Executive Magazine

Banks vie for the deposit pie

by Maya Sioufi December 10, 2012

written by Maya Sioufi

If there is one figure that summarizes the significance of the banking sector in Lebanon, it is that total assets stood at $148 billion as of the end of September 2012. That’s a 5 percent increase so far for the year, despite Lebanon’s dreary economy, and means that Lebanon’s 71 commercial banks control assets worth 3.5 times the country’s gross domestic product.

What is less cheerful for bankers this year is the declining growth rate in assets and deposits, with profitability also expected to be down by the end of the year. Scenarios range from Byblos Bank chairman François Bassil expecting profits to drop 25 percent, to Blom Bank chairman Saad Azhari’s more optimistic scenario for flat profits this year.

For the first nine months of the year, alpha banks — the 12 largest with deposits in excess of $2 billion — reported total net profits of $1.2 billion, a 5 percent increase on the same period last year, which was marked by a domestic political vacuum and the beginning of the Syrian uprising. This is in contrast to the years prior to 2011, when banking sector profits were growing at double-digit rates. This year’s drop in profitability comes alongside an increase in provisioning, as alpha banks set aside $293 million for bad loans in the first nine months of the year, 3.5 times the amount allotted over the same period last year, according to Bankdata financial services.

Shrinking growth

In a year stacked with challenges — from turmoil in neighboring Syria, to increased international scrutiny, among others — the 5 percent growth in commercial bank assets in the first nine months of 2012 is down only two percentage points from 7 percent growth in the same period of 2011. But the rate is less than half the 11 percent average growth for the past five years. Deposits, standing at $121 billion as of the end of September, also grew by just more than 5 percent, a slight decrease on 2011’s growth rate of 5.6 percent, but a more significant decrease when compared to the average 10 percent growth rate of the past five years.

“We are watching the trend. If it continues then it could be a concern” says Pik Yee Foong, chief executive of Standard Chartered Bank Lebanon.

Jean Riachi, chairman of FFA Private Bank, notes that, “The new normal is to have a growth rate in deposits in the single digits as remittances are not as strong as before, given the worldwide recession and the Arab turmoil hitting Gulf countries.”

Slower deposit growth is occurring in tandem with a slower local economic growth. The International Monetary Fund’s most recent estimate put Lebanon’s growth at 2 percent for 2012, in line with Egypt and Bahrain.

“If you want to be optimistic, you can say for sure deposit growth is at a much lower rate than before, but it is still much above the minimum needed to support a 4 to 5 to even 6 percent GDP growth in Lebanon, and finance the public and private sectors,” says Freddie Baz, chief financial officer of Bank Audi.

Both the public and private sector are highly dependent on the banks to meet their funding needs. At $42 billion, banks increased their lending to the private sector by 6 percent in the first eight months of the year, versus only 2 percent for the public sector, which reached $30 billion on commercial bank loan books.
“With lower growth in deposits, the government cannot expect to keep on relying on the banking sector to fuel expenditures and will need to cut the budget deficit,” warns Riachi.

With the economic pie no longer growing at the same rate as in previous years, competition is bound to get fiercer. “We witnessed more cutthroat pricing from the competition and banks fighting over clients that are not worth fighting over,” says Tarek Khalife, chairman of Credit Bank.

Back to the basics

Compounding this is the fact that Lebanon has the 13th highest bank penetration rate worldwide, with 97 branches per 1,000 square kilometers according to the International Monetary Fund.

With pressures on profitability this year, several banking leaders told Executive they have tried to focus more on improving services and reassessing their cost structure, with the sector’s overall cost-to-income ratio dropping 1.6 percent in the first six months of the year to stand at just under 47 percent. “Most banks are following austere operating expenses policies,” says Baz. Standard Chartered Lebanon’s Foong added, “We are using this time to reevaluate our competitiveness and at the same time we are investing in improving customer service, systems and processes, compliance, etcetera.”

All in all, however, Lebanese commercial banks continued to enjoy solid fundamentals throughout 2012, largely thanks to the usual suspects: a regulator that has remained staunchly conservative through the years, forbidding bankers from engaging in risky activities, as well as the banks’ assets being predominately owned by local players who remained disinclined to cash out and flee.

December 10, 2012 0 comments

Comment

No longer quiet

by Peter Speetjens December 7, 2012

written by Peter Speetjens

Nothing ever happens in Jordan, it is often said, yet 2012 has been an altogether eventful year, which prompted some pundits to wonder if the country could be the next Arab state to fall. That, for now, seems a little far-fetched, although it is clear not all is well in the Hashemite Kingdom — neither economically, nor politically.

Tensions most recently boiled over when the government of newly-elected Prime Minister Abdullah Ensour in November announced a series of price hikes for, among other things, household gas, fuel and public transport. Jordan is facing a $5 billion budget deficit and strict austerity is required to secure a $2 billion loan from the International Monetary Fund.

Following the cabinet’s decision, thousands of people hit the streets to protest. In violent clashes in the north of the country, dozens of police officers were wounded and a demonstrator was shot dead. In May, similar measures were met with a comparable wave of protests, which forced King Abdullah II to “freeze” the fuel price increase introduced by Jordan’s previous government.

Keeping an eye on Jordanian politics is like watching a Mexican soap opera, as ministers and prime ministers roll on and off the screen like bad lovers. The latest power shuffle took place in October when King Abdullah replaced Fayez al-Tarawneh with Ensour, the country’s second prime minister in 2012 and its fifth since the first Arab uprising started in Tunisia in late 2010.

The change was triggered by the “Friday to Rescue the Nation” rally organized by the country’s main opposition group, the Islamic Action Front (IAF), the Muslim Brotherhood’s political wing. Some 20,000 people called for freedom and “real” reform in what is now known as the biggest public manifestation in the history of Jordan. Sure, 20,000 does not seem an awful lot, but Jordan started from scratch: until early 2011, all public gatherings and demonstrations were banned.

Meanwhile, change at the top is unlikely to impress anyone. King Abdullah has played this joker a bit too often during his 13-year reign, with disappointingly little result. What is more, nearly all top officials stem from a tiny inner circle of tribal elite. Often they have been in the driver’s seat before.

