Comment

Stagnating in stability

by Nadim Houry
written by Nadim Houry

I never thought I would say it, but Lebanon was one of the most stable countries in the Middle East this past year. Many commentators and politicians expressed regret that Lebanon failed to capitalize on this to attract capital escaping the tumult of Cairo, Damascus and Tripoli. My regret is that Lebanon failed to use this opportunity to finally push forward reforms essential to make it a fairer and more transparent place.

2011 was a year of paralysis. The country had no government for the first six months, and while political life resumed in July following the formation of a new government, there was no progress on many draft laws — some that have been languishing in Parliament’s drawers for years — meant to prevent torture, improve the treatment of migrant domestic workers and protect women from domestic violence. The prisons are as crowded as ever. By the Ministry of Interior’s own account, the country’s main prison in Roumieh — a facility built for 1,500 inmates — held 3,700 in April of this year. Most troubling, 2,757 were awaiting trial. Faced with multiple inmate riots, Parliament finally approved the building of additional prisons in September but failed to tackle the real reasons behind the overcrowding: rampant overuse of pretrial detention and lengthy trials.

Lebanon’s military and security forces may be less intrusive than their Arab counterparts but there are worrying signs of increased harassment of activists and artists who criticize the army and certain high-ranking officials. In July, military intelligence summoned Saadeddine Shatila, of the international human rights group Alkarama, for his work documenting torture at the Ministry of Defense, and detained him for seven hours. Lebanese judicial authorities detained musician Zeid Hamdan — who toiled for years to promote Lebanon’s underground music scene — in July for several hours based on an accusation that he had defamed the Lebanese president in a song calling on him to “go home.”

The semi-naked images of women adorn our overcrowded highways, but when it comes to politics, women seem to have no place. Politicians spent months haggling with the Council of Ministers to ensure that all religious groups were adequately represented, but failed to include a single woman in the 30-person group. Dar Al Fatwa, the country’s highest Sunni Muslim authority, and the Higher Shia Islamic Council, are opposing a law that would protect women from domestic violence for fear that prosecuting husbands who beat their wives would affect the family unity.

Frankly, what harms the family in Lebanon are personal status laws that differentiate between citizens based on the religion into which they were born. These laws discriminate against women in matters like divorce, child custody and inheritance, forcing many of them to stay in abusive marriages. It is no wonder that an increasing number of Lebanese travel to Cyprus to get married.

Instead of finally shedding light on those who disappeared in Lebanon’s turbulent past, the authorities watched impassibly as more politically motivated kidnappings took place in 2011. The February kidnapping of three Syrian brothers from the Jasem family — one of whom had been detained for distributing flyers in Lebanon denouncing the Syrian regime — and the disappearance in May of Shibli Aisamy, an 86-year-old Syrian dissident, are painful reminders of the ongoing risk of politically motivated kidnappings. But even more troubling is what the Jasem case reveals about the state of Lebanon’s judiciary: a leaked police report contained evidence linking the kidnapping to a member of the Lebanese security forces in charge of the Syrian embassy’s security. Yet the judiciary has not investigated the accusations, proving yet again that it is incapable of resolving politically motivated crimes.

So “where do we go now?”, to quote Nadine Labaki’s recent blockbuster movie about the dilemmas facing a divided Lebanese village. Change in Lebanon will not be easy. There is no dictator to topple, no common enemy to rally the country’s youths. It is doubtful that the current political elite can truly reform the system which keeps them in power. But short of systemic reform, they could at least open up the drawers in Parliament and in the ministries and start adopting and implementing many of the laws and decrees that have been left there to rot.

 

NADIM HOURY is director of the Beruit office of Human Rights Watch

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Real Estate

Back to basics

by Executive Staff
written by Executive Staff

Following Lebanon’s skyrocketing success in 2010, this year saw a much calmed real estate sector. Though many buyers have been carefully shopping around and looking for the best deals, most industry representatives contend that prices will not fall any time soon.

Because of the limited availability of land plots in prime areas, the price of land remains high while developers have little reason to sell quickly as many have relatively small debts. Therefore, prices have remained stagnant this year, while sales across mid to high-end units have slowed.

Yet, one market that has continued to grow is small-size homes, 250 square meters or less, in proximity to the central business district.

Contrary to last year’s record-breaking sales,  the statistics covering the first nine months of 2011 paint a downward slope in revenues, largely due to a 26 percent drop in sales to foreigners. In the words of Karim Makarem, director of real estate firm Ramco, “The market for foreign buyers is almost nonexistent today.”

