Economics & Policy

Bursting bubbles in the gulf

by Faysal Badran
written by Faysal Badran

We have mentioned over the last six months, that the Gulf markets, and in particular the Saudi stock market had gotten ahead of itself. The metrics we used were always simple to understand: the market capitalization had surpassed the national productive economy by a measurable distance. In fact, at its peak in February of this year, the market capitalization of Saudi Arabia at its peak had reached nearly four times the value of the GDP. To put this speculative fervor in perspective, at its manic NASDAQ-driven peak, the US market capitalization had hit 1.75 times the GDP. We use the Saudi market for analysis since it is the largest of Gulf markets, and actually has become one of the largest emerging markets in the world.

The flood of IPOs in a fairly arcane and unregulated market led to an unhealthy, almost parabolic trajectory. This, coupled with excess small public participation as well as an over zealous margin trading (day trading on borrowed money) has led to the inevitable and dramatic fall. So far, at the time of writing, the Saudi market has lost 30% of its value from the top, or nearly $200 billion, yes billion.

Though we did point to the high risks embedded in the Gulf markets in two articles, the devastation is truly awesome. Even the most pessimistic of analysts did not except the decline to come so swiftly, and what is more eye-popping, is that rather than allowing the market to adjust to more reasonable valuations, the authorities, asleep at the wheel when it came to reigning in speculation and lending, suddenly, panicked and stepped in to attempt to cushion the fall.

As we all know, perhaps the most damaging type of government intervention is when political leaders try to swing markets. There are many historical examples of failed attempts, the most spectacular that come to mind are the US attempts to stop the crash of 1929, and the twelve years the Japanese spent trying to stop the Nikkei’s collapse from 39,000 to nearly 8,000. Needless to say, I truly believe that not only is government intervention futile, but it can actually accelerate the fall, creating a larger frenzy on the downside. The purist in me might ask why would any government even want to prop up speculation? It seems absurd, but many governments do it.

Jawboning

Recent attempts at reversing markets were characterized by jawboning, i.e. talking up the market, much like the internet analysts did in 2000 prior, during and after the meltdown. The talking heads go on television claiming that the fall is “exaggerated” and the economy is fine. It may very well be, in fact the Saudi economy is more than just fine, it is growing faster than most emerging markets and government and capital spending is up sharply, but even the strong growth does not legitimize the outlandish market valuations with less than stellar companies going public.

As the authorities showed, accentuated laxness in allowing shady companies to list and an amateur public to speculate they, in effect, fanned the flames of the inevitable boom-bust cycle. In most Gulf markets, authorities are also attempting to make what they deem as “structural” moves to stop the falls. For instance, Saudi is allowing non-Saudi residents to invest as of the end of March. But at this stage, who wants to catch the proverbial falling knife? A 30% fall is not simply a garden variety “pull back” or healthy correction as some pundits like to call it, it’s a calamity, and it indicates some serious technical damage. Once this process begins, and especially at such a high level of excess valuation, little can and should be attempted to stop it. It is simply a market adjustment phenomenon tied closely to human behavior, which is summed up in two extreme modes of conduct: greed and fear. Once the greed is replaced by fear, the process is a long one, and in some cases, Exhibit A Japan, may take decades.

Foreign participation

Propping up the market not only doesn’t make sense and is not a clear mandate for governments; it also means that governments, in any attempt to buy the market is wasting precious cash, which will be unavailable for other ventures. My guess is, a broader participation of foreign players from the get go, would have perhaps provided the market with a healthier backdrop.

Here are some numbers for Gulf markets. The Abu Dhabi Securities Market has so far lost 23.4% on the end-2005 close of 5,202.95 points and 37.7% on its all-time high. The Kuwait Stock Market dropped 1.1% to close below the 10,000-point mark at 9,939.30 points, 13.2% below its 2005 close of 11,445.10 points. The Doha Securities Market dropped below the 9,000-points mark to close down 4.4% at 8,873.08 points. It is 19.7% below last year’s close of 11,053.24 points.

In this context, one wonders, can the Beirut bourse withstand any gravitational pull? So far the answer is no. Since the fall in the Gulf markets, Solidere and the main “money center” banks are off by nearly 20%. Many will have you believe that the reason for the Beirut fall is the political situation, but while the shenanigans of the decaying political system may not be helping, the true culprit for the most part is the fall in the Gulf markets. First, the mood of Arab investors and therefore their appetite for risk declines as they get hit. Secondly, as they get margin calls and they need to cut risk in their portfolios they will liquidate their assets abroad, once they have made some decent gains. Of course, had the political situation been better, the fall in Beirut may have been smaller, but there still would have been a sizeable pullback. As oil and stocks have fallen in tandem, the rationale for risking some cash in illiquid markets such as Beirut fades.

It is certain that the attempts at stopping the market fall in the Gulf will ultimately fail, as every single government intervention historically has, but in the interim, there will be sharp upswings. And while it is true that the Lebanese market does not suffer from the same overvaluation as the Gulf, at their peak, banks in Lebanon were trading at multiples associated with global banking powerhouses, an unreasonable state of affairs, despite their strong results and the astute banking culture of Lebanon. In sum, as long as the Gulf markets are hit by selling, it is tough to envisage a very rosey outcome for Beirut stocks, and even the most perfect political denouement may not be enough, as stocks in Lebanon are already up massively from their lows anticipating better times ahead. Some foreign funds may be tempted to jump in should the political situation improve, for a tactical play, but too many fiscal and economic bumps are straight ahead to look for anything more than speculative spasms.

In the long term, I do believe that there is room for improvement in Beirut equities, and for the bourse to attract foreigners and Arabs. For now, the main focus has been on debt securities (bonds) as the government has had to borrow excessively to finance reconstruction, but eventually, as more family businesses are incentivized to list, and a proper equity culture develops, Beirut can place itself on the regional market map. This is a tall order, though, as this will require a better environment, both political and economic and frankly, more credible leadership and clearer policy. Ideally, most emerging markets must undergo genuine reform in order to attract the larger players, i.e. the US and European funds.

