Comment

Stand-up and laugh

by Paula Schmitt
written by Paula Schmitt

The Egyptian American comedian Ahmed Ahmed says in his stand-up show that, because there is a supposed terrorist also called Ahmed Ahmed, his name is in a most-wanted list. That makes air travel a unique — if not, horrible — experience. But one cannot but laugh when he tells of his ordeal: “I always know who the air marshal is on the plane. He is the guy reading People Magazine upside down and looking right at me.” After googling his own name and finding out that indeed there seems to be a terrorist called Ahmed Ahmed, the comedian wonders if the other Ahmed is in the Arab world going through the same identity mix-up: “I swear I am not a comedian, I am a terrorist!”

These and other stories are told by the Axis of Evil, a stand up comedy group formed by Ahmed, Aron Kader (whose father is Palestinian and mother is an American Mormon), Maz Jobrani (Iranian-American) and Dean Obeidallah (Palestinian-American). Of all places, the Axis’s first performance happened where the expression Axis of Evil has a whole different connotation: Washington, D.C. Since then, November 2005, they have been touring America using humor as a weapon against prejudice. Now, after full-house performances throughout the US, the Axis is touring the Middle East with a mission that is as necessary as destroying prejudice: helping make the Arabs laugh at themselves.

In America, the Axis of Evil Comedy Tour has been welcomed with raving reviews by the likes of CNN, Time, National Public Radio, and Newsweek. Along with the laughter, the group aims at promoting a shift in cultural perceptions. “We don’t want to be defined any longer by the worst examples in our community. There are a few terrorists and they define all of us,” said Ahmed in an interview on CNN.

But the paradigms are changing already. A lot has happened since 9/11, when Dean Obeidallah followed the suggestion of a club owner and dropped his Arab surname, performing under his middle name instead, Dean Joseph. Now, the group has become so popular and is so successful in defying prejudice that one of the Axis’s show in the US was sponsored by one of the main targets of the jokes: the FBI. With some of the officers attending one of the performances, Ahmed looks at them, sitting close to the stage, and tells the audience “It’s so nice to be standing in front of the FBI and not be handcuffed.”

In his routine, Ahmed reminds the audience that after 9/11, hate crimes against Middle Easterners increased by 1,000%, but that still leaves them in fourth place among hate crime victims — behind blacks, gays and Jews. “I just want to be number one in something,” he joked. United in prejudice, but with the wisdom to transform pain into pleasure, the ethnic comedians are more important in healing and unifying than they are given credit for. Quoting a colleague who is a rabbi, Ahmed says “you can’t hate anybody when you are laughing with them.”

But do Arabs easily laugh at themselves? Kader has one line aimed at the more uptight, imitating a fictitious Arab who insists he does indeed have a sense of humor: “Whoever says we don’t have a sense of humor, I will kill you and burn your flag.” But it takes a lot of high self-esteem and intellectual freedom to laugh at oneself. The only practicing Muslim in the group, Ahmed jokes that “you know you’re a Muslim when you drink, gamble and have sex but you won’t eat pork.”

Comedy is about stereotypes. As a Brazilian, I know my country has them in abundance and I was genuinely offended when my government threatened to sue the producers of the Simpsons cartoon, after one episode showed the Simpson family travelling to Rio to find out what happened to the money they were donating to a boy living in a slum. On the same trip, the Simpsons watch TeleBoobies, a show in which semi-naked girls entertain Brazilian children, while the Brazilian public transport system is depicted as one long conga line. Sadly, even our president at the time made the surreal comment that the cartoon “brought a distorted vision of Brazilian reality.”

Since when does comedy have the duty to reproduce reality? What some suspect, though, is that the president was offended not by the distortion, but precisely by the small bits that didn’t distort our reality all that much. After the embarrassing, irrelevant dispute, Homer Simpson made his retribution in style. In a later episode, he is the proud owner of a monkey. And he asks his friend to be careful with the animal, as it was a present from Brazil, and whose pedigree is very important, since “this monkey is the cousin of the tourism minister.” Kudos.
 

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Hardliner city

by Andrew Tabler
written by Andrew Tabler

Until recently, Syria bucked the age-old political dictum that regimes under intense external pressure halt domestic reforms until the coast is clear. The country’s 10th Five Year Plan, approved a year after Syrians were named suspects in the murder of the late Lebanese Prime Minister Rafik Hariri, introduced a slew of economic and social reforms designed to transform Syria from a state-dominated and socialist system to one involving greater domestic freedoms and a partnership with the country’s vibrant private sector. While liberalization in Syria’s finance, forex and trading regimes continue to unfold, Israel’s bombing of an alleged Syrian “nuclear” facility on September 6th has triggered the widest crackdown since the dark-days of the 1980s on Western influence in Syria and the ways its people communicate with the outside world.

The first signs came in mid-September when the Syrian government announced that names of all schools, businesses and shops must be in Arabic ahead of Damascus’ serving as the 2008 Arab Cultural Capital. As businesses with western names like KFC and Shrimpy prepared to change their marquees, foreign schools and universities were ordered to integrate Syrian curriculum into their hitherto Western teaching models. Even Arab European University — one of the darlings of Syria’s European-supported reform process — was forced to drop the term “European” in favor of “International”.

Internet speeds throughout the country then slowed to a trickle in late September without reason. Rumors filled the Syrian capital that a Finnish firm supplied technology to Syrian authorities to more closely monitor internet traffic in the country. Suddenly added to the list of banned opposition websites and blogs were such popular services such as Facebook and even some functions of Google news. The new software is rumored to allow complete tracking of individual e-mail accounts inside and outside of Syria.

Syrian “reformers” ran for cover. Deputy Prime Minister for Economic Affairs Abdullah Dardari — Syria’s reform guru and author (with German assistance) of the Five Year Plan — recently stopped meeting foreign media without prior permission from Syria’s Ministry of Information. As President Assad’s right hand of reform, Dardari is under intense criticism by pundits and economists for everything for fiddling with the economic numbers to his stark warnings that Syria must cut its annual $7 billion subsidies bill or risk a fiscal crisis of major proportions. While Dardari insists that Syrian oil production is plummeting at a rate of 11% and therefore the state must accelerate efforts to make up the difference through taxation, his critics say the high price of oil will keep the budget deficit in check. The subsequent announcement by his rival, Finance Minister Mohammed al-Hussein, that the 2008 budget deficit would be in excess of $3.8 billion, down from a $5.86 billion only five years ago, failed to stem the tide of calls for Dardari’s head in a much-anticipated cabinet change. Neither did the regime’s midnight hike of gasoline prices by 20% two weeks ago and to be followed by a 20% hike next year. Diesel is still only $0.14 a liter, however, ensuring that a steady supply of smuggled fuel will continue to make its way to Lebanon, Turkey and Jordan where it fetches nearly five times the price.

But who’s counting anyway. Dardari’s effort to launch an “Executive Plan” to monitor the Five Year Plan and actually see if Syria was meeting its targets was quietly shelved late last summer for unknown reasons. The regime’s preference to fly blind in reform followed the state’s closure earlier this year of the renowned media coverage monitor IPSOS-STAT’s Damascus offices. Syria might have plenty of new private sector newspapers, magazines and radio stations, but no one knows exactly who listens to them and how they compete with their hard-line state-owned competitors.

