Finance

A bumpy ride

by Executive Staff
written by Executive Staff

The insurance industry in Lebanon is priding itself on a good year in 2011, with measurable partial results documented faster than ever before. Issues that inhibit the sector’s growth, however, do not get resolved; they merely get reiterated.

The total gross written premiums of insurance companies in Lebanon reached 14 percent year-on-year growth in the first three quarters of 2011, to $904.4 million. According to a ranking source with knowledge of the insurance industry, this nine-month rate of growth stated in the third Quarterly Report of the Lebanese insurance association is more credible than an earlier figure of 17 percent which the second Quarterly Report gave for the first six months in 2011. However, the 14 percent claim will need to be corroborated by further analysis, the source said. “We have not reached 17 percent full-year growth in more than five years in the local market and 2011 is not supposed to be a bumper year for insurance in Lebanon.”

Even if reconfirmed by future analysis of sector data, being “gross written” means that the industry’s nine-month turnover figure does not account for the portions of premiums which primary insurance providers cede to the reinsurance companies as backup cover for the risks they accept; this safeguarding practice is the international standard in the insurance industry but while generating commission income for the primary insurers, the ceding of premiums constricts the potential for direct profits.

Written results technically also do not account for how much of these premiums insurers have yet to earn through the lifespan of the policies, which is commonly 12 months but often not aligned with a calendar year. On top of that, the sector’s reported growth rate of 14 percent is nominal and does not reflect the impact of inflation and some specific cost drivers on the insurers’ earnings. The cost increases of medical treatment that already dented the bottom lines of Lebanese insurers in 2010 have been reflected in the 2011 policy price hikes, which industry leaders said represent an important chunk of the industry’s overall premiums growth.   

According to the Quarterly Report, medical insurance is the top generator of premiums in Lebanon at 29.8 percent of the total, ahead of motor insurance with 27.4 percent and life insurance with 25.1 percent. When reviewing the nine-month growth curve of medical insurance, sector companies have reported 14 percent growth in medical premiums, the same as the rate of total premiums growth.

However, the increase in policy numbers was minimal. Medical insurance contracts issued for expatriate laborers — which are low-value contracts with almost 42 percent in acquisition and administration cost for the insurer — have shot up by more than 26 percent. Yet these contracts consistently constitute low single digit percentages of total medical premiums and the growth of policy numbers in the higher-valued coverage of customers with individual and group policies was only 2 percent. 

Life insurance and life insurance-linked savings contracts in Lebanon have a long-term record of vulnerability to consumer responses to the national economic situation and pressures on their personal incomes. Although life insurance investments by the Lebanese, at 0.7 percent of total gross domestic product (GDP) in 2010 according to research publication Sigma by Swiss Re, are far ahead of the shares of GDP one sees in most Arab countries, they are still farther below the world average 4 percent allocation to life insurance in global GDP.

Also in non-life insurance, the Lebanese market is situated generally ahead of the Arab averages for insurance share in GDP. It performs respectably when compared with economies in regions such as Latin America and Eastern Europe but the country remains underinsured when measured against global and developed market averages.

Market data in Lebanon for the past 10 years or so do not support the assumption that domestic take up of insurance or savings contracts with insurance will shoot into the skies — lest there were a sustainable economic miracle of the type that the country dreamt of in the first half of the 1990s when initiating reconstruction and development after the end of the Lebanese civil conflict and in, unfortunately vain, hopes of regional peace dividends.

Putting any epochal regional economic wonders aside, and noting that the more realistic regional prospects at the end of 2011 point with alarming firmness in the opposite direction for the Lebanese economy, there are other factors that in theory can benefit the growth of insurance in Lebanon. Pitifully, these are issues of legislation and political decision making. After 1968, when a 1955 sector law was replaced with new legislation, revisions of the country’s insurance laws have been batted backwards and forwards but with no real consequence.

This habit, to all stakeholders’ professed regrets, has held true over the past five years. The pernicious state of deadlock between the nation’s waring political gangs, who are hardly concerned with trifle insurance matters, means that 2012 is no more likely to celebrate a new national insurance law than 2011 was.

On a positive note to the current constellation, leading representatives of the political and supervisory camp as well as the sector players in insurance companies and brokerages attest to a much improved relationship between the two sides after high-level stakeholder meetings at the Ministry of Economy and Trade in November 2011.

The issues waiting for solutions with the ministry are not a new insurance law but no-less-important practical matters, including the creation of incentives for employers and individuals that would stimulate growth in life insurance and the resulting social safety network improvements, fairer conditions for marine insurers who are railroaded by the international competition because of cumbersome Lebanese tax requirements and better enforcement of the mandatory motor insurance and enforcement of traffic safety.

In the current positive climate between industry and ministry, progress on these matters would be genial for the growth of insurance in Lebanon. This however, will depend in the first instance on how long the current cabinet will be around.

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Society

Deck the halls with bling and baubles

by Executive Staff
written by Executive Staff

Against a background of flatlining national economic growth, Lebanon’s retailers have suffered a double blow this year, with many big-ticket shoppers from Europe and the Middle East avoiding Beirut for their annual shopping sprees, put off by the regional unrest.

But these challenges have not checked the rapid expansion of the luxury retail sector, a vital element of Lebanon’s identity as a shopping destination. Instead, developing nuances in consumer behavior suggest increasing sophistication among buyers, subtly altering the strategies of luxury retailers.

“We can still rely on investor confidence in the Lebanese economy,” says Ziad Annan of AS Chronora, the local agent for Rolex, Girard Perragaux, Jean Richard and Tudor, among others. “Malls are still being built, and the national retail network is still expanding.”

Izzat Traboulsi, managing director at the Fashion Trading Company (FTC), which manages Hugo Boss Middle East, suggests that the national psyche plays a part in this buoyancy: “Lebanese in general are very competitive. They like to bring all the brands of the world to Lebanon, so even if people are not working in retail they want to bring this or that brand.”

Such confidence is necessary in a country where the commercial sector must always be prepared to rise and fall with the vagaries of domestic and regional politics, even in times of global plenty. At the Financial Times Business of Luxury Summit this year, Euromonitor International reported a slight improvement in global luxury retail sales, currently valued at around $210 billion, following the 2009 global recession. A key element of this growth is the sales performance of emerging markets, including the Middle East, with total luxury spending in these markets growing 43 percent in the last five years to a value of $30 billion, compared to just 6 percent growth in developed markets.

But Lebanon’s participation in this success is conditional on domestic and regional political stability, both in short supply in 2011. Few of the high-end fashion players interviewed by Executive would not admit to a very difficult year, especially in the first two quarters.

Barkev Atamian, the business manager of the Atamian group, which represents about 70 percent of the combined watches market in Lebanon at the fashion, luxury and exclusive levels, says that growth has been flat this year, affected by a change in the spending habits of visitors who are now “basically coming for business, for short periods”.

“If you don’t have a stable country you don’t have tourism. If you don’t have tourism, you cannot survive,” he says. Holding brands at a variety of market levels, Atamian can also clearly see the texture of the dips in profit. “It’s the medium-high which is suffering, because the people who [have been] spending maybe $1,000 are [now] spending $500 or $400. The [person] spending $10,000 on a watch is not that affected by the situation. It’s the $800 to $1,500 segment that is affected the most.”

