Finance

Lebanon – Banked for the storm

by Executive Staff
written by Executive Staff

While some experts believe this year will not be different than the last for Lebanon’s banking sector, others are not so sure. Most agree, however, that conservative policies set by the Lebanese Central Bank allowed the banking sector to avoid any major effects from the global financial crisis. Prohibiting Lebanese banks from purchasing subprime products in the US, building up its foreign reserves to $13 billion (acting as a preventive measure to guarantee the Lebanese lira’s stability), ordering banks to have a minimum of 30 percent of their total assets in cash and setting rigid loan level ceilings for real estate projects, the central bank has played it cool by keeping assets safe and close to home. As of November 26, 2008 Central Bank Governor Riad Salameh announced that the combined assets of Lebanon’s banks totaled more than $100 billion — four times the country’s GDP. Bankers in Lebanon have agreed that the central bank takes pride in shying away from complex investments and structured products that it does not understand, and with the international circumstances that unfolded, it was definitely the right move to make for the Lebanese banking sector. Unfortunately, one thing the central bank cannot protect the sector from is political instability.

Well-known for its volatile social and political environment, Lebanon made a recent comeback after the Doha Accords were signed at the end of May 2008. Foreign remittances by expatriates were the best proof that Lebanese abroad viewed local banks as safe havens, totaling $5.5 billion by July 2008. Those remittances are expected to have surpassed the $6 billion mark by the end of the fourth quarter 2008. In just the first nine months of 2008, deposits into Lebanese banks reached an astounding $7.8 billion — up from the previous record high $6.6 billion for the entire year of 2007. The Economist Intelligence Unit (EIU) predicts that with the June parliamentary elections approaching, a rise in political uncertainty this year is expected to have a negative impact on the flow of foreign remittances into Lebanon. Nassib Ghobril, head of economic research and analysis at Byblos Bank, believes deposit inflow is “likely to slowdown this year, because a big part of the deposit inflow is from the Lebanese diaspora,” adding that, “the key question is, will these expatriates have the same purchasing power and liquidity as they did before the global financial crisis?” He concluded, “this year is definitely going to be different, economically, than last year.”

A rock, but not an island
While the Lebanese banking sector has so far been insulated from the global financial crisis, it is not isolated. Lebanese banks will begin to feel the inevitable decline in economic growth in the coming months. The EIU forecasts economic growth in Lebanon to slow to 2.7 percent in 2009 — down from its previous outlook of 3.1 percent — while finance minister Mohamad Chatah projects a three to 3.5 percent growth rate, down from a previous estimate made in 2008 of five percent. Factors affecting the country’s growth are mainly due to political uncertainty, economic contraction of Western markets and sluggish growth rates in the Gulf. These elements are likely to have an implicit impact on Lebanon’s tourism, real estate, construction and financial sectors, according to the EIU. Despite high levels of liquidity, meager exposure to real estate lending, robust deposit bases and strong support from the central bank, Lebanese banks could be adversely affected by the high political risk and sudden outbreak of conflict that has threatened the country in the past, most recently in 2005, 2006 and 2007.
Beginning the New Year on uncertain ground, banks in Lebanon are still waiting for fourth quarter results to be announced. Ghobril asserts, “It is clear from the third quarter 2008 results that [fourth quarter outcomes] won’t match past results. The fourth quarter was more challenging than the third quarter.”
This year, banks will be even more prudent than before, as the global financial crisis has taught every bank lessons that can only be learned in the crucible. Ghobril highlighted the increased competition amongst domestic banks, as lending opportunities “will be scarcer.” Moreover Ghobril says, “banks will be more careful in scrutinizing their lending opportunities,” especially since “lending opportunities abroad are likely to decline.”
More crucially, Lebanese banks will need to manage their liquidity. “Another concern is the excess liquidity in Lebanese pounds that accelerated in recent months, and where to place this liquidity,” he contends, although the top priority on banks agendas this year will definitely be about “maintain[ing] liquidity over profiting,” Ghobril adds.

Bank stocks
Like most stocks on the Beirut Stock Exchange (BSE), bank shares are vulnerable to Lebanon’s political environment. Thomas Schellen — publishing editor at Zawya Dow Jones — contends that, “Share prices of Lebanese banks have definitely been sensitive to the political risk and other developments.” This was most evident in May 2008; after the Doha Accords were signed, bank shares shot up but have since declined. Schellen notes that major banks such as BLOM, Audi, and Byblos “have been on a rather steep slide” since the middle of last year.
Yet Ghobril points out that “stock markets have not really reflected the performance of the listed banks,” and that “they are doing much better than their share prices in terms of performance.” Due to the lack of liquidity and small size of the BSE, bankers seem to turn a blind eye to share prices as the sector has been outperforming itself in the last few years.

Forecasts
Overall, 2009 will be a year of vigilance for the banking sector in Lebanon. Schellen said he would prefer to “use dice or Chinese oracles” to predict what will happen this year, “because in the current economic environment — on a global scale — it’s very unlikely that anyone’s predictions will be on target for 2009. There are so many challenges.” Without a doubt, the most difficult hurdle to prepare for in Lebanon is political uncertainty. Ghobril said he “cannot overemphasize the importance of maintaining political stability,” as it is “key to increasing confidence, which in turn encourages new projects, investments and businesses to expand and consumers to borrow.” But, with Lebanon’s political history, one can never know. “With the elections approaching,” says Ghobril, “it is likely that consumers will be apprehensive and investors will take a ‘wait and see’ approach.” Marwan Mikhael, head of research at BLOMINVEST Bank, expected that as long as the political situation is secure, “2009 will be a record year” for Lebanese banks. If the environment does worsen, on top of slower growth, Mikhael foresees “a slowdown in the capital inflows to Lebanon.”
All in all, Ghobril trusts that this “year will be conservative and cautious, [as we wait] for things to clarify domestically — regarding the political front with the elections — and regionally, economically and financially.” On the bright side, Lebanon’s resilience to political impermanence has enabled the banking sector “to adjust in an environment of political instability,” notes Ghobril. With the unpredictable global financial events and domestic uncertainties, pragmatic approaches throughout the banking sector are indispensable this year. Schellen has faith in the country’s banks and concludes that “confidence in the banking sector does not seem to have waned, as far as I hear, as compared to confidence in banking sectors elsewhere, I think the Lebanese [banks] still shine and look like gold right now.”

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Finance

The Central Bank of Lebanon – Riad Salameh (Q&A)

by Executive Staff
written by Executive Staff

As governor of Lebanon’s central bank for the past 16 years, Riad Salameh has seen political and financial instability wrack his country, and he has been lauded by domestic and foreign observers for his steady hand during those times of crisis. Executive Magazine recently sat down with the governor to discuss deposit tax, remittances and strategy.

