Economics & PolicyElectoral law

How to have a fair election

by Matt Nash
written by Matt Nash

The goal of any electoral law in a representative democracy is fair and accurate representation. Many people in the country have argued that even with parliamentary seats divided among the country’s different religious groups, Lebanon has not done well in achieving this fair and accurate representation with its own electoral laws. A long-standing allegation against Lebanon’s political elite posits that those in power draft laws to keep themselves and/or their political parties in those positions. And for at least the past 12 years, politicians have debated more than ten draft laws aimed toward fairer representation, with little success.

Draft law discussions are currently raging among the country’s various political parties, outside of both Parliament and public spotlight. Daily press reports offer hints as to the drafts being tabled, but no repository of draft law texts exists for interested citizens to examine the various ideas in detail. According to the current schedule (set forth in the existing electoral law from 2008), parliamentary elections should be held on May 21, and the law governing the polls should be agreed and published in the Official Gazette by late February. To help readers understand the various options available, Executive will explain the current voting system, the systems allegedly under discussion, and a few other proposals that have been suggested over the years.

The status quo

Electoral law 25 of 2008 saw Lebanon’s 128 parliamentarians elected from 26 districts (qada being the Arabic singular). The law relies on a majoritarian seat allocation system, meaning the candidate with the most votes wins the seat. As an example, imagine a district with five seats: Two Sunni, two Maronite, one Druze. The majoritarian calculation system means that the top two Sunni candidates with the most votes get seats, as do the top two Maronite candidates and the top Druze candidate, even if all of those candidates individually only secure 33.3 percent  or more of the votes in the district. The obvious downside of majoritarian systems is that it means a lot of wasted votes, for instance in our example, 66.9 percent of the voters in that district would be represented by MPs they didn’t vote for.

Full proportional representation

One way to mitigate the risk of minority rule highlighted above by adopting a seat allocation system based on proportional representation (PR), which roughly means that seats are allocated based on the percentage of votes received, instead of based on the “highest number of votes wins” principle currently in place. Moving to such a system would first and foremost mean electoral lists have to be mandated by law, which they currently are not, although in practice parties did form lists in 2009 and in previous elections. The legal mandate of a list is essential in a PR system. In Lebanon, while lists have never been a mandatory requirement under the law, as stated above parties have formed them in the past. However, because the lists are not mandatory under the current system, voters do have the option to “mix and match” between or among the lists, depending on how many there are. For example, in 2009 the Free Patriotic Movement list in Metn was “broken” by Michel Murr and an ally, who proved more popular than candidates on the FPM list for the same seats. It’s worth noting that under a full PR system, voters would lose the option of mixing and matching, instead they would be required to vote for only one list.

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Lebanon would opt for an open list system should it adopt either a full or partial PR seat allocation system

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In a PR system, the number of seats in a district are allocated to the number of lists based on a threshold (number of votes cast divided by the number of seats), meaning seats are allocated among the top vote-getting lists in proportion to the number of votes for each. Lists with a low amount of votes (say one or two percent of the total, although the exact percentage is determined by the aforementioned threshold) would not be given seats.

In general, there are two types of PR systems, closed list and open list. A closed list system means the party whose candidates form a list gets to choose which candidates are actually elected based on the seats granted to the list through voting. An open list system means voters cast two ballots: first choosing a list and then an individual candidate (this is called a preferential vote, and the number of preferential votes that individual voters can cast varies around the world, i.e., one or more preferential votes per voter). List votes are used to determine how many seats each list is allocated and candidate votes are used to determine which candidates are elected (the method of distributing candidates varies and can impact which candidates are elected, see infograph below).

Based on past draft laws, interviews with politicians and a civil society group, as well as press reports, it seems that Lebanon would opt for an open list system should it adopt either a full or partial PR seat allocation system. This makes sense if the past is any guide. In many countries with PR, lists are formed by separate parties (meaning if there are five parties with various popularity in a district, there will be five lists). However, given the demographic mix of the country’s various districts (none are one hundred percent populated by a single religious group) and support (in some cases) for more than one party among members of the same religious group, lists in Lebanese districts tend not to reflect a single party but rather an alliance of parties. To illustrate, imagine parties A, B, C and D are popular in a district. Instead of four party-specific lists, Lebanese voters will often be faced with either one list including all the parties or two lists (A+B as list one and C+D as list two, for example). Open lists make this tendency for district-by-district alliances possible, whereas closed lists do not.

Hybrid PR-Majoritarian system

At time of writing, local press was abuzz with speculation that, should a new electoral law be agreed, it will likely mix the two aforementioned systems (i.e., some MPs would be elected based on top vote getters being awarded seats and others would be elected based on PR). In such a scenario, the country would likely be divided into two “levels” of districts: smaller districts more reflective of the qada for majoritarian allocation, and larger districts reflective of country’s five traditional governorates (mohafaza, the Arabic singular) for PR allocation. Such a hybrid system was endorsed in 2006 by a commission that was tasked with drafting a fairer and more representative electoral law and appointed by the 2005 Fouad Siniora government shortly after elections that year.

Size matters

The size of a district and how many seats it is given are important for fair and accurate representation. Consider, for example, districts as they were during the 2009 election. If one divides the number of registered voters in a district by the district’s number of seats, clear differences emerge in how strong of a “voice” individual voters in each district have in Parliament. Looking at the extremes, the district of Keserwan has five seats and 89,228 registered voters (meaning each MP represents 17,845.6 voters), whereas the district of Bint Jbeil has three seats and 123,396 registered voters (meaning each MP represents 41,132 voters).

An ideal electoral law would distribute seats more evenly based on the number of registered voters in a district. Additionally, in a PR system, the larger the district, the more accurately PR will reflect the will of the voters. Imagine a district with three seats and five lists. It’s likely that only two or maximum three lists will be allocated seats. In a ten-seat district, It is possible that all five lists would get at least one seat.

Local vs. regional

As district sizes get bigger, however, minority influence on the outcome can still diminish even with a PR or hybrid system. For example, imagine a PR district for North Lebanon (including the districts of Akkar, Tripoli, Minnyeh-Donnyeh, Batroun, Koura and Bcharre). Based on the 2009 voter roles, this North Lebanon district would have 679,699 registered voters. If 60 percent turned out, that would leave 407,819 votes in a district with 25 seats (assuming each district’s 2009 seats were added together). The PR seat allocation threshold, therefore, would be 16,312 votes for a list to be allocated one seat. Imagine a very popular local candidate (Candidate A) in one district can only make alliances with very unpopular candidates from other districts to form a list. Imagine Candidate A’s list ends up receiving only 14,000 votes, 90 percent of which come from his or her home district. Candidate A does not get a seat under the pure PR system, and the the voters in his or her district feel they have no representation in Parliament.

Sectarian sensitivities

Imagine we add the sectarian dimension of Lebanese politics to the above example. If Candidate A is of a religious community with a minority of voters compared to the overall North Lebanon district, not only do local voters feel cheated out of their candidate, but will also most likely claim that another religious community has usurped their rights by electing an unpopular candidate to represent members of their religion. This was the argument in the three election cycles after the Civil War, while Lebanon was still under the influence of its larger neighbor. Christians complained districts were drawn in such a way that non-Christian voters were the ones electing Christian candidates. This argument surfaced in some districts in 2009 as well because some districts have religious minority voting blocks large enough to tip the scales in one direction or another (i.e., the argument goes: If only Christians voted in district X, Candidate A would have won, but the Sunni voting block swayed the contest for Candidate B).

Off the table

The fear that sects would not be able to elect their own candidates gave rise in 2012 to the so-called “Orthodox Law”. Under this law, which is no longer under consideration, according to press reports, Lebanon would be represented by only one district and each sect would vote for its own candidates. This law did not envision taking a census to actually determine how many members of each sect are currently living and voting in Lebanon, rather it adopted the same seat distribution for sects used in 2009. Less in-your-face was a proposal by the Lebanese Forces (since abandoned) that would have created several non-contiguous districts to group sects as constituencies, effectively getting close to what the Orthodox Law proposed via a different route.

The “also-rans”

Another option would be dividing Lebanon into 128 districts, which would favor local candidates with a strong following. As each district would only have one seat, this could, in theory, be a majoritarian seat allocation system. However, it is still vulnerable to creative district drawing that might end up with voters feeling disenfranchised. The reverse would be having the entire nation as one electoral district with each voter getting 128 votes. This would work against strong local candidates with limited national recognition. Yet, another choice is the single, non-transferrable vote. Under this system, voters get only one vote. The 128 candidates with the most votes are elected. This system makes it especially tricky for political parties to maximize their number of seats, especially in the Lebanese context, where parties tend to have a few very well-known stars. These party stars could attract the most votes from party supporters, leaving the party with fewer seats than it would have had under a different system.

Pobody’s nerfect

There is no global best practice for designing an electoral system, and voters across the world wake up after election day feeling disappointed, or worse (just ask American supporters of Hillary Clinton, who won the popular vote for president in November 2016, yet had to watch her rival Donald Trump be sworn in as president on January 20). No matter the system used, the potential for minority voices being silenced and results being skewed, either by drawing districts in a certain way or out-right vote buying, always exists. A voting system arguably “works best” when it has the most buy-in from the electorate. It’s a worrying sign that discussions of electoral reform in Lebanon are happening behind closed doors. More concerning is the possibility that a relatively complicated law will be adopted with very little time to explain how it works to voters — surely a recipe for feelings of exclusion.

Infographic by: Ahmad Barclay & Matt Nash

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Economics & PolicyMacroeconomic context

Real risks and fake pathos

by Thomas Schellen
written by Thomas Schellen

It is a funny thing with collective risk awareness. Human existence is full of perpetual risk, but our awareness of various risks differ. Even if different risks are equal in frequency and magnitude, some are perceived emotionally and with great and immediate personal involvement, while others only in intellectual terms, distanced from one’s existential core. For example, outcries over the risks of war tend to be highly emotional and gripping to the extent that songs about it can transcend the conflict they were originally about. There are scores of anti-war songs which, like 1960s ballad Eve of Destruction by Barry McGuire, are passionately replayed by several generations. They always have the same sad message of impending doom and lack of progress in defeating war.

By contrast, there are very few songs on capital risk, stock market fluctuations, or anything for that matter that is seriously related to economics – Hank Williams Jr’s Stock Market Blues (2012) or Pink Floyd’s Money (1973) are the few exceptions. This is strange, given the endless supply of market risk data with potential for conversion into lyrics and with very little variation requiring new melodies or rhythms. Economic risk is presented prosaically, in dry reports bare of lyrical elements. There are entire schools of financial analysts who offer variations of only two refrains: the cheerful chorus that money is to be made somewhere and the annually recurrent, but apparently futile, warning that we are on the eve of economic disaster (without ever eradicating the potential for such disaster).