Like the majority of retailers, Deemah Fakhoury of Fawaz Holdings (Shoebox, La Cave du Joel Robuchon and C&F, among others) notes that “it is only since October that the market has shown some potential growth,” giving some retailers hope for their numbers. But Karim Tabet of the Tabet Group, whose holdings include Frette, Zadig & Voltaire, Barbara Bui and Toywatch Middle East, expresses surprise that so many retailers are relying on December, even in a market defined by its seasonality. “Christmas… should be the cherry on the cake and not the most important month.”

It’s not all doom and gloom, though; Tabet’s fashion holdings performed beyond expectations this year, as have some other boutiques. Ziad Matta, chief executive officer of Boutique 1, which operates both a multi-brand store and mono-brand Missoni and Blumarine boutiques, reported “stellar performance” in some areas.

I dreamt I dwelt in marble halls

This uneven performance in 2011 follows an orgy of expansion in the retail sector in the last two years, with names like Chanel and Louis Vuitton only the most high profile of a “territorial expansion for all brands,” that is set to continue in 2012 and beyond, notes Fawaz Holdings’ Fakhoury.

Oliver Petcu, managing director of CPP Luxury Industry Management Consultants, has monitored the trend of big name international brand franchises in downtown Beirut. “Lebanon has been a battle ground, and I would even say [there’s been] a war of vanities between the three players [Aïshti, Luxury Clothing Company and Azadea] to secure franchising distribution,” he says. “This comes with a very high price and a business plan [that] makes it almost impossible for a store to break even earlier than four or five years from opening”.

Many retailers are thrilled with the developments, however, including W. Salamoon & Sons, who exclusively represent several high-end watch brands. Carole Salamoon describes the Beirut Souks enthusiastically as a “hub of fine Swiss horology.”

Rapid expansion and development outside the city center also continues apace, attracting its own fans and critics. Malls are popular with many local shoppers who want to avoid Beirut’s paralyzing traffic, and for brands like Hugo Boss, due to open at the new Beirut City Mall in Hazmieh at the end of 2012. But Alain Masri of J.M. Weston, a luxury shoe manufacturer that has maintained its store on Allenby Street in downtown since 2003, observes simply that “you have three malls coming in the next five years, and all of them are full of new brands. I don’t know if everyone will find a customer.”

This trend of expansion despite economic challenges is apparent across the Middle East. The annual research report by real estate organization CB Richard Ellis reported in November that “nearly three quarters of international retailers (71 percent) are planning to open more than five stores in the Europe, Middle East and Africa (EMEA) region by the end of 2012, with 20 percent of retailers looking to open 40 stores or more in 2012, compared to 18 percent in 2011.”

Beirut, however, is more politically vulnerable than the other Middle Eastern shopping destinations that make up these figures — Saudi Arabia, the United Arab Emirates, Kuwait and Qatar.

Seduced by Solidere?

Solidere and the Beirut Souks are the cheerleaders for much of this flamboyant expansion. “If any high-end shop wants to open in  Lebanon, there’s no other gateway than Foch, Allenby and other subsidiary streets,” says FTC’s Traboulsi. “It’s like Avenue Montaigne in Paris or Sloane Street in London or Fifth Avenue in New York; it is really the prime location for high-end brands.”

But like the rest of the sector, development is uneven and a poor 2011 has left some retailers uncomfortable, with most seeing the Souks as having a long way to go. “The downtown area is an incomplete project,” says AS Chronora’s Annan.

“We’ve grown accustomed to the desert-like landscape of Martyrs’ Square and the seaside sector, but the emptiness causes discomfort in the customer’s mind, hence the lack of footfall. The overall Souks area has seen more footfall this year, but to the consternation of most tenants spending is still disappointingly low, while the overall expense of operating in the Beirut Central District alarmingly continues to rise.”

CPP’s Petcu, however, sees the enthusiasm of retailers to sign up for mono-brand boutiques as a mistake rather than something that will work itself out, calling it “completely unjustified from a feasible business perspective,” and predicting that political volatility and competition from European shopping centers will soon force retailers to rethink their strategies. “In the following two to three years I would expect most of these brands to shift from mono-brand to multi-brand, unless retailers will continue to be able to afford losing money.”

Many local retailers are placing their faith in the slew of recently opened and imminent cafés, bars, clubs, cinemas and restaurants in downtown. “When the cinemas and food courts open is when they will see a big growth,” says FTC’s Traboulsi.

In 2011, the uneven entertainment offerings limited the Souks, in particular, as a popular destination for middle-income shoppers — the sort of buzzing central destination that its developers are hoping to encourage with ever more programs of exhibitions, concerts and other events.

But as Solidere’s quarterly reports showed, more than 30 outlets opened or were due to open by September 2011, as confident investors continue to choose downtown as the location of the moment.

I like it my way

Shoppers in Lebanon have always been slaves to luxury, but subtle adjustments in consumer habits and retailers’ communication strategies are emerging as the market matures. Sophie Salameh, the founder of Sophie’s Choice multi-brand boutique and café, stocks her rails with the “chouchoux of the international press”, up-and-coming young designers previously little known in Lebanon and the Arab world. Many of her pieces are special orders and limited editions, reflecting a global trend toward customization and individualization. This, says Salameh, is “the top of luxury… to be able to do things according to your choice and your taste.” Wealthy and stylish young Arabs educated abroad, in particular, are beginning to buy “what they like themselves, not what [the brands] are imposing on them.”

Amal Berri, manager of high-end fashion boutique Reem Acra, also notes that “alteration is half the work in this shop”. As a Lebanese designer who has had some success as a novelty brand positioned against such well-known names as Elie Saab and Zuhair Murad, Reem Acra represents another trend suggested by CPP’s Petcu — that of the success of Lebanese designers. “They have a unique ability to understand the mentality, taste and preferences of Arab consumers, in ways that Western brands cannot,” he said. “Lebanese designers boast a unique versatility, which translates not only in their creative design but also in the way they process raw materials.”

Communication with customers, Petcu notes, is a key advantage in the market, and Lebanese designers are in an advantageous position for “events, testimonials with local celebrities,” and so on. But most boutiques are currently revising their approaches to marketing, as high-end brands work out how to maintain their exclusivity online while taking advantage of the opportunities offered by new forms of media. “The way we communicate to our customers has radically changed, as we all need to keep up with the times,” says AS Chronora’s Annan.

Lache my vitrine

Can Lebanon maintain its relatively recent luxury retail boom? As a vital part of the country’s identity and economy, the commercial sector is the ‘vitrine’, or store window, through which Lebanon — with its long history of glamour and commercial success — wishes to show itself to best advantage, and which gives it a bright confidence even in troubled times.

Traboulsi, for one, believes that there is a depth to the sector’s service and the minds behind it that makes Lebanon stand out from the crowd in the region. “Not in terms of shopping offerings, but in terms of concepts and culture and vision, definitely in retail, Lebanon will always be the window of the Middle East.”

And yet, sales in 2012 are no more certain than those in 2011, says Annan. “I expect a status quo as long as the situation in Syria doesn’t improve, and the government fails to take aggressive action in rectifying the various pending issues we’re all familiar with.” But although “the situation might certainly lead to greater challenges, and fewer opportunities,” it comes down to the fact that “Lebanese customers are a resilient bunch, and the retail industry is solid.”

Retailers in Lebanon speak from long experience, and have learned not to watch the political scene too closely. Berri echoes many when she says that in Lebanon “if you want to wait for the right time you will never open” — so open they will.