Rollbacks in Syrian reform this autumn are the latest chapter in a two-year hiatus in political and social legislation. In his acceptance speech to a second seven-year term as Syrian President Bashar al-Assad said Syria has been in a “battle with destiny” (presumably with Israel and the US) and therefore has not had time to follow up on changes to the political parties, emergency and NGO laws promised in the 2005 Baath Party conference. The latter law, rumored to be on the verge of passage last September, is now expected next year.

So why is the regime letting private sector banks, insurance companies, foreign exchange house and trading companies flourish? Some people say it’s due to the state’s fiscal problems. But a closer look shows that, ironically, Syria’s pullout from Lebanon in April 2005 was perhaps the most powerful impetus for reform during Assad’s first term. Strained ties with Lebanon forced the state to implement long-dormant legislation to allow Syria’s private sector to do what Syrians long contracted Lebanese to do for them. In the bizarre world of Syrian reform, Friedrich Nietzsche’s quote “that which does not kill us makes us stronger” has never rang more true.
 

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Editorial

A different focus

by Yasser Akkaoui
written by Yasser Akkaoui

This year’s Executive Facts and Forecasts has picked three nations in the MENA region that it believes best represents its economic heartbeat: an emerging Sudan, a thrusting UAE and a Lebanon that is in transition but which has potential in abundance.

One of the exciting stories of the past years has been the resurgence of Sudan from decades of political conflict and war, enabling the country to truly access its natural resources — such as oil and sugar — and use these to develop a burgeoning economy. The result has been double-digit growth that has propelled Sudan into the limelight and made it attractive to investors seeking to diversify their emerging markets portfolio.

The UAE (and the rest of the GCC for that matter) had another record year and will continue to set new economic benchmarks. Those who believe that the oil boom is past its peak had better think again. This is not a flash-in-the-pan correction similar to what was experienced in the 70s; black gold will maintain its robustness to fund even greater projects and fuel prosperity throughout the region and beyond. But this success is not just down to increased oil revenues; they have merely helped implement a remarkable vision that has seen assets used to create sustainable economic development and transform a region into throbbing modern metropolis

Lebanon, being the regional barometer that it is, must thank its lucky stars that the political crisis that has plagued the little Mediterranean nation since mid-2006 happened during the current oil boom. The economic development in the GCC has allowed Lebanese talent to be absorbed into, and contribute to, the dream and brand Lebanon was able to diversify and become less reliant on an ailing and limited local economy. The good news is that the election of a new president at the end of 2007 should herald at least three years of calm and allow Lebanon to once again take its place as the most elegant boutique in the regional mall.

What we at Executive hope to showcase in this annual issue is that, despite the tag of instability that is so often attached to the region, the Middle East and North Africa is filled with credible and sustainable opportunities with the vision and talent to make them happen.

 

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North Africa

The Maghreb – Opening markets

by Executive Staff
written by Executive Staff

Although both Tunisia and Morocco have free trade deals with the European Union and Algeria’s economic and political ties with Britain have reached an unprecedented high, there is a growing feeling in all three Maghreb countries that rapid growth will be spurred from the southeast — the Gulf — rather than from the North.

Even before oil prices rocketed to $100 a barrel, Gulf investors had begun to move into North Africa in a big way, eyeing especially tourism and real estate opportunities in Tunisia and Morocco, while banking interests kept a close watch on the possibilities afforded by future privatization of the monolithic Algerian state banking sector.

Gulf money is, ironically, being starved of investment opportunities at home while in Europe much of the focus previously directed towards the Maghreb is shifting to the newer and poorer members of the EU in Central and Eastern Europe.

Yet the influx of Gulf money is neither charity towards fellow Arabs nor less demanding of moves to liberalize the Maghrebian economies and open up sectors previously denied to private sector investment. The UAE firms Emaar, Dubai Holding and Abu Khater Investment Group are moving into the region in a big way. And the decision to allow “alternative” financial products in Morocco — for which read Islamic finance — opens up the possibility for the spread of a banking system that is also gaining roots in London.

Backed by this new source of interest, the countries of the Maghreb can look forward to 2008 in a situation of macroeconomic stability and steady growth.

However, the region will have to keep up the pace of reform if it is to continue to attract petrodollars as well as tackle its leading economic and social headache — high unemployment among quickly-growing, young populations. All three have kept inflation in check but pressures remain, meaning that significant monetary and fiscal relaxation would be ill-advised. The encouragement of private sector job-creation as opposed to public sinecures is the priority. This will entail sustained deregulation and liberalization, robust financial sectors and the continued development of trade and investment ties.

Morocco

Morocco has achieved average GDP growth of 5.4% since 2001, thanks to a raft of reforms, but is expected to only achieve 2.5% this year. The drop is mainly due to the effect of a severe drought on agriculture, which contributes 20% to GDP and more than 40% to employment. The cereal harvest fell from 9.3 million tons to 2 million tons and exports of products like citrus fruits have also nosedived.

The country is committed to reducing its reliance on agriculture, and the government is confident the economy will bounce back and targeted 6.8% growth in 2008. The IMF forecasts a marginally more modest 5.9%. In the third quarter of 2007, due mainly to the lively services and construction sectors, unemployment dipped beneath the psychologically important 10% level, despite the loss of 20,000 agricultural jobs. As elsewhere in the region, unemployment is a serious issue, with the government saying 400,000 jobs a year must be created over the next 10 years to keep pace with population growth and reduce overall joblessness. This is no small feat — over the past 10 years, a period of relatively high growth, on average only 130,000 new jobs were created annually.

With fears of inflation eliminating any expansionary fiscal policy as a tool for cutting unemployment, job creation will have to come from the private sector, aided by the government’s pro-business stance. Sectors such as telecom, transport and the all-important labor-intensive tourism sector are all expected to register growth between 7 and 9% over the next year.

As well as seeking to strengthen the trade-oriented industries that benefit from EU open ties, Morocco is seeking to develop trading relations with its immediate neighbors, which have been weak up to this point, not least down to Algeria’s support for the Polisario Front in Rabat’s continuing conflict over the Western Sahara.

Tunisia

In 2007 Tunisia marked 20 years since the Change, when President Habib Bourguiba, who had led the country since independence, was replaced by Zine al-Abedine Ben Ali. Under Ben Ali, Bouguiba’s socialist model has been incrementally rolled back in favor of free markets and private enterprise.

For the past 35 years, Tunisia has made attracting FDI to the country a cornerstone of economic policy, and has specifically encouraged investment in export-oriented sectors. Its geographical position, relatively affordable land and labor, and most importantly a range of trade deals, particularly that with the EU, are touted by officials as ideal reasons to invest in the country.

This policy has been accelerated since the Change, with privatization and a gradually more open economic policy being keys to ensuring that foreign capital continues to flow in, and exports to flow out. FDI grew from $83 million in 1986 to $3.65 billion in 2006, and has created an estimated 270,000 jobs in that time.

The IMF has praised Tunisia’s “outward-oriented development strategy” which eschews protectionism and looks to encourage foreign participation in the economy and stimulate exports. Over the past decade, exports have grown by 15% annually and now contribute more than half of GDP, compared to 35% 20 years ago.

