North Africa

Tunisia: Plan in the Offing

by Executive Staff
written by Executive Staff

Tunisia’s 11th Development Plan has set out a road map to boosting growth through tax reforms, investment and economic restructuring.

In July, parliament unanimously approved the Development Plan, which had been presented by Prime Minister Mohammed Ghannouchi. It is the latest five-year economic plan, taking the economy into the second decade of the twenty-first century. The draft plan has been two years in the making, and Ghannouchi said that it was based on extensive consultation, an assessment of the results of past plans and a thorough analysis of developments at the national and international level.

The program combines economic reforms designed to boost investment and encourage and diversify the private sector, while boosting social services. In a move to encourage foreign direct investment (FDI), the Development Plan includes large-scale changes to the tax system. Corporate tax will be lowered from 35% to 30%, while businesses will be given a rebate equal to the increase on VAT.

Customs duties on a range of equipment and materials imported from certain countries which have free-trade agreements with Tunisia will be lifted, taking the proportion of duty-exempted imports to 80% of the total.

Strong growth

Tunisia’s strong GDP growth of 4.5% over the past decade is forecast to increase to 6.1% due to the expansion of the service sector, which will account for 50% of the economy within the next few years, and the restructuring and liberalization of other sectors and the economy in general. The Development Plan envisages that the increase in growth will help improve incomes. Per capita income grew from $2,300 in 2001 to $3,000 by the end of 2006, Ghannouchi said. The program foresees this increasing to $4,400 by the end of its remit.

The program envisages cutting unemployment to 13.4% by 2011, from 14.3% at present, made possible in part by infrastructure and industry projects.

The reforms to taxation and government spending, coupled with growth, should reduce the budget deficit to 2.2% of GDP by the end of 2011, from 2.9% at the end of 2006. The Development Plan sets out a maximum of 3.1% for the budget deficit, and 2.6% for the current account deficit (CAD). It also targets a reduction in foreign debt from 47.9% to 39.1% of GDP over the course of its implementation.

After parliament approved the 11th Development Plan, Ghannouchi emphasized that the coming five years will present challenges as well as opportunities for Tunisia. These include tougher international and domestic competition and potential increases in the price of raw materials.

“The targets set by the 11th Development Plan are ambitious and are meant to formalize Tunisians’ determination to achieve new results on the path of progress and prosperity,” he said.

The cost of the plan to the government is estimated at $45.5 billion, 35% more than the 10th Development Plan. The government aims to fund the package partly through $6 billion in foreign investments, with an additional $9.8 billion from international loans and partnership agreements with other countries in the Mediterranean and MENA regions.

Program is well costed

At a meeting to discuss the funding of the Development Plan, European Investment Bank (EIB) vice president Phillipe de Fontaine Vive announced that the financial arm of the EIB, the FEMIB, would be increasing its loans to private sector companies by 50%. Furthermore, the government is encouraging a diversification of private funding.

There is a consensus among economists that the program is well costed and that the country does not face serious external or internal risks over the next half decade, so investment will continue to come in and the government’s fiscal position will be strong enough to fund much of the plan. The US envoy to Tunisia, Robert F. Godec, recently described Tunisia as a “stable country with zero risks for foreign investments.” The recently-released African report of the World Economic Forum (WEF) also singled out Tunisia as an oasis of stability in the continent, a statement which should further boost investor confidence. While in the past Tunisia was considered a highly controlled marketplace, with strong repatriation controls, the system is changing rapidly as the government homes in on the link between trade and growth.

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GCC

GCC: US Demands Change from OPEC

by Executive Staff
written by Executive Staff

The United States Senate in late June passed a bill that would allow the Justice Department to sue the Organization of Petroleum Exporting Countries (OPEC) for price manipulation and high oil prices, but President George W. Bush has threatened to veto the bill, warning that OPEC members could retaliate by tightening the flow of oil into the US.

The bill, dubbed NOPEC or the “No Oil Producing and Exporting Cartels Act of 2007” would revoke the sovereign immunity OPEC members enjoy from being sued in US courts.

OPEC President Mohammed al-Hamli called the move by US lawmakers a dangerous step and added that decisions taken by OPEC were non-binding and that the organization will fight these attempts.

“It’s a really dangerous step. We will defend ourselves against these attacks,” Hamli told reporters at an oil conference in Turkey in June.

Latest official figures show that Americans are currently paying an average of $3.21 a gallon at the gas pump as oil prices continue to reach record highs. Prior to the Iraq war, Americans paid an average of $1.00 a gallon and blaming OPEC appears to score some points with the public.

“We don’t have to stand by and watch OPEC dictate the price of our gas,” Senator John Conyers, a Democrat from Michigan said. “We can do something about … this anti-competitive, anti-consumer behavior, and we are.”

The pressure’s on

The anti-OPEC bill was sponsored by Senators Herb Kohl, a Democrat of Wisconsin and Arlen Specter, a Republican of Pennsylvania. The House voted 345-72 to pass the bill.

“Price fixing by cartels is the worst violation of antitrust law and the principles of free competition,” Kohl told Executive. “If OPEC nations were private companies, their actions would be plainly illegal under antitrust law,” he added.

He thinks NOPEC would give the US government an important tool in responding to OPEC actions.

Although the White House has threatened to veto the measure, the bill may become law as both the Senate and the House have enough votes to override the veto. “The bill passed both Houses by more than the two-thirds needed to override a veto, 345-72 in the House, and 70-23 in the Senate,” Kohl said. But observers note that even if it became law, the Bush administration’s Justice Department would be the entity that would have to initiate any lawsuit.

But not all Americans support the action against OPEC. Local observers believe the problem with current oil prices is the combined increase in global demand and shortages of refinery capacity in the US. They say that congress is aiming at the wrong target. “It is the US refiners — who have made record profits — who should be called on the carpet and who every year about this time make their annual financial killing,” Robert Prince in Washington said.

“The arrogance this legislation conveys is unbelievable and completely irresponsible. As an American, I’m ashamed,” a US citizen who wished to remain anonymous told Executive. “Oil prices will continue to rise because demand has started to outstrip supply. This is the most basic rule of economics and our leaders don’t seem to appreciate it.”

Republican Senator Pete Domenici of New Mexico warned that the plan would hurt US consumers more than it would OPEC. “OPEC producers could just decide not to sell oil to us any longer,” he told reporters. “They would suffer the loss of some profits but our entire economy could come to a grinding halt.”

Although the official reaction from OPEC to NOPEC was perfunctory, Hamli said OPEC had successfully fought off two prior attempts by US lawmakers against OPEC and will do so again.

But supporters of the bill don’t believe that OPEC will react by cutting or reducing oil supplies to the US. “We would be surprised if OPEC member nations would want to stop selling oil to one of their best customers,” Kohl said.

“We would hope OPEC would respond to this law by ceasing the practice of setting mandatory production quotas designed to drive up the price of crude oil, rather than take the extreme step of cutting off oil supplies,” he added.

OPEC says the high prices are due to geopolitical tensions and refinery bottlenecks in the US rather than any shortage of crude supply. And most analysts do not foresee a decline in prices in the near future. On the contrary, what they predict is an extreme jump in prices by 2009 and 2010.

In late June, the New York-based Bloomberg News quoted Jeffrey Currie, a London commodity analyst at the world’s biggest securities firm, saying that $95 crude is likely in 2007 unless OPEC increases production, and declining inventories are raising the chances for $100 oil. Jeff Rubin at CIBC World Markets predicts $100 a barrel as soon as 2008.

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GCC

IPO Watch: Kingdom Come

by Executive Staff
written by Executive Staff

The Kingdom Holding initial public offering in Saudi Arabia last month was the much-anticipated climax of the flotation eagerness that has characterized GCC equity markets since 2004.

IPO lead manager for Samba Financial Group announced that 1.25 million subscribers submitted orders for the 315 million shares which Kingdom Holding put on the market at SR 10.25 ($2.74) per share, a total share offering worth about $860 million. Demand, according to Samba, reached $2.3 billion, representing subscription coverage of 264%.

Kingdom Holding will be the fifth-largest listed company in Saudi Arabia, but the company’s founder and best-known Arab entrepreneur, Prince Al-Waleed bin Talal, will retain over 93% ownership of the holding company with its local and international assets. Although offering merely 5% of Kingdom Holding’s stock for sale — substantially less than the 30% Prince Al-Waleed had talked about earlier — the IPO carried a message of trust in the Saudi Stock Exchange (SSE).

Putting a chunk of equity on the SSE where the mouth of the savvy global businessman Al-Waleed has been for a long time, comes at an important junction. While the primary market in the GCC is far from exhausted, the transmission ratio between the primary and secondary markets has come under scrutiny.

