Executive Magazine

Jad Hatem – Q&A

by Executive Staff February 5, 2014

written by Executive Staff

Jad Hatem is a partner at B.E.C.A. Hatem & Partners, one of Lebanon’s leading accounting firms. The company has around 500 clients, many of whom are due to file taxes online for the first time ever in 2014, after the Lebanese government introduced the system at the end of 2013. In coordination with the Ministry of Finance, B.E.C.A. have been helping prepare their clients through specific training programs.

E What companies have to pay their taxes online this year?
For the year 2014, all the large companies will submit online but the smaller companies still do hard copies. In the coming years all companies will be obliged to pay online. For now the larger companies are paying VAT, completed on a quarterly basis, annual tax income and real estate taxes online.

E How significant a difference can online taxes make for both the government and the companies?
I would say it is going to be a win-win situation. For the taxpayer it will be much easier to submit it on the web directly rather than a hard copy to be completed, signed and submitted to LibanPost — with the fees attached. For the Ministry of Finance it will be much easier. In the past they used to get hard copies from the LibanPost, scan it, enter the data into the system — now that won’t be necessary. So on both sides it will be beneficial.
Nevertheless, I am sure the first two years there will be complications — it is new, people don’t know how to do it, and there might be bugs in the system. Many accountants from an older generation are not familiar with IT and the internet. So it might be tough for them in the beginning but later on it will be much easier.

E The government is aiming to get all companies to pay taxes online by 2015. Is that realistic?
It will be feasible as long as the large taxpayers’ scheme is successful this year. There is no reason why it can’t happen.

E How well is the e-taxation system that was launched at the end of last year working?
We cannot judge yet, we don’t have feedback as the first quarter that has been submitted is this quarter. So the first test is now — the deadline was postponed till the end of January. It is too early to know. But what we can say so far is that people, companies and accountants are not well informed about how to proceed with this file.

E So the potential problems are more to do with knowledge than the functioning of the system?
We don’t know yet how efficient the system will be but what we know at this stage is people are not aware how to do it. So we need to have workshops so taxpayers know how to succeed.

E How have you been training your clients to avoid problems?
We carried out a three-hour briefing for over 100 of our clients to give them the knowledge to register online, get an access number, and complete the forms.
We had 140 attendees, all of them from our clients — the chief accountants.

E Is three hours training enough to learn how to submit your tax forms online?
Yes, after three hours they should be able to register, to get online, to get the login and have 80 to 90 percent of the knowledge required to file their tax returns.

E Are some businesses that you work with hesitant to go online?
There is hostility, mainly from the older generation, which has been doing it for decades. For them they don’t want to change but on the other hand it is not an option — this is how things are moving. Now those in big companies cannot do it offline any more, it is compulsory.

E How many years behind is Lebanon in going online?
IT-wise and in terms of internet penetration, compared to Europe we are far behind. Lebanese are not very familiar — if you look at the statistics most of them are into social media but that is it, in terms of using the internet for e-payment, etc. Lebanese are still not used to paying for things online. But compared to other Arabic countries, excluding the UAE, we are not far behind.

E Does auditing online make the system more transparent, thus potentially reducing corruption?
The information will be available much quicker, so as soon as you submit, the information will be available. In the past it was completed manually, then sent to the Ministry of Finance to be processed. All of this process took months but not any more. But the impact on transparency will be indirect.

February 5, 2014 0 comments

Leaders

Time for a government

by Executive Editors February 5, 2014

written by Executive Editors

For the past 10 months, Lebanon has been without a government. The caretaker cabinet has proved completely incapable of responding to the country’s two major ongoing challenges — the influx of 900,000 Syrian refugees fleeing their country’s civil war and a striking downturn in security conditions. Since Christmas alone, Lebanon has seen four car bombs. The political void has also fed into wider inactivity; parliamentary elections have been missed, natural gas tenders repeatedly postponed.
The coming months will see challenges just as daunting. President Michel Sleiman is due to step down in May, while parliamentary elections are scheduled for November. Tenders for natural gas must move forward lest Lebanon risk losing the interest of international oil companies and any hope for energy independence or a balanced budget. Syrian refugees will continue to arrive in Lebanon, putting further strains on state infrastructure. And the rapidly deteriorating security situation demands a strong response by the army and Internal Security Forces, backed up by political consensus.

It is good that leaders seem close to announcing a new government with broad participation. Sleiman and prime minister-designate Tammam Salam have been doggedly pushing for a cabinet. The Future Movement and Hezbollah, protagonists in Lebanon’s most fraught political dispute, have signaled their willingness to share power. As Executive went to press, it appeared that only one card had yet to fall into place: Michel Aoun’s Free Patriotic Movement (FPM).

The party’s major demand is to keep its current portfolios of telecoms and energy. There is some merit in keeping ministries under the same management: often new ministers bring coteries of advisors and erase the painstaking work of their predecessors.
Similarly both Nicholas Sehnaoui and Gebran Bassil, respectively the caretaker ministers of telecoms and of energy and water, have been effective in their roles. The two are among the only ministers that can point to real accomplishments under the last government, the former improving the country’s (still slow) internet networks and the latter pushing forward the oil and gas bids.

But these are hardly good enough reasons to sign over entire ministries to specific political parties in perpetuity. Lebanon has a long history of building political fiefdoms, rather than functioning ministries. Indeed, Bassil’s comments in late January that it was important to keep the energy ministry under the control of Christians smacks of just the kind of self-serving feudalism that has long held the country back.

This thinking must not be tolerated. Sleiman and Salam should not let the FPM get in the way of the formation of new government. Hezbollah and Amal, the FPM’s major coalition partners, shouldn’t either. With weekly car bombs at home and a devastating war still raging next door, the stakes are simply too high.

There are more pressing issues in Lebanon than telecoms or even energy. It is time for the FPM to apply its competence in these areas as well.

