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.

0 comments
0 FacebookTwitterPinterestEmail
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.

 

0 comments
0 FacebookTwitterPinterestEmail
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.

0 comments
0 FacebookTwitterPinterestEmail
Comment

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.

 

0 comments
0 FacebookTwitterPinterestEmail
Comment

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.

 

0 comments
0 FacebookTwitterPinterestEmail
GCC

GCC The dirham adventure

by Executive Contributor
written by Executive Contributor

If the newspapers are to be believed in the UAE at the moment, the Emirati Central Bank is under increasing pressure to revalue the dirham. Rhetorical headlines like “Do we need a revaluation?” are being splashed across the pages of major dailies, fuelling expectations that the UAE government will be acting on the issue. While expatriates looking to send money home may feel the pinch, there are more overriding issues behind the government’s caution in revaluing the dirham.

In line with Gulf Cooperation Council (GCC) plans for a united currency, the UAE pegged the dirham to the US dollar. However, plans for a so-called Gulf dinar appear to be falling apart. The first to break ranks was Oman at the beginning of the year, when it pulled out of the single currency and declared its willingness to follow its own monetary policy. Bahrain has also made sounds about abandoning the peg, though it was Kuwait which took action in late May to move to a mixed currency basket on which to value the dinar. Ever since, the Kuwaiti dinar has charted a slow but steady course away from the US dollar.

The UAE has maintained its belief in single currency union, despite its failure to meet with the entry conditions. It is not alone, as Qatar too is in a similar position. The primary reason in both cases is the excessive amount of inflation in their economies, occasioned somewhat by both imported inflation and the dramatic growth rates both states are facing. However, as the UAE central bank governor, Sultan Nasser bin Suwaidi, told reporters in mid-September, “Our commitment to the dollar peg is a collective decision by all GCC central banks. We are not ready to change it.”

Perception is feeding the problem

The reason for the dollar peg seems easy enough to understand. As most of the revenues coming to the GCC area are priced in dollars, and the size of the local economies is small, riding on the back of the US Federal Reserve’s decisions makes sense.

The problem facing the UAE central bank is unusual. High growth and inflation as well as low interest rates and a weakening currency are beginning to feed into each other. Imported inflation is also beginning to fuel inflation concerns in the UAE. Although officially at 9.3%, many economists suspect the CPI rate may be higher due to the unsophisticated basket used to assess the figure. Imported inflation largely comes through the increase in prices for goods and services bought outside of the US dollar area, affecting around 60% of all imports coming into the UAE.

While imported inflation is making up around a quarter of the overall inflation picture in the Emirates, the overwhelming problem remains supply and demand in the marketplace. Rent and accommodation make up around half of the inflation increase for the CPI, and in a sense this is a reflection of the strong growth rates in the country. Equally, the CPI inflation picture is beginning to feed its own expectations, with consumers now factoring in its presence.

Monetary supply has also been playing a strong role in fuelling inflation. M2 money supply grew by 23.2% in year-on-year terms in December 2006, while the provision of consumer credit has also grown considerably. Overall, this excess money supply has been affecting consumption patterns, thus feeding back into the CPI.

Monetary supply has grown at rates well above those of growth in GDP since 2000, although there are signs that they are beginning to reach a level of convergence. Still, this money supply growth indicates that excess liquidity is flowing into the economy. With few long-term savings instruments available, and most deposits kept in highly liquid forms in the banking system, the economy is swimming in excessive cash.

The difficulty for the central bank is in how to control this excessive monetary supply, cool growth and keep inflation under check. However, with few monetary policy tools to speak of, the central bank is put in a difficult situation. Despite the efforts of many large state investment vehicles, such as Abu Dhabi’s ADIA, to try and sterilize money supply by moving large amounts away from the internal Emirati economy, the effect is insufficient. Although these entities have the ability to limit money supply in terms of revenues from oil sales coming into the economy, they can do little to influence the overall market.

As a result of this thinness of monetary controls, the idea of being overly adventurous with the dirham takes on a new meaning. A simple revaluation of the currency may do more harm than good, encouraging further imports and consumer spending, thus further worsening the inflationary picture.