Underpricing has distorted the outlook

Last month, in a working paper for the the International Monetary FundAnalysts studying the IPO market evolution in the GCC between the start of 2001 and 2006 said that the abnormally high first-year returns of 47 IPOs presented a distorted picture. “The average initial abnormal returns of 290% exceed those found in the existing literature for both developed and emerging market IPOs,” the working paper said and related this high ratio to the massive underpricing of GCC IPOs.

Underpriced offerings have been the rule in the GCC and driver of immense oversubscription ratios for a number of reasons, including the practice of state-backed issuers to use the IPO mechanism for a bit of redistribution of oil wealth to retail investors and specific groups in the workforce, e.g. teachers.

This led to huge trading volumes and quick profits in first-day trading of many listed stocks. Latest signs, however, suggested that this phenomenon is waning. 

Low-cost airline Air Arabia, which undertook its IPO on the Dubai Financial Market, was among the region’s newly listed companies that were subjected to a more subdued market sentiment in first-day trading. The Sharjah-headquartered carrier, which saw the second-lowest oversubscription rate (1.5 times) in the DFM’s history in March, ended its first day of trading in July with an 11% gain — low by comparison with other IPOs but still better than what analysts had predicted.

“It will probably go below its AED 1 ($0.27) offer price when it lists,” Shehab Gargash, chief executive officer with Dubai’s Daman Investments had told a conference a week before the listing.

“I still hold to the view that it’s headed below one dirham,” Gargash told Executive after the stock closed its second day of trading flat.

“There are a lot of institutional and high net worth investors carrying more than they bargained for,” he said, referring to those who poured cash into the IPO, likely expecting a typical DFM oversubscription rate at least in the double digits, and wound up with a larger percentage of shares as demand was relatively low.

Air Arabia’s muted performance comes on the heels of the DFM’s former least-oversubscribed, worst-first-day performance title holder Gulf Navigation Holding, which listed in early February. GNH’s 3.5x subscription rate and 20% climb on its debut were a case in point for Amir Halawi, a researcher with UAE-based investment bank, The National Investor.

Halawi recently co-wrote a report predicting that first-day climbs for stocks listed in the UAE hitting the stratosphere were a thing of the past. In his report, he argued that investor behavior in the UAE equity market needs to shift from indiscriminate buying of underpriced IPO shares to acquisition of shares that have the best fundamentals. “We believe that some people have started losing money on some IPOs and this is going to become a structural phenomenon,” he told a local radio show in early July.

No uniform trend

Gargash, on the other hand, denied that there is a uniform trend. “I don’t think a pattern can be generalized,” from the first-day performance of Air Arabia and GNH, Gargash said. “I think the trend is there are two types of IPOs, the star IPO and the…less glowing,” he said, pausing during the telephone interview with Executive to search for the inoffensive put-down.

The differentiation is the perception of investors as to how well-backed by government intervention the companies are and to what extent governments show active support for these companies, Gargash said. GNH is entirely privately held and the emirate of Shajrah only holds a 17% stake in Air Arabia.

Regardless of the fate of first-day gains for UAE first-time floats, the IPO market in the six Gulf Cooperation Council countries has been off to a booming first half of 2007. The number of completed subscription periods of IPOs reached 22 by June 30, up 69% from 13 during the same period in 2006.

A study by Abu Dhabi-based investment bank Gulf Capital said as of July, between 2007 and 2010 there are as many as 76 more IPOs on the way in GCC countries alone, 41 of which already have a lead manager assigned.

The strong expectation for GCC primary markets has resulted in much-increased attention from international investment advisors and researchers. Where sources on IPO activity were limited to one or two local companies in the past — the online information provider Zawya.com leading the field — recent weeks saw a spike in coverage of Middle East IPOs, if not in a dedicated report then at least in a sidebar of global IPO coverage. 

“Middle East IPO growth is driven by high market liquidity, government privatization activities, continued economic prosperity and the massive government budget surplus created primarily by increased oil prices, the main source of the governments’ revenues,” wrote Oman Bitar in a recent report on IPOs by financial services company Ernst & Young, where he is managing partner of Middle East advisory services.

The three researchers, Abdullah Al-Hassan, Fernando Delgado, and Mohammed Omran who looked at the GCC equity markets for the IMF said in their paper that the extremely high positive returns of recent IPOs here come down crashing when the perspective is adjusted to first-year performance. Evaluating IPO returns in the GCC against general indices for the respective bourses, the researchers found that these stocks performed below their benchmarks in the first year of trading when initial returns are excluded.

According to the research, aftermarket performance under a one-year buy-and-hold strategy is positive when seen against the IPO subscription price but negative when first-day returns are taken out of the equation. “A strategy of investing one dollar in IPOs at the end of the first trading day and holding it for one year would have left an investor with only 77% to 50% of the return of each dollar invested in GCC stock exchange general indices,” the academic paper said.

Moving toward realistic values

The consensus of professional market participants, analysts and researchers is that the GCC equity markets are at a junction where the experiences with underpricing, excessive subscription demand, and imbalanced first-day trading have to be mitigated by creation of more professional intermediaries and improved regulatory frameworks along with better information provision.

Recent IPO issues, including the Kingdom Holding offering, indicate that initial pricing — unless mandated differently by regulators as was the case for the Saudi insurance sector — is moving in direction of more realistic valuations.

The fixation on oversubscription is also lessening as IPOs were oversubscribed by an average of 6.5 times during the first half of 2007, about nine times less than the 60-fold demand that was prevalent in average oversubscription rates in GCC countries during the first half of 2006.

Institutional investors are expected to adjust with fair ease to the changed trends and prepare themselves to set their portfolios accordingly. Concerns are stronger that retail investors will face harsher learning curves that require dismissing excessive expectations for first-day rallies and abnormal positive aftermarket returns of IPO stocks.

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GCC

Dubai: Sour-Sweet Trading Dreams

by Executive Staff
written by Executive Staff

After years of planning, the Dubai Mercantile Exchange (DME) opened for trading on June 1 with its flagship Omani crude futures contract. It’s a collaborative effort bringing together Tatweer, a unit of Dubai-government-owned Dubai Holdings, the New York Mercantile Exchange (Nymex) and the Sultanate of Oman.

The DME’s mission statement and declared rationale is to bridge the gap between international pricing mechanisms for sweet, or low-sulfur, crude and the Gulf’s more sulfuric (sour) oil, especially for trade with Asian oil buyers.

The price of sour crude from the Middle East is currently set in reference to inappropriate benchmarks — futures contracts for very different products traded on the world leading commodities exchanges, Nymex and London-based Intercontinental Exchange (ICE).

The idea of establishing a platform for setting its own benchmarks, enhancing profits, and managing risk in the trade of Middle Eastern oil is not new, it has just never worked before.

Part of Dubai’s goal as financial center

This dream to host the oil futures benchmarking is tied to Dubai’s goal of claiming the role of financial center between East and West through the Dubai International Financial Centre (DIFC). At its inception in 2002, the DIFC was labeled as tool to boost the contribution of the financial industry to the emirate’s GDP from 11% in 2001 to about 20% in 2010. While the DME makes reference to this target in documents on its website, it did not state how large a role the exchange aspires to play in this mission.  

Being the center for sour crude futures trade could prove to be lucrative, given that the DME’s fees per trade are around $1. Brent (ICE) and West Texas Intermediate (Nymex), currently see daily volumes average around 150,000 trades.

The value of having a role in the futures contracts for Middle East oil was underscored by the ICE when it beat the DME to the punch by launching a similar contract on May 21 to directly compete with the DME. There is, however, a major difference in that the ICE sour crude contract is cash-settled whereas the DME’s contract is physically — actual barrels — settled and backed by the governments of regional oil producers. (Although only about 5% of physically-settled futures contracts result in the buyer actually taking the physical product).

High daily volumes are the backbone of a futures contract, which is essentially an agreement to buy a commodity later at a locked-in price. Therefore the 100 contracts, or lots, a trader buys on Monday at $68 each can be sold on Tuesday if the commodity’s price climbs.

Any futures exchange is, however, extremely volatile and contracts are traded quickly, often to maximize profit (as opposed to investors in the equities market who typically hold an investment for a longer period of time). Traders want to be able to get in and out of contracts at a moment’s notice.

This liquidity, however, is the element previous Middle East oil contracts have failed to grasp. Muted trader interest that kept liquidity low killed the first sour crude futures contract launched in Singapore in 1990. The flops that followed have either completely failed or traded in such low volumes they have not reached the status of a price benchmark.

A Nymex solo attempt at a sour crude contract, launched in 2000, only saw two days of trading but remained listed for a year. The DME partnership is Nymex’s fourth sortie into the sour crude futures arena, while the ICE is making its first dash into this market, although it did, however, acquire the International Petroleum Exchange in 2001, whose attempt at a Middle East crude futures contract had turned sour in 1991.

