Banking & Finance

Regional equity markets

by Executive Editors
written by Executive Editors

Beirut SE  

Current year high: 1,039.30    Current year low: 842.04

>  Review period:  Closed July 24 at 886.92 points   Period Change: +0.27%

The traditional post-government formation rally failed to materialise. Instead, markets toiled under the weight of local and regional worries as Moody’s changed its outlook on four of the largest Lebanese banks to negative and domestic economic indicators weakened. Indictments issued by the Special Tribunal on Lebanon plus ongoing turbulence in neighboring Syria and in Egypt made the BSE performance look almost Phoenix-like, with Solidere rebounding to neutral territory and Bank Audi reporting a 9.3% increase in second quarter profits.

Amman SE  

Current year high: 2,477.99                Current year low: 2,083.56

>  Review period:  Closed July 25 at 2,090.18 points            Period Change: -0.16%

Amman’s financial markets welcomed long-awaited stability following months of losses. The country’s focus shifted to securing energy supplies after the Arab Gas Pipeline bringing cheap Egyptian gas was sabotaged, costing the country millions of dinars in daily losses. While the gas is likely to flow again by early August, tourism revenues are not, as tourist numbers have already fallen 14% YoY in the first six months. Promise comes from ASX heavyweight Arab Bank with a 5.14% return during the review period, a possible sign of better times to come.

Abu Dhabi Exchange  

Current year high: 2,833.09                Current year low: 2,471.70

>  Review period:  Closed July 25 at 2,663. 13 points   Period Change: -1.5%

ADX stocks entered July with some gains but their rally of hope in June petered out. Market heavy Etisalat was resilient even when the company was accused of foreign direct investment violations in India. In banking, NBAD and First Gulf delivered strong 1H earnings growth. Construction and real estate stocks continued their 3-month trend south with little support in sight. Readying themselves for Ramadan, investors were in profit-taking mood and the ADX index weakened at the end of the review period.

Dubai FM  

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

>  Review period:  Closed July 25 at 1,510.58 points            Period Change: -0.42%

DFM investors were more active than their ADX peers in the pre-Ramadan lull, and attention focused on the Greek bailout and forthcoming quarterly earnings. Second quarter profits swelled 85% YoY at Emirates NBD, and investors are bracing for more positive banking results. Tipping the other side of the balance was Emaar Properties, whose Indian operations reported heavy losses, pushing its shares down 4.5% during our review period. Meanwhile, there’s the underlying positive sentiment about the potential MSCI upgrade even if the official decision spills over into 2012.

Kuwait SE  

Current year high: 7,129.30                Current year low: 5,973.10

>  Review period:  Closed July 25 at 6,065.3 points   Period Change: -2.36%

Solid second quarter results at National Bank of Kuwait (NBK), Boubyan Bank and Kuwait Finance House (KFH) were not enough to jump-start stock prices. Instead, profit takers ruled the charts and pushed the KSE index down to a seven-year low of 5,973.1 points on July 18, as market heavyweights NBK and KFH tumbled 6.9% and 10%, respectively. Kuwaiti investors await further positive earnings results, but the KSE benchmark ended the review period more than 12% down for the year to date.

Saudi Arabia SE  

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

>  Review period:  Closed July 25 at 6,472.03 points            Period Change: -1.58%

Dismal performance of Tadawul stocks in July in fact reflected profit-taking following dozens of strong earnings reports across various sectors. All banks except SABB and Samba posted second quarter profits and major companies such as Savola and Kingdom Holding posted double-digit growth in net income. Investors still snatched some returns from SABIC’s 2.9% gain through July 25, and are looking for more as Jadwa Investment expects global moves to outweigh the cyclical downward Ramadan pattern.

Muscat SM  

Current year high: 7,027.32                Current year low: 5,904.68

>  Review period:  Closed July 25 at 5,939.45 points            Period Change: +0.39%

Muscat securities appear to have touched bottom in July following the precipitous dips in February and April. Banking stocks were buoyed by rising profits at National Bank of Oman and Bank Sohar, although legal disputes drove down BankDhofar’s profits in the second quarter. The export-oriented economy was not insulated from the global slowdown, but the outlook remains positive, supported by expectations of a global recovery and increased government spending. Among the greener pastures was Omani Qatari Telecommunications Company which added 1.76% during our review period.

Bahrain Bourse  

Current year high: 1,475.10                Current year low: 1,298.35

>  Review period:  Closed July 25 at 1,298.95 points            Period Change: -1.57%

Rolling downwards has become the norm for Bahraini stocks. While the government was announcing plans to dig deeper for natural gas to meet the country’s rising demand, stocks were struggling to dig their way back up, instead giving away 12% from their 2011 peak. Rising profits at Ahli United Bank and National Bank of Bahrain did little to assuage fears of future unrest as the main Shiite opposition party pulled out of national dialogue. Ironically, S&P affirmed the country’s sovereign debt rating after relative stability had returned, but maintained a negative outlook.

Qatar SE  

Current year high: 9,242.63                Current year low: 7,004.66

>  Review period:  Closed July 25 at 8,399.8 points  Period Change: +0.46%

Although the Qatar Exchange is down 3.5% for the year to date, trading activity in July was only slightly diminished versus June and reflected the positive mood in the country due to rising oil prices and strong economic prospects, driving up heavyweight Qatar Telecom 1.9% through July 25. Banks and real estate stocks added to the cheer after Qatar National Bank reported strong gains in second quarter profits and a report by Barclays Wealth showed high net worth individuals expect real estate to be a safe short-term investment.

