Finance

IPO Watch – A pent-up market

by Executive Staff
written by Executive Staff

Capital market desks from Riyadh to Damascus continue to experience a great deal of backlogs for IPOs that are ready and waiting for the ice to break. Experts say that risk capital will eventually open up to new issuers and the IPO market is expected to pick up further momentum in the third and fourth quarter of 2009.

The experts might be right. In late April, and despite the severe downturn in local markets, Gulf investors announced the establishment of a $10 billion Islamic ‘godfather-of-all-banks’ bank to tap interest in sharia-compliant institutions. The new bank will be based in Bahrain and will be called Istikhlaf Bank. Adnan Ahmed Yousif, chairman of the Union of Arab Banks, said plans include a private placement of $6.5 billion and a $3.5 billion IPO in the fourth quarter of 2009. He added that the bank will be listed on the Bahrain Stock Exchange and Nasdaq Dubai. Some of the seed investors include the Islamic Development Bank, Saudi Investment Bank and the Kuwait Real Estate Bank. “The bank has raised $3.5 billion including $1 billion from the management. We are hopeful it will be ready by the fourth quarter,” said Al Baraka chairman Shaikh Saleh Abdulla Kamel, who is promoting the bank.

April showers bring May flowers
So April did not only bring with it spring, it also brought with it the earning season, two other IPO announcements and solid numbers for the four insurance firms who floated their shares during the third week of the month. The concurrent IPOs of the four insurance companies on the Saudi Stock Exchange were all well received in the market, according to announcements.
Al Rajhi Company for Cooperative Insurance or ARCCI saw its $16 million offering subscribed some 151 percent in only the first two days of its IPO. According to a statement by the issue’s lead manager, Al Rajhi Financial Services Co, over 146,000 subscribers signed up on April 18 and 19 for shares worth $24 million.
The combined value of the shares offered for subscription by the four insurers approaches $70 million. Besides ARCCI, the issuers are Weqaya Takaful Insurance and Reinsurance Company ($21.33 million), AXA Cooperative Insurance Company ($21.33 million), and ACE Arabia Cooperative Insurance ($10.6 million).
AXA and ACE also encountered handsome demand; according to statements, offerings were covered about three and six times, respectively, several days ahead of the close of the subscription on April 27.
Vodafone Qatar, which closed subscription to its $952 million IPO on April 26, did not immediately disclose if there was over-subscription. However, the company praised the “overwhelming public support” it received for this IPO.
Qatar National Bank (QNB), the country’s largest bank, said that it plans to float 32.5 percent of Qatar National Bank – Syria in May in an attempt to raise over $35 million. QNB will retain a 49 percent stake in the new bank, the Syrian government 15.5 percent and three percent will be offered to private investors. QNB – Syria has a paid-up capital of $100 million and will offer 3,250,000 shares priced at SYP500 each ($11).
The Abu Dhabi-based Emirates Steel Industries plans to launch an IPO in 2011 provided local markets stabilize, said Chairman Hussein Jassim al-Nuwais. Although no additional details were provided about the IPO, if confirmed the IPO is expected to generate a lot of buzz as observers expect it to be one of the largest IPOs in 2009.

An IPO tower
The Dubai-based Alpha Tours, which had announced its intentions for an IPO in early 2007, said the travel services company will float 50 percent of its shares to the public in the second quarter of 2009. Alpha, who has appointed Ernst & Young as the lead manager for the issue, seeks to raise $150 million, according to statements made by Ghassan Aridi, Alpha Tours chief executive.
The Jeddah-based Knowledge Economic City Co., or KEC, which announced its IPO plans last month, released additional details about the float, saying that it will sell a 30 percent stake in an attempt to raise $301.6 million in May. The Saudi authorities approved KEC’s license with capital of $906 million.
So the IPO pipeline in the region continues to do better than its peers in the United States (US) and European markets. Obviously, it will take much more interest for the IPO market to return to its pre-2008 conditions, but larger private and government companies cannot continue to put off their IPOs indefinitely. As these companies scale up, so does their capital requirements.
Given the substantial opportunities for regional companies in the US and European market, the cost of expanding internationally through buying a major competitor in those markets is beyond what even large venture-capital firms can provide. Unless the larger private and government companies can tap the IPO market, they cannot continue to grow.

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Executive Insights

EM Leadership Center

by Tommy Weir
written by Tommy Weir

The authors of Executive Insights have been invited by this magazine to offer their professional opinions and analysis to you, the reader. Executive magazine does not endorse the analysis of Insight authors, nor should the Insights be interpreted as reflecting the views or opinions of Executive or its editorial staff.

Almost every day CEOs and business leaders ask me, “What is going to happen now with the global financial crisis?” or “When will it be over?”
Well, it is over! We can confidently rest on the fact that the world of business as we know it is finished. Sure, many will give their all to bring it back; but no matter how much effort is exerted it is not coming back. This is not a doomsday comment, but rather a statement of reality and a challenge to look ahead to the future.
There simply is too much happening simultaneously on the global scene for there not to be a history-making revolution in the private sector.
For example:
• The Gordon Gecko days (from the film “Wall Street”) of prevailing greed are going to have to give way to business leaders acting responsibly. Your investors and consumers will demand it.
• The days of short-term high-risk driven solely by the quarterly results will be replaced by a focus on long-term sustainability. As CEO you will be held culpable for the long-term prosperity of your company and possibly even its impact on others.
While many businesses are longing to get back to the way things were prior to the crisis, CEOs are asking, “when will it be over?” and “how can we return to the way that it was?” The intelligent leaders are asking what the new business environment will be.
As we look to the future, we should all be wondering, “why do organizations overlook the statistic that is going to have the greatest impact on business ever?”
We all know the global financial crisis has had a crippling impact on business as it cut the supply to the hot air balloon of business and let the air out. Of course, this means that you will have to recreate how you do business and lead differently. But the statistic that matters more than any other is that the emerging markets comprise 80 percent of the global population, and the developed world (North America, Western Europe, Japan) are just 19 percent.
Over the past decade we have divided the world according the developed world and the emerging markets, which is a classification based on a nation’s social or business activity in the process of rapid growth and industrialization. But in the future we will segment the world according to where the people are. 
We can say that the era of emerging markets is ending and thanks to the global crisis this is being accelerated. Now, we are moving into a new era, what I call, “peopleization.” This era can be defined as the rise and coming together of populations.
Peopleization is about more than the location of the markets. It is about who the people are. Let’s look at another defining statistic.
The percentages between the markets are almost exact opposites. In the emerging markets 29 percent of the population is under 15 whereas in the developed markets 25 percent is over 55. And the population in 12 percent of the emerging markets is over 55 and 14 percent of the developed markets is under 15.
While the West is suffering from an aging population, the Emerging Markets are wrestling with a “youth bulge.”
Now, let’s figure out what this means for us as business leaders. To do so, you need to answer these questions in your boardroom.
Where is your future market?
Who is your future market?
What defines them?
What are you going to do about it?
As we think about the future, perhaps we should compare Gordon Gecko and Slumdog Millionaire. Both are millionaires. Is that where the comparison stops? The days of Gordon are gone. What is your future?
Whether you agree or accept it, your future is caught up in peopleization!

Tommy Weir, Ph.D., serves as managing director of the EM Leadership Center

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Finance

The financial crisis – Banked with optimism

by Executive Staff
written by Executive Staff

One year ago, with the global economy fully immersed in its ongoing downslide, Philippe Dauba-Pantanacce, a senior economist for the Middle East region at Standard Chartered Bank, went on a speaking tour. As he listened to economists and audiences from around the region, Dauba-Pantanacce couldn’t help noticing a disconcerting trend — many people thought the economic crisis was ending, and the world was headed for a recovery.

