Finance

Back to the real

by Emma Cosgrove
written by Emma Cosgrove

Credit Agricole Suisse is the main private banking arm of Credit Agricole Group, with Middle East offices in Abu Dhabi, Bahrain, Beirut, Doha and Dubai. Executive recently sat down with Frederic Lamotte, the bank’s chief investment officer, to discuss how private banking has changed in the last two years.

E  How did you manage to keep your clients during the crisis?

First, the structure of the bank is very solid and the name itself has helped retain some clients. Second, I would say that from more of an investment point of view, we had the insight of not pushing our clients into risky products.

We have always had a, not conservative, but relatively safe approach to investment. We never had any Lehman products; we never thought that Lehman or other United States investment banks were adequate for supporting investment products for our clients. We never proposed structured credit products to our clients.

In general, we never had [to worry about the Lehman crash, the ensuing ‘credit crunch’ or Bernard Madoff’s Ponzi scheme debacle] because someone stood up in the line and said they didn’t understand, or didn’t believe [in them], or that something had not been sufficiently explained, and so we didn’t market [high risk, complex] products to our clients.

This meant we never had any problems of that nature to deal with, which I think kept us from losing some clients.

On the contrary, we have gained many clients who had these bad experiences with other banks in terms of investments.

I think we have basically the same total assets as we had before the crisis: roughly $50 billion if you take the whole Credit Agricole Suisse group.

E  Today’s client really wants assurance. What type of reassurance on the level of corporate governance can be communicated to the client?

First of all, we belong to a large banking group and as such we have several layers of compliance issues locally in Switzerland, but also wherever we are operating. For example: we have a branch in Singapore, which has to follow the local rules in Singapore.

Because we belong to a French bank we have to follow some French rules and since we are incorporated in Switzerland, we also comply with the Swiss law. So we have three layers of rules that we must follow.

It puts a lag on various angles of the asset management process, but it does give reassurance to our clients.

As for the decision making process, we have investment committees every two weeks and we have designed our investment committees a bit differently after the last two years because we recognized that in some instances we wanted to acquire the specific knowledge of a specialist to best exploit some asset classes.

I will take the example of commodities. Two years ago we decided to start investing in commodities. We started with gold and had a very good experience and made a lot of money for our clients. But it was not enough. We wanted to really learn more about the investment process on commodities.

So we partnered with a company called Diapason, which is actually a Swiss company managing around $11 billion in assets in commodities, and we asked them to participate in our investment committee. This has been extremely successful because we recognized that we were not specialists in this market, so we were happy to share with somebody who is a professional in the field. But they are not managing the money for us. We manage together and that allows us to learn about the process and to be able to explain to our client why a decision was taken.

Selling funds to clients in the past was equivalent to taking their money and giving it to a third party to manage without really controlling what it was doing. This model has reached its limit because we could not completely control how the money was managed, which was difficult to explain to our clients.

The second conclusion we drew from the crisis was that we had to show our clients the exact risk [their portfolio was exposed to].  To do that, we designed a special investment fund, which is an umbrella fund where we have 29 different compartments [for different types of assets]. The client is able to see exactly and in real time how the fund is composed.

This is backed by a portfolio guardian who does not report to me, he reports to the risk control division. And the portfolio guardian makes sure that nothing in the portfolio starts to diverge from the [risk] profile [of the client]. I think this is quite an important change that we have put in over the last two years.

E On an investment level, how did the crisis change the conditions you put on the managers of hedge funds?

Hedge funds is an industry where we have been lately investing. It was fortunate. It’s a product for large investors — very large investors. It’s also a product where the approach of institutional investors and private investors is very different. The concept was developed, as diversified, low risk and liquid — exactly what private clients want.

But actually we’ve seen it’s not very low risk, sometimes it’s not very safe and sometimes it’s absolutely not liquid. When you look at the alternative investment space today you can see that institutional investors did not come out of hedge funds. The only ones who came out were private investors because they heard a marching call somewhere else, so the alternative problem came because of liquidity issues with private clients.

A lot of products sold to private customers were funds of funds, where you delegate to a third party and they go and delegate again to somebody else. It’s a double black box when risk is rising globally in the market. We sold 35 percent of our alternative investments in March 2008. I should have said: “Sell 100 percent.”

Now we’ve changed the way we approach alternative investment completely. First of all, we only go back to large investors [those who can invest $10 million into a single product]. Our new scheme on alternative investment is a direct investment in hedge funds exclusively through managed accounts. This approach ensures a high level of liquidity.

E  How did the crisis change the offers that Credit Agricole makes to clients?

On the investment front, the crisis has brought back the idea of going back to more of what I call real assets. Collateralized debt obligations were pure financial mental constructions; you didn’t know what was behind them. You had to dig so much and understand the correlation issues, which is a very complex issue for normal people. So the idea is to go back to real assets, such as commodities. We are very bullish at this point in time on industrial metals and precious metals. They are real assets that have the capacity to store value independently of which currency you use to measure its value. It’s a storage of value.

Second is real estate: we are defining a new offer on real estate. At the moment we are advocating London, because sterling is low and the prices of London real estate on the office side have gone down drastically. So we think there is a niche. And we are proposing to our clients a very concentrated risk. We tell them to invest there. We can show them the buildings. It’s not like we give you global stuff. We concentrate the risk. We show them the exact asset.

Third, I think what is very important about the real asset is to include corporations. And to that extent private equity, I think, is a real asset. When you own a share, not the listed shares, but a private share of a company who has a product or a service, this is a real asset. So for us private equity is part of the real asset panel, which we promote to our clients.

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Iraq’s recount stew

by Ranj Alaaldin
written by Ranj Alaaldin

Iraq continues to be embroiled in its messy post-election coalition building process. Domestic rhetoric and behind-the-scenes dealings have been supplemented with visits to regional neighbors, with every man and group naming their price for compromise and cooperation. As expected, this process will likely take longer than the optimistic one to two-month timeline predicted by Iraqi officials, particularly since Iraq’s electoral commission ordered a manual recount of the votes cast in Baghdad province on April 19.

