Comment

Losing hearts and minds

by Nicholas Blanford
written by Nicholas Blanford

Is the government losing to Hizbullah in the battle of hearts and minds over reconstruction from last year’s devastating month-long war? Although much has been achieved in the past 12 months, the government, crippled by political crises may have also fallen victim to its own innovative plan to help rebuild the country. In the aftermath of the war, the government opted for a direct investment scheme allowing donors to adopt and supervise the spending of their funds on projects of their choice, thus bypassing the cumbersome — and often corrupt — bureaucracy of the state. It was a novel scheme and has allowed wealthy Gulf states to charge ahead with rebuilding war-shattered villages and towns in the south, earning gratitude from the residents who have named some main streets after Gulf rulers and hung banners thanking them for their support.

Prime Minister Fouad Seniora encouraged the Gulf state sponsorship of southern Shiite villages in a perhaps vain attempt to break the region’s reliance on the social and economic support of Hizbullah’s charitable institutions. But the loyalties of the residents by and large remain committed to Hizbullah for two principle reasons. First, the Shiites of southern Lebanon are remarkably resilient and have an enormous capacity to withstand hardship and adversity. Second, the increased political and sectarian polarization in Lebanon over the past year has strengthened the “bunker mentality” of the Lebanese — the instinct to retreat into the protection of the community when under threat. Given that Hizbullah is the paramount representative of Lebanon’s Shiite community and probably the most powerful political entity in Lebanon, there is little inclination among Shiites to drop their support for the organization.

Furthermore, the direct sponsorship scheme was not confined to Sunni Gulf supporters of the government. Iran is a highly visible donor state — the emblem of its reconstruction organization is a familiar sight in South Lebanon. According to the Los Angels Times, Iran has spent $155 million on reconstructing schools, mosques and churches, health clinics, electricity projects and bridges. The Iranian organization’s most visible enterprise is the enormous construction of new and improved roads throughout southern Lebanon. The daily said the Iranians have completed work on 504 roads and is working on another 76. The scale of the road building has raised eyebrows, particularly the four-lane highway that is replacing a rarely used and potholed minor road cutting through the mountains between the Litani river and Jezzine. It is widely known that Hizbullah has turned the area into part of its post-war military front line, and nervous Druze and Christian politicians believe that the Iran-funded road building is less an altruistic boon for the sparsely populated area, but a scheme to improve communications links between Shiite Nabatieh and the Shiite villages of the Western Bekaa.

Unlike other Gulf countries, Iran has declined to put a ceiling on its total funds for Lebanon’s reconstruction. It is assumed that hundreds of millions of dollars have also been channeled to Hizbullah’s social and charitable organizations. In a speech marking the first anniversary of the ceasefire that ended the war, Sayyed Hassan Nasrallah said that Hizbullah had spent $380 million to provide alternative accommodation for more than 28,000 families and financial assistance to businesses, agriculture and fisheries. Hizbullah apparently is planning to hand out another $4,000 per family who lost their homes on top of the $12,000 and $10,000 cash payments given in the wake of the war.

The upshot of the direct investment scheme is that most Lebanese in the south only see foreign countries helping them instead of the state. Southern Lebanon traditionally is a neglected area of the country, ignored by successive Beirut-centric governments. Therefore, many southerners believe that the government’s low profile in the war-battered district indicates the usual lack of interest by the state.

Indeed, the battle for hearts and minds between the government and Hizbullah has also moved to Beirut’s southern suburbs. According to government figures released in June 2007, some 87% of the housing units damaged or destroyed during the war have been processed with recipients receiving $52 million of a total $116 million due. However, in Beirut’s southern suburbs only 28% of homeowners eligible for compensation have been processed. That has spurred Hizbullah to charge that the government is deliberately foot-dragging on payments to an area of strong support for the party. Hizbullah has formed an institution called Al Waad to take charge of the reconstruction of the southern suburbs. It has just begun breaking ground in the neighborhood after the sites were cleared of rubble. The argument has been made that the government resented paying compensation in Beirut’s southern suburbs knowing that homeowners would hand over the money to Al Waad to fund the district’s reconstruction and about 70% have done so. That would be tantamount to the cash-strapped government providing funds to a Hizbullah project for which the Shiite party will gain the ultimate plaudits once the new suburbs are completed.

NICHOLAS BLANFORD is a Beirut-based correspondent and author of  “Killing Mr Lebanon – The Assassination of Rafik Hariri and its Impact on the Middle East” 

0 comments
0 FacebookTwitterPinterestEmail
Capitalist Culture

Rule of law – and the election

by Michael Young
written by Michael Young

One aspect of any form of capitalist culture — a culture of openness, cosmopolitanism, free minds and free markets — is the rule of law. With September 25 set as the date for parliament to meet and elect a new president, the rule of law, as embodied in Lebanon’s supreme legal document, the Constitution, is again under pressure.

The Lebanese never learn, it seems. Remember that the political crisis that Lebanon is still going through today, and which led to the assassination of the former prime minister, Rafik Hariri, in February 2004, began as a constitutional crisis. Syria decided that Emile Lahoud should have his presidential mandate extended by three years, and an amendment to this effect was forced through parliament. The episode prompted action at the United Nations, where the Security Council passed Resolution 1559 demanding that Syrian withdraw from Lebanon. The rest, as they say, is history — history that may soon repeat itself.

The reason is that many prominent Lebanese are now discussing amending Article 49 of the constitution yet again, this time to allow senior state employees such as the army commander, General Michel Suleiman, or the Central Bank governor, Riad Salameh, to stand for office. In an interview with Al-Safir in mid-August, the Maronite patriarch, Nasrallah Sfeir, acknowledged, albeit conditionally, that he would not oppose an amendment if it could help save Lebanon. He added, for good measure, “If the army commander can save the country, then welcome to him.”

Regardless of the merits of Suleiman or Salameh; regardless, too, of the intentions of the patriarch, who was a beacon of respect for the rule of law and the constitution during the years of Syrian hegemony, the fact is that amending the constitution to adapt to political circumstances is in an of itself a terrible mistake. Apparently, the lesson of 2004 has been lost.

