GCC

Opportunity in Dubai’s crisis

by Executive Staff
written by Executive Staff

Dubai has been the Middle East’s business hub and an attractive destination for international investors since its doors were opened to foreign entrepreneurs. Thanks to its free-market economy and developed infrastructure, the emirate witnessed a continuous inflow of investors who chose to benefit from its appealing operating conditions and promising growth.

Although the high operating costs — including office rents and wages — did not keep new businesses from opening in Dubai, they were a concern for entrepreneurs who struggled in some cases to find a suitable office with affordable rent, or talented employees expecting reasonable salaries. With the international financial crisis hitting the region, these costs have now come down, making it less expensive for new entrepreneurs to settle in the emirate.

Office space

When starting a business in Dubai, finding a suitable place for office space is essential since it greatly affects the company’s customer base and operations. In the last few years, one of the main problems that new companies faced was the shortage of office space, since demand was on a steady increase while supply failed to keep pace.

“Definitely rents were very high before [the crisis began]. They were a huge component in the cost of a business, and one of the major factors when determining where to have your office space,” explains Camilla D’Abdo, general manager of D’pr/D’event.

The freehold areas witnessed a greater increase in rents mainly due to their attractiveness and strategic locations. Rose Marie Kilzi, leasing director for Great Properties, says “the rates are usually a bit more expensive [in the free zone] because the business owner is not required to have a local sponsor in order to operate the business. While this is a great incentive, it is a bit more expensive for business owners, especially when market prices — whether in the free zone or outside — are so expensive.” Kilzi also notes that in the last couple of years, rents doubled, while some locations “even saw hikes of about three times the original price.”

With the financial crisis in full swing, companies have begun downsizing or even closing down, while at the same time the supply of new offices continues to increase. These two effects have forced office rents to drop, making it less expensive for new businesses to settle in Dubai. Landmark Advisory, a real estate consultancy, announced that prices of commercial real estate in Dubai have fallen by almost 30 percent already and they are expected to reconcile at 35 to 40 percent below their peak during the third quarter of 2008. Additionally, the company reported that commercial rents are expected to drop by 30 to 35 percent.

The ball is currently in the tenant’s court, hence businesses are capable of finding offices in Dubai’s prime locations with affordable rents. Hala Abou Nader Kassis, owner of Agate Engineering Consultants, says “the landlords or the sales representatives who still have our application are calling us to offer the chance to rent a space that we applied for and could not rent because of the high rate. Currently we expect to move from our location to a better one, with wider space and a better price too.”

Kilzi echoes Kassis, explaining that, “we were almost never able to find office space available on Seikh Zayed Road. Only this week, we have received requests from owners to lease out about 10 [different offices] there.”

Wages

Before companies started to lay-off their staff and freeze their hiring strategies, high wages in Dubai were making it problematic for new businesses with limited capital to open. One of the reasons for the wage hike was the expensive accommodation for which employers had to compensate. Furthermore, Dr. Uwe Forgber, director of Conject Dubai, a leading provider of management software for the real estate and construction industry, says “Dubai is a busy [human resources] market with people who are ready to change jobs just for some more percent of salary. This makes choosing the right people difficult as you never know if they are money driven or really interested in what the company is doing.”

It was also easier for large companies who started their businesses or opened their branch more than five years ago, since prices of residential properties were still affordable, which induced them to buy property to accommodate employees at reasonable prices. Davinder Reo, co-founder of Duplays, a full-service sports portal, opened his business in March 2008. “We came at a time where housing was so expensive, it was unaffordable for us to buy a three bedroom apartment to accommodate three people.”

Similarly to rents, wages are also coming down since people who are in need of a job are settling for less in fear of being rejected or remaining unemployed. Employers say wages have decreased up to 25 percent, making it easier for new businesses to attract talented employees. Eric Raes, general manager of Makateb holding, notes that “it was always hard to find talented [employees] …nowadays, new businesses and established ones will find the process of hiring people easier as top talents are now willing to negotiate and settle for a lower salary range. However, these lower wages should be accompanied with a reasonable package that allows the candidate non-monetary benefits like training programs and personality/skills development sessions.”

Bureaucracy

New entrepreneurs also have to decide whether to settle in one of the free zones or outside. One of the main differences lies in the sponsorship system, which is applicable to companies setting-up outside the designated free zones. The sponsor must be a UAE national and be at least 51 percent owner of the company. Moreover, the sponsor will require a fee and/or a percentage of the profit. Additionally, outside the free zone area, an office space and a rental contract should also be arranged prior to applying for a license.

Subsequently, a license should be applied for at the Dubai Economic Department (DED) — unless indicated otherwise in exceptional cases — for which different rules are set for different types of businesses. Three types of licenses exist: commercial licenses, professional licenses and industrial licenses.

Different investors had different experiences in setting up their businesses. While some considered it easy, others struggled.

“Getting a license is a real challenge, it took us about three months,” says Reo. He used the help of the local sponsor who guided them through the procedure. Forgber says “setting up a company was more difficult than advertised by the Tecom Free Zone. But all-in-all the people were and are really helpful and friendly. We finally managed to found the company after overcoming some obstacles.”

Others found the process easy and straightforward. D’Abdo says “the time for getting a license can range, but it is not going to take a couple of months. Getting a license… has never been a difficult task and we have not faced any obstacles. It is very straightforward.”

It is much harder for investors who are managing their paperwork themselves without guidance or past experience. This explains the popularity of business advisors who help with the process. DED is currently trying to facilitate the licensing procedure by making most of its services available online, meaning investors can perform most of the process at home. “Wherever possible, we are also working with other government departments that enable investors to set up businesses with more ease. If all the paperwork is in place, it is only a matter of hours before any investor can get a business license and roll out the enterprise,” asserts Mohammed Shael, chief business registration and licensing officer at the DED.

More importantly, in late 2007 DED launched nine e-services on its website, “which are specifically created to boost efficiency of operation and enhance productivity,” claims Shael. These e-services are to help potential entrepreneurs find information about starting up new businesses in Dubai. The service is available in both Arabic and English.

New businesses

Despite the challenging conditions the global economy is currently facing, it seems new entrepreneurs have not shied away from Dubai and still consider it an attractive investment destination. DED announced that 3,503 licenses were issued in the fourth quarter of 2008, up by 3.3 percent compared to the same period in 2007. Furthermore, 429 new licenses were given out during the first two weeks of 2009, in addition to 50 Intilaq licenses to UAE nationals enabling them to set up home-based businesses. Eighty percent of the new licenses were trade-focused commercial licenses, while professional licenses made up just under 20 percent, leaving the rest for tourism and industry.

Anil Mampilly, business development manager at EMN Chartered, attributes the increase of licenses to the fact that many companies are relocating to Dubai, finding it less expensive than other countries. “We have branches in different countries and we are currently receiving calls in our UK and Russia offices from people saying they decided to relocate their business to the UAE, mainly because it is less expensive and also because of the tax incentives. [They are coming] not only to Dubai but also to Sharjah and Ras Al Khaimah,” explains Mampilly.

Looking forward

Although office rents and wages are not the only factors entrepreneurs consider before opening a business, they are definitely among the more important. “Being able to hire good staff for lower salaries and finding a suitable office space at lower prices make this period a good time for investment,” states Raes.

Although the international economic conditions might not be very encouraging for investment, Dubai could now represent an attractive opportunity for those who are willing to invest for the long run.

