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Concepts of conception

by Thomas Schellen June 6, 2012
written by Thomas Schellen

Without children, there is no society. Thus any society that seeks perpetuity will support the raising of children and in some form provide toward needs such as nutrition, education and medical care. But what about financing the beginning of life when the biological method has misfired? Should artificial conception be funded by society, whether through state provisions or via private health insurance? 

The issue is under debate in almost every society, including here in Lebanon. The debate revolves around advanced techniques in reproductive medicine, such as in-vitro fertilization (IVF), and it is charged with ideological, religious, cultural, demographic, financial, medical and bio-ethical aspects. But to bring the issue down to earth, the question that people ask if they desperately want a child is: “Why is IVF not paid for by health insurance?” Private providers, still behind the curve in terms of even maternity leave, are probably not the best place to start.  However, as the Lebanese state and its agencies have provided maternity-related medical care at overall rates of almost 95 percent in public hospitals, and more than 75 percent in private ones, it is a valid question for Lebanese society if the state shouldn’t fund IVF treatments for childless persons who want to conceive and cannot do so otherwise.  

Admittedly there are many aspects to this issue, but here we will look at IVF from a strictly economic perspective. On the simplest denominator, the fertility branch of the medical economy is a business activity that displays pronounced profit-seeking behaviors. It moreover is a market where there is a tight supply of qualified medical providers and a demand that is not only growing but also urgent, in the sense that a successful conception by IVF statistically requires numerous attempts and has to be accomplished before age 40 or 42, depending on local regulations. Attempts later in life have a dramatically reduced chance of sucess. The combination of desperate demand and a poorly regulated market opens the possibility for deception and abuse. This means that society needs to assume oversight of the supply side through precise operating standards that go beyond supervision of technical or medical competency, and of the market through a competent regulatory framework. Society must also decide what controls there must be over the demand side of fertility seekers. (An example of a country in our region that has been proactive on the issue and has departed from stonewalling against IVF was interestingly, the Islamic Republic of Iran.)  

Lebanese society, with its well known bent for ignoring the rule books, will need to very carefully regulate all three elements of supply, market, and demand side if it desires a platform where the pleas for children by the childless can be answered without opening the doors for unbearable supply-side corruption and market distortions.  There is another locale in the neighborhood that not only accepts IVF, but also claims to be the paradise of IVF. According to a May news article by Israeli writer Viva Sarah Press, the health ministry of Israel has announced that the number of babies conceived by IVF has risen to more than 4 percent of all births, and a 2011 story in the New York Times (NYT) called Israel “the world capital of in-vitro fertilization”. The practical factor driving Israel’s high rate of IVF treatments is that they are fully covered by the mandatory national health insurance. The rationale behind the societal willingness, according to the NYT story, was on one hand appreciation of family and on the other hand the desire to counter birth rates in Palestine.    

Political demographics aside, the fundamental issue is that life is not to be denied and that children are the greatest opportunity to fill it with meaning — Lebanese society needs to discuss where it stands on helping those who cannot have children.

June 6, 2012 0 comments
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Economics & PolicyMonaco

Bechara el-Khoury & Mustapha el-Solh

by Maya Sioufi June 3, 2012
written by Maya Sioufi
The relationship between the principality of Monaco and Lebanon started developing from the independence of Lebanon under the rule of Bechara el-Khoury, Lebanon’s first president and Riad el-Solh, Lebanon’s first prime minister. Today, Lebanon’s consul in Monaco is Mustapha el-Solh, the great grand nephew of the first prime minister and Monaco’s consul in Lebanon is Bechara el-Khoury, the grandson of the first president. Executive sat with both consuls to discuss this enduring relationship between the two countries.
Bechara el-Khoury 

How would you describe the relationship between Lebanon and Monaco?

There has always been a consul of Monaco in Lebanon, ever since my grandfather was president, as we are riverains de la Méditerranée. The relationship has always been very good and now we couldn’t have it better. Mustapha el-Solh is very well connected and I am not badly connected either [laughs]. The access is easy. That is what is the most important in bilateral relationships. 

How many Monégasques are there in Lebanon? 

Three: Eric Bessone (director of sales and marketing middle east at Monaco’s Société des Bains de Mer), the wife of my father, and myself. My brothers and sisters also have the nationality but they live in Paris and so does prominenet Lebanese businessman Toufic Abou Khater. Those are all the Lebanese with a Monegasque nationality. 

What are the ongoing projects between Lebanon and Monaco? 

Monaco is cooperating to finance projects in Lebanon such as sea cleaning, planting cedars and a few health programs for the United Nations Relief and Works Agency (UNRWA). There is a non-governmental organization (NGO) called Les Amis du Liban, which distributes 250,000 to 300,000 euros ($320,000 to 380,000) per year to different sectors of activity. When Prince Albert II came two years ago on a state visit to Lebanon to see President Sleiman, we organized training for the Lebanese fire brigade to go to Monaco and be trained to deal with fires in towers, because they had no previous training and we have more and more towers. This program is still ongoing. We also have a Maronite priest who stays at the Monaco cathedral on a revolving three-year loan. We are always working on projects to improve the relationship between Monaco, Lebanon and the Middle East. 

Do you also represent the Middle East? 

My job is not just for Lebanon. It is also for the area because Prince Albert II knows I have relationships across the Middle East. Whenever he goes to the region, he takes me with him. We can attract a lot of Arab tourists to Monaco. There is potential for the Middle East clientele to come and develop projects in Monaco. 

