Finance & Economy

MENA markets overview

by Executive Staff
written by Executive Staff

Beirut SE  (1 year)

Current Year High: 1,200.49  Current Year Low: 705.56

All things considered, the Beirut Stock Exchange outperformed its regional peers in 2009, when measured at the beginning of the year-end holiday season, which includes the Hajj pilgrimage, Christmas, and New Year.

The BSE index gained over 41% by its 2009 Independence Day weekend (November 20), a performance achieved otherwise only by the Tunindex of the Tunisian bourse.

But before speculating that their shared heritage from ancient Carthage and Berytus is an omen for the next conquest of global stock markets to be achieved by good Phoenician fortune, it is worth reviewing the BSE’s drivers of growth and assessing the Lebanese market’s necessary quests for the gains of 2009 to be meaningful for the real economy.

The best performer in Lebanon in 2009 was the real estate firm Solidere, with gains above 55% in both share classes.

Audi and BLOM, the two leading banks whose common shares together represent over 37% in market capitalization traded on the BSE, recorded common share price gains of 44.3% and 10.4% respectively.

Hence, banking and real estate remained the two legs of Lebanese equity trading. Common stock and share variations representing the two sectors comprise BSE market capitalization of about $12 billion at a ratio of about two-to-one.

Stocks from other sectors — only industrial and trading are categories found in BSE bulletins — account for not even 1% of market capitalization. For far too many years there has been no new blood from other sectors added to the exchange via initial public offerings.

On the other hand, in November 2009, the BSE had to delist one industrial stock, of ceramics tile maker Uniceramic, following the company’s declaration of bankruptcy in September 2009. It was the second manufacturer with a rich history in the industrial sector to forcibly exit from the Lebanese bourse since the BSE reopened in 1996, after pipe maker Eternit went defunct almost a decade earlier. 

But when new listings should have emerged and initial public offerings were accumulating on other equity markets in the region, the BSE moved from one pained politically induced slumber to the next. 

In all of 2007 and until May 2008, political paralysis stunted the prospects of new listings on the exchange. From mid-2008 through 2009, it was the global financial crisis that threw a spanner into the works.  

With 2010 on the doorsteps investors in the Middle East have been preparing for a new rise in IPO activity, and companies in the Gulf Cooperation Council are getting their due diligence done and readying prospectuses. In Damascus, the new Syrian bourse is anticipating a small but steady stream of stock market entrants. What will happen in Beirut?

The 2009 performance of the BSE was a testimony to great expectations from the business of politics. From May 1 until July 1, when the preparations for parliamentary elections and their successful execution cheered the moods, shares of Solidere rose 65%. Fadi Khalaf, secretary general of the Union of Arab Stock Exchanges and chairman of the BSE until August 31 2009, would not give any numerical predictions but reckoned that the stock undervalued at around $25 in both classes.

“Just look at the number of square meters owned by Solidere, the prices per square meter in the region and apply that to the Beirut Central District (BCD),” he says. “The price of the stock still has to catch up with the prices of real estate in the BCD.”  

The two-month period from September 10 to November 10 saw stocks fluctuate lower on days with news of political problems, but the BSE added over 17% in a positive climate of strong banking performance, record tourism growth, confirmation of good remittances, and generally hopeful politics.

“Investors on the BSE have experienced many political and military issues in Lebanon. At a certain time they started separating the political issues from the financial issues,” says Khalaf, although he concedes that this is not “100%” applicable.

The formation of a new Lebanese Cabinet after 19 weeks gestation brought on a withdrawal from the BSE’s year high reached on November 9. Since then, pundits have highlighted matters such as if the new Cabinet will have the required potency for reshaping economic policies.

Much now will depend on real, reliable steps in floating state-affiliated companies on the BSE, as well as on the infusion of new private sector companies with a measure of sector diversity. The Lebanese economy has been given a positive assessment and outlook for the near term, as far as that can be done.

However, for this to be amplified in the stock market, the BSE’s stock diversity and liquidity must increase. That may now be in the cards, with Lebanon’s central bank governor stating that the national carrier, Middle East Airlines, of which the Central Bank of Lebanon owns a 99.23% share, is planning to list on the BSE. The Lebanese chocolates manufacturer and retailer Patchi, as well as Naas Water have also expressed interest in listing on the exchange. “Listing on BSE is affected by the family companies and the absence of privatization and by prices of stock performance,” says Khalaf. “Every time we have good performance and a run in prices we are contacted by some companies to list.” 

The other big issue for 2010 and 2011 would be a change in alignment. While they all had an impact, oil prices, regional economics, or developed market share price trends were not consistent forces of primary influence on the BSE index movement over the past 13 years.

The question for the BSE is, will the bourse be able to decouple itself from its historic drivers — from its sluggish past, from fear of politics, from itself?

“With the turmoil we had, prices on the BSE consolidated even though they were not yet overpriced,” says Khalaf. “Consolidating at underpriced levels gives the markets steam and momentum. Thus the market is now more ready to see new moves and this is why, with stability and enough consolidation at attractive prices, it is a good time to go forward.”

Amman SE  (1 year)

Current Year High: 2,968.77  Current Year Low: 2,454.48

Ten weeks of selling pressure in the summer of 2009 tarnished the otherwise bright market trend on the Amman Stock Exchange (ASE) to a darker color. As the ASE general index nosedived from its year-high 2968.77 points on June 2 to its low of 2,454.48 points on August 19, the momentum of Jordanian stocks thereafter did not return to the positive. When compared with the start of 2009, the ASE index close of 2,573.37 points in the Nov 19 session represented a disappointing 6.71% drop.

Jordan’s banking sector continuously underperformed the market in the first 11 months of 2009 and was the biggest loser on the bourse by Nov 19, with a drop of 15% from the year’s first trading session. The sub-index for industrial stocks showed the widest swings, but in the end its 8.3% drop for the period was almost as close to the general index’s performance as that of the services index (-6.8%), which had shadowed the general index for much of the year. Insurance turned out to be a surprise upside wild card, closing the period 4.3% up, but has to be noted for its small share in ASE cumulative market cap. Arab Bank, the country’s strongest financial firm, saw a loss of 16.6% of its share price between the start of 2009 and Nov 19. Arab Potash, the heavyweight industrial mining scrip, dropped 4.6%, while Jordan Phosphate Mines and The Housing Bank for Trade and Finance also experienced double-digit price drops. Jordan Telecom Group was a large firm to show an uptrend in the review period, with a 7.7% gain. Jordan Emirates Insurance Company, a firm that was entirely restructured and recapitalized in 2009, somewhat theoretically came out as the best gainer, with a massive 585% share price increase.

Abu Dhabi SE  (1 year)

Current Year High: 3,239.74  Current Year Low: 2,136.64

For much of 2009, the Abu Dhabi Securities Exchange (ADX) appeared to roar handsomely, as its sibling in Dubai rocked. With a close at 2,924.26 points on Nov 19, the ADX general index gained 22.4% from the start of 2009, a solid third place in the Gulf Cooperation Council after the Saudi Stock Exchange and the Dubai Financial Market  (DFM) and indefinitely better than the ADX slide of over 48% in the previous year. But Nov 2009 was not a strong month for the United Arab Emirates’ exchanges; index levels for ADX and DFM dropped over 3% between the start of the month and Nov 19. After the Nov 25 announcement of Dubai World’s debt dilemma, however, the ADX was infected in what looked like an H1N1 attack — a virus with minimal impact in big, distant places but rapidly spreading among relatives with exaggerated fears. The ADX index closed at 2,668.23 on Nov 30, suffering a one-day fall of 8.3%, even greater than that of the DFM. The 2009 bottom on the ADX was recorded back on January 22, at 2,136.64 points. The year high of 3,239.74 was set on October 15. Large caps that were affected heavily by selling pressure at the end of the review period included real estate stocks Aldar and Sorouh, as well as ADX market cap leader Etisalat as well as the National Bank of Abu Dhabi and First Gulf Bank. For the first 11 months in 2009 First Gulf was the top gainer on the ADX with a share price improvement of 85%. NBAD gained 50.2%; Aldar Properties (+24.9%) and Etisalat (+2.7%) were also on the positive side by the Nov 30 close, albeit in a far more negative environment than in earlier months.

