The case for gold
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Smart Investor: Up to speed – September 2008
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Euromoney magazine, September 2008

Summits come and go, but it was quite something to be at the first Palestine Investment Conference in Bethlehem in May. The investments committed at the event, which Palestine’s prime minister Salam Fayyad put at $1.4 billion, were significant, but it was the conference’s very existence that held the real importance: 1500 delegates, 500 of them from overseas, congregating on the West Bank to talk about investing in it rather than shunning it.

The world wants Palestine to work. That’s evident from the $7.1 billion of donor pledges to the Palestinian Territories (the West Bank and Gaza) made at meetings in Paris in December. The theory is that a stable and economically viable Palestine, eventually as an independent state, would defuse one of the most volatile flashpoints of the Arab world.

But what sort of economy could Palestine be? It has been in a mess since the second intifada, the uprising that began in 2000, prompting the imposition of stricter security measures and a withdrawal both of donor support and of any foreign private sector interest. Per capita GDP fell by 40% between 1999 and 2006.

There are, though, signs of a brighter future. The economy turned modestly positive in the second half of 2007 and is expected to continue to grow in 2008. The optimistic view is that this is the time to get in. “The Palestinian economy is like a coiled spring, a spring that has been pushed down and down and down and is ready to bounce back,” says Ronald Cohen, founder of British venture capital firm Apax Partners but attending in his role as chairman of the Portland Trust (and, as a Cairo-born former refugee of the Nasser administration, well disposed towards Palestine’s plight). “If you look at Palestinian GDP per capita over the last seven years, the curve goes down like this,” he says, motioning steeply downwards. “That is the spring that is capable of surprising the world economy.”

Portland Trust is an example of the vast donor goodwill that has risen for Palestine in recent years (and, as Cohen puts it: “I speak as someone who comes from the private equity world. We are not given to exaggeration in terms of results.”) One can barely move for big ticket commitments from the developed world. The Department for International Development (DFID, an arm of the UK government) is here in force; so is PEGASE, the new European mechanism for support to Palestinians, and USAID. Over here are the Danes, revitalising agricultural services; over there are the Italians, with a credit line facility for small and medium enterprises through soft loans. Even on Manger Square, where Christians come to see the place of Jesus’s birth, the Peace Centre next to the Church of the Nativity was funded by the Swedes.

From this part of the funding world, the invective is powerful.  “A growing economy able to provide opportunities and jobs for the Palestinian people must be at the core of a lasting peace process,” says World Bank group managing director Juan Jose Daboub. “While the difficulties of investing here must be acknowledged, the rewards can be significant.” Robert Mosbacher, president and CEO of Overseas Private Investment Corporation (OPIC), which is in for $250 million of a $500 million affordable mortgage scheme with partners including DFID, is similarly enthused. “If you wanted proof of our commitment to this region you can’t get better proof than the fact we are providing 25-year mortgages at fixed rates,” he says. “That says somebody is confident with what is happening. We are deeply committed and confident that these mortgages are good solid credits.”

It’s a big step from there to bring the foreign private sector in. But that $1.4 billion, which Fayyad says should translate to 35,000 jobs, includes some landmark deals involving foreign money, chiefly from the Gulf. The biggest was the confirmation, after much delay, that Israel will free the frequencies for Palestine’s second mobile phone operator, to be set up by Wataniya Mobile. This company is owned by Wataniya International, which is majority owned by Qatar Telecommunications Company, or Q-Tel. The project is expected to involve $650 million of investment over the next few years. Gulf money is also committed to construction, with Qatari Diar Real Estate Investment Corp signing up with a Palestinian group, Bayli, to build a planned community – Palestine’s first – north of Ramallah.

