Executive Magazine

Jean Riachi – Q&A

by Executive Editors December 18, 2013

written by Executive Editors

Jean Riachi is the chairman and CEO of FFA Private Bank, Lebanon’s largest investment bank. Riachi sits down with Executive to talk economic outlook, investment opportunities for the bank, and strategies going forward.

What is your opinion of the macroeconomic situation — what’s influencing it and what are the biggest challenges for the country in 2013?

I think 2013 was the year where the regression of Lebanon was revealed and really felt, while probably it started in 2011. It might not be very clear when you look at the macroeconomic figures because they don’t show a big decrease in activity, but we really do feel that, and I’m talking not about recession, but about regression, because the country has entered into a phase of not only much slower growth but also a lot of sluggishness, a lot of bad mood. Now in terms of the banking sector, it has not translated yet into bad figures in terms of loan portfolios…but I think that it will show in the coming years.

In terms of pure investment banking activities, we were very much frustrated by this year because we had a number — not a big one — but a number of merger and acquisition (M&A) deals that were on the right track, where we had started this trend of talking to family businesses — some wanted to restructure, others wanted to sell, others wanted to expand by buying. We had a number of mandates that were going very well, for very interesting deals, that did not go through…We had in numerous cases people sitting together, so the matchmaking was done. Negotiations started on very good grounds, but with time passing you had buyers seeing their figures going down month after month. [They were] worrying about what will happen on the other side, and at the end [you had] both sides deciding to withdraw from doing any deal, because the buyer was worried of doing a deal at the wrong moment at the wrong price, and the sellers were worried about being forced to lower their expectations while everybody says this [situation] is cyclical and things could come back.

So yes, it was a very frustrating year in terms of investment banking/M&A activity. Now we have had a few successful stories in raising capital for companies, but interestingly nothing where the core business was in Lebanon. So [the way] for people like us to survive is to use Beirut as a base but to do deals or invest in markets that are outside markets.

When you say outside markets, is it more industry destinations or more geographic destinations? Let’s say, looking more at Africa, or looking more at Europe, or looking more at certain specific industries where you see growth in the medium-to-long term?

We are not dogmatic. I mean any interesting deal is something we are going to work on. Depends on what business line you’re talking about; we have capital market activities, brokerage, we have asset management activities, and we have real estate and finally we have investment banking activities. Since maybe 2007 there have been no more capital markets. At the time, the breakdown was maybe 30 percent in Lebanon and 70 percent outside Lebanon, I mean dealing on markets outside Lebanon. Today it’s 95 percent outside Lebanon and that started earlier. We cannot say that our brokerage activities were affected. Actually they grew a little bit in 2013. If you look at asset management, as well. All our investments — investments we do for our clients — all the assets we manage for our clients are outside Lebanon.

Looking forward to 2014, when you meet with your board of directors and you want to put together a strategy for 2014, how do these meetings look?

You know, when you are an investment bank and you have your home market, especially when you are a leader in your market, which is our case, this is where you can do best. Now we have to take things as they are and say, ok, we don’t have a local market. Our domestic market is frozen, so let us try to build on what we have to grow our operations.
It’s important to remember that people still have money, I mean, there is a lot of cash in the hands of the Lebanese, and they are looking for investment opportunities. So our role is to try to find, to source, to study, to evaluate, to do due diligence on opportunities, and if they don’t exist in Lebanon, we’ll go and get them outside Lebanon.

December 18, 2013 0 comments

Banking & Finance

‘2014 will be the toughest yet for banks’

by Executive Editors December 18, 2013

written by Executive Editors

François Bassil is the chairman and general manager of Byblos Bank and head of the Association of Banks in Lebanon. Bassil sits down with Executive to talk about the bank’s performance in dire economic times and the bank’s strategy for next year.

How do you gauge the performance of the bank in 2013?

In 2013, it wasn’t bad. It was an acceptable year up until now, at least up until last month [October]. We made a [positive step with] the bank’s balance sheet up 8 percent, and deposits increased 7 percent the first nine months of the year. There was a small decrease of profits of 6 percent. We took a lot of provisions because of the situation in Syria. In general, all Lebanese banks worked hard this year but their profits were stagnant. And credits to the private sector increased by 5 percent.

Next year will be difficult because unfortunately there is the security problem in Lebanon, there is the political problem, there is the rift within the political class, which is not able to agree to form a government. The administration is crumbling…banks are not on an isolated island. They will be affected by the economic sector which is on the brink of…well up until now it hasn’t collapsed. There are just difficulties in certain sectors, in tourism which has been affected the most. Up until now banks are not calling upon their dues, neither from the hotels nor the restaurants. They are instead rescheduling debts. This can last one year, two years, but not any longer.

What strategy do you have for 2014 in such an environment?

There is a new development now with the accord between Iran and the international community. That will likely have a positive effect on the whole region. Will it have a direct and immediate impact on Lebanon? That’s a question mark, it all depends. If it has a direct effect and leads to the formation of a new effective government inspired by the Baabda declaration, I think it will be a positive step for the country. Otherwise, we are in the course of establishing the budget and perspectives of the three next years. In any case we have already taken measures to activate our activities abroad.

