Economics & Policy

Executive Insight Booz and Co

by George Atalla
written by George Atalla

Public–private partnerships (PPPs) have helped many countries in the Middle East modernize their highways, upgrade their communications infrastructure and build new power plants. But such partnership models have proven less effective for governments seeking to outsource certain services, such as health care.

Handing over such services to the private sector requires a greater level of collaboration and trust between governments and their partners than straightforward infrastructural works. Creating an electronic payments system, for instance, goes to the heart of what government does and affects its everyday transactions in a way that the construction of a sewage plant does not.

To better manage such services, the Egyptian government is developing a new approach to partnership called ‘joint ownership’, which could be broadly applicable throughout the region. This approach transforms the way in which public services projects are structured and offers opportunities for private sector entities around the world to capitalize on the region’s rapid growth.

In the joint ownership model, both the government and the private entity get a stake in a newly formed private company. The government awards a contract to the jointly owned company, giving it the right to be the sole provider of the service in question. It also contributes regulatory support, clearing a path for the company to operate without interference. The private sector contributes the technical and management know-how, as well as a portion of the financing for the project.

Successful system

The Egyptian government conducted its first experiment with the joint ownership model to launch a nationwide e-payment system in 2007. The newly formed company, e-finance, was created with an initial investment of 60 percent from the government and 40 percent from its private-sector partner, and was granted concession rights that made it the sole entity allowed to operate an electronic payments platform for the Ministry of Finance.

The Egyptian government was also able to ensure the buy-in of the banks, pension fund managers and others that needed to be part of the system. The private partners, meanwhile, provided know-how in the areas of software development, banking, automation, and e-services, as well as designing, installing, managing and maintaining the e-payment system. The new system allows civil servants, who used to line up at cashiers’ windows every week for cash payments, to receive their salaries automatically via an ATM card.

Hundreds of thousands of pensioners now receive their income from the government in the same way. The company is expected to become profitable over the next several years, once the infrastructure is in place and the system reaches its projected number of processed transactions.

The experiment proved so successful that the Egyptian government is now considering other areas in which joint ownership might be effective. For instance, there are opportunities to replicate this model for services as diverse as carrying out customer handling and data processing at customs, providing state-of-the-art training to Egyptian and regional civil servants, and even for conducting government-wide procurement services.

 There is a caveat to these partnerships: They are short-term commitments. Governments, after all, should not be the owners of companies. Their economic role should be to set and enforce the regulations that enable competitive markets. But as long as both parties understand this condition, they can reap several immediate benefits from joint ownership.

Complimentary pairing

Most importantly, the partnership offers access to resources that neither side would independently have access to. The public partner gets the technical, financial and management resources of its private-sector partners: the private sector’s often higher salaries mean it enjoys better-trained workers and deeper expertise than exists in government.

In turn, the public partner can offer concession rights and support regulatory changes that may be vital for the new company’s success.

Second, the venture’s risks are shared in a way that can increase the initiative’s prospects of success. For instance, political, legal and environmental risks are borne by the public partner; after all, the public partner can directly influence outcomes in those areas. Risks relating to the design of the service or financing fall to the private partner, which presumably has more expertise in those areas.

Finally, jointly owned companies offer straightforward exit strategies in the form of initial public offerings or strategic sales that are not available in most other types of PPPs. In particular, if the company is prospering, the public partner can push for an initial public offering, giving it a way to cash out of its position. Or the public partner can sell all or part of its stake to a strategic investor.

The same structure that bestows benefits also creates some risks. If the government has granted concession rights, the new company may be a monopoly player in the market. To address this issue, contracts need to clarify what services must be provided and what is reasonable for consumers to pay.

The joint ownership model also creates a conflict of interest for the public partner. The government would normally push to maintain low prices for its services, but as a stakeholder in the company, it should be maximizing profits. This risk can be diminished by creating a separate entity within the government to monitor the performance of the company.

In the long term, the real priority for any Middle Eastern government must be to figure out what fixes are required in its legal, regulatory and institutional frameworks, so that its private sector can launch public-services projects without such intensive government involvement.

This is the true sign of success — when the government doesn’t need to offer itself up as an owner in order to spur private sector participation. Until that happens, joint ownership will remain a potential short-term strategy.

0 comments
0 FacebookTwitterPinterestEmail
Finance

Life saver Lang

by Emma Cosgrove
written by Emma Cosgrove

Before 2006, Near East Commercial Bank (NECB) was going nowhere. “There was no increase in revenues, no increase in assets — no increase at all,” said Dominique Lang, the Swiss banker who has acquired the task of reviving it. “It was, in our opinion, a dormant company, but it had a good name and good staff.”

Where the Central Bank saw a stain on Lebanon’s thriving banking scene, Lang saw an opportunity.