Where are the investment opportunities in Monaco?

They are in real estate primarily. Also there is a law in Monaco which allows you to have worldwide revenues come in with no taxes and go out to pay your worldwide employees with no taxes, making it attractive for companies to set up an office in Monaco. That is why all the big ship owners are based in Monaco today. This is important because it is an enormous facility. Also there is no personal income tax in Monaco and a small corporate tax. 

What can Lebanon learn from success story of Monaco? 

Lebanon needs to attract more tourism. One of the strengths of Monaco is that every single day there is an event and there are conventions. Lebanon needs to do that too. Also, Monaco was promoting heavily the healthcare industry. This could be done in Lebanon. For instance,  Monaco has fantastic heart surgery unit. We have very good doctors so we [could] have more specialized centers. 

If you had to choose to live in either Lebanon or Monaco, where would you choose? 

Obviously, I was born in Lebanon and I carry a very famous name, but for my own personal choice I would live every day in Monaco. 

Mustapha El Solh 

As consul of Lebanon in Monaco, what does your role entail? 

The Lebanese consulate in Monaco is an honorary one and has existed since 1996.  We represent the interests of Lebanon across all sectors and we look after the interests of all the Lebanese residents in Monaco. We conduct all consular administrative services, such as passport renewals and visa issuance, and we organize many events throughout the year to promote Lebanon in Monaco. Last year, I organized the official trip of Prince Albert II to Lebanon with an economic delegation of 80 people during which many bilateral agreements were signed.  For example, four Lebanese TV stations signed distribution agreements with the local TV cable operator to transmit locally in Monaco. 

And as president of the Association of Consuls Honoraires de Monaco, what does your role entail? 

The Prince and the government of Monaco look highly to the consular corps for reinforcing the bilateral relationship between Monaco and the rest of the world; there are more than 80 consuls accredited in Monaco. In 2009, I was elected by all consuls in Monaco to become president for a five-year mandate. My main role in this post is to promote the consular function and most importantly to represent the interest of the consular corps during all the official events in Monaco.  

How strong is the current relationship between Lebanon and Monaco and how can it be further developed?

The relationship between the two countries is exceptional. In the past 20 years, there have been numerous agreements and exchange programs. On the economic side, companies have signed trade agreements allowing exchange of services and products (mainly in jewelry, insurance, shipping, etcetera). Major environmental agreements were executed between the two countries.  Bank Audi, Lebanon’s largest bank, opened a branch in Monaco two years ago.  A representative office for Monaco’s largest tourism and service company, the Société des Baines de Mer (SBM), opened in Beirut in 2010 and since then many cultural events have taken place in Beirut coming from Monaco.  

Do you have figures on how many Lebanese live in Monaco and how many visit Monaco per year?

There are more than 300 Lebanese living in Monaco and Lebanon features among the top 20 countries to visit Monaco. 

What can Lebanon learn from Monaco’s success story?

Up until the early 1970s, Lebanon used to be the success story of the whole Mediterranean basin. Whether for its touristic or financial infrastructure, Lebanon excelled in attracting visitors. Unfortunately, the civil war and the recent political turmoil impacted negatively Lebanon’s potential. On the other hand, Monaco always prioritized offering its residents and visitors a great experience and the principality has developed a sophisticated financial infrastructure with an absolutely secure environment. It manages the country as a large corporation and its general interest is to service a profitable and satisfactory business model. It also offers rich cultural programs including ballet, theatre, museums and art exhibitions. I strongly believe that once the political stability is regained in Lebanon, it would offer equivalent conditions and would become a key destination for people to reside throughout the year, as well as visit to discover the richness of our ‘patrie’.

How many years have you been living in Monaco? What do you like best about living in Monaco that you can’t find in Lebanon?

I have been in Monaco for 18 years and have been greatly welcomed by its society and people. The special thing about Monaco is that it is a cosmopolitan city but also maintains certain traditional and conservative habits. With time, Monaco grows on you due to the warmth and care of its citizens.

If you had to choose between living in Lebanon and Monaco, which country would you live in?

I left Lebanon almost 30 years ago and I have lived across many continents and cities. Lebanon has and will always be home. Monaco is a great place to live, it offers my family the best conditions and continues to be a second stable home.

June 3, 2012 0 comments
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Economics & PolicyMonaco

The East floats into town

by Maya Sioufi June 3, 2012
written by Maya Sioufi

It is early May and the famous Place du Casino — wherein lies one of the world’s oldest gambling houses, the renowned Monte Carlo Casino — is overflowing with tourists. 

Californias, 911s  and Continental GTs line the casino entrance for tourists to gawk over and take the cliché Monte Carlo postcard shot beside overpriced luxurious wheels with the Monte Carlo casino behind: the ultimate photo of lavishness. 

The European sovereign debt crisis engulfing the principality’s neighbors does not seem to have reached Monaco, but the faces flocking to these alluring two square kilometers do seem to have changed, with Asian and Eastern Europeans tourists replacing Western European and American ones. 

A look at the recent financial results of the Société de Bains de Mer (SBM), Monaco’s biggest employer and the company behind some of the principality’s most prestigious assets, does not paint the same rosy picture as the Place du Casino. 

