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GCC

Calling from 30,000 ft

by Executive Staff May 1, 2008
written by Executive Staff

On March 20, 2008, the first ever authorized in-flight mobile phone call was made from an Emirates Airlines Airbus A340-300 flying at 9,000 meters from Dubai to Casablanca. Passengers were so quick to use the service that an Emirates representative on board meant to make the first call was beaten to it instead — by a matter of seconds — by two speed-dialing passengers.

Airlines in the Middle East see this kind of behavior as confirmation that they are going down the right path by installing the new in-flight mobile phone capability. Emirates has long had in-seat phones available, as have other airlines, but the prohibitive cost, at around $7 per minute, and the credit card swiping hassle made them all but an added decoration to the seat-back for many passengers. But Emirates, catering to the communication hungry business traveler, sees demand for an expanded and convenient in-flight communications package.

“Our customers are already making more than 7,000 calls a month from our in-seat phones,” said Sheikh Ahmed bin Saeed Al-Maktoum, Emirate’s chairman and chief executive. “So we will be making life easier for those for whom staying in touch has become an important part of their everyday lives.”

Soon, anyone will be able to make and receive mobile phone calls, send text messages, check their email, and, eventually, surf the internet at cruising altitude, and from their own mobile phone, blackberry, or laptop computer. The price of a call will be about the same as a roaming international call — at the cheaper cost of around $4 per minute, according to the service providers.

The charges will appear on the passenger’s monthly mobile bill but the per-minute fee will vary, depending on the service agreement between individual mobile companies and the in-flight mobile service providers, OnAir and Aeromobile.

Aeromobile has integrated the traditional in-seat satellite phone technology, called “Inmarsat Classic Aero,” into a kind of mini mobile phone network. OnAir uses Inmarsat’s upgraded “Swiftbroadband” technology, which offers greater bandwidth and internet browsing capability. Both companies have started installing and testing the equipment after gaining approval from international transportation and communication regulators, and from mobile phone network operators.

Overcoming the technological hurdles

Until recently, the usage of mobile phones in airplanes had been banned for two reasons. First, airline regulators worried mobile phone signals could interfere with an aircraft’s navigation equipment and other sensitive onboard computers.

Second, mobile phone companies feared jets flying overhead filled with chatting passengers would jam or interfere with ground networks, resulting in dropped calls and reduced system capacity.

Now, OnAir and Aeromobile have overcome these concerns — at least enough to satisfy both transportation and communication authorities and the network owners in around 40 countries. They have done it by setting up an isolated wireless mobile network inside the aircraft.

“The analogy actually is to consider that once you get on an Aeromobile equipped aircraft, you’re actually traveling to a new country, and you’re roaming into that country — and that country can actually fly anywhere in the world, wherever that airplane goes,” said David Coiley, AeroMobile’s Vice President of External Relations.

The mini mobile network works like this: inside the cabin, a wireless mobile signal is broadcast like a wireless internet network. The network sends calls to an on-board ‘base station’ modem, where the signal is translated from GSM to Internet Protocol signals. The IP signal is then beamed from the aircraft’s satellite antenna to one of Inmarsat’s satellites. The satellite sends the call to a dedicated ground station, where the call is converted back into a GSM signal and routed to its destination. Receiving a call works in the reverse order. Coiley says the whole process takes about a quarter of a second on average.

It’s still an electronic device

The new regulations will allow mobiles to be used only above 3,000 meters, and, like all electronic devices, never during take off or landing. Passengers are told when it is safe to turn on their mobile devices by a crew announcement. When phones are switched on, they are automatically connected to the aircraft’s network and the customer is greeted with a text message. Dialing a number is the same as making an international call on the ground.

The airborne wireless network prevents mobiles from interfering with the aircraft’s computer systems, since phones emit potentially dangerous electromagnetic waves when they’re searching for a network.

And as Coiley noted, this also keeps the phones from trying to connect to ground based networks below. “It’s actually irrelevant if you’re flying over this country or that country… and irrelevant in terms of what you’re paying,” he said. “We are in this isolated country that does not interfere with the country below it in terms of communications.”

With the currently installed technology, the number of possible simultaneous calls is limited. Each base station has a channel, and on the Inmarsat Classic network, each channel can handle between six and twelve calls at the same time. Most planes will only have one channel. Even the most advanced technology, the Inmarsat SwiftBroadband system, can only handle 12 to 24 callers at once, so the entire plane will not be chatting away mid-flight.

Still restricted, but growing

Currently, one will be hard pressed to find a flight with the new technology. Emirates is only flying one aircraft with the mobile in-flight capability. Routes over Chinese and US airspace cannot use them, as those countries’ regulatory agencies have not yet approved the use of any mobile technology on aircraft.

But in the next year, one can expect to start seeing, and hearing, more mobile phones on flights around the Middle East and Europe. The European Union has cleared the way for passengers to use their mobiles in-flight, with Air France currently flying one plane using OnAir’s technology on European routes.

As the Middle East trailblazer, Emirates Airlines plans to invest $27 million dollars to fit its fleet with Aeromobile systems, which cost around $200,000 dollars each, while OnAir is also contracting with Royal Jordanian and Oman Air. In January, Kuwait-based Jazeera Airlines announced plans to equip its fleet of Airbus A320s with OnAir’s in-flight mobile technology by 2009.

“We are excited to be one of the first airlines in the world to install the technology that allows travelers to use their mobile phones during flight, “ Jazeera Chairman and CEO Marwan Boodai said in a statement. “The new service will be available to all passengers for a fee, and will empower passengers to continue communicating with their families or their office while on board.”

Jazeera’s service will “allow unlimited text messages and emails including attachments to be received and sent, and will allow up to 12 simultaneous voice calls,” the company said in a statement.

Air-phone? Air-rage

But maybe not all the passengers are as excited as Jazeera’s Chairman. According to an International Airline Passengers Association survey of 1,500 European and North American airline passengers conducted last June, 45% of respondents said that a person in the seat next to them making a call was “highly annoying,” 10% higher than a wailing infant. Only 5% said a passenger making a call in the next seat was not annoying at all.

But the Middle East may be different. According to YouGovSiraj’s MENA wide research study last November, 47% of business travelers “want complete freedom to use mobiles phones” on an airline, and “43% of leisure travelers want the same.”

Regardless of the regional passenger approval of the technology, Aeromobile and OnAir have put flight crews in direct control of the systems. Pilots can turn the network off during night flights to prevent possible conflicts between passengers who want to talk and those who want to sleep. They can also switch it into text-only mode, or data-only mode. The pre-flight announcement will also plead with passengers to turn off their ring tones by putting the phones in “silent” mode.

Having the ability to make phone calls from an airplane may encourage passengers to switch off their phones at take off and landing. Studies indicate that up to 50% of phones are left on during normal flights. Moreover, the new technology will help to limit potentially dangerous, illegal calls already taking place on flights. A Carnegie Mellon study indicated that in the US, every flight already has one to four calls being made from the aircraft.

Those illegal calls and text messages will probably continue for some time, as airlines estimate the mobile service will not be available on all aircraft until one to four years. Installing in-flight mobile phone technology takes about three days, and can be done during already scheduled aircraft inspections and repairs. 

May 1, 2008 0 comments
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Economics & Policy

Shifting gears

by Fares Saade May 1, 2008
written by Fares Saade

Fueled by demographic growth, urbanization and economic development, the cities of the Gulf Cooperation Council are growing at a rapid rate that is outpacing their current transport infrastructure and services.

The United Nations forecasts that 88 percent of the GCC will be urbanized by 2025, compared to a world average of 57 percent. What’s more, an increase in income levels will cause demand for mobility to outpace even the region’s rapid population growth.

So far, this surge in demand has been largely met by private vehicles and taxis, with public transportation accounting for less than 10 percent of all motorized trips. This approach has resulted in congestion, pollution and deteriorating road safety. It threatens to slow the growth of the region’s cities and undermine the quality of life for urban residents.

To address these challenges, authorities have been making massive investments in public transportation systems; regional governments have recently announced that they will pour a combined $26 billion into metro systems, trams and monorails. However, these investments alone will not change commuters’ habits and attract them away from cars and onto public transport. Other countries’ experience shows that careful policy formulation and planning are indispensable to the success of public transportation. For the car-dependent cities of the GCC, those lessons are particularly critical.

The path to public transport

Transport authorities must be realistic about how many people will actually use public transportation. With strong car cultures and populations spread over large areas, GCC cities will have to work hard to drag drivers out of their cars.

To reach even modest success, transport authorities must consider five critical steps. Although their implementation will vary by country, each serves a common goal: enhancing the attractiveness of public transport and dissuading individuals’ use of cars.

Focus on convenience: People will not use public transportation if it is not easy to do so, and thus public transport should first aim to be accessible. The recently opened Dubai Metro is a case in point: It is still working to reach a satisfactory and sustainable level of use with plans for “park and ride” facilities and better feeds from high-frequency bus services and taxis.

The cleanliness and comfort of stations and vehicles are also important in attracting riders from all socioeconomic brackets. Finally, fare levels and structures need to balance affordability for users with transport authorities’ goal of maximizing revenues. To offset the reduced convenience of public transportation, the cost of the trip to the customer — in both money and time — must be lower than the cost of the same trip using a car.