On the DME, contracts are traded for delivery two months in the future. In its first month of trading, 39,571 Oman crude oil futures contracts changed hands — the equivalent of nearly 40 million barrels. This was slightly lower than the rival contract launched by ICE, which saw over 50,000 futures contracts, equal to over 50 million barrels, trade in its first month.

In an attempt to avoid the plague of illiquidity that downed other contracts, the DME has instituted a market maker program. This common practice brings industry heavyweights (like traders and investment banks) to boost liquidity levels, offering cash incentives to increase daily trading volumes to the 20,000 mark, after which, according to the DME’s website, the program will tail off.

Still too early to tell

“The initial target figure mentioned by the DME was 20,000 lots per day and while volumes were reasonably promising to start with, liquidity has since declined to under 1,000 lots on some days,” commented Paul Young, executive oil pricing editor for Asia with the commodities pricing firm Platts. “But it’s still way too early to give an overall verdict on the success of the contract and the DME is launching new initiatives intended to improve liquidity.”

“The Asian market welcomes the DME as a more transparent benchmark for pricing purposes. I think liquidity level at this point remains an issue, but it is still early days for the exchange,” Victor Shum, a Singapore-based energy consultant with the firm Purvin and Gertz, told Executive. “I think the general sentiment seems to be, ‘Well, let’s take a wait and see attitude.’ I think the DME has the elements there to be successful. I think most traders would like to see rising liquidity.”

Gary King, DME’s chief executive office emphasized the contract’s innovative elements when giving his outlook on the contract’s future. “We decided to align ourselves with a Middle East oil producer,” King told Executive a few days before the June 1 launch. “No one’s ever done that before.”

King said market research revealed customers who wanted a physically delivered contract and not the traditional cash-settled contracts and the contract launched in May by ICE. This offers a direct link between the paper market of the futures contracts and the physical commodity. In a bid to meet what King described as market demand, the DME set out to find a producer to partner with for the physical delivery.

Oman announced before the contract’s launch that it would base the price of all of its crude on the DME contract price, starting this month. In late June, in a move apparently timed to offer one last burst of good PR before the launch, the Dubai government, which essentially has about a one-third stake in the bourse, made the same announcement regarding its oil contracts two days before trading began.

Government backing from producer nations for the contract will certainly help lend it credibility, but the exchange has only rallied two middle-weights — Oman and Dubai — in a region of heavy-weights, John Sfakianakis, chief economist with Saudi Arabia’s SABB bank, told Executive.

Oman has 5.5 billion barrels of oil, according to estimates from the U.S. government’s energy information agency. That’s the second lowest level of reserves of the six Gulf Cooperation Council countries behind Bahrain with less than one billion barrels.

The agency’s figures estimate the UAE has 97.8 billion barrels, but UAE government websites put Dubai’s share near 4 billion in 1991. Abu Dhabi sits on an estimated 94% of the nation’s reserves.

Some are being left out

“I’m a little bit skeptical because Abu Dhabi should be a natural participant in this,” said Sfakianakis said. The DME has approached other regional producers, but came back scant on direct commitments.

“We’ve talked to all of them, and I think the proof is as we go forward, the goal is to get the contract accepted as regional benchmark and overall the ultimate goal is to get it accepted as a global benchmark,” King said in an interview the day the exchange opened.

“I think what’s accepted is that it’s important to get first three contracts trading, demonstrate they trade in a robust fashion, that they’re liquid and that you get effective price discovery,” he added, referencing the two cash settled futures contracts that are spreads between the Oman crude price and the prices of WTI and Brent.

But what of Saudi Arabia, the 800-pound gorilla, which holds the second-largest oil reserves in the world? “At the moment you can safely say that Saudi Arabia is not involved,” Sfakianakis said.

An exchange of their own

Given the goals of other GCC nations to power up their own financial hubs, it is possible that bigger producers have not shown the urge to commit to the DME sour crude contract, because they would like to run a benchmarking exchange themselves .

One contender is Qatar’s IMEX, which has just appointed its first CEO. The exchange has been rumored to look longingly at sour crude contracts, in addition to jet fuel and liquefied natural gas futures. IMEX, just like DME, is not yet letting on what futures it plans to introduce in the coming months.

Competitive pressures notwithstanding, Dubai’s financial services sector is an undisputed pillar for the economies of both the emirate and the GCC, now and in future. The question is if it will be the Gulf’s sole central financial market place. According to numbers released in June by the Dubai Chamber of Commerce and Industry, finance in 2006 contributed to about 10% of the emirate’s rapidly expanding GDP — and thus would have to significantly outpace other growth sectors within Dubai if it really is to supply 20% of the emirate’s GDP in the next decade. 

The DME’s immediate concerns will be for developing its products and client base beyond the discounts it offered traders in the startup phase. Since early 2006, there’s been talk of a jet fuel futures contract, and King has said in interviews during the DME launch that this could be running by year’s end. He added that the exchange is keen on trading other commodities but was reluctant to give details.

“The market doesn’t take prisoners. We’re holding most of those ideas close to our chests at the moment,” he told Dow Jones on June 1.

Diversifying or bringing other producers on board or simply securing pricing agreements would be a boon for the nascent exchange, but is not an absolute make or break necessity. In the end, analysts argue the market is ready for change, but is there room in the market for two or more sour crude contracts?

“Not really,” says Michael Davies, senior analyst with the London-based futures brokerage firm Sucden. “At this early stage, there needs to be a focus on one.”

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GCC

GCC: Arabian Heights

by Executive Staff
written by Executive Staff

Four seem confusing, one is asleep, five are quite small, but three are standing tall, doing better than ever — ‘tis not a legend to a treasure map of Captain Jack Sparrow, this; ‘tis the Arab stock markets in the first half of 2007.

From the start of the year until the end of July, the indices of three major Arab equity markets — the Abu Dhabi Securities Market, the Kuwait Stock Exchange, and the Cairo & Alexandria Exchanges — have moved up beyond most expectations, with gains in the range of 20% to 25%.

The KSE and CASE achieved new historic records last month as their rallies drove them above the highs they had achieved in the days of the regional bubble that peaked between autumn of 2005 and February of 2006.

On a two-year performance check, CASE is up nearly 80% when compared with the end of July 2005, KSE is up 40%, ADSM, however, is down by a quarter of its index. Like its twin in Dubai and the neighbor in Doha, the Abu Dhabi bourse had its till now top valuation days in the second half of 2005. The largest of the region’s exchanges, Riyadh’s Saudi Stock Exchange, is down by more than 40% in two-year comparison and — after some gains in July — reduced its losses for the first seven months of this year to less than 5%.

The big black stallion in MENA markets in the first half of 2007 has to be Egypt. Its EFG Hermes Index tested the barrier of 75,000 points in the second half of last month, reaching more than 7% higher than its previous record highs from February 2006. In the way of dark horses, attention possibly deserved by the CASE case was sucked up by the on-going Dubai hype and the fascination of GCC as the main stage in the current Arabian economic miracle.

Credit Suisse favors GCC markets

Swiss wealth maker Credit Suisse (CS) blew its investment horn heavily for the Gulf last month in producing its debut in-depth report on the GCC markets, calling them “the most attractive globally on cash flow and dividend yield metrics.” Besides being very profitable, listed companies in the GCC on average have low debt. For enterprise multiple — the cost of a company expressed as ratio of enterprise value to earnings before interest, tax, depreciation, and amortization — the GCC are currently the cheapest markets worldwide, CS added.

The bank favored the GCC even more on basis of its latest oil price forecast; CS updated its outlook for benchmark crude (West Texas Intermediate) to average $62.5 per barrel through 2010. Its investment advice for GCC portfolio holders is allocation of 40% (market weight) to the SSE, 27% to the UAE (33% overweight), 19% to Kuwait (30% underweight) and 14% to Qatar (27% overweight against its share in the MSCI GCC index).

The weighting reflects that the Kuwaiti market has sped ahead of Saudi Arabia, Qatar, and the UAE in stock price levels. The Bahraini and Omani markets, which also rose to new record highs in recent weeks, do not figure in the hefty CS research and recommendation paper; their combined weight in the MSCI GCC index is only 2%, since they have significant size handicaps against their GCC peers with the exception of the region’s expatriate bourse, DIFC, that has nailed down the role as the world’s largest listing place for Sukuk but still rests in anticipation of its kiss of life for equities. 

With all the enthusiasm about Gulf equity markets, it is an enticing profitability play that a theoretical investor in index-tracking stock on the Egyptian exchange would embark on his 2007 summer holidays with his portfolio value about 120 percentage points ahead versus the Saudi bourse’s Tadawul All Shares Index if he bought and held shares from the end of July 2005 to the end of the same month in 2007. 