SBM is the main economic actor of the principality and its assets include fours hotels, among which are the famous Hotel de Paris and Hermitage hotel, five casinos, including the Monte Carlo Casino, 33 restaurants and bars, three spas and the legendary Jimmy’z night club, a celebrity hotspot. Being 70 percent owned by the state of Monaco and the ruling Grimaldi family, with the remaining stake listed on the Paris stock exchange, “the SBM and the state are almost one” says Bechara el-Khoury, consul of Monaco in Lebanon. 

As the financial crisis hit the pockets of tourists, the profits of the SBM reversed from 31 million euros ($39 million) in fiscal year 2006/2007 (ended March 31) to a 22 million euros ($28 million) loss for the fiscal year 2010/2011. Its stock price got hacked too, down some 50 percent from the start of the financial crisis. Year to date, it is down 10 percent (as of May 18). In response, the company reshuffled its management in November 2011, appointing a new chief executive who replaced the former CEO of nine years, creating a deputy CEO position and adopting a new strategy. 

Attracting new customers

Sitting at the cozy yet refined Bar American in the Hotel de Paris, Axel Hoppenot, marketing director at the SBM, talks through the new strategy, which aims to identify how to develop revenues and readdress the cost structure. He reveals that they have witnessed a pickup in activity so far this year. 

While the European sovereign debt crisis is still weighing on their results, Hoppenot is confident that the “engines of growth from the new markets will help the company overcome this difficult period.” He confirmed that there has been a focus on attracting new markets to Monaco, most notably focusing on Russia, Eastern Europe, Asia and the Middle East. 

To cater to the Middle East, the SBM opened a representative office in Beirut at the end of 2010, headed by Eric Bessone, from which the company aims to cover the region. According to Bessone, the role of the Beirut office is to present offers of leisure, business, and well-being from the 50 institutions of the Monégasque company. 

Currently, the Middle East accounts for approximately eight percent of their total hotel revenues and can reach up to 10 to 12 percent in the summer. The Middle Eastern clientele has increased in the past couple of years, adding some two to three percentage points, according to Hoppenot. He does, however, warn that this year will not be as solid due to Ramadan falling in the middle of summer. 

Bringing Monaco to Lebanon

The interest in the Middle East was most striking with the opening of Saadiyat Monte Carlo Beach Club in Abu Dhabi last year, SBM’s first venture outside of Monaco. 

“Today it is more complex to set up a business in European capitals as the entry cost is much higher, and because of quality control we can only set up in prime locations” says Hoppenot. “Abu Dhabi is, in the Middle East, one of our most important markets.” 

When asked if SBM was considering more investments in the region, Hoppenot stated that for now, given the economically challenging times, SBM is focusing on consolidating their current assets in order to ameliorate the quality of service. 

As for Lebanon, SBM has been focusing on bringing the glamour of Monaco closer to home. The aim is to “get closer to our guests and help organize ‘tailor made’ stays in Monte Carlo”, says Bessone. In 2011, SBM organized the exchange of DJs between Monte Carlo’s Jimmy’z and Beirut’s famed Sky Bar. This successful exchange will take place again this year. 

It also brought the Les Ballets de Monte Carlo’s “Cendrillon” to the Casino du Liban in November. This year, it organized the exchange of chefs between La Posta’s Maroun Chedid and Blue Bay’s Marcel Ravin, with two events occurring in April and May. 

“Many Lebanese love to visit Monaco and these events make them feel like they are in Monaco,” says Bessone, “at least for a night, until they visit again.”

June 3, 2012 0 comments
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Economics & PolicyMonaco

Monaco’s book balancer

by Maya Sioufi June 3, 2012
written by Maya Sioufi

The principality of Monaco, renowned for its glamour, its “beautiful people”, its Grand Prix and its luxurious yachts, also boasts the highest gross national income per capita in the world — some $197,460, according to 2010 World Bank estimates. To better understand the dynamics behind this economic model, Executive travels to the city state in Southern France to sit with Italian Marco Piccinini, Monaco’s Minister of Finance and Economy, at his offices atop the famous Rock, Monaco’s old town. 

Initially, however, Piccinini seems more interested in hearing about Middle Eastern politics, as he spends the first 15 minutes asking questions about the Middle East. “Sorry if I am the one interviewing you” he says jokingly. Married to a Tunisian with whom he has one child, he is curious to understand the dynamics of the region.

When the tiny principality recently revealed its 2012 budget, it forecast balanced books for the year ahead, an envious feat for European neighbors struggling to restrain raging deficits. With 833 million euros ($1.06 billion) in both revenues and expenditures, it will be a turnaround on previous years. 

“We have experienced some budget deficit after the crisis, but already this year we are essentially ‘budget balanced’ and we will be back to a surplus in one to two years, maximum” says Piccinini. Unlike some of his European counterparts, raising taxes is not on his agenda. Piccinini says the aims are “cutting costs, investing in areas with better returns, moving resources from what brings nothing to what brings more.” 

Trying to be modest

Monaco boasts a mild taxation system. Famed for charging no personal income tax, it has attracted many “tax refugees” to its appealing shores. It also offers a mild corporate tax system, charging corporations a 33.3 percent tax rate if more than 25 percent of their revenues are generated from outside of the principality; otherwise, the rate is zero. 

“People ask me, ‘is your model with mild taxation sustainable?’ It can happen, because we never deviated for political or ideological reasons from our three pillars” says Piccinini. The three pillars of the economic and social model of Monaco are to have zero sovereign debt, to run a reserve fund covering four years of budget expenditures and to have a balanced budget with a possible budget surplus. “Our aim is to try to have a surplus which can be put away for difficult days,” he adds. 