As the UAE economy seeks to move into being more export-oriented away from traditional sources such as oil and gas revenues, the dollar peg takes on a different meaning. The UAE could be said to be using this period of weak dollar activity to try and encourage the development of a more diverse economic base. However, the price in the short term is inflation and the complaints of residents that their dirham is not going as far as it used to.

With the Indian rupee gaining 14% on the dirham since the first of the year, and the euro gaining some 17%, expatriate workers are starting to worry. Although this fall in value may put pressure on them in the short term, until the central bank is able to install more complex monetary control mechanisms, the peg to the dollar may simply have to stay put.

0 comments
0 FacebookTwitterPinterestEmail
GCC

GCC Acquisition

by Executive Contributor
written by Executive Contributor

On September 4, Franklin Templeton Investments, a leader in the international asset management industry, with over $621 billion in assets, announced the acquisition of 25% of Dubai-based Algebra Capital. Executive talked to Algebra’s managing director, Mehiedinne “Dino” Kronfol, to discuss the recent acquisition as well as his outlook on the regional economic context.

“It was Algebra Capital’s intention, since its founding in November 2006, to establish a strategic relationship with an organization that could provide both institutional credibility and a strong distribution capability. Franklin Templeton meets both criteria exceptionally well,” said Kronfol. “We began managing assets two months ago via discretionary mandates and sub-advisory agreements and will be launching our first fund, the Alpha long-only MENA Fund very soon,” he added.

Joining forces

According to Kronfol, the regional MENA asset management industry will triple in size over the next five years, growing from around $75 billion to over $200 billion. Reluctant to disclose any figures at present, Kronfol nonetheless declared that the company’s target was to reach $4 billion over the next five to seven years. “During our first year of operation, Algebra Capital structured a number of high level agreements and products that will be communicated to the public in the coming months, delivering on the strategic objectives of the firm both within the region as well as on a global scale,” he said.

In terms of structural changes, Franklin Templeton now has two of the Algebra Capital seven board seats while day to day management and operations remains in the hands of the original management team. “Algebra Capital’s key differentiating factor is that it remains a 75% management owned and controlled by the team,” underlined Kronfol.

Algebra Capital preferred not to speculate on how the collaboration between the two firms will further develop in light of Franklin Templeton’s option to acquire more shares in the future, only stating that the deal was structured to secure commitment on both sides to ensure a close working relationship aimed at building the regional asset management business.

Kronfol believes that the acquisition is a strong statement from a global asset player and proves the strategic importance the region carries from an international perspective. “The selection of Algebra Capital by Franklin Templeton confirms our position in the market as the international institutions’ partner of choice. In addition, this alliance will strongly position Algebra Capital as one of the leading players in the MENA asset management industry, both in the region and worldwide,” he explained.

With international players and regional institutions increasingly competing for their stakeholders in the regional markets, Algebra intends on capitalizing on innovative new product lines such as the Alpha MENA fund focusing on all 12 Arab equity markets and benchmarked against the MSCI Arabia index.

 “The shari’a compliant space is without a doubt the fastest growing segment in financial services, not only in the region, but perhaps also globally,” explained Kronfol. Algebra Capital plans to position itself as a market leader in shari’a compliant asset management by developing a number of products. “We are working closely with Franklin Templeton in this regard and are aiming to expand our distribution network and reach. Bear in mind that the Algebra Capital team has extensive experience in this specialized niche including management of shari’a funds and portfolios as well as the establishment and conversion of Islamic financial institutions,” he said.

Risk migration?

In the wake of the US subprime mortgage crisis and the weakening dollar, how are regional investment companies influenced? In Kronfol’s opinion, markets initially affected by the crisis were those with a larger concentration of foreign investors such as Egypt, the UAE and Qatar. “The crisis has actually highlighted the low correlations our markets exhibit compared to developed markets. We are closely monitoring the situation and are mindful of the possibility of risk migration to our region whether in the form of higher funding costs or available liquidity,” he said.

The declining dollar has weighed heavily on regional economies, as most Gulf countries have their currency pegged to the dollar with the exception of Kuwait. Kronfol believes that the weak dollar has slightly contributed to inflation, principally through imports in non-dollar currencies which represent roughly 30% of regional trade. He sees the policy debate triggered by the weak dollar as one that will focus market attention on available monetary policy tools, and hopefully, on new structural reforms essential to improve the management of regional economies. “We certainly encourage the development of domestic money and debt markets to provide governments with additional tools to complement fiscal policy such as open market operations.”

