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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Economics & Policy

Expat largesse

by Austin Mackell
written by Austin Mackell

 

During the first quarter of 2009, Lebanon braced itself for a steep fall in remittances. The logic held that the global financial crisis would severely affect remittance inflows from outside the country,  as Lebanese working abroad saw their own budgets tighten. The Lebanese government even prepared its 2009 budget proposal, which was never ratified, “on a very strict assumption of a 20 percent decrease in the level of remittances,” according to Lebanon’s Minister of Economics and Trade Mohammad Safadi.

It was a reasonable fear since, according to the International Monetary Fund, 70 percent of Lebanon’s remittance inflows are from the Gulf Cooperation Council and the United States, both of which were badly exposed to the crisis.

A few months into 2009, however, a less gloomy picture emerged with the IMF predicting a drop in remittances of 12 to 15 percent. Today the picture has brightened further, with Safadi saying that the predicted decline “has not yet materialized,” and pointing out that Standard & Poor’s ratings agency, who had expressed concerns that a fall in remittances could hurt Lebanon’s ability to pay its debts, had actually improved Lebanon’s credit rating.

In fact, in November 2009 the World Bank released its updated figures predicting that Lebanon would only experience a 2.5 percent drop, from $7.18 billion to $7 billion in remittance inflows for the year as a whole.

Projecting in the dark

The numbers are even more significant considering Lebanon’s remittance to gross domestic product ratio has also dropped, from 24.8 percent of GDP, using official figures, to a projected 21.4 percent, according to data provided by the World Bank, the IMF and Bank Audi.

The decrease can be attributed to the IMF’s forecast that Lebanon’s GDP will grow by 7 percent to reach $32.7 billion by the end of 2009. It should be noted, however, that many debate the methodology used to calculate Lebanon’s GDP [see page 58]. The Economist Intelligence Unit, for instance, expects Lebanon’s GDP to grow at a rate of 5.1 percent to reach a total of $30.2 billion by the end of 2009, resulting in markedly different figures.

Nassib Ghobril, head of research and analysis at Byblos Bank, is quick to point out the inexact nature of such predictions. “[At this stage] they’re not even forecasts, they’re expectations,” he says. “It’s very difficult to put your finger on a forecast given the lack of regular data… there simply are no figures since the end of 2008, and that’s exactly where we need greater transparency from the authorities.”

Ghobril frequently bemoans this lack of information.

“There are no remittance figures from local authorities here,” he says. “In Jordan,  we have figures on remittances every month.”

Ghobril sees this lack of information as a major problem given how important remittances are to the economy, and he advocates that it be addressed immediately.

When contacted by Executive, the Banque du Liban, Lebanon’s central bank, said that they publish remittance results quarterly on their website. However, as Executive went to press, no data for 2009 had been published.

Not yet a science

The significance of remittances to development and world capital flows only became a fashionable part of economic calculations in the last decade, so even the figures that are released are somewhat questionable. 

 

“The calculation of remittances is not a science yet,” says Ghobril. He points out that there are major methodological issues not yet settled. For example, the World Bank includes deposits (as opposed to transfers) of less than $10,000 made by expatriates into Lebanese banks in its calculations of remittances, despite the fact that in many cases these expatriates may simply be taking advantage of Lebanese banks’ high interest rates to maximize their savings and not directly contributing to actual economic activity.

The decision to include these deposits was part of a shift in the World Bank’s method for calculating remittances in 2003.

That year the World Bank reported that Lebanon received around around $4.7 billion in remittances, nearly doubling the 2002 figure of $2.5 billion — a jump Ghobril asserts was more a result of the change in methodology than an actual increase.

There has not been major methodological change since then, however, meaning that the growth from $4.7 billion in 2004 to $7.18 billion last year can be regarded as an authentic increase. The IMF also recently suggested including remittances in Lebanon’s GDP, which would significantly improve its debt-to-GDP ratio.

Uncertain inflows

As around $1.4 billion per month continue to flow into Lebanon’s banking sector from abroad, many believe that remittances must be doing well. It is also possible though that, in these uncertain economic times, a significant amount of this money is arriving from investors who have turned to Lebanon’s trusted banking sector as a safehaven to stash their cash, rather than true remittances, which would be Lebanese sending money home to be spent.

Kamal Hamdan, economist and managing director of the Consultation and Research Institute, says that a significant though unknown part of this year’s figure can be attributed to the liquidation of fixed and non-fixed assets from non-resident Lebanese.