But while Monaco’s relatively low tax environment becomes more appealing for businesses to come and set up shop, Piccinini stresses that the principality is not trying to compete with other tax havens. “We see ourselves more as a gateway to Europe for non-European investors. Taxes can be one of the elements but not the only element,” he says. 

Even with its hefty banking sector (deposits in Monaco’s banks total some 19 times the size of its economy), Piccinini says Monaco has no aspirations of being a global financial hub akin to London or New York. “Let’s be humble. We cannot pretend to reproduce, in less than two square kilometers, what other financial hubs have produced; banking has been developing very well but we don’t want to become a financial hub which may be exposed to the uncertainties of this business.” The deposits in Monegasque banks in those two-square kilometers amount to a 78.4 billion euros ($100 billion) as of end 2010, the most recent consolidated figures available. That’s equivalent to 65 percent of the total deposits held in Lebanese banks. “It is the size of a small to medium sized bank. Our goal is not to increase assets under management. We want to remain a reasonably sized banking platform,” says Piccinini. 

Attracting the MENA region

The minister also eludes to Lebanese and Middle Eastern financiers beginning to wet their feet in the Monegasque financial fodder. Lebanon’s Audi Bank set up a branch in Monaco in January 2010 and Qatar recently acquired KBL, a Luxembourg-based bank with a branch in the principality. And the Middle East’s venture into the principality does not end at the banking sector. “We have Middle Eastern people from many businesses here. The tourism, banking, shipping and industry sectors are all pillars of Monaco’s economy and in many of these areas, Middle East nationals are very active. The Prince dedicates every year an official visit to the Middle East,” says Piccinini. As for investment, he says that Middle Eastern clients are mainly interested in investing in Monaco’s real estate sectors, in incorporating family offices in the principality and in having a base in Monaco, which becomes their gateway to Europe.  

Monaco seeks to remain “attractive as an overall destination by being an interesting hub for the [European] region and also a place where one can enjoy life,” says Piccinini. “That’s the attractiveness of Monaco”.

June 3, 2012 0 comments
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Short on solutions in Bahrain

by Thomas Schellen June 3, 2012
written by Thomas Schellen

By hosting a Formula 1 race in 2012, the Bahraini government was angling for attention on two fronts, positive publicity and economic benefit. Instead, they received mainly critical attention driven by human rights activism and popular outrage. Much less attention came when the International Monetary Fund (IMF) published its annual economic assessment known to market watchers as the infamous ‘Article IV’ report.  The report’s top line was that Bahrain suffered a slowdown of its economic growth of some 1.8 percent in 2011.

Looking back on the past ten years (assuming the IMF got its estimates right) GDP performance was the poorest in more than a decade, with a full four-percentage-points discrepancy from the past 10-year averages.

But on questions whether the slowdown was a symptom or side effect of change, a mere fallout of the protests, or a result of other global and regional pressures, the IMF was decidedly ambiguous. On the one hand, the IMF said that “disruptions caused by protest activity during the first half of 2011 have weighed on growth.” On the other, the “macroeconomic impact of the unrest has been cushioned by the largely unaffected oil and aluminum sectors.”  It did not say which factor had a greater impact but it did point out that the oil sector contributes over 85 percent to Bahrain’s fiscal and external receipts.

And while it takes more than a few protests to stop the flow of oil, the kingdom is being stretched thin. The IMF also observed that Bahrain’s fiscal stance had been expansionary to the point that the break-even price of oil for sustaining state expenditures had reached $114, versus $80 in 2008, the highest break-even price for oil in the GCC back when prices were even higher than today.

Yet one need only dig a little bit into the files to find that the IMF knows well that protests have changed the economic situation significantly. In a press statement released at the end of a two-week IMF visit for consultations in December 2010, David Robinson, the IMF official leading the delegation at the time, said: “Buoyed by the rebound in oil prices, the continuing recovery in the global economy, and fiscal stimulus, growth is expected to accelerate from the 3 percent recorded in 2009 to 4 percent in 2010 and further to 5 percent in 2011.” We all know what happened one month later. But you wouldn't think the IMF did if you looked at their recommendations. 

In the September 2009 Article IV, the IMF’s Executive Board “emphasized that the key challenges faced by authorities are to safeguard financial stability and mitigate the impact of the global downturn on the domestic economy.”

In the 2012 consultations, the IMF described the impact of the euro crisis on the Bahraini financial sector as “further deleveraging of the wholesale banking sector.” It also added that its “principal impact on the domestic economy has been the associated loss of employment in the financial sector, as contagion to the conventional retail banks appears to have been contained.” Nothing on addressing the problems causing unrest.

The debates in Bahrain over economic justice and social equity included, among many other things, the discussion of whether the 2012 Formula 1 event was so economically beneficial to the people that the demonstrations were ill-placed. The activists argue that the protests at the race were justified because of human rights violations and the need to attract global attention. Neither side could substantiate their argument with economic data, which would strengthen their claims of having the better way toward improving people’s lives.

Yet, if the government of Bahrain, or any stakeholder in the state or economy, were to look for an assessment of measures — such as the 15 percent increase of salaries for all public sector employees in August 2011 — that is conducive to lowering social inequality, they would not get answers from this year's assessment by the IMF’s Executive Board either. It concluded, “policies should be geared to restoring confidence in the economy, including by finding a lasting resolution to the social unrest, promoting growth, and securing a sustainable fiscal position.” We know, IMF, but how?

