Economics & Policy

Basel II

by Nicolas Photiades
written by Nicolas Photiades

The banking world was rocked in early 2000 when the Basel II Capital Accord came out with its first draft. This accord emanated from the Bank for International Settlements (BIS), which is an international organization whose aim is to promote international monetary and financial cooperation, discussions and policy analysis, and acts as a bank for central banks worldwide.

Back in 1988, the BIS created the Basel Committee for capital adequacy for banks worldwide. This first Basel I accord stipulated that different risk weightings had to be applied to the different bank asset classes, and that these risk weightings determined the amount of capital needed by banks to cover the risk on their assets. However, Basel I only broadly covered three types of loans with an undiversified and incongruous risk weighting scale (0%, 20% and 100% for OECD – Organization for Economic Co-operation Development – governments, OECD banks, and everything else respectively). The capital adequacy ratio or the equity to risk weighted assets ratio had to reach a minimum of 8% for all banks worldwide.

The Basel II accord put an end to the over-simplistic Basel I and established new rules for banks. Under Basel II, risk weightings are highly diversified and depend uniquely on mostly credit risk. Basel II is asking all banks to base their risk weightings on credit ratings, whether these are provided by specialized rating agencies or an internal rating system developed by the banks themselves. The minimum regulatory capital adequacy ratio remains at 8%, but is arrived at using exponentially more sophisticated risk assessment methods.

Step in right direction

For many, the Basel II accord is seen as a significant step in the right direction, as it forces banks to improve radically their risk management practices. It also forces banks to realize the importance of “economic” capital, which is the capital needed given the underlying risk level on the asset side. This new accord also puts more responsibility on the national supervisor; in Lebanon’s case the banking Control Commission (BCC), as it faces the task of developing sufficient and suitable resources to meet the demands of the accord.

No matter how revolutionary this new accord is on bank capital, it is creating havoc among most of the world commercial banks. Indeed, most banks on the planet are not ready and are ill-equipped to meet the Basel II conditions, and realize that once Basel II regulations are implemented, their capital adequacy will look weak and insufficient. The difference between the Basel I and Basel II accords are so significant that all the work established by banks on the basis of Basel I from 1988 till today will appear obsolete. Risk management systems and risk models will have to be significantly updated at a very high financial cost, while entire business philosophies and strategies will have to be completely re-thought.

For large international banks, Basel II is not really a problem, as they have been developing a work ethic and a risk management system that is similar to what has been laid out by the Basel II accord. It is no surprise in any case to find that most members of the Basel Committee responsible for coming up with the Basel II accord are all former bankers employed by these large multinational institutions. By laying out the new principles, the Basel Committee is in a way forcing more level playing fields in international banking and indirectly creating a situation whereby the weaker banks, which are unable to adapt to the new system will have to either raise their game or disappear altogether, pushed out by competition.

The Basel II accord is due to be implemented in developed economies (mainly G8 countries) in January 2007, while all other countries will be given more time to adopt the new rules. In Lebanon, the BCC has set the date of implementation for sometime in 2008. Given the current state of the Lebanese banking system in terms of risk management and credit risk assessment capabilities, the date set by the BCC for the implementation of these tough rules and regulations might be considered tight. Most, but not all, Lebanese banks, have struggled to understand the concept of Basel II for the last few years, despite massive communications efforts by the central bank and the Association of Lebanese Banks. Most have not yet started to build a data warehouse (five years worth of qualitative and quantitative information), as required by Basel II, and wouldn’t have the capacity to analyze such data even if it existed.

Strategy

Before implementing the Basel II accord, Lebanese banks need to recognize that risk management must be embodied in the core strategy and culture of the bank, and that there should be a need to adopt an integrated approach to managing risk throughout the institution. They will have to come to terms with the idea that economic capital and shareholder value are the essential key drivers, and not just regulatory capital.

For the moment, the situation is such that there is a lack of comprehensive and reliable default and recovery data, back-testing results are non existent, and few banks are capable of using internal ratings models under the IRB method. Moreover, there are still several more factors that are inhibiting the development of robust risk management cultures and processes: Lebanese banks have a weaker connection between risk management and corporate strategy than their Western peers, there is a lower level of risk management review at board level, as well as a weaker link between management performance and risk management effectiveness. While a majority of markets are putting in significant efforts to develop internal risk management models, most banks in Lebanon still lack the appropriate historical data to develop and support their own internal models, the development of which is of vital importance to the banking sector as well as to the economy as a whole. These models will have to assess default rates, and more importantly recovery levels, as it is usually during a downturn, similar to what Lebanon is going through today that banks have to realize their assets. Although Gulf money is swamping Lebanon for the moment and the disposal of property collateral for bad loans can be done more easily, it remains that recovery levels will always fall below what the banks have always assumed. Basel II should therefore force local banks to develop a performing risk management model that would assess default and recovery rates more realistically.

Credit crunch

A badly developed risk model could considerably underestimate a bank’s need for capital when calculated in the economic cycle and could even lead banks to decide to stop lending as long as their risk models are inadequate. Indeed, if incorrect assumptions are built into credit models, credit crunches could result, as banks would be feeling uncomfortable lending to the private sector. In fact, it’s like a fighter plane going to battle without a modern radar. This plane would be blind and would rather choose to withdraw from a potentially losing battle. A credit crunch is similar in the sense that banks may choose to stop lending for fear of embarking on potentially significant levels of bad loans. Such scenario would be disastrous for the economy and would most probably see a substantial number of companies going bust for a lack of liquidity and funding. In other words, a lack of organization on an internal level for banks in order to tackle risk properly, could lead to an implosion of the economy. The danger for the country’s economy collapsing would not be the government’s inability to repay foreign debt, but the banks’ incapacity to assess risk.

Although such a scenario has a small probability of ever occurring, it should nevertheless be taken very seriously by both the banks and the national regulator/supervisor. The latter has already circulated detailed questionnaires on Basel II to all banks, in an effort to check the status of each bank as regards to their ability to implement these new demanding guidelines. The response from some banks, particularly the smaller ones has reflected a recurring ignorance of the matter as well as some degree of panic. When first issued, the Basel II regulations were widely considered to be a weapon of mass destruction to the smaller and emerging market banks worldwide. The accord placed emerging markets banks (including Lebanese banks) at a disadvantage as compared to multinational banks, especially those which are present in their domestic market. It also added further momentum to the consolidation pressure faced by smaller banks which lack the resources to develop sophisticated internal rating and other risk models. For most small banks the choice will be simple: either reinforce capital and become niche players, or sell, before it’s too late, to larger banks, which have the resources to implement Basel II regulations.

If the Basel II regulations are to be applied to the balance sheet of Lebanese banks today, then the capital adequacy ratio, as defined by the BIS, would drop well below the 12% minimum regulatory level set up by the central bank. At the moment, the average capitalization ratio for the Lebanese banking system stands at around 21%, which appears too high given the risk environment. However, if Basel II conditions are applied, given the approximate probabilities of default, the ratio would drop sharply to around 5% (in some cases, well below that level), reflecting a high level of risk on the asset side.