“You liquidate once and for all so I don’t know if this $7 billion is a sign of strength or rather an ultimatum,” says Hamdan. He expects, however, that remittances will remain relatively steady in terms of their ratio to GDP “because a decrease of a few percentage points is not enough to affect its weight with respect to GDP.”  

Another (and perhaps more meaningful) indicator that remittances can be expected to stay fairly stable is the lack of an influx of returning expatriates, tens of thousands of whom were predicted to return home as a result of the crisis — though in Hamdan’s view, the absence of repatriation figures constitutes “the worst example of the lack of accurate data.”

There was “no reversal of the brain drain phenomenon witnessed so far, despite the fact that local demand for skilled labor has been rising,” says Safadi. 

While this return of talented expats would have presented positive opportunities, the fact that it hasn’t occurred also has a positive dynamic, as it means that those who have lost their jobs have likely taken up other employment, or moved from city to city or country to country seeking work in markets where wages are high and from which they can continue to send remittances.“We didn’t see thousands of Lebanese returning here, so that means they’re still working somewhere,” says Ghobril. 

Perhaps the strongest indicator of the continued strength of remittances, however, is data coming from the remittance sending countries. Saudi central bank data estimates that total remittances — to all countries — from Saudi Arabia reached $15 billion in the first eight months of 2009, an increase of 12 percent compared to 2008.

While this growth, probably fueled by the kingdom’s massive development plan, is a slowdown from the 26.7 percent growth in remittances that took place between 2007 and 2008, it certainly paints a brighter picture than many predicted when the financial crisis first kicked off. 

Resilient but not immune

Other Gulf states have also dug into their remarkably deep pockets and ploughed ahead with their own long-term strategies for infrastructure development. This was reflected in the IMF’s Regional Economic Outlook report for October 2009, which said that counter-cyclical government spending had helped protect economies in the Middle East from the worst effects of the global economic downturn.

Overall, according to the World Bank’s latest data, outward remittance flows from the Gulf have dropped only 3 percent this year relative to last year. Remittances from the Gulf to other countries in the Middle East have dropped from $34 billion to $32.2 billion, according to data from the World Bank, IMF and Bank Audi, and the IMF outlook report predicts that remittances will stabilize at $34 billion next year and grow to $36 billion in 2011.

However, there are negative signs as well. In Jordan, (where data on remittances is more readily available than in Lebanon) there has been a decline of 6 percent in remittance inflows, and Egypt, the biggest recipient of remittances in the region, has announced a decline of 8.8 percent.There are reasons to believe that remittances from the US may have suffered a more serious decline, with remittances to Mexico having dropped 15 percent year-on-year in the year to August, as reported by The Wall Street Journal.

With the region expecting to have a better year in 2010 and the US officially out of a recession, there is reason to be optimistic.

However, as Ghobirl says: “There is no way not to be effected…The Lebanese economy has shown that it is insulated from the crisis but not isolated. It is resilient but not immune.”

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Business

Sayfco Holding

by Nada Nohra
written by Nada Nohra

Cache Yerevanian, chairman of Sayfco Holding

Good news for middle income house seekers searching for affordable apartments: Sayfco Holding, the Lebanon-based high-end real estate developer is going back to its roots, said Chahe Yerevanian, Sayfco’s chairman. After having abandoned the middle income market for many years, the company is planning to launch  a new housing project in Jdeideh (Metn) this month for mid-range budgets.

‘Abraj Jdeideh’ will feature five 15-storey towers and will include apartments ranging from 122 square meters, which will be priced at $140,000, to 166 square meters — priced at $180,000. Sayfco is not planning to stop developing luxurious housing projects, but is now entering a new market, which is projected to be healthier in the forthcoming years.

“Luxury [demand] will stop for a while because of the economic crisis. The prices [of high-end apartments] will never go down, but I think luxury will stop having a quick turnover,” said Yerevanian. Sayfco has finalized the plans and is waiting for the permits to come through in order to launch the project. Construction will start by the end of this year or beginning 2010 and will take around two years.

From politics to real estate

Even though Sayfco has not been involved in middle-income housing for some years now, this segment was the sole target of the company when it was first created. Ara Yerevanian, Chahe’s father, took the challenge upon himself, when he was elected a member of the Lebanese parliament in the 1950s, to provide housing for the middle income market, something which the government failed to do. He established ‘Ara Yerevanian Establishment’ and began building 200 to 300-unit residential developments,  priced at around $30,000 per unit. When the Lebanese Civil War began, the family immigrated to Canada and started conducting its business there until they returned in 1995. The company was then renamed Ara Yerevanian & Sons. In 2000, Chahe took over the leadership of the company and started targeting Gulf Cooperation Council  (GCC) clients, while also entering higher market segments.

