Fortnightly, December 31st 2014

Fortnightly, December 31st 2014

December 31, 2014





1.1  Finance Ministry & Histadrut Agree on Minimum Wage Raise
1.2  Antitrust Chief Dissolves Israel’s Natural Gas Monopoly 
1.3  Israel to Halt Majority of Gas Mask Production


2.1  Israel Chemicals to Invest $452 Million in Chinese Potash Firm 
2.2  Trax Image Recognition Receives $15 Million Investment  
2.3  Frutarom Acquires Slovenian Plant Extracts Company Vitiva   
2.4  Supreme Court of Israel Lifts Stay on Exploratory Drilling in Northern Israel  
2.5  Eilat Railway Not Economically Worthwhile  


3.1  Dairy Queen Plans Kuwait Relaunch
3.2  Courtyard by Marriott Arrives in Abu Dhabi
3.3  US Seafood Restaurant Brand to Open in Dubai
3.4  Associa Expands to Middle East and North Africa Region
3.5  BioShaft Awarded Contract in King Abdullah Economic City
3.6  CorMedix Finalizes First Middle East Neutrolin Agreement in KSA


4.1  Israel’s Biggest Solar Energy Plant Underway 


5.1  Amman Ministry to Draft 3-Year Financial Action Plan

♦♦Arabian Gulf

5.2  Raytheon Wins $2.4b Deal for Qatar Patriot Missiles System 
5.3  Housing Costs Rocket but UAE Inflation Eases in November 
5.4  UAE’s First Nuclear Reactor to Start Operations in 2017
5.5  UAE’s Non-Oil Foreign Trade Rises to $142 Billion in First Half
5.6  Saudi Plans to Raise Spending 0.6% in 2015 Budget
5.7  Saudi Arabia Among World’s Worst For ‘Dirty Money’ Flows

♦♦North Africa

5.8  Egypt Current Account Hits Deficit of $1.4 Billion in July – September
5.9  Morocco Ranks Third Most E-Commerce-Friendly State in Africa


6.1  Turkey to Slide Back To World’s 19th Biggest Economy By Year’s End 
6.2  Ankara in New Bid to Boost Control Over Internet 
6.3  Millions of Turks Bring In Less Than Poverty Level Income 
6.4  Draft Bill for Casino Resort Goes to Nicosia 
6.5  Snap Election Risks Greek Lifeline 



7.1  On Eve of 2015, Israel’s Population Hits 8.3 Million
7.2  Fast of the 10th of Tevet 
7.3  Largest Sports Event in Israel’s History – 2015 Tel Aviv Marathon 


7.4  Syrians Constitute One-Fifth of Amman’s Population 
7.5  Backlash Against Kuwaiti MP’s Call for Alcohol to be Legalized 


8.1  Compugen Enters Immuno-Oncology Collaboration with Johns Hopkins
8.2  $12 Million Investment in Nutrinia Brings Hope to Pre-term Infants 
8.3  Teva Announces FDA Approval of QNASL Nasal Aerosol 
8.4  FDA Approves Teva’s GRANIX Injection for Self-Administration 
8.5  BioLineRx Out-Licenses Novel Skin Lesion Treatment to Omega Pharma 


9.1  Plarium Launches Total Domination: Reborn for Android Devices
9.2  Mellanox Delivers Open Ethernet Switch Abstraction Interface 


10.1  Record $15 Billion in Israeli High-Tech Exits in 2014
10.2  Israel’s Tourism Drops By 7% in 2014

 11:  IN DEPTH

11.1  ISRAEL: Israel’s Policy Confusion on Natural Gas
11.2  ISRAEL: Bank of Israel Joins War Against Unreported Income
11.3  LEBANON: Lebanon’s Biggest Fight Is Yet To Come
11.4  JORDAN: Jordan Year in Review 2014
11.5  JORDAN: IMF Staff Concludes Visit to Jordan
11.6  JORDAN: Jordan Aims to Reduce Unemployment
11.7  GCC: Oil Price Drop Highlights Need for Diversity in Gulf Economies
11.8  ARABIAN GULF: Gulf Arab States Brace for Tough Times Over Oil Price Plunge
11.9  KUWAIT: Fitch Affirms Kuwait at ‘AA’; Outlook Stable
11.10  BAHRAIN: Fitch Revises Bahrain’s Outlook to Negative; Affirms at ‘BBB’
11.11  EGYPT: Fitch Upgrades Egypt to ‘B’; Outlook Stable
11.12  TUNISIA: After Elections, Now Comes the Hard Part for Tunisia
11.13  ALGERIA: Algeria’s Winter of Discontent
11.14  MOROCCO: Morocco Unveils Gas Plan
11.15  TURKEY: The Islamic State and Partisanship in Turkey
11.16  TURKEY: Erdogan Continues to Consolidate Power
11.17  TURKEY: The Massacre Turkey Hopes Alevis Will Forget


 1.1  Finance Ministry & Histadrut Agree on Minimum Wage Raise

The Finance Ministry and the Histadrut labor federation have agreed that the planned increase in the minimum wage to NIS 5,000 ($1,275) a month will apply to some 700,000 public sector workers, as well as to employees in the private sector.  The decision was made on 28 December after Histadrut head Nissan Koren met with senior officials in the Finance Ministry. 

The deal Nissan Koren and the Finance Ministry officials reached was an extension of a decision by Prime Minister (and now Finance Minister) Benjamin Netanyahu to raise the minimum wage, and complies with a decision by Attorney-General Yehuda Weinstein last week that a decision to do so could be made before the upcoming Knesset elections provided it was done by the Finance Ministry and the Histadrut, and not by decrees by Economy and Trade Minister Bennett.

Now that the move has been approved, the minimum wage will be raised in a three-step process.  The first stage is slated to be implemented on 1 April 2015, after the elections, and will see the minimum wage increased to NIS 4,650 a month ($1,184).  In the second stage, to be implemented on 1 August 2016, the minimum will be raised to NIS 4,825 ($1,229).  The final increase to NIS 5,000 is scheduled to take effect on 1 January 2017.  (IH 29.12)

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 1.2  Antitrust Chief Dissolves Israel’s Natural Gas Monopoly

On 23 December, Antitrust Commissioner Professor David Gilo informed Israel’s Delek Group and Texas-based Noble Energy of his decision to revoke the licensing agreement pertaining to their holdings in the Leviathan offshore gas field.  The companies, which also control the Tamar, Tanin and Karish gas fields, have effectively formed a cartel, which the Antitrust Authority said it seeks to dissolve.  Gilo met with the companies’ attorneys that morning and informed them that both Delek Group and Noble Energy would have to sell the majority of their holdings in Leviathan.  The decision is subject to an Antitrust Tribunal hearing, during which the companies would be able to appeal the decision, but sources privy to the issue said it was unlikely that the panel would rule otherwise. 

Leviathan, discovered in 2010 roughly 130 kilometers (81 miles) west of Haifa, holds an estimated 22 trillion cubic feet of natural gas.  The field was the world’s largest offshore discovery of the past decade.  Tamar, discovered some 80 kilometers (50 miles) west of Haifa in 2009, is believed to have reserves of up to 8.4 trillion cubic feet.  The Tanin and Karish gas fields, discovered in 2012 some 120 kilometers (74 miles) northwest of Haifa’s shores, are believed to hold about 1.3 trillion cubic feet of natural gas each.  The Delek Group, through its various subsidiaries, controls 53% of the offshore ventures, while Noble Energy controls 47%.  (Various 23.12)

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 1.3  Israel to Halt Majority of Gas Mask Production

The vast majority of gas mask production in Israel will cease following the upcoming confirmation of Prime Minister Netanyahu’s interim Cabinet.  Defense Minister Ya’alon, who initiated the proposal, approved the decision to halt production based on the significant decline in the threat of a chemical weapons attack from Syria.  Syria agreed in 2013 to radically reduce its chemical weapons stock in an operation concluded in June.  About a year ago, the Cabinet approved Ya’alon’s initial motion to end the distribution of gas masks to civilians and reduce production – thereby supplying gas masks only to IDF forces and emergency responders.

The Cabinet’s approval came as a result of the reduced threat and as an economic measure.  A provision to the proposal also called for reevaluating the issue in a year’s time.  By the time gas mask distribution to civilians was stopped in January, over 60% of Israelis had received one.  Completing the task of providing gas masks to everyone was expected to cost over $255 million.  Halting production will mean shutting down production lines at the Supergum and Shalon companies.  This will also mean the dismissal of dozens of factory workers.  (Various 25.12)

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 2.1  Israel Chemicals to Invest $452 Million in Chinese Potash Firm

Israel Chemicals is to invest $452 million for 50% ownership of a joint venture that will operate a fully integrated, phosphate business in China.  Israel Chemicals will also take a 15% strategic holding in Yunnan Yuntianhua, one of Asia’s leading producers of phosphate rock, which is traded on the Shanghai stock exchange with a market cap of $1.8 billion.  The joint venture will include a mine that produces 2.5 million tons of phosphate rock annually for the next 30 years, a downstream phosphate operation and a marketing and sales organization that primarily serves the Chinese and the Asian markets.  Israel Chemicals says that the strategic alliance will leverage its and Yunnan Yuntianhua’s technical, marketing and production expertise and will include a joint phosphate R&D platform in the Yunnan province to develop process improvement and new products for both partners.  (Globes 16.12)

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 2.2  Trax Image Recognition Receives $15 Million Investment

Israeli-Singaporean company Trax Image Recognition, a leading provider of in-store shelf monitoring, analysis and technology powered by image recognition, announced a significant $15 million cash investment from existing shareholders to support the growth, new product development and technical innovation of the company.  Trax will use the fourth round of investment, which is its largest to date, to expand its global operations with a focus on developing its market share in the US and Europe.  In addition, the new funds will also allow the company to launch new products and services enabling it to meet the growing requirements of its global manufacturing and retail customers.  The new offerings, available in 2015, will be initiatives in market research and the consumer space.  The investment will also help Trax secure a leading position in the crowdsourcing market by forming partnerships in this sector.  (Trax 15.12)

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 2.3  Frutarom Acquires Slovenian Plant Extracts Company Vitiva

Flavors and specialty fine ingredients company Frutarom Industries signed an agreement to acquire Slovenian company Vitiva for a cash payment of about $9.9 million.  The deal will be completed over the coming weeks.  Vitiva specializes in R&D, production, marketing and sales of specialty natural plant extracts exhibiting antioxidant activity or scientifically proven health attributes backed up by clinical studies and of natural colors for customers in the food, pharmaceuticals, nutraceuticals and cosmetics markets.  Its customers are some of the world’s top food, pharmaceuticals, and cosmetics manufacturers.  Vitiva’s revenue grew 27% from $8.7 million in 2013 to $11 million for the 12-month period ending November 2014, and its activities will be integrated into Frutarom’s specialty fine ingredients division.

The acquisition of Vitiva brings Frutarom advanced R&D capabilities and represents another milestone in carrying out Frutarom’s rapid and profitable growth strategy while broadening their portfolio of natural products and solutions.  (Globes 23.12)

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 2.4  Supreme Court of Israel Lifts Stay on Exploratory Drilling in Northern Israel

Newark, NJ’s Genie Energy, a leading independent retail energy provider and a developer of oil and gas projects, said that the Supreme Court of Israel has rejected a petition challenging the permits issued to Genie’s Afek subsidiary, and the Court has lifted its injunction on Afek’s exploratory program in northern Israel.  The Company said that it expects to spud the first exploratory well during Q1/15, barring additional regulatory or legal delays.  During the hearing in Jerusalem, the Court found that the permitted exploratory wells posed no discernable risks to public health or safety, and lifted the injunction effective immediately.

Genie Energy is comprised of IDT Energy and Genie Oil and Gas (GOGAS).  IDT Energy is a leading independent retail energy provider supplying electricity and natural gas to residential and small business customers in the Northeastern United States.  GOGAS is a resource and technology development company focused on producing clean and affordable transportation fuels from the world’s abundant oil and gas resources.  (Genie Energy 23.12)

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 2.5  Eilat Railway Not Economically Worthwhile

The basic cost of constructing a railway line to Eilat is NIS 30.3 billion and the state will have to subsidize it by NIS 500 million annually, according to a team headed by Prime Minister’s Office director general Harel Locker.  The government appointed the team to recommend ways of financing the project. Representatives of the National Economic Council and the Ministries of Finance, Transport and the Environment participated in the committee.

The team almost completely ruled out the possibility of paying for the project through off-budget financing from the private sector, or through a foreign government, and estimated the cost of the venture at NIS 10 billion more than the Ministry of Transport’s official estimates.  The estimate does not include additions to projects, such as a control center, maintenance sites, service centers, and additional upgrades, whose cost cannot be estimated at this stage.  The team stated, “Even without the train to Eilat, the Ministry of Transport’s projected expenses for land transportation development exceeds the projected expenses limit in the state budget.  If the Eilat rail project is added, the projected expenses are significantly higher (the expenses limitation makes it possible to increase the state budget by 2.5% annually).”

Locker was appointed in February 2012 to head a team for considering three alternatives for financing construction of the railway to Eilat.  These alternatives were carrying out the project without a tender in a government-to-government framework, setting up a venture through a private-public partnership (PPP), and building it with exclusively government financing. The team was scheduled to submit its recommendations within 90 days, but needed almost two years to write a short document.  (Globes 30.12)

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 3.1  Dairy Queen Plans Kuwait Relaunch

Dairy Queen, the fast-food and ice-cream seller owned by Warren Buffett’s Berkshire Hathaway, has announced plans to expand the brand’s presence in Kuwait with a multi-unit development deal for DQ Grill & Chill restaurants and DQ Treat stores.  Durra Khaled For Foodstuffs Co has signed a long-term franchise agreement with Dairy Queen and plans to develop more than 20 DQ Grill & Chill restaurants and DQ Treat stores throughout the Gulf state over the next five years.  DQ Grill & Chill restaurants are planned to open by mid-2015.  The first DQ Treat only stores are also expected to open in 2015 and will feature the soft-serve products that have made Dairy Queen famous around the world.  Operations in Kuwait started in the 1990s and closed in 2003 when the franchisee decided to leave the restaurant business.  (DQ 23.12)

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 3.2  Courtyard by Marriott Arrives in Abu Dhabi

The Courtyard by Marriott hotel brand has made its debut in Abu Dhabi, with a 195-key property adjacent to the city’s World Trade Center Mall opening on 21 December 21.  The executive team at the hotel is targeted at young business travelers.  Among the facilities at Courtyard by Marriott World Trade Center, which is a five minutes’ walk away from the Corniche, are complimentary Wi-Fi throughout the hotel and 1604 square feet of meeting space across three meeting rooms.  The hotel also has a fitness center as well as an outdoor, rooftop swimming pool.  (Marriott 22.12)

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 3.3  US Seafood Restaurant Brand to Open in Dubai

EMM Group, one of New York’s leading restaurant firms, said it will initiate its global expansion with the opening of the first international outpost of the CATCH New York brand, a US-based seafood restaurant, in Dubai in early 2015.  The restaurant is set to open at The Fairmont on Sheikh Zayed Road in Dubai.  The opening date has not yet been confirmed but it’s expected to open late January or early February.  (AB 20.12)

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 3.4  Associa Expands to Middle East and North Africa Region

Associa, the community management provider, announces its expansion into the Middle East and North Africa (MENA) region with the opening of a regional office in Dubai, United Arab Emirates.  Associa enhances clients’ communities and investments through the highest levels of service and unparalleled industry expertise.  The Associa portfolio includes residential, mixed use, and master planned communities to luxury high-rise, active adult, resorts and golf while also helping builders, developers and real estate professionals achieve their goals.  Associa combines its international strength with local, fully staffed offices to meet client needs and drive superior results for clients and communities.  Based in Dallas, Texas, Associa and its 9,000 employees operate more than 170 branch offices in the United States, Mexico, Canada and the United Arab Emirates.  (Associa 22.12)

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 3.5  BioShaft Awarded Contract in King Abdullah Economic City

Once more, EMAAR has selected Long Beach, California’s BioShaft Water Technology to provide a larger packaged waste water treatment plant to phase one of BayLaSun, a prestigious district in King Abdullah Economic City (KAEC).  Two years ago BioShaft successfully supplied and operated a packaged plant for EMAAR’s Jeddah Gate Development, serving two residential towers with an occupancy of 900 residences.  The new plant capacity is over a quarter million gallons per day and was signed on 16 September 2014, with BioShaft agent in Saudi Arabia, Zuhier A Zahran & Co.  The plant is scheduled to be operational by March 2015.

