Executive Magazine

Morning briefing: 4 Oct 2012

by Executive Staff October 4, 2012

written by Executive Staff

Economics

Riot police in Iran have clashed with protesters in the capital over sharp falls in the currency, the rial.

Tear gas was used to disperse the demonstrators, some of whom were setting fire to tires and rubbish bins. There were many arrests, reports say.

Eyewitnesses told the BBC that scores of people gathered outside the central bank, calling for the governor to stand down, chanting anti-government slogans.

The rial has plummeted to record lows against the US dollar in recent days.

More from the BBC

National Bank of Fujairah will replace British lender Barclays PLC on the United Arab Emirates' interbank rate setting panel, the banking regulator said on Thursday.

"Following the withdrawal of Barclays Bank from the Eibor fixing process, the National Bank of Fujairah was selected by the Eibor panel banks to join the Eibor panel, starting October 8 2012," the statement said.

Sources told Reuters last month that NBF, the 11th-largest bank by market capitalisation in the UAE, would join the panel after the U.K.-based lender quit the panel in July.

More from Arabian Business

The airline industry is expected to continue its growth in the Middle East but at a slower pace than previous years, British Airways Middle East Commercial Manager Paolo De Renzis has said.

“I see growth due to strong demand, but I don’t know if it will continue at the same pace,” Renzis said during an interview held in Beirut’s eastern suburbs hours before the touchdown of the first British Airways plane at Rafik Hariri international airport since 1992.

British Airways began running flights to Lebanon in 1987, but ended operations five years later.

More from The Daily Star

Speculative buying will continue in Dubai, but the emirate’s property market is much better regulated now, experts at Cityscape have said. Rampant off-plan property buying by speculators in Dubai’s property market before the financial crisis was one of the main reasons that the emirate’s real estate market crashed in 2008/2009,with prices dropping upto 60 per cent.

But the positive reaction to the two recent off-plan projects announced in Dubai proves that interest has returned to the segment.

Emaar’s latest project, The Address The BLVD, sold all of its serviced residences on the first day of sale. Long queues of people also reportedly waited to buy Nakheel’s Jumeirah Park Legacy villas earlier this week.

“I think the people who are investors in the off-plan market must have learnt lessons [from the financial crisis]because some of those people were affected badly by the downturn in pricing,” said Nick Maclean, managing director at CBRE Middle East.

More from Arabian Business

Politics

Turkish artillery has renewed firing at targets in Syria after shells from across the border killed five Turkish nationals.

Several Syrian troops were killed by Turkish fire, activists from the Syrian Observatory for Human Rights said.

Turkey's border town of Akcakale was shelled, apparently by Syrian government forces, on Wednesday, killing a woman and three children.

More from the BBC

US Republican Presidential candidate Mitt Romney was seen to have come out on top after the first presidential debate, with Barack Obama performing badly.

The focus of the debate was on domestic issues, foreign policy was not discussed in depth.

More from the BBC

October 4, 2012 0 comments

Society

Junkyard tapas

by Nabila Rahhal October 3, 2012

written by Nabila Rahhal

What do you do with your plot of land waiting for a delayed permit from the Ministry of Tourism to build a new restaurant on it? Options vary from converting it into a parking lot to watching the weeds grow as the space goes unused.

Mario Junior Haddad and Chef Tomas Reger, respectively owner and executive chef of Le Sushi Bar, however, had other ideas, and decided to have fun with their space by turning it into the ‘Junkyard Pop Up’ — a temporary outdoor restaurant located in the alleyway next to the United petrol station in Mar Mkhayel. They plan to build an Italian restaurant there when the permit comes through — hopefully, they say, early next year — but in the meantime, the Junkyard is great publicity for their restaurant consultancy company Food for Thought, and a trendsetter in Beirut’s restaurant scene — being the first pop-up restaurant in the city.

With Christmas lights hung all above a flooring of grass and gravel, the restaurant has a Mexican backyard party feel. Divided into two areas, on one side there is a square bar set on oil barrels that seats several dozen people around its four sides, and to the other a seated dining area. Even on the weekday Executive visited, the bar started filling up around 8 p.m. and was packed an hour later, while the dining area required reservations ahead of time.

For a place with relatively little publicity, the Junkyard is surprisingly popular. “As this is a temporary project with a low budget, we did not want to spend too much on promotions,” says Guy Salame, brand developer at Food for Thought. “We used word of mouth, and some social media, therefore creating some mystery, as well as a snowball effect where people tell each other about the place and create a buzz.” The temporary nature of the restaurant also created a sense of immediacy, that one needs to try it at least once before it shuts down.