Even without delving into the risk hikes that have been perceived by activist groups in the days since the US elections, global risk assessment in January 2017 was very high. The World Economic Forum’s (WEF)Global Risks Report (GRR), this year in its 12th edition, said last month that: “Polarized societies and political landscapes are taking center stage in many countries, with deepening generational and cultural divisions amplifying the risks associated with sluggish economic recovery and accelerating technological change.” It described political events of 2016 as “a wake-up call” to reassess the capacity to adapt to an evolving risk landscape and ominously warned that we could be at “a pivotal moment in political history” and it is a “febrile [feverish] time for the world”.

The economic uncertainty index is a design by economists to alert corporate decision makers to potential risks that could influence their business. This index, which is produced in collaboration with professors at three American business schools (Kellogg, Stanford and Booth), measures Economic Uncertainty (EU) and Global Economic Policy Uncertainty (GEPU) in the US and in 15 major economies. In 2016, the GEPU reached a record level of over 270 points in October and November that year. The GEPU index has been steadily increasing since the 2000s; it had peaks of 178 points in August 2001, 200 points in September 2008 and 217 points in October 2011.

This index, which is based on key terms found in newspaper reports such as “perception drivers”, demonstrates to its creators that increased levels of economic policy uncertainty are associated with elevated stock price volatility. “At the macro level, innovations in policy uncertainty foreshadow declines in investment, output, and employment” in the United States and major economies, according to the index authors, who declared that historically, economic policy uncertainty in their country has “drifted upwards since the 1960s”.

Perennial risk scenarios

Showing spikes in high-risk moments such as tight elections, wars, large-scale terror attacks and fiscal confrontations in the United States or with American involvement, the index aims to “capture uncertainty about who will make economic policy decisions, what economic policy actions will be undertaken and when, and the economic effects of policy actions (or inaction) – including uncertainties related to the economic ramifications of ‘non-economic’ policy matters, e.g., military action”.

The consistent rise of global economic policy uncertainty and the ever tighter interactions that the WEF’s influencers perceive between diverse risks are notable findings of the GRR and the GEPU index. This perspective is exacerbated if one considers that the list of risk-prone events in the outlook for 2017 from outside of the economic sphere easily numbers about 50 flashpoints and events, beginning with changes in the leadership at the United Nations and the European Parliament in January.

There are also long-term and even perennial crises scenarios in countries from the divided Koreas (a presidential crisis erupted recently in South Korea) and Cyprus to South Sudan, Colombia and Venezuela, and acute ones like the Greek crisis and, above all, the wars in Syria and against Daesh. On top of all this, there are at least a dozen national elections scheduled for 2017 (in addition to the Lebanese parliamentary elections) that by definition constitute events with uncertain outcomes in economic powerhouses like Germany and France, as well as in jurisdictions such as the Netherlands, Norway, Iran, Chile, Argentina, Liberia, Hong Kong and Kenya. Bearing the unexpected outcomes of the Brexit and US elections in mind, 2017 could well be another year of unpredicted changes, and thus of manifest uncertainty.

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In economic terms, one person’s risk is another person’s opportunity

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Jumping on the bandwagon of uncertainty apostles this January was  also the Bulletin of the Atomic Scientists, which told the world that its Doomsday Clock – a warning clock that has fluctuated between 17 minutes and two minutes before “midnight” since 1947 – is now 30 seconds closer to expected doom, at two minutes and 30 seconds to midnight after it had stood for two years at three minutes before midnight. Designed as a risk alertness tool over the possibility of nuclear war in the post-WWII environment that pulled the US against the USSR, the Doomsday Clock signals the nearness of global extinction. Only once in the past 60 years was it closer to the end of the world than today, when in 1953 it was set at two minutes. In 1991 it was set farthest from the fateful moment, at 17 minutes to midnight.

The Bulletin of the Atomic Scientists is an activist publication that seems nowadays more equipped with climate researchers and environmentalists than with nuclear experts. In 2015, the bulletin set its clock at only three minutes in large part because of their worries over the environment. Now its board of sponsors have decided to adjust the setting half a minute closer to doomsday because 2016 was a difficult year in which “the global security landscape darkened”, citing as the main motivations for the reset their concern over the usage of “cavalier and reckless language” about nuclear weapons (especially in the US in connection with the inauguration of Trump) and disregard for climate research and the views of (most) scientists.

Putting the alarm up by a notch shortly after President Trump’s inauguration earned the organization a lot of media attention, fitting in with an avalanche of worries and protests by civil society that was reminiscent of Soviet rhetoric in the Cold War or the American propaganda hype about Saddam Hussein’s alleged weapons of mass destruction in 2002. In the sum total of exaggerated worries, 2017 is shaping into a dual year of real risks and fake pathos about these risks, meaning that the accumulation of potential risk events could be accompanied by further risk escalation due to waves of protests against some change agents like Donald Trump or change events that are not unequivocally welcome.

Mitigating factors

In economic terms, one person’s risk is of course another person’s opportunity. Consequently, and perhaps helpfully in keeping risks away from a self-fulfilling escalation cycle, the outlook for 2017 from an economic perspective is less problematic than the outlook from a political or social vantage point.

The World Bank confirmed in its Global Economic Prospects report earlier in January that it projects global economic growth to “accelerate moderately” in 2017 and reach 2.7 percent. It expects advanced economies to register 1.8 percent growth this year, slightly better than in 2016; meanwhile emerging and developing markets, “as a whole should pick up to 4.2 percent”. At the same time, however, the World Bank cautioned that “the outlook is clouded by uncertainty about policy direction in major economies” and warned about universally negative repercussions for investment in all countries if a protracted period of uncertainty were to materialize.

Expressions of what economists like to sell as their “guarded optimism” also reverberate in manyprivate sector financial institutions. Take the example of the bankers at Goldman Sachs. The bank is one of the clear winners of the US election in terms of share price gains and also in the sense that a former Goldman president and COO is now joining Trump as head of his Council for Economic Affairs, along with three other people who were also once affiliated with the bank that are now among the president’s men. The bank told the world through videos underlaid with soothing background music (no rap, sadly), that it expects 2 to 3 percent growth in the US and 3.5 percent globally for 2017

Goldman paints something of a mixed picture for Europe with 1.5 percent GDP growth that is consistent with gradual improvements in the labor market and foresees 1 percent growth for Japan. It foresees that China will grow at about 6.5 percent, but with some long-term concerns, and expects commodity producers among emerging market countries to show some recovery after “a lot of pain” in 2015 and early 2016. Brazil is still slow and has yet to move into actual recovery, whereas India is exposed to a slowdown due to currency reform after strong growth in recent years, says Jan Hatzius, chief economist and head of Global Economics and Markets Research at Goldman Sachs in December 2016.

Upbeat sentiments were also reported by Bank of America/Merrill Lynch’s January Global Fund Manager Survey. According to the survey of 215 fund managers, investor expectations for global growth in January improved by 5 percentage points to two-year highs (net 62 percent from net 57 percent in December) and the number of respondents expecting growth to be “above trend” is the highest in five-and-a-half years at 17 percent.

However, risk is never out of the picture. The three tail risks that funds managers most commonly cited as current concerns were trade war/protectionism, US policy error and China FX devaluation, according to Bank of America/Merrill Lynch.

Similar notes were intonated later in January at the World Economic Forum’s closing panel in Davos, as panelists juxtaposed strengthening global economic growth against the increased risks of political uncertainty and trade protectionism. In a panel bringing together IMF’s Christine Lagarde, German Finance Minister Wolfgang Schäuble, the UK’s Chancellor of the Exchequer Philip Hammond, Japan’s central bank governor, Haruhiko Kuroda and from Black Rock USA, chairman Laurence D. Fink, global economic activity was characterized as moving up and consumer confidence was seen as strong according to a press briefing. The WEF quoted Lagarde as saying, “For the first time in years, economic growth is not being revised down,” with IMF projections for global growth of 3.4 percent in 2017 and 3.6 percent in 2018.

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What can devalue our collective awareness is that the risks that become reality are often not the ones we are concerned about  

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The limitations of forecasting

In the WEF’s GRR, a global risk is defined “as an uncertain event or condition that, if occurs, can have significant negative impact on several countries or industries within the next 10 years.” The survey for the 2016 report did not ask the participants to assess the likelihood of a Brexit or a Trump win in the US elections. Choices in the category of geopolitical risks are more general; the available options in the surveys for 2017 GRR were state collapse, failure of national and of regional or global governance (two separate questions), interstate conflict, large-scale terrorist attacks and deployment of nuclear weapons.

This report highlights the importance of how the questions in a risk survey necessarily influence the outcome. What can devalue our collective awareness is that the risks which become reality are often not the ones that we are asked about or worry about the most in the period preceding their eruption. In the GRR published in January 2016, the top risks listed for likelihood of occurrence were large-scale migrations, extreme weather events and failure to mitigate climate change, while the top risks listed for severity of impact were failure to act on climate change, weapons of mass destruction and water crises.

Four notable risks that did not top the GRR charts last year but materialized against popular expectations in 2016, were financial volatility at the start of the year, Brexit in the middle of the year, the military victory of the Syrian government forces in Aleppo and the outcome of the elections in the United States. If they were discussed at all, or considered seriously before their occurrence, all these events would probably have represented significant risks in the eyes of analysts, academic influencers and economic deciders in developed countries.

Once these events did materialize however, the economic and financial outcomes were quite different from what people warned of during and immediately after their occurrences. The sudden volatility in January did not trigger the financial catastrophes predicted by some analysts. Brexit, shocking as it was at the time, did not instantly drag European markets asunder, and the Republican win in the US elections was followed not by a deterioration in stock indices but by a market rally.   

Risks at home and in the region

Capturing Lebanon-specific risks or even Arab regional ones and assessing them is not in the remits of GRR nor the EUI. Risks, both globally shared and uniquely local ones, are ever present in Lebanon and make up half of Lebanese existence. The dangers include; a war with Israel because of an escalating altercation in south Lebanon; Syrian state collapse; economic problems resulting from troubles in the Gulf region that weaken remittances; domestic political vagaries on top of dangers of irrational US policies or belligerent Israeli politics; dangers of euro-zone inflation or movements in the euro-dollar exchange rate that are to Lebanon’s disadvantage or outright detriment;  as well as the danger of conflicts between larger global or regional powers that play on the Lebanese stage – and 90 percent of countries are bigger or more powerful than Lebanon. All of the above are on our national risk list alongside the dangers related to the environment, from pollution and weather events to earthquakes and social issues, whether an ageing population or unemployment. Continuing to live happily against all these risks is the other half of Lebanese existence, and the name of the Lebanese game.

