Executive Magazine

Iraq’s northern Cinderella

by Riad Al-Khouri January 3, 2009

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

January 3, 2009 0 comments

Comment

History’s famous footwear

by Claude Salhani January 3, 2009

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.

January 3, 2009 0 comments

Executive Insights

Success and challenge for family business in the GCC

by Ahmed Youssef & Marc-Albert Hamalian January 3, 2009

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.

January 3, 2009 0 comments

Executive Insights

Credit Suisse

by Fadi Eid January 3, 2009

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.

January 3, 2009 0 comments

Executive Insights

Lebanon in the eye of the storm

by Marwan Mikhael January 3, 2009

written by Marwan Mikhael

There is no doubt that the sheer scale and global consequences of the financial crisis are staggering. The financial meltdown translated into a deep economic recession that reached the US, Europe and parts of Asia. All over the world, financial systems are being re- examined not only to define acceptable levels of capital and leverage, but also to introduce necessary financial regulations. Authorities in advanced countries are trying to speed up the process of improving transparency, developing a higher degree of corporate governance and creating new clearing and monitoring institutions.

While governments and central banks all over the world are taking every possible measure to stimulate the economy, their efforts are being hampered by three main factors. First, companies, banks and financial institutions are engaged in a deleveraging process that is squeezing the credit market even more and deepening economic recession, thus dumping the impact of concerted and non-concerted interest rate cuts by central banks. Second, the financial crisis has shaken investor and consumer confidence alike during the last few months and it will need more effort and time to be restored. Third, measures that are being implemented will feed into the economy with a lag of nine to 18 months. Therefore it will not be before the last quarter of 2009 or the first half of 2010 that we can expect to see the end of the tunnel.
In this context, Lebanese banks appear to have weathered the storm perfectly. At a time when the credit crunch was entangling the international markets, with interbank rates going through the roof during the month of October, Lebanese banks seized the opportunity and lent their ample liquidity to foreign financial institutions. Consequently, they realized high returns with the three-month US dollar LIBOR rates reaching 4.85 percent on October 10, 2008, and staying above the four percent level for several weeks.
Being less integrated into the global financial system than other emerging economies, Lebanon was not negatively affected by the financial turmoil. The capital outflow that resulted from position liquidation by some investors to cover their losses on the international markets was more than offset by private capital inflows. These inflows came primarily from Lebanese expatriates and some Arab businessmen and tourists. They consisted of remittances, tourists spending and transfers for investment purposes or just to flee disturbed markets in other parts of the world. As a result, the balance of payment registered a surplus of $2.4 billion during the first 10 months of 2008. In addition, based on the latest update of the report on remittances released by the World Bank, remittances from Lebanese expatriates are expected to reach six billion dollars in 2008, thus registering an increase of nine percent compared to 2007.
Banks’ balance sheets remain strong despite the negative performance of the Beirut stock market. The Blom Stock Index (BSI) followed the downward trend of international markets and declined by 22 percent year up to December 16, 2008. By contrast, total deposits at commercial banks increased by 10 percent in the first 10 months of the year and the dollarization of deposits declined from 77 percent to 70 percent. Furthermore, published results for the third quarter of 2008 show a large increase in banks profits. On the assets side, banks increased their lending to the private sector by 17 percent, bringing their claims on the private sector to 90 percent of GDP. Thus, no liquidity problems or credit squeeze were witnessed on the Lebanese market.
This confidence in the Lebanese banking system and the Lebanese Lira stems from the solid balance sheets of commercial banks and the conservative approach adopted by the central bank. Banks enjoy high liquidity ratios, high returns on assets and a leverage ratio of 12 to one (liabilities/equity), which is considered very conservative by international standards. The central bank’s conformist approach resulted from a circular issued in 2004 banning financial institutions, including banks, from investing in the subprime market and the related structured products in the US.
In the midst of the global financial turmoil, Lebanon has to foster the established confidence in its system and take advantage of the global economic recession to catch up with peer countries. The challenges ahead for Lebanese banks are many with the development of e-banking topping the list. Banks should also improve their penetration rate by developing their Islamic banking activities more. Being an important source of income for commercial banks, the large outstanding stock of government Treasury Bills and Eurobonds helped them survive the financial crisis. However, banks should try to reduce their reliance on government debt for their income in the future.
Finally, providing that Lebanon remains in the calm eye of the financial cyclone, where blue skies, light financial wind and low political pressure persist, the economy is set to thrive. The economic growth rate is expected to register more than seven percent in 2008 — above the six percent expected by the International Monetary Fund — and six percent in 2009 despite the global economic recession. The government as well as the banking sector have a golden opportunity to introduce the necessary reforms in their respective areas and to be ready by the end of 2009 or mid- 2010 to play a leading regional economic and financial role.