E At present, how is the Lebanese banking sector performing? When will it feel the impacts of the global financial crisis?
Lebanon will not feel the effects of the financial crisis, because we took the necessary measures preemptively. This crisis has turned out to be a confidence crisis. Confidence in the banking sector in Lebanon and in the monetary in general, is very high, as witnessed by the large conversions from dollars to the Lebanese pound. In 2008, de-dollarization was important and the central bank bought more than $8 billion from the markets. Dollarization rates in deposits in the banking sector dropped from 77 percent to around 69 percent during 2008. The measures that we took preemptively were essentially based on preventing the banking sector from leveraging its balance sheets and on the other side, regulating the structured products and forbidding the acquisition of toxic assets — like the sub-prime — by banks. So the banking sector in 2008 recorded profits that were over $1 billion, which was the best year for them. The liquidity that we do have in our system will prevent any crisis in 2009. As you know our GDP is driven, essentially, by consumption and we do not have a real estate bubble in the country, therefore we are still predicting a real rate of growth of four percent. The only risk for Lebanon is political or security, because the consumption sector is sensitive to events that are linked to these two elements.

E With the regional financial situation at hand, what is expected in terms of foreign remittances to Lebanon this year?
We have run a scenario here at the central bank that we call the ‘worst-case scenario,’ whereby the remittances would drop from $6 billion — which was the level of 2008, according to the World Bank — to $4 billion, which is almost a 30 percent drop. On the other side, we have also computed the import bill of the country, given the new prices of oil — which is a big import for Lebanon — and raw material in general, especially building material and foodstuffs. It turned out that in the worst-case scenario this is going to affect the balance of payment by around 10 to 15 percent. In 2008, our balance of payment closed with a surplus of $3.4 billion. Therefore, an effect of 10 or 15 percent on this balance of payment will not really be affecting the credit possibilities of our system, whether to the public or to the private sector. Now if some Lebanese would return to Lebanon, I personally view it as an opportunity to improve the productivity in our economic sector, because these people have talent, that’s why they were hired outside. Now they have experience and connections. The central bank, in agreement with the government, is going to take initiatives to facilitate credit for new businesses created in 2009.

E With the ongoing political situation in Lebanon — and the upcoming parliamentary elections in June – what are the implications for the Lebanese banking sector?
The elections should happen in a better situation now that we have the reconciliation that took place in Kuwait between Saudi Arabia and Syria. As you know, Lebanon is affected by regional tensions and it is positively perceived here when you have Arab reconciliations. So, the markets are telling us today that we don’t have a real problem in 2009 and we have seen through all the month of January, more conversions from dollar to Lebanese pound. I don’t foresee any negative implications on the banking sector.

E What strategies and regulations will the central bank be implementing this year that are different than the past?
The central bank will make sure that the credit market is working normally and that there are packages that could help to decrease the cost of borrowing, especially on newly created businesses. We do not anticipate any major or fundamental change in the model that we have built through the years. There is no need — given the stability we are seeing and the progress in the banking sector — for any new administrative decision. This year what we are looking at is… implementing Basel II, so we are looking to work more in the elaboration of circulars pertaining to the application of Basel II. We are going to improve on the payment system. We are working today with the Banking Association to introduce the iBank, which is a banking identity for each customer. This will improve the transparency and also the speed of payment. There is also going to be the introduction of what we have called the ‘city project’, which links online and real time the banks with the Central bank so they can have direct access to the information they need. Of course it’s secure access. So we are looking at some improvement, but no administrative measures.

E At a recent conference in Beirut, you announced your support for a single Gulf currency. What are the pros and cons of creating a Gulf Central bank? How will it affect Lebanon?
The Gulf countries have been working for many years to create this currency that we think is an important step forward that can be an advantage for all the Arab countries. The idea to create an Arab currency is based on creating an instrument that would help the Arab countries in the future to face any major crisis that could happen internationally. As you have seen today what saved the US and Europe was the fact that they had an instrument, a currency that was accepted worldwide. So they could create more of this currency and inject it into their economy and keep this economy afloat. You need a currency as an instrument for stability and development… This is a serious project, but also we all know that it will take many years if we start today in order to implement it. In Europe, it took them 50 years. I think it’s important to start laying the ground for that. The Gulf currency can be the first pillar for that project.

E The recently drafted five percent non-deductible tax on interest deposits — which is reportedly going to go up to seven percent – has left many bankers feeling uneasy. Some of them say it is unjustified and its benefits are outweighed by the negative impact it has on the banking sector and depositors. What is the reasoning behind this tax?
The government is seeking to create revenues, because one of the major vulnerabilities of our system is the deficit. The yearly deficit that is increasing and adding to the stock of debt — Lebanon can handle its stock of debt, but the markets need to see less deficit. Of course there are revenue measures, but there is also on the other side, an obligation to the government to rationalize its expenditures. I think that the banking sector that has lent consistently to the government is frustrated by the fact that they are not seeing reforms being implemented. This tax is part of the Paris III program, which was approved by the government, by the parliament and even approved by the banking sector at that time. Including this in the budget does not mean it’s going to be applied immediately because it is stated that it will be left to the Ministry of Finance to determine the proper timing. Certainly today everybody agrees that it is not the time to put more taxes on deposits and therefore on the liquidity of the country. Based on that, I believe this measure — and according to what I understand from the Minister of Finance and the government — will be enacted in the budget, but will not be applied as long as we have this worldwide environment of a crisis in the banking sector.

E With the low interest rate on the US dollar, dollarization of the Lebanese economy is decreasing and people are saving in Lebanese pounds to receive higher interest rates. How safe is the Lebanese pound?
The Lebanese pound is sound, safe and has weathered major crises in the past. The market is confident about the strength of the Lebanese pound. It’s not only an issue of interest rate spread, because you had in the region many currencies — or in emerging markets — that are paying now more interest than the Lebanese pound and yet they have not attracted conversions toward them. On the contrary, we see that their value is decreasing. You can site any emerging country in the past six months — we have seen their currency drop in a substantial way. So there is confidence from the market that the currency is sound and we are determined to keep the Lebanese pound stable and now we have more means to do that. As you know the balance sheet of the central bank is at an historical high. Our liquidity in foreign currency is approaching $20 billion, our gold stock is evaluated at more than $8 billion and we do have other assets that can add up to around $2 billion. So we have a balance sheet that is equal to the GDP of the country and that is a very rare situation in the world.

