Comment

The after-neocon effect

by Lee Smith
written by Lee Smith

Now that Paul Wolfowitz has been driven from his position at the World Bank, insiders here in Washington concur thatAmerica’s neocon moment in the Middle East is officially over. So what does the future, and the 2008 presidential elections, hold for American policy in the Middle East?

Iraq. Recently, the Democratic-led Senate rejected a bill demanding the White House set a timetable for withdrawing troops from Iraq. The Dems’ two top presidential candidates,Hilary Clinton and Barack Obama, both senators, voted for the bill, understanding that it was doomed to fail regardless. In other words, they are having it both ways, and the same sort of indecision and half-measures that characterized the current White House will undoubtedly define a Democratic administration as well. Are the Republicans any more focused? Perhaps, but that is besides the point. As Al Hayat’s Hazem Saghieh has explained, the problem in Iraq is Iraq. There is no solution in Washington.

Iran. Recently, Iranian-American academic Haleh Esfandiariwas arrested in Tehran, where she was visiting her elderly mother. Her boss at the Wilson Center in Washington is none other than Lee Hamilton, the less famous half of theBaker-Hamilton Iraq Study Group that counseled engagement with the Islamic Republic. So, does this gross violation of human rights mean that Democratic officials who have chided the Bush administration for not delivering a Grand Bargainto Tehran will finally understand the nature of the IRI? Of course not. More than a quarter of a century ago, theIslamic revolution declared war against the US by taking dozens of its citizens hostage at the American embassy andWashington ignored the message. Republican contenders likeJohn McCain and Rudolph Giuliani acknowledge the seriousness of the Iranian threat, but whether they can do a better job than the Bush team in waking the international community is another matter.

Persian Gulf. Could the US lose hegemony over the world’s most strategically significant piece of real estate, or what is effectively America’s sixth and greatest lake? Recall that it was under another Democratic administration thatAyatollah Khomeini came to power thus smashing one of the pillars of the US’s Gulf security strategy. The two men most responsible for this catastrophic failure, former PresidentJimmy Carter and his gullible National Security Adviser Zbigniew Brzezinski, are now regarded as two of the wise olds ages of the American foreign policy establishment.

Palestine/ Israel. So what if Hamas and Fatah are at war,Mahmoud Abbas has less charisma than Farfur the muqawama mouse and Ehud Olmert has lower approval ratings than any leader in Israeli history? The only facts on the ground that matter to the Democrats is that they’ve been attacking Bush for seven years – for following Bill Clinton’s advice! ThePalestinian leadership is not now willing or able to make peace and trying to force the issue is a waste of American time, money and prestige. Why won’t that matter to theDemocrats, even if they’re led by Hilary Clinton? Well, keep in mind that no matter how ineffectual in solving the crisis, the peace process is primarily a jobs program forAmerican policymakers and officials. Too many otherwise unemployable experts have too much invested in the“process,” so ordinary Arab and Israeli citizens will pay the price for Washington hubris with their lives.

Egypt. When Gamal Mubarak visited the White House last year on personal business, the White House gave him an earful of abuse, which he dutifully relayed to his father, president of the Arab world’s most populous state. Stop imprisoning non-Islamist political figures, Washington said, like al-Ghad chief Ayman Nour – a contestant in the 2005presidential elections. But the only thing that matters to the Pharaoh is passing the dynasty on to Gamal. The US StateDepartment prizes stability – i.e., the devil it knows – and has consistently defended Mubarak against a White House that at the height of its powers sought to ram much-needed reform down Cairo’s throat. It seems that now both Cairo and FoggyBottom will have their way and the regime will endure, as is, as unchanging as the Pyramids.

Syria. Anyone who wants to know the future ofWashington-Damascus relations should pick up Barry Rubin’s newly published The Truth About Syria. Here, the former fellow at the Council on Foreign Relations details how craven Western officials and diplomats have attended the Assad regime on bended knee, ignoring its longstanding support for terrorism targeting its neighbors in Iraq, Turkey, Jordan, Israel, thePA and, of course, Lebanon. Washington has deceived itself about Damascus’ intentions for close to 40 years now, including both Republican and Democratic administrations, and will continue to do so at great peril to their regional allies. It was only the much-reviled neocons who saw throughSyria’s ruse – without ever doing much about it.

Lebanon. See all above.

LEE SMITH is a Hudson Institute visiting fellow and reporter on Middle East affairs.

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Consumer Society

GCC – New direction

by Executive Staff
written by Executive Staff

The Middle East is cash heavy and banks aspire to modifythis reality, by weaning more and more of their customersfrom carrying paper money. Electronic cash is bettermanageable and more profitable for financial institutionsand thus the credit card industry is expanding into cardswhich they hope will appeal to regional customers –including a new variety of sharia-compliant credit cards.

As with all Islamic banking products, plastic is relativelyrecent. A Malaysian bank, AmBank, started foraying intoelectronic payments around 2001 when it launched its AlTaslif card in December of that year.

Hot on the heels of their Malaysian counterparts, banksoffering sharia-compliant financing options in the Gulf havebeen rolling out “Islamic credit cards” at an increasingpace since 2002.

Prior to the unveiling of Bahrain-based ABC Islamic Bank’sAl Buraq card in 2002, plastic money adhering to shariaprinciples available in the GCC was limited to debit cards.The cards were designed for use when traveling and backed byfunds in customers’ current or savings accounts, settled atthe end of every month and not allowing for spending beyondthe amount of actual cash a customer had.

Debit still rules over credit

Although credit card companies laud the Middle East as theworld’s fastest growing market for payment cards, the creditcard penetration in the region is relatively low and in mostcountries, debit cards are the rule. The sole exception isthe UAE whose residents account for one-third of credit cardholders in the region comprising the Middle East andPakistan, a study by MasterCard said.

Sharia-compliant banks had to overcome a number of hurdlesin developing cards that would appeal to their clientele.Islamic jurists consider standard credit cards haraam(sinful) for a variety of reasons. Charging interest orpaying interest is forbidden because it treats money as acommodity instead of an essentially valueless means forexchange. So the card issuers cannot charge interest, orribah, payments on cards whose balance is not paid in fullat the end of the month.

Furthermore, conventional credit cards often come withvariable interest rates. The amount one has to pay canfluctuate so when signing a credit card contract, one isignorant of the exact amount one will have to pay in a givenmonth. This uncertainty, or gharar, is also forbidden.

Finally, insurance policies linked to standard creditcards are, along with all conventional insurance, generallyconsidered forbidden because the concept itself isconsidered a form of gambling, or maysir. One can eitherbenefit from insurance when it covers insured losses or loseall they money paid in premiums if the need to cash in neverarises.

In order to tap into the market of people who want thebenefits of a credit card while still observing religiouslaw, Gulf banks have employed a variety of sharia-compliant finance concepts to enter the credit card arena.By charging different fixed fees the banks are able to stillturn a profit.

Based on the concept of ijarah, or lease or servicecharge, the UAE’s Emirates Islamic Bank, or EIB, has cardsthat let customers spend beyond their total cash bytechnically purchasing the item for them. The bank explainson its website that the card falls under the principle ofijarah by charging a yearly fee for the service of lettingcustomers hold an outstanding balance on the card. The fees,which in one example amount to $325 for a card with a $2,200(AED8,000) limit, can be paid quarterly.

