Fortnightly – May 2, 2007

On 29 April, the Olmert government abrogated a clause banning the state from purchasing or marketing natural gas from the Palestinian Authority, thereby removing the main obstacle to a contract with BG Group (British Gas). The move was supported by 21 ministers and three were opposed. In March, the cabinet postponed a decision whether to sign a contract with British Gas, after Minister of Foreign Affairs Livni, Minister of Defense Peretz and Minister of Strategic Affairs Lieberman demanded a review of the diplomatic and security ramifications a deal. Negotiations between the government and British Gas are in an advanced stage. The government will buy natural gas directly from the company and sell it to private consumers under a 15-20 year contract worth $2b. Minister of National Infrastructures Ben-Eliezer said that the decision would diversify Israel's sources of natural gas. The Ministries of Finance and National Infrastructures authorized a subcommittee to reach a detailed contract with British Gas. Senior government officials said Israel could not rely on a single natural gas supplier EMG, which would then become a monopoly. They added British Gas would not begin deliveries before 2012, by which time a deal might also be reached with the Palestinian Authority. EMG and the Delek Group subsidiary Yam Thetis LP are considering petitioned the High Court of Justice against the deal with British Gas and the Palestinian Authority. (Globes 29.04)

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1.2 Hirschson Suspends Himself from Finance Ministry

On 22 April, Finance Minister Hirschson informed Prime Minister Olmert that he is suspending himself from his government post and Knesset seat for three months until the police investigation against him is over. According to his lawyer, Hirschson maintains his innocence and will fight to protect his good name. Hirschson has been interrogated by police four times in the past weeks, regarding allegations of embezzlement of very large sums of money from nonprofit non-governmental organizations (NGOs) he chaired. The organizations were run by National Workers Histadrut Labor Federation, which he headed from 1995. The main allegations relate to money allegedly embezzled from the Nili (Jewish Youth for Israel) organization. Several weeks ago, the Maariv newspaper reported that Hirschson had transferred about $200,000 to a political figure who used it for private expenditures, or for an election campaign. It is also alleged that the $200,000 may have gone to Prime Minister Olmert, who allegedly used it for his internal Likud election campaign. Hirschson has allegedly been receiving hundreds of thousands of shekels of cash envelopes, and holding some of them in a safe deposit box. Hirschson is suspected of theft, fraudulent receipt of goods in aggravated circumstances, fraud, falsification of corporate documents, and breach of trust. Following Hirschson's announcement, Prime Minister Olmert said that he will assume the responsibilities of finance minister. (INN22.04)

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1.3 Mazuz Says Olmert Cannot Be Acting Finance Minister

Attorney General Mazuz has informed Prime Minister Olmert that he may not serve as acting minister of finance because of the investigations against him in privatization of Bank Leumi affair. Mazuz will allow Olmert to keep the finance portfolio only briefly, until the cabinet appoints an acting minister to replace Minister of Finance Hirchson, who took a three-month leave of absence because of suspicions of his involvement in embezzlement at the National Workers Organization (Histadrut HaOvdim HaLeumit). Mazuz's position reopens the rumor mill about candidates for the finance portfolio. (Globes 26.04)

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1.4 Comptroller Finds Suspicion of Dishonesty by Prime Minister

State Comptroller Lindenstrauss stated in his report on the Investment Promotion Center affair that the conduct of Prime Minister Olmert raises suspicion of dishonesty. Lindenstrauss has sent the report to Attorney General Mazuz. The report covers benefits given to YY Silicate Block in Dimona, which was represented by a close friend of Olmert. The report found that Olmert, when he was minister of industry, trade and labor, intervened on behalf of the company and helped it to obtain various benefits amounting to millions of dollars. The ministry's professional staff opposed aiding the company. Lindenstrauss said that Olmert should have refrained from discussing the matter because the company was represented by the Prime Minister's friend. Lindenstrauss believes that Olmert's involvement in the cases constituted a severe conflict of interest. (Globes 25.04)

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1.5 Olmert Unveils Anti-Poverty Plan

On 18 April, Prime Minister Olmert presented the main points of the government's social program for 2008-10, together with Minister of Finance Hirchson, Minister of Social Affairs Herzog, and Minister of Industry, Trade & Labor Yishai. The plan's main targets are reduction in the number of poor families, and to expand the labor force. The plan aims at pulling 60,000 families with 115,000 children out of poverty, which will reduce the poverty rate by one percentage point a year during the program's three-year period. The target is to cut the poverty rate from the current 20.2% of families to 17.2% in 2010. The plan also aims at adding 92,000 people aged 24-64 to the labor force, and increasing the proportion of this age group in the workforce by one percentage point a year from 68% to 71%. Olmert said welfare-to-work programs (the Wisconsin plan) would be revised to improve the integration of different populations into the labor force. The Bank of Israel has approved the plan, saying that it hoped that it would form the guidelines for the government's 2008 budget. Given that the Prime Minister and Finance Minister are under serious legal investigation, there have been those who have questioned the timing of this announcement. (Globes 18.04)

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2: ISRAEL MARKET & BUSINESS NEWS

2.1 Teva & HaPoalim Rated leading Israeli Companies by BDI

Business Data Israel (BDI) has updated its BDI Code, a list of Israel's top 50 companies for 2007. The BDI Code is compiled from quantitative variables, including turnover, profitability, risk level, added value, financial stability, payments ethic, weighted management level, and employment. Teva Pharmaceutical Industries heads the list. BDI says that the company grew by 55% according to BDI's variables, widening the gap over other companies. Bank HaPoalim, Israel's largest bank, is in second place. Electric Corporation (IEC), Israel Chemicals and Bank Leumi complete the top five. Oil Refineries, Clalit Health Services, Dor Alon Energy in Israel (1988), Bezeq The Israeli Telecommunication and Amdocs are in sixth to tenth place. Israel's top 50 companies employ 290,000 people altogether. Their aggregate revenue rose 13.4% in 2006 to $87.56b and average revenue per employee was $560,000. The aggregate pretax profit margin was 12.5%. A breakdown by industry showed 40% of the top 50 companies are manufacturers, 12% are in trade, and 14% are in services. Three of the companies are in infrastructures. (Globes 25.04)

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2.2 BDI Finds Prisma Israel's Largest Investment House

Business Data Israel (BDI) has ranked Prisma Capital Markets as Israel's largest investment house, managing NIS 37 billion in assets, including provident funds. This is the first time that BDI has included Prisma, controlled by Markstone Capital Partners Group, in its rankings. Harel Investment House rose from ninth place last year to second place, managing NIS 33.9 billion. Clal Finance Batucha is in third place with NIS 30.9 billion in assets managed; followed by Psagot Ofek Investment House with NIS 26.7 billion. They are followed by Excellence Investments, DS Apex Holdings, Meitav Investment Management and Migdal Capital Markets. BDI says that Israel's top 20 investment houses manage an aggregate NIS 263 billion in assets. The top three – Prisma, Harel Investment House, and Clal Finance Batucha – manage 40% of this total. Interestingly, 41% of the company's assets managed are held by mutual funds. (Globes 18.04)

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2.3 Mobixell Completes Acquisition of Adamind's Assets

Mobixell Networks has closed the acquisition of the key assets of Palo Alto, California's Adamind, a global supplier of media adaptation software for the mobile messaging (MMS), content, and convergence services markets. The acquisition of Adamind's assets includes intellectual property and all its software products. The acquisition also encompasses contracts with customers and suppliers relating to the development, marketing, and sale of all Adamind's products including transcoding and Mobile Multimedia software (the MediaSpire product family). In addition, the deal includes Adamind's tangible assets. Mobixell will engage the majority of Adamind's employees and contractors world-wide and intends to merge Adamind's products and technologies to form a powerful market leader in the Mobile Multimedia domain. Adamind's R&D and Product Management Center are located in Ra'anana, Israel. Mobixell Networks (http://www.mobixell.com), also of Ra'anana, Israel, provides innovative multimedia technologies and business solutions that facilitate the expansion of mobile operators, content and service providers' mobile multimedia services by enabling content consumption, Peer-2-Peer content sharing, User Generated Content communities, mobile advertising, and more. Mobixell's reliable network-based solutions deliver the highest quality multimedia, raising user satisfaction while helping operators drive traffic growth, safeguard crucial content revenue streams and realize new revenue streams. (Mobixell 18.04)

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2.4 Elron Announces New Investment in BPT

Elron Electronic Industries has completed a new investment of approximately $1.2m in BPT (Bio-Pure Technology), an Israeli-based water technology company. The aggregate financing round of $2.5m was led by Elron and Aurum Ventures M.K.I. As a result of the investment, Elron holds approximately 19% of BPT's outstanding shares. Headquartered in Rehovot, Israel, BPT provides advanced membrane-based separation solutions that address the unique needs of the water, wastewater treatment and chemical process industries; and enable high-grade separation and re-use of water and valuable materials within the process. BPT offers a cost-effective and environment-friendly process, employing its proprietary HMT™ (Hybrid Membrane Treatment (solution, based on NF (Nano-Filtration) membranes exhibiting high stability, selectivity and reliability. BPT's solutions address aggressive wastewater streams and water-intensive applications in a wide range of industries, such as pharmaceuticals, chemicals, agrochemicals, metals, food & beverage, drinking water, water re-use and desalination. BPT's products were successfully field tested by major clients and the company began sales this year. Elron Electronic Industries (http://www.elron.com), a member of the IDB Holding group, is a leading Israel-based technology holding company directly involved in the long-term performance of its group companies. (Elron 19.04)

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2.5 Lab One Innovations Secures $3.5 Million in new Financing Round, led by Migdal Capital Markets

Lab One closed a $3.5m round of financing led by Migdal Capital Markets a leading asset management and brokerage house owned by Migdal Insurance (TASE: MGDL) and Bear Stearns Asset Management Inc. (BSAM). Other participants in this round include Tel Aviv Economic Development Authority and Lab One's founders Cohen and Gaash. Migdal investment was completed through its Investment Banking and Underwriting arm, Migdal Underwriting.

Tel Aviv, Israel's Lab One (http://www.lab-one.co.il) is a technology incubator that was established to encourage the creation of new technology companies at the pre-seed stage, before the stages that are of venture capital funds interest. The incubator receives state funding up to 85% of the total investment in a new company where the other 15% comes from the incubator's own resources or external investors. Lab-One creates value to its portfolio companies, via an envelope of financial, business resources and administration support, which allows its companies to swiftly realize their potential in an optimal environment. Tel Aviv, Israel's Migdal Capital Markets (http://www.migdal.co.il) is leading asset management and brokerage house owned by Migdal Insurance and Bear Stearns Asset Management Inc. Migdal Insurance is the leading insurance company in Israel was founded in 1934. Generali, the leading insurance organization in Italy and one of the largest in Europe, is presently the major shareholder of Migdal. Since its inception, Migdal has been committed to innovation and creativity in the development of insurance products and has achieved a good reputation in life assurance. (Migdal 23.04)

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2.6 Frutarom Acquires British Flavors Company – Jupiter Flavours Limited

Frutarom Industries signed an agreement to acquire through its subsidiary, Frutarom (UK), 100% of the share capital in the British company Jupiter Flavours Limited, which develops, produces and markets flavors. In consideration, Frutarom made a cash payment of $2.8m. The acquisition agreement also determines a deferred payment of up to $600,000 based on the future results Jupiter is expected to achieve. The acquired activity is synergistic with Frutarom's activity in Britain and is expected to expand Frutarom's product offering to its customers, as well as adding new leading customers to Frutarom's existing customer base in Britain. The acquisition of Jupiter joins Frutarom's acquisition in March 2007 of the British company, Belmay, and additional acquisitions made by Frutarom in recent years. This acquisition will contribute to strengthening Frutarom's activity in Britain and to its position as the leading flavors producer in the British market. Frutarom intends to integrate the acquired activity with its own activity in the British market in order to achieve the greatest possible operation efficiency and savings, and estimates that this will not require additional resources. Haifa, Israel's Frutarom (http://www.frutarom.com) is a multinational company operating in the global flavor extracts and fine ingredients markets. Frutarom has significant manufacturing and development centers on three continents and markets its products to more than 5000 customers in over 120 countries on 5 continents. Frutarom's products are intended for the food and beverage, flavor and fragrance, pharmaceutical, nutraceutical, health food, functional food, food supplement and cosmetic industries. (Frutarom23.04)

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2.7 Smart Energy Solutions & Autolite Brand Enter Into Licensing Agreement

Smart Energy Solutions and Danbury, Connecticut's Autolite have entered into an agreement to license the rights to use the Autolite brand name for Smart Energy's innovative, easy to install, automotive battery protector product, which uses unique electronic technology to ensure that you will never be left stranded with a dead automotive battery. Smart Energy's battery protector device constantly monitors electrical discharge of the battery for nearly all kinds of vehicles. Should the device detect that the battery is losing sufficient charge to start the vehicle's engine, it automatically disconnects the battery to preserve its starting power. In addition, there is a built-in anti-theft feature. Smart Energy Solutions (http://www.smgy.net) is the sole owner of the Battery Brain line of vehicle accessory products. The company is headquartered in Pompton Plains, NJ, with R&D operations Petah Tikva, Israel. (Smart Energy Solutions 24.04)

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2.8 New Mexico Buys $5 Million in Israel Bonds

New Mexico purchased $5m in Israel Bonds. Gov. Bill Richardson announced the purchase on 23 April, saying that the economies of New Mexico and Israel are similar and that New Mexico is committed to strengthening trade with the Jewish state. "Israel Bonds are a proven financial investment that we are proud to include in our portfolio," Richardson said. "I am pleased that this purchase will help Israel move forward with important economic projects that will better the lives of its citizens." Bonds President and CEO Matza said New Mexico's "investment highlights the strong principles shared by the American people and the people of Israel — freedom, democratic values and the determination to surmount every challenge."