Full-month volumes on the Egyptian bourse in June reached 641,911 transactions and exceeded 1 billion traded securities. The value of trades was close to $5.8 billion, of which 4% were over-the-counter trades.

The first-half year rally of CASE was more than many local observers had dared to hope for at the beginning of 2007 when a magazine report in January said all that investors in Egypt could wish for were political stability and another market rally — “but that might be asking for too much.”

Regional investment firms, while taking a positive look on Egypt overall, expressed some polarization in their views on the Nile republic versus the GCC. In its regional outlook published in April, Dubai’s Rasmala Investments was bullish on CASE saying that the capital market is situated for gains because of privatization benefits and infrastructure investments.

Risk sensitivities

Shuaa Capital across town was a bit more kittenish, asserting its positive view on Egypt in the long term but stating the firm had pulled away from the market because of concerns over a valuation parity mismatch with the GCC and fears of Egypt becoming engulfed in a wider emerging markets sell-off.

In the three months since Shuaa published their spring assessment which named the UAE as their first market pick and the Saudi market the second, the Dubai Financial Market and the ADSM have done well with respective index gains of 14% and 16%. But the SSE moved up by barely 5%, and that only thanks an upward push in the second half of July, while CASE’s Hermes Index kept rolling with a three-month rise of over 13%.

As de-facto standalone paladin of the international equity game in North Africa (the much younger bourses of Tunis and Casablanca are no comparable partners at this time) Egypt has concerns over influence of international market swings on its prices, perhaps more so than the GCC where mutual dynamics can play out stronger.

People are getting more sensitive to risk, according to a ruling consensus among analysts who have gauged the credit, equity, and bond developments on large global markets in the past five months. This increased caution also could transmit distant market jitters to bourses in the Middle East in conjunction with the overall growing trend of global interaction of investor sentiments.

Coming as a timely reminder of this was Wall Street’s second-worst day of 2007 to that date on July 26 which sent the Dow lower by 311 points. Coming shortly after the New York Stock Exchange set new records, the market quiver radiated into other major markets where Japan’s Nikkei and other Asian bourses went lower the next day.

In their first responses, analysts evaluated the drop in the Dow as significant because of the high volumes of trade involved, which signaled selling by institutional investors. Without attempting any soothsaying about US markets in the remainder of 2007, the fluctuations on Wall Street are noteworthy symptoms of the increasing globalization of major equity markets that also was behind the year’s sharpest drop in the US market index at the end of February.

Back then, it was nervousness on China’s Shanghai market that triggered a wave of slides from the East to the West, ending with a drop on Wall Street. The end-July jitters traveled in the reverse direction, but immediately led experts to speak of a domino effect, raising just the same questions over growing international cross influences of market movements as the February tremor had done.

The Middle Eastern exchanges were not much affected by the February slump and because of the Islamic weekend had a time insulation benefit from the late-July drop which fell on a Thursday/Friday. However, intensification of global market developments and their influences on regional markets can be expected.

Credit Suisse July 2007 Top Stock Picks for the GCC

Accessibility to foreign investors needed

Looking at it from another angle, the accessibility of the region’s equity markets to foreign investors is worth wondering about in the positive sense. CASE statistics, in June, said foreign investors supplied 31% of the exchange’s total market value traded. An important factor in Egypt’s rally has been the economy’s platform of reform, privatization and improving of attractiveness to international players.

The announced intention to sell 80% Banque du Caire by the Egyptian government last month was a major case in point, leading — despite an outpouring of local concerns over selling out to foreigners — to immediate reports of international interest in buying the bank.

On the other hand, most of the top stock picks which CS presented in its review of the GCC markets had the drawback of not being open to foreign investors. Some blue chip stocks in the GCC that have been given mouth-watering upsides of well over 50% by local and international analysts are not available to non-GCC buyers.

In light of the performance differences between the privatization and diversification driven uptrend of CASE and the heavily oil-dependent path of the restrictive Saudi market, it is worth asking if GCC equity markets in 2007 have sacrificed significant valuation gain potentials through their access policies which barred sophisticated international investors from making moves on what they identified as the end of the correction phase that followed the initial Gulf equities bubble.   

Also an open question is to how much the Middle East can be knitted into a sufficiently coherent fabric of equity markets, trade and services. Over half a century of political proclamations of Arab free trade have not panned out, today’s private sector web of financial firms and investment relations is the intriguing show. To give just one small example for this integration, UAE investment firm Abraaj Capital owns 20% in Egypt’s EFG Hermes which owns 25% in Lebanon’s Banque Audi.

What is still missing is the joint platform of a true regional bourse — but with a load of political agreements needed and the ratio of magnanimous announcements to concrete steps in that direction waking musings on the actual international willingness to acknowledge the Palestinian state, all short-term bets on the joint Arab bourse option should be in Monopoly money.

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Levant

Turkey: Quo vadis?

by Executive Staff
written by Executive Staff

The solid victory of the Justice and Development Party (AKP) in Turkey’s July 22 elections has stunned many pro-secularists, and given rise to questions over the hold the Ankara establishment (especially the military) may still have in the country. The gamble Prime Minister Recep Tayyip Erdogan took in calling early elections seems to have paid off. The reaction from the markets has also been positive, with many hoping for continued economic reform and stability.

The 46.7% of the vote gained by the AKP is enough to see it take 340 of the parliament’s 550 seats — sufficient for a comfortable majority, though not enough for the required two-thirds majority needed to enact constitutional change or elect a president. The party managed to increase its share of the vote by 12.4% over its 2002 results, demonstrating its continued popularity with voters.

Two other parties managed to cross the 10% threshold and take their place in parliament: the center-left Republican Peoples Party (CHP) and the far-right National Action Party (MHP). The CHP, despite improving its vote by 1.5%, will have a smaller number of deputies than in the previous parliament, at 112, while the MHP returned from the political wilderness with 14.3% of the vote, giving it 71 members. The strong showing of independent candidates, especially in the south-east of the country, saw 27 get elected. It is estimated that 23 of these independents will come together under the Democratic Society Party (DTP) umbrella, considered a “pro-Kurdish” grouping (an allegation the party denies). Another well-known independent candidate, former prime minister Mesut Yilmaz, also managed to get elected in his home province of Rize.

The Democrat Party (DP), formed after the failed union between center-right parties the True Path Party (DYP) and Motherland Party (ANAP), did poorly at the polls, getting just 5.4 % and failing to pass the barrage. Its leader, Mehmet Agar, announced his resignation after the poll.

Winners and Losers

The AKP managed to poll strongly across Turkey, being the leading party in all but 13 of 81 provinces, especially in the Central, East and South-East Anatolia regions, and the party even made a strong showing in the Black Sea area. The CHP was limited to its strongholds of Izmir, Mugla and Thrace, while the MHP managed to lead in Icel and Osmaniye in the south of the country. The other 6 provinces where the AKP was not the top party were taken by independents in the Kurdish-dominated south-east.

Other big winners in the elections were female deputies, with 48 being elected — double the number in the previous parliament. The spread of female representatives between the main parties works out as 28 for the AKP, 10 for the CHP, 2 for the MHP and 8 for independent candidates.

One of the female independents elected, Sebahat Tuncel, has been fortunate in receiving parliamentary amnesty for all crimes performed before or during office. Tuncel was placed under arrest in November 2006 under suspicion of membership in the Kurdistan Workers Party (PKK). She was released from jail days after the election and — as long as a vote to lift her amnesty is not taken by the parliament in the future — will enjoy the fruits of her new status while an elected member. Others will not be as lucky, with 59 deputies from the outgoing house now losing their immunity. The most significant of these is former DP leader Mehmet Agar, who may well face prosecution over his involvement in the 1996 Susurluk scandal, which helped bring to the surface the problem of the “deep state” in Turkey.

Recriminations

Following the poll, there has been much soul-searching on the pro-secular side as to the failure of other mainstream parties to make a dent in the AKP’s continued strong showing.

The military have been blamed in some quarters for sparking a crisis that actually helped to bolster support for the ruling AKP. The military’s “warning” in April appears to have been ignored by most voters, who were more willing to maintain the relative economic and political stability enjoyed during the AKP’s first term of government. As the deputy prime minister, Mehmet Ali Sahin, put it, “The constitution is clear. In Turkey, the politics are made by politicians and not by other institutions.” The AKP sees that the gamble it took in holding early elections has now given it the ability to take on many of the traditional secularist institutions such as the military and judiciary. It looks set to use its majority in parliament and success at the polls to reduce the power of these groupings.

