Levant

Building Amman’s future

by Executive Staff
written by Executive Staff

Breathing modernity into the center of Jordan, the Abdali Urban Regeneration project will truly metamorphose the mundane architectural conventions of the country. As the largest mixed-use development project Jordan has ever seen, Abdali will completely recreate Amman’s central downtown district. With the fast-growing economy of Jordan, there is definitely a need for an upscale development like that of Abdali.

Strategically located in the heart of Amman, the new downtown project is based on 447,000 square meters of land — owned by the National Resources Investment and Development Corporation (Mawared) — and holds an investment value of just over $3 billion. As the military’s business arm, Mawared, is the largest real estate developer in Jordan. The total built-up area (BUA) of Phase I alone is 1.08 million square meters, and is planned for completion by 2010. Phase II’s BUA measures in at 723,000 square meters and is hoped to be finished by 2013. The Abdali master plan’s total BUA is approximately 1.8 million square meters, integrating a vibrant mixed-use development into the city.

For the first time, Jordanians will be able to be able to work, reside, learn, and entertain in one area. According to Abdali Psc, the project plans “to support Jordan’s drive towards the knowledge economy by providing an electronic infrastructure for a contemporary business and residential environment.”

Conveniently, the site of the development is adjacent to major municipal buildings, such as the House of Parliament, the King Abdullah Mosque, the Palace of Justice, and the Ministry of Education.

That’s what friends are for

The Abdali project has significant partners and investors. In June of 2003, the project was launched from a partnership between Mawared and Horizon Development, owned by Bahaa Hariri, which will head the development of the 80-hectare smart urban center. The initial agreement concluded that the joint venture between Mawared and Horizon would construct the new downtown with a budget of $800 million, providing a superlative infrastructure to promote the notion of metropolitan living in Amman.

Horizon and Mawared intend to create a blended assortment of public and private usages for the site. The project will encompass alluring and animated urban spaces for the public on a 24 hour per day basis, which will be comprised of 40,000 residents and approximately 90,000 people total to be living, visiting, and working in the new downtown on a daily basis. Abdali boasts that 15,000 job opportunities will be created. The project will also provide a network of pedestrian-friendly roads, gardens, central shopping facilities, entertainment centers, an American University campus, office complexes, a civic plaza around the proposed King Hussein Memorial Library, a performance arts center, exclusive residential buildings, medical and legal quarters, and underground parking facilities.

Additionally, on the sidelines of the World Economic Forum in 2004, Mawared signed a Memorandum of Understanding (MOU) with mammoth developer Emaar of the United Arab Emirates. This MOU emphasizes Emaar’s desire in partaking in the development of select residential complexes within the Abdali project.

The United Real Estate Company, an investment company acquired by the group of Kuwait Projects Company (KIPCO), is also a major partner in the Abdali project. KIPCO is known to be one of the leading investment companies in the MENA region. The latest partner boasts significant real estate and management advisory service experience, which will certainly aid the project in reaching its superior goals.

Abdali gives back

The last few years have witnessed a swelling trend in large organizations to jump on the bandwagon of giving back to their respective communities, and Abdali Psc is not one to be out of fashion. With traditional Corporate Social Responsibility (CSR) initiatives in mind, Abdali has recently launched its full-blown program known as ‘Ruyatak’, in order to nurture the aspirations of Jordanian youth. Acting as the CSR arm for Abdali, and boasting the theme of ‘Let your vision come to life’, Ruyatak aims to empower the Jordanian youth from various ages and underprivileged backgrounds. Seeing as approximately 60% of Jordan’s total population is under the age of 25, these young individuals face a higher risk of unemployment than any other demographic in the country. Believing that the youth are “the pillars of the future of Jordan,” the main focus of Ruyatak is to educate adolescents by providing life skills, encouraging them to play a dynamic role in Jordanian society. “In addition to harnessing their talents, sustain[ing] their enthusiasm, and realiz[ing] their potentials,” Abdali says it provides “[the youth] with adequate opportunities to gain valuable experience and become active members of their respective communities, allowing them to compete in the emerging labor market.”

Under the umbrella of Ruyatak hang three initiatives by Abdali. The first component is comprised of a partnership between Abdali and the eminent Save the Children foundation, resulting in the NAJAH Program. This initiative aspires to address two of the most key challenges facing Jordanian youth today: the inability to find employment in the midst of the country’s economic inequality, and the deficit of skills and knowledge to not only enter but also to remain in the labor market.

The second addition to Abdali’s CSR arm — NAJAH by Abdali Phase II — was formed after the great success of Ruyatak’s initial program (NAJAH). This initiative looks to expand the original CSR project on a larger scale by creating a long lasting agreement, addressing the perpetual challenges faced of youth unemployment throughout Jordan. It aims to do so by eroding the inherent idea of societal exclusion possessed by these deprived youths. The NAJAH project trains Jordanian youth, aged 18-24, through three various learning cycles on life and work skills (such as CV writing classes, internships, field research, etc.), enabling them to benefit from the considerable economic investment taking place in their country. Abdali aims to improve the employability skills of the participants of up to 80%.

The third social responsibility initiative under Ruyatak — Alwaan Al-Abdali — was founded by the partnership between Abdali and Relief International Schools Online (RI-SOL), a global NGO promoting education and community development. This scheme builds on the qualities of experience and human resources by engaging youth ages 12-30 that are living in the most poverty stricken areas of Amman (i.e. Wehdat, Jabal Naser, Ashrafieh, and Al Hashimi Al-Shamali). Participants are offered to take part in youth-led projects; familiarizing them with team work, the needs of their society, social cohesion, and the best communication skills at hand.

As the CEO of Abdali Psc, Jamal Itani comments, “We hold great faith in the Jordanian youth. We understand their situation, and highly believe in their potential; that is why we invest great efforts in finding new opportunities for the young people to achieve their ambitions and complete their goals… They are not just the future, they are today; and we offer them in the present a reliable vision to shape a better tomorrow that will be up to their expectations.”

Undeniably, the Abdali project is reaping with priceless benefits for Jordan. With three CSR schemes, such social programs are sure to aid the Jordanian youth in building better futures. Also, by implementing the Ruyatak program Abdali hopes to guarantee its sustainability amongst its numerous stakeholders and to build local partnerships. Abdali’s social responsibility initiatives will, without a doubt, further ensure a better community comprehension of the socio-economic opportunities created by the new downtown project. With a new, smart urban center in Amman, the overall effect of the Abdali project will bear immeasurable fruits for the Jordanians and tourists alike. 

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GCC

A pearl in progress

by Executive Staff
written by Executive Staff

Access to Qatar’s busiest real estate development site is tightly controlled. Trucks, buses, and cars rolling across a dusty dam have to pass checkpoints before they can reach what for a few more months is a feast only for the eyes of engineers and connoisseurs of construction work in progress.

Past the security cerberuses, visitors encounter an orderly maze of infrastructure and buildings in every stage of construction, from anchoring of foundations for residential towers to a finished power substation. The Pearl-Qatar, or TPQ in the jargon of people involved, is the domain of the United Development Company (UDC), one of the country’s leading private sector enterprises.

The first of The Pearl’s towers —  out of 66 being built — will be ready for tenants once Qatar’s oppressive summer heat has passed for this year, according to the UDC engineers working at the site.

To be that challenging and thrilling a task, it has to be a new island — what else, one is tempted to ask, given that island building has shaped up into a sort of coastal obsession in the Gulf. With 16 million cubic meters of earth moved in less than three years after the start of the project (8 million cubic meters were dredged from the shallow waters in the immediate area, another 8 million were trucked in from elsewhere), The Pearl-Qatar island has been put vis-à-vis the Qatari capital Doha.