King Abdullah Economic City (KAEC) involves building an entire city from scratch on a piece of land that is roughly the size of Washington, D.C. hosting as many as 2 million people, with investment in the project estimated to be as much as $100 billion.  It is part of an ambitious program to place Saudi Arabia among the world’s top ten competitive investment destinations.  EMAAR is one of the world’s largest property development companies.  Emaar Economic City, a consortium headed by Dubai’s Emaar Properties and Saudi investors, is focused on building the King Abdullah Economic City, a special economic zone near Saudi Arabia’s Red Sea coast from Jeddah.  (BioShaft 23.12)

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 3.6  CorMedix Finalizes First Middle East Neutrolin Agreement in KSA

Bridgewater, N.J.’s CorMedix, a pharmaceutical company focused on developing and commercializing therapeutic products for the prevention and treatment of cardiac, renal and infectious disease, announced the first signed Middle East sales/distribution agreement for lead product Neutrolin with distributor Arabian Trade House in Saudi Arabia.  Saudi Arabia has approximately 13,000 patients on hemodialysis; with central venous catheter (CVC) usage rates are as high as 40%.  In Saudi Arabia intensive care units (ICU), there are an estimated 1.6 million patients per year on catheters and an estimated 3,000 oncology patients with catheters.  CorMedix’s Neutrolin is a novel formulation of taurolidine, citrate and heparin with1000 u/ml that provides a combination preventative solution, decreases the triple threat of infection, thrombosis, and biofilm to keep catheter’s operating safely and efficiently by optimizing catheter blood flow while minimizing infections and biofilm formation.  (CorMedix 23.12)

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 4.1  Israel’s Biggest Solar Energy Plant Underway

Energix Renewable Energies of the Alony Hetz Property and Investments announced that Israel’s biggest solar energy project, at Neot Hovav in the Negev, has received a permanent license for producing electricity.  According to the company’s estimates, power production will yield annual revenue of NIS 42-45 million for twenty years.  The solar power plant will have an output of 37.5 megawatt.  The plant is on reclaimed land formerly used as an evaporation pond for industrial waste, on which some 400,000 photo-voltaic panels have been erected for collecting the sun’s rays and converting them to electricity.  The power produced by the plant will be transmitted via a sub-station to Israel Electric Corporation’s national grid and will be sufficient to power about 40,000 homes.  Energix plans to set up an educational tourism center on the site on the subject of renewable energy.

In 2009, the Israeli government decided that by 2014, 5% of Israel’s electricity would be generated from renewable sources, but currently renewable energy accounts for only 1% of Israel’s power consumption.  This puts Israel at the bottom of the table of the developed countries, despite the fact that it enjoys more sunshine than most European countries.  (Globes 22.12)

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 5.1  Amman Ministry to Draft 3-Year Financial Action Plan

Amman on 24 December tasked the Finance Ministry with preparing an executive plan for financial reform for the years 2015-2017.   During a session chaired by Prime Minister Ensour, the Cabinet decided that the envisioned plan should be coupled with a time frame for implementation and indicators to periodically measure progress.  The plan will be endorsed before the end of the year along with the financial reform program that is being implemented under the supervision of the International Monetary Fund (IMF).  The financial reform program will be conducted based on the fifth review of the Kingdom’s financial reform plan conducted in cooperation with the IMF.

It also coincides with the referral of the draft 2015 state budget and the independent government units’ budgets draft laws to the Lower House for endorsement.  The importance of the reform program stems from the government’s commitment to addressing budget deficit and indebtedness, while improving international organizations’ confidence in the Kingdom’s financial reform process.  The Council of Ministers tasked the financial minister with forming a committee representing ministries and government agencies that will be responsible for facilitating the mission, according to Petra.  (Petra 24.12)

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♦♦Arabian Gulf

 5.2  Raytheon Wins $2.4b Deal for Qatar Patriot Missiles System

Raytheon won a contract valued at $2.4 billion to supply 10 Patriot missile defense systems to Qatar, which is beefing up its defenses to counter a growing threat from Iran.  The long-awaited contract, announced by the US Department of Defense, includes spare parts and is due to be completed by April 2019.  Qatar will become the 13th country to operate the Patriot missile defense system and the fourth of six Gulf Cooperation Council members to opt for it.  The contract was negotiated between the governments of the United States and Qatar as part of a $23 billion arms package announced in March that also includes Boeing attack helicopters and Javelin missiles built by a Raytheon-Lockheed Martin Corp joint venture.  The Pentagon first approved the sale of up to $9.9 billion worth of Patriot batteries and other equipment in late 2012.  (AB 20.12)

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 5.3  Housing Costs Rocket But UAE Inflation Eases in November

The UAE’s inflation rate eased to 2.8% year-on-year in November from a five-and-a-half year high of 3.1% the previous month.  The UAE’s National Bureau of Statistics released the November consumer price data which showed that housing and utility costs, which account for over 39% of consumer expenses, rose 4.4% year-on-year, the fastest increase since February 2009, and 0.2% month-on-month in November.  The data also revealed that food and soft drink prices, which account for nearly 14% of the basket, increased 2.1% on an annual basis but fell 1.4% from the previous month.  Analysts polled by Reuters in September forecast average inflation in the UAE would accelerate to 2.5% in 2014 and three% in 2015 from 1.1% in 2013, which was the highest level since 2009.  (AB 28.12)

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 5.4  UAE’s First Nuclear Reactor to Start Operations in 2017

The first of four nuclear reactors being built by the UAE will start operations in 2017 and the rest will be fully operational by 2020, said Mohammed Al Hammadi, CEO of the Emirates Nuclear Energy Corp (ENEC).  He said that 61% of the first nuclear reactor has been completed and it is slated to start production in 2017.  Work is also underway on the second and third reactors while the site is being prepared for the fourth, he said.  The second reactor will come online in 2018, the third the following year and the last in 2020.  Al Hammadi said another 5% of UAE electricity needs will be provided by renewable energy sources by 2020, helping the Gulf state to cut 12 million metric tons of carbon emissions.  In 2009, an international consortium led by the state-run Korea Electric Power Corp won a $20.4 billion deal to build four nuclear power plants in Baraka, west of Abu Dhabi.  (AB 23.12)

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 5.5  UAE’s Non-Oil Foreign Trade Rises to $142 Billion in First Half

The value of the UAE’s direct total foreign non-oil trade totaled $142.8 billion in H1/14.  The Federal Customs Authority (FCA) said it showed an increase in trade but did not give a figure for the first half of 2013.  The latest statistics included imports of AED340.1 billion, exports of AED63.3 billion and re-exports of AED121.4 billion.  Asia, Australia and the Pacific region maintained its position at the top of the list of the UAE’s non-oil trading partners with 42% of the total non-oil trade value, followed by the Europe (27%) and the MENA region with 15%.  Saudi Arabia was the UAE’s biggest trading partner in the Gulf region during the first six months of the year with 36% of the GCC total, followed by Oman, Kuwait, Qatar and Bahrain.  The FCA preliminary statistics revealed that native gold and semi-processed gold were the most commonly imported goods by the UAE, followed by vehicles, and non-composite diamonds.  (AB 21.12)

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 5.6  Saudi Plans to Raise Spending 0.6% in 2015 Budget

Saudi Arabia plans to raise government spending 0.6% to a record high in its 2015 budget while covering a large deficit due to plunging oil prices with its huge fiscal reserves, the Ministry of Finance said.  The budget gives the first detailed look at how the world’s top oil exporter intends to handle an era of cheaper oil. 

The stock market rose in the minutes after the announcement, trading 0.9% higher.  Financial markets had feared the kingdom might cut spending sharply, but the plan suggests Saudi authorities are confident of their ability to ride out a period of low oil prices and see no need for major austerity.  Some analysts believe Riyadh is content to see oil prices fall as a way to squeeze out competing producers in non-OPEC nations.  The budget figures imply it could pursue this strategy for years if it felt that was necessary.

Spending in the 2015 budget is projected at SR 860 billion ($230 billion), up from SR 855 billion in the 2014 budget plan.  While that is a record amount, it is the smallest increase in more than a decade.  Revenues were projected to drop to SR 715 billion in 2015 from SR 855 billion in the 2014 plan, leaving a deficit of SR 145 billion.  Saudi Arabia will continue spending actively on economic development projects, social welfare and security despite the oil price slide and challenging conditions in the global economy, the ministry said.  (Reuters 25.12)

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 5.7  Saudi Arabia Among World’s Worst For ‘Dirty Money’ Flows

More than $30 billion in illicit capital flowed out of Saudi Arabia in 2012, facilitating crime and corruption, according to a new study released by Global Financial Integrity.  The Gulf kingdom was among the worst hit countries in the world, with nearly $310 billion of dirty money being drained between 2003 and 2012.  Saudi Arabia was the sixth worst hit country, behind China, Russia, Mexico, India and Malaysia.  Researchers found growth of illicit flows particularly in the Middle East and North Africa and in sub-Saharan Africa, where the growth was seen at 24.2% and 13.2% respectively.  The GFI research found fraudulent mis-invoicing of trade transactions was the most popular method to move money illegally and accounted for nearly 78% of illicit flows in 2012.  Money is moved overseas through trade mispricing by fraudulent under billing or over-invoicing for goods to avoid tax or to hide large transfers.  (AB 20.12)

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♦♦North Africa  

 5.8  Egypt Current Account Hits Deficit of $1.4 Billion in July – September

Egypt’s current account recorded a $1.4 billion deficit in the three months to September, in contrast to a $610 million surplus in the same period last year when Arabian Gulf states provided billions of dollars in aid.  The deficit was driven by a wider trade gap and a contraction in net transfers.  That was partly offset by a rise in foreign direct investment (FDI), driven by a rise in net inflows to the oil sector to $948.1 million from $377.6 million, the central bank said.  Official transfers, including cash and commodities, fell to $1.48 billion in the first quarter, which started on July 1, down sharply from $4.33 billion a year earlier, it said.

Soon after the army ousted Islamist President Morsi in July 2013, Saudi Arabia, the UAE and Kuwait pledged over $12 billion in loans, grants and oil products.  In November, the finance minister said Egypt had received $10.6 billion from the Gulf in the 2013-14 fiscal year, suggesting most of the aid had arrived.  FDI rose to $1.8 billion in the quarter, the first of the 2014-15 fiscal year, compared with $745.4 million a year earlier.  Last year’s FDI figure was revised down dramatically from the $1.246 billion initially reported. 

Tourism also recovered in the first quarter from a particularly poor period last year, when Morsi’s ouster was followed by weeks of violence.  Tourism has suffered since Egypt’s 2011 uprising toppled Hosni Mubarak and was slowly beginning to recover before Morsi’s ouster.  Tourism receipts more than doubled to $2.09 billion from $931.1 million a year earlier, but oil exports fell by $138.3 million to $2.91 billion.  (Various 30.12)

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 5.9  Morocco Ranks Third Most E-Commerce-Friendly State in Africa

Africa Internet Group has ranked Morocco third on the list of the continent’s top seven e-commerce friendly countries.  With internet services widespread across the African continent, e-commerce has started to thrive.  Morocco comes in third of the most e-commerce friendly countries in Africa, preceded only by Senegal and Kenya first and second respectively.  Morocco, the only North African country included in the ranking, is “well-positioned to become Africa’s financial center,” the report says. Casablanca, Morocco’s largest economic city, had ranked first as an emerging global financial hub in a report released in early September.  The big financial city of Casablanca has managed to attract business heavyweights and over 100 companies, including BNP Paribas, American International Group (AIG), international law firm Clifford Chance, Silk Invest, and Boston Consulting Group to name a few.  (MWN 28.12)

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 6.1  Turkey to Slide Back To World’s 19th Biggest Economy By Year’s End

Turkey will drop from 17th to 19th place on the list of the world’s biggest economies by the end of 2014, according to the World Economic League Table by the Center for Economics and Business Research (CEBR).  Turkey’s GDP will decrease to $767 billion by the end of the year, from around $827 billion in 2013 due to a loss in the Turkish Lira’s value, according to the report.  The CEBR expects the country will rise to 16th place on the list by 2024.

According to the report, which was prepared using the IMF’s 2013 data, growth forecasts, current inflation rates and exchange rates, Turkey will be able to regain its status in 17th by 2019, with an expected GDP of $1.52 trillion.  The CEBR notes Turkey, which aims to be one of the 10 biggest economies by 2023, will be able to reach 14th place by 2030.  (HDN 30.12)

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 6.2  Ankara in New Bid to Boost Control Over Internet

The Turkish government has announced more plans to exert greater control over the internet, with talks on a bill to give the prime minister and communication minister the power to block webpages without a court order if they threaten “national security and public order.”  According to this study, if a situation concerning public order is in question on matters concerning public order and national security, upon a demand by the related minister or the prime ministry, the Telecommunications Directorate will be able to temporarily remove content or block access.  However, still, there is an obligation to file for a court within 24 hours and an obligation for the implementation of the court order, said Transportation, Maritime Affairs and Communications Minister Elvan. 

In September, as part of an omnibus bill, the government granted TIB extraordinary authority to monitor internet users and block websites and their content without court permission.  The bill was, however, overturned by the Constitutional Court a month later.  (HDN 25.12)

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 6.3  Millions of Turks Bring In Less Than Poverty Level Income

Out of 29.3 million people who are able to work, 21 million – 72% – earn less than TL 2,030 a month, the amount set as the poverty line for one worker in Turkey, the Independent Turkish Health Care Workers’ Union reported.  According to the report, 21 million people whose monthly income is below TL 2,030 include 3 million unemployed, 3.45 million family workers 5.7 million agricultural workers, 5 million minimum wage earners and 4 million employees in the private sector.  (Zaman 26.12)

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 6.4  Draft Bill for Casino Resort Goes to Nicosia

The draft bill that will regulate the establishment, operation, function, control and supervision of a casino resort has been sent to the Cypriot parliament, after it was approved by the Council of Ministers.  The Ministry of Energy, Commerce, Industry and Tourism has invited interested parties to provide comments relating to the draft regulations, which have been posted by the Ministry.  The draft bill determines a single casino-resort operator, who may also issue sub-licenses to smaller gaming operators in other locations.  This will now send all the towns’ tourism bodies and hotel operators into a frenzy to lure the operator, with one argument saying the location should be a seaside town, while others prefer the capital or even the mountainous regions that need a tourism boost.  The draft bill also lays down the ground rules for gaming, amounts to be allowed and screening of locals to prevent issues of addiction, as well as age limits and access.  (FM 24.12)

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 6.5  Snap Election Risks Greek Lifeline

Greece faces snap elections next month that risk severing the international lifeline that has supported the country since it sparked Europe’s sovereign debt crisis in 2010.  Prime Minister Samaras said in a live broadcast in Athens on 30 December that he will recommend parliamentary elections are held on 25 January, almost 18 months before his coalition’s term was due to end.  Samaras spoke after he failed in his third attempt to persuade lawmakers to back his candidate for head of state, forcing the legislature’s dissolution.