While there is an international awareness of factors, such as growing irrationality of voters, the exploitation of this irrationality by populists, the decoupling of wealth from democracy and the shifting of global power centers (broadly from West to East in the current scenario and from North to South a few years ago), risk cycles on smaller levels and their impacts on a country like Lebanon are commonly not mentioned in the global picture.

But there are some reports of regional relevance, just like there are a handful of fun songs about economics. As the World Bank’s regional outlook for the Middle East highlighted last month, the region-wide pace of economic growth this year is forecast to reach 3.1 percent in 2017, after having experienced – for an emerging region unsatisfactory – estimated growth of 2.7 percent for 2016. The outlook, which estimates Lebanese GDP will increase 1.8 percent in 2016 and modestly accelerate to rates of 2.2 percent this year and 2.3 percent in 2018, sees oil importers achieving the strongest gains. Specifically, Saudi Arabia is forecast to grow by a quite meager rate of 1.6 percent in 2017, but this will be an improvement in comparison  to  the estimate for 2016.

The factors to watch in this regard are regional developments involving friends as well as more distant neighbors and those, whether states or non-state actors, that have shown themselves as outright foes of Lebanese progress. Besides the hope for positive change from the Lebanese parliamentary elections, it seems prudent to pay careful attention to developments in the economies of the Gulf Cooperation Council countries.   

Shuaa Capital observed in December that Saudi Arabia allocated SAR 890 billion to spending in its 2017 fiscal budget, above both budgetary and actual spending in 2016, and is also  planning for a budget deficit of SAR 198 billion in 2017, 40 percent lower than the deficit for 2016.   

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It seems there are reasons, but not enough reasons, to keep on predicting doomsday in the global economy

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A mixed regional outlook

Estimates by officials in the United Arab Emirates imply that Dubai’s economy will be increasingly on the mend in 2017. In a presentation at the UAE Economic Outlook 2017 event in January, the Chairman of Dubai’s Economic Development Committee Sheikh Ahmed Bin Saeed al-Maktoum said the emirate was expected to grow by 3.1 percent in 2017, after growing 2.7 percent in 2016 in real terms amid an unfriendly regional and global economic climate. 

By watching Arab equities – an exercise that is not found everywhere – Credit Suisse in January spoke of “an impressive rally” in Middle East markets, whereby the region’s 17 percent gains in Q4 of 2016 marked the “by far the strongest performance by any region and allowed the Middle East to post a modestly positive return for 2016 overall.”

“After experiencing a contractionary economic environment over the past two years, economic indicators across the Middle East are beginning to show signs of improvement. The oil exporting GCC economies are set to reap the benefits of higher oil prices and progress made on subsidy reform, while Egypt has successfully initiated the politically difficult steps towards preserving its foreign exchange reserves,” wrote Fahd Iqbal, Head of Middle East research at Credit Suisse.

In other moderately encouraging news from the region’s financial industry, the annual investment banking report for the Arab region by Thomson Reuters, which was released last month, said that investment banking fees in the Middle East reached $820.8 million during 2016, an 18 percent year-on-year increase and the highest annual fee total in the region since 2008. According to Thomson Reuters’ analysis, debt issuance in the region was the highest in over 35 years and jumped year-on-year by 145 percent to almost $78 billion, bolstered by Saudi Arabia’s $17.2 billion bond sale in October of last year. On the other hand, merger and acquisition activity, as well as equity issuances in the Middle East, were described as low in comparison to other years, with values of announced M&As with regional participation at $47 billion – the lowest since 2013 – and equity and equity-related issuances at $2.6 billion, which a director at Thomson Reuters said was “a 55 percent decline year-on-year and the lowest annual issuance total in the region since 2004”.

Meanwhile, the outlook for GCC banks is mixed according to ratings agency Standard and Poor’s. S&P Global said the agency expects the financial profiles of GCC banks to “continue to weaken in 2017-2018”, but added that this expectation had been incorporated in ratings and that it considers most GCC banks to have created “sufficient capital buffers to remain resilient to their weakened operating environment”.

In this altogether complex landscape of regional assessments, global risks and more or less fearful anticipations, Lebanon will have to find its place for the best possible economic performance, as well as conduct its domestic politics and business to the best of its capacity. By consensus of many economists, it seems there are reasons, but not enough reasons, to keep on predicting doomsday in the global economy. More likely is that we will muddle along, with risks building underneath and erupting every now and then, without us being able to evade them but also without being destroyed. Same procedure as every year.

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Economics & PolicyInterview

A full load of plans to spur on the economy

by Thomas Schellen
written by Thomas Schellen

If there is unanimity concerning Lebanon, it is that the new government signifies a chance to put the country on a new track that will create prosperity and inclusive growth for Lebanese society. At the same time, it is widely agreed that the regional and domestic challenges are significant. Not least among these challenges is the task of holding fair parliamentary elections, as well as the need to return to organized budgets, improve infrastructure, invest in the economy and achieve continuity in government. These challenges are all surmountable, but they all have to be tackled. To inquire about governmental plans and strategies for the improvement of the economy, Executive sat down with the new Minister of Economy and Trade (MoET), Raed Khoury, who is a member of the Change and Reform bloc. The interview took place right after the January 14/15 Parliament session, which focused on the rent law(discussed further in a Q&A below), among other issues.

In elaborating on economic policy priorities, Khoury starts by explaining that the ministry is currently engaged in both short-term and long-term planning involving other government ministers. Some points in this plan “relate directly to the Ministry of Economy and some are related to the whole government,” he says, explaining, “The government has assigned a number of ministers to form what is called the Economic Committee in order to address the macroeconomics of the country”.

“It is a special political opportunity that the country should take advantage of. The priorities of the new cabinet lay down the basis for the medium-to-long-term future of Lebanon,” he adds. In reference to a set of prepared answers to questions that Executive submitted in advance of the interview, he then outlines economic and general policy priorities as comprising four important pillars in the short-term; the electoral law, budget approval as a starting point to improve Lebanon’s financial conditions, agreement on a plan for rehabilitation of Lebanon’s depleted infrastructure and appropriate management of the oil and gas sector.

Elaborating in more detail on each pillar, he emphasizes that the electoral law is an urgent issue given its importance in reviving constitutional authorities and national confidence. The adoption of a budget should entail decisions on several levels, including; redirection of expenditures toward sectors where Lebanon has a competitive advantage to create balanced and sustainable growth, tightening the revenue collection processes to avoid incurring any losses and to ensure social equity by the appropriate distribution of revenues among Lebanese citizens, adjusting the wage bill in the public sector – which accounts for more than 30 percent of total spending – and rectifying what he called the “peculiar transfers” to Electricité du Liban, ideally through a public-private partnership deal for operating the power utility and addressing the issue of public debt, which is growing. “In fact, public debt has exceeded $74.5 billion to date,” he stresses.

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Khoury sees it as a priority to update the country’s consumer protection law

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According to Khoury, the plan to rehabilitate Lebanon’s infrastructure needs to tackle problems comprehensively, such as the waste crisis, shortcomings in the supply of water, road, air, maritime and urban transport, telecommunications and energy. It is important in the context of infrastructure development “to highlight the private public partnership law,” he adds.

For the fourth pillar, proper management of the oil and gas sector, the minister takes the view that development of this sector “opens the page for a new era of economic prosperity and will aid in limiting the deficits in Lebanon’s public finance”. This makes it paramount to push to advance the file on the energy sector and to invest every effort in ascertaining that appropriate planning for this new sector is carried out, he says.

From Khoury’s perspective, the recent governmental visits to Saudi Arabia and Qatar make it evident that this new government has been implementing positive decisions since its formation in December. He attaches particular importance to the visits in the context of the issuance of the oil and gas decrees, for rebuilding regional confidence in the Lebanese economy and for revitalizing the relationships between Lebanon and the Gulf Cooperation Council.

Legal framework

When asked what the MoET would hope to achieve within the current cabinet’s term of little more than three months, he responds that he expects the current cabinet to work longer than that and be in charge for between six to nine months. “This is still very short. There are some quick wins that we need to put in place at both the ministry level the country level. It would also be an achievement if we can implement a long-term macroeconomic plan,” he says, before going on to specify that the economic vision and strategy would be based on a socio-economic developmental perspective and encompass a range of initiatives from attracting new Foreign Direct Investment (FDI) to the creation of a better business climate and diversification of the economy by way of supporting innovative sectors through small-and-medium-sized enterprises (SMEs) and startups.

For attracting FDI, the minister envisions special incentives for investments originating in the Lebanese diaspora. Regarding enhancing the business climate, he points to the importance of avoiding unpopular austerity measures and the need to amend laws and update the legislative framework. “Several economic sectors are relying on the ratification of several draft laws by the Parliament in order to enhance the business environment. These laws include; a public-private  partnership law, a bankruptcy law, a competition law, a secured lending law, a commerce code and so forth,” he says.

Calling it of great concern that Lebanon is ranked only 126 out of 189 countries covered by the 2017 edition of the World Bank’s Doing Business Report, Khoury sees it as a priority to update the country’s consumer protection law and the laws relating to protection of intellectual property, just as much as improving the national trade balance by spurring Lebanese exports. To achieve the latter, he calls for strengthening existing trade relations, opening new markets and concise targeting of the Lebanese diaspora. 

Markets of importance to Lebanon cited by Khoury in this regard include West Asia, the EU, Africa and the Mercosur common market in South America. In countries around the world, it will be important for Lebanon to collaborate with the private sector, mainly with the chambers of commerce and private economic entities.

As far as strengthening consumer protection at home, he aims to enhance the role played by the Consumer Protection (CP) Directorate at the MoET, especially with regards to monitoring the quality, safety and validity of local and imported products. Calling the CP Directorate’s role “critical” for the benefit of the Lebanese, he says positive repercussions of stronger consumer protection activities will affect many sectors from hospitality to healthcare and agro-industry.

A final action point on the minister’s mind is mitigating the socioeconomic impact of the refugee crisis and spillovers of the ongoing Syrian conflict. MoET’s goal here entails following up on the management of the crisis to alleviate the repercussions on Lebanese host communities and Lebanon’s social structure, Khoury says. He points to competition between Lebanese and Syrian labor for low to high skilled jobs and also at the level of micro to small enterprises, in addition to unemployment that has climbed to more than 25 percent in general and 35 percent among youth.