The Directorate of Land Registry and Cadastre recorded $6.84 billion in total property sales during the first ten months of the year, a 10.78 percent drop compared to the same period last year; property transactions decreased by 14.5 percent to 66,143 throughout the same period.

Supply side figures are not much rosier. The Order of Engineers of Beirut and Tripoli reported that construction permits covered an area of 12.4 million square meters during the first nine months, down by 5.4 percent year-on-year. However, cement deliveries actually increased by 7.7 percent during the period.

For the Ministry of Finance, the slowdown means a 6.8 percent drop in property taxes, down from $453 million in the first nine months of 2010 to $422 million this year.

Slow sales

“A couple of years ago, half of the project would have been sold by the time excavation was complete… The absorption rate would have been 80 percent by the time it was delivered, now it is about 60 percent,” said Makarem, who insists there is still demand for in the right areas.

Slow sales may be attributed to the fact that rents in Beirut are still relatively cheap, with residential yields only 3.3 percent of the value, the lowest in years. Conversely property prices are over-inflated, leaving increasing numbers of people happy to remain in the rental market.

The September 2011 Global Property Guide rated Beirut 36th in terms of most expensive cities to have property in, with average prices pegged at $4,258 per square meter, and average rents at $2,342.

Secondary market

Not only have foreigners stopped buying in abundance, but some have also started to sell up and put their money into other regions where they feel there are gains to be made.

“There is a surge in the secondary market,” says Zina Dajani, managing director at Benchmark, the developer behind Beirut Terraces and other residential projects in Beirut. “Some owners who had bought their apartments at the early stages of some projects during the years 2007, 2008 and 2009, and that have now come to completion, are offering them at prices that are slightly lower than developer’s prices, making an acceptable profit but not necessarily doubling their money.”

“In our project (Venus Towers), we expect maybe 20 percent [of buyers] to resell,” said Salah Karameh, sales and marketing manager at Venus Real Estate development, asserting that prices have never dropped in Lebanon.

Especially in Beirut, real estate players expect prices to be stable for a few years and then rise again.

However, others are reluctant to resell. Capstone Investment Group’s Trabaud 1804 high-rise in Ashrafieh is 70 percent sold; it launched in mid-2010. Capstone Chairman Ziad Maalouf claims that though there is a waiting list for the small size apartments “no one who bought wants to resell for profit.”

Investment and financing

In 2010, $4.9 billion in foreign direct investment was funneled into real estate. Chairman of the Investment Development Authority of Lebanon (IDAL) Nabil Itani says 2011 saw less investment in real estate and tourism than previous years. Given the double effect of the financial crisis and political instability in the region, it is investment from Lebanese diaspora, rather than Europeans or Arabs buying second homes, which is keeping the market afloat.

Though there is still a residual oversupply of luxury apartments in Beirut that continue to struggle to attract serious buyers, developers have realized there is huge potential demand in the undersupplied middle segment, especially in the capital. As such, developers are focusing much more on lower quality apartments in peripheral areas to fit demand. It is this segment that is most efficiently supported by bank loans and subsidized lending through the Banque du Liban (BDL), Lebanon’s central bank.

Though developer borrowing to finance a project is capped at 50 percent by law, many Lebanese real estate firms have continued to use pre-sales as a buffer, so that debt financing is far below 50 percent. Some developers have priced their apartments at below market prices in order to sell all of their units in days, while others have used a private equity model to spur financing (see page 150). Still, leverage is limited so developers can afford to go one, two or three years without selling.

“If you look at all the unsold apartments, developers have already paid back their investment by selling 30, 40 or 50 percent of their buildings,” said Freddie Baz, chief financial officer at Bank Audi.

Banking loans to the housing sector grew by 61 percent in 2010 up to $4.5 billion, while bank loans to construction totaled $6.3 billion, up about 30 percent, according to BDL’s most recent figures. Yet Jean Riachi, chairman of FFA bank, sees little reason for optimism that current trends will continue.

“I think the banks will be more conservative with regard to lending to real estate, be it housing loans or loans to developers, because obviously the market is slowing down so they have to be careful.”

Priced out of pocket

While budgets haven’t changed much in the past few years, property prices have increased tremendously, particularly in Beirut, pricing many locals out of the central market.

