Levant

Where luxury lives

by Executive Staff
written by Executive Staff

A healthy market with strong fundamentals has led real estate developers in Lebanon to emphasize development of luxury apartments, villas, and towers, which blend contemporary designs with rich cultural heritage. The preservation of the traditional environment is the mainstay of developers and continues to be central in the majority of their projects. Additionally, each of the new developments has unique value added features providing owners with elegant homes that meet high standards.

Market segment

Some developers have anticipated that the market need will shift during the financial crisis to more affordable apartments rather than high-end luxury. This has induced them to consider targeting this market segment. Chahe Yerevanian, chairman of Sayfco, explained that the company has changed its targeted segment according the changing market conditions. Historically, Sayfco focused on middle-income housing, where prices ranged between $36,000 and $90,000 at that time. Later, Sayfco switched to mid-sized luxury apartments priced between $250,000 and $500,000.

“We switched because we gained many GCC clients,” Yerevanian said. Afterwards, when the market boom began, extremely high-end products were the trend. One example is the Clouds project with prices ranging from $2-9 million, Yerevanian explained. Now, with the financial crisis at hand, Sayfco has gone back to the more affordable mid-sized luxury apartments expecting investors to be less keen to invest very large amounts of money in property.

The developer Byblos Real Estate Investment (BREI) is more diversified with their plans, which include targeting many market segments at the same time. “BREI’s plan is to create several brands under its umbrella, each having its own identity and developing products for a specific segment of the market, whether they are high end or middle class clients,” explained Antoine Al Khoury, general manager of BREI. Accordingly, BREI also has plans to target the Lebanese middle class, in terms of “the size of apartments, location of buildings, or building specifications,” in order to meet the upcoming market demand.

On the other hand, Greenstone real estate developers concentrate on “couples and families looking for high-end luxury apartments in prestigious areas in Beirut,” explained Sandro Saade, co-general manager of the company. Additionally, Greenstone does not feel the need to diversify its targeted segment due to the current situation. “Greenstone did not feel an impact on its projects, since each [of them] holds unique quality specifications and niche positioning out in the market,” said Saade.

Preserving cultural heritage

Experts and developers agree that preserving the Lebanese cultural heritage is very important and it would be unfortunate to lose the little Lebanon has left. At one of several thematic seminars hosted by Greenstone, the managing partner of RAMCO, Raja Makarem, expressed his concern about the lack of preservation of Lebanese heritage. Makarem said that incentives for preserving traditional and cultural properties should be given to owners, by cutting their taxes for example. He also added that it is not too late to teach our children at school about the importance of preserving the Lebanese heritage.

Many developers have been active in developing projects that preserve the traditional environment of the hosting neighborhoods, while adding a sense of modernization and comfort. Greenstone, with their new project entitled ‘L’Armonial’, are safeguarding the traditional 1920’s façade of a building in Ashrafieh. What this entails is “an innovative residential structure of 25 high-end luxury apartments… and an art gallery in the lobby [which] is intended to emphasize authenticity and respect to culture,” said Karim Saade, co-general manager of the company. The building also includes luxury spa facilities, a gym and a 20-meter swimming pool. Saade described L’Armonial as “a true marriage between old and new, tradition and innovation.”

Moreover, BREI has also developed the ‘Convivium’ brand in Gemmayze, which consists of “six communities characterized by their conviviality and architecture that fits with the local environment, as well as the comfort of modern design,” said El Khoury. With this brand, BREI aims to create sustainable communities, while respecting existing architectural tradition, heritage and environment.

Value added

It is certainly no longer enough to build high or low rise buildings with charming façades and large apartments in order to satisfy renters’ demands. Developers are currently finding new and diversified ways to add value to their projects, whether by enhancing security measures, being environmentally friendly, or simply creating innovative ideas that would differentiate one building from another and make it more attractive to live in.

For example, Sayfco is offering those who are looking for nontraditional housing and innovative architecture the ‘Pearls of Bchamoun’ village, which consists of 27 villa-like buildings with a total of 168 apartments. Yerevanian said that the villa-like buildings make the project “one of the most unique projects in Lebanon.” This new structural design is intended to attract clients that are looking for modernism and innovation, as well as enjoying a relaxing environment and different leisure activities.

Moreover, BREI is currently working on ‘Edelweiss’, which is a new project in the heart of the Faqra Club and it will take the form of a small village that includes low-rise buildings with two to four bedroom apartments in addition to chalets. This project has many environmentally friendly aspects, “there is an underground parking and cars will not be allowed to go in the village except for delivery at specific hours and for emergencies,” explained Al Khoury. Additionally, “buildings will be quaint, petites and made of natural materials like stone and wood. They will have some green features, in terms of energy saving and water treatment,” he added.

With more projects in the pipeline, it is anyone’s guess as to what cards developers are holding for their future plays, as they continue to supply those looking for luxury with distinguished properties characterized by a high level of originality and innovation.