June 3, 2012 0 comments
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Finance

Reputations at risk

by Paul Cochrane June 3, 2012
written by Paul Cochrane

Syria and Lebanon naturally have shared business interests, but in an era of American and European sanctions against the Syrian regime and individuals associated with it, Lebanese businesses have been forced to try and insulate themselves from risk. 

The banks are no different. Byblos Bank, for instance, had the name of Rami Makhlouf — the billionaire Syrian businessman and cousin of Syrian President Bashar al-Assad currently under United States and European Union sanctions — removed from the public listing of shareholders in its Syrian affiliate, Bank Byblos Syria. The UK-based Bankers’ Almanac — effectively the shareholder listing of banks globally — “were asked on January 9 by [Byblos Bank’s] relationship manager to change the ownership details to their current listing,” a spokesperson wrote in an email to Executive.

Alain Wanna, head of Group Financial Markets Division at Byblos, confirmed that Makhlouf did hold a 4.9 percent stake and that the bank had recently tried to evict him as a shareholder, but Makhlouf had refused. 

Morthada al-Dandashi, who owns 2.85 percent of Bank Byblos Syria, may be a further reputational risk for Byblos. Although not sanctioned, a leaked 2008 US Embassy cable reported that Dandashi managed “Makhlouf’s ‘parallel’ financial activities in Syria,” and Makhlouf “paid Dandashi $2 million ‘ante’ to become a partner in Cham Holding, and deposited significant sums under Dandashi’s name in the Damascus branch of the Lebanese Byblos Bank.”

It appears though, that Byblos is in a bind. “Shareholders have the right to freely buy and sell shares as long as they own no more than 5 percent of the Bank’s total shares,” said Wanna. “Thus, Byblos Bank Syria has no legal authority to approve or disapprove the entry or exit of any shareholder.”

He added that while Makhlouf had been a founding shareholder in Bank Byblos Syria, he had reduced his stake and after three years Byblos was not required to list him. “Makhlouf is not represented on the board of directors, he has no executive function, is a passive shareholder and may be in other banks,” said Wanna.

Banque Libano-Française (BLF) is in a similar predicament with its Syria arm, Bank Al Sharq, which, like Bank Byblos Syria, trades on the Damascus Securities Exchange. Among its shareholders is Ahmad Nabil Mohammad Rafic al-Kuzbari, who was placed under US sanctions last year for his position as the former chairman of Cham Holding, which Makhlouf founded.

“Like many other Syrian investors, Kuzbari holds shares in Bank Al Sharq that represent 1.5 percent of the capital of the bank,” wrote a BLF spokesperson in an email. “He is not a member of the board of directors, neither [is he] represented on the board of directors nor is he involved in management. Consequently, we are confident that his shareholding does not represent a reputational risk for the bank.” 

Under US law Americans are banned from financial dealings with sanctioned individuals or entities. Interestingly, the International Finance Corporation (IFC), the private investment arm of the World Bank — itself 51 percent funded by the US Treasury — also owns a stake in Byblos Bank, at 8.36 percent. 

When asked about being jointly invested with a sanctioned individual, an IFC spokesperson wrote in an email that: “Our investment is at Byblos-Lebanon level, while Makhlouf is a minority shareholder in Byblos-Syria, which is a different entity registered under the Syrian banking law and subject to supervision by the Syrian Central Bank.”

This separation is dubious, given that Lebanese banks and their Syrian arms are consolidated and that the group gains from the profits made in Syria.

The US Treasury’s Office of Foreign Assets Control (OFAC), responsible for enforcing sanctions, has been “repeatedly engaged with the Lebanese banking sector to stress the importance that it not become an outlet for the Syrian regime and its proxies to evade sanctions,” in the words of a spokesman.

Lebanese banks categorically deny Syrian money is moving through Lebanon, and while anecdotal evidence suggests banks are generally denying new accounts to Syrians, financial sources point out that this can, and is being, circumvented by Lebanese individuals acting on behalf of Syrians. Indeed, the leaked 2008 US embassy cable noted Makhlouf has accounts in Lebanon under different names. 

Also, a US Treasury official visiting Beirut stated banks have to refuse banking relationships not only with OFAC sanctioned individuals, but also family members and affiliates.  

“How can a Lebanese bank know those surrounding an OFAC-listed individual to avoid them? It is really weird and beyond banks’ capacity,” said Paul Morcos, founder of the Justicia law firm that provides legal consulting for the banking sector. “Legally, it is a grey area, and it is as if bankers are no longer responsible for best efforts but have to achieve the best results.

 

This article was published as part of a special report in Executive's June 2012 issue

June 3, 2012 1 comment
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Rebuilding the future

by Jihad Yazigi June 3, 2012
written by Jihad Yazigi

Syria’s political landscape has dramatically changed in the last fifteen months and so has its business environment.

A few weeks before the uprisings began in March 2011, the Syrian government had announced its five-year economic plan running from 2011 to 2015, which was supposed to serve as a guide and a broad strategic framework for economic policy in the coming years.

The plan confirmed the continued liberalization of the economy, the gradual cancellation of all forms of subsidies on energy products and a return to focusing on manufacturing and other “productive” sectors. 

For many in Syria’s business community, which had already benefited from a step-by-step transformation of the economy into a market-led system since the early 2000s, the prospects looked promising. Syrian expatriates returned home to benefit from the new employment and investment opportunities. Regional investors were banking on the opening of a new frontier market, while locally-based investors saw their decades of patience bearing fruit at last.

