Executive Magazine

Lebanon – Dr. Francois S. Bassil

by Executive Staff December 3, 2008

written by Executive Staff

Executive Magazine spoke with Dr. François S. Bassil, general manager at Byblos Bank and president of the Association of Banks in Lebanon, for his views on the Lebanese banking sector in the current global financial conditions.

E How do you see the current and future economic situation of Lebanon in view of domestic and global developments?

The Lebanese economy has demonstrated its resilience in the face of a series of political shocks since 2005, but it also missed many opportunities and could not take full advantage of the economic boom in the states of the Gulf Cooperation Council and the unprecedented level of liquidity in the region during that period. The Lebanese economy grew by 7.4% in 2004, its highest growth level in the previous 10 years, so the system demonstrated that it has competitive advantages and that the economy can attract capital, tourists, foreign companies and talent. But due to deteriorating security and political uncertainties in the country, the economy could not fulfill its potential and grew by only 1% in 2005, and it did not post any growth in 2006 because of the July War and expanded by just 4% in 2007. But all indicators point to unmistakable signs of improvement in economic activity in Lebanon since the Doha Accord this May that saw the end of the downtown sit-in, the reopening of parliament, the election of a new Lebanese president, the formation of a national unity cabinet and the overall reactivation of public institutions after a long period of paralysis.
These developments helped improve the country’s economic outlook, which increased investor sentiment and improved consumer confidence. In turn, this has revived economic activity as best illustrated by a very successful tourism season that saw the number of incoming tourists to Lebanon rise by 29% and the number of passengers at Hariri International Airport jump by 17.5% in the first eight months of the year, while occupancy rates at Beirut hotels reached 91% in August. Further, the coincident indicator, an index of economic activity in Lebanon, rose by 12% year-on-year in August, reflecting the revival of economic activity. Also, the balance of payments posted a surplus of $2.2 billion in the first nine months of the year compared to a surplus of $580 million in the same period last year, reflecting an increase in capital inflows. Further, the central bank’s assets in foreign currency increased by $4.2 billion, or 29%, in the five months since the Doha Accord to reach a record high $18.4 billion on October 15, 2008.

The improvement of these and other indicators illustrate the positive impact of the political developments on the economy. As such, several organizations changed their growth forecasts for the country. For example, the International Monetary Fund projects real GDP growth at 6% in 2008, up from 3% last April, and forecasts a 5% growth in 2009. Similarly, the Economist Intelligence Unit revised upwards its economic growth forecast since the Doha Accord to 4.2% in 2008 and 3.1% in 2009 from -0.7% for 2008 and 0.5% in 2009 previously. In parallel, rating agency Standard & Poor’s upgraded its long-term sovereign credit ratings for Lebanon to ‘B-’ from ‘CCC+’ and maintained the outlook at ‘stable’ due to the easing of political tensions and the reduction in the government’s near-term financing risks. Capital Intelligence revised its outlook on Lebanon’s ratings to ‘stable’ from ‘negative’, while Fitch Ratings and Moody’s Investors Service affirmed the country’s sovereign ratings.
During this entire period of political instability and uncertainty, Lebanon’s financial authorities managed to contain the fiscal deficit and the growth of the public debt, as the fiscal deficit declined from 11.5% of GDP in 2006 to 10.3% in 2007. Similarly, the public debt regressed from 178% of GDP at end-2005 to 177% of GDP at end-2006 and 171% of GDP at the end of 2007. Also, the national currency remained stable throughout the past three years, while monetary authorities demonstrated their ability to defend the currency and maintain the stability of the Lebanese pound. But at the same time, we have missed several opportunities to improve the investment climate and the business environment in the country. For example, most of the structural reforms necessary to reduce the public debt have yet to be implemented, such as the privatization of the mobile licenses and the crucial reform of the electricity sector. Also, the prevailing political conditions did not allow the country to benefit from the high level of liquidity in the region to increase foreign direct investment. So authorities should make financial and economic issues their priority and let political decisions serve these priorities, rather than the other way around. We need to help ourselves in order for others, including our friends in the region and around the world, to help us.

E Byblos Bank issued $200 million in preferred shares in 2008. How will the proceeds be used? Are the political and security conditions in the country favorable for such issuance?

The share offering constituted the largest issuance of preferred shares by a Lebanese bank so far in 2008, and reflected the confidence of investors in the Lebanese banking sector in general and in the vision and strategy of the Byblos Bank Group in particular. Proceeds will be used for general funding purposes, including strengthening the bank’s capital structure, external growth and development of investment banking activities, among others. The preferred shares are non-cumulative, redeemable and subject to a call option by the bank starting in 2013 and for each subsequent year. Holders of the Series 2008 Preferred Shares will receive $8 annually per share in dividends.
In November 2007, the bank raised $200 million from the issuance of a convertible bond. The issuance took place amid challenging political circumstances and a difficult period in the country’s history, while the issuance of the preferred shares took place shortly after the normalization of the political situation. In both cases, Byblos Bank demonstrated that it is possible to attract funds to a transparent, well-managed institution that has a clear vision and strategy backed by an executable expansion plan. Still, the ability of Lebanese banks and companies in general to attract funds would improve significantly with an improved macroeconomic environment, sustainable GDP growth, declining public finance ratios, increased stability, implementation of structural reforms [etc.].

E How would you evaluate the global fiancial crisis? What effect will it have on the Arab world, and Lebanon in particular?

The world is facing a financial crisis of unprecedented proportions. What started as defaults on mortgages in the United States evolved into a liquidity crisis, then a solvency crisis and spread to the rest of the world to become a global confidence crisis, while it looks like it is gradually also becoming an economic crisis. Authorities in advanced economies have committed a total of $2 trillion to support their banking and financial sectors, while the International Monetary Fund is stepping up its efforts to help emerging market economies that are facing difficulties. The crisis affected stock markets as well, with estimated losses of about $30 trillion in market capitalization around the world so far. Further, it looks like major advanced economies will enter into a period of economic slowdown. So one key factor is to restore confidence in the global financial system, as the longer the volatility and uncertainty in global markets, the longer it will take to restore confidence in the credit and equity markets and the longer it will take to restore a high level of global economic growth.

The Arab economies, especially the economies of the GCC, are not isolated from the rest of the world. So the crisis has been felt regionally, reflected in part by a significant drop in Arab stock markets. But monetary and financial authorities in key Gulf economies have taken preventive measures to ensure liquidity in the system. Also, the GCC has wisely used its oil revenues and continues to post fiscal and current account surpluses. In addition, the region has very large foreign reserves and its foreign assets are estimated at about $2 trillion. So the region is capable of weathering the crisis, but there is no doubt that Arab financial markets are feeling its impact. However, the GCC is one of the most important economic blocs, not only in emerging markets but across the world. So the expected stability of this economic bloc will be a key to restore global confidence and stability.

December 3, 2008 0 comments

Real estate

Dubai‘s foundations mature

by Iseeb Rehman December 3, 2008

written by Iseeb Rehman

The decline in global property prices has started to seep into Dubai, although it’s arguable that this is a short- term correction born as a direct result of the world credit crisis and the speculative nature of investors. No one can deny the fundamental strengths of Dubai in terms of tourism, trade, real estate investment and as a potential financial power house of the Middle East.