Marvel in the making

Engineering of the island involved meeting technical and environmental challenges as well as accommodating sales interests by increasing the number of apartment towers and undertaking a spectacular ceremony of flooding the surrounding areas that had been blocked off from the sea during an early phase of the project.

The most demanding task, however, was to make it all come together. “We have about 15 districts on the island and each has its own theme of design, like pieces in a jigsaw. It represents a universal world,” chief engineer and construction manager Abdulrahman Jawhari said. “The biggest challenge is to make all these elements come together and make them fit.”

The task was made no less challenging by the fact that UDC, while being the master developer of TPQ, has pursued a path of farming out parcels and aspects of the project to over 60 partner firms whose involvement Jawhari described as ranging from over a billion Qatari riyals ($275 million) to a few million but which all have to fit with UDC’s set of standards and development guidelines for the Pearl.

The esthetic perception of the Pearl will vary from visitor to visitor and no one today can reliably predict if the long-term role of man-made islands in the quest for a livable planet will be positive, detrimental, or negligible. On the investment side, TPQ fits the pattern for a mega-plus project where cost is not the first consideration in all decisions. From initial cost forecasts of $2.5 billion, the project value estimations have moved up to a range of between $7.5 billion and $9 billion, insiders say.

Seen in context of both Qatar’s national development ambitions and the corporate growth aspirations of UDC, the TPQ project is pivotal beyond its financial aspects and earnings potentials.

As for national ambitions, Qatar is driven. The peninsular country in the Gulf does not kid around when it promotes itself on the airwaves as building the world’s fastest growing economy. Per capita, the citizens of Qatar enjoy a world-leading nominal GDP whose phenomenal double-digit annual growth has been forecasted to continue unabatedly in the next three to four years.

Qataris also bear tremendous inflation which will reduce the purchasing power gains — but at a projected total GDP scratching at the $100 billion mark in 2011 and with a population of 1.2 million people (Economist Intelligence Unit estimates), there will be many wealthy residents. 

This economic wonder was and will be propelled by gas exports, the larger hydrocarbons sector, and related industries. In consequence, the country’s planners have to find ways to deal with the challenges of increasing financial wealth of their citizens and to work on economic efficiencies. An image of having world-class residential and commercial real estate landscape and the successful creation of tourism destinations would help in meeting these national needs. 

The Pearl has a significant tourism and boutique retail angle. According to Hussam Ahmed, the manager in charge of retail development at TPQ, the average daily inflow of visitors to the hospitality and retail areas on the island (which will feature a 2.5km waterfront promenade with up market retail and restaurants in the first-to-be-inaugurated Porto Arabia section of the island) is calculated at 25,000 to 30,000 persons, stipulating a multiple of Qatar’s population in annual visitors.

Catering to a customer range

In addition to the high-end boutiques in its fanciest quarters, other retail areas on the island are set to tickle younger and broader lifestyles and cater to wider audiences. “We are not branding The Pearl as upscale destination; although we have higher percentages [of high-end retail], we are addressing different levels,” Ahmed said, adding a reference to the government’s goals in developing tourism in Qatar.  

Qatar’s real estate development activity is intimately linked to the emirate’s state interests, ruling family, and political class. The dominant real estate companies with the largest development projects — the Lusail project on land near to the Pearl — and those with the highest market capitalization on the Doha Securities Market are state-owned and state-backed enterprises.

UDC vowed unequivocal alignment with Qatar’s development aims under the “directives and wisdom” of the emir, Sheikh Hamad Bin Khalifa al-Thani, as the message of UDC chairman Hussain Ibrahim Alfardan stated in the company’s 2007 annual report — a 130-page compendium of the highest gloss whose every page is made from paper so heavy that it would be suited as magazine cover or for printing an invitation card to the most lavish of dinner parties. 

In the same report, UDC announced a net profit of $94.5 million in 2007 (38% up year-on-year). It listed partnerships with Belgian, Turkish, Spanish, UAE-based, and Qatari companies in joint ownership of subsidiary companies that are active in construction materials and services, tourism operations, real estate management, utilities, wastewater treatment, and petrochemicals manufacturing.

Several of the joint ventures were born during the work on TPQ and address needs that serve the project. The dredging activities for the new island inspired a partnership with a Belgian specialist company; the resultant joint venture firm, MEDCO, is now a major contender for dredging and land reclamations in the region.

When addressing an estimated cement need of around 3 million tons for TPQ, UDC teamed up with Belgium’s Besix for a ready-mix joint venture. As the issue of operations for the various marinas with over a 1,000 berths around the island arose, UDC in 2007 found a partner in a Spanish firm, Ronautica. For managing real estate, UDC has recently entered a new venture with Asteco, a property management firm headquartered in Dubai.

There is a special potential that can be assessed for Qatar Cool, the Qatar District Cooling Company established in 2003 as joint venture between UDC and the regional pioneer in district cooling, Tabreed of the UAE.

The firm’s first plant started operations in 2006 with capacity of 30,000 tons of chilled water in Doha’s West Bay office and residential district. This year, a second plant in West Bay and the first two phases of a massive district cooling plant on The Pearl will become operational, adding 37,000 tons capacity in West Bay and about 60,000 tons in TPQ, said Qatar Cool general manager Fayed Khatib.

Looking ahead

By 2009, the integrated plant on the Pearl will be at full capacity of  130,000 tons, making it the world’s largest district cooling facility, he added. Serving air conditioning and cooling needs from a central plant is a strong business model for Qatar where 60 to 70% of a building’s annual power consumption goes to mitigating the impact of the country’s hot and humid climate.

Qatar Cool claims 40% to 60% lower power consumption per client than decentralized units in each building would incur, saying its solutions offer benefits to Qatar’s economy and environment as well as allowing customers to reduce capital expenditure on oversized individual cooling systems and associated costs, including insurance.

At a startup capital of $2.75 million in 2003, Qatar Cool was a small initial investment with low risk that has grown into a joint venture with $82.4 million capital and net profits of $2.9 million in 2007 which are projected to grow at rate of 80-100% in 2008. “Our revenues and profits will keep multiplying,” said Ahmad Chehadeh, Chief Financial Officer of Qatar Cool, and clarified that this expectation is alone from the existing schemes and does not include eventual new projects.

The company is learning and collecting data that will serve as basis for optimizing its operations and development of new solutions. Although it does not presently use alternative energy sources, it has a great interest in processes that conserve energy and has already achieved substantial efficiency gains from studying and improving its own production processes, the company’s managers said.

One day, UDC and its partners in Qatar Cool could even reap technology leadership benefits from the experiences and skills that Qatar Cool has begun accumulating in the operation of remote cooling schemes in a very hot climate. Even before such lofty hopes will be tested, the cooling firm is a definite asset for future projects that UDC will compete on. As Khatib said, “Having Qatar Cool in their portfolio, UDC has a nice selling point in future projects by being able to offer complete solutions.”

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GCC

Emirates of added taxation

by Executive Staff
written by Executive Staff

Recent history in the UAE has seen hundreds of thousands of expatriate workers, tourists and foreign businesses flock to cities like Dubai and Abu Dhabi, with the surging economy offering well-paying jobs and phenomenal business opportunities, while the absence of income or sales tax has made working and shopping in the Emirates exceptionally attractive.