Few could have imagined what the following months would entail. When a few children were detained in Daraa, their families went out to demonstrate to request their freedom and everything changed forever in Syria.

In the following months, the economy would contract significantly and security would deteriorate, causing many businesses to close and lay off staff, expatriates to return to their place of exile, investors and tourists to flee. 

The question now is on how, when and with what means Syria is to be rebuilt. For many, it’s probably already too late. The shaky reconstruction of neighboring countries — such as Iraq or Lebanon — has convinced them that it will take far too long for Syria to return to normalcy or for potential investments to start generating returns to justify the risk of staying. They have left the country — or are planning to do so during the summer — and will probably not return anytime soon, leaving that possibility to their children. Investors in this category generally have most of their capital safe in bank accounts abroad and have limited fixed investment in Syria proper, while executives in top management positions will easily find opportunities in the Gulf and possibly further afield, in the United States or Canada.

For others, leaving is simply too costly and/or complicated. Investors that have put at stake much of their capital or savings in a project, bankers that have deployed across the country at the cost of millions of dollars, expatriates that have cut off almost all links with their previous host country, or people simply too attached emotionally to Syria, will try to stick it out as long as physically possible. Others will relocate to nearby places, such as Lebanon or Dubai, from where they will be able to continue to manage their investments, or temporarily find a new job in the hope that the conflict will end soon. 

It is this category of investors and highly qualified individuals that Syria will need to rely on when reconstruction begins. The size of their involvement and experience in the country, as well as their commitment to it, will be an invaluable asset when the time for rebuilding arrives.

Much, however, remains to be clarified before this takes place. Not only must the political crisis gripping the country end, the economic policies of the future must also take into account the calls for change that are coming from large segments of the population. In other words, investors must understand the underlying causes of the current uprising if they want to contribute positively to the new Syria. Syrians taking to the street are, in the words of a Syrian intellectual, from “the working world.” These are the people who have suffered in the last two decades from the rising income disparity, decreasing state investment in infrastructure and social services, and unregulated liberalization that has shed thousands of jobs.

While those with financial capital and wherewithal need to continue to lobby for their interests as investors and champion the cause of good governance and of a sound legal and business environment, they must also take into account the fact that the state must continue to have a role in the economy — albeit redefined — and that solidarity between the haves and the have-nots needs to prevail. This will be a requirement for Syria to change for good and for the stability they cherish to hold, whenever it may return. 

June 3, 2012 0 comments
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Finance

The long arm of Uncle Sam

by Paul Cochrane June 3, 2012
written by Paul Cochrane

With the United States’ debt having surpassed 100 percent of gross domestic product, at over $15.7 trillion, the Internal Revenue Service (IRS) has launched an aggressive worldwide campaign to try and curb the deficit by bringing in tax revenues from US citizens abroad.

While the Foreign Account Tax Compliance Act (FATCA) is not to go fully into effect until 2014, it has already caused waves in the international banking community and within Lebanon, as it will require all banks to essentially act as agents of the IRS by listing US citizens holding accounts. In Washington DC, a new building is under construction that will be devoted to handling FATCA files alone, given there are an estimated 117 million Americans abroad — including Green Card holders — and that the IRS assumes it may be able to repatriate upwards of $100 billion in taxes.

“The US is not looking at Lebanon as a place to hide money but rather at Singapore, Lichtenstein and Switzerland,” said Fadi Osseiran, general manager of BlomInvest Bank, in reference to the world’s major tax havens. “We are involved for a stupid reason, as some Lebanese have dual nationality.”

Anecdotal evidence suggests there are an estimated 22,000 people in Lebanon holding US citizenship, although the US embassy declined to confirm this. While FATCA concerns earnings above $100,000, banks will nonetheless have to require customers to declare whether they have a US passport, Green Card or were born in the US. As Lebanon has banking secrecy, a client can refuse to disclose such information. In such a case, the bank will refer the individual to the Central Bank’s Special Investigation Commission.

The risk for banks is that if they do not comply with FATCA they could be designated as non-compliant and international banks, especially in the US and Europe, will refuse to deal with them. To make sure US citizens do not try to evade the upcoming act by transferring funds or changing account holdership to non-US citizens, the IRS can go back several years through accounts. And if someone gives up their citizenship, they will have to pay taxes for five more years.

“The IRS is calculating this kind of evasion, although it is worth little compared to the revenues they’ll have,” said Paul Morcos, founder of the Justicia law firm that provides legal consulting for the banking sector. However, all is not yet clear on full disclosure. “This law will lead to confusion and gray areas, like for example cases where we have a joint account between a Lebanese father and a son who has been naturalized in the US. Does a bank have to report on this or not?” added Morcos.

Who will report to the IRS is a further issue; whether it will be Banque du Liban (BDL), Lebanon’s central bank, or the individual banks is currently being hammered out in a bilateral agreement between Lebanon and the US. “The BDL could be the agent for all Lebanese banks but I don’t know if the IRS will agree,” said Samih Saadeh, managing director of Banque BEMO.

Bankers deny that FATCA will be a nail in the coffin of banking secrecy as it only concerns US citizens, but it could be the beginning of the end of such a service if there are further amendments to FATCA and if Europe and other jurisdictions follow the US lead with an act of their own, similar to how the US’ recent emphasis on enforcing the Foreign Corrupt Practices Act was repeated by the British government with its Bribery Act.

