Comment

Commemoration and conformity

by Peter Speetjens
written by Peter Speetjens

Perhaps, if on another planet, one may have missed the 10-year anniversary of the day when September 11 became “9/11”. Virtually every self-respecting media outlet in the world dedicated time and space to the terrorist attack which, among other things, saw two planes torpedo New York’s Twin Towers. Television channels repeated the explosion again and again last month. Newspapers created special supplements and magazines filled entire issues with stories of the victims, their families, firemen, witnesses and just about anyone remotely connected to the dreadful event. For people not anywhere near the scene when it happened, no problem, there was always the “where were you when” question. The American media in particular went overboard, which is to some extent understandable, given the event took place on American soil. Worldwide, 9/11 also resonated, as it unfolded live on TV for a global audience of hundreds of millions — one reason the late German composer Karlheinz Stockhausen defined 9/11 as “the greatest work of art… ever”.

Still, while the West likes to pat itself on the back for its intrepid free press, the conformity of its coverage was striking. It was, by and large, an emotional affair with few critical questions asked. Only a heartless fool would not feel for the nearly 3,000 victims and their families, or take exception to a moment of silence. But do we need to watch and read the same thing in English, French, Arabic and God knows how many languages? What is more, is the wave of media attention justifiable, considering the millions of people who were killed over the course of history, yet for whom no tears are shed and no flags are waved? Why is there no global wave of compassion for the victims of “the other 9/11” in 1973? On that day, General Augusto Pinochet took power in Chile, with US blessing. Many more than 3,000 people were killed on that 9/11, while some 20,000 were to be shown their graves in the months following and a million forced into exile. Why does the rest of the world not commemorate the 800,000 Tutsis killed in Rwanda during the 100 days of horror, or the 2.5 million people killed by the Khmer Rouge in Cambodia? The book of mass atrocities has many chapters, with much of human history written in blood.

Commemoration, however, is not just about compassion. The ritual in memory of the martyr is also a means to close the ranks and stand as one. It is about reconfirming the collective identity, an act particularly welcome in the US, a country that seems to grow more divided by the day as it goes through one of the worst economic spells in its history.

On such a solemn moment of unity, it is not befitting to raise critical questions. Doing so is to step out of line and out of the group; one essentially declares oneself an outcast. That is what happened to New York Times (NYT) columnist Paul Krugman. In a welcome variation to the general mode of tear jerking, he wrote in a piece called “The Years of Shame” that “fake heroes like Bernie Kerik, Rudy Giuliani, and, yes, George W. Bush raced to cash in on the horror… [while] the attack was used to justify an unrelated war the neocons wanted to fight, for all the wrong reasons. How many of our professional pundits took the easy way out, turning a blind eye to the corruption and lending their support to the hijacking of the atrocity?”

Conservative America crucified Krugman. Former Defense Secretary Donald Rumsfeld, one of the Iraq War’s main architects, tweeted: “After reading Krugman’s repugnant piece on 9/11, I canceled my subscription to the NYT.” Waging a war on false grounds was not the only consequence of 9/11. What about Guantanamo Bay, the Patriot Act and the rendition of terrorism suspects to countries like Egypt, Jordan and Syria? In the name of the victims of 9/11, are these not the questions that should be asked? The media’s, and society’s, widespread abdication from its responsibility to address these controversial issues is no show of reverence for those who were killed, quite the opposite; it dehumanizes them, reducing them to objects fit only to be mourned, rather than remembered as living, feeling, thinking individuals — many of whom, had they survived, may well be asking these questions themselves. 

PETER SPEETJENS is a
Beirut-based journalist

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Finance

Beirut Stock Exchange: Ringing the changes

by Maya Sioufi
written by Maya Sioufi

The Beirut Stock Exchange (BSE) could be considered among the sick children of Middle Eastern bourses. With a tiny market capitalization of $11 billion and an average daily volume of trades of $2 million, it is eclipsed in the shadows of the big boys in the Gulf such as Saudi Arabia, Qatar and Abu Dhabi, with market capitalizations of $324 billion, $122 billion and $67 billion respectively. Admittedly, the BSE, even in the best circumstances, is unlikely to rival the top regional markets, but few would disagree that its full potential has hardly been tapped.

For years, the BSE has been effectively orphaned by the Lebanese government. The Ministry of Finance has left the BSE chairman’s seat vacant for more than two years; the seats of three other board members — two resigned and one deceased — collect dust as well.

In an apparent effort to begin ameliorating the situation, on August 4 the Lebanese parliament approved the capital market and insider trading law, which will provide Lebanon with an independent authority to oversee the exchange and protect investors.

“This law is a quantum leap”, said Riad Salameh, governor of Banque du Liban (BDL), Lebanon’s central bank as it would attract “substantial” investment in Lebanese companies. “It will also allow companies to raise their capital and expand their business without borrowing money”, he added.

The new capital market law does lay out the blueprint for significant changes to the BSE, which, if implemented, could go a long way in helping inject new life into the bourse; however, the timeline and quality of implementation is as yet uncertain, and many feel that reforms need to go beyond the scope of what the law proposes.

What the law entails

Up until now the BSE has been both an exchange and its own regulator, simultaneously — meaning independent oversight has been utterly absent. 

“The role of an exchange should be to bring buyers and sellers together and not to be a regulator, and so the role of the BSE [has been] a failure,” said Jean Riachi, chairman of FFA Private Bank.

The long-awaited capital market law, which had idled on the shelf since it was first introduced in the Lebanese Parliament five years ago, calls for the establishment of an independent regulatory body called the “The National Council for Financial Markets in Lebanon” — headed by the governor of BDL and consisting of seven members, with five drawn from the private sector.  The law also requires theBSE to be privatized but it does not state how this should be done. The Arab Federation of Exchanges (AFE) has suggested privatizing the exchange by selling part of it to brokers with an equal distribution of shares amongst them, granting veto power to the government to protect investor interests and selling a specified amount to the public with a limit of 5 percent ownership per shareholder.

Ziad Abou Jamra, deputy general manager at Fidus, believes the law would “serve as a milestone in enhancing the overall performance of the BSE.”  The problem, however, is: “You never know when it will be implemented, as with any law in Lebanon,” said Fadi Khalaf, secretary general of the AFE and former head of the BSE.

The lack of liquidity

Investors had regularly complained that the BSE simply lacked the liquidity to make it attractive — even before popular uprisings swept through the Middle East and North Africa this year. Since the regional unrest began, the volumes have only become thinner, while the BSE also lost $2 billion in market cap between January and September.

According to a senior private banker the Lebanese equity market is cheap and offers attractive dividend yields but the illiquidity could leave the exchange dormant and unattractive. Georges Khoury, general manager of Libano-Française Finance and head of private banking at Banque Libano-Française, similarly argues that Lebanese equities are cheap but the thin volumes and Lebanon’s inherent political instability scare away investment in the BSE.

The scant listings on Lebanon’s exchange contribute to the lack of liquidity. There are currently 11 companies with securities listed on the BSE, of which three (Solidere, Bank Audi and BLOM Bank) account for almost 75 percent of the exchange’s market capitalization. There is little diversification among sectors either, as the exchange consists of six banks, two industrial companies, one real estate company, one automotive company and one fund. Though Lebanon has a relatively small economy, Khalaf says there are some 50 companies sizeable enough to raise equity on the exchange, but which avoid doing so.

Khalaf said, however, that the new law should be a catalyst for greater liquidity in the capital markets, given that the head for both the central bank and the capital market regulator is the same person; he explained that the central bank governor is the most influential person in Lebanon’s banking sector and can encourage the sector to inject liquidity into the capital markets and motivate companies to list.

