Lebanon

Banking sector – Invading Algeria

by Executive Staff
written by Executive Staff

President Bouteflika’s 2005 Charter for Peace and National Reconciliation closed a chapter of Algeria’s tumultuous past and focused instead on solid economic development program and reforms. This has been dovetailed by record oil prices steering the North African nation into a period of exceptional prosperity. Given such a favorable context, it is not surprising that a growing number of financial institutions, including Lebanese banks, see opportunities in Algeria.

“By restoring security, stability, credit worthiness, economic growth, and convertibility on current accounts, Algeria elicits all the features of a business environment that is predictable, safe and attractive for the expansion of foreign direct investment (FDI),” said Joe Dakkak, general manager of Fransabank El Djazaïr.

The African nation is currently running substantial trade surpluses and building up record foreign currency reserves, close to $100 billion. According to Nassib Ghobril, head economist of Byblos Bank which is currently applying for a license in Algeria, the nation has undergone major economic changes, shifting gradually from a state to a private sector economy. “Soaring oil prices have also allowed to replace foreign debt with current account surpluses while public finances improved significantly.”

Among the larger economies in Africa, Algeria’s gross domestic product is estimated at $116 billion, with a growth rate of 4.5% for 2007, picking up from 2.7% in 2006 after a 5.3% growth rate in 2005. “The 2006 lower growth rate was principally due to a drop in total hydrocarbon output related to infrastructural problems, which were resolved since,” said Ghobril.

Privatizing the banking sector

According to the World Bank, Algeria falls into the lower-middle income country classification, with a per capita GDP of $3,400 dollars for 2006. Most growth witnessed recently has occurred in the fields of construction and services, which exhibited growth rates of 5% and 7% for 2006. In 2003, public debt constituted 44% of GDP, a figure brought down to 17% of GDP in 2007. “In 2006, Algeria has prepaid its exterior debt of $12 billion with revenues from the oil sector, while Russia agreed to erase its Soviet-era debt,” said Ghobril. At the same time, the restrictive monetary policy of the Bank of Algeria, has kept inflation under control at the respective moderate rates of 1.5% in 2005 and 2.5% in 2006. “It is expected that inflation will remain moderate and under control in the coming years,” emphasized Dakkak.

Elie Azar, marketing manager at the Lebanese Canadian Bank, which owns 60% of Trust Algeria (paid-up capital of $35 million), underlined that Algeria’s sheer size and its lack of basic products and services, fuels the appetite of Lebanese bankers, while Dakkak said that, while the country has freed itself of the centralized planned economy, public banks are not yet a driving force in economic development and the financial system. This leaves room for private sector banks to grab a share of the market.

The IMF and the World Bank have both been very vocal about the necessary measures to propel Algeria’s financial sector into the 21st century. The African country has been strongly encouraged to privatize several public banks, in order to transfer know-how to the sector, help curb restructuring costs as well as position Algerian institutions regionally. Algeria seems to be listening closely as state owned bank Crédit Populaire d’Algérie (CPA) is the country’s first financial institution to be put up for sale. “The bidding process is starting very soon, most probably in the next few months, with 51% of the company going on the bidding block,” said Ghobril.

According to the Oxford Business Group, cash transactions predominate in the African country where only 15% of the population utilize ATM cards while the number of branches for banks stands at one per 30,000 people.

Dakkak believes, however, that the government and Central Bank alike have made significant efforts to modernize the banking sector and the payment system. “Today, 19 banks are accounted for in Algeria, six of them public, one semi-public, and 12 foreign private banks of which one is American, four French and seven Arab,” said Fransabank El Djazaïr’s GM. Société Générale, BNP Paribas, Arab Bank, City Bank, Natexis, Al Salam, Deutsche Bank, Calyon (a Crédit Agricole corporate and an investment banking subsidiary), have all set up shop in the capital Algiers. They will also be joined by the Export Development Bank of Iran that has announced it will open a branch in Algeria very soon, as reported by the Byblos Country Risk Weekly Bulletin. The largest three state-owned banks are Banque Extérieure d’Algérie, Banque Nationale d’Algérie and CPA. By the end of 2007, the private banking sector will account for only 6% of total deposits amounting to $56 billion and 7% of total outstanding loans, currently at $26 billion, from $23 billion in 2004. Today, 90% of the banking sector is dominated by state banks, while local private banks are mostly family-owned.

The size of banks varies significantly. While state-owned banks boast as many as 200 branches, private banks feature limited networks with branch numbers varying between one and 21 branches as in the case of Société Générale, according to Azar. “The banking sector remains quite underdeveloped, most activity residing in import-export payment operations. Percentages of customers using banking services are also very low. We are, however, slowly introducing private retail banking services,” he explained. In Ghobril’s opinion, one reason state banks remain powerful and are the heaviest of all local players is that they tend to lend to mammoth-like state-owned companies. “This situation results in a high level of non-performing loans (NPLs), which has recently forced the government to inject $150 million to state banks in a recapitalization effort.”

In 2007, banks’ assets ratio to GDP will reach 47%, a figure that is considered to be relatively low. The NPL of public owned banks for 2005 were 38.2%, which accounted for 8% of GDP while it remained at 5.8% of total loans for private institutions. “The capital adequacy ratio for private banks was 23.7% for 2005 rising from 21% in 2004. It decreased in the case of state owned banks from 14% in 2004 to 12% in 2005,” Ghobril pointed out. Public banks are also weighing down on the whole banking sector, as return on assets (ROA) and return on equity (ROE) exhibited levels at 0.4% and 8% in 2005 respectively. On the other hand, private banks showed an ROA of 2.2% and ROE of 25.4%.

Many hurdles to jump

One major drawback to any banking sector progress lies again in the lack of branch networks. The collapse of several private banks between 2002 and 2004, with the media-blitz Khalifa scandal on everyone’s mind, has greatly undermined public confidence in private sector banks and led to the closure of private banks or their merger with state-owned institutions. The slow penetration of the banking sector is also due to a governmental decision dating back to August 2004 which banned public companies from dealing with private banks. “It is, however, our belief that the ban will be removed very soon, along with the privatization of CPA; this process should accelerate market penetration of private banks,” so Dakkak.