The suburban area of Hazmieh has experienced increased construction activity in the last year, with the biggest Spinney’s super market in the country, a new airport link and the upcoming Hazmieh City Center only likely to increase demand. Two developments there plan to ask for Ashrafieh-level prices, according to Ramco.

In addition, areas like Baabda and Metn have experienced a revived interest in real estate activity in the past few years, while other areas like Fanar, Horch Tabet and Aramoun have rising potential.

The Mechref suburb of Beirut will soon see large investment, with Zardman real estate planning to build an ‘affordable’ housing community there. Yarze, however, “is facing a bit of a downturn because it was over -reaching and I think certain brokers there played a part in that, evidenced by [the fact that] property there that has been on the market for a while and hasn’t sold,” says Makarem.

Developers have also realized that there is greater potential in some underdeveloped areas where land is cheaper. Ramco stated in its third quarter report that developers have turned to areas such as Corniche El Nahr (in Ashrafieh) and Jnah to build housing, where the cost of land is under $1,500 per square meter, whereas Beirut’s prime land can cost up to $5,000 per sqm of built up area (see chart above).

As there are few empty plots left in prime locations such as Ashrafieh, many heritage buildings and landmarks are being torn down by developers to build more profitable towers, a phenomena many consider a crime against Lebanon’s cultural and social history. Though Beirut’s Mayor Bilal Hamad told CNN in August that developers have to get a permit from the Ministry of Culture before they can build on site of old buildings, so far less than 300 classified heritage buildings remain from around 1,000 that were documented in 1995.

Predictions

In November 2010, the director general of the Ministry of Economics and Trade predicted that Lebanon’s real estate market would grow by up to 15 percent in the next three years. With this year’s stagnation in sales and downward statistics across both supply and demand indicators, and with most experts predicting that prices won’t budge and sales may remain slow for the next two years, it seems his prediction was highly ambitious.

It can, however, be applied to underdeveloped regions around the periphery of Beirut where developers are able to buy and construct projects that cater to the undersupplied, middle-income housing market. A prime example is the success of FFA Real Estate’s first development project in Badaro, where apartments ranging from 75 to 214 square meters sold out within five days in May.

With 15,000 additional homes required each year to keep up with rising local demand, a sound real estate market remains on the horizon — as long as developers shift focus to a more reasonable, middle class segment.

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Comment

The year since Mubarak

by Jonathan Wright
written by Jonathan Wright

The year began in Egypt with a sudden but thankfully short-lived rash of self-immolations by aggrieved Egyptians following the example of Mohamed Bouazizi, the young street vendor who set himself ablaze in a solitary protest in southern Tunisia, December 2010. Tongue in cheek, commentator Issandr el-Amrani predicted “a year of spontaneous combustion” and imagined the authorities grappling with an epidemic of suicides across the oppressed nation. But millions of Egyptians, inspired by the Tunisians who drove out President Zine al-Abidine Ben Ali, had other ideas about how best to express their grievances. Less than a month after the first Egyptian doused himself with petrol and lit the match, President Hosni Mubarak had been toppled from the throne he had held for almost 30 years, pushed out of office by the largest street demonstrations the Middle East has seen since the Iranian revolution of 1979.

As the sun set on February 11, Vice President Omar Suleiman appeared on television to announce that Mubarak had ceded power to the Supreme Council of the Armed Forces, a group of some 20 generals who remain in power as the year draws to a close. Egyptians went home to rest, declaring themselves confident that their revolution was in safe hands and the generals would oversee a speedy transition to democratic and civilian government.
But the next 10 months have not been easy for almost anyone in Egypt. Many of the revolutionaries, especially the liberals and the leftists, say the military council has betrayed their revolution; the generals have sent more civilians to military trial than Mubarak ever did and have failed to purge the security forces and bureaucracy of the brutal and corrupt officials who thrived under Mubarak. The generals themselves soon learned that managing civilians was not the same as barking orders at conscripts in boot camp and that there were limits to the goodwill Egyptians showed them when they took power. Ordinary Egyptians lamented the lawlessness in outlying areas, the rising unemployment and the higher prices. Egypt's Coptic Christians, said to make up some 10 percent of the population, saw four of their churches set ablaze or demolished and then scores of young Christians massacred outside the state television building on October 9, in an incident that the military shows no willingness to investigate.