Other challenges the BSE faces, however, go beyond the scope of the new law and may yet leave the exchange hobbled.

Entrepreneurs and family affairs

Several factors contribute to the limited options on the BSE menu, among them being that the majority of Lebanese companies are family-owned enterprises (FOEs) and prefer not to have foreign investors own a stake in their company. It is also a transparency issue. Listing implies corporate taxes and transparency; according to Khalaf, companies in Lebanon often keep “several books” and thus prefer not to list.

Khaled Zeidan, general manager at MedSecurities, a BankMed subsidiary, said the mentality of family businesses in Lebanon needs to change in order for the businesses to survive. As new generations rise up through a company, the distribution of its capital becomes more and more diffuse.

“You need to institutionalize or it is over for everyone,”said Zeidan.

According to Ammar Bakheet, head of asset management at Audi, FOEs need to be educated about the long-term benefits of listing; in order to expand, at some point they will need to access the equity markets and go beyond bank financing.

A viable BSE would also help venture capitalists, who on the one hand seek out entrepreneurial start-ups to invest in, and on the other hand need to exit these investments; in developed economies, listing on equity markets is a lucrative exit strategy. Take Berytech for example: this Lebanese business incubator created a fund in 2008 with $6 million of capital to invest in start-ups. With a lifespan of seven years, the fund has not yet exited any of its investments, and as Nicolas Rouhana, managing director at Berytech, explains, the exit strategies for investments is one of their main challenges. He says the fund’s current exit strategies include the company being acquired by the entrepreneurs themselves, by larger funds or by multinationals looking to buy the technology or the product. The BSE is not considered a viable option. 

The banks vs. the bourse?

Long seen as the backbone of the Lebanese economy, the country’s banking sector is 10 times the size of the capital market. This has lead to mixed opinions regarding the banks’ impact on the market’s development. AFE’s Khalaf believes that the banking sector and the capital markets are in competition, as it is in the banks’ interest to provide loans to companies: loans generate more income for banks than advising companies on listing on the exchange.

A study undertaken in May 2010 by the French consulting firm Arche and sponsored by the French Ministry of Finance noted that banks in Lebanon are acting more as credit issuers and less as market intermediaries, given that “their operating income is heavily geared toward interest income.” The study also stressed that “capital markets will never develop without strong and active intermediaries.” Arche experts recommended that the BDL push investment banks to act more as intermediaries with the use of incentives or penalties.

A financial expert disagreed, saying she believes that in the long run the whole financial system, including banks, would benefit from strong capital markets, as the extra liquidity would go through the system. A stronger capital market would also require more activity from the advising arm of the bank. BLF’s Khoury concurred, saying the strength of the banking sector is not the main issue affecting the development of the exchange. He stressed that the main roadblocks were the lack of liquidity and the lack of diversification of the bourse.

Beyond the law

It is clear that the new capital market law, in and of itself, will not make the BSE an exchange ripe for hungry investors; policymakers will need to do more.

Saeb el-Zein, managing partner at Spinnaker Middle East and board member of the BSE, recommended the privatization and listing on the exchange of the various telecommunication, electricity and water companies owned by the government, a suggestion that AFE’s Khalaf strongly adheres to aswell. Zein also suggested encouraging the development of private pension funds — supported via various tax incentives — that would commit to investing in local capital markets and obliging the social security fund to invest up to 20 percent of its assets in Lebanese stocks.

Khalaf said he suggested to Lebanon’s Ministry of Finance a tax exemption of a limited number of years for companies that list, but the ministry turned down his proposal as it reduces revenues. Zeidan suggested that incentives ought to be given to local banks that buy securities on the BSE in order to increase institutional participation in the exchange.

Jacques Sarraf, chairman of Malia Group conglomerate, recommended creating a system to encourage small companies to merge, which will create larger companies better suited for listing on the exchange.

Khalaf, however, warned against relying too heavily on incentives to boost the exchange. He points out that when Egypt introduced tax exemptions on the profits of listed companies, the number of listed companies increased significantly but there was little trading. Owners would list a stake to benefit from the tax exemption but they would not trade; listed companies on the Egyptian exchange went from 627 in 1991 to 1,070 by the end of June 2001, but the majority of the trading was concentrated in 30 companies.

Investors are also concerned about the lack of transparency, which is crucial in building confidence in an exchange. Stock exchanges usually encourage good corporate governance by issuing listing and disclosure standards and by monitoring compliance with these standards, but this is not applied in Lebanon.

According to Badri Meouchi, executive director at the Lebanese Transparency Association, the BSE does not have corporate governance guidelines; it only has requirements for listing.

In order for proper corporate governance to be implemented, several articles in the Lebanese code of commerce need to be amended, such as separating the role of general manager from chairman, protecting minority shareholders rights (such as allowing them to elect board members) and not requiring board members to have shares in the company.

The BSE’s ills have not gone unnoticed, and the government’s passage of the new capital market law could provide some useful medicine. However, much remains to be done before the bourse is given a clear bill of health and given the chance to reach its full potential.

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Consumer Society

Ian Gorsuch

by Executive Editors
written by Executive Editors

It the Beirut launch of McLaren Automotive’s long awaited high performance car, the MP4-12C, Executive spoke with Ian Gorsuch, McLaren’s regional director for the Middle East and Africa.

A totally bespoke car, the 12C has a lightweight carbon fiber chassis structure and a 3.8-liter, V8 twin-turbo engine producing around 600 brake horse power (bhp), able to reach 0-100 kilometers per hour (km/hr) in just 3.3 seconds.

  • The MP4-12C has been a long time coming, with production of the iconic McLaren F1 ending in 1998 and the world’s best selling luxury supercar, the Mercedes-Benz SLR McLaren, in 2009. Why did it take so long?

We had a long gestation period. Over the last three years there’s been a lot of speculation about what we were doing, especially as we had no new car on the road. And because it is our first car (in such volume), there has been a lot of discussion. Perhaps we revealed too much information too early, and we should have been more circumspect in releasing information as it created such a seemingly long waiting time. But although it seems like a long time to launch, it is on time.

  • How much did McLaren invest in developing the MP4-12C?

More than $1.3 billion has been invested in the project since 2005. Around 30,000 hours were spent in simulation development, and 100,000 kilometers of prototype testing was carried out, from the Arctic to the Middle East. We could have done testing in Death Valley in the United States, where the temperatures are the highest on earth, but we thought it better to do the testing in the humidity and dust of the Gulf.

  • Will there be other MP4-12C models?

We will also be launching the MP4-12C GT3 racecar. It is not like the Porsche GT3, which can be driven on the roads; it is purely a racecar. There has been a lot of interest from race teams, and we will initially start in Europe.

  • A new trend appears to be for supercar manufacturers to downsize and improve carbon emissions. Is this the case for the MP4-12C?

The car has the lowest carbon emissions in its segment, better per horsepower than a Toyota Prius. We built in performance criteria, not just 0-100 kilometers, but also ergonomics and CO2 [carbon dioxide] levels. We are a technology-led company.

  • How else does the car differ from others in the same segment?

The problem for many people is that they have to choose a luxury vehicle for a certain job. [They need] good suspension to make driving in traffic comfortable, or a performance car for high speed, which needs rigidity and good engagement with the road. Rarely can you enjoy the two together. With the MP4-12C’s unique suspension you can feel everything on the road, high speed on bends and you are able to cruise around in town, much like the comfort of a BMW M-Series. It can be driven every day, not just for a burn out on the weekend.

  • The F1 famously had a gold covered engine. Does the MP4-12C?

No, we didn’t need it for the MP4, perhaps due to the engine size. It was only on the F1, and for heat insulation on the engine bay.