Tunis SE  

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

>  Review period:  Closed July 22 at 4,399.01 points            Period Change: +2.1%

Tunindex stocks aim for the stars and for the second consecutive month hit first place in the MENA region. Despite continued skirmishes between various groups ahead of October elections, the end of oppressive rule is breathing new life into tourism and trade, with the food sector especially benefiting from exports to neighboring war-torn Libya. Tunis Air reported strong increases in bookings and was swiftly rewarded with a 7.2% monthly return through July 22. Uncertainty about election results and post-election democratic processes remain a major source of investor unease.

Casablanca SE  

Current year high: 13,397.47              Current year low: 11,213.55

>  Review period:  Closed July 25 at 11,341.1 points            Period Change: -1.48%

The king won a unanimous, and by government accounts, democratic, 98% “yes” vote for a new constitution. Yet investors were not visibly emboldened by the king’s bids for change under his own leadership, which was deemed “inviolable” in the new constitution. The MASI kept sliding in July and slumped to a 17-month low at the end of the review period. Immediately following the constitutional vote, the Moroccan government announced plans to sell parts of its stakes in Maroc Telecom and Royal Air Maroc.

Egypt SE  

Current year high: 7,210.00                Current year low: 4,878.00

>  Review period:  Closed July 25 at 5,104 points     Period Change: -5.0%

Investors headed for the trenches as Egyptian protestors roared back into Tahrir Square. Already fragile stocks retreated back into the red in July as Commercial International Bank and Orascom Telecom fell 8.3% and 4.2%, respectively. Escaping the selling pressure was Telecom Egypt, rising 5.6% ahead of an anticipated dividend announcement. Orascom Construction was flat despite securing a major Saudi Infrastructure contract and $350 million in loans from the International Financial Corporation.

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Banking & Finance

Lebanese Capital Markets

by Executive Editors
written by Executive Editors

Lebanese equity markets

BLOM Stock Index (BSI)

Weighted effective yield of Eurobonds

Equities update

Although political tensions in Lebanon eased following the formation of a new cabinet, investor sentiment remained wary in light of escalating political upheaval throughout the Middle East and North Africa region. This was mainly reflected in low trade volumes on the Beirut Stock Exchange for the four-week period from June 20 to July 15, 2011. The daily average volume for the month reached 120,568 shares compared to 306,829 shares recorded over the preceding four weeks. Furthermore, the corresponding traded values fell by half to $1.56 million. The BLOM Stock Index (BSI), Lebanon’s equity gauge, fell considerably during the aforementioned period, ending at 1,320 points on July 15, 3.05 percent lower than its previous close on June 17, and amounting to a 10.5 percent loss  since the start of the year.

Compared to regional and emerging markets, the BSI underperformed both the S&P Pan Arab Composite Large MidCap and the MSCI Emerging indices.

Throughout this period, Solidere’s stocks dominated trades on the BSE, accounting for 65 percent of the total traded value. Nevertheless, the distorted political environment weighed negatively on the performance of the real estate stocks in classes A and B, which fell by more than 7 percent to settle below the $17 mark for the first time in 26 months. It is worth highlighting that BLOMINVEST Bank updated its coverage on Solidere with a ”Hold” recommendation and a fair value classification of $19.40 per share.

The performance of banking stocks also witnessed a downward trend, except for BLC bank’s stock, which rallied 12.6 percent to $1.87. The BLOM Bank Global Depository Receipt (GDR) stock declined 2.8 percent to $8.68 while its listed stock slipped 0.47 percent to $8.46. BLOM Bank preferred shares classes 2004 and 2005 were de-listed from the BSE in preparation for the issuing of $200 million worth of new five-year 2011 preferred shares. Bank Audi stocks followed suit, as its GDR and listed stocks dropped by a respective 4.42 percent and 0.43 percent. Byblos Bank common stock retreated, by 0.57 percent. The preferred stocks for Bank of Beirut classes D and E witnessed a mixed performance. The former lost 2.96 percent  while the latter rose 1.78 percent to reach $25.75.

Additionally, manufacturing sector equities closed on a negative note, as Holcim’s stock fell 9 percent to a four-month low of $16 due to the distribution of dividends.

Bond bulletin

With respect to debt instruments, the Lebanese Eurobond market sustained its advance between June 17 and July 15 with demand concentrated on medium and long-term bonds. This pushed the BLOM Bond Index upward 0.58 percent to 110.48 points. Consequently, the weighted yield on holding Eurobonds fell by 20 basis points (bps) to 5 percent and the spread against the US benchmark yield widened by 15 bps to 374 bps. Lebanon’s credit default swap for five years was trading between 340 bps and 367 bps on July 15, compared to 328 bps to 353 bps on June 17. In regional economies, CDS quotes for Dubai stood at 338 bps to 358 bps, with Saudi Arabia between 93 bps to 98 bps.