E The central bank has a lot of obligations in 2009. How are you looking to finance these payments? What should be done for Lebanon to start paying back its national debt?
In 2009, you have the foreign currency denominated debt and you have the Lebanese pound debt. On the foreign currency, the decision was taken to exchange all the bonds that are due in 2009 into maturities that are to be in five to 10 years. The exchange is presently taking place — the Ministry of Finance is preparing for that and we know from the banks that it’s going to be successful. On the Lebanese pound side, there is a heavy demand on treasury bills. I don’t think that the central bank will have to intervene to finance the government this year because of that demand and because the government is running a large surplus in its accounts in Lebanese pounds at the central bank. Our contribution would come in case the government does need foreign currency to pay the interest in foreign currency on the total debt for this year and to meet their demand to buy dollars from us for the import of fuel… As long as political and security situations are good, we view [2009] as a stable year.

E Will bank profits for this year be the same as last or will they slowdown?
I think the stress in 2009 — and I’ve spoken to the bankers about this — is not to fight to improve their profitability, because it is already in good shape, but more to have their attention on keeping good liquidity and not taking undue risks. Lebanon today is one of the rare countries that has excess liquidity, especially in the area. I know that they will be approached for financing in the region, so they have to be careful about their decisions. De-dollarization — and we encourage that — is helping us to decrease the risks, because once the savings are in Lebanese pounds, the usage of this currency is purely local and cannot be used regionally or internationally. So we want to be conservative in 2009.

E In all your years spent as governor of the central bank, what has been your biggest challenge to date?
I am maybe one of these governors who had a big challenge every year. If you want to go back the last 15 years, I have seen Israel invade Lebanon three times. I have seen crisis in the emerging markets — first in Asian markets, then in Eastern European markets, then in Latin American markets. We have lived through very hard political times — the country was always split in two. We have seen the assassination of Prime Minister Hariri and the assassination of many other prominent personalities. Blockades on Lebanon and the war in 2006. International crisis in 2008. A local political crisis with no institution functioning in 2007… I leave it to you to decide which one was the most difficult.

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Finance

Investment – Proceed with caution

by Executive Staff
written by Executive Staff

According to a UBS report entitled, “Proceed with Caution,” the year to come should be tackled carefully in terms of investment opportunities. The report identifies potential opportunities and highlights pitfalls to be avoided by investors as the global economy slides further into recession. It also looks beyond the present crisis of confidence occurring the world over and forecasts investment returns for major asset classes and regions. The report indicated it was time to calculate risk, noting “attractive valuations of certain assets must be weighed against the risks stemming from a global recession. We remain defensive overall but recommend increased exposure to corporate bonds.”


The autonomy of a price collapse
Bernhard Kern, executive director of Investment Solutions at UBS AG, remarked that over the past 129 years the SP 500 has had 44 negatives overall. “Among assets that have taken the hardest blow during the credit crisis are featured oil, followed by Middle East equities,” he pointed out. Kern emphasized that previous oil prices between $80 and $100 per barrel were driven by demand, while prices above this level had been mostly fueled by speculation. He explained that the price of oil would probably vary between $30 and $50 in coming months, but it would again witness levels of $100 per barrel in the next few years.
“The collapse of the financials culminated with the bankruptcy of Lehman brothers, which heralded the end of the brokerage model,” Kern pointed out.
The director explained that after September 15 — the date of the Lehman bankruptcy — trust had been significantly eroded, with lending plummeting, while equities were the only functioning market that had remained. He attributed the rally on the dollar partly to the fact that investors had sold off their foreign assets in order to bring their money closer to home.
Kern expected the real estate market to stabilize with the supply of new homes coming down. Regarding global growth levels, he pointed out that GDP growth levels in the developed world were below zero percent, while they remained far from their full potential in the developing world. He estimated that the first two quarters of the year would be difficult for global economies, while the recovery would be a gradual one.
Kern envisioned three possible economic scenarios for the crisis. The first was a V shaped economic recovery with economies picking-up relatively quickly, to which he attributed a 15 percent chance. The second scenario, the most probable according to Kern, would be a U shaped recovery accompanied by a fairly deep recession, which had a 60 percent probability. The final and most pessimistic recovery scenario, with a 25 percent probability, was defined by a deep recession followed by a prolonged period of stagnation.
Kern expected the economic situation to be difficult in the next few months, with stock markets possibly bottoming out yet again before recovery would kick in mid-2009.

Balancing risk
His views were backed by the UBS report — which underlined that improved valuation should be balanced against recession risks — and this has several implications for asset markets. The report noted that “besides their corrosive effect on fundamentals, they also lead to heightened risk aversion, driving investors to seek shelter in risk haven assets such as cash, gold and government bonds. This then causes the price of assets to fall. If so, some higher risk assets may reach a point where they deliver a long-term cash flow that commensurates with the increased level of risk they entail. Although we do not foresee a deflationary outcome, we think a defensive stance is still warranted, given the uncertainty about the depth and duration of the global recession.”
The report added that corporate bonds offered value despite higher defaults. “We recommend that investors start rebuilding equity cautiously with a focus on sectors where earnings contraction is likely to be less pronounced.” Such sectors were identified as healthcare, consumer staples and telecoms.
The report added that, “higher risk opportunity awaited further evidence. It is unclear whether an easing of monetary conditions as reflected in central banks’ interest rates will begin to have a positive impact in 2009. However, as money and credit markets start to normalize, financials and other cyclical exposed equity sectors could benefit from such a policy stance.”
Reflation as a risk factor of government bonds was a final point mentioned in the report. Although deep economic recessions are usually supportive for government bonds, the UBS report fully dismissed that reflationary policies would begin to take hold before the end of 2009, stating that “a cyclical recovery in the economy amid higher fiscal deficits would likely push government bond yields high and prices lower.”

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Finance

UAE – Called to account

by Executive Staff
written by Executive Staff

With the tumultuous ride of 2008 fading, banks in the UAE are unsure of what awaits them in the New Year. Slower growth? Check! Tightened liquidity? Check! A troubled real estate sector? Check! The uncertainty comes in what else will banks operating in the Emirates have to deal with and how exactly will they weather the aftershocks of last year?