Integration: The easier it is for commuters to ride multiple modes — for instance, bus and metro lines — the more convenient public transport becomes.

There are two main levels of integration. The first one is at the station level; major interchange stations provide commuters with access to metro, tram, bus and taxi services. Metro stations in sparsely populated GCC cities would require strong feeders, such as buses and taxis. Fares and ticketing are the second level of integration: Allowing users to pay a single fare and use a single ticket for multiple modes is another element of convenience, particularly when the combined fare is lower than the sum of the fares on the different modes.

Smart card ticketing technology has now become the standard for many metros, as it offers users the added benefit of being able to use it for parking and various small purchases, such as newspapers and drinks.

Discourage car use: Disincentives for car use are probably the best way to encourage riders to use public transportation. Recent studies have shown that urban rail systems mostly attract riders who had previously been using the bus rather than those who had been driving — unless authorities impose severe restraints on the ownership and use of personal cars.

Such measures may include limiting car ownership (via sales taxes, import duties, and annual fees) and restricting car usage (via parking charges, congestion and road tolls, and fuel taxes). For GCC cities, the challenge is substantial. Taxing car ownership and fuel is likely to be contentious in an oil-producing region accustomed to low taxes and import duties.

The dynamic management of parking space and policies that charge for it would likely prove not only easier to implement but also be better targeted to specific congested areas of city centers. A number of cities, most notably in Saudi Arabia and the United Arab Emirates, have been moving in that direction recently.

Overall, in a region where very few people use the existing bus service, restricting car usage is inevitable if public transportation is to really take off. Measures can be gradually introduced over time as public transport becomes available and convenient.

Bring in the private sector: Private- sector involvement can offer a number of benefits to GCC cities in developing or operating modes of public transport.

* The greater efficiency that characterizes private-sector operation leads to reduced government spending on subsidies for urban transportation. Other countries’ experiences show that competition for operating franchises is the primary way to reduce subsidies.

* Public-private partnerships in infrastructure projects, such as rail transport and station development, alleviate the fiscal burden on governments and facilitate the projects’ execution. There is an increasing need for better financial management of these projects as GCC governments attempt to boost their reserves and ensure fiscal discipline, despite the oil boom of the last few years.

* Private operators tend to have the discipline and much-needed customer orientation to ensure high standards of service quality, reflected in service frequency, schedule suitability, maintenance, image and staff friendliness.

Dubai Metro is a  step toward improving public transport infrastructure in the UAE

Create an enabling institutional and regulatory framework: Few of the above-mentioned policies and measures are possible without a solid and integrated framework for planning and regulation. Public accessibility, intermodal integration and disincentives for car use require well-integrated planning between the relevant government entities. Private-sector participation requires transparent and well-developed licensing, regulations and enforcement mechanisms. This is difficult in the current GCC institutional context, which remains largely fragmented and underdeveloped. Planning, regulation and enforcement responsibilities are often distributed among different uncoordinated entities with overlapping roles and responsibilities.

However, in the past few years, a growing number of countries have been establishing integrated transport authorities with a clear mandate for planning, regulating and enforcing all matters related to surface transport and traffic management. Not all countries may want to have a single entity; nonetheless, the allocation of responsibilities and the coordination mechanisms have to be well-established.

Public transportation may not be the sole remedy for the looming mobility challenges facing GCC cities, which demand a holistic approach that includes strategies for traffic management, non-motorized transport such as walking and cycling, and the integration of transport with land-use planning. But none of these strategies will dispense with the need to develop and promote the use of public transportation. Accordingly, following these vital steps to encourage public transport use will help public transportation reach its ultimate objectives.

May 1, 2008 0 comments
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North Africa

Making things mobile

by Executive Staff May 1, 2008
written by Executive Staff

Identifying the commander amongst the mishmash of uniforms that made up the southern rebel army during the years of Sudan’s vicious North-South war was easiest done by finding the man with a large grey and black Thuraya satellite telephone in his hand.

A North-South peace deal in 2005 ended the war and allowed for a semi-autonomous southern Sudanese government headed up by the former rebel party. The same army elite are now ministers and governors; internationally recognized as in charge of the vast wilderness of the South and the garrison towns that formerly eluded them.

The Thurayas were indispensable, not only for military communication in the bush but also to mark sites with GPS coordinates. A +88216 number for the UAE company phones is still usual on government business cards. Although satellite telephones are rarely switched on in towns and have no reception inside the new offices, this is not just a war time throwback.

Despite the fast growth of the indigenous mobile phone operator Gemtel, connected through neighboring Uganda, and the much slower spread of Khartoum-based companies, outside of some eight main southern towns officials and humanitarian workers are again dependent on the dollar-a-minute Thurayas.

The satellite phone still rules southern Sudan’s communication network. Without one, vital work from drilling boreholes to building health centers can be delayed for months while workers sit in the field without spare parts.

But now, after some political wrangling, the government is spending millions of dollars to better the environment for mobile operators to change this and bring the war-torn South on line, to link people to each other and into the regional economy.

Rebel licenses

The southern government has said it is committed to ensuring that all operators move out further than just urban areas and provide mobile services to all southerners.

But it hasn’t always encouraged some of the companies to work at all.

Under the peace deal only six operators — four signed on by Khartoum and two by the southern rebels — are allowed to work in Sudan, all of which had pre-existing contracts. Until 2010, also under the deal, they will have no new competition.

While in the bush, the rebels signed Gemtel and NOW (Network of the World) to work in what the contracts called “New Sudan”. The term was made famous by Dr John Garang who led the southern movement until he died in a helicopter crash in 2005.

He knew most southerners wanted independence from Khartoum but he saw the whole of Sudan change by the movement’s efforts into a secular, democratic and decentralized state.

But the southern government was told that the two new networks — very little more than names at the time — would not be allowed to operate outside of the South. The southern telecommunications minister, Maj. Gen. Gier Chuang Aluong, said this was because Khartoum viewed ‘New Sudan’ licenses to mean they are only applicable for the South.

A census began on April 22, 2008, to discover the true southern population but it is already clear the North has up to three times as many people as the South — currently estimated to be around 10 million — more cash and a much better fiber-optic system for operators than the South — dependent on satellite dishes — can offer.

The former rebels wanted their companies to have access to the whole Sudanese market. Thus, a row ensured, about which Aluong said that until Khartoum allows access northwards for the southern-signed companies, he would disallow the four North-signed companies from operating on his turf.

The one low-capacity station in  Juba, owned by Khartoum’s Mobitel was not allowed to expand. Another North-signed company already working in the South, Sudatel with its Sudani network, was labeled ‘illegal’ by ministry officials. Both systems were almost unusable.

New growth

But a memorandum of understanding signed last year between the two former foes — in Khartoum’s favor — has meant the four Khartoum-signed companies now have the go-ahead to move into the South.

These four — that also include Areeba and Canatel – have already begun surveying new areas, the Southern Sudan Ministry of Telecommunications and Postal Services Undersecretary Juma Stephen said.

This should please Juba residents. Already, those who can afford it usually carry around at least two mobile phones, one with a Gemtel SIM and another one with a Sudani SIM card.

Both networks are frequently busy and everyone has become used to being cut off mid-conversation and paying for long periods of useless fuzz. “When there are more operators, there will be less congestion,” said Sudani’s Juba manager, Nyero Felix Peter.

Encouraged by the political agreement Sudani has recently opened three new base terminal stations (BSM) that are the reason for the network’s vast – if not perfect — improvement, Peter said. “In order to improve our technology, we needed the freedom to expand horizontally,” he explained.

Sudani, like Mobitel, is still using Khartoum’s gateway for international calls and its switch — the mechanism that sends a call from one phone to another. Because calls have to travel from a Juba BSM to a Juba satellite dish, then to a Khartoum satellite dish, then to the Khartoum switch to, finally, be sent back to Juba — via the same satellite route, but in reverse — calls typically take up to ten seconds to connect.

But the southern government, keen to be able to monitor their own calls and hoping to start generating income, is building its own gateway and switch. Contracted last year, Swedish Ericsson will complete the job by October 2008, Stephen said, and money for the total cost of the project, $17 million, has already been set aside by the government.

“It will be better. At the moment, using Khartoum there is a big wastage of the network,” Peter said. He also pointed out that at the moment the government cannot know how much traffic is going on in the South.

“With the gateway we will bring back money to the government,” Stephen said, noting “operators will pay to their government 2.5% of their traffic revenues generated in southern Sudan.” Under last year’s MOU, the South and the North will be allowed different numbering for international calls — probably +2491 for one and +2492 for the other.

Protecting their own

The appearance of southern Sudan’s Gemtel SIM cards on the market was one of the few major signs of new development in 2006. Some people talked to family members in neighboring countries for the first time in 15 years. UN and non-governmental agencies reduced their dependence on radio communication within the town. Traders could reach and affordably talk to partners in Uganda and Kenya.

The South had entered into an agreement with neighboring Uganda to rent out its gateway at $50,000 a month for the company and the phones will continue to use the Ugandan international numbering +256, and not Sudan’s +249, until the South’s own gateway takes over the job. Officials say that, once this is accomplished, it should dramatically reduce costs for customers.