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Banking & Finance

For your information

by Executive Editors
written by Executive Editors

Lebanon’s newest bank receives  BDL approval

Banque du Liban (BDL), Lebanon’s central bank, granted its final approval for the establishment of the country’s newest specialized private bank, Cedrus Invest Bank, after the new enterprise fully covered its $44 million paid-up capital. During Cedrus’s general assembly held in June, Ghassan Ayyash, BDL’s former vice governor, was elected as chairman of the Board Of Directors (BOD), while Fadi Assali and Raed Khoury were appointed general managers of the bank. Other BOD members include Georges Atik, Ghazi Youssef, Ibrahim al-Jammaz and Elias Abou Farhat. Following BDL’s approval, Cedrus Invest Bank’s management issued a statement in which it explained that launching the bank at a time of domestic and regional political and economic distress was a vote of confidence from the bank’s investors and shareholders. The latter include around 30 Lebanese residents and expatriates, as well as investors from the Gulf Cooperation Council  countries. Lebanon’s newest bank aims at creating an office for high net-worth individuals and families alongside its other business lines, which include wealth management, capital markets, asset management and private equity. Cedrus Invest Bank will soon raise its paid-up capital to $50 million due to high demand for its shares, the statement added. The bank aims at expanding beyond the Lebanese market in the foreseeable future and will tap into the Levant region, with a focus on Syria and Iraq, as well as into the Gulf.

Lebanon performs well on The Banker’s list

Nine Lebanese banks ranked amongst the top thousand commercial banks in the world, seven of which improved their rankings since 2010, according to a recent survey by magazine The Banker. Taking into account only the core of a bank’s strength — the shareholders’ equity that is readily available to cover actual or potential losses — the survey ranked the banks based on their 2010 end of year tier one capital as per criteria set by the Bank for International Settlements. Bank of Beirut made the biggest leap among Lebanese institutions, rising by 120 places to reach 663rd while recording a 45.3 percent yearly increase in its tier one capital. Byblos Bank followed, ranking at 448th, jumping 58 places from its standing a year earlier and posting an 8.83 percent rise in its tier one capital-to-assets ratio. Recently acquired Lebanese Canadian Bank ranked 912th, a notable jump of 57 spots from the previous year. Meanwhile, both Bank Audi and BankMed saw their positions fall, dropping by 29 and 21 notches to the 355th and 659th spots, respectively. The aggregate tier one capital of the nine Lebanese banks totaled $8.67 billion by the end of 2010, a 15 percent yearly increase, compared to a 10 percent increase in the top thousand banks’ tier one capital, while their profits-to-tier one capital ratio reached 19.9 percent in 2010, also more than the 13 percent ratio for the top thousand banks.

Premiums land high in MENA rankings

Lebanon ranks first in the Middle East and North Africa (MENA) region and 52nd globally in terms of insurance penetration, or total insurance premiums as a share of gross domestic product (GDP), according to global reinsurer Swiss Re’s latest “World Insurance in 2010” report. Compared to 3.1 percent in 2009, Lebanon’s insurance penetration stood at 2.8 percent of GDP in 2010, above the MENA average of 1.3 percent for the same year, but still below the world average of 6.9 percent. Cover premiums in Lebanon totaled $1.1 billion last year, accounting for 0.02 percent, 0.17 percent and 3.2 percent of global, emerging markets and Middle East and Central Asia premiums, respectively. In terms of nominal premiums, Lebanon dropped two spots on the year before to 66th among 147 global markets, and slipped one place, to sixth, in the Arab world. Also included in Swiss Re’s report were estimations of the average amount spent per capita on insurance premiums, or insurance density, which placed the United Arab Emirates first in the MENA region, at $1,248, followed by Qatar at $619, Bahrain at $527, Oman at $261 and Lebanon at $253.

Cypriot banks’ deposit and debt ratings downgraded

A day after it had downgraded Cyprus’ long-term debt rating from A2 to Baa1, just two notches above junk, international ratings agency Moody slashed the deposit and debt ratings of the two main Cypriot banks, Marfin Popular Bank (MPB) and Bank of Cyprus (BoC), from Baa3/Prime-3 and Baa2/Prime-2, to Ba2/Not Prime and Ba1/Not Prime, respectively. Moody’s said the island’s high level of exposure to Greek Government Bonds (GGB) was the primary reason behind its ratings announcement, as it considered all rated Cypriot banks likely to take part in the Greek debt exchange.  MPB and BoC exposure to GGB is $4.9 billion and $3.5 billion, respectively, according to the European Banking Authority, constituting 95 percent and 55 percent of their tier one capitals, respectively.

Lebanon still a draw for FDI

Among 18 Arab countries, Lebanon was the fourth major foreign direct investment (FDI) recipient in nominal terms and posted the fifth highest FDI growth rate for the year 2010, according to figures released by the Arab Investment and Export and Guarantee Corporation (AIEGC) last month. Lebanon attracted $4.96 billion of FDI in 2010, a 3.2 percent rise from $4.8 billion a year earlier, making it one of five Arab countries to have witnessed an increase in FDI last year, in contrast with a 23.4 percent yearly decrease in aggregate FDI to Arab economies in 2010. Lebanon ranked highest in the Arab world in terms of FDI inflows as a percentage of gross domestic product (GDP), which stood at 12 percent, followed by Jordan at 6.2 percent, Sudan at 5.4 percent and Qatar at 5.1 percent in 2010. Lebanon’s FDI inflows accounted for 7.7 percent and 8.7 percent of total inflows to Arab countries and to West Asia, respectively, and for 0.44 percent of global FDI in 2010, which increased by 0.7 percent for the same year.

