Finance

Standard Chartered Bank, Qatar – Tom Aaker (Q&A)

by Executive Staff
written by Executive Staff

With years of banking experience under his belt, Tom Aaker — chief executive officer of Standard Chartered Bank (SCB) Qatar and North Africa — has an expansive resume. Aaker joined SCB in 1993 and has held numerous senior positions around the globe, from Hong Kong to London, Zambia and the USA. Currently, Aaker is a board member of SCB Botswana, SCB Zimbabwe and Corpmed Medical Center. Executive recently conducted an exclusive interview with the bank’s top man, discussing the current banking situation in Qatar and around the region.

E What strategies will Qatar banks use in 2009? How will they differ from 2008?
Standard Chartered Group had an exceptional performance in 2008. Profits were up 19 percent from 2007 globally and that was up from the year before. We are one of the very few banks in the world that had significant earnings growth from 2007 to 2008 and the prospects for 2009 are very strong as well.
Our bank is in Asia, Africa and the Middle East and those are regions that have had some difficulties, but are nowhere near like the US and Europe. Our bank is typical of the performance in those regions; we don’t have the sub- prime mortgage problems and things that have really hurt banks in the West. So our performance last year was terrific. In Qatar specifically, we have record earnings, we don’t disclose our performance because we’re a branch of SCB in the UK, but I can tell you that our earnings, revenues and growth were record-breaking in 2008 in Qatar.
Our bank is very strongly capitalized and very liquid. Many banks in the world have taken capital injections through bailout packages or by taking capital from various strategic investors — we haven’t done that, we haven’t needed to, our capital base has been very strong. We did a rights issue last year, which was very successful and that was raising capital from existing shareholders.
Our loans-to-deposit ratios are far better than our competition, in Qatar and globally. We have more deposits than we have loans; so there are excess deposits that we generated sitting with the central bank and that gives us a huge advantage.

E What has SCB learned from the global financial crisis? Have these lessons
affected your global strategy?
I would say that probably the best way to describe our strategy in 2009 is to stay with what has worked in the past. We succeeded last year because we remained very true to our strategy, which was retail and corporate banking in Asia, Africa and the Middle East with a long-standing group of customers and with products that we knew well, that were time tested, and we had success. We’ll continue on with the same strategy; I don’t think there will be any departure to new markets or new products, I think it’s more of the same because it’s worked well.
In terms of lessons learned, our group CEO is always reminding us to identify what we call ‘loose rivets,’ and by that he means potential risk areas that if we get a little bit complacent, there could be an unpleasant surprise. He’s told all of us to be always on the look out for that loose rivet that could pop and [result in] an operational breakdown. So we’re being very careful on the operational side right now just to anticipate things that could go wrong. An example of that is liquidity. We know that’s a huge advantage in the global financial markets — to be liquid — so we’re being proactive, raising plenty of deposits so that we are more liquid than anyone else just in case [things] do get worse, [although] we’re anticipating… better. We’re sticking to what we know. In these times it’s not wise to be doing anything too new or experimental when the marketplace is so unpredictable.

E What are the top issues and concerns that banks in the MENA region will be
facing in 2009?
I think there is still a risk that we’ll see bad loans and a lot more provisioning by banks in this region. You’re seeing it happen in record amounts in the West and to some degree we’re starting to see it in the MENA. Some of the UAE banks are now starting to write-off massive amounts of loans to real estate developers and some of the consumers who were employed in those sectors… I think that’s one of the risk areas that we need to be very cautious of this year: credit quality and which banks have strong asset portfolios and which don’t. The ones that don’t are going to be writing-off large amounts of bad loans this year.
Fortunately I believe our quality is very good, not only here in Qatar but around the MENA region because we have very strict credit criteria. In Qatar for example, we don’t even make mortgage loans… we’re not in real estate. That’s one of the areas that I think is the most risky. Those banks that have made mortgage loans to build office towers, they could find difficulties this year… but we’re not in that sector, so I’m not as worried for us, but for the region’s banking sector… I think bad loans, write-offs and provisions are going to be a theme this year.

E There has been a significant decrease in demand in the Qatari property market. How has this affected banking operations in the country?
It hasn’t affected our operations. You hear that real estate prices are down 20 percent, 30 percent… I don’t think it will be anywhere near as severe as the situation in Dubai. There is not a surplus of properties [in Qatar]. The leadership of this country has been visionary to make sure that the build-up of real estate has been at a measured pace and the economy here is not built on real estate, it’s built on infrastructure, natural gas, health care, education, etc… It’s a very diverse economy, and it’s one that I believe has been very well planned.
Even if there is a dip in real estate prices, I don’t think there is going to be a crash like other markets. But even that dip might prove painful for certain banks because they were very exposed and had made some very aggressive loans.

E How would you describe the liquidity situation in the Qatari banking sector?
It’s hard to tell because any data that you get is a couple of months old by the time you see it. One of the situations that was difficult in Qatar last year was the inflow of foreign money in anticipation of the peg being revalued. A lot of speculators around the world thought the riyal was undervalued and should be stronger; there were no exchange controls, no problems moving money in, so a lot of investors would bring dollars into Qatar, buy riyals, sit on those riyals and hope there would be a revaluation… then they could re-buy their dollars back cheaper and take them out.
This time last year, there was this huge amount of riyal liquidity, this hot money that had come in from speculators… What happened last summer when these speculators had gotten in trouble somewhere else and realized they were done with that trade, they bought their dollars back and took them out of the country to use them somewhere else. There was this exit of a lot of liquidity from the system. It all pulled out at pretty much the same time.
All those banks that were sitting on those deposits saw them disappear. In the fourth quarter, a lot of banks in this market were scrambling around trying to get new deposits so they could present good numbers by December 31 to comply with central bank rules. So you saw a scramble at the end of the year and what happened is that banks were willing to pay a lot more for deposits. In this market the rates went up as high as seven or eight percent. Customers were able to pick and choose and move their money around and earn very nice deposit rates. At the end of the year, there was a liquidity issue going on in the sector.

E In a recent report, ratings agency Moody’s forecasted a negative outlook for the Qatari banking sector, reflecting expectations of deteriorating operating conditions. What is your take on the banking sector’s outlook in the next 12 to 18 months?
I think first of all, the ratings generally feel like they were way behind the curve in the last year when there was deterioration in banks and ratings agencies didn’t anticipate it very well. Bad things happened before they had negative outlooks and downgrades. So I think now and for years to come, rating agencies are going to be much more pessimistic and are going to try and anticipate bad things much sooner.
On the other hand, there is still a lot of unknowns in Qatar in terms of the quality of assets. Time will tell whether some of the banks in the sector have lent too aggressively in the real estate sector, personal loans, credit cards, etc. There could be some banks that will really suffer from big write-offs this year and I imagine that some of the ratings agencies are just anticipating that that’s a possibility and saying that the outlook is just not as good as it was.
In terms of economic growth for Qatar, we as an institution are very optimistic — we forecast that the GDP growth will be 16.5 percent, nominal growth… then if you take out our forecast of inflation of about eight percent, you’re left with about 8.5 percent of real growth. That’s very strong growth! If the economy grows at that rate, then I think the banking sector and the whole country will still do pretty well. We see Qatar as booming right ahead, especially with the natural gas reserves that they will continue to sell.

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GCC

Private equity – Bigger, fewer, more focused

by Executive Staff
written by Executive Staff

 

Predicating the future has never been an easy task and it has gotten no easier today. Charlatans with crystal balls are in ample supply however, especially when it comes to the lifeblood of the region. Last year when the price of oil was at around $150 a barrel, Merrill Lynch was predicting that the price would reach anywhere between $180 to $200 a barrel. Last December their figure was around $25 per barrel. According to Business Monitor International (BMI) and OPEC, the 2009 average for oil prices will level out at around $50 a barrel. All of this ‘shooting in the dark’ leaves private equity (PE) firms — and everyone else for that matter — at a loss with regard to how much cash flow will be generated in the region in the near future.

Therefore, ignoring the predictions is probably the best way to go about handling the issue of oil prices. Nevertheless, “Oil will remain the backdrop on which we exist,” said Arif Naqvi, CEO of Abraaj Capital, while speaking on a panel at last month’s PE investment international conference in Dubai. “Everyone is happy with $60 to 80 per barrel,” he went on to say. While the intrepid CEO may be wrong about what everyone’s satisfaction levels are pertaining to the price of oil — even if the budgets of countries around the region are positioned well below the $50 a barrel mark — there can be little doubt that he is right in that without an ample supply of petrodollars, the PE industry’s prospects for growth are not promising.