Now Tunisia is focusing on further improving its attractiveness to foreign investors and in increasing the export of “value-added” — i.e. more expensive and higher-margin — products. The 11th Development Plan includes pledges to “stimulate private investment, particularly in high value-added sectors” and “improve the business climate, attract more FDI.”

Legislation is in the pipeline to allow companies to apply for 10-year tax holidays on profits derived from exports, after which they will be taxed at 10% — equal to the lowest rate in the EU.

No set timeline has been laid out for the shift of the dinar to full convertibility. Most estimates are in a vague three-to-five year range, despite the undoubted benefits of convertibility to foreign investors. While Tunisia’s present system of controlled floating rates is seen both as transitional and not a huge barrier to investment, the fact that there is no set date for full convertibility puts in doubt the political will to implement a full float.

Tunisia’s macroeconomic stability looks secure enough, promoting a continuation of strong growth. This growth will be essential to ensuring that jobs are created for the growing population, many of whom are — or will be — young university graduates, equipped to work in high-end, demanding jobs.

Unemployment has remained stubbornly around 14% for the past half decade. By continuing to promote FDI in high-earning sectors, the government is taking some of the right steps to increase employment. However, they need to be supplemented by a loosening of red tape and an even more active encouragement of private enterprise. The official projection is for unemployment to be cut to 13.4% by 2011 — even taking into account fast population growth, this seems woefully short of what is needed.

Algeria

The soaring world price of energy defies all attempts by oil and gas rich countries to diversify the fundamentals of their economies. Algeria’s non-hydrocarbon growth this year is expected to be 6%, with overall growth of 5% as hydrocarbon output was reduced. Even so, the cash interpretation of these percentages is such that the significance of oil and gas in the economy is going up, not down.

Government coffers are brimming with hydrocarbon revenues, and money is being ploughed into big projects such as the $60 billion Complementary Plan for Support to Growth which aims to bring the country’s infrastructure up to the standards of the developed world, as well as providing jobs for the country’s unemployed.

This level of funding coming on-stream requires a continuation of careful monetary policy, particularly as other pressures such as rising food and construction costs are also present. The IMF predicts 4% inflation by year-end, tolerable for an emerging market, but has warned that keeping a lid on prices is a key priority for the country, along with the elusive goal of a diversification away from hydrocarbons.

Two other, thornier problems highlighted by the organization are high unemployment and an underdeveloped financial sector. Overall unemployment is 13% officially, but youth unemployment may be as high as 45% — a very serious issue indeed for the country. While public funds and continued growth should help cut unemployment to a degree, a report prepared for the IMF has suggested that supply-side reforms will also be beneficial. These include easing labor legislation to make hiring and firing easier, a reduction in employer contributions to social security, using oil revenues to cut taxes and ensuring that the financial system is robust enough to support private enterprise.

In 2007, Algeria recommenced privatizing its previously troubled banking sector, offering 51% of state-owned Crédit Populaire d’Algérie (CPA), the country’s fifth-largest bank, with a 15% market share. Technical bids were submitted by several large international banks, including Banco Santander, Citibank and BNP Paribas and the deal was expected to be sealed before the end of the year at the time of going to press.

The fact that such large banks are enthusiastic about the privatization bodes well for the Algerian banking sector, where previous privatisations ended in crisis and renationalization. It is also a fact that has not escaped the bigger Gulf banks. State-owned Algerian banks account for 95% of loans and deposits, but suffer from inefficiency and a high proportion of non-performing loans — around 38% of all credit, compared to 5.8% in the private sector.

However, there are currently no published plans to privatize the largest state banks, Banque Exterieur d’Algérie (BEA), Banque Nationale D’Algérie (BNA) and Banque de l’Agriculture et du Développement Rurale (BADR). Since they would all benefit from the capital, technology and professionalism that the private sector can bring, it is only a matter of time before the government applies the same logic to them that it did to CPA and Banque de Developpement Local (BDL).

And those all important new ties with Britain, now assuming the economic mantle once worn by France? Bouteflika’s two-day visit to London in July 2006 was the first visit for an Algerian head of state to the UK since the country gained independence from France in 1962. His 48 hours in London was aimed at promoting Algeria to potential UK investors and the broader international community, but especially to the British energy and telecom sectors. Britain’s recognition of the potential gains from these newly forged links was signalled by its intention to acquire larger premises in Algiers for its embassy and easier visa access. The British Council is also back after a 13 year absence.

Peter Grimsditch is editorial director of the Oxford Business Group.

 

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Financial Indicators

by Executive Contributor
written by Executive Contributor

 The Beirut Stock Exchange closed its fourth trading week in October with the year’s best index showing as the BLOM stock index reached 1373.636 points on Oct 26. Banking shares were the force behind the upwelling of optimism; the market buzz centered on talk of an acquisition offer for BLOM Bank. The bank’s GDR shares closed at $90.70 on Oct 26, its listed shares at $77.10. Bank Audi also pulled up, its GDRs reached $71.65 and its listed shares, $68. With some hopes emanating from political talks, Solidere also firmed further and closed at around $19 on Oct 26. Total value of shares traded on the BSE in the third quarter of 2007 was $257.4 million. A new run at auctioning two mobile phone operator licenses for the two existing cellular networks is scheduled for February, with distant hopes for broadening the activities on the BSE by listing part of the government’s stakes in the two operators. 

Beirut SE: Blom  (1 month)

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

 The Amman Stock Exchange was the region’s Ramadan racer. It slowly rose from months of slumber in the mid-5000s at the beginning of the fasting period. In October, the ASE Index pulled up in a steep ascent to close at 6,713.02 points on Oct 25, its 17.3% gain for the month measuring near the top in the MENA region. Arab Bank, the bulky force behind many ASE developments, rallied by 29% between Oct 1 and Oct 25. It was the first time since February that the bank’s stock was quoted above JD 27 ($ 38.14) and the climb came ahead of its quarterly results announcement, in which the bank disclosed a 15.6% increase in net profit for the first nine months of 2007. After banking, the industrial, financial services and insurance sectors moved up on the ASE in the week to Oct 25. Noteworthy in the real estate sector was the IPO announcement by Damac Jordan for Real Estate Development with subscription in late October and early November. 

Amman SE  (1 month)

Current Year High: 6,764.93         Current Year Low: 5,267.27

The Abu Dhabi Securities Market displayed an even better mood than the Dubai bourse as far as fasting induced index gains. It soared 12% after Eid to close at 4,269.4 points on Oct 25, bringing its gains for the month to 22.2% and to 42% since the start of 2007. During Ramadan, Abu Dhabi’s key real estate stocks ALDAR and Sorouh set the pace for bullishness on the ADSM but banking and energy values also went strong. Energy company Taqa gained 17% from Oct 1 to Oct 25; banks First Gulf and NBAD moved up 25% each. Etisalat, which traded up just over 25% during the period, attracted attention on rumors that it would open its share ownership to foreign investors but denied late in the month that it would takAbu Dhabi SM  (1 month)

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

 Fasting is good for the soul and it also looks to clear the mind with leanings for optimistic investment decisions nowhere in the GCC more than on the UAE bourses. The index moved to 4969.82 points on Oct 25, up about 17% from the first of the month. No more Mr. Sluggish, the Dubai Financial Market appears to have determined in introspection and even the weight of still lackluster Emaar with an unexciting third-quarter profit statement could not hold the DFM down. Between Oct 1 and 25, Deyaar (up 15%), Arabtec (up 22%), Air Arabia (up 24%), DFM Co (up 33%), and Amlak Finance (up 39%) were among the stocks that drove the positive market sentiment. While the end of the month saw some expected profit taking, analysts started talking about the index scaling the 5,000 points and further by end of 2007.

