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BusinessHospitality & Tourism

Check-up or check-in?

by Samer Elhajjar & Laurent Yacoub April 20, 2021
written by Samer Elhajjar & Laurent Yacoub

Before October 17, 2019, most 4- and 5-star hotels in Beirut reported annual average room occupancy rates of 75 to 80 percent before the first coronavirus case in Lebanon was reported on February 21, 2020. This occupancy rate had been the norm since 2009 and most hotels expected that in 2019, they would exceed that rate and set a record year. According to Ernst & Young Middle East hotel benchmark survey, the occupancy rate in Beirut’s 4- and 5-star hotels slipped to an all-time low of 16 percent by November 2020, down from the previous year’s recorded 69 percent during the same period. In details, we can attribute the low hotel occupancy rate to several reasons. Starting with the global COVID-19 pandemic that has affected the world, followed by the blast that hit Beirut port on August 4, 2020, ending with the worsening financial crisis and political deadlock in Lebanon. As a result, the number of arrivals to Beirut airport recorded a 72.22 percent drop by November 2020, compared to the same period in the previous year, which affected the hospitality sector negatively.

Almost all world economies are at a standstill because of the COVID-19 pandemic, and tourism in particular is one of the hardest-hit sectors. In 2019 alone, travel and tourism accounted for $2.9 trillion in direct contribution to the global domestic product (GDP), which is the highest contribution by sector. Unfortunately, the United Nations asserts that the spread of the virus has cost the global tourism sector $1.3 trillion in lost revenue in 2020. This predicament escalates to the potential jobs lost, which are estimated at 38 million, a figure that represents 70 percent of the industry workforce. A recent Roundtable Discussion organized by Executive Magazine in partnership with the United States Development (USAID) Lebanon Enterprise Development (LED) project shed light on the many issues that hotels and hospitality venues are facing.

Researchers have embarked on studies to ascertain the impact of the COVID-19 pandemic on the Lebanese hospitality industry. A prime study is one that two Lebanese University researchers commenced in June 2020. A survey questionnaire posted on social media platforms, including LinkedIn, Instagram, and Facebook, was used for data collection. 404 filled questionnaires were obtained, with 348 valid responses from both Lebanese citizens and foreigners residing in the country. Findings from the study indicate that people’s purchasing power had declined by about 40 percent compared to 2019. When this is the case, many are unwilling to spend their hard-earned money on the allegedly luxurious items in life, including hospitality bills. One could also cite the long-standing Lebanon economic crisis as a complementary factor. Also, 36 percent were unwilling to pay more than 40,000 Lebanese pounds ($26.47 at the official exchange rate) on related transportation, meals, and associated activities.

First line of defense

Hotels’ administrations never imagined that such a pandemic would occur and cause the industry to perform in such an unprofitable manner. Lebanese hotels often face national calamities that the managements are ready for and set mitigating measures to face, and such activities threaten their operations. Most remedial actions from Lebanese hotels are predicated on cutting operational costs and concentrating their business activities in the capital as the rest of the places are rift with political and geopolitical crises. According to our research, despite managers’ training on various crises strategically, the COVID-19 pandemic presented a different type of challenge that executive teams did not consider when planning.

The results of our research show that Lebanese hotels faced business drop and revenues losses; the pandemic’s effects crippled all operations including bookings, meal preps, occupancies, and conferences causing the industry to function in survival mode. Although the Ministry of Tourism is yet to issue a precise figure on the revenues lost, the International Labour Organization (ILO) asserts that approximately 25,000 of the total estimated 69,000 workers employed in the hospitality industry were dismissed from their jobs. This data correlates to the period between September 2019 and February 2020. Monthly occupancy rates at 4- and 5-star hotels in Beirut had decreased from 79 percent in March 2019 to 10 percent in March 2020, forcing many hotels to cut jobs and/or reduce wages amid the economic slowdown of the COVID-19 outbreak.  Hotels cancelled investments in renovations, and the focus was on pressing costs that facilitate the company’s survival. Since 2019, 150,000 workers in the tourism sector lost their jobs. Foreign staff members returned to their respective countries. Others were laid off as many hotels shut down their operations to minimize expenses as the pandemic caused revenues to drop to negatives. On a relatively positive note, the average room rate increased by 156 percent from November 2019 to November 2020, leading to a RevPAR growth rate of 132.6 percent during the same period.

As mentioned earlier, with the decline in revenues (including booking cancellations), hotels have had to be ruthless in reducing their operational costs. The most evident strategy is the downsizing of staff. On the other hand, many were compelled to take their annual vacation days while the remaining had to adhere to reduced and alternate days of arriving to work. Further, workers’ wages and working times were reduced while the administrations froze their bonuses and incentives.

Nonetheless, the country and other stakeholders, including corporations and the public, have facilitated lockdown measures, allowing for the reopening of various firms in multiple sectors. Today, it is typical of guests and employees entering these establishments to have their body temperature measured. Moreover, specialized hygiene and cleaning audits have been instituted. Suppliers are expected to adhere to the set protocols when delivering supplies. To this end, there have been impressive comebacks of the Lebanese hospitality sector where people have begun showing to these facilities frequently.

Opening for business?

The Lebanese context appears to be more complicated than possibly elsewhere. Firstly because the country faces the ramifications of geopolitical crises from its immediate neighbours such as the Syrian War and Arab Uprising. Therefore, it is likely we will experience optimal economic recovery when the current political challenges are over, as it is difficult for tourism to thrive in such circumstances. However, the second complication is that the failure of reforms has led to a state of internal maintenance, which, compared to international hyper-competitive countries, constitutes a considerable setback in the county’s development. It will take the government a reasonable period to sell itself as a great tourism destination, far from the current imagery state of a country marred by significant levels of political instability. These steps will be paramount in revitalizing the hospitality industry. More importantly, they will be more ruthless when coupled with the world’s complete healing from the current COVID-19 pandemic.

In the meantime, companies in this industry must continue upholding safety measures in their operations. The future remains optimistic, given that companies such as AstraZeneca have already manufactured a credible vaccine. Positive news offers much-needed hope to all stakeholders. Partially open hotels must ensure social distancing to curb the spread of the virus. Besides, they will witness a lower impact than individual and family-owned business units because travellers will prefer chain hotels to commit to sanitation and hygiene standards. Moreover, the government has chosen such organizations to quarantine international visitors. Lastly, let everyone anticipate a new ‘normal’ where masks could be mandatory, and employees expected to maintain stricter safety and hygiene procedures.

April 20, 2021 0 comments
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Economics & PolicyHealthcare

Year one AC (After Covid)

by Thomas Schellen April 16, 2021
written by Thomas Schellen

After a year of living face to face with SARS-CoV-2, it is high time to recognize the relationship existentially and give credit where credit is due. The coronavirus is confronting our species with questions and challenges that we never have consciously dealt with. For starters, humankind has not really inquired in the past if a virus had equal existential standing to us or might be superior to us in any way. We furthermore neglected to discuss if such an organism must be respected as a being with inherent inhuman qualities, dignity, rights and feelings. 

This quagmire about a virus’s dignity arises in tandem with the bigger existential questions about viral intelligence, cognition, and existential validity when comparing the individual coronavirus to the average human or the collective coronavirus population on planet earth – notably, of the coronavirus population we know neither the exact number nor the approximate strength – to that of humanity as a whole. 

This means we have to address the question if this virus might actually be superior to the human species not only by its short-term success but also in evolutionary validity and intelligence. Are we, who for the longest time have viewed ourselves as the smartest species, prepared to acknowledge that this humble virus has outwitted us? 


This evaluation of the smartest species by the way is not about who can cause more havoc on planet earth or do more to impact its ability to sustain life. Notwithstanding that humankind may be the most invasive species on the planet, the jury is still a long way from determining if we are, in terms of irreversible impacts, the most destructive types ever to walk, crawl, flutter, slither, bounce around or somehow move on earth. But if we are not existentially more successful than the virus, it is time to relinquish the claim of being the only civilization-building and smartphone constructing species, and step back from the illusion that we ever were number one because of our perceived genetic greatness.