Playing the long game

Lang, a Swiss banker for nearly 30 years and chairman of Nomina Finance in Zurich, and his business partner Alfred Wiederkehr finalized the acquisition of the bank in April of this year — a deal nearly 10 years in the making.

NECB has been located at the Place de Beyrouth since 1978 when SNA insurance group owned it, before the Caland family took control.

Since 1993, Lang had been aware of Lebanon’s banking potential through a business relationship with the Caland family, and he became a shareholder at NECB when he and Wiederkehr wholly subscribed to a $9 million capital increase at the bank in 2006, gaining a 43 percent stake. Lang remained a shareholder until 2007, when the Central Bank began putting pressure on NECB to shape up its neglected balance sheets. He then became chief executive and soon enough, the sleeping bank began to show signs of life.

And indeed, the Central Bank’s concerns were not unwarranted. At end-2007 NECB had $142 million in assets and just $17.6 million in loans, with 40 percent of these considered “doubtful” and 10 percent classified as “bad debt.” The bank posted $3 million in losses that year.

But soon after Lang took over the management of the bank, he began to clean house.

“The bank had a big portfolio in real estate which was bringing in no money so we sold the biggest part of this portfolio. The operational result was then in the black,” he said.

Lang dropped most of this underperforming portfolio in favor of much higher-yielding treasury bills. This move significantly improved the bank’s interest margin and sped up the transition from red to black. The recovery was helped as well by the fact that NECB managed to spend significant time in red figures without losing a single depositor — a feat Lang attributes to the relationships between bank staff and clients.

In 2008 the bank made $283,000 in profits; 2009 saw more growth to almost $2 million. And according to Lang, the bank has already generated $2.6 million in profits for the first half of 2010 “The bank is now back to a normal situation,” he said.

It was this success in bringing NECB back from the brink, combined with the owning family’s dwindling interest in the bank that led Lang and Wiederkehr to buy the remaining 57 percent of the bank. The decision was made in January of 2010 and the deal, the value of which both parties have agreed not to release, was approved by the Central Bank in April.

According to Lang, the central bank was very receptive to the acquisition. He says that the close involvement of the Central Bank and Banking Control Commission (BCC) with regards to strategic planning has helped, and was not a hindrance as some of the bigger banks often complain.

Selling secrecy

Now Lang has the job of improving the bank past mere profitability.  A feasibility study is currently being conducted regarding the opening of two new branches in Beirut and Lang plans to continue the bank’s niche profile, focusing mainly on retail and private banking. He plans to focus on small and medium loans (ranging from $50,000 to $500,000) as smaller loans have a better profit margin and entail much lower risk.

Further, Lang says that the banking secrecy law and the know-how within the sector are good selling points to international clients.

“We see a slight demand from people in Europe, in Switzerland, to have an alternative to banks in Europe for the secrecy,” he said. “Lebanon is one of the remaining countries that has a law for banking secrecy. Until now we have brought [international] private clients for an approximate amount of $250 million.”

0 comments
0 FacebookTwitterPinterestEmail
Comment

A perversion of principles

by Michael Young
written by Michael Young

Recently, The Economist took an interest in Arab autocracy, titling a leader on the subject “Thank You and Goodbye.” The premise for this statement was that the leaders of Egypt and Saudi Arabia were getting old, therefore change is coming to both countries “for good or ill.” Change is indeed coming, but the rule in the Arab world has tended to be that the more things change, the more things remain the same.

The tenor of the leader was interesting, if for the wrong reasons. After listing the advantages and disadvantages of the policies of Egypt’s Hosni Mubarak and Saudi Arabia’s King Abdullah, the magazine carried its argument into a minefield of “ought to.” It advised that the regimes in both countries ought to do this and ought to do that, without really explaining why they would want to do so, given that they have spent decades avoiding the path of rule of law, democratic elections, human rights, and so on.

 

What positive developments there were during their respective rules came on relatively non-political fronts. Mubarak has managed to bring in investment, causing the Egyptian economy to grow quite rapidly of late. King Abdullah has sought to loosen the reins of the Saudi system by expanding education and opening up avenues for internal dialogue. However, as the framers of the Barcelona Euro-Mediterranean process learned years ago, against their initial hopes, Arab regimes’ economic and social liberalizations have not generated much in the way of political openness.

One reason for this is that the business community in the Arab world has tended to avoid rocking the political boat. Prominent businesses or businessmen often have established close ties with regimes (when they are not actually also regime figures), and therefore see few advantages in challenging a profitable status quo. Income disparities in the region also tend to be great, while higher education is of relatively low quality, making it even more difficult for a middle class to emerge and challenge the order in place.

That conundrum is one reason why even usually sharp observers, not least The Economist, are obliged to resort to the circular “ought” formulation – condemned to repeat, with little expectation of a response, what the Arab world needs by way of amelioration, without which reform would be impossible.