Clearly, Gulf liquidity is the prize Palestinians need to target: there is the affinity in language and culture, the sympathy for the Palestinian position in the Arab world, the abundance of petrodollars looking for a home and the scale of the Palestinian diaspora around the world, much of it still in the Middle East. Consequently, most efforts to do something new start off by targeting the Gulf. Padico, a Nablus-based, offshore registered investment holding company set up after the Oslo peace accords in 1993 and with investments from finance to agriculture and construction, is in the process of setting up a landmark $100 million offshore fund to invest in infrastructure and real estate in East Jerusalem. Padico has put in a quarter, it has secured another quarter from local and regional banks, and there’s little doubt where the rest will come from. “I think we can easily raise funds for it from the Gulf,” says Samir Hulileh, CEO of Padico. And they won’t be investing for charity. “Participants are expected to attain above average return on investments,” he says. “That’s my firm belief.”

Prime Minister Fayyad is adamant that real money, chasing returns, is coming in. “This is private sector, not funded by the PNA [Palestinian National Authority] or donors,” he says in a small briefing with Euromoney and other journalists in Bethlehem. “It’s based on the concept of investment.” He also refutes the idea that investment in housing and affordable mortgages isn’t the sort of thing to boost economic growth. “It’s not just the immediate construction needs, but all that has to come with it in terms of building materials. And we do need houses.”

Efforts to attract western funds are likely to start with the most frontier-spirited of venture capitalists. Walter Isaacson, president and CEO of the Aspen Institute in the US, says he is working “very closely” with people who want to develop a venture capital fund to invest in the ICT sector in Palestine. Indeed, technology and communications are widely seen as the ideal sectors to invest in since they’re not impeded by freedom of movement restrictions in the same way that manufacturing is.

One would imagine that the investment framework would be in its infancy in this stateless, shell-pocked state, but according to the World Bank it stacks up surprisingly well. Daboub says it ranks 22nd in the world in terms of tax regimes for business, and 33rd in terms of the legal framework to protect investors. Earlier this year an amendment to income tax laws went through, giving cuts of up to 15% for people and businesses; there are further exemptions for investment fund projects. A money laundering law has been passed, laws governing the banking sector are drafted and a new corporate law is expected to be ratified any day. It’s certainly needed: corporate law today in the West Bank runs under Jordanian law dating back to the 1960s, and in Gaza, the law dates from the days of the British mandate in 1929.

But there are big concerns about dispute resolution. “Lawlessness has almost ridiculed or sidestepped the court system in Palestine,” says Kamel Husseini, advisor on international relations for Paltel Group, and something of a spokesman for Palestinian commerce. “Militias have taken the law into their hands. You need to bring confidence and respectability to the court system in Palestine, to rulings and their enforceability.”

And there is a big caveat to all of this positive momentum. It’s a 360 square kilometre caveat on the Egyptian border, and it’s called the Gaza Strip. Any Palestinian state will be made up not just of the West Bank but Gaza too, and no matter how business-friendly and sophisticated the remarks of Palestine’s Fatah government in Ramallah on the West Bank, this government does not speak for Gaza. Hamas does and, ceasefire or not, that’s a whole other proposition.

Even in an ideal, peaceful world, Palestine would be a rather wonky state: two separate provinces, several hundred miles apart and separated by a country that fears and resents it. But without Gaza, with almost half the population, there’s just no viable Palestine. The West Bank is land-locked, barring the Dead Sea, which doesn’t have a navigable waterway that goes anywhere else. Gaza is where the port should be, the inlet and outlet for goods and services. It’s where the only international airport is (or would be if the runway hadn’t been cut in half by bulldozers in 2001), and it’s the place from which Palestine can access offshore oil and gas reserves, a rare example of a saleable resource. Today, though, it is under a state of what Fayyad calls “complete siege”.

The impact on business is immense. Hundreds of containers are held at Israeli ports accumulating storage costs; unemployment is colossal and getting worse, with 80,000 workers laid off in 2007 alone; the skilled labour force is becoming more obsolete, machinery is not properly maintained and can’t be repaired because there’s no way of getting spare parts in. And this is therefore the exact opposite of the West Bank: diminishing opportunities for a young workforce rather than credible alternatives, and the sort of anger which drives people to endorse an openly hostile Hamas leadership.