The recount came after complaints from the incumbent Prime Minister Nouri al-Maliki of the Islamic Dawa Party and his State of Law coalition. Ordered by a special elections court, the recount covers 68 seats in the 325-seat parliament and could alter the final result of the poll; especially since Maliki came a close second behind the victor, Ayad Allawi and his Iraqi National Movement (INM), with 89 seats to Allawi’s 91.

Since the March 7 vote, both the INM and State of Law have been courting smaller political blocs and parties in attempts to garner a majority of seats for the purposes of forming a government. Maliki alleges the electronic system of vote counting was unreliable, and any ruling could have a number of implications.

Firstly, many will ask what difference it makes to Maliki since Iraq’s Supreme Court has ruled that it is the largest post-election parliamentary alliance, rather than the largest vote winner in the election, that can form the next government. But a recount that changes the result in Maliki’s favor gives the prime minister a strengthened hand in his push to retain the premiership and have his State of Law coalition lead the next government.

As the largest bloc, State of Law (and indeed Maliki) would redeem the prestige it lost when INM was declared the largest single bloc after the elections, and in such a position State of Law could be more willing to negotiate with INM; that is, Maliki would rather have Allawi and INM play second-fiddle to him (as runners up) than the other way around. Maliki has also recently witnessed internal problems within Dawa itself, with reports suggesting that specific factions within the grouping oppose another Maliki premiership. A recount in Maliki’s favor constitutes a political boost and may temper the tongues of his critics.

The extent to which the recount ruling will adversely impact Iraq’s political process will depend on Allawi’s own reactions to it. The former Iraqi premier has previously contested the jurisdiction and legitimacy of Iraq’s institutions, such as the supreme court, and it will be interesting to see how his coalition will react to any detrimental outcome the recount may bring. What could be dangerous is any subsequent perception on Iraq’s streets that this is yet another attempt to sideline the Sunni voice in politics by Shiite powers, which dominate post-2003 Iraq’s institutions and domestic affairs.

Allawi has indeed warned of pressure that may be brought to bear upon Iraq’s electoral entities, but there is yet to be any significant suggestion that they have succumbed, given that Iraq’s electoral commission, the Independent Higher Electoral Commission (IHEC), refused Maliki’s earlier calls for a manual, nationwide recount.

The United States will be wishing for stability as it prepares to withdraw all combat troops by the end of August, as part of its wider withdrawal plan (recently confirmed as being on schedule by the top US commander in Iraq General Ray Odierno), which should see the US military out of Iraq by the end of 2011. However, uncertainty may already be proving conducive to terrorism, with a series of bombings claiming more than 80 lives in the past month alone.

Of course, a recount may not change anything or even benefit State of Law. Iraqis may welcome the recount if it actually legitimizes the results, even if it does delay the political process, particularly if they trust the voting process driven by IHEC. Many will, however, be concerned about any changes it provides, since Iraq’s political entities are all too capable of just about everything and anything. Both Maliki and Allawi could contest the outcome if it goes against them; Maliki in particular could push for his earlier calls for a recount in other provinces in addition to Baghdad, while Allawi may continue to call into question any potential wavering of Iraq’s electoral entities.

RANJ ALAALDIN is a scholar on Iraq and is published regularly in The Guardian

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Scudsupmtions

by Nicholas Blanford
written by Nicholas Blanford

Watching the development of the story concerning Hezbollah and Scud missiles has been an object lesson in how speculation can be spun into established fact. I first heard the rumor from sources in Washington about three weeks before the story was broken in Kuwait’s Al Rai Al Aam. The newspaper essentially claimed that Syria had transferred Scud rockets to Hezbollah. Israel, it continued, had come close to bombing an arms convoy, but deferred at the last moment due to American promises to diplomatically push the issue with the Syrians.

The Al Rai Al Aam piece was followed a day later by a larger story in The Wall Street Journal, which covered much of the same ground but included confirmation on the Scud transfer from an American source.

Yet for all the fuss it has generated, details of the alleged transfer are unclear and have become mired in conflicting intelligence information, and Israeli officials have been uncharacteristically reticent in discussing the allegations. It remains unknown which variety of Scud is alleged to have been transferred, whether the rockets have entered Lebanon, whether they remain in Syria but in Hezbollah’s hands, or whether Hezbollah personnel have been trained on the systems only. Syria’s most advanced Scud is believed to be the Scud D, a Syrian-manufactured copy of a North Korean version of the original Russian rocket.

Even the American State Department hesitated to confirm the allegation in an otherwise strongly-worded statement regarding how the number two at the Syrian embassy in Washington had been summoned for a finger-wagging interview-without-coffee. The next day, the State Department admitted it was unsure that the Scuds had been delivered to Hezbollah in the first place.

Nonetheless, though no evidence has been provided, one can be sure that six months from now it will have become an accepted fact that Hezbollah has Scud rockets.

It is true that since the end of the 34-day war with Israel in 2006, Hezbollah has sought to bolster its arsenal with larger rocket systems with increased range and, crucially, fitted with guidance systems allowing it to strike strategic targets in Israel, such as military bases, airfields and industrial sites in the event of another conflict.

Military analysts believe that Hezbollah has received the M600 rocket, thought to be a Syrian clone of the Iranian Fateh-110, which can carry a 500-kilogram warhead 250 kilometers, far enough for Hezbollah to hit Tel Aviv from its camouflaged bases in the northern Bekaa Valley.

Yet, the acquisition of Scud rockets would present a formidable logistical challenge to Hezbollah, including smuggling the 13.5 meter rocket — almost double the length of the M600 — across the Lebanon-Syria border, which, with numerous countries’ intelligence agencies keeping an eye on who or what passes through, is one of the most closely scrutinized frontiers in the world.

Given the capabilities of the M600, it is unclear why Hezbollah would seek to augment its arsenal with the high-signature Scud. The Syrian Scud D variant has a range almost three times that of the M600 but the size of the warhead is the same and the additional range may not be an important requirement for Hezbollah, given the new emphasis on accuracy and the comparative lack of strategic targets south of Tel Aviv.