Dubai FM  (1 year)

Current Year High: 2,373.37  Current Year Low: 1,433.14

A hub of global attention in these challenging times for super-ambitious and somewhat burnt investment locales, the Dubai emirate of wonders tried something new at the end of Nov 2009 — how it is to run after taking the belt out of your pants and with your shoes tied together. The experiment of shocking investors by exhibiting the Dubai World debt dilemma in a most embarrassing manner (mostly due to the announcement’s timing) drove the Dubai World shares on Nasdaq Dubai down 15% in a single session and had a short-term erosion effect of around 10.1 billion Dirhams ($2.75 billion) on the market cap of the Dubai Financial Market, resulting in a DFM market cap readout of $41 billion on Nov 30. The market close at 1,940.36 points on Nov 30 was a 6.6% drop on the month and reduced the year-to-date increase to 18.45% for 2009. Less than two weeks earlier, the year-to-date increase had stood at over 30%. Of more serious concern, Dubai gambled away the trust of its participants and stakeholders, which until Nov 24, had been on a good track, thanks to the Gulf Cooperation Council’s most pronounced turnaround in stock fortunes when comparing 2009 with 2008. The DFM year low was an index reading of 1,433.14 points on February 5. The 2009 year high of 2,373.37 was reached on October 14. Gulfa Mineral Water, a firm with a $38 million market cap, was an upside outlier in share price developments with a 153% gain. Although hit hard with limit-down drops at the end of Nov, Emaar Properties gained 61% between the start of the year and Nov 30. The Emirates’ largest bank, NBD, climbed 65.2%.

Kuwait SE  (1 year)

Current Year High: 8,966.00  Current Year Low: 6,391.50

Investors were sure to be worried at the Kuwait Stock Exchange’s (KSE) performance in the fourth quarter’s first half. The sharp slide of the index between October 7 and Nov 17 wiped out gains achieved in spring and took the KSE index back into negative territory, closing 13.2% lower at 6754.30 points onNov 19 when compared with the start of 2009. The year had started badly enough, with a 29% nosedive from the 12 month high at 8,966 on December 15, 2008, to the current 12 month low of 6491.50 on March 1, 2009.

Recovery seemed apparent in the following three months with a 31% index climb to early June, but the 8,000 points level was quickly lost again and the scales shifted increasingly to downside melancholy as time went by. Food was the most solid sector in the KSE annals this year, but could not sustain its intermediate gains of up to 50% and ended the review period only 16% higher. The industrial sector also had a positive close, up 6% year-to-date on Nov 19. Investments, real estate, insurance and banking all underperformed the general index by between 14% for investments and 2% for banking. More than 40 stocks showed double-digit share price increases during the review period, but the losers were greater in number. Real estate group Safat Global Holding fared the worst, suffering a 74% price weakening. The multi-line conglomerate Al Abraj Holding lost 72.5% and communications player Hits Telecom gave up 69%. Market cap leader Zain ended the review period with a 14.3% improved share price and top bank NBK ended 1.2% lower. 

Saudi Arabia SE  (1 year)

Current Year High: 6,568.47  Current Year Low: 4,130.01

The Saudi Stock Exchange (SSE) consolidated its regional importance through a leading positive performance between January 2009 and the religious high season of the Hajj pilgrimage. By the Nov 18 close, the TASI general index was up 31.6% for the year-to-date. The TASI’s year low was marked on March 9 with 4,130.01 points and the peak was reached on October 24 at 6,588.47. The main rally in 2009 lasted from March 10 until late May and took the index 47.2% higher to 6,100.85 points on May 23. At total turnover of $319 billion, or $1.4 billion a day, and a market cap of $328.5 billion at the close of Nov 18, the SSE was approaching the end of 2009 still quite far behind top performance years such as 2007, when it had ended with daily

average trade volume exceeding $2.6 billion and a year-end market cap of $515 billion.  However, the broadly positive performance of 2009 entailed all sectors, except for a

5% drop in the building and construction sub-index. The real estate sector managed a 5% gain; the banking sector advanced 19% and the important petrochemicals sub-index rose 55.4% — making it the second best performer after the maverick insurance

sector, where the speculative attractions of the many newly listed insurers lured investors into a buying mood, pushing the insurance sub-index up 86% by the Nov 18 close. Seven insurance firms topped the price performance charts with gains above 200%. More weightily, market cap leader SABIC gained 58%.

Muscat SM  (1 year)

Current Year High: 6,762.94  Current Year Low: 4,223.63

Performance of Gulf Cooperation Council stock exchanges in the penultimate month of 2009 was at best subdued; the Muscat Securities Market (MSM) closed the Nov 19 session at 6385.23 points, a measly 0.5% up on the month. Its 17.4% year-to-date gain, however, put the MSM into a solid middle position in annual performance among its neighbors. Throughout 2008, the MSM lost nearly 41% of its value under the impact of the global recession. The 2009 year low of 4223.63 points on January 21 and the year high of 6762.94 points on October 11 were 181 trading days apart. The MSM general index gained 60% during that period, which entailed only short periods of intermittent index drops. Looking at sector performances in 2009, the services and insurance index ended the review period 4.9% higher, but was a clear underperformer when compared with the MSM sub-indices for banking and industrial stocks. The banking index gained 42.3% and the industrial index recorded even a 67.8% increase. The spread between losing and winning stocks in 2009 was quite substantial but gainers outnumbered losers. After downward pressure in 2008 had pushed several large companies significantly lower, in 2009 National Bank of Oman (down 10.7%) and Omantel (down 16.5%) were still beset with negative price performance among the five largest companies by market cap. By contrast, shares of Bank Muscat gained 8.9% between the year’s first close and Nov 19. Oman’s major initial public offering in 2007, Galfar Engineering, gained 29%, closing on Nov 19 within 0.5% of its issue price. 

Bahrain SE  (1 year)

Current Year High: 1,954.75  Current Year Low: 1,438.32

There was no magic in being small for the Bahrain Stock Exchange (BSE) in 2009. The negative sentiment that had driven the BSE general index 34% lower in 2008 carried on unabated until mid March of 2009. The drop in early 2009 amounted to 12%. After a short bout of springtime awakening, the overriding trend returned to unfavorable and the BSE close at 1443.35 points translated into a 20% loss for the year-to-date. The less than pretty performance picture is reinforced by the fact that the BSE’s 12-month high was in Nov of 2008, while the low for the year-to-date was recorded on Nov 18, 2009. After a shy rise in September, the index dropped 9.77% in the period from October 7 to Nov 19. The sector indices on the BSE revealed the worst performer to be the investments sector. It closed 31% lower on Nov 19 when compared with the start of the year. The other financial values, insurance and banking, also were deep in the doldrums with share price index losses of 18% and 15%, respectively. Industry was the brightest sector with a gain of 20%, followed by hotels and tourism, up 11%. Less than 10 companies achieved year-to-date share price gains, led by Bahrain Flour Mills with a 45% rise. Gulf Hotels Group, Al Salam Bank Bahrain, and contracting group Nass Corporation showed gains of near 20% each. The stocks of Global Investment House (GIH), Gulf Finance House (GFH) and Al Baraka Banking Group were the basement performers of the first 47 weeks in 2009. GIH lost 76.7%, followed by GFH at 53.7% and Al Baraka at 53.5%, noting that the latter recorded a 10% day-on-day rise at the very end of the period.

Doha SM (1 year)

Current Year High: 7,624.45  Current Year Low: 4,230.19

The Doha Securities Market (DSM) accomplished an overall modestly positive performance in the period from January 2009 to  Nov 19, closing at 7183.76 points with a year-to-date gain of 4.3%. Even as the DSM index experienced an early 2009 aftershock to the landslide of share prices that overwhelmed the market between June and Nov of 2008, the upward arrows proved themselves between March and October 2009. From the year low of 4,230.19 on March 4 to the year high of 7,624.45 points on October 6, the DSM benchmark index rose by just over 80%. Real estate and banking stocks contributed greatly to the increase in that period. The down and up of DSM sub-indices during the first 11 months of 2009 did not show great differences in direction of sectors, but the services and industrial indices were consistently outperforming the general index just as banking and insurance underperformed. By Nov 19, the upside margin versus the general index amounted to 6% for services and 7% for indices; juxtaposed by downside margins of 4% for banking and 12% for insurance. In a broadly balanced split between losing and gaining companies, the best performer in 2009 was Ezdan Real Estate with a 139% gain. The stock, the DSM’s number three by market cap at the end of the review period, had skyrocketed in

August and the first half of September. The other big names at the top of the market cap ranking (Industries Qatar, Qatar National Bank, and Qatar Telecom)  all closed in positive territory on Nov 19 for the year to date, respectively up 14%, 19%, and 37%. Down 39%, Qatar General Insurance and Reinsurance was top loser.

