Sudan

The waiting game

by Executive Staff
written by Executive Staff

Never good, the dusty red roads of South Sudan’s capital, Juba, have been further potholed and haphazardly widened by the steady increase in traffic since peace between north and south was signed in 2005, ending Africa’s longest running conflict.

In the same three years sprawling markets filled with crockery, cloth, never-before-seen vegetables and thousands of bright, cheap Chinese motorcycles have sprung from areas that formerly housed soldiers, half-buried mines and unexploded ordinances.

Small hills of the side-products of peacetime plenty — Ugandan water bottles, Congolese plastic bags, milk powder packets from Mombasa — pile up on every street corner. Foreign journalists dropping in have called the former garrison, miserably cut off during the long years of civil war, Africa’s new “boom town”.

But while Juba has plenty of northern Sudanese, Somali and Kenyan wholesalers, thousands of Ugandan traders and a fair share of Chinese restaurateurs, it is hard to find a new southern businessman.

“They are not used to business, but to war,” Ahmed al-Nour explained. He works in a north Sudanese-owned hardware shop whose shade attracts a few of Juba’s increasing street children, squinting up at that sun with their hands outstretched for coins.

And, al-Nour says, although the armed conflict that killed 2 million people and displaced a further 4 million is over, there is a strong sense that the struggle for the South still continues.

He explains that the most important thing for southerners is to hold on until 2011 when, under the terms of the peace deal, they will have their chance to vote for independence in a referendum.

“They (Khartoum) have not made unity attractive, the south will separate,” al-Nour said.

“We are just waiting, every year,” echoed Paul Amoko, an unemployed ex-soldier desperately looking for work in Juba’s crowded hospital in another part of town. Like many, he has looked instinctively to the new government for a job and not the private sector.

The secession vote is just one part of the three year-old North-South peace deal that also gives the South 50% of revenues from the oil-rich region and enshrines democratic transformation of the country together with wealth and power sharing.

The largest of the former southern rebel groups, the Sudan People’s Liberation Movement (SPLM) who signed the deal with Khartoum’s leading National Congress Party, now leads the semi-autonomous southern government, headed by President Salva Kiir, who is also the First Vice President of Sudan.

Lack of trust

Part of the mandate of the two signatories to the Comprehensive Peace Agreement (CPA) is to make unity attractive. Although, confusingly, many members are open secessionists, the SPLM in theory stands for union with northerners; based on the choice of the South’s population, probably standing at around 10 million people.

But after more than 50 years of on-off war over ethnicity, religion, ideology and in more recent years, oil, many southern Sudanese believe independence is the only path to freedom, a coming of age from southern anxiety to the normalcy that is a pre-requisite for real development.

“I, even, am one of the ones who will remain reserved until 2011,” Elizabeth Majok, head of the Employees Justice Chamber said. 

She agreed that southerners, who also have little experience, have missed out on many of the business opportunities that arrived with peace because they are waiting and not acting.

Majok argued that after many broken promises for southern equality by various northern governments, and what she sees as a distinct lack of commitment to the new peace deal by Khartoum, southerners are throwing themselves behind the promise of independence, not the current peace.

A long and troubled journey

Both sides have accused the other of violating the CPA deal and slowing down its implementation. Scuffles over oil agreements with foreign companies and occasional armed hostilities have contributed to keeping tension high between the former foes.

But international alarm peaked following a decision by the SPLM to pull its ministers out of a Government of National Unity in October, protesting the failure of northern soldiers to redeploy out of the South and their lack of real influence in the coalition.

The former southern rebels accused Khartoum of unwillingness to implement the deal, saying they were purposely dragging their feet.  

However, SPLM ministers went back to work in December, ending the crisis after Sudan’s President Omar Hassan al-Bashir agreed to some of the demands by the SPLM ministers. He reshuffled the cabinet and re-funded the delineation and demarcation of the contentious North-South border. But new deadlines for the late withdrawal of northern troops out of the South have been missed since. When fighting broke out along the border in December between southern soldiers and armed northern nomads  President Kiir said the nomads are supported by Khartoum, exciting tensions. 

The SPLM is also accusing President al-Bashir of withholding cash due to the southern government, leaving much crucial work in the South behind schedule. The southern government is almost wholly dependent on their share in Sudan’s 500,000 barrel per day production. Officials frequently complain there is a lack of transparency in how figures are calculated and say Khartoum is claiming wells beyond the border as theirs.

South Sudan’s Minister for Presidential Affairs Luka Biong said that the South is missing $1 billion from the oil-rich Abyei area alone, which both North and South fiercely contest as their own.

In a speech during southern celebrations of the third anniversary of the peace deal earlier this year, Kiir said that given the struggles in implementation so far, a much better relationship between the signatories is needed to get through a national census, democratic elections, and the 2011 referendum.

The pre-fab problem

From the road, the Beijing Juba Hotel looks almost as grand as its name. With its two stories and gold pillars guarding the entrance and sitting on prime Juba land it looks a world away from the tumbled-down cement houses and huts that makes up most of the southern capital.

But the lettering is cut from polystyrene and painted black and the building itself is pre-fabricated, put together from a giant kit over a few weeks by the Chinese owners. Pieces from the lurid blue and green mosaic floor inside are already chipping away.

Providing accommodation for the sudden in-rush of thousands of international aid workers and government employees that suddenly massed in the small capital, the Beijing Juba Hotel is even more expensive than most of the some 35 other tented or pre-fab camps that sprang up after the peace deal.

Like the dozens of restaurants that cater to internationals and former rebels flushed with government job cash, almost all of them are owned by foreigners.

Charging up to $200 a night, the owners hope to make back their investment in five years, after which the giant, presumably sun-worn prefab will be given to the southern government as a “gift”. 

It is not only southerners, Majok said, who are waiting for 2011; international investors, nervous about war breaking out again, are also “one foot in and one foot out”.

“Perhaps after 2011 there will be more investment, when people know what is going to happen,” she said. The US has also put sanctions down on Sudan and although the South is technically exempt, some think proper separation would make the region more attractive.

John K. Pan Paguir, director-general of trade at the South Sudan Trade and Commerce Ministry, said that none of the foreign businesses that have registered with the ministry have fulfilled long-term investment promises. All, he said, are in it for the quick money.

These investors, like the thousands of east African traders, are taking their money back out of the country. According to Majok, the short-term mentality — together with the habit of employing foreign staff — is not doing anything to contribute to stability in the South.

“Food is being brought in from outside, there is no real construction, no tax that is equivalent to the millions they are getting. We are not benefiting. At least the workers should be Sudanese.”

An Indian-owned hotel sitting right next to the beautiful and empty blue of the Nile is typical; while 10 or so local girls have been hired for cleaning and to wash clothes, all waiters and bar staff, kitchen staff, many construction staff and all of management are foreigners.

