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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Comment

Georgia on my mind

by Norbert Schiller
written by Norbert Schiller

Shortly after the collapse of the Soviet Union I joined a small group of Cairo-based journalists on a tour of the former Soviet republics of Azerbaijan, Armenia and Georgia. When we arrived in the Georgian capital of Tbilisi, one of the first things we wanted to do was interview the newly elected President, Eduard Shevardnadze. Shevardnadze had held numerous political posts during Soviet times, the last being minister of foreign affairs under the leadership of Mikhail Gorbachev.

Our initial queries proved fruitless until someone at the Ministry of Information suggested we contact a particular young member of parliament who was supposedly very close to Shevardnadze. After agreeing to meet us, the young MP said that he would try his best and see what he could do to arrange an interview. With nothing else to do but wait for an answer from the president, we sat in the MP’s office while he gave us a little background into his own personal life. He said that he had received a graduate fellowship from the US State Department and during his time in America he got a masters of law degree from Columbia University in New York. He also mentioned that he was married to a Dutch woman whom he met while attending a course on human right in France in 1993.

As the small talk with the MP continued, one of my colleagues, a Dutch journalist, turned to me and asked if I would be interested in illustrating a story about the MP and his wife for a Dutch magazine. “The story of a young woman from Holland falling in love and marrying a Georgian MP would be interesting for our readers,” he said.

After we were assured an audience with Shevardnadze the following day, our group decided to leave and spend the rest of the day site seeing around Tbilisi. My Dutch colleague and I stayed behind with the young MP and he proceeded to show us around parliament and then took us over to his home to meet his wife and young son. She in turn took us out (since the focus of the story was on her) and showed us where she worked as a volunteer with the Red Cross. Later that evening we returned to their home and enjoyed drinks, Georgian and Dutch folk songs and a bite to eat. The whole time I photographed their every move, trying to get a good portrait of the family so Dutch readers could get a feel for how one of their compatriots was living her life away from her homeland in a newly independent country.

Back in Cairo I developed films and put together a nice series of photos that were eventually published in the Dutch monthly magazine along with my colleague’s story. After that, I didn’t give the Georgian-Dutch couple much thought until recently.

About six months ago, I was going through a drawer stuffed full of papers and I noticed an envelope full of large photographic prints. I emptied the contents and found numerous pictures I had made of the Georgian MP and his family along with a copy of the article that was published. At the time I must have indented to send the envelope to them, but never got around to it. All of a sudden I felt a bit guilty and began thinking whether I should go ahead and send it now, 13 years later. After a moment’s pause, I thought again, and decided against it because who knows whether they were still living in the same place or for that matter if they were still married. Not wanting to deal with it, I put everything back in the envelope and stuffed it back into the drawer.

A few weeks ago, at the height of the Russian-Georgian crisis, I turned on CNN at the top of the hour to watch the news headlines and saw footage showing the Georgian president on a visit to the town of Gori, just south of the breakaway region of South Ossetia. The president was seen close up answering questions to reporters both in Georgian and English when suddenly a Russian plane passed overhead and the president said, “Let’s leave, let’s move away.” Then there was a lot of commotion as the president, his bodyguards and the media accompanying him started running for cover and jumping into vehicles. After the video clip ended and the CNN anchor switched gears to another story elsewhere, I sat back, stared at the ceiling and tried to recall where I had seen the Georgian president’s face before. It was not like I had been following events in Georgia very closely so he was not a television acquaintance. There was something more personal about it.

I got up and went over to the drawer stuffed full of papers, pulled out the envelope once again and stared at the photographs of the young Georgian MP I took 13 years before and tried to make the connection. Then I went my computer, typed in his name on Google, and read his biography. It mentioned his masters from Colombia Law School and, more importantly, his marriage to wife Sandra E. Roelofs, a Dutch citizen.

Bingo! I was staring at none other than Georgian President Mikheil Saakashvili, the former MP who I once had the privilege of spending a day with. Maybe now I should think seriously about sending those photographs with the article so he can at least remember back to happier times when he was working in the shadows of Shevardnadze, rather than ducking for cover across television screens at the top of the hour.

Norbert schiller is a Dubai-based photo-journalist and writer

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Feature

Heating wars

by Peter Grimsditch
written by Peter Grimsditch

Having lost the cold war in a spending battle that almost bankrupted Moscow, the Russians seem determined to come out on top in the heating war. This July, energy companies from Turkey, Bulgaria, Romania, Hungary and Austria agreed to build the Nabucco gas pipeline, designed to funnel non-Russian energy into Europe through Turkey. Moscow stands accused of bullying its former satellite Ukraine by turning the gas taps on and off at will, in the process also disrupting supplies to Europe fed by the Ukrainian pipeline.

