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.”

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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

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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.

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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

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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.

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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.

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Feature

A difficult dawn for democracy

by Executive Editors
written by Executive Editors

It was an election campaign colored with glittering posters flooding the country’s streets, countless party political conferences and female candidates campaigning actively on the ground. This is the new Iraq that has exceeded expectations; the Iraq that should see most foreign forces depart from the country in August and be left alone by the end of 2011.

On March 7 the Iraqi parliamentary election saw 6,000 candidates compete for just 325 parliamentary seats. It was contested on the basis of an open-list system which allowed the electorate to vote and elect their own Members of Parliament, giving their vote the decisive impact that has encouraged blocs and parties to think twice about their commitment to the Iraqi population.

Services like electricity and water, jobs and security are the main issues for Iraqis. Who they trust to provide these is not such a simple matter.

“Iraq needs someone able to maintain order and stability on the basis of nationalism” said a woman named Marwa at a Baghdad university. Nationalism (watinyah) was the ever-present factor in this election and, accordingly, was the issue Iraqis believe their representatives need to first embrace before the above services are delivered.

Two men often came up in discussions with Iraqis: Prime Minister Nouri al-Maliki and Ayad Allawi. Unsurprisingly perhaps, it is those very two men who have emerged as victorious in the elections.

The squabble for concessions

Allawi and his Iraqi National Movement (INM) have claimed victory over Prime Minister Maliki’s State of Law coalition, with 91 seats to 89, but the next stage in Iraq’s democratic process could prove to be more challenging and tumultuous than the election itself. With so few seats between the two leading coalitions, it is no simple matter to resolve the issue of which man forms and leads Iraq’s next government.

Iraq has a diverse political system with various blocs and parties. Power depends on the ability to forge alliances with other groups, since a coalition has to garner 163 seats to form a government. Both Maliki and Allawi will, over the coming weeks and months, court the two significant groups: the Kurdistan Alliance, which won 43 seats, and the essentially sectarian coalition of the Iraqi National Alliance (INA), which won 70 seats and is dominated by the Islamic Supreme Council of Iraq (ISCI) and the Sadrist bloc.

The leading group within the INA (in terms of seats gained so far) is cleric Muqtada al-Sadr’s Sadrist bloc.  The Sadrists are known to dislike Maliki and in 2008 were the target of a Maliki-enforced decision to battle their ‘Mahdi Army’ militia group in Basra, which in the end severely weakened them.

The Sadrists and Allawi, however, also have a distasteful and violent past. As a result, it may all come down to concessions over power and what Maliki and Allawi can offer the Sadrists and, indeed, the Kurds. The Kurds, along with the Sadrists and ISCI, could join forces and seek to oust Maliki from office and have come close to allying together before.

The possibility of disintegration within the INA and the Iraqi National Coalition (INM) of Allawi makes it difficult to predict the forthcoming government, particularly when it is not yet known how many seats individual elements within the various blocs have gained.

“The political parties try to find any issues to talk about so if they lose they can say it’s fraud. To be frank, if one political bloc wins all the others will oppose it. I’m ready for a fight”

The worst is yet to come

Of course, a partnership between Allawi and Maliki would constitute the dream ticket, one that would satisfy Iraq’s neighbors and that would radically transform the internal dynamics of Iraqi politics, since both men constitute representatives of both the Sunni and Shiite communities. Past and personal problems, however, make this unlikely, as well as both men’s desire to assume the premiership.

Although the results are out and Allawi has emerged as the winner, the fact that Maliki came an extremely close second means it will be a tumultuous journey toward the formation of the next government. Do not expect to see it any time soon.

In addition to the coalition building process, which will have to be exhausted, there may also be continued allegations of fraud and the possibility of legal battles that dispute the results, particularly from the losing parties.

Allawi’s INM also persistently warned of widespread fraud, calls echoed by almost every other party (some legitimate, but most may be little more than political posturing). Zoran Trajkovski, the electoral affairs officer at the UN Assistance Mission for Iraq (UNAMI), which provides support and technical assistance to Iraq’s Independent High Electoral Commission (IHEC), said election administration had improved over previous ballots.

