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Last Word

Free market football

by Michael Young June 5, 2010
written by Michael Young

The World Cup is upon us, and for a few weeks the language of amity and unity will be pushed aside by rants and rumbles of nationalistic exclusivity. In the wake of the Greek financial crisis, European national amity and unity have also been severely tested, which leads one to wonder whether the future of capitalism will resemble the beautiful game.

 Whether in football or Europe, don’t be fooled, the integrative forces of the market will overcome the divisive dynamics in both. Football has long been an advanced manifestation of what open markets are supposed to be about: players move with little difficulty across national borders; a great deal of money liberally exchanges hands as a consequence, in no small part greased by highly profitable television contracts; marketing and appeal is global; and the most talented players and managers usually come out of the maelstrom far richer.

Some might protest that football in general, and European football in particular, works more like an oligopoly. The wealthy clubs are the most powerful; they are able to buy the best players, which allows them to win more games and gain more lucrative television contracts and advertising revenue, especially in European championship play. This earns them even more money and resumes the cycle.

But the power of some clubs is also what transforms them into truly global, unifying phenomena. If a club has the means to pick and choose players from an international menu, it will do so. Let’s say you’re an Italian club like Inter Milan; why select a majority Italian team when you have the money to mix things up and import even better players from Brazil, Argentina, Holland, and anywhere else?

 The irony is that football remains an unfettered outlet for fans’ allegiance to a particular city, country, region, or even in some cases social stratum. Yet capitalism has made such identities less and less meaningful. Inter was once regarded as the working class team of Milan, but the notion is almost laughable today, with the team a major financial powerhouse enjoying international appeal. The market has fundamentally altered Inter’s image, so that while this was once defined by what the team stood against (above all, its rival AC Milan), today it is defined even more by all that the team embraces through its expanding fan base. 

Which brings us to Europe after the Greek financial crisis. There too there has been much talk recently of nationalism and the emergence of a two-tiered European economy. The Germans didn’t initially want to pay for the profligate Greeks, and for a moment the European experiment looked like it might collapse. A deal was done, but the European Union is not out of the woods yet. What is emerging is a sometimes disturbing form of “cultural” differentiation, whereby the burden on Europe is said to come from the “southern” states, most on the Mediterranean, who take a very different view of taxes and public finances than their parsimonious brethren in the north.

 We might even go further to say that Europe has gone the way of football in allowing hubris to get the better of prudent accounting. Neither in Europe nor in football is the sky the limit anymore. And when that happens populist instincts return, as do doubts about the cosmopolitan advantages of the whole. But then reality somehow kicks in.

A sport defined by antagonism, but that has seen the relative dissolution of that antagonism thanks to the integrative dynamics of capitalism, finds itself in not so different a place as the project of European integration. This too faces antagonism, but capitalism was instrumental in the creation of a unified Europe and will continue to sustain it.

 And that place, quite simply, is the broad realization that retrenchment and divorce is not an option either for Europe or football, at least if both are to prosper. The market is a cruel leveler, but it takes enormous effort and time to restructure things when it is flawed. The penalties in participating may be damaging, fouls are common, but then, making it all worthwhile, come the goals.

June 5, 2010 0 comments
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Consumer Society

Title take-back for the hummus heavyweight

by Executive Editors June 5, 2010
written by Executive Editors

Some competitions are won by a narrow margin. If the last six months are any precedent, the contest over hummus won’t be one of them.

On May 8th, Lebanon carved its initials into the immortal Guinness Book of World Records for the second time in less than a year with the most hummus ever assembled in a single place.

The record amount, initially claimed by Lebanon last October but snatched across the border by Israel in December, has grown exponentially as the competition between the two countries has escalated.

Israel’s December record of 4,090 kilos more than doubled Lebanon’s initial amount of two tons, and Lebanon’s May rebuttal sets the figure at 10,453 kilos. 

A day later, on May 9, Lebanon set the record for most falafel assembled, weighing 5173 kilos, which equals approximately 10452 dozens.

“We could have done 12 tons,” said Chef Ramsi Choueiry, who presided over both of Lebanon’s record-setting events, “but the specific amount [10,452 kilometers is the square-area of Lebanon] reflects the core philosophy of this event: that hummus is quintessentially Lebanese.”

The contest has been part of an aggressive bid by Lebanon to win international recognition for what the Association of Lebanese Industrialists call a “misappropriation” of the dish by other Mediterranean countries — and by Israel in particular — which export billions of dollars worth of the dish under the name hummus, the Arabic word for chickpeas, first used by a Lebanese manufacturer in the 1950s.

On May 8, under the direction of Chef Choueiry, 300 apprentice chefs attacked vats of chickpeas, tanks of olive oil and crates of lemons in an industrial fervor that would have brought a tear to Henry Ford’s eye. One by one, teams of apprentices dumped their brimming tubs into an enormous ceramic bowl — the world’s largest, designed by architect Joe Kabalan, earning the country another world record — while the numbers on a giant digital scale climbed skyward.

“This is really fantastic,” said Jack Brockbank, Guinness’s representative adjudicator who witnessed the record. “Lebanon has well and truly re-earned its place in Guinness.”

Whether reclaiming the Guinness record plays into Lebanon’s hands in its bid to register ‘hummus’ as a protected food — marketable under that title only if it is manufactured in Lebanon — the stunt has caught the world’s attention, with international news services from Britain’s BBC to the China-based Xinhua running the story over the course of last month.

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Consumer Society

The Struggle for Arab Independence

by Executive Editors June 5, 2010
written by Executive Editors

Albert Hourani, the late Lebanese-British historian once wrote: “All states are artificial… they have been formed by specific historical processes, by human acts within a given physical environment over a period of time.” It is precisely those processes and acts that are laid out in great detail by Middle Eastern historian Patrick Seale in his latest book on the region, “The Struggle for Arab Independence.”

