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E VERY ROLE X IS MADE FOR GRE ATNE S S. THE DAY-DATE, INTRODUCED IN 1956 , WA S THE FIRST WATCH TO DISPL AY THE DATE, A S WELL A S THE D AY I N I T S E N T I R E T Y. A P O W E R F U L E X P R E S S I O N O F E L E G A N C E A N D S T Y L E , ITS CL A S S IC D E S IG N QUICK LY B EC A ME A FAVOUR ITE A MONG W O R L D L E A D E R S . T H E D AY- D AT E I S P R E S E N T E D H E R E I N P L AT I N U M .

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“They were both indeed Breguet watches, wonderfully accurate, wonderfully resistant (…).” Patrick O’Brian, “Blue at the Mizzen”, 1999


Marine Royale – Automatic Alarm – 5847BR w w w. b r e g u e t .c o m Breguet Boutiques – Dubai Mall, Dubai ( UAE ), +971 4 339 87 56 – Mall of the Emirates, Dubai ( UAE ) +971 4 395 18 62


THE DUBAI MALL, GROUND FLOOR

R A LPH L AU R EN . COM


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REGIONAL NEWS, PEOPLE, NUMBERS AND EVENTS

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MATEIN KHALID Defensive investment strategies.

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DR TOMMY WEIR What’s your leadership brand?

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EUGENE A. LUDWIG Balancing act for banks.

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SHARIF EL KILANY The Gulf tax revolution.

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MOHAMMED QASIM Why don’t we save our money?

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ECONOMY GCC flinches at Euro and US debt crisis.

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MARKETS Gulf IPO pipeline shrinks again.

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COMMODITIES The gold price is set for a dizzying ascent.

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ENERGY Masdar Capital seeks to invest internationally.

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OIL’S FRAUGHT JOURNEY The Arab Spring and global economic slowdown spell an uncertain fate for crude.

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ISLAMIC VERSUS CONVENTIONAL BANKS The sectors fight for customers amid a challenging climate.

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THE LONG ROAD FOR ETFS Political uncertainty and low liquidity impede growth of exchange-traded funds.

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FAKING IT Rife counterfeit goods are stifling regional creativity and business profits.

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POWER STRUGGLE Domestic oil subsidies will harm the region’s economic strength in the long run.

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BAHRAIN’S MARITIME AMBITIONS The island’s shipping industry is batting off political turmoil.

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TRAVEL Let your hair down on Greek island, Mykonos. CARS Reviewed: Volkswagen Touareg. PLACES TO BE Fairmont Al Babr, Abu Dhabi.

;8K8:ILE:?  /- STATS Regional mergers, acquisitions and bond issuances.

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GULF BUSINESS PREFERRED HOTELS A selection of the region’s top rooms.

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EVENTS The Gulf’s top business conferences.

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IN YOUR SHOES Christian Porta, CEO of Chivas Brothers. Gi`ek\[Yp<d`iXk\jGi`ek`e^Gi\jj#;lYX`

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Saudi building contracts up 156 per cent

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Saudi Arabia more than doubled construction contracts in the first half of 2011 as it continued to struggle with soaring housing demand. The kingdom, the largest real estate market in the GCC, awarded SR84.2 billion worth of building mandates in the first six months, up from SR33 billion last year, a 156 per cent rise, according to Jeddah-based bank NCB. Despite vast spending pledges from the government, Saudi lacks adequate housing supply and a developed mortgage market. Demand from the countryâ&#x20AC;&#x2122;s fast-growing population has fuelled property prices in recent years and aggravated inflation. King Abdullah Bin Abdul Aziz vowed recently to spend 30 per cent of the Saudiâ&#x20AC;&#x2122;s annual economic output (about $130 billion) on mass housing, job creation and other measures.

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Doha Cables has been awarded a OR1.8 billion riyal ($494 million) contract by Qatar General Electricity & Water Corp (Kahramaa), as the country tries to meet rapidly growing power demand. Doha Cables is to double its production capacity from a current 40,000 tonnes of copper annually to fulfill the contract to supply low and medium voltage power cables. Kahramaa forecasts demand for power in Qatar will almost double to 8 gigawatts by 2013.

Oman ďŹ nds 75,000 jobs after protests

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Oman has found 75,000 local job seekers work in the public and private sectors, according to a government minister. Almost 56,000 Omanis have started work and efforts are underway to complete the recruitment of the remaining 19,000, said Minister of Manpower Sheik Abdullah Bin Nasser Al Bakri. More than 32,000 have found placements in the private sector, while the public sector provided work to about 23,000 people. Earlier this year, the Arab Gulf state witnessed demonstrations by Omani nationals demanding more job opportunities.

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On the Radar

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Saudiâ&#x20AC;&#x2122;s $20bn chemical plant plans unveiled Saudi Aramco and Dow Chemical have outlined plans to build one of the worldâ&#x20AC;&#x2122;s largest chemicals plants and float the $20 billion joint venture ahead of its planned start-up in 2015. The partners will spend around $12 billion building the plant, located at Jubail on Saudi Arabiaâ&#x20AC;&#x2122;s Persian Gulf coast. It will produce high-margin chemicals and plastics for fastgrowing Asian and Middle East markets, with another $8 billion earmarked for third-party investors and contingencies. Andrew Liveris, Dowâ&#x20AC;&#x2122;s chairman and chief executive, said in an interview that the complex would boost the sales contribution of emerging markets from 28 per cent to the â&#x20AC;&#x153;mid-30sâ&#x20AC;? and continue its diversification from lower-margin commodity products. Dow and Saudi Aramco expect to split annual earnings of $1 billion from sales of $10 billion after their ownership is reduced to around 40 per cent each following a stock market listing in Saudi slated for 2013 or 2014.

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UAE sticks with dollar despite trouble The UAE Central Bank has re-affirmed its commitment to maintain its currencyâ&#x20AC;&#x2122;s peg to the US dollar, despite a backdrop of rising global economic uncertainty that has caused the greenback to fall against other major currencies. â&#x20AC;&#x153;On the issue of the exchange rate policy, the Board of Directors affirmed that the

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peg of the dirham to the US dollar is continuing without change,â&#x20AC;? the central bank said in a statement. The move follows news that Bahrainâ&#x20AC;&#x2122;s central bank would stick with the dollar peg, despite the US currencyâ&#x20AC;&#x2122;s recent woes and a historic downgrade of US debt by ratings firm Standard & Poorâ&#x20AC;&#x2122;s.

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It was expected and people will continue to invest in treasuries whether or not its rating is AAA, AA or AA+. Don’t forget that when Japan lost its AAA years ago, some market operators were puzzled too. The US is the richest economy and the most indebted one. What is certain is that other countries will lose this gold label within the next two years.

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The Gulf is directly affected by hydrocarbon revenues, where two factors are key: the currency in which those revenues are generated; and the level of demand for the Gulf’s oil and gas, most of which flows to East Asia. The demand side of the equation remains firm with a strong outlook going forward. In the near term, oil is likely to remain denominated in dollars and it is unlikely that the negative equity market and consumer sentiment reaction to the US downgrade will cause a permanent decrease in Asian demand for oil, so the impact of the US downgrade on Gulf economies will be indirect and muted at best. N_Xk`jk_\c`b\c`_ff[f]X^cfYXc[flYc\[`g6

Recent macro data suggest significant slow-down on both sides of Atlantic, ‘Japanisation’ of Western economies is the most likely outcome. As for emerging countries, they’ve been quite immune so far and we need to have more data in order to get a firmer direction but recent decrease in recent PMI figure for India/Brazil is pointing to the same disease to a much lesser extent. ?fn_Xjk_\8iXYJgi`e^X]]\Zk\[`em\jkfij\ek`d\ek kfnXi[jk_\i\^`fe6

The Arab spring has led to additional political uncertainty in the region and will likely fuel a lower growth rate linked to a drop in tourism amongst other factors. It is temporary and it will not last forever. The real concern for bond investors has been the collapse of Dubai World. This has a memory effect for the bulk of investors.

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Drydocks $2.2bn hits further delays Drydocks World, a unit of Dubai World, said a proposed $2.2 billion loan deal with lenders expected to be completed by the end of April may not be reached this year. “Discussions [with banks] are still ongoing and it has not been completed yet,” said Khamis Juma Buamim, chairman of Drydocks World. “I can’t confirm if we will reach a restructuring agreement this year,” he added, when asked if he was confident an agreement would be struck before the loan comes due in November. Dubai World’s shipbuilding unit is restructuring a $2.2 billion facility taken in October 2008. The loan comprises a $1.7 billion three-year loan and a five-year $500 million loan. The Dubaibased ship and rig builder said earlier this year that it expected to complete the restructuring by April 30 and had agreed on the headline terms with banks.

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COMMENT

K?<;8IBE<JJ9<=FI<;8NE Matein Khalid is fund manager in a royal investment office and a writer in finance and geopolitics.

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T IS IRONIC THAT THE CURRENT EMERGING markets trauma emanated from the US and the EU, unlike the Mexican, Russian and Asian currency meltdowns in the 1990s. The $30 fall in Brent crude oil, the spike in volatility and the plunge in stock market indices in unison is a classic index of risk aversion. The August trauma on the MENA stock market indices suggests another bear market. Yet I doubt this scenario will happen. One, the US has entered a soft patch, not a double dip recession while Asian growth is still robust, if decelerating. This means that oil demand will continue to rise, (albeit at a slower pace), not contract. This is totally unlike the case in September 2008, when the failure of Lehman Brothers triggered the worst, synchronised global recession since the Great Depression. Two, Libyan oil exports have now ceased and geopolitical supply shocks will anchor the oil market. Three, the most crucible variable is Saudi oil policy. The Saudis ignored the OPEC quota system at the last Vienna conclave and unilaterally raised production to almost 10 million barrels a day (MBD) in June. Yet the financial mayhem in the Eurozone now means the possibility of an oil glut, a prospect anathema to the kingdomâ&#x20AC;&#x2122;s planners, whose budget breakeven price rose to $90 after the governmentâ&#x20AC;&#x2122;s $130 billion social welfare spending programme. A U-turn in Saudi oil policy will put a floor under the free fall in oil prices, possibly in the $75-85 range. This, in turn, will indicate a cyclical bottom in GCC stock indices and MENA sukuk.

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During times of financial stress, high beta bank, property developer, contracting and oil service shares should be sold as they have the highest correlation to global markets and Wall Street risk aversion metrics. Saudi petrochemicals or Qatari LNG companies, for instance, are natural high beta shares whose values will be gutted by a fall in commodities prices. It is also best to avoid illiquid markets, such as Bahrain and Oman, when the grizzlies rule the roost. Dubaiâ&#x20AC;&#x2122;s DFM index is too heavily weighed to Emaar and the banks, thus vulnerable to global bear runs. This means investors should take advantage of share bargains in defensive, high dividend growth sectors. This means Saudi telecoms and the most innovative, high speed data centric, high growth Saudi telecom is Mobily, the second Saudi mobile phone operator after the incumbent STC. Mobily is still in growth mode, with 29 per cent annual increases in net income in its latest earnings report. Saudi Arabia is the largest, most exciting broadband market in the Middle East. As Mobily offers a three Saudi Riyal (SR) per share dividend, I see no reason why its shares cannot trade as high as 58 â&#x20AC;&#x201C; 60 SR since its footprint, business model broadband focus and 25 per cent growth should easily command a higher multiple. Any fall in Mobily share price to the 40-42 range in case Wall Street contagion deteriorates could make an attractive entry point for GCC investors. GCC and MENA debt/sukuk are not a safe haven during times of high risk aversion and a fall in crude oil prices. Yet deflation risk in the US will force the Federal Reserve to extend its epic monetary easing policy until 2011. Low dollar rates will anchor GCC credit spreads, which will widen as oil prices fall, new issues go into the ice age and fund managers scramble to raise cash. It was extremely prudent for Dubai to compete its corporate restructuring to avoid facing possible rollover risk as debt funding markets in MENA seize up, as in 2009. High budget breakeven oil prices will also make Gulf sukuk yields rise as Brent oil prices fall. It makes no sense to bottom fish for value amid a global financial crisis. It is always darkest before dawn.


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N?8KËJPFLIC<8;<IJ?@G9I8E;6 Dr Tommy Weir, advisor on fast-growth and emerging market leadership, and author of The CEO Shift

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HOULD A LEADER BE CONCERNED ABOUT his or her personal brand as a leader? This question often evokes polar opposite responses. Some argue intensely that a leader, especially a CEO, should only be concerned with the corporation’s brand. Others argue that it is imperative that leaders spend time building their own brand – believing that leaders don’t belong to any company for life, and that their main affiliation isn’t to any particular job. Before we continue to explore the answer, let’s agree to a common understanding on what is meant by leadership brand. It is the packaging of the asset that relates to a leader’s personification, creating an indelible impression. Leaders should not be solely defined by their job title or confined by a job description. In 1997, Tom Peters was among the first to argue that leaders should be concerned with and build their personal brand. It is important to highlight that a leader’s brand is not self-promotion; it is the positioning of the leader and his/ her career.

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To get an expert insight on personal branding, I turned to Phenomena ME, which specialises in personal and corporate branding. They quickly pointed out that a leader’s brand couldn’t be separated from the leader for the simple reason that a leader is a person. They also added that corporations should leverage the personal brand of their leaders to build the corporate brand. Jeff Immelt of GE, Howard Schultz of Starbucks and Michael Eisner, former CEO of Disney, are company brand ambassadors who also built their own personal brand. That short list is representative of the reality that nearly all of the Fortune 500 leaders are brands in and of themselves. As a business leader you know that the branding of your business is important and the same priority should be true for yourself. So, it appears that it is acceptable for leaders to build their personal brand while they are representing their company’s brand. The problem arises when leaders work to build their personal brand at the expense of, or avoidance of, the corporate brand. So, starting today, realise that you are a brand and that you can benefit by a positioning strategy to advance your own brand. You will need to think like a brand manager and answer this question: “What is it that you do that makes you different?” This will help you to figure out how to distinguish yourself from all the other very smart people walking around who are similar to you. Maybe we should refer to building a personal brand as managing your reputation – the opinion that others have based upon your identity. A reputation separated from experience is fraud, so a personal brand needs to be built on reality. You no longer live in a time when reputation is constrained by organisational walls. In the decade of social media, as a leader you should take an active role in managing your reputation. Just as with the corporate world, people make buying decisions based upon reputation, as a leader they choose to follow you based upon your brand reputation.