Capital increases

This future inadequacy in capitalization should make the banks more aware of the urgent need to increase capital, using various means, with a particular focus on IPOs (initial public offerings) and listings on the BSE. A listing would diversify the shareholder base, force the listing bank to maintain transparency and market discipline (in strict accordance to Basel II’s Pillar III), and would allow for quick subsequent capital increases whenever they are needed. A large number of banks seeking a listing on the BSE over the next two years would boost the local bourse significantly, as the number of stocks would increase and local and international investors would be offered a greater stock diversity. The secondary market would also be enhanced in terms of liquidity and any potential bubble would be prevented, or at least postponed to a later date, as the arrival of the new banking stocks would offer continuity in terms of investment opportunities.

However, banks should be aware that capital increases would have to take place starting today and on a gradual basis. If Basel II rules are implemented in 2008 and banks are not prepared on the capital side, a massive traffic jam of banks seeking a listing, all at the same time, may then occur. No market in the world can take a large number of simultaneous IPOs from companies in the same sector. Such a situation would be catastrophic for the BSE, the banks and the Lebanese economy. Let us hope these warnings are heeded.

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North Africa

Dynamic market

by Executive Staff
written by Executive Staff

The inclusion of a capital gains tax hike in Morocco’s 2008 budget is designed to increase government revenues in order to subsidize the rising cost of commodities on global markets. The tax rise, from the 10% rate introduced last year, to 15%, has caused some disquiet. Leading many in the capital markets sector to claim it will stifle small investors, who have recently shown increased interest in the stock market. The sell-off in the immediate aftermath of the announcement suggests that these fears may have some foundation. However, in the medium term, the Casablanca Stock Exchange (CSE) looks set to remain dynamic. Many initial public offerings (IPOs) of recent years have been hugely oversubscribed, and 2007 was no exception.

There was not a great deal of parliamentary enthusiasm for the tax rise, with fewer than half of lawmakers turning out for the vote, and 96 voting in favor and 67 against. The idea of an increase was first floated in early November, when economy and finance minister Salaheddine Mezouar published the draft budget. Between the announcement and the beginning of December, the benchmark MADEX index, a star performer this year, dropped 9.6%. This drop is likely to have been led by institutional investors, who may well be followed by individuals.

While there has been a global retreat from capital markets due to developed economies slowing and the 2007 credit crunch, the tax increase and subsequent drop in MADEX should be seen in the context of past shocks. In 1998, the CSE underwent a severe correction after initial listings were discounted, leading to unrealistic gains. In spring this year, there was another sharp drop, with the MADEX losing 6.35% between May 8 and May 10.

Consequently, capital markets insiders are wary of any government move that reduces the confidence and enthusiasm of investors, many of whom have already been burned once, and are just returning to the CSE, which currently has capitalization of $77 million.

There have also been questions about whether the tax will have the desired effect of covering the commodity subsidies and plugging the hole in the budget left by a recent cut in corporate tax form 35% to 30%. The government has pledged $2.6 billion to subsidize cereals and oil products to counteract inflation, an increase of almost 50% on last year. Additionally, $1 billion has been allocated to subsidize wheat, sugar and cooking oil. These commitments take the proportion of government revenue allocated to subsidies to 8.4%.

The tax seems to be a populist move, taxing gains on assets that the majority of Moroccans do not own in order to subsidize the products that make up a large proportion of the purchases of the less affluent, and which have been particularly subject to inflation of late.

However, whatever the wisdom of and political motives behind the tax increase, current activity on the CSE has been so intense as to suggest another wave of over-enthusiasm, as occurred before 1998 and May this year. Arguably, the tax could play a part in reducing the number of fair-weather investors, benefiting the exchange in the long run.

The exchange’s growth since 1998 has been driven by IPOs, the majority of which have been very successful. This year alone, seven firms have launched offerings, after a record 10 in 2006, and two more are expected to make IPOs before the end of the year. Consumer credit agency Salafin and Stokvis, a construction equipment distributor, will take the total number of firms traded on the CSE to 72.

Such has been the popularity of IPOs huge oversubscriptions have occurred, with more than 100 times as many applications for October’s listing of Atlanta, an insurance company, as there were shares available. Consequently, the share sale was curtailed by a day. The stock has surged since, gaining almost 60% in two months.

Similarly, the 20% IPO of property developer Compagnie Générale Immobilière (CGI), in which government investment body Caisse de Dépôt et de Gestion has an 80% share, was 141 times oversubscribed. The rate of allocation was therefore reduced to 0.8% for the 55,000 new shareholders. Since the listing, the stock’s popularity has not waned and the price has doubled.

Trading volumes have also been boosted by the introduction of online brokerage services by a handful of Moroccan banks.

While the tax increase has caused a stir within capital markets, and will be used to prop up expensive subsidies, it may in fact have a stabilizing effect on the market. History shows that, when the CSE grows at breakneck pace, it tends to be followed by a painful correction. The capital gains tax hike may help ease the breaks and prevent this happening again.

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Lebanon

Unfinished business

by Executive Staff
written by Executive Staff

After nearly a year and a half of rumors that a Gulf-based bank was planning a buyout of Banque Nationale du Paris Intercontinentale (BNPI), the president of the Federation of Bank Employee Unions, George Hajj, confirmed the future sale of BNPI’s assets to Bank of Sharjah to form the new Emirati-Lebanese Bank. Union-management talks regarding the affects of the acquisition on BNPI employees went on for over a year, before breaking down on November 30, when BNPI employees began a general two-week strike against all bank branches.

A package BNPI offered to employees on December 12 ended the strike on a conditional basis. Management and union leaders continued to hash out details as workers returned to their jobs on December 13. Indemnity packages will be reviewed on a case-by-case basis with ceilings set for the total amounts for each person. The December 12 offer by BNP Paribas, BNPI’s Paris-based controlling arm, included six months of initial indemnity, based on an individual’s last monthly paycheck, followed by an additional month of indemnity for each year of service in excess of five years. The deal might save the bank’s operations in the short term, but questions arise as to why BNPI is following Bank of America, Chase Manhattan Bank, Nova Scotia, and ABN Amro out of the country.

Back to work

Judging by the employees returning to work, the November 30 strike was a success as BNPI’s offer to displaced employees increased over the two weeks. Negotiations were set to continue during the holidays. While the unions released an official statement in the Beirut daily an-Nahar on December 14 promising that workers will return to BNPI for the time being, to ensure that customers can conduct their banking during the al-Adha and Christmas holidays, the new ownership’s restructuring is bound to cause casualties among the ranks of BNPI staff. It is likely that some employees will find jobs within the Emirati-Lebanese Bank, but BNP Paribas hinted that only half of the new institution’s employees will be selected from former BNPI workers.