First, when the document becomes a utensil to be transformed at will to satisfy parochial political objectives, it loses its inviolability. The repeated amendments applied to the constitution and to civil service regulations until 2005 discredited national institutions to no end. This may have been part of the Syrian strategy, in order to make clear who was in charge, but the practical result of this was that the state lost all credibility.

A second reason to avoid an amendment now specifically in the case of senior state employees is that there was a reason for imposing a condition that demanded a two-year hiatus between working for the state in a senior position and applying for the presidency. It was, quite simply, to ensure that high-level civil servants would not, while in office, use their positions to promote an electoral agenda. One might criticize this as not being inclusive enough, since government ministers are allowed to be presidential candidates. Still, Article 49 is a worthy step forward in the constitution, and merits being strengthened, not watered down.

Absence of the rule of law

In many respects the rule of law is at the very heart of most of Lebanon’s woes, and yet the Lebanese don’t seem to realize it — or rather they realize it, but are so overwhelmed by its absence that the problem is almost invisible by its omnipresence. Corruption, a dilapidated judiciary, the suffocating hand of political patronage, the picking and choosing of state authority, the existence of armed groups even more powerful than the army, are all examples of the things that the Lebanese cannot stomach, at least when they pay the price for such behavior. All are related in one way or another to the unwillingness of certain groups, all political affiliations included, to let the law constrain their actions.

That much is well known. However, the question that will be posed starting this month, as Lebanon enters the presidential election period ending in late November, is whether the country can gradually reimpose a liberal order based on the rule of law after a 32-year interval characterized by war and foreign intervention and domination. Lebanon may have gotten rid of Syrian soldiers two years ago, but the Lebanese are nowhere near building a state that can stand on its own. This is due in part to the continuation of Syrian efforts to return, but the majority, too, has been slow in introducing the kind of reforms that would encourage the Lebanese to have faith in a new political order.

Any amendment of the constitution should be rejected, not mainly for political reasons, but for existential ones. Lebanon will not survive as a liberal beacon in the Middle East if its constitution and system of governance continue to victims of political circumstance. A new president may come or not come, but what must be ingrained is a sense that things will no longer be as they were before. The constitution, like the law, is there to protect and be protected. It’s time to confirm that message once and for all as Lebanon prepares to take what is perhaps its most important step in the last three decades.

Michael Young

0 comments
0 FacebookTwitterPinterestEmail
By Invitation

A Passing Summer Cloud?

by Imad Ghandour
written by Imad Ghandour

Loans will go bad, deals will be canceled, fortunes will be lost, and the sudden end of cheap financing is wreaking havoc on the buyout market, reported Fortune magazine.

Just open the Wall Street Journal or CNBC, and you will hear these same headlines repeated everyday. The news about the financial meltdown is all over the media, with the death toll rising by the day. First it was the sub-prime lenders, then prime mortgage lenders, then hedge funds, then investment banks. Even some money market funds, the safest of the safest, are witnessing a rush of withdrawals.

The private equity party, in its latest round in the US and Europe, was a classic bubble waiting to burst. The combination of low interest rates, depressed stock prices, and rising corporate profits created ideal conditions for private equity firms to flourish. With the abundant supply of debt and highly leveraged acquisitions, even modest improvements in the company’s profits generated huge returns for the private equity firms and their investors. With huge returns being logged in, investors piled hundreds of billions — $404 billion in 2006 according to Private Equity Intelligence — into private equity funds. Fund managers, with ever larger funds to deploy, were paying huge premiums to snap up deals.

In 2002, when markets did not recover from the 2000 hangover, buyout prices averaged just four times cash flow (defined as earnings before interest, taxes, depreciation, and amortization, or EBITDA). But by early this year the average buyout price was clocking in at 15 times cash flow. In a typical deal a private equity shop would borrow more than 80+% of the purchase price, and the rest it would put up in cash. In some deals, even that cash was supplied by the banks through an innovative scheme called “bridge equity,” where banks were putting up part of the equity, in addition to 80+% of the debt!

Risk?!

Lenders thought acquired companies will never default. Hedge funds bought junk bonds on the margin with a lot of debt. Junk bonds were priced at historical low levels with sometimes 2-3% spread over 10-year treasury. And private equity players piled as much debt as possible on the acquired companies’ balance sheets with no buffer for a downturn. The motto of the party was: “Buy it if you can finance it.”

What about us?

There is a structural difference between us and them. Of the 25 transactions announced or closed by MENA funds within the region in 2007, no more than five were leveraged, and only one was leveraged to the levels mentioned above. Unleveraged transactions are unthinkable outside the region, but are the norm here. Returns are not derived from financial engineering, but from relentless economic growth that will keep on humming as long as the price of oil is above $50 per barrel. The liquidity crunch grounding the global financial system is watched with amazement by the bankers in the region, who are flooded with liquidity and have minimal exposure to mortgage lending.

Nevertheless, the psychological effect will be global and will touch MENA. Now that the global case is tainted, private equity players will work harder to raise funds and finance transactions.

But economic growth will keep top and bottom lines growing at a healthy pace, creating opportunities and seducing investors. Shareholders will continue with the trend of opening up their capital for private equity or any form of intelligent capital. Governments will move unabated with their privatization programs. Bankers will pause, add 50 bps to any transaction they are pricing, and move on. And those mammoth international competitors setting up in the region probably will cut their losses and close shop.

But one lesson should be learned. Risk will show up its ugly face, it is only a matter of time. Price it right, mitigate it when possible, and manage it on continuous basis.

Imad Ghandour is Head of Strategy & Research (Gulf Capital) and Board Member of the Gulf Venture Capital Association

 

0 comments
0 FacebookTwitterPinterestEmail
Banking & Finance

IPO Watch – Galfar goes public

by Executive Staff
written by Executive Staff

August’s star attraction in the regional primary market was a construction and engineering group from Oman. Galfar Engineering and Contracting started receiving subscriptions for its month-long public offering on August 12 and its IPO was the largest for the month both in absolute value — $156 million with 100 million shares offered — and even more so in relation to its home market, where the measure is the biggest new equity item in a good while.

