Executive Magazine

Growing pains

by Ziad Abou Jamra June 27, 2013

written by Ziad Abou Jamra

Towering above the country’s gross national product at some three times the size, Lebanon’s banks deposits (about $127 billion in 2012) make up much of their balance sheets’ liabilities.

The loan part has been solid and the policy on lending in Lebanese banks is extremely conservative. For example, a minimum of 25 percent down payment on mortgage loans is a norm. This policy has been proven by crisis; Lebanese banks withstood the 2008 financial debacle with hardly any repercussions. In addition, Lebanese banks’ loan to deposit ratio stands at around 35 percent compared, for example, to 80 percent for banks in the Gulf Cooperation Council.

The other major component of banks’ assets is significant holdings of government debt in the form of Lebanese treasury bills and Eurobonds. As of December 2012, 42 percent of the Lebanese banks’ assets were invested in papers issued by the central bank or the state, according to Moody’s.

While commercial banks have been financing the public debt for a long time and achieved good profits, sovereign Eurobonds and T-bills carry an inherent risk of default on government debt. We do not believe that this is imminent or even likely in the near future, but we nevertheless need to highlight tools that help us measure the government’s ability to finance its debt. Commercial banks’ long-standing appetite for public debt may change if the banking sector does not achieve real growth in deposits and assets. Creating a break in this dynamic ultimately goes back full circle to negatively impact banks.

After Lebanon’s debt to gross domestic product (GDP) ratio peaked at about 175 percent in 2007, robust growth allowed this ratio to fall back down to 133 percent at the end of 2010. In 2013 we see that lower GDP growth of recent years has put upward pressure on this ratio, spreading fears that we could once again be headed to unsustainable debt levels. Having said this, it is important to mention that the Lebanese economy has been able to, in a span of less than 10 years, double its aggregate demand, as GDP stood at about $20 billion in 2004 and is currently above $40 billion.

Should the economy come even close to this performance over the next 10 years, we would be out of the woods; we have operated in recent years with no new legislated budget, implying that the government spends only what it earns. Although the short-term economic growth outlook for Lebanon is not so bright, we see it as entirely possible to return to a positive dynamic on the debt to GDP ratio.

This will require a GDP growth rate of 6 percent or more, which is realistic for Lebanon as an emerging economy. Political stability and security will be key for returning to growth rates of 6 percent or even 8 percent, which we regard as being in our reach as the country has proven between 2007 and 2009. We expect that domestic political stability will be recovered as a solution to the Syrian situation is found in the coming few years.

Too many cooks?

Another key issue is that Lebanon is ‘overbanked’. This is often spoken of in negative terms but we see potential in this fact.

As the banking sector’s high ratio of deposits to GDP (300 percent at end 2012) has necessitated geographic expansions of Lebanese lenders into new markets for many years, we see the strength in human resources and experience that banks have gained in the overbanked domestic market as an aid to international expansion.

In this context, we note that the “Arab Spring” resulted in a painful experience for Lebanese banks that took their first steps abroad in the period up to 2011. Several top tier banks, which had rapidly expanded in countries such as Syria and Egypt, were the most affected. It is our opinion that the damage was significant but was downplayed as that would have caused further injury. This was most likely achieved by allowing banks to amortize losses incurred over a lengthy period of time. We believe that the combination of more proper exposures and a new expansionary policy will work strongly in favor of Lebanese banks and inevitably bear fruit for them.

Additionally, although being overbanked implies that over saturation can be found in parts of the market, Lebanon’s ratio of 31.5 commercial bank branches per 100,000 adults in the 2008-12 period according to the World Bank is 22.5 points below Switzerland’s banking density.

In conclusion, we reiterate and emphasize that, while numerous facts and variables need to be accounted for when trying to assess the future of the Lebanese banking system, it is the ability (or lack thereof) of the economy to resume a robust growth that will prove crucial to the continued wellbeing of banks in Lebanon.

Ziad Abou Jamra is the deputy general manager of Fidus

June 27, 2013 0 comments

Business

Beirut’s boutique photographers

by Joe Dyke June 27, 2013

written by Joe Dyke

Company: Karen and Josette

Country: Lebanon

Industry: Photography

Founder: Karen Kalou and Josette Youssef

Established in: 2009

In 2009, Karen Kalou and Josette Youssef had both recently returned from studying in North America — Kalou in Montreal and Youssef in New York. They met by chance and soon discovered their shared disappointment in the state of photography in Lebanon. Both had trained in the art and felt that much of Lebanon’s industry was lacking in guile, with a tendency towards the overstated.

The photographers prefer to use mostly natural light (Photo: Karen and Josette)

“In the fashion industry [in Lebanon] there is a lot of guys shooting and there wasn’t really a feminine touch, or an emotional touch, to fashion photography here,” Youssef says.