Of course if Syria’s health improves, we have a lot to do in Syria and it will improve the situation in Lebanon. Everything depends on what is going to happen in Syria. These improvements do not enter our outlook for next year’s budget, for our plan in 2014. Instead we continue to take provisions, and [know we will]stagnate in Syria. We are managing a crisis in Syria.

We are developing our activities in Iraq. There are ways to develop despite certain precarious regions like Baghdad. In Baghdad we don’t have a lot of activity. We have a presence there; we have to be there. We were one of the first banks there. And we have operations in Basra and Erbil that are working well. In 2014 we are going to open in another city in the region of Kurdistan. In Iraq, I am optimistic that we are going to double our numbers.

In [the Democratic Republic of the] Congo (DRC), we bought a bank that belonged to Lebanese. They kept 33 percent, and we bought 66 percent. It is beginning to be profitable [after] three years. The first year we had some losses, but the next year we had small profits, this year was good. And next year I think it will be much better because we have developed relationships with local and foreign companies established in the DRC.

And we are becoming more and more active in Africa, especially in the Congo. We have a team that travels in Africa, looking for business, and we are going to count on our foreign relations for 2014. Of course, if things budge in Lebanon for the better, we are here.
Besides that, the problem for Lebanon is whether the state can continue to pay its personnel.

Is this a real danger?

It’s a real danger because banks do not want to continue to finance the deficit of the state. If you have a client that is gradually going out, and taking no measures to improve his situation, to continue to finance him, to help him, without any effort on his part…he is a big client to the banks. He is continuing to squander the money that he is receiving, and making no effort. Besides this, his revenues are diminishing because his business is diminishing. In the business community, there is a decrease of productive activities, of the taxes paid by individuals, of the taxes paid by businesses. Next year, they will decrease much more.

December 18, 2013 0 comments

Banking & Finance

Hadi Naffi — Q&A

by Executive Editors December 18, 2013

written by Executive Editors

Hadi Naffi is the executive general manager of Banque Misr Liban (BML). Naffi sits with Executive to talk about strategies for a small bank to remain competitive in the Lebanese market, and the impact of turmoil in Egypt.

Tell us about the performance of the bank in 2013.

Our deposits increased by over 12 percent in the first 10 months of the year. Our advances to the private sector, the credits to the clientele increased 16-17 percent. The situation is healthy, the situation is good for now. We are making profits but we are not making as big profits as we could have expected in a flourishing economic situation, that’s all. The times are tough, we are fighting, we are working hard, but our numbers are good. We have witnessed a serious development of our bank.

In Lebanon there are five large banks that alone dominate 60-65 percent of the market. When you think that in total there are 49 banks in Lebanon, of which 10 control up to 85 percent of the market, the others have to fight for the remaining 15 percent of the market.
When we arrived [on the scene] in 1929 BML did not even represent 0.5 percent of the market. Today, despite its growth, we only represent around 1.1 percent of the market. That’s nothing.

Have the developments in Egypt had a negative impact on your bank?

None. None because it is Egypt that invests in Lebanon, we don’t invest anything in Egypt. We are completely autonomous, and the flow of investments [means it] is the Banque Misr in Egypt that invests in the capital of Banque Misr Liban. The BML doesn’t invest anything in Egypt, doesn’t give credits to Egypt.

What were your largest investments in 2013?

We have made many investments that are not apparent, we have invested in technology, in the sense that we are updating our IT platform.

We also invested in the workflow of operations within the bank to ensure a higher quality of service to the clientele.

Today we are in very tough competition between banks. The only thing — the only value added thing — that one bank can have over another is to offer a more sophisticated service which responds better to the needs of the clients. The more sophisticated it is the better equipped we are to participate in an active competition.

Small banks, when they are dynamic — such as the Credit Bank led by Tarek Khalife — the reason they are dynamic is because they want to attract capital which will allow them to take a bigger share of the market. To what extent does BML have this option?

Dynamic banks, such as Tarek Khalife’s…they see big. They have reason to see big. They tell themselves, ‘by staying dynamic I will be able to show that [others] have an interest in joining me.’ This is normal. The only difference between Tarek Khalife and BML is the following: Over there it’s under the control of the family of Tarek. Here it’s under the control of an Egyptian financial institution. The decisions within Tarek’s bank will be made more easily.

So would the idea of augmenting capital and having a more aggressive strategy work?

It exists, but I will explain one thing. When I arrived here at the end of 2007, the capital was LL27 billion — a little less than $20 million. In 2009, I asked for an increase in capital. We brought it to LL100 billion. Today, we don’t [increase capital] because we don’t need it. We know that the Basel II and Basel III calls for capital adequacy ratio of liquidity coverage rate and all of that and we have completely conformed. Certainly we will need to increase the capital when there is an increase in activity, but this will come with time.

Today the Banque Misr in Egypt is subject to compliance with regulators there. To what extent, on a regulatory level, do you have to accommodate?