But this circular argument also leads to a paradox, one related to revolutionary change: Arab regimes are bad, but they are often better than their likely alternatives, namely militant Islamists who would impose far worse governance systems than the ones we have today. However, for these Islamist oppositions to be marginalized, Arab regimes need to open their systems up politically and economically, to reduce the popular discontent that allows the Islamists to thrive. Yet here is where things goes sour: If regimes become more tolerant, this could be exploited by the Islamists to expand their power, and many have actually done so quite successfully at the ballot box, as in Algeria, the Palestinian territories, Lebanon and even Egypt.  Where does this paradox lead?

Greater acceptance in the West for Arab regimes that abuse their societies, since this keeps Islamists at bay; and a higher likelihood of revolutionary change, because if a regime falters — as happened in Iran in 1979 — the Islamists, having no alternatives, will embrace violent and absolute transformation.

In other words, if Arab regimes untighten their fists, stability may suffer, and if they keep the fist tightened stability may eventually suffer too, in a dramatic way. So the West, particularly the United States, which provides many Arab regimes with vital financial and economic aid, is at a loss about what to do. That’s why the Western states also have a package of ‘oughts’ in hand, though few of them are ever adopted that could threaten the regimes implementing them. 

Here is an irony: standing against those lamenting Western “neo-imperialism” in the Middle East is a reality of harsh Arab sovereignty. It is a sovereignty based on instilling the fear in the hearts of the outside world, the West in particular, that tinkering with the machine of the dictators may have terrible consequences. So Arab regimes everywhere remain free because their people are kept in chains.

0 comments
0 FacebookTwitterPinterestEmail
Comment

Grand Ayatollah Mohammed Hussein Fadlallah, 1935-2010

by Nicholas Blanford
written by Nicholas Blanford

Sayyed Mohammed Hussein Fadlallah was a difficult man to pigeonhole, although many tried. From the early 1980s, he became, in the minds of many, synonymous with Hezbollah and was forever described as the group’s “spiritual leader” who had personally blessed the suicide bomber who blew up the United States Marines’ barracks at the Beirut airport in 1983. It was a tag that endured, even though Fadlallah eschewed a formal role within Hezbollah.

The claim that he blessed the Marines’ barracks bomber has also been put down as a rumor deliberately circulated by Lebanese military intelligence during the presidency of Amin Gemayel to discredit the cleric.

Fadlallah, despite being a leading advocate of an activist and modernist Islamism, tended toward dispensing guidance and advice and disdained the parochial obligations of running a political institution. Yet his teachings and writings served as an inspiration for Hezbollah’s founders and he continued to wield influence from afar during the party’s formative years. Among his early followers was a skinny bespectacled youth named Hassan Nasrallah, who even before reaching the age of 10 was a regular attendee at Fadlallah’s sermons in Nabaa.

Even though the official marja (religious reference for followers) for Hezbollah is Iran’s Ayatollah Ali Khameini, it is no secret that many members of the party actually followed Fadlallah. I know of one Hezbollah fighter who was utterly inconsolable on hearing of Fadlallah’s death and in his grief made unflattering comments about Khameini.

Fadlallah was a magnificent public speaker with a showman’s knack for whipping up an audience. But in the 1970s, he faced stiff competition from Imam Musa Sadr for the hearts and minds of the Shia community. Sadr was an Iranian of Lebanese ancestry who had arrived in south Lebanon in the late 1950s and soon made a name for himself as a progressive and dynamic cleric determined to better the lot of the marginalized Shia. He established the Amal Movement in 1975.

Both Sadr and Fadlallah were brilliant orators, but there the similarities ended. Sadr was slim, tall, charismatic, enlivened with boundless energy that saw him holding meetings, lectures and sermons up and down the country. Fadlallah was short and portly, a scholastic figure who centered his activities on his Nabaa neighborhood, glossing over doctrinal differences between Shia and Sunnis and emphasizing the unity of all Muslims.

Sadr’s purview essentially was limited to the communal betterment of Shias in Lebanon within the Lebanese system, while Fadlallah advocated the creation of a modern Islamic state and espoused a universal Islam that ignored man-made frontiers.

Sadr regarded Palestinian militant activities in south Lebanon with misgivings because of the suffering it brought upon his Shia constituents, but Fadlallah embraced the Palestinian cause, considering the eradication of the Zionist state as a moral and Islamic imperative.

Sadr vanished, mysteriously and famously, on a 1978 trip to Libya. For many Shia, dismayed at the more secular direction of the Amal Movement under the subsequent leadership of Nabih Berri, it was natural to gravitate toward the bolder views of Fadlallah.

Fadlallah originally objected to suicide bombings, but changed his stance in the mid 1980s when Lebanon was in the grip of Israeli occupation. In justifying suicide bombings, he said “there is no difference between dying with a pistol in your hand or exploding yourself.” But he pointedly added that suicide operations could not be condoned lightly and that if alternative means of attacking the enemy were available then they should be used instead.