0 comments
0 FacebookTwitterPinterestThreadsBlueskyEmail
Finance

Listing to live

by Nicolas Photiades
written by Nicolas Photiades

When implemented sometime during 2008, the Basel II Capital Accord will demonstrate that the entire Lebanese banking sector will be in need of extra capital to cover up the underlying risk of their assets. Most banks are expected to see a drop in their capital adequacy ratio (equity divided by risk weighted assets) from an average of 21% for the sector to a level below 6%-5% (for some banks even more). Lebanese banks’ capital adequacy ratio will then be below the minimum regulatory capital ratio of 12% as established by the Banking Control Commission (BCC) a few years ago. In other words, the entire Lebanese banking system will need a whopping $5.7 billion (current equity is $4.3 billion) of extra capital in order to reach the minimum regulatory capital adequacy ratio of 12%, or $2.6 billion if the BIS CAR is to reach 8%.

This sudden drop in capital adequacy will make local banks realize, not only that they need to increase capital significantly but also that they need to assess risk in more details and more professionally, and that they will need to obtain capital funding flexibility. Under Basel II regulations, capital is expected to fluctuate constantly at first, as banks try to find optimization of their assets in terms of credit risk and risk weightings. This capital fluctuation would crucially require an equity funding flexibility that can only be obtained through a listing on a recognized stock exchange, which also enjoys strong liquidity in a developing secondary market.

A listing, which would be an initial public offering (IPO) for most banks (only a few are already listed) would also force transparency and a certain operational and market discipline for all new entrants. Any CEO of a bank facing a capital shortage as a result of Basel II should not only seek to increase capital in order to meet regulatory requirements. He or she must be asking him or herself whether they have the right stuff to go through an IPO. Taking a company or a bank public is a grueling affair, even in Lebanon, especially that the CEO will have to manage the process in tandem with day-to-day work, which is already hard enough. The senior management team may need strengthening, replacing or overhauled. Products and revenues will have to be diversified to create long-term, healthy and recurrent profitability. Investors would never look at a Lebanese bank IPO if all these criteria are not met.

Sooner rather than later

Even if internal and operational issues are covered, banks must be able to time their IPOs correctly. They must start increasing their capital today or at least enquire about conditions for a listing with the BSE. Increasing the capital through an emerging market bourse takes double the time it normally takes in a developed market. The idea of gradually increasing capital after thoroughly preparing the IPO, starting from today should be taken seriously and constitute a major strategic challenge.

However, if all banks carry out their IPOs at the same time, especially if it is soon after Basel II regulations are implemented, then there will be a few winners and a lot of losers. The Lebanese and regional market has no room for 40 Lebanese banking IPOs at the same time and the BSE will certainly not be able to cope with such a bottle neck. In general, most IPOs worldwide are carried out earlier rather than later. In Lebanon, banks could set a first by trying to list too late, a result of sheer desperation in the face of a forceful set of international capital adequacy regulations.

Banks should not only think about increasing their own capital. They should also be advising their corporate customers to get themselves more equity funding flexibility, particularly those corporates which have established successful franchises. By increasing their capital through the local equity capital markets, Lebanese corporates would enhance their credit strength and debt capacity significantly, as they would become more transparent, be forced to follow a strict market discipline that normally accompanies a listing, and be able to finance their development with capital rather than debt. The end result would mean a much better risk weighting of their credit exposure with their bankers, and consequently less capital for the latter.

Basel II is regarded as a constraining evil by bankers worldwide. For Lebanon, it could be the trigger for a healthier economy and exponentially greater competitiveness. From 2008 onwards, no Lebanese bank should have the right to look back. As Brutus says in Julius Caesar, “There is a tide in the affairs of men, which taken at the flood, leads on to fortune. Omitted, all the voyage of their life is bound in shallows and in miseries. On such a full sea are we now afloat. And we must take the current when it serves, or lose our ventures.” Enough said.

0 comments
0 FacebookTwitterPinterestThreadsBlueskyEmail
Economics & Policy

An unbeaten Risk-Taker

by Stephen Schurr
written by Stephen Schurr

Even for the most extra-ordinary skier, neither acumen nor experience can prepare oneself for the mortal threat of an avalanche. Philippe Jabre learnt this last year.

In February 2005, Jabre, then the star trader for London hedge fund GLG Partners, was skiing in Courchevel with his wife Zaza, a client and two guides when a huge mass of snow rapidly descended upon them. When the avalanche hit, his wife was submerged. Jabre and his companions spent 23 minutes trying to find her and dig her out, with the odds of her survival dwindling by the minute. Miraculously, she survived, capping her recovery in January with a return to the slopes at the French ski resort where they own a home.

Survivor

Jabre also faced down two powerful forces in his professional life in 2005 that threatened to submerge him. The first was a near-cataclysm in the credit market that put his GLG Market Neutral fund down 18% through May. The fund posted a remarkable recovery, capped by a double-digit return in December that put it up 5.47% for the year.

The second was the UK Financial Services Authority’s investigation into his February 2003 trades in Japan’s Sumitomo after he received information about a coming convertible-bond deal from Goldman Sachs. It was the most high-profile regulatory probe in the history of the London hedge-fund community.

The latter reached its conclusion this week, with the FSA’s Regulatory Decisions Committee deciding to fine Jabre and his former firm GLG £750,000 apiece, determining that the trader and, in turn, his firm violated market conduct and committed market abuse.

The fine against the 45 year old Jabre was the largest ever meted out to an individual. Despite the penalty, the RDC ruling marked the third time Jabre evaded a dreadful fate. The judicial panel decided that Jabre did not deliberately commit market abuse, ruling that he did not violate the FSA’s Principle 1 governing market integrity. Against the FSA regulators’ recommendation, the RDC opted not to ban or suspend Mr Jabre.

That he emerged with his license intact can be seen as miraculous in some regards. When the two-year investigation came to light last year, it seemed to many in London’s hedge fund set a clear-cut case that would end with Jabre’s head on a platter. As the investigation wore on, the details became less clear, as is often the case regarding the nebulous terrain of information exchanges between investment banks and hedge funds.

A legend

The decision ensures that Jabre, for two decades a prominent fixture in London’s investment community, will have a third act – the first being the spectacular success, the second his near-demise under regulatory scrutiny and the third his potential return to running money. The course of the third act may not go smoothly. He will not be returning to GLG and he must re-register to run money if he plans to start a new fund – meaning the FSA once again holds the key to his future.

