Banking & Finance

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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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Comment

When every day is Friday in Syria

by Nicholas Blanford
written by Nicholas Blanford

After four months of a steadily intensifying popular uprising, the regime of Bashar al-Assad, the Syrian president, is bracing for what may prove to be a climactic few weeks ahead.

August 1 marks the beginning of the holy month of Ramadan when pious Muslims fast during the daylight hours and — crucially in the Syrian context — visit mosques on a daily basis for prayer.

Since the uprising began in mid-March, demonstrations have focused on Fridays, Islam’s holy day of the week, when young men can freely gather in large numbers for prayers without hindrance from the security forces. Once prayers are over, the protestors are well placed to leave the mosques andlaunch straight into street demonstrations. In August, every day could be a Friday, turning this year’s Ramadan into a grinding and bloody test of stamina and determination on the part of both the protestors and the Syrian security forces. It is open to question how the already over-stretched security forces will be able to confront daily protests from opposition activists, many of whom will have the additional inspiration of the holy month to sustain them. On the other hand, if the security forces escalate their ruthless repression of the protest movement, with a corresponding escalation in casualties, the opposition activists will need all the resolve and nerve they can muster to keep returning to the streets day after day. Indeed, regardless of what one thinks of the Assad regime, the tenacity and courage of the protestors over the past four months has been extraordinary.

The Syrian security forces — using a blend of the elite Fourth Division headed by Maher al-Assad, Bashar’s younger brother, intelligence agents and shabiha militiamen drawn from the Alawite sect — have rushed from one flashpoint to another, using brute force in a bid to stifle the rebellion. But the protest movement has refused to yield and is slowly gaining traction with demonstrations growing ever larger and more widespread.

The army numbers some 220,000 regular troops, but the vast majority of them are ill-trained Sunni conscripts, most of whom presumably have little intrinsic loyalty to the regime. Indeed it is the Alawite-heavy Fourth Division, which numbers some 20,000 troops, that has spearheaded the crackdown. Minor fissures have appeared in the army, mainly due to individual soldiers refusing to open fire on protestors, and allegedly some have been shot for disobeying orders, have escaped into Turkey or Lebanon or have joined the ranks of the protestors. The number of defectors appears minimal at this stage and does not as yet presage a major split within the army. But the collapse of the army remains a possibility in the longer term, particularly if the protest movement continues to gather momentum and the security forces are seen as incapable of suppressing the dissent.

An indicator to look for is defections or signs of dissent among Alawite army officers in the weeks and months ahead. Rami Makhlouf, Syria’s uber-oligarch and cousin of the president, told The New York Times in May that the regime would “fight to the end”. Such stark comments raise the specter of a sectarian conflict between the majority Sunnis, sensing that their time for ruling the country is at hand, and the Alawites, who fear the backlash should they lose power. The Assad regime has played upon those fears of sectarian conflict. Certainly, the smaller communities in Syria — including the Christians and Druze — generally have dithered between throwing their weight behind the opposition in the hope of a peaceful transition to democracy, or standing with the regime and its protection of Syria’s diverse minorities.

Worryingly, there have been isolated incidents of sectarian violence, mainly in mixed Alawite and Sunni neighborhoods, although it is too soon to say whether this is a harbinger of a broader communal struggle to come.

Still, it is doubtful that the Alawites really would stick together for a “Masada-style” finale in their lofty redoubts in the coastal mountains. Indeed, many analysts conclude that it is a mistake to lump all Alawites together as a single pro-Assad block (similarly Syria’s Sunnis are not a homogenous group). Alawite unity has frayed in the 11 years that Bashar al-Assad has ruled Syria, with power becoming more centralized within the extended Assad clan. Hafez al-Assad, the former president, was careful to disseminate the privileges of power, not only among fellow Alawites but among the Sunnis too, thus blurring Alawite control of the levers of power and honoring in perception if not in deed the secular ideology of the ruling Baath Party.

Other than a split within the army, the other key dynamic under watch is the fate of the Syrian economy and how it could shape the out comeof the confrontation between the regime and the opposition. The economy has been badly hit by four months of unrest. Syria achieved growth of about 3.5 percent in fiscal year 2010, but the economy is contracting by about 3 percent this year. Tourism, a key sector that accounts for about 18 percent of the economy, has been heavily hit, with visitors staying away this summer and hotels reporting record vacancies.