  • How many MP4s are to be produced?

About 1,000 a year. There are already around 20 on the roads in Britain. Once we get up to full production and offer different models, it will be 4,500 worldwide.

  • How many do you expect to sell in the Middle East?

We will sell around 100, so 10 percent of global sales. The order bank is more than that, but the constraint is the production capacity. The biggest market is the United States.

  • What’s the price tag?

In Dubai, AED900,000 to AED 1,000,000 [$245,000 to $272,271].

  • Are customers old clients?

There are only 106 F1s in the world at the moment, so if we sold to F1 customers it would not be a viable business. We don’t advertise, so the key is through the media and our reputation.

  • Could the financial crisis affect sales?

At our level there are a limited number of cars so we are reasonably secure. And this is indicative worldwide. Before the crisis, if someone was worth $100 million, they are now worth, say, $70 million. This has not affected their lifestyle but it has affected their purchasing psyche. It’s not value for money, but people don’t just want a badge, they want intrinsic qualities behind the badge. This is an advantage we have.

  • Can you tell us about the main investors in McLaren Automotive?

Peter Lim, a Singapore investor, has joined us along with our chairman Ron Dennis. Other investors are the TAG Group, headed by [Saudi businessman] Mansour Ojjeh, and Mumtalakat Holding Co., the Bahraini sovereign wealth fund (with 50 percent). So we now have European, Middle Eastern and Asian investors, bringing new money, equity and experience to the board. We are perhaps the best funded car company in the world.

  • What is your regional presence in the Middle East?

We have six new showrooms; a 400 square meter showroom in Dubai, which is to open in November, and in Abu Dhabi, Jeddah, Doha, Bahrain and Kuwait. And we have eight service points, including Beirut, as a lot of Gulf nationals bring their cars to Lebanon in the summer and need the confidence that their car can be looked after.

Asia is the next step, with Osaka, Singapore and Hong Kong. We will be opening 35 new showrooms in 19 countries. It has been very exciting but [there has been] a lot of pressure, as no luxury brand has done in such a short time span a global launch with showrooms for just one car. We have had to train technicians at our facility in Woking, England, create unique dealer ordering portals and sign dealership contracts.

  • Is McLaren facing problems with the gray market?

The gray market is a problem for every luxury manufacturer, and it is costing the second buyer a lot of money. I heard of one car sold on Ebay, worth $280,000, that was offered online for $411,000. It was sold to a trader for $445,000.

  • When it was launched in 1993, the McLaren F1 was the world’s fastest production road car with a top speed of 386 kilometers per hour. British actor Rowan Atkinson, known for his role as Mr. Bean, crashed his F1 in early August in England. Have you any news?

Atkinson is fine and his car is being repaired. The press undervalued the car at $3.2 million. It is actually worth $5.76 million as there are only a few in existence worldwide.

“People don’t just want a badge, they want intrinsic qualities behind the badge. This is an advantage we have”

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Economics & Policy

For your information

by Executive Editors
written by Executive Editors

Huff, and puff, and blow ,your smoke out

Non-smokers will be breathing a breath of fresh air after a new anti-smoking law was passed by Lebanon’s parliament last month. The law, which has been in the pipeline since 2004, was slow to come to fruition but was spurred on recently by both civil society and the press. It prohibits smoking in certain indoor and outdoor locations including bars, restaurants, schools, hospitals, public and private offices and on public transportation. It also bans any form of tobacco advertising, including promotion and sponsorship. In addition, the law increases the size of the required health warnings on cigarette packages to 40 percent of the surface area of a pack. Hotels were granted some leeway by being permitted to allow smoking in 20 percent of their rooms. Penalties to be introduced range from a fine of $663 to $1,990 for establishments that are caught allowing smoking indoors, as well as a fine of $66.3 for individuals caught smoking in public spaces. Implementation is to take place gradually over the next year, allowing establishments and businesses to recalibrate their activities accordingly.  “A long road ahead to achieve effective implementation awaits us,” said a statement released last month by the health ministry’s National Tobacco Control Program unit. “The previous partial law passed in 1996 was very weakly implemented; it is necessary to prevent the tobacco industry and its allies from once again standing in the way of effective implementation.”

Enough energy to bring ,down a cabinet

Cracks in the cabinet began to emerge last month when a bill proposed by MP and Free Patriotic Movement leader Michel Aoun to borrow $1.18 billion to fund electricity projects from 2011 to 2014 was not passed from the cabinet to parliament. Aoun threatened to pull his ministers out of the cabinet if the bill was not passed, and as Executive went to print a deal had not yet been hammered out. The project proposes to produce 700 megawatts of electricity at a cost of $850.4 million using combined cycle gas turbines, as well as $247 million on transportation of power, $38.5 million on distribution and $40 million for consulting. According to the energy minister, the additional 700 megawatts could decrease average power rationing around the country by up to seven hours per day. If the power was only partially distributed to curb rationing by an average of 4 hours and repairs on the rest of the aging infrastructure were completed, estimated savings of $460 million per year for the treasury could be achieved and individual households could save $730 million to $1.3 billion on expenditures for private generator companies, said Energy Minister Gebran Bassil.

Assuming a deficit fall

The finance ministry seemed to shift the goal posts in the latest release of public finances last month, which stated that the total fiscal deficit had fallen 4.8 percent in the first half of the year. According to their figures, the 2011 deficit through June came in at $908.7 million. Government expenditure was put at $5.63 billion, a rise of 7.3 percent on the same period in 2010, while revenues were believed to have risen to $4.77 billion, a 9.8 percent rise. The smaller deficit figure, however, factors in revenues estimated by the telecom ministry totaling $704 million over the first six months of 2011, even though this sum has not yet been transferred to the treasury. The government’s largest expenditure item, debt servicing, shrank slightly during the first six months of this year to $1.9 billion, a fall of 0.5 percent year-on-year, constituting 33.8 percent of total expenditures. Interest payments on domestic debt made up $1.2 billion of that total in the first half of this year, with the primary surplus — the government’s income statement without debt servicing — at $1.13 billion, fractionally different than in 2010.

Welcome news on the web

The price of legal Internet in Lebanon looks set to fall after the adoption of a ministerial decree last month by the cabinet. The decree, which was proposed by the telecom ministry, details a new breakdown of prices and bandwidth caps for different categories of Internet speeds. The changes will take effect one month from the projected publication in the official gazette on August 29. The price list was not yet made public but was leaked to the pro-opposition Al Mustaqbal newspaper and confirmed as accurate by several telecom experts. The changes will see the slowest available residential Internet package rise in capacity — from 128 kilobits per second (kbps) with a bandwidth cap of 2 gigabits (GB) per month to 1 megabit (mbps) per second with a cap of 4 GB — while falling in price, from $23.21 to $15.90. The highest available residential package will rise from 2.3 mbps with an 8 GB cap to 8 mbps with a 30 GB cap, while decreasing in price from $199.00 to $114.09. The telecom ministry also announced that the 3G mobile Internet service will have a test-run on some 4,000 clients by mid-September, with the service available to the general public by the end of the year.

Business feeling blue

The feeling amongst the top hirers in the country is that business has been stagnant in 2011 but may well emerge from the doldrums come next year, according to a new survey conducted by the job site Bayt.com. Bayt’s latest Consumer Confidence Index (CCI) stated that 45 percent of Lebanese respondents believe that business has been stagnant this year while only 13 percent think things are going well, with the remaining 36 percent offering a neutral response. Nonetheless, 34 percent of respondents think that next year things will improve, while around half that percentage believes things are heading south in a year’s time. The June CCI index itself decreased year-on-year by 19.7 percent to 98.3 points. Asked whether salaries make up for the increasing cost of living in Lebanon, 71 percent said that they did not.

