Executive Magazine

Forcasts: Lebanon’s new normal

by Nadim Kabbara June 3, 2012

written by Nadim Kabbara

Robust economic growth in Lebanon came to a halt last year as domestic political uncertainty and regional turmoil took their toll on key sectors such as trade, tourism and real estate.

This year is not shaping up to look much different as challenges translate into weaker bank profitability: slower capital inflows will moderate asset funding, softer trade and loan activity will impact fee generation, and regional unrest will drive loan loss provisions in subsidiaries that were meant to be the engine for growth.

This subdued level of profitability for Lebanese banks could represent a ‘new normal’ in the near term. Management teams are prudently placing their expansion plans on hold in order to preserve balance-sheet quality in the face of slower economic activity, heightened political uncertainty and an increase in regulatory capital.

This new normal contrasts with previous years during which the banking sector nearly doubled its profits, from $850 million in 2006 to $1.6 billion in 2010. This was possible by sidestepping the global financial crisis, attracting significant financial inflows and stockpiling record reserves at Banque du Liban (BDL), Lebanon’s central bank, all of which boosted Lebanon’s reputation back to the forefront of regional financial centers.

However, slower profit growth could influence the lending behavior of commercial banks, as well as their participation in government debt auctions and their redeployment of capital aimed at maximizing shareholder returns. It is unlikely, though, that there will be a material shift away from the existing business model, which has worked well for years.

The public sector will continue to finance its fiscal deficits with more debt, outside of enacting much needed reforms. BDL will continue to influence deposit rates to ensure that Lebanon attracts financial inflows, and will seek to reduce its intervention at treasury auctions. And banks will continue to participate at government auctions, at the very least maintaining their concentrated sovereign exposure.

Ultimately, the banking sector needs an avenue in which to continuously invest its excess liquidity; with a near-zero international benchmark rate in the interbank market, moderate private-sector demand and regional turmoil seen impacting asset quality in related subsidiaries, they don’t have many options left on the table.

With several headwinds on the horizon, the case between the banking sector, the Ministry of Finance and BDL is likely to be strengthened further as each major party shares a responsibility to maintain a healthy economy and a resilient banking sector. We have seen a concerted effort earlier this year on shorter-term local currency treasuries, which were auctioned at higher rates to ensure bank subscription, following the International Monetary Fund’s recommendations, but these higher rates were not enough to make up for the reduction in profit growth.

With tighter bank regulations, slower banking deposits, higher provisions caused by regional unrest, and cautious management focused on preserving asset quality, profitability for the banking sector could remain lackluster for now.

Although investors may have over-penalized the banks, judging by their very weak stock market performance on account of turmoil in Syria and Egypt, they will need to contend with a lower growth profile and less appetizing dividend payouts once visibility improves and their growth plans are back on track.

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

June 3, 2012 0 comments

Society

A Passion for Adventure

by Executive Staff June 3, 2012

written by Executive Staff

The story of Kuwait-based telecommunications operator Zain is a corporate lesson worthy of attention. The company grew by leaps and bounds for seven years, until in 2009 it became an Arab model in profit building, branding and positioning in the top tier of telecoms operators worldwide. “A Passion for Adventure” narrates this story from the perspective of Saad al-Barrak, who led the Zain team during that time.

A fluid read, the book will be most rewarding for anyone fascinated with telecommunications in this region and for students — in a wide sense of the word — of the Arab management experience.

Parts of the book that convey details on the acquisition of African network Celtel and on the creation of the Zain identity out of boringly named predecessor Mobile Telecommunications Company (MTC) were page turners. It is information of record that MTC paid $3.36 billion for Celtel and that South African rival network MTN, feeling duped at being bested by MTC, tried to have the agreement revoked in the courts. But the narration on how MTC reevaluated their too-low bid and turned the table in their favor by making an unsolicited higher offer in the last minute, is fresh and certainly worth reading.

Some parts of Barrak’s rendition of the Zain story — such as recollections of how this or that capable individual joined the team — might appeal more to the people who were part of the journey. Where the narration covers Iraq’s invasion of Kuwait and in a few other places in his book, the author cites sources for context that feel like alien additions sourced from a newspaper archive, rather than organic parts that belong.

More interesting to read was an earlier part of the tale in which Barrak recalls how he felt and responded when he was offered a position far beyond his experience and imagination by his first employer, International Turnkey Systems (ITS), a Kuwaiti ICT vendor and systems integrator for banks and other corporate clients. His recollection of how he was supported by the owners of ITS, whose company was bleeding money for needless expenses, offers worthwhile insights into Arab corporate culture.

From his testimony about the rise of Zain, it is evident that Saad al Barrak is a fortunate man. He started his career in leadership at a moment of opportunity and his decisions of expansion, branding and community building came at the right moments, benefiting from an age when all circumstances favored an operator combining a rich war chest with a daring growth ambition.

Barrak’s perception of Zain’s acheivements was poignantly illustrated when he told Executive, “It was Zain that got all these people inspired to move and become international companies and as Zain has stopped, everybody else has stopped, right? That shows the leadership and pioneering and inspirational role that Zain played in the region.”

“These people” refers to Arab telecommunications operators like Saudi Arabia’s STC and the United Arab Emirates’ Etisalat, which indeed embarked on international expansions after the Kuwaiti operator.

There is no payback chapter tearing into the details of Zain’s partial dismantlement, only a very positive interpretation of the process that saw the company’s top international assets sold to Indian operator Bharti in mid 2010. People looking for angry testimonials or hard forensic analysis of that part of the Zain story will not be satisfied.

The inner core of Barrak’s tale, however, is not the growth and wane of Zain but his view on management, epitomized in his sentence: “The best of plans and strategies are the ones extracted from the hearts and minds of your people, or inculcated in the hearts and minds of your people.”

In narrating these views, he states his case for “preaching a new business and economic ideology… which is part and parcel of our universal, open philosophy — an all-encompassing philosophy considering the universe as our homeland and humanity as our tribe.”

Readers may regard this new business ideology to represent an incremental enhancement of management concepts rather than a total reinvention of the art of management. But it is in any case a notable Arab contribution and perspective on leadership. There cannot be arguing that such contributions deserve to be heard. As Barrak said, “We need inspiring examples from our region and this is what we tried to do in Zain.”