“Displaying the results on the wall of each polling station shows great transparency; it couldn’t really be more transparent,” said Trajkovski. “We need to [ensure] the acceptance of the results because that is key to political reconciliation.”

Like Allawi and Maliki, ISCI leader Ammar al-Hakim also raised concerns about the independence of the electoral commission, noting that his party “witnessed problems in the last election, but that was a local government election and we thought it would be better to be patient.”

Hakim was adamant that this time his party would not stand for “any violations or unfair measures.”

But IHEC Chairman Faraj al-Haydari defended the veracity of the results: “The political parties try to find any issues to talk about so if they lose they can say it’s fraud. To be frank, if one political bloc wins all the others will oppose it. I’m ready for a fight.”

Parties have three days after the result is initially released to present evidence of irregularities. These will be investigated and parliament will only sit after the count is ratified by the court, which has around 30 days to do so, according to the constitution. Once the results are ratified, they must be accepted.

Dodging and braving the countless mortar attacks launched on election day, more than 62 percent of all Iraqis cast votes. Democracy has been embraced in Iraq and seems to get stronger with every election.

The hard work starts now, however. As the coalition building process picks up speed, Iraq’s government should be formed over the next two to four months.

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Editorial

Morality free zone

by Yasser Akkaoui
written by Yasser Akkaoui

The 2008 global financial crisis was just that – almost everyone took a hit. But looking at the Dubai property figures for the fourth quarter of 2009, it appears that Dubai is still in tatters while the rest of the world is rallying. Even more worrying is the controversy surrounding the conduct of Omar bin Sulaiman, Saad Abdul Razak, Zack Shahin, Michael Bryan Smith, Kabir Mulchandani and Tawhid, Tawfiq and Tamjid Abdullah, who have all been detained in Dubai on different allegations of financial wrongdoing.

Part of Dubai’s attraction to investors was the promise from the government that “Dubai will grow.” The emirate would be independent of oil with a sustainable long term and diversified economy, delivering healthy returns. Until 2008, things were looking good and the government was seeing through on its promise. Investors encountered minimal red tape, and everywhere you looked there were assurances of best practices and best standards. It was a golden age.

But then we realized that Dubai was another ‘black pearl,’ a creation literally hewn from the sand. While the government controlled the supply and marketing, there was no safety net when Dubai’s soft underbelly was exposed to the global crisis. An unmitigated disaster? Not necessarily. Brand Dubai can be saved by wise management but, and this is where the Omar Bin Sulaiman factor comes in, it cannot claim to be a modern statelet and behave like a bazaar, where money is made on the back of lucrative government contracts, while bad practices and a lack of transparency are the norm. Dubai should know better. It is a global player in a global market. It shed its developing economy profile years ago. Dubai has to think of a new promise, one that will ensure best regulatory practices and best governance.

Meanwhile, Lebanon’s freewheeling economy cruises unabated, even if it is deaf to the distant drums of war. The Lebanese private sector has lived through so much conflict that it has clearly become blind to the demands such an environment places on modern business. If the economy is to evolve from its short-termist mentality, the private sector needs to take measures to ensure it is crisis-proof. The central bank has led the way, looking after its own by issuing advisories to local banks to create off-sites, crisis committees and the like, should there be a conflict. Banking is a key sector, but so is the media, retail, tourism, real estate and insurance, to name a few. It is a shame that the Ministry of Economy and Trade is not helping to backup the rest of the private sector as well.

Then again, Lebanon was never underwritten by the state.

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Finance

Cash flow in a conflict

by Ahmed Moor
written by Ahmed Moor

When disaster strikes, survival is often earned by those who have planned ahead. For businesses, this means developing contingency plans for worst-case scenarios associated with their operating environments, which can differ depending on locale: in Los Angeles there is the threat of earthquakes, while in Taiwan they face typhoons. In Lebanon the most sizable systemic risk is, perhaps, war.  