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Finance

Where to invest in 2012

by Executive Staff
written by Executive Staff

After the market trauma of 2011 and the continuing uncertainty, investor expectations heading into 2012 are still sinking, but yet, despite the dread, one must put one’s money somewhere. Thus, for investment recommendations going into the new year, Executive sought the advice of four financial experts: Youssef Nizam, head of equity research at Audi Saradar Investment Bank, Mahdi Mattar, chief economist at CAPM Investments, Georges Khoury, head of private banking at Banque Libano-Française and Mohieddine Kronfol, chief investment officer of fixed income and sukuk at Franklin Templeton Investments (ME).

Mahdi Mattar

Bullish or bearish?
Mattar remains cautious but he still thinks 2012 will improve on 2011. He recommends buying long-term investments “with the stomach to handle volatility,” as he envisions high turbulence amidst ongoing uncertainty in Europe and the deadlock in the United States fiscal debate. The markets are being driven not by fundamentals but by reactions to
policymakers’ decisions, he says.

Thoughts on the Middle Eeast and North Africa (MENA) region going into 2012? 
The MENA region and emerging markets in general — especially countries with a fiscal and current account surplus — are in a much better situation than developed markets. He stresses the positive aspects of the region, such as the deep pockets of many governments, their high foreign reserve ratios and favorable fiscal and current accounts on average within the Gulf Cooperation Council (GCC). He cautions that regional capital markets will still be affected by what is happening in the international markets despite their strong economic fundamentals.

Favorite countries in the MENA region to invest in 2012?
Mattar likes the GCC countries. He particularly favors Qatar and Saudi Arabia based on their attractive fundamentals.

Top investment ideas in the MENA region?
His top investment idea remains bonds issued by quasi-government entities in the United Arab Emirates. He likes Taqa, Ipic and to a certain extent Qatar Telecom. He is also looking at high yield bonds that are related to government entities in Dubai, such as Dubai Holding and Emaar. In Saudi Arabia, he is keen on local demand plays, especially in the retail and consumer sectors. His picks in these sectors are Jarir, Al Hokair, Al Othaim and Mobily.

Youssef Nizam

Bullish or bearish?
Nizam is cautiously optimistic. Given massive global uncertainty, he acknowledges that from the second quarter of 2011 onwards issues in the Middle East took the backseat and global problems took the front. “What is steering our car going forward has nothing to do with what is happening in our region,” says Nizam. Having said that, going into 2012 his optimism stems from the already very low expectations for the MENA markets and the relatively attractive valuation. With Brent oil still trading at $110, oil-based MENA economies will continue to fare well, and their governments will be spending money and creating economic activity. Political uncertainty, however, remains the major concern.

What would you buy?
Nizam would invest in companies and environments with the following themes: An increase in governmental spending since the Arab uprisings; oil and gas exploration and production; reconstruction following the collapse of regimes (though this would be post-2012); normalization of banks’ provisions, particularly in Saudi Arabia; high commodity prices.

Your favorite MENA markets for 2012?
Qatar and Saudi Arabia. For high risk, he recommends Egypt as it is down 45 percent this year, and it has a probability of recovery following the elections at the end of 2011, though November’s protests put this assessment in doubt.

Top MENA stocks for 2012?
Nizam would choose three stocks from Saudi Arabia: Maaden as its phosphate plant goes into commercial production in 2012, Saudi Kayan as it is going into commercial production in 2012 and Mobily for lower risk. From Qatar, he would choose two stocks: Industries Qatar for a high beta play and Commercial Bank of Qatar for its defensiveness and high dividend yield.

Georges Khoury

Bullish or bearish?
Khoury expects 2012 to be a very difficult year. “People are afraid and cautious, even at the level of private banking,” he says. He does see some opportunities in these markets for a long-term investment, however, three to four years from now.

Obstacles that the global markets are facing?
Political issues are the dominating factors in what is happening in global markets today. Khoury does not find attractive the potential opportunities as a result of the European crisis, such as the high yields on Italian government bonds, as he prefers to buy in a stable market. “It is not a financial crisis; it is a political crisis. That is the difference between 2008 and 2011.”

Thoughts on the MENA region going into 2012?
Khoury is concerned about the lack of liquidity in MENA markets. He highlights the case of Dubai, where speculation increased after the market was opened to foreigners and subsequently crashed once they opted out. Khoury is only confident about countries in the MENA that are cash rich, such as Saudi Arabia, and Qatar to a smaller extent, but he prefers not to invest in this region.

Top investment idea globally?
He likes equities in emerging markets. Khoury sees good opportunities in Brazil, Russia, India and China. His preferred exposure would be to India, which is “pushing more on what we call middle class family income earning.” He also likes China, though he would recommend investing selectively. Moving to more established markets, Khoury does see potential in American stocks but would stay away from financials and stick to the commodities, pharmaceutical and technology sectors. Within technology, he would invest in the big blue chips that are cash rich such as Intel, Cisco, Apple, Microsoft and IBM. He would also look to invest in potential acquisition targets such as Yahoo and Research In Motion, the makers of Blackberry. However, he would wait for the outcome of Europe’s crisis before investing. “Europe is a disaster; you are talking about 17 to 18 nations with one opinion and several central bank governors and finance ministers. In my view this is not something you can really rely on to take the right action in the market,” he says.

Mohieddine Kronfol

Bullish or bearish?
Kronfol expects a positive year for equity markets in 2012, “albeit with significant headwinds.” He says, “with interest rates at very low levels and central banks predisposed to additional quantitative easing, equity markets and risk assets generally should deliver positive returns.”  

Main challenges the global markets are facing?
Confidence is the principal difficulty for markets and certain economies. It is becoming increasingly critical, he says, to make tangible progress on structural reforms that address weak competitive conditions, high unemployment, poor governance and the inefficient allocation of capital.

Thoughts on the MENA region going into 2012?
Kronfol is upbeat about the MENA region because of the attractive valuations, the expectation for positive economic growth at a faster pace than the world average, the balance sheets of GCC governments where banks are unleveraged and the high level of oil prices, which are likely to remain near $100. Naturally, these positive drivers are impacted by global economic and financial agents, political turmoil at home and other developmental challenges. But, he says, “For long-term investors, we are at attractive levels.”

Your favorite countries in the MENA region for 2012 and your top investment ideas?
Saudi Arabia, Qatar and the UAE. He likes sovereign, financial and corporate bonds and sukuks. He also likes financial and consumer discretionary stocks.

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Business

Q&A – Tarek Sadi

by Executive Staff
written by Executive Staff

Entrepreneurial fervor among the Lebanese is well established, though the proper support systems to encourage and assist entrepreneurs are only recently improving. Endeavor, a non-profit nongovernmental organization (NGO), which supports high impact entrepreneurs in emerging markets, set up shop in Lebanon at the beginning of the year. It has helped create more than 156,000 jobs worldwide since its establishment in 1997 and now aims to do the same in Lebanon. Executive sat down with Tarek Sadi, managing director at Endeavor in Lebanon, to discuss how to discover the best entrepreneurs, how to help them and what is in it for him.

E  What are the main challenges that entrepreneurs face in Lebanon?
One challenge they face is finding the right talent to build up their team. The difficulty in hiring people that are dedicated and motivated consistently comes up in our discussions with entrepreneurs. This is partially due to the brain drain in the country and partially due to a cultural preference to build careers in established and stable businesses.

Another challenge in Lebanon is that entrepreneurship is still not viewed as a viable career choice and failure is perceived negatively. Globally, it is accepted that most entrepreneurs fail a number of times before becoming successful, and the failures are viewed as valuable learning opportunities. In Lebanon we view failure negatively, not as a stepping-stone to success. This is reflected in our laws as Lebanon lacks laws protecting entrepreneurs from failure and encouraging them to start again, such as Chapter 11 in the United States. As they say, the US was built on the back of Chapter 11.