BNPI resumed normal banking operations on December 15. Some workers returned to their posts on December 13 to prepare the information systems after two weeks of gathering dust. On December 14, Bechara Fatti, a member of the unions’ leadership, said that, “BNPI employees cancelled the strike for clients during the holidays of al-Adha and Christmas, but negotiations are still going on.” Fatti also noted the progress of the negotiations and explained “there is positive movement to us from our president and next week we are going to continue the negotiations.”

While BNP Paribas has yet to formally declare the planned sale to Bank of Sharjah, the bank did issue statements in Beirut dailies on behalf of BNPI, assuring customers that BNPI will remain in the country they have served for 63 years. The announcement did not apologize for the strike or leaving Lebanon, but offered condolences only to customers whose business with the bank was harmed during the ongoing strike. In what was an obvious attempt to restore customer confidence in the bank, BNPI made no mention of its deal with Bank of Sharjah, saying only that BNPI would “not refuse the involvement of a partner within the framework of its development.” Even though BNPI has not issued public announcements detailing the planned sale, workers fearing losses in job security consider the ink dry on the deal. According to the details of the buy-out, Bank of Sharjah will own 80% of capital in Emirati-Lebanese Bank, with the rest remaining with BNP Paribas.

When asked about the compensation offered to BNPI employees compared to those from other fleeing institutions in recent years, including Bank of America, Chase Manhattan Bank, Nova Scotia, and ABN Amro, Hajj replied that, “The amount offered [to us] by the head office in France is not equivalent to what was paid by other banks that left Lebanon. So that is why we asked them to either remain in Lebanon and continue operations or to pay indemnity equal to what other banks paid when leaving Lebanon. Their proposal is very cheap.” However, the unions were willing to listen to the initial framework of a deal that would pay, for example, a veteran of 10 years six months of initial indemnity plus five additional months for his service in excess of five years, for a total payout of 11 months indemnity.

The roots of BNPI’s exit

Hajj has repeatedly called for BNPI to remain in Lebanon, noting its breadth of locations and the possibility that other, more successful operations may act as a hedge against losses in the country, which has seen numerous shocks to stability, including the July War in 2006 with Israel, the opposition’s sit-in at Beirut’s Central District, and the ongoing presidential crisis. Although Lebanese banking is continually cited as one of the country’s best industries, all the aforementioned problems have led to lower credit ratings, making some banks look elsewhere to establish themselves.

In November, Standard & Poor’s (S&P) rating service gave Lebanon a “B-” credit rating, a downgrade from the standard “B” rating the country has enjoyed. Most analysts attribute the lower score to the country’s weak governance, challenges to development and reconstruction after the 2006 war, and continued instability. All of these factors have  hampered the capacity of Lebanon’s government to assure lenders that it is able to service its debt and cause worry for nail-biting creditors. The country’s uncertainty creates an unstable air for private banking operations. S&P last gave the country a “B-” during last summer’s war, but reinstated the firmer “B” after direct conflict ceased. For foreign banks, these credit ratings are more than just letters. A credit rating’s downgrade immediately affects the profitability of western banks as they must move money from operations into reserves to comply with international frameworks aimed at hedging against risk, including the Basel II Capital Accord.

Under Basel II, western banks operating in risky environments, as determined by credit ratings, must comply with the international banking standards upheld in the agreement, including increased capital allocation to reserves to hedge against risk-sensitive operations in the country. Credit ratings affect the capital requirements of all banks, within a group of 10 countries, including France, from which BNP Paribas directs its global operations. According to Basel II, banks must allocate capital along with the risk rating on bank assets, which are determined by credit ratings of various services, including Moody’s and S&P.

For BNPI, the minimum capital set aside to deal with risk is too high an opportunity cost when BNP Paribas could close the subsidiary operations and focus assets on another part of the globe, most likely in another country with a higher credit rating. In sum, BNPI is reassessing its operations in Lebanon and weighing the possible profitability in the face of such risks. Any decision taken will be one based indirectly on the domestic affairs of the country. By selling 80% of its operations in the unstable country, BNP Paribas is freeing capital and will use it to expand into other markets or consolidate market share in the 85 countries in which they have already gained a foothold.

Union leader Hajj agreed with the profitability thesis, but believed BNPI could save workers the stress of loosing their jobs, saying, “Yes, I believe they are gaining less, but they are still gaining money. They prefer to have less risk. That’s why they prefer to sell their shares and be in control of only 20% of capital. There is no other reason.”

Hajj believed that after two weeks of affecting banking operations, the strike continued to produce its intended results, especially the unflattering situation of not being able to offer all its services to customers. He acknowledged that, “It’s the 11th day and until now all the cashiers are closed and all the other activities in the bank are closed.” He believed the banks are taking a big responsibility because “the checks are sent only by clearing. They are not returning checks even if the account is closed or even if there are sufficient funds in the account to cover the checks. They are not operational at all. [And] it is not only compensation; all the other activities are closed [as well].” In addition to shaming BNPI’s operations, strikes were also planned at other locations in Lebanon’s capital, including the French Embassy and Banque du Liban, the country’s central bank.

A trip to BNPI’s main office in Beirut on December 11 certainly showed the marks of the strike on local customers, who have come to depend on the bank’s reputation for stability after operating for over six decades in the country. A handful of customers, both for personal and commercial banking, came and went through the lobby at Gibran Tueni Square. One disgruntled customer with established relationships in the bank, who wished to remain anonymous, believed the strikers should be considered “criminals”. He likened the strike to the closing of Intra Bank in 1967 and the stress it induced on his family and community.

The best BNPI can do?

Twelve days into the strike there was a glimmer of hope for worried employees who have waited for over a year as rumors persisted of an impending sale. Among a crowd of BNPI workers and union representatives, BNPI’s President Henri Tyan presented the latest offer from BNP Paribas in Paris. Unfortunately, Paris’ offer did not match the “protocol” of indemnity that most employees feel is their right. BNPI workers have pushed for a protocol similar to the deal ABN Amro sealed with its employees when the bank exited Lebanon. That bank offered employees 24 months of indemnity matching their last monthly paycheck. Longevity was also rewarded, with two months of extra indemnity granted for each year of work.

At BNPI, a deal seemed to slide away from the expectation of employees. On the morning of the strike’s 12th day, the discussion revolved around a plan to give employees six months of indemnity and an additional month for each year worked, but the deal Paris presented to the group gathering in Beirut immediately caused dissatisfaction. Tyan’s offer to the group later that evening was the initial six months of indemnity followed by additional indemnity of one month for each year after five years of service.

Both newcomers and veterans of the company showed their disappointment over the disparity between their package and those offered to ABN Amro employees. One employee evoked accolade from the crowd of his counterparts in clearly explaining the poor deal BNPI was offering employees.

In addition, the payout did not include standard end-of-year bonuses enjoyed by employees, who receive only 25% of their total package up front. The remaining 75% is paid a year later. Although President Tyan explained opportunities remained with the new bank, the workers still did not feel secure. One employee of 11 years expressed her dismay, calling the deal a fraction of the standard offered by other fleeing banks.