The Russians counter-attacked on at least three fronts. The first was to gather support for a rival pipeline, called South Stream, which would equally avoid Ukraine by forging a link with Turkey under the Black Sea. Anxious to flex its geographic muscles, Turkey signed up for this rival venture too. For Ankara it was an opportunity for a double whammy. It showed the European Union that treating its application for membership with near contempt risked a counter attack where it hurts — on energy supplies. Simultaneously, it demonstrated to Russia, Turkey’s biggest trading partner, that it has buried its past as NATO’s poodle. For good measure, it also provided a chance for Turkey to try to negotiate a better deal on the nuclear power station tender that was “won” last year by a Russian-led consortium in a one-horse race.

If you can’t beat them, buy them

In a heads-you-win and tails-you-can’t-lose move, Moscow opened a second front by taking shares in companies on which Nabucco would rely. Russian company Surgutneftegas acquired a decisive stake in the Hungarian energy firm MOL at nearly twice market value, according to a report in Foreign Policy magazine. Although little is known about Surgutneftegas, one Budapest newspaper shed light on the obscurity under the headline: “Mr. Putin, Declare Yourself.”

The story is similar in Austria, where both Nabucco and South Stream would end. Gazprom already owns 30 percent of Austria’s Baumgarten storage facilities and an obscure Russian company, Centrex Europe Energy & Gas, is seeking to buy a further 20 percent in partnership with Gazprom. Controlling commercial stakes in the key European partners for Nabucco gives Moscow at least two options — starve the venture of funds and thus try to prevent it from being built, or sit back and take the profits from transit fees and sales if the pipeline is constructed.

Politicians have been trying to quell newspaper headlines about a gas war

The third line of attack came in a finely targeted bid to deny gas to Nabucco. Since Azerbaijan’s resources are key to the project, Russian President Dmitry Medvedev signed an agreement giving Moscow the option to buy up to 500 million cubic feet of gas at well over market rate. In the North African theater of the heating wars, Gazprom is committing itself to infiltration of the Algerian market, a major supplier of gas to Europe with new transit pipelines planned to Sicily via Tunisia.

Since the non-Nabucco Europeans are split on the rival projects through Turkey, Ankara can fairly claim that it is entitled to back both sides. The Italian energy giant ENI is involved in South Stream and Prime Minister Silvio Berlusconi was in Ankara when his Turkish and Russian counterparts signed a series of deals in August. The French are almost disinterested observers because their energy mix does not include a heavy dependency on Russian gas and the Germans, despite massive vulnerability to energy supply interruptions, appear reluctant to antagonize Russia by openly backing the other side.

However, Nabucco’s committed supporters have not been idle. The European Commission announced last month it had opened negotiations with Turkey about becoming a full member of the Energy Community Treaty to enable it to align its energy rules with those of the 27 EU countries. Europe was also courting Azerbaijan before the Medvedev deal was signed and, in some respects, offered a better deal. While the Russian agreement made no specific commitment to buy any gas at all, the EU made an all-out commitment to building energy and trade links.

As a display of its even-handed approach, Germany’s former Foreign Minister Joschka Fischer has joined Nabucco while former Chancellor Gerhard Schröder threw his lot in with Gazprom four years ago. Both were private, not state appointments.

Meanwhile, Turkey offers encouragement to both sides and, some maintain, stands to win no matter which of the pipelines gets built. Politicians from various countries have been trying to quell newspaper headlines about a gas war by disingenuously claiming the two schemes through Turkey are not rivals but complementary.

The whole affair risks becoming a soap opera.

Peter Grimsditch is Executive’s correspondent in Istanbul

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Financial Indicators

Global economic data

by Executive Staff
written by Executive Staff

Inflation: GDP deflator

Average annual growth in percentage

Source: OECD

During the period 1993-2006, inflation in the OECD area fell to a record low of 1.2% in 1999. It then gradually increased to 2.5% in 2006. The average annual rate of inflation over the last three years was below 5% for all OECD countries, except Norway, Mexico and Turkey. The volatility in the Norwegian GDP deflator is mostly due to variations in the export prices of petroleum, and these grew very strongly over the last few years. The strong growth in the GDP deflator for Mexico and Turkey effectively reflects general domestic inflation occuring in their economies. These latter two countries have, however, drastically reduced their inflation rates over the period 1993-2006. At the other extreme, Finland, Germany, Korea, Japan, Sweden and Switzerland recorded average annual rates of inflation over the last three years of below 1%. Several countries (Canada, Czech Republic, Finland, Germany, Luxembourg, Norway and Switzerland) recorded deflation over the period 1993-2006 for one or more years, but Japan is the only country where this has been sustained over a number of years.

