Banking & Finance

IPO Watch – Sizzling summer

by Executive Staff
written by Executive Staff

The story of the summer doldrums in the IPO market in the MENA region has now become an old wives’ tale. Most analysts say the IPO market is set to sizzle this summer as some big-name companies trying to capitalize on the bull market to go public. A surge in domestic liquidity and market reforms has sharply boosted IPO activity in the region this year and economists in the GCC expect the region to achieve new IPO benchmarks in 2008.
These favorable predictions come despite continued doubts over the attractiveness of one GCC exchange for stock market debutants, namely the Dubai International Financial Exchange (DIFX). In the latest IPO cancellation case on DIFX, Lebanese-owned Future Pipe Industries Group said at the end of May it now favors listing in Europe, on either the London Stock Exchange or on Euronext N.V. Future Pipes cancelled its $487 million IPO on DIFX in early May for reasons which analysts linked to the poor liquidity of DIFX and the downtrodden performance of April DIFX entrant, Depa, immediately after the start of trading.
As good news for the DIFX, Depa share prices picked up in the course of last month and on May 27 the stock closed one cent above its opening day quotation of $1.55.

Gulf markets
Although on the weaker side in share price trends so far in 2008, Saudi Arabia’s Tadawul Exchange is one of the Arab stars in primary market action this year. In April, two new Saudi IPOs have successfully raised a combined total of $3.28 billion.
One of the two newly listed firms, construction firm Mohammad Al Mojil Group, closed its first day of trading May 27 with a 17.14% share price gain, according to the Zawya IPO Monitor. The second firm, Al Inmaa Bank was scheduled to start trading at the beginning of June. Al Inmaa was 1.74 times oversubscribed and Mohammad Al Mojil Group was 3.14 times oversubscribed.
The equity market in Saudi Arabia is set to be the recipient of further announcements of new IPOs in the third quarter of 2008. Astra Industrial Group said it will offer 30% equity, Chemanol with 50% and Maaden will float 50% to raise $2.47 billion. Also in the kingdom, Halwani Brothers, part of Saudi-based Dallah Albaraka Group, will offer 30% of its capital in an IPO that will start on June 21 and run until June 30. Another new entrant, Abdullah Al Othaim Markets Co. said it will float about 30% of equity in an IPO scheduled to start from June 21 to June 30. The company is seeking to raise around $6.13 million
In Bahrain, the IPO of Voltamp Energy, which was launched on May 5 has received very encouraging response from GCC investors. The company is raising $35.8 million and the IPO will close on June 3. Voltamp said the money raised will be used “for funding the ongoing capital expenditure and for meeting the long-term working capital requirements.”
A development in an already announced IPO on the BSE is that of Mobile operator Zain Bahrain, a unit of Kuwait’s Zain Group, which has set the second half of 2008 as the time frame to launch its initial public offering for part of its shares. Zain’s chief operating officer, Ahmad Al Shatti, said the board will decide by mid-June on the stake it will offer to the public and the value it seeks to raise.
The stable markets of the GCC continue to drive IPO activities to new levels especially since the majority of the IPOs this year have performed well against the backdrop of the subprime and credit market crises. Analysts agree that larger deals tend to encourage and pull other companies onto the IPO bandwagon. Companies large and small are now taking advantage of the spectacular growth the region is currently experiencing and going public has officially become a trend.

Surpassing the energy boom
Much of the growth in the region’s markets can be traced to the energy boom, but listings in the GCC this year have extended well beyond the high oil prices. Real estate and property firms, as well as telecom companies and financial firms have made their market debut. Investors, Arabs and foreigners alike, are finding what they are looking for in the region’s market. Strong deal flow will continue to entice institutional and private equity investors. Market observers agree that deals on track in 2008 will outpace last year’s numbers. They say the stock market will set the climate for public offerings. As long as the market does relatively well, companies will be able to raise money.

 

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Lebanon

Dr. Freddie Baz (Q&A)

by Executive Staff
written by Executive Staff

Dr Freddie Baz, Bank Audi’s CFO and Chief Strategist talked to Executive about the current situation for banks in Lebanon and future prospects for the sector.

E How do you view the expansion of Lebanese banks in the region. Do you believe they can compete with foreign players?

When we started expanding in the region, we tended to favor acquiring local financial institutions well established in each country. This approach has been particularly helpful in closed markets where Central Bank authorities have decided to stop granting new licenses. In such markets, which usually encourage consolidation through mergers and acquisitions, we have and continue to look for an inorganic growth. As an illustration, we are considering consolidation in Jordan, a market where many opportunities are available as middle size banks show good profitability ratios. However, our initial strategy has been to grow organically. In Syria, we were able to build close to $700 million in deposits during our first year of operation. This year, deposits would reach to $1.5 billion. In Jordan, we have been able to build a customer franchise deposit base of $600 million in less than two and half years. Our bank’s 2007 consolidated balance sheet boasts $17.5 billion in assets, of which $3.5 billion stem from three foreign markets — Syria, Egypt and Jordan.
This example illustrates the reality of a few Lebanese banks, which have been able to build customer and account portfolio franchises. In parallel, Arab banks have enough liquidity to acquire other financial institutions but they do not have the necessary expertise to build institutions organically, which is a know-how proper to Lebanese banks.

E Is the Lebanese banking sector considered as attractive for other regional financial institutions?

