Entrepreneurship

Start me up

by Matt Nash
written by Matt Nash

EXECUTIVE interviewed French Ambassador Emmanuel Bonne via email about French contributions to Lebanon’s entrepreneurship ecosystem as well as his country’s assistance to Lebanon.

E   In terms of the economic relationship between the two countries, we’ve heard the French government will be helping to fund and build Smart ESA (École supérieure des affaires). What added value will the government of France bring to this partnership and the wider Lebanese entrepreneurship ecosystem?

France is very active in the development of entrepreneurship and digital technology, namely through its “French Tech” initiative. Launched in 2013, this initiative aims not only to enable French entrepreneurs and innovators to develop and expand internationally, but also to share their expertise and create synergies with entrepreneurs and incubators from other countries. Smart ESA, the new incubator and accelerator of the ESA Business School, aspires to become the relay of French Tech and thus connect France to the entire Middle East.

On May 27, ESA Business School received an extended lease agreement from the French government and launched renovation works on a 3,000 square meter building with a financial donation from Bank Med. The French Minister of State, Jean-Vincent Placé, joined us on this occasion. The new “smart building” is set to be operational in fall 2018. In the meantime, Smart ESA has planned for temporary offices and innovation spaces on campus to welcome the first three batches.

A new initiative, the Smart ESA Business Matching platform, was also launched last September through a strategic partnership with Ville de Paris and Paris & Co; an initiative that was championed by the French embassy. It will eventually be expanded to the rest of France and to all of Europe. “Scale up to compete!”

Smart ESA also took part in the Banque du Liban (BDL) Accelerate Event in November in Beirut, during which it announced its four programs: Ideation, Incubation, Acceleration and a unique “à la carte” option.

From the heart of Beirut, ESA Business School’s campus is now the strategic location from which startups, entrepreneurs and companies at all stages (from seed to growth) will be the actors of Lebanon’s digital transition.

E   What do you see as the potential impact of entrepreneurship on Lebanon’s economy? Will the embassy try to connect French entrepreneurs with Lebanese entrepreneurs? If so, how and what value do you hope this will add?

France is traditionally one of Lebanon’s leading trading partners. Every year, France ranks among the leading suppliers in Lebanon, with a market share of around seven percent, which represents one of our highest market shares in the Near and Middle East. Moreover, Lebanon holds 45 percent of the stock of Middle Eastern foreign direct investments in France.

Lebanon is a small country indeed, but it is destined for greatness, as it is strategically located at the crossroads of East and West. It offers many opportunities for companies, not only for its own market, but also outside its borders, particularly in the Near and Middle East, as well as Africa. Besides, Lebanon has a very large diaspora which directly partakes in enriching the exchanges between our countries. Among  French entrepreneurs, a considerable share are of Lebanese origin, thus contributing to building new bridges between our two countries.

In this landscape, France has a privileged place: it is a partner of choice, maybe even a partner of heart.

The number of French companies exporting to Lebanon has increased significantly in recent years, namely due to the involvement of small and medium-sized enterprises (SMEs). In 2015, over 4,600 French companies exported their products to Lebanon, nearly 14 percent more than 10 years ago. In addition, more than 100 French companies are based in Lebanon today, in various sectors as diverse as wholesale, food processing, financial services, and health and telecoms, to name but a few. French investments are also steadily increasing, jumping from 66 million euros in 2007 to 530 million euros in 2015.

Through our Business France office in Beirut – the trade department of our embassy – we aim to develop links between French SMEs and Lebanese companies. Practically, our efforts can be as varying as raising awareness of and promoting communication on the Lebanese market, establishing direct commercial ties between French and Lebanese entrepreneurs, or organizing theme-based collective operations in Beirut or Paris.

In 2017, several programs will be launched to promote bilateral commercial ties: a symposium on health and hygiene in hospitals, the display of equipment and French food products at the Horeca fair, and the ninth edition of the French pavilion at Project Lebanon, as well as collective assignments of French companies specializing in various sectors related to well-being and the environment. This aim of cooperating and working together strengthens the trade ties between France and Lebanon, which in turn can increase and create new market opportunities and boost mutual investments.

E   What economic hopes do you have for Lebanon in 2017?

We are well aware of the extent of the challenges that Lebanon has to overcome. The Lebanese economy is facing strong pressure from the Syrian crisis, the impact of which is estimated at more than $12 billion. Lebanon’s real GDP has grown 1.8 percent per year on average since 2011, which contrasts greatly with the 9.2 percent average registered between 2007 and 2010.

The main message that France wishes to deliver to the Lebanese people is that of its unwavering friendship. We are standing by Lebanon’s side through this difficult time as we look to further deepen our cooperation with the country’s institutions.

As mentioned earlier, French companies have built trust and long-standing relationships in Lebanon. We wish to strengthen and expand these connections by exploring new partnerships to create more ground for sustainable and inclusive growth. There are many projects in the making to support Lebanon’s economy. For example, the French Development Agency (AFD, Agence Française de Développement) has been assisting Lebanon in developing its private sector for the past 15 years by financing companies and banks through loans, portfolio warranties, investment capital, etc. The AFD’s action also contributes to looking for ways to better exploit Lebanon’s growth potential, as well as the competitiveness of its economic actors, in areas such as vocational training or sustainable development.

We truly hope that Lebanon will see a resumption of economic growth in 2017 and that  financial and monetary stability will be preserved. We also look forward to seeing the government take appropriate measures to control the public deficit, stabilize the public debt and bring about the structural reforms needed to modernize the country’s infrastructure.

E   In terms of assistance pledged specifically to Lebanon at the London Conference in early 2016, how much has France actually deployed to date and where/how was it spent (i.e. focused on any specific sectors/needs)?

The issue of refugees is very sensitive, especially in Lebanon where they have a considerable presence. This is why our aid is directed not only toward Syrian communities, but also toward supporting the Lebanese people who have welcomed them.

Since the beginning of the Syrian crisis, we have spent 90 million euros on humanitarian and development projects in Lebanon – making it the biggest receiver of French aid in the region.

During his recent visit to Lebanon last April, President François Hollande announced that half of the amount pledged by France at the London Conference would be allocated to Lebanon, totalling 100 million euros for 2016-2018, 50 million euros of which would be spent in 2016. We are currently in the process of finalizing the allocation of those grants. This assistance comes in addition to the other actions that France carries out in Lebanon, through our investments in supporting the security and stability of the country. 

As announced during the London Conference, France’s priorities are mainly oriented toward youth and education. We are implementing those priorities by closely working with the Lebanese government, UN agencies, NGOs and local partners such as municipalities. This follows France’s tradition of close educational cooperation with Lebanon.

On top of these priorities, our programs have also targeted other sectors, such as food assistance, access to water, shelter, vocational training, health and the protection of women and children.

Since President Hollande’s visit to Lebanon, France has also tripled its humanitarian resettlement program for Syrian refugees currently in Lebanon. As a result, 3,000 Syrian refugees will be resettled in France in 2016-2017, as we aim to welcome the most vulnerable refugees, such as people in need of urgent medical care.

E   How does the embassy judge the actual impact of this assistance (any metrics/hard numbers would be appreciated)?

We are working hard to maximize our impact.  First, our assistance programs, regardless of the sector, are all designed to support Syrian refugees as well as the host communities in Lebanon, as we are very much aware of the generosity the country has shown in welcoming and hosting Syrian refugees. Secondly, most of our programs combine emergency relief and capacity building, as we look to achieve a long term-impact. Capacity building is addressed both toward Lebanese civil society and the Lebanese government.

Allow me to give one example: one of our programs dedicated to Lebanese NGOs was designed in partnership with the Lebanese Ministry of Social Affairs. This program started with a budget of 600,000 euros and now has a budget of 2.6 million euros. We have adapted it in view of working with as many Lebanese NGOs as possible.

Thirdly, French programs implemented by French NGOs are developed in a way that French expertise is transferred to local stakeholders. This continuum guarantees the efficiency of our humanitarian programs in the long term.

A lot has been done and a lot remains to be done in Lebanon, with Lebanon and for Lebanon. We continue to work for the sake of the long and meaningful friendship that exists between our two countries.

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Entrepreneurship

Is Lebanon’s startup ecosystem sustainable?

by Victor Mulas
written by Victor Mulas

When I was first introduced to Beirut’s start-up ecosystem in 2011, AltCity was refurbishing its first space, the Seeqnce experiment had just launched, MEVP was one of the few venture capital (VC) firms investing in Lebanon, Endeavor was just opening, and Wamda and ArabNet were nascent.

Fast-forward to 2016 and Beirut is a different city for startups. The support infrastructure for entrepreneurs has expanded with several acceleration programs such as the UK Lebanon Tech Hub, AltCity Bootcamp, Speed@BDD, Smart ESA, and more in the pipeline. Beirut Digital District (BDD) has become the hub of the ecosystem, and Banque du Liban (BDL)’s Circular 331 and other donor-backed funding support programs such as World Bank-Kafalat and USAID-IM Capital have resulted in multiple VC and matching funds for Lebanese entrepreneurs. 

There is no question that Beirut’s ecosystem has expanded significantly in the last five years. A lot of the credit for this should go to the intermediaries that have been working hard to help startups grow and get funded. Circular 331 built on this organic tissue and turbocharged the ecosystem to where it is today.