For someone or something coming out of obscurity – it may never be solved whether this virus has its direct ancestral ties to those purported Asian bats or to carnivorous geneticists sitting in secret labs – SARS-CoV-2 has not only survived the ignominy of being named by human scientists according to the strange aesthetics that characterize intellectual human convention in this age but also thrived. 

There are some hard numbers that speak to the virus’s success – the obvious one being that SARS-CoV-2 in 2020 has infected a documented headcount of 100 million humans (of which 70 million infections have been completed under a total 97 percent plus recovery rate). In return, we are totally in the dark as to how many viruses we have infected. Further thinking in terms of satire – and shockingly for those humans who consider themselves the best of the best, meaning all local politicians, journalists, intellectuals, and other crowd pleasers – it has taken less than one year for the little critter to take over the global conversation. 

In this sense, the pandemic has delivered the final evidence of our existential insufficiency. Even the staunchest defender of reason as the winning attribute of the human being has to acknowledge it: we do not uniquely stand out as the top species in terms of collective intelligence or cognitive capacity. In the category of species intelligence, the galactic race for the 2021 Nobel prize (I use the anthropocentric term for lack of a better synonym of the cosmic maker’s reward for the most irritating creations) is already run, and the virus has won. 

The effectiveness of viral nudging

Moreover, we humans have to admit that the coronavirus has changed our lives in myriad ways, including in the war we waged against it. The virus, on the other hand, has apparently been thriving and mutating to its heart’s delight but at the same time has not killed so many of us that it is in danger of running out of victims. The message: not killing its host bodies to any larger percentages (as most of us wrongly expected) has become the first demonstration of how smart this virus really is.

Furthermore, from the two competing organisms’ social survival perspective, the 2020 count of global infections (never mind how accurate the tallying has been) obliges us also to recognize that the virus has changed human behavior incomparably more than the other way around. (It is even dubitable if human behavior played a causal role in the virus’s mutation process).

Virus-induced human behavior changes by contrast are unmistakable. On the level of everyday occupations and distractions, people have stopped indulging in almost everything previously considered part of a fun life: they are no longer traveling, socializing, going to sports games and movies, or shooting off fireworks as much as they did before 2020. Indeed, the very definition of what constitutes the key factor in the capitalist human existence – that we all live to work and deserve to feel miserable if we don’t have a job – has been put in question.

On a higher plane of social and emotional involvement, the viral nudge to human behavior change is even more existential. This is despite the fact that excess mortality related to the coronavirus has been assessed as noticeable only in an age group (septuagenarians and older) that accounted, less than half a century ago, for a much smaller part of humanity than today and despite the relative statistical insignificance of the total Covid-19 mortality in comparison to the global population from the perspective of humankind’s survival (the global population at end of 2020 was higher than a year earlier, and in the opinion of the United Nations (UN) there is no sign that the long trend of increase in the global population will flatten or reverse until very late in the 21st century). These statistical facts notwithstanding, the experience with the rise in Covid-19 fatalities has shed harsh light on the finality of death, and by illuminating death, also on the preciousness of life at any age as well as on eventual infirmity that precludes productive economic activity. 

Without taking away from the prospectively beneficial change impulses to contemporary human behavior that could arise from a lasting post-pandemic appreciation of human dignity, social appreciation of the aged, and awareness of life’s important aspects in the population strata that are psychologically co-shaped by the experience of the pandemic, it has on the other hand to be acknowledged that countless peoples’ lives have been thrown over the last nine or ten months into an illogical economic and social rhythm of lockdown and infection, whereby increased infections translate into politically determined economic lockdowns. Medical outcomes of lockdowns, which are being regularly declared as successes by the politico-medical cabals, are with the same regular irregularity followed by the counter tides of existential depression and economic misery that the same lockdown-enforcing politicians and medical experts fail to address adequately in social or economic terms. 

At the end of January, the International Monetary Fund’s (IMF) press briefing on the world economic outlook update at the beginning of 2021, for example, gave an estimate that projected global growth for 2021 at 5.5 percent, partly attributing this slightly improved prediction to fiscal measures in rich countries. However, at the same time the IMF predicted that in 150 of the world’s economies, per capita incomes in 2021 will be realized “that are below their 2019 levels” – with implications for the life experiences and opportunities of the affected millions that are very far from being adequately assessed. 

Noting that “there is a great deal of uncertainty” about the fund’s world economic forecasts, IMF chief economist Gita Gopinath as late as January 2021 could only confirm “that the crisis in 2020 still remains the worst peacetime global contraction since the Great Depression” along with a projected cumulative loss in global output of USD 22 trillion over the 2020 to 2025 period.

Other IMF observations at the end of January added for good measure that the level of average public debt worldwide, fueled by USD 14 trillion in global fiscal support by end of 2020, approached 98 percent of GDP by end of last year, a 14 percentage point expansion over what had been predicted for the same point in time before the pandemic entered the picture. Again, the impact of the new and old debt mountains on the social reality of the next several generations appears to be shrouded in foggy but predictably life-altering uncertainties.  

What all this means in terms of economic outlooks on macro and micro levels – is simply that the people of the world can be no surer than their academic luminaries and economic augurs about how their lives will have to change individually or collectively from the lasting economic disruptions in the post-pandemic world on company, social group, sub-national, national, regional corporate, or wider levels.

One thing that is clear from the human economy perspective is that global risk perceptions have been fundamentally altered in the course of the past 12 months and are still being reshaped. Thus, the outlook of the 2021 risk report by the World Economic Forum (WEF) reflects the changed perceptions of economic leaders and policy decision makers by describing the report’s thrust as the convergence of societal fractures, from rising unemployment and youth disillusionment to pandemic risks and geopolitical fragmentation, with climate and environmental risk factors as existential threats to humanity. 

In short, the WEF latest risk report’s implication of the 2020 geo-economic experiences with a contagion of pandemics and recessions is that, while long-term external and environmental risks are overlapping with short-term societal fractures, societal cohesion is more important than ever for future risk trajectories. 

This increasingly clear big picture is not satisfactorily integrated with the short-term perspectives that the governments of G7 countries or multilateral agencies are able to present at this juncture of pandemic-related economic uncertainty in early 2021. Unfortunately, the evidence that harsh lockdown measures are more beneficial for reducing mortality rates, or more precisely either excess mortality among populations at large or excess mortality in economically active population groups, is so far absent. As example, a story by the editor of the Mises Wire (Mises Institute), focusing on the efficacy of lockdowns with focus on the Western hemisphere, noted last month that “the overall trend of infection and death appears to be remarkably similar across many jurisdictions regardless of what non-pharmaceutical interventions (NPIs) [such as lockdowns] are implemented by policy makers.” 

Recent think tank studies, such as one published in by the Sydney-based Covey Institute which ranked countries in terms of their effective ability to limit impacts of the coronavirus or Covid-19, are suggesting that the responses of the past year have had greater or lesser effectiveness in terms of reducing mortality and case numbers, but also indicate that despite great variations in pandemic responses, there is no uniform distance between countries. Different factors such as political organization or economic development level do in no way translate into foolproof methods of success in dealing with the coronavirus. 

Additionally, current narratives such as the study by Covey do not actually reveal either the causal connection or even the correlation between harsh measures and long-term positive health outcomes. This uncertainty is blatant even without pointing out that those new surveys and behavioral studies are still failing in assessing quality-of-life repercussions or predicting medium-and long-term negative outcomes of lockdowns and economic weakening in most countries as far as mental health, longevity, poverty alleviation, social justice, and creation of job opportunities are concerned.  

Rhetoric, from the global to the local level since March of last year, has been talking haplessly about the need for an economically functional society to be built on human health but, repetitions and slogans notwithstanding, this politically tainted global rhetoric is insufficient to politically or scientifically explain either the lockdown logic or the real medical and socioeconomic implications of varying lockdown implementations. The IMF, the UN and World Health Organization, and hosts of institutions and governments have been vacillating between pro-lockdown speeches on the importance of human health and warnings about the economic repercussions of those lockdowns and disruptions of global trade. All they have proven is the existence of uncertainty and entrenched glaring contradictions with regard to health and economy. 

