Economics & Policy

For your information

by Executive Editors
written by Executive Editors

Syria stutters

As Syria comes under further strain as a result of the ongoing uprising and government crackdown, a series of announcements last month reflected the effects on the country’s economy. In an interview with Bloomberg in late October, Adib Mayaleh, the governor of Syria’s central bank, said the country had spent $3 billion of a $5 billion emergency fund since the start of the uprising in March in order to defend its currency from devaluation and to finance trade. The fund’s existence was revealed in August when Mayaleh announced that $2 billion had already been spent. Mayaleh also noted that foreign currency reserves held by the central bank amount to around $18 billion.  European Union sanctions on oil imports from Syria are scheduled to start this month and are expected to deprive the government of an essential foreign currency source, accounting for 25 percent of total annual revenue. Last month Mayaleh also hinted the country may transition away from the euro towards the Russian ruble if the EU bans the country from dealing in their currency. “In the near future we will agree on parameters for switching to close cooperation with Russian banks and using the ruble for international settlements,” he told Bloomberg.  This year Syria’s economy is expected to contract by 2 percent, according to the International Monetary Fund. Other predictions are even worse for the Levantine state, with the Institute of International Finance positing a 3 percent decline. Syria’s finance minister announced in September the country was expecting gross domestic product growth to slow to around 1 percent this year from 5.5 percent in 2010. [See Dithering in Damascus]

Draft budget released

Last month Lebanon’s finance ministry proposed its draft budget for the year 2012, in accordance with the constitutional deadline for doing so. The budget proposed a series of new taxes including an increase in value added tax (VAT) from 10 percent to 12 percent, while removing VAT refunds on a series of fixed assets used to perform activities such as educational services, activities of non-profit organizations and manufacturing of books, newspapers and magazines. Last month Neemat Frem, president of the Association of Lebanese Industrialists, told Executive that industries have not been receiving their refunds from the VAT administration for over 18 months. “They are borrowing from the private sector without asking us, by force,” he said. The increase in VAT is expected to rake in around $262 million in 2012, according to the draft budget. However, last month Finance Minister Mohamad Safadi told a local radio station that the revenues from the VAT increase would  total $364 million. A 3 percent tax on sales of real estate was also proposed in anticipation of a tax on real estate profits by 2013. The budget also proposed raising the tax on gasoline by LL2,000 ($1.32) per jerry can (1 jerry can = 20 liters) after it was reduced by LL5,000 ($3.25) earlier this year. The budget also proposes a tax on the thorny issue of illegal privately owned maritime properties built on public land, without specifying the amount. The budget predicted real gross domestic product growth in 2012 at 4 percent with inflation expected to hit 5 percent. The total deficit was estimated to reach $4.1 billion, or 29.7 percent of total expenditure. Total debt servicing was estimated to come in at $3.86 billion, an increase of around $24 million on 2010. Other items proposed included exemptions from some fees for non-polluting vehicles and reducing late fines imposed on municipal fees by 70 percent for years prior to 2009. The budget did not account for the increase in minimum wage, decided upon by the cabinet last month, which Safadi stated would cost the government at least $700 million. The budget will have to be approved by cabinet and then sent to parliament to be debated before it is passed into law. Lebanon has been without a budget since 2005.

Lebanon gets thumbs up and down

A series of global economic rankings released last month provided a mixed outlook for Lebanon’s relative position in the region and globally. The World Bank/International Finance Corporation’s “Doing Business Report 2012”, released last month, ranked Lebanon in 104th place amongst the 183 countries surveyed, a drop of one place in the global rankings. The report is compiled according to a composite index of 10 sub-indices including availability of electricity, registering property, paying taxes and enforcing contracts, all of which are major problem areas in Lebanon. The country fared worse than the previous year in terms of getting credit, protecting investors and starting a business. Resolving insolvency was deemed to take around four years and 22 percent of a debtor’s total estate value on average, compared to 3.5 years and 14 percent in the region respectively.  Balancing this grim assessment was the right-wing Fraser Institute, based in Canada, which measures competitiveness and government intervention in global economies and praised Lebanon’s economic freedom, ranking the country second amongst 16 countries in the region last year, the same position as in 2009. The index measures five broad factors of economic freedom and 18 variables.

FDI down

Lebanon is experiencing a downturn in foreign direct investment (FDI) and will continue to do so for the rest of this year, in line with the regional situation brought on by this year’s uprisings across the Middle East. According to the Kuwait-based Arab Investment and Export Credit Guarantee Corporation (AIECGC), total FDI in Lebanon will fall by 39.5 percent this year, from $5 billion in 2010 to $3 billion. Thirteen of the 21 Arab countries will experience a downturn this year, according to the organization, with the Arab world tipped to experience an FDI contraction of 17 percent in 2011 to $55.1 billion. Countries which have recently experienced uprisings were particularly affected by FDI contraction, with Egypt expected to see a 92 percent slide to just $500 million this year. Tunisia is expected to receive 21 percent less FDI year-on-year in 2011, Syria’s figure will fall by 65 percent and Libya’s is expected to see an 87 percent plummet. A total of seven Arab countries were tipped to see growth in FDI, including Saudi Arabia with $29 billion (up from $28 billion in 2010) and Iraq, which should see investment inflows of $3.5 billion this year according to the AIECGC. 

3G prices and legal problems

Last month Telecommunications Minister Nicolas Sehnaoui revealed the pricing structure for Third Generation telecommunication services (3G), tipped to be launched in February. Users will be charged $19 dollars by the ministry for every 500 megabits (Mb) of data they use over the service. Mobile operator Alfa also released their pricing scheme for the service last month saying that the service will be introduced in the ”coming few months”.  The ministry is still embroiled in a court case at the Shura council, Lebanon’s highest court, with the private data service provider Cedarcom over licenses to operate the service. The council ordered the ministry to halt execution of the 3G project on September 15 for one month pending the submission of a request for information by the court. Sources close to the proceedings told Executive that the government had submitted the requested documents, which stated that the mobile operators do not need a license because they are government-owned. When it came to pricing the service, which for public companies would require a cabinet decision, the sources said the ministry intended to treat the mobile operators as commercial entities able to set their own prices.

Hunt again for energy

The cabinet seemed intent to restart on the road to hydrocarbon wealth last month as it prepared for a proposed bidding round at the start of 2012. Last month the cabinet authorized the launch of a tender process to survey onshore hydrocarbon prospects. It also recommended a new draft law to regulate onshore oil and gas exploration similar to the one passed in August covering offshore exploration. The energy ministry also revealed that it has launched a tender process to reassess the seven existing onshore wells drilled between the 1930s and 1960s.

