GCC

Bahrain on the rise

by Executive Contributor
written by Executive Contributor

Island economy booming

In the build up to November 25 parliamentary elections, Bahrainis’ attention has been focused on the state of the kingdom’s economy—and wrenching social changes to the kingdom’s gender balance in government.
In the social arena, Bahrain will have its first female deputy after the election. This is known before a single ballot has been cast, given that Lateefa al-Geood is unchallenged in her bid for a seat in parliament. Reformists have broadly welcomed her accomplishment, but some women’s activists have expressed some discomfort given the way in which she will win her seat.
On the economic front, the recently-published World Investment Report 2006 indicated that last year, Bahrain had the fourth-highest outflows of foreign direct investment (FDI) of any country in the West Asian region.
With over $1 billion in outflow for the kingdom, only the UAE, Kuwait and Saudi Arabia recorded higher outward FDI. This placed the kingdom within the overall pattern of FDI behavior in the Middle East and Gulf Cooperation Council (GCC) areas. Receipts from hydrocarbons are increasingly being used by Gulf economies to invest in projects that aim to diversify the economy. The result is not only internal investment, but also regional and beyond, with Asia and Africa benefiting from much of the Gulf’s FDI.
In all, GCC outflows more than doubled in 2004-2005.

Money flows out, flows in
At the same time, the GCC’s booming economies have continued to be major recipients of FDI. The same report showed that of the Gulf States, the UAE and Saudi Arabia attracted the highest volume of inward investment, followed by Turkey. The UAE pulled some $12 billion in 2005, while the Saudis received some $4.6 billion. Somewhat surprisingly, the Turks blew away a history of poor past performance in FDI by attracting some $9.7 billion. These three economies attracted more than 75% of the West Asian area’s total FDI inflow. The figure on inflows for West Asia rose 85% year-on-year.
The other interesting factor that became visible in 2005 was the importance of FDI to gross fixed capital formation in the Gulf. In the West Asian region overall, 15% of this formation was due to FDI, making the region a bigger draw for foreign investment than both Asia and Oceania for the first time ever.
Much of this inflow was in service-sector industries, such as finance and telecoms. Yet it has also been good news for local projects hoping to arouse foreign interest in other areas.
As an example, one of Bahrain’s largest real estate projects, the Bahrain Investment Wharf (BIW), recently announced that it had signed a dredging and land reclamation supervision contract with Dar Al-Handasah Consultants-Shair and Partners. This came after BIW had assigned the task of carrying out the dredging work to Great Lakes Dredge and Dock Company.

Unique privately-owned project
When completed, BIW will be a mixed-use estate, featuring industrial, business, logistics, warehousing, commercial and residential property. Built on around 1.7 million m2, it will be the only privately owned, operated and managed project of its kind in the country. The project is currently a public private partnership (PPP) between the Bahraini Ministry of Trade and Tameer.
The project runs through several phases, with the award of the Great Lakes contract signalling the completion of a major stage in the plan.
The reclamation work on 55% of the remaining land of the Bahrain Investment Wharf will be completed in about 11 months, BIW chairman Ahmed al-Qattan told reporters on October 14.
A number of different complexes will be developed on the new land, with the industrial park expected to house light, medium and convertible industries. The services complex will see transport, cargo and storage investors as well as other support companies. A logistic base and residential and commercial quarters will also be provided to help lure international firms operating in transport and warehousing.

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GCC

Power talks

by Executive Contributor
written by Executive Contributor

Qatari-Indian ties to deepen

In its push to diversify its economy and expand investment and business activities abroad, Qatar is reaching out to India – and India is reaching back.
Within the past month there has been much activity in Qatari-Indian business relations, some in the more traditional field of energy but also in finance and other non-oil related sectors. Qatar has long had close ties with the Indian economy, being the country’s largest single supplier of gas, a position that is set to expand. India, too, is home to many of the migrant workers employed in Qatar, whose remittances are a major source of cash for the Indian economy.
With the growth of India’s economy into a global powerhouse, and Qatar’s drive to spread its economic wings, the relationship is set to deepen. Bilateral trade between India and Qatar has an estimated value of just $1 billion, the majority represented by the export of $690 million worth of Qatari liquid natural gas (LNG).
In mid-October, the Qatar National Bank announced it was seeking to break into the Indian market: “Entry is difficult but we are looking at different options for entry into India,” said Ali Shareef al-Emadi, the bank’s acting chief executive in October, adding that the move was part of a wider expansion plan for the bank.

Looking for options
In early October, another door opened for Qatari investment in India, with the country’s National Thermal Power Corporation offering the Qatar Investment Authority a 40% stake in its gas-fired power project in the state of Kerala. NTPC is planning a major expansion of its plant there, lifting capacity from 350MW to 1,950MW, and it is looking for partners; Qatar, as India’s leading gas supplier, is a natural choice.
The proposal came only a week after a call for Qatar to buy a stake in Indian gas company Petronet. Following a meeting with Qatar’s finance minister, Yusuf Hussain Kamal, Petronet’s managing director said that he had proposed Qatar buy a stake of up to 12.5% in the company through a soon-to-be-floated $100 million foreign currency convertible bond issue. A delegation of officials from the Qatar Investment Agency will visit India shortly to look into the proposal.