However, what seems truly unfortunate is how this rhetoric mutates while on its path down from top-tier multilateral institutions and developed countries and becomes tainted with increasing populism, ideological trash, and expressions of autocratic state behaviors. In the context of Lebanon’s patriarchal attitude of administrative powers, the ignoring of measured arguments and honest expert discussions along with long-standing deficiency in honestly conducting democratic public debates has recently reached extremely painful and disrespectful peaks of poor governmental communication.

Summing up the state of global pandemic affairs by the first month of 2021, medical science does not supply enough hard data and rationales for either hard or soft approaches in fighting the pandemic holistically and behaviorally; nor do either economic studies or medical research provide a full image of the human costs and benefits of lockdowns in their medical and social contexts versus their macro-social and economic risks and repercussions. All that remains to be repeated is that economies around the world have entered cycles of pandemic stop-and-go, with incalculable impacts of those cycles on human lives, physical well-being, happiness, and mental health. 

But in turn, we don’t even know up to this day if all our lockdowns and quarantines have caused a single specimen of SARS-CoV-2 to stop interacting with singing, speaking, and breathing humans. From what we can deduct by having been the global laboratory specimen in experimental political and medical coronavirus responses by a handful of self-appointed virus czars and their economic serfs, all that has been achieved through one year of epic competition between the virus and mankind is that, from the virus’s perspective, there seems to be a practically inexhaustible supply of future hosts (approximately 80 times more humans could have been infected than are documented to have been exposed to it in the first year of market presence). But what is even more impressive: the viral reality of being talked about universally, of being a bug that controls human behavior politically, economically, and socially without having even a political platform, or a PR consultant.  

Learning more from the virus

We can learn from the virus a great number of lessons. First among them is perhaps that human wisdom is no less elusive and fears are today no less irrational and no more existentially resilient today than they were four or five centuries ago. Our fears rule us much more than we cozily embedded intellectuals have noticed in the past 60 to 70 years that had been characterized by receding hunger and increased life expectancy. 

The second lesson is medical: For humans, the competition with the virus will in the long and medium term be medically rewarding, with the urgent adversity of the virus boosting medical innovation far beyond what would have been possible even a year ago. Winning the Nobel prize of medicine (at some point) will be a shoo-in for the immunologists that create vaccines against the coronavirus. In the longer run, the new research into vaccines will be beneficial because it will faster open the vaccination doors against many types of cancers and infectious diseases. 

The third and highly challenging lesson of dealing with the pandemic is economic. From the perspective of having attempted to build an economic science since well over a century of studies, observations, models, and theories, we have to concede that in economic life, there is still more between heaven and earth than our b-school wisdom lets us realize… 

Our constructs and models – dubbed mistakenly as economic science – are only as good as the variables they incorporate. With much of the story of economic responses to the coronavirus appearing destined for the textbooks highlighting human foolishness, a long period of better research and understanding should pass before anyone should be deservedly awarded a pandemic-impact-related Nobel Memorial Prize in Economic Sciences. But over this time, fundamental rethinks of economic safety and well-being – rethinks perhaps best historically comparable to the way in which the shock of the Great Depression reshaped its host country of the United States and how improvement of the developed world’s economic reality had been attempted through the Bretton Woods system – are going to be inevitable. 

A large fourth set of virus lessons relates to human systems or societal organization and to valid principles of leadership or the lack thereof. The point zero of these SARS-CoV-2 aided realizations is that the ability to dominate the global conversation in this age of social media communications is no indicator of brains or value. Point one, if a political figure wants to guide their polity through an unprecedented crisis, whether war, famine, monetary dissolution, or other destruction of certainty, this political figure needs to have a strong basic trust in people. Point two, sudden crises will not be soluble by the old recipes and previous certainties or propaganda spiels. Point three, the systemic ability to deal with a crisis cannot be predicted on the basis of ideology and governance theorems. Point four, any crisis to be met in a democratic context requires tireless extra effort at achieving solutions by truly democratic and respectful opinion and decision making processes, however uncomfortable the democratic disagreements that they may involve. No democracy, however old and well instituted, will be sustainable if it fails to embrace the common good from diverse perspectives. Point five, any politician or leader in a crisis such as this pandemic – irrespective of coming from democratic, oligarchic, autocratic, or dynastic background – needs more than a ruling position. They should better be equipped with past achievements that build a bond of common determination between the polity and the leader. 

April 16, 2021 0 comments
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Photo BlogPhoto Essay

The plain picture

by Greg Demarque April 14, 2021
written by Greg Demarque

February 26
Lebanese citizens protest in Riad El Solh square against economic conditions and demand access to their bank deposits.

January 17
Lebanon initiates a total lockdown and curfew from January 14 to 25 as COVID-19 cases skyrocket after
the end-of-year holidays.

February 11
Lebanese citizens and foreign ambassadors gather to
mourn slain journalist Lokman Slim and
denounce terror.

February 18
Families of the Beirut Port explosion victims protest against delays in the investigation and the recusal of the appointed judge.

March 2
Protesters across Lebanon block roads as the dollar exchange rate reaches LBP 10,000 on the black market.

January 17
The decision to extend the nationwide COVID-19
lockdown to February 8 triggers protests in Tripoli and
clashes with the army.

February 14
The Ministry of Public Health initiates the COVID-19 vaccination campaign with medical personnel first in line to get the vaccine.

February 27
Citizens gather at the Maronite Patriarchate in Bkerki to support calls for a UN-sponsored international conference to resolve Lebanon’s crises.

March 8
On International Women’s Day, citizens lead marches and demonstrations to address women’s rights issues.

April 14, 2021 0 comments
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AnalysisBusinessReal estate

Hedging on real estate

by Nabil Makari April 12, 2021
written by Nabil Makari

Real estate, long perceived in Lebanon as a long-term investment which would allow reaping profits in an economy of services, was in addition seen as an attractive investment due to a high number of expats and tourists willing to buy local housing for vacation purposes. However, since the beginning of the financial crisis in Lebanon, the sector has increasingly emerged as a hedging tool for depositors willing to limit a haircut on their bank deposits. 

Over the past years, real estate investment hunger had weakened gradually and significantly from a peak in 2012, and this weakness, which was correlated with the high interest environment for deposits, has been reversed since the beginning of the financial crisis in Lebanon in 2019. With capital controls and local currency depreciation, the impending fear of a haircut of deposits has resulted in movements from deposits to real estate, causing a price hike in the sector. Nevertheless, it is necessary to ponder whether this is a long-term trend or merely a result of the political situation of Lebanon, filled with doubt and uncertainty.

Overall price hike

According to Bank Audi’s Real Estate research report dated July 2020, the value of real estate sales went up by 52.5 percent year-on-year in May 2020, to reach $3.7 billion, following double digit contraction in the past two years. Indeed, real estate prices had dropped in 2018 and were selling at a discount in comparison to 2015. Asking prices of residential real estate in Beirut grew by 20 to 30 percent in June 2020 relative to the previous year. This mostly shows a trend on the part of buyers willing to hedge their deposits and to invest in relatively “safe” assets. 

On the other hand, this does not appear to be a generalized trend adopted by the Lebanese population as a whole but rather by specific classes. Soon after the October revolution, buyers started looking for safe havens for their deposits, and this demand was met with a supply by property developers. Indeed, according to Mireille Korab, head of Real Estate Business Development at FFA Real Estate, from October 2019 to January 2020, the spike in purchases had been driven mostly by wealthy individuals hoping to buy bargain products to avoid a haircut, while property developers were willing to sell quickly to close their debts. Since then, this spike has been driven by many more high net worth depositors, according to Korab, trying to avoid the same probable fate to their deposits. 

By June 2020, most developers had repaid their loans, and prices therefore had gone back to the same level as 2015, according to Korab.

 Who is buying and selling?

Early on, sellers consisted of property developers who were eager to pay back their bank loans, the real estate properties being sold until June 2020 involved apartments that were usually only a few years old or still under construction, mostly around Beirut. However, this was followed in the second part of the year by sales around the country where people bought real estate, whether apartments or land, hoping to hedge potential losses from a haircut. 

This has resulted in land prices going up, noting well that the price of such real estate using local Lebanese dollars (lollars), with an ever rising discount of lollars to cash dollars. As a result of developers having repaid their loans, the market is more and more difficult for banker’s checks, as sellers are currently focusing on selling their obtained banker’s checks at a discount on the black market to obtain fresh dollars, according to Korab. “For the wealthier of the sellers, they are not selling unless it’s fresh cash to limit their exposure to the real assets they would use,” says Korab.