“I foresaw that the luxury market is going to have a boom, so instead of building apartments for $100,000 to $150,000, we went up to half a million and from there we went to Clouds [Faqra Club]— 11 villas for $5 million each,” said Yerevanian.

In 2004, Ara Yerevanian & Sons was substituted with Sayfco Holding and all its subsidiaries were created: Sayfco Development, Sayfco Brokerage, Sayfco Financing, Marina Hills, Villa des Roches and Ahlam Lands. This move was the first step to restructuring Sayfco and turning it into a corporate entity, rather than a family business.

“I believe family businesses do not last more than two generations… once the kids and the cousins meet, and the wives come in, the company is gone,” said Yerevanian. Therefore, potentially, the management of Sayfco will be separated from its ownership and when Yerevanian retires, a non-family member may take his place. “This is how I see the future of Sayfco,” said Yerevanian.

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Comment

Strengthened by sanctions

by Gareth Smith
written by Gareth Smith

When Iran introduced gasoline rationing in 2007, Ehud Olmert, then Israeli prime minister, said the torching of some Tehran gas stations showed “economic sanctions are working increasingly well.” Threats to blockade Tehran’s gasoline imports brought rebellious Iranians to the streets and the Islamic Republic to its knees. But the more things change, the more they stay the same. Since 2007, there have been two more rounds of United Nations sanctions, far tighter United States sanctions and a European Union ban on investment in Iran’s energy sector. 

And yet Iran’s nuclear program is further advanced, Mahmoud Ahmadinejad is still president and Ayatollah Ali Khamenei is still the supreme leader.

Iran’s reformists have long pointed out that sanctions strengthen the very people they are supposedly designed to undermine, enhancing the role of the state and its various agencies. US President Barack Obama was elected with a pledge to “engage” Iran, but once in office strengthened the sanctions regime developed under President George W. Bush, on the grounds it may push Iran to abandon its nuclear program. Many Obama supporters say this is the only alternative to military action — hence those who back sanctions need to show they are “working” or come up with new ideas for sanctions that will “work” better.

The saga of gasoline imports shows the pattern all too well. It was fear of sanctions — rather than, say, the chronic air pollution in Tehran — that led Ahmadinejad’s government to introduce gasoline rationing in 2007. Politicians had long dragged their feet over increasing the price of fuel from a subsidized price of 9 cents a liter, despite a consequent demand for gasoline that Iran’s own refineries were unable to supply.

When rationing was introduced in 2007, the allocation of cheap petrol was 100 liters a week, with motorists paying a higher price for any extra. The ration stayed at this level for three years, but was reduced to 80 liters at the beginning of the current Iranian year (in March) and to 60 liters in June, despite the usually higher consumption of the summer holiday period. During the summer, oil minister Masoud Mir-Kazemi put production at 44.5 million liters per day and imports at 20 million liters.

At the time of rationing, consumption was 75 million liters per day and appears to have fallen 14 percent to 64.5 million, while imports — 35 million liters daily back in 2007 — have fallen from 47 percent of consumption to 31 percent. A report in August from the Paris-based International Energy Agency forecast a 75 percent fall in the cost of Iran’s gasoline imports within five years, partly through opening new refineries and curbs in consumption. Incrediblely, the National Iranian Oil Company announced at the end of last month that a sudden 40 percent jump in domestic production had allowed the country to actually begin exporting gasoline, having covered domestic demand.

As production has increased and consumption has fallen, the sources of supply that have made up the difference have also shifted. Oil traders such as Glencore, Trafigura and Vitol, and companies such as Total and Shell began to end gasoline sales earlier this year as talk of sanctions increased. But the gap left by Western companies has been filled by Turkish refiner Tupras and state-owned Chinese companies including Sinopec.

Chinese companies have supplied around half of Iran’s gasoline imports in recent months, and there have even been reports that the Russian oil giant Lukoil, despite its substantial US retail operation, has resumed sales to Iran in a partnership with China’s Zhuhai Zhenrong. All this despite Lloyd’s of London — which has 15 to 20 percent of world marine insurance — announcing in July it would not insure or reinsure gasoline shipments to Iran. Iran’s trading partners and neighbors lack sympathy with the American approach, arguing sanctions should relate solely to Tehran’s nuclear and missile programs. The new UN measures passed in June blocked assets of individuals and entities allegedly involved in proliferation, whereas EU and US sanctions go much further. Washington’s financial sanctions seek to block from the US market not just Iranian businesses but third parties with significant dealings in Iran’s energy and financial sectors.