With more projects in the pipeline, it is anyone’s guess as to what cards developers are holding for their future plays in the real estate game

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Finance

Lebanon – Revenue remits

by Executive Staff
written by Executive Staff

As commercial banks in Lebanon reported an astonishing 9- month growth of 44 percent in 2008 and customer deposits increased by $7.5 billion in the first 10 months, it looked like the banking sector was not affected by the global financial crisis. But as time passes, inescapable challenges are beginning to emerge. “The Lebanese economy could be affected by what happens to the economies of the region,” said Lebanese Finance Minister Mohamad Shatah. The Lebanese economy will undoubtedly be affected by the ongoing global financial crisis, however, the question remains as to how these effects will take shape and to what extent they will impact the banking sector and economy at large. While some are saying Lebanon has benefited from the global turmoil, others are more cautious and waiting for the inevitable effects of the crisis to hit home. CEO of Standard Chartered Bank, Foong Pik Yee, asserts that, “It would be complacent to expect the economy of Lebanon to remain unaffected by the global slowdown, however this will be relatively unnoticed compared to the severe impact suffered by Western economies and also being noticed by Asia and some countries in the GCC.” The majority of observers seem to believe that the financial calamity affecting millions of Lebanese expatriates in the Gulf, the US, Europe and elsewhere, will reduce the amount of foreign remittances to Lebanon.


The money sent home
In 2008, the remittances that poured into Lebanon reached $6 billion, “constituting an increase of four percent from $5.57 [billion] in 2007, and compared to $5.2 [billion] in 2006 and $4.9 [billion] in 2005,” stated Byblos Bank. The finance house claims that Lebanon was the 18th largest recipient of remittances in the world, coming immediately behind Indonesia, Morocco and Pakistan. Lebanon came in ahead of Serbia & Montenegro, Vietnam and Ukraine. Foreign remittances to Lebanon made up 17.4 percent of total remittances to the MENA region in 2008. According to the World Bank, estimated expatriate remittances to Lebanon in 2007 were equal to 24.4 percent of the country’s GDP — making it the fifth highest ratio in the world. Due to the global financial crisis, the influx of foreign remittances into Lebanon began to slow during the third quarter of 2008. As remittances were a major contributor to the banking sector’s sound performance in 2008, the new year “might not be as good as 2008, in view of the global recessionary environment and its potential impact on Lebanese remittances that constitute a major support for Lebanon’s economy and financial system,” noted Dr. Marwan Barakat, head of the research department at Bank Audi – Audi Saradar Group. On the bright side, the worst-case scenario, he says, is that remittances in 2009 will continue to make up more than 20 percent of Lebanon’s GDP. The World Bank, however, stated that inflows of foreign remittances “are expected to regress by 6.7 percent in 2009 in a base case scenario and to drop by 13.2 percent in a worst case scenario.” While remittances may slightly decelerate in 2009, the Lebanese banking sector is still awash with liquidity.
Lebanese commercial banks possess a high level of liquidity in foreign currency, “making them able to roll over and buy new government paper in both local and foreign currency,” said Moody’s Investors Service. The foreign currency reserves at Banque du Liban jumped 57 percent in the first nine months of 2008, totaling $15.3 billion. This increase in foreign currency is largely due to the massive inflow of funds into Lebanese banks by the sizable Lebanese diaspora abroad, who consider the banks as sound financial sanctuaries. The boost in foreign currency reserves is also due to the central bank’s purchasing of $1 billion in US dollars in October 2008 and an additional $900 million in November. Nassib Ghobril, head of economic research and analysis department at Byblos Bank, believes that another challenge for Lebanese banks “is to see how much the inflow of deposits can continue given the growth slowdown in the Gulf and in major countries where Lebanese expatriates are.” With its best financial year in history, the Lebanese banking sector and economy at large naturally await an imminent slowdown.
Moody’s warned that because of the ongoing international financial crisis, Lebanon’s economy is expected to be negatively impacted “as external demand falls and inward investment and remittances decline, with remittance inflows from Lebanese workers in the Gulf already reported to be falling.” Auguste Tano Kouame, the World Bank’s lead economist for the Middle East and North Africa, asserts that Lebanon will definitely experience a decline in economic activity, which will consecutively affect the financial magnitude of the nation’s banking sector. According to Kouame, “The impact of the crisis in Lebanon is going to start first in the real economy, then move to the banking sector — unlike what happened in the United States, Europe and the Gulf region where the stock market was first hit — because Lebanon’s economy is mostly dependent on tourism receipts, remittances and on exports to some extent.” Principally, economic success heavily depends on the political situation in 2009.

Don’t rock to boat
Pik Yee found that, “overall, the key issue and concern for Lebanon remains political stability.” Everyone is keeping their fingers crossed that the approaching parliamentary elections in May 2009 will run smoothly. Moody’s contended that “a return to serious political turmoil would quickly set back the economy and could lead to a withdrawal of bank deposits, although these have been highly resistant to political shocks in the past”.
In brief, confidence levels in the Lebanese banking sector are “strong, despite the global turmoil,” mentioned Barakat. Due to the conservative regulatory and supervisory policies by the central bank, inflows of remittances and high liquidity, the Lebanese banking sector is poised to perform well — if even at a slower rate than last year — in 2009. While the Institute of International Finance (IIF) expects Lebanon’s GDP growth to decrease to 3.5 percent in 2009 from 5.5 percent in 2008, the World Bank estimates the country’s economic growth for 2008 to be at 5.5 percent and 4 percent in 2009. With the incessant regional effects of the global financial crisis on the horizon, IIF forecasts are the most realistic. Despite the upcoming, unavoidable economic slowdown, Lebanese banks are positioned to perform well.