February 5, 2014 0 comments

Finance

Investment banking: Small sector in search of big deals

by Livia Murray February 5, 2014

written by Livia Murray

The investment banking sector in Lebanon is staggeringly small. With Lebanon’s history of maintaining a strong financial sector despite periods of crisis, one would expect its finance professionals to be well-versed in the notoriously lucrative industry, which registered revenues of $76 billion globally in 2013. But as the Lebanese market shows, not all financial systems are endowed with the same opportunities. Revenues from investment banking in Lebanon are so marginal that an operation could not even sustain itself if it were to rely solely on investment banking income.

Identity crisis
To compensate for low revenues, institutions that do investment banking are forced to diversify their products. What are referred to as investment banks in Lebanon commonly delve into brokerage, wealth management, long and medium term deposits and lending, alongside their advisory and capital raising services. Though it borders on an identity crisis, this combination of services is feasible and even encouraged by the specialized banking license under which these banks operate.

“This is the model that works,” says Samir Taleb, founder and partner of financial institution Lucid Investment. “It’s the central bank license which allows both together and actually encourages both together.” This specialized bank license issued by Banque du Liban (BDL) gives a wide mandate to the banks for services in corporate finance and private banking. A total of 17 banks are registered under this license.

Investment banking is still relatively new to Lebanon. As the newest pillar of FFA Private bank, it accounted for only 10 percent of their total revenues in 2013 according to its senior manager and head of investment banking Julien Khabbaz. Their investment banking division carries out corporate finance advisory to regional companies who want to sell, restructure, or carry out a merger or an acquisition, and provides fundraising on a project-by-project basis. With the bulk of their revenues stemming from brokerage and asset management, the money they raise mostly comes from a pool of investors who are clients of the private bank. FFA acquired the specialized banking license in 2007 and has a shareholder equity of $30 million.
Cedrus Invest Bank’s founder and CEO Raed Khoury estimates that a similar 10 percent of the bank’s total revenues stem from investment banking. Out of a total net income of $3 million for 2013, investment banking profits would stand at $300,000, with the lion’s share of the bank’s revenues coming from private banking and wealth management. Established in 2011, the bank has a total paid-up capital of $52 million.

The weak appetite for investment banking in Lebanon has caused investment bank subsidiaries of larger groups to derive a bulk of their investment banking activities from divisions of their parent companies. According to Credit Libanais Investment Bank’s head of corporate finance and economic research Fadlo Choueiri, a great part of the bank’s investment banking activities come from advisory work for the Credit Libanais Group, particularly as it added a number of branches in the Middle East and West Africa.
Blominvest Bank uses a similar model. With parent Blom Bank having branches across Qatar, Saudi Arabia and Jordan, whenever one of these branches identifies a company that needs investment banking services, they outsouce these services them to Blominvest where the manpower is. “Our role will be really to provide services for our subsidiaries outside of Lebanon because this is where the deals are,” Fadi Osseiran, general manager at Blominvest, says.

slim pickings
Investment bankers in Lebanon are forced to diversify their services or outsource because of the barren landscape for such activities in Lebanon. “You might wait two years and have no transactions,” says Lucid’s Taleb. The lack of companies willing to seek investment banking services explains the meager profits of investment banking, and the need for a backup plan. “Because when it dries up, it dries up,” says Khaled Zeidan, who works on the buy-side of deals as general manager of MedSecurities.

Those in the financial sector blame the family ownership structure of Lebanese companies as hampering investment banking activities. “They want to preserve their control and going public or opening up their capital is a much lengthier and difficult process,” says Osseiran. Business owners in Lebanon will opt for taking bank loans when they need capital over selling shares, which would dilute ownership.

Though scepticism is not undue for a sector that does not have the cleanest reputation, those in the industry point to the merits of financial services and advising for a company. “You have shareholders and partners to report to,” says Taleb. In juxtaposition with the family business structure which has a reputation for being shadowy and inefficient in their finances, opening up capital can lead to fiscal transparency and institutionalized management. “Investment funds will be fighting to get a meeting with you as a company to support you, possibly partnering with you, financing the company to expedite growth,” says George Azar, managing director at financial advisory firm GA consult.

Sourcing deals
If Lebanese investment bankers are having trouble sourcing their deals locally, the appetite for Lebanese investment banking services is only slightly better in the region. But sourcing deals from the outside is more difficult than keeping active on the local market because of competition from large regional and international banks. Those who have managed have had to find space in the market. “I believe we sit in a nice niche,” says FFA’s Khabbaz. “We’re kind of in the niche of deal size where you don’t have many investment banks working on that same field,” going for deals in the $5-$50 million range.

Nonetheless, Lebanese investment bankers are forced to look abroad. “In order to be financially solid, if you want to work only in investment banking, [you need] to have deals in the region,” says Khoury. Many of the mandates currently under control of Lebanese investment banks are from Lebanese companies abroad, as regional expansion is the preferred method of scaling for these companies. In 2013, Cedrus worked on acquisitions in the UAE’s insurance sector, Saudi Arabia’s healthcare sector, and Lebanon’s food and beverage sector, with tickets ranging from $5 million to $10 million per deal, as well as smaller advisory deals within Lebanon. They could not disclose the names of the companies because of non-disclosure agreements.

Lebanese investment banks can look at bigger deals by getting work from their parent bank’s regional subsidiaries. Blominvest is currently working on two advisory mandates for a Saudi plastics company at a size of $70-80 million and a Qatari construction company at a size of $300 million, thanks to Blom Bank’s branches in those countries. They raised $100 million in 2013 for investments abroad, $50-60 million of which went to Saudi Arabia, mostly in real estate.

The future
In spite of the current limitations, investment bankers are hopeful that the next couple of decades will see an increase in investment banking activities in Lebanon. “We’re going to see exits in the next few years, people that inherited that business and they don’t want it, or people who inherited and want to grow it or need new partners or cash injection or people that need restructuring or advisory on corporate governance,” says Khabbaz. New management opting to open their capital would give investment bankers the opportunity to structure and plan these exits.

