Executive Magazine

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

Business

Where Europe and the Middle East meet

by Maya Sioufi October 2, 2012

written by Maya Sioufi

Ongoing political instability in the Arab world’s most populated country has not scared off at least one private equity (PE) fund from making major investments. Beirut-based Euromena recently deployed $20 million in an Egyptian oil and gas company, Sakson Petroleum Services, after having invested $13.5 million in an optometry hospital, Al Oyoun Al Dawli, earlier this year.

“It’s a country that had already a lot of potential and revolution gives it more potential,” says Romen Mathieu, managing director of the Euromena funds. “There are 80 million people looking to live, get medication, wear clothes and if you select well, you can make a lot of money.”

Since the launch of Euromena’s first fund in 2006, a total of approximately $100 million has been invested by the two Euromena funds in 14 companies in four countries in the region [see chart]. With an average ticket size of $8 million per company, these funds also offer co-investment opportunities in specific names, bringing the total amount invested to $175 million.

Seeds of the idea

Armed with PE experience from investment bank Lazard and accounting firms Arthur Anderson and Ernst & Young, Mathieu saw an opportunity in 2004 to invest in medium-sized companies in the Middle East. While certainly aware of the lack of transparency, stability and infrastructure in the region, Mathieu saw this as outweighed by the opportunity and decided to launch a PE fund dedicated to the Middle East. His strategy was to start off by attracting European public institutions to provide credibility to the fund and eventually attract private Gulf investors reassured that it would abide by the book. His goal was to create a Euro-Arab partnership. As he needed a platform and a solid partner to launch his fund, he went to United Kingdom-based private equity firm Capital Trust, which had previously tried but failed to venture into this region and was keen to give it another go. With Capital Trust on board, the European Investment Bank (EIB), the first European institution to deploy capital into Mathieu’s venture, soon followed.

“By creating opportunities for work, Arabs can educate their children and instead of holding the Bible and the Koran and running with it, they can think of a better life,” says Mathieu. “If the Gulf and Europe understand this, they will face the enemy of fundamentalism and illiteracy.” That’s how he says he succeeded in gathering interest from three European public institutions — the EIB, Proparco, a Paris-based development institution and Averroes Finance, a fund of funds — accounting for 30 percent of the committed capital. Equipped with European public money, he raised the remaining capital from 45 private investors in the Middle East.

There are also bigger plans for 2013, despite the European sovereign debt crisis and the uncertainty in several countries in the Arab world. Mathieu’s next aim is to raise a minimum of $200 million starting next year for Euromena’s third fund, and he is keen on adding companies in Libya, Iraq and Sudan to the Euromena portfolio. The final composition of the investments, however, depends on the final makeup of investors of the funds — with major targets including the International Finance Corporation, the private sector lending arm of the World Bank, and Germany’s DEG, one of Europe’s largest development finance institutions — as they may put restrictions on where their money goes.
For this third fund, he will also be seeking to tap private European wealth from families such as the Rothschilds and institutions such as Paris-based PE Quilvest, in addition to Arab public investors such as sovereign wealth funds (SWFs). Mathieu seems more confident on attracting European private investors, given the previous funds’ track record. The first fund’s three exits generated an average return of 2.5 times the investments, and one of the exits was completed through the sale to French building materials leader Saint Gobain and another one to London-based international pharmaceutical company Hikma.

“We are getting appetite from European private investors,” adds Mathieu. As for Arab public investors, he is less confident and laments that “one can never understand why they would or would not give you a penny; it’s not a transparent process.” Despite this, he has not given up and will pitch to Arab SWFs again next year.

For now, the focus is on investing in two additional companies already on Mathieu’s radar — one in Morocco, still untapped by Euromena, and another in Egypt — which would complete the investments of the second fund, as well as exiting two additional companies by year-end, which Mathieu is confident will be completed despite the challenges in the region. He says the exits will be done through sales to professional investors and high net-worth individuals in the region, as strategic international investors are less willing to deploy money due to the given uncertainty in the region and the European economic crisis. With lack of visibility on prospects in the Arab world, Euromena exits its investments when it has the chance to make at least two times the investment.

“Especially in times like today; if I wait one more year, I might make three times [the investment] if the ‘Arab Spring’ turns into an ‘Arab Summer’ but I would definitely sell today because there is a big question mark on tomorrow” says Mathieu.

