Lebanon

Extra Virgin

by Executive Staff
written by Executive Staff

Olive oil has been a staple of the Middle Eastern diet for millenniums and demand for the product remains high. Global consumption of olive oil has been increasing at 1.5% per annum over the past decade. Market demand for this product is expected to continue as the apparent health benefits of olive oil, and an ongoing interest in Mediterranean cuisine, stimulate the market.

Under-developed sector

Lebanon is considered a minor player in a global market dominated by Spain, Italy, Greece, and Tunisia. The Stanford Research Institute (SRI) Expanding Economic Opportunities in Lebanon project, estimates the economic value of olive farming in Lebanon to be well over $200 million annually – barely 0.2% of the global $125 billion olive oil industry. The IOOC (International Olive Oil Council) released new figures in November 2006 showing that, while overall worldwide production has increased in the last 10 years from 1,735,000 tons to 2,599,000 tons, Lebanon’s production has barely changed – it went from 5,000 tons to 5,500 tons and the same is predicted for 2006/07. However, Lebanon’s neighbors are cleaning up their act to keep up with increasing global demand. Syria’s olive oil output went up from 76,000 tons to 100,000 tons in the last decade, and the IOOC predicts an output of 155,000 for 2006 and 2007. Jordan almost doubled its production in last 10 years and output is expected to increase from 22,000 tons to 36,000 tons this year.

In terms of foreign sales, Lebanon exports 1,000 tons, while Syria is predicted to shift 40,000 tons overseas – a 100% increase since 2005 – while Jordan is expected to experience similar growth with 17,000 tons.

Lebanon is clearly lagging behind, but experts agree that there is global demand for its produce as international olive oil tasters highly rate Lebanese extra virgin olive oil. “Our oil is excellent when produced using good cultural practices and when extracted in modern mills, respecting hygiene conditions,” explained Hussein Hoteit, an agricultural engineer.

Lebanon produces many different flavors and tastes of extra virgin olive oil because of the variations in soil, topography and altitude, but producers now realize that to be part of the global market they have to consider more than just the taste. (Access to international markets was eased in 2002, when the EU agreed to full liberalization – i.e. no duties and no quotas for less than 1,000 tons – for Lebanese olive oil, but production still remains too low for a major entry.) Today’s producers must recognize that economies of scale, labor costs, agronomic practices, and quality pressing are essential in today’s global market.

“One third of the oil produced, is for personal consumption; the remainder is sold to be bottled by the major companies, or from producer to consumer directly in the [$85, 16kg] tanakeh,” said Youseff Fares, an agricultural engineer and manager of Olive Trade. He added that the summer war reduced supply and pushed up prices of what was otherwise an excellent harvest.

One too many obstacles

According to Hoteit, many olive groves were damaged or covered by cluster bombs that prevented harvesting. The mohafaza of Nabatiyeh is only able harvest 23% while the mohafaza of South Lebanon can only pick 17% of the crop. On top of this, five olive mills in the south were destroyed. “The Lebanese olive oil industry is in a tough position. Production costs are increasing, quality is decreasing and the moral of the producers is at an all time low,” said Sleiman El Dagher, president of the Syndicate of Interprofessional Lebanese Olive Oil Producers (SILO).

The war was just another stumbling block for this fraught industry. According to SRI there are several problems facing the sector. Progress within the industry is vital if it is to grow, compete, and sustain itself in the world market. With respect to economics of production, the most important considerations for olive growing to ensure high fruit and oil yields are improved crop management and production techniques. Good storage facilities are also vital to retain quality of product. In Lebanon, these are inadequate compared to other Mediterranean countries.

There is a lack of extension services at the public sector level, such as low cost laboratory and testing facilities, while the sustainability of the sector is also at risk, especially in the south, as fewer people are choosing to live in the rural, olive growing areas.

Local consumers have also been hit by the recession and are reluctant to pay premium prices for olive oil. This has led to increased imports of foreign produce, especially from bulk-producer Spain. To make matters worse, Lebanese olive oil is losing out to shady operators who import olives and oil. These are either pressed or rebottled locally and passed-off as Lebanese.

Reaching out to other markets

Not surprisingly, producers and farmers are calling on the Ministry of Agriculture to implement a nationwide initiative for the improvement of the sector, with a focus on higher quality and a larger agriculture extension and outreach program.

Cheaper laboratory and testing facilities are also needed. “A nationwide incentive to test and certify local oil is essential for this industry to thrive,” insists El Dagher.

There are several ongoing projects with EU financing to train tasters to form a national Lebanese panel and establish four agricultural service centers in Jezzine, Hasbaya, Marjayoun and Bint Jbeil. Each will feature a modern mill and plant for bottling. Elsewhere, a number of producers are looking to export to specialty markets, such as France, Spain, USA, Australia and the Arab countries.

All this can be a significant source of jobs and revenue in the struggling agro sector. According to the SRI, however, to accomplish this, Lebanon must plant more trees and double its output of extra virgin olive oil, the type most in demand internationally. At the moment, it is estimated that extra virgin olive oil represents 25% to 35% of total Lebanese olive oil exports. “We should not attempt to take the highway of globalization that larger countries like Spain, Italy, Turkey and Greece, are on,” said El Dagher. “We should focus on creating a genuine Lebanese product, which can be exported to niche markets abroad.”

 

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RegionUncategorized

Another year Another conflict

by Nicholas Blanford
written by Nicholas Blanford

If there is one abiding image that symbolized the horrors of the Middle East in 2004, it had to be the harrowing videotaped pictures of doomed hostages in Iraq. The shots of terrified captives pleading for their lives are the antithesis of the optimism expressed by American officials at the beginning of the year that Iraq would become stable with the formal termination of the United States-led occupation in June and creation of an interim Iraqi government. Like other key areas of conflict in the Middle East in 2004, Iraq has dashed even the frailest of expectations.

At the beginning of the year, the Road Map unveiled in Spring 2003 by President George W. Bush was still considered a viable means of charting a peace between Israel and the Palestinians, despite the continued violence in the West Bank and Gaza. Libya announced it was abandoning its weapons of mass destruction program after tiring of its pariah status, setting a strong example to other countries with WMD ambitions, while Syrian President Bashar al-Assad signaled a willingness to resume peace talks with Israel after a four-year hiatus. Elsewhere, a democratic reform initiative from the Bush administration was spurring Arab governments to begin assessing political and social change in their countries.

Saudi Arabia is facing its worst unrest in years with a series of bombings and shootings carried out by Islamic militants seeking to overthrow the royal family.Yet the death in November of Yasser Arafat, the veteran Palestinian leader, spurred a flurry of international diplomatic activity amid hopes of a new beginning for the peace process. But a breakthrough appears remote given the Israeli government’s determination to proceed with a unilateralist agenda and the uncertainty surrounding the emergence of a new Palestinian leadership.

The Syrian-Israeli peace track remains frozen with Sharon clearly reluctant to resume negotiations, particularly at a time when Damascus is subject to a United Nations Security Council resolution and unprecedented international scrutiny. At end of 2004, the carnage in Iraq has developed an ineluctable momentum, which few see ending anytime soon, while Arab governments generally have been hesitant in embracing even minor reforms, despite mounting pressure from the West.

