Executive Magazine

A bridge to the future

by Thomas Schellen June 3, 2012

written by Thomas Schellen

In one of the more unexpected twists of the Egyptian migration to a fairer economy, collaboration of commercial and state interests in public-private partnerships (PPPs) could resurface before the end of this year to develop crucial and sorely lacking infrastructure.

“If everything goes as we are planning, we will be tendering out one to two projects by the end of this year and another two to three projects in the first and second quarters of next year,” says Atter Hannoura, the director of Egypt’s PPP Central Unit at the Ministry of Finance.

Even though it was maligned before the revolution as a lackey of the old regime, the unit has been preparing a portfolio of new projects while the country rethought its politics. Hannoura would not put a number to the cumulative value of projects in the PPP pipeline because most are at the stage where pre-feasibility studies have yet to commence.

However, two projects are already further along in preparations: a $500 million wastewater treatment plant that will process 1.2 million cubic meters per day (cbm/d), and its 37-kilometer access road with two Nile crossings, which will cost around $400 million.

The PPP pipeline

This is quite a step up from Egypt’s first PPP project, a 250 cbm/d wastewater plant of worth EGP 800 million ($132.5 million) capital expenditure and EGP 2.6 billion ($430.7 million) transaction value, which the unit had tendered successfully shortly before the 2011 uprising. In the longer outlook of a few years, the prospects for Egyptian infrastructure PPPs could be much larger still, Hannoura enthuses, “The infrastructure gap in Egypt is big and I believe that no less than 30 to 40 percent of infrastructure projects could be tendered out to PPPs with combined values of over $100 billion in the next five or six years.”

This outlook is supported by Abraham Akkawi, partner and head of infrastructure and PPP advisory services in the Middle East and North Africa at global consultancy Ernst & Young. “I am optimistic. PPPs in Egypt will come back in six months if there is no move to the extreme right or left [in the political power],” he tells Executive.

Economic and social infrastructure developments rank at the top of Egypt’s investment needs today and have since long before the Tahrir uprising for democracy. The World Bank’s International Finance Corporation and other multilateral development banks (MDBs) see PPPs as the golden road to match development needs and investor supply in emerging countries. When the Egyptian government under Hosni Mubarak started the PPP Central Unit in June 2006 and the regime-aligned parliament adopted a PPP law in 2009, the initiative was praised as pioneering example for the Middle East by MDBs and international providers of consulting services, which, coincidentally, provide advisories required for structuring a PPP project.

However, the first project timelines which the PPP Central Unit internationally advertised with deliveries for 2009 to 2012 proved overambitious, as the global financial crisis cast its dark shadows over Egypt and all investment-seeking emerging markets. With the spread of the ‘Arab Spring’ to Cairo at the end of January 2011, many thought that the uncertainty in the political system would block Egypt’s ability to attract private investors to the complex, long-term deals that are the essence of PPPs. Whether structured as a concession for reaping operational revenues from end users or a contract where the government is the off-taker and paying partner of fees to the operator of the PPP project, PPPs must be designed for duration and contractual reliability.

Surviving the spring

As Hannoura admits, the Arab Spring “was winter for us”, but he emphasizes in the same breath that the bidders in maturing or early-stage tenders last year said they were committing themselves in up to 95 percent of the projects and only asked the unit “to extend deadlines.”

The four projects worked on by the unit at the time comprised two early-phase projects and two, more mature, hospital PPP projects with capital expenditures of up to EGP 1.3 billion ($215 million) and transaction values of up to EGP 3.1 billion ($515.5 million) each.

Not extending the deadlines would have been bad business for the Egyptian state as bidders would either have pulled out of the process or added massive risk premiums. “In this case we will be receiving costly bids from which we will suffer for the next 20 or 25 years of the concession period. [Thus] when the bidders asked for a three-month extension, we gave them six months extension,” Hannoura says; positive responses from four bidding consortia allowed the hospital tenders to be closed this spring.

The unit, however, had to cope with three needs: it had to keep alive the few PPP projects that were in various stages of preparation or tendering, it had to demonstrate to banks and bidders that Egypt was still a “mega market” for PPPs, and it had to convince political stakeholders in Egypt that PPP was the answer to their problems.

Success in closing the hospital tenders was good proof of life and sent the message of the PPP process’ survival straight to the private sector, but the more serious hurdles had to be taken on the political and administrative sides.

According to Hannoura, the previous way of handling PPPs was to prepare everything centrally and just hand the final documents for signature to the involved line ministries. The method was flawed by not engaging the ministries — which had to manage the projects under their authority — to feel ownership or perhaps even understand the projects.

The second big hurdle was Egypt’s parliament. The PPP law had been passed against the votes of the then minority opposition and their response was to critique the law sharply. The minority of 2009 is now the parliamentary majority of 2012. “They had been defeated on this law, they were very much against the law and said publicly that this was one of the laws that had been created to serve the interests of businessmen,” Hannoura says.