Today, we are living in an environment of globalization, a world of globalization. All regulators, worldwide, in the emerging countries and in the developing countries, are referring to the recommendations of Basel committees. Basel II and Basel III have [put forward] many recommendations, some very complicated. But in all cases, all regulators are applying them, though in different ways. But at the end of the day it’s the same regulation everywhere. This problem is not raised [for our bank] at any time because actually [we all follow] the same regulations. It’s all based on the Basel committee.

December 18, 2013 0 comments

Society

Dressing down

by Nabila Rahhal December 18, 2013

written by Nabila Rahhal

It was a common sight this year to see sales assistants lounging on the doorframes of their trendy boutiques in Beirut, sleepily waiting for customers to walk in. Meanwhile, the public was assaulted by a barrage of text messages urging them to benefit from the latest sales, discounts, and ‘unbeatable’ offers. This was a hard year for the retail sector in Lebanon.

Retail’s issues are the same as those of other sectors: a lack of wealthy tourists hunting for the latest fashions, coupled with lowered local purchasing power which has caused many Lebanese to downgrade their tastes or skip buying all together, save for necessities.

Figures from Global Blue Lebanon of purchases by tourists who reclaimed their value added tax for the first nine months of 2013 as compared to the same period in 2012, show a decrease in spending across almost all nationalities of tourists, with most significant drops coming from the Gulf Cooperation Council countries (GCC).

Renata Zeidan, owner of Santiago Boutique, a multi-brand upscale boutique with branches in Ashrafieh, downtown Beirut and Kaslik, says her business has dropped 15 to 20 percent, mainly due to the decline in tourist numbers, especially the wealthy Syrians who used to come to Lebanon for the weekends and Arab and Turkish nationals.

Nadim Chammas, CEO of Menawear, distributor of Slowear in the Middle East and North Africa region, says that the initial plan was for the the Slowear flagship store in Beirut to act as a model they could present to others in the region. “I had many potential customers and clients who were supposed to fly in and see the store in Beirut but most of them cancelled their trip [due to the incidents we had last year],” says Chammas.

MID-MARKET SUFFERING

Although Hamra Shopping and Trading Company (HSTC) expanded significantly this year, opening four new stores in Lebanon and two in Baghdad, its chief executive officer Rami Rayess says they were not immune to the effects of the current unstable political situation and they had a challenging 11 months, though they are still waiting for the increased activity the holiday season will bring to formally assess the year.

With purchasing power on the decline, and the internal situation showing no signs of improving, it was no wonder that Lebanese chose to spend less on fashion and luxury items this year. “Even Lebanese who have money are spending less because psychologically they are not in the mood to spend and are not going out as much,” says Zeidan.

Luxury goods in Lebanon, as is often the way, did not appear to feel the sting of the declining economic situation as deeply, and it’s still possible to hear, for example, of the latest $35,000 Piaget watch being sold to a local a few days after the model arrived in Lebanon, and of people spending thousands of dollars on a bottle of cognac. Executive’s special report on luxury goods in August 2013 concluded that the sector is performing relatively well.

Instead, it is the mid-market that is suffering and Zeidan feels that this is a global problem. She describes how, when she was at Milan Fashion Week this year, it was only the luxury brand stores, such as Hermès and Chanel, and the mass market retailers that were busy while stores targeting the mid-market were empty.

In Lebanon the challenge is felt more acutely, due to the added difficulties of local instability. This has caused retailers such as Zeidan to rethink their strategy and opt for less expensive brands without sacrificing quality. “Fashion has changed and the mid-market clients’ lifestyles have changed to the cheaper products worldwide and we have to keep up,” says Zeidan.

Still, although Lebanese mid-market shoppers may be opting for lower-priced retailers for everyday wear, they still frequent the mid-market stores for special items. Sales assistants at the downtown boutiques say they had increased sales during prom season and in the summer, Lebanon’s wedding season.

Looking back at 2013, Slowear’s first year of operations in Beirut, Chammas says, “The response was more than we expected from the Lebanese customers and I thought it would take more time to achieve this level of success with them. Of course we suffered from the fact that there were practically no Arab tourists this year and this part of the business on which we were also relying did not happen, but the rest was good.”

Lebanon saw the longest sales season this year with almost 52 weeks of discounted items, according to Nicholas Chammas, head of the Beirut Traders Association. The reason behind this was to clear inventories and make room for the new collection of season friendly items, though some items were sold at a loss, according to Chammas. A quick glance at shops during that period would show that, although many browsed the shops, few came out with bags in hand.

Considering the expenses retailers have to pay, some items cannot be sold at lower prices while still being viable. “This is why our clothes have to be expensive, considering what we spend to get them into the country, the rent prices we have to pay, the electricity bills and employee wages. The consumer cannot afford this but we cannot afford to have it cheaper as well,” says Zeidan.

PAYING THE RENT

Beirut is the 37th most expensive country for retail rent in the world, according to a survey by property consultants Cushman & Wakefield with locations such as downtown, ABC Ashrafieh and Hamra popping up in the list of the most expensive retail spaces in the Arab world.