Hundreds of thousands of workers and civil servants, no longer deterred by state security and the riot police, have staged strikes, sit-ins and protests for better conditions; strapped for cash, the government cannot possibly meet all their demands. The upper echelons of the old regime have had it rough, but not as rough as many thought they deserved. Mubarak himself appeared in court lying on a gurney, charged with giving orders to shoot the demonstrators who brought him down in January and February; his sons and senior ministers are in detention, some convicted of financial crimes, others still on trial. The Islamists appeared to be the most obvious beneficiaries. Free to campaign for imminent parliamentary elections without fear of harassment, they have made hay while the sun shines. But their politics is fragmented across a broad ideological spectrum — from the hard-line and literalist Salafis to urbane intellectuals for whom Islam is the cultural backdrop to liberal democratic politics.

What happened in Egypt was not quite, or is not yet, a revolution. State structures have survived, though much weakened and vulnerable to contestation by competing political forces. The ruling military council has been cautious and conservative to a fault, taking no bold initiatives and usually acting only in response to street protests. The police force collapsed in the first few days of the uprising but is slowly finding its feet, without any fundamental change in its authoritarian mentality. The social and economic systems remain in place, and there is little popular demand for dramatic changes that go beyond eliminating corruption, favoritism, inefficiency and other vices.    

The euphoria of the uprising has dissipated, along with the sense of unity and purpose that opposition to the Mubarak regime generated. But for the moment Egypt is a place where people can breathe more freely and can cast their votes with some confidence that they are choosing their own leaders.       

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Society

Q&A – Nicolas Chammas

by Executive Staff
written by Executive Staff

As chairman of the Beirut Traders Association, Nicolas Chammas oversees study and research into Lebanon’s commercial sector and lobbies the Lebanese government on behalf of traders. In a chat with Executive he spoke about the contracting economy and the need for policymakers to cut retailers some slack through more supportive legislation.

E  Where has 2011’s poor economic performance left Lebanon’s retailers?
The year 2011 started very weakly because we had a hangover from 2010. The political bickering really dragged the entire economy down. And then in the very early days of January the government collapsed. So all in all, with the absence of government and no decision makers at all and the troubles in Syria, in the first semester of 2011 the [commercial sector] activity collapsed by about 30 percent. There has been a correction upwards in the third quarter… there was a slight increase in the number of tourists and number of visitors and on the retail scene as well. So I would say that we are looking overall at a 20 percent decrease in 2011. The first semester was terrible, and we were able to get some breathing room in the second part of 2011. Lebanon is a resilient country — the economy goes through terrible cycles, very deep troughs and very high peaks. But our problem now is a macroeconomic one, because we have fallen down from an 8 percent to a 1 percent growth rate and now you need some momentum in order to go back up.

E  How exactly has the regional unrest affected the economic performance of the retail sector?
You have to bear in mind that the situation in Beirut is different to the situation in other regions. [In Lebanon] you have two types of interactions with Syria — you have the interactions at the borders in Tripoli and in Zahlé, whereby you have a daily exchange between the Lebanese and the Syrians. In Beirut, you have the final customer coming to shop from the retailers and you have the retailers of Syria coming to buy from the wholesalers, so all these have been affected.

E  Have some consumer sectors been disproportionately affected?
You have three segments of consumers in Lebanon. You have the Lebanese residents who constitute perhaps, depending on the sectors, at least two thirds of the consumers, you have the Lebanese expatriates and you have the Arab residents. When you talk about the luxury segment, you have perhaps 40–30–30 [distribution across these segments], because the purchasing power of the visiting Lebanese is much higher than the local residents. We have estimated that the revenues of a typical Lebanese residing abroad are four to five times higher than his counterpart here in Lebanon, so this directly affects the luxury sector.

The medium level [of the retail sector] has been really affected because of the melting purchasing power of the population. The luxury items and international brands have not been suffering because of the constant flow of visitors and expatriates. The number of tourists coming by land has drastically decreased, and it’s true that visitors from the Gulf states have decreased in number, but if you look at the purchasing ticket,  it has stayed strong, which at the end of the day makes for a good sales volume in luxury products. The problem is the down periods are measured in months and the up periods are measured in days or at best in weeks.

E  Are some shopping areas within Lebanon succeeding more than others?
Malls are becoming more and more important, and they are taking away some business from the traditional markets. You have typical streets in Beirut — I would say Hamra, Verdun, Ashrafieh [and] lesser-known areas like Mar Elias and Barbour. These areas are suffering because malls are one-stop shops. Parking is a terrible thing, so you are in a tough spot if you are a middle-of-the-road retailer on one of the streets of Beirut. On the contrary, you are in a sweet spot if you have a strong international brand and [are] located either in one of the known malls or in one or two streets in Downtown Beirut. So you have a matrix in terms of positioning and location.