This 730-page history book reads more like a gripping novel, with its protagonist carrying the tale from start to finish. In addition to plotting the course of how myriad Arab provinces came to become the rigid collection of states that we today call the Middle East, Seale also chronicles the life of Lebanon’s prodigal, yet perhaps most important, son: Riad el-Solh.

The life of Lebanon’s first prime minister is recounted from the days of his grandfather Ahmad to his untimely death in Amman in 1951.

Seale, who spent six years researching material for the book, describes a dark and tumultuous period of Arab history, jumping back and forth between the life of his protagonist and the broader events happening at the time, to offer one of the most comprehensive books in English on Arab struggles against Ottoman, Western and now Zionist occupiers.

The book cites countless sources from historical works, intelligence documents and personal accounts to paint what is, at times, a rose-tinted picture of Riad el-Solh’s political life and the role he played in shaping Lebanon and the wider Middle East. Seale portrays Solh as an internationalist, an Arabist, a working class sympathizer, an anti-colonialist, a journalist and a lawyer all in one.

The only criticism he seems to have of Solh — which by the end of the book seems to be a veiled compliment of sorts — is that he was no accountant, as he squandered a large portion of his family’s fortune on his political career and the fight to free the Arab world from its occupiers. But as any journalist, including Seale, knows, there are always at least two sides to every story, and indeed to every person.

Seale also goes to great lengths to give credit to others who fought for Arab “independence.” A laundry list of Arab notables, politicians, kings, imams, and thinkers are mentioned, leaving the reader with the impression that each of these men could have their own 700-page tome.

Meanwhile, Seale gives special attention to the calculations of the Zionists and their collusion with the British in such detail that it is perhaps only topped by Ilan Pappe’s “The Ethnic Cleansing of Palestine.”

Interestingly, he describes Solh’s repeated meetings with notable Zionists such as Chaim Weizmann, Israel’s first president; David Ben-Gurion, its first prime minster; and Moshe Sharett, Israel’s second prime minister, who he first met as a young boy when the latter’s father was employed as a smallholder at one of the Solh family friend’s estates in Jericho.

Solh naively offered these men a pact with the Arabs, a fact which Seale admits, but again paints it as a politically astute calculation during the 1920s and early 1930s, despite the disastrous affects of Israel’s creation.

However, it is details such as Solh’s childhood meetings with Sharett that makes the book stand out as a work of both exhaustive research and refined story-telling. It gives due credit to a man who is described in the first half of the book as a bastion of the wider Arab, and to a greater degree Syrian, struggle — a Greater Syria which included Le Grand Liban, which became the Lebanon we know today.

Midway through the book, Seale describes Solh’s most significant change of heart, when he started to believe in an independent Lebanon, something that set him apart from his fellow Arab nationalists. From that point onward, the reader follows Solh’s every political maneuver to become the first premier of the country, as he navigates his way past colonial French occupation, hostile Maronite opponents and even his own family members. The chapter describing how he and Bishara el-Khoury, the British-backed first president of Lebanon, battled with the French in the final throws of their colonial project, is separated into rounds — 14 of them, each a page or two long.

Finally, Seale describes how King Abdullah I of Jordan, the great grandfather of the current king, who sought to end the fight with the Zionists, tricked Solh into coming to Amman to mend ties that had deteriorated, only to be assassinated in what Seale suggests was an Israeli plot.

Seale may at times overstate the importance or relevance of Solh, but he does give him more of the genuine credit he is due than the Lebanese seem to today.

Tellingly, his book ends with the commissioning of Solh’s statue in the heart of downtown Beirut — today, the statue serves as little more than an adjunct to a construction site.   

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Economics & Policy

Regional equity markets

by Executive Editors June 5, 2010
written by Executive Editors

Beirut SE 

Current year high: 1,200.49    Current year low: 815.53

>  Review period: Closed: May 21 – 1,102.47           Period change: -0.62%

Good macroeconomic expectations and encouraging numbers on commercial bank deposits, central bank reserves, tourism activity and construction all supported positive calm in the Lebanese market. Real estate firm Solidere was the best performing stock in the review period, its share price advancing just under 2% in its two share classes. Solidere stock got a buy recommendation from a local bank with a target price upside of over 30%. Byblos Bank moved south, giving up 7% of its share price.

Amman SE 

Current year high: 2,968.77                Current year low: 2,396.28

> Review period: Closed: May 23 – 2,459.08            Period change: -4.52%

The Amman Stock Exchange, which already weathered bad tidings this year, was not spared the pressure that pushed share prices down on a broad base throughout May. On the year-to-date trajectory, the ASE is also among the losing markets, down 3.64% from January 1. The ASE sector indices moved range bound with the general index, with the exception of the insurance index, which showed a pronounced drop at the end of the review period and closed 7.8% down on the month.

Abu Dhabi SM 

Current year high: 3,239.74                Current year low: 2,467.04

> Review period: Closed: May 23 – 2,758.35            Period change: -0.68%

As one of the few markets in the GCC to have intra-month gains to show for itself, the Abu Dhabi Securities Exchange closed the review period with only a modest drop, which preceeded a precipitous plummet over the next two days. The industrial sector index was the upward outlier in May and ended the period 7% higher. The other sector with a gain was energy, up 0.35%. Taqa and Dana Gas were companies that attracted attention. Cattle farm operator and livestock trader, Gulf Livestock Co, was hot property, recording a share price gain of 43.7%. 

Dubai FM 

Current year high: 2,373.37                Current year low: 1,533.36

> Review period: Closed: May 23  – 1,680.52           Period change: -3.41%

While sovereign debt has been a big topic in Dubai, this time it was fear that European sovereigns could be trapped in a cauldron of debt which impacted investor sentiment, and made brambles the only green shoots in evidence on global stock exchanges. Indices for telecommunications (up 8.5%) and utilities (up 4.7%) defied the gravity pull, while transport and real estate were hit hardest. The index backsliding meant that the DFM is, for another month, the GCC’s worst underperformer for the year to date, down 6.8% when compared with the start of 2010.