“Prices in downtown are very expensive and are the same as those in New York which has a much higher volume of shoppers than Beirut. This is really too much and one wonders where we are heading,” says Zeidan. She adds that this is the reason one sees many empty shops in Central Beirut and although landowners are working to reduce the rent fees, they would still be considered expensive.

The Beirut Traders Association, along with BLOM Bank, have issued a credit card that will encourage shopping in small and medium enterprises with reward points and hope this initiative will inject some much needed life into the sector.

Retailers Executive spoke to are going ahead with their expansion plans, with Slowear expanding further into the Middle East and launching two points of sale in Dubai, and a new point of sale in Qatar and Kuwait and HSTC planning to pursue expansions in all aspects of their business both in Lebanon and in the countries where they are already in operation.

“On the Lebanese side, I am optimistic,” Chammas says. “Lebanon can always offer you a surprise. When everything is doing well, it unfortunately comes up with a surprise you didn’t expect and on the other side when things are bad you get a good surprise.”

December 18, 2013 0 comments

Economics & Policy

Back in the black

by Joe Dyke December 18, 2013

written by Joe Dyke

There were very few positives for the Lebanese economy in 2013, but the industrial sector was perhaps one of them. If 2011 and 2012 were years of crisis — with the Syrian civil war destroying trade routes and wreaking havoc with business plans — 2013 was a year of adaption and stabilization.

In the first eight months of 2013, industrial exports totaled $2.2 billion, an increase of 12.3 percent from $1.9 billion in the same period in 2012, according to the Ministry of Industry. Industrial imports reached $217 million in the same time period, up 7.7 percent from $201.4 million in 2012. The government does not collect accurate information for total industrial output but Neemat Frem, head of the Association of Lebanese Industrialists (ALI), told Executive that growth was “certainly double digit” in 2013. These figures were, admittedly, starting from a low point after terrible years in 2011 and 2012, but growth is growth and there was precious little of it in the Lebanese economy this year.

In fact, industry was one of the key reasons why Lebanon’s economy grew at all in 2013. The meager 1.5 percent growth in gross domestic product (GDP) achieved nationally was — according to World Bank figures — mostly from industry. While services — the traditional driver of the economy — and agriculture made up less than 0.5 percent of GDP growth, industry alone was responsible for over 1 percent.

This is somewhat of an anomaly, mostly due to the rapid decline in services, which in the boom years of 2008 and 2009 made up over 7 percent of GDP growth. Industry’s input to GDP growth has never been more than nearly 3 percent in 2010, and is unlikely to be the major driver if and when the economy does start to grow again. But the positive numbers do point to a strong level of resilience in the sector.

RELATIVE RESILIENCE

Eric Le Borgne, lead economist at the World Bank’s Lebanon branch, agrees that “in relative terms” industry was a success in 2013. “The big losses have come from the services sector; industry has remained a small part but relatively resilient. It has been resilient even though some sectors have been impacted by the trade disruptions through Syria and the Gulf/GCC customers going through Syria. But overall what we see is relative resilience.”

Confidence is gradually returning as well. Banque du Liban’s Balance of Opinions quarterly business survey — a key measure of how industrialists perceive their positions — was at -5 in the second quarter of 2013. While this was clearly negative (a positive score means that more industrialists forecast growth than decline), it was up from -11 in the same quarter 2012, and -8 in the first quarter this year. There was, however, clear geographical divides with those in the North (-30) and Beirut and Mount Lebanon (-7) negative, while those in the Bekaa (+5) and the South (+34) were positive about the coming months.

In terms of policy, it is hardly a surprise that little if anything was done by the government to support industry in 2013. The industrial sector has long complained of marginalization — the industry ministry is one of the worst backed financially, with an annual budget of little more than $5 million — and the fall of the government in March made policy-making impossible. Caretaker Industry Minister Vrej Sabounjian, however, denies that his time in office has been a failure. “[We] have achieved a lot of things, but of course there are some things we could not do yet — especially because in the last 6 or 7 months we have not had all the powers of execution,” he said.

The biggest disappointment has perhaps been the failure to implement the tax reduction for Lebanese exports, which would see the rate fall from 15 percent to 7.5 percent. The deal was first backed by the government of Omar Karami in 2005 but has yet to be implemented. A year ago Sabounjian told this magazine it would be done in 2013, but he now believes the collapse of the government in March and the subsequent failure to reach a unity deal has made it impossible in the short term. “It is in the parliament. It has been over seven or eight months in the parliament but I hope one day they meet again and finalize this law,” he said. Industrialists have grown weary of political promises and none that Executive spoke to believed the decision will ever be implemented.

The fall of the government has also led to a moratorium on all plans to develop other parts of the framework for Lebanese industrialists. Lebanon’s bid to accede to the World Trade Organization (WTO), which officially began in 1999, is now all but consigned to history. In February USAID, the American development agency, indicated as much when they cut their funding aimed at supportting the bid. “We had done everything we could and it was up to the government of Lebanon to take it to the next level,” Heath Cosgrove, director of economic growth, water and environment of USAID said, explaining the decision. The key competition law which needs to be passed for WTO status to be granted has been sitting on parliament’s to-do list for a while, but the economic interests of the country’s oligopolies make sure it never makes it to the top. Improvements to intellectual property laws, research and development schemes and tax incentives also went unmade in 2013.