Created in 2003 through an agreement with Huawei Technologies Co. Ltd. — China’s largest telecoms equipment company – and the rebel leaders, Gemtel already had 23,000 subscribers by June 2007 although, because the SIM cards are sold through the black market, exact numbers are impossible to come by.

The government still owns part of the company and is trying to buy off the equipment from the Chinese enterprise including the satellite dish that is based there, Juma said.

But Gemtel proved to be too much of a good thing. A scarcity of SIM cards drove prices up as high as $200 per piece. Announcements of new stocks to be sold led to massive queues and many disappointed in the crowds as often the bulk would already be taken by huge government pre-orders.

Normal civilians began to purchase the cards in much smaller towns hours down the road, and then brought them back to the capital. Even as more and more towns come online, overcrowding in the capital has steadily reduced the quality.

One of the reasons the South wanted access to northern Sudan for its two indigenous networks, is so it could more easily sell the currently un-operating NOW — owned by private investors outside of Sudan and members of the former rebel party – to foreign investors. The sale of the network is now halfway done, ministry officials said.

Although the southern government did not win access to northern Sudan for Gemtel and NOW in negotiations, they did win more control. Under the MOU the South will get a branch of the regulating National Telecommunication Corporation in Juba. This will allow the southern government to protect the head start Gemtel has made in the South against its northern competitors.

“We will establish a regional branch here and we can regulate costs and tariffs,” said Juma Stephen, explaining the southern companies need protection from the northern companies. “Those operators are already established in the market. Gemtel is still an infant, growing up.”

May 1, 2008 0 comments
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Financial Indicators

Global economic data

by Executive Staff April 28, 2008
written by Executive Staff

Female life expectancy

The past decade has witnessed rising life expectancy averages for citizens of OECD countries.  The total average from 1995 of 76 was bumped to 78.6 in 2005, giving an extra 2.6 years to the average citizen. The underlying variables which have contributed to this extension of life, whether they are advances in medical technology, better lifestyle choices, or merely happiness, are indicative that something good is happening in first world health. Although Koreans have gained an extra five years in life expectancy during the ten years, other countries reported respectable increases, including Australia with 3, Iceland with 3.2, Ireland with 3.8, Poland with 3.1, and Turkey with 3.5. Greece, the Netherlands, the Slovak Republic, and Sweden reported improvements, but they hardly shook the scale with scores of less than 2 years each. But while the OECD’s life expectancy is getting better, men have little to celebrate.  From 1995 to 2005, the average life expectancy for men dropped by three years. When compared with the increase women enjoyed to their life expectancy of an extra two plus years, one must wonder if gains by one sex come at the detriment of the other. Among the countries men should avoid are Korea and Ireland, which have seen the male life expectancy drop by 5.5 years and 4.2 years, relatively. It just so happens that both countries are among those best suited for a woman who wants a longer life, as they give their female inhabitants 4.5 years more in Korea and 3.4 years in Ireland. Turkey also placed respectably, extending the average female life expectancy by 3.6 years. This might come as good news to the wannabe widow, but for those women who want to have their husband outlive them, only one piece of advice can help: set your sights on younger men!

Male life expectancy

Tobacco consumption 1990 — 2005

Have first world campaigns to extinguish smoking from public buildings and private enterprises succeeded in decreasing smoking figures? According to OECD data, the percentage of adults who smoke daily has been cut for many countries, as noticed from the small light colored bars from 2005 against the deep purple bars from 1995 data. Sweden and Iceland have cut their rates from 25.8% and 30.3% in 1990 to 15.9% and 19.5% in 2005, respectively. Denmark also brought its figure down from 44.5% in 190 to 26% in 2005. The British and French have also made strides, regardless of how much discontent their populations showed to government restrictions over who can smoke and at which locales. Not all OECD states were able to report such successes. The Greeks actually took to smoking more over the fifteen year span, with a 0.1% increase from their 1990 level of 38.5%.

Rich world obesity: 1990 — 2005

Are the bellies of rich people getting bigger?  Have the seeds of capitalism grown to fruition to satiate the appetite of the OECD citizens? According to OECD figures, obesity is definitely on the rise. From 1995 to 2005, most OECD countries reported that a greater percentage of their adult population had unacceptably high body mass index scores, with Britain and Canada among those with dealing with markedly more obesity. An interesting case that presented itself was the Czech Republic and the Slovak Republic where, once united politically, they have seen obesity rates diverge over time. In 1995, 11.3% of Czechs were obese, rising to 17% in 2005, while in the Slovak Republic, a 18.9% obesity rate in 1995, higher than the Czech Republic’s at that time, has thinned in the 10 years since to a 2005 obesity rate of 15.4%. What might be the reasons for Czechs getting fatter and Slovak’s getting skinnier?

April 28, 2008 0 comments
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Financial Indicators

Regional equity markets

by Executive Staff April 28, 2008
written by Executive Staff

Beirut SE: Shuaa  (1 month)

Current Year High: 2,654.42  Current Year Low: 1,761.53

Given the persistent absence of a president and no end to the political crisis in Lebanon, the Blom index for the Beirut Stock Exchange can be noted for its close at 1,514.90 points on Mar 25 as a veritable improvement from 1,436.02 points at the end of last month. Against a backdrop of $119 million total traded value in all of January and February, the BSE in early March treaded on the lane of chronic pain with average traded value somewhere below $2 million per day in the first two weeks of the month. Buzz came from a new edition in merger discussions between Bank Audi and its Cairo-based shareholder, investment bank EFG Hermes. In mid-March, commercial banks got a nod of trust from Standard & Poor’s on account of their resilience. Reports of 23.6% growth in 2007 profits by the 11 banks with assets over $2 billion apiece also spread good cheer. The central bank could be satisfied with the successful close of a new $875 million Eurobond with yield of 9.25% that found favor mostly with local takers. 

Amman SE  (1 month)

Current Year High: 8,667.85  Current Year Low: 5,560.56

Dropping below 8,000 points for the first time since February 20, the Amman Stock Exchange in March could not sustain the strong upwards trading momentum it had displayed in the first two months of 2008. The ASE Index’s close at 7,883.04 points on Mar 25 signified a slide of 784.81 points, or 9%, from a year high on Mar 16 even as the index on Mar 25 was still 5.8% better than at the start of 2008. The industrial sector, which had led the market’s rise to Mar 16, showed the steepest drop among ASE sectors in the second half of the month but came out ahead of the other sectors with a 3.7% loss versus the end of February. Banking and services underperformed the general index in the monthly balance. Profit taking and decisions of foreign market participants influenced the ASE March downtrend after a hefty $31 million net increase in shareholding by regional and international investors had benefited the ASE Index in January and February. At end of February, the total foreign ownership of ASE-listed companies stood at 50.1% of market value.   

Abu Dhabi SM  (1 month)

Current Year High: 4,930.39  Current Year Low: 2,839.16

With a close at 4,605.52 points on Mar 25, down 4.4% on the month but still up 1.2% year to date, losses of the Abu Dhabi Securities Market Index in March amounted to just over half in percentage terms of the suffering of neighbor DFM. Energy and real estate/construction led the market down in the course of the month. Except for insurance, which was positive by a fraction, no sector closed Mar 25 higher than at the end of February. The banking, industry, and consumer sub-indices weakened slightly, between 1 and 2%. The ADSM had some notable numbers on growth in overall trading volume and trades by international investors in 2007 to report. Within a 148% increase in overall volume on the bourse, the participation of foreign investment climbed by over five percentage points, to 20.3% of total trade in 2007. According to numbers cited by investment firm MAC Capital Advisors, net foreign investment increased tenfold year-on-year to AED $2.7 billion at the end of 2007.

Dubai FM  (1 month)

Current Year High: 6,291.87  Current Year Low: 3,658.13

Sometimes oversold, sometimes pressed down by international worries, the Dubai Financial Market index flattened a bunch of support levels and ended 8.3% down by its Mar 25 close of 5,467.74 points when compared with the end of February. Market movers on the DFM comprised mostly the usual players, the likes of Air Arabia, Dubai Islamic Bank, DFM.co, plus real estate stocks. Most sectors didn’t stray far from the general index, except for utilities, which lost 23.7% and materials, which was the sole shiner with a 37.7% climb on the month. National Cement rallied from $3.15 at the end of February to a new year high of $4.33 on Mar 25. Emaar Properties dropped back to the $3 range but analysts were not deterred in their substantially higher estimation of the stock’s worth. On top of the shakes from watching global markets and seeing the Fed cut US lending rates again, the DFM at the end of the review period took freight from potential regulatory action which by clamping down on margin trading could siphon off liquidity.

Kuwait SE  (1 month)

Current Year High: 14,455.40            Current Year Low: 10,108.70

Almost 15% up on the year is not bad at all in first-quarter 2008 performance against that backdrop of global equity markets chills. The Kuwait Stock Exchange closed at 14,319.40 points on Mar 25, signifying a year-to-date gain of 14.02% that was surpassed in the region only by the Muscat Securities Market. The KSE Index hit a new historic peak at 14,455.40 on Mar 19 ahead of a long holiday weekend. On the month, the food sector dropped 4.98% and was the KSE’s main underperformer; services (+8.21%), non-Kuwaiti (+6.84%), and insurance (+4.14%) sub-indices outperformed. Analysts spotted a very positive factor for the bourse’s good development in the reduction of excessive tax burdens that foreign investors used to have to pay but other traders warned of artificial highs and imbalances in March trading patterns. The resignation of Kuwait’s cabinet on Mar 17 did not appear to shake to KSE much; however, financial market actors found their own bones to pick as they argued over competing plans to establish a Capital Markets Authority.