Even before the uprising took hold, the Syrian economy was facing several long-term threats. They include declining oil production, high unemployment and a devastating five-year drought that has decimated arable production and driven many country dwellers into the cities. Increasing public debt has forced the state to curb its long-standing policy of subsidizing everyday goods, from electricity to bread and cooking gas — a legacy of the Baath Party’s original socialist principles. The removal of subsidies has led to increased inflation (15 percent in 2008) and price rises, aggravating the economic plight of many ordinary citizens and serving as a motive for the protests. Cheap clothes imports from China and Asia have also put many Syrian textile factories out of business.

At the beginning of the year, the Syrian government announced a five-year plan to attract $11 billion in foreign investment. But foreign investment has slowed. Qatar Electricity and Water has cancelled a $900 million project to build power plants, and other foreign companies are also considering canceling projects.

Syria’s business community so far has watched the unrest from the sidelines, unwilling to make any commitments that could backfire against profit margins. But the longer the uprising continues, the more the economy will stagnate, which could force the hand of the merchant class. But for now the heterogeneous and divided opposition has offered little in the way of reassurance to the merchant community about how it intends to usher in a stable, free market democracy.

How this ends is anyone’s guess. But it is evident that the Syria over which Assad presided at the beginning of the year has gone. There can be no return to the status quo that existed before March. Some analysts maintain that the Assad regime cannot prevail in this struggle because it faces a no-win situation. If Assad ushers in a meaningful program of reforms, it will undermine the regime’s grip on power, thus leading to its eventual demise. If it does nothing and continues to rely on force it is similarly doomed.

Most of Syria’s Arab neighbors have watched Assad’s tribulations with unease mixed with quiet schadenfreude, with the latter growing stronger the further the country lies from Syria’s borders (and reach). The West has generally limited its stance to the unrest in Syria with repeated calls for Assad to reform or face losing his legitimacy, a response that most Syrian opposition activists consider tepid and redundant given the nearly 1,500 people killed so far.

Ultimately, the fate of Syria may be decided in the coming weeks as the protestors and security forces gird themselves for the Ramadan protests and a contest to see which has the stronger staying power.

Nicholas Blanford is the Beirut-based correspondent for The Christian Science
Monitor and The Times of London

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Society

Q&A – Nassib Boueri

by Emma Cosgrove
written by Emma Cosgrove

As Chief Executive Officer of Y&R/Wunderman for the Middle East and North Africa, Nassib Boueri has had a lot to deal with in the first half of 2011. Shrinking budgets, unstable conditions and constant evolution have left some of the advertising industry’s cash cows dry. Executive caught up with him to talk about lessons learned and challenges faced during and after the ‘Arab Spring’.

What have you learned about the advertising industry since January?

The whole region has changed a lot since then. But I am a very strong believer that life goes on. Yes, there is a huge impact on business in these countries. There is a huge impact on consumers as well in terms of spend. But then again, we have learned from lessons in the past that people move past a certain moment and they move on. Yes, it has had a great affect on the economies and the spend in the advertising business. But if I look at places like Dubai or Abu Dhabi today, our industry is slightly picking up.

Saudi has always been and will always remain one of the most sustainable economies in the region. So as much as there is a downturn, or fear, there is always also an upturn somewhere else. [Qatar hosting the World Cup in 2022] is also a sign of things to come. Maybe it will not affect our industry today, but it certainly will in the next five or six years.

The economy is still bad in certain countries and it hasn’t picked up, but then again I haven’t seen anybody, neither our competitors, nor ourselves, close down in these countries that are in turmoil. You cannot pack up and leave the next day.

Regimes will change, be it Syria, be it Egypt, but the country is still there. The economy is still there. Economies do not disappear. They go through difficulties, but they don’t disappear. Countries don’t disappear – leaders do – but countries don’t. And our industry will get affected here or there but it will not get wiped out. So as a group we have not gone backward in terms of revenues or billing. And we are witnessing growth in certain markets and we are holding on in other countries. We have not closed our office in Egypt. We have not let anyone go in Egypt. Our global clients are spending; the budget cuts are minimal. The local client base has been affected that’s for sure. But nevertheless, business goes on.

