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Society

Like your grandmother used to cook

by Nabila Rahhal July 10, 2012
written by Nabila Rahhal

Enab got its name from the vine that connects all the grapes together,” says co-owner Hasan Rahal. “We wanted a name that reflects the idea of the Lebanese family life.”

This concept comes across well in the decor and the general ambiance of the venue. While the idea seems somewhat déjà vu — yet another establishment boasting a Lebanese menu in a pleasant setting — Enab has some interesting features that distinguish it from other places in the same milieu.

To walk into Enab, is to walk into the dars, or salons, of times gone by. The light, wide space opens up into several rooms, each painted in a different vibrant color, thereby creating a different mood. The traditional architecture is complimented by equally authentic accessories found throughout the space, such as the sink with the antique faucets or the wooden chest full of drawers.  “Each item we used was handpicked and chosen to match the ambiance of the space. They are items commonly found in village homes,” says Rahal.

Outside, a serene garden with a rocky wall echoes the Lebanese mountainside. Within are the plants traditionally grown in Lebanese homes such as gardenia, jasmine and lemon and orange trees.

Enab’s atmosphere and setting encourage people to enjoy typical Lebanese traditions such as the sobhiyeh (morning gatherings over coffee), tawleh (backgammon) with argeeleh in the afternoons and long dinners over mezza and arak.

“Enab is the story of every Lebanese household and we want everyone to enjoy it,” says Rahal. “We are not restricted to one class of society and our prices are a reflection of that: they are very fair considering how generous our portions are and what the prices of the competition are like.”

Indeed, the prices Enab offers are reasonable: a typical meal of a salad, four mezza and a mixed grill plate costs around $20.

A plateful of profits

The people behind Enab are Hasan Rahal and Zaher Rizkahllah, who, between them, also own the Second Cup franchise, the Zucca Beirut restaurant and Karam — a Lebanese restaurant popular in the Gulf, according to Rahal.

For this project the owners chose Mar Mikhael as their location and then started looking for an old house with a garden in that area. The initial investment for the project was $2 million dollars, according to Rahal, an amount they hope to return in three years time on the basis of their current turnover rate of around $150,000 a month.

Four months into the project Rahal claims they are taking in around 250 customers on a weekday, and 350 on both Saturday and Sunday, of whom most are local Lebanese.

Another strategy that Rahal says will help them reach the $2 million target is a franchising strategy in the Arab region, which is tipped to begin next year.

Enab prides itself on being a restaurant, and not merely a café, says Rahal, who adds that the menu focuses on the sort of dishes that our grandmothers used to cook. When asked about Layla’s or Frieda’s having the same kind of menu, Rahal replied that those places offer a fusion cuisine with a twist on old favorites, while Enab focuses on the traditional dishes as they are.

While that may be a new idea in the modern setting that Enab offers, the menu could do with having a few signature dishes. In short, go to Enab for the mood and the quality preparation of old Lebanese favorites, not because you are hoping to discover a new recipe or dish.

July 10, 2012 0 comments
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Society

A step short of democracy

by Rany Kassab July 10, 2012
written by Rany Kassab

With election fever yet to hit Lebanon, less than a year ahead of the 2013 parliamentary elections, the eyes of Lebanese and much of the Arab world were turned westward in recent weeks, toward two countries that hold particular geo-political significance on the world stage, and with whom Lebanon has a special historical, cultural, and emotional bond.

Affectionately referred to as Umm el Hanouna and Umm el Dounya, the similarities in the recent presidential campaigns of both France and Egypt, respectively, are to a large extent limited to these terms of endearment.

Though both countries adopt a two-round system of elections, with the top two runners-up in the first round facing each other in a second and final round and the president directly elected by universal suffrage, the fact that France has been honing its democracy for more than 200 years has clearly placed it at an advantage. This was fairly evident when comparing the campaign that led François Holland to the Elysée to the one that saw Ahmad Shafiq squaring off with Mohammed Mursi for the Egyptian presidency.

At face value, and considering that it was the country’s first genuine elections since the 1952 revolution which ended Egypt's multi-party system, the presidential elections in Egypt had nearly all the components to render it a true democratic milestone, one that the revolutionaries of January 25, 2011, many of whom aspired to a “western-style” democracy, had fought for. A presidential oversight commission made up of the country’s highest judges was set up, Egyptians living abroad were given the chance to vote in embassies and consulates, a campaign-spending ceiling was placed and each candidate allocated a number and logo to facilitate identification and recognition and a campaign silence period was promulgated and largely enforced to maintain a “free voting environment.”

