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The rich just keep getting richer

by Fadi Chahine
written by Fadi Chahine

The ultra rich—those who hold more than $30 million each—have increased their assets by 8.5% to $33.3 trillion in 2005 from $30.7 trillion in 2004, Merrill Lynch and Capgemini said in their 2006 World Wealth Report (WWR).

The Middle Eastern share of high net-wealth individuals (HNWI) in 2005 amounted to $1.2 trillion, representing the strongest growth rate by region with 19.7% when compared with $1.0 trillion in 2004. Africa and Latin America followed with growth rates of 14.5% and 11.8%. Compared with $800 million combined HNWI assets in 2003 in the region, the wealth of the Middle Eastern rich increased by half in just two years.

In terms of individuals, the HNWI count for the Middle East increased by 9.8%—more than the global increase rate of 6.5% in 2004-2005—but remained in the range of 300,000 to 400,000 individuals.

Rising oil prices a factor

The WWR attributed the Middle East’s strong HNWI growth generically to the world market’s rising oil prices as well as heightened investor confidence and large trade-driven surpluses in the region. Observing that combined HNWI assets increased significantly faster than HNWI numbers, the report said the region’s wealth “not surprisingly … continues to experience an inequitable distribution.”

Counting 1.1 ultra-HNWIs for each 100 HNWI, the Middle East was very close to the global average as far as proportion between rich and super-rich is concerned. Out of 8.7 million HNWIs worldwide, 85,400 hold assets of $30 million or more.

A table of HNWI population changes in select economies showed the year’s strongest growth for South Korea, with 21.3%, followed by India and Russia. Saudi Arabia achieved 13.5%, and the United Arab Emirates 11.8%.

Globally, the very rich have doubled their combined wealth to $33.3 trillion in 2005 from $16.6 trillion in 1996 when the World Wealth Report was first published. However, as HNWIs grew in numbers to 8.7 million last year from 4.5 million a decade earlier: assuming increasingly sophistication survey mechanisms over the years have filled gaps in the initial counts, growth in the numbers of individuals and their total assets are closely correlated and moreover intertwined with global economic growth over the period.

This is also visible in the fact that the evolution of combined wealth and that of individual wealth holders has followed a very similar pattern, of increasing 62% and 56% from 1996 to 2000, undergoing a contraction in 2001, and resuming steady expansion from 2002.

On the cost-of-being-filthy-rich side, the report noted a narrowing of the gap between the “Cost of Living Extremely Well Index” growth and average Joe’s consumer price index inflation. In 2005, the CLEWI grew 4%, only 0.4 percentage points more than the CPI with 3.6% growth. Two years earlier, the gap had still amounted to 5.5 percentage points, according to the WWR.

How did they do it?

In Europe, where HNWI growth rates have been subdued compared with other world regions, the rich additionally bear the cross of having to spend more on staying in style. According to Capgemini/Merrill Lynch, heavily moneyed individuals in Europe have to allocate around 1.6% of their average wealth for sustaining lifestyle aspects such as lodging in five-star auberges, maintaining that body and tan in spa visits and securing their children’s education in private schools.

As to the big question—how did they get that wealthy?—

the 2006 WWR observed an increase in earned wealth vis-à-vis inherited riches, diagnosing that over the past five years, “earned wealth has grown faster than wealth passed down from an earlier generation.” Inheritance last year was the main origin of wealth only for Middle Eastern individuals, where a WWR survey among relationship managers described it as source of 32% in HNWI wealth, 14 percentage points above the global figure.

On global level, the survey attributed HNWI fortunes firstly to ownership or sale of a business (37%), followed by what the report quite loosely described as “income” with 24%.

This income excluded items such as investment returns and stock options, which in their combination accounted for a share of wealth ranging between 25% in North America and a mere 10% in Latin America. Investment performance, the direct bailiwick of Merrill Lynch and Capgemini, contributed less than one might have expected to the total, namely 12% in Asia-Pacific and 10% in each Europe and North America, but only 5% in the Middle East and 3% in Latin America.

Looking to the future, the WWR estimates that HNWI assets will increase to $44.6 trillion in 2010, of which the Middle East will claim $1.8 trillion, reflecting an annual regional growth rate of 8% versus the estimated global annual growth rate of 6%.

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Contemporary art in the Gulf: time for a renaissance?

by Sunny Rahbar
written by Sunny Rahbar

In May 2006, Christie’s held its first-ever auction in the Middle East, a sale of international contemporary art with an emphasis on Arab and Iranian works. All expectations were shattered: more than $8.5 million worth of art was sold, and a second auction is now planned for January 2007. Despite the absence of a strong artistic tradition, the Gulf is increasingly emerging as a new artistic hub in the Middle East. The Sharjah Museum held its 7th biennial in 2005, an event now widely regarded as the Gulf’s premier modern art showcase; the 8th biennial will open in April 2007, and is expected to be even bigger. The first major art fair in the Middle East, the Gulf Art Fair, will take place in March 2007, and will see some of the world’s most exclusive galleries taking part, rubbing shoulders with their new local counterparts. The Guggenheim has announced its biggest-ever museum to be built in Abu Dhabi, expected to open in 2011.

If there was a lull in terms of artistic innovation, production or sales of Middle Eastern art during the later decades of the 20th century, it was because the Middle East itself was in a state of unrest: most local artists either had to go to the West to pursue their careers, or stay and make art under adverse, often repressive condistions. Only rarely was their art shown to local audiences.

The popular resurgence of Arab art began in earnest in the late 1990s. One catalyst was the the surprise triumph of Iranian director Abbas Kiarostami’s “Taste of Cherry” at the Cannes Film Festival in 1997, which raised both awareness and interest in regional cinema. Iranian cinema may be the regional star, but Arab filmmakers caught the wave as well. For foreign audiences, Middle Eastern cinema was new and innovative; people were curious to see and, perhaps through these films, better understand the region. The fact that much of this emerged despite tight government regulations and censorship, and often under politically or physically dangerous conditions, only heightened Western interest and curiosity.

Around the same time, galleries throughout Europe began to recognize the level of emerging talent among Middle Eastern artists and a Western appetite for regional culture. In 2001, the Barbican in London organized an exhibition of contemporary Iranian art from 1970s to present day. Other prominent shows included Disorientation in Berlin in 2003, a multimedia group show for young Arab artists; Contemporary Arab Representations in Rotterdam in 2002; and Harem Fantasies and the New Sheherazades, showcasing the works of contemporary Middle Eastern female artists in Barcelona in 2003.

Meanwhile, there was a feeling within the nascent Gulf art community that things were changing. A discourse emerged, as artists reflected on their situations, the region and its nuances, identity and exile, politics and life. Among the younger artists being showcased, there were also many older, established artists showing new work or work that not been seen in years. There were also artists, such as Mona Hatoum and Shirin Neshat, who had already made their careers in the West but suddenly found themselves the subjects of much greater attention as more curiousity surrounded Middle Eastern art and artists.

At the beginning of the decade, Dubai had only a few art galleries, which mainly displayed European and other Western artists. The cinemas showed Hollywood films, few of the exciting new Iranian and Arab films and filmmakers were recognized, let alone screened in the Gulf. There were pockets of production and promotion in other parts of the the Middle East, especially in the cultural capitals of Beirut, Cairo and Tehran. But most of the action was in the West.

Five years ago, there were no contemporary art galleries that specialized in art from the Middle East in Dubai. There were no magazines that wrote specifically about local artists, and there was no secondary market for art in the emirate. In short, there were no real platforms for local artists to be promoted to their home audiences.

At the time, some naysayers speculated that people in the Gulf were simply not interested in Middle Eastern artists, and perhaps there was no real market for such work. Five years on, however, there are now two magazines solely devoted to Middle Eastern art and culture, Bidoun and Canvas. Art-based forums, nonprofit groups and new galleries are springing up. The Dubai film festival today, for example, has an entire section devoted to films by Arab filmmakers.

There is a market for Middle Eastern art in the Gulf: as shown in Dubai, the kind of work that people once dimissed as not having a “market” here is exactly what the collectors are buying. And the best news is that in this boom, some of the most exciting work to come from the artists of this region for a long time is emerging: Middle Easterners are making art that is thought-provoking and conceptually strong. The Gulf and its artists are waking up, and it’s about time.

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Editorial

A year of tumultuous change and reversals

by Yasser Akkaoui
written by Yasser Akkaoui

Lebanon is still a wildcard in the Syrian deck. The Syrians know it and the Lebanese know the Syrians know it, so they will only have themselves to blame if they allow Damascus an entrée back into Beirut because of their inability to get along. Imagine the shame of being ruled—either directly or by remote control—by a regime they so successfully asked to leave in 2005. Oh, how long ago that heady spring now seems.

Destabilization in Lebanon will almost certainly give Damascus an opportunity to come in from the cold internationally and cut a deal with the US. It would see Damascus distance itself just enough from Tehran, use its influence to ease tensions in Iraq and rein-in the argumentative Lebanese, who by then will have proved they cannot handle fully-fledged independence. Such a deal would also realign Damascus with the Gulf states, who are investing heavily in Syria. The Baath has tasted the twin fruits of liberalization and FDI, and it likes them.

Politics is about pragmatism. Forget the doe-eyed girls in low-cut jeans who were the symbols of the Cedar Revolution. Those who believe the US will stand by a fractured Lebanon forever are dreaming. In 2007, it may be forced to surrender Lebanon—especially a Lebanon that has done itself no favors—to shore up Iraq.

Elsewhere in the region, the economies of the GCC continue to perform like thoroughbreds, and unlike in Lebanese politics, lessons have been learned. The conditions that led to the stock market correction—one that saw so many small investors get badly burned—have been identified. Economic growth has been so rapid that bigger institutional investors are now exposed to unprecedented risk, and measures are being adopted to stop them reoccurring. One way to do this is through wholly embracing the culture of corporate governance (currently the buzzword in regional banking). The signs are that, in the GCC at least, attitudes are changing.