But the absence of government support may be helping unite the industrial sector. ALI’s Frem told Executive that industrialists have given up hope of government leadership but are looking to improve support within the sector. Chief among their proposals is an industrial park (see box above), which, if it is formed, will be run without any government support.

MEASURING GROWTH

Similarly ALI is seeking to establish an industry index to reliably measure industrial development. Among the key indices to be included will be job creation, investments, proper industrial output statistics and a yearly overview of change in costs. In a country where reliable data on almost any sector is lacking, this initiative is to be welcomed.
More fundamentally, however, Frem makes the case that the shockproof nature of the industrial sector means that there should be more focus on orienting policy towards supporting it. “We are living in a country that is built on many fault lines, so we shouldn’t build an economy that is not resilient,” he says, referring to the service and tourism-oriented focus of the economy. “In 1974, 25 percent of Lebanon’s GDP was from industry. Now it is 10 percent but it should be around 20.”

December 18, 2013 0 comments

Comment

Iran’s power dynamics – the old and the new

by Gareth Smith December 17, 2013

written by Gareth Smith

As 2013 opened, Iran’s Ayatollah Ali Khamenei was struggling to manage an unpredictable and often truculent president in Mahmoud Ahmadinejad. At the end of 2013, Iran’s supreme leader oversees a president trying to improve relations with the United States, Europe and the Saudis and to instill tighter fiscal discipline. That culminated in the November deal in Geneva to reduce global sanctions on Iran in exchange for limits to its nuclear program.
The election of Hassan Rouhani upset those ‘experts’ who see Khamenei as micro-managing most aspects of Iranian politics, security and economy. In reality, Khamenei rarely leads from the front but prefers to wait for consensus — or stalemate, or inertia — to emerge from the interplay of factions scattered around parliament, Qom, the military, intelligence, the charitable trusts and the provinces.

Khamenei has been dubbed “Bismarck with a turban” by Ray Takeyh, the former State Department official now at the Council on Foreign Relations, but he is surely less decisive than the Prussian whose limited wars redrew the map of central Europe. Caution rather than calculated risk-taking has helped Khamenei become the longest serving leader in the Middle East.

There has been wide agreement in Iran on the desirability of an international agreement over the nuclear program. This results in part from the halving of Iran’s oil exports by sanctions introduced in 2012 by the United States and European Union and also from the long-term stagnation of the gas sector (Iran’s net exports in 2012 were only 4.4 billion cubic meters from output of 160.5 billion, a poor return from the world’s largest reserves of 33.6 trillion). Ayatollah Ruhollah Khomeini, founding father of the Islamic Republic, famously said the Revolution was not about the price of watermelons, but Khomeini was practical when necessary, especially in his 1988 decision to accept peace with Iraq.

The November agreement with the P5+1 — the permanent members of the UN security council plus Germany — is a significant step. But even this will not automatically restore the formal bilateral relations with the United States broken since the 1979 Islamic Revolution. Neither will it suddenly remove the geopolitical rivalry between Iran and Saudi Arabia.

But the new ‘balance’ could well suit Khamenei. It leaves opponents of talking to the ‘Great Satan’ with their ideology to cling to: no doubt Hussein Shariatmadari will continue his stinging editorials in Kayhan newspaper exposing the follies of trusting the US. Meanwhile, Iran is expected to receive up to $7 billion in relief from economic sanctions under the deal, desperately needed to stimulate economic growth, projected at just 1.1 percent for 2014 by the London-based Economist Intelligence Unit.

Hence Khamenei’s judicious tweets, which on the one hand have warned of US duplicity while on the other assured fellow Iranians that the nuclear negotiation team are not “compromisers” (over Iran’s ‘rights’ and ‘red lines’) but rather “our own children and the children of the revolution.”

Syria is more of a conundrum. Arguably, stalemate in the war might also look to Ayatollah Khamenei like ‘balance’. From Tehran’s perspective, Bashar al-Assad seems better placed on the eve of 2014 than 12 months earlier. In August 2013, former president Akbar Hashemi Rafsanjani stirred a hornet’s nest in Tehran by accusing the Syrian regime of using chemical weapons, promoting a debate as to whether Assad was expendable. Now the pendulum has swung back. If the regime’s offensive in Qalamoun opens an effective corridor to Aleppo, and if the opposition continues to fragment, then Tehran may well return to collective expressions of long-term friendship.

But Syria is messy. Those fighting the war are more and more embittered. Although relatively contained, the conflict is percolating into Lebanon, Turkey and Iraq. It has reinforced the Saud family’s sense of insecurity, and strengthened the forces of militant Sunnism regionally. Iran’s own Sunni minorities, especially the Kurds and Baluchis, are restless.

