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The tribal curse

by Farea al-Muslimi
written by Farea al-Muslimi

Perhaps most of Yemen’s problems, if properly addressed, could be resolved within a short or medium timeframe — that is, except for the issue of tribes. Nothing in the country is more complex than its tribes. Even if not immediately apparent on the surface, tribal connections influence almost every aspect of Yemeni society and interaction, and lay the framework sustaining many of the country’s other problems.

The tribal system has existed in Yemen for thousands of years, but never quite in as problematic a form as it does now. Historically, the sheikhs that led the tribes represented the interests of their people before the national government, a setup that made practical sense given Yemen’s rugged geography and remote communities. Today, however, the focus of most sheikhs has turned to using their positions to concentrate wealth and power for themselves and their families. These tribes have, in many ways, replaced the role of the state, and become mini-states inside the state. A tribal sheikh acts as businessman, contractor, judge, lawyer, governor and every other type of bureaucratic functionary for his people. Some even have their own prisons for those who would disobey their tribal rule of law.

Economically, the impact has been terrible. Yemeni economists have estimated that 80 percent of the country’s income goes to a 2 percent segment of the population, with tribal sheikhs being among the most powerful of these elites. Having more than one salary from different government agencies, Yemenis even joke that some sheikhs get salaries as martyrs even if they are living. 

Though still a problem in Southern Yemen, the power of sheikhs is weaker there, given that it had been curbed during the communist years before the 1990 reunification. The north, however, is a mess, where, since Yemen’s revolution in 1962, the power of the tribes has been continually shifting. When former President Ibrahim al-Hamdi tried to enforce the rule of law and weaken the sheikhs’ power in 1977, he was assassinated. Recently deposed President Ali Abdullah Saleh took a very different approach during his three-decade rule, empowering the sheikhs and legitimizing his rule with tribal support, while fueling wars between those tribes that challenged him.

The so-called “war on terror” is only complicating the issue, with the West allying with tribes to fight Al Qaeda in Yemen. Western cash and support is now a new source of wealth and corruption for tribal leaders, and has been counterproductive in terms of counter-terrorism. If the existence of Al Qaeda is bringing you money, would you really try to kill them off?

For the last few decades, Yemeni tribal leaders have also had monthly salaries from regional powers; from Saudi Arabia to Iran, Qatar and even from Libya’s Muammar Qaddafi, cash poured in. It was as if tribal leaders were saying to Saleh: “You get paid by the Americans, we get paid by others.” Some were even getting paid by two opposing countries at the same time and working to achieve both agendas, such as Libya’s and Saudi Arabia’s.

In April, the Yemeni Parliament tried to pass the annual budget, including $60 million for the tribal sheikhs. This incited rage around the country, especially among the youth who still occupy many of the city squares around Yemen. This amount was actually only a small portion of what sheikhs used to get from the former regime every month as a guarantee for their loyalty to Saleh. For the first time, Yemenis spoke publicly against this practice, and prime minister himself went into the street and promised not to pay the sheikhs. In response, the sheikhs held a national conference, condemning the prime minister and accusing him of trying to “explode a crisis in the country.”

At the same time, international humanitarian organizations and Yemeni government were begging the world to fund the $262 million shortfall in funding for humanitarian crisis response operations in Yemen; more than 1 million children suffer from acute malnutrition and more than 10 million Yemenis do not have enough to eat, according to the director of Save The Children in Yemen, Larry Farrell. Yet while humanitarian aid organizations call on the world to save Yemen from a catastrophe, and the World Bank warns of Yemen running out of oil to fund itself, both of them seem to overlook the millions of dollars still being funneled to the tribal sheikhs — money that could go a long way in help Yemen feed its own children and solve its own problems. 

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Finance

Doors close across the border

by Paul Cochrane
written by Paul Cochrane

Lebanese banks with operations in Syria are caught between the proverbial rock and a hard place. The uprising that kicked off last spring has forced banks into survival mode as the Syrian economy has weakened and profits have been slashed. Some banks have considered exiting the country, expansion plans have been put on hold, and all players have set aside millions of dollars in provisions.

