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?

0 comments
0 FacebookTwitterPinterestEmail
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.

0 comments
0 FacebookTwitterPinterestEmail
Finance

Time to get together

by Executive Staff
written by Executive Staff

Six of the United Arab Emirate’s banks control 60 percent of the banking market, according to Emirates Business 24|7 analysis, suggesting that mergers and acquisitions are needed in the banking industry. Based on figures from the end of 2009, of the UAE’s more than 50 banks, 60 percent of business is conducted by Emirates NBD, National Bank of Abu Dhabi (NBAD), Abu Dhabi Commercial Bank, First Gulf Bank, Dubai Islamic Bank and Mashreq. The same six banks also held 60.34 percent of deposits at the end of last year, compared to 58.33 percent at end-2008 and 64 percent of lending at year-end 2009, down from 68 percent. The decrease in lending, however, can be attributed to the industry-wide slowdown and not the spreading of loans throughout the industry. Furthermore, Emirates NBD and NBAD control 30 percent of all banking business in the UAE, prompting Adnan Ahmed Yousif, chairman of the Union of Arab Banks, to say, “The UAE should encourage bank mergers. Since the UAE does not have a tax system for local banks, capital requirement could be the ideal tool through which banks can be encouraged to merge.”

Mergers prescribed for the UAE </p> </div> </div> <div class=

0 comments
0 FacebookTwitterPinterestEmail
Economics & Policy

Up or down?

by Executive Staff
written by Executive Staff

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.


The CAS says rising fuels prices, in part, drove the CPI up in February

0 comments
0 FacebookTwitterPinterestEmail
Business

Plotting a course

by Executive Staff
written by Executive Staff

Mustafa Abdel-Wadood is a managing director and a member of the board of directors of Abraaj Capital. In his capacity as chief executive officer of Abraaj Investment Management, he oversees the company’s investment activity across the Middle East, North Africa and South Asia. He is also a member of the board of directors at Young Arab Leaders (YAL). In 2002, the World Economic Forum selected him as one of the 100 Global Leaders for Tomorrow and as a Young Global Leader in 2007.

Mustafa Abdel-Wadood - Managing director and board member of Abraaj Capital

When did you join Young Arab Leaders?

I was part of the original board, which was founded and chaired by Mohammed al-Gergawi. The idea came about whilst we were attending the World Economic Forum Middle East event at the Dead Sea, Jordan, a few years ago. Gergawi discussed it with a number of us and later put together a concept document that formed the principles upon which YAL was founded.

The intention was to create an organization that would promote the betterment, and further the causes, of Arab youth, with its members serving that cause as role models.

What originally brought you to YAL and what do you feel are the most important needs of the youth of the Arab World?

Having had the benefit of attending the pre-formation sessions as well as the inaugural meeting, I was attracted to the cause of an organization that represented and served Arab youth. The youth of any region are its future and, given the young population of the Arab World, we need to ensure that the youth have the right opportunities and aspirations to succeed if we are to have sustainable growth in this region.

What is your role on the board of directors and what is the purpose of the board? 

The principles of modern management run throughout our organization’s work, as we embrace transparency and the policy of equal opportunity in all our processes.

Our current board represents the diversity of our network in terms of background, gender and experience; it is this diversity that is our organization’s strength and allows myself and others to collectively contribute a wide range of viewpoints. The members of the board direct the organization strategically and contribute their time and resources to achieving the organization’s key objectives.

What issues confront Arab Youth in the world today? 

The single issue at the core of all the problems facing the Arab world is the provision of effective and relevant education at all levels. All progress will flow from there. Unfortunately, our educational systems across the board, with a few exceptions, have a long way to go before they become relevant in today’s world. Today’s youth need to be armed with the right tools and the right mindset to capitalize on the growth potential of this region. This will not only lead to employment and the economic betterment of the Middle East, but will also lead to a more tolerant and progressive society, whilst preserving our unique culture.