Nevertheless, on December 13, employees recharged BNPI’s main branch with a sense of vigor. Workers were working on computers, answering phones, and moving about the headquarters. An employee explained her package after 17 years of service, which includes six months initially plus another 12 months for her 17 years with BNPI, for a total of 18 months, if the deal goes through. She noted the union needs to work out the details with management, including ceilings on indemnities, but a more specific deal will be presented to employees after further union-management talks. The bank resumed business on December 15, after two weeks of closed operations, but prior to the resumption employees were already dusting off their cubicles in preparation for work. A lawyer with BNPI, Mireille Fayallah, explained that “employees can come and go as they usually do to use the information systems.”

Effect on locals and other banks

Other banks have left Lebanon in recent years. Most attribute the flight to domestic instability, especially the profitability issues of operating in a country with low credit ratings and higher capital requirements imposed by the Basel II accords, but the global banking climate itself has seen many mergers and acquisitions in attempts by banks to dominate market share. After BNPI’s exit, only four major western banks will remain in Lebanon, including HSBC, Société Générale, Citibank, and Standard Chartered. Sadly, one of Lebanon’s most consistent and strongest industries will appear weaker after Bank of Sharjah’s acquisition of BNPI. Looking forward, Hajj believes that “if the situation stays like this, I believe no western banks will remain here in Lebanon.”

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Capitalist Culture

Embracing a dictator

by Michael Young
written by Michael Young

Thinking back to early December, we’re still not sure whether the visit to France by the Libyan dictator, Moammar Gadhafi, was good or bad. Good, because even members of French President Nicolas Sarkozy’s government openly expressed their discontent with receiving a chronic human rights abuser in Paris; or bad, because they all had to backtrack and accept that France is now in the business of “engaging” thugs for financial gain.

The contradiction between making money and defending human rights has long been at the center of international affairs. More often than not the imperatives of the first have overridden those of the second. For a moment after his election, Sarkozy looked like he might buck the trend. His appointment of Bernard Kouchner as foreign minister, like that of Rama Yade as secretary of state for human rights, suggested he would favor policies focused on the protection of individual liberties.

Instead, Sarkozy has been recklessly unprincipled in his behavior overseas. The opening to Libya was almost entirely done so that France could sign large contracts, in particular defense contracts, with the Libyan regime. Recall how several months ago Sarkozy played a key role in helping release Bulgarian nurses held by the Gadhafi regime (lubricated by a ransom paid for by the Qatari government). At the time, Seif al-Islam Gadhafi, son of the Libyan leader, let the cat out of the bag as to the real motivations behind the release in an interview with Le Monde.

Gadhafi told the newspaper: “First, the agreement [with France] involves joint military exercises; we will be buying Milan anti-tank missiles from France to the order of 100 million euros, I think. Then there is a project for the manufacture of arms, and for the maintenance and production of military equipment. You know it’s the first arms supply deal between a Western country and Libya [since the sanctions ended].” 

In an interview with the Le Nouvel Observateur just before Moammar Gadhafi’s visit to Paris, Sarkozy was at some pains to defend his embrace of the Libyan leader. His main argument, however, was that unless countries spoke with authoritarian regimes that showed a willingness to alter their behavior, there would be no progress on human rights.

Sarkozy had a point, sort of. For Western states to advance democratic values worldwide, they need to articulate these in their dealings with autocrats, or autocratic governments. But what Sarkozy didn’t say is that the democracies often start off with a concession by engaging dictators before the latter earn engagement first by making concessions of their own on human rights. The practical result of Sarkozy’s thinking is that democracies usually find themselves in a dilemma: talking about human rights but doing little about it because engagement is usually premised on a political or financial calculation that makes one want to deal with unsavory regimes in the first place. In other words, despots are only really “frequentable” if they have something the West wants; and if they have something the West wants, then that places them in the driver’s seat when it comes to such things as human rights and democracy.

That deadlock can be convenient for both sides. Western governments can say that they spoke out in favor of human rights, before moving on to the more lucrative business at hand; and the despots can take pleasure in watching the hypocrisy of their Western interlocutors.

There may not be many ways out of this dilemma. The reality is that two very different logics are confronting each other: the logic of rational compromise, which the democracies bring to the table; and the logic of the gun, which the autocrats bring to the table. Almost invariably, the logic of the gun wins out because, first, the international community is divided and a despot will always find a willing business partner somewhere; and, second, because the logic of rational compromise relies on persuasion rather than intimidation, and no amount of persuasion will change a dictator whose stock in trade is intimidation.

What does all this mean for a capitalist culture — the assumption that capitalism in its cultural manifestations should encourage the free exchange of ideas, minimal state-imposed restrictions, and, ultimately, the pursuit of human liberty?

Plainly, this equation has usually failed to work when it comes to relations between states. For France’s capitalists to prosper and be happy, Libya’s political dissidents have to suffer without the benefit of French solidarity. Until, and unless, the democracies place human rights and liberty at the forefront of their endeavors, the situation will remain as is. Leaders like Sarkozy will say, with hand on heart, that they are defending the dictators’ victims, then turn around and arm the dictators to the teeth.

Michael Young

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Financial Indicators

Global economic data

by Executive Staff
written by Executive Staff

Most popular car color for select regions

According to DuPont’s 2007 Global Automotive Color Popularity Report, silver no longer dominates others as the color of choice. Although silver maintained its lead in South Korea and China, it faced a decline in North America, Europe, and Japan, reporting a drop on year-to-year popularity from 2006 to 2007, while also falling behind white for North American and Japan, and black in Europe. Conservative colors are still the most popular, with tones of white, silver, black, and gray dominating market share in 2006 and 2007. As reported in the figures’ press release, industry experts believe the white revolution is a continuation in fashion and home decor trends in the various areas. One can infer from this idea that demand for the purest of colors will shift into other industries as well.

Percent of R&D spending for select OECD countries

The politics of spending are ever present for OECD countries whose research and development (R&D) spending vacillate around the OECD-average of 30% of R&D spending by the government and 63% of R&D spending coming from the private sector. Among the highest government R&D spenders are Portugal, Turkey, and Mexico while the least R&D spending is conducted by the Japanese, Luxembourg, and Swiss governments. For private R&D spending, Luxembourg, South Korea, and Japan rank highest, while Portuguese, Hungarian, and New Zealand spends the least on research and development. The US brings numbers of 65% for private spending, while 29% of the country’s R&D spending is public. The European Union has figures of 54% for industry and 35% for government.

Average hours worked per person in select OECD countries

Are the French the laziest workers in the world? According to data on select OECD countries, France is one of the lowest, as its average worker clocks in only 1,555 hours a year. However, the Dutch work even less hours then their increasingly boisterous counterparts, clocking just 1,391 hours a year. In accordance with stereotypes, the most overworked are South Koreans, who earn their vacation after 2,357 hours on the job a year on average, followed by citizens of the Czech Republic, who average 1,997 hours a year and Hungarians with 1,989 hours a year. The OECD average of 1,750 is higher than that of the Euro-zone, whose workers spend 149 less hours on the job at an average of 1,601 hours a year. The United States  found itself in the OECD and the Euro-zone average, with moderate figures of 1,715 per worker in 2,006.