A few years ago, stocks of Lebanese banks were considered quite affordable. Prices have, however, improved in recent months, although they still remain very attractive. The large banks, mainly Audi and BLOM, used to be traded at ten or twelve times their earning, a figure that has increased to 15 or 17 times. This figure is quite high against the backdrop of the current situation. In spite of the improvement of trading multiples, Lebanese banks still feature the cheapest assets in the region. If one takes the example of the NBK acquisition of Al Watani, which was bought at 50% of asset value, current trading multiples of Lebanese banks are still estimated at only 18% of their assets. Cheap prices and large assets inherent to the Lebanese banking sector will certainly stimulate the appetite of foreign banks. Another enticing factor is that large Lebanese financial institutions have billions in assets and are extremely well established in terms of footprint. In addition to their know-how, Lebanese banks are operating both in emerging and frontier markets. The latter category, which includes countries such as Sudan, offers massive profit potentials. With price to assets at less than 20% and a wide network of branches in more than ten countries, Lebanese banks are certainly exposed to takeovers. The management is thus faced with two choices, either to acquire or be acquired.

E So are you saying that Lebanese banks are still undervalued?

What determines the real value of a bank is its operating environment, namely the political and economic framework. Political stability tends to boost confidence. This in turn affects aggregate demand, consumption and investment levels, which reflect on GDP growth rates. This process takes a chain form. In my opinion, there is a very strong correlation between commercial bank transactions and GDP growth rate. If one takes a quick glance at the Lebanese economy, one notices that there is a wide gap between actual GDP and potential GDP, which is estimated at around $34 billion — $10-11 billion of yearly additional income compared with actual levels. If the economy is allowed to thrive, banks will grow and their trading multiples will be within the region’s prices to assets and prices to equity. For investors to eye a particular market, they need to have a clear vision for a limited period of three to five years.

E How risky has the sovereign debt become for Lebanese banks?

The sovereign debt has been diluted due to the large bank assets. When Prime Minister Hariri was assassinated, Lebanon was faced with a $2.2 billion outflow in deposits. Since then, deposits of Lebanese banks have grown by $16.6 billion. The war with Israel generated an immediate outflow of $3.1 billion dollars in deposits. Nonetheless, since July 2006 Lebanese bank deposits have witnessed an increase of $12 billion. In the meantime, subscription to public debt has remained constant, meaning that exposure of Lebanese banks is plummeting with time. Only a few years ago bonds in foreign currency reached a percentage of 30% in terms of deposits in foreign currency; this figure has dropped to 12 % for the sector and to 9% at Audi in recent years.

E Do you believe that growth in deposits can be partly attributed to an accumulation of interest?

Last year’s growth can be attributed to the convergence of two main elements — soaring oil prices and the repercussions of the subprime crisis. Rising oil prices have impacted on the money transfers made by the Lebanese diaspora residing in the Gulf. In 2001, the Arab region’s GDP amounted to about $600 billion; it doubled in 2007 reaching $1.2 trillion with an oil price at $88. In years to come, the growing oil price will certainly reflect on banking sector assets. On the other hand, the subprime crisis has also encouraged Lebanese who lost confidence in foreign banks to divert some of their funds to Lebanon. The outlook for Lebanon seems to be quite positive for now, as witnessed in the growth of $1.8 billion in deposits in the first two months of 2008.

E Lebanese banks are very reliant on Lebanese living abroad. How does this market particularity shape your strategies and products?

Bank Audi’s main objective is to be among the top five banks in the region. We do not especially target the Lebanese diaspora, which seeks us naturally. On the contrary, we want to create and develop a sound customer base in all of our locations and hence focus our attention on the local population, namely Egyptians in Egypt or Syrians in Syria. We are a universal bank at the service of Arab citizens.

E Do you foresee a specialization in the banking scene, with each bank focusing on a particular market segment?

All banks pretend to adopt a universal bank approach, given they have the proper expertise. We are a universal bank: we boast 400,000 retail accounts, one third of our deposit base is constituted by accounts with balances in excess of $1 million each, some of the top fifty companies in the region are featured among our clients. Our Capital Markets department manages $5-6 billion in yearly turnover on Lebanese stocks and bonds. As you can see, we have been able to reconcile between two market dimensions, mass and elite. A universal bank is built on expertise, which in turn generates market share. Nonetheless, our approach also differs from one market to the other. While we may opt for the universal bank approach in certain markets, we may choose a more specialized one in another.

E Do you think the Lebanese banking scene has become overcrowded?

Not really. Lebanon may have become overcrowded in terms of numbers of banks. But when one takes a close look at banking coverage ratios, such as number of accounts per household or residents per branch, they still lag behind. In my opinion, the Lebanese retail market is still in its infancy. There are huge potentials in terms of organic growth for banks in the retail market. For Lebanon to close the gap between actual and potential GDP, billions of dollars of loans will be required. The Lebanese banking sector has always been very concentrated. Years ago, the first 20 Lebanese banks represented 80% of the market. This figure has dropped to about 70% to 75% today. Among the alpha banks, size varies greatly from one institution to the other, the top two banks weighing as much as the last five.

E Many economists have criticized Lebanese banks on the premise that they tend to finance the government instead of the private sector. Do you agree?

In Lebanon, the proportion of consolidated loans to GDP is almost one-to-one, an extremely high ratio beyond any acceptable ceiling. However, due to the importance of the consolidated deposits of banks to GDP, among the highest worldwide, the contribution of banks to the private sector seems to be dwarfed in comparison. In reality there is no crowding-out effect. When it comes to loan segmentation, the banking sector is only reflecting the reality of the market. In addition, Lebanese SMEs need to be managed more like companies and less like mom-and-pop-shops, by developing proper audits and processes in order to be able to secure larger amounts of loans.

 

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Branch managers are vital investments for sales effectiveness

by Peter Jenkins & Peter Vayanos
written by Peter Jenkins & Peter Vayanos

A recent study by Booz Allen Hamilton Striving for growth: Best practices in retail banking sales and service channels revealed that the majority of banks are failing to fully meet customer needs and maximize sales channel performance. This comprehensive study, which used customer research and mystery shopping assessed 100 banks across 17 countries including 12 banks in the GCC, looked at what customers want from their banks, how banks are performing and best practices to drive profitable growth.