The basic repayment structure is the same among thedifferent cards. Like a conventional card, users purchasegoods with the card, receive a statement of what they owe atthe end of the month and can opt to pay it all or pay aportion. The minimum due monthly is either a percentage ofthe amount owed – usually between five and 10% – or a fixedamount (AED100 for the EIB card in our example).

New concept

Saudi Arabia’s Samba financial group, another strongregional bank that has taken the Islamic business to heart,introduced its Al Khair card in 2003 under the tawaroqconcept. Under this concept, a cardholder who does not wantto pay the full balance on the card at the end of the monthwill agree to a tawaroq transaction in which the bankpurchases an asset at the cardholder’s expense. The bankresells the asset to a third party and the cardholder paysthe bank in set monthly installments.

Typically with tawaroq transactions, “the asset purchasedand resold is managed by the bank’s core banking system,”said a report released in April on sharia-compliant creditcards by the financial services company BPC Group. The assetcosts more than the amount due.

It sounds complicated and financing of purchases throughsharia-compliant credit cards can probably not be consideredlow-cost, although no independent statistics on averagecosts and consumer satisfaction with the cards in the youngindustry have been published.

There are also no numbers on the actual size of theIslamic credit card industry yet, but a growing number ofbanks is venturing this year into this segment, includingnot only regional banks but also multinational ones.

After First Gulf Bank started offering a sharia-compliant credit card under the name, Makkah Card, thisspring, it said that it “recorded high demand” fromcustomers for the product, which the bank called theregion’s first standalone, unsecured Islamic credit card.

In April, London’s Standard Chartered Bank threw its hatinto the Islamic finance ring by launching sharia-compliant services under the name saadiq, or truthful –including a fee-based card.

This incarnation of the cash-less payment system relies onthe service fee concept of ujrah. Under this system, insteadof paying an annual fee for the card, users pay a fee forthe use of borrowed money.

If a customer does not pay the full amount owed at the endof a month, the remainder goes into an account the bankestablishes. The remaining money is paid back monthly with aminimum payment due each month. Standard Chartered turns aprofit by charging a monthly maintenance fee each monthprovided there is money in the account.

Adding a twist, Saudi Arabia’s National Commercial Bankjust launched the first Titanium Islamic MasterCard, whichcomes with a cash-back program, cannot be used forun-Islamic purchases, and, according to one newspaperreport, invests a customer’s unpaid balance in commoditieseach month, keeping the profit.

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By Invitation

Implementing Paris III: what it takes

by Mounir Rached
written by Mounir Rached

As part of Paris III, the Lebanese government has promisedto embark on a number of fiscal reforms addressing primarilythe revenue side “in view of the relatively limited scopefor further cuts in public spending.”

The objective of these reforms is set in paragraph 92 of theParis III reform agenda. It aims at minimizing distortionsand enhancing equity and fairness in the distribution of thetax system.

Can these reforms achieve their objective?

Lebanon’s revenue structure relies heavily on indirecttaxes. Taxes on income and profits constitute only 14.5% oftotal revenues and 3.3% of GDP; while indirect taxes (mostlyVAT and customs) contribute 46% of the total. In spite ofexemptions, indirect taxes are, as generally recognized,regressive.

To recall, the most important tax measure taken recently wasthe introduction of a one rate and one stage value added tax(VAT) in 2002 that resembles more a sales tax. This isregressive tax in spite of exempting basic items andservices. It was a step forward to shore up revenue anddiversify its base. Its impact was visible and raised taxrevenue to a record 15% of GDP. However, it magnified equitydistortions as it was not accompanied by other tax reformsto enhance equity. Customs top rate, for instance, remainsat 90%, and customs provide 25% of tax revenue.

Making adjustments

Will the proposed new measures, as part of Paris III,impact significantly on revenues and its structure? The taxadjustments include VAT increase to 12% in 2008 and to 15%in 2010, and the tax on interest income to 7% in 2008.

These two adjustments, assuming a neutral effect oncapital and on the consumption pattern, could raise taxrevenue by 1.5%, accruing mostly from VAT. Raising taxrevenue to GDP to the desired objective of 18% by 2011 hasto be generated by administrative measures. These include:activating the large tax payer’s office (LTO), fullystaffing the Tax Roll department – a data base department,expanding the withheld tax registration, and adopting a TaxProcedure Code. A Global Income Tax without rate change isplanned for 2008. These measures are expected to raiserevenue by another 1.5% of GDP.

Direct tax collection on income (enterprise and wagetaxes) will, after all, remain very low at 4% of GDP by 2011compared to an unweighted average statutory rate of 10%.This implies the presence of either extensive tax evasionand/ or ineffectiveness in collection. An endemic problem inLebanon, which is not being addressed genuinely by any ofthe proposed measures except in the enhancement of coverageby tax withholding.

The revenue structure will continue to remain nearlystagnant, and to rely heavily on indirect taxes (50% oftotal revenue) and non-tax revenue (32%); without enhancingequity. A comparison of before and after tax income (basedon the family income distribution study CDS, 1998) showedthe ineffectiveness of the pre-1999 structure (a moreprogressive tax) on equity enhancement. The after tax incomeshare of the tranche with the lowest income (6%) increasedto 1.12% compared to 1.09 % of the total before taxes. Forthe tranche with the largest income (3.1%), the after taxincome share dropped only to 15% from a 15.9% share beforetaxes.

These indicators point out to the need to further strengthenincome tax share to enhance equity; especially in the caseof Lebanon, where income distribution is highly skewed. TheOECD countries, for instance, have moved in their recent taxpolicy reform towards reducing marginal income tax rates andplacing more reliance on VAT and other indirect taxes.However, income taxes remained the largest portion of totaltax revenue in these countries (25%, compared to 3.3% inLebanon). Their reforms set priority on fairness andsimplicity, and were based on public support reflected inthe platform of political parties.

New measures needed

In Lebanon, a more effective collection of income tax evenat the current rate structure (five marginal rates) couldraise revenue by another 6% of GDP, thus closing most of thefiscal gap needed to reduce debt accumulation. Income is thelargest tax base that needs to be fully tapped. Currently,civil servants and wage earners are the most compliant. Somereforms are inevitable, however, such as treating financialand on-financial enterprises equally by raising the rate onthe former to 21% and applying this one rate on both.

The direction of reforms in Lebanon needs to be based onpublic choice rather on a centralized decision induced onlyby the objective of raising revenue. An open public debate(or even a referendum) on tax choices could guide thegovernment and garner support for its decision.

Dr. Mounir Rached is a senior IMF economist and a founding member of the Lebanese EconomicAssociation. The views in this article don’t represent those of the IMF. Dr. Ghassan Deeba is Associate Professor at the LAU.

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Lebanon

Looking Overseas – Banks eye lucrative markets

by Executive Staff
written by Executive Staff

Bullish is not a term many would use to describe Lebanon’seconomy in the current situation, or indeed Lebanon’sbanking sector on a domestic level, but when it comes toLebanese banks expanding beyond their own borders, bullishwould seem to be the right terminology.

All the Alpha banks, along with a good proportion of theBeta banks, are getting in on the act, putting Lebanon backon the regional banking map after largely disappearing fromview in the late 1970s when the sector lost out to Bahrainand the UAE as a Middle Eastern banking hub. In manyrespects, the roller coaster ride Lebanon has been on forthe past few years has actually been positive for thebanking sector, compelling banks to diversify away fromLebanon and mirror the movement of Lebanese white collarworkers that have gone to the Gulf and elsewhere in theMiddle East in search of more promising employment.

