Consumer Society

Ikea franchise unlikely in Lebanon

by Executive Staff
written by Executive Staff

Ikea has more than 250 stores in 34 countries, with over 310 million people visiting the low-cost home products retailer every year.

In Britain, according to one estimate, almost twice as many people visit an Ikea store on Sundays as attend church.

Not one percentile of Ikea’s annual visitor figures is likely to come from Lebanon anytime soon however, or indeed are Lebanese likely to read one of the 130 million copies of Ikea’s catalogue that were distributed last year. Neither is attendance at Lebanese places of worship likely to be rivaled by people opting to unpack and reassemble one of Ikea’s DIY wardrobes.

But why not? After all, the Swedish-created Ikea has had a presence in the Middle East since 1983 in Saudi Arabia, Kuwait in 1984, Dubai in 1991, and in Israel since 2001. In all locations the store has been a veritable hit, with enough demand in the UAE open a store in Abu Dhabi.

“We would love to be all over the world, and are growing with 20 new stores yearly,” said Charlotte Lindgren, Ikea’s corporate PR and media relations officer.

Stores are opening in China, two a year in Russia, and Japan is Ikea’s latest market.

So what’s wrong with Lebanon as a new store location? Firstly, it costs around $100 million to open one of Ikea’s aircraft hanger size stores, according to Lindgren, and involves a great deal of investment from not only Ikea but also franchisees—a price tag that would be equivalent to some of Lebanon’s larger shopping malls.

And secondly, just like there are no stores in South America or Africa, Lebanon arguably lacks enough people with the appropriate purchasing power necessary to make an Ikea store viable. Products would also have to be imported from Europe, and with the high rate of the euro right now could dampen Ikea’s competitiveness.

Equally, Lebanon does not have the expatriate population of the Gulf that needs to furnish new apartments on a regular basis as people come and go.

Although there would undoubtedly be a Lebanese market for Ikea’s designs, the Lebanese penchant for more traditional furnishings, such as handmade furniture and the ubiquitous Louis XVI style, would be an additional marketing obstacle.

And let us not even go into the state of the Lebanese economy, the political situation, and all the rest that is keeping foreign investors at an arms length.

But perhaps, and it is a big perhaps, some enterprising Lebanese might figure out a formula that could work here. After all, according to some sources, a Lebanese franchiser in Kaslik was interested several years ago in setting up an Ikea outlet.

The idea clearly remained a pipe dream however, and for the foreseeable future it would seem that Lebanese shoppers are to be confined to the traditional outlets, Khoury Home or BHV to supply furnishing needs.

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Capitalist Culture

The intifada will be televised

by Michael Young
written by Michael Young

Going back some 30 years, many Lebanese will recall that their civil war, which began in 1975, was mostly understandable to them through three mediums: newspapers, radio, and the more immediate experience of gunmen fighting in their streets. Television was far behind when it came to informing the public, or shaping its views.

There was a great leap forward in the mid-1980s, when the Lebanese Forces created the Lebanese Broadcasting Corporation. The television station not only allowed the militia to control an influential information platform when no one else did; it also (for those days) offered good entertainment, increasing the station’s popularity. It was a brilliant political gambit; but, most importantly, it was a brilliant financial one too. LBC brought much money to the Lebanese Forces, until the Hariri government’s new law on the audio-visual media in 1994 and the arrest of Samir Geagea formally took the station out of the former militia’s orbit.

Images equal political power

The audio-visual media law represented belated recognition of the political power inherent in owning a mass media outlet. The law effectively divvied up of the audio-visual landscape between major political leaders or institutions, who were granted directly or indirectly the means to get their message across. Prime Minister Rafik Hariri had his Future station, while Parliament Speaker Nabih Berri established NBN. Powerful politicians who didn’t own stations of their own invested in existing outlets, or maintained influence over stations owned by family members, such as Michel Murr in the MTV station controlled by his brother. The official Télé-Liban was gradually downgraded, though not eliminated, because President Emile Lahoud wanted his station.

In fact, Lebanon was going through two processes—both revolutionary in the Middle East: its leaders were embracing a potent new political medium, whose power was greatly enhanced by the expansion of Arab satellite broadcasting in the late 1990s; and they were doing so through private ventures. It was hardly ideal capitalism, since the audio-visual media law was oligopolistic, but it was vaguely capitalism nonetheless. And for all its faults, the audio-visual media sector was far more stimulating than what was on display in most other Arab countries.

But it was not democratic. The most remarkable example of television’s political potential came in 2002. In the Metn by-election that followed the death of parliamentarian Albert Mukheiber, MTV played a central role in mobilizing the then-opposition against a candidate backed by Lahoud and by Interior Minister Elias Murr. The election was a family affair, since MTV was used to support the candidacy of Gabriel Murr, against his niece Myrna, who was backed by Michel Murr, at the time Gabriel’s foe. But beyond that, the by-election was a referendum on the power of Syria and its allies in Lebanon. In voting for Gabriel Murr, many Metn voters were really voting against the Syrian-dominated order. MTV played the role of unifier between the diverse groups that formed the opposition coalition.