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COMMENT

898C8E:@E>8:K=FI98EBJ Eugene A. Ludwig, founder and chief executive of Promontory Financial Group

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ECENT DIRECTIVES OF TWO CENTRAL BANKS, in the UAE and Qatar, created ripples in the regional banking sector. Especially noteworthy was the forceful and immediate way they were announced. They were not part of a gradual seeding of regulatory change that is more common for central banks in the region and worldwide. These directives - Qatar’s directive to ban Islamic windows in conventional banks and the UAE’s decision to limit the size and fees of personal loans and to ban unsolicited telemarketing - underscore the changing behaviour of regulators, who are keen to be seen as proactive. This new regulatory posture will prompt regional banks to realign their operations periodically to be consistent with regulators’ expectations. GCC banks in particular have emerged stronger after the crisis, with capital levels that meet or exceed the higher regulatory minimums. They will need to manage carefully as they balance the challenges of meeting customer expectations with their desire to diversify into new geographies, including other regional markets such as Turkey. Any expansion will be best executed if carefully planned with adequate strategic and regulatory due diligence, as evolving regulation can create cause for consolidation in the banking industry. The case for banking consolidation exists in the GCC, though it is not quite as strong as the number of banks per country may suggest. In the UAE for example, 56 banks serve a population of around eight million. That is around 147,500 customers per bank, many of whom are wealthy. The UAE has one of the highest per-capita incomes in the world, leading to super-wealthy customers, and many banks have

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just one branch in the country, effectively limiting their reach. Most of the expansion plans of banks, especially foreign banks, are subject to regulatory directives. Instead of being over-banked, the region is actually under-banked in many geographic areas, such as in Saudi Arabia, which has a relatively low ratio of banks to population and area. Another regulatory imperative is the long-term strategy to comply with Basel III requirements, a strong set of mechanisms to mitigate risk in the banking sector. Basel III aims to improve the banking sector’s ability to absorb shocks arising from financial and economic stress. Financial institutions would be perceived as being safer, their cost of capital would decrease, and they would be able to issue debt at a lower cost. Though the region’s regulatory model has been effective through the crisis, it would be enhanced by Basel III, as it gives teeth to regulation in case of non-compliance. On the other hand, banks could become less profitable and face constraints on their ability to pay dividends, deploy capital, and pursue rapid expansion. Regional banks will need better capital planning and increased profit retention, yet taking these steps may impact credit growth and limit maturity transformations. Disguising long-term loans as medium-term or similar window dressing will not work, as improved disclosure will be a key to improving capital acquisition capabilities. Bank executives would do well to be cautious for now in adopting aggressive programmes aimed at expansion and customer acquisitions. The launch of new services and increasing employee numbers might well be best put on hold or at least slowed until an effective strategy to tackle the new regulations is put in place. Banks that excel in balancing the requirements of external regulation with an internal desire for expansion will be better poised to take advantage of the ‘new normal’. Keeping in mind their own operating environments and the changing posture of regulators, banks need to determine how to arrive at the proper balance.


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K?<>LC=K8OI<MFCLK@FE Sherif El Kilany, MENA tax leader, Ernst & Young

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HE TAX LANDSCAPE OF THE MIDDLE EAST is changing dramatically, both for local and foreign companies. Many countries in the region are adopting new transfer pricing principles and withholding tax regimes. The member states of the Gulf Cooperation Council (GCC) have decided to introduce value added tax (VAT) in their countries in the near future, a true indirect tax revolution. The number of tax treaties of Middle Eastern states with countries in the rest of the world is rapidly increasing. Countries such as Iraq, Kuwait, Oman and Qatar have slashed corporate tax rates, while significant reductions also took place in Egypt and Saudi Arabia. At the same time, in many countries the tax base has been broadened, exemptions have been curtailed and tax deductible expenses narrowed. With the modernisation of their tax regimes, Middle East governments are trying to make their countries more attractive to foreign investors. Foreign direct investment (FDI) is seen by many authorities as a cornerstone of development, hence the recent relaxation of restrictions on FDI in the Middle East. The desire for diversification is also present in the realm of taxes. Many governments whose revenues are heavily dependent on the energy sector want to increase the relative importance of more ‘normal’ tax revenues, including indirect taxes, such as VAT. By and large, the modernisation of tax measures should be welcomed, as they bring tax laws and regulations more in line with mainstream international practices. For example, the OECD-favoured ‘arm’s length principle’ for transfer pricing is now enshrined in

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legislation in Egypt, Oman, Qatar and Saudi Arabia and recognised in practice by other countries in the region. That said, the positive effect of the often radical fiscal changes will depend to a very large extent on the way governments and companies prepare and execute their implementation. First of all, it is clear that the introduction of many new laws and rules constitutes a significant challenge for national fiscal authorities. It is encouraging to see that various tax agencies in the region are taking up the challenge by modernising themselves. They are contracting experienced staff, training existing personnel, increasing ‘e-communication’ with taxpayers and basing the selection of audit targets on a risk-based analysis. Tax agencies could also standardise and simplify their procedures and clarify the way they intend to implement the new rules. For taxpayers, especially multinational companies, it is of paramount importance that they know how tax authorities will interpret new treaties, laws or regulations. Companies doing business in the Middle East should also adapt to the new tax realities. In general, the tax changes are positive for multinational enterprises as they will allow for better alignment of their tax accounting in the Middle East with their tax accounting in the rest of the world. At the same time, it is clear that companies must make a significant effort to maximise the benefits and minimise the risks of the profound changes. Companies should ensure their documentation in support of transfer pricing decisions is robust, as this is likely to be an area of focus as tax authorities increase their reviews of company accounts, decisions and documentation. Even with the best intentions on both sides, conflicting interpretations and viewpoints are inevitable in a situation of rapid and profound changes. Companies should, therefore, prepare and adapt now.

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AST YEAR, AS PART OF OUR COMMITMENT a savings culture in the region, we launched the groundbreaking National Bonds Savings Index. The study was a first-of-its kind in the UAE, and provided an insight into the savings habits of UAE residents. The results showed a worrying lack of interest in savings or understanding of their importance. We recently announced the results of the second wave, the 2011 National Bonds Savings Index, which revealed that nine out of 10 UAE residents are not confident in their current savings, and almost half of the population saved much less than they had planned to last year. Furthermore, 71 per cent of respondents said that they do not save regularly. Around one tenth of those surveyed declared not made any attempts to save at all. Of the latter, three quarters blamed rising expenses, liabilities and loans for their inability to save. The Index amalgamates responses in three key areas (respondent’s perception of their savings potential, the savings environment around them, and their own financial stability in the near future) into base values that can be used as a frame of reference to measure changes

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in savings sentiments. The 2011 National Bonds Savings Index indicates an increase in ‘savings potential’, and a decrease across all other components among UAE residents compared to 2010, with UAE Nationals and Western Expats experiencing a drop in their savings sentiments. Of the different nationality groups, Asian expats and Arab expats showed an increase in their savings sentiments over the past year. Of those who do save, 64 per cent admitted that the amount is usually less than a fifth of their income, while among UAE nationals and Arab ex-pats specifically, 40 per cent claim to save less than a tenth of their income. Overall the trends show that Westerners and Asians save bigger amounts than other segments of the society. Worryingly, respondents declared that they are spending more money than last year on everyday expenditures such as groceries, transportation, household items and utilities. Different emirates showed different patterns: Sharjah residents claim they are spending more money on necessities such as groceries, household items and children’s education, while Abu Dhabi residents blame increased expenditure on transportation, rents, eating out and buying luxury items. Overall, we have seen that while there is a willingness to save, there is a lack of understanding of how to save. These results are worrying for our economy, and as a result, National Bonds has pledged to launch a nationwide financial education roadshow aiming at educating the community on how to manage their spending and plan their savings. The road show should begin in the fourth quarter of this year. This is not just about consumer attitude change. The change in thinking needs to begin with the corporations that employ people up to the banks and financial institutions that advise them. We will look forward to everyone’s support in our drive.

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HE LATEST DEBT crisis in the West has led to the painful realisation that the Gulf must re-open the investigation into the controversial dollar peg and its dependency on oil. GCC governments had hoped the case file on the two biggest economic taboos had been closed. But in light of the US dollar downgrade in early August, regional central banks have faced renewed pressure to drop their dollar pegs.

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Plus there are fresh concerns that the peg restricts the Gulf’s ability to fight inflation by forcing it to shadow US monetary policy. With the US Federal Reserve cutting rates to ward off a recession, regional policymakers may find it difficult to control inflation with the cost of borrowing at historic lows. Gulf central bankers faced a similar set of problems during the 2008 recession. Plus, with another serious slowdown looming, there are fears that a repeat drop in global energy demand could cut the oil income for crude producers in the region. DOLLAR DEJA VU In 2008, former Fed Chairman Alan

Greenspan said the Gulf’s near-record inflation rates could be eased significantly by dropping the dollar peg. Rampant real estate prices and subsequently soaring housing and rental costs had led to untenable levels of inflation in the run up to the financial crisis. Today, inflation is much lower, partly due to the massive oversupply in residential and commercial property, but there are signs that problems could spring back, with Saudi Arabia facing the biggest threat, according to analysts. Saudi residential property prices rose 60 per cent during the first half of the year, and with the vast investment pledges by various governments and handouts, inflation could escalate quickly, a report


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by CB Richard Ellis said recently. US President Barack Obama has made it clear that US interest rates will remain low until 2013, given the fragile nature of the economy. As a result, Saudi faces “short term pressure” on inflation, according to Mohamad Hawa, head of Mena equity strategy and financials research at Credit Suisse Investment Banking. Although he added: “Mediumto long-term, the construction of 500,000 new homes as announced by the King should ease this pressure, as delivery will start in a few years.” Dollar weakness can potentially stoke GCC inflation by also pushing up costs of importing goods to the region. But central bank chiefs in the region have in recent weeks spoken in favour of retaining the peg. “We are pegged to the dollar and will keep it. We don’t see the dollar collapse,” Mohamed Al Tamimi, the deputy executive director of the UAE Central Bank Treasury Department, was quoted as saying in a report by Reuters. Meanwhile, policymakers in Riyadh have argued that floating the Saudi riyal would not be appropriate for an economy that relies on oil exports. EURO CONTAGION Outside the fiscal woes in the US, there are growing concerns about the extent of the threat posed by Eurozone debt problems. Given that GCC states are intimately connected to Europe, there is expected to be short-term economic and market turbulence. GCC stocks have remained depressed, partly over fears of a contagion from Europe as finance chiefs spent August attempting to stop Italy becoming the next victim of the sovereign debt troubles. Long term though, economists are

warning that a widespread debt disaster could jeopardise trade and investment between the GCC and the Eurozone. GCC-based sovereign wealth funds and private investors, which are net exporters of capital to countries like the UK and Germany, face the risk of sustaining substantial losses across their portfolios. Latest figures show the 17-nation bloc grew by just 0.2 per cent on a quarterly basis with analysts expressing concern over sluggish GDP growth in Germany, which had been driving Europe’s economic recovery. The silver lining in all this for Gulf states could be that amid the economic turmoil government around the world will likely ditch their search for alternative sources of energy, leaving the door open for strong future oil demand. Shrikanth S, Frost & Sullivan’s industry analyst for banking and financial services, said Europe may witness a “marginal decline in demand for energy” due to the uncertainty in the region. “If the financial troubles of Europe spread, the continuation of the concessions given to the renewable energy will be debated

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and might also be withdrawn. That could be a positive for the Gulf States.” OIL DEMAND Yet, a collapse in global energy demand and a low oil price can never be positive for the Gulf. Most worryingly, financial analysts are heavily downgrading economic growth for the US, the world’s largest oil consumer. Deutsche Bank revised its forecasts for US 2011Q4 GDP growth from 4.3 per cent to three per cent. Meanwhile, Barclays Capital reduced its demand forecast for oil for both 2011 and 2012. Oil cartel Opec and the International Energy Agency have also trimmed their estimates. In general, there is concensus that given the general outlook of the macro-economy, the state of oil demand does not seem particularly healthy. But some believe that oil prices would have to fall dramatically to threaten the budgets of GCC oil exporters. Credit Suisse’s Mohamad Hawa said prices have to drop up to 30 per cent before governments “fear the risk of lower public spending”. Either way, the current uncertainty may be forcing Gulf governments to do some soul searching, particularly over their dependence on oil. It hits to the heart of the diversification efforts in the last decade, which some say need to be accelerated. That oil is traded in dollars will be a compelling reason to keep the peg to the greenback. Compared to 2008, GCC states are in better shape, with healthier budgets thanks to a year of high oil prices, plus banks with stronger, more liquid balance sheets. But it’s yet to be seen how much more gloomy economic news the region can expect out of Europe and US later this year.

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N 2005, A gold rush of initial public offerings (IPOs) was in the works. Abu Dhabi-based Aabar Petroleum Investments Co’s 55 per cent flotation of shares was 800 times oversubscribed, while about half of Saudi Arabia’s population applied for shares in Bank Al Bilad that same year. A year later, Qatari Islamic lender Masraf al-Rayan booked a sports stadium

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to receive IPO applications, but the venue was unable to contain the subscribers who queued outside the facility, creating traffic jams and prompting intervention from police to contain the crowds. Six years on, the IPO landscape is sparse. IPOs in the Middle East in the second quarter of this year raised $487 million, compared with $590.6 million in a year-earlier period, according to Ernst & Young. Offerings in the first quarter of this year fell 95 per cent to a five-year low of $21.7 million, the firm said. The outlook for the region’s IPO market is dim, given the low liquidity and valuations, regional political unrest, and the global stock market turmoil spurred by the US credit

downgrade and the snowballing sovereign debt crisis in Europe. In Saudi Arabia, United Wire Factories Co closed its IPO in August, preceded by Saudi Integrated Telecommunications Co’s offering in May, while in the UAE, property developer Eshraq Properties, and two insurance firms Insurance House and National Takaful Co sold shares. However, several IPOS have since been cancelled or postponed. “In the next two years, IPOs will be at the same low level of 2009/2010,” said Imad Ghandour, executive director at investment firm Gulf Capital and a co-founder of the non-profit MENA Private Equity Association. “IPOs require confidence in the political


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Companies looking for better valuations have in the past listed in international markets such as Dubai-based port operator DP World, but the jury is still out on whether such moves add value. “Our companies are so small in terms of market cap compared to the large international companies in the international markets, they will not show in the price screens,” said Mohammed Yasin, chief investment officer of financial services company CAPM Investment. “Their true value and real investor interest will be based on their value in their local market.” Analysts blame the mismatch between the price the sellers want and the buyers are willing to pay for the lackluster IPO activity, which is pushing small and medium sized enterprises (SMEs) to turn to private sales for capital. To assist SMEs in accessing the financial markets, the UAE and Qatar have announced plans to introduce a secondary market for small-cap listings, where requirements are less stringent, however, analysts are not convinced these initiatives will achieve results given the need to change company laws and listing regulations. “I don’t think these announcements will materialise or reach their ultimate objectives,” said Ghandour. “Even if you go to a small company exchange like (London Stock Exchange’s) AIM, liquidity is a problem.” Regulators in the Gulf impose listing requirements that are discouraging investors from subscribing to IPOs and more companies from going public.

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Foreign investors are banned from partaking in IPOs in most exchanges and the fact the Gulf countries have yet to join the MSCI Emerging Market Index dampens international interest in public offerings. In the UAE, companies have to list 55 per cent of their shares, unless they plan to join NASDAQ Dubai, which has a minimum of 25 per cent float size. Gulf companies going public also struggle between selling shares at par value or through a book building process. Gulf regulators have long propounded the par value approach, setting a fixed price to shares to spread the wealth to citizens and protect retail investors, who are the majority. “The best solution is to have a mix and match of both methods, by splitting the offer into ‘proportionate allocation’ which is suitable for retail investors at par, and have ‘book-building process’ allocation suitable for institutional investors which will be at least at par or more if there is real extra demand,” said Yasin. “This way you give institutional investors the quantity they are looking for and protect the retail investors at the same time.”