Fadlallah supported Hezbollah’s goal of establishing an Islamic state in Lebanon, but recognized that given Lebanon’s pluralistic society, the attainment of an Islamic state was an impossibility in the short term. His perspective helped shape Hezbollah’s decision in the late 1980s to reverse its outright rejection of Lebanon’s power-sharing system of governance and to submit candidates for Lebanon’s parliamentary elections in 1992.

NICHOLAS BLANDFORD is a Beirut-based correspondent for The Christian Science Monitor and The Times of London

 

 

 

0 comments
0 FacebookTwitterPinterestEmail
Comment

Shifty as a desert fox

by Paul Cochrane
written by Paul Cochrane

As readers of a business magazine, I am no doubt preaching to the converted, but it really does pay to scan the financial pages to know what’s going on with the movers and shakers of this world. If you had confined yourself to reading ‘straight’ news and the op-ed pages, or watching TV news for that matter, you would have missed out on the biggest media deal in the Middle East this year. A deal that has been a long time coming and is set to have major implications for the region’s TV landscape.

In February, global media ‘emperor’ Rupert Murdoch, owner of News Corp, acquired a 9.09 percent stake for $70 million in Saudi Prince Alwaleed Bin Talal’s Rotana Group, which has six TV channels and is the world’s largest producer of Arabic music.

Murdoch has been itching to get into the booming Middle Eastern market to extend his control over the planet’s media consumption, with an empire already spanning the Americas, Australia, Europe and Asia with the Fox network, the Star TV network, Sky News and a plethora of newspapers including The Wall Street Journal   (WSJ) and The Times of London. Signs of News Corp’s entry into the region started with Rotana launching two Fox channels last year. Then came the stake in Rotana, which sparked speculation that a Fox Arabic news channel was in the pipeline.

Bin Talal denied this in February, but in July the prince announced that he is to launch, independently of Rotana, a 24-hour Arabic news channel in partnership with the Fox network. Murdoch’s move into the region then took a further twist in mid-July, with news that British pay-TV broadcaster BSkyB, 39 percent owned by News Corp, is in talks with a private Abu Dhabi investor to launch an Arabic news channel.

Such developments would have previously lit up the news wires and the blogosphere, as happened when News Corp bought Dow Jones, owner of the WSJ, in 2007. Instead, the News Corp-Rotana deal seemed as if it had never happened. Few regional newspapers ran any form of commentary, and the news was nowhere to be seen outside the business pages.

Perhaps editors assumed that Bin Talal’s news channel, whenever it may launch, will have little impact, given that there are 487 Arabic satellite channels already broadcasting in the region. But one might have thought that in the Arab world, of all places, there would have been more than a muted response to the entry of a media empire that banged the drums of war louder than any other organization for the invasions of Afghanistan and Iraq, and, moreover, is rabidly pro-Zionist.

The more likely reason for the media’s silence is more alarming.  Elsewhere, when News Corp expanded, people decried the fact that media consolidation would lead to less diversity in opinions and affect freedom of expression.

Yet in the Middle East, the major media outlets and newspapers have long been in the hands of the few. Bin Talal is the biggest shareholder in News Corp outside of the Murdoch family, at 7 percent, while he owns the majority stake in the Lebanese Broadcasting Corporation’s (LBC) satellite channel and is a stakeholder in Lebanese newspapers An Nahar and Al Diyar. Other Middle Eastern media heavyweights are owned by or linked to Gulf royalty. Clearly, no one wanted to ruffle any feathers or affect future job prospects by critiquing the deal. As Bin Talal is one of the richest men in the world, Murdoch’s buy-in is not solely about further monetary gain.

The prince said as much in February: “The [News Corp] transaction is way, way beyond finance… Rotana does not need to be financed. It has near zero debt.” Perhaps when Murdoch acquires a further stake in Rotana — which he is entitled to do in late 2011, to 18.8 percent — courageous voices in the media will speak up about what a strange tie-up this is, between a Saudi prince and a media mogul whose outlets continuously bash Arabs and Muslims while offering unflinching support for Western and Israeli military aggression in the very region where he is investing.

Or, perhaps, there will just be a short story in the business pages to let us know it is, well, business as usual.

PAUL COCHRANE is the Middle East

correspondent for International News Services

 

 

0 comments
0 FacebookTwitterPinterestEmail
Comment

The rial’s slow starve of Yemen

by Alice Fordham
written by Alice Fordham

Yemen’s currency woes do not top global concerns. And yet the wobbling Yemeni rial, having depreciated 13 percent against the dollar since January, could have devastating consequences for the stricken nation, the ripples of which could well wash ashore through the Arabian Gulf and beyond.