Stocks and bonds plunged in Athens after the government defeat, recalling the height of the Greek financial crisis in 2012, with investors concerned a victory by the opposition Syriza party would jeopardize the terms of Greece’s rescue struck with international creditors.  Syriza, which opposes austerity measures imposed in return for the outside aid, leads Samaras’s New Democracy movement in opinion polls.

The trigger for the elections was the failure at the third and final attempt of Samaras’ bid to push through his nominee for president, Stavros Dimas.  Dimas attracted the support of 168 lawmakers in the 300-seat chamber, short of the 180 votes required.  Under the constitution, the legislature must now be dissolved and a date for elections set.  The International Monetary Fund, one pillar of the so-called troika of international creditors that includes the European Commission and the European Central Bank, said in an e-mailed statement that Greece faces “no immediate financing needs.”

The election comes as Greece’s economy shows signs of recovery, exiting in the second quarter a six-year recession that cost the country about a quarter of its GDP and tripled the unemployment rate.  (Bloomberg 29.12)

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 7.1  On Eve of 2015, Israel’s Population Hits 8.3 Million

Israel’s population has reached 8,296,000 on the eve of 2015, representing a 2% increase over 2014, according to a year-end report by the Central Bureau of Statistics.  Of Israel’s new citizens, 176,600 were newborn babies, while another 23,000 were new immigrants, representing around 11% of the population increase.  Some 6.218 million people, were Jewish, representing 75% of the population.  The next largest group, 1.719 million Arabs, accounted for 20.7% of the population.  The remaining 4.3%, some 359,000 people, were non-Arab Christians and others whose religion isn’t classified in the population registry.  The figures did not include an addition 190,000 foreign workers residing in Israel, nor those who entered the country illegally.   

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 7.2  Fast of the 10th of Tevet

The tenth of Tevet (Asarah BeTevet), the tenth day of the Hebrew month of Tevet, is a fast day in Judaism.  Falling this year on 1 January, it is one of the minor fasts observed from before dawn to nightfall.  The fasting commemorates the beginning of the siege of Jerusalem by Nebuchadnezzar II of Babylon, an event that eventually culminated in the destruction of Solomon’s Temple (the First Temple) and the conquest of the Kingdom of Judah (today southern Israel).

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 7.3  Largest Sports Event in Israel’s History – 2015 Tel Aviv Marathon

More than 40,000 runners are expected to descend upon Tel Aviv to participate in the 2015 Tel Aviv Marathon.  Taking place on 27 February 2015, runners from Israel and abroad will participate together in Israel’s largest international sports event.  42.195 km long, the marathon ends next to Ganey Yehoshua Park with an after-party for the participants and events throughout the evening.  A large expo will take place in Rabin Square from 22 – 25 February with runners’ kit distribution, lectures and booths run by world leading sports companies.  The traditional pasta party will happen the night before the marathon which will be a day of celebration with music playing along the route in keeping with the flair of Tel Aviv’s world famous Nonstop City life.

The marathon is as diverse as its participants and encompasses the entire city, passing through the heart of Tel Aviv and its main streets and sites.  The route incorporates the sensational Rothschild Boulevard and other tree-lined streets of the Nonstop City exhibiting the vast collection of Bauhaus buildings, the Azrieli sky scrapers, the 8km stretch of beach promenade along the Mediterranean, the Sarona Templars Colony, HaYarkon Park and the ancient city of Jaffa and its historical port.  Tel Aviv Marathon 2015 is expected to draw 150,000 people to participate in the plethora of events surrounding the full-marathon.  Additional sports events include a half-marathon, 10km and 5km races and a hand-cycle race.  (TA 18.12)

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 7.4  Syrians Constitute One-Fifth of Amman’s Population

Syrians constitute nearly 20% of Amman’s population.  Interior Minister Majali told a group of MPs that there are over 791,000 Syrians residing in the Jordanian capital, whose overall population has recently been estimated at four million.  In April this year, Amman Mayor Biltaji said that the population of the capital had risen to around four million due to various factors that include domestic migration and the influx of refugees from neighboring countries.  At a meeting with the Lower House Integrity Committee, Majali said that around 1.4 million Syrians currently live in the Kingdom, explaining that 639,000 of them are registered as refugees, while over 750,000 had been living in Jordan before 15 March 2011 when the Syrian crisis started.  According to the minister, Mafraq comes second in terms of hosting the largest number of Syrians as it is home to over 159,000, followed by the northern governorate of Irbid, which hosts more than 144,000 Syrians.  Official figures estimate that around nine million people live in the Kingdom, including 6.5 million Jordanians.  (JT 29.12)

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 7.5  Backlash Against Kuwaiti MP’s Call for Alcohol to be Legalized

A Kuwait MP is facing a backlash after he called for the Gulf state to legalize the sale of alcohol, claiming the country’s ancestors were tolerant of its consumption in the past.  Independent MP Nabil Al Fadhl made the comments as part of his aim to persuade lawmakers to reverse the ban on the consumption of alcohol, which has been in place since 1964.  Al Fadhl also called for the lifting of tough restrictions on musical concerts, which were imposed 10 years ago, and vowed to challenge an article in the Kuwaiti constitution banning non-Muslims from getting Kuwaiti citizenship.  Critics have come out in force against Al Fadhl’s call for the legalization of alcohol, which is banned under Islamic culture but sold in some Gulf countries, such as the UAE, Bahrain, Qatar and Oman.  The Islamist Social Reform Society also strongly condemned Al Fadhl’s comments.  (AB 28.12)

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 8.1  Compugen Enters Immuno-Oncology Collaboration with Johns Hopkins

Compugen announced the initiation of a multi-year research collaboration with Johns Hopkins University, School of Medicine.  The collaboration will focus on further evaluation of selected novel B7/CD28-like immune checkpoint candidates discovered by Compugen for the potential treatment of cancer.  This evaluation will include the candidates’ differentiation profile with respect to known checkpoints and their potential to serve either for monotherapy or in combination with other cancer treatments.  This collaborative research will expand Compugen’s ongoing assessment of the biology and mechanism of actions of its novel B7/CD28-like immune checkpoint proteins, and provide access to the world-class immuno-oncology research tools and expertise at Johns Hopkins University.  The specific studies under the collaboration will assist Compugen in further substantiating the potential of its novel proteins as targets for cancer immunotherapy.  It is anticipated that the results of this collaboration will significantly broaden the underlying scientific knowledge of Compugen’s targets and will support their translation toward the clinic.

Tel Aviv’s Compugen is a leading drug discovery company focused on therapeutic proteins and monoclonal antibodies to address important unmet needs in the fields of oncology and immunology.  The Company utilizes a broad and continuously growing integrated infrastructure of proprietary scientific understandings and predictive platforms, algorithms, machine learning systems and other computational biology capabilities for the in silico (by computer) prediction and selection of product candidates, which are then advanced in its Pipeline Program.  (Compugen 18.12)

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 8.2  $12 Million Investment in Nutrinia Brings Hope to Pre-term Infants

Nutrinia announced the successful completion of a $12 million round of funding.  The C round of financing was led jointly by internationally renowned investors OrbiMed, Jacobs Investment Company and Pontifax.  Funds from the round will be used to advance two multinational clinical studies to support registration of NTRA-2112 for treating pre-term infants and NTRA-9620 for treating Short Bowel Syndrome in the EU and the United States.  Nutrinia’s drugs are based on insulin, which has been shown to support the maturation and rehabilitation of the gastrointestinal tract.  In four separate clinical studies, Nutrinia’s insulin formulation in oral presentation was shown to expedite GI maturity and growth, and improve several other clinical and economic parameters. 

Nutrinia has an additional program that promotes enteral nutrition in infants with Short Bowel Syndrome (SBS), a malabsorption disorder.  Approximately 2,500 infants suffer from SBS annually in the US.  These infants rely on long term parenteral nutrition support that puts them at risk of liver disease, line infections and other complications.  Moreover, parenteral nutrition is extremely costly: The annual cost of parenteral nutrition is estimated at $180,000 to $570,000.

Ramat Gan’s Nutrinia is developing formulated oral insulin for gut maturation, focusing on dual orphan drug indications – premature infants and short bowel disease.  The company was founded in the NGT incubator, Nazareth.  The company was financed from inception by leading investors Jacobs Investment Company, San Diego and Maabarot group of Israel, as well as additional prominent investors such as Morningside ventures.  (Nutrinia 18.12)

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 8.3  Teva Announces FDA Approval of QNASL Nasal Aerosol

Teva Pharmaceutical Industries announced that the U.S. FDA approved QNASL (beclomethasone dipropionate) 40 mcg for the treatment of nasal symptoms associated with allergic rhinitis (AR) in children 4-11 years of age.  QNASL 40 mcg is a lower dose formulation of QNASL Nasal Aerosol (80 mcg), a waterless (non-aqueous) intranasal corticosteroid (INS) spray currently available by prescription for adults and adolescents (12 years of age and older) for the treatment of nasal symptoms associated with AR.  QNASL 40 mcg delivers effective symptom relief at one-fourth of the dosage approved to treat adults and is the first and only waterless hydrofluoroalkane (HFA) nasal allergy treatment to be approved for use in patients as young as four years of age.  The drug is expected to become available by prescription in February 2015.

Teva Pharmaceutical Industries is a leading global pharmaceutical company, committed to increasing access to high-quality healthcare by developing, producing and marketing affordable generic drugs as well as innovative and specialty pharmaceuticals and active pharmaceutical ingredients.  Headquartered in Israel, Teva is the world’s leading generic drug maker, with a global product portfolio of more than 1,000 molecules and a direct presence in approximately 60 countries.  (Teva 19.12)

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 8.4  FDA Approves Teva’s GRANIX Injection for Self-Administration

Teva Pharmaceutical Industries announced that the U.S. FDA approved GRANIX (tbo-filgrastim) Injection for self-administration by patients and caregivers.  With the approval of this additional administration option, physicians will soon have the flexibility to prescribe GRANIX for either in-office or at home use.  GRANIX, a leukocyte growth factor, is indicated for reduction in the duration of severe neutropenia in patients with nonmyeloid malignancies receiving myelosuppressive anticancer drugs associated with a clinically significant incidence of febrile neutropenia.  GRANIX has been commercially available in the U.S. since November 2013.  The currently marketed GRANIX syringe is indicated only for administration by a healthcare professional.  Teva plans to launch a new GRANIX syringe, for self-administration by patients and caregivers, in early 2015.

Teva Pharmaceutical Industries is a leading global pharmaceutical company, committed to increasing access to high-quality healthcare by developing, producing and marketing affordable generic drugs as well as innovative and specialty pharmaceuticals and active pharmaceutical ingredients.  Headquartered in Israel, Teva is the world’s leading generic drug maker, with a global product portfolio of more than 1,000 molecules and a direct presence in approximately 60 countries.  (Teva 23.12)

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 8.5  BioLineRx Out-Licenses Novel Skin Lesion Treatment to Omega Pharma

BioLineRx entered into an exclusive out-licensing agreement with Belgium’s Omega Pharma, one of the largest OTC healthcare companies in Europe, for the rights to BioLineRx’s BL-5010, a novel product for the non-surgical removal of benign skin lesions, for OTC indications in the territory of Europe, Australia and additional selected countries.  BioLineRx will retain the rights to BL-5010 in the United States and the rest of the world.  This licensing agreement significantly accelerates the pathway to commercialization for this asset, with the first OTC products expected to enter the market in 2016.  Under the terms of the agreement, Omega Pharma will be responsible for all development activities required to obtain regulatory approval in the licensed territory for at least two OTC indications.  In addition, Omega Pharma will sponsor and manufacture the product in the relevant regions, and will have exclusive responsibility for commercialization.

Jerusalem’s BioLineRx is a publicly-traded, clinical-stage biopharmaceutical company dedicated to identifying, in-licensing and developing promising therapeutic candidates.  The Company in-licenses novel compounds primarily from academic institutions and biotech companies based in Israel, develops them through pre-clinical and/or clinical stages, and then partners with pharmaceutical companies for advanced clinical development and/or commercialization.  (BioLineRx 23.12)

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 9.1  Plarium Launches Total Domination: Reborn for Android Devices

Plarium announced the global release of Total Domination: Reborn for Android Users.  This desert warfare-themed MMO strategy game is rebuilt for full compatibility on the Android platform and is now available for free on Google Play at:  The Android launch of Total Domination: Reborn builds on the continued success of the franchise.  In June 2013, the iOS version premiered as the top strategy game in the U.S. App Store and as a top 50 app across all game types.  Originally launched on social networks, the Total Domination franchise has garnered more than 30 million online users worldwide, helping Plarium become one of the top hardcore game developers for Facebook.  In order to ensure a smooth MMO experience, Plarium has invested a heightened level of community management never before seen in mobile gaming, allocating an entire staff dedicated to working with the players of Total Domination: Reborn.

Founded in 2009, Tel Aviv’s Plarium Global is dedicated to creating the best mobile and social experience for hardcore gamers worldwide.  With over 130 million registered users, they are consistently ranked among Facebook’s top hardcore game developers.  (Plarium 18.12)

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 9.2  Mellanox Delivers Open Ethernet Switch Abstraction Interface

Mellanox Technologies announced the addition of the Switch Abstraction Interface (SAI) to its Open Ethernet switch systems, for open management and control of Ethernet Switches.  SAI is the common software Application Programming Interface (API), which is in specification by the Open Compute Project (OCP), and is targeted at forming a common, hardware-agnostic, unified API for Ethernet switches.  By utilizing the generic interface provided by SAI as a common interface, applications and protocol stacks can operate seamlessly over any compatible switching hardware platform.  Mellanox will deliver SAI as an integral part of its OCP-compliant switch systems and will share it with the open source community.  Mellanox will continue to take an active part in the OCP and other Open Source community projects, by providing further enhancements that facilitate increased development and deployment of this and other projects.

Yokneam’s Mellanox Technologies is a leading supplier of end-to-end InfiniBand and Ethernet interconnect solutions and services for servers and storage.  Mellanox interconnect solutions increase data center efficiency by providing the highest throughput and lowest latency, delivering data faster to applications and unlocking system performance capability.  (Mellanox 16.12)

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 10.1 Record $15 Billion in Israeli High-Tech Exits in 2014

PwC Israel announced that Israeli high-tech exits doubled to a record $15 billion in 2014.  This has been by far the best-ever year for the country’s high-tech and biomed sector in terms of exits.  In 2013, Israeli exits totaled $7.6 billion and in 2012 exits totaled $5.5 billion.  The closest to 2014 was 2006 when exits totaled $10 billion.  In 2014, there were 70 IPOs and mergers and acquisitions in Israeli high-tech, up from 45 such deals in 2013.  Between 2005 and 2009 the number of deals (but not the total amount of money involved) surpassed 2014, with 76, 93, 88, 84 and 73 deals respectively.  In 2014, there were 18 IPOs totaling $9.8 billion compared with just $1.2 billion raised in 2013.  There were also mergers and acquisition worth $5 billion in 2014, down from $6.5 billion in 2013.  The fall shows that many more mature Israeli high-tech companies preferred an IPO to being acquired. 52 Israeli companies were acquired in 2014, compared with 39 in 2013.