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GCC

The empty lanes of realty

by Executive Staff
written by Executive Staff

Since July 2008, stock prices of real estate companies have plunged continuously. This is especially true in the UAE where investors fled the stock market due to bad expectations, the need for liquidity to cover losses in foreign markets, or because they were simply following the crowd. Yazan Abdeen, portfolio manager equities at ING Investment Management thinks “markets are smart in their nature. They have the ability to discount future expectations and the fears of investors.” In this case, investors began to expect the burst of a real estate bubble that would result in a plunge in property prices and lower valuations for real estate companies. “Regardless of the size of the company, I think that the market was taking into consideration some trends of action will take place that will yield in the deleveraging that has happened to these companies,” says Abdeen.

At first, investors started to sell their real estate stocks irrespective of the company’s fundamentals, relying solely on the sector’s outlook and the overall macroeconomic situation. However, since concerns started to emerge about the financial status of these companies due to tighter liquidity and expectations of weaker earnings results, doubts about their fundamentals have grown. “Progressively, it would appear that people began to question the fundamentals and the overall features of some of the [real estate] companies in tighter liquidity conditions,” explains Sana Kapadia, vice president of equity research at EFG-Hermes. “What started as a more technical sell off [seems] to have become a questioning of long-term sustainability,” she adds.

Emaar’s stock price

Emaar properties’ stocks for last half year

Source: Zawya Dow Jones

Emaar properties, the largest property developer in the region hit its lowest share value of $0.48 on February 3 and as Executive went to print, stood at $0.75 after the Dubai government launched a $20 billion sovereign bond program to ease liquidity conditions. At the same time, other real estate companies in Dubai, like Union Properties and Deyaar, stood at $0.23 and $0.15, respectively. Even though these companies have witnessed a small increase in their stock prices, likely due to the $20 billion bond program, it is still too soon to tell if this indicates a trend toward market recovery

Since the beginning of the crisis, Emaar stocks have been the most affected in the sector as they have lost more than 80 percent of their value in 2008 and around 37 percent in the last three months. Thomas Schellen, publishing editor at Zawya Dow Jones, explains that even though Emaar’s stock price has suffered the greatest loss, that does not necessarily indicate that it has worse market fundamentals than other companies in the UAE or the region. In Schellen’s view, Dubai was the worst hit by the crisis because the relative importance of its the real estate sector in the economy is higher than in other GCC countries. Consequently, Emaar, being the biggest company on Dubai’s financial market and with a high trading activity, was affected the most. Kapadia also believes that the impact on Dubai’s stock market is more significant since “a distinction continues to be made between Dubai and Abu Dhabi, with more risk being perceived in Dubai companies in the property market… the property market crash [is] expected to be much worse in Dubai than Abu Dhabi.”

Emaar’s financial situation

On February 12, Emaar released the long awaited 2008 fourth quarter report announcing a 54 percent decrease in net profit, mainly blamed on the $480 million write-down in its US subsidiary John Laing Homes, which weighed down the company’s net profit. Emaar recorded a net operating profit of $1.519 billion in 2008, 15 percent lower than its net profit of $1.79 billion in 2007. It also announced that its revenue dropped by 10 percent, from $4.865 billion in 2007 to $4.360 billion in 2008. A week after the report was released, Emaar announced that it will not be paying a dividend in 2008.

Additionally, it seems that liquidity problems at Emaar are starting to emerge since the company revealed in January its plan to secure financing by raising up to $4 billion through Eurobonds and Islamic sukuk. It has announced the establishment of a $2 billion Euro Medium Term Note (EMTN) program and a simultaneous sharia-compliant $2 billion sukuk program, already listed on the London Stock Exchange. These programs are issued “as a part of the company’s global growth strategy,” said Emaar in a statement.

U.A.E. Property prices have fallen 40 percent and are expected to drop 20 percent more in 2009

Emaar’s possible downgrading

In mid-December 2008, Standard and Poor’s (S&P) rating service revised its outlook for the company from stable to negative, while keeping its ‘A-’ long-term corporate credit ratings. “A prolonged downturn could negatively impact our view of Emaar’s business risk, and it could also lead to deterioration of Emaar’s currently healthy financial position,” said S&P’s credit analyst Alf Stenqivist in a recent press release. Even though Emaar’s rating is still high, the fact that S&P’s outlook was downgraded is not a positive sign for the company. Moreover, Moody’s Investor Service said at the beginning of February that it is reviewing six leading Dubai companies, including Emaar, for rating downgrades due to Dubai’s macroeconomic outlook. Moody’s anticipates that the downgrade would be lowered by not more than two notches, still leaving these companies with investment grade ratings. Schellen explains, “the outlook forecast might influence negotiations between the debt issuer and the bond buyers. The bond buyers might demand a higher yield because the outlook is negative, but unless the actual rating changes, it is unlikely that there is going to be any change in the direct interest situation.”

Abdeen explains that the share prices of a company do not affect its operations from a financial perspective. “The movement of the share price is neither loss nor gain for the company. The price does not affect its performance,” but there is very much a link between the company’s performance and its share price. Therefore, any bad news for Emaar or the market in general might affect the company’s share performance.

Property prices

The fact that property prices are still on a downward trend — especially in Dubai — and that projects are being shelved, is not improving the confidence of investors who would rather stay out until the market starts to show some signs of recovery. Analysts at the UAE investment bank Shuaa Capital said in mid-January that property prices have fallen 40 percent so far and are expected to lose an additional 20 percent by the end of 2009. Collier International’s analysts were more optimistic since their fourth quarter House Price Index (HPI) revealed a drop of only eight percent in Dubai between October and December of last year. “If you come to the market here and see what is happening, [Collier’s numbers] are underestimated. I know that some major places in Dubai, like the Burj Dubai area, have gone back to the price of the third quarter of 2007. It seems they have dropped around 45 percent,” says Abdeen.

Forging into the future

Abdeen believes that any company should now have four key factors in mind to withstand the difficulties in 2009. These four elements are “visibility, profitability, proof of cash flow generation and lack of high leverage — you need these four pillars to stand, and if you have them, you will be immune,” he adds.

Kapadia believes “this is the time for companies to have strong corporate governance and corporate communication.” Everyone knows these are difficult times and companies are struggling to deal with changing market dynamics. Therefore, “if a company communicates and discusses how it is dealing with the current market challenges, it would help people believe that management is focused on dealing with the new dynamics,” she explains.

 With the current chaos in the UAE real estate market, it seems that Emaar and others have a lot to do to revive investor’s confidence in their company, as well as the market in general. People are starting to suspect that Emaar is currently facing much more trouble than expected and they would rather stay out of the stock, even if it is priced at half a dollar. “I think there is high risk-averseness and a general desire not to spend on any kind of investment right now. Even if the stock may look cheap on P/E [price to earning ratio] basis, the earning is in question, given limited visibility regarding how the current cycle will play out,” explains Kapadia. “It has become challenging for companies to maintain the sustainability of their earnings.”

It certainly seems people are not expecting any improvements in the short run, however, with the fast changing market conditions and the complexity of the market mechanism, experts agree that the stock markets are very volatile and only a wait-and-see strategy should be adopted at this time. “Right now it would be pretty stupid for an analyst to claim that he or she knows what is going to happen in 2009 and what the scenario is most likely to look like,” concludes Schellen.

“Visibility, profitability, proof of cash flow generation and lack of high leverage — you need these four pillars to stand”

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Finance

Merrill Lynch – Gary Dugan (Q&A)

by Executive Staff
written by Executive Staff

Currently the managing director and chief investment officer of Merrill Lynch Global Wealth Management in Europe, the Middle East and Africa (EMEA), Gary Dugan has been in the financial business for more than 25 years — previous positions include managing director and global markets strategist at JPMorgan Institutional Investment Management and the Private Bank, and managing director and head of research and investment strategy at Barclays Wealth. Executive had the pleasure of a candid, one-on-one interview with Dugan after his ‘Year Ahead 2009’ presentation in Beirut, to discuss the effects of the global financial crisis on the region’s markets.