Analysts from GCC-based finance firms valued the offering highly. Based on the performance of peers in the construction industry, two finance houses — Gulf Investment Services and Fincorp — estimated the stock’s upside potential at 47-49% over the subscription price, despite its significant issue premium. Included in the offering price of 602 Baizas ($0.165) per share is an issue premium of 500 Baizas, which will provide the company with working capital and funding for expansion.

The Galfar IPO is expected to be oversubscribed by significant margins when it closes on September 10. Subscription rates for other recent IPOs ranged from no oversubscription to more than 10 times the offered amounts.

Another ongoing subscription at time of this writing is for a Kuwaiti logistics firm. A startup company with equity participation from several big names in Kuwaiti trade, Amanah Warehousing Company invited subscriptions for 60% of its capital in a $111.7 million IPO between August 20 and September 17. Amanah’s IPO has a small issue premium and is open only to Kuwaiti investors.

Smaller public offerings ongoing at the turn of August to September are a $19.5 million capital raising effort by Syria’s Al-Aqeelah Takaful Insurance and a $4.2 million effort by a Jordanian construction supplies manufacturer, which was freshly established in June of this year.

In the business of IPO fundraising in the first eight months of 2007, two regional investment banks accounted for major chunks of lead managing in terms of value. Saudi Arabia’s Samba Financial Group and Dubai-based Shuaa Capital reported to have managed amounts of $2.77 billion and $1.6 billion, according to data gathered by business information provider, Zawya. This strong performance was based on the fact that the two firms succeeded in capturing the largest individual deals in GCC markets, including the Kayan Petrochemicals and Kingdom Holding IPOs in case of Samba and the Air Arabia flotation for Shuaa.

In terms of deal numbers, however, the National Commercial Bank and the Banque Saudi Fransi, both headquartered in Riyadh, accounted for just over half of the 23 flotation measures handled by the top ten lead managers up until end of August, with seven (NCB) and five (Saudi Fransi) completed mandates. The top 10 lead managing firms attracted a total of $6.5 billion in IPO business.

IPOs lag behind 2006

By Zawya’s count, some 45 companies this year so far debuted on MENA equity markets through IPOs or equivalent measures. The Saudi primary market with 20 IPOs was the most active, followed by Jordan with eight new entrants on the Amman Stock Exchange.

In year-on-year trends, 2007 IPO numbers appear to lag behind 2006 as exemplified in the case of Saudi Arabia’s Tadawul exchange. According to the 2006 annual report of the Saudi Capital Market Authority (CMA), the kingdom’s wave of going public peaked in 2006 with 62 public offerings for shares worth close to $7.5 billion in total.

As far as initial trading for newly listed stocks went, August was surprisingly strong, defying analysts’ views that the wide gaps between subscription prices and first-day performances are on the way out at least for this month — which turned out to be overall quite atypical in more than one way for a supposedly uneventful vacation time. Of five stocks with trading debuts between August 10 and August 27, the least reported share price gain to August 27 was just over 80% by newly privatized Moroccan real estate firm CGI.

These gains, however, are peanuts when measured against the explosive gains of three Saudi insurance companies. Allied Cooperative Insurance made a first-day show of jumping 997.5% on August 27. That, however, is still nothing compared to the incredible acrobatics of Alahi Takaful Company and Saudi Indian Company for Cooperative Insurance. Alahi, which debuted on August 19, made a one-day gain of 9.94% on August 27 to SR 213 per share.

The same day was Saudi Indian’s second day of trading. Incidentally, it was not a strong day for the Tadawul All Shares Index; it weakened by about 0.4% — but Saudi Indian advanced by 9.96% to a close of SR 132.50. Mind you, the rules for flotation of insurers in Saudi Arabia’s opening of this sector to private operators after a long wait stipulated that the issue price for any insurance stock is at a par value of SR 10 — so Allied Cooperative and Saudi Indian enter the region’s stock market annals with share price gains of more than 120 times and more than 200 times in their first two days and two weeks of trading, respectively.

For Saudi investors, this may be a good moment to note in their agendas that one more insurance company IPO is in the pipeline for the third quarter of 2007. Others, who are barred from buying on Tadawul because they are not legal residents of Saudi Arabia, may observe this highly localized insurance IPO bubble in bewilderment.

0 comments
0 FacebookTwitterPinterestEmail
Comment

Is Iran a real threat, or a paper tiger?

by Claude Salhani
written by Claude Salhani

Every which way you turn in Washington these days there is talk of war, all while the President George W. Bush is gearing up for a major Middle East peace conference this fall. Maybe the president is heeding the counsel of Vegetius of ancient Rome who said: “Igitur qui desiderat pacem, praeparet bellum,” or “whoever wishes for peace, let him prepare for war.”

Indeed, those who wish for war are plentiful along the banks of the Potomac. Starting with the Iranian opposition, who have been at the forefront of the leakage of information pertaining to the Islamic republic’s nuclear program.

Alireza Jafarzadeh, an opposition figure with close links to the Mujahedeen-e-Khalq, or the People’s Mujahedeen, the first person to reveal the existence of Iran’s secret processing sites, likes to remind the administration that Iran poses “a very, very serious threat to the free world,” and a country which wants “to extend its influence beyond its borders.”

Yet, much closer to the American president, also counseling for war is Vice President Dick Cheney. The hawkish VP has long preferred the strong arm approach in dealing with Iran over diplomacy. Murmurs around Washington of a possible US and/or Israeli military strike to destroy Iran’s nuclear power sites has recently gotten louder, even if a well-informed source told this reporter that according to senior US intelligence officials, President Bush has definitely decided not to strike any of Iran’s alleged nuclear weapons production facilities this year. That doesn’t mean that military intervention against Iran could not happen next year.

Cheney, it has been reported, wants to see punitive action against Iran before Bush’s term in the White House ends in January 2009. Cheney’s proposal, the sources say has not gotten approval, so far.

Of course a relevant question is whether Iran poses a real threat or is it just a paper tiger? The neoconservatives, their Iranian allies and the pro-Israel lobby, all support the idea of a military strike. However, a well-informed Saudi source told this reporter that the reality paints a very different picture.