June 3, 2012 0 comments

Real estate

History under siege

by Jeff Neumann May 6, 2012

written by Jeff Neumann

In the arena of Lebanese architectural heritage some combatants are better at the game than others. Today activists, archaeologists, politicians and real estate developers have entered the stadium to battle it out over what is probably Lebanon’s oldest sporting venue. At issue is the fate of a Roman-era hippodrome downtown in Wadi Abu Jamil. Unchecked construction and the rush to build mega-sized steel and glass towers have taken a toll on historical sites in the city for nearly 20 years. The hippodrome site is privately owned and most of it has already been developed and built over, but a remaining plot of land in the middle of the former track has become the focus of many interests, all angling for different outcomes.

Some two thousand years ago the hippodrome hosted horse and chariot races. Today, it sits neglected in the heart of Beirut’s rebuilt downtown of exclusive villas and upscale shopping areas. Overgrown with tall grass and littered with garbage from nearby construction sites, it is almost impossible to imagine the hippodrome’s former glory. Assuming that you can get past the heavy security to even approach the site, the hippodrome today is virtually indistinguishable from any other neglected ancient ruins. But in spite of its current state, it has great significance: Lebanon is home to two out of five Roman hippodromes in the Levant — one in Tyre, and its twin in Beirut. The hippodromes of Lebanon are unique because they are the only ones in the world adjacent to Roman baths.

The great irony of the situation is that some of the loudest critics are largely responsible for the current state of the hippodrome. In March, former culture ministers Tamam Salam and Tarek Mitri held a press conference denouncing plans to build over the open remainder of the site. But the sale and development of various plots at the site in the preceding years were approved by both of them. Solidere, the private company in charge of reconstructing Beirut Central District, justified this earlier development using in-house archaeology experts. Development started by moving Roman-era baths to a different location nearby [see map], and progressed to the point where former Prime Minister Saad Hariri built a large private residence and garden squarely on top of the hippodrome.

So tight is the security at the site that current Culture Minster Gaby Layoun and his top advisor, Michel de Chadarevian, were not allowed past the rusty metal walls that have long encircled the area. “I went there with the minister last month and they would not allow us to even have a look,” de Chadarevian says. “We asked Saad Hariri’s office to let us look around, but we were denied access. We are not even allowed in to remove the grass.” Executive was directed by Hariri’s office to Future Movement Members of Parliament Salam and Nabil de Freige for comment, but neither was available for comment.

Build over, preserve under?

After signing off on development of much of the site, in 2009, Salam, then culture minister, placed the hippodrome on a list of protected historical sites, but the damage was already done. An area surrounding the reconstructed Maghen Abraham Synagogue was all that was left and today represents the plot of contention.

According to the culture ministry, the owner of the undeveloped plot, Nazem Ali Ahmed, consulted Italian architects to find a solution that would generate revenue, while also meet the requirement of having the ruins available for public viewing. His solution, while still in the early stages of development, is to construct a roofed, open air museum. The ruins would be viewable underneath thick glass flooring from walkways and landings. A second level would be reserved for retail and commercial space. Its height will be limited by the current regulations laid out by Solidere, the ministry says. Solidere did not respond to repeated requests for comment.

De Chadarevian says that the current plan to preserve the hippodrome is based on similar efforts in Greece to enclose ruins under glass and install modern walkways and viewing areas. He explains to Executive that the ministry is “happy to have an investor interested in creating and building a museum for free. We will not pay anything. He will do everything and we will all benefit.” (There have been unconfirmed media reports of a $30 million Kuwaiti-funded hotel and museum on the plot.)

This plan set off a public outcry from preservationists and archaeologists. Josef Haddad, founding member and current secretary of the Association for the Protection of the Lebanese Heritage, disputes the notion that a glass enclosure would preserve the ruins. “The glass will trap the heat and humidity and accelerate the deterioration of the site,” he says, pointing to the fact that Rome’s ancient ruins are largely out in the open and exposed to the elements. Under the current plan, portions of the ruins downtown, excluding the fragile section that was once spectator seating, will be removed during construction and replaced when the building is complete.

“We are surprised that out of all ministries, the Ministry of Culture is working the hardest to destroy the hippodrome,” Haddad says. “It belongs to the Lebanese people, not private landowners.” Haddad says that he and the Association for the Protection of the Lebanese Heritage “are doing our best to halt the process,” but adds that a real solution can only come from Solidere, Nazem Ali Ahmed, and the culture ministry.

Jeanine Abdul Massih, professor of archaeology at the Lebanese University, does not believe that constructing what would essentially be a shopping mall over the ruins would do the site justice. “If you want to really preserve it you need to take the whole thing, not just a part of it,” she says. “If you only preserve part of it, what do you really have left of this beautiful stadium? You cannot preserve just a part of a stadium to give an idea of what it was like.” Abdul Massih suggests protecting and restoring the entire site, and adding it to a Beirut historical walking trail. “We need to connect the people with the history,” she says.

Little room left to fight

“We are preserving this place — if the ministry could destroy all that Solidere has done in order to regain all of our antiquities, we would be very happy,” de Chadarevian says, striking a somewhat populist tone. In preservationist circles that might normally be a welcome statement, but he does not hide his contempt for activists seeking to reach a new deal for the hippodrome. “All the campaigns on Facebook, this is rubbish,” he says. “I asked them, ‘do you know what this is? Have you ever gone there and had a look around?’ No, they have not. So why are they even talking about this?”

According to de Chadarevian, the root of the problem is the location of Hariri’s home, and his former cabinet members using their influence to steer development deals. “The only problem is that new construction will block the view from Saad Hariri’s residence,” he claims, and points blame squarely at the two previous culture ministers: “[Tarek Mitri and Tamam Salam] agreed to destroy what remained of the hippodrome years ago.” Several members of Hariri’s Future Movement have rejected this claim.

Professor Abdul Massih suggests a land swap between the Beirut municipality and Nazem Ali Ahmed could resolve the dispute and come as close to satisfying all parties as possible. But the prime location of the hippodrome means this is a highly unlikely outcome. The current construction plan for the hippodrome site has top-down blessing, from Prime Minister Najib Mikati to the Ministry of Culture, as well as Solidere and the Beirut Municipality. Now, the municipality’s final approval of the building plans is all that stands in the way of commercial development at the hippodrome site. [No one from the Beirut Municipality was available for comment].

For those seeking full preservation, the overall outlook is grim. It is also nothing new, says Abdul Massih. “So many other beautiful things here have been destroyed, so nothing would surprise me,” she says. “But I will fight to preserve it.”