Jabre was not available for comment. But several prominent individuals in the London hedge fund community said that whatever the outcome, the third act will be as closely followed as the first two because of his stature.

“Philippe is a hedge fund legend,” said a manager at a London fund that operates some strategies similar to GLG. “He is a born money-maker, and there are very few of those out there, even in the hedge fund world.”

Jabre’s personality, according to those who know him well, is that of the quintessential hedge fund manager, only more so. The price of a ticket to this world is an extreme degree of competitiveness, high intelligence and innovative thinking. Jabre established a reputation at a young age in the London investing community as both a risk taker and a brilliant trader. He earned an MBA from New York’s Columbia University in 1982, trained at JPMorgan and soon made his way to BAii, a division of BNP, the French Bank. In his 16 years there, he specialized in the budding market for convertible arbitrage, a strategy that involved buying a company’s convertible bonds and selling short the company’s stock.

Jabre acquired a reputation among critics for operating aggressively. In 1997, he joined GLG Partners, a hot two-year-old hedge fund started by former Goldman Sachs bankers Noam Gottesman, Pierre LaGrange and Jonathan Green. It was developing a reputation as a player in the burgeoning London hedge fund industry, in part on the strength of its access to new offerings, and Jabre’s convertible arbitrage brought a new dimension. “It’s ironic now, given the investigation, but one of GLG’s big moves toward legitimising themselves as a firm was getting Philippe,” said one hedge fund manager who was active in the 1990s.

Jabre’s Market Neutral fund grew to more than $4 billion at its peak, returning 23.1 per cent returns on average after fees between 1998 and 2005. According to individuals familiar with his investing style, Jabre’s ability to beat the benchmark by 18 percentage points a year on average was his push to move away from convertible arbitrage and toward more opportunistic trading across various asset classes.

GLG helped Jabre, who has four children, become a rich man, with his personal fortune estimated at £180-£200 million, enabling him to concentrate on charitable efforts, including a focus on Lebanese causes.

However, the two-year FSA investigation caused an irreparable strain in the relationship between GLG’s senior ranks and Jabre. Individuals familiar with the firm say GLG came to view Jabre as someone who took unnecessary risks. One individual described the rift as akin to “a rock group that becomes huge, where their success leads to their eventual break-up”.

Own firm

While Jabre officially remains on leave, individuals say he will not return to GLG. Jabre will almost certainly look to raise money for his own firm. Some individuals say the FSA could decide to block any attempt by him to set up a new fund in London. But other hedge fund industry participants, however, say the FSA would grant him approval since the RDC did not suspend him.

And no one is questioning Jabre’s continued ability to attract investors. Said one hedge fund manager: “Somebody was asking me the other day whether he could raise money if he starts running his own hedge fund. My God, he’ll almost be killed in the rush.”

Stephen Schurr is the London-based hedge fund correspondent for the Financial Times. Copyright 2006 The Financial Times Limited

0 comments
0 FacebookTwitterPinterestThreadsBlueskyEmail
Comment

Capitalizing on defeat

by Yasser Akkaoui
written by Yasser Akkaoui

We business journalists are often invited to dinners and lunches along with many heads of private sector companies. Without fail, we are asked about the outlook for the economy, as if, in our opaque world, the press has its own special-issue, X-ray glasses.

The answer is normally a variation on a rather depressing theme: that we tend to hear what the government isn’t doing rather than what it is. Simply put, there is no national plan with which to asses the state’s vision, especially as the year to date has been characterized more by politics than economic strategy, which appears to have not been included in the so-called national dialogue.

In fact, anyone would think that the role of the government was just to manage the debt, that or offer us conflicting outlooks for the fiscal and monetary situations. At ministerial level, we have not heard much from Mr. Haddad at Economy and only the tiniest of squeaks from Mr. Gemayel and his bumper sticker campaign at Industry. Where are our plans for agriculture, industry and tourism? Don’t tell us that there are no more jobs to create or no more natural resources or assets to exploit. We just don’t buy it. Stop telling us what we can’t produce and start telling us what we can. So where is the plan?

You see without a plan there is no speculation and without speculation there is no investment and without investment there is no growth. Or are we just happy to be a good-time country living off birds, booze and beaches.

In this month’s special section, we look at the recent interest in Lebanese real estate. We can identify pockets of initiative to encourage speculation, flowering in what is still largely a wasteland. If we are so clever, why have we not taken a leaf out of the books of recent regional success stories and use property development as a vehicle for investment? The government should grasp the nettle and initiate this culture or at the very least invite those who can, to come and do so.

But sadly till now we have heard nothing. So this is why the last time I was asked about the economic outlook I turned to the gentleman and said. “You are on your own but you have succeeded nonetheless. For the time being stay that way, for it seems we can only rely on ourselves.”

0 comments
0 FacebookTwitterPinterestThreadsBlueskyEmail
The Buzz

Me, Myself & I-Mate

by Yasser Akkaoui
written by Yasser Akkaoui

When it comes to PDAs I am a virgin user. So far, they held little attraction. I am a minimalist kind of guy I suppose. For me a cell phone is for making phone calls. I don’t use the camera neither the alarm nor reminder functions and I don’t really send text messages. My one concession to options is my subscription to Clip Plus, a service that tells me who has called when the phone is off.

So when I was offered a complimentary, all-singing-all-dancing I-mate JasJar worth around $1,200, you will forgive me for telling you I did not get into a lather of excitement. I was hesitant to take such a huge technological leap.

Essentially, I am a self-conscious kind of man. I don’t like to make an obvious statement of what I can afford or where I have reached in life, by what clothes I wear or which watch I have on my wrist. The same extends to my choice in telecom accessories. I don’t need to be seen to be speaking into a piece of NASA hardware to feel secure. So the size of the Imate was a novelty and took some getting used to. Yes, I was worried that people might think I had just stepped off the boat from Dubai with my duty-free gizmos ready to cut a dash in provincial Beirut. Still, I pride myself in my positive outlook and decided to give it a go. After all, apart from my image, what did I have to loose?

