receive an average of 1 CM per day, but in reality the amount of water that comes depends on two factors: the number of hours water is provided by the local water authority, if any, and whether the household decides it wants to follow the law. Because of the government’s previous apparent disinterest in organizing the sector, instead of meters and a pay-as-you-go system, households in Lebanon pay one annual lump sum that is disconnected from actual consumption. The cost ranges from $156.5 in Beirut and Mount Lebanon to $117.4 in the Bekaa. Businesses have a different tariff structure depending on the type of establishment.

The only mechanism in place to regulate supply is a “gauge,” basically a plastic hole fitted to the pipe that brings water to households. “Those who remove the gauge get more and those who keep it get less than 1 CM per day,” says Abdo Tayar, advisor to the minister of energy and water and the person spearheading the country’s water strategy formulation.

Depending on the season and the location, water is supplied daily from three to 22 hours per day, according to data from the Ministry of Energy and Water’s (MoEW) draft water strategy acquired by Executive. Speak to Beirut residents in the summer, however, and it is not uncommon to hear them complain of days on end without water. That’s because, unlike electricity, people outside the capital have considerably better supply than those inside it. Officially, residents of Beirut receive three hours of supply per day in the low season and 13 hours in the high season, while the residents of north Lebanon receive 22 hours of supply year-round. Perhaps due to the fact that a private contractor manages water distribution in Tripoli, the city receives running potable water 24 hours a day. 

No good reason

The lack of water at the tap would perhaps be understandable if Lebanon was as arid as Jordan or Saudi Arabia. But Lebanon is the only country in the Middle East that does not contain a desert and comes second only to Iraq in terms of renewable water sources, according to the Food and Agriculture Organization of the United Nations (FAO). The three main river basins cover about 45 percent of the country and Lebanon is littered with springs and small tributaries.

Continuity of water supply (hours per day) - Lebanon

But even with these resources, if water is mismanaged, the Lebanese might as well be living in the middle of the Sahara. According to the World Bank, “if no actions are taken to improve efficiency and increase storage capacity, it is estimated that the seasonal imbalance of water resources will lead to chronic water shortages by 2020.”

According to a report by the global water consultancy Global Water Intelligence, Lebanon is already a water-scarce nation, with renewable water resources estimated at 926 CM per capita per year in 2009: just below the 1,000 CM per capita per year threshold that defines ‘water poverty’. That too is expected to fall to 839 CM per capita per year by 2015 because of population growth, and that’s before climate change is taken into account.

“We are going into a phase where we are going to have less and less snow and more and more rain,” says Nadim Farajallah, professor of hydrology and water resources at the American University of Beirut (AUB). “Snow is what recharges our ground water; rain just runs off into the sea.”

Even with all these signs pointing to impending disaster, the real problem may in fact be far worse, since no one really knows the exact amount of Lebanon’s water resources. In the late 1960s and early 1970s, the United Nations Development Program (UNDP) mapped Lebanon’s underground geological structures, including its aquifers. Until today the country has not performed an assessment of how much water these aquifers actually contain or how they can be exploited, and the UNDP’s maps do not cover all of the country, according to Tayar at the energy and water ministry.

Farajallah adds that, “Money has to be spent on this. We need to look at each aquifer, characterize it, understand how much it yields and what is a safe yield. You have to extract as much as you recharge if you want to sustain your source.”

Waste water flows from a storm drain onto Beirut
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November 3, 2010 0 comments
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Finance

A new era of innovation starts in the Middle East

by Shaun Young November 3, 2010
written by Shaun Young

Here’s a story you may recognize.

Ten years ago, two young Jordanian entrepreneurs founded an internet services company to foster an online community through which Arabic speakers could access and generate content. At the time, Arabic-speaking Internet users were only in the thousands and there were no regional venture capital (VC) funds. Undeterred, the entrepreneurs continued to experiment with different business models in the Web 2.0 space until they found one that worked. With some financial support from their families, the entrepreneurs were able to set up an office in Amman, launch their business and become pioneers in developing content for the world’s 320 million Arabic speakers.

