Construction has long been a mainstay of the Tunisian economy, and this year new projects will help stimulate an economy that is likely to see a contraction resulting from the global financial crisis. Since Gulf investors stepped up their interest in 2006, the construction sector has been dominated by high-end, mixed-use developments, but this year domestic spending on infrastructure and housing is a top priority.
Tunisia’s fourth largest industry in 2008 was construction. According to Chokri Driss, the director of the National Federation of Buildings and Public Works Entrepreneurs, it accounted for approximately 7 percent of the economy and employed 33 percent of the working population. But its strength is a relatively recent development.
Although the government has long encouraged private investment, the sector suffered from a lack of financing until 2006 and was characterized by small-scale local investments. Since then, the promise of Gulf investments totaling nearly $50 billion has led to new competencies and a revitalized sector.
Foreign direct investment will likely now be harder to secure, particularly for luxury proposals. For even though big residential, office, retail, tourism and leisure complexes are still in the works, the downturn has led to slower progress.
Despite these factors, foreign direct investment remains a central component of the government’s plan to upgrade infrastructure and spur on construction, with expansion set to continue. A $550 million project for the Enfidha Airport, 80 kilometers south of Tunis, was awarded to the Turkish firm Tepe-Akfen-Vie Airports Holding, under a build-operate-transfer contract, and is slated for completion by October. The Japanese International Cooperation Agency’s joint roadway project with the Tunisian government to build the $106 million Radès-La Goulette highway in Tunis is also in its final stages.
In January, Slaheddine Malouce, the minister of equipment, housing and physical planning, announced that $318 million would be allocated to development. Projects under the new spending plan include extending existing highways, such as the Tunis-Hammamet-Sud and the Sfax-Gabe connections, the upgrade and consolidation of roads and the construction of new bridges.
In addition to transport infrastructure, foreign investors are also providing financing for energy facilities, such as France-based Alstrom’s construction of a 400 megawatt power plant that is expected to be operational by the end of 2009, the joint Tunisian-Italian El Haouaria 1,200 megawatt gas plant, and the joint Spanish-Tunisian Bizerte project to build wind turbines that will generate 120 megawatts.
Malouce also unveiled the government’s plan to build new low and middle-range housing units. There has long been a shortage of affordable housing in Tunisia, and with the population growing at an annual rate of 1.2 percent, the lack of supply is becoming increasingly pressing. The centerpiece of the strategy is the eleventh development plan, which calls for the construction of 300,000 homes.
In 2009, the Société Nationale Immobilière de Tunisie plans to build nearly 3,000 homes throughout the country, 58 percent of which will be low-range units and 36 percent mid-range. The government is also working to develop a village for social housing in the governorate of Ariana, which will include 1,700 homes.
Making the old new again
There are also plans to revitalize older communities. An urban renewal program will target 200,000 inhabitants in 56 districts from 2009 to 2012, primarily by addressing the lack of basic infrastructure. The program, which covers sanitation and utilities, also finances s economic activities such as the construction of roads and the extension of waste-water treatment canals and storm-water drainage.
While the majority of these investments will go toward upgrading infrastructure, 30 percent is reserved for microcredit, trades and training, which will enable small business owners to access funding, as well as prepare unskilled workers for the job market.
The government hopes that holistic community development programs will help ease the difficulties of the slowdown in growth, giving residents the necessary skill sets to find work. By channeling these plans through construction projects, the government is both filling a necessary housing gap and using public funds to stimulate the economy during a difficult period.
A recent internet disruption in Algeria was a sobering reminder of the challenges the country’s internet services sector faces. It also underlines the importance of the government’s continuing efforts to develop a comprehensive internet policy framework, while highlighting the potential for WiMAX licensing and the development of asymmetric digital subscriber lines (ADSL).
Algérie Télécom (AT), the public telecommunications company, attributed the limited nationwide connectivity to a rupture in one of the two submarine fiber-optic cables that provide Algeria with its broadband data network. The ruptured cable, named the South East Asia-Middle East-West Europe 4, is maintained by France Télécom Marine, and extends from Marseille to Singapore with a stopover in Annaba, east of Algiers. All of the data activity was transferred to an already saturated cable system, ALPAL-2, which connects the island of Majorca to El Djemila, near the capital. The result was a slow to non-existent connection for Algeria’s ADSL subscribers.
The disruption’s impact on local businesses was limited though, due to the low level of connectivity. Algeria has few internet-based businesses, although in recent years it has become a popular destination for call centers.
Internet connectivity in Algeria’s business community can be broken down into two sectors. State-owned companies, which dominate market activity, rely on phone and fax as their primary means of communication, although email is on the rise.
Larger multinationals, primarily in the oil and gas sector, tend not to rely on the local networks, opting for more stable but costlier satellite-linked very small aperture terminals (VSAT) or WiMAX solutions. These corporations cannot afford to have internet downtime or have operations in rural areas not covered by the ADSL network. Oil and gas rigs, for example, transfer high volumes of data to headquarters on a daily basis.
“There is no way of knowing what is going on in a rig unless it is connected 100 percent of the time,” said Stéphane Valici, the chief executive officer of Divona, a licensed VSAT operator.
The propensity of multinationals to rely on alternative forms of connectivity highlights the enormous potential in the country’s IT sector. WiMAX technology, if properly exploited, is capable of providing broadband internet access to consumers without the need for cables. This is of crucial importance since much of Algeria’s connectivity problems stem from its “last mile” cable network — the final link from the provider to the consumer — rather than the internal fibre-optics.
According to Mohamed Fadi Gouasmia, the general manager of Anwarnet, “WiMAX eliminates the need to depend on this cable network by going completely wireless.”
So far, national scale investment in WiMAX has been limited by the lack of a licensed operator. However, this is now slowly starting to change. The government has begun to hand out exploration authorizations, to seven companies thus far, allowing them to operate WiMAX services over the 3.5 GHz frequency. However, only three of these companies are actively marketing WiMAX services. Divona’s Valici and Anwarnet’s Gouasmia both agree the bandwidth provided operators is too limited for them to expand.
Some of these players do not have adequate resources and consolidation in the industry is being delayed due to the uncertainty regarding their status if a license is issued. Furthermore, companies are not allowed to cede their licenses, nor be acquired without the approval of the national regulator, Autorité de Régulation de la Poste et des Télécommunications.