While Lebanese bankers are used to operating in crisis mode, the international sanctions against Syria — by the United States, the European Union and the Arab League — have presented further operational challenges and the specter of reputational risk. Although Lebanese banks are not legally obligated to comply with the sanctions — and operations within Syria are essentially unaffected — the sector has pledged to do so. The US Treasury in particular has breathed heavily down the necks of Lebanese bankers to comply with the sanctions and for Lebanon to not be a conduit for Syrian cash.

Such internal and external pressure has impacted the bottom lines of the seven Lebanese banks with Syrian affiliates, both within the affiliate itself and at group headquarters in Beirut. For while Lebanese banks only entered Syria from 2004 onwards, the market was under-banked and ripe for growth, with the banks attracting $6.79 billion in aggregate assets by the end of 2010.

“Before the uprising the banking sector was on a fast track and expanding throughout Syria. Profits were good and it was a virgin market that needed everything,” said Samih Saadeh, managing director of Banque Bemo, which has a stake in Banque BEMO Saudi Fransi (BBSF) in Syria.

At the end of 2011, aggregate assets had dropped by 17.2 percent to $5.8 billion. As Saad Azhari, chairman and general manager of BLOM Bank put it, “Syria was the (sector's) second most important market after Lebanon.”
The pull of gravity
Indicative of the impact of the uprising on the banking sector is BLOM's affiliate, the Bank of Syria and Overseas, where loans to Syrians dropped 60 percent over the past year, from $650 million to $250 million. As Jihad Yazigi, editor of the financial publication, The Syria Report, remarked: “Nobody is investing, nobody is spending, and companies are closing. Whole areas are out of business entirely. I think gross domestic product will decline 10 to 12 percent this year.”

To cover bad loans and banks’ exposure, provisions are being hastily put aside (see table). “All Lebanese banks are taking profits as collective provisions,” said Alain Wanna, head of Group Financial Markets Division at Byblos Bank. “In Syria the decision was for all profits made in Syria to act as collective provisions, as we don’t know how long (the instability) will last.”

Financial Safety Valve
Last year, Bank Byblos Syria's profits slumped 26.8 percent to $3 million. Wanna conceded that internally, the bank's management discussed exiting Syria on several occasions, but in the end decided to reduce its exposure to the country.

Most affected by the Syrian crisis has been Bank Audi Syria (BAS), with profits down 83.20 percent to $2.1 million, attributed to problems with their portfolio (BAS' management turned down Executive’s interview requests). Less affected have been the newcomers, BLF's Al Sharq, First National Bank's Syria Gulf Bank, and Fransabank Syria, which saw profits, assets and customer deposits actually increase. BLF's general manager, Walid Raphael, put Al Sharq's 72.2 percent growth in assets, from $161 million in 2010 to $284 million in 2012, down to its recent start and a focus on commercial rather than retail banking, adding a new branch that opened in May. However, that has been the exception rather than the norm.

BBSF, the largest private bank in Syria with 40 branches, has put on hold plans to open three new branches in Damascus and one in the conflict-ridden city of Homs. “We are not looking for more business, but our strategy is to stay there and no branches have closed except in the hot areas,” said Saadeh. Profits at BBSF dropped 1.2 percent last year, to $11.8 million, but in the first quarter of 2012, with BEMO holding 22 percent of BBSF and profits down, the Beirut arm “got zero,” said Saadeh, which negatively impacted BEMO's net profits, dropping 53.57 percent on the first quarter of 2011, to just $1.45 million.