Dubai FM  (1 month)

Current Year High: 5,192.29         Current Year Low: 3,658.13

The Kuwait Stock Exchange embraced a new valuation level as its index closed above 13,000 points Oct 7 and stayed in record territory by its close of 13,096.4 points October 25. In peer comparison, however, the KSE paid a modest price for having been the year’s top artist in escaping from the hesitancy that held the UAE and Saudi markets in its grip in the second and third quarters during which the northern exchange soared ahead. In the one-month period from Sep 25 to Oct 25, the KSE index advanced by just under 2% while four of its neighbors took flight with increases above 10%. But since mid-October, the ratio of market cap to GDP in Kuwait exceeds two to one, far above this ratio in other GCC countries. The bourse’s oversight authorities made new attempts at increasing transparency by toughing up regulations in October but the initiative met with a backlash of criticism from major market players. Kuwait’s capital markets draft law is still under discussion in parliamentary committees.   

Kuwait SE  (1 month)

Current Year High: 13,175.20       Current Year Low: 9,164.30

 The Tadawul Index on the Saudi Stock Exchange closed at 8,364.51 points on Oct 27, an improvement of 517 points for the month. In its year-to-date performance, the gap between the SSE and GCC peers last month widened in favor of the latter, however, as the Tasi is trailing neighboring indices by between 12 and 37 percentage points. Analysts named banking and electricity as two sectors that contributed significantly to the subdued development. STC, seen as telecoms underperformer, closed Oct 27 up 4.2% on the month but third-quarter and nine-month results couldn’t impress even as the state-controlled company announced the third 12.5% quarterly dividend for 2007. The SSE led the region as far as time off for the Eid celebrations with closure from Oct 11 until Oct 20 but the exchange used the period to switch to a new trading system with wider capacities that debuted successfully on Oct 21.  

Saudi Arabia SE  (1 month)

Current Year High: 9,717.89         Current Year Low: 6,861.80

 The Muscat Securities Market rose 13.1% in October to a close of 7,942.94, a new record high. The market is up 42.3% since the start of the year. According to research by a Kuwaiti investment firm, the Omani market last month reached a price to earnings ratio of 15.50, behind Kuwait (20.20) and Qatar (19) but ahead of Saudi Arabia (15.40), the UAE (14.60) and Bahrain (13.70). BankMuscat, the sultanate’s largest bank, traded sideways with a 1.3% gain for the month; however, it reported a 40.7% increase in its nine-month profit. Debutant Galfar Engineering shot up 67% in its first two days of trading Oct 24 and 25. Telecoms operator Omantel, for which a partial sale of the government’s 70% stake to a strategic investor is expected in 2008, soared by 43.5% upon news of the planned sale. The UAE’s Etisalat is said to be among the companies interested in the stake. 

Muscat SM  (1 month)

Current Year High: 8,051.92         Current Year Low: 5,399.29

 The Bahrain Stock Exchange index closed at 2,615.85 points on Oct 25, its 2.8% rise on the month making it October’s second slowest index gainer after the Kuwaiti bourse and, after it was overtaken by the Dubai Financial Market, dropped to being the year’s second worst performer after the Saudi Stock Exchange. Banking stock played a mixed role, with a diverse showing of positive and negative profit growth in the third quarter. Gulf Finance House, which showed a 49.4% improvement in third-quarter profit, rose 12% from Oct 1 to Oct 25. Bank of Bahrain and Kuwait, which undertook a 15% rights issue on Oct 16, dropped 12% during the period. Telecoms firm Batelco closed 7% higher compared with the start of the month after retreating from a year high the stock reached on Oct 17. Newcomer Seef Properties, in its third month of trading, climbed 15% in October.  

Bahrain SE  (1 month)

Current Year High: 2,642.85         Current Year Low: 2,106.70

 The Doha Securities Market was also in full upswing in October. It started the month with a 200-point jump and closed on Oct 25 at 8,947.7 points, representing a 13.6% index increase over 30 days. Among the winners: Industries Qatar closed Oct 25 up by 17.5% compared with Sep 30; Al Khalij Bank advanced 22%, Rayan Bank 25%. Third quarter earnings were strong to exceptional for a number of companies, including Rayan Bank and also Nakilat which gained 27.5% while Q-Ship traded up 11% but reported a 56% drop in third-quarter profit on Oct 25. Also down in third-quarter profit (by 16%) was Salam International, which had a 22.5% rally till Oct 23 before profit taking set in. A rise of Gulf Warehousing Company stock accelerated after the firm on Oct 17 announced a return to profitability in 2007; the stock doubled in price in October. The DSM became a correspondent member of the World Federation of Exchanges, an international trade organization of securities markets. 

Doha SM: Qatar  (1 month)

Current Year High: 9,331.88         Current Year Low: 5,825.80

The Tunisian bourse closed at 2,532.49 points October 26, up 2.6% from its index reading of 2,468.27 on October 1. It was 8.64% up from the start of the year. Market heavyweight SFBT advanced over 5% in the course of the month. Banque de Tunisie, the bourse’s number two firm by market cap, gained 4.3% between Oct 1 and its close on Oct 26. Tunisair stayed on a slope and closed the month down by more than 12%.

Tunis SE  (1 month)

Current Year High: 2,712.33         Current Year Low: 2,294.38

 The Casablanca Exchange stayed its mellowing course with a 2.3% gain to 13,184.17 points on Oct 26. Year-to-date, the index is up 39%. In terms of price to earnings ratios, the Moroccan bourse is in a steam bath with PE of more than 28 times, above Egypt’s 19 times and above anything in the GCC but its protected status continues to be fending off correction impulses. Market aing 21% of total market cap, moved at the rate of the index, while leading bank Attijariwafa Bank closed Oct 26 with a very slight drop when compared with the first of the month. Atlanta Insurance started trading on the exchange Oct 16 aCasablanca SE All Shares  (1 month)

Current Year High: 13,506.29       Current Year Low: 8,431.06nd moved from its IPO price of MAD 1,200 ($152.7) the share to MAD 2,078 on October 26.  

  The Hermes Index of the Cairo & Alexandria Stock Exchanges vaulted over the 80,000 points line late October in post-Ramadan trading and closed at a record 81,062.75 points on Oct 25 on a single day jump by 1,200 points. Between Oct 1 and 25, Suez Cement pushed up 25% to a new year high; financial holding EFG Hermes moved up over 10% to a 17-month peak while Telecom Egypt moved to 20-month highs toward the end of the month. Real estate firm Sodic attracted buyers and continued to rise in October, adding 11%. Orascom Telecom rose 8%; Orascom Construction traded sideways but could announce it was awarded a $109 million contract to build Egypt’s first integrated solar power plant. On Oct 25 Egyptian authorities said the country’s new NILEX bourse for small cap stock (capital range $90,000 to $4.5 million) is assuming operations with modest first-year listing goals.