Recriminations over the failure of the CHP to significantly increase its presence in parliament have seen renewed calls for the resignation of its leader, Deniz Baykal. One former party chairman, Hikmet Cetin, reportedly said: “It is not enough for Mr. Baykal to leave the CHP, he has to quit politics for the sake of both the CHP and Turkey.” Baykal responded after 48 hours of silence following the election by stating that, “such calls are a product of the media, which is seeking excitement nowadays.” The CHP-Democrat Left Party (DSP) alliance for the election also looks shaky, with some indicating that the 13 pro-DSP deputies may well leave the 112 strong CHP unity bloc. However, as the DSP would fall short of the 20 representatives needed to form an official parliamentary group, talks of a walk out may well be premature.

Others have blamed the center-right DYP and ANAP for dropping the ball in failing to unite, and thus capture a larger share of the vote from the AKP.

However, few of the opposition parties have pointed to the success of the AKP government over the past four and a half years as the true source of its electoral support. The 7.5% average annual growth experienced since the AKP’s coming to power seems to have gone down well. The markets responded very favorably to the AKP’s victory, with the Istanbul bourse surging to new highs on the day following the election victory. Moody’s, however, chose to keep Turkey’s credit rating at Ba3, citing worries over the upcoming presidential election process.

Whereto next?

One of the first things to go before the parliament will be the selection of a new president. The foreign minister, Abdullah Gul, on July 25 announced his renewed interest in the position, despite the political crisis this sparked which caused the early parliamentary elections. In his announcement, Gul said, “The people have approved my candidacy.” However, there have been calls for a compromise candidate to avoid a fresh political stand-off in the country. Erdogan, though supportive of Gul, said after the election he aimed to resolve the dispute over the presidency without causing further tensions. As to the proposed October 21 referendum on allowing the president to be elected by popular vote, as well as introduce two four-year terms for the post, constitutional law specialists are mulling over whether this has any meaning or not.

Another potential source of controversy, the Supreme Military Council (YAS) meeting in August, is set to be held before parliament convenes and elects a new president. The YAS meeting focuses on the promotion, reassignment and retirement of military officers, as well as the dismissal of those considered to be “reactionary.” As all the decisions will be approved by President Ahmet Necdet Sezer, there will be little AKP interference in the process, despite the committee being chaired by Prime Minister Erdogan, who has in the past expressed his reservations over the process.

In economic terms, the government will be looking to restart the temporarily stalled privatization process, and further reforms in line with IMF and EU requirements. The EU accession process will also become a topic of debate in the near future, though with Nicolas Sarkozy of France bolstering skeptics of Turkey’s candidacy, movement will be slow. Other foreign and economic policy issues, such as the PKK in northern Iraq, are likely to take a back seat until after the final political contests are played on the political field. And for Erdogan, it appears to be a game he is winning.

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Levant

Syria: Shame list has no impact

by Executive Staff
written by Executive Staff

Barely a week passes without Washington condemning Syria for allegedly engaging in some nefarious activity. The latest two hits came in the form of an American travel ban on a number of pro-Syrian Lebanese politicians, along with the release of the US Securities and Exchange Commission’s annual name and shame list of companies doing business in state sponsors of terrorism, of which Syria is an inaugural member.

Yet despite much political posturing from Washington, the raft of economic sanctions unleashed by US President George Bush have had little impact on US-Syrian trade. Trade between two countries tripled from 2005 to 2006 and is showing healthy gains in the first quarter of this year. Furthermore, America imports more than 10 times the value of goods from Syria as does Damascus’ high profile ally Iran, with total exports to the Islamic republic weighing in at a mere $17.8 million, compared to $209 million with the US, according to figures from the Syrian Central Bureau of Statistics.

Total trade between Syria and the US in the first quarter of this year hit $144 million, up from $72 million in the first quarter of 2006, figures from the US Department of Commerce show. As a total, in the six month period from the last quarter of 2006 to the first quarter of 2007, total trade reached $361 million, more than three times the amount during the same period a year earlier when the figure was only $116 million.

Analysts are chalking up the rise in trade value to unusual agricultural activity. Syrian farmers last year relied on expensive corn imports to feed their livestock after barley crops — the staple feed — were destroyed by bad weather. Nevertheless, the healthy figures indicate that for all the political manoeuvring, sanctions are having little affect on Syria which has traditionally traded with Europe over America.

“In terms of volume, bilateral trade has not been greatly affected,” Jihad Yazigi, economist for the Syria Report, said. “Syrian trade with the United States is centered on oil and food, commodities which fall out of the scope of the sanctions. The sanctions are not about bilateral trade. It’s a specific items ban affecting technology and aircraft parts.”

Sanctions have little effect

Furthermore, Syrian-US trade is sure to be higher than official figures show given that Syrian traders can easily source American goods through countries in the region such as Lebanon and Dubai. Jordan’s Free Trade Agreement with the US, the first signed with an Arab country, also has an unknown effect due to the practice of importing raw materials from Syria, repackaging them as Jordanian goods, and exporting the finished products to the US.

Syria has operated under some form of American sanctions system since 1979 when the country was listed as a leading sponsor of international terrorism by the State Department. Exports of dual use items — such as electrical components and software — were banned and American aid to the country was cut.

Relations thawed in 1991 when Damascus supported the US-led coalition to expel Saddam Hussein’s forces from Kuwait. Trade and investment flowed, with US oil giant ConocoPhillips investing $500 million in a joint oil and gas project.

America’s second war against Saddam brought relations to a halt when Syria refused to give her support to the venture. The awarding of a $700 million gas project near Palmyra to an international consortium which included the US based Occidental Petroleum in early 2004 was seen by some as an attempt by Damascus to win favor with the US. Bush, however, didn’t take the bait and Syria’s defiance over Iraq resulted in the Syrian Accountability and Lebanese Sovereignty Restoration Act (SALSA) which banned all exports except food and medicine, along with direct flights from between the two countries.

The assassination of former Lebanese Prime Minister Rafik Hariri brought renewed economic pressure on Syria. Two additional penalties were issued by the Bush administration late last year under Section 311 of the US Patriot Act, resulting in the Treasury Department severing correspondent accounts with the state-owned Commercial Bank of Syria (CBS). Bush also issued executive orders under the International Emergency Economic Powers Act (IEEPA) which saw the Treasury seize the US assets of certain members of the Syrian government accused of supporting terrorism and aiding the pursuit of weapons of mass destruction.

The latest move came earlier this month when the SEC added well-known companies including German electronics and engineering group Siemens, chemical and pharmaceutical group BASF, as well as banking group Deutsche Bank to its annual list of companies active in countries it deems as sponsors of terrorism.

While the 2004 sanctions resulted in an immediate drop in trade — US exports to Syria fell by $13 million a month after they took effect — Syria recovered its traditional trading position with the US throughout last year.

Syria’s business community has a proven record in operating under and around sanctions. Yet there is always hope that access to America’s markets and knowledge base may become easier.

“The Syrian people are always looking to establish positive relationships with all the countries of the world,” a spokesperson for the Damascus Chamber of Commerce said.

“Problems exist regarding exports and imports and there are issues surrounding transport, but there are proposals to develop trade relations between Syria and America and we in Syria want to deepen our economic relations with all our trading partners.”

US Trade with Syria — Figures from the Census Bureau

Trade relations could influence politics

There is a considerable upside to deepening trade relations with the world’s largest economy. Since finalizing an FTA in 2001, Jordanian exports to the US have skyrocketed from $229 million in 2001 to $1.42 billion in 2006. Jordan now boasts a trade surplus of $771 million, compared with a deficit of $110 million in 2001. Over the same period the US has sought to deepen her economic ties throughout MENA, signing trade agreements with Morocco, Bahrain and Oman.

Likewise, if Libya is any example, business relations can quickly deepen following an extended period of political tension. Before the reformed ‘rouge state’ was brought in from the cold, the US had negligible trade with the country. Last year, the US racked up $2.4 billion in imports and $434 million in exports, providing Libya with a $2 billion trade surplus.

Speaking at a Banking and Financial Services conference in Damascus, David Hale, chairman of Hale Advisers LLC, said Syria’s trade “could probably triple or quadruple if Syria were able to end sanctions and pursue an FTA with America.”

“If Syria could pursue a foreign policy which turned America from a foe into a friend, it could significantly boost its prospects for boosting trade and investment,” the global economist said. “The Assad government should therefore regard its foreign policy as a potential instrument of economic reform. It should attempt to capitalize on America’s problems in Iraq to improve relations with the Bush administration.”

A number of developments have hinted at better relations between Damascus and Washington. The issuing of the Baker-Hamilton report last December called on President Bush to engage Syria in finding a solution to the violence engulfing Iraq. The visit of US House Speaker Nancy Pelosi to Damascus in May renewed discussions of a possible easing of sanctions, while Secretary of State Condoleezza Rice’s meeting with Syrian Foreign Minister Walid Muallem was seen by many as an indication that America would adopt a more pragmatic approach to solving the region’s ills.