The honeymoon of this “tax haven” is set to end soon though — as early as the beginning of 2009 — with the implementation of the government’s proposed value added tax, or VAT. Although Abu Dhabi has been conducting studies concerning this for several years, there was a recent announcement that Dubai Customs — the department responsible for instituting the VAT — is aiming to have all the necessary infrastructure in place by the end of 2008, ready for the government to implement the proposed levy of 3-5% soon after.

The stated aim of the tax is to begin the process of diversifying government revenues away from the current heavy dependence on energy resources. However, with 40% of the UAE’s GDP directly dependent on oil and gas output — some estimates put earnings-per-day at $225 million — it would seem the possible revenue gain through VAT would be relatively insignificant in comparison. This begs the question: how effective can this attempt at revenue diversification be?

“I think it [VAT,] will be very small compared to oil revenues, but nonetheless it is very important to introduce these taxes just so that you have increased revenue sources,” said Monica Malik, director of economics at EFG Hermes investment bank in Dubai.

Diversifying revenue

Mohsin Khan, director of the International Monetary Fund’s (IMF) Middle East and Central Asia Department agreed that, regardless of the amount of income government earns from VAT, simply having an alternative energy resources is essential. He remarked that, “The VAT revenue [will be] dwarfed by the oil revenue, but the important thing is to have a stream of revenue that is independent of oil and gas.”

Khan pointed out that the IMF has recommended the VAT be implemented in coordination with other governments in the Gulf Cooperation Council (GCC). “This is because the VAT should be seen in the context of establishing a single, unified market comprising all the GCC countries,” he explained. “The introduction of a tax that does not discriminate against trade in the context of removal of borders is an important element in the development of a single market.”

As it stands, however, the UAE looks to be well ahead of other GCC members in bringing in VAT, and in so doing is garnering much criticism from those who say the timing could not be more inopportune, with the Emirates having endured an average of 11% percent inflation through 2007 and as of yet no sign of relief in 2008.

Inflation paints a somewhat vexing problem for policy makers in the UAE though, as upward price pressures are being fuelled by roaring demand for housing and property, the global increase in food prices and the sinking value of the American dollar, to which the UAE’s dirham is pegged. The dollar peg

also strips monetary policy control from the UAE’s central bank and thus removes the standard option governments use to control inflation — raising interest rates. Price controls typically offer only temporary relief and can have damaging distortive effects on the economy, while fiscal restraint to curb inflation isn’t plausible given the massive infrastructure projects the UAE is undertaking. According to Khan, “The bottom line is that it may be necessary to tolerate a somewhat higher inflation rate in the short term, and focus on bringing inflation down in the medium term.”

In this context the new VAT would only be adding to these inflation woes, at least in the short term according to the IMF, which has stated that it expects VAT to cause a one-off jump in inflation of 1-2% during the first year, but that the tax would not cause permanently higher inflation.

VAT impact disputed

Dubai Customs has been quick to dismiss the IMF’s forecast however, claiming that any price increases resulting from the VAT will be offset by the planned cuts to customs duties on imported products — undertaken as part of the obligations the UAE has assumed for itself through signing on to international trade agreements, including with the US and European Union (EU).

“VAT is going to replace the current customs duties amounting to five percent,” said Abdulrahman al-Saleh, executive director of corporate support sector at Dubai Customs, in comments made in May. “Thereby it is expected to support the price level and mitigate the rise of the inflation rate.”

However Malik said it is too early to tell what the impacts might be, as it is yet to be determined which products will subjected to the new tax. “If there are a number of goods that are exempt from the customs [duties] and then would have VAT [imposed on them], then that would have a greater inflationary impact. But these all depend on which ones are going to have the VAT put on and which ones aren’t, so a lot of these questions will come out later on.”

She added that by international standards, the UAE’s proposed VAT rate is very low — internationally, for example, VAT rates are typically between 15-20%. Malik also pointed out that even though Dubai has been raising the cost of some government services — such as electricity, water and road tolls — “the fact that you don’t have income tax means you will still be very attractive for expatriates to come in and live here.”                        

141 nations currently collect some form of VAT, including almost all first world economies — bar the US — and as Mohsin Khan remarked, “The GCC is the only major region … that does not have a VAT. It is perfectly normal for an economy to have a tax based on turnover in the private sector. And it gives you a chance to get rid of elements that are negative for business, such as local fees and charges.”

Thus, while the timing of VAT implementation in the UAE could be open to criticism due to inflationary worries, if the Emirates are truly going to earn their place in the modern global economy, the government ought to have diversified revenue streams and a refined taxation system comparable to any of the world’s most advanced. Properly implementing VAT would go a long way in this regard.

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MENA

Virtual commerce

by Executive Staff
written by Executive Staff

Internet shopping has yet to take off in the Middle East, but online trading is another story, with banks and brokerages scrambling to set up platforms to tap into the surging demand for the service.

In the last few years, online trading (OT) has started to flourish in the region, with institutions in Egypt, Palestine, Saudi Arabia, the UAE, Kuwait and Lebanon getting in on the act where people can trade, at the click of a button, in stock markets, foreign currencies, securities, futures and options.

The sector is growing at such a rate that major OT players like Mubasher, which started in Saudi Arabia and expanded into Dubai and Abu Dhabi, then the rest of the Gulf, has plans to go global by entering the African, Indian, Indonesian, Iranian, US and European markets.

“We started with 300 subscribers in 1999, and went to half a million in 2008, so it’s a boom,” said Mohammad Jamal, business development manager of Mubasher. “We will maybe reach a million or more subscribers by the year end,” he added.

The attraction of OT as opposed to the traditional form of dealing directly with a broker is to cut out the middleman, save on transaction fees, and be able to immediately monitor and make transactions.

“Users save a lot, and know more about their investments. There also used to be a lot of misbehavior among brokers,” said Jamal.

Saving on Labor

The advantage for institutions is less staff and fewer brokers, as some 4,000 Merrill Lynch brokers in the USA found out recently when they were laid off due to the surging popularity of OT.

“In 1996 we had 50 financial brokers, and today just one or two brokers can do around the clock shifts,” said Walid Abou Sleiman, CEO of Aksys Capital, a Lebanon-based foreign currency brokerage.

For larger institutions, OT has allowed them to expand into other areas. Egyptian financial giant EFG-Hermes, for instance, has been able to enter the retail market by going online, as well as expand its footprint in the MENA region, initially with OT in Egypt, and now also in the Emirates.

“We’re going vertical and horizontal, trying to have an online team in every country that allows everyone to trade in different markets. We are also trying to get people in the UAE market into Egypt, and vice versa, as well as increasing percentage here,” said Mamdouh El Baz, regional director of online trading at EFG-Hermes.

Lebanon’s Arab Finance Corporation (AFC), which has developed the AFC BeirutTrader, the first OT platform that is providing for investors direct market access to the Beirut Stock Exchange (BSE), is also optimistic that their recently launched system will be a boon for Beirut.

“The AFC BeirutTrader has been designed to cater to the needs of private and institutional investors as well as fund managers and gives a powerful tool to investors wishing to trade in the BSE,” said Tarek El-Ahdab, manager of AFC. “There is a general move towards OT globally and it is only natural that investors interested in the Lebanese market be given the possibility to trade online.”

For institutions like Aksys Capital, OT has enabled the firm to rise above the country’s political and economic instability through an online platform open to anyone worldwide for financial currency trading that has liquidity provided by major global players Citi Group, Deutsche Bank, the Royal Bank of Scotland, UBS, and Bank of America.

