Executive Insights

Ziad Ferzly

by Ziad Ferzly
written by Ziad Ferzly

The Middle East region, especially the Gulf, has experienced a great boom over the last few years. With rising oil prices and ambitious projects, many thought this would continue ad infinitum. However, the global economy has gone into a recession and the Middle East is not immune. The financial market crashes around the world and region have been followed by economic downturns that are having a severe impact on companies everywhere. As people come to grips with this shock to the system, they must adapt to new realities. This recession is real and must be dealt with decisively. Managers need to admit that there is a problem. It is important to avoid getting sucked into collective self-deception, whereby company stakeholders put on blinders and convince themselves that they are immune to the decline and can ride out the storm without consequence. Companies need to be as proactive as possible because the longer they wait, the more difficult it will be to recover.

During the boom, most companies grew, even if they were not professionally managed. Many investors made money whether they evaluated investments properly or not. As the saying goes, a rising tide lifts all ships. Yet things have changed. The wave has crashed. The ensuing flush of the system will help ensure that the stronger, better prepared players are the true survivors. Prudent companies are the ones who take this time to properly restructure their operations. Companies should follow these restructuring guidelines:
• Stabilize the situation — A company that is experiencing significant difficulties should first stabilize the situation. In extreme cases, the goal is to survive long enough to go through the restructuring process in a proper and timely fashion. Generating cash and cutting expenses are of paramount importance. The company should identify major problems and attack them quickly. It should address the root of the problem, not the symptoms.
• Appoint a restructuring team — This is the team that should lead the company out of trouble. With a combination of key internal managers and select outside restructuring advisors, this core group will be responsible for executing the entire restructuring program that will be put in place.
• Gather data — It is important to base plans on real life data collected internally from the relevant groups. Data should be gathered on production, sales, pricing, costs, customers, etc. The company must have a full understanding of the situation. Data will ensure that decisions are grounded in reality, not conjecture.
• Change leadership — Often, there needs to be a change in the top management of the company. Some managers can stay, while others must go. Strong and effective leadership should be established. The company cannot afford to have weak or incompetent management, especially in difficult times.
• Assess capabilities — The restructuring team will assess the company’s capabilities, strengths, and weaknesses. The team will then generate ideas on the options available. There needs to be a match between the capabilities of the company and the options chosen.
• Recalibrate strategy — How does the company create value? What changes need to be implemented? Where is the company headed? The restructuring team should clarify objectives and adjust strategies in a deliberate manner to focus operations and the organization on common goals.
• Develop a realistic plan — After assessment and strategic recalibration, the team should devise a playbook or turnaround plan for the company to follow. The goals should be realistic and achievable given the current state of the company and market conditions.
• Renew organization — The new vision and strategy for the company may require a new organizational structure for better execution. People need to be empowered and, at the same time, held accountable for their actions and decisions. Their rewards should be properly aligned with the company’s long-term performance.
• Improve processes — There are core processes to the business that need to be improved. Other processes might be outsourced. Whether improvement happens in terms of time, cost, or quality, addressing the different facets of the operation will produce a better run organization. This requires a thorough analysis of various processes and matching new processes to the capabilities of the employees in the new organizational structure.
• Conduct financial restructuring — The restructuring plan will inherently have a major financial component in place. Whether this relates to creditors, investors, employees, or suppliers, the financial plan that is put in place needs to go hand in hand with the strategic plan that the team has put in place. Proper financial management is critical to the success of this effort.
• Manage stakeholders — There is a wide variety of stakeholders for companies: from shareholders and employees to suppliers and customers. As the company goes through its restructuring process, it needs to effectively communicate with various stakeholders to make sure that they are aware of what is happening and, when possible, participate in helping the process succeed.
• Measure and show progress — The way to gauge progress is by measuring the results of decisions and actions taken. Whether the parameters chosen are financial, operational, customer-oriented, or otherwise, measuring performance is essential to tracking the restructuring effort. Data should be gathered throughout the process. Showing progress will excite stakeholders and will give the restructuring team the validation it needs to continue with the current plan.
Conglomerates and investment firms should consider a restructuring — as described above — of the parent, holding, or management company first, and then of the portfolio, i.e. the individual companies or investments. The restructuring team needs to:
• Decide on an overall strategy — The team should ask itself: What businesses or industries do we want to be in? Why these industries? What makes us qualified to hold and potentially manage all these companies? What is the right mix of company holdings that serves our overall strategy and goals?
• Review current holdings — The following questions should be asked: Does the current portfolio of companies and investments make sense in light of the prevailing conditions? Do the companies fit within our overall strategy? Are we too heavily skewed in one direction and do we need to make adjustments to our portfolio? Do we want to keep all the companies as they are today or do we want to entertain the idea of corporate transactions such as mergers, acquisitions, or divestitures?
• Set a strategy for each company — For each of the companies in the portfolio that the restructuring team decides to keep, they should put together a targeted strategy depending on internal data gathering, industry statistics, and market conditions. The team should follow the restructuring guidelines highlighted above.
Studies have shown that companies that went through successful restructuring efforts had a few characteristics in common:
• They were low cost producers, and had very efficient operations.
• The management teams led by example. They did what they asked their employees to do.
• They focused on the internal operations of the company addressing issues such as quality, productivity, and differentiation.
• They had an internally consistent strategic plan.
• They had a change in top management, used outside restructuring advisors, or both.
There are many companies that should have gone through a restructuring program over the last few years, but did not realize the need given their apparent success in the market. Now is a good time to act for those companies, and also for others that are experiencing difficulties because of the economic downturn. Many will not make it through this year. Companies need to ensure that they are strong enough, focused enough, and prepared to weather the storm. Those that restructure now will be well positioned to capitalize on opportunities ahead of their competitors as the economy improves. It is time to restructure.