Energy production for select OECD countries

From OECD data, it appears that countries best endowed with natural resources are the prime producers of energy within the OECD. Heading the pack is Canada, which produces 385.3 million tons of oil equivalent (mtoe), followed by Australia at 253.5 mtoe, and Mexico at 242.5 mtoe. Norway, with the help of its sea-based crude endowments, produces 233.2 mtoe, slightly lower than its North Sea neighbor the United Kingdom (UK), which produces 246.4 mtoe a year. Among the lowest energy producers of the OECD were Ireland and Iceland, which produced only 1.9 and 2.5 mtoe relatively. The two countries are joined by other single-digit performers, including Greece, Portugal, Austria and the Slovak Republic.

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Financial Indicators

Regional equity markets

by Executive Staff
written by Executive Staff

Beirut SE: Blom  (1 month)

Current Year High: 1,526.31  Current Year Low: 1,168.36

(Chart unavailable at time of going to print)

The Beirut Stock Exchange (BSE) closed December 18 with a Blom Stock Index reading of 1,543.72 points in a period that saw the number of delays in presidential elections increase to nine. The political wrangling was not good for investor moods or any other economic assessments; thus after the assassination of leading military officer Brig. Gen. Francoise el-Hajj and the murder’s implications for the political situation, the BSE could not maintain its year high of 1574.75 points reached in early December. The exchange is nonetheless in very positive territory at the end of 2007 when compared with the war period in mid 2006 and the internal crisis months since December of the same year. In the week leading to Dec. 14, Solidere supplied 85% of traded value; the scrip in its two incarnations closed cents from $24 on Dec. 18. Banks also could defend their overall good standings; Audi and Blom GDRs respectively closed at $76.95 and $93.20 on Dec. 18.

Amman SE  (1 month)

Current Year High: 7,298.95  Current Year Low: 5,296.32

The Amman Stock Exchange Index scored a 20-month high on Dec. 10 at 7,298.95 points before entering the Adha holidays with a close of 7,272.57 points on Dec. 17 after a spate of profit harvesting in the second week of the month. The market’s optimism thus has remained fairly relentless on a three-month trajectory that pushed the exchange up by over 1,600 points since mid-September and accounted for almost all its gains in the 2007 balance. The government added to the year-end stock boom by finally privatizing Royal Jordanian airlines in a 71% public sell-off that deserved the privatization label. The stock traded for a single day before Adha. According to regulator statements, RJ shares found institutional buyers at home, in Arab countries, and outside the region whereas retail buyers in the IPO were in their overwhelming majority Jordanians. Hikma Pharmaceuticals made an offer to buy Arab Pharmaceutical Manufacturing at a substantial premium to the latter’s recent share price and APM shareholders accepted the offer, bringing further consolidation to Jordan’s important pharmaceutical industry.   

Abu Dhabi SM  (1 month)

Current Year High: 4,291.22  Current Year Low: 2,839.16

The Abu Dhabi Securities Market seemed insatiable in its aspirations with a rise to a year high of 4,543.14 points on Dec. 16 before slowing a tad to its close at 4,520.80 points the next day and a well-deserved holiday break. Real estate and construction stocks paced the ADSM’s gains in December. Telecommunications firm Etisalat announced a purchase of 16% worth $438 million in a mobile operator in Indonesia. The company’s shares experienced a day of exceptional trading volume on Dec. 9; the stock advanced well in the first ten days of December and saw some selling thereafter. Shares of credit firm Financehouse shot up more 36% in a week and the company attributed the sudden rise to multiple factors working together. Apart from a small one-day dip in the Dubai Financial Market index on Dec. 10, the ADSM and DFM indices moved in tandem through the month, with the ADSM one step ahead at a gain of 5.93% from Dec. 1 to 17.

Dubai FM  (1 month)

Current Year High: 5,775.67  Current Year Low: 3,658.13

The Dubai Financial Market stayed its course of strength and closed at 5,737.39 points on Dec. 17, up 39% from the start of 2007. Both the DFM and the ADSM traded in December at levels which the exchanges had last seen in late spring 2006. Leading developer Emaar Properties said it focuses on international expansion and may raise debt to finance its growth. The stock made some gains in December but is still cheaper than target prices given it by most analysts. Real estate stocks Deyaar and Union Properties also scored gains in December, and so did real estate finance stock Tamweel which launched a $300 million exchangeable Sukuk that was oversubscribed “within hours”, according to the company. In the national outlook, currency alignment factors to the US dollar carry the potential to spice the UAE financial and equity markets with some uncertainties.

Kuwait SE  (1 month)

Current Year High: 13,175.20            Current Year Low: 9,584.50

The Kuwait Stock Exchange (KSE) was one of two tail performers (the other was Bahrain) among GCC stock markets in the truncated 2007 tail period of trading between Dec. 2 and Dec. 17. But as all GCC markets were positive in December, the KSE index moved up 2.24% over the period, to close Dec. 17 at 12,312.90 points on the eve of the Adha holidays. Trade volumes descended in the course of the month as, in addition to a pre-holiday lull, observers described investor attention as gyrating toward the upcoming results season. In sector terms, investment stocks did well. Macroeconomics seemed encouraging enough, as the year’s buoyant oil income gave Kuwaiti state revenues a 40% boost in the first 11 months of 2007 when compared with the entire year of 2006.

Saudi Arabia SE  (1 month)

Current Year High: 11,349.99            Current Year Low: 6,861.80

The crown of best performer in December 2007 went unquestioningly to the Saudi Stock Exchange (SSE) with a 16.6% gain in the Tadawul All Shares Index between Dec. 1 and Dec. 17 when the market closed at 11,349.99 points. Passing the 11,000 points line on Dec. 12, the TASI in December moreover reached its highest readings since 0ct. 10, 2006. Heavyweight Sabic shot up by 24.8%. Banking and petrochemicals had notable advancers. The initial public offering of real estate firm Dar Al-Arkan was covered more than four times by demand. Savola Group and SEC announced hefty new projects. Also the bonus share made a comeback as banks ANB and Jazira proposed bonus issues of 43% and 33.3%. The strong performance of the SSE and most regional markets in the wane of 2007 is ever more remarkable when contextualized to global trends.

Muscat SM  (1 month)

Current Year High: 9,057.78  Current Year Low: 5,532.64

The Muscat Securities Market took December as time to do the same as in most months of 2007 — move up. The index closed in heights the Omani bourse never reached before at 9,036.06 points on Dec. 18, near its historic high from a week earlier. For the year to date, the bourse tallied an index growth of 61.9%, the best upswing in the entire Middle East and North Africa region. Investment and brokerage stocks were hot and analysts saw banking stocks as fraught with expectations. Newcomer Galfar climbed to OR 1.388 on Dec. 18. Alliance Housing Bank recorded an upswing with fluctuations as it tied the knot with Bahrain’s Ahli United Bank and the International Finance Corporation to become a commercial bank in 2008. Oman’s second telecommunications operator, Nawras, said it wants to go public some time in 2008 but the IPO decision is not firm yet.