Kuwait SE 

Current year high: 8,371.10                Current year low: 6,650.80

> Review period: Closed: May 23  – 6,997.3             Period change: -4.14%

While the Kuwaiti Stock Exchange index fared better than most of its GCC peers in May, the less than romantic stock developments meant that the index was pushed marginally into the red compared to the start of the year, making it the GCC’s second-worst price performer for the year to date, after Dubai. All sector indices fell, but banking and food did comparatively well. The KSE ratio of losers to gainers was not as decidedly bearish as in peer markets, but MENA Holding, Jazeera Air, and Gulf

Finance House, three prominent stocks, each shed over 25% in worth.       

Saudi Arabia SE 

Current year high: 6,929.40                Current year low: 5,407.31

> Review period: Closed:  May 23  – 6,271.5            Period change: -9.33%

During the May review period, the Saudi Stock Exchange was caught in a 650-point slide from late April peaks. The index, TASI, closed at 6,271.50 points on May 23, representing a 9.33% fall from the last close in April. Only ten gainers, led by two recent debutants Gulf General Cooperative Insurance Co and Al Hassan Shaker Group, plus Zain Saudi, stood against a vast majority of losing stocks, many of which weakened by double digits. Among sectors, the petrochemicals sub-index was notable for underperforming the TASI by more than 7 percentage points.

Muscat SM 

Current year high: 6,933.75                Current year low: 5,263.94

> Review period: Closed: May 23  – 6,420.87           Period change: -6%

The reality of investor worries caught up with the Muscat Securities Market and dragged the index lower between April 30 and May 23. With its close at the end of the review period, the MSM index slipped back to levels last seen in January of this year and its year-to-date gain shrunk to less than 1%. All three sub-indices — banking, industry, and services — moved in step with the general index’s downtrend. Banking suffered the sharpest fall, sliding 8.66%, followed by services, while industry very slightly outperformed the general index.

Bahrain SE 

Current year high: 1,635.08                Current year low: 1,413.81

> Review period: Closed: May 23  – 1,491.98           Period change: -6.28%

Stock market participants in Bahrain had only a few sessions of positive index movement in the review period, as the BSE gave up the gains it had achieved earlier in the spring in May and closed roughly at levels last seen in early Feb. With no roses awarded to any sector, the banking sub-index, down 8.5%, got stuck with the thorns as the BSE’s worst performer in May. United Gulf Bank, Ahli United Bank and Ithmaar Bank were the bottom trio in performance, losing 22.5%, 14.3% and 10.5% respectively.  

Doha SM 

Current year high: 7,801.33                Current year low: 5,731.30

> Review period: Closed: May 23 – 6,974.96            Period change: -7.58%

The second biggest GCC loser in the May review period was the Qatar Exchange. Industries Qatar and Barwa Real Estate Co, two heavyweights in the Qatari economy, found themselves among the biggest losers with drops of 12.7% and 12.65% respectively. Qatar Islamic Insurance was the best performer with a 9.5% gain. In terms of sectors indices, insurance looked, for the moment, recession proof while industry underperformed the market. The slides of the Doha and Riyadh bourses reflected weakening oil prices, but the real coupling appeared to be with global investor fears.

Tunis SE 

Current year high: 6,929.40                Current year low: 5,407.31

> Review period: Closed: May 21 – 5,928.03            Period change: 2.44%

The decoupling from international fears that the GCC and many other emerging markets would have wished for last month, did happen in the Maghreb. The Tunindex of the Tunisian Stock Exchange showed a countercyclical and all the more respectable gain of 2.44% in the review period, closing at near record highs reached two days earlier. The Tunis Stock Exchange is now up 14.8% this year. Market debutant Tunis Re led the monthly list of gainers with a 51.8% share price climb, while tire maker STIP and dairy firm Tunis Lait also rallied.

Casablanca SE 

Current year high: 12,457.59  Current year low: 9,997.56

> Review period: Closed: May 21  – 12,370.36         Period change: -0.73%

Against expectations, the closer to Europe, the more confidence the region’s bourse actors seem to radiate this spring; the second strongest gainer in MENA after Tunisia was the CSE. Year to date, the CSE is the region’s indisputable star gainer, up 18.42% since Jan 1. The best gainers in Morocco in May were Nexans, an electrical equipment manufacturer, transport firm Timar, and Mangem, a mining company. All three stocks rose in the 25% range. Market cap leader Maroc Telecom fell by 0.95%.

Egypt CASE 

Current year high: 7,603.04                Current year low: 5,229.40

> Review period: Closed: May 23  –  6,393.67          Period change: -16%

A high rise goes before a mighty fall, or so was the implied message of the Egyptian Stock Exchange’s EGX 30 index, which presented strong volatility in May and dropped almost 1,200 points over the review period. For the year to date, the index stayed in the black, but only just. All three market cap heavyweights with more than $5 billion in valuation were drawn into the fall. Orascom Construction Holding gave up 11.2%, Orascom Telecom was hit with a 22.7% drop and Telecom Egypt weakened by 8.8%.

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Economics & Policy

For your information

by Executive Editors June 5, 2010
written by Executive Editors

Beirut bourse booms after bank stock sale

Total trading volumes at the Beirut Stock Exchange (BSE) reached 102.1 million shares in the first quarter, up 66 percent on the same period last year, while aggregate turnover totaled $1.3 billion, up 448.5 percent on the first four months of 2009.

Trading was bolstered by regional investment bank EFG-Hermes’ sale of its entire stake in Bank Audi in January — with a large stake picked up by former Prime Minister Najib Mikati’s M1 Group — and the private financial arm of the World Bank, the International Finance Corporation, picking up a 47.6 million common share in Byblos Bank.