It is Kiswahili as often as Arabic that is spoken under the mango trees.

Four-wheel drives and salaries

Paul Amoko, who spent most of his life in the army before being demobilized, will soon be joined by 45,000 men and women, who the former rebel southern Sudan People’s Liberation Army — struggling with a massive 70,000 parade payroll — want to reintegrate into society.

With the flame of the South’s entrepreneurial spirit still small and with little or no access to cash, many of them will look to the government for jobs, not the private sector.

Although the civil service is already swollen and eating up more than 70% of the government’s $1.5 to $1.7 billion a year in oil revenues, it is obvious why it attracts southerners: it is those in the government who are benefiting from peace most.

For those without a government, or almost equally prized NGO or UN salary, life is tough. According to joint UN and government figures, the South has the world’s worst maternal mortality rate with one in 50 women dying during delivery. Some 10.2% of newborns die in childbirth. Only 2.7% of those who survive to childhood are fully immunized.

Little has changed for the rural peoples who make up most of the southern population, said the parliament’s economic and development head Barri Wanji, adding that so far there’s been little effort at promised decentralization. He explained that parliament had a difficult time last year getting cash out of central control for rural development projects. “[Ministers’] priorities are different from rural areas … where the emphasis is on high salaries, emphasis is on getting cars, emphasis is on building good houses.”

But even these high salaries are not staying in the South. Majok explained that she — like all of the South’s top officials — has her family outside, which is where she spends most of her salary on the schools and other services the South still struggles to provide.

And, she added sadly, even those with the backing to get loans from the Nile Commercial Bank — of unclear ownership but propped up with government funds — are probably spending it investing outside of the country.

Growing dissatisfaction at home

While southerners say they are confident that the SPLM will try to maintain peace, there is also a growing discontent with the party’s ability to deliver services to underdeveloped communities and deal with corruption within its ranks.

“Even [with] the roads, nothing is happening,” said John Mabior, a soldier, who added that money was being lost to corrupt politicians rather than reaching the people. “It is now a very big problem in southern Sudan.”

A report from the government’s Anti-Corruption Commission on government contracts in mid-2007 is still not available to the public but one government official described the contents as showing “shocking … overspending.”

And it is unclear whether investigations are still moving forward or not in what has become a test-case for Kiir’s zero-tolerance on corruption, said an MP. Over $70 million was spent on government vehicles, bought at twice the market rate. Most never arrived.

But no other southern party has yet challenged the SPLM’s supremacy. And as one Juba citizen put it, in their current position, waiting for independence, southerners have little choice. “There is room to play, to discuss with the SPLM. With the North, there is no room.”

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North Africa

The other oil

by Executive Staff
written by Executive Staff

Olive oil may be overlooked as a commodity in the world economy, but for Tunisia it is the largest export earner and it provides livelihoods for hundreds of thousands of its people. The government has undertaken a concerted program to boost production and improve the earning potential of areas already under cultivation by improving irrigation and encouraging organic farming. These developments should help the sector surmount issues it faces such as trade limitations and an undeservedly shaky reputation in some countries.

Tunisia will produce 1.1 million tons of olives and 200,000 tons of oil from them in 2007-2008, the Tunisian agriculture ministry announced last December. This will make this year the fifth in a row that it has produced this amount, placing it as the world’s fourth largest producer of olive oil, after Italy, Spain and Greece. The government has set its sights on boosting production further, to ensure that other growing producers such as Turkey do not overtake it — and if possible to improve Tunisia’s ranking further.

As part of this policy, the government will encourage the planting of an additional 30,000 hectares of olive fields every year to boost oil production to at least 210,000 tons annually. Some 130,000 tons will be exported. As harvests have in the past been affected by droughts — production fell to 30,000 tons of oil in 2001-2002 and 70,000 in 2002-2003, the government is also increasing spending on irrigation.

Tunisia has around 56 million olive trees planted on 1.6 million hectares, a third of the country’s total cultivated area. The bulk of production is in the center of the country, where 52% of the country’s olives are grown, with smaller amounts from regions in the north (33%) and south (15%).

The economic and social importance of the olive oil industry cannot be overstated. Olive oil is the main source of income for more than 500,000 families from Tunisia’s population of 10 million, according to the Office National d’Huile; it accounts for around 50% of export revenues.

There is considerable scope for export growth, if some hurdles can be overcome. Despite its large output, Tunisia has a relatively low profile as an olive oil producer among consumers, as most of its overseas sales are in bulk, rather than through brands.

The European Union, which is a major importer of many Tunisian goods, currently limits the entire bloc’s purchases of Tunisian olive oil to an annual average of 50,000 tons a year, due to pressure from the EU’s own olive oil manufacturers. Competition from Turkey and Syria on the EU market also makes life tough for Tunisian exporters.

The sector has also received some negative publicity of late, with scandals involving the relabeling of Tunisian oil as local produce in Italy and Spain, doing little to improve their image abroad — even though Tunisian exporters themselves were not necessarily implicated.

Tunisia’s olive oil does have some competitive advantages. Most Tunisian olive growers use little or no chemical fertilizers and pesticides, so much output can be classified as organic, and giving access to a growing niche market and moving it up the value chain. So far 35,000 hectares have either been certified as producing organic olives or are actively in the process of acquiring this status.  Additionally, the government is encouraging better promotion of Tunisia’s olive oil in growing markets, such as Asia and North America as well as Europe.

Tunsia’s Maghreb neighbor Morocco is also looking to develop its olive oil industry, boosting production and improving technology. Its oil production sector is in need of revitalization, and will not become as large as Tunisia’s — the government’s target is production of 30,000 tons of oil within the next few years — but could play an important role in the economy of some rural areas. Currently, some 500,000 hectares are cultivated for olive trees, and the government hopes to double this figure by 2010.

In September, the first, of a wave of 10 new 1000-hectare olive groves, was planted in the Beni Hellal region in west central Morocco. The project to develop new export-oriented farms has been launched by Oléa Capital, a joint venture between Crédit Agricole du Maroc and the Société Générale Asset Management.

Crédit Agricole president Tariq Sijilmassi has said that the fund will help bring a sector “in need of success stories” up to date and introduce “a modern financial framework.”

However, demand for olive oil continues to grow, so Oléa’s founders have seen the potential for exports from modern farms and plants in Morocco. Oléa hopes to lead the way in showing how Morocco’s olive oil production can develop and prosper.

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North Africa

Pushing ahead

by Executive Staff
written by Executive Staff

Morocco moved into 2008 continuing economic reforms aimed at boosting growth and reducing poverty under a new government.

