Executive Magazine

Don’t write John Kerry off yet

by Riad Al-Khouri June 26, 2013

written by Riad Al-Khouri

As continued troubles roil the Middle East, the need for action to stabilize the region economically becomes more urgent. Since 2011, in much of the Arab world a lack of stability has created a vicious circle of weaker economies and political unrest that is becoming tougher to handle through normal policy measures.

Of course, many problems in Arab economies are internal, due either to local political conflict or mismanagement. Yet, the regional situation has a major impact: despite home-grown elements of the Arab Spring in many states, the Palestinian-Israeli dispute remains a major obstacle to regional stability and prosperity. Real peace between Arabs and Israelis could help the countries around Israel to end costly and destabilizing confrontation, allowing the private sector and civil society to flourish. In the case of Lebanon and Syria, the advantages of a genuine, just peace with the Israelis would be dramatic, but Egypt and Jordan (those countries that already have treaties with Israel) could also benefit enormously from expanded relations with the Jewish state that are based on justice and sustainability.

Seeming to sense this potential, US Secretary of State John Kerry has kept a busy schedule of shuttle diplomacy, making four Middle East trips in less than five months on the job. “So much of what we aspire to achieve and what we need to do globally, what we need to do in the Maghreb and South Asia, South Central Asia, throughout the Gulf, all of this is tied to what can or doesn’t happen with respect to Israel-Palestine,” Secretary Kerry said during his Senate confirmation hearing in January.

On June 27-29, as part of his fifth visit to the region, he will meet with Jordanian, Israeli, and Palestinian officials on advancing Middle East peace. While there is much cynicism about his plans, perhaps a little optimism couldn’t go amiss.

A key component of his strategy has been to re-introduce the Arab Peace Initiative (API) as a starting point for a comprehensive regional solution to the conflict with Israel. Promulgated at the 2002 summit of the Arab League, the declaration called on Israel to complete withdrawal from the occupied Arab territories to the pre-1967 war line, attain a just solution to the problem of Palestinian refugees, and accept an independent and sovereign state of Palestine in the West Bank and Gaza Strip – with East Jerusalem as the capital.

In return, the Arab states committed to regarding the conflict with Israel as having ended and signing a peace agreement with the Jewish state to normalize relations. The API was unanimously re-affirmed at the 2007 Arab League summit at which all 22 members except Libya were present, with Ismail Haniyeh of Hamas abstaining. In 2009, then-Senator Kerry called the API the basis for Arab countries to play a more active peacemaking role and paint a clearer picture than ever of the rewards peace would bring. That indication of the stability and prosperity the region could enjoy through peace has become even more relevant in light of recent economic retrogression in the Arab world.

In early April of this year, the US informed the Palestinians that a new approach to peace negotiations would be on the basis of the API with the 1967 lines modified through mutual agreement. Later that same month, the Arab League agreed to support limited land swaps as part of a peace deal based on the two-state solution of the API.

Amid present turmoil in the Middle East, it is significant that Arab leaders remain publicly committed to the API, which is itself consistent with an overwhelming international consensus. On the Israeli side, Yaakov Peri, Israel's science and technology minister and former head of the Shin Bet security agency, last week endorsed the API, the strongest statement by an official of Israel in favor of the Arab initiative since its relaunch in April. Peri sits on a small committee of senior Cabinet members that is briefed on peace efforts, and his comments appeared timed to support Secretary Kerry's moves to mediate resumption of talks between the two sides.

Would the API solve all the problems of the region? Clearly not. But an easing of tension on the Palestinian-Israeli front would help the Middle East become more stable. Of course, there is little optimism that a breakthrough is coming in the coming weeks, but Kerry’s seemingly strong commitment to the plan – and relentless visits to the region – could help push both sides slightly closer to a deal.

Riad al Khouri, a Jordanian economist who lives in the region, is principal of DEA Inc, Washington DC

June 26, 2013 0 comments

Economics & Policy

Alfa and Touch: Who is innovating?

by Stephanie Naddaf June 26, 2013

written by Stephanie Naddaf

Taking a 50 percent hit in sales of a top product is never easy. But if you’re a government who uses those profits to service your debt, it can be disastrous. Such is the case with mobile text messaging in Lebanon, which has lost around half its volume over the past two years. When you consider that “the money [mobile operators] earn all goes to the government, it…goes into settling the debt of the government of Lebanon” – as mobile operator Touch’s Chief Commercial Officer Nadim Khater bluntly puts it – such a drop in revenues is bad for the entire country. No wonder Touch and Alfa, Lebanon’s only mobile telecoms operators (both of which are government-owned) are desperate for new products and fresh revenue streams.

The actual innovation is being done by Orascom and Zain, the private companies contracted to manage Alfa and Touch – officially Mobile Interim Companies 1 and 2 – respectively. Both of these companies have a list of objectives that should be met within their contracts with the government. The more objectives met, the greater the profits for both the government and the mobile operators. The flip side is that when revenues are down, both the government and privately contracted operators suffer – making innovation a high priority for all involved.