Curiously, Gaza’s share of Palestinian GDP actually grew from 28.7% to 29.2% between 2000 and 2006 (even though actual per capita declined from $1166.90 to $861.68 over the same period, based on constant prices), and a recent white paper on Gaza puts required investment in Gaza construction at more than US$1 billion in the next five years. But, once one gets past donor funding, who in their right mind from the private sector would commit their money here?

“Palestine cannot thrive with its other half left underdeveloped and unattended, because it will always pull it down,” says Husseini. “You cannot assume a rosy picture in the West Bank and ignore Gaza.”

Even in the West Bank, restriction of movement is a big issue. Mohammed Kamal Hassouneh, Minister for the National Economy, says business could increase by 30% with full freedom of movement. “Everything would be developed if we were free on crossing points,” he tells Euromoney. “All of our private sector suffers from the movement of people and the movement of goods.”

All things in time, though: Israelis have well-founded fears for their own security and it is hoped that a viable West Bank will give Israel comfort to begin to ease the restrictions. Israeli investors did attend the Bethlehem conference and there are signs of some willingness among Israel’s business community, if not its political lobbies, to engage. “We are lobbying the Israeli business community, which is a vocal and important player,” says Husseini. “They will benefit from an environment where Israel is perceived as a neighbour rather than an occupier.”


While getting 500 delegates from overseas into Bethlehem was an achievement, it was rarely easy. Euromoney entered Palestine from Jordan, crossing the border at the Allenby Bridge over the River Jordan. (There is no airport of any consequence on the West Bank.) The border crossing took four hours, two of it spent detained in a small room being quizzed by three separate members of the Israeli army on why Euromoney wanted to attend.

Having got through the border and taken a bus to Jericho, Euromoney hailed a shared taxi to Bethlehem and received a quick lesson in movement restrictions. The taxi had white Palestinian number plates rather than the yellow Israeli ones; that meant the driver was compelled to leave the pristine freeway that would have taken us there in minutes through the outskirts of Jerusalem, and instead take a 14 kilometre detour on a disintegrating highway through barren hills punctuated by the tin shacks of the Bedouin. That’s because Palestinian cars can’t use half the roads even in the supposedly Palestinian West Bank itself.

Checkpoints can take hours, especially when entering Palestinian Territories through the vast and controversial eight metre high wall that separates Israel from it, but also within Palestine itself. It’s no way to run business. And that wall cuts the West Bank off from East Jerusalem, which Palestinians believe to be their capital; among the institutions sitting dormant and unreachable there is Palestine’s Chamber of Commerce.


One would expect the banking sector to be a shambles in Palestine but it is instead in a period of dynamic growth.  According to the Palestine Monetary Authority, the central bank, the sector grew by 22% in 2007; total assets are $7 billion, client deposits $5 billion, compared to $150 million at the time of the Oslo Accords in 1993, according to the Bank of Palestine.

There are 21 banks in the Palestinian Territories, compared to three at the time of the establishment of the Palestine Monetary Authority in 1994. Ten are local, 10 Arab (with Jordan particularly well represented) and one bold multinational – HSBC, which runs a branch in Ramallah. All are privately owned and between them they run 175 branches. “They’re incredible resilient,” says Michael Essex, director of the Middle East and North Africa at the IFC.

They don’t, though, do much. “Due to political uncertainties and border closures, the banking sector has followed very conservative lending policies in terms of absolute exposure,” says Hashim Shawwa, general manager of the Bank of Palestine. “Bank credit penetration is very low, with loan to deposit ratios at 35% compared to 78% in developed countries.” It’s partly for this reason that the likes of the IFC, OPIC and Aspen have trend to build risk sharing and long term financing programs like the affordable housing initiatives.