The knock-on effect has been the pace of off-plan sales, which have inevitably slowed in recent weeks, although property that is completed or close to handover is still very much in demand and interestingly has seen minimal impact in pricing. Statistically the ratio of investors to end-users was originally 60:40. We have witnessed a turnaround, which is positive for the market as now we are seeing real buyers enter the market and purchasing for personal use.
The UAE market as we see it today is simply in a lull period. However, Dubai as we know is a global fusion metropolis. The current global economic crisis could yet become a bonus to the UAE, which can offer alternative support to investors as its banks are safe, liquidity is available and personal debt (in global terms) is at a minimum level. This is supported by the fact that Abu Dhabi is the federal capital of the UAE and Dubai is central to the continued success of the country.
Current investment opportunities in Dubai are appealing and I predict that in six months to one year prices will have stabilized at 2006 and 2007 values. In addition, the range of legislation implemented over the last year by RERA and the Land Department has provided transparency and stability to the market, which in turn will become attractive to international institutions when rebuilding their balance sheets. Dubai, in short, is in a period of transition where it has begun as an infant market and is developing to be both a professional and established one, as is everything else that is growing with it.
Of course, there are several specific factors that have helped shield Dubai from global market turmoil. For one, Dubai has firmly established itself as a highly marketable global brand, with its potential to maximize the business value of investors being among its biggest brand attractions. One hundred percent foreign ownership, zero personal and corporate taxation, state-of-the-art infrastructure, fast employee visa processing, full repatriation of capital — these are just a few popular incentives that define the conducive investment landscape of the emirate. Its massive investments to develop its air, sea and land transport facilities, which have transformed Dubai into one of the most highly accessible destinations in the world, have also helped accelerate Dubai’s reputation across global markets. With a strong transport sector, Dubai continues to drive more business and investment traffic into the emirate.
The combination of widespread infrastructure development, strategic location and proactive government policies has likewise cultivated a unique environment that breeds creativity, ingenuity, professional excellence and high technology — all of which are associated with the Dubai brand.
The message is thus clear: Dubai is a mature, yet highly dynamic investment destination. Mature, because Dubai has successfully incorporated key measures that ensure sustainability and long-term growth, e.g. gradually removing speculators from the real estate market and replacing them with longer-term investors and end-users. Ultimately, it is its dynamism reinforced by its resilient character and mature outlook that continues to enable Dubai to harness growth opportunities as they come, regardless of the circumstances.

Iseeb Rehman is managing director of Sherwoods Independent Property Consultants.

December 3, 2008 0 comments

Economy & Finance

MENA – 2009 to tally the toll

by Executive Staff December 3, 2008

written by Executive Staff

The year 2008 will forever be remembered for bringing the global financial system to the brink of total collapse. “When I predicted earlier this year that we were facing the worst financial crisis since the 1930s, I did not anticipate that conditions would deteriorate so badly,” said George Soros, the billionaire American financial speculator, aptly capturing the scale of the global financial crisis in the New York Review of Books. Soros went on to warn that, “a deep recession is now inevitable and the possibility of a depression cannot be ruled out.” Thus, globally 2009 will be dominated by the repercussions of the financial crisis.

How the global financial crisis will impact the Middle East is still unclear and analysts expect the full implications to slowly emerge over the next year. Already there has been a dramatic drop in the price of oil, real estate in the GCC has been shaken, investor confidence rocked and stock markets in the region have shown a volatility similar to those in the major financial centers throughout the globe. Yet, concomitantly the Middle East has so far appeared to have navigated itself away from the most severe aspects of the financial crisis, as seen in the West. The economic fundamentals of the GCC are seen by analysts to be strong and able to withhold the continued onslaught from the outside.
As vice-president of MENA Capital Ziad Maalouf explained, “The banks have strong fundamentals in the GCC because the governments are behind them with their huge reserves and have shown in the crisis that they are willing to act to support the banks if need be. In the UAE we have already seen this [the central bank of the UAE introduced a $14 billion liquidity support facility].” In addition, the GCC governments have given a 100% guarantee on all bank deposits. The economic fundamentals in the Gulf became so strong primarily because of the huge surpluses obtained over the last few years due to record oil prices. Thus, stated Faisal Hasan, head of research at Global Investment House, “The governments of the region have saved 70% of their surplus oil revenues over the past five years and sovereign wealth funds in the MENA region have over $1.5 trillion at their disposal.”

Those with oil and those without
The current account surpluses of oil exporting countries are expected to reach 25% of GDP in 2008, according to the IMF. Thus, the economic fundamentals of the GCC are expected to be strong enough for growth to continue in 2009. For non-oil exporting countries next year is going to be very difficult. Amjad Ahmed, CEO of Investment and Merchant Banking at NBK Capital, said that Egypt and Turkey in particular are going to have a hard time as both these countries’ growths have relied on the inflows of foreign direct investment from the GCC and with the financial crisis, “FDI from the Gulf will be significantly reduced.”
The GCC states, while having the surplus liquidity to overcome the crisis, still had to face significant impacts on their economies. “Gulf stock markets have shed $160 billion of their total value during the first couple of weeks of the financial crisis, the Saudi All Share Index fell 17% and the Dubai Stock Market posted a 22.5% loss … several Arab sovereign funds incurred substantial losses as well on their worldwide portfolios,” said Fadlo Choueiri, head of research at Credit Libanais.
Exactly how much was lost by these SWFs is, unfortunately, guess work because of a complete lack of transparency. Jad Chaaban, acting president of the Lebanese Economic Association, warned that, “There are a lot of rumors that major sovereign funds [from the region] lost major amounts of cash in the US, but we don’t have numbers. But it has impacted the risk perception of investors.” This lack of transparency should be a cause for concern as it was a deficiency in transparency and regulation that caused the global financial near-meltdown.
While the economic fundamentals have been important in convincing investors and analysts that the GCC will be able to weather the financial hurricane, timing has also been essential in keeping the worst affects of the crisis at bay. As Ziad Abou Jamra, director of the Trading Desk at FIDUS, explained, “Lending standards were just starting to deteriorate in the GCC area when the crisis started overseas, which created a timely opportunity for GCC banks to adjust and halt all risky lending. US banks, on the other hand, were giving out loans with zero down payments, no documentation, and zero interest rates for the first two years [i.e. subprime loans].” Further to this, Hasan claimed, there was “weaker integration of MENA’s financial sector with those of the US and Europe. There were also improvements in MENA’s financial fundamentals over the last decade, including better fiscal and monetary management, more open regimes with more flexible exchange rates, and better debt and financial management that has reduced exposure to international capital markets.”
The independence of the GCC from the international financial system is contested. Choueiri said that there has been increased integration of the region into the world economy, “evidenced by some 89.18% correlation between the GCC 200 index and the Dow Jones Industrial Average during the period between September 7 and October 20,” adding “it is inevitable for government authorities in the region to implement stiffer regulation on banks and sovereign funds.”
The most significant implication of the 2008 global financial crisis on the region is likely the substantial hits that many individual investors took as, according to Ahmed, “their investment portfolios left them exposed to what happened in Europe and the US.”
It will not be until sometime next year that the extent to which individual investors in the GCC have been affected will be clear, but sentiment in the market suggests it was significant. What is maybe more significant is the advice that brokers are giving their clients, which is being repeated across the region and the globe. “We are telling our clients to liquidate some of their investments and move to safer types of products and we have re-initiated two structures that give more protection to our clients. So we are trying to protect our clients by investing in these structures instead of going straight into the market,” Ezzedine said.
It appears that 2009 will be a hard year for capitalists in the region. “Cash is scarce, many high net worth individuals lost substantial sums of money, the financial crisis has hit the ability to fundraise for Private Equity firms such as ours in the region,” said Gilles de Clerck, senior manager of Capital Trust.