An additional drawback for Hezbollah is that the Scud is liquid-fuelled, which complicates handling, storage, deployment and firing compared to the solid-fuel rockets in its arsenal. Solid fuelled rockets require no lengthy preparation process and can be launched quickly, a key requisite for Hezbollah, which is ever wary of Israel’s aerial dominance. The Scud, however, requires fuelling just prior to launching, which can take 45 minutes even in ideal conditions, let alone in a war. The propellants used are highly toxic and have to be stored and handled by trained operators.

Unlike Hezbollah’s other rockets, which can be fired from jerry-rigged launchers, Scuds are launched from specially-designed vehicles called Transporter-Erector-Launchers (TEL). Bringing these into Lebanon undetected would pose no small challenge for Hezbollah. All in all, if I was Hezbollah’s armaments procurement officer and someone offered me Scuds, I think I would be inclined to say, “Thanks, but no thanks.”

NICHOLAS BLANDFORD is the Beirut-based correspondent for The Christian Science Monitor, The Times of London and  Jane’s Defense Weekly

 

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Eruption disruption

by Paul Cochrane
written by Paul Cochrane

Expect the unexpected” is a terrible cliche, but given the wars, natural disasters and financial crises of late, it could be considered standard procedure for our times. While a volcanic eruption was to be expected — at some point or another as volcanologists frequently warn — Icelandic volcano Eyjafjallajökull’s burst of ashy activity on April 15 caught everyone with their pants down. Military powers had developed no secret weapons able to stop it and all the ’enhanced’ airport security measures and full body X-ray scanners could do nothing to screen the threat.

As the ash cloud’s creeping tendrils closed one major Northern European airport after another, it became starkly obvious how easily aviation — the predominant means of international travel — could have its wings clipped. One day of inactivity might have been tolerable, but five was catastrophic.  The impact of the volcanic eruption was staggering: 29 percent of global aviation was grounded, 1.2 million passengers were affected, airlines lost some $1.7 billion in revenue and the International Air Transport Association (IATA) said it may take up to three years for airlines to recover.

The volcanic eruption also exposed supply chain vulnerabilities, such as Gulf supermarket chain Lulu saying they were running out of fresh produce, usually flown in from Europe.  Personally, I was scheduled to be back in Beirut April 16, returning from Tokyo via Paris’ Charles de Gaulle (CDG) airport. Instead, after the 14-hour flight from Japan, I was diverted to Lyons in Southern France, where passengers were herded onto a bus for a further seven hours on the autoroute to Paris to spend the rest of the day lining up for assistance in CDG. After that, we waited in limbo, unsure whether tomorrow the ash cloud would clear to allow for take-off.

Yet, where one pillar of the globalized world fell, another, telecommunications, stood tall to save the day.  On the second day stuck in Paris, Air France became “unwilling” to provide another night’s accommodation. I put out the word, via my Facebook status, that I was stuck in Paris and needed a place to crash until April 20, my re-scheduled departure; within an hour I received an SMS message on my mobile offering me a bed. One clear lesson for individual contingency planning is that access to cash and telecommunications is essential; judging by reports and personal experience, airlines overwhelmingly failed to live up to their legal obligations to comprehensively assist passengers during the “volcano crisis.”

Many passengers, left to fend for themselves with their own funds, took to more old fashioned means of transportation — by land and sea – to complete their connection. In my case I pondered how to get from Paris to Beirut the fastest way possible: 40 hours by bus to Plovdiv, Bulgaria, another seven-hour bus to Istanbul, and from there a flight to Beirut.  As fate would have it though, the ash cloud cleared just enough on the morning of my rescheduled flight to permit takeoff, before closing in again later in the day to silence the runways.  Had the eruption continued — as some predicted it would — adaptation would have set in, with streams of people moving up and down Europe by any means possible.

Still, this would have been far less tragic than the last big Icelandic “volcano crisis” in 1783, when the eruption lasted eight straight months, spread ash as far as Damascus, causing massive crop failure and livestock loss leading to tens of thousands of deaths.

With the spate of natural disasters to hit the world recently — from Hurricane Katrina in the United States, to the Asian tsunamis and the Haitian earthquake — one might have thought airlines and governments would have planned for a volcanic occurrence. Contingency plans, however, were not effectively in place to deal with widespread airport closures, governments dithered and insurance companies pulled the “Act of God” clause to escape claims. Few can predict when natural disasters will occur, but we know for certain that they do occur, and so it is prudent for governments, businesses and individuals to prepare.

Crises, by their nature, arrive unexpected — we should expect that.

PAUL COCHRANE is the Middle East correspondent for International News Services

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An irrelevant election

by Peter Grimsditch
written by Peter Grimsditch

The brilliant classical scholar and poet A. E. Housman had a profound mistrust of opinions that are shared by a large number of people. Even, perhaps especially, when the vast majority of manuscripts contained the same version of a line of Latin poetry, the former Cambridge University professor was dogged in pursuit of what he saw as a more likely — and correct — alternative. His views on last month’s presidential elections in Northern Cyprus would doubtless have been entertaining and scathing in equal measure.

The anonymous commentators and analysts so oft quoted (or invented) by political writers have mostly been trotting out the same, simplistic line of the likely effects of the outcome, no matter who won.

The incumbent president, Mehmet Ali Talat, was credited with holding 71 meetings with his long-time fellow trade unionist, Greek Cypriot leader Demetris Christofias, which led to a series of unofficial and unenforceable agreements between the two sides of the divided Island, which was split in 1974 when Turkey invaded after a Greece-backed coup attempt. All these would be jeopardized, ran conventional wisdom, if the so-called nationalist hardliner, Turkish Cypriot Premier Dervis Eroglu, were to win the April 18 vote. The entire process of unification for an island now in its 36th year of division would be put on hold at best and vanish forever at worst.

Eroglu won an absolute majority in the first vote, eliminating the need for a run-off the following Sunday. And with that victory, the pundits continued, Turkey’s chances of joining the European Union suffered another devastating reverse. All of this somewhat misses the point.