Taking mass media seriously

Gabriel Murr won the election, but this was reversed under political pressure. Murr’s victory was a red line that could not stand. The government’s harsh backlash showed how seriously it took the incident—or at least that part of the government allied with Lahoud, which saw Myrna Murr’s defeat as a personal affront. MTV was closed down, never to be reopened. There were obvious limits to what free media meant.

During the 2005 “Independence Intifada,” television stations again played a mobilizing function. That said, the old parameters of what was acceptable were basically respected. The audio-visual media were by and large conciliatory, reflecting the calculations of the members of a political class who did not want to break off contacts with each other. It was not until last year, following the summer war between Hizbullah and Israel, that media became more divisive—dangerously so.

The downside of privatization of the audio-visual media is that stations have become weapons in Lebanon’s internecine conflicts. During the rioting on Thursday, January 25, both Hizbullah’s Al-Manar and the pro-Hariri Future station fueled the worsening crisis. The essence of media liberty, no matter how imperfect, is to remain as objective as possible; or at least to avert violence. However, for Lebanon’s stations to become mere propaganda organs is precisely what capitalist culture in media, but also Lebanon’s best instincts of sectarian compromise, are supposed to avoid.

Michael Young

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Lebanon

Bias in the air – Lebanon’s political media

by Executive Staff
written by Executive Staff

The politics that have become so divisive on the Lebanese streets have reached the nation’s TV screens, prompting Lebanon’s media council chief Abdel-Hadi Mahfouz to blame certain channels for stoking sectarianism and engaging in political insults. “Media institutions are strongly asked to ease tensions and avoid transmitting news that might lead to strife,” he urged.

Lebanon has been plunged into a power struggle for three months now, ever since the Hizbullah-led opposition, mainly comprised of Michel Aoun’s Free Patriotic Movement, pitched their tents in downtown Beirut to call for the overthrow of the pro-Western government of Prime Minister Fuad Seniora.

Over the past five weeks the situation has become increasingly tense, following clashes between pro- and anti-government supporters that have left at least seven dead and 190 wounded. Purchases of automatic weapons have also reportedly risen, and in early February the government seized a cache of arms intended for Hizbullah, raising concerns that the sectarian conflict of Lebanon’s 15-year civil war, which ended in 1990, could return.

The two camps

Lebanese TV channels are split between the two respective camps: among major networks, Hizbullah-backed Al Manar TV, the National Broadcasting Network (NBN) and New TV are all pro-opposition, while Future TV and the Lebanese Broadcasting Corporation (LBC) are pro-government.

Although there are more channels critical of the government than pro, in terms of viewership LBC and Future have the lion’s share. The disparity could be minimized, furthermore, if pro-government Murr TV (MTV), which was kicked off the air by the former government in 2002 for criticizing Syria, returns to Lebanese screens.

“Every Lebanese TV channel has a propaganda leaning,” said Habib Battah, managing editor of the Beirut-based Midle East Broadcasters Journal. “Some try to be balanced, but all have their agendas. It’s pretty clear from the content they produce.”

Lebanon’s media has long reflected the country’s political and religious divisions, but sectarianism has become more pronounced following the war between Hizbullah and Israel last year.

“The interesting thing is during the July war the same footage was used on many channels, supporting Hizbullah. So sectarianism has gotten more derisive, more apparent,” said Battah.

Nabil Dajani, a communications professor at the American University of Beirut, agreed that the media are deliberately inflaming sectarianism, but he believes the blame should not lie solely with media outlets.

“You can’t only blame the media—who is behind the media? Politicians. And it’s the government’s fault for allowing the media to get away with it. There is an audiovisual law that prohibits sectarianism, but this government is delinquent and doesn’t step in,” he said.

Propaganda clips

Sectarianism and the trading of political insults are most apparent in news coverage and on talk shows. “An important event or speech will be covered by one set of media, but not by the opposing channels,” observed Battah.

One example was the demonstration on February 14, 2007, attended by hundreds of thousands of Lebanese to mark the second anniversary of the assassination of former Prime Minister Rafik Hariri. Opposition channels gave sparing coverage of the event, while pro-government channels LBC and Future TV gave extensive live coverage. “The media will also use clips taking (political) speeches out of context,” added Battah.

Future TV, owned by Saad Hariri, a member of parliament and the son of the slain former prime minister, and Hizbullah’s Al Manar TV are regarded by Lebanese media observers as particularly sectarian.

“There is intense rivalry between Future and Al Manar, from guests on talk shows to promo propaganda clips,” said Battah.

However, Nadim Munla, chairman and general manager of Future TV, disagreed that the channel is fuelling sectarianism in Lebanon.

“Lebanon is not going through normal times, so to assume or imply international criteria on Lebanese media during abnormal times is unfair,” he said in response to the Media Council’s recent statements. “All of Hassan Nasrallah’s speeches are live on Future, and we have a daily show that sums up all the news channels in Lebanon,” he added.