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Real estate

For your information

by Executive Editors
written by Executive Editors

Property sales taxed

The Lebanese government intends to introduce a 3 percent capital gains tax on real estate sales. The proposals come as part of the Ministry of Finance’s efforts to raise government revenues and increase next year’s expenditure by 13 percent, as revealed in the draft budget on October 4. In an interview in mid October, Finance Minister Mohammad Safadi said that the real estate tax, in principle, is acceptable as long as it is below 15 percent. In June 2010, under former Minister of Finance Raya al-Hassan, a draft budget proposed a hike on property registration fees from 5 percent to 7 percent on real estate valued over $500,000 as an alternative to a tax on real estate sales. It was not implemented before the collapse of the government in January 2011.

10 new levels of luxury

A Saudi Arabian firm, Al Shegrey Group KAS Investment, has opened the doors to its newly completed boutique hotel in the Beirut Central District, according to the group’s October 3 press release. Le Dix Hotel, named after the 10 suites which each occupy their own floor, was built at a cost of $25 million, and includes luxury amenities such as private butler service and limousine transport to and from the airport. Arguably built at the highest cost per room key for a hotel in Lebanon, the large suites include two or three bedrooms, kitchen and balcony with an unblocked sea view. Chief Operating Officer of the firm’s hospitality division, Abdulkader A. Hankir said in the press release,”We invite presidents, ministers, ambassadors and businessmen from all over the world to visit Le Dix and have a look at one of the most luxurious hotels in the Arabic region.”

Summerland’s back

The Summerland Village – Residential Apartments was launched October 20, as part of the mixed-use Summerland Hotel & Resorts Kempinski development in Ramlet al Baida, Beirut. Kempinski is the hotel operator, while the developer is London-based Sanbar Development Corporation, the architects are Samir Khairallah & Partners, and the main contractor is Gruppo Rizzani de Eccher. Set to open its doors in spring of 2013, Summerland Hotel will encompass 22,000 square meters of private land with 5000 square meters of private beach, a village composed of 73 residential apartments and a 60-boat-capacity marina. The original Summerland Hotel, which closed in 2001, was created by Société Générale d’Entreprises Touristiques SAL in 1967.

Saudi, king of construction in 2011

Saudi Arabia is dominating the Middle East and North Africa (MENA) construction market this year, having amassed $17 billion worth of new contracts in the first nine months of the year, a 152 percent increase from the same period last year, according to a Bank of America Merrill Lynch Emerging Markets report released October 20. The United Arab Emirates, meanwhile, experienced the steepest fall in new contracts for the same period, down 55 percent compared to the same period last year. For the whole MENA new contracts are up 19 percent year-on-year, but third quarter results were disappointing as contract awards were down 18 percent to $17.2 billion for the quarter. The report pointed out that major UAE construction firms like Drake & Scull International and Arabtec had succeeded in diversifying away from UAE markets, but that Arabtec’s “construction margins are weakening due to low contribution from high-margin projects reaching the end of their cycle and mobilization delays.”

Hilton to manage Habtoor

Al Habtoor Group, the Dubai-based construction giant, announced on October 17 that Hilton Worldwide will take over the management of the group’s two hotels in Lebanon.  The handover of the running of the Habtoor Grand and the Metropolitan Palace will be completed in early 2012. Although a Hilton Hotel in Beirut Central District has been ready for visitors for more than a year it is awaiting the necessary permits to open.  The deals between Hilton’s chief executive officer Christopher Nassetta and Habtoor’s chairman and founder Khalaf al-Habtoor were signed at a media conference in Dubai, where they also revealed that Habtoor’s upcoming 324-room hotel on Palm Jumeirah would be run by Hilton under their luxury Waldorf Astoria brand when complete in 2013. It will be the second Waldorf in the United Arab Emirates after the Ras Al Khaimah property is complete in 2012. Habtoor’s remaining four hotels in Dubai will remain under in-house management, but both speakers said they hope to conclude more contracts together in the future. “We have experience in running our own hotels and we did a great job ourselves, but now we thought it is the right time to hand over this new project to the people who are professional, who have more experience than us, who can provide worldwide experience and also to promote our property,” said Khalaf al-Habtoor.

Cement industry’s slower build

Cement deliveries in Lebanon reached 3.7 million tons in the first eight months of 2011, showing a 4.8 percent increase compared to the same period last year, according to Lebanon’s central bank. However, this growth is more modest than the 5.5 percent growth during that period in 2010, and the whopping 20.5 percent growth in that period of 2009. In August, cement deliveries reached 451,000 tons, indicating a year-on-year growth of 6.2 percent, according to Bank Audi. As for the major players in the local industry, Holcim Liban declared net profits of $19.9 million in the first half of 2011 versus $18 million for the first half of 2010, according to a Byblos Bank report. Net sales were at $97.1 million for the first half of 2011 compared with $92.7 million for the first half of 2010. Société Libanaise des Ciments Blancs recorded net profits amounting to $1.4 million for the first six months of 2011 versus $1.5 million in the first half of 2010. Sales revenues were $6.9 million in the first half of 2011 compared to $7.5 million for the same period in 2010. These figures indicate that after a slightly slower start this year compared to 2010 the rate on construction is finally picking up to its 2010 autumnal levels.

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Banking & Finance

Lebanese capital markets

by Executive Editors
written by Executive Editors

BLOM Stock Index (BSI)

Weighted effective yield of Eurobonds

Equity update

The shivering political situation in the Arab region, the gloomy economic situation in Lebanon and fears of another global recession weighed negatively on investors’ appetites for equities. This was reflected by the relatively low daily average volume of 150,811 shares valued at $1.02 million during the four-week period between September 16 and October 14, as opposed to an average 182,811 shares worth $1.72 million traded daily during the preceding four-week period. The BLOM Stock Index (BSI) hovered between a lower threshold of 1,205 points and a higher band of 1,244 points, before closing at 1,220 points on Friday, October 14, its lowest close since June 2009. The BSI closed around 2 percent lower than on September 16, and 17.3 percent lower than its value on December 30, 2010. 

On the regional front, the BSI outperformed the Morgan Stanley Emerging Market Index (MSCI), which lost 3.5 percent, during the four-week period, to settle at 930 points after distressing economic developments in  Europe at the end of September. As for the S&P Pan Arab Composite LargeMidCap Index, it fell by 1.2 percent to 106 points.  

Banking stocks captured the bulk of trade between September 16 and October 14, representing 63 percent of the total value traded. BLOM Bank stocks retreated during the period, as its Global Depository Receipts (GDR) lost 3.9 percent to hit $7.85 and its listed stock declined by 4.7 percent to settle at $7.80. However, BLOM Preferred 2011 added 0.1 percent, to settle at $10.12. Bank Audi listed stock dropped 3.55 percent to $5.98, while its GDR reversed the trend, adding 0.15 percent to reach $6.83. Both Audi and BLOM common stocks touched their lowest values since their respective stock splits in May and October 2010. It is worth noting that Bank Audi listed an additional 1 million GDRs on the Beirut Stock Exchange that were converted from Audi listed stocks as of September. Byblos and BEMO common stocks decreased a respective 1.2 percent and 3.9 percent to $1.63 and $2.47, whereas Bank of Beirut common stock gained 1.2 percent to hit $19.50.