What kind of questions has your board in New York asked you and what have you told them?

There has been a lot of change at the global level for Y&R. There has been a new CEO and he has formed a global executive committee, which I am on. The challenges have two axes. One is the economic crisis, which is affecting the whole world. And then there is ours, which is the political unrest in the region. But we all still believe that this region is a region of opportunities and a region of growth and they see that as well. Companies don’t look at things short-term.

Today, if we have to be very simplistic about things, Iran has untapped potential for business. Because of the embargo, nobody can go there yet. Iraq has untapped potential. We are there but remotely and we are increasing our presence there as we speak.

Egypt has huge potential regardless of how you break it down between the rich, the poor, you still have 80 million people. If you move from there you have Algeria. Algeria has surpluses of billions of dollars in the banks and this is one of the key issues in Algeria because the government is holding onto the money. And the people are in need of a structure — education, healthcare, services. I have been to Algeria twice this year and the potential there is huge.

When you look at our region, there is potential for the years to come. And like anywhere else in the world you go through difficulties, but I don’t fear for the region and I don’t fear for the future of our industry.

Our issues going forward are not mainly the economies of the region. Our major problems are how to develop our business; how to get the clients to understand that they need to spend. How do we tell them that what they are spending today is way less than the global average? How do we help them to build their brands? How can we keep the young generation interested and excited about our business, which is becoming less and less attractive and exciting?

Why do you feel that young people are less and less interested in working in the advertising industry?

Today it is difficult to keep people interested in this business the way they were 20 years ago. This was a very flashy industry 20years ago. Today it is banking and finance. When somebody graduates today, they are looking for opportunities, for money, for salaries, so they look where the trend is going. In the last five years, all those who were in brokerage and investments made tons of revenues and returns. Today we are still a sexy industry. Then again, it is not easy getting people into Saudi. It is not easy getting people into the Gulf anymore because it is becoming even more expensive.

Today retention of talent and getting new talent is a challenge. Growing the brands and ensuring that the clients understand that the investment they put behind the brand is not an expenditure, it is an investment. When done properly, it is an investment.

What is your opinion of using images from events such as the Egyptian revolution in advertising campaigns?

To me, anything that is taken from its own context, to be used in another context, is unethical. So if I am going to use a picture of a revolution anywhere in the world for a cause that is different than the revolution, then I don’t believe in that on a personal level.

What about recreating images or scenes similar to these events?

I believe in recognizing causes and efforts. Recreating will always depend on what is the usage of this material. If the usage is to diminish from the cause itself then I am against it. If it builds on the cause then I am totally for it.

Let’s assume I take what happened in north Lebanon in 2007or the demonstrations that happened in March 2008 and there were some plastic chairs and you promote ‘I am selling the plastic chairs [from the demonstrations] so my plastic chairs are stronger. Look! I’ve sat 100 million people on them.’ This takes away from the cause. If it is something that builds on the cause then it is fine to be nationalistic; I am more than happy. I am for creating these campaigns. I am for national pride. I am for patriotism. I am for using the local insight to build that, but not to abuse it by diminishing it into something else.

 

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Economics & Policy

Q&A – Vrej Sabounjian

by Zak Brophy
written by Zak Brophy

The new Minister of Industry, Vrej Sabounjian, has made his mark in Lebanese business as the president and owner of the food service and laundry manufacturing firm, Vresso. Having just gotten his seat warm at the ministry following his appointment, Executive met with him to discuss his vision for the sector. 

E:  Do you have any intention of pursuing a policy of tax exemption on income from exports? 

I am pro that decision 100 percent with some little modifications.  I think she [former Minister of Finance, Rayya Hassan] wanted to limit it for only five years. Industry doesn’t return its capital within five years, so I suggest somewhere between 50 and 100 percent tax credit on exports without a time limit.

E:  How much continuity can we expect from this government with regards to previous policies in the industrial sector? 