Moreover, Munla thinks the media council is “hypocritical” to call on TV channels to curb sectarianism, saying the council needs to start with themselves before pointing fingers, as many of its members are involved in the local newspaper market.

“They are political appointees. It is not impartial so I don’t want a lecture on how to do business,” he said.

Nonetheless, he also stated that the media should be at the forefront of change in Lebanon. Indeed, many channels are airing segments aimed at discouraging sectarianism and violence. One such montage on Al Manar showed a clock ticking back from 2007 to 1975, the year the civil war started. Attached to the clock were images from the recent clashes as well as archive footage, ending with the message “Let’s not go back” in Arabic.

A series of adverts encouraging unity around the idea of “I Love Life” have been aired on the pro-government channels, though the organizers of the campaign have stressed that they are an independent civil society gathering. Tensions are not expected to ease any time soon though, with Future TV to launch a 24-hour news channel and Michel Aoun’s party to launch Orange TV (OTV) later this year.

To the Future

Future TV expects to launch its new channel in the next eight to 10 weeks, “unless there are more unseen events,” said Munla.

The new channel is part of a major restructuring at Future, with new content on the entertainment channel and sales directed more at the Gulf region.

“The last pillar of change was to introduce a 24-hour news channel, the main reason being that in the last two years, we allocated more time to cover the news and current affairs,” said Munla.

He said the channel had regularly violated the time allocated to news, which is supposed to be limited to 20% of broadcast time, due to Lebanon’s turbulent politics.

“That affected our viewing base, and adversely affected our entertainment channel, so we will have a 24-hour news channel,” he added.

The new $10 million channel is considered a financial necessity as a result of the July war, with the conflict and the aftermath costing Future over 25% of its project advertising revenue for 2006. By launching the new channel with a state-of-the-art 1,800 m2 studio, Future TV intends to claw back its profits and regional position among the top five networks. Munla said that by the end of the year, Future hopes to return to “pre-recent event levels” and recover its market share by 2008.

News will be primarily Lebanese, but Future will also allocate 20% of coverage to European and Arab affairs, to boost interactivity and understanding between the two regions.

Meanwhile, OTV, the Aounist outlet, is raising funds through a joint stock company open to the public. Starting with a paid-up capital of $2 million, OTV has raised over $10 million via one million $10 shares to establish a terrestrial and satellite channel, and is currently embarking on a regional road show to whip up demand for the remaining shares.

Although OTV claims it will be objective, the channel’s name, recalling the trademark color of Tayyar, and thus the politics of OTV’s mascot, have prompted scepticism among commentators about how neutral it will really be unless there is greater involvement from foreign investors.

Not all bad news

The divergence of opinion on Lebanon’s TV screens may be perceived as fanning the flames of sectarianism and political divergence, but on a practical level, such a kaleidoscope of opinions can also be seen as indicative of a rather healthy, democratic media environment.

“If freedom of expression is measured in how often the opposition is on pro-government stations and vice-versa, we can be considered a highly democratic media industry,” said Munla.

From a certain perspective, Lebanese networks’ relatively open biases may be less dangerous than the illusion of neutrality propagated by channels in other countries. In Lebanon, viewers have the option of getting comprehensive coverage—they just have to watch news broadcasts from both political camps, and remember that the truth lies usually lies somewhere in between.

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Banking & Finance

Earning extra credit A surge in plastic

by Executive Staff
written by Executive Staff

Plastic is growing in the Middle East with the two leading global brands—Visa (12 million card holders) and MasterCard (undisclosed)—dominating the regional market.

During the 12 months to September 2006, Visa subscribers increased 23%; card sales value rose 22%, while retail sales volume went up 32%. In its results for 2006, MasterCard reported a growth of 46% in issued cards and a 34% increase in value of purchases, to $18 billion, across the South Asia, Middle East and Africa (SAMEA) region.

Denzil Lawson, MasterCard’s general manager for Middle East and Levant, told Executive that as of December 31, 2006, the company’s partner banks had issued 817 million cards for the brand worldwide, an increase of 12.3% over the same period in 2005.

“There is a huge potential for the growth of the payments industry in the region, and we expect that the usage of credit cards will further accelerate as consumers have a greater comfort level about making payments by using their credit cards,” Lawson said.

The United Arab Emirates is a particularly good market for growth in electronic payments. Although it is still a predominantly cash-based society—as are most Middle Eastern countries—it is more mature than others in the GCC in terms of card penetration, acceptance and infrastructure.

But Lawson noted that while the market has shown strong growth, its potential is still relatively untapped with many countries in the region having low card penetration of the banked customer base.

Among recent developments, local governmental bodies in the UAE have shown enthusiasm for automating payments through Visa acceptance—such as the Traffic & Licensing Department, and the Dubai Naturalization and Residency Department E-company.

Dubai eGovernment has teamed up with National Bank of Abu Dhabi (NBAD) to launch a co-branded Visa card that can be used for both eGovernment and day-to-day transactions. The promoters of the service say the new card provides a secure way for both individuals and corporations to conduct e-payment transactions with government departments.