Saudi Arabia SE  (1 month)

Current Year High: 11,895.47            Current Year Low: 6,861.80

The Saudi Stock Exchange evoked some unhappy reminiscences of performance in spring of 2007 as the Tadawul All Shares Index slumped 7.2% on the month and almost 15% year-to-date with its Mar 25 close of 9506.90 points. Unable to defend the 10,000 points level after Mar 4, the TASI’s slide was barely softened by a few up sessions, including a 1.45% rise on Mar 25. Insurance, agriculture, and services performed worst, losing between 15.7 and 10.2% from Feb 29 to Mar 25. Industrial and cement had the best showing by dropping 2.5 and 5.2%. Sabic traded on a sideways pattern in March. Hoped-for and new entrants provided moments of relief in the midst of all the nervousness: Mining giant Maaden’s 50% IPO got approval from the Council of Ministers in early March and is now expected to happen in 2008; similar hopes in 2006 and 2007 didn’t materialize. Zain Saudi Arabia, which started trading on Mar 22, dominated SSE volumes in its first days on the bourse.

Muscat SM  (1 month)

Current Year High: 10,728.67            Current Year Low: 5,532.64

Edging up 0.1% in March by the 25th, the Muscat Securities Market had the period’s second best lease on good fortune after the KSE and could reinforce its top rank in year-to-date performance, where the general index close at 10,372.08 points was up 14.8% versus the start of 2008. In the first half of March, the MSM — appearing undeterred by factors such as global markets turmoil and intensifying recession talks in the US — rose to a new high of 10,728.67 but sellers weighed in from Mar 17. The industrial and banking sectors moderately outperformed the MSM general index in March while services underperformed. While global stock watchers ended March in discussing whether positive signs in leading equities markets were fake, it seemed that the disconnect of local and global was still intact in Oman this spring, different to the larger GCC exchanges.

Bahrain SE  (1 month)

Current Year High: 2,889.22  Current Year Low: 2,106.70

Closing at 2785.84 points on Mar 25, fortunes on the Bahrain Stock Exchange edged 3.3% lower when compared with the last close in February. The investment and industrial sub-indices weighed in on the downside with drops of 6.5 and 5.3%; banking and insurance managed to keep their heads just above the waterline with gains of 1.2 and 0.4% in course of the month. Trading ex-dividend, market cap leader Ahli United Bank moved south in March; it distributed 14% cash dividend and 10% bonus shares on Mar 4. Taking a look back at 2007, the BSE announced that combined profits of listed companies last year went past the $2.655 billion mark, up from $2.1 billion in 2006. Looking forward, the BSE in late March signed a memorandum of understanding with the Dubai Financial Market under intents of increasing period exchange of information and enhance general collaboration between the two securities markets. 

Doha SM: Qatar  (1 month)

Current Year High: 10,718.78            Current Year Low: 5,944.03

The worst March of the GCC bourses was given to the Doha Securities Market. Its index receded 9.2% from the beginning of the month to a close of 9511.52 points on Mar 25, eradicating gains of January and February. The industrial index led the market down with a drop of 15.6%, followed by banking. Insurance and Services were hit less hard, recording index losses in the 5% bracket. Heavyweight Industries Qatar dropped 17% from Feb 28 to Mar 25. IQ, which achieved 38% higher profits in 2007 versus 2006, distributed a 40% dividend and 10% bonus shares on Mar 19, Trading in Doha Bank throughout the period was under the influence of its announced 40% cash dividend and 20% bonus shares issuance on Mar 24; the scrip shed 9.8% the following day. On the regulatory front, Qatar’s central bank reportedly has long-term plans to spin off its supervisory arm and merge it with the regulator for the Qatar Financial Center into a financial services authority. 

Tunis SE  (1 month)

Current Year High: 2,708.36  Current Year Low: 2,436.94

The Tunisian stock market pointed slightly downwards in March and closed at 2,664.92 points on Mar 25, compared with 2682.34 points on Feb 29. Inverse to most other exchanges around the region, the Tunisian bourse had an intra-month low phase around Mar 7 to 12. Each closing Mar 25 almost 5% lower on the month, the sub-indices for industrial and financial services companies underperformed the market index. Whereas the consumer goods sector also underperformed, the financial companies index was ahead of the other sectors and closed 0.8% up on Mar 25 vis-à-vis Feb 29. Curio: After a trading hiatus of almost four months, the share price of insurer Astree traded up 57.2% on Mar 25, at volume of 150 shares, when compared with its preceding price determination at TND 47 in a 122-shares transaction on Dec 3, 2007.

Casablanca SE All Shares  (1 month)

Current Year High: 14,925.99            Current Year Low: 10,975.78

Early March spring feelings ruled for a while on the Casablanca Stock Exchange, followed by a bout of fatigue. A week-long 655-point rally resulted in a new index record of 14,925.99 points on Mar 13; the market closed at 14,693.25 on Mar 25. Year to date, the Casablanca market leads all MENA markets with a 15.74% gain one week shy of completing the first quarter. Of the three largest companies by market capitalization on the Moroccan bourse, Maroc Telecom and Attijariwafa Bank both went lower after mid month while real estate group Addoha traded sideways on the high price level to which the stock had risen in early March. Sonisad, a manufacturer of metal rods and cables and the exchange’s number 10 by market cap, rose steeply to $550 per share on Mar 25 from $473 on Mar 11.

Cairo SE: Hermes  (1 month)

Current Year High: 101,045.70          Current Year Low: 63,232.26

Although the Hermes index for the Cairo & Alexandria Exchanges close at 96,826.67 on Mar 25 was only 572 points below its close from the month’s first trading session, this does not tell the entire story. Intra-month, the Egyptian bourse experienced a volatile ride, seeing a historic peak above 101,000 points on Mar 12 followed by a week-long nosedive of more than 5% before catching its breath and starting the month’s last week with a 1.5% rise. On the corporate side, Sawiris companies ruled the headlines. Orascom Construction Industries ended a month of flying in the $110 range with a humongous 43.9% drop on Mar 25 after paying the main chunk of its also humongous cash dividend. Orascom Hotels & Development announced it will traverse the Alps by creating a new Swiss holding company with listings in Zurich and Cairo. Uninhibited by the dollar peg obligations that forced US-aligned interest rate decisions at GCC central banks, the Egyptian central bank tightened money supply through hiking the interest rate 50 basis points on Mar 23 in response to inflation.

April 28, 2008 0 comments
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Banking & Finance

Money Matters by BLOMINVEST Bank

by Executive Staff April 28, 2008
written by Executive Staff

Regional stock market indices

Regional currency rates

Dubai Properties Plans $200B Worth of Projects

Dubai Properties, a member of Dubai Holding, consolidated its activities under a new holding company: Dubai Properties Group (DBG). The new group structure consists of six divisions that include real estate verticals, hospitality, property services, international investments, engineering and real estate development. The new group aims at increasing its global real estate investments up to $200 billion in the next three years. In 2008, DBG plans on handing out 5,000 commercial, residential and retail units across the region. The group has already invited bids for the $15 billion Mudon development in Dubailand. This project involves the building of 12 four-floor residential buildings with 8,000 square meters each.

Tehran Holds Talks on $90 Billion Listing

Iran’s Privatization Organization (IPO) is planning on listing $90 billion worth of energy related holding company shares on the Dubai International Financial Exchange (DIFX), in addition to similar listings in Frankfurt, Singapore and Hong Kong. The IPO’s preferred location for listing is Dubai with Bahrain as the backup option. If approved, Bourse Dubai that owns DIFX will face a conflict of interest with the US treasury authorities due to the ongoing plans to create NASDAQ-DIFX. On the other hand, Deutsche Börse that operates the Frankfurt exchange has welcomed the idea. If the listing goes ahead, the energy holding company will be the second largest publicly listed firm in the region after Saudi SABIC that has a market capitalization of $111 billion.

Jordanian Economy Slows in the First Nine Months of 2007

Latest figures released on the Jordanian economy revealed a slowdown in the country’s growth rates which reached 5.8% in September 2007 compared to 6.3% in the same period a year earlier. This deceleration was driven by a slowed performance in Jordan’s main sectors, primarily the financial sector that grew by 6.8% in 2007 compared to 9.3% in 2006. The manufacturing sector grew 7.4% compared to 9.8% in 2006. Finally, the agriculture and mining sectors both decreased 4.9% and 1.4% respectively. Despite this slowed performance in September of 2007, Jordan’s Department of Statistics revealed that average rates in the first two months of 2008 increased 9.1% from those of 2007. This was largely driven by rising international oil prices, in addition to an increase in prices of dairy products and cereals. According to the Economist, the country will continue to focus on the ongoing privatization program, in addition to increasing foreign and local investments in the hopes of raising GDP growth rates. These are expected to rise at a lower rate of 4.8% by the end of 2008. Finally, inflation rates in 2008 are expected to rise sharply, driven by the elimination of fuel subsidies and increased international food prices.