Waiting with baited breath, investors and analysts alike are anticipating the disclosure of fourth quarter 2008 results in the coming weeks. Before making any sudden moves, experts across the board agree that this year’s first quarter results will have an enduring affect on the banks’ performances for the remainder of the year. Moody’s Investors Service has already declared a “negative outlook” for the UAE banking sector in 2009. While statistics are momentarily unavailable, there are a few indubitable issues that banks in the UAE will be facing in 2009; with the sharp decline in oil prices and the ensuing oil production cuts, the fiscal surplus and real economic growth of the UAE in 2009 are expected to be notably weakened. Thankfully, the country’s “high levels of accumulated oil revenues, over the past five years have served as a catalyst for growth and the accumulation of substantial financial reserves,” Moody’s said. Once the international financial crisis washed ashore on the Gulf coast, a major slowdown in growth in the UAE — and across the GCC — was inevitable. During the five years up to mid- 2008, banks in the UAE were growing so quickly that their “funding growth couldn’t keep up with lending growth, which clearly was unsustainable,” notes Robert Thursfield, a director in the financial institutions group at Fitch Ratings. According to the UAE Central Bank, banks in the Emirates lent a staggering $70.7 billion in just the first nine months of 2008; but this year, lending conditions are being reigned in. The economy’s expeditious growth created a major liquidity problem throughout the UAE.

Where the trouble began
Backtracking to 2007, banks in the Emirates were awash with liquidity as foreign ‘hot money’ was streaming into the country, expecting a revaluation of the dirham. Cash deposits thus surged and the streaming liquidity empowered banks to go on a lending binge. According to Moody’s, the banks used short-term deposits to fund long-term loans. Then, after letting go of the idea of a currency revaluation, foreign funds briskly withdrew their money and liquidity in the country began drying up. The ratings agency estimates that liquidity fell to around four percent of total banks’ assets and it was in late 2007 that the UAE started feeling the brunt of tightened liquidity. Conditions worsened in 2008 once the financial crisis shook the foundations of the UAE economy and banks were one of the first to feel the effects. The continued “liquidity constraints observed [in] the last two quarters of 2008 are expected to have severe consequences, curtailing future asset growth and profitability,” exhorted Moody’s.
To support the mounting cash crisis, by September 2008 the UAE’s central bank announced it would inject $19 billion, while also setting up a $13.6 billion emergency fund facility. Around 15 percent of this fund had been absorbed by UAE banks as of January. Two out of three transfers from the injection have already taken place and the third shot is expected to happen soon. “Originally, they were talking about mid-year, but that may be brought forward. [Also], although initially liquidity was injected straight into bank deposits, we now understand [this is] being renegotiated and [it is] being used as Tier 2 funding. We should get clarity on that over the next couple of months,” explains Raj Madha, director of equity research at EFG-Hermes in Dubai.
The worsening property sector in the country has left the financial market very uneasy and virtually every bank has been — or will be — affected by its outcome. According to Credit Suisse, banks in the UAE have the highest exposure to real estate among their regional peers, with a 35 percent exposure rate for the first half of 2008. Since the credit crunch began, there is no doubt that this figure has risen. With high loan-to-deposit ratios and high exposure to the real estate market, UAE banks are becoming increasingly vulnerable to loan defaults. Some banks will be affected more than others and as Thursfield puts it, “you can’t be a bank [in the UAE] and not have exposure [to real estate].” Moody’s noted the “high potential for a decline in asset quality in the likely event of a property market correction, signs of which were apparent in [fourth quarter] 2008.” In particular, Moody’s was anxious about “the loans to ‘opportunistic’ developers that have been extended over the past four to five years following Dubai’s decision to allow freehold ownership to foreigners in 2003.” As Madha remarks, “It is virtually impossible for the banks to insulate themselves adequately against a very negative scenario, as the entire economy of the UAE is linked to property and if not property then [to] finance or tourism, or retail, all of which are also suffering.”

Baton down the hatches
Due to such unpleasant market conditions, it is no surprise that banks are tightening their lending policies. Emirates NBD — the largest bank in the Middle East — for example, announced in January that it would only consider expatriate customers for home loans if they earned a minimum of $6,800 per month, up from its previous limit of a mere $2,177. Lending policies will only heighten the problem of mortgage availability in the country, thus making it even more difficult for low and middle-income earners to finance their homes. Other banks in the UAE have taken similar action, with HSBC doubling its minimum salary requirements from $2,722 to $5,444 in November 2008. Lloyds TSB also raised its loan bar in late 2008, from $3,260 to a substantial $6,805. The bank, like its peers, bases these changes on the “exceptional market conditions” taking place. Banks in the UAE will definitely suffer “from higher delinquencies, both in retail and corporate lending,” underlines Thursfield. One major difference in banks’ strategies this year will be in residential mortgage lending. “Previously, [banks] might have lent to around 90 percent loan-to-value, now they might be only lending up to 60-70 percent loan-to-value. That will be a very straightforward way of reducing risk to that kind of exposure,” notes Thursfield.
Moody’s points out that the “equity price collapse in 2008 will affect [fourth quarter] financials (although its effects are expected to stabilize in 2009).” Banks in the UAE will eventually recover from this as they have a strong association with their wealthy sovereign and are — as Moody’s conveyed — “the principal architects and drivers of infrastructure and other large-scale businesses and have traditionally helped to boost the franchises of local banks.”
Madha hopes “that the banks do not have significant exposure to third tier developers or brokers; but if they do, they should certainly be reassessing that.” Going on to highlight what UAE banks need to focus on this year, Madha believes, “Finally, it is time to overhaul credit criteria and lending standards and impose a much more cautious approach to lending and credit scoring, encouraging working capital efficiency in all its clients, and watching cash flow and counterparty risk on every loan.” Aside from liquidity, oil prices and a faulty real estate market, Thursfield believes top concerns for banks this year will be “capital, profitability, funding, staffing, franchising, etc.” Another top concern for Madha is asset liability management. Banks must “make sure they have a full understanding of their exposure to the market risk,” he comments. In 2009, banks will definitely be more prudent with their assets and overall management strategies. The major challenge will be maintaining the results of 2008, as growth will unavoidably slow down.

New year, not so new strategies
Since the global financial meltdown hit home, banks in the UAE have indeed received a reality check. “Three months ago, most people seemed in complete denial that anything would happen in the UAE; now obviously that sentiment has changed dramatically”, states Thursfield. Strategies of banks have since been reviewed and the general sentiment is that an international crisis of such a vile nature could not have been foreseen in advance. Since the banks are well capitalized and are unlikely to default — especially with the sector’s sturdy bond with their affluent government — their main concerns will be rather easy to keep an eye on. Thursfield believes that the main strategies of banks will not change, albeit they may “be more cautious and will certainly slow down their lending in corporate and retail.”
Indeed, vigilance and calculated moves are key for 2009. Madha expects banks operating in the Emirates will be focusing on “stabilizing their balance sheets and their NPLs [non-performing loans]. Once they are able to achieve this, then they will be starting to look at issues of raising growth and profitability.”