E How has the global financial crisis affected your operations in the Middle East? How have your clients been affected?
We found that clients have moved from being quite aggressive risk takers — so they were prepared to buy in emerging markets and local equities — and now they’re much more risk averse. If you look at the kind of marginal investment they are now making, it’s more in cash and gold — very, very safe investments. So I think their whole appetite for risk has changed and dropped quite dramatically. I would say that both the revenues and the scale of the assets that are available there for our business has dropped quite dramatically. But I think people in the past might have wanted to do it themselves, because it just seemed so easy — you went and bought a building one week and the next week you went and made 15 percent. They now realize that it’s not that easy and they need more advice. We’ve never seen so many people come into our presentations, we’ve never had so many phone calls, as people want to talk through what’s going on — they need advice, greater advice then we’ve seen for some time.

E Has the Bank of America acquisition of Merrill Lynch affected your operations?
I can’t comment, sorry.

E Where do you see the greatest opportunities for growth in the MENA region?
I suppose by country, in terms of the robustness of the business, it’s countries like Saudi Arabia and Kuwait in particular. Purely because the economies there have got even greater support from their governments, they’re holding on to their GDP, the local economies are more insulated from the outside world and if they do have internal problems there is sufficient government resources in order to stimulate the economy. I suppose the one disappoint we’re seeing at the moment — but it was coming — is Dubai, because you see this heavy reliance on cash flows from the central bank and from Abu Dhabi, which have a question mark over them. Also, because people have been so heavily leveraged into property, once property collapses they really have no wealth or free cash flow left. So the opportunities are going to be difficult in the future, but there are still some stronger markets that we’re seeing elsewhere in our franchise.

E So how do you think markets like Dubai can recover? With the economy of Dubai so dependent on its property sector, what are the key components to help them recover in the future?
Well, you hope that people have learned a lesson — that the kind of one single asset that they were playing, they realize that they need diversification and a more international perspective in the way in which they invest. So we’re hoping that when they come to us they’ll be thinking, “If I’m going to stay in property, maybe I’ll look at London, New York, or other places. Maybe I’ll think about buying bonds to settle offside my very high risk asset in property.” So we’re getting a greater diversification of assets, we’re talking to our clients about more asset classes and more vehicles than we’ve ever done before. We’ve already had a massive pick-up in interest in commodities just from this visit as people see that as the opportunity — not to make huge amounts of money, but to provide some diversification against the risk they still have in their illiquid investments.

E What do you foresee as the most difficult challenges in the next 12 to 18 months?
I think in the immediate term the biggest disappointment will be a sense that 2010 is not going to be that much better. The growth in that year will be around the world only about one to 1.5 percent, whereas people had hoped we’re going to go back to the four and five percent numbers we’d had before. The second thing is — and this is a dramatic shift from where we’ve been for the last 20 to 30 years — so much less inflation around the world, even here in Lebanon you may be talking about inflation rates that get down close to zero — in the developed world, numbers that are negative, and again, whilst Japan has been the one country that has suffered that and struggled with it, we could see the whole world struggling with it. So it means a different environment for the way people live their lives — you have to go and ask for a discount everywhere, you’re going to have businesses that are unfortunately going to have to lay-off more staff to take down their cost base — so it is a very big change that needs to be underway in 2009.

E What strategy will Merrill Lynch be using in 2009 to increase risk and investment appetite amongst their clients?
I think there’s a wholesale change inside the banking industry. Clearly mergers mean companies need to get to know each other again and change is inevitable. I think what we’re going to have to work very hard to do is: one, you’ve got to start to re-invent the investment proposition for clients, because people will be less certain about the future, they’ll be more nervous about the investments they make. So we’re going to have to focus more on, what I call, the safer, traditional investments of bonds, be more prudent and away from investments that were made in the past in things like structured products and derivative instruments. The second thing is — and this will come in two ways in the sense that in the past it was fairly easy to sell something — in the future you’re going to need to do a great deal more work with the clients providing very strong guidance. That to me is much healthier as the clients will be more aware of the risks they take on in certain investments and they are more involved that way.

E Do you think it will be easier now to identify toxic assets or risky investments since the fallout of the global markets?
My secret hope is that… regulation saves the clients themselves. I’ll be honest with you, in my whole career there [were] many times where you advise clients not to do things but unfortunately people get so excited with the tops of markets — like the Dubai property marketing doubling. As we saw back in 2000, people thought technology stocks were going to give 30 percent returns every year for the next 100 years and it didn’t matter what you said to clients, you couldn’t stop them from doing it. I say we’ve got our own role to play in saving humans from their own faults — call it greed or whatever you want — but we’ve got to try and stop these bubbles from forming in the future. It can’t just be done by investment banks, it’s got to be done by heavy regulation.

E So would you say that global investors are in need of a reality check?
A desperate reality check! But as I said, I think there should have been a reality check after the huge losses in the tech bust. Yet, just five years later people were making even bigger mistakes with more money. So I just sense that we’ll get more bubbles in the future and we’ll go through some of the cycles again. I just hope that the next cycle doesn’t take the financial system down as it has done at this stage — this is a very dramatic deterioration and it will take many years to repair.

E Do you think a major mistake made by investors in the past is that they were only thinking on a short-term, profit basis?
I think it was simpler than that. I think what we had over the last 15 years — because of central bank policy and principal in the US — was that any time the markets got into difficulties, they were bailed out. If you were patient enough to wait one or two years, whatever you bought would have gone up to the price you paid and beyond it again. It wasn’t quite the case in the technology sector, but that was the insurance policy you had and then they realized this time around there was no insurance policy. The insurance policy would have had to have been so big that it would have been bigger than this planet, quite honestly. So I think that is the wake-up call, that the huge speculative booms we had are the past and that the insurance policy is no longer there. People require higher return from things but they’re also going to have to be far more patient. The other important point is that in the past, the saving that went on was very, very modest. Around the world, in the future the saving has got to be greater because the available returns are going to be smaller. That’s good news for our industry — we should see more cash inflows — but clients have got to reset what they hoped for.

 

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Levant

Lebanon – Storm brews in cedar seas

by Executive Staff
written by Executive Staff

Knowing that Dubai’s Palm islands have dominated real estate headlines for the last couple of years, developer Noor International Holding has directed its attention to Lebanon with its newly announced 3.3 million square meter “Cedar Island” development off the Lebanese coast. The estimated $7.4 billion development will host residential villas and apartments, commercial space, as well as recreational and touristic elements like gardens, a golf course, a sailing club and a water park. Moreover, the Cedar will be divided into commercial, public and private zones, each having specific components.

Why an island?
Noor International aims to create a comprehensive development, encompassing all elements essential to a community. Dr. Mohammed Saleh, chairman and owner of Noor International Holdings explains, “the problem is that we have not been able to find any piece of land on shore that would enable us to develop such a project.” He says if a piece of land with only 60 percent of the proposed island’s area had been found, they would have created the cedar shaped development on a mountainside or seashore, which would have been much easier. “Our project includes villas, chalets, gardens, a school… and that cannot be done on a 10,000 to 20,000 square meter piece of land on the shore,” he elaborates.
Additionally, the developer’s idea is to attract Lebanese expatriates and immigrants who have long been waiting for such a project in order to come back to Lebanon. “Lebanese expatriates and immigrants cannot be attracted to Lebanon by a small scale project including a couple of villas. A mega-project is needed to induce them to come back to their country and invest in it,” says Saleh. Noor International claims it is already receiving emails from potential buyers the world over interested in the project.
Furthermore, the island aims to create 50,000 jobs during the construction phase and even more jobs upon completion, since thousands of people will be working in the project’s restaurants and facilities.

