Executive Magazine

The uncomfortable gaze of Uncle Sam

by Maya Sioufi December 3, 2012

written by Maya Sioufi

Lebanese banks had their fair share of challenges to deal with in 2012 : a stagnant economy; the ongoing turmoil in neighboring Syria; increased scrutiny from the United States; increased regulatory requirements; America’s upcoming Foreign Account Tax Compliance Act (FATCA); the anti-Iranian lobby urging foreign institutions to drop their holdings of Lebanese debt; cyber attacks on Lebanese bank accounts, and the list goes on.

These challenges have not left the sector unscathed. Deposits and assets of the sector, while still up in 2012, are growing nowhere near the rates enjoyed a few years ago. End-of-year profits are expected to drop in 2012 with several general managers expecting falls at double-digit rates.

The big nasty

First and foremost on bankers’ list of concerns is the ongoing unrest in Syria and its spillover into Lebanon and its economy. There are currently seven Lebanese banks present in Syria with total assets standing at $5.2 billion as of the end of June 2012, though this amounts to a meager 3 percent of Lebanese banks’ balance sheets. Profits generated from these Syrian affiliates stood at $30 million for the first six months of the year, just below 4 percent of the total sector profits. To stay on the safe side, banks allocated $293 million in collective provisions — held against unidentified losses on a portfolio of loans — in the first nine months of 2012, after allocating $232 million in 2011. “Our profits in Syria are allocated as provisions; there are no contributions from Syria to our earnings,” says Freddie Baz, chief financial officer of Bank Audi.

But the impact of Syria’s ongoing chaos on Lebanese banks goes beyond their presence inside Syria. With international sanctions placed on Syria, US regulators have kept a close eye on Lebanese banks to ensure they don’t become a funnel for Syrian cash. Officials from the US treasury have visited Lebanon on numerous occasions in 2012: US Deputy Secretary of the Treasury Neal Wolin met with Lebanese government officials in September and David Cohen, the Treasury’s under secretary for terrorism and financial intelligence, warned banks back in May to be extra cautious when dealing with Syrian transactions, saying, “We want to be as careful as possible that the regime, its cronies and its allies that may be trying to shield their assets might not be able to do so.”

Several experts Executive spoke to said they believe that the international scrutiny imposed on the banks is excessive. “I believe the business of banking is changing dramatically; we investigate deposits rigorously as if in a police state,” says Anwar Jammal, chairman of Jammal Trust Bank. “A lot of US and European banks have made far bigger mistakes and gotten away with a slap on the wrist, keeping in mind that to err is only human.”

He adds that his bank has just finished implementing a new anti-money-laundering software program that makes the 17 different ways of spelling the name ‘Mohammad’ into one word. “If you spell it in one way or one of the 17 different ways, it will tell you it is ‘Mohammad’,” explains Jammal.

“There was an accident or two in Lebanon but the scrutiny is exaggerated,” says Rami el-Nemr, chairman of First National Bank. “There were lots of rumors; it became the talk of the town. I think it was not fair for the banks.”

FATCA fears

For a segment of the Lebanese population, this scrutiny is bound to get personal. The upcoming FATCA requires all foreign institutions to disclose the holdings of their clients with a US nationality, or face paying hefty penalties; this has already led several local banks to lose business. “We have already lost some clients but we have to deal with FATCA and Lebanese banks have to deal with it too,” says Jean Riachi, chairman of FFA Private Bank. The total number of Lebanese Americans with accounts in Lebanon is hard to come by, but several chairmen of Lebanese banks say it is a small percentage of total accounts — “definitely single digit,” according to Saad Azhari, chairman of Blom Bank.

A sigh of relief came in October when the implementation of FATCA was delayed by a year, until January 2014, giving foreign banks additional time to set up the software and teams necessary to comply. And comply they must. With two thirds of the sector’s balance sheet in dollar deposits, “the US rule is ‘my dollar, my rule’; you want to deal with the US dollar, you have to abide by my rule,” says Bank Audi’s Baz.

Online exposure

The compliance department is not the only one receiving more bank resources. The information technology (IT) department has seen its budget buffed up in order to deal with a different type of threat: a cyber one. In August, a cyber virus dubbed ‘Gauss’ attacked bank accounts in the Middle East. Kaspersky Lab, a Moscow-based IT security vendor, discovered the virus and claimed it began operating in September 2011, attacking some 2,500 machines in the Middle East, of which 1,600 were in Lebanon. “It is a lot more destructive than war,” says Jammal. “It has the ability to wreck havoc around the world. It mushrooms and it is something that is very serious and we take it very seriously.”
It’s been a rough ride for banks in 2012 with challenges continuing to pile up. The prospects for 2013 don’t look much rosier with the Syrian horizon still unclear, and with “a lot more open issues in the region; if I had to hierarchize what does not make me sleep at night, it’s the Israeli threats on Iran which can generate a hell of a lot of problems everywhere,” says Baz.

The banks, having survived Lebanon’s history marked with strife and unrest, are accustomed to dealing with challenges, and know how and when to reinforce the fortress.

“Given the resilience of the Lebanese people, the banking sector will come through ok, inshallah,” says Pik Yee Foong, chief executive of Standard Chartered Bank Lebanon.

December 3, 2012 0 comments

Comment

The Islamic divide

by Moe Ali Nayel December 3, 2012

written by Moe Ali Nayel

It has been a year of dreaming dangerously for some Lebanese Sunnis who see the perpetually impending downfall of Syrian President Bashar al-Assad as an opportunity to reassert their historical dominance over the country’s Shia.

February’s escalation of the long-running feud between pro-Assad Alawites and anti-Assad Sunnis in Tripoli set a polarizing tone for 2012; tensions spilled south with anti-Hezbollah Salafis protesting in Saida. This came almost concurrently with former Prime Minister Saad Hariri’s self-imposed exile from Lebanon. Hariri, leader of the country’s largest Sunni political party, the Future Movement, first announced his departure was for personal safety; later he tweeted that he was busy managing his overseas businesses.