The Iraq debacle

The architects of the US-led invasion of Iraq had harbored ambitions that the overthrow of the Baathist regime and the introduction of democratic rule would engender a domino effect throughout the region, with dictatorships being replaced by budding democracies. The goal may have been noble, but the manner in which it was implemented was grounded in naivety and obtuseness, a fundamental failure to understand the ethnic, social and cultural realities of Iraq.

Early policy decisions, such as the disbandment of the Iraqi army and the de-“Baathification” process as well as questionable military tactics, fueled the budding insurgency in Iraq during the summer and autumn of 2003. From simple hit-and-run guerrilla tactics, the insurgency has evolved over the past year into a fluid multi-dimensional guerrilla war which shows little sign of diminishing despite – or even because of – the measures undertaken by the Iraqi authorities and their American allies.

The formal end of the American-led occupation in June and the hand-over to an interim Iraqi government did nothing to quell the insurgency. Ayad Allawi, the interim prime minister, is known as the “mayor of Baghdad,” an ironic term that still probably overstates the reach of his influence, which by the end of the year barely stretched further than the barricaded Green Zone in the heart of the capital.

Oil exports, the revenues of which were supposed to help fund reconstruction, have been decimated by the near daily attacks against Iraq’s oil infrastructure. US officials predicted before the war that Iraqi oil would generate $50 to $100 million in two to three years. But some 250 attacks since the end of the war have resulted in revenues of only $17 billion. The absence of Iraqi oil from the international market is a significant factor in the soaring oil prices of recent months which have reached in excess of $50 a barrel.

The violence is laying bare the country’s ethnic and sectarian seam lines, provoking concerns that Iraq may eventually splinter into three or more states. The Shiites are the most vocal champions of Iraq’s territorial integrity and have been at the forefront of the call for nationwide elections. Comprising some 60% of the population, the Shiites expect elections to transform their demographic advantage into real power after decades of being marginalized by the minority Sunni elite.

The Kurdish question

That ambition, however, causes unease among the Sunni and Kurdish communities which each represent 20% of the population. Despite Kurdish leaders’ stated allegiance to a united Iraq, separatist sentiments run deep among the Kurds, which the ongoing turmoil in the rest of Iraq is doing nothing to abate. Indeed, the Kurds have been steadily reasserting their authority over the oil-rich city of Kirkuk, home to a volatile ethnic mix of Kurds, Turkmen and Sunni and Shiite Arabs.

The prospect of an independent Kurdistan continues to alarm neighboring Turkey, which has threatened to intervene militarily in such an event. Turkey and northern Iraq’s other neighbors, Syria and Iran, fear that their own sizeable Kurdish communities will begin agitating for greater rights if an independent Kurdish state emerges in Iraq. That concern hardened in March when Syrian Kurds rioted for several days in the Hasake region of north east Syria.

The Sunni minority

The Sunnis, who populate the mainly desert and agricultural heartland, fear marginalization in a future Iraq dominated by Shiites. A key element in neutralizing the insurgency is to encourage the emergence of a new Sunni polity to replace the outlawed Baath party, which can participate in the political process. As it is, the most popular Sunni representative gathering at present is the Muslim Clerics Association, a religio-political group of hard-line Sunni clerics, who are at odds with the interim Iraqi government, oppose the presence of foreign troops in Iraq and have called for a boycott of the nationwide elections scheduled for January 30.

In preparation for the January elections, the US military launched a number of operations in October and November to break the back of the insurgency. But the insurgents have generally avoided a direct confrontation with the Americans, choosing to regroup and stage attacks elsewhere in the time-honored fashion of guerrilla warfare. Under the present circumstances, a military solution to the insurgency appears remote because there are insufficient coalition troop numbers to police the country and the newly formed Iraqi security forces are proving unreliable.

The unrelenting diet of suicide car bomb attacks, kidnappings, roadside ambushes and the brutally effective tactic of beheading hostages has forced aid agencies, charities and foreign businesses to abandon the country, undermining the ability of the international community to help in the reconstruction process.

Although Iraq has become synonymous with the decapitations of foreign hostages, the practice began this year in neighboring Saudi Arabia with the videotaped execution of an American, Paul Johnson, by extremist militants, who have seen to it that Saudi Arabia has been rocked by a wave of kidnappings, shootings and bombings since May 2003. The Saudi security forces have launched a crackdown on the militants, arresting hundreds of suspects, often during bloody shootouts.

The Palestinian-Israeli conflict

For most of the year, peace between Israel and the Palestinians has rarely looked more remote. The much heralded Road Map was essentially ignored by Israel and the Palestinians, while the US was too preoccupied with Iraq and the presidential election to actively coax the two sides back to the peace table.

Sharon, supported by Washington, refused to deal with the Palestinians while Yasser Arafat remained head of the Palestinian Authority. The veteran Palestinian leader was pronounced “irrelevant,” threatened with assassination and confined to his crumbling headquarters in Ramallah. Four years of fighting have left the PA and its security apparatus in tatters and in no position to rein in the numerous autonomous militant groups that have filled the vacuum.  Israel continued its policy of assassinations, killing in March Sheikh Ahmad Yassin, the blind and crippled spiritual leader of the Hamas movement, and a month later Abdel Aziz Rantissi, the head of the Hamas politburo.

The absence of a negotiating partner to suite Sharon’s requirements left him free to pursue his unilateralist agenda of building a concrete barrier separating the West Bank from Israel and preparing for a withdrawal from the Gaza Strip. Sharon’s plan to abandon the Gaza Strip along with four settlements in the northern West Bank has caused considerable controversy in Israel. The right wing strongly opposes any dismembering of Jewish-only settlements. The left wing found themselves in the awkward position of being obliged to support a plan that reduces the level of occupation while still not fully trusting Sharon’s motives.

With his government divided over the plan, Sharon traveled to Washington in April to seek the support of his ally, George W. Bush. The Israeli premier was rewarded with a commitment from Bush that there would be no right of return for millions of Palestinian refugees that Israel could keep some of the settlements in the West Bank and would not have to withdraw to the 1967 “Green Line” border. It was an unprecedented public concession to Israel from an American president, legitimizing the illegal colonization of an occupied land and prejudicing the final status talks in Israel’s favor.

Arafat’s death encouraged speculation of a potential new beginning to the peace process. But given the fragmented nature of the Palestinian polity, the transition to a new leadership could be marked by intra-Palestinian violence, which would delay any resumption of negotiations with Israel.

As for Sharon, he remains committed to his Gaza withdrawal plan and is in no hurry to resume peace talks with the Palestinians. That much was clear from a revealing interview given by Sharon’s senior advisor, Dov Weisglass, to Israel’s Haaretz newspaper in October. Weisglass admitted that the Gaza disengagement plan was “formaldehyde” to freeze the peace process with the Palestinians, “all with a [US] presidential blessing.”

Road to Damascus

Sharon’s reluctance to discuss peace with the Palestinians extends to the Syrian track. From December 2003, Bashar al-Assad has been dropping hints with increasing frequency that he is willing to resume unconditional negotiations with the Israelis. Assad’s interlocutors believe the Syrian president is genuine and Israeli military commanders have recommended taking advantage of Syria’s diplomatic isolation to cut the best possible deal. But Sharon, so far, has refused, saying that Damascus must first curtail its support for militant Palestinian groups and Lebanon’s Hizbullah.