“WiMAX technology,” Valici said, “is likely to remain a niche in Algeria unless licensing issues are resolved.”
For now, retail users and small and medium-sized companies must use the country’s oversaturated ADSL network. Ali Kahlane, the CEO of Satlinker, an internet service provider (ISP) and virtual private network operator, said this underlines the need for an upgraded ADSL network.
“AT heavily promoted its ADSL services by lowering prices without expanding its bandwidth,” said Kahlane, who is also the current head of the Algerian Association of ISPs.
This promotion, without expanded capability, caused network oversaturation. There was a rush to sign-up in high-density urban areas, and subscriptions ran out quickly.
Other areas with lower populations often have excess capacity. The network is in need of a overhaul that will allow for increased internet penetration and a rise in subscriber numbers. Officially, ADSL penetration has reached 430,000, with 500,000 connections available.
And yet the future looks positive: Kahlane says the Ministry of Post, Media Technology, and Telecommunication and Algérie Télécom have “noticeably” begun to separate “internet policy from telecoms policy,” which will provide a more rigorous legal framework for IT connectivity.
Given the potential in both the corporate and retail segments, combined with an impending $150 billion government spending plan, a robust strategy to build a strong information and communications technology sector could improve Algeria’s profile as a knowledge economy.
Despite continuing volatility in the global financial markets, Morocco’s relative isolation has thus far minimized the effects of the turmoil on the country’s banks. The Kingdom’s sound financial fundamentals may, however, still face the effects of a global contraction. Although these factors will certainly provide challenges in 2009, the central bank, Bank Al Maghreb, has already begun to take proactive measures, while the underlying strength of the banking system should prevent significant decline.
In a recent report, Standard & Poor’s credits highly restrictive regulations for reducing the North African nation’s exposure to international investment products. However, the analysis cautions that the weakening economy may become a risk to the banking sector as remittances, tourism inflows, trade volumes and foreign direct investment (FDI) decline. A drop in these sources of revenue, coupled with a correction in the real estate sector, may affect the strength of Morocco’s banks.
Still, the government is prepared to act pre-emptively to soften the results of the recession. One such effort was an interest rate cut in March. Bank Al Maghreb lowered its key interest rate from 3.5 percent to 3.25 percent, as inflation continues to decline. The interest rate cut follows the December reduction of the mandatory reserve ratio, as the government works to make more capital available to banks in a bid to stimulate lending.
Although lending was up 23 percent in December from the previous year, it declined from the 26 percent growth posted in the third quarter. Starting January 1, the central bank reduced the ratio three points to 12 percent, which will inject around $1.3 billion into the money market.
The cuts will help provide extra liquidity, but overall Morocco’s banks are in a good shape despite potential external shocks. In 2008, they provided $63.6 billion in credit, up nearly 23 percent on 2007, and received $70.1 billion in deposits, up 13 percent from the previous year.
The big players
The sector continues to be dominated by Attijariwafa Bank, Crédit Populaire du Maroc and Banque Marocaine du Commerce Extérieur, which posted healthy increases in net profit in 2008 of 27 percent, 16 percent and 46 percent respectively.
In recent years the banking sector has made considerable strides, with an October 2008 report from the International Monetary Fund noting that a number of reforms have been implemented and that the sector is “stable, adequately capitalized, profitable and resilient to shocks.”
The broad changes include the restructuring and privatization of previously specialized public banks, strengthening the power of the securities regulator Conseil Deontologique des Valeurs Mobilieres (CDVM), the modernization of the payment system, and the adoption of anti-money laundering and counter-terrorism financing laws. While there are still a number of areas that need reform, including the reduction of non-performing loans and the increase of accessibility, Morocco’s banks are steadily improving.
The sector’s strength will be increasingly important as the global slowdown affects the Kingdom’s other sectors. Morocco’s primary trading partner, the Eurozone, has contracted, and thus so too have some of Morocco’s significant revenues.
Manufacturing has always been a strong contributor to the economy, but exports fell 32 percent in the first two months of the year, including exports of electric cables, textiles, electronic components and phosphates.
In the same period, remittances from Moroccans abroad have declined 15 percent. Remittances have become a crucial source of foreign currency for both the country’s financial institutions and families.
Similarly, tourism contributes around 6 percent annually to GDP, but receipts were down 3.5 percent in 2008 compared to 2007, decreasing from $7.2 billion to $7 billion.
This year may also prove a challenging time to secure FDI. Although Morocco is traditionally a major recipient, Europe’s recession and the Gulf’s declining oil prices will likely limit contributions. A reduction in FDI may also affect the real estate sector’s significant investment levels.
Construction and mortgage loans have been an engine of growth for banks in the past five years, but signs of a correction are showing, particularly in the luxury segment. According to Standard & Poor’s, if the correction extends to the middle-market segment, banks will feel the effects. Although unlikely to pose a serious problem for solvency, real estate will no longer be a reliable source of growth in the coming year.
Still, Morocco’s banks should be able to rely on a relatively strong economy in 2009, with economic growth expected to range between 5.8 per cent and 6.7 percent, roughly the same as in 2008. This steady growth rate should shore up banks’ confidence and maintain a rise in lending, thus ensuring a continuation in Morocco’s economic momentum, even during these difficult times.
A joint group of North African and European countries in April announced the launch of a long-term investment fund called InfraMed, that is the first financing facility of the Union for the Mediterranean (UFM). Equipped with a joint commitment of $543 million, InfraMed will be an equity investor in projects to build urban, energy and transport infrastructure in the Southern and Eastern Mediterranean regions. The fund will be open to other long-term investors in Europe, the Middle East and North Africa (MENA), with the aim of doubling its assets in the coming months. Other countries in the region are expected to adhere to the fund, French Ambassador to Tunisia Serge Deagaillaix said at a regional economic forum.
InfraMed will invest in infrastructure projects compliant with “social and environmental responsibility criteria enshrined in the United Nation sponsored Principles for Responsible Investment and the principles set forth in the Long-Term Investors Club charter,” according to a statement released by EFG Hermes.
InfraMed is arriving at a convenient time. As the global economic crisis curbs cross-border capital flows, infrastructure projects across the southern rim of the Mediterranean are struggling to find investors.