Hariri’s departure left a vacuum and a new Sunni personality soon emerged: Sheikh Ahmad al-Assir, whose posters have been slowly replacing Hariri’s in Sunni strongholds across Lebanon. A Salafist preacher, Assir first garnered widespread media coverage in March by staging a rally in Downtown Beirut, giving him a national platform for his extremist, anti-Shia sectarian rhetoric — a stark contrast to Hariri’s more ‘moderate’ line.

Militant Sunni anger then erupted again on May 20, when Sheikh Ahmad Abdel Wahed, a prominent anti-Assad Sunni cleric, was shot dead after an altercation at a Lebanese army checkpoint in North Lebanon. That night masked gunmen in Beirut’s Sunni enclave of Tariq El Jdeideh opened fire on Lebanese Army soldiers, and clashes elsewhere in the country, spurred by enraged Sunni partisans, left two people dead and 18 wounded.

Two days later, a Syrian opposition group kidnapped 11 Lebanese Shia pilgrims in Aleppo. Family members and friends protested in Beirut’s streets, with widespread retaliatory attacks reported against predominantly Sunni Syrian laborers.

Assir’s vitriolic attacks against Lebanon’s two most prominent Shia leaders — Hezbollah Secretary General Sayyed Hassan Nasrallah and Amal leader Nabil Berri — on Al Jadeed TV provoked Shia thugs to assault the station’s offices on June 25. After burning tires out front and firing shots at the building, they were arrested, setting off protests in Shia neighborhoods.

In August the Free Syrian Army posted a video of a beaten Hassan Salim al-Meqdad, who they had captured in Damascus and accused of being a Hezbollah member working for the Assad regime. In response, the Meqdad clan began a wave of kidnappings targeting Syrians in Lebanon, specifically Sunnis.

The Syrian conflict’s impact on sectarian identity in Lebanon is profound. Many Lebanese Sunnis view the revolt, especially since it became an armed conflict, as the uprising of their Syrian brethren against an oppressive Alawite regime allied with Shia interests. On the other side, many Lebanese Shia see the Syrian conflict as a foreign-backed conspiracy and, should Assad fall, they worry about being regionally isolated in a sea of Sunni vengeance. The Saudi, Qatari and Kuwaiti funding that has poured in to the Syrian opposition since it took up weapons has only entrenched these sectarian characterizations.

When Sunni intelligence chief Wissam al-Hassan was assassinated in a car bomb in Beirut on October 19, sectarian animosities hit fever pitch across Lebanon. Angry Sunni protesters accused Hezbollah and Syria of the killing, demonstrators attempted to rush the Grand Serail (the administrative headquarters of the Lebanese cabinet), road blocks isolated Beirut from the rest of the country, masked Sunni gunmen manned checkpoints and demanded identification cards to identify Shia motorists, while belligerents in Tariq El Jdeideh fired rounds toward Shia neighborhoods in Beirut’s southern suburbs.

This aggression saw little response from the Shia side, however — a show of remarkable restraint that may have saved the country from a slide back into civil war.

In November, clashes erupted again in Saida, when Assir issued an ultimatum to Hezbollah to take down posters commemorating the Shia holiday of Ashoura. Attempting to follow through on the threat, Assir and supporters confronted Hezbollah members in the neighborhood of Ta’amir; the ensuing clashes left three dead. In response to the incident, Hezbollah’s Nasrallah called for patience and restraint, urging Sunnis and Shia to remain vigilant of sectarian incitement, while Assir announced the formation of an armed “resistance brigade” in Saida, then later reneged.

Thus, 2012 nears a close with the gulf between Lebanon’s Shia and Sunni communities only widening. This hate between communities has been stoked by the likes of Assir, who has ridden its wave to take himself from obscurity to prominence. Unfortunately, this terrible tide shows no sign of receding as we move into 2013.

Moe Ali Nayel is a freelance journalist based in Beirut

December 3, 2012 0 comments

Economics & Policy

A cold, harsh year

by Zak Brophy December 3, 2012

written by Zak Brophy

It was never going to be an easy year for Lebanon. The economy entered 2012 with the International Monetary Fund pegging growth at only 1.5 percent for the previous year, war and economic crisis flanked the country, and among the only indicators rising in the face of falling growth was inflation.

Now as the year draws to a close and we survey the prospect for 2013 there is little reason to cheer; the economy is most likely slumped in stagflation, Syria boils more violently than ever and Lebanon’s politicians have effectively squashed hopes of meaningful reform and leadership from parliament.
One event that was lauded as a success was the cabinet’s passing of a new budget. Admittedly, in most countries this is considered a bare minimum the citizens can expect from their elected leaders, but in Lebanon is has become something of an exceptional occurrence.

Since the political crisis that descended in 2006, the government has not passed a budget and as such the nation is suspended in a state of “continual illegality”, according to legal attorney and lecturer in constitutional law, Wassim Manssouri. Of course this government and its predecessors haven’t stopped spending, far from it, but rather they have racked up more than $20 billion (over LL30 trillion) in extra-budgetary expenses.

When the cabinet actually managed to agree on a budget there was a fair amount of backslapping and self-congratulation. However, the felicitations were premature and unjustified. The budget had been sheared of any of the meaningful reforms or progressive initiatives that had been included in a previous draft, and what is more, although the cabinet agreed on the budget and passed it on to Parliament, it has since been stuck in the legislative mud.

Debating and agreeing upon a fiscal plan for the nation is not a priority, it would seem. For those among us that actually want to analyze the details, as that is surely where the devil lies, the budget is too vague and opaque. “The structure of the budget does not have the transparency we need in order to see how the budget for each sector is outlined,” explains Yahya Hakim, member of the Lebanese Transparency Association. “Even in the commissions they don’t discuss the individual chapters of the budget and the deputies have no clue how it is prepared.”