Widespread resentment at the US approach aids Iran’s search for partners willing to continue or expand trade. As one Iranian economist recently told me: “I actually believe Ahmadinejad likes sanctions. They help make him the underdog, standing up for his country’s rights against a superpower behaving unfairly.”

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Economics & Policy

Shaking up the system

by Sami Halabi
written by Sami Halabi

Until recently, thelabor laws of the United Arab Emirates seemed as stationary as the tectonicplates under the Arabian Gulf. Those plates seldom shift, but when they do the result is earth shattering.

The new laborregulations in the UAE may not be as dramatic, but they do have the potentialto shake up the country’s antiquated employment market.

The regulations came inlate December in the form of a ministerial decree, an edict from the laborministry that is not actually a piece of legislation. As Executive went topress, an official document had not been posted by the labor ministry, but theminister of labor had made radio and press announcements.

Perhaps the mostsignificant reform is that workers looking to change jobs will no longer need a“no-objection certificate” (NOC) from their former employer, without whichworkers were previously barred from taking up new employment for a ‘coolingoff’ period of six months.

But this regulation doesnot apply equally to all; a classification system has been put in place tocategorize workers according to their qualifications. Those with universitydegrees or a management position can move to new jobs without the NOC, buteveryone else must remain in their jobs for two years (as opposed to theprevious three-year validity of labor cards) before they may change theiremployer.

The measure to reducethe duration of labor cards to two years is expected to save private sectoremployers $184 million in costs incurred by the defaulted contracts of the 70percent of employees that left before the three-year period. According to arecent poll of workers in the UAE by Bayt.com, a recruitment and job researchcompany, 24 percent of workers stay in their position for a period of two yearsand only 21 percent stay for all three.  

“The recent UAE Ministryof Labor announcements are set to give more freedom to employees to switch jobswithout the previously… imposed six months ban and the required no-objectionletters from employers,” said Amer Zureikat, vice president of sales atBayt.com. “We see this as an attempt to not only attract more talent to thecountry but also to promote flexibility and transparency at the workplace —which was deemed ‘very’ important by 72 percent of UAE participants in a recentBayt.com poll.”

Local jobs for localpeople

That added flexibilitymight well be stymied, however, by the inclusion of another regulation in thereforms that seeks to increase the level of UAE nationals in the private sectorto 15 percent. Currently the private sector workforce is less than 1 percentEmirati, with most locals preferring to be employed in the public sector, whichin 2008 saw a low of 54.5 percent of employees being Emirati, reaching to 60.9percent in April 2010, according to recently released official figures. It hadbeen reported that the 15 percent target was to be hit by July, but officialsfrom the International Labor Organization (ILO) told Executive this was not thecase.

Other reforms includelowering the minimum working age to 16, while imposing tough regulations onwhich type of work can be practiced by minors. Expats are also now allowed toofficially take on a second part-time job or part-time work, which applies topeople with spouse visas as well. Six-month work visas are also to become parfor the course.

While the internationallabor community has lauded these measures, the UAE still has much more to do tofall in line with international standards. According to the ILO, the countrystill does not have any legal representation in the form of unions orcollectives, and these regulations are not expected to cover the tens ofthousands of workers in the free zones.

UAE labor law alsoleaves out domestic labor, which therefore excludes an estimated 300,000 to500,000 domestic workers.

If these issues, alongwith the kafeel, or guarantor, system are reformed in the future, perhaps thenthe changes really could be viewed as a tectonic shift in policy as opposed toan aftershock from the financial crisis.  

 

 

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Financial Indicators

Global economic data

by Executive Staff
written by Executive Staff

CLIs signal deep slowdown in OECD area and major non-OECD member economiesn OECD Composite Leading Indicators (CLIs) for November 2008 point to deep slowdowns in the major seven economies and in major non-OECD member economies, particularly China, India and Russia. The following outlines the extent of these slowdowns:

  • The CLI for the OECD area decreased 1.3 points in November 2008 and was 7.3 points lower than in November 2007.
  • The CLI for the United States fell 1.7 point in November, 8.7 points lower than a year ago.
  • The Euro area’s CLI dropped 1.1 points in November, and was 7.6 points lower than a year ago.
  • In November, the CLI for Japan decreased 1.6 points, and was 5.5 points lower than a year ago.
  • The CLI for the United Kingdom fell 0.6 points in November 2008 and was 6.7 points lower than a year ago.
  • The CLI for Canada fell 1.2 points in November and was 6.1 points lower than a year ago.
  • For France, the CLI decreased 0.8 point in November and was 5.7 points lower than a year ago.
  • The CLI for Germany fell  2.0 points in November and was 10.7 points lower than a year ago.
  • For Italy, the CLI fell 0.2 point in November and stood 5.0 points lower than a year ago.
  • The CLI for China decreased 3.1 points in November 2008 and was 12.9 points lower than a year ago.
  • The CLI for India fell  1.2 point in November 2008 and was 7.6 points lower than in November 2007.
  • The CLI for Russia decreased 4.3 points in November and was 13.8 points lower than a year ago.
  • In November 2008 the CLI for Brazil dropped 1.1 point and was 2.9 points lower than a year ago.

Strong slowdown in the OECD area

Strong slowdown in the United States

Strong slowdown in the Euro area

Strong slowdown in China

Strong slowdown in the United Kingdom

Strong slowdown in Canada

Strong slowdown in France

Strong slowdown in Germany

Strong slowdown in Italy

Strong slowdown in Japan

Strong slowdown in India

Strong slowdown in Russia

Downturn in Brazil

  • The above graphs show each country’s growth cycle outlook based on the CLI, which attempts to indicate turning points in economic activity approximately six months in advance. Shaded areas represent observed growth cycle downswings (measured from peak to trough) in the reference series (economic activity).
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Financial Indicators

Regional equity markets

by Executive Staff
written by Executive Staff

Beirut SE  (1 month)

Current Year High: 1,629.74           Current Year Low: 724.04

  • The Beirut Stock Exchange ended the review period with low trade volumes as the BLOM Stock Index closed the January 23 session at 1,114.77 points, down 5.3 percent from the start of 2009. Shares of real estate firm Solidere recorded limited price movements in the $16 range throughout January, whereas banking sector stocks BLOM and Audi came under some selling pressure. Although the Lebanese banks have been regarded as largely impervious to the calamities experienced by financial institutions in most other countries, the two largest banks on the Beirut bourse traded lower by 5 percent to 10 percent in the first weeks of 2009. Political and security concerns, which intruded upon the country in January through the Gaza invasion and its potential implications on Lebanon, are known as depressants for trade on the BSE, whose wishes for good fortunes in 2009 are likely to depend predominantly on internal stability, regional economics and international progress in solving conflicts in this part of the world.  

Amman SE  (1 month)

Current Year High: 5,043.72             Current Year Low: 2,561.30

  • The Amman Stock Exchange Index closed at 2,677.03 points on January 22, trading lower in the first weeks of 2009 but only at a minor net loss of 2.95 percent from the start of the year. When measured against the first trading session on January 4, the trajectories of the four official sub-indices on the ASE showed industrial and banking sectors underperform the general index by 5.5 percent and 3.5 percent, respectively, to January 22, while services and insurance did better than the general index by small margins. Jordan’s parliament started debating the issue of legislating stronger supervision of financial intermediaries, most specifically foreign exchange companies whose dabbling in brokerage last year had caused problems. Arab Bank started the year under pressure, weakening 12.7 percent between January 4 and January 22. Mining firms Arab Potash Co. and Jordan Phosphate Mines Co. dropped 6.5 percent and 8.4 percent, respectively, in the same period. With a price to earnings ratio of 14.78 times as per Zawya calculations, the ASE is in the top tier of share valuations across the MENA region at this time.

Abu Dhabi SM  (1 month)

Current Year High: 5,148.49             Current Year Low: 2,136.64

  • The Abu Dhabi Securities Exchange index closed at a 52-week low of 2,136.64 points on January 22, 10.6 percent down from the start of 2009. At first glance, the ADX has moved in step with its smaller neighbor, the Dubai Financial Market. Both waded through troughs in the last two weeks of 2008, both reached relative highs at the end of the first week in 2009 and both have weakened since. Real estate, banking and finance sub-indices accounted for the ADX descent, with a notable difference to the DFM in that Dubai’s banking values performed better than the investment companies tracked by a separate sub-index. Analysts have many arguments about Abu Dhabi’s real estate outlook being more robust than Dubai’s, but in the review period the ADX real estate sector index dropped more than its DFM counterpart. While much fuss had been made in the past three months about the differences between the two emirates, in early 2009 their bourses point to them being on the same macroeconomic team.