Take “newcomer” Ensour. The 73-year-old previously was, among other functions, minister of planning, minister of education, minister of foreign affairs and minister of industry and trade. His 63-year-old predecessor, Tarawneh, had already been prime minister in the late 1990s, and twice served as chief of the royal court. No one, certainly not the IAF, expects these dinosaurs to herald a new dawn for Jordan, even though Ensour during his inauguration appeared a man of good intentions. “The main challenge is holding free and fair elections,” he said.

Easier said than done, and his words did not impress the IAF, which immediately reinstated its intention to boycott the elections scheduled for January 2013. The same is true for several leftist and pan-Arab parties. And who can blame them? The new election law, adopted last summer, did introduce some cosmetic changes but is still tainted by the same old ills. In short, voting districts greatly vary in size, and favor rural areas to guarantee the tribes a parliamentary majority over the, predominantly Palestinian, urban masses. For example, Kerak, with a population of 200,000 is entitled to 10 seats, while Zarqa, with a population of one million, gets 11. In addition, the first is divided into six voting districts, the latter into only four. “If nothing changes, the new parliament will simply institutionalize polarization and political crisis rather than offering a mediating role and way out,” American scholar Curtis R. Ryan wrote in Jordan Business.

And if that is not enough, Jordan has other concerns. With its northern neighbor Syria in turmoil, the country has already accepted more than 100,000 Syrian refugees, some 40,000 of whom live in Camp Zaatari. Finally, the kingdom detained 11 Jordanian Islamists in October, allegedly for plotting to bomb Western targets in Amman.

Shortly after, Washington sent some 100 military advisers to Jordan.With their help, the Jordanian army and security forces, regarded among the region’s best, will do whatever it takes to keep the region’s ultimate buffer state afloat. However, it remains to be seen for just how long the way of the gun will be able to keep increasingly restless Jordanians in line.

Peter Speetjens is a Beirut-based journalist currently on assignment in Jordan

December 7, 2012 0 comments

Hospitality & Tourism

Off the flight path

by Nabila Rahhal December 7, 2012

written by Nabila Rahhal

Famed in the region as a holiday reprieve and named one of the top 10 cities in the world to visit by the New York Times in 2010 — the same year that more than 2.1 million visitors came to Lebanon — business in Beirut’s economy has always relied heavily on its hospitality and tourism sectors.

The drawback of a hospitality-driven economy is that even soft blows can do much damage. As Rabih Saba, managing and founding partner in Venture Hospitality, explains, “Security is the key word for hospitality. It is not the regional insecurities or even the internal politicians’ conflicts that hurt our sector the most. What people ultimately care for is their personal safety — so as long as the streets are safe, our business will be relatively unaffected. The danger to us is when the conflicts influence the streets.”

Food and beverage sector left hungry

The conflicts certainly hit the street this year, with protests blocking roads, mass kidnappings and sporadic armed clashes, among other things, which all helped contribute to Gulf states issuing warnings against travel to Lebanon.

“2012 started even better than the previous year until May, when the drop kick-started with the closures of the airport road,” says Mario Haddad Junior, owner of Sushi Bar and Falamanki, among other establishments. “Depending on the outlet, we are somewhere between 11 percent and 19 percent below last year, which constitutes a substantial decrease, but not a major loss.”

While there are no official numbers regarding revenues for this sector, those in the field estimate losses in revenue to be around 30 percent, across the board, when compared to last year. A significant number of venues closed down, including the world-renowned Buddha Bar and Duo in Downtown.

The reason? Simple. The almost total absence of tourists and expats this summer. According to Hady Fadel, corporate marketing manager at Boubess Group, which incorporates leisure industry companies such as spas, restaurants and hotels, the group’s venues in locations more reliant on tourists saw less activity and profits than those frequented by local residents. “Our restaurants in Ma’arad Street [Downtown Beirut] depend to some extent on the Arab tourists, and these were more affected by their absence this summer than our other outlets such as the ones in Zaitunay Bay or Hamra Street, which generated major profits,” says Fadel.

Haddad adds that, “It is not only the absence of the Arabs’ personal spending in the restaurants that caused our losses; it is their general spending in the country and those people benefiting from them and in turn spending in restaurants. Because of this lack of income this summer, Lebanese who went out spent less. This shows you how much the hospitality industry relies on tourists and specifically the Arabs.”

Toni Rizk, managing partner at TRI Food and Beverage, also pointed to internal unrest as a contributing factor to losses in the sector: “There were many nights where people were scared to go out because of the internal skirmishes. The losses in profit incurred then cannot be made up for, since what’s gone is gone. The biggest example of this scenario is the bombing in Ashrafieh and the events that followed, which pretty much diminished the Adha break activity we were expecting.”

And, even if profits are made during the winter festivities, they will not be enough to make up for losses amassed throughout the year, says Marwan Ayoub, founding and managing partner at Venture Hospitality.

The smoking ban

The third quarter of the year saw the introduction of the smoking ban in all indoor venues, which many in the hospitality sector see as the straw that broke the camel’s back. While it is too early to tell the exact effect of the ban, many operators view the timing of its implementation at the end of an already weak year as ill advised. They also object to the lack of exceptions made to venues which are smoking based.

“The smoking ban also hit a lot of people hard, namely those who recently invested in nightlife venues or cigar and nargileh [water pipe] lounges, and are now being asked to change their entire concept,” says Haddad. “Exceptions exist even in Europe and the United States; for example in Las Vegas you can smoke in the casinos, but here you can’t. In the end, restaurants will adjust but it is mainly the little bars, the cigar lounges and nargileh places that will suffer under this ban.”

Leftovers of 2012

This year the food and beverages sector in Lebanon was kicked in the teeth. “Today, the broad title for the industry is ‘survival of the fittest’,” says Ayoub. “Starting a couple of years after the [2006] war and until the year 2010 there was a boom in this business where the demand was bigger than the supply, and so almost all venues worked. These days are gone and nowadays if you don’t do your research well and open the right concept in the right area you will not last.”