Yet despite all these measures, and regardless of the influence of the military in the process and the enactment of tailor-made laws and regulations to prohibit certain candidates from running (or allowing them), the key failure that prevents hailing these elections as a testament to pure democracy is the lack of political maturity.

Missing the point

While it might seem harsh, and may be excused to a certain extent because of a lack of precedent or a deep-rooted democratic culture, the reality of the matter is that the situation resembled one of a completed puzzle with a missing centerpiece.

In fact, little effort was made to make voters aware of their roles and responsibilities as citizens to cast their ballot based on their conviction in the program of their preferred candidate. Nor was there any to drive to highlight the issues at hand that voters would need to consider when choosing who to vote for. Instead, most campaigning prior to the elections focused on the mechanics of the process, failing to trigger the much needed debate on the nation’s post-autocratic agenda.

Moreover, while both candidates in the run-off did publish electoral programs setting their vision for the country, these programs were seldom referred to, debated, challenged, or used as a basis for proposing two distinct options for the country that voters would choose from. Alternatively, the campaigning often centered on the individuals and their personalities and backgrounds, rather than on their ideas and what they have to propose for Egypt.

In France, as in other developed democracies, opposing candidates lay out their strategies for tackling such issues as economic growth, poverty alleviation, investment opportunities, job creation, social security, healthcare, education, etc. In Egypt, all such issues were marginalized and treated as secondary priorities, with the campaigning focused on defamation and hollow accusations of corruption and treason, all the while stressing the past and failing to emphasize the vision for the future.

Though passions and emotions are a staple of any elections, they should be a side effect and not the main drivers of the process, which was certainly not the case in Egypt where ideas and issues took a back seat to instinctive and “populist” discourse.

The result is that whoever is elected will not be held accountable for promises made. Nicholas Sarkozy had promised to lower unemployment to a specific level, and though the European crisis might be blamed for his incapacity to achieve the target set, the majority of the French sanctioned him for it, along with his other unfulfilled pledges, choosing to vote Hollande out of a rejection of Sarkozy. Regarddless of whoever  leads the nation, it seems hard to believe that Egyptians would be able to assess and evaluate them based on tangible and objective criteria.

Social media’s limitations

Another key point to be learned from the Egyptian elections, which is intrinsically linked to the political awareness and maturity of the country, is the extent to which social media has had a role in influencing or even deciding its outcome.

While social media was widely heralded as the catalyst behind Egypt’s revolution, whether rightfully or not (it would be a gross simplification to attribute complex geo-political developments to one medium or platform even if it succeeded in galvanizing demonstrators and breaking the chains of fear), it remains that it did show its limitations during the Egyptian presidential elections campaign.

True, social media was pivotal in mobilizing voters and getting them to take to the streets to express their opinions or cast their vote, but its powers were rather shallow in moving beyond simply calling for action or in succeeding in elevating political maturity to a level that would make a tangible and long-lasting difference.

This conclusion might anger some, particularly among the many bloggers and political pundits whose intentions and motivations were certainly noble, but having closely followed the elections, it is unfortunate to notice that the issues often failed to take center stage. In the United States they say, “It’s the economy, stupid,” to refer to what the elections, more often than not, boil down to. The same could be said about France, the United Kingdom, and other developed nations. 

If we as Lebanese are to move to that stage, knowing that we definitely have what it takes for it, we need to enhance our political maturity and to start voting with our minds, and not simply our hearts.

July 10, 2012 0 comments
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Society

An expensive looking tan…

by Nabila Rahhal July 10, 2012
written by Nabila Rahhal

Summer has hit Beirut and the temperatures are sizzling, as are the prices of entry to the various resorts along our coastline.

The country’s most exclusive resorts have always been overpriced compared to neighboring countries, but over the past few years it seems the cost of most seaside retreats has become well out of reach of many Lebanese hoping to top-up their tans on what, in theory, are ‘public’ beaches.

Still, while complaints over increasing entry fees and dwindling tourist numbers abound, major resorts claim they are not experiencing a decrease in customers. Though both have increased their entry fees, LazyB reports a 30 percent increase in visitors from last year while Edde Sands boasts almost double the clients.

Some beach goers admit to frequenting the beach less than they did last season, while preferring to go to the “luxury beaches” when they do. “When I do go to the beach, I like being pampered and receiving good service. I might be paying a high amount for this, but since I don’t spend every day at the beach, it’s worth it,” says teacher Dania Naamani.