Forecasts
The arduous obstacles ahead for banks in the UAE are nothing to look forward to, as Moody’s and others are confident that negative market conditions will “persevere for at least 12 to 18 months.” Envisioning the worst case scenario, Madha foresees a lack of improvement in the property market and “that a major state developer could default on its loans and liabilities.” Yet it is unlikely the government would allow that to happen. Thursfield posits a similar scenario, but with banks being the ones to default. He points out, however, that this would also be “pretty unlikely.” On the bright side, says Thursfield, “it could be a good result and lead to consolidation and then you would have fewer banks going forward.” Mergers and acquisitions just might become more attractive to some of the 52 plus banks operating in the Emirates and possibly pose a long-term solution for the over-banked country. Governor of the UAE’s central bank, Sultan Nasser Al Suwaidi, in mid-January underlined that, “consolidation between banks may provide one of the most effective solutions to face the shocks of the crisis.”
In the most ideal scenario, Madha hopes to “have confidence brought back to the market by an alliance with Abu Dhabi, establishing the financial viability of all businesses in Dubai.” Thursfield claims the best case would be if banks in the UAE could “maintain profitability levels from 2008.” This will, without a doubt, be challenging.
It will take quite some time for banks to fully stabilize, as the long-term effects of the global turmoil take their final shape. Governor Al Suwaidi forecasts credit growth in the country to slow to no more than 10 percent in 2009, after surging more than 50 percent in the year to June 2008. Needless to say, 2009 presents many challenges for the banking sector and depends greatly on how well banks respond to last year’s outcomes.

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Capitalist Culture

Populism – Dazed by idolatry

by Michael Young
written by Michael Young

As the carnage in Gaza escalated in January, about the most popular foreign leader in the region was the Venezuelan President Hugo Chavez. We might be able to understand the Arab delight when Chavez expelled the Israeli ambassador from his country (as later did his Bolivian counterpart, Juan Evo Morales), but less understandable was why so many Arabs ignored that Chavez is a populist autocrat who not long ago tried to change his country’s constitution to extend his mandate.

The question might seem disingenuous. The obvious answer is that Arabs don’t much care about what Chavez does at home, as long as he stands as a symbol for those issues the peoples of the Middle East consider important: uneasiness with Western capitalism, suspicion of globalization, hostility toward the United States and Israel, and a taste for radical behavior, or at least what can be sold as such abroad. Fair enough. However, the too- frequent Arab attraction to foreign autocrats tells us a great deal about the Arab world itself.
Here we have the region that perhaps most suffers from despotism, that is the most in need of open societies, term-limits on leaders, and lucid alternatives to the visceral aggression underlining populist behavior, and yet whenever its peoples look overseas, they tend to embrace those leaders who in most ways duplicate the behavior of their own oppressors. Instead of a capitalist culture of free markets and free minds, many Arabs will go for the radically chic choice of applauding dictators who irk the West. This was especially visible throughout the Cold War. The notion that America was more popular at the time than it was under George W. Bush is only true in relative terms. Even if America is deeply disliked today, it was never particularly liked two, three, and four decades ago, when Arabs were moved much more by the likes of Fidel Castro and Che Guevara, or by the bevy of post-Stalin Soviet leaders from Nikita Khrushchev to Leonid Brezhnev, then they were moved by the generally duller representatives of Western democracies.
Defenders would say this didn’t diminish the fact that, for many Arabs, such approval was mostly related to parochial concerns. The enemy was Israel between the 1950s and the 1990s, so it was natural to lean in the direction of those who were most antagonistic to Israel’s leading sponsor after the 1960s: the United States. Perhaps, but if that was the case, then this was a remarkable example of how so many people in the Middle East allow their agendas to be shaped by what they are against, rather than what they are for. And this may be one explanation, among others, for why the region ends up being so tolerant of its foul regimes. This was certainly true in Iraq. That the US was responsible for a bloody war and its aftermath is entirely possible. That this could have been avoided had the Bush administration made less of a mess of its postwar policies cannot be denied. But the removal of Saddam was, in and of itself, a necessary step toward any realistic chance of achieving a democratic Iraqi future.
That future may come or it may not come, but under no circumstances could it come while Saddam Hussein was in power. Yet how many Arabs would admit this is true? A tiny minority. For over two decades, since the start of the war against Iran, Saddam was a hero to the Arabs. And if they could once laud the “anti-colonial” posturing of the mad Idi Amin Dada, for example, then we know why they had no problem with a Saddam Hussein. By the same token, if they could stomach a Hafez Assad or a Moammar al-Qadhafi, there was no reason for them not to look with sympathy on places like North Korea and North Vietnam, or to list Chavez today as their favorite foreign leader.
The writers Ian Buruma and Avishai Margalit put their finger on the problem in their essay ‘Occidentalism: The West in the Eyes of Its Enemies’. They wrote of liberal civilization that “[i]t is a threat because its promises of material comfort, individual freedom, and the dignity of unexceptional lives deflate all utopian pretensions.”
Indeed, the populist autocrat has in him the promise and excitement of the boldly unachievable. Many Arabs may never have been convinced that Brezhnev would bring on a bright millennium of justice, even though they sided with the Soviet Union in his day. Yet, somehow they could convince themselves that Castro would move us all closer to it, or Ho Chi Minh, or Chavez today. These all seem to be men of which dreams are made, charismatic men, though their legacies have often been nightmares. The path to utopia is usually paved with repression.
It’s a pity that so many Arabs should still believe in false utopias, but also a sign that when it comes to their own polities, they have nothing to believe in at all.