“Of course,” Dauba-Pantanacce said recently, “we can see now, in fact, that’s not what happened.”
Dauba-Pantanacce, who encourages people to call him Philippe (he knows his name is hard to pronounce for non-francophones), prides himself on bringing a dissenting view to economic discussions. In the fall of 2007, for instance, Standard Chartered had been one of the only major banks to predict that interest rates in the United States would drop to one percent. They were right.
Late last month, Philippe brought his contrarian’s instinct to a roundtable discussion on the global economy and its impact on Lebanon, held at the Intercontinental Phoenicia Hotel in Beirut and organized by Executive. At the moment, the outlook for Lebanon, which had thus far weathered the economic crisis with surprising resiliency, did not look good.
Nassib Ghobril, the head of Economic Research at Byblos Bank, had recently been reading a handful of country reports from the International Monetary Fund (IMF) and others — “they were all very gloomy,” he said. Just that week, for instance, the Economist Intelligence Unit had downgraded Lebanon’s expected economic growth in 2009 from 2.7 percent to 2.4 percent. It was the third such downgrade this year.
The focus of this pessimism, as everyone at the table knew, was the expected decline in earnings around the world — especially the Gulf, where some 30 percent of Lebanon’s expatriate workers are based. That fact continues to threaten a dramatic decline in Lebanon’s remittances, which constitute at least 25 percent of gross domestic product.
Philippe was not dissuaded. He believed that things could be worse and, in fact, thought they might be getting better. Philippe is willow-thin and he has an easy-going affability. He was wearing a tailored, dark suit with a bright pink tie. Sitting next to him on one side was Pik Yee Foong, the chief executive officer of Standard Chartered in Lebanon, who had earlier introduced him as “Mr. Philippe.” On the other was Abdel Rahman Mogharbel, a manager at the Banking Control Commission at the Central Bank of Lebanon, which has been credited by many, including Philippe, for insulating Lebanon from the crisis with its conservative policies.
“We are calling this crisis the Great Recession, versus the Great Depression,” Philippe said. “The fourth quarter of 2008 was appalling, but the first quarter of 2009 was better.” Where Lebanon is concerned, Philippe sees remittances declining less precipitously than most due to the stability of the Gulf, adding that low oil prices will drastically reduce the cost of energy, a major burden on the country’s expenditures.

Gulf of hysteria
The focus of Philippe’s analysis was an outlook for the Gulf countries, particularly the United Arab Emirates, that was stronger than that of most other economists. For months, the business press had been filled with articles predicting the demise of Dubai — the downward spiral, they called it — and Philippe thought the whole thing was overblown, a lot of “hysteria.” As he saw it, the downturn in Dubai had been driven by an over-inflated real estate market, but that the market “correction” was, “for the medium to long term, a good thing.”
“Where will the engine of growth come from in Dubai?” Mazen Hanna, an economic advisor to Saad Hariri, asked Philippe. Like several of the Lebanese economists at the roundtable, Hanna found Philippe’s take on the Gulf a little hard to believe. Dubai’s economy, he pointed out, was “one of the most affected today because it was the most exposed internationally.”
Philippe’s answer was, to some extent, non-academic — we don’t know all the details, but the money keeps coming from somewhere. He mentioned some maturing bonds that had recently been paid out by an unknown investor.
He went on, “This crisis has put Dubai to the test, but more than Dubai it has put the UAE as one country to the test.”
Dubai had been bailed out by Abu Dhabi (another thing Philippe says he had predicted with certainty before most other analysts), which may have cost Dubai its independence, but in exchange had actually fortified the UAE’s economy in the long run.
Now instead of two separate economies — one, Dubai’s that was heavily based on real estate speculation (and thus highly unstable), the other, Abu Dhabi’s, that was solely based on oil and gas reserves (and thus ephemeral) — there is now a shared, diversified economy.
Going forward, the UAE — with a distinct geographical advantage, and a “logistical structure” (including major ports and airlines) that Philippe considered 10 years ahead of anyone else — could position itself as a major transportation hub and the “warehouse of the region,” he said.
With regard to Lebanon, Philippe pointed to something more intangible: the strength of domestic confidence.
“Domestic consumption can drive every force of the economy,” he says, pointing to the US, where 70 percent of the GDP comes from it.
Meanwhile, he says the Lebanese people’s great faith in their national banking system has meant that deposits nationwide have, and will continue, to rise. More bank deposits means more money to offer as loans.
Once again, the Lebanese were less bullish than Philippe.
This was something one private banker — who preferred to remain anonymous — knew a thing or two about, and she pointed out that one  of the reason the banks in Lebanon were so well capitalized was because the Lebanese had so little faith in other markets. “Even if you have a political crisis in Lebanon the outflows have nowhere else to go,” she said. “It’s very superficial.”

A bad moon a-rising
Standard Chartered’s Pik Yee Foong said that although the deposit to loan rate in Lebanon was fairly well endowed, there were “mixed signals” on demand for loans.
And Imad Jamil Zbib, an assistant vice president at American University Beirut and a former professor of business, saw a more pressing indicator: graduating seniors were having a hard time finding jobs, especially now that they had to compete with more experienced young professionals returning from layoffs in the Gulf.
Yasser Akkaoui, the editor-in-chief of Executive Magazine, who was moderating the panel, asked the collected experts what they thought were the biggest risks for the Lebanese economy.
The obvious answer was the unstable political situation. “I think the political deadlock in the country had derailed the privatization process,” Mazen Hanna said, referring to efforts to privatize Électricité du Liban, as well as the telecommunications networks.
He went on to address the dangers associated with Lebanon’s dependence on remittances and expatriate investments, which account for a large percentage of the banking sectors’ deposits.
“My greatest fear is a point in time where you would find that this financing is no longer available to the government, and the government in such a world would have no recourse to the rest of the world because of the current situation… That would be the gloom scenario.”
On this, at least, Philippe agreed. Much of the domestic spending he had pointed to was dependent on what he called the domestic dynamic: “a feeling, real or imagined, of security and political stability.” A major security or political crisis in Lebanon could upset the whole balance. He agreed privatizing EDL was also essential.
But if his dissenting predictions were right — as they had been so often in the past — then the stability of the Gulf countries ought to be a sufficient bulwark, at least, against Mazen Hanna’s “gloom scenario.”
For most of the conversation Abdel Rahman Mogharbel had been tight-lipped, not willing to say too much, perhaps worried that, as a representative of the Central Bank, his thoughts could be misconstrued as foresight. Finally, he turned to Philippe, smiled, and said dryly, “You seem optimistic.”

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Levant

Campaign priorities – The Grand Serail’s to-do list

by Executive Staff
written by Executive Staff

Lebanon has an exasperating array of economic issues which will need to be tackled by the new government that will be formed after the June 7th general elections. Many leaders speak about economic plans and reform, but can their walk match the talk?

“Not one of the current candidates for the upcoming elections has a clear understandable economic vision for Lebanon,” says Oussama Safa, the general director for the Lebanese Center for Policy Studies. “This shows that accountability and checks and balances have no part in the elections. The elections are a battle of slogans not programs.”

As part of this magazine’s election coverage, Executive has asked Lebanese business figures, academics, economists and civil society leaders to provide what they think the economic priorities for the next government should be.
Stability seems to be top priority.

“If there is political stability and security then there will be confidence. Confidence is the key aspect to economic growth,” says Nassib Ghobril, head of economic research for Byblos Bank.

Safa says that to achieve stability, Lebanese politicians must place their first priority on “forming a national unity government and staying away from controversial issues.”

However, March 8 and March 14 have already begun to disagree over the meaning of a national unity government. The March 8 coalition has made clear that, for them, a unity government means that the minority has veto power in the next government. March 8 has already offered March 14 a blocking minority if the opposition wins. But March 14 has made clear that they want direct competition in this election where the winner takes all. Prime Minister Fouad Saniora told Reuters that “a national unity government is not only favorable but it is important… But for us to depend on ‘veto power’ governments means that we will reach… a point where we cannot advance.”

Stability is one priority that does appear to be achievable, despite the current disagreement over the makeup of a unity government. Rapprochement between Syria and Saudi Arabia helps, and increases the prospect of a government with a minority wielding veto power. Antoine el-Khoury, general manager of BREI Real Estate, says “we should be smart enough to find common ground.”
Besides stability, Khoury and other interviewees say the new government should focus on reducing the role of the state, fighting corruption, increasing transparency and containing the economic crisis.

Reducing the role of the state

The cost of doing business in Lebanon is prohibitive for Lebanese businesses and foreign investors. Reducing the role of the state is seen as a key step toward creating a better environment for these business interests. This is seen as particularly urgent given the increased competitiveness of the region and the global financial crisis.