Banks are active in time and savings deposits, Islamic murabaha and foreign exchange, but getting them into anything longer term, even trade finance, is challenging in this environment. “They are more liquid than they are in other places, because there isn’t a depth of borrowers,” Essex says. “You don’t really have the projects, that’s one of the issues. Then of course they are always affected by their ability to freely move around: that’s a challenge, as some of the loans they have made to private sector companies obviously get impaired when places lock down.” Essex says non-performing loans stand at about 15% compared to 7% on average for the region, although Jihad El-Wazir, governor of the Palestinian Monetary Authority, tells Euromoney that figure is out of date and that it actually stands at nearer 7% today.

Banks themselves say all the right things. “A strong financial sector is the backbone of a country’s economy,” says Shawwa. “The banking sector is secure and fast expanding.” Competitors are similarly optimistic. “We have considerable capital which it is in the interest of the bank to employ,” says Mazen Abu Hamdan, regional manager of Arab Bank, which has the largest share of banking deposits in the Palestinian Territories.”We are ready to finance any feasible projects presented to us.”

But as with everything else, so much depends on the security situation. “Commercially, obviously Gaza is very much challenged these days,” says Essex. “The banks we are working with have branches in Gaza and even in these difficult circumstances are operating. But it’s difficult, very difficult.” Minister of National Economy Kamal Hassouneh adds: “In Gaza now … some of them maybe will close. They are suffering there now.”

The IFC is trying to work with local banks to help. “They’re the ones who have deep contacts across the West Bank and Gaza, and lots of branches,” says Essex. “We want to go through them and reach lots of small companies that way.” Aside from its housing finance initiatives, it has a pilot project in student loans and is also trying to bring Palestinian banks into its global trade finance programme, which has 180 member banks worldwide. Three banks are ready to sign up, though Essex declined to name them in May.

Asked if other foreign banks are looking at opportunities, Jihad says: “We have received some interest from additional foreign banks, particularly coming from the Gulf; we may see more strategic partnership.” With 21 banks for a country of barely four million people, and with half the country effectively frozen, there’s not an obvious need for more players, but if a period of consolidation comes, that may prove to be the entry time for a handful of far-sighted multinationals. That’s clearly going to be a challenge to get past a risk management committee, but Jihad argues it shouldn’t be. “You get the perception in many quarters that Palestinian banks are like the Wild West in the 1900s,” he says. “That’s definitely not the case.”


Yes, Palestine has one. And the remarkable thing is it has stayed open consistently since its launch in February 1997. It’s not the biggest exchange in the world – 38 stocks, and a market capitalisation of $3.1 billion – but it lodged a claim to fame by being the world’s best performing stock market in 2005, returning 306%. Up 30.8% in the first six months of 2008, it’s one of the world’s best performers.

The numbers are partly explained by the complete absence of other effective ways of getting any exposure to the handful of success stories on the West Bank. “At the time [2005’s record year], the stock exchange was the only opportunity for investors to invest in Palestine,” says Kamal Husseini. “It is virtual not physical, there is an exit strategy, it’s liquid. It was the only window.”

Foreigners are permitted to invest in the market without restriction, and some do: Kuwait’s Global Investment House actually has a mutual fund devoted entirely to the Palestinian Territories. The Palestine Dedicated Fund was up 18% in the first six months of the year. “The current environment continues to be supportive of further price appreciation,” says Tala Samhouri, head of MENA asset management at Global. “The first quarter of 2008 earnings have been extremely impressive with aggregate growth of 85% year on year.”

Chris Wright
Chris Wright
Chris is a journalist specialising in business and financial journalism across Asia, Australia and the Middle East. He is Asia editor for Euromoney magazine and has written for publications including the Financial Times, Institutional Investor, Forbes, Asiamoney, the Australian Financial Review, Discovery Channel Magazine, Qantas: The Australian Way and BRW. He is the author of No More Worlds to Conquer, published by HarperCollins.

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