Foreign currency flight from Syria exaggerated

Many an eyebrow was raised at the end of June when The Economist cited that an estimated $20 billion had left Syria since protests began to sweep the country in March. “There is obviously capital flight, but it is impossible that $20 billion left the country,” said Jihad Yazigi, editor of the economic newsletter Syria Report. With the World Bank pegging Syria’s overall economy as worth $52 billion at the end of 2010, and total deposits in private and state banks close to $30 billion, such capital outflows would have disemboweled the country’s finances. “The $20 billion figure is ridiculous, as the deposits of private banks are $11 billion and the deposit base of the whole banking system is $29.8 billion,” Freddie Baz, chief financial officer at Bank Audi, told Executive. “Estimates range between a 15 percent to an 18 percent drop in the deposit base of private banks, so there has been a decline of around $2 billion.” Lebanon’s Bank Audi, which operates Bank Audi Syria, is the second largest private bank in Syria with some 18 branches. However, in an effort to contain foreign currency deposit flight and alleviate pressure on the Syrian pound, the Central Bank of Syria (CBS) issued in early July a set of rules to implement new measures it had announced in May to control foreign currency purchase and withdrawal transactions. The measures include authorizing Syrians to open savings accounts in US dollars and Euros up and equivalent to $120,000, granted the amount is blocked for a minimum of six months, while also allowing foreign currency purchases of up to $60,000 for accounts with a minimum six-month maturity, with the maturity extended by one month for every additional $10,000 purchased. CBS governor, Adib Malayeh, said they had closed about 30 foreign exchange bureaus suspected of conducting illegal operations, with reports of the Syrian pound having been traded at between 10 and 15 percent lower than its official exchange rate. Malayeh said the Syrian pound was still rock solid despite the political unrest, with bank deposits up 4 percent for the second quarter of 2011 relative to the first.

Lebanese banks receive a Moody downgrade

Lebanon’s top four alpha banks, Bank Audi, BLOM Bank, Bank of Beirut and Byblos Bank saw their standalone Bank Financial Strength Ratings (BFSR) and Global-Local Currency (GLC) deposit ratings downgraded by Moody’s Investors Service. On July 19, Moody’s cut all four banks’ BFSRs and GLC deposit ratings to D- and Ba3, respectively, from a previous stable rating. It also reduced Byblos Bank’s B1 subordinated debt to negative. The international ratings agency mentioned the slowdown in the Lebanese economy and political tension, along with instability in neighboring Syria, as factors for increased domestic credit risk and weakened asset quality and profitability for rated banks. Both Bank Audi and BLOM Bank’s extensive operations in Syria suggest a great deal of material exposures to the country, which Moody’s estimated ranged from 70 to 125 percent of the banks’ tier one capital at the end of 2010. Moody’s ratings announcements also raised concerns over the four banks’ exposure to sovereign risk due to their low-rated Lebanese government securities portfolios, which equal several times their tier one capital levels and reflects the banks’ continuous funding of Lebanese public debt. By contrast, Moody’s said the banks’ long-term foreign currency deposit ratings remained unchanged, as those deposits are capped by Lebanon’s B1 ceiling. Lebanese bankers downplayed public concerns in response to the ratings announcement, asserting that Lebanon’s financial institutions have enough liquidity to overcome what is a temporary situation.

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Feature

Portraits of freedom

by Executive Editors
written by Executive Editors

Images from Cairo’s Tahrir Square have become iconic symbols of the struggle against oppression and have helped inspire the fight for human rights across the Middle East and beyond; But many goals of the Egyptian Revolution are yet to be fulfilled. Repressive laws remain in place, the military continues to detain its critics and prosecute them in military courts and the torturers of the old regime have gone unpunished, prompting thousands to return to the streets to demand greater reforms. For a look at some of the Egyptians who helped begin the process of change in their country, Executive presents in the following pages portraits of men and women from all walks of life who joined the movement to end Hosni Mubarak’s 30 years of repressive rule. All photos taken by Platon in April 2011, commissioned by Human Rights Watch.

1) April 1, 2011: Egyptians return to Tahrir Square in Cairo for a rally to “save the revolution” and protect their right to demonstrate.

2) Ahmed Seif al-Islam, 60, is a veteran Egyptian lawyer, activist and former political prisoner and founder of the Hisham Mubarak Law Centre, which since 2008 has been the leading Egyptian NGO providing legal assistance to protesters.

3) Heba Morayef, the Cairo-based researcher for Human Rights Watch, covering Egypt. In the middle of the demonstrations and violence during the Tahrir protests, Morayef visited hospitals and morgues to document the civilian death toll from government attacks and sniper fire. 

4) Sama Lotfy, 2, Neama el-Sayed, 26, Yassin Lotfy, six months, the children and widow of a protester killed by Egyptian security forces during the Tahrir Square demonstrations.

5) Hossam Bahgat, 31, is the director of the Egyptian Initiative for Personal Rights, which he founded in 2002. He has long played a prominent role in exposing human rights violations in Egypt, including the government’s failure to prosecute sectarian violence against Coptic Christians.