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Finance

Investment – Past the wreckage

by Executive Staff
written by Executive Staff

What do you say to an investor who has just seen a significant chunk of his equity investment drain away this year? “It’s true that the best time to invest in the market is the worst time to raise funds,” said Joe Kawkabani, head of equity asset management at Algebra Capital, which recently launched a new fund with Franklin Templeton Investments.

Only a sixth of the funds tracked by Zawya are in the green this year, with an overwhelming majority sinking in red ink. Yet the appetite of investment fund managers to source new funding has not disappeared. In November 2008, Holland’s ING Investment Bank launched ING Invest Middle East and North Africa Fund, at a time when some of the region’s most liquid markets were down by more than 60 percent.
“We aim to have assets under management of between $500 million and $1 billion,” said Fadi Al Said, head of equity for the Middle East at ING Investment Management, although he admits that most of the funds will come in early 2009 as some clients put a freeze on investments through the end of 2008.
Clearly, these are not ordinary corrections in the regional stock market and it is not surprising that even most moneyed investors are counting their losses and licking their wounds. “There is a wait-and-see approach as nobody wants to catch a falling dagger,” says Kawkabani. “Investors want to cross the big psychological barrier of this year [2008] before taking decisions.”
Led by global markets, investor sentiment in the region has collapsed, writes Credit Suisse in a gloomy report on the crisis that has engulfed regional markets. “Driven initially by foreign institutional investors deleveraging, local entities have also unwound positions. Retail investors have also joined the wave but as in previous occasions, they have lagged behind and suffered from margins calls and a depleting capital base.” There is also anecdotal evidence of capitulation across the GCC markets as investors unwind their levered positions and succumb to the consensus that earnings will weaken substantially next year, says Tarek Fadlallah, executive director at Nomura Investment Bank, in his recent report ‘Nowhere to Hide’. “The GCC markets have lost a combined trillion dollars in market capitalization from their individual peaks and aggregate valuations have become more alluring,” he noted.
Despite the market’s travails, we may be close to a bottom. Certainly some fund managers are taking the long view. “The MENA region is expected to grow at a strong pace in the coming years due to the rise in massive infrastructure spending and the emergence of business sectors, such as logistics, banking, construction, petrochemicals and fertilizers,” says Kawkabani.
Meanwhile, Kuwait’s Global Investment House has secured licenses to launch three new funds, while hedge fund manager Brevan Howard Offshore Management has listed two funds on Nasdaq Dubai exchange, showing that many investment houses are braving the storm and not allowing current market sentiment to derail their long-term plans. As Fadallah wrote, “Market excesses correct — eventually and always. It’s not doom and gloom, just a new paradigm.”

Yadullah Ijtehadi is the managing editor of Zawya.com

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Free markets – Liberty’s loss

by Michael Young
written by Michael Young

Two-thousand and eight was not the best of years for capitalist culture. The world financial system took a substantial hit starting in October, there is widespread fear that this will lead to a lengthy recession and government intervention in troubled economies has become not only publicly acceptable, but actively encouraged by many. The free market is more often these days viewed as a fount of greed than as a mechanism for the efficient regulation of human relations.

As for that other facet of capitalist culture, liberty — whether political, cultural, social, or otherwise — it has been knocked well down the agenda in inter-state relations. That can be put at the door of the Bush administration’s failure to move much beyond rhetoric in its so-called “freedom agenda” for the Middle East, but more broadly because of the widespread skepticism the administration elicited. The world is happy to see George W. Bush go and therefore everything he was associated with seems to be fair game for dismissal — the baby with the bath water.
That’s a pity, because while the Bush administration largely came up short in its support for democracy, and while the abysmal postwar planning in Iraq virtually ensured the United States would not soon attempt again to put dictators on the spot, for the first time in decades the ideas of liberty and democracy were actually being discussed. Bush may have ended his term in office by supporting the old despotisms of the Middle East, but he did remove a mass murderer from power in Iraq and replace it with something far more pluralistic. In Lebanon he did, along with France, push for a Syrian military withdrawal that ended 29 years of hegemony by Damascus — wherever the present uncertain aftermath leads.
All the signs are that the new Obama administration in the US, while its differences with Bush when it comes to the Middle East may be less flagrant than many were led to believe, will be even less concerned about placing democracy and human rights at the center of its regional policy. Many of those in the next administration served under President Bill Clinton, whose wife Hillary will be secretary of state, and if the Clinton years were any indication, we may see an administration devoted to the status quo regarding liberty.
When it comes to the markets, things are likely to be rather different. Thanks to their majorities in both houses of Congress, the Democrats have an open highway when it comes to state intervention in economic affairs, and now a rationale for doing so as the markets buckle. The Republicans were no slouches in expanding the federal government’s powers over the economy, or over the lives of many Americans in the so-called “war on terror”, but the Democrats are supported by constituencies that will make economic intervention far more likely and extensive.
While these two developments — a greater ability to play with free markets and declining interest in the promotion of liberty — are worrisome, they are also taking place in a very different context than when Bush entered office eight years ago. The talk in the past two months on Western governments having effectively “nationalized” their financial sectors by buying stakes in troubled companies, or injecting them with capital, is laughable. Ultimately, the success or failure of this policy will be judged by market forces, by whether these interventions are deemed efficient by the societies involved and by whether salvation’s price was worth the payback. In all likelihood, regulatory frameworks will be tightened across the board, but the aim will be to avoid persistent interventions since few states can afford massive bailouts. The real question in the coming year will not so much be whether the free market is discredited — it will not be — but whether states can impose the proper balance between allowing markets to function efficiently and what their societies will demand from them when it comes to stabilizing the markets. The fear is that too much intervention demanded may undermine free markets.
More uncertain is the fate of liberty in the near future, particularly political liberty. When it comes to that issue, both the US and Europe remain wary of challenging their allies or business partners on matters of democracy or human rights. In the Middle East in particular, the Bush administration’s “freedom agenda” all but collapsed after 2005, as Washington was compelled to rely on alliances with leading Arab autocracies to contain Iran and to stabilize the situation in Iraq. Ten years after the start of the Barcelona process the Europeans essentially admitted, in 2005, that the democratization facet of the project had failed among their southern and eastern Mediterranean partners. The EU was forced to admit that economic liberalization in no way guaranteed more political openness.
With those failures in mind, the likelihood in 2009 is that liberal democracies will push ‘liberty’ to the background. As they work to find the right dosage to rejuvenate free markets, expect much less interest from the US and Europe when it comes to bolstering free societies.