Long-term agreement
India has also announced that it is seeking a further long-term agreement with Qatar to provide an additional 10 million tons of LNG annually, starting from 2010, yet another fillip to Qatar’s strongly performing energy export trade.
In mid-September, on the sidelines of the Non-Aligned Summit in Havana, Qatar’s Crown Prince Sheikh Tamim bin Hamad Al Thani met with Indian Prime Minister Manmohan Singh, with the focus of talks being further direct Qatari involvement in the Indian economy.
Though the full details of the discussions were not made public, a statement following the meeting said that Qatar was considering investments in India’s infrastructure and energy sectors. Likewise, India is considering opportunities in Qatar’s construction, transport, communication, oil-related service industries, IT, education and banking sectors.
However, there is a sticking point with Qatar’s desire to become more deeply involved in India’s economy, said al-Emad: India has only just begun opening up its market to overseas banks and financial institutions.
An example of this is Doha Bank’s application to operate in India, which has been held up at the Reserve Bank of India since last year. It is important for India to further liberalize policies to promote trade to the maximum, said Doha Bank Deputy Chief Executive Officer R. Seetharaman.
India must look at the bigger picture, he said. Since funds are required for infrastructure development, financial institutions and banks must be allowed to come in to speed up the process.
In many ways, Qatar and India are natural business partners. Both are looking to expand their economies, with the emirate having cash to invest and India actively seeking investment. Qatar already has a strong position in the Indian energy sector as a major supplier—a position that appears set to be consolidated as India’s demand for gas expands along with its economy. If India lowers a few more barriers in its financial sector, the distance between these two countries will narrow further.

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Levant

Visiting Syria

by Executive Editors
written by Executive Editors

Historical
investment

No doubt inspired by the growth of tourism in Lebanon, Syria has launched a concerted push to promote itself as a tourist destination by cashing in on its abundance of natural and historical sites to attract foreign visitors—and their currencies.
According to Syria’s tourism ministry, 3.4 million foreigners visited the country in 2005, a figure Damascus wants to see reach 7 million by the end of the decade. Investments in the tourism sector rose from $100 million in 2003 to $800 million by the end of last year, again a figure Damascus wants to see more than double in the coming years.
As an incentive to investors, the Syrian government has set out an attractive build-operate-transfer (BOT) scheme, with lease terms of up to 99 years. The government has waived a number of taxes formerly applied to investments in the tourism industry, including stamp duty on contracts. It has also cut the time and complexity needed for applications to make investments in the sector and identified 82 sites to be set aside for tourism development. Further incentives include tax holidays for investors for the first seven years of operation and tax cuts of up to 50% from the eighth year onwards.
The government has also given a commitment that it will boost infrastructure in areas listed as being of high tourism potential and upgrade the quality of services provided at sites of interest to visitors.

Facing challenges
However, Syria’s tourism industry does face a number of challenges. Compared to some of its neighbors, it does not have the number of high-end resorts and facilities needed to cater to the well-heeled visitors who are increasingly becoming the focus of the market. Damascus is attempting to redress this deficiency by actively seeking out foreign, and especially Arab, capital inflow to help the industry blossom.
In the past months, Syria has been wooing Arab investors, with more than a little success. Leading the charge has been Sadallah Agha al-Qala, the minister of tourism, who has been touting both the country’s tourism potential and the increasing ease and attractiveness of doing business in the country.
“The Syrian government has opened the way for scores of tourist sites that achieve economic and tourist feasibility in addition to issuing a large number of decisions and decrees which encourage the launching of new tourist projects,” the minister was quoted as saying to a delegation from Iran’s Amiran Group for Investment in late September.
Amiran’s chairman, Hasan Akhondi, said his group was looking into setting up a tourism resort complex on the Mediterranean coast near Lattakia that would include hotels, chalets and associated facilities. Though still in the negotiation stage, Akhondi said Damascus’ new measures to encourage investment in tourism were encouraging.

Regional interest
The Iranian interest in Syria, and especially around Lattakia, has been mirrored by other investors from the region, with Kuwaiti company al-Nour looking into launching a major development on the shores of the nearby November 16 Lake. In September, representatives of Qatari tourism developer al-Diyyar signed a memorandum of understanding with the Syrian government to invest $250 million in a new coastal project at Ibn Hani, which will include a five-star hotel, villas and chalets, a shopping complex and eateries, to be built on an area of 220,000 m2.
Naser al-Ansari, Al-Diyyar’s executive director, said that the Ibn Hani project would not be the last his firm would invest in, but rather the first of many.
These are only some of the new projects coming on line. According to Fareed Karima, Syria’s director of tourism projects, there has been a growing interest in the country’s tourism sector. In a press statement released in early September, Karima said 51 investors had made bids on 18 of the tourism sites identified by the government. The total value of these bids alone added up to $500 million.
The last three years have seen a constant 6% increase in foreign arrivals, with receipts growing apace. Having already taken steps to liberalize the sector and encourage investment, Syria is looking to build on its newly laid solid foundations.

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Mohammed al-Rumaithy – Help from the UAE

by Executive Staff
written by Executive Staff

Last month, the UAE Program to Support and Rebuild Lebanon handed over the keys of 168 repaired schools to the Lebanese government. Executive talked to the program’s director, Mohammed al-Rumaithy, about the logistical aspects and political overtones of reconstruction in Lebanon.

E When exactly did the program begin and what are the main projects you have been working on in Lebanon?