According to MasterCard, the market in the Middle East is receptive to segmentation and this has enabled it to work on some innovative collaborations offering the cardholders card choices and benefits which are meaningful to them.

Ranks of Spending

According to Visa, Saudi Arabia ranks first in Visa card spending in the Middle East followed by the UAE and Kuwait. “GCC cardholders are increasingly taking advantage of the convenience and security of cards for daily shopping,” said Kamran Siddiqi, general manager for Visa International Central and Eastern Europe, Middle East and Africa (CEMEA) in the Middle East.

However, there is a downside. Credit cards can be just too convenient, with many customers forgetting just how punitive card companies can be with late payments. More than one emerging credit market has shown that a rapid rise in credit card market penetration often is followed by serious increases in consumer debt levels and, all too often, defaults.

Credit vs. Debit

The volume of credit card sales in the region is still a drop in the bucket, as MasterCard’s SAMEA turnover of $18 billion demonstrates when compared with the brand’s worldwide transactions, which totaled almost $2 trillion in 2006, generating Gross Dollar Volume (GDV) of $1.9 trillion, an increase of 14.9% over 2005.

“There are is debit card opportunities in Lebanon and Egypt, as well as the opportunity to increase the banked population,” MasterCard’s Lawson said. “Debit cards in the Middle East are predominantly used for ATM transactions. Mature markets see (point-of-sale) growth rates outstripping ATM rates.”

According to statistics provided by Visa International, the ratio of Visa debit card users to credit card users in the GCC is 4 to 1. Statistics also showed that the volume of retail purchase transactions with usage of Visa debit cards is 50% higher than the volume of transactions using credit cards.

That is good news for the card issuers, since credit cards harbor more earnings options and generate better profits to issuers than the debit cards with their remote risk opportunities.

The Visa card business in the UAE has been growing by more than 25% year on year over the last few years, and Visa’s Siddiqi said that by moving away from cash to automated electronic payments, bank deposits are deepened, thereby increasing funds available for commercial loans in the region—a driver of overall economic activity.

“The process also allows for greater transparency and accountability leading to stronger efficiencies and better economic performance,” he said, claiming that Visa’s role is beneficial not only to the financial services sector but also to the economy as a whole. “Recent studies have shown that card payment is a catalyst for economic growth and can help grow a nation’s GDP by 0.5% to 1%,” he added.

Fraud prevention

Although credit card companies are doing all they can to combat illegal activity by introducing chip-and-pin and security numbers, some credit card owners still appear to lose all sense of logic when it comes to giving people confidential information about their cards.

Commenting on fraud, Siddiqi said that Visa takes pride in the fact that the level of fraud associated with Visa card transactions from cards issued in the Middle East is currently one of the lowest in the world.

“This stems from a variety of reasons including the ongoing collective efforts of the industry as a whole. From Visa’s end, we support our member banks with product and technology development and risk management of online payments,” he said, adding that Visa is also actively involved in fraud forums and seminars with both member banks and local enforcement authorities.

“Constant innovation in new technologies such as chip cards also helps to mitigate the level of card fraud risk,” Siddiqi said.

In Lebanon

Economic growth and disposable incomes in the Gulf region are larger than the respective figures in the Levant and North Africa. Between heavily underserved credit card markets such as Egypt or Algeria and the frontrunners in plastic payments in the GCC, Lebanon occupies a position in the middle.

Figures released by Lebanon’s central bank show that the number of credit and debit cards issued at the end of September 2006 reached 1.257 million cards, down 1.9% from the second quarter of 2006, but up 10% on the year.

Banks—especially the retail-focused banks in the top segment of the market such as Audi, Byblos, Fransabank, and Credit Libanais, as well as foreign banks HSBC and Standard Chartered—have ridden the local credit card train in Lebanon for a good while now, building their card programs around the standard parameters of staggered spending limits and special feel-good factors for the wealthiest and most profitable customer groups. But the Lebanese banks have also developed lifestyle cards and co-branded cards that appeal emotionally to air travellers, fashion fans, cigar smokers, compulsive mall goers, or simply central bank employees.

Payment card usage by the resident card holders in Lebanon increased 24.2% to an average monthly amount of $44.4 million in the first nine months of 2006 when compared with the same period in 2005. With an increase of 4.01% to about $850,000 in monthly average, card usage by visitors and non-residents in Lebanon showed much lesser growth last year, hardly surprising in light of the tourism malaise caused by the war last summer.

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Paris III provides some relief but debt situation still perilous

by Mounir Rached
written by Mounir Rached

The exuberant Paris III conference provided $7.6 billion in concessional pledging; certainly, a positive outcome as concessional loans—loans with flexible terms for the borrower—are more favorable than market borrowing in terms of debt service cost. The donors pledged $1.3 billion in private sector loans reflecting their concern that the sector has been constrained by stringent high-cost financing. A key issue is how these pledges, when they are realized, will impact government finances.

Taking away the $1.3 billion earmarked for the private sector through the voluntary intermediation of the private domestic banking sector and $750 million in grants, leaves $5.6 billion available for government financing between now and 2011.