Haddad also believes that those who entered this business in an immature manner will be naturally selected for extinction. “In this business, you have to love it and have a passion for food to stand out from the rest. Otherwise, and especially in these tough times, you will not last,” he says.

Boubess Group, for example, is a multi-branded and multi-regional hospitality company and so, according to Fadel, it was still able to record growth this year. Zaitunay Bay restaurant owners who have other venues in the country say they have recorded profits this year in comparison to their other venues, though they had forecasted much better for such a project.

Cautiously optimistic for 2013

Despite the tough times, all operators interviewed by Executive have plans to open new venues in 2013, though they appear to be proceeding with caution and are not as aggressive as previous years. “With the current climate, I am not comfortable spending so much money on the originally planned Italian restaurant in Mar Mikhael and we will work to make permanent the market food concept that is there now [where the Junkyard pop-up restaurant was located],” says Haddad.

According to Rizk, “If the regional situation continues like this, we will be facing a bigger crisis as tourists continue to avoid Lebanon and overseas expats fear visiting. Already, the high tourist season in Lebanon is shrinking with barely a productive week of festivities in the winter and a month in the summer, especially with Ramadan now in it.” Yet Rizk says his company will continue with its expansion plans, though with caution, as to not expand means “being left behind and having others take over our market share.”

Some operators have plans to venture out of Beirut to areas such as Dbayeh or Antelias as the rent in the capital has become too high. Others are working on innovative concepts that will coax the Beirut residents out once again.
Fadel sums up Boubess Group’s outlook for 2013, and that of the food and beverage sector: “The situation around us will not stop us from further diversifying our portfolios because throughout the country’s history there has been turmoil, and things have reached rock bottom often.”

“But sooner or later, things get back to normal and so we use this downtime to find good opportunities and when the market picks up, we will be ready,” he adds. “We need to be positive and move on with our expansion strategy.”

Hotels in 2012

Hotels are another arm of the hospitality sector which has witnessed one of the worst declines in their business in years, with the number of tourists entering the country at 1.18 million as of October 2012, down by roughly 16 percent from the first 10 months in 2011, an already weak year for the sector.

According to an Ernst and Young study, room occupancy in Lebanese hotels in the first two quarters of 2012 saw an increase of 11 percent as compared to the same period in 2011. Pierre Achkar, head of the Syndicate of Hotel Owners in Lebanon, explains that, “The first six months of 2012 did indeed see an occupancy increase in comparison to the same period in 2011 but this does not mean hotels were performing that well. The first half of 2011 was a bad period in that year, before our government was formed, and we had internal instabilities.”

Achkar adds that this increased occupancy in the first half of the year is only true for hotels in Beirut, as the city has managed to position itself as a corporate tourism destination for international conferences and general business events. “Hotels outside of Beirut did not see any of their customary activity in the first six months of 2012 because these hotels usually fill up with tourists from neighboring countries who find them cheaper than Beirut hotels, and are more likely to have vacant rooms,” he says. “These tourists, who are mainly Jordanians, Syrians, Iraqis and Iranians, did not come this year. Seventy-five percent of Jordanians usually come here by car and this was impossible in 2012, and the Iranians come here as part of their religious pilgrimage to Syria which they obviously did not do this year,” continues Achkar.

Gulf Arab countries warning their citizens against visiting Lebanon was considered the final blow for the hotel industry. “Saudi Arabians are the biggest spenders in Lebanon and losing them, and the Arab Gulf tourists in general, impacts our entire economy,” says Achkar, adding that due to their proximity to Lebanon and their love for it, Arab tourists are irreplaceable in Lebanon, as was proven this year.

The toll till today

“Hotel occupancy has been going down since the Arab tourists’ ban, and we were hoping for increased activity during Adha, but the bombing destroyed the season. The situation is very bad now, and Beirut hotels are running at 32 percent room occupancy. This leads to a hungry competitive market which decreases room prices to attract guests, but the whole situation is a losing one,” explains Achkar.

Amidst these dismal times, it is the low budget and boutique hotels that crept ahead. While representatives from higher-end hotels interviewed mostly admitted to a drop in room occupancy, those from lower-budget establishments said they were working at an average of 60 percent occupancy this year, and were generally satisfied with their activity, compared to other hotels. “We mainly get European and American tourists who want to explore the country on a budget and though we did have a lower occupancy than last year, we are still performing relatively well compared to the pricier hotels that cater more [to] the Gulf tours,” said a manager from Napoleon Hotel in Hamra.

With the overall significant decrease in visitors, hotels in the country have developed crisis management plans to cope with the situation which include closing down floors or their less popular restaurants, giving their employees unpaid days off and not hiring any new staff.

The future’s uneasy occupancy

Rana el-Khoury, general manager of Le Gray Hotel, describes this challenging period as one of survival, yet she says she still harbors hope for the future, based on the complex Lebanese market. “It is necessary to reduce costs to cope with the consequences of such a delicate situation we are currently experiencing,” says Khoury. “In the meantime, maintaining a superior service quality and competitiveness are key to meet any sudden improvement in the market. Given the complexity of the Lebanese market, improvement can occur overnight, as seen in May 2008 with the Doha Agreement; occupancy rates jumped back then from 30 percent to 90 percent within one week.”

She adds that another challenge is maintaining and keeping ready their trained employees who are getting discouraged by the current situation: “The departure of such skilled talents, increasingly discouraged by the lack of prospects, could cost the tourism sector in Lebanon. Consequences are difficult to turn around.”
If regional trends persist, 2013 does not promise to be a better year and hotels may be looking at an even bigger crisis than they are facing now: “If the situation stays like it is, especially with the Gulf Arab tourists’ ban, then we have no hope,” says Achkar. “While hotels will not completely close down, due to their inherent land value and such, they will continue to run at low occupancy, and return no profits.”