The Union for the Mediterranean is the third European led push to integrate the Northern and Southern Mediterranean countries in 15 years, after the Barcelona Process and the Mediterranean Union.
The UFM aims to boost economic and political connections between Europe and the MENA region. It is seen as a promising forum for addressing a number of regional issues, ranging from Middle East peace talks and North-South trade to stemming immigrant flows.
Nicolas Sarkozy’s relentless campaigning shepherded the UFM proposal all the way through the successful 2008 launch that united 40 leaders from the EU, North Africa, the Balkans, the Arab nations and Israel in one gathering. But analysts worry that the push to unionize the Mediterranean is bound to encounter resistance, particularly in the form of Arab-Israeli tensions and the vast divide between Northern and Southern economic and political development.
North Africa’s reception of the UFM has varied from country to country. Morocco and Tunisia were early enthusiasts of the plan, eager to tap into its economic resources. Algeria, initially objecting to Israeli involvement, ultimately signed on. Libya is the only Mediterranean-rim country not to participate at all. Libyan leader Muammar Gaddafi said he suspected that the France-backed UFM is really a move to buttress French hegemony in the MENA, under the guise of European and Mediterranean cooperation.
Launching a financing facility for infrastructure is a positive, non-controversial beginning for the UFM, especially since the fund is co-managed by two Arab and two European companies. If successful, the fund could prove the UFM’s potential to serve the interests of all its diverse adherents.
The InfraMed fund’s members include are Caisse de Depot et de Gestion (Morocco), EFG Hermes (Egypt), Caisse des Depots (France), and Cassa Depositi e Prestiti (Italy).
The last flight of Air Senegal International (ASI) touched down in Dakkar on April 24, grinding to a halt the operations of this joint venture between Moroccan national airline company Royal Air Maroc (RAM) and the Senegalese government. Once an inspiring success story of cooperation, ASI’s mounting troubles boiled over last month, when RAM was subpoenaed in a Senegalese court and the fleet of debt-ridden ASI aircraft relegated to a hangar in Dakkar.
RAM announced in April its decision to immediately withdraw from the management and capital ownership of ASI, in spite of an earlier Senegalese court banning RAM from withdrawing from the joint venture pending an audit.
“It is unacceptable that the Senegalese party… ask RAM to remain in the management of this company beyond 2009,” said RAM spokeswoman Habiba Laklalech. RAM executives pointed out that restarting the company would require a $37 million subsidy. The Senegalese administration, charged with settling the full amount of the company’s debts, called the Moroccan pullout “unacceptable and irresponsible.”
Good company gone wild
The Moroccan national carrier and Senegal launched ASI in 2000, with RAM investing 51 percent of the capital and the Senegalese government according air traffic rights, valued at 49 percent of the company’s capital. The partnership made sense: RAM brought its proven experience as a respected international carrier to the table. Also, there were lucrative opportunities in the West African civil aviation market, underserved by the ailing sub-regional carrier Air Afrique.
Beyond business, the alliance expressed the strong historical ties between Senegal and Morocco. Both countries deeply valued their economic, religious and political links that date back to the trans-Saharan trade routes of medieval Islamic empires. Abdoulaye Wade, Senegal’s popular, twice-elected president in power since 2000, and King Mohamed VI, who has ruled Morocco since his father’s death in 1999, worked together to expand trade ties and modernize their longstanding partnership.
Exporting Moroccan know-how to Senegalese companies had two major advantages. It increased friendship between the two countries and also created a West African platform for Moroccan companies to penetrate the region and expand across the African continent. Over the past decade, Moroccan companies helped themselves to a generous portion of business in strategic sectors in Senegal, including electricity, banking, transport, construction and aviation.
ASI got off to a promising start: the carrier had doubled its turnover by 2003 and was named best African company in 2005. But tensions between the Senegalese government and the Moroccan company soon set in, culminating in an embarrassing incident whereby 2,500 Senegalese pilgrims were marooned in Jeddah, without resources, for several days. The oil price spikes of 2006 bogged down the company in debt amounting to $24 million in 2007. That same year, the Senegalese government announced its decision to take over the beleaguered airline, promising to recapitalize the troubled company through a voluntary liquidation. RAM officials said they were neither consulted about Senegal’s decision to nationalize the company nor informed of the decision until it was made public.
“It must be remembered that since October 2007, the Senegalese state formally committed to recapitalizing the company, which has still not been accomplished,” said RAM CEO Driss Benhima. The Senegalese administration’s missteps were the cause of “a number of bitter pills ASI had to swallow in the name of South-South cooperation,” said Benhima. He added it was nevertheless the Senegalese partner that first decided to take over RAM’s share of the airline.
A(nother) step back for regional integration
The crash of Air Senegal International is the first serious scandal to rock Moroccan-Senegalese relations.
“If the historical relations and brotherly ties between the two countries had any importance vis-à-vis the latest developments in this affair, the Senegalese state never would have summoned the Moroccan national company before the court,” Benhima said.
He added that while such disputes are typical of foreign investors in developing countries, RAM had wrongly believed that things would be different for Moroccans in Senegal.
On the Senegalese side, some questioned Morocco’s motives for investing in the first place. Senegalese journalist Koffi Ba accused RAM in an editorial of positioning itself in ASI in order to control a potential competitor (on the Dakkar-Paris line, for example). Calling RAM/ASI a “half-partner, half-rival,” he pointed out that the Moroccan-controlled Senegalese carrier closed its Dakkar-Accra line in 2006, just in time to see the Moroccan carrier inaugurate the same route.
Amidst bitterness and charges of vile conduct from both sides, the divorce could have a negative impact on ongoing efforts to achieve regional integration. The West African Economic and Monetary Union, the African Union, and the Union for Mediterranean all aim to develop closer political and economic links among African countries. But infighting, corruption and bad business deals have a way of impeding integration efforts, and the Air Senegal International affair proves unexceptional in this regard.
Morocco’s pullout from ASI, justified or not, stains its credibility as a foreign investor. The move will likely cause hesitation on the part of African states considering whether or not to grant a telecommunications license, finalize the sale of a bank, or award air traffic rights to a Moroccan company.