Household: Net saving rates

As a percentage of household disposable income

Source: OECD

Household saving rates are very variable between countries. This is partly due to institutional differences between countries such as the extent to which old-age pensions are funded by government rather than through personal saving and the extent to which governments provide insurance against sickness and unemployment. The age composition of the population is also relevant because the elderly tend to run down financial assets acquired during their working life, so that a country with a high share of retired persons will usually have a low saving rate. Over the period covered in the table, saving rates have been stable or rising in Austria, France, Italy, Norway and Portugal but have been falling in the other countries. Particularly sharp declines occurred in Australia, Canada, Japan, the United Kingdom and the United States. Negative saving — which means that consumption expenditures by households exceeded their income — was recorded in some countries, in particular in Australia, Denmark, Greece and New Zealand.

Law, order and defense expenditure

As a percentage of GDP

Source: OECD

Within the total, the shares of the two components — law and order and defense — vary considerably between countries with high shares for defense expenditures in the United States, Korea, Norway, Denmark, France and Sweden and high shares for law and order in Iceland, Luxembourg, Ireland, Spain and Belgium. On average, the share of expenditures on law and order has generally been growing faster than defense and now accounts for more than half of the total for the countries shown in the table. In 2005 — the latest year for which most countries can supply data — expenditure was highest in the United States and the United Kingdom, and lowest in Luxembourg, Iceland and Ireland. In the majority of countries the shares of expenditures on defense, law and order in GDP have been falling since 1995 with particularly large falls in Norway, Sweden, Ireland and France.

Prison population

Number per 100,000 inhabitants, 2004

Source: OECD

Over the last fifteen years, most OECD countries have experienced a continuous rise in their prison population rates. On average, across the 30 OECD countries, this rate has increased from a level of 100 persons per 100,000 unit of the total population in the early 1990s to around 130 persons in 2004. The prison population rate is highest in the United States, where more than 700 per 100,000 population were in prison in 2004: such level is three to four times higher than the second highest OECD country (Poland), and has increased rapidly. This increase extends to most other OECD countries. Since 1992, the prison population rate has more than doubled in the Netherlands, Mexico, Japan, the Czech Republic, Luxembourg, Spain and the United Kingdom, while it appears to have declined only in Canada, Iceland and Korea. There are large differences across countries in the make-up of the prison population. On average, one in four prisoners is a pre-trial detainee or a remand prisoner, but these two categories account for a much higher share of the prison population in Turkey, Mexico and Luxembourg. Women and youths (aged below 18) account, on average, for 5% and 2% of the prison population respectively. A much larger share of prisoners is accounted for by foreigners (close to 20% of all prisoners, on average), with this share exceeding 40% of the total in Luxembourg, Switzerland, as well as Australia, Austria, Belgium and Greece. In several countries, the rapid rise in the prison population has stretched beyond the receptive capacity of existing institutions; occupancy levels are above 100% in more than half of OECD countries, and above 125% in Greece, Hungary, Italy, Spain and Mexico.

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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 weakness of global stock markets transpired on the Beirut Stock Exchange mostly as a drop in trading volume which dwindled to a 1.25 million shares trickle in the trading week that ended Sep 19. The Blom Stock Index closed the period at 1737.60 points, compared with 1,794.17 points at the end of August. Political worries are a constant factor in the Lebanese market and one perceives them almost as market fundamental. The real disruptor of trading fun was the global financial crisis although its impact on the valuations of Lebanese stocks was much smaller than elsewhere in the region. Lebanon’s central bank reaffirmed that the banking system is impacted only in minimal form by the problems of global financial institutions and Fitch Ratings reaffirmed its B minus ratings view on Lebanon as stable. Solidere, which initiated a 10% dividends payout at the end of August, saw one massive trade on Sep 8 which lifted the scrip briefly back above $31. During the review period, Solidere moved from $29.11 to $29.54 on Sep 22, making it one of the regions’s best performing real estate stocks in the period.

Amman SE  (1 month)

Current Year High: 5,043.72  Current Year Low: 3,088.85

The Amman Stock Exchange index gave up 11.65% from the start of September to its close at 3.861.37 points on Sep 18. Despite its losses, however, the ASE was among the privileged few bourses in the region and beyond which could report gains in the year to date period, in which the ASE is up 5%. Insurance, banking, and services sectors moved down in the period but managed to perform better than the general index; the industry index experienced a massive drop, going down more than 24%. The stocks of resource miners Jordan Phosphate Mines Co and Arab Potash Co came under heavy selling pressure, losing 30.64% and 23.02%, respectively. Observers attributed their weakening to withdrawal of foreign investors from the ASE in connection with international and regional market volatility. However, industrial stocks are still quoted significantly higher when compared with the start of 2008, mostly due to buying sprees of regional investors earlier in the year. Banking, insurance and services sectors by contrast have shown much less fluctuations over the longer period but fell back into negative territory in September when compared with Jan 1.