According to Ghobril, the $60 billion infrastructure project undertaken by the Algerian government is one way the local banking sector might benefit. “However, another reason lies in the market’s reality where private sector lending to individuals and companies is growing, the economy flourishing, and the middle class expanding.” The size of the country population estimated at around 35 million is thus reason enough for attracting the attention of the Lebanese banking sector.

In Dakkak’s opinion, economic reforms implemented by Algeria in recent years have brought vigor and consistency to banks in relation with allocation of budgetary resources and management. “It has made it possible to devise incentive and supportive instruments to benefit private initiative conducive to the emergence of a new class of entrepreneurs. The pursuit of reforms will concentrate henceforth on the modernization of the financial and banking sector, enabling it to play a strong role in financing the economy,” he added.

The government has been working on improving governance and transparency within the financial sector. On this, Azar said, “Part of this endeavor aims at modernizing the banking sector, especially through telecommunication with the introduction of basic universal banking practices such as an electronic payment system and ATMs.”

One downside to the banking sector remaining under scrutiny is the tight grip the Central Bank has on the FX market which means that banks are faced with a surplus of cash and an increasing difficulty in re-using it. This state of affairs leads to a more active involvement of private sector banks in the extension of credit facilities to the fast developing private sector. “Imports are free and exports are encouraged by public authorities in a move to reduce the dependence of the Algerian economy on the hydrocarbon sector. Thus, FX transactions are allowed, although the regulations in this regard remain constraining. The development of private banks can be jeopardized by the lack of access to money markets (due to the Aug. 2004 directive) as the huge liquidity concentrated with the public bank is unproductive,” Dakkak stated. Structural problems will hence remain an obstacle to the emergence of a dynamic banking sector.

For Fransabank El Djazaïr’s GM, the over-estimation of the Algerian risk can no more be justified by political factors, safety arguments or economic and financial data. In this context, the government’s continuous efforts to diversify the economy by attracting foreign and domestic investment outside the energy sector, should have even more success in reducing high unemployment and improving living standards.

Ghobril nonetheless underlines that security will remain a growing concern along with the evolution of the political situation in light of the constitutional amendment that will allow president Bouteflika to run for a third term. “As long as oil prices run high, public finances remain sound, infrastructure projects are multiplied, leading to a rise in living standards, the outlook will be positive. Algeria needs to pursue reforms, liberalize capital accounts, improve the ease of doing business and attract FDI to the non hydrocarbon sector.”

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Regional chess

by Executive Staff
written by Executive Staff

There are two schools of thought regarding President George W. Bush’s Middle East peace extravaganza held last month on the shores of the Chesapeake Bay in Maryland, which brought together for the first time 16 Arab countries and Israel in a non-violent environment.

One group believes it was a waste of time, pure theatrics by an administration desperate to leave something more substantial for the history books than the wars in Afghanistan and Iraq. Critics of Bush’s foreign policy were quick to denounce the Annapolis antics as just a mega-photo opportunity and a publicity seeking stunt meant to take focus off the economy, a US dollar at its weakest point in decades, a hurting real estate market going south as a result of the sub-prime scandal and gas prices going through the roof.

Then there are the optimists, the president’s supporters and those who believed a miracle could be accomplish in Maryland when previous attempts have failed in the Holy Land, where miracles traditionally are given greater odds.

Bush’s intent was to jump-start the comatose peace negotiations between Palestinians and Israelis with the expectation of reaching an agreement for a two-state solution before the end of his mandate, now just a year away. For the president, it was somewhat of a shot in the dark. Palestinian and Israeli leaders walked away from the peace conference promising the US president they would “push for peace.” In political parlance that is the equivalent of saying “the check is in the mail.”

But something unexpected did come out of Annapolis. The first thing is the highly significant return of Russia to the Middle East peace negotiations. According to sources close to President Vladimir Putin, Russia was instrumental in convincing the Syrians to participate in the Annapolis meeting. Putin personally telephoned Syrian President Bashar al-Assad urging him to participate in the Annapolis conference. This was confirmed by a high-ranking European diplomat in Washington.

Syria, long shunned by the Bush administration for its policies in Iraq and Lebanon and considered by Washington to be counter-productive to peace efforts, remains a key player to any future negotiated settlement of the larger Middle East crisis.

Russia’s renewed interest in bringing about a peaceful settlement to the Arab-Israeli dispute injects a new momentum in a process that has been dragging for decades. Putin has already convened a follow-up summit in Moscow scheduled for January.

Saudi Arabia and other Arab states are suddenly eager to shift the peace talks into high gear. After decades of refusing so much as to even mention the name of Israel, there seems to be a new impetus, spearheaded by the Saudis, to get the ball rolling.

Why this sudden sense of urgency after years of procrastination? Because the Saudis, much like the Russians, have seen what sort of damage home-grown terrorists can cause to the economy.

Another result of Annapolis is a meeting of the minds of two leaders on opposing ends of the political spectrum: Russia’s Putin and King Abdullah of Saudi Arabia.

Just like Russian pressure on Damascus convinced Assad to send his deputy foreign minister to Annapolis, similarly, the Saudi king’s political clout brought a total of 16 Arab countries — including Syria — face-to-face with Israeli leaders at the conference.

What motivated those two politically opposed leaders to act in unison with the European Union, the United States and Israel? The fact that they all share a common enemy — Islamist terrorism.

Moscow and Riyadh, much like Washington, London, Paris, Madrid, Istanbul and other cities that have experienced firsthand attacks by Islamist terrorists, also agree on a fundamental focus point of the Middle East conflict. They say that until the Palestinians have their own state, the continued unrest in the Middle East will provide extremist Islamists a perfect recruiting poster for their cause.

The Russians, much like the Saudis, and indeed the United States, have seen the results of homegrown terrorism and it was not pretty. Ironically, the Islamists, contrary to what they were hoping for, ended up acting as a unifying force by bringing together the United States and Russia, two former Cold War warriors. At the same time, they succeeded in pushing the vast majority of the Arab World into the same camp with the Western-Russian alliance — and Israel — who now agree they have a new common enemy — the extremists within Islam.

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Special Section

Luxury Automotive – Directing the best

by Executive Staff
written by Executive Staff

What is your brand’s overall strategy for the Middle East?

