Levant

Mêlée on the menu

by Executive Staff
written by Executive Staff

The latest battle in the Middle East is not about territory or religion, but food. The Association of Lebanese Industrialists (ALI) plans to bring a lawsuit that aims to essentially copyright the names of prominent dishes served in Lebanon and the Levant. The foods associated with the case include hummus, tabbouleh, falafel, araq and labneh.

Fadi Abboud, president of the ALI, said he is bringing the suit because Israel has hijacked the names. “Let them call their hummus Tzipi Livni’s chickpea dip, or call it hummus in Hebrew.” he said. “We were the first country in the world to commercialize hummus, to industrialize the production of hummus, and export hummus, when Israel was barely five years old.”

According to Abboud his organization is pursuing internationally recognized cultural rights to the foods similar to ‘Protected Geographical Status’ (PGS) laws in the European Union. PGS laws aim to protect the names of foods by eliminating unfair competition and preventing the deception of consumers with fake products. PGS laws have designated food product names like Champagne, Feta and Roquefort cheese as protected, and those products are only legally allowed to be labeled as such if they hail from their designated place of origin.

It is unclear whether the lawsuit has a chance of succeeding. Foods like Feta and Roquefort are protected because the EU decided they are produced in unique geographic areas and through a process that is exclusive to those areas.

Rami Zurayk, a professor at the American University of Beirut’s Faculty of Agricultural and Food Sciences, compared ALI’s suit to Italians trying to copyright pizza.

“What if Italians said no one can use bread and tomato and call it ‘pizza’?” he asked. “Instead, it has to be called ‘Italian style tomato pie’!”

Even how ALI would bring their case is in question. Feta, champagne and other names are protected in the EU. Since Lebanon is not an EU member, or a member of the World Trade Organization, it is unclear where the suit would be brought. And even if the EU laws are expanded, other Arab countries would not be happy if Lebanon gained a patent for hummus and tabbouleh.

Abboud admitted that many dishes he wants to patent are of disputed origin, even among Arab countries. Hummus’ origins are unknown — some say Saladin invented the pasty chickpea and tahini dish, while others trace it back to ancient Egypt.

“Everybody in this region eats hummus,” Zurayk said. “I don’t think Lebanese can claim hummus. One has to be realistic about this.”

Abboud agrees, and said he does not want to start an inter-Arab war over food designations. He suggests creating a kind of ‘Arab Food League’ to determine who could claim which foods, and, at the least, keep the Israelis from claiming the name.

“If we don’t agree with the Syrians that hummus is Syrian or Lebanese, let’s have a panel, not turn this into a war,” he said. “If the panel sees that hummus is neither Lebanese nor Syrian, but part of this entire region, then that’s something we’ll accept.”

Abboud is writing letters to Prime Minister Fouad Saniora and other government officials to get the ball rolling on the lawsuit. But he fears the Israelis may have already initiated a lawsuit to claim hummus as their own — a move he said would not surprise him. Israelis already hold the Guinness Book of World Records title for largest plate of hummus.

“We are very, very hurt,” Abboud said about the Guinness title. “And we are going to make a larger hummus dish, and make sure the world knows where hummus originates from.”

With the number of stories in the international press about Abboud’s lawsuit, he may be accomplishing his goal long before the case is ever gets close to a court. Or has that been his goal all along?

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Levant

Frayed circuits, crossed wires

by Executive Staff
written by Executive Staff

When people discuss the electricity problem in Lebanon, they often accuse Électricité du Liban (EDL), the fully government-owned electrical utility, of being mismanaged, corrupt and needing years to reform. Some even avoid opening the subject saying that EDL is like Ali Baba’s cave, and its problems are too complicated to discuss.

Now, is true that EDL is deep in debt and needs structural reforms to get back on track. Nevertheless, it is important to find out if all these complications are due solely to its internal mismanagement, or also to external factors that EDL has no control over and are the responsibility of the government.

Any distribution network is subject to losses. There are two types of losses, technical and non-technical. By losses are meant the difference between the energy that is generated by the power plants or bought from external sources and the energy billed to customers. Technical losses result from difficulties in the physical properties of the network. They represent 15% of total production and over the last few years have been constant. These losses are due to the inefficiency of the old power plants, like Zouk and Jiyeh, which causes severe losses in the transmission and distribution process.

Non-technical or commercial losses are the main cause behind EDL’s deficit. They are mainly due to the fact that EDL has been selling energy for much less than it costs. Additionally, these losses results from unpaid bills by water treatment and pumping stations, hospitals, ministries, residential customers and electricity theft by tapping into lines and manipulating meters. Non-technical losses are around 20% of total production, which is huge comparing to international standards that are around 3-4%. Earlier this decade it had even been higher, reaching 30%.

High cost

If EDL collects 100% of its bills, has no loss of energy and operates under perfect managements, it will still be losing money. 89% of Lebanon’s electricity is generated by gas oil and fuel oil, the remainder by hydropower plants. In the 1990s, when the price of oil was below $30/barrel, the cost of production was around LL100/KW ($0.07). On that basis different tariffs were set for residential customers, public institutions like hospitals and churches, industrial firms and administrations. When the price of oil started to rise and the cost of electricity went up to LL350/KW ($0.23) EDL was not allowed to change its tariffs, and thus profits turned into huge losses that the government was obliged to subsidize.

In early 1990s, concessions were given to four private companies in Zahle, Aley, Bhamdoun, and Byblos to buy electricity from EDL — for a lower tariff than residential and commercial customers — and handle distribution and bill collection in their areas. Due to political pressure, these contracts were not changed, even when it became more expensive for EDL to produce electricity and thus today these four companies still buy electricity for very low tariffs and sell it to consumers at current prices, making big profits at EDL’s expense.

Industrial firms are also abusing the facilities given to them in the contracts signed with EDL. They pay the highest price during peak hours that vary between summer and winter. In order to save money, firms use their private generators during these hours, leaving EDL with revenues that would not cover even half of the production cost. Since the government did not change these contracts either, EDL has no choice but to bear these losses and hope for the price of oil to decrease.

Billing

Even although the tariffs are already very low, some costumers, especially in the public sector, fail to pay their bills. EDL has a separate billing section for the public sector, which includes public administrations, public institutions and water treatment stations. During the Civil War and until the early 1990s, the whole public sector was using electricity for free. When EDL took the decision to cut electricity to these institutions, they started to pay. However, things did not improve much. Currently, unpaid bills add up to LL200 billion ($133.3 million). EDL tried to suggest a payment plan to facilitate the procedure, but the government showed no interest.

Water treatment stations are causing the biggest loss. Out of five stations, each located in a different governorate, only the ones in Beirut and Mount Lebanon are paying. Their debt amounts to LL160 billion ($106.7 million). Second come hospitals, which are considered public institutions and are the biggest debtors in their segment. They do not enter the government’s budget and therefore are not subsidized. EDL cannot cut electricity to these institutions for both political and moral reasons.

In the case of public administrations (ministries, city halls, etc), even though their debt is lower than that of water treatment stations or hospitals, they are causing losses to EDL. They are also paying fewer and fewer of their bills. In 2005 they paid around 64% of their bills, In 2006 that rate fell to 57%, and to 50% in 2007.

The government tried to settle its situation with EDL by declaring that it should collect its bills in exchange for the subsidies it receives. However, that is against the law, since while EDL has the right to collect its bills in full, but not the means to do so, the government has the obligation to subsidize the electrical utility that might otherwise collapse both physically and financially.

The collection process for the private sector, including residential and commercial customers, is more successful, if only for the sole reason that EDL can cut electricity in case these costumers fail to pay. Eighty-five to 90% of bills are being collected. In Beirut, only 1% of the bills are unpaid, in Antelias 4%, and around 12% in Chiah. In some areas the rate of unpaid electricity bills goes up to 25%, usually because bill collectors are not able or are not allowed to enter. Each week, cases of assaults and physical attacks are taking place and usually remain unreported. In 2003, former President Emile Lahoud allowed police escorts to assist EDL in bill collection, but that decision did not last long. Currently bill collectors are facing their challenge alone without any protection.