Sitting down over coffee, the two came up with Karen and Josette, a high-end boutique photography company offering various type of photography, ranging from events to fashion. Kalou remembers the meeting where they sought to define their ideas more clearly. “We just kept bouncing ideas off each other — we defined the whole business. We defined our target market, we defined the look, we defined what kind of photographs — we just did everything in like two hours. And it clicked.”

They seek to make Lebanese fashion photography more natural (Photo: Karen and Josette)

What emerged was a company that prioritizes quality over quantity, with Youssef saying they would rather provide clients with a few dozen beautiful photos than 1,000 dull ones. More than anything, though, the two women have tried to develop and maintain their own distinct style.

“Aesthetically we wanted a very organic style. [In Lebanon] everything is very formal and done up. Whether you are shooting a wedding, or a portrait or fashion, everything is big lights, big makeup — big, big, big,” Youssef says. “We wanted to do something much more low-key, which is North American specifically. There is this movement towards doing something natural and organic and that feeds into our style.”

The women also do family portraits (Photo: Karen and Josette)

“So it had to be very creative, very emotional, very natural — the kind of work that we both do,” she adds.

Business started slowly but took a major upturn in 2010 when they were awarded the inaugural Deutsche Bank Creative Award recognizing excellence in the arts. They won 10,000 euros ($13,000), plus practical support from experts. More importantly, however, the award catapulted them into the public consciousness — with clients suddenly seeking out their services.

Since then they have become major players in the Lebanese market, while trying to remain true to their niche market positioning. But unlike most entrepreneurs Executive has interviewed, the two women are not actually looking for a major expansion. There aim is to maintain a niche, with clients seeking out their work specifically.

As such they have chosen not to hire new photographers but instead build on their own work — hoping to become among the most respected photographers in Lebanon.

Youssef (left) and Kalou are planning to increase their work in the Gulf

Yet, as with many companies in Lebanon, the tough economic conditions are forcing them to reconsider their strategy. Declining growth has left clients more wary of spending, forcing Youssef and Kalou to look abroad — with the Gulf their prime target for boosting revenues. “We are definitely talking about branching out into the United Arab Emirates,” Youssef says. “We did a few events there and it went really well… [But] we are definitely talking about it seriously because I don’t think this [Lebanon] is going to be enough.”

June 27, 2013 0 comments

The Buzz

Business briefing: 27 June 2013

by Executive Staff June 27, 2013

written by Executive Staff

Economics and Policy

Cyprus has agreed a deal with a US-Israeli partnership to build a liquefied natural gas plant on the island to exploit untapped energy riches, undermining the potential of an agreement with Lebanon.

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Saudi Arabia's religious authorities have approved a request by the government to reduce the number of pilgrims permitted at Islam's annual haj this year to allow expansion work at Makkah's Grand Mosque.

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Companies and Business

The Lebanese-Canadian Bank has reached a $102 million settlement with the U.S. government over allegations it took part in a scheme to launder drug money and other funds for terrorists, prosecutors said.

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June 27, 2013 0 comments

Economics & Policy

Uneasy bedfellows

by Zak Brophy June 27, 2013

written by Zak Brophy

Lebanon’s bankers and the government are a close-knit family, and like any family they have a love-hate relationship. In this particular homestead, the kindred glue that binds them together is the colossal national debt.

Of late, however, this has started to come unstuck. Banque du Liban (BDL), Lebanon’s central bank, has made efforts that may offer some respite in the short term, but the long-term fix will have to encompass a much more fundamental rearrangement — if, that is, any one is daring to look that far down the line.

From a paltry $1 billion at the end of the civil war in the early 1990s, the state’s debt has skyrocketed to around $58 billion today and the main proprietor of this liability has been the nation’s prodigal sons, the banks. For many years, this relationship served the bankers well by providing them with a safe asset in which to park their extraordinary liquidity. As such, the commercial banks’ current exposure to the public debt is equivalent to 21 percent of their consolidated balance sheets.

The problem for the banks in Lebanon is that they are too big for a very small market, with assets surpassing 350 percent the size of the economy. So even if the private sector is growing well, the demand for credit does not suck up the banks’ liquidity, and hence, the attractiveness of the government’s ‘IOUs’. This is especially true considering the highly favorable interest rates on which the banks were reaping handsome profits for much of the peacetime period.

“Our banks are probably the only ones in the world who can continue to fund a particularly high public debt, fund the private sector with loans amounting to around 103 percent of gross domestic product (GDP) and at the same time remain very liquid with a loans-to-deposit ratio of 30 percent,” explains Mazen Soueid, chief economist at BankMed.

This anomalous arrangement is enabled because the banks are continually attracting huge inflows of capital to fill their vaults. From the four corners of the Earth, a successful diaspora send much of their fortunes home, enticed by high domestic interest rates, while from the east flow petro-dollars and from the west come those seeking sanctuary from the chaos bedeviling the European and American banks.

So that is the love part. But threads of discord have found their way into the home, and the banks are warning that the pillow talk is over until there is a serious shake up of affairs. “The banks have reduced their exposure to Lebanese pound denominated treasury bills and while we continue to exchange Eurobonds I don’t think we will continue to indefinitely subscribe if there are no concrete reforms,” warns Nassib Ghobril, head of economic research at Byblos Bank.