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Y LATE AUGUST the price of gold had climbed to a record $1890 an ounce as the Euro and US debt crises spurred demand for bullion. Now in its eleventh year of a bull market, experts expect the gold price to rise to $2050 by the end of year, upwards to a high of $5000 within 18 months. Local brokers have been inundated with trade in 2011, with some institutions claiming business has spiked as much as 25 per cent in the last six months. According to Sajith Kumar, director and CEO at DMCCâ&#x20AC;&#x2122;s JRG International Brokerage, the gold price will continue its sideways-upward trend for another two years. â&#x20AC;&#x153;There has been increased demand for exchange-traded funds (ETFs) and gold coins are doing very well. We expect the gold price to increase to $2050 by year end as demand rises. There is increased retail sales and demand from China and India, as well as from global institutions and treasuries. Clients are staying away from equities and bonds,â&#x20AC;? he said.

Ă&#x2C6;>FC;@J8KK?<JK8IK F=8E<OGFE<EK@8C I@J<%@E=C8K@FE@J :FD@E>#N8K:?FLK% 8CCK?<98@CFLKJ 8E;DFE<PGI@EK@E> N@CC?8M<@E<M@K89C<# LE@EK<E;<; :FEJ<HL<E:<J%Ă&#x2030; Dubai Multi Commodities Centre (DMCC) chairman Ahmed Bin Sulayem has said he plans to move the organisationâ&#x20AC;&#x2122;s Shariah-compliant gold ETFs from NASDAQ Dubaiâ&#x20AC;&#x2122;s stock exchange to its flagship bourse, the Dubai Gold and Commodities Exchange, before year-end with the aim of increasing trade volumes. Since the beginning of the year, gold has climbed by more than 30 per cent. If Germany decides to bail out struggling EU countries â&#x20AC;&#x201C; including Greece, Ireland,

Spain and Italy â&#x20AC;&#x201C; and back â&#x20AC;&#x2DC;Euro bondsâ&#x20AC;&#x2122;, this will spike inflation and thus ramp up the gold price. Equally, if Germany decides to not to back the bonds, the affected Euro economies will weaken further â&#x20AC;&#x201C; sparking market panic and another flight to bullion. This autumn, gold will be a win-win scenario and its bubble is unlikely to burst for some time yet. â&#x20AC;&#x153;You have a money printer at the US Fed and the Euro zone is now joining in by buying Spanish and Italian bonds. Gold is at the start of an exponential rise. Inflation is coming, watch out. All the bailouts and money printing will have inevitable, unintended consequences,â&#x20AC;? said Peter Cooper, founder of the Arabian Money investment newsletter. â&#x20AC;&#x153;A surprise slump in the gold price could come if there was a big crash in financial markets, like the autumn of 2008. That would be because of a mass panic that led to the liquidation of all assets, including gold, but it would bounce back quickly.â&#x20AC;? Cooper added that is it always â&#x20AC;&#x153;psychologically hardâ&#x20AC;? to buy gold at a new all-time high but this sentiment has led to â&#x20AC;&#x153;so many missed buying opportunities over recent years that we all ought to have learnt our lesson by now.â&#x20AC;? Gary Dugan, chief investment officer at Emirates NBD, the UAEâ&#x20AC;&#x2122;s largest bank, has similarly high projections for the gold price. â&#x20AC;&#x153;On pure fundamentals we believe that individuals and central banks hold less gold than they desire and that they will be ongoing buyers for many months to come. The main driver of a spike in the price would probably be further problems in the Euro zone,â&#x20AC;? he said. The CIO also believes that a new recession has not necessarily been averted, which could yet spike the gold price. â&#x20AC;&#x153;The chance of a recession in the US or Europe is as high as 30 per cent. We believe that many investors do not have enough gold in their portfolios. Our advice would be for most investors to hold seven to eight per cent of their wealth in gold. Gold is for today.â&#x20AC;?

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ASDAR CAPITAL, THE venture capital arm of Abu Dhabi government-owned green energy firm Masdar, is bullish about snapping up stakes in renewables and clean tech energy companies in order to fully invest a $290 million fund by 2014, but this region is providing few opportunities.

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Masdar, which has about $540 million of assets under management, is keen on investing in companies in North America, Europe and Asia as part of Abu Dhabi’s plan to position itself as hub for green energy. Masdar, a unit of Abu Dhabi government investment firm Mubadala, was set up in 2006 with a mandate to develop and invest in the renewables and clean-tech energy sector in a bid to meet Abu Dhabi’s target to generate seven per cent of its power from clean energy by 2020. This plan includes the building of Masdar City, a residential and commercial complex designed to be zero-emissions and zero-waste upon completion.

“We see a trend where investment opportunities are getting stronger, there are better management teams and better use of capital,” said Alex O’Cinneide of Masdar Capital. Masdar Capital, which has fully deployed its first $250 million fund launched in 2006 in partnership with Credit Suisse, has only made two investments in its second fund, which was closed at $290 million in partnership with Deutsche Bank and could be fully invested by 2014: California-based glass processing firm eCullet ($38 million) and Chinese wind energy firm, UPC Renewables ($25 million). It expects to


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È>FM<IED<EKJ NFIC;N@;<8I< <8ID8IB@E>DFI< =LE;J=FIK?<:C<8E <E<I>PJ<:KFI8J G8IKF=<:FEFD@: I<:FM<IP8E; JK@DLCLJG8:B8><J :I<8K<;KF:FD98K K?<I<:<JJ@FE%É invest around 35 per cent of the fund each in North America and Europe, with the rest going to other regions. “The countries which have some of the most interesting products and technologies are still Western Europe and North America, but one of the biggest markets to avail of is China,” said O’Cinneide. “I can see products and services being developed in Europe and North America and used in operation in China. I also see a trend where a lot of the products and services that are being developed move out to Asia to be actually scaled up into manufacturing and commercialisation.” China came in first place in clean energy investment in 2010, followed by Germany and the US, according to a report by non-profit organisation The Pew Charitable Trusts, released in March this year. China, the world’s leading producer of wind turbines and solar modules, surpassed the US as the country with the most installed clean energy capacity in 2009.

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Globally, clean energy investments increased 30 per cent to a record of $243 billion in 2010 from a year earlier, while venture capital and private equity investments in the sector in G-20 countries increased 26 per cent to $8.1 billion in 2010 from a year earlier, the report showed. Governments worldwide are earmarking more funds for the sector as part of economic recovery and stimulus packages created to combat the recession. The Fukushima nuclear disaster in Japan is an added catalyst to the industry as countries such as Germany start switching off their nuclear plants and look for other sources of power. In the UAE, the economic ministry has forecast that private sector investment opportunities in the alternative and sustainable energy industry will reach $100 billion by 2020. Currently, Masdar Capital’s portfolio includes only one UAE company, Abu Dhabi based solar developer Enviromena Power Systems, in which Masdar owns a significant stake, said O’Cinneide. “We receive proposals from companies based in the region, but the volume of those proposals is much less than we get in North America,” said O’Cinneide. “We imagine going forward that the overwhelming majority of our investments

will still be internationally focused. We have a very developed venture capital and private equity market in North America and Europe with a history of funding technological companies for the next level of development.” Greater government funding in renewables would help Masdar and its partners scout for more investment opportunities in the region. Regionally, more investors are shifting toward venture capital and funds with a specific focus on industries such as energy and power, which are considered resilient non-cyclical sectors with room for growth, the non-profit MENA Private Equity Association said in its 2010 report. Private equity and venture capital funds raised in the Middle East and North Africa rose 18 per cent to $1.3 billion in 2010 from a year earlier, but is still shy of the $6.5 billion record reached in 2008, the association said. The lackluster fund-raising environment prompted Masdar Capital to close its second fund at $290 million, below the initial ticket size announcement of around $500 million. “We decided to close the fund and focus on investing that rather than spend time on fund raising,” said O’Cinneide.

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WHO BENEFITS MOST FROM A BANK’S INDEPENDENCE? Its clients.

Being a partnership and having no shareholders to satisfy, Lombard Odier can afford to take the long-term approach to value creation for our clients. It’s what we’ve been doing since 1796.

The next 200 years

Dubai Representative Office supervised by the UAE Central Bank The Fairmont, 25th Floor · Sheikh Zayed Road · P.O. Box 212240 · Dubai, UAE Telephone +971 4 509 0111 · Facsimile +971 4 509 0222

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EDITOR’s letter

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T’S OFFICIAL: PRIVATE BANKERS HAVE flooded the region. This year, as an editor, I have received 1,000 per cent more calls on this sector than at any other stage in my career. As the US and Euro debt crisis deepens, the notion that the Middle East and Asia offers growth and richer harbours is only intensifying. When the US Dodd-Frank bill clamped down on Wall Street banks and leveraged debt instruments, financial big-hitters from UBS to JP Morgan and Merill Lynch set their sights on building global wealth management franchises. With these firms still smarting from the sting of billion dollar losses associated with financial derivatives and subprime mortgages, fee-generating business represented a more robust way to salve the balance sheets. Naturally, the most coveted prize for a private banker is the Ultra High Net Worth individual (UHNW). This is banking terminology for ‘richer than most’. The region is home to 400,000 of these uberclients; and this formidable figure is growing by the day. The Boston Consulting Group reported that this group of millionaires controlled a total $2 trillion assets in the region in 2010. It is even more significant that this figure will rise to $6.7 trillion by 2015. Consistently high oil prices and above average economic growth have bestowed the Gulf populace with some of the largest personal nest

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eggs in the world. So, while the major global and Swiss banks pencilled in the UAE and the Middle East as part of their emerging markets expansion strategy as far back as the 1990s, the race is now on to woo the wealthy and clinch a slice of their expanding investment portfolios. The turbulent ecomonic climate also means the region’s megarich are in need of more sophisticated investment advice than ever before. One drawback for wealth managers amid the current global economic crisis is the dampened client confidence in financial instruments and the renewed desire for investing in low risk commodities and Western real estate. But the opportunities in the local wealth market far outweigh the challenges. It is Dubai that has the potential to reap the most benefits from the combination of the Arab Spring and the US and Euro turmoil. The emirate is currently capitalising on its status as a ‘safe haven’ and is consequently enjoying additional capital inflows as spooked regional investors shift their cash. Dubai must seize this moment to uphold its cosmopolitan International Financial Centre hub, build on its wealth management talent pool and develop its overall banking infrastructure with the aim of being a globally recognised private banking capital – the Gulf equivalent of Switzerland or Singapore. That time is now. In this month's private banking special report, Gulf Business speaks to the some of the region's top wealth managers about the challenges and opportunities that lay ahead. Alicia Buller, Editor, Gulf Business

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Emirates NBD has been perhaps the best placed of the Gulf-based banking groups to benefit from the recent political turmoil. Dubai’s top bank has witnessed a renewed optimism around the emirate as a safe bet amid the uncertainty. Over the last nine months, rich investors have turned to the GCC’s biggest bank to protect their cash. Emirates NBD’s private banking business has helped drive the group’s positive first half results, which saw profits rise 43 per cent year-on-year to Dhs2.2 billion. The UAE's biggest lender by assets reported a net income of Dhs744 million in the second quarter of the year, up 85 per cent compared to Dhs403 million in the same period last year. Gary Dugan, chief investment officer

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for private banking, said his clients were “pleasantly surprised” that Dubai profited from the geo-political problems in the Middle East. “In general, there’s been more trading, a rise in airline passengers and a marked turnaround in the hotel sector, all of which has helped us.” Deposits at the bank have remained buoyant as wealth investors seek security over riskier assets. Overall in the UAE, deposits held by banks increased seven per cent to $306 billion during the first five months of the year, surpassing the increase for the whole of the previous year, according to data from the central bank. Dugan said he had struggled to convince private banking clients to diversify their holdings though. “The appetite for real estate or private equity has waned. We’ve spent the last year trying to rebuild confidence in our client base and tempt them to go for something slightly riskier.” High yield bonds and corporate bonds have become the mainstay for investors, although the bank has seen a pick up in appetite for commodities and local equities in the second quarter of the year. There has also been growing demand so far this year for gold certificates, a product the bank launched in late 2010. “There’s been a consistent backing of gold, especially gold certificates and the delivery of gold. It’s given us a chance to take greater market share,” said Dugan. “Most clients we find are underrepresented by gold in their portfolios; they have on average about one to two per cent, but we recommend seven to eight per cent of their total worth.” Gold prices have remained high against the backdrop

of instability in the Eurozone and US economies. It seems that persuading wealthy clients to look beyond gold to more exotic and high-yielding investments is the private bank’s toughest challenge. “Our typical client is mostly conservative, with assets in cash or near cash, with an average of about $2 million to $3 million to invest. But we’re almost back to levels of confidence seen around the time of the financial crisis, with major concern over global events being reflected in clients’ risk appetite,” said Dugan. The Emirates NBD Group has had to tackle demons from the past, in particular its exposure to major corporate restructuring in Dubai and the real estate sector. Indeed, Business Monitor International has said that the UAE’s banking sector is set to underperform its regional peers over the next 18 months as concerns about a weak real estate market and Dubai’s debt overhang will continue to weigh. Meanwhile, the latest results also show that impairment charges were high at Dhs2.35 billion compared to Dhs1.74 billion in the first half of 2010. Dugan’s private banking function will be critical to convert the groundswell of confidence currently supporting Dubai’s hopes into sustainable revenues that can be registered at a group level.

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IF?@KN8C@8#<O<:LK@M<M@:<:?8@ID8E:<F# 98EBJ8I8J@E$8CG<E>IFLG#D@;;C<<8JK8E;@E;@8% In a business that maximises wealth, Swiss-owned Bank Sarasin-Alpen has been called on to play the role of wealth protector in the last six months as clients shy away from risk. The bank, which is one of various units in the region owned by Bank Sarasin based in Basel, started Gulf operations in 2005 with the launch of its Dubai office. It has since spread to Doha, Muscat, Manama and most recently Abu Dhabi. GCC clients are now more cautious about taking bets with their money after suffering heavy losses from the financial crisis. There has been also been â&#x20AC;&#x153;heightened risk aversionâ&#x20AC;? so far in 2011 in response to the Japanese tsunami, conflict in North Africa and a US and European debt crisis, said Rohit Walia, executive vice chairman & CEO, Bank Sarasin-Alpen Group, Middle East and India. â&#x20AC;&#x153;From a clientâ&#x20AC;&#x2122;s perspective, they are now more aware of the risks associated with the investments and have wealth preservation at the back of their minds even when they evaluate opportunities for wealth creation. Before the crisis they were more interested in building their wealth but now they also want us to keep their wealth safe and secure.â&#x20AC;? As the battle for Gulf wealth heated up in recent years, Bank Sarasin-Alpenâ&#x20AC;&#x2122;s approach has been to deploy experienced boots on the ground to its GCC offices. Most recently, it hired ex-EFG private banker Neil Ashford as a managing director and head of its Abu Dhabi office. Part of the difficulty in building private banking businesses in the region is that simply having a physical presence doesn't guarantee success. But, hiring bankers that have a â&#x20AC;&#x2DC;little black bookâ&#x20AC;&#x2122; with access to the right people does. Much of the wealth is centralised in family offices, and having a strong and trusted relationship with these firms is key to success. In that sense, Ashford was one of a rare breed, having more than 30 years of banking

experience spanning across private, corporate and trust intermediary banking. Analysts say that if private banks manage to get a foothold with these family offices, it gives them an opportunity to leverage their relationship to sell more sophisticated products and services to key players in the region. â&#x20AC;&#x153;The fact that we are present in most of the GCC countries ensures that we are available to meet our clients when they want to see us and move away from the concept of suitcase banking,â&#x20AC;? said Walia. Bank Sarasin-Alpen has not been alone in this strategy. In April, Deutsche Bank unveiled Serene El Masri as its head of private wealth management for the Mena region, joining from BNP Paribas. Mark Winzenried joined Lloyds TSB Private Banking from Arab Bank while Abu Dhabi Islamic Bank named Stuart Crocker as head of private banking from HSBC. In May, UBS hired Albert Momdjian, previously head of investment banking for MENA at Credit Agricole, for a senior wealth management position. Walia added: â&#x20AC;&#x153;With the increasing number of banks appearing in the region, there is definitely a danger of oversaturation. There are over 50 banks in the UAE. In addition, the Dubai International Financial Centre has a host of other banks and financial institutions.â&#x20AC;? Meanwhile, despite housing three of the densest millionaire populations in 2010 â&#x20AC;&#x201C; Qatar, Kuwait and the UAE, the Middle East has become safe-obsessed. Less risky investments such as fixed income have, therefore, grown in popularity.