The I-mate JasJar is undeniably big, heavy and wide. It is not discreet and it is difficult, if not impossible, to pass unnoticed when talking on it in public. But it is slim and, if carried without the carrying case, can fit neatly and unobtrusively into one’s inside jacket pocket without spoiling the cut of the suit. Still, you know it’s there.

The cover is however, there for a purpose. The screen is delicate, as two friends of mine found out when their screen cracked (one had to send his Imate – along with all the stored data – to Dubai to be fixed; an inconvenience to say the least). The good news is that, in the name of research I tried to break my new toy, but was unable to. Maybe I just look after things.

Novelty value

So what about the performance? Well, first off, Configuration is quick. I was expecting to go to hell and back before I could get it to work but it took a mere 10 minutes. Then it was a case of which screen to use. Did I go with the fold-out format, not unlike that of a laptop, or did I opt for the more space-age, touch-screen method? As a child of the laptop generation I went for the latter, but given current habits it might also depend on whether or not you have a driver (my logic being that you can use the keyboard easier in the comfort of chauffeur driven luxury). That said we should never encourage people to send text messages while driving should we?

What really made my day however, was the SMS facility. As I have said I am not really text kind of guy. Even people who send me SMS messages will get a phone call in reply. However, the JasJar allows you to send SMSs on a Microsoft Outlook email platform and on a recent business trip I found I was saving a fortune in phone calls by using this very civilized and professional option that allows you to manage your messages like e-mail.

I was also able to access the internet where there is WIFI hosting. While I quite enjoyed the novelty of sitting in a lounge (T-Junction of the Emirates Tower as it happened) and logging onto to Yahoo, it is not my thing and I have never fully understood those who need to do their work in public. That said, if I had transferred my emails onto the JasJar, I might have been as busy as the proverbial bee.

For those who can’t stop themselves, the JasJar comes bundled with all the standard Microsoft software – PowerPoint, Word, Excel etc. – so they will never be caught short. Would I buy one? Honestly? I liked it, but would prefer something smaller like the I-mate JAM. But then again, I have not made that crucial lifestyle leap…yet.

0 comments
0 FacebookTwitterPinterestThreadsBlueskyEmail
The Buzz

Handheld butler

by Executive Staff
written by Executive Staff

There has been a lot of hype surrounding the Vertu mobile phone, arguably the ultimate in personal communication. The phone also comes with what it calls a Concierge service, an equally exclusive option for those people on the go, who like things planned ahead of time wherever they are in the world. EXECUTIVE wanted to know more and went to Karen Bou Fayad, Vertu’s marketing and public relations manager in Lebanon for the lowdown on one of today’s must haves and its bespoke customer service.

E When did Vertu decide to establish the Concierge service and what was the corporate philosophy behind it?

The idea of establishing the Concierge service came in the earliest phases of the development of Vertu. The whole philosophy of the brand was to create an unforgettable experience to his clients. What makes Vertu so special is the obsessive attention to details and the craftsmanship that is behind each product. Each component was selected in order to make the use of a Vertu phone an unparalleled experience: The scratchproof sapphire crystal screen, the jeweled ruby bearings under each key, the exceptional sound quality, and the hours of work spent in the assembly of a phone, the level of performance, etc. To compliment this experience, Vertu decided to offer his clients the unique Concierge service, an integrated customer experience, where the service is accessed directly from the phone simply and easily by way of a dedicated button on the side of every phone. This is unique to Vertu and is not available on other phones. Neither are other services so instantly and easily accessible.

E Fair enough. How many Concierge users are there in Lebanon? What percentage of Vertu users, both in Lebanon and abroad, have signed up for Concierge?

Concierge is complementary for the first year, but a lot of our clients are so satisfied with the service and find it so useful that they subscribe to it at the end of the first year.

The frequency of usage of the Vertu Concierge can be very different from one client to another. The most frequent requests the lifestyle managers get are information about hotels, restaurants, theaters, concerts, musicals, sports events and so on. Unfortunately, we can’t disclose detailed figures on the percentage and the number of Concierge users.

E How much does Concierge cost and what services are on offer? What is the most used Concierge service?

As mentioned earlier. Concierge is a service that comes with every Vertu phone. The Vertu clients gain access to a dedicated team of lifestyle managers, capable of helping them get the most out of their valuable free time. The service is available 24/7 in English, French, Italian, Russian, Mandarin, Cantonese and German. There are three kinds of service: Support on issues related to Vertu and Vertu products, questions regarding the phones, the distribution, the company, etc. Secondly there is an emergency service in which we can put the client in touch with doctors and organize car repairs and services and lastly there is the Lifestyle service through trips can be organized and restaurants recommended and booked. Concierge can also give shopping advice. All three services are widely used by our clients. The lifestyle service is highly appreciated for the quality of the work and the recommendations of the Concierge managers.

At the end of the first year, clients will continue to be supported on issues relating to Vertu products. Those clients wishing to subscribe to ongoing lifestyle support can do so. There are two levels of service. The standard service, similar to the level of service received during the first year, is available for £650 ($1,140) per annum. Those who wish a more bespoke and personal service can subscribe to VIP service at £3,600 ($6,300) per annum. This includes a personal lifestyle manager who oversees all requests relating to a small group of specific clients

E Can you give us some real life examples of how Concierge is used?

Certainly. A woman recently wanted to arrange a small 21st birthday gathering with friends in Switzerland. Vertu Concierge recommended the perfect location, managed all contact with the venue and even organized drinks, food and a cake for the event. A regular business traveller used Vertu Concierge to arrange a last-minute trip including all flights, car hire, accommodation and a gift to thank his hosts at the end of the trip. The client particularly liked dealing with one person, who had responsibility for all of the arrangements. One Vertu client was head over heels in love with the red pair of shoes of her dreams and had tried in vain to bribe the sales team of a very famous luxury brand store to strike a name from the waiting list and replace it with hers. Even the brand’s customer service couldn’t help. The shopping specialists of the Vertu Concierge knew that those shoes could only be bought at the firm’s own stores, so the selection was limited. They telephoned the entire brand’s stores in the world, negotiated with the sales managers, had the staff of the headquarters rummage through the stock room and finally met with success. A few days later, a courier brought the client’s house the pair of shoes of her dreams.