Our strategy is to be the leading luxury passenger car and SUV brand in the Middle East and Levant.

How does the Middle East market respond?

We are one of the oldest luxury brands in the region with ties to many of our authorized distributors for over 50 years. The Mercedes-Benz brand has always represented quality and innovation and will continue to do so which is why we continue to be the leading German luxury automotive brand in the Middle East and Levant.

How has Mercedes-Benz responded to market demands?

Our customers are important and we always listen to them. For example, it was a customer who suggested that we should build a special version of our Mercedes SLR McLaren to celebrate the 50th anniversary of the Mille Miglia victory by Stirling Moss. We responded by introducing the limited edition ‘722’ version that had its world media premiere in Dubai at the beginning of this year.

What percent of your brand’s overall sales go to the Middle East and how many units are sold?

The Middle East and Levant, excluding Iran, Iraq and Egypt, account for approximately 1% of the company’s turnover, of which approximately 90% is achieved in the countries of the GCC. Within the GCC, the UAE and Saudi Arabia account for over half of the total 2006 volumes and around 60% of GCC sales.

In 2006, the Mercedes Car Group (Mercedes-Benz passenger cars, Maybach and SLR McLaren), sold a record 15,675 vehicles, a12.8% increase over the previous year’s figure of 13,898.

Are you growing in the Middle East?

Sales of Mercedes passenger cars continue to grow every year because we constantly introduce a range of innovative new products and also ensure we offer the best available sales and after sales service.

The Middle East is one of DaimlerChrysler’s largest markets particularly for Maybach and SLR. Basically, Mercedes-Benz sales in the Middle East and Levant form an inverted pyramid, unlike almost any other market region, whereby the S-Class forms the base with a share of Mercedes-Benz sales of more than 30% and the B-Class the tip. The total market for smaller vehicles is significant, particularly for fleet and rental, and especially in those markets with a high expatriate component, but generally the region remains disproportionately that of a “large car” market.

In light of increased liquidity in the Gulf, has your brand responded specifically?

Middle East customers like to have special versions of their vehicles. At Mercedes-Benz our Designo range allows them to choose their own interior design. In addition, our performance vehicle arm, Mercedes-AMG, has opened its own Performance Studio that can meet the individual requirements of any customer.

What are the difficulties faced by Mercedes-Benz in the Middle East market?

Vehicles have to be equipped to cope with the environmental conditions pertinent to the region generating heat, dust and humidity and, in some areas, rough roads. It is worth mentioning that only cars from authorized distributors meet the homologation requirements defined to deal with these conditions. In terms of customer comfort, customers are no different to those in other countries.
 
On a local level, how are you competing against others?

We position ourselves as the premium luxury automotive brand. We maintain that position by annually outselling the competition.

Has the Middle East/GCC market influenced design?

Car clinics for future designs include representatives from the region. The Middle East plays a significant role in hot weather testing for all our Mercedes-Benz models. 

What is your best-selling model?

For some years, the S-Class has been and continues to be the region’s favorite luxury sedan. As I said, the region remains a “large car market”. Last year, the new S-Class continued its tremendous success with 6,272 units sold compared to 3,937 in 2005.

Does Mercedes-Benz have a CSR commitment to alternative energy? Does this issue and ecological awareness play any role in your Middle East operations, or do you think that at this time it is a “lost cause” in the region?

We do not believe the Middle East and Levant is a lost cause. The governments of Dubai and Abu Dhabi are aware of the problems and are moving to make a difference with Dubai investigating the introduction of hybrid public transport and Abu Dhabi set to introduce cleaner diesel fuel.

DaimlerChrysler revealed its agenda for the future at the recent Frankfurt Motor Show with a display of 19 new models, among them seven hybrids and the trailblazing F700 research vehicle that uses the innovative DiesOtto engine which combines the best elements of both diesel and petrol engines.

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Clear view on billboards

by Paul Cochrane
written by Paul Cochrane

Earlier this year, Sao Paolo’s conservative mayor Gilberto Kassab made a radical decision when he introduced a Clean City Law that banned all public advertising in the metropolis, saying it constituted as “visual pollution.” All 15,000 billboards, outdoor video screens and ads on buses were removed.

The advertising industry threw up their arms in horror but the public will prevailed, with more than 70% of Paulistas approving, according to surveys, and some $8 million in fines issued to cleanse Sao Paulo’s urban landscape.

In Lebanon, such a development seems otherworldly. Take a drive north from Beirut to the Casino du Liban and you are bombarded with images of scantily clad ladies, scantily clad men, bottles of booze, tinned meat, watches, political propaganda, and so on.

Billboards obscure signposts and traffic dividers, in places, have adverts every five meters — it is serious overkill. Indeed, one of the reasons billboards are banned on highways in much of the world is because ads are a distraction, especially if you are a male with wandering eyes and an gargantuan image of a woman’s bursting cleavage heaves into view; just enough of a distraction to ram into the car in front.

It would arguably be all right if this plethora of billboards were confined to urban areas, but billboards pop out of the Lebanese landscape in the most wonderful spots — instead of an unimpaired view of a valley stretching into the distance you get to see a hair replacement ad. Nice.

It was not ever thus. In the early 1990s the billboard epidemic was similar to what it is today, with hoardings mushrooming all over the place as the country struggled to get back on its feet.

Then the government decided to tear down all the billboards and establish regulations that stipulate where billboards could be placed and the distance between each hoarding. There was a brief respite for the visually weary, and a few years later the practice started again, with a vengeance.

Although billboard companies are now individually abiding by the law by erecting hoardings 100 meters apart, the problem is that a firm will place their billboard in-between a rival’s, and have the next ad 100 meters on, meaning billboards are every 25 or 50 meters.

“There has been a total misapplication of the law and a major laissez faire by companies, sometimes municipalities, who have profited from the income,” said Danny Richa, president of the International Advertising Association’s Lebanon chapter. “This is in addition to a lot of political figures who profited from free adverts for the elections and gave backing and blessing to some companies to break the law.”

Herein lies the conundrum for the sector and the state. Billboards are a major income earner for cash-strapped municipalities, but the more billboards there are the less effective advertising becomes and the less money there is to be made by municipalities.