Abu Dhabi SM  (1 month)

Current Year High: 5,148.49  Current Year Low: 3,458.84

The Abu Dhabi Securities Exchange had no day that would invite satisfied smiles between the end of August and Sep 22 when it closed 9.04% down on the month at 4,014.47 points. During the entire period, the most positive performance by any sector on the ADX was a gain of not even 0.2% relative to the start of the month. The sector indices for consumer, banking, real estate, industry, and energy each lost more than 10% in the period under review. Construction and insurance showed stability in the upper realm of the market’s negative spectrum. Among four stocks which went more than 20% lower were two banks, one construction firm, and a hotel company. On the flipside, the bourse’s ratios were the most bargain-friendly of all GCC securities markets with a price to earnings ratio of only 10.45 times. The UAE central bank made an exceptional move of providing banks a $13.6 billion short-term lending facility to avert the threat of a lending crisis.

Dubai FM  (1 month)

Current Year High: 6,291.87  Current Year Low: 4,162.97

The Dubai Financial Market closed at 4,200.53 points on Sep 22. It carried less volatility than its neighbor up in Qatar but lost 11.8% from the start of the month. After a few positive days and a 9.9% upswing on Sep 21, the last session of the review period saw the index fall over 2.5%, a reiteration of the motives of quick profit taking and general nervousness. The materials and telecom sector sub-indices kept their heads above water during the period; year-to-date, the materials sector is the DFM’s only positive performer. Mortgage lender Tamweel, whose former chief executive has been under investigation for embezzlement and breach of trust, was the DFM’s biggest loser with a 33.05% erosion of its share price. It was followed by investment bank Shuaa Capital, whose shares went down 23.6%. The crash of Lehman Bros caused tangible jitters in Dubai where an office of the failed investment bank was based.

Kuwait SE  (1 month)

Current Year High: 15,654.80            Current Year Low: 12,039.00

The Kuwait Stock Exchange index closed at 13,140.40 points on Sep 22. But the day to watch was Sep 15, marking a red dawn over the entire GCC region. It was the markets, not some invasion by a communist superpower. But the picture certainly seemed worrisome enough on this day as the Kuwait Stock Exchange dipped into negative territory in its year-to-date performance. All GCC stock markets at that point were dripping red, both for the day and for the year. The KSE index recovered and returned into the green year-to-date with a gain of 4.63% by Sep 22. But the index still had to let go more than 9% over the review period. The parallel market sub-index traded sideways near the zero line, making it the outperformer of the period. Industry and investments were the sectors with the biggest losses. After the carnage of Sep 15, the Kuwait Investment Authority reportedly intervened with share buying which may have helped the KSE to return onto positive ground vis-à-vis the start of the year.

Saudi Arabia SE  (1 month)

Current Year High: 11,895.47            Current Year Low: 7,216.71

The Saudi Stock Exchange suffered the greatest downward pressure of all GCC markets and closed at 7,461.14 points on Sep 22, nearly 15% down when compared with the end of August and 33.2% down from the start of the year. Departing from its positive performance of the previous month, selling prevailed almost unabated in the market that had evidently not forgotten its bad experiences from two years ago. Market cap heavyweight Sabic gave up 15.75%. No single sector escaped the maelstrom, with insurance coming out at the very bottom. Three insurance companies experienced the most severe selling pressure, each dropping around 40% of its market valuation like stones in the sector that was known for speculative share buying for some time. Blame for the Tadawul pains was attributed to foreign influences and the global crises of financial market actors.  

Muscat SM  (1 month)

Current Year High: 12,109.10            Current Year Low: 6,861.32

The performance graph for the Muscat Securities Market from Sep 1 to 22, 2008 showed a lopsided V whose left arm was longer than the right. Losing 8.11% over the period by its Sep 22 close at 8723.63 points, the MSM general index traveled as low as 7868.70 points in trading during the Sep 16 session. The industrial and banking sub-indices were locked to the general index with the closeness of tango steps while the services sub-index was the period’s relative over-performer. Telecom stocks were among the better regarded values. The National Detergent Co boiled 54.7% higher after a 10-for-1 stock split on Aug 31. Financial heavyweight Bank Muscat was in the period’s bottom group of performers with a share price loss of 24.29%.

Bahrain SE  (1 month)

Current Year High: 2,902.68  Current Year Low: 2,490.91

The Bahrain Stock Exchange index closed at 2,569.74 points on Monday, Sep 22. This represents a slide of 5.79% in the September review period and a loss of 8.02% from the start of 2008 for the island kingdom’s bourse. After a 200-point free fall in the first half of September, the market looked up at the end of the period as it managed a 45-point climb over four sessions. The sub-index for hotel and tourism stocks, which entered September almost 24% improved from the start of the year, flat-lined until Sep 22 but this looked deliriously pretty against the backdrop of sagging by financial sub-indices on the BSE. Investment and banking stocks suffered from global markets disease and thus underperformed. Of listed companies, real estate investment firm Inovest and engineering contracting group Nass Corp were pushed down by 19.23% and 15.35%, respectively, followed by banks Salam and Ithmaar.  