October 2, 2012 0 comments

Economics & Policy Industry

Q&A: Neemat Frem

by Paul Cochrane October 1, 2012

written by Paul Cochrane

Neemat Frem is the president of the Association of Lebanese Industrialists, chief executive officer at INDEVCO Group and founder of technology service provider Phoenix Machinery. He recently sat down with Executive to discuss the state of the industrial sector in the face of regional turmoil, high energy costs and the economic downturn in Lebanon.

Let’s start off with some statistics. Lebanese industry had five years of strong growth, but 2011 and 2012 were slower, reflected in lower exports, a drop in machinery imports and also fewer bank loans to the sector. What do you attribute the drop to?

No doubt the first half of 2011 was tough… basically, Lebanese industry doubled in size in five years. In 2011, it was not a slow down in growth but a complete stop and it was the second half of the year that did all the damage. This year we started to regress, about 6 percent below 2011 — I am using exports as an indicator. Now, what do I attribute this fall to? What happened with the flare-up of oil prices was a major handicap to the Lebanese economy, and I can’t stress enough the fact that our economy is inversely correlated to the price of a barrel of oil, as we have no other form of energy. This is number one. The second factor is the turmoil in the Levant today. Also, a loss of confidence by the Lebanese consumer, and this has affected patterns of consumption, no doubt about it, plus the fact we missed our tourism season, which affected our local market.

Are you optimistic about the rest of the year?

I think 2012 will end as a tough year and I am personally worried, not only for the situation of industrialists but also because of the condition of public finances and the pressure it puts on the private sector. Our indicators are not good, to say the least. I know there is a major struggle within the Cabinet on the level of taxation policy and strategy, but I tell you with such public financing it is hard not to expect that the economic environment will be [negatively affected].

What is your stance on the draft law for a 50% tax cut on exports?

It would help for sure but we asked for 100 percent as that would really change things and attract foreign capital while enticing non-Lebanese industrialists to relocate here. But we ended up with 50 percent. Again, the problem is overall profitability, and it is not easy to be profitable today and to feel the effect as (the tax reduction is based on) profit tax rebates. To tell you the truth, we are not looking today at incentives from the public sector, but are worried about what kind of handicaps we will experience in the coming years due to the level of deterioration in the public sector. What sort of problems are we going to have due to this changing situation? This is my worry today.

What contingencies are in place?

The only contingency Lebanese had for a long time was to relocate, but this time I think the Lebanese are intelligent enough to do it in a flexible way, to stay in Lebanon and have new deployments in emerging countries, like in Africa. I see it more than exports in the coming era. I see Lebanese industrialists having satellite operations to protect their export markets.

One contingency that could be prepared for is if the border with Syria is completely closed.

I doubt it will be completely shut. So far it hasn’t, despite everything. If it is shut, our research shows that the two countries that are the hardest and most expensive to reach are Jordan and Iraq, as [there are] major land freight costs. The others, well, [there will be] a delay in time but costs are almost the same, to Saudi Arabia, Egypt, the United Arab Emirates and Kuwait. Regarding Europe it will be open, and the Balkans, which we… export to by land, as we have a RORO (roll-on-roll-off) vessel to Turkey and from there continue north.

Is the RORO vessel between Mersin (in Turkey) and Tripoli running effectively?

It is already in operation, twice a week. Again, for Iraq that is a way to get there, Kurdistan especially, but it is expensive, double the price.

What prices are we talking about?

It is around $4,000 to $5,000 for a 40-foot container. The problem is the land cost, this is why Iraq and Jordan are the problem. The Jordanian market is up north, not in Aqaba, so you need to drive there.

If we look at the situation in Syria it is obviously affecting us here, and in Syria companies are lacking raw materials and workers. Could Lebanese companies step in to fill the gap?

They already are, first of all in the Lebanese market as competition from Syria is decreasing by the day.

So taking up that slack is primarily for the Lebanese market, not replacing Syrian goods say sold in the Gulf? Could you see that coming?

The Syrians were never big competitors with Lebanese products. I foresee however that once everything settles down there will be a construction boom and a big market for Lebanese cement and other products.

Yes, figures are already being thrown around of $15 billion to $20 billion needed for Syria’s reconstruction, and this could be good for Lebanese business…

No doubt about it. Since the start of the Arab Spring there have been a lot of opportunities the Lebanese could seize, but our history has shown we don’t know how to seize these opportunities. And we haven’t till today. Will we this time? Only time will tell.

Is this due to the divergence between the private and public sector, where the private sector is left to do its own thing?

Mostly because the political situation needs to [fit] an agenda to seize opportunities for economic growth. But today, the government has other priorities and this is a problem.