The Lebanese great escape?
In Lebanon, 2008 will be remembered as the year of Riad Salameh, governor of the Banque du Lebanon, the country’s central bank. Many people in the sector believe he helped Lebanon escape the financial crisis’ worst effects. Ezzedine said that “Lebanese banking will not be affected [by the global financial crisis] because we do traditional banking in Lebanon, which means none of the Lebanese banks were allowed to invest in any of those derivatives that caused the crisis. This was because Riad Salameh saw this crisis occurring because of the over-leverage of properties and he saw the cycles and possibilities of a bubble bursting that would affect the whole financial system.”
Thus, miraculously, the financial crisis even brought an improvement to Lebanon’s economic situation. According to

Oil
Oil prices reached a record $147.27 per barrel on July 11 of this year and, according to the IMF, oil and gas exports will amount to an estimated $1.1 trillion in 2008, up from $700 billion in 2007. Analysts are putting this record price down to massive speculation on oil and the subsequent drop to $51, at the time Executive went to print, appears to confirm this view. “These speculators were buying every small dip in prices and the rally continued, which eventually led to the final blow off and $148-per-barrel prices. This latest drop in oil prices will definitely be a big negative for speculation in the region (lower liquidity) and will definitely lead to lower GDP growth levels,” said Ziad Abou Jamra, director of the trading desk at FIDUS. However, while speculation was no doubt a major cause of declining prices, the global financial crisis is now also causing a serious hemorrhage in demand. The uncertainty over what will happen to oil in 2009 has even led Goldman Sachs to close their recommendations for oil. Future markets expect oil to average $102 a barrel during 2009- 2013 on a cumulative basis, giving the region a projected fiscal revenue of $5.6 trillion over the five-year period, compared to $1.8 trillion during 2003-2007.
Sentiment among analysts in the region regarding the oil price is relatively upbeat, despite the uncertainty. As Faisal Hasan, head of research at Global Investment House, stated, “Trade balances and balance of payments are likely to remain positive… The sharp decline in oil prices will reduce the consolidated external current account surplus of the GCC countries by almost half, but still it will remain positive.” Most analysts in the region are remaining confident mainly because they believe that for most of 2008 oil was overpriced and they expect oil prices to stabilize at $60-70 per barrel next year, which will still be above the average $47 per barrel needed for the GCC to achieve a fiscal balance. Amjad Ahmed, CEO of Investment and Merchant Banking for NBK Capital, said that although the market is fluctuating a lot, “growth in India and China will ensure that oil is maintained at the $60-70 mark.”
Nonetheless, the continued dive in oil prices is not promising and the decision by Goldman Sachs to close their recommendations for oil pricing illustrates the uncertainty in the market. This is further accentuated by the fact that the continued slide in oil prices has occurred in the context of two production cuts by OPEC, Fadlo Choueiri, head of research for Credit Libanais, pointed out. However, Abou Jamra countered that, “speculators loved buying oil at around $150 and now they hate it at around $50. Betting against speculators is usually a winning proposition.”

Antoun Samya, a research analyst at BLOMINVEST, there has been an inflow of $8 billion into Lebanese banks from Arabs and expatriate Lebanese. “Lebanon is currently seen as a safe haven by high net worth individuals,” Samya said. However, negative impacts of the crisis in Lebanon are expected to be felt in 2009, despite the IMF estimating growth to reach 5% in real GDP. In Ezzedine’s view, “negative impacts have begun to appear and on the real estate side, some projects have been slowed down… also a slowdown in remittances from abroad will occur.”

2009: Wait and see
The economic fundamentals of the GCC are facing their biggest test yet and 2009 will be a year of continued questioning of these fundamentals. Analysts are quietly confident that there is enough liquidity in the region to escape any severe economic crisis in the GCC, but simultaneously there is nervousness as the full implications of the crisis in the region are still unclear. Oil prices continued their decline to the crucial $50 mark and the existing confidence is fragile. The coming year will be a long one and the start of an even longer recovery period for the global financial system. The age of conspicuous consumption is over.

December 3, 2008 0 comments

Capitalist Culture

Economic crisis – Fair-weather finance

by Michael Young December 3, 2008

written by Michael Young

In mid-November, with the US presidential election settled, congressional Democrats tried to push their advantage. They proposed massive government intervention to bail out the ailing American auto industry. Senate Republicans and outgoing President George W. Bush said no, the proposal was shelved. However, come January, Democrats will control both houses of Congress, allowing them to again table what is arguably the most burning global issue today: Is the global capitalist system working, or are we entering a period when massive government interference in the markets is inevitable?
The financial crisis, which is segueing into a global recession, has provoked heated discussion over the free market. As powerful financial institutions began to totter, defenders of state intervention said massive injections of government funds alone could halt the meltdown of the world’s financial order. They provided as evidence the panic that overcame stock markets when Lehman Brothers was allowed to go under, and argued that only more regulation could avert further disaster. This may have been a far cry from socialism; however, as the US administration and other governments embraced that logic, suddenly quite a few states found themselves with stakes in very sick companies.
Conversely, free market ideologs, most prominently libertarians, said governments were doing exactly the opposite of what they should do. The problem was not the free market, they posited, it was not the need for more regulation; the problem was that governments were not permitting markets to correct themselves by allowing poorly run financial institutions to collapse. Defending capitalism, they underlined, did not mean defending bad management of capitalist enterprises. In fact the opposite was true.
Andrew Davis, of the US Libertarian Party, forcefully made that argument: “Businessmen are bad for capitalism when they use the government as life support for failing ventures. Instead of letting other companies absorb these failing businesses, CEOs and government bailouts have distorted the natural forces of capitalism and prevented the necessary — and effective — economic turnaround that only comes through an unfettered free market.”
In theory the libertarians were right: It made no sense to blame free markets when governments were doing everything possible to prevent the markets from filtering bad companies. Where the libertarians came up short, however, was in failing to recognize that the crisis was essentially a political one. No government, and that included the supposedly free-market Bush administration, could allow major companies to fall like houses of cards, since the public’s response to this could have been cataclysmic.
And that’s not mentioning that self-correcting mechanisms in the market would have probably taken years to be effective and bring about some kind of new equilibrium. In the meantime, unemployment would have gone up dramatically, undermining economic confidence.
But where politics intervenes, sound policy becomes a luxury. That’s why the interventionists are wrong in seeing more government writ as an economic solution. It’s also why the way the debate is taking place today is worrisome. We should not be trying to determine whether capitalism is worth defending. As Matt Welch, the editor of the American libertarian magazine Reason, recently wrote: “After the collapse of communism and the attendant discrediting of Marxian economic models, the industrialized world more or less settled on democratic capitalism as the best available option for countries to grow and prosper. Old Europe slashed government involvement in industry, New Europe rode mass privatization to massive growth, East Asian countries went from emerging market ‘tigers’ to full-fledged market economies, and China used markets to yank hundreds of millions up from poverty. One could perhaps be forgiven for thinking the 20th century’s great economic argument had been settled.”
The discussion shouldn’t be whether capitalism works (of course it does), but how it can be made to work most efficiently, thus most freely, without pushing governments into situations where they need to spend hundreds of billions of taxpayers’ dollars to bail out companies. Should that mean more regulation? Perhaps some regulation is necessary, but the more governments regulate, the more inefficient economies become and the greater the costs to societies. The short-term panic should not in any way represent a blank check to stifle markets down the road.
Unfortunately, that seems to be precisely the direction in which governments, particularly the US government, are heading. When states intervene to save one economic sector, they cannot very well abandon others. Then political calculations kick in to muddy the waters further. That’s why the discussion of the free market’s merits is a red herring. The real issue is how consistently free-market ways can be applied so that the very notion of a ‘free market’ actually retains some meaning.