But still there are storm clouds, albeit distant ones. The short and medium term future may be rosy, but the long term still needs to be addressed. Almost all the world’s enlightened nations have recognized the fact that fossil fuels are finite and already dramatically altering the planet with their emissions. For years now, they have invested in alternative sources of energy—wind, solar, water—in preparation for the day when oil becomes too expensive. By then, the GCC should have diversified into enough sectors to enjoy a seamless economic transition. When intensified conflict can send the price of fuel into the stratosphere, such diversification cannot come soon enough.

The nations of the GCC have shown they can adapt. For Lebanon, intransigence may be its undoing.

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Lebanon Outlook

Looking back – 2006

by Executive Staff
written by Executive Staff

January 2006

Beirut experiences a relatively muted new year after the killing of MP Gibran Tueni and the revelations of former Syrian Vice President Abdel-Halim Khaddam on Arabic satellite TV. Among his many accusations is the charge that Brigadier General Rustom Ghazaleh, acting as what he called Syria’s “viceroy” in Lebanon, stole $35 million from al-Madina Bank and regularly insulted and threatened Lebanese leaders. In another interview, Khaddam reveals that Syria sought Spanish mediation to prevent Security Council member-states from adopting Resolution 1559. In return, he offered to abandon his plan to extend President Lahoud’s mandate. British Foreign Secretary Jack Straw arrives in Beirut for talks with Prime Minister Fuad Siniora but does not see President Emile Lahoud. Siniora is locked in talks with Hizbullah leader Sayyed Hassan Nasrallah to resolve the Cabinet crisis. Local media reports that Belgian prosecutor Serge Brammertz will be named as successor of outgoing chief UN investigator Detlev Mehlis. Syrian President Assad announces he will not appear before the UN commission. The announcement comes as UN Secretary General Kofi Annan formally appoints Brammertz as successor to Mehlis in the UN probe into the slaying of ex-premier Rafik Hariri. Arab diplomatic efforts to find a solution to the crisis reach a deadlock as talks between Siniora and Hosni Mubarak in Egypt and Saad Hariri and Jacques Chirac in France strengthen resolve to reject any deal with Syria. The UN investigating commission questions brigadier Rustom Ghazaleh and his assistant colonel Samih al-Kasha’ami in Vienna. Israeli Chief-of-Staff Dan Halutz warns that Israel would strike at Lebanese infrastructure targets if his country felt it necessary. His words come at a time when tensions between Iran, which supports Hizbullah, and the Jewish state reach an all-time low. Riot police use tear gas and water cannon in Beirut’s Riad al-Solh square to disperse 250 pro-Syria demonstrators protesting the visit to Beirut by US Assistant Secretary of State for Near Eastern Affairs David Welch. In another anti-American demonstration, this time outside the embassy in Awkar, former legislator Zaher al-Khatib pledges allegiance to Iranian President Mahmoud Ahmadinejad, Assad and the Iraqi insurgency. The Agriculture Ministry insists all domestic birds, including poultry, be kept indoors following news of increased incidents of bird flu in Turkey. Official statistics reveal that 700 people died on Lebanon’s roads in 2005, a rise of 20%. Nasrallah calls on all Arab nations to help resolve the crisis between pro and anti-Syrian Lebanese factions that he says threatens to polarize the country and divide the government. The US Treasury freezes the assets of Syrian military intelligence chief Assef Shawkat, brother-in-law of President Assad, accusing him of being a sponsor of terror. US President George W. Bush meets MP Saad Hariri and reaffirms the United States’ support for Lebanon and its rejection of any deal that may compromise the country’s independence. Brammertz, the new head of the UN Hariri probe meets Lahoud, who calls for a swift conclusion to the investigation which he hopes will “uncover the terrorist plot that is targeting Lebanon.” Ghassan Tueni returns to Parliament to fill his son’s seat as Lebanon’s most senior MP Edmond Naim dies. He was 88. Michel Aoun’s Free Patriotic Movement announces that his party, in an alliance with Hizbullah, will contest Naim’s vacant seat in Baabda-Aley. Bosta, a musical comedy, takes top spot at the box office beating off competition from major foreign films. Malaysia-based Lebanese businessman Elie Youssef Najem tells officials in Kuala Lumpur, investigating his role in a bogus charity pledge, that he is worth $46 billion dollars and is Canadian lord and a Lebanese prince.

February 2006

Hizbullah joins Arab nations in urging Denmark and Norway to apologize for the defamation of Islam in their press through the publication of cartoons depicting the Prophet Mohammed. Norwegian diplomat Raymond Johansen meets Foreign Minister Fawzi Salloukh, calling the cartoon incident “unfortunate and regrettable.” Johansen’s apology does not appear to go far enough: the following Sunday, demonstrators from all over Lebanon descend on Beirut and set fire to the Danish consulate in Tabaris. Some 2,000 troops and police use tear gas and fire their weapons in the air in an attempt to calm the situation, but the protest quickly degenerates into mob violence. At least 30 people are injured, including policemen and firefighters. As Muslim clerics appeal for calm, protesters stone the nearby St. Maroun Church as well as attack cars and buildings in Ashrafieh. Danish embassy staff had been evacuated two days earlier, in anticipation of protests. During an emergency meeting of cabinet, the government apologizes to Denmark and Interior Minister Hassan al-Sabaa resigns. General Michel Aoun calls for the whole cabinet to step down. Over 300 people are arrested for their alleged role in the riot. The majority belong to the radical Islamist group, Osbat al-Ansar. Anti-Syria politicians launch a day of protest against Presidents Emile Lahoud and Bashar Assad as they address over 500,000 Lebanese in Martyrs’ Square to commemorate the one-year anniversary of former Prime Minister Rafik Hariri’s killing. Among the speakers are Saad Hariri, Walid Jumblat and Samir Geagea, all of whom, after paying tribute to Hariri and others killed during 2005, pledge to remove the president, whom they refer to as the “symbol of domination.” At 12:55, the exact time of the blast, the crowd observes a minute’s silence. Aoun’s Free Patriotic Movement, Hizbullah and Amal all send representatives. The next day, Telecommunications Minister Marwan Hamadeh says that members of the March 14 coalition have commissioned legal experts to prepare a constitutional text that would enable parliament to end Lahoud’s term, as US Secretary of State Condoleezza Rice hints that Lahoud should step down. Meanwhile, a statement from Baabda palace says that, “the president is determined to live up to his oath until the very last moment of his constitutional mandate.” Saad Hariri accuses Lahoud of being complicit in his father’s assassination. Lebanon plunges into further political crisis as 17 out of the 24-member cabinet refuse to attend the weekly cabinet meeting at Baabda. That same day, Hassan Nasrallah demands the crisis be solved by “broad national dialogue.” The events unfold as Condoleezza Rice visits Lebanon to hold talks with Prime Minister Fuad Siniora and meets Salloukh, Maronite Patriarch Nasrallah Sfeir, Druze leader Jumblat and Saad Hariri. She does not see Lahoud The March 14 coalition drafts two petitions to invalidate the legitimacy of the presidency and remove Lahoud from office. One is signed by 14 deputies who swear they were forced by Syria to vote in favor of the extension of Lahoud’s term. The presidency has warned that the Presidential Guard Brigade would not hesitate to use force in the event of mass protests at Baabda. Meanwhile, Nasrallah says that Hizbullah’s weapons would only be used to defend Lebanon, not the Shia community. Aoun accuses the March 14 coalition of abusing its position by calling for the ousting of Lahoud. After DNA testing, human remains found in Anjar are positively identified as those of French hostage Michel Seurat who was abducted in Lebanon in 1985. A news story in Al Anwar reports that Lahoud believes Israeli agents, masquerading as Syrian assassins, are plotting to kill him.

March 2006

Along-awaited national dialogue begins at the parliament building, bringing together political parties and leaders, many of whom have not met for years. They include Hassan Nasrallah, Walid Jumblat, Saad Hariri, Michel Aoun and Samir Geagea as well as Prime Minister Fuad Siniora and Speaker Nabih Berri. Shops and businesses in the BCD are shut for the duration. Ghassan Tueni and Michel Murr are chosen to represent the heavily contested Greek Orthodox representation. Three pro-Syrians are excluded at the request of the March 14 leaders. In an opening speech, Berri announces that the three main topics for the dialogue include uncovering the truth about Rafik Hariri’s assassination, UN Resolution 1559 and Lebanese-Syrian relations. He says that the issue of President Emile Lahoud’s resignation will also be discussed as it falls under Resolution 1559. Lahoud is not invited to the conference. As the talks enter their fourth day, there are reports that participants have already agreed on the ending President Lahoud’s term. Geagea announces “The current presidency is over. We are in the process of searching for a new president.” Meanwhile, Finance Minister Jihad Azour calls on leaders at the national dialogue to add economic issues to their already-packed agenda, declaring that “the constructive and positive dialogue will not be comprehensive if it does not address economic problems and social concerns raised by the citizens.” The national dialogue stalls following a dispute between Druze leader Walid Jumblat and Hizbullah’s Hassan Nasrallah. It resumes six days later, after Jumblat holds talks in Washington with Secretary of State Condoleezza Rice and other high-ranking US officials. In New York, he meets UN Secretary-General Kofi Annan and ambassadors for the five permanent members of the Security Council. He calls on the US to intensify pressure on Syria to free Lebanon from Damascus’ influence and calls on Hizbullah to behave like other militias and surrender their arms. Meanwhile, after much lobbying from restaurant and bar owners, downtown opens for business as the national dialogue resumes. However, owners remain pessimistic as parking restrictions and road closures remain in force. Lebanese Forces leader Samir Geagea has said that the anti-Syria coalition may have to return to its original plan to oust Lahoud through street protests if national dialogue talks fail to resolve the issue. Syrian President Bashar Assad calls the March 14 leaders “useless instruments” in the hands of foreign powers that use them to undermine Syria and Hizbullah. The body of Frenchman, Michel Seurat kidnapped more than 20 years ago in southern Beirut, is flown to Paris with full military honors. The UN commission investigating Hariri’s assassination publishes a new 25-page report in which it says it is closer to understanding the circumstances surrounding the killing. 10 Lebanese soldiers killed during the 1975-90 civil are buried with full military honors after an official ceremony at a military hospital. They are awarded the Badge of War and the Wounded. Assad agrees to meet the UN Hariri commission but stresses it is a “meeting” not an “interrogation.” Annan says that a mixed Lebanese and international court should be convened to prosecute those charged in the Hariri assassination. Interior Minister Ahmed Fatfat announces that Pierre Dakkash has won an uncontested parliamentary seat in the Baabda-Aley by-election. Forbes lists Hind Hariri, the daughter of the late Rafik Hariri, as the world’s youngest billionaire with a fortune of $1.4 billion. The Free Patriotic Movement announces it will create an independent TV station. Bekaa poultry farmers stage protest at recent losses incurred by the bird flu scare, dumping eggs and live chickens.