Doha SM  (1 month)

Current Year High: 12,627.32            Current Year Low: 7,858.48

The Doha Securities Market displayed a fluctuation range of more than 2,900 points between the end of August and its close at 9,431.63 points on Sep 22, near its average index level for the period. Despite a rebound after the excess drop on Sep 15 and 16, the index scored a net loss of 9.7% in the time under review. The services sub-index was the DSM’s best performer, ending 5.8% down. Leasing company Alijarah, which had been on a downward trajectory since early June, closed the period at the head of the market with a 6% gain but only three stocks achieved a net gain by Sep 22. Real Estate companies UDC, QREIC, and Ezdan formed a trio of underperformers in a very rough phase of DSM history, closing 19.1%, 21.2%, and 29.3% lower.

Tunis SE  (1 month)

Current Year High: 3,418.13  Current Year Low: 2,445.51

The bourse of Tunis achieved the rare feat of trading sideways when comparing its close at 3,340.79 points on Sep 19 with its start into the month. Nonetheless, intra-month the TSE had its moments of relative volatility, moving below 3,300 and above 3,400 points. Poulina Group, the exchange’s new heavyweight, slipped by 8.97% in the review period; when compared with its Aug 2008 issue price of TND 5.95 ($4.84), the scrip ended its first month of trading about 20% up. Somocer, a tile manufacturer whose share price had almost doubled in August, fell back more than 25%, making it the period’s top loser. UIB, not one of the country’s top banks, was the period’s best performer, jumping up 18.02%.

Casablanca SE  (1 month)

Current Year High: 14,925.99            Current Year Low: 12,230.58

The Casablanca Stock Exchange index closed at 13,092.11 points on Sep 19, which represented a 7.04% negative return when compared with the beginning of the month. However, the market rallied more than 750 points in the last two days of the review period, pushing back up after the shock selling caused by the world market contagion. Gainers, the strongest of which was beverages company Oulmes with an increase of 19.85%, were outnumbered three to one by losers over the review period. Real estate group Alliances Développement, which had debuted on the exchange in mid July, weakened the most, giving up 29.63% in just over half a month in September. With a price to earnings ratio of 22.85x, the CSE was at the upper end of the regional spectrum at the end of the review period. 

Egypt CASE (1 month)

Current Year High: 11,935.67            Current Year Low: 7,071.16

The CASE 30 index closed at 7,071.16 points on Sep 18 with a loss of 16.31% since the start of September. After the local panic over capital gains taxation and cutting of subsidies, the correlation between the Egyptian exchange and global markets supplied further down pressure on the Cairo and Alexandria Stock Exchanges in September to the point that the market closed the Sep 18 session 32.97% lower from the start of the year, making it at least unlikely that investors will have much to worry about capital gains tax until the end of 2008. Losers outnumbered gainers seven times in the review period; major real estate, industrial, consumer goods, financial services, telecommunications, and construction companies were represented in the about 10% of stocks that each lost more than a quarter of their market cap in September. Market cap leader Orascom Construction Industries fared comparatively well with an 8.16% drop; the company also reported some successes in new contracts for a mega project in Abu Dhabi.   

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Uncategorized

Money Matters by BLOMINVEST Bank

by Executive Staff
written by Executive Staff

Regional stock market indices

Regional currency rates

GCC countries adopt draft for single currency

The Gulf Cooperation Council (GCC) approved a draft agreement regarding the creation of a single currency for five of the six member countries. Saudi Arabia, Bahrain, Kuwait, Qatar and the United Arab Emirates plan on introducing this monetary union by 2010. However, many issues face the implementation of the currency by that time. According to Qatar’s central bank governor, it is extremely important for the unified currency to have strong foundations on both the monetary and the fiscal policies side and all other economic sectors. In addition to that, the GCC countries have not yet decided on a location for a central bank, noting that at least two countries are competing to host the bank. These issues are expected to be decided during the next GCC meeting to be held in Oman later in 2008, though it is the only country planning not to participate in the monetary unification.

Private Arab investments over $94 billion

Private investments in the Arab world have totaled $94.5 billion in the last 12 years. The UAE is among the five leading locations for private investment, as it also ranked second in terms of exporting foreign direct investment (FDI) outside the Middle East. Saudi Arabia, the world’s leading oil exporter, attained the highest amount of private capital at $40.5 billion, or 42% of total inter-Arab private investments of $94.5 billion. Lebanon was reported as the second recipient of investments at an amount of $12.1 billion followed by Egypt at $8.7 billion. Despite this year’s surge in Arab investments, inter-Arab rates remain much smaller than the overseas amount of Arab assets at $1 trillion. The discrepancy results from a lack of Arab confidence in terms of investing in their own countries. Kuwait led the list in terms of private FDI outflow at a sum of $15.1 billion. It is followed by the UAE at $10.9 billion, Saudi Arabia at $4.6 billion and Lebanon at $3.2 billion. Total Arab private FDI stands at $41.7 billion, a negligible proportion of the $8.3 trillion global amount.