May 6, 2012 0 comments

Real estate

For your information

by Executive Editors May 6, 2012

written by Executive Editors

Real estate market “flat”

The overall number of real estate transactions in Lebanon dropped 4.29 percent between January and February. But while the number of overall transactions was down — 5,156 in February from 5,387 in January — the nationwide average value per transaction rose 6.66 percent over the same time period. The total number of real estate transactions fell by 12.02 percent last year to 82,984, compared with 94,320 transactions in 2010. Over the same year, the value of real estate transactions fell to $8.84 billion, compared to $9.48 billion in 2010. According to a Bank Audi report, Lebanon’s property market has shown “a somewhat flat performance” during the first two months of the year. According to year-on-year data, the total number of transactions fell 0.82 percent in the first two months of 2012, while the total value of transactions dropped $40 million to $1.16 billion. Using figures provided by the Order of Engineers, the report also notes a 3.5 percent overall rise in the number of construction permits issued across Lebanon this year. The data shows a 9.1 percent drop in new permits in Beirut and a 19.2 percent rise in the Mount Lebanon region.

Rent-to-own law passes cabinet

The Council of Ministers, Lebanon’s cabinet, approved a new draft rental law in late April, which would allow low-income families to buy property by making yearly or monthly payments. The Cabinet also agreed to amend a controversial rental law that, if passed, would allow landlords to raise rents by 20 to 80 percent over a four-year period [see page 30]. The Association of the Owners of Rental Buildings issued a statement the following day praising the passage of draft law 767, but also asked the Administration and Justice Committee of Parliament to “enter a new stage that ends the accumulated injustice against old landowners on the issue of rents” by quickly passing the law on to the General Assembly, and to establish a government fund to assist low-income renters who intend to buy residential property.

MENA construction drops

The value of construction projects awarded in the first quarter of 2012 across the Middle East and North Africa (MENA) has fallen more than 30 percent from the first quarter in 2011, according to Citi Research and Analysis. Approximately $18.5 billion in projects have been awarded between January 1 and March 31 in the MENA region, the research unit of Citigroup Global Markets said in its MENA Construction Project Tracker, a monitor that tracks projects from announcement to completion. The comparison figure for the first quarter of 2011 was $27 billion. The cumulative value of projects awarded in March was $4.3 billion, the lowest figure for the year-to-date according to Citi Research. With 76 projects awarded in the year so far, the number of projects was similar to the same period in 2011. “Project awards are generally lumpy,” the report says, while forecasting spending to show “ongoing strength” because of MENA governments’ “desire to avoid unrest” in the wake of the Arab Spring. Kuwait accounted for 38 percent of project values in the first quarter, followed by Saudi Arabia and the United Arab Emirates with 16 percent, or $2.9 billion, each. However, the report noted that Kuwait’s leading share is derived mainly from one single $5.9 billion aviation-related project.

Needing more malls

An apparent dearth of retail space in new residential areas across Abu Dhabi is dragging down property prices, according to a report by UK-based property consultancy Cluttons. “A shortage of retail facilities at many of the new residential developments needs to be addressed, the lack of which is seen as a culprit to falling values,” the report said, before the opening of Cityscape Abu Dhabi last month. According to Cluttons, “Apartment values have been affected the most, with Al Reem and Marina Square apartments falling 7.4 percent and 7.3 percent, respectively, on third-quarter 2011 prices.” Abu Dhabi-based real estate consultancy CBRE also released data that shows residential apartment rents in the city are down 18 percent in the first quarter over the same period last year, and are down 3.5 percent since last quarter. Also at Cityscape, the National Bank of Abu Dhabi (NBAD) announced that its new wholly-owned subsidiary, NBAD Investment Management (DIFC) Limited, had been approved to start a real estate investment fund focused on “income-generating properties.” Zain Abdullah, senior executive officer of NBAD’s new unit said in a statement, “We believe that this fund will offer regional and international institutional investors a diversified avenue to access the UAE real estate market within a strong regulatory environment.”

UAE banks boost credit, offer 100% mortgages

As the United Arab Emirates’ property market continues to struggle, Emirates Islamic Bank announced in mid-April that it would offer 100 percent mortgages to UAE nationals. “For most people, owning a home is one of the biggest lifetime investments and provides an opportunity to build equity in real estate,” said general manager Faisal Aqil, speaking to The National in April. The new loans will be available for first time buyers or for buying off-plan, and can be approved within 24 hours. Variable rates will start at 4.99 percent. Home prices throughout the UAE have been trending downward in recent years, with Dubai as the exception, posting a meager 0.5 percent rise in home prices in 2011. In a statement to reporters, Abu Dhabi’s Aldar Properties announced a $1.09 billion credit facility from the 70 percent state-owned National Bank of Abu Dhabi. In addition to helping the developer manage its liquidity, the deal will be a three-year revolving facility to cover everyday operating costs.

Corruption ties and net loss for Egypt’s SODIC

Egypt’s third-largest property developer, Six of October Development and Investment (SODIC), posted a net loss of $32 million for 2011, after registering a profit of $22.4 million one year prior. In a statement, the company offered a stronger assessment of its operations, saying, “During a tough 2011 SODIC preserved the strength of its balance sheet, improved cash collection delinquency rates, increased receivables and maintained healthy levels of cash on hand.” Prior to the report, SODIC issued a statement about its former chairman Magdi Rasekh, who in April of last year was sentenced to five years in prison and fined $388 million for his role in an illegal land deal under the Mubarak regime, saying the ruling would not affect “the firm’s assets or the assets of the rest of its shareholders.” Also, last month, the Egyptian government announced a plan to sell nearly 8,000 plots of city land and certificates of deposit to expatriates living in the Gulf. By appealing to wealthy Egyptians living outside the country, the government hopes to raise some $4.5 billion with the new plan, which would also allow Egyptian joint stock companies to purchase land with a guaranteed 4 percent, one-year return on the investment. Additionally, any financing for the properties must be done through financial institutions based outside of Egypt.