Towards the end of last year Prime Minister Abbas el-Fassi outlined his government’s plans for reform, which were approved by parliament by 155 votes to 93. The launch of the policy package followed September’s election, which resulted in el-Fassi’s appointment, with his Istiqlal Party becoming the largest party in parliament. The policies, however, continue the broad course of the previous government, and el-Fassi has pledged to see through structural reforms in tourism, infrastructure and housing. “We are going to take on other reforms and bring to completion those begun by my predecessor Driss Jettou,” he said.

While the reform plans have been broadly welcomed, some issues have not been addressed, most notably boosting regional trade and allowing the dirham to float.

In his address to Parliament in October, el-Fassi described the course he wishes to take over his five-year term. Liberalizing fiscal reforms continue with the aim of boosting growth through encouraging enterprise. Business taxes are being lowered to 30% from 36% and value-added tax (VAT) reduced. It is hoped that these cuts will actually increase the tax take, by encouraging business registration and making avoidance less attractive, bringing the grey economy into the formal sector.

Despite its generally liberal outlook, the government has also made commitments to tackle poverty. It has pledged $2.43 billion worth of subsidies in 2008, in order to boost the spending power of the less affluent and combat inflation. These will target primary products, notably imported fuel and cereal crops, which have been particularly subject to inflation in recent years. However, the subsidies will distort markets and could discourage local agriculture if they are allowed to undercut domestic product prices. Therefore they may be a temporary measure until global supply shocks ease.

One of the key policy planks is bringing down rent costs and improving the housing stock. To this end, the government plans to bring on stream 150,000 new units annually.

The construction industry will receive a fillip from this, as well as the development of almost 50 hotel developments by French hotel group Accor, which already owns 24 hotels in Morocco through its Casablanca Stock Exchange (CSE) — listed subsidiary Risma.

This will in turn boost the country’s cement sector, which is dominated by foreign-owned firms and already growing strongly. Cement production increased 10% in 2006 and then 15%, to around 10 million  tons, in the first three quarters of 2007, and a further increase is likely to be necessary to meet the growing demand for social housing and other developments. The industry’s growth will help create much-needed jobs, helping address one of the government’s other major goals of bringing down unemployment and providing for young people coming into the labor market.

However, the government’s program has not tackled some issues which many in the business community would like it to. Currently intra-Maghreb trade is very low, accounting for less than 10% of the trade of Morocco, Algeria and Tunisia together. This is despite three fast-growing and increasingly productive economies, and the development of a trans-Maghreb motorway. Diplomatic disagreements with Algeria, which backs the Polisario Front separatists in Western Sahara, have hamstrung any attempts to develop trade ties. El-Fassi has yet to put forward plans to improve integration, which would surely boost the economies of all countries.

The government has also yet to finalize plans to allow the dirham to float freely, which is desired by many in the domestic business community and their foreign partners. Currency liberalization would facilitate export and import activities.

Morocco has set regional standards on democratization, enjoying free elections and a lively media. However, a complex electoral system makes it very difficult for any party to win an outright majority, leading to messy post-election horse trading; the days after the election were characterized by squabbles over ministerial positions and budgets rather than policy issues. Though admittedly this is common in many European democracies as well, it was an unedifying sight.

Nonetheless, el-Fassi’s government seems to have the momentum to continue the reform process, as well as addressing pressing social issues. Perhaps a year of growth and development will embolden the government to tackle the issues of regional cooperation and the dirham.

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North Africa

Farming faces the future

by Executive Staff
written by Executive Staff

Recent drought has highlighted the weaknesses of the Moroccan agriculture sector, with the government stepping in to help. In the long term, privatization and consolidation of farm holdings will be more important, as emergency subsidies, in securing its future.

Directly and indirectly, agriculture provides the livelihoods for half of Morocco’s population, and has suffered a great deal of late, due to the drought in 2007. Given its importance as an export sector as well, the government is keen to take action. It is already tackling the most immediate issues by increasing subsidies on products such as equipment which reduces water loss in irrigation systems, but broader reform will be needed.

At the Institutional Seminar on Agricultural Development in Rabat on December 12, the Minister of Agriculture and Fisheries Aziz Akhannouch called for a “sustained effort” to increase output and competition. He said that the state would play a key role in improving coordination between investors and agriculturalists.

“Given the realities of the sector, the current situation of farmers, calls for a redefinition of the state’s role, in the form of new relationships between the producers and industry players.” Akhannouh also added that the government would initiate programs to promote innovation, financing and access to markets.

Beyond the immediate moves to tackle the water shortages, the government has stepped up its policy of leasing state farms to the private sector. In December it offered 38,700 hectares of farmland previously managed by Société de Développement Agricole (SODEA) for tender. The system has had the desirable results of bringing in capital and management experience through foreign direct investment (FDI). The leasing of 42,800 hectares of land in 2004 brought in $610 million, and new foreign management brought in $3.3 million in 2006. The new farm offerings have attracted interest from France, Egypt, Spain and the United Arab Emirates.

The fractured nature of farmland

Despite this success, the majority of the Moroccan agriculture sector remains fractured and increasingly uncompetitive.

Landholdings in Morocco are very small — 69% of farms are smaller than five hectares, and only 11,000 farms are larger than 50 hectares — due to inheritance traditions that divide family land between offspring.

The fractured nature of the farms limits productivity and means that most farms are too small to make much of a profit. Therefore they struggle to make necessary investments in equipment, vehicles to take food to market and new staff to boost output. Larger, more profitable farms would have the cash to spend on better irrigation systems and to lessen the effects of droughts, like last year’s. Farmers will have better access to the financing, innovation and markets rightly highlighted by Akhannouch.

So Morocco’s attempts to remain competitive and increase exports as it integrates into the global market are hampered. The World Trade Organization and Morocco’s trading partners are likely to apply increasing pressure on Morocco to overhaul the way agriculture is organized.

The understandable cultural and emotional attachment to the family land, and the government’s reluctance to contradict it, has stalled the process of consolidation. But the fact remains that the global market has no such sentiments, and unless reforms can be introduced, small farms are unlikely to grow, and may go out of business.

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Levant

Doubling efforts

by Executive Staff
written by Executive Staff

Chakib Khelil, minister for energy and mines, has announced ambitious plans to increase Algeria’s phosphate production, generating valuable additional export revenue for the state, and creating up to 50,000 jobs.

Speaking at a mining conference in Algiers in December, Khelil told assembled guests Algeria was “open for business.”

“We have placed Algeria on the world map as a prominent player in the mining sector,” he added.

Algeria currently produces just less than 2 million tons of phosphates a year. Ferphos, the state phosphate mining company, has hopes to increase exports to 4 million tons by 2010, and eventually 30 million tons by 2020. This would see Algeria become the third largest phosphate producer in the world, after the US and China.

Phosphate production in Algeria has more than doubled in the past six years following a decline in the mid-1990s. Given the current high price of minerals in the market, investment in the sector is increasingly attractive. Should Ferphos meet its 2020 target, phosphate sales could generate $7-8 billion a year for the state.

