Economy & Finance

IPOs – Waiting game

by Executive Staff
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.”

 

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Society

Telecoms‘ towering potential for MENA investors – By Hashim Omran

by Executive Staff
written by Executive Staff

As Middle Eastern and African economies witness a period of unprecedented economic development that is fuelling governmental and consumer spending, the telecom industry presents investors with a unique opportunity to capture this growth. With mobile penetration rates in the region well below the global average, it is no surprise that the Middle East and Africa are commonly referred to as “frontier markets”. As well as being relatively untapped, the unique blend of growth and profitability that the markets in the region offer adds impetus to the investment case.

As the industry matures, and as greenfield opportunities become increasingly limited, many operators are taking advantage of their solid financial standing to fund acquisitions to capture growth beyond their national borders, resulting in a re-rating of valuations across the sector. The sector’s underperformance so far this year compared to other areas has resulted in it trading at a discount. The underperformance, coupled with the high financial outlook for the second half of 2008, has led to an increase in performance expectations. With a unique opportunity set that combines value and growth, the telecom sector is well positioned to exhibit robust growth in the medium term.
Africa is the world’s single fastest-growing mobile market. According to ITU’s African Telecommunications ICT Indicators 2008 Report, the continent has the highest annual growth rate in mobile subscribers and added approximately 65 million new subscribers during 2007. At the beginning of 2008, there were over a quarter of a billion mobile subscribers on the continent and it is forecasted to pass the magic 50% mobile penetration mark in 2009. Analysts predict there will be more than 690 million mobile subscribers in Africa by 2013 — highlighting the unique market opportunity. If we examine the MENA region, it underscores the opportunity that exists. Morgan Stanley predicts that MENA subscribers will increase by 24% in 2008 to 240 million and a further 17% in 2009.
Increased subscriber numbers are not the only indicator for significant growth to come. Analysts are also predicting an increase in the already high average revenues per user (ARPU) rates across the region and in particular the GCC. High ARPU is a catalyst for telecom companies to invest in other markets like Africa, in turn creating growth opportunities in those countries. The UAE’s leading telecom operator, Etisalat, is not only investing in cash-rich companies in the GCC, but has also acquired stakes in telecom companies in Egypt, Nigeria and Sudan.
The era of the monopoly has come to end with a wave of liberalization across the region. There are at least two telecom operators in all countries across the MENA region, and in some places three. Greenfield licenses are not being issued and the value of an existing license has therefore vastly increased. This scarcity premium is re- rating the value of existing telecom assets which is in turn fuelling an increasing number of mergers and acquisitions. Zain obtained the most expensive GSM license ever globally, by spending $6.1 billion for KSA’s third mobile license. South Africa’s MTN bought Dubai-based Investcom for $5.5 billion in 2006 — becoming the largest operating group in the Middle East and Africa with 40.75 million subscriptions by June 2008 through its operations in 21 countries in the region. MTN also launched Iran’s second network, Irancell, in the third quarter of 2006 and is now in talks with India’s Reliance Communications ltd. to forge a partnership.
Regional regulators are demanding that telecom operators awarded new licenses issue an initial public offering (IPO) on the local exchange — most recently evidenced by Vodafone in Qatar. This brings with it higher profit margins for not only the telecom operator, but also investors.
March 2008 also saw the launch of the much anticipated Kenyan Safaricom IPO — East Africa’s largest ever listing with 10 billion shares on offer to investors. The IPO was oversubscribed by 532% in the first two days and on the first day of trading (June 9, 2008) shares soared as much as 60%, illustrating strong appetite for the sector.
In the last eight months, telecom indices in African & Middle Eastern markets have significantly underperformed indices for the respective markets. For example, telecom indices in Saudi Arabia, Egypt and South Africa have lost 17.9%, 8.59% and 5.1% respectively during this period, while their overall markets have gained 10.3%, 3.3% and 10.2%. With telecom companies reporting strong earnings growth across the board, a reversal of this trend is expected in the second half of 2008.
In a July report titled ‘Be Brave and Buy’, Merrill Lynch analyzed the global telecom sector and concluded that strong fundamentals and continuing growth make the sector extremely appealing. Moreover, the Middle East and Africa were highlighted as the fastest growing regions in the world. The report also highlighted the significant underperformance of telecom indices relative to MSCI World and MSCI Emerging Markets. In terms of valuations, the report emphasized the attractive multiples across the industry as a compelling reason to invest.
As global investors seek a way to tap into the MENA’s frontier markets, the telecom industry presents a unique proxy to capture the regional growth. The industry offers a chance to invest in a growth market that trades at a deep discount to other sectors and markets.