The ludicrous failings of Lebanon’s lawmakers to enact a budget for more than six years leaves little room for hope that they will enact the comprehensive reforms that the economy actually needs. “We need to go through a complete administrative and financial reform,” argues Hakim. “If we don’t we will never get anywhere and we will continue to just turn in circles.”

The last real effort to enact such reforms was under the leadership of President Fouad Chehab from 1958 to 1964, which bought him into conflict with the traditional feudal, confessional and clan-based politicians. These same forces have ensured that while some politicians may pay lip service to such reforms, they never see the light of day.

“In Lebanon structural reforms would harm narrow political interests and on top of that, politicians view reforms as a zero-sum game,” explains Nassib Ghobril, head of economic research at Byblos Bank. “If a politician implements reforms then he can score points against his opponent or even his nominal ally so they will do what they can to put barriers in his way.”

And so it is that the public administration remains a hemorrhaging body, rife with clientelism that inefficiently manages a crippled and antiquated national infrastructure.

Paying the public

The changes to the public-sector pay scale, agreed by the cabinet in September, has perhaps been the defining economic debate within Lebanon in 2012. It is also a fine example of how an issue of critical economic importance to the nation can be reduced to the ignominious status of a political football.

Under the proposed scale, ‘category one’ employees will receive a hike of LL2.9 million ($1,933), with monthy scaled increases of LL1.7 million ($1,133) for ‘category two’ employees, LL940,000 ($626) for ‘category three’ employees and LL210,000 ($140) for the state’s lowest-level clerks. In addition to this, public high school teachers, the main advocates behind the new scale, will receive around LL1 million ($667) in raises, while public elementary school teachers will receive LL789,000 ($526).

While the government reached a consensus on the pay scale it did so without reconciling how they would actually pay for it, and herein lies the foil that has scuppered the implementation of the policy. The specter of tax increases to fund the multi-billion dollar increase in expenditures has drawn cries of impending economic catastrophe from the private sector, and the government has tussled between different proposals without offering anything suitable.

“There are other sources such as fighting tax evasion and improving tax collection, which by my conservative estimates could raise an additional $1 billion in revenues,” argues Ghobril. “Then of course, long overdue reforms reducing waste and inefficiency could go a long way to cutting the government’s expenditures.”

The need to increase the purchasing power of Lebanon’s low-income households is a necessity in the face of high inflation, which is both internally and externally driven; while there are currently no reliable or comprehensive official statistics to precisely gauge inflation in Lebanon, FFA Private Bank reported that the country’s consumer price index rose 11.1 percent in October year-on-year. Rising prices for nearly all tradable goods are imported, as Lebanon is such a small player on the global stage, both in terms of consumption and production. However for any non-tradable goods or services the spiraling costs can to a large degree be explained by a structural imbalance in the economy.

Lebanon enjoys huge inflows of capital, such as remittances from expatriate Lebanese and oil money from the Gulf, which, along with easy credit from the banks, boost the local money supply. It is these large inflows of capital that drive up prices for anything that is non-tradable on international markets, such as real estate or a meal at your favorite restaurant. This phenomenon is further compounded by Lebanon’s ruinous disregard for its productive sectors.

Neighbor from hell

Throughout 2012 the shadows cast by the Syrian crisis across Lebanon have only grown more menacing. So much so that it could perhaps be considered a success that the nation has, in the main, stayed aloft from the violence ripping its neighbor apart. However, while violence has been confined to sporadic and localized clashes or targeted assassinations the economy has taken a battering, with no sectors passing unscathed.

Tourism spending in the third quarter of 2012 was down 24 percent on the same period in 2011 and deposit growth in the banking sector has been on a downward trend recently; growth of 7.6 percent annually in August 2012 is off from an annual increase of 10 percent in August 2011 and pales compared 18 percent in 2010.

In many regards the effects on the economy from the turmoil in Syria are beyond the control of Lebanon’s business leaders and politicians, but nonetheless there has been a woeful lack of leadership. Stepping back from the picture it also makes sense for Lebanon to have prepared itself for any disturbances and shocks to its economy when times were good. Had Lebanon made hay while the sun was shining then it would not be so vulnerable to the current instability.

“We live in a rough neighborhood that is in one way or another unstable and has been for decades,” explains Ghobril. “We had opportunity in 2008 to put up buffers and increase our strength and to improve the immunity of the economy.”

Indeed, those were very different days in 2008. The Doha Accords had reinstated security in the country, Lebanon’s banking sector emerged as a safe haven from the global financial crisis attracting a huge inflow of capital, the central bank increased its foreign currency reserves to unprecedented levels, growth rates were comparable to China and global interest rates were near zero.

Had Lebanon reduced its public finance vulnerabilities, cut public expenditure and the borrowing needs of the government, improved tax collection and implemented reforms then, the nation’s house would have been standing on much stronger foundations now. However, content to persevere with a dysfunctional status quo the government missed the boat. “They did absolutely nothing,” says Ghobril.

Looking at this missed window of opportunity through the lens of Lebanon’s public debt burden, which is the third highest in the world when viewed as a proportion of gross domestic product, is particularly illuminating. The public debt to GDP ratio dropped from 180 percent in 2006 to 135 percent by the end of 2010. While this was a welcome move in the right direction, it was on account of bullish growth in the nation’s economy as opposed to any effort to reduce the borrowing needs of the government.

Now it is a very different scenario. Lebanon’s real GDP growth throughout 2012 has struggled along between zero and 2 percent and the government is still spending well beyond its means; the total fiscal balance registered a deficit of LL1,708 billion ($1.13 billion) in the first half of 2012 compared to a lower deficit of LL1,304 billion ($865 million) over the same period in 2011. What’s more, the gross public debt increased by LL2,436 billion ($1.62 billion) in the first half of 2012 to reach LL83,313 billion ($55.28 billion) against LL80,887 billion ($53.67 billion) at the end of 2011.