Syria’s bargaining position has rarely been weaker. The US slapped limited sanctions on Damascus at the beginning of the year as part of the Syria Accountability Act, which calls for a Syrian withdrawal from Lebanon, cooperation on stabilizing Iraq, abandoning its alleged WMD program and ending its support for “terrorist” groups. Terminating Syria’s influence over Lebanon was elevated from a fringe issue in Washington to a stated policy goal of the Bush administration in 2004.

Syria’s approval for an extension to Lebanese President Emile Lahoud’s mandate led in September to the US and France co-sponsoring a UN Security Council resolution demanding Damascus cease interfering in Lebanese affairs. Resolution 1559 also demands a withdrawal of Syrian forces from Lebanon, the disarming of Hizbullah and Palestinian militias and the deployment of Lebanese troops to the southern border with Israel.

Damascus has made a greater effort to beef up security measures along its 600-kilometer desert border with Iraq to prevent infiltrators joining the insurgency. But the US has ruled out granting Damascus leeway in Lebanon in exchange for greater cooperation over Iraq.

Diplomacy and democracy

The unrelenting violence in Iraq and the Palestinian territories has overshadowed faltering attempts in early 2004 to promote political, economic and social reform in the Arab world. The Bush administration’s Greater Middle East Initiative, a framework for Arab reform, was widely criticized as an unwarranted meddling in Arab domestic affairs. It was also derided for failing to cite the Arab-Israeli conflict as a root cause for the region’s ills. The adverse reaction of Arab governments led to a revised and diluted version of the initiative being unveiled at the Group of Eight (G-8) summit in June.

Still, Arab regimes felt compelled to address the subject of democracy at the Arab League summit in May. The gathering produced the Tunis Declaration, a lukewarm pledge to promote human rights, freedom of expression, judicial independence and widen the role of women in society. Some countries are tinkering with minor democratic measures: Saudi Arabia is planning to hold its first municipal elections in February, and Kuwait is close to finishing a publications bill abolishing censorship in the local press.

The process of democratizing the Arab world received another boost in December when Arab foreign and finance ministers and G-8 representatives met in Morocco to further the Bush administration’s reform project.

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Financial Indicators

Life expectancy at birth: totalNumber of years, 2003

by Executive Contributor
written by Executive Contributor

Life expectancy at birth remains one of the most frequently quoted indicators of health status. Gains in life expectancy in OECD countries in recent decades have been due to a number of important factors affecting mortality rates, including rising living standards, improved lifestyle and better education, as well as advances in access to care. Other factors, such as better nutrition, sanitation and housing also played a role, particularly in countries with developing economies. Higher national income is generally associated with higher life expectancy at birth across OECD countries, although the relationship is less pronounced at higher levels of income.

Foreign-born persons with tertiary education
As a percentage of all residents with tertiary education, circa 2000

n In many countries, foreign-born persons represent a significant percentage of persons with tertiary education. Many OECD countries “gain” more than they “lose” from migration of the highly educated. The table shows foreign-born persons with tertiary education living in or from OECD countries as a percentage of the number of residents with tertiary education.

Gross and net national income per capital
US dollars, current prices and PPPs, 2003

Per capita gross national income (GNI) and net national income (NNI) are often preferred by analysts when comparing income levels. GNI is defined as GDP plus net receipts from abroad of wages and salaries and of property income. Guest-workers and other migrant workers who live abroad for twelve months or more are considered to be resident in the country where they are working. Property income from abroad includes interest, dividends and all or part of the retained earnings of foreign enterprises owned fully or in part by residents.

Partner countries and regions of OECD merchandise trade
As a percentage of total OECD merchandise trade

Distribution of household disposable income among individuals
Measure by Gini coefficients

The distribution of incomes within a country is important for two reasons. Inequalities create incentives for people to improve their situation through work, innovation or acquiring new skills. However, crime, poverty and social exclusion are linked to inequalities. Income is defined as household disposable income. It consists of earnings from work, property income such as interest and dividends, and pensions and other social security benefits; income taxes and social security contributions paid by households are deducted. The equality of disposable incomes among individuals ranges from 0 in the case of “perfect equality” (each share of the population gets the same share of income) to 100 in the case of “perfect inequality” (all income goes to the share of the population with the highest income). Household income is adjusted to take account of household size.

Households with access to a home computer
Percentage of all households, 2004 or latest available year

The table shows the number of households that reported having at least one personal computer in working order. The second part of the table shows the percentage of households who reported that they had access to the Internet. In almost all cases, this access is via a personal computer, either using a dial-up, DSL, fiber optic or other broadband access.

World CO2 emissions from energy use, by region
Million tons

Carbon dioxide (CO2) makes up the largest share of “greenhouse gases.” The table refers to emissions of CO2 from burning oil, coal and gas for energy use. Carbon dioxide also enters the atmosphere from burning wood and waste materials and from some industrial processes such as cement production. Emissions of CO2 from these sources are a relatively small part of global emissions and are not included in these statistics. The Revised 1996 IPCC Guidelines for National Greenhouse Gas Inventories (see below) provide a fuller, technical definition of how CO2 emissions have been estimated for this table.

Foreign direct investment (FDI) is a key element in the rapidly evolving process of international economic integration. FDI creates direct, stable and long-lasting links between economies. FDI is an additional source of funding for capital investment. Foreign direct investment (FDI) is defined as investment by a resident entity in one economy with the objective of obtaining a lasting interest in an enterprise resident in another economy. The lasting interest means the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence by the direct investor on the management of the direct investment enterprise. Absolute control by the foreign investor is not required, and ownership of 10% of the ordinary shares or voting stock is the criterion used. Inward stocks are the direct investments held by non-residents; outward stocks are the investments held in other economies.

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Financial Indicators

by Executive Contributor
written by Executive Contributor

The Beirut Stock Exchange entered 2006 with its most auspicious start since reopening a decade ago. Trading volumes soared to new heights and the Blom Index rallied by about 50% in January. Backed by regional investor appreciation, shares of the big banks and of Solidere reached valuations that had been fanciful theories in earlier years. Banks Audi and BLOM used the felicitous time for capital increases, issuing new shares and GDRs; other companies enthused about IPO opportunities. The Beirut market lost some of its verve in the spring time crash season of regional bourses, but suffered less than its peers in the GCC. It took a war between Israel and Hizbullah to create a trough in July and August, and further hideous political assaults by forces unknown and known to drive the index in November 2006 below year-end 2005 levels.

Beirut SE: Blom (1 year)
Current Year High: 1,934.21 Current Year Low: 1,013.97

On the Amman Stock Exchange, the 2006 trading story mirrored the goings-on of Gulf stock markets, even as the Hashemite Kingdom’s economy experienced the high flying world oil prices, inversely to the GCC countries, as the year’s biggest financial burden. In late November, the ASE Index shrank to its lowest level of the year, some 3,400 points below the market’s 2006 peak on January 8 and 31% down from the start of the year. Investor confidence throughout 2006 didn’t spark sufficiently to re-ignite the fire that had driven the ASE upwards during all of 2005. This notwithstanding, investments by highly liquid Gulf companies, creation of new financial and real estate ventures, and a lively period of company formations in the Jordanian economy set positive accents in a challenging year. Besides the market-ruling Arab Bank, Jordan Telecom (where France Telecom at long last acquired a controlling stake) supplied talking points in 2006.