At this stage, with no financial restructuring and no International Monetary Fund (IMF) package in sight, due to negotiations with the IMF having reached a standoff, the price of real estate might very well keep going up, with the lollar to dollar discount also going up. This would therefore result in higher prices for rent and buying housing as such prices would go up, with rent prices usually following the price of the underlying asset, and most property sellers insisting on being paid either fully or in part in cash dollars.

This movement on the real estate level is limited mostly to residential properties and land, as commercial real estate has taken a hit. With the impact of Covid-19, real estate for restaurants, shopping malls, and other high-yield commercial real estate has not proven an attractive investment or hedge, especially with regards to short-term leases. With no short-term use for many of these real estate assets, there is little demand for them in the current situation, though long-term leases could prove attractive as they would be considered a long-term investment should the Covid-19 situation be eventually resolved or at least attenuated.

In light of the reimbursement of loans by developers, who are the remaining potential sellers in this situation?

According to Bank Audi’s report, supply has decelerated lately, whereas demand has soared. Indeed, sellers are not very keen to sell real estate unless they require fast cash, for example in case they need to send money abroad, after exchanging the bank check received for the transaction and for cash dollars at a discounted rate. In addition, development projects have frozen, due to reduced availability of construction loans, and the fact that most of the materials can only be obtained in exchange for cash dollars. According to the latest statistics released by the Order of Engineers of Beirut and Tripoli, the total surface area of new construction permits decreased by 32.6 percent in 2019, and by a further 61 percent on a yearly basis as at July 2020. 

In addition, according to Byblos Bank’s Real Estate Demand Index for the Third Quarter of 2020, 0.6 percent of Lebanese residents had plans to either buy or build a residential property in the coming two quarters, down from 1.1 percent in the second quarter of 2020 and compared to 4.7 percent in the third quarter of 2019.  

Banking on fresh dollars

Could the real estate market also prove an attractive investment for holders of dollars in overseas accounts? In the current political situation, with no clear economic policy in sight, there is little security offered to long-term investments.

On the other hand, the depreciation of the Lebanese pound has made local prices cheaper for holders of foreign currencies, especially holders of US dollars. With Lebanon having many of its citizens living abroad, it is conceivable that these expats would be enticed in investing in Lebanon to obtain real estate at attractive prices and engage in development projects. According to Korab, “Developers at present wouldn’t sell for other than cash, because cash would help diminish the cost of construction.” 

Indeed, with the depreciation of the Lebanese pound, costs of construction have gone up due to the depreciation of the local currency and the fact that much of the raw materials being purchased are sourced from abroad. Developers, not being able to transfer money abroad, have to rely on cash transactions, and with the spike in real estate prices in lollars, in addition to the current political situation in Lebanon, there is little appetite for development of real estate projects. According to Byblos Bank’s Real Estate Demand Index for the Second Quarter of 2020, the demand for residential real estate had dropped sharply during the second quarter of 2020, which suggests that “the stock of residential units remains significantly higher than the actual demand, and that the purchasing trend is originating mainly from a relatively limited number of buyers.” In addition, according to this report, potential local real estate buyers are reluctant to acquire and build a residential unit, as “they have been forced to address more urgent and basic needs.”

Nevertheless, buying land in real cash dollars could prove attractive for holders of cash dollars as these transactions do not have an investment component such as that of development projects, and do not require any import of raw material. 

The road ahead

The road ahead will depend mostly on Lebanon’s political and economic situation. Should negotiations with the IMF lead to a rescue package (conditional upon the introduction of reforms), more effective governance and the financial situation on the path to recovery, Lebanon could prove an attractive place for real estate investments. 

Services are the dominant sector of the Lebanese economy, and the depreciation of the currency could help attract more foreign investments as well as attract more tourists. At this stage, foreign investments would result in a lower rate of Lebanese pound to US dollar, and development projects could be kick-started, which would help rein in the need for cash in real estate transactions. In this case, a more stable exchange result would make dealing in the real estate market easier. On the other hand, should the current situation become a long-term one and lag on, the discount of the fresh dollar to the lollar would keep growing and real estate prices in lollars would keep going up to keep up with the need for cash due to higher discounts. “The price is readjusted in terms of fresh cash,” says Korab. Indeed, in November of 2019, nominal real estate prices were close to those of 2011. Last May, real estate prices had spiked to a level similar to that of prices between 2013 and 2016, which were higher than those of 2018. Overall, the shape of real estate in Lebanon depends on reforms and economic solutions: should reforms be put in place, the real estate market would become more stable and result in investments in development projects. If not, the discount of lollars to US dollars would keep widening and prices would go up and readjust to fresh cash.

In conclusion, the rise in real estate prices in lollars is a direct consequence of economic uncertainty, and an inefficient meeting of supply and demand. Should an economic roadmap be adopted, and successfully implemented, prices would be readjusted and the movement of deposits to real estate would drop, while investments in real estate could start anew.

April 12, 2021 0 comments
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BusinessInsurance

Lost in the fog

by Thomas Schellen April 9, 2021
written by Thomas Schellen

Lost in the fog

Lebanese insurers seek to ward off economic pressures and evil opinion spells

The best thing to say about the performance of insurance companies in the year to date is that they are slowly reappearing from what seemed an organizational stupor that during the past year enveloped the sector up to the level of the regulator, the Insurance Control Commission (ICC). In the first quarter of this year, a few insurance companies have become newly active in terms of communicating with their market, and the insurance association has begun strategizing on how to re-assert the sector’s public perception, which had taken several beatings during the past year. After a period of providing information very haltingly, the ICC as the presently sole source of quotable data on Lebanese insurers, has released its quarterly report on sector results in Q4 of 2020 on March 15.

Such accumulation of vital signs can be observed from a financial sector that was impacted very badly by the liquidity crunch and economic implosion which Lebanon underwent in 2019/20 – certainly as badly as banking and financial intermediaries but with almost no attention given to insurance in the past year’s various rescue plan drafts for the nation and restructuring debates about the banking sector.

Causes for concern

But despite the sector’s slowly returning vitality symptoms noted above, at least equally many signals in the first few months of this year have been screaming out to the contrary – arguing that insurers are still deep in the financial woods, life-threateningly entangled in the brambles of the economic crisis. The numbers in the ICC’s quarterly report are neither clear nor comforting, several insurance providers and intermediaries are not returning phone calls or responding to interview requests, and those who have lately agreed to talk, offer more by way of hope and personal determination to improve the state of insurance in 2021 than they can point to in terms of positive economic indicators and effective support by political or monetary authorities.  

In the ICC quarterly report for the fourth quarter of last year, gross premiums written in 2020 for the fourth quarter and for the year to date (ytd) are respectively stated as 570,421 million Lebanese pounds and 2,357,090 million Lebanese pounds. The most important business lines identified in the report in terms of premiums generation were medical, life, and motor, followed by property and casualty at some distance.

In terms of claims, paid benefits amounted to 1,613,509 million Lebanese pounds for the ytd and 438,534 million Lebanese pounds for the fourth quarter. To this the annual total, property and casualty claims contributed little over 9 percent.

In comparison to these results, gross premiums written in 2019 according to the  previous fourth quarter report show the following: Gross premiums written in Q4, 2019 were 530,524 million Lebanese pounds, with life insurance contributing slightly under one third to this total, followed by health, motor, and property which each accounted for between approximately 17 and 30 percent of the insurance market.

In the preliminary end of year tally (the ICC annual report for 2019 has yet to be published), total gross premiums were stated as 2,428,967 million Lebanese pounds. In this total, the breakdown of market shares by insurance lines for the full year was similar to the fourth-quarter results, but differed in the fact that medical insurance came out on top for the full year as the largest business line by premiums.

In terms of gross claims, life payouts in 2019 accounted for close to 40 percent of the total 413,450 million Lebanese pounds that were settled. Collated over all four quarters, the total was 1,580,971 million Lebanese pounds in gross claims settled, with the medical settlements accounting for the highest share of 40 percent, followed by life with 32 percent. Like in 2020, property and casualty claims have contributed about 9 percent to the year’s settled claims in 2019.