For the moment, however, most Syria watchers believe any improvement in relations between the two countries will have to wait until after the 2008 US presidential elections. Major obstacles still lie on the road between Washington and Damascus, primarily the international tribunal to investigate the killing of Hariri. Should Syria feel to be forced into non-compliance, more serious sanctions might follow regardless of who sits in the White House.

The end game for Syria is the Golan Heights

“The real threat of the tribunal is that it is a way for the Republicans to lock in an inimical relationship with Syria should the Democrats come to power,” Joshua Landis, author of the upcoming book Democracy in Syria, said. “Furthermore, any issues of non-compliance would result in a resolution which would likely force the Europeans to join the economic embargo. Their unwillingness to do so has greatly weakened the efforts of American officials to isolate Syria.”

For Syria, the end game remains the recovery of the Golan Heights. Its support for Hamas and Hizbullah — groups which the US considers terrorist but which Syria considers national liberation movements sanctioned under international law — will not end while this rocky outcrop captured from her in 1967 remains under Israeli occupation. “The white elephant in the room is always the Golan Heights,” Landis said. “So long as Israel and the United States believe that they can deny it to Syria and get Syria to cooperate in Israel, Palestine and Lebanon, then they have rocks in their heads.”

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Lebanon

Beach resorts: Bathing suits trump bombs

by Executive Staff
written by Executive Staff

Contrasting images portray the tourism business in Lebanon this summer. Visit the downtown of Beirut or the shopping areas popular with guests from the Gulf region, and business is minimal or at best, slow. But go to seaside resorts along the Lebanese coast from the north to the south and you see crowded beaches with vivacious parties that start from, or last into, the morning.

Downtown Beirut, which at this time of the year in stable political conditions would have been packed with Gulf Arabs and foreign tourists spending their money, is barely seeing visitors in the wake of political tensions and security threats that have gripped the country since December 2006.

The whole city should be buzzing with visitors; however, we can only see some expatriates returning to vacation in their homeland. Desperate retailers place their hopes on putting up sales signs and the restaurant scene in the city center has been compacted into a few remaining eateries that get by on serving lunch to the office workers in the area.

But the fun in Lebanon never dies — it just moves elsewhere. In the absence of foreign tourists and despite the uncertainties clouding their horizon, forever-young local revelers of all ages now take care of the tourism business domestically, with their love to party and enjoy their hot summer season.

“Every Sunday we are at the beach in resorts like Ocap or Pangea in Jiyeh. The ambiance is crazy there, places are always crowded during weekends, pool bars are full and loud music just make the place rock even in daylight,” said Rana Arakji and Rachid Chouceir, two young professionals who work in central Beirut but shun the city’s present tristesse when it comes to recreation. Towns to the south of Beirut like Jiyeh and Damour, where a year ago Israeli fighter jets thundered maliciously across the sky, this summer are attracting throngs of beachgoers and Arakji said she has no worries about security.

Beach resorts and water parks are satisfied as the 2007 summer season is moving along. On weekends, cues form at the entrances and many resorts are filled to capacity as locals seek the sun after a hectic week at work.

Locals making up for tourists

“This summer season started very good. We are not affected a lot by the political and security incidents. On Sundays we have almost 2,500 people in our resort,” said Sofie Edde, marketing executive at Edde Sands, a five-star Phoenician-themed 100,000 square-meter beach resort and hotel in Byblos.

Edde Sands CEO, Fadi Edde, believes that if the situation remains as it is now with no major security threats, the resort should witness a decent and reasonable closing of the season. “In 2007 we are dealing with similar numbers as in 2005,” he told Executive.

The life on the beaches defies the months of political instability, a string of bomb blasts, and the images of imported conflict in northern Lebanon around the Nahr al-Bared Palestinian camp where since late May the Lebanese army has been locked in a deadly battle with Islamist militants.

A bit further down the coast from ancient Byblos and Edde Sands, Elie Mechantaf, owner of Cyan Beach in Zouk, was very satisfied with the summer season’s takeoff in June and July. “Cyan Beach is booming this year and I cannot compare it to previous years because this is my best year in terms of performance,” Mechantaf told Executive in a phone interview.

Operators are keeping their fingers crossed that the season will be spared from a repeat of last year’s summer war, which cost the lives of 1,200 Lebanese and destroyed the tourist season.

“In 2006 we didn’t break even, the year was a total loss,” said Fadi Edde. “In our work, we consider May and June as pre-opening cost, and we expect to make revenues in July and August, so when you spend money and don’t get any revenues, it will be a total loss.”

Encouraged by the good start of his 2007 season, Mechantaf said he is planning to expand by adding 8,000 square meters to his 15,000 square-meter resort. Banking on profit expectation of $300,000 during the three-month summer season, he bought land adjacent to Cyan Beach; his total investment in the expansion will be a minimum of $1 million.

Mechantaf said he is much more dependent on Lebanese locals than on foreign tourists. For pricey operators, expatriate Lebanese on home visits and tourists are important to reach profit targets. “Edde Sands depends on the buying power of the Lebanese expatriate community. They spend much more than local Lebanese,” Edde said. With 30% of typical revenues coming from foreign tourists and expats, the resort expects that business this year will be as good as, but not better than, 2005.

Beach resorts maturing

With the exception of private clubs restricted to members of local elites, the upscale beach resort business in Lebanon is young. Five to six years ago, the first beach-wise developers started investing in resorts that offered more than cheap lawn chairs, primitive umbrellas, and snacks. The exercise included investments such as carting clean sand to upgrade the shore, setting up boardwalks and acceptable shower facilities, and most of all, building atmosphere and image for resorts carrying names such as Oceana, La Voile Bleue, La Guava, Janna Sur Mer, and so forth.

As they are showing their resilience, the hip places are proving this summer that they are more than the ad-hoc businesses with short-term leases that some of them started out as, even though legal questions over theoretically free beach access rights as well as environmental sustainability issues are ugly smudges on the pearly white vest of the whole industry.

DJ parties and special events in beach resorts also are now an important part of the entertainment staple in the country. In early July, an appearance by Dutch music animal Tiesto drew an estimated 20,000 to Edde Sands, making his concert a testimony to Lebanon’s vivacity in a challenging time — all the more so since the country’s two largest traditional music events, the multi-faceted Baalbeck and Beiteddine festivals, have been cancelled for the second year in a row despite assurances to the contrary made by tourism minister Joe Sarkis in May.

The only festival scheduled to proceed normally (at time of this writing) is Byblos Festival. Incidentally, its three-week program from rock to soul will take place almost on the beach; one of the four shows in the festival will be five performances of Zenobia, advertised as an epic by Mansour Rahbani that celebrates the queen of ancient Palmyra as “the first voice of liberation in the East” who refused to bow to the power of the greatest empire of her age.

Beach resorts in the north and south will decorate the rest of the summer with less weighty lore, having put a number of concerts with international DJs and local performers on their calendars. In the long run, resort operators bet on special events as increasingly important components in their income mix. Edde said organizing the Tiesto party brought double benefits of marketing the resort and giving his team experience in organizing and running a large show. This will lead more companies or individuals to want to stage events at Edde Sands, he said.

Having sun, local crowds, and parties going for themselves, trendy beach resorts seem to count among the few enterprises in Lebanon whose outlook for 2007 is not downcast. They hope, however, that the country will somehow progress to political normalcy and then things will be a lot better — even on the beach.

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Cover story

Conflict vs. Growth: Political Threats to a Bullish Region

by Executive Staff
written by Executive Staff

The Middle East looks like a paradox: On the one hand the high oil prices boost the regional economies, financiers are running out of investment projects, Gulf stock markets are recovering from the 2006 slump and one of the last “closed economies,” Syria, is opening. However, all this economic development occurs in the shadow of a whole number of political Damocles’ swords. External threats – an American war with Iran, which would affect the Gulf, and an Israeli-Syrian conflict that could draw in Lebanon — and domestic quandaries — ranging from out-of-control population growth to sluggish bureaucracies and the Islamist challenges to ruling elites — could all spoil the current growth.

The twin forces of oil money and attractive economic policies have boosted the region’s economic outlook and general confidence. Mega-scale infrastructure, tourism, and real-estate projects — like the Abdallah Economic City near Jeddah and the Dubai Metro — are springing up, not just in the Gulf, but also beyond the boundaries of big oil-producers. In Damascus we find the Eighth Gate and in Amman there are the Abdali projects.

It’s easy to see from whence this bullishness came. In 2006, MENA oil revenues stood at a staggering $510 billion, $75 billion more than the previous year. With the barrel of oil hitting $75, oil producing nations are swimming in a cash surplus, while remittances and foreign direct investment (FDI) to resource-poor countries have also risen to historic levels.