The third challenge is that the economy is not geared towards helping and supporting small and medium enterprises (SMEs), and as such the cost of financing the partnership is still high. Kafalat, which provides loan guarantees to help SMEs, is a very successful pioneer in increasing banks’ support to SMEs and it is a great example of how effective the right programs can be.

Finally, there is a disconnect between the investment industry and entrepreneurs in Lebanon. Venture capitalists tell us that they are not seeing the volume of opportunities to invest in that they would like to see and entrepreneurs tell us that there are not enough investors in Lebanon. There is a schism between the two that needs to be bridged.

E  Who do you think is right; the entrepreneurs or the venture capitalists?
I think both are right. From what I see, there are a lot of very exciting businesses and great startups in Lebanon being funded informally by friends but not by the venture capital (VC) industry. Entrepreneurs do not fully appreciate the value VCs bring to the table and prefer to go to sources of capital that are within their comfort zone. A couple of great successes out of the VC industry in Lebanon will do a lot to correct that misconception.

E  Since you launched Endeavor in Lebanon at the beginning of this year, you have selected four companies to offer your support to. How did you go about selecting them?
We selected Eastline Marketing, Mobinets, Nada Debs and Printworks. We look for companies that are already in business, and we identify as many companies as possible that are innovative, have high growth potential, a good track record and above all that are headed by entrepreneurs who are ambitious, trustworthy, perseverant and who want to give back. We look for businesses that can be regional and global. These companies then go through a rigorous selection process which culminates with a global event, during which an international selection panel, made up of professionals from different backgrounds, selects entrepreneurs presented by our 13 countries. Historically over the past 15 years only 3 percent of companies around the globe identified by Endeavor offices became Endeavor entrepreneurs.

In Lebanon, we look to select about four companies a year and give them a tremendous amount of support. Our focus is not how many we can select but how many we can support and help create value which translates into new jobs and economic growth for the country. As we build up our capacity, we build up the amount of companies that we select.

E  What makes it so attractive to be selected?
First of all, the rigorous selection process is incredibly valuable. Even if the entrepreneurs are not selected, they are still sitting in front of some of the brightest business minds in the world giving them feedback on their businesses. Entrepreneurs that have been through the selection process have told us this is extremely valuable as they have a rare opportunity to have a 30,000 foot view of their business. For entrepreneurs that have their nose to the steering wheel every day, this is a great opportunity to gain perspective.

Secondly, once entrepreneurs get selected, we distill all the feedback we get throughout the process into very clear actionable points that we help them overcome through our global networks.

There are several other attractions to being selected, such as access to international markets, access to a peer network of over 600 Endeavor entrepreneurs from around the world and access to mentorship. Through our relationships with top business schools, we help entrepreneurs secure bright interns from schools such as Harvard Business School, MIT, Insead and Stanford. We also have global partnerships with the top four professional services and consulting firms that help us support our entrepreneurs.

E  What is in it for Endeavor?
We have three goals in Lebanon: create jobs, grow the economy and help identify and promote top entrepreneurs to stimulate our entrepreneurial sector. We have a small ‘give-back’ program, which is designed to make sure our entrepreneurs see us as service providers and not as a freebie. In the more mature Endeavor offices such as Mexico, Brazil, Chile and Argentina, the give-back program covers at most 30 percent of the budget so it is not something we will live from. The idea is that as entrepreneurs become successful and exit their businesses, they start sitting on the board of directors and fund Endeavor locally themselves for future entrepreneurs. Our work will also help promote global best practices and the right corporate cultures, giving proper incentives to employees and building meritocracies, which we believe will also help reverse the brain drain. We are part of a global world; we need to think in global terms and act in global ways.

E  Booz recently published a report calling for accelerated entrepreneurship in the Middle East to tackle the surge in labor force numbers expected in the region. How crucial is entrepreneurship in helping to create jobs?
Entrepreneurship is the only way we are going to create the 80 million jobs in the next 10 years that are needed in the Middle East. Otherwise where will these jobs come from? The public sector can’t create that many jobs and the large companies are consolidating their workforces in the face of uncertain economic times. There are a lot of great institutions and NGOs helping start-ups and early stage entrepreneurs in Lebanon. And we are starting to see some great stories come out of them.

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Finance

Lebanese securities performance 2011

by Maya Sioufi
written by Maya Sioufi

For the Beirut Stock Exchange (BSE), crises at home and abroad made 2011 a predictably rough year. A five-month government deadlock in Lebanon left the country in a bind, and Lebanese securities priced in this uncertainty. Revolutions in the Arab world and the unresolved European sovereign debt crisis took their toll on the Lebanese stock market as well. Lebanon’s fixed income market, on the other hand, is looking increasingly attractive to investors in comparison to troubled markets on the other shores of the Mediterranean and beyond.

The nascent year

At the beginning of 2011, just weeks before the fall of the previous cabinet, the BSE’s market capitalization stood at $12.6 billion. Six months later, immediately following the formation of the current cabinet, it had fallen to $11.3 billion.

Although Lebanon’s political situation stabilized after the formation of a government in June, the BSE was not immune to regional turmoil, nor the European sovereign debt crisis. The BSE witnessed consistent monthly drops in its market capitalization throughout the year but these accelerated into double digits from June through October as political troubles in Syria and economic woes in Europe escalated.

In addition to the turbulent regional and global markets, the BSE has its own structural problems, such as a lack of liquidity, a deficiency of listed companies, a now two-year void in its presidency and no independent authority to oversee the exchange. The capital markets and insider trading law approved by parliament in August is expected to tackle this last issue by providing Lebanon with an independent authority to oversee the exchange and protect investors.

According to Riad Salameh, governor of Banque du Liban (BDL), Lebanon’s central bank, the law would attract “substantial” investment in Lebanese companies.

Good-looking Lebanese… debt

As Lebanese equities suffered steep losses in 2011, Lebanon’s credit default swaps (CDS) — a proxy for sovereign default risk — performed relatively better. In the third quarter of 2011, Lebanon’s change in CDS spreads was one of the best performers globally, along with Venezuela, Qatar, the United States and Ireland. Lebanon’s CDS spread widened by only 22 percent in the third quarter to 430 basis points. The widening of a CDS spread means it is more expensive to insure a country’s credit and it reflects an increased perception that the country is more likely to default. Relative to the widening of the CDS spreads of 68 countries monitored by CMA Vision, a provider of market pricing data, Lebanon fared well. Italy, Germany, the Netherlands, Denmark and Austria, meanwhile, all saw their CDS spreads widen by more than 150 percent in the third quarter.

Lebanon’s credit is classified as non-investment grade or “junk” by the three rating agencies Moody’s, Standard & Poor’s and Fitch, though all three have a stable outlook on Lebanon.

Lebanon’s gross public debt stood at $54.4 billion as of September 2011; Finance Minister Mohammad Safadi expects this figure to reach $60 billion by the end of 2012. Lebanon’s gross public debt to gross domestic product (GDP) stands at an astounding 134 percent, according to the International Monetary Fund. By comparison, Greece’s ratio, the highest in Europe, stands at 142 percent.