The average fund size in 2008 registered at around $258 million, up from around $177 million in 2006, according to research conducted by Zawya Private Equity Monitor (ZPEM) and the Gulf Venture Capital Association (GVCA).

Coming together

That said, there has been much debate within the industry regarding where future investment will be targeted and how the landscape of the industry will look.

“We expect this trend [of larger funds] to continue, with a smaller number of larger general partners leading the industry through its next phase of evolution,” wrote Vikas Papriwal, partner private equity and sovereign wealth funds at KPMG, in the annual GVCA Private Equity and Venture Capital in the Middle East report.

In support of the argument that larger and more diversified firms will rule the day, many observers point to the prospects of mergers and acquisitions between funds that seem to be in the pipeline.

“There are growing signs that a cooling market, tightening liquidity and rising borrowing costs could prompt a wave of consolidation in the region,” says James Tanner, head of Placement and Relationship Management.

Imad Ghandour, executive director of Gulf Capital, notes that “there has been an increase recently in funds buying from each other.”

On the surface things may look to be stagnant, but things are happening out of sight. “There are quite discrete asset sales and processes going on. Every week someone says, ‘officially we are not really selling, but unofficially here is what’s available,’” says Yahya Jalil, senior executive officer and head of private equity at The National Investor in Dubai. This may not seem surprising given that worldwide the value of companies PE firms are holding has decreased by around 50 percent, according to The Economist. Moreover, only half of the funds announced since 2006 have so far been raised and approximately $11.7 billion of announced funds in 2006 to 2008 have failed to make a close, according to ZPEM and the GVCA. Clearly the number of PE funds in the region will need to be consolidated greatly.

This new makeup of funds, however, does not necessarily predicate the fact that these consolidated funds will be attractive to investors, who are becoming more prudent and concerned with specialization as opposed to reputation.

“When investors begin to deploy money again it is going to be less to general funds that have generic purposes and more to specific opportunity funds. They will begin to ask the PE firms about the specific opportunities present where the firm wants to invest their money,” says Hisham El Khazindar, managing director and co-founder of Citadel Capital.

Ammar Al-Khudairy, managing director and CEO of Amwal Al Khaleej Investment Co., remarks that, “the asset accumulation firms are less in fashion than they were a year ago. The pure dedicated type of firms are more in fashion; this is the new paradigm without a doubt.” He adds that “institutional investors much prefer to deal with people who do nothing but PE. They are being much more selective and a larger size is not one of the selection criteria; they see it as a negative aspect.”

What will the future hold? The argument seems to be far from over, but given the two opposing forces in the market and the eventual equilibrium that will have to be met, in all likelihood “there will be a ‘happy medium’ and funds will not want to go over $10 billion,” concluded one senior PE executive.

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Finance

Qatar – A pearl of prudence

by Executive Staff
written by Executive Staff

Watching their regional counterparts struggle to stay afloat, banks in Qatar are making very calculated and prudent moves this year. While the global financial turmoil has not hit the Qatari banking sector as hard as other GCC nations, bankers and analysts alike are expecting the ripple effect of the crisis to arrive sooner than later. Fortunately, most banks in the pearl of the Gulf did not invest heavily in structured products or toxic assets — as many other banks in the region did — which has helped Qatar avoid major a fallout in its small, yet robust, banking sector.

With a predicted real GDP growth of around 8.5 percent in 2009, today Qatar is one of the fastest growing economies in the world. As global markets face an indefinite period of recession, many investors are looking for financial safe havens. With its diverse and relatively peppy economy, Qatar hopes bankers and investors will continue to flock to the country and help it achieve financial supremacy over its oil-poor neighbors Bahrain and Dubai. With many multi-billion dollar projects spanning numerous industries in the works, the banking sector would be a major beneficiary of such developments. Unfortunately, due to the global economic slowdown, many of those projects are expected to be delayed or cancelled, leaving banks to feel the blow in their loan portfolios. But thanks to major diversification strategies, banks in Qatar are believed to be well protected against any aftershocks the global meltdown could send their way.

Sovereign serenity
Despite the inevitable slowdown in growth, with the affluent government standing behind its economy all sectors are expected to perform adequately this year. The resilience of the banking sector, according to Mohamed Damak, a rating specialist in financial services at Standard & Poor’s, is “above average,” which is “mainly due to the combination of lower exposure to structured investment products” and the proactive role taken by the Qatari government. For example, in the fourth quarter of 2008, the Qatar Investment Authority (QIA) announced its plans to acquire between 10 and 20 percent ownership in every local bank — of which there are 11 total — helping to increase confidence across the banking sector and to boost liquidity conditions in the market. More recently, at the end of March 2009, the government purchased $1.8 billion worth of local banks’ investment portfolios in order to share the burden of such funds, revive lending, boost liquidity and to support the economy.
While this latest act has been welcomed with open arms by banks across the country, Raj Madha, director of equity research at EFG-Hermes in Dubai, points out “the reality is this is essentially a free gift from the government. It does have the negative impact of encouraging risky behavior on the basis of relying on the government to act as a backstop. However, given the very unusual nature of the current global situation, it may seem reasonable to make an exception on this occasion.”
Still, Madha views this “start of greater intervention from the government” as “positive for valuations, underpinning that the government stands behind the [banking] sector in case of a blow up. Clearly,” he cautions, “this creates some moral hazard, but this is not really the market to be worrying about moral hazard and perverse incentives.”
Abdulbasit A. Al-Shaibei, chief executive officer of Qatar International Islamic Bank (QIIB), believes that this move “is a prudent strategy [by] the government of Qatar,” while calling the sovereign’s decision — unsurprisingly — “generous” toward local banks.
But, Madha highlights, one must not forget that “credit portfolios are still exposed” and the government’s purchase of investment portfolios “has no impact on loan provisioning.” As far as the central bank’s role is concerned, the majority of observers seem to be quite content with how well the institution is managing its banking sector.
Elena Panayiotou, an analyst at Moody’s Investors Service, trusts that Qatar Central Bank (QCB) “aims to exercise sufficient prudential control and supervision of the local banking sector and to harmonize Qatari banking regulations with international standards, as well as to address specific risk areas.”
Damak reiterates this sentiment, saying, “the [QCB] is hands-on with risk issues, meaning they are aware of the different risks and they tend to be proactive when dealing with risks.” In general, Damak — like Madha — sees the “interventionist” attitude of the government as a positive thing. In the event of an emergency, he believes, Qatari banks can expect to “see some kind of extraordinary support.”
Overall, there is no disagreement about the supportive role played by the Qatari government toward its banking sector. Yet, despite the copious sovereign support, “the main issue will be whether the government spending will take up the slack from slower growth in the private sector,” warns Madha.

Home is where the heart is
Before the international financial crisis began, banks around the world — Qatar included — were looking abroad. Whether it was for cross border investments, lending or general expansion, Qatari banks “were a bit aggressive in terms of going abroad,” notes Al-Shaibei. In 2009, he says, “Qatari banks will focus more on the local market [and] concentrate on strengthening their equity base.”
Over the past five years, contends Damak, banks have been “growing tremendously.” Qatar National Bank (QNB), Commercial Bank of Qatar (CBQ) and Doha Bank (DB) alone have witnessed a growth rate of 43.2 percent in 2008, Damak discloses.
Madha agrees, saying that last year “was all about growth and finding new areas to expand the balance sheet into. This year, growth is almost a bad word, with banks focusing primarily on profitability.”
Panayiotou emphasizes “a slowdown in the Qatari banks’ business growth, reflecting the current global economic environment, the tightened funding conditions both domestically and internationally, [as well as] the banks’ more risk-averse behavior.” Strategically, banks will have to “apply more prudent lending policies, particularly in the retail sector as consumer indebtedness in the country rises and as the risk element of the segment increases,” she adds. According to Moody’s data, Panayiotou explains, personal loans have one of the highest delinquency rates in the entire Qatari banking system.
Robert Thursfield, a director in the financial institutions group at Fitch Ratings in Dubai, chimes in saying that “lending growth is likely to be slower” this year in the Qatari banking sector.