Dubai FM  (1 month)

Current Year High: 5,960.16             Current Year Low: 1,462.11

  • The Dubai Financial Market closed at 1,472.82 points on January 22, representing a drop of 10 percent from the start of 2009. Real estate and construction stocks have been through the mill again last month as the concerns and often highly emotional decisions of investors continued to drive the market. Emaar Properties, Union Properties and Arabtec Holding were among the companies hit by selling pressure. Arabtec traded at $0.29 and Emaar at $0.51 on January 22, both down in the 90 percent range from their 2008 highs. On macroeconomic turf, forecasters of banks such as Standard Chartered revised their forecasts for the Dubai economy even lower than their views had been around October, in the previous round of prediction making. Standard Chartered in January dared an estimate of 0.5 percent real GDP growth for Dubai in 2009. Sector-wise, the emirate appears to have developed a collective over-sensitivity to bad real estate predictions, just as it had seemed oblivious to all warnings of potential bubbles and downsides of property markets until spring of last year.

Kuwait SE  (1 month)

Current Year High: 15,654.80            Current Year Low: 6,496.80

  • The index of the Kuwait Stock Exchange moved south, in daily increments, during the January 1 to January 22 review period. Its close at 6496.80 points on January 22 indicated a new 52-week low as well as a 16.5 percent drop from the start of the year. In international and regional context, the KSE underperformed the Dow but was not far from the MSCI Arabian Markets, which also exhibited strong downward pressure in the same period, with a drop of near 17 percent. In terms of sectors, real estate, investments and banking underperformed the KSE general index by between 4 and 7 percentage points. Besides worries about oil prices in the massively energy export-dependent country, punches to the securities market came in the form of news that Investment Dar (TID) and Global Investment House had been hit by problems. TID, overexposed on the debt side, slumped 62.75 in the review period. Global, whose shares similarly lost more than half of their value, had defaulted on close to $3 billion in debt obligations but in mid-January was given 60 days to find a solution. The company could also bask in being winner of an award as “Best Islamic Fund Manager,” according to a January 22 press release.

Saudi Arabia SE  (1 month)

Current Year High: 10,351.03            Current Year Low: 4,264.52

  • The Saudi Stock Exchange’s Tasi fared like a man with mild stomach flu in the middle of a GCC epidemic of markets diarrhea. Closing at 4,556.80 points on January 21, the Tasi was down 5.13 percent from the opening of its first session in the year. Results season has cast increasingly darker shadows from the middle of the month. The big bad earnings day on the SSE was January 20 when market leader Sabic presented its astoundingly low Q4, 2008 net profit of $90 million — representing a drop of 95 percent from Q4, 2007 and undercutting analyst expectations for the last quarter by around $800 million. The company attributed the change in net profit to global weakening of demand for its products. Sabic’s share price lost around 21 percent from January 1 to January 21; theoretically, similar to many other stocks in MENA, Sabic is now a total bargain. Another massive downward surprise came from food conglomerate Savola, whose shares plummeted by close to 30 percent over some 15 days before and just after the company announced a Q4 loss of $124 million because of provisioning related to deterioration in the value of its investment portfolio. 

Muscat SM  (1 month)

Current Year High: 12,109.10            Current Year Low: 4,223.63

  • The Muscat Securities Market just doesn’t get the full attention of international analysts, and there aren’t really many opinions to choose from why the MSM index dropped 19 percent from January 1 to January 22, to a close at 4,405.43 points. Banking stocks were the most obvious culprits in the downtrend; while Bank Dhofar achieved a seven percent price gain during the review period, its peers Bank Muscat and National Bank of Oman traded at the other end of the price development spectrum and saw their share prices drop 25.5 percent and 33 percent, respectively. Jazeera Steel was the market’s worst performer, with share price losses of almost 47 percent, presumably linked to the weakening demand expectations for steel pipes. An international analyst opined that Oman would face economic pressures in 2009 due to the falling oil price and its comparatively low amount of oil resources.   

Bahrain SE  (1 month)

Current Year High: 2,902.68             Current Year Low: 1,660.05

  • The Bahrain Stock Exchange Index closed at 1,660.05 on January 22. This reading also represented a new 52-week low, as the KSE recorded on the same day, but the drop from the start of 2009 for the BSE was a comparatively benign eight percent. The BSE might even boast of doing better than the Dow these days, if only the tiny bourse were not light years behind the size of a major stock exchange. By sectors, the banking and investment sub-indices were the BSE’s downward drivers, while hotels, insurance, industry, and services kept their noses pretty much above water. Market cap leader Batelco could report a modest increase in its annual results to $276.4 million net profit for 2008; its fourth-quarter results in 2008 appeared to be in line with the overall earnings development. Batelco shares gained less than one percent in the review period, meaning the company was among the BSE’s best performers in the year to date.