The study revealed that, globally, customers still prefer banking in branches despite the trend towards online — 63% choose to use a branch for purchasing current and savings account products and 54% choose their branch to purchase mortgages. The situation in the GCC is very close to that of the global average. However, despite the importance of the branch channel to customers, many banks in the region under-perform and have yet to get the basics right. GCC banks scored on average 20% less than the global average. As the competitive intensity increases in the region and banks have to deal with a more heterogeneous customer base in terms of age, wealth levels and cultural background, addressing shortfalls in sales effectiveness in the branch will become a crucial source of differentiation.

So how can sales effectiveness be improved? Our work with domestic champions that continue to win year in year out shows that success can be attributed to the mastery of the five following levers:

• Customer information and insight: Branches need to leverage customer insights more and provide tailored service to target customer segments.

• Sales management: Sales staff should be supported by a sales pipeline and have access to the right level of MIS to measure performance.

• Processes and tools: Sales processes should be simplified and staff should have access to systems that support a single customer view.

• Capacity and deployment: Staffing levels need to reflect the customer mix and sufficient time should be allowed for sales related activities. Capacity planning needs to be proactive to cope with peaks in demand.

• Roles and capability: Branch staff require clear roles and responsibilities backed up by effective HR processes and appropriate performance management systems.

In the Middle East there is still a way a go. For starters, many banks lack accurate and complete data on their customers to support the development of customer insights. Often the most fundamental data is missing. Sales management activities also tend to be more reactive in nature and driven around promotions as opposed to being approached in a systematic fashion. Furthermore, few banks have managed to deploy the systems and processes to enable a single customer view across multiple channels. Finally, many customer sales representatives viewed themselves primarily as providers of service and not responsible for sales. For example, in one of our clients, the customer sales representatives spent 41% of their time on service-related activities and only 9% of their time on sales-related activities.

On top of the above capabilities, many banks continue to overlook the performance impact of successful branch managers. That’s a big oversight because exceptional branch managers can have a disproportionate impact on a branch’s performance. In a recent Booz Allen Hamilton analysis of more than 4,000 bank branches, just 5 to 10 percent of branch managers demonstrated consistent top quartile performance over a sustained period. But those branch managers delivered three times the growth of their local competitors. On a three-year net present value basis, an exceptional branch manager is worth between $500,000 and $1 million to his or her bank.

All the signs are that the same picture holds true for for the Middle Eastern banking sector.

Why has this situation arisen? The results of our study suggests the following:

• Management often does not know or agree on who their top branch managers are.

• Sources of exceptional performance are not often adequately explained and thus rarely replicated. Training is often focused on developing basic skills, rather than competencies required to generate top performance.

• The symmetry between branch manager competencies and branch requirements is not always explicitly understood and managed.

• One size does not fit all — top performers harbor different aspirations and need to be cultivated differently

What are the traits shared by top performing branch managers? They are proud of their bank, their branch and their employees. They are creative in coming up with new ways to drive business. They are driven to succeed and motivated by their branch’s success, not just their salary and bonus packages. They are confident in their ability to meet their goals and they typically hold an integrated view of all the aspects of their business — sales, service, people and the core operations.

Just as important, however, are the differences among successful branch managers. Interviews conducted in conjunction with the Booz Allen Hamilton study found that they perceive themselves, accurately or not, to be variants around two themes: “town mayors,” who identify more strongly with their branches and their communities than with the overall organization, strive to maximize their branch’s performance and their communities’ ability to prosper and have few ambitions to move beyond their current position, or as “find the next challenge” types, competitive about their role within the bank as a whole and desirous of moving to larger branches as a way to take on positions of greater importance within the organization.

Understanding these differences in both ambition and talent offers banks the opportunity to manage the career paths of their top performing branch managers more effectively, getting the most out of those high performers and make sure they put the right manger in the right branch. Given that the attrition rate among branch mangers industry-wide is between 20 and 30 percent every year, rigorous, thoughtful career planning is essential to the retention and continued success of the best branch managers. But that must be coordinated with new approaches to every aspect of human resources processes relating to the branch manger, including recruitment, training and performance assessment. This will be a particularly tough challenge in the Middle East given the shortage of skilled resources and the relatively low standards that prevail in many human resources departments.

Taking an objective approach to managing sales managers will work in any retail sector, or any business for that matter. For banks, it will produce a significantly better return on the investment they make on their branch managers — but it will work only if high performers are given the tools, the goals, and the incentives to maintain their pace. On that note it is worth it for retail bankers to ponder the following five questions:

• What is the state of the key levers required to enable successful sales activities?

• Do you know how to find and assess your best people?

• Do you have the right people in the right branches?

• Can you successfully attract the best from your competition and retain them?

• Do you have the infrastructure to support and develop great branch managers?

Peter Vayanos is a Vice President and Partner with the Financial Services Practice of Booz Allen Hamilton, based in the Beirut office.

Peter Jenkins is a Vice President and Partner with the Financial Services Practice of Booz Allen Hamilton, based in the Dubai office.

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Lebanon

SGBL – A new horizon

by Executive Staff
written by Executive Staff

Antoun Sehnaoui, who became Chairman and of leading Lebanese bank Société Générale de Banque au Liban (SGBL), in October 2007, believes in organic growth over radical change. “It is about evolution rather than revolution,” explained the youthful chairman, who succeeded his uncle Maurice Sehnaoui as head of what many regard as Lebanon’s most innovative bank.

One of the most recognizable on the Lebanese banking landscape with its familiar red white and blue logo, SGBL’s activities are organized into a three-core business: retail banking, corporate and investment banking, and private banking. It also has a presence in Jordan, where as SGBJ it operates 18 branches, Cyprus with six branches and in Syria, where it offers specialized financial services through its affiliated companies, Fidus and Sogecap.