If you identified the company as Maktoob, you’d be correct, and know that the story’s climax is last year’s $164 million acquisition by Yahoo!, marking the first major deal of its kind in the Middle East.

But, you’d also be right if you answered Jeeran.

Sharing an origin and path similar to Maktoob, Jeeran is an ad-funded online community that incorporates blogs, videos and photo sharing. With more than 6 million unique visitors per month, Jeeran is one of the most popular blogging services in the Arab world.

The example demonstrates that in the Web 2.0 space in Jordan alone, there are many promising tech start-ups: Arabic animated content, technology and multimedia design firm Think Arabia has created an educational animated short to introduce Google’s products to Arab-speaking Internet users. There is online recruitment company Akhtaboot and social media management and advertising firm Modern Media.

Among these tech start-ups, is there the next Maktoob? Quite possibly. Regarding Jeeran, Think Arabia and Akhtaboot, investors are likely to be thinking of them as the Facebook, Cartoon Network and Monster.com of the Middle East. These are tested business models transplanted in nascent and growing markets.

The more interesting question may be: Who will be the Yahoo! for the next Maktoob? Investors from outside the region will likely rush in, but the entrepreneurial ecosystem has evolved since Maktoob and Jeeran launched. Jordanian VC fund IV Holdings has invested in Jeeran. Dubai-based Abraaj Capital has bought the rights to a Think Arabia cartoon series on entrepreneurship. A prominent Middle Eastern entrepreneur has already invested in Modern Media and Akhtaboot.

With increasing regional investment and mentorship, the vernacular for rising stars in the Middle East is shifting from “the next Google” to “the next Maktoob.” According to Aramex chief executive officer Fadi Ghandour, “there is the potential for more ‘Maktoobs’ throughout the region right now. The challenge is supporting them, because several markets are more than emerging — they’re ready to explode. ”

Elevating entrepreneurship that generates the greatest impact

Small to medium-sized enterprises (SMEs) are prevalent throughout the Middle East. In April this year, the United Nations Economic and Social Commission for Western Asia (UN-ESCWA) Executive Secretary Bader al-Dafa reported that SMEs account for over 90 percent of businesses in the Middle East. Dafa added that SMEs build national economies through the job opportunities created for young people, the reduction of unemployment rates and increases in GDP.

If SMEs are a considerable driver of job and wealth creation in the region, it’s essential to support them. However, given that SMEs are such a large percentage of all businesses in the region, it seems only practical to identify and support the entrepreneurs who have highest potential and impact.

Endeavor is the global organization that pioneered the concept of “High-Impact Entrepreneurship" in emerging markets. The nonprofit identifies and supports entrepreneurs with the greatest potential for creating jobs, prosperity and a culture of innovation and investment. For 13 years, Endeavor has selected and supported 539 ‘high-impact’ entrepreneurs from 349 companies that have generated more than 130,000 jobs and $3.5 billion in annual revenues.

In its four years of operation in the Middle East, North Africa and South Asia (MENASA), Endeavor’s portfolio of high-impact entrepreneurs has grown rapidly (see chart). As of October, Endeavor was helping 41 companies that generate more than $163 million in annual revenues and provide 3,842 jobs across the MENASA.

“When Endeavor launched in 1997 with offices in Chile and Argentina, the landscape in Latin America looked similar in many ways to the Middle East today. I’ve been knocking down the doors of Silicon Valley VCs to let them know that the time for the region is now,” says Endeavor co-founder and CEO Linda Rottenberg.

Within the MENASA portfolio, there are companies that have grown into large enterprises and have become role models to aspiring and fellow entrepreneurs. For example, Pharmacy 1, the leading drug store chain in the Middle East, or Airties, the first company to introduce MESH networking technology suited for emerging markets.

However, as Endeavor has witnessed in Latin America, many more entrepreneurs can thrive given an integrated and international ecosystem of entrepreneurs, investors and mentors.