…such as industrial zones talked about for years and years?

Forget about it, there is a complete paralysis on the economic zones. Today we are talking about developing private industrial parks and have suggested creating private power plants, as industrialists, and selling to the grid at the same contract and conditions as the government signed with the Turkish power ships that are coming (a three-year, $390 million contract to provide 270 megawatts); this is nothing but fair. What the government gave to a Turkish company should be starting conditions for Lebanese industrialists on the ground to sell electricity to the grid. We have given this proposal to the Industry Minister to put it on the agenda of the Cabinet, but we’ve had no answer.

Where would you set up such zones?

The Zahle area, near Saida or Batroun. You can’t go further than this.

Are there any success stories you’d like to highlight?

We are still surviving in Lebanon, which is a success story and still importing machinery. Okay, machinery imports have decreased by 12 percent this year, which is a leading indicator of growth in the sector, but for me it is quite an achievement. In other terms, in 2012 the sector will import almost $180 million to $200 million of new machines, and this goes straight to the expansion of the sector.

October 1, 2012 0 comments

Economics & Policy Industry

Outside the box

by Paul Cochrane October 1, 2012

written by Paul Cochrane

To Lebanon’s older generation, Carosserie Abillama is a household name, with ‘Abillama’ stenciled on the back of nearly every truck, tipper, tanker or ambulance in the country. The company, which has been around since 1933, is still at the forefront of trailer manufacturing and other automotive add-ons, although its name does not stand out as much as it used to amid the surge in vehicles and trucks on Lebanese roads over the past few decades.

Lebanon is also no longer the company’s major sales market, selling to 27 countries and approved for its high international standards by leading European companies Scania, MAN, Renault and Volvo. Abillama has even built trailers for Formula 3 racing cars, “which is at a very high level as it’s so image orientated,” said general manager Daniel Abboud.

Last year, however, Lebanon was a significant market, at 50 percent of sales, then dropping to 15 percent in 2012. “In terms of sales, Lebanon has not dropped that much, but exports have risen,” said Abboud. “This year our biggest market is West Africa, at 45 percent, followed by the Gulf at 25 percent and institutional buyers 15 percent.”

The surge in exports to West Africa was a deliberate strategy by Abillama to anticipate a potential drop in sales due to the crisis in Syria and its spillover to the Lebanese economy. Abboud put a dedicated sales team on the West African market, and “it worked.”

“I think we’re going to have a good year and next year even better. We have a nice order book,” he said, projecting annual revenues at $16.5 million, up from $14.5 million in 2011.

Part of the company’s success over the past 80 years has stemmed from predicting downturns and keeping sales diversified. “For a while, 90 percent of our market was Iraq before the Americans came [in 2003],” said Abboud. “We saw the dangers so stopped taking orders. It was a good approach, as if we’d stayed we’d have been in bad shape.”

A further key to success is Abillama’s research and development, and bringing out new products to stay ahead of the competition, such as a new cement mixer developed with an American company for whom Abillama manufactures to order, primarily for the Saudi Arabian market. “There is a lot more research and development in Lebanon than elsewhere in the region. In Saudi Arabia, Syria, the Emirates, they just copy others. The ‘Abillama tipper’ has been a generic term in Saudi Arabia for the past 40 years,” said Abboud.

In terms of competition, in West Africa Abillama vies for business with European firms, while in the Middle East, Iraq in particular, the company is facing stiffer competition from Turkey. “High quality Turkish producers were focusing on the European market, but they have lost it due to the economic downturn there so are turning to other markets where quality is important,” said Abboud.

Universal Metal Products

While Turkey poses a competitive threat to Abillama, aluminum tube manufacturer Universal Metal Products (UMP) sees the closure of Syria as a market and transport route for Turkish products to much of the Middle East as a boon for the company. “We are picking up slack not because of Syria so much, but due to Turkish suppliers being out of the market. They are now being restricted due to logistics and political reasons, and that trade link has been broken,” said general manager Nizar Raad.

UMP has experienced a major up-tick in sales to Saudi Arabia this year for the collapsible aluminum tubes it manufactures for the cosmetic and pharmaceutical industries. The situation in Syria, however, is causing logistical problems and heightened transport costs, deriving from export for which overland transport is the most cost effective method.

“We’ve made contingency plans for sea as there is the possibility of Syria blocking the route to Jordan,” said Raad. “We got the cost by sea freight, to Jeddah, and that is okay but the problem is the delays in offloading. Then the goods have to be driven to Riyadh, the main pharmaceutical hub. These time factors and delays are a problem.”