Bank stocks accounted for 95.8 percent of aggregate trading volume on the BSE in the first quarter, followed by real estate stocks with 4.1 percent.

Lebanon had one of the highest software piracy rates (total pirated units/total units installed) in the Middle East and North Africa (MENA) last year, ranking fifth in the region and 39th globally, according to a survey by American software industry group Business Software Alliance. Piracy rates reached 72 percent last year, down from 74 percent in 2008 and 73 percent in 2007. Piracy related losses have increased however, from $44 million in 2007 to $46 million last year. Lebanon’s piracy rate was higher than the global average of 43 percent, the MENA rate of 64 percent and the Arab rate of 66 percent.

 The MENA region still has one of the highest software piracy rates in the world, reaching $1.18 billion in losses in 2009, but dropped 7.7 percent overall on the previous year. Saudi Arabia tops the regional list, with $304 million in losses, followed by the United Arab Emirates with $155 million, Egypt with $146 million and Iraq with $129 million. Qatar posted the highest increase last year, with piracy losses surging 92.3 percent on 2008. Yemen, which has the lowest losses at $10 million, took the top ranking in the region with a piracy rate of 90 percent.

The survey covered business application software, operating systems, consumer-orientated software and local language software.

Iran and Hezbollah in spat over finances

Iran has reportedly put Hezbollah’s security chief Wafiq Safa on probation for “extravagant spending,” according to sources at intelligence information group Stratfor. In a May 5 release, the source claimed that Safa, the maternal cousin of Hezbollah Secretary General Hassan Nasrallah, has squandered more than $3 million on personal spending. This has reportedly put strain on Iran’s willingness to continue funding Hezbollah, following the exposure last September of disgraced Lebanese businessman Salah Ezzedine, who was affiliated with the party, for running a ponzi scheme worth as much as $1 billion.

According to Stratfor, Iran’s original intention was to dismiss Safa altogether, but Nasrallah reportedly appealed to Ayatollah Ali Khamenei and threatened to resign if his cousin was dismissed. Safa was a founding member of Hezbollah and is the party’s main contact with the Islamic Revolutionary Guard Corps.

Regional exports soar

During the 18th Arab Economic Forum, which brought 800 participants from 20 countries to Beirut in May, the Secretary-General of the Arab League Amr Moussa announced that Arab exports rose 20 percent last year to reach $1.5 trillion, accounting for 7 percent of international exports. Foreign direct investment (FDI) in the region also surged, reaching $100 billion in 2009, representing some 5.7 percent of total worldwide FDI. But while exports have risen, inter-regional trade is still under-par at $85 billion, which is less than 6 percent of total Arab exports.

Economic growth and lagging infrastructure

Minister of Finance Raya Hassan stated  last month that economic growth during 2008 and 2009 “did not translate into results on the ground” in relation to employment and improving social affairs. She added that Lebanon has not made any significant advances in infrastructure development since the country was ruled by the Ottomans, pointing to a lack of progress in electricity and public transport.

Hassan added that two versions of an electricity sector reform plan had been submitted by the energy minister, but indicated that around $1.5 billion budgeted to cover losses in the sector did not include expenditures pertaining to barges — planned to be brought in to cover high demand this summer — or expenditure on natural gas from Egypt to run some of Lebanon’s power plants.

She added that although she was “100 percent” behind an increase in electricity fees. She added that it would take up to two years to complete the proposed upgrade of 600 megawatts at a slated cost of $796 million.

Hassan revealed that Value Added Tax (VAT) would not be increased from 10 percent to 12 percent this year, but could be in 2011. “Next year things will be different. If we want to increase expenditures [again] we will need to increase VAT,” she said.

The issue of the approximately $3.6 billion in pledges from donors at the Paris III conference was also discussed at the conference. Hassan said that $500 million was pending deployment because of “conditions placed upon” the telecom and electricity sectors, and $850 million is held up due to Parliament’s inability to pass the laws needed to free the money up for investment.

Speaking at a presss conference, Future Movement lawmaker Nabil de Freij asked Hassan not to send any more bills to Parliament, as they were currently backed up.

World Bank allocates $500 million for Lebanon reform

The World Bank has pledged $500 million to the Lebanese government with  as part of an aid package to implement economic reforms over the next four years. Details of the package were disclosed during a meeting between the World Bank’s vice president of the Middle East and North Africa (MENA), Shamshad Akhtar, and Finance Minister Raya Hassan on May 19. “We renew our support for the coalition government to implement vital programs which will help achieve growth as well as tackle the effects of the financial crisis which hit the MENA region,” said Akhtar.

The aid is intended to fund economic reform, launch investment projects, create jobs and generate more balanced economic development throughout the country. To date, Lebanon has received $4 billion of the $7.6 billion of loans and grants pledged during the Paris III conference.

Industrial exports on the up

The global economic crisis may be cautiously subsiding, but Lebanon’s industrial exports are already experiencing double-digit growth, surging 24.6 percent to $866 million in the first quarter from $695 million in the same period last year. March was a particularly good month, with exports reaching $336 million, an increase of 55 percent on March 2009, according to data released by the Ministry of Industry.

Machinery and mechanical appliances formed the core of exports, at 18.82 percent, followed by pearls at 18 percent and precious and base metals at 14.32 percent. Switzerland remains Lebanese manufacturers’ top destination, accounting for 13 percent of all export trade.

Imports of industrial machinery also spiked, up 7 percent to $57.8 million in the first three months compared to last year. Italy was the main source of imports, with a 22.86 percent market share, followed by Germany with 21 percent and China at 15 percent.

Lebanon expects growth, but how much? 

The Economist Intelligence Unit (EIU) has forecast that Lebanon will achieve 5.6 percent economic growth this year, while Central Bank Governor Riad Salameh said at the Arab Economic Forum that he expects to see 7 to 8 percent growth.