Cairo SE: Hermes  (1 month)

Current Year High: 82,439.79       Current Year Low: 55,853.97

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Uncategorized

World CO2 emissions from energy use

by Executive Contributor
written by Executive Contributor

 Global emissions of carbon dioxide have risen by 88% since 1971 and are projected to rise by another 52% by 2030. In 1971, the current OECD countries were responsible for 66% of the total. As a consequence of rapidly increasing emissions in the developing world, the OECD contributed 49% to the total in 2004, but this is expected to fall to 38% by 2030. By far, the largest increases in non-OECD countries occurred in Asia, where emissions in China have risen by 5.5% per annum between 1971 and 2004. The use of coal in China increased levels of CO2 by 3.2 billion tons over the 33-year period.

Two significant downturns can be seen in OECD CO2 emissions, following the oil shocks of the mid-1970s and early 1980s. Emissions from the economies in transition declined over the last decade, helping to offset the OECD increases between 1990 and the present. However, this decline did not stabilize global emissions as emissions in developing countries grew.

Disaggregating the emissions data shows substantial variations within individual sectors. Between 1971 and 2004, the combined share of electricity and heat generation and transport shifted from one-half to two-thirds of global emissions.

Fossil fuel shares in overall emissions changed slightly during the period. The relative weight of coal in global emissions has remained at approximately 40% since the early 1970s. The share of natural gas has increased from 15% in 1971 to 20% in 2004. Oil’s share decreased from 49% to 40%. Fuel switching and the increasing use of non-fossil energy sources reduced the CO2/total primary energy supply (TPES) ratio by 7% over the past 33 years.

Employment in companies under foreign control

As a percentage of total employment

The shares of foreign affiliates in manufacturing employment show considerable variation across OECD countries ranging from under 10% in Switzerland, Turkey and Portugal to 30% or more in Sweden, Belgium, the Czech Republic, Hungary, Luxembourg and Ireland. Employment in the service sector foreign affiliates is lower in all countries although as noted above, comparability is affected in several countries by the exclusion of employment in banking and insurance services.

In the period from 1997 to 2004, employment in foreign-controlled manufacturing affiliates grew or remained stable in all countries for which data is available except Spain and Ireland, where the rate slightly fell and in Austria, Portugal and the United States where the shares have remained fairly stable. Particularly sharp increases were recorded by the Czech Republic, Belgium, Finland, Norway, Poland and Sweden.

Remittances to major remittance receiving countries

As a percentage of GDP

The issue of immigrant remittances is not a new one but it has acquired a certain prominence in recent years, because of the realization that immigrants are transferring to their home countries amounts that significantly exceed the development aid given to the same countries by host-country governments of the countries where they are working. In certain countries, in particular Honduras, Lebanon, Bosnia-Herzegovina and Haiti, the amounts transferred are equivalent to close to 20% of the national gross domestic product.

As migration continues to increase (by over 3 million persons per year among long-term migrants as well as significantly many short-term migrants), the amounts transferred will continue to increase. Immigrants tend to transfer more in the early years after arrival but less as time goes on and the settlement decision becomes more definitive.

The presence of many Caribbean and Latin American countries in the table reflects the importance of the United States as a major destination country for persons from these countries.

A certain number of OECD countries appear towards the bottom of the table, not all of them for migration-related reasons, however. The remittances for Belgium in particular reflect essentially the large number of residents of that country working cross-border in the Netherlands and especially Luxembourg.

Road motor vehicles

Per thousand population

 In 2005, ratios of motor vehicles to population range from 780 per thousand inhabitants in Portugal to 86 in Turkey. Over the periods shown, ratios of vehicles to population increased in all countries except in the United States. Sharp increases of this ratio occurred in Greece, Poland, Iceland and the Russian Federation.

In 2005, road fatalities per million inhabitants ranged from over 237 per million inhabitants in the Russian Federation to 46 in the Netherlands. Over the periods shown, rates decreased in all countries except in the Russian Federation with particularly sharp falls in Portugal, Slovenia, New Zealand, Luxembourg, Finland and Spain.

Road fatality rates per million inhabitants are an ambiguous indicator of road safety since the number of accidents depends to a great extent on the number of vehicles in each country. Rates per million vehicles are affected by driving habits, road design and other factors over which governments may exercise control. In 2005, fatality rates per million vehicles were less than 100 in the Netherlands, Iceland, Norway, and Switzerland, but exceeded 400 in Slovak Republic and Korea. Note that low fatality rates per million inhabitants may be associated with very high fatality rates per million vehicles. For example, a country with a small vehicle population may show a low fatality rate per million inhabitants but a high fatality rate per vehicle.

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North Africa

Tunisia Increased Learning

by Executive Contributor
written by Executive Contributor

The process of reforms initiated by the government during the last 20 years has lead to a quantitative change in the educational system in Tunisia. After having succeeded at raising the attendance rate, the country must now take on the challenge of modernizing and improving the quality of its educational system.

Free schooling and the recent reforms have resulted in an attendance rate of 99% for children aged 6 and a literacy rate of 94.3% for ages 15 to 24, according to figures released by the Ministry of Education. Such figures are impressive in comparison to most other states in the MENA region.

Nevertheless, the education budget has created a solvency problem due to the demand and heavy burden on public finances, claiming nearly a third of the state’s general budget, or 7.5% of the country’s GDP.

The increasing number of students, which should reach some 500,000 by 2009, will further burden the slice of the budget allotted to education, especially if the state system remains predominant. In competition with the free public system, private institutions still remain largely “marginalized”, with student bodies made up mostly of foreign students and the children of affluent Tunisian families.

Quality issues

Faced with this growing demand, the challenge concerns not only the ability to accommodate students but above all, the quality of education received. The growing need for teachers explains why a large proportion of the 19,000 teachers is recruited without experience and are themselves still a part of the student population. These teachers are often saddled with responsibilities exceeding their capabilities, a fact which is affecting education quality.

In fact, many professionals have noted a significant decline, reflected by low skill levels among the new generations of graduates, requiring companies to invest in the training of their employees. These conditions contribute to the existence of a genuine market for private institutions.

These challenges make the renovation of the education system the focus of the school year 2007-2008, aimed at improving the quality of instruction. Lazhar Bououny, the minister of higher education, scientific research and technology, has emphasized the need to “create a partnership among businesses, the educational system and professional training programs, by developing new skills and by adapting university programs to the needs of the economy, in order to assure a better level of employability among graduates.”

The unemployment rate among young graduates is estimated at above 25% according to analysts (18-19% according to official figures). The goal is thus to increase the number of students in the most promising sectors and to achieve increased employability (especially in the service sector and the new information and communication technologies) through the creation of new educational departments in line with university education in the countries of the EU.

The BMD (bachelor’s-master’s-doctoral) reforms officially adopted in July 2005 are part of this framework. The central objective of these reforms is to raise the level of the tertiary educational system in order to meet international standards by facilitating the equivalence of Tunisian diplomas with foreign diplomas and adapting training programs to employers’ needs through the professionalization of university studies. The BMD scheme has received 48 million euros from the EU under its program to modernize higher education.