Electricity theft

Electricity theft can occur by tapping into network lines or manipulating meters. It represents the unbilled electricity, which amounts to up to 40%. In some areas, EDL conducts search campaigns — up to twice a week during the night and more often during daytime. No specific number of violations can be assigned to different areas, since it can dramatically increase or decrease depending on the frequency of the search campaigns. There were talks about a law stating that anyone who steels electricity or water is sentenced to jail for a period ranging from three months to two years, but that law was never implemented. In every case a fine is issued depending on the period and amount of electricity stolen. If the fine is unpaid, it is redirected to the police and then settled by agreement without reaching court.

Solutions

The main solution suggested by both EDL and government is privatization. It would involve selling EDL or one of its sections — generation, transmission or distribution — to the private sector, leaving the government free of any obligations. However, while waiting for privatization to take place, EDL officials think that the government should undertake basic actions to help the sector survive its crisis. First, the billing system should be set to at least cover the cost of production. Old contracts with private distribution companies and industrial firms should be changed and brought up to date to reflect today’s oil price. It should be EDL’s right to set a bill that would cover its expenses with a small profit margin to be able to renew its power plants and supply more electricity.

An alternative to raising prices would be using natural gas instead of gas oil and fuel oil, since it is much cheaper and would lower the production cost. The government should also encourage customers to use alternative sources of energy, like wind or solar energy, by offering low-interest loans for this kind of investment. The perfect solution would be if EDL itself used alternative sources of energy by constructing small dams in different areas and using them to generate electricity. However, that would need huge amounts of funds that the government is unwilling to supply.

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Levant

A higher lowest wage

by Executive Staff
written by Executive Staff

The minimum wage in Lebanon has been the center of dispute between the General Labor Confederation (GLC), the private sector and the Lebanese government for the last couple of years. This dispute was agitated by increased inflation of consumer goods caused by the depreciation of the US dollar against the euro, as well as other internal and external factors. Each side has pulled in its own direction throughout the negotiations and refused to take no for an answer. The GLC wanted to increase the minimum wage to LL960,000 ($640) and to increase all other salaries by LL200,000 ($133.33). The private sector disagreed and the government was trapped between the two, trying to make social and economic reforms without causing further chaos in the economy.

The law

Before the new wage law was passed, Lebanon’s minimum wage had been LL300,000 ($200) since 1996, despite continuous pressure from the GLC. Ghassan Ghosn, the president of the GLC, stated that “the last raise in 1996 was insufficient, it did not represent a real match between the minimum wage and inflation, it was lower than the optimal number by 15-20 percent, as I remember, and we carried on with our demands since then.”

In early September this year, the cabinet finally decided to raise the minimum wage to LL500,000 ($333.33). It was further mandated that all salaries — with no exception — should also be increased by LL200,000 in both the private and public sector. The raise was to be retroactive on all salaries paid since May. The cabinet also decided to increase transportation subsidies from LL6,000 to LL8,000 as well as to add LL150,000 to the retiree’s pensions. The public sector raised their wages in October. On September 10 the law was finalized — signed by the prime minister and the president — and implementation should begin in the private sector as of November.

Economist Elie Yachoui considered the additional LL200,000 “a bonus for workers in both private and public sectors.” The salary increase should be a percentage and not in fixed amount. He added that there is no study as to why the government chose LL500,000 as a practicable minimum wage and to why it added LL200,000 to all salaries. “We can not randomly fix or present figures. Any figure should be justified and should have an acceptable rationale behind it. Our country is very far from being scientific in steps and decisions taken,” said Yachoui.

General Labor Confederation

The GLC’s Ghassan Ghosn is not happy with the new minimum wage. He wanted to raise it to LL960,000. “The raise is not enough, but we do not refuse to receive a part of our right, we take it and we continue with our movement,” he said. Many criticized his suggestion and said that it is rather unrealistic and prices would skyrocket. Ghosn pointed out, however, that LL960,000 is not a random figure. He explained that studies were done by economic experts based on a recent UNDP report on poverty in Lebanon. The report was published in conjunction with the collaboration of the National Labor Organization to determine the basic needs of the family. These studies showed that a Lebanese should earn LL960,000 in order to support a wife and two children. If a family is receiving less than LL960,000 then it is below the poverty line.

What is more important is that the GLC emphasizes LL960,000 as a value and not an absolute number. “If the government improves medical care, education, transportation … and exercises control over prices and monopolies then maybe $100 would be enough,” said Ghosn. “When teachers start putting their children in public schools, then we will do the same … it is not enough to build public schools and paint them, or construct public hospitals with good architecture, there should be a high level of medical care and education.” He added that we talk about a laissez-faire economy, while we have exclusive agencies and monopolies that cannot be removed because of political pressure. This forbids any kind of competition, freezes the market and decreases the purchasing power of the consumers because of rising inflation. If the government does its job right, then the real value of people’s wages would increase and there would be no need for any significant adjustments that might hurt the economy and cause more inflation and unemployment.

Yachoui commented on the GLC’s demands saying, “perhaps they are right when they talk about one million Lebanese Lira because of the very high cost of living, but we should look at the capacity of the private sector.” He added that it is true that there are monopolies, exclusive agencies and not enough competition in the market, but Lebanon is an importing country, therefore with the increase in prices of wheat and oil in the last couple of months, it is also importing inflation. So even if there was competition in the market, there would still need to be an increase the wages because of the external inflation.

The private sector

The private sector did not reject the new minimum wage but refused to increase the salaries of employees earning more than LL500,000, saying that the government has no right to set the salary scales for the private sector. Fadi Abboud, president of the Lebanese Industrialists Association, was quoted saying that it will take their case to the Shura Council if the government forces them to abide by the increase. He added that it is against the nature of the World Trade Organization (WTO). Ghosn commented on Abboud’s statement saying that this point of view was too right-wing and that the government should interfere with or without the private sector’s approval.

Even though the private sector rejects the new law, it has no choice but to abide by it. Any worker that does not receive the new raise has the right to go to the Ministry of Labor, the GLC or his own union and file a complaint against his employer. The question is how successful will the government or unions be in forcing all the private companies to follow the new law, and will employees have the courage to file complaints or will they be too scared of losing their jobs? The lack of enforcement in Lebanon means the outcome can hardly be forecasted.

SMEs

The private sector as a whole has rejected the new legislation. Large companies operate on a large scale and should be strong enough to handle the wage increases. But how will this affect revenue, prices and employment in small and medium enterprises (SMEs)?

Ghassan Beyrouthy, an economist and the owner of Bel Azur Resort in Jouniyeh, said that SMEs will be the ones most affected by the increase in minimum wage and salaries. After having a rough couple of years due to the 2006 war and political instability, the tourism sector was able to catch its breath this summer and make some income, he pointed out. However, it is still too vulnerable to bare such increases in wages with unrelenting high prices and the unstable environment. “I cannot give LL500,000 to the man who cleans the rooms or the dishes, not to mention the National Social Security Fund (NSSF) expenses that would also increase. If the government forces the private sector to abide, I will have to either fire some of my employees or keep them if they settle for their previous salaries,” said Beyrouthy. It will be challenging for SMEs to raise the salaries of all their employees and fight rising inflation at the same time.

Additionally, SMEs cannot increase their prices infinitely. They have already raised them recently and any further amplification will lower demand for their goods and services. With prices unchanged and no additional sales or revenue, a further increase in salary costs may in fact result in higher unemployment.