“We continue to follow the policy of controlling liquidity,” said Salameh at the forum, held in Beirut in May. “The cost of liquidity in Lebanon had a good outcome on the growth rate and reduced the volume of debt in private and public sectors,” he added.

The EIU predicts 5.3 percent growth next year, and raised its growth estimate for 2009 to 6.9 percent from an earlier 5.1 percent. It added that growth is being driven by the tourism sector, investment in construction, real estate and financial services. But the London-based research company was relatively cautious over its growth forecasts, given the lack of timely data for the overall economy outside of the banking and tourism sectors.

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Real estate

For your information

by Executive Editors June 5, 2010
written by Executive Editors

Real estate sector sets new highs 

The real estate sector continued to perform well in the first quarter, up 41 percent on 2009 to reach a record 22,059 transactions, according to a Bank Audi report sourcing the General Directorate of Land Registry and Cadaster (GDLRC). Sales transactions to foreigners surged by 19 percent, while there was a significant increase in the overall value of property sales, up 110.3 percent to a record high of $2.1 billion. Average value per property has correspondingly spiked, up 49.3 percent to $950,000.

Beirut saw the highest increase in property prices, attributed to the shortage of land. However, the 87 percent surge seen in the first quarter is likely due to there being a small number of overall sales but at a high value. With property prices rising, so have rents. According to a study by Cushman & Wakefield, the capital’s retail market has steadily expanded and rents have risen, which they forecast to continue this year. Prime retail areas in the capital, including downtown, Achrafieh, Verdun Street and Kaslik Street, are now ranked among the top 10 areas in rental prices in the Middle East and North Africa, according to the study. Building activity is also on the up, with the Order of Engineers in Beirut and Tripoli stating that newly issued construction permits totaled 3.8 million square meters in the first quarter, up 65.8 percent on the same period last year.

Aabar to open Dead Sea hotel

Abu Dhabi’s Aabar Investments is to invest $42 million in a new Jordanian company to develop a hotel and convention center at the Dead Sea.

A joint venture with the Dead Sea Touristic and Real Estate Investment Company, the hotel will be run by an international chain, reported Maktoob. Aabar, which has stakes in Daimler and Virgin Galactic and is owned by the Abu Dhabi government’s International Petroleum Investment Company, reported first quarter profits of $430 million. The firm entered into a $800 million loan agreement in May with local and international lenders to fund expansion over the next three years.

Qatar buys Harrods

The investment arm of Qatar’s sovereign wealth fund, Qatar Holding, last month bought the iconic London department store Harrods for a reported $2.2 billion. The store, acquired in 1985 by Egyptian businessman Mohamed al-Fayed, has been under-performing in recent years but Qatar Holding was “specifically selected” for its “vision and financial capacity to support the long term successful growth of Harrods,” according to a spokesperson.

The deal adds to Qatar’s growing portfolio of costly investments in the British capital, which includes a stake in Songbird Estates, which controls more than half the buildings in the Canary Wharf business district.  Qatar is also the second largest investor in the London Stock Exchange Group.

Natural treasure could fall from grace 

According to An Nahar newspaper, The United Nations Educational, Scientific and Cultural Organization (UNESCO) is threatening to place Lebanon’s Kannoubine Valley on the ‘World Heritage Site in Danger’ list, which is the first step toward removing it from the World Heritage list. This is mainly due to the violations of the valley management principles set by UNESCO back in 2007, such as rampant unplanned construction, new restaurants opening that do not conform to the regulations, posting of political flyers along the walls of the valley entrance and trash burning. Consequently, Minister of Culture Salim Warde sent a letter to the Lebanese President Michel Sleiman and the Maronite Patriarch Mar Nasrallah Boutros Sfeir, as well as the Ministry of Interior, asking for their support to preserve the site and take adequate measures to handle these violations, said the newspaper. UNESCO’s World Heritage Center considered the violation as threatening to the features which made it of special value and earned the valley its original listing. The center also proposed that the authorities ask for international assistance to set new guidelines and stricter rules and regulations, which would help the director general of antiquates control and protect the valley.

Beirut gets ugly

The construction boom underway in Beirut has received negative coverage in the British press over the past month, lamenting the loss of the city’s heritage, its Ottoman-era buildings and the little green space that remains in favor of tower blocks and plenty of concrete.

An article on the British Broadcasting Corporation’s website starts with architect Assem Salaam saying: “Beirut is an ugly city.” Robert Fisk’s article in The Independent newspaper is entitled “Beirut is determined to kill its rich Ottoman past,” and The Guardian ran a commentary called “The battle for Beirut’s buildings.”

The argument is that Beirut is losing its identity to real estate brokers bent on turning the capital into the next Dubai, while the city’s distinctive architecture, already battered by the civil war, is being lost to cater to speculators and wealthy expatriates seeking second homes.

Closer to home, Lebanese daily An Nahar ran an article on the destruction of Beirut’s heritage along with a searing cartoon depicting a hammer in the shape of a tower block knocking down one traditional Lebanese house after another. Politicians have also waded into the debate, with Progressive Socialist Party leader Walid Joumblatt saying his main concern during the May municipal council elections in Beirut was to preserve traditional buildings and green spaces.

“I am calling for the preservation of neighborhoods…being invaded by real estate brokers,” said Joumblatt to An Nahar.

But at the same time, international media have put Beirut in the spotlight as a top destination to visit, with The Guardian running an article entitled “Beirut is back and it’s beautiful,” and The Financial Times running a travel special entitled “Lured to Lebanon.”

Knowledge Economic City launches IPO

Saudi Arabia’s Knowledge Economic City (KEC), one of six “smart cities” being developed in the kingdom, launched a $272 million initial public offering (IPO) in late May. The IPO, which will offer 30 percent of the company through issuing 102 million shares, will help raise the firm’s capital to $906.7 million, reported Reuters.