In an interview with local press on October 22, Lakhdar Mebarki, CEO of the Ferphos Group, said early indicators for Algeria’s phosphate industry were encouraging.

“With the exports already carried out we confirmed that there is a good place for Algerian phosphate on the international market,” he said.

However, Mebarki added that it was difficult for Ferphos to establish an international presence, with competition becoming increasingly fierce.

Increasing capacity for higher output

Ferphos is already well on the way to answering Khelil’s call to boost output. With an estimated 2 billion tons of reserves, Algeria’s main limiting factor in output is currently infrastructure. To keep to its schedule of doubling output by 2010, the company has announced plans to build a new processing plant at Bouchegouf, 450 km east of Algiers, with the capacity to turn out between 2 million and 3 million tons of phosphates a year.

Further down the track, similar facilities will be established at Mdarouche, while a third plant, with an annual capacity of 12 million to 14 million tons to be built in Jijel, some 350 km east of the capital. All the processing facilities will be located close to the massive Djebel Onk mining complex, in the province of Tebessa.

A further challenge is transportation infrastructure. The existing rail lines serving the regions where Ferphos currently operates do not have the capacity to meet the company’s freighting needs. According to local press, Ferphos can only transport 1.2 million tons of phosphate by rail each year, and had to establish its own road freight subsidiary to haul the additional 800,000 tons it produces. The port of Annaba, through which Ferphos makes most of its exports, is also in need of an upgrade. The port’s facilities will be hard put to handle the 2 million tons of exports expected, let alone the 4 million tons projected in just two years’ time.

However, the announcement on December 15 that the government intends to spend $18 billion on upgrading the country’s rail network, including the opening of a new line in Tebessa, will go some way to easing Ferphos’s concerns about land haulage.

Even at full pelt, Algeria’s phosphate reserves should last another 65 years. However, to maximize value from this finite resource the government is also looking to diversify the industry vertically. The Bouchegouf facility will not only be used to extract raw mineral phosphates, but will also have the processing capacity to turn the material into fertilizers, adding value to export sales. Having received initial approval for the project by the Council of State Participation, Ferphos is now waiting for final clearance to create a joint venture with a foreign partner.

Phosphates have the potential to further improve Algeria’s trade balance. However, the government would do well to proceed with caution. As history has too often demonstrated, national wealth garnered from resource extraction — be it phosphates, oil, or even remittances from overseas nationals — can have a deleterious effect over time on a nation’s wider economic development. Signs of this “curse” can already be found in Algeria: the World Bank’s Doing Business 2008 ranking, published this month, sees the country dropping to 131st — the only Maghreb country to witness a slide. If Algeria wants to translate natural wealth into national wealth, it will have to work harder on reforming its economy.

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Levant

Developing the past

by Executive Staff
written by Executive Staff

As the heavy wooden door of the Old Vine Hotel — the newest addition to Damascus’ ever expanding stable of Old City boutique hotels — swings shut, the noise and chaos of the outside lanes fades. Gone are the scrums of tightly wrapped tour-guided Iranian pilgrims, the small boys artfully carrying steaming cups of sweet tea through the crowds and the calls of Syrian merchants flogging cheap Chinese wares. They have been replaced by the Damascus of folklore: a narrow hallway leads to a marble courtyard embellished with a large fountain, filling the traditional Beit Arabi with the soothing sounds of running water.  Like its growing number of competitors, the nine room boutique hotel promises to transport visitors back to the Middle East of the Thousand and One Nights legend.

“Business has been good, demand is strong,” general manager Sami Maamoun said. “Our guests want to stay in a unique environment which they can’t find anywhere else. They want to experience a traditional Damascene house and the atmosphere that goes with it.”

Long ignored by the country’s wealthy, who traded their sprawling traditional houses for modern apartment blocks in the new city, in recent years the Old City of Damascus — heralded as the world’s oldest continuously inhabited city — has attracted intense interest from the private business sector. Around 70 restaurants and six boutique hotels are operating in the area; a further 28 restaurants, 13 cafes and 40 hotels have been granted licenses and are expected to commence operations within the next two years. All of which has seen property prices soar, increasing by up to 300% since 2000.

Preserving the past

A new-found passion for the Old City is, however, raising concerns about the impact such development is having on the World Heritage Listed site. A proposed development to widen Al-Malik Faisal Street, which runs parallel to parts of the northern wall, would entail the demolition of a number of historic buildings. The potential for demolition has resulted in the area being placed on World Monuments Watch’s List of 100 Most Endangered Sites for 2008. UNESCO has further threatened to revoke the area’s World Heritage Listing should the project proceed. While a decision is yet to be made — Syrian authorities will again meet with UNESCO officials later this month — recent comments by government officials indicating they would like to expose the Old City’s original walls have been viewed by many as an indication the project will be given the green light.

At the same time, the boom in restaurants and hotels is putting massive strain on an already weak infrastructure. Waste water, traffic management and air pollution have been identified as primary threats to the area by a joint Syrian-EU project working to preserve the Old City. Other questions are being raised, such as whether some of the restorations being carried out by private investors are adhering to strict guidelines imposed by the Syrian government, which stipulate that only traditional materials and methods be used, adding considerable expense to any project. “It would take an army of inspectors to guarantee that everything that should be happening during a renovation is happening,” architect and historical monuments expert Luna Rajab said. “We also need to move away from creating new decorations — fake ancient if you will. From a restoration point of view, you should not create anything new for which you don’t have documentation.”

A preservation strategy needs to be developed that would treat the Old City as a continuous area of equal importance, says Rajab, rather than simply focusing on individual buildings and monuments. “We need to pay attention to all the elements that make up the urban tissue of the area,” she said. “The importance may not be in the house itself. But that house next to this mosque and near that madrassa forms a continuum which needs to be respected.”

Preservation experts are not the only ones concerned about the private sector-led renaissance of the area. Many local residents complain about the noise and crowds that now choke, what until a few years ago used to be, sleepy lanes and alleyways. At the same time, poor services and skyrocketing housing prices are exasperating a long term exodus from the Old City — between 1995 and 2005 more than 20,000 residents moved out — threatening the traditional character and ambiance of the area. “We don’t want the Old City to be turned into a dead city, one that is only used as a tourist zone, one that people visit for shopping and restaurants and then leave,” Erfan Ali, program director of the Syrian-European Union Muni­cipal Administration Modernization (MAM) project, said. “Old Damascus has never been that, it has always been a living city and it is important to preserve that character.”