How is YAL working to have the biggest impact on the region?

We recently distilled our strategy to focus our programs on two pillars, education and entrepreneurship. YAL and its chapters have worked on a number of initiatives under these pillars, including mentorship, scholarships, fund-raising for special causes and executive exchange programs. The focus of our work is always the youth and creating opportunities for them to hone their skills.

What is YAL’s future role?

The role is as clear and sustainable as it is today. What we need to achieve in the future is to widen the impact as much as possible, encompassing all 22 Arab League nations and hence, potentially, thousands of youths.

0 comments
0 FacebookTwitterPinterestEmail
Economics & Policy

Middle East Private Equity

by Executive Staff
written by Executive Staff

 

Over the last decade, the state of private equity (PE) in the Middle East has gone from virtually nonexistent, to a booming prospect, to an industry facing a shakeup. In 2004, the region was home to just 26 funds, with a total of $3 billion under management; in 2010, 142 funds manage $34.5 billion.

The sector’s breakneck evolution has made it difficult for investors to get a clear picture of the industry’s underlying fundamentals, and they therefore have been understandably cautious about directing their funds to regional PE firms.

In fact, it is now becoming clear that the region’s heady growth over the last decade worked to cover up some critical weaknesses in the PE industry. Some issues are structural: Significant gaps remain in the region’s legal and regulatory frameworks and corporate governance requires development, as the influence of family-owned businesses may hinder corporate disclosure and limit transparency. Another challenge is the fact that PE firms in the region are still sitting on about $11 billion of unspent capital — much of which is contingent on the performance of previous funds.

Even if the appetite for PE investing were to return to the insatiable pace of 2006–2008 (around 70 transactions per year, with an average size of $30 million), it would take more than five years to deploy all of this capital. Considering that most firms average three to five years until they invest their funds, the mismatch could create significant pressure to invest quickly. The PE market in the Middle East would need to develop much faster in order to absorb the available capital.

In order to fulfill its potential and continue attracting global investment dollars, the industry will need to undergo some reform as it consolidates. PE firms that hope to operate in the Middle East should consider five key imperatives.

·         Develop an investment approach based on themes with staying power. Focusing on individual nations or sectors, as many firms outside the region do, might limit Middle East-focused PE firms’ pool of opportunities, thus restricting their ability to scale their assets with superior returns and in a reasonable time frame. Theme-based investments, by contrast, are built around economic trends and span numerous countries and sectors. For example, PE firms that focus on the theme of serving a growing and increasingly wealthy population will invest in sectors such as consumer and mortgage finance, real estate management, retail, and restaurants and leisure.

·         Tighten up risk management practices. PE firms will need to ensure that their portfolios are not over-concentrated. Naturally, this means that they should not be heavily skewed toward any single geography or sector. However, firms must also ensure that the companies in their portfolios are balanced between different stages of their development — i.e., between companies still in the growth stage that demand cash, and those that have achieved maturity and generate cash. Meeting this target is particularly problematic in the region, where many opportunities are at an early or greenfield stage. A better balance in the portfolio will create a hedge against the cyclicality of the business. In terms of individual deals, PE firms will need to practice more rigorous risk management before, during, and after each transaction.

 

·         Be an active owner. The robust economic growth that preceded the downturn allowed many companies in the region to chase top-line growth at the expense of working capital and profitability. Liquidity issues bubbled beneath the surface while the economy was booming, but rose to the top when the recession hit. These same companies are now struggling to get their house in order. Adopting the appropriate financing approach, anticipating a buildup of operational capabilities and strengthening relationships with key stakeholders and suppliers will require active oversight by existing PE backers, as leading firms KKR and Blackstone have demonstrated.