The global investment bank JP Morgan observes that bank deposit growth is likely to remain below the 5 to 6 percent necessary to finance both the private and public sectors this year. The central bank will therefore likely have to intervene with its large stock of foreign exchange reserves — hardly a sustainable long-term solution. As Charles Arbid, president of the Lebanese Franchise Association, states, “This current system is not working anymore. We need the support of politicians and everyone needs to be involved. We need to work and produce more and spend less. We need to move away from a culture of debt.”

But alas, it is likely to be a long wait before any of the necessary policy changes or reforms are implemented. It is going to be a bleak winter for Lebanon’s economy. With the elected leaders locked in a battle of attrition, the nation’s business owners, workers and traders are going to have to navigate the treacherous landscape of 2013 alone.

December 3, 2012 0 comments

Finance

Where to invest in 2013

by Maya Sioufi December 3, 2012

written by Maya Sioufi

It was a choppy year for markets in 2012, with headlines dominated by the European sovereign debt crisis and ongoing austerity plans in the peripheral countries causing social unrest. The United States presidential elections also kept investors jumpy, assessing how each candidate would affect performance of the stock markets and how they would deal with the upcoming fiscal cliff. Ongoing unrest in the Arab world, a change in leadership in China and Hurricane Sandy on the US east coast were among several other issues that added to market volatility. For investment recommendations for the upcoming year, Executive spoke to 10 of the region’s top investment professionals.

Georges Abboud – Head of private banking at Blom Bank

Overall view: Favors US over European markets but could see both markets becoming cheaper in 2013 due to rising unemployment and quasi-nil growth expectations. As for emerging markets, he favors Russia for being cheap.

MENA: Favors exposure to Saudi Arabia and would diversify across sectors.

Lebanon: Recommends Blom Bank (though it should be noted that this is the bank he works for) and Solidere for their upside potential.

By assets: Recommends investing in large cap companies with strong growth potential, limited debt and high dividend yields. Also favors building exposure to US residential real estate as he expects a pickup in prices in the next few years, increasing exposure to gold on dips around $1,550 or lower and selling the yen against the dollar. He is also keeping an eye out for high-yielding fixed income securities, such as Venezuelan government bonds, which are still returning more than 10 percent.

Top picks for 2013: For large-cap companies, he recommends Google, Total, General Motors and Nissan. For smaller companies, he favors LinkedIn in the US and Groupe Eurotunnel in Europe. In emerging markets, he recommends Russian energy company Gazprom.

Nadim Kabbara – Head of research at FFA Private Bank

Overall view: Believes that the US and major central banks’ quantitative easing measures limited the downside of the markets. Favors investment in the US over Europe as it is still challenging for now, and would not generally invest in Europe unless there are selective opportunities.

MENA: Sees good investment opportunities in the region. He would avoid countries that are oil importers, or that have high political risk, such as Kuwait, Lebanon, Syria, Bahrain and Egypt. He favors Saudi Arabia, which is looking to use its revenues to boost non-oil sectors. He also recommends investing in Qatar, Oman and the United Arab Emirates.

Lebanon: Expects the Lebanese equity markets to continue reflecting the performance of companies within the banking and real estate sectors, which are operating in more difficult conditions against a backdrop of greater economic and political uncertainty and weakened investor appetite.

By assets: Favors playing an increase in spending from the US consumer and would invest in discretionary sectors, such as apparel manufacturers, automobile and component makers, retailers and food and beverage. He is also opportunistically waiting to invest in more cyclical companies, with a preference for industrial companies and technology companies. He also likes the US healthcare sector as “the baby boomers are now turning 60 and many will be exiting the workforce and are going to need more medication.”

Top picks for 2013: Spirit Airlines, a US-based regional ultra-discount airline company, and Etihad Etisalat, a Saudi Arabia-based telecommunication company.

Elie Khoury – Chairman of Berytus Capital

Overall view: Conservatively bullish on US markets, with expectations for a modest 4 to 6 percent return given the lackluster unemployment picture and despite his bullishness on the US housing market. He is slightly bearish on Europe as austerity plans are one of his chief concerns.

MENA: Not too keen due to the political unrest in the region.

Lebanon: No interest in the Lebanese markets.

By assets: Favors equities, which he expects to continue their upward trend due to the continuous support from central banks globally. If the US unemployment and housing picture improves, he will be buying equities more aggressively. His top sectors to invest in are technology and consumer.

Top picks for 2013: Khoury likes Pfizer in the pharmaceutical sector, Kraft in the consumer non-cyclical sector and Microsoft, Intel and Qualcomm in the technology sector. Given his bullishness on the US housing market, he would acquire equity and mortgage real estate investment trusts as well as service and home improvement stocks, such as Home Depot, Costco and homebuilders exchange-traded funds but warns that investments exposed to this sector should not account for more than 10 to 15 percent of a portfolio.

Elias Feghali – Head of private banking at Middle East Capital Group, a subsidiary of First National Bank

Overall view: Prefers the US over Europe but not bullish on equity going into 2013, as quantitative easing policies are postponing a deeper problem — the continuous growth in sovereign debt.

MENA: Not much appetite for investments in the region due to the Arab revolutions. Top picks in the region would be First Gulf Bank and National Bank of Kuwait.

Lebanon: Would invest in Lebanese securities as some stocks are very cheap, but he would be cautious with the banking sector for now, due to its exposure to Arab countries in turmoil. He would invest in Solidere at a stock price below $14.

By assets: Favors high yielding stocks such as US tobacco companies Philipp Morris and Altria. He also has a preference for defensive sectors like consumer staples. He highlights Coca Cola, WalMart and McDonald’s, as even in times of economic crisis they perform well.