The implementation of the bachelor’s degree will be followed by the master’s degree in 2008 and the doctorate in 2010. While 59 out of the 190 institutions of higher education have already adhered to the BMD system, this figure is expected to reach 107 in 2008.

Close collaboration among representatives from the field of public education and the private sector will lead to the preparation of a workforce better qualified and more able to compete in the national and international economy. As Tunisia does not have the resource wealth of its two biggest neighbors, Algeria and Libya, creating a smart workforce remains the best way to maintain economic growth.

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North Africa

Morocco Growth Withers

by Executive Contributor
written by Executive Contributor

Morocco faced a disappointing setback to its recent positive GDP growth, plummeting from 9.3% during Q3 in 2006 to 1.7% in Q3 2007. The High Commissariat for Planning released a report in September noting this decelerating growth rate and stated that a production output drop of 20.9% in agriculture is largely responsible, a situation which arose from failed crop harvests and prolonged drought this summer.

A limited supply of exportable agricultural produce (agriculture accounts for 11% of total export value in Morocco) required the country to import commodities it is used to providing in surplus, such as wheat, flour and cereal.

Wheat yields for 2006/2007 dropped to 20 million quintals, down from 90 million quintals in the previous season. The national stock of wheat was only sufficient to provide flour for two months, forcing the government to import over 3 million quintals of wheat.

This indicator flags the country’s reliance on agricultural output, which provided $67.4 billion of GDP in 2006 (14.1% of total GDP). Agriculture remains important in the kingdom, currently employing 40% of the active labor force. With the majority of Moroccan crops highly rain-dependent, this sector often produces fluctuating yields. Key crops such as grapes, wheat and fruits, which are all grown in the north and rely on the area’s milder climate with higher precipitation levels, have suffered volume decreases of up to 80% (in the case of wheat) due to adverse weather conditions.

Development challenges

Rain in Morocco never falls at the same time of the year, and never falls in the same area. This irregularity poses a huge challenge for the agricultural sector, as only 11.5% of agricultural lands are properly irrigated.

key crops such as wheat and fruits have suffered volume

decreases up to 80%

Reliance on rainfall is therefore a development challenge for the Moroccan economy. Despite diversification efforts, agriculture remains one of the country’s key income providers. Agricultural land covers 8.7 million hectares, 20% of the country’s total area. Cereal crops cover the greatest area, accounting for 68% of land under production.

Moroccan agricultural production provides a core component of the country’s demand for primary food products. In 2006 domestic production provided 72% of domestic cereal demand, 25% of oil, 87% of milk and 100% of fruit and vegetables.

This year, the government was forced to not only to import but also to raise consumer prices to counteract import costs. The value of Morocco’s wheat imports for 2007 at the end of July exceeded 287 million euros ($407 million). This represented an increase of 66% compared with 2006 imports, and goes a significant way to explain the ensuing price hikes for basic foodstuffs.

The period of Ramadan saw the climax of social unrest surrounding price hikes, with sit-ins, protests and violent clashes between hungry rioters and security forces. This compelled the government to lower prices during the holy month, which knocked 7% off the price for vegetables but did not address the underlying issue of dependency. 

The government has recently received donor aid money from the African Development Bank ($63 million) and the US Millennium Challenge Compact ($700 million), a slice of which has been earmarked for rural development. Current projects still prioritize rural infrastructure, linking remote communities with their nearest trading depot.

It seems, however, that the pressing problem is addressing water dependency in a country which cannot afford to rely on rainfall for crop success. The World Bank has recently indicated that with Morocco using 90% of its economically accessible water resources, figures for 2035 project that 35% of Moroccans could have access to less than 500 cubic meters per capita (current per capita water access is 700 cubic meters).

Much remains to be done as Morocco addresses its water dependency. Irrigation techniques, desalination methods and exploiting untapped reserves are key areas to be explored. Although Morocco has been keen in the past to increase the number of dams and other water storage mechanisms, inefficiency in distribution has reduced the effectiveness of such infrastructure works. However, should natural gas exploration plans prove successful, the question of how to pay for the energy needed to fire desalination plants could be solved.

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North Africa

Algeria Property power

by Executive Contributor
written by Executive Contributor

After nosing around the market for the past few years, Emaar of the UAE now appears ready to dive head first into the Algerian real estate market. On October 3, the company announced plans for four multi-purpose developments in and around Algiers. Worth $20 billion, Emaar’s new venture represents the largest single investment in the Algerian property sector.

The new scheme dwarfs the company’s previous largest development in North Africa, the $14 billion Century City in Tunisia, where work began in August this year under the aegis of Sama Dubai.

The center piece of Emaar’s Algerian venture will be in Sidi Abdullah, an upmarket development covering up to 1500 hectares some 30 kilometers from the capital. The Sidi Abdullah project, slated to be an “education” city by the Algiers government, had long been stalled owing to the political uncertainty of the 1990s. Although infrastructure and roadwork will need to be brought, a number of developers are beginning to now move in on the creation of this new satellite city for the capital. Emaar’s other three endeavors include a modern health care city at Staouali and a tourist resort at Colonel Abbes to the west of Algiers, as well as a mixed-use waterfront redevelopment on Algiers Bay.

Creating a positive investment climate

Emaar’s management said that, when finished, the four developments will create several thousand jobs in the tourism, information technology and health sectors, and will encourage foreign direct investment in the Algerian economy.

According to Mohamed Ali Alabbar, chairman of the Dubai developer, Algeria’s strong growth rate and its program of economic reforms were among the motives behind Emaar buying into the country.

“Radical economic changes proposed by President Abdelaziz Bouteflika and Prime Minister Abdelaziz Belkhadem have created a favorable investment climate that complements Emaar’s plan for international expansion,” he said.

Emaar is not the only Dubai firm with projects envisioned or already underway in Algeria. Harbor and cargo handling management firm Dubai Ports World is still seeking to clinch an agreement that will see it take a 50% stake in the Djen Djen container terminal. However, while the deal could earn Algeria $70 million and see a further $150 million in investments and upgrading of facilities, it is being opposed by local trade unions, who fear job losses if the Emirate’s company wins control of the port.

In March, the Dubai Aluminum Company (DUBAL) joined forces with Abu Dhabi’s Mubadala Development Company and Algeria’s national oil and gas company Sonatrach to develop the country’s first aluminium smelter. With a $5 billion budget, the project was the largest foreign investment in Algeria at the time.

While good news for the Algerian economy, Emaar’s entry into the Algerian property development sector is not exactly recent news, with the projects first being floated last year.

However, the at times lengthy negotiation and approval process for foreign projects in Algeria has added to the time lag between the developments first being discussed and the ink drying on contracts. This is despite the fact that the Algerian president has close ties to a number of Emirati notables, having spent a period of political exile in the UAE during the 1980s. In fact, it was in October last year that Hamid Temmar, Algeria’s minister of participation and investment promotion, announced that the government had initially approved the Emaar projects, which were first presented to the president in August 2006.