When oil prices plummeted more than two years ago, Yemen’s single-resource economy took a pounding, as the government had overestimated its income and overspent. The result was a 2009 deficit around 10 percent of GDP: crippling for a country unable to borrow from international financial markets and whose primary means of raising funds is to borrow from its central bank and sell foreign currency reserves.

International Monetary Fund policy advice and some aid have reduced the deficit, but the finance ministry predicts it will still be 7.7 percent of GDP in 2010.  Further problems have come in the form of a national shortage of dollars. Yemen imports nearly everything it consumes, and a policy designed to make importing easier and more profitable saw low taxes on imported goods last year. Reliable statistics are hard to come by in Yemen, but Deputy International Planning Minister Hisham Sharaf said that luxury goods, including cars and electronics, came pouring into the country as never before. Exporting dollars for imported goods, traders have depleted dollar reserves, which stood at $6.2 billion in March, their lowest level in five years. This dollar demand consequently boosted its value over the rial.

Respected economists also allege that as much as $3 billion dollars has left the country in money-laundering activities. Political analyst Abdulghani al-Iryani, however, reckoned that sum to be on the high side, and said that the more common practice was for people to dump their rials for dollars and stash them in Dubai banks, exacerbating the dollar shortage and leaving the rial ever-more vulnerable.

Recently the rial has held stable on exchange markets, but only because the government has propped it up through drawing on some $1.1 billion in foreign currency reserves; this is unsustainable and would devour these reserves within two years. As long as the pressure on Yemen’s economy is maintained, oil supplies dwindle, gas exports remain negligible, investors are scared and no cash injection comes, the rial’s fall is inevitable.

How much it will fall is debatable: optimists hope for a gradual, controlled descent, while pessimists foresee a rush to change assets to dollars and a possible run on the banks. Even the current stability measures are harmful. Interest rates, for instance, are being held around 20 per cent, which businessmen say is preventing them taking out loans to expand or start businesses.  Given that almost all Yemen’s food is imported, food prices have risen and will rise more. Yemeni consumers are fairly thin already and will have to tighten their belts further, despite there being more malnourished children here than anywhere in Africa, with the World Food Program classifying a third of the population as “acutely hungry.”

High food prices in 2007 sparked riots. Yemen is critically unstable, and large parts of the non-urban areas of the country are ungoverned, with Houthi rebel groups in the north, an increasing Al Qaeda presence and secessionists in the south. The IMF and World Bank, along with the government, are attempting to improve the situation. The bloated civil service has had its pay frozen and last year’s Ramadan bonus was cancelled. Massive government fuel subsidies, which benefit the rich far more than the poor, have been cut slightly, and a general sales tax has been introduced targeting importers.

There is talk of helping Yemen move from an oil to a non-oil economy, encouraging fishing, mining and tourism. But these are slow, long-term changes difficult for a country hanging on the edge of civil war and bankruptcy, with dwindling income, growing population, chronic unemployment and rapidly-diminishing savings. It is also an open secret that those close to the top of Yemen’s opaque power structure benefit from oil subsidies and unreformed business laws.

Western powers worried about Al Qaeda, and Gulf countries worried about a failed state on their borders need to look to the nitty gritty of the Yemeni economy. They should use their leverage with the government to cut corruption, slash fuel subsidies and get Yemenis trained and internationally employed in Saudi to help rebuild Yemen, one rial at a time.

ALICE FORDHAM is a correspondent

 for The Times of London

 

0 comments
0 FacebookTwitterPinterestEmail
Comment

American imports of influence

by Riad Al-Khouri
written by Riad Al-Khouri

In praise of free trade, 19th century British politician Richard Cobden described it as “God’s Diplomacy,” bringing people together to prosper. Taking a page from his book, the United States has successfully applied this idea in the region, using trade to further political ends even as America’s traditional Middle East diplomacy stumbles.   

This regional success for America began with the launch of the Qualifying Industrial Zone (QIZ) model in the mid-90s, allowing joint Israeli-Jordanian output to enter the US duty-free, mandating 7 to 8 percent Israeli value-added input into a product as one condition for the trade privileges. QIZ resulted in massive Jordanian garment exports to America, reaching a peak of over a billion dollars annually. So successful was the model in promoting trade that Egypt got the same privilege — the Israeli component in the Egyptian case being 11.7 percent — and started in 2005 to sell textiles and apparel to the US, with those exports jumping to $764 million in 2009.

On the political side, QIZ has been another way for the US to both support Israel economically and effectively buy off Jordanian and Egyptian complicity with the Jewish state, thus furthering America’s political agenda in the region.

Investment in a QIZ is particularly attractive to industries such as textiles and clothing, which are subject to high US tariffs. Consequently, 80 percent of QIZ companies in Egypt and almost all of those in Jordan produce such articles, with big-name US buyers including, among others, Wal-Mart, Van Heusen and JC Penny. Around the States these past few months, I saw more of these products, labeled “QIZ made in Jordan” (or Egypt). This is a far cry from 15 years ago, when it was almost impossible to find Jordanian products on sale in the US, and very rare to see items from Egypt.

