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The financial crisis – Banked with optimism

In a gloomy economy, one banker sees bluer skies ahead

by Executive Staff

One year ago, with the global economy fully immersed in its ongoing downslide, Philippe Dauba-Pantanacce, a senior economist for the Middle East region at Standard Chartered Bank, went on a speaking tour. As he listened to economists and audiences from around the region, Dauba-Pantanacce couldn’t help noticing a disconcerting trend — many people thought the economic crisis was ending, and the world was headed for a recovery.

“Of course,” Dauba-Pantanacce said recently, “we can see now, in fact, that’s not what happened.”
Dauba-Pantanacce, who encourages people to call him Philippe (he knows his name is hard to pronounce for non-francophones), prides himself on bringing a dissenting view to economic discussions. In the fall of 2007, for instance, Standard Chartered had been one of the only major banks to predict that interest rates in the United States would drop to one percent. They were right.
Late last month, Philippe brought his contrarian’s instinct to a roundtable discussion on the global economy and its impact on Lebanon, held at the Intercontinental Phoenicia Hotel in Beirut and organized by Executive. At the moment, the outlook for Lebanon, which had thus far weathered the economic crisis with surprising resiliency, did not look good.
Nassib Ghobril, the head of Economic Research at Byblos Bank, had recently been reading a handful of country reports from the International Monetary Fund (IMF) and others — “they were all very gloomy,” he said. Just that week, for instance, the Economist Intelligence Unit had downgraded Lebanon’s expected economic growth in 2009 from 2.7 percent to 2.4 percent. It was the third such downgrade this year.
The focus of this pessimism, as everyone at the table knew, was the expected decline in earnings around the world — especially the Gulf, where some 30 percent of Lebanon’s expatriate workers are based. That fact continues to threaten a dramatic decline in Lebanon’s remittances, which constitute at least 25 percent of gross domestic product.
Philippe was not dissuaded. He believed that things could be worse and, in fact, thought they might be getting better. Philippe is willow-thin and he has an easy-going affability. He was wearing a tailored, dark suit with a bright pink tie. Sitting next to him on one side was Pik Yee Foong, the chief executive officer of Standard Chartered in Lebanon, who had earlier introduced him as “Mr. Philippe.” On the other was Abdel Rahman Mogharbel, a manager at the Banking Control Commission at the Central Bank of Lebanon, which has been credited by many, including Philippe, for insulating Lebanon from the crisis with its conservative policies.
“We are calling this crisis the Great Recession, versus the Great Depression,” Philippe said. “The fourth quarter of 2008 was appalling, but the first quarter of 2009 was better.” Where Lebanon is concerned, Philippe sees remittances declining less precipitously than most due to the stability of the Gulf, adding that low oil prices will drastically reduce the cost of energy, a major burden on the country’s expenditures.

Gulf of hysteria
The focus of Philippe’s analysis was an outlook for the Gulf countries, particularly the United Arab Emirates, that was stronger than that of most other economists. For months, the business press had been filled with articles predicting the demise of Dubai — the downward spiral, they called it — and Philippe thought the whole thing was overblown, a lot of “hysteria.” As he saw it, the downturn in Dubai had been driven by an over-inflated real estate market, but that the market “correction” was, “for the medium to long term, a good thing.”
“Where will the engine of growth come from in Dubai?” Mazen Hanna, an economic advisor to Saad Hariri, asked Philippe. Like several of the Lebanese economists at the roundtable, Hanna found Philippe’s take on the Gulf a little hard to believe. Dubai’s economy, he pointed out, was “one of the most affected today because it was the most exposed internationally.”
Philippe’s answer was, to some extent, non-academic — we don’t know all the details, but the money keeps coming from somewhere. He mentioned some maturing bonds that had recently been paid out by an unknown investor.
He went on, “This crisis has put Dubai to the test, but more than Dubai it has put the UAE as one country to the test.”
Dubai had been bailed out by Abu Dhabi (another thing Philippe says he had predicted with certainty before most other analysts), which may have cost Dubai its independence, but in exchange had actually fortified the UAE’s economy in the long run.
Now instead of two separate economies — one, Dubai’s that was heavily based on real estate speculation (and thus highly unstable), the other, Abu Dhabi’s, that was solely based on oil and gas reserves (and thus ephemeral) — there is now a shared, diversified economy.
Going forward, the UAE — with a distinct geographical advantage, and a “logistical structure” (including major ports and airlines) that Philippe considered 10 years ahead of anyone else — could position itself as a major transportation hub and the “warehouse of the region,” he said.
With regard to Lebanon, Philippe pointed to something more intangible: the strength of domestic confidence.
“Domestic consumption can drive every force of the economy,” he says, pointing to the US, where 70 percent of the GDP comes from it.
Meanwhile, he says the Lebanese people’s great faith in their national banking system has meant that deposits nationwide have, and will continue, to rise. More bank deposits means more money to offer as loans.
Once again, the Lebanese were less bullish than Philippe.
This was something one private banker — who preferred to remain anonymous — knew a thing or two about, and she pointed out that one  of the reason the banks in Lebanon were so well capitalized was because the Lebanese had so little faith in other markets. “Even if you have a political crisis in Lebanon the outflows have nowhere else to go,” she said. “It’s very superficial.”

A bad moon a-rising
Standard Chartered’s Pik Yee Foong said that although the deposit to loan rate in Lebanon was fairly well endowed, there were “mixed signals” on demand for loans.
And Imad Jamil Zbib, an assistant vice president at American University Beirut and a former professor of business, saw a more pressing indicator: graduating seniors were having a hard time finding jobs, especially now that they had to compete with more experienced young professionals returning from layoffs in the Gulf.
Yasser Akkaoui, the editor-in-chief of Executive Magazine, who was moderating the panel, asked the collected experts what they thought were the biggest risks for the Lebanese economy.
The obvious answer was the unstable political situation. “I think the political deadlock in the country had derailed the privatization process,” Mazen Hanna said, referring to efforts to privatize Électricité du Liban, as well as the telecommunications networks.
He went on to address the dangers associated with Lebanon’s dependence on remittances and expatriate investments, which account for a large percentage of the banking sectors’ deposits.
“My greatest fear is a point in time where you would find that this financing is no longer available to the government, and the government in such a world would have no recourse to the rest of the world because of the current situation… That would be the gloom scenario.”
On this, at least, Philippe agreed. Much of the domestic spending he had pointed to was dependent on what he called the domestic dynamic: “a feeling, real or imagined, of security and political stability.” A major security or political crisis in Lebanon could upset the whole balance. He agreed privatizing EDL was also essential.
But if his dissenting predictions were right — as they had been so often in the past — then the stability of the Gulf countries ought to be a sufficient bulwark, at least, against Mazen Hanna’s “gloom scenario.”
For most of the conversation Abdel Rahman Mogharbel had been tight-lipped, not willing to say too much, perhaps worried that, as a representative of the Central Bank, his thoughts could be misconstrued as foresight. Finally, he turned to Philippe, smiled, and said dryly, “You seem optimistic.”

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Executive Staff


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