Hashim Omran is the vice president of EFG-Hermes Asset Management.

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Private Equity

MENA – Budding with equity

by Executive Staff
written by Executive Staff

The Middle East and North Africa (MENA) region continues to favor private equity as a leading alternative asset class, but changes in 2008 have led many to believe that 2009 will bring new industry dynamics, with a host of investment and regulatory movements sure to make private equity firms more competitive.

Time to invest
Although regional liquidity levels rose in 2008, commensurate with the price of oil, capital has not gone to new funds. In 2007, regional private equity houses raised a total of 22 new funds totaling assets under management of a little over $5 billion. During the first half of 2008, however, funds focused on MENA investments rose only $1.14 billion, which is a slight drop on first half 2007 figures of $1.81 billion and consistent with similarly small drops in other developing markets, such as Central and Eastern Europe and Latin America. The slowing growth in fundraising in 2008 is indicative of the many funds that have raised money but have yet to invest. Few firms have exercised capital calls for new investments, but in 2009 fund managers will have to start making deals to move their funds into the investment stage. Following a more fervent investing climate, different fund managers will prove themselves at a time when a market consolidation will begin and only the best private equity firms will remain standing.
Infrastructure and energy remain the best placed industries in which to invest. The large deal sizes for companies with grand-scale projects in the works for both sectors allow private equity firms to do some tinkering with company fundamentals, but with ever larger-scaled projects, a few deals could prove extremely lucrative. Relationships in executing these higher-level transactions will be important and local fund managers will be best placed to work with the appropriate officials in government and the private sector to invest successfully. Additional infrastructure investments in what the industry terms ‘social infrastructure’ will also allow funds to deploy capital to strategically important companies involved in the fields of education and health, which in the largest regional economies has achieved astounding growth, particularly in Saudi Arabia and other countries of the GCC and, to a lesser extent, in Egypt.
However, in order to source and invest in lucrative deals, private equity firms must still countenance a number of related issues pertaining to the lack of available data, on-the-ground and competent advisors, entangling legal and regulatory frameworks, and finding appropriate management talent. The majority of these problems will remain unsolved in 2008 and there is no panacea in finding the right technical competence to operation teams, although improvements in many countries’ regulatory climates should allow funds to execute more deals in 2009 under less constraining frameworks than fund managers dealt with in the past.

Restructuring for 2009
An ameliorating regulatory environment should prompt fund managers to look for standard exit opportunities via public offerings. One constraint on sourcing deals might be the inability to find strategic partners to whom fund managers could sell their investments down the road. Although capital markets are not performing at exceptional levels, new stock exchanges in North Africa and other frontier markets in MENA should prompt fund managers to line up deals that could be exited upon them. Syria, in particular, will remain a country to watch as many funds, including those raised by SHUAA Partners, have included the country in their fund foci. The country’s Law No. 7, passed in 2000, afforded financial firms special tax treatment, which existing holding companies operating private equity-like business lines have used to their advantage. In 2009, the country plans on taking another significant step forward with the (long-overdue) opening of the Damascus Stock Exchange, with a building and trading platform already purchased.
New improvements should give the necessary boost to the region’s broader investment climate, in which private equity stands to benefit. However, challenges to the industry will not be erased in 2009 from better external climates. Observers have pointed out the excess amount of private equity funds in the region, and particularly in the Gulf, which are doing deals in tandem partnerships or focusing on a myriad of hot industries, like infrastructure and telecoms. Some acknowledge that up-to- date, regional private equity firms have looked for the most lucrative deals and, in a relatively immature investment climate, have been able to capitalize on easy opportunities denoted as ‘low-hanging fruit’. As these types of deals dry up, firms will face a more challenging investment environment and will need to work on their own internal mechanics in order to survive through 2009.