Causing further headaches for the sector was a requirement by the Central Bank of Syria (CBS) initiated prior to the uprising, for banks to increase capital from $100 million to $200 million. “There was a list of banks and a schedule for each to reach (in phases),” said Byblos’ Wanna. “Ours was in August last year. We tried to negotiate with the CBS to say the balance sheet was down but they insisted on the increase.” Currently Byblos Syria’s capitalization is $120 million for a balance sheet of $700 million. BBSF has also reached the first phase of the higher capital requirements.
Looking ahead
The banking sector has proved remarkably resilient in the face of the conflict. The limited run on the banks last spring by depositors was a “panic move,” said Saadeh, while deposits and withdrawals have “balanced out” since then. Bank share prices on the Damascus Stock Exchange (DSE) have also not plummeted as some might have expected, although they have been somewhat artificially salvaged by only 3 days of trading  a week, and stock only being allowed to decline by just 1 percent a day and increase by 5 percent. Nonetheless, the DSE has slumped by 40 percent since the uprising broke out, according to figures released by the International Monetary Fund.

Cross Border Performance

Summing it up
“We’ve not seen any banks go under in Syria yet, and that is a positive thing. People haven't withdrawn all their money and I see it as a stabilizing factor,” said Ayham Kamel, a Syria expert at risk consultancy firm, Eurasia Group, who formerly worked in the Syrian financial sector.

Yet with the economy expected to contract further this year, more sanctions slapped on Syria by the EU in May — including on the CBS governor Adib Mayaleh — and operational costs higher due to the crisis amid a slump in business, the outlook for Lebanese banks in Syria could not be described as peachy.

“There is a risk for Lebanese banks at some point, as I'd expect them to hit the red zone and become unprofitable,” said Kamel. “To me, it is not a question of if but when, given the current trajectory in Syria. They are going to find it very hard to manage the books and have profitability towards the end of the year or in 2013.”

 

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

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Short on solutions in Bahrain

by Thomas Schellen
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?

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Finance

Reputations at risk

by Paul Cochrane
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

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Rebuilding the future

by Jihad Yazigi
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. 

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Finance

The long arm of Uncle Sam

by Paul Cochrane
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

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Economics & Policy

Searching for a sense of perspective

by Thomas Schellen
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
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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Economics & Policy

Prosperity needs peace

by Sarah Lynch
written by Sarah Lynch

On May 23 and 24, approximately 23 million Egyptian voters — accounting for about 46 percent of the electorate — flocked to polling stations across the country to choose their nation’s next president, or as it turned out, the two contenders in a June 16/17 runoff between Mohamed Morsi and Ahmed Shafiq. The monumental election, seen as the first free and fair process ever for most Egyptians to determine their country’s leader, was hoped to bring final closure on thirty years of authoritarian rule under Hosni Mubarak.

Mubarak, once touted as modern Egypt’s pharaoh and blamed for the country’s corruption-induced economic hardships, was deposed as president in February 2011 and sentenced to incarceration for the rest of his life on June 2. He was held responsible for the death of protesters in the Tahrir uprising that led to his resignation.

The biggest challenge that the country faces now is building a positive path to the future; to a large degree this is an economic challenge. Jobs, not speeches, are needed by the millions of Egyptian voters who came from poverty-stricken towns along dirt-lined alleyways to cast their ballots.

While the country lies in wait for freedom from corrupt politics and for equitable business, a new trust and buy-in by the people with the ability to move the Egyptian economy forward is an issue of great importance, along with the creation of accountable institutions and empowering policies. In canvassing views of business leaders and economists on the outlook for Egypt’s economy after the elections, the consensus was that the economic outlook after elections is bright and the economic players are willing and eager — as long as there is political stability.

“It’s been a wait-and-see game since the early days of the revolution,” said Cesare Rouchdy, regional director of marketing for the Four Seasons hotels in Egypt. “The main culprits are safety, stability and security. If these three elements exist, there will be a resurgence of economy and what goes with it. But as long as we don’t have these three S’s it will be difficult.”

Signs of this economic resurgence have so far kept well out of sight, at least in the important tourism sector, while the country was gearing up to its second round of elections. At the end of May, two Four Seasons hotels in Cairo were operating at 20 to 30 percent occupancy, while two other hotels in Alexandria and Sharm El Sheikh were running at 35 to 45 percent, substantially below normal rates for the spring season. “Right now, we should be running at close to 70 percent,” said Rouchdy, adding his voice to a chorus of cautious optimism about the nation’s economic future. “We’re optimistic but not singing from the rooftops yet. There are many ‘if’s’ that come into play.”

