Global downturns have a way of forcing action. What was perhaps overly ambitious in the past could be papered over as long as investors believed in the future and money was available. The climate has changed dramatically and so too has the response from business and government.

Case in point is Emaar’s proposed merger with government run Dubai Holdings, with Dubai Properties, Sama Dubai and Tatweer under that umbrella. For those not familiar with some of the landmark projects under these property brands, they include: the Burj Dubai, Dubai Towers and the giant Dubailand entertainment complex.

For one, this will create a $53 billion entity if it comes together as planned by autumn -- sizable by any global standard. Number two, expectations have changed in the region in part because of what Dubai Inc. has done over the past few years, having introduced a greater level of transparency into the process.

The word got out that there was something in the works, so instead of waiting until the structure of the deal was complete, Emaar and others decided to flip the switch. As a result, there remains a great deal of uncertainty whether a consolidated property group will be net positive to existing shareholders.

As the desert sands settled so too did the wave of negative comments surrounding the transaction. Robert McKinnon, Managing Director of Al Mal Capital believes that "from a property market perspective it is absolutely necessary and good for the market." McKinnon says the aim by the government is to clear up the property market in two years instead of letting it linger for a decade if not longer. McKinnon raised a valid question about the valuations which will be used as part of this process. Being too generous now with valuations in the short term, will not pay dividends long term.

Ask Japanese investors what their experience was in the 1990s, which many still refer to as the lost decade. The fact the Japanese government decided to muddle through that decade without taking bolder measures though is a good lesson for everyone in the region today. This Dubai merger is designed in part to put a brave face on what has been a painful 40 percent correction in property values over the past year. Everyone will be eager to see which projects survive the merger process at the end of the day.

Even in Saudi Arabia the default by two well-known family entities in the Kingdom is being handled in a much more transparent fashion than would have been the case just a few years ago.

The Saad Group and Algosaibi restructuring of more than $6 billion in debt will incorporate nearly 40 different lenders. At least a dozen banks have come forward to say they do indeed have exposure to what many commonly refer to as the "problem" but they added it won’t be mission critical to their operations.

This debt restructuring is a tricky one for Saudi regulators and for the region in general. As family entities and not publicly traded companies, Saudi central bank officials say the long arm of the law may in these cases have limited jurisdiction. Unless laws were broken, regulators in this more transparent environment will not likely play a major part in the process.

Officials told me there is no systemic risk to the banking system, but it will indeed be painful for those who chose to lend at such prolific levels. It does not take a genius to read between the lines, that government bank bailouts won’t be in the works even if this first round of numbers is lower than the final tally in a few months time.

What perhaps has not changed, if we use the Emaar merger and the debt restructuring as our benchmarks, is the desire by government officials to remain behind the scenes as both plans take shape. It is not difficult to reach officials on the phone or approach them in person, but few if any want to be on the record before they feel all the paperwork is in order and they are confident the worst is behind us.

In this era of globalization and internet chatter, the region is indeed introducing greater transparency, but full disclosure may still be a ways off.

Labels: downturn, middle east, transparency

The temporary migration is officially underway. Arab businessmen swap 45 degree temperatures on the Arabian Peninsula for the very pleasant 25 degrees in the City of London to garner perspective for the year that was and where we go from here.
There is a certain irony in annual summer escape to London. Only nine short months ago during the third week of September, depositors in this financial capital were wondering if they could find a safe haven for their hard earned cash. This week at the Arab Banking Summit they were in their comfort zone gauging the state of their union and the state of global banking.

As one senior Arab private banker noted, we are still feeling the tremors from the earthquake. But all told, the 280 banks in the region, 80 of them in the top 1000 worldwide, are faring much better than their Far Eastern and western counterparts.
The region is still growing, which provides some comfort with projections of 2.5 percent this year, 3.5 percent next year. This allows a base from which to work through non-performing loans. But all told, regional banks are sitting atop more than $2 trillion in assets and about half of that in deposits. Leverage was not in fashion the past few years and this allowed a few in the audience to say “I told you so.” One banker kindly suggested I take off my headsets during the heated comments pointing the blame at the “Americans.”

As a long term resident of London who now spends up to ten days a month in the region, I take little offence when Uncle Sam comes under attack. But the banker made a valid point. While Wall Street is probably responsible for three-quarters of the banking crisis, the U.S. economy has had to absorb only 25 percent of the fall out. This was an equal opportunity crisis which spread its virus pretty evenly around the globe, hitting the large institutional investor and the small retail client with equal measure.