Yashoui said that exporting firms are probably the only ones who will be able to bare this increase. “Exporting firms are in general profitable firms. Those who are relying on domestic markets like hotels and restaurants are too vulnerable and will have to fight to survive”.

Ghosn presented an upbeat view when he was asked about how the sector will handle the pressure. He said it is true that every law or reform has an adverse effect, but we should all bear the burden and contribute in the revival of our economy. He added that it is not only the private sector that has to bear the consequences, but the government should also boost the economy by creating new job opportunities, decreasing taxes on imports and implementing growth strategies. The GLC is in an open battle with the government to ensure more reforms will be implemented and that it will fulfill its role in enhancing the growth of the overall economy.

The government

Will the government be able to handle its part of the financial burden? Lebanon’s budget deficit reached 26.18% ($1.45 billion) of spending in the first seven months of 2008 and may exceed 37 percent in 2009 due to the increase in wages for government employees and the expected rise in Electricite du Liban’s (EDL) deficit, as reported by the ministry of finance. The higher wages alone will cost the treasury LL500 to LL800 billion ($333 to $533 million).

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Editorial

The game we never win

by Yasser Akkaoui
written by Yasser Akkaoui

Let’s make one thing clear: If Alan Greenspan, the former head of the Federal Reserve, has no clue, then who am I to predict how the economic meltdown will run its course. I will not waste my ink and your time on the matter.

That said, I will offer a humble vignette, the origins of which came to me in New York, the Ground Zero of the current crisis. I was having lunch with a friend at Le Bilboquet, a well-appointed restaurant uptown between Madison and Park Avenues, when we noticed a brace of Lehman Brothers executives wolfing down their food, apparently without a care in the world. I asked my companion how they could stomach their food at a time when the doom mongers on Wall Street were predicting the end of capitalism and the beginning of a new socialist dawn.

My friend shrugged and pointed out the huge global correction was in fact nothing more than the apogee of capitalism. The markets, he said, were “a game we always play but never win.”

His maxim became clearer to me when I returned to Beirut and saw my sons playing video games. They would lose their allotted ‘lives’ but still be able to resume the game where it left off, and once more they would take the play to a frenetic level of activity — blood, monsters, demons, crashes, death, take your pick — until the game engulfed them.

The game they play but never win, if you will.

‘Game over’ was determined, not by the players, but by big daddy, in this case me, who stepped in to break up the inevitable sibling dispute. On one occasion, I had to intervene when my eldest son, bored by ‘driving’ on the virtual road, had taken to reversing up virtual one-way streets, mounting the virtual pavement and even running over innocent virtual pedestrians.

The game, if you will, had become infected with a corrupt and destructive culture. In my son’s case, it was harmless, but in the case of the global markets this corrosive culture had seen the real cash, or human element, become subsumed by that of the superego and its big daddy, in this case the regulators, had to step in and clean up the house.

Like Alan Greenspan, we have no idea when the ‘resume game’ button will be available.

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Financial Indicators

Global economic data

by Executive Staff
written by Executive Staff

Road motor vehicles

Per thousand inhabitants

In 2006, ratios of motor vehicles to population ranged from 778 per thousand inhabitants in Portugal to 86 in Turkey. Over the periods shown in the table, ratios of vehicles to population increased in all countries except in the United States. Sharp increases of this ratio occurred in Portugal, Iceland, Greece and Poland. In 2006, road fatalities per million inhabitants ranged from over 230 per million inhabitants in Russian Federation to 49 in Sweden. Over the periods shown in the table, rates have decreased in all countries except in Iceland and in the Russian Federation with particularly sharp falls in Portugal, New Zealand and France. Road fatality rates per million inhabitants are an ambiguous indicator of road safety since the number of accidents depends to a great extent on the number of vehicles in each country. Rates per million vehicles are affected by driving habits, traffic legislation and the effectiveness of its enforcement, road design and other factors over which governments may exercise control. In 2006, fatality rates per million vehicles were less than 100 in Switzerland, Norway and Sweden, but exceeded 400 in Slovak Republic, Turkey and 1,100 in Russian Federation. Note that low fatality rates per million inhabitants may be associated with very high fatality rates per million vehicles. For example, a country with a small vehicle population may show a low fatality rate per million inhabitants but a high fatality rate per vehicle.

Gross domestic expenditure on R&D

As a percentage of GDP, 2006 or latest available year

Expenditure on research and development (R&D) is a key indicator of government and private sector efforts to obtain competitive advantage in science and technology. In 2005, research and development amounted to 2.3% of GDP for the OECD as a whole. The R&D data shown here have been compiled according to the guidelines of the Frascati Manual. It should, however, be noted that over the period shown, several countries have improved the coverage of their surveys of R&D activities in the services sector (Japan, Netherlands, Norway and United States) and in higher education (Finland, Greece, Japan, Netherlands, Spain and the United States). Other countries, including especially Italy, Japan and Sweden, have worked to improve the international comparability of their data. Some of the changes shown in the table reflect these methodological improvements as well as the underlying changes in R&D expenditures. For Korea, social sciences and the humanities are excluded from the R&D data. For the United States, capital expenditure is not covered. Data for Brazil and India are not completely according to Frascati Manual guidelines, and were compiled from national sources. Data for Brazil, India and South Africa are underestimated, as are the data for China before 2000.

Water abstractions

Cubic meters per capita, 2005 or latest available year

Most OECD countries increased their water abstractions over the 1960s and 1970s in response to demand by the agricultural and energy sectors. Since the 1980s, some countries have stabilized their abstractions through more efficient irrigation techniques, the decline of water-intensive industries (e.g. mining, steel), increased use of cleaner production technologies and reduced losses in pipe networks. More recently, this stabilization partly reflects consequences of droughts while population growth continues to drive increases in public supply. At world level, it is estimated that water demand rose by more than double the rate of population growth in the last century, with agriculture being the largest user of water. Water abstractions refer to freshwater taken from ground or surface water sources, either permanently or temporarily, and conveyed to the place of use. If the water is returned to a surface water source, abstraction of the same water by the downstream user is counted again in compiling total abstractions. Mine water and drainage water are included. Water used for hydroelectricity generation is an in situ use and is excluded. It should be borne in mind that the definitions and estimation methods employed by member countries may vary considerably and may have changed over time. In general, data availability and quality is best for abstractions for public supply, representing about 15% of the total water abstracted in OECD countries.

Population growth rates

Average annual growth in percentage, 1993-2006 or latest available period

The size and growth of a country’s population are both causes and effects of economic and social developments. The natural increase in population (births minus deaths) has slowed in all OECD countries, resulting in a rise in the average age of populations. In several countries, falling rates of natural increase have been partly offset by immigration from outside the OECD area. In 2006, OECD countries accounted for 18% of the world’s population of 6.5 billion. China accounted for 20% and India for 17%. Within OECD, the United States accounted for 25% of the OECD total, followed by Japan (11%), Mexico (9%), Germany (7%) and Turkey (6%).  Between 1993 and 2006, the population growth rate for all OECD countries averaged 0.7% per annum. Growth rates much higher than this were recorded for Mexico and Turkey (high birth rate countries) and for Luxembourg, Australia, Canada,  Ireland, New Zealand and United States (high net immigration). In the Czech Republic, Hungary and Poland, the population declined from a combination of low birth rates and net emigration. Growth rates were very low, although still positive, in Germany and the Slovak Republic. The population growth of OECD countries is expected to slow down in the coming decennia.