As Semaan Bassil, vice-chairman and general manager ofByblos Bank put it, “One positive thing of the [July] warwas putting pressure on Lebanon to find new markets outside.This is very healthy, as before the civil war, the marketwas outside.”

Changes to the regulatory environment in the MENA regionhave also been conducive to the banks expansionaryaspirations. Syria’s banking sector came in from the cold in2001, allowing foreign and private banks for the first timein over 30 years; Sudan, Algeria and Egypt have opened up,and Qatar has becoming an increasingly assertive financialmarket.

An additional factor is that the Lebanese market holds fewpossibilities for serious growth. “All banks have reached asaturation point and cannot compete for more market share.The main driving force is [that the banks are] not happy inLebanon,” said Shadi Karam, Chairman of BLC.

Equally, it has only been in the last few years that bankswere able to viably entertain the idea of expansion. “Onlynow have banks reached a certain size to allow them toexpand overseas – whether in total assets or equity,” saidSalim Sfeir, Chairman and General Manager of the Bank ofBeirut (BoB). Chasing the money

The Central Bank has been key to the expansion, relaxingcross border lending and dishing out approvals to encouragethe sector to charter new waters. Indeed, with bank lendingto the government gradually declining – although still thebedrock of the banking sector – the Central Bank, under thesound guiding hand of Governor Riad Salameh, is under nomisconceptions about the potential for cannibalism if bankswere not able to seek new markets.

Equally, with inter Arab trade estimated at $20 billion,Lebanon would be foolish not to go after a larger slice ofthat pie, given its geographical positioning and commercialas well as retail banking strength. Lebanese bankers alsohave an added advantage over their internationalcounterparts operating in the Middle East – namely, anunderstanding of the culture and language as well as theknow-how of turning a banking sector around, as was the casein Lebanon after the civil war. Lacking such insight, someBritish banks that recently entered Egypt have read themarket wrongly in terms of products and services. But forLebanese banks, such attributes have played into thebankers’ hands, particularly in Jordan and in Syria. Aftertwo and half years in Jordan, Audi “could reach $2.5 billionin assets,” said Freddie Baz, advisor to the chairman atBank Audi. While in Syria, after two years of operations,Audi Syria reached some $400 million in assets. BLOM andByblos have also fared well in Syria.

The fledgling Syrian market is attractive to other banks,with First National Bank (FNB) an 8% stake holder in thesoon to be launched Syria Gulf Bank, and Libano-Francaise,BoB and Fransabank waiting for licenses. The Lebanese-Canadian Bank (LCB) and CreditBank also plan to enter theSyrian market. “It’s a natural expansion into Syria, as itwill benefit the sector and help to converge the two marketsto a common denominator,” said Tarek Khalife,chairman-general manager of CreditBank.

For Libano-Francaise – with 10% to 15% of its business inLebanon consisting of corporate loans to Syria, and 90% oftheir Paris operation catering to Syrians – the bank was“following our clients,” explained Walid Raphael, deputygeneral manager. The bank had planned to enter Syriaearlier, but shareholders in France opposed the move.

Cairo and beyond

Jammal Trust Bank (JTB) is also in expansion mode, planningto rectify their position in the Egyptian market afterlosing their license in 2005. “When the late chairman passedaway two months before the [Egyptian] Central Bankrequirement to increase capital, I couldn’t raise anextraordinary session because the one who passed away held99% of the shares. I had to wind down operations, but nottotally liquefy,” said Anwar Jammal, Chairman and CEO of JTB.

√Meanwhile, JTB is looking to expand to West Africa. “Ithink there is huge potential, be it catering to Lebaneseexpatriates or the locals. We’re also hoping, at a laterstage, to move into the Gulf,” said Jammal.

Other banks are faring better in Egypt, which is proving tobe a lucrative market. Bank Audi bought Cairo Far East Bankwith $47 million in assets, and after nine months, had $1billion. BLOM bought Misr-Romania Bank at the end of 2005for $100 million, $60 million in net equity and $40 million“in good will.” “The first year generated profits of $11million. For the first three months this year, it was $6.3million, so by year’s end, it should reach $15 million,”said Saad Azhari, BLOM’s vice chairman and general manager.After a year of operations, BLOM Egypt had 40% growth inlending and 25% in deposits.

BLOM, Byblos and Audi are already in the Gulf, and otherbanks are also moving to have a slice of the boomingmarkets. CreditBank plans to open offices in the QatarFinancial Center (QFC) and the Dubai Financial Center, aswell as a representative office in Kuwait. BLC, which wasbought out by the Qatari Investment Authority in late 2005and is well established in the UAE, is planning to open inthe QFC.

Driving the move to the Gulf is the surging number ofLebanese expatriates working there, using correspondingbanks or the Lebanese bank equivalent to remit money home.For instance, in 2002 there were some 3,500 Lebanese inQatar, there are now 35,000, according to Khalife. Suchremittances are highly significant to the economy, withworldwide remittances to Lebanon recently estimated at $5.2billion or equivalent to 25% of national GDP.

As Khalife remarked, “The middle class has disappeared fromview, but not from the banks, they are [working] in theregional markets.”

Risky business

While Algeria is proving a promising market for BLOM,Fransabank and the Lebanese-Canadian Bank with its 60% stakein Trust Bank Algeria, banks are wary of the recentlyliberalized Libyan market for political and bureaucraticreasons. Indeed, one of the top five banks recounted how anemployee wasn’t able to visit Tripoli to prospect thebanking sector as he was unable to get a visa. Sudan is alsoseen as potentially risky given the ropy peace and thetroubles in Darfur, but Bank Byblos is already present, asare the Lebanese-Canadian Bank with a 3% stake in Al SalaamBank, Fransabank with a 20% stake in United Capital Bank,and just last month, Bank of Beirut acquired an 18% stake inthe Saudi-French Bank.

Bank Audi is also optimistic about its presence there.“Sudan could bring millions of dollars in assets, its on theright track to increase significantly,” said Baz. Some banksare equally bullish about Iraq, with Byblos andInternational Bank operating in Irbil in the Kurdish areaand FNB angling to get in on the action.

“We are looking very seriously to open in Irbil, probably in2008 with a license for all of Iraq,” said Yasser Mortada,deputy general manager of FNB.

Other banks are hesitant to enter the market until thesituation improves and clearer regulations are establishedconcerning Central Bank regulations, whether from Irbil tooperate in Northern Iraq or in Baghdad to operate in thewhole country. Such issues recently warded off Bank Audi,and as BLOM’S Azhari put it, “we look at countries more andnot less stable than Lebanon.” Given the current situationin Lebanon, that is probably sound advice.

Nonetheless, the benefits of expanding outside of Lebanonare manifold. BLOM and Audi are now among the top 20 banksin the region in assets and ratings, with both estimating50% of deposits will come from outside Lebanon in the nextfive years. Already some 40% of the deposits collected byLebanese banks abroad are by BLOM, said Azhari, while ByblosBank’s foreign operations account for 20% of profits anddeposits, slated to reach 40% in the next five years. “It’sa win-win situation for well established companies to useLebanon as a platform to export products and services,” saidBassil.

Whether Lebanese banks will go even further afield as theygrow larger, banks are reticent to say. Libano-Francaisehinted that they were not confining plans to the MENAregion, and Sfeir said that the Bank of Beirut was activelyseeking acquisitions to establish new branches in differentmarkets.