These ministers and bankers also feel the discussion of the green shoots of recovery is lulling many back into the business as usual mentality. Compensation levels were and remain out of touch with normal society; they see bonuses creeping back up again and restless shareholders seeking 10-20 percent returns on capital, when the global economy is struggling to come back.

Many of the participants talked about returning back to basics, which means knowing your customer, their appetite for risk and most importantly the bank’s appetite for risk. This is clearly where there was misalignment. The challenge now is insuring that the proper road to recovery and yes regulation is followed.

This meeting took place as the largest debt restructuring in Saudi Arabian history --some $6.3 billion to two of the largest family companies in the Kingdom is unfolding. It was revealed that BNP Paribas and Citigroup top the list of 37 creditors with exposure to this restructuring. Hard lessons still need to be learned.

These isolated incidents aside, the region has benefited greatly from traditionally high capital requirements and restrictions put in place to block exposure to the high risk instruments created over the last decade in London and on Wall Street.

So the region will be forgiven for thinking it shouldn’t follow the trends in the West. One Arab executive even pleaded with his European counterparts to avoid the gravitational pull across the Atlantic. To make a new interpretation on the famous phrase from scorned financier Ivan Boesky, greed is not good at all cost.

These bankers are eager to see the next phase of response to the crisis. There is some legitimate scepticism about whether the G20 will indeed follow up on the long laundry list of remedies to the global financial system.

Supply side economists went out of fashion long ago and there is a strong belief that the region will have a nasty aftertaste from the deficit spending within the industrialized countries right now. With high deficits to finance for years to come, less money will find its way to the region in the form of foreign direct investment.

This region continues to open up to the outside world to foster long term development, but as we work our way through the next few years, it will be funding closer to home that will need to be available.
The conservative Arab approach to banking is still paying dividends.

At this critical juncture, the economy is certainly not “front and center” of the protests in Iran since the future of the young republic, as some suggest, is at stake.

But make no mistake, the phrase that former Clinton political strategist James Carville coined during the 1992 U.S. presidential campaign, “it’s the economy stupid” applies here. More specifically, it is the mismanagement of vast natural resources and economic isolation due to the country’s desire to develop its nuclear capabilities that has hurt the country.

Iran, according to research from OPEC, ranks number two in proven oil reserves and number two in natural gas reserves. That puts Iran in the top slot on combined total energy reserves. Today, Iran officially says it produces 4.2 million barrels a day of crude, but actual production according to leading energy analysts is about a half million barrels a day short of that.

The reason is quite simple. Iran as a result of economic sanctions has been isolated from the essential tools for development: technology and capital. In business terms, Iran has been a political hot potato that nobody in the West was willing to touch.

Take the world’s largest gas field to illustrate the point. French energy giant Total finished off its work on phases 2 & 3 in the South Pars field at the end of last year. Negotiations on the next phase have been dragging on for a few years, until the National Iranian Oil Company signed a $4.7 billion deal with China National Petroleum Company earlier this month.

Total’s straight talking Chief Executive, Christophe de Margerie said last summer that the political risk was too great. Still trying to keep the prospects warm, a company spokesman this week said negotiations are still underway. China sees only the upside, with little political fallout due to its size and seat on the U.N. Security Council.

But China’s foray into the Iranian energy sector does not solve what has been an ongoing problem for the country. The international oil companies (IOCs), at this stage at least, possess the technology and know-how that Iran desperately needs. With technology and capital, veteran energy analyst Mehdi Varzi said Iran could be producing six million barrels a day, not four. You do the simple math, but at $70 a barrel, we are looking at another $140 million in daily revenues.

Natural gas fits into another category, but we can see neighbouring Qatar growing at least eight percent this year based on the growth generated on the other side of the same giant gas field. Iran with skilled partners should be doing the same.

Top line economic growth in Iran has been a promising 5.7 percent over the past five years, but as those in the developing world know, it is woefully short when two million young Iranians enter the workforce each year. They want opportunity, they see the world differently through the internet and they expect their leader to manage what has been handed to them, whether it is power or natural resources.

While the current President has publicly thumbed his nose at capitalism and the forces of “western” globalization, the leadership has been in fact acting in quite a capitalistic fashion. In the last few years, the government has privatized a host of strategic companies ranging from copper to telecommunications. The financial services sector opened up this year, but the government still owns and operates about three-quarters of the economy.

Recognizing that the state is not the best manager, the government passed Article 44 into law which calls for 80 percent of the economy to be in private hands in the next decade. As Tim De Borde of the London based boutique investment bank and fund manager Turquoise stated on our program, “Iran has been so isolated, but change is occurring.” That is why the fund sees opportunity and has posted average gains of 13 percent a year for the past five years with its Iranian investments.

