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‘s cash and courage in these times of crisis

by Imad Ghandour
written by Imad Ghandour

The repercussions of the catastrophic events witnessed during the past few weeks will be felt throughout the globe and in every corner of the financial system. Private equity will be no exception. Even in the Middle East, many miles and economies away from the epicenter in New York, the first nine-month data show a dramatic drop in PE activity, and we should expect further deterioration as the aftershocks of the collapse are felt in the last quarter of 2008 and well into 2009.

Slowing to a halt?
The private equity industry elsewhere has begun feeling the slowdown as early as late 2007. Since the beginning of the year, deal activity dropped significantly, and private equity houses are barely closing deals these days as bank lending tightened to a halt. According to Dealogic, global deal volumes dropped by 74% to $180 billion, a four-year low. In the US, deals worth $62 billion were done in the first half compared to more than $400 billion in the similar period last year. Despite the fact that PE funds were flush with cash (they have more than $400 billion of unused funds), banks were simply not lending. PE has one healthy leg, but the other leg was severely impaired.
Fund raising was not initially affected, but was eventually caught in the storm as the crisis escalated. Although private equity funds raised close to $324 billion in the first half of the year, fund raising agents predict next year to be slow or dead. With investors under stress to revaluate their stock portfolios, private equity is taking a temporary backseat while investors shift their attention and money elsewhere. Furthermore, investors will be asking themselves: why invest again when PE firms still have hundreds of billions of unused cash?
In the region, and despite the global gloom, the fundamentals that supported the growth of private equity are still as valid today as they were two years ago. The leading private equity houses like Gulf Capital, Abraaj, and HSBC have enough unused cash from the recently raised funds to finance future acquisitions for years to come. It is estimated that around 40-50% of the funds under management (totaling $13 billion by end of 2007) are still unused.

The money marches on
Local PE funds have been doing deals with limited bank financing and the tightening of bank lending will not change their business model. They have relied, and will continue to do so, on bottom line growth to substitute for smart financial engineering. With the local economies and government spending still on a growth trajectory, corporate profits will continue to grow.
Deal flow is expected to continue if not improve. Access to debt and equity markets will be limited as stock markets plummet and banks tighten their lending criteria. Consequently, families will find private equity as one the few readily available sources of capital open for business in this conservative environment. Investment companies around the GCC will be re-organizing their portfolio after being hit by losses in some of their investments, and again, after tightening bank lending. Governments tendering public assets will find that competition will diminish significantly as Western firms face trouble at home and local firms hesitate in an uncertain environment.
Valuations will see a haircut from their 2007 levels as investors today seek better returns with bargain deals available everywhere. Even if the stock market recovers to ‘normal’ levels as it is driven up by retail investors, valuations of PE deals will be influenced more by the recovery of the global stock markets rather than by the local ones. Investors willing to write $50 or $500 million checks have the globe as their oyster, and will invest in the best opportunity available whether it is in a Saudi private company or a listed company in NASDAQ.
History has shown that private equity investing in times of crisis yield the best returns. PE funds that invested in the 2001-2003 period made hefty returns as they exited in the peak years of 2006 and 2007.
I have been a strong proponent of private equity growth in the region and I have echoed my opinion and optimistic projections repeatedly on the pages of Executive, throughout the media and in conference circles. My outlook has not fundamentally changed.
As Warren Buffet has professed earlier: cash and courage in the time of a crisis are priceless.

Imad Ghandour is the chairman of the Information & Statistics Committee — Gulf Venture Capital Association

 

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Banking & Finance

IPO Watch – Easy does it

by Executive Staff
written by Executive Staff

The GCC is set to experience delays in initial public offerings especially during the last quarter of 2008 as governments have taken measures to stabilize market conditions around the region. Arab countries were following the leads of governments in developed economies, which had their hands full in trying to rein in financial markets that have spiraled out of control due to a global financial market crisis that started with the meltdown in US subprime mortgages.