PwC Israel found that the value of the average deal in 2014 was $212 million, compared with $170 million in 2013.  NASDAQ was the main venue for Israeli IPOs in 2014 with 67% of the offerings, London’s AIM saw 28% of offerings and the NYSE 5%.  In terms of sectors, semiconductors saw deals worth $5.7 billion in 2014 followed by IT and software with $3.08 billion, life sciences with $2.2 billion, internet with $1.8 billion, communications with $1.44 billion, and cleantech with $430 million.  (PwC Israel 30.12)

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 10.2 Israel’s Tourism Drops By 7% in 2014

Incoming tourism dropped 7% in 2014, in comparison with 2013.  Despite Operation Protective Edge, the number of visitors to Israel (including one-day stays with no overnights) totaled 3.3 million in 2014, down 7%, compared with 2013. 

2014 began well for tourism, with an 8% rise in the number of visitors to Israel in January-June, compared with the corresponding period in 2013.  The increase in incoming tourism (excluding one-day visitors) was an even greater 18%.  The trend was reversed with the beginning of Operation Protective Edge in July 2014; with incoming tourism plunging 30%, then stabilizing in recent months at a level of 20% below the preceding year.

Of the 3.3 million visitors in 2014, over 2.5 million (78%) came by air, down 2%, compared with 2013. 400,000 (12%) came by land, 5% more than in 2013, 240,000 (7%) were one-day visitors, down 26%, compared with 2013, and 90,000 (3%) came on cruise ships, 65% fewer than in 2013.  The cruise segment suffered the most from Operation Protective Edge.  Tourism’s contribution to the economy this year was an estimated NIS 41 billion.  (Globes 30.12)

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 11.1 ISRAEL:  Israel’s Policy Confusion on Natural Gas

Simon Henderson wrote in the Washington Institute on 23 December that the Israeli regulator’s decision to reopen a natural gas agreement because of a monopoly issue jeopardizes the country’s gas export potential and its ability to attract foreign capital, as well as threatening to complicate relations with Jordan, the Palestinian Authority and Egypt.

The Israel’s Antitrust Authority announced it was considering whether to cancel an agreement that allows Houston-based Noble Energy and Israel’s Delek Group to develop the country’s two biggest offshore gas discoveries, the Leviathan and Tamar fields.  The move would void an earlier compromise whereby the two companies could evade being labeled a cartel and retain ownership in return for selling two smaller fields, Karish and Tanin.

All the fields lay offshore northern Israel, with Leviathan – at eighty miles the farthest out – in waters several thousand feet deep.  Tamar, containing 10 trillion cubic feet (tcf) of gas, was discovered in 2009 and brought on-stream last year.  Its gas now generates about half of Israel’s electricity.  The appropriately named Leviathan (22 tcf) was discovered in 2010, but production won’t begin until at least late 2017.  Together, the two fields contain enough gas to satisfy Israel’s domestic needs for many decades, as well as providing a surplus for export.  Israel’s geographic position has occasionally prompted questions regarding whether exporting some of its gas would ever be commercially viable, although Noble and Delek have never accepted this view.

A final decision by the antitrust commissioner, David Gilo, will only be made after he holds a hearing, likely soon.  But the immediate impact has been to cast doubt on when Leviathan will be developed, if at all.  The first phase of the project, establishing seabed production systems and a pipeline ashore, is estimated to cost $6.5 billion.  Both Noble and Delek have been working to raise the funds.  Likely customers for the gas include a new power station at Jenin in Samaria, the Jordanian state electricity company, and a Spanish-owned, underutilized liquefied natural gas facility on Egypt’s Nile Delta coast.  The U.S. government has been a firm supporter of these prospective deals, seeing them as commercially logical as well as helping secure regional peace. If they were to be canceled, the impact on at least the Jordanian economy could be substantial.

If Noble and Delek are judged to be operating as a cartel, the Leviathan field will apparently have to be sold, and the new owner would be responsible for financing its development and securing new agreements with potential customers.

With elections in Israel scheduled for March, the surging public debate on natural gas will be further invigorated.  Considerable resentment has already been aired over the profits that could eventually accrue to Delek, whose owner, Yitzhak Tshuva, is a self-made billionaire personifying for some the inequalities in Israeli society.  But the central issue is the price being paid by the Israel Electric Corporation to the Noble/Delek consortium for the Tamar gas.  No world market price exists for gas; Israel Electric is paying $5.5 per million British thermal units, which is less than 70% of what the European Union paid and less than half what Japan paid for gas in November, but 25% higher than the U.S. “Henry Hub” price for the month.  Nevertheless, it is hard to see how notionally forcing the sale of Leviathan would drive down the price: the greater risk premium that a new investor would require would likely drive up costs, swamping any modest benefit from having two producers rather than one.

A key question is whether Noble Energy will lessen its commitment to developing Israel’s gas in these circumstances.  Its outgoing CEO, Charles Davidson, expressed frustration with Israel’s regulatory system in a September interview: “I can’t help being taken aback by the inability to decide on the part of the government and most senior regulatory echelons in Israel.  It is unreasonable and creates a constant atmosphere of uncertainty.”  A Noble spokesman said the decision “will impact Noble Energy’s continued investment.”  Noble is the only major foreign oil and gas company operating in Israel, staying on even after the government changed the terms of taxation for energy companies.  In these circumstances, it is possible the Leviathan field could never find a buyer.  Finding a buyer would also be challenging if, alternatively, the Tamar field were put up for sale.

Whichever way it goes, the decision of the antitrust commissioner could still be challenged in the courts.  Also, the government’s deputy legal advisor has just proposed a new approach to regulating the natural gas sector, although the immediate result will likely be the creation of a committee to discuss the matter – unless Prime Minister Binyamin Netanyahu, judged to see Israel’s gas as an important geopolitical card, intervenes.  On 23 December, he ordered Professor Eugene Kandel, the head of his National Economic Council, to check the implications of the antitrust commissioner’s actions.  To avert a decision that could handicap future U.S. policy, holiday plans or not, American officials should urgently point out to their Israeli counterparts the probable negative consequences of jeopardizing the deal.

Simon Henderson is the Baker Fellow and director of the Gulf and Energy Policy Program at The Washington Institute. His upcoming Policy Focus on exploiting Israel’s natural gas riches will be published in early 2015.  (TWI 23.12)

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 11.2  ISRAEL:  Bank of Israel Joins War Against Unreported Income

Globes reported that the Bank of Israel is joining the global war against tax evasion, and is ordering the banks to require from customers who are foreign residents a declaration that they have paid the legally required tax on the money in their accounts.  Sources inform “Globes” that Supervisor of Banks David Zaken recently sent the banks a draft circular on the subject of how to handle foreign residents.

In the draft, the Bank of Israel sets forth the binding procedures for the banks with their customers who are foreign residents.  Among other things, every foreign resident customer (both new and existing ones) will have to present data about the source of his wealth and income, and declare that he has paid the legally required taxes.  The customer will also have to waive banking secrecy with respect to the overseas law authorities.  The bank will employ measures to discover in which countries the customer must pay tax.  The bank will be required to clarify its procedures for classifying foreign resident customers as high-risk customers, and will have to determine who at the bank has the authority to approve opening an account, and to manage and conduct transactions for these customers.  The Bank of Israel also allows the banks not to open an account for foreign residents who do not provide all these particulars, and to freeze an account (i.e. to not provide banking services) in cases exposing the bank to the risk of violating overseas law.

“In recent years, we have been witnessing more determined and forceful activity by various countries aimed at locating money of their residents held outside the country.  This trend is liable to increase the exposure of Israeli banks to compliance risks and reputation risks, and to require them to take proper measures with both their existing customers and new ones,” the Bank of Israel said in explaining the new rules.

These rules allegedly constitute a burden for the banks, requiring them to utilize considerable bureaucracy, and are liable to cause foreign residents to withdraw their money.  At the same time, banking sources welcomed the Bank of Israel’s rules, which end the current lack of clarity about what the banks must require from their foreign resident customers.

In recent years, the war against tax evasion waged by the overseas tax authorities, especially in the US, has been stepped up, and the banks are an important player in this war.  The most prominent example of this trend in Israel is the investigation taking place in the US against a collection of banks around the world, including three Israeli banks – Bank Leumi, Bank HaPoalim and Mizrahi Tefahot Bank, on suspicion of helping their American customers evade taxes.  Bank Leumi has already made a provision of over $1.5 billion in its accounts in this matter, and it is likely that Bank HaPoalim and Mizrahi Tefahot will also pay considerable sums.

The Bank of Israel is anxiously following the investigation and the ensuing stiffening of regulations on tax evasion around the world.  In a “Globes” interview at the Israel Business Conference recently, Zaken said, “This is a heavy, significant and alarming fine.  In recent years, the US authorities have beefed up their legislation and enforcement against tax evasion by US citizens, and this has had an effect on international banking systems, including banks in Israel.  One of the issues under assessment is how to make sure that such events do not recur, and not necessarily in activities with US citizens in general, in order to reduce the risk of tax evasion by citizens of any country,” thereby hinting at the action he was planning.

The banks themselves were disturbed about the stiffer regulation.  They prefer losing customers to getting in trouble with the foreign legal authorities, and in the past two years have therefore established rules for dealing with foreign residents.  Declarations that the assets in their accounts were reported to the tax authorities have been required from several of them (especially Europeans), and the banks have even threatened to freeze or close accounts for which such affirmation was not provided.  These demands led to complaints by several customers, who felt that the bank had betrayed them by violating banking confidentiality.

Furthermore, not all the banks have enforced these requirements.  It appears that the lack of clarity and uniformity among the various banks in their requirements from customers and the customers’ complaints on the subject led the Bank of Israel to set uniform requirements for all the banks.  The new regulations are also liable to cause foreign customers to withdraw their money from banks in Israel.  The banks have been forced to require such declarations from their US customers (as part of implementation of the FATCA rules).

“Globes” reported that US customers have withdrawn an estimated $4 – 5 billion from banks in Israel.  At the same time, it is doubtful whether large amounts will be withdrawn.  Legal sources told “Globes” that money could not be withdrawn easily from banks when the reporting declaration required for it had not been provided.  (Globes 17.12)

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 11.3  LEBANON:  Lebanon’s Biggest Fight Is Yet To Come

On 18 December, Salman Andary posted in the Fikra Forum that this has without a doubt been one of the most difficult years for Lebanon in recent history.  The tiny country, which tried remaining neutral toward the atrocities and implications of the war raging in Syria, has fallen into the eye of the storm.  Lebanon has been the target of numerous violent attacks, the most significant of which were carried out by militant groups affiliated with the Islamic State in Iraq and al-Sham (ISIS) and Jabhat al-Nusra, al-Qaeda’s Syrian branch, against the Lebanese Armed Forces (LAF).

All eyes have been and continue to be on the LAF.  The Lebanese army is a cross-confessional institution and largely uninvolved in politics.  Nonetheless, it faces the particularly challenging tasks of maintaining security, pursuing terrorists, and protecting the lives of Lebanese citizens.  As of late, the greatest challenge for the army has been the abduction of dozens soldiers and policemen by the IS and Jabhat al-Nusra on the outskirts of the border town of Arsal and the Qalamoun region, which straddles the Lebanon-Syria border.  For the past five months, the Lebanese government has been involved in heated, but less than serious negotiations to secure the release of the soldiers and policemen.  After repeated threats, the militant groups acted by killing Ali Bazzal, one of the soldiers.

This past summer, the LAF demonstrated its counterterrorism capabilities when it pushed back Syrian militants in Arsal who were planning to storm several areas of the Bekaa Valley, which is inhabited by Sunnis, Shiites and Christians, and declare an Islamic “emirate.”  However, if the battle in Arsal is any indication of the future, the LAF will need additional support in the form of weaponry and equipment to face the spreading wave of terror.  To that end, Saudi Arabia has pledged $3 billion to finance an arms deal between Lebanon and France.

In order for the LAF to be effective, it needs the full backing of Lebanon’s political establishment.  Additionally, the government should carry out a prisoner swap with ISIS and Jabhat al-Nusra, even if the terms are distasteful, in order to free the security personnel who are still alive.  If not, ISIS and al-Nusra will continue killing the captives, yielding serious sectarian, political, and security implications for the country.  Absent a prisoner exchange, the military institution might decide to wage a difficult, but necessary, operation to clear the border region of militant groups.

Separately, Hezbollah’s involvement in the Syrian civil war has kept Lebanon mired in violence.  It is worth pointing out that Hezbollah – which has rejected a prisoner swap – does not comply with the will of the Lebanese state, nor does it respect the country’s sovereignty or government institutions, including the army.  In contrast to the LAF, which is beholden to the state, Hezbollah is fully independent.  It is present in a number of border areas, administers checkpoints, fights militants at will, and takes advantage of the porous border with Syria to send its fighters to battle.  Hezbollah carries out Iran’s agenda through its support for the Syrian regime and its interests in Lebanon – no more, no less.

According to an informed security source, the LAF needs greater autonomy in its decision-making as well as increased support from the government and the international community.  The same source added that tension within the Lebanese security establishment and a lack of procedural coordination among them in the war on terror will make matters for the military more complicated.  For example, the leaked news that Abu Bakr al-Baghdadi’s wife was arrested contributed to the breakdown of negotiations with ISIS and Jabhat al-Nusra, and it also led to the killing of Bazzal, the soldier.

The path to security and stability in Lebanon is long.  Yet despite the beginning of winter, which usually heralds a respite in militant attacks, the decisive battle between the LAF and groups such as ISIS and Jabhat al-Nusra is approaching, particularly since no one expects a deal securing the release of the abducted soldiers and policemen in the near future.  The LAF is facing challenges on several different fronts; it needs both domestic and international support to successfully overcome them.

Salman Andary is a Lebanese journalist based in Beirut.  (Fikra Forum 18.12)

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 11.4  JORDAN:  Jordan Year in Review 2014

The Oxford Business Group reported that the economy of Jordan is picking up strength with forecasts for higher year-on-year growth this year and next, while lower oil prices should provide at least a temporary respite from the kingdom’s energy burden.

According to data from the Department of Statistics (DoS), real GDP growth stood at 3% in the first half of 2014 helped by strong performances in mining, utilities and construction.  Jordan is on track for growth of 3% for the whole year, up from around 2.8% in 2013, according to a central bank official speaking in early December.  The IMF predicts growth of 3.25% for the year.

A continued drop in oil prices could substantially ease fiscal pressure for Jordan.  A 20% drop in oil prices, for example, brings savings of JD800m ($1.1b) to the kingdom’s JD4.08b ($5.8b) import bill, as well as reducing the budget deficit, the central bank governor said in October.  In fact oil prices have plummeted by around 40% since the middle of the year.  Growth is expected to accelerate to 3.5-4% in 2015 on the back of cheaper energy, stronger external demand and a pick-up in economic activity. 

However, one of the main challenges in 2015 is to reduce the primary budget deficit to 2.5% of GDP from a forecast 3.5% in 2014 after grants, mainly through a tighter control of expenditure.  The IMF is also calling for further tax reform by the government, on top of parliament’s expected approval of an income tax law by year-end.

Energy Import Burden

Energy imports, which account for 97% of national consumption, act as one of the largest drains on the economy.  According to official data, the cost of energy, including imported crude oil, oil products and natural gas reached 17% of GDP in 2013.  However, the price of oil falling to a five-year low in December augurs well for further increases in economic growth in 2015.

Jordan is taking measures to reduce its reliance on energy imports with a number of projects to boost renewable energy contributions underway.  In March, the government concluded the first round of its three-stage renewable power projects scheme to boost energy generation.  The government signed 12 projects, worth $570m and set to generate a total of 470 GW a year of electricity in the first phase, while it is eyeing a further eight deals at later stages of the project.  Jordan has issued a third round of requests for proposals for renewables projects under the scheme.

All the projects under the three phases are due to come on stream by 2018 and the government aims to generate 10% of national energy consumption from renewable resources by 2020.