·         Deepen relationships with limited partners (LPs), especially institutional investors. Historically, the majority of LPs in the region were high-net-worth individuals. However, institutional investors now represent a more significant percentage of LPs — an important development for PE firms as they broaden their investor base. Firms should seek to strengthen relationships with institutional investors, whether regional or international, which are looking to make a play in the region. These may include banks, insurance companies, pension funds and others that have been adding private equity assets in hopes of achieving risk-adjusted returns beyond those possible in public equity markets. Deepening the relationship entails more rigorous relationship management, including continual reporting, and better understanding of the risk-return relationship that institutional investors seek. 

·         Build confidence through new fee structures and fund-raising approaches. Lowering entry fees will encourage investors to come on board and give fund managers the opportunity to prove their worth. Among limited partners globally, the standard “2 and 20” fee structure — in which firms take a management fee of 2 percent of the fund’s net asset value each year and a performance fee of 20 percent of the fund’s profit — has become a source of increasing dissatisfaction. Sensitive to investors’ concerns regarding these arrangements, some big PE firms around the world have lowered their management fees on committed but uninvested capital to 1.5 percent (and sometimes lower for LPs with large commitments); regional firms should consider doing the same. Another peculiarity is fundraising for specific opportunities — while cumbersome, this bespoke option appeals to investors and should be taken into account.

The region’s PE industry sprang up when equity prices were rising, and many local players enjoyed early success in the form of quick and profitable exits from investment positions. However, that dynamic soon reversed. Today, winning will not depend on timing or on external market factors; it will depend on more fundamental sources of value. As firms in the Middle East rebuild, they will need to do the basic things right: Identify sustainable investment ideas, create value within their portfolio companies, reduce their risks, and gain the trust of the best possible investment partners. These are things that will work, and remain important, in good times and in bad.

0 comments
0 FacebookTwitterPinterestEmail
Society

Forces of Fortune

by Executive Editors
written by Executive Editors

Hard power dominates the Middle East. The prospect of military conflict is never too far away and economic sanctions are familiar to many countries in the region. Vali Nasr, professor of International Relations at Tufts University, argues in his new book, Forces of Fortune, that the future of the region will not be shaped by this hard power. It is soft power that will really shape the region, and in particular the continued rise of a middle class.

“It is business with a small “b” that should hold our attention,” writes Nasr. ‘Grow the economy and the rest will sort itself out,’ is the central thesis of the book.   

Nasr rightly points out that Islam and capitalism are two ideas which are symbiotic rather than, as many Westerners believe, antagonistic to each other. The Prophet Mohammed was, after all, a merchant. Turkey is the gleaming example illustrated by Nasr, of how an Islamist party (the ruling AKP) has not gone down the route of Iran, but embraced capitalism and economic liberalization.

“Islam [in Turkey] is conservative but pro-European, pro-democracy and above all, pro-capitalist,” he writes. Forces of Fortune is essentially imagining a region that follows the Turkish model of development, and how the United States can support and spread the Turkish model across the region.

In arguing this, Nasr provides a strong case for the futility of sanctions. Nasr argues that instead of sanctions the US should be increasing business ties and free trade with Iran, so that its society  pressure the regime to reform.

“What sanctions and isolations are achieving, however, is making it more difficult for commerce to flourish, and the historical force that alone can change the Middle East to start that process in the one country that matters most [Iran],” he writes.

The main point of contention with this book, however, is that it presents an argument that is 10 years out of date. The idea that “the road to human rights, social freedoms and democracy runs through business growth and economic progress” has already been proven false — China, Russia and Gulf Cooperation Countries are just a few that have shown this to be so.

Even Nasr argues that in Dubai “the foreigners do all the work, and make plenty of money…but have few political rights.” Business growth and economic progress can occur quite happily without human rights, social freedoms and democracy. 

Further to this, in a region dominated by hard power, the book leaves you with a sense that Nasr puts too much weight on the shoulders of small “b” business. In Lebanon, for instance, Nasr makes the claim that southern Lebanese businessmen leaned on Hezbollah to stay out of the “Israel-Hamas war of 2008-2009.”