In the real estate sector, Solidere A and B edged below their support level of $15, losing 1.3 percent and 2.6 percent to stand at $14.95 and $14.9 respectively, their lowest level in more than two years.

In the industrial sector, cement manufacturer Holcim Liban added 1.7 percent to reach $16.99 after revealing an 11 percent year-on-year growth in profits. Ciment Blanc Class B hit $3.25, its highest level since March 1998.

Eurobond bulletin

The Lebanese Eurobond market saw some selloffs on profit taking from foreign investors during the last two weeks of September, in order to cover some of their losses incurred in emerging markets. The BLOM Bond Index slipped 0.15 percent to 111.07 points. The portfolio weighted yield remained almost unchanged at 4.77 percent, whereas the spread against the US benchmark yield widened 16 basis points (bps) to 388bps as investors rushed for fixed income instruments. Lebanon’s credit default swap (CDS) for five years — a proxy for a country’s risk of default — reached 402-432bps compared to 395-425bps on September 16. Comparatively, in regional markets, Dubai and Saudi Arabia CDSs were quoted at 453-464bps and 111-118bps respectively.

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Banking & Finance

Market bulletin

by Executive Editors
written by Executive Editors

Beirut SE  

>  Review period:  Closed October 24 at 1,212.74 points   Period Change: -1.69%

The Beirut Stock Exchange was a ghost town in October as investors hid from uncertainty in Syria and worrying indicators for the outlook of the Lebanese government, economy and banking sector. In the meantime, a raise in the minimum wage united business owners and employee syndicates against the government but did little to attract investors desperate for stability. Class A shares of Solidere, the developer of Downtown Beirut, fell 2.05 percent during the period while Bank Audi, which reported its slowest growth in net profit since 2007, held its ground.

Amman SE  

>  Review period:  Closed October 24 at 1,955.62 points   Period Change: -1.81%

A positive mood reigned over Amman stocks in October with a new political leader promising reforms even more feverishly than his predecessor. To investors, however, the ride back looks bumpy at best, but the 1.8 percent rise from the low point on October 10 is a good start. Regional instability is making it tough for the market, given the economy’s dependence on declining tourism. Royal Jordanian shares plummeted 7.8 percent on large full-year loss estimates but management and trading in banks was light, with Arab Bank falling 2.3 percent during the period.

Abu Dhabi Exchange  

>  Review period: Closed October 24 at 2,446.71 points   Period Change: -3.42%

The Abu Dhabi Exchange’s dismal performance in October proved that money can not always buy investor happiness. Abu Dhabi stocks, previously considered safe from the Dubai debt crisis, plummeted to a 30-month low as risk-aversion emanating from Europe left investors watching from the sidelines. Although the National Bank of Abu Dhabi reported strong third quarter earnings, the bank’s shares were met with little cheer at empty exchange hallways, leaving the stock to tumble to 5.2 percent, a minor loss relative to real estate developer Sorouh’s 15.7 percent plummet before reporting results.

Dubai FM  

>  Review period: Closed October 24 at 1,359.77 points   Period Change: -5%

Dubai may be safe from Arab uprisings but local woes proved enough to upset the markets. The Dubai FM index was the region’s worst performer during the period as rumors surfaced that the exchange would not be upgraded to MSCI Emerging Markets status in December 2011. If that were not enough, Emirates NBD, which was forced to take over fallen Dubai Bank, said profits fell more than half in the third quarter, sending its stock down 8.5 percent. Real estate developer Emaar fared even worse ahead of earnings, down 9.8 percent.

Kuwait SE  

>  Review period:  Closed October 24 at 5,918.5 points   Period Change: +1.46%

Kuwait’s market recorded another month of positive growth, as a new wave of optimism came from an increase in real estate transactions: National Real Estate witnessed an outburst of trading that drove the stock up 56.8 percent. Banks suffered the fate of their peers elsewhere in the region as National Bank of Kuwait reported dismally flat third quarter earnings and floated 3.78 percent upwards on low volumes. Ahli United Bank struck down investors with a 10.6 percent scorcher ahead of earnings.

Saudi Arabia SE  

>  Review period:  Closed October 24 at 6,132.25 points   Period Change: +0.33%

It appears nothing can shake the Saudi mammoth exchange, including the cancellation of the Zain Saudi Arabia takeover or the 53 percent drop in the company’s third quarter profit. Zain’s shares fell only 9.6 percent but the market remained buoyantly in positive territory. Banking stocks took the rudder, and with tailwinds of double digit growth in net profits in the third quarter, they brought in 2.3 percent from their bottom on October 4.

Muscat SM  

>  Review period:  Closed October 24 at 5,538.75 points   Period Change: -1.1%

The comeback from the end of September/early October slide was more difficult than expected for Muscat securities. Investors welcomed leaping profits at Bank Muscat, sending the stock up 3.4 percent, but kept National Bank of Oman flat despite increased third quarter earnings. The exchange’s newest comer, SMN Power, also received a warm welcome and a 3.6 percent rise over its subscription price. But the excitement remains limited by downbeat trading volumes, prompting brokerage firms to petition the Capital Markets Authority for more flexibility with margin trading rules.

Bahrain Bourse  

>  Review period:  Closed October 24 at 1,144.4 points   Period Change: -1.83%

Bahrain investors can take a breather from a marathon year of record losses. Mixed third quarter earnings kept some traders interested, but the cold pause in domestic politics and the rising tensions between Saudi Arabia and Iran do not bode well for the average capitalist. Arcapita’s rating was also downgraded and kept on negative watch by Moody’s as Gulf International Bank saw its profit dwindle 13 percent in the first nine months. Aluminum Bahrain fell 10 percent despite reporting growth in production, on fears of rising production costs and weaker global demand.

Qatar SE  

>  Review period:  Closed October 24 at 8,457.95 points   Period Change: +0.76%

It is not all good news for Qatari stock traders, but the worst is probably behind them. After an initial flop following rumors that the Qatar Exchange would not be upgraded to MSCI Emerging Market status in December 2011, stocks took comfort in strong profits at most companies and rallied 3.7 percent from their low point on October 5. Qatar National Bank, Qatar International Islamic Bank, Masraf Al Rayan and Commercial Bank of Qatar all bucked the MENA loss trend and reported healthy earnings, with the latter’s shares inching up 1.5 percent during the period.

Tunis SE  

>  Review period:  Closed October 24 at 4,538.41 points   Period Change: -2.74%

The victory of Islamic ‘renaissance’ party Ennahdha in Tunisia’s polls meant anything but a renaissance for Tunisian stocks. Although party leaders promised not to impose Sharia law or retract women’s rights, investors were cautious after several months of optimism. With lower tourist numbers, a crisis in nearby Europe and another round of elections in a year preceded by a re-drafting of the constitution, stocks fell. Tunis Air dropped 2.9 percent and Carthage Cement fell 3.8 percent during our review period through October 24.