Saudi prince seeks big tower loan

Kingdom Holding Co, Saudi Prince Alwaleed bin Talal’s investment company, is seeking a loan worth as much as $533 million by this summer to help pay for the construction of the Kingdom Tower in Jeddah, according to a Bloomberg report last month. According to plans, the Kingdom Tower will be more than 1,000 meters tall, with an estimated finishing cost of $1.2 billion. The building plans, drafted by Saudi Binladen Group — a 16.63 percent stakeholder in the project’s owner, Jeddah Economic Co — were approved by municipal authorities in February, and the project is expected to take over five years to complete after construction starts. When finished, the Kingdom Tower will become the world’s tallest building, surpassing Dubai’s Burj Khalifa, which stands at 829.84 meters.

May 6, 2012 0 comments

Banking & Finance

Financial quotes of the month

by Executive Editors May 6, 2012

written by Executive Editors

“How can we grant bills of health from these [government run] labs when rats are running everywhere?”

Mohammad Choucair, head of the Beirut Chambers of Commerce

“The country will manage well, even if we don’t sell a single barrel of oil for two or three years.”

“In Silicon Valley, there’s still too much money chasing too few ideas. If your idea is brilliant and your timing is right, you can become a multimillionaire overnight.”

Paul Saffo, Silicon Valley forecaster on Facebook’s $1 billion acquisition of popular photo application Instagram

“Spain is not going to be rescued; it’s not possible to rescue Spain, there’s no intention to, it’s not necessary and therefore it’s not going to be rescued.”

“God willing, we will take the loan before a president for Egypt is in place.”

Mumtaz al-Saeed, Egyptian Finance Minister, on the proposed $3.2 billion International Monetary Fund loan

“Tonight, Senate Republicans voted to block the Buffett Rule, choosing once again to protect tax breaks for the wealthiest few Americans at the expense of the middle class.”

Barack Obama, President of the United States

“I feel great — as if I were in my normal excellent health. And my energy level is 100 percent.”

Warren Buffett, billionaire investor legend when diagnosed with prostate cancer

“Investments in tourism are extremely good despite the fall in the number of tourists entering Lebanon through Syria.”

Fadi Abboud, Lebanon’s Minister of Tourism

“At times, elections can lead to uncertainties and, for investors, to a changing configuration of opportunities and risks. We are entering such a phase in Europe.”

Mohamed el-Erian, CEO of Pimco, the world’s largest bond investor, on the upcoming French, Greek and Irish elections in Europe

“If you wake up the morning after and still feel like the gazelle is running from the lion, or the lion is running for the gazelle, then everything is ok.”

Fadi Ghandour, after resigning as CEO of Aramex, the delivery and logistics company he founded and managed for 30 years

May 6, 2012 0 comments

Banking & Finance

The expert opinion MENA stock tips

by Executive Editors May 6, 2012

written by Executive Editors

Black is still the dominant color on the market screens this year as equities continue their upward drift. In the midst of first-quarter corporate earnings season, which so far have proved resilient, investors are increasingly concerned that a correction is on the horizon as macroeconomics headlines remain frail. For this month, Executive speaks to Elie Khoury, cheif executive of Berytus Capital and Nour Eldeen al-Hammoury, chief market strategist at Amana Capital for their investment recommendations.

Elie Khoury

Bullish or bearish?

Khoury is conservatively bullish on the markets in the United States and slightly bearish on Europe, as the US enjoys much better fundamentals than Europe. He believes equities will continue their upward trend because, “With central banks from the US to Europe to England pumping all this money, they are inflating everything which is why equity markets performed so well since beginning 2012 until today.” He adds that if the US unemployment and housing picture improves, he will be buying equities more aggressively.

Main concerns?

Khoury’s greatest concern is banks’ exposure to derivatives. “At $188 trillion, this exposure is 14 times the size of the United States’ [gross domestic product]” he warns. In the short term, Khoury is mainly concerned with the economic issues in Spain and Italy; he adds that issues in Greece might resurface in May during the upcoming elections.

Favorite asset classes?

Khoury favors equities. “The summer time will provide us with many opportunities. Markets will correct and investors will get the opportunity to invest,” he says. Khoury’s top sectors to invest in are technology and consumer products.

Specific names?

He likes Pfizer in the pharmaceutical sector, Kraft in the non-cyclical consumer goods sector and Microsoft, Intel and Qualcomm in the technology sector. Khoury also highlights Costco, Home Depot, McDonalds and Starbucks as stocks he would be buying on the basis of their relative weakness to benefit from lower entry points.

MENA equities?

While deterred by the unrest in the region he notes that it is “putting a floor on the price of crude which is good for Saudi Arabia so it is the only country in the region we could be positive on.”

Nour Eldeen al-Hammoury

Bullish or bearish?

Hammoury warns against buying aggressively due to the very slow economic growth and the fact that the United Kingdom is back in recession. “The crisis is not over yet and it needs a minimum of 10 years to solve,” says Hammoury. He does not expect the recent rally in equities to continue and he is awaiting a correction in the markets, as “the waves of the tsunami are still rolling.”

Main concerns?

Hammoury’s largest concern is the oil market, as a “higher oil prices are not good for the global economy.” He is also concerned with the sovereign debt crisis in Europe and the lack of transparency from politicians. “We saw an ‘Arab Spring’, we could see something of the sort in Europe as well,” warns Hammoury.

Favorite asset class?

He would stick to gold and recommends buying between $1610 and $1625 per ounce. Within equities, Hammoury would remain in defensive sectors (such as utilities, consumer goods and telecoms).

MENA equities?

He is not interested in investing in the region at this point, but he does highlight that the abundant cash reserves in MENA governments’ coffers provide support in these turbulent times and “the continuous high prices of oil that will carry on stimulating reserve cash for governments.”

Specific buy?

His top stock globally is Apple. He sees it going to $700 or to $800.

Any name in the MENA region?

He likes Dubai-based Tabreed, also known as the National Central Cooling Company.

May 6, 2012 0 comments

Banking & Finance

For your information

by Executive Editors May 6, 2012

written by Executive Editors

Banking secrecy exceptions

Banking secrecy was lifted on 18 accounts in Lebanon last year according to the annual report of the Special Investigation Commission (SIC), an independent entity established 10 years ago by the Banque du Liban (BDL), Lebanon’s central bank, to fight money laundering. Of the 18 cases, five were referred from abroad and 13 were from domestic sources. In 2011, the SIC received 335 suspected cases, up from 245 in 2010 and 202 in 2009. Of the suspected cases, 100 were from foreign sources and 235 from local sources and the SIC investigated 285 cases. Counterfeiting, accounting for 13 percent of all reported cases, was the most common crime, followed by terrorism funding at 8.5 percent of reported cases, fraud of private funds at 6 percent, narcotics trade at 4.5 percent and embezzlement of public funds at 3 percent. Sixty five percent of the cases were not categorized. “Reporting entities were assessed via extensive on-site examinations and follow-up corrective measures were imposed,” according to central bank Governor Riad Salameh.