Risky business
Due to the declining property market in Qatar, banks will indubitably be adopting a shrewder attitude towards developers and customers alike. Even though the Qatari property market conditions are not nearly as severe as those in Dubai, it is still a crucial concern for the banking sector. Mortgage lending will witness a significantly more conservative approach, insists Damak, as “the expected decline in property prices will have some manageable effects on the Qatari banking system… and the fact that some of the projects will be delayed or cancelled will translate into lower opportunities for growth going forward.”
Al-Shaibei admits, “Of course, we will get hit because of the drop in property prices.”
Panayiotou illustrates the deteriorating real estate situation in the country, saying “a further decrease in demand in the Qatari property market will lead to slower growth in the financing of the construction and the real estate sectors in the country.”
Luckily, Al-Shaibei insists, “everything will be manageable. [The real estate issue] is not going to get out of control.” All local banks are heavily dependent on government projects, so thankfully for them the sovereign’s damage control should be sufficient to deal with any property contractions. Bank growth is also expected to slow due to continued declining liquidity.
Liquidity in the Qatari banking sector is currently adequate, but like in every other economy around the world, it is expected to tighten significantly as the crisis unfolds. Experts unanimously agree that liquidity has been declining in the Qatari banking system lately. The extended and unknown period of global distress is, explains Panayiotou, “expected to lead to a tightening of the banks’ liquidity levels, particularly as funding conditions in Qatar and in international markets continue to be challenging.”
This year, banks in the country will be targeting lower growth than ever before in order to preserve liquidity in the long run and to achieve realistic profitability goals. In terms of balance sheet growth, Madha says, “Qatari banks are now reducing their expectations to low double digits, from the stratospheric levels we saw in 2006 through 2008. This will require some shift in mentality, with banks being much more selective about providing credit.”
Damak asserts that this year, “preserving liquidity and asset quality indicators” will be top priorities on the agendas of local banks.
Seeing as banks are prominently dependent on customer deposits, there is “[f]ierce competition in Qatar in attracting deposits, together with the challenging conditions in the inter-bank and wholesale markets, [which] is likely to put pressure on banks’ funding and liquidity levels going forward,” voices Panayiotou. The good news, she proclaims, is that Moody’s’ concerns “are partly mitigated by the government’s strong financial position and its significant and growing contribution to the Qatari banks’ funding base.”
Another risk, noted by both Panayiotou at Moody’s and Damak from Standard & Poor’s, is the banks exposures to the Doha Stock Market (DSM). Damak warns that Qatari banks will have “some exposure to the stock market and with this decline we will see some one-off effects on profitability if the stock market is not stabilized during the remaining quarters [of 2009].”

What to do
In order to avoid financial catastrophes, Qatari banks will have to act preemptively on a number of fronts. First and foremost, banks must maintain, if not boost, their current liquidity conditions in order to safeguard themselves from future crises in either global or local markets. Secondly, banks should be cautious with provisioning and balance sheet security. Damak stresses the need for calculated risk management, as the international operating environment is clearly not as favorable as it used to be. Also, he says, taking good care of credit and funding is important to banks’ success and protection in the current circumstances. Panayiotou draws attention to the banks’ “need to identify and finance clients that provide good returns with relatively low risk profile, while at the same time ensuring that they take early remedial actions in cases where delinquency rates of existing clients start to rise.”
Prudent moves and preventative measures are the safest best for Qatari banks in 2009. To date, Qatar’s banking sector has been able to avoid any major hits on its domestic front from the global financial crisis, but symptoms of the downturn are likely this year with anticipated slower growth and tightened liquidity conditions.

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GCC

Private equity – Where to scare up the cash

by Executive Staff
written by Executive Staff

 

In times of crisis come times of great opportunity, or so we are told. The proverb does seem to bear some truth, however, when applied to the regional private equity (PE) market. Perhaps for too long, PE activity has been focused on a few hotspots in the Middle East and North Africa and has neglected many of untapped or fundamentally solid areas. Now there is little choice when it comes to being picky; firms need to go where the opportunities are rife and many countries in the region are taking advantage of the newfound openness towards expansionism that has taken hold of the industry.

The first country in the cross hairs seems to be Saudi Arabia. The usual criticisms of Saudi being a cumbersome and overly conservative market have turned out to be unfounded. Both Saudi Arabia’s central bank and its sovereign wealth fund (SWF) are coming out of this financial debacle much less scarred than most of their regional counterparts, but that’s not to say they have been unaffected.

“There will be an increased reliance on cash coming out of places such as Saudi… which are unlikely to be so badly affected by current market conditions,” says Robert Hall, head of transaction services Middle East & South Asia at KPMG. Others are more reserved in their analysis.

Ammar Al-Khudairy, managing director and CEO of Amwal Al Khaleej Investment Co, says “I would not point out Saudi Arabia as a bastion or a haven of still available money. It is a haven of less economic turmoil without a doubt. That does not, however, necessarily give investors more comfort than other markets vis-à-vis deployment or fresh commitment of capital.”

Flow like the Nile

Another country that looks to continue its upward trend despite the effects of the global downturn is Egypt. The land of the pharaohs has already attracted $2.8 billion in PE investments (33 percent of total MENA investments) since 2005 according to Zawya Private Equity Monitor and the Gulf Venture Capital Association. Even though this figure is largely attributed to Abraaj’s investments of $1.4 billion in the Egyptian Fertilizer’s Company (EFC) and a $501 million investment in EFG Hermes in 2006, Egypt is expected to continue to attract investment from PE firms desperate for buying opportunities.

“There is a positive outlook on the medium to long-term prospects of Egypt because of the demographics, reforms and the fact that Europe needs the southern Mediterranean basin as a manufacturing base because of environmental and cost of labor issues,” says Al Khudairy.

For the more risk-prone capitalist there is always Iraq which, despite its obvious shortcomings, cannot be written off when considering investment opportunities in the region.

“Obviously Iraq has its challenges, but PE is a local business and you need to be there early,” says Hisham El Khazindar, managing director and co-founder of Citadel Capital. In theory, the promise of post-conflict Iraq is monumental given its oil reserves, demographics and the amount of greenfields on offer for potential investors. However, other industry heavyweights would rather pay more when and if the political risks of Iraq ever do subside.

“Iraq still has significant geopolitical risks and we won’t know the full effect of these risks until the US winds down its occupation,” says a regional PE chief executive who spoke on condition of anonymity. “I would rather pay three times the amount [for a company] without a civil war than with one.”

Preservation is key

The regional PE sector is at a crossroads, or perhaps the more accurate term would be a U-turn. Gone are the days when investors lined up to throw money at PE firms. Today, what separates the wheat from the chaff will be cold hard cash.

“If you have already raised money then you will be OK, if you haven’t then you are in trouble,” says Imad Ghandour, executive director of Gulf Capital. That notion becomes even more reinforced when one considers that leveraging options have all but dried up for the immediate future.

“I do not see previous levels of leveraged investments restored in the foreseeable future, as the market will need to clear excess leverage,” says Rami Bazzi, senior executive officer at Injazat Capital. Al Khudairy adds that, “leveraging is gone for two or three years at least.”

As regional PE firms move forward, the key to surviving will be to take care of ones own and keep limited partners happy whether or not the bottom has been reached.

“The bottom may have been reached but it is important to remain disciplined and stay focused on your existing portfolio a little bit longer, to make sure it is in good form and weathering the storm before starting to get distracted by some of the great opportunities, even if it means you miss the bottom,” says El Khazindar.

The ride has been bumpy and it’s not over yet. What remains to be seen is whether regional PE firms will hold on for the ride or if they will be thrown to the wayside.

“We have had a rising tide that lifted all the boats and the industry never had to really roll up its sleeves and do the dirty work as portfolio companies,” says Yahya Jalil, senior executive officer and head of private equity at The National Investor in Dubai. “That time is now at hand.”

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Capitalist Culture

Ethics – The need for greed

by Michael Young
written by Michael Young

Ever since the financial crisis hit last October, rarely a day goes by without another article being published suggesting how we must all develop a greater social conscience when it comes to economic affairs.

That word “conscience” is an interesting one, both for its quasi-religious overtones and for the fact that use of the word in the last, let’s say, 25 years, when free- market capitalism was accorded near mystical status, could assure you a life sentence with hard mockery.

Take for example what the sociologist Amitai Etzioni recently had to say about the good life, and how to achieve it in the shadow of the global economic crisis. Lamenting consumer voracity in the capitalist system, he observed: “Only after we come to see that additional goods add precious little to our happiness; that pursuing them is Sisyphean — the more we gain, the more we seek; and that deep contentment and human flourishing rise out of spiritual projects and bonding with and caring for others, shall we be able to come to terms with much that bedevils us.”