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2.9 Delta Makes Second Connection To Israel

Delta Air Lines is adding another flight to Tel Aviv, Israel, from New York's John F. Kennedy International Airport, becoming the only U.S. airline to provide nonstop service from two U.S. gateways to Israel. The Atlanta-based airline announced plans to offer a second daily nonstop flight between New York and Tel Aviv starting 10 March 2008. Delta began nonstop flights between Hartsfield-Jackson Atlanta International Airport and Tel Aviv in 2006. Delta has been very successful in the Israel market since the launch of its nonstop service from Atlanta last spring. Delta recognizes that Tel Aviv is the sixth-largest market across the Atlantic and it is a natural fit for their customers to have access to this growing and dynamic market from their two largest trans-Atlantic gateways. Over the past year, Delta's Atlanta service has gone from strength to strength, with average load factors of around 80% and more than 150,000 passengers flying this route, reflecting strong customer demand. (ABC18.04)

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2.10 Tehuti Networks Selects Trinity Technologies as Northern California Sales Representative

Herzliya, Israel's Tehuti Networks, a semiconductor company providing 10 Gigabit Ethernet (10GbE) single-chip, low-power network controllers, has signed an agreement with Trinity Technologies to market and sell Tehuti Networks' 10GbE semiconductor solutions in northern California. Trinity Technologies will also provide technical support for Tehuti Networks' customers. Tehuti Networks' solutions provide true 10GbE performance, with no additional power, footprint requirements or memory requirements compared to a basic MAC. Tehuti Networks' low-power 10GbE solutions are targeted for volume applications that are sensitive to power and cost budgets. Though its OptiStrata proprietary microprocessor architecture, Tehuti Networks offers an optimal combination of features implemented in hardware and firmware to offer high performance with no impact to the operating system, power, real estate and cost budgets. (Tehuti Networks 30.04)

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3: REGIONAL PRIVATE SECTOR NEWS

3.1 Bennigan's Opens First Restaurant in Jordan

Plano, Texas' Bennigan's Grill & Tavern will expand with a new opening in Amman, Jordan. The restaurant blends with the current culture and remnants of early civilization, while still providing guests with an Irish flare. This is the first restaurant for franchise group Fine Taste Company and marks Bennigan's 53rd international location. Since 1976, Bennigan's has been offering customers a diverse food and drink menu with an Irish influence in a classic grill & tavern setting. (Bennigan26.04)

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3.2 Triton Distribution Systems Opens Office in Kuwait to Serve the MENA Market

Sausalito, California's Triton Distribution Systems, a next generation web-based global pioneer in technology and distribution solutions for the travel and tourism industry, is opening an office in Kuwait. The Middle East and North African region (MENA) has been experiencing an explosive growth in tourism, 8%-10% over the last four years, and is expected to double by the year 2020. Triton Distribution Systems is a pioneer in low-cost, business-to-business, internet-based travel distribution and procurement solutions. Triton provides the electronic distribution of travel inventory from airlines, car rental companies, hotels, tour and cruise operators, and other travel vendors to travel agencies and their clients on a global basis. (Triton26.04)

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3.3 Georgia's Fire of Brazil Opens in Bahrain

The Living Concepts, a franchise developing company based in Bahrain, has been awarded the Master Franchise Rights for Atlanta, Georgia based restaurant chain Fire of Brazil. Signing took place between the managing director of The Living Concepts and the president of Fire of Brazil. The multi-million dollar deal entitles The Living Concept to expand the Fire of Brazil Churrascarias franchise international markets excluding North America, South America and the Caribbean. This unique concept offers a one-price menu for guests to select from 15 types of meats, then a gaucho comes around with swords of meat and you eat until you're satisfied. Fire of Brazil's menu selections appeal to all with a variety of meats, chicken, salads, etc. The Living Concepts vision is to combine traditional with modern values and bring high-end quality franchises to individuals and letting them indulge their senses in all aspects of life. (TradeArabia 24.04)

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3.4 Rollins Establishes International Franchise in the United Arab Emirates

Atlanta, Georgia's Rollins, a premier consumer services company, has expanded its international presence through the establishment of franchises in the United Arab Emirates. The Company began its Orkin franchise program in the U.S. in 1994, and established its first international franchise in Mexico in 2000. Today the Company has 54 domestic franchises and 5 international franchises. With the opening of their first franchise in the United Arab Emirates, they are establishing Orkin's global brand recognition in the Middle East. (Rollins24.04)

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3.5 L-3 Communications Link Simulation & Training Delivers F-16 Aircrew Training System to Oman

New York City's L-3 Communications announced that the F-16 Aircrew Training System that was built and delivered for the Royal Air Force of Oman (RAFO) has achieved ready-for-training status. The aircrew training system was built by L-3 Link Simulation and Training under a contract initially awarded in 2004. The aircrew training system is comprised of one F-16C Block 50+ Full Mission Trainer, an instructor operator station, computational systems and a newly developed visual system database encompassing Oman and bordering waters. L-3's Link division is a systems integration organization that delivers and supports training systems and equipment to enhance operational proficiency. Its current services include conducting front-end analysis, program design, simulator design, production and field support, and aircraft logistics support. L-3 Link has major operations in Arlington, TX, and other key bases of operation in Binghamton, NY; Orlando, FL; Broken Arrow, OK and Phoenix, AZ. (L-3 24.04)

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4: ISRAEL MACRO-DEVELOPMENTS

4.1 Finance Ministry Sees Israel's Economy Growing 5% In 2007

On 30 April, the Ministry of Finance predicted that Israel's economy will grow by 5% this year, after 5.1% growth in 2006. Business product is projected to grow by 5.6%, after 6.4% growth last year. The ministry said the global economic environment and domestic demand made this growth projection achievable. It added that the rise in real wages, the increase in employment, fall in the unemployment rate and the fairly low real interest rate supported further growth in domestic demand. The ministry added a caveat; the 2007 growth projection for 2007 is less than the potential growth rate, because of a slowdown in global markets and the appreciation of the shekel. The ministry added that the Second Lebanon War cost 0.7% of GDP in annual terms, amounting to $1b. Israel's economic growth in 2007 depended on such factors as the global growth rate, a responsible fiscal policy and how restrictive monetary policy will be. There is also the assumption that there will be no major deterioration in the security situation this year. Inflation is forecast at less than the 1-3% target in 2007 and that there will be deflation in the coming months. The unemployment rate is projected to fall to a monthly average of 7.4% of the civilian labor force during the fourth quarter, investment in fixed assets will rise by 5.5%, exports will grow by 5.1%, industrial exports, excluding diamonds, will grow by 7.4%, imports will grow by 4.9%, private consumption will grow by 4.9%, public consumption will rise by 2.9%, real wages will rise 2.8%, the number of employed Israelis will increase by 3.3%, and participation in the labor force will rise from 55.6% to 55.8%. Finally, the ministry projects that public debt will fall to 84% of GDP in 2007 from 86% in 2006. (MoF30.04)

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4.2 Paz to Build $60 Million Ashdod Power Station

Globes reported that Paz Oil Company will build a private power station at Paz Ashdod Refinery. Globes added that the Southern Regional Planning and Building Council appeals committee overturned a decision by the Ashdod Local Planning and Building Council against the project. The local planning council claimed it lacked the authority to approve the project. The power station will cost an estimated $60 – 70m to build. The appeals committee ruled that the local planning council had the authority to grant a building permit for a power station on a 375 acre site at Paz Ashdod Refinery. This decision will pave the way for construction of the power station, since it has already obtained a private electricity generating license from the Public Utilities Authority (Electricity). The power station is due to generate 43 megawatts and will be driven by natural gas. Paz Ashdod Refinery switched to natural gas during H1/05 and currently buys natural gas from Delek Group subsidiary Yam Thetis, in a contract signed before the split up and privatization of Oil Refineries. (Globes 22.04)

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5: ARAB STATE & PAKISTANI DEVELOPMENTS

5.1 King Asks Government To Develop Strategy On Water & Energy

King Abdullah II on 23 April asked the Jordanian government to develop a comprehensive strategy on water, energy and infrastructure projects needed for sustainable development. During a visit to the Prime Ministry, the King underlined the need to focus on these top priorities at the current stage, saying they constitute the main pillar for sustainable socio-economic development. The Monarch called on the government to be well prepared for this year's municipal and parliamentary elections, which, he said, "should be held in an atmosphere of fairness, transparency and integrity". He also urged enhanced cooperation between the government and deputies during the House's current extraordinary session. The King was briefed by Prime Minister Bakhit on progress in several projects that aim to improve citizens' living conditions. He said the government should adopt clear plans with a specific timetable for the implementation of the projects, stressing that citizens need to feel the outcome of the development process. He called for a prompt execution of the Zarqa Hospital project and a railroad project to connect Amman with Zarqa areas. During the session, the King directed the government to check complaints from investors, saying all obstacles facing investment flow should be removed. Stressing the need to encourage investments, the Monarch told the government to set up income generating projects for needy citizens to help improve their conditions. (JT24.04)

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5.2 Jordan to Host G-11 Summit

Jordan will host the second Lower-Middle Income Countries Summit (G-11) on 19 May at the Dead Sea. The organization's 11 member countries will attend the summit as a means to increase cooperation and knowledge sharing. King Abdullah launched the G-11 in September last year and the group's first summit was held on the sidelines of the United Nations General Assembly in New York. During the launch, the Monarch said member states should adopt a common goal: To make foreign aid responsive to local needs, shift from loans to grants to keep countries from re-accumulating debt, lobby wealthy countries to open their markets to developing country production, especially in the agricultural sector, and channel savings from debt into strengthening education and public health sectors. Jordan is the current secretary general of the group, and the Monarch will chair its meetings in Jordan. The gathering will discuss issues that are of interest to the member countries. In addition to Jordan, the group includes Pakistan, Sri Lanka, Morocco, Tunisia, Georgia, Croatia, Honduras, Paraguay, Ecuador and Indonesia. Meanwhile, from May 18-20 the Kingdom will host the World Economic Forum for the fourth time at the Dead Sea. Large-scale investment projects in various areas are expected to be announced during the conference. (JT24.04)

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5.3 First Quarter Jordanian Tourism Figures Reveal Upward Trend

Visitor arrivals in Jordan continued to grow during Q1/07, rising by 20% compared to the same period last year. Preliminary figures released by the Ministry of Tourism show that some 1.388 million tourists visited the country between January and March, compared to 1.1 million during the corresponding period of 2006. The number of visitors on package tours also increased as well as the number of nights spent. Tour groups also jumped by 3.3%, reaching a total of 65,574 tourists compared to 63, 411 in the same period of last year, with the number of nights spent in 3-, 4- and 5-star hotels also rising by 1.3%. Minister of Tourism and Antiquities Dabbas welcomed the news, saying both his ministry and the Jordan Tourism Board have been promoting the Kingdom's attractions in international and regional tourism exhibitions over recent months, particularly in the key Gulf market. According to the minister, there is optimism that this summer will see an increase in visitors, with hotels and tour and travel agencies already reporting an increase in bookings in Aqaba, the Dead Sea and Petra. (JT27-28.04)

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5.4 Kuwaiti Investors Apply To Set Up $3-5 Billion Medical City Near Amman

Kuwaiti investors are seeking government approval to launch a medical city near Amman at a cost of $3-5b, according to a statement by Petra. The project will include hospitals with the latest medical technology, hotels, entertainment centers, swimming pools and gardens. The Kuwaitis submitted their application recently, offering the Social Security Cooperation, one of the largest financial institutions in the Kingdom, a partnership deal. Knowledgeable medical officials described the project as "a new type of service to the region including organ transplant, stem cell research and new methods in treating complicated diseases. If the project goes ahead according to plan, the medical city would be ready to receive its first patient by 2012. Investors from the Gulf, mainly Kuwait, Saudi Arabia and the United Arab Emirates have been flocking to Jordan over the past three years to invest oil revenues in development projects mainly in real estate and education. Economists believe existing projects funded by Gulf investors are the tip of the iceberg, as they expect many more investors to come in the near future. (JT24.04)

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5.5 Jordan Starts Work on $300 Million Power Plant

Jordanian Energy & Mineral Resources Minister Shraideh laid the corner stone on 30 April for a $300m US-Japanese project to build a power plant generating cost-effective electricity. The Amman East Power Plant, which is a joint venture between a consortium of AES Oasis and Mitsui and Co., will be constructed in the Al Manakher area with a total generation capacity of 370 megawatt (MW). The consortium will establish a private shareholding company, AES Jordan PSC, to build, own and operate the plant. AES Oasis owns 60% of the project, while the Mitsui and Co. owns 40%. The Overseas Private Investment Corporation (OPIC), an agency of the US government that helps US businesses invest overseas, will provide $70m in financing for construction, which to date is the largest private US investment in Jordan. The 1st phase of the plant, with a total capacity of 200 MW, will end by August 2008, while the plant will be full operational in August 2009. The plant is expected to increase Jordan's power generation capacity by approximately 20% and is expected to reduce the average cost of generation by approximately 10%. The plant will also have an electricity tariff that is 15% lower than the current annual average for the National Electric Power Company (NEPCO) and 40% lower than that for electricity imported from Egypt and Syria. (JT01.05)

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5.6 Kuwait Posts Record $53.5 Billion Income

Oil-rich Kuwait posted record income of $53.5b in the last fiscal year that ended March 31, the finance ministry announced on 24 April. It is the first time that revenues of this Gulf state have topped $50b in a single fiscal year. According to the figures, revenues are up about 13% on the $47.4b posted in the previous year and exceed by $24b the government's whole year projection of $29.5b. Oil revenues reached $50.2b, constituting 94% of total income, also the largest ever in the emirate's history. Oil income is up 12% on the previous fiscal year of 2005/2006 and almost twice the budget projection of $26.8b, the ministry figures showed. The budget calculated oil income at the conservative price of 36 dollars a barrel while the actual price of Kuwaiti oil averaged around 58 dollars last fiscal year. Kuwaiti oil output averaged 2.47 million barrels per day during the past fiscal year, but in recent months the emirate has cut production to 2.4 million bpd in line with OPEC decisions to trim crude supplies to boost prices. Non-oil revenues amounted to $3.3b, also a sharp rise over the previous year's $2.6b. Preliminary figures for spending last fiscal year reached $28.6b, up 21.2% on the previous fiscal year's expenditure of $23.6b. The figure is certain to increase sharply due to adjustments in the closing accounts which normally exceed 20%. Kuwait sits on 10% of the world's oil reserves. It has a native population of one million people, in addition to 2.16 million foreign residents. By law, 10% of total revenues are placed in the Kuwait Fund for Future Generations. Returns on the fund's assets, estimated at well over $5b a year, do not figure in the budget. (Various25.04)

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5.7 Arab Telecom Sector Worth $70 Billion By 2015

The telecommunications and broadband internet sectors will generate $70b in annual revenue by 2015 in the Middle East and North Africa region, according to Madar Research reports. Its report also indicates that the Middle East telecommunications market is set to top $50b this year. The report shows that Arab countries' ranking in the annual ICT Index gained by 43% in 2005 compared to the previous year. (GN24.04)

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5.8 Saudi to Raise Refining Capacity By 62%

Saudi Arabia's refining capacity will reach 3.4 million barrels per day (bpd) by the start of 2012, up 61.9% from its level in 2006, the country's investment authority said on 24 April. The increase will be achieved once three planned refineries start production, the Saudi General Investment Authority (Sagia) reported. The three refineries will cost at least $20b. Expansion projects in the petrochemical industry will nearly double the kingdom's share of global output to 13% by the start of 2010, up from 7% currently. (Reuters24.04)

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5.9 Saudi Economy May Grow 4%