Bahrain SE  (1 month)

Current Year High: 2,684.14  Current Year Low: 2,106.70

The Bahrain Stock Exchange (BSE) closed at 2,652.96 points on Dec. 18, marginally up by about 2% on the month but almost 20% on the year. Ahli United Bank reported high demand for its 10% rights issue; which closed on Dec. 2 with 364 shares subscribed at issue size of 300 million shares. Gulf Finance House was both a newsmaker and notable performer. The company said it will invest in establishing a $3 billion financial center in Tunisia, after the same mold as hubs in GCC locales such as Doha and Manama; its share price moved from BHD 2.8 on Dec. 2 to 3.06 on Dec. 18. The BSE announced that it will move quarters and picked the Bahrain Financial Harbor as its future domicile. Although the smallness of the kingdom’s equities markets is a handicap, local analysts have voiced expectations for a good 2008 after the BSE announced that the cumulative profits of listed companies in the first three quarters of 2007 were up almost 45% year-on-year. 

Doha SM: Qatar  (1 month)

Current Year High: 10,057.59            Current Year Low: 5,944.03

A sudden 4% slide in the Doha Securities Market on Dec. 2 made the index dip below 9,000 points but for the time being put a halt to the market’s retreat from its Nov. 4 year high above 10,000 points. Thus, December awarded buying opportunities as the DSM rallied for a week after which it relaxed and closed at 9,462.40 points on Dec. 17 — up 3.7% on the month and close to 33% since the start of 2007. The insurance sector had a winning streak in December while the industrial sub-index, paced by Industries Qatar, softened. Newcomers added some spice to trading; conglomerate Aamal Holding advanced from its debut at QR 11.60 on Dec. 5 to QR 29.30 on Dec. 17. Qatar Oman Investment Co, which assumed trading as the 40th equity on the DSM Dec. 12, gained when measured by its issue price of QR 10.3 but had a sobering few days. After its first day open at QR 30.10, it fell back to QR 20.30 at the Dec. 17 close. 

Tunis SE  (1 month)

Current Year High: 2,712.33  Current Year Low: 2,316.10

The Tunisian Stock Exchange traded sideways in December and its close at 2,602.43 points on Dec. 18 represented a change of mere 4 points vis-à-vis its reading on Nov. 30. Year to date, the index was up 11.64% on Dec. 18. Of the three strongest stocks by market capitalization, drinks maker SFBT and bank BIAT moved sideways while Banque de Tunisie achieved modest gains in the first half of December. The Tunisian and Moroccan bourses differed from most Arab stock markets in that both recorded less growth in 2007 than in 2006; however, they did better than most regional markets in having gains during both years. The exchange that took the hardest beating was the Palestinian bourse which had lost 46.4% in 2006 and whose index in mid-December stood almost 16% below its reading at the start of 2007. 

Casablanca SE All Shares  (1 month)

Current Year High: 13,506.29            Current Year Low: 9,367.89

Shares on the Casablanca Stock Exchange closed at 12,586.08 points on December 17; more than 920 points lower than the index’s year high reported on Sept. 5. Although the index recorded gains in the trading sessions just ahead of the Adha holidays, the Casablanca bourse lost over 3% in the past three months and was the only North African market to recede on both its one-month and three-month performances in the last quarter of 2007. August entrant CGI traded sideways in December while October debutant, Atlanta Insurance, lost some ground during the month. Market heavyweight Maroc Telecom recovered in December share price losses it had seen in the second half of November. According to analysts, investors initiated some shifts in their portfolios away from local equities in response to a plan by Morocco’s government to hike its capital gains tax in 2008 to 15% from 10%. At its close on Dec. 18, the index was up 32.77% since the start of 2007.

Cairo SE: Hermes  (1 month)

Current Year High: 90,771.12            Current Year Low: 57,013.49

Taking a record high above 90,770 points on Dec. 9, the Cairo and Alexandria Exchanges ended a week of profit taking and new demand with a close of 89,993 points in the benchmark Hermes Index on Dec. 17. From Dec. 2 to Dec. 17, the index added 2.41%. Orascom Construction Industries was a main driver of the December gains and rose 10% during the period. OCI also agreed to sell its cement unit to multinational Lafarge, bagging a deal worth close to $13 billion. Among big name companies, Orascom Telecom Holding sold its stake in Hong Kong’s Hutchison Telecom for $962 million but denied media speculations that OTH itself could be for sale. OTH reached a year high of EGP 90.50 on Dec. 9. In the financial sector, the share price of investment bank EFG-Hermes gained 4.5% between Dec. 2 and Dec. 17.

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Consumer Society

Facing the challenge

by Executive Staff
written by Executive Staff

Test driving a new Porsche is like interviewing Haifa Wehbe. You’re already excited before even seeing the car and when you do, you have to concentrate hard not to lose focus on content over form.

Rule #1: Don’t get overexcited. Of course, the car will be gorgeous, of course, the interior will be refined, and of course, the engineering will be top-notch. From a German luxury car maker like Porsche we expect nothing less than Teutonic quality and precision. You just need to remember this when you sit in the Porsche Cayenne and look at the perfect finish of the interior, maybe comparing it to your own car at home. Then you turn on the engine, play around with the seat’s lumbar support and think “Mmmm …” — before you’ve even moved an inch, the car has already captivated you.

Rule #2: Start slow, don’t rush anything. Unless you’re a trained sports car driver, jumping in and pushing the pedal will result in a very short drive. And, since you’ve been invited to this event, flown across the Mediterranean to a plush resort (the name of the location — Porches — is not entirely a coincidence) on the Algarve, Portugal’s southern coast, the last thing you want to do is crash the car a minute and a half after you received the keys. Or later, for that matter.

Thus, at first you just take a seat and have a look at all the details. It’s the equivalent of making small talk with Haifa before you start the actual interview. These days, all cars have essentially the same layout — lights to the left, windshield wipers to the right of the steering wheel — but since you’re planning to drive fast, on windy mountain roads you really don’t want to have to take your eyes off the road to figure out how to turn on the air-condition.

More important than the A/C button will be the ones next to the gearshift, which let you select different suspension settings: Normal, Comfort, and Sport. You can call them the “Driving the girlfriend/wife to the restaurant,” “Driving to Work,” and “Driving on my day off” buttons. The big Sport button right next to them changes engine and transmission set-up and the gas pedal control to a more responsive, dynamic setting. And if you have air suspension, it lowers the chassis for better aerodynamics. It also increases the volume of the rear-end silencer, giving the car a bigger roar at higher speeds. Just to make sure that the driver does not mix up the “small” with the “big” Sport button, maybe one of them should be renamed.