This may or may not be true, but Nasr provides no evidence for how he comes to this conclusion, nor does he even suggest that other equally pressing issues may have prevented Hezbollah from joining the conflict. 

In other words, Nasr fails to provide a convincing argument as to how economics alone can change the status quo of the region — as opposed to other issues, such as the Arab-Israeli conflict, foreign intervention, the role of petrodollars and internal political and social structures.

This book provides a fluid account of the histories and development of Iran and Turkey, in particular, but is outdated and one dimensional. Forces of Fortune provides little in the way of new information and a weak argument as to why commerce will be the force that transforms the region.

0 comments
0 FacebookTwitterPinterestEmail
Real estate

Lebanese real estate strong but softening

by Karim Cherif & Martin Bernhard
written by Karim Cherif & Martin Bernhard

Lebanon’s housing market has boomed in the last two years. On the back of a robustly growing economy and large inflows of foreign capital, both housing investment demand and supply increased markedly.

Relatively sound fundamentals

With the economy still growing, Lebanon’s property markets continued to perform well. Demand for Lebanese residential properties remained relatively strong in 2009. As illustrated by the high foreign direct investment (FDI), foreign investors as well as Lebanese expatriates continued to invest in residential properties despite the global economic turmoil. Concurrently, housing demand from domestic buyers was elevated. According to Bank Audi’s estimates, the number of property sales increased by about 2.3 percent to 83,622 transactions in 2009, compared to 22 percent year-on-year in 2008. Mortgage lending continued to expand. Housing loans increased by a staggering 41 percent year-on-year in the second quarter of 2009 (see table inset below), partly because of low interest rates.

On the supply side, construction continued to grow. The first eleven months to November 2009 witnessed an increase in building permits of 6 percent year-on-year, according to the Association of Engineers, and an increase in cement deliveries of 16.5 percent year-on-year. In a business survey conducted by Banque du Liban (BDL), Lebanon’s central bank, in the second quarter of 2009, the number of managers reporting a rise in construction activity exceeded   by 16 percent those reporting a decline. The overall housing supply situation in Lebanon is difficult to assess, given the limited data availability. There is currently no sign that the market is either severely under or oversupplied but there may be some risk of excess supply in the future. For instance, numerous residential projects in the luxury segment are currently under construction.

Mortage lending expansion, by year

Source: Bank of Lebanon, Credit Suisse

Softening, but no sharp fall of house prices expected

Taking the average sale value as a proxy for prices, we calculate that property prices increased by about 7 percent year-on-year countrywide in 2009 (see chart on facing page). In Beirut, housing price growth has been stronger, particularly in the high-end segment, where prices increased up to 40 percent year-on-year in 2009.

The surge in property prices raises some concerns about a potential overheating of Lebanon’s housing market. Homebuyer affordability has decreased markedly, especially in Beirut. As a consequence, domestic buyers are increasingly focusing on smaller and more affordable properties on the outskirts of the city. Moreover, foreign demand may also cool down in the near term, given that valuations in Lebanon are rich in comparison with other property markets where prices have corrected in recent quarters. Investor interest may thus start to shift back to other MENA countries with higher residential yields, putting some pressure on the Lebanese residential sector.

In the near term, we expect average housing prices to soften moderately. However, a strong correction is unlikely in our view. Over the long term, our outlook remains benign, as long as political stability can be maintained.

Transaction activity and price changes, by year

Source: Bank Audi, Central Administration for Statistics, Credit Suisse

Promising long-term prospects

The Lebanese housing sector is structurally sound, in our view. Housing demand should benefit from positive demographic and wealth trends; the population is likely to increase by about one quarter in the next 25 years according to the United Nations.

On the supply side, land scarcity limits new development projects, especially in and around Beirut. This marks a difference to other Middle Eastern countries where land is plentiful. Over the long term, we thus remain positive about the Lebanese residential sector.