Freddie Baz, chief financial officer at Audi Bank, likes to compare Lebanon’s debt profile to that of Japan and not Portugal, Ireland, Greece or Spain (PIGS), as 95 percent of the debt is held by local investors, as opposed to only 30 to 40 percent in PIGS. Indeed, Jean Riachi, chairman of FFA Private Bank, says, “Although rating agencies classify Lebanon’s debt as low grade, many investors around the world and not only in Lebanon are quite confident because of the technicalities of the Lebanese debt whereby it is 95 percent held by Lebanese.”

There are restrictions imposed by BDL requiring local banks to acquire investment grade bonds only and, according to Khaled Zeidan, general manager at MedSecurities, yields on these bonds are very low and thus government debt becomes attractive for local banks. “Most banks have few options in deploying their liquidity and with all the restrictions that the central bank has put in place, banks generally go back to Lebanese republic paper whether in USD [dollars] or LBP [Lebanese pounds],” he says.

Lebanese bankers are not the only ones recommending Lebanese debt as an investment. International banks are doing so as well. Merrill Lynch upgraded in October its rating on Lebanese Eurobonds to “Overweight” from “Marketweight,” while Barclays, which has kept its “Marketweight” recommendation, raised the allocation of Lebanon’s debt in its emerging markets portfolio.

The 10-year yield on Lebanon’s sovereign debt has dropped by 40 bps this year and stands at around 5.8 percent as of mid-November, which bodes well in comparison to those in floundering countries in Europe like Italy, which has its 10-year yield at over 7 percent, a 2 percent rise from the beginning of the year, and Spain, which stands at 6.3 percent, a 1 percent rise year-to-date. 

Alain Wanna, deputy general manager at Byblos Bank, notes changes in the approach to Leban-on’s sovereign debt. “For the last two years, we had a strategy at Byblos of reducing our exposure to the government as a percentage of equity. But today, when we compare the sovereign debt of Lebanon to the sovereign debt of some European countries, we see that Lebanon is still performing extremely well,” he says. “At the end of the day, we need to make a choice on where to place our money.”

The attractiveness of Lebanon’s debt is reflected by the successful refinancing and issuance of Eurobonds this year. In May, Lebanon refinanced $1 billion in Eurobonds: one issue of $650 million maturing in 2019 at a yield of 6 percent, and a second issue of $350 million maturing in 2022 at 6.1 percent. And in July, Lebanon launched a $1.2 billion two-tranche Eurobond composed of a $500 million issue of bonds maturing in 2016 with a 4.75 percent yield, and a $700 million issue of bonds maturing in 2022 with a 6.2 percent yield.

“If you look at rates paid on the Eurobonds and the rate in the latest issued tranche, you can see [it] has dropped and not increased,” says Francois Pascal de Maricourt. “That's really a sign of confidence in Lebanon.”

The rosy picture painted by the attractive rates of Lebanon’s debt will likely be shaken if the government does not take action and implement the reforms necessary to tackle the debt. “A lack of reforms in the budget is very dangerous because they don’t realize the dangers if things go wrong,” says Byblos’ Wanna.

“Today there is excess liquidity in the sector, money is coming into Lebanon. But what if the banks stop investing; what if deposits don't flow?” he added. “The government should start to think about that and take corrective action. And it is time today to initiate reforms because money is available. It is more difficult to initiate reforms under pressure; look at Greece.”

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Business

Sources of inspiration

by Executive Staff
written by Executive Staff

DERMANDAR

The concept:
Meaning ‘all around’ in Lebanese slang, Dermandar specializes in digital image technologies. The concept is simple: pictures taken with a normal camera can be turned into a panorama picture within seconds using the online tool that Dermandar has created. It was co-founded in January 2010 by Elie Grégoire Khoury and Elias Fadel Khoury and launched as an iPhone application in June 2011.

Sources of revenues:
The iPhone application is priced at $1.99 in the Apple store, of which Apple takes 30 percent commission. This revenue now covers five to 10 times Dermandar’s expenses, rendering the company “very cash-flow positive,” according to Khoury.

2011 accomplishment:
1.8 million downloads since the launch of its iPhone application on June 8 2011 (97 percent of Dermandar usage is on the iPhone app and not the website). These downloads are mainly coming from the United States (21 percent of downloads), China (12 percent) and Germany (11 percent). As Dermandar is an offshore company, it is not allowed to sell the application inside Lebanon.

Future plans:
Dermandar is developing an Android app and will eventually develop a Windows 7 app, but it has no plan for a blackberry app as “that is the segmentation of the worldwide market,” says Khoury. Dermandar is also preparing new apps for 2012 based on digital image processing using what has been learnt so far to “provide more fun and sexy apps.”
More on www.dermandar.com

BUTTERFLEYE

The concept:
ButterflEye produces swimming goggles with integrated electronic monitors that track the heart rate of an athlete during activity. A tiny bulb at the top of the lens goes green if the swimmer is in his target zone, yellow if he needs to speed up and red if he needs to slow down. It was founded by 23-year-old Hind Hobeika and was officially registered in September 2011. It is still at the prototyping stage and the product should be ready for sale in 2012.

Sources of revenues:
The price of the goggle is expected to be north of $100 and the primary market will be the United States. However, the revenues will not only be based on the sales of the products but also on the licensing of its US patent, which has already been filed and is expected to be reviewed in a couple of months.

2011 accomplishment:
“Opening ButterflEye, focusing full time on its work and securing $100,000 in funding from Berytech, one of Lebanon’s most important venture capital [funds],” says Hobeika.

Future plans: 
First, Hobeika has to start selling the product and secure a license for the patent. In order to do that, ButterflEye might need another round of financing. She also wants to develop other products related to sports and biomedical technologies.
More on www.butterfleyeproject.com

CINEMOZ

The concept:
Cinemoz is a video-on-demand platform providing videos from the Arab world. It was set up by 27-year-old Karim Safieddine and will be fully accessible to the public in December 2011, with a diverse library of 250 titles, from feature films to TV series to documentaries and shorts. As an Arabic content provider, the direct geographical target of Cinemoz is Egypt and the Gulf Cooperation Council (GCC), while still remaining strongly Pan-Arab and globally competitive.

Source of revenues:
Cinemoz generates its revenues through premium in-video advertising. “The model has proven to be viable and meets all the interests of different parties involved, whether it’s content owners, advertisers or ourselves,” says Safieddine. By the end of 2012, Cinemoz expects advertising revenues to reach $500,000.

2011 accomplishment:
“I believe our most outstanding achievement for 2011 was to actually build a strong team and keep it together. Finding talented individuals who are willing to fully immerse themselves with a start-up and get them to build something from the ground with you is a major obstacle in Lebanon,” says Safieddine.

Future plans:
Cinemoz’s future plan is to have a second round of investment (after securing a $200,000 loan from Kafalat), add premium content, develop state-of-the-art technologies and deliver a groundbreaking product.
More on www.cinemoz.com

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Economics & Policy

Executive Insight – Public-private partnership

by Ziad Hayek
written by Ziad Hayek

In order to grow our economy and provide a better standard of living for our people, we need to invest in modern infrastructure urgently. We need roads that are well maintained, renewable energy projects that reduce our fuel bill, dams and waterworks that harness our most precious natural resource, fiber-optic networks that allow us to be part of the global knowledge economy and water and solid waste treatment plants that preserve our environment. We need projects that create a large number of jobs to help stem the emigration of our best and brightest. Everyone can agree that investing in infrastructure is investing in our future.

