Society

Fashion – Beirut’s singular style

by Saria Francis
written by Saria Francis

After the exhausting rush of 2010, which saw new luxury boutiques cropping up in downtown Beirut like saplings in springtime, Lebanon’s luxury retail market has settled into a more stable summer of 2011, reaping the rewards of last year’s investments.

 “The international luxury portfolio stands almost complete here in Beirut. And today we can say proudly that we offer the market the utmost in the fashion luxury industry,” says Nora Yagmur, general manager at Snowball, mother company of PLUM, PLUM Kidstore, Sugar PLUM, Lanvin Balmain and Isabel Marant.

“Beirut’s market is daring; [it opens] to new names in the industry faster than other countries in the region. Beirut has always been defined as the fashion window of the Middle East,” Yagmur adds.

Distinguished fashion marques such as Louis Vuitton, Hermes, Burberry and Dior have all set up shop in Beirut Souks, Solidere’s temple to ritzy retail.

Spending spree

The increasing prevalence of luxury shops in Beirut is no coincidence. “Lebanese men and women are famed for their sense of style and the attention they pay to every single detail that forms their personal image,” says Izzat Traboulsi, managing director of Hugo Boss for the Middle East. Whether it’s in their price range or not, it appears that stepping out in the right threads is a top priority for many; “If you have 100,000 people who can afford luxury in Lebanon, you have 200,000 people buying it,” Traboulsi says.

“When it comes to growth, we had minus 1 [percent] in 2009, plus 16 [percent] in 2010 and we budgeted plus 11 this year,” says Patrick Chalhoub, joint chief executive officer of regional luxury heavyweight, Chalhoub group. The political upheavals of the so-called ‘Arab Spring’ seem to have had little affect on the luxury market.

“We were running at plus 21 or 22 [percent] until the end of May in the region, which is quite remarkable and shows there is a market dynamic in luxury,” adds Chalhoub. 

Events closer to home had a more pronounced affect. After the collapse of Saad Hariri’s government in February, many managers and owners of the luxury brands’ downtown shops witnessed a notable crash in sales.

Hugo Boss reported a drop in 2009 in the Middle East, while globally the company remained stable. The brand recorded a turnover of $2.13 billion globally in 2009, with an increase to $2.42 billion in 2010. Traboulsi notes, “profits dropped 16 percent in 2009” because of the global financial crisis, but “globally, we had a good balance because of emerging markets like Japan and India.”

Lebanon’s position as a favorite holiday spot for wealthy Gulf Arabs has traditionally played into the hands of the luxury retail market, but according to Traboulsi this trend has been declining of late. The shoppers spending hundreds of thousands of dollars are deterred from visiting due to the country’s unstable situation.

Traboulsi added that compared to the global net income of $2.69 billion in 2010, Hugo Boss’s turnover in Lebanon was small — resulting in only $20 million in 2009 and 2010.

“It is too bad to lose all the potential we have,” says Traboulsi, “I expected more of Lebanon because we have many assets and good businesspeople that are ‘fashion-forward’.”

The competition today in Beirut is fierce, says Traboulsi, who points to Solidere’s extended luxury retail area where the Middle East Luxury Group’s Gianfranco Ferre has already placed a huge 80 percent sale tag on its window for summer 2011.

Overestimated potential?

Lebanon’s economic fate is intricately linked to the internal political situation, which is notoriously hard to forecast. Nonetheless, Beirut has become one of the foremost fashion destinations of the Middle East. According to Yagmur, the market is currently home to at least 98percent of the international luxury portfolio and is constantly introducing the latest international designers.

However, Beirut’s luxury markets bustle in the shadow of their Middle Eastern competitor, Dubai. Traboulsi says that the higher wages in Dubai reinforce the clients’ ability to buy luxury items, while the average salary in Lebanon is much lower, not to mention the stifling effect of Lebanon’s ongoing political crisis. “It is a pity to see the private sector doing so well, while politicians battle over futilities,” Traboulsi concludes.

“This does not mean that Beirut is not on the top of the list [as a fashion destination],” insists Yagmur.

 

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The Buzz

Tumult takes its toll

by Executive Staff
written by Executive Staff

Nationwide protests, now entering their fourth month, are edging Syria closer to economic meltdown. The government in Damascus has for the most part offered rosy official assessments and downplayed current events as a temporary blip in an otherwise grand upswing — the truth is likely far more grave.

Compiling a credible, comprehensive economic analysis of Syria is implausible even in the best of times, let alone during a mass uprising. However Executive,  through interviews with sources inside the Syrian regime and the tracking of significant indicators, has compiled a report that portends the cracking of the economy at its foundations.

The beginning of capital flight

The first negative signs appeared even before the protests had turned into a full scale uprising; private banks’ first quarter reports issued at the end of March showed that the five-year streak of average annual asset growth of 33 percent had come to an end, registering instead a 4.3 percent decrease quarter-on-quarter. According to first person accounts from sources close to the unfolding events, in April the decrease in bank deposits was so great that the government set a limit on cash withdrawals, with those over 1 million Syrian pounds [$21,074] requiring special approval from the bank manager.

Despite this, early last month Finance Minister Mohammad Jleilati announced that Syrian bank deposits had actually increased 30 percent — many familiar with the subject viewed this statement with skepticism as an attempt to ease the angst of regime supporters. Jleilati, though, did confirm that the country is suffering an economic recession due to the “current circumstances” in a statement elaborating on why the treasury bonds auction scheduled for this month was postponed indefinitely.

The Damascus Stock Exchange (DSE) has also lost some 28 percent of its DSE Weighted Index (DWX) over the second quarter alone, even though in May the stocks index rose following an amendment to the trading law (introduced mid-May) that would allow listed companies to buy their own stocks. Commenting on this, Jleilati said: “Investors should hold on to their stocks even if they reach their book value,” as the drop in their value is due to “rumors spread by other investors to decrease the value of stocks to buy them later for book value.”

Jleilati was appointed finance minister after the recent cabinet reshuffle, replacing Muhammad al-Hussein, who in early June was prevented from boarding a plane leaving Damascus International Airport. The former finance minister had spearheaded the campaign in the first quarter to quell public discontent through public spending increases [as reported by Executive in April].