0 comments
0 FacebookTwitterPinterestEmail
GCC

Supermarket They’ve got it all

by Executive Contributor
written by Executive Contributor

With gigantic malls opening around Gulf cities, the retail food industry has morphed considerably in the past ten years and supermarkets, critical elements in the food distribution network, are playing a more important role in the retail chain by providing a greater variety of food at lower cost.

Saudi Arabia and the UAE markets are the heavyweights of the GCC food retail industry. “UAE hypermarkets have witnessed a 105% growth in the last four years while supermarkets progressed by 77%,” said Himanshu Vashishtha, managing director at The Nielsen Company UAE, the privately-owned global information, research and media company. “In KSA, hypermarkets have grown by 45% and supermarkets by 21%,” he added.

According to ShopperTrends 2007, an annual study recently released by Nielsen, Saudi households spend an average of $400 (1,500 Riyals) per month on household shopping — a figure closely matched by UAE consumers — 40% of which goes towards fresh food such as meats, fruits and vegetables.

Large players dominate the GCC retail food market: Panda and El Watni are positioned atop the KSA food chain while Carrefour, Spinney’s and Lulu’s — a company targeting Indian expatriates — are the main market breakers in the UAE. The Emirates market also includes large cooperatives in Sharjah and Abu Dhabi which operate in collaboration with the government. “These outlets are impressive in terms of size and turnover and offer a varied assortment of products, but they need to improve the quality of service rendered. Such structures appeal to locals and feature bargain offers all year-round, without being necessarily cheaper than other chains,” said Vashishtha. 

Targeting a diverse population

The UAE market is extremely diverse: Gulf nationals amount to 20% of the overall population of Arabs, Indians and Westerners. “Market diversity affects significantly products lines carried by hyper and supermarkets alike, with distributors trying to cater to different market segments by featuring special ethnic food sections,” underscored Vashishtha. Supermarkets have also learned as well to adapt to growing population of singles — mainly caused by high costs of living as males send their spouse and families back to their home country- thus dedicating special sections for prepared meals.

Furthermore, supermarkets target various categories of consumers:  Lulu’s is mostly sought after by the Indian community while Spinney’s is favored by Westerners. Most UAE consumers perceive shopping as a matter of convenience. They have also recently adopted the concept of shoppertainment, a blending of shopping and entertainment. “With most supermarkets located in malls, consumers tend to identify grocery shopping as an outing for the entire family. For instance, a typical family will buy groceries, shop for clothes, enjoy a meal and watch a movie,” explains Vashishtha. The trend also seems to exist in Saudi Arabia where only few entertainment choices are available. In the KSA, two other factors shape consumer behavior: the prohibition against women driving implies that females often rely on husbands, sons, or brothers for their grocery shopping. The other factor is that grocery stores do not offer delivery services due to restricted access to residential areas.

The operation manager observed that GCC consumers are generally loyal to brands; they seek good bargains but are rarely aware of how much money they have actually saved on their purchases. “A supermarket can increase its footfall by having frequent promotional offers. This tool is more effective when it comes to Indians and westerners who are usually more price conscious than Arabs,” he said. 

Catering to Islamic culture

The Islamic culture widespread in the GCC countries has also reflected on product mixes as well as design of points of sales. “Hyper-and supermarkets will feature isolated special sections dedicated to the sale of pork products, a model that is rarely duplicated by groceries because of constraints such as the limited space available,” says Vashishtha. On average, the overall design of GCC outlets meets western standards, but contrarily to Europe, stand alone supermarkets are not common phenomena and are mostly located within shopping malls. Grocery stores, which seek a different mix of fast stock keeping units (SKUs), can also be found either around or attached to residential areas.

Most super- and hypermarkets in the GCC region such as Carrefour — owned by the Al Futhaim group — are franchised and monitored by a global partner. On the other hand, some chains like Spinney’s are directly owned by a mother company. As Vashishtha concluded, “The nationality of the chain has little or no impact on consumer behavior.”