Richa said that in the first year after the regulations were enacted a company would need to advertise on just 200 billboards to get a result, with the average price of a 3×4 meter billboard $100 a week. Today, to get the same reach a company would need to advertise on 1,000 billboards, paying an average of $20-25 a week per hoarding.

“It’s costing billboard companies more to place these ads, maintain them, and bill post them, and the advertisers are getting less efficiency,” said Richa.

So what is to be done? Outdoor marketing is estimated at some $14 million a year (not including wall ads), an important income earner, and billboards do serve a purpose as a form of visual entertainment when stuck in traffic, as people increasingly are. Equally, outdoor adverts have proven to be morale boosters, such as after the July War when numerous companies lifted people’s spirits through witty billboard campaigns — something the international media picked up on and reported.

Part of the problem though is that alternative forms of advertising have not taken off in Lebanon, such as direct marketing or internet advertising, as mass advertising is cheap and effective in terms of geography and reaching the country’s small populace.

Going Sao Paulo’s route is therefore not an option for the foreseeable future. What is called for is tighter regulations, such as applied by Beirut’s municipality, which permits fewer billboards but charges higher prices.

“We have reached a point were we’d like the billboard owners to get together and immediately start to apply the law again by removing the excess, because if they don’t we will be obliged to lobby the government and could find a situation where all billboards are removed: the good, the bad, and the ugly,” said Richa.

The less draconian solution is to implement regulations area by area, fining violators and entitling companies that play by the book the visibility they are paying for. As for the countryside, let’s be able to see the valley without the billboards.

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Talking To

Stephane Fouks – Branding Dubai

by Stephane Fouks
written by Stephane Fouks

Stephane Fouks is the executive co-chairman of Euro RSCG Worldwide, CEO of Euro RSCG France and CEO of Euro RSCG C&O — all part of one of the world’s largest communication and advertising networks. Executive caught up with him in Dubai to talk about advertising and branding in the Gulf, and how Middle Eastern brands can try to go global.

What are your impressions of Dubai when you come here, particularly when looking at the city from an advertising and communications point of view?

The energy is the first thing you feel when you arrive. Of course, that’s partly because of the amount of construction but also — and this is something that’s very interesting for us — because of the desire for modernity here, which is most apparent in the architecture. This is exciting for the advertising industry because you need that energy, since you’re interested in reaching a growing market, but you also need that desire for modernity. Of course, this is modern and well-designed but it also has an Arabic fragrance in a very interesting way. For advertising people this is always very exciting because it’s what our business is about. It’s taking what you can from each identity and using it to develop international relations and international communication between brands, consumers, media and people. So you really get the feeling that this is an ideal place for our line of business.

So your business must be growing very quickly here in Dubai?

Well, it’s a double-digit growth, so of course it’s very good. In fact, Dubai for us is like a big country, it’s like Brazil, Russia or India — a market where you have a double-digit growth in our industry.

The advertising market here is obviously much newer than in more developed markets like Europe, but where do you see the biggest differences, and where do you think the local market has to catch up?

I think you have three main differences between this region and what we can call the mature markets, even though what makes my business exciting is that it’s a never-ending story: if you consider that a mature market is a market with no change, then you are dead. This industry is always about the future and not the past.

The first difference is linked to the place taken by international brands in Dubai, where they represent the mainstream of communication and marketing. This is a place that gives a fantastic position for international brands, which is not the case in France or Russia, where things are really different. The second difference is that this is not a mature market for media. Even though there are new magazines and newspapers and TV channels coming up all the time, this is just the beginning of this media explosion, especially of the digital world and online communication.

The third difference is that what I said earlier about architecture is also true for advertising. You are working with international modern codes, but there’s a need for international codes with local emotion. And it’s not just about respecting internal rules or local culture, but it’s more because there is a strong history of craft and design which can be drawn upon. There’s a specific culture. It’s like when you’re working in China or India you can’t do exactly the same advertising as you can in Paris or New York.

A recent study by a major international magazine listed the top 100 global brands, none of which came from the Middle East. Looking ahead, what do you think Middle East-based brands need to do to achieve more of a global awareness?

First, I think that Emirates is not far from being one of these global brands. They have a real territory where they can express their culture of “more than comfort.” It also has a good pricing level so any of their ads will be probably present a very strong brand in this industry.

Also, some internationally-recognized brands are actually seeing large investment by shareholders from this region, particularly from Dubai, Qatar or Kuwait. In some cases they’ve become the main shareholder in some of those global brands. It’s true for the hotel industry, and it will also become true in other industries, for instance in sports cars like Aston Martin. This investment doesn’t change the DNA of the brand but it does change the way the brand can be perceived here, as it gives the brand more regional ‘routes’.

E Some UAE companies, particularly major property developers like Emaar, are starting to go regional and even global. If you were advising them on creating an international brand for themselves, what would you advise?

From what I saw from them, I think they are still at stage number one of developing a brand. They still speak about size, business and efficiency, which is a good definition of this first stage. But you don’t become a brand if you don’t define a culture, a goal and a mission.

What has stood out or impressed you in Dubai about the advertising market here?

There is certainly a strong outdoor presence here, as there is a strong print culture in all the Arab countries. But the most impressive note for me has been architecture. I think there is still more modernity here in architecture than in advertising, although this is a good sign as it means that ads will become more and more modern. Much of the corporate advertising here is still very poor, but this is a good sign for us because it means we can really help them to do better.

Are you doing a lot of online work?

Yes, of course. For a lot of clients, it’s a way of entering the market with a good level of investment. Online business is growing fast, at close to 40% per year in the Middle East, so it’s very strong even though that 40% growth is starting from a low base. Despite all the growth here, we consider that the reality of the communication world is not just about digital — we are convinced that there will always be a place for print media, for outdoor, for TV, and that when you want to establish a brand you need to consider a way to be channel-free and not to purely focus on TV or digital. Concentrating on just one channel is the best way to lose out on the evolution of the brand and the market.

What kind of image does Dubai have in France?