Capitalization would also allow investment bankers to sink their teeth into larger deals. “As the Lebanese companies want to grow and become competitive in the region, they need to re-capitalize. So they might ask for investment banks to advise them how to increase their capital, and find them companies for acquisitions, etc,” says Khoury. “There are a lot of things that need to happen as naturally family businesses grow and become a size where they can be more institutionalized and have a future. Maybe someday we can see some of these companies be publicly listed,” says Khabbaz.

Besides the capitalization of family businesses, some of the major sectors of the economy are still public. Privatization of major sectors of the economy such as telecoms and a major airline would drive demand for investment banking services. “You couldn’t really kick off investment banking in a place where there the sectors of importance are not privatized,” says Osseiran. Investment bankers also see potential in sectors of the economy on the verge of being developed, such as oil and gas.

Capital markets:
no exit in sight
Though investment bankers see prospects in the future for investment banking deals, one of the lingering problems they will face are the underdeveloped capital markets. Very few companies are listed on the Beirut Stock Exchange. With real estate giant Solidere and a handful of banks taking up the majority of the market, it has not seen any new equity listings since the turn of the century.

Weak capital markets provide little exit strategy — dubbed by Zeidan as the “holy grail” of the industry — for investors to sell their shares in a company and capitalize on their gains. But the current political situation has lead to an undervaluation in the price of shares that dissuades investors from buying and companies from selling. “Investors are not willing to pay a premium over and above the book value of the share,” said Choueiri, who claimed that the price of listed shares fell from roughly three times the book value in 2008 to barely over parity today.

Political deadlock limits both investments in companies and the desire for companies to list, take capital injections, and expand, as today’s climate is far from ideal for initial public offerings (IPOs). Khabbaz admitted that some of their mandates for mergers and acquisitions ground to a halt in 2013 because of insecurities relating to the political situation. “They kind of stalled and froze just because people were reluctant to do deals, to execute, to invest, to buy each other out,”he says.

But political deadlock is not the only culprit for lack of deals and IPOs. A regulatory framework has been slow in implementation, despite the establishment of capital markets as early as the 1920s.

These regulations would establish minimum requirements for companies to list and be traded on the stock market that would increase the transparency and accountability to their shareholders.

With the relatively recent formation of the Capital Markets Authority, a regulatory body to oversee Lebanon’s capital markets in 2011, investment bankers are still dubious this will lead to real change any time soon. “We’ve been waiting 10-15 years on the making of it,” says Osseiran. A high priority in every country that wants to develop serious capital markets, a regulatory agency is a must for a highly functioning and reliable trading environment. Though Lebanese investment bankers may see more deals in the next couple of years, it is important that this is paired with a regulatory framework to limit the potential risks in this industry.

February 5, 2014 0 comments

Leaders

A frontal assault?

by Executive Editors February 5, 2014

written by Executive Editors

Saudi Arabia’s pledge to support the Lebanese Armed Forces (LAF) to the tune of $3 billion over the next five years should be cautiously welcomed.

The army is one of the few genuinely cross-sectarian bodies in this divided country and enjoys widespread support. In 2013 a study by the Norwegian research company FAFO found that the LAF was by far the most trusted institution in the country, with over 80 percent support compared with averages of around 50 percent for the parliament and the government. Most significantly, the backing was roughly consistent across all age groups and sects (it was lower among Sunnis, but still the most trusted body).

Despite its reputation, the LAF suffers from chronic underfunding (see main article). Tasked in its mandate with juggling the daunting duties of defending the country against foreign aggressors, reclaiming Lebanese land under Israeli occupation and maintaining internal security; it is clearly incapable of keeping all the balls in the air.

This is partly about technology; while the LAF has plenty of manpower much of its hardware, such as dozens of Soviet-made tanks, are relics from previous eras. The need for investment is clear.

Thus the $3 billion could be a major moment for the country, allowing the military to significantly improve its capabilities. It will not become a regional superpower and will remain incapable of providing a realistic military threat to Israel, but it could get a much firmer grip over internal security and stop the country sliding into further strife. This best-case scenario would be welcome.

But then we return to politics. No one with knowledge of the Middle East will accept that Saudi’s motives are purely philanthropic. Indeed, the deal appears to have as much to do with boosting Riyadh’s relations with France as with concerns about Lebanon’s security.
Those that have cried foul have accused Saudi Arabia of seeking to politicize the army, or to use the funding to create a counterweight to Hezbollah. Indeed, the Hezbollah-leaning Lebanese newspaper Al Akhbar alleged that the deal was contingent on the Shi’ite group being excluded from the next government.

If the Saudis want to be seen as honest brokers — supporting the most beloved of Lebanese institutions out of concern for the country’s stability, rather than sectarian preference — then assurances are needed. Foremost among these would be a guarantee that the leaders of the LAF alone will choose what areas they wish to strengthen and what they wish to buy. Any Saudi interference, whether direct or indirect, will only pour fuel on political fires.

So far transparency has been severely lacking — as yet there are few indications of where the money might end up. To avoid perceptions of favoritism, more clarity is needed from both the Saudis and the LAF.

The widespread support for the military is to be cherished. While the need for new funding is great, it cannot be traded in exchange for independence.

February 5, 2014 0 comments

Leaders

Corporate responsibility is everyone’s duty

by Executive Editors February 5, 2014

written by Executive Editors

It is not easy these days to find companies that are expanding in Lebanon. Uncertainty rules the economic climate and the only thing safely said about this year’s business prospects is that there are so many variables that macroeconomic forecasts are even shakier than in ‘normal’ times. But there are corporate examples for optimism — even if some can be described as hoping against probability. There also are companies that tell Executive of investments and expansions that will mean the creation of new jobs in areas such as hospitality and trade.

One company to talk new business last month was Beirut Waterfront Development, which is set to open the Beirut Yacht Club this spring (see story). Another was Spinneys, the retail chain that has more stores and new concepts in the pipeline for Lebanon (see story and interview). The two represent very different corporate narratives. With the Yacht Club, Waterfront Development is invested in a segment of the real estate and hospitality market where exclusivity is the aim and targeted profit margins in the sale of a few super-pricy apartments are a function of scarcity. Spinneys is a mass retailer of fast-moving consumer goods whose daily bread is beating the competition on price and whose mantra is winning on razor-thin margins.

