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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India‘s fatwa against terrorism

by Peter Speetjens
written by Peter Speetjens

The multiple bomb attacks on Bombay last November were but the latest in a series of terrorist attacks that rocked India during the second half of 2008. In total, five cities were targeted killing over 200 people. While almost daily the Indian media launch yet another story “proving” that the hand of Pakistan is behind it all, most experts do not believe that either country can afford do be drawn into a war. There is a growing fear, however, that Indian Muslims may be drawn into the conflict.
The Bombay attacks have been claimed by the Lashkar-e- Toiba (LeT), an Islamist organization based in Pakistan that fights for the “liberation” of Kashmir and has close links with the Pakistani military intelligence (ISI). The consensus among Indian security agencies is that the series of attacks required such a level of training, coordination and funding that it could never have been pulled off without the support of Pakistan.
“Most terrorist attacks in India are executed with the help of Pakistan,” says Animesh Shroul, a scholar at the Institute of Conflict Management in Delhi. “Pakistan cannot fight India directly. It needs proxies. The aim is to create a climate of political and economic chaos, which ultimately would force India into negotiations over disputed Kashmir.”
Bombay is of course the economic engine of India. In addition, India’s tourist sector has taken a hit. Captain Alok Bansal of the Institute of Defense Studies and Analyzes believes there is a second, more fundamental reason for Pakistan to disrupt communal harmony in India. “A successful pluralistic India is a negation of the very reason for Pakistan to exist as a safe haven for Muslims on the subcontinent,” he says. “Pakistan, like Israel, is a state based on religion. It needs an outside enemy to keep its ranks closed inside.”
Although the perpetrators of the Bombay bombings arrived by boat from Pakistan, most experts believe they could not have operated without some sort of Indian help. People tend to forget that India is home to the second largest Muslim population in the world. It is feared that Pakistan and terrorist groups such as Al Qaeda may aim to incite some of India’s 140 million Muslims.
The main suspect to have offered “a hand” in the Bombay attacks is the Indian Mujahideen (IM), which claimed responsibility for the four attacks that preceded Bombay. A violent off-shoot of the banned Students Islamic Movement of India, IM believes jihad is the only option to improve the socio-political situation of Indian Muslims.
“If the Muslims are terrorized, the Hindus can never live in peace,” stated an IM e-mail posted after the Delhi bombing last October. The 13-page letter also called upon the youth of Gujarat to join their ranks. In 2002, a Hindu mob killed some 2,000 Muslims in the western state of Gujarat. It is widely believed that the state’s right-wing Hindu authorities were (partly) involved in the massacre, yet no one was arrested. Until today, many of the bloodbath’s survivors live as refugees in their own country.
Gujarat remains a serous stain on the image of India being a tolerant nation, while it serves as a main battle cry for Indian Muslims. In sharp contrast with the quite sensational tone of the Indian media, both Shroul and Bansal believe that IM is a relatively small group.
“It is possible that some Indian Muslim youth are involved in terrorist activities,” says Dr. Zafurul-Islam Khan, editor of The Milli Gazette. “Their motive is not Kashmir, but revenge for what happened in Gujarat and other places. Some of them may have been used by the ISI, but these claims have so far never been proven.”
India could prove a fertile ground for extremist organizations to find new recruits. According to a 2006 government study, Muslims are economically worse off than any other community on the Indian subcontinent. While they make up some 14 percent of the population, less than five percent enjoy higher education or have a government job. In fact, the report concluded that many Muslims in India are worse off than Dalits — the untouchables.
It seems, however, that the older generation of Indian Muslims stands in the way of a rapid radicalization of Indian Muslim youth. Aware of the delicate position of Indian Muslims in light of the recent terrorist attacks, roughly 2,000 Muslim clerics of the Jamaat Ulama-e-Hind (JUH) in November 2008, mounted a “peace train” to Hyderabad where they met with some 4,000 other clerics to ratify a fatwa against terrorism, which had been issued earlier in 2008.
With some 10 million members, the JUH is arguably India’s leading Muslim organization. “Please do not use issues of justice or discrimination with our plea against terrorism, and our plea for communal harmony,” JUH President Maulana Qari Usman told Tehulka Magazine. “They are different stories.”
In issuing the world’s first fatwa against terrorism, the Indian Muslim community proved it is more than able to speak with its own distinct voice, one that deserves to be heard elsewhere around the world.