Ziad Ferzly is managing director at Cedarwood Advisors, which provides strategic, financial, and investment management services to companies, investment firms, institutions, and governments around the globe.

 

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Executive Insights

Rethinking private equity – part I

by Imad Ghandour
written by Imad Ghandour

The sharp reversal of economic fortunes in the Gulf has sent all private equity (PE) houses back to the drawing board to redesign their investment strategy. Some are optimistic the Gulf will bounce back quickly, while conservative investors predict this recession will be deep and long and are waiting for the recession tornado to vanish so they can pick up from the carnage good companies at attractive valuations. The bulk of PE houses, however, are focusing on a selected number of defensive sectors to invest in, with the consensus being that education, healthcare, and fast moving consumer goods and related industries will survive the downturn.
Starting with education, this article is the first of a three-part series — which will also run in March and April issues of Executive — covering the dynamics of investing in each of these defensive sectors:

Back to school
Education is one of the largest global industries, yet one of the most fragmented. It is estimated that the global market size for education services is $2.5 trillion and it is ranked amongst the top three industries depending on how you count. Yet, it is one of the least represented sectors amongst listed companies. The largest education company by market cap is Apollo in the US, with a market cap of only around $7-10 billion. Just a handful of companies have revenues exceeding the billion-dollar mark.
Yet education takes a significant chunk of household and government expenditures. In Saudi Arabia, the education and vocational training budget comes second after defense, with more than a quarter of the budget allocated to it. In most societies, household spending on education is only exceeded by accommodation expenses. Furthermore, governments are offering subsidies to investors, and many are privatizing their educational system. This means an even larger pie for private sector operators.
The education sector is divided into several subsectors. The largest and the most fragmented is K-12, or primary and secondary education. Adult education and vocational training come second. Other notable sub-sectors are early childhood education (pre-school) and testing (e.g. GMAT, SAT, TOEFEL, etc).