Once you’ve looked at all the levers, switches and buttons, maybe even flipped through the manual (perfectly prepared ‘test drivers’ have already read it online before the trip), you have a last look at the steering wheel and see the “+” and “-” buttons. It’s the Tiptronic — shifting gears without having to take your hand off the wheel, just like a race-car driver. You eyes light up, thinking of the mountain roads mapped out in your roadbook. Now this will come in very handy …

Rule #3: After establishing a good relationship, you can (slowly) push the boundaries. The streets are excellent (it is Europe, after all) and the fact that it’s a Saturday means that traffic is light. You start to drive, slowly at first, and try out how it handles, how it reacts. ‘Well’ and ‘quickly’ come to mind. Then off to the highway. Too bad you’re not in Germany, as there wouldn’t be any speed limit. Oh well, a little over won’t hurt, but that’s what everyone else is doing and it doesn’t quite let you get the full Porsche feeling.

It turns out, then, that the mountain roads are much more fun. Granted, you can’t drive as fast as on the highway, but you can really enjoy the fact that the car you’re driving has almost three times as much power (405hp coming out of a 4.8l engine) than the ones you’re used to. And by now you have enough handle over this machine to start playing around with it. It’s all about acceleration. Which happens almost too fast for you to feel it. Instead of drifting over to the other lane, pushing the gas pedal to increase the speed, passing the car in front of you, looking in the mirror to see if you’re sufficiently ahead of it, then drifting back into the right lane, overtaking a car now goes like this: left, gas, right, done. If you’re in the passenger seat and blink, you will have missed it. But no worries — there’ll be plenty more opportunities to observe the maneuver.

However, this is where Rule #4 comes in: Never, ever forget Rule #1. If you think that after an hour on the road you’ve truly mastered a Cayenne GTS, you may be in for a rude awakening. (Thankfully, the brakes are excellent and the ABS totally reliable.) But then, it’s not like after an hour of chitchat with Haifa you’ll be part of her entourage or get invited to her birthday party. It takes some doing, and you have to be patient. I remember coming very close to flipping the first SUV I drove, when I learned almost too late that I couldn’t race it through the hairpin curves down Sunset Boulevard to Pacific Coast Highway the same way I did with my own sedan.

Conveniently, Porsche addressed exactly this issue. — an SUV’s innately high center of gravity that causes it to lean in curves — with a system called Porsche Dynamic Chassis Control (PDCC) that is optional in the GTS. When installed, the car stays glued to the road like a 911, even if you whip the steering wheel around at 90km/h. It’s a lot of fun, actually. Just make sure your passengers have their seatbelts on and whatever luggage you have is tied down. 

Rule #5: As long as you’re polite, and once you’ve shown that you’ve done your homework and are a competent journalist, it’s perfectly alright to question a few things. Like, was Haifa’s Bint el-Wadi really such a good idea? Regarding the Cayenne, as a resident of Beirut I had to smile about Porsche’s announcement that soon the GPS SatNav will have maps for Lebanon, as I got visions of drivers quickly becoming irritated at the computer’s (understandable) unawareness of constant ad-hoc construction, closure of streets, aks al-seer traffic, and creative parking. Also, as a die-hard “stick” driver, the automatic transmission, even in Tiptronic mode, doesn’t feel quick enough. Yes, one soon gets the hang of downshifting before the curves through the “-” button on the steering wheel — real drivers use the brakes as little as possible — but I did miss the good ol’ clutch. It’s too bad that the regional market doesn’t like manuals and consequently the Cayenne will only be sold in the automatic version.

Most test drives, not unlike most interviews, end too quickly. This one certainly did. There’s still so much to try, a drive in the rain, or in the snow. Or, seeing as how in our region, the vast majority of the Cayenne will be sold in the Gulf, perhaps trying out a bit of wadi-bashing? Oh well, maybe the next test drive will be in Oman …

Matthias S. Klein is managing editor of EXECUTIVE. The GTS is available in Spring 2008.

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Banking & Finance

Money Matters by BLOMINVEST Bank

by Executive Staff
written by Executive Staff

Regional stock market indices

Regional currency rates

Emirates Aluminum Company to Build World Largest Smeltery

Emirates Aluminum Company (EAC) completed the financing of the world’s largest aluminum semltering factory in Abu Dhabi. The overall cost of the project is $4.9 billion with an initial annual production capacity of 700 tons that will double by the completion of the second phase. EAC is a joint venture between Moubadala Development Company and Dubai Aluminum that will further the expansion of the project to reach $7 billion. City Group and Sullivan & Cromwell acted as the financial and legal consultants of the project in addition to a consortium of banking institutions that financed the deal including Goldman Sachs, Export Finance and Insurance Company, Abu Dhabi Bank, Royal bank of Scotland, BNP, Standard and Chartered and Somitomo to name a few. EAC started operations in 2007 in Abu Dhabi’s Tawile area and is due to reach production capacity by 2010.

Saudi Arabia Budget for 2008 at $120 billion

The Saudi Government has ratified its budget for 2008 at $120 billion with an over-budget ceiling of $10 billion. The budget figures revealed the good performance of the Saudi economy where state revenues reached $162.6 billion representing an increase of 55% over last year versus an expenditure of $120 billion increasing 16% from the previous year. The government also used the budget surplus to reduce the debt by $14.2 billion. Additionally, GDP is expected to grow 7.1% to reach $373 billion with a trade surplus of $148.16 billion and inflation at 3.1%. Interesting to note that the 2008 budget is the highest in the history of the Kingdom where the education sector has been given priority with $28 billion followed by the health at $12 billion, water and agriculture at $7.6 billion and the specialized projects at $6.7 billion. New and pending projects were also given $44 billion budget expenditures.

Paris Conference Pledges $7.4 billion for Palestinian State

Donor countries pledged $7.4 billion during last month’s Paris conference to support the Palestinian economy. The aid, that was originally estimated at $5.6 billion, will be channeled over a period of three years of which $2.9 billion will be released in 2008.   

The pledge is part of the Palestinian State’s plan to revive the faltering economy. The conference that was attended by representatives of 68 states and 20 global organizations is a push by the international community to establish a Palestinian state and reinvigorate the peace process. The biggest contributors were the EU with $640 million, followed by the US at $555 million, Saudi Arabia, Germany and the UK with $500 million each and France at $300 million. French president Sarkozy in his opening speech reiterated the need to establish a Palestinian state by the end of 2008 that will coexist with Israel.

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Banking & Finance

2007 closes upbeat

by Executive Staff
written by Executive Staff

Trimary markets in December ended 2007 on a much higher note than many had foreseen for the year when giving their expectations 12 months ago, depicting 2007 as recovery year for regional financial markets with little to get excited about. And specifically, after an erratic performance in 2006, the market for initial public offerings in 2007 was described as a bottle of champagne without the sparkle. Instead, the IPO market in 2007 has surprised analysts and inspired new trust that 2008 and the following years will bring larger and qualitatively strong IPOs. While not quite reaching the size of the two largest IPOs in 2007 – of banks VTG in Russia and Citic in China – the Arab countries’ largest IPO, by DP World, was not far behind as it fetched $4.96 billion compared with around $8 billion for VTG and almost $6 billion by Citic. 

