Society

Jewelry – More than meets the eye

by Lauren Williams
written by Lauren Williams

It may have just been a convergence of circumstances, but Tiffany’s opening of both their Beirut boutique and their regional headquarters in Dubai within the same week was a pretty forthright statement of optimism in response to anyone doubting the regional market for luxury goods.

“It had been planned for several years and all of a sudden the circumstances aligned,” said a pleased Laurent Cathala, Tiffany’s vice president of emerging markets, at the boutique’s opening in downtown Beirut last month. Although present in the region for 15 years, the first boutique brings Tiffany’s signature diamond setting — the celebrated six-prong “Tiffany Setting” — to Beirut for the first time. Cathala said the appetite and spending power exists, and added that the company is enjoying double-digit growth across the region.

Tiffany’s new collection of vintage-inspired locks are a highly successful complement to the brand’s signature key collection and have already proved a hit in Lebanon, as have the iconic “atlas designs”, based on the Atlas clock that graces the entrance of Tiffany’s flagship Fifth Avenue store in New York. Their success has been aided, said Cathala, by the company’s penchant for history, a strong narrative and personality in jewelry.

Indeed, talk to any jeweller in Lebanon and they will say the same. Set against a backdrop of recovery from a financial crisis that dealt the global luxury sector a harsh blow, and high gold and gem prices that are almost double those of last year, savvy jewellers are looking to promote the value of jewelry by nurturing its deeper meaning.

Collaborations and one-off designs, alternative materials —stones, woods or old gems with a history — heritage references or pieces conveying a story create the preciousness associated with real luxury. The value is in the art.

A stalwart in Lebanon’s jewelry trade, designer Selim Mouzannar’s ‘Beirut’ collection has been one of his most successful lines to date, both in Lebanon and with international clients in London, Paris and Dubai.

Incorporating the distinct architectural elements of the city, with a hint of both melancholy and playfulness, the collection is a personal favorite for the 46-year-old designer.

“When I chose the name Beirut it was just out of personal affection, but in retrospect I realize part of the reason it worked was because the name attracted as much attention as the jewelry. Especially internationally, Beirut has a complex history and mystery that is attractive to people,” he explained. “People like to have a story behind a piece. [They] want jewelry that is not just a symbol of wealth or power — they want something they can fuse with, that they feel comfortable in, that helps inform their identity.”

Likewise, his recent collaboration with Lebanese interior designer and architect Nada Debs, which saw the designer’s organic, minimalist philosophy applied to finely crafted “leaf” bracelets and rings, gave fans of both designers reason for excitement.

“Collaborations put many energies together,” says Mouzannar. “It makes sense when you are in a bubble to expand your horizons.”

Architect Christian Nasr recently turned his attention to jewelry, applying his carefully honed architectural principles to new materials. His first line is geometric and minimalist, in yellow gold and onyx. Using his architectural approach, he says scale is examined with a sensibility that leads to “spatial volumetric forms.” His use of onyx, he said, was built on the recognition that people are looking for “stones with a story.”

Diamond dreaming

For Pascal Mouawad, owner and artistic director of the eponymous iconic Lebanese brand (whose creations have been the choice adornment for the likes of Angelina Jolie, Heidi Klum and Jennifer Lopez), success has partly been in creating personalized, custom-made pieces that have helped shape his clients’ identities.

“We’re known for our ability to cater to specialized requests, and to oversee every aspect of the design and manufacture,” said Mouawad. “We’re fortunate to be a house that caters to a very niche clientele and many of our clients ask us to design pieces on a custom-made basis.”

The Middle East, and particularly the Gulf market, makes up the majority of Mouawad’s sales, with Lebanon representing a small but important market. The demand for gems in the region is increasing. “When the global financial crisis emerged, the luxury sector got hit hard and [the] jewelry market [was] affected the most,” said Mouawad. “In the last two years, demand has increased and now we are seeing a recovery… There is more consumer confidence, and demand for gems and jewelry is on the rise.”