The measures reversed the previous policy of gradually lifting subsidies and instead increased heating-oil allowances for public sector employees by 72 percent, equivalent to $33 a month, in a move that would, he said, “cost the government an extra $326 million annually,” while cutting the price of diesel by 25 percent, from 20 SYP [$0.42] to 15 SYP [$0.31] per liter. Another appeasement effort in the first quarter was the implementation of a social security fund of $250 million to help the neediest families in Syria; however, allegations of corruption have been rife and there has been little official mention of the program, or the allocated money, since.

Adding to increased government expenditures is the cost of suppressing the uprising itself. According to a source in the regime, armored trucks regularly leave the central bank loaded with cash to finance the regime’s makeshift militias, made up of shabiha and hired thugs, Baath party members and public sector employees. Although Jleilati claims that Syria’s foreign currency reserves at the central bank still exceed their pre-crisis level — $18 billion — the government appears to be hoarding foreign cash, having disallowed banks and exchange bureaus from handing out United States dollars and other major foreign currencies.

Foreign exposure

Also casting doubt on the foreign currency reserve claims of the finance minister is the fact that Syria’s international trade has plummeted. Europe, which accounts for a third of Syria’s exports, has been withdrawing its support by boycotting Syrian companies; recently, experts from Austrian and German companies left the filters and coolers in the Adra Cement factory half installed and returned home, citing new protocols of boycotting Syrian companies, while the European Commission froze all its programs and support. Further, Turkey, which accounts for a quarter of Syrian exports, has been retracting its support and business; many companies dealing in textile, clothing and manufacturing are losing their Turkish customers and investors and are shutting down.

One recent example is the General Wool and Carpets Manufacturing Company in Aleppo, one of the giants of the sector that was formed with the merger of the Hama Wools Co. and Damascus and Aleppo Carpets. As Executive went to print the company had shut its gates, unable to pay its workers’ wages.

Another engine of the Syrian economy and significant source of foreign currency, the tourism and hospitality industry, has also come to a grinding halt. “I fear that we will have to fire [staff], as we’ve already sustained heavy losses due to the unrest,” said an investor in the hospitality sector who requested anonymity. “If the people can’t go out at the weekends because of the protests and intimidating security personnel and check points spread everywhere, how are we supposed to make money?”

According to the Syrian Ministry of Tourism, the tourism and travel sector accounted for $8 billion in revenue last year, or 12 percent of Syria’s gross domestic product, employing 792,000 people (some 11 percent of the workforce). This year, what was expected to be a boon season with 8.5 million tourists is being devastated by cancelations, affecting all tourism-related businesses in the country, from tour operators and hotels to airline offices and car rentals. Occupancy rates at hotels in Damascus at the end of June did not exceed 30 percent capacity, while Aleppo hotels were nearly empty. Many countries have issued travel warnings to Syria, inhibiting the chance of a short-term recovery in the industry.

The ‘fall guy’?

The ejection last month of Rami Makhlouf from the regime’s inner circle is a sign that the turmoil in the streets is riling the elite. As the cousin of President Bashar al-Assad, Makhlouf was launched from relative poverty and obscurity to extreme wealth and national infamy, beginning his ascendency as Assad begun his preparations to assume the presidency in the late nineties.

Makhlouf, a billionaire, was at one point reputed to control 60 percent of the Syrian economy through a massive web of investments in telecommunications, construction, tourism and other sectors. On June 16 — shortly after the US had placed his holding company, Souria Holding, under sanction and he had sold out his most lucrative venture, Syria Duty Free, to a Kuwaiti consortium — Makhlouf announced he was resigning from business, selling his interests in Syrian mobile and internet provider Syriatel, and donating the profits of his investment to charity; he then left the country with his family.

While Makhlouf, widely reviled as the epitome of corruption within the Syrian regime, may have been sacrificed in an attempt to appease popular sentiment, his ilk remain of paramount importance to the Assad family’s rule. The president’s sway in the street has eroded with the growing waves of protest around the country, but he has largely maintained his support among the wealthy businessmen and merchant classes in Damascus, and the industrialists of Aleppo — a crucial pillar of his power base.

However, as the economy languishes, businesses close and fortunes evaporate, so too will this support.

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Comment

Revolutionary rebranding

by Josh Wood
written by Josh Wood

In the immigration hall of Cairo International Airport above the booths where customs officers process travelers’ passports, visitors idling in the queues now see is a picture of a young boy with his face painted red, white and black — the colors of the Egyptian flag — next to the words: “We should teach our children to be like the Egyptian youth.”

The words are a quote from United States President Barack Obama, congratulating the Egyptian people on their revolution that ended the three-decade reign of Hosni Mubarak. The banner is an advertisement for the Egyptian mobile phone service operator Mobinil.

Today, in the afterglow of the revolution, Cairo is awash with the country’s official colors. Face painters and flag vendors crowd Tahrir Square. Empty spaces across the capital from street curbs to building walls have been turned into canvases for the colors of Egypt’s rediscovered public nationalism.

Companies — some of which had strong ties to the fallen regime — have taken note; advertisements on television and on billboards overlooking highways now commonly play off of the revolution and Egyptian nationalism. For Mobinil and Vodafone, the two principal mobile carriers in the country, such ad campaigns are somewhat hypocritical considering that the companies shut down their networks at the government’s request in the early days of the revolution. By facilitating the mobile and Internet blackouts the companies allowed the Mubarak regime to cut off Egypt from the rest of the world. For the Egyptians protesting during those bloody days, the inability to coordinate and communicate put many lives in danger.

At a time when SMS text message services were still disabled, the only messages that came through to Vodafone subscribers were those urging citizens to “confront traitors” and giving details about pro-Mubarak demonstrations. In press releases Vodafone asserts that it was forced to send out text messages and shut down the mobile network in accordance with the country’s Telecoms Act and Emergency Law.