During a visit to Abu Dhabi in mid-June, Belkhadem said that developers whose projects had been waiting to be granted final approval for up to a year would be getting “good news” soon. One of those on the waiting list was Emaar.

The time lag for many projects in Algeria was underscored by the annual report issued by the World Bank in late September on ease of doing business. The report showed that Algeria had actually slipped nine places down the rankings, placing it 125th out of 175 countries, and stated that investors had to go through 14 separate stages to register and open a business.

Nevertheless, these difficulties do not appear to be enough to deter potential developers as foreign investors continue to show enthusiasm for Algeria.

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GCC

UAE banks Coming of age

by Executive Contributor
written by Executive Contributor

The UAE banking industry has come a long way since the country’s foundation in 1971. Banks operated in the states that became the United Arab Emirates even earlier. The British Bank of the Middle East (which later became part of HSBC Group), the Eastern Bank (which later merged with Standard Chartered) and the Ottoman Bank (which joined Grindlays Bank) were among the lenders that operated in the emirates prior to unification.

The National Bank of Dubai was the first local lender to be set up in 1963, followed by the National Bank of Abu Dhabi in 1968. The banking sector expanded rapidly in the 70s as oil prices soared. The lending troubles of UAE banks also started in the 70s and extended into the 80s and 90s. In 1977, Ajman Arab Bank fell into trouble and was rescued and renamed First Gulf Bank, now a leading Abu Dhabi-based lender. In the 80s, the slide in oil prices drove a number of banks to near bankruptcy, which prompted the Central Bank of the United Arab Emirates to intervene and rescue the lenders, leading to increased government ownership in the sector. In the 90s, the scandal of the Bank of Credit and Commerce International and its affiliate, the Bank of Credit and Commerce Emirates tainted the UAE.

BCCI, which was set up with capital from the UAE, was closed down in 1991 at the behest of the Bank of England and others amid accusation of money laundering, bribery, and fraud among others. Set up in 1972 in Pakistan, the bank grew to become one of the largest international private banks. By 1991, the Abu Dhabi government owned 77% of BCCI, although most of its operations were outside the United Arab Emirates. Besides the BCCI fiasco, in the 90s the UAE government had to intervene to rescue a number of banks that merged to improve their financial standings. They include Abu Dhabi Commercial Bank, the outcome of a merger of Khalij Commercial Bank, Emirates Commercial Bank and Federal Commercial Bank. The Central Bank of the UAE also came to the rescue of Mashreqbank and Dubai Islamic Bank, which faced financial difficulties in the 90s.

“In the UAE, the regulatory environment is not as strong as in Saudi Arabia or Bahrain,” Robert Thursfield, a Dubai-based analyst at Fitch Ratings told Executive. “Management teams are not as strong as in Saudi Arabia.”

In this decade, however, the UAE banking industry is making headlines for news other than scandals and bankruptcies. The Emirati banking sector is now only second to Saudi Arabia in size of assets. In a non-rescue-related move, the Dubai government this year decided to merge the two largest lenders in the emirate, forming the biggest bank by assets among the six GCC states and the Middle East as a whole. Dubai-based Emirates Bank International and the National Bank of Dubai became Emirates Bank NBD, with assets exceeding $45 billion at the end of 2006. Previously, the National Bank of Abu Dhabi, with assets of $27.5 billion at the end of 2006, was the largest lender among the seven emirates. The new bank officially listed its shares on the Dubai Financial Market in October.

“UAE banks have been some of the more competitive ones because of their high number, including many foreign banks, and the ensuing competitive pressures,” according to Alexander Von Pock, a Dubai-based manager at US consultancy firm A. T. Kearney.

This merger announcement has fuelled speculation of further consolidation within the UAE banking industry, as all eyes are now set to watch the Abu Dhabi government make a similar move when it merges its two largest lenders, the National Bank of Abu Dhabi and Abu Dhabi Commercial Bank. However, the two banks have said that  this event may take years to occur. Currently there are 26 foreign banks operating in the UAE, 22 local ones, and two investment banks.

Industry analysts have argued that the Dubai bank merger was facilitated by the government’s controlling stakes. Otherwise, mergers in the United Arab Emirates may prove difficult. Each of the seven emirates has its own national bank and its own rules for the banking industry. Besides, private banks are usually largely owned by big families, such as Mashreqbank, which is majority held by the al-Ghurair family. Abd al-Aziz al-Ghurair and his family rank No. 86 on Forbes’ list of billionaires, with a net wealth of about $8 billion.

“The trend is for further mergers as nearly 50 banks service 4.5 million people, which makes it an overbanked market,’’ Dubai-based Raj Madha, senior financial research analyst at Egyptian investment bank EFG-Hermes, told Executive. “The problem is that most banks have significant controlling shareholders, and this makes it problematic for mergers to occur.”

Analysts say the Emirates Bank NBD merger also could lead to consolidation among banks in the Gulf Cooperation Council. Already lenders in the GCC are beginning to acquire stakes in other Gulf banks. Commercial Bank of Qatar has received the initial approval to buy a 40% stake in the UAE’s United Arab Bank, a move seen as a further sign of consolidation in the GCC banking industry. But not all analysts agree that mergers will begin to roll out in the near future. Continued profitability, regulatory hurdles and high liquidity in the Gulf continue to act as disincentives to mergers and acquisitions, according to A. T. Kearney’s Von Pock.

“Some players are trying to get acquisitions to become regional players, but there are still obstacles and regulatory hurdles to mergers and acquisition activities in many countries in the region.”

Record profits

Profits at UAE banks have been rising steadily over the past three years, having climbed from $1.8 billion in 2003 to $5.4 billion in 2006.

“In line with the other GCC countries, the UAE banking sector continues to benefit from a buoyant operating environment, principally driven by high oil prices resulting in increased government infrastructure spending and general growth in both retail and corporate lending,” Ken Matheson, Dubai-based CEO of HSBC Bank Middle East Ltd, told Executive. “The UAE’s economic outlook continues to be favorable with an increasingly diversified economy. The banking sector remains competitive and closely regulated.”

Profits in 2004 and 2005 were aided by a bullish stock market, a large number of initial public offerings (IPOs), and sale of shares on the UAE stock exchanges. The benchmark Dubai Financial Market General Index soared in 2005, only to lose more than 40% of its value in 2006 as the number of IPOs declined and investors viewed stocks as expensive. Likewise, the Abu Dhabi Stock Market Index shed more than 40% of its value in 2006. The stock market slump and IPO slowdown in 2006, which hit all GCC countries, cut the UAE banks’ non-interest commissions and fees.

The fall in non-interest income didn’t drag bank earnings to the bottom as lenders hastened to boost income from core banking activities. Also, the Central Bank intervened, limiting the amount of money that banks lent to investors in IPOs. These actions helped maintain profitability at UAE banks, earning praise from the International Monetary Fund.

“The financial system is sound and has not been affected by the correction of the UAE stock markets in 2005-06. Directors noted the strength and resiliency of the UAE financial system, as evidenced by the high capitalization and profitability of financial institutions,” the fund said in October in a statement following consultations with UAE officials. “They encouraged the authorities to further strengthen prudential regulations and bank supervision, especially in the context of the current rapid credit growth and buoyant real estate market.”