The approval process
The Cedar Island is in its preliminary stages, since it has not been approved yet by the Lebanese authorities, nor have the location of the island or the construction method been determined. Noor International must submit three studies to the government for approval: an environmental impact assessment, a feasibility study and a site location study. Of four potential locations along the Lebanese coast — Damour, Amchit, Sour and Dbayye — Noor International considers Damour the most viable and will conduct the location study on this area. If not approved, the company will consider other locations.
Official responses should come from the Ministry of Works, the Civil Regulatory Administration, the prime minister, the parliament and the president of the Lebanese Republic. “We expect the process to take around six months or one year at the most,” says Saleh. After receiving the approval, the company estimates the construction work to take around four years. Noor International has already won the blessings of Elie Marouni, the Minister of Tourism and Wael Abou Faour, the Minister of State. Moreover, the developer is currently using the services of the Investment Development Authority of Lebanon (IDAL) in order to facilitate the process and benefit from the package deal that IDAL is providing in terms of tax incentives and fee reductions.

Public response
When the idea was proposed to the public, some people were terrified by its potential environmental and socio- economic impacts, while others embraced the project and held up its potential contribution to the Lebanese tourism sector and the economy in general. Environmentalists claim that the Cedar Island will cause serious water and air pollution, as well as affect the well-being of the Damour community.
Environmental consultant Lama Abdul Samad explains that, “we have a rocky ecosystem, rich with wildlife and marine habitat and dredging will kill everything there. It is too bad because Damour is one of the places on the shoreline” that has not yet been severely damaged by human development, she adds. Additionally, the immediate vicinity of the island’s area is not the only place that will be affected. Sourcing the fill for the island, whether by sea dredging or quarrying the mountains, will further harm Lebanon’s natural heritage.
Skeptics also argue that the construction, which would last for about four years, will cause serious air and noise pollution, since a lot of machinery and equipment will be used. “The air and noise pollution will be catastrophic, heavy machinery will cause traffic jams and the fumes and dust will contaminate the area’s environment,” comments Abdul Samad.
Lebanese environmentalists have started to act as 13 environmental organizations, including Greenpeace Mediterranean, Byblos Ecologia, the Society for the Protection of Nature in Lebanon and others, have formed a joint coalition hoping to keep the project from being constructed. As a first step, the coalition issued a press release stating that it categorically opposes the Cedar Island and warns the Lebanese government of the harmful impacts that the project may have on Lebanon’s environment, as well as the economic and social ramifications on the surrounding communities. Yasmin El Helwe, the oceans campaigner at Greenpeace Mediterranean, explains, “our next step is to have pre-assessment. However, we cannot do that right now because we are not aware of the project’s location or the method of construction.” Greenpeace is also working with their scientific unit at Exeter University in the United Kingdom in order to discover possible environmental impacts.

Project construction
Although the method by which the island would be constructed remains undetermined, Saleh explains that most probably the cedar trunk will be constructed by land reclamation, while the branches will be floating. “The island might be a mix of a floating structure and land reclamation. However it is too early to tell since as soon as we choose the location, we will conduct a topographic study of the surface and determine the best suited method of construction,” notes Saleh. He also emphasizes that the methods will be chosen to minimize the impact of the island on the maritime environment. “If, God forbid, we damage the environment, we will fix it,” says Saleh.
For the construction of the Cedar’s trunk, Saleh says the company has found a way to enable its creation without using sea dredging or quarrying mountains. “I heard that there is a license being issued for constructing a tunnel in the mountain leading to Shtoura [in the Bekaa valley], which would reduce the travelling time from more than an hour to 25 minutes. The idea is to use the rocks that will be taken out of the mountain to construct the island.” Saleh did not specify to whom the license is being issued, but he added that if the tunnel project is not already online, Noor International will propose and execute the idea itself. “One tunnel might not be enough, it is a plus or minus, but here we are trying to find ways to develop our project without hurting the environment. Instead of damaging the sea or the mountains, a point in which environmentalists are 100 percent right, we are developing new infrastructure,” he notes.
Experts claim that a floating island is a bad idea, not because of the construction process, but due to the costly maintenance the island will require. Adel Monsef, project manager at Archirodon, a leading international construction group, explains that, “a floating structure, whatever it is, needs maintenance every year or maximum every two years. In this case, a dry dock has to be built next to the island, which would be very costly. We are on the Mediterranean and we have rough seas, so there will have to be [lots of] maintenance, they are already facing some difficulties in the Palm,” which experiences mild seas compared to what the Cedar would face, Monsef adds.
Conservationists agree that whatever the method of construction, there is no escape from the serious environmental impact it will cause. Even if the branches are floating, the upper layer of the maritime ecosystem is very dependent on sunlight and would die. “The fish might swim out, but there are other elements in the ecosystem that will not survive,” says Abdul Samad. “If it is not going to sustain life, they might as well cover it all than have it slowly die and rot,” she highlights.

The fight continues
As Noor International works on the approval by conducting the required studies, opposing parties are on guard and trying to make their case. Saleh would like the environmentalists to open a line of communication with the company. “We are an environmentally friendly project, we are coming to build and not to destroy,” says Saleh.
Saleh also thinks that the attack on Noor International was premature, since no studies had been made on the possible impacts. He says that only when these come out will environmentalists have the right to oppose the project. Yet the environmentalists believe no study is needed to prove their case. “It is impossible to build such a thing without causing damage to the environment,” concludes El Helwe.

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Finance

National Bank of Abu Dhabi – Michael H. Tomalin

by Executive Staff
written by Executive Staff

The National Bank of Abu Dhabi (NBAD) is the second largest bank in the UAE with assets reaching $45 billion. Executive Magazine recently conducted an exclusive interview with the bank’s CEO of 10 years, Michael H. Tomalin, a senior international wholesale and private banker with more than 30 years experience with Rothschild and Barclays in the UK, Japan, the Middle East, Australia, the Caribbean and the Far East.

E What strategies will UAE banks be using in 2009? How will they differ from previous strategies?
Obviously global markets are more tricky and I think that the strategies in 2009 are going to be more focused on good housekeeping and also more at home than abroad. There’s going to be a lot more concentration on getting it right inside the UAE. It will be less expansionist and mostly internalized.

E Will banks be more prudent with lending and provisions? Seeing as many banks grew very quickly in the UAE, it seems that increasing loans may not be a good idea.
I’d be careful about how you express that because the UAE was growing very fast and the banks were supporting the growth of the UAE. So, I don’t think banks were imprudent in terms of developing the UAE. The job of the banks in the country is to support the economy and to mobilize deposits on the one hand and apply them to projects on the other. They also financed people and businesses so the economy could grow. The economy was growing and what was happening was that the banks were following and supporting the growth in the economy.
Now clearly, the economy is growing at a slower pace. Because the economy is growing at a slower pace banking and business will grow at a slower pace. The growth of the whole banking system of the UAE is going to slowdown from the very high numbers that we saw — which were again, a reflection of the very high growth rates that we saw in the UAE — to a more modest number, somewhere probably around 10 percent rather than 30 or 40 percent.