Buttressing the maritime border

The issue of the location of Lebanon’s maritime border has finally been resolved, at least as far as the Lebanese government is concerned. Last month, Lebanon’s parliament passed a law demarcating the country’s maritime border with Cyprus and “Occupied Palestine” for the first time. The law sets out Lebanon’s Exclusive Economic Zone from which it can extract what many expect to be hydrocarbon resources present under the seabed. The move comes after Israel submitted its own proposal regarding maritime borders, in which it drew its boundary according to a previous agreement between Tel Aviv and Nicosia that adopted “Point 1” as the boundary for Israel’s proposed border with Lebanon, which starts in Ras Naqoura and ends 133 kilometers off the coast at an angle of 291 degrees. Lebanon also signed an agreement with Cyprus adopting Point 1 but never ratified it in parliament. The new law proposes “Point 23” as the ending point, which is around 17 kilometers southwest of Point 1 and corresponds to Israel’s existing northernmost contract blocs, areas where oil and gas companies can come to explore and extract hydrocarbon resources. The differences have resulted in a disputed area of some 854 square kilometers and have fueled fears of potential conflict over the area. Israel has already found large deposits of gas in its northern fields and is in the process of extracting them, while Lebanon has not yet had its first bidding round or set out contract blocs. The agreements signed with Nicosia by both Israel and Lebanon (which never ratified the agreement in Parliament) each allow for an adjustment of Point 1. Last month, the foreign ministry requested to the United Nations Secretary General that the UN step in as arbitrator to resolve the issue.

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Real estate

For your information

by Executive Editors
written by Executive Editors

Solidere’s ups and downs

Solidere, Lebanon’s largest firm by market capitalization, will be distributing $147 million in dividends to shareholders, as approved at the Ordinary General Assembly held by the real estate company on August 1. Of this, $61 million will be paid out in cash, while the majority, $86 million, will be distributed as shares. This comes after a 19 percent drop in sales through the first half of 2011, with share prices hitting a two-year low of $15.85 in the last week of August. At the same time, Citi Investment Research & Analysis, a division of Citigroup Global Markets, valued Solidere’s target price per share at $31 in August, though it said the company’s shares were “high risk”.  They also warned that they may not be able to reach the target price, due to concerns that those planning to build on plots already purchased from Solidere may have trouble securing financing and making payments, given the economic slowdown and tightening of credit in the region. The company currently owns a land bank of 1.9 million square meters, valued at about $7.5 billion based on current market prices.  In an August 18 press release, Solidere unveiled their plans for Zeitouneh Square, a public garden behind the Starco building in Beirut Central District, with the company’s master plan stipulating the allocation of 50 percent of the total land area to public spaces and gardens. It plans to complete four other public squares in the near future as part of this overall plan.

Increased construction of the humble abode

While the number of construction permits increased 21.8 percent year-on-year in the first half of 2011, to 9,728, according to figures from the Order of Engineers in Beirut and Tripoli, the actual construction area authorized by permits increased by just 5 percent to 8.77 million square meters (sqm). These numbers indicate that developers are increasingly interested in smaller plots, possibly to deliver buildings with small-sized apartments (less than 250 sqm) to accommodate demand, according to a recent report by real estate advisory RAMCO. Supply indicators in Lebanon have been low through the first half of 2011. Unlike during the first half of 2010 and 2009, when cement deliveries increased 9.2 and 19.8 percent, respectively, deliveries rose just 2.9 percent in the first half of this year, in parallel with the slow progression of construction activity. Tons of cement delivered reached 2,662,000, according to figures from Banque Du Liban, Lebanon’s central bank, and in June cement deliveries increased 18.3 percent year-on-year, putting an end to a downward trend seen earlier in 2011.

Rising up amid an uprising

In an August 2 company statement, Dubai-based mall developer Majid Al Futtaim (MAF) Properties said it had started foundation work the week before on its $1 billion mixed-use project in Syria, its first in the country, which will cover 1.5 million square meters in the Yaafour district west of Damascus. The news is surprising given the uprising against President Bashar al-Assad, which has engulfed Syria and hobbled its economy since March. The first phase of the Khams Shamat project, slated for completion by 2014, will include hotels, residences, offices and commercial space. Peter Walichnowski, chief executive officer of MAF, said that the foundation work is “in preparation for the buildings’ development and the completion of works related to roads, electricity, water, sanitation and public services.” MAF has three other major projects underway in Lebanon, Egypt and the UAE.

Israel’s cynical use of housing crisis

Israel’s Ministry of Interior gave final approval on August 11 to the construction of 1,600 new units in the East Jerusalem settlement of Ramat Shlomo in the occupied West Bank, with an impending approval of 2,700 additional units. Israeli officials claimed the move came in response to protests over soaring real estate prices in Jerusalem, a claim that anti-settlement group Peace Now called a “cynical use” of the housing crisis, according to The New York Times. The settlements were initially proposed in March 2010 during a visit by US Vice President Joe Biden, an apparently deliberate affront to the Obama administration’s calls for a permanent cessation to settlement building. On August 4, 900 new homes were approved in Har Homa, a settlement just north of Bethlehem, also in the West Bank.  European Union foreign policy chief Catherine Ashton condemned the settlement approvals, telling Agence France-Presse, “The European Union has repeatedly urged the government of Israel to immediately end all settlement activities in the West Bank, including in East Jerusalem. All settlement activities are illegal under international law.” The area is a point of contention between the Palestinian Authority, which views East Jerusalem as the capital of any future Palestinian state, and the Israeli government, which has insisted on a unified Jerusalem as its capital in the event of a two-state solution. It was originally annexed from Jordan after the 1967 war.

Getting real on land prices     

The last quarter was the worst in the past five years for the real estate industry in Lebanon, according to property advisory firm RAMCO’s second-quarter report, citing limited land sales and especially slow sales in the luxury segment of the residential market, where the price per square meter (sqm) is $5,000 or above. The report called the continually rising price of land “worrying”, and said that realistic selling prices would not justify the cost of the plots to land buyers, thus concluding that landowners will eventually re-align their expectations with market realities and lower their prices. Demand mostly exists for smaller apartments, under 250 sqm, at prices ranging between $500,000 and $800,000 each; two projects with a built-up area of nearly 10,000 sqm each “were almost entirely sold out in a very short period of time” because they offered small-sized apartments at a fair market price. In the commercial sector, the report said that Grade A, purpose-built offices are undersupplied in Beirut and are mostly concentrated in the Beirut Central District (BCD). Estimated Rental Values (ERV) in BCD are $325 to $375 per sqm per year in the Park Avenue area, and $275 to $325 per sqm per year in the Beirut Souks area. Other business areas like Tabaris offer some high-end office buildings with ERV between $250 and $275 per sqm per year. It also noted that Verdun and Clemenceau have ERVs of $250 to $275 and $225 to $250 per sqm per year, respectively.

Bringing life to the Dead Sea

On July 28, the Jordanian government, along with the Jordanian Development Zones Company (JDZ), announced a 25-year development plan to create a touristic and commercial area within 12 zones along the northern coast of the Dead Sea. The chief executive officer of JDZ, Taha Zboun, said that the project was openly looking for both local and foreign investors (small and medium sized) to undertake development on the 59 plots up for sale, while also claiming it would create jobs for thousands of locals. Though the vision for the corniche boulevard is to create a string of hotels, malls and restaurants within the touristic zone, the project will also focus on boosting infrastructure, including an investment of $250.5 million in a desalination station. American development firm, Sasaki Associates, has been appointed to lead the consortium for master planning purposes.