Preliminary reports indicate that out of the $5.6 billion, budgetary support (funds not requiring conditionality) is not expected to exceed $1.3 billion. Of remainder of the financing, $4.3 billion will be tied to the donors’ reform package, implying a rise in spending by an equivalent amount to implement the conditions set by donors.

Debt accumulation with Paris III assistance is therefore expected to reach at least $11.8 billion by 2011 to finance the rise in fiscal deficits reflecting the increased capital spending associated with reform (excluding the additional interest payments associated with debt service). As a result, the total debt could rise to $52 billion and the debt ratio to 167% unless a significantly higher growth rate is realized. Alternatively, debt accumulation without Paris III financing was expected to reach $49 billion, 158% of GDP, as a result of cumulative projected deficits over the same period.

Yes, Paris III disbursements may not necessarily mitigate the debt burden and could indeed make it bigger. However, this is still certainly much better than what would be anticipated without the implementation of a reform program, which would see the debt increase to an unsustainable 180%. This highlights the significance of the reform program, and the need for higher grants in the aid package. Privatization and mobile licensing could further enhance the debt outlook through debt write-offs and enhanced growth potential.

Paris III financing, however, provides added benefits: debt maturity structure and debt service will improve in comparison to alternative sources of financing, mainly market borrowing. Further debt diversification by the government—by practically doubling the official debt—would reduce exposure to market pressure, secure better credit rating on international markets and possibly reduce the vulnerability of the banking sector as the government seek recourse to alternative financing.

The tax and expenditure package designed to bring revenue and expenditure to 25% and 27% of GDP respectively by 2011 is also step in the right direction. The higher VAT and higher receipts from Global Income Tax could compensate for the revenue loss resulting from the European Free Trade Agreement (EFTA) sequenced tax reduction—12% annually to be eliminated completely by 2015— on selected imports originating in the EU. However, VAT needs to be streamlined to preclude tax cascading. Most of the gain in expenditure decline could be generated from terminating transfers to EDL, which make up 3.5% of GDP alone.

The tax on interest income earned by residents and non-residents, estimated to raise revenues by 0.5% of GDP, deserves a careful review as it lowers the effective interest rate earned and may lead investors to reconsider keeping their funds in Lebanon.

Other elements in the recovery documents, such as pension reform, are positive and reassuring, but there are governance and accountability concerns in other areas that are themselves issues earmarked for reform. A well-articulated plan with a comprehensive timetable for all reform is needed if a reform plan is to be held up for public accountability.

The main challenge for the government is to proceed rapidly in implementing the proposed reforms with a high priority placed on accountability, governance and transparency. Allowing access and monitoring by independent citizens’ oversight groups is one way to regain public confidence and ensure a credible and effective implementation of reforms.

Dr. Mounir Rached is a senior IMF economist and 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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Middle East coming out as top spot for emerging markets

by Fadi Chahine
written by Fadi Chahine

So, you are an emerging markets investor, or concerned about the volatility in the US or European markets. If you have worries about a slowing of Chinese investments, or you believe a global financial bubble is about to burst, you may want to consider pouring some of your assets into the number one emerging market in the Middle East: Saudi Arabia.

Experts say the safest emerging markets are those which are flush with liquidity. This allows investors to keep investing and buying, even when an emerging market undergoes a correction.

Case in point: Saudi Arabia and the GCC. Although the Saudi stock market and its smaller neighbors experienced substantial corrections in 2006, their fundamentals have remained strong and analysts said the drop was softened by their abundant liquidity. We all know the story of the oil price boom of the past two years and how it swept billions of dollars in windfall revenues into GCC economies, driving their stock markets up.

Until February 2006, GCC bourse indices broadly mirrored the upward price movements of oil. But then the investors caught on to the notion that price-to-earnings ratios of 30 to 40 times have moved beyond reason. It has been well reported how retail investors, who jumped on the bourse bandwagon late, lost their (borrowed) shirts in the downturn.

However, the second half of the story is that the fundamentals of corporate health—at least for blue chip firms—in GCC markets are today better than recent stock prices suggest. This has a lot to do with the way in which the high GCC oil revenues have percolated into the economy and created growth potential.

Should you trust Gulf markets, especially the Saudi Stock Exchange? You may want to take a cue from the prince, and this is not Machiavellian talk. In early February, Al Waleed bin Talal, nicknamed by Time magazine as the Arabian Warren Buffett, announced that his company, Kingdom Holding Company (KHC), has approved a plan to invest around $2.5 billion in the Saudi stock market. The money will mainly go to the banking, media and real estate sectors.

Middle East markets trending upward despite volatility

Still concerned? It is true that some Saudi investors in spring 2006 tried to prop up the Saudi bourse through loudly-announced share buying that slowed the slide but could not stop it. But this is different.

Al Waleed’s modus operandi is to buy strategic stakes in global brand name companies during times of distress on the stock exchange, and to work closely with management to engineer a turnaround. Al Waleed sees the markets in the Middle East, where most of his money was being invested since 2004, as “trending” upward.