Saudi Arabia's economy, the largest in the Arab world, may grow as much as 4% this year, more than previously expected, on a possible rise in oil output, Samba Financial Group announced on 25 April. Samba Chief Economist said he may revise his expectation for average Saudi oil production this year to 8.7 million barrels per day (bpd) from 8.6 million bpd. The Organization of the Petroleum Exporting Countries (Opec) may raise its oil production cap on rising oil prices, allowing Saudi Arabia, the world's largest oil exporter, to pump more. Saudi officials said earlier this month the kingdom was producing 8.5 million bpd, he said. The bank had forecast Saudi Arabia's gross domestic product growth at 2.43% in February. Opec had agreed oil output cuts totalling 1.7 million barrels per day last year to shore up prices. Growth of 4% would still be the slowest in five years. Saudi Arabia's nominal GDP has roughly doubled in size since 2001 on a near tripling in oil prices in the five years to July 2006. Oil accounts for about 75% of government revenue. (Samba25.04)

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5.10 Bid to Boost Saudi Poultry Exports

According to a USDA Foreign Agricultural Service Annual Report, despite generous government subsidies and a rising population, Saudi Arabian poultry producers are facing robust competition from imported frozen chickens. Brazilian-led imports now account for a 44% slice of the Kingdom's domestic market valued at $ 1.6b annually. Reacting to this ‘Samba' invasion, some Saudi producers of poultry meat are now searching for export markets elsewhere in the region. Annual consumption of poultry meat in the Kingdom is estimated at over one billion kilos per annum and Saudi government support is designed to compensate for the higher local production costs, which in some cases is up to $ 580 per metric ton more expensive than Brazilian imports. Originally aimed at attaining self-sufficiency, the Saudi government's support could now encourage new export drives. New and extended poultry farms qualify for government grants and interest free loans and producers receive 25% towards the cost of certain capital equipment. In 2004 a new scheme was introduced, designed to help construct cold stores, as well as schemes to attract investment in the latest production technologies. Saudi Arabia's poultry export ambitions will doubtless increase the current 10,000 metric tons, with countries such as Qatar, Bahrain, Kuwait, U.A.E., Oman and Yemen being targeted. (Al Bawaba 04.04)

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5.11 Yemen Aims to Copy Booming Dubai

Yemeni President Saleh vowed on 22 April to knock down obstacles to foreign investment in his impoverished country. He said Yemen is keen on eliminating any hindrances to investors, learning from the experience of the United Arab Emirates (UAE), especially Dubai. The state General Investment Authority will work on providing facilities to investors and simplifying business procedures, Saleh said. Lands would be made available to investors at attractive prices provided they start building their projects on them within six months of purchase. He noted that foreign investors want Yemen to open up its banking and insurance sectors and to introduce a more advantageous tax system. Industry & Commerce Minister Al-Mutawakkel said the government would outline 100 investment opportunities worth an estimated $8b in the energy, minerals, tourism, infrastructure and other sectors. GCC Secretary General al-Attiyah said Gulf leaders were seeking to assist Yemen's development in order to prepare it to integrate with the Gulf economies. The GCC states are Yemen's top trading partner and a major destination for Yemeni labor, he said. Attiyah said the success of last November's international donor conference in London, during which $4.7b in aid were pledged for Yemen up to 2010, shows the benefits of cooperation between Sanaa and the GCC, which took part in organizing the parley. The pledges have since gone up to $5b. (WB23.04)

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6: TURKISH & CYPRIOT DEVELOPMENTS:

6.1 EU's Share in Turkey's Exports On The Rise

EU's share in Turkey's exports rose to 51.6% from 49.7% in the last decade, according to figures of Turkish Foreign Trade Undersecretariat. On the other hand, the share of EU member states in Turkey's imports dropped to 39.3% from 53% in the same period. Turkey earned $11.5b for its total $23.2b of exports to EU member states in 1996. In 2006, Turkey made $43.9b of its total $85.1b of exports to the EU. On the other hand, Turkey imported goods worth $23.1b from EU countries in 1996. Turkey's total imports were around $23.1b that year. Ten years later, Turkey imported goods worth $53.8b from the EU. Its total imports were around $137b. (FTU24.04)

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6.2 Turkey Permits Cattle Imports After 10 Years

The import of cattle, a long contested topic among Turkey and certain foreign countries, is expected to start soon, according to a spokesperson for the Turkish Minister of Agriculture & Rural Affairs. Turkish Minister of Agriculture & Rural Affairs Eker said cattle would be permitted from the United States and certain European Union countries. He added that the name of the ministry will be changed to ‘Ministry of Food and Agriculture.' (Referans 24.04)

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6.3 Turkey Welcomes Its First Fast Train

Turkey's first fast train started trial runs between Ankara and Eskisehir on 23 April. The train took off from the state-owned railway company (TCDD) Behiçbey station in Eskisehir. The train, comprised of three cars and two engines, was brought to Eskisehir after it was rented from Italy. The Eskisehir-Ankara route constitutes the first stage of the Istanbul-Anakra fast train project. Trial runs started at lower speeds. Depending on test results the velocity of the train will be increased gradually. Trial runs will continue until the train reaches 250 kph without any problems. At those speeds, the 206 kilometer-long journey will last less than an hour if the fast train begins regular service. The general directorate of the TCDD ordered 12 fast trains from Spanish company CAF and the machines will arrive by the end of 2007. These trains will be operated by specially-trained TCDD staff. Turkey will be one of eight countries in the world and six countries in Europe that uses fast trains. (Zaman24.04)

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7: GENERAL NEWS AND INTEREST

*ISRAEL:

7.1 Israel Celebrated 59th Independence Day with Population of 7,150,000

Israel celebrated the 59th anniversary of its re-birth with a population of 7,150,000. When the state was re-founded in 1948, there were 806,000 residents. A third of those still live in the country. Figures published on 22 April by the Central Bureau of Statistics indicate that 5,725,000 residents of Israel – 80% – are Jewish. Most of the remainder are Arab. The population has increased 121,000 in the past year. Most of that increase – 89% – reflects natural growth. Since last Independence Day, 148,000 babies were born in Israel. About 44% of the population resides in cities of 100,000 inhabitants or more. In 1948, Tel Aviv was the only city with more than 100,000 residents; it had 248,500 inhabitants. Today, Israel has five cities above 200,000 inhabitants: Jerusalem, Tel Aviv, Haifa, Rishon LeZion and Ashdod. These five cities account for 1,810,300 residents, or about a quarter of the population. Rural localities house 8% of the population. The rural population includes 119,700 kibbutz members, less than 2% of the overall population. At the founding of the state, kibbutzim housed 6% of the population. (CBS22.04)

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7.2 Lag B'Omer Celebrated Worldwide

On Saturday night5 May and 6 May Israel and world Jewry will mark the celebration of Lag B'Omer. Lag B'Omer means the thirty-third day in the Count of the Omer, Lag in Hebrew letters equals the number 33. Omer refers to the Grain Offering, called the Omer, which was brought in Temple times. Lag B'Omer is celebrated by huge bonfires, families go on picnics and outings, as well as other outdoor events. In Israel, at Meron, the burial place of Rabbi Shimon bar Yochai and his son, Rabbi Elazar b'Rabbi Shimon, tens of thousands of Jews gather to mark the anniversary of the death of this great scholar who lived in the immediate aftermath of the Second Temple. Lag B'Omer also marks the Bar Kochba Revolt, the last great revolt for Jewish sovereignty against foreign rule in the Land of Israel.

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7.3 Jerusalem Day Marks 40 Years of Liberation

Jerusalem Day (In Hebrew: Yom Yerushalayim) is an annual Israeli national holiday celebrated on Iyar 28, which this year falls on 15/16 May. This year it also takes on special significance, as it is the 40th anniversary of the liberation of the Old City of Jerusalem by Israeli forces. According to the 1947 UN Partition Plan, Jerusalem was to be an international city, not part of either the proposed Jewish or Arab state. The Jewish leadership accepted the plan, but the Arab leadership rejected; all surrounding Arab nations joined the Palestinians in attacking Israel. After the 1948 Arab-Israeli War, the city was divided between Israeli and Jordanian control. Jordan controlled Jerusalem's Old City and the eastern side of Jerusalem, and killed or forced the Jews in those areas out. Jews were forbidden from entering Jordanian Jerusalem, including their holy sites, and most Jewish cemeteries and synagogues throughout the West Bank were desecrated. In 1967, eastern Jerusalem, location of the Temple Mount, Judaism's holiest site, was liberated by Israel during the Six-Day War. The war ended in ceasefire on June 11, 1967. On May 12, 1968, the government proclaimed the holiday of "Jerusalem Day" for the 28th of Iyar, corresponding to the date that the Israeli military conquered those parts of Jerusalem which had previously been in Arab possession. On March 23, 1998, the Knesset passed the "Jerusalem Day Law" which made the day a national holiday. On Independence Day it is common practice for Israelis to hang out flags outside their home windows. Traditionally, these flags aren't taken off again until after Jerusalem Day

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7.4 IBL Starts Play June 24 as Israel's First Pro Baseball Circuit

Forty-one years after he retired from baseball, Hall of Fame pitcher Sandy Koufax was the final player chosen in the draft to stock the six teams for the inaugural season of the Israel Baseball League. Koufax, 71, was picked by the Modi'in Miracle in the draft conducted on 26 April by former major league general manager Dan Duquette, who heads baseball operations for the league. The Miracle will be managed by a member of the 1969 "Miracle Mets" former player Art Shamsky. In the 1965 World Series, Koufax refused to pitch Game 1 for Los Angeles because it fell on Yom Kippur.

Former major leaguers Ken Holtzman, Art Shamsky and Ron Blomberg will manage three of the six teams in the first season of the Israel Baseball League (http://www.israelbaseballleague.com), Israel's first foray into professional baseball. The inaugural season will begin on 24 June, with a 45-game schedule covering eight weeks and culminating in a championship. The three managers are joined by the league's Commissioner, Daniel C. Kurtzer, the former U.S. Ambassador to Egypt and Israel and Larry Baras, the Boston businessman who conceived the league. Mr. Baras is Managing Director, IBL and IBL Community Foundation.

The teams will be the Bet Shemesh Blue Sox, and the Modi'in Miracle, (sharing Gezer Field in Kibbutz Gezer), the Tel Aviv Lightning and Netanya Tigers (sharing Sportek in Tel Aviv), and the Ra'anana Express and the Petah Tikva Pioneers (sharing Baptist Village Field in Petah Tikva). Not all of the managers and players have Jewish heritage; a large number of international players have been signed to play in the league, hailing from all over the world, with varying degrees of playing experience. (Various29.04)

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7.5 Sesame Street Returns to Israel & PA After More Than Decade Off The Air

Puppet regimes are back in the Middle East. Once again, they're promoting peace, diversity and the importance of brushing your teeth. On 29 April, it was announced that new episodes of Sesame Street are going on TV in Israel and the Palestinian territories, years after the original versions signed off. Producers tailored the Middle Eastern casts and story lines to the fit the audiences. "Rehov Sumsum," the Israeli version of the show, for the first time includes a Muppet of Arab origin. Its Palestinian counterpart, "Shara'a Simsim," seeks to offer positive role models to boys in Judea, Samaria and the Gaza Strip. The Palestinian version has no Jewish characters. Gary Knell, president of Sesame Workshop, the New York-based nonprofit group behind Sesame Street programming worldwide, met with political and educational leaders in an attempt to promote the program. The Israeli version enjoyed wide success when first aired in the early 1980s. A lack of funds stopped production of new episodes for more than a decade, but producers re-launched the show last winter. (AP30.04)

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*REGIONAL:

7.6 Turkey's Presidential Process in Turmoil as Court Challenges Ruling Party's Pick

Turkey's election of a new president headed to court on 27 April, after opposition deputies boycotted in an effort to deny a 367-vote majority to the nominee, Foreign Minister Abdullah Gul. If the resort to the 11-judge Constitutional Court by opposition Republican People's Party (CHP) is successful, it would mean the effective annulment of Gul's election late in the afternoon by 357 votes of the ruling Justice and Development Party (AKP) and a handful of maverick deputies and new parliamentary elections. Turkey's unicameral legislature was the scene of day-long, high-stakes political maneuvering, as all sides sought to slalom through arcane procedures and interpretations of the Constitution, resulting in an ambiguous result that could take days or weeks to resolve. The skirmishing turns on a provision that requires a two-thirds majority – 367 votes – to elect a new president in the first two rounds of voting. If a choice is not made in the first two rounds, a final third round only requires a simple majority — 276 votes. If the court annuls the elections, the only way forward is for Parliament to call early elections. According to the constitution, the elections should be held within three months. Within this period President Ahmet Sezer will remain in his post until the new president is elected by the new Parliament. There are also fears of machinations by Turkey's military, who are staunch defenders of the Kemalist secular approach to the Turkish state. (TDN28.04)

On 24 April,, Turkey's Prime Minister Erdogan named Abdullah Gul as the ruling AK party candidate for president, following harsh secularist objections to his own reported ambitions. The choice of the moderate and widely respected foreign minister, is seen as a bid to compromise with the army-backed secularist establishment, but may not stamp out all objections since Gul also has an Islamist background. Hundreds of thousands of people rallied in Ankara this April against Erdogan's running, worried that he would undermine the secular foundations of the state. The army had also issued a subtle warning to him. Gul, 56, is virtually certain to become president due to the 353-seat majority the governing Justice and Development Party (AKP) holds in the 550-member parliament, which will elect the president. While he may not garner the required two-thirds majority of 367 votes in the first two rounds of voting, a simple majority of 276 suffices in third or fourth rounds on May 9 and May 15. However, the main opposition Republican People's Party (CHP) has said it plans to boycott the elections as they were not consulted, stressing that it would challenge the vote at the Constitutional Court. The CHP argues that at least 367 legislators should be present in the assembly at the first round in order for voting to begin. The AKP will now try to secure the backing of the centre-right Motherland Party (Anavatan), the conservative True Path Party (DYP) and independent lawmakers in order to assemble 367 lawmakers.

Gul's wife wears the Islamic headscarf, which is seen as the symbol of political Islam, and in an immediate sign that his candidacy would not be free of controversy, the foreign minister urged respect for those who wear it. Erdogan pledged the new president would be committed to secularism. Erdogan never openly declared his presidential ambitions, but nor did he deny that he intended to run. Many AKP members were concerned that without their charismatic leader, the party might lose support in general elections scheduled for November. The AKP has disowned its Islamist roots, committed itself to secularism and secured the opening of Turkey's European Union membership talks. Yet it remains under suspicion of harboring Islamist ambitions. The government has made unsuccessful attempts to criminalize adultery and restrict places that serve alcohol to special zones. Outgoing President Sezer, a hardline secularist, has often clashed with the government, vetoing laws he deemed anti-secular and blocking the appointment of officials he saw as Islamist government cronies. Gul and Erdogan belonged to the Welfare Party of Turkey's first Islamist prime minister Erbakan, whom the army forced from power in 1997. But in contrast to Erdogan, Gul has stayed away from open confrontation with the secularist establishment on explosive issues such as the headscarf ban. (AFP24.04)

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8: ISRAEL LIFE SCIENCE NEWS

8.1 Protalix BioTherapeutics Receives FDA Approval for Phase III Clinical Trial of prGCD

Protalix BioTherapeutics has received written notice from the FDA that it may initiate a Phase III clinical trial in the United States of its lead product candidate, prGCD, a proprietary plant cell expressed recombinant form of human Glucocerebrosidase (GCD), for the treatment of Gaucher Disease, a lysosomal storage disorder in humans. The FDA has allowed the Company to directly initiate Phase III based upon the results of the Company's pre clinical and Phase I clinical trials of prGCD. The Company presented the completed data from its Phase I clinical trial at the European Working Group of Gaucher Disease (WEGGD) in Cambridge, United Kingdom in July 2006. The Company hopes to commence the Phase III clinical trial shortly. The trial will take place in centers in the United States, Israel, where approval from the Israeli Ministry of Health has been received, and other locations worldwide. The study will initially consist of male and female adult patients with Gaucher Disease.