Cash is king
From an investment point of view, education has very interesting characteristics. It has stable and predictable cash flows: students pay upfront for the service, and once a student enters a school or a university, he is likely to stay there until graduation. In the GCC, population growth and rising incomes imply continued growth in demand, and most likely shortage of supply.
Parents (clients) have limited price influence on tuition and thus tuitions increases are ahead of inflation and margins remain healthy and stable. In the GCC, for example, it is very common to have net margins of 25-35 percent.
The main challenges for institutions are the upfront investment in real estate and recruiting good teachers. Schools and universities, in particular, need a significant investment in purpose-built facilities, and investors have to balance the economics of being close to the urban demand centers and the escalating cost of land as you get closer to such centers. The other challenge is recruiting quality teachers in the wake of a shrinking global population of teachers but a growing population of students. Symptoms of teacher shortage are already evident, resulting in escalating costs.
Given the attractive investment characteristics of education and limited number of investment opportunities, listed educational institutions usually trade in the 20-30 times their earnings. This creates a significant arbitrage opportunity for investors who build new schools and eventually sell them at high valuations.
PE houses are not flocking to education for one main reason: opportunities are scarce. Yet the most creative PE players were able to enter the sector early, and will probably cash out handsomely, even in turbulent times!

Imad Ghandour is head of Statistics and Information Committee, Gulf Venture Capital Association and board member, Maarif Education and Training Holding Co, Saudi Arabia

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Executive Insights

Why Arabs lose the communication war

by Dima Itani & Ramsay G. Najjar
written by Dima Itani & Ramsay G. Najjar

How do we decide who wins a war? Do we wait for the white flag to be raised to declare a winner? Do we count the number of casualties? Do we count the number of survivors? Truth be told, in modern wars, the real winner is the side that wins the “communication war.”

Regardless of the toll a war takes on its victims, what remains in the minds of people once the fighting stops are the headlines. Who can forget the headlines about the massacres of men, women, children and elderly in Nazi concentration camps during World War II? The Jewish people have engaged over the years in massive and structured communication efforts, using powerful messages and impactful channels to portray themselves as the victims of atrocious acts and to remind the world of the horrible ordeal they experienced.
In large part thanks to this communication strategy, Israel today is a forceful and successful “brand” whose image is that of a nation pursuing stability and safety for its discriminated and persecuted people and is thus immunized against the negative publicity stemming from its military attacks. Just like the Jews’ situation during World War II, today Palestinians are facing massacres of their men, women, children and elderly. Unlike Israel and the West, however, who have always treated communication as an imperative and a top priority, the Arab world has yet to recognize the primordial importance of communication, especially in an era of globalization and the eradication of all boundaries.
To see how our region has fared in communicating its message throughout the Gaza conflict, we need to look no further than the TV screens, radios and newspaper front pages throughout the region: the messages that we see, hear and read all use the language, values and sensational rhetoric that appeal solely to the Arab audience. This “preaching to the converted” does little to reach out and change perceptions on the other side of the world. In the case of Arabs, there has been little or no effort made to understand Western audiences and identify what triggers their emotions and stirs their passions, to communicate with them and make a difference in how they see things.
This must change in order to get the message across when targeting communication to other cultures. The Arab world’s communication should use the audience’s language and idioms effectively, touch upon their values and use a discourse that resonates with them. In other words, rather than showing the same tragic images over and over again, and continuously referring to the innocent blood spilt, it would be far more powerful to draw a simple parallel between the children of Gaza and the children of the West, highlighting that while children in the US and Europe were preparing cookies and milk for Santa and waiting for their gifts, children in Gaza were trembling in fear and waiting only to see if they will live to see the next day.
Communicating effectively across cultures requires identifying a painful event in the audience’s history — one that they can relate to on a deeper level — and comparing it to the situation and difficulties faced by their counterparts in the present. Highlighting the likeness to a tragedy that the audience knows and understands goes a long way in creating a sense of responsibility for the current situation and a need to put an end to it for the sake of future generations. What is sad is that in the case of Israel’s communication, they have capitalized on past tragedies in such an influential way that it has given them a retroactive license to slay and shed the blood of innocent people and still be viewed as the victims.
However, even the most creative communication strategy that builds upon all these powerful messages cannot have an impact without the right channels to send its messages through. Although it can be said that the Arab world’s communication is leveraging new media channels along the lines of Facebook, YouTube and blogs, as citizens from around the region continue to upload photos, comments and video of their perspective on the Gaza conflict, even these channels are Western inventions that are merely being copied in the Arab world rather than being pioneered in the region. If the Arab World wants to get in on the communication game, it must work to create and innovate new channels that can grab audiences’ attention rather than trying to go through overused channels only to be drowned out by the endless numbers of other YouTube clips, Facebook groups and blog entries. Until then, the Arab world will continue to be in the backseat when it comes to communication, aggravating this region’s fears that it will never be seen from a just or human perspective.
Even if our part of the world succeeds in consolidating its messages, tailoring these to Western audiences and sending them out through the most impactful and innovative channels, we will still face another major obstacle: layers upon layers of negative prejudice accumulated over years of poor communication. But these prejudices only highlight the imperative need for effective communication strategies and immediate action in order to start tearing these misconceptions down.
Many may argue that regardless of the message, Arabs will never have the leverage or resources to carry out communication efforts that can match the impact of those carried out by the enemy. A strong narrative and story, however, spoken in the audience’s language and using themes that appeal to their deepest emotions can have just as much power as extensive, well-orchestrated, and costly campaigns.
Of course, we cannot ignore the fact that deeply ingrained perceptions seem to persist no matter how civilized or open-minded cultures get, as the side long-envisioned as the victim will always be a victim and the side seen for years as the murderer will always be the murderer. The only way to break this vicious cycle is through compelling communication that opens the door for another perspective.