“Before OT the FX market was restricted to the big players but today, with technology, anyone can have access,” said Abou Sleiman, adding that out of the $3 trillion in foreign currency trading worldwide, OT accounts for over $60 billion.

Competitive systems

With OT platforms not necessarily restricted to one domestic market, but rather regional and increasingly global ones, competition between platform providers is tough and getting tougher. In Dubai, over 100 brokerages have opened up in the last four years, with some 60% having electronic capability. In Egypt, EFG-Hermes is competing with nine other players, although the company, along with Al Arabia Online, dominates 90% of the Egyptian market, according to El Baz.

In Saudi Arabia, the region’s biggest economy and where OT is at its most developed, 350,000 of Mubasher’s half million subscribers are from the country, and Mubasher handles more than 50% of all OT transactions and volume. “Last year, of all IPOs in Saudi 80% took place online, either through the website, via mobile phones, or at ATMs,” said Jamal.

The challenge for OT service providers is therefore to offer the best online platform that is easy for clients to use, offers multiple trading options and client specific tools, as well as being informative. Companies are consequently teaming up with international programmers, in the case of Aksys Capital with Ireland’s Squared Financial Services, while other OT platforms were developed in conjunction with, or actually for, local bourses, which was the case for Mubasher in Riyadh and AFC in Beirut.

And aside from buying and selling online, subscribers can also trade via their mobile phone, watch line prices and ticket rates. Nonetheless, improvements need to be made said Jamal. “At Mubasher we’ve done a lot of R&D, and will introduce advanced smart ordering features like algorithmic orders and, where orders take place according to your strategy, automatic trading and profit capabilities.”

OT providers are also scrambling to offer timely and informative analysis on financial markets to offset the region’s lackluster media coverage of financial markets.

“These are not established markets and there is a total lack of financial reports, information may be skewed, and not enough information for people to make wise decisions,” said Adam Kaye, center manager of the Online Trading Academy in Dubai. Indeed, millions of Saudis were stung when the Tadawul stock market plunged in 2006 — a fall which was blamed on, among other things, excessive speculation and insufficient knowledge of the risks associated with trading.

“The way people use OT could be dangerous,” said Sami Akhras, general manager of AFC. “You can get in and out within a few minutes, and they could be a catalyst for trading more than they should. People are under the impression it is an easy way to make money.”

As a result of such associated risks, Kaye said technical analysis and real-time charting is key.

“Everyone is trying to come up with a better mousetrap, but it’s not really working. The charting is the problem, and the greatest thing people are aware of is charting capabilities for markets — it’s still not developed to the point it is in the US. Reuters has MetaStock, and they are the leaders of global availability, but Mubasher is feeding to Reuters for the region, so Mubasher has a big edge over everybody else,” he pointed out.

Such an edge, said Kaye, could lead to the possibility of an oligopoly by a few online brokers, recounting how at a conference on OT Mubasher, the last company to address the audience, said that everything other OT companies had in the pipeline Mubasher had already done.

“Mubasher have created an amazing system and can replace 80% of small brokers in the region. The future is mega-brokers,” said Kaye.

Not all agree on such a future however. “I don’t think there can be a monopoly, as the backbone behind all this is IT, so you have to develop a good system. The feed is crucial and it comes from the banks,” said Abou Sleiman.

Market hindrances

With such rapid expansion, regulations in many countries are still not up to speed. Jamal said money transfers were an issue, with countries having different rules and regulations. Equally, settlement days differ, with Saudi Arabia doing so on the day, whereas in Egypt it is three days after.

“Egypt is doing this on purpose. It is a mature bourse and an investor market, not a trader market where people speculate. They want to lessen the effects by imposing day plus three to have only serious traders,” said Jamal.

In the Emirates, commissions are levied on OT transactions, a minimum of $20 one way.

“You have to make $40 first before counting your own money, and this can only be done if you have a very considerable amount. So if it’s less than 20,000 AED ($5,450), commissions will eat you, so you need 100,000 AED ($27,200) to make it,” said Kaye.

The solution to this, he added, is for universal standards that can be applied to all bourses and financial markets across the region.

The region’s dollar-pegged currencies are also hindering the growth of foreign currency OT, but if the GCC moves towards a common currency and de-links from the greenback, Abou Sleiman thinks there would be a surge in currency speculation.

Despite such obstacles and drawbacks in the mid-term, as Jamal put it, “online trading is the future.”

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By Invitation

A stitch for Turkey’s fraying ends

by Priyan P. Khakhar
written by Priyan P. Khakhar

After the decision of Turkey’s constitutional court to close down the Islamic AKP party due to allegations of promoting certain virtues in society, analysts and policy-makers have expressed concern about increasing tension in the already politically turbulent country. Political analysts may argue that the move, initiated by certain elements within influential circles of the Turkish state, is meant to maneuver the growth of the AKP.

Ever since the establishment of the Turkish Republic, secularism has been a red line in their politics, although today the secular establishment deemed it obligatory to allow the AKP greater representation, compared to thirty to forty years ago where any attempt by Islamists to capture power was foiled and deterred.

Due to the developments which have taken place in the past few decades in Turkey and the region, the military, which is the most influential source of the secular establishment, has not been at liberty to dictate the political culture of the country according to their visions. With the growth of Islamic movements, both philanthropic and political, along with leftist currents and Kurdish insurgency, the stance of Turkey’s military was forced to be moderated.

The question of which side in the political arena is following the just cause is a matter of deeper political analysis. What is meant to be addressed here, however, is whether the cohesion predicted could take shape through embracing pluralism in a society where many remain disillusioned or intolerant. The positive aspect of the AKP leading the government was that the main Islamic current moved closer to a line of moderation, meaning that the compatibility of Islam and democracy could have been demonstrated.

Furthermore, the presence of two main political trends, a secular and a religiously oriented one, gave the impression to many observers and politicians in the European Union that Turkey is moving closer to viable democracy and upping its chances of entering the EU, ignoring the French opinion on the matter.

It is evident that the secular republicans have acknowledged the importance of adopting a more pragmatic policy, provided that the AKP, once in power, assures the rest of the Turkish population that they will be free of schemes to gradually transform Turkey into a Islamic Republic.

The secular Kemalists, on the other hand, might have to use more progressive methods in promoting their culture. This may be achieved first through reforms within their circles, which would work to preserve the presence and importance of the military while being less reliant upon them; second, by acknowledging humanitarian issues like the Armenian genocide and the Kurdish question, without compromising Turkey’s core values and sovereignty.

The Islamists, on their part, are being tested in this era like never before since even the president is from the AKP, which is a precedent. The AKP is in a position whereby they are responsible for the later developments, and may have to demonstrate their dedication of preserving the secular establishment, which has proven, regardless of its flaws, to be the most successful Muslim country to modernize its society and gain a strategic position in a region troubled by war and ethnic conflicts.

A cohesion would only be feasible if both sides compromised their positions on marginal issues, while guarding Turkey’s status as the only modern Muslim nation-state. It seems evident that the military, the constitutional court, and their proxy institutions are more concerned with protecting Turkey’s identity as a secular nation-state prior to potentially entering the EU, contrary to the view that they are not interested in the EU.

Moreover, the recognition of more minority rights may also enable Turkish immigrants in the West, particularly Germany, to be more accepted and vibrant in the cultural and commercial spheres. The AKP could leave a legacy behind if they succeed in entering the EU while consolidating Turkey’s various factions by endorsing national liberal reforms, ensuring the right for every party to participate rather than for each party to function in a revolutionary (AKP, Kurdish parties) and the other in a counter-revolutionary (Republican People’s Party) way and realize the crucial issues facing the country.