6) Muslim-Christian unity youth organizers, from left to right: Moaz Abdel Kareem, 28, from the youth wing of the Muslim Brotherhood and a participant in the Tahrir Square protests. Sally Moore, 33, psychiatrist, feminist and Coptic Christian youth leader. Mohammed Abbas, 26, a member of the Muslim Brotherhood’s youth movement and a leader in Tahrir Square who worked with secular counterparts and the April 6 movement in planning protests. Mohammad Abbas and Sally Moore drafted a “birth certificate of a free Egypt” shortly after Mubarak’s resignation.

7) Wael Ghonim, 30, the Google regional marketing executive who administered the “We are all Khaled Said” Facebook page after the young Alexandria man’s brutal killing by police. Ghonim’s passionate appearance on Egyptian television after being detained for 12 days by the security police helped energize the protest movement.

8) Nawal el-Saadawi, 80, an Egyptian writer, veteran women’s rights advocate, psychiatrist and author of more than 40 fiction and non-fiction books, many of which address the persecution of Arab women. Saadawi’s decades-long struggle for women’s rights and against female genital mutilation helped pave the way for the adoption of a historic 2008 law that banned the practice in Egypt.

9) Sondos Shabayek, 25, a writer for independent Egyptian newspapers and magazines and a “citizen journalist” who participated in and tweeted the story of the Tahrir Square protests.

10) Sarrah Abdel Rahman, 23, a social medi activist who reported from Tahrir Square with her popular “sarrahsworld” YouTube commentaries.

11) Laila Said, the mother of 28-year-old Khaled Said, with influential Egyptian activist Wael Ghonim. Speaking out about the torture and murder of her son by Egyptian police in June 2010, Laila became known as the “Mother of Egypt” and as an emblem of the consequences of endemic police torture and impunity.

12) Alaa al-Aswany, an Egyptian writer born in 1957 and author of acclaimed novel The Yacoubian Building. He was a founding member of the political opposition movement Kefaya (“Enough”).

13) Ramy Essam, 23, a charismatic singer, guitarist and songwriter who  became famous during the Tahrir Square protests as “The Singer of the Square”, was detained and tortured by the Egyptian military after  President Hosni Mubarak fell.

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Editorial

One pillar is not stability

by Yasser Akkaoui
written by Yasser Akkaoui

If Riad Salameh were no longer driving the bus that is Lebanon’s economy, many of us would feel differently about being on it. Faith in the lira, confidence in the sanctity of our savings and a belief, if fragile, that Lebanon can withstand internal and external economic shocks are thanks to him. But as we breathe a sigh of relief at his re-appointment to a fourth term as governor of the Banque du Liban (BDL), Lebanon’s central bank, we must also look at the precedent being set: It is true that through times of siege from without and sabotage from within he has kept us from tumbling off the road to prosperity… But nothing gold can stay.

It is no coincidence that the banks have kept Lebanon’s economy (relatively) on course during Salameh’s tenure. In fact it is no less than obvious; a well-tended garden makes for better flowers. If other ministries took their cue from the BDL, they too might discover the wondrous results diligence, conservatism and foresight can produce.

 Manufacturing, industry, agriculture — long neglected by the state as unviable oddities in Lebanon’s gross domestic product — are precisely the sectors in need of investment to help broaden the foundation upon which our prosperity is based.

As it takes many pillars to support a temple, the government must give the Lebanese a reason to believe that this varied and vibrant country can have a varied and vibrant economy.  

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Economics & Policy

An uphill struggle

by James Reddick
written by James Reddick

Having shut down operations when the Israeli bombing campaign began on July 13, 2006, Abbas Safieddine had the disconcerting experience three days later of seeing the smoldering ruins of his plastics factory outside Sour broadcast on France 24. Despite sitting on an isolated plot of land, far from any military, or even another civilian, establishment, PlastiMed’s facility was destroyed entirely by several direct hits; for days the plastic-fueled fire raged, while the site continued to billow smoke for weeks.

“That Sunday [July 16] was when they started bombing [manufacturers]; that was the ‘industry day’ when they hit all the factories for some reason,” Safieddine said. Theories have abounded as to the rationale behind the targeting of independent, apolitical businesses, with some accusing Israel of attempting to wipe out regional competitors. But in the case of PlastiMed, which manufactures and supplies to “filling companies” intravenous pouches for medical use, no such competition exists, neither from Lebanon’s southern neighbor, nor from anywhere else in the Middle East and North Africa region.

Today, the company operates administratively out of an office in Beirut‘s southern suburbs, while its factory is being rebuilt on the original site (after an attempt to buy land in Mount Lebanon fell through). It plans to reopen, with “a soft start” in the first quarter of 2012. But the difficulties encountered to get to this point, exactly five years later, demonstrate the immense challenges that faced all businesses affected by the war and the cumbersome process of procuring assistance from the Lebanese government. Initially, indications were good that the company would receive support from the Ministry of Industry. In early August 2006, he was  contacted by the ministry and by the Association of Lebanese Industrialists (ALI). “We had a few meetings with the minister at the time. They wanted acquisition of some data — anticipated losses, stuff like that,” he said. An appraisal of damage that excluded losses of stock came out to around $16 million, nearly four times the budget of the entire United Nations Industrial Development Organization relief program for affected industries and well beyond the means of Hezbollah’s cursory assistance for select businesses damaged in the war.