E Phew! Ok so what is the profile of the Concierge user?

Vertu’s customers are lovers of the most beautiful things in life such as watches, clothes and cars. They want to be surrounded by accessories that fit their personality and lifestyle. Most of our clientele is male. However, some models of Signature and the last Pink and White special editions have shown a very strong response among women. I would say that the profile of the Concierge user is the same than the general profile of Vertu’s clients. They are lovers of the most interesting experiences in life and expect Concierge to answer their needs and compliment their lifestyle. The requests the Concierge will receive are based on the clients tastes and hobbies. The Concierge will be asked to recommend the most select restaurant to the best pub to watch a football match!

E What do you say to those who counter that if you can afford Vertu you don’t need it?

Vertu Concierge is a personal service consisting of a team of specialists dedicated to developing a global database of international suppliers and testing these to ensure they will deliver the best service exclusively to Vertu clients. Their expertise is not limited to a country or a domain.

When a request comes through the team of experts combines his or her expertise with services held within the knowledge bank to deliver solutions in response to the client requests. They have extensive international experience, and an undeniably international outlook. For clients this means the service can be extremely useful, not only at home, but also when they travel. The lifestyle managers try to get to know each of the clients better in order to deliver to them customized personalized recommendations and suggestions that will answer the best their personal needs and tastes. The Concierge users are therefore sure they can receive the best assistance at any time and in any part of the world they are living in or traveling to.

E How many establishments have signed up to be part of the Concierge infrastructure? What does it cost them? In Lebanon which is the sector – hotels, restaurants, car hire etc – that has responded the most to Concierge? How can we measure how much business Concierge has brought to those businesses that have signed up?

No establishment will need to sign up to Concierge to be part of its database and recommendations. As the Concierge service is dedicated to offer the best service to his clients, the lifestyle managers will only recommend the best response to their clients needs. They have an international database and strong relations with key locations and suppliers. Not only will the Concierge service will always try to update his database with the newest and the best locations and services on an international level, he will also take in consideration the clients’ experience and feedback about places or services he recommended to answer other users requests. However, the Concierge may also contact some establishments to organize special offers to his clients. The best example would be the themed offers for the owners of the Pink and White Special Editions phones, such as priority personal and Christmas shopping at Barney’s and Harrods, complementary pink champagne at the Raffles Grill in Singapore, priority booking in the Spas of the Mandarin Oriental in New York and Singapore and the Georges V in Paris and special upgrades in the Ice Hotel in Canada to name a few.

E What is the level of growth in Concierge both in terms of subscribers and those companies signing up to be listed in the service?

Since the creation of the company in 2002, Vertu has witnessed an exceptional level of growth. The Middle East region is very dynamic and I would say that, as a result of this, the number of the Concierge users is also growing in an exponential way.

0 comments
0 FacebookTwitterPinterestThreadsBlueskyEmail
Finance

Mena- GCC securitisation General Issues

by Executive Staff
written by Executive Staff

Over the last couple of years the MENA and GCC markets have started to push for more diversity in their financial activities. Securitisation has emerged as a catalyst and is experiencing notable growth that has already materialised in markets like Egypt, Lebanon, Saudi Arabia and the GCC countries. Some specificities related to these markets and major hurdles that have slowed progress, are examined thereafter.

Securitisation has already demonstrated its ability to structure transactions in markets where no specific regulations exist. Most of the countries in the MENA – GCC regions have yet to enact such regulations. Some countries have or are on the verge of enacting regulations. Others have yet to envisage such reforms and remain a challenge for securitisation transactions. Several countries have addressed the securitisation issue in a formal way, like Turkey, Tunisia and Lebanon for instance (which has recently enacted a new securitisation law). It is interesting to mention that the absence of such a precise and predetermined setting has not been a hurdle for securitisation transactions, a number of which has already close in some MENA – GCC countries.

In looking at Saudi Arabia and all other sharia based systems, it can be determined that there are stringent restrictions and uncertainties at many levels. Although transfer of assets or receivables is allowed, some restrictions apply as to the nature of the purchaser. Also, courts apply Shariah law in their decision-making process. Shariah is itself divided into different schools of thought. Although the Hanbali school is dominant in Saudi Arabia, a sitting judge can decide to choose another school of thought and focus exclusively on substance, ignoring what was created in form (a necessity in structured finance). This brings great uncertainty and instability to the cornerstone of a securitisation transaction: the concept of true sale. The possibility of re-qualifying a true sale and of piercing the legal and corporate veil makes any investor very weary of such a risk. Another problem faced in Saudi Arabia and in some other countries in the area are the very strict laws on foreign ownership. These hurdles imply that for transactions in such countries, the best ways to structure a securitisation transaction would be by using a two tier structure with both an SPV in the country of origination (the “Owner SPV”), and one in a foreign country, (“Issuer SPV”), with adaptable legislation (Jersey, Luxembourg…). It is necessary to mention that it is not an option to create an SPV as a subsidiary of the Originator, since it would expose the “Owner SPV” (the “local” one) to consolidation risk and would remain under the control of the originating entity.

In addition to the above mentioned factors there are a number of factors to be considered in any market for securitisation. In the MENA – GCC region these factors are also hurdles at this very early stage of the evolution of regional structured finance. The absence of fixed income capital markets which efficiency is measured by their ability to accurately and transparently reflect a true measurement of risk and return. Simply stated and in a market ignored by the Rating agencies, there is a real problem with information gathering, processing, disseminating and analysing.

In the rare cases where the mentioned handicaps can be overcome, some additional factors come into play. From the investors’ perspective, there is real hesitation to engage in what still seems to be an exotic financial instrument. This is a result of the lack of experience and exposure but also in case of banks, it is the result of fear of competition. Additionally, the stagnation of financial activities has affected the private sector. Companies that otherwise would be viewed as potential clients for a securitisation transaction, are so dependent on traditional banking and on their relation with those banks and would hesitate to jeopardize these relationships for a financing alternative. The choice of securitisation often comes at a moment where a company would have exhausted other alternatives. Beyond the absence of harmonisation of the standards used throughout the region which already makes the data eventually available hard to understand, the implementation of the International Accounting Standards (IAS) raises another problem. These standards (IAS or other) are the result of a lengthy nurture process stemming from back and forth “trial and error” actions on very sophisticated markets. Standards have been put to the test and improved on numerous occasions. They grew in sophistication along with the markets. This is a major difference with MENA – GCC where these standards have been imported in their most refined/sophisticated version. Thus, instead of starting to evolve in a rather flexible market, regional markets have to evolve with complicated accounting standards that developed markets did not experience while growing their business. This puts an additional hurdle for innovative financial instruments.