April 28, 2008 0 comments
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MENA

Heavy on the pocket

by Executive Staff April 28, 2008
written by Executive Staff

Across the Middle East and North Africa, price rises are disturbing the efficient movements of the market, drawing the attention of governments to intervene, and harming the average consumer in the process. While nobody in the region is particularly fond of inflation, the causes and effects of it cannot be ignored and must be studied in a regional and global context. Many variables, including a growing appetite for commodities and natural resources by the developing world, a weak dollar to which many regional economies are pegged and tremendous growth rates of most economies in the region, are to blame.

Consumers, businessmen, and central bankers alike are feeling the squeeze as the economics of prices are spilling onto the domestic scene of many countries. Citizens in the Gulf stand to benefit, or at least enjoy some respite, from the economic solution their governments know best: public handouts in the form of further stipends and allowances.

While these sort of archaic practices remain as questionable in theory as in practice, governments are trying to stave off the sort of disenfranchised public rioting that’s been seem in the streets from the Levant to North Africa. As MENA countries continue to experiment with development strategies for their economies, they must combat the devil of rising prices.

Inflation gaining momentum in the MENA region

Although inflation has many experts, it has even more variables, which is why the context in which it is occurring in the region is further exacerbated by the inherent disparities between economies. From conflict-ridden Lebanon, to the resource-rich countries of the Gulf Cooperation Council (GCC), to Maghrebis faced with lower purchasing power, the drivers of inflation are shared at the international level, but diverge at the domestic level.

Globally, a slew of resource-hungry developing countries are pushing up international prices for basic commodities, including energy resources like oil and natural gas. As the newcomers continue to develop, they will demand goods at faster rates than produced in the past, leading to price increases as demand overshadows supply. As the developers in Africa and Asia purchase more building and energy materials, the MENA region will have to face the challenge of acquiring goods at decent prices.

A weak dollar is another culprit for global price rises, especially for a region in which many countries maintain a greenback peg. For the resource-rich Gulf, selling oil in dollars to then purchase goods in Euros will be all the more expensive as the dollar continues its slide relative to the EU currency.

The flame feeding the outstanding economic growth rates of Gulf countries is not so revered when observed through an inflation-adjusted lens. While double-digit growth remains the highlight of countries in the peninsula, the inflationary menace lurks deep inside the structures of industries essential to the region’s growth and development. As inflation continues to pick away at the Gulf’s economic growth, it also poses a threat to regional adhesion to the monetary union planned for Gulf Cooperation Council countries in 2010.

In February, Dubai’s Chamber of Commerce and Industry (DCCI) warned that GCC member states might be unable to meet the set inflation criteria necessary to form a union as housing shortages and rising import costs maintain inflationary pressure. The criterion specifies a 2% rate as the maximum allowed for the average of the three years in which inflation appeared the least. According to data from the International Monetary Fund (IMF), only Kuwait, Oman, and Saudi Arabia fit the criteria from 2003 to 2008 figures, but even they may not be able to stave off incredible price rises for long.

Abandoning the greenback

One step other GCC economies might opt for is switching from the greenback peg to a mixture of currencies more equitable with the Euro and possibly even a currency linked to the commodity in which they specialize: oil and natural gas. Egyptian-based investment bank EFG-Hermes forecasted a 60% possibility that central banks will reform their currencies in 2008 to fulfill one of their main goals of price stability.

But not all Gulf central bankers are likely to follow suit. On the converse, maintaining a weak currency peg is inherently attractive to foreign investors as well a country’s exporters, both of which allow a country to offset inflation. Hamood Sangour Al-Zadjali, governor of the Central Bank of Oman, ruled out revaluing his country’s rial from the US dollar for just those reasons.

Nevertheless, the currency peg usually only highlights the disparity between international currencies, but fails to mention the steps central banks must take to maintain the momentum of the US Federal Reserve. When the Fed tackles its own domestic troubles and attempts to spur economic growth through interest rate cuts, GCC economies are forced to follow suit as long as they remain pegged; however, rate cuts are the last thing Gulf economies need when some are reaching double digit inflation.

For many Gulf central banks the only move to combat inflation is to raise the reserve requirement, the rate at which banks borrow money. By keeping more money in their vaults they are able to dampen money supply growth and future inflationary pressure because less money is chasing around the same amount of dollars.  Saudi Arabia pursued two increases in the reserve requirement in two months to stave off inflation higher than the current 7%. According to an interview with Reuters, Saudi Arabia’s Central Bank Governor believes that “inflation will decline in the second half of this year after it peaks in the first half,” hoping that “recent government measures [handouts in addition to central bank moves] will have the greatest effect on inflation in the second half which will contribute to stabilizing inflation, keeping it close to its levels in 2007.”

Kuwait is usually held as the prime example of moving away from a dollar peg. In May 2007, the country revalued its currency to the dollar amid a weakening greenback. However, Nassib Ghobril, Head of Economic Research at Byblos Bank, believes that “it has not solved the problem.” Instead he pointed to economic growth slowing in industrialized countries and the decrease that global demand should experience, which will in turn reduce inflationary pressures.

How high can it go?

While the GCC countries continue to erect skylines in the desert, inflation is climbing along with it as the region’s building boom is nowhere near catching up with demand, leading to demand-driven inflation. In Qatar, the General Secretariat for Development Planning indicated that rent and utility prices rose by 28% in the fourth quarter of 2008, similar to prior performance, but much higher than other components in the inflation-watchers price basket. In Abu Dhabi, the National Bank reported that rents in the emirate rose by 19% last year and accounted for 61.8% of Abu Dhabi’s total inflation.

As downstream industries like cement and other building supplies face price increases from heightened demand in developing countries, tenants and owners are facing not only the stiffening competition from supply constraints, but from inflation in basic materials leading to projects which are more costly.

Dubai’s ruler Sheikh Mohammed bin Rashid Al-Maktoum issued a verdict aimed at lifting custom duties on cement and steel to control inflation in building materials costs. In-country suppliers to the UAE are facing a tough time keeping pace with the emirate’s demand, which has led to further delays in construction projects.

Government response to housing inflation remains mixed, but all countries seem to favor some general blend of economic steps aimed at easing the in-country price climate like price controls in addition to welfare measures like increased stipends or money from the government.

Qatar decided to freeze rent increases for the next two years to ease inflationary pressure in its housing sector.  The move is expected to “shave off roughly 40% of the

annual inflation figure,” according to Giyas Gokkent, Head of Research at National Bank of Abu Dhabi.

Other attempts by regional governments, including the UAE, to cap rent increases have yielded little results because the legislation applied to existing contracts, but failed to even mention any application of the law to future contracts as tenants fill the apartments build as part of the Gulf’s construction boom. For 2008 rent increases were capped at 5%, down from 7% in 2007.

Handouts

To offset the price rises on the pockets of its citizens, many Gulf countries are turning to handouts to compensate lost purchasing power. Kuwait plans to spend $3.7 billion on a cost-of-living allowance scheme for Kuwaitis. Around 430,000 Kuwaiti workers and pensioners will receive the allowances, amounting to a real wage increase between 15% and 133%. Bahrain is also pursuing welfare measures aimed at improving the situation of those most affected by price increases. A $106 million payout was approved during March whereby low-income families will receive $133 each month.

A UAE plan to give citizens discounts on certain foods, gasoline, and fuel at government-operated cooperative supermarkets to offset inflation is also in the works.  In an interview with Reuters, Jamal Al-Saeedi, Executive Manager of the Emirates Society for Consumer Protection, stated “There is too much inflation and it is hitting households. People cannot live without these items so we are looking for a way to reduce the costs.” The UAE’s federal employees also benefited from a 70% salary raises at the beginning of the year.

Although handouts do not signify a government strong on tackling inflation at its roots, they do have some merit in economies where price hikes are hitting people in the stomach. UAE fast food chains KFC, Pizza Hut, and Hardees all reported average monthly price increase of 10%, while Burger King reported 15-30% increases.

Price caps and agflation

Retailers are also experiencing the pressure of inflation through a mixture of supply worries and maintaining competitiveness, but also government intervention in setting price caps. In the United Arab Emirates (UAE), retailers have responded negatively to a government edict to cap prices for basic consumer goods, including food and water. Caught between receiving a $2,700 fine for selling above the set price to a $5,450 fee for hoarding products, retailers are worried that they will not be able to guarantee the supply of some products for long.

Oman has also called for price caps on food sales.  According to Khalil bin Abdullah Al-Khonji, Chairman of Oman’s Chamber of Commerce and Industry, “the idea is to cater to the needs of the lower middle class and those sections of society for whom the slightest price can cause a major dent in their budget.”

Although some understand that agflation – a term given to agricultural inflation – contributes largely to the rise in food prices, many have turned once again to their government to offer protection either in the form of pay raises or subsidies.