The minister who was here was doing a great job, taking into consideration the situation of the previous government. I am very optimistic that whatever plans we bring to the new government, with a very pro-business prime minister, we will find quick acceptance. 

E:  What does it mean when it is written in the ministerial statement that the government ‘will also create a committee to administer industrial centers and look for industrial zones’ and how will these zones be funded?

We are going to create a committee which is going to oversee a number of regional committees. The regional committees will make their own recommendations and then the main committee will adapt or make any modifications. If we have a good credible project in hand I’m sure there’s going to be a lot of help from the private sector. 

E:  Lebanese industry is very heavily concentrated around Mount Lebanon and Beirut. Do you have any policies to revive industry in the outlying areas?

That is the whole purpose. We can create a zone, for example, in the north and it will probably not be very active and we can do another zone in Mount Lebanon and it will probably be very active. It depends where the industrialists and the manufacturers are from and where they want to do their business.

E:  But will the ministry try and encourage industrial activity in areas where industry has declined over the past years? 

Well there must be a reason for a decline. All I can tell you is the ministry will be fair for all the areas. 

E:  Are there certain sectors that would benefit from giving small firms incentives to merge and consolidate?

Merging in my personal opinion is a matter of culture. Now that we are in a global economy and the Lebanese are known to adapt good ideas immediately I don’t see why they should not try to merge. I don’t think a company should merge with another company because of government incentives though.

 

E:  A lot of the policies you are going to want to enact will require the support of other ministries. Will you get it?

For the first time in a long time this government is pro-industry. I think the policies previous governments adopted were not pro-industry. In this government there is a shift to giving industry its fair space to grow and have good policies for all the industries in Lebanon.

E:  How much power do you have as a ministry to alleviate that burden of expensive and unreliable electricity and energy on industrialists?

You know unfortunately Lebanon is one of the countries in the Middle East that has no resources, until now, for energy. This is a big concern for all of us. I don’t think it’s just going to be a case of drawing a line and having a final solution but it is in the government’s intention to work on this issue and to try to come up with solutions.  How long it is going to take, I don’t know.

E:  In the interim period, could industrialists get subsidized fuel for their generators or a more preferential tariff on their energy from the government?     

I don’t know if Lebanon can subsidize or give more preferential tariffs. As you know we are buying our energy. But the Ministry of Industry is working on a program to try to make the cost of energy less. This is a priority for us.

E:  You have a comparatively small budget. Do you have the resources to enact the policies and reforms needed to develop the industrial sector?

We asked to have our budget increased 25 percent, and I am confident we are going to get it. For us to be successful we need to listen, be transparent and be honest about what we can realistically achieve. 

E:  What are your intentions with regards to World Trade Organization accession?

It is still in the cards.

E:  What niches of Lebanese industry will be most competitive in the international arena as barriers to trade come down?

If we are talking about appliances I don’t think Lebanon is going to have lots of factories making TVs or cameras for example. But there are a lot of things which we are doing tastefully and at good prices. Clothes, food, jewelry, fashion, wine…

E:  Is the agro-food sector too fragmented?

No.  I’m not always a believer in a big firm and the big size. Why don’t we look at the profitability? We should be concentrating more on the profitability and the possibility of adapting and changing quickly. If you have a huge-sized company you cannot change as easily. So if you have a smaller size but a profitable business you can change and see what the market requirement is and make the necessary changes.

E:  Is the ‘law for the protection of national production’ fit for the purpose and can you assure industrialists it will be applied to protect them from over-subsidized imports?

I don’t like protection in business. I like competition. Competition is good for the consumers, and it’s good also for the manufacturers. However, from the point of protection we should be aware of our size. If we have a contractual agreement with any other country we should take into consideration the size and capabilities of both parties.

E:  Lebanon has a big problem with regards to infringement of intellectual property rights, which is particularly damaging to the knowledge-based industries. How do you intend to address this problem?

It is our priority to try and enforce the laws that exist. We all have to live under the law…

E: …but now they are not being properly enforced. 

This is very important to us.  I can assure you.

E:  How adversely affected do you think Lebanon has been by the unrest and political uncertainty in Lebanon and the wider region?