But besides professing corporate optimism, both have another factor in common: they have been targets of huge criticism. Waterfront Development was accused by one media outlet of building a “boardwalk of corruption” in the St. Georges Bay — arguing that the company was part of a scheme to abuse public property for private gain. In 2012 activists attacked the Spinneys chief executive as ‘CEO against freedoms’, with allegations over their working conditions.

Media and activists are important parts of society and as Lebanon matures toward a more open and inclusive society their contributions are important. Similarly, criticism and exposure of corporate ills are an essential feature of their watchdog functions. And when it comes to Lebanon’s huge need for more social equity, the protection of the country from disgraceful private use of public property and the preservation of labor rights are absolute priorities.
However, the virtues of standing up for the little guy and for the public good must preserve the dignity of these causes. The responsibility to present facts and argue with fairness is incumbent not only on news media but also on activists. Even the simplest examination of the accusations against Spinneys and Waterfront Development showed that the companies were often not given a fair hearing. Most significantly, the attacks against both companies were pushed forward not only by media and activists but also by leading Lebanese politicians, while a politician was also the main target in the attack on Waterfront Development.

The entanglement of political figures points to a major dilemma as the Lebanese wait for a new government to help find a solution to our macroeconomic trough. The dilemma is that the Lebanese need their politicians to be active but that the political class is perceived, often with good reason, as producing more problems than solutions.

Politicians should speak out against abuse of public properties and scrutinize economic actors for treating their employees fairly. But if politicians single out one and keep silent about all the others, they raise suspicion that their motives are not pure. And by damaging companies that otherwise would grow, it loads another straw onto the back of this heavily burdened camel that is the Lebanese economy.

February 5, 2014 0 comments

The Buzz

Business briefing: 16 Jan 2014

by Executive Staff January 16, 2014

written by Executive Staff

Economics and Policy

Authorities in the UAE and Iran may have reached a tentative agreement to end a long-running dispute over three islands in the Gulf.

Lebanon’s futile stimulus package

by Joe Dyke January 14, 2014

written by Joe Dyke

When Riad Salameh, the governor of Banque du Liban (BDL), Lebanon’s central bank, announced in November $800 million for a new stimulus package to help the economy grow in 2014 — he was perhaps guilty of overstatement. While there will be $800 million made available, what Salameh neglected to mention was that $468 million of it was actually unused money from 2013’s stimulus package which will be rolled over. As such, just $332 million of purely new money will be extended, less than 1 percent of gross domestic product (GDP).

While Salameh was quick to stress that the primary reason for not releasing more money was fear of inflation, there are other factors that may have caused him to ease off. Put simply, the impact of the first stimulus package remains unclear, while the general weakness in the economy and low levels of confidence mean that the positive effect of any new round of stimulus is likely to be muted. In such a climate, and with the ongoing political impasse showing no signs of easing up, the governor is faced with the unenviable task of again shouldering the burden of moving the economy forward with limited tools.

Assessing success

In January last year BDL announced the details of its first monetary stimulus package since 2009, with a total of $1.47 billion being extended. The mechanism, as with most monetary stimulus packages, was indirect — BDL would extend loans at 1 percent to the country’s commercial banks, providing they lend to their customers at corresponding lower rates. Specific sectors were targeted, with real estate receiving 56 percent of the funds, environmentally-friendly projects 20 percent and the productive sectors just 14 percent. The cumulative effect of the package, it was hoped, would be to boost demand in the economy by helping thousands of Lebanese buy their first homes, open businesses or develop existing projects.

Assessing the efficacy of these policies has proved difficult. The bank has yet to release detailed numbers on the impact and, industry experts say, is unlikely to do so. “We need to see the detailed results of the first stimulus to have the full picture,” Nassib Ghobril, head of research at Byblos Bank, says. “BDL doesn’t publish those but often the governor [Salameh] indicates them through the media.”

So far the main sign Salemeh has given was the seemingly high figure of 96,000 housing loans supported through the package, which he mentioned at a public speech in November. There has, however, been no specific data released on this, and so it is impossible to assess how many of these loans would have been taken out by home buyers anyway without the interest rate subsidy (see real estate article article).

Lebanon’s economic activity grew in total an estimated 1.5 percent in 2013, according to the World Bank and government figures, but how much of that was supported by the stimulus package is unclear. The World Bank has done what its economist Ibrahim Jamali describes as a “small analysis” but has yet to undertake a larger one, partly due to lack of data. “The extent of the impact is still not clear. We will have to wait at least one or two more quarters to have a more elaborate idea [of how it affected the economy].” Ghobril agrees that there are as yet “no reliable estimates” of the impact on GDP, but believes that “without the stimulus growth would probably have been lower.”

Producing growth

One area of criticism, however, has come from the focus of the stimulus package. The decision to put over half of the available funds into real estate has certainly helped boost parts of that sector, but the knock-on effects for the rest of the economy have perhaps been more muted than if investments had been made elsewhere.

The issue is that real estate in Lebanon already suffers from oversupply — half-built or already empty buildings scatter the country. As such, a measure that helps people invest in their first homes has limited multiplier effects for the overall economy. “New mortgages are not generating the construction of new buildings, so it doesn’t generate economic growth and new jobs,” Ghobril says.

While BDL has yet to release in-depth details of where the second round of stimulus will go, Salameh has indicated the focus will not fundamentally differ from its predecessor. “This new package is similar to the one we launched this year,” he said in November, singling out real estate and technology as targeted areas.