While American and Asian markets are driven by a demand for classic tastes, he says local customers are looking for more ornate pieces that are bold or have an edgy, ‘fashion forward’ feel. And as if to illustrate the demand for luxury, the jeweler, who took the reigns of the family business last year, launched in February the world’s most expensive handbag. The “ridiculously extravagant” 1001 Nights Diamond Purse, handcrafted from 18 carat gold and encrusted with 4,517 diamonds, earned a place in the Guinness World Records with a price tag of  $3.8million. 

Co-owner of Tufenkjian jewelry, Gerard Tufenkjian, says his biggest markets are in the Gulf, where sales are still driven by jewelry investments and diamond sales haven’t slowed. At the high-end especially, high diamond prices have little effect on sales. “If you are going to spend $10,000 on an item, then you are probably also happy to spend $15,000,” Tufenkjiansaid. For these clients, that “something special” lies squarely in the price tag, but others say luxury is a personal experience.

Tiffany’s Cathala says his brand success lies in the fact that Tiffany’s is a “democratic luxury jeweller…We have something for any budget, for any occasion.”

 

 

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Syrians’ flight from harm

by Nadim Houry
written by Nadim Houry

 

We are on a mountain path, crossing from Turkey into northeastern Syria to meet some of the displaced camping near the border fence. The hike over the mountain is beautiful, with pine trees and a shimmering lake in the valley below, but the destination is far from serene. Around 10,000women, men and children have gathered on the Syrian side of the border within a stone’s throw of the fence, while more than 10,000 have already crossed into Turkey and are residing in well-cared-for but off-limits camps.

Syria has made it near impossible to reach people affected by the fierce crackdown, so refugees who flee to neighboring countries or areas not under the control of the Syrian security forces are the only witnesses to human rights violations we can meet with face-to-face. The residents of the makeshift camp are mostly from Jisr Al Shughur and other towns in the northern governorate of Idlib, the majority of whom have escaped since the Syrian army began military operations against their towns on June 10. Syrian officials have justified the attacks as a response to “armed gangs” and “terrorists” who have killed security forces. I am hoping the refugees can shed some light on the events.

We reach the camp shortly after President Bashar al-Assad has concluded his third public speech since protests erupted in mid-March. “Come back, the army will protect you,” he tells those who left for the border area and Turkey. But to the refugees huddled around the television, these words ring hollow. “He wants me to go back so they can kill me like they killed my brother,” a soft-spoken man in his mid-20s tells me. “I will only go back when Syria is free.”

Most of the camp residents have suffered at the hands of Syria’s security forces. Many have a brother or a cousin who was killed or detained in the past few weeks. In one tragic example, Bilal al-Masri tells me that security forces killed his father during the early 1980s and his brother three weeks ago. “Killed by the father [Hafez] and the son [Bashar],” he says. “I hope it stops here.” Others were injured and escaped for fear that the security forces would harm them if they remained in Syrian hospitals.

Syrians who were active in organizing protests or in filming them are afraid that the security forces will reserve for them the same fate two of their friends met. Anas Katrun and Bashir Abdo were detained on June 10 as they went to film the army’s entrance into the towns. They disappeared, only to appear on Syrian state television on June 19 looking haggard and confessing to being “terrorists.” Abdo’s brother, who is in the camp, can still barely talk about his brother without his voice quivering.

The testimonies we collected from those at the border confirm some of the worrying patterns we documented in other parts of Syria, particularly Daraa, near the southern border with Jordan. Here, as there, security forces have shot at and killed unarmed protesters, arbitrarily detained and tortured people — dozens are still missing — and restricted medical care to many of the wounded. One particularly bloody Friday occurred on May 20 when security forces shot at large protests in the Idlib cities of Maaret Al Numan and Mastoumi, killing at least 40 people and injuring hundreds more — a dozen of whom are in Turkey now.

But the testimonies also show that the Syrian regime’s repression is at the same time self-defeating and has the potential to lead Syria into a bloody conflict. On May 13, protesters in Jisr Al Shughur torched the town’s Baath party building and someone wrote graffiti, saying, “We burned the building because we are tired of all the lies.” The person was referring to the government claim that “armed gangs” and not security forces were responsible for many of the killings. On June 4, after security forces shot at protesters during a peaceful funeral procession in Jisr Al Shughur, young men from the town, as well as some defected soldiers, attacked the security forces, killing security personnel and sustaining heavy losses themselves.