In Lebanon I don’t see any situation that is not pro business. The laws are pro business and I think there are good opportunities here. I also encourage Lebanese businesses to see this as an opportunity to search for new markets if their markets in the Middle East have been affected.  It presents new challenges and new opportunities. 

 

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Economics & Policy

A homegrown shortfall

by Sami Halabi
written by Sami Halabi

 

The need for security is a constant refrain among Lebanese politicians and journalists, who tend to intone that it has something to do with ministers meeting their maker on a Sunday drive to the mountains, or with the ongoing drama with the country’s southern neighbor. But there is another danger that goes beyond bombs and blasts which policy makers have both ignored and neglected: food security.

Without going into elements of nutritional content and purchasing power dynamics in depth, food security is commonly accepted to require both availability and access to food. Food sovereignty, on the other hand, focuses on the “right” of people in their respective countries to define the systems that feed them rather than having them subject to international market pressures.

The surging price of wheat, and the government’s costly measures to dull the effects provide the most recent reminder of Lebanon’s vulnerability. Last year, Russia imposed an export ban on wheat, the Ukraine limited exports and erratic weather saw other major world producers’ harvests fall; hoarding ensued, and the global price of wheat skyrocketed. Such shocks had an immediate effect on a country as import-dependent as Lebanon and policy action had to be taken. Wheat — which has always been subsidized to support farm production, and at the mill level when necessary to maintain the price of bread — was purchased and stored, and mills began to receive wheat from the local grain board at subsidized rates for the baking of bread. And again, during the first quarter of this year, the government spent $18.5 million to purchase 48,532 metric tons (MT) of imported wheat, which was resold to mills at a subsidized price in order to maintain the price of Arabic bread at $1 per kilogram.

The drastic measures following global fluctuations in wheat prices is indicative of Lebanon’s larger problem: The country’s precariously lopsided agricultural import to export ratio. For example, Lebanon produces around 100,000 MT of wheat a year and imports 700,000 MT, according to Abdolreza Abbassian, senior economist at the United Nations Food and Agriculture Organization (FAO).

“We are already food insecure because we don’t have any more farmers,” says Ali Darwiche, secretary general of Green Line, a Lebanese association that promotes sustainable development. Over the years, he says, Lebanese farmers have been forced to abandon their plots due mainly to the fact that their products have to compete with imports that are cheaper to produce elsewhere and enter Lebanon without import tariffs.

In any given year, more than 80 percent of Lebanon’s food supply is made up of imports, according to the agriculture ministry. This puts the country at the mercy of international commodity prices and frames the issue of food security as one predicated on a lack of food sovereignty.  

The global financial firm Nomura classified Lebanon as the fifth most vulnerable country in the world to a crisis due to rising food prices, on the basis of gross domestic product (GDP) per capita, food as a percentage of household consumption and net food exports as a percentage of GDP.

According to the latest official government figures, the rise in the consumer price index of food and non-alcoholic beverages was 7.6percent year-on-year in June 2011, reflecting a continuous upward climb since the statistics were first recorded in December 2007.

Making matters worse in Lebanon is the fact that when prices go up there is no guarantee that they will come down again, even when global prices drop, due to the asymmetric price transmission within Lebanese markets —meaning, prices stay high because the few who control the market are happier with high margins and have little incentive for competitive pricing.

According to a UN study on economic competition commissioned by the Ministry of Economy and Trade in 2003, which the ministry now says it “does not endorse or validate,” half the products sold in the Lebanese market come from sectors where there is an oligopoly in place, where over 40 percent of the market is owned by four companies or less. According to the document, 72percent of farms in the country are controlled by 6 percent of farmers. The same goes for other products related to food production, like mineral water, pesticides, fuel and so on.

“In something like the tomato market, it is not an oligopoly; the farmers are diverse, but the wholesalers are concentrated and fermented. You’re kind of creating sub economies,” says Jad Chaaban, acting president of the Lebanese Economics Association and a specialist in the economics of food. “It’s a cartel that is spread up across interest groups and professions. We need a more integrated, better-regulated market, and a tackling of oligopolies, because it will increase local sales and decrease imports.”