Khamenei never shared the triumphal Shi’ism asserted by Ahmadinejad. Pragmatists in Tehran have never lost sight of the math: Shia are just 15 percent of Muslims worldwide. And in military terms, some estimates put GCC defense spending at 10 times Iran’s, a startling figure even ignoring Israel’s arsenal and the US presence including the 5th Fleet based in Bahrain. Khamenei would for sure know the old Persian proverb: “He who wants the rose should respect the thorn.”

Gareth Smyth is the former chief Iran correspondent of the Financial Times

December 17, 2013 0 comments

Economics & Policy

‘We couldn’t do anything in 2013’

by Joe Dyke December 17, 2013

written by Joe Dyke

By his own admission, caretaker Minister of Economy and Trade Nicolas Nahas has had a frustrating year — as a member of a resigned government, unable to implement policy, but still blamed for the stagnating economy. Executive sat down with him to discuss the impact of the conflict in Syria and the formation of a new government in Lebanon.

What stage is the Lebanese Syrian Conflict Trust Fund [to help stabilize the economy] at and how much will you be seeking?

It is an idea. It was developed during the visit of President [Michel] Sleiman to New York and has been taken on with the World Bank in Washington. We have organized several meetings where we have set [out] the social and economic impact assessment.

We have given [donor countries] the priority of the government, we have given them the concept note of the trust fund, we have given them the way to go forward. It is up to the countries to figure out how they participate.

There have been different kinds of responses — countries that have already pledged to the fund, others have said they will study it, others prefer bilateral [aid].

Do you believe that without a new government potential funders will not give?

We are not there yet. We are in the process of making the idea workable. We are setting the priorities, we are taking advantage of the time in front of us before the donor meeting where everything should be ready — including a new government.

Could formal refugee camps take some of the strain off the Lebanese government, as the bill would be picked up by the international community?

Being in camps or not being in camps wouldn’t change that. Whenever they are registered as a refugee they are taken care of by international organizations.

But they are using the already crowded public school sectors and public hospitals, rather than specific facilities paid for by the international community…

Whenever we can help them, we help them. It is not a matter of being in camps to cater for health and education and everything. They are registered as refugees and the United Nations organizations have the means to give them the services.

Would you agree 2013 was a lost year in terms of policy making?

2013 was a year where there was no government. So by definition no government — no policy. There is no government.

For yourself in 2013, would you say you had any successes — things you achieved despite the collapse of the government?

Again, it was a resigned government. How could we see any?

The Finance Minister Mohammad Safadi has said that he believes there could be 0 percent growth in 2014. Is that a view you share?

I don’t know from where he has these assumptions… The figure in 2013 and the figure in 2012 don’t show we will have 0. But let us see, it is early to speak about 2014.

What should be the first priorities of the incoming minister of economy, whoever he or she is?

Stability, stability, stability. Whenever there is stability the private sector is capable of generating the kind of activity which is needed to have growth again.

There are a lot of things that are totally possible — all it needs is a political solution on when and how to start this huge set of reforms which should be implemented in every aspect of Lebanon.

There is an incredible amount of negativity about 2014 among the Lebanese business community. What would you say to those who are worried they might lose their businesses?

They are right to be conservative, to be alarmed, but the figures do not show that we are in recession. We are in a slow motion growth; we are not in the peak time, we are in the down time. The economy is about peak and downtime.

The most important [thing] is to consolidate our activity, to reduce our costs and to wait until the external factors are there to allow us to go forward with the economy — as happened in 2006, as has happened every time since 1975.

This year we have seen the highest level of industrial machine [imports], we still have the creation of new companies, the central bank has made available new loans. There are so many initiatives going on, and there is activity. But there is no other way — we consolidate, we reduce our costs and we wait until we go for a new launch.

December 17, 2013 0 comments

Economics & Policy

‘We have tried to attract Syrian industrialists’

by Joe Dyke December 17, 2013

written by Joe Dyke

Vrej Sabounjian is perhaps the most positive person in Lebanon. Despite worsening security conditions, a refugee influx and a stagnant economy the country’s caretaker minister of industry is convinced that there are plenty of opportunities — companies just need to find them. Executive met with him to discuss his record in 2013.

When this government was formed, you promised to be the most pro-industry government in Lebanon’s history. Have you failed?

I have succeeded. The government was not saying that we were going to be 100 percent pro-industry. I think governments should have balanced policies with all the sectors — industry, services, tourism, etc.

As far as industrial policy, I think we have done well and I would thank all my [ministerial] colleagues and the prime minister and president. We can say that after two and a half years the Lebanese industrialist has achieved a lot of things, but of course there are some things we could not do yet — especially because in the last six or seven months we have not had all the powers of execution. So that is a minus, not a plus. But we have done a lot of things.

What specific successes are you proud of?

I don’t want to specify what I am proud of and what I am not proud of. For me as long as it is a service for the Lebanese, it is my priority. Some services help big industries, some help smaller industries — neither is necessarily more important for me.

Secondly I don’t like to brag and say, “I did this,” and “I did that.” There is a very long list of what we did — maybe one day we will publish it. But I don’t want to brag while I am in the post that “this is what I did.”

You still have not been able to implement the cut in export VAT from 15 to 7.5 percent?