Morocco suffers a doubling deficit

Morocco’s budget deficit is expected to double in 2008 as the government attempts to protect its citizens from the rising oil and food prices through the implementation of higher subsidies, as reported by Standard and Poor’s (S&P). The deficit, which was 2.7% of GDP last year at $2.14 billion, will hit 5.5% of GDP for this year approaching $4.2 billion. It will hence be 3.1% higher than the originally expected 2.4% rate. The reason for the increasing deficit is the lower than expected growth, first estimated at 7%, but will probably waver around 5.5%. This is leading to less tax collection. On the other hand, Morocco has avoided making cuts to its subsidies to shore up public finances. However, Rabat is expected to limit inflation to just 5% this year because of the continued commitment to its subsidy programme. The Moroccan government holds billions of dirhams in a social security fund that if included, will lower the budget deficit to 3.6% of GDP. This smaller amount  however is compared to a 0.7% surplus in 2007.

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Consumer ElectronicsSpecial Report

The catalyst of technology

by Executive Staff
written by Executive Staff

Margaret Thatcher once said, “You and I come by road or rail, but economists travel on infrastructure.” The former British prime minister was speaking about transport at the time, but the same idea can be applied to almost any industry; especially technology and electronics.

Today infrastructure is viewed as the main catalyst for growth in developing economies. “They are still growing because it’s all about infrastructure build-up,” said Robert Chu, vice president of Asia Pacific at Hitachi, told Reuters when asked about the reasons emerging markets like the Middle East are still seeing rapid growth. The same applies to the consumer electronics industry where the development of technological infrastructure is fueling growth in the industry. Throughout the MENA region, depending on which nation you are dealing with, national infrastructure is having either a beneficial or an adverse effect on consumer electronics products, as well as consumer behavior. Moreover, demarcation lines defining what products and services are feasible are beginning to take shape across the region.

Oil rich nations eager to encourage investment are pouring money into their infrastructure. For example, due to its continuing investment in technological infrastructure, the UAE was recently ranked as the region’s most ‘e-ready’ nation, according to the World Economic Forum. Services that require technological infrastructure, such as GPS, have been embraced by mainstream consumers throughout the GCC as price levels become more affordable in unison with infrastructure initiatives.

“You need an appreciation for the technology in terms of an educated market that is willing to pay for those [advanced] features,” said Agop Kassabian, executive director of sales & marketing at Toshiba’s exclusive distributor in Lebanon, “and you [also] need other players that complement that have the available technology for the consumer to make use of these products.”

Despite the rosy outlook for the GCC, not all the Middle East is taking advantage of the fruits of infrastructure. Many countries in the region, such as Lebanon, are suffering from limited buying power amongst their citizens as well as lack of basic services, both of which greatly hinder sales and investment in the consumer electronics industry. “Today in Lebanon we still lack some of the basic means of life — we don’t have power — first we need the basics in order to work on something else,” said Cesar Chalhoub, vice president of ITG Holdings.

In Lebanon, political wrangling and a lack of vision have crippled infrastructure and slowed the pace of progress to a crawl. “There is no futuristic vision … it’s a mentality issue,” explained George Khoury, CEO of Khoury Home. “In terms of the political aspect, if a futuristic idea is proposed, because you are from a certain [political] party, other parties will block your initiative purely for political reasons so as not to give you the credit for implementing such an idea.”

Infrastructure issues are also effect on the cost of finished goods as consumers are having to invest more in order to protect their products from damages. “If you buy a TV set for $1,500 you have to pay an additional $300 for a UPS or a stabilizer to protect it,” Khoury said. Distributors are also feeling the infrastructure crunch in Lebanon. “We have to apply a standard warranty on products by default,” said Adib Cherfan, CEO of Samsung’s exclusive agent in Lebanon, “and if we find that it is an electrical problem that caused this TV to crash, we are repairing the problem ourselves, even though it is not covered by the standard warranty.”

On the other hand, the same consumer behavior that is being adversely affected by the lack of infrastructure is also making up for infrastructure shortcomings. “You have to overcome these infrastructure issues until the government installs the appropriate infrastructure,” Khoury explained. “But people will not stop buying products because of infrastructure constraints. People will purchase products and wait till the infrastructure is available.”

Show me the way

The future of the consumer electronics lies in integration as consumers  demand more and more flexibility and compatibility between products. “Everything is becoming digitalized which allows more flexibility in terms of sending and receiving data,” stated Chalhoub. “Also being able to convert data into different types of media and to transfer and communicate these elements […] integrating and automating everything, whether remotely, wired, or wirelessly is a major technological concern for the consumer.”