Tunis SE  (1 year)

Current Year High: 4,194.27  Current Year Low: 2,836.64

No Middle Eastern bourse could keep up with the index gains of the best-performing emerging markets in 2009, but the ones that did improve more than their regional peers were two MENA dwarves — Tunisia and Lebanon. Each positioned in the shallowest part of the market cap pool, the Tunisian Stock Exchange (TSE) and the Beirut Stock Exchange accomplished index gains exceeding 40% year-to-date by Nov 20. The Tunindex closed at 4099.63 points, up 41.7% on the year. The bourse’s 12-month low was seen back in

December 2008 and the first trading session close of 2009 at 2,889.97, was the market’s year-to-date bottom. The peak came on October 21, at 4194.27 points. This was also a historic high, in light of the fact that the Tunindex had been rising not only in 2009 but also in 2008. The TSE was internationally noted for standing higher one year after the historic Lehman Brothers collapse than it did on the day of the crash. All sectors on the Tunisian bourse gained in 2009. Retail and consumer services came out on top, up by 70.1% and 56.9%, whereas consumer goods manufacturers and building and construction materials were the laggards, with gains merely in the 20% range. In line with the smooth uptrend of Tunisian equities, winners outnumbered losers in the 2009 review period by four-to-one. The only large scrip to move lower was Tunisair, dropping 9.8%. The size leaders on the TSE, the Poulina Group Holding industrial and trade conglomerate and the Banque de Tunisie advanced by 13.4% and 28.3%, respectively. Poulina, which had debuted on the exchange in an, in hindsight, unenviable moment in 2008, rebounded in spring 2009 and by Nov 20, recorded a 15% gain since its initial public offering.   

Casablanca SE  (1 year)

Current Year High: 11,729.86            Current Year Low: 9,405.86

The Casablanca Stock Exchange (CSE) in 2009 was mellow in the sense of soft performance numbers. When compared with the first trading close back in January, the general index of the CSE ended the Nov 19 session 2.3% down, at 10,338.46 points. The index, which bottomed this year at 9,405.86 on January 8, passed its high for 2009 at 11,729.86 points on June 17. Whereas the previous year had seen the Moroccan securities market take a small beating (by regional comparison), the index lost 24% between mid April and year-end 2008. Both optimism and volatility were noticeable in 2009 but concentrated in the early months of the year. In the second half of the review period, sideways and gradual downward movement were the main index directions. The total market cap on Nov 19, according to Zawya, was equal to $65.5 billion and could not measure up to the Egyptian Exchange (EGX) market cap of over $88 billion. This demonstrated the divergent market trends on Atlas and Nile, as the Moroccan bourse had in spring temporarily outshone the EGX as the second largest MENA bourse after Saudi Arabia. Believers in the growth potential of the CSE forecast a surge of listings, market activity and index values in coming years. Stock performance of the largest listed Moroccan companies in 2009 was in the lower half of market records when comparing their Nov 19 closing prices to those at the start if the year. The five largest companies by market cap all had share price losses, which ranged from 1.75% at Attijariwafa Bank to 10.4% at Maroc Telecom and 23.3% at real estate firm Compagnie Generale Immobiliere. The best upward movers were found in metal and manufacturing stocks. 

Egypt CASE  (1 year)

Current Year High: 7,249.55  Current Year Low: 3,389.31

With 47 performance weeks of 2009 in the bag, the more fortunate ones among Egyptian equity players should have felt much happier — or at least about 20 times more financially satisfied — than they had been around the same time in 2008. Where the Egyptian Stock Exchange’s (EGX) benchmark index had been down by two thirds in Nov 2008 and full-year 2008 had spelt disaster with a 57% negative price return since the start of the year, the 6,195 points close of the EGX 30 on Nov 19, 2009, represented a year-to-date gain of 34.8%. The market experienced its year low at 3389.31 points on February 5 and scaled its high for the past 11 months on October 26, at 7,249.55 points. However, with the end-of-Nov Dubai debacle of dumb communication and debt rescheduling, the EGX was the first MENA victim outside of the UAE, sliding 8% on Nov 30, on account of nervous contagion. Whereas tremors were hardly visible on the Tunisian and Moroccan bourses, the Dubai pull-down demonstrated that Egypt is a vulnerable market. The one-day Nov 30 anomaly sealed a month of Egyptian stock weakening, as the EGX 30 shed 19% between Oct 26 and Nov 30. Of the largest stocks in various sectors, overall market cap leader Orascom Construction Holding closed 62.6% up; Commercial International Bank climbed 36.5% and Talaat Moustafa Group achieved a gain of 97.3% (all by their Nov 30 close versus the start of 2009). Telecom Egypt saw a marginal drop of 0.3% and El Ezz Aldekhela Steel gave up 7.5%. Pronounced drops in late Nov contributed to make Orascom Telecommunications and El Sewedy

Cables end the first 11 months in 2009 down by 14% and 20%, respectively.

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Finance & Economy

Awaiting the thaw

by Executive Staff
written by Executive Staff

Companies, companies, everywhere, and nay a share for sale. The ancient mariner could have rhymed to no end about primary markets in 2009 and it looks as if not a line will need to be added to the eulogy of initial public stock offerings (IPOs) in the Middle East in the last six weeks of the year.

Given that the period from November until New Year’s Day in 2009 embraces the two important religious observations of Eid al-Adha and Christmas, everything points to a slow season for investment activities.

Barring a dramatic turnaround in new-issues activity in December, companies looking to go public have shelved their aspirations until after the New Year. All of this translates into another wait for the investment banks that underwrite new offerings and the IPO market in general.

As the economy chilled in 2009, the number of companies that went public froze. The volume of new issues is down sharply from 2008. The number of IPOs in the region reached 13 year-to-date, with an estimated $2.2 billion raised — a drop of 82 percent compared to $12.45 billion in the same period of last year.

In the third quarter of 2009, regional markets raised around $850 million in four IPOs, compared to $1.2 billion in seven IPOs in the second quarter of 2009.

Saudi Arabia, which accounted for about 48 percent of the total IPOs year-to-date, had the largest IPO in the third quarter, when National Petrochemical Company (Petrochem) successfully raised $640 million in July, the region’s second largest offering in 2009.

The fact that Petrochem is a young investment company in a leading Saudi industry and does not expect its main project (Saudi Polymers Company) to start production for another two years, makes its IPO an unrestrained play on future growth.

The region’s largest IPO came out of Qatar when telecommunications operator Vodafone Qatar was able to raise $929.3 million in April.

After these encouraging developments in the second and third quarters, the fourth quarter of 2009 started with nothing more than a drizzle of three initial public offerings on the Saudi Stock Exchange that added around $52 million to the year’s tally.

For November, the sole market with new primary issues was Syria, where Al Baraka Bank Syria offered $35 million in shares.

Earlier hints of two November insurance IPOs, in Saudi Arabia and Tunisia, remained unsubstantiated by November 20. And the year’s longest list in initial offerings is clearly that of companies — numbering at least 50 — that had previously announced plans for going public in 2009, but it can now be said, with almost certainty, that they will not offer subscriptions before the new year begins.

IPO performance (October 2008 — September 2009)

Most completed IPOs (third quarter 2009)

Source: Zawya

Share of deals by exchange in MENA (2009)

Share of deals by sector in MENA (2009)

Capital raised by exchange in MENA (2009)

Capital raised by sector in MENA (2009)

Source: Zawya

Glad to see you go

It is no secret that the regional IPO market had a slow start in 2009. The recession, investor skittishness and a challenging outlook for the Gulf Cooperation Council capital markets have decreased investor demand for new stock offerings.

Dubai, previously the region’s hottest and fasted growing economy, did not even witness one IPO in 2009. Analysts say this year will go down in history as the worst year for IPOs since the region’s first stock exchange opened its door for business.

Executives and bankers will be happy to put the year behind them. All indications show that investors will start spending again in 2010 if the opportunity is right.

Public offerings are expected to reemerge in the second quarter of 2010, but experts warn that investors will be especially cautious about putting money into unproven businesses when many blue-chip stocks are available at steep discounts.

“GCC investors are becoming more discerning, and demanding a robust offering with a good IPO story, growth momentum, and sensible pricing,” said the Chief Executive Officer of leading investment firm Gulf Capital, Karim El Solh, in November.

MENA IPOs by volume & number of deals (Jan-Sept 2009)

Source: Zawya

MENA & GCC IPO trends by quarter

Source: Zawya

MENA & GCC IPO activity

Jan-Sept 2009 versus Jan-Sept 2008 ($millions)

Source: Zawya

Signs of recovery

Regional capital markets had a mixed performance in 2009, but signs of a serious recovery can be seen everywhere. Experts are encouraged by new life in global markets and can also point to respectable performances of recently floated companies in the Middle East.