Casablanca SE  

>  Review period:  Closed October 24 at 11,333.9 points   Period Change: -1.1%

Investors contemplated Moroccan stocks as they watched the forthcoming November 25 parliamentary elections on the horizon. A debate erupted over the construction of the country’s high speed train linking Tangiers to Casablanca. In choppy trading, Attijariwafa Bank, an exchange heavyweight, was off 3.42 percent during the period while Itissalat Al Maghreb held its ground. With the key tourism sector suffering, hopes are high for Gulf support after being promised full GCC membership.

Egypt SE  

>  Review period:  Closed October 24 at 4,311.88 points   Period Change: +4.22%

Egyptian stocks are again fertile land for investment. The resumption of negotiations with the IMF and World Bank over a subsidized $3 billion loan and 10 times more in promised funds by the G8 sent Egyptian stocks soaring to the top of MENA exchanges during the review period. The prisoner swap between Egypt and Israel and the recommencement of gas flows at revised prices boded well, and drove Orascom Construction Industries up 5.9 percent and Commercial International Bank up 12 percent.

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Banking & Finance

Financial quotes of the month

by Executive Editors
written by Executive Editors

“The biggest headwind the American economy is facing right now is uncertainty about Europe.”

Barack Obama, president of the United States

“Lebanon will not be affected by a recession in Europe as the Lebanese economy essentially is dollarized.”

Riad Salameh, governor of the Lebanese central bank

“You want to look for countries with relatively clean balance sheets, with AAA types of ratings and with the ability, importantly, to print money.”

Bill Gross, founder of Pacific Investment Management Co (PIMCO), the world’s biggest bond fund

“This is the most serious financial crisis at least since the 1930s, if not ever.”

Mervyn King, governor of the Bank of England

“It was a wrong decision.”

Khalaf al-Habtoor, chairman of Al Habtoor Group, on their decision to acquire a stake in British lender Barclays in 2008

“We are open to any investment opportunities in all parts of Europe.”

Mustapha al-Shamali, Kuwait’s finance minister

“Don’t be a dick.”

What an investor apparently told Glencore’s CEO Ivan Glasenberg after he asked about the possibility of a last minute increase in the list price of its $10 billion IPO

“They [the IMF] have very substantial resources that are uncommitted.”

Timothy Geithner, United States Treasury Secretary, on the US’s refusal to inject more funds into the IMF

“We do not look opportunistically at distressed assets or special assets that come up one way or the other.”

Mohamad al-Jasser, governor of Saudi Arabia’s central bank, when asked about buying European sovereign bonds
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Banking & Finance

For your information

by Executive Editors
written by Executive Editors

Beirut Stock Exchange trades thin

Trading activity on the Beirut Stock Exchange (BSE) is dire so far this year. The total volume traded stood at 64.2 million shares as of the end of September, a 54 percent year-on-year decrease. Turnover stood at $467 million, down a whopping 72 percent from September 2010, and the BSE’s market capitalization decreased 14 percent to reach $10.6 billion. While the Lebanese equity market is being hit, the spreads on the country’s credit default swaps (CDS) — effectively the market’s perception of a county’s default risk — have been outperforming global peers. Spreads on Lebanon’s CDS have widened just 22 percent in the third quarter and stood at 429.7 basis points according to CMA Datavision, a CDS and bond-pricing firm. This is a much better performance than the widening of spreads in Denmark (216 percent), The Netherlands (176 percent), Italy (165 percent) and Austria (160 percent). Only the United States, Venezuela and Ireland performed better than Lebanon in the third quarter.

Merrill Lynch and Barclays recommend Lebanese Eurobonds

Merrill Lynch upgraded its rating on Lebanon’s external debt to “Overweight” from “Market Weight” within its emerging markets portfolio, placing Lebanon in the same category as Abu Dhabi, Qatar, Jordan, South Africa, the Philippines and Uruguay. The upgrade is driven by the low beta correlation of Lebanese Eurobonds to the international markets, due largely to an increased risk aversion. Merrill Lynch also raised Lebanon’s allocation in its portfolio to 3.9  percent from 3.5 percent and highlighted that Lebanon’s external debt returns were the only ones in positive territory among the 42 emerging economies in the portfolio. Barclays Capital maintained its “Market Weight” recommendation on Lebanese Eurobonds in its emerging markets credit portfolio but raised Lebanon’s allocation to 2.8 from 2.4 percent.

Tier one capital ratio to hit 12 percent

Lebanon plans to raise its tier one capital ratio, the core measure of a bank’s financial strength, to 12 percent within seven years, more than required by BASEL III, a new global regulatory standard on bank capital adequacy. Basel III requires banks to hold a tier one capital of 6 percent, up from 4 percent, by 2015. According to Riad Salameh, governor of Banque du Liban (BDL), Lebanon’s central bank, the new capital requirement imposed on Lebanese banks would place them “among the highest in terms of capital adequacy.” BDL will soon issue a directive requesting a 10 percent target for tier one capital within four years, rising to 12 percent three years later. During meetings at the International Monetary Fund, Salameh indicated that he does not expect Lebanese banks, which have an insignificant exposure to European sovereign debt, to be affected by the European crisis. He added that current regulations encourage solvency and liquidity in line with Basel III.

Gulf investors drop bid for Zain Saudi

Kingdom Holding, own- ed by Saudi billionaire Prince al-Waleed bin Talal, and Bahrain Telecommunications (Batelco) dropped their $950 million bid to buy a 25 percent stake in Zain Saudi, the kingdom’s third-largest mobile phone company which is owned by Zain, Kuwait’s biggest mobile phone company. The failure of the deal follows the collapse of two previous attempts to acquire a 46 percent stake in Zain: one in March for $12 billion by the United Arab Emirates’ operator Etisalat, and one in September 2009 for $13.7 billion by India’s Vavasi Group and Malaysian billionaire Syed Mokhtar al-Bukhary. Zain Saudi’s third quarter results showed accumulated losses of $2.5 billion, pushing the company to focus on capital restructuring. Zain Saudi recently appointed Khalid al-Omar as chief executive officer after the resignation of Saad al-Barrak. As of October 13, Zain Saudi’s stock price was down 27 percent on the year.

Commercial bank assets up

The total assets of Lebanese commercial banks stood at $138.1 billion as of the end of August 2011, a 10 percent year-on-year increase. Private sector deposits also increased 10 percent year-on-year and stood at $113 billion. Deposits in Lebanese lira stood at $37.8 billion, down 1.7 percent year-on-year while deposits in foreign currencies rose 17 percent to reach $75.2 billion. The dollarization rate of deposits rose to 66.6 percent, up from 62.6 percent a year ago. Loans to the private sector increased 17 percent year-on-year and amounted to $39 billion, of which $5.6 billion went to the non-resident private sector.