The master plan

These are all issues that the long anticipated master plan for the Old City is working to address. The plan, expected to be finalized in May, will divide the city into distinct commercial, tourism and residential zones and place limits on the number and style of future developments. Three tourism restaurant zones will be created in the areas of Qaymarieh, Bab Tuma and Midhat Pasha, while boutique hotels without restaurants will be able to establish their premises anywhere in the city. Syrian authorities have stopped granting business licenses until the new guidelines outlined in the master plan are finalized. In all, 59% of the Old City is expected to be zoned as residential. “I think we can say this plan is getting the mix between commercial, residential and tourism right,” according to Ali. “With more than 50% of the Old City designated as a residential area, the traditional character of the city will be maintained and we will have a living city.”

Tourism infrastructure will also be improved and themed walking routes are expected to be launched by the end of the month. Visitors will be provided with pamphlets that chart out routes of interest and include information about sites of historic and cultural significance. The walking tracks will include those which highlight the area’s spiritual heritage, taking in the numerous Islamic, Christian and Jewish monuments, as well as others which focus on classical sites, handicrafts and souqs. Plaques are to be installed around the city to help visitors navigate the maze of streets, lanes and alleys. A permanent sound and light show is also scheduled to commence in April in front of the Umayyad Mosque detailing the history of Damascus in 10 different languages.

Plans to restrict traffic access during certain hours and create pedestrian only zones are also scheduled to begin next year. Electric cars and even a tramway running around the city’s walls are all on the drawing board as ways of introducing environmentally friendly transport means around and within the area.

Damascus authorities have also started working with the German Technical Cooperation Program (GTZ), which recently concluded a 13-year program in the northern city of Aleppo to assist low-income residents in restoring and repairing their homes through a system of micro-loans and grants. The project worked to keep residents of Aleppo’s Old City in their homes which, in-turn, preserves the ‘living character’ of the area: residents venturing out in the morning in their pajamas to buy bread, children playing in the alleys and running errands for their parents and old men playing backgammon and smoking nargileh in front of their homes and small stores. As project manager Regina Kallmayer pointed out, “The aim is to create instruments that will enhance the ability of residents to upgrade their homes and improve their living conditions which will encourage them to stay in the Old City.”

“The Old City needs a lot of work and the government, despite best intentions, simply cannot carry out what is needed because they just don’t have the money,” he stated. “The government could put as a pre-condition on investors requirements that they take care of the surrounding area and this would have a big impact.”

“We can still have a successful mix of commercial, tourist and residential areas like every historic city throughout the world,” said May Bendki Mamarbachi, founder of the city’s first boutique hotel Beit al-Mamlouka, which recently received its third Condé Nast Traveller gold star award. “The difference is that Syria is at the beginning. It will take time for us to develop like the established historic cities of Spain or Italy, but we are moving forward toward this.”

Not all investors, however, are as community minded. Ali said many need to change their mindset when coming to do business within Damascus’s ancient walls.

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Levant

Taking stock

by Executive Staff
written by Executive Staff

It may come as a surprise that Palestine has a successful stock exchange, especially given the recent political difficulties that have dislodged the economy. However, with a total market capitalization of $1.9 billion, the Palestinian Securities Exchange (PSE) accounts for only a small portion of the would-be state’s economy and investment opportunities. Inevitably the exchange’s development and economic prospects will be intricately linked to the outcome of the new peace negotiations kicked off by the Annapolis talks in late 2007. Nonetheless, given political stability, it has strong potential for growth, a factor that led Kuwait’s Global Investment House (GIH) to take a 10% stake in the exchange, in February 2007.

Based in Nablus, with offices in Ramallah, the PSE is controlled by the Palestinian Development and Investment Company (PADICO) and was incorporated in 1995, following a period of relative optimism. During this time a significant number of successful and ambitious diaspora Palestinians were returning home with the intent to build what they hoped would become their nation-state. The first shares were traded in February 1997, but since then the economy and investor confidence have often taken a battering, first at the hands of the second intifada and more recently from the infighting between Hamas and Fatah. Although stocks have at times suffered heavily, especially during the last two years, the PSE itself has weathered the storm well. As Talal Samhouri, head of Asset Management in the MENA region for GIH, said, “the exchange is actually in really good shape, with excess capital and equity it has been making money even through the bad times of 2007.”

Politically limited risks

Anybody who has heard the age-old adage “Warning: Prices can go down as well as up!” will be well aware that there can be difficult times but there are also bumper years. In 2005 the total market capitalization reached $4.5 billion and the Al-Quds Index increased by 306%. These were among the highest growths in the world that year, partly as a correction to previous weaker, politically difficult years and partly due to improved performance of listed companies combined with the optimism that Gaza disengagement seemed to hold. As is particularly the case in politically volatile countries, little did they know what lay ahead. By year-end 2006 market capitalization had decreased to $2.7 billion, losing 38% of its value, a trend that continued through 2007, which it ended at $2.35 billion, a 13% drop year-on-year. The services index was the best performing sector of 2007, down a mere -5.42% while the insurance sector slumped -41.13% on the previous year.

Samhouri explained that, “in some ways the nice thing about the PSE is that it has a very high correlation with political improvement.” This is borne out by the recent gains on the exchange: the second half of 2007 saw steady improvement, although not enough to get out of negative territory for the year as a whole. Performance in early 2008 has been strong with 11% gains on the Al-Quds Index in the first three weeks of trading.

In many ways the PSE is ahead of its field compared to local exchanges. It was supposed to have been the first Arabic stock exchange to go public but due to the adverse political situation that has dominated since 2006 the offering was postponed. Although the exchange itself was ready to take the measures, the closure of government departments with many staff not having been paid for months made it impossible to push through the legal and bureaucratic requirements. Since the PSE is owned by PADICO, which is also listed on the exchange, the IPO is seen as an essential step in removing any conflict of interest. In the end, it was the Dubai Financial Market that was the first Arabic stock exchange to list, in November 2006.

All being well politically, the IPO is planned to take place in 2008. GIH, who have board representation on the PSE, see their investment in it as a private equity opportunity and are confident of achieving high returns. Samhouri thinks that “we can see improvements coming in the future and can hold for the next few months or years until the situation stabilizes because then there will definitely be improved market conditions.”

Certainly, the developments since the Annapolis peace talks began seem to indicate that the American administration is prepared to push harder than before to achieve an equitable solution that would eventually allow the conditions to which Samhouri refers to take root. Bush’s use of the word “occupation” and his assurance that Abbas is as much a partner in peace as Olmert are good news to investors in the Palestinian economy, just as they are to Palestinian citizens. However there is still a sense that Annapolis is too little, too late in the presidency and to achieve stability will require, as much as anything else, the next US president to take up the reigns of the peace process at the start of his or her presidency rather than the end.

Stock exchange a winner in volatile market

Although political instability is bad news for the stocks themselves it can actually translate into good business for the exchange. As Samhouri pointed out, “this is the great thing about stock exchanges, they make money whether the market is going up or down.” The last two years of plummeting stocks have led to large and volatile trading volumes, a winner for the stock exchange, which makes its money on commissions. All the same, at times it has been forced to take precautionary actions, closing on three occasions in the last two years following major events and having to restrict price fluctuations to 3%, rather than 5%, following Hamas’ election victory.