Michael Young

December 3, 2008 0 comments

Banking

Islamic Banking – Sharia‘s security

by Tenets of Islamic-based savings institutions pay dividends December 3, 2008

written by Tenets of Islamic-based savings institutions pay dividends

“Asset growth for the seven leading GCC Islamic banks [in the first three quarters 2008] goes something like this. Abu Dhabi Islamic Bank plus 12%. Al Rajhi Bank plus 31%. Bank Al Jazeera plus 9%. Boubyan Bank plus 27%. Dubai Bank plus 61%. Dubai Islamic Bank plus 4%. Kuwait Finance House plus 23%,” said Moody’s analyst Anouar Hassoune. These numbers paint a picture of growth for the Islamic finance industry in an otherwise gloomy global economic environment. And although Dubai Islamic Bank posted growth of just four percent, this low figure can be chalked up to a couple of extenuating factors. For starters, one of the bank’s former vice presidents was held by police this summer as part of a bribery investigation. It is more likely, however, that the low posting derives from DIB’s failure to make use of the United Arab Emirates Central Bank facility for refinancing in the face of the ongoing financial difficulties in the UAE. Even with minor hiccups like these in the industry, the Islamic banking sector is on track for asset growth of 27% for 2008, a repeat performance of 2007.

The formerly niche market of Islamic finance has quickly moved into the main stream in recent years, boasting over 390 Islamic financial institutions in 75 different countries. Studies suggest that the assets under management of these institutions will exceed $600 billion by the end of 2008. It is further predicted that 80% of GCC banks will be sharia compliant by 2015. But this rush to become sharia compliant should not be conflated with a uniform strategy in the sector. Evolution within the GCC Islamic banking sector in 2008 has highlighted the differences between countries. While the Islamic banking sector in most Gulf countries has moved towards a more commercial approach, Saudi Arabia’s sector has a comparatively conservative costumer base and no competition from conventional banks, which will likely promote stasis in the austere kingdom’s banking scene. Meanwhile, the Central Bank of Qatar has opened the door to competition within its Islamic banking sector by making licenses more available, in turn driving their Islamic financial institutions to compete more earnestly on the commercial level with their conventional banking competition. This development has been followed to its logical conclusion in the UAE where Islamic banks and commercial banks are virtually indistinguishable. Meanwhile, Kuwait’s Islamic banks have settled into mode of functioning like investment vehicles. They take funds from depositor accounts and invest them into ventures such as real estate projects. Profit from the project is then paid back to the depositor at their arranged rate of return.
Despite the different approaches of the region’s Islamic banks, there is one common thread among them: real estate. As Islamic finance prefers physical asset backed investments, Islamic banks have become heavily involved in the GCC’s spicy property markets in recent years. Some analysts have expressed concern about the fact that those institutions tend to be even more exposed to the region’s property markets than conventional lenders. It seems the deciding factor would be the amount of value lost. “A 10-to-15% decline in property value in Dubai might not have a big impact,” said Hassoune of Moody’s. “But a 30% decline in the property market starts to become a crisis.” Given the current state of the world’s economy, it is extremely difficult to predict what may happen to real estate markets in the Gulf. It is, however, expected by many analysts that the market will drop by at least 10%. Islamic bankers throughout the region will be holding their breath and hoping it doesn’t go much lower than that. Yet if even if their fears are realized, there may still be hope. Moody’s stress tests, which simulate worse case scenarios, suggest that even if there were a 50% fall in real estate prices most Islamic banks would survive the resulting substantial equity losses, while smaller banks would likely need to be bailed out. While most sharia compliant banks may survive the expected real estate turmoil, some Islamic mortgage providers have already begun to suffer. In late November, two of the UAE’s largest Islamic mortgage providers merged under pressure. Amlak Finance and Tamweel united under the banner of the Real Estate Bank (REB). REB is a government entity and the move was perceived by analysts as direct intervention by the UAE government to save troubled assets. This was the first time the federal government had rescued a company. Time will tell who will be the second.

Growth for 2009?
Even if Islamic mortgage providers are braving rough waters these days, the Islamic banking sector as a whole is set to grow for 2009. Yet it is unlikely that the industry will see the same 27% growth rate that it enjoyed for both 2007 and 2008. “The Islamic financial system is facing some structural weaknesses, which need to be overcome for the Islamic banking industry to keep growing. First is capital. To keep growing at 27% you need equity to maintain the same capitalization… [and] internal capital generation is not enough,” said Hassoune. While some investors, like governments, are willing to put money into the Islamic banking industry, non-sovereign investors have been constrained. So the key variable will be sovereign spending — sovereigns will need to spend next year in order to make their economy grow.
Another issue facing Islamic financial institutions in the Gulf is liquidity. “Liquidity needs to be there for you to keep on growing and liquidity management is very difficult,” Hassoune asserted. And managers have been “providing incentives not to grow the credit portfolio excessively. So liquidity is a structural constraint. Especially at times when liquidity is disappearing out of the money markets and out of the credit market anyway,” he concluded.
Given these constraints, it is not surprising that Islamic banking is expected to grow by only half of what was seen in 2007 and 2008. But even if the percentage of growth is in the mid-teens, that is still higher than the global market. And Islamic banks are still on pace to reach 20% of market share by the end of the decade.