Air Senegal International, on the other hand, looks set for a revival helmed by the United Kingdom-based Groupe Sahelian Air in the coming months.
The Gulf is going through a period of great economic turbulence and the region’s airlines have been at the center of it all. The International Air Transport Association (IATA) announced that the Middle Eastern airline industry is expected to suffer financial losses of $800 to $900 million in 2009. Regional airlines have cut international passenger capacity by nearly 5 percent. Despite this downturn, Gulf airlines are continuing to expand and, in total, are expecting to add 114 new aircraft to their fleet in 2009, 8 percent of global deliveries. This year’s launch of two new airlines, Fly Dubai and Wataniya Airways, has been an integral part of the continued growth in the region’s airline sector.
Whether the region is capable of soaking up all this extra capacity during these tough times, only time will tell. But what these ventures are certainly illustrating is the strong economic fundamentals of the region, and most importantly that lessons have been learned from the global financial contraction. These airlines, by very different methods, are focusing their business model on three basic pillars: price sensitivity, efficiency and sustainability; not practices the Gulf is traditionally known for.
Wataniya airways
Wataniya Airways, also known as Kuwait National Airways, is Kuwait’s third passenger airline and was launched at the beginning of this year. The main concept of the airline is to deliver a ‘premium’ service at the best price by ensuring that the fixed costs are as low as possible. The Kuwaiti Investment Project Company (KIPCO) owns 30 percent of the airline while the other 70 percent is owned by Kuwaiti investors. It’s first route was Kuwait to Dubai. In addition to the Dubai route, three other routes were quickly announced: Cairo, Bahrain and Beirut. The airline is run by George Cooper, the British chief executive officer of Wataniya Airways and a former managing director at British Airways. A return flight from Kuwait to Beirut on Premium Economy costs around $225 (including taxes and fees), while First Class costs around $362.
In line with Wataniya’s business model, the airline has reduced fixed costs as much as possible by employing two central concepts: leasing and outsourcing. Wataniya’s fleet of four Airbus A320s and the three more slated to arrive in 2010, are all leased. Leasing the airplanes means that Wataniya does not have to put down capital upfront while, at the same time, allowing the airline to downsize or upsize relatively easily.
Wataniya outsources maintenance, catering, information technology and engineering. The company also outsources accounting services from a center in India. Catering is the best example of how outsourcing reduces costs, as they only pay the catering company per passenger.
“If we don’t get the passengers on the plane we don’t have to pay for them,” says Cooper. “This is not the case for most of the major airlines, but as a smaller operation we have the flexibility to work in such a manner.”
To ensure that “premium” service is delivered on the flight, Wataniya puts extra emphasis on crew training. While many of Wataniya’s crew have previous training, Cooper says “we ignore this.”
“While most airlines undergo a training program of six weeks we have created a training program of eight weeks to ensure that our customers receive that extra service.”
Wataniya can also boast an almost exclusive terminal. On landing in Kuwait, Wataniya takes you to an almost empty terminal. A modernist building with gleaming metallic passport desks, Sheikh Saad General Aviation Terminal was opened this year to private and business charters and one commercial operator, Wataniya Airlines. The terminal has lounges with wireless internet, concierge service and a range of shopping facilities. The terminal also boasts a lounge for First Class passengers, ensuring a pleasant wait before the flight, a complimentary buffet and catering services.
The A320 in service with Wataniya is designed to hold 180 passengers, but Wataniya has decided on only 122 seats to create extra room. The difference is noticeable, as this reporter, who is nearly 2 meters tall, had more than enough space in premium economy, sitting in chairs that are all ergonomically crafted. Another highlight of the airline is the OnAir in-flight passenger communication service with the ability to use mobile phones and internet that allows passengers to stay connected while flying. Wataniya is the first Middle Eastern airline to introduce this service.
Fly Dubai
The other airline to launch in 2009 is Fly Dubai, the emirate’s first budget airline, which made its inaugural flight on June 1st from Dubai to Beirut. Fly Dubai is a complete reversal of the business model of Wataniya Airways. While Wataniya aims to lower fixed costs as much as possible, Fly Dubai bought 50 new Boeing 737-800 aircraft at an estimated cost of $3.7 billion.
The airline has been set up by the government of Dubai and although in the beginning will be supported by the Emirates Group, it will not be a part of it. The business model is a new twist to Dubai’s airline industry.
“We focus on trying to offer the lowest price possible and to make travel as uncomplicated and with as little stress as possible,” said CEO of Fly Dubai, Ghaith al-Ghaith, who was previously a vice president of worldwide commercial operations at Emirates Airlines. The company’s slogan is: “It’s that easy.”
The lowest fare on Fly Dubai is $100, one way, inclusive of taxes, from Dubai to Beirut. Fly Dubai, by the end of June, will also fly to Amman, Damascus and Alexandria with further plans to expand throughout the region and Eastern Europe, India, Iran as well as North and East Africa. To ensure the lowest fair is offered, passengers only pay for the extras they select. Luggage, for example, is seen as an extra. One piece of luggage costs $11, at a flat rate, up to a weight of 32 kilograms; the second bag $27, up to 32 kilograms. Normal sized hand luggage is free. Any ‘extras’ a passenger orders on board, such as food, is charged. The Fly Dubai experience is very similar to that of any American or European budget airline, but with a touch of Gulf luxury added in. All the seats are ergonomically designed, with the seat pocket placed on top of the seat instead of at the knees to maximize knee space.
One essential element to Fly Dubai is that it has Emirates by its side. Fly Dubai does not need to consider the methods Wataniya uses because Emirates group will ensure that all the IT, engineering, catering and maintenance is taken care of. As for the risk of buying 50 Boeing 737-800s upfront, Ghaith said it was the best way to deliver the kind of efficiency needed for low cost airlines, and that leasing could not possibly achieve the same results.
Ghaith is very confident that Fly Dubai is filling a gap in the market.
“In this region we are way behind when it comes to low cost,” he said. “Only 5 percent of total traffic is low cost, compared to Europe that is 20 percent and increasing. So Fly Dubai is in a good position to fill this gap.”