In Europe there is a strong, strong excitement about this “new Far East,” if I may call it that. In Paris, they consider that Dubai is a fantastic place for both holidays and business. It’s a fantastic mix where you can find great hotels, but also a fast-growing business market where you see an emerging financial services hub or a regional base for advertising and communication. It’s very exciting. In Europe, they don’t consider that Dubai is part of the ‘crisis area’ of the Middle East. However, it was interesting that we looked closely at the possibility of holding our annual meeting in Dubai — the idea was very well received by all the Europeans but it was more difficult to persuade our US friends, as they tend to see the whole Middle East region as a general ‘crisis area’ and see that Dubai is only a few kilometers from Iran.

So if you were advising the whole region on improving its image in the US, what kind of strategies would you suggest?

There are two mistakes that you should avoid. The first mistake is thinking that because there is an Arabic ‘fear’, you should try to present yourself in a way that avoids using an Arabic image. That is a mistake because the DNA of the brand is stronger with your own image. Instead, you should concentrate more on differentiating yourself than escaping from reality. You should assume the reality to create the differentiation. The second thing is to understand that the offer will create the demand. A lot of campaigns and posters think that you should follow the demand, and if you do market research in the US, you will surely find that Arab-branded products or services are not in demand. So, therefore, many people might believe that you should escape this Arab image. I think this is a terrible mistake: you should assume the image of modernity of an Arab country, which is possible, and which in fact exists here in aspects like architecture.

Do you think that Dubai does a good PR job in terms of promoting itself?

Absolutely. For me it’s probably the best fast-growing city brand in the world. The others are Shanghai or Mumbai, in my opinion, so Dubai is really in that category of fast-growing global city brands.

What are your plans here in the coming years?

We consider this place as a regional hub. Not just for the local market, but rather at the center of a region which reaches from Mumbai to Cairo. Dubai is a very good location to offer our services to an interesting cultural mix.

And the cultural mix is very diverse and segmented in Dubai — does that pose a challenge or an opportunity?

It’s a reflection of my company. Traditionally, the advertising world would try to duplicate everything American. But we really consider that this world is now over: we live in a multicultural world where we have to take into account that there are several hubs. And here in Dubai is one of the hubs of tomorrow, especially for services, like financial services, media and communications. As a multicultural company with a marketing HQ in New York, a corporate HQ in Paris, a CEO in London and a joint venture with a very well established family here, we are in a good position to be a fast-growing network in this region.

Do you feel restricted by the constraints placed on advertising in the Gulf, in terms of what can and can’t be shown, and which types of products can be advertised?

There are two ways of looking at limits on creativity. In the name of my industry, I prefer it when we have more flexibility and freedom to create, but I also recognize that limits oblige you to be more creative. For example, in Russia the alcohol market has become very restricted: you can’t show any people consuming the product, because no assimilation is allowed between the brand and consumption. This has therefore actually forced the ad agencies to be more creative. So on the one hand I prefer more freedom, but on the other we know how to manage these constraints to be more creative.

One last question about Lebanon, where Euro RSCG also has a presence. What prospects do you see for Beirut’s advertising market and how much ground has it lost to Dubai in the past few years?

To be honest, Lebanon was the hub of creativity for the Mediterranean region for years and years, but because of the various crises in the past few years, the market has become stronger today in Dubai than it is in Beirut. However, there is still a culture and a creativity in Beirut which is just asking to come back. It started this year with movies, with some Lebanese productions that were very interesting. For us, having a culture of film and cinemas, like you have in Bollywood in Mumbai, means that you already have the elements of the advertising market. We still think that amidst all the troubles, there is still the flame for a growing advertising market in Beirut.

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Banking & Finance

IPO Watch – New trends coming

by Executive Staff
written by Executive Staff

The next big thing in initial public offerings for the Middle East will sell a slice of the world for give or take $4 billion in November. The slice amounts to 20% and the world is DP World, the UAE’s flagship global company with its fingers in harbors in almost all continents.

The flotation of DP World will gobble up about the same amount as all IPOs in the Middle East did in the second quarter of 2007. It ascertains that the region’s 2007 primary market will stand head and shoulder above the $8 billion that were raised in 2006.

Apart from being the largest beast in the short history of Arab IPO times, the DP World offer will be set apart from garden-variety offerings where the flat-rate subscription price represents an outsized discount to the company’s fair value.

Instead, institutional investors will be asked to bid for shares in mid-November and this book building will determine the IPO price within a — at time of this writing not yet announced — range. Retail investors can subscribe to the offering in early November and will have to pay the price set through the book building process.

As further mark of distinction (and new governmental strategy), DP World will debut on the Dubai International Financial Exchange (DIFX) as the first state-backed company of its size to populate the fledgling bourse and hopefully set a paradigm for liveliness more than two years after the launch of DIFX with overoptimistic short-term forecasts.

In a new batch of insurance IPOs, Al Saqr Insurance put 42% of its equity on offer on the Saudi Stock Exchange at the regulator-mandated par value of $2.67 per share and total offering size of $22.5 million, while fellow sector companies Trade Union Insurance and Arabia Cooperative launched offerings for $28.1 million and $21.4 million. Subscription for all three companies has been scheduled to close November 3.

Another two IPOs announced for the second week of November in Saudi Arabia, for educational firm Al Khaleej Training and for manufacturing firm Middle East Specialized Cables, have been approved for issue sizes of 30% each without providing details.

As recent stock market trends seemed encouraging enough, Jordan rounds off the scene with two short-notice IPOs in the under $10 million range, by Model Restaurants Co. ($8.84 million, until November 10) and Damac Jordan for Real Estate Development ($1.76 million, until November 11).

Moroccan plastics and soda producer SNEP had announced an IPO subscription offer worth up to $131.5 million for a two-day period ended October 23 but results had not been publicized by time of this writing.

Several firms joined the fray for investor interest in October; most notably Oman’s Galfar Engineering which made its entrance into the public trading square at the predicted pace and gained more than 80% in the first three days of trading.

In Jordan, the Professional Company for Real Estate Investment and Housing started trading on the Amman Stock Exchange at JOD 1.05 ($1.48) and ended its first week with a 20% gain, at JOD 1.26. Over in Casablanca, insurers Atlanta rode up 73% in 10 days between its flotation and October 26.