December 7, 2012 0 comments

Economics & Policy

So many options, so little growth

by Thomas Schellen December 7, 2012

written by Thomas Schellen

The global disaster count was going so well. Throughout the first 10 months of 2012, the financial tally of natural catastrophes for international reinsurers and insurers was a fraction of the horrors of 2011. Even a tsunami alert that had reporters spending anxious hours watching the beaches of Waikiki in late October 2012 turned out to offer doomsday journalism nothing more exciting than a 2.5-foot (0.76 meters) wave after sunset, with less insured damages than a major highway crash.

But then, within 48 hours after the Hawaiian micro-tsunami, Hurricane Sandy rolled in and CNN audiences were treated to hours of live reporting by rain-drenched ‘global news leaders’.

With this tropical storm came a big wave of insurance claims, first estimated at $6 billion, but those assessments were upped to $20 billion to $25 billion within one month. By December 2012, the insurance industry was yet to have the final insured cost of Sandy because of overlapping damage events. What was clear by that time, however, was that Sandy’s freakish convergence of weather patterns into a catastrophe for the immensely populated Eastern Seaboard of the United States was not enough to make insurance giants stumble on their profits path.

According to numbers for the first nine months of 2012, published by the world’s two largest reinsurers in November, profit expectations for the full year represent strong increases from 2011 due to a combination of better investment performances and lower catastrophe counts. Munich Re, the world’s largest reinsurance firm, surpassed its 2012 profit expectation of 2.5 billion euros ($3.2 billion) by end of the third quarter. The company revised its full year net profit expectation to 3 billion euros ($3.84 billion).

Swiss Re, the world’s second-largest reinsurer, reported a 68 percent year-on-year profit leap to $2.18 billion in the third quarter of 2012 alone, though this included a $626 million one-off gain related to the sale of the US business of Admin Re, a Swiss Re unit. Evaluating 2012 until November, Swiss Re Group Chief Executive Michel M. Liès boasted of “very good financial results in a volatile environment” and “excellent performance in [property and casualty] reinsurance”. The company said in the same statement that it was ahead of its return-on-equity targets for the first nine months of 2012.

The relevance for the Middle East, and for Lebanon, in the natural catastrophe story of Sandy is the insurance industry’s ability to handle it. This story draws attention to the business and economic importance of insurance, and that’s difficult in Lebanon — while the region saw a new generation of gripping industry headlines, the insurance sector’s year in Lebanon was frankly described as “dull” by the country’s insurance commissioner.

Disaster management

One lesson to remember on natural catastrophe insurance after the experiences of 2012 and 2011 is that the very nature of disasters precludes short-term expectations. Natural perils as well as man-made catastrophes are the biggest challenge the insurance industry has to deal with, said Farid Chedid, chief executive of regional reinsurance brokerage, Chedid Re. Reinsurers take these risks carefully into account in pricing the covers they offer insurance companies for assuming parts of their risks from catastrophe underwriting.

“The problem is how to open the client for taking into consideration that this has to be priced in. You can have 10 years of no losses and the client is saying, ‘I am spending too much money on insurance, what am I getting in return?’ But the idea is that you accumulate premiums over 10, 20, 30 years to compensate for a major loss. If these companies [were struck by a disaster and did] not have insurance, they would be wiped out,” Chedid said.

“The insurance industry, as well as the governments, have not done enough to create the real need and awareness for insurance,” commented Fady Shammas, chief executive of Arabia Insurance. “Insurance awareness is non-existent in some Arab countries and in some circles in the Arab world, insurance is even considered haram, or wrong.”

The negotiations with reinsurers have been getting more complicated for Lebanese insurance companies, confirmed Fateh Bekdache, chief executive of Arope Insurance. Everybody in 2012 showed more concern about the possibility of a major earthquake affecting Lebanon, he said, but potentials of social unrest and labor turmoil — subject to insurance clauses known as ‘SR&CC’ for strikes, riots and civil commotion — also became a big issue in the region and were of much larger concern than ever before in reinsurance negotiations in preparation for 2013.

Political perils

The worst 2012 surprise for the Lebanese insurance industry and especially for Beirut-based regional companies with subsidiaries operating in Syria, however, was the conflict that ravished Lebanon’s eastern neighbor. On the business side, revenues contracted significantly. Arabia Insurance, one of the few truly regional players in the Middle East, witnessed a 25 percent drop of premiums written by its Syrian unit, according to Shammas.

Yet even as premiums contracted sharply, the group’s profitability in Syria edged higher. Apart from that, the company’s main concerns in 2012 were not the numbers. “Our fears are over the physical security of our employees,” said Shammas. “We are concerned about our branches and our head office and also about the cash we carry in the banks in case there is devaluation of the Syrian pound.”

Arope, which followed its parent Blom Bank into the Syrian and Egyptian markets, also had to wrestle with a backlash from the Syrian crisis. The company was not yet ready to disclose annual results on Syria. “We hopefully will not have losses in Syria but we have to wait and see,” said Bekdache.
However, both companies told Executive that their business in Egypt was regaining momentum. “Egypt is definitely looking up,” Bekdache said and Shammas said that Arabia’s premiums in Egypt rose 13 percent in the first nine months of 2012.

Woes of sanctions

A second unwelcome implication of the Syrian crisis for Lebanese insurers in 2012, and one which is likely to be obstructing business flows even more in the coming year, is the need to comply with a vast array of international sanctions against Syria.

The same business barrier of course applies to interaction with Iran. Cargo insurers, for example, do not normally have all the information available to them that the sanctions regimes require, and could unwittingly be subject to repercussions if those they insured violated the sanctions and the insurers were unable to prove they had made reasonable efforts to comply. According to Malek Costa, the head of group compliance at Blom Bank, Lebanese insurers should urgently invest in a compliance department, even if it is a one-person operation.

The third negative impact of the Syrian crisis is on the sale of cross-border covers for motor vehicles, the so-called ‘Orange Card’. Demand for the Orange Card dried up in 2012 and while representing a small portion of the motor insurance business, the revenues drop cut deeply into the cash flow of the scheme’s manager in Lebanon, the insurance association Association des Compagnies d’Assurances au Liban (ACAL). In planning for 2013, the association announced that it would have to tighten its belt on projects, such as helping to sponsor insurance practitioners for professional qualification programs.