0 comments
0 FacebookTwitterPinterestThreadsBlueskyEmail
Business

Zafer Chaoui

by Executive Staff
written by Executive Staff

Zafer Chaoui was appointed Chairman of the board of Château Ksara in 1991. During his tenure, the country’s oldest winery has gone from lame duck to Lebanon’s market leader both at home and abroad. Although wine is not Chaoui’s only business interest (he is a managing partner of the Chaoui Group of companies, which began life selling paper, board and pulp from Finland in the 30s and which is now a market leader in this field. The group’s other activities include the sales of raw materials to the pharmaceutical, food, feed and detergent industries. Zafer Chaoui is a board member of Banque Libano-Francaise and the honorary consul for Finland), he calls it, “the most beautiful part of my business life.” A businessman who normally prefers to let his results do the talking, he kindly spoke to EXECUTIVE.

E The company is embarking upon a significant expansion over the next four years. Can you outline the changes you envisage for the company and why you felt it was necessary now?

Since 1991, we have gone from a production level of 1 million bottles to a production level of 2 million bottles. This is the optimum we can do today with our current facilities. For the last three years we have sold out of our wines and have had to delay shipments. Our customers have not been happy about this. But before embarking upon any expansion program, we had to make sure that our grape partners, Mrs. Rizk, Mr. Itani and the Jesuits at Tanail, would agree to enlarge the vineyards. All this has been approved and in the coming years production will increase to 2.7 million bottles. I want to stress however, that we are not expanding to sell more but to improve quality and to sell it better locally and abroad.

E Will this gradual move to better quality see a change in pricing strategy and the streamlining of your range?

We have a good range. We will not streamline. On the contrary, we might move into niches like we did with the single varietals, the Chardonnay and Cabernet Sauvignon. We will certainly emphasize on noble grape varieties as much as we can.

E Will the increased production be used to plug gaps where demand currently exceeds demand, like with the Reserve du Couvent?

The reserve is our best seller and I don’t believe you can find a more competitive price to quality ratio anywhere in the world. The château range of wines is our flagship and I would like to see a greater concentration on premium wines. We are quality conscious but we are a company that likes to make money. We make higher margins on the premium wines.

E Lebanon is a very small producer in global terms yet its quality is not in doubt. What should be done among the producers to harness its potential?

The other [Lebanese wine] producers are our competition and healthy competition is key to success. They share our principals of professionalism and honesty and their aggressive ad policy has created greater awareness among the Lebanese population and increased local consumption from 2.5 million ten years ago to 5 million today. That said, consumption is still low by global standards and there is room for improvement. We exhibit together at international fairs because the biggest market for us is the world and as Lebanon’s production is small we can develop a niche market. Our wine sector is now used by the government as an example of a healthy local export, one that can be an ambassador for Lebanon.

E It could be argued that wine is Lebanon’s most high profile export. What are your personal feelings about the promotion of wine by the public sector?

The public sector anywhere in the world is always slower to react than the private sector. In Lebanon, it is probably slower. There is much goodwill when we speak to all the ministries individually but as our interests are spread between three ministries – those of Economy and Trade, Industry and Agriculture – this can sometimes make life difficult. But there is progress. We are working to create the National Wine Institute to make sure our wine meets the required standard and to help export our wine. Furthermore, since export levels have increased, I have noticed a bigger increase in interest from the public sector. You know it is always easy to blame the government but it has helped where it can, especially in facilitating soft loans for Lebanese industry.

E Château Ksara’s biggest export market is Syria. In light of the recent political tensions, how would you describe the commercial relationship between the two countries?

I don’t want to avoid this question. Syria is one of our main export countries. It is a huge country with untapped potential and we can see this just by looking at the many banks that have entered and are still entering the Syrian market. There is little or no wine production in Syria and we have always sold our wine there. Our sales are increasing year after year and have not been affected by any political tension.

E 2007 is the 150th anniversary of the company. How will Château Ksara be celebrating?

First of all, I want to say that I feel I am very lucky to be chairman at this time. We are making a documentary film and producing a book to commemorate the event. We are also hosting a three-day event for our foreign contacts, distributors, the press and private individuals who are close to Ksara. It will entail one full day at Ksara and other events in Lebanon. Then we will hold another event for our local customers, focusing on the tradition and modernity of Ksara.

E The company has come a long way since the early 90s. What would you say has been the main factor in the resurrection of the company’s fortunes?

The main factor has certainly been the investments that have been made in this company in a regular basis, year after year following a strategic plan that that has been fully respected.

E Can you tell us the level of investment?

Let us say that we have invested on average $500,000 every year since 1991.

E When the company decided to embark upon its expansion policy in the early 90s, the local sector was very different than it is today; Ksara was, in a way venturing into the unknown, especially in planting untested vines and buying new equipment in anticipation of greater production. What was your biggest fear during that period?

We were optimistic. You must remember that the war had just ended. We had been let down during the war by a lack of security and had lost out on many opportunities. When the war ended, we looked forward. We had great terroir, we had a strong brand and we had willingness of the board to make Château Ksara exceptional. So our fears were not professional fears. As long as the country was stable, we always knew we would succeed.

E So there were no doubts as to your strategy?

I was confident and everyday since that day my confidence increases.

E What would you say are the company’s strengths?

The name of Château Ksara, one that dates back to 1857, and one that is associated with tradition and quality. Again, I cannot overemphasize the backing of the board that is determined to invest and do the best for the company.

E Château Ksara is one Lebanon’s oldest, possibly the oldest, companies.

It is the second oldest according to the records at the chamber of industry.

E How important is this tradition in your corporate philosophy and how has the company been able to build in this tradition in terms of brand equity and market positioning?