Marcus Marktanner, professor at the American University of Beirut’s Institute of Financial Economics, believes that not much can be done by policy makers to ameliorate inflation. Playing with price ceilings and alternative rationing “has little effect if the price shock is long term. The damage that messing around with the price mechanism causes to allocation efficiency regularly outweighs its social benefits.”

The Levant’s experience

Discussing inflation in the context of Lebanon makes for a hybrid case mixing textbook economics with the tough experiences of dealing with continued conflict and instability. Led in recent years by Lebanon’s Central Bank and its sage Riad Salameh, who has averted a country-wide financial disaster numerous times, this small state was doing well until the Summer 2006 War with Israel.  Coupled with the country’s need to import energy at high costs, as well as maintaining the Lebanese Lira’s peg to the dollar, “the consequences of war led to higher inflation for 2006 and carried over into 2007,” according to Ghobril. The country’s trade deficit is further exacerbated by the rising Euro, which is making imports more expensive.

Ghobril also noted the problems of measuring inflation in Lebanon. With the Central Administration for Statistics issuing quarterly figures, the Central Bank issuing only end-of-year figures, and the Consultation and Research Institute studying the situation monthly, the country relies on international organizations like the IMF and the World Bank to maintain its numbers. Trying to weed through the several possible figures for 2007 ranging from 6% to 15%, Ghobril believes that “frankly the increasing prices have been manifested in the last quarter of last year and so far this year.”

According to Edward Gardner, the IMF’s Senior Resident Representative in Lebanon, the fund relies “on the consumer price index used by the Banque du Liban, largely because it affords a common frame of analysis with the authorities. This index suggests that consumer prices rose by nearly 6% by end-2007, with about half of the increase in the index originating from higher food prices.”

Ghobril believes that “there is not a lot [the government] can do” to combat inflation. Noting the global nature of the problem, he thinks that Lebanon is in a better situation that many of its regional neighbors, including those in the Gulf and in North Africa. Calls from Lebanese industrialists for local consumption should be heeded as local production can be consumed at cheaper prices than imports coming from Europe.

Gardner concurs that “there is very little the Lebanese authorities can do to counter global trends. By reducing gasoline excises – at a considerable fiscal cost – the government has moderated the impact of higher international fuel prices on consumers and CPI inflation,” adding that, “with gasoline excises now near zero, the government’s room for manoeuvre has been exhausted.” On the monetary side, Lebanon’s peg to the dollar “provides this anchoring role” of preventing a price-wage spiral.

Jordan, another small state whose economy depends on international currents, is facing rising food and fuel prices, both of which are being experienced across the globe and attributable to international factors. In addition to these international causes, the 700,000 Iraqi refugees living in Jordan are increasing demand as well. 

According to Rasha Manna, Vice President of Research at Jordinvest, “another inflationary factor is the lifting of fuel subsidies from the government. They have been phasing out oil subsidies for some time, which were abolished completely in February 2008.” A recently-published study from the Ministry of Industry and Trade shows the effect of fuel prices on production cost. It seems that in around 90% of factories, fuel represents only about 10% of expenses. Of course this figure varies from one industry to the other, in cement accounting for up to 40% of expenses.

Inflating North Africa

West of the Levant, inflation continues to take its toll, but for the economies experiencing the gravest effects – Algeria, Egypt, and Morocco – the high prices cannot be attributed to small statehood as in the case of Lebanon, or bountiful riches, as is the case in the Gulf. 

Egypt’s urban consumer price index, fuelled by food and beverage inflation, hit an eleven month high in February with a year-on-year growth of 12.1%, up from 10.5% in January.  The 16.8% inflation in food and beverage prices was largely attributed to a 26.5% rise in the prices of bread and grain, as well as 20.1% increase in dairy prices. The country’s inflation stems mostly from international price rises on imported products, including supply constrains on domestic production. As the country is not tied to the US dollar, Egypt’s central bank raised its interest rates in February to combat price rises after having held the rate steady for a year. 

Algeria’s inflation rate is on par with Egypt’s and has hit double digits in the past year, although the government continues to maintain 3.5% as the official inflation number. Algeria’s inflation is linked to the prices of several heavily consumed products, including milk and cereals, which Algeria imports in large amounts.

According to Algeria’s National Statistics Office, inflation hit 3.5% in 2007 against 2.5% in 2006, but independent research groups, like Casey Research, believes the figures do not reflect reality. Recently oil, milk, and other products have doubled in price, and although imported inflation is a worry for most North African countries, Algeria’s own products have also faced inflationary pressure, with apples, for example, increasing in price by 50%.

The government remains steadfast and Said Barakat, Algeria’s Minister of Agriculture, blamed “speculation” for the price increases. In addition to ascribe responsibility to the private sector, Algeria’s Minister of Commerce also shouldered some of the blame, but retorted that, with only 3,000 price controllers to oversee one million suppliers, his task to maintain prices is impossible. With imports rising to $27 billion in 2007, against $21 billion in 2006, Algeria’s inflation will continue to be affected by cereals and basic foodstuff imports.

Morocco

The price explosion many Moroccans witnessed in early 2008 for basic necessities came as a surprise and adversely impacted the purchasing power for many.  Consumer protection associations came to denounce the inflationary spiral while the Moroccan government assure them that the situation is manageable.

Mohammed Belmadi, President of the National League of Consumer Protection, said in an interview that “the reason for increased costs of living is attributed to the index of consumer prices and the dizzying rise is has undergone in the past three months.” Prices have risen by up to 50% and the long list of costlier items is not limited to food but also includes transportation, health care, medicine, school supplies, clothing, housing, water, electricity, and cleaning products, among others things.

On the issue of distribution and supply chains in the country, Belmadi noted that “logistics are badly supervised and poorly structured, stressing the need for price controls to preserve the purchasing power of citizens.” He pointed out that “In addition to the controls, it is important to reduce supply costs from imports, consolidate small shopkeepers to centralize purchases, and diversify supply sources.” The goal, he said, “is to ensure that consumer rights and business competitiveness are protected through constant support to efforts aimed at promoting quality and safety.”

Nizar Baraka, Delegate Minister of Economic Affairs, painted a reassuring picture when he asserted that “the government has taken financial and fiscal measures to cope with the price increases on the international scale, avoiding their impact on the national market and preserving the purchasing power of citizens.”

Speaking at a government council to explain the current price situation, the minister cited increases in the budget for the compensation fund from $1.78 billion in 2007 to $2.74 billion in 2008, which will go towards subsidizing wheat for the first time, abolishing tariffs on wheat and the elimination or decrease of certain taxes on consumer products. Thanks to these measures, Baraka noted, “no increase in the prices of subsidized products had been recorded, rising prices for some unsubsidized commodities was halted, and the rate of inflation fell to under 2% in 2007 while general living cost have been on the decline since last October.”

For his part, Abdellatif Jouahri, Governor of the Central Bank, noted that “the main uncertainties are inherent in perspective of the evolution of production and income, and the pursuit of rapid growth and bank credit.  Similarly, the downward pressure on the dollar had a significant impact on financial portfolios, which could result in greater volatility of capital flows.”

Where to go?

With strikes and riots in the Gulf, injuries and deaths at bread stations in Egypt, and a general, MENA-wide sense that prices for basic commodities are rapidly increasing, it can only be hoped that the various policies by the regional authorities are having the desired effects. In the end, the biggest threats to stability are not revolutionaries, Islamist or otherwise, but a populace that feels the government is not playing its part in the ‘moral economy’ — guaranteeing affordable provision for the masses of the basic commodities: food, shelter and heating.

April 28, 2008 0 comments
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North Africa

Uncle Sam knows best

by Executive Staff April 28, 2008
written by Executive Staff

Does American education remain the most popular choice for universities in the Middle East and North Africa (MENA) region? Recently, rumors circulated that Al Akhawayn University in Ifrane (AUI), Morocco switched from the traditional American model of education to the French system of tertiary learning. The rumors seemed counter intuitive during a time when the whole world, including the MENA region, is shifting to the American style of higher education which, in addition to the usage of English as the primary language of instruction and research, focuses on creative thinking and problem solving instead of rote memorization.

Rethinking the American model of education would have not only been counter to popular notions of higher education but would have affected the foundations on which AUI is based. Located in a country desperate for efficient human capital, any move by AUI away from the American model would have brought into question the effectiveness of the school in developing the country’s next generation of leaders.

Founded in 1993 with a large endowment from Saudi Arabia to Morocco to aid an oil spill that was never realized on the country’s coasts, AUI represented a move in international diplomacy between the “two brothers”, a namesake which currently adorns the university and acts as a tribute to the then kings of each country – King Fahd of Saudi Arabia and Morocco’s King Hassan II. Nestled in the mountainous village of Ifrane, AUI is the articulation of the late King Hassan II’s vision to create a university based on the American style of education.

In the institution’s bylaws, which were signed by Morocco’s king, it is made “very clear that it’s an institution where English is the official teaching and research language,” according to AUI’s President and former Minister of Education Rachid Benmokhtar Benabdallah. He also believes AUI “is an institution built on the American model of education and American standards of education and all of the associated criteria. The laws are clear and are there, so we cannot change them”. In an interview with Executive he dispelled the rumors, noting that “nothing changed at the university level.”