Ziad Abou Nasr, beach lounge manager at Riviera Hotel, believes you get what you pay for: “If you want to eat a falafel sandwich, you pay a small amount and get it. If you want to eat a high quality meal, then you have to pay more. We are not forcing people to come to us,” he says. Abou Nasr says Riviera has also not reported any complaints or decrease in customer numbers.

Too many lira for a lounger

Still, others refuse, or simply cannot afford, to pay those high fees. “I bring my family to AUB Beach because it is free for me (as I work here),” says Hassan Youssef, a staff member at AUB who frequents its beach, which is free for its faculty, staff and students. “Last month, I took them to a beach club in Jiyeh, I paid $70 for entry and food because we weren’t allowed to bring our food with us. Now, I bring them here every weekend, its better.”

Ahmad Khatib, a student, admits to inviting his girlfriend to the beach only during weekdays as the entry fees are a bit less than on the weekends. Youmna Ashi, a young employee, dislikes the idea of paying for entry to a beach meant to be public and purposely avoids such resorts, preferring to head South or North where there are some beaches with free entry, such as Pierre and Friends in Batroun and the public beach in Sour.

Beach resort managers Executive spoke to justified the increases in their prices by citing the increase in the general cost of living in the past three years, which has also affected them as resort managers. Many cited the increased salaries they now have to pay their staff, the added cost of electricity generators and the diesel they run on, and the increased cost of raw material as reasons for the heightened entry fees.

LazyB’s owner George Boustany speaks of the newly added 3,000 square-meter family area as the reason they had to inflate the entry fee. Edde Sands management also speaks of the new bungalows and other improvements they made.

Others, such as Atlas Beach in Jiyeh say they have not increased their prices due to an already challenging season that has seen tourists chased away by unrest both at home and in the region. They hope that keeping the same reasonable prices will attract more clients. 

Whether this year’s season will reap any real profit for the beach clubs is unknown. But one thing is certain, the price of a tan in Lebanon has gone up.

July 10, 2012 0 comments
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Last Word

Ghassan Tueni

by Executive Editors July 7, 2012
written by Executive Editors

 “An irreplaceable giant”, “a veteran journalist”, “a legendary maverick”, “a press baron”, are a few of so many terms national and international newspapers used to describe Ghassan Tueni on the morning of his death last month at the age of 86, after a long struggle with illness. That day, Lebanon bid farewell to one of its few stepping-stones towards democracy and freedom.

Being a skillful journalist, distinguished diplomat and clever politician did not stop Tueni from also being a mighty father, loving husband and tender grandparent. He had no fear of death, embracing life, making him an inspiration to journalists and citizens across both the nation and the Arab world.

Tueni started his career as journalist at the age of 22 when he took control of Annahar newspaper after the death of his father. He strongly believed in freedom of the press, advocated for a secular and independent Lebanese state and stood for the rights for women and minorities. Tueni was jailed several times for his objections to the Syrian occupation and press censorship, became a member of parliament in 1951 at the age of 25, and served in different governmental positions, including house speaker, deputy prime minister and ambassador to Greece. In 1977, he became Lebanon’s permanent representative to the United Nations, a position he held until 1982. Soon after his famous plea “Let my people live” at the 1978 UN Security Council meeting, the UNSC adopted Resolution 425 calling on Israel to withdraw from South Lebanon.

Tueni’s voice reached out every day through his articles, speeches and lectures, until that day he thought he retired. Sadly, destiny decided otherwise when his son Gebran was assassinated in 2005. Ghassan consequently filled his son’s seat in parliament, and retook control of Annahar as editor-in-chief and publisher. Some of Tueni’s detractors have said that he was too close to the West and the Gulf Arab states, to which he sold the majority stake of Annahar, inviting criticism that the newspaper was lenient in its coverage of them and that it toed a more ‘right wing’ political line in recent years. Yet, in retrospect, his achievements overshadow any possible critiques.

For all his prestige though, Tueni was tragically familiar with death, losing not only Gebran, but before that both his other children and his wife. His son Makram was killed at the age of 21 in a car crash in Paris in 1987, while his seven-year-old daughter Nayla perished from cancer, which also took Nadia, his wife of nearly three decades, in 1983. 

“I refuse to show my sadness,” he once said to his granddaughter Michelle. “Grief is not supposed to be shared, only happiness.” Despite all the hardships he suffered, Ghassan Tueni remained strong, surviving the loss of his loved ones and continuing to work toward democracy and spreading the ethics of true journalism. He refused to display signs of weakness or despair, sadness or grief, even at the lowest of times. Indeed, at the funeral of his last remaining child, the victim of a car bomb, he uttered the famous words: “Let us bury hatred and revenge along with Gebran.”