Peter Speetjens is a Beirut-based journalist

 

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Last call for peace

by Claude Salhani
written by Claude Salhani

Now that the initial euphoria behind President Barack Obama’s Middle East peace initiative is settling into the reality of the region’s intransigence, a different picture is beginning to emerge, and it is none too bright.

What darkens the horizon is the fear that if President Obama’s efforts — spearheaded by veteran negotiator George Mitchell — do not meet success, the backlash may be disastrous for the region, for US foreign policy and for the Obama presidency.
For once there is a president in the White House who is truly dedicated to the peace process because he understands the impact that peace in the Middle East has on US national security. As well, the president believes that solving the longstanding Israeli-Palestinian dispute will impact positively on addressing other grievances in the region. While settling the 61-year old dispute is not going to solve all the region’s problems, a comprehensive peace treaty between Israel and the Arab world will go a long way in bringing stability to the troubled region.
However, even if Obama is set on seeing peace in the Middle East, principal actors in the region seem less convinced that peace can be achieved at this point.
There are two reasons Obama’s initiative may fail.
First is Israel’s intransigence to cede on issues such as the settlements. This issue may become even more of a stumbling block now that Israeli President Shimon Peres has called on the right-wing Benyamin Netanyahu to form a government. Netanyahu has allied himself to the far right wing Avigdor Lieberman of the Yisrael Beiteinu — Israel Our Homeland Party — whom some consider to hold fascist tendencies not unlike those shared by Jean-Marie Le Pen’s National Front in France, the late Joerg Haider’s Freedom Party in Austria or Belgium’s Vlaams Blok. Netanyahu is against returning any land captured by Israel and very much in favor of keeping and expanding the settlements. A flexibility on the part of “Bibi” will depend directly on how much pressure Washington applies.
Now add Lieberman’s desire to expel Arabs en-masse and his views of Palestinians, whom ironically, as says Daniel Levy, a senior fellow at the Century Foundation and the New America Foundation, have been in this land far longer than Lieberman, an immigrant from Moldova. The ultra-rightist Avigdor Lieberman, far more so than Netanyahu, wants to see the settlements expanded.
Yet there is still room for optimism. History has shown us that it has always been the most hard-line Israeli prime ministers who have moved ahead in the peace process with the Arabs. Menahem Begin, considered one of the most conservative of Israel’s prime ministers, signed the Camp David peace accords with Egypt and returned the Sinai Peninsula in exchange for recognition by Egypt and the establishment of diplomatic relations.
And Ariel Sharon, the architect of the invasion of Lebanon in 1982, as prime minister withdrew from the Gaza Strip.
The second reason why the future of the peace talks is in jeopardy is Arab inability to reach a consensus before coming to the negotiating table. Inter-Arab squabbling, between Syria on the one hand and Egypt and Saudi Arabia on the other, does little to help the overall Arab cause.
Several high-ranking Arab diplomats in Washington have voiced their opinion that the differences between various Arab countries remain a cause of great concern.
Already Hamas, who has been at the forefront of the dispute with Israel in recent weeks, has been saying it might seek to form a new front independent of the Palestine Liberation Organization (PLO).
Many diplomats and observers agree that President Obama’s peace initiative may very well be the last chance to settle the Middle East dispute. Failure at this point will guarantee decades of more conflict and violence. And if the past helps us predict the future in any small way, we can reach the following conclusions: with each passing decade since conflict began in the Middle East, the level of violence has grown exponentially and the issues have become more complex.
To miss this opportunity for peace would be regrettable to say the least. However, history will judge today’s leaders, and so will their children, especially if they are condemned to fight yet another war.

Claude Salhani is editor of the Middle East Times and a political editor in Washington, DC.