In terms of décor, the Junkyard lives up to its name. Broken-down 1960s style televisions lead the way to the bathrooms, which are themselves housed in cargo containers rescued from the Beirut Port. The kitchen is located in a similar, yellow container, which has led some to dub the makeshift restaurant the ‘Yellow Container’. Charming, junky decorations — such as the old fashioned blender still used to make drinks, lights hanging off a helicopter blade above the bar and the antique water heater lying on the grass — provide nostalgic conversation cues to clientele, and also come at a low cost to the owners. Salame again talks about the low budget in relation to the décor, which he says inspired the architect to use rescued and recycled items.

In keeping with the idea of having fun with their place, Chef Reger changes the menu daily. While chicken, meat and seafood are always on offer, the methods of preparation and type of fish will differ depending on what is fresh in the market, and what the chef’s mood is that day. Executive tried the wild mushrooms dish, the teriyaki chicken and the steak with butter sauce. Though it sounds like a hefty plateful, the portions are small and are meant as tapas to share, rather than full meals. The wild mushroom plate was a medley of tasty fungi garnished in a light soy-esque sauce, the pepper-seasoned steak was rare and juicy, though the chicken was a touch oily. The average bill per person — for a drink and three tapas — was approximately $40, thus don’t come on an empty stomach unless you’re prepared to pay $120 to get full. At such prices, this ‘fun’ restaurant, with little overhead to speak of, likely also leaves the owners counting cash with a smile.

“The pop up concept is an idea Food for Thought might repeat next summer in other locations,” says Salame. “We could just take our yellow container and set up somewhere else.” In the meantime, he says he wouldn’t be surprised if other restaurateurs began copying the “pop-up” formula. While it is yet to be determined how popular the idea will be, the Junkyard is currently providing a unique and rustic dining experience — and one that will only last so long.

October 3, 2012 0 comments

Society

House of Stone

by Nabila Rahhal October 3, 2012

written by Nabila Rahhal

Anthony Shadid’s remains were scattered under the olive tree in the garden at his house in Jdeidit Marjeyoun, South Lebanon. He was not buried in the United States where he was born and raised, but in the home he had chosen as his own. This home, or bayt, as Shadid refers to it, is the main character in his third book “House of Stone”, and represents the very human concept of belonging.

Returning to Lebanon on sabbatical from his post as a journalist covering the Middle East for the New York Times, Shadid was not at peace. In his words he was “stunned by war, and shockingly no longer young, married or with my daughter Layla.” Perhaps this emotional state is what led Shadid to decide to fix his ancestral home in Marjeyoun, as a distraction from his internal turmoil and to finally have a place he could call home.

Through describing the renovation, Shadid draws a picture of modern life in a small town. His prose is simple yet well crafted, bringing the characters to life with an objectivity which allows the readers to draw their own opinions of each. Shadid enters Marjeyoun a stranger, but since his roots are from there, townsfolk immediately know his whole family history and think him insane for deciding to repair the house; others simply think he is an American spy. Gradually though, some warm up to him and Shadid’s retellings of nights around the dinner table with some of his new friends are absorbing.

The repair process clearly fascinates Shadid and some parts of the book get weighed down with the details of knocking down a pillar or building up a stone wall.

However, interactions between contractor and workers lighten the tone with humor. When he tries to locate antique tiles for his flooring and ends up meeting a dealer who strips tiles from homes destroyed by the war, the story sheds light on the lesser known aspects of home repair in Lebanon.

Rebuilding memories

Parallel to the home repairs is Shadid’s recounting of the history of the house and his ancestors who lived in it. With the same precise attention to detail he was known for in his journalism, Shadid reconstructs the life of his great-grandparents, while imagining them in the various rooms of the house and what they would have been doing at the time.

Through this, the reader learns about life in Lebanon during the Ottoman Empire and the French Mandate which brought on the beginning of Lebanese emigration.

Shadid’s depiction of his great-grandfather, Esper, and his struggle to decide whether to send his children to the United States for a chance for a better life, or to keep them with him in the perilous times he was living, carried an understanding and sensitivity for not just his own ancestor’s quandary, but one still as relevant to Lebanese families today. And while Esper’s children emigrate after all, they take their home with them in their hearts.

This is evident when Shadid describes the almost daily Lebanese gatherings his grandparents used to host in the US, which again parallels the experience of many Lebanese emigrants to foreign lands who try to build space in which to belong.

Unfortunately, the author passed away before he had the chance to really enjoy the fruits of his labor, his bayt, and after finishing the book, the reader is left with a sense of loss for Shadid, his home and a Lebanon long gone.