April 2006

President Emile Lahoud and Prime Minister Fuad Siniora argue over a draft resolution pledging support for Hizbullah during a session of the Arab summit in Khartoum. Siniora demands the removal of the clause that pledges support for the armed “Lebanese resistance.” Earlier, Syrian President Bashar Assad and Lebanese Siniora shake hands on the sidelines of the Arab summit in Khartoum, despite heightened tensions between the two neighbors. Later in the week, a cabinet meeting ends in pandemonium after ministers from the March 14 coalition, in particular Telecom minister Marwan Hamadeh and Interior Minister Ahmed Fatfat, hurl abuse at Lahoud before walking out. The incident, captured live by local news cameras, threatens a political crisis, coming just two days after the spat in Khartoum. Things get worse for the president as Patriarch Nasrallah Boutros Sfeir, talking to the French magazine Le Point, says Lahoud is no longer fit to fill the country’s top executive post. Finance Minister Jihad Azour announces the successful closing of a five-year, LL400 billion ($265 million) bond with a yield of 9.4% to further finance the public debt. The tourism ministry also has good news, proclaiming that nearly 70,000 tourists visited Lebanon during February, a 40% year-on-year increase. The Lebanese poultry market claims a 50% contraction since January due to the nationwide fear of avian flu. The news comes as poultry farms in southern Lebanon are hit by a less dangerous H7 form of the virus. US Ambassador Jeffrey Feltman says that Lebanon‘s economy is living on “borrowed time,” as the European Union urges Lebanon to speed up the launch of its long-awaited economic reforms. Meanwhile, Solidere announces net profits of $108.5 million for 2005. The figure is double the $54.1 million achieved in 2004. US Secretary of State Condoleezza Rice, speaking in Washington, says that the biggest problem faced by Lebanon is Hizbullah and its relationship with Iran and Syria. Siniora meets US President George Bush and and urges an Israeli withdraw from the disputed Shebaa Farms as Saad Hariri holds talks with French President Jacques Chirac, who urges Lebanon to adopt economic reforms and calls on the international community to boost economic support for Lebanon. Meanwhile, Michel Aoun asks the parliamentary majority to apologize to Lahoud for insulting him and invites him to participate in national dialogue talks. The General also predicts the disintegration of the March 14 anti-Damascus alliance when the national dialogue resumes. The finance ministry announces that the government has abandoned plans to issue $850 million worth of Eurobonds after former mobile phone operator, LibanCell, seeks court action to freeze assets of the Lebanese government abroad, claiming it is owed $266 million by the state. Siniora says he believes that Lahoud is “not free” to resign, hinting that Syria may harm him if he steps down. A delegation from Hizbullah visits Tehran where it meets Iranian President Mahmoud Ahmadinejad to congratulate him on his country’s success in uranium enrichment. March 14 politician Walid Jumblat says he expects more security alerts in the run-up to the next report by the United Nations team investigating the murder of ex-Prime Minister Rafik Hariri. Australian-Lebanese crime boss “Fat” Tony Mokbel flees Lebanon after being convicted of drug trafficking and suspected of involvement in gang killings in Australia. Three lucky ticket holders win almost $5 million in prize money as the Lotto numbers are drawn. A Roman burial cave containing a human skeleton, gold leaves, glass rings and other artifacts is discovered by laborers in Baalbek. They are left unattended and later stolen.
May 2006

Lebanon’s leaders once again fail to agree on the fate of President Emile Lahoud and the issue of Hizbullah’s weapons. Speaker Nabih Berri refuses to confirm reports that four presidential candidates—Michel Aoun, Nayla Mouawad, Boutros Harb and Nassib Lahoud—were proposed during the session. The talks are adjourned until May 16, but that dialogue also ends in stalemate and is further adjourned until June 8. Lebanon gives a one-year extension to the mandate of chief UN investigator, Serge Brammertz, who is leading the probe into former Prime Minister Rafik Hariri’s assassination. Solidere announces that a Kuwaiti investment group intends to build a $1.3 billion, 206,000m2 (BUA) mixed-use development in the BCD as Solidere chairman Nasser Chamaa says he expects the company’s net profits in 2006 to exceed the $108.5 million earned in 2005. Berri receives a summons, instructing MPs Walid Jumblat, Saad Hariri, Marwan Hamadeh and journalist Fares Khashan to appear before a Syrian military court to answer charges of inciting regime change. More than 5,000 demonstrators, march through Beirut to mark Labor Day. Prime Minister Fuad Siniora discusses financial reform with British Chancellor of the Exchequer Gordon Brown on the first day of an official two-day visit to London. He later meets British Prime Minister Tony Blair, whom he asks for support in solving the Shebaa Farms dispute. Speaking to supporters during a rally to mark the anniversary of his return to Lebanon from exile, Aoun launches his strongest attack on the anti-Syrian parliamentary majority and calls for the resignation of the Siniora government. Later that week, 200,000 teachers, students and workers, backed by Hizbullah and the Free Patriotic Movement, march peacefully through the streets of Beirut to demonstrate against the government’s economic policy. Tourism Minister Joe Sarkis says he expects 1.5 million tourists to visit Lebanon this year. Speaking at the Arab Economic Forum in Beirut, Siniora vows to move ahead with economic reforms aimed at cutting budget deficits and public debt, despite the public demonstrations against his government’s policies. Later Siniora, assures concerned investors that the government is tackling the issue of corruption, acknowledging that poor management in public sector was behind the problem. Meanwhile, Nabil Itani, the head of the investment Development Authority of Lebanon (IDAL) predicts that foreign direct investment will reach more than $2 billion by the end of the year. Patriarch Nasrallah Boutros Sfeir says that Lahoud may resign if there is proof of his involvement in the spate of political killings that dominated 2005. The statement comes after MP Saad Hariri says he would support any candidate for the presidency if he were backed by the Patriarch. Meanwhile, Siniora welcomes a UN Security Council resolution calling on Syria to establish formal diplomatic ties with Lebanon and to demarcate the common border. Clashes between the army and Syrian-backed Palestinian gunmen near the border with Syria leave one soldier dead and one guerrilla seriously wounded. Facing a strike by the nation’s bakers, Economy and Trade Minister Sami Haddad decides to maintain the price of bread at LL1,500 but to reduce its weight by 100 grams to 1,300 grams—in effect, removing one slice of bread from the loaf. Saad Hariri visits Russia where he holds talks with President Vladimir Putin. Rana Koleilat, a major suspect in the Al-Madina Bank scandal, says she is ready to talk to the UN team investigating the killing of Hariri. Nazik Hariri, the former prime minister’s widow, denies television reports that she offered jewelry to Bernadette Chirac, wife of the French President. Maxim Chaya becomes the first Lebanese to climb Mount Everest. Six Israeli warplanes fly over Tyre, Naqoura, Bint Jbeil and the Shebaa Farms, drawing fire from Lebanese anti-aircraft batteries.