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Economy & Finance

Falling with optimism

by Executive Staff
written by Executive Staff

At the close of 2008, most financial analysts and observers of the Casablanca Stock Exchange (Bourse des Valeurs de Casablanca, BVC) agree that the market remains sheltered from the financial turmoil rocking global markets, with the national economy’s fundamentals still strong. Thanks to its advantageous position at the crossroads between European and African markets, the BVC, Africa’s third-largest market, is a top performer in the region, with a capitalization that reached MAD600 billion ($69.2 billion) in 2007.

Officials are currently downplaying a bearish trend that began in October. In a statement Fathallah Berrada, president of the executive board of the bourse, gave assurances that there is no direct link between the global financial crisis and the current bearishness of the BVC. Berrada pointed out that Moroccan businesses and the overall economic environment remain strong and healthy, claiming that the morose climate in market circles is unfounded, caused “80-90% by psychology” and not grounded in any real cause for doubt. Insiders have indeed predicted the downward trend, which Berrada called “a sign of vitality and maturity of the market,” adding that it is very healthy for markets to correct themselves from time to time.
A similar assessment was voiced by Youssef Benkirane, president of the Professional Association of Bourse Businesses (Association Professionnelle des Societes de Bourses — APSB), who attributed the trend to the psychological impact of the international financial crisis. International turbulence has had “no direct impact” on the Casablanca market, he said. Yet he did concede that investors cannot remain unaware of what is happening in the international markets. He continued, “There is a psychological contamination among investors, which is leading them to panic and start selling their stocks.”

Rallying investors
Benkirane called upon investors to maintain their confidence in the national financial market, as well as in the more than 70 businesses being traded on the market, whose average profits were more than 20% higher in the first semester of 2008, compared to the same period in 2007. One reason for preserving investor confidence, he said, is that the national financial market “is not open to the exterior thanks to the current foreign exchange regulations,” adding that “we do not have the problems of interbank liquidity that are going on abroad.”
Abdellatif Jouahri, governor of Morocco’s central bank, also publicly expressed his optimism for the future of the national financial market. In a declaration at the 32nd meeting of the Council of Arab Central Bank Governors and Issuing Institutes, held in Marrakech, he confirmed Morocco’s prudence and indicated that authorities are closely following the evolution of this crisis to ward off any risks. In order to effectively insure the immunity of the Moroccan monetary system, Jouahri announced the creation of a watchdog unit charged with collecting and exchanging information with the large financial markets and global policymakers.
At a colloquium organized by a Moroccan parliamentary group, participants debated what is at stake in the market, as well as ways to reverse the downward trend. Participants agreed that exchange regulations and the stability of the Moroccan banking system will protect against all but a limited fallout on the Casablanca market. The risk did, however, spark a debate on possible new roles the bourse could play in the Moroccan economy and its integration in various development policies. The colloquium concluded by recommending several measures geared to restore medium and long-term stability to the market. One recommendation would isolate the bourse as a separate sector and not simply a transaction market, allowing it to better finance the economy through privatizations. Another would differentiate between speculation and savings in the medium and long-term so as to favor the shoring-up of reserves. Another recommendation would reinstate a former system of deductions for institutions.