This trend is also occurring on the product level as consumer behavior is becoming increasingly dictated by integration capabilities. “The product itself is becoming an integrated product that is compatible across the consumer electronics spectrum,” said Chahwan. “These features push consumers to demand more, so instead of being satisfied by one item they have to have the complete the set.”

This idea resonates with what many of the major consumer electronics manufacturers are promoting as their ‘next big thing’. The answer in terms of products is wireless boxes that communicate with several devices in the home or office to provide consumers with a truly integrated environment. “You already have wireless speakers and wireless communication between notebooks and printers,” said Selim Antaki, CEO of LG’s distribution agency in Lebanon. “Next year, you will have wireless communication between your DVD player, home theater system, and your flat-screen television.” With the recent growth in the consumer electronics industry, the focus of integration seems to be centered on the flat-screen TV and in particular the LCD. “The LCD will be the main unit when it comes to the CE industry carrying all other CE products and peripherals,” stated Karl Zalum, commercial manager of Philips’s exclusive agent in Lebanon. “This will create a centralized technological environment around the LCD that will encompass everything from your mobile phone, to your laptop, to the Internet,” he said.

Other technologies on the horizon such as Blu-ray DVD players and High Definition Television (HDTV) have yet to penetrate regional markets due to high retail prices and infrastructure constraints. Blu-ray initially won the battle against Toshiba’s HDDVD format, which the Japanese company abandoned due to accurate forecasting in relation to limited adoption levels associated with high definition DVD technology.

“The battle was not fought for very long because the market demand for such a product was not that great,” Kassabian explained, “so it wasn’t worth the investment, and the proof is that we don’t see Blu-ray catching on like wild fire.” Blu-ray DVD players are still seen by most as too expensive for mass adoption. “It will take over as soon as it is more affordable and well positioned to reach everyone,” said Chalhoub. Antaki added that “for a Blu-ray, you pay more than 10 times what you pay for a conventional DVD player.”

Regional piracy also plays a role in the adoption of Blu-ray technology. “Blu-rays biggest issue is piracy,” Antaki stated. “People can buy cheap video CDs and DVDs; if they want to use Blu-ray they have to pay fifteen-fold what they are paying locally.”

HDTV has taken off in Europe and North America, though infrastructure constraints and the inavailability of complementary products essential to high definition broadcasting are stunting the growth of this technology in the region.

“There are no high definition receivers on the market,” Kassabian said, “and even if you do have a high definition receiver you need an HDMI (High-Definition Multimedia Interface) cable and a high definition subscription that doesn’t exist.” The main reason behind the unavailability of high definition signals is that most broadcasters do not yet see enough potential revenue in terms of advertising and subscriptions if this service is offered to consumers in the region.

“It is difficult to put a time frame on exactly when we will begin, because it needs to make good business sense,” said Azhar Malik, the vice president of marketing and public relations at Showtime Arabia, to The National. “The decision to begin will be dictated by customer needs and their willingness to adopt and pay for the technology […] We are not at that stage today.”

Moreover, some countries in the region still rely mainly on analogue signals and rather than digital transmission. However, technology products such as FPTVs are beginning to promote the idea of digital transmission in order for customers to make the most out of their products. “LCDs and Plasma television adoption has affected the quality issue,” Antaki observed. “So it is driving people to demand a better [quality] signal.”

Keeping this in mind: many of the industry players believe that the pressure from products and consumers will eventually lead to high definition signals becoming available to the wider market. “It’s just a matter of time until high definition signals are picked up [in the region],” Kassabian said, “and once the consumer sees the picture quality of high definition they will get hooked.”

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Consumer ElectronicsSpecial Report

Behind every good machine…

by Executive Staff
written by Executive Staff

The service sector of the consumer electronics industry is playing an ever more substantial role, not only in revenues, but more importantly in brand differentiation and after-sales service. It is proving to be the determining factor between lower and middle/high range products and is affecting localization strategies in order to ensure customer loyalty. “Locally, the customer is going back to his local partner. He is becoming more selective in terms of his local partner from whom he is buying, in order to ensure the peace of mind that comes with after sales service,” stated Cesar Chalhoub, vice president of ITG Holdings. “When you buy a new item, whatever it is the major concern is what if something happens to this, where one can go to take care of the problem,” Chalhoub explained.

The success of brand names, with regards to the service sector, is viewed as another reason that third tier consumer electronics brands did not persevere in the market. “They [third tier brands] proved that they are not really reliable and they are not delivering what the name brands are delivering,” Chalhoub remarked. “Their distribution network in itself was not built on a long term vision and this is why they couldn’t provide adequate services.” Added Adib Cherfan, CEO of Samsung’s exclusive agent in Lebanon, “They couldn’t follow the big brands in terms of adapting their products to the pace of technology.”

Globalization and information exchange has also positively affected the service sector. As information about local markets becomes more readily available, strategic investment strategies are becoming increasingly centered on local partners and the service matrix that they can provide. “Today we are sitting at a table to discuss the matrix of service, in terms of what my role is [as a local partner] in order to get his product to the market and how much it costs [the manufacturer],” Chalhoub said.