Al Waleed’s confidence appears to be well-placed, as the latest figures of corporate earnings for the listed companies have registered strong and consistent growth in the last five years. At $458 billion, the Tadawul Stock Exchange is the fifth-largest in market capitalization within the global emerging market universe, and the most liquid.

After a 32% drop in market capitalization as of early 2006, valuations improved and positive projections are expected for the next five years. SABIC, the petrochemical and construction company for example, is selling at 15 times the expected 2006 earnings, down from a peak of 40. American and European banks, which have long scoured GCC countries almost exclusively to reel in high net worth clients, are increasingly paying attention to the development of these markets. The analysts of these global banks now recommend bouquets of strong but undervalued Saudi companies.

Sound good? There’s just one catch: To invest you must be a Saudi resident. So start making friends in Riyadh.

FADI CHAHINE is the Managing Editor of Regional Press Network (RPN)

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GCC

Dubai aims to buy Liverpool giants

by Executive Staff
written by Executive Staff

Dubai looks set to enter the first division of world football, with news that the state-owned corporation Dubai International Capital (DIC) is closing in on a buyout of English Premier League giant Liverpool.

In a deal worth an estimated $880 million, DIC would acquire the majority stake in the club, winner of 18 English league titles and a number of European trophies, including the 2004-05 Champions League.

Liverpool’s chief executive officer, Rick Parry, said on Jan. 15 that DIC was in the process of putting the finishing touches to the details of its bid and completing the legal work associated with the offer.

“It is a case of finalizing the due diligence and pulling everything together, which we hope will be completed relatively quickly,” Parry said during an interview with British media. “A huge amount of work has been going on from both parts. I imagine we’ll have something to say relatively soon on that.”

Not the first foreign owners in football

If the deal goes through, as all parties expect it to, it would not be the first time that overseas buyers have gained control of one of English football’s icons. Both Manchester United, the current Premier League leaders, and Chelsea, the reigning champions, are foreign-owned, by American and Russian concerns respectively. A number of other teams in the English leagues have large shareholdings in foreign hands.

Owning a football team does not just mean getting the best seats at games. Should the DIC buyout of Liverpool go ahead, the Dubai investor would have a billion-dollar business on its hands and own an internationally recognized brand. Television rights, shirt sales, merchandising and promotional value are all the up side of such a deal.

Of course, football is a high-risk enterprise, and failure on the pitch can bring losses away from the playing field. If it becomes the owner of Liverpool, DIC will be expected to invest heavily in star talent, as well as in the new stadium the Reds have long been planning.

Football is increasingly becoming big business in Dubai, with a number of top European clubs drawn to the emirate during their mid-season breaks. Taking advantage of quality training facilities and the mild weather, teams such as Germany’s Bayern Munich, Benfica of Portugal and Italian outfit Lazio came to Dubai in January to both sharpen their training regime and recharge their batteries. Such visits not only earn money for the local tourism industry but also help promote Dubai in the overseas media, which always keeps a close watch on the doings of their sides.

Dubai is taking the task of becoming a football venue seriously, having poured millions into staging a showcase competition early in the new year. The Dubai Football Challenge 2007, which kicked off on January 8, pitted the national sides of the UAE and Iran and foreign teams such as German Bundesliga Hamburg SV and VfB Stuttgart against each other.

Played at Dubai’s showcase Maktoom Stadium, the three-day tournament drew good crowds and rated highly on television.

According to Jochen Schneider, VfB Stuttgart’s manager and sport administrator, the success of the first Dubai Football Challenge will enhance the appeal of the emirate for leading teams in the future.

High class, global appeal

To get such high class teams for the first tournament is testament to its global appeal, and the attraction of Dubai to big teams, he said. “We came to Dubai in January 2006 and that successful trip has been part of our domestic success throughout last year.”

Increasing the profile of sports such as football in Dubai is part of a wider strategy to expand the economy’s base as well as the emirate’s attraction to visitors. More than $2.5 billion is being spent to develop Dubai Sports City, a sporting and tourism project that aim to offer world-class facilities and act as a springboard for Dubai’s bid to host the 2016 Olympics.

Billing itself as the world’s first fully integrated purpose built sports city, the development will feature four major stadiums, and offer facilities for sports such as football, cricket, tennis, golf, rugby, athletics, swimming and hockey. One of its features will be a Manchester United Soccer School, continuing the strong push towards promoting football in the region.

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GCC

GCC sees insurance industry booming With Dubai leading the way

by Executive Staff
written by Executive Staff

In tandem with the emirate’s development, Dubai’s insurance industry is set to reach new heights over the next few years. Meanwhile, throughout the Gulf Cooperation Council (GCC) the insurance sector is booming.

According to a recent study published by Nexus Insurance Brokers, the region’s largest independent financial adviser, the GCC insurance industry will enjoy a period of strong and sustainable growth, fuelled by a surge in regional demand for insurance products. The sector is expected to grow by some $2 billion by 2010, reaching $7.1 billion. In particular, it seems the UAE insurance sector is currently growing by around 20% per annum.