Asked what the MoET plans or projects for the next few months are in relation to the insurance sector, which is under its supervision, Khoury refers to acting head of the Insurance Control Commission (ICC), Nadine Habbal, as the person with the most expertise on the subject. As she talks to Executive, Habbal emphasizes that the ICC had a very fruitful year in 2016 and was recognized in a recent report by the International Monetary Fund’s Financial Sector Assessment Program as “instrumental in maintaining the [insurance] industry in a generally sound situation”.

Addressing ICC plans for the coming months, she lists four major projects, “First, the organization of the compulsory [Third-party Liability] motor insurance policy, which can be ranked as first priority because of the new [traffic] law. We need to abide by this law and have a standard policy covering both bodily injuries and material damages.The second project will be the organization of medical insurance benefits. We want to have a standard policy with minimum benefits and we want to interfere in the pricing strategy. We have to impose minimum pricing; this will aid the policyholder in having the right coverage [in combination] with an acceptable price. Next is quantifying and managing the risks of an earthquake. We also aim for creation of a framework of soft loans that will act as incentives for mergers and acquisitions in the insurance industry.” She concluded that achieving  these four goals within five or six months would be significant and regarded as an institutional success for the ICC.

In addition to elaborating on the MoET strategy for the coming months, Khoury kindly responds ad-hoc to several questions by Executive, addressing issues from real estate to banking and the ministry’s relationship with Banque du Liban, Lebanon’s central bank.

E   If we take a look at specific laws that are on the agenda at this time, the rent law sticks out. It was a topic in Parliament this January and is an urgent topic on the minds of the population both the side of tenants and the side of landlords. When putting them into a macroeconomic context, how important are laws like the new insurance law that has been debated for years, or modernized laws on restaurants and hospitality demanded by that industry, or the rent law that has been highly contentious? What is the most important law from the ministry’s perspective?

All of them are important but the rent law is very important for [a number of] different reasons. First, it will create fairness in how people are treated, which is important for the socioeconomic environment. Second, it creates stability in the real estate market in terms of prices, etc. Third, it also helps in creating more turnover and demand in the real estate sector, which will attract foreign and Lebanese investors to buy and sell [properties], creating a market.

E  The usual assumption is that confidence is a key factor for economic development. If investors don’t have confidence in the legal framework of a country, they are very hesitant to invest in an area like real estate.

True.

E  In order to encourage inflows of Foreign Direct Investment (FDI) into real estate, and also encourage local Lebanese to invest, what can the ministry do in terms of building confidence in this market?

We have some input for the law itself from our side, and we can also try to think [in line] with [Banque du Liban, Lebanon’s] central bank. We have not yet looked into it, but there could be a project with the central bank for incentives that are geared toward this legislation in order to create what I have said before. It has to be with the central bank in terms of subsidies. Also, as the Ministry of Economy, we have a role in supervising the implementation of the law in terms of prices.

E  So in this regard and with regard to Consumer Protection Laws, the function of the Consumer Protection Unit at the MoET will be crucial?

Exactly.

E  Do you have a plan to enlarge the functionality of the Consumer Protection Unit to a greater level?

We are now studying the capacity [needed] for accompanying this law and will have our opinion later.

E  The time frame for this cabinet is limited by elections later in 2017. Is it true that there is no visibility at this time as far as the next cabinet after parliamentary elections, or is there already some agreement or personnel arrangement for the next cabinet as far as ministerial positions?

On positions, no. So we don’t know if I will stay or not. But whether I stay or go, I am part of a political party that is involved in putting together an economic plan and agenda for the country. I will be part of this regardless of my position, because I am directly involved in this and I will continue to [be].

E  That is good to hear. Prior to the 2005 elections, Executive made the rounds with most political parties in Lebanon to inquire about their economic perspectives. There was an almost total absence of party programs as far as having an economic platform. Is it different today?

First of all, concerning our political party, we have finalized an economic plan, and it is already on the table. We are now in the process of communicating this plan to other parties and developing a common paper that will be adopted as a roadmap for the future. So in this regard, I can tell you, yes, we have done something. We have been working on this plan for the past three months and have finalized it internally. Now we are at a stage of communicating with other parties and reaching agreements with at least three or four major parties in order to roll it over.

E  It is my understanding that the Lebanese constitution calls for implementation of meritocracy in filling positions from the president on down but all throughout the past 25 years we have been hearing people allege that wasta is more important than merit in getting a job in public administration. What can be done to create a stronger image that people are placed in positions because of merit?

There is a process involving the Civil Services Board which does examine people for their qualifications. When they pass [applicants] will see what vacant positions are to be filled in the government and we as ministers will have our say. We will interview them and take [the applicants] we want. I can’t tell you how to change the image but there is a process and there are exams. Wasta might come into play when two people have the exact same level of qualification and compete for the same job, but there is a process.

E  It seems that it was often difficult to attract qualified people to top positions because the remuneration in the private sector is much better.

You are right. For very high-caliber people the private sector is more competitive when you compare remuneration. But there is stability in the public sector and this weighs in because in the private sector a company can fire someone if the company is not doing well, whereas in the public sector it is difficult to fire people. There are also some institutions within the government, like the United Nations Development Programme (UNDP) or some semi-government entities, where the remunerations are higher and more flexible. There are ways to overcome the situation but in general the salary in the public sector is lower than in the private sector.

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I personally made it a point to seperate the two things by resigning from my position as chairman of a bank [when appointed minister]

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E  The insurance sector is an important sector under your supervision and the minister of economy has a role in the development of the insurance industry. Do you think that the combination of regulator and supporter of development is a  good thing in the hands of one ministry, or should the regulator be independent from ministerial decisions?

We are debating now if the [Insurance Control Commission] should be under the Ministry of Economy or should have more independence. I am the kind of person who believes that it should be more independent but again, once it is independent, the ICC’s role would be more supervisory than promotional regarding insurance companies. The regulator’s first role is to protect the sector, its second role is promoting it. What we care about is that an insurance company does not lose money and shut down. The regulator doesn’t care if it makes a million dollars or $10 million. And what we also care for is ensuring the fair treatment of clients, etc. But in terms of the ministry’s role, I believe the ministry has to work hand in hand with the regulator in order to carry out some elements of promotion as well. I am also thinking about something, that I will not talk about now, in order to promote the insurance companies to make them healthier and more developed.

E  So whether the scenario would be to keep the ICC under the ministry or independent, there would be a focus on the development of insurance?

Yes, of course.

E  In terms of banking, many international voices – not least the World Bank – have for the last five or six years spoken with some criticism of quasi fiscal policies being exerted by Banque du Liban (BDL). One of the major issues in Lebanon was the inability to create effective fiscal policy on part of the government. As a person coming from the banking field, how do you see the relationship between MoET, BDL and the banking industry?

You are right in saying that the banking sector and BDL have played a role in regard to fiscal policies. This is for two reasons. The central bank has been working in a healthy way, unlike the government, which has been interrupted many times by inability to form a Parliament or cabinet – you know the story. The second reason is because the central bank has tools, [meaning] mainly it has money which it can control to enact fiscal stimulus. The government, including my ministry, does not have the financial capability to support or subsidize anything in the economy like the central bank can do with regard to the housing sector, for small-and-medium-sized enterprises (SMEs), for energy and many other sectors. After all, the central bank is supervising more than $160 billion in deposits in commercial banks and it is a wealthy institution. Going forward, we will take some of the burden from the central bank by working hand in hand with the central bank in putting more fiscal laws and regulations into place, but the stimulus will still come from the central bank.

E  The political game between monetary policy and fiscal policy is considered to involve some competition based on divergent interests of the fiscal and monetary authorities.

Not in Lebanon. The central bank is playing both roles.

E  So this will continue for the coming years?

It will continue for a long time, yes, because the fiscal situation is not healthy at the [level of] government. We have debt and a negative balance of payment, our budget is running every year in minus, so we don’t have many tools.

E  When people are appointed to public positions, one often hears in other countries that they step back from their private business because of potential conflict of interest between public and private functions. Can you say what you did in this regard?

I am not sure if regulations force [disassociation from their private business] on ministers or deputies in Lebanon. However, I personally made it a point for myself to separate the two things by resigning from my position as chairman of a bank in the private sector. I resigned on the day after I was appointed minister of economy. It was my personal decision.

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EditorialOpinion

Free minds of Lebanon, unite!

by Yasser Akkaoui
written by Yasser Akkaoui

Our economy is in tatters, and we lack uninterrupted basic services like electricity, water and waste management. There is no acceptable explanation for why our country is near ruin. Fixing these problems is simple, and 2017 is our last chance to change course.

There are plenty of free minds in this country that understand how to create a Lebanon we can be proud of. A Lebanon where pro-growth economic policies are respected. Where the rule of law is respected. Where the environment is respected. There is no shortage of research penned by local authors with concrete, easy-to-implement solutions to this country’s myriad problems. It’s time to stop writing and start moving.

Webs of dependency created by the clientelist system in place seem finally to be weakening. The cost of struggling to survive in a broken country getting worse year by year clearly outweighs the benefits of low-wage jobs and the occasional table scraps. More people are seeing this at home. And those watching this final descent from abroad are at last getting angry enough to demand change as well.

Mismanagement is destroying this country. So many of us agree on this point and on the ways to move forward with creating a nation worth living in. Unity is our only option. As our corrupt politicians go about writing an electoral law aimed at keeping themselves in power, we must stand in opposition.

Those of us who have been calling for change – academics, NGOs, the media – have never succeeded in actually fulfilling our role of becoming pressure groups that force real change. That ends today. 2017 is our year. This election is our chance.

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Retail Overview

A balancing act

by Nabila Rahhal
written by Nabila Rahhal

It’s been a mixed year for Lebanon’s retailers and luxury retailers. On the one hand, shoppers were once again bombarded with text messages urging them to hurry up and benefit from the latest discounts and offers, and passing by “70 percent off sale” signs on store windows was an all too common occurrence. Both of these are sure signs of a weak market in which consumers are not spending much of their disposable income and retailers are becoming increasingly desperate to sell their products at any price.

On the other hand, 2016 also witnessed several major store openings, including Hugo Boss’ flagship store on downtown Beirut’s Allenby Street and A. Lange & Söhne, a luxury watch store – both of which brought some much-needed dynamism to the sector.

Overall, retailers feel that while 2016 may have been a continuation of the past five years – marked by a decrease in tourist arrivals as well as dwindling local purchasing power – 2017 might just be the year that will see the economy improve, bringing a much-needed boost to their stores’ performance. The infrastructure is in place to welcome them, all that is needed are the willing shoppers.