An unbalanced hunger

Further contributing to Lebanon’s food insecurity are its drastic disparities in wealth. The UN estimates that 28 percent of the Lebanese population lives under the upper poverty line of $4 per person per day, and there is a “wild gap between rich and poor,” says the FAO’s Abbassian.

“From the data we’ve been collecting it seems that… there are pockets of poverty and food insecurity in certain areas in the country,” says Hala Ghattas, assistant professor of community nutrition at the American University of Beirut.

The level of inequality is so wide that the poorest 20percent of the population accounts for 7 percent of all consumption, while the top 20 percent accounts for over 43 percent. “No matter what food prices are, some people will always be able to access food and some will keep falling below a certain threshold; these are the more food insecure,” says Ghattas.

Already consumption patterns have been affected. “We’ve already seen that people were unable to buy meat,” says Chaaban, who explained that the price increase on meats is a reflection of other increases in the components of animal feed. Globally, meat has shot up by 19.9 percent in the first five months of this year, according to the latest FAO figures.

“When the prices are so high, some people reduce substantially their consumption so that it creates health problems,” says Chaaban, who claims that research is beginning to show that the poorest people in Lebanon are starting to show signs of micronutrient deficiencies.

Overall, however, Lebanon does better on nutritional food security indicators than it does on economic ones. The International Food Policy Research Institute, an international food research organization, puts undernourishment at just 2 percent (between 2003 and 2005), well below the global average of 21.3 percent. And another major indicator used to measure food security, the Global Hunger Index (the average of the percentage of general undernourishment, children under five who are underweight, and mortality rates under five years old) fell from 5 percent just after the civil war to 3.5 percent in 2005 and now remains under 5 percent.

Regardless, Lebanon’s lack of agricultural production and large wealth inequities make food security a critical issue in need of governmental attention. However, many of the reforms needed will take time, a continuity of policy and a good deal of money. Essentially, to increase food security, local production will have to increase.

Potential for production

In theory at least, Lebanon has a good deal of potential compared to others in the region.

For starters, if Lebanon actually wanted to employ much of the arable land it has available it could do so rather easily. According to the“ optimistic view” of the UN, the amount of potential arable land in the country is 269,000 hectares, on top of the 306,000 already being used, or 88 percent more potential agricultural land, as compared to a country like Egypt with just3 percent of usable farmland yet to be cultivated. 

However, even if there was the will to employ this land for agriculture, arable land does not necessarily translate into useful and productive crops. “The main factor for food security is the land use planning and you need to make sure that not every piece of land is a piece of real estate,” says Green Line’s Darwiche. “For us the value of a piece of land is in its real estate, not in what it can produce. Prices should go up; it is not fair when real estate goes up by this much, while fruit prices stay low.”

Up until today there is no master plan for land use in the country, with much of the profitable area along the coast already built up, both legally and illegally. Of course any master plan would need political consensus, which would not be an easy thing to navigate in the morass of Lebanese land politics, where each sect has its enclave, and the notion of a national project as one state has been fleeting.

And beyond the issue of land allocation, farmers need incentives to produce in Lebanon. “The government should protect the farmer; the ministries should make sure they get irrigation, electricity and labor,[but] the main problem is the open market economy that doesn’t protect food security. In Lebanon, we don’t have the qualifications to be food secure,”Darwiche says. Accession to the World Trade Organization (WTO), which has been pushed for since 1999 by the Ministry of Economy and Trade, certainly would not help producers who are already facing prohibitive competition from importers cashing in on Lebanon’s lax customs duties. “Where the level of domestic protection is high, as in the Syrian Arab Republic, trade liberalization is likely to reduce domestic agricultural prices, unlike in countries where domestic protection is lower, such as in Egypt, Jordan or Lebanon,” reads a recent UN report on food security in the Middle East.

Along with incentivizing and allocating new agricultural land, there should be a push to make existing food production more effective. At present, Lebanon’s cereal yield stands at 2,619 kilograms per hectare(kg/ha), which is just above the regional, but below the global, average. Countries with more sophisticated irrigation systems like Egypt register 7,589kg/ha.