There were times when almost the only things our region exported to the rich markets of the West were crude oil and a few other minerals in raw form. By the 1980s, with the expansion of immigrant communities, some foods joined the list of regional exports, as Lebanese hummus and such became available on Western supermarket shelves.

The counterargument runs that selling these ethnic products is easy and ultimately a small niche, while exporting garments to be sold by Wal-Mart is a poor man’s game, so all this exporting hubbub is not really making people rich through higher value-added products.

Could this pattern now be changing? The answer from Egypt, Jordan, and a few other countries in the region seems to be yes. Egyptian QIZs are now kicking in with furniture, leather products, footwear, and glassware. Jordan, which has had a free trade pact with the US since 2000, goes beyond QIZ garment production and has started exporting a growing breadth of goods to America, including air conditioning equipment, branded pharmaceuticals and cosmetics, among many others.

Of course, the hummus and falafel mixes are still there, but in increasingly sophisticated form, and joined by higher-end goods such as spices, herbal tea, and burghul wheat — products that have also penetrated Europe Union with help from EU free trade deals with many Arab states. Not that this is a simple process: such hurdles as EU technical requirements and US Food and Drug Administration product guidelines have to be negotiated, but regional exporters are increasingly managing to comply with requirements of Western markets.

The image of a Middle East exporting only crude oil and crude hummus is fading as regional exporters manage to penetrate Western markets with a widening variety of higher value-added goods, thanks to free trade deals. The next big surprise on this score could even be the Syrians, whose commercial pact with the EU may be coming on stream soon, after which Syria’s industrial exporters will no doubt begin invading European markets.

Given the current state of the regional peace process, however, God’s Diplomacy may take a little longer to bridge the divide between Damascus and Washington.

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

0 comments
0 FacebookTwitterPinterestEmail
Comment

Sanctions stalk Iran’s free market

by Gareth Smith
written by Gareth Smith

As Iran’s 2005 presidential election approached, a broker active in Tehran’s stock exchange was downbeat. “Pessimists look at the elections and see no new ideas and no new faces,” he told me. “They worry that pressure from outside means tighter rule at home. And that, in turn, means more bad politics, more bad economic policy and no markets.” Five years later, his words appear prophetic. Expanded economic sanctions imposed by the United States and — to a lesser extent — the United Nations have curtailed Western investment in Iran’s economy, strengthening the role of the state. The conservative president Mahmoud Ahmadinejad has presided over a crackdown on the reformist opposition and reversed the sluggish economic liberalization that took place under the previous president, Mohammad Khatami. Strange, then, that the Tehran stock exchange (TSE) should be at record levels, with the most-quoted index, Tepix, reaching 15,361 in the third week of July, above even the bull market that peaked at 13,882 in late 2004. But today’s “boom” at the TSE is very different to 2003 and 2004. In those days, expatriate money was flooding back, feeding rising prices in stocks and real estate. At the same time, private banks were expanding, Western energy companies were signing deals for developing Iran’s oil and gas resources, and Tehran was in talks with the European Union over its nuclear program.

The current rise of stocks in Tehran takes place in an exchange more and more dominated by state, or quasi-state bodies, which have proved adept in exploiting the Ahmadinejad government’s privatization policies. Funded to a greater or lesser degree by oil revenue, the state sector is far better placed to survive sluggish economic growth, currently at 2 percent according to the International Monetary Fund. The retirement fund of the Revolutionary Guards was also involved in the consortium that last year bought a 50 percent plus one share stake in the state-owned Telecommunications Company of Iran (TCI).

“The government and quasi-government bodies have made the TSE far more of a co-operative than a competitive game,” an Iranian economist told me. “As a general rule, in developing or risky economies cash dividends are more prevalent [than retained earnings] and pay-out ratios higher. Buying and selling stocks can help increase an extraordinary income to make up for declining profits from normal businesses. And of course, we should not forget that high oil revenue over recent years, despite the falls since 2008, has built up greater liquidity and that there are a limited number of investment opportunities in Iran.” Isolation cuts both ways, and sanctions make Iranians reluctant to invest abroad.  Government and quasi-government bodies are especially cautious. Another factor in the bourse’s boom, said the economist, was a perception that political unrest after last year’s disputed general election had died down: “The surge in the TSE began around five months ago as people perceived an apparent stability after nearly a year of uncertainty.” The buoyancy of the Tehran stock market has also attracted liquidity from falling markets in the region and elsewhere. Turquoise, an investment firm majority-owned by the London Stock Exchange, offers an Iran equity fund and has described the TSE as “one of the most under-valued emerging markets in the world.”