With over 47 insurance companies, 23 of which are locally owned, the UAE has the largest insurance sector in the region. Most of these companies are based or have an office in Dubai. The sector may appear overcrowded, but a number of small insurance companies have low risk retention and act more as captive agents than real insurance companies. In addition, risk is offset by international reinsurance companies, which play an active role in the region. Meanwhile, some insiders predict mergers between small insurance companies in the near future.

The latest official figures on the insurance sector in 2005 released by the Ministry of Economy and Planning indicate that premiums rose from $1.29 billion in 2004 to  $1.85 billion in 2005, accounting for a healthy increase of 30%. A breakdown of premiums by class of insurance reveals that the non-life segment made up more than 74% of premiums. However, the life segment is expected to grow faster over the next few years.

While local firms dominate the non-life market and collect 75% of premiums, foreign firms control the life insurance market with a similar share with giants such as Arab Insurance Group, American Life Insurance Company (Alico), Axa-Norwich Union or Allianz. Their products are mainly sold to Western expatriates.

In the non-life or general insurance market, a breakdown of segments indicate that accidents and liability account for 61.8%, fire 16.9%, the land, sea and air transport 16.7% and medical 7.6%.

Despite this, UAE market is underdeveloped

Overall, the insurance market in the UAE remains underdeveloped by international standards. Indeed, although one of the highest in the region, the insurance premium density per capita, or the average amount of money spent on insurance products per person per year, stood at $444 in the UAE, compared to $4,508 in the UK or $5,716 in Switzerland.

The GCC governments have played an instrumental role in promoting the benefits of insurance policies. In July this year, the UAE introduced a new health insurance scheme in Abu Dhabi, a move which many say will undoubtedly boost and revitalize the insurance industry for years to come. This new product is finally becoming more acceptable in the GCC. Under the scheme, companies with a staff of more than 1000 will have to provide health insurance for their employees and their close families. An estimated 500,000 people will benefit from the plan, including low-wage workers. The scheme is set to be introduced in Dubai in early 2007.

The insurance industry as a whole is already starting to reap the benefits of this rejuvenating plan, set to expand given the predominantly young population.

Aside from health insurance, a new regulator will also emerge in 2007. Although still under the auspices of the Ministry of the Economy, the new authority will work to improve relations between insurance brokers and companies, as well as consider new solutions for motor insurance and professional indemnities for each sector.

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GCC

UAE’s ‘du’ service Tackles foes

by Executive Staff
written by Executive Staff

This year saw new UAE telecoms operator Emirates Integrated Telecommunications Company, branded as du, secure its customer base ahead of its expected launch of operations in February.

Du, which launched a campaign allowing customers to book their phone numbers with the company in November, has received approximately 500,000 subscribers booking 750,000 numbers. Under the campaign, customers are allowed to keep their old phone number but must change the prefix from ‘050’ to ‘055’. The ease of switching operators and the option for customers to retain their mobile number seems to have had a positive impact on du’s efforts to build a substantial customer base.

Etisalat and du square off

However, the imminent launch of du’s operations has led the existing operator, Etisalat, and the newcomer to adopt aggressive marketing strategies to showcase their new products, services and pricing. The mobile penetration rate in the country is extremely high, with estimates placing it at 125%—the highest mobile penetration rate in the Arab world. It also has internet penetration levels of 60%. Against such a backdrop, competition between du and Etisalat is set to be fierce.

Some analysts fear that this will not dramatically impact prices. Osman Sultan, CEO of du, said that the company will be looking to grab a 30% market share within three years of launching operations. However, this will not be achieved through a price war. According to Sultan, “We have a great deal of respect for Etisalat as a strong regional player with a very deep pocket. We will not be getting into a price war with them as such cut-throat competition would not be in the interest of either company.” However, Wisam Francis, BIS Shrapnel’s project manager for the Middle East telecom sector believes that du will struggle to achieve its ambitious targets, suggesting that it will only achieve between 10-20% market share up to 2009.

Du has been investing heavily in its infrastructure and human resources in preparation for the commencement of operations. The company has also been keen to make its mark ahead of the launch, highlighting its next-generation network and pricing structure. Particular areas of emphasis for both Etisalat and du are broadband and mobile television, both of which are expected to gain prominence in 2007. Du has also stressed its per second pricing strategy that distinguishes it from its competitor Etisalat. All customers will have the option to be charged on a second by second basis on all mobile voice calls. Sultan said that this was a particularly important development because, “It is only fair that our customers pay for precisely what they use.”

Etisalat is also preparing for the arrival of the new operator by readjusting its pricing structure. One key area that Etisalat is looking to address is international calls. The company is going to offer off-peak rates to business customers on their international calls, constituting a 35% discount on current rates. Ahmad Abdul Karim Julfar, the chief operating officer at Etisalat, seemed to concede that this decision was driven by the changing nature of the market in the UAE and recent developments. He argued, “In light of the current market environment we have reviewed our services and rates to ensure that the true cost of the service is more accurately reflected in the charges.”