It started right at the beginning of the war, but at that time it was only focusing on humanitarian aspects like food and medicine. This continued until the end of the war, when the UAE decided to participate in rebuilding—and in particular, rebuilding schools—because they believed that this was a very important project. The other major aspect of our work is de-mining and bomb removal. The UAE finished its first de-mining project here two years ago, so it was natural for us to resume this kind of work—although this time the problem of bombs is greater than mines, which is a new situation for Lebanon.

E What stage are you at in terms of achieving your objectives?

On October 18 we handed over the keys for 168 schools to the Lebanese government. Another 37 will be ready by November 18 and a further 11 by December 11. These were all schools which weren’t actually hit by rockets, but which were used for other purposes during the war and needed repairs and other work. There are two schools which were destroyed by missiles, and we estimate that we will have rebuilt these completely by December 2007. We’re satisfied with the result, the government is satisfied and so are the people in the south.

E How closely are you working with the Lebanese government on these projects, and how did you organize to rebuild the schools in the first instance?

We first went specifically to the Ministry of Education, met the minister and were given all the information on the situation. But from then on it was all on us to decide how we would work and deal with contractors, and so on. The government had nothing to do with the project field-wise, although they were helping us with statistics and logistics whenever we needed them. They asked us to go away, do the project and then give them the keys to the schools.

E How is the project funded?

It is all funded by the UAE government, except for humanitarian aid which is funded by donations from the people of the UAE.

E Is there a budget?

No, there is no specific budget, but the government is always prepared to support us if we require extra funds. At the start it was extremely difficult to budget because we didn’t know how many schools had been hit, and in the chaos immediately after the war there were no reliable statistics for us to budget from. The same was true for the de-mining and bomb removal: it was difficult to know how many cluster bombs or mines needed to be dealt with.

E How much has been spent on the program so far, whether from the UAE government or from fund-raising?

It’s a significant amount.

E What are the major logistical problems you’ve encountered when working in South Lebanon?

There have been no significant problems, although of course access was difficult at the start because of the destroyed bridges. We were also very squeezed for time as we knew that the government had told parents that the kids would be going back to school on October 16, so we only had 30 days. When we heard what the Lebanese government had promised, we had to run around even more and cover as much ground as possible every day. I think what we did so far has been appreciated by the minister and the government.

E Do you use private Lebanese contractors to rebuild the schools or do you ship in any staff from the UAE?

Only the engineers are from the UAE, the rest are Lebanese. We went directly to local contractors in the South, which is easier for logistical purposes and they know the area well already.

E Did you initially want to do more reconstruction projects in Lebanon, but were limited only to the schools?

The government of the UAE is ready to help in any way, but, of course, we don’t want to take over other people’s work. When we first came, many countries and NGOs were on the ground, and to do the job properly you have to focus on one thing. You cannot come and say “I want to do everything.” So when we made it clear that the UAE would rebuild the schools, everyone knew that. I think what we’ve done so far, and are still doing, has touched the Lebanese people. If it’s rebuilding schools, then it affects kids; if it’s removing mines and bombs, then it affects farmers. In the south, these bombs are preventing everyone from moving around—farmers, children, everyone. Even moving from house to house becomes impossible. So our projects really touch the daily life of the people. There may be more on the way, as now we get requests from the ministry about other work to do. We are tackling each request at a time, and we may increase the number of projects, but it will not be by much.

E How does de-mining actually work on the ground in the South? With so many NGOs and other organizations down there, are you given a specific section to clear up?

The main two players are the UN and the Lebanese Army. They are coordinating all the de-mining and bomb removal efforts and trying to solve this problem as quickly as possible. You tell them what your capacity and budget is and they will nominate a specific piece of land for you. The same goes for other countries that come to help. There are a lot of countries participating.

E How much work is there left to do in terms of de-mining and bomb removal?

Lots. We will not be finished until September 2007. I think there are more than 2,000 mines in Area Six, which is north of the Litani. And regarding the bombs, we’re talking about millions. But it’s a good opportunity to train our officers and [non-commissioned officers], as these conditions produce the best results from training.

E Since the end of the war, the issue of reconstruction has naturally taken on some political overtones. Many people think the various groups are trying to win the support of local people through rebuilding projects. Do you feel as if you are involved in this political aspect of things?

Not at all. We’re not politicians and my country has never in its history mixed politics with help. We have been working in many countries—in South America, in Africa, everywhere—and when we come to help our brothers in Lebanon it’s for help and nothing else. The program works along specific principles and applies to the whole of Lebanon. It does not leave anybody to one side because of their religion, ethnicity or beliefs. Because the people here know that, they welcome us and try to help us. The UAE has nothing to do with politics and this project is solely for the Lebanese people.

E What has been the feedback from people in the south towards the program? Has there been any antagonism?

It’s been positive. We get support and positive comments, and we know that we are giving from the heart and they are receiving from the heart. We’ve given to everybody and without having to particularly plan it, especially in the first few weeks when we went everywhere to help. We never encountered any negative reactions or rejections.

E How do you ensure that this reconstruction aid money is going to the right place in the South, and not being channeled off along the way?

Well, if I understood you correctly, I’m not a security agency to check up on the contractors I employ. I send in my engineers, they do the estimate of how much something will cost, and I go around the contractors and nominate the one who offers the best price. I don’t check up on contractors and if I did we would never ever finish this project.

E Apart from the schools and the mines, what other projects do you still have to complete?