E Undoubtedly, the real estate bubble has burst in the UAE. How has the downturn in the property market affected your operations?
I would say we are less exposed than most. We think that there has been a correction in property prices, but there is some good value emerging. The basic story of the UAE is a very strong story. The UAE economy is in a very strong position. We’ve seen property corrections like this elsewhere in the world and my expectation is that we will bounce of out it in due course — it may take a bit of time, but we will bounce out of it. As far as this bank is concerned, we’re very comfortable and relaxed about our property exposure as a whole.

E Will you be tightening your lending conditions for property developers this year?
We will continue to lend to projects that we think make sense. We’ve always been a prudent bank. The country will still continue to grow. Buildings will have to be built. Projects will have to be completed, there’s a big infrastructural spread planned for this part of the world — in Abu Dhabi in particular — and we’ll have to play our part in that. The issue for the banks is not so much the credit quality issue, but the actual liquidity issue. The problem for the banks is that there is not enough liquidity in the overall banking market for the banks to grow very fast. The reason why the liquidity is tighter than it was is that there has been a very substantial withdrawal of liquidity by foreigners. So foreign managers, foreign banks, foreign hedge fund managers and others came in anticipation of a possible re-valuation of the dirham and the continuation of markets moving in a very positive direction. The global downturn has meant that a lot of that foreign money that came in has actually gone out and of course, the UAE is a free and open market. That money going out has left a hole that needs to be filled.
The central bank, Ministry of Finance and others have begun filling the hole but the hole is still large. So the difficulty is that with international lenders basically strapped for cash in terms of lending themselves, and international investors having taken money out of the economy, the problem for the UAE banking system is actually a shortage of liquidity.

E Recently, the government of Abu Dhabi announced it would inject $1 billion into your bank and provide similar amounts to four other banks in Abu Dhabi. This injection was not like the prior injections in Dubai banks.
The first $13.6 billion injection was made by the government of the UAE, not the government of Dubai. The UAE government injected $13.6 billion in two tranches into the whole banking system, and we benefited from that along with Ras Al Khaimah banks, Sharjah banks and Dubai banks. They all benefited from that more or less in relation to their size.
So it was the federal government of the UAE that injected this money into the banking system. This money was a deposit, as you rightly say, I think it was a five and a seven year deposit. The borrowers have the option of turning it into Tier 2 capital by accepting convertibility in favor of subordination. In other words, if the banks are willing to offer a conversion option into equity, the lender — the federal government — is prepared to subordinate its claim and that would make it Tier 2 capital.
Most banks, as far as I know, have not gone and accepted that option because the terms of the conversion are quite tough. The conversion terms are the lower of book or market, so most people have chosen not to take that conversion. We have not accepted it, for instance, and I doubt that any or many banks will.
Now quite separate from that, the government of Abu Dhabi chose to invest $4.3 billion in Tier 1 capital into its own banks. Indirectly, it is actually the owner because 70 percent of the stock [of several Abu Dhabi banks] is owned by the Abu Dhabi Investment Council, which is a trustee on behalf of the government of Abu Dhabi and similarly for the other banks. So this is actually the owner investing in its own bank, effectively. This investment was made via Tier 1 capital by way of a perpetual instrument, so it’s a deeply subordinated perpetual instrument, which is in fact Tier 1 capital for the Abu Dhabi banks. Tier 1 capital is obviously very different from Tier 2 capital and it is obviously very different from a deposit.
So what we got from the federal government was a deposit, which will be repaid at the end of its life and it will rank alongside any other deposit. Tier 2 capital is subordinated but termed, in other words it becomes repayable at some point in the future. Tier 1 capital, like equity, is permanent capital — it’s there forever. So the Tier 1 capital that the government of Abu Dhabi put into the Abu Dhabi banks is treated for capital adequacy purposes just like equity, it’s permanent capital. The primary purpose of it was to boost capital adequacy ratios because it actually increased the capital adequacy ratios of the Abu Dhabi banks by two, three, or four percent depending on the original size of the capital. So the Abu Dhabi banks had a substantial boost in their capital ratios. As a secondary effect, it also improves liquidity because obviously the $1 billion that is placed with us is extra cash that we have.

E On February 9, Standard Chartered announced that the UAE needs to inject an additional $27.2 billion into the banking sector in order to bring the advances to deposit ratio below 100 percent and to boost liquidity conditions. What’s your take on this? Is this a necessary step?
It comes back to the earlier point I made — one must distinguish between capital and liquidity. As far as capital is concerned, the Abu Dhabi banks are in a very strong position. As far as liquidity is concerned, because of the withdrawal of foreign money earlier, there is a shortage. Around $54 billion that came into the economy was withdrawn from the economy. That’s more or less 20 percent of the deposit base of the banking system. Now of that 20 percent, the federal government have replaced about $13 billion.
So yes, arguably, another $27 billion of liquidity is required to rebalance the market as a whole. But that’s not the same as capital. The system doesn’t need an extra $27 billion of capital, the system as a whole needs extra liquidity. The issue is liquidity, not capital. The capitalization of banks in the UAE, generally, is very strong. Banks in the UAE are very strong banks, they have very strong capital positions, there is nothing wrong with their capital positions. The difficulty for the UAE, is because — nothing to do with the UAE by the way — we are part of the global marketplace, foreign moneys that came into this market were withdrawn. This is not because people disliked the UAE at all, but because the world situation became very bad and people were forced to bring back money to meet claims that they themselves had on their own banks or funds. Now what the Standard Chartered economist is saying — and he’s right — is that there is a shortage of liquidity in the UAE banking system, it’s obvious. That’s clearly the case and that shortage of liquidity ultimately needs to be covered.

E What new regulations should be put in place to help the UAE banking sector weather the effects of the financial slowdown? What lessons can be learned from what has happened?
I don’t think we need any new regulations. Perhaps, first of all, we need to accept that what has happened is a function of global market forces. In terms of going forward, we need to find ways of closing the liquidity gap so that banks can go about their jobs and support the ongoing growth of the UAE. I would say the lessons to be learned are that we need to grow our balance sheets inline with our growth in deposits. In other words, the business of the bank cannot grow faster than the business of the deposit base behind it. We can’t have one growing at a different pace than the other. So we’ve had this enormous withdrawal of money. The banks either have to slow their lending down enormously to rebalance it or there has to be new liquidity coming in. The problem with slowing the lending down so much is that it could actually have negative effects on the economy as a whole and that’s what the authorities are trying to resolve. You’ve got to try to find that balance. The alternative for the banks is simply to bring their loan book down to meet their deposit position, but the effect of slowing a car down from 130 to 50 kilometers per hour in the space of 300 meters is you often have an accident. So, it’s better to do it in a very gradual way. On the one hand we have to find more liquidity, on the other hand banks should be more careful about expanding their loan books going forward.

E In the fourth quarter of 2008, your profits decreased by 34 percent year-on-year due to high provisioning. What can you tell us about this?
The provisioning we made in the fourth quarter was largely voluntary, these were collective provisions that we made. There are two spins you can put on our numbers. Spin number one is: operating profits are up 48 percent, the results are brilliant. This is a very, very strong bank with a very, very strong set of results. So the headline that we had for our press release is ‘NBAD record results buck the global trend.’ [We had been seeing] banks around the world with their profits going down catastrophically like UBS, Royal Bank of Scotland, Citibank, Merrill Lynch, Goldman Sachs, Deutsche Bank, you name it. Very strong banks that we see as our peers going from big profits to losses, if in the context of that we increase our net profits by 21 percent, it’s fantastic. But it’s actually even better than 21 percent because our operating profit was up 48 percent.
Because our operating profit was up so much we chose — we weren’t forced — to make an extra collective provision against things that might go wrong in 2009. They may not necessarily go wrong in 2009, [but] they might. We’re being precautionary and prepared. Much of that collective provision was taken in the fourth quarter, so actually our fourth quarter profits were up 16 percent, they were not down 34 percent. But the analysts say they’re down 34 percent — the reason why they’re down 34 percent is because we took this huge lump of collective provision, which was made in the fourth quarter.
So, it depends from which end of the telescope you look at it. You could say — which is the way I like to look at it — the bank did so well, it could afford to make a massive collective provision against the future and still increase its earnings year-on-year by 21 percent. We may bring all this back to account next year. We are as cushioned as we can be for a tough 2009. I think the spin the press has put on our results isn’t right. How many banks in the world actually had their profits up 16 percent? I think virtually no one. Because our profits were up 16 percent, we were able to take an extra load of general provisions.