Turkey’s ruling Justice and Development Party (AKP) calls the shots in the Turkish Republic of Northern Cyprus (TRNC) and it made very little difference who actually won last month. Turkish-Cypriots are financially dependent on Turkey. Without the $500 million annual contribution from Ankara, the TRNC would sink into bankruptcy faster than Greece. The rhetoric from both candidates during the election was mainly for domestic consumption.

Christofias said he was ready to negotiate with whomever was elected but insisted he would not resume talks from scratch. Eroglu told supporters: “Talks will continue because I want peace more than those who say that I don’t.”

Much more significant is what Recep Tayyip Erdogan, the Turkish prime minister, had to say. His clear disdain for what he sees as disruptive tactics from the European Union was illustrated by his public description of the union as a Christian club. It may well be true that a solution to the Cyprus issue is a prerequisite for Turkish EU membership. However, rapid accession is unlikely with or without a solution, and Erdogan’s desire for an answer to the divided island’s problems has other motives. Opening the northern side to direct trade would improve its economy and eventually lessen its dependence on Ankara’s money, and a reduction in the 30,000 troops stationed there would cut Turkey’s contribution to maintaining their presence.

Even additional benefits accorded to Turkish Cypriots if they become “official” members of the European Union alongside their fellow Cypriots in the south are less than they might appear. Around 40 percent — or 80,000 — Turkish Cypriots already hold EU passports. Roughly the same number cross into Greek-Cyprus daily to work jobs that pay far more than the equivalent employment in the north.

For all the publicity surrounding the Talat-Christofias talks, nothing of worth was achieved in two crucial areas — a system of governance or a solution to the property problem. In the north, 30,000 villas and apartments have been built since the split, mainly on land owned by Greek Cypriots. Properties subject to claims by their former owners are being sold at discount prices to foreigners, perhaps unaware of the difficulties of ever securing full title to them. The land problem is not one-sided. The land that houses the old Larnaca Airport and part of the terra firma on which the new one stands belongs to Turkish Cypriots. Optimism stemming from the 18 months of meetings between politicians on both sides of the island is based on little, save an excess of shallow public relations, cheerfully and regularly trotted out by the foreign media.

Housman-style followers of useful information would do better to watch for results from Erdogan’s visit to Athens this month.

PETER GRIMSDITCH is Executive’s Istanbul correspondent

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United by farce

by Sami Halabi
written by Sami Halabi

Optimists have lauded the sight of Lebanon’s politicians playing a game of football together, under the banner “we are one,” as a sign of good faith to mark the 35th anniversary of the Civil War.  But for those of us less buoyant in nature, the sight was a slap in the face. We would rather see our public figures stop playing games and start getting serious about governing the country.

The players — a mixture of ministers, members of parliament and members of the Lebanese Football Association — managed to muster “unity” for a full 30 minutes, the duration of the match.

However, once the final whistle was blown — much to the relief of Lebanon’s heavier public figures — the youngest player and only goal scorer, Phalange MP Sami Gemayel, did little to contain his contempt for the opposing team’s captain, Hezbollah MP Ali Ammar.

“It seems that Ali Ammar’s defense strategy is a failure,” Gemayel was quoted as saying in the press, ostensibly alluding to the discussions over a national defense strategy currently being mulled at the National Dialogue sessions. 

Playing foul-for-foul, Ammar was quick to boot the ball back into the other end: “Our defense strategy is only directed against the Israeli enemy, and our team did not want to defeat the team of PM Hariri because he is the Prime Minister,” he retorted.

Notably absent from the game were the public, who have been banned from football matches since 2005 due to fears of sectarian violence pouring out into the streets. The irony of this, of course, is that some of the same politicians waddling haplessly across the pitch were the ones to stoke sectarian tensions in the first place.

Thus, with the stands empty, the absence of the public from the political field of play — from parliamentary committees to national dialogue sessions — was extended from the figurative to the literal.

The fact is that many of the player-politicians at last month’s “unity” match have done more to reinforce Lebanon’s sectarian divide through sports than anyone else, given that many own sporting clubs and/or interfere with appointments at the various sports federations.

And while our public figures kick out cash for personal prominence in Lebanon’s sporting arena, when it comes to supporting sports as a national institution — through the Ministry of Youth and Sports, for example — the ball gets deflated, with thread-bare funding for the ministry making it little more than a pawn in the greater struggle for power in Lebanon’s cabinet.

In front of the cameras, of course, the player-politicians told a different story. All agreed that sports needed to be encouraged in Lebanon, though as a former member of Lebanon’s national rugby league squad myself, as well as a development officer for the sport, this doublespeak looked clearly offside.

During a meeting with an adviser to a former sports minster, our team was promised only partial funding for travel expenses if Lebanon made it to the 2008 world cup finals; qualifiers would not be funded at all. When Lebanon hosted an international tournament in 2004 and the lights cut out in the middle of a game, then-President Emile Lahoud had to intervene to get them turned on again; a massive poster of Lahoud was later draped over the grandstand for the final, which Lebanon won against France.

If Lebanon’s politicians truly wanted to encourage sports in the country, they could start by giving the people access to “public” municipal sporting facilities — currently off-limits to those without the right political connections or money to pay.

It was the public who paid some $100 million to reconstruct Camille Chamoun stadium, only to be barred from its first event of the year, as the politicians played their “unity” match. Perhaps the referee should have given them all red cards at the opening whistle and consigned this self-congratulatory sham to an early shower.

SAMI HALABI is deputy editor of Executive Magazine

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Economics & Policy

Regional equity markets

by Executive Editors
written by Executive Editors

Beirut SE  (One month)

Current year high: 1,200.49    Current year low: 715.49

>  Review period: Closed: March 26 – 1,119.09        Period change: 3%

The Lebanese bourse was in the volume shadows, with average daily trade values of $2.3 million in March — significantly below the turnover figures in the first two months of 2010. The MSCI Lebanon Index closed at 1,119.09 points on March 26, reflecting a gain of 3% versus the February 28 close. For the first quarter to date, the index return was a paltry 0.3%. This contrasts unfavorably with the MSCI Arabian Markets Index, whose 11.5% increase in the period from Jan 1 to Mar 26 even exceeded the gains of the Saudi Stock Exchange’s TASI.  