In their report ‘A New Path for Economic and Social Development in Lebanon’, Marc Daou and Jad Chaaban — president of the Lebanese Economic Association and an economics professor at the American University of Beirut (AUB) — articulate how Lebanon is in danger of being overrun by the rest of the region: “Human capital, Lebanon’s main competitive advantage, has deteriorated. Despite spending lots on education, the quality of learning is low compared to other countries, and outcomes are not up to expectations.” One of their recommendations is to “reduce the role of the state to the regulation and provision of public goods.”

Nassib Ghobril of Bank Byblos argues that the new government should go even further than this. Ghobril claims that 2007 was one of the worst years in Lebanon’s recent modern history but the economy still grew by four percent.
“What does this tell us? We only need a minimal government in Lebanon,” he says.

The level of bureaucracy that the state imposes on businesses in Lebanon can be incredibly taxing, says Safa. “It takes 42 days to set up a business in Lebanon which is probably the longest in the world.”

Another reason the private sector wants the state out of its business is because of the negative relationship between the two. Khoury says that when his company goes to the civil service they make him and his company “feel like thieves,” just because they are businessmen. He says that at the same time the government is not doing enough to promote responsible businesses. “We feel alone fighting against irresponsible businessmen draining the resources of the country,” remarks Khoury.

The bloated Lebanese bureaucracy is viewed as needing a complete overhaul, which would include shrinking and reorganizing the government. One interviewee who requested to remain anonymous says that certain parts of the administration are very corrupt. The procedures laid out by the various administrative departments are deliberately unclear and inconsistent; a citizen always needs to hire mediators. He also added that his company must pay bribes to various part of the government administration to get the public documentation.

Corruption and transparency
Lebanon is currently ranked 102nd of 180 countries on the Corruption Perceptions Index (CPI). Other indicators such as the Global Integrity Index, the World Bank Governance Indicators, as well as the Open Budget Index confirm Lebanon’s desperate situation when it comes to corruption and transparency.
The Lebanese Transparency Association (LTA), the Lebanese chapter of Transparency International, has been working hard to bring the government to account. Gaëlle Kibranian, program manager for the Democratization and Public Accountability program at LTA, says Lebanon’s situation is dismal.
“Lebanon remains [a] confessional [system], which shapes the relationship between citizens and state, as well as the lack of separation of powers,” Kibranian says. “This leads to nepotism, clientalism, and patronage.”
Kibranian argues that one of the first measures the government should be taking is to “implement the United Nations Convention against Corruption (UNCAC), which was ratified by Lebanon.”

Khoury confirms the need for more ethics, particularly in regards to the real estate sector, “which is not only important for us but also in attracting investors.”
But it’s not all bad news and there is some hope that politicians will take corruption seriously. The elections and the new election law are a case in point. Kibranian notes that the monitoring and controlling of this year’s campaign spending has made a difference.

“It has meant that politicians are taking the question of corruption very seriously, trying to abide by the law, in order to avoid future challenges,” claims Kibranian.
Apart from outright corruption through bribes, Safa gives another view of the problem in relation to overlapping interests. He says close relationship between the government and the Lebanese banking sector is too close for comfort.
“The bankers and financers are in bed with the government — the prime minister is a former banker and the Lebanese government owes billions to the Lebanese banking system,” Safa says. “The result of this is that different economic sectors are ignored.”

The power of the banks was recently illustrated in their rejection of a proposed interest rate increase and a social security proposal that was stopped by the Bank Association. According to Nassib Ghobril, 54 percent of the public debt is owed to Lebanese banks, illustrating what a stranglehold the banks have on the Lebanese government.

But the banks have recently been held up as Lebanon’s savior, and rightly so, in the face of the global economic crisis. The firm foundations of the Lebanese banking system, demanded by the Lebanese Central Bank, have saved the economy, thus far, from significant harm amidst the turmoil of the global economic crisis. The economic crisis continues however, and the experts say the new government should focus on protecting Lebanon.

The global economic crisis    

The president of the World Union of Arab Banks, Joseph Torbey, recently called for the Lebanese government to create a ‘national strategy’ to strengthen the financial and monetary system against the financial crisis. Torbey says a strategy is urgently needed, given Lebanon’s large public debt.

This was backed by Freddie Baz, general manager of Bank Audi sal-Audi Saradar Group, who wrote in the Daily Star that the financial crisis was worse than anyone could ever imagine. A similarly gloomy view was reflected in a comment by an anonymous J.P. Morgan adviser quoted in the Star. The advisor didn’t see an end to this crisis before 2015.

So, despite the fact Lebanon has so far escaped the consequences of the global economic crisis, and even benefited from the crisis through increased deposits, there may still be a long, rough road ahead.

Although Lebanon may have benefited from increased deposits, Bank Byblos’ Ghobril says many of the resources for financing the public debt are now gone due to the financial crisis and the lack of liquidity.

The chance to privatize the telecommunications sector and Middle East Airlines has now been missed. Ghobril says even if the privatizations continue, it will be a long time before investors are willing to pay the prices they were eyeing just a year ago, in 2007.

“A Credit Suisse report stated that the government could have received $5 billion for the telecom network but in the current financial crisis the valuation has collapsed,” Ghobril stated.

Most significant for Lebanon is the predicted fall in remittances, which account for 27 percent of Lebanon’s current account receipts — the highest such share in the region. Ghobril warned that the future is precarious for Lebanon economically because of the likelyhood of a huge drop in remittances.

“Standard and Poor’s carried out a stress test that showed that if remittances drop by 20-30 percent, as expected, this would lead to a current account deficit of 17 percent of GDP,” Ghobril says.

Not only does Lebanon have to cope with its citizens abroad not sending money back, but Safa says the new government will also have to cope with “waves of Lebanese [who] may return.”

“A main challenge for the government will be finding jobs for all of these returnees,” says Safa.

The wrap-up

The challenges for the Lebanese economy and next government are enormous. It is clear that the main priority for the next Lebanese government should be stability, and once this is achieved then the many challenges to the Lebanese economy can be addressed.

These challenges are intertwined and can be solved through the creation of good governance policies. Good governance in the current sectarian system is yet to be achieved and many doubt the upcoming election results, regardless of who wins, will change this feature of Lebanese government.

However, if the above priorities are addressed in an economic strategy that is then implemented, the economic woes of the budget deficit, the balance of payments, social inequalities and the trade deficit could all start to be ameliorated. Being content with stability, however, may be more realistic.

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Finance

UAE – Sovereign salvation

by Executive Staff
written by Executive Staff

The decongested streets of Dubai seem strangely incongruent with the message that the federal government of the United Arab Emirates (UAE) would have you to believe — that the effects of the global financial crisis haven not been severe in the UAE.

Egyptian investment bank EFG-Hermes estimates that the total population of the UAE — of which more than 80 percent is comprised of expatriates — will contract by  5.5 percent by the end of this year, propelled by Dubai which is forecasted to lose 17 percent of its inhabitants. While the well-endowed government saves its economy through multi-billion dollar bond issuances, setting up emergency funding facilities and pumping numerous liquidity injections into the banking sector, bankers can take a big sigh of relief, but not  for long. Indeed, the deep-pocketed sovereign is propping up the country’s banking system — addressing major issues such as tightened liquidity conditions and toughening up their risk management strategies. But with the ailing real estate market and soaring job cuts, banks have more to worry about than just increasing their cash flow.
In order to efficiently manage the effects of the financial crisis, the UAE sovereign entities are aiding the banking sector to positively, and briskly, move forward. With liquidity conditions finally looking up, analysts say the UAE economy — including its banking sector — is on the mend. As the world faces an indefinite period of recession and recovery, many investors are looking for safe havens to secure financial opportunities. Once the real estate sector hits rock bottom, the UAE hopes individuals and investors alike will flock back to the country, allowing Dubai to continue its reign as the region’s top trading and business hub.
With its affluent, robust government standing behind it, the UAE banking sector is well positioned to fight the crisis head on. Unfortunately, the ongoing property crisis has taken its toll on banks’ profitability and swollen their portfolios. The government has tried to jump-start recovery through various cash injections and recapitalizations, and there are hints of mergers and acquisitions among the UAE’s 52 banks. Bankers are hoping that this year will be less tumultuous than the last, aiming for conservative risk management policies and overall cautious moves.