Nominal net investment income of nearly 300 million Lebanese pounds for the insurance sector by end of 2019 vanished entirely in 2020. The ICC report showed a loss of 89 million Lebanese pounds for the year in net investment income, notwithstanding the microscopically encouraging note that the net investment income in the fourth quarter was positive at 82 million Lebanese pounds.  

In other observations, the ratio of paid claims to gross written premiums in 2020, while little changed for the industry at 68 percent (2019: 67 percent), revealed indications of claims exceeding premiums which were more pronounced on company level than in the previous year. Companies Allianz SNA, United, Adir, Bancassurance, AIG, and LCI showed paid-claims-to-gross-written-premiums ratios above 100 percent after four quarters. LCI, the sole credit insurance provider based in Lebanon, witnessed ratios of more than 200 percent for both the fourth quarter and the full year of 2020. 

A darker picture yet

After several years where gross premiums growth was in the single digits in nominal terms but often was seen by insurance sector insiders and analysts as insufficient to maintain sector profitability levels, the reported trend of increasing claims and decreasing premiums fails to impress and does not look hopeful, even in Lebanese pound figures. When adding a mental note of the Lebanese pound destruction in 2020 and 2021, the incomplete data picture darkens by several orders of magnitude.

Discussing the troubled 2020 and uncertain 2021, Fateh Bekdache, general manager of Arope Insurance, does not mince his words in saying that the last year was “damn difficult.” Going through the list of problems and challenges that have been afoot in 2020 and still are pressing on the sector, he first mentions that insurers took large provisions towards the settlement of claims, which was the necessity resulting from the magnitude of the August 4 Beirut port explosion. Bekdache next names as problems the lollar/dollar and Lebanese pound currency conundrum and the issue of having to settle claims in the same currency and same category (cash or check) in which a policy premium had been paid; the painful cost inflation of imports that is reflected by the increase in costs related to medical covers; and challenges on how to pay reinsurers. “So far we don’t have answers to most of those issues,” he tells Executive. 

Instead of sector participants getting help in solving the issues, blame games and accusations abounded when the insurance sector’s role was brought to the table, says Jamil Harb, the secretary general of the Association des Compagnies d’Assurance au Liban (ACAL). Counterproductively, the industry has been under outright mental assault from many sides, he tells Executive: “We are being attacked by the public, by the market, and by the press. But we are doing our best to provide the service of insurance.”

Bekdache likewise sighs that insurance companies are attacked all the time on all domestic fronts, with nobody in a public position and power to support the sector apparently taking insurers seriously – despite the proven need for insurance protection in days of escalating risks. “I don’t know what people really want,” he comments.

The historic catastrophe event of the past year was the Beirut Port explosion. It had obvious implications for life, medical, motor, catastrophe, and property covers held by commercial and private insurance clients. The problems of settlement delays and yet unsolved liability and negligence issues that are affecting settlement of catastrophe and property insurance claims more than seven months after August 4 have splattered the most visible stain on the sector’s reputation and credibility (see our story Deal or no deal on the complex issue). It left a dark mark on insurance in the local public perception but also was seen as a stain by reinsurance partners abroad whose trust in the ability of assessing risks in Lebanon was utterly shaken. “It is a gross negligence issue that really scared the reinsurers. We were faced with many questions during negotiations of reinsurance [contracts],” Bekdache explains.

Other spots on the vests of insurance companies – reputations that market players had been building in arduous efforts over the last twenty years – are tied to the litany of liquidity problems that every Lebanese has become a knowledge expert on. For insurers in particular, acute currency problems and cash flow challenges translate into much more than reputation risks, because their operations are dependent on fairly managing risks, pricing of premiums, and settling of claims in the dichotomous currency environment of the Lebanese pound, the crippled local dollar, and the increasingly dear “fresh” dollar, or any sound money.

As highlighted in a paper by the Lebanese Actuarial Association (LAA), insurance companies in 2020 resorted to hardly sustainable measures and steps. Saying they are very concerned with the “challenging risks that the Lebanese insurance industry is undergoing,” the actuaries pointed to ongoing market practices that include imprecise remedies such as programs of issuing policies in multiple premiums in efforts to reduce currency and underwriting risks, or inflating sums insured in order to increase premiums. Having observed such artificial increases at margins from 30 to 300 percent in motor all risk (30 to 100 percent) and property (200 to 300 percent) in dollar, lollar, and Lebanese pound covers, and also having witnessed substantial increases in minimum premiums for motor all risk covers, the LAA notes potential problems in relation to those practices, namely deficiencies in defining insured sums, issues that could arise with regard to cessation to reinsurance, inadequate frequency of pricing reviews, and upward distortions of dues in distribution and taxation.

Add global and regulatory detriments

Stirred into the foul mix of sharply increased costs, obscure financial risks and destruction of purchasing power that insurers are faced with at home, have been hardening – which in insurance speak means increasingly expensive – international markets for insurance and reinsurance. Although international reinsurance profitability outlooks for 2021 and the coming years have during the recent reporting season been painted in rosy colors in expectations presented by reinsurance giants the likes of Swiss Re, SCOR, and Munich Re as well as research reports by specialized and universal ratings agencies such as S&P and AM Best, the field of insurance is seen as being forced into many changes and strategy revisions, including adjustments to health insurance, retirement, and numerous other life and non-life product lines.

To cite just one source that has been elaborating on insurance uncertainties that loom ahead, the Organization for Economic Collaboration and Development pointed out last June during the first wave of the COVID-19 pandemic and recession, “This global health and economic crisis is also set to have an impact on insurance companies. They are likely to face changes in the demand for insurance policies and claims experience as well as impacts on the value of the assets that they hold to meet their obligations to policyholders.”

Facing more immediate problems than global insurance outlooks and long-term strategy concerns, local insurers have already seen clients who sacrificed their life contracts and canceled dollar-denominated policies that they could not find the dollars to pay the premiums for, have downgraded vital medical policies to lower class covers, or have been unable to renew motor insurance. Globally induced upward pricing pressure on insurance premiums is the last thing they need.

“I don’t know how people will renew motor insurance in 2021 if they are faced with struggles to put food on their tables,” comments Bekdache, while confirming that strong upward price pressure is in force across insurance lines. “There will be hardening conditions, and this will apply especially for catastrophe cover which [the port blast] falls under. It is a big problem but you have to face it,” he says.

As the rotting cherry on top of this indigestible looking insurance cake, the ICC regulator appears to have been backsliding in its efficacy as far as keeping tabs on a troubled sector that is overcrowded with distressed providers, some of which have long been operationally shaky and under-capitalized, evoking analyst views that there are insurers in operation today that must be considered as technically bankrupt.

Gradually building competencies and expanding its supervisory activities in the 2000s and 2010s, the ICC over the years succeeded to narrow and then close a problematic time lag of issuing its annual and quarterly reports. Until the departure of the institution’s head nearly one year ago, the ICC also appeared to advance incrementally in building a competent authority that in the late 2010s functioned as independent regulator and only nominally was positioned under the Ministry of Economy and Trade. 

However, for almost a year now, it has not been clearly visible who was in charge at the institution. The ICC website does not show a profile of a new commissioner or acting commissioner, and insurance observers and company managers tell Executive that they don’t know who is really running the ICC and making the decisions. People who know the institution moreover say that even before the economic shocks of 2019/20, personnel decisions have not been morale or capacity boosters. “The Insurance Control Commission should have grown in the last five years and hired people, retained talent and developed competencies. The opposite was done,” comments the ICC’s head in the 2000s and early 2010s, Walid Genadry.

The challenge of reinventing opportunities

Lebanese insurers, hard pressed for economic survival and habitually tending more to be followers than inventors when it comes to designing new and revolutionary services, can be assumed to have very limited abilities and room for reinventing themselves in the expected crosswinds of global insurance market changes, as the outlook for insurance business lines in Lebanon is more than elusive. Arope’s Bekdache, while enthusing at the end of December to Executive that after the very difficult past year, “we are looking forward to a better 2021,” continued by saying “the year ahead will be very delicate and we are very cautious in drawing up our strategy for 2021.”