Michael Young

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Shoes, footprints and carbon tax

by Peter Speetjens
written by Peter Speetjens

December 2008 was dominated by shoes and footprints. At an anti-government protest in the Icelandic capital of Reykjavik, Sirry Hjaltested said that her grocery bills had gone up by half in recent months. She blamed the country’s bankers for the ruined economy. “If I met a banker,” she told the Economist, “I’d kick his ass so hard, [that] my shoes would be stuck inside.”
From now on George W. Bush’s Iraqi footprint may be measured by another man’s shoes. As a ‘goodbye present’ in the name of the Iraqi people, TV-journalist Muntadar al- Zaidi hurled his footwear at the outgoing US President who, it must be said, dodged the attack perfectly.
Still, as the pair of size-tens was sent flying during a live press conference, its impact is likely to be felt for years to come. The shoes were an instant hit with US comedians and talk show hosts, while the Internet’s merciless all-seeing eye, Youtube, claimed over 5 million viewers within days. EU leaders and President-elect Barack Obama may have giggled in private upon seeing the incident, yet in public were occupied with quite a different kind of footprint.
The EU adopted a plan to fight global warming by reducing its 2020 CO2 emission levels by 20 percent compared to its 1990 carbon footprint. As so often with these grand scenarios for the earth’s well-being, satisfied politicians are quick to pat themselves and each other on the back, while environmentalists call the result a “sell-out.”
“These are the most ambitious plans in the world” and “we mean business,” the triumphant European Commission President Jose Manuel Barroso told the press, while French President Nicolas Sarkozy termed the deal “historic.” Organizations such as Greenpeace and the WWF had a slightly different view. According to them, it was “a black day” that saw leaders choose “private profits over the will of European citizens and the future of their children,” as European industries get free emissions permits when facing a five percent cost increase.
On the other side of the Atlantic, US Presidential elect Barack Obama presented the political team that in the coming years is to formulate a sound energy and environmental policy. Obama set the stakes high. Acknowledging that past US governments, both Democrat and Republican, have failed to live up to expectations, “this time must be different,” he proclaimed. “This [fighting global warming] will be a leading priority of my presidency and a defining test of our time. We cannot accept complacency nor any more broken promises.”
His most promising appointment is no doubt Dr. Steven Chu as energy secretary. A 1997 Nobel Prize Winner, Chu is Professor of Physics at the University of California, where he has pushed academics and industry scientists to work on biofuel and solar energy technologies. Unlike a major part of the US Republicans, Chu believes that a decrease in burning fossil fuels is essential to combat global warming.
Although few people will disagree that Chu seems the man for the job, it remains to be seen if he and Obama can make a major impact. It is no exaggeration to state that the environment is but the latest victim of the global financial crisis and economic downturn. With profits falling and jobs vanishing, who needs an extra burden and who is willing to lose votes over a far-away Arctic meltdown?
And yet, the Americans and others have got some work ahead when it comes to reducing their carbon footprint. While the world average carbon output amounts to about four tons, the Americans emit 20 tons per person. As a political solution is not on the horizon any time soon, some people may opt to at least reduce their own footprint. That, however, may be easier said than done.
Last June, MIT professor of Mechanical Engineering, Timothy Gutowski, asked his students to compare the energy consumption of people in different socio-economic classes. A total of 18 different lifestyles were chosen ranging from vegetarian students to professional golfers. Interestingly, the researchers found that even Americans with the lowest energy usage, including a homeless person, a five-year-old child and a Buddhist monk, still had a carbon footprint twice the size of the average global citizen. This is because the services provided for every American, including infrastructure and public services, guarantee a minimum that no American can drop below.
However, the research found that as income rises so do emissions. Bill Gates, who was taken as a case study, had an estimated carbon footprint of about 10,000 times the American average, as he flies around the globe in his private jet. The study concluded that voluntary reductions by most people are unlikely to make much of an impact, yet considerably more can be done by the wealthy. Gutowski suggested that the best way to lower footprints is to tax carbon use.
Now there’s a shoe for the American president.