Sheltered from on top
With the largest debt in the Gulf, the UAE’s only hope is through its sovereign entities, like Dubai Inc. Dubai Inc. is a collection of government-owned companies with an estimated $80 billion in short-term debt to date, a significant increase from the $60 billion debt it had in November of last year.
Once the global financial crisis washed over the Gulf, the federal government of the Emirates reacted “practically overnight,” according to Rajai Ayyash, country manager for UAE, Kuwait and Oman at The Bank of New York Mellon.
Central Bank of the UAE (CBUAE) started by setting up a $32.6 billion emergency funding facility in the fourth quarter of 2008. It then injected $4.4 billion into Abu Dhabi banks, and issued a $20 billion bond to the government of Dubai. Now with the most recent move taken by Abu Dhabi to raise $10 billion in bonds through international investors from Europe and North America, it is crystal clear that the affluent UAE government is willing and able to prop up its economy and banking sector.
“From a capacity point of view, the federal government is in a good position to provide support and we think that this is one of the main advantages for UAE banks, compared with other systems in the MENA region,” says Dr. Mohamed Damak, a ratings specialist in the financial services group at Standard & Poor’s in Paris.
Classifying the UAE government as “interventionist toward the banking system,” Damak says “from a willingness point of view, the willingness is apparently there and the track record is strong in terms of support.”
Without a doubt, if it weren’t for the deep-pocketed Emirati sovereign helping to fix the fight, the banking sector and the entire economy would have been dropped to the canvas in the opening rounds of global financial turmoil. Still, even with the government’s efforts, the effects of the international financial catastrophe have been rather bleak.
In mid-April, the CBUAE announced that its assets and liabilities had declined by 32 percent to $52.7 billion at the end of 2008, down from $77.8 billion in 2007. The last time the CBUAE posted any such decline in assets was in 2003, when assets shrank by a mere 1.4 percent. Currently there are no figures as to how much local banks lost last year, but so far nine of 18 listed national banks that have released results have recorded higher profits – including NBAD, National Bank of Ras Al Khaimah, Sharjah Bank, Emirates NBD, while the other nine banks — Dubai Islamic Bank, Mashreq Bank, Abu Dhabi Commercial Bank (ADCB) and Dubai Commercial Bank — have suffered noteworthy losses.
National Bank of Fujairah, for example, reported losses of $13.7 million in 2008 and $88.2 million in 2007. The largest bank in the region by assets, Emirates NBD, faced fallout in relation to the Madoff scandal in the US, says Raj Madha, director of equity research at EFG-Hermes in Dubai.
ADCB also took hits from US exposures and First Gulf Bank (FGB) had hedge fund exposure. “In all these cases they’re trying to shut down these exposures, but they shouldn’t have been in those [situations] in the first place,” Madha says. “In most ways, it’s difficult to say what they should be doing now because now we’re seeing what they should have been doing a year ago.”
An area in which the government’s efforts have made a difference in recent months is addressing the liquidity situation. Before the fateful weekend of September 13, 2008 banks in the Emirates were awash with liquidity as foreign ‘hot money’ was streaming into the country, with investors expecting a revaluation of the dirham. Cash deposits surged thereafter, and the flowing liquidity empowered banks to go on a lending binge.
As noted by a recent Moody’s report, the national banks used short-term deposits to fund long-term loans. After letting go of the idea of a currency revaluation, foreign investors were briskly withdrawing their money and thus liquidity in the Emirates began drying up. It was in late 2007 that the UAE started feeling the noose tightening on liquidity, and Moody’s estimates that liquidity fell to around four percent of total banking assets. Bankers estimate that more than $51.7 billion exited the country in 2008.
The various sovereign measures taken since the fourth quarter of 2008 have resulted in more liquidity in the banking sector in recent months. Youssef Nasr, chief executive officer of HSBC Middle East, says the amount of liquidity had “significantly improved” in the last four to five months.
Ayyash agrees with Nasr, pointing out that currently “individuals and family businesses are more confident in the local banking sector and are thus depositing more and more cash [into the banks].”
“Also, international banks are back [on] the scene again, selectively reestablishing lines, which is very important,” Nasr says.
Madha accredits the enhancement of the liquidity situation to banks yielding their offers of high deposit rates — some as high as seven percent — as well as significantly lowered inter-bank rates.
“The spread over US dollar libel has come down more into line with the rest of the GCC countries, which is obviously a positive,” says Madha.
Others agree that the liquidity situation is healthier than it was just a few months ago. But it is still not as high as it was this time last year.
“[The] liquidity situation is still under pressure compared with the situation a year ago, when the system was flush with liquidity coming from outside, betting on the revaluation of the dirham,” Standard & Poor’s Mohamed Damak says. “But, we understand the situation has eased significantly in the past few months due to the intervention that was put in place by authorities.”
But New York Mellon’s Ayyash is confident that “liquidity is no longer an issue.”
However, Moody’s Middle East analyst John Tofarides says that while liquidity has gotten much better, it is “still being financed by the government.”
“In order to assume normal deposit growth, you have to have, at the same time, economic growth, because deposits are created by a function of economic growth,” Tofarides says. “If we have a slowdown in 2009, then the deposit growth would be — under normal circumstances — negative, but here we have government support injecting money from outside the system, thus balancing it out.”

UAE bond
The first quarter of 2009 has been quite eventful for the UAE, with the federal government issuing two separate bonds just less than two months apart. The first was issued in February, announcing a $20 billion bond for Dubai’s sovereign. Luckily, half of this was automatically raised by the CBUAE, leaving the remaining $10 billion to be raised in two to three years — when the bank thought it would be needed.
As of April, Dubai had already distributed more than half of the funds from the first $10 billion tranche to several quasi-government companies in the form of loans, with an appealing interest rate of four percent.
Director general of Dubai’s Department of Finance, Nasser al-Shaikh, told DubaiEye Radio on April 22 that “all the support that we extend… is in the form of loans, the tenor of which is a bit shorter than our commitment to the central bank to ensure that we have the money paid to us before we repay it to the central bank.”
Declining to name the recipients, al-Shaikh did mention that state-affiliated real estate companies had taken some money from the funds. Al-Shaikh added that the government would not wait for the initial $10 billion to be fully used up before rolling out the second $10 billion. Exactly when the next $10 billion would be launched depends on the requirements of “more than 10” quasi-government organizations he said, adding that the government is looking at numerous options “within and beyond the country” for raising the funds.
An EFG-Hermes Research analysis released in April pointed out that, “[such] comments stand in contrast to newsflow earlier in the year, which indicated that the second tranche would not be needed for two to three years.”
Whenever the rest is used, the bond “puts confidence back into the market,” says Dr. Eckart Woertz, program manager of economics at Dubai’s Gulf Research Center. “It helps Dubai to alleviate the worse fears for 2009, to ensure refinancing; not more, not less.”
As for the $10 billion Abu Dhabi bond program announced in April, only $3 billion has actually been launched so far. Hamad Al Hurr Al Suwaidi, under-secretary at the Department of Finance, commented last month that Abu Dhabi intends to raise the remaining $7 billion for the program over the next two years.
Of the program’s $3 billion launched, al-Suwaidi noted that investors from North America and Europe bought 90 percent of the 10-year issue bonds, and 75 percent of the five-year issue bonds, on the $3 billion. Asian investors constituted around five percent of the total bond program.
Dr. Giyas Gökkent, chief economist and acting head of asset management at the National Bank of Abu Dhabi (NBAD) — the country’s second largest bank by total assets — reveals that “the purposes of the Abu Dhabi bond issue were: one, to create a sort of benchmark for other borrowers and secondly, to gauge market appetite for bond issues from the region and the UAE. The oversubscription showed that clearly there is demand for good credit, so the reason why Abu Dhabi is doing [this bond] is clearly because they have a large number of projects and from a capital use perspective, [Abu Dhabi] found it useful to go this route.”
Gökkent adds that the bond was issued to aid the funding of projects going forward in Abu Dhabi, while in Dubai the bonds are being used to finance Dubai Inc. debts.