Top picks for 2013: Would buy gold and silver, and the stocks of McDonald’s and Altria. Also highly recommends owning a security that plays the market on the downside for hedging purposes, such as VIX Short Term Futures.

Nour Eldeen al-Hammoury – Chief market strategist at Amana Capital

Overall view: Expects economic growth to stall as long as debt continues to rise across the board and urges governments to stop spending money they don’t have; he would not be surprised if another economic shock occurs in 2013 or 2014.

MENA: No interest in the region but he does highlight that the abundant cash reserves in MENA government coffers provide support in these turbulent times and sustained high oil prices will continue stimulating reserve cash for the governments.

By assets: Recommends gold and silver with a preference for silver for its undervaluation. Within equities, prefers defensive stocks in 2013 such as telecommunications, consumer and utilities.

Top picks for 2013: Would acquire the S&P 500 index which he sees going to 1,500. Would also invest in Apple stock, which he expects to reach $800 in 2013, as well as Facebook, which he sees going to between $25 and $30.

Hatem Rafii – Head of asset management at Royal Forex Trading

Overall view: Very bullish on major world equity markets such as Germany, the UK, France and the US.

MENA: Expects the continued geopolitical risk to remain high and attract investors looking to buy cheap stocks, as opposed to greedy ones that buy stocks even if they are expensive in order to generate more returns. He likes the GCC markets, which he expects to continue to move higher, albeit very slowly. Favors markets in the UAE, Saudi Arabia, Kuwait and Qatar.

Assets: Very bearish on gold over the next 18 months as Rafii expects the continued economic recovery in the US and Europe to undermine gold prices. Even though the Japanese Nikkei index has been underperforming, he believes it has the most attractive risk-reward ratio, with a potential upside of 12,000 during the next 18 months but a downside of 8,250, as warranted by four-year lows.

Top picks for 2013: Invest in the Dubai Financial Market stock as it is a “great stock to accumulate once volumes come back to the exchange,” he says. He also likes the banking sector in Saudi Arabia. He would also buy two indices: Japan’s Nikkei 225 and the S&P 500.

Henri Chaoul – Chief investment strategist at Alkhabeer Capital

Overall view: Expects a slow recovery in the US, which is heading towards “an ugly fiscal cliff” at the end of 2012 and a contraction of growth in Europe. Expects most emerging markets, particularly India, Brazil and China, to struggle because of weaker exports to developed economies. Despite all the quantitative easing seen all around the world and especially in the US and Europe, believes inflation will remain broadly under control.

MENA: Amid a slowdown across the world’s major economic regions, he expects Gulf countries to witness continuous growth led by the $65-plus billion in construction contracts awarded in the GCC in 2012, the growing demand for hotel space in the region — particularly in the UAE — and the passing of the long-awaited mortgage law in Saudi Arabia (passed in July 2012).

Assets: Does not recommend investing in the US sovereign fixed-income market due to low yields; prefers European sovereign market due to the European Central Bank’s recent interventionist policies. Cautious on corporate bonds due to the excess liquidity impacting the yields. Remains neutral on European equities. Expects a 10 percent appreciation in US equities in the event of pro-growth fiscal policies as well as an unchanged capital income taxation policy.

Top picks for 2013: Favors cyclical sectors in Europe that may be more undervalued than others and which would benefit from a positive turn in events in Europe, such as chemicals, oil and gas and industrial goods. Recommends gold, which he expects could breach the $2,000 psychological barrier.

Walid Abousleiman – Chairman of Aksys Capital

Overall view: Believes 2013’s main theme for investment will be Asia, except Japan. Expects the resolutions regarding Greece and Spain to continue overhanging the embattled European markets, but “this time around, investors have been reluctant to deviate from risky assets due to profound commitment by the European central bank governor Mario Draghi to maintain a unified irreversible.” Hopes for a brighter economic outlook in the medium term in China following the once-in-a-decade government reshuffling. Sees the American economy leading economic growth globally, as justified by improving macro indicators, especially a rising uptrend in the housing sector combined with moderate third-quarter corporate results.

MENA: Expects volatility to remain as continuous geopolitical threats surround the region and oil prices pick up, leading investors to gradually pull out of equity markets and accumulate positions in the sovereign debt of solid economies, namely Saudi Arabia, the UAE and Qatar.

Lebanon: For long-term investors, recommends Bank Audi, Blom Bank and Solidere.

By assets: Recommends holding a third of the portfolio in cash or cash equivalents, a third in gold and a third in US large-cap equities. As for fixed income, he would stick to quality corporate names in developed markets with short-term maturities.

Top picks for 2013: Recommends the technology, consumer staples and financial sectors once the US fiscal cliff overhang is dealt with.

Khaled Zeidan – General manager of MedSecurities, a BankMed subsidiary

Overall view: Remains focused on US markets, in particular sectors that will benefit from the ongoing monetary easing, such as banking and consumer retail. As for emerging markets, expects China to remain the main driver, along with commodity-producing nations Brazil, Canada and Australia.

MENA: Still focused on Turkish and Saudi Arabian markets, no longer market wide but rather sector specific. In the case of the Saudi market, focuses on banking, insurance and cement. In Turkey, would look at the banking sector, particularly after Turkey’s credit upgrade to investment grade (in November 2012).

Lebanon: Expects the local market to bottom out in 2013, providing long-term investors with an opportunity to pick banking stocks as well as Solidere at great long-term value.

By assets: Recommends maintaining exposure to both equities and fixed income with a stronger bias to equities.

Top picks for 2013: US-centric banking stocks are an interesting trade as the Federal Reserve’s accommodative policy will result in prices drifting back to book value, which is 30 to 40 percent higher than current prices (as of November 2012).

Sami Akhrass – Chairman of Arab Finance Corporation

Overall view: Bearish on US and European markets due to the “money printing spree” of most central banks in developed countries, which he expects to contribute to creating asset bubbles. As for emerging markets, expects them to be negatively impacted by the performance of global developed markets.