Peter Speetjens is a Beirut-based journalist

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How the West was humbled

by Paul Cochrane
written by Paul Cochrane

The double whammy of the subprime market crisis followed by the deepening financial crisis has seen a remarkable change in fortunes among the vanguard of economic power. Recall British Prime Minister Gordon Brown’s visit to the Gulf in November to essentially beg for money to help shore up Britain’s ailing industry.

Not even a year ago, such a trip by the leader of one of the world’s leading financial centers — and accompanied by 27 senior business executives — would have been unthinkable. Rather the trip would have been about cementing economic relations, making some speeches about the value of the free market, a veiled reference to democracy and the hopeful flogging of British goods, services, and weapons.
But these are different, more difficult times and pride is making an exit, replaced with knitted brows and forced smiles of gratitude — if the money is made available.
And perhaps rather unsurprisingly, there are elements among this increasingly dishevelled elite that are not happy about this change, particularly when it comes to non- Western entities buying up landmark buildings and sizeable assets in Europe and the USA. The British popular press is a glaring example, which appears unable to accept the shifts in economic power, with regular commentaries and articles bemoaning such ‘humiliation’ on the world stage. Gulf sovereign wealth funds (SWFs) have come under particular criticism over the past year and a half, due largely to knee-jerk jingoism of the sensationalist kind. Take this example from an editorial in The Daily Express in November: “There is mounting concern about individuals and sovereign wealth funds in the Middle East that are buying into key British businesses… Now they are buying out our assets, our country, with our own money. It is a sad, sickening prospect.” That a change in fortunes affects the psyche of a former world power is somewhat understandable, though there is little need to bite the hand that feeds you. But such resentment has been around for quite some time and recent changes are no exception. One notable factor in this new alignment of the financial stars is how pragmatic political leaders are in comparison to popular sentiment. Just think back a few years to Dubai Ports World’s attempt to acquire the rights to run American sea ports. The Bush administration was all for it, whereas US media made a mountain out of a mole hill. Newspaper cartoons depicted terrorists hidden inside containers, Arabs dressed in jelabas turning a blind eye to dubious cargos sailing past the Statue of Liberty and all the old, staid Orientalist clichés were dragged out. They seemed to confirm what the Arab world has long suspected, that Americans and the West view Arabs as untrustworthy and as potential terrorists. The Dubai Ports episode was a particularly virulent case and the emirate did well to back out quietly without making a fuss. The spate of SWFs buying up assets and icons over the past year is being taken in a rather different light, but is nonetheless seemingly dependent on the acquisition. After all, Manchester City’s supporters couldn’t have been more enthusiastic about the Abu Dhabi United Group for Development and Investment purchase of their soccer team this year. But when it came to Abu Dhabi’s SWF pumping some $7.5 billion into Citigroup and Kuwait investing in Merrill Lynch a year ago, up went the cry of the barbarians at the gates and concern over vested political interests. As if Western multinationals, the International Monetary Fund (IMF) or the World Bank don’t have vested political interests everywhere they operate! But as with jingoistic attitudes having to change, so it looks as if the West’s dominance of the IMF may also have to adapt to the fallout from the financial crisis. The fund is looking to the Gulf’s finances — with oil producing countries generating some $1 trillion over the past few years from high oil prices — to help the IMF’s bail out packages. In return, Gulf countries will want more than just a seat at the IMF’s table; they will want to have an actual role in the fund’s decisions. As Brown said in Abu Dhabi, “I very much accept the argument that countries which do contribute in this way should have a greater say in the overall governance of the IMF.” Whether this will happen, and to what degree, will have to wait until the next meeting in April. And as for the Gulf helping to shore up British business — despite the reservations of the popular press — Brown’s visit helped to land $1.5 billion in deals, while Barclays Bank bypassed a handout from the British Treasury through a $11 billon stake from the Abu Dhabi royal family. The times are changing and hopefully so will attitudes as the axis of financial power starts to shift.