It has been in the parliament for seven or eight months. I hope one day they meet again and finalize this law. But other than that there are many, many things we have done — for example the [establishment of the National] Wine Institute and the obligation of manufacturers to have three kinds of insurance. This allows safety for the employees and for all the neighbors.

What about plans to encourage the United Nations to only buy Lebanese goods when supporting refugees?

We are working on that plan with the UN. We have been meeting with them to urge them to spend their money in our country. We have opened our doors to our Syrian neighbors who are temporarily here. I want them [donors] to spend their money here by first giving priority to whatever we manufacture in this country and, secondly, if it is not available in this country, the Lebanese merchants can import for them. But it has to go through Lebanese businesspeople.

Have the UN accepted this yet?

This policy is not implemented. There is no policy.

Could Lebanese industrialists cope with the scale of the demands?

Of course. We are capable and we are willing to be capable. Once we finalize the plan we will have an office so that small companies can go and register so that when there is a tender they can participate and we can support them with the paper work. We are able to give [the UN] whatever they need — supplies, food, water, clothing. Whatever they need.

You would be in favor of making this legal so that they would only be able to get resources from Lebanese companies?

Not only in favor. I am convinced this is our right. We have one and a half million refugees in our country and I hope all the donor countries think this way.

The industrial zones were in the government’s mission statement. They are no longer realistic and private sector leaders are planning to establish them without government support.

This industrial zone is an idea and I don’t say I don’t like it, it is fine…

…but you are not fully in favor of it?

I am in favor but this should not be a reason for us to say, “Well we don’t have an industrial zone we are not doing good business.” I want to say, “If you want to do industry, do it wherever you want and I am with you. Wherever you have a piece of property, do it, invest in it and the minister will help you.”

So you will support a privately run industrial zone?

If they have land they want to [develop] I am willing to help them as well. But I am not going to ask the people that have their factories somewhere for the last twenty years to close their places and go there — this is not going to happen. I don’t favor this at all.

That is not what they are arguing for, they are arguing for government support for these zones similar to tax breaks you see in other countries…

I don’t think the Lebanese people need more tax breaks. We are one of the lowest countries, we are paying 15 percent tax — that is all. The lowest advanced capitalist countries are 35 percent, France is 75 percent [at the top rate of tax]. We are 15 percent and they are still saying they don’t want to be taxed? This is one of the lowest taxes. Let them think about how we can produce better, faster and in alternative ways.

Is it fair to say accession to the World Trade Organization is not realistically going to happen in 2014?

I don’t know about that. Maybe we should ask about the World Trade Organization — I am with open markets and equal opportunities for all. But the same rules apply for a country with a population of 90 million and a country of 4 million? If we are a small country we are always under regulation from larger countries. I disapprove of that. I think there should be exemptions. The WTO is a good thing but I think there should be some precautions and protections [based on] understanding the real situation of every country.

Why has Lebanon not been able to attract more Syrian industrialists fleeing their country?

I don’t think we did not attract. We have said many times we are ready to help if anybody wants to invest. It is a matter of choice where they go — it doesn’t mean we are against their investments. On the contrary we are with their investments. But if they don’t want, they are welcome. Many industrialists visited me, I showed them ways they can invest and they were very happy. But it is their choice — we cannot say, “No, you have to invest here.”

Were you disappointed not to attract more?

Not at all. Why should we be disappointed?

Industrialists complain that the minister of agriculture is able to attract more support for his policies than you are as he comes from Hezbollah. Have you had the full backing of the rest of the government?

As I said, I thank all the ministers. Whenever I need it I have the support. If not 100 percent — that is not possible with any minister. Not every minister can get the support for everything he wants, but mostly whatever I needed, I got the support. It had nothing to do with my background or who was supporting me.

How confident are you for Lebanese industry in 2014?

I would say that there will be great opportunities in Lebanon in 2014. There will be a lot of things for sale. Some businesses will close down, some will open up — but there will be opportunities. I think they should look at opportunities in 2014 and beyond.

December 17, 2013 0 comments

The Buzz

Business briefing: 17 Dec 2013

by Executive Staff December 17, 2013

written by Executive Staff

Economics and Policy

The United Nations appealed for a record $6.5bn for Syria and its neighbours on Monday to help 16 million people, many of them hungry or homeless victims of a conflict that has lasted 33 months with no end in sight.

Out of spirits

by Nabila Rahhal December 16, 2013

written by Nabila Rahhal

Given Lebanon’s reputation as the liberal party capital of the Middle East, it is no wonder that alcohol consumption in the country increased by 6.3 percent from 2007 to 2012 and that around 942,000 liters of alcohol were consumed last year, according to figures from the International Wine and Spirits Research (IWSR).

Yet even this lucrative business is starting to feel the heat this year, and some distributors Executive spoke to are finding it hard to maintain their positivity in the face of dwindling tourist numbers and a tightening local market. Since spirits are not basic needs, they are among the first products people spend less on during difficult times.

Although the last three months of the year, and all the festivities associated with them, account for a significant chunk of annual spirits sales, distributors are nonetheless expecting a notable decrease in consumption from 2012.