Countering that allegation by pointing out that the PPP law had to be transparent and up to international standards would not be enough to sway the Islamic parties. However, the chief advocate of PPP in Egypt launched a charm offensive by telling the new political majority that he was in favor of amending the PPP law. This offer led to a discussion on the concept’s merits with the concerned parliamentarians. Discussions on amendments to the law are a work in progress but in Hannoura’s opinion it is already a success: “The party issued a statement that the PPP law would remain in force with some minor amendments,” he says. “In my opinion, this was a 180-degree change and it was a success.”

As he adds that public-private partnerships are in full concert with an Islamic economy, he radiates the hands-on confidence of someone who is convinced of what he does. But this does not mean his job is a sinecure. The PPP Central Unit is “very short on cash” he declares and could urgently use between $8 million to $9 million as it is working to get its projects ready for tendering. This money would help fund advanced capacity building at the Central PPP Unit and its satellite units at line ministries ($1.5 million to $2 million) and to run an awareness campaign ($1 million). But the biggest chunk of cash on Hannoura’s wish list is for $5 million to $6 million to pay “transaction advisors”. Presumably it will be difficult to ready projects for tendering on credit.

Having funds for public information would also befit the unit’s website, which is still frozen with its most recent news as of the end of last month dating from May 25 — but alas, 2010, and opening with “President Mohamed Hosni…” Yet weightier concerns arise from the question if large-ticket PPPs will really give Egypt all they are hoped to deliver.

Building for the future

While it is globally undisputed and well proven that infrastructure is a crucial accelerator of economic growth and that Egypt has huge needs for the roads, railroads, recycling plants, ports, hospitals, schools and universities which Hannoura has on his list of projects to tender as PPPs, “We had a lot of mega projects and we learned nothing from them,” says Hisham el-Agamy, an executive director at the Swiss management school, IMD, and an Egyptian expatriate. He acknowledges the need for PPPs but in his view, something else is needed much more.

“What is really important for me as the son of a farmer coming from a small village is that we need jobs, real jobs,” Agamy says. “We have to understand what it means to create [small and medium-sized enterprises] and how to create the right atmosphere and dynamic for SMEs to grow and work on added-value products, not just commodities and low-cost products. Real jobs can only be created through SMEs and we have to be serious about that.”

June 3, 2012 0 comments

Finance

A chat with ABL’s Torbey

by Maya Sioufi June 3, 2012

written by Maya Sioufi

The growth in profitability of Lebanon’s banks continues to be stunted by slower economic progress not only in Lebanon but also globally, as well as turmoil in neighboring Syria and increased international regulation. Executive sat down with Dr Joseph Torbey, the president of the Association of Banks in Lebanon (ABL) to discuss these issues in the banking sector.

With growth in the profitability of the Lebanese banking sector slowing, what are your expectations for profits in the sector going forward?

I expect profits to be at the same level as last year. There is drop in the growth of profits because the economy is moving slowly and the environment is politically challenging but the banking sector is still in good shape. I expect 8 percent growth in the deposit base this year and, so far, we are in line with this expectation.

With a slowing domestic economy, is competition among local banks increasing? Should smaller banks consolidate to survive?

For the top 11 banks in Lebanon, the central bank has a policy which does not allow them to merge among each other, as banks should not be “too big to fail” because if they fail, they can threaten the stability of the [economic] system. There is always the possibility for larger banks to acquire smaller and medium sized banks. I don’t expect any [merger or acquisition] operation this year but it is always a possibility.

When it comes to Syria, different banks are adopting different measures. As president of the ABL, what is your recommendation for the banking sector in terms of dealing with Syria?

We are following all international rules [and regulations] and we are not taking risks to evade these rules.

How about the Foreign Account Tax Compliance Act (FATCA)? What impact will this new law have on the banking sector?

The number of Lebanese with a double citizenship is not big and so not many customers will be impacted, but it will be a big burden on banks because they need systems and software. Many banks will avoid American customers because it is really a big cost to banks to operate a system dedicated to giving specific treatment to US citizens different from treatment of all the customers of the bank. We will be asking our American customers to cooperate with the US government and disclose what is being asked of them. Our decision as a sector is to cooperate with FATCA.

Several bankers have also voiced their concern on the exposure of the sector to the government debt. Should banks reduce their funding to the sovereign?

The sovereign risk is under control and there is an improvement in the ratio of public debt-to-gross domestic product. We don’t have a big worry over it. We are putting pressure on the government to implement reforms but reform is not an action taken in one day. It is a behavior and some reforms need the participation of the Parliament and a proper political environment. The government is under geo-strategic pressure now, more than the pressure to perform economic and financial reform, but in the end, the government will be obliged to implement reforms.

Regarding the wage increases imposed by the government, how significant has been the impact on the banking sector?