UMP’s exports are not totally dependent on the Middle East though. “We do export indirectly to Europe and the United States, so the lower euro is helping. We also export to Pakistan for special clients,” said Raad. He expects business to be similar to last year, neither growing nor contracting.

Resource Group Holding

Resource Group Holding – soon to be called just RGH – are an investment group that manages a diversified portfolio of businesses in the Middle East, West Africa and Asia. The company expects to have similar revenues this year as 2011, at over $100 million. But this is not down to less business in the Middle East and Africa, its core markets, or any loss in trade to Syria. Indeed, RGH’s telecommunications infrastructure arm Serta was granted permission by the United States Office of Foreign Assets Control (OFAC), which oversees sanctions, to sell equipment sourced from the US to Syria this year.

Revenues are expected to hover around the $100 million mark because the group is going through a period of consolidation as well as significant investment, with Chief Operating Officer Dany Eid expecting to see returns next year and for RGH’s revenues over the next five years to grow by more than 100 percent to exceed $200 million.

In Lebanon, RGH is expanding its 4,000 square meter Inkript facility, which handles high-security printing, from checkbooks to lottery tickets, electoral voting cards and bonds, to bank cards and electronic-passports, by a further 16,000 square meters, financed through a subsidized loan from the central bank and the Investment Development Authority of Lebanon. The expanded facility is slated to open by end 2013, and will create further employment, adding to the current 500 working at the plant in South Beirut. Elsewhere, RGH has 200 employees in lottery business Intersektion’s brand Afrijeux in Chad, and 300 other employees in Lebanon and abroad.

In further expansion, RGH bought a factory in Saudi Arabia last year to make mobile phone SIM cards and scratch cards. “We bought the facility to cater to the sizable Saudi market and have proximity to our customer base,” said Eid. “The plant is still in the restructuring phase, so we expect this investment to yield results as of next year.” The group is also involved in the smart phone gaming business through investing in a startup called Game Cooks, which co-produced the hit game Birdy Nam Nam. “With the Arab world as the primary target, games like Run for Peace and Déjà Vu have witnessed over 1 million downloads so far in less than a year,” said Eid.

Eid sees Lebanon’s strength as being able to not only manufacture goods at a high quality, but also to combine development with value-added and follow up solutions. “The future is in value-added and solutions. At a group level, our products are already highly technical, such as printing, and through products that provide solutions, like software for SIM cards. What makes our products hard to compete with is that they are relatively unique, as clients for printing, for instance, are mainly governments and banking sectors, and competition at that level is lower.”

Vresso

For Vresso, a manufacturer of customized stainless steel kitchens and exclusive distributor for 50 food service equipment and laundry brands, the dampened economic climate in the Middle East has slowed sales this year, most evident in Syria with hotel and tourism-related projects on hold. But with exports accounting for 60 to 65 percent of business and selling to over 30 countries, Vresso is weathering an economic downturn in one area and focusing on others. “We are optimistic about the future, especially emerging markets opening up, but I won’t say where because our competitors would be on a plane tomorrow,” said Carl Sabounjian, Sales and Marketing manager at Vresso.

Sales have been surprisingly good for the company, even for stainless steel kitchen units that have a price tag anywhere from $10,000 to more than $200,000. To bolster sales of such expensive items, Vresso has been offering more credit facilities. The tactic has worked. “Business has been very good, quite great in fact, especially for restaurants, super markets and coffee shops, as well as with private villas and wine cellars,” said Sabounjian.

Vresso has 120 employees within the group, and 40 employed in manufacturing stainless steel cabinets, tops and refrigeration units. Steel sheets are bought from local importers, then cut, bent and welded at Vresso facilities, with products manufactured from scratch to customer specifications.

“Next year a lot of new models are coming out, and a lot of foreign franchises — especially internationally renowned restaurants — are coming to Lebanon so we see a good market ahead,” said Sabounjian, forecasting that once the conflict in Syria is over there will be significant business opportunities.

October 1, 2012 0 comments

Economics & Policy Industry

Exports in mayhem

by Paul Cochrane October 1, 2012

written by Paul Cochrane

Syrian industry has been seriously hit by the ongoing conflict, suffering from a lack of raw materials, workers, energy and capital amid heightened risk. Multinational companies such as Proctor & Gamble that sold fast-moving consumer goods exited the Syrian market last November when European Union sanctions went into effect.