If you want to succeed, you play on all the elements that help you achieve success. We have played on our history and we have exploited our assets, especially the fantastic [ancient Roman] caves. We have emphasized on tradition through our name and the lineage, nobility through our quality and modernity which reflects what we have done since 1991, when we transformed Ksara from an old company to one with the best equipment, best human resources, and aggressive local and international marketing.

E Has your age and your links to the Jesuit brothers ever been a negative factor in your brand positioning?

You have to transform liabilities into assets and the inherent equity in our name and heritage far outweighs any negative connotations. Today we are seen as an old company with a young spirit and this has been, especially borne out in our packaging, our labeling and in our innovative ad campaigns.

E Many of your senior managers have been with the company for many years? What is done to foster human resources development within the company and how has this been translated into performance?

Alot. Really I mean it. We have fantastic middle management with a high level of education. This is a huge asset. Furthermore, we delegate clearly specified business responsibilities as well as regularly send them, lower management, on courses, as often as three times a year, to improve their core performance and expose them to changes, developments and new techniques in the world. This is something I am very proud of. We also operate a bonus system. This makes the staff feel they are partners in the company that they have a stake. The managing director Charles Ghostine and I work hard to create the right atmosphere. People spend a lot of time at work, much more than we do at home and so the key to success is a good environment in all areas of the company. Whoever wants to work and is positive will stay with us for a long time and those who don’t want to work will leave us very quickly. I would like to add that, despite everything in 2005, we achieved better sales than 2004 and this is a huge indicator of our corporate determination.

E Your export manager started in accounting and studied wine making in France before taking up his present role. He is now a respected member of the wine community. This delegation of responsibility is rare in an Arab company, where decision making is still a very much centralized entity.

Yes, he had the chance to study Ksara in all its aspects. He discovered a love for wine and wine making during the war when our French enologist had to leave. He then went to study France and get his diploma. This is very important for an export manager. He knows the product inside out and speaks with authority and, as you say, he is a respected member in the world of wine. However, this is the exception. It is not how we do things. We can’t ask every one of our employees to go and study wine for three years. Ideally, when I look for a sales manger, I would want an aggressive businessman with a strong business degree.

E You have many business interests. You are a pharmaceutical industrialist, a paper manufacturer and a banker. What does Château Ksara mean to you?

Yes I am fortunate to have many biz interests as you say. However, Ksara is the most beautiful part of my business life. It has a touch that does not exist in other businesses and sentimentally speaking it has a special part in my heart

E Where would you like to see Château Ksara ten years from now?

As I mentioned earlier, I hope we will have reached our target for increased production. I don’t believe we can go further than [2.7 million bottles]. We will have reached a satisfactory limit whereby we will have improved quality and strengthened our position in the local and international market.

0 comments
0 FacebookTwitterPinterestThreadsBlueskyEmail
Business

Pipe Dream

by Thomas Schellen
written by Thomas Schellen

In the Lebanese economy, trade houses and regional distribution ventures have long resided at the nexus of business success. And while at first it may look unassuming, the import and distribution of plumbing supplies, sanitary wares, heating equipment and tools is a fascinating part of this crucial but underreported economic activity. Georges Khoury & Co is one of the leading players in this particular industry.

Based in Beirut, the enterprise, which employs around 100 staff, supplies locally manufactured as well as imported tiles, pipes, bathroom fixtures and related materials to commercial and individual customers. Founded in 1937, the company’s operation in Lebanon looks back on almost 70 years of action in its sector. For the past three years, the firm has also been running branch operations in Syria and Iraq.

Business in this subsector of the building industry currently is, “slow in distribution and good in projects, and this is symptomatic,” business development manager George Khoury told EXECUTIVE. This situation is symptomatic for the country’s economic mood, he elaborated, in that individual clients of the middle to lower middle income groups hesitate to invest in building new homes or undertaking major renovations whereas larger investors, such as hotel and up-market property developers, show more optimism about Lebanon’s potential.

With warehousing space of some 20,000 square meters between all its locations, Georges Khoury & Co manages an inventory of some 10,000 stock keeping units (SKUs) ranging from items of less than a dollar to luxurious shower cubicles running at $20,000 per unit.

According to Khoury, the company is large in its sector on the Lebanese enterprise scale and a medium to large player in the highly segmented regional building supplies sector. Due to company policy, however, he would not disclose turnover figures or the amounts which the company invested into building its operations in Iraq and Syria.

Politics don’t much impact the business of Georges Khoury & Co but the fortunes of the local economy are likely to reflect directly upon the performance of the company, which achieved good business with major project developments and can show a contract to supply the Four Seasons Hotel on the Beirut waterfront as a recent example.

Being able to win such contracts has a lot to do with having a track record of experience and knowing contractors, consultants and developers in Lebanon and beyond. Having this track record gives Khoury confidence that the firm will be able to tap into the lucrative market for large real estate developments and outright mega-projects that are emerging in Syria.

Gulf boom

Khoury said that working in the reconstruction of Lebanon primed the company to be a strong contender for projects in the Levant that range from hundreds of residential units to entire communities designed from scratch, mostly by Gulf–based developers and financiers. What gives Georges Khoury & Co and other Lebanese firms an additional edge in this new market is the fact that the building materials suppliers and contracting firms in the GCC countries are already highly stretched in handling the construction boom in their home markets, he added.

Besides strong industry contacts, the manager referred to technical knowledge and consistent development of human resources as key factors for success in the sanitary wares and plumbing supplies business, as much as for any modern business today. While they may not always look the part, the humble drain and the average faucet are more than just off-the-shelf components. Selection of appropriate systems even in the budget end of the market influences the long-term performance of a building project, whether individual home or apartment complex, and produces substantial consequences for long-term operating costs and replacement needs.

Regional expansion

On the top end of the market, technical expertise is also a crucial factor in representing manufacturers who measure their products by performance improvements of shower thermostats that respond to water pressure changes three-tenths-of-a-second faster than rival products, and seek to distinguish bathroom technology with names such as “dreamspray” and “silkmove”. The space at the top of the global faucet and bathroom systems manufacture is a hotly contested realm where players seek to woo the competition with innovations such as household water recycling systems that allow for discarded water from your kitchen sink to be re-used in flushing the toilet.