These are doubtless noble thoughts, and who can deny that the financial crisis was, in large part, a result of a system that didn’t know when to put order in the increasingly rickety credit edifice, because the rising profits were too alluring. However, what is galling in absolutist pontifications like those of Etizioni is that they seem to imply that everything about capital expansion in the past decade and more, and even the capitalist system in general, has been about greed. Certainly greed played a large part of it — but then again, what is the motor of an expanding economy except a desire to accumulate, therefore a certain kind of greed?

And it was not all about unalloyed greed. The expansion of sub-prime mortgages in the housing market allowed those who, hitherto, could not purchase a home, to do so. The market ultimately collapsed, the regulatory framework was a shambles, but the rationale behind the loosening of credit conditions was in many ways defensible. There was more money circulating in the market, so why not allow more people to benefit from this? In this period of rapid change, economies grew, spurred on for most of this period and until last year by low oil prices, pushing consumption up and allowing countries like China and India, with their large populations, to expand employment and reduce poverty.

Nothing odd here; these are the normal tropes of an expanding economic order. Of course, the critics have more often been loudest in their censure of the poorly understood market for derivatives, whose value in connection with palpable economic benchmarks was always dangerously vague. However, when one calls for “spiritual projects and bonding with and caring for others,” that is an implicit attack on the very foundations of the capitalist economy, sounding warning bells that the backlash against that economy may be even more excessive than its unquestioning defense.

What is disturbing in the sudden onrush of moral sanctimoniousness in the markets is the increasing effort in many societies to go overboard in legislating morality — or more perniciously, in legislating day-to-day behavior on moral grounds. Why is this a problem? Largely because it is often unclear who decides what is virtuous in the marketplace. It need not always be the state, but can be a vocal minority, which, because of its effectiveness, can ultimately impose its will on a majority. This seems to have been the case, for example, with anti-smoking crusaders who over the decades turned the debate over public smoking into largely a moral one, managing to transform smokers into pariahs banished to the sidewalks of most Western cities.

But let’s assume for a moment that it is the state that legislates virtue. How does it effectively do so in the markets? Certainly tighter regulatory frameworks can be introduced to protect investors and prevent destructive market meltdowns; certainly too, more public money can be put into socially meritorious projects, or into, let’s say, more foreign aid to countries in need. However, nothing can or will alter the essential greed at the heart of capitalism, and nothing should. When states take onto themselves the duty of creating more righteous orders, this becomes social engineering, and the dangers to society only multiply.

There are many lessons to be learned from the financial crisis, not least that this may be as close as we will ever get to a bottomless pit of capital loss. That the markets will need deep reform in the coming years is obvious. But we should get a grip. We’re not on the verge of a new ethical metamorphosis when it comes to the nature of capitalism, nor should we welcome such a thing. In difficult times people become extreme. And nothing is more extreme than an overdose of morality in a financial system that, by definition, demands healthy amorality.

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GCC

Abu Dhabi – A sure and steady rise

by Executive Staff
written by Executive Staff

Abu Dhabi, the capital of the United Arab Emirates and the largest of the seven, has been overlooked for years by investors and entrepreneurs who tended to consider Dubai a more attractive destination. Yet the capital did not stand idle. The fact that Abu Dhabi possesses 10 percent of the world’s oil, five percent of its gas reserves and that it produces 90 percent of oil in the UAE, has enabled it to diversify its economy by investing heavily in infrastructure, real estate, tourism, financial services and other key sectors. In 2007, the Urban Planning Council released the Abu Dhabi 2030 plan, which has been the foundation for the growth of the real estate sector. Dr. Hanni Shammah, CEO of Bloom Properties, believes that Abu Dhabi is trying to become a global city, in line with New York, London and Hong Kong.

“Abu Dhabi is in the midst of a structural change. It is rebranding and repositioning itself with the rulers aspiring to transform the city into a global and cosmopolitan city, while keeping a proud Arab/Emirati identity,” says Shammah.
A major problem for Abu Dhabi since the beginning of its boom has been the lack of real estate supply, whether residential or commercial. Consequently, the capital became more expensive than Dubai. Mohammed Al Haj, CEO of MBI, a venture capital firm that specializes in properties and financial investments, say that since the UAE government aims to attract investors from around the world, it expected the inflow of expatriates would take 10 years.
“What happened is that the region was attractive and the oil prices were dramatically high, which attracted all those people in only three or four years,” he explains. “Therefore, the demand was really high and the infrastructure wasn’t ready.”
Due to the tremendous shortage of supply and Abu Dhabi’s long-term plan, the real estate market grew quickly. Major residential and commercial projects were being launched and developed, while demand escalated. But oil wealth has proven to be insufficient to protect Abu Dhabi from the impact of the current crisis. Although the capital has strong market fundamentals, demand for most real estate segments has gone down, prices and rents of residential properties are decreasing, and bank financing is becoming less available.

Residential prices
Before the financial crisis started to impact residential real estate prices in Abu Dhabi, they were escalating rapidly. Buyers were acquiring property despite the high prices, encouraged by the promising economic growth of the capital in general and the housing market in particular. According to the Landmark Advisory first quarter 2009 report, even though the fourth quarter of last year witnessed a softening in villa and apartment prices, they increased 80 and 55 percent respectively for 2008.

End-user demand is high in Abu Dhabi, but it was not the only reason prices escalated. Speculators saw the capital as the next best thing after Dubai and aimed to make the same returns on real estate investments.

Shammah says, “I know several people who got a bit greedy and instead of investing in a single property they went for whole floors and multiple units, while not necessarily having the means to digest such investments.” He added that prices in restricted areas have been more resilient to the current conditions as opposed to freehold areas. “Most price decreases that I have seen in freehold areas were within the 20 to 30 percent range,” he adds.

Hussain Ali Al Shamkhani, chief investment officer at Escan, agrees with Shammah, but he believes that because Abu Dhabi opened up its market recently, speculators have not had as much time to affect the market. This means end- user demand has been a more significant factor.

“There was not enough time — [the speculators] would have made one flip, two if they were lucky, but I believe that most of them did not have the chance to,” he says.Whether the prime driver of the market was speculators or end-users, one sure thing is that the former are out of the market right now and the latter are more conscious about purchases. The factors behind the decreasing demand are mainly the lack of financing, as well as uncertainty and lack of confidence in the real estate market and the economy in general. Consequently, prices started to decline, going back to their original values in some cases. The Landmark report states that since their peak in the third quarter of 2008, prices of villas have decreased 20 to 25 percent, while prices of apartments declined by 15 to 20 percent. The report adds that Abu Dhabi’s master developments like Al Raha Beach, Al Reef, Al Reem Island and Hydra Village were the most affected. Al Reem witnessed the biggest plunge declining from 20 to 25 percent between the third quarter of 2008 and March of this year. Listings for Al Raha Beach and Reem Island suffered a 10 to 15 percent decline in the same period.
Hesham Ikhwan, branch manager at the newly opened Landmark Properties in Abu Dhabi, believes the fundamentals of Abu Dhabi are still sound, since demand is still higher than supply. He attributes the fall in prices to two things: the financial crisis and the soaring prices featured at last year’s Cityscape.
“At Cityscape last year, developers launched their projects at very high prices, which were around 2,000- 2,500 AED ($540-$680) per square foot, so when investors bought [the properties] they could not sell them right afterwards as usual. So it took the market a while to realize that obviously prices were too high, therefore it leveled off for a while and then [prices] started to decrease.”
It is important to differentiate between off-plan units and those completed or under construction. Off-plan units have been the worst hit since people are currently looking for properties that will give them immediate returns, either by renting or occupying them so they don’t have to pay rent. Loshini Lawrence, operations manager at the Abu Dhabi branch of Better Homes, explains “banks are not offering mortgages on off-plan properties right now. They are more focusing on ready projects in Abu Dhabi.”

Since end-users currently dominate the market, they will certainly find finished properties more suitable. Paying rent for a couple of years until the delivery date of a new apartment is expensive, further completed projects are easier to finance and less vulnerable to volatility.

“If you have an off-plan unit and you are trying to sell, good luck!” says Al-Shamkhani, explaining that while completed projects are best positioned, those under construction have had their share of price declines as well. “People are hearing that developers are going to delay or top construction, citing the lack of funding. For example, if it is now the time to make your fourth or fifth payment, you have to rely on your own money,” he furthers.

Experts agree that the price correction in Abu Dhabi residential real estate is healthy in the long run and essential to bring prices back to more affordable levels.