Meanwhile, measures to offset costly diesel and fuel bills are being implemented.  A $65m liquefied natural gas terminal is being constructed at Aqaba, which will become operational mid-2015.  In addition to diversifying supplies, the project is set to save the kingdom as much as $500m a year in energy costs, after gas supplies from Egypt have been repeatedly interrupted and curtailed in recent years, forcing Jordan to pay for diesel and fuel bought in global markets.

Reforming the Investment Environment

Increasing foreign direct investment is high on the list of priorities for the government.  November saw the first meeting of the Higher Investment Council, which is charged with drafting strategies to attract investment to the kingdom and is responsible for cultivating a more investor-friendly environment as well as boosting private sector participation in the economy.  The council, which is made up of both public and private sector representatives, was created under the Kingdom’s Investment Law to unite previously disparate bodies concerned with investment into a single body.

In a further bid to increase private sector participation, a public private partnership (PPP) law came into force in November.  Although the government has already signed a number of PPP contracts, the field was subject to various legal ambiguities prior to the passage of the law, reducing Jordan’s ability to harness private capital for the development of public infrastructure.  Measures contained in the law in addition to the clarification of PPP contracts include the creation of a council to approve all government contracts with the private sector.

The authorities are increasingly keen to involve the private sector in infrastructure development as the government’s persistent fiscal deficit has constrained its capital investment budget.  One avenue of support for the private sector is likely to come through increased European Bank for Reconstruction and Development (EBRD) investments in infrastructure projects.  These will help the government handle challenges in electricity production, as well as the water and energy sectors, which have been exacerbated by the growing influx of refugees from Syria.

An announcement by US President Barack Obama in December, that economic aid to Jordan would rise by $1b to a total of $3b over the next three years, was widely welcomed.  The country is coping with an influx of nearly 1.4m Syrians, expanding the population by about 20%.  (OBG 23.12)

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 11.5  JORDAN:  IMF Staff Concludes Visit to Jordan

A team from the International Monetary Fund (IMF) led by Kristina Kostial visited Amman during 10 – 16 December to take stock of recent economic developments and discuss with the authorities their planned economic policies for 2015 and beyond.  At the end of the visit, Ms. Kostial issued the following statement:

 “Jordan continues to weather well a difficult external environment.  The conflicts in Syria and Iraq continue to weigh on its economy, but activity is gradually picking up.  Growth is expected to increase to 3.1% this year while unemployment has declined to 11.4% in the third quarter.  Inflation has also declined – primarily reflecting a slowdown in food and fuel prices – and stood at 2.4% year-on-year in November.  The current account deficit continues to narrow and is estimated at 7.9% of GDP for 2014 as a whole.

“The program is expected to remain broadly on track through 2014.  The central government budget has been tightly managed, and international reserves remain at comfortable levels.  While the electricity company NEPCO is affected by shortfalls in gas flows from Egypt, this is expected to be broadly offset by lower costs of oil imports.

“The economic outlook is positive. Growth is expected to increase to 3.8% in 2015 while the current account would further narrow to 5.9% of GDP.  The economy is being helped by lower oil prices which will in particular lower in the next few years the import bill and NEPCO’s losses, offsetting potential shortfalls in gas supply from Egypt.  Jordanian citizens will have more money to spend on non-fuel items, including on domestically-produced goods.  The benefits, however, could diminish over the longer term if cheaper oil reduces remittances, export and tourism receipts and Foreign Direct Investments (FDI) from oil exporting countries.

“We held constructive discussions on macro-economic policies for 2015.  The budget will provide further fiscal consolidation so as to put public debt on a firm downward path.  It will be complemented by sustained implementation of the energy strategy and is expected to be supported by a new income tax law, which will contribute to a fairer tax system.  Monetary policy will continue to maintain high foreign exchange reserve buffers.

“Structural policies are needed to more forcefully move forward with the agenda for more growth and jobs.  Of particular importance are improvements in the quality of public institutions; the business environment; and labor markets, including by re-examining public sector hiring and compensation, helping new entrants to the labor market acquire skills needed in the private sector, and enhancing female labor market participation.  In this regard, the mission welcomes the authorities’ new medium-term economic strategy, Vision 2025, the implementation of which could raise the standard of living of all Jordanians.

“The next mission to review Jordan’s economic performance is tentatively scheduled for early March 2015.  The IMF looks forward to continuing its dialogue with Jordan and supporting its national program of economic reforms.”  (IMF 22.12)

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 11.6  JORDAN:  Jordan Aims to Reduce Unemployment

Norma Naamat posted on 6 December in Al-Monitor that Jordanian Planning and International Cooperation Minister Ibrahim Saif considers unemployment one of the major obstacles to Jordan’s economy.

Speaking to Al-Hayat, he said Jordan encountered significant challenges over the last years as a result of external factors, and noted that he implemented many reform programs and plans, which have achieved great success in order to meet these challenges.  Yet, the Jordanian economy is still suffering from some [challenges], most prominently high poverty and unemployment rates.  He explained that King Abdullah II instructed the government on the need to develop a socio-economic vision, through which the features of the path toward economic recovery for the next 10 years are determined, with a focus on value-added and high productivity sectors.

Although the unemployment rate declined from 12.9% in 2009 to 12.6% in 2013, Saif said it’s still high, as a result of some factors such as the demographic shifts and lack of harmony between the outputs of the various education stages and labor market requirements, as well as the competition between migrant labor and local labor force.

When asked about the impact of Syrian refugees on the high unemployment rate, he replied: “The Syrian crisis has significantly affected all of the Jordanian fields, and placed pressure on infrastructure and services, in addition to the labor supply and demand.  Most of the jobs were taken by low-skilled and low wage migrant workers in the construction, agriculture and manufacturing sectors.  Migrant labor is competing with the Jordanian labor in occupations that used to be exclusive to Jordanians.”

He noted that growth rates were mainly associated with foreign direct investment in the real estate and construction sectors, which heavily employ migrant labor.  Thus, unemployment rates have continued to increase from 2003 to 2008, despite good economic growth, which reached nearly 6% during the same period.  He added the government sought to focus on encouraging private sector investment in the sectors that require a great deal of skills, in which Jordan has a competitive advantage in the economy and has showed a real ability in the exportation field.

He added that Jordan needs to achieve a nearly 6% annual growth rate, as a result of the growth in the sectors that require a great deal of skills, to reduce unemployment in the future.  These growth rates should be accompanied with sectorial reforms designed to improve companies’ employment environment in a fair and balanced manner.  He explained that 35,000 job opportunities were created for males in 2013, and 19,000 for females, and that more than three-quarters of these jobs were created by the private sector, and about 21% by the public sector.

Regarding the projects financed by the Gulf grant and job opportunities, he said the total value of the Gulf grant is $4.9 billion.  They are equally financed by Saudi Arabia, the UAE, Kuwait and Qatar, and [the grant] is designed to pay for development projects in Jordan over the next five years.  He emphasized that the preservation of growth rates and reduction of unemployment rates are the two main challenges to the Jordanian economy.  Jordan has strong human capital, and a good numbers of skilled labor.  He noted that in the next phase, the work will focus on the encouragement of small and medium enterprises and entrepreneurship, which generate employment opportunities.

In this context, economic expert Joseph Mansour said there are several reasons leading to high unemployment, most importantly the informal economy, whose objective is to evade taxes, and the desire to work in the public sector.  He added that employment rates in the public sector are nearly three times the rate of population growth, which has encouraged the youth to be employed in the public sector, where the work conditions, health and social insurance, stability and low working hours are provided.

He noted that other factors, such as public transportation means, are absent in Jordan, and that the private sector is weak and doesn’t rewards the employee with an income that goes in line with the effort made, and sometimes health and social insurance are not provided.

He added that the investments that are supposed to generate job opportunities go to the unorganized sectors, such as the construction sector that attracts migrant labor and brings harm to the country.  He pointed out that unemployment rates in the high-growth periods in the past reached 13.7%, while this average decreased during the economic recession between 2009 and 2013 to 12.6%, which means that the period of economic growth brought damage to the Jordanian labor force and did not increase employment rates.  He said that “We are in dire need for the economic growth rates to be accompanied with the employment of Jordanians, not the immigrants.”

He continued that unemployment challenges are reflected in the weak relationship between economic growth, employment, demographic factors, the trends in the demand for labor, employment policies in the public sector, inefficient programs for employment, low levels of training, and a weak public transport sector which prevents employees from remaining in their place of residence and working in another province and thus increases unemployment rates in the provinces.

The Department of Statistics released its quarterly report that showed that unemployment rates in Jordan for the third quarter of the year reached 11.4%, down from 12% in the second quarter.  Qasim al-Zoubi, general director of the Department of Statistics has attributed the decline to several reasons, including employment policies in the public and private sectors, which contributed to the employment of additional Jordanians.  He added that unemployment rates for males decreased and those for females increased, and was high for university graduates as it reached 17.9% compared to other educational levels.

He pointed out that 57.7% of the total unemployed are high school or [university] graduates, and 42.3% of the total unemployed do not hold high school degrees.  (Al-Monitor 16.12)

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 11.7 GCC:  Oil Price Drop Highlights Need for Diversity in Gulf Economies

Countries of the Gulf Cooperation Council (GCC) will have to adjust the incentives of workers and firms to encourage them to work and produce in the non-oil tradable sector if these economies are to succeed in diversifying their economies, a new IMF study says.

With oil prices declining by 40% since June, the importance of diversification is once again highlighted.

While governments in the region have made some progress toward economic diversification in recent years, much remains to be done. The strategies pursued thus far have yielded mixed results, according to the report.

To make significant progress toward reducing their reliance on oil, GCC governments need to change the incentive structure of the economy to encourage individuals to work in the private sector and induce firms to look beyond domestic markets for new export opportunities, the authors say.

New Growth Model Needed

The GCC growth model – which relies on oil as the main source of export and fiscal revenues – has delivered strong economic and social outcomes.  Over the years, GCC governments have increased public sector employment and spending on infrastructure, health, and education.  This has helped raise standards of living and support private sector activity, particularly in such sectors as construction, trade and retail, transport, and restaurants.

But the current growth model has weakness, the report points out.  Greater diversification would reduce exposure to volatility in the global oil market, help create private sector jobs, and establish the non-oil economy that will be needed in the future when the oil revenues dry up.

Why have the diversification policies pursued to date by GCC governments fallen short of their goal?  The paper examines the experience of other oil-exporting countries and draws possible lessons for the GCC.

Case Studies in Success

Historical experience offers few examples of countries that have been able to successfully diversify away from oil, particularly when their oil production horizon is still long.  A number of obstacles often stand in the way of diversification, such as the economic volatility that is induced by the reliance on oil revenues or the corroding effect that oil revenues have on governance and institutions.  Economies rich in oil also often see a decline in competitiveness of other economic sectors caused by the appreciation of the real exchange rate as resource revenues enter an economy, a phenomenon known as Dutch disease.

Success or failure appears to depend on the implementation of appropriate policies ahead of the fall in oil revenues. Malaysia, Indonesia and Mexico offer perhaps the best examples of countries that have been able to diversify away from oil, while Chile has had some success in diversification away from copper.

While each of these four countries followed its own path, a number of common themes are evident.  First, diversification took a long time and took off only when oil revenues began to dwindle.  For example, Malaysia started its export-oriented strategy in the early 1970s and experienced rapid growth in export sophistication in the 1980s – 90s.  It took more than 20 years to reach a level of sophistication comparable to some advanced economies.

Second, successful countries focused on putting in place the incentives to encourage firms to develop export markets and to support workers in acquiring the skills and education to get jobs in these new expanding areas.  In addition to focusing on creating a stable economic environment and a favorable climate for doing business, this entailed:

  • Making investments in high-productivity industrial clusters, even when there was no prior comparative advantage.  The early experience of Malaysia, Mexico and Indonesia showed that import substitution or reliance on labor intensive manufacturing led to inefficient firms with limited scope for income and productivity gains.  Changing their approach and despite starting from a low-technology base, these countries increased their export sophistication by focusing on specific manufacturing clusters that led to an upgrading of technology (see chart).  Chile used export subsidies and public-private partnerships to establish new firms and upgrade technical skills in specific sectors.
  • Developing horizontal and vertical linkages from industrial clusters.  Creating networks of local suppliers around existing export industries can expand the employment potential of a given sector, although care should be taken that the local source sectors are efficient and do not lead to a loss in competitiveness.  Malaysia entered downstream and upstream activities based on rubber and palm oil to build linkages with the rest of the economy and upgrade research capabilities and technology.  Mexico developed linkages around the automobile sector.
  • Using foreign capital to promote technological transfer. In the 1980s, Indonesia attracted foreign capital through the creation of free trade zones, provision of tax incentives, and the easing of tariff restrictions and non-tariff barriers.  Similar policies were implemented in Malaysia and Mexico.  In Mexico, accession to the North American Free Trade Agreement played an important role in attracting foreign direct investment that facilitated the development of the automobile sector.
  • Using export subsidies, tax incentives, and access to finance to facilitate risk-taking by entrepreneurs, especially small and medium-sized enterprises.  Entering new sectors is risky for private sector firms.  To some extent, export subsidies and tax incentives can help reduce the risk for entrepreneurs in infant industries.  In addition, financing and support provided by development banks, venture capital funds, and export promotion agencies can also reduce risk.
  • Making investments in training to ensure the availability of high-skilled workers. Creating industry clusters necessitates human capital and skills relevant to the sector, along with required infrastructure and industrial facilities.  For instance, Malaysia and Mexico focused on training and skill-upgrade of workers, and sponsored workers for foreign training.  Over time, these investments in training paid off in terms of building a high-skilled work force.


 Lessons for the GCC

What can the GCC countries learn from these experiences?  Greater economic diversification will require realigning incentives currently facing firms and workers, the IMF report says.

To date, policies to support diversification have focused on securing a stable economic environment, improving the business climate, and investing in infrastructure and education.  These policies are all important steps in the right direction and they have achieved some degree of diversification of GDP, but they do not tackle the distortive effect that the distribution of oil revenues has on incentives.

In particular, high wages and generous benefits encourage nationals to seek employment in the public rather than the private sector, while high government spending in a relatively protected domestic environment encourages firms to produce non-tradable goods and services. In short, despite some progress, these policies have not achieved much diversification in exports, which are still mostly oil.

Measures to alter incentives are critical to spur diversification.  These should include moving away from using the public sector as the employer of first and last resort, ensuring that the education and training systems provide workers with the skills needed for private sector employment, and developing stronger social safety nets to guarantee minimum income levels and support job search activities.

On the firm side, measures are needed to address the lack of competition in some domestic markets, reduce incentives for low productivity production, and encourage exports, the report says.  (IMF 24.12)

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 11.8  ARABIAN GULF:  Gulf Arab States Brace for Tough Times Over Oil Price Plunge

Gulf countries are bracing for tough times as vital oil revenues fall and after they missed a golden opportunity to diversify their economies in a decade of unprecedented windfalls, analysts say.  The six nations of the Gulf Cooperation Council (GCC) — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) — could soon start reeling from falling oil prices, which have dropped by half from their 2014 highs to around $60 a barrel.  Pumping about 17.5 million barrels per day, GCC countries are forecast to lose at least half their oil revenues, or around $350 billion a year, at current price levels.

Oil revenues make up around 90% of income for most GCC states and with prices now below budget forecasts, their governments are looking at certain deficits next year.  Spending cuts are sure to follow — and possibly even the region’s first taxes — raising fears of public discontent and eventually an economic slowdown.  The oil price drop has also sent Gulf stock prices plummeting, wiping out billions of dollars of market value across the region and hurting major private firms like developer Emaar Properties and builder Arabtec Holding.