But it is the future that has injected a new buzz – not to mention new capital – into the bank which is embarking on an ambitious expansion plan. The monies will finance local and international acquisitions, the opening of more local branches with a new look and what Sehnaoui calls “more maneuverability” to SGBL’s banking operations. This with no doubt means that SGBL will continue to plow new retail banking furrows by rolling out new products, while consolidating other core activities such as private banking and asset management, investment and corporate banking.

Furthermore, in line with meeting the standards set by its committed French partner Société Générale, SGBL will be aiming to scale new heights in terms of human resources and deliver a level of professionalism commensurate for a bank with an international profile. “It’s not that we lacked any of these previously,” says Sehnaoui, once again keen to stress that the changes are part of a process to improve SGBL’s position in a “competitive global environment.”

Reassurance has long been the bank’s watchword. SGBL ranks first in terms of loans to deposits of all the Lebanese banks, and is probably the most risk averse, an important strength in a financial world blighted by the ongoing subprime mortgage crisis. “Our shareholders insist on this,” explains Sehnaoui, who is arguably the first in what promise to be a new generation of young and dynamic chairmen in Lebanese banking. “The ambition now is to increase profits and make Lebanon a regional platform for our international activities.”

A new vision

Sehnaoui believes that by as early as 2010, the bank’s new vision will have yielded fruit “I expect us to be operating more robustly locally and internationally, across all our activities, while at the same time boosting inter-business revenue synergies, operating efficiency and ultimately operating income.” It is a vision predicated on the firm belief that the Lebanese banking sector will continue to be the pillar of the country’s economy. It currently contributes a big share of the nation’s GDP but, more importantly, it is suitably diversified so as to withstand most shocks.

The banking sector is underpinned with decades of Lebanese conservatism but it also recognizes that it must embrace global banking methods; no one is capturing the essence of this zeitgeist better than SGBL, which understands the needs of both its retail and private banking clients and further understands that both are equally important in a competitive and diverse global banking industry.

The bank itself is hardly a newcomer to the sector. Capitalizing on over 50 years of experience, SGBL’s retail banking operations will pursue a strategy of ambitious organic growth in countries where the group is already present. SGBL has always been a leader in retail banking, a reputation based on its ability to introduce new products onto the market and invest in technology.
SGBL will therefore be expanding its client base and giving wider geographic coverage. Meanwhile, the exploitation of revenue synergies between businesses will continue, with priority given, amongst others, to cooperation with the regional network of Syria, Jordan and Cyprus and cross-selling between SGBL divisions.

For its Lebanese networks, SGBL will also adopt a strategy of deliberately targeting high-net worth individuals and work at closer cooperation with corporate and investment banking arms, both of which should promote dynamic growth. The investment banking division is gearing itself up to play what it hopes will be a key role in helping rehabilitate Lebanon’s private sector much of which was mauled after years of conflict and political instability by actively getting involved in forthcoming M&As and privatization.

Sehnaoui is acutely aware of the needs, issues and concerns of the Lebanese private sector, an arena in which close understanding play a key role in oiling the finely calibrated cogs of Lebanese economic activity. “The private sector is the lifeblood of our very small but dynamic country,” he says. “The private sector is our partner in growth.”

Elsewhere, the Private Banking and Asset Management divisions, backed by the expertise of Fidus and its team of specialists, not to mention the support from Groupe Société Générale, will consolidate its position as a leading purveyor of wealth management products and services. With the demand for innovative private banking services in the region – and the demand for Lebanese private bankers – SGBL will aim to deliver innovative financial products and diversified and tailor made investment solutions to a lucrative niche in this growing sector.

“Thanks to Fidus, our brokerage and portfolio management arm, SGBL was able to develop its activities in wealth management locally and internationally, answering the growing needs of its clients around the world and the increasingly active nations of the GCC, buoyed as they are by the recent windfall from the hike in oil prices,” says Sehnaoui with pride. “The region is booming and we need to seize the day.”

Meanwhile, in the area of specialized financial services, the SGBL Group will continue its expansion in countries with strong potential (in particular the GCC) by drawing on its years of experience and standing in the Lebanese market. “Regional investors appreciate the skill sets that Lebanese bankers bring to the table. We are international in outlook but we understand their needs.”
The Group is also currently stepping up its international expansion and this will offer new opportunities to Société Générale Group’s through its wide and diversified businesses lines across the region. “Today, SGBL is evolving gradually in an unstable and uncertain environment in which we can nonetheless find solutions,” declares Sehnaoui. “In this environment only banks that can offer their clients innovative products, high quality service and the best price can follow a risk-free development strategy.”

Sehnaoui believes that SGBL can look to the future with genuine confidence. The bank has built up a huge reserve of goodwill; it has the know-how, the infrastructure, the client base, the right level of affiliated services and most importantly, an international presence of which only a few Lebanese banks can boast. “With all these, SGBL has all the tools at hand to reposition itself as an important actor on the local and regional banking market.”

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By Invitation

The economics of three digits

by John Defterios
written by John Defterios

World Economic Forum meetings are, as one former Prime Minister put it over a nightcap, part private high-level talks, part networking and a fair portion of theatre. “Theatre is good, just not in large doses” he rightly declared.

That is a succinct description of what transpired in the Red Sea resort of Sharm el-Sheikh this week at the World Economic Forum meeting.

There was plenty to digest and discuss, but as usual the many of the more memorable thoughts came in the networking lounge over an espresso. I spoke to the CEO of a Gulf investment authority who, during our conversation said they really want to get it right this time, since they are blessed with the “three digits.”

The conversation continues, as I try to bluff my way through what “three digits” means. After another minute my curiosity gets the better of me and I confess my ignorance. “Three digits,” he tells me with a broad smile, “is oil — anything over $100 and we are in three digit territory,” he said, adding that: “We can do a lot with three digits.”