2007 also proved that investor’s appetite for IPOs has not dampened and in the month of December, the market witnessed the announcement, closing or listing of at least seven IPOs. Starting with the UAE, Abu Dhabi saw three IPO announcements in December. Islamic insurance provider, Mithaq Lil-Takaful, said it will float 55% of its shares for general subscription in January 2008. But the company did not disclose the amount it wants to raise. Also on the Abu Dhabi Securities Market (ADSM), Al Nahda International Education Company plans to offer 72% of its shares to the public in an attempt to raise over AED 727 million ($198 million). With National Bank of Abu Dhabi as the lead manager, the IPO is scheduled to be launched in the first quarter of 2008. Third in line but in no way least, diversified group Al Qudra Holding announced that it will list on the ADSM after offering 30% of its shares in Q1 2008. Although the company did not disclose the amount it will raise, demand for Al Qudra’s shares is expected to be high according to market analysts.

But the most interesting announcement in the UAE which has generated a lot of buzz on the GCC’s stock markets came from Dubai-based Emirates Airlines, the region’s largest and the world’s eighth largest airline, which said it will launch an initial public offering that could value the carrier at up to $20 billion. The move is in line with the company’s expansion strategy and would help financing more than $60 billion of aircraft purchases. Although rumors about an IPO were leaked in early November, the country’s flagship carrier officially announced its plans for an IPO in December. Emirates Air, which is fully owned by the Government of Dubai, said the timing and the value of the offer will be determined at a later date. The shares are expected to list on the Dubai International Financial Exchange (DIFX).

In Saudi Arabia, Dar Al Arkan Real Estate Development Company, which offered 59.45 million shares or 11.01% of its stock at SR 56 ($14.90) each was oversubscribed 423%, attracting more than SR 14 billion, according to lead manager, Samba Financial Group. The offering’s retail tranche was expanded from 30% to half the total offering upon strong demand from almost 2 million individual investors and the stock has been scheduled to start trading on the Saudi bourse on December 29.

In North Africa, two IPOs are of note in Tunisia despite a shortage of information: the Société de Production Agricole de Téboulba (SOPAT) and Automobile Reseau Tunisien et Services (Artes). SOPAT, which produces and distributes frozen chicken products, offered on December 3 around 26% of its shares in effort to raise around TND 5.75 million ($4.65 million). Although the offering closed on December 15, there hasn’t been any announcement by the company in terms of the success of the IPO. Artes, a local distributor of Nissan and Renault cars, announced on December 7 that it will offer 30 to 35% of its shares on the Tunisian Stock Exchange, without providing further information. Moving west to Morocco, Microdata, a distributor of computers and information technology equipment, has announced in early December the offering of 30% of its shares on the Casablanca Stock Exchange. Looking to raise around MAD 121 million ($15.4 million), the Microdata IPO set December 26 as closing date.

A long awaited privatization measure in the Levant was implemented through the IPO for 71% of Jordanian flag carrier, Royal Jordanian (RJ). Its IPO raised JOD 184.5 million ($260 million) between November 21 and December 7. RJ has a market capitalization of JD 260 million. Over 29,000 subscribers, including regional and international institutional investors, participated in the offering.

Although the dollar’s slide and the debate over a possible revaluation has created some concerns in the IPO market, analysts believe this concern is not wide-spread and that 2008 is expected to be another record breaking year for IPOs. In the first nine months of 2007, the six Gulf countries raised $5.9 billion according to a report by the Abu Dhabi-based private equity firm Gulf Capital. In another step to open up the Middle East’s markets to the rest of the world, the region’s largest stock market, the Saudi Stock Exchange, announced in December that it plans to allow foreigners to subscribe to IPOs. Without stating the projected date for the move, Abdul Rahman Al-Tuwaijri, chairman of the kingdom’s Capital Market Authority, said in an interview that foreigners would gain permission to invest through domestic funds which will be established by licensed firms.

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North Africa

Cementing the deal

by Executive Staff
written by Executive Staff

Tunisia’s construction materials industry is reaping the benefits of the country’s location and trade deals, both of which serve to boost its exports to help meet increased demand from abroad. The cement sector is particularly dynamic, and has attracted several foreign firms, notably from Spain and Italy. However, the introduction of a new law that requires the majority of domestically produced cement to be kept for the internal market may act as a disincentive to others who have been looking to set up plants over the next few years.

Foreign cement manufacturers have been attracted to Tunisia because of its proximity to growing markets in the Mediterranean basin, and the relatively low cost of raw materials, with prices 20-30% below those elsewhere in the region. A free trade agreement with the European Union will come into full effect on industrial products at the beginning of this year, further increasing the opportunities for export.

Tunisia currently has seven cement plants, five of which have been privatized and are now owned by Italy’s Colacem, Spain’s Uniland and Prasa and Portuguese firms Cimpor and Secil. The remaining state-owned plants, in Bizerte and Oum El-Khélil are currently being prepared for privatization, and several local companies have announced interest. These seven plants produce almost 7 million tons of cement annually, of which 1.4 million tons were exported in 2006, up 11.7% from the previous year. Exports totaled $89 million that year, an increase of more than 40% on 2005, according to the Central Bank.

Since 2006, there have been 13 applications filed for the construction of new cement plants, including bids by Spain’s Lodos Secos and Aricam, as well as the Italian firm Italicimenti, which aimed to establish plants in Gafsa, Kairoun and Kef respectively. These three projects were given initial authorization but in the wake of new legislation, the provisional licenses have been withdrawn, pending a finalization of the law’s specific requirements.

In September, the government introduced a new investment code to govern the cement sector, in response to its recent rapid growth and growing domestic demand. The law stipulates that at least 70% of cement produced by a factory must be allocated to the Tunisian market. It also aims to reduce the amount of electricity used by the extremely energy-hungry plants.

The provisions are designed to ensure that domestic demand is met, at a time when construction is burgeoning and global costs for construction materials are soaring. Without these restrictions, it would be more profitable for the cement manufacturers to push as much as possible out into the more lucrative foreign markets. At home, demand is expected to grow on average 4.5% a year in the medium to long term, peaking at around 7% in 2013-14.

However, by putting what is essentially an export restriction on Tunisian cement plants, the authorities may be discouraging further development of the sector. The latest foreign firms seeking to enter the market are doing so partly because of the excellent access to European and North African markets Tunisia affords. While the FTA gives with one hand, the 70% requirement is arguably taking with the other. The law is to an extent a gamble that firms will find the Tunisian market lucrative enough to make it worth their while selling more than two-thirds of their product to local concerns. It will rely on the government offering an attractive regulatory and tax environment as well as a skilled, good value workforce.

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