$4.08 billion backlog for UAE construction giant

The UAE’s biggest construction company by market value, Arabtec, has posted a 67 percent drop in first-half net profits — hitting just less than $27 million — following a 74 percent drop in second-quarter profit as multiple project delays took their toll on the balance sheet, reported the company in a statement on August 7. Chet Riley, an analyst at Dubai’s Nomura Bank, told Gulf News in an August 8 article that payment transfers from profits also took a toll; “around 35 per cent of Arabtec’s actual profit in the second quarter was actually paid out to minority interests… We are finding revenues are slightly lower across the board due to delays in starting up new projects.” Its current backlog of projects stands at $4.08 billion, of which a third comprises a 5,000-home project to be built in a joint venture with the Saudi Bin Laden Group in Saudi Arabia. On August 17, the builder announced it had won a $76.2 million construction contract from Nakheel to build 523 homes in Dubai’s Jumeirah Village Circle, to be completed by the end of 2012.

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Banking & Finance

Regional equity markets

by Executive Editors
written by Executive Editors

Beirut SE  

Current year high: 886.37       Current year low: 882.02

>  Review period:  Closed August 26 at 886.37 points     Period Change: -3%

Investors found little time for Beirut stocks in a tumultuous month for international equity markets and amid escalating events in Syria. Trade volumes were unusually low even by Ramadan standards and proved as uninspiring as this summer’s tourist numbers. The affirmation of Lebanon’s credit rating by Moody’s with a stable outlook meant little to Solidere investors who were bitten by a 19 percent decline in property sales in the first half of 2011. Shares of the real estate developer plummeted 6.8 percent to a 2-year low of $15.85, while banks came in slightly ahead of the market.

Amman SE  

Current year high: 2,477.99                Current year low: 2,03.71

>  Review period:  Closed August 25 at 2,028.1 points     Period Change: -2.6%

Amman stocks watched from the sidelines as neighboring equity markets spiraled downwards in August. Although the index retreated during the first week, it has since been on strong footing, backed by renewed political stability as the government pushes forward its promised reforms. A troubling increase in the budget deficit during the first six months was partly mitigated by a new agreement with Iraq to increase oil imports. Meanwhile, Royal Jordanian reported heavy losses in the first half due to regional turmoil, sending the stock down 19.5 percent through August 25.

Abu Dhabi Exchange  

Current year high: 2,833.09                Current year low: 2,491.65

>  Review period:  Closed August 25 at 2,590.49 points     Period Change: -1.1%

The rebound of ADX stocks stumbled on the downgrade by S&P of the US credit rating in early August. The emirate’s banks had reported strong second-quarter earnings when energy and real estate stocks were struck by rising fears of a new global recession. Dana Gas and Aldar fell 11.3 percent and 4.8 percent, respectively, during our review period while National Bank of Abu Dhabi was slightly better off at -0.5 percent. Abu Dhabi plans to face fresh global economic uncertainty with new blood after a shake-up of leading company managers, including at Aldar.

Dubai FM  

Current year high: 1,781.92                Current year low: 1,352.24

>  Review period:  Closed August 25 at 1,465.01 points     Period Change: -3.5%

The region’s international hub was synching more with global equity malaise than listening to positive domestic indicators. Skepticism spread to major stocks, dragging Emaar Properties down 3.5 percent despite the group reporting a 20% increase in hospitality revenues in the second quarter. Similarly, Emirates NBD slipped 7 percent during our review period, although Fitch removed the ratings of the bank from negative watch, citing Dubai government support. Thin trading also showed how equities took second stage to gold trading, in addition to the typical Ramadan calm.

Kuwait SE  

Current year high: 7,129.30                Current year low: 5,764.30

>  Review period:  Closed August 25 at 5,785.6 points     Period Change: -4.1%

Kuwait’s exchange continued to nose dive in August, hitting a dangerous seven-year low in the benchmark index. Kuwait closed August trading almost 63 percent below the KSE’s June 2008 historic high tide mark. Latest corporate results were just as discouraging, with Agility reporting a 57 percent decline in net income in the second quarter with less government business, sending the stock down 10.2 percent during our review period.

Saudi Arabia SE  

Current year high: 6,788.42                Current year low: 5,323.27

>  Review period:  Closed August 24 at 5,979.3 points     Period Change: -6.5%

Domestic market sentiment took a direct hit from rising fears of a global recession. Stocks tumbled following the downgrade of US debt, which represents a major chunk of the kingdom’s portfolio. Petrochemical stocks slid 11% during the month as the Tadawul’s powerful stock SABIC dropped 10.5% among Ramadan trading volumes. A recent report by Global Finance Magazine said that Saudi Arabia hosts five of the 10 safest banks in the Middle East.

Muscat SM  

Current year high: 7,027.32                Current year low: 5,426.56

>  Review period:  Closed August 25 at 5,584.67 points     Period Change: -3.8%

Muscat securities investors were flooded by a flurry of corporate and regulatory announcements during a supposedly quiet month, with the Capital Market Authority introducing margin trading to boost the exchange’s activity. But the Renaissance Services conglomerate announced a disappointing 71 percent drop in first-half profits and revealed fraudulent activities at its Topaz unit, pushing the stock into a 24.3 percent fall during our review period. Other investors struck gold in Omantel’s 7.1 percent gain following the announcement of strong revenues in the second quarter.

Bahrain Bourse  

Current year high: 1,475.10                Current year low: 1,259.80

>  Review period:  Closed August 25 at 1,260.95 points     Period Change: -2.4%

Ever declining Bahraini stocks were dominated by negative sentiment echoing Europe and the US. A steady market decline since late February’s civil unrest has cost stocks nearly 12 percent so far in 2011 and the trend appears unwavering. The country heads for elections in September to replace resigned opposition politicians, adding another layer of uncertainty to already murky global and domestic waters. Banking stocks faced rising investor uncertainty, falling 3.15 percent during the month through August 25, with Ahli United Bank leading the decline by 4.2 percent.

Qatar SE  

Current year high: 9,242.63                Current year low: 7,195.88

>  Review period:  Closed August 25 at 8,171.48 points     Period Change: -2.8%

Industries Qatar, the country’s second largest stock, called back investors from their Ramadan escape, after adjusting its profit goals upwards for 2011 and putting on hold a steel expansion project. Traders rushed to book their profits, especially amid mounting global economic concerns, driving the stock down 12.2 percent through August 25. Outside the petrochemicals arena, sectors continued to show some strength, with banks adding 0.5% during the period, led by Qatar Islamic Bank, which rose 1.5% after its credit rating was affirmed by Fitch.

Tunis SE  

Current year high: 5,681.39                Current year low: 4,058.53

>  Review period:  Closed August 25 at 4,476.94 points     Period Change: +1.3%

While global investors were getting burnt in international equity markets, Tunisian investors have put on a nice summer tan. The Tunindex led Middle East exchanges under coverage for the third consecutive month, signaling a steady return of domestic and foreign investors to a reinvigorated market. The country introduced a new press code and launched a successful electoral role registration process, sending positive shockwaves to the country’s tourism industry. Several stocks registered strong gains, including market heavyweight, Poulina Group, which rose 4.7 percent through August 25.

Casablanca SE  

Current year high: 13,397.47              Current year low: 10,784.67

>  Review period:  Closed August 25 at 11,277.3 points     Period Change: +0.7%

Casablanca stocks were on the offensive in August as the country took delivery of the first batch of F-16 jets from the US. The market index performed near the top of MENA exchanges, buoyed by banking stocks which rose 1.6 percent during our review period. Despite minor dismay over several electoral law items, the announcement of parliamentary elections in November rejuvenated investor sentiment. Positive news

also included tourist numbers, rising 6 percent during the first half of the year.