Michael Young

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Fortress America in Baghdad

by Paul Cochrane
written by Paul Cochrane

Opened in the midst of the slaughter in Gaza and the twilight of Bush’s presidency, the new American embassy in Baghdad garnered less coverage than when its astronomical budget was first publicized in 2005.
The opening was more than the completion of the largest and most expensive embassy in the world. It marked the day the US diplomatic corps moved out of Saddam Hussein’s former palace and handed it over to the Iraqi government, five days after US forces officially came under an Iraqi mandate on New Year’s day.
Many Iraqis are eyeing warily the move from one palace to what is essentially an even larger one. The embassy is far grander — albeit minus the gold plated bathroom fixtures — than anything Hussein ever built during his nefarious reign.
It is on a level of Cold War era grandeur, similar in scope to the colossal project Nicolae Ceaucescu attempted in Bucharest, the centerpiece being a palace the Romanian leader wanted to be seen from space.
The 104-acre embassy complex, which is the size of approximately 80 football fields, nearly turned into a similarly sized white elephant as costs ballooned to $700 million and the project taking nearly two years longer than expected. In that time it became a symbol of the quagmire Iraq has become for the US, with no end in sight and costs spiraling upwards. But with the embassy finished and operational, it now represents the most prominent symbol of ‘fortress America’ today and, moreover, that America wants to stay in Iraq for longer than Barak Obama’s presidency will last.
As the International Crisis Group commented in 2006, “the presence of a massive US embassy co-located in the Green Zone with the Iraqi government is seen by Iraqis as an indication of who actually exercises power in their country.”
Visible from space and larger than the Vatican, the embassy draws historical comparisons to the Crusader castles of the middle ages. All that is missing is a crocodile infested moat around the walls.
But secure it certainly is, nestled inside the Green Zone, with a 4.5 meter thick perimeter wall to protect this city within a city that includes a power station, a water treatment plant, schools, restaurants, swimming pools and a shopping area.
With an annual budget of $1.2 billion, the 5,550 Americans and Iraqis working at the embassy — half listed as security — are certainly not roughing it. The residence of the US ambassador to Iraq is 1,500 square meters, while the deputy chief of mission has a “cozy cottage” measuring 900 square meters.
Tough though a posting to Baghdad may be for the diplomats, State Department, FBI, and federal agents that are to work out of the embassy, it is far from the realities of the “red zone” that lies beyond the walls, of power cuts, broken sewage pipes and violence.
That the US needed a secure site is understandable, given the track record of attacks on US embassies. In Beirut, the Americans are in their third embassy in less than 30 years, while the former US embassy in Tehran stands as a memorial to the overthrow of the Shah, and resultantly the American presence in Iran, the walls covered in colorful murals depicting the US as an oppressor, imperialist and warmonger. As Ayatollah Khomeini said in December, 1979: “This place is not to be considered an embassy but rather a ‘spy center’.” Following the US embassy hostage crisis in Tehran, the US had to resort to the somewhat farcical position of operating out of the Swiss embassy.
A drive past other embassies in the region indicates how seriously security is taken, with the Istanbul compound a veritable fortress, as is the one in Amman, with armored personnel carriers lined up outside and reportedly surface- to-air missiles within the sandstone complex.
But as Niccolo Machiavelli points out in the section on fortresses in that Bible of realpolitik, The Prince, “If they are beneficial in one direction, they are harmful in another.” Indeed, despite US ambassador to Iraq Ryan Crocker saying at the launch that the new embassy is a testimony to America’s commitment to a “long-term friendship with Iraq,” given the US role in the country over the past nearly six years it is hard to see the embassy as a symbol of friendship. Furthermore, with the embassy a fortress, it doesn’t exactly give off the impression of amiability. But that is the Catch-22 situation in which America has placed itself due to its foreign policy decisions over the years in the Middle East. At the same time as presenting itself as a beacon of hope, democracy and freedom to the world, to gain access is akin to entering a maximum-security prison.
As Machiavelli remarked: “So, all things considered, I commend those who erect fortresses and those who do not; and censure anyone who, putting his trust in fortresses, does not mind if he is hated by the people.”

PAUL COCHRANE is a Beirut-based journalist

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Power for a Persian rapproche

by Riad Al-Khouri
written by Riad Al-Khouri

As instability in the region shows no signs of abating, the launch of a dialogue between the new administration in Washington and Iran is seen in the West and the Middle East alike as important for durable peace. While helping to solve long-standing regional issues, including problems like Gaza that affect stability in the Levant and beyond, talks between Tehran and the US could also shore-up the iffy American position in the region.

At the same time, Tehran’s need for friends and partners internationally will nudge it along the path to Washington. As with any sound diplomacy, a new approach to Iran needs sticks as well as carrots. Regarding the former, Germany said late last year that it wanted further sanctions to be imposed against Iran, hitting the bank and transport sectors. The suggested new measures aim to give the incoming US administration further means of pressure on Iran in any future dialogue, offering the carrot of incentives along with the threat of tougher sanctions over Tehran’s nuclear ambitions.
Iran, a leading oil and gas producer, denies seeking atomic weapons and says that its nuclear program aims to provide energy for a growing population when reserves of fossil fuels run out. At first glance, such an argument may appear strange, given that Iran has a massive reserve of hydrocarbons — especially gas, in which it is a world leader. For the time being, however, Tehran’s internal energy equation is precarious, but not because of lack of gas or crude oil underground. Rather, it is a question of politics and pricing.
One problem in this respect is that Tehran’s populist government tries to keep the poor happy through a subsidy system. Direct and indirect subsidies on goods in Iran amount to the equivalent of many tens of billions of dollars a year. However, under increasing financial pressure, Iran is considering a measure that would abolish costly subsidies on fuel and electricity, while compensating poorer people with cash. Currently falling oil prices encourage this and similar steps, which are part of a wider plan to make the country more efficient. Gasoline and electricity, among other basic items, are very cheap in Iran, but if the proposed measure comes into effect, prices of such vital supplies will rise at least fourfold.
Yet the point is being made in Tehran that prices need to become a reflection of real economic forces for the system to be reformed and that 60 percent of the money saved would, in any case, be used to boost the spending power of people with low and middle incomes. One of the basic problems of the Iranian economy is that despite the country’s wealth of varied natural resources, oil revenues still account for 80 percent of foreign currency receipts, making Tehran highly vulnerable to petroleum price shifts. The inability to diversify is partly due to lack of foreign investment and other forms of failure by Iran to engage with the world economy.
Meanwhile, crude output might fall drastically and the Islamic republic could even cease exports because of ageing oil fields and a lack of foreign technology. Crude oil production may drop to as little as three million barrels per day (bpd) by 2015 from over four million last year and the country could even halt petroleum exports (having shipped about 2.3 million bpd overseas in 2008).
Is this unthinkable? No. Without major new investments in Iran, its output and exports of crude oil will surely drop over the next few years. Though the Iranians are the second-largest producer in the Organization of Petroleum Exporting Countries, Tehran faces the prospect of an eight percent annual decline in production over the next decade because of the twin problems of lack of investment and old technology. Sanctions by the West and the tight credit market resulting from the global crisis have continued to cut financing for Iranian projects, while a lower demand for energy has already caused crude oil prices to sink. As a result, Tehran is looking for new partners to develop major projects, but because of sanctions, cannot find them in the technologically advanced West.
One of the problems for Iran’s energy sector is that it extracts less oil from the ground because of lack of adequate projects to enhance recovery. New developments using high technology could help compensate for natural declines in mature oil fields. But unless current impediments facing the oil industry are removed, rising internal demand may force crude exports down to one million bpd by 2015. This makes reconciliation with the West even more urgent.
The alternative is more Western-Iranian enmity, which risks destabilizing the Levant, the Gulf and eventually the whole world.