There is no doubt about that and I confirm that after 20 years of covering OPEC meetings and visiting production facilities from the Gulf of Mexico to the Arabian Gulf, I know it costs about $4 to $6 per barrel for the major Middle Eastern producers to get their crude to market. To put it crudely, that is a profit of about $120 a barrel at today’s prices.

Spend it wisely

While the Gulf producers are happy to watch the savings roll in, they are very aware that the world is watching to see how they plan to use it. It was, no doubt, the number one issue on the agenda at this regional meeting. Somewhat boldly some members of the Arab community, which are not blessed with the same huge natural resources, spoke up in Sharm el-Sheikh.

Egyptian Prime Minister Ahmed Nazif, the tall, silver haired reformist, noted that one cannot force money where it does not want to go, but, “I believe that real opportunities exist today in the region, whether it’s in infrastructure, whether it’s in capacity building, education and other aspects of it.” Egypt is attempting to be the back office to the Middle East — why set up in Bangalore if you can capture the diversity of language speakers and low cost in your own backyard?

A former government official from Jordan, now running a private equity group, was more direct. Reem Badran is CEO of Kuwaiti Jordanian Holding Company — a firm funded with Gulf money. She says, “There is room for the oil producing countries to give a hand to the non oil producing countries to make these types of imbalances and gaps less and everybody would flourish at the end of the day.”

There is a great deal of money from the six Gulf countries flowing into real estate development projects throughout North Africa. The key now is to expand that brief to include factories and even schools. The second most talked about issue had to be development of human capital. During the final plenary panel of the meeting which I chaired, all four leading businessmen (and woman) talked about the sense of urgency to do more. Money is being deployed into education in every market, but these business people admitted they need to be more involved to insure that the skills needed are being taught in universities and vocational schools. If not, the over reliance on expatriate workers will remain. The most pressing concern, and it was reinforced on my panel, is that 100 million more people will need jobs over the next ten years.

If that is not an incentive to use the “three digits” wisely, I am not sure what is.

John Defterios is the presenter of CNN’s Market Place Middle East.

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Beirut’s irrepressible optimism for property investors

by Priyan P. Khakhar
written by Priyan P. Khakhar

From a distance, one observes the birth of a new skyline — sprouting towers of elegant bricks, mortar and concrete that will house an eclectic range of people who choose to live in Beirut, a city with a raw database of stories with even more plots and twists than the latest Hollywood movie. These flawlessly finished apartments, kaleidoscope designs and stainless kitchens do, however, also come with a somewhat jaw-dropping price tag for a non-utopian city. Apartments in the tower blocks facing the marina, for example, are $1 million plus, this being considered a modest figure by the many that have already sold “off-plan.” A recent report by Bank Audi on Lebanese real estate records over 35,000 property transactions in the third quarter of 2007 alone.

The political climate of the country is no secret, with the World Bank and International Monetary Fund rating the investment risk of the nation on par with states such as Chad and Sudan. In mid-May the country was on the brink of civil war when Hizbullah’s heavily armed fighting machine attacked and seized large parts of West Beirut and nearby Beirut suburbs. For six months Lebanon had remained without a president and the specter of confrontation and violence had loomed over the entire nation for the past three years. After the fighting in May, most business people in Lebanon’s hospitality and tourism sectors were convinced this would be another summer of dread, a third year with an abysmal tourism season and a degree of security risk that would scare even a speculators of George Soros’ ilk.

How then does one explain these property prices? Take for instance the prices in towns such as Marbella on the Mediterranean coast of Spain, a naturally luxurious and hedonistic playground of the rich and famous that can potentially be Beirut, once the “Paris of the Middle East.” Apartments and villas, in gated compounds, boast similar million dollar and above price tags, with a relative saving grace of EU membership, security, a stable and functioning government, absence of political bickering, lower investment risk rating and of course the Spanish siesta. From a stability point of view, comparing Marbella and Beirut can be like comparing chalk and cheese, and yet the latter demonstrates great resilience within the real estate sector.

Analysts could attempt to explain this, citing the strong Lebanese banking sector with its impressive levels of liquidity and credit availability, investment from the Middle East region in general, former Lebanese residents re-investing in their motherland and a social transformation of the younger generation irrespective of the political divisions and diversions that frustratingly prevail. The prices must therefore exist due to supply and demand side factors that have assimilated the political factor, combined with changing perceptions of the nation to both investors and home buyers. The supply-side factors may be explained two-dimensionally by the fact that key locations in the city, such as Hamra, are crowded with developments in a relatively small space; this is compounded with the needs of the local and growing student population at prestigious institutions such as the American University of Beirut delivering medium-term tenants for investors, all scrambling for limited good space locations.

Prices in Marbella, however, have long reached their peak, and the number of British residents and investors living in this southern gem of Spain is a known fact. In similar fashion, Beirut has lured investors from a variety of locations in the Middle East. The country boasted FDI stocks of $18.3 billion and inflows of $2.7 billion in 2006, this in a year Lebanon was at war with Israel. There is speculation further investments are yet to come, providing the political tensions dilute or at least don’t escalate to the previous historical levels. It is a question of risk taking, risk adverse or a laissez-faire attitude to risk in terms of investment, though it has to be noted that both Lebanese economics and politics exist in varying shades of grey. 2008 growth in 2008 is projected to be positive, with estimates from 4-8% depending on which local source is consulted. According to local research companies such as Infopro, “the prices have risen, though some are just gearing up for the boom that is to come in 2008.”

After several days of intense negotiations in Qatar, Lebanon’s opposing leaders elected a president and a new “united” government was expected to be formed by end of May. The Doha agreement has created hope for many Lebanese to lift the nation out of a state of violence and confrontation into peace and stability.
Within hours of the political sea of change on May 25, 2008, the Beirut city center was preparing for an abundant summer of returning visitors and countless festivities. This ability to return to form and celebrate life is what makes the place. Beirut offers that ‘something extra’ — an intangible and unquantifiable element — that is mainly driven by an unprecedented cosmopolitanism that refuses to exclude anyone or anything, an “x-factor” which other cities in the region lack.

