Executive Magazine

‘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.

Throw me a loan

by Livia Murray December 16, 2013

written by Livia Murray

The steady decrease in Kafalat loans, which dropped by 17.2 percent in the first 10 months of the year compared to the same period of time in 2012 is likely to increase even further by the end of year due to the instable security situation in Lebanon, according to Kafalat chairman Dr. Khater Abi Habib. This comes off the back of a 16.4 percent drop between 2011 and 2012.

However, the decrease in Kafalat loans is one of the country’s few maladies that cannot be dismissed as just another instance of Lebanon’s dire economic circumstances. While most sectors have experienced a slight or significant decrease in extended loans, many have remained constant, while the high technology sector actually saw a fair increase.

Kafalat has presented an extraordinary resource for entrepreneurs since its inception in 1999 at the initiative of the government, the Association of Banks, the central bank, and the National Institute for the Guarantee of Deposits. Through Kafalat’s program, entrepreneurs of small- and medium-enterprises including startups can take out a collateral-free loan from commercial banks based on the feasibility of their business plans. The program has created an incentive for banks to lend by guaranteeing 90 percent of the bank’s loan for amounts of up to $200,000 and has broadened the sphere of who can open a business. Many entrepreneurs in Executive’s top 20 Lebanese entrepreneurs have been beneficiaries of the scheme.

Sectoral discrepancies

The economic downturn has not hit all sectors to the same extent, tourism reflects the most significant fall from grace. As President of the Association of Hotel Owners Pierre Achkar told Executive in September, “all hotels are partially closed.” News like this may make entrepreneurs in the tourism industry think twice before expanding their businesses, or delving into startup projects.

The tourism sector received 122 loans by the end of October 2013, compared to 166 in the same period in 2012, a 26.5 percent decrease. As the number of tourists travelling to Lebanon has decreased, particularly with the hesitation of lucrative Gulf tourism, banks are understandably tightening their loans to this sector, blocking even the bravest of entrepreneurs adventurous enough to start a business in these turbulent times. Banks have increasingly refrained from offering the Kafalat Plus program — a completely collateral-free loan — to the sector, says Abi Habib, and have favoured the Kafalat Basic program, where they can take up to 50 percent of the value of the loan in collateral.

Closely following tourism’s misfortunes was the industrial sector, with a decrease of 25.7 percent in the number of loans. Remaining comparatively constant however were the agriculture and crafts sectors.

In contrast, the number of loans to the high technology sector actually saw an increase, showing that not all entrepreneurship is hindered by the economic downturn. Though still not making up a great percentage of Kafalat’s loans, the number of loans extended in the technology sector actually increased by 23.5 percent from 13 to 17 projects between October 2012 and October 2013.

Trends and guarantees

Lebanon’s entrepreneurs have been fairly resilient to the various stresses the country has witnessed. “[Economists] wonder why our economic activity in this country hasn’t dropped further,” says Abi Habib. He ventures that Lebanese entrepreneurs being so accustomed to civil instability is a central reason the country has not witnessed a number closer to an 80 percent drop in loans. But as long as hard times continue, he adds, people will be more skeptical of launching or expanding their enterprises.

A similar resilience can be attributed to the banks, who continue to lend. Although banks are not required to share with the program the number of Kafalat loans they refuse, Kafalat has not been made aware from the side of the entrepreneurs of a higher than average number of rejections.

Nonetheless, the banks would more likely be conservative if it were not for Kafalat’s guarantees, particularly when lending to startups, for whom Kafalat’s incentives guarantee 90 percent of the loan, given that only one or two out of 10 are likely to succeed. In fact, Kafalat’s program for startups is operating at a loss, and is subsidized by more profitable programs that handle less risky businesses.

Despite a general decrease in Kafalat loans, the small but growing high-tech sector presents a glimmer of hope for economic growth, however limited, through entrepreneurship.

December 16, 2013 0 comments

Real Estate

Concrete ambition

by Thomas Schellen December 16, 2013

written by Thomas Schellen

Statistically, by almost all indicators available to Executive, activity in the field of real estate development and building construction in Lebanon is in a slump. In the first nine months of 2013, the indicators of property transactions, construction permits, engineering insurance premiums and morale among construction managers concerning their businesses were down compared with the same period in 2012. The only exception is that cement deliveries were up.

Recorded property transactions were lower by 5.2 percent in volume and by 4.5 percent in value: with slightly fewer than 50,000 transactions from the start of the year until September 30, with a total value of $6 billion. Within the overall contraction of deals, the share of property sales to non-Lebanese also exhibited continued weakness, regressing from 1.86 percent in 2012 to 1.81 percent in 2013.