Diminished hope

“At the time, the association, as well as industrialists in general, were really hopeful. But it didn’t take long for the optimism to fade as most assistance was coming up for residential apartments. There was no mention of commercial assistance. So after two or three months we started to realize that nothing was going to happen,” Safieddine said. “The government really pulled out of this. Their excuse at the time was that there wasn’t enough money to go around to residential areas, much less to commercial. Plus, their argument is that the government has never assisted in commercial or industrial losses due to civil unrest or war or whatever.” Eventually, Safieddine got word that a proposal was in the works to implement a loan program through Banque du Liban, Lebanon’s central bank, though he says the process of appraising his losses, negotiating the loan and signing off on it has taken until this year to finalize. As with all of the central bank loans addressing industrial damage from the 2006 war, the conditions stipulate that 20 percent of the money for rebuilding must be put up by the factory owner, meaning that PlastiMed had to provide $3.2 million.

“These are big losses,” said Safieddine. “If it’s $1,000 you make the decision immediately. But you’re talking millions of dollars. The bank is very strict in making you conform to the 20 [percent] deal.”

Regaining trust

Even with the assistance (of which a total of $9.3 million will be forgiven), the company remains in a precarious position. Before the war, the operation was running 24 hours a day, with nearly 100 employees. When the factory finally reopens, the workforce will be at most 35 to 40 people, with as yet no intention of expanding. Repairing contracts with clients is one of the largest hurdles. When the factory was bombed, its entire supply was destroyed.

“We had two main customers here, and all of a sudden all their supplies were lost so they had to buy from Europe, because remember we have no competition regionally,” said Safieddine. “We had to assist our customers at least in a way to assure them that we have a warehouse somewhere in a neutral area of Beirut with a confirmed supply of their demand for six months or so. And we’re in the process of doing that.”

But regardless of these offerings to potential clients, building up a customer base is no small task.

“Our customers restart on an annual contract. So we sign off for the whole year,” he said. “If we miss, the customer has to wait another year. Then he may or may not sign with you. So in our case it takes time to acquire a customer. It’s difficult to lose a customer, but it’s hard to get one.”

But these are concerns for the future, when Safieddine and his staff can ditch their office in Ghobeiry and begin production once again.

“Our primary concern is to rebuild and launch,” he said. “After that, we’ll cross the other bridges when we get there.”

 

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Economics & Policy

Threadbare redress

by James Reddick
written by James Reddick

When Ali Ismael, co-owner of Tricot Starlet Co., saw the wreckage of his clothing factory in Beirut’s southern suburbs, bombed just five days before the 33-day war ended, the shock literally sent him to the hospital with high blood pressure. “Everything I worked for my entire life just went to waste,” he said. “I did not inherit anything from my parents — neither my partner nor I. It was our entire life’s work and it was hard looking at it burn in front of my eyes.”

Little remained of the factory, located in a hard-hit area on Al Kassis Street next to what Ismael described as the “Hezbollah kitchen”. Initially, he considered this the final blow for the company; already, the textile industry was suffering in Lebanon, with cheaper competition from Asia and, contends Ismael, “mafias that can get in a whole container at the port for$15,000 without paying any customs.”

But his partner, Hussein Chehab, was unequivocal about the company reopening. “He was very brave and he directly decided to reopen again,” said Ali. “I wasn’t as brave but I supported him and his decisions.”

One of Tricot Starlet’s saving graces was a relatively immediate influx of money to help mitigate the $2 million of direct damage. First, he sold his two remaining warehouses for $415,000, which he used to buy a new facility in Hadath. Then his siblings and an American client with whom he used to work provided an undisclosed amount, while a Turkish supplier offered the company a generous $75,000 worth of credit. And lastly, Hezbollah provided $100,000 as compensation — not enough for a full restart — but sufficient to pay employees during the two months in which Tricot Starlet was out of commission before a new factory was opened in Hadath.

Left guessing

Notably absent in Ismael’s recounting of funding is the role of the Lebanese government. The United Nations Industrial Development Organization did provide $25,000 for four sewing machines, but Ismael has been unable to secure a central bank loan. Unlike many other factory owners Executive spoke with who were unwilling to mortgage their assets in order to receive a loan, Ismael is willing but has been left in limbo.

“The central bank sent some experts and auditors to appraise the damage,” he said. “I paid $12,000 to complete such procedures, but until now did not receive anything.”

Working through Bank of Beirut and Arab Countries (BBAC),Ismael said, the application was submitted to Banque du Liban, Lebanon’s central bank, and approved, but “has stopped there.”

Four years since the loan mechanism was created, and nearly three since the application deadline, Ismael no longer expects any assistance and is not sure of the problem. The central bank circular stipulates that a recipient must need the loan in order to continue operations, which for Ismael may not be the case. Still, nearly $2 million in damage is a hefty sum for a firm the size of his, with just 40 employees before the war, to have to pay.

Nonetheless, the business continues with apparent efficiency. Men and women crouch over sewing machines, guiding the fabric as the needle chugs along the seams. Ismael designs the clothes, for women and for men, but is aware that in Lebanon the viability of plants like his is waning. “The cost of the thread is increasing and the sales prices are declining,” he said. “There is no possibility to grow in this industry; it is fading.”