The program is building a brand-new hospital close to Shebaa, which a consultant is working on now in cooperation with the Lebanese Ministry of Health. A tender will be open soon. We’re also repairing two existing hospitals in Marjeyoun and Bint Jbeil. The latter needs a lot of equipment but luckily it wasn’t touched during the war, so we will simply furnish it. The hospital in Marjeyoun is working but needs a few improvements.

E And what about Beirut?

As I said, the program applies to the whole of Lebanon, and in Beirut in particular we’ve been helping at Ouzai harbor, which was damaged by bombs during the war. About a month ago [in September] we distributed checks to 91 fishermen and 315 boat owners in the harbor, to help them get back on their feet. A few buildings in the harbor were destroyed too, and we’re coordinating with the local people to rebuild them. There are only four or five buildings, but they’re important for the people who work in the area. This should take no longer than two months to finish.

E Will the program keep a permanent presence here?

I think we’ll be finished by December 2007. The people working on the program won’t remain in Lebanon that long, so once we make sure that the remaining schools are contracted it will be a matter of follow-ups and payments that can be done through the embassy.

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The forgotten war

by Executive Staff
written by Executive Staff

When Americans talk of “the war” these days, they mean the one being fought in Iraq, a war that has been percolating for three and a half years. But Americans – and a broad multinational coalition — have been fighting another war, in Afghanistan, even longer than in Iraq. As of last month, NATO assumed the control of operations in Afghanistan.

For most of the American public, the Afghan conflict was almost forgotten for a while as the violence unfolding in Iraq grabbed most of the headlines, and, to be sure, the priority of the Pentagon.

But more recently, the Taliban has been making a not-so-discreet comeback (along with the resurgence of opium), waging attacks against Afghan government troops and coalition forces. The almost-forgotten conflict is once again making headlines.

The Bush administration decided to wage war in Afghanistan shortly after the September 11 attacks on New York and the Pentagon, in order to oust the Taliban who ruled the country and offered unlimited support to Osama bin Laden and his al-Qaeda terrorist organization. So what happened? What went wrong? Why did the United States get it so wrong in Afghanistan? Why was there such a misjudgment in the war planning? The answers to all the above questions may be found in looking at who the primary architects of the war were. Indeed, they are the very same ones who planned the Iraq campaign: Secretary of State Donald Rumsfeld, his deputy Paul Wolfowitz, Vice President Dick Cheney and a handful of carefully selected close and trusted subordinates. The president himself was not interested in the small details. Bush was more of a “show me the big picture” type of leader. As was the case in Iraq. Do we not find a similar modus operandi in the two conflicts? Go in light, go in quick, cause the maximum damage to the enemy in a Rumsfeldian blitzkrieg, but then completely fail in post combat planning. Although different in its execution, in many ways the Iraqi campaign was a mirror of the Afghani one. Granted, the terrain is very different; Afghanistan is made up of sharp mountain ridges, littered with deep caves where al-Qaeda and the Taliban could hide from heavy US aerial bombing and artillery. On the other hand Iraq is mostly flat and American tanks were able to race from the Kuwaiti border to Baghdad in record time. In studying both conflicts in Iraq and Afghanistan – as undoubtedly military historians will do in the years to come, hoping to extract lessons of what went right and what went wrong — what is already emerging is that Rumsfeld wanted quick victories to be obtained through the use of special forces, light, rapid moving units, skip the details. Full speed ahead and damn the torpedoes. In years to come, historians will scrutinize every document, every minutes of war preparation meetings, every inter-departmental memo and pre-war document as they become declassified. What they will most likely conclude is that while the initial planning for the war-– the actual battle plans for the invasion of both Afghanistan and Iraq were brilliantly executed — the post-war administration of both countries –- now under US tutelage and therefore the legal and moral responsibility of the United States, was utterly disastrous.

And the reasons? Lack of attention to what happens the first day after combat operations are over. James Fallows, a noted Atlantic Monthly national affairs correspondent, notes in his book Blind into Baghdad that the Bush administration messed up in Iraq by failing to give attention to details: “It will be years before we fully understand how intelligent people convinced themselves of this. My guess is that three factors will be important parts of the explanation.

“One is the panache of Donald Rumsfeld. He was near the zenith of his influence as the war was planned. His emphasis on the vagaries of life was all the more appealing within his circle because of his jauntiness and verve. Fallows goes on to say: “The third factor is the nature of the president himself. Leadership is always a balance making the large choices and being aware of details. George W. Bush has an obvious preference for large choices. This gave him his chance for greatness after the September 11, attacks. But his lack of all curiosity about significant details may be his fatal weakness. When the decisions made during this time are assessed and judged, the administration will be found wanting for its carelessness. Because of warnings it chose to ignore, it squandered American prestige, fortune, and lives.”

While it is important to point out that Fallows was writing about Iraq, the same can be said of Afghanistan. In both instances, the US did not go in with enough manpower to guarantee that life in Kabul as in Baghdad could return to normal once the actual fighting phase ended. In his research, Fallows found that, “According to the standard military model, warfare unfolds through four phases: ‘deterrence and engagement,’ ‘seize the initiative,’ ‘decisive operations,’ and ‘post conflict.’ War College directives clearly state that planning for Phase IV (post combat) ‘had to start as soon as possible,’ well before Phase III (‘decisive operations’).”

This means that planning for the post-combat phase should begin far ahead of the start of the war. This did not happen in Afghanistan and it did not happen in Iraq. In both cases, the signature on the architect’s blueprints are the same.
 