â&#x20AC;&#x153;We have taken advantage of this for clients, especially in high Indian interest rates by bringing Indian debt issues to them.â&#x20AC;? There is some optimism that the pick up in investment and tourism in the GCCâ&#x20AC;&#x2122;s so-called â&#x20AC;&#x2DC;safe havensâ&#x20AC;&#x2122; like Dubai could produce results in the medium term. â&#x20AC;&#x153;Although this [investment] has not yet translated into better equity markets I believe it will do so in the not too distant future,â&#x20AC;? added Walia.

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Unanimously the best bank in Lebanon.

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Private banking is a notoriously maledominated profession, but rich female investors have become one of the key drivers for wealth management services in the Middle East, according to Merrill Lynch Wealth Management. This unit of Bank of America has been operating an office in Dubai since the 1970s, and has witnessed serious demographic changes taking hold in the region. One of the most recent shifts is that women are stepping up and demanding investment solutions from private banks, said Tamer Rashad, head of Middle East at Merrill Lynch Wealth Management. Historically, women have been overlooked or undervalued as private banking clients, despite controlling 22 per cent (or $500 billion) of the wealth in the region, according to the Boston

Consulting Group. After falling sharply in 2008, womenâ&#x20AC;&#x2122;s wealth grew by nearly 15 per cent in the Middle East in 2009 and Boston Consulting projects that the amount of wealth controlled globally by women will grow at an average annual rate of eight per cent through until 2014. Rashad said there had been an â&#x20AC;&#x153;increased interestâ&#x20AC;? from women in the region for Merrill Lynchâ&#x20AC;&#x2122;s products. He said high GDP and savings had also boosted demand in the industry, adding: â&#x20AC;&#x153;Clients are seeking more sophisticated solutions around wealth management, investment returns and transferring wealth to the next generation.â&#x20AC;? Merrill Lynch Wealth Management first opened a Middle East office in Beirut, Lebanon, 49 years ago and now operates in offices in Bahrain and Riyadh, as well as Geneva, London and Monte Carlo. It has an office in the Dubai International Financial Centre and one outside the business park. In September 2008, Bank of America announced its intentions to purchase Merrill Lynch & Co., in an all-stock deal worth approximately $50 billion. Merrill Lynch was at the time within days of collapse, and the acquisition effectively saved Merrill from bankruptcy. Merrill Lynch is now the largest and most profitable wealth manager in the world, according to Scorpio Partnership's Annual Private Banking Benchmark for 2010. In recent months, Rashad has overseen a hiring spree intended to strengthen the bankâ&#x20AC;&#x2122;s position in the Middle East. Most recently, Leila Alameddine joined as market manager for Levant, Shereen Ghobrial as regional sales manager, Utku Balik as business strategy and initiatives execution manager, and Ahmed Barakat as UAE market manager.

Tamer Rashad relocated to Dubai from New York in 2010, prior to which he was head of global relationship capital intelligence and a member of the office of the president & chief operating officer at Merrill Lynch. Contrary to sentiment in other private banks currently operating in the Gulf, Rashad said there had actually been an increase in risk appetite: â&#x20AC;&#x153;More equity, less cash and lower investment in local real estate from clients.â&#x20AC;? He added: â&#x20AC;&#x153;Changes taking place in the Middle East provide a dynamic opportunity for the region. We are witnessing a rapidly growing interest from clients to expand the breadth of their portfolios and increase exposure to international investments.â&#x20AC;? Heavy investment in in-house research facilities over the last decade has given Merrill Lynch an edge over its competitors to better understand the demands of markets like the Middle East. The bank has grown its research component and now publishes one of the most recognised research documents on private banking activity, the Merrill Lynch Global Wealth Management and Capgemini survey. According to the latest survey in June, at the end of 2010 the number of HNWIs grew in Saudi Arabia and Bahrain but declined marginally in the UAE. â&#x20AC;&#x153;The past few years have seen great fluctuations in HNWIâ&#x20AC;&#x2122;s wealth and population,â&#x20AC;? said Rashad â&#x20AC;&#x153;In 2010, we saw growth rates slow down from the higher double-digit levels of 2009 when many markets were quickly returning from significant crisis-related losses.â&#x20AC;?

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8IE8L;C<:C<I:H#?<8;F=E<N D8IB<KJ8KCFD98I;F;@<I Although wealthy GCC investors remain strong backers of local economies, Geneva-based Lombard Odier has witnessed a spike in money being sent overseas. The Swiss private bank, which services ultra high net worth clients out of a representative office in Dubai, manages $167 billion in global assets. Increasingly, local investors are shifting their wealth outside the Gulf region and requesting sophisticated funds to preserve their families’ net worth, said Arnaud Leclercq, head of new markets at the firm. “A number of wealthy individuals, in particular Emiratis and Saudis who have been typically invested only locally are deciding to reallocate a portion of their wealth outside of the Arab World,” he said. In the past, Saudis have held 90 per

cent of their wealth locally, but Leclercq said there had been a marked shift recently, and this figure is now closer to 70 per cent. GCC investors have looked to diversify their investments and spread risk following prolonged turbulence in local markets. “We have also seen an increased level of interest from the very large and wealthy families in setting up family funds outside of the region, in the shape of a reserve fund, very similar to how a sovereign wealth fund functions. “Investors have also become increasingly savvy, and they now are looking for banks that can provide diversified booking centres outside of the Gulf, in places such as Geneva and Singapore,” said Leclercq. Lombard Odier has been a dominant player in private banking since it was established in 1796. Much of this brand capital has contributed to its growth in the Middle East. The firm has had ties to the region since the 1970s but only opened a representative office in Dubai in 2007. It has, however, been criticised for taking a less aggressive stance than some of its competitors, such as Credit Suisse and Julius Baer, in targeting the region’s wealthy individuals. Less than 10 per cent of its managed assets come from the Middle East – a proportion the bank is trying to raise to 20 per cent in the next four years. Out of its office in Dubai, it is planning to continue expansion into what it calls ‘new markets’, which include the rest of the Middle East, Central

Asia, Russia and Turkey. To underline the commitment to this planned growth, Leclercq said he himself will be relocating from Geneva to Dubai by the end of 2011. “We have already begun to select a number of senior bankers and specialists to cover these areas, so there are clear plans to expand not only in the local market, but also to establish Dubai as one of our three global hubs: Switzerland, Singapore and now Dubai,” he said. There has been a flood of private bankers to the region in recent years, raising concerns that the market could quickly become over-saturated. But Leclercq is defiant: “Lombard Odier works in the UHNW segment… We are one of the world’s largest private banks involved in this specific segment. Indeed, there are not many banks – if any – that are as involved on the local level as much as we are.” He did issue one word of caution in the short-term: “Over the period of the last 18 months, we certainly have noticed that a number of clients have decided to reallocate their resources to areas other than wealth management – in the sense of private banking. For example, they are opting to reinvest in real estate in the West, buy gold or simply holding cash – all rather than have their assets managed.”

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<;L8I;FC<<D8EE#:<FF==8C:FEGI@M8K<98EB Falcon Private Bank may be small and nimble, but it is owned by Abu Dhabi’s mighty Aabar Investments, a fact that has allowed it to punch above its weight in the Middle East. Managing $13.5 billion in assets, the Zurich-based wealth manager is dwarfed by a lot of its Swiss competitors. But the presence of Aabar, which bought the firm in late 2008, provided instant credibility and reassurance for potential Gulf clients. This is a reality not lost on Falcon CEO Eduardo Leemann, who said: “Without Aabar it’s very difficult to expand into the region. Our owners are extremely well-known and respected.” Aabar is regularly called upon to identify the “good guys and bad guys” in the Middle East, he said. “This high level local knowledge means that it’s almost like operating in Falcon’s home market. It’s like having our Zurich clients just round the corner.” But the relationship comes at a price for Falcon, which must seek authorisation from Aabar on major decisions, typically large credit facilities above $25 million or certain high-risk investments. A large capital deployment, such as the acquisition of another bank or buying a new IT system, would also require Aabar’s sign-off. Leemann added that the arrangement ,)&J<GK<D9<I)'((

doesn’t extend to the Abu Dhabi company sharing its GCC private banking contacts. Still, Falcon expects its assets under management to nearly double to $25 billion in five years as it taps the growing wealth in Gulf and Asian markets. The bank, formerly known as AIG Private Bank, was bought from the crippled US insurance giant AIG by Aabar in 2008 for 288 million Swiss francs (Dhs1.2 billion). Falcon seeks to target individuals with a minimum wealth of $5 million. In the UAE, it currently manages $600 million of assets, but Leemann said by the end of 2011 this could hit $1 billion. It opened a branch in Abu Dhabi in April, joining its existing branches in Dubai, Hong Kong, Singapore and Geneva. Falcon has also applied for an investment advisory licence with the UAE Central Bank that is currently under processing. “Middle East investors go with Falcon because they like to have local investments booked somewhere else, for instance Singapore or Zurich,” said Leemann. “For them it’s about political diversity and the diversification of risk. They like Arab National Bank and First Gulf, but they also like us.” He said there was a danger of the Gulf getting overcrowded, especially with rivals Julius Baer, UBS, JP Morgan and

Bank Sarasin expanding their operations, but he added that the region was “still very attractive”. Leeman admits that Falcon, like other banks in Switzerland, have suffered recently because of currency fluctuations between the Swiss franc, Euro and US dollar. “The bad news for banks like us with a big portion of costs being booked in Swiss francs, is you lose out on the currency situation. The revenues are in Euro and USD, but the currency has changed against the Swiss franc of late, so margins have been weakened. Then add this to a dull market environment and it makes people very risk-averse.” But he said that unlike its larger competitors, Falcon has the benefit of agility and can deploy capital to essential markets like the Middle East. “Compared to the bigger players in private banking, we can act much more quickly on the ground in the region. Most of the big hitting banks will see the MENA region as just another region, where internal capital allocations are competing with, for example, regions like Africa and Asia. “When it comes to investment allocation, MENA has to fit into this huge global network, which means their money or appetite may not necessarily be there. We don’t have this problem,” he said.


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Credit Suisse held $865 billion in global private banking assets in 2010, up 11.56 per cent on the previous year, according to the Scorpio Partnership Private Banking benchmark study. However, the Swiss financial services company, like many global banks, has experienced challenging times in 2011. The firm is axing 2,000 jobs after revenues slumped in the face of the European debt crisis, with net income falling by 52 per cent to SFr768m ($973.4 million) for the second quarter of this year. The steady fall in the value of the US dollar against the Swiss franc has also hurt the Zurich-based bank. Having set up its presence in the region more than 40 years ago, Credit Suisse has long known the potential of Middle East investors and is well placed to benefit from the growing wealth of local UHNWs. Bruno Daher, co-CEO and head of private banking for the region, has his sights set on increasing the

Middle East’s share of the pie. “Private banking has been very active in the region for a very long time; the difference now is that in light of current challenges in mature markets there is renewed wealth creation in China, India, MENA and emerging markets in general. In all these locations, wealth management will thrive,” he says. “Credit Suisse has always considered MENA to be among its priority markets. UHNW is a fast-growing segment, accounting for about one third of our assets under management in our wealth management business globally.” Daher says that private banking is not just about products, which have now become commodities, but wealth management is about relationships, premium advice and client management. Integrated offerings and cross-pollination between investment banking, asset management and private banking arms also offer the client more value in today’s headwinds. Credit Suisse is currently taking measures to forge stronger relations between all of three of its arms in the region. But, along with the tools, you also need the talent, says Daher: “The MENA region now has more talent than ever before, making it a highly active, successful market. We have hired and trained people over the years which helps to grow the talent pool. An ability to

attract and retain people is fundamental to our long-term success.” Daher adds that it’s easier to recruit in Dubai than the rest of the Gulf as the emirate offers a practical hub for bankers with easy flight connections, quality schools, housing and medical infrastructure. Credit Suisse is taking action globally to reduce its cost base, but these cuts will not necessarily make their way to the Middle East as Daher builds up his team. “We are taking action to adjust our cost base and are seeking cost efficiencies across the bank in order to ensure attractive returns,” he says. “We continue to be proactive about monitoring the size of our business relative to client opportunities and market conditions. This involves realigning resources to growth areas.” Daher believes the way to combat the extreme levels of uncertainty from markets is to stay close your customers because, in today’s climate, clients are becoming increasingly jittery and, in some cases, more knowledgeable, with increasingly sophisticated financial requirements. “To maintain strong relationships, you need to be able to partner clients with experienced advisors who can help them to achieve their aspirations. The markets are complex. Clearly, we are facing a challenging economic and market environment and I believe that it’s going to be a difficult year all round.”