Global financial crisis fallout
When asked about the repercussions of the international financial crisis on the Moroccan economy, Abderrahmane Ouali, consultant and university professor, responded: “What we may feel, although not immediately, will touch our real economy. In other words, our growth could be weakened and our levels of unemployment and inflation could rise.” As for the impact on the Casablanca bourse, Ouali indicated that it is minimal, “since the bourse is still in embryonic stages.” Ouali agreed that the downward trend was the result of a severe and brisk correction after several bearish sessions.
The severity of this correction is related to the over- valuation of certain key securities, especially in real estate (CGI, Addoha and Alliances), cement, construction sector securities and leading banks. Markets similar to Casablanca have PERs of close to 20 times their profit. Ouali said, however, that the Moroccan bourse was dealing with, before the abrupt fall, a PER close to 29 times profit. PERs for some exceptional securities were 131.1 times profit for CGI, 72.3 times profit for Alliances, 33.3 times profit for BMCE Bank and 25.3 times profit for Addoha. “This overestimation made the market less and less attractive and suddenly the volume of transactions began to fall inexorably, halving since August. With flagship securities so elevated, investors became harder to find and some turned over securities neglected until now,” Ouali added.
In 2009, a series of measures will be implemented to insure a rigorous and transparent management of the Casablanca Bourse in conformity with international norms, like the implementation of the latest version of the New Trading System (NSC V900). In its 80 years of existence, the bourse has acquired the know-how and the capital necessary to respond to the aspirations of investors, gain their trust and contribute to Morocco’s development.

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By Invitation

Resource efficiency is everyone‘s business

by Fadi Eid
written by Fadi Eid

The demand for resources is rising — financial crisis or not — while supplies are becoming increasingly scarce. The global population is set to rise from 6.3 billion at present to eight billion by 2030. Consumption of resources in today’s developing countries is rising unchecked and can be expected to account for two thirds of international energy consumption by 2030.

This change will force the world’s population to implement sustainable solutions and to think with the future in mind. Longer term, it means switching to alternative energies. In parallel, it is vital to make more efficient use of existing resources. Increasing efficiency means handling resources with greater awareness in terms of consumption and utilization. Credit Suisse distinguishes between five basic areas in which the efficient use of resources can be enhanced.

Energy efficiency
New lighting, heating and cooling technologies could achieve energy savings of up to 60%. New aircraft engines could cut kerosene consumption by 15-30% and hybrid vehicle technologies offer a fuel reduction potential of 30-50%.

Waste efficiency
To overcome the waste problem, the volume generated needs to be drastically reduced. Numerous technologies for waste recycling are already available, but they could still be implemented more consistently.

Water efficiency
Instead of tapping new water reserves, it is essential to improve the consumption cycle so that water can be treated for re-use. Innovative technologies could reduce consumption in households and industries.

Raw materials efficiency
Many raw materials are not recycled, but instead are disposed in landfill sites once they have been used. The introduction of a global recycling process could improve matters in this area. New technologies also make it possible to work with smaller quantities of improved materials.

Controlling air pollution
Healthcare costs caused by air pollution account for 5-20% of total international GDP. There is definitely room for better filter technologies to be deployed worldwide, as well as for tighter control systems to be established.

Fady Eid is the chairman and general manager of Credit Suisse (Lebanon Finance) S.A.L.

 

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Real estate

Bahrain – Calm oasis

by Executive Staff
written by Executive Staff

Bahrain, the smallest territory and population in the MENA region and the smallest economy in the GCC, is currently continuing its real estate development as it is trying to diversify its economy away from oil and gas, which still represent around 77% of revenues. Faced by the same challenges as other countries in the region, ranging from the cost of construction to the liquidity crunch, it seems that Bahrain is better equipped to handle the global financial crisis since its demand is mainly local and its market is comparatively small.

Since Bahrain is the first to be expected to run out of oil, it started to diversify its economy long before its neighbors, focusing on tourism, real estate and finance. In 1999, legislation was passed allowing land ownership by GCC nationals. In 2001, a new decree was issued, which came into force in 2003, stating that non-Bahrainis, GCC nationals and others, may own land in Bahrain for both personal and business use. Around the capital, the areas that are open for freehold ownership are Ahmed Al-Fateh, Hoora, Bu Ghazal, Seef and Northern Manama, including the diplomatic area.