There are fears that the continued focus on housing in the second package will do even less than the first one to help stimulate the real economy. The World Bank estimates that only 6 percent of loans made possible by the stimulus package went to the productive sectors, where multiplier effects are higher. “The real estate sector has already benefited from the first stimulus package,” the Bank’s Jamali says. “It should not be omitted in the second one but maybe more funds should be allocated toward the productive sectors.” Ghobril concurs that a shift in emphasis is necessary. “Personally I would shift it toward companies and sectors rather than real estate and mortgages.”

Roger Melki, senior adviser to the Ministry of Economy and Trade, sees nothing wrong in support for the real estate sector but adds that small businesses are suffering and need support. “What we have observed in the last 12 months is that the small and medium sized companies are refraining from taking loans, but not the large ones, they are investing.” A key indication, he adds, is the loans made by Kafalat — the government sponsored loan-guarantee company which supports small and medium-sized businesses — have fallen, with companies wary of expansion. “If you look at Kafalat loan guarantees they are 16 percent lower in 2013.”

Deck chairs on the Titanic

While debates about the focus of the package are relevant, more fundamental problems look set to undermine the impact of Salameh’s plans. One reason to doubt the impact of any stimulus package is the desperately low levels of confidence in the economy.

In the first six months of 2013, the Byblos Bank/AUB Consumer Confidence Index dropped to its lowest level since the index was founded in 2007. In total there was an average monthly reading of 29.4, down 14.1 percent from the second half of 2012. The primary reason is the country’s political turmoil, with the impact of the Syria crisis a major factor. Effectively, confidence in the economy is so low that even if loans are cheap, customers may be hesitant to invest.

In the face of such a difficult challenge policy makers need as many options as possible, but Salameh’s hands are tied. The central bank can only carry out a monetary stimulus — lending to the banks cheaply on the basis that the interest subsidy will feed into the economy — but such a funding mechanism is flawed in a static economy. If, as was the case with 2013’s package, confidence is so low that there is not enough demand, then the money goes unused. The alternative would be a fiscal stimulus — direct government spending in key sectors to boost demand.

“A fiscal stimulus would have a more direct impact. In terms of monetary policy you talk about channels of transmission — there is a stimulus package but unless people are willing to borrow the money and do something with it, it is not that useful,” the World Bank’s Jamali says. “With a fiscal stimulus the government is spending that money, so there is no question whether people will borrow it or do something with it that is not useful. A fiscal stimulus would be more immediate and this might be desirable at this time, given the state of the economy.”

Fiscal stimuli such as a hearty infrastructure development package might benefit Lebanon in more than one way. Applying this Keynesian methodology would be the responsibility of the government and this, unfortunately, is outside the realm of options for Salameh. Since the resignation of Prime Minister Najib Mikati in March 2013, Lebanon has been without a government of any kind, and there are few prospects of forming one in the coming months. For this reason, a fiscal stimulus package is impossible. In effect, the complete failure of the country’s political class to work together has crippled the country’s economic options for countering the impact of the downturn and forced Salameh into action. “BDL is taking on the role the executive branch should be doing. It is the government that should find ways for growth not the central bank having to bear this burden again,” Ghobril says.

As Lebanon looks for economic hope in 2014, the stimulus package is one area of positivity. Salameh has long been the driving force behind the economy, filling the role the politicians have failed to. But a combination of a severe lack of confidence, odd choices of focus and a lack of alternative options mean the real economy will likely be numb to the stimulus.

January 14, 2014 0 comments

The Buzz

Business briefing: 14 Jan 2014

by Executive Staff January 14, 2014

written by Executive Staff

Economics and Policy

An electronic system that warns Saudi men when their female “dependents” are leaving the kingdom will be made optional in an historic move towards greater female independence.

A twofold investment opportunity

by Thomas Schellen January 10, 2014

written by Thomas Schellen

While the current slump in the domestic real estate market is largely seen as temporary rather than structural, some astute real estate players are turning to international markets for revenues. Intermediaries have been advertising home buying opportunities in Cyprus or jumping into promotion of properties in Spain to well-heeled clientele. Now, developers with a bent for regional activities have a new iron in the fire that looks ever hotter as local demand is cooling; Erbil, the capital city of Iraqi Kurdistan and the latest boomtown of the Middle East.

Geographic diversification has long been a natural path for Lebanese real estate players seeking to mitigate domestic risks or expand beyond the confines of a small territory. In 2013, this became extra relevant as business potentials in southern European property sales and Kurdish developments expanded while local demand kept contracting.

Recent examples are Lebanese intermediaries Plus Properties, with a Cypriot venture, and Prime Consult, whose owner Massaad Fares told Executive that he has reactivated an operation in Spain where he has an experience base.

Investment-grade properties in Spain turned up as an important new opportunity in October, after the Spanish Parliament in September adopted legislation that grants residency privileges to investors with a commitment of half a million euros, (around $675,000).

Overseas nationals with clean personal records and the prerequisite wealth can look forward to the right of free movement in the Schengen Area and later to European citizenship for themselves and their immediate family members, if they spend more than half of each year at their Spanish residency during the multi-year process.

Money to be made

Portugal, which has had a similar law in place for about a year, reported in November that it has issued 318 such investor visas, with estimates that the number might increase to 400 by the end of the year. Adopters consist mainly of wealthy Chinese and Russian families, who acquired 78 percent and 5 percent of the visas respectively.

Prime Consult’s Fares suggested that interested foreigners should jump on the new real estate opportunity because the visa wagon might only be accessible for a short time. However, the number of European countries that offer similar options has been increasing in recent years, and there seems to be no great risk of a policy reversal as the investor visa is unlikely to impact the population balance in countries as large as Spain.

While investor visas are unlikely to rescue the Spanish economy in 2014, providing brokerage services to willing investors can be a good business. As Fares put it, “there is money to be made in each market,” which he expects in the case of Spain’s new investor visa option will come, not from the Lebanese, but rather via Dubai from an Indian and other Asian client base.

Aimed at flush Lebanese property buyers, the Cypriot concept of Plus Brokers is a unit in Beirut-based Plus Group. According to Amanda Hajjar, the group’s marketing manager, Plus Brokers dashed into the action in May 2013, based on a spur-of-the-moment inspiration from group chairman Georges Chehwane.