This year, banks have reported a 26% increase in profit to $3.2 billion as of June, compared to $ 2.5 billion in June last year, according to latest Central Bank figures.

Going forward, banks in the UAE banking industry are expected to remain profitable as long as lending practices don’t change. “Outlook for the region remains positive while oil prices remain as they are. Barring regional political issues and instability, Fitch expects banks to continue to report good numbers,” Robert Thursfield maintains.

Standard & Poor’s also sees the future of the UAE banks in a favorable light.

“We expect the banking sector in the UAE to continue to enjoy healthy profitability, asset quality and capitalization,” said Mohammed Damak, a Paris-based financial analyst at Standard & Poor’s. “Profitability should be further supported by increasing loan volumes, even though margins are under climbing pressure.”

The UAE banking industry’s transformation from disarray in the 80s and 90s to profitability in this decade partly stems from better regulation by the Central Bank and better management among lenders.

“Banks are much better run and regulated now compared with the 90s,” said EFG-Hermes’ Madha. “In the 90s systems were weaker and management was not as strong.” The high rating given to banks by agencies such as Fitch also relies on the strength of the UAE economy, which has been buoyed the last three years by soaring oil prices. The United Arab Emirates, 90% of whose oil is produced in Abu Dhabi, is among the top five oil-producers in the Organization of Petroleum Exporting Countries, the supplier of close to 40% of the world’s crude.

“All bank ratings are high because they are driven by support from the UAE, mainly Abu Dhabi,” said Thursfield. “On standalone basis, banks would not be as highly rated.”

Profitability of UAE banks has been spurred by the growth in the emirates’ population due to the influx of expatriates, and robust economic growth exceeding 8% over the last three years, according to the IMF.

Foreign and Islamic competition

Local banks are operating in a tight market. They face competition from foreign banks, which have always outnumbered them. Foreign banks have been offering their services in the United Arab Emirates prior to the formation of the federation, but their role in the UAE has been curtailed. Unlike local banks, they are limited to having eight branches only and require local ownership.

However, it won’t be long until foreign banks in the emirates start to operate on par with local banks as the federation inches closer to signing free trade agreements with the US and the European Union. Although talks with the US and the 27-nation bloc have been delayed, banks are getting ready for real competition.

“The market must be aware of the US free trade agreement, which looks at issues of putting foreign banks on a level footing with national ones,” said Madha. “Local banks are preparing for competition as we can see from the big rise in costs — evidence that banks are looking at broadening product appeal and building a more defensive franchise as competition picks up.”

Conventional local banks face another challenge: They must vie for market share with the rising number of Islamic banks, lenders that are shari’a-compliant, meaning that they do not use of interest, as it is considered usury, and prohibit investment in alcohol, gambling and prostitution.

Already this year two new Islamic banks have been set up. Dubai Holding, the holding company of the government of Dubai, created Noor Islamic Bank and the government of Abu Dhabi announced the establishment of Hilal (Crescent) Bank.

“Islamic banks will take away market share from conventional banks,” Madha asserted. “They are growing more quickly than conventional banks, now that they are capable of giving customers more or less the same level of prices and products as conventional banks. We expect Islamic banks to be more competitive than they used to be.”

Over the past two years many conventional lenders, such as Dubai-based Mashreqbank and Abu Dhabi Commercial Bank, set up Islamic banking units or services in a bid to face off Islamic lenders.

A number of conventional banks have also converted to become Islamic lenders. National Bank of Sharjah converted to Sharjah Islamic Bank and Middle East Bank renamed itself Emirates Islamic Bank.

Feeling the pinch in the UAE market, lenders have also set their eyes on buying stakes or acquiring banks abroad. There has been a foray of acquisitions in Egypt, where the nascent banking market has been opened up to foreign investors. Abu Dhabi Islamic Bank, a shari’a-compliant lender, bought Egypt’s National Bank for Development and Abu Dhabi-based Union National Bank purchased Egypt’s Alexandria Commercial and Maritime Bank to benefit from the Egyptian market’s low banking rates. Abu Dhabi-based First Gulf Bank also recently announced that, together with the Libyan Fund for Social and Economic Development run by Saif al-Islam Gaddafi, it will set up a commercial lender in the North African country.

Except for allowing some Gulf banks to open branches in the UAE, the Central Bank hasn’t issued any new licenses for foreign banks since the 80s, when it strove to limit their number that in 1977 had swelled to a record  of 34. Foreign banks have been flocking to set up base in the Dubai International Financial Center, where they can have 100% ownership and don’t need a license to operate from the Central Bank. Goldman Sachs, Morgan Stanley, and Commerzbank are some of the international lenders that are taking advantage of the free environment in the DIFC and enlarging or even moving their staff to the new financial community.

“The establishment of the DIFC has been a breakthrough in the UAE,” said HSBC’s Matheson. “International investment banks, in particular, have had their entry to the region made immensely easier by the establishment of such a center, and this will have a significant impact on the UAE financial industry and beyond. However, they cannot all exist offering all things to all men. Instead, we will see a specialization within the new players, whether into Islamic finance, equity capital markets, funds or other specialist areas.”

Real estate and oil price correction exposure

Banks in the UAE are also susceptible to exposure to the real estate sector, as real estate prices are forecast to cool down by 2009, according to the Egyptian investment bank EFG-Hermes.

Standard & Poor’s has also warned about such a fall in real estate prices. “A real estate crash would be far more severe compared with the recent stock market correction,” Damak told Executive. “Real estate loans are much bigger in volume compared with what has been invested in the stock market. Direct and indirect exposures to the property sector are larger, and a real estate crash could affect the real economy, and ultimately translate into material hikes in banks’ delinquency rates, a factor that is not captured by the banks’ current non-performing loans ratios.”

Such warnings have been echoed by the International Monetary Fund. “The growth of private sector credit remains high and banks’ exposure to the real estate sector has increased recently. Reforms are underway to strengthen the prudential and regulatory oversight of the banking system,” the fund said in its October statement. “Directors welcomed the authorities’ intention to establish a federal credit bureau to help improve the reporting and monitoring of credit data.”

“uae banks have been some of the more competitive ones because of their high number”

The establishment of a credit bureau is seen as an essential component safeguarding the UAE banking sector from future lending shocks similar to those the occurred in the previous decades. Rating agencies and consultancy companies have been quick to point out the benefits of such a bureau. “Information is key and a credit bureau can provide such information that mitigates credit risk,” said Von Pock of A. T. Kearney.

Besides a real estate sector shock, UAE banks can be affected by their historic reliance on oil-generated wealth, which has fluctuated along the years and left the industry vulnerable to crashes, as was the case in the 80s. But this is unlikely to occur in the short-term, given that oil prices have shot up to new records, with the oil price hovering around $90 a barrel in New York.

“It would need a significant drop in oil prices to impact the banking sector,” said Raj Madha. “Abu Dhabi has a huge amount of financial resources that they have built up over recent years and could be used to subsidize projects in the medium term.”

Analysts also point out that the UAE government, along with other governments in the GCC, is currently basing their state budget on low oil-per-barrel calculations to cushion any possible shock from a fall in prices.

Thus, Van Pock is sure that “no major oil price correction is expected, and so there will be excess liquidity in the region for some time.”

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