Further expansion of Lebanese banks in the region isassured, although the country’s most regionally prolificbank, Bank Audi, was keeping quiet about its expansionstrategies. “Currently in the pipeline are three to fourother markets we are working on, either for a license oracquisition. We will hopefully close the year with a minimumof two new expansions in the region,” said Baz.

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GCC

Kuwait: Tapping into banking gold

by Executive Staff
written by Executive Staff

Kuwait’s banking industry has risen to new challenges and increased prominence in the past two years as the Gulf’s northernmost emirate was simultaneously tested by its ballooning revenues and by the deflation of the regional stock market bubble. With a handful of commercial and even fewer Islamic banks, the banking sector’s importance is considerably weightier than the number of players might suggest.

A clear indicator for the sector’s growing role in the national economic fabric is the position of banking in the Kuwait Stock Exchange (KSE), where the nine listed Kuwaiti banks account for close to one third of total market capitalization although they make up barely 5% of listed companies.

Banks were at the forefront of the upward trend on KSE this year, which outdid other Gulf equity markets in terms of stable improvements and overall performance. Compared with the 12% gain of the KSE’s general index from the start of the year to mid May, the banking sub-index grew twice as strong, showing an improvement of 24%.

As Safaa Zbib, head of research at Kuwait-based financial firm Bayan Investment told Executive, commercial banks ended the first quarter of 2007 with strong earnings that helped them outperform the other seven sectors on the KSE.

The eight banks that published quarterly financial reports by the end of April, indeed showed their consistent qualities in the first quarter results that (excluding BKME for which no result was available) totaled KD218.3 million – equal to $757.8 million, 28.8% better than in the first quarter of 2006.

Sector leader National Bank of Kuwait (NBK) had the lowest percentage growth with 13.4% but topped the results list in absolute numbers with KD64 million, ahead by almost KD13 million on runner-up Kuwait Finance House, the country’s top Islamic bank.

The banking sector’s share in the KSE market capitalization climbed six percentage points to 31% at the close of the first quarter of 2007, Zbib said. In mid-May, the cumulative market cap of the eight stood at nearly $54 billion, with NBK and KFH accounting for more than $32 billion between them.

Also noteworthy, KFH had considerably narrowed the valuation distance to sector leader NBK to less than $400 million from more than $3.5 billion at the end of 2006. KFH caught up with NBK’s market value through a combined bonus shares and rights issue for 40% of its capital this spring. NBK on its part executed a 5% bonus issue but also extended again a share buyback program for 10% of its stock, which went into a third six-month round in May.

Successful strategies

NBK told Executive in a written statement that it credited the fast growing economy’s hunger for loans, investment, and core banking services on both the retail and corporate levels as lead factors in its success. The bank’s successful strategy enabled it “to deepen our market penetration both in terms of customer acquisition and providing our customers with a wider scope of service offerings.”

Zbib said the banking sector’s strong development in the past few years was partly due to the opening up of the Islamic banking sector in 2004. Until then, Kuwait Finance House held a government-enforced monopoly on Kuwait’s sharia-compliant banking market. After the central bank lifted prohibitions against the creation of new Islamic banks, Boubyan Bank entered the field, raising $260.7 million in its IPO and one specialized bank, Kuwait Real Estate Bank, switched to sharia-compliance. However, numbers prove that allowing the entry of new Islamic banks did not harm the profits at KFH, to the contrary.

Oil, being the life juice of the Kuwaiti economy, also figured in the growth spurt of the banking sector. The banks’ performance both for the quarter and the past few years come on the back of loans to finance large oil and gas projects, said Mihir Marfatia, a financial analyst with Kuwait’s Global Investment House.

The banks’ total assets grew 29% to $97.6 billion in 2006 from $75.7 billion in 2005, not including Kuwait Real Estate Bank, for which 2006 figures are not available.

Commercial banks have also indirectly impacted the market through providing a means for economic growth and diversification, said Jan Randolph, an analyst with US-based Global Insights, which studies Gulf Cooperation Council (GCC) markets. Randolph told Executive that banks in Kuwait act as vehicles for development in the economy, supporting the development of other sectors.

With their consistent earnings growth, Kuwaiti banking stocks became attractive investments, according to Zbib.  “The banking sector in general is a steady sector – and not risky,” she said.

Although banks are an important source for the upward share price momentum that the KSE experienced this year, they did not influence the market through big-time share buying. “You won’t see banks impact the Kuwaiti stock market directly,” said the head of research at Oman’s BankMuscat, who did not want to be named.

According to BankMuscat’s research, Kuwait’s banks have fueled the buying of shares on the KSE only through their lending activities, which were dominated by retail lending in 2004, 2005 and 2006.

Keeping close watch

A key factor in the sector’s stability has been the watchful eye of Kuwait’s Central Bank, which monitors commercial banks to ensure they follow international standards, practice transparent corporate disclosures and maintain high capital adequacy levels, said Karim Kamal, who heads the research department at NBK.

“It’s not that there are very strict rules on how to do business, but there’s very strict control and follow-up that doesn’t allow banks to do risky things,” he said. “Because of this, investors see the low-risk aspect of investing in the banking sector. So whenever they feel there are winds of change or a downturn in the stock exchange, they park their money in the relatively safe banking sector.”

In one example of its sector control, the Central Bank stepped in during 2004 by mandating banks to lower their lending ratios from 92% of deposits and follow what was called the 80:20 rule. It stipulated banks could only lend 80% of their deposits, but re-classified deposits to make the rule less restrictive.

While it was not exactly followed, the rule brought lending ratios closer to the 80% mark. The central bank has since increased the ceiling to 88% of deposits, Marfatia said.

The year 2004 was a busy one on the regulatory front as the central bank also opened Kuwait’s banking sector to foreign operators while maintaining restrictions that offered domestic banks protection of their retail business. “While the Central Bank has been granting licenses to international and regional banks in Kuwait, it has been limiting those licenses to one branch, making it impossible for those banks to compete on the retail level,” Kamal said.

The only exception to the rule is the Bank of Kuwait and the Middle East (BKME). It was privatized in 2003 by the Kuwait Investment Authority, which allowed Bahrain’s Ali Ahli United Bank to buy a controlling stake, 67.33%, in BKME (originally a foreign bank that the Kuwaiti state had bought from the British in 1971) and allowed it to keep operating its multiple branches.

But by and large, foreign banks wanting to work in the Kuwaiti market – the first operating license went to BNP Paribas in 2004 – have to focus on the corporate market and on private banking for high net-worth individuals.

After having expanded their local activities in the past few years, Kuwaiti banks are now facing the challenges of taking the leap abroad and become players outside of their borders.

“Our challenge is not on the local scene,” Randa Azar, NBK’s chief economist, told Executive. “It is more related to the regulatory barriers to our ability to execute our regional expansion strategy.”

Some analysts, like Randolph of Global Insights, cautioned that banks in Kuwait and other GCC countries ought to take care to cover themselves against over-concentration of lending to particular sectors, such as real estate, where a fall in asset qualities and investment losses could have devastating consequences for overexposed lenders.

The latest measure of the Kuwaiti authorities, the surprise announcement on May 19 that the dinar will shift from a dollar peg to be tied in the future to a currency basket, may not make regional expansion easier for Kuwaiti banks, as the move enforces doubts on the implementation of a GCC monetary union in 2010. For the moment, though, analysts agree it is too early to say what impact the re-pegging of the dinar will have on the business of Kuwait’s commercial banks.