The core issue to be resolved at this stage is for both parties to realize the supreme interests of Turkey, both politically and economically, regardless of the difficulties the country has been facing.

The secular establishment should recognize the economic progress that the AKP-led government has been able to shape, while at the same time ensuring the rest of the Turkish population that it is concerned with preserving the secular values modern Turkey is based on. This could be achieved by proving the state institutions, including the military, to be competent in promoting a culture of liberality and tolerance where the AKP can be assimilated and brought closer to moderation, and to tone down the Jacobin rhetoric and practices upon which they have been reliant on for decades.

Having said the latter, the secular republicans could be seen as a credible force by the European Union and may eventually widen the umbrella of the Western powers (NATO, EU) over Turkey where culture and economics are interchanged freely and constructively.

By Dr. Priyan P. Khakhar is assistant Professor MME Track Olayan School of Business

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Editorial

The winds of change

by Yasser Akkaoui
written by Yasser Akkaoui

Summer is the period when the Middle East harvests the fruits of its hard labors. It is the time when families travel, head to the mountains, and hit the beach. It is a time when they might splash out on those luxury goods with which we reward ourselves: the watches, the cars, the clothes, even the holiday.

And yet even amid the conspicuous consumption of the oil rich statelets, the realities of life in the Middle East do not lie far beneath the surface of the polo clubs, the malls, the hotels, the racetracks and the beach resorts. On June 16, the MI6 branch of British intelligence picked up a coded warning of an imminent terror attack on Dubai. Yes Dubai, the third most popular holiday resort among British holidaymakers and currently coveted as the ideal location for emigration among westerners eager to escape the taxes, gloominess, mediocrity and urban crime of their own nations.

And yet on the cover — and inside — the May 26 issue of Time, the Middle East was portrayed in two distinct colors: the black of a Lebanon newly plunged into civil conflict and the white of a GCC — epitomized by Dubai’s iconic Burj al Arab —  as the affluent counterpoint to a Levant in turmoil with Beirut as the new epicenter.

But what may have been a marketable cover for Time ignores the reality. It is a reality that functions in shades rather than colour. Lebanon may be fragile: there is no government yet and the security situation as witnessed in the more remote areas of the country is uncertain. And yet in Beirut, full of post-Doha euphoria and a new president, the capital gears itself up for what it hopes will be a bumper summer.

In another corner of the spectrum, the GCC appears to go from strength to strength. Oil price margins fuel private equity funds, steel and glass rise out of the sand and the Gulf societies bask in unprecedented attention from western nations anxious to plant corporate, cultural and educational roots in countries they see as both allies and part of a strategic gateway to the eastern markets of the future. And yet we had that irritating warning from MI6.

What protects the whole Middle East is not only a commitment to economic prosperity but one that is underpinned with an equal commitment to security. In a region in which there are many players — let us not forget that the team sheet also includes the US, Israel, Syria and Iran — with many agendas, the winds of change can shift.

We must learn to trim our sails accordingly.

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Banking & Finance

Money Matters by BLOMINVEST Bank

by Executive Staff
written by Executive Staff

Regional stock market indices

Regional currency rates

Syria to collect $550 million from mobile operators in 2008

The Syrian government has forecasted $550 million in revenues from the country’s two mobile operators, MTN and Syriatel. The new figure represents a 31% increase over the 2007 collection due to the build, operate and transfer (BOT) nature of the project. This entitles the government to collect 50% of the revenues instead of 40% in 2007. The Syrian Telecommunication Establishment (STE), a state-owned monopoly fixed-line operator, collects the royalties on behalf of the government. STE, which is expected to have a $1.2 billion of revenues in 2008, is planning on investing $1.5 billion over the next five years in expanding its fixed-line network into remote parts of the country.

Citigroup inks $2.8 billion Yemeni gas project

Yemen’s $2.8 billion gas-liquefication plant, considered the country’s biggest financed project, has been finalized by Citigroup ahead of its June deadline. The project will be financed by a number of entities that include: $120 million loan from Japan Bank for International Development, $400 million loan from Export Import Bank of South Korea, an additional $1.1 billion loan from the French export credit agency Coface. The seven mandated lead mangers will also provide another $1.1 billion in loans. The lead managers are Tokyo-Mitsubishi Bank, BNP Paribas, Citigroup, ING, Royal Bank of Scotland, Société Générale and Sumitomo Mitsui Banking Corporation.

Egypt’s inflation at 15.5%

The Economist Intelligence Unit (EIU) has forecasted an average 15.5% inflation this year, from 9.7% in 2007. The surge in inflation comes at a time of increasing oil prices where the Egyptian government increased fuel prices by 57%, 32% and 35% for 95 octane, 92 and 90 octane fuels respectively. Diesel prices also rose by 47%. Tax on tobacco was increased by 10%. The hikes in fuel prices and cigarettes taxes were implemented to offset increases in public sector wages and subsidies.

The EIU is also forecasting inflation to peek to 22% this year and gradually decrease to 9.1% in 2009. The Egyptian Central Bank has made inflation targeting its main policy and is likely to use monetary measures to curb inflation. The Central Bank has already raised interest rates three times this year with overnight deposit and lending rates standing at 10% and 12% respectively. Rates are likely to be raised by no more than 100 basis points in the coming 18 months in the wake of balancing economic growth and inflation control.

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Financial Indicators

Global economic data

by Executive Staff
written by Executive Staff

Educational attainment of recent immigrants

Percentage of foreign-born labor force and of the native-born labor force aged 25-34 and 25-64 with a tertiary qualification (2005)

Source: OECD

In many emigration countries, emigrants tend to be of higher educational attainment than the general population. This is because emigration involves certain costs, which are more easily borne by persons with higher education and presumably higher incomes, and because highly educated persons are more “tuned in” to opportunities abroad. Whether or not emigrants are more highly educated than the native-born populations of the countries they are moving to, however, depends in part on the history of immigration in these countries, the needs of their labor markets and the returns to different levels of education in destination countries relative to those in the countries of origin.

Recent arrivals to OECD countries who are in the labor force are in some countries more and in others less educated than the native-born labor force. Immigrants to southern Europe, Finland, the Netherlands and the United States in particular tend to show lower levels of tertiary attainment than both the native-born labor force and younger (25-34) native-born recent entrants to the labor force. In France, Belgium and Scandinavia, on the other hand, recent arrivals tend to have relatively more persons with tertiary education in the labor force than the native-born, but less than native-born persons 25-34. Finally, in Austria, Luxembourg, Switzerland, Central Europe and Ireland, the percentage of persons with tertiary education is higher among recent immigrants than among both the native-born labor force and native-born recent entrants to the labor force. Migration to these countries and in particular to Ireland, Luxembourg and Switzerland, is especially highly educated.

Producer Price Indices (PPI)

PPI: manufacturing (average annual growth in percentage)

Compared with consumer prices, producer prices have risen more slowly throughout the period 1993-2006, for OECD in total by 3%. More than half of OECD countries recorded average annual increases of under 2.5% and in two countries, Japan, and Switzerland, producer prices were actually lower at the end of the period than in 1993. All countries recorded unusually sharp rises in 1995, 2000 and 2005-2006 due to sharp movements in world commodity prices. For the Czech Republic, Hungary, Mexico, Poland and Turkey, very high growth rates in the first 3-year period have been replaced by moderate growth in 2003-2006.