“To improve yields you need to have bigger lots to justify mechanization and irrigation and use of pesticides within reasonable limits,” says President of Dora Flour Mills and Chair of the Agrifood Traders Syndicate, Arslan Sinno. “You have limited land resources so how can you seek to be self-sufficient when there are alternatives [such as imports]?” According to Sinno, an increase in productivity would take at least 20 years, during which Lebanon should expect price volatility. “Our lots are small and the production is small… and there are no silos or central collection centers. There is no room to separate the types of wheat and clean them, and if you don’t clean them you cannot export them,” he says.

At the current rate, Lebanon is heading into a period of increased food insecurity. Indeed, according to global food charity Oxfam, food prices are set to double by 2030. Right now only the Ministry of Agriculture has put forward a strategy, based on eight axes that include updating laws, reforming the ministry, improving infrastructure and developing microcredit, though as yet nothing concrete in terms of time or costs has been decided. But Lebanon cannot bide its time on such an important and increasingly relevant issue. The land is there; the policy must follow. “We need a real government,” says Darwiche. “Then when we have net balance in food imports and exports equal to zero, we can consider that we have food security.”

 

 

 

 

 

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Economics & Policy

The Survival Industry

by James Reddick
written by James Reddick

It is five years to the month since the 2006 war with Israel ended. The aftermath saw more than 1,100 Lebanese dead, infrastructure in disrepair and entire villages and urban neighborhoods flattened. Since, economists and the media have marveled at the miraculous resurgence of the economy, driven primarily by the reconstruction boom and an influx of foreign cash. But while the economy recovered (for a time at least), the owners of industrial enterprises bombed during the war were for the most part left with their livelihoods in doubt, massive debt and little to no assistance from the central government to get their businesses back on track. In this Special Report, Executive examines the story of Lebanese industrialists and their struggle since 2006 to build back the businesses that support both them and their communities. 

A devastating toll

The scope of the destruction was devastating; in all, 192manufacturing facilities were damaged, with 114 experiencing what the Association of Lebanese Industrialists (ALI) classified as “total damage”. Owners estimated in November 2006 the value of damage to industrial production at $245 million, a number excluding any loss of stock, contract losses and work stoppages. The size of the firms hit ran the gamut, from the Bekaa’s dairy heavyweight Liban Lait, to the more modest Tricot Starlet clothing factory in Beirut’s southern suburbs. Along with these two firms, whose factories were completely leveled, Executive spoke with affected industrialists from around the country, and while a good portion received aid of some kind, all expressed disillusionment with the often misleading response of the government, whose initial pledges never materialized. Many were back in business and upbeat about their commercial prospects, but others, five years later, were emotional about their hardships and the uphill struggle still before them.

The immediate aftermath

Immediately following the end of the 2006 war, the Ministry of Industry and ALI began to collect information on the scope of the damage to factory owners. At the time, hopes were high that direct assistance would flow into the sector.

In late August, the Stockholm Conference brought together donors from around the world, resulting in approximately $900 million in pledges to assist the country, and then at the beginning of 2007, the Paris III conference followed with more than $7 billion in additional contributions. Much of this went towards rebuilding basic infrastructure and damaged hospitals, schools and residential areas. Within this package, two soft loans, one from the Arab Fund for Economic and Social Development (AFESD) and the other from the European Investment Bank (EIB), were pledged to directly assist enterprises damaged in the war, totaling $86 million and $140 million, respectively, but these required ratification by parliament.

According to an unnamed representative of the Council for Development and Reconstruction (CDR) responding to questions by fax: “After three years of signature and due to political constraints, the parliament did not ratify those loans. By the end of 2010, the EIB decided to cancel this facility, the AFESD loan [is] still at the parliament awaiting ratification. Therefore the damaged industrial plants did not get the chance to benefit from these credits.”

In a phone interview, another CDR representative who also requested anonymity said, “at the time when SMEs [small-to-medium enterprises] were in need of this assistance, parliament wasn’t functioning and no decisions were being made.”