 Argentina to Egypt: a comparison of emerging market entrepreneurs

Egyptian entrepreneurs Ahmed Metwally and Mostafa Hafez head Nasr City-based Timeline Interactive, which develops video games that can be purchased and downloaded online. In 2009, Timeline released CellFactor, the first downloadable video game to use sophisticated 3D visuals and game play physics in five languages and for $10.

Founded in 2005, Timeline has already gained globally recognized partners and clients. The company is the first and only video game studio in the Middle East certified by Microsoft and Sony to develop games for Xbox360 and PS3. Timeline is creating a gaming ecosystem in Egypt by training engineers and cultivating demand for high-end games.

Metwally and Hafez also position themselves more broadly within the entrepreneurial ecosystem in Egypt. They understand that few investors and entrepreneurs in the Middle East take the initiative to become part of such a new movement. On another continent and in the same year Timeline launched, Mariano Suáraz Battán and Patricio Jutard founded Three Melons in Argentina’s nascent video game industry. After raising financing, the duo created their first game connected to advertisers, called an “advergame.” The launch of the company’s Indiana Jones LEGO game drew more than 10 million users worldwide, and more than 800,000 people every day play Bola, the studio’s first social game, on Facebook and Orkut.

Fellow Argentine and serial entrepreneur Wences Casares mentored Three Melons since its inception, and Battán and Jutard were able to raise $600,000 from Santander Bank. Jeff Brody of Silicon Valley-based Redpoint Ventures provided strategic advice to Three Melons during its acquisition by Silicon Valley social gaming firm Playdom. In July 2010, Disney acquired Playdom for $763 million.

Both Timeline Interactive and Three Melons started out with under a million in annual revenues, navigated the forefront of a regional market, developed a landmark product and won global recognition. The difference is that Mariano and Patricio benefited from a rapidly-developing ecosystem: the global and local network of investors, mentors and fellow entrepreneurs that catapulted Three Melons to the next level.

The catalyst of an established network composed of global and local investors, mentors and entrepreneurs, separates a country of high-impact companies and one of high-potential companies. Take Colombian based fitness center Bodytech and Turkish gym B-Fit or mobile phone software solutions providers ComperanTime of Brazil and Javna of Jordan, and the trend continues.

In these cases, the Latin American companies generate more impact — in annual revenues and jobs — than their Middle Eastern counterparts. Seasoned entrepreneurs like Fadi Ghandour and Maroun Chammas are set to change this. Charles el-Hage, former senior partner (now retired) at Booz & Company, says: “Entrepreneurs in the Middle East are not only creating innovative, high-growth, globally-competitive enterprises, they are assuring future generations of young entrepreneurs in the region that they can be next.”

“How soon?” not “What if?”

In Young World Rising, author Robert Salkowitz says the most important business story of the next decade is the convergence of three powerful trends: demographics, technology and entrepreneurship. The Economist addresses the union of these elements in a recent article on the rise of young entrepreneurs in emerging markets. In terms of trends, the much lower median age in many of these countries in 2020 is only the start (see chart above). Younger entrepreneurs are leading the internet technology revolution and have the uncanny ability to identify and shape new markets. They exchange seniority and security for risk and returns, and having succeeded with the trade-off, create a middle-class segment that has the wherewithal to also embrace risk. People in this group either have benefited from or are inspired to become entrepreneurs.

The article spotlights companies from Argentina to Ghana and concludes: “The next Facebook is increasingly likely to be founded in India or Indonesia rather than middle-aged America or doddery old Europe.” The article’s conclusion is provocative, but not as much as its omission: nowhere is a company or entrepreneur from the Middle East mentioned.

In the Middle East, technology, unemployment and innovation will start to expedite the development of the entrepreneurial ecosystem. It will happen by necessity, if not by design.

People under the age of 30 account for 70 percent of the Middle East’s population and this demographic is the primary driver of Internet penetration rates, which reached 28 percent in the region in 2009. There is urgency as this demographic faces one of the highest unemployment rates in the world. According to King Abdullah II of Jordan, the region will need to create over 200 million jobs by 2020.