It was not in the house of stone’s fate to be forgotten once again, however, as neighbors say Shadid’s second wife and his son still reside there on weekends and vacations. Shadid would be pleased.

October 3, 2012 0 comments

Society

Nicolas Chammas under the cosh

by Nabila Rahhal October 3, 2012

written by Nabila Rahhal

There seems to be little end to the litany of woes Lebanon’s economy has been suffering this year, brought on by regional unrest and internal instabilities mushrooming across the country. Many industries have felt the impact. For a closer look at the implications of this soured environment on the country’s traders, Executive sat down for a frank one-on-one with Nicholas Chammas, head of the Lebanese Traders Association (LTA).

Mohammad Choucair, president of the Lebanese Chamber of Commerce, Industry and Agriculture, as well as some economists we have been speaking to, are saying the economic situation in Lebanon is the worst it has been in a while. What are the figures that alarm you the most?

In the first quarter of the year the numbers were exceptionally good where the trade sector is concerned. We had an increase of 7 percent compared to the same period in 2011, and this is because it came in the realm of a very strong fourth quarter for 2011. Unfortunately, the middle of the second quarter (April-June) 2012 saw a strong turnaround due to the events in the north and the other instabilities, which led to a barely even quarter as compared to 2011. In the third quarter, all hell broke loose due to the closures of the airport road, the abductions of foreigners and the continuing violence in the north.
These factors and the [Gulf] Arab travel warnings, led to the almost complete absence of Arab tourist. Also, Lebanese expatriates have not come back for the summer in the expected numbers. Add to that the slim purchasing power of those residing in Lebanon and you have a recipe for an economic disaster.

How much has the trade activity fallen from the beginning of the year?

So far, we have dropped a good 15 percent compared to 2011 as the third quarter accounts for about 50 percent of our annual sales and when it is hit, our entire year suffers.

What is your forecast for the rest of year?

Though Q3 has not ended, if you extrapolate and assume all things remain equal, I foresee a drop in the commercial activity of around 20 percent for the year 2012 (as compared to 2011). This is a disaster because trade constitutes about one third of the total gross domestic product (GDP) of Lebanon.

Your forecasts are based on 2011 numbers, which was already a bad year…

We have been going downhill since 2010; 2009 and 2010 witnessed a growth rate of 9 percent, which benefited the trade sector a lot. Unfortunately, we got the wrong cues and traders spent hundreds of millions of dollars on luxury retail expecting good times to come. Then the events in Syria happened, and now traders are in a debt trap; they borrowed huge amounts of money and now the cash flow is severely restricted and our expenses have skyrocketed.

So you forecast bankruptcies going forward?

Definitely. The operational costs have risen so much and at the same time the top line has dropped in a dangerous way. Either you incur more debt, which is poisonous in the long run, or you have to increase your equity or you liquidate. They are all bad solutions and there are no good options.

How much do you believe the raise in minimum wage has contributed to speeding up the pace toward bankruptcy?

Very much so, as we have stated plainly in past negotiations with the Ministry of Labor when all was well. Back then, we agreed that there is an imported inflation due to the high exchange rate of the euro versus the United States dollar and the expensiveness of raw materials like oil — raising wages only lead to home grown inflation.

Last time you spoke to Executive, you were asking the government for subsidized loans for the retail sector, which they have done for other sectors. Where do you stand on this now? Is it likely it will still occur?

We are very much in need of this and are even more strident about it as we are facing difficulties with outstanding loans, and need to renew the loan base with more favorable conditions. But, I don’t see it happening now as the government’s budget carries a huge deficit and they are unable to figure out ways to pay their dues.

What is the LTA doing to help support the sector in these challenging times?

We are a strong voice within the economic organizations of the country and we often take the lead in negotiating with the government on issues that affect the sector. In the end, 80 percent of our problems are due to security issues and the lack of law enforcement in the country, so we cannot do much more than give advice and be persistent about representing our demands.

Regarding social security, the National Social Security Fund (NSSF) is requesting that the salary ceiling for contributions to the end-of-service indemnity funds be increased from LL1.5 million to LL2.5 million. This would represent an additional burden on the private sector. What would you be rooting for in this case?

Our position has been adopted by all the economic organizations. Early on, we refused to move the ceiling, but we were outnumbered on the board of directors of the social security fund. [The NSSF board is made up of 10 representatives of employers, 10 for employees and six from the government.] The issue went to the government who stopped it because they realized it was unfair to the employers. As a concession, we agreed to take the ceiling up from LL1.5 million to LL2 million.

With the economic crisis we are facing, what sectors in your opinion are the most heavily impacted?