KSA main players
Azizia Panda
Azizia Panda Hyper
Al Othaim
Giant
Bin Dawood/Al Danoub
Al Raya
Carrefour

UAE main players
Carrefour
Abu Dhabi Co-op
Spinney’s
Lulu/EMKE
Al Safeer
Sharjah Coop

Source: The Nielsen Company

Shopping Modality

The Nielsen Company — which also owns marketing information brands (ACNielsen), media information (Nielsen Media Research), business publications (Billboard, The Hollywood Reporter, Adweek), trade shows and the newspaper sector (Scarborough Research) — has released this month a study on Shopping Modality highlighting consumers’ four shopping modes. Depending on the type of items purchased, shoppers can be in auto-pilot mode (grab and go), variety mode, (seeking new tastes and formats), susceptible to “buzz” mode, thus open to engaging advertising or are simply on the hunt for a bargain (on the lookout for price discounts and promotions). “The study was led all over the world as well as in the KSA and the UAE, which are the most relevant markets in the region in terms of size,” says Vashishta. 

According to the study, shoppers don’t waste energy on everyday decisions. To simplify their lives, they often shop in grab-and-go mode, reaching for the brands they usually buy without checking label or price. In these moments shoppers are not willing to try anything new, and marketers need to tailor their strategies to such behavior for a more effective reach. Items such as coffee, cereal, cheese, margarine and mayonnaise fall within a shoppers’ “auto-pilot” mode. For this particular category, the implication for marketers is that they need to avoid radical repositioning or pack changes if they are leaders, not to be negatively perceived by consumers. 

However, the same rules don’t apply to buzz-activated categories such as chocolate, energy, sports and yogurt drinks. “Customers radar is fully turned on as they actively explore alternatives. Marketers of ‘buzz’ categories need to generate ‘buzz’ through exciting advertising, new introductions and innovative packaging that leaps off the shelves to grab the consumers’ interest and attention,” said the study.

With variety-activated categories, auto-pilot mode is also often switched off when shoppers cruise frozen foods and cold cereal aisles. Consumers get bored with the same choices, and are on the lookout for a “household chef” who can deliver variety and surprise. “In this context, exciting and informative packaging plays a major role in purchase decision as consumers are browsing actively and are on the lookout for interesting and new product innovations. Biscuits, chewing gum and salad dressings also fall into the variety seeking shopper mode,” underlined the report.

Finally, bargain-hunting activated categories are driven by price comparison and promotions. This category includes canned tuna and tomatoes, cheese, canned fruit and pasta sauce.

According to the report, “It all comes down to marketers knowing what ‘mode’ shoppers are in when they shop for specific products or categories.”

0 comments
0 FacebookTwitterPinterestEmail
GCC

GCC Playing family fortunes

by Executive Contributor
written by Executive Contributor

It could well be argued that local firms in the UAE have an easy time of it. Thanks to favorable company laws, a demographic explosion and soaring oil prices, the major groups — which are almost all family-run — have seen their fortunes multiply over the past few years without needing to open their capital to outside investors.

But change now looks to be afoot. A recent amendment to IPO regulations, as well as the prospect of a key commercial law being relaxed, means that the traditional family business model might require some tweaking in the future.

No one believes that the dominance which the bigger family firms still enjoy in the economic landscape of the UAE will be substantially reduced, but for various reasons, that landscape could well look slightly different in five years’ time.

List chance

One key change may start on the country’s capital markets in Dubai and Abu Dhabi. At the end of August, a federal decree amended regulations on capital markets listings to allow family companies to float a minimum of 30% of their capital. Under the old rules, which dated back to 1982, firms had been required to list at least 55%.

“Before the new rules came in, it was somewhat unattractive for certain family businesses to list their capital, as they would have to float a majority stake and lose full control,” says Ahmad Shahin, senior associate in the research department of Shuaa Capital in Dubai. “We now expect to see a lot more IPOs from family-owned firms here.”

In general the move, which had been under discussion for over two years according to local market watchers, has been welcomed in the business community. Although it is too early to judge its impact, a number of large family-owned concerns have already expressed interest in partial listings.