Patents

Triadic patent families (number per million inhabitants, 2005)

Source: OECD

Growth during the second half of the 1990s was at a steady 7% a year on average until 2000. The beginning of the 21st century was marked by a slowdown, with patent families increasing by 2% a year on average. The United States, the European Union and Japan show a similar trend, with a stronger deceleration in Japan after 2000. About 53 000 triadic patent families were filed worldwide in 2005, a sharp increase from less than 35 000 in 1995. The United States accounts for 31% of patent families, a loss of around 3 percentage points from its level in 1995 (34.4%); the relative proportion of patent families originating from Europe has also tended to decrease, losing more than 4 percentage points between 1995 and 2005 (to 28.4% in 2005). In contrast, Japan’s share in triadic patent families gained almost 2 percentage points to reach nearly 29% in 2005. When triadic patent families are normalized using total population, Japan, Switzerland, Germany, the Netherlands and Sweden appear as the five most innovative countries in 2005. Ratios for Finland, Israel, Korea, Luxembourg and the United States are above the OECD average (44). Japan has the highest number of patent families per million population (119), followed by Switzerland (107). One of the largest increases between 1995 and 2005, from 7 to 65 patent families per million inhabitants, occurred in Korea. By size, China has less than 0.4 patent families per million population.

Contribution of key activities to aggregate productivity growth

Contributions of key activities to growth of value added per person employed (in percentage, 2000-2006 or latest available year)

Source: OECD

Over the period 2000-2006, “market services” accounted for the bulk of labor productivity growth in many OECD countries. Namely, in Greece, Luxembourg, New-Zealand, Norway, the United Kingdom and the United States, “market services” accounted for over 55% of aggregate labor productivity growth. However, the highest aggregate labor productivity growth performances can still be attributed to the manufacturing sector. This was the case in the Czech Republic, Finland, Korea, the Slovak Republic and Sweden. The contribution of “market services” to labor productivity growth has increased between 1995-2000 and 2000-2006 in Belgium, the Czech Republic, France, Luxembourg and New Zealand. This growing contribution of market services is sometimes linked to an increasing share in total value added, but in the Czech Republic, Japan and New Zealand, for example, it also reflects faster labor productivity growth in the market service sector. However, in several other countries, labor productivity growth in market services has slowed down in the most recent years.

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Financial Indicators

Regional equity markets

by Executive Staff
written by Executive Staff

Beirut SE: Shuaa  (1 month)

Current Year High: 3,423.90  Current Year Low: 1,761.53

The Beirut Stock Exchange was impacted by the latest act in the national political parody, titled approximately “how to form a cabinet.” Shares stayed resilient and Blom Bank’s BSI closed at 2031.83 points on June 26, a healthy improvement of 35.3% from the start of the year. Trading followed sideways trends for a number of stocks, Solidere closed the session above $36 per share, Blom and Audi GDRs closed at $103 and $99.30, respectively, and the common shares of banks Audi, BoB, and Byblos showed slight gains when compared with the end of May while BLC was unchanged and Blom listed shares appreciated by 13.8% between May 28 and June 26. 

Amman SE  (1 month)

Current Year High: 5,043.72  Current Year Low: 3,003.07

The Amman Stock Exchange moved up in early June as if Jordan were nowhere near Asia and immune to any contagion from Far Eastern or Western stock market tremors. The ASE market index crossed one of those famed psychological barriers by climbing beyond 5,000 points June 18 to a new year high of 5043.72 points the following day. Notably, this particular barrier is rather fresh for the Jordanian environment as it derives from the ASE’s new free float index which replaced the weighed index effective from June 8. In the last week of the review period, profit taking and selling moods ahead of the H1 results season erased 395 points from the index which closed at 4648.91 on June 26. Industry stocks led the market and climbed more than 29% between June 1 and 18. APC and JPMC were the focus of sellers after June 18, however, making the insurance sub-index the month’s best gainer, up 15.7%. For easier evaluation of the bourse’s movement in June, the index peak on June 18 was equal to 11,093.9 points in the weighed index.

Abu Dhabi SM  (1 month)

Current Year High: 5,148.49  Current Year Low: 3,327.86

The Abu Dhabi Securities Exchange fared better than the Dubai bourse in June but the largest UAE bourse couldn’t maintain mid-June price levels and the index dropped 1.6% in the course of the month. It closed at 4,957.21 points on June 26, receding below the 5,000 points line after trading above it between late May and June 22. The banking and consumer sub-indices outperformed the general index and ended the review period 3.1% and 1.8% up. Energy was the biggest loser, giving up almost 16% by market close on June 26. Dana Gas weakened to below $0.54 the share but the bigger energy loser was Taqa, which went through a dispute over trading rights for its convertible bonds and slid from $1.09 on June 10 to $0.78 on June 26. In structural terms, the UAE stock exchanges hope for increased listing by family-owned firms as the government announced that minimum flotation requirements for IPOs will be lowered to 25-30% from previously 55%.

Dubai FM  (1 month)

Current Year High: 6,291.87  Current Year Low: 3,968.09

The DFM index line had that downcast look in June that comes from dropping more than any other GCC market in this month. The first four sessions were alright but then things went south and the DFM general index closed at 5,432.43 points on June 26, down 4.3% from its reading at the end of May. With all sectors in the red, banking and insurance did better than other sub-indices whereas consumer staples severely underperformed and ended the period 22.2% down. The UAE, among whose main drawing points for business is the stable political and security environment had a fright minute from a warning by the British Foreign Office that terrorism is now a high danger for the British — and by implication all other — expatriates living in Dubai and other parts of the country. On the day after the terrorism alert was splashed across global media the DFM went down but only by a blip of three quarters of one index point, barely noticeable in the overall drag.

Kuwait SE  (1 month)

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

The Kuwait Stock Exchange carried its uptrend to further highs, making it six months of consecutive index gains. With a 3.7% rise in the general index from the start of June until its close at 15,562.60 points on June 26, June was even more kind to Kuwaiti investors than each of the two previous months in terms of absolute point gains. The index scaled a new historic high at 15,654.80 on June 24 before dropping a bit ahead of the summer and the results season for the first half of 2008. The banking sector paced market gains early in the month but by the second half of June, industrial and real estate values were the star gainers, respectively adding 8.6% and 7.7% on the month. First Dubai Real Estate Development Co was late June’s top gainer on the KSE, climbing 29% on the week and 9.1% on the day to close June 26 at $4.53. The stock was already on the up when the board on June 25 adopted a proposal to increase the capital by about four-and-a-half times, to $378 million. The increase, if approved by shareholders, will include a 200% bonus shares issue.

Saudi Arabia SE  (1 month)

Current Year High: 11,895.47            Current Year Low: 6,900.50

The Tadawul Index traded sideways but managed a small gain in June and closed at 9581.34 points on June 26. The Saudi Stock Exchange is still down more than 14% since the start of the year but looks much better when one takes a glance to the east where stock market indices on the other side of Asia have been ravaged in the first half of 2008, losing up to 54% in the year to date. In the second half of June, the Saudi hotels, insurance, and banking sectors booked gains while the industrial and retail sub-indices trailed below the market trend. At the end of the review period, news from foiled terror plans for attacking oil facilities at Yanbu and in the Eastern Province caused some instinctive selling that added a downward nudge to the monthly picture. 