The curse of technology

For both Alfa and Touch the changes in consumer trends present both threats and opportunities. As the popularity of smartphones increases, subscriptions to mobile plans that include internet access have been booming. In September 2011, only 144,000 Touch customers had a data subscription; today that number is 881,000, up by a factor of six. This data boom is also due to the decrease in prices for internet services, causing more people to switch over to a data plan.

But among the downsides of internet for the phone companies (and upside for consumers) are apps such as Viber and Whatsapp that allow free or significantly cheaper SMS and voice services. The cumulative effect has been a sharp decline in revenues in recent years. According to Touch’s Khater, “SMS revenue has gone down 52 percent from last year and voice by 5 percent… What we see is the rise of data, the ‘data boom.’”

Related article: Mobile phone prices across the Arab world

The company has moved quickly into providing internet, with revenues from data services “growing by nearly 75 percent during the period of February to May 2012 and [February to May] 2013,” Khater said. But despite the scale of this boom, it doesn’t quite make up for lost SMS revenues, which he said are “almost being covered.” “It’s almost a balancing act between the losses in voice and SMS and what we are making in data,” he said, declining to give more specific financial figures.

Alfa Chairman and Chief Executive Officer Marwan Hayek said his company has seen a comparable drop in SMS use. But despite the losses, he said, “with our innovative…plans, we managed to secure [increased] revenues.” He declined to give any specific numbers backing his claim.

The challenge of 4G

As the number of data subscriptions grows, so does the demand for higher internet speeds and data consumption. Last month, both operators rolled out 4G-LTE in a bid to bring the latest-and-greatest mobile data technology to Lebanon.

“Almost half of our customer base is on a data plan, and this number is only growing…so we had to make sure that our data is up to standard and we are keeping up with the latest technologies, especially when it comes to dimensioning and capacity,” Khater explained. There are, however, huge engineering issues involved in data technology, he warns, thus explaining why many customers have reported slow speeds. “Some engineers say it takes 18 months to really optimize and dimension a data network right.”

And Khater admits the 4G-LTE network isn’t yet at full capacity, but currently “limited to dongles and routers and tablets. It’s not available on mobile phones yet because having it on a mobile phone requires more engineering work.”

Yet Hayek remains optimistic, explaining how deployment of 4G is ongoing “to further expand the network coverage to major cities gradually until the end of the year.” It is expected that by end of 2013, “300 4G-LTE sites will be installed covering around 40 percent of the population and representing 25 percent of the network infrastructure,” he said.

Capturing the student market

But faster speeds don’t necessarily mean more revenue. Thus both companies have been pursuing strategies to bridge the gap between lost SMS revenues and money from new data plans. With the mobile market already partly saturated, one of these strategies is to focus on the one steady source of new customers: youth.

Both mobile operators provide plans designed for younger people. Targeted directly towards students, Alfa’s U-Chat plan aims to tap into the market. “We have a message and data driven plan (U-Chat9) for low-budget students, and message and data driven for high-end students (U-Chat17),” Hayek said. The U-Chat17 line provides university students 1000 MB, 1000 SMS and five hours of talk monthly for only $17.

Touch provides a similar plan, Web & Talk, which allows up to 60 minutes to random numbers, one hour to a preferred number, 300 MBs, and 300 SMS monthly, all for $14. “We felt that the youth segment is really keen on having data,” stated Khater.

Both companies stress that these offers are proving successful. Khater states that “during the first week [after launching], 200,000 customers subscribed to the Web & Talk plan.” Alfa said their U-Chat plan also attracted a large amount of customers, but declined to share exact figures.

App-lying themselves

But perhaps the most interesting areas which both Alfa and Touch have pushed into may seem a strange field for mobile operators: app stores. Alfa launched its store in November, while Touch introduced its own earlier this month. However, both of these stores have been launched in beta, meaning there is still some testing to be done before they are fully functional. “We are not making a big fuss about it yet just to make sure everything is running just before we make a big announcement,” said Khater. This will also allow the app stores a chance to get more developers and more applications available on each of the stores. Currently there are just a handful of apps on the Alfa store – including Alfa’s very own mobile services app. On the Touch App Store, there is only the recently launched music app Anghami

But for Touch, the app store is just the beginning. On June 19, the company announced its collaboration with Anghami in order to allow for in-app purchases. This allows customers to purchase music directly and charge it to their phone bill. Khater explains how “developers and agencies wishing to use Touch as a payment channel for their apps will be subject to a revenue share agreement.” For example, if a consumer was to purchase a song through the Anghami application on the Touch App Store, then the money will be taken from the customer’s Touch account and the revenues split between the app developer and Touch. The exact percentage, however, will depend on the contract between Touch and the developer.

“We feel this is very fresh, it’s very innovative, it’s very new. It gives the developers and the start-ups a way to monetize whatever they have built on mobile apps,” explains Khater. Touch’s app store also provides what is called backend-as-a-service, provided by mobile and web developer Apstrata. This allows developers of applications to access cloud storage and simpler usage of tools such as identity management, push notifications and social media integration.