“We are not having a very good year, meaning I doubt we are going to see any growth. Still, despite the difficult times we are being more aggressive and grabbing market share though this costs us more money and is impacting our net revenues,” says Naji Hmouda, business manager at Neo Comet, the spirits distribution company which is part of Fattal Holding and distributes Grey Goose and Martini among others. These tactics led to a 15 percent rise in their on-trade sales (spirits sold in hospitality venues), says Hmouda. However, the overall drop in tourism is having its own impact on this kind of distribution.

One of the early signs of trouble in the spirits industry, often described as having a high loyalty factor, is when consumers downgrade from their favorite brand to a cheaper one, something spirit distributors in Lebanon have noticed. “The premium or the mid-level range, usually the most consumed, is where we are having a tough time. This shift to the slightly lower cost ranges started last year and is worsening this year,” says Hmouda, adding that conversely in a typical “the rich get richer scenario” their $3,000 per bottle Louis XIII cognac is having a record year.

Free measures

Other overall challenges faced by the industry this year include the parallel economy in which brands are smuggled in tax free and sold at prices that undercut distributors who hold exclusivity.

Distribution company Nexti, owned by Fawaz Holding, was only able to maintain its on-trade numbers in 2013 because of the many bars frequented by Lebanese that were “mushrooming” in Mar Mkhayel neighborhood, Uruguay Street, and Jounieh.

The anti-smoking law which took effect in late 2012 also had a negative impact on the on-trade sector during the first quarter of 2013, as some smokers preferred to take their drinks at home where they could light a cigarette instead of having to smoke out in the cold. Ramzi Nohra, brand manager at Etablissements Antoine Massoud also adds that the closure of many food and beverage venues this year added to the drop in figures for the on-trade division.

This general decline in on-trade sales was offset somewhat by a shift toward off-trade sales as more consumers bought their liquor from wholesalers such as supermarkets or neighborhood grocery stores. Nohra explains this shift by saying that 2013 saw new chains enter the market — notably Carrefour — as well as expansions by the established supermarket chains into either more branches or different retail concepts.

Within the off-trade sector itself there was a shift in sales from the upper trade section of hypermarkets to the lower trade section of neighborhood grocery stores, according to distributors Executive spoke to. Carlo Vincenti, owner of G. Vincenti & Sons, believes this shift is due to people avoiding impulse buying and promotions common in hypermarkets. Hmouda points out that neighborhood grocery stores usually extend a credit line to their regular customers who can therefore pay for their shopping at the end of the month, a much needed perk that is not available in supermarkets where average purchases can reach up to $100 or more.

New contenders

Whiskey remains the most consumed spirit in Lebanon, representing more than 50 percent of the market. Since a lot of whiskey consumption happens at home, it is a major fuel for the off-trade sector, says Vincenti.

“A long time ago, before the civil war, there was a high tax on whiskey to encourage consumption of the locally made arak. When this was dropped, whiskey became affordable and people were eager to try it,” explains Nohra.

“Scottish whisky still dominates the market in terms of volume but there is heightened demand for both premium whiskeys — as mature drinkers develop an appreciation for quality — and for Irish whiskey [especially] among the younger generation who are embracing its smooth taste,” says Tarek Fawaz, CEO of Fawaz Holding.

Vodka is the fastest growing spirit in Lebanon and its consumption has doubled in the past seven years, though it still only accounts for half of whiskey’s numbers, according to the distributors Executive spoke to.

Early in its rise, says Vincenti, vodka growth was fueled by the development of the hospitality sector in the country and was adopted by the younger generation of partygoers who appreciated its neutrality and mixability.

“Vodka was perceived as an ingredient and did not have an independent image until recently when it developed the premium and super premium category and better production process in general. Today, vodka has evolved and is considered a pure spirit which can be consumed straight on ice,” says Vincenti giving the example of Chopin Vodka, which they distribute.

Nohra believes vodka’s growth in Lebanon is part of a global trend and says standard or regular vodka make up 70 percent of the market with the premium and super premium brands having a smaller share due to the low purchasing power of the Lebanese.

The ready to drink category (RTDs) is a surprisingly strong emerging contender in the spirits industry mainly due to its low price and its practicality factor — with spirit and mixer pre-mixed in the can. RTDs are popular among consumers between the ages of 18 and 25.

Nayef Kassatly, whose company Kassatly Chtaura produces the popular RTD Buzz, says quality and strong communication are important factors in the RTD business. “Buzz has been face-lifted four times so far because it is a trendy product in a category that is very new and fickle and so might have a short life span; it grew very rapidly but it might drop as fast as it grew,” he says.

The overall outlook of Lebanon’s spirits distributors for 2014 is one of survival in tough times. “In Lebanon we learn to survive despite everything; we have to go on no matter what as it’s been like this for more than 25 years,” says Vincenti.

“I don’t see any growth in this industry next year. The market is saturated and there is a lot of competition among the distributors for the narrow local market we have. If we can remain stable, that is positive enough to survive until better times,” concludes Fawaz.

December 16, 2013 0 comments