Where established employers fail to provide them, many entrepreneurial young people will take matters into their own hands; in June 2009, Qatar-based nonprofit Silatech reported that 26 percent of Arab youth are planning to open a new business in the next year, in comparison to 4 percent of youth in the United States. 

With such a hunger for entrepreneurship, many aspiring and current entrepreneurs from the Middle East will participate in Global Entrepreneurship Week (GEW) in the region and the “Celebration of Entrepreneurship” conference in Dubai this month. Last year, 5.4 million participants attended GEW events in Endeavor-hosted countries. In the first quarter of 2011, Endeavor Lebanon will launch and, within the year, will support a portfolio of Middle Eastern entrepreneurs.

Who knows — one of them may be the next Maktoob.

November 3, 2010 0 comments
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Economics & Policy

Chinese whispers

by Gareth Smith November 3, 2010
written by Gareth Smith

 

With Russia, we remember centuries of territorial disputes, with the British their past control of our oil, and with the Americans we remember them supporting the Shah,” says a leading business journalist in Tehran. “There is no memory of China in our contemporary history, and therefore little emotion.”

On the other hand, Iranians are wary of cheap Chinese goods that have — as in so many countries — flooded the market, bankrupting domestic textile and shoe manufacturers. And there are rumbles too over the quality of Chinese technology in building the Tehran metro.

As a result, mixed feelings over China abound in Tehran as Iran’s relationship with Beijing becomes crucial both to its economy and its international policy. As the latest wave of United States-led sanctions squeeze Iran’s trading partners, including South Korea, many Iranian analysts are nervous about overdependence. This is political as well as economic; China now stands as Tehran’s main supporter in the United Nations Security Council, after Moscow’s decision in September not to supply the S-300 missile defense system signaled its disquiet with Iran.

In economic terms, the summer’s United States and European Union sanctions have increased China’s importance to Iran both as a supplier of gasoline and a buyer of crude. Sadegh Zibakalam, politics professor at Tehran University, warned in September of the dangers. 

“It would be most unpleasant if the Americans make trouble for the Chinese,” he wrote. “China has for some time decreased its investments in and oil purchases from, Iran… The claim that the sanctions have not worked and have forced us to blossom is all entertainment and propaganda.”

China has considerable investments in Iran’s energy reserves, including an agreement in principle to buy 10 million tons per year of liquefied natural gas (LNG) over 25 years from the largely untapped South Pars field. Sinopec, the Chinese oil group, has agreed rights to exploit the Yadavaran oil field in the southwestern Provence of Khuzestan, with reserves reported at 15 billion barrels.

But much Chinese investment is far from nailed down. Work at Yadavaran is overdue.

 There have also been reports in Iran that China National Petroleum Corporation (CNPC) has slowed down work on a master plan for the South Azadegan oilfield, despite Iran pressing it for a final agreement on a 70 percent stake. Under US pressure, Japan’s Inpex announced last month it would be relinquishing its 10 percent share in Azadegan.

CNPC has also trimmed its involvement in the second phase development of the Masjid Soleyman field in Khuzestan. Work seems far faster at North Azadegan, where engineering, procurement and construction tenders are expected this month after CNPC recently finished the front-end design.

Crude sales slowing

As a supplier of gasoline for Iran, China has become more important since operators including BP, Vitol, Trafigura, Glencore and Reliance ended sales earlier in the year because of threatened US action against suppliers. At the same time, there are growing, if inconclusive, reports that Iran is having difficulty selling crude. This could have a marked fiscal impact as oil sales account for around 80 percent of Iran’s foreign currency revenue and 60 percent of the government budget.

UN and EU sanctions exclude crude sales, but US banking restrictions have impeded the use of letters of credit, while EU restrictions on insurance deter shipping companies from sending tankers to Iranian terminals. Traders had been using Asia-based banks to open letters of credit, but recent sanctions announced by Japan and South Korea obstruct this option, leaving Chinese banks as the main source of finance for Asia’s trade with Iran.