 

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Economics & Policy

The state of industry, 2011

by Zak Brophy
written by Zak Brophy

The industrial sector in Lebanon is often regarded as the runt of the economic litter. Real estate, tourism and banking receive the lion’s share of attention and praise, not to mention political support. Perusing the figures over the past five years showing the manufacturing sector’s inexorable decline in share of value added to gross domestic product(GDP) — in comparison to other sectors of the economy — it is easy to see why attention is focused elsewhere.

Nassib Ghobril, head of economic research and analysis at Byblos Bank, holds firm that Lebanon’s industrialists are actually faring rather well, however. “The sector is doing well, and we shouldn’t always be putting it down saying it is on its way to disappearing and that industry is not in good health,” he said.             

Indeed, when judged on its own merits, and not in comparison to other sectors of the economy, industry has proven resilient in recent years. Imports of industrial equipment — a good indicator of industrial activity —have increased by a compound annual growth rate of 9.2 percent over the past decade. What is more, the value the sector has added to the economy has increased at an accelerating rate, from 1.5 percent in 2001 to 11.3 percent in2009. 

A rocky road

But this growth has not been without its blips. If anything, the vicissitudes of the local and regional political arena over the past decade have highlighted industry’s acute responsiveness to security concerns. The long-term nature of investment in the industrial sector means it is one of the first areas where investors get cold feet when the all-too-common specters of discord rear their ugly heads.

“They [industrialists] don’t want to borrow in a market where there is a lot of uncertainty and where cash flow is a major concern, especially when you have political concerns,” explained Jad Chaaban, acting president of the Lebanese Economics Association.

At the close of 2010, industrialists had good reason to hold their heads high after a strong performance throughout the year. Industrial exports were up 27 percent on 2009 and imports of industrial machinery and electrical equipment hit a record high of $227 million, up 14 percent from2009. In fact, industrial exports have been increasing consistently and strongly for most of the past decade — excluding 2008-2009 during the international financial crisis and a slow down following the 2006 war — with the prepared foodstuffs, machinery and mechanical appliances, pearls, precious and semi-precious stones (excluding gold ingots) and base metal sub-sectors performing consistently well.

But 2011 has ushered in upheavals in Lebanon and across the wider region, with events in Syria remaining the most pressing concern for Lebanon, and how the chips will fall is still far from certain. 

Head of the Council for Industrial Exports’ Development Khaled Farshoukh fears the consequences for Lebanese industry. “There has been growth of around 20 percent to 25 percent every year [in industrial exports in the last three years],” he said. “When we compare that to the first quarter of2011 we can see there is no growth… When we look to the figures, if we don’t move up we will lose.”

His concerns are warranted — especially as imports of industrial machinery and electrical equipment also stagnated in the first quarter — but it is still too early to assess the impact of the recent regional turmoil on Lebanese industry. Heading into the second quarter, industrial exports were up 16.76 percent in April 2011 on the same month in 2010.

The new Minister of Industry Vrej Sabounjian told Executive, “I encourage Lebanese businesses to see this as an opportunity to search for new markets if theirs in the Middle East have been affected. It presents new challenges and new opportunities.” Beyond the creation of a stable and secure environment for investment, few Lebanese industrialists have high expectations of support from the government. General Manager of Dalal Steel Industries Toufic Dalal said, “people nag about the government. I don’t nag because if you compare between Lebanon and other countries — in Europe, for example, — you would pay 40 percent to 50 percent tax, but here I only pay 15 percent [corporation] tax. It offsets the costs we have to endure.”

Basic requests

But low expectation for services does not mean no expectations.

Ghobril from Byblos Bank reasoned that a “15 percent corporation tax is low, as is the capital gains tax, but that doesn’t excuse the government from providing basic services like electricity, roads and water. The very basics at least. Not to mention security. If the government can’t deliver these basic services it should not exist.” 

Addressing the perennial saga of Lebanon’s debilitated energy system is one of the ‘basics’ where industrialists concede they need government support. “This is a very big problem… There is no clear government policy for the energy sector,” Farshoukh said. “Until now everyone is still working on diesel and there are no alternatives. So if there isn’t a push from the government to have a special price for diesel for industry we will continue to have the same problems.”

A 2010 report by the Ministry of Industry states that in 2007 industrial spend on energy from Electricité du Liban amounted to 1.3 percent of intermediate consumption — the cost of the inputs of production — which is proportionally not particularly high. However, because electricity supply is not constant, industrial establishments spent $192.3 million on fuel products for their own energy production, which constituted 4.1 percent of intermediate consumption. Additional costs to industrialists stem from disturbed production and increased depreciation of equipment, according to Chaaban. “The major cost for industrialists is the interruptions. The indirect cost is the replacement of the machines that are hit by these interruptions,” he said. A 2008 World Bank report states that the average industrial firm loses7 percent of its sales value due to interruptions in electricity supply.

The government could also foster a more propitious environment for industrial development with the creation of a well-designed and managed network of industrial zones. These would be designated areas of cheap land for industrial firms with the suitable infrastructure on site to provide a microcosm with lower operational costs [see Q&A with Neemat Frem on page94].