Marwan Mikhael is head of research at BLOMINVEST Bank

January 3, 2009 0 comments

Executive Insights

Internal communication and corporate inner peace

by Mark Helou & Ramsay G. Najjar January 3, 2009

written by Mark Helou & Ramsay G. Najjar

The title of this piece is not that of a meditation book, nor is it a quotation by a yoga guru. It simply expresses the importance of internal communication — which unfortunately remains neglected in this part of the world — in guaranteeing internal cohesion across an organization, with all its positive consequences in terms of resistance to crisis, resilience and ability to navigate in the midst of turmoil.

When external communication seeks to build and immunize the image of an organization in the “outside” world, internal communication strives to consolidate the sense of belonging and foster loyalty, which in turn renders its members ardent defenders and even ambassadors of the “brand,” protecting the company’s name long after having clocked-out. In light of this, one cannot help but establish a parallelism between a corporation and a human being: external communication corresponds to the way in which a person deals with their surroundings, while internal communication would be closer to “what is happening in the head” of this person — internal crisis or inner peace, self-confidence or doubt about oneself, clear convictions or inner contradictions, etc.

Why businesses need to find zen
Without pushing the comparison further, it is clear that internal strategic communication has been relatively neglected by regional corporations as compared to the importance given to external communication, with many chronic symptoms of this situation being discernable across sectors: lack of cohesion between employees, debilitated loyalty to the organization, absence of well- being in the workplace — which automatically translates into lower productivity — and many more harmful signs. In many aspects, regional corporations are becoming like Babel towers in which no one seems to speak the same language, work towards the same goals, or even be informed of the direction in which the organization might be heading in the future. Companies do not seem to realize, however, that by focusing only on external communication and failing to properly address employees’ concerns and need for information, they might be inadvertently exposing themselves to external scrutiny as disgruntled and fearful employees could disseminate negative messages that can harm the organization’s image at any moment. As such, by failing to proactively extinguish an internal communication problem, companies would be fueling the fire on the external communication front.
This becomes especially pertinent in light of the severe economic crisis that is shaking the world. The landscape we are now witnessing in the region is far from reassuring: companies are downsizing their workforce in a wave of job losses never seen before, with many analysts agreeing that we might just be entering the tunnel. If the attention is now focused on the employees who have lost their jobs, this should not overshadow difficulties faced by those who have managed to stay onboard: worries about their future place in the company, fear of being fired at any moment, uncertainty concerning the direction that the company might take — all due to a lack of transparency within the company or simply a failure to properly communicate its situation and vision clearly to its internal stakeholders. It goes without saying that such a state of mind would directly impact the productivity of the corporation, which might in turn lead to more job losses, thus indefinitely maintaining the vicious circle. The worst example in this respect that will be used for decades to come is that of Lehman Brothers, whose employees only found out about the collapse of their company through the media and walked out to tourists gathered outside their offices snapping pictures of them as they left the building carrying boxes of personal belongings.
What makes this situation puzzling is the fact that internal communication tools are readily available and seem to actually be used, yet they do not appear to be yielding the desired positive results. Examples abound of regional corporations that publish an internal newsletter that ends up collecting dust in the drawers of employees, because the one or two people in charge of writing it are unaware of the real issues that are of interest to their colleagues due to the lack of two-way communication channels. Similarly, one can think of the many companies that have built their own intranet network, which nevertheless remains underused due to the lack of engaging content and the absence of an overall internal communication strategy.