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

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Death and deceit for Gazans

by Peter Speetjens
written by Peter Speetjens

Whatever happens in Gaza, blame Hamas! That was the official line of Israel’s well-oiled PR-machine and it was largely swallowed by most Western politicians and mainstream media. Hamas started it, so the argument goes, and if you hit someone, you may expect to be hit back. Hit Israel and expect to be hit back hard.
This is of course a quite simplistic view of things. First of all, Hamas did not start it. As Israeli columnist Uri Averny pointed out, the cease-fire between Hamas and Israel held for months. It was Israel that provoked Hamas by sending an army patrol into Gaza killing three Hamas militants allegedly digging a tunnel. Gaza’s ruling party replied by firing a salvo of Qassam rockets into Israel.
Now, one may argue that shooting homemade rockets into Israel is not the most effective way of promoting one’s cause and that it is time to find another method, but one is on thin ice to claim that Hamas initiated the conflict. In fact, as Averny also pointed out, it was predominantly Israel that did not live up to the conditions of the cease- fire, as it refused to lift the economic blockade that has strangled Gaza since 2007.
Nearly every international aid agency last year sounded the alarm. UNRWA reported last summer that half of Gaza’s population lived on food handouts, while unemployment amounted to 70 percent and that 87 percent of the population lived under the poverty line of $2.40 a day. The World Bank last year warned that the Gaza economy ran the risk of “irreversible collapse.”
Yet these gloomy observations hardly made headlines and they fell on deaf ears among Israel’s diehard supporters — and Hamas’ many enemies — who claim Hamas is to blame for the sorry state of Gaza’s economy. The fact that Israel has failed to implement the Oslo Agreement since 1994, long before Hamas even came to power, does not change things a single bit. That’s just politics, stupid!
The 1994 Paris Protocol on Economic Relations between Israel and the Palestinian Authority stipulates, “there will be free movement of industrial goods, free of any restrictions, including customs and import taxes between the two sides,” and “the Palestinians will have the right to export their industrial produce to external markets without restrictions.”
More importantly, the question of who is responsible for what in the latest wave of death and destruction in Gaza cannot solely be answered by determining who started it. Even if Hamas initiated the Israeli attack by firing rockets, that does not justify disproportional military retaliation. No courtroom in the world allows one to endlessly stretch the required link between cause and effect, as the right to self-defense is limited by the principle of proportionality. Yes, Israel has the right defend itself. No, it cannot respond in any way it wishes.
To put it in simple terms: if you hit someone in the face, the recipient is entitled to hit you back. They, however, are not entitled to bring out a crowbar to break both your knees, bomb the electricity plant in which you work and kill your whole family. On January 18, the day Israel unilaterally announced a cease-fire, Hamas rockets over a period of some three weeks had killed three Israeli civilians and 10 Israeli soldiers were killed. Over the same period, at least 1,300 Palestinians were killed, an estimated one third of whom were children. The immense material damage has since been estimated at nearly $2 billion.
Finally, the role of international media, such as BBC and CNN in the spectacle of death was highly embarrassing. Not allowed into Gaza, their reporters stood quite literally on the Israeli side of things. Their job was essentially to read out Israeli press releases and make sure that any accusation of wrongful conduct from Palestinians or the United Nations was countered by a smooth-talking Israeli press officer who, no matter what happened, blamed Hamas.
Israel bombed not one, but four UNRWA schools filled with refugees? Hamas is known to fire rockets from UN sites. Israel bombs a UNRWA truck killing its driver? Hamas is known to have fired at UN trucks in the past. Israel bombed a mosque filled with people? Hamas is known to hide weapons in mosques.
The Western media proudly claim to be objective, as they show both sides of the story. Yet, giving equal attention to both sides of a conflict that is essentially unequal, means taking sides. The war takes place in Gaza, Palestinian victims outnumber Israeli casualties by at least 100 to one and yet the New York Times publishes an equal number of photos of destruction in Gaza and Israel, therefore producing a false impression of the conflict.
To me, the war and its coverage are best summed up by a fragment starring BBC reporter Bethany Bell. Standing inside Israel, she first told us that some 60 air strikes hit Gaza overnight. We see black smoke behind her. Meanwhile, she continued, 12 Hamas rockets were fired into Israel. One of them hit a kindergarten. The kindergarten, Bell said, was empty.

Peter Speetjens is a Beirut-based journalist

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Terror.com

by Mohanad Hage Ali
written by Mohanad Hage Ali

Last November, senior military leaders in the United States took the unusual measure of briefing the president on “a severe and widespread electronic attack on Defense Department computers.” According to a Los Angeles Times’ report, the attack, which was believed to be originating from Russia, targeted combat zone computers and the US central command overseeing operations in Iraq and Afghanistan. Nevertheless, the security services’ primary concern was whether its non-state enemies could acquire the capability to conduct cyber attacks against Western targets.
More than two years earlier, US authorities warned there was a threat, posted on a website affiliated with Al Qaeda, to attack the stock market and banking services online. The threat was apparently issued as revenge for the detentions in Guantanamo Bay. The US Homeland Security Department called it an “aspirational threat”.
The magnitude and consequences of such attacks are best comprehended when the Internet economy’s size is taken into consideration. Internet dealings and transactions today are a vital part of Western economies. According to a University of Texas at Austin study, the Internet economy “supported an additional 650,000 jobs in 1999 as revenues soared to $523.9 billion” in the US alone. The same study, conducted just under a decade ago, noted that even then the Internet economy “directly support[ed] 2.48 million workers, more than the insurance, communications and public utilities industries and twice as many as the airline, chemical and allied products, legal, and real estate industries.” This growth has prompted the Organization for Economic Co-operation and Development (OECD) to ask in a 2008 report, “has the economy become an Internet economy?” The OECD also stated, “increasingly, the largest productivity gains for businesses come from using online networks in some form.”
The online economy is growing to the extent that hacking a single company’s website for a day costs millions of dollars. For instance, BBC news reported in 2004, “three- quarters of UK companies have been hit by security breaches in their computer systems over the past year, costing billions to industry.” It was noted in the same report that “the average computer incident costs large companies $165,000 a time.”
The US warning against Al Qaeda cyber attacks in 2006 held some credibility as the Internet played an increasingly significant role in its operations. The new threat cyberspace poses was also shown when U.K. based extremists used the Internet to recruit other members, including teenagers. Through password protected web forums and chat rooms, they indoctrinated and prepared those recruits to launch suicide operations. Even the explosives used were home prepared according to “recipes” widely distributed on Al Qaeda web forums.
The militants’ success in exploiting the Internet was most apparent in last year’s failed Exeter bombing. Nicky Reilly, a 22-year-old of Irish background, entered the Giraffe restaurant’s toilet in Exeter to assemble his bomb before detonating himself. A slight mistake in his “internet bomb recipe” prompted an early explosion inside the lavatory, which left him with facial injuries. According to the police investigation, militants situated on the Pakistan-Afghanistan border area “groomed” Reilly through online chat rooms to become a suicide bomber. Sitting on his computer for long hours everyday, he watched more than 2,000 Al Qaeda videos, researched possible targets and then downloaded a bomb recipe.
In that same year, the trial of Aabid Hussein Khan’s Bradford terrorist cell exposed the Internet’s extended or unconventional use. This cell, which was plotting to attack the Queen and members of the royal family, not only compiled detailed information about different targets from the Internet, thus lessening the need to physically survey the area, the cell members also allegedly sought recruitment and training from the World Wide Web.
This British online terror saga started right after the Afghanistan and Iraq invasions, with the case of a young Moroccan immigrant named Younis Tsouli — whose online alias was Irhabi 007 — who dazzled the Western intelligence agencies for years before his capture in a tiny West London flat. For two years, Western intelligence services chased the 22 year-old Internet hacker, trying to uncover his real identity. Irhabi 007’s Internet activities involved propaganda, distributing training manuals, instigating others to commit acts of violence, hacking websites and distributing a hacking manual online. He was dubbed “the master” of online attacks, hacking, programming, and digital media design.
According to some reports, Irhabi 007 was making “explosive new use of the Internet,” specifically through websites and password protected forums that “cater for would be Jihadists.” Tsouli disseminated training manuals and propaganda material online, and then began helping radicalized youth to perpetrate attacks.
So far, Internet staged and planned attacks have failed to achieve their goals, but will 2009 be the year cyber terrorism makes its mark?