For more than a decade now, public sector salaries, the servicing of the public debt and the subsidizing of electricity have consumed our national budget and left little money for development projects. To finance infrastructure today, the government has three options. Firstly it could borrow money — a frightening prospect considering our dangerously high level of debt. Secondly it could raise taxes — a politically unpalatable and economically inadvisable course of action in the context of declining real incomes. Or thirdly, it can look to the private sector to invest in infrastructure that can later be transferred to the government. It is obvious that this last option, i.e. that of a public-private partnership (PPP), is our only viable way forward. 

Lebanon already has two of the main elements that are needed to execute successful PPP programs. First, we have the know-how and the human resources. Lebanese companies and individuals are investing in and managing PPP projects in the Arab world, in Africa and beyond. Many have repeatedly expressed their readiness to invest in Lebanon. Second, we have the financial resources. Our banking system is flush with some $115 billion in deposits. Short-term deposits to be sure, but more than enough to fund the $3 billion or so for the immediate infrastructure required in sectors such as electricity, water, rail and many others.

So what else do we need? What is stopping us from embarking on this road to social and economic development? We need a legislative framework that safeguards the interests of the government and people of Lebanon while providing sufficient comfort to investors. It must also impose transparency, for serious investors do not participate in the often-complex PPP tenders if there exists the possibility of a minister or official manipulating the results. Finally, the legislative framework must establish, on the government side, an inter-ministerial organ that has a capable team who are able to speak the language of the private sector and help structure a bankable deal.

This is what the current planned legislation, drafted by a multidisciplinary group of experts and will hopefully be approved by the Council of Ministers before long, aims to do. 

I have proposed and championed the enactment of a PPP law since I took office in 2006 because I truly believe that it is the most important factor in our future economic development. I am disappointed that we have not been able to see it through until now.  Draft legislation was approved by the Council of Ministers in 2007 but was not taken up by Parliament. It was again proposed in Parliament in 2010 but the Council of Ministers wanted to approve it first. A new draft was then prepared and discussed in several ministerial meetings but discussions were unfortunately not finalized by the time the government resigned in January 2011. In the meantime, we have lost many opportunities to invest in our country’s infrastructure, to grow our economy, to increase our productivity and to raise our income per capita. Instead of sharing in a bigger pie and comparing the size of our portfolios, we are sadly left to argue about the minimum wage and fight over the crumbs.

It is high time that our government and our Parliament get their act together and do the right thing by our people.

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Economics & Policy

Clearing the smoke

by Executive Staff
written by Executive Staff

Little has improved in Lebanon since Executive’s last year-end report on the environment in December 2010. Air quality continues to deteriorate, urbanization advances almost totally unchecked and water resources remain poorly managed; and these are only a few of the steadily growing ecological problems the country faces.

For years, one of the major problems present in addressing Lebanon’s many environmental issues has been the near total lack of reliable and current data.

It has been more than a decade since the last comprehensive report on the environment here was released, so perhaps the most substantial development of 2011 was not an innovative field project or the passing of new environmental regulations, but rather the publication of a 355-page report titled “State and Trends of the Lebanese Environment 2010”.

The report, released in July by the Lebanese development firm ECODIT, was compiled with the assistance of the Ministry of Environment (MoE) and the United Nations Development Program (UNDP). It includes data culled from the Central Administration of Statistics, local and international non-governmental organizations, as well as various news reports. Together, this will add to the ability to clearly analyze the successes, failures and neglected areas of the environment in Lebanon. It can also serve as a platform from which to promote the adoption of new environmental laws.

Environmental governance

Any substantial changes to existing environmental laws in Lebanon must ultimately gain approval from the top — no easy task considering the epic bureaucratic hurdles of government. Najib Saab, secretary general of the Arab Forum for Environment and Development (AFED), says Lebanon’s biggest environmental issues, “such as air pollution, land and water degradation and coastal zones’ deterioration, can be easily solved in the presence of adequate governance, professionalism and vision.” He adds that “environmental matters are managed by amateurs.”

And not only are government agencies highly inefficient — in the case of the MoE at least, they are also understaffed. More than two years ago, the MoE was given approval to hire an additional 23 staff members for various positions, and salaries for an additional 20 contracted technicians were to be paid in part by a grant from the Italian foreign ministry’s local outreach arm, Italian Cooperation for Development in Lebanon. With government bureaucracy a chronic problem in Lebanon, on the surface, adding more staff to a ministry seems like an unwise decision. But adding analysts, technicians and other specialists to a long neglected ministry could be of great benefit in the future. To date, most of these positions have not been filled. [See Q&A with Minister of Environment Nazem Khoury on page 216]

Another urgent problem is the lack of an environmental law enforcement body. Without one, the task of enforcing regulations, cracking down on violations and monitoring and carrying out court rulings falls on municipal police departments and the Internal Security Forces — both of which have other priorities. The addition of even a modest environmental police force in Lebanon could begin a process of changing people’s attitudes toward the environment. “If the government would enforce laws, say, against throwing trash on the side of the road, I think Lebanese people would stop doing this because they don’t want to pay fines,” says Capricia Chabarekh, an environmental and air quality specialist at ECODIT.

The MoE has sought assistance from a broad range of NGOs in Lebanon, as Rayan Makaram, Greenpeace Lebanon campaigner, says: “When the new minister of environment was brought in this summer, right away he asked for feedback from civil society, NGOs and the media. This push toward greater cooperation with the government was a good success. But, it’s just a first step.”

Shortsighted land management

According to Rita Stephan, environmental and land management specialist at ECODIT, one of Lebanon’s most pressing issues is the poor management of its land resources. Given the country’s size, having responsible policies that curb urbanization and regulate land use is all the more urgent.

“We don’t have land for public gardens; we only have land to build towers and big commercial centers,” she says. “We are destroying our land heritage.”

An October 2011 report from the AFED, ‘Arab Environment: Green Economy,’ offers a blunt assessment of the region’s overall disregard for environmental sustainability: “Arab economies continue to unsustainably deplete renewable natural resources, motivated by short-term profits, causing environmental impoverishment of scarce land and water resources while discounting the value of these resources of future generations.” While meant to address the region as a whole, this statement could be used to describe practices in Lebanon alone, too.

And the figures are staggering: “The average annual cost of environmental degradation in Arab countries has been estimated to be $95 billion, equivalent to 5 percent of their combined GDP in 2010,” the AFED report adds. The last time a thorough cost analysis of environmental degradation in Lebanon was performed — 12 years ago by the World Bank — estimates put the cost at roughly $500 million, or 3.4 percent of Lebanon’s GDP.

Seeing potential in solid waste

According to data from the MoE, solid waste management, or the lack thereof, is one of the fastest growing problems for Lebanon. One possible solution, supported by both the UNDP and ECODIT, is the construction of four waste-to-energy (WTE) incinerators in Lebanon. ECODIT’s Stephan points out the positives — increased energy production for Lebanon’s ailing power grid and less solid waste piling up in landfills, among others — but acknowledges some activists and NGOs are against it. Building and maintaining incinerators “is costly and they need to strictly regulate it,” she says. Among the problems is to dispose of the ash produced from burning waste, which can contain highly toxic chemicals and heavy metals that are dangerous to water supplies.

Beginning in 2006, the government was expected to begin the construction of treatment plants and landfills as part of its WTE “master plan”, but it has so far failed to act. And it is not just a matter of building WTE facilities, it is about changing people’s habits, as Stephan explains: “You have to sort the waste well before incinerating it. So we need to reorganize our waste. We should be separating it in our homes.” She adds that “there is no public awareness for separating waste, and this is a major problem in Lebanon.”