Noting that widely used insurance covers in motor and medical protection are still as vital as before the Lebanese crisis and adding that insurers have been obliged last April by a ministerial decision to provide, to a degree, coverage of COVID-19, ACAL’s Harb acknowledges dejectedly that as of early 2021, “the industry has no sweeping news, and this is bad. There is regression in all lines of business.”

Corroborating the validity of the example of their reinsurance treaty’s redesign for improving the market situation of LCI, the LAA paper proposes that securing a very high level of trust with all of an insurer’s stakeholders and that “adequate pricing, equitable claims handing, and solid risk management are key to ensure sustainability of the Lebanese insurance market.” To move in this direction, the paper recommends that the insurance industry should pursue five solutions to improve its current survivalist practices. These proposed solutions involve, among other things, the creation of an inflation index, changes in product designs, and the application of transparent and controlled processes to avoid litigation.

All in all, it cannot surprise that the mood in the Lebanese insurance sector is glum, with some interspersed lights of hope. 

What about trade credit insurance?
One insurance business line that sits pretty in economic realms but commands little attention from consumers concerned with protecting themselves against risks of car accidents and medical emergencies, is trade credit insurance. This specialty niche, which has exactly one Lebanese provider in the Lebanese Credit Insurer (LCI), has seen demand growth in many countries because companies everywhere worry increasingly about risks that trade partners, especially smaller companies, might go bankrupt in the long economic aftermath of the global COVID-19 pandemic. To protect their deliverables and invoices, sophisticated corporate clients across diverse economies are thus stepping up their usage of trade credit insurance, explains Karim Nasrallah, the general manager of LCI.
He tells Executive that LCI benefits in some sense from the corporate demand for securing their assets in trade but admits that the market outlook of trade credit insurance in Lebanon, while perhaps not as downcast as that for mass insurance lines, is nonetheless challenging. “There is not much growing demand but there is a strong willingness [by large corporate clients] to stay insured,” he tells Executive, explaining that the market on one hand has moved to shorter term or cash invoicing and overall shrunk due to increased reliance of traders on cash in the absence of credit and banking facilities. On the other hand, “volumes have gone up because of increasing prices [of traded goods]. Thus for us premium income is stable or slightly growing but this is mostly due to our stable portfolio [of corporate clients],” he adds.  
In the economic crisis of 2020, “we have suffered, like most in the sector. [It was] not too dramatic but we had bad results,” he concedes before explaining that the best outlook for his insurance specialty now is in exportation focuses and aspirations of Lebanese manufacturers and producers. “People see the necessity to grow exports and bring fresh currency into their businesses. Demand for export credit has been growing and this is the only thing that we have been able to grow our business in,” he says.
Changing products and service structures allowed LCI to better satisfy market demand in the new economic situation of Lebanon and increase the insurer’s ability to serve exporters with adequate protection of their invoices and not erode the value of an eventual claim when an invoice in hard currency might be insured by a premium paid in local dollars. LCI to this end has redesigned a formerly combined export and domestic credit reinsurance treaty into a more attractive treaty split into export and domestic coverage terms. This treaty, which has been in force from January, has motivated clients to activate pending policies, Nasrallah says: “We had to adapt to the market to keep business going.”  

April 9, 2021 0 comments
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BusinessInsurance

Deal or no deal

by Nabil Makari April 6, 2021
written by Nabil Makari

The Beirut port explosion on August 4, 2020 resulted in the loss of more than 200 lives, countless wounded, and also massive insured losses now estimated to range between $1 billion and $1.5 billion by the website ReinsuranceNe.ws. While some of the damages have been repaid, according to the specifics of insurance policies, others have not, awaiting for an official report pertaining to the causes of the Beirut port explosion.

The damages to insured properties, in principle, would be subject to reimbursement by private insurance companies, in accordance with the insurance policies signed between property owners and the said companies. Though from legal and contractual aspects, this would appear to be a straightforward matter, the reality is far from being so, in part due to the unclear reasons behind the blast and the economic situation in Lebanon which has resulted in policies having to be readjusted to take into account the difference between “real” dollars and dollars held in banks and subject to capital controls.

Lollars and dollars

The first issue that has been at the forefront of the reimbursement of policies has been that of the payment of the insurance policy in local dollars or “real” dollars. As the Lebanese dollar (dollars held in bank accounts before the beginning of the financial crisis and capital controls) has lost in value in comparison to real dollars (the current discount as of February 24, 2020, being 30 percent for real dollars to 100 “lollars”) due to informal capital controls and a lack of liquidity, the underlying asset being insured could no longer be paid in local dollars, should the insured party be paid in full in the occurrence of damages. A good valued at $20,000 pre-crisis, should it need to be replaced, would require either the same amount in cash or a cheque with a higher value in lollars to be discounted for cash. This has resulted, over the past year, in insurance policies being readjusted for their fair value. In addition, the Lebanese Association of Actuaries in a report dated February 16, 2021, recommended “a review of the Pricing approach, including matching the premium with the allocation of costs by currency,” and the introduction of an Inflation Index to properly reflect the value of assets and costs of claims.

According to Elie Hanna, former president of the Lebanese Insurance Brokers Syndicate, if the insured have readjusted the insured sums in their insurance policies to account for the real value of the underlying asset, and if the policy covers the cause of the damage, then they are repaid, in full, by the insurance company. According to Hanna, this follows law and logic, “but since it is the first time that we had different exchange rates, judges may rule otherwise.” This payment can occur in cheques taking into account the discount of dollars to lollars. In addition, according to Elie Torbey, president of the Association of Insurance Companies of Lebanon (ACAL) in a TV interview dated February 12th 2021, insurance companies have sent experts on the ground, in the aftermath of the blast, to evaluate the damages. According to him, 50 percent of reported damages have resulted in experts being set to investigate, and insurance evaluation will be conducted in real dollars in order to account for reconstruction fees.

In conclusion, the value of underlying assets has had to be readjusted to account for the presence in Lebanon of a non-transferable currency being sold on the black market at a discount for real dollars. Insurance companies have managed to readjust these policies for many of their clients. For clients who did not choose to renegotiate their policies and accept paying elevated premiums, payments are to be made in local dollars. The difficulty with regards to many non-adjustments is due to the higher cost of living: with a depreciation of more than 85 percent of the Lebanese pound to the dollar since the beginning of the crisis, many Lebanese simply cannot afford to readjust their insurance policies. In addition to the need to adjust for the massively depreciated lira, the cost environment of insurance has internationally been hardening, which translates into upward pressure on insurance premiums in most markets.

Vehicle damages and other property damages are covered under different policy terms. Most insured car damages have been paid back, according to Hanna. “Others have paid on a compromise basis,” he says, when adjustments of the sums insured have not taken place, and when the policies do not cover all causes (especially war and terrorism) taking into account the difficulties in renegotiating policies in a time of scarcity. With property insurance, on the other hand, settlements have occurred in small amounts but not large ones, as insurance and reinsurance companies are still waiting for an official report.

Reinsurance and official reports

A thorny issue that is blamed for holding up the settling of larger property insurance claims from the port explosion is that of dealing with international reinsurance companies. According to Torbey, in the same TV interview, most insurance companies are reinsured with regards to the Beirut damages, with international reinsurance companies, and with reinsurance companies covering over 95 percent of the insured damages. The main concern with regards to reinsurance companies is the need for an official report as to the causes of the Beirut port explosion, as the report would then clarify whether or not such cause is included in the reinsurance policy or not, and therefore would result in repayments by said reinsurance companies to the local insurance companies.

There are two basic types of reinsurance arrangements: facultative reinsurance and treaty reinsurance. Facultative reinsurance is designed to cover single risks or defined packages of risks, whereas treaty reinsurance covers a ceding company’s entire book of business, for example a primary insurer’s homeowners’ insurance book. Facultative reinsurance is typically used for high-value or hazardous risks because the policies can be tailored to specific circumstances.

With regards to repayments, according to Hanna, it would all depend on the insurance policies, terms and conditions, and modes of payment: some reinsurance companies have negotiated with local insurance companies a certain amount of reimbursements, others are still waiting for an official report, while some have partly repaid according to premiums and on a compromise basis. In addition, self-imposed capital controls by banks since the end of 2019 have resulted in local insurance companies not being able to transfer money to their reinsurers. For those companies who already made those transfers to their reinsurers, the latter have proposed to deduct these amounts from their repayments due to their local clients instead of cancelling the reimbursement policies, taking into account their long-term relationships with the local counterparties.