E In your opinion, what is the key element that will provide a competitive advantage to banks in order to brave the economic slowdown and make them stand out from crowd?
I think very strong risk policies, both credit risk, market risk and operational risk. Risk policies in the sense that prudent extension of credit, market policies, very careful management of balance sheets, operational policies, making sure that everything you do operationally is perfect. That’s why I use the phrase ‘good housekeeping,’ I think that’s what banks should be concentrating on in 2009. The banks that do those things well are the banks that will be in a stronger position in 2010.

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Finance

UAE – Sovereigns of solvency

by Executive Staff
written by Executive Staff

As the dust from the global economic storm beings to settle in the UAE, banks are hesitantly wading into 2009. This year, the operating environment for banks is undoubtedly challenging. Experts say that since the estimated — but not official — $55 billion exit of foreign currency last year, a major liquidity hole has been created in the banking sector. When the global financial crisis shook the core of the UAE economy, what was once scarce liquidity had become almost non-existent. Thanks to the affluent sovereign that is the UAE federal government, the banking sector has been provided with liquidity assistance via cash injections totaling $13.6 billion. At present, the central bank claims Emirati banks have only absorbed two-thirds of this liquidity fix, with a third shot expected to take place sometime in the first quarter of this year.
While bankers, analysts and financial houses scream in unison for liquidity in the market, the governor of the central bank, Sultan Nasser Bin Al Suwaidi, claims that the liquidity situation in the UAE is “much better” and the emergency fund is “not being needed to a great extent.” It seems as though the federal government of the UAE is in dire need of a reality check.
In the first week of February, the Abu Dhabi government announced its plan to feed $4.4 billion of capital into five of its banks, with the National Bank of Abu Dhabi (NBAD), First Gulf Bank (FGB) and Abu Dhabi Commercial Bank (ADCB) each receiving some $1.1 billion, while Union National Bank (UNB) and Abu Dhabi Islamic Bank (ADIB) each took in $544.5 million. This cash boost from the government of Abu Dhabi differs from the UAE federal government’s injection to all banks in the Emirates, as it is a capital injection and not a liquidity injection; the former inherently increases the latter, with the added benefit of improving Tier 1 ratios. Now, with Abu Dhabi banks looking significantly more capitalized than their Dubai peers, sentiment on the ground is negative and tense — to say the least — and could leave Dubai banks searching for the panic button sooner rather than later. Fitch Ratings contends that this capital injection into Abu Dhabi’s top five banks “leaves other banks in the UAE looking potentially more vulnerable in the event of a significant domestic downturn.”

What’s love got to do with it?
Raj Madha, director of equity research at EFG-Hermes in Dubai, believes that with this recent capital injection by the Abu Dhabi government, the UAE is witnessing an expanding “gap between Abu Dhabi capital and Dubai capital.” What’s more, he exhorts, is that there could “be pressure for Dubai to find some way of increasing the capital of Dubai banks. If they can’t, then obviously the solvency advantages of the Abu Dhabi banks may be a significant advantage for them.” John Tofarides, an analyst in the financial institutions group at Moody’s Middle East in Dubai, considers the recent capital boost skewed as it “creates uneven competition as Abu Dhabi banks can borrow at a lower cost. After this move, deposits in Dubai and other Emirati banks pay as much at two percent higher on similar maturities.”
According to Robert Thursfield, a director in Fitch Ratings’ financial institutions team in Dubai, the nature of the new capital “looks like a financing plan to enable Abu Dhabi projects to continue as planned, although it could also be a cushion for potential future problems in loan books, in particular real estate related exposures.” Whatever the motive, evidently Abu Dhabi has made a clear statement that its number one priority is, well… itself.
Bankers and analysts alike are expecting similar action to be taken by the Dubai government in the near future, but as of yet no one is quite sure how the Dubai sovereign will play its cards. Thursfield asserts that banks preserving capital means they are trying to “effectively cushion future risks and defaults. If you’ve got a bigger cushion to absorb losses and problems, then you look stronger than if you’ve got a weaker, smaller cushion, which is effectively where we are now. The Abu Dhabi banks have got a much bigger cushion.”
Logically, to even out the disparity between the banking sectors of the two competing emirates, a comparable action would be necessary. Fitch notes that the “required injection for four [Dubai banks: Emirates NBD, Mashreqbank, Commercial Bank of Dubai and Dubai Islamic Bank] would likely be of similar magnitude given that the equity of the five Abu Dhabi banks at 30 September 2008 was about [$14.2 billion] compared to about [$14.4 billion] for the four Dubai banks.” Clearly, “Abu Dhabi is in a much better position than Dubai,” propounds Thursfield, “and any support it gives to Dubai and other emirates is going to come with greater strings attached.” Naturally, he says, Abu Dhabi “will stand by Dubai if they get into significant trouble”. While Thursfield is confident in Abu Dhabi’s potential backing of its neighbors, others are more skeptical as this recent move has sparked fears throughout the Emirates. Time will tell what the federal and/or individual sovereigns have in store for the fate of Dubai’s banking sector and entire economy.

The 2009 decline
The fourth quarter 2008 performance of most banks in the Emirates “remained satisfactory” notes Fitch, with a few exceptions. ADCB reported a net loss of $70.8 million, Emirates NBD reported a net profit loss of seven percent from 2007 and Union National Bank’s net profit came in at $18 million. The ratings agency claims, “the main banks that have reported headline figures to date all remain profitable for the full year, although [fourth quarter 2008] figures show a significant decline in net income compared to the previous three quarters in 2008.” With an extremely strenuous year ahead, “2008 levels of net income [are] unlikely to be repeated,” says Fitch, while liquidity and real estate exposure remain top concerns for UAE banks.
Popular consensus throughout the Emirates voices the need for solving the country’s liquidity problems. Without liquidity, the banking sector is not the only industry at risk — tourism, finance, labor and real estate sectors are all facing major losses and will continue to do so as long as liquidity is hard to come by.
With the inevitable burst of the property bubble, every bank in the UAE — to some extent — is vulnerable to the real estate sector. A chief concern for the UAE economy “is that there are direct as well as interlinked exposures to the property market that are not easy to accurately quantify, given current disclosures,” Tofarides indicates. Madha feels that in relation to property sector regulation, the Ministry of Finance “could do more to lower counterparty risk.”
Madha echoes that the UAE has not yet witnessed a harmonized liquidity situation. Pointing to the current deposit rates, which he says are a “reasonable guide to understanding where the banks are in terms of liquidity,” banks like ADCB and Emirates NBD possessing deposit rates of around seven and 5.5 percent respectively, are “de facto proof that the liquidity situation is not yet stabilized.”
It must be kept in mind that this liquidity crisis is also largely related to the implementation failures of Basel II. Apparently, authorities are now looking to apply Basel III in order to strengthen the financial system and hopefully help avoid any unforeseen crises in the future. Dr. Nasser H. Saidi, chief economist at the Dubai International Financial Centre Authority (DIFCA), told a panel at the Economic and Islamic Finance Outlook for the UAE that, “The scope for regulation… should be strengthened. We should develop early warning indicators. We need [the] Basel III framework in 2009 and key factors such as risk management, liquidity management, CAR [capital adequacy ratios] need to be incorporated in the new guidelines.” New regulations should be welcomed with open arms in an economy facing such major downturns.