Emirates NBD takes over Dubai Bank

Emirates NBD, the largest lender in the United Arab Emirates, has taken over the struggling Islamic lender Dubai Bank for an undisclosed amount on the orders of Sheikh Mohammed bin Rashid al-Maktoum, the ruler of Dubai. The Dubai government, which holds a 55.6 percent stake in Emirates NBD, had acquired Dubai Bank in May after it was hit hard by the financial crisis. Before the takeover it was owned by both Dubai Holding, with a 70 percent stake, and Emaar properties, with a 30 percent stake. In an emailed statement, the government’s media office said the takeover was “in line with Dubai government efforts to enhance the banking sector in the emirate.”

Iraqi Telecommunications IPO delayed

Iraq’s three telecommunications operators, Korek Telecom, Zain Iraq and Asiacell, missed their planned deadline for floating on the Iraqi Stock Exchange (ISX). The companies were expected to be listed by the end of August 2011 but will not be penalized for missing their targets and now seem unlikely to launch an initial public offering (IPO) until the middle of 2012. The operators are first required to change from private companies to shareholding firms, which is expected to take a month to complete. The Iraqi exchange’s market capitalization stands at just $4 billion, with the average daily volume traded just $2 million — yet, technically, it is one of the world’s best performing markets this year. Taha Abdulsalam, chief executive of the ISX, expects the current market capitalization to double when operators list on the Iraqi bourse.

Qatar investing in gold and Luxembourg banks

Qatar Holding, a subsidiary of the gulf state’s sovereign wealth fund, the Qatar Investment Authority (QIA), is planning to create a standalone investment vehicle called “Qatar Gold” to invest in gold companies. It began by acquiring a 10 percent stake in British mining company European Goldfields at a cost of $775 million, of which $600 million will finance mine development in Greece. The Qatari royal family is also buying two banks in Luxembourg previously owned by troubled Belgian banks, Dexia and KBC. Precision Capital, a Qatari-backed firm based in Luxembourg, agreed to buy KBC’s private banking unit, KBL European Private Bankers, for $1.4 billion. Following the break up of Dexia by the French and Belgian governments, the Qatari royal family agreed to acquire Dexia’s troubled unit in Luxembourg, Dexia Banque Internationale Luxembourg (BIL), for an undisclosed amount. Qatar National Bank, which is 50 percent owned by the QIA, is in talks to buy the Turkish division of Dexia, Denizbank, in a deal that could potentially be worth $6 billion.

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Feature

Revolution reaches for the next level

by Executive Editors
written by Executive Editors

Since February 11, Tahrir has been taken to the factories,” says workers’ rights activist and blogger Hossam al-Hamalawy. “The barometer for progress has been [thought of as] how many people gather in Tahrir, but that’s not true. The labor strikes that have taken place after former president Hosni Mubarak’s fall are phase two of the revolution.” 

Egypt has witnessed more than 120 different labor strikes since March this year, according to data from the Egyptian non-governmental organization (NGO) Awlad El Ard Association for Human Rights. This is in addition to over 490 sit-ins, demonstrations and protests. Experts estimate that roughly half a million workers participated in strikes in August and September alone.

The current wave of labor actions found its roots in December 2006, when the nation’s center of textile production in the industrial city of Mahalla El Kubra saw an outbreak of wildcat strikes. These protests in many ways helped pave the way for this year’s 18-day uprising and its perceived success after workers took to the streets during the final days of the revolution, ensuring Mubarak’s dethroning.

“The organization and awareness of workers is in itself outstanding… I think in the future, these workers will lead the way to change”

Unions unquelled

Labor agitation escalated in mid-September, most significantly when tens of thousands of teachers descended on downtown Cairo as part of a larger strike calling for increased wages. That same week, hundreds of thousands of doctors, nurses and health technicians walked out of public hospitals, while transportation networks ground to a crawl when workers from 25 bus depots across Greater Cairo staged a partial strike.

“The organization and awareness of workers is in itself outstanding,” says labor activist and journalist Moustafa Basyouni. “I think in the future, these workers will lead the way to change.”

Egypt’s labor force is more than 25 million people and worker protests have affected all sectors of the economy, most occurring in the public sector. Acting government officials eventually negotiated with teachers and transport workers. However, other strikers have been completely ignored.

“It just depends on the power of the strike,” says Hamalawy. “Look at the aviation workers; you can’t mess with them. They brought Cairo to a halt.” When air traffic controllers went on partial strike in early October, hundreds of flights were delayed and travelers stranded, forcing officials to address their concerns.

In what human rights activists consider among the more troubling responses to the strikes, workers have been arrested and tried in military courts. Many cite the authorities’ failure to address workers’ concerns in a consistent manner as an obstruction to a return to normalcy, wreaking havoc on the economy.

The government’s projected 3.5 percent economic growth rate for 2011-2012 is unrealistic given the unstable political and social environment, according to Magda Kandil of the Egyptian Center for Economic Studies.

“We know that growth rate has slowed to 1.8 percent,” she says, “and I’m not confident at this point that it’s back on track. The private sector remains at a standstill and foreign investors are concerned [about financial risk], so they’ve scaled down involvement.”

“The military is not dealing well with the labor strike movement,” she adds, referring to the Supreme Council of the Armed Forces (SCAF), the ruling junta that rose to power following Mubarak’s ousting.

“I think the frustration in the labor movement reflects [the fact] that many people are not happy,” says Kandil. “The best thing the ruling council can do is ensure a swift transition.” Parliamentary elections are slated to begin on November 28, but SCAF says it will retain power until a new president is elected, with this ballot now expected as late as 2013.

The number of civilians subjected to military tribunals by the ruling council exceeds the total number of people tried this way under Mubarak’s 30-year rule

SCAF’s bludgeon of ‘justice’

Within the confines of a military prison, Khamis Mohammad was stripped and beaten brutally. “I was treated as an enemy of the country, as if I was the reason for the poor economy,” says the young Egyptian who is one of many arrested on charges of public assembly in violation of an anti-strike law.

After being plucked from a 200-man sit-in outside Cairo’s petroleum ministry, Mohammad remained in a dingy jail cell for weeks until he was given a one-year suspended sentence by a military — not civilian — court. Such trials are just one aspect of post-revolution governance by the ruling military council that human rights organizations claim undermine a smooth transition to democracy.

“Military trials are a way of intimidating the opposition and are counter-revolutionary by nature,” says Shahira Abu Leil of the human rights group No Military Trials for Civilians. “The revolution was about freedom of expression and free speech. And the military has tried people who were exercising these rights.”

“SCAF is doing this because it’s a way to put people back into a disciplined state,” she adds.

Some 12,000 Egyptians have appeared before military courts since the start of the revolution; roughly 8,000 remain in prison and 4,000 have been released, according to Abu Leil. Courts have acquitted 795 of the total number of cases, equating to a conviction rate of 93 percent, Human Rights Watch (HRW) said in a September 2011 report; 1,836 individuals, like Mohammad, were released on suspended sentences.

“The judges are in a clear hierarchy, so one of the concerns we’ve had with the military justice system is there have been cases of clear political instruction,” says Heba Morayef of HRW. “In your average [civilian] courts judges make independent decisions, but in these cases SCAF is making the decisions.”