Eurobond oversubscribed

A $700 million Lebanese Eurobond issued last month was 30 percent oversubscribed, resulting in a boost to the finance ministry’s coffers. The first tranche of the Eurobonds brought in $600 million, up from the original plan to raise $350 million. It carries a 5 percent yield and matures October 12, 2017. The second tranche brought in $350 million as originally planned. It carries a 6.4 percent yield and will mature on April 27, 2026. Non-Lebanese accounted for 30 percent of the subscribers with the remaining issuance taken up by the local banks, holders of the majority of Lebanon’s hefty debt. Byblos Bank and Bank of America-Merrill Lynch were the lead managers on the Eurobond. The proceeds of this issue are to refinance $293 million and 115 million euros ($151 million) in Eurobonds which matured in March and April 2012, respectively. Lebanon’s finance ministry revealed earlier this year that it will be issuing $5 billion worth of Eurobonds and treasury bills to cover the public debt in 2012.

Qatar-Swiss mining mega merger

Qatar’s sovereign wealth fund, Qatar Investment Authority (QIA), has invested a whopping £1.7 billion ($2.7 billion) into Switzerland-based mining giant Xstrata. With a five percent holding, QIA now becomes Xstrata’s third largest investor after Glencore, the largest publicly traded commodities supplier, with a 34 percent stake, and asset manager Blackrock, with a five percent stake. This aggressive move comes ahead of a planned £23 billion ($36 billion) mega merger between Xstrata and Glencore and increases the chances of the deal tilting in Glencore’s favor. Aside from Blackrock, most of the top 10 investors are critical of the deal and want better terms from Glencore. Under the proposed deal, Xstrata shareholders would receive 2.8 Glencore shares for every share they own, but many shareholders want at least 3.6. Ivan Glasenberg, chief executive officer of Glencore and Mick Davis, CEO of Xstrata, are going on a global road show in the coming weeks to convince investors to agree to the “merger of equals”.

Egypt close to IMF loan

Egypt’s finance ministry expects to secure a $3.2 billion loan from the International Monetary Fund (IMF) by May 15, before a new president is elected to run the country at the end of June. However, the deal, which has already been delayed from March, faces a significant obstacle. The Freedom and Justice Party, the Muslim Brotherhood’s political arm that holds almost half the seats in the new parliament, is heavily critical of the IMF loan, and has suggested several other options, such as collecting overdue taxes or re-evaluating gas export deals. The party says it is not outright opposed to the loan, but wants either better terms or the creation of a new government — not due until after the presidential elections — to oversee the distribution of the funds. According to Egypt’s finance minister Mumtaz al-Said, “Egypt needs $10 billion to $11 billion in the next 18 months to bring back economic stability.” Egypt has hemorrhaged more than $20 billion in currency reserves since the February 2011 revolution, which overthrew former president Hosni Mubarak. Whether Egypt succeeds in securing the loan remained unclear as Executive went to print.

Kafalat loans drop

The loan guarantee company Kafalat gave out $33 million loans to small and medium enterprises in the first three months of the year, down 21 percent from the same period last year. The number of loans dropped 20 percent to reach 240. The industry sector accounted for 36.7 percent of the total guarantees; the agriculture sector took 36.3 percent of total guarantees, while tourism accounted for the next 20 percent of the guarantees. Geographically, Mount Lebanon accounted for the majority of borrowing, taking up 44 percent of the loans, followed by North Lebanon at 16.3 percent, Bekaa at 15.4 percent and South Lebanon at 10 percent. Beirut accounted for just 7 percent of the loans.

$100 million for MENA infrastructure

The International Finance Corporation (IFC), part of the World Bank Group, and the Islamic Development Bank (IDB) plan to invest $100 million in infrastructure projects in the Middle East and North Africa region. Each institution will be investing $50 million into the Arab Infrastructure Investment Vehicle, part of the Arab Financing Facility for Infrastructure (AFFI), an initiative led by the World Bank, the Islamic Development Bank and IFC. The AFFI assists in financing and technical issues for cross-border infrastructure projects and encourages governments and the private sector to contribute to the development of these projects. The purpose of the investments is to spur economic growth in the region. MENA countries need to invest $70 billion annually in infrastructure to sustain their growth rates, according to the IFC, which invested approximately $2 billion in the region in 2011.

Financing Tunisia

Qatar has agreed to lend Tunisia $500 million at an interest rate of 2.5 percent, to be repaid in five years. The Gulf state was one of the main foreign backers of the revolution which overthrew longtime president Zine el-Abidine Ben Ali and resulted in the Ennahda party coming to power in Tunisia in October last year. Earlier this year, Turkey opened a $500 million credit line to Tunisia, repayable over 10 years. The United States recently announced that it aims to help finance the economic recovery in Tunisia by providing “several hundred million dollars” of loan guarantees before the end of June, according to the US Department of the Treasury. The Tunisian economy is still struggling following the political upheaval that shook the country last year. The International Monetary Fund forecasts 2.2 percent gross domestic product growth in 2012 and 3.5 percent in 2013, while expecting the unemployment rate to drop 2 percent this year to 17 percent.

Aabar dumps Daimler

Abu Dhabi’s Aabar Investments, a government-owned company engaged in investing across sectors and countries, is reviewing its portfolio of overseas investments and intends to completely exit its investment in Daimler, as well as in the Formula One cooperation and Tesla Motors, the luxury electric carmaker, according to Germany’s Manager Magazin. Aabar acquired a 9 percent stake in the luxury carmaker by injecting 1.95 billion euros ($2.56 billion) in March 2009, which it reduced to a 3 percent holding in February after the surge in the price of the shares. The share price at the time of the investment stood at 20.27 euros ($27); as of 21st of April it was trading at 41 euros ($54), up 100 percent from the price that Aabar paid. Abu Dhabi National Energy (TAQA), an oil explorer and power supplier majority owned by the government, sold its 7 percent stake in Tesla Motors in April, making a profit of $113 million. In April, Aabar nearly doubled its stake in Dubai builder Arabtec to 10.45 percent.