The work, however, is not done yet. Beirut’s ecosystem is still maturing and there are signals that there may be a startup bubble. When I see the same startups jumping from support program to support program without graduating into funded and sustainable businesses, and the same founders over and over at every ecosystem event, I cannot help but wonder how much of the growth achieved in the last years is sustainable and how much more the ecosystem can grow.

Local startups may get funding under Lebanon’s own set criteria, but they will not become successful nor be able to create growth and new jobs for the country unless they can compete internationally. This is important because these successful startups are a source of sustainability if they end up contributing back to the ecosystem in sufficient numbers.

How can the ecosystem be reinforced and face the challenges ahead? The following are some of the areas we have identified based on the World Bank’s field work over the last five years (particularly through the supporting activities of the Mobile Internet Ecosystem Project (MIEP), which we started preparing in 2011) and research carried out within the ecosystem, including an on-going survey of startup founders we are conducting in collaboration with Endeavor Lebanon and Berytech. We are still refining our findings and will present the final results in a more detailed study at a later date.

1. Maturity of the support infrastructure

There are a number of accelerator and incubator programs in Beirut. The question is, are they providing the quality training and support needed for startups to graduate and compete internationally? How do the programs of these support infrastructure compare to the leading international ones (such as Y Combinator, Techstars, etc.)?

The first step of an ecosystem is to catalyze accelerator and incubator programs. The next step is to create high quality programs and attract internationally competitive talent to support these programs. World Bank research shows that in most emerging ecosystems, accelerators and incubators create quantity, but not necessarily quality, in startups. This is not bad per se, but if the ecosystem wants to achieve sustainability, it needs to develop a sophisticated support infrastructure.  Accelerators and incubators do not necessarily end up producing the startups that will succeed, but they have an important function in training talent for successful startups and other industries developing tech-based products and services. Maturity and sophistication of support infrastructure is key to providing this talent.

2. Home-grown angel investors

Circular 331 and other donor-backed programs have increased the number and size of funds available. While there is still a small number of active angel investors for startups, very few successful startup founders become angel investors who go on to mentor and nurture the new generation of startups.  From research in mature ecosystems, such as New York City, we know that this loop of successful startup founders becoming mentors and angel investors for new startups of the ecosystem is critical to achieving sustainability. Moreover, startups that have been mentored by successful startup founders have a three times greater chance of becoming successful themselves and creating more employment.

These self-grown angel investors are also the most likely to invest in more suitable startup projects, since they have unique insights into the market and are investing their own funds. Home-grown angel investors result in what can be characterized as “smart money” – an investment and mentorship relationship with a founder who “made it,” – as opposed to “dumb money,” an investment with no experienced mentorship involved. The ratio of “smart money” to total funding available matters for developing a robust and sustainable ecosystem.

3. Sufficient and diverse talent pipeline

Many of the startup founders we surveyed in Beirut highlighted the lack of talent to support their projects. In more in-depth conversations, founders pinpointed the need to train university students for their businesses.  However, many of the students that these startups managed to attract from competing job opportunities abroad left soon after they were trained to become entrepreneurs themselves.

This is not a unique problem to Beirut. Every ecosystem I visit, be it New York, Berlin or Santiago, seems to need more talent than it has available. The question is: What is the size of this talent gap?

Based on the responses to our surveys and interviews, there seems to be a large gap between university education and the practical skills required by the ecosystem. There are initiatives, such as AltCity Bootcamp, which are trying to partly address this gap. However, they do not seem to be enough. Moreover, these initiatives focus on “white-collar” tech talent, people who have the education, skills and willingness to be an entrepreneur. Understandably, these people often want to create their own startup, not work for one. That is the reason why talented workers tend to leave as soon as they gain practical and actionable skills.

There are only a couple of nascent initiatives – most notably SE Factory – that focus on “blue-collar” tech skills. These are coding bootcamps that serve as vocational training for the lower educated/skilled population whose goal is to work for a startup or a larger company. This is a large part of the talent that would stay to support startups as they grow. The current production of graduates from these programs seems to be too small for the ecosystem’s needs.

4. Connection with traditional local industries

Beirut’s ecosystem is mostly insulated from the rest of the economy. Startup founders and intermediaries have barely connected with other sectors of the economy beyond sponsorship or funding relationships.  More mature ecosystems tend to create startups that have mutually beneficial relationships with local industries (be it talent previously working in these industries, or formal research and development (R&D) processes of companies, such as open innovation processes). This reinforces the ecosystem by providing talent that is more likely to be successful in a startup venture, with startups that can develop products and services tailored to industry needs. It also opens the possibility of creating mini-ecosystems around these industries (e.g. the London fintech ecosystem around its banking industry).

At the same time, this connection between startups and traditional companies increases the competitiveness of the industrial base of the country, as these companies can absorb new innovation, scale it up and develop new products and services themselves. We can see this virtual cycle at play in places like New York, London or Berlin. However, there seem to be little to no connection or productive relationships between startups and Lebanon’s industries.

The ecosystem would also benefit from expanding its reach beyond Beirut. It is mostly concentrated in the city with little input from, or outreach to, the rest of the country, and as a result misses potential talent, diversity and impact. It could also benefit from addressing social and public challenges by developing social innovation as an area for growth. Interestingly enough, Beirut, and Lebanon as a whole, are not lacking in social and public challenges, but its startup ecosystem is way behind on social innovation when compared to other regions in the world, forfeiting a large area of growth with significant positive network externalities for the country.

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Industry & Agriculture

Italy hopes to expand strategically

by Jeremy Arbid
written by Jeremy Arbid

For the Italian government, supporting Lebanese manufacturing has long been seen as a key to economic stability and growth. In the last year, Italy financed a feasibility study for the creation of new industrial zones and agreed to fund new infrastructure upgrades supporting the sector. Executive visited the embassy to find out more.

E   With Lebanon electing a new president, how do you view 2017 in terms of the country’s economic prospects?

In the next year there might be, with a new government, an indication on economic policies that would show the international community which direction the country wants to go. The private sector will require some assistance and international partnership to seize new opportunities. In view also of regional evolution, there again will be a larger market for Lebanese exports. Hopefully with peace in Syria there will be conditions for the economy of Lebanon to grow. But the most important factor would be the indication from the government of where the country’s resources will go – renewing infrastructures, incentives for the private sector and for small and medium-sized companies. Depending on the priorities that the government will define, Lebanon’s international partners will better direct their foreign assistance programs to the country.

E   Has the Italian government identified projects or priorities moving forward?

Based on what Italian cooperation has done so far, we have had some positive returns. For example, on urban development, we started several years ago with a feasibility study and subsequently invested $10 million on a program to develop initiatives in five urban areas. The World Bank, based on our assessment, added $60 million more, contributing to the creation of new companies and jobs. That was a dual-donor, multi-year program which contributed to creating new opportunities, developing Lebanese enterprises and improving quality of life. Similarly, programs to protect cultural heritage became a factor in improving tourism.

In 2017, we envisage support for the industrial sector, implementing programs more or less the same way. We are aware that the Ministry of Industry intends to create new industrial parks to facilitate local and foreign investment. Italy financed a UNIDO (United Nations Industrial Development Organization) feasibility study for the creation of three industrial parks and [on November 17, 2016] we signed an agreement with the government of Lebanon, assigning part of an $80 million soft loan to realize the initial infrastructure in these industrial zones. Of course, the project needs more donors to be implemented, and we hope others will join us, similar to what happened in previous programs. We will also consider expanding our assistance programs in order to finance key infrastructure serving the industrial area in Tripoli. There will probably be other donors involved, as it is critical to support a larger manufacturing role for Lebanese enterprises.

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Depending on the priorities that the government will define, Lebanon’s international partners will better direct their foreign assistance programs to the country

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E   Italy has a larger role in and connection to Lebanon perhaps than other countries in terms of trade and history.

Our cooperation system with Lebanon is a comprehensive one. For Italy, assistance to Lebanon is strategic, which is why it encompasses: security, including our 10-year long participation in UNIFIL and the program of assistance to the Lebanese Armed Forces; cultural heritage; and aid programs to build infrastructure, develop small and medium-sized companies, enhance social programs and improve the environment. We are also trying to expand the lifespan of valuable projects once their first phase is implemented, such as the study on the Orontes River Basin, by trying to attract other donors. That’s why it is key for us to work side by side with the government. Another example is the 1 million euro renovation program of the National Museum’s basement. Italy financed the work, adding valuable expertise that contributed to [expanding] the museum, which will be a worldwide landmark in archaeology and a new point of attraction for tourism that can help generate income. For the next year, we are considering ideas to support small and medium-sized companies, if and when the Lebanese government gives an indication they want to move in that direction.

E   In mentioning an economic vision, hoping that Lebanon comes up with one when it forms a new government, do you think the investments Italy is making are maximized and reaching its targeted beneficiaries?

We saw the recently launched central bank programs as one of the signs that the private sector, [with several] newly born companies, is very active. Lebanon has all the means to promote innovation and adapt the production of goods and services to the evolving market, relying on very skilled individuals present in the workforce and on a very active private sector able to extend their foreign business partnerships. What the private sector sometimes calls for, as we’ve heard, is better services that can reduce production costs. Industrial parks are one solution that might help the private sector. Others, of course, are a regular supply of energy, water management and new infrastructure. Italy, the EU and other European donors will keep on supporting the efforts of the government in that direction.

E    Can you say a little bit about the intensity of trade in 2016 between Lebanese and Italian imports and how bilateral relations are developing?