June 2006

The judicial team charged with discussing the international tribunal to try suspects in the assassination of ex-premier Rafik Hariri leaves for New York for talks on the nature and scope of any future court established to try the crime. Meanwhile, UN Secretary-General Kofi Annan expresses concern at the cross border clashes between Hizbullah and the Israeli army and calls on all parties to exercise maximum restraint. Later, the Israeli Army claims to have killed three Hizbullah fighters who crossed into Israel during clashes with its troops. In a letter to the UN explaining the details of the clashes, Fuad Siniora says that as long as Israel continues to occupy Lebanese territory, Hizbullah will keep up its operations against the Jewish state. Several thousand Hizbullah supporters take to the streets in Beirut’s southern suburbs, burning tires and blocking roads, including the airport highway, in protest against Bas Mat Watan, a TV comedy show that satirized the group’s leader Hassan Nasrallah. Political leaders resume the National dialogue amid rows over the disarmament of Hizbullah. Lebanese leaders once again put off any decision on the issue but agree on a “pact of honor” aimed at defusing tensions between pro and anti-Syrian factions. US Assistant Secretary of State for Near Eastern Affairs David Welch says that “there is a strong presumption” that Syria is responsible for the assassination of Hariri and urges Damascus to cooperate with the investigation. Former Prime Minister Omar Karami announces the formation of the Lebanese National Gathering, a new political front, and sets its first priority as the toppling of the Siniora government. Allied with him are at least 25 pro-Syrian officials. Authorities announce that a burial site in the east Lebanon town of Anjar, originally believed to be a mass grave for victims of Syria’s military presence, is actually a graveyard dating to the 17th century. Speaking at the end of a three-day Maronite synod, Cardinal Nasrallah Boutros Sfeir calls for Lebanon’s Christians to close ranks and urges them to seek better relations with themselves and other Lebanese. Former Lebanese Cabinet Minister Suleiman Franjieh officially launches his new Al-Marada party in his hometown of Zghorta with representatives of Hizbullah, Amal and the Free Patriotic Movement in attendance. Druze leader Walid Jumblat, renews his anti-Syrian vitriol, saying “there will be no settlement, no pact of honor and no peace with the tyrants of Damascus, with those who have violated Lebanon’s independence and killed its free men.” Meanwhile, Abdel-Halim Khaddam, the former Syrian vice president, says he has evidence that the Syrian president Bashar Assad was responsible for Hariri’s killing, telling a Saudi newspaper that he has all the documents that incriminate the illegal policy of the Syrian regime. Solidere approves $100 million in cash dividends ($0.60 per share) to its shareholders after recording a net profit of $108.5 million in 2005. Israeli Prime Minister Ehud Olmert tells French President Jacques Chirac that Israel would pull out of the Shebaa Farms border region if the area officially comes under Lebanese sovereignty. Romania invites Siniora to represent Lebanon at a Francophone summit in Bucharest but does not extend invitation to Lahoud. Ain Mreisseh is shaken by a Saturday night gun battle between bodyguards of President Lahoud’s younger son, Ralph, and those of Walid Jumblat’s stepson following a row over who should go first on a traffic light. Meanwhile, Interior Minister Ahmed Fatfat denies charges by Muslim clerics that the government has approved a gay rights group and two nudist beaches. After much anxious waiting, Lebanese viewers learn they will be able to watch the World Cup on local TV.

July 2006

Just as what promises to be a bumper tourist season gets into its stride, Israel launches a massive air, ground and sea bombardment on south Lebanon, Beirut and other areas of the country. The attacks come after Hizbullah fighters capture two Israeli soldiers and kill eight others along Lebanon’s border with the Jewish state. In the first major strike against infrastructure targets, Beirut airport’s three main runways are bombed sending panic-stricken tourists fleeing via Syria and Jordan. Hassan Nasrallah declares “open war” as he emerges unscathed after air strikes on his home and office in Beirut. As Lebanon is increasingly cut off from the outside world and systematically dismantled by Israeli air strikes, the foreign embassies evacuate their citizens, which include many Lebanese with dual nationalities. Shop shelves empty as people scramble to stock up on basic necessities and many Beirut residents seek safety in the mountains. Prime Minister Fuad Siniora declares Lebanon a “disaster zone,” as Nasrallah vows to wage an unrestrained campaign against Israel. For his part, Israeli Prime Minister Ehud Olmert announces “nothing will deter us.” At their summit in St. Petersburg, the G8 group of nations calls on both sides to end the fighting. Thousands of villagers flee the South of the country, seeking refuge in the southern port city of Tyre after Israel orders residents to evacuate the border area, warning of more attacks. Despite urgent appeals for restraint, international diplomatic efforts to halt the fighting fail. US President George Bush blames Hizbullah for the escalating violence and calls on Syria to rein in the group. Middle East Airlines (MEA) announces it is transfering operations to Damascus after the closure of Beirut airport. Siniora tells the international community, “I hope you will not let us down. We, the Lebanese want life. We have chosen life. We refuse to die.” The UN says 500,000 people are displaced in Lebanon. “Our situation is tragic,” declares Lebanese Health Minister Jawad Khalife. “Hospitals across Lebanon are suffering medicine and fuel shortages.” The central bank announces that Lebanon’s currency is stable and its reserves remain liquid. Meanwhile, fierce fighting continues as Israeli ground forces push into Lebanon, heading towards Bint Jbeil. They momentarily capture the town but lose nine soldiers in the fighting. Israeli warplanes also continue raids across Lebanon. In an interview, Nasrallah vows that deeper Israeli incursions will not stop his group from firing rockets into Israel. Asked about diplomatic moves to end hostilities, Nasrallah says: “We do not feel that we are currently interested in discussing ideas or initiatives.” Later in the week however, he announces that “the priority is to stop the Israeli aggression, and when things reach the phase of serious discussions over ideas and initiatives we will be ready to propose our ideas.” US Secretary of State Condoleezza Rice makes a surprise visit to Lebanon to launch further diplomatic efforts to resolve the conflict. After meeting with Siniora, she heads to Israel. More than 20 people are killed, the majority of them children, when Israeli warplanes bomb the village of Qana. There is global outrage and, across the region, angry crowds take to the street demanding revenge. Rice, whose Middle East mission is thrown into turmoil by the attack, once again calls for a ceasefire. Olmert, tells his country there will be no ceasefire. Ex-president Elias Hrawi, who oversaw the implementation of the Taef peace accord and who steered the country through reconstruction between 1989 and 1998, dies at the American University of Beirut hospital. He was 80.

August 2006

Belief organizations declare the suspension of activities in South Lebanon following Israel’s warning that all moving vehicles will be considered targets. The government announces it will deploy 15,000 soldiers in the south when Israel withdraws. In Jerusalem, the Israeli military announces it wants to broaden its ground offensive then appears to put such a move on hold to allow diplomatic efforts to continue. A ceasefire between Israel and Hizbullah comes into effect at 08:00AM local time on Monday August 14, but not before 42 Lebanese and five Israelis soldiers are killed in the hours leading up the cessation. Israeli Army Radio says the naval and air blockade will remain in effect for the present. Just before the ceasefire, Israeli warplanes drop leaflets over Beirut blaming Hizbullah and its Iranian and Syrian “masters” for the destruction in Lebanon. The timing for the cessation of hostilities was announced by UN Secretary General Kofi Annan two days earlier, following the adoption of Security Council resolution 1701, which had called for the deployment of an international peacekeeping force in South Lebanon. Both the Israeli and Lebanese governments endorse the resolution, but Hizbullah leader Hassan Nasrallah says that while his fighters would abide by any ceasefire, they will continue to fight as long as Israel still has soldiers on Lebanese soil. Israel’s army chief of staff Dan Halutz says that Israeli troops may remain in south Lebanon for months, in response to an assessment by his own intelligence chiefs who say it may take that long for the UN troops to deploy. Still, as Israeli troops pull back to their border, for the first time in nearly 30 years 15,000 Lebanese soldiers take up positions in South Lebanon in line with Resolution 1701. Hizbullah claims a stunning victory despite the losses. Fuad Siniora says the operation will impose the government’s authority on the region south of the strategic Litani river. “There will be a single state with the sole decision-making power,” he says. “There will be no dual authority and there will be no off-limit regions for the army.” Meanwhile, the issue of the legitimacy of Hizbullah’s arms persists. President Emile Lahoud announces it is “shameful” to ask Hizbullah to disarm as it is “the only force in the Arab world that was able to stand up to Israel.” Cars jam roads to the South as thousands of refugees stream back to towns and villages. Sweden says it will host an international aid conference for Lebanon on August 31 with representatives of 60 governments and organizations taking part. CDR boss Fadl Shalak announces that war damage totals $2 billion for buildings and $1.5 billion for infrastructure. Later, talking to New TV, Nasrallah announces that if he had known the capture of the two Israeli soldiers would lead to war, he wouldn’t have ordered it. UN Secretary-General Kofi Annan arrives in Beirut as part of an 11-day tour of the Middle East. He demands that Hizbullah release two captured Israeli soldiers and Israel lift its blockade of Lebanon. Italy agrees to send 2,500 troops to take part in the expanded UN peacekeeping mission in southern Lebanon and approves a $38.4 million aid package. The US also says it is pledging an additional $230 million to help the Lebanese rebuild their homes and return to their towns and communities. Syria’s President Bashar Assad says that he would consider the deployment of international troops along the Lebanese-Syrian border as hostile towards his country. The war leaves at least 1,287 people, nearly all civilians, dead and 4,054 wounded. At least 1,140 civilians—30% of them children under 12—have been killed along with 43 Lebanese soldiers and police.

September 2006

Israel’s blockade of Lebanon continues. France prepares to play a more robust role within UNIFIL by rolling out heavy tanks, artillery and radar systems. US civil rights leader Jesse Jackson meets Hizbullah officials in Lebanon and calls for proof that the two captured Israel soldiers are alive, while Lebanese MPs, led by speaker Nabih Berri, embark upon on a round-the-clock sit-in to protest Israel’s blockade. The Jordanian government initiates a three-month taxes and tariff exemption for Lebanese trucks entering and exiting Jordan. Canada pledges $1.8 million to clean up oil spills off the Lebanese coast and help boost the fishing sector. British Prime Minister Tony Blair arrives in Lebanon for talks with Premier Fuad Siniora. He is met by angry demonstrators gathered in the center of Beirut to protest the UK’s stance on the war. Finance Minister Jihad Azour announces that the war and the blockade have increased Lebanon’s public debt to $41 billion. Hoever, the ratings agency Standard & Poor’s announces that the Lebanese economy and public finances have weathered the impact of the conflict and removes Lebanon from its Credit Watch list. Hizbullah says it would accept UN peacekeepers as long as they stick to defending Lebanon against Israel. However, French commander General Alain Pellegrini hints that his soldiers would disarm the group if the Lebanese army does not. The mayor of Baraasheet, a Hizbullah town 10 kilometers from the Israeli border, issues a warning to the UN soldiers if they try to disarm Hizbullah: “We will inflict even greater losses on them than we did on the Israelis.” Riad Salameh wins the Euromoney award for world’s best central bank governor in recognition for his fiscal management during the war. UNESCO confirms that three of its Lebanese World Heritage sites—Byblos, Baalbek and Tyre—are in urgent need of repair. Hizbullah leader Hassan Nasrallah makes a rare public appearance to address a huge rally in Beirut’s southern suburbs. He rejects calls for Hizbullah to disarm and boasts it has over 20,000 rockets still at its disposal. Nasrallah, hitting out at March 14 alliance, also claims that the resistance is “stronger than ever.” Interviewed on the Orbit satellite channel, Siniora hits back, claiming that Hizbullah caused the “re-occupation” of Lebanon. He also insists that the army will never allow any armed presence along Lebanon’s southern border. Meanwhile, speaking at a rally to remember Lebanese Forces members killed during the 1975-1990 civil war, Samir Geagea challenges Hizbullah and its followers to prove fealty to Lebanon and accept national unity before demanding a new government. In his most recent report, Chief UN investigator Serge Brammertz corroborates the theory that ex-Premier Rafik Hariri was killed by a suicide truck bomb but does not say who ordered it. Mohammed Zuhair Siddiq, a Syrian national suspected of involvement in the assassination of Hariri, claims that both Syrian President Bashar Assad and his Lebanese counterpart Emile Lahoud ordered the killing. Speaking to French newspaper Le Monde, Defense Minister Elias Murr says the government is ready to integrate Hizbullah fighters into a regular army brigade that would patrol villages in the South. At the joint World Bank/IMF annual meeting in Singapore, the World Bank approves a grant of $70 million for a Trust Fund for Lebanon to support the government’s reconstruction efforts. The funds will come from the Bank’s surplus and will not add to the national debt. Turkey says it will provide up to 1.4 billion kilowatt-hours of electricity to Lebanon to make up any shortfall created by the war. Fishermen in the southern port city of Tyre complain that their nets are filled with bombs and missile parts.