A time to boom

The current high oil price was caused, mainly, by expectations of continuing strong demand, especially from the fast growing economies of China and India, fears of supply disruption in a number of hotspots such as Iraq, Nigeria and possibly Iran, concerns about the reliability of major oil/gas supplies in Russia and Venezuela, as well as general capacity constraints on the hydrocarbon sector’s infrastructure.

OPEC even estimates that, because of increased demand (reaching 95.8 million barrels per day), falling supply in mature areas such as the North Sea and Mexico, and delays in new projects such as Russia’s Far East, there will be an oil supply “crunch” five years from now, leading to even higher oil prices. The same is forecast for the gas sector.

Buoyed by this dramatic rise in hydrocarbon revenues the MENA region’s real GDP growth stands at 6.3%, up from 4.3% during the first half of the decade, and an even lower 3.6% during the 1990s. In 2006, remittances, flowing from oil- to labor-exporting countries in the region, have reached $19.3 billion for MENA recipient countries, while the tourism sector saw solid growth of 14.5% compared to a 12.6% rate in 2005.

High oil revenues have also spurred FDI, which reached more than $24 billion in 2006, triple the 2004 level. The main recipients are Egypt, Lebanon, Morocco, Tunisia Jordan and the UAE. This intraregional flow of FDI is not stopping any time soon as it finds homes in energy, infrastructure, real estate, and tourism sectors.

Most of the region’s countries have managed to expand their fiscal surplus or, in case of state deficits, significantly reduce debt. In 2006, MENA current account surplus rose to 23% of GDP or $280 billion. This has had positive effects on the labor market, pushing the unemployment rate from 14.3% in 2000 to under 10% in 2006.

The World Bank, in a study released in June 2007, predicts that “prospects for MENA are potentially favorable for the period through 2009.” While an easing oil price might slow down growth among the producing countries, the non-producers are expected to compensate with stronger growth with the region holding steady at over 5%.

Investment data shows that the countries in the region are aggressively pursuing exploration for oil and gas deposits. The Maghreb countries are prospecting new blocks, Egypt is searching on its northern coast and southern border, Jordan — perilously dependent on external supplies — is investigating to exploit oil shale deposits, and even Lebanon has drawn up plans to develop offshore gas reserves.

Much of the surplus wealth is re-invested in the region. By 2010, the GCC countries plan to have spent $700 billion in the MENA oil and gas sector, infrastructure, and real estate projects. Parallel to the oil price hike, the region has also undergone a phase of economic liberalization, partially owing to the demands of globalization and partially owing to the realization even by such nomenklatura states as Syria and Libya that clinging to the old ways would spell certain economic (and with it political) demise.

But wait

Yes indeed, the region is enjoying an economic prosperity last seen in the heydays of the 1970s oil boom. Everywhere one travels, from hyper-rich Dubai to “If-Egypt-is-3rd-World-then-this-must-be-6th” Khartoum, construction sites are buzzing, consumer goods are in demand, and confidence is high. Yet, there are clouds on the horizon. Politics — both global and domestic — could spoil the party and throw spanners into the spinning wheels of the economic boom.

This summer, hints by the advisors to George W. Bush that the U.S. government would like to “solve” the question of Iranian nuclear facilities (read: Iran’s attempts to produce nuclear weapons) before the administration leaves the White House in early 2009, were answered by Iran’s Supreme Leader, Ayatollah Ali Khamenei, with an ominous warning that in the event of a US/Israeli attack, the Islamic Republic would close the Strait of Hormuz, highlighting, yet again, the vulnerability of the Gulf’s main oil and gas export route. The body of water, at its narrowest point barely 34km (21 miles) wide, is the gateway for one-fifth of the world’s oil supply, which in 2006 amounted to 17 million barrel per day (bpd).

This particular threat — coupled, for good measure, with that of retaliatory attacks against US military bases in GCC countries — is certainly the darkest case scenario. Iran will no doubt think long and hard before it decides to jeopardize its good relations with the UAE and Qatar and the oil-hungry economic powerhouses of East Asia. Nevertheless, the chance that Tehran, if it feels cornered, may resort to such an act of despair, or that in the event of a military confrontation, elements within the Iranian army or Revolutionary Guard may take unilateral action, cannot be dismissed as the stakes are too high. In fact no one is taking any chances.

Securing alternatives

Pipelines that bypass the straits already exist while others are on the drawing boards. Because of already existing political upheaval and discord, however a number of already existing pipelines — like the Trans-Arabian Pipeline going from the Saudi Gulf coast through Jordan and Syria to Lebanon’s Mediterranean coast or a number of pipelines running through Iraq — are unusable.

Saudi Arabia’s East-West Pipeline, running from the Abqaiq oil complex on the Gulf across the peninsula to Yanbu on the Red Sea, is currently underutilized, as the shipments via Yanbu add up to five days to the travel time to the Asian customers, but could easily be brought to its full capacity of 5 million bpd.

In the UAE, Abu Dhabi’s state-owned oil investment company has just tendered the engineering and design contract for the Abu Dhabi Crude Oil Pipeline (ADCOP), which will carry 1.5 million bpd — over half of Emirates’ production — to the oil terminal in Fujairah on the UAE’s eastern coast, thereby circumventing the Strait of Hormuz. Another project, at this point only in the pre-planning stage, is the Trans-Gulf Strategic Pipeline (TGSP), which would run along the southern Gulf coast all the way to the Indian Ocean, connecting the “inner” GCC countries Kuwait, KSA and UAE with the “outer” member state Oman, eventually even including Iraq and Yemen and stretching up to 1,500 km. This Strait-of-Hormuz-Bypass is envisioned to carry as much as 5 million bpd.

Eventually, when the two new conduits are constructed in many years to come, those three pipelines could take two-thirds of the oil currently carried by tankers, thus cutting shipping costs, reducing traffic in the narrow straits and busy oil terminals and — by offering a safe route — ensure continuity of oil and gas exports.

But in the meantime all eyes are on the deployment plans of the American aircraft carriers and the training exercises of the Iranian navy.

Heating up

Further west, in the Levant, the external threat is not so much from a direct US intervention — with almost all ground troops busy in Afghanistan and Iraq, the Americans have only capacity for air-strikes and thus the cup of regime change has passed by the Syrian government — but for the time being the frontlines of the Arab-Israeli conflict could easily heat up.

We have already seen what a “heating up” can do in Lebanon, where in the summer of 2006 the economy was brought to its knees within a month and projected growth of 6% was cut down to zero. The Cedar Republic remains in the throes of internal quarrels and external interference.

In a way, Damascus in summer 2007 resembles Beirut 2006 before the Summer War: bullish about its economic future, with drastic upsurge in consumption, real estate developments and other FDI-fuelled projects springing up, yet all linked to the “IF no war breaks out” caveat. Investors, even those who like to take a punt with their diversified portfolios, don’t like war.

However, that might not be Syria’s biggest problem. Following the, albeit slow, economic opening, this infitah policy is not a sure bet. Out of an estimated 20 million people living in Syria today (including up to 1.5 million Iraqis), 1 million are now doing better than under the old socialist economy — but for the other 19 million the situation is remaining stagnant or getting worse in relative as well as absolute terms. Today’s conspicuous consumption — almost unheard of a decade ago — is not only a sign of the country’s economic prosperity but, in a society still officially cherishing social equality and solidarity, also breeds resentment among the have-nots. It remains to be seen if the Syrian government will be able to contain the social tensions in the way Egypt and other socialist-gone-capitalist countries of the region have, or if economic stratification will accomplish what secular and Islamist opposition never could: break the regime.

The other domestic challenge that Syria, together with a whole number of countries in the region, faces is that of rapid demographic growth not matched by a similar rate of job creation. Major oil producers like Saudi Arabia and Libya have the money to absorb job seekers into the state bureaucracies and pay them meaningful wages. Less affluent economies also provide university graduates with public sector employment, but at salaries that force many bureaucrats and teachers to take second jobs to make ends meet. Egypt is a prime, and through its film industry a well-known, example.

However, economic disaffection is brewing in all but the super-rich GCC countries. So far, many of the region’s regimes have benefited from a tight policing of their population and fear of the alternative — as cited in Iraq — has prevented the social upheavals predicted by political pundits at least every six months from breaking out. But the social problems — growing populations and rapid urbanization — will not just go away and can only be addressed by solid economic growth across all social strata.

Dealing with demography

In the Gulf countries, particularly Saudi Arabia, policies of “nationalization of the work force” are seen as a way out of the dependency on foreign labor and expertise and prepare the countries for the time “after the oil” when their economies will have to generate revenues from other sources. The smaller Gulf nations have minute populations relative to their GDP, whereas Saudi Arabia, with a current population of 22 million nationals (plus 5.6 million foreigners) and a 3+% population growth rate is facing a true conundrum. The strong rise in oil revenues has alleviated the pressure for the time being, but contrary to its brothers in the GCC, in terms of demographic challenge it belongs more in the “Egypt, Iran, Syria, Yemen” camp.