A drive down the city center would awe the most critical of architects at the restoration of a once destroyed French style quarter. Retail spaces are plenty, with rents in the popular malls ranging from $2,000-$3,000 per square meter. One would expect the political factor to suppress prices, yet it appears that some defiance amongst buyers and sellers remains. Given that the political crisis subsides, in terms of real estate at least, the city seems set to become a Marbella of the Middle East.

Dr Priyan P. Khakhar is an assistant professor at the American University of Beirut’s Olayan School of Business.

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Arab sovereign wealth funds

by Sven Vehrendt
written by Sven Vehrendt

The past months have witnessed an intensive debate about the relevance of SWFs in the global economic system and their role in global financial markets. Global Insight, the research firm, states that SWFs have grown a remarkable 24% annually in the past five years. Morgan Stanley, the investment bank, argued that the total size of the SWFs could increase from $3 trillion to $12 trillion by 2015.

Commentators have tried to put these stunning figures into perspective. Robert Kimmitt, Deputy Secretary of the U.S. Treasury, argues that if one wants SWFs to appear large then one would argue that hedge funds manage an estimated $1.5 trillion and that the current market capitalization of the S&P 500 is roughly $12 trillion. On the other hand $12 trillion is only a fraction of the estimated $190 trillion in total global financial assets. Assets managed by mature-market institutional investors (such as pension funds and endowments) are about $53 trillion. Pension funds manage over $15 trillion, insurance companies $16 trillion, investment companies $21 trillion. This is a small fraction of the global debt and equity securities, exceeding $100 trillion.

But an important element is missing in this assessment. First and foremost, Gulf Arab SWFs shall be of benefit to the citizens of their countries. How relevant are they then with regards to their own economies? An analysis arrives at some interesting findings.

The size of the assets managed by the Abu Dhabi Investment Authority is estimated at $875 billion. This is equivalent to 675% of the GDP of the United Arab Emirates. The Reserve Fund for Future Generations managed by the Kuwait Investment Authority is estimated to manage assets valued at over $170 billion. This represents twice the GDP of Kuwait. The Qatar Investment Authority’s assets stand at over $60 billion or 141% of Qatar’s GDP. Only Saudi Arabia’s assets managed by the Saudi Arabian Monetary Agency are somewhat smaller at just below 100% of Saudi Arabia’s GDP.

Based on these numbers one arrives at the conclusion that although large, Arab Sovereign Wealth Funds might be not that overwhelming in size if one compares them against the assets of other players in global financial markets. But our numbers show that they are extremely important in the context of their own national economies.

Here some more examples: An optimistic 8% return that ADIA might manage to realize amounts to roughly $44,300 per UAE citizen (excluding expatriates), or roughly 63% of GDP per capita. This is substantial. The same is true for Kuwait. At 8% growth, the revenues realized by the KIA amount to $17,160 per every Kuwaiti citizen or 44% of Kuwait´s GDP per capita. Again, this is not trivial and illustrates the importance of SWFs’ role in maintaining the wealth of oil exporting Gulf countries.

A fundamental question is then if the SWFs will be able to maintain or even grow this wealth for future generations. The idea of SWFs is to enable governments to diversify away from their own national economies and searching for interesting return perspectives elsewhere. But if SWFs do not identify very attractive investment opportunities outside their economies, their purpose is challenged.

The economies of the Gulf are currently growing at a rapid speed, much stronger than most of economies elsewhere. It will therefore be quite difficult to identify investment opportunities that are on par with opportunities at home. If we see GDP per capita growth rates increase in the Gulf region as rapidly as in the past years and we assume that SWFs will invest elsewhere, that is in regions which are growing at a more slower pace, then the SWFs contributions to safeguarding the welfare of the citizens of Gulf states is negative. Only in case the economies in the Gulf region would calm down and other economies grow more rapidly will SWFs be able to meet their task to secure their standard of living for future generations beyond oil.

The importance of SWFs within their national economies and their exposure to global economic trends illustrates how important a broader debate about purpose and investment strategies of Arab SWFs has become. Not only have SWFs become a contentious issue for Western policy makers, but their risk/return profile should also be of major concern for the Arab public, since the future economic well-being of Arab societies is at stake.