Touch’s in-app payments and backend-as-a-service innovations are far beyond anything Alfa currently offers. However, when asked about the direction Alfa is heading in terms of future innovative projects, Hayek simply responded “data.” The company has yet to reveal anything more specific.

Reinventing the phone company

Touch’s move into apps and Alfa’s yet-to-be-disclosed data products are in their early stages, but they speak volumes about the future of the sector in Lebanon. Assuming an increase in internet speeds, smartphones will eventually eliminate the need to make almost any traditional voice calls or messages – meaning revenue from these sources will drop further, leaving data plans as the only ‘traditional’ revenue source. The move into app stores and services other than simple data subscription shows that Touch – and Alfa to a lesser degree – aren’t banking on just being wireless internet companies in the future. It remains to be seen whether such self-reinvention will be successful, but one can be sure economists at the Ministry of Finance are watching closely.

June 26, 2013 0 comments

Editorial

The wild card in play

by Yasser Akkaoui June 25, 2013

written by Yasser Akkaoui

The darkness over Damascus was lit up like a light bulb early last month, the entire city illuminated in orange for five seconds in the middle of the night. All reports said these were the biggest explosions yet in the more than two-year conflict. And where did these missiles that struck the military base on the edge of the city come from? Israel.

It had slipped the minds of many that the region’s most powerful military was also watching; the beast, however, has only stirred.

While massive international interests are at play in Syria, the proximity of Israel, the strength of the Israeli army, and Israel’s sway over American and Western foreign policy means that there is perhaps no power so able to quickly and radically redefine the parameters of the Syrian conflict. When Russia said last month that it would send S-300 anti-aircraft missiles to Syria, the Israeli Army responded that it would destroy any such shipment. No one should doubt that they would follow through with this threat.

Let’s be clear: Israeli policy makers do not care about the lives of Syrians or the destruction of their country. They care about preserving “Israeli security”. For a long time, Syria’s Assad family was Israel’s perfect enemy. While the Syrian army posed little threat against the far-more-sophisticated Israeli war machine, the Assads oversaw a police state powerful enough to prevent local paramilitary groups from forming and launching attacks from the Golan Heights — from the point of self-interest, the Assads knew what the Israeli response would be.

Thus today, from an Israeli perspective, one has to wonder what sort of future Syria is preferred. One run by the radical and unpredictable Salafist factions now hijacking the Syrian opposition in the name of jihad, or one under the grip of a tyrannical regime bent on crushing internal dissent and ruthlessly looking out for its own self interest? With many cards in their hand yet to be played, the Israelis may yet flush out a neighbor they love to hate.

June 25, 2013 0 comments

Banking & Finance

Investment ideas

by Maya Sioufi June 25, 2013

written by Maya Sioufi

Up, up and away we go. Stocks continue their rally this month, but economic fundamentals are showing weakness across the board. France is sliding back into recession and China’s industrial output is disappointing. This month, Executive sits again with Elie Khoury, chairman of Berytus Capital, and Nour Eldeen al-Hammoury, chief market strategist at Amana Capital, for their take on the markets.

Elie Khoury

Last time we spoke to Khoury, in November 2012 he was conservatively bullish on equities in the United States and recommended investing in Pfizer (up 15 percent since his recommendation as Executive went print), Kraft (up 19 percent), Microsoft (up 35 percent), Intel (up 10 percent) and Qualcomm (up 14 percent). The overall gain in the Standard & Poor’s 500 index over the same period was 18 percent.

> Still bullish? He remains bullish on equity markets overall, and especially US markets. With the inflation rate at 1 percent, below the Federal Reserve’s target of 2 percent, Khoury does not foresee the cessation of quantitative easing — when central banks inject money into the economy by buying up government securities — any time soon.

> Time to start investing in Europe? One can start selectively investing in Europe now, as it is cheap, according to Khoury. He would recommend the non-cyclical sectors such as the food industry and the pharmaceutical sector, as they are safer plays.

> Concerns in these markets? Khoury stresses that the market, spurred by cheap credit, has gone a bit ahead of itself and he remains concerned about the high US unemployment rate — currently at 7.6 percent — and European debt issues. However, he stresses that he is taking a more positive approach toward the markets today and would look to build position on any correction.

> Invest in gold? He would advise a net position of 3 to 7 percent of one’s total investable portfolio in this asset class and he says he believes the secular bull market on gold is taking a major hit. “I think in the short term the best days [for gold] are behind us and not in front of us,” he says.

> Top recommendations? In the consumer sector, he still likes Kraft and also recommends investing in Kellogg’s and Coca-Cola. In the pharmaceutical sector, he highlights biopharmaceutical company Amgen and an animal health business Zoetis, a Pfizer subsidiary that listed in February of this year. For the technology sector, he prefers Apple and Samsung.

Nour Eldeen

al-Hammoury

When Executive sat with Hammoury in November 2012, he was concerned about market fundamentals. Still, he recommended investing in the S&P Index (up 18 percent since his recommendation), Apple (down over 20 percent) and Facebook (up 28 percent).