“If prices can be in a range from 400AED ($108) per square foot to 1,000AED ($270) in residential properties, [it]

Distressed assets ripe for the picking

The ongoing global liquidity crisis has put the completion of many real estate developments in the UAE and the region into question, since developers, who relied heavily on banks or off-plan sales for construction, have found themselves with empty pockets and no equity to cover their costs. Consequently, these projects have decreased in value and some institutional investors and high-net- worth individuals who can still secure financing see these assets as good investment opportunities.

Duncan Pickering, real estate partner at DLA Piper in Abu Dhabi explains, “distressed assets generally come from borrowers who default or who are about to default. Banks would generally be working with the company to negotiate an exit or sell the property, and generally, for companies that are holding on to the distressed assets, time is running out for them so they need to find a resolution quickly.”

Property consultant Jones Lang LaSalle announced mid- March that $1.98 billion worth of equity is waiting to be invested in distressed assets in the GCC region, the most attractive destinations being Abu Dhabi, Qatar and Saudi Arabia. The Dubai real estate developer Cirrus Development revealed in the same month an international fund to buy distressed assets in Dubai, the US and the UK, targeting prime real estate and hospitality assets. Moreover, the US- based property firm Tate Capital also began a two-month study to identify investment opportunities in the UAE. By acquiring distressed assets, Tate Capital is aiming to create a long-term income stream for the company. Morgan Stanley also announced in January its plan to acquire distressed assets around the world, including in the Middle East, by establishing five global funds.
Pickering expects that “there will be funds from all around the world that are looking at the Middle East to see whether they can pickup distressed assets.” However, these assets are associated with some risks. “One of the key risks is failure to carry out adequate due diligence either because the deal has to be done very quickly or because the seller has limited information or inaccurate records. The seller may be under pressure from the lender to sell,” says Pickering. For example, in Abu Dhabi, there is no public register to check if a particular development was partly sold and contracts were exchanged, which would make it harder for the investors to make a decision. The lack of reliable information would make the right price of the asset very hard to determine. “The opportunity to buy distressed assets is really only as good as the investors’ ability to negotiate the right price,” adds Pickering.

“We always recommend a buyer get full disclosure from the selling management team as soon as possible. Unless information is available, the purchaser cannot decide if there is an investment opportunity that is worth exploring — it takes a lot of money and time to carry out such an investigation,” he further explicates.
Investors appear to still be in the exploration and investigation process, since there have been no big announcements about this type of transaction yet. However, it is expected that in the near future investments of this nature will take place.
 

While the speculative market may be dead, experts say property values will increase in the long run. Oscar Marquez, a real estate trainer at the Leader’s Edge Training says, “real estate will always double in value. I remember when I first got into real estate [and] started to sell houses for $150,000. Now the same house is selling for $600,000. That was 20 years ago. Twenty years from today the house worth $600,000 is going to be $1.2 million.”

Residential rents
As Abu Dhabi attracted resident expatriates, the demand for leased property grew and rental rates increased accordingly, especially for residential apartments. According to the Landmark report, average rental rates for residential villas and apartments in the fourth quarter of 2008 were 35 and 80 percent higher than in the same period of 2007. During the fourth quarter, one-bedroom apartments witnessed the biggest hike as they registered a 125 percent increase in rents, followed by two and three bedroom units at 95 and 100 percent, respectively.

High rents, coupled with low availability in Abu Dhabi, caused some people to commute to work in the capital while living in Dubai.

Lawrence said, “you may pay three times [the rent] in Abu Dhabi for the same accommodation that you would pay in Dubai. People are not ready to pay that much anymore, they are doing their homework and negotiating the price and the number of payments.”

Al Haj of MBI thinks that rents soared even more than the report stated. “It depends on the location, but in some place, rents increased 90 percent and even 100 percent. For example, now if I am renting a house and paying 20,000 AED ($5,400) if I move out, the new tenant would pay 80,000AED ($21,000). Some owners are willing to pay current tenants one year of rent in order to move so that they can bring a new tenant and make him pay more,” Al Haj explained. Hence, tenants who pay affordable rents consider themselves lucky and try to renew their contracts benefitting from the low, five percent rent cap in Abu Dhabi.

Rents are holding stronger than prices since people who are reluctant to buy still need a place to live. Unlike Dubai, people are not leaving the capital due to job losses or the closing of companies. The Landmark report states that apartments witnessed an increase of two to three percent in the last quarter and another one to two percent in the first two months of the year. Villa rental rates decreased three to five percent in the last quarter and recovered by two to three percent during January and February.

The fact that villa rental rates decreased was because more units are coming on stream, which increases availability and “tenants have more [options] for villas, like in Al Raha Garden and Al Khalifa city, but for apartments they are very hard to find, especially the two bedroom apartments,” said Ikhwan from Landmark.
Rents are not expected to slowdown, since demand is still strong and supply is expected to remain short in the next couple of years.

Matthew Green, associate director of CB Richard Ellis in Abu Dhabi, says that rents are expected to hold stronger than in Dubai since “in Abu Dhabi, we can say that on average there will be 8,000 to 10,000 [new units] in the next couple of years, while Dubai has been averaging 30,000 units per year.”

Office space
Soaring demand has also hit offices, since Abu Dhabi was becoming an attractive destination for new businesses, branches and relocations. Consequently, there is an even bigger supply gap than in the residential market and new companies have found it more appropriate to use commercial villas as offices. CB Richard Ellis’ fourth quarter Abu Dhabi report stated that even though rental rates started to soften in the fourth quarter of 2008, there was a 30 percent overall increase during the year. Lawrence from Better Homes, whose office is located in a commercial villa, explains, “when we chose the villa, it wasn’t the cheapest, but we had no choice. There was no tower space available.”

Many companies opening in Abu Dhabi face the same difficulties. Not only is finding office space a problem, but finding a place to park is a major issue as well. According to Al-Shamkhani from Escan,“if you go downtown in Abu Dhabi, good luck finding a parking space. Sometimes you have to drive around 15 minutes or up to an hour to find a spot, so villas are more convenient.”

Companies are currently cautious about expansion plans and are picking more affordable and smaller offices. According to Asteco’s fourth quarter Abu Dhabi real estate report, demand for large offices has decreased slightly, while demand for smaller offices, between 50 and 100 square meters, has increased. Experts predict the market will maintain high prices until new offices come online.

Future outlook
Compared to its neighbor Dubai, Abu Dhabi has not gone as far in terms of growth and development, but that should not be considered a disadvantage in these tumultuous times. What happens in Dubai happens in Abu Dhabi on a smaller, more delayed scale. This gives Abu Dhabi the opportunity to anticipate, either by improving its property laws, trying to secure financing or controlling the market supply. Simply said, as Dubai suffers, Abu Dhabi learns.

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Short of a sure bite to eat

by Riad Al-Khouri
written by Riad Al-Khouri

For some countries in the region drought, high population growth and social tension will be an explosive combination over the long term. Add to that serious short-term concerns about nutrition and other crises that arise regarding problems of unsustainable development. An example of this was the food price jump of 2007 to 2008, which sent an urgent message to states in the Arabian Peninsula: when nutrition once again becomes expensive — maybe in the next two to five years — economies must be better prepared.

Viewed in this context, water is a major issue that now seems to be taken more seriously. For example, Saudi Arabia, the region’s largest economy and also the biggest geographically, will phase out water-intensive cereal production by 2016 since non-renewable fossil water reserves are being depleted. Instead, Saudi agriculture will re-orient to crops such as fruits and vegetables using water-saving technologies, including greenhouses and drip irrigation. Such a shift will help to ease the tough demography-hydrology combination, as the combined population of Saudi Arabia and her five neighbors of the Gulf Co-operation Council (GCC) will soar to nearly 60 million by 2030.

All this poses a threat to food security, as major food import dependence — currently 60 percent of total demand — grows in the GCC states. Fortunately, they can afford to throw money at the crisis in the short term. The poor man of the Arabian Peninsula, Yemen, does not have that luxury. The country suffers from severe levels of food insecurity, including lack of income to access and buy food and inadequate national safety nets. Last year it even looked as though Yemen was losing further ground as the share of poor people in the total population may have increased by six percent due to the rise in food prices that began in late 2007 and peaked in mid-2008. Steps taken by the government to ameliorate the effects of high food prices last year included one-off distribution of wheat, flour and seeds.

In the end, these measures succeeded in staving off disaster until the eventual fall in prices eased the situation. At the same time, the crisis was an eye-opener that is prompting Yemen to look at sustainable long-run solutions to its nutritional balance. During 2009, targeting and overall efficiency and effectiveness of the food safety net is expected to improve, based on a similar model being applied in Jordan.