The Abu Dhabi Securities Market lost almost 42% between the beginning of January and the last November weekend, but still fared better than its sister exchange in Dubai where the DFM Index dwindled by 65% over the same period. But different to the DFM with its flotation move, ADSM management in the last quarter of 2006 busily denied rumors that a partial privatization and flotation of the state-owned bourse were on the books. Where ADSM and DFM managements appeared to agree was in stating that a merger of the two exchanges was not a near-term option, even as numerous voices in and around the UAE have been in consensus that consolidation into a broader and stronger unified bourse would be a good thing and eventually inevitable if the Emirati exchanges want to remain attractive in the longer term.

The high point of the year for the Dubai Financial Market came in the middle of November when institutional and individual investors queued up to buy the 680 million shares that the DFM made available in its own initial public offering. At par value of 1 Dirham per share, the region’s first IPO of a stock exchange operator attracted subscriptions worth AED 190 billion for general subscription, which represented almost 43% of the AED 1.6 billion IPO. Analysts attributed the intense investor interest in the DFM IPO to the attractiveness of primary markets but did not suggest that overall trading activity on the Dubai exchange was prone to strengthen in the near term. The past 12 months to late November 2006 saw the DFM lose over 900 points from peaks it had reached almost exactly a year earlier.

The Kuwait Stock Exchange braced the storms of 2006 with somewhat less violent appearing Index movements than the UAE and Saudi bourses. It also testified to its reputation as one of the region’s more mature exchanges by achieving a 12% increase in traded companies in 2006. Nonetheless, the KSE’s rapid slide from its year-high of 12,054 points on February 4 to less than 10,000 points on March 14 gave many individual market participants the shakes and brought about several demonstrations in which Kuwaiti retail investors demanded government intervention to prop up the exchange. After achieving gains between end of July and late October, the KSE disappointed somewhat in November by moving into a downward period for the fourth time in 2006 and once again dipping below the 10,000 points line, but its year-to-date contraction of around 15% at end November was quite presentable relative to its main competitors in the GCC.

The Saudi Stock Exchange is the trendsetter for Gulf markets by the power of its underlying economy, its trade volumes and its market capitalization. When the Tadawul Index was still on the rise early in 2006 to its peak of 20,655 points on February 15, it was moving contrary to the correction mode that already ruled in neighboring markets. But just as analysts warned of the abnormally high price to earnings ratios of Saudi stocks in late February, the SSE got caught on a 60% slide between March and November. Volatility dominated and market interventions by big players proved futile, illustrating instead the market’s transparency problems and its immaturity. Noteworthy measures by the authorities included admission of resident foreigners and an SSE-wide stock split in March and April, and licensing of new brokerages throughout 2006.

Not the main stage of Gulf stock developments, the Muscat Securities Market in 2006 stayed its course in the bandwidth of 4,700 to 5,800 points where it already had been trading in during the second half of 2005. The spring time meltdown of GCC bourses affected the Omani bourse but the correction was less pronounced than elsewhere, and from mid August until the end of October, the MSM was moving up nicely, climbing more than 1,000 points. While local traders say the Omani market has a lot of potential and is not governed by rumors and similar volatility drivers, the sultanate still many have fewer companies that will attract international and regional attention than other GCC markets. Nonetheless, by the last weekend of November, the MSM was the Gulf’s solitary bourse reporting an index gain—nearly 12%—from the start of the year.

Muscat SM (1 year)
Current Year High: 5,799.77 Current Year Low: 4,657.16

The Bahrain Stock Exchange started 2006 with a meteoric rise of more than 9% to its year-high of 2347 points at the beginning of February, only to take a hard fall directly afterwards that brought its index down 13% within less than two months. Another volatile period followed from April through mid August, after which the BSE however regained a relatively solid posture that positioned it by end October in positive territory compared with the start of the year. In November, the market again fell in step with the downward trend of the region’s other bourses, reporting in 2% lower year-to-date on the last weekend of the month. In a noteworthy change of its capital markets operating framework, Bahrain from September 2006 implemented a new law that established the Central Bank of Bahrain as single regulator for the kingdom’s financial services industry.

Qatar’s capital markets showed only short periods of gains in 2006 mixed into a persistent southward trend that pushed the Doha Securities Market Index 44% lower over the course of 11 months. The DSM, which had peaked already in September 2005, reached its highest point of the past 12 months in December of last year and, similar to the DFM, ended November 2006 on levels we had last witnessed two years earlier, in November 2004. The structure of the DSM’s portfolio of listed companies is still in need of development and analysts saw indications that the market will remain range bound for a while. However, from the third quarter of 2006 onward, licensing of finance firms and banks at the new Qatar Financial Center made significant progress and the creation of this parallel financial services center is expected to contribute to the listing of new companies on the DSM.

Petite but très chic: the Tunisian bourse is North Africa’s smallest, but like its Moroccan counterpart, it advanced steadily throughout the year and could report a 44% index gain between January 1 and November 27. The Tunindex reached 2,326.80 points and the TSE achieved a market capitalization of $4.274 billion. This is little over half of the market cap of the Beirut Stock Exchange, the region’s second-smallest, and equals just about one and a quarter percent of the Saudi Stock Market’s market capitalization. Another area where the TSE appears somewhat diminutive, is the creation of news, at least as far as news that make it to the region’s English-oriented markets.

The Casablanca Stock Exchange dropped by some 1,850 points or more than 20% between May 8 and June 14 of this year, but in the larger picture of its development over the past 11 months, this was a mere breather in a bull run that drove the index up by 65% between the start of the year and the last November weekend when the CSE crossed the 9,000 points line and rode to a new high for the year—a feat irrespective of the question if those round numbers, often cited as “psychological barriers,” have any real significance in the region’s fast-paced markets. Traditionally driven by banking and finance stocks, the CSE saw lively trading action this year with one highlight being the telecom sector and new IPOs that widened the bourse’s scope. At the end of November, construction supplies firm Fenié Brossette and industrial equipment trader Société de Réalisations Mécaniques embarked on the CSE’s two latest IPOs.

With Egypt’s economic strengthening throughout the reform-minded past two years, the Cairo and Alexandria Exchanges benefited from privatization action and diverse investor interest that pushed the Hermes Index up by well over 6% at the last November weekend when compared with the end of 2005. CASE was by and large buoyant in the second half of 2006, after essentially sliding in the first half and reaching a year low of just under 42,000 points in late June. The Hermes’s rise from this level to above 59,000 points at the end of November marked one of the region’s most impressive second-half performances and when viewed over the past two years, the index was over 250 higher. Telecommunications and banking stocks were among the bourse’s attention grabbers in 2006 and the market expects further impulses from privatization and IPO activities.

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Levant

Jordan’s real boom in real estate

by Executive Contributor
written by Executive Contributor

Jordan is set to become the latest in a long line of Middle Eastern countries to experience a boom in its real estate market, with the tourism, office and residential sectors all enjoying an unprecedented growth spurt.
Towards the end of 2006, a number of the region’s major investment and property development companies have announced new large-scale projects in Jordan, building on the sound foundations laid over the past few years as the country’s real estate market started to take off.
In early November, the Saudi Arabian construction firm Saudi Oger and rights holder Saraya Aqaba signed the final agreements for the second stage of development of Jordan’s single biggest property project.
The new tourism development, to be built at the Red Sea port of Aqaba, has a price tag of $995.7 million and will include shopping, dining, entertainment, freehold accommodation and cultural facilities, all built around a man-made lagoon.
At the same time, Jordanian developer Union Land Development announced plans for a 35-story mixed office and accommodation tower block in central Amman, with construction due to be completed within two years.