Six of the region’s eight newly listed stocks, which started trading in the second half of 2009, have achieved share price gains that were substantially above the gains of their respective benchmark indices for the same period.

Analysts point to the fact that subscription ratios in the Middle East and North Africa (MENA) region have been better than expected in many of the subscriptions undertaken in the past few months. The three Saudi insurance stocks that went public in the third quarter reported oversubscription demand, ranging from 7.5 to 11.6 times the available capital.

International investment banks such as the Royal Bank of Scotland (RBS), Bank of America Merrill Lynch, Ernst & Young Middle East and others, see confidence returning to the MENA markets as well.

Bank of America Merrill Lynch raised its 2010 growth forecast for the GCC from 3.2 percent to 3.7 percent, reflecting a growing level of confidence that the region would emerge from the economic downturn faster and stronger than it had previously expected.

“Our research shows that primary equity issuance conditions in the Middle East have improved substantially since the beginning of this year and should improve further as volatility continues to normalize,” said Durk van der Zee, head of equity capital markets Middle East, at RBS.

This prediction, however, was made prior to the Dubai World (DW) debt standstill request that shook the region’s bourses, and in particular those of the UAE. RBS was also one of the European banks whose balance sheet was exposed to DW’s outstanding debt.

MENA advisors ranking (Jan-Sept 2009)

Source: Zawya

Top countries (Jan-Sept 2009)

Source: Zawya

IPO tsunami

Investors on the buying side are searching and waiting for IPOs from good clean companies, with a clean balance sheet, a record of transparency and good valuations.

According to data compiled by Regional Press Network (RPN), there are at least 150 IPOs scheduled in 2010, many of them planned for the first half of the year. This number is expected to double in the event that the impact of the global financial crisis on the region’s capital markets dissipates.

Bankers say when the IPO market comes back and the flow is more steady, it will be driven by best-in-class, larger companies.

Analysts who spoke to RPN say some key drivers that will propel the IPO market in 2010 are high oil prices, stabilization in the real estate sector, regulatory reforms and the fact that MENA equity markets are undervalued.

“When oil exceeds $65 per barrel, which is our average budget breakeven forecast for the GCC, these countries start saving,” said Turker Hamzaoglu, an analyst for Bank of America Merrill Lynch in London.

Family-owned companies are expected to be on the top of the tsunamis’ crest, converting into public companies at a faster rate than in the past, analyst said.

Abdulaziz al-Zamel, head of capital markets at Saudi Hollandi Capital said he expected to see a rise of family-owned businesses going public over the next three years.

“[Family-owned businesses] will come to the market for three key reasons – to source funds, to ensure business continuity and to bring some degree of professionalism to their structures,” said Zamel.

Busy IPO New Year

Experts agree that even though conditions have thawed over recent months, the real rebound is on hold until 2010 when a number of high-quality companies are expected to hit the market.

“The future outlook remains bright,” said Samer Shaheen, a research analyst at Bloomberg in Dubai. “Continued economic growth and high oil prices will fuel the liquidity necessary to support future offerings, and investors will be seeking investments in new sectors and in attractive, well priced IPOs.”

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Finance & Economy

Adjusting the Lebanese socio-economic debate: It is about growth, not debt

by Mazen Soueid
written by Mazen Soueid

The size of Lebanon’s public debt — which at $48.5 billion amounts to 1.5 times the country’s gross domestic product, one of the highest debt to GDP ratios in the world — is a constant feature in the nation’s political and economic debates. It is blamed, rightly or wrongly, by the public, the politicians and even some economists for most if not all the socio-economic problems that Lebanon faces: youth unemployment, migration, immigration, the cost and reliability of power supply, high business costs, the lack of economic diversification such as low contributions from agriculture and manufacturing, and even red tape and corruption.

The word “unsustainable” has been used since 1996 to describe Lebanon’s debt dynamics; since then, Thailand, the Philippines, Indonesia, South Korea, Russia, Brazil, Argentina, Turkey and Iceland, to name a few, have all defaulted, while enjoying significantly better ratings and hence more “sustainable” debt dynamics, ex-ante, than this humble Mediterranean state that has been ravaged by civil war, invasions, assassinations and sectarian strife, all in its recent history.

But why is the debt level so central to the political, and even social debate of our nation? Japan has a debt to GDP ratio that is higher than Lebanon, and it is barely mentioned in the national socio-economic debate, let alone the political debate.

The debt is a liability inheritance that one generation leaves to another. It is a negative inheritance in the sense that future generations will have to pay more in terms of taxes to cover the debt. But Lebanon’s tax rates are low when compared to other countries. The Lebanese pay around 15 percent of their total income in taxes (this includes income tax, VAT, and social security contribution). This compares with a tax contribution of 26 percent in Jordan, 27 percent in Tunisia, 28 percent in Russia, and 44 percent in France. Of course, the return on these tax payments does not match the Lebanese citizen’s expectations, and he or she would probably be willing to pay more in return for universal health coverage, better education and, above all, law and order in the country. But reforms and progress on these fronts have been hindered, not by debt level but rather by the complexities and limitations of the political system. Even the modest economic reforms outlined in Paris III have not been implemented, which ironically would have allowed Lebanon to get still-pending grants from donors and reduce the debt.

The debt level would also be relevant when the cost of servicing it crowds out the private sector. But in Lebanon the total assets of banks are around three to four times the size of the economy. Lebanese banks have enough deposits to fund the public sector, the private sector and to maintain some of the best liquidity ratios in the world. In fact, loans to the private sector grew 16 percent in 2006, 15.8 percent in 2007, 18.6 percent in 2008 and now stand at $23 billion, or 70 percent of GDP — a very decent ratio for a country with an income level like Lebanon’s. By comparison, loans to the private sector are around 33 percent of GDP in Turkey, 41 percent of GDP in Russia, 47 percent of GDP in Egypt, 65 percent in Tunisia. At 70 percent, the ratio does not reflect much crowding out in Lebanon. 

Last but not least, a high debt level is usually worrisome when a significant portion of that debt is held by foreigners, leaving the country’s future prey for “barbarians at the gate.” Ask the Argentinians, the Uruguayans and many Africans about being at the mercy of foreign investors and they would tell you horror stories. But in Lebanon, most of the debt is held domestically. In fact, out of the $48.5 billion gross public debt outstanding, less than $6 billion is currently held by foreigners, and most of it to bilateral and multilateral donors rather than by international investors. Some people confuse external debt, which is the debt held by foreigners, and foreign currency debt, which is the debt denominated in foreign currency that could be held by either local or foreign investors. But on that account Lebanon also fares well. Its foreign currency debt has been slightly declining both nominally and as a percentage of total debt, and now stands at $21.3 billion — 40 percent of total debt — down from 50 percent of total debt only a couple of years ago. This is also less than the $25 billion in foreign currency reserves held by the Central Bank of Lebanon, not counting gold of course. 

How has the debt then emerged to be the centerpiece focus of the Lebanese public debate? My belief is that the debt issue was and remains a tool to politicize the economic debate, and use it to condemn a whole era of Lebanon’s recent history: an era that saw the rebuilding of the country, of its airport, ports, roads, schools and hospitals, an era that saw its re-emergence as a primary tourist destination and as a financial service provider for the region. This era has put Lebanon back on the map. Blaming the high debt for all our problems is a call to condemn this era and hold it responsible for what should actually be blamed on the shortcomings and limitations of our political system, and on the abnormalities that we have gotten used to by now, such as foreign interventions in local affairs, and the lack of ability by the state to impose law and order and exercise its sovereignty on its entire territory. It is also a way to distract attention from the need to push ahead with key reforms that could significantly increase the productivity of the economy. And many of us, sadly, fall for it.

Lebanon should reduce its debt, no question about it. High debt creates an unnecessary vulnerability, it scares foreign investors, and it keeps the sovereign rating low, imposing a floor on interest rates and a cap on the ability of the financial sector to develop and grow. But its effects on the Lebanese economy and on the wellbeing of society have been completely blown out of proportion. What really matter are growth, investment and job creation. Take the last three years for example: the economy has grown (in real terms) by 7.5 percent in 2007, 9 percent in 2008 and is on its way to achieve 7 percent growth in 2009.

These are rates that are not only unprecedented in Lebanon, but they are also among the highest in the world. They have also helped reduce the debt from 180 percent of GDP in 2006 to around 150 percent of GDP in 2009, at a time when debt to GDP ratios have increased in most countries due to the global financial crisis. And yet if you ask the Lebanese on the street, or even on a university campus, few if any know about these real economic growth rates, but they can all recite that the national debt is $50 billion.