Expected to attract $8.5 billion in investment, the 4.8 million square meter project in the holy city of Medina is slated to have 30,000 residential units and attract the information technology, health and education sectors. The state-owned King Abdullah Foundation, Savola Group, Taiba Investments and the Binladen Group are among the largest shareholders in the KEC.

Other smart cities to be built to cater to Saudi’s growing population include the King Abdullah Economic City, Prince Abdulaziz bin Mousaed Economic City in Hail, the Jazan Economic City south of Jeddah and the Sudair Industrial and Business City on the outskirts of Riyadh.

Sharjah to allow freeholds to foreigners

The Emirate of Sharjah has passed a draft law that will allow the sale of freehold property to foreigners, but only if the ruler gives approval. Emirates Business 24|7 reported that the Sharjah Executive Council and the Sharjah Consultative Council (SCC) passed the law, which includes an article that allows registration of properties bought by United Arab Emirates and Gulf Cooperation Council nationals. “However, the same article also states that the registration of properties for foreigners [including non-Arabs], is subject to the ruler’s approval and order,” a source at the SCC told the paper.

Sharjah, one of the poorest Emirates, was expected to pass freehold laws to entice investors for the mega projects currently being developed, such as the $4 billion Sharjah Marina and the multi-purpose, 60 million square feet Al Nujoom Island, which is to have 1,000 villas completed within the next 18 months. The new law is expected to be enacted soon.  

June 5, 2010 0 comments
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Banking & Finance

Money matters bulletin

by Executive Editors June 5, 2010
written by Executive Editors

Regional stock market indices

Regional currency rates

MAF mall empire set for $3.5 billion expansion

Majid Al-Futtaim Properties (MAF), the Dubai-based retail, property and investment company, aims to double its portfolio by 2015 with 14 new projects in Saudi Arabia, Egypt, Lebanon, Yemen, Qatar, Syria, Oman and the United Arab Emirates. MAF Properties, which is famous for building an indoor ski slope in Dubai, currently runs 10 malls across the Middle East and North Africa region, and plans to invest $3.5 billion in the coming five years to build four new shopping malls in Lebanon, Syria, Egypt and the UAE. The malls are scheduled for completion by 2014 and will increase the company’s total gross leasable area from 800,000 square meters to more than 1.3 million square meters. The group’s chief executive, Peter Walichnowski, declared that sales in the company’s malls were not significantly affected by the global financial crisis. He added that shopping malls were important infrastructure for modern living in the Middle East and North Africa region.

Doha’s new airport set to land

Qatar has announced that the first two phases of the $14 billion New Doha International Airport (NDIA) will be completed by the end of 2011. The initial phases of the airport will have the capacity to accommodate 24 million passengers and 1.4 million tons of cargo each year. The runway and the main terminal structure are already in place. When the whole project is completed, it will be able to accommodate 50 million passengers using 175 check-in counters, and will be surrounded by five artificial islands. The airport will also provide 50,000 jobs. Qatar is currently competing with its neighbors Abu Dhabi and Dubai to become the Gulf’s transit center, linking it with Asia and Europe. The project’s costs have increased substantially from the date of its inception in 2004, when it was estimated at $5.5 billion. 

Egyptian inflation falls

Egypt’s inflation rate fell to 11.4 percent in April from 12.2 percent in March 2010, its third drop this year and its lowest rate in seven months. The Egyptian Central Agency for Mobilization and Statistics reported that the improvement resulted from a decrease in the prices of food and beverages due to higher output from domestic manufacturers. Food and beverages account for more than 40 percent of the weighted basket of Egyptian consumption goods used to measure inflation. The Central Bank’s strategy of keeping interest rates unchanged and relatively low is paying off in terms of promoting growth, while keeping prices under control. Coupled with increasing rates of privatization, consumer goods manufacturing is advancing at the cost of a decline in industrial manufacturing, since the latter remains underdeveloped.  Finally, in terms of real gross domestic product, Egypt’s economy reportedly grew by 5.1 percent in the first quarter of 2010 from a year earlier, whereas it expanded by an annual 4.5 percent in 2009. 

June 5, 2010 0 comments
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Banking & Finance

Marwan Barakat

by Executive Editors June 5, 2010
written by Executive Editors

Marwan Barakat is head of research at Bank Audi. He sat down with Executive to discuss the issues currently facing Lebanon’s banking sector and possible solutions to the country’s fiscal woes.

  • What is the sector most lent to in the Lebanese economy?

The Lebanese economy is primarily a trade and service economy. These are the sectors that have the most important value-added. These are the sectors that are the most important drivers of growth. If you want to get technical, these are the sectors that have the lowest investment to value-added ratios. The breakdown of the bank lending over economic sectors is a mirror-image of the breakdown of GDP, by economic sectors. Banks lend to sectors that have [a high level of] economic value-added, so lending to the trade and service sector has grown significantly over the past few years.

Lending over the first quarter of this year has been very high. $2.3 billion in additional loans to the private sector in one quarter is unprecedented. Those loans were directed to residents inside Lebanon, resident companies or retail loans, or to a number of [corporations] in the region.

Because Lebanese banks have [a high level of] flexibility, they can go beyond borders and they can lend. They have very high liquidity in a period where liquidity has been relatively squeezed since the onset of the crisis in the region. So accordingly, banks have played the role of financing private sectors across the region, not only in Lebanon.

  • We still have expensive deposits on the books. With the surge in lending, do you expect that excess liquidity will no longer be an issue?

I don’t like to put it that way. Excess liquidity has played an important role for the resilience of the Lebanese banks throughout the financial crisis. Cash pays in tough times. In these tough times we had a lot of capital inflows targeting Lebanese banks and accordingly generating earnings and balance sheet growth. Earnings grow systematically and value-added to shareholders grows systematically, so accordingly, liquidity has paid off in these tough times.