The PSE has state of the art trading systems, was among the first exchanges in the region to introduce e-trading in April 2007 and as such is well equipped to deal with volatile market trading conditions. However, the PSE’s location in Nablus, much better known for its frequent occurrence in the news as a flash point in the Israeli-Palestinian struggle, may leave doubts with potential investors as to its reliability. Dr. Abu-Libdeh, chairman and CEO of the PSE, has commented on this to the international press, “The challenge for us, as I see it, is not in securing the administrative, logistical and infrastructure conditions for the work, its convincing an investor in Dubai that it is worth investing in Palestine through the stock exchange.”

In his opinion, “the prices in shares are very much undervalued […] and the analysis of the companies shows beyond any shadow of a doubt that these companies are doing very good business; they are really solid in terms of their plans and ability to strike operational profits.”

Perhaps the exchange’s main weakness is its size. With only 35 companies listed, the total market cap of $1.9 billion is only a fraction of the potential and in no way constitutes a liquid secondary market. Nearly two-thirds of this market cap is dominated by just three companies, namely; the Palestinian Telecommunications Company (PAL TEL) accounting for about one-third; PADICO for a fifth and the Bank of Palestine for a tenth.

In coming years the exchange hopes to develop stronger relationships with other regional bourses. To date it already has a memorandum of understanding with the Cairo and Alexandra Stock Exchange and is in negotiations with other regional exchanges, including Oman, Jordan, Qatar, Bahrain and the Dubai Financial Market to set up closer relationships. A pan-Arab platform is also in discussion, over which exchanges would be able to swap blocks of shares. The board of directors hopes that measures such as these, together with the investment and board participation of GIH, will improve their visibility to other nations, particularly the cash heavy GCC.

Resumption of aid will help

Improvements to the broader Palestinian economy, or that of the West Bank at any rate, can be expected following the resumption of international aid and the pledge of $7.4 billion from over 70 countries and 20 organizations at the Paris donors conference. The sum was significantly more than the $5.7 billion that the Palestinian Authority requested and will translate to improved financials for companies listed on the exchange as the money filters through the economy. With this in mind though, according to the World Bank, the single biggest obstacle to improving the Palestinian economy are the restrictions on the movement of people and goods. Improvements on these fronts would lead to far greater trade and significant gains on the Al-Quds exchange.

No matter what happens, the PSE seems set to stay put but the degree of its success will depend on the peace talks and their outcome. As Abu-Libdeh has commented, “We are entertaining a lot of options for the future, but it all hinges on what happens to the political process, if it doesn’t give us the breathing room we need it will be difficult to generate the necessary interest to continue growing.” That said, if prospects continue to improve (at least in the West Bank) then the PSE could buck the trend of decreasing world stocks caused by fears of a US recession. The London Stock Exchange recently saw its largest decrease in value since 9/11, while elsewhere bear markets are emerging in many of the world’s leading economies. Should the peace talks gain momentum then the Palestinian Stock Exchange could be one of the biggest beneficiaries of Annapolis.

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Lebanon

Mum’s the word

by Executive Staff
written by Executive Staff

Traffic in Beirut is grinding to a halt. The daily commute for the city’s workers is getting longer and more frustrating. As long ago as 1994 the government set up a comprehensive Greater Beirut Area Transportation Plan (GBATP) that was meant to address the most serious urban transportation issues through to the year 2015. The GBATP identified four main categories that needed immediate attention: (1) the lack of institutional capacity for urban transport planning and traffic management in the Greater Beirut Area (GBA), (2) the lack of capacity in the existing road network, (3) the lack of parking management and the shortage of parking spaces and (4) the unregulated public transport system.

As of early 2008, none of these four issues have been solved. In 2002, however, the World Bank Urban Traffic Development Project did give a big push towards helping Beirut solve its chronic traffic problems, with a $65 million loan to help with the implementation of the Urban Transport Development Project (UTDP). A progress report released by the World Bank gives an understanding as to why Beirut’s traffic problems continue. Despite the fact that the grant helped pay for two intersections, which have been completed, from the amount earmarked for street parking and traffic lights only $21 million of the $65 million granted has been dispersed. Added to this is the continued delaying of various road works projects around Beirut, especially the larger capacity building projects. As these various large scale road work projects drag on and newer roadwork projects begin, the whole road network is becoming increasingly jammed.

Complicating matters

Willam Debs, of Elie Selwan contractors, who is the project manager for the Museum and Adlieh underpass, told Executive that “the July War of 2006, of course, created major delays to the projects as well as the introduction of various infrastructure elements, which were not part of the original contract.” The Adlieh project is now taking in all sorts of infrastructure works: telephone ducts, lighting systems, traffic control systems, sewer collector systems and security camera installations have all been incorporated into the underpass project. Subsequently, coordination with government councils has been a challenge, despite periodic meetings, according to Debs. Electricité du Liban (EDL) has caused particular problems for the Adlieh underpass. Due to the fact that EDL is planning long term and this therefore introduced lots more unforeseen work into the project. “The EDL, because of the political situation at the moment, cannot make straightforward decisions in how they set up their electrical systems and this is also causing coordination problems.” The current political crisis has also delayed construction of road work projects as it affected the labor pool. “Whenever the political tension rises the daily workers do not turn up,” Debs explained.

Meanwhile, as the delays of the various road work projects continue around Beirut, businesses next to major roadwork projects continue to suffer. Georges Aad, operations manager at Auto Mall right beside the Adlieh roundabout, location of one of the underpass construction sites, vented his frustration at the damage the road works are doing to his business. “For every client it takes half an hour to get here and as a result it is becoming increasingly difficult to run the business. We have to make more and more special offers to our customers.” However, Aad said that the contractor, Elie Selwan, had made sure they maintained good communications with local businesses. And although Aad is skeptical over the official date for the completion of the Adlieh underpass, summer of 2008, he is pleased with the plans for the final development and is looking forward to the project’s completion as he expects it to greatly improve his business.

As for the government actors, in particular the Council for Development and Reconstruction (CDR), who are responsible for “planning of road works and the progress of construction activities,” Aad was unsure what sort of oversight they were doing, if any. They have made absolutely no efforts to contact him in terms of consulting about the project or provide any sort of update. Any information about the project had been given by the contractor Elie Selwan. This, however, clearly contradicts the stipulations of the World Bank Urban Traffic Development Project report, in 2002, which cites as one of the main aims for the government need to create a process of “public consultation and public information programs.” After numerous phone calls and emails Executive was only given a list of the current road works being undertaken in Beirut. Obtaining any substantive information proved difficult as its officials would not give out any information and the CDR’s president, Nabil Jisr, was unavailable for comment.