Georges Khoury & Co carries products of around 25 manufacturers, among them three Lebanese brand producers, Lecico, Uniceramic, and Future Pipes. For other suppliers, the company relies on manufacturers from all price ranges and many countries. China, for instance, is not the only good source for low-cost products, Khoury said, pointing to Turkey and Egypt as very competitive regional producers and referring to the latter country comparable to China in terms of labor cost as well as productivity.

Representing such a wide range of suppliers, means that a distributor plays different roles for different corporate partners. High-end manufacturers in Europe run strong marketing and presales departments on their home turf but in a market like the Eastern Mediterranean, the distributor acts as more than a wholesaler, Khoury said, and is a partner in promotion and brand building of the products he carries.

The same may not apply in relations with local manufacturers, which make their own investments into acquiring market share and may view distributors merely as one in a number of equal channels to market. This creates interesting questions on the role of intermediary companies and the value they add in representing international vis-à-vis local brands.

Sitting in a first floor office in the Beirut suburb of Sid al Bouchrieh, George Khoury is a third generation family member in the management of Georges Khoury & Co. He just returned from scouting market and industry developments at a sector trade show in Egypt. His desk is lined with neat miniatures of Dutch houses in a testimony to his admiration for this European country.

Role models

His admiration for the Dutch relates in part to the similarities between Lebanon and the Netherlands, he said, as far as the widespread abilities of both peoples to converse in several languages and their success in trade.

Among business role models, Khoury expressed high esteem for the management of Kuwait’s PWC Logistics company, which transformed itself within a few years from a local to a global enterprise and logistics provider to such picky clients as the Pentagon.

While the business development plans for Georges Khoury & Co are not quite as high-flying, the company appears to be working on reinventing itself, although Khoury would not reveal details. But he is adamant in describing the strengths he sees in the Lebanese, praising the country as a series of micro-economies. “I call the Lebanese market dynamic. It is constantly changing,” he said.

Georges Khoury & Co. still derives the bulk of its turnover from the local market but Khoury anticipates many changes for the sector at large and for the company. “The future is outside [of the country],” he said, but “Lebanon is our strong base for the region, it provides us with our strength, the people that work for the company.”

0 comments
0 FacebookTwitterPinterestThreadsBlueskyEmail
Business

Black gold black ops

by Michael Young
written by Michael Young

Why is it that in Hollywood movies, the Middle East is always best understood by characters that are jaded? Watching George Clooney in Stephen Gaghan’s film Syriana, that obligation is again respected. Clooney, who portrays a CIA agent and won an Oscar for his role, shuffles through the scenes comatose with cynicism, burdened by his past manipulations, buffeted, too, by the perfidy of the American government.

It’s fun, but Syriana, like its misleading title (Syria plays no role in the story), is a misleading film. It’s often an inaccurate, anachronistic compilation of tendentious postulations about oil politics in the Middle East, thrown out as complex truth to an unsuspecting audience.

In a nutshell, the main plot involves an American oil company trying to regain oil drilling rights in an unidentified Arab emirate that has just awarded those rights to a higher-bidding Chinese company. The person behind the China deal is the reformist son of the emir, who feels it only natural, given his country’s interests, to hand the contract to the higher bidder. The emir’s other son, however, a lightweight, is used by the American company to invalidate the Chinese contract in its own favor. His reward is to succeed his father. It’s not giving much away to say that the CIA helps ensure this succession, thus benefiting American oil.

Syriana is supposedly based on Robert Baer’s book See No Evil, an account of his days in the CIA. Baer was stationed in Beirut in the mid-1980s, and, since leaving the agency, has made a career as pundit on the Middle East and the intelligence community. In fact, Syriana has very little to do with See No Evil, and far more with Baer’s second book, Sleeping With the Devil, describing how the US, because of oil, has looked the other way on Saudi Arabia’s troubling relationships with militant Islamic groups.

Hypocritical

That theme has nourished a bevy of post-9/11 films and non-specialist books about the Middle East, most prominently Michael Moore’s documentary Fahrenheit 9/11. Most of these efforts are paper thin when it comes to understanding regional realities. But that’s hardly news: popular culture has always depicted the Arab world ineptly-not necessarily degradingly, but usually shallowly. To an extent that’s understandable, since few cultures display subtlety in portraying very different ones in their popular media. The thing is, Syriana is utterly frivolous in depicting something the director and producers should have known something about: the United States.

Like Moore, Gaghan falls back on an old theme in the film-making repertoire: the malevolence of large corporations manipulating vile governments. No beef there, but given that Hollywood is an invention of large corporations, the criticism is a trifle hypocritical. And as Peter Nolan and Sacha Kumaria have written about Syriana, the idea that multinationals control oil markets is laughable. “The reality is that the heart of the oil industry, the vast fields in the Persian Gulf, Russia and elsewhere, are already the private preserve of governments, who own 80 percent of the world’s oil reserves, shutting out foreigners and the private sector.”

No less laughable, they note, is expecting that the CIA will readily murder those obstructing the welfare of US oil. The relationship between big oil and government is undeniably cooperative at times, just look at the current Bush administration; but it’s not invariably so: during the Clinton years, the administration was not pleased that American oil was cutting deals with an Iraq under sanctions. But Gaghan’s point is different; his aim is less to be accurate than to offer a cautionary tale about American politics; and here, too, his intentional ambiguity is disturbing.

Myth

Baer’s memoirs cover the Clinton years, and Syriana seems to take place before 9/11. However, it is not Bill Clinton’s legacy that the film-makers are going after (Gaghan and Clooney are voluble Democrats). Rather, if the release date of a film says anything about its message, then it is the current Bush administration that Syriana is warning against. And while no one would deny Bush has been an aficionado of big oil, he has also been far more willing to address democracy issues in the Middle East, despite American oil politics, than Clinton ever was.

More than ever, the Middle East has become Rashomon-like in its capacity to serve as a vehicle for very personal interpretations of the US government, not necessarily substantiated by facts. That may be fine for American film-makers and actors, but it doesn’t help anyone learn more about the region, oil markets, or about US politics for that matter.

0 comments
0 FacebookTwitterPinterestThreadsBlueskyEmail