Whatever forgiveness the mobile phone operators may have received from the public was quickly undone when a video by ad agency JWT credited themselves and Vodafone for the revolution. The short video —apparently not intended for the public — showed an award-winning commercial for Vodafone that the agency had created and released in early January, several weeks before the revolution. In it are portrayed scenes of everyday Cairo life as movie star Adel Imam narrates about “the power of 80 million” Egyptians. Following the commercial, text added by JWT appears saying, with no lack of subtle self-aggrandizement, “We did not send people to the streets. We did not start the revolution. We only reminded Egyptians how powerful they are.”

Egypt’s telecom companies are not alone in their rebranding efforts. After infuriating protesters in Tahrir Square by urging them to disband and go home, Egyptian pop star Tamer Hosni is now releasing tracks about the martyrs of the revolution. Magdy Rasekh, the father-in-law of Alaa Mubarak, one of the former president’s sons, stepped down as chairman of the board of real estate giant Six of October Development and Investment Company (SODIC) just as the company unveiled an ad campaign focusing more on its contributions to the country’s economy than to the luxury villas and cities for the rich that it is building outside of Cairo.

Under Mubarak, connections to the regime were the means to get ahead and be successful. Corruption enriched those who became part of the system. A few business magnates — perhaps most notably steel tycoon Ahmed Ezz —have taken the fall for such connections, but many companies that made their money this way remain. For these people, rebranding is simply good business.

With Egypt’s post-revolution economy stagnant and the country’s tourism industry dried up for at least the time being, somebody is going to have to keep the economy afloat. For many of those who protested in Tahrir Square, the revolution was as much against the corrupt system that made the rich richer and poor poorer as it was about Mubarak’s dictatorial regime and human rights abuses. Unfortunately for them, it is likely to be many of the same people who prospered under Mubarak who will provide Egypt’s economy with integral capital in its time of need, likely maintaining the old ways of cronyism and corruption, only now behind a facade of populist branding.

JOSH WOOD is a contributor to The International Herald Tribune and Esquire Magazine

 

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Society

Epics in Time

by Lauren Williams
written by Lauren Williams

When an enamored Zeus changed form into a bull to kidnap and ravish the beautiful Phoenician princess Europa, a continent was born.

Originally from Tyre, South Lebanon, she was whisked away to Crete, where her union with Zeus would see the birth of many of the Helenistic demi-gods. It’s a local legend of timeless proportions that has fascinated artists of all disciplines for centuries.

Europa appears in Ovid’s ‘Metamorphoses’ and Homer’s ‘The Iliad’ and since then, her grace and suffering have continued to inspire sculptors, poets and artists over centuries. In today’s world, the force of the myth remains poignant in interpreting the relations between East and West. 

Lebanese artist Hussein Madi has been obsessed with the myth for decades. “The idea that this woman names a continent is fascinating to me,” the now elderly Madi explains from his atelier. “And the fact that she came from [Tyre] makes it all the more fascinating. I love this story.”

It was the timelessness of the mythology and Madi’s reinterpretation of the legend that brought European watchmakers, the Swiss-made Gerard Perregaux to Lebanese shores and directly to Madi.

Girard Perregaux, who are sponsors of the Menasart Fair — the second Middle East and North and South African art fair to be held in Beirut in July this year — approached Madi to create two unique paintings to be used on the faces of two limited edition watches.

The result is artwork within an artwork that derives its extravagance not just from its convergence of multi-disciplined beauty and high art, but also in claiming a charming slice of history.

The two limited haute horlogerie watches — a male and a female version — feature individualized artworks, reinterpretations of the kidnap of Europa first painted by Madi, then painstakingly transformed into mother-of-pearl mosaics to be fitted on the faces of the 1966 watches by Girard Perregaux craftsmen, over more than 700 hours.  

The watches, as yet unpriced, will be unveiled for the first time at the fair but have already attracted palpable excitement. “When we saw Madi’s work and we saw the legend, we knew he was perfect for the project,” explained Zeina Annan, the marketing director for AS Chronora, Girard Perregaux’s agents in Lebanon. “This year we will prove that watch-making is an art form and this is a story and a project that is really close to our hearts.” 

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The Buzz

When the workhorse refuses the whip

by Sarah Lynch
written by Sarah Lynch

A group of middle-aged men lie sprawled on the sidewalk outside a towering building in Egypt’s Nasr City, shading their faces with newspapers. For 15 days these oil and gas workers have been staging a sit-in, demanding that their petrochemical employer give back the jobs that they abruptly lost before their nation’s revolution.

“We are demanding to return to our old work because we don’t have any other way to make money,” says protester Hamouda Mohammed.

Back in downtown Cairo, Qasr Al Eini Street, lined with banks, hospitals and government buildings stretching south from Tahrir Square, has become ‘protesters’ row’. Since the uprising that swept the nation on January 25 and toppled President Hosni Mubarak in mid-February, teachers, lawyers, doctors and others can be found here most days, waving Egyptian flags and holding homemade posters, partaking in Egypt’s nationwide wave of labor strikes.

Week after week, protests, sit-ins and strikes continue to be staged across post-revolution Egypt; Kamal Abbas, director of the Center for Trade Union and Worker Services (CTUWS), a 20-year-old non-profit group, says that nearly one million workers were involved in labor strikes between the start of the revolution and mid-May, (although this figure could not be independently verified).

Experts say the strikes span all sectors of the economy, from textiles to agriculture to oil and gas and include both private and public workers. Strikes have been held from Aswan in the south to Alexandria along the northern coastline and the Suez Canal in the east.

Roots of the labor movement

The stronghold of the labor movement has long been in the Nile Delta, in the industrial city of El Mahalla El Kubra. The labor force in Egypt today consists of roughly 23 million citizens, almost one third of the nation’s more than 80 million people, with the largest sector of employment being agriculture, followed by industrial manufacturing.

The country has a long history of labor action dating as far back as the time of the pyramid builders under the rule of the Pharaohs. While the country has witnessed an up-tick in strikes since the revolution this year, today’s movement is rooted in decades of labor issues and uprisings whose modern history dates back a century.