Where are the tourists?

Similar to other sectors of the Lebanese economy, including the hospitality sector, stakeholders in the retail sector felt the sting of declining tourism figures as a result of the instability associated with the war in Syria.

The biggest spenders among tourists typically were GCC nationals, especially those from Saudi Arabia, many of whom have been avoiding Lebanon following travel advisories – and sometimes bans – by their countries’ governments. According to figures by Global Blue – which gives percentages of tourists who reclaimed their value added taxes by nationality – the first half of 2016 showed an increase in expenditure by Saudi nationals compared to 2015. Nevertheless, this is still a significant drop in spending figures from their height in 2010 (see data, below).

The first area to be affected by the drop in GCC arrivals was downtown Beirut, owing to its nature as a tourist attraction and the concentration of luxury and premium brand stores. “The first area which gets hit is Downtown because 25 percent of the turnover there is from tourism. This is in contrast to, for example, ABC Dbayeh and ABC Ashrafieh, where the turnover from tourists is only two and ten percent, respectively,” said Izzat Traboulsi, CEO of T2 trading, the retailer for Hugo Boss in Lebanon and Egypt.

Traboulsi explains that although it is true that very few tourists from the GCC came to Lebanon in 2016,  in his experience visitors from Egypt, Tunisia and Iraq somewhat compensated for the lack of visitors from the Gulf. However, figures from Global Blue reveal that percentage expenditure from Iraqis and Egyptians remains rather low, particularly when taking in consideration the high number of their arrivals into Lebanon (see data below).

A local act

Retailers who were not reliant on tourists but rather on the local market managed to perform better than most in 2016. “Hamra Shopping and Trading Company (HSTCo) has not built a retail concept exclusively designed for tourists. Our retail concepts offer international retail and customer service standards that local customers can enjoy as well as tourists. This has helped us to better cope with the declining number of tourists,” says Jamil Rayess, general manager of HSTCo, which operates Grand Stores (GS) and several other mid-range brand stores.

Still, even within the local market, retailers have noticed a decline in the spending power of the local population. Here again, it was the luxury and premium brands that were the most affected as the Lebanese who used to be able to afford high-end products either held back from purchasing to wait for better times or opted for medium-range brands instead.

That does not mean that medium or even low-end brands were exempt from this downturn, as Lebanon witnessed a general slowdown across the entire retail sector. “HSTCo’s brand portfolio and retail concepts are diverse, giving us an edge [in our ability] to cater to a wide spectrum of income brackets. Our study of the current retail market has shown that dwindling local purchasing power has affected businesses of all income brackets,” says Rayess.

While malls continued to experience more footfall than standalone shops, this did not necessarily translate into more sales for the retailers there. “Although there is more traffic in malls and department stores, we have such a great store in Downtown – in terms of location, layout, product and team – that the conversion rate is very high. And although we still have fewer people that go to our flagship in Downtown, those who do have a much higher average ticket, almost triple, than that of our stores in malls,” says Traboulsi, explaining that this could be because those who shop in Downtown tend to have a high income while malls have stores that target a variety of income levels.

A different track

Faced with such a situation, most retailers Executive spoke to were happy to have survived 2016 without any further losses, although they noted that the upcoming holiday season could tip the scales in their favor. “I consider our biggest achievement to be the maintaining of our sales and turnover figures close to previous years. Although our margins decreased, we were able to achieve fairly good results in 2016,” says Mher Atamian, managing director of luxury watch retailer Atamian.

  As such, Lebanese retailers had to once again get creative in identifying strategies or approaches which would entice the reluctant local market and the dwindling number of tourists to buy more. Providing customers with a smooth and exclusive shopping experience gained added significance in Lebanon’s competitive retail sector.

Traboulsi mentioned customer service management as a main aspect which attracted clients to Boss’ flagship store. This was echoed by AS Chronora, exclusive retailers of Rolex and Tudor in Lebanon, who also focused on enhancing their customer experience and engagement.

“Here at Rolex Lebanon, we believe that our boutiques are not only showrooms displaying an array of the latest Rolex and Tudor pieces, but also a place where relationships are built between our clients and the Chronora team that aim to last for generations to come. Engaging this community’s interest has been our objective for the past year, during which two global Rolex exhibitions were introduced,” says Zeina Annan, customer experience manager at A&S Chronora, explaining that the experience does not stop there and that Chronora intends to update its website and social media platforms to allow their customers to “express themselves and their dreams while partaking in a perfect Rolex lifestyle experience.”

Others concentrated their efforts on e-commerce. “The industry is changing, and for us to remain leaders we need to stay ahead of these changes and adapt our business model accordingly. With that in mind, and noting that the conversation is happening online where everybody is on the move, we realized that is where we needed to be,” says Rayess, speaking of the website and mobile shopping application launched by GS in October 2016.

Staff training and development also played a role in ensuring that shoppers get the best experience. “Our expert sales advisors attend the renowned yearly watch fair in Basel, thus helping maintain their place among the leading experts in the industry. Even more profound is the knowledge of our master watchmakers who continuously attend a training course at the Rolex headquarters in Geneva at least once a year. Our after sales workshop located at our Downtown Rolex boutique is at our customer’s disposal for any repairs and maintenance,” explains Annan.

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Stakeholders in the retail sector felt the sting of declining tourism figures as a result of the instability associated with the war in Syria

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New beginnings

Some retailers took advantage of the slow years the country is passing through to grow their business in the expectation of better times ahead.

GS opened its 2,500 square meter (sqm), four-floor department store facing Beirut Souks in October 2016, with an entire floor dedicated to home décor.

In June 2016, Hugo Boss opened its 350 sqm flagship store, the biggest men’s wear luxury store in Lebanon, on Allenby Street. Right from the start, Traboulsi wanted the flagship store to have the look and feel of its European counterparts, and worked aggressively to meet this goal. He believes he succeeded: “We opened the store and emerged with this dynamic look and feel when the whole economy was tired. So the customers who came in were feeling this dynamic energy and this was reflected in their buying and in a higher turnover for us. We got this feedback from the end consumers themselves,” enthuses Traboulsi.

A brighter 2017?

The enthusiasm Traboulsi has displayed for the opening of Boss’ flagship store carries through to 2017 where he believes that the election of President Michel Aoun – and the eventual formation of a government – will lead to a return of tourists and Lebanese expats and translate into more sales for retailers, especially in the luxury items department.

“2017 will witness the comeback of Lebanese expats with a high income who naturally feel more at home spending their money here rather than elsewhere. This will positively impact the luxury market more than the others since it was the most affected in the crisis,” says Traboulsi.

While some, like Rayess, share Traboulsi’s expectations for 2017, others are adopting a more cautious approach. “The worldwide retail sector has been suffering for two years now. I think 2017 will be more or less similar to 2016. We believe we are still a couple of years away from seeing positive growth,” says Atamian.

Still, there are reasons for excitement in 2017, most notably with the opening of ABC Verdun – a joint development between ABC and Verdun 1544 Holding, one of the largest companies of Bahaa Rafic Hariri Group in Lebanon – in the summer of 2017. Stretching over 180,000 sqm of built up space, ABC Verdun consists of ten floors (five of which will be dedicated to underground parking) with over 200 shops and a cineplex.

It is hoped that ABC Verdun will revitalize Verdun and Ras Beirut area. “Perceived as the symbol of business opportunity in Lebanon, this new mall underlines ABC’s commitment to the project and its faith in Lebanon and its economy. It is anticipated to generate more than 2,000 job opportunities as a thriving social hub with both tourists and residents flooding in all year long,” says Tani Ezzedine, head of real estate at ABC. Only time will tell whether 2017 will indeed be bright for the retail sector or whether it will bring more of the same.

Chart by Ahmad Barclay

Chart by Ahmad Barclay

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Foreign PerspectiveHospitality & Tourism

Visiting Lebanon

by Nabila Rahhal
written by Nabila Rahhal

With Lebanon looking to diversify its tourism market away from tourists from the GCC region, China seems to be an obvious choice. According to the China Tourism Research Institute, 120 million Chinese travelled abroad in 2015 alone, spending approximately $104.5 billion.

Although the Chinese embassy in Lebanon was unable to provide us with figures regarding how many of its nationals visited Lebanon, it is safe to assume that the number is rather low. Therefore, it is clearly a market worth tapping into and developing.

Executive corresponded with Ambassador Wang Kejian via e-mail to discuss ways to grow economic and touristic relations between the two countries.

E   Is there an aim or expectation to further intensify economic relations between China and Lebanon in 2017?

This year marks the 45th anniversary of diplomatic relations between China and Lebanon. Ever since the establishment of diplomatic relations in 1971, the economic and trade relations between our two countries have made considerable headway in all fields.

In 2017, I sincerely hope that our bilateral trade and investment will enjoy steady and healthy development, and that our practical cooperation in finance, communication, energy and infrastructure will be further strengthened as well.

E   How aware are the Chinese of Lebanon as a tourism destination? Is Lebanon marketed as a destination in China among travel agencies and such?

In 2008, China and Lebanon signed a memorandum of understanding on tourism cooperation. Amity between the people of both countries holds the key to sound state-to-state relations. Mutual visit[s] can help the two peoples learn more about each other. With the growing friendship between them, I believe that there will be more and more Chinese tourists coming to Lebanon.

E   What could the Lebanese public and private sectors do to market Lebanon as a tourism destination to the Chinese market? What elements/attractions should be highlighted?

To know more about each other is the first step. By enhancing the promotion of various tourism sites and projects, Lebanon is surely going to attract more Chinese travel agencies and tourists.

E   What needs to be improved in Lebanon in terms of tourism infrastructure to make it a more appealing destination to Chinese travellers? Or is it merely an issue of lack of awareness and marketing?

Transportation is of vital importance to tourism infrastructure. Convenient transportation would make the experience better for tourists. Additionally, more Chinese-speaking tour guides, more Chinese restaurants, better security services and diversified Middle East region tour packages that include Lebanon will also make this country more attractive to Chinese tourists.

E   In terms of the retail sector, what could be improved to make it more attractive to tourists from China when they visit Lebanon?

Chinese tourists and their purchasing power have ranked number one in the world since 2013. For them, shopping is an important part in their travel agenda, especially for high-end and exotic culture products. Shopping occupies a large proportion of their overall time. Other than that, recreation and entertainment are also potential areas to attract Chinese tourists’ consumption.

E   Are there any new areas where you see collaboration, FDI, or trade potential?