The Israeli onslaught in the summer of 2006, which killed more than 1,200 Lebanese and wrought some $3.6 billion in damage, served notice that major violent confrontations can, and do, erupt without prior notice. With tensions escalating recently between the region’s belligerents — particularly Israel and Iran — the threat of renewed conflict is real, and a fact that every responsible business should take into consideration. Banque du Liban (BDL), Lebanon’s central bank, recognized this as far back as August 2009 when it sought to reinforce disaster preparedness by issuing “Basic Decision No. 10227,” which stated that “all banks operating in Lebanon must prepare a business continuity plan” within the year.

The document goes on to say that every business continuity plan must include “preventative and prudential” detection, rescue and business resumption procedures. BDL outlined 12 principles for creating a compliant plan. The first four  can be classified as threat and resource identification; the next set of steps relates to preparation and the final two steps are testing the plan and then continuously updating it as necessary. 

As a case study, Executive spoke to two Lebanese banks to learn about their experience during the 2006 bombardment and how they have since adapted their contingency plans. Both Byblos Bank and Bank of Beirut said that they were already largely compliant with BDL’s guidelines when Basic Decision No. 10227 was issued. 

Byblos Bank

Founded in 1950, Byblos Bank operates in 11 countries in the Middle East, Europe, and Africa. With total assets at approximately $20.5 billion and 1,800 employees, the retail and corporate bank is one of the largest in Lebanon.   

During the 2006 Israeli bombardment of Lebanon, Byblos Bank encountered a variety of difficulties but managed to remain operational for the entire period.

The strikes on Lebanon were unanticipated, so operations in 2006 were without a formal business continuity team. Management found that many employees could not access branches where they worked, so they were reassigned to locations closer to home.

Philippe Saleh, head of corporate risk management at Byblos Bank said, “There are a lot of uncertainties which may happen… we had all these uncertainties, which we had to deal with on a relatively ad hoc basis.”

Concern about the bodily safety of employees was compounded by concern about fuel shortages for the banks’ generators to remain functional, though the 34-day conflict ended before supplies were exhausted. Significantly, the bank did not have to resort to disaster recovery systems. 

One of the biggest challenges faced during the war was coordinating amongst different groups of employees as many were unreachable, and were unwilling or unable to venture from one branch to another when critical communication lines went down. For the same reason, gaining access to branches to secure funds in case of looting or destruction was problematic. 

 Members of the public struggled to withdraw funds from automated teller machines (ATMs), many of which were in dangerous areas and therefore not restocked until the conflict ended.

 After the 2006 war, the bank created a business continuity committee responsible for coordinating all aspects of the business as a disaster situation evolves.

Now if a situation were to occur, information such as telecommunications availability, core systems and human resources management will be centralized and recommendations forwarded to the continuity committee.

After 2006, Byblos Bank minimized cash in ATMs in areas deemed to be ‘strike-prone,’ while cash in other locations was increased. Should another war break out, branches identified as non-essential will be temporarily closed,  permitting the bank to relocate essential resources, such as fuel, to larger branches that are more accessible, while minimizing the amount of danger to which employees are exposed. 

Byblos Bank also maintains a remote operational command center and a backup server in Lebanon, with a disaster recovery site in Syria.

Byblos’ Saleh explained, “If there are any disasters in our core system, or where our core system is located, we can switch to a disaster recovery site in order to resume our business.”

The business continuity team catalogued all people and equipment vital to the running of the company, so that if they do need to relocate to a remote operations center, all of the required tools are available. Additionally, the bank’s hard assets — such as equipment, hardware and furniture — are insured.  

Banque du Liban’s 12 principles for business continuity in the event of war or major disaster
 
Threat and resource identification:
• Risk classification
• Bank activity classification
• Activity selection under disaster and post-disaster operation modes
• Resource classification and provision under disaster and post-disaster operation modes
Preparation:
• Alternate site location
• Selecting implementation staff and determining their duties
• Training plan operation staff
• Data transfer
• Security procedures
• Plan implementation procedures
Ongoing:
• Regular renewal of continuity plans
• Rigorous testing of continuity plans

In the event that the business continuity committee can’t reach the company headquarters, other sites have been identified for coordination. Three different communications systems have been made available to the committee members, and key employees have had virtual private network (VPN) facilities installed on their laptops to permit them to work remotely. VPNs act like a protected layer of internet access on top of an existing network, enabling the user to access secure information without risking infiltration.