Sukuk
In 2007, sukuk issuance grew by 90% on the previous year to hit the $47 billion mark. In 2008, however, it is expected that issuance will only have reached $20 billion, which is a 40% decrease. There are several reasons that sukuk issuance has declined. First, the spreads on sukuk have widened due to perceived higher systemic risk in the global banking system. Second, the liquidity needed to make the sukuk market run has dried up. Third, the initial spread on sukuk was too low because demand for sukuk was significantly higher than supply. Finally, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has cast doubt as to the sharia compliance of previously issued sukuk. Recent AAOIFI fatwa’s on the issue have, in part, prompted a shift toward one particular type of sukuk known as ijara. Even though ijara have buy back agreements, they are still sharia compliant, explained Moody’s Hassoune.
“AAOIFI scholars have said that a repurchase agreement is not incompliant with sharia. What is incompliant with sharia is to say five years ahead of the maturity of the sukuk that we will repurchase underlying assets at a given price, except for ijara. Ijara is leased assets, so because they are leased the assets are still the property of the originator. The repurchase agreement is just the originator saying to himself that he will buy back the asset at the price that is his price. At the end of the day the sukuk holders are not buying the underlying asset, they are buying the usufruct of these assets,” Hassoune explained.
Other developments in the sukuk industry include a shift away from the US dollar as the dominant issuing currency. Many issuers these days are using their own local currencies for ease of use rather than out of fear of an unstable dollar. The geographic distribution of sukuk is also widening. Senegal has considering issuing, while the Gambia and Sudan have both issued non-rated sukuk recently. It is likely that 2009 will see further shifts, including one away from corporate issuance (currently 75% of the market) and towards sovereign issuance (now just 25% of the market). These percentages will probably shift to half and half by the end of the year.
In conclusion, the sukuk market will slow in 2009. “Two thousand nine will probably resemble the second half of 2008, which is to say limited sukuk issuances, except for in domestic markets,” said Hassoune. Yet even with this decline, surely there are bankers in the West peering into the sukuk market with envy when compared to the mess they see brewing at home.

December 3, 2008 0 comments

Real estate

GCC – Development hits the wall

by Executive Staff December 3, 2008

written by Executive Staff

While the global economic uncertainty is increasingly trimming down investors’ confidence and consequently, leading to panic selling and the pulling out of millions of dollars worth of foreign investments, the stock market is bearing harsh consequences with share prices suffering precipitous fall. This drop in share value is also due to the sharp fall in oil prices, which has made investors increasingly concerned about the future of Gulf economies. All seven GCC markets fell in the past three months and $150 billion of their market capitalization has been lost since the end of 2007.

Since the beginning of the crisis, banks and mortgage houses have become very conscientious about lending and even though most GCC governments like Bahrain, UAE and Saudi Arabia are injecting liquidity into the banking sector to keep work going on major projects and to ease liquidity pressure, the real estate market has not shown any improvements yet. Moreover, amidst the increased government regulations and the corruption scandals in the UAE, the demand for real estate is slowing down and consequently causing real estate companies’ shares to experience heavy falls.

Emaar
Since the beginning of the year, Emaar, the Gulf’s largest property developer by market value, has lost more than 80% of its share value. To overcome this crisis, the company bought back 200,000 of its shares in October, aiming to restore investors’ confidence in the real estate sector and the entire UAE market. Mohamed Ali Alabbar, Emaar’s chairman, told Arabian Business that, “at Emaar, we firmly believe that there is no better investment we can make than in our own future. The decision taken by the board of directors to buy back Emaar shares reflects our firm belief that those shares are currently undervalued.” Apparently, this attempt was not effective since the company is now preparing to cut jobs by reviewing its 5,000-strong workforce. No details about how many employees will be fired have yet been announced. Moreover, Emaar — as well as Union Properties and ETA Star — has also started offering easy payment options to attract buyers.
Other companies have also started to cut jobs. DAMAC fired 200 employees in the beginning of November in response to the continuing global slowdown. Omniyat has also announced job cuts. No number has been publicized as yet, but it is estimated that around 60 jobs will be cut. Jean Pierre Nammour, managing director of Al Nahda Real Estate, remarked that this cut in budget could have a negative effect on the UAE economy. He explained that companies, after they lay off staff, will first begin to cut back on their advertising budgets, since they have already advertised previous projects and no new projects are currently initiated. Consequently, the advertising agencies will lose a large amount of revenue and will also let people go. Therefore, the effect will be extended to include other companies and thus hurt other sectors in the economy.

Dar al-Arkan
Dar al-Arkan, the largest Saudi developer by market value, has lost around 64% of its share value since the beginning of the year, despite announcing a 44.9% jump in second quarter profits. It seems that Dar Al-Arkan is not slowing down its business since it has already set up a mortgage finance company targeting the middle-class sector of Saudi Arabia’s growing population. The managing director of the company, Abdullatif bin Abdullah al- Shelash, showed upbeat expectations and told Arabian Business that with the measures that the kingdom has taken to increase liquidity, the market will not face any mortgage crisis. However, the company’s reputation was damaged when the Saudi bourse regulator imposed a SAR100,000 ($26,667) fine in early November, for violating disclosure regulations.
“Any problems faced by local real estate companies are a consequence of the global financial crisis, but as soon as the global financial markets begin to improve and the local real estate market starts to take shape again, companies on the stock market are definitely going to improve their current situation,” said Hayan Merchant, CEO of Ruwaad Holdings LLC.

Corruption in the UAE
A major corruption investigation in Dubai has lead to the arrest of dozens of executives in state-backed companies linked to the property sector. This is the most extensive anti-corruption exercise in the emirate’s history, as Sheikh Mohammed made it clear that Dubai will not tolerate any officials abusing their authority for personal gain.
The investigation began in April when the former CEO of Deeyar, Zack Shahin, two company executives and two company suppliers were arrested. Since then, the company’s shares started to lose their value, which have declined by 73% to date. Moreover, Mohammed Khalfan bin Kharbash, former chairman of Dubai Islamic Bank and its real-estate affiliate Deyaar, as well as Minister of State for Finance and Industry, was implicated in November in connection with allegations of financial wrongdoing at Deyaar. Many of the company’s ex-employees might also face trial.
In late August, four employees of Dubai Holding Subsidiary real estate developers Sama Dubai were taken into custody following accusations of bribery. A few days before that, two men from the sales department of Nakheel were also arrested.
In October, Abdullah Nasser Abdullah, the deputy CEO of Tamweel and CEO of Tamweel Properties and Investment LLC was arrested on charges of embezzlement. Additionally, the company’s former chief executive and the former head of investment were also arrested on embezzlement charges. In the same month, the former CEO of real estate developer Mizin was questioned over irregularities in selling lands.
This anti-corruption probe reduced investors’ confidence and was one of the main reasons for the freefall of stock prices. However, these developments should benefit the economy in the long-run by increasing transparency in the real estate market and creating a healthy environment for investors.

Scaling back activity
Currently, Dubai’s largest developers are reviewing their projects in response to the economic climate. For example, Nakheel announced that it is reassessing its business objectives and will scale back activity on some projects. Union Properties said it would not announce any new projects until the status of the credit market becomes clear. Sama Dubai, which has already unveiled projects worth almost $55.2 billion, is reviewing these to adapt to the current economic situation. DAMAC is following suit by reviewing its construction timetable and is planning to reschedule some of its latest projects. Additionally, Mohamed Al Zarah, CEO of Great Properties, announced that, “we will not be launching new projects this year as we feel it is a good time for us to reassess our projects and improve the company internally. This is key for us to successfully operate in the market alongside the credit crisis recovery phase.” He added that, “We will wait to see what January 2009 will bring.”