With [the] political situation and security environment getting better, I think there will be more Chinese companies doing business with Lebanese companies. We also welcome more Lebanese companies to invest in China.

E   Does China see offshore Lebanon as a potential market for Chinese oil and gas service companies?

Energy cooperation is an important part of the ‘Belt and Road’ initiative. China’s oil and gas enterprises keep tracking news of Lebanon’s offshore oil and gas development and they will follow up accordingly.

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Hospitality & TourismHotels Overview

Light at the end of the tunnel?

by Nabila Rahhal
written by Nabila Rahhal

It has been a long five years for Lebanon’s hotel industry, marked by an ever-dwindling tourism market. With the election of a president in October 2016, however, that period may soon be over.

Just like one would get ready to meet a loved one after a long period apart, Lebanon’s hotel industry is getting ready for the return of tourists. The sense of excitement mixed with cautious anticipation that usually accompanies such reunions is palpable.

After making do with mainly business travelers or local banquets, Beirut’s four and five star hotels can’t wait for the Gulf Cooperation Council (GCC)nationals to once again fill their rooms.

Yet, these hoteliers remain somewhat anxious. Not only has a lot changed in the past five years both domestically and regionally, but internal stability in Lebanon, as a result of regional insecurity, is still fragile and there is the sense that Lebanon’s hospitality sector won’t be able to bounce back as easily as it did before.

A broken record

By now the story of how the onset of the war on Syria in 2011 resulted in travel advisories warning GCC nationals against visiting Lebanon has been recounted many times. Couple this with the internal insecurity that has plagued Lebanon for the past five years – manifesting in countless examples including the assassination of former Minister Mohamad Chatah in 2013, the Duroy Hotel suicide bombing in 2014, the 2015 suicide bombings in Dahieh and most recently the wave of suicide bombers in the Bekaa town of Al Qaa in May 2016 – all of which have taken a huge toll on Lebanon’s tourism market. According to Pierre Achkar, head of the Lebanese Hotel Owners Association, Lebanon lost a huge market of visitors who used to travel by land. “When the war in Syria started, the roads between the Arab countries and Lebanon shut down, and so the first year alone we lost 360,000 tourists who used to come to Lebanon by land, 200,000 of which are Jordanians,” laments Achkar.

The decrease in this revenue stream was coupled with the significant drop in visitors from GCC countries, the largest share of which came from Saudi Arabia, due to “political reasons,” according to Achkar.

A market shift

The decrease in tourists from GCC countries coincided with a significant increase in visitors to Lebanon from Jordan, Iraq and Egypt (see data, page 178). Nevertheless, this increase has not compensated for the loss of tourists from the Arab Gulf, according to a number of hotel operators interviewed.

Four and five star hotels in Lebanon mainly cater to GCC nationals and are therefore the most impacted by their absence. “Hotels in Hamra, with their $110 or so rooms, depend on the Egyptians, Iraqis, and small-time business people. The five star hotels in Downtown depend on more high-end guests and they are not coming,” says Peter Edholm, cluster director of sales and marketing at Le Vendome and Phoenicia Intercontinental Hotels & Resorts.

Edholm goes on to explain that while they welcome any client at the hotel, suite guests – who tend to be GCC nationals – generate much more revenue than standard room guests, not only because of the higher room rate, but also because these guests tend to consume more in the hotel itself through the minibar and dining at the hotels’ various F&B outlets.

Achkar explains that although tourists from Jordan, Iraq and Egypt are positively affecting the sector to some extent, they cannot be compared to GCC nationals when it comes to length of stay and spending power. “The Egyptians, Jordanians and Iraqis who come to Lebanon stay a maximum of five days and an average of three days. The GCC nationals stay a minimum of ten days and take more rooms and suites, and have a higher purchasing power than nationals of every other Arab country,” says Achkar.

Facing such circumstances, many hotels began decreasing their room rates, forcing other hotels to do the same in order to remain competitive. “When the occupancy percentage goes down, price competition is elevated and hotels are forced to decrease prices to such an extent where even if your hotel is full, you are not getting the same room rates that you were getting in the good days,” says Achkar. He explains how some hotels have been gradually dropping their rates over the past five years, so that today they are at an average of 30 percent lower than they were in 2010, and even 50 percent lower in some cases.

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In terms of profit margins, maintaining numbers despite circumstances was the goal

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More of the same

Despite the continuing negative circumstances, the hotels interviewed for this article reported a stable 2016 when compared to 2015, with no significant drop in occupancy or profits.

The internal security situation in the country was somewhat stable this year, meaning a slight positive impact on the sector. “For the first time in years, Lebanon has seen stability within its hotel industry. Year-on-year Lebanon neither improved nor worsened, which actually gave a sense of optimism,” explains Michel Boulad, director of sales and marketing at O Monot luxury boutique hotel.

In terms of profit margins, maintaining numbers despite circumstances was the goal. “We are slightly below last year in terms of revenue, but I think we managed the hotel here very carefully in order to achieve the same profits that we had in previous years. The ban that was imposed on GCC nationals and the local uncertainty before the election of the president made 2016 a very challenging year, so if you look at our results, personally as a general manager, I am very pleased because it was a tough year,” says Rami Sayess, regional vice president and general manager at the Four Seasons Hotel Beirut.

Wearing different hats

This stability in terms of profits was largely achieved through a diversification of revenue streams, which all hotels tried to identify and benefit from. “It was not about cutting costs, but about finding new ways to generate profit. We thought of ways to introduce new revenue streams such as opening a new F&B outlet on the third floor and opening the roof again in a different style,” says Sayess, giving the opening up of their spa to non-hotel guests as another example of diversification.

With a decrease in leisure travelers, business conferences and events – and the travelers they bring with them – became of added importance to hotel operators. “The corporate market has contributed significantly to our business,” says Boulad, giving an example how O Monot’s location in close proximity to the Beirut Digital District has benefited them in attracting global visitors to the area.

Sayess also discussed the importance of business travelers, explaining how in 2016 Four Seasons Beirut became more open to conferences and group business travelers. “This year, and for the first time, we opened up to groups of business [travelers], which we were a bit hesitant and not very flexible about before since we used to target individual travelers more. But there are some quality groups looking for hotels like Four Seasons,” he explains.

Hotels go all out for private events

Banquets, weddings and private social events also became of bigger value to hotels over the past five years, with the Phoenicia citing close to one hundred weddings and large social events held at their hotel in 2016. Both the Four Seasons Beirut and the Kempinski Summerland Hotel and Resort say their banquet and reception halls are almost fully booked throughout December 2016.

“We are aiming to host 70 weddings. More and more people are coming to Kempinski Summerland and we are fast becoming one of the major players in terms of events such as corporate meetings and dinners, especially considering that we have only been open since September 2016,” says Maha Bourachi, director of sales and marketing at Kempinski Summerland. Bourachi explains how in summer 2017 they plan to target outdoor weddings and social dinners, taking advantage of their outdoor venue which can accommodate up to 1,000 guests, while in winter their goal is to be considered “the retreat or getaway for corporate executives within Beirut.”

As such, F&B outlets and banquet halls are fast becoming a main revenue stream for hotels in Lebanon, which Sayess says is not necessarily a bad thing. “I would say around 45 percent of our current business is coming from F&B while traditionally it should be 40 percent F&B, 60 percent [room bookings]. In F&B and the spa, you really cater to the local market and this is how you make your name in any market. When you look at our corporate business, a lot of it is booked by agencies in Lebanon, so your name, in the local market, is very important for you to make sure you don’t only depend on foreign business,” explains Sayess.

Boulad also speaks of the importance of F&B in attracting corporate business: “We are aware that one of the most important aspect[s] for any hotel in Lebanon is its cuisine, as it increases the hotel’s visibility to local companies and their business travelers, which is why we launched the O Monot Business Lunch.”

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GCC nationals love Lebanon: the country, the food, the language and the weather all play a factor and they have been missing it

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A foreign affair

In the almost total absence of the GCC market, hotel operators became proactive not only in developing alternative revenue sources, but also in identifying potential previously untapped tourism markets. “We have to start somewhere, so we are tapping into the Russian, Chinese and other markets. It’s all about creating trends or tapping into them. If we had just stopped trying and waited for the president to come, we might as well just have shut down,” says Phoenicia’s Edholm.

Kempinski Summerland also speaks of opening up to the Russian market. “We are looking at the Russian market because we believe that with the luxurious resort we have, we can offer them a lot. It’s only a three and a half hour direct flight which is available three days a week and does not require a visa,” says Bourachi.

Meanwhile, O Monot leverages its membership in the “Small Luxury Hotels of the World” group to attract French and English visitors, according to Boulad.

Mixed feelings

But it seems that not a lot can replace the revenue which tourists from the Arab Gulf regions have brought to Lebanon, because with the first whiff of hope that the election of a president in Lebanon and the imminent formation of a government might bring them back, Lebanese hoteliers hopped into planes to visit those countries and remind them of Lebanon as a tourism destination.

Despite this rush, some hoteliers hesitate to expect too much from Gulf nationals, given how much the region has changed in the past few years. “With the last boom in Lebanon, you had no war in Syria, no war in Yemen, no big refugee issue and most of all you didn’t have an oil price of $40. You now have saving schemes through the Gulf, the Gulf consumer is no longer one who will throw money left and right,” says Edholm.

Reintroducing Lebanon

Hotel operators Executive spoke to say they are promoting Lebanon as a destination on their trips to the region, the logic being that doing so will bring more business to their individual properties. “For me it is more important to promote the destination than my own hotel because when the destination is doing well, everybody will do well. So it’s not really about us alone. We have a lot of work to do,” enthuses Sayess.

As a destination, Lebanon has several advantages over international cities which are currently being frequented by Arab Gulf tourists and which deserve to be promoted. “GCC nationals love Lebanon: the country, the food, the language and the weather all play a factor and they have been missing it. I know this from my regional capacity,” says Sayess explaining that he is counting on the popularity of the Four Seasons brand in the region to attract Gulf tourists to the Beirut property.

Achkar cites price, cultural similarities and proximity factors as added advantages Lebanon has over international cities in attracting GCC nationals. “Prices in general are a lot higher in Europe than they are in Lebanon. Also, today there is hostility in Europe towards veiled women, and this has an impact; we don’t have this problem in Lebanon. We have something to suit every lifestyle here from religious, to leisure, to cultural tourism,” explains Achkar, adding that the GCC countries’ geographical proximity to Lebanon is another advantage.