Finally, core operations personnel will be relocated to Cyprus should a conflict erupt. Subsidiaries outside Lebanon rely on them, so they will be evacuated either by air or sea at the first sign of conflict. 

The bank carries out risk assessments when opening new branches, but that factor alone does not determine where new ones will be opened. For instance, Byblos recently opened a new branch in the southern town of Bint Jbail, which was heavily bombed by the Israelis.

“Where the business is, where the people are, we are going to open,” said Saleh.

Bank of Beirut

Established in 1963, Bank of Beirut, has roughly $10.5 billion in assets and operates in six countries, among them Oman and Cyprus, providing retail and commercial banking services. The bank faced numerous challenges in 2006. While a contingency plan was in place at the time, management was surprised at the scale of fear and panic amongst bank employees charged with securing the business. Understandably, many were reluctant to venture out during the bombardment.

A second major challenge was maintaining communications during the war. Network connectivity took a major hit, and the bank’s management experienced problems communicating with employees at different branches.

These two challenges demonstrated that the existing contingency plan needed to be upgraded.  Despite the difficulties faced during that period, a number of branches in South Lebanon remained open and the bank maintained operations.

 After 2006, the general business continuity management outlook changed to focus on enabling employees to work in secure environments and reduce the amount of time spent away from home. One of the first steps taken was to create a larger, better-equipped contingency site.

Fermenting through a firefight
 
For the Bekaa Valley-based Chateau Kefraya winery, the 2006 Israeli bombardment of Lebanon couldn’t have come at a worse time. According to Emile Majdalani, commercial director at Chateau Kefraya, “The situation in 2006 was quite critical…the continuity of the business was at risk. If you are not there for a full year, especially in the export markets…it’s a big catastrophe.” That’s because the winery’s harvest period begins in August and ends in October.
Every year, the harvest yields approximately 2 million bottles of Lebanese wine, which is both consumed domestically and exported. The Chateau Kefraya management saved most of the harvest by continuing to work during the bombardment. Of course, employees in the vineyards could not venture out, but the rest of the team prepared for the eventual cessation of hostilities so that they could move the product right away.
The season was saved due to the preparations made during the attacks, but the Kefraya Nouveau, which is made from the season’s first grapes, could not be produced in time, as the attacks ended three or four days too late for that vintage. Luckily, only 500 to 1,000 cases of Nouveau are produced every year, so the bottom line impact was not pronounced. The company is sensitive to harvest risk however, as all the grapes used for Kefraya wines are grown and harvested from the Kefraya vineyards; for quality control purposes, the company does not buy any grapes.
The war did affect the export markets as the port was closed for a month and a half after the bombardment began. Many roads were bombed as well, and at one point, the company resorted to hiring a ship in Sidon to transport thousands of cases of wine to Beirut as the main highway between the cities was impassable. Transporting wine in this way took a full day, but the goal was to continue to operate regardless.
Majdalani credits employee perseverance for the successful 2006 season, as the company benefits from years of experience operating under duress in Lebanon, noting that: “Chateau Kefraya began to be commercialized during the [civil] war, so we are used to these situations.”

The larger site includes more space for employees who wish to spend nights there to minimize travel, and more equipment to replicate branch working conditions. In addition, diverse satellite equipment and telecommunications connections  were added, allowing phone and internet access in remote areas, or where infrastructure had been destroyed.

Bank of Beirut management made a request to BDL to move data to recovery sites abroad.  However, due to banking secrecy restrictions imposed by the Banking Control Commission, all client data must remain in Lebanese territory and the request was denied. Consequently, all critical core-business data servers are situated in Lebanon, but non-client related tasks like email services have been backed up in other countries.

Once a disaster is acknowledged, the business continuity committee takes control. At this stage, the core business and operations personnel have already been identified. Existing documents outline the steps to be taken by each group of employees. However, as Fadi Shalhoub, head of information security and secretary for the business continuity committee at Bank of Beirut, said “We have written procedures but they are flexible to the point where if something [unanticipated] happens…we can take the necessary action.”

One other change the bank made after 2006 was to decentralize operations. This means that foreign subsidiaries can continue to operate independently of management in Lebanon in the event of a crisis.