VoIP still a controversial technology

However, it would appear that the rationale behind cutting prices on international calls is not simply driven by the imminent arrival of a new mobile operator in the UAE. Etisalat is also taking into account the potential changes to regulation on Voice over Internet Protocol (VoIP) in the emirates. This issue continues to dominate the telecommunications sector in the country. As it stands, the technology is still illegal with services such as Skype blocked in the UAE.

It has been rumored that the national regulatory body, the Telecommunications Regulatory Authority (TRA) is set to legalize VoIP. However, it has issued a rebuttal this week saying that the technology is still under review. The TRA’s manager for administration and public relations, Adnan al-Bahar told the local press, “Until the regulatory framework is in place VoIP is illegal.”

Nevertheless, it would appear that it is only a matter of time until the regulatory framework is put in place issuing in the legalization of VoIP. This is seen as a particularly important growth area in the telecommunications sector in the Middle East and North Africa region. According to Luke Kabamba, the Dubai-based ESM business unit head for IT software management company CA’s Europe Middle East and Africa eastern markets, The Middle East market has witnessed a huge surge in the last couple of years and many companies today have plans of investing in VoIP, which not only helps increase customer satisfaction and staff efficiency but also simplifies and reduces the cost of managing voice communication systems.

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GCC

UAE, Oman link exchanges

by Executive Staff
written by Executive Staff

In early January, the Abu Dhabi Securities Market (ADSM) signed a cross-listing agreement with the Muscat Securities Market (MSM), reflecting its will to attract foreign investors, improve its performance and strengthen its links with regional markets.

The agreement between the ADSM, the MSM and the Muscat Depository & Securities Registration Company allows for the listing of Omani companies in Abu Dhabi. Oman and Emirates Company will be the first Omani company to list in the UAE.

According to Abdullah al-Nabhani, the general manager of Muscat Depository & Securities Registration Company, the establishment of an electronic link between the two Gulf markets has fostered greater interest in the UAE markets. “Since MSM established the electronic link with ADSM, we have seen a huge increase in demand for UAE securities in Oman. We hope this agreement will help to not only meet this demand, but also offer investors the opportunity to diversify their risks by having more choice.”

The ADSM currently has 54,000 Omani investors registered making up 7% of the total and contributing $62.62 million to the market. The agreement with Muscat is part of a wider strategy on behalf of the ADSM to broaden its investor base and the number of foreign companies listed on the market. According to Rashed al-Baloushi, the ADSM’s acting director general, “As long as we continue to bring international companies and more diverse investment opportunities to the UAE local markets, we are helping investors to spread their risks, contributing to long-term market stability and ultimately furthering economic growth in the UAE.”

Similar agreements

Qatar, Pakistan and Jordan already have similar agreements with the ADSM, facilitating cooperation and dual listing on their respective markets. Pakistan was the first non-Gulf country to sign such an agreement with the Abu Dhabi market. As a result of the memorandum of understanding between the ADSM and the Central Depository Company (CDC) of Pakistan, 10 Pakistani companies have already received approval for cross listing.

This agreement paves the way for further investment between the two countries. There are currently 2,200 Pakistani investors registered on the ADSM, with investments worth $13.61 million. However, investment from the UAE to Pakistan is seen as a key consideration in this agreement. Al Baloushi believes that this agreement will help to consolidate Emirati investment into Pakistan. “Abu Dhabi is a significant investor in Pakistani companies so it is important for us to cement close ties between our markets. We also look forward to working closely with the three Pakistan stock exchanges as we implement our best practice program and continue to improve the regulation and governance standards in the UAE financial markets,” he said.

Hanif Jakhura, the chief executive of the CDC, also pointed out that the agreement would facilitate investment from the Pakistani expatriate community into their home markets.

Similarly, the agreement between the Securities Depository Center of Jordan and the ADSM is a step forward for facilitating investment relations between the two markets. Arab Bank is likely to be the first Jordanian company listed on the Abu Dhabi market. The presence of Jordanian investors in the UAE is already well established with approximately 7000 investors registered and investments amounting to $168.8 million.

Seeking more arrangements

Al-Baloushi said that the ADSM is seeking out more agreements along the same lines. Khaled al-Suwaidi, the manager of ADSM’s listed companies department, also recently told a conference in Singapore that attracting foreign investment is a strong priority for Abu Dhabi’s stock market. He further laid out the measures taken by the ADSM to bring the market into line with international best practice. The ADSM has suggested a corporate governance code for all listed companies as well as a UAE trust and custody law.  

These measures are seen as particularly important to attract foreign and institutional investors. Currently, foreigners can invest in 38 out of the 61 listed securities on the ADSM and account for 40% of investors in the market. Al-Suwaidi believes that this figure will increase because of the positive economic development prospects for the emirate.

In spite of the current slump in the market, al-Suwaidi believes the economic conditions of Abu Dhabi are conducive to investment. “Abu Dhabi’s progressive economic agenda, promoting diversification, liberalization and an enhanced role for the private sector, demonstrates that the long-term fundamentals for growth are in place,” he said. 

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