Turkey has not filled any supply gap, with exports from Turkey into Syria dropping from $2.3 billion in 2011 to just $302 million in the first five months of this year. However, exports from Lebanon to Syria have risen by 18 percent to date on 2011, to $126 million, while for the first time in years Syrian products headed the other way have fallen, by 8 percent to $142 million, according to Lebanese Customs data. Are Lebanese industries stepping up to fill an apparent supply and demand gap?

The short answer is: not really. Firstly, demand for non-essential items in Syria has plummeted as prices have risen, people’s finances have been squeezed, and stores are infrequently open, if at all. Take for example the sales of Lebanese cosmetics firm Ch. Sarraf & Co., part of the Malia Group, in Syria. When the group started a distribution company there in 2008, sales quickly reached the same volumes it had taken 10 years to achieve in Lebanon. It was a good market. But since the uprising began in March, 2011, business has dropped.

“We are facing export difficulties so a few months ago we put aside stock as a preemptive measure, but demand [for cosmetics] is about half of what it used to be as purchasing power is down,” said the company’s general manager Joanne Chehab. “People are only buying products of first necessity, although shampoo is still one.”

A second factor is that demand for more life-sustaining essentials has also not risen. According to a report in As Safir newspaper, the Lebanese Farmers Association said that exports to Syria have dropped by two-thirds on last year. Demand has equally not risen for items more suitable for life under a siege than fresh fruit and veggies — tinned and packaged foods. According to the head of a leading Lebanese agro-industry company who asked to remain anonymous, there has been no marked demand by Syrian companies or traders.

One necessary product that is facing production shortages in Syria is pharmaceuticals, yet while there may be demand, potential increased exports from Lebanese pharmaceutical companies are complicated by the borders still being under the regulation of the Syrian state.

“Until now, exports from Lebanese pharmaceutical companies to Syria are subject to regulations by the Syrian authorities; that is why it’s not as easy as one would think [to export],” said Neemat Frem, president of the Association of Lebanese Industrialists. “But in areas that are unregulated, that is completely different, and we might see more in those areas.”

Cash flow curbs

While generator manufacturer Saccal Industries has witnessed a 100 percent growth in demand for generator sets due to power shortages, Syria is not as lucrative a market as one would expect. “We are selling more but there is the problem of cash flow. People are afraid of spending money in the current environment,” said the company’s general manager Asaad Saccal.

The United States sanctions banning the use of Visa and MasterCard, as well as transactions in dollars, and the considerable depreciation of the Syrian pound are both major contributing factors to the squeeze. “We are selling for cash not credit as the currency is fluctuating a lot,” said Chehab. “We sell in Syrian pounds and then transfer on the spot.”

Compounding the situation is problematic distribution, which has become more difficult. Traders are looking for higher margins to cover inflated insurance premiums and container hires.

A little silver lining

So what has caused the up-tick in exports to Syria reported this year? Data is not broken down by category, but one reason for the increase is a 25 percent spike in exports of machinery, spare parts and engines due to international sanctions, according to economist Kamal Hamdan.

Another factor is fuel. Subsidized Syrian fuel used to be smuggled into Lebanon; but as the conflict dragged on and shortages emerged in Syria, this flow has reversed, causing Lebanese imports of fuel from abroad to jump, both to make up for lost supply to the domestic market and to feed the export and smuggling markets in Syria. Lebanon’s imports of oil and mineral fuels have surged 89 percent year-on-year, to $3.2 billion. Non-hydrocarbon imports on the other hand have grown just 1.8 percent, according to Byblos Bank data.

In addition to fuel exporters and smugglers taking advantage of the conflict, some other companies are also directly and indirectly benefiting from industry shutdowns in Syria. Aluminum tube manufacturer Universal Metal Products (UMP) has noted an increase in orders from Saudi Arabia, which the company does not attribute to the closure of three Syrian manufacturers in the same field — they did not have the ISO specification required in the kingdom’s market — but rather the drop in Turkish trade with Syria.

“Due to the broken trade links with Turkey we are picking up slack from Turkish business they have lost,” said UMP’s general manager Nizar Raad. On the labor side, for manufacturers such as Carosserie Abillama, the closure of Syrian manufacturers provided the Lebanese firm with skilled workers that had been laid off.

All in all, there is little silver lining to the Syrian crisis for Lebanese industry, with the situation causing more damage to the sector than any potential sales up-ticks due to shortages over the border.

Where industry may well experience an upside in the near future is if goods that have been hoarded away start running out. Otherwise, it will not be until the conflict is over, when the rebuilding effort in Syria creates a massive demand for materials and products.

October 1, 2012 0 comments