I don’t look at it as excess liquidity. Do we have excess deposits when compared to the size of the Lebanese economy? That’s true — the capacity absorption of the Lebanese economy of these extensive deposits when compared to GDP [is] a ratio of 300 percent deposits-to-GDP. But for us this is an opportunity: an opportunity for regional expansion and for international expansion.

  • So have we exhausted the viable borrowers in Lebanon?

This is something we discuss internally on a regular basis. Our belief is that there is room for lending within Lebanon as the domestic economy is growing at a fast pace.

If the economy grows by 5 or 6 percent or more over the next few years then this definitely creates opportunities for the banks to lend to the domestic private sector, but not to the extent of absorbing all of the growth on the funding side. Accordingly, we are continually searching for opportunities within the region. Our corporate banking people are always on planes or on the road.

  • But GDP growth is expected to slow. Are banks expecting the GDP growth of 2009 to reoccur and is this a realistic expectation?

My official standpoint is that there is room for the GDP to grow at a high pace for a number of years to come because of the high cyclical output gap. The economy is operating at 70 percent of its potential output. This is our estimate.

The developing economies operate at an output gap. The output gap is the difference between actual output and potential output. Potential output is the output when all resources — labor resources, capital resources — are fully utilized. The developing economies in general are operating quite below potential output at varying degrees.

[Lebanon’s] economy has important capacities when compared to the actual output, which is still quite below the potential output. Why? Because we passed through difficult years: years of no growth.

  • Has there been any progress in making the Lebanese lira a standard of deferred payment?

There has been some progress but not enough. The efforts of the central bank led to an improvement in private sector lending in Lebanese pounds. If we look at the latest figures, the figures that were issued for March, we see over the past year we had close to $1.4 billion of additional loans in lira out of $5 billion of additional loans: close to 30 percent. Overall, Lebanese pounds represent only 15 percent of total lending, which means that somewhere, the new measures of the central bank have helped.

Does this mean that we have reestablished the borrowing function of the currency?

Definitely not; loans are still dollarized to the extent of 83 percent.

This effort, or joint effort between the central bank and Lebanese banks has to be reinforced and intensified so as to take advantage of our liquidity in Lebanese pounds.

  • Do banks want to stop relying on T-bills to soak up Lebanese lira liquidity?

Lebanese banks have, in relative terms, reduced their exposure to the treasury over the past few years. If you look at these exposures as a percentage of their deposits, or as a percentage of their shareholders’ equity, there has been a relative improvement in banks’ exposure to the government.

This is something that banks would like to continue to decrease, which would positively affect their financial standing, positively affect their risk profile, and ultimately the international credit ratings of those banks that are rated. But definitely, this depends on the ability of the government to find other sources of funding. But in case they do not, we are not going to shoot ourselves in the foot. We will continue subscribing to forthcoming issues in Lebanese pounds and foreign currencies.

The Ministry of Finance should consider issuing in Lebanese pounds and not in foreign currencies for a period of time. We have maturities in foreign currencies. If, for a two-year period, these maturities are not issued in foreign currencies but are instead issued in Lebanese pounds, then this would improve the risk profile of Lebanon and ultimately of the banking sector, and there is room to do that.

Because we have operating surpluses in Lebanese pounds, we are interested in investing those operating surpluses in Lebanese pound treasury bills. They don’t need to issue in foreign currencies. If they don’t, and give back the maturing bonds’ cash to the banks, then this would reduce the foreign currency debt, which is the main vulnerability indicator of debt, because of the fact that the Lebanese government can issue debt in Lebanese pounds and can print currency in Lebanese pounds and ultimately redeem the debt in Lebanese pounds. There is no default risk in Lebanese pounds.

The default risk is always in a currency that the country does not have a full mastery over. There should be a distinction between the two risks. We have $21 billion of foreign currency debt and our GDP is $33.6 billion, so we have a foreign debt-to-GDP ratio of close to 60 percent.

Imagine if in two years we don’t renew our foreign currency debts and they issue debt in Lebanese funds rather than foreign currencies. You have $3 billion in annual maturities, so [after two years] $6 billion. You have $21 billion of foreign currency debt today, so you will reach $15 billion in two years time while GDP will be above $40 billion. This is a 38 percent foreign currency debt to GDP ratio. Imagine how much this would improve the risk profile of the sovereign and of the banks.

  • Why hasn’t this been done?

I think that [the authorities] are increasingly more open to that. I think that the main reason is that when you don’t renew those maturities, you have to pay them in foreign currencies. Where do you get these foreign currencies? From the reserves. They don’t want to see the reserves declining [because confidence in local currency is derived from high foreign currency reserves at the Central Bank].

I believe that we can allow ourselves, rather than having $30 billion in foreign assets, to have $25 billion in foreign assets. The reserve level is very high so [$5 billion less] is not going to jeopardize confidence.

June 5, 2010 0 comments
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Banking & Finance

Banking with a stacked deck

by Executive Editors June 3, 2010
written by Executive Editors

If the global financial crisis taught the world anything, it was that the banking world and the real economy are two arms of the same body. But while countries around the world use both those arms to haul themselves out of recession, Lebanon has for years relied almost solely on its banking sector to drag the country’s economy forward.

“The most powerful section with regards to contribution to [gross domestic product] is the banking sector,” says Simon Neaime, professor and chairperson of the economics department at the American University of Beirut. “If the banking sector is not doing well, Lebanon does not do well.”

Luckily for Lebanon, the sector has been performing marvelously as the alpha banks held $122.17 billion in assets at the end of March 2010, according to the Bankdata financial services. That figure represents a 24.7 percent rise in the past year.

This is also significant for the job market, as the banks are currently the largest private sector employer in the country, according to Nassib Ghobril, head of economic research and analysis at Byblos Bank. Indeed, at the end of 2009 the banking sector accounted for nearly 20,000 jobs, a year-on-year increase of 6.2 percent according to preliminary 2009 results from ABL.