Iran has reduced the amount of crude stored at sea since a peak in June of 40 million barrels, the highest offshore build-up of Iranian crude since 2008. But it still had 20 million barrels anchored offshore in late September, according to Reuters. The Paris-based International Energy Agency (IEA) said in September that Iran might resort to storing more oil in tankers “as new sanctions have the unintended consequence of squeezing crude buyers.”

Thomas Strouse, of Washington-based oil consulting firm Foreign Reports, has used Chinese customs figures to ascertain that Iran remains the third largest oil supplier to China, a position it has held consistently since 2005 behind Saudi Arabia and Angola. But from January through to the end of August, Chinese crude imports from Iran did decrease year-on-year by 24.7 percent to some 391,000 barrels per day.

Scaring the customers

Strouse argues that China’s reduced imports were less a consequence of Western political pressure than of Tehran’s uncompetitive pricing.

“There are a number of reasons for China’s reduced oil imports from Iran and not all of them are political,” he says. “China wants to diversify its supply, and this means reducing its dependence on Iranian oil imports. It would be logical to assume that the Chinese have made a geopolitical assessment that Iran may not be the most secure and stable source of supply in the future.”

But that is far from the end of the story. “Additional reasons for China’s reduced imports from Iran include uncompetitive pricing and reduced Chinese demand for Iran’s heavy crude,” says Strouse. “Japan, the other leading purchaser of Iranian oil, has also reduced its imports from Iran in 2010, offsetting this reduction by a surge in imports from Russia. A new supply of oil from Russia’s Eastern Siberia is seen as more favorable, not only because of its geographical proximity to Japan, but also because of the reduced threat of a potential supply disruption in a place like the Strait of Hormuz.”

 

In general, China wants a diverse supply as it pursues high economic growth, and Iran is not expected to increase production in coming years. But those in Tehran nervous at political and economic dependence on China will note that while China currently imports only around 8 percent of its oil from Iran, more than 15 percent of Iran’s oil exports flow to China. 

The centralization of Chinese buying increases the scope for geopolitical assessments in its decision-making. “Beijing can turn the tap off, if it wants,” says the Iranian business journalist.

China’s only two lifters of Iranian crude — Unipec, the trading arm of Sinopec, and Zhuhai Zhenrong — are both state-run, and they are also among the Chinese companies that have been supplying around half of Iran’s gasoline imports, exploiting the gap left by suppliers fearful of US sanctions. Overall, China will likely continue to take advantage of opportunities in the Iranian market, but will keep a watchful eye on its wider political and economic interests.

US officials have recently been saying that China is violating UN sanctions against Iran, and President Barack Obama has reminded the Chinese of their extensive interests in the United States. The American right wing has China firmly it its sights. “The US State Department estimates that companies have terminated between $50 and $60 billion in energy projects in Iran owing to the threat of sanctions, but European businesses remain concerned that Chinese companies will snap up their voided Iranian contracts if and when they withdraw,” said Mark Dubowitz of the Foundation for Defense of Democracies in September.

Iran knows it still offers opportunities for China. Both in government and among ordinary Iranians, there remains a deep-seated sense of the country’s rich natural resources.

If anyone around the world had forgotten this,  in October Iran declared a hike in its oil reserves estimates by nearly 10 percent to 150.3 billion barrels — just days after Iraq announced a 25 percent increase to 143 billion barrels in its reserves.

Iran also boosted its gas reserves figure by nearly 18 percent to 33.1 trillion cubic meters, cementing its position as the holder of the second richest gas resources after Russia.

But extracting those carbon reserves is far from easy with US, European and many Asian companies eschewing the market. Massoud Mir-Kazemi, Iran’s oil minister, warned earlier this year that the country required $25 billion per year in investment just to maintain current oil production levels. This figure is unlikely to be raised by Chinese investment or by issuing bonds. No wonder the IEA has forecast Iran’s oil-pumping capacity will by 2015 drop about 18 percent to 3.3 million barrels per day.