Tentative markets

The picture in investments and financial markets is quite the similar mixture of hope and concern over the unknowns of a politically turbulent period. “There is minimal participation in the market from local, retail and foreign investors,” said Amr Reda of Pharos Securities Brokerage, one of the top five brokerage firms on the Egyptian Stock Exchange (EGX) and a unit in Cairo-based investment bank Pharos Holding for Financial Investments.

Financial markets had borne the immediate impact of the political upheavals since January 26, 2011 as the EGX shuttered its doors for almost eight weeks and recorded intense volatility in the following months. The Egyptian bourse then hit a six-week low after official results of the first round of elections were announced at the end of May, reflecting ongoing concern about the possibility of further unrest as the polarized runoff will pit the Muslim Brotherhood’s Morsi against Mubarak’s last prime minister, Shafiq.

According to Reda and other analysts, the reticence of investors in the period between the election rounds is rooted in their concerns about the unpredictability of who will lead the country and what their policies will be. This uncertainty is stoked further by the fact that the powers of the president and parliament — now dominated by the Muslim Brotherhood’s Freedom and Justice Party and the conservative Salafi Al Nour Party — remain undefined because the constitution is still unwritten. Moreover, the future role of the military council that has governed since Mubarak’s ousting also remains unclear.

Reflecting the weak institutional maturity and intense emotionality of the current situation, there is even a perception in the market that regardless of who wins, a backlash is expected from the other candidate’s support base, said Hany Genena, head of research at Pharos Securities.

The hope for faster resurgence of business is certainly nurtured by financial intermediaries who had to contend with a year of investor fears — in the first five months of 2012, average daily turnover on EGX was $80.5 million, according to financial information provider Zawya, almost $5 million lower than average daily trading in full-year 2011 and less than half of the average traded value of $161 million in 2010.  Genena said he had noticed pent-up demand from domestic investors for the past six months and has also seen such demand also from overseas investors based in the Gulf Cooperation Council countries, South Africa, Russia, the United States and Europe. “[The economy] will not just recover. It will fly,” Genena enthused, but added that this is dependent on no major changes in government or economic policy that could negatively affect business.

While the International Monetary Fund answered an interview request on their view of Egypt’s future with a “press line” statement on “constructive discussions”, slightly more reassuring sentiments could be obtained from other international organizations. “The market is expectant but is inclined to be positive on Egypt. However, the business environment has to be streamlined and the investment climate improved,” said George T. Abed, senior counselor and director for the Middle East and North Africa at the Institute of International Finance (IIF) in Washington.

When will recovery begin?

In the assessment of Egypt’s private sector players, the tides will turn to the better before the year is out but not in the first three months of the new presidency. “We don’t see investments coming in the third quarter. Quarter four is a maybe,” said Abu-Bakr Makhlouf, head of investor relations at the Egyptian Resorts Company, a developer of resort cities that is listed on the EGX.

His was one more voice demanding investment opportunities in the fundamentally sound Egyptian market has piled up, with the outcome of presidential elections the deciding factor that will determine the strength and speed of new investments flows.

The wait-for-the-election-results fever extends into the top tier of Egypt’s services companies. “I think everyone is looking at what will happen after the election, and if there is some political stability the economy has a chance to start improving again,” said Yves Gauthier, the chief executive of mobile phone operator Mobinil, adding that he sees the operator as improving this year after a boycott campaign in 2011 and “on a good path to deliver acceptable results.”

Taking diverse voices of international institutions, local private sector and financial players, and professional advisors into account, the common denominator for Egypt under its next president is a buildup of expectations held in check until Cairo’s current political sandstorms settle. Development of the private sector depends on the agenda and economic vision of the winner in the presidential race, said Magda Kandil, executive director of the Egyptian Center for Economic Studies.