In 1919, an Egyptian political figure named Sa’d Zaghlul attempted to attend the Paris Peace Conference with his colleagues to demand freedom from the grip of British occupation following World War I. Zaghlul and two others were arrested and later deported, leading to mass strikes among labor groups and workers — an event that led the way to Egyptian independence three years later, in 1922. This movement developed into a nationalist party that later became known as Wafd.

Workers in the early 1900s faced harsh working conditions and lacked a legal federation for the nation’s rapidly forming unions, which became regulated by the state in the 1940s. This continued with little substantive improvement until the government formed a labor federation in 1957 that was later reorganized and named the Egyptian Trade Union Federation in 1961. The federation represents roughly two and a half million people from the private and public sectors in 23 different syndicates. But many say the federation is simply an arm of the government and that it lacks independence and autonomy. Until January 30, it was the only trade union federation for workers in the country.

Throughout the first half of the 20th century, labor movements ebbed and flowed, often with nationalistic reverberations. Then in the 1960s, under President Gamal Abdel Nasser, an unwritten agreement was reached between the labor movement and the government; workers would be guaranteed lifetime employment, which included acceptable living wages and non-wage benefits such as job security, in return for workers’ compliance.

“People had the idea that the government was responsible for getting them a good job, an apartment, helping them [afford to] get married, and be educated and have good health services — this has been the idea for some time,” says Ahmed Kamaly, associate professor and chair of the economics department at the American University in Cairo (AUC).

But over time, the system reneged on those promises. Beginning with the liberalization of the economy in the mid-1970s, benefits and subsidies were slowly reduced. With the large-scale privatizations of state-owned Egyptian companies that began in the early 2000s, employment was no longer guaranteed; workers faced private owners bent on streamlining payrolls, sparking a new wave of protests.

According to a 2010 report by the Solidarity Center, a United States-based non-governmental organization that assists workers around the globe, there were more than 1.7 million protesters involved in demonstrations, strikes, sit-ins and gatherings across public and private sectors from 2004 to 2008. More than half a million of those were in 2008 alone.

“There [have been] many years of neglect of labor relations and a failure of old representatives, so now there is no running away from the fact that we need to take matters seriously and rewrite the labor law,” says Mona Said, an expert in labor market issues and an associate professor at AUC.

Wages remain the chief impetus behind labor action in Egypt where, as of May 31, the minimum wage was 118 Egyptian pounds per month (less than $20). Another major point of contention for workers is job security. Experts say some companies force workers to sign resignation forms before they begin employment; should an employee file a complaint with the Ministry of Labor after being unfairly dismissed, the employer can simply show the ministry the resignation form, putting an end to the case. Without alternative options, or a protective government, the workers are pressured to sign the forms.

Revolution, labor and economics

The labor movement played an important role in sparking and sustaining the nation’s revolution. One of the instigators of the political uprising was the April 6 Youth Movement, which started as a Facebook group in 2008 to support workers who were planning to strike on April 6 of that year in El Mahalla El Kubra. Labor strikes continued over the next few years. Then, as thousands descended on Tahrir Square in late January, workers across the country quickly mobilized, bringing their nation’s economy to a halt. Banks closed, textile mills shut down and even transportation was affected by the strikes.

While experts say the number of strikes has since dropped following those fateful days, the lingering revolutionary spirit continues to invigorate workers to take action to see that their demands be addressed.

The economy has been left reeling in the wake of the revolution — the Economist Intelligence Unit estimates gross domestic product growth to be just 1.2 percent in 2011, as of mid June the stock market index was down 22 percent on the year, the tourism sector lost well more than half a billion dollars in the first quarter and net foreign currency reserves had contracted some $13 billion on the year to the end of May. In May the Central Agency for Public Mobilization and Statistics, Egypt’s official statistics body, reported that the unemployment rate had reached 11.9 percent — some 3.1 million people — though Labor Minister Ahmed al-Boraie was later quoted in Al Ahram as saying true unemployment was likely to be much higher. The current political uncertainty combined with labor unrest has also shaken the markets, economists say, slowing both foreign and domestic investment.

“No investor is going to invest with this level of uncertainty, not only in terms of politics, but also in terms of the workers,” says AUC’s Kamaly. “At any time you can go to the streets and have a demonstration, and no one will tell you ‘Don’t do that’.”

Thus, while many of those on strike have legitimate grievances, their continuing labor action could hardly have come at a worse time for a country trying to rebuild its economy, and may be self-defeating. The strikes are contributing to a general loss of economic activity that leaves employers short of the revenues needed to meet strikers’ demands.

The interim ruling military council has imposed an anti-strike law intended to quell demonstrations, sit-ins and protests, but activists and workers have generally defied the ruling as they continue to voice their grievances.

“I do think strikes negatively affect the economy, but people don’t know what else to do,” says Hani Kheir, while standing outside the Petroleum Ministry one afternoon last month, demanding that the government give him a job. “It’s the only way to relieve their tension and at the same time ask for their demands.”

“I don’t see any changes after the revolution,” says Karem Saber Ibrahim, executive director of the Land Center for Human Rights, an Egyptian NGO. “The salaries are the same, contracts are the same, days off are the same, the lack of vacations and holidays are the same.”

He, like so many people on strike, doesn’t believe demonstrations affect the economy.

“The thing that affects the economy is the thieves,” he says. “The government has failed us and has not helped develop the country.”

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Editorial

Arabs and advocacy

by Yasser Akkaoui
written by Yasser Akkaoui

Search Amazon for books on lobbying and advocacy and you will find more than 9,000 on the subject. It does not take 60 years to understand the American system of checks and balances. All you need is a cause, conviction and the tenacity to keep pushing your message until it is heard and repeated by congressmen, senators, the media, influential personalities and the president. Mobilize networks of mutually-interested individuals to muster electoral money and resources for candidates that supports your cause, and, voila! Welcome to influence.

To have the world’s strongest economic power as an ally, learn the local vernacular and the ideological concepts that resonate. A little bit of democracy and a whole lot of fiery advocacy for a few decades or so should earn the leaders of your cause a regular spot to speak at congress and, if you’ve manage to scare the politicians enough about their dependence on you for reelection, expect them to jump to their feet and offer 29 standing ovations for a 45-minute speech.