December 3, 2008 0 comments

Economy & Finance

Inflation – Price bubble spring leak

by Executive Staff December 3, 2008

written by Executive Staff

Inflation was the biggest economic story in the Middle East for 2008, before the global financial system almost completely self-destructed. While inflation was a global problem due to a sharp rise in oil and food prices, levels in the Middle East were exceptionally high. The GCC’s average inflation rate was estimated to be 11.5%, according to Global Research. Inflation exerted significant pressure on much of the region’s population and civil unrest occurred from the UAE to Egypt. The causes for these high levels were largely related to the same underlying issues fuelling global inflation, but in the region they were further exasperated by the dollar peg, strong domestic demand and supply bottlenecks, especially in the GCC. Not surprisingly, the debate over the pegging of currencies to the dollar re-ignited, especially in the GCC.

The strong growth in both the GDP and the money supply in the GCC should have been accompanied by a tight monetary policy in which short-term interest rates would have been raised gradually, but because of the dollar peg this could not occur. “Very low interest rates coupled with high growth precipitated speculation and aggressive buying of real estate and financial instruments led to major bubbles in almost all asset classes,” said Ziad Abou Jamra, director of the trading desk at FIDUS. “Add to that the imported inflation that was due to a very weak dollar and high emerging market demand in China and India, and you had all the ingredients for spiraling inflation levels. In addition, this peg forced the Gulf central banks to print dinars, riyals and dirhams with which to buy dollars, and that money printing is inflationary.”
Subsequently, the big debate as to whether the GCC should move away from the dollar peg to a basket of currencies was taken up again. Kuwait was the first country to de-peg but its inflation still remained above 10% for much of 2008. Given this example, the idea of de-pegging from the dollar met much resistance and governments across the region had to look for other solutions. Amjad Ahmad, CEO of Investment and Merchant Banking at NBK Capital, stated that, “Although the dollar peg had some impact on inflation, ultimately it was the local economic realities of huge liquidity amounts, the high demand and small capacity, that were the underlying causes of inflation.”
To combat the effects of high inflation, many governments implemented broad-based wage increases but this risked second-round inflation effects. The IMF issued a warning to regional governments that broad-based wage increases should be avoided as it was only exacerbating the situation. Governments throughout the region were finding that their options in dealing with inflation and its effects were reduced. Tax cuts on food staples, consumption subsidies, price controls, trade restrictions to protect domestic supplies of food, boosting of social safety nets and supply side measures were all attempted yet none of these successfully mitigated rising inflation or its effects. Everything governments in the region have attempted in order to control inflation was ultimately fruitless. Zaid Maalouf, vice-president of MENA Capital, confirmed that, “Inflation is the most challenging problem for central governments and there are not many financial tools that the central banks in the GCC can use as the money markets here are not as well developed as in Europe.”

Inflation in Lebanon
Lebanon 2008’s inflationary trend was especially acute because of the dire political situation for the first six months of the year and the heavy dependence on imports. Estimated to be between 10-11.5%, depending on whose figures are taken, inflation is now at its highest point in 15 years. At the worst point during the political crisis, it was estimated to be at 13%. Jad Chaaban, acting president of the Lebanese Economic Association, noted another major problem in Lebanon that made inflation even worse: oligopolies. “Lebanese markets are very concentrated, so the importers have a tendency to shift prices immediately to consumers because they have the power to do so due to the fact that there is an oligopoly system in Lebanon. This also leads to an asymmetry of transmission, which means that when costs increase the retailer passes it on to the consumer but when those costs go down the prices to the consumer remain static,” he said.
Getting accurate figures for Lebanese inflation levels is a major problem. Chaaban claimed that the government figures are not correct and that there has not been enough of a concerted effort to reduce inflation. “The central bank does not have an active target for inflation so the government responds with measures that are ad hoc. You don’t see inflation as a top priority for the government and this is bad because in an open economy such as Lebanon, inflation is a major issue,” Chaaban said.
However, Jihad Azour, the then-finance minister, said in an interview in Executive’s April issue that attention is being shifted to fine tune inflation figures with efforts being made by the IMF and the Central Bank of Lebanon. Further to this, Azour noted that the government has a good record when it comes to controlling inflation and in 2008 took several measures to control it. “The first measure was to make sure the increase in the oil price was not passed onto the consumers and this has cost the government $1.1-1.2 billon. The government has lost more than $500 million of revenue per year and additional costs of more than $600 million due to the increase in oil prices in terms of deficit or subsidy to Électricité du Liban. In addition the government provided a 60% subsidy to the wheat that it is importing,” he explained. Nonetheless, despite all these various subsidies for much of 2008 inflation was at record levels.

From inflation to deflation?
Record inflation now appears to be confined to the history books due to the effects of the global financial crisis. “This latest crisis reversed all inflationary stimulators. The real estate bubble is popping, equities and other financial instruments are on sale, crude oil prices are dropping, down 63% from their July 2008 peak. In addition, the dollar is strengthening against all major currencies, paving the way for much lower import prices and halting the printing presses of the regions’ central banks. Lower liquidity means lower speculation and lower inflation,” said Abou Jamra. Subsequently, in 2009 inflation will not be a significant issue. In Europe and the US, where the reversal of inflationary stimulators are more severe, there is even worry of deflation. With the huge budget surpluses in the GCC, however, this is not a significant threat to the region. Yet, Abou Jamra warned, “If history is any guide, real estate and stock prices will continue their downward trend in 2009, notwithstanding a short-term rally for the coming three to six months and this will put a brake on the consumers’ purchases. The only offset to lower consumption is government spending by a lot. With crude oil prices at $55, we doubt that they can do that aggressively.”