All three impacts of the Syrian crisis on Lebanon-based insurers in 2012 did not translate into huge cuts in corporate bottom lines — Arope is expecting another record year in net profits and Arabia is looking at 10 to 15 percent growth in 2012 net profits. But the Syrian spillovers do increase costs and could be harbingers of more detrimental impacts in 2013, especially in indirect repercussions if the Lebanese economy suffers from further slowdown next year.

On the other hand, a recovery of business activity in Syria would mean that insurers will see their business scale up very quickly. Shammas said, “If Syria sees more imports or exports, the insurers will issue more policies immediately. Insurance providers are very closely linked to the economic cycle; if there is more banking activity, we will sell more. As soon as there is a positive change in the Syrian economy, we will benefit.”

The divisions of mandatory

Across the Middle East region, the experience of the past few years has proven that the only way to increase insurance in wider populations is to introduce compulsory insurance schemes, such as mandating employers to register their staff with a health insurance scheme.

The introduction of compulsory lines in Saudi Arabia, and regulations requiring Shariah compliance of all insurance companies, have expanded the kingdom’s insurance market and played a large role in enhancing the Islamic insurance practice, takaful.

However, according to Chedid Re’s Farid Chedid, the sword of mandatory insurance is double-edged. “Motor and medical across the region today represent 60 to 70 percent of the business. These are the two most challenging lines of business and the most volatile. Having the two most difficult lines of insurance as compulsory and leaving the rest apart — is that to the benefit of the industry? I don’t know,” he said.

A minor boon for Lebanese insurance in 2012 was based on a new compulsory insurance requirement. Ministry of Industry regulation, phased in mid-year, that all industrial establishments have to show proof of a fire insurance package when renewing their annual licenses played out promisingly, said Abdo el-Khoury, executive board member at United Commercial Insurance (UCA), which according to him is the third-largest provider of fire policies in Lebanon.
“Fire insurance will advance further due to the Ministry of Industry’s decision to force factories to have obligatory insurance against fire and liability,” he told Executive, “but as things have just started moving in this regard, it will need at least two years to show good results on fire risks.”

Cranking up the engine of motor

A much weightier, and riskier, field of mandatory insurance in Lebanon will have to be ploughed and planted in the motor business line. In late October 2012, a new traffic safety law went into effect in Lebanon including a clause that motor vehicles must be insured, not only for third-party liability (TPL) against causing bodily injury but also against material damages.

Whereas insurance motor premiums underperformed both the market and historic trends in 2012, the coming year could therefore see a bloom of a thousand new TPL products. It could. But as things look at the end of November 2012, the issue could also reveal itself to be a field infested with sickly tumbleweeds.

Running a sustainable scheme of compulsory TPL for material damages will require providers, intermediaries and supervisors to improve aspects of the business that have been fraught with remarkable dysfunctionalities this past decade. “We must not repeat the mistakes,” insurance commissioner Walid Genadry told Executive.

The opportunity for fraud was demonstrated in a case uncovered not long ago: the supervisors and the National Bureau for Compulsory Insurance (NBCI) caught on to a practice where apparently four providers, or some of their agents, took to the blatantly criminal practice of faking Mecanique vignettes and selling these fakes to motorists to display in their vehicles. Genadry said, “After the withdrawal of the license of American Underwriters Group insurance company, we noticed a marked increase in declared and legally bought compulsory car insurance vignettes.”

The insurance industry has made efforts to install technical tools to eliminate cheats on TPL policies and vignettes at the points of issuance, through a control system using online linkages between the Mecanique inspection stations, the relevant ministerial departments and insurance providers.

Other efforts are ongoing to more effectively combat motor insurance fraud by policy owners and identify drivers with extreme risk profiles. The tool for this is the Motor Risk Center (MRC) project, a database where insurers can share and access the relevant information. When and with what degree of voluntary participation this MRC will be running is a different question.

Perhaps quite fortunately from the insurance industry’s perspective, the implementation of the compulsory TPL scheme for material damages is a Lebanese process. It has specificities. The traffic safety law acknowledges that design of the TPL scheme is the domain of the Ministry of Economy and Trade (MoET). The ministry logically empowers the NBCI to propose tight or broad policy options and prepare the needed sets of tariffs, coverage terms and ceilings and standard policy documents.

“It will be a good step for the assured parties to have material damages cover but we still need ACAL and all insurance companies to put up criteria and facts based on the statistics on hand,” commented UCA’s Khoury. He emphasized that the scheme will not represent completely new ground as Lebanese insurers have been underwriting material damages covers since many years, albeit not in a compulsory setting. “If we can study the risks well, it will be a plus and provide premium income to the insurance companies,” he added.

As the new reality will require motorists to have covers for bodily injury TPL and material damages TPL, another question is if the new TPL should come as one uniform policy, a policy package with two sections or two wholly separate policies that motorists will need to buy.

The NBCI has a lot on its plate. According to Arope’s Bekdache, who was reelected in October to another three-year term as the NBCI head, it asked the motor committee of the insurance association immediately after the traffic safety law’s coming into effect to work on all the issues that need to be solved in devising the new compulsory scheme.

In conclusion, the signing of the traffic safety law signifies no automatism in the implementation of the new compulsory TPL. However, as all insurance stakeholders Executive queried affirmed, there is now a real push to get to the new reality.

No deadline for the implementation of compulsory material damages TPL seems to have been set under the framework of the traffic safety legislation, or by the MoET, and Executive found no evidence of a schedule for the scheme’s finalization. It is certain that, after agreements are reached by concerned parties, NBCI will submit the scheme to the minister of economy, whose simple signature then will put the new rules into effect. Stante pede. Immediately.

December 7, 2012 0 comments

Last Word

Endangered prospects

by Sami Halabi December 7, 2012

written by Sami Halabi

The Lebanese proverb probably most apt for doing a good business deal roughly translates as follows: Always give your bread to the baker, even if he eats half of it. That’s because bakers know what they are doing with bread; someone else will probably just burn it. So when the Lebanese cabinet finally formed the Petroleum Administration last month, many feared the bread was toast before it even began to bake.