Yet, challenges remain. Market transparency is still limited. Moreover, there are some oversupply risks in the luxury segment in the near term due to elevated construction activity and slowing demand.  But most importantly, political stability will be vital for continuous growth in the residential sector and the economy overall.

Supported by a resilient economy

The Lebanese housing sector essentially draws its fundamental strength from the country’s robust economic growth. Lebanon’s economy has shown considerable resilience to the global financial crisis, reaching an estimated real gross domestic product growth of 7 percent year-on-year in 2009, according to the International Monetary Fund. The economy was driven by all sectors, the main ones being market services, trade, government, industry and construction, with Credit Libanais putting the construction sector’s contribution to output at some 8 percent.  The Lebanese banking sector was relatively insulated from the recent crisis due to a traditionally more conservative approach to banking. The sector is also very well regulated and supervised compared to other economies in the region. Moreover, structural economic drivers such as capital inflows supported the sector. Following the strong growth in 2009, the IMF estimates the Lebanese economy will grow by 4 percent year-on-year in 2010.

Foreign direct investment growth

Contrary to other developed and emerging economies, Lebanon was not exposed last year to extensive liquidity constraints. While credit growth to the private sector was on a downward trend since the end of 2008, it has remained in positive and double digit territory.

Since September 2009, the trend turned towards the upside. Foreign direct investments (FDI), which accounted for about 12.5 percent of output in 2008, are estimated to have reached $4.3 billion in 2009, an increase of 20 percent year-on-year, according to the Investment Development Authority of Lebanon. Most foreign investors in Lebanon are based in the MENA region and more than a half of them invest in real estate properties. While Lebanon’s fiscal stance and its large debt are the main vulnerabilities of the economy, Lebanon has escaped the worst of the recent financial turbulence.

Thanks to a steady rise in budget revenues and sustained economic growth, the BDL recorded in June 2009 that the debt-to-GDP ratio has declined from 188 percent to 153 percent since end-2006. Strong deposit inflows, important for Lebanon’s large financing needs, boosted the BDL’s reserves, which doubled over the last year and a half. Still, the annual inflation rate was relatively low at 4.3 percent last November, compared to 2008.

Dollar  peg limits currency risks

Despite the BDL‘s continued commitment to the stability of the Lebanese lira’s (LL) exchange rate against the United States dollar, many Lebanese are still reluctant to hold LL instead of USD. This induced the BDL to maintain fairly stable interest rates throughout the global economic crisis, in contrast to the US Federal Reserve’s aggressive interest rate cuts, without leading to an appreciation of the LL. The higher interest rates mitigate the risk of a liquidity-driven asset price bubble. A gradual de-dollarization has nevertheless taken place in the last two years. The positive interest rate spread to the USD in combination with the fixed exchange rate also spurred capital inflows.

Separately, remittances from expatriates reached $7 billion in 2008, leading to a $3.4 billion surplus in the balance of payments. As of November last year, the BDL recorded a balance of payments surplus of a record-high $6 billion.

Karim Cherif, Martin Bernhard and Adelheid von Liechtenstein are research analysts at Credit Suisse

0 comments
0 FacebookTwitterPinterestEmail
Banking & Finance

Money matters bulletin

by Executive Editors
written by Executive Editors

Regional stock market indices

Regional currency rates

Zain board approves asset sale to Bharti-sources

The board of Kuwaiti telecoms operator Zain has approved a $9 billion sale of most of its African operations to India’s biggest telecom firm, Bharti Airtel. After two failed attempts to buy South Africa’s MTN, Bharti has succeeded in securing a presence in Africa. Zain’s African businesses were considered a target for Bharti, as they are similar in demographics to the Indian market, characterized by low income, low tariffs and a rural population. According to a London-based telecoms analyst, “Bharti’s way of operating is perfect for Africa.“

Algeria on track for rail network upgrade

Canadian engineering and construction firm Dessau has won a $38.8 million contract to design a railway line in Algeria. This contract is part of a $2.3 billion government project to revamp the country’s rail network. Dessau will carry out the preliminary and final designs for the construction of a 170-kilometer line between Bordj Bou Arreridj and Thenia in northeast Algeria. Dessau will be responsible for designing bridges and drainage structures, as well as the reconstruction of roads and other infrastructure. The railway will operate as a passenger and freight rail network, with trains able to travel at up to 160 kilometers an hour.