Across North Africa, the story is similar: demographic growth unmatched by creation of jobs that pay livable wages breeds discontent within the political system, regardless whether it is monarchist, republican, or whatever. Libya is the 18th-largest oil producer in the world with a small population of just 5.6 million. After it had “come in from the cold” and rapidly developed economic ties with the West — the UK signed a $900 million oil and gas exploration deal — domestic challenges replaced foreign politics as the No. 1 threat to the stability of Qaddafi’s regime with criticism about government policies and social disparities increasingly based on an Islamist worldview.

Indeed, throughout the region, variations on the Islamist theme of politics have become the most pervasive ideology. “New veiling” and the surge of “Islamic finance” alike are markers of this development. This political phenomenon is by no means homogeneous — ranging from the Islamic capitalists of Kayseri (Turkey), whose “If you are successful, God loves you” outlook mirrors the Protestant work ethic, to the anti-business extremists of the Taliban. However, regardless of the specific flavor, it is the followers of political Islam who challenge the status quo across the region and in countries as diverse as Morocco, Egypt, and Saudi Arabia.

It remains to be seen whether the powers that be can successfully accommodate or even integrate these Islamist currents. Turkey is a good example that business-friendly Islamists in power can actually be beneficial to economic prosperity in contrast to overly state-focused secular and military elites, whereas Khomeinist Iran proves that dirigiste Islamist regimes could cause the exact opposite — an ossification of the economic sectors. Of course, then there are the hard-line ideologists who oppose and attack anyone who doesn’t follow their own model. With these, dialogue is impossible and it is they who pose the greatest threat to prosperity, since they do not care about the economic, and thus social, repercussions of their actions, exemplified by the terror attacks against tourists in Egypt and the 2006 summer war in Lebanon. Both — one extremist group and one mainstream parliamentary party — carried out actions that had negative impacts on the local economies of their respective countries.

As all countries in the region, including Gulf states, are enlarging the percentage of tourism revenues within their GDPs, they become more and more reliant on their image as “safe” locations. Whereas the infrastructure can be quickly repaired after war or a terrorist attack, convincing tourists and businessmen that it is again safe to visit is a much harder task. Just look at Lebanon this summer. The place should be full of tourists but they chose to stay away.

Hard to predict

There is no inevitability of disaster. Indeed, warding off those threats doesn’t need magic and the region’s governments and business leaders have all the means at their disposal to shield their countries against outside perils and solve domestic problems.

Prudent allocation of the last years’ high revenues, such as strong debt-reduction and a build-up of financial reserves, give the region’s economies — and their political establishments — good positions to absorb unforeseen shocks and ward off possible threats. Apart from Iraq, Lebanon, and the Palestinian Territories, racked by long periods of political instability and war, most of the countries in the region should be able to weather even a worst-case scenario, on the condition that it is short-lived and followed by an almost immediate recovery.

However, they are not (yet) geared to withstand any major long-term instability.

As long as the current situation prevails — even with Iraq mired in occupation and fratricide, Iran playing with the nuclear option, the Arab-Israeli conflict nowhere near a solution, etc. — the region’s economies will continue to prosper. In fact, countries in the region have a vested interest to maintain a certain “balance of risk” — they profit from a political situation volatile enough to keep the price of oil at the current high but not too unstable to (1) threaten continuity of prosperity and (2) push consumers to look for alternatives to the Gulf’s (and North Africa’s) oil and gas.

The oil producers are keen to keep the price within a band of $50-80 per barrel (pb). If it drops lower, they will face significant financial problems for two reasons. The first is the break-even factor. Qatar, with a break-even price of $47 pb, would be the first to suffer. Oil economies Algeria, Saudi Arabia, UAE and Kuwait have more leeway, since their break-even price is between with $38.80 (KSA) and $22.40 (Kuwait). However, for the countries whose economies are essentially oil-based, any decline in the oil price automatically translates into a significant drop in GDP. Thus, a 10% decline in world oil prices would cut Saudi Arabia’s current account as percentage of GDP by 5.2%, and Qatar’s by 5.1%.

Non-producers, while having to foot larger energy bills, will profit overall from high oil and gas prices, since the vast amounts of petro-dollars that are flowing into their economies in the shape of FDI and remittances outweigh rising energy costs.

Furthermore, cautionary tales like those of Iraq and Lebanon, and incidents of Islamist terror serve the region’s political and economic establishments — often one and the same and in all other cases symbiotically connected — to curb domestic dissent and prevent it from gaining mass appeal. However, the only way to ensure that the current calm, after a decade of trouble in the 1990s, isn’t just a temporary lull before the next storms is if the region’s leaders rapidly create and maintain the frameworks for a self-sustained continuous economic growth. In order to achieve that, they have to significantly decrease reliance on the essentially unpredictable price of natural resources and put less emphasis on the state as the main driver and provider of social prosperity.

It remains to be seen if the balance of risk can be maintained.

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If you think getting a resident’s visa to the Emirates is difficult try being a pet!

by Executive Staff
written by Executive Staff

Years ago cats were the easiest pets to take on an airplane. They were small enough that most airlines let them on as hand luggage. Because of their size and disposition they were rarely scrutinized in the same way dogs are for health certificates and vaccine cards when they arrived at airports, particularly outside Europe. That has all changed, especially in the UAE.

Last year, the small matter of a war forced me to relocate my family to Sharjah. Getting the paperwork — work permits and residents visas — in order is always a headache but I groaned when I learned that pets, in this case our Siamese cat Simone, were not exempt and needed their own papers.

To avoid having your pet quarantined on entry here are the steps one needs to follow: make sure your pet’s vaccines are up to date. Then, take said pet to its vet and have a micro-chip implanted in either it’s neck or behind the ear verifying that the information on the vaccine card tallies. In Lebanon, the cost for the chip is around $40. Once that is done, you (or your vet) need to get a “Good Health Certificate” from the Ministry of Agriculture in the country you’re travelling which states that all the health documents are legal and that your pet is in good health. It is advised to get that document within five days of departure. In Lebanon, the “Good Health Certificate” costs around $20. Then you need an import permit from the UAE Ministry of Agriculture. To get that you need to fax the vaccine card, the Good Health Certificate and a copy of your passport. If you have no one in the Emirates to pick up the permit your pet will, on arrival, be detained at the airport until you can produce the import document, which costs AED200 or $56.

On landing in the UAE, you must proceed to the veterinary clinic in the cargo section of the airport to pick up your pet. If all your paper work is in order you need to sign a few more documents, pay an additional AED 100, ($28), and you and your animal are then free to leave.

To avoid putting Simone in the hold, I called all the airlines in Beirut that have flights to the United Arab Emirates to see which one would accept my cat inside the cabin. I didn’t think much of it because I am used to seeing cats, sitting in cages on their owners’ laps on aircrafts. I called about 10 airlines that make the Beirut Dubai/Sharjah run to learn that only Middle East Airlines (MEA) allows pets on board. All the others said that animals have to be checked in as cargo and put into a pressurized, temperature-controlled section in the cargo area of the plane. Poor Simone. They added that the rule was imposed on them by the Emirates port authority. The only odd exception other than MEA was Emirates Airlines which forbids all animals inside the cabin except falcons and even they need a ticket. This, by the way, is nothing new. In the mid-1980s when Emirates was in its infancy, I was lucky enough to return first class to Dubai from Pakistan. A lucky break, I thought as I turned left, past the curtain into the world of privilege. Or so I thought. I had been allocated a window seat and my fellow passenger was a cage with four hooded falcons returning from a hunting trip in the Punjab. Their masters were relaxing in the row in front of me.

Back in Beirut, I proceeded to the airport with Simone and his accompanying paperwork. The check-in was simple (apart from the $70 weighing fee) and the flight went well with Simone sleeping the entire journey. After retrieving our luggage in Dubai I thought we were home free but at the last control, one of the customs agents saw the cage and escorted me to an office. “Why had I been allowed to carry the cat on the plane,” I was asked. Simone was promptly taken away to the cargo area where I had to go and rejoin the formal process before I could take her home.

We brought our cat back to Lebanon with us for the summer and the vet at the Dubai airport assured us that all her papers were in order. He said that all we need to take her back is a re-entry card, which we got, and a new health certificate issued no more than 5 days before we travel. When we called our vet in Beirut to ask how long the health certificate will take, we were told that there are new UAE regulations requiring a blood test for rabies. This test cannot be done in Lebanon and the blood sample has to be sent to France, a process that takes eight weeks. I’m praying Simone is exempt.

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