Market overview
Over the past three years, property prices have been growing by 10-15% per annum with a 20% increase for some projects from the third quarter in 2007 to the second quarter in 2008. Nonetheless, price increases in some high- end districts were even more substantial. In Durrat Al Bahrain, the price of a 500 square meter villa doubled to around $800,000. Increases for new rents in residential areas, however, slowed to 30% from 40% in 2007. Amin Al Arrayed, general manager of the real estate company First Bahrain, explained that the country’s real estate market is driven by regional demand and not global demand like in Dubai, and thus is less inflationary. He added that, “marked increase in prices of all factors of development and a shortage in key building materials… created significant problems for developers who were faced with ever increasing cost.” The cost of materials rose 30% in 2007 and a further 50% in the first half of 2008.
As is the case throughout the region, real estate demand in Bahrain outweighs supply. Oxford Business Group (OBG) reported that 40,000 social housing units are currently needed, with demand growing in leaps and bounds. According to Zawya, at least 60,000 residential units will be delivered in the next eight years and a balance between supply and demand should come in 2012. Additionally, the Bahraini real estate advisory DTZ said that more than 1 million square meters of office space should be available across the kingdom by 2012, representing a 100% increase in the space currently available.
According to Global Property Guide, currently real estate projects worth $9 billion are under development. The most important developments that will be completed in the next couple of years are Durrat Al Bahrain, Bahrain Bay, Diyar Al Muharraw, Reef Island and Bahrain Investment Wharf. New towers are also being constructed, like the Abraj Al Lulu, Infinity Tower and Era Tower. Al Arrayed explained that, “a key trend has been the rise of mixed- use developments that provide integrated and holistic lifestyle solutions, [as well as] the move towards sustainable development and smart eco-friendly solutions.”
Moreover, Bahrain announced plans for major expansion of its international airport that will have a price tag of nearly $1 billion. The plan is to concentrate on expanding terminal capacity to meet the country’s air transportation requirements for the next two decades.

World financial crisis
When the global financial crisis hit the market, there was a slowdown in demand for real estate, as many of Bahrain’s residents are waiting to see what will happen next. “The financial crisis has impacted the real estate sector directly as a result of a reduction in the liquidity that is required to fund most of the development projects,” said Al Arrayed. He also explained that, as in other countries, speculators were most affected. “In particular, the high-end freehold sector that has seen the highest level of appreciation in recent years has been the hardest hit, as over leveraged speculative investors are unable to secure financing required to pay their developers… the current crisis will test those business models that have focused on investment driven developments characterized by short-term returns.” He expects many of these speculative developments “will have difficulty obtaining the necessary funds to proceed.”
R. Lakshmanan, CEO of Sakana Holistic Housing Solutions, told Gulf Daily News that the sales in property might have slowed down, but the rental market is still very strong. Additionally, prices are not falling and people should start buying again in the next few months. He added that Bahrain is better placed to weather the correction than other countries in the region.

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Economy & Finance

Tunisia – Market maneuvering

by Executive Staff
written by Executive Staff

Tunisia’s Bourse des Valeurs Mobilieres (BVMT) is expected to remain relatively immune to the international financial crisis in 2009. Mokdadi Hamadi, CEO of UBCI Finance, said that in light of the daily pressure investors apply to stock exchange prices, directors of traded companies should turn to new opportunities, and legally, intervention may take two forms. First, companies could buy back their own stocks, injecting liquidity into the market. This may ease the volatility of securities and reassure shareholders, in conformity with the article 72/73 of the Public Call for Savings.