UAE comes to town
Not to be outdone, a day or so later UAE developer DAMAC Properties announced that it had already sold out two of its four projects in downtown Amman, one a 35-story tower and the other an eight-story residential complex, and was starting work on a third development, a nine-story residential tower.
Peter Riddoch, DAMAC Properties’ chief executive officer, said that the Amman developments were driven by his company’s belief that the Jordanian capital would become a true hub for business and tourism throughout the region and beyond. Having already invested $150 million in the Jordanian property market, Riddoch said there were more projects in the pipeline.
One of the reasons behind Jordan’s property boom has been the strong growth enjoyed by the country’s economy over the past three years. While figures for 2006 are down on the preceding two years, 6% compared to the 7.2% for 2005 and 8% for 2004, the Jordanian economy is continuing to expand at a healthy rate.
Another underlying cause is a general shortage of accommodation and office space, especially in the capital, Amman. This problem is compounded by a lack of land for development, with the shortage in the city center being particularly acute.

High-rises on the horizon
According to Omar Maani, the mayor of Amman, the only viable option is high-rise developments, a feature that is already beginning to appear on the capital’s skyline. He believes they are an essential component of thriving, modern cities and represent smart growth.
Encouraging investment in the construction of high-rise buildings will both address real and emerging market demands and meet the needs of investors, he said.
However, Maani believes that there will have to be an extensive overhaul of Amman’s planning regulations, which date from 25 years ago, with a modern master plan and real estate development guidelines drawn up before wholesale construction can begin.
It was necessary to modernize land planning and the regulatory regime, together with an upgrade in infrastructure to accommodate growth or else both Jordan’s citizens and investors would face serious consequences, he said.
The municipality is finalizing an interim growth strategy that Maani said will provide a necessary bridge to facilitate development in a controlled manner until the master plan is adopted in the next few months. This will streamline planning approval and clear the way for granting permission for the new generation of tower block investment projects, the mayor said.
Though Jordan’s real estate and construction boom is generally viewed in a positive light, there is something of a downside. Increasing demands for material and rising wages for construction workers were estimated to have risen by 15% in 2006; both are factors in pushing up real estate prices and inflation. While inflation hovered around the 3.5% mark for the past two years, and averaged 1.7% for the two years before that, the rise in Jordan’s consumer price index is expected to top 6% for 2006.
Despite the inflationary concerns, and some worries that lower-income Jordanians may be priced out of the market, the growing interest of international developers in the property sector is being seen as a sign the country is set to build on the economic stability and growth of previous years.

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Levant

Iran ascendent

by Executive Contributor
written by Executive Contributor

by investing
in Syria

Iran is fast becoming one of the major overseas investors in Syria, with projects worth more than $800 million already in the works and other schemes in the pipeline for 2007. Over the past few years, Iran has invested heavily in Syria’s energy, construction, utilities and automotive sectors and has now added tourism developments to the list.
The strength of Syria’s economic ties with Iran was underscored at the end of 2006 during a visit by Iranian Foreign Minister Manouchehr Mottaki. While regional and political developments dominated his meetings with Syrian leaders, Mottaki found the time to address the economic side of the bilateral relationship.
Describing the level of economic links between Syria and Iran as determined and positive, Mottaki said that his government recognized the great potential for cooperation between the two countries and wanted to map out new strategies to expand on this even further.
Tehran sets no limits to the expansion of cooperation between the state and private sectors of Iran and Syria and is ready to provide facilities in this regard, he said.
Syrian Prime Minister Mohammed Naji Ottri was just as enthusiastic, saying that both countries wanted to make use of the potential of the other and were seeking to put in place further mutually beneficial projects for sustainable development.

Iranian investment growing
While in Syria, Mottaki paid a visit to one of the larger developments being carried out with Iranian assistance, a $200 million water management project in southern Aleppo. The cornerstone of the scheme is a 5.3 km tunnel with a radius of 5.4 meters to carry water from the Euphrates Dam to the farmlands on the Aleppo plain.
In what could be the largest Iranian investment to date in Syria, the two countries, along with Ven­ezuela, announced in late 2006 that they had formed a consortium to build an oil refinery in Syria. The project, budgeted at $1.5 billion, foresees the construction of a refinery with the capacity of processing 140,000 barrels of oil per day.
Iran has a number of other projects in Syria, having recently announced plans to construct 50,000 housing units in the Adraa district outside of Damascus and establish an industrial zone near Hisya in central Syria. Elsewhere, work is nearly complete on a cement factory in Hamah, with production due to start in early 2007.
Another Iranian investment is set to start production by the beginning of 2007, with the first Iranian designed Samand cars rolling off the assembly lines at a new $60 million facility, a joint venture between Syria and the Iran Khodro Company (IKCO).
According to Mahdi Tashakkori, the project director, the first phase of production will see 10,000 cars built annually, rising to 30,000 when the plant goes to a full three shifts.
The project is part of the Iranian firm’s push to establish a wider sales and production base, Tashakkori said.
IKCO will coordinate the project within the framework of offering technical knowledge and production line machinery as well as the establishment of the project alongside with the development of National Samand’s brand in the Syria and Arab countries’ markets, he said.

An incentive for Syrians
An incentive for Syrian buyers of the Samand will be Damascus’s decision to drop sales taxes, thus putting the cars in the same price range as similar size imported saloons, an incentive that was also attractive for the plant’s Iranian investors.
Syria has also announced it would import 5,000 buses from Iran as part of measures to upgrade the country’s public transport network, with the first 1,200 vehicles to be delivered in 2007.
Tourism ventures are another area where Iran is keen to play a role in Syria. In late September, Iran’s Amiran Investment Group announced it was considering establishing a major tourism resort complex on Syria’s Mediterranean coast near Lattakia that would include hotels, chalets and associated facilities.
Both governments have said they want to see greater cultural ties and encourage pilgrimage tourism between the two countries as well as promoting the more traditional holiday tourism.
Meanwhile, with Damascus enacting new legislation and regulations to encourage foreign capital inflow and open up the country’s economy, Syria is becoming increasingly attractive to Middle East investors, with a number of Gulf states moving into the finance and banking sector.

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Levant

Insuring Syria Risky business

by Executive Contributor
written by Executive Contributor

Syria is set give life to long-declared plans to expand the country’s insurance industry, issuing licenses to two newly established companies in mid-October, with more firms expected to enter the market in 2007.
In line with many of the private banks that have been launched in Syria, both new firms have strong links to the Gulf. The main offshore shareholders in the Syrian-Kuwaiti Insurance Company are Kuwait’s Gulf Insurance, the United Gulf Bank, the Damascus-based Kuwaiti United Company for Investment in Syria, and the Kuwait Projects Company, with the other bank, the Arab Insurance Company-Syria, being backed by UAE investors. In both cases, overseas corporate shareholdings have been limited to 49%, with the remainder set to be sold off in an initial public offering (IPO).