Carmiel, Israel Protalix' (http://www.protalix.com) proprietary technology is based on its plant cell culture and bioreactor system, which provides an effective and scaleable cell system for industrial production of recombinant biopharmaceuticals. Protalix is pursuing advanced clinical studies for its enzyme therapy for Gaucher Disease and intends to advance additional recombinant biopharmaceutical drug development programs. The Company believes its plant-based expression has significant advantages over more traditional mammalian and bacterial expression technology with respect to patient safety, cost and scalability. (Protalix18.04)

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8.2 Optimata Virtual Patient Approved as a Registered Trademark

Optimata announced that the Optimata Virtual Patient (OVP) has been approved as a registered trademark by the US Patent & Trademark Office. The company also announced the launch of a new module to simulate and optimize targeted therapy agents. The Optimata Virtual Patient is a unique predictive bio-simulation technology, comprising computer-implemented mathematical algorithms of key physiological, pathological and pharmacological processes in the body of the patient. Calibrated with patient-specific parameters, this technology can tailor improved treatments of various mono-therapies and combination therapies of targeted and chemotherapeutic drugs. The original concepts underlying Optimata Virtual Patient are protected by patents in USA (2000) and Europe (2006) and so are the mathematical algorithms embedded in it . To distinguish this technology from other marketed bio-simulation technologies, Optimata succeeded in obtaining a trade-mark status for its Virtual Patient technology. Earlier this year Optimata announced a new and expanded collaboration agreement with Eli Lilly & Co. to assist in the clinical trial design of various anti-cancer compounds.

Ramat Gan, Israel's Optimata (http://www.optimata.com) is a science-based, interdisciplinary company, dedicated to the development of predictive biosimulation technologies – Virtual Patient Engines. Optimata's technology enables computer-generated trials that accurately predict how individual patients or patient populations will respond to a compound. The technology combines models of human physiology, specific diseases and the therapeutic impact of a compound. (Optimata26.04)

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8.3 Compugen Joins Mayo Clinic for the Discovery of Novel Biomarkers for Unstable Atherosclerotic Plaques

Compugen announced a collaboration with Mayo Clinic targeted at discovering and validating novel biomarkers for diagnosing the presence of unstable atherosclerotic plaques in coronary artery disease and cerebro-vascular disease. Currently, there are no diagnostic tests to identify patients with unstable atherosclerotic plaques, and therefore, the availability of biomarkers for this purpose would represent a significant medical breakthrough. Compugen expects to utilize its unique discovery engine approach to predict and validate biomarkers related to active atherosclerotic disease. Compugen's integrated analysis will incorporate data derived from biological materials provided by Mayo Clinic, as well as Compugen's proprietary expression and clinical data. Compugen will have exclusive commercialization rights for products resulting from this collaboration. Mayo Clinic is entitled to compensation under the agreement. Tel Aviv, Israel's Compugen (http://www.cgen.com) is a leader in the discovery and licensing of product candidates to the drug and diagnostic industry. The Company's powerful discovery engines enable the predictive discovery of numerous potential therapeutics and diagnostic biomarkers. This capability results from the Company's decade-long pioneering efforts in the deeper understanding of important biological phenomena at the molecular level through the incorporation of ideas and methods from mathematics, computer science and physics into biology, chemistry and medicine. (Compugen30.04)

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9: ISRAEL PRODUCT & TECHNOLOGY NEWS

9.1 IncrediMail Offers Babylon's Language Translation and Dictionary Service to Users

IncrediMail has launched a translation and dictionary service, integrated with its flagship product, IncrediMail, through its previously announced collaboration with Babylon. When users elect to purchase the full version of Babylon, the companies will share the revenue that is generated. IncrediMail users are now able to instantly get language translations, definitions and encyclopedic details for any word or phrase in an email with the click of a mouse. The Babylon service is included in the latest versions of IncrediMail XE and IncrediMail Premium. Current IncrediMail users can simply upgrade their version of IncrediMail to access to the service without incurring any additional costs. Consumers can elect to purchase Babylon 6, the full version of Babylon, which enables language translation and dictionary services on any desktop application outside IncrediMail. Tel Aviv, Israel's IncrediMail (http://www.incredimail-corp.com) designs and markets an integrated suite of customized and entertaining email software products for the consumer market, offering users the ability to design highly personalized email presentations with our large collection of multimedia content for email communication. Or Yehuda, Israel's Babylon (http://www.babylon.com) is the leading provider of single-click translation and information access solutions. Babylon 6 is desktop software that is available for private individuals as well as corporations. (IncrediMail18.04)

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9.2 Siano's SMS1000 Mobile Digital TV Receiver Chip Powers Intel's Mobile Internet Device Platforms

Siano Mobile Silicon announced that its SMS1000 multi-standard receiver chip will power Intel MID platforms. The MID (Mobile Internet Device) product category delivers entertainment, communication and navigation usages enhanced by a rich Internet experience to consumers in small, ultra-mobile devices. Especially designed for low power, the MID platform will allow consumers to watch mobile TV for 8 to 20 hours (depending on the broadcast technology) before their device runs out of battery. The Siano SMS1000 is the industry's only low-cost, ultra-low-power, quad-band multi-standard receiver in mass production. It supports DVB-H, DVB-T, DAB, DAB-IP and T-DMB mobile digital standards, in various spectrum ranges, from 170MHz up to 1680MHz. Netanya, Israel's Siano Mobile Silicon (http://www.siano-ms.com) provides integrated silicon receivers for the mobile digital TV (MDTV) market. Tailored specifically for handheld and mobile devices, the company's all-CMOS multi-standard solution overcomes formidable engineering challenges such as mobility reception, hand-offs, power consumption, form factor and small antenna. Siano 18.04)

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9.3 Swiss Air Navigation Services Provider skyguide Places 7-Digit Order for NICE Air Traffic Control Solutions

NICE Systems has received through its partner and distributor in Switzerland Mobatime Swiss an additional order from skyguide, which is responsible for the provision of air navigation services within Swiss airspace and in the airspace of certain adjoining regions in neighboring countries. NICE was selected to supply advanced interaction management solutions for ground to air and ground to ground air traffic communications, as well as control room and IP phone-based interactions, ensuring compliance with regulations and enhancing air travel safety. With high reliability and integrity for these critical communications, skyguide will be able to more efficiently capture interactions and more rapidly investigate communications among air traffic personnel. NICE's air traffic control (ATC) solutions will enable skyguide's aviation administrations to comply fully with aviation requirements as mandated by ESARR (Eurocontrol Safety Regulatory Requirements), in force in all of Europe and which all Eurocontrol (the European organization for air traffic control) member states must implement. Ra'anana, Israel's NICE Systems (http://www.nice.com) is the leading provider of Insight from Interactions solutions and value-added services, powered by advanced analytics of unstructured multimedia content – from telephony, web, radio and video communications. NICE's solutions address the needs of the enterprise and security markets, enabling organizations to operate in an insightful and proactive manner and take immediate action, to improve business and operational performance and ensure safety and security. (NICE 18.04)

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9.4 Sibir Telecom Selects Orca Interactive for Advanced IPTV Service in Russia

Orca Interactive announced that Orca's IPTV middleware – RiGHTv – has been deployed by Open Technologies, a leading Russian system integrator of complex information services for Sibir Telecom, one of the largest telecommunication operators in Russia. The first phase of the deployment covers the Novosibirsk branch of Sibir Telecom with an expansion planned within the limits of this federal district this year. Utilizing Orca's RiGHTv middleware as part of the end-to-end solution provided by system integrator Open Technologies, Sibir Telecom's IPTV service includes high quality broadcast television, electronic programming guide (EPG), radio channels, video on demand, network PVR and time shifted TV. In the future, the services will be expanded to include interactive games and information services that will be integrated into the service using Orca's Service Delivery Platform (SDP) architecture. RiGHTv allows Sibir Telecom to scale the solution as they grow, while providing a telco grade, customized solution from the first day. The advanced IPTV service will provide Sibir Telecom with a significant advantage over the traditional cable television competitors in Novosibirsk. Ra'anana, Israel's Orca Interactive (http://www.orcainteractive.com) is a leading provider of IPTV middleware and applications for broadband network operators and service providers. Orca enables triple-play providers to deliver a full array of attractive video-over-IP services that generate new revenue streams and strengthen customer loyalty. Leveraging a flexible telco-grade middleware platform, Orca empowers operators to deliver broadcast TV, video on demand (VOD), personal video recording (PVR), home media and other compelling interactive services. (Orca18.04)

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9.5 InkSure Signs Exclusive Marketing Agreement With EIPR for Brand Protection Field Investigations in India

InkSure Technologies has entered into an agreement with Enforcers of Intellectual Property Rights (EIPR) of Mumbai, India for the marketing to international brand owners in India of third-party field investigation and auditing services that will utilize InkSure SmartInk solutions for the detection of counterfeit goods. In India, InkSure will utilize EIPR as its exclusive value-added reseller of CMRT solutions used in third-party field audit services, and InkSure will be the exclusive CMRT supplier to EIPR. EIPR (Enforcers of Intellectual Property Rights) is India's largest investigation agency specializing in anti-counterfeiting solutions, including investigations of patent and trademark infringement, grey market evaluations, pretext purchases, litigation support and multi-jurisdictional raid actions. InkSure Technologies (http://www.inksure.com), with its corporate headquarters in Ft. Lauderdale, Florida and its R&D center in Science Park, Rehovot, Israel, specializes in comprehensive, covert security solutions designed to protect high profile brands and documents of value from counterfeiting, fraud and diversion. The Company's R&D activities include the development of "chipless" RFID technology for affordable item-level secure logistics and track-and-trace applications. (InkSure19.04)

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9.6 Eltek Receives Sizeable Follow – On Order From a Major Fortune 100 US Manufacturer

Eltek announced that a major U.S. industrial manufacturer has placed a follow-on order for flex – rigid PCBs that will be used in the production of advanced industrial equipment. This order valued at $770,000 is anticipated to be supplied during the second and third quarters of 2007. This order was received under a supplier managed inventory program agreement. This framework agreement provides for our shipment of the PCBs to a hub close to the customer in the U.S. under frequent scheduling agreements. Sales are recognized when the PCBs are shipped to the customer, which are expected to be completed in the third quarter. Petah Tikva's Eltek (http://www.eltekglobal.com) is Israel's leading manufacturers of printed circuit boards, the core circuitry of most electronic devices. It specializes in the complex high-end of PCB manufacturing, i.e., HDI, multi-layered and flex-rigid boards. Eltek's technologically advanced circuitry solutions are used in today's increasingly sophisticated and compact electronic products. The Company has invested heavily in upgrading its production facilities over the past five years. (Eltek26.04)

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9.7 Screenpeaks Sets New World Record – 70 SlideTV Channels Currently Broadcasted Over Different Satellites

Screenpeaks has achieved a new record in SlideTV history, reaching the 70 SlideTV channels mark. Screenpeak's channels are broadcasted mainly over Astra, Hotbird and Hispasat satellites, serving Europe, and the Middle East. The SlideTV concept is a proven business model with high success rates and profitability for Screenpeaks' customers. The turn-key-solution and the economics offered by Screenpeaks SlideTV created a growing customer demand for expanding their business into proven profitable media formats, resulting in an increasing rate of channels going on-air within short time. Screenpeaks continues to evidence the growing demand for its SlideTV™ solution and therefore the company plans to offer additional channels and expand into additional territories and business opportunities to its customers. Rosh Ha'Ayin, Israel's Screenpeaks (http://www.screenpeaks.com) is the leading provider of SlideTV platforms operating over 70 Channels worldwide. Screenpeaks SlideTV is an end-to-end ultra-thin-band digital slide TV channel – broadcasting slides and voice programs over digital satellite or cable TV, focused on revenue-generating advertising and information, consumed over premium rate calls and premium SMS. Viewers are able to instantly and easily react and move-to-action over mobile and fixed phones and to generate instant revenues to broadcasters, mainly from Premium telephony and SMS. (Screenpeaks25.04)

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9.8 Telkom South Africa Embarks on Nationwide WiMAX Network with Alvarion's BreezeMAX

Alvarion announced that Telkom SA, the provider of public switched communications services in South Africa, has selected its BreezeMAXTM 3.5 GHZ to roll out WiMAX networks as part of an ongoing deployment project for increasing wireless broadband services on a nationwide level. The first deployments are taking place in the highly urbanized province of Gauteng and along the coastal regions of the country. Working with its local leading technology partner SAAB Grintek, Alvarion offers a fast and cost effective deployment process by means of its award-winning BreezeMAX platform and extensive proven field-experience. Taking part in the WiMAX rollout initiative, end users are expected to experience excellent and reliable network coverage, enjoying quick access and triple play services. BreezeMAX complies with IEEE 802.16 standards and uses OFDM technology for advanced non-line-of-sight functionality. Its carrier-class design supports broadband speeds and quality of service, enabling carriers to offer triple play broadband services to thousands of subscribers via a single base station. Since its launch in mid-2004, BreezeMAX is the most popular WiMAX system in the world having been successfully deployed in over 300 installations, in more than 100 countries worldwide.