The open closed skies of the region
One of the main difficulties that Fly Dubai, Wataniya and all airlines in the region face is the open skies policies of the region. Currently they are opaque and lack uniformity. All Arab League members are expected to agree on an open skies policy by 2015, but so far only 11 countries have signed the policy. This has caused problems for airlines, which try to base their business model on travel in the region, especially for airlines like Fly Dubai and Wataniya.
Even those governments that have signed the open skies policy, such as the Emirates, have also not always upheld the spirit of the agreement. Wataniya, for example, has already started to run into problems in the Emirates, being told that they cannot fly over certain parts of the country, as other airlines have tried to scupper the progress of the carrier. While regional jealousies and protectionism have created hurdles to the region’s ambitious airline industry, the financial crisis has had both positive and negative impacts.
Financial crisis?
The idea that there are positives from the global financial contraction for the region’s airline industry is hard to believe. It is even harder to understand how a start up airline could benefit from a market that is having its growth squeezed. Yet, Cooper claims that the financial crisis helped in many ways.
“The crisis helped us pick up talent from other airlines that were downsizing. Over half the pilots of Wataniya are American and victims of the downsizing that went on there,” Cooper said. “Also, because of the economic crisis, costs are low and we do not have to buy planes in advance as now there are no waiting lists.”
Fly Dubai’s al-Ghaith noted that the crisis has created opportunities.
“Airlines are part of the infrastructure and as everyone says, ‘what you need to do in a crisis is build up your infrastructure,’” he said.
But these airlines have, of course, not escaped the economic turmoil. Cooper does admit that, especially for the Kuwait-to-Dubai route, capacity is below the desired amount.
Ghaith also stressed that Fly Dubai is very much “a long term commitment.” Those launching the airlines are quietly confident that when the Gulf begins to boom again they will be more prepared than ever. The two airlines’ focus on price, quality and luxury is a welcome addition to the market. Price sensitivity has finally come to the region; let’s hope it’s just the beginning.
Five year old Edgar Enrique Hernandez in Mexico was the first confirmed case of H1N1 on April 2. “Swine flu” has now spread around the world, and by May 25 more than 12,000 people were confirmed to have contracted H1N1 influenza in 43 countries. 86 people have died.
Eighteen US soldiers in Kuwait were the first confirmed cases of swine flu in the Gulf Cooperation Council in mid-May. Around the same time, an Emirati citizen was diagnosed with the flu after having traveled to Canada and back. He became the first confirmed case of a GCC national contracting the virus.
In another a sign of the growing fear in the region, a journalist from Executive was even briefly detained by Syrian medical personnel as he was recently leaving Lebanon and examined for symptoms of influenza.
How these cases will affect the regional economy has yet to be seen, but the flu has already had severe economic consequences for Egypt, where pig farmers paid the biggest price for the outbreak (also read “A poor cull in Egypt” in the Comments section).
Economic costs of a pandemic
Mexico has felt the devastating economic cost of the influenza pandemic. In April, a five day suspension of all “non-essential” activities around the country occurred, creating dramatic sights of empty streets and football teams playing to empty stadiums. The economic cost was as much as $57 million per day in lost revenue, according to Mexico City’s Chamber of Trade, Services and Tourism. The peso also fell 4 percent against the dollar and the local stock market fell 3 percent. As for the vital summer tourist season, there is little hope of gaining anywhere near the $40 billion earned in 2007.
If the Mexican experience was repeated globally the economic consequences would be devastating. The World Bank predicts that if an outbreak similar the devastating 1918 epidemic — which killed more people than World War I — occurred now, then the global gross domestic product could shrink by 4.8 percent and cost $3 trillion. The most telling account of the possible economic cost is the SARS epidemic. Warwick McKibbin, an international economics expert at the Brookings Institute, argued that the SARS epidemic in 2003 cost the world $40 billion due to canceled flights, closed schools and panicked Asian markets. And that was a relatively short lived outbreak. McKibbin said a serious swine flu outbreak could be much worse.
“A mild scenario would cost the global economy about $360 billion and an ultra scenario up to $4 trillion within the year of the outbreak,” he said. “The mild scenario is estimated to cost the world 1.4 million lives, and close to 0.8 percent of gross domestic product and [approximately $330 billion] in lost economic output.”
McKibbin said that as the scale of the pandemic increases, so would the economic costs. In the most extreme, “ultra” scenario,” a flu based massive global economic slowdown “would kill more than 140 million people and cost the world economy $4.4 trillion.”
Already the H1N1 has had global economic consequences that have only added to the difficulties countries are facing with the global economic crisis. The economic and human cost of a full scale influenza pandemic would be frightening, but it is fear that is currently having the greatest affect on the global markets. The H1N1 virus has already made a significant impact on a fragile global economy. When news broke out about swine flu, tourism and airline companies stocks dropped steeply: British Airways stock fell nearly 17 percent, Lufthansa’s dropped by 12 percent at one point. Oil prices also slid in the wake of swine flu.
Possible affect on the MENA Economy
Officials in the Middle East and North Africa are taking steps to prevent swine flu from spreading (see box for full list of measures). It began with a GCC emergency meeting in Doha on May 2 that discussed ways to effectively face the dangers of the flu. Saudi Arabia and the United Arab Emirates also imported thermal monitors to scan airline passenger’s body heat for abnormally high temperatures.
When laboratory tests came back positive for the Emirati citizen traveling from Canada, the UAE Ministry of Health was quick to calm fears the flu might have spread to other passengers on the flight.
“Passengers who were on the same flight have not developed any H1N1 symptoms,” said Haneef Hassan, the UAE Minister of Health, according to Arabian Business.
“The patient, who arrived to the country on a flight from Canada, is recovering now at a government hospital after he has received a course of treatment,” Hassan said. “He will remain under observation and treatment for 10 days as medically recommended.”
The US troops diagnosed with H1N1 in Kuwait were put under immediate quarantine, Kuwaiti officials said, adding they had left the country.
Yussef Mendkar, deputy chief of Kuwait’s public health department, said the troops “had no contact whatsoever with the local population,” and that Kuwait was free from the virus.
News agencies reported that the infected troops did not leave their base, located far from any population centers, and anyone who had contact with the infected troops had been put under medical observation.
The Kuwait and Dubai experiences highlight a huge issue in the GCC: whether it’s US troops, locals traveling abroad, transit passengers or the enormous migrant worker population, the region is highly exposed to a possible H1N1 outbreak.