Reaching meaningful inner discourse
The ad hoc fashion in which these channels are being used in today’s regional corporations cannot therefore guarantee any success in this respect. Not only that, but it is in times of acute crisis that all the benefits of efficient and consistent internal communication are the most visible. The analogy with a human re-emerges in this case: it is in difficult times that a person who is “inwardly solid” can prove his/her value, and a corporation that is internally immunized can demonstrate its resilience.
This suggests that simply deploying internal communication tools is necessary but not sufficient to implement solid and sound internal communication. These tools have to be anchored in a holistic strategy that addresses all the internal issues and optimizes all the channels, in a bid to maximize the synergy between them and subsequently optimize their impact on the targeted internal audience.
This strategy should aim at conveying a single consistent vision and mission for the company, while at the same time contributing to reinforcing personal ties between organization members, cultivating employee well- being and encouraging individual sense of initiative. This requires sending out a consistent set of strategic messages that aim at boosting the morale of employees, engaging them in the decision-making and change process, reassuring them about their future, and demonstrating transparency about the situation and where the company is heading. From internal newsletters to orientation programs, employee appreciation events, sports teams and corporate events just to name a few, all these initiatives contribute to convey these messages and to reinforce the bonds between organization members, creating a sense of belonging that naturally translates into increased motivation, loyalty and higher productivity. The invaluable role of proper strategic internal communication is multifold: toning down all negative perceptions, consolidating the weakened sense of belonging and reunifying the organization’s ranks by providing a clear and reassuring vision that will breathe much needed optimism for the organization’s future.
As such, a sound and consistent strategic internal communication platform could be seen as a gauge of inner solidity that would ultimately translate into “inner corporate peace” in times of turmoil and immunize the organization until it reaches a safer shore.

Mark Helou & Ramsay G. NajjarS2C

January 3, 2009 0 comments

Executive Insights

Exposing the roots of the world‘s economic crisis

by Mazen Soueid January 3, 2009

written by Mazen Soueid

For all the talk of greed, fraud and excesses in the analysis of what went wrong and how it caused global capitalism to suffer one of its worst crises in almost a century, one would have expected at least as much talk about the fundamental causes of the crisis. Those causes are rooted in US economic policymaking dating back to 2001. The burst of the housing market bubble in the US, which took the prices of other assets like stocks and corporate bonds with it, should not be looked at independently of the dotcom bubble burst in 2001. Indeed, the seeds of the housing market bubble were planted in reaction to the dotcom bubble burst, which ushered in one of the strongest policy easing responses the US market has ever witnessed, an expansionary monetary policy, very low interest rates and an easing of constraints on credit growth.

The reasons behind the massive easing may have been justifiable at the time; the burst of the dotcom bubble threatened to inflict huge losses on the American private sector due to its overexposure to the stock market. The events of September 11 aggravated policymakers’ fears that a combination of wealth effects, plus loss of confidence, could have disastrous effects on consumer spending and hence investment. Of course, under normal circumstances easing could indeed stimulate investment. But the US economy, coming out of a long productive period, was already over-invested and so the extra money was not put to productive use. Instead, it helped inflate the price of another asset: real estate, which was the easiest candidate in light of low interest rates and further financial deregulation.
Policymakers were not unhappy to see housing prices rise fast. In fact, there was a strong need for another asset to rise in value in compensation for the wealth lost in the stock market and for the confidence lost after September 11. But a fast rise in housing prices brought both the speculators and the subprime buyers into the market, which fueled the bubble even more and made the housing sector vulnerable to a sudden reversal. This was all but guaranteed in light of the monetary tightening that was later adopted to control inflation. The dynamics that came together to set in motion the expansion were reversed and caused an equally steep contraction. Poor regulation and excessive leverage guaranteed that the crisis spread to the banks and hence to the rest of the economy, while globalization and financial linkages guaranteed its spread to the rest of the world.
The implications of the crisis will be severe. The developed countries, especially the US, have yet to see their housing prices bottom out, which will be the first step to bringing the skeletons out of the closet. The late but definite understanding by US policymakers of the breakdown of the monetary transmission mechanism (i.e. the inability of low policy rates to translate into lower term lending rates) and hence their shift to direct intervention through the purchase of bad assets as well as the injection of capital into banks, should help the credit cycle take off again in time. The massive infrastructure upgrade proposed by President-elect Obama is surely the correct, massive fiscal response needed in times like these. But just like monetary policy, fiscal policy will need sometime to be transmitted. As a result, we are surely looking at weak, most likely negative, growth in 2009, while the house is put back in order.