MENA: He would wait for all the political changes and for the upheaval to play out before deploying capital into the region.

Lebanon: He would stay clear of Lebanon’s sovereign bonds. As for equities, while the valuation and the dividend yields of banks are attractive, he is concerned about the lack of liquidity and visibility.

By assets: Favors corporate and sovereign bonds in Europe as well as corporate bonds in the US.

Top picks for 2013: In the US, recommends corporate bonds of Bank of America, Goldman Sachs and Morgan Stanley as well as the US Treasury bond maturing in February 2022. In Europe, recommends corporate bonds of Telefonica, HeidelCement, Fiat and Credit Agricole, as well as the Spanish government bond maturing in April 2021 and the Italian government bond maturing in March 2022.

December 3, 2012 0 comments

The Buzz

Morning briefing: 3 Dec 2012

by Executive Staff December 3, 2012

written by Executive Staff

OPEC member Qatar will ask firms to tender for a 1,800 megawatt (MW) solar energy plant in 2014 costing between $10-20 billion as the world’s highest per capita greenhouse gas emitter seeks to increase its renewable energy production.

More from Arabian Business

The Board of Zain Group has appointed Scott Gegenheimer as its new Chief Executive Officer. Gegenheimer replaces Nabeel Bin Salamah, who announced in October that he would not be renewing his contract.

A bitter pill to swallow

by Gareth Smith December 1, 2012

written by Gareth Smith

The death last month of Manouchehr Esmaili-Liousi, a 15-year-old boy suffering from hemophilia, has been reported in the Iranian media as the first fatality caused by the latest financial sanctions imposed by the United States and European Union.

While sanctions do not directly target Iranian pharmacies or the wider medical sector, 75 percent of the medicines for treating hemophilia are made in the US and the EU, and supplies have dropped by two-thirds. Drugs are also in short supply for patients suffering from cancer and multiple sclerosis.

The problem is that Iran’s central bank, the only official channel for transferring money abroad, is a major target of sanctions. Many international private banks are increasingly loath to handle transactions or accounts in any way linked to Iran, given the risk of attracting attention from the US Treasury Department.

Without a doubt, 2012 has seen an unprecedented tightening of the noose around Iran. US and EU measures against third-party buyers have halved Iran’s crude oil exports to between 1.1 million and 1.3 million barrels per day, undermining government revenues and helping send the rial into a decline that has seen its international value halved in a year. What’s more, the US congress is intent on legislation that would further reduce President Barack Obama’s room for maneuver in loosening sanctions as a quid pro quo in any negotiations.

The military stand-off, especially in the Persian Gulf, has become an accepted day-to-day reality. Iran’s shooting at a US surveillance drone early in November reflects a trend that saw 2012 begin with extensive Iranian naval exercises in the Persian Gulf and threats from senior officials — including the first vice-president, Mohammed Reza Rahimi — to close the Strait of Hormuz if there were any move against Iran’s oil exports.

Talks between Iran and the permanent members of the UN Security Council plus Germany, which were revived in May after a lapse of over a year, failed to get beyond generalities. Real progress will not be made through such an unwieldy structure, and it is significant that Sergey Ryabkov, Russia’s deputy foreign minister and point-man on Iran, made it clear last month for the first time that Moscow accepts the need for direct contact between Washington and Tehran.

Reports that senior US and Iranian officials met quietly in Qatar in October may indicate the two sides accept this. The word in Washington is that a window of opportunity has opened with the re-election of Obama as president and will last until preparations begin for the Iranian new year, Nowruz, a festival that closes down the country for several days before March 21.

The window may close then because when Iran goes back to work after Nowruz, politics will be dominated by the presidential election scheduled for June 14, when voters choose a successor to Mahmoud Ahmadinejad on the expiry of his maximum second term. But the window could then re-open, especially if, as widely expected, the new president has a better relationship with the rahbar (‘leader’), Ayatollah Ali Khamenei, and a clearer unity of purpose replaces the current rivalries between the foreign ministry, the president’s office and the leader’s office.

Loud whispers in Washington refer to a ‘more for more’ process in which the US would seek verifiable nuclear curbs from Iran in exchange for US concessions, including sanctions relief. But where the US bottom line lies — would Iran have to ship out all its 20 percent-enriched uranium? — is unclear, and considerable political opposition exists on both sides to any kind of deal.

Another problem for US would-be peacemakers is the perception abroad that the Islamic Republic is vulnerable and even in danger of collapse. Despite sanctions, this is far from true. June’s presidential election will probably have a higher turnout than the 65 percent in the March 2012 parliamentary elections and will no doubt be hailed by the authorities as a victory over the scheming foreigners.

In fact, it may be that tighter sanctions, in ‘heating up’ politics, were partly responsible for March’s turnout being comfortably higher than parliamentary elections in 2004 and 2008, when it barely reached 50 percent.

Continuing coverage of Iranians dying for lack of medicines may help the authorities to motivate voters. With the US claiming ‘success’ with the sanctions and the Iranian leadership ‘victory’ in its defiance, 2013 is unlikely to make either side any keener on compromise.

Gareth Smyth has reported from around the Middle East for nearly two decades and is the former Financial Times correspondent in Tehran

December 1, 2012 0 comments

Finance

Private versus public exposure

by Maya Sioufi December 1, 2012

written by Maya Sioufi

With $42 billion tied up in loans to the private sector, accounting for 28 percent of commercial banks’ balance sheet, the dismal performance of the economy has banks reassessing their lending strategy.

“Banks are being flexible with some clients in terms of extending maturities,” says Ghassan Assaf, chairman of BBAC. Anwar Jammal, chairman of Jammal Trust Bank, notes that, given the dismal tourism season, “We scrutinized lending to projects involving hotels and restaurants as any feasibility or payback program they give you needs to be revisited.”