PAUL COCHRANE is a Beirut-based journalist

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Iraq’s northern Cinderella

by Riad Al-Khouri
written by Riad Al-Khouri

With the Crash of ‘08 ushering in the 2009 worldwide slump, it is clear that the economic crisis will hit richer countries more than others. According to the Organization for Economic Co-operation and Development (OECD), 2009 growth estimates for the United States, Iceland, and Switzerland, are respectively -1 percent, -9 percent and zero percent, while for China, India, and Indonesia they are eight percent, seven percent and five percent. In the European Union, it is noteworthy that wealthy Holland and Britain are set to do badly next year, with projected growth of zero percent and -1 percent respectively, while relatively poor Slovakia and Poland are due to expand at four percent and three percent. Though this is not an absolute rule — for example lowly Portugal will not do well in 2009, growing at zero percent, while better off Slovenia is set to expand by two percent. It is interesting to see how some economies with sophisticated securities exchanges have got into a mess, while less advanced countries avoided such hassles and as such could grow more. Of course, the correlation is imprecise, but for once 2009 may be a case of the rich not getting richer, while the less well off do relatively better. This phenomenon might also be observed in the Middle East, where the free-wheeling Dubai and Kuwait, for example, have not done well over the past few months and do not enjoy a rosy short-term outlook, while poorer areas in the region are less affected and might perform relatively better next year. The economies of Syria and Yemen have not nosedived, nor has there been a share price crash in Damascus or Sanaa for the simple reason that they do not have stock markets. Kurdistan in the north of Iraq may be just such a Cinderella economy in 2009, going from neglect to becoming something of a star. Baghdad and other parts of central and southern Iraq are unstable, but the Kurdish province in the northeast is another story. For a start, there is security and a low crime rate, with a prison population of about 1000 in a region where five million people live. The comparable ratio in the US is 50 times higher.

Politically autonomous within Iraq, Kurdistan has lots of potential. The province enjoys abundant natural resources and advantages, including a pleasant climate, fertile soil and high oil reserves. Growing investments in housing, tourism and industry have come to the region in the past few years and there is also great potential in other sectors. Vital petroleum reserves are abundant, a main attraction for investors. Only about 10 percent of the region has been explored and there is probably a lot more oil waiting to be tapped. Additionally, oil production costs are among the lowest in the world, with vast deposits of petroleum lying close to the surface in much of the province. Kurdistan is also abundant in cattle, sheep, cereals, fruits and vegetables. The province is now developing the infrastructure to get these and other products to regional and world markets, with new highways being built and others under repair. One problem is underdeveloped air transport, especially important for the landlocked province. However, with a major airport expansion project in the regional capital of Erbil set to come to fruition very soon, Kurdistan will open up to tourists and investors alike. Though already served by several carriers such as Turkish airlines, Royal Jordanian, Austrian and Emirates — as well as Iraqi Airways — the big new airport opening in Erbil in 2009 will make it easier for businesses to operate in Kurdistan, as well as promote it as a tourism destination.
Kurdistan has a lot to offer. Erbil is one of the oldest continuously inhabited cities in the world and boasts a huge citadel designated by UNESCO as a major historic architectural site. Yet, for that and many other spectacular natural or historic areas throughout Kurdistan to attract tourists, hotel facilities need to be upgraded. Although several international five-star hotel brands will arrive in Kurdistan next year, most notably the German company Kempinski in Erbil, the province still has some way to go in the development of tourism. In these and other areas, with Arab money pulling out of world bourses, the province could become a regional investment magnet. For Kurdistan, war could be a thing of the past and like its poorer neighbors in the region, it may be on the road to economic development in 2009, despite the world crisis.

Riad al Khouri, co-founder and principal of KryosAdvisors, is senior fellow of the William Davidson Institute at the University of Michigan, Ann Arbor

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History’s famous footwear

by Claude Salhani
written by Claude Salhani

President George W. Bush wanted to make history — he will. The bad news for the president is that he will certainly not be remembered the way he would have wanted. That is to say, fondly, or as a great American. Opinion polls have consistently placed Bush at the end of the line as far as popularity goes, behind the most unpopular presidents to date, Franklin Pierce, Warren G. Harding and James Buchanan.

In 2006, Siena College in Loudonville, New York, polled 744 professors with the following questions: After five years as president, if today was the last day of George W. Bush’s presidency, how would you rank him? Great — two percent; Near great — five percent; Average — 11 percent; Below average — 24 percent; and Failure — 58 percent.
A more recent survey, conducted in 2008, found that 98 percent believe that the George W. Bush presidency “was a failure,” and 61 percent believed it to be the worst in history. While the way history will remember Bush may not be in accordance with his aspirations or his ambitions, the 43rd president of the United States will go down in history where only two other men and one woman have ventured before, to be remembered because of a shoe. The first time shoes entered contemporary history was when an irate Soviet leader used a shoe to command attention; the second time shoes crossed paths with history was when it was revealed that a dictator’s wife had acquired an incredible collection of shoes; the third mention of shoes in the news was when a would-be terrorist attempted to use a shoe as a tactical weapon, and finally, last month, when an Iraqi reporter hurled his old shoes at the president of the United States.
Now I may be proven wrong by some Internet blogger with far greater knowledge of the role shoes played throughout history, or by a nerdy Webmaster with a shoe fetish, but it really wasn’t until Soviet Premier Nikita Khrushchev used his right shoe at the United Nations in 1960 to bang on the table that shoes made the headlines.
At the time Khrushchev was protesting a speech being delivered by Lorenzo Sumulong, the head of the Filipino delegation to the 902nd plenary meeting of the General Assembly. Until that time shoes were meant to be worn, not used as utensils in public affairs debates. Khrushchev forever changed that concept. Photographs of the Soviet leader hitting his shoe on the desk of the UN General Assembly, of course, made the front pages of almost every publication in the world.
The shoe incident at the UN became synonymous with Khrushchev. Since then, it became quasi-impossible to disassociate one from the other. For better or for worse, the image of Khrushchev and the shoe became forever etched in the memory of all those who were old enough to understand what was going on in 1960. If Khrushchev, as leader of the Union of Soviet Socialist Republics, was modest in his dress, one woman who made the news with her shoes had no qualms about spending money on them.
Imelda Marcos, the wife of the former Filipino dictator, Ferdinand Marcos, owned no less than 1,065 pairs of shoes, or 2,130 shoes. In any case, those were the ones she left behind. The next time shoes are mentioned in the news is about three months following the September 11, 2001, terrorist attacks on the World Trade Center in New York and the Pentagon.
In December 2001, 41 years since shoes were last in the news — except for the mentions of Imelda’s collection — shoes found their way onto the front pages of newspapers around the world. This time the location is an American airliner flying across the Atlantic from Paris to Miami. The man who was to become known as the shoe bomber tried — and luckily failed — to ignite his shoes which were filled with explosives. Reid, a convert to Islam, tried to blow up the airliner over the Atlantic Ocean. The whole episode sounds rather fishy, but the bottom line is that Reid is in prison for life.
And now, President George W. Bush, who was voted in several polls as the least popular president the US has had since independence in 1776, makes a place for himself in history — albeit certainly not for the most well-heeled of reasons. Bush will be remembered as the president who had an old shoe thrown at his face in Baghdad. And if that was not bad enough, Bush will now be remembered as the president who was shoed — excuse the pun — or if you prefer, booted-out of Iraq. Bush must not despair, these standings do change. A 1982 survey polled 49 historians and placed Eisenhower in ninth place, whereas in an earlier 1962 survey, Eisenhower came in at 22.
But for Bush to climb up in the ratings, future presidents would have to fare far worse in both foreign policies and domestic affairs. That might take a few years.