An official report is still to be published, to allow for reimbursement from international reinsurers. It is still undetermined whether the Beirut port explosion resulted from an act of war, terrorism, negligence on the part of port and/or governmental authorities, or a combination of these factors. Some insurance policies mention these specific acts as causes for reimbursement, whereas other policies exclude them. The responsible reinsurance companies would therefore ask for an official report that would follow a judicial investigation to determine the causes of the blast. To date, no official reason was given with regards to the causes of the Beirut port explosion, therefore, many reinsurance payments are still in limbo.

Business interruption

Another side of the damages is that of business interruption, which is typical in case of large hotels or other businesses relying on a steady supply of clients. Distinct from property insurance, business interruption would include coverage over a certain amount of time not for the damage caused to the property per se but for the loss of clients resulting from the damage. In the case of a hotel, for example, such insurance would cover part of the losses stemming from the lack of clients who would have otherwise spent time at the hotel. 

Again, in this case the devil is in the details: each insurance policy would have to be examined. Unlike property damages that require official reports, business interruption insurance is more straightforward and therefore most businesses that have signed up for such an insurance will manage to be repaid. The amounts will depend on whether they have readjusted their policy for the depreciation of the Lebanese dollar, and whether they can in some cases negotiate the amounts due to some reinsurance companies not having repaid full amounts due in case of a lack of transfer from their Lebanese clients.

According to the latest report of the Lebanese Insurance Control Commission, the amount of outstanding claims regarding the Beirut port explosion reaches 1.5 trillion Lebanese pounds, with estimated insurance losses at 1.6 trillion Lebanese pounds. Overall, the damages of the blast have resulted in partial payments of 74 billion Lebanese pounds, with some reinsurance companies still waiting for the official cause of the blast in order to assess whether or not the policies would cover the cause of the explosion. Nevertheless, should this occur, most of the damages will not result in payments, as Lebanon does not mandate insurance on housing, unlike other countries. According to Torbey, most houses are not insured, and only companies and owners having taken property loans have been fully insured, while property owners are mostly not insured. Therefore, should repayments occur fully, the Beirut port blast will most likely result in most Beirut homeowners having to pay for the damages themselves.

In conclusion, insurance after the blast will be different. International reinsurance companies will become wary, deeming that Lebanese insurance companies should have been aware of the risks, and therefore reinsurance premiums will probably rise and, in turn, impact the price of insurance premiums in Lebanon. Insurance companies in Lebanon are regulated financial companies and therefore cannot exchange money on the black market and are forced to function within the banking sector for transfers; they are therefore heavily impacted with regards to paying reinsurance premiums abroad (they are not allowed to discount cheques in Lebanese dollars for real transferable dollars). Insurance, after the blast, might become a luxury when it is in fact and first of all a necessity.

April 6, 2021 0 comments
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Leaders

Inflection anniversaries

by Executive Editors April 3, 2021
written by Executive Editors

One has to assume that there are many reasons why somewhat articulate people tend to intellectualize social and economic moments of despair or change. Distancing ourselves in various ways from the direct emotions of shocks and despair, some talk of inflection points, some of tipping or turning points, and some perhaps of nadirs. All these terms differ in nuanced meanings – nadirs for example technically are points directly below the observer whereas an inflection point might denote a curve’s transition from convex to concave – but all these terms carry common connotations of danger, need for change and, in the case of climate tipping points, even irreversibility. 

Looking back at the first three months of 2020 after a year of continual struggles and crises, it is justified to speak of three and more inflection points which back then changed the Lebanese trajectory: the discovery of the coronavirus SARS-CoV2 in January and classification of the Covid-19 disease as a pandemic in March comprising the first, the assumption of government by a politically one-sided and overall ill-fated Council of Ministers in January and its February 2020 ministerial statement that was as pretentious as it was portentous constituting the second, and the country’s hasty and disorderly first-ever default on an external financial obligation, namely the Eurobonds default of March 9, 2020, representing the third extreme and consequential shock. 

Overlapping – but not logically underlying – these expectable but nonetheless traumatizing shocks are the longstanding deficiency of the Lebanese political system and social contract and the presence of that powerful disruptive “elephant in the Lebanese room,” Hezbollah. As factor of enormous weight that Lebanese politically correct assemblies would rarely discuss in all its magnitude and impacts, this pachyderm entity is brimming on one hand with military capacity and cultural identity which cannot be denied. But it also is a force that throughout its history has been capable of negative disruptions of the national integrity of Lebanon, and which has exerted such impacts never more so than in the past 12 months of the Lebanese system’s exploding dysfunctionality.  

Shocks and disruptions are scary in their short-term and long-term impacts. Undigested shocks often result in depression and even harm bodily well-being, whether of an individual or, as the recent experience of the Lebanese people suggests, of small collective and larger societal levels. 

Over the past 18 months, the people and opinion makers of Lebanon have talked about little but shocks and their escalating sufferings. If done right, that is with honesty and resolve, discussion of traumatic processes is therapeutic. It should be the first step on a long road of regaining mental health and restoring a pre-trauma state. 

If done the wrong way, however, with no other concern than one’s own complaints and with no regard for the bigger picture or the suffering of others, the drawn-out circular discussion of bad experiences and traumatic moments apparently can take forms where own failures are ignored and blame is deliberately deflected from the self to the convenient villain, the usual suspects, the ominous or concrete other. This one-dimensional blame-pushing, one fears, can be counterproductive to the point of losing sight of rescue opportunities and getting stuck in dead-end thinking and vicious loops.  

The rage and silence of the land

Lebanon has been trapped for months now in economic down-sliding and dead-end thinking. Solutions are theorized but not implemented, certainly not on the plane of political reforms or steps that are germane to democratic systems. Non-solutions are in oversupply and spreading in the fashion of ever-mutating viruses of destructive political verbiage. The absurdity of the present situation is of Alpine or even Himalayan proportions. A well-educated population with an abundance of university-trained talents and historically unprecedented access to – supposedly enlightening and empowering – knowledge resources, has become information-wise encased in fake news, occupationally trapped in unemployment, economy-wise faced with destruction of currency, and is in daily life increasingly threatened by persistent hyperinflation. On the level of basic necessities, the Lebanese people are beleaguered by losses of electricity, gasoline, water, money, food security, and, crucially, emotional self-esteem and mental security. 

As result, popular rage is constantly mounting against over political self-interest and lack of humanity presented by a few in the political class – and by all agents of the status quo of self-interested political-militaristic cults. The images of despair and protests are becoming our only diet and understandably so – but nonetheless these images are tormenting us. At the same time, the country has spent too many days and weeks in lockdowns, turning a territory once overflowing with outgoing and very socially interactive people into a place that evokes the depressed silence of a mass burial site. 

Besides witnessing more or less organized and so far impotent outcries against perceived political evils, the country for 12 months has thus been governed through lockdowns which as their only undisputable outcomes produced forced quiet and economic inactivity. The social climate reeks of depressed minds, only erupting in occasional shouting matches over nothing or interrupted by those who vent their mental pressures by racing their cars down narrow urban streets with no respect for either the feeble legal order or the other humans on the street. Lebanon at the gates of spring and on the ides or March 2021 has become at the same time the land of historic rage and a land of eerie silences. 

Evaluating the inflection points in the first quarter of 2020 from a year’s worth of hindsight, the undeniable lesson in Executive’s view is that hasty decisions at the one, financial, moment have been as detrimental as indecision at many other, monetary policy-setting, moments and that absence of true interactive leadership in an acute crisis is the worst absence of all. The ill-prepared decision of the financial default is milk that has been spilled and still waits to be mopped up with the implementation of smart reforms and negotiations, whereas solutions in terms of monetary policy come with zero guarantees but nonetheless have to be tried and proven right or wrong (see story on currency boards). 