The most exposed sector is obviously tourism. We cannot expect hotels to fill up when there are no tourists in Lebanon. Directly after that, restaurants have been suffering and then it comes to us, the traders. We had increased our capacity in the wake of 2009-2010 to accommodate for the demands coming from abroad and now there is an increase in supply and hardly any demand.
Manufactures are also suffering and while they are selling abroad, they are facing logistic problems when it comes to shipping over Syria. The banks will be the last to suffer because they deal with us and there will be a leap time before they start to suffer. As for real estate and construction, they hit a plateau in 2011 because of increased capacity and no demand and a bubble was created, but it will take a while to pop and even then, it won’t be as drastic as it was in other countries, such as the US.

Do you think there are any economic opportunities for Lebanese companies from the increased inability of Syrian companies to meet their domestic demands?

We have noticed that imports of merchandise into Lebanon have increased 11 percent year-on-year (for the first three quarters of the year) and this is not explained by domestic consumption. So, part of it is explained by the Syrian [impact] on Lebanon.

You are threatening civil disobedience. Who are you going to strike against and what are your demands?

This is the last resort for us. We will first try to keep the discussions with government officials open and convince them of the danger of the situation we are in to reach a common ground. Then, we are willing to symbolically close down for one hour or a day, followed by an open-ended strike. For us, it is an issue of survival, so if we have to go on strike, we will. The key demands are the basic demands of order, a state of law and security.

Do you believe the situation is a cycle the Lebanese will eventually overcome, like the ones before, or is it more severe this time?

I have mixed feelings about this. Speaking about the long run, Lebanon has seen and overcome worse. But this is not just another obstacle, it is extremely painful and no one would have imagined the extent of the economic chaos due to the situation in Syria. So far we have shed five percentage points of growth in 2011 and 2012, which means billions of dollars lost that cannot be made up for.

October 3, 2012 0 comments

The Buzz

Morning briefing: 3 Oct 2012

by Executive Staff October 3, 2012

written by Executive Staff

Politics

Two car bombs exploded on a main square in a government controlled central district of Syria's second city Aleppo on Wednesday morning, a pro-government television channel said.

Al-Ikhbariya TV said the bombs detonated in Saadallah al-Jabari Square in western Aleppo, Syria's largest city which has now been split in two with forces loyal to President Bashar al-Assad mainly in the west and rebel fighters in the east.

Fighting only with light weaponry, rebels have resorted to bomb attacks in areas still controlled by Assad. Several large protests in support of the president have been held in Saadallah al-Jabari square.

More from The Daily Star

Economic growth in Jordan slowed slightly to 2.9 percent year-on-year in the second quarter but was supported by a sharp rise in tourism, official data showed on Tuesday.

The pace of growth eased marginally after a first-quarter expansion of 3 percent year-on-year.

Jordanian authorities expect the economy to expand by around 2.7 percent in 2012. The International Monetary Fund (IMF)recently forecast growth could reach 3 percent with signs of a recovery in remittances and a rebound in tourism receipts.

More from Arabian Business

Iraq’s Finance Ministry has begun paying an initial $650 million to Iraqi Kurdistan for oil companies working in the autonomous region, Deputy Prime Minister Rosh Nuri al-Shawish told Reuters Tuesday.

Baghdad and the Kurdish Regional Government agreed last month to settle a dispute over oil payments, after the latter pledged to continue exports and the Iraqi government said it would pay foreign companies working there.

“The federal Finance Ministry has started transferring the first oil payment of $650 million to the Kurdish region,” said Shawish, a Kurdish member of the central government negotiating team.

More from The Daily Star

And finally…

US pop sensation Rihanna is to perform at Dubai's Meydan Racecourse.

Meydan commercial director Mohammad Nasser Al Khayat told Arabian Business at Cityscape Global 2012 that an official announcement on the 'Umbrella' star's performance in the emirate was imminent, without indicating when Rihanna would be playing.

Meydan, according to Al Khayat, is lining up a series of high profile concerts for next year in a bid to turn up the heat on Abu Dhabi’s Yas Marina, which in recent months has boasted gigs from the likes of Madonna, Paul McCartney and Elton John. Hip hop performer Eminem will headline next month's Abu Dhabi F1 Grand Prix, alongside heavy metal group Nickelback, further cementing the UAE capital's reputation for live music.

More from Arabian Business

October 3, 2012 0 comments

Society

Retail and the economic crisis

by Nabila Rahhal October 3, 2012

written by Nabila Rahhal

After the hotels and restaurants, it is the retail industry that is feeling the effects of the current economic strain,” says Nicholas Chammas, head of the Lebanese Traders Association.