More than 100 days into Syria’s protests, it is increasingly clear that the savage and senseless violence of Syria’s security forces is fueling the protest movement. While a vast majority of protesters remain committed to peaceful means, some of those interviewed say they are getting tired of being shot at like ducks in a pond and may start adopting more violent means of opposition. Unfortunately, the Syrian government is still not hearing the message. Two days after I left the makeshift border camp, Syrian tanks closed in on it, driving the majority of its temporary inhabitants into Turkey.

NADIM HOURY is director of the

Beirut office of Human Rights Watch

 

 

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Egypt: not yet a civic state

by Jonathan Wright
written by Jonathan Wright

The Ottomans in Egypt let power slip more than 200 years ago, when Albanian adventurer Muhammad Ali became the de facto independent ‘viceroy’. But their legacy lives on in a version of the Ottoman millet system, which divides the population into religious communities, each with control over personal status matters such as marriage, divorce, child custody and inheritance. For administrative convenience and in deference to the Muslim concept that ‘revealed’ religions are the only ones that count, every Egyptian is registered as either Muslim, Christian or Jewish. ‘Freedom of religion’ in the Egyptian context basically means the freedom to worship in the manner of one’s ancestors.

The system has been creaking at the seams for decades, and globalization, migration and the communications revolution have added to the strain. Some Muslims have tried to turn Christian, Christian women have dismayed their birth community by converting to Islam and previously unfamiliar beliefs and practices have appeared — Baha’ism, atheism and yoga derived from Hinduism, for example. Thousands of people, still a tiny minority of Egypt’s 80 million people, live in legal limbo between the sectarian structures imposed by the state and the messy reality of the 21st century. The iniquities of the system have also contributed to sometimes violent disputes — churches attacked and set ablaze or street brawls between young Muslims and Christians.

A revolution, especially a revolution in which equal citizenship and a ‘civic state’ were prominent themes, might seem a good moment to jettison the Ottoman legacy and launch Egypt into a new era of individual freedoms. Revolutions often go hand-in-hand with changes in the status of the established religious institutions; witness the drastic reduction of church power after the French and Russian revolutions. The old regime of former President Hosni Mubarak never even tried to bite the bullet. At the most, it sometimes made concessions to foreign criticism and activism by Egyptians, allowing Baha’is, for example, to receive identity cards that do not specify the holder’s religion. 

Now change is in the air in Egypt, with a lively debate over what a ‘civic state’ might mean in practice and how it should be enshrined in legislation. Even the Muslim Brotherhood has endorsed the concept, though its version seems to be heavily qualified by vague references to Islam as the state religion and a ‘reference point’ for lawmakers. Among the wider population a ‘civic state’ has broad appeal in theory and Muslim-Christian harmony is cherished as an ideal. 

In a significant first step, the government of Prime Minister Essam Sharaf has dusted off old proposals for a standard law regulating the construction and maintenance of mosques and churches, to replace the system whereby Muslims could build mosques almost at will while Christians who wanted to build, repair or expand churches had to plead for permits from provincial governors of unpredictable inclinations. But the proposals are hardly revolutionary, and in the end the power to grant permits will remain in the hands of government officials.

On the broader question of conversions and separation of state and religion, liberal opinion is far from achieving the critical mass likely to lead to a breakthrough. Still, a recent opinion poll did show some encouraging signs for inter-faith relations in general; 67 percent of Egyptians (more than in any Arab country other than Lebanon) said they would not object if someone of a different faith moved in next door, and 78 percent said religious leaders should not have authority to dictate legislation. 

But the liberals are treading warily, conscious that accusations of hostility to Islam might undermine their political chances, and the military council running Egypt since February has no track record of innovative or progressive thinking. Without bold leadership, the future of state-religion relations in Egypt will emerge through a process of negotiation in which some of the parties cling to inherited privileges — not just Muslims on behalf of Islam but also Christian churches on behalf of their role as arbiters between Christians and Christians. The outcome will undoubtedly be a compromise that retains some elements of the old system, not a fresh start based on universal principles of human rights. As in many other spheres of life, the Egyptian revolution may turn out to be something rather less than ‘revolutionary’.

Jonathan Wright is managing editor of Arab Media and Society 

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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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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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