Sven Vehrendt is an Associate Scholar at the Carnegie Middle East Center, Beirut

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Capitalist Culture

Diplomacy – Venice of the Gulf

by Michael Young
written by Michael Young

One of the more interesting stories in the Gulf in the past decade or more has been the expanding, paradoxical role of Qatar. When the emirate hosted the Lebanese dialogue talks in May, this was only its latest demonstration of a policy of counterpoint that has either pleased or infuriated those used to more predictable behavior from Arab states.
The dialogue helped one understand Qatar’s strange ability to place itself at the nexus point of contradictory regional interests. Why, many observers wondered, had the March 14 parliamentary majority agreed to the interchange with the opposition under the auspices of a regime with close ties to Syria and Iran, which has financed reconstruction in Hizbullah-controlled areas? Simply put, there was no one else. Tension between Saudi Arabia and Egypt on one hand and Syria and Iran on the other meant that the Saudis, traditional mediators in inter-Arab affairs, were unable to play that role in Lebanon. Egypt, in turn, had its own problems with Damascus and was anyway represented more or less by the Arab League secretary general, Amr Moussa. Jordan and the North African states were too preoccupied with other matters to intervene. So Qatar filled the gap.
In many ways, Qatar is the Venice of the Middle East. Not for the picturesque waterways or singing gondoliers; but because Qatar, like the Venice of the Renaissance, is a place constantly juggling and preserving a balance between its most improbable relationships, all the while protecting itself, increasing its profits, and enhancing its regional role.
While Doha has good relations with Syria and Iran, as well as Hizbullah, it has managed to do this while hosting the largest American military base in the Middle East, maintaining contacts with Israel, preserving more ambiguous relationships with militant Sunni Islamists, protecting itself on both the Arab nationalist and Islamist sides through its Al-Jazeera satellite TV station, and, more recently, working to paper over its previous rivalry with Saudi Arabia (partly by toning down criticism of the kingdom on Al-Jazeera).
Before the Lebanese dialogue in Doha, Qatari policies in Lebanon provoked much anger from March 14. In some ways the reaction was justified: Qatar sided openly with those most opposed to the government. However, at a broader level, Qatar is interesting because it has taken the lead in shaping what can only be described as a post-ideological approach to Arab politics. Certainly, most Arab states long ago gave up on ideological consistency, and Arab nationalist or Islamist regimes have, mostly, turned their ideological pretensions into little more than instruments to buttress dictatorships. But Qatar has taken this a step further, so that the emirate can openly ignore the most fundamental of Arab benchmarks, the isolation of Israel, while providing political and financial sustenance to Israel’s bitterest foes.
Is this something positive? In one way it is. Pragmatism is an ingredient that has long been in short supply in the modern Arab world. The region is more often defined by polarization, by its stubborn divisions, than by efforts to transcend differences and deal with all sides simultaneously. Pragmatism can also be an essential element of capitalist culture, where the market, whether the market of politics, economics, or ideas, is basically allowed to develop unfettered, free of preconception.
But a capitalist culture, and the pragmatism underlining it, becomes self-defeating when it bolsters autocracy. Take the case of Iran or Hizbullah. That Qatar seeks to deal with both to its advantage is understandable; but if Iran or Hizbullah were ever to impose their will on Qatar, or on Arab states behaving like the emirate, the latitude for that pragmatism would collapse. Would a hegemonic Iran in the Gulf, for example, allow Qatar to continue to serve as a headquarters for U.S. power in the region? A Syrian return to Lebanon, while it might not disturb officials in Doha, could significantly strengthen those regional forces with an interest in obstructing Qatar’s open ways.
In other words, by basing its political actions purely on self-interest, a post-ideological state like Qatar might find itself helping unleash those forces in the Middle East that suffocate the interesting possibilities in a post-ideological state. The same would doubtless apply if pressure came from, let’s say, the United States, except that there are limits to what the U.S. can do. For example, despite its hostility to Al-Jazeera, Washington has understood that it cannot much change the station’s tone. In late 2001, the then-U.S. secretary of state, Colin Powell, tried, and was promptly condemned at home for this.
Gulf politics are so personalized that it may be difficult to reach the conclusion that Qatar represents the way of the future — or a way of the future. The possibility always remains that when leaders change, so do a state’s policies. However, the tightrope act the emirate has pursued in recent years is working for the moment. Not everyone is happy, but it may be a model that Gulf states begin adopting, perhaps to their detriment. Perhaps not.

Michael Young

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The Horn of too many bulls

by Paul Cochrane
written by Paul Cochrane

One word sums up the Horn of Africa’s regional importance: geostrategic. Over the last two months, several developments have highlighted how intricately linked the Middle East is, and wants to be, with the countries on the other side of the Red Sea. There are the usual three suspects: business, politics and the “war on terror,” plus a wildcard, piracy.

The big business news is that Osama bin Laden’s brother, Tawfik, wants to build a $22 billion Africa-Arab bridge to link Djibouti with Yemen. The 28.5-kilometer project would span the narrowest point across the Red Sea, at the Bab al Mandab, “the Gate of Tears” — an appropriate name, especially given the situation in the vicinity and all the piracy off the Somali coast.

Indeed, piracy has dramatically increased since the Islamic Courts Union (ICU) was toppled by the US-backed Ethiopian invasion of Somalia in December 2006. Last year there were 31 attacks, and so far this year 23 attacks by Somali pirates on sea-going vessels, including the 47-day hijacking of a Russia bound icebreaker, the Svitzer Korsakov. A $1.6 million ransom was allegedly paid out.
Bin Laden’s Bridge, as it could be dubbed, will potentially bring more stability to the region and its sea routes — after all, an estimated 3.3 million barrels of oil are shipped through the Bab al Mandab every day. The bridge certainly intends to boost traffic between the two continents, and act as an entry point for pilgrims to Mecca. But the ongoing situation in Somalia presents concern for any parties involved in the troubled Horn, including Qatar.

This is the big international politics story: Ethiopia breaking diplomatic ties with Qatar over the emirate’s alleged funding of the al-Shebab movement in Somalia, the military wing of the ICU and a recent addition to the US State Department’s list of terrorist organizations.

Doha-based Al Jazeera’s sympathetic coverage of an anti-Ethiopian rebel group, the Ogaden National Liberation Front (ONLF), also rankled Addis Ababa, especially given Qatar’s diplomatic ties with Ethiopia’s other nemesis and ONLF supporter, Eritrea.

A week after the diplomatic spat — Doha denies any involvement with Al-Shebab — a US air strike killed the top leader of the movement, Aden Hashi Ayro.

Whether Qatar has any involvement with these groups or not, Doha is not the only Middle Eastern player in the mix, with a UN arms embargo monitoring group reporting in late 2006 that Egypt, Iran, Libya, Saudi Arabia, Syria, Yemen and Lebanon’s Hizbullah were all supporting warring factions in Somalia. The US meanwhile has a military base in Djibouti, 100 military advisors in Ethiopia, recently donated $97 million to Ethiopia in recognition of its “strategic importance,” and Special Forces are reportedly operating within Somalia. This melee thus includes countries on side with the US-led “war on terror,” seemingly on side with the “war on terror’, and those that are on the complete other side against the war on terror.