The retail industry in Lebanon depends heavily on Arab tourists and has suffered the effect of their decreased numbers this summer.

“During the good summers, we used to have an average of five Arabs daily entering our shop. This year we are lucky if we see five a month,” says a salesperson in Nine West’s Verdun branch. Walking through downtown Beirut, one quickly notices the unusual quietness relative to previous summers, and though there are a few shoppers strolling around, it appears no one is buying.

Numbers obtained from the tax free shopping services company Global Blue show there was an overall decrease in visitor refunds between the first quarter of 2012 and the second. Syria was one of the few countries whose percentage of spending evolution went up in the second quarter of 2012, which is likely the result of the increased number of Syrians fleeing the violence in their country.

While there was an undeniable economic setback this summer, major retail companies declined from commenting on difficulties they might be facing. Small shop owners in Hamra and Fern El Shebak, traditionally busy shopping areas especially during the summer, spoke freely of the lack of activity in the market, the decline in their sales and of the extended discount periods they hoped would encourage shoppers to spend, but to no avail.

“There are no tourists to buy, and we cannot depend on the Lebanese residing in the country as they barely have enough money to eat, let alone shop. There is basically no way forward until the political situation improves,” said one shop owner in Hamra, summing up the feelings of many in the industry.

October 3, 2012 0 comments

Economics & Policy Industry

Q&A: Vrej Sbounjian

by Paul Cochrane October 2, 2012

written by Paul Cochrane

Lebanon’s productive sectors are often short-changed in favor of tourism, real estate and banking. What’s more, Minister of Industry Vrej Sbounjian commands a paltry budget of LL7.71 billion ($5.14 million). In such an environment the nation’s industrialists need a well-informed fighter holding their corner in the Cabinet. Executive met with the minister to see if he has been up to the task.

The 2012 budget lacked any tangible or creative initiatives to boost Lebanon’s productive sectors. Was this not a failure on your behalf?

We can’t forget previous governments in the past six or seven years couldn’t even pass a budget, so I want to congratulate this government on even having passed a budget. With regards to industry, it is fine, we don’t have any complaints concerning the economy or industry.

Where are we at with the draft law to slash export taxes?

That law has been approved in the Cabinet and I met with [Speaker] Nabih Berri and he promised me it will be in the first parliamentary meeting. That law will mean taxes on all Lebanese products that are exported will be reduced by 50 percent. We pay 15 percent on income tax and profits, but that will be reduced to 7.5 percent.

Can the government afford to lose that revenue?

We don’t look at it from that perspective but rather at how many more jobs we will create and how many more opportunities and investments will come to the country.

One of the biggest disincentives to invest in Lebanon is bad infrastructure. What has happened to the plans to develop industrial zones in Lebanon?

There are lots of industrial zones in Lebanon that you can use. If you want to build a factory or a warehouse to produce or assemble a product you don’t need to go to an industrial zone.

In this government’s mission statement it said new industrial zones would be created…

I’m not saying I don’t want to do it. These are for places where there is no industry in Lebanon. But in a lot of areas there are factories that have been there for years. We cannot ask them to move.

It’s not about moving existing factories but providing the infrastructure to attract investment for new industries…

We are not looking to heavy industries. We are interested in service industries and assembly industries for export to other Arab countries. The investor will take advantage of the 7.5 percent tax rate, plus…

It’s not 7.5 percent yet…

It is 15 percent but it will be 7.5. There is nobody against this law.

If you are not focusing on heavy industry, what efforts are you making to develop high-skilled, light industry within Lebanon?

First of all we have great education and great schools and I would like to encourage…

The problem is that the well-educated and skilled workforce leaves to work elsewhere.

I think the reason of leaving is because the opportunities available in a large economy are more than in a small economy. This is not new. Look at Spain and Italy now and how many people are leaving.

They are going through an economic crisis and there are huge levels of unemployment.

And we are having an economic downturn. It happens.

But once intelligent and skilled young people finish their education, what strategy is there to keep them in Lebanon to help develop its industries?

We have to create the right environment and laws and then leave everyone to be creative themselves.

In your last interview with Executive you said more bilateral agreements were in the pipeline once those with Armenia and Sudan were signed. Are they?

Absolutely, we are looking to have agreements signed with Tunisia and Cyprus very soon.

Why is there no progress on Lebanon’s plans to join the World Trade Organization?

I want to ask you, is the WTO doing well for other countries?

Are you insinuating you are against Lebanon joining the WTO?

I didn’t say I don’t think it is a good idea. With my experience I have learned we have to take into consideration the size of the country and the size of the population. I don’t know all of the details of the WTO but I think that those two issues must be taken into consideration.