It was also not possible for Executive to interview many of the consultants hired by the CDR to provide “supervision services during project implementation” or contractors due to the fact that they — the CDR — obligated them to sign agreements stipulating that they are not allowed to talk to the press, or anyone else, unless given official notice and permission by the CDR itself, as the consultancy Spectrum and contractor Hourie told Executive when contacted for information.

Public information blackout 

The CDR thus has ensured that it has strict control over the information given out regarding Beirut’s road works. Willam Debs said that, according to the tender, the contractor’s only responsibility is to ensure access to all shops, business and residents to be open at all times. Public consolation and information programs are the CDR’s responsibility.

It is clear that the CDR needs to implement a public information program sooner rather than later (or never). The council itself has repeatedly stressed, as far back as 1994, the importance of the dissemination of information on road works into the public realm, as has the World Bank. Despite that, in the tender documents and in the implantation of the road work projects the CDR has completely ignored the end users and ultimately their (tax-paying) clients. Why is the CDR so reluctant to release public information into the public domain?

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Lebanon

Going up

by Executive Staff
written by Executive Staff

The acquisition of the former Carlton Hotel seafront property by Jamil Ibrahim Establishments in mid-January gave Lebanon’s real estate sector an optimistic start to the year.  According to Karim Ibrahim, managing partner of the firm, this was “one of [Lebanon’s] the largest real estate transactions.” The eventual plans for the site will be contested in an architectural contest with a deadline of March 30.

This is not the only big development taking place as many grand luxury residential complexes are going up across the city. Of particular interest these days is Wadi Abou Jamil, a residential area in the Beirut Central District. Several five-star residential projects are underway by premiere developers such as Stow’s Stow Wadi complex, Mouawad’s The Pavillions with a separate villa and townhomes, and Ven Invest’s Wadi Residence of 80 apartments, each ranging 100-900 square meters (sqm).

The Sursock area in Achrafieh is also a new hotspot with the addition of three residential towers under construction, the latest Jamil Ibrahim’s Le Dome de Sursock two-block tower breaking ground this month. Jamil Saab’s $18 million Sursock Tower will be finished in June of this year. Nearby Saifi is home to several ongoing projects such as Byblos Real Estate Investment’s (BREI) Convivium brand of luxury apartments which range from a 700 sqm penthouse in Convivium III to small, 36 sqm studio apartments in Convivium VI. The seafront area in West Beirut is also a key area as many new developments take place.

The new trend has been to focus on incorporating gardens in the design such as Jamil Saab’s Le Patio in Achrafieh, which includes 700 sqm of green area, and MENA Capital’s Qoreitem Gardens in West Beirut that are surrounded by the landscaped gardens of Daouk Villas.

Lebanese are moving the market

The local real estate market is heating up at a time when those abroad are seeing a downturn as a result of the US subprime meltdown that has spread to European and global markets. Coinciding with this upsurge is the decline of the dollar to the euro and other instabilities in worldwide markets that are making Lebanese expatriates who search for ways to hedge against mounting inflation and safe harbors for their wealth view the real estate market in their homeland as a golden opportunity.

In addition, compared to real estate prices in the region, the Lebanese market is considered to be underpriced. Levantine neighbors Syria and Jordan, and even farther Egypt, are much more expensive than Lebanon, mainly because of the recent inflow of Iraqi, and GCC, investments. As Ibrahim pointed out, “Ten years ago we used to compare our prices to Dubai and now we are cheaper than Syria. Today, the expats are seeing that they can afford to buy a 300 sqm apartment in Beirut. They know that one day the political situation will get better and prices will get back to where they should have been because the area is more desirable than elsewhere. If they wait, they know they won’t be able to buy the same kind of apartment.”

And so they are buying. Most developers have witnessed a shift in demand from GCC buyers, which dominated the market in previous years, to mainly Lebanese expatriates. While Gulf Arabs are waiting for political stability to return to the country, Lebanese are undeterred. “Lebanese investors are always a little bit stronger and do not hesitate to invest,” explained Selim Yasmine, real estate marketing and sales manager for MENA Capital. Around 70% of all current real estate buyers are Lebanese living in the Gulf and Africa, compared to circa 20% before.

However, the market did face difficulties during the first half of 2007. Sales slumped and construction was interrupted briefly by strikes and political instability. Abed Azhari, assistant general manager at Stow, reported that “until probably the third quarter there was a slowdown in demand because of the political situation. It was a bit dead. We had some people approach us, but only at the interest level. Then, in the fourth quarter, we had what could be characterized as a boom — things started picking up again.” As a reason for this development, he said that “in the beginning, people didn’t know what would happen and waited. Then they saw that nothing major happened and moved forward.”

Pierre Abou Jaber, CEO and partner of Ven Invest had been surprised by the sudden take-off in sales of his latest project, Wadi Residence, during the last three months of 2007. Interest was so high that the developer sold 25% of the 80-apartment complex before it was officially launched.

Meanwhile, over the last year other development projects continued and prices increased by around 40%, according to Antoine el-Khoury, general manager at BREI. Developers agree that land scarcity in the capital is the main reason for pushing prices up. In the suburban areas on the edge of the city prices remain relatively unchanged. Mountain resort areas have seen an upswing in development interest for summer destinations such as Aley as well as ski resort areas like Faraya-Mzaar.

Construction   

Source: Bank Audi

Putting prices in perspective

Joseph Mouawad, chairman of Mouawad Projects, put the increase of price in a historical perspective. “Over the past three years, prices in Solidere have increased by 30% to 50% in some places. Achrafieh prices have gone up as much as 70-80% in that time. West Beirut has also had their prices doubled from $2,500 to $5,000 per sqm.”

The Beirut Central District has been hit hard by the ongoing protests and the ‘tent city’ erected in December 2006, causing Mouawad to lament, “Prices should be much higher than what they are now. When the price per square meter in West Beirut is $5,000 and I’m selling at $4,000 per sqm in BCD, something is wrong. The prices in BCD should be at least 50% higher than anywhere else in Beirut.” According to him, one of the reasons for the higher prices is that the kind of infrastructure and development planning that is part of the BCD does not exist anywhere else in Beirut. “Achrafieh was not planned to have so much development,” he said. “In the BCD everything was planned for.”

But prices along the Marina area of the BCD — known as the “Golden Strip” — are now between $7,000-8,000/sqm. Stow currently has the Beirut Water District under construction, which will be a mix of residential and commercial space plus a yachting club and could see their prices per square meter hit $10,000 when it goes on the market.

Real estate prices were also affected by the increasing costs of building materials. Over the past year, cement and iron prices have increased and in conjunction with the decline of the dollar this has made these materials significantly more expensive. For Chafic Saab, of Jamil Saab, this meant that their Le Patio will now cost $30 million instead of the originally planned $25 million.

