Levant

On solid oil

by Executive Staff
written by Executive Staff

In spite of lower oil prices and the run-up to a possible global recession, many experts believe still believe lower oil prices are not sustainable on the long run. This bodes well for countries such as Jordan, which are thus encouraged to tap into relatively new sources of energy like oil shale.  

In 1947 oil exploration started in Jordan, a country deemed difficult to explore from a geological perspective. “We’ve made two small discoveries in the 80s in the Azraq region, an area which currently produces about 30 barrels per day. We also discovered gas along the Iraqi border which has allowed us to produce about 21 million cubic feet per day,” said Dr Maher Hijazi, director general of the Natural Resources Authority.

In 2004, as oil prices rallied, oil industry players started eyeing Jordan with acute interest. Currently companies such as the SRL from Ireland, Indian Universal Energy Corporation, Global Energy and American Sonoran Energy are investigating Jordanian market potential.

One energy source attracting international players is oil shale. “Jordan is blessed with huge oil shale reserves which cover about two thirds of the country. Oil shale reserves located in the south and the center of the country are usually found close to the surface at some 30 to 40 meters depth, while in the rest of the country, they lie at a depth of 100 meters,” Hijazi said. Reserves found close to the surface are easily accessible while deposits deep in the earth’s mantle are more difficult to mine.

Black gold by the ton

“The amounts of oil shale found close to the surface are very significant, with conservative estimates putting them at more than 40 billion tons,” the director said. He explained that over the past three years Jordan has tried to draw industry interest, while industry players are equally considering oil shale or tar sands as a viable option due to soaring oil prices. 

“We have tried to draw companies that possess solid experience in oil shale extraction. One has to keep in mind, however, that there are no commercial projects for oil shale but only small experimental projects, which account for a production of 15,000 barrels per day,” Hijazi said.

Brazil’s Petrobras, which produces about 3,700 barrels per day, boast oil shale extraction experience. Estonian, Russian and Canadian companies have also developed technologies that can be adapted to oil shale extraction. “These companies have all come to Jordan in the past two years,” Hijazi pointed out.

The director added that memoranda of understandings have been signed with several companies and the Jordanian government, with concession negotiations scheduled in the next few years.

Petrobras recently announced it joined forces with Total, signing an MOU to produce crude from Jordanian oil shale, while Estonian ST Energia has completed a feasibility study on production of oil shale in Jordan, estimating the cost for a plant at $8.5 billion and production levels at 36,000 barrels per day.

The concession agreement to be negotiated by the Jordanian government with ST Energia covers Atarat Umm el-Ghudran, an area 120km south of Amman believed to have some 50,000 barrels per day in production potential. Other feasibility studies underway include one by the Jordan Energy Mining limited (JEML), a British company relying on Canadian technology, another by a Saudi company using Russian technology and Oswal Chemicals, an Indian company also using Russian technology. JEML will be submitting its study early next year while Petrobras’ will be finished in three years.

The current MOUs primarily focus on surface retorting — hydrocarbon recovery from oil shale located on the surface. “Deep oil shale exploration is another matter completely, as only one technology is available, developed by Shell in Colorado, that allows to exploit reserves found deep in the earth crust,” Hijazi explained.

“We have been in negotiation with Shell for more than two years now and hopefully will finalize an agreement by early next year. The Shell project has, however, a very long term horizon and is highly risky as it requires billions in capital,” he said.

Hijazi pointed out the possibility for the Estonian company to use technology the company has developed to produce energy from oil shale without refining it. The company is currently doing a feasibility study for building a power plant capable of producing 600 to 900 MGW, which would cover half the needs of Jordan in electricity. The project would be completed in seven years and would cost $1.5-2 billion.