October 2006

Speaking at an iftar in Beirut, Lebanese Parliamentary majority leader Saad Hariri rejects any change in the make-up of Premier Fuad Siniora’s cabinet following Hizbullah calls for a government of national unity. Lebanese army helicopters begin patrolling the Lebanon-Syria border for the first time in an attempt to prevent smuggling operations, as the UN announces that there are up to 1 million unexploded Israeli cluster bombs in south Lebanon. They kill, on average, three civilians each week. US Secretary of State Condoleezza Rice warns of possible assassination attempts on Lebanese politicians allied to the March 14 alliance. During a brief visit to the Arab state, Siniora thanks the people of Kuwait for their financial assistance after the emirate agrees to deposit $500 million with Lebanon’s central bank and grants Beirut $300 million in post-war reconstruction aid. Malaysia Airlines announces it is resuming flights to Beirut. Israel is accused of stealing water from the Wazzani River. Speaker Nabih Berri visits Saudi Arabia in a bid defuse political and sectarian tensions affecting Lebanon. Speaking to an-Nahar, the leader of the Lebanese Free Patriotic Movement MP Michel Aoun says that he will wear out Siniora and will not let him rest until he leaves office. Six civilians are slightly hurt when a rocket hits a building next to the UN’s Beirut headquarters and Siniora’s offices. Speaking at a news conference to mark the anniversary of the Syrian-led military offensive that ousted him from power on October 13, 1990, Michel Aoun accuses the government of corruption and once again calls for a government of national unity and normal relations with Syria. Later, the government announces it has put together an $80 million package to compensate families whose homes were destroyed in Beirut’s southern suburbs during the war and begins distributing the first state aid for rebuilding the South in a program that will eventually cost $600 million. Meanwhile, Arab finance ministers approve a series of recommendations and measures to support the Lebanese economy and call for strong Arab participation in next year’s international donor conference on rebuilding the war-battered country. Former Syrian Vice President Abdul-Halim Khaddam once again predicts that President Bashar Assad’s regime will collapse and calls on Syrians to prepare for the day when he will be overthrown. As Oman and the EU pledge a total of $88 million to Lebanon’s reconstruction fund, the Central Bank Governor Riad Salameh says he hopes for at least $500 million or more in soft loans from international sources to revitalize the private sector. The Beirut port begins upgrading its cargo-inspection system with the installation of a new mobile X-ray scanner that will speed up the clearance of goods in and out of the country and limit smuggling. Carlos Ghosn, the Lebanese-Brazilian CEO of the Nissan Motor Co. is appointed Honorary Knight Commander of the British Empire for his contribution to the economic development of Japan and Britain. A small bomb is tossed from a speeding car in the Beirut district of Ramlet el-Baida starting a small fire. There are no reports of injuries. Albanian Prime Minister Sali Berisha says his government is willing contribute peacekeeping troops to Lebanon. Sixteen Lebanese women and children who were injured in the war leave Beirut for Italy, where they undergo treatment for their wounds. Beirut MP Ghassan Tueni is shortlisted for the EU Human Rights Prize. The Dutch media circulate reports that Lebanon is among a handful of countries importing Dutch sheep, despite an outbreak of bluetongue disease.

November 2006

Lebanon’s political leaders meet for the first time in nearly five months with Hizbullah leader Hassan Nasrallah threatening street demonstrations if the round table dialogue fails to produce a national unity government. He accuses the parliamentary ruling majority of seeking to use UNIFIL to disarm Hizbullah, calling the alleged plan “an American-Israeli demand.” MP Ghassan Tueni proposes a parliamentary petition calling for the resignation of President Emile Lahoud as Defense Minister Elias Murr deploys 20,000 troops across Beirut to deal with any civil disturbances and Iran says it is ready to equip the Lebanese army with anti-aircraft weaponry. The central bank predicts that inflation will rise to 7% by the end of 2006. Fransabank becomes the first Lebanese bank to operate in Algeria and the world’s first qualification covering all aspects of Islamic finance is launched in Britain in a joint British-Lebanese initiative. Lebanon signs a $71 million grant agreement with the World Bank for post-war reconstruction. Transparency International announces that Lebanon has witnessed a considerable improvement in perceived levels of corruption, ranking 83rd out of 163 countries. The Lebanese government and the UN release a joint report on the quality-of-life indicators in Lebanon. One of the findings is that the proportion of “poor” families in Lebanon has dropped from 31% in 1995 to 25% in 2004. Five Hizbullah and Amal ministers resign from the cabinet, igniting a constitutional dispute between Lahoud and Prime Minister Fuad Siniora. Environment Minister Yaacoub Sarraf, who is close to Lahoud, also resigns, becoming the 6th cabinet minister to quit. Lahoud claims that the cabinet cannot vote to endorse a UN draft text calling for an international tribunal in the assassination of former Premier Rafik Hariri without a Shia presence. Nasrallah boycotts the government and vows to establish a “clean government.” In talks with speaker Nabih Berri, Iran’s supreme leader Ayatollah Ali Khamenei says the US and Israel will be defeated in Lebanon. Trade unions and syndicate heads urge the country’s politicians to stop bickering and work towards economic recovery. Meanwhile, the hotel owners syndicate warns that street protests will completely ruin the end of year tourism after heavy losses in the summer war. Nasrallah, in a televised speech, urges his supporters and anti-Syrian factions to be psychologically ready for street protests to demand a national unity government. Druze leader Walid Jumblat warns that Lebanon is on the verge of a coup d’état. One day later, Industry Minister Pierre Gemayel and his bodyguard are gunned down in his car in Beirut. He is the sixth outspoken opponent of Syria to be assassinated in two years. At his funeral, attended by hundreds of thousands of mourners, his father, former president Amine Gemayel, announces that the “countdown for the election of a new president has started.” French Foreign Minister Philippe Douste-Blazy and Arab League chief Amr Moussa are among the dignitaries who attend the downtown service. In a message read at the funeral, Pope Benedict XVI condemns the killing, calling it “unspeakable.” Gemayel’s casket, wrapped in flags of the Phalange party and Lebanon, is taken to his home in Bikfaya for burial. Supporters demand that only the army bear weapons and call for the removal of “Caesar of Baabda.” Days later, the government defies its Syrian-backed opponents and approves a Special International Court for Lebanon to try suspects in the assassination of ex-Premier Hariri. The cabinet also refers Gemayel’s murder to the judicial council, the highest trial court in Lebanon. Meanwhile, the opposition says it will wait till the end of the mourning period before going ahead with its threatened campaign of street protests. Aounist and Lebanese Forces supporters clash in Sassine Square in Beirut after Aounists attempt to replace a poster of their leader that had been burned days earlier.

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Lebanon Outlook

Beirut’s banking sector healthy but challenges lie ahead

by Executive Staff
written by Executive Staff

The Lebanese banking sector has survived and thrived through not one but two major shocks in two years: the assassination of Rafik Hariri in 2005 and the Israeli-Hizbullah war in the summer of 2006. A younger or less experienced banking sector would have collapsed under shocks like these, but the shrewdness of Lebanese bankers and banking regulators, the implicit and sometimes explicit support of friendly Arab neighbors and the extraordinary recurrence and solidity of Lebanese deposits and remittances from a very wealthy and influential Lebanese diaspora once again allowed the banking sector to remain solid.

This impressive resilience and the continuous financial performance and growth in assets, despite the setbacks, was reflected in Riad Salameh being named best central bank governor in the world for 2006 by the renowned Euromoney magazine. This is not the first time a Lebanese has been honored this way: In 1990, Mr. Edmond Naim also got the nod for his work in preserving the banking sector during 17 years of civil strife.

Balance sheets maintained

The balance sheet of Lebanese banks had been structured in more or less in the same way for the last 15 years, albeit in different proportions. At the end of August 2006, treasury bills (government debt securities) accounted for 27.2% of total assets of LL108,603 billion (or $72.04 billion), compared to 25.13% at the end of December 2005. The trend of Lebanese government treasury bills holdings has been decreasing for the last few years, particularly after the Paris II donors’ conference, when the government, through the BDL, underwent a series of monetary reforms. These mainly consisted of increasing liquidity levels on the banks’ balance sheet, reducing interest rates on both US dollar and Lebanese pound deposits, and, last but not least, reducing the exposure on the state, which remains to this day poorly rated by the international rating agencies (B- and B3 by Standard & Poor’s and Moody’s, respectively. These groups are the world’s largest and most respected rating agencies, particularly by international capital markets).