 

November 3, 2010 0 comments
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Finance

Q&A with Stefan Keitel

by Emma Cosgrove November 3, 2010
written by Emma Cosgrove

Stefan Keitel is managing director and global chief investment officer at Credit Suisse. He recently sat down with Executive to discuss how to best cash in on today’s investment trends, as well as a Credit Suisse fund that is raising some eyebrows.

E  What is the best way to take advantage of the upswing in emerging markets?

There are many ways to invest in emerging markets, which are definitely a long-term trend. It completely makes sense to go for emerging market equities. It completely makes sense to go for emerging market bonds. In both asset classes, we strongly recommend investment in local currencies.

Another way to invest in emerging markets that is quite interesting for some conservative United States or European investors is buying European or US firms which have a major stake of their business model dedicated to the emerging markets, let’s take Nestle for example. Nestle is a very conservative Swiss corporate and has one third of their business model dedicated to the emerging markets and that is also where one can invest indirectly into the emerging markets, so that’s the way we would like to go; catching the trend by buying a visible stake of the overall equity portfolio into the emerging markets.

E  Is there a reason you have not included [emerging markets index] trackers in this recommendation?

That’s more on the selection side. When we talk about portfolios, on one side we have the asset allocation decision. When we then talk about how to implement the emerging markets, to fill this allocation with life, then of course we have to find the right way to go for that. And here, you can also do it in different ways. I think the mixture is key.

You can go for active managed funds to go for ‘selection alpha’ [when managers’ performance is above market performance]. From my personal point of view, from our point of view, this is a good strategy because the emerging markets are not efficient markets. They are not comparable to the big US markets or the big European markets. The active fund manager can definitely manage ‘alpha,’ nevertheless you can also go for trackers to minimize risk and to go for broad diversification. That means we strongly recommend both.

But, when you compare the emerging markets with traditional markets, then it’s crystal clear that the best strategy to go into the emerging markets is an actively managed fund.

E  Do you feel that investors have lost trust in products coming from big names like Credit Suisse?

I would not say that it has something to do with the products from the big names. I think it is a mistrust of all types of structured products because the financial crisis clearly showed the disadvantages of structured products with regard to transparency and liquidity and sometimes understandability. I think these elements are now more or less a drag for the success of structured products.

E  Have you dropped any products since 2008?

No. Of course there is a kind of shift in thinking; I think now there is a bigger challenge to be able to explain the rationale behind [the product] because a client now puts more requests on the table. This has influenced [the industry’s] strategy in selling structured products. For the advisory space, structured products definitely make sense and can add value.

It is [with non-standardized discretionary clients] where you have to differentiate an individual customized concept, [to make sure] that it makes sense, but [structured products are] not for the standardized discretionary management.

E  Can you confirm that the “Emerging Markets Credit Opportunity” fund launched in August by Credit Suisse contains Israel’s Koor Industries, the Qatar Investment Authority (QIA) and Saudi Arabia’s Olayan Group?

This I cannot. I am responsible for the scenarios of the asset allocation and the concept and the philosophy as a CIO. And I think the fund managers and portfolio managers on the equity and fixed income sides have to deal with the different selection opportunities. This cannot be my job.

E  If you are involved in strategy then this has to affect you, no?

Not really, no.

E  Do you deal with individual clients?

In special cases, because we are explaining how to build up a strategy and how to run discretionary mandates and we do that for them. But in special cases, especially for the premium clients on the private client side or for the institutional clients, I as a CIO of course have to go to the table to be involved in the conversation. And that’s also a request of the clients. I think the big endowments and insurance companies, but also the ultra high net-worth clients, want to see the CIO. They want to hear from the CIO how they see the world and what is going on with the macroeconomics and the GDP and inflation/deflation story.

E  Have you had personal contact with your largest shareholders in the last month?

Every month on a frequent basis.

E  It seems logical then to say that you would have contact with QIA, Koor and the Olayan Group in the last month since the launch of this fund, which would be part of their portfolio…

No not in my specific case, no. We have also some other important people at the bank and I assume that they perhaps have been in contact.