The ruling council has held their ground on the judicial system refusing calls to end military tribunals, citing increased crime rates and the need to prosecute baltageya — or thugs — who have been on the prowl since the January uprising.

“Military trials are easy and efficient,” Morayef says. The average length of each trial is between twenty and forty minutes and civilians are sometimes tried and sentenced in groups. “But decisions are often not based on proper examination of the evidence,” she argues.

The number of civilians subjected to military tribunals since the ruling council rose to power on February 11 exceeds the total number of people tried this way under Mubarak’s 30-year rule. Those convicted range from laborers to activists, such as blogger Maikel Nabil who went on a hunger strike after being sentenced to three years in jail for “spreading false information” and “insulting the military establishment”.

In early October, seven demonstrators were plucked from a protest in the Nile Delta city of Shabin El Koom while demanding improved factory conditions and increased job stability for workers at the Turkish textile company, Mega Textile. Those arrested were given 15-day jail sentences while investigations took place, an act allowed under Egypt’s Emergency Law.

“This needs to be changed because the people are considered guilty until they’re proven innocent,” says Egyptian lawyer Mohammad Hassan as he stands among a group of workers in the city.

Egypt’s widely reviled Emergency Law has long been a hot-button issue for activists because it gives the military government the right to detain people without charge and criminalize mass gatherings. Emergency law was to expire at the end of September but was renewed following a violent attack on the Israeli Embassy in Cairo.

“The recent crackdown is on political protests, labor protests,” HRW’s Morayef says, “and from a freedom of assembly standpoint, that’s very serious.”

SCAF is refusing to repeal emergency law despite requests not only by enraged activists but also by the Obama administration. United States Defense Secretary Leon Panetta raised concerns about the Emergency Law while visiting Egypt in October, and US President Barack Obama is urging Field Marshal Hussein Tantawi to repeal the action and put an end to military trials. As part of the widening crackdown, SCAF has placed a firmer grip on civil society, restricted press freedoms and carried out arbitrary arrests — all characteristics of Mubarak’s regime.

The Egyptian cabinet announced in September that more than 30 Egyptian NGOs are being investigated for receiving foreign funding without being properly registered. Should these groups be found guilty of “treason”, Egypt’s human rights network could effectively be shut down.

“The recent crackdown is on political protests, labor protests… and from a freedom of assembly standpoint, that’s very serious”

Silencing the press

Additionally, the military council is censoring media following months of relative press freedom. In mid September, plainclothes police  stormed the offices of Al Jazeera’s Mubasher Misr Channel , taking equipment and rouging up staff. Two weeks later, an edition of the weekly Sawt Al Umma and the daily Rose Al Youssef were prevented from going to print allegedly over controversial stories. In a subtler form of censorship, a writer at a popular Cairo-based magazine says management was told specifically not to write articles that criticize the military, or they would face punishment.

Most severely, military forces clashed with civilians on October 9 during a demonstration by Coptic Christians, leaving 24 dead and hundreds injured. The same evening, the US-funded Al Hurra television station was raided by military forces brandishing automatic weapons. Telephone, electricity and Internet services were also cut to one of Egypt’s leading newspapers, according to the Committee to Protect Journalists.

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Editorial

Shooting blind, from the hip

by Yasser Akkaoui
written by Yasser Akkaoui

The current Lebanese government is, in economic terms, as dangerous as a blind man with a loaded gun and an itchy trigger finger.

To date, it has shown little to no leadership in guiding Lebanon’s floundering economy back to prosperity, offering no comprehensive strategy to promote sustainable growth across the different job-creating industries — be they financial, service-related, manufacturing or agricultural. Instead what the government has offered is ill-considered, quick-fix patches. Cabinet’s commitment last month to raise wages for workers in lower income brackets by an arbitrary amount would be in the same category, if it were not also actually counter-productive to the ends it is purportedly trying to meet.   

First, let’s be clear: With the rising prices it has become effectively impossible to achieve a descent standard of living earning the current minimum wage. However, the equation for setting the new optimal minimum wage requires knowing a few basics numbers ­— none of which the government has: It has developed no capacity to monitor wage rates or income distribution across the country, has no labor force or household surveys and no employer surveys. In other words the government has no idea what the optimal wage increase would be, and no clue as to the impact of its proposed minimum wage increase on either employees or employers.

Concurrently, since the beginning of this new government’s term, the country has experienced zero economic growth, meaning private sector businesses are already struggling. Forcing them to raise wages 40 percent overnight without offering the prospect of recouping these costs through new growth will result in employee layoffs and employer insolvencies.

What Lebanon needs is a comprehensive plan to address the fundamental flaws in the structure of the economy to boost growth, create jobs and raise the general standard of living — including setting the minimum wage at a level that is fair for employees and feasible for employers. What the country does not need is major policy decisions that affect millions of Lebanese and the economic stability of their country taken by shoot-from-the-hip politicians who, to date, have show themselves utterly unqualified to hold office.  

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Finance

Executive Insight – Rise of the Chief Risk Officer

by Shane Phillips
written by Shane Phillips

Revolutions, rogue traders and roller coaster markets have one thing in common: They make risk professionals fashionable. While the fourth quarter of 2011 will see bloodletting in the front offices of many high street banks, risk professionals will sit comfortably and benefit from what is now being coined as “The Rise of the Chief Risk Officer (CRO)”. 

As globalization gathered steam in the early 1990s, corporations began to realize that managing their downside had a huge upside and so began to anoint executives with the remit of ensuring their organizations had the appropriate risk controls. This innovation has taken hold of the global corporate community with breathtaking speed. In 1993 James Lam was hired by GE Capital as the world’s first CRO. Since then the role has spread to all four corners of the earth, across industries and sectors, and is now being considered the fourth C in the C-suite.

Risk has experienced explosive growth over the last 10 years. In 2000 only 45 percent of financial services companies had a CRO, now more than 80 percent do. Companies are hiring risk professionals both vertically and horizontally throughout the organization. 

Risk teams were first assigned to cover critical areas such as liquidity risk, market risk and credit risk. Since then the spectrum has broadened and today risk teams deal with operational risk, enterprise risk, industry risk, investment risk, political risk and many others. In fact new areas of risk are probably being created as you read this article. 

This translates into an ever-growing demand for risk professionals in every world region, including the Middle East. In the Gulf Cooperation Council (GCC) we have seen a steady increase in the number of CROs on the ground, with most high street banks having one for each country, where previously there was one for the region. In 2000 there were less than 20 CROs based in the United Arab Emirates, whilst today there are more than 100. 

Culture clash

Unfortunately it is not enough that organizations hire risk professionals and create risk policies and procedures. Most organizations had risk professionals among their staff in 2006 and 2007. When the financial crisis struck, the problem was that they did not have risk cultures. An organization’s culture is dictated by the values of its leadership and the preponderance of chief executive officers (CEOs) coming from the front office means middle office and back office staff are the underdogs in any boardroom discussion.