Trilingual brothers

The source of confusion came from a shift in the direction of AUI’s primary and secondary schools. Families in Ifrane who send their children to AUI’s primary and secondary schools are having trouble coping financially and logistically with their physical move from the isolated town or in cases where students transfer to other schools.

What were once American system schools under AUI’s direction are now international schools. “For the Moroccans”, according to President Benabdallah, “we have a problem with the primary and secondary schooling and the problem is that if the students attend then they will only learn English, but what happens if they have to go elsewhere, if they move to another city, or if they switch schools? They will not find another school on the costs side which is affordable for them.”

He believes that the other American schools in Morocco are very expensive and people do not have the means to pay the yearly fees of $13,500-16,000, meaning that if AUI’s primary and secondary schools remain purely American, the service offered will essentially be for the international community and not Moroccans. Hence, a university-wide discussion was started and the solution found was to convert the pre-university education into an international school.

The new ‘international school’ will have three languages: French, English, and Arabic. In searching for a new management team for the school, AUI had two options, but chose an international school instead of running the school under the international baccalaureate mandate, because the latter “gives you just the rules, what you should do, and they come for evaluation, assessment, and so on, but they don’t manage the school, so it remained a problem”, according to AUI’s president.

After negotiating with a French organization, AUI’s leadership found a solution by changing to an international school with courses in French, but with six hours of English weekly, and three hours of Arabic, which can be expanded to six hours a week of Arabic for Moroccans. The mix of languages will help students master all three to become tri-lingual before university, but the added benefit will give the families of students more flexibility when they head elsewhere in Morocco.

In addition to the change in instruction in the primary and secondary schools, according to Abdessamad Fatmi, the school’s Director of Communication, further confusion came from an AUI-commissioned study on the ways to improve the university. As with many third-party studies, the product provided several options, including switching AUI to the French system, yet the school did not follow the advice.

Encouraging English

As Fatmi pointed out, at the university level the attention to educate in English will be maintained since “we are in the process of evolving as a university as we are growing to make sure that our students master the language, which is very important, and the reason is that they can pass the Testing of English as a Foreign Language (TOEFL) exam, and that we ensure that at the end of study they pass another test for professional English before leaving campus.”

In the end, Benabdallah maintains that “nothing changed and we will stay the way we are as the Moroccan university under the American model of education.”

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North Africa

Building its place

by Executive Staff April 28, 2008
written by Executive Staff

By promoting the right infrastructure development a country might attract capital from foreign firms looking to move the production of goods and services overseas. For Morocco, developing sites for foreign companies to conduct their operations overseas is part of a wider movement across francophone North Africa.

As countries like Algeria, Morocco, and Tunisia diversify their means to attract foreign capital by encouraging the growth of market-based competition, they are increasingly aware of their valuable position denoted by a common language, which unites them with Europe as well as their close proximity to the continent. While European firms look to stay competitive on international markets, many are choosing to delegate their business processes overseas.

Further slides in the US Dollar are making dollar-denominated economies more competitive on international markets as the factors of production are relatively cheaper against the more expensive euro and other currencies not pegged to the greenback. A continued fall in the dollar will likely serve as an impetus for European firms to ‘offshore’ a portion of their business to North Africa to cut costs and remain competitive.

Morocco develops its offshore industry

For Morocco, developing infrastructure to host offshoring sites is part of the wider 2005 Emergence Plan aimed at deriving the economic benefits from a burgeoning offshoring industry. Through developing a successful offshore industry, the kingdom calculates that more capital and workforce in the country will increase gross domestic product (GDP) by $12.3 billion while at the same time creating nearly 440,000 jobs and slashing its trade deficit in half.

One such offshoring site the kingdom developed is Casablanca’s NearShore Park, which opened its doors at the end of 2007 and currently hosts such companies as BNP Paribas, Dell, and Tata Consulting for a total occupancy rate of 100% within its 57,000 square meters. Other parts of the park are also being constructed and businesses continue to fill them up at the park’s price of $12 per square meter, taxes included.

According to NearShore Park’s management “we do not have a [single] local standard. We are working with our customers on the final version of the product.” Confident in the industry’s future in Morocco, another 200,000 square meters are planned over the next two years while an additional 350,000 square meters are set for construction through 2011. Atos Origin, Novedia Group, and Novative already expressed interest in the park as an offshore location for future operations.

Moroccan officials are trying to use Casablanca’s strengths to the city’s advantage, which have currently placed the economic capital in the “top 5 most popular offshore destinations in the world, according to a study conducted on 37 foreign cities,” said Mohamed Lasry, CEO of NearShore Park. Other contenders for Europe’s offshore operations include Prague, Czech Republic, and Sofia, Bulgaria, where low manufacturing costs, coupled with policies aimed at harnessing foreign direct investment (FDI) encourage the development of industry for many Western European firms looking to cut costs.

To compete with others, including the very popular Asian outsourcing hubs in India, Southeast Asia and China, Morocco is still preparing its workforce to match the same number and degree of talents in their pool of human resources, including training engineers and other experts in information and communication technology.

According to Mohamed Kabbah, Governor of Casablanca, the NearShore Park “is an incentive for getting Moroccan engineers abroad to come and work in Morocco.” The NearShore Park is also associating itself with institutions of tertiary learning, including universities and vocational schools to harness the talent still left in Morocco as “Morocco is fighting for its place in the knowledge economy,” according to Kabbah.

The advantages to a firm situating itself in the NearShore Park include office facilities held up to international standards as well as a private telecom loop run by Maroc Telecom within the park, at prices cheaper than those offered to consumers elsewhere. Public transport plans to offer connections are in the works and NearShore’s chief operating officer Joseph Hoffman promises no less than five bus lines through the park with a bus coming every two minutes.

Casablanca is not alone

While Casablanca might be aiming to become the biggest, it is certainly not the only Moroccan spot for Europe’s offshoring industry. The country’s political capital Rabat has begun its own Technopolis with a first phase completion date of June 2008 and a $58 million price tag. The remaining construction will hopefully be completed by 2015 for a cost of $500 million. The Technopolis aims to attract talent to serve as an arena for software support.

With the aim to build its technology industry as one driver of human capital development, Rabat has welcomed ST Microelectronics who installed a microchip design research and development (R&D) site for 180 engineers at a price of $13.6 million. With a focus on hardware design, clients include the American giant Texas Instruments.

The challenges of Morocco succeeding in attracting international firms is partly based on exogenous market factors, including currency movements, but the country’s success is also largely on par with Morocco’s own challenges of developing human capital. The country will continue its efforts to develop an economic environment favorable to industry and competitive against regional rivals such as Algeria and Tunisia who have thrown their hat in the race and are pursuing their own plans to create hubs for service sectors and R&D.

April 28, 2008 0 comments
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North Africa

Emerging to the world

by Executive Staff April 28, 2008
written by Executive Staff

Algeria’s accession to the world economy is moving forward with a surprising amount of support from the North African country’s Arab and European neighbors. In the past decade, the country integrated slower than its neighbors and was surpassed by both Morocco and Tunisia, who acceded to several trade agreements with the European Union (EU) and multilateral trade accords with Arab neighbors.

Despite a long history of being stalled under the country’s socialist-oriented economic policies, Algeria’s economy finally began to show promise when it began talks to join the World Trade Organization (WTO) in 1998. Ten years later, Algeria is still not a member, while Morocco and Tunisia have benefited since their accessions in 1995 by using the organization as a platform and mechanism for their continued liberalization and privatization plans.

Governments and businesses with connections to Algeria are poised on the sidelines as the country is set to finally join the plethora of other members during the second half of 2008.

A successful accession to the WTO is not by any means the final step on the path to liberalization, but it certainly is indicative of prior progress and future cooperation of the government with others in the global trading order. However, not all news of Algeria’s accession is positive and the country is attracting criticism from officials for not moving fast enough in key industries such as energy and services, where government reform plans are not satisfying the appetite of the world’s economies.

Regional connections

Like the many developing countries before it, Algeria’s progression towards the WTO began through a series of moves aimed at integrating the country’s economy with regional groups through regulatory and trade policies. Most WTO-aspirants follow the formula of increasing bilateral and multilateral trade with proven partners. Doing this helps the state create trade norms and learn to deal with more competitive markets. Understanding these norms and establishing trade policies on a small level helps the country manage tariffs and other protectionist measures to maintain a solid pace to improve and develop.

In the past decade, Algeria established connections with its Arab and European neighbors. For Algeria-EU relations, the success was attributed to the idea “that trade and economic integration helps to strengthen competitiveness and better face the remaining competition from other economies,” according to the European Commissioner for External Relations, Benita Ferrero-Waldner.

Neighbors in the Maghreb

For Algeria, proof of the country’s growth in regional trade is found in its burgeoning trade relationship with Morocco, its immediate neighbor to the west, but one with which it still shares tense relations regarding territorial disputes. The rise of Algeria-Morocco trade includes a year-on-year growth of 13.5% for Moroccan exports to Algeria, but more impressive is the astounding growth of Algerian exports to Morocco: 26.9% in 2006. The growth is attributed mostly to price increases in Algerian natural resource commodities, including the export of natural gas.