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Financial Indicators

Regional equity markets

by Executive Staff
written by Executive Staff

Beirut SE  (1 month)

Current Year High: 3,470.63  Current Year Low: 1,761.53

The Beirut Stock Exchange felt the influence of international markets just like anyone else. Liquidity and share volumes dried up towards the end of the review period and the BLOM Stock Index ended at 1402.88 points on Oct 24, some 19% down from 1732.24 on the final close Sep 29 before the observation of the Eid al Fitr holidays. Solidere shares had another difficult month and closed at $21 and $21.06 for the two share classes on Oct 24, about one fourth down from their valuations at the start of October. Banking shares declined to $70 for Audi and $83.5 for BLOM, although the banking sector reported improved third-quarter results, which were impervious to the financial markets epidemic that decimated global banking income. The Lebanese banks remained bright because they were barred by the central bank from speculating in derivatives and real estate — and because they never were subjected to strong pressure for finding risky products as long as they could do well with investing in Lebanese sovereign debt instruments. What was seen over years as the banks’ risky over-exposure to T-Bills and eurobonds now looks a lot saner.

Amman SE  (1 month)

Current Year High: 5,043.72  Current Year Low: 3,351.01

Distress in motion also on the Amman Stock Exchange. The ASE general index closed at 3117.07 points on Oct 26, representing a 23.36% weakening when compared with the last close in September. Selling of industrial stocks — much of it attributed to foreign investors — supplied the weight that pulled the market down but the insurance, banking, and services sub-indices all also headed south, albeit less than the general index. Local analysts said the market provides exceptional buying opportunities for those who can afford to enter but cautioned that it may be quite a while before share prices recover the losses of the recent fear phase. 

Abu Dhabi SM  (1 month)

Current Year High: 5,148.49  Current Year Low: 3,133.51

The UAE markets couldn’t cling to the notion of having a persistent real estate boom and living in splendid isolation from the financial world crisis. In Abu Dhabi, real estate was beaten down 23.55%, leading all sectors into the valley. The general index moved down 6.56% but that was by Oct 23, with no telling how much the bloodletting would still swell to by the end of this month, and in weeks thereafter. Signals sent by the leading global markets were scary as October entered into its final days, and the price to earnings ratio of the Abu Dhabi Securities Market headed below a 9x, a multiple that should bait buyers like an artificial fly attracts a hungry trout. 

Dubai FM  (1 month)

Current Year High: 6,291.87  Current Year Low: 3,025.08

The ease of autumn that returns Dubai to a place where one can revel outdoors and enjoy walks in the old souks also came, however, with a shocking fall in equities. Much has been said about a confidence crisis in global markets, and confidence in the Dubai market has been eroded more than one would have believed possible as the DFM general index wilted with a 24.8% slide to its close of 3102.65 points on the evening of Oct 26, which translates into a 47.7% drop from the start of the year. As if that were necessary, a look back by 12 months can illustrate the size of the malaise further: in the same period a year ago, the DFM index ascended 17.2% and was knocking at the door of 5,000 points. One can and should note, however, that apart from the rude awakening of the real estate mirage, the UAE economy is much better than the paucity of confidence lets on. 

Kuwait SE  (1 month)

Current Year High: 15,654.80            Current Year Low: 10,804.40

The Kuwait Stock Exchange Index, dropping 18.4% from Oct 1 to 23, was in the group of the GCC’s worst performers together with the Dubai Financial Market and the Doha Securities Market in the review period. The KSE index closed at 10,481.10 points on Oct 23. Local analysts lamented that the bourse’s weakening was exaggerated and that “the panic has to stop.” Panic was among the most widely used words in international stock market comments during the month – however, as much as investor psyche and overshooting due to fears contributed to the downturn, the term panic could do with some clarification. The individual investor decisions in the current situation may be rational by the person’s interests and ad-hoc needs – which is not an attribute of a panicked mind. The damage is the accumulation of self-interest that defies the economy’s purpose, and thus damages the interests of the very persons that acted individually in pursuit of their own self-interests. 

Saudi Arabia SE  (1 month)

Current Year High: 11,895.47            Current Year Low: 5,794.87

There is really no point in reporting time-based performance or trying to make sense of any numbers in stock markets during the month of October 2008. What was up one day by 4% can be down 9% the next, or moving at the limit one way or another. Markets that were the worst performer of the month yesterday have been outdone in negative sentiment by another bourse the next afternoon, leaving the single day and the current moment the only relevant events. The Saudi Stock Exchange recorded a massive fall on Oct 25, after world markets drowned in negative sentiments a day before, but other regional markets were spared the dip momentarily because of their Friday/Saturday closures. Limit-down was the direction of roughly one third of the SSE’s 125 listed companies on this day. In the longer vision lines, the SSE lost 16.38% from the start of October and more than 52% of its value when comparing with the year high it reached in January. 

Muscat SM  (1 month)

Current Year High: 12,109.10            Current Year Low: 6,626.94

Spicy trading peppered with excessive volatility was the market scent also on the Muscat Securities Market. The general index’s 21.2% drop from the start of the month to October 26 was shadowed by all sub-indices. However, the industrial index was the underperformer of the month, ending the period 28.89% down. In daily reports on the MSM by a financial news provider, the R word and three ways of writing fear provided minimal variation and zero consolation regarding market moods, although recession is still no specter for any GCC country. Thus, the tale of the MSM was no altercation from the experiences of other GCC markets in October — fallout from global fears but not a meltdown of local profits were given the blame for driving investors into the abyss, like the Asian proverb of the herd that swerves if the lead bull swerves without reason.

Bahrain SE  (1 month)

Current Year High: 2,902.68  Current Year Low: 2,309.12

The Bahrain Stock Exchange was exposed to less volatility — at least during this review period — than other markets in the area but it gave up 10% since the start of October and its year-to-date record, down almost 20%, is a solid disappointment. The BSE closed its Oct 23 session at 2,290.69 points. Banking and investment companies underperformed the market. Banking stocks at the bottom end of market developments included banks Salam Khaleej, and Ithmaar. Gulf Finance House and Esterad Investment Company were at the bottom of the tally, closing down 18.59% and 20.90%, respectively — Esterad’s stock gave up 9.40% a day after the company announced that it had swung from a $4.5 million profit in Q3 2007 to a BHD $20 million loss in the third quarter of 2008. 

Doha SM  (1 month)

Current Year High: 12,627.32            Current Year Low: 7,029.95

Volatility of 5.42% and a precipitous decline of 20.45% from the start of October to a close at 6,892.95 points on Oct 26 are the fever readings of the Doha Securities Market, according to the Zawya thermometer. The DSM’s curve of pain included a single-day fall of 8.93% on Oct 26, which wiped out gains made between Oct 12 and 21. Qatar Cinemas was star performer of the month, giving up a mere 0.9% of its value. Real estate developer QREIC and Doha Insurance Company hurt the most, as they each saw 42.6% erased from their share prices. While their price performance during the review period was comparable, the two companies significantly diverged in their interim earnings announcements — DIC reported 44.5% higher nine-month figures whereas QREIC said its earnings contracted by some 15%.

Tunis SE  (1 month)

Current Year High: 3,418.13  Current Year Low: 2,516.22

The Tunisian Stock Market index tumbled 11.39% in October, closing 2,979.22 points on Oct 24. The market’s single gainers were Union Bancaire pour le Commerce et l’Industrie, which advanced 1.45% and glass manufacturer Sotuver, which edged 1% higher. In its second full month of trading, newcomer Poulina lost 14% since the start of October. Financial services firm Tunisie Leasing and Assad, a battery maker, were the biggest victims of downward pressure, dropping 21.5% and 24.9%, respectively, over the period.

Casablanca SE  (1 month)

Current Year High: 14,925.99            Current Year Low: 11,971.33

It looks as if Rick has finally cashed the profit from his Café Americaine and gotten out of the Casablanca market. The Casablanca Stock Exchange saw its second consecutive month of slippage and ended the October 24 session below 12,000 points, at 11,935.46, to be precise. Representing a 4.42% weakening in the review period, the Moroccan bourse was reading almost 6% lower on the year. However, the P/E ratio of 20.05x is the highest in the region on the Oct 25/26 weekend, keeping Moroccan stocks at valuation ranges from where the average P/E ratios of GCC bourses have long departed. 