> Still concerned with the fundamentals? He is less convinced about a further upswing in the US markets, given that the current levels fail to reflect the performance of the economy. “Equities across the board don’t reflect economic fundamentals, and they should not be at these levels at all,” he says.

> Main concerns? The Federal Reserve’s ballooning balance sheet at $3.3 trillion is Hammoury’s biggest worry. He expects quantitative easing to continue at least until the middle or end of the third quarter as central banks worldwide eventually lose control of inflation rates, forcing them to stop easing and start raising rates fast. He is also concerned about the worsening sovereign debt situation in Europe. “[Politicians] spent more than three years trying to solve Greece [which carries over] 400 billion euros of debt, and they did not even solve it that much. So how much time will it take to solve Italy, with more than 2 trillion euros of debt?” he asks.

> Top investment tips? Hammoury’s top recommendation is to invest in commodities such as silver and gold, which he recommends buying through exchange-traded funds. He also likes Asian currencies and would continue to sell the Japanese yen against a basket of currencies such as the sterling, the dollar and the euro. As for equities, he would stay clear of this asset class for now, and his only equity tip would be to buy Apple and diversify it by buying some Samsung stock as well.

June 25, 2013 0 comments

Special Report

Lending Hope

by Sam Tarling June 25, 2013

written by Sam Tarling

To follow a microfinance loan officer around for a day is somewhat akin to taking a ride with Robin Hood, albeit one that operates well within the law. It seems the officer knows almost everyone, and everyone knows him. “I’m famous around here!” exclaims Ismael Jaouni, a loan officer for non-profit microfinance institution (MFI) Al Majmoua as he shows Executive around the working class streets in the Beirut suburb of Jnah.

Despite usually carrying higher interest rates than commercial bank loans, it’s no wonder that microfinance loans are popular. They don’t require collateral, they offer smaller sums than most bankers keep in their wallets and they are convenient, especially for clients in remote locations.

“It’s easy because when I have to repay, I don’t have to go to the bank. It’s like the bank paid me a visit,” said sculptor and artist Elias Khalife. After a lightning strike destroyed his business premises, he got a loan in just a few days and was soon back up and running. The loan officer he contacted at MFI Vitas was a friend of his wife’s.

While product promotion is almost exclusively based on word of mouth and personal relations between loan officers and the communities they serve, microloans seem to be making an impact on the grassroots of Lebanon’s economy.

More than $14 million in loans have been given out over the last four years alone through the USAID-funded Lebanese Investment in Microfinance (LIM) program, according to Joanna Naccouzi, communications and coordination manager at the International Executive Service Corps, which facilitates funding and development for MFIs. This, she claims, has saved over 11,000 jobs, especially in rural areas. It’s empowering less-enfranchised segments of society too, as some 42 percent of the program’s 8,000 loans were granted to women and 41 percent of them to clients between the ages of 18 and 35. And LIM’s efforts make up just a fraction of the nationwide cumulative portfolio of some $120 million to $150 million [see page 26].

Beekeeper

Estephan Badawy, a former Middle East Airlines pilot, started producing honey 13 years ago on the hillsides of the village of Lehfed in Lebanon.

Badawy took a $30,000 Kafalat loan to start his project and recently took a $5,000 USAID-financed microloan from Association d’Entraide Professionnelle (AEP) to buy and fill 40 more hives, bringing his total to 280.

Although he only sells to friends and family, Badawy is confident he’ll find a home for the extra 400 kilograms his hives should yield once they reach full capacity. “Pure honey is like when a man has a beautiful daughter at home; he’s not worried about when she’ll get married,” said Badawy.

His investment should increase his production from 1,600 kg to 2,000 kg per year.Badawy sells his product for around $23 per kilogram and expects to pay off the loan in two and a half years. He is paying annual interest of 10 percent.

Chef

When an industrial accident nearly blinded Jihad Saadeh, he was forced to close his successful car repair business. Saadeh had 12 employees on his payroll, and his children were enrolled at the American University of Beirut.

To provide for his family, Saadeh opened a small restaurant in Lehfed with his wife Raymonda. His four children help out in the summer, and every year he expands the premises.

Today, Saadeh’s labour of love can seat some 700 diners. He recently took a $5,000 USAID-financed microloan from AEP in order to buy a new generator to supply sufficient electricity to cater for a full house. Saadeh said with just a few large events he could repay the debt.

However, Saadeh is a reluctant microborrower: he was persuaded to take the loan by his children but remains wary of debt, an attitude one industry insider said was common among the older generation.

“I don’t like to have a debt,” he said. “If something happens to me today, I don’t want my children to be indebted.”

Sculptor

Sculptor and artist Elias Khalife took a $15,000 USAID-funded microloan from Vitas after his atelier in Ehmej, Lebanon was destroyed in a lighting strike.

Three weeks after the fire, the charred remains are still visible as Khalife works beside a hastily erected structure. Khalife was able to get back up and running quickly, after receiving the money in just 15 days.