Finally, here is a thought just for the sake of alternative analysis. Much of Taoism revolves around Yin and Yang. The belief that there is no absolute good or absolute evil and that there is actually a bit of both in everything. This may also apply to the Lebanese public debt. Not convinced? Ask yourself this question: what would a very liquid and sizeable Lebanese banking sector have done with all its accumulated liquidity over the last few years, beyond lending locally, if there was no indebted government to lend to?

The answer is simple: invest and lend abroad.

What would have been lost abroad in a financial crisis so massive that the government would have been forced to step in and bail out the banks, like most governments around the globe did? Now those governments have debt ratios of more than 100 percent of GDP and fiscal deficit ratios of 10 percent of GDP. These figures are now completely normal all over the world, especially in industrialized countries.

But these are also the figures we have in Lebanon. Except we also have an airport that is expected to have received 2 million tourists by the end of 2009, who in turn contributed to a 7 percent growth rate and kept almost all of us employed. Not a bad deal, after all.

Mazen M. Soueid is chief economist at BankMed and advisor to former Prime Minister Fouad Siniora

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Finance & Economy

Expat largesse

by Executive Staff
written by Executive Staff

During the first quarter of 2009, Lebanon braced itself for a steep fall in remittances. The logic held that the global financial crisis would severely affect remittance inflows from outside the country,  as Lebanese working abroad saw their own budgets tighten. The Lebanese government even prepared its 2009 budget proposal, which was never ratified, “on a very strict assumption of a 20 percent decrease in the level of remittances,” according to Lebanon’s Minister of Economics and Trade Mohammad Safadi.

It was a reasonable fear since, according to the International Monetary Fund, 70 percent of Lebanon’s remittance inflows are from the Gulf Cooperation Council and the United States, both of which were badly exposed to the crisis.

A few months into 2009, however, a less gloomy picture emerged with the IMF predicting a drop in remittances of 12 to 15 percent. Today the picture has brightened further, with Safadi saying that the predicted decline “has not yet materialized,” and pointing out that Standard & Poor’s ratings agency, who had expressed concerns that a fall in remittances could hurt Lebanon’s ability to pay its debts, had actually improved Lebanon’s credit rating.

In fact, in November 2009 the World Bank released its updated figures predicting that Lebanon would only experience a 2.5 percent drop, from $7.18 billion to $7 billion in remittance inflows for the year as a whole.

Total remittances ($millions) 

Projecting in the dark

The numbers are even more significant considering Lebanon’s remittance to gross domestic product ratio has also dropped, from 24.8 percent of GDP, using official figures, to a projected 21.4 percent, according to data provided by the World Bank, the IMF and Bank Audi.

The decrease can be attributed to the IMF’s forecast that Lebanon’s GDP will grow by 7 percent to reach $32.7 billion by the end of 2009. It should be noted, however, that many debate the methodology used to calculate Lebanon’s GDP [see page 58]. The Economist Intelligence Unit, for instance, expects Lebanon’s GDP to grow at a rate of 5.1 percent to reach a total of $30.2 billion by the end of 2009, resulting in markedly different figures.

Nassib Ghobril, head of research and analysis at Byblos Bank, is quick to point out the inexact nature of such predictions. “[At this stage] they’re not even forecasts, they’re expectations,” he says. “It’s very difficult to put your finger on a forecast given the lack of regular data… there simply are no figures since the end of 2008, and that’s exactly where we need greater transparency from the authorities.”

Ghobril frequently bemoans this lack of information.

“There are no remittance figures from local authorities here,” he says. “In Jordan,  we have figures on remittances every month.”

Ghobril sees this lack of information as a major problem given how important remittances are to the economy, and he advocates that it be addressed immediately.

When contacted by Executive, the Banque du Liban, Lebanon’s central bank, said that they publish remittance results quarterly on their website. However, as Executive went to press, no data for 2009 had been published.

Not yet a science

The significance of remittances to development and world capital flows only became a fashionable part of economic calculations in the last decade, so even the figures that are released are somewhat questionable. 

“The calculation of remittances is not a science yet,” says Ghobril. He points out that there are major methodological issues not yet settled. For example, the World Bank includes deposits (as opposed to transfers) of less than $10,000 made by expatriates into Lebanese banks in its calculations of remittances,

despite the fact that in many cases these expatriates may simply be taking advantage of Lebanese banks’ high interest rates to maximize their savings and not directly contributing to actual economic activity.

The decision to include these deposits was part of a shift in the World Bank’s method for calculating remittances in 2003.

That year the World Bank reported that Lebanon received around around $4.7 billion in remittances, nearly doubling the 2002 figure of $2.5 billion — a jump Ghobril asserts was more a result of the change in methodology than an actual increase.

There has not been major methodological change since then, however, meaning that the growth from $4.7 billion in 2004 to $7.18 billion last year can be regarded as an authentic increase. The IMF also recently suggested including remittances in Lebanon’s GDP, which would significantly improve its debt-to-GDP ratio.

Uncertain inflows

As around $1.4 billion per month continue to flow into Lebanon’s banking sector from abroad, many believe that remittances must be doing well. It is also possible though that, in these uncertain economic times, a significant amount of this money is arriving from investors who have turned to Lebanon’s trusted banking sector as a safehaven to stash their cash, rather than true remittances, which would be Lebanese sending money home to be spent.

Kamal Hamdan, economist and managing director of the Consultation and Research Institute, says that a significant though unknown part of this year’s figure can be attributed to the liquidation of fixed and non-fixed assets from non-resident Lebanese.

“You liquidate once and for all so I don’t know if this $7 billion is a sign of strength or rather an ultimatum,” says Hamdan. He expects, however, that remittances will

remain relatively steady in terms of their ratio to GDP “because a

decrease of a few percentage points is not enough to affect its weight with respect to GDP.”  

Another (and perhaps more meaningful) indicator that remittances can be expected to stay fairly stable is the lack of an influx of returning expatriates, tens of thousands of whom were predicted to return home as a result of the crisis — though in Hamdan’s view, the absence of repatriation figures constitutes “the worst example of the lack of accurate data.”

There was “no reversal of the brain drain phenomenon witnessed so far, despite the fact that local demand for skilled labor has been rising,” says Safadi. 

While this return of talented

expats would have presented positive opportunities, the fact that it hasn’t occurred also has a positive dynamic, as it means that those who have lost their jobs have likely taken up other employment, or moved from city to city or country to country seeking work in markets where wages are high and from which they can continue to send remittances.

“We didn’t see thousands of Lebanese returning here, so that means they’re still working somewhere,” says Ghobril. 

Perhaps the strongest indicator of the continued strength of remittances, however, is data coming from the remittance sending countries. Saudi central bank data estimates that total remittances — to all countries — from Saudi Arabia reached $15 billion in the first eight months of 2009, an increase of 12 percent compared to 2008.

While this growth, probably fueled by the kingdom’s massive development plan, is a slowdown from the 26.7 percent growth in remittances that took place between 2007 and 2008, it certainly paints a brighter picture than many predicted when the financial crisis first kicked off. 

Resilient but not immune

Other Gulf states have also dug into their remarkably deep pockets and ploughed ahead with their own long-term strategies for infrastructure development. This was reflected in the IMF’s Regional Economic Outlook report for October 2009, which said that counter-cyclical government spending had helped protect economies in the Middle East from the worst effects of the global economic downturn.

Overall, according to the World Bank’s latest data, outward remittance flows from the Gulf have dropped only 3 percent this year relative to last year. Remittances from the Gulf to other countries in the Middle East have dropped from $34 billion to $32.2 billion, according to data from the World Bank, IMF and Bank Audi, and the IMF outlook report predicts that remittances will stabilize at $34 billion next year and grow to $36 billion in 2011.

However, there are negative signs as well. In Jordan, (where data on remittances is more readily available than in Lebanon) there has been a decline of 6 percent in remittance inflows, and Egypt, the biggest recipient of remittances in the region, has announced a decline of 8.8 percent.

There are reasons to believe that remittances from the US may have suffered a more serious decline, with remittances to Mexico having dropped 15 percent year-on-year in the year to August, as reported by The Wall Street Journal.

With the region expecting to have a better year in 2010 and the US officially out of a recession, there is reason to be optimistic.

However, as Ghobirl says: “There is no way not to be effected…The Lebanese economy has shown that it is insulated from the crisis but not isolated. It is resilient but not immune.”