The 2010 Dodd-Frank Act in the United States requires banks with $10 billion or more in assets to create a board level risk committee. This marks an important step forward in developing risk cultures where the authority of the CRO is underpinned with direct access to the board, enabling him or her to circumvent the CEO and highlight risk issues. In early 2000 only a minority of CROs had access to the board and CEOs could easily mute, or in extreme cases remove, their CROs if they did not march to the sound of the boss’s drum. This change in legislation and reporting line will cause a cultural change and require the front office to adapt a more risk-conscious approach to their work or face the wrath of a CRO.

There were a few brave candidates, both CROs and chief investment officers (CIOs), who resigned from their posts in 2007 and 2008 because their leadership refused to listen to them. These men and women were facing extreme pressure to fall in line as their organizations gorged themselves on risky derivatives. Standing up for what was right was a fatal strategy in these companies. We all saw the effects of such cultures as Bear Sterns and Lehman Brothers came crashing down, causing unprecedented damage.

A growing trend

A recent study by Deloitte has shown that more than 50 percent of CROs are currently reporting to the board. This is an improvement on 2008, where that figure was 37 percent. This represents a gradual shift in the skill sets an organization requires at its helm and also raises questions about whether we have the right kind of leadership in the CEO seat. CEOs of the future will be required to have an understanding of risk, compliance and legal in order to effectively manage their organizations in the new market place. 

This change was not sudden and contrary to popular belief it is not the love child of a vicious bear market. While the correlation between tough economic data and the increase in risk professionals over the last three years suggests a causal link between increased economic risk and the corporate demand for CROs, this demand is in reality a long-term trend of risk management that has been growing steadily since the late 1980s. Behind what seems like a recent phenomenon of CRO empowerment we have been witnessing the ascendency of the middle office as operations, information technology, compliance, legal and risk have all been slowly growing in influence over the last three decades. 

What we are experiencing now is a trend which really began in the late 1980s and was first felt in the early market crash of the 1990s. At that time globalization and technology first began to change the way we did business and several mammoths such as IBM almost went bankrupt because they were not quick enough to adapt. In the 1990s companies had to think globally but act locally as clients wanted standardized services across the world. This is the tail of the same trend that is now past its tipping point. Throw increased volatility into the mix and large companies now have a significantly increased risk profile, a risk profile which has been slowly inching higher for the last 30 years. 

In conclusion, the rise of the CRO is a trend with a convincing track record, bound to accelerate further as it is authenticated with legislation and enforced with new regulation. Stanton Chase International has seen a 400 percent increase in demand for risk professionals over the last five years and we predict a further 44 percent increase in 2012. As organizations strive for better corporate governance and move to defend their profit pools from downside risk, CROs will continue to see their equity price rise.

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Finance

Teamwork to the top

by Executive Staff
written by Executive Staff

Insurance companies in Lebanon may have a future filled with potential but their presence is also stacked with risk. Although sector growth in 2011 to date has not been bad at all — data for the second quarter imply 17 percent expansion of premiums in the first half of the year (see story on sector statistics page 56) — growth in key segments of domestic insurance demand raises questions and interaction with global partners is also set for some challenging times.

In an interview with Executive, Assaad Merza, the president of the Association of Insurance Companies in Lebanon and chairman of Capital Insurance, said that although the sector shows good numbers in terms of the underwritten premiums that represent the industry’s turnover, “all insurance companies do not write large profits.” He added that a majority of people in the population tend to buy only medical insurance because of its importance for their families and themselves but do not have, or can not afford to buy, other needed policies.

As Merza further pointed out, insurance companies have been impacted this year by slowing sales of homes and cars. As with personal loans in general, lenders require that buyers of homes or cars back up the loans they take with a life insurance policy that will cover outstanding payments in case of the buyer’s death. This tying of insurance to provision of credit has generated profitable business for insurance companies but providers, especially firms linked to banks by ownership, feel it when the loan markets slow. 

“Insurers and banks definitely go alongside [one another] and all the retail lending products have insurance embedded in them. So it is normal that insurance will be affected if the economy slows down and this affects lending, especially in retail,” commented Fateh Bekdache, general manager of Arope Insurance.

BLOM Bank-owned Arope, whose continuous growth in the past few years has propelled the firm into the top tier of Lebanese insurance companies in terms of turnover and profits, saw its premiums rise in 2011 but expects 2012 to be a more challenging year, said Bekdache. Another bank-owned insurer, Byblos Bank’s Adir, has enjoyed premium developments this year in line with those of the same period in 2010, according to remarks General Manager Jean Hleiss made to Executive on the sidelines of an insurance conference in Beirut last month.   

While medical insurance has led to growth in premiums in 2011, the increases were not from new business, said Edward Traboulsi, general manager of Lebanese insurance firm Assurex: “Looking at the statistics for the first two quarters we have seen market growth mainly coming from medical insurance. The main driver behind that is the increase in prices or premiums which have to follow the increases in medical cost.”   

Real, that is inflation-adjusted, growth rates will be hard to achieve for 2011, agreed Elie Nasnas, general manager of AXA Middle East. “I think the sector is improving but growth this year will be less than two digits and the driver will be inflation much more than new business or increases in the number of insured.” According to Nasnas, insurance activity in the region is generally following trends in economic development and the concept that the sector itself would be sending impulses for growth into the wider economy is currently a dream.

“Unfortunately, the insurance sector is not yet driving the economy, definitely not,” he said.

Insurance activity in Lebanon is very sensitive to fluctuations in the economy as the reach of mandatory covers for companies and individuals is small. Even the compulsory third-party liability policies for motor vehicles are still limited to covering bodily harm instead of material damages and a mandatory insurance for buildings, the so-called decennial insurance introduced several years ago, has so far not been implemented because the legal requirement mandated an earthquake cover and insurance companies refuse to cover such acts, as they cannot  obtain reinsurance.

Across the entire Middle East and North Africa (MENA), risk mitigation levels in society are tied to the presence or absence of compulsory insurance schemes. These schemes, plus the prevalence of life insurance as savings and wealth-building instruments, constitute a large portion of insurance spending in developed economies, which in 2010 were reported at $3,724 per capita in North America (United States of America and Canada) and up to $6,633 in Western Europe. In addition to macroeconomic factors, the absence of compulsory lines contributes significantly to the far lower degree of insurance spending in emerging economies, which for 2010 was preliminarily calculated at $110 per capita by a report for global reinsurance firm Swiss Re.

In comparison to developed economies, MENA populations have a high tolerance for personal risks and relatively high reliance on familial support networks. The introduction of new mandatory insurances would be a key requirement to facilitate premium growth in any country of the MENA region.