The issuing of construction permits during the first nine months in the lower two thirds of Lebanon receded for the third year in a row, with 7.8 million square meters (sqm) licensed by end of September, a drop of 14 percent, a similar contraction to that witnessed between 2011-2012.

The Order of Engineers in North Lebanon allotted permits totaling 9.7 million sqm for the first nine months of 2013 compared with 10.7 million sqm in the same period in 2012, translating into a narrower contraction of 9.3 percent year-on-year.

Meanwhile, insurance premiums in the engineering industry fell 7 percent to $8.2 million in cumulative revenue for the first three quarters in 2013, according to figures provided to Executive by the Association des Compagnies d’Assurances au Liban (ACAL). In the third quarter of 2013, engineering premiums dropped to about $1.75 million, the lowest quarterly amount since the fourth quarter of 2011.

Development activity shifted in 2013 to outlying areas of the capital and farther into the provinces where land and development costs are more compatible with end buyers’ financial means. The Beirut governorate represented no more than 5 to 6 percent of building permit issuance in the year’s first three quarters.

A slow year has contributed to an atmosphere of pessimism among many industry leaders.
In a second quarter survey conducted by Banque du Liban (BDL) in which enterprise managers were asked to assess the evolution of their businesses, the majority expressed that 2013 had been a year of decline rather than improvement.

Moreover, the survey revealed that managers of enterprises dealing with construction and public works saw the most recent quarter as having reduced activity versus all 11 quarters between Q4 2010 and Q2 2013.

A manageable challenge

Statistics on cement deliveries — which are correlated during the middle and later implementation phases of construction projects — provided an exception to the downtrend.

Cumulative deliveries of cement were up 7.2 percent from 3.4 million tons in the same period in 2012, according to BDL. However, the question remains how much the increase in volume says about the state of the industry. Cement deliveries during the first eight months of any of the past five years have been in a range of plus/minus 6 percent of 3.5 million tons.

While the stats point to a property market recession in Lebanon, the sentiments that developers shared with Executive during the research for the 2013 sector review were not your expressions of the bust phase in a typical boom-and-bust cycle.

Approximately one third of the developers and intermediaries that Executive talked to assessed 2013 as the worst year for their respective companies in years or even since they started doing business in Lebanon. Ramco, one of the most experienced intermediaries, up-market developer Premium Properties and Prime Consult — the property firm best known for its association with Lebanon’s soon-to-be tallest building, Sama Beirut — all expressed such sentiments.

However, while developers overwhelmingly said that the year was tough, they also insisted that it was a challenge that was manageable and not entirely unexpected. Whilst admitting the year in Beirut “was tough for everybody,” Ayad Nasser, chief executive of niche developer Loft Investments, argues that perceptions of a very bad year were shaped by the fact that the sector became accustomed to high growth and returns in the years 2008-2010. “But I can assure you the market is not dead. People are doing some transactions, we are still alive, and we are cool,” Nasser says.

Inquiries by people who called in search of a property were “rare” this year, concedes Mireille Korab, the head of sales and marketing at FFA Real Estate. She qualifies her remark with a note of optimism, however, by adding “but you still have people calling and they are more serious. People are not shopping around, they are serious and they know what they want. If you present them with the opportunity, they will buy.” Ramco director Karim Makaram similarly concedes that while business is down, there are still sales to be made, “even at the upper end of the market, which was the most negatively affected by the downturn.”

Still in the mixer

Many developers who took note of regional changes and their ability to negatively impact Lebanon were prepared for the slump ahead of 2013, choosing not to embark on new projects whilst adjusting market strategies. Loft Investments’ Nasser says he opted against new projects in anticipation of a slower market and Houssam Batal, chief executive of Premium Properties, says that his company put itself into “a position to be successful by off-loading most of our inventory.”

One unforeseen incident that greatly hindered the real estate sector was the collapse of the Mikati government in March 2013 followed by consequent failures to establish a new cabinet.
In the view of Massaad Fares, chief executive of Prime Consult and head of the Real Estate Association of Lebanon (REAL), a lack of confidence was the decisive factor impinging the market. Samer Bissat, senior project manager of the Majd Al Futtaim (MAF) Waterfront City project in Dbayeh, argues that the detrimental impact of the domestic political impasse was more significant than that of crises in countries around Lebanon. “The political scenario affects the mood in the market, the mood of the investors, and it affects the foreigners more than the locals and the expatriates,” explains FFA’s Korab.

While the political class is not everyone’s darling, another part of the administration appears to have a solid fan base in developer circles: the central bank. “The incentives that the Central Bank Governor [Riad Salameh] provided did have a real positive effect and helped the property market not to stagnate despite the deteriorating political and security situation,” says Hassan Tajideen, chief executive officer of developer Tajco.

