Saturday, February 18, 2006

Why Invest in Syria? A Debate between Idaf and Ehsani

The following debate between Idaf and Ehsani2 over why people are investing in Syria despite its political problems was posted in the comment section two posts ago. It is well worth reading and copying on the main page.

In the interests of the many "Syria Comment" readers who write to me praising their well-reasoned analysis, we would be grateful to Ehsani2 and Idaf if they would both contribute regular short essays about the Syrian economy to be posted to "Syria Comment." Their commentary has been superb and their different perspectives complimentary and provocative.

I am planning a new format and look for "Syria Comment" that will allow for more powerful searching and archiving according to subject and category. I hope t-desco will consider doing the same for his "fundamentalism" beat. It would be a shame not to have his scattered comments and research collected periodically and synthesized in short articles. If these authors are interested and would write to me, I would love to discuss how this might be done. You guys are carrying a lot of water for "Syria Comment”; why not splash it on the front page? Here is the debate.

Idaf said...
Al-Kifah el-Arabi has a good round up of FDIs in Syria during 2005. Ehsani, I appreciate your comments on the fact that foreign investments in Syria were at its best since 35 years while Syria had it worst political situation possible for the country during the same era! It seems to me that global investors are seeing real opportunities and are not bothered by Mehlis, Bush, Condi and Jumblat. It looks that they are seeing something that the pessimists among us are not seeing!

EHSANI2 said...
Idaf. You ask an important question. My answer is going to be long as I think this is a very important issue.

You are absolutely right. Let me start by including myself amongst the group of people who have participated in this FDI number. Why did I decide to invest in Syria this year in spite of the worst political situation in 35 years?

1- Since 09/11, Gulf investors and Arabs in general do not feel comfortable investing their funds in the U.S. or the western banking sector in general. This has resulted in increased investments in the local economies. As a result, local equity markets booms and so did real estate prices. First it was the GCC countries, and then it was Jordan (due mainly to Iraqi capital). Contrary to conventional opinion, Iraq itself has experienced a massive boom in its real estate prices since the U.S. invasion. There are reports of house prices that have risen by seven-fold since Saddam’s downfall. The other critical factor is demographics of course. The region has 50% of its population under the age of 18. This is a massive wave of future growth that needs to be tapped. In effect, therefore, the “macro” situation is extremely favorable in the region surrounding Syria. Lebanon itself has seen continued investments since the death of Hariri. As the U.S. has become more involved in the country (a new $100 mm embassy is being built), gulf investors in particular, feel that it has become even more attractive to build and invest there. Lebanon’s real estate prices have risen dramatically as a result and are presently at multiples of what they are in Syria. This brings us to Syria.

2- Most investors have shunned Syria for years, and for very good reasons. Capital has a strong nose for profits and return. It correctly did not get attracted to Syria’s Baath. Given the regional boom discussed above, the discrepancy between real estate prices in Syria and that of its neighbors has grown dramatically. In the mean time, the Baath party’s hold on power has been shaken. Either the party has to reform itself dramatically or it is going to fall. In my opinion, there is no third probability. What capital has sensed therefore is that things have hit bottom and that given the low prices of real estate relative to neighboring countries, it is better not to miss the opportunity of buying assets on the cheap. As one Saudi investor told me a week after the Hariri murder: “This is the best time to buy in Syria. If you don’t pick up assets on the cheap, you are going to look back and regret not having done so”. Syria is a country with massive potential. When and if the Baath party is removed from power, this country will experience a massive boom. Even though prices have indeed risen nicely over the past one-year, they still pale in comparison with our neighbors. I predict significant further increases. All you have to do is go down to the Syrian coast and compare property prices there with their equivalents in Lebanon and Turkey. Please note that Syria only has 800 so-called 5-star beds in Lattakia and the coast. This is for a population of 20 million people. It is shockingly inadequate. There is no question that there are massive opportunities for growth in this area. Gulf investors have done just that by snapping up land on the coast and many other places for that matter. They are doing this helped by Mr. Makhlouf and others who are encouraging them to buy at seemingly crazy prices. Few laws have to be changed in the interim before their investments yield super returns. My suspicion is that these laws will indeed be coming out soon. Mr. Makhlouf has a particularly good nose and track record in this area.