December 3, 2008 0 comments

By Invitation

A thinner glass ceiling, yet still limits for workforce women

by Nada Tarraf December 3, 2008

written by Nada Tarraf

For the last several decades, women have increased their participation in business, the economy and politics. But this revolution remains incomplete, not only in the Arab world as many might think, but also in Europe and the United States. For instance, while women are highly active participants in US and European businesses and political life, their representation in the parliaments remains relatively low. Furthermore, gender discrimination remains an issue when it comes to decision-making executive positions in the workplace.
According to existing statistics and data conducted by several organizations and analyzed by the Lebanese League for Women in Business (LLWB), most working women in Lebanon have attained high degrees of education from universities (29.1%) or high schools (26.8%), compared to 13.7% of working males with a university degree and a further 5.7% with a high school degree. In terms of economic activity, the labor force participation of Lebanese women is estimated at only 21.7% of the total labor force and thus remains very low. Furthermore, while the number of women qualified for top management positions continues to increase, they still do not have equal opportunities when it comes to senior positions. According to ESCWA statistics from 2002, women employers are only 1.5% of the female workforce, while some other statistics cited in the National Report about the Situation of Women in Lebanon for the Year 2000 demonstrate women’s limited participation in decision-making at different levels.
In Lebanon, civil laws do not prohibit women from practicing most jobs, but widespread stereotypical notions about women and men determine “appropriate” specializations and professions for women.
In most technical and production fields, women are denied social security benefits and have also been discriminated when it comes to health care, hospitalization and other social benefits for family members. Moreover, Lebanese labor law prohibits mechanical and manual industries from hiring women at all.
In terms of rural employment, the Committee for the Elimination of Discrimination against Women released a report noting that, “women agricultural workers are excluded from Lebanese laws and that no development grants have been allocated to rural areas to improve women’s opportunities.” It also observes that women’s contribution to agriculture (11.8%) has been shrinking due to competition, stagnation, decline in incomes, weak incentives and narrow frameworks of participation.
As for political participation, Lebanese women have gained the right to vote, hold public office, elect and be elected in municipal councils. However, the pervasive chauvinistic mentality in the country hinders their efforts at leadership. At the international level, regulations stipulate that female candidates for third category foreign-service posts must be unmarried and forbids wives of foreign-service employees to work. Women have the right to participate in diplomatic delegations, but representation is actually given to men, even if a conference theme concerns women.
What explains this phenomenon and what are the barriers to the full and effective participation of Lebanese women in the local economy and in the decision-making and planning spheres? Can we think of women as the unexploited workforce and leaders’ capital for the future of the country?
In the early 1970s, working women were mainly found in limited sectors such as education, nursing, trading, handicrafts and agriculture. Between then and the 1990s, the country witnessed a small yet noticeable movement of women to new and less traditional sectors, mainly due to a new trend in the female enrollment rate into new choice of specializations in post-secondary and university education. The number of women who graduated and started working in liberal professions such as lawyers, judges, engineers, doctors, physicians, bank managers, university teachers — just to name a few — increased considerably during this period.
On another hand, the heavy migration of males to Arab countries (1970s-80s), then to Europe and North America (1980s-90s), followed by the worsening economic living conditions after the war (1990s) and finally the latest political turmoil and the aftermaths of the recent war, necessitated that women participate more proactively in various economic sectors and even in the less traditional ones.
We at LLWB believe that women are a vital element in the Lebanese society’s development and prosperity. A woman should have the opportunity to achieve her full civic, social and professional rights and potential through equal opportunities, unrestricted access to resources, entrepreneurship and leadership.

Nada Tarraf is founding member and treasurer of the LLWB

December 3, 2008 0 comments

Real estate

UAE – How the bull went bear

by Executive Staff December 3, 2008

written by Executive Staff

Up until the second quarter of this year, “growth” was the only word that would come to one’s mind when referring to the UAE’s real estate market. Surging demand, accompanied by a high level of liquidity and top market performance were a perfect combination to rank Dubai and Abu Dhabi as two of the fastest growing cities in the world. Additionally, the population growth triggered an ever rising demand on property. According to the Ministry of Economy, the UAE population is projected to grow by 6.12% in 2008, reaching 4.76 million people, compared to 4.48 million in 2007. Next year, the growth rate is expected to rise to 6.31%, causing the population to cross the 5- million mark.
According to Future Brand’s Gulf Real Estate 2008 report, the UAE currently claims 5% of worldwide real estate sales, increasing by 1.35% since 2007. The report also stated that 25,000 people per month are taking up residence in Dubai. In other words, every two minutes someone is choosing to make Dubai their new home. Moreover, the increase in the UAE’s transparency has encouraged foreign investors to further enter the market on a speculative basis, driving growth and prices upward at an excessive rate.

Before the Crisis
Ever since Dubai’s real estate boom began, demand was on a steady increase, as all kinds of projects were being launched in an attempt to keep up. “Developers in the UAE have been exploring all possible avenues in terms of developments, ranging from condominium units to hotels, villas, shopping malls, etc. As the market has a dearth in all of the above, there has been huge motivation for developers to consider building a mixture of all of them,” said Hayan Merchant, CEO of Ruwaad Holdings LLC.
Despite the developers’ attempts, supply remained short and prices were escalating accordingly. According to a Future Brand’s report, since last year alone property prices in Dubai rose by approximately 40%. Sheikh Zayed Road, being one of the most popular residential areas, recorded the highest annual rental growth of 51%. Bur Dubai and Ghusais followed suit registering 40% and 42%, respectively.
Abu Dhabi experienced a 200% increase in the commercial real estate rental sector, the highest in the world. Colliers International reported that in the Emirates’ capital, price growth of residential units reached 54% in 2007/08, compared to 18% in 2006/07. “Until the crisis occurred, demand was on a continuous increase and projects were unable to keep up. You would have a launching of a project of 500 villas that would be sold off within a day or two,” said Jean Pierre Nammour, managing director of Al Nahda Real Estate. “You could have anything on sale and people would buy it,” he added. Nammour also explained that even prices in Sharjah increased, the price of one square foot of property going up from $150 to $230.
“With more expatriates flocking to the UAE, whether as a result of the natural growth of the country as a business hub or as a result of the financial crisis, the focus is to build residential units to fill the demand gap,” said Mohamed Al Zarah, CEO of Great Properties. Oxford Business Group (OBG) reported that supply shortage in residential units reached 50,000 units in Abu Dhabi and 21,000 units in Dubai.
Additionally, Colliers International reported that office supply is expected to increase to 5.6 million square meters by 2010 and 160,000 units are expected to be delivered to the market in the same year. Although no projects were canceled, increased governmental regulations and the liquidity squeeze that gripped the banking sector recently raise doubts about the capability of developers to meet the demand.
Since late last year, developers had to worry about the rise in construction and labor costs which lead to the delay of some projects and to a further increase in property prices. According to OBG, this shortage resulted in a monthly inflation of around 1%, leading to an increase of 20% in construction costs since November 2007. Also, because of the high demand suppliers of construction materials could not fulfill more than 45% of their orders despite their efforts to increase capacity. Furthermore, finding better living conditions at home than in Dubai caused laborers to turn up their nose at low wages. This shortage did not only present itself in construction, but in any type of labor. “There was also a shortage of office staff, you could not find a secretary or accountant in town,” said Nammour.
Currently, the cost of material has dropped, but real estate companies are not initiating any new projects since the global financial crisis hit, not to mention that some have also started firing their staff. “Supply that was supposed to hit the market over the decade will definitely slow down as projects and plans are being reviewed,” averred Merchant.

When crisis hits
Although experts agree that the UAE real estate market is not as affected as the North American or European markets, it cannot be denied that it is suffering from severe turbulence that led to increased government regulations and put developers and buyers on guard.
Since the beginning of the global financial crisis, the real estate sector in the UAE has been experiencing a slowdown in demand and even some “panic selling,” stated Nammour. “I think that what is happening is a correction in the market, but there is an overreaction by investors, there was no need to go to the extreme of panic selling,” he added. Nammour also explained that panic is contagious, since if one person started selling property, many others would quickly follow.
Since May 2008 the availability of property in the UAE market has increased 150%. Real estate agents have been very busy listing properties for sale — during October, 100 to 200 properties were added to the market every day. For example, between September 10 and the end of October, availabilities at Palm Jumeirah increased by 52%. Availability at the Dubai Maritime City increased by 250%, while at Al Barari availability jumped by 117%. Moreover, the number of properties for sale also increased in Sharjah by 50% in the Al Khan area and by 151% in Ajman’s Emirates City.
Consequently, prices have started to decrease. HSBC reported that in October prices fell by 4% in Dubai and 5% in Abu Dhabi. Prices of villas recorded a 19% decrease in the same month. Additionally, the average advertised price for some ready properties decreased by 32% in Dubai Marina and 38% for off-plan properties in the same area.
Since the UAE market is known to be driven by speculation, it seems that these investors are the ones who are slowing demand and leading prices to drop. “The first effect is obviously that the investor and speculative buyers are not in the scene anymore. It is the end user who is still there,” said Isseb Rehman, managing director of Sherwoods Independent Property Consultants. He explained that big investors are now trying to cover their position. “They have exposure to lots of big projects that were released during the year. Their exposure is so large that they are now trying to cover their position or sell short, even at a loss,” he said.
Merchant stated that off-plan sales were the worst hit in the market. “The last 18 months have seen exceptional growth in the sector and this has led to prices being inflated for off-plan sales, price corrections were imminent in these areas. Even now, the biggest corrections are starting to take place in the areas where speculation was at its highest,” he said.
Rehman explained that this stage is natural in every growing market. “When the market is booming at the rate it has, it had to reach a phase where it started to mature. Right now Dubai is in a transition period from a very young market to a semi-mature one. And this transition period is where you find people refocusing on what they are doing.”