Central bank intervention could go a long way toward explaining why the dynamics of the Lebanese property market in 2013 were not exhibiting the marks of a bust phase. In focusing much of the 2013 economic stimulus package of $1.46 billion — of which 56 percent was allocated to home finance support — on real estate, the central bank has pursued a policy to make real estate finance easier for families in the lower and middle income brackets. This stimulus policy was the opposite of the monetary tightening by which central banks conventionally respond to boom phases.

Having low-cost access to funding under the 2013 stimulus package, banks could lend money to home buyers at comparatively low rates of interest. The stimulus measure appears to have softened the pressure on the real estate sector which accounts for 13.8 percent of Lebanon’s aggregate economic value, according to figures from the Central Administration for Statistics.

With the support of the stimulus package in 2013, one third of demand — the home buying of first-time owners and young families — was functioning rather normally while two other demand categories — up-graders and Lebanese expatriate and foreign buyers who want to invest — were subdued.

Fares sees the value split in the market as heavily skewed toward the two latter categories. “If the market is $7 billion a year, they probably represent $6 billion,” he says.

“The young generation buys the smallest apartments and the least expensive ones,” he adds.
Buyer’s market

For property buyers who had the cash, the confidence, the speculative bravado, or the absolute need to hunt for a new home in 2013, the market was to their advantage, at least relatively speaking. Newly constructed budget apartments that would have been available for significantly less than $100,000 per unit eight or nine years ago will most likely never again be that affordable. But compared with 2010 or 2011, new units in this market segment were available to Lebanese buyers in the past year at stable or sometimes slightly reduced prices, with financing terms and loan rates that could be called affordable by emerging markets standards.

Buyers who had the means to aim for a medium to high-end property had leverage to negotiate for lower prices. Developers Executive spoke to had different approaches — some insisted they had not and would not agree to bargain — but many readily admitted to having considered offers that were 10 percent or more below their asking prices, depending on the project and its demand experience. If they had the resolve to test the developers’ pain threshold for prices by negotiating aggressively, end buyers could get 15 or sometimes 20 percent discounted on the asking prices, according to comments from various experts.

According to property experts, these discounts may still be found in 2014 but most developers expect the strong buyers’ market to taper out in the course of next year. Makram Zard, chief executive of Zardman, says discounts were stronger in Beirut’s Ashrafieh district than in the Metn region. “I am guessing that these discounts won’t be there anymore in the middle or second half of 2014 as the market will pick up and the developers will be in a stronger position.”

Talking of better days to come, the tapering or durability of discounts will of course chiefly depend on market trends and here developers expressed optimism. REAL’s Fares predicts that in 2014, “the real estate market will start the up cycle. I think by January/February we will hit the real bottom and we will start going up from the beginning of spring. If the political situation is stable and clearer, this will give an added push.”

Sleeping giants

Batal of Premium Projects says that his company hopes for the political situation to clear up but emphasizes that they will be working on new projects in 2014 regardless of political currents. “I have a feeling that we are almost at the end of this tough period,” says Loft Investments’ Nasser. Chahe Yerevanian, chairman and chief executive of Sayfco, also strikes a positive note. “I foresee a general improvement in the market starting in the summer,” he says.

There certainly are enough projects on the drawing board by which developers are seeking to reignite a new profits cycle, and naturally they hope to rouse the market out of its current slumber, the earlier the better. The central bank has already said it will help with another, albeit smaller, stimulus package. On the other hand the meager estimates of the coming year’s real GDP growth — the World Bank is talking 1.5 percent — and the many vagaries of the regional situation serve as a reminder to keep realistic.

On the balance, undertones of caution contextualize any optimism and no one is expecting a jolly ride to profits in 2014. MAF Waterfront’s Bissat, who does not expect to see large changes in the market in 2014 compared with 2013, emphasizes that developers will need to demonstrate staying power and keep their ear to the ground in researching customer demand.

Building the future

Developers will also need to have new ideas, of this FFA’s Korab is sure. “The whole issue about coming up with a successful project is that the markets are changing very fast and we need to be up to speed. To succeed in this market, you need a new type of product; you need a smart product,” she says.

Beyond that, she is sure of one more thing: there is no alternative to having a positive outlook. “We don’t believe in stopping. Lebanese don’t stop and we don’t nag. At this point we are positive and we should always be positive. What should happen? We have been through war, through bombs, through everything and the market in Lebanon proved to be a really solid and mature market. If something unforeseen happens in 2014, it will be the same as this year perhaps; it can’t be worse.”

December 16, 2013 0 comments