“The situation has radically changed in the Gulf, and especially between the Kingdom (of Saudi Arabia) and Iran. Iran is at best a second-grade power and slowly slipping into a third-grade power,” said the source, who requested anonymity.

The source claims that Iran is on the defensive. Now it is Iran who is worried, said the Saudi source. Economically, Saudi Arabia is light years ahead of Iran. Saudi Arabia leads in oil production and exports. In a report carried by Arab News, Abdullah Jumah, the president and chief executive of Saudi Aramco, said the kingdom’s oil output reached 10.7 million barrels per day by the end of 2006. Aramco also added an additional 3.6 billion barrels of oil to its reserves in 2006 and boosted its natural-gas holding by 10.4 trillion standard cubic feet, more than double its initial target.

Iran, according to Oil Minister Kazem Vaziri Hamaneh, increased its crude-oil production by 55,000 bpd in the last year, bringing total output to 4.08 million bpd.

Additionally, unlike Saudi Arabia, Iran lacks the capability of refining its own crude, relying instead on foreign refineries, principally India. Which means a blockade of shipping lanes through the Straits of Hormuz would choke Iran, depriving it of its own oil.

Leading US military strategist Anthony Cordesman thinks Iran’s current military capabilities are “outdated” and “present little current threat to its neighbors.”

“Iran has exaggerated its military capabilities,” Cordesman, of the Washington-based Center for Strategic & International Studies, said during a recent speech to a group of military experts in Abu Dhabi.

“Iran is more focused on national defense than using military power to boost its influence in the region,” he said. Iran represents “a force that has to be taken seriously in the defense of its country, but it has very little capacity to project outside the country,” Cordesman said, adding that Iran’s nuclear program could someday pose a danger but that “any serious threat lies a decade or so away.”

Iran’s ballistic missiles use 1960s technology, making them only accurate enough to “probably” strike a large city, Cordesman said. Their small warheads might only damage a few buildings. The most sophisticated weapons system in Iran’s arsenal are defensive: the Russian-made TOR-M1 air defense systems just purchased from Russia.

Cordesman also contended that tensions in the Gulf were being worsened by US and Israeli leaders overstating the Iranian threat. “The real danger Iran poses would be in an asymmetric capacity perhaps, but not in conventional warfare,” he said.

But it is precisely this asymmetric capacity that has many US and European Union officials worried. Iran has the ability to disrupt — albeit temporarily — the oil flow in the Gulf. And it has the ability to create trouble in Lebanon through Hizbullah. One area of particular concern to the Europeans, primarily the French and Italians, is the vulnerability of the United Nations Interim Force in Lebanon, where Iran could demonstrate its power precisely through asymmetric warfare.

CLAUE SALHANI is Editor of the Middle East Times and a political analyst in Washington, DC

0 comments
0 FacebookTwitterPinterestEmail
Consumer Society

Sisters are doing it – For themselves

by Executive Staff
written by Executive Staff

Former jewelry designer Paula Naaman launched her scarf collection seven years ago with only four designs and ended up with more than 40 orders at her first trade fair. While doing a thesis on women imprisoned for prostitution, Sarah Beydoun decided to train them to make handicrafts and offer them a way out of the Game. Thus began the popular Sarah’s Bag label.

Hala Beydoun made her first batch of decorated cookies for her daughter’s birthday. Her friends wanted more. She quit her teaching job and now heads Cocoa and Co, maker of bespoke cookies.

Nada Zeini, a former architect-turned jewelry and accessories designer, used her first creations to decorate her kid’s Christmas tree. Her friends caught on and started wearing them as broaches under the Nounzeh brand (the first letters of her name in Arabic).

Mariana Jammal Bassatne, a communication graduate, decided after designing her second handbag that her passion for beautiful leathers would become her full-time job, while interior designer Nayla Saab-Takieddine’s jewelry, originally designed for her family, was such a hit among her friends that she launched the Or La Loi collection, or The Reign of Gold, a play on French term hors-la-loi originally meaning “outlaw.”

What all these women have in common is that their business expansion was prudent, relying on minimal investment, high margins and reinvestment. Sarah Beydoun started Sarah’s Bag with $200 and the socially conscious appeal of them being made by female prisoners. “I went to my first trade fair with 12 handbags,” remembers Beydoun, who launched her first collection from her brother’s garage in Qasqas before moving to her current store in Gemaizeh. “My friend Maria Hibri then convinced me to attend another exhibition and my collection was completely sold out!” Today, with her partner Sarah Nahouli, she sells “hundreds” of bags each year.

Moving beyond Lebanon

Paula Naaman’s business has grown by solidly ploughing back all profits into the business while Hala Beydoun’s operation followed a steady growth built on her “edible art,” as she likes to call it, which was so successful — her products are now available online, at one outlet, at fairs and upon direct order— that her husband quit his job as a fabric trader to work with her.

Beirut being as it is, all the women rely on word of mouth, websites, trade fairs and the press to spread the retail gospel, although many have moved beyond catering to Beirut’s jeunesse dorée and have begun to explore foreign markets. Most have made the leap via trade fairs and are now selling directly through regional outlets. Naaman’s brand, Paula K, generates 50% to 60% of its income outside Lebanon, mainly in Qatar, Kuwait and Abu Dhabi.

“Since the war, I would say that sales to international clients, made up principally of Arabs and Europeans, have gone up to 60%,” says Zeini whose designs are sold in Egypt, Qatar, Saudi Arabia, Italy, Germany, Belgium, Ireland and Greece. Sarah’s Bags can be found in the Emirates, KSA, Egypt, Kuwait, Qatar and Jordan with foreign sales making up 60% to 70% of the brand’s total turnover. Bassatne’s designs are also sold in the UAE, Saudi Arabia, Singapore, Bangkok, Athens, London, Qatar and Kuwait, with export sales making up 80% of revenues.

With success have come the harsh realities of the international market. The women entrepreneurs all had to learn about rules and regulations, especially when it came to food stuffs. Hala Beydoun had to adjust to the UAE’s stringent rules, while Bassatne faced a similar problem when she tried to export handbags made of banned exotic leathers. There is the additional concern about counterfeiting, which has made a few wary about outsourcing and recruitment. Jewelry designers like Saab-Takieddine have to content with fluctuating gold and diamond prices, while Lebanon’s unstable political situation is a burden for all.