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A8N;8K8C$?8C89@#:<FF=E:9:8G@K8C Saudi Arabia is leading a dramatic rise in demand for Islamic private banking despite the regional turmoil, according to the Middle East’s largest wealth manager NCB Capital. The Riyadh-based bank, which manages $14.9 billion in assets, dominates regional Islamic finance due to Saudi’s abundance of super-rich Shari’ah investors. Demand from wealthy Muslims in the country has soared since the recession, according to Jawdat al-Halabi, CEO of NCB Capital, but surprisingly has remained strong even through the tumultuous first half of the year. “The financial crisis hit Islamic banking, but not as hard as conventional banking. This spurred interest from clients for Shari’ah compliant investment. Since the start of 2011, clients have looked for value and growth and better returns than they’ve seen in the past. Whereas they were previously sitting on the sidelines post-crisis, they are now becoming more demanding,” said al-Halabi. The firm offers conventional banking services, but 95 per cent of its asset management business is in Islamic products. High net worth individuals in Saudi have been eagerly awaiting the government’s public spending package, which is likely to stimulate widespread economic activity. The kingdom has over $92 billion in Shari’ah financial assets and is the largest Islamic banking player in the world in terms of fund volume. Global Shari’ah compliant assets are estimated to have crossed $1 trillion in 2010, growing at a sustainable 15-30 per cent per annum. Al-Halabi is confident that despite fresh competition from international private ,+&J<GK<D9<I)'((

banks that have moved into Saudi, NCB Capital will continue to strengthen. “International wealth management players have small offices in Saudi and don’t put people on the ground. They use it as a window to collect money and Dubai as a hub through which to invest. This limits their local Saudi knowledge. There’s always been a high number of players in Saudi. The 11 domestic banks have always been into wealth management. Although the

volume of participants is quite big, the size of the market can sustain that.” He added that some international institutions in the past have operated as “suitcase bankers” in Saudi and have done so without a licence, which some say is illegal. “Because of recent regulations, which tightened the rules around registration, more bankers are formalising their presence and becoming regulated businesses. So the competition hasn’t changed


much, itâ&#x20AC;&#x2122;s just become more visible.â&#x20AC;? As demand for Shariâ&#x20AC;&#x2122;ah investment spikes, NCB Capital is set to roll out a 12-month campaign of Islamic funds. Al-Halabi is planning to launch four funds over the coming year that will invest in Saudi real estate, equities and small â&#x20AC;&#x201C; to medium-sized businesses (SMEs). The proposed SME fund will be structured as an Islamic private equity product, targeting wealthy family offices. The bank is also in the final stages of a tie-up with an international asset manager to expand its global equity offering. â&#x20AC;&#x153;The bulk of our clients invest nationally and regionally,â&#x20AC;? said Al-Halabi. â&#x20AC;&#x153;Most of the Saudi investors that want international exposure separate their onshore and international investment and so do it with

international banks. On the domestic side, Saudi domiciled banks are better than international players because of their on-the-ground presence, closeness to the clients and accessibility to the market,â&#x20AC;? he added. NCB Capitalâ&#x20AC;&#x2122;s strength in Islamic fund management is typified by its AlAhli Saudi Riyal Trade Fund. With assets under management at a record SAR16.5 Billion ($4.4 billion) and more than 17,000 clients as of December 2010, it is the largest Shariah-compliant fund in the world. More broadly, the firm has grown its assets under management by 23.46 per cent since January 2010, adding SAR6.8 billion which represents 95 per cent of the total market's growth last year and today it has a 36 per cent share of Saudi mutual funds.

Given the bankâ&#x20AC;&#x2122;s influence in the Saudi market, its ambitious expansion is likely to unsettle rival private banks that attempt to increase their presence in the Kingdom.

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o sooner had warnings surfaced about the price of oil reaching unsafe levels this summer than the global economy started panicking about crude hitting the lows seen in 2008. The volte-face, sparked by a downgrade of US debt and a string of gloomy economic forecasts, has left Gulf governments drawing parallels with the fallout from the credit crisis, which severely damaged their petro-dollar income. In 2008, oil plummeted from a high of $147 a barrel to $36, fuelling the worst recession in history. Analysts are asking whether an oil-induced doubledip recession is now on the cards. Key energy exporters Saudi Arabia and the UAE need oil prices above $85 a barrel to meet their spending obligations, according to the latest estimates. These concerns seem a far cry from fears ,-&J<GK<D9<I)'((

expressed in the first half of 2011 about a fresh oil price spike and its effect on the worldâ&#x20AC;&#x2122;s financial health. Few would disagree that the S&P downgrade of US debt to AA-plus in August was a game-changer for GCC oil exporting nations. The Organisation of the Petroleum Exporting Countries (Opec) and the International Energy Agency (IEA) have since trimmed crude demand for 2011, while also decreasing next year's growth prediction. Given this, if the past is any guide to the future, analysts say sustained high oil prices for the remainder of the year will trigger a serious slowdown in the fragile global economy. This scenario emerged in 2008, but also twice before, first in the oil shock of 1973/74 after the Arab-Israeli conflict choked oil flows; and again during the

1979 Iranian revolution and subsequent Iran-Iraq war. Worryingly, in each of these cases the cost of oil relative to global economic output has hit current levels.

GI@:<J?@>? With a slump seemingly around the corner, Gulf states will be looking at factors that could support prices. In the first instance they are not expected to allow prices to plummet, so they may reduce oil output sooner than they did after the financial crisis in 2008. This could, of course, send world economic growth into freefall, shattering their main income and any hopes of breaking even on their budgets and paying for the planned infrastructure spend. The loss of production due to the Arab Spring chaos this year and demand from emerging economies like China are two


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powerful narratives that could provide a floor for prices. Robeco, a Dutch asset management firm, said recently that Chinaâ&#x20AC;&#x2122;s unquenchable thirst for natural resources and demand from developing markets continues to outpace new sources of supply, leading to escalating oil prices. A natural resources fund manager with the firm, Peter Csoregh, said that tensions were likely to erupt as China vies with the West for natural resources to support its growth rate as the government tries to stave off social unrest. â&#x20AC;&#x153;Can China double from here, can they triple from here? Sure they can. Is there enough oil or copper in the world to allow them to do that? No,â&#x20AC;? he told Reuters. All the risk factors that could spur the oil price again are lurking in the

background, say analysts. Disruption to production in volatile areas including Libya, Iraq, Nigeria and Syria pose perhaps the most immediate threat to supply. And if the so-called â&#x20AC;&#x2DC;killer of productionâ&#x20AC;&#x2122;, US arch enemy Venezuelan President Hugo Chavez, regains his health in the long-term this will likely provide further support for high oil. Simon Wardell, an oil analyst at the economic forecasting firm IHS Global Insight, said: â&#x20AC;&#x153;The biggest concern is the things you canâ&#x20AC;&#x2122;t predict, and weâ&#x20AC;&#x2122;ve already seen that this year with developments in the Middle East. Unforeseen events

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like these could have a huge impact. Meanwhile, academics at Stanford University in the US that study the causes of previous price rises, in July singled out speculation among oil traders as a big factor. In a paper entitled â&#x20AC;&#x153;Investor Flows and the 2008 Boom/Bust in Oil Pricesâ&#x20AC;?, Professor Kenneth Singleton â&#x20AC;&#x201C; a highly respected econometrician â&#x20AC;&#x201C; mounted a wideranging assault on the belief among policymakers that speculation does not affect commodity prices. Singleton argued that in their attempt to outplay competitors, traders stoke the market and push prices higher. His conclusions undermine the long-held view that future prices are determined solely by economic fundamentals. Charles Maxwell, a senior energy analyst at brokerage firm Weeden & Co,

said speculators like hedge funds should only be blamed to a point. â&#x20AC;&#x153;After oil reached $147 a number of institutions examined the role of speculators in the rise and came to the conclusion that it was players like hedge funds driving it to its highest point. But the facts donâ&#x20AC;&#x2122;t bear that out. We now know all about the contracts hedge funds were involved with; and the physical holding of oil from $120 upwards was diminishing all the time. So hedge funds were not responsible. In general, speculators got hurt last time so they are unlikely to be as carefree this time round.â&#x20AC;?

E<N;8E><IJ The Middle East faces a more explosive set of challenges in 2011 than it did three years ago, with the potential for revolutions to spread throughout the

region and a greater dependence on economies around the world as a result of increased globalisation. â&#x20AC;&#x153;Geopolitics is much worse this time round,â&#x20AC;? said Richard Swann, managing editor for Europe, Africa and Middle East at energy analyst firm Platts, who added that organisations like Opec and IEA are diminishing forces in the future price of oil. In June, the IEA announced it would release 60 million barrels of oil from its member governmentsâ&#x20AC;&#x2122; reserves, apparently in response to â&#x20AC;&#x153;ongoing disruption of oil supplies from Libyaâ&#x20AC;?. But any attempt to reduce prices in the medium- or long-term failed, as the price of Brent crude fell $5 on the announcement but rallied since. Today, following Augustâ&#x20AC;&#x2122;s economic developments, Opec faces the exact

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Ă&#x2C6;K_\D`[[c\<Xjk]XZ\j Xdfi\\ogcfj`m\j\kf] Z_Xcc\e^\j`e)'((k_Xe`k[`[ k_i\\p\XijX^f#n`k_k_\ gfk\ek`Xc]fii\mfclk`fej kfjgi\X[k_ifl^_flk k_\i\^`feXe[X^i\Xk\i [\g\e[\eZ\fe\Zfefd`\j Xifle[k_\nfic[Xj Xi\jlckf]`eZi\Xj\[ ^cfYXc`jXk`fe%Ă&#x2030; opposite dilemma of keeping prices buoyant. It can cut output to boost prices, but reports last month suggested that the cartel was not planning to get together before the next scheduled meeting in December. Opec, provider of about 40 per cent of the worldâ&#x20AC;&#x2122;s crude, set its biggest-ever supply cuts in late 2008 amid a collapse in global demand. The decision capped production at 24.845 million barrels a day for all members except Iraq, which is exempt from the quota system. Members

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have largely exceeded quotas in 2011 as they sought to take advantage of higher global crude prices earlier this year and to make up for the lack of Libyan crude due to the civil war in the country. Abhay Bhargava, an energy and power systems specialist at Frost & Sullivan International, said Gulf governments that are looking to support higher oil prices for budgetary purposes could be playing a dangerous game as elevated prices could suffocate foreign investment into the Gulf from oil consuming nations. â&#x20AC;&#x153;Gulf countries are dependent on other economies around the world, as much as they like to think theyâ&#x20AC;&#x2122;re not. If you get a price at $147 then Gulf governments will have a lot more money to spend and build up their economies. But at this price itâ&#x20AC;&#x2122;s not sustainable and is rather impractical. Other consuming nations will suffer and the GCC will eventually be on the receiving end,â&#x20AC;? said Bhargava. Unforeseen issues that could push oil prices higher, such as a new wave of unrest in the Middle East and a repetition of an event like BPâ&#x20AC;&#x2122;s oil spill last year in the Gulf of Mexico, are by their very nature hard to forecast. Yet, expected weak economic growth in the coming years has led many to believe that the current global conditions seem unlikely to support any immediate flareups in crude. Amid this uncertainty, governments in the Gulf will be treading carefully from now on.

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S P O N S O R E D F E AT U R E

STRATEGIC TALENT MANAGEMENT AND TRANSFORMATION IN CORPORATE CULTURE – THE NEW FRONTIER OF GLOBAL COMPETITIVE ADVANTAGE. In July 2008, Drake and Scull International (DSI) raised Dh1.2 billion by offering 55 per cent of the company’s shares to the public in an IPO that was 101 times oversubscribed pulling Dh132 billion in subscription. The shares were priced at Dh1 each plus an offering cost of Dh0.02 per share. The process of floating a private family-owned business into public needs more than just going to the capital market and raising funds It is also about ensuring a smooth transition to corporate culture and the implementation of a strategic talent management approach. It requires a change in mindset, habits, culture - corporate culture, which luckily is picking up in the UAE and the region. It also requires fundamental change in attitude among corporate leaders In the case of DSI, it was virtual re-engineering of the company, its systems, and processes and re-aligning the human resources in line with the requirements. In many ways, it was a sea change. Cultural Transformation begins with understanding the Cultural Capital of your organization - the connection between “who you are” and “what you stand for” as an organization. Purposeful culture change does not happen without awareness, partnership, and commitment. The bedrock of the corporate culture transformation is your employee’s alignment with the company’s vision, mission and values. The success story of Drake and Scull International is attributed to the ability of the management to preserve the heritage of the company that dates back to more than 150 years. Over countless generations our employees have acquired a treasure trove of knowledge and experience and stood the test of time by adapting

Zeina Tabari, Chief Corporate Affairs Officer, Drake & Scull International to the changing world and challenging market dynamics. Our vision is to become an international company that promotes operational excellence and we recognize that our people are the catalyst for that change. Strategic Talent Management is a critical element of any organization’s quest to maximize possibility. Employees are after all, any organization’s most valuable asset and you want to be sure that you are getting the greatest return on your investment. Implementation of succession planning program is vital for your corporate culture transformation especially when evaluating the talent currently employed in your organization, understanding what each team member’s strengths and weaknesses are, and developing a training and development program to prepare high potential team members to assume greater responsibility and

provide leadership direction within your organization. To cope with our horizontal and vertical expansion and to increase our competitive advantage our talent managers are on constant quest of building and measuring our diverse workforce to ensure that they can execute across various functions, business units and geographies. It is empirical to understand that organizations don’t transform – People do. The virtues of success in an ever changing and globalized world is acknowledging that successful corporate transformation and talent management are the new frontier of global competitive advantage, because they define the inherent long-term capability of an organization to build and sustain high performance, attract and retain talented people, and build resilience and adaptive capacity.


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he last two years have been challenging for Islamic and conventional banks alike, with the negative impact of the regional and global financial crisis affecting performance. In the early period following the financial crisis, Gulf Islamic financial institutions initially performed better than their conventional rivals. However, over the last two years, Islamic bank performance has closely mapped conventional banks. In fact, the GCCâ&#x20AC;&#x2122;s Islamic banking sector return in 2010 was the same as the return for conventional banks in the GCC at 1.61 per cent. But, although profitability has been similar, Gulf Islamic banks have continued to grow at a faster rate than conventional banks. Islamic banks have maintained their expansion by continuing to launch new products and services, and customers are still migrating from traditional banks to Shariaâ&#x20AC;&#x2122;h-compliant institutions, although not at the rate seen some years ago. The inflow of new Islamic financial entities entering markets has, not surprisingly, slowed since the global credit crunch and this has also reduced the overall growth in assets. As a result, the organic growth has been quite impressive. Before the crisis, Islamic bank profitability returns were significantly superior to those of conventional banks. Prior to 2008, the Islamic banking sector in the GCC generated overall returns around 50 per cent higher, with return on assets 3.6 per cent against conventional banks 2.4 per cent. This is due in part to the relatively immaturity of the market but as the market has matured, the gap has narrowed significantly with overall margins now similar between both Islamic banks and their conventional rivals.

@E:I<8J<;:FDG<K@K@FE Competition has increased within the Islamic sector and from conventional banks introducing more Islamic products and services through dedicated windows. To boost their market position, Islamic banks need to identify and target the most valuable customer segments with differentiated and higher-quality offerings. On the whole, and as with conventional institutions in the Gulf, Islamic banks that focus on retail banking have generally performed better than those that target only corporate banking. To be successful, Islamic banks require economies of scale in order to drive down cost-income ratios. Crossborder expansion, including mergers and acquisitions, is one option for increasing scale. However, often differences in the structure of products across countries add to the challenges of cross-border expansion.

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The most successful Islamic banks are developing products that address customer needs, such as Islamic credit cards and mortgages. Customers increasingly expect products to perform as well as those from conventional banks and will not accept added complexity as an excuse for higher costs or lower performance. To mitigate additional complexity, Islamic banks pay greater attention to cost containment, fast processing times, and low error rates. Islamic banks need to manage these core areas and understand customer needs in order to compete against conventional banks. A number of Islamic banks established over the past five years have encountered tough conditions. Growth and returns have so far not matched original expectations due to the extreme market conditions since 2008. These banks include UAE’s Al Hilal Bank and government-backed Dubai’s Noor Islamic Bank. Despite the challenging market, the smaller Islamic banks, aided by their start-up capital position, have done reasonably well, but in niche markets and with niche products. Institutions initially spoke of regional and even global ambitions but this has been postponed in the current economic climate. Other banks are now building their operational base for further growth. Dubai Islamic Bank (DIB), the largest Islamic bank in the UAE, has focused on -+&J<GK<D9<I)'((

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diversification and growth, including the expansion of its branch network and growth in its overall customer base.