We have increased our exports to Lebanon, while imports remained stagnant. In order to sell more to Italy, Lebanon has to work with European institutions. We are assisting Lebanon in the processes to bring the quality of certain export products to standards that can facilitate export to the European Union. For example, to export agricultural products, like olive oil, where Lebanon has an advantage, it would be important to target the high control standard required to enter the European food market.

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We are assisting Lebanon in the processes to bring the quality of certain export products to standards that can facilitate export to the European Union

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E   Was there any increase in the number of Lebanese exports to Italy in 2016, or was it stable?

Estimated figures for 2016 do not show an increase. I think it reflected the general stagnation of the economy. The reduction of exports due to the war in Syria was not compensated by an immediate reorientation of exports to other markets.

E   So for 2017, do you still see more of the same or do you anticipate that there will be more trade intensity in terms of Lebanese exports to Italy?

I don’t see a significant increase. The latest figures show that there was no increase. Reorienting exports will require a bit more time. So unless there are some surprising factors, maybe toward the end of 2017 we might see some better signs for Lebanese exports.

E    From the initiative with the creative cluster (supporting the production of furniture in Tripoli and jewelry in Bourj Hammoud) did you see any measurable results in the last 6 months after helping to open the shop in Gemmayzeh?

We haven’t received any data so far. However, we considered that project [to be] an important capacity building program. It is an opportunity for certain producers to see their businesses in a different way. We do not expect immediate results, but certainly the new approach that has been spreading among the producers will revitalize the sector.

E    Are you not worried that Lebanon might rise up to be a competitor to Italy if we learn everything that Italy – industrial or design wise, in arts and crafts – can teach the Lebanese. Are you breeding your own competitor?

Well, the world is an open competitive market. Certainly there is no interest in keeping a market like Lebanon depressed. We believe that by disseminating capacities we create the conditions to work more and to work together. Elevating the standard of competitors might create new market opportunities for mutual advantage and better terms for new business partnerships. By helping to improve the standards or the production capacity of competitors of a different size, it would be possible to generate partnerships that can work for the benefit of both.

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CommentEconomics & Policy

It is all possible

by Annalisa Fedelino
written by Annalisa Fedelino

Beirut, December 2026.

For the second year in a row, the number of tourists visiting Lebanon has topped 3 million. They are lured by the country’s historical sites, great food and social scene, as well as by their curiosity to experience the multicultural milieu that makes Lebanon such a unique place, not only for the Middle East, but the entire world.

As of last June, tourists can move around more easily, taking advantage of the new city transit system that has helped make Beirut one of the most accessible and livable cities on the Mediterranean.

Traffic jams and piles of trash, so common only a decade ago, are now long gone. The country has been doing well politically and economically, growing by an average of 5 percent per year in the last five years alone. Elections are taking place within constitutional deadlines and under modern electoral laws. More and more jobs are being created every year, especially for new university graduates who now increasingly prefer to remain in Lebanon rather than emigrate abroad. Opportunities abound in the ever growing service sector (tourism and health care are just two examples), the technology sector and agribusiness.

Lebanon has climbed up the rankings of countries defined by their openness, ease of doing business and innovation. The government has passed a range of groundbreaking legislation that has modernized public administration and created a proper pension system and post-retirement health service for all its citizens. A series of infrastructure projects – a rehabilitated railway system, new bridges and overpasses, a new road network to better connect Lebanon to the rest of the Arab region (and beyond), as well as waste treatment facilities and electricity power plants – have successfully matched the private sector’s ingenuity and managerial skills with the public sector’s vision for improved service delivery.

Progress is perhaps most tangible in the major cities, yet the scope and benefits of Lebanon’s new projects have spread throughout the country, empowering local governments along the way. Internet speed and costs are among the most competitive regionally, and electricity is efficiently produced and now partly exported to neighboring countries. The offshore gas and oil sector, after an unsteady start, is now properly regulated and transparently managed. And after years of investment, proceeds from Lebanon’s natural resources have now started to flow into the government’s coffers. They will partly be used to fund additional capital projects, and partly to reduce the government’s public debt – creating a virtual circle of lower budget deficits, lower debt and interest rates, and more fiscal space to strengthen public services and create an environment where the private sector can flourish, boosting growth and job creation.

It all started about a decade ago…

After a long political impasse, significant changes and reforms were implemented starting in early 2017. The first step was a government of national unity – one that, although short-lived in the run-up to long overdue parliamentary elections – paved the way for progress that subsequent governments embraced and expanded upon.

The first budget in over a decade was discussed and approved in 2017 – and since then, annual budgets have become the norm once again. The government also took some courageous steps. As public debt moved toward 150 percent of Gross Domestic Product (GDP), a package of measures was implemented – starting with fuel taxation that capitalized on low domestic oil prices. This fiscal adjustment came at a cost, particularly as the economy had been weakened after years of political uncertainty and major regional shocks – chief among all, the Syrian crisis and associated refugee flows. At the same time, however, the renewed policy effort also helped revamp confidence, as the Ministry of Finance – supported by the whole government – clearly communicated its strategy and committed to providing better services to taxpayers.

Regulatory authorities were finally activated and empowered – starting in the telecommunication and electricity sectors. A new Public-Private Partnership Law, in line with international standards, was approved after languishing in parliament for many years, creating a modern legal and regulatory framework for the public and private sectors to work together in planning, executing and managing projects. And in a positive nod to the future, Lebanon also became a member of the Extractive Industries Transparency Initiative, underscoring its commitment to transparency and accountability in managing Lebanon’s then nascent offshore wealth. 

As change became visible and gained momentum, confidence started to recover. And the international community – perhaps heartened by the resolve of Lebanon’s revitalized policy-making framework – added to its ongoing support by providing large and reliable multi-year funding to cover the long-term costs of hosting the refugees.

  

Beirut, December 2016

We will only know in a decade’s time whether the story above is a snapshot of reality or mere fiction. But it is all possible. Lebanon has the potential and the capacity to become a beacon of progress and prosperity. The moment is now, starting by setting aside divisions and embracing a sustainable future that will benefit all. 

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Industry & AgricultureWine

Grapes of success

by Nabila Rahhal
written by Nabila Rahhal

Lebanese wine has been filling many a glass both locally and globally as the country’s winemakers continue their efforts to grow their market share and as new boutique wineries are launched.

Coming out of the Lebanese Civil War with just eight wineries, the wine industry in Lebanon has grown to over five times that number, with 42 wineries registered with the Ministry of Agriculture in 2016.

Of this total number, 23 wineries are members of the Union Vinicole du Liban (UVL) and account for 95 percent of Lebanon’s total wine production, which is around nine million bottles per year, according to Zafer Chaoui, current head of the UVL and chairman and chief executive officer of Château Ksara.

And yet, Lebanon’s production numbers remain a drop in the ocean in comparison to neighboring wine-producing countries. “Growth is needed. We produce nine million bottles, while Cyprus produces 27 million bottles and it doesn’t have the wine we have because our climate is better,” says Chaoui, explaining that while Lebanon might never be able to compete internationally in terms of volume of production, and therefore in prices, it does produce quality wine and should compete in that category.   

All that glitters

Locally, wine consumption has been on the rise for the past four years, following a global trend due to it being perceived as “healthier” than other types of alcohol, according to Paul Choueiry, general manager of Les Caves De Taillevent.

Unfortunately, there are quite a few Lebanese who assume that imported wine is of better quality and taste than the local variety, although the country’s wine producers insist that this is often not the case. “Lebanon has incredibly good wine, and sommeliers and wine specialists who visit Lebanon are really flabbergasted by this. Lebanese have to know this because we have this kind of snobbery that we should only drink foreign wine. It is not wrong to enjoy foreign wine, but if you do a blind test, the Lebanese wine tastes just as good,” says Hady Kahale, general manager of Ixsir.

The perception of foreign wine being better than local wine is not helped by the many restaurants in Lebanon that boast an extensive imported wine list with only a few local varieties – often at almost the same price as the imported ones – according to the winemakers Executive spoke to. “This is very dangerous because you don’t see it anywhere else in the world, and what also happens is that when customers pay $60 for a bottle of French wine in a restaurant, they think, ‘Why should I pay almost the same amount for Lebanese wine?’” says Kahale, explaining that for a foreign wine to be priced at a high-end restaurant for $60, it would have left the winery at $1.50, making it very unlikely to be high quality.

Although consumption of wine is increasing in Lebanon, many wineries feel more could be done to promote local wine. “Unfortunately, we still find some restaurants that offer more imported wines than Lebanese wines. We should work more on promoting Lebanese wines in Lebanon together with the UVL,” says Joe Assaad Touma, winemaker and co-owner of Château St. Thomas.

It starts at home

Wine producers have indeed been working to improve the perception of local wines among their fellow citizens with the goal of increasing its consumption, which is still relatively low. “If you look at the consumption of Lebanese wine per capita, it’s two to three bottles per year compared to French wine which is 60,” explains Edouard Kosremelli, director general of Château Kefraya. 

Their efforts are slowly but surely bearing fruit with an increasing number of Lebanese feeling pride in their local wine.

The rise in the number of boutique and small wineries also added a much needed dynamism to the sector. “Many small and medium-sized wineries are being established, and they are most welcome because healthy competition improves quality and pushes us to do better, both locally and internationally,” says Chaoui.

Having more wineries also increases the chances of people becoming aware of Lebanon as a wine-producing country, thereby increasing consumption. “With more wineries, consumers have become more curious about their wine and want to try new wines,” says Kosremelli.