This is the prism through which the Middle East and North Africa needs to assess Obama’s ‘Arab Spring’ speech, in which he outlined a new era of America engagement within the region; undoubtedly he supports the concept of Arab democracy, but this will extend only so far as it does not conflict with his reelection, and at the moment it is not the Arab lobby whom he feels beholden.

For Arabs to ever be the primary consideration and beneficiaries of American policy in the MENA, they must create an energized and expansive lobbying network — not just in Washington, but in every major US state. Then, perhaps, when another American president unveils a new US policy direction for the Arab World, it will be to the Arab American Political Action Committee that he offers his justifications.

For this we would need real leaders, and leaders we have none.    

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Economics & Policy

The GCC expands

by Fabio Scacciavillani
written by Fabio Scacciavillani

The ‘Arab Spring’ is yielding some unexpected and exotic political fruits. The proposal to accept Jordan and Morocco into the Gulf Cooperation Council is certainly among the most intriguing, and it was followed almost immediately by Palestine’s request to join.

GCC Secretary General Abdul Latif al-Zayani announced that the current six members (Saudi Arabia, Kuwait, United Arab Emirates, Qatar, Bahrain and Oman) would welcome Jordan and Morocco into the bloc, saying that meetings “to complete procedures” are to be initiated soon.

Given the swift response by an institution not known for the timeliness of its decision-making process, it is likely that there were earlier discussions on this matter at the highest level (although Kuwait, Oman and Qatar reportedly expressed reservations about the move, preferring a limited membership, like that of Iraq and Yemen, confined to cultural and sporting events).

Previously, Jordan had shown interest in joining the bloc, but its requests had been politely turned down. Yemen’s request for membership has stalled for years but the country, though currently embroiled in political unrest, hopes to join by 2016. On the other side of the region, Morocco has apparently been invited to join.

This development could mark the coming of age of an international forum with ambitions to be a sort of Arabian version of the European Union, but which has been marred by a weak institutional framework and erratic procedures. Created in 1981 as a bulwark against a perceived threat from Iran, the GCC’s original agreement was ambitious in scope and covered vital areas with the potential to reshape and modernize the economies of the Gulf, while fostering a common foreign and security policy in a region endemically at risk of destabilizing crises. These included:

  • Harmonizing regulations in economy, finance, trade, customs, tourism, legislation and administration
  • Promoting scientific and technical progress in industry, mining, agriculture, water and livestock
  • Establishing scientific research centers
  • Setting up joint ventures
  • Establishing a unified military presence (the Peninsula Shield Force)
  • Encouraging cooperation of the private sector
  • Strengthening ties between populations
  • Establishing a common currency by 2010

Within the GCC framework the six countries have undoubtedly made some progress, for example in creating a Customs Union, in freeing the movement of citizens (but not of foreign residents), in establishing a joint military force (which was deployed recently in Bahrain), in cross-border investments and capital movements and in a number of other minor fields.

However, there are two fundamental differences between the GCC and the European Union. First and foremost, the members of the EU have transferred national powers to EU institutions. The most visible, influential and famous of these is the European Central Bank, which exercises its monetary authority in full independence from any political interference, as enshrined in the Amsterdam Treaty.

In several additional key areas member states have devolved their functions to the EU Commission or other supranational bodies: international trade, antitrust legislation, agriculture policy and visa regulation. The EU Commission issues directives through a  common legal charter, which can span virtually any field, to which all national legislation must adhere.

In case of controversy or lack of compliance with a directive, the European Court of Justice can rule to force national governments to conform to EU legal provisions. Often pieces of national legislation are struck down by the EU Courts, which in some cases can even overturn the verdicts of national Tribunals.

Furthermore, one of the main achievements of the EU, the single market, allows for goods and other services to be traded freely across the EU and removes customs and passport controls between most member countries. One can travel from the Arctic to the Mediterranean without encountering a single frontier post. In essence the EU is a super-state with institutions that exercise powers even against the will of national governments, an elected Parliament and a body of laws and principles (the so called acquis communautaire), which is valid for all citizens and all the 27 countries. More recently the EU has adopted a Constitutional Treaty that establishes the fundamental principles guiding its actions and the decision-making rules.

By contrast, so far the GCC has been mostly a permanent structure of regional diplomacy, facilitating the exchange of views at the highest level. The implementation of decisions made by the GCC is the responsibility of national governments, not of common, independent institutions. The only (limited) exception is the Monetary Council, which is the precursor of the Gulf Central Bank to be established when, or if, the GCC issues a common currency. This will be the first genuinely independent supranational institution in the Arab world. But the plans for the monetary union, which was supposed to go into effect at the beginning of 2010, are proceeding slowly, with two countries (Oman and the UAE) out of six having declared their intention not to join.

The accession of the Jordanian and Moroccan monarchies to the GCC could help inject new life into the integration project and would mark a historic step forward, so long as it is conducive to an institutional framework modeled on the EU, with a devolution of powers at GCC level.

A major goal could be the establishment of a true single market, styled on the EU, with completely free movement of capital, goods and labor, plus an antitrust authority with pervasive powers.

At present, border controls, trade barriers and protectionist measures among GCC members are still very much in place (even to transfer a used vehicle between two countries requires a dose of patience and money which could be put to better use). This hampers the development of industries and economic activity that could create the several million jobs needed to absorb an increasing youth population, which, as recent events clearly show, is ever more restless and impatient.

On the other hand, the proposed enlargement might turn out to be just a political card played on an increasingly shaky table. It could very well be that the GCC’s newfound hospitality is intended to raise the six nations’ profile in the region and is more of an internal security pact by which member states would intervene in the case of internal unrest. If this is the case, the GCC would merely gain a front row seat to events unfolding in Algeria and Syria (as it already has in Yemen).

But for the GCC to limit itself to merely preserving the political status quo of its member states would be a missed opportunity: United States President Obama delivered a major policy speech on the Middle East last month, which foreshadows an unprecedented involvement in the region outside the security arena, and a clear indication — underlined by the explicit mention of the pre-1967 borders between Israel and Palestine as a natural negotiation platform — that the wind has dramatically changed.