Muscat SM  (1 month)

Current Year High: 12,109.10            Current Year Low: 6,309.94

The Muscat Securities Market had a slight net loss of 0.6% when comparing its close of 11,484.23 points on June 26 to the start of the trading month. Intra-month, the MSM index touched a new record high of 12,109.1 points on June 11 before giving up those early June gains in the second part of the month. The MSM’s downward movement in those two weeks was on account of banking stocks while the services sector traded sideways and the industrial sector added further gains between June 11 and 26. Individual stocks showed volatility and by late June there were both limit-up and limit-down movements in the same session. Banking heavyweight Bank Muscat shed 15.2% of its share price from June 5 to 26.

Bahrain SE  (1 month)

Current Year High: 2,902.68  Current Year Low: 2,409.27

The index on the Bahrain Stock Exchange corrected downward by 61 points after recording a year high of 2,902.68 points on June 16. On the month, the index weakened by 1%. The insurance sector was the BSE’s best performing sub-index in June, showing intra-month gains of almost 4% and closing still in positive territory on June 25. Hotels and tourism was the only other sector to stay out of the red while banking slipped in the second half of the period and underperformed the general BSE index. Banking heavyweight Ahli United dropped 6.3%. In the longer-term view, the BSE is moderately up from the start of 2008 and in late June reported the lowest P/E ratio of all GCC bourses at 12.27x.

Doha SM: Qatar  (1 month)

Current Year High: 12,627.32            Current Year Low: 7,340.06

The Doha Securities Market starts June with positive sessions and the index climbs to a June 11 year high of 12,627.32 points. The DSM slides back below 12,000 points and closes at 11,875.09 points on June 26, marking a net loss of 0.1% in the review period. The banking sector led the market up and down through the month, letting the insurance sub-index come out on top as June’s best performer among DSM sub-indices. Industry and services under perform the general index in June. While opposing movements of DSM and KSE in June put the two exchanges on near identical footing in year-to-date share price gains of about 24%, the DSM is still the priciest in the GCC in terms of P/E ratios. In a development which participants hope will boost Doha’s future as regional financial hub, the NYSE Euronext exchanges make a deal with Qatari authorities for buying 25% in the DSM for $250 million; the contract’s completion is expected in the fourth quarter of 2008. 

Tunis SE  (1 month)

Current Year High: 3,059.63  Current Year Low: 2,436.94

The Tunindex conquered a new record high on June 26, closing at 3035.50 points. The closing price represents gains of 2.5% on the month and 17.05% from the start of 2008. During the second half of June, banks traded range bound with the general index while the financial services and consumer goods sub-indices outperformed the market; the industrial index trundled behind. In the year-to-date view, the two financial sub-indices — financial services and financial companies — rocked, with gains of 57.3% and 23.3%. Shares of Assad, a battery manufacturer, continued to gain in June and ended the review period at twice the price they traded at at the end of April. Assad and global manufacturer of industrial batteries, Enersys, announced a manufacturing joint venture.

Casablanca SE All Shares  (1 month)

Current Year High: 14,925.99            Current Year Low: 11,271.35

Perched on its hyper-valuation of 33.3 times price to earnings, the Casablanca Stock Exchange crept sideways and a bit downwards into the summer. The index closed at 14,188.96 on June 26, down by 328 points from the start of June. Market cap leaders Maroc Telecom and Attijariwafa Bank moved with the downward trend in June. While the Moroccan financial market’s relative isolationism as affecting local investors continues to distort the picture, the economy’s overall outlook of above 5% in 2008 and 5.5% in 2009 offers encouraging perspectives for the second half of this year.

Cairo SE: Hermes  (1 month)

Current Year High: 103,313.60          Current Year Low: 67,011.50

The Cairo and Alexandria Stock Exchanges in June didn’t make it out of the doldrums which the Egyptian had slipped into in May when the government announced an end to certain industrial subsidies and tax breaks. A 7,500 points fall in the EFG Hermes index in June to the close of 87,814.12 points on June 26 meant that the bourse dropped into the red on its year-to-date record and ended the review period 5.3% down when compared with the beginning of 2008. Market heavyweights Orascom Construction Holding and Orascom Telecom Holding shed 4.9% and 11.5%, respectively, between June 1 and June 26. At the end of the period, the market suffered another hit on the short-term confidence front when it was announced that the sale of Banque du Caire did not go through as planned because the government deemed the $2.025 billion valuation of BDC implied in the offer by top bidder National Bank of Greece as too low. 

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By Invitation

Economic diversification and the road to sustainable development

by Richard Shediac, Rabih AbouchakraChadi N.Moujaes & Mazen Ramsay
written by Richard Shediac, Rabih AbouchakraChadi N.Moujaes & Mazen Ramsay

A strong, sustainable economy enhances a nation’s standard of living, creates wealth and jobs, encourages the development of new knowledge and technology and helps ensure a stable political climate. Economic diversity across a wide range of profitable sectors and sustainability are intrinsically linked, and are key to a sustainable economy. Economic diversification can also reduce a nation’s economic volatility and increase its real activity performance.

Can diversification drive sustainability?
Many Gulf Cooperation Council (GCC) countries are “transforming” their economies from being based on a single commodity to being robust, diversified ones. Hydrocarbon rich GCC countries, with economies heavily dependent on oil and gas, face sizeable challenges in diversifying. It is therefore opportune to highlight the need to create sustainable economies.
As such, closely examining GCC economies, G7 economies, and transformation economies (Hong Kong, Ireland, New Zealand, Norway, Singapore, and South Korea) enabled the evaluation of trends in and potential relationships between economic diversification and subsequent sustainability.

Evaluating economic diversification
Three key findings were established during the analysis of economic diversification.
1. Gross Domestic Product (GDP) should be distributed across sectors
Economic concentration and diversification was assessed by analyzing whether GDP was distributed across a wide variety of economic sectors — or across a few. This evaluation determines a “concentration ratio” and a “diversification quotient”. The concentration ratio measures a nation’s concentration in a given sector, while the diversification quotient is the inverse of the concentration ratio — providing an innovative metric that policymakers can use to gauge economic diversity. The lower the concentration ratio and the higher the diversification quotient, the more diversified is a nation’s economy. Results showed that GCC countries have the highest concentrations in terms of sector contribution to GDP and thus the lowest diversification quotients due to the historic dominance by the oil and gas sector.
Growth in non-oil sectors reflects spillover effects from increased oil receipts and subsequent record-high inflows of capital. These cannot be considered inherently sustainable because of dependency on the dominant sector’s fortunes in the marketplace. GCC countries’ non-oil sectors have not fully matured and still have pervasive structural gaps. This suggests revenues from oil and gas are not being reinvested effectively in GCC countries, but instead are being used to fund nations’ internal (i.e. local) economies, rather than external ones.
Therefore an economy with a strong foundation in export helps insulate against unexpected changes in the domestic economy, and insulates against volatility of oil and gas prices and the subsequent knock-on effects.

2. Concentration is not inevitable in hydrocarbon-rich economies
Many GCC economies, especially larger ones, have been susceptible to such changes in oil prices. In the KSA, GDP growth has been driven by the oil and gas sector, but has varied over the years due to oil price changes and shocks. Growth in non-oil sectors has also varied due to fluctuations in oil prices. This suggests “contagion effects” — the tendency of failure in one economic or financial arena to spill over into other arenas.
The UAE’s GDP growth has been driven mainly by the oil and gas sector. Nonetheless, the UAE has recently experienced relative improvement in non-oil sectors as a result of Dubai’s efforts toward economic diversification. Only 5% of Dubai’s GDP came from the oil and gas sector in 2005. In neighboring Abu Dhabi, the Emirate drew 59% of its 2005 GDP from oil and gas, and growth in non-oil sectors continues to lag.
Being hydrocarbon-rich does not predestine economic concentration. Sustained, robust policies focused on diversification can make large differences in an economy, and nations rich in any single commodity must be particularly attentive to the issue of diversification to avoid a natural tendency toward economic concentration. Beyond the need of building a solid economic base that would endure after natural resources expire, economic diversification is key to shielding domestic economies from underpinning and relatively uncontrollable risk factors related to global demand and supply shocks.