The loss of manpower is another big issue. An estimated 14,000 Lebanese engineers have left to work in the Gulf and abroad. “In the beginning of 2007, we increased the packages for our engineers by 30% so they wouldn’t think of leaving,” said Ibrahim. Others also found it difficult to retain and recruit engineers.

Mouawad pointed out that if stability can’t be maintained and a political solution to the presidential void is not found, there is the possibility of a slowdown in selling apartments. “It’s starting to become a problem now because prices are going up. If the situation stays the same, people could get scared about their future and the future of their children.”

He went on to say that, “If you had asked me two months ago ‘Would you be rushing to start a new project?’ I would’ve said, yes, definitely. Today, I would say that one should wait a little bit. The situation we are facing right now is getting more and more serious.”

Developers are forecasting this year to see 20-30% price increases, provided the political conditions remain the same. If it were to improve, the real estate market could pick up even more. As Yasmine commented, “Imagine what the pent-up demand will do to the market when the political situation is resolved, especially as in the past year we have become relatively inexpensive compared to the Arab countries in our immediate neighborhood.”

Developers agree that even in the worst case scenario, because of the limited supply of land and the high standard of living, prices would only plateau and await better times, but never go down. Further down the road, Ibrahim believes, “If the political situation is resolved and there is stability for the next 15 years, prices in Beirut could become comparable to Dubai again.”

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GCC

Gold standard

by Executive Staff
written by Executive Staff

Over the past few years, the price of gold has taken an upward path, breaking every record, never faltering, never relenting. Many have followed gold’s rapid ascension. Since 2007, gold prices have appreciated by more than 30%, to over $900 an ounce by January 2008.

According to Carole Rouhana from Lebanese jeweler and distributor Antoine Hakim, the spike in the gold price is not the first, as everyone still remembers the soaring gold price of the 80s. “However,” she said, “we are currently witnessing an unprecedented rallying of gold prices, recently having increased by almost $50 on some days!” The jeweler admits that the company has decided to modify its price structure in order to absorb the rise in gold value, a measure it has rarely resorted to in the past. “We have been able to spread the cost for our diamond jewelry lines, although prices of diamonds have also known an upward, though slower, trend.”

The jeweler complains that prices of other precious metals have also increased, without matching gold levels. “Because of the rise in price of precious metals and diamonds, any offer made on one of our items or diamond solitaires will stand for a week’s time only, until the publication of the new Rapaport prices (the wholesale diamond index). In addition, we also renew our stock of gold every week, and thus we are affected significantly by elevated gold prices.”

In 1980 gold prices towered at around $860 an ounce, but then quickly fell from their lofty heights as new supplies of gold came on the market coupled with a slowing demand. Central banks around the world also intervened, pushing prices down by adopting measures such as sales and leasing, which accelerated the supply of precious metals. Inflation, which roared at the time, was also progressively subdued with an increase in interest rates levels.

Steady increases

“Comparatively, in the last few years, the behavior of gold has been far from erratic, witnessing a steady increase since 1999,” explains Nassib Ghobril, head economist at Byblos Bank. On the eve of the 21st Century, gold hit an all-time low at around $250 an ounce. “These levels reflected the decision taken by the Central Bank of Great Britain to sell its gold reserves. At the time, many analysts saw gold a dying commodity, one which would be slowly phased out as central banks around the world toyed with the idea to sell their reserves,” he added. In 1999, the Washington Agreement (WAG) was also signed. Its stated purpose was to maintain gold’s role as an important element of global monetary reserves. The agreement structured the market by outlining the organizations allowed to sell gold and limited supply to 400 tons a year. The second agreement that followed took place at the end of the fourth year of the Washington Agreement, limiting sales to 500 tons a year.

Other factors have also influenced the price of gold. Recently, with a growing physical demand, inflationary trends, oil soaring to unprecedented levels, commodity prices up and the dollar plummeting to unprecedented lows, gold prices seem to be following an upward, and even skyrocketing trend.

“This surge in the value of gold can be attributed to several factors,” said Ghobril. The growing physical demand for gold is first driven by an expanding middle class in countries such as India, Russia and China. Inflation is another factor exerting an upward push on price levels. And with recession looming over the near economic horizon, there is little chance that the Fed increases interest rates anytime soon. “On the contrary, with the current stagflation occurring in the United States, interest rates will probably be brought down,” points out Ghobril. According to the Country Risk Weekly Bulletin which quoted Credit Suisse, “in the recent rally, Fed Fund expectations play the most important role. It seems that gold prices start rallying when markets are pricing in more than 100 basis points (bp) of interest rate cuts. At the moment, markets are expecting more than 150 bp of interest cuts by the Fed. Rate cuts of such a dimension could lead to higher inflation expectations and a significantly weaker dollar, which is why investors are turning to gold.”

The price of gold has also been paired by some with oil prices and with current oil levels heading irresistibly towards the $100 bracket, a break in gold prices is not expected anytime soon. “I cannot establish a definite correlation between the rise in prices of oil and gold,” says Ghobril. The price of gold has been rising for the last six years while pressures on oil prices have been mounting over the last five years. However, he underlined that the regional geopolitical instability as well as the volatility of markets will lure investors into considering gold as a safe haven.

From physical holdings to shares

In the 1970s, investment was solely in the form of bullion or coins. This is still the method used by some individuals as witnessed in growing volumes traded at the moment. Today, bullion banks such as Goldman Sachs, JP Morgan Chase, the International Monetary Fund, the US Exchange Stabilization Fund, the US Federal Reserve, the German and French central banks come seventh behind certain funds specializing in gold trading. These Exchange Traded Funds (ETF) have changed the face of the gold market, issuing shares against physical holdings of gold in bank vaults and further structuring the market. With ETF, individuals are now able to buy shares that move in line with gold prices. The money under management by these institutions is significantly growing as gold prices rise, as well as demand for such instruments. Today it seems that institutions and central banks have around 33,000 tons of gold in their vaults. However, estimates vary to a great extent with the Gold Anti-Trust Committee putting the figure at a mere 16,000. One more factor that can be accounted for the high prices of gold is the decline in global gold outputs, especially in South Africa, one of the producers.

“We can exclude the speculation factor in such a market, which has been growing steadily, and is considered to be a safe haven away from the fluctuations known by other investments opportunities,” explains Ghobril. “This trend is also exacerbated by the weakening dollar, considered to be one of the last factors affecting gold prices.”

In Lebanon only, the central bank’s value of gold reserves have massively risen due to a rise in the international price, reaching an all time high of $7.64 billion, a figure picking up by 30% from its 2007 levels. As Ghobril points out, “It was probably a very wise idea not to sell our gold in 1999, as advocated by some analysts. Today, for many people gold remains a source of confidence.”

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