With more than 3 million units deployed in 150 countries, Tel Aviv, Israel's Alvarion (http://www.alvarion.com) is the world's leading provider of innovative wireless broadband network solutions enabling Personal Broadband to improve lifestyles and productivity with portable and mobile data, VoIP, video and other services. Leading the market with the most widely deployed WiMAX system in the world, Alvarion is leading the market to Open WiMAX solutions with the most extensive deployments and proven product portfolio in the industry covering the full range of frequency bands with both fixed and mobile solutions. Alvarion's products enable the delivery of personal mobile broadband, business and residential broadband access, corporate VPNs, toll quality telephony, mobile base station feeding, hotspot coverage extension, community interconnection, public safety communications, and mobile voice and data. (Alvarion 25.04)

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9.9 Gilat Provides Broadband Satellite Network for Nigerian Elections

Gilat Satellite Networks was chosen by WIN TSS (Telecom Security Systems) Nigeria to provide a broadband satellite communications network and outsourced network services for the recent national elections in Nigeria. WIN TSS is using the Gilat SkyEdge VSAT network to provide a reliable, high-speed data and voice communications transmission backbone between national election headquarters in FCT (Abuja), the headquarters in 36 state capitals, and all of the LGA (Local Government Area) sites nationwide. Gilat's VSAT solution for WIN TSS includes a SkyEdge hub and more than 1,000 solar-powered SkyEdge Pro terminals, management of hub operations and satellite space segment. SkyEdge's low power consumption enables cost reductions through solar power support for the remote sites. Gilat's SkyEdge is a satellite communications system that delivers high-quality voice, broadband data and video services over a powerful unified system. SkyEdge represents Gilat's deep knowledge base and field-proven product offering, acquired through two decades of experience. SkyEdge's flexible architecture and efficient space segment utilization make it an ideal platform for operators and service providers. Petah Tikva, Israel's Gilat Satellite Networks (http://www.gilat.com) is a leading provider of products and services for satellite-based communications networks. (Gilat26.04)

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9.10 Teleperformance Netherlands to Benefit From NICE SmartCenter by Moving to NICE Perform

NICE Systems announced that Teleperformance Netherlands will benefit from NICE SmartCenter by moving to NICE Perform and by adding TotalView Workforce Management system from IEX Corporation, a NICE Systems company. NICE SmartCenter is an innovative solution designed to enable organizations to manage their contact centers in an insightful proactive manner and take action at the righttime. NICE SmartCenter builds upon the success of NICE Perform by expanding significantly the offering and taking it to yet a higher level of added value for customers. NICE SmartCenter leverages the synergies of the combined capabilities of NICE Perform, IEX TotalView and Performix. With NICE SmartCenter, Teleperformance will be able to manage its contact center in a more insightful and proactive manner and take action at the right time. Furthermore, leveraging the synergies NICE Perform with IEX TotalView in the Netherlands centers will enable Teleperformance to better link its customer interactions with its planning and management processes and more closely align quality management and workforce management functions. Ra'anana, Israel's NICE Systems (http://www.nice.com) is the leading provider of Insight from Interactions solutions and value-added services, powered by advanced analytics of unstructured multimedia content – from telephony, web, radio and video communications. NICE's solutions address the needs of the enterprise and security markets, enabling organizations to operate in an insightful and proactive manner, and take immediate action to improve business and operational performance and ensure safety and security. (NICE 30.04)

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10: ISRAEL ECONOMIC STATISTICS

10.1 The Composite State-of-the-Economy Index for March 2007 Up by 0.6%

The Central Bureau of Statistics announced on 30 April that the composite state-of-the-economy index went up by 0.6% in March 2007, indicating the continued rapid expansion of economic activity. The rise in the index was the result of significant rises in the indices of trade and services revenues and of manufacturing production and a rise in the indices of goods exports and imports, offset in part by a decline in the index of services exports. It should be stressed that the composite indices for January and February 2007 were revised upwards due to the upward adjustments of the data of goods exports in those months. This is also due to the upward revision of the February index of services exports. With regard to the various components of the index, the index of manufacturing production rose in February by 2.3%, following its 2.8% decline in January. The trade and services revenue index rose in February by 3.1%, after rising by 2.3% in January. The goods exports index recorded a rise of 4.5% in March, in contrast to its 9.4% drop in February. The services exports index fell in March by 6%, following its rise of 1.8% in February. The imports index rose by 2.5% in March, after falling by 1.1% in February. (CBS30.04)

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10.2 Israel's Defense Exports Up 25% In 2006 to Over $3b

SIBAT – Foreign Defense Assistance and Defense Export Organization announced that Israel's defense exports exceeded $3b in 2006, 25% greater than in 2005. For the first time, defense contracts signed in a single year exceeded $5b, 10% more than in 2005. Defense exports and contracts have doubled within a decade. The Ministry of Defense said that the boom in defense exports strengthened Israel's position as one of the world's top six defense exporters, after the US, Russia, France, UK and Germany. (Globes 26.04)

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10.3 Unemployment Rate Unchanged At 7.6% in February

On 26 April, the Central Bureau of Statistics announced that the unemployment rate remained unchanged at 7.6% of the civilian labor force in February 2007, amounting to 216,200 persons. The unemployment rate was 7.7% during the Q4/06. The unemployment rate has been falling steadily since mid-2003. (CBS26.04)

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10.4 IVC Reports: Capital Raised by Israeli High-Tech Companies – $406 Million in Q1 2007

The IVC Research Center announced findings of its Quarterly Survey concerning venture capital and private equity research in Israel. In Q1/07, 121 Israeli high-tech companies raised $406m from venture investors – both local and foreign. The amount was up 13% from the $360m raised by 101 companies in Q1/06, but was 15% below the previous quarter's $477m (highest in five years) raised by 105 companies. In Q1/07, Israeli VCs invested $171m in Israeli companies, 42% of the capital invested. This amount was very close to Q1/06 and Q4/06 levels of $177m (49%) and $178m (37%), respectively. The 42% Israeli VC share of the total amount invested in Israeli high-tech compared with an annual average of 49% for the 1999-2006 period. The remainder of capital was from foreign investors as well as non-VC Israeli investors. IVC Research Center is Israel's leading research center providing business leaders with an unmatched wealth of data on Israeli venture capital, private equity and high-tech industries. (IVC26.04)

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10.5 First Quarter Tourist Overnights Down

Israel's tourist overnights at hotels totaled 1.6 million in Q1/07, 8% fewer than the 1.8 million in Q1/06. Hotel overnights by Israelis fell 1%, the Israel Hotel Association reports. The average room occupancy rate fell by 6% to 51%. The Hotel Association attributes the decline to the persistent effect of the Second Lebanon War last summer and because the Ministry of Tourism failed to take any immediate marketing countermeasures to bring back tourists. The Hotel Association director general called on the government to act immediately to stop the loss of tourist markets and to implement its promise to invest $50m in marketing. The Hotel Association also wants the establishment of an independent marketing network with the goal of attracting tourists. The fall in tourist overnights hit Eilat the hardest, where they were down 29% compared with the corresponding quarter. Tourist overnights in Tiberias and kibbutz guest houses fell 16%, Jerusalem – 8%; and Haifa – 5%. Tourist overnights at the Deal Sea were unchanged and they rose in Tel Aviv and Herzliya. Some 60% of hotel overnights by Israelis were in Eilat and the Dead Sea. The number of overnights by Israelis in Eilat rose 4%, compared with the corresponding quarter, and by 2% at the Dead Sea. Overnights by Israelis in Tel Aviv rose 16%, but they fell 24% in Jerusalem. (Globes 25.04)

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In Depth

11.1 IVC Reports: Capital Raised By Israeli High-Tech Companies – $406 Million in Q1 2007

The following are the findings of the Quarterly Survey conducted by the IVC Research Center, which for more than eight years has been at the forefront of venture capital and private equity research in Israel. This Survey, conducted with the cooperation of the Israel Venture Association (IVA), reviews capital raised by private Israeli high-tech companies from Israeli venture capital funds and from other investors. The Survey is based on reports from 80 venture investors of which 50 are Israeli management companies and 30 are other – mostly foreign – investment entities.

In the first quarter of 2007, 121 Israeli high-tech companies raised $406 million from venture investors – both local and foreign. The amount was up 13% from the $360 million raised by 101 companies in the first quarter of 2006, but was 15% below the previous quarter's $477 million (highest in five years) raised by 105 companies.

Eighty-three companies attracted more than $1 million each. Of these, 17 companies raised between $5 million and $10 million each, seven companies raised between $10 million and $20 million each, and two companies raised more than $20 million each. The average company financing round was $3.4 million, compared with $3.6 million in the first quarter of 2006 and $4.5 million in the previous quarter.

Israeli VC Investment Activity

In the first quarter of 2007, Israeli VCs invested $171 million in Israeli companies, 42% of the capital invested. This amount was very close to Q1/06 and Q4/06 levels of $177 million (49%) and $178 million (37%), respectively.

The 42% Israeli VC share of the total amount invested in Israeli high-tech compared with an annual average of 49% for the 1999-2006 period. The remainder of capital was from foreign investors as well as non-VC Israeli investors.

"Q1 results show the continuation of the strong investment level that we saw last year – around $1.5 -1.6 billion," said Zeev Holtzman, Chairman of IVC Research Center and Giza Venture Capital. "The Israeli VC fund investment level is almost the same as in previous quarters, but the relative Israel VC share is less. This indicates a shortage of capital and a very cautious pace of investments by the Israeli VC funds. Other investors – mostly foreign VC funds – have increased their investments. Interestingly, many of these investments were made without the involvement of the Israeli VCs, effectively increasing competition for good deals."

First investments accounted for 51% of total dollar investments by Israeli VCs in Q1, compared with 37% in the first quarter of 2006 and 55% in Q4 2006. The average First investment by Israeli VCs was $2.1 million, while the average Follow-on investment was $0.8 million.

Israeli VC Activity in Foreign Companies

In Q1, Israeli VCs invested $9 million in nine foreign companies in addition to their investments in Israeli high-tech companies. This compares to $16 million invested in foreign companies in the previous quarter and $24 million invested in the first quarter of 2006. Two of the investments were First investments, and the remainder were Follow-ons.

Capital Raised by Sector

In the first quarter of 2007, 33 Communications companies attracted $124 million or 30% of the total capital raised, followed by 20 companies in the Life Sciences sector with $68 million or 16%.

Seventeen Internet companies raised $64 million or 16% of the capital, which compared with $21 million or just 6% in the first quarter of 2006 and $22 million or 4% in the previous quarter. "The Internet sector is gaining momentum just as in the US," said Efrat Zakai, Director of Research at IVC. "First quarter Internet figures – the highest in five years – surged due to an increase in the number of deals and one particularly large financing round of over $20 million."

Capital Raised by Stage

Q1 was another successful quarter for Seed companies with 29 Seed firms attracting $54 million, 13% of the total capital raised. This amount showed little variance from Q1/06 and Q4/06 when $50 million (14%) and $54 million (13%) were raised, respectively. From among the Seed investments, Internet companies attracted the largest share of capital – 37% – followed by Cleantech firms with 18%.

Early Stage (R&D) companies captured 40% of capital raised, Mid-Stage companies (up to $10 million in revenues) 30%, while Late Stage companies attracted only 17% of investments.

IVC Research Center (http://www.ivc-online.com) is Israel's leading research center providing business leaders with an unmatched wealth of data on Israeli venture capital, private equity and high-tech industries. IVC products and services are used regularly by venture capital funds, private investors, high-tech companies, financial investors and institutions, as well as public entities such as the Office of the Prime Minister, the Central Bureau of Statistics, the Bank of Israel and the Office of the Chief Scientist. (IVC22.04)

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11.2 When Everybody Loves the Shekel

Morgan Stanley's Serhan Cevik (http://www.morganstanley.com) observed that the shekel's appreciation is not just about the dollar's weakness, in his opinion. The US dollar has long been on a depreciation trend, and their currency team expects cyclical adjustment to continue in the coming months. "Although the dollar's weakness has played a role in the shekel's rise, we think that Israel's own economic and structural features are more important in determining the value of its currency. With fiscal normalization and greater specialization in higher value-added sectors, the Israeli economy has enjoyed a marked acceleration in real GDP growth and structural shifts in the balance of payments. The current account balance, for example, turned from an average deficit of 2% of GDP a year in the 1990s into an average surplus of 3% of GDP in the last four years (and as much as 5% of GDP in 2006). This improvement, especially against the headwind of higher commodity prices, represents the core of our argument for the shekel's appreciation. However, although the shekel remains fundamentally undervalued, its recent move below 4.10 against the dollar has been much faster than even our out-of-consensus expectation and created a policy dilemma for the central bank.

Currency pass-through has led to an episode of technical deflation. The consumer price index declined by 0.2% in the first quarter of this year, lowering the year-on-year inflation rate from -0.1% at the end of 2006 to -0.9% last month. The extent of deflationary pressures represents a significant shift away from price dynamics a year ago — when inflation was running at annual rate of 3.8% — and also shows a deviation from the central bank's target range. We see one reason as really behind the prevailing deflation pressures, and that is not the lack of domestic demand in the economy. Instead, the shekel's appreciation is the major culprit, driving dollar-denominated and -linked prices lower. The degree of exchange rate pass-through is exceptionally high in Israel, especially considering the low level of inflation. In our view, this is not so much because of changes in import prices, but reflects the behavior of non-tradable prices linked or denominated in dollars. For example, Israel's housing sector is almost fully dollarized and, with its 22% weight in the basket, has a significant influence over inflation dynamics. Hence, the 6.6% year-on-year drop in housing prices has pushed the headline inflation reading lower, while the inflation rate measured by prices unaffected by the exchange rate is now running at more than 2% on an annualized basis.

As previously argued, interest rate cuts are not bringing an immediate correction. The Bank of Israel has responded by lowering short-term interest rates to weaken the shekel and thereby bring inflation within its target range. We have previously argued that this policy approach may not necessarily be effective in the short run, since the shekel's appreciation is a result of fundamental improvements and structural changes in the economy. In other words, the economy has experienced a structural shift in the current account, while the composition of capital flows is not very sensitive to interest rates. Latest figures on foreign exchange activity show that even though non-residents poured more money into shekel-denominated bonds, the great majority of capital flows are either direct investment or strategic exposure in the equity market. Moreover, a cycle of monetary easing could also attract new investors and put even more pressure on the shekel. This is why we maintain the view that currency-driven deflation does not justify aggressive monetary easing. Indeed, instead of bringing stability, such a monetary policy orientation could lead to asset price bubbles and higher (exchange rate and inflation) volatility in the future.

The economy is expanding faster than its potential growth rate. It is not easy to estimate the potential growth rate for an economy experiencing structural transitions, but our conservative calculations suggest a potential growth rate of 4-5% for the Israeli economy. This means that the actual rate of real GDP growth — reaching 8% on an annualized basis in the last quarter of 2006 — has been well above the potential growth rate and consequently narrowed the output gap. In our view, with the lagged transmission of interest rate cuts, these underlying dynamics will gradually bring inflation within the target range." (MS23.04)

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11.3 Middle East & Central Asia Sovereigns Show Strong Growth, Better Creditworthiness, Says Report

Standard & Poor's (http://www.standardandpoors.com) reported that Middle Eastern, North African, and Central Asian sovereigns continued to benefit from strong real economic growth, averaging more than 6%, and improved creditworthiness. Their ratings, however, remain constrained by low fiscal flexibility and geopolitical risks.

"Sustained high commodity prices have spurred economic growth in the Gulf countries and Kazakhstan, as both public and private investment increased," said Standard & Poor's analyst Farouk Soussa. "Although the majority of this investment has been in the oil sector, significant public and private expenditure in other sectors has also been witnessed in countries such as Oman, Saudi Arabia, and Qatar, where efforts to diversify the economy have been redoubled."