While details of economic plans are unclear, candidate Mohammed Morsi backed by the Brotherhood espouses free-market policies and believes the private sector should generate jobs and growth. “[The Brotherhood's] umbrella of support is for job creation and employment opportunities and helping the poor by empowering them with education and jobs,” Kandil said. His rival Shafiq also supports growth of the private sector: “Shafiq’s approach is probably going to be about order and stability and [based on the philosophy that] if the macro economy works, well this will ultimately trickle down to the bottom,” she said.

Whoever wins, Egypt’s new president will face a slew of challenges. A big one will be delivery of vision, several experts emphasized. According to the IIF’s Abed:  “The new leadership needs to articulate a clear vision for Egypt’s economic future and institute market reforms to encourage private sector-led investment, both domestic and foreign.”

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Finance

A chat with Riad Salameh

by Maya Sioufi
written by Maya Sioufi

This year has been shaping up to be even more bumpy than the last for Lebanon, riddled with domestic unrest, an ongoing conflict in neighboring Syria and global economic uncertainties. The banking sector, accustomed to dealing with turbulent events, has to grapple yet again with grueling headwinds. For more clarity on the events shaping the sector, Executive sat down for a chat with Riad Salameh, the governor of Banque du Liban (BDL), Lebanon’s central bank.
 

The growth rate of profits in the banking sector dropped significantly in 2011 and continues to drop this year, as reported in the first quarter. What is your interpretation on the recent performance of the sector?

We don’t consider the growth of profits in the banking sector as an indicator for the healthy situation of the sector. We want the banks to make profits and distribute dividends but we don’t want banks to operate like start-up companies. The race to make more profits was not to the advantage of the banking sector worldwide. What’s happening today in the financial community is a result of an obsession with always delivering a growth in profits at the expense of the quality of the banks’ balance sheets.

To maintain the sector’s healthy balance sheets, we are keeping a prudent approach by forbidding banks to go into risky investments and demanding banks take appropriate provisions given the situation they are facing, especially due to the turmoil in the Arab world and also due to what is happening around the Mediterranean [with the European sovereign debt crisis]. We are confident that the banks are healthy in Lebanon because we have run stress tests and they have put aside general provisions for the worst-case scenarios.

What would further deterioration in Syria mean for the banking sector? Would you recommend they exit from the country?

We require the banks  to have the proper capital allocated and the proper provisions taken ahead of time. That’s one of the reasons why you don’t have the same growth in profits [as witnessed in previous years]. The decision to work in Syria or not is a commercial decision that the banks themselves have to take. Banks operating in Syria and banks here [in Lebanon] operating with Syrians have decreased their operations by 40 percent in the past 15 months. Their total credit exposure stood at $4.8 billion 15 months ago and is down to $2.7 billion today.
 
Do you think Lebanese banks with Syrian affiliates are exposing themselves to reputational risk by having individuals sanctioned by the United States and the European Union as shareholders? [Rami Makhlouf has a stake in Bank Byblos Syria, and Ahmad Nabil Mohammad Rafic Al Kuzbari in Banque Libano-Française's Bank Al Sharq]

It is a legal issue and it is the will of the owners of these shares whether they want to sell them or not. Being a shareholder in a bank, especially since this participation occurred before these personalities were listed on the Office of Foreign Asset Control (OFAC) or other sanctions list, is something you cannot do anything about because you have to rely on existing laws that govern the economic activity and they differ from one country to another. They should not be elected as board members or, if they are board members, they should be asked to leave the board. I believe none of the [Lebanese] banks operating in Syria has on its board anyone listed on the OFAC list or any other sanctions list.

How rigorously have moneychangers been regulated since the Lebanese Canadian Bank (LCB) case? For instance, were the changers that were allegedly connected to drug dealer Ayman Joumaa and Lebanese Canadian Bank thoroughly investigated, such as Hassan Ayash Exchange and Elissa Holding?