Dima Itani & Ramsay G. Najjar, S2C

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Finance

IPO Watch – The time that bides

by Executive Staff
written by Executive Staff

As regional capital markets remain volatile, analysts say companies who are contemplating initial public offerings (IPOs) may not find enough takers for new equity in 2009. The IPO market had been a star in the bull markets for the last several years, but had lost its charm by mid-2008 and is likely to face bleak days ahead in 2009.
On the upside, there is still a large number of planned and announced IPOs for the first half of 2009. According to reports by Zawya Dow Jones, there are over 40 companies scheduled to launch their IPOs in the first half of 2009. Some market watchers are guardedly optimistic about this flotation pipeline, saying that investors’ sentiments are improving.
For the moment, however, all indications suggest that investors and capital seeking companies alike continue to remain on the sidelines waiting for capital markets to stabilize before they go after IPO opportunities in the region. A good example is that of Kuwait-based Burgan Bank, which cancelled its plans for a $697 million capital increase after the authorities decided against issuing a decree for the increase for reasons, observers say, “related to the turbulent regional and global market conditions.”
While there is no consensus as to when IPO activity will recover, however, announcement about new IPOs in January show that confidence in the IPO market is being built tick by tick. January witnessed the announcements of six new IPOs — much lower than the monthly average for most of 2008, which was around 10 IPOs.
“Companies are preparing for IPOs because the long-term strategic rationale for such transactions has not changed,” said Phil Gandier, a partner of transaction advisory services of Ernst & Young Middle East. Many companies are likely to push ahead with their plans in 2009 despite the global economic meltdown, Gandier added in a report in January.

