Executive Magazine

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.

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

Unemployment in Lebanon

by Zafiris Tzannatos October 2, 2012

written by Zafiris Tzannatos

Unemployment in Lebanon is in excess of 10 percent, with youth unemployment close to 25 percent. This is despite the low labor force participation rate of educated Lebanese women (only 20 percent compared to 35 percent for the Arab region), and the high rate of emigration — some say nearly half of every cohort goes abroad to find employment.

Addressing this issue requires a better understanding of the forces underlying labor supply, especially education, as well as how the economy works and its impact on labor demand.

Education is good on average

In international comparisons of student learning — such as the Third International Mathematics and Science Study undertaken in 2007 — Lebanon comes at the top in the Arab region, making the Lebanese employable across the world.

Lebanon has one of the highest skilled emigration rates in the world (measured in terms of those that have university education) and the highest rate among the Arab states.

For the university graduates who stay behind, the unemployment rate has been increasing over time and now tops 11 percent, double the rate of Lebanese without a university degree pointing to an over-supply of educated Lebanese.

Much of education spending in Lebanon (80 percent) is private with public spending the lowest in the Arab world. Only one in four pupils are in public primary schools, one in 10 do not complete primary education and one in four do not complete secondary education.

An economy of constraints

Most of the jobs created in the Lebanese economy are in low value-added sectors such as wholesale and retail trade, repair and maintenance, transport and storage, food and hospitality services. Therefore employers have little concern about lack of skills and are unwilling to pay high wages. According to business environment and investment climate surveys, the prime concerns of employers relate to political instability, macroeconomic uncertainty, poor governance, cost of financing and weak public infrastructure.

These structural deficiencies in the economy have resulted in creating no more than 3,400 jobs annually in the last decade compared to almost 19,000 new job seekers coming into the labor market every year in the foreseeable future. This abundant labor supply alone is sufficient to depress wages, letting aside the presence of migrant workers, many of whom are undocumented and low skilled and prepared to work for low wages. How does all this come together?
Based on opinion surveys among executives, the World Economic Forum’s “Global Competitiveness Index 2012” ranks Lebanon last (that is, best) compared to all other Arab states in terms of “inadequately educated labor force.”

What can be done?

Tackling the lack of job opportunities for well-educated workers, which is leading to a high rate of emigration among the skilled labor force, is necessary to secure a progressive future for Lebanon. Geopolitical uncertainties, the high level of public debt that is bound to saddle the economy for many years to come and managing immigration are critical issues. But for political and logistical reasons, addressing them is a Herculean task.

On the other hand, governance and public infrastructure (such as electricity and transport) can be improved in the more immediate term to create a competitive and transparent business environment. This would add more high value-added activities to the economy and increase demand for a more skilled labor force.

It is also vital for the government to dedicate more resources to public education in order to meet the needs of less affluent Lebanese, who face unequal opportunities due to inadequate access to a proper education. Whether this would reduce unemployment quickly is yet to be seen, as the size of the existing excess labor supply and the “reserve army” of educated but non-working Lebanese women are disheartening. However, it will create a more inclusive future society. And an inclusive society is in many respects preferable to faster economic growth.

October 2, 2012 1 comment

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.

Money for ideas

by Maya Sioufi October 2, 2012

written by Maya Sioufi

An “American Idol” for entrepreneurs; that’s how the first round of selection for Beirut-based business accelerator Seeqnce could be called. The 436 applicants — ranging from designers, developers to business people from 30 countries and places as far apart as California and Romania — had three minutes to pitch their idea to the three-person jury of Seeqnce program directors. Their dream? To become the next DropBox or AirBnb, ideas that found financing from Y Combinator, a renowned Silicon Valley-based accelerator.

All you needed was an Internet business idea, or techie aptitudes as a developer or web designer, and you could have applied to the program to be part of one of the eight startups that were recently selected. There was just one condition. You had to commit to being in Lebanon for six months, the duration of the program, which started on September 25. The 150 candidates selected after the first screening process had to partake in “shuffles” (where participants worked in teams on assigned projects), and “mixers” (Saturday night rooftop parties to network and share ideas). The aim was for the participants to eventually form their own teams.

They then went on to partake in Seeqnce’s four-day “hackathon” workshops. Some teams fell apart and other opportunities surfaced. Rawad Hajj, cofounder of Rikbit, an online platform for group outings and one of the selected startups, started off with two Romanians who left the program because of the August kidnapping spree that struck Lebanon. He then joined another team that was working on a similar idea. Finally the teams had to participate in the “challenge”, whereby they had 48 hours to pitch their business ideas to the Seeqnce directors. Eight startups were finally selected [see box], of which seven are from Lebanon and one from Egypt.