The exposure to the Lebanese sovereign bonds has shown its weaknesses in the aftermath of the Israeli war on Lebanon in 2006, as T-bill values went down as a result of a lack of liquidity on these securities in the secondary market and reduced investor confidence. This decrease in the value of T-bills has affected the banks’ liquidity, in the sense that they could only be disposed of at a loss, and hence would have brought less cash to the banks were they to have been liquidated. Although values are beginning to rise, banks are now aware that T-bill holdings have to be reduced over time. The disposal of T-bills by banks can only be carried out gradually, with individual investors (e.g. expatriates, non-residents) and foreign institutional investors replacing the banks. It should be clear by now that the capacity of Lebanese banks to fund the state through the subscription of T-bills is fast reaching its limits, with most banks, particularly the larger ones, growing unwilling to buy government securities within the scope of swap deals (exchanging current government securities with newly issued ones, holding a longer maturity).

Lebanese banks have retained their very strong capacity to gather deposit funding throughout 2006, and are unlikely to feel any weakness on that front in the foreseeable future. Customer deposits accounted for 81.15% of total assets at the end of August 2006, compared to 82.64% at the end of 2005, and amounted to LL88,128 billion ($58.46 billion). The rising levels of customer deposits with Lebanese banks reflect the high standards of banking penetration and financial intermediation, with banking assets to GDP amounting to around 350%. The banks’ solid and recurrent deposit base improves financial flexibility (or the ability to raise funding) significantly, and even reduces the risk of maturity mismatching between assets and liabilities. Although deposits are short-term in nature, they are highly recurrent and have funded longer-term maturity assets for more than a decade.

Deposits staying put

Customer deposits have traditionally been denominated in foreign currency (mainly the dollar), given that confidence in the Lebanese pound has never been substantial. However, the Lebanese pound has shown a strong resilience to the successive crises of 2005 and 2006, while the monetary authority has proven its strong commitment to maintaining the local currency at its post 1975-1991 civil war value. The injection of $1.5 billion in the form of deposits at the BDL by the Saudi and Kuwaiti governments at the height of the war this summer is a further reflection of the desire by regional powers’ desire to support Lebanon in maintaining a stable value for its local currency. The dollarization rate of customer deposits during the 2006 crisis was less significant than in the aftermath of the Hariri assassination, reaching 75% compared to more than 80% in 2005. The dollarization rate had dropped to 73% by the end of December 2005, and therefore did not increase substantially even as Israeli warplanes were thrashing Lebanon’s infrastructure. There was insignificant fleeing of deposits during the summer of 2006 (believed to be less than 4% of total sector deposits), with those deposits leaving the country transferred out to foreign branches or subsidiaries of local banks in any case. A major proportion of transferred-out deposits are now believed to have returned to their original accounts in Lebanon.

Asset quality was slightly affected by the summer 2006 war, with loan losses believed to have reached around $80 million for the entire sector, which at the end of August 2006 had total consolidated loans of around LL28,052 billion ($18.61 billion). Loans to the private sector accounted for 25.8% of total assets, and are not expected to change significantly, as banks remain cautious in a very difficult operating environment. Retail lending, on the other hand, is showing signs of tremendous potential, with most banks developing an expertise in products such as credit cards, car loans, housing loans and personal loans. Retail loans usually carry lower risk weightings and should be less onerous on bank capital come 2008, when Basel II capital regulations start to be implemented in Lebanon.

Interested in profits

On the earning side, Lebanese banks have continued to rely on interest income for their profitability. As at the end of 2005, net interest income accounted for slightly less than 70% (around 67%) for the entire consolidated banking sector. Although this figure appears high, it has been decreasing since 2002 when the proportion of net interest income to total operating income accounted for close to 80% (77%). Banks have been trying to diversify their earning base by increasing non-interest income and decreasing the proportion of interest income derived from treasury bills. Non-interest income has essentially been emanating from treasury and capital markets activities, with the Audi-Saradar group being the most active in that field. Interest income has been slightly diversified in favor of interest income from inter-bank deposits and retail loans. However, the main hope for earnings diversification comes principally from the geographical expansion of a number of banks, particularly the larger ones, into regional “captive” markets. By setting up branches or joint ventures in markets such as the GCC or parts of North Africa, including countries such as the Sudan, Lebanese banks have laid the foundations for future earnings to be equivalent or even outweigh domestic earnings. Geographical expansion is the key to solving the problem of operating in a small and troubled domestic environment, and would diversify income and funding.

At the end of August 2006, the consolidated shareholders’ equity of Lebanese banks amounted to LL8,412 billion ($5.58 billion), or 7.75% of total assets and almost 30% of total loans to the private sector. The sector’s equity to assets ratio at the end of 2005 stood at 6.04%, which is significantly lower than the figure at the end of the summer 2006 crisis. Banks have been increasing their capital either externally, by issuing shares to new investors (a lot of them coming from the GCC region) and issuing products such as preferred shares, or internally, through the re-injection of profits into equity. The effort to increase capital is due to the forthcoming Basel II capital regulations, which the BDL intends to start implementing in Lebanon in 2008. From 2008 until 2011, Lebanese banks will have to follow the standardized approach of Basel II, which virtually means risk weighing all assets, including T-bills at 100%, risk weighing non-performing loans at 150% and applying a 15% charge on the three year average operating income to account for operating risk. Market risk is also to be accounted for, as part of Basel II regulations.

Dangerous times ahead

Although some banks have enough fire power to raise capital relatively easily and meet Basel II standards, a number of smaller banks are likely to struggle to meet the new regulations, given their weak capacity to fund themselves in terms of capital. However, with the current dangerous and unstable political environment, the entire banking sector, including the big guns, runs a serious risk of seeing its profitability—and hence its internal/organic capital raising capacity—dwindle, as well as seeing the last and most determined investors turn their shrugging shoulders on them. Let us hope Lebanese politicians recognize the potentially explosive economic situation and start acting accordingly.

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Levant

Tough choices

by Executive Editors
written by Executive Editors

Turkey’s farms face reforms

With a 2007 deadline looming, the Turkish government is desperately trying to overhaul the agricultural sector in time to receive structural funds from the EU. By 2007, the EU candidate country is expected to have a system in place to disburse some 9-10 billion euros ($11.4-12.66 billion) to both farmers and state agencies involved in agriculture. Efforts to transform the sector, however, are likely to have far-reaching and potentially serious consequences for Turkey, as agriculture continues to account for around one-third of employment and is particularly important in often-impoverished rural areas with little else in the way of industry.
According to the most recently released figures from the Turkish Statistics Institute, 6.77 million workers, or 29.3% of the total Turkish workforce, were employed in the agricultural sector as of June 2006. Perhaps even more troubling, however, is the small size of Turkish farms, which limits productivity: 65% of farms are 0-5 hectares, while 94% are smaller than 20 hectares, making Turkish farms significantly smaller than those in EU member states. The smaller the plot of land, the harder it is to justify the expense of new equipment and technology, making modernization difficult.

Upsetting the applecart
Wages in the sector, however, are rising, albeit from a low base, with the average daily wages of a seasonal agricultural laborer increasing to YTL13.62 ($9.02) for women, up 14.26% year-on-year, and YTL18.06 ($11.96) for men, up 16.82%. Permanent workers in the sector have also seen a salary hike of late, with the average monthly wage now at YTL314.41 ($207.93) for women, up 9.89% year-on-year, and YTL403.49 ($266.74) for men, up 11.39%.
Government efforts to harmonize the local agricultural sector —a vital economic lifeline in many poorer areas of the country—in line with EU standards could upset the system, sparking a large increase in rural unemployment and forcing millions of farm laborers to head to cities in search of jobs. According to some independent estimates, the agricultural reforms could cut the industry by as much as 40%, leaving roughly 2.5 million people jobless.
The knock-on effect of reforming agriculture will likely be a wave of urban migration, straining employment, housing and social services in Turkey’s already-crowded urban centers. With a national unemployment rate of 8.8% as of June 2006, rising to 11.2% in urban areas, it is unclear where these largely unskilled and poorly-educated workers will find jobs.
As part of the reform effort, the government has taken aim at the overproduction of particular crops, especially hazelnuts, by introducing quotas. Turkey is the world’s largest producer of hazelnuts, accounting for some 70% of total production. With backing from the World Bank, the state has tried to reduce the area under hazelnut cultivation by 100,000 hectares through cash incentives, though the project has so far been less than a success: to date, only 885 hectares have been converted to other crops.

Far-reaching consequences
The government is also working to curtail the practice of farmers’ divvying up land among their children, which has resulted in ever-smaller plot sizes, limiting productivity and modernization. In order to raise the average size of Turkish farms, the government is now pushing farmers to consolidate fragmented family holdings, making it a requirement for EU funding. While this may spur consolidation, the government is also running a risk, as farmers who refuse to merge their holdings—likely the worst-off farmers most in need of funds—will be barred from receiving EU money.
Already, state subsidies on seeds, fertilizer and fuel are being cut, with total subsidies scheduled to fall from $6 billion to $2 billion a year. While these cuts will in theory be more than made up for by funds from Brussels, farmers will first have to qualify in order to receive EU money, a process which may create problems.

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Levant

Back to school in Jordan

by Executive Editors
written by Executive Editors

Prepping the next leaders

This month, while much attention was focused on the landmark opening of a branch of the Sorbonne in Abu Dhabi, a potentially more daring educational initiative was taking form in the Middle East, as Jordan’s King’s Academy officially began accepting applications for the 2007-08 academic year.