Government stalling will cost Lebanon dearly in the near future. According to the ECODIT report, “waste generation in Lebanon is expected to increase by 1.65 percent annually to reach 2.3 million tons by 2030, notwithstanding potential waste recovery from sorting and composting facilities.” It adds, “Waste disposal is particularly difficult in Lebanon because of its rugged terrain and limited surface area.”

According to Saab of AFED, “Waste-to-energy is just one possible component in an integrated solution to the waste management challenge. Until now, the principles of reduction and re-use are totally absent. It’s as if consumers are encouraged to generate more waste. In this context, waste-to-energy is one option. But what is being considered by the ministry is restricted to generating energy through incineration. When up to 80 percent of municipal solid waste is composed of organic material like in Lebanon, many doubts are raised on the efficiency of combustion, how much energy it produces and how many pollutants. High content of wet organic material is not good for burning, will need addition of fuel to blaze and generates minimal energy.”

“We haven’t seen a study of an option comprising generating energy from organic waste, utilizing digestion to obtain methane. This might be the better option in the Lebanese case. Environmental affairs, including waste, are run by pretentious amateurs or shrewd salesmen,” Saab says.

The issue of waste-to-energy incinerators is highly divisive, with NGOs and activists who are against incinerators pitted against the Ministry of Environment and UNDP who support their construction. According to Makaram of Greenpeace Lebanon, “Our stance is that incinerators are still incinerators — they encourage the production of waste rather than the reduction of waste. Around the world, countries are shutting these incinerators down, and now we want to build them in Lebanon? The global trend is to close down. If we build these in Lebanon, we’re going against science and global trends.”

Additionally, the AFED report estimates that “greening the waste management sector would save Arab countries $5.7 billion annually.”

On the horizon

While there were significant steps taken to improve the environment in 2011 (such as the passing of the National Water Sector Strategy in April), tangible improvements have yet to be seen.

With assistance from the UNDP and NGOs, the government has several major environmental projects on schedule to begin in 2012. Jihan Seoud, environment and energy program associate for UNDP in Lebanon, says that a program with the ministry that will work toward reducing ozone-depleting substances will start next year.

The water sector strategy will be looking at options for renewable sources of water for Lebanon, as well as studying the effects of climate change on supply. “It’s quite comprehensive,” Seoud says. “Of course, implementing the strategy and finding the funding to do the work required is another story.”

The World Bank, in its June 2011 Country Environmental Analysis states that Lebanon is set to meet five out of eight Millennium Development Goals (MDG) set out by the United Nations by 2015. Among the three that are predicted to fall short is the reversal of environmental degradation, or as the report calls it, the Ensure Environmental Sustainability MDG.

So, while there is always more that can be done to improve environmental conditions across Lebanon, 2011 could be looked back on as a turning point in the understanding of the most crucial issues. Now it is up to the policymakers to act.

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Finance

Performance of Lebanese banks in 2011

by Maya Sioufi
written by Maya Sioufi

Lebanese banks had to prove their resilience once again in 2011, though instead of dodging a global financial crisis, this time around they had to navigate a five-month government stalemate, the undoing of Lebanese Canadian Bank (LCB) and the continuing Arab revolutions.

For the first nine months of 2011, assets, deposits and profits all grew, albeit at much lower rates than those enjoyed in previous years. The total assets of the Lebanese alpha banks — the 12 banks with deposits in excess of $2 billion — stood at $143 billion, a 6 percent year-to-date growth, but a slowdown on the 11 percent growth in 2010 and 22 percent growth in 2009.

In February, the United States Department of the Treasury designated LCB as a “financial institution of prime money laundering concern,” accusing the bank of laundering hundreds of millions of dollars for a Lebanese-Colombian drug baron with links to Hezbollah, which Washington has designated as a terrorist group.

LCB was eventually bought out by Société Générale de Banque au Liban (SGBL) for an undisclosed amount, although banking sources in Lebanon put the figure at around $500 million.

The ordeal shook Lebanon’s banking sector, but several leading industry officials with whom Executive spoke said they were optimistic that there would be no recurrence of incidents of this sort.

“Definitely LCB was a big event, which was a concern for the market, but it was handled and now hopefully it is behind us,” says Walid Raphael, general manager of Banque Libano-Française (BLF).

Indeed, the general consensus is that the LCB debacle has nurtured, by necessity, a new culture of accountability on the road to transparency. “I think it was an individual case, and I think most banks have learnt a lesson,” says Jean Riachi, chairman of FFA Private Bank. According to Freddie Baz, chief financial officer at Bank Audi, “Important banks in Lebanon know their responsibilities and duties in terms of compliance.”

“LCB is an event that triggered some kind of extra focus,” he adds. “These crises can happen and they can quickly be resolved without collateral damage.”

But the Lebanese banking sector remains on the fence with regards to Syria, where the outcome of the uprising is still far from certain. While most in the industry say the impact on Lebanese banks has been contained thus far, they remain concerned going into 2012.

The US is also monitoring the Lebanese banking sector’s cooperation with Syria, and its official warning came during the visit in November of Daniel Glaser, the treasury department’s assistant secretary focused on illicit financing. He cautioned the Lebanese monetary authorities that banks in Lebanon were at risk of being blacklisted if they helped Syria dodge international sanctions.

“I think in 2012 the predominant local theme will be the Syrian situation. The impact has been contained so far,” says Khaled Zeidan, general manager at MedSecurities. 

“The issue is you never know what might happen tomorrow in terms of sanctions,” BLF’s Raphael says with regards to Syria.

According to Baz, Bank Audi’s assets in Syria shrunk by one third due to withdrawals of deposits but he casts doubt on an assertion made in a November Financial Times article stating that a continuous flow of Syrian money is being smuggled into Lebanon. “Audi is the largest bank in Lebanon, with the largest deposit base, and we have not seen any material deposit from Syria over the last nine months,” he explains.

But aware of the potential for further sanctions, banks claim they are taking measures to protect themselves. Francois Pascal de Maricourt, chief executive officer of HSBC Lebanon, said: “When we can not have a proper assessment of the origin of the funds and when [they] could put the bank at risk, we have to turn down some business and I believe most of the banks in Lebanon are very careful and are doing the same.”

In fact, deposits, which stood at $118 billion at the end of September 2011, only grew by 5 percent year-to-date, compared to the 2010 rate of 12 percent and the 2009 rate of 24 percent. Profits grew by a marginal 1 percent to reach $1.2 billion, which fades in comparison to the staggering 25 percent increase in profits in 2010 and 18 percent in 2009.

The three largest Lebanese banks with branches in Syria — Banque BEMO Saudi Fransi, Bank of Syria and Overseas (member of BLOM Bank) and Bank Audi Syria — saw their assets fall by an average of 24 percent and deposits drop an average of 29 percent through the first three quarters of 2011.

Beyond the region

Looking beyond Syria and other regional turmoil, the European sovereign debt crisis has dominated headlines throughout the second half of the year and severely shaken the global markets. However, its impact on the Lebanese banking sector has been minimal. Banque du Liban (BDL), Lebanon’s central bank, has strict regulations on local banks which, “In normal times restrict our capacity to originate profitability but in difficult times act as important buffers,” says Bank Audi’s Baz. For example, banks are forbidden from investing more than 50 percent of their equity abroad and require that only investment grade fixed income be held in banks’ portfolios.