On these special issues, we have done our investigation and we have sent files to the General Prosecutor so that they can be investigated according to Lebanese laws. We understand that the General Prosecutor has asked for evidence from the US and so far we haven’t received an answer on these requests because the operations that are considered to be criminal did not take place in Lebanon. They allegedly took place with car dealers in the US and with the sale of cars in Africa. What we have here in Lebanon is funds coming in and out without transactions linked to them. So having this evidence is very important to be able to legally continue the investigation. We issued a circular to not allow exchange houses to conduct third-party operations as banks do. We have strengthened measures by making banks responsible in case such operations went through them. We also requested capital increases and imposed training on exchange houses.

Do you think there is a need for more rigorous enforcement of the Consumer Protection Law as well as greater transparency from the banking sector over loans and other banking fees?

The central bank has created a department to follow up on these issues in terms of proposing circulars and we believe further laws will be welcome. I believe one of the most important issues for us in the coming years is to concentrate on transparency that banks should have with customers, which would touch on real fees, real costs of opening an account and concentrate on the improvement of the quality of people serving customers.

How much will it cost the banks to comply with the upcoming Foreign Account Tax Compliance Act (FATCA)regulation? What will the impact be on banking secrecy in Lebanon? What if other countries follow?

FATCA is not a major issue for the banks in Lebanon. The central bank will ask the banks to respect the FATCA law to preserve their correspondent bank relationships and not to expose these banks to questions from the Internal Revenue Service (IRS) or penalties from the IRS. The central bank will make sure that the banking secrecy law will not be hurt and will take a position to cover implementation of FATCA without breaching our banking secrecy by involving the Special Investigation Committee (SIC) in this issue. If there are questions or reports to be sent concerning people under FATCA law, it can be done through the SIC. It will create some costs for the banks as they will have to produce software and some compliance initiatives but given the small number of accounts of that sort, it won’t be very costly for the banks.

You have recently said that the banking sector has reduced its exposure to the government debt and that the central bank is filling the gap. The banks’ deposits with the central bank are increasing though, and so in the end the exposure has not changed?

We are not concerned with the banking sector’s exposure to government debt because their liquidity is ample and when the situation is normal by Lebanese standards, from a political and security standpoint, we are seeing surpluses on the auctions of treasury bills and on Eurobond offerings with issues oversubscribed by two to three times. Confidence is there, and our objective is to keep interest rates stable in periods of instability. The exposure to the central bank is different from the exposure [of commercial banks] to the government because when banks place their deposits with the central bank, if the deposits are in Lebanese pounds, the central bank is the institution that issues the national currency so there is no risk; if it is in foreign currency, it is being deposited with the central bank outside of Lebanon or with correspondent banks so the liquidity is present and not being used.

You are requesting from banks to raise capital above the requirement of Basel III. Why so? Isn’t this an additional burden on the banks that already face an economically challenging situation?

The requirement of Basel III is 7 percent tier-one capital (measure of a bank’s capital adequacy) and the sector is already compliant. We went over that level and we think it is important for Lebanon to be at higher level so that banks can remain well-accepted worldwide. We set a target of 12 percent by 2015. Between 2015 and 2019, we might demand higher tier one capital. It is not the end of the exercise. We want banks to strengthen their capital and have quality capital. We are also pushing so that the credit will not be affected. We don’t want to see them improve the ratio by decreasing their credit.

How much additional capital will banks have to raise?

It depends on the expansion of their balance sheets, but at present the figure would stand at around $2.5 billion, which they can secure from their profits. We recommend to banks not to distribute more than 25 percent of their profits as dividends. They have other measures they can use such issuing new shares or issuing preferred shares, which would go into the two percent tier-two capital (additional capital of lower financial strength than tier-one). 

With additional costs from wage increases to compliance with regulations and a challenging economic environment, smaller banks are being impacted more severely than larger ones. Do you expect consolidation in the sector? Would you favor it?

We don’t have any merger in view. Our position remains the same. It is up to banks to decide if they want to merge. We are encouraging mergers between big banks and medium or small banks or among medium banks or among small banks, but we reject any attempt of a merger among the first 11 banks.

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

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