Banks
Until June 2008, mortgage lending in the UAE doubled, reaching $23.84 billion compared to $12.5 billion a year earlier, according to UAE central bank numbers. However, since the beginning of the crisis, the banking sector started to tighten lending due to global market conditions and in the fear that developers’ staff could default on their payments, since more job cuts are announced. For example, Lloyds TSB has stopped offering home loans to people wanting to buy apartments in the UAE and offered only 50% of the value of villas. Overall, banks used to offer up to 90% financing, but now have reduced that to 50- 60% only. This has further led to a slowdown in sales. “People are waiting for liquidity to fall in and lending needs to come back,” said Rehman. Even though lending has been cut, developers like Emaar, ETA Star Property and Union Properties are announcing easy payment plans to attract and hold on to buyers. “While this will certainly affect the developers’ progress on the projects and payment to contractors, it will give everybody a chance to reassess their plans and understand how the market will recover from this crisis,” commented Al Zarah.

Expectations
Looking at the current state of the UAE property market, “growth” is certainly not the word one would use anymore, or at least not before things get clearer. The market is experiencing a correction and it is difficult to say if the situation will get worse. A survey conducted by Arabian Business showed that 85% of its readers believe that the real estate market will get worse before recovery comes, while only 10% stated that the worst is over. Additionally, 63% stated that investors need to be prepared for a major price correction and 22% believed that more companies will be forced to make further cut jobs.
“At the end of the day, everything corrects itself. But as long as the market thinks that the bottom has not been reached yet, there will always be speculators and investors that will dump their properties,” said Nammour. Therefore, all stakeholders should be optimistic as it will be their expectations that will drive the market upwards again.
Al Zarah believes that the situation will be clearer in January 2009. “At the moment we are running into the holiday season and the New Year, so it is difficult to predict. January 2009 will witness a new US president and we will also understand his plans to relieve the US and the world from this situation,” he said. His advice to investors is that, “those who already invested earlier this year or last year should hold on until we know what 2009 will bring. They should remain optimistic.”
Merchant said that the long-term effect of the crisis will be rather good to the whole market, since “investors and developers will have a more realistic and end-user focused approach to the development of the real estate and will reduce expected returns to those that are more reasonable in any given market,” adding that: “as an investor in the UAE and across four other continents, I am confident that towards the end of 2009, the markets should start showing signs of recovery, stability and improvement.”

December 3, 2008 0 comments

Economy & Finance

IPOs – Waiting game

by Executive Staff December 3, 2008

written by Executive Staff

The Initial Public Offering (IPO) market in 2008 was vibrant in the region before investor confidence was sapped by the global financial disaster. The Bahrain Tribune reported that after specific instructions from the Central Bank of Bahrain, an IPO that was tipped to be one of the country’s biggest, that of real estate and construction supervisor Naseej, was postponed due to the instability caused by the financial crisis. Other major IPOs have also been delayed due to the uncertain market conditions, including Vodafone Qatar and Gulf Capital. Last year Q4 saw 17 IPOs raise $7.54 billion but this year, at the end of October only three IPOs had occurred raising $22.4 million. This is further compounded by the announcement that in Saudi Arabia, 80 companies have postponed IPO plans. Nonetheless, the IPO news for 2008 was significant including for Q3, which bucked global trends. “Six of the largest 20 IPOs in the world took place in the Middle East in the third quarter of 2008,” said Phil Gandier, managing partner at Ernst and Young Middle East. “The largest IPO in the world in the third quarter was Ma’aden [raising $2.47 billion] that was listed in Saudi Arabia.”

Gandier is bullish about the prospects of IPOs in the region and even pointed to the postponement of the Naseej IPO as positive because it shows that “regulators are keen to maintain confidence in the capital markets in general and IPO transactions in particular. They do not want to see any IPOs fail because of poor investor sentiment, therefore regulators would not be keen to see IPOs take place in such turbulent times.”
Faisal Hasan, head of research at Global Investment House, also sees 2008 as a positive year for IPOs in the region, saying “IPO activity was high in the MENA region in the first nine months of 2008 with a record $13 billion raised in 50 IPOs, as compared to 54 IPOs worth $6.9 billion in the same period last year. The average oversubscription was 15.7x compared to 10.2x last year.” Nonetheless, the regulators’ precautions no doubt are also due to the saga of Dubai Port World (DP World) that was launched in November 2007 and had major consequences on the IPO market throughout 2008.

The DP World debacle
DP World was launched by pricing through a book-building process, the first time this had been done in the region, which allows a company to maximize their share price. Thus, when DP World was launched its share value was $1.30.
Ziad Maalouf, vice-president of MENA Capital, stated that DP World was the first example in the region of “how IPOs can do badly in the secondary market and the importance of pricing. Despite DP World having good fundamentals and having a good business structure the price was too high.” Maalouf believes that DP World was a wake-up call to investors. “What happened to DP World has made people more astute about the investments that they are making and a lot more research is being done now in making sure that the pricing of the IPO is correct and that the fundamentals are there,” he said.
However, the DP World saga shook investor confidence in IPOs fundamentally, stated Mahmoud Ezzedine, director of the private banking department at FIDUS. “IPOs did not have a positive environment in 2008 because DP World really hit confidence, I think we are passed this IPO craze,” he said. Maalouf disagreed, saying “The IPO market in the region has been very strong in 2008 [before the financial crisis] due to the real estate boom and the liquidity in the region. Investors have been encouraged to tap into capital markets and there have been many successful IPOs in 2008. There is great enthusiasm in the Gulf about IPOs and a well established IPO culture has now been set up.”
The IPO market had a good year in 2008, according to Gandier. “The number and value of IPOs in the Middle East has been growing steadily and there was a solid pipeline of announced and rumored IPOs … the challenges for those companies looking to do an IPO in 2009 will center around uncertainty and volatility regarding pricing and potential new capital market regulations,” he said.
Sentiment among analysts is the IPO market will pick up again in 2009 and those that prepared during the downturn will be the most successful on the upswing. Gandier explained the confidence the market will pick up is based on the fact that “all the strategic reasons why companies planned to embark on an IPO are still valid, i.e. institutionalize the business, enhance the brand and image, monetize part of the shareholders equity and provide finance.”

December 3, 2008 0 comments