Despite struggling to find distribution channels and to make a name for their wine, boutique winery owners have managed to create a niche market where those curious about wine can find a lot to be occupied with. “When you become known, established distributors will ask for the product. But if you want to build a brand, they will never help you out or push it unless you give them incentive; so you do your own marketing and hope that people will ask for it,” explains Jennifer Massoud, co-owner and communications manager at Atibaia, adding that they have seen sales of Atibaia pick up the most in outlets where managers put in the effort to educate consumers on boutique wineries.

A wine tour

The growing trend of enotourism (visiting wineries) has also helped Lebanese discover their country’s wineries and wines.

Château Ksara, with its well-known caves which sheltered those escaping the Ottoman army during World War I, received 27,000 visitors in summer 2016 alone and expects the total number of visitors for 2016 to be around 60,000, according to George Sara, Château Ksara’s Chief Commercial Officer and board member. 

Meanwhile, Château Kefraya reports an increase in visitors to its winery when compared to 2015. Ixsir, too, has done well, having welcomed more than 30,000 visitors in 2016 to its winery and its accompanying Nicolas Audi catered restaurant in the hills of Batroun.

Not only does enotourism help consumers understand how wine is made, it also makes them associate the wine label with the good time they had at the winery, making them more likely to select it next time they go wine shopping, explains Kahale.

Wine selling

Promoting wine locally does not stop with potential customers lunching at wineries, but also involves engaging the consumer with wine production. As such, some wineries have been inviting consumers to help out with the grape picking and to celebrations at the end of harvest season. “Château St. Thomas has been hosting an annual harvest event since 1999, and the idea is to live the experience of harvesting grapes and making wine. It’s very important to have this experience and meet the people who produce the wines,” explains Touma.

Participation in local wine festivals such as the annual Vinifest, which takes place at the Beirut Hippodrome, or others held during the Christmas season also help to increase local consumers’ awareness regarding the quality and variety of Lebanese wine. “It’s important to maintain market presence and grow the consumption per capita level in Lebanon, and Vinifest is typically an event that helps in this direction,” explains Kosremelli.

Kahale thinks that marketing efforts at the local level should be directed at making Lebanese wine trendy in the eyes of consumers, especially when it comes to marketing and advertising. “Exporting is very important, but it is the Lebanese market which is extremely important for us all. Local consumption is very small in Lebanon, but this is the market we have to work with. We need sexy ideas; we need to up our marketing as this will increase the market,” enthuses Kahale, giving the example of Ixsir’s collaboration with young Lebanese artists to design the bottle of their entry range wine brand, Altitude – the first time this was done in Lebanon – and the positive response it drew from consumers. Château Kefraya also mentions their collaboration with local artists to design their labels as a marketing activity, citing Lara Khoury’s label design of the Les Breteches limited edition in 2016 as an example. Meanwhile, Château Marsyas collaborated with designer Nada Debs for their 2017 gift pack.

Sara also speaks of the importance of finding fresh ways of marketing Château Ksara, but says they have to balance that with their long history of winemaking. “We want to bring generations together around our wines, and social media is a great tool to cultivate a following among younger wine lovers. Moving forward, we have to tread a fine line between constantly reminding consumers that we are still here – through our new interactive website and seasonal billboard and radio ads that reflect the Lebanese lifestyle of wining and dining and fun in the sun at the beach – and maintaining our position as Lebanon’s most venerable winery with a history steeped in tradition going back to the Jesuits in the mid-19th century,” explains Sara.

Going global

Lebanese wine first went global with the late Serge Hochar, winemaker and founder of Château Musar. He took Château Musar to the UK amidst the Lebanese Civil War – and garnered a lot of recognition both for Lebanon as winemaking country and for his label as “the wine of the war.” Ever since – and especially now that they are spurred by the challenges brought forth by local and regional instabilities – Lebanon’s wine producers have been seeking greener markets across the globe.

In doing so, wine producers understood that by working together under a common umbrella, they would have a bigger impact than if they marketed their wine individually. “I always say to my colleagues that with exporting we have to overcome small competition. When people talk about Chilean wine, or South African wine, who talks about individual wineries? We all have the same climate, same quality of grapes and we are professionals,” says Chaoui.

In this case the umbrella is the UVL, which for the past few years has concentrated all its efforts in making a name for Lebanese wine abroad. Their efforts caught the attention of the Ministry of Agriculture and the Chamber of Commerce, who have both given the industry their support. “The new dimension that UVL has been taking for two to three years is marketing. Everything that is being done out of Lebanon is being done through UVL, with the support of the Ministry of Agriculture and [the] Chamber of Commerce,” says Kahale.

Recounting the UVL’s activities in 2016, Chaoui speaks highly of the Wines of Lebanon event that took place in New York in November 2016, under the patronage and financial support of the Ministry of Agriculture, and organized by Hospitality Services. “[The organizers] hired a PR company which succeeded in getting local wine professionals to attend this event. For us, this is the key to success because the Lebanese already know our wine. All those who attended were extremely satisfied,” says Chaoui.

The second major event for the UVL, and hence Lebanese wine abroad, was being the guest of honor at Megavino, the biggest wine fair for professionals in Europe which takes place in Brussels. “Megavino was a great event for us because we had the chance to be a guest of honor. The exposure was huge, and many people who have followed the news in the region didn’t even know that Lebanon produces wine,” says Chaoui with a quiet pride, explaining that the 80 percent of the budget for Megavino came out of the annual sum which the Chamber of Commerce gives the UVL, with the wineries covering the remaining balance (including airfare, transport costs for wine and accommodation).

These efforts, coupled with the individual marketing initiatives and follow-ups by individual wineries, has led to Lebanese wines being served at tables as far flung as China, which Château St Thomas cites as a market, or Mexico, where Ixsir recently sent a shipment.

Whether locally or abroad, Lebanese wine is certainly carving a name for the country’s grapes and producers. That’s something we can all toast to.

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Banking & Finance

A promise of wealth

by Thomas Schellen
written by Thomas Schellen

Oussama Kaissi is the chief executive officer of the Islamic Corporation for the Insurance of Investment and Export Credit (ICEIC), the insurance arm of the Islamic Development Bank (IDB). The IDB is a Saudi Arabia-based multilateral organization which comprises a group of Islamic institutions in the realm of finance. Executive sat down with Kaissi to discuss the role of Islamic banking in Lebanon and the potential of issuing Islamic debt instruments (known as sukuk) for the country.

E   If we talk about the state of the Islamic finance industry in Lebanon, Islamic banks do not seem to have developed strongly here in the past when compared with the conventional finance offers, which local corporate customers have responded to. How do you see this?

There are two Islamic banks here in Beirut. One of them is an offshoot of [GCC-based] Baraka Group, and the other is an Islamic entity of Credit Libanais. They were created to answer the market’s call for a niche product, and I don’t think they have been developing the market much. These banks have not failed – as they are in existence and their offering is normal – but they have not grown. Islamic finance has proven globally that it is a viable product. Any time you have a viable product, the minute that you see that it has failed to grow [you can surmise] this is because of lack of knowledge on the potential of Islamic finance and the lack of knowledge on the part of the consumer. Islamic finance and conventional finance play very important roles on the horizons in the economies where they both coexist. I know there is a huge base here [in Lebanon] of potential customers for Islamic finance and this group ranges from individuals to businesses. It is one of the most vibrant financial sectors in the region. That is why I tell you that the market here is ready. I believe that Islamic finance is an extremely important window for the banks here and for the government to go to the market to procure more debt instruments, finance the debt that they have and even pump some liquidity into the market.

E   When Islamic finance first rose to prominence some years ago, the cost of an Islamic loan used to be higher than the cost of a conventional loan. Is it correct to say that this has changed?

Yes, that is correct.

E   You see cities like London aspiring today to become international hubs for Islamic finance. Where do you see Lebanon fit in with the centers of Islamic finance?

London has taken center stage in terms of being a worldwide hub for Islamic finance, and Dubai is trying to become the regional hub in the Middle East. South Africa is trying to become the regional hub in Africa, and Malaysia and Singapore are important players as well. Thus, on every continent you have somebody who is well-situated to be the regional hub for Islamic finance. With respect to banking in Lebanon and how you view it going forward, and on how to link Islamic finance with the conventional system, Islamic and conventional finance have to be seen as collaborators. There should be a balance, where people still go to the conventional markets for debt and where people can proceed to explore Islamic finance. But [as an Islamic banker] one has to be critical of oneself in the sense that the growth of Islamic finance has not reached its full potential yet, even though the numbers are healthy.

E   What has to be done?

In my opinion, Islamic finance has to be brought to the market in a simplified manner. One of our main mandates as the IDB Group is the promotion of Islamic finance. We have to do more, and we have to be more active in helping Islamic banks to manage their day-to-day activities, go to market and issue sukuk. Sukuk are now an integral part of finance, where you can issue sukuk like bonds and create liquidity. If you go to the markets and see a liquidity squeeze, this does not mean that there is no cash that can be tapped into. The market is flooded with cash, but you need programs for sukuk specifically that can go to these markets and tap into that cash. These programs should be supported with highly rated institutions so that the costs are low and returns are matching what is the going rate. The markets are open for us in all Islamic hubs, whether in London, Dubai, South Africa, Singapore or Malaysia. As far as legislation, we are operating in all legislative environments. Another issue that in my opinion is a positive, not a negative factor, is the diversity of Sharia boards.