Islamic insurance
Three other firms, Syrian Qatari Insurance, Nour Insurance and Al-Aqila Insurance, have also been given initial clearance to set up shop in Syria by the Syrian Insurance Supervisory Commission (SISC), the nascent sector’s regulatory watchdog. All are looking to start active operations in 2007 after being given the nod in October 2006, with licenses expected to be issued by the end of the year. The three firms have Gulf backing and intend to attract customers by promoting takaful, the Islamic model of financial services for funds investments.
As with the opening up of the banking industry to private concerns, the path to liberalizing the insurance sector has been somewhat long and winding. Though initial plans by the Syrian government to clear the way for private insurance companies to operate were floated in early 2003, it was not until June 2005 that a decree to that effect was issued. The first private insurer, Mottahida, only got the formal go ahead to start writing policies in the middle of 2006.
There has been some private insurance activity in Syria prior to this. The Syrian International Insurance Company (SIIC), whose main shareholders the Beirut-based Blom Bank and its insurance affiliate Arope Insurance, was formally granted a license for limited operations by the SISC in February. This followed Blom’s entering the local banking sector in 2005 through the Bank of Syria and Overseas.
Until the opening up of the sector, the country’s sole insurer was the state-owned Syrian Insurance Establishment, set up in the mid-1950s. While it provided comprehensive coverage for most of the traditional policy areas, including health, automotive, fire and accident for private citizens and commercial policies for businesses, there was little pick up. This was in part due to the public not seeing the need for such services, especially in the field of health coverage, as most medical services were state-provided anyway.

Ranked last in the region
According to industry studies, Syria is ranked last among regional countries in terms of insurance coverage, with less than $140 million invested in policies. This can be both a good and a bad thing for the infant sector in the country. While the Syrian insurance market is almost virgin territory for insurers, there is less awareness of the need for insurance in the community, among both businesses and the public; an awareness will have to be developed in order to build a sustainable client base.
While there is optimism among the companies entering the sector, with projections that the market could be worth $500 million in a matter of years, it is notable that most have only raised the $17 million minimum capital required under Syrian law.
The push by the Syrian government to encourage broad-based insurance coverage can be seen not just as a move to protect both private individuals and businesses, but as part of Damascus’s campaign to attract foreign investment to the country and to have the cashed-up insurance companies use funds from policies for new developments. Speaking at the launch of Mottahida in June, Finance Minister Mohammed al-Hussein said that the entry of insurance companies was a major step towards supporting the Syrian economy.
With the potential that Syria’s new insurance firms could have to invest, the industry could become another plank in the government’s program to build a broad-based economy with more focus on the private sector.

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Uncategorized

Syrian IPOs ready to go with potential for banks

by Executive Contributor
written by Executive Contributor

largely thanks to the legacy of the elder Assad, Syria has very limited opportunities for private investment and the vast majority of interests are publicly owned. The absence of a stock exchange means that many larger Syrian investors often choose real estate as an investment destination—which partly explains why real estate is disproportionately expensive in Damascus compared to most other commodities.
Despite the fact that Syria is generally considered to be a poor economy, there are a large number of wealthy expatriates, many of who fled after or during the Baathist revolution. According to one estimate, expatriate Syrian wealth is thought to be larger than that of the Lebanese and, one source says, reaches over $70 billion. There is, therefore, significant potential for greater private investment both from inside and outside the country. This helps to explain why the recent IPOs in Syria have been so hugely oversubscribed by Syrian nationals.
In the late 1980s and early 1990s, when Hafez al-Assad was still in power, a number of IPOs were attempted, but failed, as they did not generate sufficient investor interest. This discouraged other public/private companies from opening their equity for a number of years until 2003, when the government’s re-licensing of privately-owned banks (under a 2001 law) signaled a new era of IPOs, as reformist elements in the new Assad regime began to introduce a gradual economic liberalization plan.
In March 2006, with a view towards establishing a stock exchange in Damascus, the government created the Syrian Securities and Exchange Commission (SSEC). Syrian companies now wishing to open their capital to the market have to apply through the SSEC, which will ensure the company satisfies requirements in terms of its finances, credit history, prospects and valuation. This is a very new process, however, and as yet there are no case studies to judge by.
With the establishment of this commission, which is considered to be professionally-staffed and foreign-aided, analysts in Syria expect to see many more IPOs in Syria—or rather many more companies wishing to broaden their ownership base and open their capital. The stock exchange is expected to open in late 2007, although delays would not be surprising.
With the arrival of the SSEC, the likelihood of another Daaboul-style mishap has been reduced, although it should be remembered that both private and public sector companies in Syria are financially opaque, have an untraceable credit history and are not experienced in sophisticated styles of corporate governance. They also tend to be family-owned.
Furthermore, those companies which have opened their capital are generally high-profile companies with excellent prospects (banks and a mobile phone company). Whether other types of companies could have as successful IPOs is as yet untested, although there is undoubtedly a great deal of private investment potential given the 40-year absence of opportunities.

Banking IPOs in Syria

International Bank of Trade and Finance (IBTF)
This was the first IPO of the new wave and, as such, was seen as a landmark transaction. IBTF, the first of the privately-owned banks to open after the legislation of 2001 made them possible, ran the IPO in October 2003 and opened $14.7 million of its capital—the first time a bank made an open equity offer in Syria. It was open to Syrian nationals only and totalled 49% of its capital, with a 5% limit per investor. The majority shareholder (49%) is Jordan’s Housing Bank for Trade and Finance.
Arab Bank Syria
Arab Bank, a subsidiary of the Arab Bank Group of Jordan, was established in Syria in January 2005 with a capital of $30 million. It offered 24.3% to Syrian investors.
Bank Audi Syria
Audi’s IPO took place in 2005 and was hugely oversubscribed—it attracted subscriptions of over $115 million compared to needs of only $11.7 million. This represented 25% of the bank’s capital and it was open only to Syrian investors.
Byblos Bank Syria
The Byblos IPO took place in July 2006 and represented $6.7 million or 15% of the bank’s capital. The bank began full operations in August 2006, although it had been licensed some time before this.
Bank of Syria and Overseas (BSOM)
Blom Bank has a 35% stake in BSOM, the IFC has a 10% stake, 13% is held by Syrian businessmen and the rest was opened as an IPO in 2004.
Banque Bemo Saudi Fransi (BBSF)
BEMO bank and larger Syrian investors have the majority shares in BBSF, with the third party being Bank Al Saudi Al Fransi of Saudi Arabia. 48% of the bank’s equity was sold as an IPO to Syrian nationals in October 2003.
Syria Gulf Bank
A joint venture between Syrian and Gulf investors (the bank is part of the giant Kuwait-based KIPCO group). The IPO took place between Sept. 4-21, 2006, and was 250% oversubscribed. It raised $7.8 million, or 26% of the total capital. It was sold to Syrian nationals within Syria itself and also in the Gulf, where there are a large number of wealthy Syrian expatriates.
Al-Sham Islamic Bank
This was the first Islamic bank to launch an IPO in Syria. The IPO took place between Nov. 18 and Dec. 8, 2006, and was oversubscribed. There is rising interest in Islamic finance in Syria, as very little Islamic banking or finance is currently available.