“Banks are very conservative when it comes to investing customer deposits. We do not speculate… so we didn’t see a major impact from the European debt crisis,” said Alain Wanna, deputy general manager and head of Group Financial Markets at Byblos Bank. In addition to imposing stringent restrictions to minimize volatility, BDL maintains stability through its stash of foreign currency reserves, $31.3 billion as of the end of July 2011, and its gold reserves, which reached $17 billion as of mid September, the second largest in the Middle East and North Africa region after Saudi Arabia. BDL governor Riad Salameh, whose term was renewed for a fourth time in July, has said he intends to keep the gold reserves to protect the economy from regional unrest.

“Lebanon is immune to what is happening in Syria and worldwide because of the model we have, which is a highly liquid, prudent approach to credit and low leverage,” said Salameh at a September meeting of Arab central bank governors in Doha, Qatar. Loans provided by banks in Lebanon still increased despite the challenges faced in 2011. In fact, lending at alpha banks increased by 13 percent year to date, a slowdown relative to the 25 percent increase in 2010 and 16 percent in 2009, but still a strong rate given the obstacles encountered this year. In spite of the continuous increase in lending, a survey completed in July by The Banker magazine revealed that Lebanese banks had the lowest loan to deposit ratio among the 1,000 commercial banks analyzed globally.  “Who would you lend [to] in the absence of growth in the economy and a real government program to promote entrepreneurship?” asks Zeidan.

According to Saad Azhari, chairman of BLOM Bank, the figure that should be looked at is loans to gross domestic product: “Usually in underdeveloped countries, the ratio of loans to gross domestic product varies from 40 to 60 percent. In developed countries, it is between 80 and 90 percent.” Lebanon’s loan-to-GDP ratio is just over 90 percent.  Furthermore, Byblos’ Wanna argues, loans to the public sector should be factored in to the loans-to-deposit ratio, noting that, “all banks have large portfolios on the government, whether in local or foreign currency.”  According to the most recent report by the Association of Banks in Lebanon, claims by commercial banks on the public sector as of the end of August stood at $28 billion and claims to the private sector at $39 billion.

Of potential consequence to deposit flows is a measure within the pending draft budget proposed by Finance Minister Mohamad Safadi in October, which calls for a raise in the tax rate from 5 percent to 8 percent on the interest of deposits. The probable impact is not clear but it has sparked heated debate within the banking sector.

FFA’s Riachi is not concerned about the proposal. “I don't think it will affect flows, and I think people will think in terms of net interest and see where their advantage is relative to other banks.” 

But some are worried about the measure’s timing. “We are [already] witnessing lower growth of deposits and lower capital inflows. It is not a disaster but it is not the right time,” says Azhari.

“I think fresh capital will remain hesitant for some time. You don't introduce something like this during difficult times, particularly when there appears to be many challenges ahead, and when investor and consumer confidence are in a period of retracement globally,” says Zeidan.

The road ahead in 2012

The International Monetary fund has projected 2011 growth in Lebanon to be 1.5 percent. The prospects for limited growth can be further reflected through low consumer confidence. Household spending accounts for 79 percent of Lebanon’s GDP, according to Byblos Bank, and a recent consumer confidence survey undertaken by Byblos and Olayan School of Business reveals that consumer confidence has been consistently falling since 2007 and reached a low in August 2011. 

Looking towards 2012, and with excess liquidity sitting idle on banks’ balance sheets, the banking sector is hungry for growth opportunities. The prospects of deploying further capital in Lebanon seem poor, as expectations for 2012’s GDP are dim. The IMF is forecasting a pick-up to 3.5 percent but banking experts are concerned as many obstacles still lay ahead, namely political uncertainties such as disputes over STL funding, approving the draft budget and unresolved turmoil in Syria. 

“The real issue for the banks will be how to continue on growing after the exceptional period they have been enjoying for the past years. Further expansion in other markets may be one of the solutions to be explored,” said Zeidan. Case in point: Bank Audi’s new license to operate in Turkey. According to Baz, it is the first bank in 14 years to acquire a banking license in Turkey.

Despite riding the challenges of 2011 relatively unscathed, it is critical for the banking sector in Lebanon, which still sits on big piles of cash, to hunt for future growth opportunities — a precarious task in an environment of political instability both locally and regionally. 

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Business

A name you can trust

by Executive Staff
written by Executive Staff

The role of branding products to increase their value and profitability is given serious import in the commercial world. Building familiarity, trust and loyalty to brands is at the core of every marketing team’s role. But what value is there for producers in branding a whole economic sector or even a whole nation?

According to independent Policy Advisor Simon Anholt, it is “fundamental.” As a pioneer of the idea of nation branding, he now advises governments, civil society and private corporations on reputation, investment promotion and national identity. Talking about the importance of a nation’s image in attracting investment from abroad he says, “Even very serious, practical-minded professional investors are influenced by these so-called ‘soft factors’ to a considerable degree.”

Government and business both share responsibility in the quest for a more commerce-friendly countenance. Charles Arbid, president of the Lebanese Franchise Association, argues that Lebanese industrialists need to develop the concept of branding on an individual and collective level. “We cannot sell anymore in the local market or export if we don’t work on the quality assurance in our products, and this has to be done through branding,” he says. 

Government, meanwhile, is involved, both implicitly and explicitly, in promoting the image of Lebanon as a serious industrial player.

Diana Menhem, an economic officer with the United Nations Development Program in Lebanon says, “When you are dealing with the reputation of an entire industry it is very different than dealing with the reputation of a particular product… It is the responsibility of the government and the stakeholders to increase the visibility of the entire sector.”

Quality control

With this comes an understanding that it only takes one rotten apple to ruin the barrel. That is to say, if the respect and recognition of Lebanese industry is to be developed and maintained, there has to be quality assurance across the board.  It is incumbent upon organizations such as Libnor, the Lebanese standards institution, to ensure that the quality standards for Lebanese products are rigidly enforced. “If you have one product that is substandard, the reputation of the entire industry will go down with it,” says Menhem.  “It is the responsibility of producers to realize that if they don’t adhere to the quality standards, the reputation of their products will really go down and they won’t be able to export anymore.”

It is not just the reputation of an industry’s products but also the image of the whole country that determine both the allure of Lebanese industry as a viable investment destination and the desirability of its products in the marketplace. Anholt argues that expensive branding strategies are almost always a complete waste of money when it comes to developing a national image. The trends in his survey, the Anholt-GfK Roper Nation Brands Index, reveal that the inestimable billions of dollars spent by nations trying to change their global image have absolutely no correlation with the perceptions of ordinary people around the world.

“Grand strategy is infinitely more important than brand strategy: the country needs to know where it’s going in the world and how it’s going to get there,” says Anholt.

Lebanon’s failings in this regard are cause for considerable disquiet for Nassib Ghobril, head of economic research at Byblos Bank, who laments that the economy is subordinate to politics. “The economy has been suffering from the political challenges but [it] is secondary to the political crisis,” he gripes.

While Anholt is dismissive of branding campaigns as tools to enhance a nation’s image, he is emphatic on the importance of political and social stability. With upheavals ripping through the political and social fabric of several nations in the region, and not without significant economic consequence, his advice is particularly pertinent.

“Unstable countries should worry more about becoming more stable and less about how to convince people that they are stable,” Anholt says. “Unequal countries should think about how to create more equality, not how to persuade the world that they are equal.”

Industrialists and government-related agencies, such as IDAL and Libnor, share in the task of increasing visibility, improving standards and building trust in Lebanese products. As for the nation’s lawmakers, perhaps the best way they could support ‘Brand Lebanon’ would be to engage in a little less talk, a lot more action and dedicate themselves to some steady and stable governance.

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