“I expect an overall increase in premiums of between 12 and 17 percent in the Arab world for 2011. For 2012 I have some doubts,” said Fady Shammas, chief executive of Arabia Insurance.  He added that, “Unless there are compulsory insurances that are agreed upon and legislated, I don’t expect major growth. The more compulsory, the more premiums. But as long as the people of the Arab world are poor and disposable incomes do not exist, many governments will be very reluctant to come up with laws of compulsory insurance, very reluctant. I don’t expect any introduction of compulsory insurance in 2012, because the governments are afraid of the people.”

The region’s upheavals thus figure indirectly in lowering the business outlook for insurance companies, at least in the short-to-medium term. As Lebanese insurance firms have established subsidiaries in countries affected by the Arab revolutions, their businesses in these countries have also seen a direct downturn. According to Arope’s Bekdache, 2010 was a very good year for the company’s regional subsidiaries in Egypt and Syria but this year is not. The manager did not disclose, however, how sharp the decline in each of these two countries was in the first nine months of 2011.

In Bekdache’s view, however, insurance expansion in under-served regional markets is not going to be derailed. Unrest in single countries will delay the implementation of expansion projects but insurers who ventured into these markets did so with a long-term perspective and are confident that the market growth will restart after the societal changes.

That sentiment echoes with Assurex, the first Lebanese company to acquire a license to operate in the Iraqi market. According to its General Manager Traboulsi, there is no doubt that the rationale for expansion remains sound. “We need to look at other markets in order to grow. We have the know-how and the capabilities and there is business out there, so it is very important for us to grow our business to look outside the borders. Iraq was a country where we thought there is potential for us,” he said, adding that although it is very challenging to write new business in Iraq, the country offers a rare combination of an established insurance tradition and while being a “virgin market”.

One reason Traboulsi cited for the pressure on Lebanese insurers to venture outside is the intense competition in the crowded domestic market. “The pie is just not growing in Lebanon. We are competing against ourselves to grow our market share or increase our volume of business,” he said.

The same sentiment was voiced by Max Zaccar, chairman of Commercial Insurance and one of the sector’s longest-standing leaders of a family-owned insurer. Aggressive competition over the very few profitable lines in general insurance, including marine hull and cargo business, has intensified further in recent years, he told Executive.

The problem of competition is endemic even at a regional level and fragmentations of the industry play a large role in lowering the strength of sector companies, said Farid Chedid, chairman of Chedid Re, one of the largest brokers in reinsurance services in MENA.   

The most problematic side of the intense competition among Arab insurance companies is that, “unfortunately most of the competition is based on price,” Chedid said.

The tightness of insurers’ profit margins is an issue that influences negotiations between them and the international reinsurance companies to whom they hand portions of risk to limit their exposure to manageable levels. Due to pressures that global reinsurers face from high catastrophe losses, (according to Swiss Re, the first half in 2011 was the second worst year in reinsurance history with a loss of $70 billion) and from difficult financial markets that impair their investment incomes, regional insurers are now caught in a quagmire. “On the one hand we have reinsurers who are trying to raise prices and improve terms and conditions [to their advantage] and on the other hand insurance companies are in severe competition with one another and are trying to pull prices down. This makes things very difficult because each group is looking at the business from a very different angle,” Chedid added.

He believes that the Middle East’s insurers may be forced to rethink their strategies. “Our region cannot live without reinsurance. Reinsurance cession is one of the highest in the world. Why is there so much reliance on reinsurance? Because insurance companies are too many — over 500 companies in MENA — and because there are so many, they do not have the capacities for higher retention of risk.”

This tight squeeze on the industry can, Chedid argues, help make the sector more efficient. “The smaller insurance companies that rely heavily on reinsurance will definitely be left behind if they don’t increase their capital bases and upgrade their underwriting and risk management expertise. We are moving toward a trend of more consolidation in the industry, more expertise in the industry, more capital in the industry and therefore more retention of risks in the region.”

Negotiation of contract renewals with reinsurance companies is one strong concern of sector companies, but an even larger concern is the development of investment portfolios and investment incomes, Arabia’s Shammas said. Between the impact on underwriting from reinsurance tightening and the impact on investments, the greater impact is “definitely on investments. If your results are good and you are profitable, the reinsurer will not put pressure on you when terms for renewals are negotiated — whereas your investments are at risk at any point in time.” He added that Arab insurance companies are impacted by the performance of their investments in European bonds and equities, and are furthermore exposed to the effects of turbulent global conditions on countries in the Middle East.

The region’s insurers will not escape the impact of the latest financial woes in developed economies, said Ibrahim Muhanna, a Lebanese insurance consultant. “The insurance industry in the Arab world always has a delayed effect from financial developments in global markets. When in 2008 everybody said we were immune, I told them we are going to feel it and they felt it a year later.”

Even insurers without direct exposure to the European crisis will feel an impact because they have investors who are exposed, albeit with a delay of a year or two, Muhanna told Executive. “If one of their big policy holders, for example, is exposed, this policy holder’s business will go down in the second year and his premiums will go down and the insurer’s business will go down. It has a delayed effect. It takes a good two years to feel it in the Arab world. The results reported in 2011 are not as bad as anticipated but in 2012 and 2013 we will definitely feel the results.”

A final duo of items weighing on the balance sheet of insurers in the Middle East are the issues of regulation and cooperation. Fairly advanced regulations have been introduced in some countries but there are major differences, and in Lebanon the adoption of a new insurance law has yet to happen (see interview with the Lebanese insurance commissioner on page 64).

Mention of regulatory intrusion into their established ways still has the ability to raise the hackles of insurance managers and the implementation of regional insurance regulation remains something of an illusion, although it would facilitate important progress in regional sector growth in the views of many region-wide actors such as Chedid.   

“Today, each country has its own regulation and different regulatory requirements beginning from very basic things [such as] policy wordings, risk management, capital base. Some countries are moving towards risk-based capital, others are using minimum capital with guarantees,” he said. “We need to move to more homogeneity in the region by regulators so that the market can develop and the insurance companies can develop on regional basis and therefore grow. Then they will be able to retain more risks in the market and be able to afford better underwriting expertise and better IT systems. No country in the region today can on its own provide enough volume and enough business to create economies of scale. As a regional company, you can create economies of scale and you are able to compete with international giants,” he said.

As major stakeholders in the Lebanese insurance industry emphasized to Executive, the country’s insurance sector can only blossom with regional cooperation. This, however, means that issues that reside just below the surface in regional dialogue — including misgivings, jealousies, territorial thinking and distrust of the other stakeholders’ intentions — need to be mastered by companies, brokers, regulators and all practitioners of insurance.

A conference bringing together insurance regulators and insurance companies at the end of October in Beirut was the first initiative to provide an equal and open forum for all stakeholders. Although Sharia-compliant insurance, or Takaful, has no significant representation in Lebanon, the forum even drew the attention of an insurance regulator from Senegal who attended with the specific aim of meeting Takaful companies.

Although, or perhaps even because, discussions at the forum had their moments of clearly opposing views, the event was hailed by participants as a great step forward in improving relationships among the region’s insurance stakeholders.

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