The developing world
The implications of the crisis on developing countries may be less severe in the short-term, but may have longer- term implications. The strongest implication has to be the end of the “decoupling myth,” the belief held over the last couple of years that emerging markets, particularly the big four (China, India, Brazil and Russia) have decoupled from the US and are hence capable of carrying world growth on their own. The collapse of world trade and with it commodity prices, the withdrawal of foreign portfolio investments, the freezing if not reversal of foreign direct investments and the expected steep decline in global remittances are all factors that make emerging markets look quite vulnerable at this stage. Of course those with high current account deficit, and hence balance of payments funding needs, will be the ones to show the first signs of strain as we have seen in Eastern Europe.
How long it will take for the world to emerge from the crisis depends to a great extent on how quickly the credit mechanism is restored within the US and globally. One thing to keep in mind, however, is not to repeat the mistakes of 2001. Creating an alternative bubble is not a sustainable way to handle the burst of a bubble. A related and equally important lesson is that fast credit growth and financial innovation have been given significantly more weight than sustainable credit growth and financial stability. A model of capitalism that reassigns weight in favor of sustainability and stability may be one of the few good outcomes of the crisis. Hopefully another good outcome is the restoration of basic economic fundamentals, of basic banking principles and of the basic code of conduct and work ethics. That may be the only way for capitalism to save itself. And that it must, for no viable alternative is yet available.

MAZEN M. SOUEID is chief economist at BankMed

January 3, 2009 0 comments

Executive Insights

EM Leadership Center

by Tommy Weir January 3, 2009

written by Tommy Weir

Globally we are faced with unprecedented circumstances and the world is a significantly different place than it was a year ago. Because of this competitive and threatening environment, anxiety is pulsing through corporate executives around the globe. Unfortunately, many businesses have fallen and in the coming year many more will fail. The question is, will yours be one of them? These global realities are requiring business leaders to revolutionize their perspectives as nearly everything has changed. One must feel pressured because business as we know it has come to a halt. What does this mean? It is time for action. To succeed in our competitive and changing world, you need to make the CEO shift. The CEO shift is not about your company replacing its chief executive officer. Rather, it is what you must do for your company to succeed. Simply stated, reality is mandating that every business make these five critical shifts:

Market shift
The markets of the world have moved. They are no longer in the backyard of the West. Clearly, they have moved to the East. Fast-growth and emerging markets are distinct and you must understand and respond to them accordingly. Market shift is not about outsourcing, offshoring or insourcing to/from a foreign land. It is not a trade act. It is more than a plan to expand your existing client base. To discover new horizons and grow your business you need to respond to this era of peopleization.

Growth shift
In the past, to find the biggest and/or largest of anything people looked to EuroAmerica. Now companies and projects in the East are growing at rates once unheard of. Every single day, the news reports about the massive growth in the East. Whether it is a report of good fortune, such as the rise in number of millionaires in the emerging markets, the growth of the middle class in China or the unprecedented rates of corporate growth in India and the Middle East, the size of expansion and growth in the East is massive. It is clear that the growth shift is in the East and your business cannot afford to ignore it. To compete you will need a new definition of what growth is.

Speed shift
Beyond the magnitude of growth, emerging markets have experienced a whip-lashing shift in the speed of business. They are setting new standards. Economic activity in the emerging markets is growing at rates of around 40 percent, as compared with two to three percent in the West and Japan. It’s little wonder that your business needs to make a shift. If one travels to Beijing or Mumbai on a monthly basis, one will notice the obvious differences. In Dubai, on a weekly basis, one has to verify their route to work as new roads appear and old ones are closed. Business is now moving at a warp speed.

Talent shift
The acclaimed ‘talent war’ is over, and talent won. The real global crisis is that there are not enough workers to provide the world with the business that it needs. A talent shift is needed if a business is going to compete or even survive. Only businesses that redefine their talent strategy and approach will make it. The legacies and histories that were once relied on are a prescription for failure. This is one of the most severe pains and two Panadol will not make it go away.

Leader shift
There is not a one-size-fits-all style for leadership. One must make the shift away from the ideal of a single approach to leadership. Because of the success in the West, many people try to emulate their exported ideas and practices of leadership. Yet in the emerging markets, those practices do not deliver as hoped or expected. You need to embrace the emerging market model of leadership. Are CEOs in trouble? Yes. And just as sure as the sun sets in the west and rises in the east, it is time to make the CEO shift. The so-called ‘emerging markets’ are more than living up to the term ‘emerging.’ They are doing more than developing and coming on the scene, they are now the focus of the paparazzi on the world’s red carpet and are on every VIP list. In order to make the CEO shift, it is imperative that one makes a global shift away from the traditional Western perspective and leads their business into the emerging markets. The CEO shift is a must do for every CEO.