The banking sector has more than 21,000 employees so our costs are really high. I don’t have actual figures. The banking sector was successful in absorbing the shock of the increase but other economic sectors have difficulty in complying with the wage increase as it comes at a difficult time when the economy is slowing, the regional situation is bad and the international situation is not in good shape either.

With the cost of doing business increasing, where will the opportunities for growth of the banking sector come from going forward?

A big number of banks are operating worldwide and they are following their customers, financing them in Europe, Africa and Latin America. Our expansion is not based only on opening branches and subsidiaries abroad but also in following customers.

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

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

Economics & Policy

Tomorrow’s ‘good society’

by Ghassan Hasbani May 3, 2012

written by Ghassan Hasbani

The ‘good society’, in a connected world, is one that provides a framework for people to realize their potential in a meaningful and dignified manner. Steps toward this society, and economic growth, are being realized today by developments in information and communication technology (ICT), and by people who have grown up connected to the Internet.

Those who are getting their first job today, those born around 1990, are the spearhead of the future economy: the first generation to know the World Wide Web for the entire course of their lives. They are at the vanguard, leading future generations into an increasingly borderless society and an economy that is global and highly connected. For them to build the good society of tomorrow, they must be allowed to operate within a framework that provides connectivity and basic business infrastructure, one with regulations that fit the realities they face, and one that provides access to investments to fund the realization of their visions.

However, looking at the prospective opportunities, we must acknowledge the challenges and risks that are likely to dominate the global socio-economic and political scenes over the next 10 years. At the 2012 World Economic Forum in Davos, world leaders agreed on three risk dimensions, as published by the WEF’s Global Risks Report.

The first category of risks entails growing income disparities and widening social gaps among young and old between East and West and within the West. The combination of these factors could create a dystopia, a global society full of hardship and void of hope. The second risk relates to the readiness and speed with which governments and governance systems respond to change and the third risk stems from the rise of hyper-connectivity that creates the specter of cyber attacks.

Responsibility for addressing these risks falls to national governments and stakeholders in international governance systems on the one hand, and on the other to companies such as the leading telecommunications and ICT firms that provide the infrastructure for the connected global economy.

So how can these global risks be addressed and a good society created over the next decade? The answers lie somewhere within the risks themselves; hyper-connectivity and the cyber world, while creating the majority of risks, also provide many of the solutions if handled well.

Where we are threatened by income gaps and polarization of societies with chronically unemployed youth and state-dependent impoverished retirees, connectivity can help economies to reach sustainable prosperity. In three examples where ICT can be a major factor in building a good society, I want to highlight education, healthcare, and e-government.

Education: The use of technology and provision of a connected infrastructure for universal learning in the classroom of the future can simultaneously increase the quality of education and improve its affordability in all corners of the world. Students in rural areas or urban ghettos, which have been historically deprived of quality education, will have better chances to realize their economic potentials through connected education.

Healthcare: Connectivity in healthcare will reduce the burden of skyrocketing medical costs on older population groups and help in creating a healthier society with huge positive implications for increased and extended productivity of citizens. Realistic examples are remote diagnosis and also remote operations, where a surgeon in the United States can perform surgery in Lebanon using cyber-controlled robotics. Similarly, connectivity in healthcare could allow remote heart monitoring or tests for blood sugar levels. Faster, more efficient and more affordable care for the most wide-spread medical problems of our time will result not only in greater well-being of people and create healthier workforces, but also keep in check the healthcare cost for the state and families.

Government services: Connectivity in provision of governmental services, e-government, represents a third immense potential to use ICT for building a good society through reduction of public sector costs and through decentralization. In adapting all administrative government processes to electronic infrastructure, we can apply for a passport, legal documents and register property transactions without the need to go a government office. This decentralizes access to services while it maintains control centrally to reduce the possibility of human error or fraud and thereafter creates efficiency.

There is a need for proper regulation, however. Too much government intervention and protectionism would stifle progress; too little, and it will open the room for greed, and abuse of power. The balance will be struck by creating an efficient yet largely liberal economy in which governments create the necessary policies and regulatory safeguards for the emerging world, while allowing the private sector to compete in a fair and transparent environment. This approach will require policy makers to set clear rules and enact governance systems that are suited for managing a connected world.

As the breakneck speed of technological change and the rise of new trends in hyper-connectivity create new opportunities and risks, the governance systems need to be able to respond to changes faster than ever before. The liberal management of economic sectors will also need to create sufficient reasons and incentives to attract investments in sectors best suited for private initiative while maintaining sovereign authority in other areas.

These examples are based on solutions available today, but will require some time to achieve mass-market adoption. Implementing these effectively will require things such as everyone having access to a mobile phone and an internet connection, and for the fixed internet to work with high reliability. ICT readiness and quality are key to tomorrow’s good society.

May 3, 2012 0 comments