3. Labor distribution should support growth
Employment distribution generally reflects and shapes GDP distribution across sectors. In the GCC, employment is distributed unevenly, compared to G7 and transformation economies with employment balanced across a variety of profitable sectors. The oil and gas sector, producing 47% of GCC countries’ GDP, provides work for only 1% of the employed population, with the majority of the workforce employed in sectors relatively less economically productive and of secondary strategic importance. In reality, government services constitute around 20% of total GCC employment, while a majority of workers are laboring for the support of other economic sectors, rather than being the key drivers of growth themselves.

Evaluating economic sustainability
Measuring the relationship between economic diversification and sustainability highlighted a statistically significant relationship between the two. A collection of analyses measuring productivity and competitiveness and the relation of economic volatility to concentration, employment, and economic performance, resulted in a number of key findings:

Poor economic diversity is linked to low productivity and competitiveness
Productivity is directly related to competitiveness; the more people and/or capital it takes to do a job or create a product, the lower productivity is, which in turn raises the product’s price and lowers its potential for competition in the marketplace. GDP labor productivity in GCC countries in 2005 was $1.6 million per employee for the oil and gas sector but only $9,300 per employee for construction. GDP-to-credit capital productivity was $121 million per unit of credit for the oil and gas sector but only $1.2 million for construction.
Labor and capital productivity are key measures of sustainable economic development. As such, poor economic diversification — the over reliance on a single dominant economic sector — has an unfavorable effect on the productivity and competitiveness of other lagging sectors.
Underperformance is persistent across GCC economies and productive sectors. Even in the oil and gas sector, GCC output per employee remains low, suggesting inefficiencies or less-than-ideal production processes. The achieved gains in labor and capital productivities have mostly been visible in the oil and gas sectors and limited in others.

High economic concentration leads to volatile growth and fluctuating economic cycles
High economic concentration makes an economy vulnerable to events like price changes in the dominant commodity. Price shocks have resulted in fluctuating business cycles, as economies respond to rises and dips in the price of oil and the spillover of volatility from oil to non-oil sectors. This sensitivity is manifest in all sectors that contribute to the bulk of economic output and employment. A high level of volatility hinders sustainable economic growth, because periods of prosperity generally do not fully offset the negative structural effects of bad times. Economic shocks have a long-lasting negative effect.

Volatility in concentrated economies may spawn structural unemployment issues and engenders systemic risks
Elevated volatility in GCC countries is highest in economic sectors that employ most of those nations’ populations. High volatility causes frequent unemployment, resulting in high structural unemployment rates — i.e. unemployment because available laborers do not have the skills or knowledge for the available jobs. Workers with particular knowledge and skill sets cannot easily be moved to different sectors of the economy.
Volatility in non-oil sectors in the GCC region has relatively been on a downward trend over time. Nevertheless, this reduction could be more the result of there being fewer total shocks, rather than the result of effective diversification.

External trade helps reduce economic volatility
Pervasive volatility can be decreased with the development and diversification of high value-added exports of goods and services, especially for economies based on a single commodity. When non-oil exports are mapped against real activity volatility, an inverse relationship is revealed between external trade diversification and economic uncertainty — the higher and more diversified a country’s exports, the lower its volatility. High but concentrated economic growth will be outweighed by excessive volatility leading to low risk-adjusted performance if diversity is not effectively implemented. This phenomenon can be captured by a revisited version of the Sharpe ratio, which measures an economy’s risk-adjusted performance.
On average, transformation economies increase volatility by 1% with growth of 2.52%; in comparison, GCC economies increase volatility by 1% with growth of just 0.69%. For GCC economies, any increase in growth inherently increases economic risk rather than economic reward.

Diversification is a critical component of a sustainable economy
How can economies that have relied on the export of a single commodity reduce volatility and achieve sustainability? Is economic diversification a key part of accomplishing this?
The study compared GDP growth volatility against economic concentration and GDP reward-to-volatility ratio (i.e. the Sharpe ratio) against the diversification quotient. The results revealed a clear link between economic diversification and sustainable development.
Nations, like those in the GCC, with a high concentration ratio suffer from higher growth volatility than G7 or transformation nations. Nations with a high diversification quotient like Norway, South Korea, and Ireland enjoy a high Sharpe ratio — a high economic return per unit of volatility.
Regression estimators in the analysis are significant. About 30% of variation in GDP growth volatility and reward- to-volatility ratio is captured by single independent variables — economic concentration and diversification. The remaining 70% of the variation not explained by the regression can be explained by other factors — oil prices, inflation, exchange rates, investor and consumer confidence, general asset price shocks, and so forth. Many of these are difficult for policymakers to directly influence, while economic diversification is measurable, monitorable, and a critical component of a sustainable economy.

Effecting sustainable development: summary of key findings
and recommendations for policymakers
• GCC economies are the most concentrated and inadequately diversified. Hydrocarbon-rich nations are not necessarily doomed to poor economic diversification, as shown by the paragon economies of Norway and to a certain extent Canada.
• Employment distribution is balanced in G7 and transformation economies, but skewed toward low-value- added sectors in the GCC economies.
• High economic concentration exposes economies to external or exogenous events like changes in oil prices, which creates economic volatility.
• Overall volatility and subsequent spillover effects can be mitigated with the effective development and diversification of high-value-added exports.
• Volatility minimization and risk-adjusted real activity performance improvement can be achieved with increased economic diversification.
Policymakers must focus on economic diversification when creating development agendas, and must rigorously measure and monitor economic diversity in evaluating the success of their policies. Specifically, policymakers should pursue the following courses:
• Diversify economic bases in terms of output and input distributions. Stakeholders should incentivize injection of labor and capital into productive economic sectors, as well as the development of new knowledge and technology.
• Foster the growth of the external sector by exporting a wide range of high value-added goods and services internationally.
• Enhance productivity and competitive levels of the economic base, through resources and strategic investments, including enhancing human and financial capital, technology and knowledge to entrench innovation. Innovation allows economies to create high economic value from almost nothing as a starting point. This said, although preparing the ground and establishing the prerequisites and underpinnings of an innovation economy should be initiated at early transformation stages, the effective generation of economic output out of innovation sectors should come as a natural phase in an economy’s transformation path. A premature reliance on innovation sectors is likely to minimize chances of success and expose a not-yet-immunized economy to harmful and disruptive competition.
• Use the metrics of economic concentration and diversification, as well as economic sustainability and uncertainty, as targets when determining policy.
• Monitor and devise clear diversification strategies and mechanisms to mitigate economic volatility and spillover effects, uncertainty, and perturbed business cycle transitions.
These steps will help policymakers create long-term, sustainable growth in their economies to help ensure stability and a high standard of living for their nations.

RICHARD SHEDIAC is a partner at Booz Allen Hamilton who leads the firm’s public sector and health businesses throughout the Middle East

RABIH ABOUCHAKRA and CHADI N. MOUJAES are principals at Booz Allen Hamilton

MAZEN RAMSAY NAJJAR is an associate at Booz Allen Hamilton

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