Elsewhere, a continued favorable global conjuncture and ample liquidity has helped keep real interest rates low, stimulating domestic investment and demand, and improving the inward flow of capital. Turkey, Morocco, Jordan, Egypt, and Israel all enjoyed strong real investment growth in 2006 – a trend that has been boosted by increased intra-regional investment by oil-exporting Arab countries. Lebanon was a notable exception to the strong growth story as the mid-year attack by Hezbollah against Israel reversed a promising economic recovery in the first half of the year.

Moreover, ratings in many countries in the region are constrained by a lack of fiscal flexibility and/or underperformance on the budget. In the Gulf states and Kazakhstan, fiscal performance in 2006 continued to be very strong, with almost all countries increasing the size of the already large surpluses registered in 2005 as revenues accruing from a further rise in oil prices far exceeded those assumed in budgets. Encouragingly, these unforeseen oil revenues were not matched by excessive spending, but mainly once more used to augment stabilization funds for future use, or used to retire domestic debt (as was the case in Saudi Arabia). Nevertheless, ratings in the Gulf countries remain constrained by the dependence of government finances on oil revenues.

Other countries in the region generally exhibit similar structural inflexibilities on the expenditure side of the budget, while not enjoying the kinds of revenues generated in oil-rich states. (S&P24.04)

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11.4 Iraq Economy: Oil Deposit

The announcement of a study that suggests that Iraq's oil reserves could be almost as large as those of Saudi Arabia, the world's leader, has come amid fresh evidence of the monumental difficulty of realizing that potential, as bombs in Baghdad left 200 people dead in a single day and Iraqi MPs wrangled over the details of new oil legislation.

The reminder of the scale of Iraq's unrealized oil wealth has come in the form of a report by IHS, an industry consultant, providing details of existing oil reserves and of more than 400 undrilled prospects and undeveloped discoveries. The Iraq Atlas estimates that Iraq has proven reserves of 116 billion barrels (slightly higher than the standard industry figure), which could be supplemented by a further 100 billion barrels in the barely explored desert region to the west of Baghdad. Saudi Arabia's reserves are put at 264 billion barrels, with Iran occupying second place in the world ranking with 138 billion barrels.

The IHS study confirms what most analysts of the Iraqi oil sector have long suspected. The giant oilfields discovered in the Kirkuk area in the north in the 1920s and in the southern region in the 1950s required the drilling of relatively few, shallow, wells, and there was consequently little incentive for major exploration and development efforts to be deployed elsewhere. The seizure of power by Saddam Hussein at the end of the 1970s ushered in a period of wars and sanctions that prevented any significant development of the Iraqi oil sector for more than a quarter of a century. Iraq's oil production capacity has fallen from a peak of 3.6 million bpd to little more than 2 million bpd, as the industry has suffered a further battering in the chaos and violence of the post-Saddam era. Iraq has the dubious distinction of having the highest reserve/production ratios in the world.

Since the US-led invasion in 2003 there has been only limited exploration drilling, mainly in the Kurdish region, and just three contracts have been let for existing oilfield development work – to Turkish and Canadian firms in the north and to Ireland's Petrel Resources in the south. These three schemes will add a total of some 350,000 bpd of production capacity by 2009. Further progress awaits an improvement in the security situation and the establishment of a robust legal framework that will allow foreign companies to invest.

Kurds Object

The civil conflict that continues to tear Iraq apart has not stopped the government from addressing the critical question of passing a new oil law. In February the cabinet approved a draft law, allowing provincial authorities to negotiate development contracts, subject to review by a Federal Oil and Gas Committee. The oil minister, Hussein Shahristani, has said that the law will be submitted to parliament for final approval in the next few weeks. However, the Kurdish Regional Government (KRG), which has attracted strong interest from international companies to explore for and produce oil in its relatively secure region, has voiced its objections to a number of items in annexes attached to the law since it was passed by cabinet. According to remarks attributed to its chief oil official, Ashti Hawrami, the KRG has been particularly exercised by the placing of virtually all of Iraq's oilfields under the control of the Iraqi National Oil Company (INOC, which is to be re-incorporated under another law likely to be passed as part of a package, also including a law on distributing oil revenue to Iraq's 18 provinces based on population). This would have a damaging impact on the production-sharing contracts that the KRG has already signed and on new agreements that are under negotiation.

The KRG has been anxious to ensure that the law is sufficiently flexible to deal with the very different conditions obtaining in its region, compared with the rest of Iraq. In Kurdistan, investors are taking on considerable exploration risk, which does not apply to the numerous fields elsewhere in Iraq that have been discovered but not developed. The law requires the KRG to submit its contracts for review, but this process could be compromised if the fields in question are designated as being under INOC control in the annexes (which have yet to be published). The law itself provides for a number of commercial frameworks, including service contracts, exploration and development contracts and risk exploration contracts. It also recognizes the need to provide adequate returns and incentives to investors, within the context of best serving the national interest.

According to Al Hayat, a London-based Arabic daily, one of the annexes specifies the different categories of fields. These include 27 in production and 25 close to production, all of which come under INOC's remit, as well as 26 that have been discovered but not exploited, which will be offered to investors and contractors. The annexes also provide details of 65 blocks to be offered for exploration, according to Al Hayat.

Mr. Shahristani suggested that any remaining differences about details of the law can be ironed out by the end-May deadline for its passage. However, persuading international companies and financiers to commit resources to Iraqi oil projects in the current political and security circumstances will be another matter entirely. (EIU19.04)

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11.5 Further Reforms Needed To Capitalize On Diversification Efforts in Gulf States, Says Report

Standard & Poor's (http://www.standardandpoors.com) reported that although record oil receipts have enabled Gulf states to shore up their balance sheets and intensify nonoil investments, these countries have yet to secure the long-term viability of their private sectors, Standard & Poor's Ratings Services said in a report. The report, titled "Gulf States Tackle Diversification, But Tough Decisions Lie Ahead," points out, a viable private sector is essential to reduce the employment burden on the states.

"Despite the surge in nonoil investment over the past few years, Gulf states still face two key issues," said Standard & Poor's credit analyst Luc Marchand. "First, they need to develop a private sector beyond energy-intensive industries that remains viable even in an oil price slump. Second, they need to increase the proportion of nationals employed within the private sector.

"These are long-term aspirations, requiring sustained commitment to structural reforms that will enable an entrepreneurial class to emerge and increase foreign investment in the nonoil economy. Such reforms should involve not only privatization and the development of a business-friendly legislative environment, but also merit-based access to credit, the reduction of red tape, and strong and independent courts able to intervene in commercial disputes."

The nonoil investment boom of recent years has had only a moderate impact on employment patterns in the six countries that make up the Gulf Cooperation Council (GCC). Heavy industries require minimal labor: the booming petrochemicals sector, for example, employs only an estimated 150,000 people. Most new jobs, whether in heavy industry, construction, or services have, in any case, been taken up by imported labor. Moreover, much of the foreign
investment in the financial sector is confined to free zones, which operate according to their own regulations in parallel with the local economies. Consequently, structural reform of the domestic financial sector–a key engine of growth and therefore employment–has lagged. Above all, oil remains the key driver of the nonoil economy and the chief reason for the recent surge in service-sector investment.

Meanwhile, argues the report, the jury is still out on the GCC's impressive diversification efforts. Many of the diversification trends have been repeated across the region, raising the risk of oversupply. "There is compelling logic to the development of sectors reliant on external demand such as petrochemicals, fertilizers, and aluminum," continued Mr. Marchand. "But it is not clear that internal GCC demand will be sufficient to support such rapid expansion in the services sector. Tourism, to a large degree directed at intra-regional flows, is a case in point. Moreover, tourism would be particularly exposed to any serious escalation of geopolitical tensions. "It is also unclear whether the region can sustain four major financial centers, each vying for a share of the international financial market," he added. (S&P24.04)

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11.6 Moody's Issues Annual Report on Kuwait

In its annual report on Kuwait, Moody's Investors Service (http://www.moodys.com) says its investment-grade ratings are supported by robust GDP per capita and a high level of prosperity primarily due to its substantial hydrocarbons endowment. The foreign currency country ceiling for bonds is Aa2, which is based on the foreign currency government bond rating of Aa3 and Moody's assessment of a low risk of payments moratorium in the event of a government bond default.

"Kuwait has been able to achieve its wealth, including wide fiscal and external current account surpluses, thanks to the fourth largest oil reserves in the world," said Moody's Assistant Vice President Kenneth Orchard, author of the report. "It is a major oil exporter while having a relatively small population of around 3 million." For these reasons, both the public and private sectors have been able to accumulate substantial net foreign assets. Meanwhile, Kuwait enjoys close relations with the United States, which is strongly committed to protecting its sovereignty, other G8 countries, and its regional neighbors.

"However, Kuwait's ratings are constrained by a number of factors, including its high dependence on volatile oil exports and a bloated public sector, which employs over 90% of the labor force of Kuwaiti nationals," said Orchard. "Expatriates compose over 95% of the private sector work force."

He said the country's political, administrative and legal institutions are still developing and remain weaker than most other Aa- or Aaa-rated countries. Government effectiveness is limited by a slow legislative process and cumbersome bureaucracy. "Although we expect the government's finances to continue to improve over time, Kuwait's ratings are likely to be constrained by political and institutional factors, which are given comparatively more weight in the Aa rating category," explained the analyst. For example, he said, recent political posturing that led to the resignation of the government will delay passage of important legislation such as Project Kuwait, a plan to introduce foreign investment into four major northern oil fields. There also remains a risk of a negative effect on Kuwait of political developments in Iran, Iraq or the wider region. Moody's report, "Kuwait: 2007 Credit Analysis," is a yearly update to the markets and is not a rating action. (Moody's 25.04)

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11.7 Kuwait: On the Information Superhighway

Although Kuwait's ability to take advantage of information and communications technology has declined in relation to its neighbors, it has made significant progress recently to change this trend. The recent World Economic Forum report on network readiness ranked over 120 countries according to a set of information technology (IT) indices, including the adoption of IT and communications systems and the usage of IT networks to further economic development.

The report, which took into account the exploitation of IT in both the private and public sectors, saw Kuwait drop eight spots to 54th. While Kuwait is the lowest of the four Gulf countries ranked in the index, the UAE (currently ranked at 29th) and Bahrain (50th) also dropped, slipping six places and seventeen places, respectively. Qatar showed a positive gain, moving up three spots to 35th. According to Irene Mia, senior economist of the World Economic Forum and co-editor of the report, countries that did well in the rankings demonstrated a focus on education and innovation in the public sector, offered a market environment conducive for IT and provided a stable regulatory environment for IT.

The results are surprising for Kuwait, a country with ambitious plans for digital integration, a high penetration of consumer technology and the third largest computer market in the region. The reason for this, according to Eesa Mohammed Bastaki, director of education and technology at the Dubai Silicon Business Park, is that Gulf countries suffer from lagging educational systems and a shortage of technological innovation, stifled by excessive bureaucracy and inadequate regulation. Economist Jasem al-Sadoun, with Al Shall Consultants, paints a similar portrait, attributing Kuwait's current ranking to the lack of government funding for appropriate educational and infrastructure systems, which in turn limits the growth of an innovative private sector.

In conversations with OBG, IT industry analysts have pointed out that the very oil-based liquidity fuelling the regional boom discourages economic diversification. The budget surpluses and increased cash flows, while fuelling growth, dampen any incentive for encouraging private sector growth or investment in research and development. Mohammed Wadie, of the Arab Planning Institute, said that Arab countries generally suffer less-than-expected investments in IT and communications in comparison to other regions.

Software experts also note that Gulf Cooperation Council countries lack rigorous intellectual property protection laws, which in turn hinders local innovation and product development. According to media reports, approximately 60% of software in Kuwait is thought to be illegally copied or sold, while in the UAE an estimated 35% of software is pirated, either knowingly or unknowingly. However, while there are a number of issues restricting Kuwait's network readiness, there are nonetheless a number of signs indicating dramatic improvements are in the offing.

Georges Kaldany, general manager of Gulf Business Machines, said that 2007 is shaping up to be a much better year for Kuwait's IT sector. "We are seeing a lot more activity in IT solutions this year than last year, with a number of major projects in the pipeline that will, hopefully, stimulate further growth in the field."

One of these is the recent establishment of the Central Agency for Information Technology (CAIT), under the ministry of planning. CAIT's mandate is to coordinate the country's e-government campaign, promote greater awareness of IT issues and encourage further development within the IT sector. Most recently, CAIT officials have been working with Singapore's e-Government Leadership Centre to upgrade Kuwait's e-government infrastructure.

High oil revenues have also spurred new investments by both the private sector and the government. Real estate companies, for example, are increasingly integrating network systems into their developments, through the use of what are called smart (or digital) buildings. These are buildings that are hard-wired for broadband and high-capacity operations from their inception. This is part of the government's new Fibre-to-the-Home (FTTH) initiative, which seeks to deploy fibre optic networks to 36 areas throughout the country, increasing household connectivity.

New efforts are being made to encourage long-term growth in the IT market as well. Microsoft CEO Steve Ballmer was in Kuwait in late April to inaugurate an innovation centre, along with National Technology Enterprises Company. The center, one of several worldwide, will serve as a high-tech and entrepreneurial incubator for local software companies and IT engineers.

Kuwait's IT market is showing signs of improvement, with a forecast growth rate of 17% for 2007. The industry is expected to balloon from $406m last year to over $800m in four years time, with the IT services sector alone expected to surpass $143m this year. Consumer technology is also expected to grow steadily, with software sales growth forecast at 15%. Kuwait's telecommunications sector remains one of the most developed in the region, with regional market leaders Mobile Telecommunications Company and Wataniya overseeing a mobile penetration rate of nearly 90%. (OBG01.05)

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11.8 Total Exports of Bahrain in 2006 Stood at $11.54 Billion – a 15.3% Increase

Global Investment House's Bahrain Economic & Strategic Outlook found that Bahrain's total exports in 2006 stood at $11.54b and oil exports contributed $9.18b of the total exports during the period. The total exports in 2006 were up by 15.3%, on account of higher oil prices in the year 2006. The oil's contribution to the total exports has been increasing gradually since 2002, as it increased from 68.3% in 2002 to 79.7% in 2006, and it is further expected to cross the 80% mark provided the oil prices remain at the same levels. Despite the rigorous diversification efforts by the Bahraini government, the gradual growth indicates Bahrain's continued dependence on oil, although lower compared to the regional peers. On the other hand, the total non-oil exports stood at $2.334b or around 20.3% of the total exports in 2006. The non-oil exports reported an increase of 4.7% in 2006 and hence the contribution to the total exports has been the lowest since 2002. In absolute terms, the non-oil exports have increased, but due to the higher oil prices through out the year has brought down the contribution of non-oil exports.

In the non-oil sector, base metals and articles thereof constitute the largest items of exports, followed by textile & textile articles and products of chemical and allied industries. The top three non-oil import items constitute machinery and appliances, transport equipment and base metals and articles. On the external accounts side, Bahrain will have to widen its non-oil export base. GIH believes that with its thrust on manufacturing industries, Bahrain will be able to develop its non-oil exports in the years ahead; however, it will take some time before its non-oil exports contribute substantially to the total revenue.