=L<CC@E><OG8EJ@FE Growth has been achieved through offering a comprehensive suite of products and services that meet the needs of its institutional and consumer clientele. DIB now operates across the UAE through an expanding network of 68 branches serving over 1.2 million customers. The bank’s retail business accounts for 50 per cent of all revenues. Last year, DIB also increased its stake in Tamweel, the UAE-based Islamic home finance provider, to approximately 58 per cent. DIB also launched Emirates REIT, Dubai’s first real estate investment trust. The bank also expanded its offerings in consumer banking, launching Al Islami Salam

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has a growing international presence with important banking activities in Turkey, Malaysia and Bahrain. The global potential of the Islamic banking market is estimated at $4,000 billion while the current market is estimated at only $700 billion. With such potential remaining, itâ&#x20AC;&#x2122;s clear why governments and investors are still very optimistic about the long-term prospects. Governments, particularly in regions which were not significantly affected by the credit crunch and are still enjoying good rates of economic growth, such as Asia, are encouraging more Islamic banks to start up. Improving economic growth, new Islamic banking products, higher infrastructure spending and continued diversification from oil economies will

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help to drive Islamic assets. Government backing for the development and promotion of Islamic banking, low penetration and competition among conventional banks make Islamic banking attractive.

:?8CC<E><J8?<8; There remain hurdles for the Islamic banking industry. Institutions are restricted by the lack of a viable Islamic interbank market. While deposits may be redeemed immediately, Islamic bank assets are usually backed by real estate, and are therefore illiquid. This forces Islamic banks to hold more cash or liquid assets than conventional peers --&J<GK<D9<I)'((

to pare illiquidity risks. In the past few years, this has been a blessing for Islamic banks as they boasted greater internal liquidity and were not forced to rely on wholesale markets. Islamic banks have enjoyed increased interest in their products because they were insulated from the crisis somewhat, due to absence from the traditional interbank market and the avoidance of problematic off-balance sheet assets and sub-prime linked assets. The stipulation by Islamic banks that you must own an asset has also allowed them to avoid derivative instruments entirely. However, the fact that Islamic bank assets are usually backed by

real estate also harmed the sector amid the widespread collapse of the GCC property market. Today, one of the main challenges for Gulf Islamic banks remains their wide exposure to real estate. Many believe Islamic banks not have the same flexibility as conventional banks in managing balance sheet risks. The outlook for Islamic banks in the GCC is, of course, closely correlated to the economic environment. Although asset growth has been subdued in recent times, growth rates have been in excess of the conventional banking sector and this will continue for the foreseeable future.


Better thinking. Together.

True diversification begins with a difference of opinions. With so many industry-leading thinkers at our affiliates, there’s no shortage of opinions on any investment issue. We make the most of them, bringing together experts from firms like Loomis, Sayles & Company, Aurora Investment Management, AlphaSimplex Group and Gateway Investment Advisers. Their ideas frequently drive the markets, and we value their different perspectives and insights. Out of their exchange of viewpoints come new investment strategies for our clients. It’s a process we call Better thinking. Together. And you’ll experience it when we work with you.

X Call us at +971 4 365 8066 or visit ga.natixis.com to see how our intellectual capital can sharpen your thinking.

2 YEARS IN A ROW

Best Asset Management Banker Middle East 2011 Industry Awards

This communication is provided in and from the Dubai International Financial Center (DIFC) by Natixis Global Associates Middle East. It is only available to persons who have sufficient financial experience and understanding to participate in financial markets within the DIFC, and qualify as Professional Clients as defined by the Dubai Financial Services Authority (DFSA). This communication should not be delivered to or relied on by any other type of person. Natixis Global Associates Middle East is the trade name for Natixis Global Associates Middle East, a branch of Natixis Global Associates UK Limited, which is duly licensed and regulated by the DFSA. Registered office: PO Box 118257, Office 603 - Level 6, Currency House Tower 2, DIFC, Dubai, United Arab Emirates. Natixis Global Associates Middle East is a business development unit of Natixis Global Associates, the global distribution organization of Natixis Global Asset Management, the holding company of a diverse line-up of specialized investment management and distribution entities worldwide, including the investment managers referenced herein. The investment management subsidiaries of Natixis Global Asset Management mentioned in this communication conduct any investment management activities only in and from the countries in which they are licensed or authorized. This communication is for information only and does not constitute an offer of financial services, nor a recommendation or offer to purchase or sell shares in any financial instrument. Investors should consider the investment objectives, risks and expenses of any investment carefully before investing. ADINT224-0811


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THE LONG ROAD FOR ETFS

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The Gulf region’s Exchange Trade Funds (ETFs), index-based open-ended funds that are listed like stocks on bourses, have failed to attract sufficient liquidity, but regional investors are buying ETFs globally to gain exposure to different asset classes and markets. The UAE and Saudi Arabia raced last year to gain the title of the first Gulf state to list an ETF, a move that was seen as a step towards wooing foreign investors and increasing liquidity on the stock exchange, where volumes and valuations have dropped due to the economic slowdown. The UAE won with the listing of the National Bank of Abu Dhabi’s ETF on the Abu Dhabi Securities Exchange in March last year. A few weeks later, Saudi Arabia’s FALCOM Financial Services launched an ETF for Saudi equities and later listed a second ETF for Saudi petrochemical -/&J<GK<D9<I)'((

stocks on the Saudi bourse, Tadawul. Globally, assets of ETFs in the first half of this year rose 41 per cent to $1.4 trillion from $1 trillion in a year-earlier period, according to Blackrock’s ETF landscape report. Money manager Blackrock, which sells ETFs through the iShares unit, has forecast that assets under management for ETFs and Exchange Traded Products, which are products similar to ETFs, will grow by up to 30 per cent annually over the next few years to reach $2 trillion by the beginning of 2012. Assets of National Bank of Abu Dhabi’s ETF reached $5.2 million in the first half of 2011, while the two Saudi ETFs had $27.2 million in assets, according to Blackrock’s report. The global stock market rout, however, is expected to slash ETF assets and valuations and impact the liquidity of regional and international lisitings. For regional investors, buying ETFs is a cheap


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way to invest in booming markets such as Brazil, because management fees tend to be less than those of mutual funds. ETFs can be bought and sold on an exchange throughout the day, whereas mutual funds are priced at the end of the trading session. Gulf investors are currently showing interest in iShares’ emerging market ETFs, particularly Brazil and Russia, and Islamic-Sharia compliant products, which are attracting Saudi investors and Islamic insurance companies, says Robert Broadwell, a director at iShares. “They [Gulf investors] probably have a higher percentage in equity ETFs versus fixed income and a higher preference for the US equity sector, especially technology and healthcare,” says Broadwell. “Over the last six months, we have also noticed investors in the region becoming more selective in their emerging market exposure. Consensus among private banks is that Brazil and Russia are better in terms of stock valuation, and are not witnessing the same fears about inflation witnessed in India and China.’’

region this year, he added. ETF provider Source has witnessed There is a greater potential for rising interest in its Islamic ETFs for commodity ETFs as a means of diversifying gold, silver, palladium and platinum, says away the investors’ portfolio from equities Sameer Meralli, the chief executive officer and bonds and Gulf exposure, says of Alchemy Capital Advisors, which has François de Viviés, financial services a partnership with Source to distribute manager at consultancy Bain & Co Middle ETFs in the Middle East, North Africa and East. Gold and oil are the most common South Asia. Regional investors have a fastproducts for diversification, he added. growing appetite for Source’s agriculture, While the global ETF industry is oil and Russia ETFs, he says. Source growing, regional ETFs are lagging is owned by Goldman Sachs, Morgan behind due to the low liquidity Stanley, Bank of America Merrill Lynch, plaguing exchanges, novelty of the JP Morgan and Nomura. products, regulatory hurdles, foreign “Initially we saw demand come from ownership limits and, most recently, institutional asset managers, private the negative investor sentiment due to banks, family offices and a number of the political turmoil. sovereign clients, however, the breadth of clients is growing across the region and across segments as more investors turn to ETFs as part of their portfolio allocation,” j e[ says Meralli. ]l `b\  [ c Source, which has about $8.4 billion in [\ [  \e iX[\ Xj `Z\j $ e k Z_ gi assets, has attracted more than $500 \ \  g i l b [  million in inflows from investors \f [X jj XZ Xi Xe \o\ eki j#Xe [Xp [ j in the Middle East since the K= ^\j `e[ ZX k`\ \X Xe i< Xe fe cjf f[` feZ lp f firm started distributing ; X d [ Y j Z_ [ < @E ]le[ b\o YXj\ <K=j Zfd i`Z\ ZXe the products in the 8   j  Z # % g GC \[ jkf Xi\ iËj [j i\ kfi <O $kiX[ fe e[j Gff Yfe [jX `em\j  =J ^\ k\[ ]l [ `e^ ]le e# <K Z_Xe \c`j K_\ [Xi Zcl[ lXc jj`f % i % k e <o XkX k`\j JkX j#`e dl ^j\ [Xp k k_ Zli` Xe[ jj\ _`c\ X[`e k_\ j\ :@ \iX j%N Xki flk DJ fk_ Z`\ f] l^_ f] ii\e \e[ _if Zl k_\ =jk Xk cc<K j\



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“Even in the more developed markets with some of the more successful, critical mass ETF products you can clearly see a relatively flat growth trend during the initial launch followed by a steep incline as investors begin to adopt the product,” says Meralli. One problem facing locally listed ETFs is the lack of sufficient authorised participants or market makers, which are firms that are ready to buy and sell stocks regularly, guaranteeing liquidity. “If there isn’t a local bank ready to provide liquidity for the exchange for market making, it is very hard for any other investor to provide it,” says Amine Bentaleb, associate director at Dubaibased investment bank Arqaam Capital, which holds ETFs products in its hedge fund. “The only solution would be for local investors to take the pain and develop the market overall, sacrificing one year short-term profit for a long-term leading position and that’s the sacrifice that needs to happen at some point.’’ A potential upgrade of Qatar and the UAE from frontier to emerging market status by index compiler MSCI could attract foreign investor interest in the ETFs. But for a country like Saudi Arabia, the Arab region’s biggest stock market and the most restrictive toward foreign investors, the task is even more difficult since it is not included on global indices. “The MSCI upgrade will help the resource coverage and may help asset managers that hold these specific stocks, but this is not a panacea and people will want to have exposure to the entire basket,” says iShares Broadwell. Gulf ETFs have more chance of attracting foreign cash because institutional investors abroad are unlikely to be attracted to a single country or sector. “Regional ETFs would make sense because you will have more liquidity and investors wouldn’t have to capture liquidity in each market, or deal with the settlement nightmare that happens in each country in the region,” says Arqaam’s Bentaleb. National Bank of Abu Dhabi has looked at pan-Gulf ETFs and doesn’t rule out the

possibility of listing ETFs on international exchanges, but market conditions need to improve to allow the launch of new products, says Alan Durrant, the bank’s group chief investment officer. “The asset class of ETFs in the UAE and Saudi are equities and these haven’t been popular asset classes over the last year,” says Durrant. “Investors who were interested in stock markets five years ago have lost a lot of money and are very leveraged and don’t want to or can't put money into stock markets because they have been burned so badly. These are potential investors that are lost.’’ Nonetheless, Durrant says the bank’s ETFs has attracted investors from Europe

ÈN_`c\k_\^cfYXc<K= `e[ljkip`j^ifn`e^#i\^`feXc <K=jXi\cX^^`e^Y\_`e[ [l\kfk_\cfnc`hl`[`kp gcX^l`e^\oZ_Xe^\j# efm\ckpf]k_\gif[lZkj# i\^lcXkfip_li[c\j#]fi\`^e fne\ij_`gc`d`kjXe[# dfjki\Z\ekcp#k_\e\^Xk`m\ `em\jkfij\ek`d\ek[l\kf k_\gfc`k`ZXcklidf`c%É and Asia, as well as local retail and institutional investors and expects the outlook to improve as banks increase lending and the UAE’s economy continues to grow. The regional tension has already impacted plans for ETFs in the region. FALCOM had been in talks to list ETFs in Oman, but the current market conditions are not conducive, a company spokesperson says. “Certainly there is a lot to add to the ETF product line, however, it may not be an ideal time,” says the FALCOM spokesperson. “Investors want to see the global instability settle down before they may start taking new bets.’’ The iShares Gulf ETF, which includes

stocks from all Gulf states except Saudi Arabia and is geared towards investors mainly in Europe, has been impacted by low trading volumes in the region’s markets due to the current unrest, says iShares’ Broadwell. An HSBC official said last year the bank planned to launch Sharia-compliant ETFs in the Gulf, and a Standard & Poor’s official said it was in talks with regional Gulf banks to create a new-exchangetraded product based on its indices. Neither of these plans has materialised. “Local investors buy ETFs abroad because they have less knowledge on companies, but it wouldn’t make sense for local investors to buy ETFs for companies here,” says Arqaam’s Bentaleb. “It would be better to do cross listing of ETFs here rather than structure one from scratch because it doesn't make sense to reinvent the wheel.’’ Part of Alchemy’s mandate is looking at the possibility of cross-listing Source’s products on exchanges in the Middle East, North Africa and South Asia, but there are no imminent plans, says Meralli. One locally listed product that has the potential for growth is the Dubai Gold Securities, a Sharia-compliant exchangetraded commodity that was developed by Dubai Multi Commodities Centre and the World Gold Council and is listed on NASDAQ Dubai. “The Dubai Gold Securities provides direct and easy access to gold and is not a blended product. It should have more room to develop, but then again liquidity becomes an issue because it is traded in a separate exchange not in a widely liquid exchange,” says Arqaam’s Bentaleb. But attracting local and international investors to locally listed commodity ETFs that exist elsewhere may prove difficult. “If a products exists in the US, Europe and Asia, it is hard to rationalise going to new markets and new exchanges where there aren’t other products listed,” says Deborah Fuhr, Blackrock’s global head of ETF research and implementation strategy. “You need to develop an ecosystem to make ETFs work.’’ >LC=9LJ@E<JJ&.(


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of pharmaceutical firm Pfizer EMEA, concedes that it is impossible to assess the true scope of the counterfeiting problem. “What we do know is that those who counterfeit our medicines are no longer small amateur operations from their garage or basement,” he says. “Today, they are members of organised transnational criminal enterprises with complex distribution networks. We have seen links to narcotics traffickers, firearms smugglers and terrorists.” Pfizer has witnessed a significant increase in the number of countries where counterfeit medicines have breached the legitimate supply chains – from just seven in 2006 to 50 in March 2011. Six of those countries are in the MENA region: Egypt, Jordan, Kuwait, Libya, Saudi Arabia and the UAE. “These products are made in locations that are unlicensed, unregulated, not inspected and insanitary,” he says. “We have seen life-saving medicines being manufactured in rodent and pest infested

labs with mould growing on the walls, peeling paint and dirty equipment. We have also seen supposedly sterile injectables filled with ordinary tap water in filthy bathrooms. “Counterfeit medicines may contain no active pharmaceutical ingredient (API), too much API, or the wrong API. Our labs have confirmed the presence of pesticides, rat poison, brick dust, leaded paint, cartridge ink and floor polish. There have also been reports of heavy metals, arsenic, anti-freeze – and even plaster and wallboard.” The firm’s anti-counterfeiting programme has prevented more than 65 million dosages of counterfeit Pfizer products from reaching patients around the world since 2004. In the MENA region, more than six million fake drugs have been seized. Middle Eastern countries where authorities have dismantled counterfeit medicine manufacturing operations include Egypt, Jordan and Qatar.