Amman SE  (One month)

Current year high: 2,968.77    Current year low: 2,396.28

> Review period: Closed: March 25 – 2,446.34        Period change: -0.2% 

The Amman Stock Exchange found itself at an uncomfortable distance to the positive trends exuded by regional peer markets. The close at 2,446.34 points on March 25 gave the ASE general index a minute 0.2% drop when compared with the February 28 close, but a slide at the end of the review period also means that the ASE is the only MENA bourse to end the first quarter in the red, down 3.4% year-to-date. Sub-indices for services and insurance provided bright spots on the index charts in March but the more influential industrial and banking sub-indices underperformed.

Abu Dhabi SM  (One month)

Current year high: 3,239.74    Current year low: 2,441.28

> Review period: Closed: March 25 – 2,903.92        Period change: 7.4%

The Abu Dhabi Stock Exchange baked in a balmy light that had its origins as much in the gains of the Dubai Financial Market as, ultimately, in Abu Dhabi’s financial supportiveness for Dubai’s temporary tightness last December. The banking sector did nicely with a gain of 8.6%, but this increase paled against the recovery performance of real estate stocks, where the sector index rallied 19.95% in the course of 20 sessions. The top performing ADX stock, however, was International Fish Farming Holding Co, leaping 38.2%.

Dubai FM  (One month)

Current year high: 2,373.37    Current year low: 1,533.36

> Review period: Closed: March 25 – 1,845.21        Period change: 15.8%

As if it wanted to deliver a message on the advantages of acting contrary to the horde behavior in stock markets, the Dubai Financial Market was full of optimism  in March, after the predictable state and national affirmation of debt commitments related to the Dubai dream’s funding essence. Utilities tanked 21% as real estate rose 28.5%.  bold enough to purchase Emaar shares at the pessimistic bottom on Dec 9, 2009 and selling on Mar 25, would have seen an enjoyable gain of 59%.

Kuwait SE  (One month)

Current year high: 8,371.10    Current year low: 6,391.50

> Review period: Closed: March 25 – 7,489.80        Period change: 1.5%

Banking and food provided the growth impetus on the sector side, while insurance was a negative outlier. Amidst other insurance stocks trading in moderate ranges, First Takaful Insurance Company crashed an extraordinary 45% in only two trades of 120,000 and 30,000 shares in the past 30 days. While still 1,700 points away from its 12-month high, the KSE is now the second-best share price performer in the GCC for the year to date, trending to a first-quarter gain of 6.9%.

Saudi Arabia SE  (One month)

Current year high: 6,801.64    Current year low: 4,632.51

> Review period: Closed: March 24 – 6,756.98        Period change: 5%

Thanks to appreciating 5% in the review period, the SSE could claim the distinction of being the region’s first market that achieved a double-digit gain in 2010 and was up 10.4% for the year to date. Construction, petrochemical and industrial sectors led the rally in March. Sub-indices of sectors that moved lower since the last close in February were insurance, media and multi-investment. The market close on March 24 represented an 18-month high.

Muscat SM  (One month)

Current year high: 6,813.20    Current year low: 4,575.99

> Review period: Closed: March 25 – 6,779.20        Period change: 1.3%

The Muscat Securities Market closed at 6,779.20 points on March 25, representing a 1.3% gain from the last close in February. Banking was the best performing sector index. As the MSM in late March breached the 6,700 points level for the third time in the past 12 months, bourse metaphysicists may have been motivated to test their insights about the psychological import of the 7,000 points barrier. For market participants with an earthly orientation on share price performance, it may have been more inspiring to note that the MSM index has been inching toward the 7% gain for the year to date.

Bahrain SE  (One month)

Current year high: 1,681.28    Current year low: 1,413.28

> Review period: Close: March 25 – 1,528.46          Period change: 0.7%

With the island kingdom’s vigorous PR campaigns focusing on Bahrain’s pole position for doing business in eastern Saudi Arabia, and with the remaining global attention span consumed by the Ferrari F1 desert win spectacle, the Bahrain Stock Exchange was the relative underperformer in the March 2010 GCC stock price race.  Banking and insurance provided the positive highlights. Ahli United Bank was the star performer in March, climbing 10.2%. The BSE first-quarter gain margin, while a respectable 4.8%, was underperformed only by the DFM.

Doha SM  (One month)

Current year high: 7,624.45    Current year low: 4,810.00

> Review period: Closed: March 25 – 7,413.76         Period change: 7.9%

From a perspective that performance stability and equality ought to be a GCC markets good, the Qatar Exchange was very fortunate in March. That gain lifted the year-to-date performance of the QSE to 6.5% – out of the red and into a happy first-quarter performance trinity with the Omani and Kuwaiti exchanges. All QSE sector indices followed the uptrend in March, although banking and services excelled among them. The single scrip to suffer a double-digit weakening in the March review period was the Qatar Cinema and Film Distribution Co. 

Tunis SE  (One month)

Current year high: 4,743.05    Current year low: 3,080.88

> Review period: Closed: March 26 – 4,693.45        Period change: 0.4% 

The leveling of performance by the Tunisian bourse’s Tunindex continued in March and the index close of 4,693.45 points on Mar 26 represented a gain of 0.4% from the last close in February. On a quarterly basis, however, the TSE’s impressive year-to-date gain of 9.4% has been eclipsed only by the SSE. Real estate developers Simpar, which jumped 52%, Attijari Leasing Co (24.6%), and insurer STAR (17.2%), were the other top gainers in March. In April, the initial public offering of insurer Tunis Re can be expected to create a buzz and draw interest to the market.

Casablanca SE  (One month)

Current year high: 11,729.86  Current year low: 9,997.56

> Review period: Closed: March 26 – 11,228.49      Period change: 1.2% 

Real estate firm CGI was top performance dog with a gain of 18.8% in the review period; paper maker Papelera de Tetuan was the underdog with a 14% share price weakening. Against the general assumption that the future of the Moroccan exchange resides in a substantial increase in the number of listed stocks, an unconfirmed media report on March 27 said the Groupe ONA conglomerate and its largest shareholder, SNI, plan to merge into a single holding company and delist.  