While GCC nationals who know Lebanon may be eagerly waiting to come visit again with no restrictions, Edholm is worried that the young generation of those nationals are not as acquainted with Lebanon, and that travel agencies there may not know enough to tell them differently. “Those who have been with the same travel agency for many years are very fond of Lebanon of course, but people who have worked in the GCC area for just a few years have no idea what Lebanon is because they never sold it during their time of work there. You have a huge percentage of people in travel agencies who will take the call from clients without having any clue about Lebanon as a destination,” warns Edholm.

 The price wars 

The past few years led many hotels to decrease their room rates to remain competitive, according to Achkar, and raising them back to their original value once tourism picks up again will take time. “Even if the situation in the country dramatically improves overnight, you can’t automatically go back to your pre-2011 prices, you have to gradually go up with the rates. The hotel guest who has been staying at the hotel with the lower rates in the difficult time will expect to be rewarded for their loyalty by having the same low rates now that the situation has improved,” explains Achkar.

Room rates have been decreasing globally as well, which will make it twice as hard to go back to the original rates. “The pricing we have will grow a little bit, but will not go too high. Cairo and Turkey are still great destinations despite the issues [there this year], so you cannot charge $400 for a room in Beirut when it is $200 in these countries. Dubai has also gone down, and we are conditioned by the market in terms of price. They won’t go back to the prices that existed before the oil crisis,” says Edholm.

A positive future?

Despite all of this, hoteliers maintain a positive outlook for 2017, with expectations that even if a smaller number of Gulf nationals visit Lebanon, it will still add some much needed dynamism to the sector and help on its road to recovery from the slump of the last five years – which will not be easy. 

“If tourists come back to the country in droves, we will need six months to a year to start making profits again. And we need at least three to four years to make up for the five years that were lost. And even then, the profits that will be generated will be used to pay off the accumulated hotel debts to the banks, delayed payments, etc.,” explains Achkar.

So while the future may not yet be rosy for Lebanon’s four and five star hotels, there are hopes that the first few steps have been taken to point Lebanon, and consequently tourism, in the right direction once again.

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CommentReal estate

The view from Beirut

by Karim Makarem
written by Karim Makarem

All of the figures revealed by RAMCO’s research department confirm a slump in Beirut’s real estate market. A finer analysis of these figures yields some hopeful – and other more worrying – conclusions.

Actual drops are higher than recorded

The RAMCO price index, published for the third consecutive year earlier in 2016, reveals two years of consecutive drops in the asking sales prices of residential projects under construction at the time of the study.

Not only have prices dropped two years in a row, they are dropping by a higher rate year-on-year. While prices dropped by a mere 0.7 percent in 2014 (compared to 2013), the recorded drop in official, listed asking prices in 2015 compared to 2014 was of 1.2 percent.

It might be argued that 1.2 percent is negligible. This is certainly no proof of a meltdown in the market, as was often predicted. In no way does the price dip portray a market in crisis or the bursting of a real estate bubble – a term often used to describe the frantic price hikes and activity in the years that preceded the current market stagnation.

Yet these figures are to be taken with extreme caution. It may be that official prices have stayed relatively stable. The fact remains that this is only the second time in the post-Civil War history of the country that prices actually registered a drop. Typically, prices stagnate. The fact that they have been dropping for two consecutive years points to a very real unease in the market.

These figures also hide a deeper, more disturbing truth. The above drops in prices are of official asking prices listed by developers. They do not take into consideration discounts that developers effectively extend to buyers when negotiations reach an advanced stage. RAMCO’s sales & lettings department is involved in sales transactions on a daily basis. The reality is that developers do offer a discount on their official list prices – sometimes a little too eagerly. Discounts vary between five percent and ten percent. In some extreme cases, they can reach up to 20 percent. In reality then, prices have dropped by anywhere between ten percent and 20 percent.

Large stock

The drop in prices is an obvious direct result of the poor economic situation in the country and the region at large. It can also be explained by the growing size of the vacant stock on the market. There were about 385 residential projects under construction in municipal Beirut in 2016, representing a stock of slightly more than 2 million square meters (sqm) of built-up area or about 10,340 residential units. This is a huge stock, 98 percent of which is offered on the sales market. Around 40 percent of it is available for sale as of the end of 2016. There is an additional, non-negligible stock on the market (for which we, unfortunately, don’t have reliable data): unsold units in projects completed prior to 2016 and new units placed on the secondary market.

The full stock of residential units offered for sale is thus much larger than the units accounted for in the study covering residential projects currently under construction. The stock on sale counts units still under construction, unsold units in recently completed projects, and resale units offered on the secondary market.

Latent repercussions

Very few new projects are being launched, but the numbers don’t yet make that clear. In years past, average sized projects in municipal Beirut took between three and four years to be completed. However, beginning in 2011, some projects began remaining “under construction” for six or seven years – sometimes even longer. Market data covering “ongoing projects” thus accounts for all of these projects, even those that should have been completed several years ago, but are still “under construction.”

There were 385 projects currently under construction in 2016, the same as in 2015. The vast majority have been “under construction” for years, and when these projects are finally delivered, the number of “ongoing projects” on the market will begin dropping to reveal the limited number of truly new projects beginning each year, reflecting the real slump in the market.

A few positives

The market hides some high-performing niche pockets. While the general trend is clearly downward, it is not across the entire market. Some projects perform extremely well despite the general gloom. Projects that cater to available budgets in neighborhoods in high demand, offering innovative, functional designs and floor plan layouts at fair market values sell off-plan.

Professional developers with a good sense of the market have adapted well to the market. The figures clearly reveal that apartment sizes have been shrinking as a result of shrinking budgets. The number of projects has remained relatively stable between 2015 and 2016. The overall built-up area that was offered in 2016, however, was 7.4 percent lower than in 2015. At the same time, the number of apartments increased by 2.3 percent between 2015 and 2016. Average apartment sizes have dropped by nine percent between 2015 and 2016, from 238 (sqm) in 2015 to 215 sqm in 2016. In 2010, 3.4 percent of residential projects under construction in Beirut (12 projects out of a total of 350 projects recorded that year) offered apartments smaller than 100 sqm. In 2015, this ratio increased to 7.8 percent (30 projects out of the total of 384 buildings under construction in 2015).

Another encouraging observation is the continued interest professional developers display when looking for new opportunities. Interest in land purchase has never waned, although prices of raw land have remained relatively stable. Landowners are still reluctant to drop their prices. Developers are much more careful about investing in new land, however, as the current market doesn’t forgive mistakes. In a particularly price-sensitive market, any small mistake is fatal. Developers are thus very careful about purchasing land at a price that would make a potential development financially viable. Overpriced land yields expensive apartments that would not find takers on today’s market.

Today, only land posted at financially viable prices, reflecting a financially viable cost of land on the overall project, is interesting to potential developers. Typically, the cost of land used to account for about 30 percent of the overall cost of the project (along with 30 percent of construction costs and the rest as profit margin). Today, the cost of land accounts for around 40 to 50 percent of the total cost of the project, while developer profit margins have shrunk to around just ten percent in some cases.

The high price of land plays a major role in the decreasing number of new projects launched in recent years. An adjustment is needed to make replacement costs of land purchase feasible.

Unequal price changes

Land prices also explain why the price of residential stock has generally remained more stable or even increased in some areas. Neighborhoods in which land prices were still low, either because they were in lower demand by home buyers or because they have a large stock of raw land, keeping prices low, have seen residential prices remain stable or even increase slightly.

Neighborhoods such as Sagesse, Geitawi, Kobayat, Ras el Nabah or Sodeco offer excellent value for money. They are traditional middle-class neighborhoods that are being slightly gentrified with the introduction of new real estate projects. They typically offer projects with the right combination: small family apartments, good quality construction, functional floor plan layouts and basic amenities – all at the right market value.

Some neighborhoods have ample land supply for development, such as Sodeco or Corniche el Nahr. These neighborhoods have seen the introduction of new mega-projects that are modern, innovative and cater to a middle-market clientele.

Other areas retain their value because they are in consistently high demand. Neighborhoods such as Ain el Tineh, Koreytem, Ain el Mreisseh or Manara have a continuous flow of buyers. They are established neighborhoods that attract buyers either for the quality of living they offer, the quality of the views or the surrounding supply of services, particularly schools.

Buyer’s market no longer

2016 was the ideal time to buy. With average discounts standing at around ten percent, buying at a bargain was indeed possible. The price of the average new apartment in municipal Beirut today stands at $1 million. It was therefore possible to negotiate a cut of $100,000 during 2016.

Whether this remains true in 2017 is questionable. Although it is still too soon to detect a real shift in the market, the latest loosening in the two-year-long political stalemate has already injected an air of optimism on the market. While the presidential elections have not yet yielded any tangible change, people are expecting an improvement in the local political scene. It might take a few more months before a change is effectively felt on the market, but the mood is already shifting. And that is often sufficient to encourage landowners and developers to stick to their asking prices. Discounts may not be as easy to negotiate in the coming few months as they were just a few weeks ago.

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OverviewReal estate

The lights are on, but no one’s at home

by Matt Nash
written by Matt Nash

Property developers with projects in and immediately around Beirut are in trouble. In late November, Massaad Fares – president of REAL, Lebanon’s syndicate for real estate brokers and consultants – explains that a years-long sales slump at the highest end of the market is having a wider economic impact. Developers with too much exposure to the capital can’t pay their bills, leaving suppliers, contractors and even banks in the lurch. The boom years from 2005 to 2010 saw dozens of projects offering large apartment units launched in Beirut at a time when prices of both land and finished property were skyrocketing. Market appetite for these units began waning in 2011 and was all but gone by the end of 2014.

Pretty facade, ugly interior

With this in mind, Fares says he and Namir Cortas – head of the developer’s syndicate (REDAL) – paid Banque du Liban (BDL) Governor Riad Salameh a visit to wish him happy holidays in December 2014. Fares says the two explained the problem and Salameh promised to do all he could. Not that the central bank wasn’t already doing the sector favors. Developers have been building green with the help of subsidized loans which BDL has been offering for the past few years, Fares said. Since 2013, BDL stimulus packages have targeted the real estate sector, with over 75 percent of stimulus-package-related loans facilitating the purchase of first-time homes, a BDL official confirmed during a World Bank event in early November 2016.

In 2015, BDL issued a circular aimed at helping developers with cashflow problems restructure their debt with commercial banks. However, Fares and other developers Executive spoke with since the circular’s publication confirm it is being underutilized.

These measures have helped keep the market moving in Lebanon as a whole, but have done little to benefit developers with large apartments (read: over $1 million) to sell in Beirut and some of its immediate suburbs, Fares argues. He explains that when he met with Salameh in December 2014, he assumed there were around 1,000 apartments over 300 square meters collecting dust on the market. Once the governor expressed interest in helping move some of these units, Fares says REAL and REDAL conducted in-depth market studies to understand the full extent of the problem. He says that BDL conducted its own study as well.