Tueni was a caliber of man rarely seen. May Lebanon endeavor to follow his legacy.

July 7, 2012 0 comments
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Real estateSpecial Report

View from the penthouse

by Executive Editors July 7, 2012
written by Executive Editors

Ziad Karkaji, Real Estate Development Manager,

Premium Projects:

“[The property market slowdown] will differentiate serious developers from new players who have no experience in the field, but ventured into real estate development thinking it is a simple and very easy business.”

Ayad Nasser, Owner and CEO of Loft Investments

“Many have now witnessed and been part of the innovative vision of this company that has ventured into uncharted territory, such as an industrial zone in the NBT rail area, or unusual vicinities such as a cemetery.”

Pierre Bou Jaber, CEO & Partner, Ven Invest Holding

“I believe big companies may shift their interests to other segments, such as the agricultural industry and eco-tourism […] Indeed, we are looking seriously at the next 10 years with a different scope, and that is to meet new elements of market demands based on food and service.”

Karim Makarem, Managing Director, Ramco

“There are developers who are genuine and care about the environment but there are many others who don’t quite understand what it means and they are using the word ‘green’ to encompass a lot of things… There is very little appetite from end users for green projects which leads one to believe they are more of a PR stunt than a real movement.”

Marwan Youssef, Sales Manager, Seven Invest

“Now we are just looking forward to some form of political stability in Lebanon. Now we are in a ‘wait and see’ period and this has been hard on every developer.”

Karim Bassil, Founder of BREI Real Estate Investment

“Prices in Lebanon have reached a peak and it will not change for ten years. These cycles of high prices usually continue for a decade. We have been through maybe two years, so I would say we have eight more years left before the prices adjust.” “I have respect for the politicians, but they are too busy with politics. They don’t have time for social or cultural heritage issues. It’s never too late. There is always a way to make things better.”

Nabil Sawabini, Chairman, MENA Capital

“Sky Gate is a further step up in terms of exceptional quality and hopefully it will be delivered in just a couple of years. And it will probably be, with all modesty, the most luxurious building in the Middle East.”

Nicolas Mehchy, Director of Sales, Plus Properties

“The diversity of our projects is the main reason why our sales were not really up and down this last year, because we can always find something for any buyer.”

Amanda Hajjar, Marketing Coordinator, Plus Holding

“The construction progress of all of our projects is currently on time. You hear a lot about amazing projects being launched, but you never really know where they are in the construction phase. That’s why we always try to link our clients or our potential buyers to where we currently are on the project by constantly giving updates on our projects through different outreach methods.”

July 7, 2012 0 comments
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Real estateSpecial Report

High-rising prices

by Jeff Neumann July 7, 2012
written by Jeff Neumann

If you have read this far through our special report, you probably have a good idea of the challenges faced by the real estate sector over the past year. Data shows that demand for residential property is weakening across Lebanon and developers are coping with higher operating costs than before. How they adapt will determine how well they weather what some expect to be a prolonged downturn.

Overall construction costs in Lebanon were up in the first few months of 2012, due in part to the mandatory wage increase approved by the government in March. However, material costs have for the most part stayed at the same levels through the first five months of 2012. For instance, steel in Lebanon has remained at $750 per ton through June; Portland cement cost $102 per ton over the same time period.

Shaving the fat

When asked about what is being done to cut costs, most developers declined to go into detail. The one exception, Karim Bassil, founder of BREI Real Estate Investment, offered a brief insight into his company’s operations. “The main thing is we’re reducing our overhead, we’re reducing our margins. We have already reduced our margins by 50 percent this year,” he says, describing the return generated from new income on a project. “We’re just not making the same kind of money that we were making before,” adds Bassil. “In Lebanon, when you plan something for, let’s say, 30 percent ARR (average rate of return), you end up with 20 percent of 70 percent ARR.”

Cement deliveries are also down this year by 4.2 percent — another obvious indicator of a slowdown in construction. This stings developers even more due to the fact that between 2005 and 2010, average annual deliveries increased by 11.2 percent. As an example of the many factors listed coming to a head, Bassil says that “on one of my projects in Beirut, instead of putting it around 20 percent ARR, we put it at 8 percent. This is because of politics, war and project delays — they all play a role in [reducing ARR].”

Through May, the total number of construction permits issued in Lebanon was down 9.3 percent from May 2011, according to data compiled by InfoPro. Also of note, construction area authorized by permits were down 12.5 percent from the same time last year.