Egypt CASE  (One month)

Current year high: 7,249.55    Current year low: 3,193.94

> Review period: Closed: March 28 – 6,765.26        Period change: 2% 

Volatility of 23% in the Feb 28 to Mar 25, 2010 review period and a feeble 2% gain  stained the Egyptian Stock Exchange’s first quarter performance — even as the EGX’s overall first quarter gain of 9% remains nothing to scoff at. Losers outnumbered gainers in March and of the three market cap leaders, only Orascom Construction had a good share price performance, up 11.3% in the review period. Telecoms heavies OTH and TE dropped 5.5% and 11.7%, respectively.

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Economics & Policy

For your information

by Executive Editors
written by Executive Editors

Public Debt grows though defect slows

The latest figures on Lebanon’s gross public debt as Executive went to print, showed an increase of 1.1 percent in January to $51.6 billion, according to Byblos Bank. The figure is a 9.9 percent increase compared to the same period in 2009. Domestic debt also increased some 16.6 percent this year, compared to January 2009, totaling almost $30.4 billion, with foreign debt increasing just 1.5 percent to $21.3 billion over the same period. Local currency debt accounted for 3.4 percent more of the gross public debt than it did at the end of January 2009, at 58.8 percent, signaling a continuing trend toward denominating debt in local currency, which makes it easier for the government to mitigate currency fluctuation concerns. Other promising fiscal signs emerged in January when the fiscal deficit for the month reached $17.7 million compared to the $300 million posted a year earlier. Debt servicing also decreased 26 percent year-on-year to $212.5 million in January, making up 27.6 percent of total expenditures during the month. Lebanon also scored a primary surplus of $201.2 million in January compared to a deficit of $7 million in the same month last year.

Banks propose NDIC buy-out

The Association of Banks in Lebanon have floated the idea of buying the Lebanese government’s share of the partly state-owned National Deposit Insurance Corporation (NDIC) for around half a billion dollars. The NDIC is half government owned, with the other half belonging to commercial banks. In theory, the government is supposed to inject $50 million a year into the corporation but has not paid its dues since 1996, making it liable for some $700 million dollars. The proposal would exempt the government from its dues and result in the banks paying $550 million to acquire the entity this year. The banks will pay the government a further $150 million in the coming two years, while the banks would continue to manage the operations of the NDIC along with the Banque du Liban, Lebanon’s central bank. The proposal would require the law covering the NDIC to be modified or a new law to be passed. 

Son of Lebanon tops Forbes rich list

Forbes has released its annual list of the world’s billionaires, 12 of whom were Lebanese or of Lebanese origin. Topping the list  with a fortune of $53.5 billion was Mexican Carlos Slim, whose father is Lebanese. Coming in at 64th richest person in the world, worth $10 billion, is Brazilian Joseph Safra, whose family originated from Aleppo, Syria, before moving to Beirut after World War II. The list also showed that Bahaa Hariri, the older brother of Lebanon’s Prime Minister, was $100 million richer than the previous listing with a fortune of $3 billion. Bahaa Hariri was followed by former Prime Minister Najib Mikati and his brother Taha who each had a net worth of $2.5 billion. Lebanon’s Prime Minister Saad Hariri also increased his personal fortune, with an estimated $1.9 billion fortune to his name, up from $1.4 billion in the previous rankings.

Policy quagmire to slow economic potential in 2010

Barclays Capital has indicated that Lebanon’s gross domestic product will likely grow 6 percent in 2010. The investment bank stated that real GDP growth in 2009 was more than 8 percent and attributed the slowdown to a fall in consumption. Barclays also expected a rise in both public and private investment to help spur the economy. The bank expects inflation to hit 4 percent this year on the back of higher oil prices and a possible increase in value added tax. Capital inflows are expected to remain steady while remittances are expected to climb. As such, Barclays expects that the current account deficit will be trimmed from 9.1 percent in 2009 to 8.6 percent in 2010.  The banking sector is also expected to do well but will fall relative to last year, with deposit growth projections coming in at 15 percent over the course of 2010 compared to more than 20 percent growth in 2009, according to the bank. Barclays also indicated that the toughest challenges for Lebanon’s economy would be the ability of its policy makers to enact reforms to begin to deal with fiscal problems, which it reckons will see the deficit widen to 11 percent of GDP from around 9 percent last year. It also predicted that the debt-to-GDP ratio would remain constant at 154 percent, due to the lack of reforms at the state-owned Electricité du Liban maintaining its weight on government finances. 

Up or down, take you pick of inflation statistics

According to the Consultation and Research Institute (CRI), a private consulting firm, February saw real prices in Lebanon deflate. Throughout the month, the consumer price index (CPI), the premier indicator of inflation, fell 0.26 percent relative to January. However, according to the Central Administration for Statistics (CAS), Lebanon’s official body for the collection of economic data, the CPI in February 2010 rose 0.5 percent relative to January, carried by increases in the price of transportation (14.6 percent), housing (6.1 percent) as well as water, electricity, gas and “other fuels” at 5.5 percent. Yearly inflation also differed widely between the two organizations with CRI estimating that year-on-year prices in February showed an increase of 6.08 percent with a 12-month CPI moving average of 3.17 percent, while the CAS recorded a CPI rise of only 2.9 percent. According to Byblos Bank, 70 percent of Lebanon’s inflation is caused by the increased price of imports.

Energy Ministry plans EDL reform

Figures from the finance ministry have stated that in 2009, Lebanon spent $1.5 billion on the state-owned Electricité du Liban (EDL), with 94.4 percent being spent on fuel oil and natural gas to generate electricity.  The total amount of transfers to EDL in 2009 were 7.1 percent lower than in 2008, due to a decrease in both debt servicing (-18.1 percent) and reimbursements (-6.3 percent). Most of the decrease was attributed to a fall in oil prices last year compared to all of 2008. Gas oil expenditure in 2009 increased 26 percent while fuel oil decreased by 1 percent relative to 2008, signaling the beginning of a shift toward cheaper gas-based power generation. EDL expenditures also constituted 20.4 percent of primary government expenditures in 2009, 4.8 percent lower than in 2008. Lebanon’s energy minster has also proposed a 10-point plan to reform the energy sector in Lebanon. The plan proposes providing short-term power solutions to cover for the upcoming summer season when electricity consumption peaks, rehabilitating old power plants in the medium-term, preparing a plan to allow independent producers to generate 5,000 megawatts of power by 2015, diversifying energy resources by shifting to liquid and natural gas plants and employing renewable energy, expanding the energy transport network, improving distribution and collection, installing remote counters and restructuring tariffs. A committee was also formed at the ministry to resolve outstanding issues between EDL and electricity concessionaires.