Egypt CASE (1 month)

Current Year High: 11,935.67            Current Year Low: 5,112.29

Confidence is hard to gain, easily wasted, and much harder to regain. The Cairo and Alexandria Stock Exchanges had seen shaky investor trust wane already in spring, making the onslaught of global confidence problems ever more difficult to bear. The negative performance of CASE between the last session in September and the first day of action after the Eid Al Fitr holidays only accelerated later in October and drove the index a massive 35.34% lower between Sep 29 and Oct 26 when the CASE 30 closed at 4,564.18 points. Sector heavyweights Orascom Construction and Orascom Telecom Holding reached 37.12% and 27.08% lower, while investment bank EFG Hermes Holding lost 35.27%. However, there were three smaller stocks with market cap between $8 and $60 million apiece, which were reduced to market dust by share price losses of between 69 and 93% in the review period of less than a month. 

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Banking & Finance

Private equity – Liquidity flows

by Executive Staff
written by Executive Staff

This October, emerging market equities sank to an all time low. Dominated by few firms and largely composed of infrastructure-related companies, capital markets in the Middle East and elsewhere could not provide the liquidity needed to boost stocks. While similar effects will continue across regional bourses and affect the short-term valuation of firms, the region’s private equity industry will remain shielded because of the inherent nature of the asset class and the deal types most popular in the Middle East: buyouts and growth capital.
At the fundraising stage, private equity fund managers will continue to enjoy high liquidity for another quarter, until prospected declines in oil revenues are realized and futures contracts expire. Sovereign Wealth Funds (SWF) still have capital to deploy and will continue to partner with private equity firms for attractive buyouts in the region and abroad as company valuations sink and smart investors can invest in firms with untapped value. SWFs and private equity are best positioned to do this as they enjoy longer-term outlooks — typically five to seven years — until they exit investments. These investment horizons — coupled with the fact that most funds have recently completed fund raising and are now looking to deploy capital — make private equity a source of much needed liquidity in both the Middle East, as oil prices drop, and elsewhere, as financial intermediaries are squeezing credit flows to businesses.
Owing to the large size of most family-owned firms in the Middle East and North Africa (MENA), private equity houses have structured their funds to invest in buyout deals and offer companies growth capital. According to Amr Al Dabbagh, governor of the Saudi Arabian General Investment Authority (SAGIA), private equity investment opportunities in the region are on a scale “never seen before.”

Buy and build
Private equity buyout funds follow the traditional deal and exit structure of a private equity firm. A fund manager will scout out an attractive company, buy out the firm, build its business by adding assets or cutting costs, and exit investments to strategic investors or competitors, a secondary sale to another private equity investor, or via an initial public offering (IPO) on capital markets.
Several buyout funds are targeting MENA-wide deals and three of the most notable funds recently completed investments. Abraaj Capital’s Buyout Fund II (ABOF II) along with Waha Capital acquired a 49% stake in
GMMOS group, helping Waha Capital build a regional maritime business through its Al-Waha Maritime Group. Both maritime businesses plan to use the deal to further expansion agendas. Abraaj set itself up for a strategic deal after purchasing 100% of GMMOS Group in 2007. In this deal, Abraaj Capital partnered with the strategic buyer at the investment stage and will doubtlessly exit its remainder in the deal to Waha Capital after strengthening GMMOS Group’s corporate governance.
In another series of deals, Ithmar Capital has targeted construction and infrastructure-related buyouts. The private equity player made a recent investment in the UAE- based Dewan Architects and Engineers, a mid-market architecture, engineering, and consulting firm. Ithmar Capital’s buyout investment came amidst falling equity values and, consequently, a time when undervalued firms are attractive to long-term investors like private equity houses and SWFs.
Global Investment House (Global) has also fostered a burgeoning buyout business in the Middle East. It has recently closed its Global Buyout Fund with limited partner capital commitments, as well as additional financing by Dubai Islamic Bank and Millennium Capital, to the tune of $615 million. Additionally, Global closed another tranche of its buyout business for its $500 million Islamic Buyout Fund targeting sharia-compliant investments across the Middle East, North Africa, South Asia, and Turkey (MENASAT).
Global recently made a buyout deal through its standard buyout fund, by taking a stake in Al Sawani Food and Industry Supply Company, a food and beverage franchising operation based in Saudi Arabia with locations across twelve countries.
Abraaj Capital also made a recent buyout purchase in Nas Air with the aim of expanding the firm’s fleet of five aircraft to 18 by 2010 and eventually 167 by 2012. This buyout deal would make Nas Air the fastest growing private aviation fleet in the Middle East.
Not all MENA capital will be spent in the region. Much of it will be used for global buyouts in undervalued firms in the Asia, Europe, and the US. Credit-sapped firms in the US and elsewhere looking for long-term finance can find it in Middle East private equity shops. One deal in which this dynamic was apparent is Istithmar World Capital’s buyout of US-based Gulf Stream Asset Management, a financial services provider with $3.8 billion in assets.
GrowthGate recently achieved a final close for its $100 million buyout fund focusing on buy and build deals. With the plethora of spare capital committed lying dormant in these funds, they will be an important source of liquidity for the right firms looking to sell off their businesses.

Growth capital
While buyout funds are popular in the MENA region, growth capital continues to dominate the strategies of private equity shops. Growth capital proves the more popular of the two because it is a well-received investment style for entrepreneurs, and especially family firms. The reasons for this are clear. Instead of buying a firm, restructuring it, and exiting it via a secondary sale to another private equity shop, a strategic sale to a strategic buyer or competitor, or via an IPO, growth capital investments provide liquidity to firms with an established track record, possible areas for growth to different sectors or country, and a fairly sound corporate governance structure.
Entrepreneurs looking to private equity are essentially asking for investors to partner with them over several years to help grow the business and receive a substantial rate of return for helping develop the growth. Family firms are particularly worried about the potential for private equity to erode businesses, so growth capital remains an avenue through which families can find an investor but retain the business after a period of growth.
A recent investment has illustrated the process of growth capital private equity. Ithmar Capital purchased Panceltica, a Qatar-based, regional housing firm. Although the terms of the financing were not disclosed, the private equity shop provided capital for Panceltica’s growth and expansion strategy out of Ithmar Capital’s Fund II. Ithmar Capital’s Faisal Belhoul noted at a press conference that his fund is “uniquely placed to provide Panceltica with innovative investment and business development strategies to tap into the phenomenal growth potential of the region.” With most major cities sharing a high demand for the cranes to create buildings and the workers needed to operate them — from Doha to Dubai — Ithmar Capital’s investment and expertise enables Panceltica to grow its business across the region to build onsite steel structure for housing and other projects, which is eight times as fast to construct.

In search of growth opportunities
Additionally, private equity firms are looking to provide growth capital to firms which complement portfolios. In several instances, private equity managers are looking to create an integrated portfolio where the common tie to the private equity house can foster relationships between firms looking for business. Ithmar Capital, having recently acquired Panceltica and looking to help grow its business, might look in another high- growth economy in the region, perhaps in Saudi Arabia, Egypt, or the UAE, where another firms are looking to expand into equally high-growth economies. Ideally, Ithmar Capital can line up a firm that complements Panceltica and build some synergy between business and package its portfolio with perhaps a steel smelter, which could provide Panceltica with the downstream supply needed or with a property developer that could offer Panceltica an upstream market to supply temporary housing and storage solutions for large-scale developing businesses. Ithmar Capital’s holding of Gulf & World Construction might provide the sort of portfolio synergy necessary to build the relationships on a vertical level.
Buyout funds, growth capital funds and private equity in general offer large-scale companies a stable source of finance over the course of several years. For instance, a fund launched in 2005 did, on average, achieve a series of closes over 2005 and 2006 before achieving a possible end- of-year close in 2006. Once the fund achieves its first close it can start investing and will usually have deals in the pipeline. The holding period can also last several years for each investment and the fund itself will invest deliberately over a three to four year period, so a fund launched in 2005 with a first close in the same year can still invest in 2009, provided they have some capital left over. If a fund makes its last investment in 2009, then it has a few more years until closing, perhaps to 2012 or 2013, giving the fund a life of eight years. For funds with recent closes like Abraaj and GrowthGate, investments can continue over the next three to five years, enough of a gap to weather the currently credit-sapped business cycle.