Annual growth of workers’ remittance inflows to Lebanon

Source: Banque du Liban, World Bank, IMF, Bank Audi
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Jordan’s journeymen

by Riad Al-Khouri
written by Riad Al-Khouri

Migrant labor has become part of economic life in a globalizing Middle East, with countries increasingly dependent on workers hailing from across borders and often from outside the region. Yet, with unemployment buffeting many Arab economies, the issue of migrant laborers is becoming increasingly contentious.

The unemployment rate across the Middle East will rise to 11 percent this year, according to the International Labor Organization, and the typical reaction of governments in crises is to restrict the movement of labor to keep foreign workers out. However, other forces are also at work restricting labor flows into and out of the region as well as within it. In particular, the last few years have seen a general trend towards labor market regulation, made possible by more efficient computerized public sectors, and rendered necessary by government fears over internal security. As 2009 draws to a close, these trends have combined to impose more restrictions on guest workers.

Jordan is a case in point. The kingdom’s economy relies heavily on Egyptians and other foreign workers, and in some areas the presence of this imported labor is crucial (for example, with Egyptians working in agriculture, Pakistanis in garment production, as well as Indonesians and Sri Lankans in domestic service). In turn, workers remit much needed funds to their homelands. However, the influx of migrants is becoming subject to more serious Jordanian state scrutiny.

Jordan’s (and sending-countries’) attempts to regulate the kingdom’s migrant workers started before the global financial crisis, with a major catalyst for increased Jordanian state surveillance of foreigners being the triple-hotel bombing in Amman in November 2005 that killed some 60 people and injured more than 100. Yet the issue of migrant labor has clearly become more contentious over the past few months. Jordan’s jobless rate is now back up to 13 percent after having fallen in the past few years, further challenging the status of migrant workers and accelerating the trend towards more government control in this regard. In fact, the question of guest workers had been on the state agenda for over a decade, but only in 2007 did Jordan try more seriously to regulate entry of workers from outside the kingdom bilaterally, as opposed to previous steps taken on a unilateral basis towards foreign workers by Amman.

In other words, Jordan’s current policy is to enlist the aid of foreign governments to keep the flow of their nationals into the kingdom under control. To that end, two years ago Jordan signed memoranda with Egypt, Sri Lanka and Pakistan respectively to regulate the entry of workers into the country. Under the agreement between Jordan and Egypt, the number of Egyptian laborers would be regulated and the sectors they can work in specified. Laborers coming into the kingdom from Egypt have to meet Jordanian requirements such as passing medical tests, holding certificates appropriate to their field of work and certifying that they have no criminal records.

This tightening up led to guest workers being deported for violating work permits and residency regulations. Some 318,000 non-Jordanian laborers held valid work permits by mid-2008, while that number had dropped to 304,000 by the end of last year, partly as a result of the expulsion of more than 10,000 migrant workers (most of them Egyptians).

Yet much work is still needed to organize the kingdom’s guest worker sector. The Jordanian government estimates that about 450,000 workers of different nationalities are currently employed in the kingdom (of whom around 300,000 are Arabs, mainly Egyptian) though only about two-thirds of these have work permits. Thus the process of legitimizing guest workers continues, and well more than 110,000 Egyptians have applied to work in Jordan in the two years since the Amman-Cairo labor agreement. (Under the memorandum of understanding, which was only finalized this year, Egypt is also required to keep a database of all laborers seeking employment in Jordan to be made accessible to all concerned parties.)

So far so good; however, news regarding guest workers coming to Jordan from other states is not as encouraging. For example, though agreements signed by Amman with Sri Lanka and Pakistan respectively seek to regulate workers’ entry from those countries while also guaranteeing them decent working conditions, there continue to be problems with laborers from these and other South Asian nationalities. This has particularly been the case in Jordan’s garment production sector, which is contracting in the face of foreign competition, with foreign workers who produce the clothing often feeling the pinch in unpaid salaries. Despite this, Egyptian laborers, Jordan’s largest guest-worker contingent, are well on their way to being regularized — an important step to stabilize labor markets in these times of rising unemployment.

RIAD EL-KHOURI is the senior associate consultant at the William Davidson Institute of the University of Michigan in Ann Arbor, and dean of the business school at the Lebanese French University in Erbil

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New Turks with “Zero Problems”

by Peter Speetjens
written by Peter Speetjens

One of the most striking regional developments of 2009 has been the reemergence of Turkey as a major player within the greater Middle East. Since its establishment in 1923, the country followed the credo of its founding father, Kemal Ataturk, and oriented its foreign policy westward, showing a cold shoulder to eastern neighbors.

Today, however, under the “divine guidance” of the Justice and Development Party (AKP), Ankara’s alignment is changing significantly. While mindful of not shutting the door on Europe or irking Washington, Ankara is increasingly looking east, which in 2009 produced a multitude of protocols and agreements with countries such as Syria, Iraq, Iran and even Armenia.

One of the main architects of Turkey’s shift in foreign policy is the AKP’s Ahmet Davutoglu, a political scientist and former professor of international relations, who served as a special adviser to Turkey’s Prime Minister Recep Erdogan before being appointed as Turkey’s Foreign Minister last May. It is his book “Strategic Depth” that lies at the heart of Ankara’s change in worldview.

Davutoglu argues, first of all, that Turkey lies at the heart of three geographical regions and should formulate a foreign policy accordingly, including the establishment of strategic relations with the Middle East, the Caucasus, Russia and Central Asia. Secondly, Ankara should pursue a policy of “Zero Problems” and “Maximum Engagement” with its neighbors, mainly by improving economic ties. Davutoglu’s views are part of a wider intellectual current known as “New Ottomanism” that aims to distinguish between the good, the bad and the ugly of Turkey’s Ottoman legacy.

 This new mode of thinking is a sharp departure from the Kemalist military doctrine, which for decades defined the Ottoman past in strictly negative terms, while it saw Turkey as a “lone wolf” surrounded by a “ring of fire.” Naturally, Turkey’s change in foreign policy has not been an overnight affair. Some academics argue that its roots were planted shortly after the end of the Cold War. Still, it is beyond doubt that the AKP accelerated and firmly implemented the new doctrine.

Take relations with Syria. Since the 1998 Adana Agreement ended the all too real threat of war between the two nations, ties have gradually grown stronger, which culminated this year in the remarkable decision to lift all mutual visa requirements and establish a high-level council to enhance trade and cooperation.

“Turkey is the gateway for Syria to Europe just as Syria is the gateway for Turkey to the Arab world,” Davutoglu explained.

In addition, Turkey signed a historic agreement with Armenia to reopen the borders and restore diplomatic ties. Having previously normalized ties with the regional Iraqi government in Kurdistan, Ankara and Baghdad in October agreed on no less than 48 memorandums of understanding in the fields of energy, trade, transport, water and agriculture. And on October 26, Erdogan met with his Iranian counterpart and “friend” Mahmoud Ahmadinejad. The two-day visit resulted in a flurry of agreements with the potential to propel bilateral trade from $11 billion to $30 billion.

Meanwhile, Turkish relations with Israel have soured since the latter’s 22-day onslaught on Gaza last winter. Turkey actively lobbied for an immediate ceasefire, while Erdogan became the “hero of Davos” after infamously marching off a stage he shared with Israeli President Shimon Perez during a World Economic Forum debate in January. In doing so, Erdogan and Turkey scored major points both at home and in the wider Middle East.

Still, although Turkey emphasizes that its “eastern face” does not come at the expense of its western one, its “Zero Problems” policy is likely to run into trouble sooner or later. First of all, notwithstanding its good intentions, Turkey should be cautious not to overplay its hand in a region where its Ottoman past remains a highly sensitive subject.

Secondly, criticizing Israel and improving ties with Iran will not go down well in most Western capitals. American diplomat Philip Gordon hinted as much on a recent visit to Ankara, saying there were “more points of disagreement than of agreement with Turkey.” Ankara’s “New Turks” wish to be friends with everyone, yet that may be impossible in a world where the enemy of my enemy is still my friend.

Finally there is the Turkish military, which has long seen itself as the guardian angel of Ataturk’s secular, pro-Western ideals and has a history of launching coup d’etats whenever it saw them threatened. It could do so again. Following the 2007 Ergenekon investigation, dozens of suspects, among them former generals, have been charged with attempting to bring down the government.

Regardless, no matter how events play out, one thing is certain: while long a spectator on the sideline, Turkey today is a regional player to be reckoned with.