IMF says Gulf’s medium term outlook positive

The International Monetary Fund stated that Gulf economies could grow at a faster pace in 2010 than more developed economies. According to the Fund, even as the Gulf Cooperation Council’s short-term economic outlook is clouded by the global crisis and by recent developments in Dubai, the region’s medium-term outlook remains broadly positive, supported by rising commodity prices. Non-oil gross domestic product growth was estimated to have been about 2.8 percent in 2009, and the rebound in overall growth in 2010 is expected to be stronger than that of advanced economies. However, the IMF stated that Gulf policymakers are facing the “immediate priority” of cleaning up their banks’ balance sheets through continued recognition of losses and provisions.

0 comments
0 FacebookTwitterPinterestEmail
Banking & Finance

For your information

by Executive Editors
written by Executive Editors

lending bounces back

Central bank figures suggest that regular lending in Lebanon has resumed in 2010 after showing slow growth in 2009 due to the financial crisis. Commercial bank lending saw a 3.5 percent increase (equating to $988 million) from January to last month, reaching a total of $29.36 billion. Perhaps offering evidence of a global economic recovery, much of this growth came from lending to the non-resident private sector. Loans to the non-resident private sector grew by $589 million, far exceeding the $137 million in lending growth to that sector for the whole of 2009, and amounted to a total of $4.7 billion. Lending to the domestic private sector increased by $399 million in January, reaching $24.7 billion. As loan growth leaned heavily toward non-residents, growth in foreign currency lending was six times the growth of Lebanese lira lending, possibly allowing Lebanon’s banks to resume the strategy of regional expansion, which was the case at many banks before the crisis.

Foreign reserves, gold prices push BDL assets over $55 billion

Foreign assets at Banque du Liban (BDL), Lebanon’s central bank, reached $29.78 billion in mid-March, a 0.96 percent increase from the midpoint of February. The $284 million increase contributed to the 5.24 percent year-to-date growth of foreign reserves at BDL. Foreign assets at the central bank have seen a year-on-year increase of 41.85 percent. The Central Bank’s gold reserves appreciated in value as well, reaching $10.2 billion in a 20 percent year-on-year increase, helped by the rebound in gold value earlier this month. Total assets of the Central Bank have grown by 3.73 percent in 2010 to reach $55.75 billion.

Stable banks stung by ratings

The Lebanese banking sector is stable but significantly weighed down by its “codependent” relationship with Lebanon’s public finances, said a March 17 report by Moody’s Investor service. The report touted Lebanon’s weathering of the financial crisis and ability to continue to attract foreign investment. “The stability of the Lebanese banking sector reflects, to a significant extent, its remarkable success in attracting a constant large stream of foreign funding from the Lebanese diaspora and Gulf investors. Indeed, bank deposits have displayed notable resiliencies to political shock throughout the country’s turbulent recent history,” said Stathis Kyriakides, assistant vice president and analyst at Moody’s, and the author of the report. But, as Lebanon’s sovereign rating remains at B2, or junk status, the banking sector is hampered in its efforts to improve further, though the ratings of the banks themselves will most likely remain unchanged, said the report. “Banking and government finances remain codependent in Lebanon: the government relies on ongoing financing of its sizeable debt by domestic banks and the banking sector has embedded interest in preserving monetary stability. Thus, government securities will continue to comprise a large portion of banking assets in the foreseeable future, linking banks’ asset quality to the performance of the government debt rating,” said Kyriakides in the report.