In sum, capital is coming into Syria for multiples of reasons. I, personally, have participated in investing in the country after having refrained from doing so for years. Did I do so because I believe in Bashar or the Baath? The answer is a resounding NO. I invested because I think the prices are very cheap relative to others in the region. The regime, in my calculation, will either have to change or fall from power. The old crazy ways of the Baath party will have to go. Capital smells “better” days. Every investment has risks. At these prices, the risks of losing in a lot in Syria are relatively small. Should the country change dramatically, the returns are huge on the other hand. A simple risk-reward calculation is what many investors are doing before concluding that this is the right time to invest. This is by no means an endorsement of Bashar or the Baath party. Indeed, it is an endorsement of the fact that things are at or close to hitting bottom. Few countries on earth have performed so much below their potential as has been the case in Syria for the past 43 years. Thanks to the Americans next door, the international pressure and the related calls for reform from the inside, capital has correctly concluded that the old status quo can longer survive for long. Let is say Amen to that.

Innocent_Criminal said...
i just received the Syria-Report newsletter and here is an interesting note

Syrian industry fares bad in UNIDO index
The latest release by UNIDO of the Comparative Industrial Performance (CIP) index for the year 2004, shows that the Syrian economy ranks 121 out of 155 countries

you can read more here.

Vox Populi said...
"Syria is a country with massive potential. When and if the Baath party is removed from power, this country will experience a massive boom. "

I agree with that.

Idaf said...
Thank you for your well-rounded answer. I have few comments though:

1-You mainly based your thorough answer on the view of real estate investors. The report in Al-Kifah Al-Arabi clearly mentions that the investments in the real estate sector in Syria were only 4 projects from the 558 investment projects (of around 7+ billions$) announced in 2005. Almost half of the projects (237 projects) are industrial ones. One of them is building the largest sugar manufacturing plant in the middle east.

Correct me if I'm wrong Ehsani, but I understand that industrial investments are more hesitate to come to unstable markets. For example if you're going to invest in real estate, the risk of war or regime change is no where as risky as building a regional manufacturing/industrial plant with a turnover that would require years.

2-The 9/11 atrocities happened almost 5 years ago and the prices of oil has been increasing dramatically since 2003, but the gulf investments just decided to come to Syria mainly during the last 6-8 months (plus Chinese and German ones). Shunning the US demands to "isolate" Syria.

3-If I understood your comments correctly, you're trying to say that the regime was mainly lucky to receive these investments during the current turmoil in the Syrian political arena. I in the other hand think that the investors are seeing an opportunity as you rightly mentioned, but I also think that they are seeing a genuine reform processes being implemented that would make their investments even more compelling and less risky in the long run. Note that most of the major real estate FDIs are planned to span 8-10 years (they were not included in the figures above), such as Emaar, and the other 15 B$ being discussed in the parliament.

My main conclusion is, basically, if the global investors are seeing that things are getting better in Syria, my argument that Syrians inside Syria are seeing relative improvements in their daily lives is very well founded and that this is translated into support for the regime inside Syria (an argument many Syrians abroad don't agree with).

Allow me to make the following observation too: The overwhelming majority of the investments that came to Syria last year were in the second part of 2005, just after the withdrawal out of Lebanon, Bashar's visit to Russia and the Syria becoming one of the few debtless states, the Baath party congress and the ousting of Khaddam. Coincidence? Might be.. but a very interesting one! Mehlis reports and the US accusations and pressures for "isolation" did not have any considerable effect.

Baath or no Baath, American or no Americans, it seems that investors are sensing improvements and a potentially huge returns regardless of whose in charge and how democratic he is.. it would be all nicer of course without a Baath in Damascus or Americans next door!

Innocent Criminal,
It might be that the Israelis are sending a friendly message to Bashar, but then again they might be too overwhelmed by the service that Jumblat is providing them, by throwing his gauntlet against Hizballah and his flux of curses against Syria. They are after all humans! This also came from a political party not the Israeli government mind you, so it's not state policy.

If I was an Israeli, I would be soaked with tears of joy listening to Jumblat's curses to Syria during the rally few days ago.. and more importantly, by his relentless hunt after Hizballah!

Also, don't forget that historically, the Israeli politicians and parties committed lots of such mistakes earlier. The latest was their campaign of accusations to Syria of killing Hariri just after he was killed. The Israeli government back then ordered the officials (and "begged" the Israeli media) to refrain from the campaign against Syria as it would have a counter effect on the "cedar revolution" which was very well going in line with their 15-years-old demands of getting Syria out of Lebanon and dismantling of Hizballah.

On the other hand, one should also consider the surge of blind hatred to Syria/Syrians that a large part of the Lebanese public have been manipulated to exercise by their sectarian Zai'ms for a year now. It's apparent that it's so blinding that they don't care anymore if their actions are serving Israel, hurting the ordinary Palestinians or even hurting the Lebanese national interests as long as it would hurt Syria.