There is no doubt the appointment of the Petroleum Administration by the cabinet is, in theory, a welcome measure. If our country is to ever reap the rewards of what hydrocarbon riches likely lie below our seabed, the Petroleum Administration will be needed, not only to negotiate with international oil companies (IOCs), but also to provide policy continuity when governments and ministers play musical chairs, as they so often do.

The manner in which the energy minister and affiliates of the parliamentary speaker pushed confirmation of the makeup of the board through cabinet in the waning minutes of a cabinet meeting last month — offering almost no time for the prime minister and other participants to scrutinize the list — is not reassuring. Nor is the fact that, after nearly an 11-month delay in appointing the Petroleum Administration, the names on the final list largely lack the international clout called for in the job descriptions for the different board posts.

Lamentably, this kind of behavior can be expected of politicians who barely bother to read or debate most policy issues that are pushed through the executive or the legislature. In due course, government (both the opposition and the governing majority who voted for the petroleum law) managed to make sure that the fate of the Petroleum Administration will likely follow the course of the other so-called independent regulatory bodies that were intended to provide policy continuity. Take, for instance, the Telecommunications Regulatory Authority (TRA), finally appointed in 2007. It is in contravention of the law that actually created it (in 2002) because it is still financially dependent on the telecommunications ministry, and the tenure of its board (from which two of five members have already resigned) is long up. Today, the TRA is little more than an “advisory body” to the minister by the admission of its own board members.

Perhaps thankfully, that may not be a problem for the Petroleum Administration since it is not even nearly as independent as the TRA. While it enjoys “financial and administrative independence from the minister” the latter also “provides oversight for the body,” according to law. A quick read through the law reveals that the body is beholden to the minister first and the cabinet second to organize the “essentials of its work, its organization, its hierarchy and its salaries.” And it is the minister’s signature that is needed on any exploration and production contracts, not the Petroleum Administration’s or the cabinet’s.

The much-heralded achievement of reaching a consensus on rotating presidency for the board is hardly cause for cheer. While it may mean that no single party can consolidate power over the administration, it also means that each politically affiliated board member (which they all are) may easily come to loggerheads with the minister if their bosses don’t agree.

To boot, there is no historical precedent to show this has worked to the benefit of any nation pursuing such a policy. In an industry such as oil and gas where procedures can span years and exploration and extraction can take decades, an annual rotating presidency will likely mean the opposite of the much needed policy continuity, not to mention the influence IOCs will be able to bring to bear on the disempowered Petroleum Administration members. And given that IOCs will have around six months to prepare their bids once, or if the cabinet passes several implementation decrees, it is almost certain that no bidding round will occur until after the next elections. That means the possibility of a new minister in town, with which the Petroleum Administration might not find itself in such good standing.

Finally, the Petroleum Administration will have no authority over the areas that are in dispute with Israel in the south, nor the sovereign wealth fund that is legally mandated to be set up in one year, when the first bidding round is tipped to launch. Both issues have the potential to derail the entire process and transform any discovery of oil into an unmitigated disaster, both politically and economically.

So, before we lick our lips in anticipation of untold wealth being served up to us, we may want to have a good think about who’s baking up the deal, and what’s going to happen to all that bread.

December 7, 2012 0 comments

Comment

Yemen: A country of halves

by Farea al-Muslimi December 6, 2012

written by Farea al-Muslimi

Yemen has always been a country of halves,and 2012 was no different. Half dictatorship, half elections, half reform and some even claim merely a half a revolution, given that past injustices have yet to be righted.

For starters, after more than three decades of dictatorship under Ali Abdullah Saleh, Yemenis held their first free and fair election for a president in February, though it was more of a referendum really, given that there was only one name on the ballot. Needless to say, Abdu Rabu Mansour Hadi won handily.

Hadi’s rise — or rather, Saleh’s undoing — had began a year earlier, when angry, frustrated youth began protesting. Saleh’s bloody attempts at repression only galvanized wider public support against him, spurring a general uprising. Life-long Saleh allies switched sides, skewing the character of the protest movement but also opening the door to foreign political intervention when Yemen appeared on the brink of civil war. The international community and Gulf Cooperation Council initiative, known simply as ‘the GCC deal’, led to Saleh being granted immunity for stepping down and a managed transition away from his rule.

The implementation of that deal, with all its complex details, has dominated Yemen’s political headlines for the last year.

The youth who began the protests in 2011 had six main demands for the revolution: overthrowing the regime, building a civic state with a separation of powers, the creation of a free education system, building a strong national economy, assuring an independent judiciary and the reconstruction of the military.

Looking at those demands provides an opportunity to assess how far the country has come and how far it still has to travel.

Saleh is — at least technically — out of power, and while many of his strongest allies and relatives have also been pushed out of military and civic agencies, some have managed to retain powerful positions in the armed forces. The process of reconstructing the military has begun, but too slowly for many. Further concerns remain over segments of the military that joined the revolution, as they are now actually impeding the reconstruction.

The economy, meanwhile, remains devastated. It is not just that millions of Yemenis face an ongoing hunger crisis, but that the traditional elite who maintain a stranglehold on the economy have not had their interests challenged. The National Dialogue Conference — once slated for the end of 2012 but now postponed — is meant to bring together all the country’s stakeholder groups and is the optimists’ strategy for solving Yemen’s woes. However, it faces many obstacles, the most pressing of which is southern separatists threatening a boycott. Thus, the dialogue’s legitimacy is already under scrutiny.

It is perhaps no exaggeration to say that the only two parts of the GCC deal that have been fully achieved are granting Saleh immunity and Hadi assuming his place, though with limited authority. Everything else is either in transition, or waiting for the national dialogue. Solutions for dealing with political problems — such as southern secessionists, the rebellious northern Saada region and the continued lack of youth inclusion in the process — remain vague. Despite attempts by the United Nations to reach a national consensus, such an agreement is difficult to foresee.