Tourism sector set for further growth in 2010

The World Travel and Tourism Council (WTTC), a global travel and tourism industry forum, has estimated that tourism in Lebanon will directly contribute 13.3 percent of gross domestic product over the course of this year. The council stated that $4.39 billion in revenue would be generated through tourism, with direct industry employment accounting for some 199,000 jobs and constituting 13.7 percent of total employment in 2010. The WTTC also indicated that indirect contributions to the Lebanese economy coming from tourism would constitute 37.6 percent of economic activity and generate some $12.39 billion. According to the WTTC, Lebanon is currently globally ranked 13th in terms of the share of travel and tourism employment in the country’s job market, but ranks 42nd in terms of expected real employment growth in the sector over the next 10 years. Last month, Lebanon’s tourism minister also stated that the sector would grow by 10 to 20 percent this year, and reassured the public that there would not be a war with Israel.

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Economics & Policy

Running out of steam

by Sami Halabi
written by Sami Halabi

Of the five pillars of Islam, making the pilgrimage to Mecca was perhaps the most testing for those who lived in the time before planes and cars. Each bodily able Muslim who sought to enter heaven would trek through the sands of the Arabian Peninsula by camel caravan, braving the scorching summer sun or the freezing winter nights; from Damascus, this pilgrimage could take two months.  Then, in 1864, at the height of the Ottoman Empire, the Arab world’s Turkish masters proposed a grand idea. A waqf, or sacred Islamic donation, would be opened to all Muslims of the world to fund the Hejaz Railway, which would extend from Damascus to Mecca and allow travelers to make the trip in four days, and for less than 10 percent of the price.  Fast-forward to today, and the thoughts of current Arab rulers are on the same track as their northern predecessors. The Gulf Cooperation Council has decided that they will build a joint railway to link their countries. While the advantages of such a scheme would be enormous, especially in the commercial sense as the project is envisioned to be a cargo route first and a passenger route second, deciding that something should be done and actually doing it are proving to be very different matters.

Hard to decide

Planning for the railway began to gain steam in 2004, when the GCC Technical Committee’s (GCCTC) transport department, the body overseeing the project at the regional level, commissioned a preliminary study carried out by the American firm Parksons Brinkerhoff and the Kuwait-based Global Investment House. The study eventually proposed two routes for the project. The first would have run from Kuwait through Saudi Arabia to Bahrain, connect to Qatar via a new bridge over the water, then reach the United Arab Emirates and Oman. The second route ran from Kuwait to Oman overland and through Saudi Arabia and the Emirates, with a connecting track to Qatar and Bahrain; the latter plan eventually won out. 

In February 2007, a consortium led by Systra of France, Khatib and Alami of Lebanon and Canrail of Canada was asked to perform a feasibility study covering topographical and statistical data, integration, financing and development options, legal models, as well as passenger and freight configurations.

The study, described as an “economic feasibility study” by a source who is part of the consortium and spoke on condition of anonymity, did not cover the potential problems that could ensue from the fact that every nation, which would be designing, funding, and implementing their own part of the project, also had the right to change specifications in its own territory.

“It was the case that the design would be done under the supervision of the GCC, but now the countries are seeking to design their own respective projects,” says Ibrahim al-Sbeiteh, director of transport at the GCCTC.

This is not the only issue that has led some to question the project’s feasibility.

“The multiple delays that we are seeing right now in the GCC rail network are probably also due to some liquidity problems that are down to the [financial] crisis,” says Philippe Dauba-Pantanacce, senior economist on the Middle East and North Africa at Standard Chartered investment bank.

The freedom to delay

Unlike the Ottomans, who had the luxury of administrative control over the entire area of the Hejaz, the authority of each country over their segment of track and the fractious nature of GCC decision making has made progress less than steady. Since the feasibility study was completed and approved by the GCC in December 2008, little headway has been made and divisions have begun to appear in other areas.

For example, the Gulf countries have still not implemented the common customs union that was agreed in 2003. Meanwhile, the prospect of a GCC monetary union that has been in the works for more than a decade was dealt a severe blow last year when the UAE decided to pull out, ostensibly angered when the council decided to host the Gulf central bank in Riyadh instead of the Emirates. Oman decided not to commit back in 2006.

“As we have seen in the GCC monetary union project, there are a lot of political hurdles within the GCC that constitute barriers to progress in these projects,” says Dauba-Pantanacce.

So, if track record is anything to go by, the planned completion time of 2017 may be little more than a chimera. The source on the consortium said the current completion date in 2017 would be pushed back. Construction was slated to start this year, but the project is still in the engineering design phase and, according to Zawya, companies are only expected to be prequalified for contracts this September, with detailed design contracts to be awarded in December during the GCC summit in Abu Dhabi. 

The devil is in the details

In order for detailed design contracts to be awarded however, each country will still have to decide on the route that the track will take through their respective territories. Except for Saudi Arabia, which has already started its own national railway development, GCC states have yet to define the parameters of their respective railway segments.

A further cause of concern is the status of the world’s longest marine causeway between Bahrain and Qatar, which is jointly funded by both nations. In June, Reuters reported that the 40-kilometer, $3 billion project had been suspended “amid escalating costs and increased political tension,” with a sizable portion of that extra cost due to the decision to fit the causeway with a railway as part of the GCC common rail project.

The report was later denied by the assistant undersecretary for financial affairs at Bahrain’s Ministry of Finance and chairman of the Qatar-Bahrain Causeway Foundation, but such complications do little to inspire confidence.