Tommy Weir, Ph.D., serves as executive director of the EM Leadership Center, specializing in strategic leadership development for fast-growth and emerging markets.

January 3, 2009 0 comments

Society

Real estate – Only the strong survive

by Executive Staff January 3, 2009

written by Executive Staff

The real estate market in the GCC, especially in highly speculative Dubai, is still on a downward trend and companies are struggling to ensure their survival in these tumultuous times. Since the real estate boom began, developers have done everything but play it safe and the financial crisis has caught them off guard. “In our business in the Arab world, the growth was exponential and very promising,” said Dr. Isam Daoud, chairman of Avanti Holding. Daoud also explained that this ambitious growth prompted companies to hire more staff then they would need just to prepare themselves for future projects and expansion. “We were all preparing. If we needed 50 staff, we would hire 100,” he said. Things have now changed and instead of hiring staff, companies are downsizing, delaying projects and even considering mergers. Still, it is unfair to say that all are suffering. Even though most are cutting costs, others are hiring and moving forward with their projects. Ultimately, it all depends on the financial situation of the company, whether it was relying on debt or its own equity to build projects, and whether its market activity was based mainly on speculation or end-

users.

The liquidity squeeze has been a major factor in slowing down the demand and causing project delays, since buyers and developers who rely on lending have to go cap in hand to banks asking for liquidity in order to guarantee required financing. Although governments and central banks have been injecting liquidity into the banking sector in the last couple of months, the benefits have not yet reached the real estate market. “Unfortunately banks, when they get the money, start offsetting their own losses. So the first impulse for the bank once it receives the injection is to alter its own balance sheet, and this is what is really happening. So the banks are reluctant to give the money out,” explained Amin Al Arrayed, general manager of First Bahrain. This liquidity crunch, in addition to panicky investors, has enormously reduced demand, especially in highly speculative markets like Dubai. Additionally, it induced developers to slow their pace of construction in order to give themselves more time to manage funding constraints.

Given the ongoing situation, most developers — who are far more affected than real estate brokers — are trying to survive financially by cutting costs and reassessing the feasibility of their projects, as well as offering easy and attractive payment plans to restore the market demand and to maintain the loyalty of their customers.

Cutting costs

Currently real estate companies — like other businesses —

are cutting their costs. “A lot of developers took on additional staff because staff was very difficult to come by so they were kind of over staffing. Now that the tide has turned, they are in the position where they are forced to downsize,” said Al Arrayed. Additionally, the managing director of Casamia Star, Israr Yousef, explained that companies are also cutting down on their advertising budget since the project delays and market slowdown make advertising unimportant at this time.

So far, one the biggest layoffs was initiated by Dubai Properties in December 2008, which consisted of the retrenchment of around 600 staff at all subsidiaries across the Dubai Properties Group, which includes Salwan, Injaz and Dubai Retail. Additionally, Nakheel has axed 500 jobs — 15 percent of its workforce — while Emaar and Tatweer are also considering downsizing. Omniyat also cut 69 jobs in November. It is not known how many more workers in the real estate sector have been fired, since not all job cuts have been announced and some developers are skeptical about the issue. “I would say that 60-70 percent will need to cut around 40 percent of their staff,” said Daoud.

On the other hand, some developers like Avanti Holdings have a strong financial status and do not depend on lending to finance their projects. Their financial status even allows them to give out in-house finance. In fact, they are currently hiring people thanks to their comfortable position. “Yes, sales have slowed down, but it is temporary. We are actually increasing our employees further… a lot of developers are letting go of a lot of their good employees and we are taking advantage of that and hiring them to work for us,” explained Daoud.

Extended payment plans

As banks started tightening their lending and people lost their money in the financial markets, real estate companies began witnessing payment defaults from homebuyers and property investors. Marwan Bin Ghalita, CEO of the Real Estate Regulatory Authority in the UAE, told The National that some developers reported up to 40 percent of buyers are falling behind on their payments where units were sold off-plan by developers prior to their completion, and in some cases where construction has not even started yet. Consequently, developers started extending payment plans to buyers in order to revive demand and to keep customers’ loyalty.