With nervousness sweeping the financial planet, GCC-based analysts say that local companies have adopted a strategy of ‘wait and see’ for now, bringing about the delay of several IPOs scheduled to be launched in October and late 2008.
According to figures from Ernst & Young, the number of successful IPOs in the region had reached 36 with a value of $12.4 billion, compared with 63 worth $14.3 billion in 2007. Although market experts agree that there will be many delayed IPOs in Q4, many say that these delays will be short-lived and activities in the IPO markets is expected to pick up steam again towards the end of 2008.
The precise extent of the slowdown is unpredictable. Figures circulated in Saudi newspapers boldly put the number of estimated IPO postponements on the Saudi Stock Exchange at 80, citing unnamed stock market experts. Sources were quoted by Saudi media as saying that state- owned entities such as Saudi Arabian Airlines and the Saudi Railways Organization could postpone IPOs, which equity watchers had tentatively expected for 2009 or 2010.
The trail of IPO delays has been building in 2008 already prior to the global financial tempest in September/October. Companies citing “volatile markets” as the main reason behind cancellation or postponement in their IPOs included such well-established firms as Abu Dhabi-based Al Qudra Holding and Dubai-based Emirates Post in August, and Future Pipe Industries, which shelved its flotation on the Dubai International Financial Exchange at the end of April.
Within the second half of October, consumer goods company Trarem Afrique withdrew its IPO in Morocco and UAE investment firm Gulf Capital announced it will delay until 2010 looking at its IPO which it had planned for 2009.
Gulf Capital linked its postponement explicitly to the latest surge in market turbulences. Similarly, the Qatari unit of Vodafone Group delayed its IPO that was scheduled for last month after the capital markets regulator asked it to delay the launch due to market conditions.
Other Saudi companies named as potential flotation delayers are Al-Tayyar Travel, which had announced listing plans in May of this year, and Zamil Group Holding Company, which is on record in the Zawya IPO Monitor for a general intention to go public in 2009. Saudi IPO plans account for about 40% of Zawya’s IPO pipeline for 2008/09, which holds 167 entries.
However, despite all the meltdowns, financial crisis, and turbulent markets, several companies with IPO plans in the pipeline will likely proceed as scheduled, experts say.
One company that stated its determination to go through with its IPO is the Mazaya Qatar Real Estate Development Company, a unit of Kuwait’s Al-Mazaya Holding. Company officials said the firm will go ahead with its IPO in November despite turmoil in financial markets. Al-Mazaya seeks to raise $137 million by offering 50 million shares priced at QAR10 ($2.75). The real estate investment firm will list its shares on the Doha Securities Market and plans to raise its capital to QAR1 billion ($275 million).
The biggest catch in November, by information available at time of this writing, will be Bahraini real estate firm Naseej whose subscription period is scheduled for Nov 18 thru Dec 4. The subscription target is $265 million, representing 40% of the startup company’s paid-in capital.
Then there are IPOs scheduled for October/November by Jordan’s Alentkaeya for Investment and Real Estate Development and Al Ameer for Development and Multiprojects, a conglomerate planning to expand operations. Between them, the two firms have $12.6 million in equity to offer.
The Riyadh-based Al-Ittefaq Steel Products Co., one of Saudi Arabia’s three largest steel producers, said it plans to offer 30% stake in an IPO in the fourth quarter of 2008.
Experts agree that the global financial crisis will put a minor dent in the region’s market capitalization growth for 2008. The insurance and financial sectors will be hit the hardest but not in the same way as their counterparts in the West. The damage to the local financial sector will be pale in comparison.
Analysts agree that the current turbulence in the local exchanges has a short shelf life and doubt that investors will lose their investment appetite for the region. Stocks in the MENA region recouped some of their losses in the second week of October while Q3 profits results show a strong trend. Furthermore, governments of the Gulf Cooperation Council have taken several measures to shore up the banking sector, thus minimizing any serious damage.

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Banking & Finance

Better to trust astrologist than economists with Nobel Prizes

by Zafiris Tzannatos
written by Zafiris Tzannatos

As recently as one month ago, some industrialized countries were still hesitating to admit that their economies were heading for a recession. Today the turmoil in financial markets may create a depression at a global scale. After the last crisis resembling today’s, the Wall Street Crash of 1929 that led to the Great Depression, the Dow Jones achieved its pre-1929 level only in 1954.