Mohanad Hage Ali is political editor at al-Hayat newspaper

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Society

A disagreeable diagnosis

by Josh Wood
written by Josh Wood

During the United Arab Emirate’s economic boom, Abu Dhabi and Dubai sought to bring the best of everything to their country — including healthcare.  With open checkbooks, both the government and private investors sought to make the UAE a regional medical hub. While the development of the healthcare sector has left it with a strong infrastructure, problems continue to confront the industry; the same deep pockets which allowed the country to develop world-class medical centers also resulted in lifestyles that sent the obesity rate (and its associated diseases) skyrocketing, and while the global financial crisis which devastated some of the UAE’s economic sectors was not quite as severe to healthcare, the industry has felt a bit of a pinch.

The UAE’s state news agency reported in December that the budget for state spending on healthcare was set for over $750 million, but the individual governments of each emirate — most notably Abu Dhabi and Dubai — supplemented this budget with additional funds. Today, according to the government, there are 40 hospitals, 115 primary care centers and thousands of private medical clinics in the UAE.

According to the World Health Organization’s (WHO) 2010 World Health Statistics report, there has been a definite trend toward private healthcare in the UAE. Private expenditure as a percentage of total spending on healthcare rose from 23.4 percent to 29.5 percent between the surveyed period of 2000 to 2007. Per capita expenditure on healthcare (taking purchasing power parity into account) stood at $982 in 2007 according to the report, while government spending per capita was $693. This represented 8.9 percent of total spending by the Emirati government, according to the WHO.

Fatally fat

While UAE citizens have a relatively high life expectancy of over 78 years, disease is taking its toll on the general population. Today, cardiovascular disease is the single largest killer in the country, accounting for more than 25 percent of the total deaths of Emirati citizens, according to statistics released by the government in 2010. Some non-governmental estimates place the ratio as high as 40 percent. It is also estimated that one in four Emiratis has diabetes. A December 2010 report released by UnitedHealth Group says that this number could rise to more than one third of the UAE’s national and expatriate population by 2020 if changes are not made and could cost over $8.5 billion.

Such diseases can be attributed to inactive lifestyles coupled with bad eating habits. Obesity — which is a contributing factor to both diabetes and cardiovascular disease — has been on the rise across the UAE, currently edging toward 70 percent of the national population.

The UAE’s Ministry of Health has begun efforts to educate the general population about the dangers of these diseases and has invited international health experts to conferences to discuss the problems. In 2006 the Abu Dhabi investment firm Mubadala Development brought the Imperial College London Diabetes Center to the UAE to further attempt to contain the disease. With such high rates of cardiovascular disease, diabetes and obesity, more money and efforts will be needed to put the lives of UAE citizens and residents on a healthy track.

Economic ailments

In recent years, the UAE was successful in attracting prominent foreign medical centers, such as the Cleveland Clinic, Johns Hopkins and the Minneapolis-based Mayo Clinic. But the aggressive expansion of the sector was not immune from the overall hit the country was dealt by the economic crisis.

In January 2010, the Mayo Clinic — part of Dubai’s $5.3 billion Dubai Healthcare City project — closed up shop. With strains on capital coming in to private healthcare initiatives and population growth lower than it had been, projects such as the Mayo Clinic’s Dubai outpost seemed to no longer be feasible.

Despite still having many brand name medical centers in their home country, many Emiratis still prefer heading abroad for specialized treatment. A December report by the Indian news agency PTI said that patients from the UAE spend $2 billion annually seeking medical care abroad — an amount that could benefit the UAE’s economy if such patients could be swayed to undergo treatment at home.

While medical treatment in the UAE is largely cheaper than it is in, say, North America or Europe, by regional standards it is still quite expensive as lower medical bills are a short flight away in countries like Jordan, Egypt and Lebanon, which deter patients from seeking treatment locally. Given the proliferation of top-notch medical treatment centers in the UAE and its central geographic location, the country could also further promote itself as a medical tourism destination and turn a better profit.

Road to recovery

Despite some cutbacks — such as the closure of the Mayo Clinic — UK Trade & Investment anticipates the UAE’s healthcare industry to boom in the coming years and rise to a total value of $15 billion by 2015.  In December 2010, the Dubai Healthcare Authority announced plans to implement $1 billion worth of healthcare projects over the coming year.

But healthcare spending across the rest of the GCC region remains high and it could be difficult for the UAE to compete with some of its neighbors that were not as adversely affected by the global financial crisis and continue to have excess money to spend.

Saudi Arabia alone anticipates completing 100 new hospitals by 2015, and there are currently $10 billion worth of healthcare projects either planned or underway across the region, as of late 2010. In a 2010 report, Alphen Capital estimated that the Gulf countries will require more than 25,000 additional hospital beds by 2020 to keep up with growing demands and populations.

For the healthcare sector to expand as much as was planned during the height of the UAE’s economic boom, the expatriate population of the country will need to continue to rise — a factor contingent on the yet to be fully reclaimed economic stability and success of the country. With healthcare infrastructure already largely developed, the question now remains as to whether the sector will be able to maintain or push past the status quo.

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