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o product is left untouched. From household products, auto parts, pharmaceuticals and cosmetics to DVDs, software, mobile phones and video games, counterfeiting is big business. “There are no reliable figures to estimate the size of the counterfeit trade and loss to the economy,” says Abdullah Hasayen, chairman of Dubai-based Brand Owners Protection Group. “It has been estimated by the World Customs Organisation at seven per cent of global trade, which translates to hundreds of billions of dollars in losses every year.” Yasar Yaman, director global security

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Another major issue in the region is fake auto parts. Reports suggest that these may be responsible for around half of all road fatalities in Saudi Arabia. “Counterfeit brake pads have been found to consist of a mixture of sawdust and wood particles,” reports Alexander Liske, brand protection manager, Ford Middle East. “Should they be installed on a vehicle, there is a high chance it will catch fire. Likewise, counterfeit windshields are mostly made from a onelayer glass which, in case of an impact, will shatter in particles of different and uncontrolled sizes.” Furthermore, with increased technology development over past years, counterfeit spare parts can affect other components in the vehicle. I<>@FE8C;8D8>< According to Scott Butler, CEO of the Arabian Anti-Piracy Alliance, the high level of counterfeiting in the region also presents a major threat to the development of intellectual property. “High piracy in the pan Arab region has

a huge economic impact by impairing creativity. In the US, the copyright industries provide 11 per cent of GDP through companies such as Disney or Pixar. The pan Arab region could enjoy the same economic benefits from creativity, but is impaired because of the larger countries such as Saudi Arabia, Egypt and those in the Levant that do not adequately protect copyrights. These same countries have over 90 per cent piracy rates. We have yet to see a single copyright offender imprisoned for a single day, despite millions of pirate CDs being seized and multiple offences from the same parties.” This, continues Butler, affects other parts of the region with a lower incidence of counterfeiting, such as the UAE. While the emirates have created an environment for creativity through free trade zones, high piracy rates elsewhere are sapping market potential for creative firms. “Take a look at the games being sold in Virgin Megastore,” he says. >LC=9LJ@E<JJ&.,


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;FL9C<K8B<J Finally, counterfeit products are becoming increasingly sophisticated and harder to detect. â&#x20AC;&#x153;We have seen advanced imitations of the boxes and even the security holograms we use to identify original products,â&#x20AC;? says Ernest Azzam, laser and enterprise solutions business manager at print cartridge manufacturer HP Middle East. Over the past four years HP, along with local authorities, has seized more than 30 million counterfeit products and components worldwide. In the UAE, the latest seizure included more than 125,000 items worth $20 million. Another lucrative market is counterfeit educational books. Julian Eynon, from publishing firm Cambridge University Press, says the books are often very difficult to distinguish from legitimate product. With high demand in the region to learn English they also spell big business. â&#x20AC;&#x153;Itâ&#x20AC;&#x2122;s difficult to find reliable data, but one distributor in Yemen says he is losing 70 to 80 per cent of the total market to piracy,â&#x20AC;? says Eynon. â&#x20AC;&#x153;In Saudi Arabia it may be as high as 30 to 40 per cent. Itâ&#x20AC;&#x2122;s not such a big problem in the UAE,

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â&#x20AC;&#x153;There are little-to-no games being produced specifically for the pan Arab region because there is no market and protection. The locally-created products would be pirated.â&#x20AC;? As another industry observer concurs, â&#x20AC;&#x153;The most critical impediment in fighting piracy in the Gulf is its largest market, Saudi Arabia. The home entertainment segment loses over 500 million Saudi Riyals every year â&#x20AC;&#x201C; let alone the losses to the retail, merchandising, advertising, promotion, media and video games industries. These potentially snowball into billions of Riyals.â&#x20AC;? While the UAE consumes a relatively low volume of pirated goods compared to some of its neighbours, it serves as a major transit hub. â&#x20AC;&#x153;Its strategic location and excellent shipping and logistics facilities make this region very attractive as a distribution hub,â&#x20AC;? says Hasayen. â&#x20AC;&#x153;Counterfeiters also take advantage in passing on illegal products from origin to markets â&#x20AC;&#x201C; utilising free zone areas to import, store and re-export to the rest of the world. This could be harmful to the regionâ&#x20AC;&#x2122;s reputation and to the legitimate businesses operating here. It also affects business attractiveness in terms of offering solid protection for intellectual property rights.â&#x20AC;?

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although we believe that many pirated materials are produced in the emirates â&#x20AC;&#x201C; certainly in Sharjah.â&#x20AC;? With no development costs for counterfeiters, if suppliers can buy 5,000 copies of a book at a fraction of the cost and sell them at the same retail price, there are huge margins to be made. In the UAE, the authorities are working alongside brand owners and there are many success stories. Seizures of counterfeit goods by both HP and Pfizer are cases in point. But, at the same time, counterfeiters are becoming more resourceful. In the Middle East, seizures of pharmaceuticals decreased from more than 2.7 million in 2009 to around 1.5 million in 2010, acknowledges Yaman. Legitimate brands have won some major battles, but the war is far from over.


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sought ‘tariff breaks’ from the ruling elite who benefitted from growing petroleum incomes. “Early on crude oil and power generation feedstocks were inexpensive commodities, so subsidies imposed little strain on the Persian Gulf state economies,” wrote Mike Moore, director, global oil and gas marketing at Colfax, a Columbia, Maryland-based pump manufacturer, earlier this year. “That’s all changed!” he adds emphatically. Subsidies take many forms, and in developed economies, are often defined as government payments to producers, such as farmers, to protect or bolster a market for a certain product. Normally, for example, in developed markets, agricultural or other types of producers receive cash subsidies from the government to prop up ailing production. Subsidies can also be ‘in kind,’ where a good is sold at below production cost, leaving the government to bear the costs of the ‘transaction’. The numbers were harmless in the early days. International benchmark Brent crude stood at $12.80 a barrel in 1976, a trough breached with an average price >LC=9LJ@E<JJ&.0


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of $12.72 in 1998. Local discounts were not noticeably taxing in terms of lost export revenues in the 1970s; today, the opportunity costs are becoming startling. Take petrol at the pump, a standard measure of domestic Saudi consumption. Recent data show Saudis pay $0.61 per gallon. In Kuwait it costs $0.85; the UAE $1.82. A gap then opens up; the US pays $3.79; the UK $8.06 and Turkey $9.99, said to be the world's highest, according to Germany’s GTZ. Observers may wish to ponder the dynamics behind Venezuela’s equivalent pricing, of $0.09. The gas industry is faring no better. With Saudi Aramco’s ascendancy as one of the world’s largest oil companies by revenues, the troubling issue of gas was treated as an irritating side-show. Though Saudi Arabia’s gas use has been steadily increasing, the issue of pricing has bedevilled investment in the industry precisely at a time when gas is most needed for industry and petrochemicals. As the kingdom has thrown more of its weight behind petrochemicals manufacture, it has found that charging $0.75/mmbtu for ethane feedstock does not create the conditions for boosting expenditures for new exploration and production of associated, and in particular, non-associated, gas fields. In the GCC, reliable figures for gas consumption do not exist. Flummoxed global analysts explain that a succession of power brokers in GCC countries usually royal family members - have guarded gas feedstock allocations to different actors to bolster their power bases – to steel and aluminium plant owners, power generators, petrochemicals complexes with no central control over these allocations. The entire process has become steeped in double-talk and confusion. The one GCC exception is Qatar, the only Gulf state to possess gas in quantities so abundant that it /'&J<GK<D9<I)'((

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can meet anyone’s demands. But its understandably self-interested strategy means that it is unwilling to dispense favours with no regard for economics. So, while gas from the Dolphin pipeline was priced at inception in 2007 in political deals with the UAE and Oman at no more than $1.50 per million British thermal units (mmbtu), Qatar, via Shell is charging the UAE $11/mmbtu for LNG consignments, the same as it charges for shipments to Japan. Desperate for gas, and with Dolphin supply limited, the UAE has no option but to accept the international market price. The effects of subsidies remain benign today, but will cast a growing shadow with the passage of time. Four key areas are likely to become problematic in the next 10-20 years: the increasing rate of domestic consumption, the costly loss

of potential exports, an obvious lack of efficiency with which energy is used in the region, and the opportunity cost of funds for new exploration and production. A key feature of subsidised markets is that the quantity supplied by definition increases. In this case, the unwelcome consequences are that domestic demand is beginning to rise inexorably and regional analysts are sounding the alarm. HSBC said in a recent report that Saudi Arabia is likely to burn 1.2m b/d of crude this year for electricity generation, almost double 2010’s figure. Jadwa is forecasting domestic Saudi oil consumption at 5.5m b/d in 2030, leaving only 6m b/d for export. One side effect of subsidies is the mind-set that responsible energy use is a problem facing the rest of the world, but not the GCC, says one analyst.


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energy policies. Although vast tracts of Saudi Arabia remain unexplored, a reassessment of gasâ&#x20AC;&#x2122;s importance, and an improvement in the financial terms on which IOCs are invited in would be a good place to start. So gradual progress on removal of subsidies is a must. Jim Krane, writing in The Gulf Intelligence last year, put forward three â&#x20AC;&#x153;policy alternatives,â&#x20AC;? including raising

the price of electricity, making buildings more energy efficient (mandatory standards on new construction, denser housing), and enacting green appliance standards, such as â&#x20AC;&#x153;banning the sale of inefficient air conditioners, dishwashers and washing machinesâ&#x20AC;?. Next time you fill up your car, remember cheap petrolâ&#x20AC;&#x2122;s cost in other, unseen, terms.

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Perhaps the most shocking outcome of GCC energy policy is a rarely cited ratio, the amount of energy used to produce $1,000 of GDP. According to Jadwa, in 2009, it took the energy equivalent of 1.3 b/d of oil to generate $1,000 of GDP worldwide, 1.2 b/d in China, but 13.6 b/d in Saudi Arabia. Thatâ&#x20AC;&#x2122;s over 10 times as inefficient. In the GCC, the usage of hydrocarbon inputs is the most inefficient on earth. Gas is the preferred fuel for power generation throughout the GCC, given the cleaner and cheaper processes involved. Clearly, if Saudi Arabia continues to charge such low rates for electricity consumption, the ability of the industry to fund new projects for power generation will dwindle. Indeed, a credit assessment of the Saudi Electricity Company by Moodyâ&#x20AC;&#x2122;s in April noted that the sector required investment of almost $100 billion â&#x20AC;&#x153;on power plants and the grid to meet increasing electricity demandâ&#x20AC;? by 2020. The industryâ&#x20AC;&#x2122;s ability to find such funds is not a foregone conclusion. To cap it all, it is clear that the Arab Spring has not created the conditions where the removal or diminution of subsidies could be countenanced. Some analysts say that Saudi Arabiaâ&#x20AC;&#x2122;s rulers are worried the whole powder keg could explode with one false move. As one analyst put it: â&#x20AC;&#x153;We too believe that price reforms are likely to be only gradual and should mainly take the form of higher electricity tariffs and higher hydrocarbon feedstock prices for industrial users.â&#x20AC;? Various solutions to the problems in Saudi Arabia, shared also by most other GCC members are proposed. It is clear that the drive to improve natural gas exploration and production is fundamental to an improvement in Gulf

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ahrain is a little place with big ideas and, although the political crisis has gripped this tiny island nation since February 14, it is determined to implement a long-term economic strategy. Long recognised for a good quality, educated workforce, and well able to punch above its weight due to a strategic location in the upper Gulf, Bahrainis enjoy making their way in the world. Becoming the Middle East’s financial centre in the wake of the Lebanese civil war that broke out in 1976, Bahrain has retained a formidable role as a regional financial hub, especially in Islamic finance, despite the emergence of Dubai. But the world is changing and the centres of power in the Gulf include not only Dubai, but also Doha, Riyadh and Abu Dhabi. Although Bahrain plays host to over 400 banks and its construction sector has contributed around 10 per cent of GDP in recent years, new paths to prosperity are being sought. However, the Sunni-Shia crisis’ effects

on business appear minimal. Although tourist businesses like cruise lines have steered clear, and certain embassies placed adverse travel advisories in the first half, the sense is that on the business side, it is business as usual. “It is very difficult to pinpoint whether there have been any negative effects because of the political situation, because it’s been coupled with the general global slowdown,” says Ken Howie, operations manager at Al Jazeera Shipping, owner of a fleet of 150 tugs, barges and other equipment for use in offshore projects. “[Earlier in the year], we had some issues with international clients, who couldn’t travel to us, so we would go to them. As for the people doing business in Bahrain, especially in shipping, my answer is that 100 per cent no, the situation did not affect us at all.” Howie says that utilisation of the company’s fleet is up 15-20 per cent this year as projects planned in recent quarters go ahead on schedule. >LC=9LJ@E<JJ&/*


In 2005, in need of a major new strategy to drive economic growth forward, the government singled out ports, shipping and logistics as a key area in promoting growth and leveraging the tiny kingdomâ&#x20AC;&#x2122;s proximity to the east coast of Saudi Arabia, via the King Fahd Causeway which opened in 1986. The need for new avenues of growth was obvious. The government identifies four key factors that will require increased economic development in Bahrain if it is to achieve its goal of a 29 per cent increase in the workforce in the next 10 years. According to the Bahrain Economic Quarterly, these have been identified as having a major impact on the success of the strategy: the increased need for government spending restraint in future years; the more modest contribution expected from finance and construction; a projected rapid growth of the Bahraini workforce and the slower increase in the number of low-wage guest workers in the next decade. Spurred on by the rise of port development in the Arabian Gulf and its environs, which has seen megaports planned or underway in Jebel Ali and Taweelah in the UAE, and Duqm and Salalah in Oman, as well as a number of smaller facilities, the GCC's smallest country by land mass and population has launched its own audacious ports and shipping strategy designed to capture the synergies of assisting in improving cargo links to Iraq, Kuwait and eastern Saudi Arabia. The existing facilities at Mina Salman were out-dated and have largely today been devoted to the presence of the US navyâ&#x20AC;&#x2122;s Fifth Fleet, while the facilities at Sitra are largely devoted to Bahrain Petroleum Company. The General Organisation of Sea Ports was established in 2006 as part of Bahrainâ&#x20AC;&#x2122;s Vision 2030 to regulate the industry, and a new terminal facility, Khalifa Bin Salman Port, with a capacity of 1.1 million TEU, opened in April 2009 and placed under the management of APM Terminals Bahrain, a unit of the worldâ&#x20AC;&#x2122;s fourth-largest terminal operator /+&J<GK<D9<I)'((

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and a joint venture between AP Moeller Maersk and local company YB Kanoo. The facility is located at a new, manmade $360 million terminal at Hidd, only 10 minutesâ&#x20AC;&#x2122; drive from Bahrain International Airport. Officials at the KBSP facility say that Bahrainâ&#x20AC;&#x2122;s move into port infrastructure development is squarely aimed at exploiting the opportunity for hubbing container and other cargo to the upper