Egypt SE  

Current year high: 7,210.00                Current year low: 4,478.00

>  Review period:  Closed August 25 at 4,676.05 points     Period Change: -7.1%

Fresh financial support from Saudi Arabia and the World Bank to post-Mubarak Egypt took the backseat to rising tensions between the country and Israel following a military incident in the Sinai desert. Stocks had originally tumbled along with global equities, but the rebound in the second half of the month was limited by fears of escalation on the northeastern border. Losses at market heavyweight Telecom Egypt were limited to 3.9 percent despite reporting an 11 percent drop in net profits in the second quarter.

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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 slump in global equity markets, along with the new issue of $1.2 billion of Lebanese Sovereign debt on July 28, steered investor interest towards the Lebanese Eurobond market. Hence, the BLOM Stock Index (BSI) hovered between a lower level of 1,301 points and an upper level of 1,343 points between July 15 and August 12, 2011, before closing near its lowest level of 1,305 points. During the aforementioned period, the BSI shed 1.1 percent, further lowering its year-to-date performance to a negative 11.5 percent. As for the activity on the Beirut Stock Exchange (BSE), it improved over the same period, as the daily average volume per month reached 153,424 shares, valued at $1.74 million, compared to 120,568 shares worth $1.56 million over the preceding four weeks between June 17 and July 15.

On a comparative scale, the BSI managed to outperform the S&P Pan Arab Composite LargeMidCap Index and the Morgan Stanley Emerging Index (MSCI), which were largely affected by concerns of a double-dip recession in the United States and continuing fears over a potential downgrade of French debt following S&P’s downgrade of the US Sovereign. The former lost 15 percent to settle at 107, while the latter fell 12.8 percent to 989.

With respect to the real estate sector, it dominated the four-week period of trades on the BSE, accounting for around 62.5 percent of the total value traded. Solidere stocks Class A and B rallied during the first week, adding 6.6 percent each, breaching its resistance level of $17, before reversing the trend throughout the next three weeks. Nevertheless, Solidere A and B managed to end the four-week period on a positive note, closing at $16.7 each on August 12.

On the other hand, despite the robust first-half financial results, most traded banking stocks ended on a negative note. BLOM stocks, GDR and listed, lost 1.5 percent and 5.08 percent, respectively, to close at $8.55 and $8.03. With respect to Audi Bank, its GDR and listed stocks fell as well by a respective 2.2 percent and 1.3 percent to settle at $7.19 and $6.88. Bank of Beirut followed suit as its listed stock declined 0.52 percent to $19, and its preferred Class E stock decreased 0.58 percent to $25.60. BEMO stock also ended in the red at $2.74, 0.72 percent lower than its previous close on July 15. As for Byblos Bank, its common stock fell 4.6 percent to $1.66, while its preferred stocks 2008 and 2009 rose 0.4 percent and 0.5 percent, respectively, to align at $100.5.

In the industrial sector, cement manufacturer, Holcim, saw its stock surge by 3% to 16.49, while Ciment Blancs B fell 3.3% to $2.97, its lowest level since mid-June.

Eurobond bulletin

The Eurobond market maintained its upward trend between July 15 and August 12, as investors’ appetites were lifted by the successful issuance (four times oversubscribed) of a $1.2 billion double tranche bond that was lead managed by BLOMINVEST Bank and Citigroup. Hence, the BLOM Bond Index (BBI) added 0.38 percent to settle at 110.9. Accordingly, the portfolio-weighted yield fell by 9 basis points (bps) to 4.91 percent, while the spread against the US benchmark yield widened 37bps to 411bps as investor demand for US Treasury Bonds increased following the plunge in global equity markets. Lebanon’s credit default swap (CDS) for 5 years increased to 361-391 bps, compared to 340-367 bps on July 15. In regional markets, Dubai and Saudi Arabia CDS were quoted at 350-365 bps and 105-111 bps, respectively.

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Banking & Finance

Bankers In the hot seat

by Executive Editors
written by Executive Editors

With the global economic recovery from the 2008 financial crisis stalled, wealth managers and high net worth individuals are wary of yet another credit crunch — and they would rather not make the same mistakes twice. Executive recently sat down with local and global players in the private banking industry to discuss the worldwide shift in wealth management industry dynamics and the changes in the client-private banker relationship post-2008, the unique challenges that relationship managers face in the Middle East and North Africa region, as well as the assessment and management of clients’ risk appetites in the region as a younger, more diversified generation of investors has emerged.

1 What mistakes did wealth managers, private bankers and clients make prior to the financial crisis in 2008? What lessons have they learned, if any?

Jean Riachi, chairman at FFA Private Bank: The [last] three years… were only the outcome of a decade of poor financial market performances. Unfortunately, for everybody the last decade was a lost decade due to many reasons. First, valuations in the market were very high, and second, there was no growth engine in the major economies to boost earnings enough to justify the level of capital gains and growth in the prices of stocks in global markets that we witnessed in the 1990s and in the 1980s. And still, in everybody’s mind, a good performance is a double-digit performance, and private bankers have struggled to achieve such performances sometimes by taking excessive risk, and very often by taking risks that were not obvious. So in a way it is the people’s expectations of high returns on their portfolios that have pushed banks, private banks and investment bankers to try to be creative in terms of their product offerings. And this, of course, ended up with a disaster in 2008. Today I wouldn’t say that everybody has learned the lessons.

Georges Abboud, head of private banking at BlomInvest Bank: The main lesson was on transparency on the kinds of instruments that customers were buying. People did not understand where they were putting their money. After 2008 they wanted to know exactly where they were investing. So we have to go into detail about every fund we want to invest into, each structured product — you need to know the underlying assets that are behind the product and this takes a lot of time to explain to the clients. They want to know everything. 

Reto Bartel, senior representative at UBS AG Representative Office Beirut: The recent financial crisis shook proponents of the classical investment approach out of their comfort zone. Investors perhaps believed they were in control, but in reality they were at the mercy of the markets. Credit markets failed to function and equity investors saw portfolio values decline to an extent previously deemed impossible. What went wrong? Was it just the market or did investors not fully appreciate the downside of their investment strategy? We think it was probably a mixture of both.

Raed el-Khoury, managing partner at Cedrus Invest Bank: I don’t think they learned a lot. [As for] lessons, mainly they have to really look into the risk. What are they selling to their clients? What are the embedded risks in every product? The profile of the bankers at that time before the crisis was focused on selling products. They didn’t look at the context of the client as a whole. There was wrong selling in many instances in the sense that bankers did not explain to the client the risks embedded in the product.

Selim Chami, director of investment banking group at BSEC: The bankers don’t care about learning; they want to make money. If a client comes and says I have this subprime securitization transaction I’m working on, and I have this much tranching, and I’m Goldman Sachs or Lehman Brothers and I have 100 transactions queued in line, and I need you to give me a rating as soon as possible, they will negotiate the fees and the ratings and they will push for something that they’re expecting. Unconsciously, a manager at a rating agency has all this reasoning. They go to higher management and say there are some things that are not looking too good, and there’s something that they didn’t really look into, for example the impact of the economic outlook, but they consider themselves to have done their job. You have a mass of people thinking like this. They start thinking about fees and budgets and that half-a-million-dollar bonus at the end of the year.