Diesel or gas: fuelling the divide

Because the railway was envisioned as more of a freight project than a passenger one, the speed and volume at which goods can be moved through countries is of utmost importance to the eventual linkage and completion of the project.

According to the consortium source, the $25 billion estimated cost was based on a diesel powered standard speed across the railway. But the newest proposals by Qatar and Oman to opt for an electric line could throw a spanner in the works and bring the project back to the drawing board.

The shift is significant because of several factors. Despite sitting on some 23 percent of the world’s know gas reserves, the GCC, with the exception of Qatar, is facing a gas shortage due to rising demand primarily associated with power generation. Qatar opting to run an electric train is precisely the kind of wildcard that could see the project’s financial and technical scope become increasingly more complex to implement, not to mention the political tensions such a move would stoke.

“They [GCC nations] will have some difficult tasks to resolve, mainly on the processes, the support, the interoperability, and potentially on investment priorities. Interoperability will be the most important thing to agree on, at the GCC level,” says Ulrich Koegler, partner and member of the leadership team for Booz & Company’s Middle East transport and infrastructure practice.

“If you don’t have interoperability, at the end of the day you have truncated networks,” adds Koegler.

That prospect would also entail some costly fixes in order to accommodate a common network that meshes with individual country needs. Ostensibly, the reason Qatar and Oman need electric trains is because they are more interested than the other countries in the high speed passenger oriented options that such trains offer.

GCC rail map

The economic feasibility study which was approved by the GCC was prepared on the basis of a speed of 200 kilometers per hour, which is around about the maximum speed possible with a diesel-powered train. Anything above that will require electric power. And the faster you go, the more you pay. 

Speed or strength

The hitch is that ‘double stacking’ — the rail industry term for having two containers stacked on top of each other as opposed to one — is not possible on electric trains. Since the project was only deemed viable because of its economic advantages relating to freight, the use of electric trains throws the entire economic feasibility of the project into question.

Possible solutions to this issue include switching trains and containers at stations, or building separate tracks to accommodate for high-speed electric trains that would be used for passenger transport; the former would add significantly to time spent passing between stations on opposite sides of a border, while the latter would entail considerably higher costs. “The most important thing for us at the GCC project is that the specifications are the same and the timing is agreed upon — that’s all,” says Sbeiteh. “The tendency now is that the GCC line will be diesel with the exception of Oman and Qatar. The Qataris are envisioning that they will need another track for diesel.” The increased expense of the double-track plan could cause total costs to mushroom and threaten the overall scheme’s completion.

“Do we want to first put more money in a common railway system instead of, for instance, diversifying our economy?” asks Standard Chartered’s Dauba-Pantanacce.

Paying for it all

Ultimately, without a concrete cost figure, governments in the region will be hard pressed to allocate large amounts of money to projects that are contingent on others doing the same, though if the regional railway is to work at all, they will have to do just that.

“Rail is a massive investment and you will find very few companies willing to fund it, even if there is a subsidy or [service] availability model over many years because the amount of uncertainly… is transferred to the private sector,” says Fares Saade, principal with Booz & Company and member of their transport, engineering, and services practice.

The liquidity situation is also not homogenous across the region. Saudi Arabia is still flush with liquidity and knows that it will have to put up the lion’s share of the cash, according to Koegler.

Foreign funds

Countries with tighter liquidity conditions, such as the UAE, may consider offers such as the one made in June by the International and Commercial Bank of China, in conjunction with Beijing’s railways ministry, to offer financing, export credit and advisory services to the UAE. It now seems likely that they may use this option, as the UAE National Transport Authority and the Chinese government signed a memorandum of understanding to develop technical and regulatory aspects of the country’s railway in May.

Qatar has also signed a joint venture with Deutsche Bahn International to form the Qatar Railways Development Company (QRDC), which boasts initial capital holdings of $25 billion and constitutes the largest offshore commercial deal for the German railway giant. The Qatari government will own 51 percent of the company through Qatari Diar.

Kuwait seems to be the only country in the region that will opt for public-private partnership (PPP) arrangements, after starting an office to begin tending for such projects, says Koegler. “A rail system will have low or negative returns if you don’t take the socioeconomic benefits into account; and of course private players cannot play on socioeconomic benefits,” he concludes.

Then there is always the option of another waqf, but unlike the Ottoman attempt to fund its rail, this one might carry interest.

“If they don’t finance it through a direct injection of money and they go through issuing bonds, I think that would be creatively the most appropriate way to do it,” says Dauba-Pantanacce. “Having longer-term bonds in line with long-term cash generation projects like a railway is the most sound, recognized and applied methodology that we have seen elsewhere.”

Getting people to use it

Even if the technical, financial and political hurdles are overcome, the challenge of getting people out of their cars and onto the train will be a formidable one. Today, the only piece of mass overland transit in the GCC, the Dubai Metro, is still eerily empty for most of the day.

“There will definitely be a cultural reluctance from the local population to heavily use public transportation to make a long distance trip [of] more than two hours, because they have not been used to that,” predicts Dauba-Pantanacce.

Without the religious allure of the Hejaz railway’s final destination (which it never reached, getting only as far as Medina), a passenger element to the GCC railway will be little more than a convenient ‘add-on’ to the cargo element. But like the Hejaz, time and money will be the defining factor of how successful the project is.

It took the Turks and the rest of the Muslim world 44 years to build their most famous railway. The question is: how long will it take the Arabs to agree to do the same?

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Finance

A head at last

by Executive Staff
written by Executive Staff

The board of directors of Lebanon’s Banking Control Commission were finally appointed on March 3 by a unanimous vote of the Cabinet. After more than a month without a board, the BCC will now be led by Chairman Osama Mikdashi. The other four members of the board include Ahmad Safa, Amin Awad, Mounir Elian and Sami Azar. The board remained empty for so long because these appointments were grouped in with numerous other empty government positions waiting for cabinet action. There were also reports of disputes over the qualifications of some of the candidates, as these positions are coveted and require high levels of banking competence. The Banking Control Commission’s main function is to audit the country’s banks to ensure that all Central Bank circulars are properly followed. Central Bank Governor Riad Salameh took control of the commission while the cabinet haggled over the board.

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