What the bonds mean for the banks
Logic would lead one to believe that people will begin depositing money into local banks as confidence creeps back into the market. Moody’s Middle East analyst John Tofarides says the bonds “will help [the banks] indirectly because this money will eventually be directed to the corporates; it will be fed through the banking system so at some point it will sit as deposits in the banks and then move to the uses of the corporates and pay contractors.”
Shayne Nelson, regional CEO of Standard Chartered Bank for Middle East and North Africa, echoes this sentiment, stating the bond “indirectly helps the banks and gets the economy moving.”
NBAD’s Gökkent believes that these bond programs “[lessen] the pressure on the banking system,” as the federal sovereign is giving “a fresh $10 billion to the Dubai government to inject in various companies, which means that the money did not come from the banking sector itself.”
“It’s complementary to the banking sector resources and it therefore does not put further pressure on the banking system, as the banking [sector] in the UAE had a somewhat high loan-to-deposit ratio [and] the balance sheets were already somewhat stretched,” Gökkent says.
HSBC Middle East CEO Youssef Nasr says the Dubai bond is “very positive,” adding that “the amount is sufficient for meeting all of Dubai’s current maturities of debt in 2009 and it allows the Dubai government to proceed with its budget plans.”
All in all, the bonds “seem to be achieving what [they were] designed to achieve,” states EFG-Hermes’ Madha.

Risky business
Presently, the real estate market is still a chief concern throughout the banking sector. Bank of New York Mellon’s Ayyash asserts that “the real estate sector is the most significant sector in the UAE economy and it has been hit the most.”
Woertz believes that the property market in Dubai is “pretty much a mess.” Gökkent mentions that “some banks got ahead of themselves, offering credit [to real estate developers and investors] without looking at the risk” involved. Woertz trusts that Dubai will remain a trading hub, and that more people will move to the UAE once the property market hits rock bottom.
“Investors will come back,” he says. “Many investors will go bankrupt, new investors will come in and buy it cheaper […] that’s capitalism, basically. It’s the end of many real estate investors over here, but not the end of the Dubai model.”
The situation is changing so fast in Dubai it’s hard to tell exactly what is happening. The lack of transparency doesn’t help one to get a clear picture either. What is known is that the population grew exponentially over the last 10 years, with expats coming to make up an estimated 80 percent of the population. That growth helped fuel construction and real estate prices. Now, the UAE’s growth is slowing.
As the end of the school year creeps up, the UAE is waiting to see how many more expatriates leave once they can take their children back home. With Dubai canceling 54,684 residency visas in January 2009 alone — around 1,764 per day, according to EFG-Hermes — foreign laborers losing their jobs create a ‘skip risk’ for national banks.
The law in the UAE does not permit unemployed expatriates to reside in the country for more than one month after being terminated; it forces them to leave the country and thus puts them at higher risk of defaulting on all sorts of loans taken from local banks. Woertz illustrates this concern, saying “there is a larger risk for banks here than elsewhere, because the expatriate incentive to walk away is pretty significant. Even the obligation to walk away — you’re not allowed to stay here if you don’t have a job here.”
Nasr explains that the reason the law is so strict on expatriates being forced to leave after only four weeks of unemployment is an “old philosophy… If you don’t have a job, you might become a burden on the state,” Nasr says. “It’s being offset by the fact that if the person has to leave it means he has an empty house, he won’t pay his debt, he’ll turn back his car.”
Nasr says the government is trying to find middle ground with the law, and allowing people to stay six months is being considered. But Nasr says until the law is amended and people start staying in the country, “skip risk is something we’re all going to have to deal with.”
Woertz says that even if the UAE extends the residency law to six months, “why should you stay?”
“You don’t get any unemployment benefits, it’s still pretty expensive although the rents have come down. So if you’re fired now, just forget it.”
Whether the law is altered or not, banks will definitely need to watch out for foreign borrowers skipping town and defaulting on their loans.
Dealing with this hangover in the banking sector has created room for some bankers to reach some  rather obvious epiphanies. Robert Thursfield, a director in equity research at Fitch Ratings in Dubai, asserts that national banks’ approaches to risk management “have become more cautious, although given the rapid growth of the last few years, this was inevitable once liquidity tightened significantly.”
Woertz says he thinks banks will be more risk-averse this year, while cutting lending to implement stricter rules on mortgages and credit card limits. What banks need to do this year, insists Nasr, is have capital and “get deposits first and then lend, not the other way around,” which is what was happening in 2008.
Due to numerous ill-calculated moves prior to the global meltdown, this year banks will naturally witness a significant slowdown in growth and profitability. Woertz is pessimistic, and doesn’t “see any growth potential at all — growth potential was yesterday.”
With such rapid growth over the last few years, the UAE will unavoidably experience a slowdown in bank profitability, albeit most banks will still manage to profit while a few others could break even in 2009.

‘After the drunkenness’
Referencing the Arabic expression, ‘After the drunkenness, there is an awakening,’ Nasr notes that, “we went through a period of drunkenness. But it’s back to basics [now].”
Unfortunately, he says, many of bankers forgot what banking was all about “for a few years.” Investors went a little crazy in recent years, diving first into stocks and then irrationally investing in the real estate market, with banks taking the brunt as they gave out loans at an excessive pace, disproportionate to their actual lending capabilities. Woertz says the loan-to-deposit ratio is over 100 percent in the UAE, “so it’s not as conservative as the 85 percent in Saudi Arabia.”
“Banks in the UAE grew their loans by more than 70 to 90 percent in 2008,” notes Gökkent, suggesting that the number is quite excessive.
“People tend to prefer shorter-term deposits and longer-term loans,” Nasr says. “The banking system plays a useful role in terms of bridging this gap between deposits and lenders, [especially] when they have different liquidity preferences.”
He adds that “we started getting into situations where banks were using overnight money or one month money and making 10-year loans. That’s irrational because you’re assuming that it’s going to roll over for the next 10 years, but it doesn’t happen [that way].”
Now, banks in the UAE — and around the globe, for that matter — will be focusing on reprioritizing their domestic agendas. The primary concern for national banks is to reassess and beef-up their risk management strategies, which can be done through more conservative lending policies and basic, cautious banking.

What to do?
Outsiders might find it strange as to why there have been no big mergers and acquisitions (M&A) in the UAE since the crisis took hold. But “under normal circumstances,” explains Gökkent, “[M&A] should have already happened because there was stress in the system… but because the UAE is so well endowed in terms of large accumulation of assets over the years, so far they haven’t had the need to do that.” This leads back to the eminent benefit of having an ultra-wealthy government backing you up.
This year, Madha believes that banks should be “sticking to the knitting.” While the UAE government has laid the foundation for recovery, banks can now focus on their core business and best practices. After the drunken hangover fully passes, banks and the economy of the UAE will have an opportunity to realign their agendas. Ayyash says the “only thing we can do is not to fall into the same trap and have all your portfolio concentrated in one sector; maybe they need to diversify and redefine their portfolios.”
Nasr predicts that “some banks will become more focused on retail or commercial business [and] become more specialized.”
In 2009 UAE banks will have to either sink or swim. Banks should keep in mind that, “The banking system is not an end, it’s just a means,” says Woertz.

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Levant

Amal Movement – Opposition

by Executive Staff
written by Executive Staff

Yassine Jaber, 58, has been a member of Parliament since 1996 and has held several posts in the Lebanese government. He has served as a former Minister of Economy and Trade as well as Minister of Public Works and Transport. Mr. Jaber is part of the Amal Movement and is running for the Shiite seat in the Nabatieh electoral district.

E The United Nations estimates that 28.5 percent of Lebanon’s population lives below the poverty line and 300,000 people live in extreme poverty. What will you do to alleviate the poverty situation?
In terms of poverty, two issues are involved. First, we have to provide a safety net for the poor, so that is why we talk about health, we talk about education and we talk about social help by having the social affairs Ministry become more ethical.
The other face [of the coin] of course is that you cannot give money to people to make them less poor. We have to work on economic development. To have economic development there are requirements that involve many issues. How can you eliminate poverty if you don’t encourage agriculture? Most of the poor people live in the rural areas and other parts of Lebanon that have been completely neglected. We have to work on agriculture; we have to encourage more production in industry. But, for instance, how can you have agriculture without having water and irrigation systems and all that?

E Do you think infrastructure development is the main issue that needs to be addressed?
No, not only. It’s policies that will help provide infrastructure. If you have the right policies and the supporting infrastructure, then you can have more economic activity. Of course you need there to be stability.