The article stipulates that “the interventions of a company on its own securities must have the objective, in the interest of its shareholders, of either insuring liquidity in the market of the security concerned, or reducing the excessive fluctuations of its market price.”
Second, an intermediary in the bourse could close a contract of liquidity for a determined period.
At the end of September 2008, the rate of foreign engagement stood at 25% of bourse capitalization. Twenty- two percent of foreign shareholding is estimated to correspond to a stable and sustainable participation, acquired in a partnership framework in order to occupy a strategic position, in companies and also in Tunisian banks. In August, trading on the BVMT saw 3% of foreign holdings ceded so that foreign holding in the stock market capitalization shrank from 28% end July to 25% end August 2008.
Tunisian regulations in exchange matters are considered very well structured at the level of portfolio investment. Khaleb Zribi, managing director of CGF, a subsidiary of GAT, explained that the indicators reflect the good health of the country’s economy, which presents a safe, favorable and secure platform for investing in the BVMT.
Ninety percent of Tunisia’s entrepreneurial fabric consists of undercapitalized small and medium sized enterprises (SMEs) that resort to banking over- indebtedness in order to finance their activities in the short-term and their development projects in the medium and long-term. This not only burdens their financial load, but it also generates a higher rate of questionable debts in the country’s banking system. In the end, competitiveness of Tunisian export products could be affected, which is why the state has set up several instruments aiming to help the financial market by alleviating some of the indebtedness to banks, while at the same time favoring the reinforcement of businesses’ equity capital by opening their capital, Zribi said.
An enterprise traded on the bourse gains both in prestige and in recognition, which generally helps out the business’ image and market position. Introduction to the bourse also facilitates relations with social and administrative partners, as well as in the spheres of banking, finance and commerce. The stock market has generated more dynamism among enterprises and within the financial market, as means for potential growth are explored. Investors, however, are more likely to covet the short-term dividends, to the detriment of stable portfolios that perform in the long-term.
With 100 securities traded on the principal bourse and as many on the alternative market, Tunisia’s market shows signs of attaining the status of a major regional financial market over the next few years. The bourse has a structured and balanced listing system, while the exchange rate of securities listed fluctuates in ranges limited by statistical thresholds, from 3% to a maximum of 6.09%, so falls are always moderate. Also, the trading session has been extended to a duration of five hours and 10 minutes — 9 a.m. to 2:10 p.m. — offering investors new opportunities for arbitrage and positioning. The bourse is also enriched by improving financial establishments and a group of Tunisian enterprises that are growing more structured and better managed, in adherence with wider market norms.

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By Invitation

Why the bailout should sink

by Ziad Ferzly
written by Ziad Ferzly

If you spend your time listening to Henry Paulson, treasury secretary of the United States, and Ben Bernanke, chairman of the US Federal Reserve, you would think that there is no way around the bailout. You get to hear scattered reasons about how if there was no bailout, the entire world would collapse. I am not only talking about the $700 billion, but the $5 trillion that is being spent and pledged via different channels of the US government. A closer look at their actions shows that they have little clue about what they are doing or supposed to do. After the collapse of Bear Stearns, these two men had six months to deal with this disastrous problem, but they seemed to have been caught off-guard when it was Lehman’s turn. Of course, they did not start the whole problem, but they certainly have to deal with it.

Economics is supposed to make sense, but many people seem happy to suspend reason in order to believe things that are obviously not true. Thinking that signing a 30- year loan to a very expensive house that you cannot afford will make you rich is ridiculous. That did happen for a few years. Bubbles do grow, but what bubbles do best is burst. One cannot increase income without increasing output, and signing loan papers does not qualify as output. Now, the big banks are getting bailouts and other financial institutions are trying to become banks to qualify for a bailout. The car makers are next in line. Bad businesses are supposed to restructure, and possibly fail. Banks that lose tens of billions of dollars should not get more money. The stronger, better managed banks will take over the failing ones; life will go on. Of course, we will experience extremely difficult times, but the emerging banks will be more stable and better run. Now what you get are people who had nothing to do with the problem having to support those who squandered their money and investors’ money. So, instead of being allowed to fail, like governments do with any normal business, these unhealthy institutions are being artificially propped up.
What is the lesson for the people who lived within their means, saved and bought only what they can afford when the government tries to bail out those who bought houses they clearly could not afford, then refinanced their homes, taking money out to spend on vacations, new cars and flat screen TVs? They are suckers. They could have lived a very fancy life for many years, and then walk away from their mortgage obligations as most with negative home equity are doing. What is the lesson for the banks that did not engage in this mortgage madness when they see the government bailing out the banks who bet big using obscene amounts of leverage? The lesson is that they are stupid because they should have taken more risk, made totally reckless loans, paid their executives millions of dollars a year for a few years, and have the taxpayers foot the bill for their excesses.
But what about systemic risk? Isn’t it too great, you ask?! Well, what do you expect bankers to say when they go to the government asking for money: “Please pay my bonus and help me keep my job”? No. They say, “If you do not help us, the entire system will collapse.” Well, guess what, the system is collapsing. I am happy that my many banker friends get to keep their jobs for now, but I am talking about the entire economy here, not the fortunes of a few bankers. The failure of major banks would have had a drastic effect on the economy but in the end, it would have been less drastic than the outcome we are going to see. And the recovery, ultimately, would have been quicker than it will now be.
Major economies around the world have entered into a recession at the same time. This is really a unique time in history — a very difficult time for countries, companies and families. That said, this is also a time of great opportunities for those investors who are able to properly analyze what is going on, and decide where, how, when, and how much to invest in different assets.