In the future, Algeria will need to depend on fellow members of the Arab Maghreb Union (AMU), especially Morocco and Tunisia, to service and govern parts of the two natural gas pipelines that connect Algeria’s main exports of natural gas, amounting to 98% of total exports, to its European markets. Tunisia will continue to oversee the Trans-Mediterranean (Transmed) pipeline from Algeria to Sicily, while Morocco remains part of the consortium controlling the Maghreb-Europe Gas (MEP) pipeline.

Liberalization via the WTO route is likely to foster better economic diversification, shying away from the natural gas industry as a main export driver, to include operations in services, research, and manufacturing, all of which are likely to be determined through relationships formed by Algeria under the WTO umbrella.

Many pundits consider the AMU defunct, which is why any analysis of the institution is given in small doses, since it seeks to formalize and bond a North Africa that to a large extent remains disconnected.

Going forward, the country’s WTO membership will most likely promote adhesion between AMU members and can serve as an impetus for more formalized applications of the idea behind the AMU. This model would be unique in that countries first regionalize and then globalize, but in Algeria’s experience, integrating with the WTO will bring it more formal results than its ties to the AMU.

In fact, Morocco voiced its support in January. Although the country remains a regional rival of Algeria and the land border between the two has been closed since 1994, Morocco expressed its support for Algeria’s accession plans. The ongoing dispute between the two countries — regarding the territory of the Western Sahara and the secessionist Polisario Front — has not has not interfered significantly  with their mutual desire to integrate their economies and those of the all the AMU states.

According to Mohammed Loulichki, Morocco’s Ambassador to the United Nations in Geneva, “The adhesion of Algeria to the World Trade Organization will reinforce the presence of the countries of the Arab Maghreb Union at the heart of the WTO, will ameliorate the economic and commercial interaction between its members and will permit them to contribute more to the rapid development of world trade.”

Arab investment in Algeria

However, in addition to increased trade movements to immediate Maghreb neighbors, Algeria’s connections with other Arab countries are likely to be cemented by the country’s WTO-accession plans. Algeria has been attracting a lot of business and investment from many Arab countries. Between 2001 and 2007, foreign direct investment (FDI) from Arab countries to Algeria jumped by $7 billion.

Looking forward to the next two years, Arab-Algeria investment flows will hit $19 billion, of which “90% was already approved by the government,” according to Djamel Zeriguine, Algeria’s Division Chief of the Promotion of Foreign Direct Investment. These $19 billion are destined to finance projects in downstream industries dependent on natural resources, including aluminum, cement, and other construction materials, but the money will also develop social infrastructure in health care as well as the tourism and hotel industries.

Such flows are likely to spillover into nascent industries such as research and development, as well as manufacturing, as the government moves forward with increasing private enterprises, encouraged by fellow WTO members during Algeria’s accession talks.

Selling Algeria’s geo-economic benefits

Europe is equally as encouraging of Algeria’s WTO accession plans as the country’s other Arab counterparts. For Europe, Algeria offers a host of potential for import diversification and strategic partnership. Although manufacturing and research sectors are piquing the interest of European firms, Algeria is likely to primarily remain a hedge in the short term against disruptions to Europe’s energy supplies. For Algeria, connecting with the EU offers it a chance to continue to privatize, liberalize, and economize.

The partnership is a matter of EU geo-economic security and a hedge against disruption of the continent’s energy supplies. Undoubtedly, Europe is looking to source petroleum supplies from several different entities since Russia first pulled the plug on its feed in 2005, demanding higher prices without a moment’s warning.

Further integration to the WTO trading order will help strengthen the relationship and interdependence of the two economies: for Europe, a liberalized Algeria will offer the hedge they are seeking while Algeria will benefit in the long run from increased competition and the most-favored-nation (MFN) status it will enjoy as a co-WTO member. Ferrero-Waldner believes that Algeria “is already an important energy partner for the EU,” citing the country’s status as third largest energy supplier to the Union.

She further indicated that “several gas transportation projects are already underway that will in the close future significantly increase Algerian supplies to the EU.” Other plans, such as a strategic energy partnership between the EU and Algeria that will enhance the EU-Algeria energy relationship are also in the planning stage.

Whether or not the EU’s courting of its gas-rich southern neighbor as a hedge against Russia’s geo-political maneuvering — through tampering with the EU’s gas supplies — will result in the establishment of a wider array of relations with Algeria, what is clear is that Europe is one of Algeria’s most fervent supporters for WTO accession.

The three year relationship Algeria has had with the EU is mainly attributed to the 2005 Association Agreement, through which Ferrero-Waldner believes “good progress has been reached so far, namely through the implementation of the tariff dismantling according to the planned schedule.” She holds that the Association Agreement in general is a “bonus for the domestic economy by generating new trade opportunities and increasing foreign direct investment.”

Philippe de Fontaine Vive Curtaz, Vice-President of the European Investment Bank (EIB), concurs with this positive picture and added that Algeria’s reforms have “improved the investment climate” of the country. Algeria’s reforms — which place the highest priority on privatization of public entities and restructuring certain infrastructure sectors like telecommunications and energy — are likely to be fostered with WTO membership.

Curtaz indicated that in February 2008 Algeria and the EIB signed partnership agreements aimed at the development of two reformed sectors, the private sector and the financial sector. To this end, the EIB, which manages the Euro-Mediterranean Investment and Partnership Facility (EMIPF), in 2007 gave nine southern Mediterranean countries $2.16 billion, of which 68% is for its private sector. Since the first aid package in 1980, the EIB has given a total of $3.4 billion to Algeria for the development of its private sector.

Deeper and faster reforms

However, not all news from Europe has been rosy. In fact, during a February 2008 visit to Algeria, European Trade Commissioner Peter Mandelson said that Algeria was “too late to allow a timid attitude” towards advancing commercial reforms. He expressed his dissatisfaction as to the current application of the Association Agreement, which outlines the reforms Algeria must take to integrate its economy with those of EU member states. To this end Mandelson said that “it will be necessary to look for a new partnership agreement before 2010 to improve commercial conditions.”

Touching upon the EU’s bilateral market access negotiations, which constitute part of Algeria’s WTO accession plan as members can negotiation regulations bilaterally, the EU trade official believed further improvements had to be made in trading energy and services, which remains a tough international issue as Algeria’s energy price is more expensive on international markets. However, Mandelson thought progress had been made on energy pricing and the two bodies are now in “the phase of final clarifications,” although the issue of liberalizing services remained untouched. The commissioner refuted suggestions that the EU was contributing to the postponements in Algeria’s WTO accession talks, indicating that other WTO members also had concerns.

The meaning of a WTO Algeria

Beyond being a mere indicator of economic liberalization, the WTO label carriers with it several ties which will bind Algeria to the global trading order. The most important of the WTO standards is the group’s most-favored-nation (MFN) status, which applies to all WTO members by guaranteeing them the most advantageous terms of trade with any other WTO members.

For Algeria, the MFN status would mean increasingly favorable treatment of exports to its main trading partners, like the EU, and in particular the country’s top six bilateral trading partners — the United States, Italy, Spain, France, Canada, and Belgium — all of which are WTO members.

On the import side, Algeria need not worry as the country is enjoying a positive trade balance of $37.22 billion in 2007, largely attributed to the country’s extensive reliance on its hydrocarbons sector, which dominates 98% of exports and whose price rises in oil and gas is the reason for the country exporting twice as much in dollar value as it imports.

However, foreign investors will take note of the MFN application to their exports to Algeria as a market in which the country can spend its foreign exchange earnings. Algeria’s other industrialists are likely to move on the WTO green light as the county explores economic liberalization and diversification from its reliance on natural resources.

The country will also benefit from the WTO’s technical assistance for developing countries. According to the organization, the benchmarks set for less-developed economies are usually met with success through the group’s technical assistance and cooperation as markets move from command-based to market-based. The WTO experiences of its neighbors Morocco and Tunisia seem to show a marked amount of success, although significant challenges remain in both economies.

Indirectly, Algeria’s WTO accession is likely to help the country’s trade relationship with the further integration of the AMU, in addition to the country’s trade relationship with the EU. According to Ferrero-Waldner, the EU is trying to help Algeria “embark on negotiations on services, on trade in processed agricultural and fisheries products and on industrial standards and conformity assessment.”

She believes that together “these new negotiations could be effective drivers for speeding up internal market reforms, enhancing the diversification of Algeria’s exports and deepening bilateral trade cooperation.”

Next stop, the World

According to El Hachemi Djaaboub, Algeria’s Minister of Commerce, 31 of 35 countries involved in Algeria’s accession talks with the WTO “officially” expressed their wish for Algeria’s rapid accession. He continued “The option to adhere is irreversible … the laws of the republic conform to international expectations; there is no discrimination between nationals and foreigners, nor oral rules nor recourse to tariff barriers in which the consolidation came back to 2000.”

Further integration into the WTO order is unlikely to damage other international relationships, as other countries’ experiences have shown. According to Ferrero-Waldner, “the EU has constantly expressed its support to Algeria’s integration in the multilateral trading system and the world economy as a necessary condition for its further development. WTO accession remains the top priority for Algeria. The EU welcomed recent progress and improvements on main key trade priorities in discussions in WTO both on bilateral and multilateral levels.”

April 28, 2008 0 comments
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