Al Habtoor Engineering, part of the giant Al Habtoor Group, has said that it would consider opening its capital to fund further expansion throughout the region. Another large family-owned company, the Al Fahim Group, issued a press release saying that it would consider listing its real estate and hotel units under the new regulations.

There are also reports that Dubai Ports World, which is part of the state-owned Dubai World group, plans to list 20% of its shares on the Dubai International Financial Exchange (DIFX) before the end of the year.

“There are a lot of key industries that are completely absent from the capital markets in the UAE,” says Shahin. “The retail sector, among others, is one sector that people would really want to tap into, and we hope to see a wider range of listings available for investors.”

Others say that it will take time for newly listed family-owned groups to meet the standards of reporting and corporate governance that outside investors might expect.

“We need to have more liquidity in the market before more family firms can successfully list,” says Ahmed Hamad, a trader with the Prime Emirates brokerage in Abu Dhabi. 

“There are already opportunities for foreign or institutional clients, and I think that such clients would be reluctant to invest in family-run firms in which they have no control. It’s more likely that local investors and high net worth individuals from the GCC will invest in these types of companies, should they list.”

Agents of profit

Another potential regulatory change might trigger a different shift in the family business model. Many of the largest such firms in the UAE have built empires around the country’s agency laws, which stipulate that foreign companies wishing to establish new entities, or import and distribute their products on Emirati soil, must do so through a local partner. This partner must control at least 51% of the company.

The laws have been particularly beneficial to local families in sectors like retail and import distribution, where a kind of snowball effect can occur. Foreign firms looking to enter the UAE market are more likely to choose a firm which already has a track record in distributing similar goods, which reinforces their position in the market.

But earlier this summer, the UAE’s Minister of Economy, Sheikha Lubna al-Qassimi, announced the submission of a draft law which would permit 100% foreign ownership in certain sectors.

“The company law has been handed to the justice ministry and could be ready this summer,” said Sheikha Lubna in June. There is no news yet as to what sectors it may apply to, but, “preference will go to companies that help to attract cutting edge technology and bring major benefits to the national economy,” she said.

Such a change has apparently been on the drawing board for some time, although encountered opposition as it could potentially erode the power of influential local groups who play a part in decision making at the highest level.

“There is so much money and power vested in the large local families that any dilution will necessarily be slow,” said one Dubai-based analyst who declined to be named. “There is a lot at stake, and it will not be given up easily.”

The issue is also thought to have contributed towards the breakdown of talks on a possible US-UAE free trade agreement, which faltered earlier this year, whilst the World Trade Organization (WTO) has identified the need to amend the companies law in order to sustain foreign investment in the long-term. In the short-term though, FDI continues to reach new heights, growing from $10.9 billion in 2005 to $12.8 billion in 2006.

Going abroad

“There is so much money and power vested in the large local families that any dilution will

necessarily be slow. There is a lot at stake,

and it will not be given up easily”

Perhaps looking to the longer term, with fiercer competition in their small home markets, some of the UAE’s largest family groups are starting to go regional and even global — a move which might also encourage more firms to list or access the debt markets in order to fund their growth.

Leading this global expansion are the holding groups and investment vehicles which are ultimately owned by the ruling families of the UAE, and particularly those in Abu Dhabi and Dubai.

The Abu Dhabi Investment Authority (ADIA), for instance, is said to boast over $500 billion in assets generated from the Emirate’s oil revenues, which are the largest in the country. The vast majority of its investments are thought to be held outside of the GCC in relatively conservative bets such as treasury bills, prime real estate and financial services.

Dubai has been brasher, with investment arms like Dubai International Capital and Istithmar not afraid to make high-profile purchases in the US or the UK — including bids for football clubs, household-name hotels and major tourist attractions, with the best-known example being Dubai’s bid for a number of US ports, which met major political opposition and was eventually dropped.

Other family companies are following suit. UAE property developers and construction companies have been increasingly active across the Arab World, most notably in building the region’s “mega-projects,” while retail developers tell a similar story. The Majid al-Futtaim  Group, for instance, has brought the French supermarket Carrefour to various locations in the Middle East and wants to roll out more malls across the region.

Future horizons

Interesting times, then, could lie ahead for the UAE’s larger family companies. The head of one business intelligence agency in Dubai predicts a merger and acquisition (M&A) boom, a “giant card game” which would see assets swapped and consolidated as family conglomerates streamlined to focus on a smaller number of core activities which they can take regional or even global.