Yet, unlike the latter, Yemen is classified by the United Nations as a Least Developed Country, one of the few dozen poorest in the world. The UNDP ranks Yemen very low on the Human Development Index, which leaves the country vulnerable to fluctuations in oil prices.

The economy relies heavily on oil, which in recent years accounted for around 70 percent of government revenue and up to 90 percent of the value of exports. However, oil creates few jobs directly. Generating non-oil growth and addressing unemployment is therefore a key to reducing poverty. Meanwhile, oil continues to drive the economy as growth in agriculture and manufacturing remains modest. At the same time, fuel is subsidized by the state and is being sold domestically below international prices. An additional challenge may arise as projections indicate that the oil production will decline and barring discovery of major new reserves, Yemen could become a net oil importer by 2012.

Yemen’s gross national income per capita is less than a quarter of the average in the Middle East and North Africa (MENA) region and its GDP growth has steadily been falling. Inflation has been averaging 12 percent since 2002, rapidly increasing the cost of living. Poverty in rural areas, where about 72 percent of the population resides, remains high at 40 percent. The Global Hunger Index ranks Yemen 80 out of 88 countries analyzed, indicating an alarming stage of food insecurity. While other MENA countries have seen significant improvement according to this ranking, Yemen’s score has not changed between 1990 and 2008. Almost half of the population is below 15 years of age, implying increased pressure on economic development to provide jobs and basic services, so the drive for food security should also be supported by policies to lower demographic growth. Yemen has the highest population growth rates in the MENA region, with a current annual increase of 3.1 percent (about a third higher than the average for Least Developed Countries) and a projected increase of 2.3 percent annual average until 2050.

In conclusion, an insecure food situation in Yemen will increase discontent and could even aggravate political security. Sitting at the doorstep of the GCC countries, the latter cannot afford to see Yemen degenerate into another Afghanistan, sapped by poverty and insecurity, in nutrition or otherwise.

Riad al Khouri is senior fellow of the William Davidson Institute at the University of Michigan in Ann Arbor

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Levant

Syria – Freeing the market’s bonds

by Executive Staff
written by Executive Staff

On March 10, Syrian Finance Minister Mohamed Hussein rang the bell to launch trading at the long-awaited opening of the Damascus Securities Exchange (DSE). Despite its humble size, the DSE is yet another sign that Syria means business about the privatization and gradual liberalization of its state-controlled economy. Ever since President Bashar al-Assad came to power in 2000, the country has made significant progress in its aim to become a “social market economy,” reminiscent of China.

Initiated by presidential decree in 2006, the DSE is a public institution that, once it stands on its feet, is scheduled to be transformed into a private shareholding company. Six companies are currently registered on the bourse: Banque Bemo Saudi Franci, Bank of Syria and Overseas, United Group for Publishing, Advertising and Marketing, Arab Bank-Syria, Alahlia Company for Transport and Bank Audi Syria.

Four other companies have applied to be registered. The DSE expects some 15 companies with an estimated value of 28 billion Syrian pounds (SP) (or $600 million) to be listed by the end of the year, about half of which are active in the banking and insurance sector.

Run and regulated by the Syrian Commission on Financial Markets and Securities (SCFMS), the DSE consists of a “main” and a “development” market. For a company to be registered at the main stock exchange, it has to be more than one year old, have at least 100 shareholders and a minimum capital of $2 million. New or smaller firms are registered at the development market. Currently, two of the six listed companies are listed at the latter.

Slow start

Trading on the first day in the life of the DSE was largely symbolic, as only three transactions took place, in which 15 shares in Banque Bemo Saudi Franci worth some $350 changed hands. By March 19, trading had picked up some pace, as over 1,400 shares were traded with a value of nearly $11,000. Mainly due to the limited number of listings, the DSE is currently open just two days a week.
According to Bassel Hamwi, general manager of Bank Audi Syria and deputy chairman of the DSE, the Syrian bourse offers several advantages to the Syrian economy.

“First of all, it creates a much-needed platform for the some 8,000 shareholders of the six currently registered companies to sell their shares,” he explains. “Before, shareholders who wanted to sell their stocks had to find a buyer and come to the bank accompanied by a lawyer to make the deal, while today they can simply open an account at a brokerage firm.”

“In addition to the classic advantages stock markets offer registered firms, such as increased access to liquidity, the DSE will help transform Syria from a frontier market into an emerging market,” says Hamwi. “In the more distant future, we hope the DSE can provide the channel for the privatization of public companies.”

Five broker firms have been licensed and their number is expected to climb to 12 by the end of the year. Trading at the DSE is subject to strict restrictions. “The Damascus stock exchange will not be open to gambling or risk- taking,” SCFMS chairman Ratib Shalah told the SANA news agency. “Shares can only be traded by those who want to invest money, not for speculation.”

Shares are not allowed to rise or fall by more than two percent during a day of trading, and cannot be bought and resold on the same day. Shorting and leverage are not allowed. Foreign investors are required to maintain their holdings with a licensed custodian and are not allowed to re-sell shares within a period of six months. The latter mainly serves to avoid instability due to the influx of ‘hot money’.

“These are temporary measures,” Hamwi says. “We hope that they will evolve, as the market evolves. The margin of two percent, for example, may prove too tight in the future and may need to be broadened.”

The long delay

The DSE has only just begun to function, nearly three years since Presidential Decree No. 55 was issued in 2006. The reason for the delay lays at the heart of the Syria Accountability and Lebanese Sovereignty Restoration Act (SALSRA). Passed by the US Congress in 2003 with the aim to fight global terrorism, the SALSRA bans the export or re-export of American products to Syria, with the exception of food and medicine.

As a consequence, specialized products such as electronic trading systems have been difficult to obtain. The same has been true for items such as Boeing aircraft spare parts. With an eye on air passenger safety, however, Washington recently allowed a shipment of aircraft parts to enter Syria. As the DSE was not able to obtain American- made products, it started negotiations with Paris-based Euronext and OMX, a Swedish-Finnish financial services firm. Yet these efforts were not fruitful, as Euronext and OMX were bought by the New York Stock Exchange Group and Nasdaq in 2006 and 2008 respectively. “Especially the latter was a major setback as negotiations with OMX had been ongoing for almost a year,” says Hamwi. “Eventually, the DSE managed to acquire a state-of-the-art system used in eight markets worldwide in late 2008.”

Despite these setbacks, most experts agree that SALSRA has failed to directly damage the Syrian economy. Indirectly, however, the trade embargo caused many European firms to be rather reluctant to invest in Syria, as American officials would remind them of the possible negative consequences of doing so. The DSE is widely perceived as the next step on Syria’s path to develop and enhance the role of its private sector. Syria’s state reserves have witnessed a downturn in recent years, mainly as a consequence of the decline in oil production. A decade ago the country’s wells produced some 600,000 barrels per day (bpd), today they are good for less than 380,000 bpd. Consequently, the state has sought new means to boost the economy, especially in terms of boosting the role of the private sector.

Following the collapse of the Soviet Union, Syria’s road to a new economy started as early as 1991, when Investment Law Number 10 was adopted, which introduced tax holidays for foreign investors and provided for the repatriation of overseas profits. The process picked up pace with a series of measures introduced since the inauguration of current President Bashar al-Assad in 2000. A crucial step in transforming the Syrian economy from a centralized socialist system to a Chinese-inspired social market model was the modernization of the country’s financial sector with the legalization of private banking in 2001, a move that has been overwhelmingly successful. Although it took until 2004 for the first private bank to open its doors, today there are roughly one dozen operating, while a handful of others have obtained licenses and are set to start operations later this year.

Banking on success

Deposits in Syrian private banks increased from some $9.4 billion in 2005 to $14.3 billion in 2007, which represents some 35 percent of total deposits. Five years ago, most foreign tourists changed their foreign currencies on the black market to avoid the official exchange rate set by the state. Today the Syrian pound fluctuates, while ATM machines and credit cards have become common.
The Governor of Syria’s Central Bank Adib Mayaleh, announced at a March economic summit in Kuwait that the government is considering allowing foreign investors a controlling stake in financial companies. So far, foreign shareholders have been permitted to own more than 49 percent of certain Syrian industrial ventures, but the same does not hold true for financial services firms. The authorities hope that investments in private banks will help to expand the industrial, tourism and real estate sectors.