E   Is it true that there are no united perspectives from Sharia boards?

To be united is not the issue. There is diversity. From diversity, you can either create conflict or something that is positive and harmonious. I believe that a lot of groundwork has been done and we should not negate the fact that there has been tremendous success. But the challenges are great and there is a big need going forward for us to address liquidity needs, as we are now facing economies that are heavily interacting with major economies in terms of funding and so forth. Countries are retracting now, specifically oil-producing-countries, and they are looking to raise funds in capital markets and are having to go to sukuk markets. For us to raise the capital that is needed to reach what we want, collaboration is needed from London or South Africa or from wherever. A hub can bring together the cash or liquidity that can help economies in our member countries to progress and prosper.

[pullquote]

The sectors of the

Lebanese economy, with the help of the central bank, are capable of pulling the economy out of the slump it is in

[/pullquote]

E   The Lebanese economy going forward has needs, and there has already been talk of a Paris 4 donor conference to finance gaps in the Lebanese fiscal situation. With regards to the possibility of tapping into financial tools from the Islamic side, how realistic in your view would it be to have sukuk issued on behalf of the government?

Lebanon has always had great friendships globally, starting with Europe and the Gulf. Great support for this country has been coming from the Gulf, specifically Saudi Arabia and Kuwait. They spent a lot of money to support Lebanon; specifically through multi-billion dollar support packages and aid given to Lebanon after the Israeli invasion. [Having said this], Lebanon has resilience in its banking sector. This sector is capable and it has the necessary knowhow, relationships and liquidity. The sectors of the Lebanese economy, with the help of the central bank, are capable of pulling the economy out of the slump it is in. It definitely needs to have legislation and you need political stability. Sukuk are the way to go, and I think there are plenty of Islamic banks that will be happy to talk to the government here and see how they can issue sukuk to support the economy.

E   Lebanon is, according to most perceptions, dominated by debt markets with conventional banks playing a very large role. How would sukuk figure in that equation?

It depends what you are raising sukuk for. When issuing sukuk, first we need to get an understanding of the purpose that they are being created for. If the government here wants to raise sukuk, this sukuk should be issued to service the debt or to finance infrastructure projects. In my opinion, Lebanon will hopefully have a government very soon, and it needs to set priorities on where they need to begin jump-starting the economy. If there is a clear understanding of what the purpose behind raising the sukuk is, then sukuk are definitely a viable solution for the Lebanese government.

E   Islamic finance is known for placing emphasis on its ethical dimension. But is it true that the personal integrity of people working in Islamic finance is particularly important, even more so than the ethics of people when they are in conventional finance?

Sukuk are issued by Islamic financial institutions, and I take it at face value that these institutions are well-managed by reputable people and each has a Sharia committee that is supervising their business. On top of all this, you also have the central bank or other regulatory bodies that are supervising such transactions. There should be close scrutiny [of debt issuances], whether Islamic or non-Islamic, to safeguard the interest of the people. When you issue sukuk, you create debt for the people in a country, and therefore regulators and legislators need to look very carefully to protect the interest of their people.

E   From the viewpoint of the IDB, is the Lebanese risk today higher or lower than before?

Lebanon has always been a member country for us, in hard times and in good times. We are there to offer support, and we have an appetite where some other multilateral or conventional entities do not. After all, [Lebanon as a country] are shareholders in the bank and in ICEIC, and we are always here to help.

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Banking & FinanceOverview

A retrospective

by Thomas Schellen
written by Thomas Schellen

It is understandable that Freddie Baz, the chief strategist of Lebanon’s largest bank, Bank Audi, presented a divergent view from the central bank’s narrative explaining the latter’s financial engineering (see story and infographic). Whereas the analysis picture drawn by Banque du Liban (BDL) focused on the very positive impacts of this quantitative easing measure, Baz emphasizes that there was no crisis that could explain the size of the operation. (He suspects mundane pragmatism to be involved in the operation and to account for the large size to which it has grown.) “It is very opportunistic. If I have to be candid, no central bank will miss the opportunity to beef up foreign reserves when they are available. Because once it needs the reserves, it might not find them,” he says, reasoning that the boosting of reserves is in line with a central bank’s raison d’être.

Although noting that no one is privy to what the strategies of Lebanon’s central bank governor are, Baz speculates, “he [might have] said, ‘as long as there is appetite, let’s do a little bit more [of the reserves-boosting transactions] and since I don’t have any more Eurobonds, [commercial banks] will get certificates of deposits (CD) from the central bank’.”

This perspective appears very logical when seen against the performance of the largest banking group in Lebanon. Bank Audi’s results in 2016 were impressive even before the (not yet audited) income from the bank’s participation in the financial engineering was recognized in the third quarter financial report.

For a view on the bank, it is instructive to revisit what the equity research team of FFA Private Bank wrote about Bank Audi’s half-year results. “Bank Audi posted net profits at USD 115 million (+5 percent QoQ, +13 percent YoY) with diluted EPS at USD 0.27 (+12 percent QoQ, +16 percent YoY), both above our respective $111 million and $0.25 FFA estimates,” the bank observed. The analysts further said that the bank’s results exceeded their expectations in terms of total operating income, and also by “significantly higher” trading & investment income, and, to a lesser extent, in terms of net interest income. Net fees & commissions income, on the other hand, were below FFA mid-year estimates by about 10 percent.

Three months later, FFA acknowledged that Audi’s net profits and operating income still were higher than the analysts’ expectations by a significant margin. FFA also noted a leap in “exceptional fees and commission income,” which stood at $689.9 million and thus greatly exceeded the FFA estimate of $69.3 million, which according to FFA was “resulting from BDL debt swap transactions.”

Making the most

According to Bank Audi’s publicly disclosed numbers, total assets at the end of September 2016 stood at $45.3 billion, up from $42.3 billion at the end of last year. Net-interest income improved 11.4 percent year-on-year to $739.1 million; non-interest income was reported at slightly over $1 billion, which compares to $335.1 million during the first nine months of 2015 (a 201 percent jump); 9 million profits after tax were $541.5 million, versus $280.5 million in the same period of last year; the net profits were $350.3 million, up 15.2 percent year on year – but that must be taken with the knowledge that the bank wrote off $191.2 million in regard to its operations in Syria and Sudan from its after-tax profit. At a 15 percent rate of increase, if this rate or even a few percentage points less in profit growth were to be achieved by year-end, Bank Audi’s net earnings for 2016 currently look like they are going to be the highest in the past five years (2012 was hitherto the year with the highest net, at $384 million) and thus set a new record.

As far as the impacts of the financial engineering in the income statement, the bank identified $642.9 million of its non-interest income as having been generated by BDL exchange transactions and $86.8 million in exceptional tax expenses from the same operation. Overall income tax expenses jumped 111 percent to $164.6 million. In the field of operating expenses, the bank reported a 50 percent increase to $814.7 million, of which it attributed $217.9 million to “exceptional expenses related to good-will expenses and one-offs.”

Whether in presentations of its own main indicators (assets, loans, deposits, earnings and earnings per common share), of other ratios per share, or in comparison of stock market ratios with averages for MENA, emerging markets and the world, Bank Audi looks healthy, solvent and attractive. In Baz’s words, “We have been showing the same magnitude of increases in terms of results. We had increases by two digits in our profits in Q1 and H1 with respect to the corresponding period of last year. I believe that the full year results will be along the same lines of improvement.”

He emphasized that financial engineering was “by definition” forbidden – by way of a central bank circular – to affect the bank’s bottom line. Nonetheless, it seems unmistakable that Lebanon’s largest bank made great use of the central bank’s financial engineering offer, which Baz acknowledges by comparing the banking sector to a family with children of different levels of intelligence, of which Bank Audi was “among the wisest kids.”

Christmas bells may be ringing at Bank Audi in light of these performance results, even if they are not going to be distributed as dividends. What will not be ringing, however, would be alarm bells either at Bank Audi or the other top banks in Lebanon. Both other listed banks covered by FFA, BLOM and Byblos, achieved higher than expected profits according to the Q2 and Q3 reports. In the case of Byblos, the bottom line was helped by a reversal in provisions and in case of BLOM, profit improvements were mainly linked to “higher-than-expected trading and investment income,” which in turn was based on capital gains from BDL debt swap transactions, FFA said.

Affected by the economy’s pains

However, this does not mean that the banking sector was decoupled from the sluggishness seen all over the economy. Whereas financial performance of leading banks in 2016 to date “maintained its good standards,” according to the sector review by Dany Baz (see comment), it was also noted that assets and deposits by the end of June had registered only slow growth (in the low single digits), even as the third quarter saw an acceleration in domestic activity.

This side of the year’s banking picture – that is dominated by subdued performance outside of the exceptional financial engineering environment – is confirmed by Walid Raphael, chairman and general manager of Banque Libano-Française (BLF), which uniformly ranked eighth in the sector by indicators such as assets, deposits, loans and profits, as well as by Tarek Khalife, chairman of Creditbank, ranked 14th in the sector by assets and deposits, but 10th in terms of loans.

[pullquote]With a view to the wellbeing of the Lebanese economy…bankers have their eyes focused on positive elements and potential[/pullquote]

As Raphael tells Executive, 2016 was in line with BLF’s budget and results were in line with the previous year, or slightly better. “It has been a very challenging year in terms of business because of the slowdown of the economy in general and because of the situation across the region, but also worldwide,” he explains. This difficult environment is something that Raphael moreover expects to carry on for another one or two years, even as he credits the central bank’s financial engineering to have been done in a very clever way and to have created a very strong position for BDL.