Industrial zones do already exist but they have failed to provide industrialists with the infrastructure or land price incentives to relocate.

In the late 1990s, the Investment Development Authority of Lebanon  composed a strategy to encourage the migration of industrial firms into the zones but it was beset with difficulties. According to the Ministry of Environment’s “State of the Environment Report 2000”, almost 88 per cent of all industrial establishments in Lebanon in January 1999 were located outside  of the 72 industrial zones in the country.

The issue is a sticking point for the new minister, however, as indicated by its inclusion in the new cabinet’s ministerial statement. The government “will also create a committee to administer industrial centers and look for industrial zones”, it says, and Minister Sabounjian confirmed to Executive that the issue of industrial zones was a top priority for the new cabinet. However, details on when the committee would be established, and its makeup, were not forthcoming.

Chaaban expressed trepidation at the expressed interest. “Every government program says, ‘We want to have industrial zones throughout he country’, but nothing happens. The problem is that those in charge are still driven by financial interests linked to the real estate and banking sectors.” Minister Sabounjian countered, saying “There is a great environment here [in the cabinet] and an atmosphere to do together what needs to be done for this country, especially in the Ministry of Industry. I feel the ministers are pro-industry; for the first time in a long time this government is pro-industry.”

But the jurisdiction and budget of the Ministry of Industry remains relatively limited; in 2010 its budget allocation was approximately$5.8 million, just 1 percent of the total for the general works and transport ministry and less than 10 percent of the agriculture ministry.

If Minister Sabounjian is going to execute his policies to stimulate the industrial sector he will need to enlist the support of several of his sister ministries. This should be easier with a somewhat unified cabinet, which needs to show it can deliver on its policy promises. However, first some concrete policies and plans need to be developed, which are at present woefully lacking in substance.

United we stand

There are clearly several infrastructural hurdles that need to be surmounted to improve the competitiveness and profitability of Lebanese industry. However, when firms do decide to invest, access to finance and capital is, generally speaking, readily available. According to Neemat Frem, president of the Association of Lebanese Industrialists (ALI), “this is not a problem at all”. 

In 2007, $165 million in interest-subsidized loans were provided to the industrial sector, which constituted 67.2 percent of all such subsidized loans given that year. In fact, every year from 2004 to 2007 the industrial sector received more than 50 percent of offered interest-subsidized loans, which come through a number of channels, including the Banque du Liban, Kafalat, the European Investment Bank and leasing companies.

But while access to loans, often at discounted rates, is nota problem for Lebanese industrialists, Chaaban argues the reluctance of Lebanese family-run businesses to consolidate and open up their capital is a hindrance to growth in the sector. “There has to be some kind of consolidation. Until now it’s very family-oriented small units and it’s inefficient,” he said. “If you go to Dora and Bourj Hammoud everybody is producing the same products.” His assessment is supported by a 2007 Ministry of Industry study, which reported 78.2 percent of industrial establishments employed between five and 19workers.  

Byblos Bank’s Ghobril pointed to the failure of private equity schemes to take root in Lebanon as an example of the reticence among Lebanese industrialists to open up stakes in their companies to outside investors. “The capital is there and the expertise to manage private equity funds exists in Lebanon, but family businesses are reluctant to open up their capital to institutional investors,” he said. “They prefer to go with their own internally generated funds or with loans, even though it is more expensive to borrow.”

Director General of the Beirut Chamber of Commerce Rabih Sabra argued that the predominance of small firms was due to the entrepreneurial spirit of the Lebanese, which in itself is a strength and a driver of growth. However, in a changing climate of increased competition, he added that consolidation in some sectors may be inevitable. “It will come when they feel there is competition, and companies from abroad are getting parts of the market. It’s a slow process but I hope that Lebanese companies realize that they can’t compete if they don’t merge and create partnerships,” he said.

While most people acknowledge certain sectors of industry would certainly benefit from more consolidation, opinions diverge on whether this needs to come from market incentives alone or if the government has an encouraging hand to play. 

ALI’s Neemet Frem argued that while large is not always preferable to small, some sectors, such as agro-industry, would benefit from more consolidation. What is more, he will be campaigning for new laws and policies to incentivize mergers, including assistance with relocation costs, tax holidays and social security benefits.

Minister Sabounjian conversely reasoned that market forces alone should provide the incentives for firms to merge while the government keeps its nose out. It is a safe bet to say that devising policies to encourage greater consolidation will not be on the minister’s to-do list any time soon.

Keeping the edge

So, while Lebanese industrialists may be trundling along in the shadows of the economy’s power-house sectors, they should still be given credit for their tenacious toil. But fresh challenges and opportunities lie ahead for them. In recent years Lebanon has entered into a number of bi- and multi-lateral trade agreements, and trade liberalization is likely to continue in the coming period; Lebanon is still intent on joining the World Trade Organization. 

As barriers to trade come down and protectionist measures are removed, Lebanese industry will clearly have to overcome a number of internal and external obstacles to remain competitive and thrive on the international stage.

The government is going to have to get its act together and provide industry with the stability and infrastructure that will encourage investment and lower operating costs. And, for their part, industrialists are going to have to show flexibility to adapt to the changing climate in which they will be operating, and when necessary abandon the ‘I’m the keeper of my castle’ mentality.

 

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