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Banking & Finance

Money Matters by BLOMINVEST Bank

by Executive Staff
written by Executive Staff

Regional stock market indices

Regional currency rates

QNB launches representative office in Libya

Qatar National Bank (QNB) launched a representative office in Libya, and that in accordance with the bank’s plan of international expansion. With the Libyan office, QNB’s presence now extends to 15 countries, among which are Oman, Kuwait, Singapore, UAE, UK, France and Switzerland. QNB reported net profits of QAR652.8 million ($179.4 million) in Q1-2007, up 6.7% year-on-year. The bank’s total assets rose 22.1% for the same period to QAR70 billion ($19.2 billion), while loans rose 41.5% to QAR47.2 billion ($13 billion) and customer deposits increased to QAR52.7 billion ($14.5 billion), up 15.8%.

Abu Dhabi’s Aldar to exclusively construct Ferrari theme park

Abu Dhabi-based public joint stock company Aldar Properties signed an exclusive deal with Ferrari to construct the Ferrari Theme Park on Aldar’s Yas Island Project. The theme park will feature attractions, family rides, driving school, virtual simulations and Ferrari brand products retail store. Aldar, established in 2004 and currently employing 200 people, is behind the development of the $40 billion 25 million m2 Yas Island project. The island, which will host Ferrari’s theme park, will also include golf courses, hotels, marinas, polo clubs and apartments etc. The project will be completed by 2014, with the first phase excepted to be done by 2008.

Country profile: Jordan

Jordan Investment Trust PLC (Jordinvest) issued its Jordan Economic Report 2006 explaining that despite the difficult regional environment surrounding Jordan, the country managed to experience high economic growth in 2006, as Jordan established itself “as a secure haven to conduct business.” The country’s GDP registered a growth rate of 6.4% in 2006, down from 7.2% in 2005. Unemployment rate dropped to 13.9% in 2006 accompanied by a rise in inflation rate to 6.25%, up from 3.5% in 2005. This exhibited growth was supported by the Central Bank of Jordan (CBJ) sound monetary policy that kept the dinar’s peg to the dollar. CBJ’s official reserves were at $6.1 billion in 2006. The Amman Stock Exchange witnessed a correction similar to that witnessed by other regional stock markets. Consequently, the Amman Stock Exchange Index closed at 5,518 points in 2006, down 33% year-on-year. The country’s budget deficit improved from 5.3% of GDP in 2005 to 4.4% of 2006 GDP, or some $627 million. According to Jordinvest’s report, Jordan’s external trade (exports and imports) surged by 10% in 2006, pushing the ratio of external trade to GDP (economic openness ratio) to 109%, the second year in a row in which external trade exceeds GDP in Jordan.

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Banking & Finance

Debt vulnerability and risks for solvency

by Executive Staff
written by Executive Staff

Lebanon’s public debt has been accumulating rapidly over the past decade and a half, making Lebanon one of  the most publicly indebted countries in the globe. Political imperatives and reconstruction needs led to large fiscal deficits and debt  build up. Higher than anticipated costs combined with elusive assumptions on growth and aid kept the overall fiscal deficit at 22% of GDP by 2000, raising  public debt to 151%  of GDP.

Realizing that debt build up could generate solvency concerns, strong fiscal discipline was initiated in 2001 involving freezing expenditure and introducing value added tax (VAT), generating primary surpluses for the first time, and stabilizing the debt rate.

Nevertheless, Public debt by end 2006 reached $40 billion, 178% of GDP. The fundamental question remains: how much solvency risk does this level of debt impose on the Lebanese economy? The peculiarities of public debt as well as that of the Lebanese economy have enabled Lebanon to avert crises even under extreme political stress and turmoil. Large private transfers, limited external market exposure, lower rollover risk, and comfortable reserves have allowed Lebanon to sustain higher public debt than one would otherwise expect.

Lebanon is a very open economy with heavy dependence on transfers from the Lebanese diaspora. Annual private transfers are one of the highest in the world, estimated at over 20% of its GDP. Accounting for these transfers brings down the debt ratio to 140% of disposable income (GDP plus transfers). A rate deemed closer to a sustainable threshold.

External debt exposure

Lebanon’s exposure to external debt, at 15% of the total ($6 billion), by end 2006, is low by emerging market standards, and much lower than that of countries that faced financial crises. Further, nearly half of it is to official creditors with long term maturity. The large central bank reserve cushion  of $13 billion (excluding gold)  can certainly absorb a sudden reverse in sentiment in external private markets.

Another peculiar feature of Lebanon’ debt structure is the successive decline in its market  debt ratio to 60% of total debt in 2006 from 82% in 2000. Market debt to GDP and as well to disposable income has declined to 110% and 88% respectively, perceived as more viable ratios.  The central bank has increased its holding of public debt to 25%; official creditors’ share as well increased to 11%. The counterpart to increased central bank financing has been a rise in commercial banks claims on the central bank, notably in the form of long-term deposit certificates.

The increased intermediation role of the central bank (with a lower default risk) has pacified financial markets at a time of increased political uncertainty. However, this operation has it own cost, weakening the financial strength of the central bank.  Shocks to the financial system, however, can still be  absorbed by its reserve base and swap operations, albeit at a higher cost, as in the case following Hariri’s assassination.

High share of debt holdings for commercial banks

Commercial banks’ share of public debt holding, however, remains high at nearly 50%  and  is closely linked to the stability of the deposit base (banks’ liabilities) and the maturity of public debt. The rollover risk is low owing to the banks’ strong incentive not to jeopardize the financial viability of their main debtor, the government. Their  inter-twined interest, limited exposure to foreign banking, and high liquidity has limited their alternatives.

Lebanese banks continue to experience high liquidity brought about by its ability to attract substantial flows from regional financial markets, making money supply to GDP   (nearly 3 times) one of the highest in the world. Banks on their own can absorb sudden shocks of rapid  deposit withdrawals; their foreign assets are twice non-resident deposits in foreign currencies.

The term structure of Lebanon’s debt maturity structure has improved in recent years. With Paris II (and looking forward to Paris III), long term debt  has risen to three-fourths of total debt by 2006, reducing government exposure to interest rate risk. Nevertheless, compared to many emerging economies, Lebanon’s debt remains burdened by short maturity, $16 billion mature in 2007-08.

Finally, the debt overhang remains serious, raising solvency concerns and the possibility of transmission of shocks between the fiscal and the financial sectors. Serious fiscal adjustment as well as financial sector reform is urgently needed to  reduce the debt burden, diversify debt holding, and reduce the sterilization burden on the central bank.  Solvency risk, however, prompted by external shocks is low with foreign assets of the banking sector standing at $33 billion, 75% of total debt and 150% of debt denominated in foreign currencies.

Dr. Mounir Rached is a senior IMF economist, and a founding member of the Lebanese Economic Association. The views in this article are those of the author and don’t represent those of the IMF

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Financial Indicators

Global economic data

by Executive Staff
written by Executive Staff

Tourism: hotel nights

Arrivals of non-resident tourists staying in hotels and similar establishments

Average annual growth in percentage, 1998-2005 or latest available period

Source: OECD

Over the period as a whole, the United States recorded the largest number of arrivals in hotels and similar establishments followed by China, France, Italy and Spain. The 9/11 terrorist attacks resulted in sharp falls in arrivals in the United Kingdom, Mexico and the United States but did not noticeably affect arrivals in most other countries. Countries in central and eastern Europe have recorded strong increases in arrivals since 1990. The graph shows annual growth in arrivals of non-residents averaged over the period since 1998. Arrivals declined in Brazil, the United Kingdom, Switzerland, Norway and Greece but grew at 6% per year or more in New Zealand, Iceland, Japan, India, Slovak Republic, Turkey and China. Tourism 2020 Vision is the World Tourism Organization’s (UNWTO) long-term forecast and assessment of the development of tourism up to the first 20 years of the new millennium. It forecasts that international arrivals will reach over 1.56 billion by the year 2020. East Asia and the Pacific, South Asia, the Middle East and Africa are forecasted to record growth at rates of over 5% per year, compared with the world average of 4.1%. The more mature tourism regions, Europe and the Americas, are expected to show lower than average growth rates. Europe will maintain the highest share of world arrivals, although there will be a decline from 60% in 1995 to 46% in 2020.