Loans in decline

For now, there has not been a significant rise in default rates, according to the chairmen of Lebanese banks that spoke with Executive, but if the deteriorating economic situation does not start improving soon, this scenario is bound to change. “Hopefully, we will have a smooth Christmas. It is important for tourism and for sectors linked to tourism,” says Saad Azhari, chairman of Blom Bank.

The fatigued economy has not prevented banks from continuing to extend their lending arm but the growth in lending has been declining in the past two years. “We are not lending to tourism and hospitality. We are lending to people who can export, unless it is something essential for the local market,” says Rami el-Nemr, chairman of First National Bank. For the first eight months of the year, banks lent an additional 6 percent to the private sector, down from an 11 percent increase in the same period last year and 17 percent in the same period in 2010. The private sector still swallows a larger share of banks’ lending capacity than the government — a strategy the banks have slowly been implementing in order to reduce their hefty exposure to the country’s sovereign.

While European banks knock on their governments’ doors for bailouts, in Lebanon the sovereign owes its local banks $30 billion as of August 2012, 20 percent of the banking sector’s balance sheet. But the growth in lending to the sovereign has been slowing — for the first eight months of the year it increased just 2 percent, following a 6 percent decrease in the same period of last year.

As Executive went to print, Lebanon was still in the process of raising $2 billion in Eurobonds to refinance $1.5 billion worth of debt maturing in 2013, while using the rest for treasury expenditures. In June, the country issued Eurobonds worth another $2 billion for the early redemption of Lebanese lira treasury bills and two months prior to that, in April, $950 million worth of Eurobonds were issued. So if the latest issue goes according to plan, Lebanon would have raised a total of $5 billion in 2012, as it had originally planned at the beginning of the year.

Balance the budget

Due to attractive interest rates, the government has been able to depend on the country’s banks to fund its expenses year after year — a situation that becomes less tenable as growth rates of deposits flowing into the banking sector drop (see overview page 88).

Lebanon’s debt-to-gross domestic product ratio has been consistently falling: from a jaw dropping 180 percent in 2006 to around 130 percent today. With GDP no longer growing at the high single digit rates that were enjoyed in the past — as the year ends the IMF expects a 2 percent growth for 2012 — the debt component needs to come down for the ratio to continue on falling.

“I believe banks will exert pressure on the government to balance the budget,” says Assaf. With deposits unlikely to start flowing back into the banks’ vaults at supersonic rates any time soon, the sector will likely continue conservatively allocating its resources favoring the fatigued, yet more lucrative, private sector over the heavily indebted public sector; unless the well overdue reforms are implemented.

“If reforms which should have started years ago are implemented, it will create opportunities; they have to happen one day,” says FNB’s Nemr.

December 1, 2012 0 comments

Comment

After Ahmadinejad

by Gareth Smith November 30, 2012

written by Gareth Smith

As president of Iran, Mahmoud Ahmadinejad has been nothing if not controversial. Internationally, he has goaded the Israelis and their American allies with his views about the Jewish holocaust, while his government’s populist economic policies have stirred domestic controversy unknown since the 1979 Islamic Revolution.

But with a presidential election due next June, Ahmadinejad is well into his last year in office, given the two-term constitutional limit. The change will be welcomed by most of Iran’s establishment, including senior clerics and close associates of Ayatollah Ali Khamenei, the rahbar (leader).

The election comes at a crucial time, with tightening Western sanctions that have halved Iran’s oil exports to around 1.1 million barrels a day and have helped spark depreciation of the nation’s currency, the rial, that accelerated dramatically last month.

Khamenei will be keen to see the poll pass off peacefully and won by a less volatile figure than Ahmadinejad. But recent Iranian presidential elections have been unpredictable — Ahmadinejad’s victory in 2005 was a surprise, and his re-election in 2009 produced the largest street protests since the Revolution.

Iranian presidential elections are partly managed, firstly because the Guardian Council, a constitutional watchdog body, vets candidates. But Iran has weak political parties, and the voting system is almost haphazard; if no one wins 50 percent, the two best-placed candidates enter a run-off, and with many contenders — there were seven in 2005 — 20 percent or so of votes can take a candidate through.

For Khamenei, one priority will be to avoid a repeat of 2009, when reformist candidates alleged the poll was rigged and the suppression of street protests sent Iran into a period of tightened political control.

The Guardian Council may well bar reformist candidates, as it did in 2005 before Khamenei intervened to reinstate Mustafa Moein and Mohsen Mehrali-Zadeh. But it may concern the leader that blocking reformists, who might then call a boycott, would hardly restore the legitimacy the system lost in 2009.

It is widely expected, however, that the Guardian Council will bar Esfandiar Rahim Mashaei, or any other associate of Ahmadinejad. Mashaei has been at the center of Ahmadinejad’s tension with Khamenei — indeed the leader overruled the president in 2009 when he appointed Mashaei as first vice-president, instead appointing him chief of staff. Later spats over Ahmadinejad’s removal of the intelligence minister originated in the maneuvering of Mashaei, whom one senior cleric accused of sorcery. In any case, Ahmadinejad and Mashaei have failed to create a sustainable political current that could propel an Ahmadinejad ally into the president’s office. Their efforts to sponsor lists for local and parliamentary elections have fared poorly.

That suits Khamenei, whose priorities are a quiet election and a president with a safe pair of hands. The leader would like a new president to calm Iranian politics by mending relations with parliament, the leader’s office, senior clerics and the central bank. This might also improve economic management in the face of sanctions. It could also tighten co-ordination over the nuclear program between the presidency, the Supreme National Security Council and the leader’s office. Iran is open to compromise but has red lines over its ‘right’ to enrich uranium, and any agreement will require skillful negotiating, as well as carrying domestic opinion. Given the election’s importance, the media is already weighing up potential candidates. Ali Larijani, parliamentary speaker and establishment insider, is liked by Khamenei, but lacks charisma and won only 5.9 percent of the 2005 vote.