Bahrain's trade with other GCC member countries was about 36.4% of non-oil exports and 20.7% of non-oil imports in the year 2006. Saudi Arabia has been the major export destination for Bahrain with exports worth $489.4m in 2006, representing 60.2% of total non-oil exports with the GCC member countries. The other important export destinations were UAE and Qatar representing 17.3% and 11.3% respectively of the total non-oil exports with the GCC countries. Similarly, Saudi Arabia has also been the major import destination for Bahrain with imports worth $469.24m taking place in 2006, representing 60.2% of the total non-oil imports with GCC countries in 2006, followed by UAE (28.1%) and Qatar (5.0%) in 2006. Saudi Arabia has been among the major import and export destination even when compared to all the countries that deal with Bahrain. Other major international destinations are Germany, Taiwan, India, Japan, China and USA. In 2006, Japan took the leading position from Saudi Arabia as the top exporter to Bahrain with imports worth $480m. The other major exporters to Bahrain included Germany ($256.776m), China ($328.66m), Australia ($332.64m) and USA ( $287.81m) respectively. (GIH08.04)

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11.9 Northern Emirates: Industrial Growth

The emirate of Sharjah achieved a nominal GDP growth of 19.9% in 2006, growing from $9.5b in 2005 to $11.66b in 2006, according to the Sharjah Economic Development Department (SEDD). The Oxford Business group observed that industrial activities have long been a staple of the emirates' development and remain at the core of its economy. It is estimated that between 40 and 50% of the United Arab Emirates' total industrial activity is located in Sharjah, with over 3,000 industrial facilities. Small and Medium Enterprises (SMEs) account for most of the industrial activity, operating in a variety of sectors.

In 2006, manufacturing as a share of GDP reached $1.9b – a 15.7% increase over the previous year – while gross output grew by 18.6%. The Hamriyah Free Zone – a 10m sq meters area established in 1995 and dedicated to industrial and commercial activities – has been instrumental in the expansion of Sharjah's industrial base. It now hosts more than 1,100 companies, a figure that keeps increasing. Its success is mainly due to the fact that, contrary to the city's other industrial zones, it allows 100% foreign ownership as well as 100% import and export tax exemptions. Although land prices have soared, real estate is still cheaper than in Dubai. Besides, the government heavily subsidizes energy and water prices, a boon to high-consuming industries.

Furthermore, the emirate of Sharjah has built itself an enviable reputation as a regional trading hub, mainly thanks to its two ports located on the Gulf – Port Khaled and Hamriyah Port, the latter as part of the Hamriyah Free Zone – and Khor Fakkan on the Indian Ocean. Sea. Air traffic has grown more than 50% in the past few years, which testifies to the vital role of Sharjah's ports and international airport for the local economy. This has allowed it to grab a significant share of regional trade, mostly with Iran, Kuwait, Saudi Arabia, India, and Qatar, its top 5 trade partners.

Meanwhile, 2006 was a busy year for Sharjah Airport International Free Zone (SAIF Zone), with almost 700 companies establishing operations, bringing the total to 2738 companies at the end of 2006. While figures for 2006 have not yet been disclosed, total foreign trade in 2005 was well in excess of $5.4b. Since 2000, trade has grown by 20% on average per year and 2006 should be no exception.

Growth should remain strong in 2007. In the first three months, the SEDD issued 1462 new business licenses and renewed 9,626 others, while the AIF Zone registered 121 new operations during the same period. Combined with the authorities' commitment to improve basic infrastructure and reduce red tape even further, several major developments intended to promote industrial and commercial growth should provide room for even more growth. Al Hanoo's Emirates Industrial City, currently under development, will provide space for over 3000 light and medium industrial operations, as well as commercial and residential space, over a total area of 7.7m sq meters. Sharjah Investment Center, a similar project pushed by regional property development firm SNASCO, will provide an additional 2.9m sq meters for light and medium industrial use, in addition to commercial and residential areas. (OBG26.04)

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11.10 Saudi Arabia: Tourism Goals

The Oxford Business Group reported that Saudi Arabia is preparing to shake off its austere image by developing its tourism sector. It has created ambitious plans to train locals to deal with foreign tourists as well as develop various locations around the kingdom to attract those tourists. With record oil returns, there is time to get the strategy right.

The kingdom is initially focusing on domestic tourism. The Secretary General of the Supreme Commission for Tourism (SCT), Prince Sultan bin Salman bin Abdulaziz, told OBG there is a growing domestic market with many thousands of Saudis taking holidays abroad every year but the local sector is virtually non-existent. By concentrating on domestic tourism, it is hoped that some of the money spent abroad will instead stay within the kingdom and hopefully be reinvested in Saudi Arabia's tourism sector.

Explaining why the domestic market was being targeted first, Sultan said, "It is not a government imposed restriction…this is the market we need to satisfy first. It is our duty. He said there was no objection in principle to foreign tourists, we are just not marketing ourselves to them on a major scale yet."

Set up in 2000, the SCT was created to enhance, develop and promote tourism and has spent the last few years formulating various master plans and strategies to develop Saudi Arabia's tourism industry. These range from human resource training to major real estate development and regional strategy formulation. It has also recently taken over responsibility for antiquities and museums from the ministry of education.

Sultan told OBG that the plans are based on the main tourism strengths of Saudi Arabia. "We have a constantly improving infrastructure, our people are warm and hospitable, and we have a rich and colorful heritage with amazing historic sites and antiquities. In addition we have major shorelines to attract investors for development, diving and other sports. What tourism that currently exists is concentrated on the major cities and a few sites of interest, notably the ancient city of Madain Saleh." During the First Saudi Urban Forum, held in Riyadh in early April, the SCT presented projects to develop six coastal tourism destinations on the Gulf and the Red Sea, five mountain destinations and one in the desert. The locations were chosen to promote the kingdom's natural and cultural heritage resources to attract various niches within the tourism sector.

A major aspect of the decision to develop tourism is the considerable employment opportunities that can be created within a service-based sector such as this, specifically, jobs for Saudis. Describing the range of training already underway or in the works, Sultan said that within 3-5 years they plan 80% Saudiisation. Developing the sector fits in with the government's broader strategy of diversifying the economy away from hydrocarbons. The SCT says Saudi Arabia's two Red Sea resorts have the potential to provide 90,000 direct job opportunities and a further 100,000 indirect employment opportunities. The projected tourism expenditure is about $6b.

Recognizing the need to train Saudis how to treat tourists and to be responsible tourists themselves, the SCT began the Ya Hala! (Welcome!) program to educate and train what Sultan refers to as frontline employees – people who have face-to-face contact with visitors. This includes hotel staff, security officers and tour guides. As a start, the commission launched a tourist skills development program for 400 Saudi taxi drivers at Riyadh's King Khaled International Airport. Another aspect of the SCT's decision to start with local tourists is that with the exception of Jeddah and the holy cities of Mecca and Medina, which see an annual influx of pilgrims from all over the world performing Haj and Umrah, few Saudis come into contact with tourists. Sultan said the aim was to prepare what is essentially a very conservative society for tourism at a scale and pace they can cope with.

It is therefore significant that in December 2006 high-level representatives from the kingdom's commission for the promotion of virtue and prevention of vice, whose religious police uphold the Islamic values of society, joined forces with the SCT and the Ya Hala initiative to train their staff to deal with the expected increase in tourists. These special police are often seen by foreigners as intimidating but have of late been on a drive to deliver a more balanced approach.

In February 2006, the kingdom announced it was relaxing visa restrictions and would provide a tourist visa service for Muslims and non-Muslims alike. The new proposal enables those wishing to visit the kingdom to join organized tours with approved operators, much the same as is required for those coming from overseas to perform the pilgrimages. So while the SCT's concentration is currently on the domestic market, a serious long-term strategy for more comprehensive access is clearly on the agenda. The commission is looking to announce two more mega coastal real estate developments on the Red Sea by the end of the year. These, plus the concerted drive to create a tourist economy from scratch will no doubt provide opportunities to both the domestic and international investor alike. (OBG25.04)

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11.11 IMF Executive Board Concludes 2006 Article IV Consultation with Libya

Background

Libya is a hydrocarbon rich country, but has one of the least diversified economies in the Maghreb region and among the oil producing countries. It has a long legacy of central economic management and excessive reliance on the public sector, and started its transition to a market economy in 2002, after 10 years of international economic sanctions. Since then, Libya has made efforts to liberalize its economy and foreign trade, achieving increasing economic growth while maintaining macroeconomic stability.

In 2006, economic conditions continued to be satisfactory. Real GDP grew about 5½%, reflecting an increase of 4½% in the value added of the hydrocarbon sector, and a buoyant non-oil economy (6%) boosted by increased government spending and the liberalization of the trade, service, and tourism sectors. However, preliminary end-year data indicate that annual Consumer Price Index (CPI) inflation accelerated in the last quarter reaching 7.2% (year on year) in December.

Based on preliminary data, the consolidated government operations registered a record overall cash surplus of about 39% of GDP, owing to a substantial increase (of 25%) in hydrocarbon revenues. Non-oil revenue performance grew even faster at 33%, partly owing to the reform of tax and customs administration currently underway. Government spending grew about 12%, owing to: (i) a marked increase in the wage bill, reflecting new hiring in the regions, and increases in wages for some categories of civil servants; and (ii) an improved execution of the development budget. Development spending increased to about 17% of GDP, concentrated on infrastructure and construction (42%), social sectors (32%), and hydrocarbons (19%).

Monetary developments were characterized by a strong (albeit lower than in 2005) broad money growth (about 20%), reflecting mainly the impact of the nominal increase in the non-oil fiscal deficit on money supply and a sustained increase in credit to public enterprises (of over 20%). Bank credit to the private sector grew about 7%, the highest growth rate since 2000.

On the external side, the current account surplus is estimated to have reached about 48% of GDP, reflecting the growth of hydrocarbon exports resulting from higher export prices and volumes. Import growth was robust (18%) reflecting rising domestic demand, including increased government spending. Gross international reserves reached the equivalent of 29 months of 2007 imports of goods and services, and the Real Effective Exchange Rate (REER) based on the official CPI remained stable.

In 2006, structural reform continued with the implementation of a wide range of measures covering fiscal management and taxation, banking and payments systems, trade, and the business environment.

In the fiscal area, the authorities established the Libya Investment Authority to centralize hydrocarbon revenue management. Also, progress was made on strengthening revenue administration with the establishment of a large taxpayers office and the development of plans to streamline the tax and customs departments, strengthen controls, and upgrade office buildings and equipment.

In the monetary and banking area, the authorities developed a plan to restructure the public commercial banks, merged 21 regional banks, and accelerated efforts to strengthen banking supervision and modernize the payment system.

Efforts to liberalize trade and improve the business environment continued. In particular, the authorities: (i) halved the consumption tax on imported goods produced locally; (ii) abolished all remaining state import monopolies except those on petroleum products and weaponry; (iii) reduced the list of import bans for religious, health, and ecological reasons to 10 products; (iv) opened 51 offices across the country to expedite approval of business permits; (v) lowered the floor on Foreign Direct Investment (FDI) in the non-oil sector from $50 million to $1.5 million; and (vi) established a negative list for non-oil FDI limited to retail trade, wholesale trade, and importation. Also, the authorities issued a decree requiring that all FDI in the non-oil sector be undertaken through joint ventures with a minimum Libyan participation of 35%.

Following its withdrawal from the Heavily Indebted Poor Countries (HIPC) Initiative, Libya has developed its own debt relief plan. Rescheduling agreements were reached with a number of HIPC countries including Uganda, Tanzania, Benin, and negotiations with Nicaragua are ongoing.

Executive Board Assessment

Executive Directors were encouraged by Libya's economic performance in 2006, including strong real GDP growth, and surpluses realized on the fiscal and external current account balances. Directors also welcomed the elimination of most import monopolies. While taking note of these achievements, they observed that Libya needs to restore fiscal prudence, strengthen oil revenue management, develop a well-designed comprehensive strategy to restructure public commercial banks, and enhance the implementation of structural reforms.

Directors welcomed Libya's favorable medium-term financial outlook, which reflects the projected continuation of high hydrocarbon prices. However, they considered that the authorities' ability to maintain economic and financial stability could be undermined by the loosening of fiscal conditions in the 2007 budget. Directors stressed that, to avoid jeopardizing medium-term economic prospects, adjustments to the authorities' policy stance and reform approach will be needed.

Directors emphasized that a prudent fiscal policy is key to ensuring macroeconomic stability. They underscored the need to link government wage increases to productivity performance and calibrate non-wage government spending in line with the economy's absorptive capacity, in order to keep inflation in check. For 2007, they recommended that the envisaged increase in civil service wages be introduced with caution, possibly in installments over an eighteen-month period.

Directors urged the authorities to strengthen public financial management, including by unifying the budget and increasing its coverage, improving macro-fiscal coordination, and establishing clear operating and asset management regulations for the Libyan Investment Authority (LIA). They cautioned that investing LIA resources domestically could marginalize the private sector and be counterproductive in the medium to long run.

In responding to the envisaged fiscal expansion, Directors urged the Central Bank of Libya to tighten monetary policy to contain inflationary pressures. They recommended the liberalization of interest rates and development of market-based monetary instruments in order to strengthen the monetary framework.

Directors noted that the current exchange rate regime has served Libya well, but recommended that Libya's move to greater exchange rate flexibility be gradual, and supported and preceded by a switch to market-based monetary management.

Directors advised that the recourse to the Social and Economic Development Fund to restructure the public commercial banks contains significant risks. They reiterated the view that the establishment of an independent bank restructuring agency, along the lines recommended by staff, remains key for success.

Directors noted that the authorities have implemented few of the reforms recommended by Fund technical assistance. They indicated that future Fund technical assistance should concentrate on areas not covered previously and essential in preserving macroeconomic stability, or where technical assistance recommendations have been adopted. Directors encouraged the authorities to reach debt relief agreements with heavily indebted poor countries on terms comparable with the HIPC Initiative. Directors welcomed the authorities' participation in the General Data Dissemination System and their commitment to improve the quality and timeliness of economic data. (IMF25.04)

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11.12 Fitch Rates Morocco Foreign Currency IDR 'BBB-'

On 19 April, Fitch Ratings (http://www.fitchratings.com) assigned the Kingdom of Morocco a foreign currency Issuer Default rating ("IDR") of 'BBB-' (BBB minus) and a local currency IDR of 'BBB', both with Stable Outlooks. A Short-term foreign currency rating of 'F3' and a Country Ceiling of 'BBB' have also been assigned.