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Special Report

Reform drive in Damascus set to rise next year

by Executive Contributor
written by Executive Contributor

Syria’s reform drive, expected to step up in 2007, is most noticeable in banking and finance. Although the state dominates the sector, private banks and financial services are opening up, and banks are increasing their lending to industry as well as retail banking. Syrian bankers are cautiously optimistic overall, though often frustrated by the slow pace of change.
After a half-century absence in the Syrian market (since nationalization in the 1960s), Law 28 legalized private banks in 2001; there are now 10 banks operating (or about to open shop) in Syria, according to reformist Deputy Prime Minister for Economic Affairs Abdullah Dardari, including three Islamic banks following their legalization in 2005. The first Islamic bank, a joint venture of the Bahrain-based Al Baraka group and Syrian investors, called the Syrian Islamic Baraka Bank, is slated to open before the end of 2006 with $100 million capital.
Banks that got in early have started to turn modest profits, despite only two years in the market (although legal since 2001, the first private banks only opened their doors in 2004). One of these, Bank Bemo Saudi Fransi, a Syrian-Saudi-Lebanese venture, saw its assets nearly triple in the first year and turned over a modest profit of SYP 53 million in 2006. Although state banks account for about 70% of business, private banks are making inroads, with their deposits going up by 95% in 2006, Dardari says.

Retail banking potential remains untapped, with little awareness
of services available


Since late 2005, cuts in stamp duty and central bank permission for private banks to finance up to 65% of import needs and issue their own letters of credit have opened up new possibilities for banks in Syrian trade financing, hitherto largely the domain of Lebanese and Jordanian banks. Liberalization of the trade sector should provide rich pickings for banks in the coming few years. The target for Syrian banks will be the capital that 41% of Syrian enterprises still place in offshore banks.
Syria’s retail banking potential remains largely untapped, with many Syrians having little awareness of services available. Syrian banks plan to roll out more branches in 2007. According to Ernst & Young Syria’s Abdul Kader Husrieh, speaking at a British-Syrian Society banking conference in November, Syria’s 300 bank branches need to double to match regional standards, and more than triple to meet those of emerging markets. Such an under-developed sector, he argued, offers lucrative opportunities for foreign investors to join Syrians in creating financial institutions.

Private banks have many gripes
Despite broad optimism about the overall direction, private banks have many gripes. Among pressing challenges are the lack of a credit risk agency at the central bank, making it hard to trace a customer’s credit history in a country where corruption is endemic. Syria’s four under-performing, lumbering state-owned banks also monopolize many industries, wrong-footing private banks, distorting the market and prompting private-sector calls for at least partial privatization, which remains an ideological taboo in the socialist country. US sanctions on the state-owned Commercial Bank of Syria, introduced after accusations of money-laundering, also tarnish the image of the private banks abroad, they say.
A lack of options for earning returns on excess liquidity, despite an onerous obligation to pay 7-9% on deposits, is a key difficulty plaguing private banks. The large customer deposits that bless the sector often sit in vaults at zero interest. Difficulty obtaining reliable information about small and medium enterprises is another barrier to investment, detrimental to both the banks and the small businesses that are Syria’s lifeblood.
Answering long-standing bankers’ demands, the central bank has announced plans to start issuing treasury bills by the end of 2006. It has also promised to raise the capitalization limit for private banks from $30 million and increase the permitted foreign ownership of private banks from 49% to 60%. Syrian law still stipulates, however, that foreign banks set up subsidiaries in Syria, rather than branches—an off-putting condition for many international banks.
Syria’s latest five-year development plan promises increased independence from the central bank, which currently imposes foreign exchange controls and caps private banks’ interest rates. Reforms outlined by Central Bank Governor Adib Mayaleh over 2006, if implemented fully, will push the institution towards the role of regulator rather than controller and have raised hopes it is becoming more responsive to the public sector. Mayaleh says the bank will loosen controls on the interest rates set by public and private banks over the next year, unify Syria’s multiple official exchange rates and establish and regulate a foreign currency market.
A key financial services development in 2006 was the establishment of two private insurance companies, legalized the year before, after 40 years of a single state-owned provider. Insurers predict rapid growth in the next few years in this untapped emerging market, with insurance spending averaging out at just $7 per capita (compared to $150 in neighboring Lebanon, for example), based on the state-owned Syrian Insurance Company figures.
Retail insurance provision is likely to be the largest area of growth—just 3,000 households are insured in the country of 17 million people—though low incomes, traditional reliance on family and a lack of understanding among much of the population will pose considerable challenges. Industry observers also want reductions of the hefty social security payments of 23% of the salary of each worker in Syria to the Social Affairs Association. Eleven private insurance licenses have been granted so far; until more insurance companies start up, prices will remain non-competitive, observers say. Other financial services are on the way, though it is not clear how soon: the government has set up a committee to draw up a mortgage finance law and another for developing a leasing law.

Pressing challenges include
the lack of a credit risk agency
at the central bank

Stock market opening anticipated
A reform process milestone to look out for in early 2007 is the opening of a stock market, which is expected to galvanize Syrian banking. Its success will depend to some degree on broader financial and business development as well as structural changes—the lack of an independent judiciary is a particular worry in a country where vested interests appear, if anything, to be on the rise.
The Syrian Capital Markets Authority, however, features a cast of experienced and capable names. At the November banking conference in Damascus, Authority Chairman Mohammed Al Imady said regulations to establish the market (awaiting cabinet approval at the time of writing) were up to international standards and incorporated good governance principles. Even an imperfect stock exchange, many observers believe, should encourage transparency, especially since it will be open to both domestic and foreign investors. Listed companies will also be legally required to appoint compliance officers.
The Commercial Bank of Syria’s announcement that it was preparing to list on the stock market was welcomed as a sign of a shift from state dependence even in the public sector. During 2006, public banks upped their game in response to the private sector challenge, with the Commercial Bank of Syria in particular increasing its capital, improving client facilities and training of employees and computerizing its system.
Syria’s banking scene is already unrecognizable compared to the start of the decade. Realizing the potential of this alluringly under-banked country will depend on parallel reforms in the real economy that will allow banks to generate assets from industry, agriculture, trade and tourism.

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Special Report

Syrian reform , Adopting the market

by Executive Contributor
written by Executive Contributor

Syria is stepping up reforms to become a “social market economy,” and accelerated changes are widely expected in 2007. But with the country projected to become a net importer of oil in 2008 and the structure of a command economy still in place, deep and radical change cannot come too soon.
Syria’s economy has the potential to one day be among the region’s most diversified. Strong foreign currency reserves, low national debt, abundant agricultural production and a large manufacturing sector are some of the points in its favor. Yet the economy is not even operating at 15% of its capacity, according to the estimates of Abdul Kader Husrieh of Ernst & Young Syria. Corruption, chronically inefficient industry and agriculture and a bloated and opaque bureaucracy are among many reasons for decades of underperformance.
A long-awaited reform program to provide cohesion and underpin the ambitious goals stated in five-year indicative development plan that started in 2006 is under formulation and expected in the first half of 2007. Ambitiously, it projects a growth rate averaging 5-6% per year, reaching 7% in 2010. Although many economists doubt this is possible, they applaud a new desire to aim high as a sign of commitment to progress. In a significant ideological shift, heavily centralized Syria formally adopted market reforms at the Baath Party congress of June 2005, arming reformers to defend their arguments against a shadowy “old guard” that remains resistant to change.
Leading Syrian economist Nabil Sukkar points out that reform will require the leadership to lose its adversity to risk at a time when dwindling oil reserves—and with them hard currency receipts and state revenues—threaten the macroeconomic framework and the political environment is particularly unstable. Syria remains under severe international pressure with US sanctions and the international investigation into the assassination of former Lebanese Prime Minister Rafik Hariri, which has implicated Damascus.
Expectations of a US rapprochement with Syria were gaining strength at the time of writing, in anticipation of the release of the Baker Commission’s Iraq study, which is expected to recommend dialogue with Syria and Iran. Syria and major trading partner Iraq restored diplomatic ties in mid-November. But strife in Iraq and Lebanon in 2006 exposed the vulnerability of Syria’s investment climate to regional troubles. Accusations that Damascus had a hand in the assassination of Lebanese Minister of Industry Pierre Gemayel in November cast a shadow over hopes that Syria was coming in from the cold.