E Électricité du Liban (EDL) has been a drain on the budget for over a decade; what will you do to decrease expenditure and improve efficiency?
The first step is to start implementing Law 462 issued in 2002. We have to diversify, we have to find new sources of energy, we have to encourage new policies. But, we have a very rigid system at the moment where we are unable to employ new talents and develop a new management.
EDL… [falls] under a decree called 4517 which puts a lot of restrictions on the way you employ people and on the salaries you pay to engineers and technicians. Which engineer do you know who will work for $600 or $700 per month?
The law 462, which is a law that restructures the electricity system in Lebanon, first of all stipulates that EDL has to be corporatized. Once you corporatize, it’s easier to maneuver. It’s easier to bring in talent and to make decisions. At the moment it’s impossible. The cadre of EDL [should be] 5,800 people and they only have 2,000 whose average age is 58 years old. It is impossible to work under such circumstances. I think we need to restructure it, corporatize it and allow it to work as a private company…
Once it is corporatized, we should allow the private sector to come into production because I don’t think Lebanon is going to be able to finance factories that we need. Open the window for the private sector to take part. For those who panic at the word ‘privatization’, this is not 100 percent. In the law [Law 462] we made sure — and I was one of the MPs who took part in every detail of the law — not to allow immediate sale in the sector. It’s corporatized, [meaning] it could, at a time to be decided, whenever [the government] feels comfortable, sell a share not more than 40 percent, a minority share, to the private sector; if they decide not to, [the government] could not sell and as we go on. If it’s flourishing and making a lot of money for the government, then we can sell tranches of the shares.
This sector is very important but for those who panic at private sector involvement, well, at the moment the private sector is producing most of the electricity through small generators in every street in Lebanon. At least we will have a uniform system that functions.

E What do you think about the distribution and collection side of things? Do you think these should also be considered for privatization?
It could be discussed. Lebanon could be cut into sectors and get the private sector involved, but first you have to start being able to have the authority to look at the idea. Unless the law is implemented, you cannot start… Once you implement the law, all these options become available. Then you can introduce policies.
It’s not only, for example, a matter of producing new capacities of electricity. Also we have to look at the possibility of every home in Lebanon having its hot water system work on solar energy. We have to encourage people to go into solar energy because we have 300 days of sunshine in Lebanon.
So we have to change the way we are running the electricity sector at the moment by implementing the law and bring[ing] more freedom to management to bring in new talent, new producers from the private sector as well as look[ing] at all the options of how you collect. Let’s hope that the new government can embark on this new approach.

E The servicing of Lebanon’s debt is weighing heavily on Lebanon. How will you reallocate inflows and payments to service this debt while still maintaining public services and decreasing the budget deficit?
First we have to stop the drain. You have to look at all the black holes to stop the deficit from growing, then work towards reducing the budget deficit. Dealing with the electricity issue is one aspect of it because it is a component, as well as looking at the banking sector as part of the solution and not part of the problem. Unfortunately, these days some politicians make general statements accusing the banking system of overcharging on the interest. But, I think we liked what happened in Paris II when the banks provided fresh loans for 0 percent. These are ideas that can be looked at.
As an MP at the moment, and to be realistic, we are not going to be able to do anything about the debt unless we start dealing with important issues like the new gas and oil findings in Lebanon. I am very surprised at how slow this present government and the government before have been in dealing with this issue. Unfortunately, PGS (Petroleum Geo Services), which is the company that made the surveys, did them for Lebanon and for Cyprus. If you look at Cyprus today, they have passed a new law; they have started excavation and digging. They are moving forward while we haven’t moved from ‘point A’ yet. We are still at the very beginning.

E Why do you think there is such reluctance to move forward?
I don’t know! This is a question that really bewilders me. The political system in Lebanon has been paralyzing the country. A lot of institutions are paralyzed. For example, sport [facilities] in Lebanon, we don’t use them. Why don’t we give the private sector the opportunity to manage these sports [facilities] for example? Bring events into Lebanon. Unfortunately, you feel like there is no initiative from the government. I feel sometimes that nobody is really sitting down and really thinking about things. Nobody is really sitting down and looking at the big wealth of real estate that the government owns and how to utilize it to make money out of it. These are all issues that I would look at in order to try and bring in new income to reduce the budget deficit. We need to sit down and make a list of priorities and have groups working on every issue that is important.

E Recently the International Labor Organization (ILO) reported that 22,000 students dropped out of schools in Lebanon; what will you do to curb this phenomena and to facilitate human development in Lebanon?
Most of these dropouts are coming out of public schools. As far as human resources, Lebanon has done well in general because of all the private schooling and the good universities. But, we have to pay more attention to the public schools. We have to develop a policy to make sure that students don’t leave.
Not all of the people who drop out are staying in Lebanon and just becoming bums. A lot of young people from the ages of 16 to 18 are leaving to go to Africa or Latin America. In other cases you have families getting poorer and they have to have the boys work; this is why we are seeing an advancement in girl’s education.
I think we have to pay attention to public schools and we have to really work on vocational schools.

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Capitalist Culture

Lebanon – Media‘s many mouths

by Michael Young
written by Michael Young

After nearly seven years, the tape came off MTV’s mouth last month, or so an advertising billboard told us before the April 7 relaunching of the television station. MTV was closed after Gabriel Murr, the station’s owner, won the 2002 by-election in the Metn. Subsequently, Murr, who had won thanks from voters opposed to Syria and to Lebanon’s pro-Syrian president and government, was denied both his seat and his station, which was officially closed for violating laws on political advertising.

The reopening of the station comes at a crucial moment before parliamentary elections this June. It is an open secret that those behind MTV’s revival are, in part, keen to ensure that Christian voters will not have their opinions determined solely by the leading television station, the Lebanese Broadcasting Corporation (LBC). To their minds, this could turn to the disadvantage of the March 14 coalition, even if others argue that the LBC is unlikely to take a strong position against the coalition.
Electoral politics aside, however, what does the fate of the station tell us about Lebanese media in general, especially at a time when the finances of media outlets everywhere are so tight?
To own a media outlet in Lebanon today is a luxury. Whether it is a newspaper, or a television or radio station, the advertising market and/or subscriber base are rarely enough to make a media outlet fiscally sustainable for very long, let alone profitable. That is why most outlets have largely become political instruments, kept financially alive by politicians wanting to get access to the airwaves, or maintained by newspaper owners able to get money from politicians or funders with little concern for a financial return on their investment.
In that sense, it is almost impossible to speak of truly independent media in Lebanon. But does that necessarily mean that everything the media say or write is political manipulation? And does it mean that viewers, listeners, or readers, facing a cacophony of information, are uninformed, or cannot discern the truth when it comes to news?
The answer to both questions is, surprisingly, no. In many respects, it is the very cacophony of the media that makes manipulation difficult. That there are so many news outlets in Lebanon, and so many funders, waters down the influence of individuals seeking to shape news in their favor. Most outlets have become houses of many mansions, kept alive by numerous sources of money, so that the individual funder will be able to tweak this item or that in his or her favor, but only as part of a wider effort at news shaping.
Then there is the question of truth. One complaint often heard is that there are too many media outlets in Lebanon for such a small market. Based solely on business parameters, that assessment would be true. But the reality is that the plethora of outlets, particularly partisan outlets, has its benefits. If we assume for a moment that the ideal model, media independence, is unachievable in such a tight market (and alas it is), then the next best thing is to have enough information out there to at least reach a reasoned evaluation of what is going on in the country.
This is where partisanship comes in. If you were to read a range of newspapers and hear a variety of television or radio stations, from one political persuasion or the other, you would get a fairly accurate sense of what is happening in Lebanon. What one side refuses to say, the other side will. And if the public remains potentially vulnerable to the manipulation of the many, this is better than a smaller number of sources, which would make it vulnerable to the manipulation of the few.
Some may frown on this effort to make the best of a bad situation. In fact, Lebanese media pretty much functions like any normal market. Because access to the market is restricted, media owners try to find a way to get around this, usually in ways that preserve their margin of maneuver — many funders balancing each other off, instead of just one. The nature of the Lebanese media may mean information is often filtered and tendentious, since the audio-visual market, when it was organized in the early 1990s, was mainly divvied up between the political leadership. But the partisanship at its core also offers the antidote of choice, in order for outlets to appeal to a variety of partisan audiences.
Lebanon is far from a perfect media world. Most Lebanese do not read all newspapers and watch all television stations. The ability of the media to bend opinion is  consequently high. Journalistic standards leave much to be desired, and in the absence of independent media, there are many journalists willing to profit from their coverage. However, there is also diversity in Lebanon, as opposed to the deadening uniformity of media in most other Arab countries. That allows for at least an approximate reading of political truth, which is nothing to frown upon.