Fares is light on the details of the study’s results (saying they may be made public in the future), but tells Executive that somewhere between $3 billion and $3.5 billion worth of property simply will not sell. According to RAMCO Real Estate Advisors, the average asking price for a new apartment in municipal Beirut is $1 million (see comment, page 136). Prior to the market stagnation that began in 2011, Fares says developers were able to find buyers for apartments with price tags of $2 million and higher. That’s no longer the case, he argues. Offloading units in the $1 million to $1.5 million price range is becoming increasingly difficult, Fares says.

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Offloading units in the $1 million to $1.5 million price range is becoming increasingly difficult

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Help needed

In June 2016, BDL threw the sector another lifeline with Circular 427, which allows banks to lend to property speculators in certain circumstances. Between 2007 and 2010, property prices in Beirut soared to highs that priced most Lebanese out of the capital. Analysts and developers argued that real demand was the culprit as speculative purchases were minimal. Unlike in other markets, the rules in Lebanon barred bulk apartment sales. Circular 427 opens that door, if only a crack. The circular allows banks to lend to investors keen to buy finished property from a developer in distress. Making use of the circular, a fund can borrow 60 percent of its capital to purchase existing stock on the market, provided that 50 percent of the value of purchased property is already in debt. All purchases under 427 must be re-sold within ten years.   

While they welcomed the circular with open arms, both Fares and Mireille Korab, head of business development at FFA Real Estate, wish it had gone a bit further on the incentives front. Korab notes that lack of language allowing for a preferred lending rate for anyone wishing to raise a real estate fund could suppress appetite for such a thing. She argues that the circular will be equally, if not more, helpful for banks with nonperforming loans held by developers on their books. Pressed on just how large a problem unsold, expensive units are for the sector at large, Korab becomes philosophical. It’s not the actual market impact that matters, she argues. Rather, if one or two well-known developers were to fail, the psychological effect of that news on the market would be more disruptive than the actual bankruptcies.

“I’d be lying if I said we didn’t want subsidies,” Fares offers. “If developers’ money is stuck in these apartments, they can’t do anything else. If the developer has money, they can do more for the market,” he enthuses, pointing specifically to settling arrears and new investments. Asked if he had seen appetite in the market to make use of Circular 427, Fares smiles. In late November “two crazy guys” started work on raising a $1 billion fund. In the short term, the fund’s goal will be “to buy as quickly as possible,” Fares says. When asked if he knows who the “two crazy guys” are, he replies: “Massaad Fares and Namir Cortas.”

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Banking & Finance

Freedom of insurance

by Thomas Schellen
written by Thomas Schellen

The Lebanese insurance industry seems to be in need of new energy. Not only in terms of its objective to participate in the covers of the future oil and gas industry, but also in its fundamental development of company structures and legal infrastructure.

With low growth in insurance premiums – some 4 percent in 2015 according to the annual report by the insurance association and also 4 percent by the end of the third quarter of 2016 in year-to-date terms – insurers are hanging on, some perhaps by the skin of their teeth. It seems that 2015 and 2016 were two of the most difficult years in terms of growth since the old insurance law was updated – but hardly made fit for modern times – in a lengthy process in the 1980s and 1990s.

An updated law, proposed in the early 2000s to replace the old law with a more adequate and modern version, developed and financed by the World-Bank, has not been approved to date. The insurance sector is still populated with an overabundance of small companies that have not been able to develop scale and, more worryingly, still include an unknown share of opaque providers, which can perhaps only exist in this business because they defer meeting their full coverage obligations.

Despite a clear need for collaboration in raising greater insurance awareness, illuminated sharply by the difficult economic environment of the past two years, the sector’s voice is exceedingly falling behind when compared with the voice of the Association of Banks in Lebanon.

Executive asked Walid Genadry, who headed the Lebanese Insurance Control Commission (ICC) from its inception in 2002 until 2015, and is, since last June, a Distinguished Fellow in the International Association of Insurance Supervisors (IAIS), what he recommends in order to take the Lebanese insurance industry forward from this point.

He told Executive that the lack of a new insurance law is to blame for many shortcomings in developing the sector and for hindering better supervision, and the implementation of this new law would boost the productiveness of insurers.

A 2013 World Bank evaluation of the ICC as part of its Financial Sector Assessment Program (FSAP) was positive, he pointed out, describing the regulator as having developed “an admirable capacity to develop approaches for review and analysis, follow-up, market conduct, intermediary registration and fraud investigation.” However, in Genadry’s view, this positive FSAP judgement has limited value today, merely serving as a sort of encouragement and appreciative tap on the back.

He said: “One needs to look at [the evaluation] more as praise for better than expected results rather than as praise for a very good standing. It is more like saying that you reached a grade of B – when your regulation should not have allowed you to go beyond a C – but the real objective is an A. We are not there and we cannot really get there without a solid law.”

Explaining the role of an insurance supervisory authority and differing concepts of its mandate in some continental European countries, where the first aim of such an institution is customer protection versus Anglo-Saxon countries where the focus is on the promotion of fair and stable insurance markets, Genadry said that the two approaches should be seen as complementary to each other. “The two approaches are equivalent in the sense that you cannot protect customers without the establishment of fair and stable markets and vice versa. In a nutshell, a supervisory authority is needed to protect customers as well as serious insurers,” he elaborated.

According to Genadry, a vibrant insurance sector is of even greater value in a situation such as Lebanon’s today, because it provides a lever that boosts development to a healthy economy. This makes the passage of an insurance law even more urgent, he claims, saying: “Today we have one of the weakest insurance legislation frameworks by international standards, even in comparison to other markets in the Arab region.”

He highlights that gaps in the current law are of special concern with regard to insurance supervision. “What is missing represents a permanent threat to the effectiveness, if not the survival, of an efficient supervisory authority. When you have a law (the present one) that does not respect even the basic core principle [as per international standards] of independence from the political powers and from undue lobbying, the insurance supervisory authority is at permanent risk of being jeopardized. So whatever we build, even if it is properly built, is built on sand. The ICC must become independent, either as a standalone, as part of an integrated supervision [body], or even in the vicinity of the central bank.”

Besides its failure to guarantee the ICC’s supervisory independence, the present law also falls short in other key areas. The list of shortcomings, which Genadry had to deal with in his years as insurance commissioner, is long and starts with the fact that the existing law does not even provide a possibility for setting minimum norms on governance for insurance companies. “A supervisor today cannot oblige companies to abide by basic requirements, such as having independent members on the board of directors. It is also not possible to request that insurers establish a risk committee or have a remuneration policy, compliance committee, or even an internal audit department,” he said.

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The ICC must become independent, either as a standalone, as part of an integrated supervision [body], or even in the vicinity of the central bank

[/pullquote]

Both hands tied

The current weaknesses in the legal and regulatory framework also include a lack of sufficient means for financial control, as supervisors have no power to establish relevant solvency norms or enforce actuarial design of non-life products, or tools to control conduct, such as being able to determine and penalize unacceptable market practice, nor the ability to enforce transparency or even guidelines on transparency.

The ICC further suffers from weaknesses when it comes to powers of intervention to stop wrongdoing or to penalize companies in ways that are in line with the severity of an infraction. “Today two alternatives are granted:  either totally withdrawing a license – something harsh and very difficult to exercise – or the issuance of a very low fine, a maximum of 25 million LBP – that’s not even $17,000 – in limited situations,” Genadry said.

According to him, these two options represent extreme opposites with nothing in between; the first is equivalent to shutting a company down and the second is an insignificant punishment. The name of the game is deterrence, not catching wrongdoing. As a result, means to deter companies from bad practices are very weak overall.

A modern and up-to-date insurance law would empower the authorities to supervise and, if necessary, set conditions for insurance contracts, enforce standards for the selection of external and internal auditors (or at least remove auditors that have been proven to be incompetent), take steps to intervene in the management of insurance companies if deemed incompetent or irresponsible, or make sure that policyholders’ rights are maintained if an insurance company goes bankrupt or has to be dissolved upon loss of its license.

Finally, the current law on insurance has weak and inflexible licensing requirements, inadequate definitions of insurance lines and low minimum capital requirements ($1.5 million) for insurers. It also misses out when it comes to controlling mutual insurers, due to the fact that they are licensed through the Ministry of Agriculture, without any type of formal and professional control.

With such an array of legal insufficiencies and flaws, Genadry says it is extremely difficult for any supervisory authority in Lebanon to reach its objective of protecting both serious companies and policyholders. Asked how he was able to build a supervisory authority under such weak legislation and lack of independence, plus numerous ministerial changes at the Ministry of Economy and Trade, he said some ministers were a real blessing for his work in the ICC, as they encouraged the commission to move ahead and defended it against detractors.

A crisis of credibility

“But that is not enough,” he added. “The reality is that every time a new minister comes, one has to manage a new transition. We have had nine ministers over thirteen years. Ministers upon appointment have a thorough need to develop an understanding of the insurance supervision business. This is not a criticism of any person, as you cannot expect a minister to be competent in such a highly specialized field as insurance.”

According to Genadry, the present law concentrates a lot of powers in the hands of one specific minister as head of the Ministry of Economy and Trade, stipulating that it is his authority to give and withdraw licenses, penalize wrongdoers, pass new regulations and so on. The resulting pressures are not easy to face effectively and in a timely manner.

“Lack of independence also means depending on government crises, during which the supervision activity cannot be as effective. All this makes it such that, overall, the good periods [during my work as insurance commissioner] were smaller in number than the challenging periods, and even the good periods I experienced during my term were often fragmented,” Genadry summed up in his reflection. 

As to the future outlook of the insurance sector in Lebanon, Genadry is at the same time passionate about its potential and cautious due to the risks the sector will face if the new insurance law is not expedited.

“Credibility is a vital element of proper supervision. For this, a supervisory authority needs stability, continuity, clear definition of duties and powers, and above all, competent supervisors who enjoy a reputation of integrity and possess the right tools to do their work and the ability to remain standing despite the fact that it is a profession which is, by nature, ungrateful.”

A high level of morality and competence for the supervisors is crucial. “Without that, even with a good law you do not go far,” he says, emphasizing that there can be no easy success for the supervisory authority without a good collaboration with the sector’s players, without confusing the roles, as the industry members and the supervisor complement one another.

He concludes: “There will be no real protection for serious insurers and policyholders in Lebanon without a well-established supervisory authority that is capable of applying international norms.”

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