According to figures provided to Executive, the annual Faraya Mzar design exhibition, held every August, which included 75 participants representing different crafts, generated more than $400,000, while total sales at the recent Amman Fair in Jordan, attended by 39 participants, amounted to $250,000. Nayla Bassili, dubbed the “Patron Saint of Lebanese designers” and the organizer of some of the biggest design fairs in Lebanon, underscores that Lebanese exhibitions are also sought after by Arab buyers in their quest for new designers. These fairs, which constitute a meal ticket for many new designers, are open only to Lebanese who design their own items and do not have a point of sale. This emphasis on products “Made in Lebanon” has contributed to modifying perceptions on the local and international levels as high-end customers increasingly wear locally designed items.

It is business after all

Success also means expansion and a more formal structure, not to mention the boring bits of running a business such as sales projections, accounting procedures and business plans. From the formal business model perspective, these women entrepreneurs have integrated some elements, while completely ignoring other aspects. They are heavily reliant on their core competencies, mostly introducing innovative products with a certain edge that appealed to particular market segments.

Most are still working on their structure and feel the need to calibrate work processes and organization in order to take their ventures to the next level. Others, however, feel content with an “artisan’s approach” as Naaman likes to put it. Nonetheless, their distribution strategy has been clearly delineated through hand-picking distributors, mostly exclusive boutiques. They have also done wonders in terms of identifying target market — most seek medium to high end customers with a definite sense of style — and customer relations as they entertain a very personal rapport with their clients on a local level.

The financial aspect is, however, less developed. As most businesses have expanded gradually and show solid cash flows, with profits mainly re-injected into the operations, little formal thought has been given to the matter. But now, as some seek to beef up their operations, this has meant in some cases turning to financial institutions. Hala Beydoun, who is currently preparing her business plan to open her new kitchen, has approached Kafalat. She told Executive that the government subsidized loan only covered her equipment, estimated at 25% of the total investment needed.

Elie Abou Khalil, head of retail banking at Byblos Bank, however, says that Kafalat loans go beyond equipment acquisition and perfectly correspond to the needs of this kind of entrepreneur. The particular line of credit is ideal for craftsmen and women, offering between LL 5 million to LL 600 million over seven years with a 6 to 12 months grace period and a 0% interest. Paul Chucrallah, assistant manager at Byblos Bank, believes that equity financing might present an interesting option for such businesses, although for now, the investments required were still too small for Byblos Ventures equity projects.

“Maybe they could all get together and form a syndicate?” he said.

Now there’s an idea!

 

 

0 comments
0 FacebookTwitterPinterestEmail
Editorial

Looking to the profits of tomorrow

by Yasser Akkaoui
written by Yasser Akkaoui

Why should the GCC consider investing in alternative energy? The Gulf nations have enough energy of their own for the foreseeable future, so why dismantle a lucrative and historic revenue stream?

There are, however, three powerful reasons why we should not ignore the current interest in alternative energy.

First, there are the investment opportunities, and last month’s launch of Standard & Poor’s alternative energy index — in which 50 companies from 13 countries with a combined market capitalization of $512.5 billion are represented — is the latest indicator of this potential. Secondly, there is climate change. Traditional energy producers cannot ignore the obvious and by now globally-accepted evidence that our world is changing — heating up and melting down — due to man’s over-reliance on fossil fuels. Thirdly, there are security concerns. The Middle East cannot escape the fact that it is a region with many energy eggs in one creaky and volatile basket. There is every reason to diversify while this low-intensity tension continues to simmer (especially as it looks as if Iran has only got one kind of alternative energy on its mind).

Unlike the technology boom, this is one boat the Arabs cannot afford to miss and it would be fitting that a region so synonymous with energy and wealth should use some of this wealth to lead the way in developing new, safe and responsible ways to power our earth. Then surely the shining new emirates could genuinely take their place at the developed world’s high table.

But they should not drag their heels. In the same way that Silicon Valley led the way for a technological generation, there is a new breed of US-funded research into alternative energy. President George Bush, hardly the greenest leader on Earth, has gone to Brazil three times in to discuss ethanol exports with President De Silva; and this from a man who normally only gets out of bed for Iraq, church and the future of the GOP.

Yes, there will always be resistance — oil producers and the world’s automobile manufacturers are the obvious grumblers as they have most to lose with the incursion of high additional costs required to incorporate newer and cleaner ways to do business. Speaking recently at the American University of Beirut, Nissan and Renault chief, Carlos Ghosn, no doubt wary of who butters his bread, reminded us that in a global industry which sells 65 million cars annually, it is hardly sound business practice to focus on the 300,000 hybrids assembled each year.

Then again, he, too, probably had no alternative.

 

0 comments
0 FacebookTwitterPinterestEmail
Financial Indicators

by Executive Editors
written by Executive Editors

Un Under the shadow of the non-event of St. Cloud that failed to generate any improvement to Lebanon’s crippling disease of politics, the Beirut Stock Exchange did what it has been doing in the first half of the year: hang on by its teeth, gums bleeding. The BSI capped at 1172.86 on Jul 26, July trading volumes were largely insignificant. Report-worthy movements in the banking sector included the competition among local banks to buy the domestic business of BLC from the Qatar Investment Authority and the acquisition of Banque de la Bekaa by Bank of Sharjah (BoS) for $25 million. BoS essentially acquired a license which it wants to use to build an operation in the Levant. As far as stock market confidence indicators go, first-half 2007 findings by the semi-annual MasterIndex survey gave 20.5 out of 100 points in consumer confidence to the BSE (data were collected in April). That’s a drop of 63% from six months ­earlier. Compared with other Arab markets in the survey, the BSE scored 60 to 74 points lower.