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Consumer Society

Al Taameer – Najeeb al Saleh (Q&A)

by Executive Staff
written by Executive Staff

Al Taameer, the Kuwaiti company boasting assets in excess of $150 million in 11 countries, is positioning itself in the lucrative hospitality and leisure markets. On a visit to Lebanon for the launch of its first Ramada hotel in Beirut, Al Taameer’s vice chairman Najeeb al-Saleh sat with Executive Magazine to discuss the company’s latest venture.

E Al Taameer has recently acquired the franchise for Ramada hotels in the Middle East. What motivated your decision to open your first hotel in Beirut?
The Ramada franchise deal, which was signed in June last year, encompasses six countries — Lebanon, Egypt, Morocco, Libya, Jordan and Iraq. We decided to pick Lebanon as our first destination because we had an excellent opportunity with this venue, which is located in downtown Beirut. Another reason is that Lebanon’s hotels can be positioned on both segments of tourism and business hospitality, contrary to other countries where either business or leisure hospitality activities are emphasized. Here at Ramada we tend to focus on both aspects. Another essential reason lies in the very nature of the Lebanese people who are generally multicultural and multilingual, which makes the Land of the Cedar a good place to headhunt and train qualified staff to supply our new Ramada chain. Not many countries offer a workforce at ease with so many languages!

E How many hotels do you plan to open and how much will your company invest in each venue?
We plan to open some 35 hotels all over the region in the next years. Earlier this year we also bought another Ramada hotel in the Moroccan city of Fez. We are also currently negotiating seven more hotels, including two in Libya and another two in Iraq. The Beirut venue comes with a price tag of $20 million; each investment will however vary depending on the size of the project and its location.

E What prompted the decision of Al Taameer to branch out from its real estate activity into the field of hospitality? What added value does the hospitality segment bring to your real estate activity?
Al Taameer is a publicly listed Kuwaiti company that is owned by Al-Masaleh real estate (also a publicly listed company), which focuses on the development of commercial and residential buildings. As a real estate development company, Al-Masaleh decided it would diversify into the hospitality industry using Al Taameer. Al-Masaleh is very clever when it comes to identifying locations, negotiating acquisitions and construction, while Al Taamer excels in the field of property management.

E Do you believe the economic crisis and the resulting credit crunch will affect your new hotel business?
The possibility of an adverse economic context motivated our decision to enter the hospitality business by acquiring a four-star hotel chain, which will be best able to weather the crisis. If worse comes to worst, people will not stop from vacationing or doing business and a four-star hotel is thus perfectly well positioned to tap into various market segments. This unfavorable environment might provide us with excellent opportunities: good locations at reasonable prices.

E What type of customers does the new Ramada chain target?
Ramada is a reputed brand; it belongs to a hotel chain that boasts some 6,500 hotels worldwide. The chain’s particular positioning on both tourism and business hospitality levels will allow its various venues to operate efficiently all year round. We offer an excellent service at the right price and our hotels are ideally located.

E What type of structure have you adopted in terms of management? Will your company run all the Ramada hotels in the Middle East?
We will not necessarily own the 35 hotels we intend to open, which will be run based on a management contract or rental agreement. We might also resort to branding existent three-to-four-stars hotel. Such agreements will certainly cut our investment costs. However, we intend to buy two or three hotels in each country.

E What type of growth do you expect Al Taameer to achieve in the next few years?
We had full occupancy during the summer and the Eid holidays, which bodes well for us. We have also witnessed encouraging results with our first Moroccan venue and expect about a 20% growth every year for the overall company.

E How long before each project breaks even?
We are targeting a five to seven year bracket, depending on the project.

E Where do you believe lie the main areas of growth in the MENA region?
Egypt and Morocco show potential when it comes to tourist destinations, while Libya and Iraq as well as Jordan are excellent markets in terms of four-star business hotels. I believe our territories are all very attractive and well diversified.

E Some of these territories, like Libya and Iraq, are considered to be risky business environments…
Recent history has proven that risk might lurk in the most unusual places as witnessed in the recent economic crisis. We believe that markets such as Iraq and Libya, although risky, offer excellent opportunities, in spite of a possibly trickier initial launch.

E Who are Ramada’s direct competitors in the Middle East?
The first one that comes to mind is Accor, the French chain, which also features Ibis and Novotel hotels. The segment Ramada is currently targeting remains, however, relatively untapped in the Middle East.

E With what type of support did local governments provide you?
We were able to obtain funding from local banks in Lebanon; a tourism fund providing subsidized loans has been also made available by the central bank. In Morocco and Egypt, governments have been also offering tax breaks for tourism projects.

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Banking & Finance

Egypt country report & outlook: Executive summary

by Executive Staff
written by Executive Staff

Egypt is now in its second economic renaissance, which started in 2004. This follows a first renaissance that was shallow and short lived, lasting from 1992 to 1999, and based largely on external debt relief and macroeconomic stabilization policies. This time around, the reforming government is more bent on structural reforms that aim to unleash Egypt’s potential and to take advantage of its supporting regional environment. The reform has touched almost all aspects of Egypt’s economy, covering tax and tariff reforms, bank privatization and consolidation, the investment and business environment and the conduct of monetary policy.

The result has been an increase in investment confidence, both externally and internally. Between 2004 and 2007 investment increased from 18% to 23% and FDI doubled to more than $10 billion. Exports also increased, marked by a rise in gas and manufacturing exports that were in turn driven by efforts to exploit Egypt’s primary resources and its free trade and QIZ arrangements, besides its efforts at industrial modernization. Domestic demand was also aided by higher public and private consumption, the culmination of which is that GDP growth is hovering at around 7% if not more — and is expected to stay there in the foreseeable future. But the price of these developments has been a surge in inflation to rates abetted by higher commodity prices and exceeding 10% in early 2008. And although unemployment fell to less than 10%, there is a widespread feeling that the boom’s fruits could have been more equally shared, with poverty rates still at a stubborn 17%.
Perhaps the best performer has been the external sector. In addition to better exports and FDI performance, favorable tourism and Suez Canal receipts and labor remittances all contributed to healthy current account surpluses at 1% of GDP, and helped accumulate more than $30 billion in foreign reserves covering about seven months of imports in 2007. This naturally led to a better outlook for the exchange rate, whose managed level saw an appreciation of close to 10% between 2004 and 2007. And with both GDP growing and the BOP service account in decent surplus, external debt as a ratio of GDP and its service as a ratio of exports of goods and services improved to 29% and 6% respectively.