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

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Executive Insights

Success and challenge for family business in the GCC

by Ahmed Youssef & Marc-Albert Hamalian
written by Ahmed Youssef & Marc-Albert Hamalian

In an era of corporations with global reach, multinational workforces and board-dominated corporate structures, it is easy to overlook the fact that some of the most successful companies are still family businesses — the oldest type in the world. Wal-Mart, the world’s largest corporation based on sales, Ford, Cargill and Bombardier in the Americas all began as family businesses. Peugeot, LVMH, IKEA and Bosch in Europe also fall into the category, as do Tata, LG and Samsung in Asia. These businesses have survived economic downturns, wars, family feuds and other challenges. They not only have survived — they have out-performed their respective index: a Credit Suisse index shows that family firms have outperformed non- family firms in shareholder value creation by 15 percent from January 2005 to October 2008.

Our analysis of international and regional family businesses indicates that the most critical factor to success is families’ coordinated and sustained long-term strategy for growing and controlling their businesses. This involves exercising patience in managing capital, holding onto companies through bull and bear markets, focusing on core businesses and emphasizing long-term performance ahead of quarterly gains. In the GCC, family firms are an up-and-coming force. They tend to be relatively young — most are less than 40 years old — and are typically managed by first or second generation family members, with few seeing significant involvement from third generation members. Despite their short tenure, some family businesses have gained international stature in the past few years. Their success, however, has been based on factors specific to emerging markets and the region’s cultural heritage. First, successful GCC family-owned businesses have enjoyed distinct advantages, including limited external competition and special access to capital, business networks and information. This allowed family businesses to build large conglomerates spanning a variety of sectors. In many GCC countries, activities were implicitly divided among the privileged family businesses. Second, the cultural heritage of the region has so far protected family businesses from many major and destructive family feuds. As an example, the passing of control has been less contentious an issue in GCC family businesses, where leadership traditionally is passed to the eldest brother, a practice typically accepted by other family members. Even in instances of conflict between family members, the dispute tends to, with few exceptions, be kept private and managed within the family, limiting the impact on the business. This advantage, however, is fragile as families expand and as the gap in experience and knowledge increases among various family members.

Upcoming challenges
These advantages, though, will not insulate family-run businesses in the region forever. Leaders of many GCC family businesses have acted as “restless entrepreneurs,” more focused on developing new businesses and entering into new investments than on scaling and institutionalizing businesses once they are created or acquired. This is typical not only of family-run firms, but of any company that operates in an environment of strong economic growth, limited competition and abundant capital. Today, family businesses are going to be put to the test as they face an economic slowdown and an upcoming generational change. On one hand, the current worldwide economic slump, coupled with increased competition from both regional and global firms across industry sectors and the democratization of business development in the GCC, will likely put additional strain on family businesses’ cash positions and will force them to improve performance and better manage their capital and liquidity. On the other hand, ownership of the business, and consequently control of the business, will likely become more fragmented with the inclusion of the third generation and the lack of appropriate legal frameworks like preferred shares.