The music stops

The banks have reason to be concerned. The fiscal deficit rose from $2.3 billion in 2011 to nearly $4 billion in 2012, a year in which the primary balance recorded a deficit for the first time since 2006. Economic growth plateaued at an average of 1.2 percent over 2011 and 2012, foreign direct investment is plummeting and consumer confidence is rapidly following course. As Ghobril succinctly observes, “it is not a rosy picture.”

During the boom years from 2006 to 2011, the debt-to-GDP ratio fell as robust growth outstripped the growth of the debt. However, the unhealthy confluence of a hemorrhaging public purse and a crippled private sector reversed this trend, and since early 2012 the ratio has started to creep back up again.

The banks have previously been happy to snap up the government’s papers as politicians paid lip service to much-needed reforms. However, the ominous economic malaise throughout 2012 and into 2013 — compounded by threats to the balance sheet they now see from an inflated exposure to the sovereign — has compelled their toughening stance.
“In the end, the Lebanese debt dynamics — unless you go back to a growth rate of over 5 percent — are unsustainable in the medium term because you have a very high debt to GDP and therefore need a higher GDP to pay back the debt and to sustain it,” reasons BankMed’s Soueid. What is more, the yields on the papers that the government is reissuing are not as high as the originals that they are replacing, so understandably the bankers’ appetite for them has waned.

The debt-to-GDP ratio had declined from around 172 percent in 2006 to 126 percent in 2011. This welcome trend however was only precipitated off the back of a particularly robust period of economic growth, while in reality the fundamental problems persisted below the surface. When the economy started to falter, the ratio started to creep back up, indicating that any perceived gains in the past had been merely superficial. “The only reason the debt-to-GDP ratio had been falling was because of strong growth in the economy and not due to any decrease in the nominal size of the debt,” explains Ghobril.

The banks, constrained by a limited domestic market and disinclined to deepen their holdings of government debt, have strived to diversify into foreign climes. Despite notable examples of expansion throughout the region, they have had limited success.

“Despite expansion being systemic and widespread, 80 percent of assets are still in Lebanon and 85 percent of profits of the sector are derived from Lebanon,” says Ghobril.

For the government’s part, they have previously stated that they want to attract more foreign and institutional investors to fill the void. However, while Lebanon’s sovereign debt may be of interest to a handful of investors looking to frontier markets, it’s simply not a handsome catch for the rates on offer. So with Lebanon’s banks now showing a concerted reticence about funding the government’s profligacy and the government unable to entice new benefactors, BDL has filled the void.

The lights come on

In short, the godfather in Lebanon’s troubled house has stepped in to keep interest rates steady and the government solvent. In the current climate of economic stagnation and high political risk the banks are not going to buy up all of the debt with interest rates as they are. BDL knows this but can’t afford to see interest rates rise, fearing an upward spiral that would further hobble an already fatigued economy. “The deficit is currently being two thirds financed by the commercial banks and one third by the central bank,” explains Byblos’ Ghobril.

This is of course an unsustainable fix if one dares to look beyond the immediate future. Unfortunately, the solution is dependent on decisive action from Lebanon’s notoriously fractured body politic. The government needs to seriously address its spending needs and combat the huge amounts of waste and inefficiency that beset pretty much every arm of the public administration. No easy task when there is no government.

In May the international credit ratings agency Moodys downgraded the outlook on Lebanon’s B1 government bond ratings to negative, and consequently revised from stable to negative the outlook on the long-term local and foreign currency deposits ratings of the three largest Lebanese banks: Bank Audi, Blom Bank and Byblos Bank.

“The government’s weakening creditworthiness weighs on the standalone credit profile of the banks given the high credit linkages between their balance sheets and sovereign credit risk,” announced the ratings agency in a statement after releasing the decision.

Despite dogged and vocal rallying calls from virtually every corner of Lebanese society, including from this publication, for extensive and meaningful government reform, there has been a contemptuous lack of action. Perhaps now that the nation’s most powerful players, the banks, are feeling the squeeze, politicians will be forced to neutralize the economy from the political environment and shake up a system that is riddled with corruption and waste.

June 27, 2013 0 comments

The Buzz

Business briefing: 26 June 2013

by Executive Staff June 26, 2013

written by Executive Staff

Economics and Policy

Power rationing in Lebanon is due to continue until at least Friday due to ongoing maintenance work, the state-run energy company has said.

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Arab Bank PLC, facing lawsuits over allegations that it aided Middle Eastern terrorists, said it asked the U.S. Supreme Court to stop a federal judge from imposing sanctions it claims may cause it to lose at a trial.

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Dubai Holding’s telecoms unit has hired Credit Suisse as a financial adviser to sell its 35 per cent stake in state-owned Tunisie Telecom, three banking sources aware of the matter said.

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June 26, 2013 0 comments

Comment

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