Positive stats
The financial sector also witnessed some major improvements aimed at developing both its market-based and bank-based institutions. Besides undertaking the privatization of Bank of Alexandria and initiating the privatization of Banque du Caire, the stock market has been rationalized and upgraded to international standards. The quantitative results of these improvements saw bank assets increase by a third to $168 billion and stock market capitalization to more than double as a ratio of GDP to 115% during 2004-2007. The conduct of monetary policy has also undergone a face lift with the introduction of an interbank market for foreign exchange and the preparation for an inflation targeting monetary framework. However, work still needs to be done on strengthening the transmission mechanism between policy rates and yields on financial instruments and bank rates, and on cleaning up the banking system whose NPL remain at 25%
Although the fiscal sector underwent major revenue side reforms — increasing both tax and non-tax yields by 80% to $22.6 billion between 2004 and 2007 — expenditure side reforms were lacking. This is because these reforms relate to the subsidy and transfer schemes to basic commodities and ailing public enterprises, which carry significant political and social implications. Their absence or delay thus aims at keeping a “human face” on the reform program and at not jeopardizing its public legitimacy. But the downside, of course, is that they have left the government with a deficit of 7% of GDP and a rising domestic public debt
The outlook for Egypt, an emerging market with a diversified economic base, looks good especially given the regional boom that does not look to be subsiding any time soon. Challenges remain, though. These relate to the ability to control inflation, to reduce budget deficits and to trickle down the gains from growth. That will not be easy, however, given the continuing increase in commodity prices, the importance of subsidies for maintaining social stability, and the fact that economic growth needs time to reduce poverty, let alone reduce income inequality. Add to these the potential for political instability arising from regional tension and presidential succession, and the challenges multiply.
The best answer to these challenges is not to suffer ‘reform fatigue’, but to continue with the economic reform agenda especially as it relates to financial policy, expenditure rationalization and industrial modernization. Growth and a better management of its process — if at a lower, more sustainable rate — will prove an antidote to these challenges.

See the full report at www.blom.com.lb

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Banking & Finance

Capitalism – The new world economy

by Executive Staff
written by Executive Staff

It is easy to be pessimistic. Especially when the president of the United States, the supposed beacon of prosperity in the world, concedes that “this sucker could go down.” The question becomes, how far down can we go? Around the world, analysts, thinkers and social commentators have predicted the end of the financial and economic environments as we know them… and they are probably right. The resulting financial landscape that will prevail will be inherently different than what we knew before this all started. The financial earthquake that began in the US real estate sector has inevitably resulted in tremors being felt throughout the world’s markets. These tremors come as a stark reminder that, unchecked, the greed that caused this crisis to occur has severe ramifications for the global economy.
In the minds of most analysts the current global financial crisis has erased any doubt that the world is on its way to several years of recessionary growth rates. What remains to be seen is the magnitude of how long and hard the fall will be. “The financial crisis is a major event that has had repercussions that have brought about a [global] recession,” said Fadi Osseiran, head of BLOMINVEST Bank. “The depth and length of this financial crisis will affect the shape of this recession and it is really premature to try to understand the full impact this will have.” Marwan Barakat, head of research at Bank Audi, stated that the IMF has recently adjusted that global growth estimates for 2008 down to 3.9% from a previous estimate of 5% and predicts a 3% growth rate for 2009, indicating the commencement of a global recessionary period.
Looking out the window in the Middle East. however, one can see that the sun is still shining. And like the annual spat of rain that tarnishes the windows of the Gulf’s high- rises, this storm will soon blow over — albeit leaving a few clouds in its wake. The wider Middle East in general has managed to weather the global economic downturn of the past year relatively well. Barakat explained that this is mostly due to vast amounts of liquidity available linked to petrodollar revenues, the diversification of investments, and the conservative nature of regional banking.
On the other hand, the culmination of the subprime mortgage saga seems to have had a humbling effect on initial statements by many who previously attested to the region’s relative immunity to the crisis. What has transpired in regional markets lately shows that the troubles battering major financial institutions in the US and EU have indeed affected the status of a number of financial institutions in the region. “The Gulf markets have been hit hard,” said Mounir Rached, vice-president of the Lebanese Economic Association and former senior economist at the IMF. At the time of publication, the markets of Dubai and Saudi Arabia had thus far taken the worst beating, down by about 40% each, and the MSCI of Arabian Markets Index is down by a third year-to- date. “Regional investors and funds in general were negatively affected by the global financial crisis,” added Ziad Shehadeh, instructor of Monetary Economics at LAU and head of the Credit Department at Arab Investment Bank.
All in all, however, in these times of global recession the economies of the region look to be better off than most as the effects of the global financial crisis continue to emerge.

Liqidity flowing from the desert
The region’s massive sovereign wealth funds (SWF) and wealthy investors stand high above the dry valleys of the US and Euro-zone markets like massive reservoirs ready to burst open and inundate western markets with a flood of much needed capital. The UAE alone is estimated to hold a massive $875 billion in its SWF, followed by Saudi Arabia (at some $330 billion) and Kuwait (approximately $213 billion). SWF investment strategy has also recently been focused on diverse investment aimed at increasing capacity and a substantial amount of this investment has already gone into buying up equity in western financial institutions. Last November, the Abu Dhabi Investment Authority (ADIA), the world’s largest SWF, bought 4.9% of Citigroup for $7.5 billion. Earlier this year Citi sold off a further 7.8% ($14.5 billion) to a group of investors that included Saudi Arabia’s Prince Al Waleed bin Talal and the Kuwait Investment Authority (KIA – Kuwait’s SWF). Merril Lynch also sold a special class of stock to KIA for a price tag of around $2 billon. Both Citi and Merril stocks have been heavily damaged in recent months with KIA losing $270 million on its Citi group investment. As Executive went to press, Citi’s market price had declined by more than 50% since the SWF investments.
Despite these losses, the region’s SWFs do not seem to be pulling out of western markets anytime soon. The nature of their investment strategy is regarded as long-term, and there is an expressed notion that regional governments and their SWFs are not in the business of bailing out the ailing western financial institutions that spawned the global financial crisis. “We are not responsible for saving a bank, an economy or anyone,’’ said Bader Al-Saad, managing director of the KIA in an interview with Al- Arabiya. “We are long-term investors and we have long term social and economic obligations to our country.’’

Shoring up the markets
The obligations that al-Saad was referring to have already been fulfilled to some extent, and not just in terms of monetary policy. The moves by regional governments to shore up confidence have also come at a sizeable cost. Although minuscule in relation to the infusions of developed nations, the UAE central bank has recently promised to inject a further $19 billion into its markets, bringing the total to $32.7 billion, with other regional SWFs such as ADIA, KIA, and the Qatar Investment Authority (QIA) following suit. More importantly, we are seeing assurances being made by regional governments and their respective SWFs to maintain the infrastructure and operations of financial institutions throughout the region. Mirroring the actions of many developed countries, the UAE has issued a federal guarantee of all savings and deposits in their markets, as well as guaranteeing inter- bank lending. QIA has also announced that it would contribute between 10% and 20% to the capital of local banks in order to boost their capacity to finance developmental projects. Saudi Arabia, the region’s largest economy, also made $40 billion available to its banks and cut interest rates. While these actions are indicative of a major issue in regional markets, it has been widely accepted that there is enough liquidity, and the will to inject it, to keep the Middle Eastern markets healthy and wealthy for some time to come. “I don’t think there is a [liquidity] problem. They have enough liquidity to step in when needed,” said Osseiran, “they have accumulated reserves for a while now as a result of oil revenues.”
With everything more or less taken care of on the home front, the issue of SWFs influence and standing in a global economy is now increasingly becoming the question, as opposed to a question on the minds of politicians and economists the world over. The idea of large chunks of the American and European economic and financial landscape being bought up by regional governments is in itself an idea that is politically problematic. Even al-Saad conceded that “disasters in the United States, Europe, and Asian nations do create interesting investment opportunities, especially in the real estate and financial industries.” It is not rocket science to assume that these regional governments could use their influence over western and specifically US financial institutions to leverage their own economic, political, and strategic interests on a global stage. “The West, broadly speaking, will have to come to the realization that the global economic power equation is shifting,” said Sven Behrendt, visiting scholar at the Carnegie Middle East Center.
In order to pacify those critical of the nature of SWF investment and ownership being used for political purposes, ADIA and the IMF established the International Working Group of Sovereign Wealth Funds (IWG) in May of this year. The group, composed of a wide range of SWFs, recently published their “Generally Accepted Principles and Practices” outlining their “Objectives and Purposes”. In short, this document touts the financial impetus for the actions of SWFs but stops short of saying that SWFs will not use their influence for political ends. “The IWG report focuses heavily on SWF internal governance issues and often prescribes measures that appear to be self- evident,” Behrendt said. “They do not address the fears that western economies have with regards to foreign government intervention in their economies.” Instead, the report focuses on increased transparency and corporate governance and states that “if investment decisions are subject to other than economic and financial considerations, these should be clearly set out in the investment policy and be publicly disclosed.” This is hardly the language of reassurance that developed countries were looking for.
As this new economic power paradigm begins to take shape, the question is: what will the global financial landscape look like once the dust has settled? With western economies in, or on the brink of recession, and larger growth patterns in emerging markets such as the Middle East and the BRIC (Brazil, Russia, India, China) economies, it is becoming increasingly evident that things will never be the same again. “One of the things happening now is a realignment of the world economy, making the US relatively less important,” said Riad al-Khouri, co- founder and principal of KryosAdvisors.
Nonetheless, the retrenchment of the traditional players, in terms of economic power, should be taken with a grain of salt. According to Behrendt, the estimated value of the world’s SWFs is around $1-1.5 trillion, including assets managed by central banks. Moreover, Morgan Stanley estimates that the total size of SWFs could reach $12 trillion by 2015, about $2 trillion dollars less than the GDP of the US in 2007. The sheer size of western financial institutions and the amount of real output they produce will ensure that the US and the Euro-zone will remain at the forefront of the world economy in the foreseeable future. “For the time being, the US will maintain its spot at the top [of the financial world] in general as there is no real viable alternative to the US market that can sustain the global economy,” Shehadeh said.