Road to recovery
A recently published report by the Abu Dhabi Council for Economic Development articulated the need for an entire UAE stimulus package. Even with the liquidity boosts from the federal government, the council believes that “while such measures have succeeded in offsetting liquidity shortages and ensuring continuance of normal bank lending operations, more should be done by Abu Dhabi or the UAE as a whole in order to enable the banking sector to fully recover and resume its role in supporting the domestic economy,” the report states. “This can be done through the country’s massive financial reserves.”
Other preventative measures include managing liquidity and general risk management practices. Tofarides believes that banks should “design contingent strategies for liquidity stresses and asset quality stresses to see how sensitive they are and how they can respond to such events.” This year, Madha hopes that banks will be limiting their total size of exposure “and to make absolutely sure that where [they have] exposures, those are guaranteed in some shape or form by the state — better still, in contracts where the state has waived sovereign immunity.”
Highlighting the majority’s perspective, Tofarides points out that the primary concern is to manage liquidity. On February 9, Standard Chartered bank announced that the UAE needs to pump an additional $27.2 billion into the banking sector in order to bring down the advances to deposit ratio below 100 percent and to help boost liquidity issues in the market. Experts don’t seem to have any problem with this figure and at this point, the more liquidity, the merrier.
Another top concern, Tofarides says, is for banks to “maintain their profitability and build up a higher capital cushion, account for additional provisions, or be given direct support from the government if needed.” Madha would like to see “a continued drive to ensure there is an open, visible market in financial services and we need to have transparency in the quality of loans.” Banks should also be lowering their visible risk and increasing their transparency levels, adds Madha. Tofarides echoes the necessity for transparency and honesty. “As one of my senior managers used to say, the bottom line is ‘banking is people and people is trust’. Not safeguarding a trust relationship between banks and the corporate world would harm business development with longer-term implications,” he says. In a deteriorating situation like in the UAE, transparency and cash are king.

Forecasts
Madha claims that 2009 “is the year where every bank will argue why they are lower risk than they seem. As an outsider, we can’t definitively say whether the banks are correct or are even being honest in their assessment, but we will test all these hypotheses by the end of the year and find out which banks have been honest about their risk profile.”
Regarding banking strategy in 2009, Tofarides trusts that it is no longer a growth strategy. He believes that banks will take up “a consolidation and a liquidity directed managed strategy. Prudence dictates that banks’ loan growth should go in tandem with their availability to raise funds, manage their liquidity, manage their existing loan commitments, etc.”
As Thursfield puts it, “profitability will be low in 2009, delinquencies will rise, margins may decline, funding costs may continue to be high — it’ll be a much more challenging environment.” With the looming “lack of liquidity, lack of confidence and soaring negative sentiment that affects banks’ ability to lend,” says Tofarides, “people’s willingness to take up risks and invest” is sinking.
Tofarides foresees “very limited growth” for banks in 2009, “from about zero to five percent growth,” with some banks possibly reporting negative growth in the long run, “unless they are given more money like in the case of the Abu Dhabi banks.” This opinion seems unanimous throughout the banking sector, with experts like Madha hoping “to see recapitalization of Dubai banks to the same extent of the Abu Dhabi banks.”
This is definitely the year for conservative policies and prudent moves. The developments of the coming months may be the key to overcoming the long-term negative effects of the global financial crisis.

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Capitalist Culture

Rule of law – Mr. Lebanon’s redress

by Michael Young
written by Michael Young

What does political murder have to do with capitalist culture? Quite a bit actually, in that the rule of law is better able to protect the free minds and free markets underpinning a liberal system worth its salt. This month, the special tribunal for Lebanon, which will address the assassination of former Prime Minister Rafiq Hariri, and dozens of others since February 2005, will begin operating in The Hague. However, it is obvious, and disturbing, to see how little agreement there is over what this may mean for the rule of law in Lebanon down the road.
It’s been almost four years since the investigation and trial process began. The politics of the case have been discussed and fought over, but relatively little attention has been paid, domestically or internationally, to its legal ramifications, and what the tribunal’s creation means for the general course of justice in Lebanon. The answer may not be as straightforward as some assume. The boilerplate view is that the Lebanese judiciary can only gain from the tribunal, and many would like that to be true. However, is there as clear a link here as the tribunal’s supporters suppose?
In arguing against the likelihood that the tribunal will radically change Lebanon’s judicial system, one might raise several doubts. First is the timing of the court case in The Hague. By most accounts, there will be no accusation presented this year, so that at the soonest the tribunal will bring suspects into the dock five years after the first assassinations in Lebanon. That may be standard procedure in such trials, but it doesn’t diminish the fact that the sails have been largely emptied since the heady days of 2005 when the United Nations investigation began, and when many Lebanese naively believed that justice would be swift.
A second doubt is technical. How will the impact of the special tribunal filter down through Lebanon’s judiciary to improve legal practices across the board? The real value of the tribunal, some point out, was that it was created mostly outside the debilitating confines of the Lebanese legal system, so that even if one seeks to implement the tribunal’s lessons, it will be very difficult to do so in practice. Rather than turning the punishment of political crimes into a rule, the doubters argue, the tribunal is an exception that cannot and will not soon be repeated. The dog will bark, and the flawed caravan of Lebanon’s judiciary will pass.
A third doubt is raised from the fact that the Hariri assassination has been so polarizing nationally, that there can never be any agreement over how to implement its results domestically. As the reflection of political divisions, Lebanon’s judiciary will swallow the good word coming from The Hague, mash it up and spit it out, with nothing to show for it.
All these criticisms are in some ways defensible. The relationship between the special tribunal for Lebanon and a more open legal system that defends free minds and markets is a tenuous one. The investigation of Hariri’s killing was indeed an exception in a country ravaged by political assassinations in the past three decades, none of which were ever solved. However, the Lebanese judiciary did participate in the tribunal’s formation, and Lebanese judges will be on the bench. There is also the fact that the impact of the tribunal will always be more moral in its repercussions than measurable in clear-cut tangible terms.
And how might one assess the moral impact of the Lebanon tribunal? For one thing, if the trial process is a success, it may encourage many more young Lebanese to join the judiciary, and many more lawyers to apply for judgeships — two persistent problems in recent years. It may also help alter the way that the police and judges investigate crimes in the future, reinforcing their professional pride. Already, those Lebanese who have collaborated with the UN investigation are in a position to benefit from their experiences and now train younger recruits.
Moral consequences are difficult to quantify, but in some ways their impact may be more powerful because of that. Nowhere is this more obvious than in markets, where moral choices, though not necessarily optimal in market terms, can have a fundamental impact on economic behavior. The notion of trust, to offer one example, is not easily quantifiable but can be the backbone of profitable exchange relationships. By the same token, a justice system that has as its model the successful prosecution of those behind the assassinations in Lebanon, may induce future investigators to ignore the negative consequences of searching out the truth, and persist in uncovering wrongdoing.
Much will depend, however, on what happens in the Hariri trial. The rule of law could be severely crippled if the tribunal loses momentum, or if the prosecution fails to reach a convincing endgame. Alas, many people in Lebanon will not regret that if it happens.