Shedding some light on the greater primary markets picture, a tally by international consulting firm Ernst & Young made the region’s IPO spring and early summer appear respectable but not overwhelming in global context. After a slow first quarter, the region’s primary market activity leapt in the second quarter of 2007.

Ernst & Young’s global count found the second quarter of 2007 having 531 IPOs worth a combined $88 billion worldwide. The US market recorded $15.7 billion in IPO funds gathered during the quarter. However, emerging markets contributed exceedingly to the total, led by the BRIC (Brazil, Russia, India, China) countries with $35 billion. Within BRIC, Chinese IPOs gobbled up $15.5 billion and Russians, $11.7 billion.

In relation to these numbers, the Middle East primary market activity in the second quarter of 2007 amounted to 4.4% of global capital raising through IPOs, and was equal to 11.1% of the IPO funds raised in the BRIC countries. However, by the region’s own benchmarks, the performance is impressive and latest announcements foretell much to come, with expectations focused on privatization of successful state-owned companies.

By end of October, Emirates Airlines revealed itself as the next contender for a multi-billion dollar IPO in the UAE and the general manager of the Saudi Stock Exchange told the Zawya Dow Jones news service that the bourse wants to go public as the second exchange in the region.

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By Invitation

Harnessing broadband – promise and potential

by Hana Habayeb, Chady Smayra & Jad Hajj
written by Hana Habayeb, Chady Smayra & Jad Hajj

Over the past decade, the MENA region has come a long way in terms of telecommunications sector advancement.

Between 2000 and 2005, sector revenues grew at an impressive CAGR of 16%, compared to 8% for OECD countries, largely driven by mobile sector growth. Often achieving penetration rates of well over 100%, local mobile markets have enabled phenomenal growth for operators and their global expansion.

However, the data sector is not advancing at the same pace. Only 15% of the MENA region’s population are internet users. The vast majority of this minority are constrained by the limitations of low-speed and intermittent dial-up. Broadband adoption remains abysmally low, reaching at most 6%.

Figures for 2006 show that the region’s 1.7 million broadband subscribers represented less than 1% of the world’s total broadband subscriber base of 250 million.

Why then, have populations exhibiting such appetite for mobile adoption remained so far behind their equals in broadband penetration?

The classical arguments are low affordability, capacity and coverage constraints, low awareness and accessibility, and limited online content and applications. But uniformly applying these arguments to the MENA region is neither possible, nor practical for understanding the dynamics of broadband penetration.

Affordability

In a number of countries, market forces are at work. There are several operators to choose from, and prices are below those in highly competitive European and Asian markets. So why the low take-up rate?

The annual cost of a basic broadband connection in Egypt, Jordan, Morocco, Bahrain, Algeria and Palestine, for example, is lower than, or on par with international standards. That said, adjusting for income levels, clear divergences are observed. Barring Bahrain, the annual cost of a connection is well over 10% of GDP per capita, reaching 35% in Palestine. Market forces alone cannot address such a deep-rooted affordability problem. Instead, it should be addressed through government initiatives, PC subsidies, community broadband centers, and other such affordability-related programs. While many countries are taking these steps, it is a long, slow drive to encourage adoption.

In other MENA countries, with the annual cost of a broadband connection at well over $500, price is a problem symptomatic of other issues.

The main culprit, unsurprisingly, is a lack of competition. In many Gulf markets, retail internet provisioning remains uncompetitive, explaining the high monopoly and duopoly prices. In these and other countries, the real bottleneck is the undelivered promise of competition higher up the telecom value chain. Service providers do not, or cannot, own alternative infrastructure. They are prevented from owning their own gateways, and must get access to the internet backbone, typically through a monopoly operator.

Capacity and coverage

The problem is further exacerbated by capacity and coverage constraints. Even in countries witnessing very high investment per capita in telecoms, there is a serious broadband access investment gap. Long local loops necessitate immediate investment in less densely populated areas, if broadband is to be provided over traditional networks. Within the next five years, new applications, and increasing user sophistication will outstrip the last-mile capacity of most current networks.

Another concern is international connectivity. While mobile operators can, for the most part, operate independently of one another, this is impossible for internet service providers. International connectivity can represent more than 80% of internet connection costs for service providers. The problem is twofold: first, international liberalization is in its infancy, restricting international bandwidth and capacity; second, the lack of regional co-operation for peering and local traffic aggregation has forced ISPs to accept high connection prices. The region has only two Internet Exchange Points, and several plans to build a region-wide backbone have yet to materialize, forcing operators to pay high international transit charges, when traffic could otherwise be handled locally.

Awareness and accessibility

Aside from market and access considerations, there is the issue of awareness. Understanding how critical computer literacy and appreciation of the internet’s potential is for broadband uptake, countries such as Egypt and Jordan have launched concerted awareness building and broadband utilization programs, partnering with NGOs, schools and universities.

But exclusively top-down provisioning programs have met with limited success when unaccompanied by grassroots utilization initiatives. The objectives should not be limited to education about how to use the internet, but perhaps more importantly, about what it can offer. Unfortunately, the direct impact of such programs is difficult to assess, and educational initiatives frequently require years of concerted effort before tangible benefits are reaped.

Beyond awareness, operators in the region must recognize their responsibility in making broadband accessible to the mass market. Broadband services’ complex installation and maintenance requirements are outpacing customers’ knowledge. As broadband use expands, fewer new customers will be technologically adept. Consequently, customers can no longer be relied on to facilitate installation and troubleshoot problems on their own. If broadband use is to extend beyond tech-savvy early adopters to the mainstream public, higher levels of customer service backed by responsive customer call centers will be required.

Online content and applications

The lack of local content and applications locks the final piece of the puzzle. Mobile technologies are primarily about communication with an existing network, external content is for the most part superfluous. Conversely, the internet is content and applications. With less than 3% of pages on the web in Arabic, it is no surprise that the internet has a limited value proposition for potential local users. Appeal is further curtailed by laws restricting certain applications such as VoIP, a major driver for broadband uptake.

Online content and applications are a major driver of consumer demand for broadband services, which in turn attracts necessary investment into more sophisticated infrastructure and services. Incubator and funding programs are needed to facilitate the development of attractive local content and applications, which will unlock significant economic value to developers.