To make any forecast at this point in time would make astrology look respectable. But looking at the Nobel Prizes this year and in 1997, when a similar crisis emerged, provides some lessons for the future.
The 2008 Nobel Prize in economics was awarded to Paul Krugman this October just after the onset of the financial crisis. Krugman is an American economist who has been a critic of Long-Term Capital Management (LTCM), a hedge fund discussed below.
The 1997 prize was awarded to Myron Scholes. It came after many years of strong performance of financial markets but just before the financial crises in East Asia, Russia and Brazil. Scholes (together with Fisher Black who died in 1995 and could not therefore co-share the Nobel) came up with “a new method to determine the value of derivatives,” a framework for valuing options. The so called ‘Black-Scholes’ model became the global standard in financial markets. Trillions of dollars of options trades have been executed each year using this model.
Scholes and Robert Merton, another distinguished financial economist with whom he co-shared the Nobel Prize, were members of the board of the aforementioned LTCM. The fund was initially highly successful with annualized returns of over 40%. But following the application of the model, its equity ended up to be only 4% of its borrowed assets by the time of the 1997 financial crisis. It failed spectacularly after losing nearly $5 billion in less than four months. The Federal Reserve was so concerned about the potential impact of LTCM’s failure (of “only $5 billion”) on the financial system that it arranged for more than one dozen banks and firms to provide sufficient liquidity for the banking system to survive.
The hedge fund had more troubles. In 2005 its partners were implicated for avoiding paying taxes on profits from company investments. In the relevant court case, it was argued that the partners were not eligible for tax exemptions resulting from the millions of accounting losses their company generated but had no economic substance. Interestingly, the US taxman and courts decided that there was no economic basis in clever accounting practices, but politicians did not see much ground for introducing regulations in the financial markets.
Notwithstanding its analytical eloquence, today some would say that the Black-Scholes model is using “the wrong numbers in the wrong formulae to get the right prices.” And on the day of his award, Krugman argued that the original $700 billion rescue plan of the US administration to purchase toxic mortgage-backed securities was based “on a theory that … actually, it never was clear what the theory was.”
While the toxicity of fictitious assets on the real economy is known, what is also historically known is that a more promising solution to crises like the current one is for governments to provide financial institutions with more capital in return for a share of ownership. The question whether this “equity injection” is a return to (partial) nationalization and therefore socialism is an ideological one.
The British government was the first to adopt this injection approach and, following it, so did the other major economies of Europe and the EU at a more general level. Europe’s rescue plans already amount to more than $2.2 trillion (compared to $700 billion in the US). In our own region, while the UAE pledged $19 billion for its banks, Qatar said it would take stakes of up to 20% in banks, and Saudi Arabia is coming along with similar measures.
After a delay, the US administration reversed its course and, like the Europeans, will offer banks capital infusion and buy equity stakes rather than bad mortgage securities. What explains the original US choice? In Krugman’s own words “the initial response was distorted by ideology … a philosophy of government that can be summed up as ‘private good, public bad’.”
Still, nobody (except perhaps the astrologist) knows whether the European and GCC rescue policies will work. The LTCM’s loss (of only $5 billion) in 1997 is dwarfed by the write-downs taken today. The potential size of the current ‘black hole’ if measured by privately traded derivatives contracts — which played a critical role in the unfolding financial crisis by encouraging recklessness — ballooned to $62 trillion at the end of 2007 from practically nothing a decade ago. This figure dwarfs the money set aside by the Europeans and Americans, not matter how correct their policies might be.
If there is a bright spot amidst the current economic chaos, it is that future Nobel Prizes in economics may not need to be antidotes about correcting practices adopted on the basis of a previous award.

PROFESSOR ZAFIRIS TZANNATOS is a former advisor to the World Bank and chair of the economics department at the American University of Beirut.

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By Invitation

Putting the ‘I‘ and ‘T‘ of the region‘s ICT development

by Hana Habayeb
written by Hana Habayeb

Over the past several years, countries in the Middle East and North Africa (MENA) region have come a long way towards developing their telecommunications sectors. The region’s telecommunications players have seen unprecedented growth, which had scarcely been predicted by analysts even as late as 2002. While the region has seen significant success in improving access to and use of communications technologies, there remain difficulties in encouraging the use of communication tools for the purposes of knowledge exchange. Use of the Internet remains limited, with limited development and uptake of locally-relevant information technology applications.