Indeed, times are tight for the sector, forcing developers and contractors to consider all options. As Bassil puts it, “Personally, we’re doing everything to keep our business alive for better days to come.”

July 7, 2012 0 comments
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Real estateSpecial Report

The million dollar home

by Maya Sioufi July 7, 2012
written by Maya Sioufi

The competition for clients among Lebanese banks is heating up in the home loan department. To find out which is the best on offer, Executive went shopping. We assumed that we have set our sights on a $1 million apartment and need as much cash as we can get to pay for our new pad. We included loans offered in Lebanese lira subsidized by Banque Du Liban (BDL), Lebanon’s central bank, and loans in dollars. We have not included loans offered by ISKAN (the Public Corporation for Housing) as these are capped at LL270 million (and are only offered in lira). The offers vary significantly from bank to bank, especially on dollar loans where the rate is not controlled by the BDL.

July 7, 2012 0 comments
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Real estateSpecial Report

The thrill is gone

by Maya Sioufi July 7, 2012
written by Maya Sioufi

The happy marriage between Mr. Bank and Ms. Real Estate seems to have lost some of its luster of late, becoming more of a relationship that both parties are resigned to accept for the sake of keeping the house — Lebanon — together.

On the surface, if we do the math, there is no need for the couple to seek counseling over the current exposure of Lebanese banks to the real estate sector. Out of the $44 billion which was lent to the private sector by Lebanese banks last year, a total of $13 billion was handed to the real estate sector in the form of housing loans or construction loans — that is around 30 percent of the total private sector loan book of banks and 19 percent of the total loan book. By comparison, the Spanish real estate and housing market, which is under severe pressure, accounts for 54 percent of the total loans of their local banks, forcing the banking sector to ask for a hefty bailout. Demand in Lebanon, according to experts Executive spoke with, is also primarily based on end users as opposed to speculation; given this, the banking sector’s exposure may not be worth rattling about. Of the $6 billion the construction sector added to economy last year, according to Bank Audi estimates, developers received $1 billion from banks and had to fund the rest themselves either through presales of flats or their own capital. “The real estate sector relies on around 80 percent of their own financing so it is not highly leveraged and it is not pressured to sell,” says Marwan Barakat, chief economist at Bank Audi. “That’s why there isn’t much pressure on [housing] prices.”

Omar Shantouf, general manager at FFA Real Estate, concurs: “Developers are not that highly leveraged and they can afford to sit on projects. They might sell one or two apartments at lower prices but they won’t advertise this, there is no such thing as a fire sale in Lebanon.”

As for housing loans, 36 percent of total property sales were funded by loans from the banking sector in 2011, up from 9 percent in 2007, and the remainder was funded by homeowners’ capital according to Bank Audi research. “That’s a moderate level even though it increased in past years,” says Barakat.

The honeymoon is over

Many heated debates at the dinner table, however, have centered on whether Lebanon’s lady of real estate has gotten a little big for her britches in recent years. Indicators of activity within the real estate sector are starting to paint a gloomier picture. Cement deliveries, an indicator of current construction activity, dropped 4 percent in the first quarter of 2012 after increasing 6 percent in 2011. Construction permits, an indicator of future supply, dropped 4 percent in the first quarter after dropping more than 6 percent in 2011.

Economists and financial experts Executive spoke with played down any concerns: “95 percent of our projects are sold to end users, people buying to live in it and not to speculate,” says Ziad Maalouf, chief executive of Capstone, a private investment firm. “Today, there is no risk of seeing a bubble in the market explode.”  In the construction sector, banks have handed out a total of $7 billion in loans, which represents 16 percent of total lending to the private sector. “The share of the construction sector to total loans is similar to the one of the construction sector to GDP so we didn’t over lend to [real estate]” adds Barakat, given that the share of the construction sector to the country’s gross domestic product stood at 15 percent, according to the 2010 National Accounts of Lebanon, the latest official breakdown of figures for GDP available.

While banks may lend according to the economic logic they devise, they are now faced with developers who are finding it more challenging to offload flats, which a few years ago were selling like hotcakes. “Banks are becoming more selective because of the situation in the real estate market today. They are worried about demand and supply,” says Maalouf.  As banks become pickier, they look for trendier projects. Demand has shifted from large-sized apartments, over 200 square meters, to medium-sized apartments, between 100 and 200 square meters, and from Beirut to the suburbs according to Bank Audi research.  “If you go to the bank and ask for financing for a project with flats of 600 square meters in size, no one gives you a loan. You have to go with the right project and the right sizes,” adds Maalouf.  With land prices still increasing and flat prices in tow — albeit at lower levels than in previous years — homebuyers are finding it more and more difficult to pay for a roof over their heads (see page 56). “Homebuyers can’t afford to buy houses anymore because the prices of land have gone up in the lift and our income is going up the stairs,” says Antoine Chamoun, general manager at Bank of Beirut Invest.