Conflict risk does not dictate where the bank does business in the future, as Bank of Beirut has plans to open more branches in South Lebanon.

Best practices

Based on the practices of these two banks, and on the guidelines set by BDL, businesses across Lebanon can adopt the following principles to ensure business continuity under difficult circumstances. First, a business continuity committee or similar authority must be tasked with taking control once a disaster begins to unfold. That committee should identify crucial personnel and clearly outline their responsibilities in the event of a disaster. Furthermore, a clear chain-of-command must be identified, with contingencies in place if key managers cannot be reached. Next, secondary and tertiary communications equipment must be in place to ensure that all vital parties can maintain communication at all times. Additionally, the business must have plans for resuming operations after an event; the sooner, the better. Finally, a certain amount of secrecy is important for creating a viable business continuity plan. As both banks demonstrated, information about backup locations, technology, and step-by-step procedures should remain private.  

Despite all this, things may still go wrong. As Saleh notes “Nobody will tell you that we are going to face or mitigate the risk by 100 percent.”

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Economics & Policy

Stage fright

by Executive Staff
written by Executive Staff

The Oscar-winner question for the regional outlook on initial public offerings (IPOs) is not whether the Middle East and North African primary markets are stuck in a first quarter hurt locker, as much as whether the rest of 2010 will lift performances up and away or prompt regional investors to dispatch avatars to international markets.

The numbers for March IPOs and the entire first quarter are quickly told. Three offerings were open for subscription from March 22 to 28, all three for Saudi insurance companies, and the amount sought from subscribers equals to just more than $100 million. The three firms — Solidarity Saudi Takaful (seeking $59.2 million), Amana for Cooperative ($34.1 million), and Wataniya Cooperative Insurance ($8 million) — had, as Executive went to print, not released information on the demand commanded by their offerings in the first half of the subscription period.

Stumbling start

With neither IPO miracles nor rights issues having presented themselves in the MENA in recent weeks, the region’s total value of initiated and traded new share offerings in the first quarter of 2009 was a humble $178 million — 98 percent of which came from the Saudi listings of Herfy Food Services and Alsorayai Trading Industrial Group.

IPOs that closed in the first quarter but where the stocks have yet to commence trading are the $144 million issuance of real estate firm Mazaya Qatar, and an insurance issue in Tunisia by Assurances Salim, worth $7.1 million. Whereas Mazaya Qatar had difficulties achieving full coverage of the subscription offer, Assurances Salim reported very high demand at 28.5x subscription coverage.

For the first quarter of 2010, the count of newly listed companies on regional bourses is five — one Jordanian and four Saudi — and their price performances since flotation have ranged from 17 percent to 254 percent versus the issue prices, according to Zawya.

Jordanian transport company Ubuor Logistic Services, which had a small over-subscription, advanced 73 percent from the issue price in March trading, whereas Herfy and Alsorayai gained 15.2 percent and 17.4 percent, respectively, since their debuts in February.

Waiting at the red carpet

For April 2010, the only confirmed new subscription dates are for Tunis Re, from April 5 to 16, and for a Saudi appliances maker Al Hassan Ghazi Ibrahim Shaker Co at the end of the month. The Tunisian reinsurance firm will offer shares worth $9.9 million. It appears it won’t be until late May that regional primary markets will see their next exciting premiere, with the $272 million IPO of Saudi city creation firm, KEC Madinah.   

With such pickings, investors with strong and urgent cash dispositions may have to look east, where Asian markets promise to drive the IPO production this year. The seasonal blockbuster opening on April 1 — more a heavyweight period drama than high-octane thriller —  is the $11 billion IPO conversion of ageing Japanese life insurer Dai-Ichi, from a mutual insurance to a listed company.   

Stage fright should not be the issue for Middle Eastern performers, after the corporate players had time to adapt to the rules of the securities game in several strong IPO years up until August 2008. However, market volatility and uncertainty over governance standards — the saga of lost hoards of gold at Damas jewelers has seen a new installment in March on Nasdaq Dubai — are among the reasons why resurgence of Oscar worthy IPO performances might hit the MENA bourses a season or two later than the occasional chief economist of a regional exchange would wish.      

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