The enlargement of the GCC could either constitute a myopic move for preserving the status quo (and another form of diplomatic jostling) or the means to address the roots of the economic malaise in the region by following a cooperative approach along the lines of the EU. The next few months will tell.

FABIO SCACCIAVILLANI is chief economist at the Oman Investment Fund

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Economics & Policy

An accelerating descent

by Executive Editors
written by Executive Editors

The failure of a government to actually govern can be overlooked, and even ignored, when a country’s economy somehow manages to independently cook up growth, as Lebanon’s has, churning out annual increases of gross domestic product in the range of 7 percent for half a decade. During these years many seemed to regard the economy’s continued subscription to miraculous performance as assured by God while the fundamentals needed to sustain this growth, such as infrastructure, were rotting beneath their feet.  

Today, however, the boardrooms’ belief that Lebanon’s soaring growth is immune to the laws of gravity that apply to the rest of the world has disappeared, as first quarter results for 2011 clearly show that the country is entering an economic downturn. And now — with the fiscal forecast inclement and a government necessary to navigate the storm — it becomes painfully apparent how the intransigence of the competing political camps has left the Lebanese on a quickly sinking ship. Lebanon’s sectarian political divisions and the grinding stalemates they produce are at the root of the vast majority of the nation’s tangled shortcomings.

Executive does not pretend to have the formula to resolve the impasse and get a government formed and functioning again. Instead, the following report examines the most critical issues facing the economy, and if those whose responsibility it is to govern do manage to form a government that is actually empowered to enact and follow through on policy and reforms, what some of these should be in order to cushion the current fall and restart growth.

Counting in the dark

Typically, the International Monetary Fund issues its annual forecasts for the Lebanese economy around October, but this year it waited an extra six months to come out with a figure of just 2.5 percent real growth for 2011, down from an estimated 7.5 percent last year, signaling the end of the country’s economic honeymoon. The finance ministry has also signed off on the 2.5 percent estimate.

At a press conference last month, IMF Resident Representative in Lebanon Eric Mottu explained to Executive that the estimate took into account that, even if a cabinet was formed by the second half of the year, it would not be enough to cover the losses incurred during the first half of the year. The IMF’s growth projection for Lebanon is much lower than the fund’s regional estimate of 4.1 percent. However, not everyone agrees with them.

“The IMF have been wrong a number of times in their predictions,” said Marwan Iskandar, economist and chairman of Banque de Crédit National, before predicting that growth would be between 4 and 5 percent. “They used to tell us five or six years ago to reduce the burden of public debt because otherwise we [would be] in dire straits, and then they changed their tune to reducing the debt-to-GDP ratio,” he said.

One reason for things being better than the predictions could be Lebanon’s sizeable informal economy, which is not factored into IMF statistics. Iskandar said that staff at the fund’s sister organization, the World Bank, told him that they estimate the ‘informal’ economy to be around 30 to 35 percent of the size of the formal economy, though World Bank officials have denied to Executive making such assertions.

“They don’t want to say it publicly because it would make what they are saying irrelevant,” said Iskandar. “It would make the public debt something close to the [size of the] economy.”  Currently Lebanon’s debt-to-GDP ratio is widely believed to be somewhere over 130 percent. Jad Chaaban, acting president of the Lebanese Economics Association and professor of economics at the American University of Beirut explained that developing countries usually have an informal economy at about 20 to 30 percent and Lebanon was “above average.”

“The problem is we are not [even] measuring the formal economy,” he said.

Indeed, to make an accurate forecast one would need to know the base from which that forecast is being made. As Executive went to print official GDP figures were only available for 2009, which saw 8.5 percent real GDP growth. Because economies naturally evolve between periods of positive and negative growth or contraction, until the end of last year Lebanon’s economy appeared to be experiencing what economists call a “soft landing”, a pseudonym for the graphical representation of cyclical economic slowdown resembling a plane coming into land; if the IMF and the finance ministry are now to be believed, it looks instead like the country is going into a nose-dive.

“The IMF uses official government figures and they don’t contest them,” said Nasib Ghobril, head of economic research at Byblos Bank. “It might be optimistic; we still don’t know.”

The level of uncertainty has fueled speculation and has understandably resulted in a lack of confidence in the system. Reforms purportedly underway include a program, aided by the European Union, at the Central Administration for Statistics (CAS) to transfer the job of comprising national accounts away from the prime minister’s office and to the CAS. Yet how long that will take is anyone’s guess. In the meantime “it’s all a walk in the dark,” said Chaaban.

Without accurate and timely statistics, especially during times of political transition, those with an interest in using the economic situation to their own advantage — and there are many — have the upper hand. “People who want to make the numbers look bad, lower GDP growth and those who want to make things look good, make the numbers high. GDP growth becomes a signal for confidence in government and the country; same goes for the banks and financial sector,” said Chaaban.

Thus it is hardly surprising that public officials and the media from across the political spectrum have been eager to comment on the economic situation without having any real indication of just how bad things are, or could become. Those on the side of the recently deposed March 14 coalition have been quick to point out that March 8’s stalled efforts to form a cabinet have destroyed the economy, while the latter camp has accused the former of over-reacting to make the situation look worse that it actually is.

In fact, both camps are relying on the same scattered indicators that economists have come to depend on when trying to gauge Lebanon’s performance, due to a lack of national accounts which are themselves “the best available estimates”, according the CAS’s document explaining the national accounts reform program.

Adding to the hodgepodge of numbers and forecasts, the International Institute of Finance (IIF) — a global association of financial institutions — estimated that growth in Lebanon would reach 4 percent at the unveiling of their Middle East regional overview forecast in Beirut on May 15. When questioned by Executive about why the estimate was so different from the IMF’s, Garbis Iradian, deputy director of the Africa Middle East Department of the IIF, said the forecast was “probably optimistic” and assumed there would be cabinet in place in “a few months.”