The problem for the Supreme Leader is that change is nearly unmanageable now because Iran took too long to open up. When that finally did happen, the President and chief communicator did not inspire a lot of risk taking by the major energy companies or banks who feared probes by Washington – some of which are still open today.

Barack Obama offered an olive branch to Iran, cleverly delivered from afar before the elections. During his speech in Cairo President Obama talked about the region’s overdependence “only upon what comes out of the ground”. Many countries have accelerated the pace of reforms, based on the luxury of their energy reserves.

But in Iran, the sums have not added up. The current government has built its budget on overly optimistic energy prices and massive subsidies. As a result, capital investment to support future production has been lacking and political pressure has been building.

A market of 70 million consumers and an abundance of natural resources are appealing, but only if the risk-reward ratio is manageable. Today, it is not.

Iranians went to the polls this weekend after a thorough airing of heated exchanges during a handful of televised debates. The most prevalent topic surrounded whether incumbent President Mahmoud Ahmadinejad heightened or worsened Iran’s standing in the world.

The subject ignited the youth who took to the streets to share their views, but the campaign did little to address the issue that impacts the next generation the most, creating jobs for them in the future.

Every year two million Iranians are born in a country which is second in the region only to Turkey and Egypt in population size. Nearly two-thirds of the population is below the age of 30, the bulk of the youth, 98 percent, is between the ages of 15-24. With that backdrop, job opportunities and economic management should have taken higher priority.

Iran is a prime example of the challenge that exists throughout the region today. The accepted figure, according to the World Bank, is that 100 million jobs need to be created by 2020 for unemployment to stay where it is, since the birth rate continues to surge.

Youth unemployment is estimated at 20 percent depending on the market, meaning at least one in five is out of a job. The former foreign minister of Jordan and now the Senior Vice President for External Relations at the World Bank, Marwan Muasher said during an interview that “they (the youth) are basically fertile ground for radical ideas.”

What we are talking about here is a complete mismatch between skills provided in schools today and what is needed tomorrow, which, Muasher says, requires, “A totally changed mindset in which people are trained to question authority, to think critically; this is the basis for all innovation and creativity.”

The Middle East has enjoyed regional growth of nearly six percent a year before the downturn, but executives contend that to create the jobs needed we are looking at sustained growth of 8-9 percent for the next dozen years -- that will be hard to accomplish.

The policymakers and chief executives I spoke with are not throwing their hands up in despair. Instead, they are being proactive by taking matters into their own hands.

They single out Lebanon and Jordan as two economies that are providing the training necessary to foster talent. Not surprisingly, they are the two regional economies holding up best during this downturn, minus Qatar which floats on a sea of natural gas.

Within the Gulf Cooperation Council there is another reality, that the private sector is in competition with the public sector for workers. Government has a long standing tradition of creating jobs, even when the role is not needed.

As Tarek Sultan, Chairman and Managing Director of global logistics company, Agility, bluntly stated, "It makes it difficult for us to then propose jobs for them in the private sector if they actually have to work and spend a nine hour day doing something productive." This view is coming from a company operating in 120 countries with 34,000 employees from a base in Kuwait City.

The young leader added, "We would like to see more engagement by the GCC nationals in what we are trying to achieve." Translation: If you are willing to work hard, we have a job and opportunity for you.

To be fair, governments across the region are not sitting idle. The oil rich states in particular are boosting their education budgets by 10-30 percent to address this very issue. Some have probably spent too much money at the top end of the education chain by paying to bring over western institutions, instead of focusing first on primary and secondary education.

We should not forget that technical training is an important part of the mix. For example, Abu Dhabi is setting up an airline services hub with GE and EADS and they are already beginning their plans to train future technicians.

The new generation of regional leaders recognizes the challenge. Last summer when I interviewed the Crown Prince of Bahrain, Salman Bin Hamad Bin Isa Al-Khalifa, he acknowledged what he called an over reliance on the public sector.

As part of a process of labor reforms, the government has created a fund for training Bahrainis to match the jobs needed on the ground -- from financial services to food production.

What we want to do is make the private sector the main engine,” said the British and American educated Crown Prince. “We seek to do that by investing in our people, by transforming the role of government.”

Bahrain remains an attractive target for foreign direct investment, but the region as a whole is taking in only four percent of the total pool of $1 trillion looking for fresh opportunities.

To dent double digit youth unemployment, Middle East leaders need to capture a greater share of foreign direct investment. They must convince investors that they are up to the challenge, by ensuring the next generation of local executives will be as well.

Labels: Bahrain, iran, younger generation