The main problem with oil shale extraction is it is usually site specific, with each reserve showing different geological characteristics. Technology thus needs to be adapted to each site. One main advantage Jordan has, though, is the land where oil shale can be found is public, which facilitates the process of exploration and granting concessions. “The Shell long term project, if successful, would transform Jordan into an oil exporting country. Jordan is today one of the top five countries boasting oil shale reserves,” claimed Hijazi.

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Levant

Mobile craze

by Executive Staff
written by Executive Staff

Lebanon’s first mobile phone auction took place at the Movenpick Hotel on October 3, although it wasn’t the auction Lebanese have been waiting for.

In a scene more evocative of recent auctions for license plates in the Gulf, more than 100 deep pocketed individuals and their proxies paid $200 for the opportunity to bid on 33 ‘platinum’ MTC Touch phone numbers.

The crowd was mostly male and Lebanese, with a sprinkling of Emiratis, Qataris and Kuwaitis. They smoked cigars and munched on free sushi during the auction registration. After the national anthem signaled the auction’s start, the auctioneer announced the first “beautiful” phone number and bidding kicked off to whistles and applause as young women in taut black dresses carried card board signs announcing the number offered.

The highest bid went to an anonymous buyer, who paid $450,000 for the mobile number 70.707070.

Many buyers declined to identify themselves, or their clients, and some came for personal reasons. A buyer named Eli paid $80,000 for the number 70.696969. As he wrote a check for the $20,000 deposit, he said it was a number that was “special” to him — and supposedly not for the nefarious reasons the number brings to mind. “It’s like a work of art,” he said. “It’s unique. It identifies you forever, like a license plate or a domain name.”

Numbered investment

Other bidders bought the numbers as an investment. “It’s like the real estate,” said one bidder who asked to remain anonymous.

“Somebody might have corporate reasons — like tele-shopping,” said one representative of a telecommunications company, who also declined to give his name. “You can sell the number to a company, and then they put it on TV or billboards. It’s easy to remember; it has commercial value. “

Businessman Abdul Rahman Bandakji purchased 70.666666 for $225,000, and said he will not have to advertise to find potential buyers.

“They will come to me directly,” he said. “They will try to call this number and then they will know who the owner is.”

Fabio Al Khoury stood nearby and watched as buyers paid their deposit and received their receipts. He said he paid $200 to attend as a spectator, not to buy a number. But he knew plenty of wealthy Lebanese who would shell out hundreds of thousands of dollars for a phone number because it’s a status symbol.

“Some people, they got the money and want to show off,” he said.

Gilbert Najjar, head of the Ministry of Telecommunication’s Owner Supervisory Board, said he did not feel odd about the government pandering to peoples’ vanity.

“If they’re willing to put money into it, we’re willing to help the whole community through your vanity,” he said.

By evening’s end, the auction had raised approximately $2.5 million, Telecommunications Minister Jebran Bassil said. According to MTC Touch, if the numbers had been sold outright, they would have gone for $550 dollars apiece, and netted a total of $18,000 — but that system had become corrupt. A secondary black market developed around ‘platinum’ numbers involving pay-offs to employees at the telecom companies and ministry officials. Bassil said the goal of the auction was to squash that black market and make the telecom sector more transparent.

“We can say, now it’s a clean system,” Bassil said. “It’s a cleaner environment for the cellular, for the telecom and this is a first step; we will do a lot more in the future.”

Ministry officials say it is also a first step toward installing faith in the transparency of the much bigger auction that is expected to be held in the coming months for Lebanon’s two mobile network licenses. But for now, Bassil said the $2.5 million raised from the ‘platinum’ number auction will be used to improve the mobile network. He said he hopes Alfa will hold a similar auction in the coming months.

MTC touch auction results:

  • 70.707070: $450,000
  • 70.777777: $400,000
  • 70.666666: $225,000
  • 70.888888: $170,000
  • 70.666999: $40,000
  • 70.666333: $35,000
  • 70.666600: $20,000
  • 70.711117: $16,000
  • 70.688886: $9,000
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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

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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