Mohsen Rezaie, Islamic Revolutionary Guards Corps (IRGC) commander from 1981 to 1997, has also been suggested. But he appeared in 2005 even less appealing than Larijani, and withdrew shortly before polling.

Other names bandied about are Gholam-Ali Haddad-Adel, former parliamentary speaker; Manuchehr Mottaki, former foreign minister, and Saeed Jalili, the security official who has led Iranian negotiators in talks over the nuclear program.

A more effective candidate could be the charismatic Mohammad-Bagher Ghalibaf, Tehran’s mayor since 2005 and a former senior IRGC officer, though he received only 13.9 percent of the vote in 2005. In an interview in September with the Italian newspaper Corriere della Sera, Ghalibaf spoke of “moderation” in foreign policy while keeping “firm lines” on “fundamental questions”; as well as diverting oil revenue from current spending into productive investment.

This is exactly what Khamenei needs. This far out from June 2013, Ghalibaf looks like the man to beat.

Gareth Smyth has reported from around the Middle East for almost two decades and is the former Financial Times correspondent for Tehran

November 30, 2012 0 comments

Comment

The Kurds quietly ascend

by Josh Wood November 30, 2012

written by Josh Wood

Past the sand berm marking the border between northern Iraq and northeastern Syria, a small military outpost sits amid the oil derricks that dot the parched landscape of this country at war. A few months ago, the flag of the Syrian regime flew here. Today, it is replaced with a green, yellow and red tricolor banner, flying above a few Kurdish fighters and a pickup truck with a mounted DShK machinegun.

This is Kurdish land now, mostly.

While the eyes of the world and the Assad regime turned to Aleppo this summer as fighting engulfed the city, Kurdish groups moved aggressively to wrest control of parts of their northeastern heartland in Syria’s Hassake province from the government, corralling the regime’s presence to a few towns and checkpoints along the highways.

The endgame here for many is autonomy. Under Syria’s Baath Party, Arabization policies alienated the Kurds by limiting the use of their language, stripping many of citizenship and for the most part refusing to acknowledge that the ethnic group existed. Chronically mistreated, ignored and sitting on top of much of Syria’s oil (which generated some $4 billion in annual exports before the uprising and subsequent war), most feel entitled to a post-conflict deal that at least matches that of the Kurdistan Regional Government in Iraq, if not better.

And so they are getting ready: Signs are being changed from Arabic to Kurdish, local governments are being set up, armed forces are being trained. In Derek, which the regime called Al Malikiyah as part of its Arabization policies, there is a certain afterglow of liberation. One evening in late September, scores of youth gathered downtown cleaning the city’s streets, smiles on their faces as previously banned nationalistic Kurdish music blared through truck-mounted loudspeakers.

There is exuberance and hope here, but also danger.

The Kurdish experience in Syria made many distrustful of those outside the community and there is a strong aversion to again submitting to Arab authority. The militias being readied here — most notably the Popular Protection Units or YPG — seem to be preparing themselves as much for a fight against President Bashar al-Assad’s forces as they are for a possible fight with the rebel Free Syrian Army, should it try to enter their territory.

While Kurdish groups are currently trying to stay on the sidelines of the conflict and are not attacking the remaining Assad forces, continued government occupation of the major oil fields in the Rmeilan area could bring the war to their doorsteps eventually.

There are also sharp internal divisions in Syrian-Kurdish politics. The Democratic Union Party — known by its Kurdish-language acronym PYD — is the most dominant party in Hassake. Despite publicly denying links to the militant Kurdistan Workers Party (PKK) in Turkey, offices of the Syrian group often feature portraits of PKK founder Abdullah Ocalan and Kurds martyred in battles against Ankara’s authority.

Opponents of the PYD — primarily those Syrian Kurds who identify with Massoud Barzani, president of Iraqi Kurdistan — accuse the group of working with the Assad regime, cracking down on dissent and ensuring PYD control of the area through its near monopoly on weapons. The PYD responds to its detractors — some of them not as hostile to the Free Syrian Army as they are — by calling them traitors.

In northeastern Syria, the PYD is currently able to keep dissenters confined to grumbling under their breath. But in Kurdish areas elsewhere in the country closer to the conflict — such as Aleppo’s Sheikh Maksoud neighborhood, the nearby town of Efrin and Kobane in Al Raqqa province — guns are easier to get a hold of and limited battles between Kurdish groups have already occurred.

The PYD’s alleged links to, and ideological inspiration from, the PKK also land the group in a tough spot regarding Turkey. The country’s prime minister, Tayyip Erdogan, has threatened to take action in Kurdish areas of Syria if Turkey deems that groups which have risen up there are a threat. Calls for autonomy on some level or another are also likely to be frowned upon by Turkey, a key supporter of Syria’s rebels, as it faces rising Kurdish dissent at home and increased fighting with the PKK in northern Iraq and southeastern Turkey this year.

For Kurdish groups in Syria to retain or expand the autonomy they have gained, it will likely entail a good deal of diplomatic brinkmanship and horse-trading — fail that, they will be at war.

Josh Wood is a regular contributor to The International Herald Tribune and Esquire Middle East

November 30, 2012 0 comments

The Buzz

Morning briefing: 30 Nov 2012

by Executive Staff November 30, 2012

written by Executive Staff

Economics

Oil prices are expected to fall slightly over the next year as high production feeds softening demand at a time of slowing global economic growth, a Reuters poll shows.

More from Arabian Business

Gulf Air's CEO, brought in to restructure the airline's operations in 2009, has resigned, the struggling Bahrain-based carrier has said.

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Abu Dhabi tourism chiefs have said hotels in the UAE capital posted their best ever October in terms of the number of guests.

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Politics

The UN General Assembly has voted overwhelmingly to recognize Palestine as a non-member observer state – a move strongly opposed by Israel and the US.