PETER SPEETJENS is a Beirut-based journalist

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North Africa’s offside

by Jonathan Wright
written by Jonathan Wright

Egypt and Algeria have never been the best or closest of friends. When their paths have crossed, most notably in the heyday of Arab nationalism and non-alignment, it was as rivals rather than collaborators, though post-revolutionary Egypt did support the Algerian struggle for independence and Algeria sent token contingents to help Egypt in its wars with Israel. For the young Egyptian and Algerian soccer fans that were out on the streets waving their national flags on and off for a week in mid-November, and sometimes attacking each other with sticks and stones, all that is ancient history. What mattered to them were the insults to pride that filled the airwaves and the Internet across North Africa before, during and after the two fiercely contested soccer matches for a slot in the World Cup tournament, to be held in South Africa in 2010.

Alaa Mubarak, the son of Egyptian President Hosni Mubarak, said the Algerians who turned up in the Sudanese capital Khartoum for the decisive match on November 18 were “mercenary terrorists” and “thugs and bums” armed with knives and other weapons. The Algerian government had sent them on military planes to intimidate the Egyptian supporters, he added.

Egyptians called up Cairo radio stations to complain that Algerian fans had arrived two days early, plastered Khartoum with Algerian flags, hired Sudanese to pose as Algerian supporters and then attacked the Egyptians when they came out of the stadium. The number of injured was somewhere between 20 and 200, depending on who was counting.

Algerians, naturally enough, dismissed the Egyptian complaints as sour grapes (Algeria won 1-0 in Khartoum, eliminating Egypt) and noted correctly that Egyptian fans started the violence when they attacked the Algerian team’s bus on arrival in Cairo for the first match. Nonetheless, a frenzy of chauvinism swept the Egyptian government off its feet and by the week’s end it had recalled its ambassador from Algiers for consultations on the Algerian government’s failure to restrain Algerian supporters and protect Egyptian businesses from vandals.

After a string of setbacks on the international stage, the Egyptian government was especially anxious for a football victory. It is still smarting from its disastrous attempt to persuade the Federation Internationale de Football Association (FIFA) to hold the 2010 World Cup championship in Egypt rather than South Africa.

The government and the independent Egyptian media had in fact set themselves up for disappointment by giving the impression of Egyptian invincibility. On the eve of the first match, Dream TV staged what a casual viewer might easily have mistaken for a victory celebration.   

In a pattern that has become common in the Arab world’s fledgling dynastic “republics,” Mubarak’s younger son Gamal, widely seen as the most likely successor to the 81 year old president, has shown himself to be a prominent football fan, appearing in the Khartoum stadium wearing the colors of the national team.

Commentators on both sides of the North African divide speculate that he is hoping to win street credibility with some soccer mojo.

“The regime would have used [a victory] as a weird validation of Gamal Mubarak,” wrote political analyst and blogger As’ad Abukhalil. “Gamal Mubarak…went to Sudan to attend the match and presumably to reap the rewards of victory that never came.”

Promoting sports as an alternative to serious politics and as an outlet for youthful exuberance is hardly a novel strategy, and it did not escape notice that the crowds protesting with impunity outside the Algerian embassy in Cairo this week were larger than those at any of the recent opposition rallies, some of which were met with batons and tear gas.

Happily, adult voices have not been silent in this sorry affair. Some Egyptian radio commentators have responded to complaints about Algerian fans by saying some of their conduct seemed fair game, and some editorialists have deplored the chauvinist excesses on both sides.

Zehira Houfani, writing in Le Quotidien d’Algérie, noted that “a storm of delirium over a mere football match” had swept Egypt and Algeria.

“The excesses of the acts committed, on one side and the other, and the escalation of hateful remarks by certain parties and opinion leaders are beyond all comprehension and border on irresponsibility,” she wrote. The independent Egyptian daily Al Masry Al Youm irreverently noted that Egypt and Algeria were at least even in Transparency International’s annual index of corruption, placed 111th out of the 180 countries and territories listed.

Egyptian businesses, especially those dominated by the Sawiris family, also have reason to counsel prudence. Sawiris’s Orascom Telecom, which owns the Algerian mobile phone operator Djezzy, suffered a double whammy. It had its offices in Algiers ransacked, with damage worth $5 million, and then the Algerian tax authorities told the company they wanted $596.6 million in outstanding taxes and penalties.

Jonathan Wright is the managing editor of Arab Media and Society

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The bubble’s jagged edge

by Paul Cochrane
written by Paul Cochrane

For business journalists, writing about the Gulf from 2004 to 2008 was often a repetitive process. Regardless of the sector being covered, the opening paragraph would invariably have a growth figure in the double digits, and the projection for the next year would also be a very healthy one. Every year was a record year, or so it seemed.

The global financial crisis in the autumn of 2008 dimmed the Gulf Cooperation Council’s business fortunes, flipping that opening paragraph to negative double digits or growth in the low single digits, depending on the sector. This change was welcomed by many business journalists, if only to spice up their writing, but of course not by the business community.

The reasons behind strong growth can be easily explained, but a downturn and a serious contraction in revenues requires a different explanation, and it was time for journalists to start asking hard questions — at least it should have been time to play hardball.

However, just as the crisis was beginning to bite, the government of the United Arab Emirates introduced a draft media law in January to update the archaic 1980 law. Media outlets quickly understood the ramifications of the proposed rules, which include article 32, whereby journalists can be fined up to $1.3 million for “disparaging” government officials, members of the royal family or Islam, and article 33, which fines journalists up to $136,000 for harming the nation’s image and reporting “misleading” information on the economy.

Given such fines, way beyond the financial means of most journalists and media outlets, how could hacks ask hard questions? And how could journalists report on companies and firms that were in trouble but directly linked to royal families? It is a clear Catch-22 situation: journalists want to do their job, and the public and investors have the right to know about financial shenanigans, but to do so could come with a hefty price tag, and if you can’t cough it up, it’s a stint behind bars in the debtors’ jail.

The whole notion of transparency became a mockery, and the depth of the financial crisis’ impact was barely debated in the media, at least not in the UAE and the other GCC countries, where media laws are similarly draconian.

How ingrained such self-censorship is among Gulf journalists was evident in the headlines and articles in the aftermath of the bomb Dubai World dropped on global markets by announcing a standstill in billions of dollars of debt repayments. The Gulf News gushed across its front page: “Government intervention to ensure commercial success,” the Abu Dhabi-owned The National downplayed the impact with the headline: “A silver lining in Dubai World,” and the Khaleej Times espoused optimism with: “Restructuring ‘A Sensible Business Decision.’” Elsewhere, papers’ headlines were of “castles in the sand,” “Dubai in turmoil,” and “Bombshell decision has severely damaged Dubai’s reputation.”

But while papers outside the region can tell it as it is, reporting on what has already been reported can even be a risky business in the rest of the Middle East.

In one case, a UAE-based journalist wrote an article on the new media law for the American University of Cairo’s (AUC) Arab Media & Society (AMS) website. In it, she referred to a case in May where British daily The Independent ran a story about a case of fraud in which a Dubai developer showed investors photographs of buildings under construction, but were in fact photos of another project. The investors demanded a refund, but until now they have not been reimbursed.

The developer is the Al Fajer Group, run by Sheikh Maktoum bin Hasher Al Maktoum, who is the nephew of Dubai’s ruler. For citing — not breaking — this story, the Maktoum’s threatened to sue AUC.

What this case highlights is the lengths to which the UAE will go to try and rein in negative media coverage. Furthermore, the case has warded off necessary reporting on dubious tactics by developers, which damage the reputation of the real estate sector at the very time when the sector is suffering, with real estate prices down 50 percent in Dubai from their 2008 peak, and investment bank Union de Banques Suisses projecting in November that it could take up to 10 years for the sector to bounce back.

The last thing the sector should want in such a tenuous climate is jittery investors. As an Al Fajer investor told The Independent, “This is going to define my faith in the country. If I’m dealt with correctly, great. But at the moment, it’s not going that way. We’re in the witching hour now.”

That witching hour extends to media coverage, transparency in economic data and whether firms connected to the royal family are being unfairly assisted and bailed out at the expense of ‘ordinary’ companies trying to compete in a supposedly free market. As for us business journalists, reporting on the Gulf is certainly keeping us on our toes as we cover, or indeed cover up, the Gulf’s (mis)fortunes, and try to avoid getting fined a lifetime’s salary in the process.