But analysts say that with the measures taken by the region’s health officials, the flu’s economic impact on the region will be likely be from psychological reasons rather than physiological.
“I don’t think local investors have a coherent view of the likely impact of swine flu, but it’s more of a sentiment issue with regional stocks closely correlated to international markets,” Jithesh Gopi, head of research at Bahrain-based SICO investment bank, told Trade Arabia. “The flu scare will have a bigger impact on the stock markets than it will on the real economy.”
And although the flu might represent an apocalyptic scenario to some, to others it’s been a boon to business.
A mild Swine Flu scenario could cost the global economy $360 billion — ultra scenario $4 trillion
The profiteers of pandemic
To try to avoid getting hit by the flu, people around the world are taking precautions, like buying surgical masks, hand and surface sanitizers, flu kits and drugs. Some surgical mask manufacturers had to double production to keep up with demand.
“We’re operating at full tilt to try and produce as many masks as we can to take care of as many people as we can,” Andrew Whitehead, spokesman for surgical mask manufacturer Crosstex company, based outside New York City, told the Long Island Business News on April 30.
Whitehead told the paper that Crosstex had received orders for around 10 million face masks in the first days of the H1N1 outbreak, an amount the company said it usually handles in a month.
“Masks are going to hospitals, government agencies, the Mexican government,” said Whitehead. “We got a lot of requests from China, Australia, Europe, South America and, of course, Mexico.”
Pharmaceutical companies producing drugs for the flu have also seen positive market reaction as governments stockpile the drug. Tamiflu, produced by Roche, and Relenza, produced by GlaxoSmithKline (GSK), are the two biggest companies.
Roche saw its shares rise 6 percent, while GSK saw a 5 percent rise. Although both Tamiflu and Relenza are not vaccines, they have both shown to be an effective treatment against H1N1, but only if used within 48 hours of the symptoms developing
“Roche actually lowered production of Tamiflu due to a lack of demand in 2006,” said Martina Rupp, a spokesperson at the Roche Group.
Even more ironic is that the first quarterly report for Roche stated that they reported lower than normal seasonal Tamiflu sales in the US as outbreaks were less severe. Roche will not have to worry about lack of demand however.
In the US alone, health care marketing consultants SDI released data showing more than 250,000 prescriptions for Tamiflu pills alone were filled at retail US pharmacies in the last week of April, according to the Associated Press.
That’s figure was 34 times higher than just a week before and represented more than double the number of prescriptions from the 2008 winter flu season.
Relenza prescriptions saw a similar increase, multiplying 10 times in one week at the end of April, SDI data also showed.
Governments are also building up their stockpiles of Tamiflu. Roche said governments have built up enough stores of Tamiflu to treat roughly 220 million people. GSK declined to give out information on how many doses governments are purchasing. As governments build up their stockpiles of Tamiflu and Relenza they are doing well at being cautious about not creating an atmosphere of panic while confronting swine flu.
Should we worry?
Compared to common seasonal influenza (the flu) that causes 36,000 deaths per year on average in the US alone, the 86 deaths from H1N1 should not be cause for concern. Yet, the world’s epidemiologists have been on edge even since the H1N1 strain showed up in Mexico, and it’s also caused panic and a media storm throughout the world.
The fear of scientists is that the H1N1 strain of influenza is new. According to the World Health Organization (WHO), this means that “scientists anticipate that pre-existing immunity to the virus will be low or non-existent.”
Currently, the WHO has raised the pandemic alert to level five out of six for the H1N1 strain of the virus. According to the WHO, “the declaration of phase five is a strong signal that a pandemic is imminent.”
Causing panic or fair warning?
Governments are concerned about the fear that has been sparked by the WHO’s warnings about the virus. As considerations are under way by the WHO as to whether to raise the alert to phase six, declaring the first pandemic in 40 years, governments are urging caution. Currently governments are concerned about the misunderstanding of the levels of alert and want the WHO to take into consideration how deadly a virus is in its criteria and not just, as happens currently, how far it spreads, so as not to cause undue panic.
As the financial crisis affects the real estate sector in the region, Qatar is feeling the impact as well. Since the last quarter of 2008, sales have dropped considerably, the price of land and property has fallen and so have rents.
“There is an 80 percent decrease in the volume of sales,” says David Oayda, general manager at Asteco Qatar. Property prices have not decreased to the same extent, since most developers and landlords are adopting a wait-and-see approach — not selling or buying until the economic situation stabilizes and lending comes back.
Property prices have decreased by 30 percent, according to real estate services firm Jones Lang LaSalle, while others consider the plunge more severe. Land prices have been impacted as well with a decrease of around 50 percent in the suburbs and 30 percent in the capital Doha. Rents are witnessing a large decrease with new units available, and demand slowing due to fewer people entering the country.
As demand slows and prices adjust, Qatar is experiencing a healthy and necessary correction, which Seraj Al Baker, general manager of Mazaya Qatar Real Estate Development, says was inevitable.
“People know that prices increased more than enough. [the market] needed to correct itself, and the international crisis came as an excuse,” he says.
Rents roll back
The increased influx of expatriates in the last few years has caused a rapid increase in Qatar’s population. Expatriates currently account for around 78 percent of the country’s 800,000 residents. The supply of new units was not growing accordingly, which put pressure on housing rentals. Between 2005 and 2007, Qatar’s planning council recorded a whopping 154 percent increase in rents.
To control skyrocketing prices and near-record inflation of 14 percent in 2007, Qatar’s cabinet implemented a 2-year rent freeze in March 2008. This kept rents from increasing further as new supply came online. But with the financial crisis decreasing demand, and new units coming to their handover stage, the cap is no longer needed. Rents of both offices and apartments are softening, depending on the area.
According to Colliers International’s second quarter report, apartment rental rates at the higher end of the market have decreased by around 15 percent. Oayda thinks that in general, the drop in rental prices is around 15-25 percent, depending on the areas.
Office supply in Doha is also growing, especially in the West Bay. The absorption rate of the new offices has been slow, mainly due to the decrease in the number of new businesses being established in Qatar. According to Colliers, rental demand for new office space in prime West Bay has softened by 10 to 15 percent in the last four months. Asteco’s Oayda thinks it has decreased by around 20 percent. The demand for cheaper office space along the C Ring Road and other areas remains high, keeping rents stable.