I bet though that you won't hear more of such public offers to Jumblat after this moment (they would be made behind closed doors instead) as Israeli analysts would recommend them to end. I can imagine though the feelings of Israelis listening to Jumblat cursing Hizballah and Syria with the sheers of thousands of revenge-thirsty Lebanese. if I was an Israeli I would not be able to control myself from joy.

It's interesting though that Jumblat did not comment on that offer of "protection" in any of his "let's-curse-Syria" daily show on Future TV news.

EHSANI2 said...
1- There is no question that there are industrial plants that are being built as well investments destined to the real estate sector. You have to understand thought that all the numbers you cite are just “plans” at this stage. They are yet to start. Again, they are based on potential reward, which is indeed very attractive. This is true for industrial as well as real estate.

2- Ironically, it was the killing of Hariri, and the increased pressure on the regime, that has triggered the wave of potential investors. Why? Because they sense that the pressure on the regime will force it to either change or reform.

3- The regime was not lucky. The regime is changing slowly. It has realized that it needs to reform. But the improvement is relative. When you are at rock bottom, any change can look good. In absolute terms, however, the reforms are woefully inadequate when compared to where the country ought to be relative to its potential.

4- Contrary to what you suggest, were the Baath to fall from power, the country will boom economically. The standards of living pale in comparison to others around, and certainly relative to where they should be. Market based economics is a prerequisite for economic prosperity. The Baath does not want to admit this, though they know it. They are hence incapable of unleashing the potential for this country. None of all of this would have taken place without the American next door. Saddam and his sons would still be there. Syria would still occupy Lebanon. Bashar would have seen zero reason to reform. Now the genie is out of the bottle. Changes are taking place at breathtaking speed. Thankfully, this wave seems to have reached Syria as well.


At 2/18/2006 06:06:00 PM, Blogger Innocent_Criminal said...

Hmm, commenting on the comments feels strange. but I am just relieved that the comment section is not a mess and that idaf, ehsani and others can have a serious discussion without spammers diverting the attention to their silly comments

At 2/18/2006 07:32:00 PM, Blogger ugarit said...

It's hard to believe that the increased investments are due to pressure. If the US did not invade Iraq and if Syria and the EU signed their economic agreements the growth would have be significantly higher. I have a feeling that the election of Bush, Sharon and the assassination of Harriri were not possitive for syria's investment environment. Growth would have been much higher without those events.

At 2/18/2006 07:52:00 PM, Blogger ghassan karam said...

With all due resoect to both EHSANI and IDAF this debate is a reflection on Joshua Landis who does not spare an opportunity to present his views as being well informed, authoritative and well researched.

I am willing to earn the enmity of both these two wonderful people , EHSANI2 and IDAF by suggesting that this debate was well intensioned but was never meant by the authors to rise to the level of being presentd as an affirmative endorsement/indictment of the Syrian economy.
Each of the two debators was well informed but was shooting off the hip. there were no references to studies, theoriesor even hard data except the occasional reference to am ambigous idea here or there.

I do appreciate the efforts and responses by both individuals but the material was not intended to be a thorough comprehensive analysis of either Syria or the region.

I am afraid that Joshua Landis has again chosen the easy way out and presented honest off the cuff reactions to diffenet issues as being well researched and thought out analysis, which they are not.

At 2/18/2006 08:45:00 PM, Blogger majedkhaldoon said...

As Iraqee brought large sums of money and bought properties in Syria, the prices jumped in Syria, now that price of Oil and Cement went up, the salaries has risen, all commodities are more expensive.the Hariri death investigations, suggest that Syria must make changes or the regime may fall, if the later happen, then the money that has been stolen by Assad and his famly and his friends and the officials, may return ,this include billions of Dollars, close to 40 billion, this will have an effect on the lira, compared to Dollar, and dollar may drop, also right now the property taxes are low, infact a house in Abdulmunem Ryad street, worth 40 million lira, equal to $800,000 its tax,now, is 50 dollar a year, doubling this tax will not hurt the owner, but will provide huge benefit to the county, if houses property taxes are doubled, this could provide asset that can be used in investments, provided we end corruption.also building a city in Dhmair, north of Damascus, and transfer some of the ministries there, will reduce pressure on Damascus, this will reduce prices in Damascus, hopefuly will reduce the yellow cabs there , too.
Dardary has capitalist mind, not socialist mind, Baath party,has failed, now we need to get back to capitalist programs.
people in Damasus are trade minded, and if they are allowed to do buisiness, syrian economy will fly, however economic progress will not get better unless corruption and dictatorship end, with freedom syria will be much better

At 2/18/2006 09:11:00 PM, Blogger ugarit said...

For non-Syrian investors who want to learn the Syrian dialect of Arabic:


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