Fresh announcements
Saudi Arabia, the region’s largest economy, which accounted for 78 percent of the cash raised through flotation in 2008, will be the host of an IPO of Etihad Atheeb Telecommunication Co. The company, one of three firms that were licensed to run a fixed-line network in Saudi Arabia, said it will offer 30 percent of its shares to the public in accordance with rules for new telecoms operators. The company scheduled its public offering to start on January 24 and to conclude on February 2, as it seeks to raise $80.08 million.
Also in line with regulatory requirements in Saudi Arabia, Al Alamiya for Commerce and Services, part of the Royal and Sun Alliance Insurance Group, is preparing to launch an IPO after it was granted a royal decree to operate as a licensed insurer in Saudi Arabia, the firm said.
While the measure is mandatory, sources close to the company say that they are optimistic that the offering will do well. Another insurance firm taking the dip after it was recently established with a capital of $53 million is the Global Company for Cooperative Insurance. The company did not provide details about the floatation but it was established by Riyad Bank who owns a 30 percent stake. The IPO is scheduled for the second half of 2009.
Moving to the most battered economy in the region from the global financial crisis, the UAE provided several announcements. The Kuwait-based Esdarat Holding Company plans to list on Nasdaq Dubai in the second half of 2009 to fund real estate development projects worth $2.8 billion. Although the company did hint at an IPO in June of 2008, instead it chose to go with a private placement first raising $110 million with Emirates NBD Capita in December.
But the amount raised in the private placement was only 37 percent of the original target of $300 million. “The management decided to raise the remaining amount though an IPO,” said Imad Awad, director and head of Equity Capital Markets at Emirates NBD Capita. Esdarat plans to launch the IPO in late 2009.
Mawarid Finance, a provider of Islamic credit and financing activities, said it will offer its shares to the public in 2009. The company will be listed on the Dubai Financial Market. Although there were no clear details as to the offering, the company’s CEO Mohammed Musabbeh Al Neaimi, told the press, “We intend to offer between 25 and 30 percent of shares to foreigners after getting approval from the general assembly.”
Meanwhile in the Levant, Syria finally launched the Damascus Stock Exchange in mid-January and is scheduled to begin experimental trading on the 29th. The launching of the exchange comes after a two year delay.
Among the first companies to be listed and the first brokerage firm to be licensed in Syria, Al Adham Foreign Exchange Company, said it will offer 70 percent of its shares to the public seeking to raise $3.69 million. It will offer 350,000 of its shares at a par value of $10.90 each. The remaining 30 percent will stay with the founders. The IPO will run from January 18 to February 6, a statement said.
Following suit, Syria’s Noor Takaful Insurance Co. also announced that it launched an IPO to sell 50 percent of its shares with an aim to raise $16.3 million. Noor has a capital of $31.5 million and is offering 1.5 million shares at $10.90 each. Noor Takaful Insurance is 20 percent owned by the Kuwait-based Noor Financial Investment Co.
Also in the Levant, Lebanon’s flagship carrier, Middle East Airlines (MEA), appears to be on and off the IPO bandwagon. Initially, MEA was scheduled to float its shares on the Beirut Stock Exchange (BSE) in 2008. But due to political instability the plans failed. And now, MEA’s Chairman Mohammed El Hout, said the company will not list its shares in 2009 due to the “unfavorable” market conditions. “We will not list part of the airline’s shares on the BSE because projections in the markets do not look very promising,” Hout said.
As far as IPO and stock market debuts, the MENA region started the year with a definite dry spell. The only noteworthy events in January were three rights issues in Kuwait and Egypt, while another rights issue on the Egyptian exchange appears to have been withdrawn. The two capital increases on the KSE accounted for almost 99 percent of the aggregate value of rights issues companies offered in January. Kuwait’s Abyaar Real Estate closed a 100 percent rights issue worth $242.5 million on January 8 and construction group MENA Holding launched its rights issue worth $316.8 million on January 13.

I see the tunnel, but where’s the light?
The IPO market in 2009 will be slow, but the few issues that come to market may provide significant returns, experts say. With many regional economies set to experience substantial growth this year it appears that 2009, or at least the second half of it, will offer fresh hope as far as new IPOs are concerned.
“With IPO volume low, many investors will be tempted to ignore the IPO market altogether as we move into 2009,” writes Renaissance Capital. “This may be a mistake. Historical precedent suggests that IPOs in periods of low issuance can generate very strong returns as companies are forced to become more realistic with their proposed valuations in order to successfully raise capital, thereby creating opportunities for investors.”
As can be surmised by the number of IPO announcements for January and the overall number for the first half of 2009, some industry players believe IPOs could pick up by the middle of the year. The MENA region is expected to possibly lead the bulk of IPOs globally in 2009.
Observers rightly point out that the region is where the faster growing companies reside. These companies need to tap the capital markets to fund expansion. As such, improved activities in the IPO market might be a clear indication that the doom and gloom of 2008 will soon be history.

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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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Comment

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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