Lebanon’s central bank is currently well positioned to defend the lira, at least in the near-term

The debt: the elephant in the room

So while there are scant reliable means to measure the latter half of the debt-to-GDP ratio, there is ample documentation regarding the former, and it is soaring; currently the Lebanese public debt is pegged at $52.6 billion. In the first quarter alone the deficit rose almost $1.1 billion, nearly double that of the corresponding quarter in 2010, taking the primary balance from surplus to deficit. Revenues are also dropping, particularly in excise taxes on gasoline and property taxes, which are expected to fall by 57 and 17 percent, respectively, according the IIF’s forecasts, given a slowdown in construction and cuts to the gasoline excise tax this year.

This has caused jitters about the government’s ability to finance the debt, and if real fears caught on in the market then borrowing to continue funding public services would become more costly, which could in turn erode confidence to the point that the currency’s stability would be put in question, though Banque du Liban (BDL), Lebanon’s central bank, is currently well positioned to defend the lira, at least in the near-term.

Additionally, the previous government’s mantra — that the debt was sustainable due to a decreasing debt-to-GDP ratio — has now gone out the window.

“The economy is not growing as fast; when it was growing strong, we saw a big improvement in debt-to-GDP,” said Saad Azhari, chairman and general manager of BLOM Bank. “Now I don’t think we can see this improvement because of the situation. We hope that [it] does not last long and we can have again stronger growth.”

Freddie Baz, chief financial officer and strategy director at Bank Audi, remarked: “If at 185 [debt-to-GDP ratio] we were not really concerned about the ultimate outcomes, its not at 130 or 140 that we will start being concerned.”

The relationship between the banks and the debt has seen worse days and even with the current economic downturn, and the expected rise in debt-to-GDP, Lebanese government debt still appears marketable, though at a somewhat more costly rate.

Last month the government rolled over $1 billion in Eurobonds in two tranches: the first for $650 million expiring in 2019 with a yield of 6 percent, and the second valued at $350 million maturing in 2022 and carrying a yield of 6.475 percent. The last Eurobond rollover in November 2010 carried yields carrying a weighted coupon average of 5.44 percent and an average time-to-maturity of 9.21 years, the lowest ever, indicating new upward pressure on debt financing. 

“It’s not us who decide the government will pay 6 or 7 or 8 percent, it’s the market,” said BLOM Bank’s Azhari.

Even if private demand for government debt dries up, it is likely that the BDL would itself step in as it has done in the past to buy up debt and keep the market stable. “Their goal is to ensure stability so they do what is needed. But this is something the IMF is totally opposed to and it’s a burden on the central bank’s income statement, which no one sees except the IMF,” said Ghobril.

“They will do it and of course this is not the best way,” added Iskandar. “It is the most inflationary way but under duress it is the one way to [keep] the government running.” 

At present BDL does not release its total holdings of government debt but instead a number of different figures that include vague statements such as “claims on the public sector”, which do not represent the actual debt. According to the Association of Banks in Lebanon, treasury bill holdings of the central bank, which it also issues, stood at $9.67 billion or 18.4 percent of the total debt at the end of the first quarter. Using a crude method of subtracting the central bank’s foreign currency holdings from its foreign assets, one can get an idea of the bank’s Eurobond holdings, or debt in foreign currencies, which came to a further $1.9 billion, bringing the total to $11.57 billion by the first quarter of 2011.

The governor’s office of the central bank did not respond to requests to disclose the total holdings of the bank’s public debt.

Another method used by economists is to assume that the “securities portfolio” of the central bank is comprised of only Lebanese debt, which would mean they hold $10.3 billion of public dues.  “The whole way it is managed is ridiculous,” said Chaaban. “We are selling ourselves. The banks are over exposed so the central bank buys T-Bills from their own portfolio but where does the money come from? From the [commercial] banks’ 15 percent required deposits! You are buying from yourself and giving from one pocket to the other.”

“The whole way it is managed is ridiculous…You are buying from yourself and giving from one pocket to the other”

Subsidies — popular but pricey

Compounding the debt problem has been the recent debacle over gasoline prices, which hit a historic high of 37,300 lira ($24.74) last month for one jerrycan (20 liters) of gasoline, even after a tax cut that will cost an estimated 1 percent of GDP, according to the IMF.

Last month the finance minister announced that a “temporary solution” was found one day before public transport workers were planning a major nationwide strike over the price of gasoline. The agreement between the finance ministry and the drivers is set to cost the government a further $15 million each month, for which it will take out another loan to finance the subsidy.

Proposals to cap the price at a level more acceptable to all consumers were deemed too expensive by the finance ministry, something many economists and consumer rights groups dispute.

“In all cases it is having an effect on the fiscal revenue, so at least do something tangible. Now you are not winning on any side,” said Ghobril, adding that even though this would eventually increase the amount of public debt, that was somewhat “more long term.”

“If revenues are going to fall at least let the citizens benefit,” he said.

Inflation picks up steam

Realistically, there are no short-term solutions to the debt or the deficit, but these are not what impacts their day-to-day lives. Headed in the opposite direction of GDP figures, inflation rates are expected to rise from 4.8 percent last year to 6.5 percent this year, according to the finance ministry.

Even this may be an underestimate as the figures which go into determining the Consumer Price Index, the CAS’ major indicator of inflation, only go back to December 2007, meaning that it does not cover price fluctuations of even one full economic cycle. Then there is the difference between what people feel in terms of rising prices and what the actual overall inflation rate is.

“An index [shows] an average, which is not necessarily indicative,” said Chaaban.

Still, the CPI published by the private Consultation and Research Institute showed an increase in March alone of 1.33 percent, and increased 1.95 percent in the first quarter of the year, well on pace to surpass the 6.5 percent full-year estimate.

According to most estimates, some 70 percent of the price increases come from import inflation — the increase in the price of imported goods. What’s more, during the first three months of the year the trade deficit increased 8 percent to $3.6 billion, due to a drop in exports of 7 percent and a rise in imports of 4 percent to total $4.5 billion.

The bill for “mineral fuels and oil” was 8 percent higher due to an average oil price of $105 per barrel during the first quarter compared to $76 per barrel last year. Trying to bring the price of oil down internationally is impossible for Lebanon but what is possible is to address the cartel that imports oil into the country.