The rationale was again to exploit the opportunity where a cash-strapped European Union country offers non-Europeans a road to residency in exchange for a substantial property investment; in the case of Cyprus the financial threshold is lower than in Spain or Portugal. “For a property investment of 300,000 euros plus VAT you can get access to your permanent visa and you can apply starting two months after you settle a minimum amount of 200,000 euros,” Hajjar told Executive.

Cyprus was an easy choice for Plus Brokers, due to its geographic and cultural proximity, and also because many Lebanese have experience with relocating to the island during past domestic crises. “We went to Cyprus and chose trustworthy developers with no financial problems, and we figured it was a really good investment opportunity for Lebanese who are looking to get their permanent resident visa outside of the country, considering the circumstances here,” she said.

Since launching its first promotions of Cypriot properties in the middle of 2013, Plus Properties has moved around 20 units, although not all in the residency-giving price range of above 300,000 euros. According to Hajjar, commissions on the deals are less than 5 percent per transaction and paid by the developer in Cyprus, not by the Lebanese client.

But before too long, the company found a domestic fly in the ointment as it was confronted with competitors who were making even bigger promises for supposedly much lower cost. In the case of residence options these competitors, clearly untrustworthy in Hajjar’s eyes, advertised that their clients could get permanent Cypriot residency visas along with the purchase of an 80,000 euro apartment.

“This is a very false statement,” Hajjar said. “For 80,000 euros you can buy an apartment but you get only a renewable multiple-entry visa, not a residency visa.”

Plus Brokers and other reputable intermediaries take active roles in any transaction they arrange in Cyprus, following the documents and providing on-the-ground assistance. As to the prospective market size of the Cypriot and other brokerage opportunities, Hajjar said that people are not yet accustomed to and comfortable with the idea but called the potential “not bad”, adding that “whenever anything bad happens, like a bomb, you get more clients.”

The seesaw effect of unfortunate events in Lebanon pushing up business outside constitutes an element of unease for Plus Brokers, but a bearable one. In the big picture of intermediation, after all, the Spanish and Cypriot ventures of Prime Consult and Plus Brokers appear to be focused on the short term. “It is not a strategic long-term move, because we expect that the crisis [in Lebanon] will be fixed within three to five years. It is a tactical approach,” Hajjar said.

Boom in erbil

Benefitting from the boom of Erbil when compounded with the immediacy of the brokerage business, the current engagement of Lebanese developers in Iraqi Kurdistan will endure for at least the next five years. Given the sizes of the three largest Lebanese developments in Erbil, it could even last longer, as the economic and social growth of the Kurdistan region has many needs that Lebanon can meet.

According to reports citing the Lebanese-Kurdish Friendship Association, close to 100 Lebanese companies are registered with the Kurdish authorities, and real estate companies contribute the largest share of an estimated Lebanese investment activity of over $3 billion in the region. The city of Erbil, the Arab tourism capital of 2014, is a sure bet to claim a significant share of regional business and investment in the near future.

In October last year the global Dubai based developer Emaar Properties unveiled a $3 billion masterplan for a new 134-acre “Downtown Erbil” at the Project Iraq construction fair, which was organized in the Kurdish city by Beirut based company, International Fairs and Promotions.

With some 15,000 planned residential units, three luxury hotels, a big shopping mall and significant office space, the mixed-use development aims to bring Dubai-type urban lifestyle to Erbil. Another extra-large project under the moniker “Empire World” is also under progress with local ownership involving Falcon Group, an Iraqi conglomerate. Projected at $2.3 billion, the 185-acre Empire World will entail 88 towers and 300 villas, one luxury hotel complex and value-added facilities ranging from a medical clinic to a mosque.

These mega-projects, with designs based on optimistic economic growth projections by the Kurdistan Regional Government (KRG), are each several times larger than the projects which Lebanese companies are developing in Erbil. However, the underlying ambitious thinking suggests a bright future for the Lebanese projects in the city, according to Makram Zard. Zard is chief executive of Beirut-based developer Zardman, itself working on a $200 million mixed-use project named Aura and located not far from Empire World.

“Even though there are very big projects happening now in Erbil, it still is not enough to meet the government’s demand forecast for 2020. This is good for our project since its timing coincides with the timing of the expected need,” Zard said, citing KRG-sponsored studies that Erbil will need 80,000 to 100,000 units by the end of the decade.

Zardman entered negotiations on the project two years ago and was waiting for its final building permit at the time of the interview with Executive. Having obtained the deed for the plot in February 2013, the company has done all the work, including part of the excavations, which it was able to execute without the final permits.

Some changes to the project were made necessary by a change in road planning and resultant redrawing of the project’s property line. However, by Zard’s assessment, the KRG is very supportive and professional and has streamlined the permit procedures in the two years since his company came to Erbil.

The plans for Aura were also internally updated during this period, to adjust apartment sizes downward by about 20 percent to 160, 200, and 240 square meters (sqm) for three available unit types. The design for the commercial areas was changed from an underground shopping mall to a concept with an emphasis on open-air features.

Construction costs for developments in Erbil have an economies-of-scale advantage over those in Lebanon, Zard said, due to the larger project sizes. End user prices of apartments are affordable when compared with cramped conditions between Beirut and the Metn region. Units in a new project in the low-to-middle quality range would be offered at $1,000 to $1,300 per sqm, reflecting price increases in the recent years.

“Erbil today has mainly middle to low class units and we are putting Aura on the map as middle to high. We are thus a bit more expensive than the actual market, aiming to position ourselves at $1,300 to $1,700 [per sqm],” Zard said.

“Prices are developing exactly as per our expectation but the market change is also a change in demand where higher quality is demanded. Generally, the market used to be oriented toward villas and is now moving more toward apartments,” he said.

Lebanese forays into the Erbil real estate market were pioneered by industralist Jacques Sarraf’s Malia Group, which demonstrated the Kurdish city’s strong potential with two projects.