Trade to GDP ratios

Difference between 2005 and 1992 ratios in percentage points

In 2005, the unweighted average of the trade-to-GDP ratios for all OECD countries was 45% and 51% for the EU15. For the reasons noted above, there were large differences in these ratios across countries. The ratios exceeded 50% for small countries—Austria, Belgium, the Czech Republic, Hungary, Ireland, Luxembourg, the Neth-erlands and the Slovak Republic—but were under 15% for the two largest OECD countries—Japan and the United States. Between 1992 and 2005, trade-to-GDP ratios for the OECD as a whole increased by 13 percentage points, and the EU15 increased by 14 points. Substantial increases in trade-to-GDP ratios were recorded for Luxembourg, Hungary and Belgium.

Households with access to a home computer

Percentage of all households, 2005 or latest available year

Penetration rates are highest in Iceland, Denmark, Japan, Sweden, Korea, the Netherlands, Luxembourg, Norway and the United Kingdom where 70 % or more of households had access to a home computer by 2005. On the other hand, shares in Turkey, Mexico, the Czech Republic and Greece were below 40%. Between 2001 and 2005, the percentages of households with access to a home computer increased particularly sharply in Japan, the United Kingdom and Germany. The picture with regard to Internet access is similar. In Korea, Iceland, the Netherlands, Denmark, Switzerland and Sweden, more than 70% of households had Internet access by 2005. In Turkey, Mexico and the Czech Republic, on the other hand, only about one-fifth or less had Internet access by 2005. Data on Internet access by household composition—with or without dependent children—are available for most OECD countries. In general, they show that households with children were more likely to have Internet access at home in 2004.

Ratio of the inactive population aged 65 and over to the labor force

Percentage

The youngest populations (low shares of population aged 65 or over) are either in countries with high birth rates such as Mexico, Iceland and Turkey or in countries with high immigration, such as Australia, Canada and New Zealand. All these countries will, however, experience significant ageing over the next 50 years. The dependency ratio (right panel of the table) is projected to be close to 50% in Belgium, France, Greece, Hungary, Italy and Japan by 2020. This means that, for each elderly inactive person, there will be only two persons in the labor force. The lowest dependency ratios, under 25%, are projected for Iceland, Korea, Mexico and Turkey. All countries will experience a further sharp increase in the dependency ratio over the period 2020 to 2050.

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Financial Indicators

Regional equity markets

by Executive Staff
written by Executive Staff

Beirut SE: Blom  (1 month)

Current Year High: 1,598.29       Current Year Low: 1,168.36

 The Beirut Stock Exchange passed through a valley but the BSI closed at 1,209.84 points on April 27, barely seven points lower than on April 2. While the trading floor did not differ from the rest of the country in spending another month waiting for that political thaw, listed companies made some news worth looking at. Solidere sent executives to Egypt for talks with Sixth of October Development & Investment Co. The two companies said in mid April they shortly will sign a contract for developing urban centers in two Sodic properties. Solidere stock nonetheless was under downward pressure in April and traded below $15.25 in the latter part of the month. Banks Audi and Blom announced cash dividends and Bemo announced the listing of 200,000 preferred shares.

Amman SE  (1 month)

Current Year High: 7,407.15       Current Year Low: 5,267.27

The Amman Stock Exchange in April fell back from gains earlier in the year and played to the tune of subdued expectations. The ASE Index returned to the 6,000 points range and closed at 5,969.65 points on April 26. Jordan Telecom Group dropped by about 10% in late April after dividend distribution. According to a report by Al Hayat in early April, the stake of BankMed in Arab Bank has increased to 18%, making the Hariri family’s BankMed the largest shareholder in Arab Bank. In an attempt to stimulate liquidity, the Jordan Securities Commission allowed brokers to carry out margin buys on two additional companies in the primary and 11 firms in the secondary market.

Abu Dhabi SM  (1 month)

Current Year High: 3,833.94       Current Year Low: 2,839.16

 The Abu Dhabi Securities Market entered April by ending a negative trend it had experienced in March with a year-low of 2,839.16 points on April 3 and started moving up again. It closed at 3,066.6 pts on April 26. Shares of Gulf Cement and Union Cement each soared in April with double-digit percentage gains whereas Fujairah Cement saw strong fluctuations. National Bank of Abu Dhabi also gained strongly for most of the month, before dropping somewhat after disclosing 4.7% lower first-quarter profits. Another notable advancer was Aldar Properties. Investor behavior on the ADSM in late April also included repositioning in preparation for the Deyaar IPO on the DFM.

Dubai FM  (1 month)

Current Year High: 5,488.24       Current Year Low: 3,658.13

The Dubai Financial Market moved mostly sideways in April, closing 98 points higher at 3,812.10 pts on April 26 when compared with 3,714.20 pts on April 1. The big announcement for the month was the $883 million initial public offering by Deyaar, the real estate arm of Dubai Islamic Bank. Investors repositioned themselves to participate in the May subscription for Deyaar. With high volumes in their second month of trading, the DFM’s own shares swung up by almost 50% between April 1 and 22 before losing over half their gains by April 26. A review of alleged past share price manipulations by Shuaa Capital in a Kuwaiti deal brought no evidence of wrongdoing, the Emirates Securities and Commodities Authority said after inquiries with the KSE.

Kuwait SE  (1 month)

Current Year High: 10,710.40     Current Year Low: 9,164.30

The Kuwait Stock Exchange was the shining star among the GCC bourses with the most consistent positive performance for the month. The index headed into April after a bit of late-March profit taking at 10,108.7 points and moved up 600 points, or 5.9%, to a 10,710.4 points close on April 25. A number of stocks recorded noteworthy gains but as far as market movers, the month was again in the grip of MTC. The telco had a volume of 532 million traded shares on a single day—two thirds of the day’s total KSE volume—and rose twice by the allowed daily max toward the end of the month. Speculation in the stock rode on expectations that a major block purchase of MTC is in the making.

Saudi Arabia SE  (1 month)

Current Year High: 17,730.96     Current Year Low: 6,916.85

The Saudi Stock Exchange was quite the opposite number to the New York Stock Exchange last month, but only in the mathematical way that where the Dow raced up, the SSE struck out. The rally of the previous month expired on March 25 at 8,620.1 points and, under inclusion of some spectacular one-day drops, the Tadawul Index moved south from there to 7,273.34 points on April 25. Analysts blamed disappointing first-quarter corporate results for the slide that put the SSE back on bearish ground. In a step to give the SSE more worldwide exposure, the World Bank’s International Finance Corporation said it plans to include the SSE in its Global Composite Index very soon.  