Competition on the rise

Homebuyers have also been visiting bankers more regularly in recent years. Housing loans leapt by 33 percent last year — receiving the bulk of the increase in private claims — to reach $6 billion. The central bank had a significant role to play in giving banks incentive to lend their liquidity and in helping the Lebanese folk fund their pads. The central bank’s circular of May 2009 provided an incentive for banks to lend in Lebanese lira by reducing their reserve requirements as long as rates applied to clients are within a certain limit — 40 percent of a one year Lebanese Treasury bill plus 3 percent. “It created a boost in terms of supply and demand,” says Basil Karam, head of retail at BankMed.

“The central bank helped us developers by helping home owners buy flats, helping banks to lend and helping activity in the country,” adds Maalouf. “It is the best thing that happened to the sector.” This has fueled the development of a love-hate relationship between homeowners and bankers. For bankers, it became a lucrative business. Struggling to deploy their excess liquidity — deposits stood at $120 billion, or around three times GDP, in the end of the first quarter — with interest rates globally at record low levels and a dearth of investment opportunities within Lebanon and in the shaken region, extending loans to the housing sector became a thriving business and everyone jumped on the bandwagon. Yet what that also meant was that the central bank indirectly propped up a housing market, where prices were continuously rising and thus impacting the affordability of housing in the country.

“Banks have been under pressure on their interest margins in the past few years because their liquidity is not yielding [returns] anymore both outside and inside Lebanon, so they are having to lend more,” says Barakat. As banks increase their offering for home loans, competition is getting fiercer and along with it, the advertising wings of the banks are becoming more active to lure clients their way. Billboards for home loans seem to be popping up on almost every corner. 

With rates on loans in Lebanese lira being controlled by the central bank, the competition is now on the dollar loans. “Some banks are reaching their allowable limits in extending subsidized loans in Lebanese pounds,” says BankMed’s Karam. “They will have to focus more on dollar-based loans and cut prices to attract more loans. In dollars, there is price competition, big time.” 

Chamoun agrees, saying that, “The competition on loans in Lebanese pounds [subsidized loans with the central bank and with the Public Corporation for Housing] is low because the features of the loan are imposed and there is very little difference among banks on these loans, but on the dollar, banks are putting their own features.”

While there is room to increase lending further to the housing sector, growth is unlikely to be as significant as in previous years given that it was coming off a low base, according to Barakat.  This could lead to continued competition in the sector and “it should be like this and the best offer should win,” adds Chamoun.

Increasing competition would be a welcome respite for homebuyers struggling to keep up with the elevated real estate prices. As for developers who have funded their current projects with low leverage, they are largely sitting on their pile of stock, putting  upcoming projects on hold and staying firm on prices. For developers quick to adapt to the changing dynamics, projects outside Beirut with smaller flat sizes are being developed, and thus those selling homes will likely have to do with transactions that were not as large as they previously enjoyed.

As BankMed’s Karam points out: “Lebanese will continue to borrow to buy homes but the average ticket size wont be the same.”

July 7, 2012 0 comments
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Banking & Finance

Financial quotes of the month

by Executive Editors July 7, 2012
written by Executive Editors

“There will be no more adventures. Greece’s place in Europe will not be put in doubt.”

Greece’s New Democracy leader Antonis Samaras following the narrow election victory of the pro-bailout party

Beirut MP Nabil Du Freij:“Taxes are increased when the economic conditions are improving, not when the economy is slowing.”

Simon Baugh, director of media and public relations at BAA, owner of London’s Heathrow airport, the world’s busiest international hub:“Even with a third runway, with the space Dubai has it’s not possible [to compete with Dubai]. Its growth is too big.”

“The ball is now in Greece’s court. It’s in their hands to win back the confidence of the people of Europe.”

German Finance Minister Wolfgang Schaeuble

German chants at the Germany versus Greece Euro 2012 football game: “Without Angie, you wouldn’t be here,” To which the Greeks replied: “We’ll never pay you back. We’ll never pay you back.”

“The government should work on two fronts: increase revenues to cut short the rising public debt and boost growth to lower the GDP-to-debt ratio. Otherwise, it would speed up the country’s economic collapse.”