E  Are you advising to buy gold right now?

I would not advise to buy right now but gold is my personal favorite topic since 2003. I think it is an ongoing story. I would buy gold but I would not give that misleading statement to buy it right now. I think my main call was to have bought it 10 years ago and use every consolidation phase and correction phase to add a portion to the gold market. And also on the global basis, I used the first opportunity to go to a 3 to 5 percent gold investment for all of our portfolios — for the discretionary space and also it was a recommendation for the advisory space. And I am still of the opinion that the gold trend is anything but over because I think there is mistrust in the world’s leading currencies right now, not only [regarding] the euro but [also] the British pound and others. And this is a main driving force for the gold price.

Investors definitely mistrust the stability of paper money and that is the reason that all of these big clients have now started to invest step by step into the gold market; to them, gold is a kind of diversification and a kind of insurance against all negative eventualities and that is the driving force for gold.

We are pretty convinced that it is extremely difficult to come back to a scenario where these big investors have trust in paper money because the imbalances are not getting smaller, they are rather getting bigger because [Western governments] are going to stimulate [their economies] further.

When I look at the portfolios of the big clients, many of them are talking about gold, but in their portfolios, they have allocations of 0.5 percent, 1 percent or 2 percent. There’s much room for further gold interest. Gold is not a safe haven — gold is a very volatile asset class. But I think it is extremely necessary for the overall portfolio. And when gold shows volatility, that’s another buying opportunity for the long-term because it is a long-term strategic story and not an asset class you should invest in tactically.

 

 

November 3, 2010 0 comments
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Economics & Policy

Food prices in check

by Executive Staff November 3, 2010
written by Executive Staff

Food prices in check - LebanonLast month the cabinet endorsed a measure to allow for price controls on food products that would assign levels of “acceptable profits,” according the Agriculture Minister Hussein Hajj Hassan. The ministry reported that prices of tomatoes have risen by almost 100 percent in the past four months alone, with one variety up as much as 400 percent. Hassan also attacked the policy of former Minister of Economics and Trade Sami Haddad for issuing a ministerial decree that annulled a previous legislative decree that had set a profit margin of 27 percent for middlemen dealing in various foodstuffs and household items. The minister also stated that he expected meat prices to remain high until after Eid el-Adha. Hassan said that his aim was to lower the import-export ratio for food in the country from 80:20 to 60:40.

November 3, 2010 0 comments
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Finance

Banking Special – Asking for the moon

by Emma Cosgrove November 3, 2010
written by Emma Cosgrove

 

When Beirut’s wealth managers talk about the financial crisis, their language is decidedly emotional. They speak of the “support” they gave their clients as they watched their portfolios crumble. They say that their clients “suffered,” that they were “hurt” and “scarred.” Clients felt betrayed and blindsided, as “a major part of these losses were derived from risks that they were unaware of,” said Dory Hage, head of advisory and asset allocation at Banque Libano Francaise. 

Now that the bloodletting is mostly over, the worldwide economic recovery has created a unique financial climate in which wealth managers and their clients are feeding off the slowly healing global economy to mend their own fortunes even quicker.

But while they may both be in a far happier place than they were a year ago, the travails they went through together have changed the nature of the game.

According to consultancy firm Capgemini’s annual World Wealth Report for 2010, the number of high net-worth individuals (HNWIs) — those with over $1 million in investable capital — worldwide grew by 17.1 percent in 2009 after decreasing by 14.9 percent in 2008. The total fortune of these individuals also grew last year, increasing 18.9 percent from 2008 to reach $39 trillion.

But in the Middle East, the number of  HNWIs only grew by 7.1 percent and the collective fortune of the region increased by just 5.1 percent. The region’s HNWIs are regaining their wealth slower than much of the rest of the world, and they’re not happy about it. Lebanese investors in particular are proving to be an especially intractable bunch.