May 6, 2012 0 comments

Economics & Policy

For your information

by Executive Editors May 6, 2012

written by Executive Editors

Popped for pills

The Pharmaceutical Research and Manufacturers of America (PhRMA), which represents most of the major pharmaceutical corporations in America, has petitioned the United States Trade Representative to put Lebanon on the 2012 Priority Watch List. They have complained that there is a lack of adequate intellectual property protection in the Lebanese pharmaceutical market. While it was noted that the new industrial property law passed in 2000 represented a major step forward from the 1924 law, PhRMA claim it does not provide sufficient pipeline or transitional patent protection and gives an incomplete definition of confidential information. Another point of contention the US body raised was the ministry of public health’s failure to implement sound regulation practices to distinguish between innovative and generic medicines. The Ministry of Public Health was also mentioned for having failed to successfully crack down on parallel imports, which result in a ‘grey’ market of counterfeit medicinal products in the country. Lebanon was one of 17 countries from the region recommended for the black list, including Israel and Algeria.

Figures for thought

The most recent figures from the Ministry of Finance indicate that the total fiscal deficit for 2011 of LL3.5 billion ($23 million) was LL833 million ($555,333) less than its 2010 equivalent. These figures are the result of a LL1.37 trillion ($924 million) increase in revenues, or 11 percent, which offset the 3 percent increase in expenditures of LL553 billion ($368.7 million). It is important to note that the fiscal deficit saw a healthy decrease in November 2011 when the budget surplus from the telecoms ministry was paid, which was LL2.3 trillion ($1.53 billion) compared to LL957 billion ($638 million) in 2010. Despite the growth in total revenues, the tax contribution to the public purse actually decreased mainly due to a slowdown in the taxes on international trade, with decreases in excises and customs by LL590 billion ($393.3 billion) and LL33 billion ($220 million), respectively. Lebanon’s loss-making electricity company significantly increased its burden on the public purse, requiring an extra 46 percent in transfers reaching LL2.6 billion ($173 million) in 2011. Gross public debt continued to creep up over the same period, rising by just less than 2 percent to LL80,869 billion ($53.6 billion) in 2011.

Lebanon failing its women

Lebanon ranked 6th in a survey on women’s socio-economic advancement from a selection of 8 Middle Eastern countries. The MasterCard Worldwide Index on Women’s Advancement used indicators such as tertiary education, employment, business ownership and leadership positions to assess the standing of women in society in comparison to their male compatriots. Only Egypt and Saudi Arabia scored lower than Lebanon, while Bahrain, the United Arab Emirates, Qatar, Kuwait and Oman were deemed to have a better record in women’s advancement. Interestingly, Lebanon had the lowest proportion of female business and government leaders. Conversely, Lebanon had the highest rate of regular employment opportunities for women.

Prizing open the bandwidth

Lebanon’s Internet capacity will be increased from the current 23 Gigabits per second (Gbs) to 33Gbs within two months and to 43 Gbs within four months, according to plans unveiled by the Ministry of Telecommunications (MoT). The government intends to increase capacity by making increased use of the India-Middle East-Western Europe (IMEWE) submarine cable, which runs from Mumbai to Marseille. Lebanon became a member of IMEWE consortium in December 2010 and started limited use of the fibreoptic cable in June 2011. What’s more, Lebanon and Cyprus agreed in February on the principles of cooperation for the Europa submarine cable, which would complement the IMEWE, but Lebanon’s cabinet is yet to endorse financing of the project. With regards to the tariff structure, MoT proposals for unlimited nighttime usage between 12:00 am and 7:00 am have been approved.

The MENA’s stunted growth

Growth has stalled and the outlook is uncertain in the Middle East and North Africa (MENA) region, according to the International Monetary Fund’s (IMF) 2012 World Economic Outlook. Among oil exporters, high oil prices contributed to growth of 4 percent, while among oil importers growth was only 2 percent in 2011, even after the exclusion of data from Syria. Looking forward the baseline forecast is for growth of 4.25 percent in 2012 and 3.75 percent in 2013. Among the oil importing nations, strong oil prices, anemic tourism associated with social unrest, and lower trade and remittance flows reflecting ongoing problems in Europe are the major challenges that lay ahead. The IMF identifies the reorientation of fiscal policies toward poverty reduction and the promotion of productive investment as a key medium-term fiscal policy objective.

Less tourists spending more money

The number of tourists coming to Lebanon in the first quarter of 2012 decreased nearly 8 percent on the same period in 2011. However, despite the fact the number of visitors to Lebanon fell, the amount of money they spent actually increased. According to Global Blue, the VAT refund operator for international shoppers, total tourist spending increased by 36 percent in the first three months of 2012 compared to the same period in 2011. The rise in spending by visitors was in a large part due to the fact that there had been a severe contraction in tourism in 2011, especially in the first half of the year. In early 2012 visitors from the Gulf flashed the most cash, with guests from Saudi Arabia accounting for 22 percent of total tourist spending in January.

Fueling the future

Starting in 2015, Lebanon looks set to turn to Liquid Natural Gas (LNG) to meet its growing energy demand. In early April, The Ministry of Energy and Water, launched a call for expressions of interest to build, own and operate a floating storage and regasification unit (FSRU), which is recommended to be at least 125,000 cubic meters (m³) in size with a regasification capacity of up to 3.5 million tons per annum (mtpa), according to the tender document. The deadline for companies’ proposals, which can be used for a new FSRU, existing FSRU or a vessel conversion, is June 4. Lebanon already has two combined cycle gas turbines (CCGT), but according to the MoEW the country also plans to increase the number of gas-fired power plants, which will gradually lift its LNG requirement from 1.2 mtpa in 2015 to 1.7mtpa in 2016, and up to 3.5mtpa by 2022. The FSRU will be located in the north of the country near the majority of its current and planned CCGT capacity and it is slated to operate on a tolling structure, whereby MoEW would pay a fixed monthly capacity fee to the FSRU owner, and then a monthly throughput fee for operating costs incurred for actual usage.

May 6, 2012 0 comments

Editorial

Parliament’s reckoning

by Yasser Akkaoui May 6, 2012

written by Yasser Akkaoui

Given the opaque functioning of the Lebanese state, it is good that sessions of the Parliament are open for the public to see. Unfortunately, they are akin to vultures tearing apart a carcass. In some 62 speeches and 28 hours of debate that took place over the three-day session last month, there were screams and accusations, name-calling and finger pointing, with hardly an allusion to progressive public policy.