Nemat Frem, head of the Association of Lebanese Industrialists

“Even if they cannot achieve all of it in one fell swoop, I think if people have a sense of where they are going that can provide confidence and break the fever.”

US President Barack Obama on Europeans and their sovereign debt crisis at the G20 economic summit in Mexico

Mohsen Derregia, chairman of the Libyan Investment Authority (LIA), on the $1.75 billion losses due to LIA’s investments in products managed by Goldman Sachs and Societe Generale: “We will have to see how these structured products were created, valued and managed. Then we will talk to the investment houses and see if we can claim a refund.”

“There are still a lot of unknowns for the market, which will be looking for direction from the street, the presidency and progress by the constitutional committee.”

Wael Ziada, head of research at Cairo-based EFG-Hermes following the victory of Muslim’s Brotherhood Mohamed Mursi as Egypt’s president

“Every woman needs to be self-sufficient. You hear these yummy mummies talk about being the best possible mother and they put all their effort into their children. I also want to be the best possible mother, but I know that my job as a mother includes bringing my children up so actually they can live without me.”


Cherie Blair, the wife of Britain’s former Prime Minister Tony Blair, at Fortune’s Magazine’s Most Powerful Women event
July 7, 2012 0 comments
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Banking & Finance

Ratings removed from reality

by Natacha Tannous July 7, 2012
written by Natacha Tannous

Lebanon is an anomaly in many ways, and no less so when it comes to international credit ratings. While most of the world still depends on Fitch, Standard & Poor’s (S&P) and Moody’s to grade investment risk — even after their errors in the lead up to the global financial crisis — the reports of these ratings agencies simply do not carry the same weight in Lebanon.

Take, for example, S&P’s downgrade of the United States’ credit rating from AAA to AA+ last summer; the US equity index S&P500 fell 6.66 percent to 1,119 points the next day of trading. S&P’s recent lowering of its outlook for Lebanon, however, followed by a Moody’s downgrade of three Lebanese banks, resulted in… nothing.

There was no perceptible impact in the markets, with Lebanon’s credit default swap (CDS) spread — a proxy for default risk — remaining stable after both announcements, and shares of Bank Audi — the country’s largest by assets — staying level. 

Examining the ‘downgrades’

On May 28, S&P cut its outlook on Lebanon’s long-term sovereign credit rating to negative on the back of “domestic tensions and the escalation of violence in Lebanon [which could] potentially lead to a breakdown in the government.” As a result, on May 30, it also revised the outlooks of Bank Audi, BankMed and BLOM Bank from stable to negative due to their high exposure to the sovereign, given that “the banks’ financial performances are closely linked to Lebanon’s solvency.”

The following day, Moody’s revised the standalone credit assessments of 13 banks in Jordan, Lebanon, Pakistan and Ukraine. Bank Audi, BLOM Bank, and Byblos Bank, the three affected Lebanese banks, saw their credit assessment downgraded by one notch from Ba3 to B1 on the back of high exposure to Lebanese government debt, which Moody’s described as equivalent to 350 percent, more than 400 percent and just under 400 percent, respectively, of tier one capital, the core measure of a bank’s financial strength.

Moody’s said a second factor in its assessment was “moderate geographical diversification” outside of Lebanon, with foreign assets making up less than 30 percent of consolidated assets of Bank Audi, and around a third of those of BLOM Bank and Byblos Bank.

Limited market impact of agencies

“The valuations are not based on fundamental weaknesses of the Lebanese banks or [of] the economy,” emphasizes  Riad Salameh, governor of Banque du Liban, Lebanon’s central bank. “Hence the impact of these ratings on our markets have not been felt because most participants in Lebanese markets are players who know exactly the situation and can see the strong balance sheet at the Central Bank.” 

Salameh concludes that “downgrades in Lebanon don’t really affect the performance of banks and financing of the country.”

In fact, credit rating actions have less of an impact in Lebanon than in Western countries for three reasons: first, the country’s small international investor base; second, a sustained increase in deposits, and finally, a resilient population that trusts the banking system, allowing for competitive yields.

Small international investor base

The nature of the public debt and its holders makes any credit action somewhat irrelevant. In reality, even though banks have been trying to reduce their exposure to the sovereign, roughly 97.5 percent of the dollar denominated debt is still held by local investors, with the remainder mostly held by European and US funds forced to hold the Lebanese debt as part of their emerging market index-tracking strategy, according to Nassib Ghobril, head of economic research & analysis at Byblos Bank. 