“If you are a retailer and the material price is increasing you cannot really reflect this change to the consumer unless you are a monopolist. That’s why the [price of] gasoline has been rising because there is a cartel of importers,” said Chaaban. “We call this asymmetric price transmission because if the prices of imports rise you throw it out on the consumer, but if prices fall you don’t necessarily do so because your margin decreases.” But dismantling the oil-importing cartel will be complicated, as political heavyweights own the energy companies that operate the port and distribution, according to Iskandar.

Another option to decrease real inflation would be to de-peg the lira from the dollar and re-peg to a basket of currencies in line with the composition of imports, instead of the current practice where the central bank buys and sells US dollars in the market to keep the currency steady.

“Because the central bank has so much in reserves they don’t want to change the model now because no one feels the heat to do so,” explained Chaaban.

During the first quarter, some 30 percent of imports came from countries using the Euro, 8 percent from China and only 12 percent from the United States. The exchange rate between the dollar and the euro also remained relatively high. “When the price of the euro goes up 40 percent and we import 30 percent of goods in that currency then the cost of business goes up 12 percent,” said Iskandar.

“The [price of] gasoline has been rising because there is a cartel of importers”

Instead of governance

So with the first quarter of 2011 summoning the horsemen of the apocalypse to ride down on Lebanon’s economy, how have the policymakers reacted? Well, last month Lebanon’s caretaker Finance Minister Raya Hassan, a member of the March 14 camp, made a comment that shook confidence in the country even further, saying that her ministry may be unable to pay public sector salaries due to the refusal of Telecom Minister Charbel Nahas, from the March 8 coalition, to transfer the remaining telecom revenues in his ministry’s account at the central bank to the treasury’s account.

In the past, revenues from the telecom sector — one of the few cash cows of Lebanon’s public sector — were transferred every month, providing the finance ministry with a steady cash flow to make payments to its two top expenditure items: the local banks who hold the majority of the public debt and public sector salaries.

Now, under the pretext that the money will be squandered and that the amount is in dollars, not lira, the telecom minister decided that he will not transfer the money to the treasury, which the finance ministry controls, citing the legal principle that a part of the money from cell phone revenues must go to the ‘Independent Municipal Fund’ to be distributed to different municipalities according to the amount of telephone calls made from their respective jurisdictions.

In any case, only the finance ministry can distribute these funds, so the money looks like it will be staying put until perhaps another finance minister closer to March 8 is in place. (In the first quarter transfers to municipalities decreased from $5 million to $4.5 million.)

The telecom revenues issue has highlighted the long-stated but yet unabated problem of not having a single account for the government at the central bank, which allows each ministry to work independently of central finances. This also creates a situation where municipalities rarely get the dues they are owed and public finances are left exposed to political debacles. So when Hassan said that if the situation continues the government would not be able to pay public sector salaries or retirement dues, panic ensued.

“The statement by the minister of finance was very unwarranted and inaccurate. This is absolute hogwash,” said Iskandar, a generally pro-March 14 economist. “Most of the public policy is political instead of being tied to objectives that serve the economy at large.” 

Eventually, the central bank governor said he would pay the salaries and the finance minister clarified that the scenario would not come to pass.

“The central bank is not going to pay [the salaries] but [Governor Riad Salameh] said it to reassure people,” added Ghobril. “It would be the equivalent of the government defaulting.”

Nonetheless, this does not take away from the fact that, on paper at least, the economic downturn is hitting public finances hard.

According to the IIF’s Iradian, if the telecom revenues were transferred to the treasury then the deficit in 2010 would have fallen from 7.5 percent to 5.5 percent. In any case “from an accounting perspective [the money] is not lost,” said Chaaban.

Securing growth

Even while the deficit increases and public debt mounts, there are some alternatives to dealing with the debt while at the same time implementing key infrastructure projects in areas such as water, electricity, roads and telecommunications, to create a framework for economic growth.

On average Lebanon spent only 2 percent of its GDP on government investment between 2003 and 2009, a figure well below many other countries in the region, including Syria, which spent 10.1 percent during the same period, according to the IIF.

For starters long-awaited public-private partnership (PPP) projects could be implemented, but only after a law is passed in parliament, which requires the formation of a government.

That law will have to be good enough to define the risks and obligations of both the public and private sectors. Even then it might not be enough. “In the current political climate no one is going to be believe a PPP law or any other law,” said Ghobril.

Supposing enough confidence is built after a government is in place, banks will also have to be interested, and perhaps incentivized, to finance such schemes for them to work. But since banks in Lebanon are usually more interested in short term profits to stay safe, the idea has not rubbed off well on everyone.

“I don’t think it’s a function of the banks to really take part of those PPPs; it’s not our business,” said Azhari “Since our sources of funding are short-term deposits, we should really fund the working capital, because those types of project are usually very long-term lending and this is not a function for a commercial bank.”

But as the banking sector’s deposit-to-loan ratios have grown to rates that place them well out of the range of most reasonable risks, there are some in the industry who may take the plunge of dealing with the government directly.

“We are risk takers, our duty is to buy risk; this is what we do [as] bankers,” said Audi’s Baz in relation to PPP projects. “Provided those projects are economically viable we don’t have a negative position — but don’t ask us, please, to finance non-viable projects which you know as a government are not viable because you want us to do political lending.”

Another option is to securitize public infrastructure projects, which would also develop the currently minute capital markets in the country. A securitization law already exists for this purpose so in theory the process is already one step ahead of PPP. However, even the law itself is not clear according to Chaaban, who noted that there was still uncertainty regarding the policy on reselling such securities, and issues relating to timeframes have yet to be ironed out.

“With its sectarian administrative structure and facilities, [Lebanon] is not destined to be a modern country”

The need for government to govern

It is evident that if confidence is to return to Lebanon’s economy, reforms implemented or mitigation measures exercised, then a cabinet will need to be formed. As Executive went to print, the country had been four months without a government and still the different political parties appeared no closer to a resolution over how to divide the cabinet posts.

“It is time to do so many things different but this country, with its sectarian administrative structure and facilities, is not destined to be a modern country,” said Iskandar. “It can be a place where people dance, play musical events, a university destination or maybe even technological nation one day; but as a society, it cannot be an advanced one.”

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