The Where

George Tabet, head of private banking at BLOMInvest said he’s seen a reflexive abandoning of foreign banking hubs in favor of returning home to Lebanon’s alluring interest rates.

“Big clients used to put a big part of their money in big banks in Switzerland, Luxembourg or Singapore. Now, after the crisis hit the big banks of the world, they [decided] to move a big part of this money to Beirut,” he said.

Investors we drawn by the high returns offered on deposits in local currency (averaging 5.72 percent in August according to Banque du Liban, Lebanon’s central bank.) Even dollar rates at Lebanese banks remain attractive on a global scale, with the weighted average rate on offer at 2.78 percent as of August.  And though these rates attracted record capital inflows into Lebanese banks, they also raised expectations and demands from clients who have grown more risk averse but still want to make higher returns than their bank account can provide. 

The Who

After a client decides which institution will guard what is left of his piggy bank, he has to decide how much control he wants over how his cash is invested. And opinions differ as to which way clients are tending.

Some say that discretionary clients, those who turn all their investment decisions over to a wealth manager, have become more prevalent as clients have realized that they have neither the knowledge nor the time to manage their own money in what have proven to be complicated and volatile times.

Nael Raad, deputy general manager of Ahli Investment Group Lebanon is of this belief. “In these kind of markets you can really get hurt. I think people tend more to give their money to asset managers. They are less trusting in their own capabilities.”

Naji Mouaness, head of consumer banking at Standard Chartered Bank Lebanon agreed that some form of discretionary relationship leads to better results.

“There is a science behind investing, and a traditional do-it-yourself approach driving conventional decisions may often not lead to the best result,” he said. “Deciding where to invest and investing is just half the job done, since our needs will evolve over time… regularly monitoring and re-balancing your portfolio is very important so that it is always in line with your changing requirements.”

Others claim that after incurring the losses of the past two years, clients have never been more insistent that every decision regarding their portfolio be their own.

Roula Habis, general manager of Middle East Capital Group, like most of the managers Executive consulted for this report, prefers that clients be involved in deciding the course of their portfolio. “Even if the market goes down, they will understand why their portfolio went down. If you just manage their money discretionarily, you’ll be totally responsible.”

Just as clients’ preferences as to who controls their portfolio have shown conflicting trends, mangers say that their financial behavior has been similarly erratic.

“People either liquidated their portfolios and went into real assets like real estate here in Lebanon because there was a boom, or they took more risk and started trading their portfolios,” said Mohammed al-Hamidi, managing director of AM Financials.

The risk-taking clients looking to take advantage of market volatility forced wealth managers to change the nature of their jobs.  “The period where there is a boom and bust is becoming shorter and shorter. And the reaction of the markets, because of technology, is becoming much faster and much more severe… we have to be more agile,” said Hamidi.

With this volatility, many of the traditional safe stores for capital have lost their utility, making way for other asset classes whose relative volatility seems less in such unstable markets.

“For the last two years or so, more conservative investments proposals were requested by clients; fixed income products, bonds, inflation-hedged products and the like,” said Reto Bartels of UBS’s Beirut representative office.

“Bond prices went up and more risky asset classes like equities became cheaper. In fact, equities look rather inexpensive today, and the next trend might be that the risk appetite of the investor is coming back again and investments in equities and commodities might increase, with rising prices as a consequence.”

Beirut’s financial minds all have their opinions on where these trends are going and how to seize the market as it morphs with fits and starts into whatever the brave new world of the financial recovery will look like. Until we reach that high ground again, the traumas of the crisis will remain fresh in client’s minds, and fully understanding current operating conditions is as important as ever.

To address this need, Executive has pooled the expertise of the best minds in Beirut to help investors be the masters of their own fortunes.

November 3, 2010 0 comments
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Since its first edition emerged on the newsstands in 1999, Executive Magazine has been dedicated to providing its readers with the most up-to-date local and regional business news. Executive is a monthly business magazine that offers readers in-depth analyses on the Lebanese world of commerce, covering all the major sectors – from banking, finance, and insurance to technology, tourism, hospitality, media, and retail.

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