Beirut SE: Blom  (1 month)

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

n The Amman Stock Exchange Index closed at 5,682.08 points on July 26, some 177 points lower than its July 1 closing. In year-to-date sector performance, the financial services sector made the weakest showing, down by almost 11%. Hospitality, mining, and real estate are still up more than the general index YTD, banks are barely holding their ground. Heavyweight Arab Bank led trading volumes but its share price moved down 5% in the course of July. Noteworthy transactions included a $440 million block trade in stock of HBTF. Financial services firm First Jordan Investment, an affiliate of Kuwait’s Global Investment House, carried out the subscription for its $85 million initial public offering between July 10 and 23, about eight months later than announced in first plans for the step. Saudi food conglomerate Savola and real estate firm Tameer Jordan entered an agreement by which Savola is expected to acquire 5% of Tameer.

Amman SE  (1 month)

Current Year High: 6,543.67         Current Year Low: 5,267.27

 Straying upwards but a little from its plateau in the mid 3,500 points, the ADSM index closed at 3574.54 points on July 26, less than 20 points better than its 3,556.21 points at the first of the month. Summertime vacation pressures pushed the first-half disclosure season into high gear from early in the month while trading volumes tended lower. While in Dubai the new banking partners Emirates Banking Group and National Bank of Dubai proceeded with their merger to become Emirates NBD on rationale of gaining more oomph and regional profile, local champion National Bank of Abu Dhabi released second-quarter results that showed a 16% increase in profits to $160 million, saying that domestic banking was its biggest growth driver.   

Abu Dhabi SM  (1 month)

Current Year High: 3,705.32         Current Year Low: 2,839.16

The Dubai Financial Market closed at 4332.31 points on July 26, its lowest stand in two months. Earlier in July, however, it had touched its highest level in over eight months, at 4549.4 points. Air Arabia started trading with high volumes but limited gains. Emaar Properties, whose first-half results were to the dislike of share buyers, was sent 7% lower between its July 15 results disclosure and July 26. Early in the month, the DFM released a list of 13 most actively traded stocks in the first half of 2007. Including usual suspects in real estate, finance, communications and transport, companies on the “More Active Stocks” list are given a higher ceiling of 15% as daily fluctuation limit; other stocks have a ceiling of 5%. An important non-event from an international equity angle was the decision by DP World to drop its listing plans on the London Stock Exchange, judging bond financing more advantageous than the intended IPO. 

Dubai FM  (1 month)

Current Year High: 4,985.39         Current Year Low: 3,658.13

The Kuwait Stock Exchange soared on, reaching P/E levels that made some listed stock appear overpriced to regional and international analysts. Up by 24.08% from the start of the year, the KSE closed at a new record of 12,491.10 points on July 25. Its index gain in the course of the month amounted to 445.3 points, representing an increase of 3.7%. Financial firms provided serial cross border expansion announcements. Investment Dar received approval to establish an Islamic bank in Bahrain with $200 million capital. National Bank of Kuwait stated it is negotiating a deal to buy an unnamed bank in Turkey. Commercial Bank of Kuwait said it will buy 25% in a small Yemeni bank jointly with the IFC. Blue chip telecommunications stock MTC had a string of five sessions at the down limit after its second quarter profit disappointed investors but recovered some ground at the end of the month. On strong revenues from asset sales, KIPCO posted a 2.5 times higher net profit for the second quarter 2007 at $96.2 million.

Kuwait SE  (1 month)

Current Year High: 12,491.10       Current Year Low: 9,164.30

The SSE tried for another recovery before the full heat of the summer vacation. Although still trailing everyone else in the GCC as the only Gulf bourse ending July lower than its index level at the start of the year, the TASI improved rather nicely from 6,900.50 points on July 1 to a closing at 7,633.54 points on July 26. Sabic announced 42% higher Q2 net profit at $1.7 billion. The share price of Sahara Petrochemicals rose before a bonus share issue and slumped afterwards. Four new insurers entered the fold of listed firms and Prince Al-Waleed bin Talal’s Kingdom Holding, whose 5% initial public offering was covered two-and-a-half times by demand earlier in the month, announced its rather speedy start of trading on the SSE for July 29, which should make it the 100th company on the bourse. The Wall Street Journal, seemingly determined to ruffle some feathers in the desert kingdom, published a major story alleging links between Al-Rajhi Bank and terrorism finance.

Saudi Arabia SE  (1 month)

Current Year High: 11,709.10       Current Year Low: 6,861.80

The Muscat Securities Market appeared a tad under the weather toward the end of July. The index advanced from 6,314.17 points on July 1 to a year and all time-high of 6,504.18 points mid-month before softening to 6431.31 on July 26. The market is also up by 15% year-to-date. Oman United Insurance reported a first-half net loss of $5.2 million, on account of claims related to cyclone Gonu. BankMuscat reported net profit of $104 million (44% up year-on-year); National Bank of Oman and Raysut Cement came in with first-half profit gains of 46% and 35% while several smaller firms also posted good results. Kuwait’s Global Investment House made a bid to buy 51% in Omani pipe maker Al-Jazeera Steel Products.

Muscat SM  (1 month)

Current Year High: 6,504.18         Current Year Low: 4,718.74

The Bahrain Stock Exchange was not to stand behind its larger neighbor in Kuwait and produced a record performance, soaring from 2410.87 index points at the start of the month to a new historic peak of 2,503.03 points on July 26. Although at all-time best mark, commotion over the good performance was noticeably less than similar successes had been hailed during the 2005/2006 GCC markets boom. Market heavyweight Batelco contributed to the market performance with respectable profit gains and announcement of a new regional expansion strategy which it termed “niche-growth.” A corporate Kuwaiti shareholder in Bahrain’s largest listed bank, Ahli United Bank, received an acquisition offer for his stake from International Bank of Qatar, a privately-held commercial and retail bank in Qatar with four branches.

Bahrain SE  (1 month)

Current Year High: 2,503.03         Current Year Low: 2,047.28

The Doha Securities Market lost a bit of steam in the second half of July. After a climb from 7,432.54 points on July 1 to near 8,000 points on July 9, the index retreated in the rest of the month to a July 26 closing at 7569.59. The market is still among the weaker performers in the GCC this year, up by about 6% year-to-date. Industries Qatar helped the DSM to some rosy moments towards the end of the month with a substantive improvement in first-half profit. IQ and QTEL are among Gulf stocks favored by investment analysts of Credit Suisse. DSM regulators announced that they will from this month on post all information on stock trades by executives and board members in listed companies on the DSM website and market monitors. Internationally, Qatar attracted attention with its ambition to buy UK supermarket chain, Sainsbury.