2 How has the client-private banker relationship changed after 2008, if at all?

Reto Bartel, senior representative at UBS AG Representative Office Beirut: The last decades witnessed the development of new economic theories on investor behavior which UBS uses in order to enlighten clients about the “do’s” and “don’ts” of investing. The behavioral view appeals to private investors since it captures familiar patterns of behavior we experience when dealing with real-life investment decisions. We also note that our clients have become more sophisticated, on average, not least due to the rapid increase of available information on economic developments and financial markets, as well as views and recommendations on market developments. An increasing number of clients like to talk about specific topics or are looking for a sparring partner willing to challenge their own investment theses.

Heiner Weber, head of Geneva branch at Falcon Private Bank: If the private banker has learnt his lessons from the past financial crisis, and the client has not, the dialogue would be very difficult and the results would not be as good. So private banking is really a teamwork between client and banker.

Nael Raad, managing director at Al Ahli Investment Group: In these types of markets you have to be much more transparent and much closer to your clients, monitoring their investments and attending to their needs. But you have to be closer in these volatile markets because trust is very important, especially nowadays, especially after the 2008 crash. It became more about the relationship. The client wants to know about the banker and the banker nowadays wants to tell him more about the product and tell him more about the risks involved. It’s a mutual thing.

3 Many of those in the wealth management industry are talking of a shift from universal big banks to smaller investment boutiques and family offices. To what extent is that statement true?

Daniel Diemers, principal at Booz and Company: Overall, the Gulf region is an attractive market for private bankers, and the region’s quick recovery from the financial crisis — especially compared to some Western markets — increases its allure. Not surprisingly, we expect competition to heat up over the next few years as local and regional players upgrade offerings and the global players — the incumbent private banking powerhouses — reassert themselves to defend and pursue market share. Banks need to find the right strategic positioning and stake their claim quickly. In this highly competitive environment, smaller banks will surely find their niche, as they have in the past. But we don’t see any major shift in the fundamental economics of the wealth management business model that would favor smaller players over the bigger ones.

Jean Riachi, chairman at FFA Private Bank: I believe that when you are smaller, you can take better care of your clients. I understand that most of the private banks, the global ones, have problems in terms of their profitability and they’re trying to cut their cost. I can tell you that we are not doing this because we will sacrifice part of our profitability to invest in people. But maybe this is a stand that you can have when you are a small private bank. But for sure the industry in general needs some kind of reengineering, and expectations should be lowered at the level of the banks’ profitability, at the level of the clients and the profits and the performances of the portfolios.

Georges Abboud, head of private banking at BlomInvest Bank: It is true that a lot of family offices opened after 2008 and even before. There are lots of reasons; one of them is regulations. They are so tough that the bankers cannot do whatever they used to do before. When you have your own family offices it is easier to go around some of the regulations. The drawback is that when you have a small firm — an investment company — the bank has to make money to live, to make profits, so you have to invest a lot of your clients’ money, which creates a conflict of interest there. 

4 Private bankers in the Middle East have many critics. Some say they still lack the expertise and talent that is needed to do proper wealth management. What is your take on such criticism?

Jean Riachi, chairman at FFA Private Bank: I would say that it’s a question of organizational structure. For example, in our bank, a private banker takes care only of the relationship with the client, but he’s backed by a team of asset managers, capital market specialists and real estate specialists, which means that he never manages an account on his own. Actually, he’s never allowed to manage an account. And when people come and want to give us a discretionary portfolio to be managed, the private banker will not be involved in managing it at all. Now, when it is an account managed on an advisory basis, private bankers are not the ones who decide what kind of strategies or products they are going to push. And here there are two things that are important in my view in the organizational structure: first, you have to be independent, which means that you need to not have products that you need to push; and second, of course, everybody here is pushed to explain to the clients and convince them that diversification is very important.

Raed el-Khoury, managing partner at Cedrus Invest Bank: Private bankers used to be relationship managers rather than investment advisors [and] product sellers. They would get ideas from the banks they work with and then they would go and sell them blindly to the clients. Bankers need to be investment advisors to their clients. And clients are asking [for] more and more of that, and they’re differentiating between private bankers. Our approach is, we need to introduce more — and I’m not saying that it’s not there — to the Lebanese market the concept of wealth management, whereby we would look at the profile of the client, the whole spectrum of what is needed from our clients and investors. Our private bankers would be knowledgeable bankers, not just people who go socializing and sell products. They would be able to look at the risk profile of the client, detect the risks involved in each product they would be selling, and have their opinion in what they want and do not want to propose to their clients, because, after all, this is the added value of the bankers.

5 How much would you intervene to manage a client’s risk appetite, especially when it is in excess?

Georges Abboud, head of private banking at BlomInvest Bank: You have to differentiate between the very sophisticated client who has been trading for a long time and has made money and lost money and gone through it for the past 20 years. He knows the cycles; you cannot stop him. But some people, they hear something on the news about how some companies’ shares are at their lowest level ever and they come and ask to put $500,000 into it and also ask for a loan of another $500,000 to invest in it. I’m not doing my job if I don’t stop this massacre.

Nada Safa, executive manager at Audi Saradar Private Bank: You have people as part of their portfolio, who like to speculate on currencies all day long. As a private banker you have to know how to calm the game. This is a speculator at the end of the day but you don’t want him to cross the line because he will lose money. It’s your job to be a therapist at the same time and understand his profile. This takes maturity and experience. And with time bankers know how to choose their clients. Some private bankers don’t want to deal with speculative accounts, they want big wealthy customers, dormant clients. You have exotic private bankers who have different portfolios, different client profiles. This is tough but if you have enough experience you can follow that. But at the end of the day it is your job to temper, to keep your client balanced.

Stephen Evans, head of Standard Chartered Private Bank for Europe, Middle East Africa and the Americas: I have to tell you that one of the most important qualities of a private banker is the ability to stand up and say no to a client, [to tell them] ‘I don’t think this is right for you’. And interestingly, in my experience, clients who have experienced that speak very highly of the banker, because they respect him. This is a testament to a good banker.

6 What factors play into a client’s propensity to take risk?

Georges Abboud, head of private banking at BlomInvest Bank: It is very important to think first about preserving your capital. And then you look at the needs of the client. If you have someone retired, he is not working anymore. He can’t afford to lose anything. So you will look for something in which he cannot lose. If someone has a stream of income and has money to play with then you can take some risk into equities or hedge funds.

Khalid Zeidan, head of MedSecurities Investment: The Lebanese love that [risky trading] because it moves quickly and it is very highly leveraged so he picks up the phone and he brags to his friend, “I bought this and I sold that and I made $3,000, $5,000 and $10,000, and I did that yesterday”, and then in one night he loses $100,000. He goes back to his wife and says “sorry honey, you’re not going to get that car.”

Nada Safa, executive manager at Audi Saradar Private Bank: The females I manage don’t like to take risk. You would be surprised to know there are many women in the market who manage their own wealth, especially in Saudi Arabia. They are very smart, they know what they want and they have their own wealth to manage. There is a whole niche market for this in the region and it is growing. There are more women working in private banking because… in the region women feel more comfortable building this relationship with another woman. But they don’t like risk and they are good investors. They go into funds, real estate and especially gold.

Mohammed al-Hamidi, managing director at AM Financials: Usually, the second generation will spend the money, not make the money. So definitely the second generation, usually when they come from high net worth families, they are more educated. What I know is that usually a younger person would take more risk, especially when the older person made the money. So that’s why some second generation high net worth individuals will take the money and make multiples of it and some will lose it.

Heiner Weber, head of Geneva branch at Falcon Private Bank: Many of the sons went through financial studies so they are all aware of the latest academic news on investment and they often have a more academic approach to investment. That’s for sure. Second, they are often more active because young people’s time horizons are shorter and they are extremely well connected via the Internet.