“The results of 2016 are not yet on the books, but it was a difficult year for all banks in Lebanon. Banking had a slowdown and this affected most financials. Growth in lending portfolios stagnated and this growth is the real indicator of health,” says Khalife, adding that results of the banking sector are only looking better this year because “makeup was slapped on.”

He reasons that banks are not achieving a high rate of return, considering the risk that they have to carry, when compared with other sectors such as the real estate sector. Khalife also says that non-recurrent incomes like those originating from the central bank’s financial engineering are very helpful as a short-term boost, but one should analyze the health of the banking sector without taking non-recurrent incomes into account. “I don’t see a disaster on the horizon in 2017, but we cannot count on non-recurrent events such as financial engineering to boost our results. I hope people in banking won’t depend on it,” he cautions.

Evidently neither the sector’s overall subdued growth nor the exceptional outcomes produced by financial engineering provide the full picture of the sector in 2016, which saw some banks withdraw from the market, while others claimed to have achieved a turning point towards improving their position. One such lender was Banque Misr Liban (BML), whose executive general manager, Fadi Daoud, tells Executive that they have reached exactly this state. “We performed very well with the swaps, [in which] we did well compared to our peer group. In our regular business, we also did well. We will close the year with 25 to 30 percent more profit than last year,” he enthuses.

Daoud acknowledges that BML is still in the second tier, or beta group, in terms of the bank’s size by deposits, but says it has embarked on a steady path of growth with developments of new products, upgrades to its information technology – already having inaugurated a new core banking system in 2016 – and its human capital (including creation of a new communications department and corporate social responsibility program), plus plans to regularly roll out new branches. “We are opening two new branches in 2016. We are continuing our growth by opening two branches per year, so we will be 20 this year and 22 next year,” he says.

Political consensus as hope factor

With a view to the wellbeing of the Lebanese economy, or rather the chance for its improvement in the next year and further into the decade, bankers have their eyes focused on positive elements and potential.

“Political normalization is essential. We always say in Lebanon that we can live with a political vacuum but it is much better without [one]. The fact that the presidential election happened, and now political life is being restored, with the functioning of constitutional bodies, this is definitely a positive development,” Baz exclaims and adds that he does not believe the country’s political, social, and economic environment to be suited for the political gamesmanship of earlier times. “I don’t believe that the environment is supportive for continuing the same political games of the old days. There is something new that happened in the fact that [different political forces and leaders] were all together agreeing on something,” he opines.

“I see two signs that are very important: one is the renewal of the mandate of the central bank governor, which will provide stability, and [secondly] a budget. We expect that we finally will have a budget, and this will definitely help the investors and all players to be more confident. We have been without a [state] budget for over 10 years now and I think this will be the first move to show that there is really awareness and a commitment for change,” declares Raphael.

He adds that banks, in his opinion, will be ready to contribute to solve Lebanon’s economic problems. “We know very well what the problems of our economy are and we also know what the solutions to our problems are. Also, if there is the political will, we have the means to solve the problems and find the right financing,” he adds.

Khalife concurs that all banks are hoping for a positive turn in the Lebanese economy. If there are even just signs of a turnaround, he believes the banking sector will be heartened and gain new courage as it is able to sustain another one or two years until an actual improvement materializes in government finances, due to revenue outlooks from the oil & gas sector and from achievement of structural reforms that will help lowering corruption and improving fiscal incomes.

According to Khalife, banks are lending to the Lebanese state at prevailing rates simply because they have no other choice. Since there is no bank that would refuse deposits, they have to give to the state what they cannot lend. The state’s need for finance in his analysis is a consequence of many factors that are not brought on by the banking sector. “I don’t see why Lebanon has a constant deficit. The Lebanese model is a productive model and there will be a better tomorrow if corruption is cleared out,” he says.

Optimism by bankers about the political turnaround and reconstruction in the country is no wonder, of course. In some sense, the country at the brink of 2017 exudes a profound tiredness with political stalemates and brinkmanship of power cliques and entrenched groups that may have aimed for zero-sum outcomes in their favor (scenarios where they come out as winners of power), but only produced no-win situations for the nation and economy. A continuation of the status quo of 2015 and 2016 is not what any sentient stakeholder in the Lebanese economy wants.

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Business

Big money

by Ahmad Barclay & Thomas Schellen
written by Ahmad Barclay & Thomas Schellen

In May 2016, Banque du Liban (BDL), Lebanon’s central bank, completed the first phase of a swap operation with the Ministry of Finance (MoF). Following that, BDL pulled the financial engineering tool out of its bag. It proceeded to banks with an offer to enter into a transaction in which they would have to bring in money against fresh US dollars inflows. With their existing or new funds, banks could opt to purchase any of three tranches of Eurobonds held by the central bank since their interaction with the MoF, and/or CDs issued by the central bank at the same maturities and same coupon rates as the Eurobonds. 

The precise total of Eurobonds and CDs which the central sold to banks is not yet compiled but it is generally assumed to be above $10 billion. Also not known is the ratio between money that banks pulled in from correspondent accounts and fresh funds that they could attract from investors. An indication for the latter, however, is the growth rate of deposits. Before the financial engineering this rate stood at 3.7 to 3.8 percent; after the engineering the growth rate was reported at 5 percent, meaning that growth has increased due to the financial engineering.

Incentives and rewards

It is important to understand that the central bank did not entice commercial banks to buy Eurobonds by selling them at a discount or awarding banks with higher coupon rates on Eurobonds. The tool used by the central bank to encourage banks’ participation in the operation was to offer voluntary discounting of LBP T-bills and CDs with maturities of 12 years or less at 0 percent with a haircut of 50 percent. If banks sold LBP denominated T-bills (or T-bonds) with remaining maturities of eight years and less or CDs, the central bank would buy these papers at no discount (zero percent) but with a reduction in their coupons (haircut) of 50 percent.    

In discounting at zero percent, the central bank offered to the commercial banks to provide them ad hoc with the total accumulated amount that they would normally earn over time in annual coupon payments. In applying a 50 percent reduction on the amount that is due from the discount date to the maturity date of the respective T-bill, the central bank at the same time wanted the banks to settle for a “haircut” equal to 50 percent of the amount that they would have gained when holding the T-bills to their maturities. What looked at first sight like a non-recurrent windfall gain in the billions of dollars for the commercial banks was in actuality a non-zero sum (win-win) interaction with the commercial banks by the central bank on one hand and a boost of BDL’s foreign currency reserves on the other.

Instead of having to service coupon payments twice every year until maturity, the central bank provided commercial banks with these amounts upfront (the premium), but minus 50 percent of nominal value. The central bank as the new holder of the treasury bills was of course entitled to collect the annual coupon payments to 100 percent, so that by time of maturity the BDL would have recouped the full amount given to the commercial banks as premium, plus the other income (50 percent of the coupons) that was due from the T-bills.

[pullquote]It is important to understand that the central bank did not entice commerical banks to buy Eurobonds by selling them at a discount or awarding banks with higher coupon rates on Eurobonds[/pullquote]

On the side of the commercial banks, money-now was clearly preferable to money-in-future, even at a 50 percent reduction compared with what they would have earned over years in future. Given the magnitude of involved amounts – dollar billions – some banks could report non-recurrent, not interest-based incomes to have shot up by several hundred percent in Q3 of 2016 when compared with the same quarter in 2015. This was truly a rare opportunity for any large bank, or even a small one.

To safeguard the intended usage of their advance premiums by the commercial banks, the central bank issued directives that this income was not to be included in their Profit & Loss statement and potentially allocated to distribution (as dividend for shareholders) but should be added to Tier-2 capital.

Background and context

The background against which this financial engineering played out is not a crisis or recession as the events that triggered quantitative easing measures by the Federal Reserve System after 2008 or by the European Central Bank during the current decade in the course of various national crises in euro-zone countries. The context of BDL’s action was a threefold scenario of past indicators in combination with a future outlook mixing elements of uncertainty and predictable events on the side of upcoming rules and regulations – a drama but not a crisis.

The three unfriendly past developments were a slide in foreign currency reserves at the central bank (in 1H 2016), a deterioration in Lebanon’s balance of payments (ongoing since 2010), and a slowing in the growth rate of deposits. The elements on uncertainty specifically entailed prospects for remittances for Lebanese diaspora. According to World Bank data, remittance inflows remained strong at over $7.5 billion and are projected to be 1.6 percent higher in 2016 when compared with 2015. However, the dependence or forced reliance on inflows coming from the Lebanese diaspora is a perennial source of concern in financial planning, which is exacerbated by observations of oil price weaknesses and liquidity squeezes in the Gulf.

The predictable regulatory events in global finance and their impacts on Lebanon first involve future requirements under the IFRS 9 accounting standards. These new standards mandate that provisions for loans are made in the capital of banks at the moment of issuing a loan, not, as previously only when a loan turns sour. A second predictable event will be implementation of new solvency requirements under the Basle III framework (15 percent capital adequacy ratio instead of 12 percent today); also on the horizon is a requirement for two percent in general reserves on any bank’s loan portfolio.   