Reform outlook
Reform started at a snail’s pace in the late 1980s under late President Hafez al-Assad, who, faced with a public sector that could no longer provide, made tentative steps to encourage the private sector. But after Investment Law No. 10 of 1991, which offered incentives to investors, including those from abroad, reform largely froze.
Bashar al-Assad’s reform pledges when he took over in mid-2000 built up hopes, but bankers and investors have grown impatient with the slow pace and lack of depth and say reforms tend to be disjointed and reactive. The term “social market economy” is also ambiguous. Policy-makers have yet to determine, Sukkar says, how much emphasis to place on social safety nets, how much on growth.
Change has been significant, however—particularly in banking and insurance—and appeared to regain some momentum in 2006. A stock market is expected to open in early 2007. Economists hail Deputy Prime Minister for Economic Affairs Abdullah Dardari as a determined reformer. Despite initial resistance from reactionaries in the leadership, he now appears to have stronger state backing, reflecting a belated recognition that there is no alternative to reform. A February cabinet reshuffle handed technocrats the ministries of Industry, Economy and Higher Education.
A fundamental shift is needed in the state’s role. Subsidies on fuel and commodities are an example of state drainage of the economy and one of the most pressing—and politically sensitive—concerns. An International Monetary Fund report from October 2005 found that subsidies equated to about 14.7% of Syria’s GDP. Dardari has promised a blueprint by the end of 2006 showing how to tackle the problem. No doubt with an eye to the civil disturbances that followed subsidy cuts in Egypt, Jordan and Yemen, it is believed the government is seeking a way to “target” the subsidies to ease the burden on the poor.
Creating jobs for a burgeoning population is one of the most urgent challenges for Syria. New entrants to the job market number 250,000-300,000 per year, but the economy only creates 180,000 new jobs. The realization is dawning that only a dynamic private sector can fill the gaps. A UNDP report in 2005 found that 2 million Syrians, out of a population of 17 million, could not afford to meet their basic needs. Broader poverty affected nearly a third of Syrians. While the government estimates unemployment is around 8%, economists say it is closer to 20%, and that does not include legions of under-employed workers that would need to be retrained and redeployed under any far-reaching reform of the public sector.
Using some of the oil revenues to create a fund to cushion the transition, pay unemployment benefits (currently non-existent in Syria) and retrain is advocated by reformers. Some 90% of the workforce is employed by the state, and under Syria’s antediluvian labor laws, only the prime minister can fire them. A major obstacle to creating a competitive market economy in Syria is the low level of technical training—Syria’s free and universal education system places little emphasis on usable skills. The recent decision to allow private universities is hailed by the private sector as a step in the right direction.

Economists hail Deputy PM for
Economic Affairs Abdullah Dardari as a determined reformer

Growth areas
Syria’s oil reserves are estimated at about 3 billion barrels of crude. Oil production is trailing off dramatically, barring new discoveries. Natural gas reserves are considerable, at around 240 billion cubic meters, but production is under-developed and most of the gas is destined for internal use rather than export. Syria’s potential for diversification is high, but will take a radical overhaul of state structures and institutions. According to the Syrian Investment Bureau, FDI in licensed projects rose to 30% in 2005 from 11% in 2004. With free trade agreements (FTAs) with Iran, Iraq and the Gulf—not to mention an anticipated EU agreement currently held up for political reasons—Syrian manufacturers have no shortage of markets.
However, FTAs hold severe risks as well as promise in a country where, for decades, industries remained deliberately small—95% of companies employ 10 people or less—for fear of nationalization. The government and rapidly developing private sector need to focus on supporting small and medium-sized enterprises (SMEs), the backbone of Syria’s economy, to help them upgrade if growing free trade is not to destroy local businesses and harm Syria’s balance of payments. Providing a transparent regulatory environment is crucial to enabling private factories to compete.
Manufacturers are missing out on considerable profits because of a lack of marketing and packaging capacity. In textiles, Syria’s second industry after oil, Syria tends to provide to wholesalers. Critics say the government has opened up to foreign competition—cheap garments from Asia hit the shelves this year—without supporting an industry that employs a third of the workforce. Syria gives no financial breaks to the textile exporters that would help the industry, mainly based in the northern city of Aleppo, to compete with Egypt and Turkey, particularly in European markets.
Similarly, Syria is the world’s fourth-largest producer of olive oil, but the country has no capacity to bottle and market it, so well-equipped producers such as Italy buy Syrian oil, repackage it and earn the bulk of the profit. At $800 a barrel, olive oil could be considerably more lucrative than fuel oil. Economists say local businesses need technical assistance and exposure to the outside to learn how to standardize production for export and compete internationally after decades of protectionism.
Across agriculture as a whole, it’s a similar story. Syria has food self-sufficiency and the potential to become a regional breadbasket, but socialist land laws—which place limits on the amount of land one person can own—mean farms are small. These ceilings are another sensitive issue, but one Syria will need to overcome in order to upgrade and mechanize production for export.
Damascus is placing high hopes in tourism as an eventual replacement for oil’s hard currency receipts. Tourism Minister Saadallah Agha al-Qalaa has stated tourism figures will be up by 6-8% for 2006, despite a disappointing summer season because of the war in Lebanon. Growth reached 11% in 2005, when 3.4 million tourists visited Syria. Damascus hopes that figure will reach 7 million by the end of the decade.
Syria has abundant cultural, historical and recreational tourism potential, with a wealth of historical sites and a stunning coastline. The country’s largest-ever tourism development plans to take advantage of the latter: Antaradus, a $200 million hotel and leisure complex at the northern port city of Tartous, was inaugurated this year. The tourism ministry has earmarked a further 82 projects for investment and cut taxes and red tape applying to tourism investments. Critics say the government could do more to promote tourism abroad, and in November, the ministry announced a sharp increase in its marketing budget for 2007, up to $5.5 million from $1.6 million. Gulf interest is considerable and expected to be keener if the regional political situation calms in the coming months.

Syria must catch up with
decades of lost momentum

The fledgling real estate sector has received much attention since licenses were first permitted in 2005, especially from Gulf investors, though again, many appear to be waiting for political tensions to ease. Emaar jumped in with the Eighth Gate, a multi-billion-SYP project in Damascus. The potential is clearly vast, but few projects have yet broken ground.
For Syria to defuse the economic time-bomb presented by shrinking oil reserves, it must catch up with decades of lost momentum. All eyes are on the state’s reform program, hoping it will provide a clear path to the market economy that is now all but inevitable for Syria. For this challenge to be met in more than a piecemeal way, Syria will have to tackle the toughest problems of all: setting out an independent judiciary and a transparent bureaucracy, almost certainly in the face of vested interests. As other emerging economies have shown, taking a shallow approach to market economy transition can concentrate money in the hands of a corrupt elite, deepening the economic woes of the masses and risking eventual instability.

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