The region has made great strides in developing ICT infrastructure. Driven by the forward-looking policies of regulatory authorities and policy makers, broadband infrastructure is widely available in most countries and most mobile licensees provide coverage to over 95% of their countries’ populations. Liberalization of telecommunications sectors has driven the success of regional players, allowing their expansion to neighboring countries. The market capitalizations of the top three regional players range between $18 and $34 billion. The ensuing competition has promoted the adoption of communications technologies with mobile penetration exceeding 100% in a number of countries.
Within the broader framework of ICT development, and paying particular attention to information technology, the region’s policy-makers have tried to address concerns of affordability and unequal access to the Internet. Projects such as PC for every home initiatives, IT clubhouses, and Internet community centers have strived to make the Internet affordable to large portions of the population. They have been supported by the recent wave of e- applications development — from e-government to e-learning initiatives — there is not a country in the MENA region that is not implementing such initiatives.
In the area of education, a number of public private partnerships and capability building projects have been developed to promote computer skills, curriculum development, and to improve children’s frequency of Internet access. In the realm of higher education the GCC region, lead by Qatar and the UAE, has begun to host a number of International universities. Saudi Arabia is launching its own King Abdullah University for Science and Technology with a multi-billion dollar endowment and strengths in graduate-level scientific research.
However, there remains a concerning communications information gap. While regulations and policies have seen the launch of a number of initiatives to promote ICT development and Internet adoption, the region’s appetite for Internet has not yet matched that for basic communications services.
A number of reasons explain the gap between interest in communications technologies and their use for knowledge exchange and information technology development. While affordability is often posited as an explanation, there are deeper reasons for the slow development of information societies in the region that policy makers need to address.
While countries in the region have made significant progress in the areas of training and curriculum development, a serious skills gap between what the region’s educational institutions are providing and what industry demands remains. In a survey of Arab executives, 30% sited the lack of qualified personnel as the most important challenge to successful innovation. The knowledge gap is furthered by the limited investment in research and development: by investing 0.2% of GDP in research, development and innovation, the Arab region falls far behind the world average of 1.7%.
The lack of Arabic content is another hindrance to the development of information societies in the region. Common to over 360 million people, the language has seen few successful efforts to develop content for this market. Major examples of Arabic online content and portals exist (including news sites and portals such as Jeeran.com, Maktoob.com, and Nassej.com), but they have a very small impact in terms of the amount of content an active online community requires. Arabic content is currently estimated at 0.5% of global online content. The Internet is its content; without sufficiently attractive, engaging, and informative Arabic content and applications, it will be difficult to effectively promote its use and adoption.
The lack of applications and content is partially driven by a regional investment bias towards traditional investment. For instance, of the private equity and venture capital funds in the region, those that focus on real estate have a combined size of more than $2.3 billion. Those that focus on technology, communications, and media are of a combined size of a little more than $1.6 billion. Within the ICT sector, investment in IT is much less popular than investment in telecommunications, as evident by the tremendous appetite at the most recent IPOs of telecommunications companies.
Given its experience, achievements, and remaining challenges, the MENA region must now carefully consider its trajectory. Strategies to improve access to communications services have been largely successful; however, the region must reexamine its efforts to include the I and T in ICT.
Success does not stop at connecting communities and schools to the Internet — this is a simple matter of infrastructure. Success comes in ensuring that this infrastructure is leveraged as a means to access and create greater knowledge and information. Success is not simply in the introduction of new e-curricula and training programs — success is in aligning educational institutions supply with industry’s demands, it is in the deepening of students’ intellectual curiosities. Success is not only in governments and NGOs pushing ICT applications — success is in the bottom-up, organic development of these applications on a larger scale.
A number of efforts can be undertaken to support a shift towards a more sustainable information society. To encourage information content and applications development on a large scale, we must start looking to the region’s small and medium enterprises, and support them in the areas of finance, administration and innovation.
Much financing in the region is skewed towards more traditional and ‘stable’ investments such as real estate. With that in mind, the region should encourage ICT innovation funding. It should consider providing soft loans for startups, creating innovation funds and competitions that encourage SMEs to produce, rather than governments to provide applications. The UAE has started down this path by launching an ICT Development Fund to provide grants, scholarships and advisory services to support ICT innovation.
The region must also look towards reducing and eliminating red tape barriers to innovation. Regionally, starting a business requires an average of 32 days; in Australia, it requires two. The region must take immediate action to modernize legislation and streamline registration processes in order to reduce this startup time and encourage entrepreneurs to continue innovating.
Public-private partnerships are an excellent medium by which governments have supported local SMEs. Jordan’s Education Initiative is a success-story of such an initiative. Bringing together over 35 international and local partners to develop infrastructure and curricula, Jordan encouraged the development of world-class applications, the injection of capital, the transfer of technology, and the sharing of ideas.
As a result of considered government involvement and regulatory perseverance, the region has come a very long way in a remarkably short period of time. While these actions have spurred the growth of communications technology, information technology is developing at a slower pace. The region’s next moves must further the goal of leaping from communications to information. Evidenced by its success on the communications front, the region has tremendous potential and there is no telling what it can achieve once it has attained the goal of becoming a sustainable information society.