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Finance

Banking on reform – Egypt’s BOA sold

by Executive Staff
written by Executive Staff

In a deal considered to be the largest divestment of Egyptian state assets to date, the government in Cairo last month completed the sale of Bank of Alexandria (BOA) – Egypt’s fourth largest bank – to Italy-based Sanpaolo IMI, generating over $1.6 billion in revenues for the state. The proceeds are expected to be used to re-capitalize other state-owned banks and to reduce Egypt’s public debt. More importantly, however, the successful sale sets a new benchmark in Egypt’s privatization drive and program to reform the banking sector.

Sanpaolo won the bid to acquire 80% of Bank of Alexandria on October 18 after a long and draining process as it was competing against five large regional and international players: Jordan-based Arab Bank, Mashreq Bank of the United Arab Emirates, BNP Paribas, EFG Eurobank Ergasias of Greece and Egypt’s Commercial International Bank.

Under the privatization arrangement, 15% of BOA will be floated in an initial pubic offering while the bank’s employees will hold the remaining 5%.

A milestone sale

“The sale of BOA is a milestone for the government and all parties involved,” Ali Shaker, the chairman of Egypt’s National Bank for Development told al-Hayat newspaper in mid-October. “The whole sector will benefit from this deal as it allowed the largest Italian bank to enter the market which will provide a better competitive environment,” he added.

BOA was the first of the quartet of big state-owned banks to be sold and provides a good outlook for the privatization of the other three, Banque Misr, National Bank of Egypt and Banque du Caire.

The deal, worth 5.5 times BOA’s book value, came nonetheless at a substantial cost to the Egyptian state. According to Finance Minister Boutros Ghali, the government has paid over $1.93 billion to make up for non-performing loans (NPLs) in state-run banks, most of which were on the books of BOA.

Welcomed by many observers and detractors alike, the sale of BOA also lends new momentum to overall banking sector reforms in Egypt. Experts say that the sale – which has been hailed by some as a “banking roadmap” – will strengthen the sector and provide a spike of efficiency, catalyzing the transition to a leaner and more competitive banking system and setting the pace for future reform and privatization.

For years, the banking sector has suffered from a lack of reforms and proper regulations; however, the Egyptian government did acknowledge some of these weaknesses over a decade ago, prompting it to introduce reforms. Despite serious delays in their implementation, these reforms are now helping to strengthen banks’ balance sheets and longer-term outlook, says rating’s agency Moody’s.

Further reforms needed

In June 2003, the government issued a new banking law which paved the way for the Central Bank of Egypt (CBE) to take over the responsibility for restructuring and reforming the banking sector early in 2004. The new regulations required banks to raise their paid-up capital to at least $87 million and their adequacy ratio to 10%. A Banking Reform Unit was created with the primary mission of divesting public sector holdings in joint venture banks, pushing for consolidation, improving supervision and dealing with the menacing problems of NPLs. Joint banks comprise 38% of Egypt’s banks.

So far, only 27 banks have complied with the new capital requirements and only 11 banks have gone through mergers. Bank consolidation was supposed to reduce the number of banks from 57 to 30 by 2006. Currently, the number of banks operating in Egypt is around 42, according to CBE, a reduction of 15 banks. Other mergers in the works include the mega-merger of Banque Misr and Banque du Caire, the country’s second and third largest banks. The deal, which is expected to be completed by the end of 2006, will create a new state-owned institution that can compete with the likes of National Bank of Egypt – the country’s largest bank – and other large foreign banks operating in the country.

Although considerable progress has been made on new regulations and reforms, there are still many challenges ahead for the government and the private sector. These problems include reforming the worrisome bureaucratic practices of some banks and their employees and improving information technology platforms and automation. Furthermore, the CBE still has to adjust and enforce banking regulations to meet Basel II standards, especially in the area of risk-based capital allocation.

If Egypt is to catch up with the recent developments and reforms seen in the banking sectors of most Arab countries, especially those in the GCC, it must move ahead full force with the complete implementation of its privatization and reform drive or risk being left behind at a great loss. Those who are familiar with the market in Egypt know its true potential and are now maneuvering to enter this market as serious players who can effectively compete. But the government must be more convincing and avoid further delays in carrying out reforms.

Egypt’s population of over 75 million is an “asset” for current and future banks. If exploited properly, this asset, especially in retail banking, could lead to satisfied shareholders across the sector. This was the case for Lebanon-based BLOM bank, which acquired Misr Romanian Bank (MRB) last year on the strength of the potential they saw for retail banking in Egypt. BLOM’s Vice Chairman Saad Azhari said that recent reforms and new regulations in the banking sector “made it possible for foreign banks to enter … and we were able to acquire 96.7% of MRB for less then $100 million.”

The sale of BOA has created a new “banking energy” and momentum in the sector. It is now up to the Egyptian government to do its part, and use this energy and the new “banking roadmap” to maintain the pace of privatization and create a more coherent and functional banking sector.

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Finance

Jordan’s financial markets ready to take off

by Executive Staff
written by Executive Staff

Jordan’s investment banking scene is changing, with lively action on the stage of initial public offerings, privatization and private equity deals, but also interesting goings-on offstage with some investment banking teams. In all that, Jordan is seeing an influx of Gulf capital into financial firms, which suggests that the country is migrating towards stronger involvement of regional investment banks but doing so as a secondary market for the Gulf, where the really big deals are going down.