[pullquote]Senior BDL staff spent hours on phone calls either answering financial engineering-related questions from banks or even calling banks that had not responded to the offer[/pullquote]

With the financial engineering, Lebanon preemptively positioned its banks to have higher capital bases (cumulative increase estimated at $2.5 billion) as they transferred non-recurrent income from the financial engineering operation to Tier-2 capital. Other measurable outcomes are a jump to central bank forex reserves to a historic high (around $41 billion, not counting gold reserves at the end of October 2016), a turnaround of the balance of payments from a deficit of roughly $2 billion before the financial engineering to a surplus of $555 million, and the aforementioned widening in the growth rate of deposits.

Timelines

In terms of central bank activities, one can divide 2016 into three phases. First was the swap phase involving BDL and MOF. This was wrapped up tight within one month, May 2016. Next came what could be called a negotiation or subscription phase, during which BDL opened its channels to commercial banks for enrolling in the transaction process involving the discount of LBP-denominated T-bills and CDs by banks to BDL and the banks’ simultaneous purchase of foreign currency denominated paper from BDL.

During this phase, which lasted for about ten weeks from early June until mid-August, all banks participated in the financial engineering exercise, even as it was acknowledged by market insiders that certain banks acted faster and smarter than others.

Following upon the close of the offer in mid-August was then an execution phase that lasted until late October, at which time the positive outcomes of the financial engineering were highlighted by central bank Governor Riad Salameh in a number of speeches and addresses at events such as BDL Accelerate. One month later, at the end of November, not all details have been computed by BDL but overall dimensions of moved amounts are estimated in the market at $11 or 12 billion, in equal parts benefiting the central bank (through reserves) and the commercial banks (through boosts to Tier-2 capital and some revenue gains). The harvested benefits and their allocations to capital and other uses differ from bank to bank and are not proportional to each bank’s size or ranking by assets. In addition, there are the macro-economically relevant numbers relating to the shift in the balance of payments and increased deposits growth rate.

The announcement of the financial engineering’s outcomes and huge dimensions led to a flood of questions and comments, including both conspiracy allegations and legitimate queries. What may have also contributed to confusion, besides the inherent complexity of unconventional central bank measures in general, is that the operation involved many details, sidebars and deceptively low interest rate benefits. For example, viewing the 1 percentage point increase in the growth rate of deposits in context of the total size of deposits, which is in the dimension of $160 billion, makes it clear that the gain is substantial in absolute terms, and would be equivalent to the immigration of one to two billionaires with all their assets. In another example of an effect with actual implications that are not directly meeting the eye, central bank sources told Executive that BDL is granting banks the opportunity to place long-term deposits in LBP with the central bank if they commit to five-year deposit terms at 5 percent interest. At this cost, BDL will have funds available that it can use when the Lebanese Republic issues paper – normally issued with a 6.74 percent interest rate – thus reducing the burden on the sovereign.

Motivations, objectives and effects

Cognizant of the notion that one encounters three expert assessments in any assembly involving two economists, Executive notes that an infinite number of interpretations of this BDL financial engineering is possible. World Bank assessments, as published in the fall 2016 Lebanon Economic Monitor (LEM) list several advantages and disadvantages of the exercise, such as, on the part of BDL, increased exposure to foreign-denominated sovereign debt and expansion of liabilities in foreign currency and in local currency as disadvantages versus a boost in its stock of foreign exchange reserves and enforcing of confidence in Lebanon’s exchange rate and financial system as advantages.

For commercial banks, the LEM lists as advantages their increased capital positions and increased liquidity in local currency along with a drop in their sovereign exposure in local currency and as disadvantages a decrease in their liquid foreign-currency assets placed with banks abroad as well as an increase in their sovereign exposure in foreign currency. From the macroeconomic point of view, the World Bank sees disadvantages in potential liquidity management challenges, a potential decrease in the appetite of banks for Eurobonds in the primary market and a corresponding enforcement of BDL’s role in mediating government paper, an increase in foreign exchange risk (mirrored in a disadvantage for the Ministry of Finance in form of increased sovereign exposure to exchange rate risk) and a transfer of rent – money not worked for – from the public sector to the private sector. The sole advantage listed by the World Bank economists for the macro economy is a (weakly formulated) prospect for increased private lending in LBP.    

[pullquote]The central bank’s own list of impacts and objectives behind the financial engineering is all benefits and mentions no risks[/pullquote]

From BDL’s perspective, many of the disadvantages outlined in the LEM have been and are seen simply as normal effects that come with its operations in a country with Lebanon’s profile. The central bank’s own list of impacts and objectives behind the financial engineering is all benefits and mentions no risks.

As for the seven benefits detailed on its web site, they are (1) strengthening of its forex assets, (2) a beefing up of commercial banks’ capital bases, (3) increasing liquidity in local currency and undertaking quantitative easing to provide public and private sectors with financing at optimal costs, (4) improving the government debt profile, (5) increasing the balance of payments status, (6) nudging inflation (previously around zero percent) upwards to BDL’s 2 percent inflation goal, and (7) improving Lebanon’s outlook and ratings with international ratings agencies.

The central objective and “golden term” in BDL’s thinking was indubitably an enhancement of confidence in the Lebanese system, without which the central bank rightly sees it as not possible to attract deposits from abroad, either by institutions and professional asset managers or by Lebanese expats – noting that the Lebanese diaspora is important as source of inflows and that future inflows might be affected by factors such as troubles in international economies, for example in Latin America, on top of the aforementioned effects of oil price weakening and liquidity squeezes on Gulf Cooperation Council (GCC) economies. This squeeze showed effects not only in issuance of sovereign bonds by countries in the GCC but also in the financial markets where banks have begun to aggressively hunt for deposits and thus are hiking deposit interests to rates comparable to those offered in Lebanon. 

In the end, some of these objectives and impacts might be viewed differently by economists depending on their various ideological or socio-political persuasions and some impacts might be related to causal factors that are not in the purview of the Lebanese central bank. There is new confidence and more time for Lebanon, but reasonable minds know that a price will be due. Into one direction, the Lebanese Republic can press down the road of structural reforms. Going down any other road will bring the country closer to ruin. It is worth repeating: for this improved appearance of the Lebanese economy to turn into a permanent advantage, the country needs to embark on a rigorous regime of structural reforms on the fiscal side and has to activate political decision making processes that have lain dormant for far too long.

Infographic by Ahmad Barclay

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Industry & Agriculture

Agriculture overload

by Maurice Saade
written by Maurice Saade

Following more than two years of political inertia and stagnation, a spirit of optimism is gripping Lebanon after the election of a new president on October 31, 2016, and the imminent formation of a new national unity government. There are great expectations that this optimism will be translated into a more conducive environment for higher economic growth in 2017. While it is premature to predict the magnitude and sustainability of such growth, most analysts anticipate significant improvement compared to the sluggish growth witnessed during 2015 and 2016.

As with other sectors, agriculture is expected to benefit positively from any improvement in the overall political and economic climate in Lebanon. If 2017 witnesses higher economic growth rates and improved per capita income, then consumers’ spending on food products would also increase. However, since Lebanon imports more than 80 percent of its food needs, the impact of higher economic growth on domestic agricultural production and farmers’ incomes will not be very significant. Instead, I would argue that the most critical factor for the performance of the agriculture sector in 2017 will be the ability of Lebanese farmers and exporters to maintain and improve their access to export markets.

Lebanese agriculture depends heavily on exports, particularly to the Middle East market, which represents more than 85 percent of Lebanon’s total agricultural exports. In 2015, fruits (mainly apples, citrus, bananas and grapes) accounted for 46 percent of total agricultural exports compared to 42 percent for vegetables (mainly potatoes and leafy greens). Syria has traditionally been Lebanon’s largest trading partner for agricultural products, with the Syrian market accounting for 16 percent of Lebanese agricultural exports in 2012. With the sharp decline in the purchasing power of Syrian consumers as a result of several years of protracted conflict, Lebanon’s agricultural exports to Syria have sharply declined and, by 2015, they were down by more than 32 percent compared to their 2012 levels. Agricultural imports from Syria also witnessed a sharp contraction as a result of the Syrian conflict, dropping by about 29 percent between 2012 and 2014. However, with the rapid devaluation of the Syrian pound during 2015, agricultural imports from Syria started rising again, with a 14 percent increase in 2015. In 2016, Syrian agricultural imports have continued to grow, prompting the Lebanese government to threaten to ban imports from Syria and the Syrian government retaliating with threats of countervailing measures on Lebanese agricultural exports to Syria. Lebanon grows some 125,000 tons of bananas per year and previously exported around 50 percent of total production to Syria, as of 2012. This figure declined to about 30 percent in 2015, which represents an almost $2 million loss in export value ($10.8 million in 2012 compared to $8.9 million through September 2016). In 2017, it is anticipated that the new national unity government will try to improve its agricultural trade relationship with Syria, thus reducing the threat of a potential ban on the import of some Lebanese produce, particularly bananas, given that the Syrian market accounts for more than 85 percent of Lebanon’s banana exports.

[pullquote]

It is safe to assume that the border crossings are unlikely to reopen in 2017 and, as a result, Lebanese  agricultural exports are expected to stagnate

[/pullquote]

In addition to Syria, five other Arab countries represent Lebanon’s main export markets, with about 74 percent of the share in 2015: Saudi Arabia (18 percent), Egypt (18 percent), Kuwait (13 percent), UAE (12 percent) and Jordan (12 percent). Lebanon’s agricultural exports have been increasing steadily over the past ten years and witnessed an impressive surge of more than 25 percent in 2013 alone, with total agricultural exports amounting to $249 million, equivalent to about 12 percent of the agricultural GDP and representing 5 percent of total exports. However, the closure of the last border crossing between Syria and Jordan in May 2015 made it impossible for Lebanese exporters to reach their markets in the Gulf by land. In response, the government introduced temporary subsidies for sea shipments of agricultural produce to the Gulf in September 2015. These subsidies were extended for another year in October 2016. In spite of the subsidies, agricultural exports contracted by about 5.2 percent in 2015 and by another 4.5 percent during the first six months of 2016.