According to leading Kuwaiti economist Jassem Al Saadun, the heart of the problem is that Gulf states failed to seize on surging energy revenues to build up their economies outside the oil sector.  “Gulf states have missed an important opportunity to reform and build a real diversified economy,” Saadun said.  “Public spending has soared to new record highs and it was not for vital infrastructure projects to diversify the economy,” he indicated.  “It was mostly for wages, salaries and subsidies… and handouts for buying political loyalty especially after the Arab Spring.” 

Reserves only ‘temporary cushion’

Economists are warning that even with the huge reserves many have built up, a prolonged drop in oil prices will hit Gulf states hard.  “The prevailing growth model for most oil-exporting countries has left them vulnerable to a sustained decline in oil prices,” the International Monetary Fund said in a research bulletin last week headlined: “It is high time to diversify”.

Ratings agency Standard & Poor’s (S&P) is warning that an extended decline in oil prices will likely slow the Gulf economies, reducing spending on their massive infrastructure projects and hitting the private sector.  S&P has lowered its outlooks for Saudi Arabia, Oman and Bahrain, though it has maintained their ratings because of their impressive reserves.

The IMF has said that — barring Oman and Bahrain, which are already in deficit — GCC states will not be greatly affected in the short-term as they can tap into reserves estimated at $2.5 trillion.  But these funds, the IMF warned, will “only provide a temporary cushion”.  In some parts of the region, the belt-tightening has already begun.

Regional powerhouse Saudi Arabia has insisted it will maintain its high spending levels by tapping into reserves.  But Kuwait has ordered major spending cuts and is considering lifting petrol and electricity subsidies.  In the UAE, Dubai has announced plans to raise electricity and water charges. Similar measures are expected by other countries.

‘Options are no longer easy’

According to Moody’s Ratings, Gulf countries are likely to start with cuts in spending on “non-strategic investment projects” but will eventually face tough choices.  “Slowing or even reversing the growth in current government spending, including subsidy reforms, will be more difficult as governments seek to meet social welfare demands,” the agency said.  As oil revenues in Gulf states surged from about $100 billion in 2000 to $729 billion last year, public spending grew from about $150 billion to $547 billion, according to IMF figures.

But the spending focused mostly on items like wages and subsidies, not crucial capital investment.  “Current expenditure has surpassed capital spending by miles,” indicated M.R. Raghu, head of research at Kuwait Financial Centre (MARKAZ).  Cutting that spending now is difficult as it means taking courageous decisions on wage and subsidy reforms, experts say.

The Gulf states have adopted a generous cradle-to-grave welfare system with highly subsidized services and fuel and no taxation.  The World Bank has urged GCC states to start immediate cuts to energy subsidies, which cost them more than $160 billion annually, and Saadun said it was “inevitable” they would have to start introducing taxes.  Such moves would prove deeply unpopular.  But Saadun said putting them off would eventually make more drastic efforts necessary, which could spark the kind   of social unrest that has hit other countries in the region.  “Yes, these measures are politically sensitive, but the alternative is an Arab Spring in the Gulf. Options are no longer easy,” he added.  (JT 20.12)

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 11.9  KUWAIT:  Fitch Affirms Kuwait at ‘AA’; Outlook Stable

On 19 December, Fitch Ratings has affirmed Kuwait’s Long-term foreign and local currency Issuer Default Ratings (IDR) at ‘AA’.  The Outlooks are Stable.  The Country Ceiling has been affirmed at ‘AA+’ and the Short-term foreign currency IDR at ‘F1+’.

Key Rating Drivers:  Kuwait’s IDRs reflect the following key rating drivers:

Kuwait is resilient to the decline in oil prices that has occurred so far in H2/14.  Very high per capita oil exports have consistently generated large fiscal and current account surpluses and surpluses in excess of 20% of GDP are forecast each year to 2016, despite the prospect of lower oil prices.  Fitch estimates that the FY14 fiscal breakeven oil price is $48/b and the 2014 external breakeven is $40/b.  These are among the lowest of all rated sovereigns.

An exceptionally strong sovereign balance sheet is the key support for the ratings.  Fitch forecasts that sovereign net foreign assets will rise to 269% of GDP at end-2014, the strongest of all rated sovereigns, and that the net creditor position will rise to 54% of GDP.  Both are expected to improve over the forecast period.

Current account surpluses are substantial.  Kuwait posted the second largest current account surplus of any Fitch-rated sovereign in 2013, at 39.7% of GDP, the third consecutive year that the surplus exceeded 30% of GDP.  Fitch expects the surplus to decline in line with our forecast of lower oil prices, but still forecasts a surplus of 25% of GDP in 2016.  The surplus has not been below 20% of GDP since 2003.

Fiscal surpluses are consistently in double digits.  The general government surplus was the largest of all Fitch-rated sovereigns at an estimated 34.9% of GDP in FY14 (ending March).  The fiscal breakeven oil price is low, at $48/b in FY14, but so is capital spending, which is around 10% of total spending, one-third of regional peers.  Despite rising spending and falling oil revenues, the surplus is forecast to only fall to 25% of GDP in 2016.

There are tentative signs that the non-oil economy is gaining momentum under a more pro-government parliament, reflected in the award of several projects in recent months and private sector credit growth at around a five-year high.  Fitch expects non-oil growth of around 4% over 2014-16.  Headline real GDP growth will be lower, based on Fitch’s assumption that oil production will be cut in both years.

Structural indicators are generally weaker than rating peers.  Human Development, Doing Business and World Bank governance indicators are well below the ‘AA’ median, but GDP per capita is substantially above the median.  The economic policy framework is a weakness, reflecting limited monetary autonomy and a weak fiscal framework.  The regulatory framework for the capital markets is being improved and that for the banking sector is being strengthened further.  Geopolitical risk affects the whole region.

The economy is heavily dependent on oil, which accounts for around 40% of GDP and the bulk of fiscal and external revenues.  Oil reserves are large and cheap to extract and production capacity is being increased.  The authorities have a limited economic policy toolkit, but substantial buffers can temper the impact of swings in oil prices.

Rating Sensitivities

The Stable Outlook reflects Fitch’s assessment that upside and downside risks to the rating are currently well balanced.  At forecast oil prices, Kuwait will continue to accumulate assets, further enhancing its capacity to deal with economic shocks.

The main factors that individually or collectively could lead to positive rating action are an improvement in structural weaknesses such as reduction in oil dependence, and a strengthening in governance, the business environment and the economic policy framework.

The main factors that, individually or collectively, could lead to negative rating action are:

  1. Sustained low oil prices that erode fiscal and external buffers.
  2. Spill over from a regional geopolitical shock that impacts economic, social or political stability.
  3. Adverse domestic political developments, although these would have to be much more severe than the 2012 protests.

Key Assumptions

Fitch forecasts Brent crude to average $83/b in 2015 and $90/b in 2016.  Production cuts of 5% in 2015 and 1% in 2016, likely in line with some other large producers, are forecast in order to support the oil market.  Kuwait could likely tolerate much lower prices over the forecast period without facing undue pressure on its rating.

Fitch assumes that regional geopolitical conflicts will not impact directly on Kuwait or on its ability to trade.  Fitch assumes that the current parliament will maintain its broadly constructive relationship with the government, any leadership succession will be smooth, and that the domestic political scene will be stable.  (Fitch 19.12)

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 11.10  BAHRAIN:  Fitch Revises Bahrain’s Outlook to Negative; Affirms at ‘BBB’

On 19 December, Fitch Ratings revised the Outlooks on Bahrain’s Long-term foreign and local currency Issuer Default Ratings (IDR) to Negative from Stable and affirmed the IDRs at ‘BBB’ and ‘BBB+’, respectively.  The issue ratings on Bahrain’s senior unsecured foreign and local currency bonds have also been affirmed at ‘BBB’ and ‘BBB+’, respectively.  The agency has simultaneously affirmed Bahrain’s Country Ceiling at ‘BBB+’ and Short-term foreign currency IDR at ‘F3’.

KEY RATING DRIVERS – The revision of the Outlook to Negative reflects the following key factors and their relative weights:

HIGH:  The fall in oil prices has exacerbated the already challenging fiscal situation. Fitch estimates Bahrain’s fiscal breakeven oil price to be around $130/bl, compared with a forecast for Brent to average $83/bl in 2015.  Fiscal flexibility is constrained by the very low share of non-oil revenue of just 14% of total revenues.  Wages and subsidies together account for 70% of total budget spending.

The 2015 budget has been delayed until at least March due to November’s elections.  Fitch has few details on the fiscal strategy that will be adopted or specific measures that may be proposed.  Fitch’s forecasts assume a cut back in capital spending, some moderation in current spending growth, and incremental measures to raise non-oil revenue and reduce subsidies by better targeting.  However, these measures are unlikely to make major inroads in the deficit, which is forecast to increase by 2ppts to 7.7% of GDP in 2015 on a general government basis, including estimated extra-budgetary spending (The state budget deficit is forecast to rise from an estimated 3.7% of GDP in 2014 to 6.2% in 2015).

Government debt has continued to rise, to reach a forecast 47.2% of GDP at the end of 2014 and 52% in 2015.  The ratio has moved further ahead of the ‘BBB’ median of 39.2%.  Moreover, Fitch’s forecasts show the ratio continuing to rise in the medium term, even assuming some fiscal adjustment measures in the delayed 2015 budget.

MEDIUM:  Talks between the government and opposition aimed at reaching a political compromise ahead of the November elections came to nothing and the opposition boycotted the elections, which went ahead without major incident.  There are no plans for further talks and the political stalemate continues. Fitch does not expect a comprehensive political solution to be achieved in the near term.

The affirmation also reflects the following factors:

Financing flexibility is good.  The government has domestic bank deposits of an estimated 14.4% of GDP.  These were drawn down during the last oil price fall in 2009 and were also used in 2014. Fitch assumes further drawdown during the forecast period.  The domestic capital market is quite deep: a single two-year development bond issued in September financed the whole of this year’s estimated budget deficit of 5.6% of GDP.  Bahrain has also become a regular Eurobond issuer, most recently raising $1.25b at 30-year maturity in August.

Growth has accelerated this year, with both hydrocarbon and non-hydrocarbon activity surprising to the upside.  Oil sector growth averaged 6% in 9M14, while non-oil growth rose to 5.2% in Q3/14.  The latter is largely due to the increased activity triggered by GCC-funded infrastructure projects, particularly in housing.  Of the $4.4b of projects approved to date (out of a total $10b promised over 10 years), work has now commenced on 28% of them.  This is a substantial increase from six months ago when virtually no projects had commenced. GCC funded projects are off budget and will not be affected by any fiscal consolidation effort.  Fitch’s forecasts of 4.3% overall GDP growth this year and next are higher than six months ago.

Bahrain’s external position is stronger than its ‘BBB’ rated peers.  It registered a current account surplus of an estimated 6.7% of GDP in 2014 (quarterly balance of payments data are not published) and although this will decline next year, Fitch still expects a figure in excess of 4% of GDP.  Although gross oil exports are over 50% of current external receipts (CXR), Bahrain also imports oil from Saudi Arabia to refine exported products.  Net oil exports are only 25% of CXR.  Bahrain is also a net external creditor at 150% of GDP, well above the ‘BBB’ median.

GDP per capita and broader human development and business environment indicators exceed the ‘BBB’ median.  The strong regulatory framework and local skill base, combined with low costs, are key supports to the financial sector.

Bahraini banks have generally reported sound profitability during 2014.  Capitalization remains solid and asset quality improved overall.  The smaller Islamic banks have continued to merge.  The sector is in the process of preparing for the implementation of Basel III regulations, and the Central Bank is overseeing measures aimed at improving corporate governance and oversight.

Rating Sensitivities

The rating Outlook is Negative.  The main factors that individually, or collectively, could lead to a downgrade include:

  • Difficulty in reining in fiscal deficits, resulting in a continuing rise in the government debt burden.
  • Sustained oil price weakness that would exacerbate an already challenging medium term debt trajectory
  • Severe deterioration of the domestic security situation.

The main factors that, individually or collectively, could lead to a stabilization of the rating Outlook include:

  • Significant fiscal measures which reduce the budget deficit and are consistent with the stabilization of the debt-to-GDP ratio in the medium term.
  • A broadly accepted political solution that eases political unrest.
  • A recovery in oil prices that improves public finances.

Key Assumptions

Fitch forecasts that Brent crude will average $83/bl in 2015 and $90/bl in 2016. Production levels are assumed to increase marginally to reflect capacity upgrades.

Fitch assumes that Bahrain will continue to benefit from savings through the implementation of GCC development projects financed by Kuwait, Saudi Arabia, and the UAE. Agreement on commitments from Qatar is at a less advanced stage.

Fitch assumes there will be no challenge to the rule of the royal family or the current succession.

Fitch assumes no material deterioration in the internal security situation but also does not expect a comprehensive political solution to be achieved in the near term.

Bahrain is in a volatile region and its rating factors in existing tensions and conflicts which are assumed to continue. Fitch assumes that regional geopolitical conflicts will not impact directly on Bahrain or on its ability to trade.  (Fitch 19.12)

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 11.11  EGYPT:  Fitch Upgrades Egypt to ‘B’; Outlook Stable

On 19 December, Fitch Ratings upgraded Egypt’s Long-term foreign and local currency Issuer Default Ratings (IDR) to ‘B’ from ‘B-‘.  The Outlooks are Stable.  Fitch has also upgraded the issue ratings on Egypt’s senior unsecured foreign and local currency bonds to ‘B’ from ‘B-‘.  The Country Ceiling has been upgraded to ‘B’ from ‘B-‘ and the Short-term foreign currency IDR affirmed at ‘B’.

Key Rating Drivers – The upgrade of Egypt’s IDRs reflects the following key rating drivers and their relative weights:

High:  The government has embarked on a policy course designed to tackle some of the serious structural weaknesses that have emerged or intensified in recent years.  Fuel subsidy cuts and tax hikes have been implemented as part of a clear five-year fiscal consolidation strategy.  Power shortages are being tackled, overdue payments to oil companies reduced, investment laws revised and disputes with foreign investors settled.  The measures appear to have strong political backing.

Medium:  Consolidation, stronger growth and lower commodity prices will pull down the fiscal deficit, although it will remain large compared with peers, at a forecast 10.2% of GDP in FY15 (to end June).  Excluding grants, the deficit is forecast to narrow by 6.3% of GDP in FY15. Fuel subsidies have been cut, new taxes introduced and existing taxes reformed in a largely front-loaded reform program.  Introduction of VAT, which will broaden the tax base, is expected later in FY15.  The fiscal position will benefit clearly from lower oil prices, and with wheat prices also well below the budgeted level, will add to the savings on the subsidy bill in FY15.  Savings will be partially offset by higher social spending and spending commitments in the new constitution.

Fiscal consolidation and stronger nominal GDP growth are forecast to put the debt/GDP ratio on a downward trend, ending a multi-year deterioration.  Nonetheless, debt/GDP is around double the peer median, at 90.5% at end FY14 and is only expected to fall to 85.8% of GDP by end-FY16.  Domestic banks remain ready buyers of government debt and pension funds and insurance companies are becoming more active.

Economic growth is picking up and is expected to strengthen.  Year-on-year growth rose to a provisional 6.8% in Q3/14, the highest since 2008, from 3.7% in Q2/14.  Consumption and investment have led growth, driven by greater political stability, increased confidence in economic policy and government-led investment projects.  Major infrastructure projects are underway and further commitments are anticipated at a high-level conference scheduled for March.  Fitch forecasts that real GDP growth will rise from 2.1% in 2013 to 4.7% in 2016.  Growth is vulnerable to setbacks if reform stalls.