Traders detest the growing politicization of the Iranian economy. Many Western media outlets described last month’s protests in a Tehran bazaar against tax rises as a potential return to the strikes that helped topple the Shah in 1979. On the other hand, Hussein Shariatmadari, editor of the leading conservative newspaper Kayhan, recently wrote that officials were slow to take action against “a handful of prosperous capitalists” in the bazaar. Shariatmadari has been a strong supporter of Ahmadinejad and is clearly in no mood to pander to advocates of lower taxes or market liberalization.

Across the board, sanctions weaken the private sector. If the US is successful in blocking the insurance of goods being transported in and out of Iran, then the government may well take over the responsibility. 

As the broker said back in 2005, “more bad politics, more bad economic policy, and no markets.”

GARETH SMYTH is the former Tehran correspondent for the Financial Times

0 comments
0 FacebookTwitterPinterestEmail
Real Estate

Cityscape speaks – Damac Properties

by Nada Nohra
written by Nada Nohra

Our message over the previous years has been growth, new projects, new demand, but this year it is very much construction and delivery,” says Niall McLoughlin, senior vice president of corporate communications at Damac Properties. With that message, Damac has been marketing every stage of its progress, assuring buyers and investors that the units they bought will be delivered on schedule. Last year, Damac announced that it had 11,313 units under construction. The company has delivered 3,029 in the last 12 months, and will deliver the rest by the end of 2010.

McLoughlin explains that Damac has been working with customers and transferring their investments from longer-term projects to the ones under construction or that are almost completed. “We have approached our customers on a case-by-case basis. It is a winning situation for them because they get the product earlier. It may also be a question of consolidating their portfolio to ease payment terms for them,” says McLoughlin. This strategy has been very successful, as it helped decrease potential payment defaults, which is the last thing either developers or customers want.

The company has also dedicated a new management team to focusing on customer queries, handling them case by case. “Losing a customer is not good for us, and also not good for the customer,” says McLoughlin.

Currently, Damac is not planning any news launches. The company is issuing enabling works contracts for its projects in the United Arab Emirates and Qatar. “By the end of the year, we anticipate awarding two to three main contractor works with a value of over AED 1billion [$272 million],” explains Mc Loughlin.

As for the long term, McLoughlin says the company will be looking to expand regionally, but not before the time is right. “Now the market is not ready for expansion, so our short-term objective is consolidating and constructing what we have launched,” he adds. 

 

0 comments
0 FacebookTwitterPinterestEmail
Finance

Regional equity markets

by Executive Editors
written by Executive Editors

Beirut SE  

Current year high: 1,200.49    Current year low: 991.49

>  Review period: Closed – June 22 at 1079.28 Points          Period Change: -1.5%

The MSCI Lebanon index trended lower in a not overly dramatic fashion in the June 2010 review period, leaving all the excitement for Lebanon’s army of devoted football fans. When compared with its high of 1,180.98 points for the first half of 2010, the index softened by just over 100 points. However, the banking sector could show off another victory with a 31% y-o-y rise in its Q1 2010 aggregate net profit of the top 12 lenders. Market cap leader Solidere scored a goal of $189 million net profit last year in a stable performance.

Amman SE  

Current year high: 2,744.07                Current year low: 2,320.14

> Review period: Closed – June 23 at 2,388.94 points          Period Change: -0.5%

Having just passed across a multi-year low of 2,320.14 on June 20, the best wish for the Amman Stock Exchange may be for this to have been rock-bottom for the market and for new stamina to appear after the disappointing first-half. Sadly, endurance training seemed to be of no help to the insurance sector, which dropped 15.2% at the bottom of market trends. Banking, industrial, and services sectors, by contrast, traded range bound with the ASE general index and banking even achieved a tick into positive territory, starting from June 21.

Abu Dhabi SM  

Current year high: 3,239.74                Current year low: 2,467.04

> Review period: Closed – June 23 at 2,551.39 Points                      Period Change: -2.0%

Abu Dhabi’s exchange has dropped a sizeable 7% from the start of 2010, though this decline is only half as steep as the plunge Dubai’s DFM took over the same period. The ADX exhibited some noticeable volatility in June and sector indices fluctuated in uncoordinated trends. The only sector index to end the period in positive territory, however, was the industrial index. Market cap leader Etisalat weakened 2.4% as Methaq Takaful and Gulf Livestock were beaten down 28.4% and 26.8%, respectively. The best gainer was Finance House, up 18.6%. 

Dubai FM  

Current year high: 2,373.37                Current year low: 1,487.93

> Review period: Closed – June 23 at 1551.19 Points           Period Change: -1.8%

The ‘lord of the dip’ award goes hands-down to the Dubai Financial Market for the first half 2010. With the halfway point for 2010 quickly approaching, the DFM was down 14% for the year to date at its June 23 close and danced around 1,500 – levels last seen in February 2009. No vigor, no football competition, no cultural happening seemed to energize the DFM, where a 10.7% climb of Aramex stock was the only upward outlier. The vast majority of shares tended to the red, as did the sector indices, except for transport. 

