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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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Executive Insights

Lebanon in the eye of the storm

by Marwan Mikhael
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

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Editorial

The new beast of burden

by Yasser Akkaoui
written by Yasser Akkaoui

It’s easy to do well in a boom, when the money runs almost as freely as champagne, and when investors feather their nests with the profits of successful speculation. This was never more so the case than in the GCC, where oil money transformed the local capital markets into the biggest bull on the Arabian block.

After the booming bull has come the bear of bust. It is a bitter pill to swallow, especially when it has not been our fault. The inescapable truth is that business cards from the world’s blue chip banks and finance houses have lost their luster — rogue hedge fund investor Bernard Madoff saw to that when his $50 billion scam wiped out the asset portfolios of some of America’s most powerful investors. A well-cut suit, a Harvard MBA and a Manhattan employer are no longer enough to get people to part with their money.

For the time being at least.

All of this means that in 2009, a year in which we can expect the champagne to dry up, CEOs will have to prove their mettle by showing their respective boards that they can step up to the plate and deliver real solutions in this era of change — for there will be massive change and we are not just talking about the global recession. The whole financial dynamic has shifted, as has the flow of global investment.

We were once told that every dollar would return to the US, but now the dollar is leaving America and taking up extended residence in China, in Russia, in India and in Brazil. No one saw it coming, but the flaws in the US free trade agreement are coming back to haunt the architects of its design.

The implications of all this need to be taken on board. CEOs will have to reacquaint themselves with the basics of macroeconomics and devise micro-strategies to maintain their companies’ competitive edge. And they must do this within the parameters of good corporate governance, sticking to their mission and managing ethically.

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Financial Indicators

Global economic data

by Executive Staff
written by Executive Staff

Thinkforce

Researchers per thousand employed, full-time equivalent, 2004 or latest available year

Researchers are professionals engaged in the conception and creation of new knowledge, products, processes, methods and systems, spanning civil, military and business interests. Latest figures show nearly four million R&D professionals in the OECD area, of which about two-thirds are in the business sector. That makes about seven researchers per thousand employees in the OECD area, compared with 5.8 per thousand in 1992 for instance. The number of researchers has increased over the last two decades. Finland, Japan, New Zealand and Sweden have the highest number of research workers per thousand persons employed. Outside the OECD, China has also seen growth, but at 1.2/1000 in 2004, remains relatively low.

Women in parliament

OECD countries, 2006

Women political leaders are a rarity in OECD countries, but did you know that men still vastly outnumber women in all the world’s parliaments? Nor can country differences in wealth explain much, for as a neat little OECD booklet called ‘Women and Men’ points out, women hold close to half the seats in Rwanda and Sweden and about a third in the Nordic countries, Cuba, Costa Rica and Argentina. In nine OECD countries at least a third of parliamentary seats are held by women. The Nordic countries and the Netherlands stand out, with more than 35%. In most OECD countries, though, women hold under a quarter, with 15% or less in Italy, Japan and the US.

Educating medics

Number of medical graduates per 1000 physicians, 1985 to 2005

Ageing will boost demand for health care, but as health care professionals are ageing, how can that demand be met? Even with no growth in demand for doctors, retraining of new medics is needed to replace those leaving or taking a break from the profession. That retraining requirement rises sharply when there is some growth in demand for staff, say, as people get older. However, medical graduation rates have been declining over the past 20 years, as the latest OECD Health Data 2007 shows. The average graduation rate for doctors was about 34 per 1000 practicing doctors across the OECD area in 2005. This is too low to meet the expected increase in demand, and raising pressure to bring in doctors from poorer countries where they are badly needed.

Public debt

As a percentage of GDP, 2006

In the 1990s a general government debt of 60% of GDP was one of a handful of targets European governments selected as preparation for economic and monetary union, and eventually the euro. As well as central government, it includes debt of local and regional governments, for instance. General government debt had eased in many countries, but, has risen again in several countries on the back of higher global interest rates. The euro area average stood at 76% in 2006, with Italy’s at over 100% of GDP, and no less than seven of the euro 12 easily overshooting the original 60% mark, including Germany and France. It is interesting to note that these countries have also had unspectacular growth. Fast-growing countries such as Ireland and Luxembourg, as well as Korea, were among those countries with the lowest government debt. US debt stood slightly above 60%.

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