E  What does the Beirut Traders Association envision for Lebanon’s retail sector?
Our aim is to make Lebanon the showcase of the Arab world and the meeting point of trade currents between East and West. We believe that in the past, in the ‘60s and ‘70s, Lebanon actually played that role. So we see it as our responsibility to replicate this — trade is a traditional sector, but its interests have been overlooked, unfortunately.

E  What specific legislation are you lobbying for to try and support retailers?
Subsidized loans have been awarded to the tourism, IT and agriculture industries. [Retailers] did not benefit from this at all. There was a misconception because [the government] thought that as traders our balance sheets mostly consist of current assets, which is not the case. We need to get subsidized loans on commercial investments. The cheapest boutique costs $3 million to $4 million. This is our single most important demand from the government. They bet on laissez-faire whenever it makes their case easier, but it will not happen spontaneously this time. You need to inject either some liquidity or maybe remove some constraints; give the economy more degrees of freedom. And it seems they are taking us the wrong way, because now we are negotiating the minimum wage and so on.

E  Is it not difficult to get the numbers to back up your campaigns?
Data is very scarce. [The Beirut Traders Association] analyses the data, we do the number crunching and we face the government on behalf of the entire business community. As far as micro data is concerned… companies are not listed; most companies are family businesses and they don’t have any obligation whatsoever to publish their results. And then you have a banking secrecy law, which makes things even more difficult, so our aim is to try to find some proxies or some alternative ways. We need the data rather than the individual traders because… when we are bargaining with the government we need stronger data.

E  What unique strengths does Lebanon have as a retail destination going forward?
The strong demand. [International shoppers] will keep coming because Lebanon has traditionally been the showcase for the Arab world. So even if it is small compared to Dubai and elsewhere, it is an elegant and sophisticated market. It is also perhaps a testing ground for the large companies, so they cannot afford not to be in Lebanon — not so much for the volume they will achieve here, but for the image. Being in Lebanon is important because Lebanon also is a trendsetter. As long as you have political stability, they will keep coming. We would like Lebanon to be a shopping destination for all seasons, and we will work hard toward achieving this goal.

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Finance

Executive Insight – Corporate governance in the Middle East

by Alissa Amico
written by Alissa Amico

One year ago, I argued that the second wave of corporate governance had arrived at the shores of the Middle East and North Africa. Put succinctly, the first wave was about the introduction of corporate governance frameworks and the second about their implementation.

It goes without saying that the events of the Arab uprisings have planted the governance debate firmly within public discourse in the region. In Egypt, criticism of the privatization process has, for better or worse, drawn attention to the governance of state-owned enterprises (SOEs). In Tunisia, the confiscation of private ownership stakes of the Ben Ali and Trabelsi families has required a reflection on how these enterprises should be governed. Across the region stock markets have tumbled and some, such as the Egyptian Stock Exchange (EGX), remained closed for over a month to prevent a drastic capital outflow.

This outflow of capital might be a reflection of the political risk attributed by investors to Egyptian companies, but arguably also a reflection of the corporate governance risk. Speaking at the meeting of the “Organisation for Economic Co-operation and Development (OECD) Taskforce of Stock Exchanges for Corporate Governance” earlier this year, Chairman of the EGX Mohamed Omran argued that good governance of listed companies has played an essential role in allowing the stock market to re-open in March. Due to the separation of ownership and executives in many listed companies, in cases where controlling shareholders were subject to legal proceedings listed companies were able to continue their operations.

It is important to consider what has been the impact of the Arab uprisings on corporate governance in the region, beyond anecdotal evidence. First, it is indisputable that the link between good corporate governance and anti-corruption, especially in the banking sector, is increasingly being drawn. There is a growing interest in how good governance can help preserve the integrity of Arab banks, beyond anti-money laundering or anti-fraud provisions. Risk management and related lending in the banking sector is likely to remain a priority for some time.

Political lessons

Beyond this anti-corruption angle, the connection between sound economic governance and good corporate governance is evoked less frequently. This is curious considering that the events that transpired earlier this year in Egypt and Tunisia were arguably rooted to a certain degree in economic governance perceived as unjust. And yet, when pressed to speak about the impact of recent events on the evolution of corporate governance practices, experts either hide in the comfort of national corporate governance regulations in place before the events of this year or point to the need to engage with citizens in making corporations more accountable.