Modeled on New England prep schools
King’s Academy, which is modeled after the elite preparatory schools of New England (in particular, Deerfield Academy, where King Abdullah graduated in 1980), has given itself the ambitious mandate of introducing the prep-school ethos to the Arab world, blending rigorous American-style education and community life with Arab culture and values. More ambitious still, through a strong financial aid program—15% of tuition fees will go towards scholarships, and approximately 30% of the student body is expected to receive partial or full need-based financial aid—King’s Academy plans to host a diverse student body, where class lines and other divisions are blurred in favor of tolerance, respect, and coexistence.
No small undertaking ideologically, King’s Academy also represents a significant financial investment. The school cost around $62 million dollars to build, with King Abdullah, the founding donor of King’s Academy, contributing $7 million and a 575-dunum site southwest of Amman.

The school cost around $62 million dollars to build


The idea behind the Academy came from the King himself, inspired by his experiences at Deerfield Academy in Massachusetts. Several years ago, King Abdullah stayed with then-headmaster of Deerfield Eric Widmer while in town to deliver the school’s commencement address. “I knew he was thinking about [developing a school] before he brought it up,” recalls Widmer, whom Abdullah subsequently asked to serve as founding headmaster of King’s Academy. Although Widmer had planned to retire in 2006, he found the offer irresistible—partially because, by destiny or coincidence, the Middle East had always been close to his heart. Widmer was born at AUH; although his family moved away while he was still an infant, he has always felt a strong attachment to the Arab world, and he and his wife have been regular visitors to Lebanon.
King’s Academy is gleaming on paper, boasts a beautiful campus and has already begun recruiting an enthusiastic, elite faculty. However, initial success may be an uphill battle: in addition to the standard array of challenges facing a new school, King’s Academy will have to sell the prep-school concept to a wary Arab audience. In a region where children often remain in their parents’ homes until marriage, the boarding aspect in particular is likely present difficulties. A King’s Academy education also comes with a fairly high price tag—$28,000 a year for full-time boarders, $25,000 for five-day boarders, and $16,500 for day students. Although these costs are comparable to those of the New England prep schools King’s Academy is modeled on, it is significantly higher than most local fees.

Culturally conscious rules
The absence of existing prep-school culture in Jordan creates further challenges. While touring King’s Academy’s state-of-the-art athletic facilities—which would rival those of any small American college—Executive asked Widmer whether the students would be able to participate in competitive athletics, which form a core component of the traditional prep-school experience.
“Oh, certainly!” replied Widmer. Hearing his own response, the headmaster chucked. “That is, as soon as we figure out who our competition is.”
Nonetheless, King’s Academy staff are confident that they can meet these challenges. The dormitories will enforce a far stricter separation of genders than the school’s American siblings: no boys will be allowed into the girl’s dorms, and vice versa, under any circumstances; single female faculty members will live in every girls’ dorm, providing around-the-clock supervision, and single men and faculty families will live in the boys’ dorms. While costs are high, they are all-inclusive, covering everything from uniforms, meals and books to health insurance and a school-issued laptop computer; furthermore, need-based financial aid will ease the burden for lower-income families.
As for the absence of rival schools, King’s Academy hopes to organize both athletic and academic leagues and competitions throughout Jordan, initiatives that promise to benefit not only the Academy’s own students, but their peers across the country.

Preparing for university
Finally, the Academy believes that its commitment to academic excellence, fostering intellectual curiosity and promoting coexistence in an Arab setting will appeal to parents and students alike. For the many families that already consider boarding schools in Europe or the US as options for their children, King’s Academy may offer a strong alternative far closer to home and in an environment more sensitive to their needs.

As with any secondary school, the ultimate test will come when its first class reaches the cutthroat college-admissions stage


As with any secondary school, the ultimate test will come when its first class reaches the cutthroat college-admissions stage. King’s Academy students will be groomed for the best universities in the Arab world, the US, and Europe; actually placing them in these elite institutions will be essential to gaining currency and trust among prospective parents and admissions officers alike. However, as King’s Academy will only admit first- and second-year students in 2007, it will not graduate its first class until 2010.


Fortunately, timing is on the Academy’s side. As the brainchild of King Abdullah, it is widely expected that he will send his children to the school; the eldest, Prince Hussein—the likely heir to the Jordanian throne—would matriculate in 2008. The King’s vote of confidence will obviously carry tremendous cachet—as likely will the prospect, especially to Jordanians, of placing their own children in such an intimate setting with a future monarch.
Overall, the prospects for King’s Academy seem encouraging. And in the Middle East in particular, a new generation of creative, tolerant, independent-thinking leaders could not be more welcome.

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Levant

Smoke Smuggling

by Executive Contributor
written by Executive Contributor

The invasion of Iraq opened a Pandora’s box of troubles that have been felt far beyond the country’s borders. One less noted consequence of the invasion has been the emergence of Iraq as a regional hub for smuggled cigarettes, exacerbating a regional problem and further denting the coffers of finance ministries from Amman to Tehran.
“Illicit trade is an issue in the region. Everybody has some brand affected,” said Emile Moukarzel, Philip Morris International’s (PMI) area manager for Lebanon, Jordan and Syria.

Smuggling cigarettes nothing new
The smuggling of cigarettes is nothing new, with the global trade in contraband cigarettes equivalent to 6% of yearly sales, or 355 billion puff sticks according to Tobacco Control. But in a region where the smoking incidence is among the highest in the world—over 50% of the Lebanese and Syrian adult populations are smokers—and wages are low, there is a ready market for contraband cigarettes.
Nasser Qudah, British American Tobacco’s (BAT) Corporate Regulatory Affairs Director for the Levant and Yemen in Amman, said that over the past few years Iraq has become the region’s smuggling hub with over 300 brands of cigarettes available in the beleaguered country, including eight different packets of BAT’s Kent brand manufactured in various locations around the world.
The problem stemming from Iraq is not so much counterfeit cigarettes but smuggling, as taxes are low enough to make Iraq a favorable export market, said Paul Oakley, BAT’s Beirut-based head of demand chain for the Levant and Yemen.
With one truck container carrying 900 master cases—equivalent to 9 million sticks—selling for as much as $1 million, smuggling is a lucrative business.
BAT estimates that contraband cigarettes account for between 5% to 6% of Jordan’s $500 million cigarette market, with 10% of all smuggled cigarettes BAT brands and the highest illicit brands PMI followed by Altadis.
Contraband cigarettes enter Jordan via Syria or directly from Iraq, with some cigarettes returning to where they landed in the Middle East.
“Some products go to Aqaba, are smuggled into Jordan, then sold in Iraq, and then smuggled back into Jordan,” said Samer Fakhouri, vice chairman and general manager of Jordan’s International Tobacco and Cigarettes Company.
There are no estimates on how rife counterfeit and smuggled cigarettes are in neighboring Syria, but observers think the figure is high due to minimal government legislation and enforcement, particularly in regard to street vendors.
“We have a big problem with illegal imports and counterfeit brands from Iraq,” said Dr. Faisal Sammak, director of Syria’s tobacco monopoly, the General Organization of Tobacco.
Bucking assumptions that counterfeit cigarettes are mainly imported brands, the Syrian press reported cases last year of counterfeit Al Hamraa cigarettes, the country’s most popular brand but also one of the cheapest.
Syria and Jordan’s struggle to combat smuggling pales in comparison to Iran’s battle, with the government admitting last year that the cigarette black market accounts for a staggering 70% of all cigarettes consumed, amounting to over $1 billion in illegal trade and hundreds of millions of dollars in lost tax revenue. Iran is also pointing the finger at Iraq as the primary source of its smuggling problems. To limit cigarettes smuggled to Iraq, companies have cut down on the number of cigarettes sold to the Aqaba Special Economic Zone, a duty-free haven, and increased local production.

Flooding the market?
BAT said it has increased the price of its Viceroy brand in Iraq to the same as in Syria to discourage smuggling. Companies have also started brand protection groups (BPG) to increase public awareness about the dangers of counterfeit products, legal trade and loss of revenue to governments.
However, there are claims that tobacco companies are deliberately shipping in extra quantities of cigarettes to Aqaba and other regional ports to spur sales. By encouraging smuggling, observers say, tobacco companies are also able to pressure governments not to raise tobacco taxes, arguing that lower taxation curbs illicit sales.
Major tobacco companies have been investigated for involvement in cigarette smuggling in the past decade in Europe, North America, Colombia and Honduras.

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Levant

Soft drinks sales

by Executive Contributor
written by Executive Contributor

Surge in Syria

Syria’s soft drinks market is experiencing record growth, expected to surge 17-18% this year compared to last year’s 12% growth, and Pepsi’s market share continues to grow after just over a year of operation in the country.
Syria took tentative steps last year to open up its drinks industry to foreign competition, with Pepsi and Coca-Cola taken off a blacklist and foreign mineral water imports allowed for the first time. Pepsi and Coca-Cola were blacklisted along with other US and Western firms more than 50 years ago by the Damascus-based Bureau for the Boycott of Israel, which is connected to the Arab League.
Pepsi, which is franchised to Syrian drinks and industry giant Joud, launched in August of last year with an aggressive marketing campaign to overcome any possible anti-American sentiment associated with the brand. “We didn’t give it a chance to be a foreign brand. We made it known it was bottled here, and used the same marketing strategy we did for 7-Up,” said Lilas Rabbat, a Joud marketing manager.
Pepsi’s entry into Syria’s $100 million market has taken the sector by storm, driving growth by up to 6% from last year’s 12% growth and 2004’s 6.5% growth, according to IMES.