What have been the major impacts on Lebanese industry from the Syrian crisis and how has the government responded?

I think the major impact is the fear. People from any country that had a neighbor at war would be worried. People are seeing what is going on and are understandably worried. This is the only major worry so far.

But what about tangible impacts such as increased costs of overland freight?

We have found some ways, such as getting to Iraq going through Tripoli in the north to Turkey and overland from there. As for other countries, for some we are shipping from the Port of Beirut but in many cases the overland route is still fine.

Could the Qlaiaat airport be opened up for the freight of Lebanese produce to foreign markets?

This is one of many ideas people have…

But is it an idea you support?

Would it work? Would it be sustainable? Or would it just be another cost for the government? We are just speculating. Everything is working so far. Everybody is able to export fine from land via Syria and imports are coming in.

Lebanon’s industrialists have asked for faster reimbursement of the value added tax (VAT). What is being done in this regard?

I want to ask what are they doing in other countries? Some are doing well but all the rest are in financial trouble.

VAT reimbursements is a local bureaucratic issue; how is that related to the Eurozone crisis?

In some countries they raised VAT to say 21 percent. We are at 10. They are reimbursing but taking the money back in another way. The Lebanese enjoy very low taxes.

What is your stance on article 59, which allows industrialists to reclaim their VAT on industrial machinery and mineral materials?

If you are importing a product that you want to use to manufacture items and then you want to resell it, that should be excluded from VAT. Secondly, industrial machines that are imported should be excluded. Also whenever a product is being sold to the army we are putting VAT on it. This should be excluded.

Is this up for discussion in the Cabinet?

I need to discuss with my friend the Minister of Finance, but this is the right thing to do…

I would like to add a comment about the economy here. There is a lot of complaining but I don’t think it’s justified. There was great growth from 2006 to 2011, but in economies there is growth and then recession. Without the discipline of recession, continuous growth would bring us to a larger fall into recession.

But the lack of development of Lebanon’s productive sectors makes it more susceptible to external shocks and undermines long-term sustainable growth.

Where are the Lebanese? We are innovative, we had vision, where are these people? Why are we always complaining now? We need to be creative and have a long-term vision.

You need electricity, you need Internet, you need good roads…

We have some drawbacks, but we also have many advantages. We had six years of great expansion with an incredibly strong real estate market. We may be in a recession but that is a discipline we need to go through. We need to be more realistic and enjoy life a little bit. We don’t have to make money every year; there are many nice things to be done in the country.

October 2, 2012 0 comments

Finance

MENA stock tips, October 2012

by Maya Sioufi October 2, 2012

written by Maya Sioufi

Bailout news dominated market headlines last month, but this time it was the European Central Bank (ECB) that committed unlimited funds to acquire the short-term debt of European countries in distress. Across the pond, the United States debt topped $16 trillion and the Federal Reserve announced a much anticipated third round of quantitative easing. For investment tips this month, Executive sat with Georges Abboud, head of private banking at Lebanon’s Blom Bank, and Mohammad Ali Yasin, the head of brokerage at National Bank of Abu Dhabi.

Georges Abboud

Bullish or bearish? With a lack of visibility in the markets, Abboud remains cautious and is keeping an eye out for high yielding fixed-income securities. “Investors are afraid of the valuation of equities,” says Abboud. He still recommends exposure to large-cap companies with solid growth in the pharmaceutical, energy and technology sectors but he would buy them on weakness and would sell them once they generate a 7 to 8 percent return.

Can Europe stick together? “It can’t afford not to,” says Abboud. He believes it is not in the interest of Germany to see Europe break up, as the majority of their exports are sold in Europe and they don’t want to see the Deutschmark, their former currency, resurrect with an explosion in value. As for Greece, while Abboud believes it might be better off if it left the Eurozone, its exit will send a very bad signal and cause a domino effect on other European countries. He doesn’t expect the euro to crash but is happy to sell the euro/dollar in the high twenties.

Favorite regions? US markets are now expensive, according to Abboud, and he would stock pick names in the technology sector such as Google, LinkedIn and Apple, which he would buy on dips. As for the European markets, despite their troubles, Abboud would add exposure to solid names such as AstraZeneca, which offers a 7 percent dividend yield. On emerging markets, he favors Russia as it is cheap and Abboud would gain exposure by acquiring energy company Gazprom, despite political risk.

Thoughts on MENA markets? Abboud sticks to his October 2011 recommendation of having some exposure to the stock market in Saudi Arabia and would diversify across sectors. As for Egypt, last October he was very positive about buying Orascom Telecom, he has since exited the stock after generating a significant return and wouldn’t be investing in this country for now due to political issues. In Lebanon, he likes Solidere, which he says is cheap, and could go to $17 within a short time on positive news. He is also bullish on Lebanese government bonds, now generating returns of 5 percent up from 3 to 4 percent in May.