Michael Young

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Near death of a star

by Paul Cochrane
written by Paul Cochrane

In late January I was asked to look into the closure of the Daily Star, Lebanon’s only English language daily. But discussions to financially prop up the paper were going on behind closed doors, so without a shareholder to quote, the story, as they say, was dead in the water. It also looked as if ‘the DS’ could be as well, and that this commentary might have been a eulogy of sorts.

On January 14, the DS was ordered to cease operations following a court order requested by Standard Chartered Bank over a loan of some $700,000. The presses were at a stand still, staff were on leave until further notice and the website frozen on the date the plug was pulled. It took until February 2 for the paper to raise the cash to get back on the newsstands.
To the hacks, editorial staff and interns that have spent time at the Gemmayze offices — of which I am one — the closure was but another episode in the drama of the DS.
As the old hands can readily recall, the newspaper has had many ups and downs, from the deal with the International Herald Tribune (IHT) that gave the DS a much needed boost in the early 2000s, to the unification of the Lebanon and regional editions, to the downsizing of the paper’s staff in 2005, when it shrank from occupying two floors of Marine Tower to only one. Then there was the ill-fated plan to gain a bigger slice of the regional market by moving to Dubai — I was even asked if I would be willing to make the move, it was supposedly that certain — and the loss of the IHT alliance in 2006.
Older staff still working at the paper were pragmatic following the shutdown, feeling the causes would be rectified as so many times before when the paper was in dire straits. Former staff were somewhat nostalgic — they certainly let each other know about the closure –— but were equally not surprised when recalling the financial constraints and lack of dynamism and morale in the newsroom itself.
The discontinuation of the DS did not bring about any schadenfreude though, but rather hand-wringing. For despite all of the paper’s shortcomings — notably reduced pagination and a heavier reliance over the years on the wire services and intern writers to churn out content — readers bemoaned the loss.
There was talk of what news options were left to English-speakers in Lebanon and for readers abroad interested in this perpetually problematic country. For Lebanon is extremely limited when it comes to daily news coverage in English, confined to a handful of mostly partisan websites, such as nowlebanon.com, which is linked to March 14, naharnet.com, equally pro-March 14, and almanar.com.lb, linked to Hizbullah.
Although no details were forthcoming about the re-financing of the DS, the fact that it is not openly sponsored by any political group and regularly has Lebanon’s two opposing camps breathing down its neck, makes the Star’s position in Beirut a much needed one.
Sure there is a need for less wire copy and more original content, as well as an overhaul of the opinion page, which more often than not reflects the ideas of those outside the region than in it — running counter to what anecdotal evidence suggests, that people want another perspective on Middle Eastern issues than what the Western mainstream media offers. The website also needs to be seriously revamped in keeping with the shifts in the media environment.
But these constraints appear to be acknowledged by the DS, as stated in a ‘We’re back’ announcement: ‘Expect to see some changes in format and style over the coming months as this newspaper tries to revitalize.’ That has, however, been heard before, so let’s hope some real change is afoot to boost readership and not lose the DS, again.
Media coverage of Lebanon aside, the loss of the DS would have deprived the world of a journalistic incubator for the numerous reporters, editorial staff, photographers and graphic designers that have passed through the Star since it was re-launched in 1996. From my time there and before, former DS staff have gone on to work for Britain’s Financial Times, The Economist, The Guardian, The Independent, and for Reuters; The Los Angeles Times, The Washington Post, The New York Times, Christian Science Monitor, Newsweek and Time; Germany’s Frankfurter Allgemeine Zeitung; Belgium’s De Standaard; Canada’s Globe and Mail; the UAE’s The National and The Gulf Times; Australia’s The Age; and on television with Al Arabiya, Al Jazeera, Future, and ABC.
The aforementioned are clearly some of the biggest names in global media, and a fact the Star’s management can take pride in. It is also another reason why it’s good to have the Daily Star back in print.

PAUL COCHRANE is a Beirut-based journalist. He worked at The Daily Star from 2002 until 2005.

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The costs of our conflicts

by Riad Al-Khouri
written by Riad Al-Khouri

The very high cost of rebuilding Gaza and other regional disasters is on people’s minds in the Middle East and beyond. Whether we are talking about the havoc wreaked by Israel’s summer war in 2006 against Lebanon, the more recent Nahr al-Bared conflict there, or numerous other episodes during the past few decades of large-scale fighting, there is no shortage in the region of massive destruction caused by war. Of course, the first and biggest cost in conflict is the incalculable loss of a human life, and there is no yardstick to measure this. With so many people in the region suffering, it may seem callous to discuss the economic costs of conflict. Yet, these are enormous and go well beyond budgetary outlays, so quantifying things might be a good way to wake everybody up to the enormity of our problems. Done properly, this will hopefully show decision-makers and the average person alike that war is a bad idea, if only because it is so expensive.

In that vein, a major project called ‘The Cost of Conflict in the Middle East’ has recently come to fruition with the publication of a report launched at the United Nations in Geneva. This initiative by the Strategic Foresight Group (SFG) think tank of Mumbai involves an innovative approach to engage people of the Middle East in collaboratively assessing future risks, at a time of failure of negotiation to find lasting solutions to the conflict.
The initiative has attracted interest from various regional and international actors, including the ruling party of Turkey, which hosted the project’s planning workshop in March 2008 in Antalya to define the parameters of the project. This was followed by a scenario-building event convened in Zurich in August and co-hosted by the Department of Foreign Affairs of the Government of Switzerland. Norway and Qatar also supported the exercise.
The Cost of Conflict in the Middle East project aims to quantify the numerous costs incurred by the region due to protracted conflict and to encourage public opinion to reflect on this. Researchers worked on developing a number of parameters to outline these costs, especially since the first event held in Turkey. The aim of the second workshop was to develop a “conflict escalation ladder” and a “peace building ladder,” outlining war and peace scenarios, with opinion makers and heads of think tanks from the countries of the region, as well as Europe and beyond.
The report produced from this exercise is now available in a comprehensive volume rich in graphics. After a preface by Sundeep Waslekar president of SFG, and an introduction by Swiss Ambassador Thomas Greminger, the book discusses multiple aspects of the cost of Middle East conflict since the early 1990s, including its $12 trillion “opportunity cost.” The latter expression is one used by economists to indicate “what could have been,” in this case, how much richer the region would have been without conflict. More precisely, this amount is the increment the Middle East would have earned from 1991 to 2010 (in 2006 dollar terms) under peace.
The past year also saw the unveiling of other efforts to measure the costs of fighting in the region — an especially notable one being by Linda Bilmes and Joseph Stiglitz, whose book The Three Trillion Dollar War estimated the economic cost of the current Iraq war to America at $3 trillion and the costs to the rest of the world to be another $3 trillion — in effect a $6 trillion conflict.
This is far more than the US government’s initial estimates and this is the first war in American history that has not demanded some sacrifice from citizens through higher taxation. Instead, the cost is being passed on to future generations. Yet, the largest cost has been borne by Iraq. Apart from the many people killed, unemployment is rampant, having soared to 60 percent a couple of years ago. Out of Iraq’s total population of around 28 million, two million have fled the country, creating additional costs for neighboring economies.
Like the Iraqi conflict, for which the US taxpayer will pay and the Iraqi people are paying, the war in Gaza has hit the population there directly and will also have an outside financial impact. As regards to the latter, the American people are involved through massive support for Israel, but the treasuries of European and Arab countries alike will also be footing bills. However, in the present world economic crisis, this is becoming less affordable, and efforts by SFG and others will hopefully wake people up to this expensive state of affairs.

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

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