When compared to the total amount of debt out there, Lebanon maintains a relatively small stock at some $54 billion, as well as a minor representation in broadly tracked indices (only 2.34 percent of JP Morgan’s EMBI Global index) — thus, international investor interest is low.

“The fact that the highly resilient and very well-capitalized banks hold most of the Lebanese debt… keeps a lid on credit default swap spreads and yields relative to the associated risks,” says Florence Eid, founder and chief executive officer of Arabia Monitor research and advisory firm.  “Additionally, given that banks tend to hold this debt to maturity, the illiquid secondary market also plays a part in eliminating some of the volatility.”

As a result, due to limited external funding, such revised outlooks or downgrades have limited impact.

Sustained increase in deposits

“Banks ratings are not as relevant in Lebanon, given that around 88 percent of their funding depends on private sector deposits; additionally they are concentrated,” explains Ghobril. “In fact, between 15 to 25 percent of depositors, depending on the bank, account for 75 to 85 percent of deposits, so if there is a panic, banks will rush to their large depositors to reassure them of market conditions.”

Ghobril adds that, “for events to truly affect deposit inflows or the rates, you would need extreme scenarios.”

Lebanon has only seen outflows of deposits three times since 2004, with a 5 percent outflow during the eight weeks after the Hariri assassination, which reversed afterwards, a 3 percent decrease in July 2006 when the war with Israel started (which stopped after the cease-fire) and a less than 1 percent outflow when the Hariri government collapsed in January 2011.

And currently, given the global uncertainties and near-zero interest rate environments in developed economies, there is evermore reason to believe that Lebanese deposits will stick, as moving them elsewhere would be just as risky.

Trust and competitive yields

Lebanon is one of the world’s largest recipients of remittances as a share of gross domestic product, with remittance inflows reaching $8.4 billion in 2010 (the latest figures available), totaling around a  fifth of GDP, according to the World Bank. The Lebanese Diaspora generally ‘believe’ in the country, notes the International Monetary Fund, and thus as long as there is trust in the banking system, the outlook of ratings will not affect markets. This is reflected in lower yields on Lebanon’s sovereign debt, even though political and geopolitical risks are growing. Depositors trust Lebanese banks even when things go wrong since the banks pay them relatively attractive interest rates, which have been effective over the past 20 years.

The Lebanese difference

History and experience provided enough confidence for investors to make their own assessment of the embedded political risk in the country, explaining Lebanon’s competitive yields compared to countries with similar credit ratings. The Lebanon 2026 bond issued in November 2011 with a 6.6 percent coupon, for a size of $725 million, currently trades above its offer price.

“This reflects mainly two aspects, which are unique to Lebanon credit risk,” explains Jamil Hallak, head of credit trading MENA at Deutsche Bank. “First, the bond is trading at a premium above re-offer and performed nearly 2 percent; and second, the average credit risk spread of Lebanese bonds curve is trading 100 basis points (bps) tighter than the CDS, which reflects the strong and real appetite for Lebanon credit risk.” 

In fact, markets have a dissociated attitude from the rating, since the debt is trading at rates that are similar to those of BBB rated countries. Looking at Egypt — which has the same S&P rating as Lebanon (rated B) but had a relatively stable political situation for years until the start of the uprising last year — the Egypt 2020 bond, with a 5.75 percent coupon carries a credit risk spread of 610 bps, compared to Lebanon’s 2020 bond with a spread of 428 bps. Further, Egypt’s five-year CDS is trading at around 700 bps, whereas Lebanon trades at only 490 bps.

Hence, political uncertainty is reflected in the case of Egypt and shows pure distress, whereas the Lebanese bond market is enjoying historically low yields. Lebanon’s five-year CDS yield is even lower than that of Spain and Italy, which trade at 573 bps and 512 bps, respectively, and are both rated BBB+.

A revision upwards?

If Lebanese banks continue to cut their exposure to government, while at the same time the government does not intend to decrease its borrowings, then the country will have to rely more on external funding — assuming that the Central Bank will not continuously fill the gap. In this case, credit ratings will begin to matter, as “the rating of Lebanon is an important issue for the international investor, especially when the country is not investment grade,” says Governor Salameh.

However, in order to have its outlook revised, the country must address several issues; Lebanon must reduce public spending, implement structural reforms — such as balancing the budget and establishing a proper debt management plan — as well as restore political stability and security. This will lead to an improvement in the country’s credit rating and its access to international capital markets.

Until these issues are tackled and international investors drawn to the country, ratings from companies like Moody’s will likely remain little more than letters.

NATACHA TANNOUS is Executive’s foreign correspondent in New York

July 7, 2012 0 comments
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