“If I hadn’t been able to take out the loan, I would have had to sell some land and would have been unable to fill my monthly orders,” said Khalife, who is the sole producer of statues for the nearby St. Charbel monastery.

Khalife said that despite good access to finance, small rural businesses such as his struggled to find outlets for their products.

Baker

Lucia Saab has been running a humble mana’ish bakery in Chekaa since 2000. She took a $2,000 USAID-funded microloan from Al Majmoua two years ago to expand the premises, create a seating area, and to rebrand her business as Gusto, a full fledged cafe, that she runs with her son, Chalita.

“There’s no other way I could have expanded,” said Lucia, adding that taking a microfinance loan was “a simple procedure. It’s easier than going to the bank, all you need is a guarantor.”

Dekanjia

Majida Moqdad, a mother of three and grandmother of seven, used to clean houses. She desperately wanted to leave her job and set up her own business, but unable to find a source of capital to get started, her project seemed doomed from the start.

“When I was trying to open the shop, I felt suicidal. Then someone told me about Al Majmoua. I called them; Ismael [a loan officer] came here and he helped me,” she said.

In 2010, Moqdad took a microloan of $1,000 to equip and stock her shop. Since then, she’s taken a second loan to pay for a heart operation for her father and a third loan to increase her stock. As each was repaid as scheduled, her interest rates for subsequent loans dropped from 1.5 percent of the principal per month to 1.4 percent and then 1.3 percent.

Saleswoman

Clothing-store owner Layla Jouni was Al Majmoua’s first client in the Jnah area of Beirut, taking her first loan of $1,000 11 years ago.

“When I took the first loan, I bought stock for my shop. Each time I take a loan, I make my stock bigger and bigger,” said Jouni, who said she appreciates the independence these loans have given her. “I didn’t need to get help from anyone,” she said.

Jouni has also borrowed from Al Majmoua to fix up her house and is planning to take out a loan to finance a Hajj pilgrimage next year.

Shopkeeper

Hayat Kheir Imriri recently took a microloan of $800 dollars to buy stock for her store in the Sabra Palestinian refugee camp. The loan was taken from Al Majmoua. She is shown here holding a receipt of repayment.

Mechanic

Mechanic Jihad Rashid has taken six microloans from Al Majmoua over the last 6 years in order to pay for his children’s education.

This has allowed Rashid to pay the school fees annually; if he paid monthly, he says, the school would charge him three times more interest than that offered by Majmoua, which began at 1.5 percent of the principal per month. Due to successful repayments Rashid now pays a lower monthly rate of 1.3 percent.

June 25, 2013 0 comments

The Buzz

Business briefing: 25 June 2013

by Executive Staff June 25, 2013

written by Executive Staff

Economics and Policy

Qatar's emir Sheikh Hamad bin Khalifa al-Thani confirmed on Tuesday he was transferring power to his son, Crown Prince Sheikh Tamim, taking the rare step for a Gulf Arab ruler of voluntarily ceding power to try to ensure a smooth succesion.

Lebanon’s answer to eBay?

by Executive Staff June 25, 2013

written by Executive Staff

The eBay of Lebanon – that’s what Samir Hanna, CEO of Bank Audi, called their new innovative online shopping platform eMall. Launched on Sunday night at a glitzy cocktail reception held on Bab Idriss Street in downtown Beirut (blocked from public use for the occasion) the event was well-attended – with over 200 attendees including senior bank managers, company directors and media figures – despite the ongoing clashes in the southern city of Saida.

With a violinist and a pianist in the background, Randa Bdeir, head of electronic banking and card services at the bank and the driving force behind the initiative, presented the platform. eMall allows merchants registered with Bank Audi to sell their products online and have the items delivered to consumers’ households by shipping provider Aramex. So far over 90 stores have signed up, including those selling designer items, food and beverage, and electronics.

In Lebanon e-Commerce is in its infancy, with a recent poll putting the percentage of people regularly shopping online at less than one percent. As such Bank Audi are seeking to capitalize on a burgeoning market.

Audi’s profits are to be derived from the stores rather than the customers. eMall charges a 3 percent rate on products sold through its site, in addition to a set up fee and a monthly maintenance fee which vary on the category of microsite chosen. For the consumers, anyone can buy products from the platform but Bank Audi’s clients will have access to special deals and discounts. As such, expect the bank to bite into other local banks’ market share.

eMall also provides shoppers with additional features such as ordering items from the United States shipped to their homes in Lebanon and donating to non-governmental organizations such as the Red Cross and the United Nations Development Program. The US service seeks to bypass the problem many Lebanese face as their cards are not accepted by American firms through a partnership with the website MyUS.com.

To launch the new eMall site, an indoor space on the corner of the banks’ headquarters is presenting a simulation of the site – on laptops, iPads and iPhones – and of other payment technologies, for a period of one week. The highlight of Sunday’s event was the mind-blowing 3D display, which brought to life Bank Audi’s main headquarters.