Doha SM  (1 month)

Current Year High: 12,627.32            Current Year Low: 4,589.76

  • Qatar was the least fortuitous securities market in the GCC in the early weeks of 2009. The Doha Securities Market index closed at 4815.02 points on January 22, down 30 percent from the start of the year. Note that making a fresh start doesn’t mean that things go well from the first minute. All investors and market augers who might have hoped that 2009, either from the get-go on January 1 or from the Obama presidential oath on January 20, would see global financial markets blessed by a magical Oz factor have the counter proof: the most-watched US index performed unimpressively during inauguration week and even dropped below 8,000 points on inauguration day. When measured against its first active day in 2009, the Dow gave up 10 percent by market close on January 22. Of all GCC exchanges, only the Saudi and Bahraini ones performed better than the Dow in the New Year, while Qatar came in abysmally. One wonders why the DSM underperformed every market in sight, but Doha-based analysts don’t appear unified on the issue quite yet: some experts explained the slide as catching-up with peers, while one investment firm simply called a one-week, 14 percent drop “a mixed performance.” 

Tunis SE  (1 month)

Current Year High: 3,418.13             Current Year Low: 2,648.43

  • The Tunindex accomplished a gain of 2.41 percent from January 1 to January 23 when it closed at 2,959.66 points. With its economic and political profile that is more removed from oil export prices and from the Near Eastern conflict, the Tunis Stock Exchange started the year under the conditions of a positive disconnect from regional and global share price trends. Poulina Group Holding, which since its entry to the exchange in September of last year is the TSE’s strongest company by market capitalization, shed 5.63 percent in the review period. Banque de Tunisie, the exchange’s strongest bank, ended the period 1.8 percent higher. According to ratios computed by Zawya, the Tunisian bourse saw 8.69 percent volatility in January trading and its price to earnings ratio stood at 11.58 times at the end of the review period.

Casablanca SE  (1 month)

Current Year High: 14,925.99            Current Year Low: 9,405.86

  • The Casablanca Stock Exchange opened the year with a sudden and strong slide of nearly 1,600 points that resulted in a two-year low of 9,405.86 points when 2009 was just a week old. The index then regained 450 points and closed its January 23 session at 9,979.81, down 5.6 percent from the January 2 session. The CSE’s market cap leader, Maroc Telecom, saw some volatility and experienced a net drop of 5.4 percent in the review period; the company announced positive results for both the fourth quarter of 2008 and the entire year on January 19. Its net profit for 2008 grew 7.2 percent to $3.5 billion. The real estate group Addoha and the conglomerate ONA Holding were among the weaker performers in the review period, registering share price losses of around 15 percent each.

Egypt CASE (1 month)

Current Year High: 11,935.67            Current Year Low: 3,643.34

  • With the start of 2009, the Egyptian bourse headed straight into another tunnel with only the slightest glimpse of light around after the year’s first full three weeks of trading. When measured from the January 4 year-opening session until its January 22 close, the CASE 30 Index dropped 19.1 percent and only just moved up a notch from a two-month low in the final session of the review period. It closed the day at 3,810.18 points. Local market analysts and brokers pointed to regional and international conditions, saying that the Cairo and Alexandria Exchanges were affected by heavy selling from regional investors; the analysts added they saw nothing wrong with the domestic market that would explain the above-average downward pressure. Orascom family heavyweights Orascom Telecom Holding and Orascom Construction Industries shed around 24 percent apiece from the start of the year. Manufacturing firm El Sewedy Cables took a steeper fall and lost over 30 percent.
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Finance

Money Matters by BLOMINVEST Bank

by Executive Staff
written by Executive Staff

Regional stock market indices

Regional currency rates

Algeria connects Spain to gas pipeline

Medgaz, the international natural gas consortium of five companies, completed the process of laying pipeline between Algeria and Spain. The 210 kilometer distance separating the coasts of the two countries is now connected by a 61 centimeter diameter subterranean pipeline. The pipeline that is laid at depths of up to 2,160 meter is projected to transport 8 billion cubic meters of natural gas per year between Spain and Algeria. The project that cost $1.27 billion was signed in August 2000 and will start transporting gas before the second half of 2009.