In utopia, parliamentarians represent their constituents’ demands before the convention of government, which then attempts to fulfill these demands within resource constraints. In Lebanon, the Parliament is utterly detached from the lives of the Lebanese, its members asserting the interests of their sectarian overlords and the public purse fought over for plunder.

For years now Lebanon’s enterprising and entrepreneurial private sector has been surrogate mother to a people abandoned by the state, spurring new business and generating new wealth and employment. But even the private sector can only slow Lebanon’s current slide. Among many other issues, Beirut has become expensive well beyond the means of most of its residents.

Paying “old rent” has allowed hundreds of thousands of Lebanese to scrape by and afford their other costs of living, but it has effectively been a subsidy the private sector pays in place of government policy to address public housing needs. This warped rental market has led to dangerously dilapidated buildings, the decay of heritage structures and stunted economic development. A draft rental law that has resurfaced after lying dormant for years would phase out old rents, but its vagaries on public housing mean it will almost certainly fail to help people afford homes.

In utopia, parliamentarians would engage in earnest debate and develop legislation that would leave a lasting legacy. In Lebanon, pursuing policy development seems far from parliamentary minds, but at least they let us know.

Their reckoning may be nigh, however, with increasing public protests in the country showing a gathering rage that may soon force accountability upon those who were elected to serve the public good.

May 6, 2012 0 comments

Real Estate

Turning tragedy into transformation

by Paul Cochrane May 3, 2012

written by Paul Cochrane

The notorious ‘old rent’ law that has pitted landlords against tenants for more than half a century may, after two decades of legislative delays, be seeing its last days. If the draft of the new rent law passes in Parliament this month, landlords and real estate developers will be lighting up the sky with fireworks. The prospect of reclaiming properties in the coming years — meaning land to be bought and sold — entails billions of dollars in potential earnings amid a renewed construction frenzy in land-scarce Beirut. But for tenants, a less certain future awaits, hinging on a planned government fund to financially assist economically disadvantaged tenants pay gradually higher and higher rents, and the actualization of public housing projects to re-house the dispossessed.

The lingering law

The ‘old rent’ law is one of the more bizarre laws still in existence. Enacted after World War II to prevent socio-economic deprivation and protect tenants from greedy landlords, the law resulted in the saying, “the tenant is an owner”, as it gave many rights to the renter. Under the law, all rental contracts would be extended — against the will of the landlord — until a new one was enacted, meaning rents were fixed at the originally agreed upon rate despite inflation and changes in market dynamics.

If that was not bad enough for the landlord, getting the tenant out is nearly impossible without significant financial compensation, which ranges from 25 to 50 percent of the value of the property (not the land) and decided upon by a judge based on the financial situation of the tenant in relation to the landlord.

Furthermore, there are only two ways to ask a tenant to leave if no contractual mistakes have been made: if the purpose is to destroy the building, or if the landlord (or his family) wants to live in the apartment for which they have to prove a need to do so. “You can’t lay a trap to kick out the tenant. The law provides a very powerful status and protection for tenants. The only way is by default [on contractual obligations] or to pay them to move out,” said Nader Obeid, a partner at law firm Alem and Associates.

Rent law number 160 materialized after the Civil War in 1992. Crucially it liberalized the rent market allowing for new contracts, with the landlord able to raise rent after three years, yet it made minimal difference to landlords with tenants paying old rents. These rents were adjusted in line with the depreciation of the Lebanese lira in the early 1990s and a government-mandated minimum wage increase, although not to market rates. For instance, according to research by The Monthly, a residential rent agreement from 1970 estimated at LL1,000 per year would come out to LL390,000 ($260) at today’s prices.

Since 1996, Rent Act 160 has been extended 12 times, with the last extension, law number 171 dated August 29, 2011, having expired at the end of March this year. If the new draft law does not pass, a 13th extension will have to be enacted.

Problematic numbers

While the old rent issue could have been a marginal one if the number of tenants was relatively low, according to the advocacy group named the Committee for the Rights of Tenants (CRT), some 170,000 of Beirut’s 210,000 tenants pay old rent rates. But just as no one is exactly sure how many people there are in Lebanon (the last national census was in 1932), the number of properties on old rents — and the number of people living in them — is not exact either.

“The differences in the estimates of how many people are on old rents is a weapon in the fight between the pro and against camps for restructuring the law,” said Obeid.

According to Ministry of Finance statistics published by Executive in 2010, there are 139,719 properties rented before 1992 throughout Lebanon, with 58,341 in Beirut. In February, online publication NOW Lebanon challenged these statistics, stating that the Finance Ministry did not have a breakdown between old and new rents, while the Central Administration of Statistics (CAS) also said they had never carried out any research, and information released in 2004 only distinguished between residential renters and owners. [However, CAS’s statistics in general are out-of-date and unreliable, notably claiming there are only 3.5 million people in Lebanon when other estimates put the figure at well over 4 million, if not closer to 5 million.

According to Joseph Zoghaib, head of the Association of Landlords in Lebanon, based on taxation records and copies of rent laws submitted by municipalities to the Finance Ministry, there are 81,000 tenants on old contracts and an estimated 40,000 to 50,000 on new contracts. As to the number of landlords affected, Zoghaib estimates it at anywhere between 15,000 to 20,000. Whatever the statistics are as to the number of tenants on old rent, clearly tens of thousands of Lebanese will be affected if the new law passes; at the same time thousands of landlords have been financially out of pocket due to receiving such low rents. [The Committee for the Rights of Tenants could not be reached for comment.]

No money for maintenance

Zoghaib likens the old rent law to a cancer as it has deprived landlords of return on initial investment in constructing buildings and meant there have been insufficient funds for proper maintenance of properties.

“Rent control is a cancer on Lebanon’s economy, the standard of living, and should be aggressively treated,” he said. “Most landlords have lost hope that the issue will ever be resolved.”

Zoghaib has plenty of accounts about the trials and tribulations of being a landlord with tenants on old rent, with some forced to become doormen in the buildings they own to get access to the National Social Security Fund. According to Zoghaib; one landlord is so fed up he is considering a class action suit against the Lebanese government in the United States to pressure Beirut to overturn the law or face having the state’s assets frozen in the US.