Political issues are further complicated by the fact that they are interrelated to economic problems, so unless economic fundamentals are dealt with, little political progress can be achieved. Sadly there is currently not much Yemen can do by itself economically. Until it rediscovers its economic capacity — replaced during 33 years of corrupt dictatorship with a semi-feudal system — international help is needed. The world has started to realize this and the recent international ‘Friends of Yemen’ conference led to pledges totaling $8 billion in aid and loans. How and when these funds will be spent, or even if they will materialize at all, is unclear.

Despite the dramatic events of the last two years, Yemen remains unable to end its cycle of tragedies alone. The first few months of 2013 are crucial. If the National Dialogue Conference fails, the country will go from being a weak state to a failing one. This could exacerbate emerging sectarian and tribal tensions, while the youth contingent who saw their protests fail may not be so peaceful next time. The nightmare scenario is a civil war. Now, as never before, Yemen is at the crossroads between becoming the new Egypt, where a fledgling democracy is gradually taking hold, or a collapsed state like Somalia. The outcome of the national dialogue and the international community’s actions will be crucial in deciding Yemen’s fate.

Farea al-Muslimi is a Yemeni activist and commentator

December 6, 2012 0 comments

Finance

Interest rates on the rise

by Marwan Mikhael December 6, 2012

written by Marwan Mikhael

The Lebanese banking sector has been tested against internal and external shocks many times through recent decades, and it has been tested yet again this year. The sector still enjoys high liquidity ratios, enabling the banks to weather economic turmoil, while the sector as a whole has also been steadily reducing its heavy government exposure — a positive trend amid the numerous challenges Lebanon’s commercial banks have faced in 2012.

The sector remains the main source of financing for the Lebanese government but its exposure to the highly indebted sovereign has been on a declining trend since 2006. Banks’ claims on the public sector constituted 21 percent of their total assets at the end of 2011, down from 28 percent at the end of 2006. Banks hold around $29 billion, or close to 54 percent of the gross public debt, which stood at $54 billion at the end of 2011.

The weight of public debt in the economy, however, whilst still high, has witnessed a large decline since 2005. The ratio of public debt to gross domestic product dropped from 182 percent in 2006 to 135 percent in 2011. This decline was led by high economic growth rates from 2007 through 2010, as well as a lower growth rate for public debt, with the government registering large primary surpluses during the same period.

Moreover, the relative importance of bank claims on the public sector declined when compared to bank credit to the private sector. While the banking sector continued to lend to the government from 2007-2010, their claims on the private sector increased at a much faster rate, skyrocketing 222 percent from $15.5 billion in 2007 to $34.5 billion in 2010.

Funding the public and private sectors

This economic boom took place in an environment of low interest rates on government debt and helped the banks lower their exposure to the sovereign. When such interest rates are low, banks prefer to lend to the private sector, as the rates charged are higher than the yields banks generate from their government securities portfolio. This is compounded by interest rates on deposits declining less than global interest rates, which has put pressure on banks’ profit margins. Hence banks are turning more and more toward the private sector in order to improve their profitability.

Lowering banks’ exposure to the sovereign reduced the ‘crowding out’ effect, which happens when the government has large financing needs and the available resources are limited — namely, when there is not enough increase in deposits to finance both public and private sectors without enduring an increase in lending rates. In the case of Lebanon, there is a certain growth rate of deposits that has been sufficient to finance government deficit without crowding out the private sector. Total lending needs of the economy including both public and private sectors stands at between $5 billion and $7 billion per year, which means that deposits must grow by 6 to 7 percent in order not to induce an increase in interest rates and consequently a crowding-out effect. Since 2006, there have been enough capital inflows into the country to cater to both the private and public sectors.

A bleak outlook

Growth in bank deposits for 2012 stood at 5.2 percent as of the end of September — similar to 2011 but much lower than previous years, and just enough to provide the necessary financing needs for both the private and public sectors. Going forward, any further reduction in bank deposit growth would mean interest rates would have to increase, with competition between the public and private sectors over the available funds intensifying. Consequently, the cost of servicing the public debt will increase for the government and the cost of new investments will also go up for the private sector; an unwelcome possible scenario for 2013.

December 6, 2012 0 comments

Business

Fall of the factories

by Zak Brophy December 6, 2012

written by Zak Brophy

Lebanon’s economy is dominated by banking, services, tourism and real estate, but there are scores of firms working in the productive sectors that are fighting to hold their own in circumstances that can at best be described as challenging. High operating costs, decrepit infrastructure and a dysfunctional body politic are assured burdens for Lebanon’s captains of industry.

While the enterprising and tenacious producers and traders within Lebanon are well attuned to this ramshackle playing field, 2012 has thrown some hefty additional spanners in the works. “We have reached an economic situation where we are stranded in the middle of a tunnel and there is no end in sight,” warns Mohammad Choucair, president of the Lebanese Chamber of Commerce, Industry and Agriculture. “We are seeing bankruptcies and lots of companies closing down.”

At the dawn of the new-year the International Monetary Fund (IMF) was predicting 1.5 percent growth for Lebanon’s economy during 2012. The reality is that it will be lucky to have flat-lined at 0 percent, with all indicators suggesting that the country slipped into negative growth in the final quarter. This deterioration was compounded by the political establishment’s sadly predictable degeneration into gridlock, which has only served to strip the economy of leadership and amplify the sense of insecurity in the country.

While discussing with Executive the dire straits into which the economy has fallen, the Minister of Industry, Vrej Sbounjian, stated, “We don’t have to make money every year; there are many nice things to be done in the country.” This frank admission perhaps best illustrates how rudderless the government is when it comes to offering meaningful succor to the nation’s business community.

And surely they need it. The World Bank and International Finance Corporation “Doing Business 2013” report ranked Lebanon 115th among 185 countries and 11th among 19 Arab countries in terms of ease of doing business. In almost every category, including starting a business, getting electricity, protecting investors and paying taxes, Lebanon slipped down the rankings from last year’s position. In such a climate, Charles Arbid, president of the Lebanese Franchisers Association, says, “Us Lebanese are used to being crisis managers but today we have to reconsider our way as a nation.”