Somalia is Africa’s equivalent of Lebanon.

The irony of all this is that the activities of the US and its allies in the region have made the situation worse than before the ICU was overthrown. Ethiopia, for its own ends as well as Washington’s, has waged a brutal war on Somalia. Half the population of Mogadishu has fled, a humanitarian crisis is underway and Amnesty International last month accused Ethiopian troops of widespread atrocities against Somalis, including slitting people’s throats, gouging out eyes and gang-raping women. Somalia’s disintegration is also generating further support for Islamic movements.

Furthermore, Somalia’s regression back to warlord-run days under the Transitional Federal Government (TFG) is bad for regional business.
According to the Mombasa-based Seafarers’ Assistance Programme, most of the Somali pirates are linked to the TFG, which has little control of the country and its territorial waters.  In the six months the ICU were in power, piracy on the Somali high seas was reportedly down, but from 2007 the distance vessels were advised to keep away from the coast was increased from 50 nautical miles to 200. Although that is not even enough, with a Spanish luxury yacht hijacked in international waters in early April, the second European vessel to be overrun by pirates in a fortnight.

For such an important shipping route it would be to the advantage of most players involved, and certainly for the free flow of goods and energy, to better police the area around the Gate of Tears.

One solution is to put African Union troops on the ground in Somalia instead of the 8,000 Ethiopians currently there, as called for in UN Resolution 1725, and international monitoring off the coast to ward off illegal fishing as well as piracy.
Construction of Bin Laden’s Bridge would certainly need plenty of security, and a more stable Horn would help this African theater of the “war on terror” from becoming yet another disasterous tragedy with far-reaching geostrategic implications.

PAUL COCHRANE is a Beirut-based freelance journalist. He was recently in Ethiopia.

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The ‘Axis’ taking Bush for a spin

by Claude Salhani
written by Claude Salhani

By now we are well familiar with what President George W. Bush labeled the new “Axis of Evil” — communist North Korea, socialist-leaning (Baathist) Syria and Islamist Iran. Each one has expansionist ambitions of varying degrees, though some are more grandiose in aspiration than others. North Korea and Iran want to dominate the world, while Syria will settle for considerably less.

The North Koreans want to turn the world into a vast Godless worker’s paradise, similar to the Stalinist Garden of Eden that is the northern part of the Korean peninsula — only perhaps one where the comrades aren’t starving half the time and trying to escape to South Korea or even to China the other half. However, Kim Jong-il, the megalomaniacal leader of the North, would probably be satisfied if he could occupy the South, thus reuniting the two Koreas and in the process double his clout, his ego and his people’s misery.

The ruling mullahs governing the Islamic Republic of Iran have somewhat of a similar philosophy: they too would like to dominate the world. However, the main difference with the non-believers in North Korea is that the Iranians want to impose their religious diktat on the rest of the world. The other major difference between the North Koreans and the Iranians is that the latter have been slightly more successful in exporting their revolution. The North Korean expansionist desire was stopped at the 38th parallel; in contrast, Iran’s mullahs have made inroads in the Gaza Strip by supplying Hamas with all the guns and money it needs to disrupt Bush’s efforts at peace-making in the Holy Land.

And in Lebanon, Iran’s and Syria’s proxy militia, Hezbollah, has demonstrated that it can, if it so wishes, take over the country by military force, or in any case, at least great swaths of the country. Of course whether the Shiite militia can then retain the territory it occupies is a completely different story. This Hezbollah found out the hard way when it tried to go after the Druze in the Chouf.

As for the third spoke in the new “Axis of Evil”, Syria, its territorial ambitions are far more modest than those of either North Korea or Iran: Syria only wants what is rightfully hers, the Golan Heights, the strategic plateau overlooking the northern Galilee which was taken militarily by Israel in the 1967 War and remains under Israeli occupation to this day.

Oh yes, Syria wants Lebanon too.

And here’s where the story begins to get somewhat complicated (if it wasn’t already) due to the fact that a great many Lebanese are opposed to the idea of Syrian domination. The Bush administration supports the notion of a free and independent Lebanon and has invested in backing Fouad Siniora’s government and the March 14 Movement. So the defeat of pro-government forces by the Syrian and Iranian-backed Hezbollah in early May in the fiercest exchange of internal violence Lebanon has experienced since the end of the civil war in 1990 can be seen as a defeat for Bush’s democracy spreading policy in the Middle East.

Hezbollah’s attempted coup also frightened Sunni powerhouses such as Saudi Arabia and Egypt who rightfully perceived the action as an attempt by Tehran to extend its political power base and influence in the region. Hezbollah’s victory comes as a second slap across the face of the U.S. president from his Iranian and Syrian foes. The first blow came when Hamas took over Gaza.

This leaves the U.S. administration pondering what course of action it can take. Part of the conundrum facing the administration is amplified by the fact that it continues to refuse to engage either Syria or Iran in talks, while these two countries seem to be pulling all the strings in Lebanon today.

This is where President Bush’s new counter-axis-of-evil comes into play with the American president turning to his Arab allies for assistance.

Enter Saudi Arabia, Egypt and Jordan, three moderate Muslim nations who are getting nervous over Iran’s rising influence. The recent successes of the Islamic republic in the Gaza Strip and in Lebanon have revived fears particularly among the Saudis, prompting the Saudi king to assume greater responsibility in regional matters.

As one Saudi, who is well connected to the intelligence community in the desert kingdom, said to me when the fighting broke out in Beirut: “Don’t forget the critical Saudi role, which is now even more central than the role of the U.S. and France in the region!”

Saudi Arabia’s role in the Middle East will be all that more crucial as the November U.S. presidential elections approaches and American politicians become completely absorbed by domestic politics, turning a blind eye on the rest of the world.

Claude Salhani is editor of the Middle East Times

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