The reopening of the border crossings between Syria and Jordan remains unlikely anytime soon, and will largely depend on security and political developments within Syria. However, it is conceivable that an agreement on reopening the crossings could come about as part of any possible ceasefire agreements that might be reached in southern Syria, given that all concerned parties have a vested interest in resuming trade. Nonetheless, it is safe to assume that the border crossings are unlikely to reopen in 2017 and, as a result, Lebanese agricultural exports are expected to continue to stagnate. However, the fact that the decline in agricultural exports since May 2015 has not been larger should be viewed as a somewhat positive sign about the resilience and entrepreneurship of Lebanese exporters and their ability to find alternative export routes and markets. There are increasing reports of exporters partnering with shipping companies to bring in refrigerated trucks and containers as more cost-effective methods for sea shipment, instead of using ferries to transport trucks and their drivers to the Gulf ports. Though it is not clear yet if these measures will allow Lebanese agricultural exporters to maintain their market share in key Middle East markets. Moreover, there are also indications that Lebanese agricultural exports to new markets such as Turkey, the European Union, the United States, Canada and Russia are gradually increasing. Although exports to these new markets remain relatively small compared to Lebanon’s traditional trade partners in the Middle East, the potential for growth in the medium-term remains very promising.

It should also be noted that the foreign exchange crisis in Egypt in 2016 had a particularly negative impact on the exports of Lebanese apples, since Egypt has traditionally been the single largest importer of apples from Lebanon, accounting for an average of 75 percent of total apple exports. Apple exports to Egypt in 2012 were about 88,000 tons, representing $12.9 million by value. This fell to 57,000 tons in 2015, resulting in an export value decrease to $8.83 million. With the recent Egyptian government decision to remove its previous restrictions on the transfer of foreign currency out of the country, apple exports in 2016 are expected to pick up and could be equal or slightly below their 2015 levels.

Although access to export markets will be the key determinant of the performance of the agricultural sector in Lebanon in 2017, unfavorable weather conditions could also play a significant dampening role. Agriculture is by far the most dependant sector on weather: rainfall patterns, snowfall, hail, temperature, frost, wind and other weather events are extremely unpredictable and yet can make or break the agricultural season. In 2014, Lebanon witnessed its worst drought in forty years, resulting in a major drop in plant and animal production levels. Although 2015 and 2016 witnessed average-to-favorable rainfall levels, agricultural production was badly affected in several parts of Lebanon by damages caused by snow, hail, frost and wind, while other areas were affected by particularly high temperatures in the winter and the spring. Furthermore, the rainfall levels in 2015 and 2016 were not sufficient to replenish the groundwater levels following the extreme drought of 2014. Therefore, we continue to witness rapidly declining groundwater levels, which will further exacerbate the availability of irrigation water, especially during the peak irrigation season from May to September. Rainfall levels for the current 2016/17 growing season do not look promising so far; by mid-November, accumulated rainfall levels in most parts of Lebanon were drastically low, ranging from 60 to 80 percent below their long-term averages.

If rainfall levels stay low during the remainder of the season, Lebanese farmers may face a difficult year in 2017. The delay in autumn rains have already forced wheat and barley growers to postpone the sowing of their crops. Further delays in the planting of cereal crops could result in a substantial decline in yields. Moreover, the lack of rainfall, accompanied by very warm temperatures, has already resulted in more frequent forest fires during October and November 2016.

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Industry & AgricultureRenewables

The Lebanese solar revolution

by Jil Amine
written by Jil Amine

Over the last five years, Lebanon has been in the midst of a solar energy revolution. Solar Photovoltaic (PV) technology, once considered to be expensive to install and operate, has become increasingly cost-competitive in a relatively short period of time. In late September 2016, the United Nations Development Programme’s (UNDP) Decentralized Renewable Energy Generation Project published Lebanon’s first Solar PV Status Report, which detailed the year-over-year market growth at 149 percent for 2015, with a total installed capacity of 9.45 mega-watt and a total investment amount of $30.5 million. To further understand the dynamics of the market and anticipate its future outlook, the report examined the cost, financing, growth and sector share of Solar PV. One of the report’s key findings is blatant: the industrial sector has a lot of potential to unlock through investment in Solar PV.

The cost of solar

The cost of installing and operating Solar PV systems has been steadily declining in Lebanon, in line with the rest of the world. Since 2010, the average cost of installing Solar PV has dropped from $7.2 per watt of electricity power generation in 2010 to $2.7 per watt in 2015, a reduction of 63 percent in a span of six years. More precisely, the average cost of installing the bigger hybrid or on-grid batteryless Solar PV systems, which are mainly used in factories and commercial facilities, has dropped from $5.3 per watt in 2010 to $1.7 per watt in 2015, a whopping decline of 68 percent in six years. This in turn has enabled the technology to be cost-competitive while simultaneously filling the supply-demand gap for electricity in the country, which reaches upwards of 1,500 megawatts during the summer and has plagued Lebanon for decades.

The estimated monetary savings from all the Solar PV projects in Lebanon grew from $191,000 per year in 2010 to $2 million per year in 2015, for a total cumulative of $7.3 million saved through 2015. These are the savings reaped by the operators of Solar PV systems in Lebanon by deferring a portion of their electricity consumption from the grid and diesel gensets to Solar PV electricity generation. On the other hand, the estimated reduction in CO2 emissions from all the Solar PV projects in Lebanon increased from 351 tons of CO2 in 2010 to 18,000 tons of CO2 in 2015.

To further quantify and gauge the performance of Solar PV systems and their resulting savings, a numerical analysis was conducted for batteryless Solar PV systems implemented in 2015. These systems were built with the lowest average cost the market has seen yet, which is indicative of a continuing drop in cost for the future. The total capital investment for these systems was $7.5 million, the operation and maintenance cost was assumed at 2 percent per year of the total capital investment, the yearly energy yield degradation for the panels was taken to be 0.8 percent per year, the discount rate was set at 5 percent, and finally, the lifecycle for these systems was assumed to be 25 years. The findings of this study reveal that the levelized cost of energy for these systems is 13.7 cents per kilowatt hour, whereas the cost for saving one ton of CO2 emissions is $198. While $198 might sound expensive to save a single ton of CO2 emissions, this number comes from relatively small, decentralized systems where economies of scale do not apply as effectively. If Lebanon scales up its Solar PV sector by venturing into utility-scale projects – upwards of 20 megawatts – the cost for emissions savings will drop significantly.

[pullquote] Business survivability in this sector hinges heavily on the energy bill, and, by investing in solar PV, there are big savings to be reaped [/pullquote]

Financing

The growth of the sector, although positive, did not exceed the 100 percent year-over-year mark until 2013, which is when the National Energy Efficiency and Renewable Energy Action (NEEREA) came into effect. NEEREA is a successful and ongoing financial soft loan program initiated by Banque du Liban, Lebanon’s central bank, with the support of the Ministry of Energy and Water, UNDP and the Lebanese Center for Energy Conservation. Cumulative investments in Solar PV totaled $2.3 million in 2010, grew to $9.4 million in 2013 and skyrocketed to $30.5 million by the end of 2015.

Growth

Driven by falling costs, increased savings, and proven reliability, Solar PV installations surged in 2015 with 5.65 megawatts of new capacity added. In 2010, the total installed capacity for Solar PV in Lebanon was 320 kilowatts. By the end of 2015, this capacity grew to 9.45 megawatts. This constitutes an average yearly growth rate of 100 percent. Furthermore, the year-over-year growth rate for capacity increased from 41 percent in 2011 to 149 percent in 2015, while the year-over-year growth rate for the number of new Solar PV projects increased from 27 percent to 72 percent during the same time period. This indicates that the average size of a system increased from five kilowatts to 21 kilowatts. This means that trust in the technology and in local engineering companies to support bigger size systems has increased, and, in turn, led to more investor comfort in making larger investments in Solar PV.

Sector Share

The top four sectors leading the Solar PV market in Lebanon are the commercial sector with two megawatts at 22 percent, the residential sector and the agricultural sector with 1.7 megawatts at 18 percent each, and the industrial sector with 1.6 megawatts at 17 percent. It is paramount to shed light on the fact that the share of the industrial sector needs to increase. Business survivability in this sector hinges heavily on the energy bill, and, by investing in solar PV, there are big savings to be reaped.

By investing in Solar PV technologies and deferring a portion of their electricity consumption from the grid and diesel gensets, local industries and businesses will have the comfort of knowing exactly how much a portion of their electricity needs is going to cost them for the next 25 years. This kind of risk hedging is worth money.

In other words, these industries and businesses will be able to produce energy at prices equal to or less than local energy rates, and at the same time ensure price certainty for a percentage of their facilities’ electricity consumption against the volatility of energy prices. This will set a clear example in Lebanon that other industries and businesses can follow, demonstrating that solar power can reduce pollution and lower operational costs at the same time. The sun is always shining. Its energy should not go to waste.

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