Michael Young

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Levant

Future Movement – March 14 Coalition

by Executive Staff
written by Executive Staff

Ghazi Youssef, 55, has been a Member of Parliament since 2005 and held several posts in the Lebanese government. He has served as an advisor to the late Prime Minister Rafiq Hariri and the secretary general of the Higher Council for Privatization. Mr. Youssef is part of the Future Movement and is running for the Shiite seat in the Beirut 3 electoral district.

E Lebanon’s electricity sector has been a drain on the budget for over a decade. What initiatives will you adopt to decrease expenditure and improve efficiency?
In 2001, Prime Minister Rafiq Hariri had a plan to introduce private sector involvement to provide electricity to Lebanon. Detailed studies were made by the Higher Council for Privatization (HCP) on trying to separate the three tasks of providing electricity between transmission, production and distribution. We see that the private sector can play an effective role in production.
Therefore, this plan was adopted later on even by Minister [Mohammad] Fneish, who is a Hizbullah representative, and was the Minister of Energy. He looked at that plan specifically, which would have opened up the way for private sector involvement. There was a small amendment to the Law 462, which is the electricity law that would give the right to private producers to be involved in production.
So, we look at the problem first in terms of costs. We have a couple of generating plants that need a major re-haul — the Zouk and Jiyeh plants. You have to offer the private sector a license to produce using natural gas in the north of Lebanon. You have to allow some of the concessions that exist like Zahle to be not only a distribution concession, but to become a producer.
That being said, we also would like as a priority to have a regulatory authority in place that would handle the transmission. We would make it a point whereby competitive producers would have equal access to the lines that would be owned by government — the backbone — to transmit this electricity. We have to look at the partnership and the role of the government through the regulator as being really the orchestrator of free play.

E The servicing of Lebanon’s debt has been partially paid by taxes on the private sector. Will this continue under your party and how will you deal with exclusive agents and monopolies in the private sector?
We all know of the constraint that we have in Lebanon in terms of the public debt and fiscal deficit that it is imposing on Lebanon. We have had a specific reform plan for the Ministry of Finance, for the way it looks at taxation in general. We have a couple of laws that are still hanging around parliament. One of them uses the global income tax approach.
One cannot really impose a comprehensive direct income tax, especially when it comes to the progressivity of the tax. Progressive income tax is a fair tax, taking from the rich in relative terms more than it does from the poor. But one cannot impose that in a country like Lebanon were you have a system based on specific income taxes.
We treat taxes from wages and salaries different than we treat it from profits or capital gains. Unless we get that law passed, whereby people are taxed according to their global income, from all sources, then we cannot really impose this progressive tax.
We also have to rethink our indirect taxes. There are a lot of taxes that are imposed in the form of fees on various activities such as customs, which are a form of indirect tax. All of those have to be rethought to have one sort of indirect tax, which is the VAT. One has to rethink the rate of that tax for it to be in line with the progressive income tax. We do have a specific reform plan in terms of taxation.
Secondly, we have a reform plan in terms of the administration that handles that. That has to be implemented. One cannot really accept the farming process that exists today in the Ministry of Finance in terms of the tax inspectors, how they impose taxes, what they do and their relationship with the taxpayer.

E What are the basic tenants of this reform plan?
First, governance. Secondly, we have passed a law that has to do with the tax mechanisms, whereby it provides governance and [protects] the taxpayer so that their rights are not abused by fiscal authorities. This is something that we want implemented.
Apart from that, we know that the deficit weighs heavily on Lebanon. We do support the call for closing a lot of the so-called political funds that have been created in the early ‘90s, and some even earlier like the fund for the south, the fund for the displaced; these ought to be closed. We want them closed and will continue to ask for that.
We want to redirect expenditures to these to be properly done through the ministries or through Council for Development and Reconstruction. These have to be planned. We know that a problem exists in terms of generating income for the Lebanese economy and the Lebanese government, and that it will not only be done through higher business activity or economic activity but by productive sectors.
Whether in tourism, agriculture, industry or information technology, all of those obstacles have to be removed. We see that the private sector in Lebanon has always been the basic locomotive for growth, and unless you have growth in Lebanon you cannot really face the problem of deficit and debt.

E What are you going to do to reform the telecom sector and to bring about the corporatization and privatization?
First you need commitment from the government. I have lived this sector for quite a while now and I have seen ministers come and go, that were not really committed towards releasing their hold over the sector to the private sector. The latest is Minster Bassil who has been doing things that are quite contrary to what one would think of as reform. He has not done anything in terms of giving [Telecom Regulatory Authority (TRA) director] Kamal Shehadi and the TRA the powers that they ought to have.
Mr. Shehadi has been committed to opening up and reforming the sector. He knows about the constraints that exist in terms of privatizing the cellular network. He knows that the market at this point in time will not be as favorable as it was a few months ago. He knows the political constraints of the upcoming elections and therefore [as a result of the elections] this [issue] has been put on a backburner.
We have seen lip service been given to the current minister and the previous minister towards the need to privatize the sector and liberalize it. But there are other things that Mr. Shehadi ought to be doing, for example, frequencies. This is a job that the TRA ought to be regulating and we see it still in the hands of the minister and the director general. We talk about the DSL internet high speed and anything that has to do with the backbone in terms of broadband, licensing and opening up to the private sector to bring in more capacity; all of that has been stopped by the Ministry.
Again this cannot and should not be allowed to happen, and I believe that part of our program is to have full-fledged support for the TRA to do what they ought to do. To make sure that the sector is liberalized, to make sure that there is a level playing field for all participants, whether it is government or Liban Telecom and through governance. How can we still accept to have a director general [in the Ministry of Telecommunication] who at the same time directs OGERO?
I know that the problem of high speed internet is tragic. You can’t get anything unless you go through OGERO. The private sector and private providers are being strangled. We do have this plan in mind that this sector ought to be a leading sector and it ought to be liberalized and governed properly. It has to attract the proper investment and to do so one has to remove all these snags that don’t make any sense.

E The decision to appoint the same person general director [at the Ministry of Telecommunication], and general manager of OGERO was made by MP Marwan Hamade when he was Minister of Telecommunications. He’s also part of your coalition, so the problem really exists across party lines, doesn’t it?
Absolutely. This was a temporary decision but temporary in Lebanon takes a monstrous form on its own and becomes permanent. It has been like this for three or four years.