Political stability has improved under President Sisi. In Fitch’s opinion, this reflects a desire for stability, a clampdown on political opposition and an improving economy.  Parliamentary elections are likely to be held in March 2015, with individuals favoring the president expected to win a majority.  Nonetheless, significant sections of the population are disaffected and there is serious sporadic violence in North Sinai.  World Bank governance indicators have deteriorated in recent years and are below peers.

Egypt’s IDRs also reflect the following key rating drivers:

Reserves have stabilized at below three months of current external payments, although foreign exchange rationing and GCC inflows have kept the current account deficit low.  Prospects for the balance of payments look brighter over the next couple of years, but Fitch expects only a marginal improvement in reserve coverage, as stronger inflows of foreign exchange will be used to satisfy unmet demand and pay down profit arrears to oil companies.

GCC inflows have pushed up gross external debt, but it remains below peers at an estimated 17% of GDP at end-2014.  The new funds are on a concessional basis, so external debt stock and service indicators are still stronger than peers.  Net external debt is well below peers at just 1.9% of GDP. GCC support is increasingly expected to take the form of FDI.  The rating is supported by the absence of a recent history of debt restructuring.

Rating Sensitivities:  The Stable Outlook reflects Fitch’s assessment that upside and downside risks to the rating are currently balanced.  The main factors that could lead to a positive rating action, individually or collectively, are:

  • A track record of progress on fiscal consolidation leading to a decline in debt/GDP.
  • Reforms to the business environment that lead to increased investment.
  • Sustained economic recovery

The main factors that, individually or collectively, could lead to negative rating action are:

  • Failure to anchor the fiscal deficit on a downward trend or an unwinding of recent fiscal consolidation measures.
  • Prolonged disruption to GCC inflows that strains the balance of payments and fiscal position.
  • Serious and sustained security incidents that undermine economic activity.

Key Assumptions:

Fitch assumes the government remains committed to its program of fiscal consolidation and local banks remain willing and able to finance the deficit.

Egypt is assumed to continue to receive GCC financial support, in a variety of forms, over the forecast period. Fitch has not factored an IMF lending program into its forecasts, but believes one would be easily achievable if required by the authorities.

The political environment is assumed to be more stable than 2011-2013, although sporadic and at times serious attacks on security forces are assumed to continue and underlying political tensions will remain.

Fitch forecasts that Brent crude will average of $83/b in 2015 and $90/b in 2016. In both cases these are below the government’s assumptions in its five-year fiscal plan, meaning Fitch assumes savings on the budgeted subsidy bill.  (Fitch 19.12)

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 11.12  TUNISIA:  After Elections, Now Comes the Hard Part for Tunisia

Sarra Hlaoui posted on 24 December in Al-Monitor that the Tunisian electoral marathon has finally ended after three constituent events took place in the last three months: legislative elections and two presidential election rounds, giving birth to the Assembly of the Representatives of the People (ARP) and a new president for Tunisia.  But we must recognize that the election to the top post has by far monopolized national and international public opinion.

So, it is good to report the positive turn of events after the official proclamation by the High Independent Authority for Elections of the results of the second round of the presidential elections.  With that announcement on 21 December, Moncef Marzouki congratulated his opponent Beji Caid Essebsi, thus recognizing Essebsi’s victory.  This new situation is comforting and is likely to reduce tension in some parts of southern Tunisia, specifically in al-Hamma in Gabes governorate.

Before that and throughout the campaign for the second round, the question arose whether the bases of the Islamist party Ennahda would vote for incumbent President Marzouki or abstain from voting.  We did not know whether these bases would follow the directives of Rachid Ghannouchi or stick to the message of Habib Ellouze, one of the hawks of the Islamist movement.  On his official Facebook page, he clearly stated that the Shura Council has never advocated neutrality and that it has given its members freedom to vote for whomever they choose.

“Since we know the convictions of our bases, we are confident that they will vote for Marzouki,” Ellouze said. The message was seen as a clear directive in favor of voting for the incumbent.

According to an initial analysis of the second round of the presidential elections, Marzouki won 44.32% — nearly 1.37 million votes — thus getting more votes than in the first round.

In other words, Marzouki received a massive vote — as much as in the first round, if not more — from Ennahda, Congress for the Republic and Tayyar supporters, as well as possibly from Tayyar al-Mahabba of Hechmi Hamdi and a few thousand votes from the supporters of Ahmed Najib Chebbi and others who were disappointed by the small electorate of Mustapha Ben Jaafar.

Regarding Nidaa Tunis’ candidate, Essebsi, his 1.73 million votes suggest that he received the votes of the Free Patriotic Union, el-Moubadara and part of the Popular Front.

This configuration of Marzouki’s electors should be taken into consideration in the next political stage because Nidaa has, in theory, three levers of power: the presidency of the republic, the presidency of the ARP and the head of the government.

The question that arises is: Can Ennahda be part of the future government as it wants?  There is no clear answer, but such participation is difficult to imagine.  Essebsi had clearly said that all depends on the outcome of the presidential elections and, of course, the nature of the vote. Nidaa Tunis has always accused Ennahda of doublespeak.

It is also logical that the party that won the parliamentary and presidential elections not trust a party whose leaders have no control over their base, as appeared to be the case with Ennahda.  Its base acted as it pleased and obeyed ambitious people rather than its seasoned and charismatic leaders.

This presidential election gave birth to a new face for the Islamist party, which used to be seen as disciplined and obedient to its leaders.  Moreover, observers expect a real stir inside the Islamist party.  The party may adopt a new direction, or there may be a split between moderates and the hard-liners.

Looking forward, we are eagerly awaiting to see how the formation of the Cabinet will be approached.  Some even say the head of government may come from outside Nidaa or other political parties.  Some ministers in the Mehdi Jomaa Cabinet may stay in their posts.  Most important, what is the future of Mohsen Marzouk, the rising star of Nidaa Tunis, and the political landscape in general?

These questions and many others are being asked by analysts to better understand the future of the next government.  The coming phase looks delicate, since, for the winners, the hard part starts now.  These winners are looked upon favorably now, but they are called upon to live up to the expectations.  (Al Monitor 24.12)

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 11.13  ALGERIA:  Algeria’s Winter of Discontent

The Algerian regime faces tough decisions this winter as it copes with falling revenue and low oil prices.  President Abdelaziz Bouteflika has called the situation “worrisome” and is pushing Saudi Arabia to cut its oil production to force prices up.

The last Arab republic without an Arab Spring, the People’s Democratic Republic of Algeria is one of the most opaque police states in the world.  At 77, Bouteflika is serving his fourth term despite suffering from a stroke in 2013.  He rarely appears in public and often travels to France for health reasons.  Behind the scenes, the army’s generals and the intelligence chief wield enormous power and are referred to as “le pouvoir.”  Decision-making is a mystery.

Oil and natural gas sales are key to the economic prosperity of the almost 40 million Algerians, 70% of whom are under the age of 25 and 30% are younger than 15.  Unemployment and underemployment are severe, and housing shortages are endemic.  Fortunately, the government has $190 billion in reserves to cover deficit spending.

Last weekend, the government announced the first of what is expected to be many cost-cutting measures.  Public sector job hiring will be frozen in 2015.  The public sector is Algeria’s largest employer, covering 60% of the job market. Infrastructure projects such as highways are expected to be shelved next, and extensive subsidies for electricity and education are also in danger of cuts.

The oil minister called for OPEC to cut production to stop the decline in oil prices. In practice, this means calling for Saudi Arabia to cut its oil production of 9.6 million barrels per day, something the kingdom has ruled out.  With over $750 billion in reserves, King Abdullah bin Abdulaziz is content to let oil prices stay low for now and drive alternatives such as shale oil production out of business.  Algeria is more desperate.

The last time oil prices crashed for an extended period in the 1980s, it set the predicate for Algeria’s disastrous 1990s.  Massive unrest and elections won by Islamists provoked a military coup that led to a prolonged civil war in which at least 160,000 died.  Algeria’s KGB-trained intelligence czar, Gen. Mohamed Mediene (aka Toufik) played a key part in the 1992 coup and has been the head of the Intelligence and Security Department ever since.  He has run the secret service longer than any other intelligence chief in the world.  Memories of the horrors of the civil war have been crucial to discouraging an Arab Spring in Algeria for the last four years.  High oil prices were also critical, allowing the welfare state to buy off unrest.

The “pouvoir” is not likely to cut military or security expenditures.  The defense budget has doubled in the last decade to over $10 billion in 2014, the highest in Africa.  The 2015 budget allocates $13 billion for defense and another $7 billion for the Interior Ministry, a total of $20 billion for security.  Over 500,000 soldiers, gendarmerie and police are on active duty.

The generals see danger at every corner.  Morocco is the historic enemy and the Western Sahara dispute a long-standing sore.  The collapse of the state in Libya and the ongoing civil war is a major concern.  The 2013 attack on the In Amenas gas plant by Mokhtar Belmokhtar’s al-Qaeda spin off was staged from Libya.  Belmokhtar is believed to be hiding in Libya and planning further attacks.  The mainstream al-Qaeda in the Islamic Maghreb remains a terror threat at home.  The Sahel states are all weak and dependent on French military power.  Algiers is habitually skeptical of France and Paris’ intentions in Africa.

Memories of the 1990s, an efficient and omnipresent police state and high oil prices have kept unrest from threatening Bouteflika for four years.  The regime’s leadership weakness has been masked by generous welfare payouts.  The $190 billion in reserves are a cushion, but look for Algiers to press Riyadh for assistance with increasing urgency.

Saudi Arabia is not close to Algeria and the Saudi royals much prefer Morocco.  But King Abdullah does not want to see the Arab Spring revived in the Arab world.  The Saudis backed the Algerian generals in the coup two decades ago and persuaded the United States to do the same.  The king will watch Algiers carefully this winter.  (Al-Monitor 29.12)

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 11.14  MOROCCO:  Morocco Unveils Gas Plan

Yassine Majdi posted on 19 December in Al-Monitor that on 16 December in Rabat, Minister of Energy and Mining Abdelkader Amara presented his domestic gas plan.  The plan, which has a total budget of $4.6 billion, calls for the massive importation of liquefied natural gas (LNG) to Morocco to reduce the kingdom’s dependence on other energy sources and diversify its methods of electricity production.

Natural gas is one of the cleanest energy resources available, even though burning it produces carbon dioxide.  Natural gas is primarily used for heat (heaters, ovens) and electricity.  In 2010, it ranked third in the global energy mix and accounted for 22% of global energy supply, according to the oil company Total.  The largest producer of natural gas is the United States.  Algeria is the 10th largest producer of this energy source, according to the CIA World Factbook.

LNG is natural gas cooled to -160 degrees Celsius (-256 degrees Fahrenheit).  This cooling reduces its volume and transforms it, as the name suggests, into a liquid. Reducing the volume of natural gas makes it easy to transport.

Why make a gas plan now?

One of the main objectives of the Moroccan gas plan is to “meet the domestic electricity demand,” according to Amara.  The demand for electricity is expected to rise by 6.1% annually between 2014 and 2016, and the gas plan aims to respond to this demand.

Another objective is to reduce Moroccan energy dependence.  The Moroccan energy balance is negative, particularly due to imported oil, which represents almost 61% of energy consumption of the kingdom. L NG will represent 13% of the energy mix by 2025.  Another factor Amara takes into account is the November 2021 expiration of the transit agreement of Algerian gas through the Maghreb-Europe pipeline.

What are the main steps?

The gas plan will start being implemented in January 2015.  From that date, the government will contact the main LNG suppliers to sign contracts.  These contracts will represent a volume of 3 to 5 billion cubic meters of gas.

At the legislative level, a “gas code” will be written by Amara’s department and submitted to the legislative branch by June 2015 if all goes well.  Between September and November 2015, an agreement will be made between the state, the National Board for Electricity and Drinking Water (ONEE) and select Moroccan partners to set the components of the project.  ONEE will create a tender for the transformation of natural gas into energy.

All this should make the first gas-powered power plants operational by 2021, according to the minister’s projections.

What is the cost?

Amara estimates the investments necessary for the implementation of the gas plan at $4.6 billion.  Morocco is counting on private investors as well as national and international institutions to cooperate with ONEE to provide financing for the project.  Concession contracts are planned, which means that the infrastructure will be used by investors.

The necessary infrastructure will require a budget of $267 million.  A gas terminal will be built in Jorf Lasfar and its construction will cost $800 million.  Another $600 million will be needed to build a marine jetty capable of accommodating vessels transporting LNG.  Another $400 million will be devoted to the construction of storage space.  Finally, the construction of a pipeline to transport the gas requires an investment of $400 million.  The pipeline will be about 400 kilometers (250 miles) long and pass through Mohammedia and Kenitra.  The remaining $245 million will be spent on building ONEE power plants.  (Al-Monitor 19.12)

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 11.15  TURKEY:  The Islamic State and Partisanship in Turkey

Lauren Williams reported in Sada on 17 December that the war in Syria has polarized Turkey’s political landscape and reignited hostilities between Islamists and secularists.

The war in Syria has not only tested Turkey’s economic and institutional ability to absorb over 1.1 million refugees, but has deepened latent tensions between secularists, leftists, Kurds and Islamists.  In particular, the increasingly visible presence of the Islamic State (IS) in Turkey has polarized the country, with opponents of the Erdogan government saying its support of the Syrian opposition has allowed IS to flourish, even generating homegrown support for militant Islam.

Historically, political parties in Turkey have tended to rally constituents not on a policy basis, but on ethnic, religious, and ideological grounds.  The Republican People’s Party (CHP) – now the main opposition – identifies with secularist, Kemalist and Alevi voters.  By contrast, the center-right Islamic Justice and Development Party (AKP) appeals to its Muslim constituents and has appeared to balance its moderate Islamic platform with democratic values and economic success.  Indeed, the AKP’s flourishing relations with Western allies, particularly NATO and the United States, helped make Turkey the poster child for political Islam during the last decade.  But tensions have resurfaced in Turkey with greater intensity, particularly between secularists and Islamists.

The Erdogan-led AKP has taken a hard line against Assad, insisting on his departure and calling for the international community to intervene militarily on the side of the opposition.  As part of this policy, Turkey has hosted and funded Syria’s political and military opposition; but it has also brought about criticism at home and abroad for an open door policy that has seen thousands of foreign jihadi fighters enter Syria through its border.  IS has garnered significant domestic support, as proven by reports of jihadi cells and hospitals operating in Turkey, clashes at Istanbul University between Turkish supporters and opponents of IS, and the thousands of Turkish foreign fighters in Syria.  In July, for instance, a widely-circulated video of IS supporters praying in a central Istanbul park to mark the end of Ramadan triggered a storm of controversy.  In response to the video, CHP Vice President, MP Sezin Tanrikulu, asked the Minister of Interior whether the site was an IS-affiliated training camp and whether police and the Gendarmerie Command had given permission for the group to congregate.  (Erdogan has strongly dismissed claims that the AKP government supports IS, calling it a smear campaign cultivated by his political opponents.)

Nonetheless, a series of violent clashes between IS supporters and their leftist opponents at Istanbul University occurred on 26 September, when Islamists wielding sticks and knives attacked leftist students protesting the brutality of the group.  More than 40 people, including eight IS supporters, were arrested following a similar clash in October, according to local media reports.  In the aftermath, other students accused authorities of targeting leftists and not doing enough to contain the Islamists.

The clashes were reminiscent of the “dark days” of Islamist-secularist tensions in the 1980s.  For example, in May 2013, a double car bomb in Reyhanli on the Syrian border killed 53 people.  Rival accusations of responsibility were made against both IS and the radical leftist nationalists from the Turkish Peoples Liberation Party/Front (THKP/C), illustrating the growing threat of domestically-grown militant movements on both sides of the political divide.