Upfront, the financial and corporate investment market in Amman is lively, with IPOs for two recently established financial firms announced for early November, one for First Jordan Investment Company, a financial services and real estate investment firm with significant shareholding by Kuwaiti and Qatari players, and the other for Arab Future Investment Company, a startup investment company targeting small and medium enterprises.

Other new listings on the Amman Stock Exchange (ASE) since the middle of 2006 included Al Sanabel, an Islamic investment banking and brokerage firm that started trading in October, and July IPOs by brokerage Al Bilad Securities and by First Finance Company, a Sharia-compliant consumer finance provider. Each of the latter two startups entered the market under participation of Gulf shareholders and both firms were very successful in soliciting investor interest in their IPOs, reporting oversubscription rates of between four and five times apiece.

Another new brokerage company emerged in July through a merger of two existing Jordanian financial firms in conjunction with entry of a new regional partner, Al Mal Capital of the UAE. The new firm, Al Mal Securities Jordan, claims to be a regional leader in capitalization and plans to spread its brokerage wings to Lebanon, Syria, Iraq, and Palestine, according to Al Mal Capital. The company notabene also has near-term IPO intentions on the Amman Stock Exchange.

All in all, and despite a lackluster period for the ASE Index from February, Jordan has seen a rise in stock market flotations from seven in 2005 to 13 in the first half of 2006 alone. The majority of those were for companies in the real estate investment and financial services field, according to local investment guru Henry Azzam who multi-tasks as CEO of Amwal Invest—a 18-month-old Jordanian investment bank that went public in 2005—and chairman of the Dubai International Financial Exchange. By Azzam’s calculation, the combined paid-up capital of the first-half of 2006’s newly listed firms amounted to $463.32 million, a neat sixfold increase from the $77.15 million in total capital in the 2005 IPOs.

Market becoming too crowded?

While Jordan’s financial services sector has thus been expanding in operator depth and market presence, some industry insiders say that the market is getting too crowded with so many players. Omar Masri, founder and former head of investment bank Atlas Investment Group, said that the brokerage sector has filled to a point where some 50 companies are licensed to trade securities on the ASE, making this part of the financial industry “very fragmented.”

Zaid Nassif, vice president and head of corporate finance at Amwal Invest, said that investment banking in Jordan is progressing but at the same time competition between dedicated investment banks such as Amwal and Jordinvest and investment banking departments of commercial banks has increased greatly, leaving no room for new institutions the enter the sector.

According to Nassif, recent government regulations increased the market for investment banks by requiring IPO candidates to have qualified financial firms manage their offerings. Additionally, the growing count of listed companies would generate future demand for advisory and structuring of financial vehicles such as bond issues, rights issues, or eventual mergers and acquisitions.

Other experts pointed to Jordan’s active privatization program as a reliable source for investment banking needs, meshing with the local private sector demand and interest of Arab investors in the Hashemite kingdom to create a valid financial services sector.

While opening new opportunities, such market developments are also likely to test Jordan’s financial industry which is part of an overall national banking culture with relatively shallow roots in a country where commercial banking has bloomed later than in Lebanon and where still today one bank, Arab Bank, holds an overweight position in both market share and market capitalization.

Investment sector got its wind three years ago

The investment banking sector in Jordan—which saw initial formation of investment departments at commercial banks and some banks with investment angle starting in the late 1970s, and underwent another development push in the second half of the 1990s—really picked up around three years ago when trading activities on the ASE experienced a growth spurt, Masri said.

In his opinion, investment banking units of commercial banks in Jordan have “always remained a disappointment,” but at the same time the dedicated investment banks also “have not yet made a real impression in the local financial landscape.”

Masri described Jordan’s financial services environment as well-regulated, with a platform of recognition for investment banks and a vibrant bourse that is advanced in comparison to other Levant countries. But he said the greatest weakness in the sector was a severe lack of human capital.

Investment firms have large capital bases and well-known people at the top, “but they lack the workerbees,” he said. “Investment banking has growth with good potential in private equity. Advisory on privatization, private equity, fundraising services, and brokerage services, offer opportunities—but you need the right factory.”

While other investment bankers working in Jordan also see a need for further development of the regulatory side, they agree that the shortage of qualified investment professionals is the country’s main challenge in fostering sector growth.

This issue was illustrated earlier this year by a brain-drain at Atlas Investment Group, which saw several key employees depart the company to accept positions with investment firms in Saudi Arabia, Kuwait, Dubai and London.

In part, the rumblings inside Atlas were linked to the relationship between the investment bank and Arab Bank, which had acquired Atlas over two years ago. Industry observers said that recent moves by Arab Bank, such as excluding Atlas from advising on important acquisitions and the group’s capital increase, contributed to the disillusionment of senior employees.

In the words of Masri—who left Arab Bank and Atlas this spring to develop the investment activities of the Masri family-owned EDGO Group—the lack of alignment between the visions of Arab Bank and Atlas was one of the main problems.

According to the new top executive at Atlas, Arab Bank Head of Investment Banking Jawdat Halabi, the lure for professionals to move from Jordan to the better remunerated and more vibrant Gulf markets is strong, but the Jordanian market has recently grown more attractive. “The key issue is pay, and compensations in Jordan are moving much closer to the market trend,” said Halabi, who joined Arab Bank this year from the National Commercial Bank in Saudi Arabia.