In addition, the Syrian government adopted a series of measures to attract foreign investments, as a means to stimulate social and economic development. According to the World Bank, foreign direct investment in Syria amounted to $885 million in 2007, an increase of nearly 50 percent compared to 2006. Most foreign investors hail from the Arab world, Turkey, Iran and China.

Syria’s success in attracting foreign capital and the increased role of the private sector is illustrated by the rapid growth of the country’s industrial cities. Following the completion of several feasibility studies in the late 1990s, construction started in 2001 of three industrial cities at Sheikh Najjar (4,412 hectares) near Aleppo, Hassia (2,500 hectares) near Homs, and Adra (7,000 hectares) near Damascus. The government acquired the land, installed the necessary infrastructure in terms of roads, water and electricity, before selling the land to both Syrian and foreign investors, who are exempted from a range of taxes and custom’s duties.

By the end of 2007, a total of 1,162 hectares had been sold for industrial use in Sheikh Najjar, 838 hectares in Hassia and 1,680 hectares in Adra. Some 162 companies had also started production in Sheikh Najjar. In fact, according to Khalil Mouases, director of industrial cities and zones at the Ministry of Local Administration and Environment, Sheikh Najjar met with such success that it is likely be completed by 2012, instead of 2020. The warm welcome has prompted the authorities to announce the establishment of eight more such industrial estates.

The right ingredients

The recipe for the cities’ success has not just been cheap land and facilities, but also Syria’s relatively cheap and well-educated workforce, low energy prices and the country’s strategic location between the EU, Turkey, Iran and the Arab world. Syria has also signed the Greater Arab Free Trade Agreement and free trade agreements with Turkey and Iran.

Although state-owned companies continue to play an important role in Syria’s economy, over the past decade the private sector has become the main contributor to the country’s GDP, which is perhaps best illustrated by the pharmaceutical industry. While in the early 1980s, there were two state-owned pharmaceutical plants that produced enough medicine to meet 15 percent of domestic demand; in 2008 there were 52 pharmaceutical firms that met 90 percent of domestic demand. With these developments in mind, it should come as no surprise that the Syrian authorities have earned praise from the International Monetary Fund, which concluded that the Syrian government has taken crucial, albeit slow, steps towards liberalization, which will enable Syria to deal with the consistent decline in oil reserves.

“We are quite bullish about the Syrian economy, which is diversified and has a lot of potential,” saysd Hamwi. “If properly regulated, we think the DSE will increasingly be able to mirror the state of the Syrian economy.”

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GCC

The dollar’s exposure

by Executive Staff
written by Executive Staff

“The dollar is our currency, but your problem,” quipped US Secretary of the Treasury, John Connolly, to his European counterparts in 1971. Today, nearly 40 years later, his words couldn’t ring truer. While the value of the US dollar weakened relative to the world’s other major currencies for most of the George W. Bush presidency, the slide became ever more precipitous in the first half of 2008. This helped spur inflation across the Middle East — where the value of many countries’ currencies are pegged to the greenback — as imports priced in euros, yens and anything other than dollars quickly became more expensive.

For states in the Gulf Cooperation Council (GCC), the equation was even more costly as the dipping dollar eroded the value of their trillions in accumulated dollar holdings. New revenues from oil receipts are also priced in dollars, and so even as the dollar price per barrel of oil reached record highs through the first half of 2008, the value of each dollar earned from oil was declining.

What was pushing the dollar down? The factors are numerous, complex and interrelated, but part of the answer is that America has been living well beyond its means and is thereby exposed to significant liabilities. Total US government debt surpassed $10 trillion in September 2008, helped along by the trillion dollar tax cuts early in Bush’s presidency and the hundreds of billions absorbed by military adventures in Iraq and Afghanistan. More generally, however, the American economy simply consumes more than it produces and has been doing so for a long time — in 2008 this imbalance amounted to $677 billion. The US has run an annual balance of payments deficit on current accounts of approximately six percent of GDP for most of the last decade, implying that for every $100 worth of goods and services produced, America consumes $106 worth. Where does the other six dollars come from? In essence, America has been borrowing money from the rest of the world.

If the Americans could have continued forever printing more dollars to send out into the world in exchange for the tangible products the rest of the world makes, they might not have had a problem. However, as total American debt lurched ever higher through the 2000s, moneylenders everywhere began to question America’s ability to pay this money back. These creeping doubts meant that US debt — effectively the dollars sent abroad — became less attractive to hold onto, thus contributing to the dollars declining value.

US dollar against major world currencies

Monthly average values

Welcome to the financial crisis

The grinding slow-down in the US economy through 2008 led the US Federal Reserve Bank to continually lower interest rates to try and encourage growth, with the January 2008 rate of 4.25 percent falling to 0.25 percent — effectively zero — by year’s end. Yet as the global financial crisis began to cascade and investors’ August of angst morphed into September’s sheer panic, capitalists grabbed their money and ran to where they always run when Armageddon seems nigh, the pocket of their champion, Uncle Sam.

“Despite the next to nothing yield offered by dollar denominated investments, a flight to safety into US dollars and government bonds has kept the US dollar from collapsing,” wrote Kathy Lien, director of currency research at FX360.com, in a December 2008 report. “The concern for safety was so high that investors were willing to take negative yields just to park their money with the US government.”

Thus, since August 2008 the dollar’s dive has U-turned — albeit, far from smoothly — riding demand for dollar-shelter and appreciating nearly 20 percent against the euro between July 2008 and February 2009. How can this be happening when there are so many good reasons to sell the dollar? The non-partisan Committee for a Responsible Budget estimated that the different bailouts and stimulus packages the US government has announced will total $2.6 trillion in new spending; Morgan Stanley predicts the 2009 US deficit at $1.5 trillion, or some 10 percent of GDP. While some of this new spending will be paid for through new borrowing, the rest of the money will be created, in essence, out of thin air.

“The Federal Reserve is basically printing money and using that money to flood the market with liquidity, eroding the value of the US dollar in the process,” noted Lien. “The central bank will not be worried about a weaker currency and will in fact welcome one because they know that a weaker currency is like an interest rate cut in many ways because it helps to support and stimulate the economy.”

Foreign exchange traders are a cynical lot. More than one has noticed the long-term benefits to America in driving the dollar down. Effectively, it allows the US to renege on a portion of its foreign debt, as US debt is denominated in dollars. If, for example, an American borrowed $100 worth of euros and used them to purchase goods in July 2007, they would have been able to buy 73 euros worth of stuff. If they repaid the $100 a year later in July 2008, after the US dollar had declined in value, it would only have bought 64 euros worth of stuff, meaning whoever lent America that money is getting short changed.     

As well, American workers need jobs and American politicians lose theirs when unemployment remains high. A high value for the dollar means that foreign imports into the US are continually displacing American producers, while a low dollar produces a surge in exports and creates jobs for middle class Americans, thereby preserving political careers.

“The G.C.C. states are locked into the dollar and the fate of the dollar is their fate as well”

The Chinese checker

While many countries worry about dollar devaluation, few have more to lose than China, by far America’s largest lender with a staggering $1.95 trillion in its foreign exchange reserves. The US has been able to run such a large balance of trade deficit for so long in large part because China has, essentially, been recycling its trade surplus — which was $262 billion in 2008 — back into buying US treasury bonds, supporting the dollar’s value, keeping US interest rates low and lending America back the money to buy more Chinese goods. Daniel Sternoff, director of emerging markets and energy research at Medley Global Advisors (MGA), explains that China’s trade surplus will shrink if China’s exports fall as the world economy weakens, or if China’s own $580 billion economic stimulus package to bolster domestic demand successfully props up its economy, keeping imports “at a relatively decent level.” These possible scenarios make it uncertain whether China will continue to have sufficient trade surpluses in 2009 to recycle back into the US treasury market to prop up the dollar.

“And that’s just a question of what’s the overall supply of dollars they have to be purchasing more,” says Sternoff. “Whether they will begin to sell their reserves outright is more of a political question, and we have received some indications that they are going to be spending at least $300 billion of their foreign exchange reserves.” 

A nightmare scenario for the US and the global economy at large would be if China began dumping its US reserves. This would flood currency markets with dollars, causing their value to drop, in turn evaporating the value of US dollar savings held by countries, companies and people the world over and writing off the US as the globe’s largest export market. Beijing has “serious worries over the potential for much greater dollar weakness and the erosion of the value of their holdings,” and has been looking for ways to try and diversify its reserve holdings, Sternoff points out. Yet he adds that the Chinese also “have a very strong vested interest in the stability of the global financial system and in the stability of the US economy… They’re not about to start currency wars with the US by shooting themselves in the foot by selling their bond holdings.” A second nightmare scenario is that the vast overhang of dollars in portfolios around the world has grown to a magnitude that may be beyond the control of any single group of players — and that when everyone is worrying about currency depreciation, it may only take a small event to spark a stampede for the exits.