Top investment ideas? While nothing “would make [him] jump on his desk” with joy, he does seem pretty keen on investing in US residential real estate. He is currently working on a partnership with a private equity firm in the US in order to provide his clients with a vehicle allowing them to gain exposure to the US residential market.

Mohammad Ali Yasin

Thoughts on the markets? “Avoid Europe” seems to be one of Yasin’s key recommendations as he sees a lot of value in US markets. As for Asia, with China and India’s economies slowing down, he is not keen on this region. Closer to home, he likes markets in the United Arab Emirates, Saudi Arabia, Egypt and Qatar.

Would an exit of Greece from the Eurozone come as a surprise? Yasin believes the Greek exit is priced in and if the actions of European Central Bank President Mario Draghi, in the upcoming weeks, help keep Greece in the Eurozone, he expects a rally in European markets. He believes some investors are positioning themselves for this by acquiring Spanish and Italian bonds. “If you are a gambler, you can take a position one way or another but if you are not a gambler then you stay out.”

Favorite asset classes to invest in? Yasin would place 60 percent of his portfolio in US, Saudi Arabia and UAE equities. He would place another 20 to 25 percent in corporate bonds and government-related bonds mainly in the Gulf Cooperation Council. The rest he would put in soft commodities or gold.

Top regions to invest in? He favors US equities within the developed markets. For the MENA region, he favors the GCC markets and his top pick is Saudi Arabia, followed by the UAE.

Top ideas? His top two ideas are deploying capital in the US technology sector, which he says “is the sector to be in if [US President] Obama is reelected, as whenever there is a democratic president, the technology and pharmaceutical sectors benefit.” He would also invest in the UAE equity markets with a preference for the banking sector.

October 2, 2012 0 comments

Finance

Q&A: Paul Donovan

by Maya Sioufi October 2, 2012

written by Maya Sioufi

European Central Bank (ECB)’s president Mario Draghi announced last month an unlimited bond-buying program to save the Eurozone and its debt-loaded countries. The United States Federal Reserve is also buying more bonds after it announced a third round of quantitative easing. Investors sighed with relief and markets reacted positively. The United States’ ‘fiscal cliff’ still looms, however, with massive, legally mandated tax increases and spending cuts coming into effect at the beginning of 2013 if no budget-balancing deal is found. For insight on these and other issues, Executive sat for a one-on-one with Paul Donovan, global economist at UBS, while he was in Beirut last month.

Draghi recently announced an unlimited bond-buying program whereby the ECB would acquire short-term government bonds of countries in distress. Is this a band-aid or leap forward for solving the Eurozone sovereign debt crisis?

It’s not a band-aid. I would say it is step forward; leap forward is a bit too far. It demonstrates that the ECB will not allow Europe to fail and that monetary union will hold together. Draghi is going as far as he can legally go at this stage. More will need to be done in the future to make the euro work properly but it possibly needs treaty changes. For now, this is an important step.

What is missing for the Eurozone to work properly?

For the euro to work, a banking union, a single bank supervisor, is needed. We are moving toward that and I think something will be established by the middle of next year. Secondly, we need some degree of fiscal integration. At UBS we prefer the term fiscal confederation, as it sounds more Swiss. Switzerland is a very good model with its highly independent cantons that share limited fiscal policy. We also need competitiveness in Europe and structural reforms.

Doesn’t Germany, which is highly dependent on exports, benefit from a weak euro? It wouldn’t want to see a breakup of the Eurozone as that would mean the Deutschmark would explode.

There is no question that Germany benefits from the existence of the euro. If the Eurozone were to break up, we have done a rough estimate that it would cost Germany 25 percent of its gross domestic product in a year. Germany’s main export market is Europe. Its banks would collapse as they hold French, Italian and Spanish bonds, which would become worthless; it’s chaos for the banking system. So Germany does benefit from a weak euro but the negatives of what is happening now are greater than the positives. Europe, Germany’s main export market, is very weak and German banks are weaker than they would otherwise be because the bond markets are weaker, which is why growth is likely to be below 1 percent this year.

Is a breakup of the Eurozone likely, in your opinion?