Newer projects currently under development with Lebanese involvement are the Lebanese Village by Hariri Construction and Contracting Compay (Harco), headed by Mohammed Hariri, and Mass City, a joint venture between Mass Group Holding (MGH) — an Iraqi industrial group — and Beirut-based developer Trillium Holding.

According to Harco, the Lebanese Village is being constructed on a 55 acre plot and comprises three office buildings, a 17,000 sqm mall and a 200 room low-rise motel and chalets complex next to 55 residential towers and 140 villas.

The Mass City project was announced in June 2013 by MGH and Trillium. Project images and models show it as a greenfield development on a sprawling expanse of land, and material on both companies’ websites says it will consist of around 1,750 villas and town houses and also include commercial, retail, hospitality, religious, social and recreational spaces.

No information on the project’s targeted total value and the size of Trillium’s stake in the joint venture were provided on their corporate website.

Synergies

Erbil is a center of economic potential in the recovery of Iraq but it is not for everyone. Several real estate players in Beirut told Executive that they had inquired about venturing into Kurdistan but decided against it because of factors ranging from business risk, to an immature marketing culture and not wanting to develop projects in a city where they themselves would not be excited to live.

On the other hand, the Lebanese involvement in Erbil developments, and the activity of real estate intermediaries in Cyprus, creates follow-on business opportunities for Beirut-based banks and companies.

In providing brokerage services and consulting to Lebanese people who purchase units in Cyprus either as entry points to European residency or simply as second homes, Plus Brokers have been talking to Lebanese banks about extending their home finance to such properties, Hajjar said. Zardman is looking to base Lebanese retail and hospitality outlets in the Aura development. The company also has strong expectations that Lebanese banks with affiliates or subsidiaries in Iraq will play a positive role in advancing the ease of home finance, as the market for such loans from Iraqi banks is rather restrictive, Zard said. “We are seeing a lot of interest from Lebanese banks and we are hoping that two to three years onward we will have the financing options available that we have in Lebanon.”

January 10, 2014 0 comments

Finance

Credit Agricole Suisse

by Yasser Akkaoui January 10, 2014

written by Yasser Akkaoui

Paul Wetterwald is the chief economist of Crédit Agricole Suisse, and was chief investment officer of Crédit Lyonnais Suisse from 1991 to 2005. Carine Hermon is head of private equity investor relations for Crédit Agricole Suisse. Executive sat with them to gain their perspective on developments in the global market.

E How can we make sense of the macroeconomic situation in the world today?

PW: I think that there are two points, one of which is that global growth is staying more or less at the same level, which is positive growth but at a lower level than before the big crisis of 2008. Now, we have various regional situations. Europe is back into positive territory in terms of growth but it’s lagging. We don’t have a figure but maybe we’ll have a weak figure. But what we expect is to still have low positive growth for next year with differences between Germany and southern countries.

In the United States we expect growth to stay slightly above 2 percent, which means slight acceleration. And in China we think that we have bottomed out. The new rule for China is very likely 7 percent growth which is in terms of new money, new wealth — as much as when they had 12 percent on a lower basis. Something we have to keep in mind is that China is so large right now that 7.5 is a lot and maybe enough to supply the rest of the world.

So positively, moderate growth and no inflation or risk in the mature economies, some inflation issues in the emerging markets. And in this context we have some central banks of mature economies that are maintaining very low interest rates. This is the main engine of growth for the financial markets and much more important than the rate of growth of gross domestic product (GDP) because when there is higher growth of the GDP we will have less accommodating central banks and this will be bad for the market. Next year, we still expect interest rates by the mature economies’ central banks to stay very close to 0 percent.

It’s true that in the US the market is sometimes worried about tapering. What I would say is that tapering does not mean a narrower balance sheet of the Federal Reserve. This just means that the rate of expansion of the balance sheet will be lower. So it’s still expanding the balance sheet, but at a lower rate. And when they do this the Japanese central bank will print a lot of money at the same time. The European Central Bank (ECB) will likely restart long-term refinancing operations — maybe next January; the balance sheet of the ECB has been shrinking, so they cannot keep it like this. Economic growth in Europe is not strong enough for this. In the coming year you will have the asset quality review for the European banks and the stress test. And you know the stress test will be the first one that will really be supervised by the ECB, but I don’t think they will be the nice guys. They will try to find some bad banks and to compensate for this they will give a lot of financing at the beginning of next year.

Globally, a lot of liquidity will still be flowing into the market. That’s the point. Then of course if you think that 0 percent is not enough for short-term deposits you have to find other assets. This is the global picture.

E In France, there’s a big question mark about President François Hollande’s policies. What can we say about this?

I think that the first point is that a lot of French companies are doing business outside of France. What is happening in France is not that important for the big companies.

The second point is that because of the structure of the involvement of the state in the French economy, consumption has always been very resilient. So it has given a cushion to European growth. Maybe you could say it’s not very healthy, but still it’s helping the consumers in France to stay afloat. And I don’t see that this can change very soon. So the short term in terms of the business cycle is not bad.

Longer term, in terms of public finance, it’s still an issue. But we don’t see politics taking care of this. They are trying, but you see that every time they try to raise taxes on someone somewhere the people say, ‘Not us, [tax] the others.’ I think people have to learn that you cannot spend more than what you earn. There has to be a balance.

Europe is making progress because if you remember 18 months ago with the collapse of the euro, we said Greece could go out, and still Europe is here, the euro is still here, and it’s actually strong. So I think we have to keep this in mind. There is a deficit of politics with respect to economics and this has to be filled out. It’s a slow process but we are not too pessimistic about this. What is true is that [the European economy] will remain low-growth rate — wealthy, but with low growth. Maybe [this will last] 2 to 3 years because of all the excess of debt that has been transferred to public finance. The only answer to the debt issue is you have to have time. You cannot expect debt to be resolved in two years.

E Switzerland has been under fire from the international community and is reassessing its own corporate culture. How is this affecting the banking and finance ecosystem?