Yet the conclusion that most analysts make, and it’s a fairly natural one, is that any erosion of the families’ power in the UAE will be sluggish, even if the new companies law does come into force. It may in any case be counterbalanced by overseas expansion, through a greater willingness to access debt markets or float portions of their capital under the newly-introduced IPO rules. But as UAE firms continue to make high-profile acquisitions in overseas markets which permit 100% foreign ownership, external pressure is likely to mount on the Emiratis to grant foreign companies the right to do the same in the UAE. The trick might lie in balancing the interests of the wealthy, politically influential local families against the need to further open up the local market and sustain growth.

0 comments
0 FacebookTwitterPinterestEmail
Levant

Palestine Requiem for Gaza

by Executive Contributor
written by Executive Contributor

If figures ever speak for themselves, they certainly do so in the case of the Gaza Strip. Every self-respecting UN agency in recent moths has issued a report with the most alarming figures and warned of a devastating economic and humanitarian crisis, yet no one seems to hear. To achieve certain political goals, i.e. the downfall of the Hamas government, it appears Isreal has carte blanche to do what it must, even if it brings the entire population to its knees.

On September 19, the Israeli government announced it is henceforth regarding Gaza as a “hostile entity,” which would allow for cutting off water, fuel and electricity supplies. This is only the latest in a series of measures that have virtually isolated Gaza from the world. While international aid is allowed in, borders have been sealed and essentially. The economic and humanitarian consequences are overwhelming.

The United Nations Relief and Works Agency (UNRWA), the UN body concerned with the plight of Palestinian refugees, reported that 850,000 Gazans currently survive on emergency food hand-outs, while 87% of the 1.5 million population live below the poverty line set at a humble $2.4 a day.

The World Bank, too, has joined the chorus of alarm. “The pillars of Gaza’s economy have weakened over the years,” stated to Gaza Faris Hadad-Zervos, country director for the West Bank and Gaza. “Now, with a sustained closure on this current scale, they would be at risk of virtually irreversible collapse. A solution must be reached very soon, if not immediately. Otherwise, Gaza’s dependence on humanitarian assistance could become a long-term and comprehensive situation.”

Complete isolation

Yet another UN agency, the Office for the Coordination of Humanitarian Affairs (OCHA), issued a similar warning in August. It pointed, among other examples, at the fact that some 600 Gaza-based garment factories have closed down, laying off 25,000 employees, due to a shortage of raw materials. Likewise, as no construction materials are allowed to enter, nearly all of the 250 cement, tiles and bricks factories are no longer operating. The Palestinian Federation of Industries estimates that over 75% of Gaza’s of 3,900 factories have closed.

It is worth recalling that the 1994 Paris Protocol on Economic Relations between Israel and the Palestinian Authority stipulates “there will be free movement of industrial goods free of any restrictions including customs and import taxes between the two sides” and “the Palestinians will have the right to export their industrial produce to external markets without restrictions.”

Although the Paris Protocol also demands there be free movement of agricultural produce, free of customs and import taxes, OCHA has forecasted that Gaza’s farmers are likely to cultivate less than 50 hectares in 2007, due to shortages in raw materials and the unlikelihood of exporting any goods. During the 2006 season, more than 300 hectares of various crops were cultivated.

Finally, the UN Conference on Trade and Development (UNCTAD) estimates that the Palestinian economy has lost one-third of its production capacity since 1998. According to UNCTAD’s Mahmoud Elkhafif, the restriction of movement for people and goods from, to and even within the West Bank and Gaza over the past seven years “have effectively isolated the Palestinian economy from the rest of the world.”

The West’s problem with Hamas

The acute economic malaise of “the gateway between Asia and Africa,” as Napoleon once called it, is first of all caused by the Israeli reaction to the coming to power of Hamas in 2005, yet has its roots in Israel’s overall failure to implement the 1993 Oslo Agreement and 1994 Paris Protocol.