Landlords are also becoming more flexible with rental contracts by renewing leases annually, offering tenants the ability to move to new office space or apartments after a short period of time. Property owners are also trying to attract tenants, or keep existing ones, by offering new payment schemes allowing them to make multiple payments throughout the year.
With new supply coming online, especially in the Pearl Qatar real estate project, rents are expected to decrease further, as many people will relocate, benefitting from competitive prices and better quality developments. Colliers estimates that 9,000 new apartments will be coming onto the market by the end of 2010.
The decrease in sales volume will also encourage developers to shift their strategy and offer units for lease rather than selling them at lower prices. This increases the supply side of the market and eases rents as well.
* Numbers obtained through survey of 200 of the region’s leading real estate investors
Prices feel the push
Sales of residential properties have been somewhat frozen, especially in the off-plan and the primary markets where buyers are reluctant to purchase homes because of the lack of financing and expected price decreases. Prices have decreased, much less than the more damaged markets like Dubai, for many reasons.
First, the supply shortage has given developers the luxury of not having to decrease their prices substantially since they have already sold most of their units. “They have sold enough,” says Oayda. “Developers have to do one of two things; either reduce their prices or hold their properties and possibly lease them at delivery.”
Another reason why property prices have not plummeted is that the small Qatari market is less speculative, which keeps the affect of distressed sales minimal. As is the case around the region, many speculators exited the Qatari market because of falling prices.
“If you bought yesterday and you want to sell tomorrow, it is very bad news for you,” says Al Baker. He adds that speculators do have a role to play in a booming market, but too much speculation becomes harmful. “Speculators are like the spices. You put a little bit. It is not the meal, but you need it there,” says Al Baker.
Even though most developers are reluctant to lower prices, some are feeling the pressure since new supply is coming online and there are fewer takers in the market.
In the suburbs prices were especially hard hit because owners outside the city excessively inflated prices, thinking that after the boom in Doha, the demand would shift to the suburbs.
“Land owners were asking for 150 or 200 QR ($41 to $54) per square meter [outside Doha] which was crazy,” says Al Baker. Land always decreases faster in value than built up property, mainly because it is non-income generating and leveraged owners sell it rather quickly.
A survey by Aswaq.net of Al Arabiya Television states that prices decreased more than other estimates. Using prices supplied by a number of real estate brokers, the survey says prices of real estate in Qatar are down 40 to 70 percent since September 2008. Oayda says that’s not realistic. He says he “couldn’t possibly agree” with Aswaq’s analysis.
As rents are expected to decrease with new units coming online, the same is expected of sales. Pearl Qatar is one example. The multibillion dollar man-made island project will eventually house 41,000 people. At the beginning of May, the development’s first units were handed over to their owners. Analysts say as more Pearl Qatar units are put up for sale, rents and prices are expected to decline further.
A flight to quality
As the flood of expatriates into Qatar happened rather quickly and over a short period of time, finding good quality apartments became a problem. As units came online they were almost immediately occupied, which drove up rents. The low competition made developers less keen on delivering high-quality products.
“In the last couple of years, products that came to the market were terrible,” says Al Baker. Now with the market correction and a surge of new units, experts believe that quality will improve. The financial crisis is also creating more competition in the market and encouraging developers and landlords to improve quality to attract more buyers.
Asteco’s first quarter report suggests there will be a ‘flight to quality.’ Consequently, as better developments come onto the market in the next few months, lower quality developments will be hurt most.
Liquidity flows in and out again
In the last few years, the share of real estate sector credit as a percentage of total banking sector credit has increased considerably, rising from 4.3 percent in 2003 to more than 13 percent in the first six months of 2008, according to a Global Investment House report.
Even though the banking sector in oil and gas rich Qatar has not been severely affected, loans and mortgages have become hard to obtain. Banks have adopted tighter lending policies, making fewer applicants eligible for loans, and consequently decreasing demand in the real estate market as buyers become more scarce.
Many projects have been put on hold as developers are having trouble obtaining financing for their projects, according to a real estate executive who asked not be named.
“Some banks stopped lending even if [the developer] started building already,” the executive says. At the moment, credit is becoming easier to obtain.
“Lending is a problem, but we are seeing a reverse” says Al Baker. But the share of credit for real estate growth is expected to decelerate, since banks will still adopt a more conservative lending policy in the uncertain market situation.
Companies in the real estate market
This year will be one of the most challenging for real estate companies as they deal with a lack of financing, investors’ decreasing confidence and the cooling property market. After companies watched their stock value plunge since mid-2008, it seems values are beginning to rebound. For example, the price of Barwa Real Estate Company stock rose by some 58 percent in the last 3 months. Ezdan Real Estate Company stock also rose by 69 percent in the same period.
Even though the financial situation of the Qatari companies is considered better than their counterparts in Dubai, there are signs of consolidation in the market. There may be big mergers on the horizon.
“It is a good time to do it” says Oayda. “It is a cost-saving exercise, working as a stronger team.”
In January, the government ordered a merger between Barwa Real Estate and Qatar Real Estate Investments Company (Alaqaria). The companies appointed financial advisors in order to meet the requirements for the merger, which is supposed to take place by the end of the year. Ezdan Real Estate Company also said in March that it is considering a merger with the Group of International Housing Company.
“Some are listed and haven’t really explored or touched upon the issue of the value of shareholders in some of these mergers,” says a market analyst concerned about the fact that shareholders’ interests do not seem to be the main driver behind the merger. The analyst addes that it is unknown “at what sort of ratio does the merger occur, and what sort of effect does it have on the shareholders.” The analyst asked not to be named because he is not authorized to speak to the media.
A delayed IPO
In August last year, Mazaya Qatar announced plans to raise $137 million in an initial public offering (IPO). The company’s license, which was issued in March 2008, dictates that the IPO has to be launched within two years. The exact date of the IPO was not declared, but since the announcement was made, the move is still on hold.
“Because the crisis took place, it was wise to postpone” says Al Baker. However, it is not the company who decides when to go public, but the Qatar Financial Centre Authority (QFCA), which is responsible for regulating the market. Mazaya Qatar was in queue after Vodafone. With the Vodafone IPO taking place in April — one of the largest IPOs in Qatar — it is Mazaya’s turn next.