Golden days past

Lebanon’s industrialists enjoyed a boom from 2005 to 2010, but those days are now a distant memory. Industrial exports nearly doubled in value from $2.17 billion in 2006 to $4.06 billion in 2010 but, “in 2011 it was not a slowdown in growth but a complete stop, and it was the second half of the year that did all the damage,” according to Neemat Frem, president of the Association of Lebanese Industrialists.

The standstill in late 2011 has gone into full-scale retreat in 2012 with figures released by the Ministry of Industry showing that industrial exports totaled $1.9 billion in the first eight months of 2012, constituting a decrease of 12.2 percent from the same period the previous year.

The reasons for this downturn are numerous, including a slump in tourism, which hit demand for agricultural and industrial products, a fall in exports through Syria due to the ongoing violence there and a drop in foreign investment on account of the precarious security and political situation in Lebanon. Furthermore, the already prohibitively high operating costs for Lebanon’s producers were pronounced in 2012 by an escalation in the energy crisis within the country and the implementation of new minimum wage legislation.

“I can’t stress enough the fact that our economy is inversely correlated to the price of a barrel of oil, as we have no other form of energy other than liquid oil: no gas, coal [or] nuclear,” gripes Frem. “Électricité du Liban (EDL) does not provide any buffer zone like other countries for surges in energy costs, and industrialists are running on their own generators.”

EDL was engulfed in a highly politicized internal labor dispute for much of the summer and the decaying energy infrastructure only deteriorated further, resulting in a ratcheting up of power rationing, with some parts of the country stranded without electricity for up to 22 hours a day.

With industrialists increasingly relying on generators, the global rise in fuel prices was acutely felt on the balance sheet. “Operating costs are so high in Lebanon. Businesses can’t even forecast a budget for the year because the international price of diesel fluctuates so much. It jumped by around a third [in 2012],” explains Nassib Ghobril, head of economic research at Byblos Bank.

The labor costs incurred in Lebanon are also high in comparison to regional competitors, and when the government bungled its way through the implementation of new minimum wage legislation the private sector cried foul. “The increase in salaries has affected us,” says Daniel Abboud, general manager of Carosserie Abillama, which has a staff of 300 to manufacture trailers and other automotive add-ons that are exported to some 27 countries. “Our products are customized and cannot be mechanized so we rely on labor. Our prices are up 6 percent, so it’s significant.”

As of February 1, “the minimum monthly wage will be fixed at LL675,000 ($450) and the minimum daily wage will be set at LL30,000 ($20), as per articles 1 and 2 of law No. 36/37 issued 15/05/1967,” stipulated the decree published in the government’s Official Gazette. Effectively, employees received a monthly increase ranging from LL175,000 ($116.67) for those earning the minimum wage, up to LL299,000 ($199.33) for those on salaries above LL1.5 million ($1,000).

With Lebanon’s living costs spiraling, reforming the minimum wage was necessary. However, the manner in which it was implemented whiffed of more than a hint of populism, with criticisms from numerous fronts that the proposed legislation would further fuel inflation. Unaccompanied by progressive reforms to taxation and service provision, it is likely the wage shift will do little to really improve the living standards of those on the bottom rungs of the economy, while it will certainly increase the operating costs of employers.

Left out to dry

Lebanon’s private sector is used to operating amid political crisis and under weak governments. However, the elected leaders of the country could easily throw them a few bones to help them get on with keeping the nation in business. There are several key pieces of legislation that would go a long way to energize Lebanon’s business environment, but they are gathering dust in drawers or are lost in the labyrinth of commissions at Parliament.
“We are trying to see that most of the economic decisions are taken in a sane logic and create a more business-friendly environment, and to enhance SME’s [small and medium-sized enterprises] in Lebanon,” says Nicolas Nahas, minister of economy and trade. However, in reality the Lebanese business environment is stacked in favor of a minority of players dominating the markets.
A 2003 report commissioned by the Ministry of Economy of Trade revealed that half the products sold in the Lebanese market come from sectors where there is an oligopoly, under which more than 40 percent of the market is owned by four companies or less. In plain English this is called a cartel. According to the study, three companies own 65 percent of the cement market, 69 percent of the soft drinks market, 77 percent of soap sales, 79 percent of elevator repairs and 85 percent of insulated wires and cables.

Just as Lebanon’s political elite is dominated by a small clique of men, so too is its business arena; the boundaries between the two domains are oftentimes blurred. The prevalence of cartels is damaging to the consumer who suffers from less choice and higher prices while it also hinders competition. It certainly is no friend to the SMEs.

A major step to challenge these oligopolies would be the adoption of anti-trust and competition laws. Such legislation does exist but it has been comfortably squirreled away and virtually never enters the political discourse. Minister Nahas claims the law is in stasis because there is a “constitutional debate” over the legitimacy of any legislation that was introduced during the term of Prime Minister Fouad Siniora (2005-2009).

While technically plausible, this logic is not particularly convincing. Even it were true, the fact that some politicians would hold back important legislation because it was inked from their opponent’s pen is repugnant. The more plausible and distasteful reality is that politicians who have vested interests in the survival of the cartels would rather these laws never see the light of day.
Other vital laws have also been drafted but are held up in the opaque quagmire of Lebanese politics. Perhaps most notable among these are new investment, e-commerce, trade and intellectual property rights bills. With the politicians engaged in a ruinous faceoff over who gets to hold court, they are likely to stay in the dark for some time yet. Indeed, Nahas concedes that none of this legislation will pass as long as the political impasse prevails.

And so it is that 2012 ends on a sour note for Lebanon’s private sector. For those that have persevered through the year’s economic and political crises the closing chapter brings little reason to believe things will get better in 2013. Businesses are going to have to hunker down and hope that at the very least security is maintained so they can stand fast until brighter days return.

December 6, 2012 0 comments

The Buzz

Morning briefing: 6 Dec 2012

by Executive Staff December 6, 2012

written by Executive Staff

Economics and politics

A draft of changes to United Arab Emirates bankruptcy law aimed at simplifying the process and letting failing companies restructure is taking longer than expected and may not be ready until the end of 2013.