Oman to develop airports’ maintenance facilities

The Middle East maintenance, repair and overhaul (MRO) sector was worth $2.2 billion last year and is expected to grow by 70 percent to $3.4 billion over the next 10 years. The Omani government is participating in this growth with issuing tenders for contracts to design and supervise the construction of two new maintenance facilities at Muscat and Salalah airports. The Transport and Communication Ministry is continuing the expansion scheme at the two airports by planning a maintenance, repair and overhaul facility for both sites. The project has an objective for enhancing the Omani aviation services capabilities and developing the country’s transport and tourism infrastructure.

Morocco’s inflation hits five-year high

Inflation in Morocco has reached its highest level in five years. Prices increased by 3.9 percent in 2008, compared with an inflation of 2 percent in 2007. The rise in food prices was the main factor, with food inflation at 6.8 percent, while non-food inflation was just 1.4 percent. It is worth noting that Morocco’s underlying inflation, which excludes commodities such as diesel that are subsidized by the government, grew by 4.5 percent and is higher than the overall inflation. Rabat recorded an inflation rate of 4.9 percent, Tangier and Casablanca’s inflation were 4.5 percent and 4.1 percent respectively. On the other hand, unemployment in 2008 is projected to hit 9.5 percent, down from 9.75 percent in 2007, with a labor force of 11.3 million. Furthermore, in 2008, Morocco’s main exports of phosphate rock increased by 168 percent over 2007 to $5.66 billion with a price of $409 per ton in the third quarter of 2008.

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MENA Cristal AwardsSpecial Section

Antony Lawrence – Q&A

by Executive Staff
written by Executive Staff

Antony Lawrence has been the director of marketing and innovation at Jumeirah Group since 2005. Founded in 1997, Jumeirah Hotels & Resorts is considered as one of the most innovative and luxurious hospitality providers worldwide. With the company’s rich portfolio, it continues to be a hospitality industry leader in the MENA region.

E What is your marketing strategy at Jumeirah Group and how has it changed since the financial crisis began?

Our marketing strategy has changed slightly. What we are trying to do is create not just brand campaign, since that is what we were traditionally doing, but also to do tactical advertising. ‘Tactical advertising’ means that you get a response rather than just telling people about yourself and how wonderful you are. The other big change is, instead of press advertisement, which was traditionally one of our ways of getting across, we try to use the web more to be able to track where our customers come from as well as their habits, so it is more sophisticated. We just finished an 8 million Dhs ($2.17 million) campaign only on the web. We will be promoting the brand on the web, as our cost of sale, which has become much lower on the web since we adopted direct booking, can offer our customers better deals.

E How exactly do you implement the two-way communication between you and your client?

We have a matrix solution involved in the web booking so we can actually track our customers and see where they are coming from and what the trends are, what they are booking in terms of length of stay and which media is most successful. So since the campaign started running we have seen successful results on BBC for instance, where we have been doing a lot of work. We have also been working with few of our partners like the Emirates Holidays and Emirates Airlines to make sure that we leverage our media dollars and to generate joint initiatives.

E How are you being affected by developers delaying projects?

It is just frustrating what is happening, six months before the opening of a hotel in the region we try to push some activity into that area and we would promote that space. But until we have got the opening date in place there is no point in starting to do that. So we have to slow down a little bit. Certainly the momentum is already there, because the sort of signings that were already made are from more than two to three years ago and are due to open, so it is not like they are not happening; it is only the ones that have not come out to the ground yet. I think that we will have to wait and see what happens. The other thing that I think is being big for us is that the Dubai brand is really spread around the world and that has been really helpful for us. In America three years ago we only had two percent brand awareness and now it is 10 percent awareness, so it is a huge and incredible change.

E What are your expectations for advertising in the hotel industry?

I am the judge and on the jury of advertising creativity and what was interesting to me was that the creative standards were very high in certain categories. We knew who the winners were; there was a lot of average [advertisements] and some where very good. The challenge now for advertising in the region is to raise the bar, try to be resourceful and not just do the creative work but really use media more creatively as well. As a client our demands are going to be very high and we need to work together [with agencies] to try create something that is going to hit the target that we are looking for. We need to do something that will track and measure our customers, and we are going to need to put more matrix solutions in so that we can see what is delivering and what is not delivering, as well as be more flexible. Every penny has to count. I think we have to be wiser and work a bit harder and possibly to take risks and deliver results at the same time. Within the hotel industry as well, we are being very tactical. Anybody can come up with a campaign saying ‘2 nights for the price of one’ — it is like a supermarket and there is nothing clever about that. Then again if everyone is doing it anyways it does not make any difference. It’s about creating some sort of difference and producing some new offerings. My view is to continue to build the brand message, both globally and locally, and really try to create a unique space.

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