While Turks have remained largely wary of intervention in Syria, many Sunnis in the country are sympathetic to the revolutionaries, expressing solidarity with what is perceived to be the oppression of the Sunni majority by a secular military regime.  Leftists and secularists, meanwhile, as well as the country’s main ethnic Kurdish minority and Alevi populations, who complain the ruling AKP discriminates against them, have tended to oppose the government’s position on Syria and criticize its perceived support for radical Islamists.  As Turkey’s Syria policy became more contentious, leaders from all parties have ratcheted up emotional and polarizing language in campaign speeches, drawing on the Syrian file to rally their constituents on ideological or sectarian grounds.  For example, in the lead-up to his successful win in the August presidential election, Erdogan accused opposition CHP leader Kemal Kilicdaroglu, an Alevi, of supporting Assad because of his religion, drawing criticism for equating the two similar but different sects (Alevi and Alawite).  The election results, in which Erdogan won with a 51.9% majority, also revealed the deep-rooted geographical voting patterns reflecting the split between urban secularists and conservative rural Turks.

Among Turkey’s minority communities, tensions were exhibited in sporadic incidents along Turkey’s border region from early on in the uprising. In the Hatay region (home to the largest population of the country’s estimated one million Alevis), in Gaziantep, (where hundreds of thousands of Syrians reside), and in the Kurdish-dominated south.  Hatay in particular has witnessed small-scale CHP-affiliated leftist protests against intervention and in support of Assad, and there have been consistent reports of small-scale clashes between leftists and Syrians migrating to the area.  In August, for example, police intervened in Gaziantep after a large group of Turks attacked an apartment housing Syrians they alleged were connected to a man who stabbed his Turkish landlord.  Residents blamed Erdogan’s policy on Syria for the outbreak of violence.  The resounding CHP victory in Hatay province in May’s local elections was locals’ direct punishment for the AKP policy on Syria, which brought an influx of refugees and militants that is destabilizing the economy and worsening the area’s security situation.

But events in Kobani have most clearly brought the deep fissures in Turkish society to a new head.  At least 37 people were killed over four days across the country in early October when the armed forces suppressed violent protests and clashes by Kurds, along with supporters from leftist camps and Erdogan opponents, for reluctance in siding with the Kurds against IS in Kobani.  Abdullah Ocalan, leader of the Kurdistan Workers’ Party (PKK), declared that all peace talks with the Kurds would be off if Kobani fell, and warned of a revived Kurdish military insurgency.  The presence of more religiously conservative and radical militant Kurdish groups like the Free Cause Party (Huda-Par) and the Revolutionary People’s Liberation Party (DHKP) at protests also fueled fears of a return to violence and increased popularity for secessionist Kurdish movements.

Turkey faces a host of policy challenges with all options pointing to greater engagement in Syria.  Whether the Erdogan government softens its hard line on Assad, collaborates more cooperatively with the United States on anti-IS policy, or hardens its position by resisting cooperation with the Kurds and continuing to back the mainly Sunni opposition in Syria, it risks rallying some sectors of society while alienating others even further.  Syria has meant the stakes have become higher for all domestic actors in Turkey, stoking old rivalries in what may prove the unraveling of the greatest period of stability in modern Turkish history.

Lauren Williams is a freelance journalist based in Beirut and Istanbul. She was formerly editor for the Middle East and North Africa at The Daily Star newspaper in Beirut.  (Sada 17.12)

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 11.16  TURKEY:  Erdogan Continues to Consolidate Power

Semih Idiz posted on 16 December in Al-Monitor that Turkish President Recep Tayyip Erdogan’s latest moves, from the “shadow cabinet” he is establishing, to the crackdown on the Gulen movement’s media outlets — which he is believed to have instigated — show that he is consolidating his power to fulfill his dream of becoming Turkey’s paramount leader for the next decade.

Erdogan, however, does not have it all his way yet, even if the present constitution can be tweaked by him to legitimize his exercise of executive powers.  Drafted under military tutelage following the coup on 12 September 1980, the current constitution retains articles that enable the president to monitor and head the Cabinet, for instance.

The constitution, nevertheless, defines Turkey as a parliamentary system in which executive power is vested in the prime minister and his Cabinet.  This appears set to remain an annoyance for Erdogan, if not a hindrance, unless the constitution can be amended.

As matters stand, the opposition uses every occasion to highlight Erdogan’s authoritarian tendencies and his disdain of the separation of powers principle, and to snipe at Prime Minister Ahmet Davutoglu as a mere instrument of the president’s will.  “At a time when we expect Turkey to become a truly pluralistic democracy where everyone is heard and everyone is allowed to express themselves, we see it slowly turning into a system ruled by one man,” according to Mehmet Bekaroglu, a deputy head of the Republican People’s Party (CHP).

Addressing party members in Trabzon over the weekend, Bekaroglu said Turkey was being run under a de facto presidential system in which the president calls the shots, while the prime minister acts merely as a “coordinating minister.”

Bekaroglu recalled that Erdogan’s intentions had been made apparent by his senior adviser, Binali Yildirim, who declared recently that Erdogan would head Cabinet meetings in 2015.  If the constitution cannot be amended to make him the de jure head of the executive, Erdogan will continue to face such criticism at home and abroad.

He will also find that the Constitutional Court — the only branch of the judiciary he still lacks full control over — will remain a potential source of irritation.  Erdogan’s plans, therefore, ultimately require that a new constitution is drafted, or the present one is amended, to turn Turkey into the presidential system that he and his supporters in the ruling Justice and Development Party (AKP) desire.

This in turn requires a two-thirds majority for the AKP in parliament, following the general elections planned for June 2015, which will enable it to draft its own constitution and submit it to a referendum despite objections from the opposition.

The calculation is that a strong turnout for the AKP in the 2015 elections will also translate into strong support for the AKP’s draft constitution.  In a speech at a meeting with Anatolian businessmen on 6 December, which was also attended by Erdogan, Deputy Prime Minister Numan Kurtulmus spelled out what they were aiming for:  “God willing, democratic steps will be taken after the 2015 elections, starting with a presidential system based on a new constitution, a new law on political parties and a change to parliamentary regulations,” Kurtulmus said.

Numerous questions remain despite such neatly laid out plans for Erdogan’s political future.  What happens if the AKP, for instance, when winning the elections, does not muster the majority necessary to achieve the things that Kurtulmus alluded to?  How long can Erdogan continue to force the limits of the current constitution in such a case?  Will Davutoglu and members of his Cabinet be happy to remain under Erdogan’s shadow and tutelage, having won the elections, even if they do not get the numbers required to change the constitution?

At any rate, Erdogan’s political ambitions appear set to produce confusion if his current de facto status continues.  Diplomats in Ankara, for instance, will have to figure out whether their true interlocutor as foreign minister is Erdogan’s “shadow foreign minister” Ibrahim Kalin or Foreign Minister Mevlut Cavusoglu, who already appears insignificant in Erdogan’s scheme of things.

Foreign investors and businessmen, on the other hand, will not know whether they should factor in the levelheaded remarks of Ali Babacan, the deputy prime minister in charge of the economy, or the “harebrained notions” — to cite a Western diplomat who spoke to Al-Monitor on the topic — of Erdogan’s chief economic adviser Yigit Bulut when formulating at strategic decisions.

Bulut avidly supports Erdogan’s belief that an “international interest rate lobby” is out to undermine Turkey, and insists Ankara should sever all ties with the European Union and enter strategic partnerships with Russia and China instead.

There is also the question of the “Gul faction” within the AKP, namely the supporters of former President Abdullah Gul who was sidelined during the process that elevated Erdogan to the presidency.  Will the dissatisfaction over Erdogan’s interference in the government and the AKP result in some in the AKP looking for a way out under Gul?

These questions will spring up with increasing frequency in the coming weeks and months as the country prepares for the June elections.  Many believe those elections will be a crucial turning point for Turkey’s democracy, which already appears tarnished to the outside world due to Erdogan’s ambitions.

Despite such questions that appear problematic for Erdogan, and the negative image he is projecting for Turkey abroad, the odds remain to Erdogan’s advantage at home according to Dogu Ergil, a prominent political scientist and sociologist.  “What Erdogan is doing as president is of course contrary to the system as we know it, but it is hard to argue that it is totally unconstitutional, even if the constitution says Turkey is a parliamentary system,” Ergil told Al-Monitor.

Ergil pointed out that the constitutional articles Erdogan is relying on give Turkey the appearance of a semi-presidential system.  He nevertheless underlined that under the present constitution the president can only provide “guidance,” but cannot interfere in the functions of the elected government.

Ergil believes, however, that there is little to prevent Erdogan from continuing to act as he is doing, even if the AKP comes out of the general elections unable to change the constitution and transform Turkey into a presidential system.  He also thinks it unlikely that Davutoglu, or members of his government, will become more assertive against Erdogan in the future.

“Erdogan sees his legitimacy resting in the fact that he is the elected choice of the people. He is also the spiritual leader of the AKP whose members and supporters see him as the leader of a revolution that brought them to prominence from obscurity, and carried them from poverty to relative wealth,” Ergil said.  He added, “He is more to them than just a political figure, and therefore he is unlikely to face meaningful opposition from within the AKP, unless there is a serious change in the overall situation.”

Erdogan remains a divisive figure for Turkey whose populist outbursts also land Ankara in difficult international situations, and not to mention the confusion he causes for potential investors with his off-the-cuff economic conspiracy theories.  None of this, however, appears to be working against him at home, whatever it may be doing to his international reputation.  (Al-Monitor 16.12)

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 11.17  TURKEY:  The Massacre Turkey Hopes Alevis Will Forget

Al-Monitor noted that tragedies from Turkey’s recent past are returning to the agenda like a recurring nightmare.  One such disaster that cannot be swept away is the massacre at Maras, a southeast city from which almost 80% of its Alevi residents were forced to flee to major cities and abroad.  The more the state tries to forget such incidents, the more interest they arouse.

This year a major observance was planned to commemorate the Maras killings, but the government brought in 2,200 police and gendarmes from neighboring cities to try to prevent people from accessing Maras.  Those who came in buses were not allowed to enter the city.  Those who managed to get in individually organized a small observance.  The ruling Justice and Development Party (AKP), which profusely discusses the Dersim massacres, for which it blames the main opposition Republican People’s Party (CHP), cannot tolerate even the mention of incidents like Maras, which implicate nationalists and conservatives.

In Maras during 19 – 26 December 1978, explosives and gun fire — amid provocations of “Communists are burning mosques” and “Our religion is at stake” — resulted in the deaths of 111 people, according to official sources, or 150, according to civil society sources.  Most of the victims were Alevis.  More than 200 Alevi houses were set on fire, and at least a hundred businesses were destroyed.

In the aftermath, 804 people were tried in court. Some were punished, but the real culprits and planners were never unmasked.  What happened in Maras was one of the factors behind the 12 September 1980 military coup.  Many believe the deep state blamed the killings on nationalists and religious people to justify the September coup.

Where are the graves?

So why is the memory of Maras still a bleeding wound?  According to Selin Yalincakoglu, a representative of the Yalincaksultan Alevi Cultural Association, “It has been 36 years, and we still don’t know where the victims are buried.  People at least want to know where their relatives and friends are buried.  They don’t have a grave to recite their lament.”

Popular narrative says that while the Alevis were fleeing to save their lives, the bodies left behind were buried in a mass grave.  Yalincakoglu said, “The state knows where they are buried. But it keeps silent and closes the doors on us when we ask.  Moreover, the state continues to commit crimes by erasing the traces of the massacre.”  Angry at the state, she added?, “The municipality is scratching the houses set on fire and thus covering up the traces of the massacre.  There was only one such house left, but now they knocked that down also.”

Adding salt to the wound is the state’s refusal to allow any remembrance of the victims.  For Yalincakoglu, the state’s warnings against the alleged threat of provocation is merely an excuse.  “If there is provocation, then the state should take action against the provocateurs, not us.  They haven’t allowed us into Maras for the past five years.  They tell us to go to Narli to hold the observance although the massacre didn’t happen there.  Anyhow, if we go as a group, they won’t let us go to Narli either.  This year they brought in 15 times more police than participants.  They had identity checks at five checkpoints.  All we want is to be told where the graves are and to be allowed to remember.  But the state is doing all it can to make us forget.”

Alevis’ unequal status and AKP ideology

The question most asked today is why the state is comfortable discussing the 1937-38 Dersim massacre but bans everything to do with the Maras killings.  Yalincakoglu believes the AKP is reacting reflexively as the state.  She said, “These massacres couldn’t have been carried out without the blessing of the state.  The AKP doesn’t want the state to emerge as the perpetrator after serious investigations.  It is easy to commemorate Dersim, because there are no witnesses left.  Witnesses to Maras are alive.  The state doesn’t want people to understand that it committed massacres to prepare ground for a coup.”

Sebahat Tuncel, a member of parliament from the pro-Kurdish People’s Democracy Party (HDP), said a commission of inquiry has been proposed in parliament, but the government objects to it.  Tuncel told Al-Monitor, “the local administration was inclined to allow the observance this year, but it was banned by firm instructions of the AKP.  They harp on Dersim just to use it as political leverage against the CHP.  Our request was to face up to all the massacres.  The state is still not ready for equal citizenship for Alevis.”

The historian Ayse Hur told Al-Monitor that the state is evading investigations because the victims have only a feeble voice and because it was a plot by the deep state: “The massacre was quickly buried in social memories.  In 1977, 231 people were killed in political violence and 2,800 in 1980.  On average, 20 people were being killed daily.  Therefore Maras was not unique.  We had a long stretch of amnesia after the 12 September coup.  Asking to deal with the past is something new in this country.  It came with the strong pressure against the state by Kurdish victims’ groups domestically and Armenians in the international arena.  In Maras, it was the leftists and subdued Alevis who were the victims.  Don’t expect the perpetrators to remember it.  Nobody remembers the 1934 Thrace incidents against Jews, the 1942 Wealth Tax.  The deep state lobby is still functioning.  We still don’t know the background of the 6 – 7 September 1955 pillages [against Greeks].  The AKP, out of its instinct for self-preservation, feels the need to use legal and illegal instruments of the state.”

Hur also noted, however, that if there is strong public demand, or if the AKP feels the need for a revised agenda, it could bring Maras down from the shelf in a way unrevealing of the deep state.

The journalist Ali Topuz made the following assessment about the Maras situation: “Maras was a pogrom.  Paramilitary bodies used by the deep state and their armed units, that is, the ultranationalist militants, were involved.  For the state to face up to this reality means facing up to its own crimes.  Those involved in such affairs won’t volunteer to settle accounts unless pressed hard politically.  The state’s homogenous, Turkish Sunni society project was the real cause of frequent similar incidents.  The 6-7 September looting, 1974 Cyprus operation, cleansing Greeks from Bozcada and Gokceada were all done the same way.  Soldiers who couldn’t stop the Maras massacre showed that they had the power to cope with all other armed groups.  The AKP’s determination to avoid settling the accounts arises from its close affiliation with religious ideology.  The AKP’s narrative doesn’t change: ‘Traitor provocateurs plotted these incidents to blame the innocent people and to blame Sunni Islam.’  Such a mind-set will not agree that the state is responsible.  Otherwise it wouldn’t ignore legality to prevent the Maras observance and wouldn’t invite the number one suspect of the Maras massacre, Okkes Kenger, to an Alevi workshop.”

There is a long list of incidents the state refuses to discuss. As long as that list remains in the dark, a robust and peace-loving society will remain a distant dream.  (Al Monitor 24.12)

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