Funding the startups

Nine investors with links to Lebanon — high net-worth individuals, angel investors and a venture capitalist whose names were not disclosed — are betting on the success of these newly formed startups, each investing $68,000 to deploy a total of $612,000, of which $306,000 will be directly injected into the startups in cash and the remainder will be given in the form of Seeqnce services. Each startup receives $38,250 in cash and an equal amount in form of usage of the Seeqnce space for six months, mentorship from the five program directors, access to the accelerator’s network, and workshops provided by “successful businesspeople and excellent designers,” according to Fadi Bizri, one of the founding members. He did not disclose the names of those providing the workshops, as the roster was not yet confirmed as Executive went to print. In exchange for this amount, founders of the startups have to give up a hefty 30 percent stake in their newborn company to Seeqnce and the nine investors, which will each receive a three percent stake, valuing the startups at $121,000 each (by taking into account the cash component). Accelerators in the United States and in the region that offer a similar program normally take a lower stake when investing in startups, as two of the most famed US accelerators, Y Combinator and TechStars, both take an average 8 percent stake and value the startups at $300,000; Jordan-based Oasis 500 and Dubai-based SeedStartup both take a 10 percent stake and value their startups at $140,000 and $200,000, respectively.

Cedric Maalouf, founder of et3arraf.com, an online dating site for the Arab world selected by the Seeqnce program, does not believe that the 30 percent stake is too much. “I just had an idea,” he says. “I didn’t have a team or a prototype. I really had nothing.”

The real work begins

According to Michel el-Meouchi, one of the founding members of Seeqnce, “It’s a different environment. We were going for the best balance between investors and startups. It had to be attractive on both sides and had to take into account the risk of the country and the region.” Venture capitalists were not too keen to participate in the program, according to Bizri. “The general attitude was that ‘we love the Seeqnce program and would love to meet the startups when they are out,’” he says. “We told them to get them out, we need to fund the program. Some are getting to a point that they understand that the upstream is necessary, it’s essentially their downstream.”

After the six-month program, the startups are expected to have a product out with at least early users and clear monetization options. At the end of the program, they will have the opportunity to pitch their ideas to investors for a round of financing, though after giving up 30 percent, handing over more equity might seem daunting for some. “It’s a jungle out there so not all the startups might get financing,” says Bizri.

After two rounds of financing, they have the option of buying back 10 percent of their startup. “If they make it big, they can take out some ownership” adds Meouchi. Holding their first run this year, Seeqnce aims to have it annually. “If we are still alive, we will do it again,” joked Bizri, still recovering from the rooftop party they threw in Hamra to announce the eight startups. Now selected, however, the party is over and the real work begins for these startup founders.

If these startups succeed, the market will likely open to other business accelerators, meaning a more competitive environment; one where the terms are less demanding on the entrepreneurs yet still attractive for investors.

Where Seeqnce invested

elManshar

Similar to Chicago-based Threadless, elManshar is an online community for Arab designers to upload and sell their work. Starting off with T-shirt designs, elManshar will allow its viewers to ‘like’ designs and popular ones will go into production.

Bayt Baytak

An online real estate website for the Middle East, Bayt Baytak will start by listing residential real estate for sale and for rent in Lebanon, with an aim to expand and cover the region. It will be map-based, whereby real estate owners and agents can locate their properties on the site.

Kactus

To-do lists for “how to certify your baccalaureate diploma” or “how to handle government bureaucracy” are what Kactus aims to provide. It will be an online community-generated collection of to-do lists, or Kacts, that would be easy to manage and to share.

et3arraf

et3arraf is an online dating website for the Arab world in Arabic. It will introduce affinity matchmaking, whereby subscribers need to complete an in-depth questionnaire and matches with blurred pictures will be proposed initially. Following interaction between the matches, a progressive sharing occurs whereby the relationship can be taken to the next level.

Presella

Presella is a web platform that guarantees a specific number of attendees for an event before it is paid for. Once the desired number of tickets is pre-sold, the event is officially confirmed.

eTobb

eTobb is an e-health platform in Arabic and English. Similar to WebMD, eTobb allows checking for symptoms online and finding information on medical conditions. It will also list doctors’ and hospitals’ information and allow for ratings and reviews like ZocDoc.

Yoofers

Yoofers is a social gifting platform. It will list a selection of products and users can request from their friends and family to contribute a small amount to a specific gift, and the person with the highest amount pledged wins the gift.

Rikbit

Rikbit is an online platform for group outings. Starting off with outdoor events and gradually branching out, Rikbit aims to allow users to create group events or browse for events that their friends or other Rikbit users can take part in.

October 2, 2012 0 comments

Society

Starved for business

by Nabila Rahhal October 2, 2012

written by Nabila Rahhal

With so many foreigners and expats altering their vacation plans to avoid Lebanon this summer, it is no wonder the hospitality sector, which relies heavily on tourism, is struggling.