The nature of service being provided is undergoing a transformation. Sales representatives in the consumer electronics industry are beginning to play more of a technical and analytical role in the sales process as products become more technically advanced and product differentiation becomes less evident. “You have to train your people to ask and answer the right questions and this is applied across the board,” explained George Khoury, CEO of Khoury Home. This factor is also adding to the super-store phenomena sweeping the region as smaller, more traditional consumer electronics outlets are less capable of offering these kinds of services. “The market is not growing at the same rate that we are. It is growing at a maximum of ten to fifteen percent, so this is where the difference is. Even [the] medium sized shops will disappear in the long-run,” Khoury said.

It is not all peaches and cream for the service sector, however. Exemplary service requires a great deal of investment in infrastructure as well as human resources. “The service sector is important for local added value partners such as ourselves, or in any market [where] you are dealing with local business houses; the service sector employs over 50% of our total human resources,” Chalhoub pointed out.

In the end, it’s about the people

Like any sector, human resources are intrinsic to the operations and upkeep of the consumer electronics industry — from the service sector to the showroom. The Middle East in particular has undergone several interconnected phenomena relating to the movement of labor in the region which has affected human resource costs and availability.

The economic boom in the GCC has shifted labor away from non-oil rich countries in the region to the GCC and resulted in a brain drain from countries like Lebanon. On the other hand, growth in the GCC is so substantial that many of the markets staffing needs go unanswered. “There is a shortage at all levels, in the Gulf and in Lebanon,” explained Selim Antaki, CEO of LG’s distribution agency in Lebanon. “We get a lot of inquires from LG distributors in the Middle East; they ask me if we have an excess of technicians or salespeople.” However, Chalhoub noted “The limitation of skills [and] human resources is becoming a problem when it relates to moving and supporting infrastructure elements like servicing, management, and sales.”

The economic prosperity that is recently being enjoyed by countries across Asia, and specifically in the Indian subcontinent, is adding to staffing woes across the GCC, which has come to rely on people from these regions to staff their industries. “For instance in the Emirates, 75% of the population comes from the Indian subcontinent and this relates to other countries in the region as well,” said Chalhoub. The consumer electronics industry in the GCC relies heavily on people from these regions for its service sector. “People from the Indian subcontinent in our industry are on the technical side [of the industry],” explained Antaki. “You don’t see them as sales staff and in showrooms; you see them at the supply level, at the distributor level.” Many of the staff employed in the consumer electronics industry are moving back to their home countries in order to take advantage of the subcontinent’s recent economic success. “India is seeing strong prosperity so I think you will start to see skills moving back to India even though people may have to compromise some income. If we face the lack of such skills then we will see a struggle to fill it in the consumer electronics market,” Chalhoub said.

This is good news for people looking to leave countries like Lebanon where unemployment and low wages have resulted in a mass exodus of brain power to places like the GCC. “There is a difficulty in finding skilled workers in Lebanon,” stated Cherfan, “and if you find any you will pay double or triple what you used to pay because most of the skilled elements in our human resources have been moving to the Gulf because of political instability and because they are getting much better packages.”

Thus the staffing void created by the flight of traditional labor elements in the GCC is being filled by people from the non-oil rich nations of the region. “The void needs to be filled and it is being filled from Lebanon, Jordan and Syria who will be supplying these skills,” said Chalhoub. This shortage and re-filling of labor from within the region is increasing wage levels in the consumer electronics industry and making the industry a profitable one in which to work. “Wages are going up. Recently the talk of the town is about increasing the minimum wage and [a mandatory] increase in wages [in Lebanon]. This all seems a bit silly in our industry since we are well above that in the first place,” Antaki said.

Without a constant supply of skilled labor, organizations are shying away from recruiting highly qualified and costly human resources and are instead focusing on the promotion and training of new and existing staff. “If we go to hiring agencies to acquire highly qualified technical staff, we won’t get them because the market is suffering from the low availability and high demand for such staff,” explained Robert Chahwan, general manager of Khoury Home. “Instead we are focusing on hiring and promoting of our new and existing staff through technical and practical training programs aimed at bringing them to the desired [technical] level.”

This trend is taking hold of the industry as companies have little choice but to nurture talent as the labor shortage becomes ever more prevalent. “We are taking people in lower positions and sending them to our regional or international offices to receive proprietary training in order for them to be efficient in our in-house business practices,” Cherfan stated. Yet training alone does not solve the human resources conundrum. As staff become more qualified they also become more desirable, especially when they are located in low income areas such as Lebanon, and eventually staff retention becomes an issue.

According to Khoury, “Unfortunately, sometimes when you expend a great deal of effort on certain personnel to promote them, you risk them getting snatched up by the wider region in general who look for market leaders to recruit staff.”

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