Neither of these approaches enables us to gauge the implications of political transitions on corporate governance in Egypt or Tunisia, or to draw lessons for the wider region. Instead, we should focus on the actual changes on the ground such as the swift modifications to corporate governance frameworks during the past year. For instance, in Tunisia, the transitional government just a few months after the revolution introduced new guidelines for corporate governance of banks. New guidelines for banks, effective next year, have also been introduced in Egypt, in significant part as a response to the anti-corruption concerns.

Attention is also being paid to corporate governance of state-owned enterprises (SOEs), an area which until about two years ago was a no-man’s land in the corporate governance debate in the region. Egypt was the first Arab country to introduce corporate governance guidelines for state-owned enterprises in 2006, and the Egyptian Institute of Directors has made considerable awareness raising efforts to encourage their implementation. Since then, governance of SOEs has been a matter that was allegedly of interest to everyone but which few policymakers or state-owned companies would address publicly. This appears to be changing.

The Moroccan government in October of this year released a comply-or-explain code for its SOEs, modeled on the “OECD Guidelines for Corporate Governance of State-Owned Enterprises”. Weeks later, the government of Dubai issued a decree addressing the governance of its own state-owned companies, which have been under the spotlight, not least due to the Dubai Holding restructuring. Prior to the issuance of this decree, SOEs in the United Arab Emirates were not subject to many corporate governance requirements and even listed SOEs were exempt from corporate governance guidelines issued by the Emirates Securities and Commodities Authority in 2009.

A number of governments in the region have adopted more than two or three codes for specific sectors, notably banking (Jordan, Tunisia, Egypt, etc.), but more recently also real estate (Dubai), as well as for small and medium and unlisted companies (Morocco, Lebanon, etc). It is difficult and perhaps too early to judge the effectiveness of this more extensive code drafting effort. But It ought to be emphasized that codes and guidelines are important but not sufficient for fostering good governance.

Deeds beyond words

All too often in the region, corporate governance is referred to as a practice with a finite outcome, as opposed to an ongoing process. In the public debate, the question seems to be posted in terms of having or not having “corporate governance” as opposed to having effective governance. This is a risky way of framing the question because the answer is then often given with reference to having a code or a guideline, either at the company or national level. In this view, the issuance of corporate governance code regulations is the final destination, a happy status quo.

This approach confuses a patient who has been diagnosed with one who has been cured. And yet, the difference between the two may be one of life and death. Many companies in the region, especially listed ones, have made serious progress in improving their disclosure practices, introducing board committees and establishing investor relations departments. Fortunately, some of these companies publish corporate governance reports that demonstrate with startling clarity the problems of this binary view of governance as something that can be introduced overnight like new software, without changing the hardware.

Consider, for example, one Gulf-based bank that boasts all the right policies, including specialized committees, a chief risk officer reporting to the board and standards for a number of board and committee meetings per annum. There is only one problem with the governance of the said bank — half of its board has been in place for over 30 years. In addition, some of these board members are considered to be independent since they do not hold any executive posts. But it is doubtful whether board members who have presided for that length of time can continue to exercise independent judgment.

This example underlies the dangers in the current corporate governance debate in the MENA region, whereby governance is considered as fait accompli after the boxes required by the national code have been checked. It also highlights that the risk of complacency by regulators and companies is not negligible. After all, stocks of Arab companies do not feature prominently in the portfolios of international fund managers not due to a lack of corporate governance codes or ESG guidelines but due to failings in developing implementation and enforcement cultures.

Another issue is that practices meant to be inspired by these codes are often not publicly disclosed even where there is a positive story to tell. The latter is an important point if Arab markets wish to position themselves as hubs for international capital. A dialogue between regulators, companies, investors, proxy advisers and corporate governance advisory firms may help to project Arab companies onto the international arena.

The Arab uprisings may have in the short term been detrimental to the performance of capital markets in the region, but perhaps we should remember that there is nothing better than a crisis to bring out an opportunity. The opportunity is to leverage the corporate governance debate to raise international interest in Arab markets and to attract more stable investment in the region. Liquidity and listings, the two preoccupations of stock exchanges and securities regulators in the region, will follow.

 

ALISSA AMICO is program manager for the Middle East and North Africa, Corporate Affairs Division, of the Organization for Economic Cooperation and Development (OECD). The opinions expressed in this article do not reflect the official views of the OECD or its member countries

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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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