For example, Yousef from Casamia Star explained that due to the current situation, the properties that will be sold successfully are the ones with very good payment plans. “Our payment plan was for 18-24 months, which is difficult for the investors and end-users right now. So we extended it to five years. Now if the project will be ready in 2011, they can still make payments until 2013,” he added.

In November 2008, Emaar Properties launched the ‘To Own’ scheme, which includes ‘Plan to Own’ and ‘Rent to Own’ programs aimed at easing the financial position of potential customers by offering them an extended payment plan with annual payments for five years.

Moreover, Zaid Ghoul, chief financial officer of Union Properties, said “for our Index and Limestone House developments, we are altering the payment terms as we do not expect someone to walk in with the full 65 percent required before handover in today’s market conditions. We are therefore planning to distribute this 65 percent over two or three payments until handover to ease some of the pressure on buyers considering the slow down on mortgage lending from the banks.”

Even brokers who do not decide on these payment plans are trying to accommodate the developers and buyers by helping them find common ground. “We can help our customers by presenting their point of view to developers [who] have been very responsive, they understand what is happening in the market and are not willing to lose their clients,” explained Puniet Singh, director of operations and projects at Sherwoods Property Consultants. “Developers have been diligent about having the customer’s best interests at heart, and we are more than happy to assist our clients in this manner,” he added.

Project delays

Developers have three ways to finance their projects. “One of them is the end user by selling off-
plan, the other is direct lending from banks and the final component is the equity that the developer puts into the project,” explained Al Arrayed. In the current situation, developers who rely on banking or selling off-plan have been hit the most, while those who rely mostly on their own equity were less affected. Daoud explained that “96% of real estate developers are financing their construction using local banks and of course because of the lack of funds in the banking system, it directly affected the development phase, whereby they cannot develop anymore.” This presents a harsh situation for developers, as they have no more funding to construct.

Those who are strong financially are still proceeding with their projects, focusing on the current construction, while delaying any future plans until the market clears. Yousef explained that projects already launched by Casamia Star will not be delayed, since it will negatively affect the market. “No, absolutely not. We do not want to postpone, because it will hurt the confidence of buyers and users who are investing with us.” He added the projects that were postponed are the ones that have not been launched yet.

“Our projects are above 85% completed and they are on schedule for delivery during 2009 and 2010. We have no plans to slow down on any of the existing commitments. We have however decided not to announce any new projects until we are clear on the status of the credit market and the appetite of banks to go back into lending.” said Ghloul. Many other companies are doing the same thing, like Omniyat, First Bahrain, Al Mazaya Holding, and other developers.

While some developers are focusing on delivering their current projects on time, others are failing to do so and postponing projects that are under construction. For example, Nakheel has confirmed that some of its $80 million worth of projects will be delayed, including the Trump International Hotel and Tower. Furthermore, it is planning an initial public offering to raise up to $15 billion to manage its cash flow problems. Additionally, the construction of six man-made islands would be put on hold, as well as the Jumeirah Gardens City by Meraas Development, and many other projects.

Brokers, who were concentrating on selling off-plan projects, were greatly affected by the delays. “A large part of our sales revenue was based on off-plan projects that were newly launched and which were to go under construction for two-three years,” said Singh. He explained that a large proportion of this segment has been affected, which boils down to a substantial percentage of sales. Therefore Sherwoods, like other companies with similar business models have also started concentrating on the projects under construction by working closely with developers to package value added features and to give investors assurances that the property is an income and revenue generating asset.

Experts agree that delaying projects that were already launched would have negative ramifications, as investors who have already bought a stake in these projects will want their money back. As well, not all countries have versions of the escrow law implemented in Dubai, which guarantees investors’ cash in case of cancellation. Therefore developers will have to deal with contract obligations, which would be very costly. This would further deteriorate buyers’ trust in the sector in general and the company in particular. “Projects that developers are undertaking should be followed through and this is an important message to the market,” said Singh.

Mergers

Amid the current chaos, talks are growing about possible mergers, especially small companies that will not be able to handle the current situation by themselves. Experts concur that mergers are not necessarily a negative development, especially if they mean that a solution for a given company’s woes has been found and its position in the market will strengthen again.