According to statistics by the Ministry of Tourism, the number of tourists entering the country this year, until July, had decreased 12 percent in comparison to the same period last year, which was already weak tourism-wise. Hotels, which usually rely on the summer to make their profits, suffered the most this year and median room occupancy was around 45 percent — even with deals on lower room rates — when usually it is between 55 to 60 percent, according to Pierre Achkar, head of the Lebanese Hotel Owners’ Association.

He says the first half of 2012 saw hotel occupancy percentages rise as compared to the same period in 2011. Last year started terribly, says Achkar — noting the collapse of the Lebanese government in early 2011 and the beginning of the Syrian uprising — but the situation improved with the formation of the government in June, and this spilled over to create a comparably good first half of 2012. “The numbers deteriorated by summer 2012, with the spread of Syria’s troubles to Aleppo and Damascus and the associated difficulties in reaching Lebanon by land,” says Achkar, adding that hotels have experienced an almost empty summer.

In line with Achkar’s assessment, though declining to provide numbers, major hotels in Beirut have admitted to an unusually quiet summer, especially during the Eid period after Ramadan, which is usually abuzz with tourists. According to Christophe Hazebrouck, general manager of Le Gray Hotel, contingency plans hotels have adopted to weather the crisis include cost savings, such as sending employees on vacation, and business plans like targeting other countries and promoting attractive room packages.

The main blow for hotels this season, according to Achkar, was the travel warning on Arab tourists, as they account for 60 percent of a hotel’s business. He says he sees thoughts of replacing Gulf Arab tourists with others as irrational: “We can diversify our base, but we cannot replace them as no one will spend as much as them or even visit as much as them, especially since they are so close to us distance-wise.” says Achkar, giving the example of a Saudi tourist who prepaid for 56 weekends in Lebanon at a certain hotel beginning in the summer of 2010.

To aid them through these difficult times, the Hotel Owners’ Association is appealing to the private sector and the government: “We are approaching the central bank, Al Kafaat Foundation, the association of banks and the prime minister and asking for the following: financial support for fuel, a one-year grace period for our loans which we usually pay at the end of the summer and a subsidization for the National Social Security Fund and taxes.”

As an immediate solution to the tourism crisis, the association suggests working on monetary incentives to attract the Egyptian, Iraqi, Jordanian and Syrian tourists, who are still coming to Lebanon despite everything. “Instead of wasting the ministry’s budget of $3 million to $5 million a year promoting Lebanon to European cities which usually don’t visit the country, it would be better to use this money to target the Levant tourists and provide them with charter planes or discounted plane tickets,” says Achkar.

Empty seats at the table

Restaurants, cafés and bars in Lebanon are also feeling the effects of the unstable regional and internal situation. The Syndicate of Owners of Restaurants, Cafés, Night Clubs and Pastries in Lebanon pegs the number for such venues in operation at 6,000, accounting for 9 percent of the total employment in Lebanon. A decline in this industry would therefore have a noticeable impact on the country’s economy.

In line with Achkar, Ziad Kamel, treasurer of the Syndicate, sees 2012 as the worst year for the hospitality sector since 2006 (when the July war with Israel occurred). “The year 2007 showed some growth, which continued steadily until 2011 when the situation stagnated and then plummeted to the 40 percent decrease in turnover we are experiencing now,” explains Kamel.

Offering explanations for this decrease, Kamel says: “All types of establishments in our business are affected due to the travel bans on the Arab tourists, the expats not returning as much this summer and the war next door which is spilling over to Lebanon. With all that is going on, who would choose to come to Lebanon for a vacation?”

Speaking about his own restaurants and those of his colleagues, Kamel sees that people are not going out as much and consumer confidence is low. “In such uncertain times, it seems local residents are in crisis mode and tend to save their money in case they need it for something more important than going out,” he says.

Kamel says the industry has seen closures as a result, especially in areas like Aley and Bhamdoun, as well as restaurants in downtown that mainly depend on Arab tourists.

“The people with investments in the country cannot hold on for much longer,” he says. “We, the restaurant owners, already have a lot to deal with from outdated laws and license procedures to competition without the added concern of the security situation. Investor confidence is down and national expansions are being put on hold.”

Using himself as an example, Kamel’s own expansion plan for Couqley, a restaurant he founded in Gemmayze, has been delayed.

Looking ahead

Achkar believes Lebanon has seen worse, and believes Lebanese expats will return, in small numbers, for the Adha holidays, should the situation remain relatively stable. On the issue of tourism, however, Achkar believes it is too far in the year to see any real change in numbers.

“Only regional security and internal stability will get the tourist back. Once we have those, they will come to Lebanon without us having to do any promotions,” says Achkar. Until then, the hospitality industry has no choice but to hang on and try to be creative.

October 2, 2012 0 comments