Even though the final decision lays with Qatar’s financial authority, Mazaya would not launch the IPO blindly according to the authority’s decision. Both would collaborate in order to identify the appropriate time for the company to go public.
“It is true that we [only] have two years, but it is not the appropriate time,” says Al Baker. “The issue will be addressed when the market is appropriate.”
Government support
What triggered the massive growth in the Qatari real estate sector in the first place was large government expenditure made possible by high oil and gas prices. Even though prices have decreased, Qatar is still expecting huge revenues because of the increased exports of liquefied natural gas (LNG), of which Qatar is the world’s largest exporter. In April, the government approved a budget of $25 billion for the fiscal year 2009-2010, slightly lower than last year’s budget, but still considered healthy under current conditions.
“The budget illustrates Qatar’s keenness to achieve the targets set in the 2030 National Vision to support economic and social development,” said Qatari Economy and Finance Minister Yousuf Kama, according to the Qatar New Agency.
The plan aims to sustainably transform Qatar based on the pillars of social, economic, environmental and human development. It calls for huge government investments, with the construction sector expected to grow 17 percent in 2009, according to the organizers of Qatar International Real Estate and Investment Exhibition 2009. This is expected to encourage significant private sector investment in the Qatari real estate market.
The government is also undertaking other initiatives to support all sectors of the economy. For example, the Qatar Investment Authority (QIA) revealed plans to acquire 10 to 20 percent ownership in each of the local banks. At the end of March, the government also acquired $1.8 billion dollars worth of local banks’ investment portfolios. In late April, it announced plans to pump cash into companies outside the banking sector.
Upbeat expectations
Despite the massive investment the government is making in infrastructure and development, the market still represents a small pool of investment. The price and rent adjustments have come at a time when the Qatari market is still in the first stages of its development, and when the role of speculation in the country is minimal, keeping it safe from the panic selling that has crippled Dubai’s market.
“I think we are at the bottom of the market,” says Oayda. He adds that prices will not decline anymore, but will rather stabilize. “I think that by the end of this quarter (the second quarter) the sentiment will change, the confidence will get stronger,” Oayda says.
On the other hand, Al Baker is uncertain about the short term.
“I am not sure if we hit the bottom or not, there might be… room for the market to go down,” he says.
As for the long term, Qatar seems to be a promising market, with the clear sense of direction in its development through the Qatar 2030 National Vision, and the backing of a deep-pocketed government to help sustain and increase the country’s growth. Consequently, Doha is expected to still emerge as an attractive destination for expatriates to work, live, and invest, which will contribute to the sustainability of the real estate market.
At times it seems that the Turks are fiddling while Rome burns, as Nero is alleged to have done in the year A.D. 64. Turkey’s unemployed are more numerous while industrial production and exports are in steep decline.
Yet an Ankara judge’s attempt to drag President Abdullah Gul into court for alleged misuse of party funds a decade ago is almost at the top of the current political agenda.
When the Welfare Party, predecessor of the ruling Justice and Development Party (AKP), was compulsorily wound up in 1997, its funds should have been handed over to the state, says the judge. In fact, they were channeled into helping set up the AKP. Though Gul was a member of the Welfare Party, his responsibilities were for foreign affairs, not internal party finance.
There can be little doubt that the embezzlement charge has less to do with maintaining financial probity than with hard-line members of the Republican People’s Party (CHP) keeping pressure on the AKP, which they fear is leading the country towards an Islamic state. Ironically, it also helps to disguise the steadfast — some say stubborn — attitude of the government toward a deal with the International Monetary Fund to stabilize the economy.
Months of negotiations between Ankara and the IMF have born no fruit. So in May the European Union presented a draft document at the Turkey-EU Association Council, extolling the virtues a deal would have on arranging fresh funds and restoring investor confidence. The biggest sticking point is that the IMF still believes the government spends too much money and raises too few revenues. There is now open talk of a new agreement being shelved until September, by which time Turkey would be compelled by a balance of numbers to see the error of its ways.
Those numbers include on one side a reduction in inflation to 6.9 percent, the lowest figure in 38 years, and a slashing of 7 percent off the central bank’s benchmark rate over the past six months. Not all the benefits of cheaper money seem to have been passed on to businesses or consumers. Garanti Bank, the most traded stock on the Istanbul Stock Exchange, reported a rise in income for the first quarter of this year that was 44 percent higher than for the same period in 2008. Analysts attributed a sizable proportion of the $416 million to the practice of reducing rates to depositors while at the same time continuing to reap the benefits of high priced loans.
Other statistics published in May show EU exports to Turkey down by 41 percent in the first two months of this year, while trade in the opposite direction slumped by 30 percent. Even the much publicized first Ford Transit vans to roll off the production line for export to the US failed to disguise the fact that most car plants are continuing to close for seven to 10 business days every month. Also out of a job are a third of Prime Minister Recep Tayyip Erdogan’s Cabinet, who paid the price for the party’s worst election showing since 2002 in the March municipal polls.
Consolidating the economic controls
Good for productivity perhaps, though not for employment statistics, was the news that Ali Babacan, who formerly headed up Turkey’s accession talks with the EU, will now be in charge of all three ministries connected with running the economy. His new job will save him the embarrassment of having to backtrack publicly on any enthusiasm for joining the 27-member European bloc. With both sides paying little more than lip service to the idea, the task of postponing indefinitely any serious attempt to join the club will be left to the new foreign minister, Ahmet Davutoglu. Davutoglu was Erdogan’s behind-the-scenes chief foreign policy adviser, and comes into the limelight with a track record of pushing relations with the East rather than the West. Like the president and the prime minister, Davutoglu is also a devout Muslim, as are several other new faces brought into the government.
While the appointment of conservatives doesn’t determine how the economic crisis will be approached, or how the public will react to the approach, it reinforces suspicions that the government sees shoring up support among conservatives as more important than practical measures.
For the record, there is no evidence that Nero, an effective general and administrator at the beginning of his reign, actually did fiddle while Rome burned. That hasn’t stopped the perception over centuries. The AKP could be perceived to have a similar problem.
Peter Grimsditch is Executive’s Turkey correspondent