Political activism in tackling the Covid-19 crisis has been a preoccupation of our political cadres, second only to the trumpeting of fluff analyses and vain declarations. But as in developed economies of Europe and North America, the battle against the coronavirus has been impeded by viral knowledge deficiencies, contrasting biases, and irrational human behaviors. To conquer the medical challenge of the pandemic, it may be time and vaccines that we have to trust in. In overcoming the virus’s societal challenge, however, the construction of sustainable social insurances and safety for Lebanese society, and societies everywhere, may require solutions that are more integrative of private, public, corporate, and expatriate good will than anything that existed in previous social practices (see ESSN story).  

As Lebanon has been faced with new, and even more dangerous political and economic inflection points in the first three months of 2021 than in the first quarter of 2020, there is another lesson to be drawn, a lesson of conventional foresight that does not rely on political prophecies of any sort. If Lebanon is to sustain itself, it cannot allow itself any further procrastination, indecision, political favoritism, or partisan bias. The polity has to insist on immediate but well considered economic and monetary decisions. Even the most longsuffering people will not wait for another quarter for the state to take remedial action to halt the lira destruction and the economic meltdown and social suffering across the entire country.  

Such action cannot be piecemeal or try to fix some symptoms of the existential crisis with legalistic shenanigans or political talk. With regard to the elephant in the room, the past 12 months were wasted on political games and silly dances with the pachyderm by those who could neither tame nor ride it in the past 15 years. 

This must not continue. We have to tackle solutions, own up on our responsibility, confront our demons of self-interests, our ghosts of old identities, and deal with our elephants in the room. Elephants that we cannot slaughter, because such is neither morally nor practically possible, and which it would be a dangerous illusion to think we can tame and turn into pets, can perhaps still be harnessed and put to work in the national interest. To find out how to control the elephant and implement a method of harnessing it will be key to surviving the next 12 months. 

April 3, 2021 0 comments
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Real estate

Solidere rides the real estate wave

by Nabil Makari April 2, 2021
written by Nabil Makari

With Solidere having registered positive stock performance since the beginning of the economic crisis in Lebanon, and with Lebanese rushing to buy real estate in order to hedge against the depreciation of the Lebanese currency, Executive sat with Ziad Abou Jamra, Secretary of the Board of Directors at Solidere and Deputy General Manager, to talk about Solidere’s performance and the current state of real estate in Lebanon.

1. With regards to the August 4th explosion, what is your assessment of the damages caused to Solidere properties? Have any of these been covered by insurance?  How much of it is being repaired by Solidere?

The explosion that occurred on August 4, 2020, caused severe damages to our facilities. The insurance policies that we have cover all possible causes but they nevertheless need to pinpoint a cause before initiating reimbursement in our favor. We are not waiting for that to occur but have started the process out of pocket. Rebuilding will occur in phases. The momentum of the rebuilding effort will be directly correlated to the overall situation of Lebanon but will nevertheless occur in stable steps. We are mindful of the interest of both the shareholders as well as the merchants and residents of Downtown Beirut. As for the assessment of the damages, these have already been discussed in our board meetings but discussions are ongoing and the results will not be made public for the time being.

2. The share price of Solidere has gone up 140 percent between January 2017 and January 2021 (currently at USD 24 per A common share). What are for you the main drivers of this demand?

The following improved company fundamentals are the main drivers of demand for our stock:

Cash reserves in banks witnessed a substantial increase during the year 2020, enhancing the liquidity of the company and its ability to face its urgent and future challenges. Effectively speaking, and in case the dire economic situation persists for the long term, Solidere’s current liquidity can carry the company for the next four years if not more. This liquidity will be more than sufficient to cover salaries, taxes, maintenance expenses, and other potential unforeseen costs.

The company settled all outstanding bank loans and overdraft facilities during 2020, thereby bringing its interest expense down to zero. Moreover, the remaining non-interest bearing liabilities have dropped significantly.

A major cost cutting effort initiated in late 2018 successfully brought down the general and administrative expenses by almost 26 percent from around USD 30 million (income statement 2018) to around USD 22 million (income statement 2019).

Sales picked up dramatically in the years 2019 and 2020. This helped the company record a sizable profit in both years.

Devaluation of the national currency definitely gave a boost to sales, but a big chunk of the total sales were realized before the onset of the devaluation of the local currency and its aftermaths.

3. With regards to the current situation in Lebanon, should capital controls last, how would Solidere deal with this situation?

Capital controls have no effect on our operations, as they do not affect checks that are drawn locally or transfers that are conducted internally as such. Therefore the future of such controls, whether they become regulated or not, or whether stay in place or not, will have a minimal impact on Solidere.

4. How has Solidere readjusted to the current monetary paradigm in 2020? In what form and currencies have transactions been undertaken?

Our modus operandi has remained unchanged as we have sold plots before and after the crisis. All of these transactions occurred in local dollars. Now, as our situation has dramatically improved, we may opt to require a certain percentage of future transactions to be paid in fresh dollars but we have not yet reached a decision in this regard.

5. Overall, is it correct to say that Solidere’s share price has been a result of transactions in Lollars? How do you describe the share price in comparison to January 2019?

I have covered a part of this question in answers provided above. Suffice it to say that while the local dollar has aided the share price it was by no means the only factor in the significant improvement witnessed over the recent period.

6. Solidere is a company involved in high-end real estate. Would factors such as the currency depreciation that we have been seeing result in Solidere or other developers being interested in investing in high-end real estate?

Uncertainty about the future has driven ultra-high net worth investors with significant deposits in Lebanese banks to migrate losses by buying prime real estate. As Solidere has the best of the crop in this regard, it has stood to benefit the most from this demand.

7.  With regards to properties being sold by Solidere, can you tell us more what kind of real estate has seen the greatest demand in the past year? Offices? Apartments? Other?

We estimate that more than 90 percent of the value of the transactions were land-related, with Solidere having the lion’s share of total real estate transactions in the Beirut City Center.

8. What trends are you expecting for real estate? Will there be local or foreign buyers?

As long as the political situation remains dire, demand will predominantly remain local. Actually, demand may increase as the fear factor increases. Eventually, should a regional political settlement be reached, hopefully a long-lasting one, foreign buyers will return to Lebanon, consequently improving the inflow of fresh dollars and the value of real estate.

9. How much of the increase in overall real estate transactions do you attribute to transactions in the Beirut Central District? How do you explain the attractiveness of these areas despite the damages caused there due to the Beirut blast, protests and the economic downturn?

All the recent purchases can be described as long-term in nature. These are not investors looking to flip their newly acquired assets for a quick profit. Rather, these are investors whose primary aim is to park their funds in an asset class that will most probably provide the best alternative to protect the value of their money. They possibly aim to hold on to their real estate for at least five years until the situation witnesses a significant improvement, at which point they could possibly sell for fresh dollars. These investors are looking beyond the Beirut explosion, which, no matter how atrocious that was, remains a one-off event, the repercussions of which on the real estate market will dissipate over time. They are also looking beyond the protests. That is the main reason I believe that they are focusing on Beirut as it is the area most likely to recover first and fastest.

10. Overall, it is my impression that 2020 has been a good year for Solidere in terms of repairing your balance sheet and gaining traction for your stocks. Do you see this trend continuing in the near future? Taking into account Lebanon’s situation.

The positive trend should continue in the coming few years as our stock is still undervalued relative to its net asset value (NAV). In addition, should the situation at the macro and political level improve, Solidere would be one of the first companies that would directly benefit as life returns to normal to the downtown area. Ironically however, should the situation continue to deteriorate, this would translate into a rise in both the value of Solidere’s stake in Solidere International (assets outside Lebanon) as well as a rise in the value of its real estate portfolio as a whole as local dollars would rapidly lose their worth.

As can be seen from above, Solidere has positioned itself through recent actions on its part to benefit no matter what future developments may lay in store for Lebanon.

April 2, 2021 0 comments
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by Executive Editors March 31, 2021
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EventsExecutive news

Roundtable 4 food & beverage and hospitality

by Executive Editors March 31, 2021
written by Executive Editors

Part 4 in a series of 5 roundtable discussions on the future of Lebanese industries organized by Executive Magazine in partnership with the United States Agency for International Development under the Lebanon Enterprise Development (LED) project. The roundtable dealt with aiming to export successful F&B concepts and develop job-creating quality hospitality ventures Date: March 31, 2021 – 3:00 PM – 5:00 PM

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