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Defective democracy

by Norbert Schiller
written by Norbert Schiller

Over the past quarter century, I have witnessed countless presidential and parliamentary elections in the Middle East and North Africa. I cannot remember one that went off without voter intimidation, violence or vote rigging. In fact, every time an election is announced it almost seems as though the country holding it is preparing for war. The military is mobilized and placed on high alert; buildings housing radio and television stations as well as government offices become armed fortresses and a feeling of doom grips the nation.

As a journalist, I have had rough times covering elections in the region. I have been arrested by police on multiple occasions. In one well documented case, during the 2000 parliamentary elections in Egypt, I was beaten up and had all my photographic equipment smashed to pieces. Thugs, or ‘baltaguiya’, hired by Egypt’s ruling National Democratic Party (NDP), accosted me as I was leaving a polling station in the center of Cairo and threw me to the ground, while taking all my equipment from me. If this had happened in a dark alley it would be one thing, but the attack took place in broad daylight right in front of roughly two-dozen armed police there to protect the polling station. After getting up, I called for the policemen’s help. But all I got from the senior officer on the scene was a denial that any such attack had occurred.
Since I moved to the Middle East, there have been seven presidential elections in the United States. Each president that has come to power during this period, except for Obama, has either served the maximum two terms or was defeated after his first four years in office. Over the last 25 years, elections in the US have been free of violence, intimidation and vote rigging. The only major hiccup occurred in 2000, when votes in Florida had to be recounted by hand because of irregularities with the vote counting machines. In the end, the problem was settled in a civil manner by the Supreme Court.
Presidential elections in the US have almost a festive mood about them. They come every four years like clockwork just before Thanksgiving and right in step with the holiday season. When it’s all over there is a period of reconciliation when all Americans — Democrats, Republicans and Independents — unite knowing full well that the system put in place by the founding fathers over 200 years ago, is still alive and well.
In most instances, elections in the Arab world are anything but festive, and elections for the highest office have proven to be nothing but a farce. Of the 22 member nations in the Arab League there are eight monarchies that don’t even pretend to be democratic. When it comes to the appointment of the highest office, they just appoint the next of kin to the throne. Then there are the so-called democracies. Egypt’s Mohammed Hosni Mubarak has been in office for almost 30 years, since Anwar Sadat was assassinated in 1981. The vast majority of Egyptians have known no other head of state. Sure, he has held countless referendums, many of which I covered, but the outcome of these referendums has always been the same. Take the 2005 election, the only time in Egypt’s history that a presidential election was contested by another candidate. In the end, Mubarak took 88.6 percent of the votes and the challenger, Ayman Nour, not only lost the election but was sentenced to five years in jail for supposedly “forging powers of attorney” to secure the formation of the his political party, al-Ghad — a charge he vehemently denies. Last month, he was mysteriously released after serving three years.
In many Arab countries, democracy equals a referendum, a mechanism used by autocratic regimes to appease Western calls for democratic reforms. In reality, a referendum is nothing more than an approval rating, which rarely dips below 90 percent. Besides Egypt, referendums are popular practice in Syria, Tunisia, and Yemen.
Algeria experimented with the democratic process, but when the FIS (Front Islamique du Salut) was set to win a parliamentary majority in 1992, the military stepped in and annulled the election. The military’s action sent the country into chaos and civil war for the better part of the decade, killing an estimated 100,000 people.
Lebanon knows a thing or two about chaos and when elections are held there is always a lingering fear that the country will disintegrate once again into civil war. The next elections are scheduled for June 2009 and since they were announced almost six months ago, it is as if lines are already being drawn. Chances are that nothing major will happen, but if the fragile sectarian balance is altered, nobody knows what may happen.
America’s presidential electoral system is imperfect, but it has been tested for more than 200 years. A valid complaint is how a country with such a diverse population can have only two major political parties. Despite this flaw, with every new administration there is a major change in policy that has worldwide repercussions. Let’s all hope this new administration will repair the damage done by the last and once again shine the light on the democratic process. As one friend so appropriately put it, “not an abomination, rather an Obama nation!”

Norbert schiller is a Dubai-based photo-journalist and writer

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