“From my point of view, banking secrecy is less and less important,” said Osseiran. “For me, we don’t need banking secrecy. The only reason to do it is a culture of privacy for customers, but to avoid taxes or launder money, it shouldn’t be the case.”

What is curious about FATCA is that tax evasion is not illegal in Lebanon, meaning that the US as a foreign fiscal authority has gained influence over the country.

“It is extra-territorial, being a law implemented beyond frontiers. We are witnessing the supra-national effect of the law, starting with the US Patriot Act and now FATCA, and I’m afraid of FATCA II and FATCA III,” said  Morcos. “I wonder if FATCA II or III will be more aggressive or much clearer, but I think it will be more extensive and will bring about new practices in the finance and banking industry to enhance monitoring and reporting through foreign channels.”

 

This article was published as part of a special report in Executive's June 2012 issue

June 3, 2012 0 comments
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Economics & Policy

Searching for a sense of perspective

by Thomas Schellen June 3, 2012
written by Thomas Schellen

Indices, indexes, rankings and ratings. Never have there been more measures competing for attention than today. At the end of May, two ranking reports with relevance to Arab markets were released within two days of each other. The International Finance Corporation released its Doing Business in the Arab World 2012 (DBAW 2012) report and the Swiss-based global business school IMD released its 2012 World Competitiveness Yearbook (WCY).

The DBAW report tells us, in a nutshell, that Saudi Arabia has the best framework of business regulations for domestic companies in the Middle East and North Africa (MENA) — ranked first among 20 Arab countries and 12th worldwide — and that Morocco was the country which made the greatest progress in improving its business environment in 2010/11, on a regional and global scope.

The WCY tells us that Qatar is the most competitive Arab economy — ranked 10th in IMD’s global review of 59 countries by 329 measurements — and that the United Arab Emirates was the country that made the greatest progress globally in competitiveness in 2011, advancing from 28th place to 16th.

The two reports are presumably a boon for the corporate executive who wants to choose a new market or manufacturing location. The IFC measures the level of development that regulatory frameworks have reached in 183 countries and the WCY exhaustively examines 59 countries for competitiveness on the basis of business and government efficiency, business performance and infrastructure. That is, of course, if the said executive has enough time on his hands to pore over hundreds of pages and evaluate the information that is provided.

DBAW is not a slim specimen of the report genre at 123 pages, and the WCY feeds nicely into the assumption that smart people will never stop reading, at over 300 pages (that’s excluding the expanded, detailed country profiles). Also for consideration is the Global Competitiveness Report 2011/12 by the World Economic Forum (WEF), another popular global reference and home of the Global Competitiveness Index (GCI). Covering 142 economies, it is a tome burgeoning with lists after lists, sub-rankings upon sub-rankings, filling nearly 550 pages. Thankfully there are electronic versions.

rankings

Curious details
A curio about the WCY is that the 15 most competitive economies in its ranking collectively represent just more than eight percent of the world population and do so only because of the United States, the WCY’s second most competitive economy, contributes some 55 percent of this headcount. Moreover, the top 15 in the WCY are not at all countries driven to improve their comparative economic edges by population expansion; Malaysia, number 14 in the list, stands in as number 75 in global population growth and all other 14 highly competitive countries are on record for comparatively low population growth.

Another note to ponder about the leading competitiveness reports is that both their producers, although each collaborates with research partners around the world, are based in Switzerland (ranked third by WCY and first by WEF). After banking services and those time measurement complications, the reports appear to form another market where Swiss qualities seem strong enough to inculcate oversized or even monopolistic positions.

Of course competitiveness reports are just one type of ranking report that have gone viral with the information age. Measurability is the undercarriage of management; convergence of global markets and production locations puts corporations and large organizations, whether in economy, public sector or civil society in an absolute need for comparative reports. This need has been answered by an army of knowledge economy producers, whose reports rank everything from financial centers to human happiness in comparative reports and handy lists.

rankings
Limited criteria, skewed results
In step with technological and scientific progress, the methodologies of global research reports have evolved to ever more sophisticated models. However, even the reports produced by top-tier institutions such as the IFC and leading academic entities such as IMD often disclose rankings or developments that smack of distortions or otherwise can startle the reader.

For example, a category of the DBAW 2012 report ranks countries for the ease with which businesses can access electricity. Lebanon is ranked in seventh place of 20 Arab countries and in one of the top 50 places worldwide for that particular category. Anyone who has ever done business in Lebanon or ridden in an elevator in the country knows of the annoying frequency of power cuts. The DBAW criteria, focusing on the time, cost and number of interactions required to get an electricity connection, do not mention reliability of electricity supply. But what good is knowing that it takes only a short time to get a warehouse connected to the grid when the grid operator cannot deliver the power?   

In the WCY, the UAE acheived an improvement of 26 positions, from 34th to eighth, in a particular bracket of the business efficiency sub-category. Strong gains in a single year may be possible, but this particularly large leap upward was reported in the “attitudes and values” bracket. Attitudes change over time, the assumption goes usually, not overnight. 

One will find room for questions in every index and rankings report, whether its subject is a single index based on measuring one performance area, a composite index collating several pillars into one ranking and offering the sub-rankings for better understanding, or a meta-index that consolidates other research reports under a captivating header such as Transparency International’s Corruption Perceptions Index.