In late November 2008, it was said that Emaar Properties would welcome a merger with Nakheel PJSC, however, Dubai authorities then denied the rumors later the same day. “Regarding big companies who are owned by the government like Emaar and Nakheel, I do not think they will be looking for mergers, but small companies may. It depends on how strong they are and what their policy is,” explained Yousef. He added, “I do not think a merger is a bad thing, as long as you keep the confidence of the investor in the market.” Therefore, if the crisis worsens, more mergers are likely to happen, especially among small companies who will have no other choice for survival.

In brief, all companies are currently reassessing their projects, as well as their strategies and financial situations in order to overcome this crisis. Experts are pessimistic when talking about companies that mostly relied on debt to build and had market activity based mainly on speculation. “I think that for some it may be too late, unfortunately, to come back to the market where they can actually revise their business model,” said Al Arrayed. He advises companies to focus on domestic demand, rather than speculative and to focus more on quality than quantity.

Daoud said that all companies have to reengineer their strategies and to transform the way they do business. “We have to do a total genetic transformation of our strategies if we want to survive in the next two years. The way we are building, selling, collecting the money and financing buildings must be different, since we are entering into an environment we have no experience in,” he added.

“Companies should bring more professionalism into the industry by training employees and by teaching them new things regarding real estate, which will be very helpful for the company,” said Yousef. He also asserted that governmental rules and regulations should be welcomed and implemented among companies, making companies and markets more mature.

As the crisis develops, real estate companies are cautiously planning every step. Eventually things will get better, but when and how are still unknown. The only sure thing is that the strong will survive.

January 3, 2009 0 comments

Finance

UAE – The crisis hammer

by Executive Staff January 3, 2009

written by Executive Staff

The word on the street is that banks in the UAE have faired rather well amid the aftershocks of the global financial crisis. Considering they weren’t hit as hard as American, European and Asian markets, Emirati bankers seem quite happy with themselves. Yet, when your government directly injects over $20 billion into local banks to replace funding that has gone abroad and sets up another $14 billion emergency facility, you’re in trouble. If the UAE banking sector was strong enough to recover these funds alone, they would not have needed their affluent government to pump such large amounts of liquidity into their banks. And if it was not for the existence of such a wealthy government, no such back up would have been possible in the first place. With plummeting oil prices, the burst of the real estate bubble — too much supply and nose-diving demand — decreasing business tourism and tight liquidity conditions, the country will undoubtedly see grim financials for the fourth quarter of 2008 and face severe difficulties in keeping the economy running smoothly in 2009.

The Economist Intelligence Unit (EIU) asserts, “An OPEC cut in oil production, weak investment growth (as liquidity dries up) and slower expansion in services (particularly tourism and financial services) as a result of the global economic problems will bring growth down to 3.8 percent in 2009, recovering slightly to 5.6 percent in 2010.” What’s worse, says the EIU is that, “despite the strong downward revision to our outlook for UAE GDP growth, the bias remains on the downside owing to the likelihood that the global recession could be more protracted than we currently forecast.”

With the volatile real estate market in Dubai worsening, the banking sector is also being thoroughly affected. Raj Madha, director of equity research at EFG-Hermes, suggested that “we won’t really have clarity in the banking sector until we have clarity in the property sector. So far the property sector is looking quite volatile. The sellers have, in general, not been willing to accept lower prices and the buyers are not willing to accept the higher prices. So we’ve got a dislocation between the buyers and the sellers, and the result is that the transaction volumes have gone to a very low level.” Clearly, he added, “that is not sustainable in the long- term, so the question is what needs to take place to make sure that transaction volumes pick up?” Madha’s theory presents an initial reduction of prices so to “at least reflect the strength of the dollar.” Also, he highlights the need for “a comprehensive change in the relationship between developers and potential buyers to give confidence back to the off-plan market. In the absence of that, we will only see a finished property market,” which will only continue to sour confidence levels across both the real estate and banking sectors.

This year is definitely going to be one for the books, with the UAE finally facing the reality that its previous excessive growth has decisively reached a plateau. HSBC’s chief executive officer of global banking and markets for the region, Mukhtar Hussain, boasts that the Gulf is “still a good place to be. [The economies of the region] were going at 100 miles an hour. Now they will be going at 50 miles an hour when everyone else is going at 10 miles an hour.” In a nutshell, growth in the GCC will slow by around 50 percent. According to the EIU, real GDP growth in the UAE this year will be less than half of what it was last year. But in these times of economic uncertainty, what will really happen is anybody’s guess.

January 3, 2009 0 comments