Morocco's ratings reflect the marked progress achieved in the economic, political and social areas in recent years, which has translated into continuing improvements in living standards and the external position, notwithstanding persistent fiscal deficits. The current account has shown a steady surplus since 2001, Morocco is a net external creditor and international liquidity is exceptionally high. Although public debt is high relative to peers and a rating constraint, substantial progress in reducing the budget deficit was achieved last year while Morocco's deep and liquid domestic capital market provides financing flexibility. Fitch expects receipts from tourism, light manufactured products and FDI to grow at a sustained high pace, allowing a further improvement in external debt and liquidity ratios in 2007-2008.

The economy is vulnerable to climatic shocks, due to its dependence on agriculture, and oil price shocks, due to its dependence on imported energy. However, the structure of the economy has entered a transition phase, with significant investments being made to enhance Morocco's comparative advantages. These include tourism, which has become the biggest earner of foreign exchange; "offshoring" (call centers, back offices, etc); and sub-contracting for industrial firms. The textile industry has recovered well from the shock of the end of the Multifibre Agreement in 2005, and GDP grew 8.1% in 2006, driven by tourism, agriculture, construction and infrastructure spending. Nevertheless, despite the liberalization effort of recent years, which has lifted non-agricultural growth, overall growth has not been high enough to reduce poverty, which remains relatively high, or absorb unemployment on a sustained basis.

Morocco has privatized a number of public enterprises and is progressively reducing administrative barriers to entrepreneurship. Significant efforts have been made to restructure the banking system and modernize financial markets. Financial intermediation is relatively deep, with broad money exceeding GDP. Migrants remittances boost domestic bank deposits; this helps explain the existence of a deep domestic debt market with an average domestic debt maturity of almost seven years.

Political life has been liberalized by King Mohammed VI, who has allowed moderate Islamist parties to participate in the local and national assemblies, leading to a marginalization of more radical movements. Some extremist groups are active – as illustrated by the recent bombings in Casablanca – but they are not in a position to threaten the political stability of the country. Reforms have improved governance and the business climate, despite the relative weakness of the judiciary system, and helped attract foreign investors. Fitch expects reform momentum to be sustained beyond September's legislative elections.

Because of its narrow tax base and high energy subsidies – notwithstanding reductions in 2006 – Morocco has typically run high budget deficits, which pushed general government debt to 63% of GDP at end-2005. However, an ambitious public sector reform has brought a significant reduction in state employees, an increase in fiscal revenues and a marked reduction in the budget deficit to only 1.9% of GDP in 2006. Although Fitch forecasts this to rise slightly this year, as trade tariffs fall under trade agreements with the European Union, the public debt-to-GDP ratio should stabilize in the mid-50s before falling gently. However, it will remain above the peer group median. The external situation is far stronger, owing to growing foreign currency inflows from tourism and emigrant remittances, which largely offset the structural trade deficit. Gross external debt is relatively low, with more expensive public debt pre-paid in recent years. International reserves have grown rapidly, making Morocco both a public and overall net external creditor, the latter being unusual in the 'BBB' category. (Fitch Ratings 19.04)

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11.13 Turkey: The Rise and (Slow) Fall of Inflation

Serhan Cevik of Morgan Stanley commented that for Turkey, inflation is not coming down as fast as implied by aggressive monetary tightening. "The last consumer price index reading was right in line with our estimate, and we now project the annual inflation rate to decline from 10.9% in March to 10.6% this month, hopefully signaling the start of a new disinflation phase. However, it would still be closer to the upper bound of our forecast profile, implying a year-end reading that is higher than the central bank's target. Although we expect lower inflation readings in the coming months, the pace of correction is not as swift as the baseline scenario entailed by aggressive monetary tightening and the resulting moderation in domestic demand. After last year's global volatility shock and the loss of credibility during the appointment of the new management team, the Central Bank of Turkey raised interest rates by 425 bp to 17.5% to curb the pass-through from the lira's weakening and limit the deterioration in inflation expectations. Even though tighter monetary conditions have already led to a correction in the exchange rate and a marked moderation in consumer spending, pricing behavior is still not consistent with underlying economic developments.

There is a disconnect between the retrenchment in consumer spending and inflation. Coupled with the uncertainty factor, the sudden and aggressive tightening of monetary conditions last summer resulted in an abrupt slowdown in domestic demand. Private consumption growth fell from 9.9% in 1H06 to 2.3% in 3Q and 0.1% in 4Q – the lowest reading since the 2001 crisis. This is a significant retrenchment, but we need to analyze the subcomponents to see the full extent of the correction in discretionary spending. For example, the consumption of durable goods – highly sensitive to interest rates and changes in credit conditions – plummeted from an annual growth rate of 14.2% in H1/06 to -8.3% in 3Q and -6.3% in 4Q. With such a far-reaching adjustment in the domestic economy, we should have witnessed the return of disinflation earlier than what the latest figures now suggest. Instead, there is a curious disconnect between the retrenchment in consumer spending and inflation dynamics. For example, despite the nose-dive in demand for durable goods, the annual rate of increase in durable good prices (excluding gold) surged from 2.8% at end-2006 to 7.2% in March. Muted but similar behavior is also apparent in other (tradable) categories of the CPI basket, as goods price inflation climbed from 8.7% in 2006 to 10.4% last month.

Supply-side shocks explain the rise in inflation, but not the prevailing inertia. In our view, supply shocks (like higher energy, gold and unprocessed food prices) were the original culprits slowing the pace of disinflation, which has come to an end with the pass-through from the lira's sudden depreciation last summer. Still, although the volatility of commodity prices still presents a challenge, the inflation problem has moved beyond supply shocks. For example, inflation excluding energy and unprocessed food prices increased by 330 bp to 9% in 1Q07, even as the notoriously sticky inflation rate in services at last showed a marginal (10bp) improvement to 12.1%. Likewise, even if we exclude administered prices and changes in tax rates, there is still an upward trend in core inflation – from 8.9% at end-2006 to 10% in March. We think that higher import prices – stemming from the rise in inflation in countries like China – may have contributed to higher tradable goods price inflation in Turkey. For example, clothing and footwear prices already posted a 4.2%Y increase in March, up from an average of -0.2% last year. Indeed, we expect this category (and household appliances) to become the crucial determinant of overall inflation in the next couple of months. Even so, yet another factor has an overwhelming influence over domestic pricing decision, in our view.

An ‘uncertainty premium' in pricing decisions could explain the inflationary inertia. The Turkish economy has become dollarized over the past four decades, as residents struggled to protect their wealth and income flow against ‘unexpected' shocks. Although the normalization of the macroeconomic landscape led to an encouraging reverse dollarization process, global volatility shocks and election worries have disturbed residents' portfolio allocations and pricing decisions. As a result, there is now a higher risk premium – reflecting political uncertainties and the possibility of another bout of currency depreciation – embedded in domestic prices. Of course, this creates an intriguing bottleneck in the disinflation process and thereby forces the central bank to maintain a restrictive monetary policy stance. Although transitional challenges may become disheartening from time to time, we still believe in the secular nature of disinflation in Turkey. As long as fiscal performance remains on track, the lagged effect of tighter monetary conditions will drive inflation dynamics towards the central bank's multi-year target. Therefore, recognizing the upside risk to our below-consensus inflation projections, we expect to see slow but steady disinflation in the remainder of the year. (MS24.04)

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11.14 Turkey: Advertisers Look Forward To Big Business

Building on increased business confidence, an enormous young population, rising foreign investment and the momentum of EU convergence, Turkey's advertising industry continues to grow by leaps and bounds. The Oxford Business Group reports that Turkey's advertising revenue in 2006 topped off at $1.90b, up from of $1.33b in 2005, capping an impressive growth period that had improved from crisis-year revenue of $540m in 2001, according to the Turkish Association of Advertising Agencies (TAAA). Of this, Turkish TV channels seized $995m in net revenue – with the top four or five channels controlling 60% of the revenue share – while print media took $703m. This was followed by outdoor ads with $110m and radio, which took $70m versus cinema, which put together $23m.

Perhaps more significant to the overall outlook in coming years is the promise of unrealized potential. Turkish companies have increasingly abandoned the practice of production and sales in someone else's name in favor of homegrown brands, for which advertising is increasingly regarded as a necessary investment and a new part of the business culture. Turkish success story Mavi Jeans broke away from Levi's and is now busy rejecting international offers to buy the branded denim outfit.

Industrial insiders say that increased participation by foreign companies across all sectors has created a spike in the amount of advertising spending by companies operating in Turkey. More local companies will be knocking on the doors of ad firms as they feel the pressure to compete with foreign entrants through advertising. "In order to compete, you have to have a solid brand, and for that you need advertising," said Yasemin Simer, Deputy General Manager at Alametifarika, a leading Turkish ad agency.

Turkey's advertising/GDP ratio will continue to expand apace if non-inflationary growth continues. While Turkish advertising revenue as a percentage of GDP was only 0.4% in 2004, Morgan Stanley projected an ad/GDP ratio of 0.8% by 2015, which would bring Turkey in line with the current European ratio.

As few as 20% of the top Turkish companies were advertising as of 2005, according to brokerage company Ata Invest, an indicator that has fuelled confidence among ad agencies looking to net new clients in the growing marketplace.

Reflecting the new prospects, Nielsen Media Research International bought Turkish advertising analyst group Bilesim Medya in February 2007. Turkey is emerging as a significant market, with annual advertising expenditure of more than $2.25b, said Robert McCann, Nielsen's chairman and CEO.

Turkey's under-30-year-old make up nearly 60% of the population and are familiar with global brands as never before. With high expectations for a group they know is willing to spend – often by extending their interest-free credit – brands are focusing on Turkish youth. Mobile phones, electronics and tobacco are prominent examples. Beyond traditional advertising, digital strategies are set to be the next big thing to capture the hearts and minds of the young and brand-conscious. Yet, Turkey's GDP will have to increase for Turkey's youth to become stronger consumers.

Meanwhile, the largest Turkish brands are extending their appeal beyond Turkey's borders. In an effort to create their own brand and become international players, companies have begun focusing on the Eastern European markets while attempting to penetrate Western Europe and the United States.

A government-financed project unique to Turkey is expected to contribute to the shifting dynamic. The Turquality project has selected 33 companies from textiles, jewelry, technology and other sectors to work with international companies to determine who among them can become global players. Analysts agree that it will take a creative approach and a bit of cultural departure to breach the foreign markets through homegrown ads in Turkey. Ads that work well at home often fall flat when they hit the global arena and Turkish ad firms are faced with the challenge of appealing to international consumers. According to the TAAA, ad agencies are beginning to band together to increase the creativity of the market. (OBG20.04)

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11.15 Turkey: South of the Border

Cross the Turkish frontier into Northern Iraq and you will never be far from a Made in Turkey stamp. The fridge in your hotel room will likely be Arcelik, the TV a Vestel and even the butter you spread on your morning toast will be Pinar. Turkish companies, as observed by the Oxford Business Group, are active both above and below the ground outside too, building tower blocks and airports, or drilling for oil and gas.

Earlier this month Turkish Trade Minister Kursad Tuzmen said the government is looking to increase the bilateral trade volume with Iraq to $3.5-4b this year. Currently, Turkish-Iraqi business volume, which includes construction and other services, is around $7b, with the lion's share of this going to the three governorates of Northern Iraq – Dohuk, Erbil and Suleymaniye. Tuzmen said Turkey was aiming to raise this figure to $10b. Most insiders see these as easily achievable numbers.

Turkey is Northern Iraq's most important overseas trade partner, and not just in terms of the sheer volume of business. Turkey has enormous influence over Iraq's trade, partly due to the fact that it holds the keys to the strategic Harbur border gate, the frontier post between Turkey and Iraq just next to the Tigris River. "Because Turkey is so near, we have a lot of contact with Turkish companies. All their trade with us, and the rest of Iraq, passes through here," Dara Jalil al-Khayat, president of the chamber of commerce and industry in Erbil, the region's capital, told OBG. "The landlocked provinces of Northern Iraq have no other safe exit route with quick access to both Turkey and Europe. There is also a great deal of shared history between the two neighbors, with Turkish goods enjoying a good reputation in the region."

Not only is there usually a long line of trucks at the border waiting to cross into Iraq, but since 2003, some 70% of all contracts issued by the regional government have gone to Turkish companies. Turkish businesses have also been quick to see the opportunities presented by Northern Iraq's particular circumstances. Since Saddam Hussein's troops pulled out of the region in 1991, it has enjoyed a stability not seen elsewhere in the country. This has pulled in investment from many Iraqi citizens overseas, as well as, since 2003, investors from the rest of Iraq looking for a safe haven. A new investment law passed by the regional government in July 2006 gives foreign investors the right to own property, take the full returns of their projects out of the region and be eligible for tax holidays for strategic projects.

Meanwhile, the region is rich in resources. The most well known of these is hydrocarbons, with fields up near the Turkish border and down around the currently disputed city of Kirkuk.

A new oil law has been introduced would give regional authorities a great deal of power, enabling them to sign production-sharing contracts independently of Baghdad. Annexes to the legislation that specify who controls which oil fields and how money will be collected and distributed are being widely disputed. The legislation is expected to open the door to foreign investment.

Turkish energy companies have been among the first to take advantage of this, with Cukurova Holding's Genel Enerji and Pet Oil active in the region. In addition, Turkish Petroleum Corporation came to an agreement with Royal Dutch Shell in early April 2007 to jointly build a new gas pipeline from the oil fields near Kirkuk to the Turkish port of Ceyhan. While a line between these two points already exists, the new line is expected to take a more direct route. The region is thought to hold between 12-45b barrels of gas and 100trn cu ft of gas.

Construction is a huge sector for Turkish involvement. The new airport at Erbil is being built by Turkey's Mak-Yol Cengiz Common Enterprise while other construction sector outfits – from materials suppliers to architects – are also hard at work there. The price for construction materials is high, as little of the pre-war infrastructure for manufacturing them remains and almost everything has to be brought in by road. Nonetheless, the margins are still good, as a glance around the building crane-dotted skylines of Dohuk, Erbil and Sulemaniye will testify. (OBG27.04)

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– Israeli Shekel conversions done at a rate of NIS 4.10 = $1.00
– Turkish Lira conversions done at a rate of NTL 1.5 = $1.00
-Cypriot Pound conversions done at a rate of C£ 1.00 = $1.60
– Jordanian Dinar conversions done at a rate of JD 1.00 = $1.41
– UAE Dirham conversions done at a rate of Dh 3.70 = $1.00
– Omani Rial conversions done at a rate of OR 0.385 = $1.00
– Pakistani Rupee conversions done at a rate of Rs 60 = $1.00

This fortnightly newsletter is a free service of Atid, EDI. We are a team of economic and trade development consultants, headquartered in Jerusalem, with satellite operations in Istanbul. EDI works with an international clientele interested in identifying and researching business opportunities in the region. We also serve as the regional representative offices for a number of U.S. states and bilateral Chambers of Commerce. EDI's other services include development of feasibility studies and tailored research reports, as well as identification of potential joint ventures for commercial clients. For more information on how we may better assist you, please visit our Web site at: https://www.atid-edi.com.

Fortnightly - May 2, 2007

Fortnightly – May 2, 2007

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