Doha SM: Qatar  (1 month)

Current Year High: 7,997.53         Current Year Low: 5,825.80

The Tunisian Exchange registered negative movement that saw the Tunindex tumble 3% in the course of the month, from 2509.79 points on July 2 to 2437.21 points on July 26. After recording a historic peak in February, the bourse has not made any significant gains in four months and closed July on 4.55% up compared with the start of 2007. Market heavyweight SFBT traded lower after a 5-for-1 stock split on July 8; its share price weakened by about 12% in the two weeks afterwards. The market saw an initial public offering in July by industrial manufacturer Tunisie Profiles Aluminium. The company put 4.8 million shares, representing 16% of equity, on the market for $15.5 million. Subscription closed on July 24, with no oversubscription reported.

Tunis SE  (1 month)

Current Year High: 2,712.33         Current Year Low: 1,909.26

The Casablanca All Shares Index trained further in its quickstep sideways dance, starting the month at 11,374.11 points on July 2 and closing at 11,394.32 points on July 26. Initiating the exchange’s most significant primary market action in some time state-owned real estate firm CGI (Compagnie Generale Immobiliere) put 20% of its shares on the market in an initial public offering cum capital increase worth $428 million. Subscription closed on July 27. In industrial news, American paper manufacturer International Paper paid $40 million to buy the 35% stake in local sector company Compagnie Marocaine des Bois et Matériaux which it did not yet own.

Casablanca SE All Shares  (1 month)

Current Year High: 12,723.23       Current Year Low: 7,029.45

After a month-long rally which saw the Hermes Index scale a new record at 74,964.86 points on July 10, CASE closed at 74,390.06 on July 26. Volume performers included the Orascom group companies in telecommunications and construction. Orascom Telecom Holding placed a formal $120 million bid offer to sector company Raya on July 22 but the firm rejected the offer as too low. More attention grabbers were in the banking sector, where CIB was reported in newspapers to be negotiating a merger with Arab-African International Bank (owned mostly by the governments of Egypt and Kuwait), which would create a new strong domestic banking player with 8% market share by assets. CIB shares rallied. In another development, the government said it would bust the chains of Banque du Caire and sell 80% of one of Egypt’s top banks. The move values Banque du Caire at above $2 billion and replaces a plan of merging it with Bank Misr, which would have been too costly in terms of money, network restructuring, and employment impact. 

Cairo SE: Hermes  (1 month)

Current Year High: 74,964.86       Current Year Low: 49,705.98

0 comments
0 FacebookTwitterPinterestEmail
Gglobal indicators

Immigration in Arab countries

by Executive Contributor
written by Executive Contributor

The UN Population Division database delivers an overall picture of immigration in the Arab World. Aggregating all Arab countries gives a number of 20.9 million immigrants (thus including intra-regional migrants from one Arab country to another). An alternative source could be national data of the countries of destination.  The resulting figure is lower than that of the UN. In the 14 Arab countries that have published immigration data, the aggregated number of immigrants 13 million. For the same 14 countries, the UN estimate is 18.8 million immigrants, i.e. 1.45 times higher. If the Palestinian Territories and Jordan where the discrepancy is explained by UNRWA refugees being counted as immigrants by the UN are excluded from the comparison, 12 countries give an aggregated number of immigrants of 12,288 million to be compared with 14,983 provided by the UN (22% higher than national figures). The gap between the two sources (2.7 million) is partly, but not entirely, explained by the fact that UNHCR refugees are counted in migration statistics by the UN, but not by national sources.

Top Sugar Producers

More than 100 countries produce sugar, 74% of which is made from sugar cane grown primarily in the tropical and sub-tropical zones of the southern hemisphere, and the balance from sugar beet which is grown mainly in the temperate zones of the northern hemisphere. Generally, the costs of producing sugar from sugar cane are lower than those in respect of processing sugar beets. Currently 69% of the world’s sugar is consumed in the country of origin whilst the balance is traded on world markets.

n The five largest exporters in 2005/06, Brazil, the EU, Australia, Thailand and South Africa, are expected to supply approximately 76% of all world free market exports.

n Global sugar production in 2005/06 is estimated as 147.7 million tons, 79% of which is produced by the world’s top ten sugar producers.

Exports of information and communications equipment

Growth of exports has been particularly high for the countries that started with a low base in 1996 — Hungary, Iceland, the Slovak Republic and the Czech Republic, Turkey and Poland. Germany and especially South Korea stand out as countries which started the period with substantial ICT exports and which have seen them grow rapidly between 1996 and 2005.

By the end of the period, the OECD countries could be divided into three groups — United States, Japan, Germany and South Korea with high exports of ICT goods, a middle group consisting of the Netherlands, United Kingdom, Mexico, France and Ireland and the remainder with relatively low values of ICT exports. As noted above, however, some of these, such as the four Central European countries, are rapidly increasing the value of their ICT exports.

Among the five non-member countries, growth of ICT exports has been slow and steady for all except China which has experienced spectacular growth in exports of ICT goods. Between 1996 and 2004, the value of ICT exports from China have been growing at an average rate of 33% per year and in 2004, China’s ICT exports surpassed those of the United States.

Bottled Water Consumption

Per Capital

Global consumption of bottled water has been growing over the past five years despite the fact that in a many places, including Europe and the US, there are more regulations governing the quality of tap water than bottled water. Although the US leads the world in the consumption of bottled water, at 26 billion liters in 2004, the bottled water craze is a global phenomenon. According to Beverage Marketing Corporation, worldwide consumption reached 154 billion liters (41 billion gallons) in 2004, an increase of 57% in five years. On a per capita basis, Italians are the biggest consumers of bottled water, at nearly 184 liters in 2004 — the equivalent of more than two glasses a day. Second and third place in per capita consumption are Mexico and the United Arab Emirates, at 169 and 164 liters respectively. Belgium (including Luxembourg in the statistics) and France are close, with consumption just under 145 liters per person annually.