Muscat SM  (1 month)

Current Year High: 5,956.46       Current Year Low: 4,657.16

The Muscat Securities Market had the year’s best month so far in April, achieving an increase in its index from 5556.12 points on April 1 to an intermediate peak of 5,918.89 points on April 18 before slowing to 5,848.56 pts on April 26. Oman’s listed companies achieved a combined net profit of $964 million in 2006, up 19.5% from $807 million in 2005, the MSM announced in April. BankMuscat, the sultanate’s largest bank, reported a gain of 44% in its first-quarter net profits for 2007, to $50 million. The bank’s share price improved by 8% in the course of April, while Oman Air, which reversed losses in Q1 2006 to a profit in the first quarter of 2007, advanced by 15% in the same period.

Bahrain SE  (1 month)

Current Year High: 2,251.15       Current Year Low: 1,996.6

The Bahrain Stock Exchange Index sled 50 points between April 1 and 19 before a slight rebound, closing at 2,116.34 points on April 26. The BSE’s index drop of 4.5% since Jan 1 positions the bourse in fifth place out of the seven GCC exchanges for performance, with less fluctuation than most of its cousins. Gulf Finance House moved up temporarily ahead of presenting a new strategic plan. Investment company Esterad weakened throughout April and the drop accelerated after the company announced 43% lower net profit for the first quarter. The Bahraini government, seeking to invigorate the country’s stock market and encourage wider share ownership, launched an initial public offering for 48% of state-owned real estate firm Seef Properties, starting April 26. The offer was sweetened for retail investors through a 12% price discount and 50% deferred payment.

Doha SM: Qatar  (1 month)

Current Year High: 9,142.45       Current Year Low: 5,825.80

The Doha Securities Market is still the region’s most suppressed achiever for 2007 to date, standing 9.67% lower on April 26 compared with the index values on Jan 1. But different to the Saudi Stock Exchange and some of its other neighbors, the DSM moved up last month, by almost 7%, to close at 6,443.48 points on April 26. Nakilat, among the month’s volume leaders, made modest gains in the first half of April but weakened again slightly after announcing 20% higher first-quarter results. Real estate company Barwa made some gains at the end of the month on exceptional first-quarter profits and made news by buying a Paris convention center for $522 million.

Tunis SE  (1 month)

Current Year High: 2,712.33       Current Year Low: 1,880.55

The Tunisian bourse traded sideways, with the Tunindex fluctuating in the 2,600 points range. The index closed at 2,588.20 points on April 26, some 125 points below the historic high it reached on Feb. 9. The share price of chemicals manufacturer ICF added 16%. Somocer, Tunisia’s largest producer of ceramic tiles, was a loser on the Tunisian stock market in April with a 22% drop. Banque de Tunisie, the largest bank on the bourse, traded sideways.

Casablanca SE All Shares  (1 month)

Current Year High: 12,273.26     Current Year Low: 6,563.27

One has to wonder if growth in Casablanca is unstoppable as long as local investors face restraints from placing their wealth in other markets. The Casa All Shares Index moved up 779 points in April to a close at a new year high of 12,276.81 pts on April 27. The market thus was up 29.59% since the start of 2007. Leading bank Attijariwafa Bank gained 20% in April. Shares in LGMC Industries, a canned fish producer, moved up 44% between April 12 and 27. A major new privatization measure bypassed the bourse when the Moroccan government sold its maritime transport firm Comanav on March 30 directly to privately-held French shipping group CMA CGM for $267 million. 

Cairo SE: Hermes  (1 month)

Current Year High: 65,735.76     Current Year Low: 41,965.37

With the North African bourses doing better than the GCC exchanges, the Cairo and Alexandria Exchanges showed decent development in April. The Hermes Index reached a new high for the year at 65,735.76 points on April 17 and closed with upward sentiment at 65,589.25 pts on April 26. Orascom group companies were among the attention getters for the month. Orascom Construction was the best performer among the Orascom siblings, climbing almost 15% in the course of April. Orascom Telecom Holding implemented a 5-for-1 stock split on April 12 and was labeled “strong buy” by analysts. Telecoms firm TE also got a recommendation upgrade to “outperform.” Shares of National Bank for Development crashed from steep heights after the Egyptian government declined to sell its stake to a UAE banking group.

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Special Report

Destination: Dubai: Emirate looks to expand tourism

by Executive Staff
written by Executive Staff

Bigger, better, taller…under water—Dubai’s hotels are focused on luxury and developers are rushing to one-up any record on the books as the emirate looks to maintain a longstanding policy of economic diversification. Tourism has, and will continue to be, a focus in raising Dubai’s global profile, said Sheikh Mohammed bin Rashid Al-Maktoum, prime minister of the United Arab Emirates and ruler of Dubai, in February when he released the new 8-year Dubai Strategic Plan for economic and social development.

Tourism is one of six strategic areas under the plan which follows upon the previous ten-year plan that started the emirate’s miraculous dash to the frontline of world attention. The name “Dubai” is seemingly synonymous with growth and on peopl’s lips around the world—hardly an accident for a place that has a tourism department with representatives promoting it in 14 foreign countries.

Extravagant hotels, sun-soaked beaches, political stability and shopping are the primary factors drawing increasing numbers of tourists to Dubai, Kenneth Wilson, a professor of economics and director of the policy and research center at Dubai’s Zayed University, told Executive.

“Business and commerce have always been here,” Wilson said. “Visiting for leisure is more recent, and Dubai is leveraging on its natural advantages,” like beaches and beautiful weather.

“Shopping has been a big focus in the last 10 to 15 years pitched at Europeans and people in the Gulf,” Wilson said.

The emirate has long been a trading post, and its souks were supplemented by the first shopping mall in the early 1980s—a construction that soon became a trend. Businesses pay no taxes so all of the shopping is duty free. Malls have become a staple in the city with over 50 currently built and more on the horizon.

In 2006, Dubai saw 1.875 million visitors, a 25% year-on-year increase. in the same year, they spent AED2.57 billion, a year-on-year increase of 50%.

The Dubai Shopping Festival, which drew 3.3 million visitors in 2005 based on the most recent statistics from Dubai’s Department of Economic Development, is a month-long affair started in 1996 featuring giveaways and entertainment like live music. Dubai’s souks, side-street shops and malls lure guests with discounts during the festival.

Shopping, however, is not the only thing Dubai’s malls offer. Mall of the Emirates, owned by the Majid Al Fattaim Group, houses an indoor ski slope, offering Lebanon a regional rival when it comes to skiing in the morning and going for a swim in the afternoon. If that weren’t enough, Emaar Properties is building Dubai Mall, which it bills as “malls within a mall,” on over 500,000 m2 of land and the Ilyas and Mustafa Galadari Group is working on the equally expansive Mall of Arabia. These ventures will include five-star hotels, ice skating rinks, movie theatres and plenty of retail outlets.

Welcome to the hotel Dubai

The hotel industry is thriving on the increase in tourism. Hotel and restaurant revenues accounted, in 2005, for 4.5% of the emirate’s gross domestic product based on the most recent statistics from the UAE’s ministry of economy. In 2006 the hotel industry, which includes hotels and hotel apartments, hosted 6.4 million people, trumpeted the Department of Tourism and Commerce Marketing (DCTM) proudly.

The DCTM’s own success in advancing Dubai from the Arabian Peninsula’s leisure spot to an international destination shows in the fact that residents of the United Kingdom have flocked to Dubai’s hotels in numbers larger than any other nationality from 2002 to 2006, with 687,138 coming that year. The last time the Brits were beaten as the world’s most prolific Dubai travelers was in 2001, by Dubai’s second most common visitor group—Saudi Arabians.