Kuwait SE  

Current year high: 8,140.20                Current year low: 6,528.60

> Review period: Closed – June 23 at 6,653.00 Points          Period Change: -0.7%

The fact that the Kuwait Stock Exchange closed less than one percent down in the review period cannot soften the harsh realities of the bourse’s massive slide in May, which didn’t stop until the index hit a 15-month low of 6,528 on June 15. It remains to be seen if this will be rock bottom for 2010, or if investor nerves have worn so thin that share price performance in Kuwait will fall further. Banking and industry were better than the general index; real estate and investment underperformed.

Saudi Arabia SE  

Current year high: 6,929.40                Current year low: 5,407.31

> Review period: Closed – June 23 at 6,343.47 Points          Period Change: 3.6%

After its immune system took a hit from various contagions in the second half of May, the Saudi Stock Exchange resurged in June, in a manner of speaking. Compared to its GCC peers, the SSE index was second best performer in the review period and for the year to date it is still the best student in the GCC securities college, with a 3.6% climb. Most SSE sub-indices moved range-bound with the TASI in the review period; a news-driven 23.1% spike in the Energy and Utilities index was the upward exception.

Muscat SM  

Current year high: 6,933.75                Current year low: 5,263.94

> Review period: Closed – June 23 at 6,173.33 Points          Period Change: -1.3%

The Muscat Securities Market had more losers than winners in the review period and the general index seemed to be finding its feet after two months of down pressures. While the industrial sub-index was the June market’s consistent best performer, banking had the most erratic ride. Brokerage Financial Services Co was the MSM’s best individual performer in June and shot up 19.6%, reversing a comparable drop it had suffered in May. National Mineral Water Co found no such mercy, dropping 21.6% from June 1 to 23.

Bahrain SE  

Current year high: 1,613.01                Current year low: 1,390.81

> Review period: Closed – June 23 at 1,413.19 Points          Period Change: -2.6%

Although the BSE’s bow beneath the 1,400 point line between June 15 and June 20 was merely a six-month low, and although the year-to-date performance of minus 3.1% is only the fourth worst in the seven GCC security markets, Bahrain’s investors will still be hoping the second half of 2010 bestows more blessings than the first.  While Esterad Investment fell 28.3% in the review period, a gain of 2.63% was made by Al Salam Bank – Bahrain, the period’s best performer.

Doha SM  

Current year high: 7,801.33                Current year low: 5,731.30

> Review period: Closed – June 23 at 7,072.08 Points          Period Change: 4.2%

Though the Gulf region has no team in the World Cup to bring home glory,  the Qatar Exchange took this month’s trophy for greatest market vigor. After its epic 1,250-point slide between April 13 and May 25, the ensuing gains of June made for a picture perfect V-shaped performance, albeit a V that is still rather short on the upside. The QE’s four sector indices all were positive, with insurance coming out on top as best performer. Was it because the country iterated another energetic bid to host a World Cup (2022)?  

Tunis SE  

Current year high: 4,772.39                Current year low: 3,337.48

> Review period: Closed – June 23 at 4,957.85 Points          Period Change: 0.4%

Minimal volatility and sideways trading at the ceiling of historic performance was the game on the Tunisian Exchange. The period close represented a tiny retreat, by not even 15 points, from a new index peak of 4971.35, which was scaled on June 21. The market reported a smashing success in the initial public offering of cement maker Carthage Cement. The $89 million share offering for 49.8% in the company’s stock was oversubscribed more than 13 times and the stock debuted on June 22 with a first-day change of 26.3% when compared with the issue price.

Casablanca SE  

Current year high: 12,457.59              Current year low: 9,997.56

> Review period: Closed – June 23 at 12,055.36 Points        Period Change: -0.1%

The June 2010 match between bulls and bears on the Casablanca Stock Exchange was a draw. As the impact of the downturn in most global markets in late May caused the MASI to correct from record highs of almost 12,500 points, the optimists dominated on the pitch in the first eight sessions of the review period, but the bears came back in the second eight sessions for a flat net balance. Market cap leader Maroc Telecom advanced 4.7%, and leading bank Attijariwafa dropped 1.8%.  

Egypt CASE  

Current year high: 7,603.04                Current year low: 5,229.40

> Review period: Closed – June 23 at 6,319.00 Points                      Period Change: -3.5%

The highest volatility in North African markets marked the flow of trade on the Egyptian Stock Exchange in the June 2010 review period. After a massive drop and sharp rebound between May 18 and 31 into the mid 6,500 range, the EGX 30 fell more than 300 points to June 10, recovered by almost exactly the same point score, and weakened again. Telecom Egypt managed a flat performance but Orascom Telecom lost 14.7% as analysts questioned its planned divestment from Algeria.

0 comments
0 FacebookTwitterPinterestEmail