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

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Real estate

$20 billion in undeveloped land at Lebanese banks

by Abdallah Hayek
written by Abdallah Hayek

Should a chicken incubate her eggs for forty years, one would expect her to hatch no less than a golden goose. Similarly, the Central Bank of Lebanon is sitting on $1.2 billion worth of properties, some of which have been in its nest since the 1960 — that’s equal to 18% of Lebanon’s gold reserves in value. In fact, private banks, religious organizations and local municipalities own an estimated $20 billion worth of properties, all cumulatively earning the country a big, fat return. The current financial crisis is stalemating lending institutions, making liquidity a precious commodity to have. Lebanon needs a cash injection to not only avert an impending crisis that has threatened the very existence of major economies and even countries, but also to service a mounting national debt that has reached an alarming $48 billion in a country with a GDP of $25 billion.

The proven skill and leadership of Central Bank Governor Riad Salameh are again called on to have some of these properties become the engines of development and growth, instead of them remaining idle reminders of ineptitude and red tape. Salameh has demonstrated his masterful abilities as a financial wizard and leader, building a financial firewall for the country’s economic structure and engineering regulations which major governments are trying to emulate, even at the eleventh hour. Salameh might well again be the one throwing a new lifeline into Lebanon’s economy.
What are we talking about? If we leave religious endowments (waqf) alone for a minute, the Central Bank and other private lending institutions have accumulated over the years properties they acquired as security against bad loans. Private banks have established real estate departments to promote these properties to the private sector, but that effort has remained mired by inefficiency and an inability to move these properties in the proper cycle of dynamic reinvestment. Using announcements in local newspapers, the Central Bank occasionally auctions out select properties through a closed bidding process. Currently, no such bids are available as they await the appointment of the new central bank board, which takes decisions on these matters.
The interesting thing is that the banking sector is not highly leveraged against these properties — i.e. it did not dish out loans exceeding 60% of the original value of the land. Today’s real estate prices have risen significantly and the opportunity for high returns is more than likely. Yet, in order to move these properties, the central bank would direct private banking institutions to considerably discount these properties, sometimes up to 80% of their current market values. Banks would still turn a good profit and would simultaneously take a monkey off their backs, since these properties cost dollars to manage despite their sitting idle and returning no profits.
Governor Salameh is asked to extend his ingenuity in economics and finance by inviting the public sector, banking sector, private investors, NGOs and professionals over to a roundtable discussion on an applicable plan to promote such properties. The process needs to be transparent and make use of the latest global marketing tools while providing an easy roadmap for Lebanese expatriates to invest in their homeland.
Lebanese investors and expatriates are an excellent target for such mass properties. In order to be able to bid, a website must provide preliminary information about the area, plot number, location and available shares distribution. Some of these properties are located in remote areas such as valleys and rough terrain, but the market still needs such properties for special-purpose projects like agriculture.
The amount of cash liberated by this procedure could play a major role in Lebanon’s national stability and economic prosperity if we just consider the numerous employment opportunities that this will create for thousands of families. We can literally dig ourselves out of this mess.