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Comment

Damascus‘ dove dying in Israel

by Nicholas Blanford
written by Nicholas Blanford

Any hopes Syria attached to a swift resumption of peace talks with Israel — brokered by the new administration of US President Barack Obama — appear to have been undermined by the reluctance of the Israelis and the hesitancy of the Americans.
The election of Binyamin Netanyahu at the head of a right-wing government in Israel and the cautious pace of US re-engagement with Syria suggests that there will be little movement in the immediate future.
During his electoral campaign, Netanyahu declared that he would not return the Golan Heights to Syria in exchange for peace. While his comments smacked more of electioneering than intent, Netanyahu appears to be in no rush to resume the Turkey-brokered indirect peace talks with Syria. The talks stalled in December when Syria pulled out in protest at the Israeli offensive on Gaza.
The new Israeli government, like the Obama administration, is still formulating its policies toward Middle East peace. Israeli officials say that decisions should have been made by the time Netanyahu makes his first visit to Washington as prime minister in late May.
Ehud Barak, the Israeli defense minister, backed by senior Israeli army commanders, favors pursuing peace talks with Syria. He is of the view that returning the Golan Heights to Syria in exchange for peace is a worthwhile price to pay. Barak’s rationale is that peace will help break up the anti-Israel alliance formed of Iran, Syria, Hizbullah and Hamas, thus helping secure Israel’s northern front.
Israeli officials appear to understand that there will be no severance of ties between Syria and Iran, but expect that a peace treaty would end Syria’s military relationships with Iran and Hizbullah.
Even if the Netanyahu government agrees to negotiate, any peace deal with Syria has to be put to a national referendum. And Israeli polls show that more than two-thirds of the Israeli public are against handing back the strategic heights. Thus, Netanyahu may prefer to immerse himself in negotiations with a deeply divided Palestinian entity, knowing that success is unlikely, and allowing him to wail that there is no Palestinian partner for peace. Better that, he may calculate, than engage in the seemingly simpler negotiations with Syria where he may end up having to make the major — and unpopular — concession of handing back the Golan.
Certainly, the Syrians are skeptical that the indirect peace talks will resume, let alone full-fledged US-brokered face-to-face negotiations. Syrian officials are concerned less at the tone of the new Israeli government but more with how its composition reflects a right-ward shift in Israeli public attitudes toward peace with the Arabs.
The arrival of the Netanyahu government has dampened the tentative gains of the past year during the indirect peace talks in Turkey. According to a source familiar with the negotiations, the Syrian and Israeli delegations were based in separate hotels in Istanbul during the first round, with their Turkish hosts staying in a third and shuttling in-between. During the second and third rounds, the Turkish mediators stayed alternatively with the Syrian and Israeli delegations. By the time of the fifth and final session in December, the delegations were in the same hotel.
Recep Tayyip Erdogan, the Turkish prime minister, relayed messages between his Israeli counterpart Ehud Olmert and Syrian Foreign Minister Walid Muallem, who were in separate rooms, and by phone to Syrian President Bashar al-Assad in Damascus.
It is unclear how much was agreed upon during last year’s talks. Still, perhaps the main significance of the Turkish-brokered negotiations was in keeping the notion of peace alive, given the Bush administration’s lack of enthusiasm for promoting the Israeli-Syrian track during its final months in office.
The Obama administration is taking time to formulate its own policy toward the Mideast and appears to be in no rush to help catalyze a fresh round of peace talks between Syria and Israel. The appointment of George Mitchell as Middle East envoy is a positive step, given his past history of negotiating in complex theaters, specifically Northern Ireland. A recent appointee to Obama’s Syria team is Fred Hof, an expert on the borders of Lebanon and Syria and author of a useful paper, published recently by the United States Institute of Peace, which expanded further on the concept of peace parks on the Golan as part of the confidence building mechanism during the implementation period of a Syrian-Israeli peace.
US officials say that Obama is serious about facilitating Middle East peace, but warn that his patience and time is finite. Indeed, his attention is being drawn away from the Middle East altogether, given the growing problems in Afghanistan and the global financial crisis.
Obama has no shortage of advisors whispering into his ear that he should forget the intricacies of Middle East peace and concentrate on domestic economic concerns. If either the Israelis or Syrians, or both, show signs of prevarication or obduracy, Obama may simply wash his hands of the affair and leave them to stew.

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

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Levant

Change & Reform Bloc – Opposition

by Executive Staff
written by Executive Staff

Farid el-Khazen, 49, has been a Member of Parliament since 2005 and is the author of The Breakdown of the State in Lebanon. He is also a professor of political science and former chairperson of the department of political studies and public administration at the American University of Beirut. Mr. Khazen is running with the Change and Reform bloc for the Maronite seat in the Kesrouan electoral district. 

E The United Nations estimates that 28.5 percent of Lebanon’s population lives below the poverty line and 300,000 people live in extreme poverty. What will you do to elevate the poverty situation?
Poverty in Lebanon is the result of a lack of policies to deal with this problem, and as you know the priorities of the government have been elsewhere since the end of the war in 1990. This is not an issue that was given sufficient attention. There has been attention or concern or interest by international organizations that dealt with this issue in Lebanon, but not much has been done when it comes to government and I think this has to go by sectors.
For instance, on the issue of hunger and households — I am not an expert on this issue but I assume that it has to go by age group, by gender and by region. The policy of simply giving aid, which is the classical approach, may be needed for the very poor, but beyond that I think that one should create security and jobs and provide an opportunity for these people to work. This is one effective way to elevate poverty.
Some regions are definitely poorer than others but there are also needy sectors or sectors that need development all over Lebanon, not only one region or another. This does not apply only to poverty; it applies to other areas.
In the region that I represent, Kesrouan, public schools are in very bad shape, while in other regions public schools are much better. I would not [just] go by region, I would go by where there is poverty and where there is need for infrastructure and the need for human development. Definitely there are more poor people in some regions than in others.

E EDL has been a drain on the budget for more than a decade now; what would you do to decrease expenditure and improve efficiency?
The debt that Lebanon has is partly due to this problem, the funding of EDL. This is a monumental factor; it is the worst and the most costly problem in the country and it’s been going on since the end of the war — almost 20 years now and nothing has been done.
This is not a problem that surfaced last year or a few months ago. This is due to mismanagement, corruption and a variety of factors that all converge on one thing, the policy of the so called muhasasa [a situation by which parts of a whole are split up amongst stakeholders].
Over the years, the money that has been spent to subsidize the EDL could have been used in a different way and then used to build new plants. So what is the best approach today? We are still waiting to produce electricity by gas that we don’t have and we don’t have the proper infrastructure for it. It’s a vicious circle and in my view that should be given top priority. First we need to deal with the immediate problem and find ways to produce electricity at a lower price and again I am not an expert. I am not familiar with the proposals to comment whether it is a proposal by Mr.A or Mr.B.

E In order to service Lebanon’s mountain of debt, policy has always been enacted to tax the private sector. Will this continue to be the basis of the government under your party and what will you do to spur on private sector growth?
The private sector at some point in the ‘90s had been given incentives, but with the overall policy, the political process was not at all favorable for the public sector to flourish.
You say you lower taxes or eliminate taxation or whatever, but it is still uneven and there is no long term vision. You may support the private sector through certain policies, but there is an overall political situation that is really counter to that support, and there is also this problem of corruption which does not at all go well with the private sector and how it should operate.
The private sector — especially when you are dealing with exports — it’s not simply the issue of taxation. I don’t know what the tax rate is here in comparison with other neighboring countries, say Jordan or the Gulf, but definitely it’s a package of taxes and proper administrative procedures and the overall political situation. The package in Lebanon is not competitive. You have to make it competitive so that Lebanon can really become, once again, the business center of the region that it was before the war.

E Recently the ILO reported that 22,000 students dropped out of schools in Lebanon. What will you do to curb this phenomena and to facilitate human development in Lebanon?
We have other problems in the region, mainly infrastructure and the absence of any sewage system, water pollution and waste water treatment plants. This is a major problem in the region.
When it comes to schools, I mean public schools. Public schools cost [money]. The average student in a public school would cost more than in a private school and therefore there is a huge problem; it should cost less. Plus the level of education is not as good or comparable to that of private schools. Had it been better, more parents would have been likely to send their kids to public schools.
It’s not simply schools, it’s also universities and in recent years. In the last 10 years or so, the government or the Ministry of Education have given licenses to several institutions which are not qualified to become universities and today are called universities. Students will graduate from a so-called university; they have a diploma and they think they can work with this diploma when in fact they cannot. They cannot compete with the students graduating from the established universities in the country. We have so many engineering schools, so many businesses [schools], so many medical [schools] — its total chaos.
We are a small country and already we have more than 40 so- called universities and more to come. They keep on presenting proposals for licenses and there is no policy on this. There is a lack of enforcement and this started in the ‘90s and then became chaotic, and you have political interest at stake sometimes, sometimes clientelism, sometimes nepotism, all the ills of society are there so this is an issue that needs to be addressed first.

E Telecommunications privatization has been stifled by politics and market conditions. How will you encourage competition and root out bad governance in the sector?
There is bad governance in all sectors, in all of the above. The current minister has done something that is a great achievement by lowering prices. This is a major achievement and I don’t know why this was not done before Minister Bassil came to office. The minute this service started in the mid-90s, corruption started there.
When it comes to privatization, in this sector or in any other sector, it cannot be simply privatization by the norms that apply in a number of developing countries where privatization meant private property not [real] privatization. We have seen this in a number of countries in the Middle East and elsewhere. If it is privatization by the norms that apply in Europe or developed markets where there is transparency, then yes [we agree]. Otherwise privatization becomes synonymous with private business. Under the label of privatization we can get into a very bad situation in all sectors. So we are for privatization and we support privatization, but again it should not be politicized; it should be totally transparent and it should go by the rules and the norms that are in application in other countries. We opt for privatization when we know that we can assure that we can abide by these laws. Otherwise it’s not simply the rush for privatization. Privatization, if not applied properly, is not a recipe for reform. It becomes a recipe for corruption. [I support] no politicization, transparency and the norms that are in application — the best practices.

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