June 25, 2013 0 comments

Comment

Precious little solace

by Joe Dyke June 25, 2013

written by Joe Dyke

Even as Eric Le Borgne, lead economist at the World Bank, presented the body’s latest report on the Lebanese economy yesterday, he knew facts on the ground were already making it out of date. In the southern city of Saida, at least 17 Lebanese army soldiers had been killed by forces loyal to the fundamentalist Sheikh Ahmed al-Assir while sporadic clashes have been reported in recent days in southern Beirut, Tripoli and the eastern Bekaa region.

In these circumstances, Borgne appeared hesitant to back one key part of the body’s findings. The report, optimistically titled “Growing tensions in a resilient economy”, predicted GDP growth at 2.3 percent in 2013, up from 1.4 percent in 2012. But Borgne knew the Bank would almost certainly downgrade this figure later in the year as it was on an optimistic assessment of the country’s political trends. He said the prediction was made earlier in the year on the “assumption there would be elections for June and increased security in the second half” [of the year]. “Clearly this isn’t true,” he added. A slight understatement, perhaps.

The report makes depressing reading for all but the most blindly optimistic. In essence it describes a perfect storm of factors undermining the economy. Apart from the dubious GDP prediction, most major economic trends are going the wrong way, including, but not limited to, expenditures, consumer confidence and spending, the fiscal deficit, gross public debt and inflation.

In fact, the only thing keeping the economy afloat is increased government spending. The central government posted a fiscal balance deficit of 9.4 percent of GDP in 2012, up by 3.7 percentage points on 2011. This was partly due to slightly declining revenues, but more to increased spending – largely on servicing the losses of the deeply indebted and inefficient Electricite du Liban and paying higher wages due to a public sector pay rise.

Indeed, Borgne went as far as to say that it was only government spending preventing growth dropping below zero. “Were it not for the expansion of fiscal policy, the country would have been in a recession,” he said. But this spending, he pointed out, was deeply unsustainable due to the country’s spiraling debt, with the country’s debt to GDP ratio predicted to arrest its recent decline and grow again.

The primary causes are well known to anyone in the country – Syria and the subsequent deteriorating security trends. The Bank’s figures show that trade has been severely hit as transit routes have been disrupted, tourism has been devastated – with hotel occupancy rates falling to their lowest figure since 2007 – while inflation is being pushed upwards.

The refugee crisis is also undermining unskilled laborers – both Lebanese and other nationalities. There are now nearly half a million Syrian refugees fleeing the country’s civil war registered in Lebanon, with over one million estimated to be living in the country. While Syrians have long formed much of Lebanon’s unskilled workforce, the increased numbers searching for any work they can get are creating “significant downward pressure on wages in the short-term,” the report said. “The comparative advantage of these Syrian activities in terms of prices disfavors local businesses and workers, thereby creating potential tension with local hosting communities,” it added.

A lack of options

Depressingly lacking from the 45-page paper, however, are any realistic policy proposals for dealing with the country’s woes. The Bank is emphatic in its criticism of the status quo, but its few suggestions for growth were roundly lambasted by Lebanon’s most senior economists in the debate that followed Borgne’s talk.

While the wise heads of the economy each took turns to suggest their own proposals, the depressing fact remains that the time for economic policy-making may already be passing. 1,000 well-meaning policy papers cannot prevent Assir’s men from further destroying confidence.

Until the security and political situation improves, economists can do little to help the country grow. Hezbollah and other groups’ increasing involvement in Syria, the crisis in Saida, the cancelled elections – all are increasingly drawing the country into a spiral it is hard to get out of. For policy-makers right now, the best they can hope for is to slow the decline.

After the event, Executive asked Borgne to make a prediction how much they would reduce their GDP prediction by. He politely declined, but said it would be above zero due to ongoing government spending. Precious little solace for a weary nation.

June 25, 2013 0 comments

Economics & Policy

Profits for the public

by Gabriel Chahine, Jad Bitar & Lina el-Zein June 24, 2013

written by Gabriel Chahine, Jad Bitar & Lina el-Zein

The region’s healthcare sector currently faces several pressing priorities, including rising rates of lifestyle ailments such as diabetes and heart disease, a growing population and problems of accessibility and quality of care. In addition, the predominant financial model, in which the state assumes most of the financial burden of care, is unsustainable. Both factors have led private equity (PE) firms in other markets to invest into healthcare infrastructure and the delivery of services, thus addressing societal needs while generating attractive returns.
Yet, PE investors in the Middle East and North Africa have made only minimal contributions to the reshaping of the healthcare sectors in the countries of the Gulf Cooperation Council (GCC) and elsewhere in the region.

During a recent roundtable discussion organized by the Middle East and North Africa Private Equity Association (MENA PEA) for PE firms, consultants and healthcare practitioners, four factors were named to explain the lack of industry investments in healthcare projects: mismatched investment horizons, state involvement, regulatory surprises and a lack of clarity about exit strategies. This notwithstanding, MENA PEA members affirmed that private equity can and should be a key contributor as GCC countries seek to improve healthcare and bring better services to their populations.