0 comments
0 FacebookTwitterPinterestEmail
Special Report

Banking & Finance FFA goes private

by Executive Contributor
written by Executive Contributor

In the past few years, bullish financial markets have witnessed an unequaled surge in profits, on which financial institutions have capitalized massively. In the MENA region, the constant income stream stemming from spiking oil prices has added to this phenomenon. Financial Funds Advisors (FFA,) a Lebanese financial institution, seems to be gearing up for the race to offer sanctuary for this surplus of Arab money. Quintupling its shareholder’s equity to $25 million, it has moved into the rarefied circles of private banking

Established in 1994 as a brokerage firm focusing on financial advice delivery and mutual fund distribution, FFA has recently acquired a specialized license from the Central Bank, allowing it to become FFA Private Bank. Its change in status, which required moving from the structure of financial institution and brokerage firm to a private investment bank, was mainly drawn from the need to build recognition among potential local clients and correspondent institutions.

“The status of a financial institution in Lebanon is the equivalent of an investment bank anywhere else in the world. It specializes in non-commercial banking services such as lending, fiduciary deposits, portfolio management and brokerage as well as advisory services,” explains Jean Riachi, chairman and general manager of FFA Private Bank. “However clients and other company stakeholders had trouble grasping our institution’s former status,” he adds.

Setting a precedent

Another underlying reason behind FFA’s change of status was rooted in some of the operation’s technical aspects. “Investment operation activities are for the most part off the balance sheet ,” says Riachi. “In terms of wealth management, a client can hold with us custody money, securities or cash under fiduciary. But we also need to offer him the option of term deposit accounts.”

In addition to providing equity and debt financing, the new license allows FFA to participate directly in companies with its own funds without reverting to outside investors.

“As a private bank, we can operate fully with some restrictions on the retail and commercial side of activities, such as short term credit and deposit, which in any case, we have, no real interest,” underscores Riachi.

Two years ago, FFA held talks with Central Bank governor Riad Salame who said he also believed it was time to strengthen areas such as the capital market, mutual funds and investment banking. “We informed the governor of our desire and commitment to consolidate our human and financial structure by increasing capital, inviting powerful shareholders and hiring additional staff,” Riachi recalls. “However, we did not feel comfortable with the FFA financial institution status.” One possible solution was to aquire an existing commercial bank.

“We went through some of the files on hand and came to the conclusion that much time and resources were needed to restructure any available operation, something which we did not really have. As a matter of fact, we were not really interested in the commercial banking activity.”

Another option was to obtain a specialized bank license — which imposed restrictions on certain operations such as short term deposits and credits. “Today, we’re the first independent private bank in the Lebanese market, where the investment banking activity is, for the most, affiliated either one way or the other, or fully owned by financial institutions and commercial banks. I believe granting a specialized license to a private group constitutes a precedent for the Central Bank,” says Riachi.

Given the positive sector reactions, Riachi feels the launch of FFA Private Bank will set a much needed trend within the Lebanese financial sector. “Commercial banks are commercial banks and this can lead to a conflict of interest when dovetailed with private banking,” he says. Riachi believes that commercial banks may adopt a less aggressive stance towards their investment banking arm and not allocate sufficient resources. “It is also a question of corporate culture, one that varies greatly between private investment and commercial banking structures, leading sometimes to undeclared conflicts, when the two operations are functioning within one framework. Today, I can see the sector increasingly moving towards banks splitting and spinning off these two activities.”

The FFA Private Bank depends on a revamped framework comprised of several core activities such as private wealth management, capital markets, asset management, corporate and merchant banking, online trading and a real estate division. According to Riachi, its independent structure grants FFA a competitive advantage in terms of mutual funds, allowing it to deal with many different providers and hand picking the best. The private wealth management arm is built on a strict approach to asset allocation comprising sector and regional diversification. “Of course, in terms of asset management we are free to focus on areas where we believe we can add the most value,” he adds. One of such examples would be the Lebanese real estate fund offered by FFA. In Georges Abou Jaoudeh’s opinion, FFA’s other general manager, the real estate development activity has proved to be successful and the company intends to duplicate the same line of business in the Gulf region. “We are working also on launching a real estate fund that will be investing in Lebanon and the neighboring countries,” he adds. “Since all of FFA Private Bank’s high-net-worth clients in Lebanon and the region are very sophisticated, customized financial solutions have been devised through FFA open architecture platform, in order to respond to all their needs,” says Abou Jaoudeh.

Hence, a product in relation with the equity regional market is under preparation. The company is supported by an online division dubbed FFA direct, a platform for online trading in equities, future markets and currencies, headed by Elie Khoury.

In a market dominated by major international players, Riachi has relied on the advantage of cultural and physical proximity FFA offers. “This advantage is backed by a reputation for offering the highest standard in terms of service and performance, as well as access to the best fund managers in the world.” For clients who are concerned by the unstable situation prevailing on the local level, Riachi believes that as security accounts are not exposed to corporate or country risk.

Carving a niche

“Regarding the corporate and merchant activity, we understand that competing with big players might be difficult. On the other hand, we believe that we can carve a niche for ourselves in the market of medium-size deals, which by nature are not handled by big industry names for reasons of economies of scale,” states Riachi. The FFA chairman nonetheless concedes that although the company may face much competition on the different corporate levels, the challenge is part of the job. “In the corporate and merchant banking sector, FFA Private Bank has yet to prove itself.”

FFA’s regional presence is secured through its DIFC subsidiary FFA (Dubai) Limited, a financial service provider that will essentially cover the GCC countries and will be fully operational by next fall. “Our marketing approach targets very high net worth individual with $1 million or more in liquid assets. Such clients are constituted for the most by business owners and we intend to capitalize on this specific factor to market our corporate and merchant finance activities,” says Riachi.

To build and expand its client base, FFA is looking into new investment tools. Abou Jaoudeh underlines that FFA is closely following the success and growth of Islamic financial  products in the region. “We aim through our asset management division to participate in structuring new financial products that will be sharia compliant,” he explains. “We are monitoring the Arab equity markets and believe that there is tremendous growth potential; consequently we are in the process of finalizing and launching a new certificate that will give exposure and participation, through one product, to all the upside potential of these markets.”

0 comments
0 FacebookTwitterPinterestEmail