Back to oil
Being an oil-based regional economy has certainly helped the Middle East cope with the effects of the global economic downturn and the recent financial crisis. Now that the price of oil is on the decline many observers are drawing parallels between this decrease and a worsening economic situation in the region. Indeed, the effect of a decrease in the price of oil will have a direct impact on the revenues of the regional players. “The Gulf countries will be affected by oil prices, in terms of price and volume,” Rached said. “They are going to sell less at a lower price and will behave differently with less money from oil.” However, these decreases need to be put into perspective. “All the government budgets of the GCC countries were made according to the oil price of $60 last year,” Barakat pointed out.
With oil having reached levels of close to $150/barrel it is simple mathematics to deduce that surpluses are ever present in the coffers of the oil rich states in the Middle East. Even with these surpluses, oil is still seen as the premier conduit in which the global financial crisis seeps into the real economy of the region despite the fact that governments have been diversifying their wealth in order to reduce dependency on oil revenues. “It is still the case that the overwhelming importance of oil and gas in the region mean that higher revenues from hydrocarbon exports will cause a boom and lower prices and lower exports will create a problem,” al-Khouri said. “Gulf countries have diversified their economies but they are still dependent on oil,” added Osseiran.
In any case, this substantial decrease in prices is not expected to last forever and does have good effects for the global economy as a whole. OPEC nations have called for an emergency meeting that is to be held shortly, in which supply is expected to be cut. According to Deutsche Bank estimates, different countries in OPEC require different price levels in order to balance their budgets in a time of a global financial crisis. Iran and Venezuela both require oil prices of $95/barrel, whereas Saudi Arabia needs $55/barrel. “The price of oil will go down and probably oil exports will go down,” al-Khouri said, “but not by too much because there are still parts of the world that are growing and will pay higher prices for oil and/or import larger amounts.”

Lebanon
The conservative nature of the Lebanese banking sector, guided by the central bank’s Riad Salameh, has allowed it and Lebanon’s economy to sidestep many of the direct effects of the global financial crisis. Barakat explained that tight regulations and conservative investments have allowed Lebanon to avert the worst of the global financial crisis and maintain the financial infrastructure to deal with the situation. Regulations in Lebanon pertaining to the restrictions on structured products, leverage requirements, and a high rate of deposits are seen to have pre-empted widespread exposure to the global financial crisis. Moreover, the ownership model of banks in Lebanon has contributed to more conservative investment models. “Banks [in Lebanon] are owned partially or totally by their managers which means that usually they are not looking for short term profits,” Osseiran pointed out. “These owners have an intrinsic stake in the bank.”
Despite a global recession in the works, Lebanon is expected to see growth of around 6% in real GDP for 2008 and around 5% in 2009, according to IMF figures. Such growth rates in times of global recession are indicative of the unique situation in which Lebanon finds itself. Much of this growth can be attributed to the recent political settlement in Lebanon that has increased confidence across the board. “According to the signals we are getting, regional investors are looking at Lebanon more and more in this period because of the political settlement that we had this year,” Barakat exclaimed. “Now Lebanon is back on the radar screen.”
Despite the advantages that come with Lebanon’s unique situation, not all of the news is good. Lebanon is expected to see a decrease in exports across all sectors due to a decrease in demand from trading partners. “There is no doubt that our exports will be affected,” Rached stated. “Exports to Europe, whose share is about 30%, will decline.” However, since the relative scale of exports is not considerable, and accordingly the Lebanese economy can manipulate it with relative ease, this potential problem will be looked upon as rather secondary in nature. “Our share in the world export markets is so tiny, it won’t make any difference really,” Osseiran said. “The Lebanese are able to adjust their products according to markets and prices.”

Who is paying and with who’s money?
Since this crisis began to take shape, there have been unprecedented calls for global coordination by presidents and prime ministers alike. “No country — not even the biggest — can make it just on their own at a time like this,” stated British Prime Minister Gordon Brown on the back of an emergency EU meeting. “We are all in it together and we have to work to solve it together,” the PM concluded. Yet, despite these words of encouragement and the rallying of global markets subsequent to actions of governments, including regional ones, by and large it is the people of the world who have to pay the bill for the greed of investment bankers.
The majority of the bail-outs have come from taxpayers’ pockets and there have been reports of money being printed and freed up by central banks and the Federal Reserve. As Suheil Kawar, senior lecturer at the American University of Beirut, pointed out, “The Bank of England has made facilities worth £50 billion pounds [$79 billion] to individual banks and the Federal Reserve is just printing money now.” According to Rached, “We have a contraction. Money is not growing in the US and this is a situation that is more important than inflation.” Add lower interest rates to this equation and the global economy is left with a situation that applies a great deal of inflationary pressure on the already prevalent problem of increasing global inflation. The UK, for instance, has recently reported a 5.2% increase in its consumer price index for the month of September, the highest level recorded since March 1992. The US has also registered a similar increase of 5.4% for the month of August, even before the major bailouts began to occur. Moreover, with all the mergers, takeovers and acquisitions taking place, issues relating to monopolies have been tossed aside as an unimportant consideration in times of crisis. “Issues related to government monopolies are not a priority now. The major concern is to provide stability,” Shehadeh explained. “The mergers we are likely to see are going to be cross-border and global in nature.”
All of these factors are contributing to the creation of a global financial environment with fewer players and less purchasing power to go around. How the world’s population ended up paying for the mistakes of investment bankers on Wall Street is a matter that will be discussed for decades to come; especially the next time a financial instrument like a toxic mortgage back security comes along and breaks the back of the world’s financial institutions. For the Middle East the next few years will be essential in proving to itself and the world that it can weather a global financial crisis, the resulting recession, and play a more relevant role in the global economy. “The challenge will be to continue to handle things better because we are just at the beginning of the economic crisis,” Osseiran said. “[Regional] governments will have to adjust themselves to the new era of lower oil prices, how much they are going to spend and how they can sustain budget deficits.”
That challenge, if overcome, will have a galvanizing effect on the region’s economy and set the stage for a Middle East that may start to set the rules of the financial world rather than follow them.

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