Nael Raad, managing director at Al Ahli Investment Group: The younger generation is looking more into investments: they’re more educated. They want to know exactly what it’s all about; they have the background, the education. I find that the older generation worked more on the gut feeling but the younger generation is more methodical, definitely. But at the same time it’s not all one stereotype.

Raed el-Khoury, managing partner at Cedrus Invest Bank: It’s normal to involve the heirs in the investment process, especially as they will be in charge of the future wealth. It can be more dynamic because of the younger spirit. So we see it as an opportunity to become more dynamic in the investment decision-making process. But here comes our role to really stress our conservative approach. Definitely, they’re knowledgeable, exposed, educated and open-minded but at the same time they lack maturity. And this, they will acquire and they’re definitely on the right track but they need help, they need guidance. Somebody that understands their concerns, their parents’ concerns, and can bridge the gap.

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Banking & Finance

For your information

by Executive Editors
written by Executive Editors

Regulating the markets

Having been put on the backburner for the past five years, a draft law to regulate capital markets and insider trading was finally approved by Lebanon’s parliament early last month. Lebanese investors and brokers had urged previous governments to pass the law, a move which would allow for more transparency and activity on the Beirut Stock Exchange, according to Lebanese bankers. The law stipulates that an independent commission, dubbed “The National Council for Financial Markets in Lebanon”, headed by Central Bank Governor Riad Salameh, overlook and regulate both Lebanese market trading activities and participants. According to BDL, the regulatory agency will consist of seven members, five of which will be private entities, and will be an independent watchdog both in policies and functions, similar to the United States Securities and Exchange Commission. As of Executive going to print, the government had not set a timeframe for the implementation of the capital market law.

Kafalat demand shrinks

Loans extended to small and medium-sized companies under the guarantee of Kafalat Corporation dropped year-on-year 7.5 percent through July 2011, totaling $93.3 million for the first seven months of the year, down from $100.9 million during the same period a year earlier, according to figures released by the country’s state-sponsored credit guarantee scheme. The aggregate number of loan guarantees by Kafalat up until July 2011 reached 691, an 18.9 percent annual decrease from 852 a year earlier, indicating an enduring unfavorable business sentiment in the country due to domestic and regional instability. The average value per guarantee reached $134,992 for the same period, increasing by 14 percent from the previous year’s average of $118,413. The industry sector took the bulk of extended guarantees for the first seven months of 2011, constituting 41 percent of the total, followed closely by agriculture at 38.2 percent, tourism at 17.8 percent, specialized technologies at 1.7 percent and handicrafts at 1.3 percent.

Plastic pressure in Syria

Visa and MasterCard have blocked all credit cards issued by Syrian banks, in compliance with US sanctions imposed on the Syrian regime in the face of violence against protestors across the country. News of the ban first broke when Syrian visitors to the United Arab Emirates were sent SMS messages informing them that their credit cards were no longer valid. In response to an executive order issued on August 18 by the United States Treasury department prohibiting “the exportation, re-exportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of any services to Syria,” MasterCard started blocking all transactions originating in Syria and all MasterCard transactions on accounts issued in the country. Visa also announced the suspension of its payment card activity in Syria under the recent US sanctions, stating it is “required by law to comply with the US Department of the Treasury financial sanctions against Syria.” Meanwhile, Adib Mayala, governor of the central bank of Syria, announced that Syria stopped dealing with the US dollar and switched to the euro, a decision made effective as of August 23.

Banks feel the stress

Lebanon was one of 28 countries whose banking sector fell under the “low strength” category of the Fitch Ratings’ Banking System Indicator (BSI), the agency’s annual risk assessment survey that includes 86 banking systems in advanced and emerging economies. Excluding potential support from shareholders and governments, the BSI measures banking systems’ intrinsic strength and quality, along with their systemic weakness. On a scale of “A” to “E”, from high to low quality, Lebanon came under the “D” category. Lebanon was also among eight banking systems that the ratings agency judged to have a high level of potential vulnerability, according to Fitch’s Macro-Prudential Indicator (MPI), which tries to determine the build-up of stress in banking systems. Lebanon was the only country to witness a decline in its MPI classification.

A trio of tech kick-starts

Lebanese business incubator Berytech announced a $1.05 million investment in three technology startup companies at a conference in early August, raising the number of its equity participations to eight since May 2009. Headed by young entrepreneur Hind Hobeika, “ButterflEye”, a company that has engineered swimming goggles that measure swimmers’ heart rates in real time via infrared technology, was the first to receive $100,000 of funding. Berytech also poured $600,000 into “Yalla play”, an online gaming platform founded by young businessmen Mahmoud Hajo and Karim Saddik, whose notoriety comes from the three-dimensional card game tarneeb.com. Berytech’s third investment went into “Wext”, a provider of a multi-platform web-texting software offering an instant messaging service adaptable to all mobile phones and all types of Internet connections. The Beirut-based seed capital fund Berytech has some $6 million under management, offering financing and consultancy services to young entrepreneurs in the technology field.

DP World profits surge

DP World, a Dubai World subsidiary, reported a 298 percent increase in first-half profits to $741 million [AED2.72 billion], buoyed by strong volume growth and a one-time gain from the partial disposal of its Australian terminals. The ports operator brought in $460 million [AED1.69 billion] from the monetization of 75 percent of DP World’s Australia terminals through a strategic partnership with Citi Infrastructure Investors. The world’s third largest ports operator rode a wave of global economic recovery during the first part of the year, supported by growth in newly-penetrated emerging markets of Latin America and Africa. As a result, gross volumes grew 11 percent year-on-year driving up revenues 3 percent to $1.5 billion [AED5.5 billion].  DP World also increased its cash and bank balances by 63.5 percent to $4.1 billion [AED15.1 billion], most likely in preparation for settling $3 billion [AED11 billion] of debt which will mature in October 2012.

Tourists flashing more cash

Total tourist spending in Lebanon increased 13 percent for the first seven months of 2011, relative to the same period of the previous year, according to figures released by Global Blue, the VAT refund operator for international shoppers. The majority of spenders in Lebanon were Arabs, making up 56 percent of total tourist spending in the country. By country of origin, nationals from Saudi Arabia accounted for 21 percent of overall tourist expenditures in Lebanon, followed by United Arab Emirates tourists at 11 percent, Kuwaiti nationals at 10 percent, Syrian visitors at 8 percent and Egyptian travelers at 6 percent. Fashion and clothing captured around 70 percent of total tourist shopping, watches 10 percent, and perfumes and cosmetics 5 percent. Beirut shops attracted 84 percent of total visitor spending in Lebanon, while the Metn, Keserwan and Baabda areas took away 12 percent, 2 percent and 1 percent of total spending, respectively.

Capital Trust buys into First National Bank

A Capital Trust Group private equity fund, the Euromena II, has acquired a 7 percent stake in Lebanese First National Bank, a deal valued at some $20.5 million. The stake is equivalent to 930,000 shares of the bank, making the FNB share price around $22. Press releases by both parties said that the transaction was aimed primarily at boosting FNB’s already accelerating growth, as the bank recorded balance sheet and customer deposits in March 2011 of $2.55 billion and $2.1 billion, respectively, while loans and advances amounted to $681.2 million for the same period. The Euromena II fund was launched back in June 2008 by Capital Trust Group with an initial capital ranging between $200 million and $250 million, and was the third generation fund — Menavest and Euromena I funds being the first two — for the global investment group aimed at investing in high growth companies in the Middle East and North Africa region, while excluding real estate and infrastructure projects. The Euromena I fund, which was set up in 2006 with $63 million in capital, had acquired a stake in Intercontinental Bank of Lebanon in January 2008, contributing to the bank’s $20 million capital increase at the time.

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