In 2006, the room occupancy rate for hotels in Dubai stood at an average of 82%, said Daniel Hajjar, corporate vice president of sales and marketing for the Rotana Hotels chain, one of the UAE’s leading hotel operators. The good performance of the hospitality sector last year actually marks a dip from 2005’s average occupancy rate of 84.5%. 

This is the first drop in average room occupancy in a decade according to DTCM statistics, but back in 1997 hotels had to make do with occupancy rates of around 65%, full twenty percentage points lower than today, while the room capacities were much smaller than today. Thus, industry managers like Haj-jar are confident today that the hospitality industry will maintain its high performance rates even as the emirate’s number of hotel rooms is expected to more than double in the near term from the current 35,000 rooms.  

Growth from the Top

Dubai’s five-star hotels, like practically everything else there, have been increasing in number over the years. The five-star classification system was applied to all Dubai hotels at the beginning of 1999 and between 2000 and 2005, 14 new ones have opened.

“Dubai has been very, very successful in positioning itself as a high-end travel destination,” said Rohit Talwar, co-founder of think tank Global Futures and Foresights. Talwar and his business partner, David Smith, wrote a report about the future of tourism in the Middle East to be released in early May at the Arabian Travel Market, a major regional industry meet held in Dubai. The report will highlight the economic importance of luxury hotels. “They’re attracting high-end business people, high-end travelers,” Talwar said.

Wilson also sees a link between Dubai’s investment in luxury hotels and its direct foreign investment strategy. “If you’re bringing in wealthy people who can afford that type of holiday, they also have money to invest as well,” he said. “If you build it, they will come.” This works because Dubai is “a sea of calm” in a tumultuous region that is seen as rapidly growing, attracting investors who will see they will get a return on their investment.

Talwar agreed that Dubai has been immensely successful in its branding strategy. “Dubai has been a bit of a model for the region in going out and telling the Dubai story and more countries are looking to follow that model,” he said. Syria is looking to establish tourism offices abroad, and Turkey is targeting the wealthy US visitor by putting more money into marketing overseas, he added.

The Burj al-Arab, one of many Jumeirah Hotels ventures in the emirate, opened its doors in December 1999 claiming to be the tallest building used only as a hotel and sits on its own island of sand and rock dredged from the floor of the Gulf. The next record-breaker, projected to open at the end of this year, is the Crescent Hydropolis Resorts’ Hydropolis Hotel, the first underwater luxury hotel. (The world’s first underwater hotel is the 2-bedroom Jules’ Undersea Lodge off Key Largo, Florida.)

But the strategy for marketing a new hotel or any Dubai experience through a “first in the world” moniker may have to change. “Up until now these grand developments have had time to bask in the glory of being the Burj al-Arab,” for example, but there are so many things coming in the next few years that new developments will have a smaller window of exclusive attention, Talwar said.

 Even with all the hustle-bustle of constant construction and tourists wandering about, Dubai residents, Wilson said, do not seem to mind the intrusion. This could have something to do with the fact that 80% of the emirate’s population is comprised of expatriates. Either way, Wilson said there was, to some extent, segmentation in the market where smaller places only the locals know not responding to the rise in prices that comes with an influx of wealthy tourists.

Most of these guests “are risk adverse. They want to stick with what they’re coming there for,” he said. “They don’t want to go off the beaten track and find these other places. That’s not what they’re there for.”

Ambitious Goals

Dubai’s development goals have been fueled by a desire to free itself from depending on oil revenues. It’s made significant gains on the latter. The contribution of oil revenue to GDP plummeted to 10% in 2000 from 46% in 1975, working its way further down almost every year since. The neighboring emirate of Abu Dhabi has 90% of the UAE’s estimated 97.8 billion barrels of oil, leaving Dubai with little choice but to expand its economic horizon.

Since the 1970s the ruling Maktoum family, whose uninterrupted reign began in 1833, have set their sights on making Dubai a world player. Sheikh Rashid bin Saeed Al Maktoum dredged the Dubai creek (Khor) separating Dubai City from Deira to allow easier access for large trade ships, built two ports and established the first free zone where foreigners can completely own a business, repatriate all of their earnings and not pay import duties. There are currently nine free zones in Dubai with more in the works. Outside the free zones, opening any business require that a UAE national owns 51%.

Under the Dubai Strategic Plan (DSP), the ruling family wants tourism to contribute significantly to the further expansion of GDP, even as the plan’s review of the past five years shows that trade was the largest gainer in contributing to the wealth of Dubai while the share of tourism in GDP actually contracted by 0.8%. In its forecasts, the DSP does not specify what future share of tourism in national production it aims at. The plan expects the total real GDP growth to clip along at 11%, which may seem a lofty goal, but the emirate claims that the plan announced in 2000 for 2010 was realized by 2005, including annual real GDP growth of 13.4% per capita real GDP growth of 6.1%.

To achieve his goals, Sheikh Mohammed said the emirate should focus on the sectors with “strong competitive advantage…that are expected to experience future growth globally. The sectors of strength are tourism, transport, trade, construction and financial services, in addition to the creation of new sectors with sustainable competitive edge.” The ruler of Dubai acknowledged, however, that the tourism sector will face some challenges in the future especially with a focus on “public service excellence.” According to the DSP projections, Dubai needs to add close to 900,000 new workers to achieve its growth targets.

Talwar said through the course of completing the report he co-wrote, he ran into people saying the tourism sector would need 1.6 million new workers. In his view, tourist destinations will need to pay attention to having high staff-to-guest ratios to provide all the necessary services, the quality of environment they create and what new features they add to keep the place fresh. “You can only talk so long about being able to play tennis on the roof of the Burj al-Arab,” he said.

Wilson isn’t too worried about not freshening things up fast enough. Dubai’s rulers are smart. “They don’t sit and rest on their laurels,” he said. “They seek change. The people who run this place are very smart and shrewd.”

The smarts will certainly be needed. While the intra-GCC tourism is a fairly safe bet for continued development of Dubai business, image and fear factors weigh heavy in international tourism. A new surge in tensions surrounding Iran and a longer security crisis in the Persian Gulf could cause British and other European visitors to switch their attention from Dubai to competing destinations in a blink. In this sense, Dubai is very much part of the Middle East, where “tourism will remain a fragile commodity as long as our region remains on the headlines of CNN and BBC,” as Rotana’s Najjar pointed out in a recent presentation on challenges to regional tourism.

Additionally, tourists with a medium to strong spending profile increasingly emphasize issues such as environmental integrity, social justice, and cultural authenticity in their travels, which incidentally also are main points of emphasis in the tourism development policies of the UN World Tourism Organization.

To be the world’s largest shopping mall and safe indoor playground for all ages may well be enough to win a place in the expanding global leisure society where tourism and travel is one of the best faring industries. However, being a single destination, and one that is copied by others nearby, is not the crown of tourism development in an industry where a center of attraction is required to offer more and more niches and activities with lasting appeal in order to capture the hearts and minds of visitors over and over again.

Dubai is making efforts to build a cultural and social scene from scratch and broaden its attractiveness beyond the current buzz the emirate has succeeded in creating. The challenge is far from over. “At the moment that’s still a lot of hype around Dubai, global interest,” Wilson said. “Everyone’s saying it’s interesting, there’s a lot to see, it’s unbelievable, but when it matures, in the next phase of development, what it will look like? That’s a very difficult question to answer.”

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