One chunk of funding did make it out of the Stockholm Conference and was applied as originally intended — a $4.5 million grant for the United Nations Industrial Development Organization (UNIDO), in partnership with the Ministry of Industry. According to UNIDO National Project Coordinator Nada Barakat, 85 damaged industries have received assistance. But the modest budget is reflective of the endemic lack of support for industry in Lebanon. Out of a total of $45 million from European donors funneled into the United Nations Development Program-managed Lebanon Recovery Fund, just 10 percent was allocated for industrial recovery. Because of this, only small to medium-sized factories with modest needs were targeted, as each allocation had a total limit of approximately $50,000. Nonetheless, UNIDO’s contributions have been critical for the recovery of many business owners.

One such owner, Jihad Sadaka, whose pastry and sweets factory was damaged in the war when the buildings on each side of his shop in Beirut’s southern suburbs were leveled, received a UNIDO equipment donation of a generator and water sanitation system. Sadaka also took part in the organization’s “capacity building” exercises, thereby improving his workplace standards and food safety. With the framed ISO (International Organization for Standardization) certification prominently displayed on his new desk, Sadaka said, “if someone wants to come into the factory now, I’m really proud to show them. Believe me, this was the best thing of my life.”

But most of the stories from recovering industrialists have not been so bright. For companies with losses too substantial for UNIDO assistance, their only potential recourse has been through loan assistance from Banque du Liban (BDL), Lebanon’s central bank. In the midst of political paralysis, the BDL issued two circulars, in May and September of 2007,establishing mechanisms to channel loan assistance through local private banks. According to Mazen Halawi, head of division in BDL’s financing unit, to qualify “clients were required to be unable to continue work without a loan and unable to service their debts from before July 31, 2006.” Both the client’s bank and the BDL would audit the level of damage. Once a value was agreed on the BDL would effectively cover 60 percent (funneled through private banks) via a loan that was forgiven once conditions were met; company owners would have to provide at least 20 percent through their private equity and the BDL also stipulated conditions for a soft loan arrangement to meet the remaining 20percent.

However, in extensive interviews with industrialists, the loan scheme was repeatedly described as unfavorable. Ali Ismael, co-owner of Tricot Starlet, and Sadaka each said it would have required them to mortgage their homes. Furthermore, according to Recovery Lebanon’s August 2008 “Progress and Challenges” report: “The impact of this compensation mechanism has been insignificant. Banks have not shown any interest in supporting enterprises… mainly because of the pay-back period of the granted money.” The central bank could not provide details as to the number of recipients, but Abbas Safieddine of plastics company PlastiMed (who did acquire a loan) speculated that it was “only four or five large companies”.

Political payments

Then there was reconstruction funding from Hezbollah, for which the party is well known. While their donations appear to have been fairly widespread throughout their geographic heartlands, the sums hardly softened the blows to industrialists. Sadaka received a $15,000 sum and Tricot Starlet’s Ismael $100,000 — nothing to scoff at but not nearly enough to rebuild a business.

“My understanding is that they directly assisted in rebuilding or at least compensating for small merchants and supermarkets who were ‘their people’. The losses for the [biggest] companies were too big for them to compensate,” Safieddine said. “At the end it’s politics. Most of the big industries that got hit were in no way affiliated or even close politically to Hezbollah. So there was no push from this side, no push from that side; we are in limbo.”

Despite operating in an economic climate that, in the best of times, is riddled with infrastructural deficiencies and a lack of protection from imports, and in the worst of times threatens to leave family businesses in piles of rubble with little hope of help from the government, industrialists have proved resilient in their efforts to rebuild. When asked if they were concerned about the possibility of a future war, the standard response was to leave it in God’s hands. But some of the responsibility lies with the government, not with The Maker. Despite the best efforts of organizations like UNIDO, what little funding was procured for the industrial sector was squandered by political squabbling in the post-2006 years.

Oussama Halbawi, president of the Association of Industrialists for the Southern Suburbs and the owner of a mattress, fabric and textiles factory that was completely destroyed, expressed his indignation. “In case of war, it’s the government’s responsibility to help out the victims. I was paying taxes so I expect something in return.”

For a micro-economic assessment of the impact of the 2006 war on Lebanese manufacturing, Executive presents the case studies of four factories that were completely destroyed, and documents the unique challenges faced by each as they rebuilt their business from out of the rubble.

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