PAUL COCHRANE is the Middle East correspondent for the International News Service

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Lebanon’s elephant in the corner

by Sami Halabi
written by Sami Halabi

Lebanon’s relationship with debt closely resembles an addiction to alcohol. For starters, it’s quite evident that the country wasn’t thinking straight when it took out loans with interest rates of more than 35 percent to fund its post-war reconstruction. Then, instead of accepting the inevitable fiscal hangover and reforming its institutions, the country continued to borrow money (mostly from its own banks) and spend it on those same institutions that never shaped-up. In order to remedy this situation, it may be wise to refer to the American Psychological Association’s summary of the ‘12 Step Program’, which has helped many overcome alcoholism. The first step states that recovery requires one to “admit that one cannot control one’s addiction or compulsion.”

Lebanon has yet to truly admit that it has a problem. At nearly $50 billion and 154 percent of Lebanon’s gross domestic product, the debt is mounting and the only policy the Lebanese government has enacted is to swap the short-term debt for long-term debt, in an attempt to keep its head above water just that little bit longer.

Now that Lebanon has a new government, a line is again being drawn in the sand between those who believe reducing the debt is the single largest economic problem the government must deal with, and those who consider it to be “perfectly sustainable,” as does Lebanon’s Central Bank Governor, Riad Salameh.

The “sustainable” theory goes that, given the high liquidity levels in Lebanese banks, they have the cash on hand to continue lending to the government to fund its spending; given Lebanon’s high GDP growth rate, government revenues in the form of taxes will grow, bringing down the yearly deficit and, given that the American dollar is forecast to drop in value and most of Lebanon’s debt is priced in dollars, the value of the debt will fall all by itself anyway. If Lebanon is attracting billions of dollars of investment inflows and registering record growth numbers, then why rock the boat? In time, the debt will reach a manageable ratio relative to GDP and the problem will solve itself.

That’s the rosy version, and a line put forward by prominent members of Lebanon’s banking sector, though such optimism may be easier when they hold around $110 billion in assets and are profiting from much of the debt anyway. The rest of Lebanon, however, hasn’t the luxury to be so cheerful while the country runs a deficit of 10.5 percent of GDP and has spent 20 percent more in the first three quarters of 2009 than it did in 2008. Even though these figures may be within global norms today, one must remember that elsewhere in the world government expenditures have skyrocketed to bailout their economies.

There are only two countries in the world that are in a worse state than Lebanon in terms of their burden of debt — one of them is Zimbabwe, where the local currency value has all but evaporated, and the other is Japan, the world’s second largest economy.

Japan already has some of the best infrastructure in the world; Lebanon doesn’t.

With the debt looming overhead, not only is the Lebanese government less able to provide or upgrade their antiquated public services, they also have less ability to fledge many sectors that people depend on such as agriculture or industry, not to mention protect their strategic and military interests. Lest we also forget that another conflict with Israel would completely wipe out Lebanon’s new-found investor confidence, or the fact that our politicians can hardly be trusted not to start another political debacle, putting us back in a situation of low, no or negative growth.

Those who believe Lebanon’s debt is sustainable because of the country’s economic growth tend to gloss over the fact that growth has not been uniform across all sectors, and that this is resulting in an economy that lacks diversification — the Lebanese are placing all their eggs in just a few very large baskets. To make matters worse, other untapped potential markets for development — such as water resources, refining and hydrocarbon development — are still taboo for Lebanon’s economic policy makers.

Basic economic theory, and history for that matter, dictates that for every boom there is a corresponding trough, which means that at some point in the near future the debt will not seem as manageable as some view it during this current growth cycle. Hence, as one European Commission economist stated last October, Lebanon’s fiscal situation is, and will likely remain, “unsustainable.”

Even the likely privatization of telecoms and electricity, from which the proceeds will go to reducing the principal on the debt, will not prove to be a panacea. At present valuations, Lebanon will not get much in return for these national industries due to their dismal state.

A focus on growth should always be a priority for an economy, but the kind of growth currently on the table boxes the economy in and tries to shield it from the inevitable reality of having to deal with the debt. An economy’s sustainability comes from its versitility and ability to grow on many levels — not just its ability to pay the interest on the debt it hopes will go away.

Sami Halabi is a deputy editor at Executive Magazine

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Triggers on safety

by Nicholas Blanford
written by Nicholas Blanford

Speculation on another war between Hezbollah and Israel has been bubbling away since the end of the last encounter in 2006, but it has intensified of late with many predicting a renewed conflict could be in the offing this winter or early spring.

Israel’s recent interception of the Francop cargo vessel in the Mediterranean and the discovery of 500 tons of Iran-supplied weapons and ammunition on board, allegedly destined for Hezbollah, underlines the intensity of military preparations on both sides and possibly provides Israel with the “smoking gun” to execute a swift and destructive campaign.

The good news is that neither side appears to want another round at the present time. Hezbollah’s leadership does not hide the fact that the group is re-arming. But the leadership is aware that its Shiite constituents, not to mention the rest of the country, are in no mood for more military adventures. Israel, too, has been making preparations for another war, which includes retraining its ground forces, the introduction of new weapons and defense systems and devising a new strategy for dealing with Hezbollah. The new strategy, however, is intended principally as a means of deterrence, to prevent a war breaking out in the first place. It is based on the concept of punishing, rather than defeating, the enemy. Israeli strategists have accepted that Hezbollah cannot be defeated on the battlefield and that less ambitious goals need to be set. A year ago, General Gadi Eisenkot, the head of the Israeli army’s Northern Command, coined the phrase “Dahieh doctrine” to describe the use of “disproportionate force” upon any village from which rockets are fired into Israel — in other words to inflict the same level of destruction as experienced by Beirut’s southern suburbs (“the Dahieh”) in 2006.

The doctrine has been further refined since then, most notably by Giora Eiland, a former national security advisor when Ariel Sharon was prime minister. Eiland advocates treating Lebanon, rather than just Hezbollah, as the enemy, turning the next war into a state vs. state affair rather than state vs. non-state actor. The justification articulated by Eiland and others is that, first, the Lebanese government includes members of Hezbollah and second, it is complicit in Hezbollah’s military build-up because it has not prevented armaments from being smuggled into Lebanon. The advantage to Israel would be a far broader range of targets in the event of a war. The intention would be to launch a swift and devastating offensive, mainly waged using air power, while deploying ground forces on select missions to suppress Hezbollah’s cross-border rocket fire. There would be no mass invasion with armored columns racing up the coastal highway and into the Bekaa Valley. Instead, it would be more streamlined and focused.

Israel’s political and military echelons are reportedly in agreement on the need to define Lebanon as the enemy, suggesting a stronger degree of coordination and strategic unanimity between the two than was demonstrated in 2006.

The strength of Israel’s new strategy toward Hezbollah rests in its deterrence factor. The threat of massive punishment will have the effect of dismaying the Lebanese and jangling the nerves of the government, while dampening Hezbollah’s enthusiasm for recreating the finely-calibrated war of attrition that existed along the Blue Line between 2000 and 2006. Hezbollah has been engrossed in a debilitating political struggle since the end of the 2006 war, which, along with the necessity of building up its military assets, has ensured that the Lebanon-Israel border has witnessed its longest period of calm in four decades.

However, Israel’s strategy of punishment could unravel very quickly if circumstances were to arise that lead to another war. It takes two to fight a war and no one can say that Hezbollah will stop fighting just because Israel considers that it has accomplished its goal of punishment. Hezbollah’s rockets are likely to strike deeper into Israel than in 2006, possibly hitting Tel Aviv. Sayyed Hassan Nasrallah has already articulated a Dahieh-for-Tel Aviv strategy in which Israel’s largest city will be struck if the southern suburbs are bombed again. That means that a larger tract of territory in Israel will be paralyzed than in 2006, placing additional domestic pressure on the Israeli government to conclude the war as quickly as possible. Furthermore, it is widely believed that Hezbollah will take the war into Israel next time, dispatching commando units across the frontier to cause havoc in border settlements, mining roads, blowing up bridges and attacking military bases.

The last thing Israel wants is to become bogged down in a prolonged conflict with Hezbollah, as was the case in 2006. International tolerance for Israel’s military adventures is wearing thin, even if many Western nations feel there was some justification for Israel’s attacks on Lebanon in 2006 and Gaza in 2008. The Goldstone report on the Gaza war has set an ominous precedent for Israel. Israel’s “Dahieh doctrine,” if implemented and prolonged because of Hezbollah’s refusal to yield, will beg another Goldstone style investigation, further eroding the Jewish State’s international standing. Thus, the only way Israel can be assured of winning the next war is if its doctrine of punishment prevails and prevents another war from starting in the first place.

Nicholas Blanford is the Beirut-based correspondent for The Christian Science Monitor and The Times of London

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