Patience is a virtue

Before advocating stronger PE involvement in Arab healthcare, there are barriers that need to be addressed. First, most PE investors seek deals with a short timeline and a high rate of return. The ideal scenario is to make an investment, improve operational efficiency and then exit the investment after three to four years while aiming for a high return. Healthcare deals, in contrast, often take far longer to pay off, and returns are not necessarily as attractive. Greenfield projects offer potentially higher returns, but require a longer timeline. One rule of thumb is that PE investments in healthcare require a minimum of five years to ensure proper returns.
The second barrier to PE investments is the large presence of GCC governments in healthcare. In many markets, the state remains the primary healthcare player, regulating the industry and operating most hospitals and care facilities. Many governments have publicly stated that they want private companies to enter the healthcare sector, but at the same time are increasing their own role — which sends a mixed message.

For example, the Saudi Health Ministry recently announced the launch of 420 health projects, including the construction of 127 hospitals, in addition to the 259 it already operates, at a cost of $3.2 billion. Such moves in effect “flood the market”, leaving little room for PE investors. These measures also put the public sector into competition with the private sector for scarce resources, such as talent.

Third, a lack of clarity on regulations — both new rules and enforcement — also makes investors cautious. “We don’t necessarily dislike regulations per se,” said Nicolas Murat, a partner at Dubai-based Levant Capital. “What we dislike are surprises: new rules that we didn’t anticipate, or an unexpected application of the rules.”

Last, many participants in the MENA PEA roundtable were hesitant about healthcare investments because they do not offer a clear “exit strategy”, a path to divest investments once they have achieved their target returns. Only a handful have successfully launched initial public offerings, such as Dallah Healthcare Holding Co. on the Saudi Stock Exchange last November, or Abu Dhabi-based NMC Health Plc on the London Stock Exchange in August 2012.

Remedies, opportunities

To overcome these obstacles and engage in the healthcare sector, PE firms can deploy several solutions. One promising approach is public-private partnerships (PPPs), or collaboration arrangements between governments and private companies. These arrangements have already been used in the GCC for building such infrastructure as airports and power plants. They are a potential stepping stone for the state-operated healthcare segment to attract more private-sector players such as PE firms.

Under a typical healthcare PPP, the government reduces its involvement and no longer operates facilities or delivers care. Instead, the government exercises an oversight role, identifying gaps in accessibility and quality, regulating the market and offering incentives to attract commercial players. PE investors inject capital into profitable opportunities — such as promising for-profit companies — and contribute their expertise in clinical, administrative or support services to improve performance.

There are several successful healthcare PPPs already under development in the region. Egypt last year signed PPP deals for the construction of a 200-bed gynecology and obstetrics university hospital, a new general hospital and a blood bank and pediatric and emergency-care ward at an existing facility, all in Alexandria.

While the tendering of these healthcare projects was disrupted two years ago in the wake of the Arab uprisings, the contracts are now ongoing, according to the information available from Egypt’s PPP central unit, notably with the participation of the Cairo-based PE firm, Bareeq Capital.

The Saudi Health Ministry is currently investigating several PPP opportunities, and there is an established track record of successful healthcare PPPs in the EU, including Spain and several Scandinavian countries. These examples provide guidance for structuring the PPP mechanism.

A second avenue is for PE firms to look beyond hospitals and clinical operations. While the most obvious components of healthcare, they are also complex and require specific expertise. More accessible opportunities for PE investors exist in adjacent categories, such as medical supplies, pharmaceuticals and laboratory and diagnostic services.

For example, Gulf Capital, a PE house, acquired a diagnostic imaging company in Egypt with 13 centers in 2009 and then made add-on acquisitions in Saudi Arabia, Jordan and Turkey. The company expects to run 37 centers by the end of this year, making it by far the biggest diagnostic imaging chain in the region. The company can now use its bargaining power to secure good pricing deals and financing on equipment. “It’s possible to add value in the sector by improving the quality of operations and implementing standardized procedures, and, via tele-radiology, provide specialized services in more remote areas that would otherwise not be available,” said Jonas Voelker, vice president of Gulf Capital.

PE houses can also move one degree away from clinical care by building administrative, finance and support capabilities for healthcare operators. Or they can take over some service elements from governments that are too busy building and operating hospitals. Such ventures would allow PE investors to tap into the expertise they have already built up in areas such as software, equipment and human capital through their investments in other industries.

Last, PE houses must recalibrate the expectations of their investors by clearly communicating that healthcare is not like other industries. Investments take longer to pay off and often have complex exit strategies, thus requiring greater patience. One investment house, ReAya Holding, keeps its investments as long as it takes — including some greenfield investments such as a vaccine production plant — giving them time to mature.

Following Dubai’s lead

Healthcare investment is more difficult than other industries where PE investors have succeeded in the past. Yet the opportunities are compelling. Given the scope of the region’s healthcare challenge over the coming decades, PE firms that choose their strategies and targets carefully — in markets where the government has established clear expectations, as has occurred in Dubai — will find success. They will generate attractive returns for their investors, and they will help build a stronger and healthier GCC overall.