GCC’s dollar marriage

The fabric of Gulf economies has been intertwined with the dollar since the 1970s arrangement with the Organization of Petroleum Exporting Countries (OPEC) to have oil sales priced exclusively in dollars. With five out of the six GCC currencies currently pegged to the dollar, Kevin Muehring, a financial journalist specializing in macro economics and monetary policy, remarks that, “for better or for worse, the GCC states are locked into the dollar and the fate of the dollar is their fate as well.” The Gulf’s banking systems are structured around the dollar, the banks, the government and the private sector all hold huge proportions of their assets in dollars and, most importantly, “oil is priced in dollars and therefore most of their revenues, before they are converted into their domestic currencies through government spending, are in dollars,” says Muehring.

However, one need only look to Iran to see that a dollar divorce is, although long and unpleasant, possible. In 2003, the world’s fourth largest oil producer began large-scale movement of its foreign-held assets out of dollars and as American financial sanctions continued to press on the exposed parts of the Persian purse, Tehran announced in April 2008 that it was no longer taking dollars in exchange for its oil.

“We agreed with all the buyers of Iran’s crude to trade oil in currencies other than the dollar,” said Hojjatollah Ghanimifard, international affairs director of the National Iranian Oil Company, to the Fars News Agency. “In Europe, Iran’s crude is being sold in euro, in Asia in euro and yen.”

Kuwait also caused ripples through the Gulf when it became the first GCC country to break ranks and de-peg from the dollar in May 2007, instead locking its dinar into an exchange rate mechanism based on a ‘currency basket’, including the dollar, the euro, the pound and the yen.

“The massive decline in the dollar’s exchange rate against main currencies… has contributed to the increase in local inflation rates and this step is part of the central bank’s efforts to curb inflationary pressure,” said Sheikh Salem Abdul-Aziz al-Sabah at the time.

Inflation due to dollar devaluation had other GCC states openly speculating through the first half of 2008 that they might also de-peg their currencies, “but now, this discussion is not happening,” remarks Sven Behrendt, associate scholar at the Carnegie Middle East Center in Beirut. In recent years Gulf states have funnelled much of their surplus oil revenues into sovereign wealth funds (SWFs) to reinvest, with the Council on Foreign Relations estimating the Gulf SWFs’ 2007 external portfolio at $1.3 trillion. However, the global financial storm has pummeled Gulf SWF holdings, with the Abu Dhabi Investment Authority alone estimated to have lost some $140 billion through 2008.

“They shifted a lot into equity, and with that came a higher risk exposure to their portfolios,” says Behrendt. “Now they’ve burned — quite substantially — their fingers in some of their investments.”

Given the lack of transparency with which the SWFs operate, accurate fiscal assessments are difficult, but what is clear, says Behrendt, is that they have been burned with heavy losses and are now among those sheltering their bundles of cash in US treasury bonds, in turn helping to keep the dollar high.

Should a viable alternative to the dollar reveal itself to investors, support for the dollar will collapse

Forever a dollar world?

Everybody uses US dollars because everybody else accepts them, but this was not always the case. Historically, the pound was the world’s general medium of exchange and the invoice currency of much of international trade. In the 1960s, however, major weaknesses in Britain’s economy forced London to de-value the domestic currency and the sterling lost its international shine, making way for the assent of global dollar hegemony. Today, with the US economy plummeting and the greenback baring an ever-growing debt, is the dollar’s reign near its end?

Muehring, the financial journalist, acknowledges the dollar will experience massive downward pressure in 2009, but “the offsetting pressures will be the lack of currency alternatives as the underlying economies of both the euro and the yen are in worse shape than the US.”

This was highlighted last month when German Finance Minister Peer Steinbrueck stated that a number of the 16 euro zone countries were “getting into trouble” and may need help — read ‘financial bailout’ — from the euro’s two biggest economies, Germany and France. Bloomberg reported European countries have committed more than $1.5 trillion to “save their banking systems from collapse,” and a number of countries are now staggering under the debt-load. The cost of insuring the debt of Ireland, Greece and Spain against default is at an all-time high. As well, Austria’s exposure to banks in eastern Europe has Vienna pleading with the EU for help, as the country “is on the hook for so much money that essentially if they don’t get paid by eastern Europe they’ll go bust,” said Marc Faber, managing director of Marc Faber Ltd., to Bloomberg. 

And so as the global financial crisis pushes counties and economies to the cliff’s edge, investors continue to huddle under the dollar for lack of anywhere else to hide. But the foundations of the dollar’s dominance are cracking and should a viable alternative reveal itself to lure investors away, support for the dollar will collapse.

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Levant

Politics over pragmatism

by Peter Grimsditch
written by Peter Grimsditch

If the International Monetary Fund (IMF) were putting up candidates in this month’s municipal elections in Turkey, the best advice would be for them to withdraw before being trounced. On one side, the ruling Justice and Development Party, or AKP, is spending lavishly on certain local authorities while holding off on raising tax revenues. Those killjoys from the IMF have been campaigning for months for Prime Minister Recep Tayyip Erdogan to do exactly the opposite. If Turkey wants a new standby loan to see it through the tough times of 2009, say the men with built-in calculators, it needs to be less profligate.

A “deal” has been on the cards allegedly since last November and even in February Erdogan claimed the talks were progressing well despite a “last minute hitch” when the IMF was said to have injected some “unacceptable conditions.” A team from the Fund spent most of January in Turkey seeking to hammer out a deal before suspending the talks. Smart money (and certainly not the IMF’s) is going on a forecast that no agreement will be reached before the elections on March 29. A plummeting currency and rising unemployment are making life difficult for the Turks as it is, without the possibility of cutting public spending and improving tax collection.

The indication of economic performance afforded by early 2009 numbers make for grim reading. Officially the government’s policy is still to aim for four percent growth this year, a number it has been adhering to despite advice from the IMF and others that it was not only unattainable, but ruinous. In January, the budget deficit rose by 466 percent year-on-year to $1.65 billion, overall revenues limped up a mere 0.3 percent, tax revenues fell by 2.4 percent and spending shot up 15.3 percent. In face of the inevitable, some economists are now predicting that a two percent drop in GDP this year is far more likely than growth of any size.

Greasing democracy’s palm

While the IMF is talking of belt-tightening and even said to be suggesting a tax on pensions to help fund the social security system, AKP local authorities are distributing free food, washing up liquid and, reportedly, fridges and cookers, a tactic reminiscent of the Lebanese parliamentary elections of 2000.

In Ankara, the AKP-controlled metropolitan municipality awarded $64 million in local tenders in the first six weeks of 2009. The equivalent 2008 figure for the whole of January and February was $12 million. One tender this year for $26.6 million to buy washing up liquid, soap, detergent, beans, rice, jam, vegetable oil, pasta and cheese was won by Orpas Gida, with a note on the tender saying the products were to be delivered to locations specified by the head of the municipality’s social services department. In 2008 the exercise cost $1.4 million. The voters also know the temporary rules of the election game, with reports from throughout the country of the owners of illegally constructed buildings (of which there are many) using the campaign period to add another floor, reasoning that no local authority of sense would raise objections just ahead of polling day.

Meanwhile, more conventional ways of trying to stimulate the economy, which at any other time would have appeared sound suggestions, look increasingly hollow these days. New measures announced in February allow investors up to a 75 percent reduction in corporate tax for five years if they create at least 100 jobs and move textile plants to the eastern or south-eastern parts of the country before 2010. To help the car industry, the government is urging drivers to scrap their old vehicles to buy new ones. The central bank cut its benchmark interest rate by 1.5 percent to try to encourage business to borrow and grow. In practice, one of few expansion areas is the number of unemployed, with a rise of more than two percentage points in the last quarter of 2008 to 12.3 percent.

All of this depressing statistical news makes the more lurid politics of the mayoral race in Kecioren almost a welcome diversion. The AKP incumbent Turgut Altmok has pulled out of the election after photos were handed to the party leadership of him and a woman with whom it was claimed he was having an affair. The real problem appears to have been less his alleged dalliance than the fact that he refused to accept influence from the mayor of the neighboring Ankara Municipality about who should be on the AKP ticket.

March is going to be an interesting month.

Peter Grimsditch is Executive’s Turkey correspondent

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