Highly fragmented
The soft drinks market is highly fragmented between five major brands and around 100 smaller brands, usually of the returnable glass bottle variety, which account for around 10% of the market.
The market is divided between Cadbury-Schweppes/Salsabil at 30%, which has five bottlers and includes brand Canada Dry, Ugarit at 15%, Master-Cola at 8%, and RC Cola with 4% market share.
But due to strong sales of Pepsi and 7-Up, Joud is rapidly claiming the lion’s share of the market, expected to increase from 47% market share to 50% by year end, according to Rabbat.
Coca-Cola, on the other hand, is not faring as well in the Syrian market, despite being taken off the blacklist. With no bottling plant, Coca-Cola is imported from Jordan and Lebanon, and sales account for less than 2% of the market.
Affecting sales is the price of a can of Coke, which sells for 20SP ($0.40). “Price is very important here,” said Rabbat, where low-level government employees earn as little as $100 a month. Cans of Pepsi, like any other soft drinks, sell for 15SP ($0.30).
Management problems with the Coca-Cola franchise have also affected a potential launch. Coca-Cola was run by the son of the recently disgraced former Vice President Abdel-Halim Khaddam, who is now in exile in France following an outburst against President Bashar Assad at the end of 2005. His son has reportedly sold his shares in the franchise to a Saudi investor. Coca-Cola is expected to launch local production in the coming months, although the company would not confirm this.
“If Coca-Cola starts manufacturing, they are not to be underestimated. They have learnt from Pepsi’s experience how to market here. They will copy us,” said Rabbat.
But as people associate Coca-Cola with America more than Pepsi, Rabbat points out, Joud is at a marketing advantage.
2001 boycott campaigns throughout the Arab world in a show of solidarity with the second Palestinian uprising saw Coca-Cola lose market share and Pepsi control 75% of the Middle East market, which it has retained and expanded with its presence in Syria.

‘Give me a Pepsi’
Pepsi’s strong marketing in Syria has also had other impacts. “A year ago, people would have said, ‘Give me a cola,’ but now they say Pepsi. They say it tastes better than the others,” said shopkeeper Manaf Abdulghani.
Syria’s mineral water market is also diversifying. Until last year, bottled water was controlled by the state, with 51% of market leader Balkein owned by the government. With the government allowing foreign water imports for the first time, there has been a deluge of players entering the market from Lebanon, along with Nestle Pure Life from Jordan and Masafi from the Gulf.

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Special Report

Clipped wings

by Executive Contributor
written by Executive Contributor

Airbus postpones Emirates’ A380s again

With Airbus facing well-documented difficulties in delivering its A380 passenger aircraft, Emirates Airline has reached a deal with Boeing to meet its aggressive expansion plans for its cargo business. The move comes at a time when Abu Dhabi’s Etihad Airlines has been actively adding new planes to its fleet and continues to expand service to an increasing network of international destinations.
On October 8, Emirates, the Dubai-based national carrier, signed a contract for 10 Boeing 747-8Fs, the manufacturer’s new freight series. Also included in the agreement was the option of buying ten more aircraft in the future, bringing the combined value of the deal to Dh20.54 billion ($5.6 billion).

Emirates and Boeing flying high
Emirates and Boeing signed a purchase agreement for the 747-8Fs back in July at the Farnborough Air Show, as part of the Dubai-based airline’s desire to expand its cargo tons as rapidly as its passenger numbers.
“Developing this side of our business is elemental to Emirates maintaining a leading position amongst the world’s airlines,” said Sheikh Ahmad bin Saeed al-Maktoum, the chairman of Emirates Group and president of Dubai Civil Aviation Authority.
Boeing brought its 747-8F to the market in late 2005, billing it as a lower-cost, quieter and environmentally-conscious option for air cargo. With a capacity of 140 tons, it has 16% more capacity than the Boeing 747-400F. The 747 F series is already the market leader with over 50% share in global air cargo.
With the 747-8Fs, Emirates SkyCargo, in charge of airfreight for the airline, will add to a swelling order log for Boeing.
The deal with Emirates comes only a week after Boeing archrival Airbus announced it will again delay the delivery of its A380 Superjumbo series.
On October 3, Airbus told Emirates they would have to wait an additional 10 months from the previous delivery date before starting to receive the first of its A380s. It is the third announced delay for the Superjumbo, which already has 159 orders for the 555-seat aircraft on the books.
Expecting more than 40 of those aircraft, Emirates is showing its frustration.
“Emirates has been advised by Airbus of a further 10 months delay to its A380 program, which means that our first aircraft will now arrive in August 2008. This is a very serious issue for Emirates and the company is now reviewing all its options,” said Tim Clark, the president of Emirates Airline, in a company press release.

‘This is going to cause a huge problem’
Emirates’ senior vice-president for corporate communications, Mike Simon, told local Emirati news, “On top of the previous delays, the new 10-month delay is going to cause a huge problem for us.”
The airline, which currently flies to 85 global destinations with 98 jets, hinges its expansion timetables on when its airplane orders will be delivered. With more than 100 wide-body jets ordered and awaiting delivery, Emirates has plans to significantly increase the frequency of its flights to its existing network, along with opening new cities.
As Maurice Flanagan, vice-chairman and group president of Emirates, said, “We don’t buy a single aircraft without knowing in advance where it is going to go to, and knowing that it will be profitable on those routes—including those 45 A380s.”
The A380s are especially vital for expansion into the Americas—markets that, so far, have received limited attention. Currently, Emirates only flies to New York, but has done feasibility studies to start service to Houston, Los Angeles and San Francisco. Meanwhile, the airline is in talks with Argentina and Brazil to begin their first flights to South America.
Also important will be the further penetration in Australia, by increasing the frequency of daily flights to Sydney, Melbourne, Brisbane and Perth to three.


Much of the profitability of these long-haul routes depends on the operation of the A380s, which will significantly drop the operating cost per seat.
The effects of the delay could also hit closer to home. Besides opening flights to distant cities, the A380s were important to plans at Dubai International Airport, which is undergoing a $4.1 billion expansion. Some of the new boarding gates were exclusively tailored to service the A380s.
But in the face of continuing delays, the Boeing 747-8, the passenger version of the 747-8F, seems to be the only viable alternative for airlines that are looking for the largest planes. It is smaller—450 seats to 555—and even if the orders were placed now, 747-8s would still take longer to build and deliver than the delayed A380s.
While expressing disappointment with Airbus, the airline has not made any indication that it plans to cancel its order.
Direct compensation is also an option. Reports recently surfaced in the foreign press saying that Emirates had demanded $281.3 million (Dh1.03 billion) from Airbus, although Emirates officials have since denied the claim.
Meanwhile, the expansion of Abu Dhabi’s aviation industry is having a direct impact on the numbers of visitors to the emirate and hotel occupancy rates.
Kevin Brett, general manager of the Hilton Abu Dhabi, said recently that the airline’s expansion has spurred tourism in the emirate. He said, “In 2004, the occupancy at the Hilton Abu Dhabi finished the year at 56%, whereas in 2005 we finished at above 85%. This huge jump in occupancy was largely underpinned by the emergence and growth of Etihad airlines, bringing large numbers of tourists to the emirate.”
The airline’s fleet will see the addition of an A330 next month, followed by the arrival of an A340-500 long-range aircraft. These purchases will bring the total size of the fleet to 24 aircraft with 10 more on the way in 2007. All this as Etihad is also continuing its geographic expansion, adding two new destinations over the next two months, bringing the total to 36.
Etihad’s growth coincides with plans for Abu Dhabi Airport’s infrastructure expansion.
The airport has already been supplemented by a second terminal, which has brought its handling capacity to 2 million passengers a year. This was opened at a cost of Dh21 billion ($6.8 billion) in August 2005. However, Etihad’s rapid expansion means that the volume of traffic and trade is already opening up a need for even further expansion.
The government has created a new operating company, Abu Dhabi Airports Company (ADAC), with the authority to oversee the development of the airport through a number of outsourcing initiatives. The company, set up under presidential decree in March, will be empowered to operate, manage and maintain airports in the emirate. This marks a departure from the old structure, under which the department of civil aviation was responsible for the regulation, operation and development of all aviation matters. Regulation at the local level will now be dealt with by the department of transport, as ADAC has now assumed formal control of the operation and development of the airport.
Growing Etihad
Khalifa al-Mazroui, the chairman and managing director of ADAC, recently told emirati media that one of the purposes of the company was to facilitate the growth of Etihad rather than cap its expansion. As a result, the interim solution of providing a new terminal for the dedicated use of Etihad was established. The interim terminal and the development of a new runway will increase the capacity of the airport to five million travelers by the end of 2007.

The boeing 747-8 is the only viable
alternative for airlines looking
for the largest plans


Meanwhile, some observers are concerned that expansion may outpace demand.
The development of Etihad and the new airport are a reflection of and a stimulus for Abu Dhabi’s economic growth and diversification ambitions. The airport will aim to serve this growth; however, it is also a reflection of the expansion of the industry at a regional level, which is leading to greater competition that may lead to over capacity. For example, with the establishment of a new airport at Jebel Ali, which will eventually have an annual handling capacity of 120 million passengers and 12 million tons of cargo, the UAE will have three major airports.
However, Gordon Dixon, the CEO of Oasis Leasing, a substantial player in the aircraft leasing industry, believes that this dramatic increase in the airport’s capacity would be sustainable.
He also pointed to even more opportunity in the sector.
Dixon alluded to low-cost air travel as an area of potential growth, saying, “The growth of low-cost carriers will be huge. The market is very under-served, the demand is there and the histories of low-cost carriers show that they create demand. The biggest factor, however, is the expatriate community, who would be able to return home to see their families on a more regular basis.”
These infrastructure developments will also be completed in time for the arrival of the A380 airbus, the biggest passenger aircraft in the world. In addition, ADAC will also be looking to develop a free zone at the airport within the next twelve months.

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