Besides having to digest and present more data than is comprehensible over a morning coffee, flaw factors in rankings include methodological omissions and at least three other components that one should be aware of: biases, data uncertainty and simplifications. The sources where one might look for these flaw-factors are business leaders, governments and media. 

Surveys of business leaders and decision makers are a standard component of many rankings reports, for example the competitiveness reports by both IMD and WEF. Business leaders are usually opinionated and often biased. How common is it to meet a manufacturer or trader who will tell you that his competitor’s products are a better deal than his own, or that his own country of production is not a great location to manufacture his product?

Margins of error in rankings are not the first topic discussed by the providers of rankings who have themselves an incentive to appear as reliable and authoritative as possible. However, producers of the reports are well aware of the bias issue, which a researcher on the WEF’s report called “the halo effect”.   

Secondly, not all data should be taken as equal. When governments produce projections of next year’s gross domestic product (GDP), any experienced business leader will assume that not all estimates will hit the bull’s eye.

Population estimates for a large country are very difficult or even impossible to verify, with all sorts of potential digressions in subsequent calculations. Plus, while we like to think of our governments as being honest, data supplied by government institutions and close affiliates to competitiveness researchers may, just may, in extremely rare cases, be a little bit more polished than they should be [think Greece pre-financial crisis].

But the biggest nightmare is the media. Take any rankings report and the media will redact its detailed and complex findings into something akin to a list of test results on the wall of classroom in third grade. Where the researchers explain that their report shows small actual changes resulting in a country’s rise in the percentiles of a ranking for a complex area such as labor market efficiency but that the change is not indicative of much at all, the media will scream that ‘Country X’ gained 20 ranks and is now top of the heap.

Stripping away the sensationalism, the rankings report in the knowledge economy is the business leaders’ Hamlet experience — to trust or not to trust, that is the question. According to Hisham el-Agamy, an Executive Director at IMD in charge of the Middle East Africa, Southeast Asia and Southeast Europe, governments and business investors use a competitiveness report as a “map to understand the country” but “any serious institution which wants to invest in a country does not only consider a single ranking.”

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Finance

Mounting fees

by Maya Sioufi June 3, 2012
written by Maya Sioufi

While it is still too early to assess the wider repercussions of the government- mandated wage increase this year, it is already irking Lebanese banks, coming at a time when banks are also compelled to increase spending to comply with mounting regulations both locally and internationally.

As one of the largest private sector employers, with roughly 21,000 employees as of the end of 2011, the salary increases, applied to all bank employees across all brackets, are “significant money,” says Nassib Ghobril, chief economist at Byblos Bank. As of February 1, the government has raised the minimum wage by 35 percent to LL 675,000 ($450) while increasing salaries by an average of LL 299,000 ($200) for income brackets above LL 675,000.

“As competition for talent in the region was increasing in previous years, we had to raise salaries and so we had already experienced a significant cost increase in the whole sector, ” says Walid Raphael, chairman of Banque Libano-Française. “Now, along with a reduction in growth of the economy, we are imposed with an increase in the cost of human capital. This has a major impact on the sector.”

In the first three months of this year, staff expenses at Alpha banks — the 12 banks with deposits in excess of $2 billion that account for 85 percent of the banking sector’s deposits — were up by 12 percent year-on-year to total $293 million, according to research firm Bankdata Financial Services. By comparison profits totaled $370 million during the period.

While the banking sector has strong fundamentals — it is still witnessing growth in assets and deposits albeit at a slower rate — its declining growth in profitability is making it more difficult to swallow the additional costs, a pain felt more vigorously by the smaller banks than the larger ones. “For the big banks which have large enough profits, they can manage, for the smaller ones, it is more difficult,” says Fadi Osseiran, general manager of BlomInvest Bank.

The regulation burden
The increase in salaries has been accompanied with an increase in costs for complying with additional international and domestic regulations — more software and staff needed. Those new regulations include Basel III and the United State’s Foreign Accounts Tax Compliance Act, while domestically Lebanon’s central bank has introduced new regulation aimed at curbing money laundering.

While the actual cost of compliance has yet to be calculated, the smaller banks are in a less favorable position to absorb the shock — as reflected by the drop in profits of the total banking sector relative to the Alpha banks. The sector’s growth in profits dropped by three percent in 2011 but the Alpha banks’ profits were up one percent, highlighting the struggle of the smaller banks. “Given that competition is increasing and that the larger banks are better prepared to face competition, I think the smaller ones will be impacted the most,” says Ghobril.

To pull through in more difficult times, consolidation may have to be considered. “We have been hoping that consolidation would eventually happen and it did not,” says Raphael, who added that he expects this to change. “We need the right people with the right skills, we need to train them so it is becoming a big burden for smaller banks.” 

Jean Riachi, chairman of FFA Private Bank, believes that as competition  gets tougher, smaller banks will have to merge with larger ones and he expects this to take place “in the future.”

As Byblos’ Ghobril says: “When you have a growing pie, there is enough for everyone but when the pie stops growing, then definitely the better prepared players are ready to adjust to this environment.”

 
 
This article was published as part of a special report in Executive's June 2012 issue

 

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Since its first edition emerged on the newsstands in 1999, Executive Magazine has been dedicated to providing its readers with the most up-to-date local and regional business news. Executive is a monthly business magazine that offers readers in-depth analyses on the Lebanese world of commerce, covering all the major sectors – from banking, finance, and insurance to technology, tourism, hospitality, media, and retail.

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