Bullish on strategies for growth

Halabi confirmed that Arab Bank is bullish on Atlas and has a strategy by which the company will refocus its activities on asset management and brokerage services, positioning Jordan as one of several markets in the Levant and North Africa. At the same time, however, Arab Bank is developing a second investment arm in the Gulf region through AB Capital, a company registered at the DIFX. Arab Bank has no doubt this firm will take a larger role in investment banking than Atlas, because of the Gulf market’s superior size in comparison to Jordan and the Levant.

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Comment

Real men negotiate with Tehran

by Executive Staff
written by Executive Staff

North Korea’s nuclear test should remind the world that what counts in politics is results rather than rhetoric. Especially since the “Axis of Evil” speech of January 2002, the Bush administration has pursued ideology-based policies that have failed in the real world.

The US has not achieved a basic level of success with any one of the members of the Axis: North Korea, Iraq and Iran. But Iran is the odd one out of the three, with a functioning state, an international strategy based on national interest, and a relative degree of internal pluralism.

And yet the opportunity for the United States and the European Union to reach an agreement with Iran over its nuclear program seems to be slipping away. Iran, unlike North Korea, is a signatory of the Nuclear Non-Proliferation Treaty (NPT), which means its atomic facilities are monitored by UN inspectors from the International Atomic Energy Agency. It also suspended enrichment for three years and allowed for more intrusive IAEA inspections under the treaty’s Additional Protocol.

But Iran’s talks with the EU, started in 2003, have foundered over a basic disagreement. The EU wants Iran to suspend enrichment indefinitely, so as to forestall Iran’s gaining technology for a bomb. Tehran, meanwhile, sees access to enrichment as a “right” guaranteed under the NPT.

The talks that sputtered to a halt in October between Javier Solana, the EU foreign policy chief, and Ali Larijani, Iran’s top security official, should not be the last chance to reach an agreement. Other ways of restricting Iran’s nuclear program—sanctions or US/Israeli military strikes—would be ineffective at best and highly dangerous at worst.

It seems clear both from what has leaked out from the Solana-Larijani talks and from Iran’s written response to the P5+1 (the permanent members of the UN security council plus Germany) that Tehran offered a compromise: Iran could continue to enrich during negotiations, but afterwards would limit domestic enrichment to the laboratory plant at Natanz. Other enrichment would be carried out in Russia while Natanz would remain under IAEA inspection.

Since the talks broke down, both sides have been digging in. The US and the EU continue to argue Iran should suspend all enrichment. Tehran defends its rights, and we must assume will go ahead with expanding the program beyond laboratory-level enrichment towards industrial-scale.

The outlines of a deal recognizing Iran’s laboratory-level enrichment have been evident for some time, and are acknowledged by many in Europe. But time is something now in short supply, and US and British insistence that Iran suspend all enrichment is becoming self-defeating.

Neither is this a static situation. Opponents of a deal in Tehran, while a minority in the collective leadership, are becoming more vocal and we assume more influential. President Ahmadinejad has used the issue, coupled with vehement criticisms of Israel, to project himself as a leadership figure throughout the Muslim and Arab worlds.

America looks less and less like it is in a position to dictate terms to Iran. Russia and China do not favor sanctions. Iraq is not stable, and there has been a telling growth in Afghanistan of suicide bombings against western targets. In Lebanon, Hizbullah held up the Israelis with a few hundred fighters. No wonder the Iranians think Americans can’t manage all these conflicts and attack them.

But politicians driven by ideology often fail to see realities staring them in the face, and this is what makes the stand-off with Iran so dangerous.

The insistence on ending all enrichment on Iranian soil has not produced the desired result. Hence it is time for unconditional talks aimed at reaching an agreement with Iran that accepts its right to nuclear technology, including a limited enrichment program, while also insisting it comes back into the Additional Protocol and extends its co-operation with the IAEA.

Of course Tehran would claim that as a “victory,” but in this imperfect and volatile world that is a small price to pay for a vital and practical step towards stability.

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Society

The show must go on

by Executive Staff
written by Executive Staff

Beirut Gate, the $600 million Abu Dhabi-financed real estate development in Solidere, is going ahead as planned. How quickly and successfully it does so will be a confidence test for the local market.

Covering a total footprint of 21,448 m2 and a built-up area of 178,500 m2, the project consists of eight separate plots, on which eight separate but thematically-linked buildings are to be constructed. Residential space will anchor the development, accounting for 120,000 m2, whilst 25,000 m2 is set aside for ground-floor retail units and the rest is offices.

In terms of location, it will occupy most of the remaining empty land in the north-east of Solidere, including the open area near the Tabaris overpass, and, most controversially, the sites currently home to the ‘dome’ cinema and the nearby ruined church.

Six of the planned buildings will be designed by two architects: Christian de Portzamparc, the man behind Paris’s Cité de la Musique and New York’s LVMH building; and Arquitectronica, a US-based firm. The other two will be designed by Nabil Gholam, a Lebanese architect who has produced other downtown developments; and the Erga Group, another Beirut-based firm.

Emotional turmoil

Predictably, given its size and location, Beirut Gate looks set to stir emotions. Rumors have already circulated about the possible demolition of one of Beirut’s 1960s icons, the dome-shaped cinema, and its alleged replacement with mixed-use space. However, Abu Dhabi Investment House (ADIH), the UAE-based fund which bought the eight plots from Solidere back in March, denies that the cinema will be turned into a tower block.