Continuing a tradition of success
Given these challenges, we have identified six key actions to drive the successful evolution of a family-run conglomerate.
• Re-evaluate the existing business portfolio, creating sharper focus. This can be difficult as many GCC families tend to hold on to their traditional businesses for emotional rather than rational reasons. However, family- run conglomerates must have the discipline to optimize the use of their capital and to target fewer businesses to drive superior performance. Our analysis of family businesses shows that focused family conglomerates (i.e. firms with focus on related businesses within an industry group) generate higher shareholder value than those conglomerates with a wider variety of unrelated businesses.
• Apply rigorous discipline when evaluating new investments. As the portfolio of existing businesses is rationalized, family conglomerates must create clear guidelines for new investments, focusing on scalability, relative return on capital and management time. For businesses or ventures that do not fit the criteria but are important for the family, they can be financed by funds — individual or collective — that are independent of the business.
• Build management capabilities and relinquish control when necessary. An essential element for an “immortal” family business is a management team that is able to grow the business independently of the shareholding. A silver lining in the current economic downturn is the sudden availability of management talent. To attract that top talent, family businesses must be open to ceding some level of decision-making, eliminating the glass ceiling, and creating the right incentive structures.
• Separate family and business activities. In the GCC, the line between family activities and investments is often blurred, reducing transparency and making it difficult to assess a businesses’ real profitability. One option is to create a ‘family office’ to handle activities ranging from basic services such as travel arrangements to managing individual family members’ wealth. Philanthropic activities should also be separated from the business by creating a foundation or leaving the activities to individual family members.
• Create a formal governance structure to govern family and business activities. This will ensure effective delegation and separation of activities and will help families prepare for succession. A governance structure can also be used to include and involve family members who might not otherwise be actively engaged with the company. However, while designing a governance structure is relatively straightforward, implementation can prove to be more difficult. It is best to introduce the structure gradually, over a long period of time.
• Appoint a change agent. Some families split necessary actions among themselves, with no clear accountability. This often fails to implement change because no single person has taken ownership of the evolution. In our experience, successful change in GCC family businesses should be championed by one individual, a change agent. The latter could be a family or non-family member, but must be close to and respected by the family, have a thorough knowledge of the business and be viewed as unbiased towards a branch of the family. Most importantly, the change agent’s interest has to be aligned with the family’s success.
When it comes to family businesses, there’s an old saying that contains a grain of truth, “The first generation makes the money, the second generation tries to keep it, and the third generation loses it.” Some studies show that up to 80 percent of family businesses fail to survive through the third generation. Today, many GCC family businesses will be put to the test. The large family size will require them to seek around 20 percent a year in growth to maintain the same level of wealth across generations. This has to be managed through economic downturns and across generational changes. These businesses can risk decline or possible extinction, or they can create an enduring corporation and lasting legacy for their families by managing the ‘restless entrepreneur’ syndrome and institutionalizing their business.

Ahmed Youssef, principal and Marc-Albert Hamalian, associate with Booz & Company.

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Executive Insights

Credit Suisse

by Fadi Eid
written by Fadi Eid

The world oil market has undergone dramatic developments over the last 12 months. On January 3, 2008, the price of a barrel of oil passed the $100 mark for the first time. The price continued to rise in the following months and by July 2008 it had risen another 45 percent, briefly reaching more than $145. Soon after, a drastic price correction set in. In the last four months, the price of oil has fallen more than 60 percent and reached levels below $50 — a price last seen in 2005.

Part of this price correction is surely the result of the liquidation of speculative long positions and the reduction of risk positions by key market participants in connection with the financial crisis. However, the main culprit is a change in the balance of supply and demand. For example, demand for oil in developed economies has dropped off sharply in recent months as a result of the economic downturn and the high prices seen in the first half of 2008. At the same time, oil production has risen significantly, especially in OPEC countries, with many oil- producing countries working at full capacity over the summer months. This combination of rising supply and weak demand has led prices to decline, a process that has been accelerated by the financial crisis.

Can’t help but rise again
In view of the size and speed of the price decline, the question now is whether this represents an end to the structural price increase of the last few years. However, this is probably not the case. Again, this is mainly because of the long-term balance between supply and demand. Worldwide consumption of oil is currently slightly more than 85 million barrels per day (mb/d). This represents an increase of 13 percent over 2000, and if emerging markets — particularly India and China — continue their industrial rise over the next few years, global oil consumption will climb even further. The International Energy Agency (IEA) expects oil consumption to increase to more than 106 mb/d by 2030. In order to meet this rise in consumption, considerable investments will be necessary, primarily in countries in the Middle East. The region is home to more than 60 percent of the world’s oil reserves, but it is only responsible for 30 percent of global oil production. Because oil fields in Europe, the US, and to some extent Russia are in the advanced stages of production, output in these areas is declining. Production at oil fields in the US and the North Sea in particular have been waning for some years, so production will increasingly have to be shifted to the Middle East just to maintain current levels. Significant investments will be required to increase production to more than 100 mb/d by 2030. The IEA estimates that $11.7 trillion in investments will be necessary by 2030. The costs to shift production and tap new oil fields will likely impact the price of oil.
The current price of less than $50 per barrel is already below the marginal cost of production and is therefore likely to be unsustainable. The marginal cost to produce 85 mb/d at present is about $60 to $70 per barrel, a figure that is more likely to rise than fall in coming years as a result of the necessary shift in production. While weak oil prices and increased volatility will continue in the short term as a result of the economic slowdown and the credit crisis, prices should gradually stabilize in the first half of 2009. In all likelihood, oil prices will resume their structural upward trend in the longer term.

FADY EID is chairman and general manager of Credit Suisse (Lebanon Finance) S.A.L.

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