Anger runs deep among the association’s members over what Zoghaib calls an “unjust law”, while in TV talk-shows addressing the issue over the past year heated words have been spoken between those ‘pro-landlord’ and those ‘pro-tenant’.

“Landlords have been suffering for 70 years. Before, when we talked of our plight, we were laughed at, but the second generation are freedom fighters,” said Zoghaib. “The silent majority think they are not affected by the old rent issue, but they are. For every $1 the renter saves, the Lebanese public is paying thousands of times more when it comes to higher rent and higher real estate prices, and it has caused huge revenue losses to municipalities and the government.”

Indeed, it would make for an excellent research paper to estimate the financial losses incurred by old rents on the Lebanese economy and how this factored into current real estate prices. The existence of old and new rent contracts has certainly wreaked havoc on trying to effectively analyze the real estate market, while it has contributed to Lebanon having an average price-to-rent ratio (how long monthly rent would have to be paid to cover the selling price of the property) of 22 years, compared to 11 to 16 years in peer countries. Lebanon also has much lower gross rental yields than elsewhere, at 4.65 percent, whereas it is more than 6 percent in Egypt, Morocco and the United Arab Emirates, according to the global residential property investor portal Global Property Guide in 2011.

“There is a gap between rent and real estate prices. It is between 3.4 percent to 4.5 percent gross rental yield versus the price, while it should be 6 percent, 8 percent or even 10 percent,” said Ayman Sanyoura, general manager of ProServices, a property services and management company in Beirut.

The shortage of properties available for rent on post-1992 contracts has also driven up prices, while the existence of the old and new rent contracts has often caused confusion between tenants and landlords as to their rights. “People are still unconsciously living under the old law,” said Obeid.

Furthermore, the lack of funds for maintenance has led to the loss of heritage buildings throughout the country, with buildings in such a dilapidated state that it is cheaper to tear them down — once the tenants have been compensated to move — than renovate.

“We are fighting for the law to be changed to be more fair as far as owners are concerned. It is not possible that a 200 meter square apartment is rented for $200 a year,” said Mona Halak, an architect and member of the Association for Protecting Natural Sites and Old Buildings in Lebanon (APSAD). “For heritage buildings, the owner should have the right to charge more. When we ask an owner of a heritage building ‘why are you tearing it down?’, he says ‘I get $300 a year, so why keep it?’”

The draft law

What galvanized the government into action to address the old rent issue was the collapse of a building in the Fassouh district of Beirut in January that left 27 dead and 12 injured. While there were tenants paying new rents, the majority of the occupants had been on old rent contracts, which opponents of the old law cite as a reason for the building’s tragic collapse due to lack of funds for maintenance. “It is sad to say it took 27 dead people to shock the government to draft this new law,” said Zoghaib.

The new law was drafted by the Parliament’s Administration and Justice Committee, chaired by West Bekaa Member of Parliament Robert Ghanem. A copy of the draft law in the form submitted to the committee was obtained by Executive, despite Ghanem’s office attempting to withhold it from the media. In its current form, the draft law seeks to find a solution by having tenants on old rent pay gradually higher rents over a six year period. Through government-appointed experts that report to a judicial committee, properties will be evaluated and an amount agreed upon by both the landlord and tenant. Then each year for the first four years the tenant will pay a 15 percent increase in rent, then 20 percent per year for the fifth and sixth years. After this time, the property can be rented at free market prices, but the tenant has the right, if they notify the landlord three months before the period ends, to stay on for a further three years, although at market rates agreed upon between both parties.

If a landlord wants to reclaim the property for family usage during the six-year extension period, then he has to pay compensation to the tenant equivalent to four years rent after four years of rental increases. To tear down a building, the same principle will be applied but on the value of the total six years of increased rent. In either of the above situations, if a property is considered ‘luxurious’, compensation will be reduced by half.

This proposed solution means that the compensation landlords pay out to tenants would be significantly less than the 25 to 50 percent of the value of a property under the old law, which is clearly to the advantage of landlords keen to reclaim their properties. The big question if this law passes is whether tenants will be able to pay the higher rent.

According to Zoghaib, out of the 81,000 tenants he claims pay old rent, 13,000 are economically disadvantaged (again the Committee for the Rights of Tenants were not available for comment). To alleviate the pressure, a government fund is to be established for tenants with a household income that does not exceed three times the minimum wage of LL675,000 ($450) to cover the difference in rent for nine years. By that time, the plan would be for the Public Corporation of Housing to have built apartment blocks that evicted tenants could live in under a ‘lease-to-own’ agreement (which cabinet approved last month) with no age stipulation, meaning elderly tenants could be part of the scheme. However, while the draft law is still being hammered out at committee sessions, there have been no announcements as to how the housing scheme will be financed, what land will be available for construction or where, and how willing private banks are to be a part of the scheme. What is more, Lebanon has been without an official budget since 2005.

While government sources suggest the bill will pass in May, the socio-economic repercussions could force politicians to oppose it. “Nobody wants to lose the next elections [in 2013] for passing this law,” said Sanyoura. Indeed, it is such a contentious issue that Ghanem said at a committee meeting in early April that he had received an anonymous letter threatening to kill him, his wife and his children if the bill passes.

Billions to be made?

If the bill remains relatively intact after numerous rounds of amendments and reformulations, and then passes into law, it will have a profound impact on the real estate market.

“Definitely there are both positive and negative repercussions from the eventual introduction of a large [amount] of stock to the market,” said Karim Makarem, director of Ramco, a real estate advisory firm. “If landlords are looking to sell or to rent, a substantial amount comes online, not to mention that the former tenants who vacate will need to be housed. So there are many new possibilities as well for developers.” One possible knock-on effect would be more supply than demand, which would lower real estate prices. For that reason, Sanyoura suggested it is “a good time to consider implementing this law as we’re not in a boom market.”

With buildings being vacated and renovated, and others being torn down for new projects, Zoghaib opines that $50 billion could be pumped into the economy in the coming years. A back of the envelope calculation of 30,000 buildings being re-developed at an average of $500,000, would generate $15 billion and potentially billions more in associated services.

A further boom could occur if another stuck-in-a-time warp law is overturned: the pre-1992 law concerning commercial rents, which is similar to the residential law in fixing rents, but to remove a tenant requires the landlord to compensate for the “loss of footfall” to the premises. “We’ll have a party when the [new rent] law passes and the next day move onto proposing a commercial rents bill,” said Zoghaib.

May 3, 2012 1 comment