Gulf, where Saudi Arabia is expected to be a major source of business, with project cargo flowing into Jubail, where 15 petrochemicals plants are to be built. Bureaucracy and red tape make access to Dammam Port extremely difficult, and turnaround times for boxes take from 10-30 days, making the causeway preferable for several operators. In addition, Qatar, Saudi Arabia, Kuwait, Iran and Iraq all beckon. â&#x20AC;&#x153;In the medium- to long-term, Iraq has enormous potential,â&#x20AC;? says Iain Rawlinson, chief commercial officer, APM Terminals Bahrain. â&#x20AC;&#x153;There is great interest from carriers in developing that market.â&#x20AC;? Official figures for 2010 put growth in container throughput at 31 per cent compared to 2009. In June 2010, KBSP recorded the highest volume of throughput handled ever in


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Bahrain, with an increase of 67 per cent as compared to June 2009. Gross crane productivity stood at globally competitive levels in 2010 at 35.6 crane moves per hour, evidence of a monthly growth rate of one per cent in the 12 months to December 2010. Rawlinson is noncommittal at this stage about when expansion of the terminal will take place. Expansion to 2.5 million TEU would require an additional 12 cranes on top of the existing four, and is likely to happen in the next one to three years. If the business comes, the company will expand the quay wall from 1.8 km to 3 km, leading to an eventual

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capacity of five million TEU. Such expansion does not, however, form part of the current 25-year concession. In addition to KBSP, Bahrain plays host to the Gulf’s oldest ship repair company, Arab Shipbuilding and Repair Yard (ASRY). The company is alive to the competition now that the Qatari government has opened a new yard at Ras Laffan, and Oman threatens to do the same in Duqm. Drydocks World Dubai is also a major competitor. Because minimal repairs have been requested by regular customers given the current economic slowdown, 2010 revenues were expected to approximate 2009 numbers. The IMF has given Bahrain high marks, both for its management of the fallout from the global economic crisis, and the policies used over the past decade to develop the economy. “The economy of Bahrain has managed the global crisis well,” it said. “High initial levels of bank capital and sound prudential norms established by the Central Bank of Bahrain (CBB) ensured the resilience of the financial system, without recourse to the extensive direct interventions seen in many countries.” While the other sectors of Bahrain’s economy forge ahead, albeit at a slightly slower pace for a few years due to domestic and international factors, Bahrain has an emergent shipping sector that will stand it in good stead, even in light of the local political situation. >LC=9LJ@E<JJ&/,


DATA CRUNCH TOP DEALS AND GCC ECONOMIC INDICATORS

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In association with

HSBC/NASDAQ DUBAI MIDDLE EAST

TOTAL RETURN INDEX (,( (,' (+0 (+/ (+. (+(+, (++ (+* (+) (+( (+' (*0 (*/ (*.

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THE EXPERT’S DXp)'((Ale\)'((Alcp)'((8l^)'((

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N MYKONOS, IT seems that food tastes better, people are better looking, music is constant and there will always be traces of sand on your clothes. A typical day is spent souvenir shopping or playing volleyball on the beach long enough to perfect a tan and work up an appetite. Nights are spent dancing until dawn. The energy of Mykonos infects travellers long before they even arrive on the Aegean island; whether on a boat or a flight, Greek and foreign tourists will be wearing flip-flops and swimwear beneath their clothes, pumping fists in the air to imaginary music. There is something about the island that encourages everyone to let loose. A shy dancer? On a diet? In Mykonos, you will find

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yourself in line for a Nutella crepe at 3 am after dancing on tables for most of the night. The group in front of you will be 18 yearold Italian girls, those standing in line behind you will be a Greek family with toddlers. The city throbs with life at night, seducing you to uncover new sides of your own personality to keep up with its pace. Most of the action takes place in Mykonos Town, or Chora. Here, some of the streets are so narrow you have to walk sideways, single file, in order to squeeze through to the other side. Shops, cafes and restaurants are all white, with blue doorframes and staircases, and the majority remain open for business nearly until dawn. People


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and laughter spill out onto the alleys from crowded cafes and bars. There are a plethora of restaurants in the Chora to choose from and the best meals are often found at traditional eateries in random alleyways – the best way to find them is to lose yourself in the streets. One such Greek taverna, Chez Catrane, is an upscale locale that is a favourite of Queen Rania’s, according to the owner. The restaurant offers traditional Greek cuisine, such as stuffed tomatoes, fresh fish in olive oil, and spinach pie. Another popular eatery is Pasta Fresca, located in one of the busiest streets in the Chora, with a display of homemade pasta set outside to entice passersby. The heart of town stretches all the way to the old port, where the air is perfumed with sea salt and the strip is studded with seaside cafes. From here, Mykonos’s infamous windmills, built in the 16th century, can be seen in the distant hillside, standing tall and proud like soldiers overlooking the city. Mykonos is known as much for its nightlife as it is for being a very windy city – there are 16 windmills that can be seen from practically any location on the island. Whether you are in a packed, narrow alleyway or admiring the reflection of the moon on the water at the open port, the playful wind will find a way to lift up your skirt and ruffle your hair. During the day, a break from town is achieved by spending time on one of the island’s many beaches. The beaches are up to half an hour away from the heart of the Chora, but worth the trip. Psarou beach is one of the closest locations to

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downtown, featuring one of the busiest restaurants in Mykonos. Nammos Restaurant overlooks the beach where sun beds have cushions thicker than mattresses. They are hardly used, though, because the music pumping from the restaurant has everyone dancing in the sand, in the water, even on the tables while lunch is being served. A group of Argentinean men will be partying on a table next to one where a grandfather and his granddaughter are dancing on chairs. They only stop moving long enough to try the exquisite prawn, cheese and meat dishes passed around at the tables. Panormos is a calmer beach approximately 20 minutes away from Chora. Here, soft lounge music takes a backseat to the sound of ocean waves and tennis balls hit back and forth by the shore. There are no sun beds, but rather big pillows set on the sand, warm from the touch of the sun. With so much activity, it is almost seems pointless to sleep. Still, some resorts, such as the five star Belvedere overlooking the city and located steps away from the Chora, are so lovely it is tempting to spend most of your time at the hotel pool and in your room. Most of the other luxury resorts are located at beaches, rather than Chora, such as Mykonos Blu at Psarou beach. July, August and early September are the busiest times of year on the vibrant island, so be sure to book weeks in advance at hotels, beaches (for sun beds) and restaurants. And don’t forget your dancing shoes.

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HETHER WE LIKE it or not, SUVs have taken the world by storm over the past decade, and the roads of the UAE seem to have a higher proportion of these oversized sedans than many other countries. One has to wonder just how many of the UAE market’s vast array of ‘softroaders’ ever roll off the tarmac, as SUVs are often purchased more for their form than their functionality. From the exterior, this latest variant of the Touareg looks elegant enough to valet at even the most swanky five-star establishment without fear of reproach, while exuding a tougher, more physical stance than its forebears. This is reflected partly in the more pronounced guards, along with the frontend’s letter-box grille, which is a new trademark feature across Volkwagen’s entire model line-up. Inside, the Touareg also blends opulence and functionality, combining plush leather seats and interior accents of thin walnut paneling with the more brash, modern highlights of aluminium and softtouch rubber. With a keyless ignition, thumbing the start button awakens the V6 FSI directinjection engine that powers the vehicle,

providing ample thrust and even a reassuring rumble within the upper rev-ranges. Paired with the powerplant is an eight-speed transmission, with cogs seven and eight both being overdrive gears. Providing quick, smooth up- and down-shifting, there is minimal lag time between depressing the accelerator and feeling the power transferred to the drivetrain. Excellent at cruising speeds, the Touareg also displays a rapid turn of pace when pushed, with strong performance for easy overtaking, getting you from A to B smoothly and speedily. Safety is also covered, with nine airbags throughout the cabin, along with a raft of technology. The console-mounted 6.5inch TFT display is linked to an intuitive, high-spec GPS and a multi-directional camera system. In addition, the Touareg comes with adaptive cruise control and lane assist, the latter sending a vibration through the wheel and flashing a visual alert should you begin to wander without using an indicator. There’s also a world-first technology in the Touareg’s high-beam headlights, with a sensor that automatically shifts their angle to avoid dazzling approaching vehicles or slower traffic in front.

While I stuck mostly to paved surfaces in the few days spent with the Touareg, it did step onto the sandy stuff on a number of occasions. You’re unlikely to tackle Abu Dhabi’s Moreeb Dune in this vehicle, but the extra ride height and superb suspension come in very handy for negotiating some of Dubai’s sneaky off-road shortcuts. The 2011 Touareg also has an off-road driving program, activated by a button on the centre console. This tunes the ABS, electric differential lock and automatic slip regulation, while also simultaneously engaging the Hill Descent Assist and adjusting the automatic gearshift points. While such features are a welcome addition for those who like the flexibility of a vehicle with some all-terrain capability, other features are less wellsuited to the UAE, particularly during the summer months. The panorama sunroof, stretching the length of the roof, would be fantastic in Europe and even okay during the UAE winter, but it is somewhat redundant when the temperatures reach 40+ degrees on most days. Still, this barely detracts from the winning package that is the 2011 Touareg, and it’s yours for from Dhs 157,000.

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HE CANADIAN CHAIN’S second UAE offering in Abu Dhabi is quite surprising – in a good way. Like its Dubai sister, it has the smooth and streamlined luxury touch but, equally, it’s strikingly contemporary. At a loss for a generic description, the best way to describe the hotel is ‘art-deco modern’ with a boutique feel. The huge central lobby is punctuated by sky-lights, silver pillars, rope chairs and a sweeping central staircase. The hotel is mainly aimed at business travellers but the rooms and facilities would easily keep leisure guests entertained too. Fairmont Al Babr is host to two celebrity restaurants: Frankie’s from legendary Italian jockey Frankie Dettori; and Marco Pierre White’s Steakhouse and Grill – this eatery is the celeb chef’s first outside of the UK and is also home to one of the largest selections of wine in the city. Fairmont Al Babr literally means ‘gateway to the sea’ and the well-sized guest rooms are true to its word: the views from the floor-to-ceiling windows offer an excellent vantage point to take in views of the city’s creek, as well as the hotel’s )

*

sprawling outdoor swimming pool. In fact, with the size of the pool and the hotel’s stretch of sandy beach, it’s hard to believe this hotel is in the centre of Abu Dhabi at all. The complex has 369 rooms and around 27,000 square feet of conference space. The guest rooms are the most pleasing part of the hotel. Their organic-designed themes have a fluid feel and the use of walnut wood, bamboo and marble make guests feel immediately at home. There’s also clever use of space as each room hosts a massive bed, bath, a sofa, and a top-notch surround-sound entertainment system. Fancy a rain shower in a glass bathroom to the sounds of Mozart or MTV? Well, you can here. There’s also a desk with a full selection of stationery if you manage to get some work done amid the distraction of the room’s gadgets. Wireless comes as standard. The staff service, like the rooms, is slick and polished but homely. Fairmont Al Babr is a welcome addition to the emirate’s growing selection of hotels. fairmont.com/babalbahr ,

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ITYSCAPE GLOBAL IS the region’s showcase for real estate developers to exhibit their properties to the international client. The show attracts thousands of wealthy real estate investors, developers, financiers, architects, consultants and real estate professionals. Key benefits of the annual event include: four internationally-acclaimed conference programmes featuring over 100 speakers covering key topics offering insights into global real estate investment, development and design; networking and social events to promote interaction with industry peers and opportunities for securing deals and contracts. Complete with a cocktail reception, gala dinner, awards and a golf classic, the tenth edition is going all out to bolster regional growth amid the property climate.

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HERE IS NOTHING quite like an afternoon of polo to champion all things exquisite, and the Foundation Polo Challenge, held in Santa Barbara, California, is no exception. Celebs from Brit actor Billy Zane and US actresses Jennifer Love Hewitt and Zoe Saldana were among the hundreds of glamorous guests gathered at the Santa Barbara Polo & Racquet Club for its centennial celebration and landmark tournament – highlighted by the field presence of the Foundation Team captain, the Duke of Cambridge, who was watched by his immaculately attired wife, Catherine Middleton. The British polo team’s sponsor was Royal Salute – the jewel in the crown of Chivas Brothers, owned by French distillers Pernod-Ricard – a premium brand which picked the prestigious sporting event to unveil its latest luxury blend, Tribute to Honour. With only 21 hand-cast black porcelain flagons in existence – each adorned with 413 black and white diamonds – and a price tag of $200,000-a-pop, Tribute to Honour represents the ultimate in extravagant dinner party refreshment. But, at that price, who on earth is going to buy it? CEO and Chairman of Chivas Brothers, Christian Porta, believes the interest could well come from the Middle East. “Tribute to Honour represents the scarcest, most precious product ever created by Royal Salute, and the Middle East is a market that appreciates true luxury and superior craftsmanship,” the 49-year-old Frenchman said as we enjoyed a dinner of sweetcorn lasagne with blistered tomatoes and asparagus at the table next to Will and Kate.

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Christian says the level of respect for local roots is what connects the Middle East consumer to this high-end brand, which was originally created in 1953 as a tribute to Her Majesty Queen Elizabeth II, on the occasion of her coronation. “Royal Salute has a unique heritage that is inspired by royalty and continues to pay tribute to nobility with each new expression. This is something that our customers in the Middle East value,“ he explains. The bejewelled bottle was certainly a centrepiece on this sporting afternoon, with the couture-clad crowd pausing to sample and pose for photographs at its side – confirming its status symbol appeal. Mid-range and mediocre are the biggest victims in times of recession, yet the aspirational and ‘out of reach’ often act as a sticking plaster for those holding onto any disposable income in their possession. Christian characterises Royal Salute’s experience of the most recent global financial crisis as unfazed, describing impressive 30 per cent growth in the unsteady sixmonth period from December 2010 as “robust and resilient.” I asked Christian if we should indeed be backing bottles instead of bricks and mortar in these uncertain times, but he is quick to remind me that it is probably a risky business to invest in something you (or I) could be lured to consume with little convincing. “It’s a luxurious experience that can be indulged in regularly, or savoured for special occasions,” he says with a laugh. And with that, we raise a glass to glamour, and later another as we watch Prince William power to victory on the polo field.


cartier.com

santos-dumont SKELETON 9611 MC

THE CARTIER CALIBRE 9611 MC FEATURES AN EXCLUSIVE SKELETON MOVEMENT. THE BRIDGE SKELETON, USING ROMAN NUMERALS, PROVIDES A UNIQUE DISPLAY AND TIME READABILITY. THE COMBINATION OF THE OUTLINE CASING OF THE SANTOS-DUMONT WATCH AND THE PURITY OF THE MOVEMENT CREATE ONE OF THE MOST ELEGANT CONTEMPORARY WATCHES. 18K WHITE GOLD CASE, OCTAGONAL CROWN ADORNED WITH A FACETED SAPPHIRE, SKELETON MANUFACTURE MECHANICAL MOVEMENT WITH MANUAL WINDING, CALIBRE 9611 MC (20 JEWELS, 28,800 VIBRATIONS PER HOUR), DOUBLE-BARREL, APPROXIMATELY 72 HOUR POWER RESERVE.

FROM UAE: 800 CARTIER (800-2278437) OUTSIDE UAE: +971 4 236 8345 7 DAYS A WEEK – 11 AM TILL 8 PM

Gulf Business | September 2011  

Gulf Business | September 2011

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