Abdallah Hayek is the chairman of Hayek Group, Beirut.

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Economy & Finance

Turkey – Running from fire to fire

by Executive Staff
written by Executive Staff

If it takes brief visits to both extremes to plot a middle course, then 2008 provided Turkey with an opportunity to write the manual for the rest of the world. Still riding high from a decisive election victory in the previous year, the ruling Justice and development Party (AKP) was faced with decimation when the Constitutional Court was called to rule on accusations the party had been indulging in practices that breached the sacred separation of state and Islam.

The AKP had pushed through parliament a measure to allow female university students to wear headscarves, a measure that infuriated the staunchly secularist establishment (including the army). Had the most severe penalty been imposed in the event of conviction, President Abdullah Gul, Prime Minister Recep Tayyip Erdogan and around 70 of the deputies would have been banned from politics, not only bringing down the government but also destroying the party.
In the event, a heavy touch of realpolitik set in with accommodation and compromise all around. The AKP was given a mild slap over the wrist, Gul, Erdogan and their supporters in parliament kept their jobs and the army appeared to take a course signaling its appreciation of stability.
Attributing motives is a sport that serves only to keep the chattering classes alert and is rarely based on evidence. Even so, it seems both the Constitutional Court and the army viewed that the presence of the strongest political and economic stability for decades, not to mention a booming economy, gave the AKP the right to continue. In a gesture that screamed reconciliation, the army even forewent its annual purge of officers suspected of Islamist leanings.

On the mind of business
The alternative — new elections bringing the inward- looking and fractious opposition parties back into play — was viewed with alarm by the business community. The Istanbul Stock Exchange (ISE) dipped sharply and the national currency came under pressure. Both setbacks were instantly reversed when the AKP was allowed to carry on ruling and that in itself is a measure of how much Turkey has come to rely on its steady, pro-business guiding hand.
Even if one immense threat was removed, a series of lesser, though still significant, worries kept the government on its toes. Fierce clashes with the Kurdish PKK separatists based in Iraq perpetually grabbed the headlines, especially when Turkish soldiers crossed the border almost certainly with the tacit support of Washington. Negotiations to join the European Union are becoming a sick national joke, with popular support for the application declining in proportion to the lack of progress. The target for inflation, set at 4% at the beginning of the year, was abandoned by its author, the Central Bank of Turkey, and revised upward to 7.5%. Even the new and higher number is optimistic since the final tally is likely to be around 10-11%.
Unemployment rose by nearly half a percent to 9.8% and then — finally — there descended the fallout from the international credit crunch. By the end of the year the ISE followed the freefall of the rest of the world and the lira went in the same direction, losing around 30% of its value within a matter of weeks, plunging from around 1.18 to the US dollar to a low of 1.70. Foreign direct investment went in the same direction, leaving Erdogan with an interesting balancing act going through to 2009.
Negotiations with the IMF to re-institute a standby loan to help bridge the current account deficit and provide extra foreign currency liquidity to the banks brought to the surface diametrically opposing views. The IMF said the growth target for 2009 should be slashed to 2% to allow consolidation and a cut in inflation, even at the risk of higher unemployment. Erdogan, doubtless with an eye on the municipal elections in March of next year, was unimpressed and pondered the possibilities of solving the problem in a different way — a temporary currency swap with the US or even a separate deal with the World Bank. In any event he presided over a cut in interest rates, preferring attempted stimulation of the economy to a counter- inflationary move of raising them.
Yet even with the prospect of a devalued currency making exports cheaper, the horizon is still cloudy. With Turkey’s major markets in Europe officially in recession, the price of exports becomes a little academic. The number juggling game that will dominate 2009 — not only for Turkey of course — may make the AKP’s Constitutional Court problems of 2008 appear a trifling affair.

Peter Grimsditch is Executive’s Turkey correspondent

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