Well I think it’s a new model that needs to be reinvented. You can compare it with the watch industry in the 70s when they missed the electronic watch and now the watch industry is doing well, but with way fewer people involved in the industry. So it could be the same for private banking in Switzerland. It’s very important for places like Geneva, but it’s much less important in other locations in Switzerland. It’s not like bankers are very popular people and everyone in Switzerland wants to save the banks. They saved the banks once in 2008 and now banks have to adapt. And specifically they will have higher costs in terms of legal and compliance work, so I guess the margins of the business will be lower. The Swiss economy globally is doing well despite the strength of the Swiss franc. Labor costs are high, but they are not getting higher. Whereas in other countries, the labor costs are increasing. In relative terms we are getting a bit more competitive.

E How careful should banks be around the frontier markets, especially when alternatives have become very few around the world?

We have invested a small part of the equities into frontier markets through funds in order to get good diversification. But it’s difficult, and you have to know that it’s less liquid. When you look at the performance of those kinds of investments it looks like it’s less volatile. But those markets actually lack liquidity. So you have to stay in it for a longer period of time than usual. So, yes, we have a part invested in it, but it can only be a small part of the investment world.

E Now In 2013 it seems that private equity strategies are back. How did this image of private equity change and how did Crédit Agricole Suisse adapt to it?

CH: Now to create value you have to transform the company. To have good performance in a private equity fund, you have to choose the team that can transform the company. So that is very important for us. Currently, at Crédit Agricole, we have deep due diligence on around 200 different general partnerships (GPs) and funds every year. And we choose only 10 per year to advise to our clients. And so that’s the first thing. We are concentrated on the team. That is most important. Because you don’t know where, or in which company, they will invest. So you have to be sure that the team will be able to invest in the good company.

We are looking for different points. The first is the capacity to raise the target commitment. The second is the capacity to invest the raised money. After that what’s important is the capacity of the team to transform the company — sometimes change the management team, or sometimes the internal processes, and with external growth, so there are a lot of different possibilities to do that. At the end [of the process] it’s the capacity of the team to exit the company.

To do that it’s important that the team have a realistic projection for the company and to say, ‘In 4 to 5 years I see the company to be like this and that.’ At the beginning, when they buy the company they have to know what they want to do with it.

E What is your approach when it comes to identifying target investments in the Middle East?

It’s a shame but currently the Middle East is not a real area for private equity. Why? Because there is so much local capital that there is no opportunity for private equity. So currently there is no real opportunity in private equity. We can’t find any. There is no deal flow.

E So the Middle East is perceived as a market where you pull money out from as opposed to investing in?

It’s not because we don’t want to. It’s just that there are no opportunities. Some private equity firms have few opportunities to invest in Africa and the Middle East, a little bit, but not a lot. The amount here is very low. The biggest place to do private equity is in the US, of course, but there are a lot of opportunities in Europe. I’m sure that we can find current opportunities in Europe, even if the market is not [experiencing] very big growth, and there are also opportunities in Asia. But in the Middle East, maybe in a few years we can find some opportunities, but currently there are none.

E What are the expectations of your limited partnerships, and how have they changed in the past five years? Tell us more about your strategy.

CH: When you have inflation on a growth of 3 percent, if you have only 5 percent of return it’s not good. But if you have 5 percent of return when there is no growth, it’s quite good. This is the same for private equity but on a different level. Currently, our goal is to have a return for our investor of more than 12 percent per annum. That is our goal. We select around 10 private equity funds each year. To do that we decided to invest in different geographic regions to diversify the portfolio: in the US, Asia and Europe. There are still some opportunities in Europe.

PW: I think that the strategy is really an opportunistic one. I can name the companies I know, but Carine can give examples of companies in Northern Europe, Germany and Scandinavia. She can also give examples of companies in Thailand. So it’s more a case-by-case approach than telling you that they are focusing on you know, Italy. You have cases all over the world and it’s difficult to say we like this region more than that one.

E What’s the process? You have your offices all over the world, and they will recommend GPs that are promising, is there a pre-selection?

CH: In fact, private equity work is quite small. Everybody knows everybody. So currently at the end of each year you know which new funds you will have in the next year. So you can expect that…you say, ‘Okay, I need to choose 10 different funds,’ after which you have different sets of due diligence, and then you say, ‘I will need some private equity fund invested in the US, one invested in Asia, one in Europe, we want some private equity in private equity debt, in private equity in capital, in equity, on real estate also.’ You have different debt like that.

E For the Middle East, have you been successful in identifying GPs that satisfy your ambitions?

No. not yet.

E Although the private equity space is quite developed?

I know that, but for the moment at the beginning it’s critical to only focus on Europe because we are a French bank. After that we now have a team in Asia and so we will begin to invest there, and also we invest in the US because it is the biggest market now for private equity. We want to develop our investments worldwide, but for the moment we are more focused on these three areas. We have some GP who invest in emerging markets. And when I say emerging market it can be Asia or it can be Africa too. But we don’t select for the moment funds exclusively located in the Middle East or in Africa because it’s too selective. Maybe when we become bigger we will have more opportunities to propose to our clients and in that case we could have Middle East private equity funds. But for the moment it’s difficult to have something so specialized.

We have a lot of our clients who come from Middle East and they would like to diversify their portfolio. So it’s simple for us to invest in Europe or in the US. They don’t want to have another fund in Middle East because they know it.

E We know that sovereign money or government money is the biggest source in the Middle East. What about individuals? How much do you focus your strategies of raising funds from governments as per other type of sources?

PW: This is a private banking business. We are not looking for institutional money.

CH: Yes, they can invest by themselves so they don’t need our advice to do that. In fact we are more focused on private people so we are not really [working] on an institutional level. Maybe if they need some help we can help them. But this is very rare because they have the knowledge.

PW: What is true is that the largest clients are pretty close to institutional. If you work with a big family for example you will have requirements that are really close to the investment authority. But basically in principle we don’t chase money from institutions.

January 10, 2014 1 comment