Increasing broadband penetration by 2% in one year will boost telecom sector revenues in the MENA region by a minimum of 8% (at least $2 billion). This value can be captured and the success of regional mobile markets can be emulated. To this end, it is imperative that concerted policy, regulatory and market initiatives are undertaken to address the multiple roots of the MENA region’s broadband penetration deficiency, to achieve broadband’s true potential.

Issues to be addressed for more widespread broadband adoption in the MENA region:

• Affordability

• Capacity and coverage

• Awareness and accessibility

• Online content and applications

Hana Habayeb is a senior consultant,
Chady Smayra and Jad Hajj are associates
at Booz Allen Hamilton.

 

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Capitalist Culture

Liberty – and its interpretation

by Michael Young
written by Michael Young

Over the past years, Capitalist Culture has been a regular feature of Executive, so what better occasion than this 100th anniversary issue to look back at the column, and more particularly at the themes it has tried to raise in looking at Lebanon and the Middle East.

A persistent aim of Capitalist Culture has been to address those issues somehow fitting into a broader context of free markets and free minds. The assumption has been that capitalism in its cultural manifestations encourages, or should encourage, openness, the free exchange of ideas, minimal state-imposed restrictions, an embrace of globalization, and, in some absolute way, the pursuit of human liberty. The column has always considered in an implicit way that the state is, at best, a necessary evil — an often clumsy barrier to naturally free flows in the human marketplace.

Has the column been successful in getting the message across up to now? Readers will have to answer that question. However, Capitalist Culture has benefited from the gargantuan transformations in Lebanon and the Middle East in the last five years — from the Bush administration’s decision to invade Iraq as of 2003, to the 2005 Independence Intifada in Lebanon, to the summer 2006 war between Hizbullah and Israel and its aftermath. Each of these events, and the countless ones in between have, in some fashion had an impact on the issue of liberty, state power, the forcible imposition of a democracy agenda, and much more.

The war in Iraq, following on from the 9/11 attacks of 2001, unleashed one particular global debate that has yet to subside: Was imposing democracy on other peoples the optimal way to bring about open societies in the Middle East — societies that would not send young men on missions of mass murder half way across the globe?

The answer was no way as clear-cut as the question, but suddenly the matter of liberty in the region became of paramount interest. The fiasco in Iraq did not simplify matters. From a war against terrorism, the conflict became a war for democracy, before metamorphosing, today, into a war to contain Iranian power. The centrality of freedom had not lasted very long, but in many ways it very much remains at the core of the Middle East’s woes, as does the suffocating hold of states over the region’s peoples.

Capitalist Culture also addressed, as best it could, Lebanon’s effort to break away from Syrian hegemony in 2005 and afterward. The uncertain results of that endeavor were best summarized in the piece on the late Samir Kassir, whose assassination in June 2005 was the first bloody sign that “independence” would come with a heavy price tag. And Lebanon’s peculiar confessional system has been a frequent theme of articles on Lebanon — the argument being that, for all its faults, the system, by making the religious communities and their leaders more powerful than the state, has in some way also protected pluralism. Why? Because no one side or person can impose its writ on the others, and the state is in no position to control everybody, therefore each community, even faction, is able to survive amid a general balance of forces in the country.

Where Lebanon has been less impressive, however, has been in allowing its divisions to deny the full flourishing of a capitalist culture. What openness can there really be when the society is all rifts and cracks? What kind of prosperity can ensue when political groups are willing to punish the society at large merely to score points against other political groups? Why is it that liberty in the country — such an essential aspect of the Lebanese template — is so often ignored when it advantages the other side?

The guiding libertarian principle of freedom being something one must pursue as long as it does not encroach on the freedoms of others is violated daily in Lebanon. If anything, freedom is often deployed at the expense of others, creating a society far more divided than it need be.

In the coming years in the Middle East, a great deal of trauma is likely to be felt, but the essential demands of capitalist culture will remain at the center of the region’s reality. The overbearing nature of state authority over its citizens, the lack of freedom, of intellectual liberty and artistry, of opportunity, the persistent mistrust of globalization — globalization that is increasingly leaving the Middle East far behind in its wake — are all issues that will handicap the region in ways far more fundamental than the usual and appalling problems one hears about: the Palestinian-Israeli conflict, Iran’s nuclear project, or the killings in Iraq.

The reason is simple: Everything boils down to the issue of liberty and its interpretation. One might applaud the expansion of markets when they affect economic relations; but if they don’t expand human freedom and facilitate human relations, some form of deep failure is bound to ensue.

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The Damascene dilemma

by Claude Salhani
written by Claude Salhani

Strike Damascus, bomb Tehran,” say the hawks in Washington. “No,” argue others. “Open negotiations with Damascus, bring Syria out of the cold, into the fold, and help distance Damascus from its ‘really evil’ ally, Iran.”

To strike, or not to strike? That is the question, if one may paraphrase the Bard and adapt his poetry to fit 21st century geopolitics. But what the heck is the answer? There seems nary a viable reply that may please the court, or in this case, the White House, let alone a divided American electorate in what will be a crucial election year.

There was persistent talk throughout the summer of US strikes on Syria and Iran. In fact, it’s been more than just talk. According to some people very much in the know, the question of “what to do with Iran and Syria” has, as of a few months ago entered the stage of some very serious military planning.

Cynics will counter argue that the military are always working on plans to invade some place or other. It’s part of what they do in the military. Matter of fact, the Pentagon probably has, somewhere on their top secret shelves, plans on how to invade Liechtenstein, Andorra and Monaco. They also possibly have plans on how to invade Canada and Mexico, although judging by the numbers of Mexicans in the US the Mexican invasion has already begun.

But where Iran and Syria are concerned this time, it seems to go beyond the usual planning. Military tacticians and civilian analysts have been burning the midnight oil laying out strategies of how best to tackle those two countries. Mostly, they look at Iraq and say to themselves, “We cannot have another Iraq on our hands.” To be sure, neither does anyone else. Washington wants quick, clean, short wars, much like the first Gulf War. But again, if Iraq is an example of what’s in store if a similar scenario is to unfold elsewhere, say in Iran or Syria. No country would want that and least of all, Israel.