June 24, 2013 0 comments

The Buzz

The drone that brought it home

by Farea al-Muslimi June 24, 2013

written by Farea al-Muslimi

The drone debate in America has become depressingly polarized. While critics point to the civilians killed and argue that most of the suspects could be captured, proponents counter that the targets are legitimate, that there are checks and balances and that, unfortunately, some level of ‘collateral damage’ is inevitable. That’s how things look from Washington — or even Yemen’s capital Sana’a — and that’s why many in the West welcomed Obama’s speech last month in which he suggested new limits on the use of drones.

But this debate becomes increasingly irrelevant if one considers how such policies have created complex realities on the ground in remote areas across Yemen. Crucially, drone strikes are counter-productive for both the governments of Yemen and the US. They cost Yemen monetarily, have destroyed social cohesion, created local conflicts, deter humanitarian work and, for the US, help fuel the forces that Obama and others claim to be fighting. A few examples may help illustrate my case.

In May 2010, Jaber al-Shabwani, deputy governor of the tribal province Mareb and a high-level security official, was tasked by the central government with negotiating the handover of some militants to security forces. Instead, he was accidentally killed by what was believed to be an American strike. The next day, his powerful Al-Shabwani tribe, which resides in an oil-rich governorate, attacked the local capital and bombed oil pipelines. The attacks devastated Yemen’s oil output, with losses of millions of dollars, while the tribe took control of the governorate by force and had armed clashes with security for days.

See Farea al-Muslimi discussing drones at the US Senate

Related article: America’s killing machines

On another occasion, June 2012, Hussein Saleh — a humanitarian worker with the International Committee of the Red Cross — was on a mission in the southern province of Abyan — an area targeted by many drone strikes. He was working to give humanitarian assistance when an alleged US strike killed him.

Bringing it all back home

Yet few cases emphasize the counterproductive and self-defeating nature of US drone policy better than the killing of Hameed al-Radmi in the village of Wessab — my home — in central Yemen this past April. Wessab was killed in the early evening by a suspected US drone strike, with Yemeni officials later alleging that he was affiliated with Al-Qaeda in the Arabian Peninsula (AQAP).

In the village, however, many treat these claims with suspicion. Radmi was known to lead a very normal life — dedicating his energy to helping people in the area. Unlike Yemen’s powerful sheikhs and other stakeholders, he was not perceived to be greedy and did much of his work for no personal financial gain. In recent months he had become a major force in the region: enforcing the law, demanding development projects from the government, speaking on behalf of villagers and standing up to corrupt sheikhs.

Among the projects he was actively engaged in was a new road for the area, which would make a big difference in connecting Wessab to the outside world. The government had started to develop the road, after decades of false promises, and Radmi was playing an effective role in holding local officials to account. Two days before he was killed, he personally went around Wessab asking people to sign a petition stating that anyone making trouble for the company building the road should be forced to pay a $2,500 penalty. Compare this to Wessab’s current members of Parliament, who rarely visit and have done little to improve infrastructure in recent years, and you can see why many in the area mourn his passing.

Fueling the conspiracies

His death has created hostility towards the US and left locals with more questions than answers. Clearly it was possible to capture and question him — everyone in the area knew where he was and he was not known to travel heavily armed.

Strangely, for some members of the village the killing has changed their perceptions of Al-Qaeda. If Radmi was involved, they reason, AQAP could not be the dangerous organization they hated, but is perhaps a better alternative to their government officials and sheikhs.

Others have come to the conclusion that Radmi was killed not because he was Al-Qaeda but because he had angered powerful stakeholders in the area. Parliamentary elections are less than a year away and Radmi was being tipped to run — especially with his increasing popularity. His challenge to the established order made him a threat.

“Hameed al-Radmi was killed because the election date is soon”, says Wadah Al-Qadhi, chairman of Wessab’s regional branch of the coalition for change movement during the 2011 uprising. Qadhi, who knew Radmi well, points fingers at some of those security figures who were previously Radmi’s allies. He alleges that local stakeholders are using the US to take out regional rivals.

About an hour before Radmi was killed, the head of the local government was riding with him in his car. Rumors circulate that he put a tracking system in the vehicle, allowing the US drone to locate him. Despite the fact that there is no concrete evidence for these claims, the official was afraid to leave his house for days after the bombing in fear of angry locals.

No cause for optimism

The only thing that is clear is the real reasons for Radmi’s killing are unknown and are likely to remain so. But the allegations raise serious questions about whether US officials are being played by local stakeholders to engage in local conflicts.

When asked whether I was optimistic about the recent Obama speech, in which he claimed that all the targets could not be captured and are a threat to US national security, I said no. Clearly the debate they in the US were having was not the same one that Yemenis affected by drones were engaged in.

America’s policymakers may continue to debate the effectiveness of the drones based on their accuracy and “casualty-free” operations or even based on the legality and “procedures”. But until the scope of the arguments in the West more accurately reflects the local complexities and the carnage being wrought on our lives, the decisions they make will end up justifying the unjustifiable.

Farea al-Muslimi is Executive’s Yemen correspondent

June 24, 2013 0 comments