Israel, and most of the western world, will only recognize a Hamas government if the latter recognizes Israel’s right to exist, renounces all violence, and acknowledges all previous agreements, including the guiding principles of the Road Map. Hamas is willing to agree to a cease-fire, but refuses to recognize Israel in its current shape and form, while it refuses to lay down its arms as it has a “right to resist” the occupation.

gaza is like a schoolboy who receives his weekly pocket money from his father but, when he doesn’t behave, receives nothing”

In an attempt to force Hamas to accept the above conditions, or force the population to oust Hamas, Israel has not only closed down borders, but also refuses to hand over some $600 million worth of custom duties it collected on behalf of the Palestinian Authority. The West condones the policy, while it cut down on aid to the beleaguered Gaza Strip.

Custom duties and foreign aid are Gaza’s main sources of income. According to UNCTAD, international donor support between 2000 and 2005 averaged $1.2 billion annually, which was reduced to $900 million in 2006. According to Usama Hamdan, Hamas’ representative to Lebanon, one cannot really speak of economics in Gaza.

“Gaza is like a schoolboy who receives his weekly pocket money from his father but, when he doesn’t behave, receives nothing.” According to Hamdan, the problem of foreign aid is not only that the government is not free in deciding how to spend it, but also that Israel, for security reasons, has to grant permission for any major investments. “In 1996, Israel prevented the establishment of a Japanese factory to produce car parts,” Hamdan said. “That was an investment of some $300 million and would’ve provided some 6,800 jobs.”

According to the Oslo Accord, Israel has the right to control all in- and outgoing products from the Palestinian Territories, as well as its water household, while it should grant permission for any investments made in Gaza or the West Bank. The reality is that anything that could be a threat to Israel’s domestic production is not allowed. As a consequence, Palestinian industrial output has stayed virtually unchanged since the 1960s, representing some 8% of GDP.

The Paris Protocol formalizes the customs union with Israel that has officially been in effect since 1967, and calls for free trade. Already in 2001, Claude Astrup and Sebastian Dessus concluded in a World Bank study that the Palestinian economy since 1994 had only slowed down “due to poor implementation (…) as restrictions on the movement of goods continue.”

“All trade in and out of the Palestinian Territories must go through Israel,” Hamdan explained. “Gaza can still import through Egypt and profit from tax exemptions there. Yet no goods are allowed to enter through the Rafah crossing. All goods must go through Israel, where custom duties are due, before entering Gaza, where again duties are due. Not only does this practice make goods unnecessary expensive, it is Israel that collects custom duties on behalf of the PA, which it refuses to transfer.”

To illustrate the fact that the current crisis in Gaza, though aggravated by recent Israeli measures, has existed for many years, it is useful to return to 2003, when Raji Sourani, director of the Palestinian Human Rights Center (PHCR) in Gaza, warned me not to focus on the Second Intifada as the problem to solve, but on the situation that caused the 2000 popular uprising.

Restrictive policies by Israel

“The Israeli reaction has always been disproportional and excessive,” he said. “But the Intifada didn’t fundamentally change anything. By the end of the interim agreement on May 4, 1999, the Palestinian territories were suffering from total economic suffocation and de facto apartheid, as neither the Oslo Peace Agreement or the Paris Protocol was implemented.”

Sara Roy, Professor at the Center for Middle Eastern Studies at Harvard University, could not agree more. “The pauperization of Gaza’s economy is not accidental but deliberate, the result of continuous restrictive Israeli policies (primarily closure), particularly since the start of the current uprising, and more recently of the international aid embargo imposed on the Palestinians after the installation of the democratically elected Hamas-led government,” Roy wrote in her paper The Economy of Gaza.

“One only need to look at the economy of Gaza on the eve of the uprising,” she continued, “to realize that the devastation is not recent. By the time the second Intifada broke out, Israel’s closure policy had been in force for seven years, leading to by then unprecedented levels of unemployment and poverty.”

And all the while, the world has been watching in silence. As it is watching today how half the population would starve to death if there were not any food hand-outs, while some 86% of the population makes less than $2.4 a day. On top of it all, the population of Gaza is due to increase from 1.4. million today to some 2 million by 2012. Every UN agency, and even the World Bank, have warned the consequences will be disastrous if the Israeli restriction on movements of goods and people are not eased.

0 comments
0 FacebookTwitterPinterestEmail