Both Syria and Iran are accused by the United States of supporting terrorism and of trying to acquire weapons of mass destruction. Syria has been on the US radar for a while now, accused of facilitating insurgents on their way to and from Iraq to fight US and coalition forces.

Strangely enough, those in favor of a strike on Damascus are actually more royalist than royalty. They tend to fall in two schools of thought. The first are the neoconservatives; a tight-knit cabal, close to Vice President Dick Cheney. At times they tend to be more pro-Israeli than the Israelis themselves. And as this administration’s time is ticking away, they would like to see Iran and Syria brought to heel, because they believe the next administration will not have what it takes to confront either country. And a nuclear-armed Iran and/or Syria will forever change the military equation in the neighborhood.

If and when Iran gets the bomb, analysts worry that other countries — Saudi Arabia, Egypt and possibly even Turkey — would want to follow suit, therefore initiating a new arms race, this one perhaps being far more dangerous than the previous one which brought about the Cold War. With tempers being the way they are in the Middle East, there might be nothing cold about the next war.

The second group urging the US to act against Syria can be found among a certain branch of what can best be described as neo-Libano-conservative. They are closely allied to the vision shared by the vice president, and remain at the same time in close agreement with Israel. Or, perhaps one should say more in sync with the Israeli lobby? They see the only way for Lebanon to attain true political independence is through a change of regime in Damascus.

As politics makes for strange bedfellows, Bashar’s best friend, so to speak, may well be the Israelis. Because when you come right down to it, Israel remains strongly opposed to striking Damascus. OK, let me rephrase that, seeing that Israel just carried out a strike deep inside Syria. Israel remains opposed to a change of regime in Syria, especially if what follows is uncertainty. Everyone in the Middle East immediately thinks of Iraq whenever anyone says regime change. And they shudder at the very thought.

As the saying goes, it’s better to deal with the devil you know than … well, you know the rest.

Where Syria is concerned, so long as certain red lines are not crossed — such as Damascus trying to acquire weapons of mass destruction — Israel would rather deal with the government of President Bashar al-Assad than with an unknown entity, particularly if that entity turns out to be the Muslim Brotherhood, the only other organized Syrian group besides the Ba’th Party.

But Iran is a different ballgame altogether. Where Tehran is concerned the US and the European Union are quite adamant in preventing the Islamic Republic from reaching militarized nuclear capability. In Iran’s case, it probably will not be a matter of “to strike or not to strike,” but rather when.

 

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No menial task in Jordan

by Riad Al-Khouri
written by Riad Al-Khouri

There is little doubt that reform over the past 15 years is helping Jordan to grow. The Jordanian economy has done especially well recently: Jordan’s real gross domestic product grew by 6.4% in 2006, while foreign and internal indebtedness fell last year to 73% of GDP, from 84% in 2005, and the deficit in the government’s budget represented 4.4% of gross domestic product in 2006, from 5.3% the year before. Prospects for 2007 are also good; and, barring regional conflagration, the outlook for next year is bright as well.

Growth nevertheless hides variations in economic performance. For example, cutting unemployment is a main goal of reform. However, at 14% in 2006 and around the same level today, joblessness is still high, and has been in double-digits for the past two decades.

That was not always the case: in the mid-70s and early 80s, due to public sector expansion, strong economic growth, and demand for Jordanian workers in regional markets, Jordan saw little unemployment. Such prosperity did not last long, however, and joblessness rose in the mid-80s because of slow growth of the regional labor market and the gradual return of Jordanian expatriates from the Gulf.

Additionally, high population growth began to have an impact on joblessness. Jordan’s population rose 10-fold in the past 50 years, to close to over 5.5 million today, because of immigration and high fertility coupled with low mortality. This increases the need for employment creation: the economy has to provide over 60,000 new jobs per annum for the next five years and 70,000 annually in the decade after to absorb new entrants into the labor market and prevent further unemployment, which today stands at around 170,000.

Although Jordan has achieved higher economic growth and attracted foreign investment, this has not helped create enough jobs for Jordanians. There is some evidence that the impact of growth on job-creation has lessened due partly to computers and other mechanization, though there is scant research on this topic and firm data is unavailable.

This requires new solutions to the joblessness problem, with the government trying some innovative training and helping to nudge locals into work previously done by non-Jordanians. Of these, there are more than a few in the kingdom: according to official figures, the number of guest workers in Jordan now stands at 314,000, and there are around 100,000 foreigners working in the country illegally.

About 72% of guest workers in Jordan are Arab, mainly from Egypt. Because of the proximity of the two countries and their affinities, large numbers of Egyptians come to Jordan, many in search of employment. More than 216,000 Egyptians work in the kingdom, representing 69% of the non-Jordanian workforce, but many are also in the country in other capacities, some of them illegal.

The state now seems to be doing something about this: to regularize the status of guest workers from Egypt, Amman this April suspended entry of Egyptian workers into the country offering a grace period to those already there to rectify their status under new work permits or switch to vocations in which they are entitled to employment. During that time, Jordan issued 77,000 work permits to Egyptians, before the ban on workers from Egypt entering the country ended at the beginning of July. Egyptians then wishing to work in Jordan had to hold professional certificates under a new labor accord between Amman and Cairo.

Will such a focused interventionist policy towards Egyptian migrants into Jordan succeed? Industrialists and farm owners in the kingdom say that replacing foreign labor with Jordanians should be gradual as there already is a shortage of cleaners, porters, and farm workers, most of these jobs filled by Egyptians. It is difficult to switch labor quickly, and the country’s industrialists have urged the government to be flexible in implementing the agreement with Egypt until enough Jordanians of appropriate categories become available. Farm owners in Jordan who employ Egyptians have noted bad experiences in the past with locals who could not tolerate the work environment or commit to working hours on farms. Jordanians shun work in the agricultural sector due to tough conditions; on the other hand, thousands of agricultural work permits annually go to Egyptians working in the kingdom.

It is obviously too early to tell whether stricter control on migrants will help resolve the country’s unemployment, but the key factor, of course, will be whether Jordanians can be convinced to do the menial jobs currently held by Egyptians and others. In any case, global forces mean that Jordan’s borders must stay open to migration — into and out — and that will inevitably make the task of state intervention tougher.

 

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