Hana Habayeb is an associate at Booz & Company.

 

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By Invitation

Women in politics and the media double standard

by Zeina Loutfi & Ramsay G. Najjar
written by Zeina Loutfi & Ramsay G. Najjar

From Hilary Clinton to the Sarah Palin media frenzy, the topic of “women in politics” has never been hotter. It has even gone way beyond being the subject du jour to being a staple of the entertainment world, dominating political parody shows across the spectrum. At the other end of the globe, with Lebanese parliamentary elections looming ahead and social and political reform being lauded across the region, this is also a campaignable subject in the Arab world, with a host of regional conferences and local talk shows dedicated to it.
The topic has never been more powerfully thrust into the limelight, with the media playing a significant role in bringing it to the forefront, but not always favorably. Although the intended message is to seemingly increase awareness and highlight how women are now, more than ever, poised to play an increasingly important role in the world of politics, the actual discourse and outcome are alas only serving to pull women back.
To start with, coining the topic as “women in politics” is actually a testament to the persistent problem. The proliferation of media segments, articles, and conferences in both the Middle East and the West tackling the subject of “women in politics” can only imply that that there is a need to discuss and debate such an anomaly — almost as if we are debating something as bizarre as “man in outer space.”
This indicates that the core challenge lies in the positioning of the issue itself. This cannot be truer when it comes to women and their never-ending quest to reclaim their rights. For example, for as long as this topic has been debated, the fight has always been about equality with men. Does this mean that men are perfect and complete, and that women are only slowly striving to reach that perfection? Shouldn’t it rather be that a woman should be demanding the rights that are equal to her role in society? Women represent 50% of society and therefore should claim the rights that are commensurate with their role and position. The real positioning therefore should be a struggle for women to be equal to themselves and their potential, rather than wasting energy on fighting with men.
Moving from positioning the issue to communicating it, one needs to look at how the media has been covering the women candidates in the run up to the US elections. Analyses point to the media attacking female candidates based on their gender, focusing more on personal criticism and putting them down more for their appearance, family life or other personal matters. Examples abound from criticizing Sarah Palin that by running for Vice President she is either potentially jeopardizing her children’s upbringing or the position itself, as she cannot both raise five children and run the country, or mocking her as a former beauty queen who wears red lipstick (too feminine) while at the same time she is being made fun of for hunting moose. To belie any possible media partisanship, let’s not forget Hilary Clinton being derided as too cold or tough, whereas a man may never be described this way for the same attitude or actions. All of this only points to the media’s role in promoting the perception that expectations of women politicians are different than what is expected of male politicians. But aren’t they supposed to be equal?
Regarding the role of media in building the political image of women in our part of the world, if what is said is true about the media being a mirror of society, one would really think that all women care about is fashion, makeup, tabloids, video clips, and cooking. Men also have their fair share of publications dedicated to their horses, watches, and sports, yet these are easily balanced if not outnumbered by the many that focus on “the real issues.”
At the same time, regional coverage of female candidates sometimes borders on marveling at an unnatural phenomenon, while seeming to uphold the conception that there is a “woman way to govern.” Whether this is characterized by empathy, and an emotional, more peaceful or even motherly approach, this only reinforces the misperception that women politicians are a different “breed,” which in fact only sets the cause back.
Many would argue that there is only so much the Arab media can do, in the face of the social and religious barriers that women politicians face, overcoming one obstacle only to stumble across another. From female suffrage to the right to stand for election, women now face the challenge of social norms and purposeful religious misinterpretations that hinder their being elected to office.
Despite this, what the media can do is highlight that there is only one way to govern regardless of gender, and that is to agree on one system of values and then hold candidates accountable to that. The real role that media should play is to increase political maturity by highlighting candidates’ political programs and allowing the public to elect the winning politicians and hold them accountable for their performance and certainly not their gender.
In effect, positioning the cause properly and communicating the right messages that can raise awareness and shift social norms will go a long way, yet there is only one factor that can overhaul this cause and catalyze this endless evolutionary journey towards claiming women’s confiscated rights, and that is that women finally shake off their inaction, stop waiting for others’ conscience to kick in and actually make their voices heard, loud and clear.

Zeina Loutfi & Ramsay G. Najjar, S2C

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