BCC finally finds its head

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.

Lira-laden banks try to lose liquidty

The Association of Banks in Lebanon (ABL) made two moves in March to slow the stampede of deposits into Lebanese banks. The first move came on March 5, when the ABL cut interest rates on Lebanese lira (LL) deposits to 6.5 percent. Interest rates on LL deposits were averaged at 6.61 percent for January according to the Central Bank. Interest rates on Lebanese lira deposits have been well above United States dollar rates since August of 2009, leading to massive conversions of deposits from US dollars to local currency and creating an excess of liquidity, which has proved expensive for the country’s banks. On March 10, the ABL also lowered the Beirut Reference rate on lending to 8.32 percent in LL and 5.05 percent in USD. The second effort is the recommendation for a ceiling on US dollar deposit rates. Though USD rates continue to be lower than local currency rates, dollar deposits still earn more interest in Lebanon than on the international stage. The ABL has suggested that dollar deposit rates be capped at 3.25 percent. The average interest rate for USD deposits was 3.04 percent in January. The last time the average rate surpassed 3.25 percent was in  March of 2009, when it hit 3.26 percent.

CIB leaves Kuwait, Abu Dhabi SEs

Egypt’s largest private sector lender announced on March 18 that it will be delisting its shares from both the Kuwait and Abu Dhabi bourses. In a statement on the Abu Dhabi Stock Exchange website, Commercial International Bank (CIB) said that weak trading of the bank’s shares contributed to the decision. The bank also named differences in accounting practices between Abu Dhabi and Egypt as a reason for the change. “CIB’s stock is accessible for trade through both a global depository receipt, or GDR program in London and a level 1 American depository receipt (ADR) program on the New York Stock Exchange, thus meeting the strategic objective of visibility in the global investment community,” said the bank’s statement. The bank concurrently announced that it would boost its capital by 400 percent, raising its authorized capital from $912,500 to $3.65 billion. The capital raise will be achieved through the public sale of new shares to both existing and new shareholders, which will include some private placements.

Iraqi central bank plans to rebase the dinar to improve value

The Central Bank affirms its commitment to its strategic projects, particularly knocking three zeros from the Iraqi dinar,” said a statement by Iraq’s Central Bank. “Despite the technical and logistical preparations for the project we have yet to decide on suitable timing to implement the project.” The Central Bank’s senior advisor Mudher Qasim also told Dow Jones newswires that taking three zeros off of the dinar would improve its value. If the currency is rebased and the zeros knocked off, one US dollar will be equivalent to 1.17 dinars. In order to rebase the currency, the central bank will need to print new notes. This will be the second time in six years that Iraqis have had to trade in their currency, after the US civilian authority in Iraq printed new notes in July 2004 in order to replace the currency bearing the image of Saddam Hussein.

Banks flooded by bad checks in foreign currency

Lebanese are writing more bad checks this year than they did in 2009, according to Central Bank figures. The number of cleared checks in foreign currency is more than double those in Lebanese lira (LL) and foreign currency denominated checks also make up the majority of those that bounce. Bad checks in foreign currency totaled $163 million in February of this year, up from $121 million in 2009, marking a 35 percent increase. The number of bad checks in foreign currency increased further, growing from more than 27,000 checks in February 2009 to almost 39,000 in February of 2010, a 43 percent increase.  However, the number of cleared foreign currency checks increased by only 2.38 percent, leading to the conclusion that though the value of bad checks is increasing on par with the value of cleared checks, the volume of bad checks in foreign currency is increasing much faster. In other words, bad checks in foreign currency are being more frequently written for lower amounts. Regarding checks in LL, the opposite is true. The value of cleared checks in Lebanese lira has increased 27.03 percent in the last year while the volume of LL bad checks has increased by only 4.26 percent.

0 comments
0 FacebookTwitterPinterestEmail