“It’s a sensitive issue,” says Nicholas Fraser, Executive Director of Real Estate at ADIH. “And although we have no preservation orders, we have decided to build a new cultural center on the site. This will be given to the city, and could be used for modern art galleries or installations. As for the church, it will either be rebuilt or restored.”

In business terms, Beirut Gate might be emitting positive signals at a critical time—and Fraser hopes the Beirut municipality will accelerate the permit process to encourage other investors—but is demand sufficient to make it a financial success?

ADIH say they have already sold one 38,984 m2 plot to a developer at a price of $2,200/m2, with a second sale currently under negotiation. Fraser hopes that all eight will be sold by spring or summer of next year, probably to a combination of Lebanese and GCC-based investors. If they all buy at that price, then ADIH itself will generate a handsome return—and it claims that investors or developers can expect returns of 18%.

A litmus test?

“I’d estimate that ADIH bought the land from Solidere at around $1,200/m2, which would produce a substantial margin if they sell all the plots at $2,200/m2,” says RAMCO’s Raja Makarem. “A secondary developer who then buys the land from ADIH would need to charge about $5,000/m2 to individual tenants to be able to make a decent profit.”

At pre-war levels, $5,000/m2 is certainly within the top bracket of downtown property, though not at the very pinnacle of pricing. But whilst residential space is still a fairly solid bet, and any developer purchasing a Beirut Gate plot should have a specific clientele in mind, office space in central Beirut is already subject to quite high vacancy rates, a situation which is likely to persist.

Other more immediate concerns include that of construction access for such a large site, especially in a city that already suffers from debilitating traffic. Fraser, though, predicts that the building process will be staggered.

Beirut Gate could prove to be a litmus test for confidence in the post-war Lebanese real estate market. With the other huge downtown project—the 100,000 m2 Kuwaiti-financed Phoenicia Village—temporarily on hold, the success of this development will be an important gauge for the local market as a whole.

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Finance

Banking reforms- Syria loosens up ?

by Executive Staff
written by Executive Staff

When attendees crowd the new Four Seasons Hotel in downtown Damascus for the opening of the Syrian Banking Conference on November 3-5, talk will undoubtedly turn to the complications that private banking still faces two years after the first such institutions opened for business.

Indeed, although five private banks now operate—and three more are on the way by year’s end—there is a palpable sense among Lebanese bankers, who have led the sector’s expansion in Syria, that additional measures must be passed, and soon, if long-term stability and growth is to be achieved.

As a recent Audi research report said, “serious hurdles are facing banking activity, [which calls] for the implementation of further reforms.”

One criticism is that the sector still suffers from a dangerous lack of transparency in regulation, oversight and operation. Underscoring the point, the latest International Monetary Fund (IMF) report on Syria asserts that the recent rapid expansion of private credit is likely to have weakened the quality of bank’s lending portfolios because there is little in the way of risk management practices—not to mention a credit bureau that might accurately assess a customer’s suitability for debt. At the same time, according to one Beirut-based banker intimately involved in his company’s expansion across the border, “The Syrian central bank…is lacking independence and is not playing its role like any other central bank in the world.”

Such criticism is avoided in public because the central bank, under its new governor Adib Mayyali, is seen as a strong force pushing for further reform, but the comment illustrates the dominant view that politics is still intervening in the sector, preventing much-needed exchange rate reforms, the restructuring of state-owned banks and, as a consequence of both, much sought-after interest rate liberalization.

Syrian Deputy Prime Minister for Economic Affairs Abdullah Dardari, freely admits as much, but insists that “there is an intensive liberalization program for the financial sector in Syria—including the reforming of the central bank, making it more independent and more liberalization in terms of the monetary policy where there will be more room for the market.”

To underscore his seriousness, he points to a recently initiated program of cooperation with the IMF, the European Union and the Arab Monetary Fund to address the core issues, but acknowledges that the effort will take up to two years to complete. And even then the question becomes to what extent the government will actually act on the recommendations by passing the relevant laws.

Although some bankers, like Jean Bassil, assistant GM at Byblos Bank Syria, are hopeful that Dardari’s timeframe will indeed come to fruition, with “the remaining restrictions and the complicated regulations disappearing,” two years may prove to be a long time to wait, especially for some of the smaller changes which bankers are increasingly clamoring for.

Indeed, at the top of that list, according to several sector leaders, are the private ownership cap of 49%; an improvement in clearing and settlement procedures; the lack of placement vehicles like T-bills which might tease more money out of Syria’s cash economy (CDs have only recently been allowed); and the convertibility of the currency which, according to one banker, “is still impossible.”

"The major enhancements we would like to see,” explained Bank Audi Syria’s Bassel Hamwi, in comments widely agreed upon, “are related to e-compensation, the automation of the central bank accounts, and the setup of a professional central risk unit.”

That matters have reached this point should come as no surprise: the Syrian economy operated as an integrated, state-run entity for decades, which means that as the “low-hanging fruit” of financial reform was picked in recent years, it has now become nearly impossible to introduce further reform without going to the heart of the issue.

And that means finally tackling the immensely difficult issue of financing state-run institutions, floating the currency and creating risk management practices that are not based, as one Lebanese banker put it, on “long coffee chats to determine bankable credits,” much less the political pedigree of a certain project.

Given all this, participants at November’s Syrian Banking Conference will indeed have much to discuss.

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