Anything is possible. Politicians do silly things from time to time. Our view is that if a country like Germany would lose 25 percent of its GDP in a year by leaving the euro then it would cost Greece maybe 50 percent of its economy in a year. It would be absolutely devastating. If Greece goes, Spain, Portugal and Ireland would leave within six weeks. It is bank runs that cause the collapse of monetary unions. Only four monetary union breakups took place in the last century, aside from when a country got completely destroyed like Germany after the [second world] war: the Austro-Hungarian Empire which broke up between 1919 to 1921, the US monetary union between 1932 and 1933, the former Soviet monetary union in 1991 and the Czechs and Slovaks in 1994. The trigger for the breakups, with the exception of the Soviet Union, was bank runs. The good news is that political leaders in Europe, the ones that matter, understand this, and that’s why we had the Draghi plan. Don’t get me wrong; the euro should never have been created, as it doesn’t work. Now that we’ve got it, it’s the Hotel California. You can check out but you can never leave. You have to keep this thing together because the cost of breakup is too high.

Is the upcoming fiscal cliff of concern to you?

No. It will be dealt with. Politicians in America, like anywhere else in the world, change their minds. There will be some fiscal tightening. We think most [former US President George] Bush tax cuts will be kept, most or all payroll tax cuts will be cut and most planned spending cuts will be reversed.

Who do you think will be friendlier to the markets, Republican presidential candidate Mitt Romney or US President Barack Obama?

Frankly, neither. I’m sure there will be a brief reaction and certain industries will be affected by certain party policies such as defense, healthcare and banking. The issue for us is that its not just the presidency, it’s the Senate which is very closely balanced and the House of Representatives and within that, the influence of the Tea Party among the Republicans and the moderates among the Democrats, etcetera. I don’t think you will get results where you pound the table and say buy or sell equities on these results.

With all the money-printing going on at central banks, do you think inflation is a risk going forward?

No. In developed countries, inflation is about 70 percent domestic labor costs and 10 to 15 percent commodity costs. I don’t see an increase in labor cost inflation in the current climate in the coming years. I do think commodity prices will trend somewhat higher but it will not be a major inflation issue. Printing money has never created inflation; printing too much money creates inflation. We have seen a huge increase in demand for cash globally and central banks have supplied that cash; that’s not inflation so I don’t see it as a major shock.

Are you worried about the slowdown we are seeing in some of the major emerging economies?

It is a mixed picture. We are seeing a refocus on domestic growth from global growth but I don’t think it will be a major crisis. If the emerging economies can manage more domestic demand coming through, they will sustain their growth.

Following the revolutions that the Arab world has witnessed, what are your thoughts on Middle East and North African economies?

There are a number of challenges for the region. As a result of the financial crisis and the European debt crisis, globalization of capital is reversing. For instance, French banks and life insurers invest in France; Italian pension funds invest in Italy.

For the MENA region, it is a problem because international capital will be less easy to secure and it will be harder to obtain the expertise that comes with it in many cases. Of course the region has a lot of capital so it can become more self-dependent, but capital coming from a sovereign wealth fund does not have the same motive as a private investment. My concern is that investments [may] become less efficient.

Also, political risk in the region is present at a time when many investors globally are adverse to risk. The problem here is that international investors first decide if they should invest in a region and then which country in the region. Countries with good stories might be overlooked for the time being. Hopefully when things will calm down, people will consider the region but at this stage, it is probably too early.

October 2, 2012 0 comments

The Buzz

Morning briefing: 2 Oct 2012

by Executive Staff October 2, 2012

written by Executive Staff

Economics

The Lebanese government may issue a dollar-denominated sovereign bond this month, the country’s Central Bank governor has said.

“The government and the Finance Ministry are thinking of going to the market again, maybe in October, with an issue of the Republic of Lebanon in dollars,” Riad Salameh said on the sidelines of a meeting of Arab central bankers in Kuwait.

He would not comment on details of the possible bond issue, saying it was up to the government to announce it.

More from The Daily Star

Egypt's negotiations for a $4.8 billion loan from the IMF have been delayed to give the government more time to draw up its economic reform program, the two sides said on Monday.

Egypt was due to receive a team from the International Monetary Fund at the end of September to discuss the terms of the loan. It urgently needs financial support to prop up state coffers weakened by economic turmoil since the popular uprising last year that ousted President Hosni Mubarak.

"The authorities are working on their economic program and have indicated that they need some additional time to advance their preparations and be ready to receive a mission," IMF spokeswoman Wafa Amr said in a statement.

More from the BBC

Advertising spending in the Middle East and Africa have grown rapidly in 2012, a new study has shown.

The Nielsen report showed overall global advertising spend up just 2.4 percent to $139bn in the second quarter of 2012 but the Middle East and Africa recorded the highest growth at 19.6 percent.

June saw the most growth of the quarter, at 3.1 percent.

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October 2, 2012 0 comments