This claim may be somewhat undermined by government figures from 2007 which show that the sector only made up some 2 percent of total private sector employment and 1.6 percent of total employment. Current official statistics on Lebanon’s job market are unavailable due to the government’s apparent inability or disinterest in updating figures.

The ability of employees in the banking sector to contribute to GDP through consumption is dependent on their pay, which totaled  $667 million in 2008 (ABL’s latest available figure), accounting for 2.4 percent of total real GDP that year. That works out as an average monthly salary of just under $3,000 per employee for that year.

Employee pay is agreed on a yearly basis between ABL and the Union of Syndicates of Bank Employees (USBE), which is under the General Labor Union. The difference between the highest and lowest paid salaries is currently unavailable as the banks keep them confidential, according to George Hajj, president of the USBE.

Profit over productivity

By nature, the primary means by which a banking sector supports the economy is through lending to allow for consumption and/or investment. This creates jobs that contribute to GDP through further consumption and investment.

The most recent consolidated figures from the Banque du Liban (BDL), Lebanon’s central bank, show total lending to the private sector at the end of February reached $33.2 billion from financial institutions, $25 billion of which came from commercial banks.

As per the latest estimates from the Ministry of Finance, GDP in 2009 hit $34.5 billion, roughly comparable to the $31.6 billion of active loans in the economy at the time.

According to Ghobril, when banks decide how much they will lend to each sector of the economy, they look at how much each sector contributes to GDP and allocate their loan portfolio correspondingly. Yet this approach may not be the most conducive to boosting overall output, as banks limit the amount of loans to more productive sectors such as agriculture and industry.

“When banks give out loans they are after profit, and directing those loans to productive sectors in the economy is not a lucrative business,” says Neaime, explaining that these returns take longer to mature, given that it takes time for the borrower to translate the loans into business growth to make repayments; turnaround on consumer loans, among others, is much shorter.

“When you buy a car you contribute to GDP when you make the purchase but afterwards, that’s it,” he adds. “It’s money lost.”

The most recent figures at the end of February showed lending to agriculture at just 0.8 percent of total lending. But there are some extenuating circumstances at play in Lebanon’s agricultural sector.

“You don’t have companies to lend to, you have small farmers,” says Ghobril. As such, lending to a large part of the agricultural sector is included under the classification “individual lending,” which makes up 22.1 percent of total lending.

Agriculture could be seen as a missed opportunity for the banks, given that despite infrastructure constraints, the sector has been growing. According to Bank Audi, during the first quarter of this year agricultural exports hit $48 million, a 38.7 percent jump in value over the same quarter in 2009, with a corresponding 21.8 percent increase in volume, indicating that the higher value traded was attributable to more than just inflation.

Industry takes a larger share of lending, comprising 11.5 percent of total loans at the end of February 2010, down 1.9 percent since the beginning of 2008. Figures provided by Bank Audi would suggest that this sector has also been showing growth potential, with exports up 11.3 percent in the first quarter of 2010 year-on-year.

Industry has its own problems, however, according to Ghobril, who says the sector is not broken down into sufficiently accurate subcategories, or ‘codes,’ to allow the banks to manage their risk portfolio and allocate more loans to encourage growth.

The Ministry of Finance generally lacks a methodical breakdown of each sector’s contribution to the economy in its GDP calculations, though Ghobril says the Central Administration for Statistics (CAS), Lebanon’s official body for statistics, is currently working on a program to unify subsector codes in the economy.

“As banks we don’t know the subsectors of each industry and their exact size or number. There are overlaps between numbers and codes,” he says.

Nader Keyrouz, head of economic statistics at the CAS, says that the unified codes have actually been completed and are in use at the finance ministry, and have been disseminated to the private sector but are yet to be implemented.

More real estate eggs in banks’ baskets

From what is known about Lebanon’s economic sectors, the lion’s share of loans go to real estate. At the end of last February, loans to the sector totaled $12.2 billion when combining loans for construction, housing and rent.

Using the finance ministry’s latest GDP estimate at the end of 2009, loans to the sector amounted to around 33 percent of the economy at the time. Bank loans to real estate have increased 59 percent from the beginning of 2008 to February 2010.

In light of this recent rapid growth in Lebanese bank exposure to the property market, especially given the catalytic role real estate around the world played in the global financial collapse, one might think it prudent for the banks to show restraint in approaching future growth lest this bubble burst, but alas, there is little to be found:

“I am not at all concerned about any real estate bubble in Lebanon… whatever the banks’ exposure,” says Freddie Baz, chief financial officer at Bank Audi.

There is some rationale behind this thinking, as developers can only leverage their projects by 60 percent and the local market is less speculative than, say, Dubai in 2007. But no matter what precautions are being taken, prudence does not seem to be the trend in the market today. During the first four months of this year construction permits hit 5.1 million square meters, 59 percent more than the total issuance of 2009.

Should something trigger price deflation, or if a slowing economy impacts debtor’s repayment facilities, the consequences could spiral. 

“I see it backfiring soon,” says Neaime. “I see a bubble forming because the banks are all venturing into that business and inflating prices, and when you do that there is risk of a crash.”

According to Ramco, a local real estate advisory group, in the five years to February 2010, property prices increased some 120 percent on average at the lower end and 150 percent at the higher end.

Debt impediment

It is understandable that banks focus their lending portfolio on the more profitable, transparent, and — at least in the short-term — less risky segments of the economy. After all, it is not the banks’ role to protect the public economic interest. Yet, when it comes to Lebanon, government policy since the end of the Lebanese Civil War has produced a situation where the government and the banks are “co-dependent,” according to Moody’s investor service, and thus there are many in Lebanese society who hold the banks partly responsible for the current debt situation.

Moreover, because liquidity levels are at an all-time peak and interest rates on deposits in local currency are relatively high, continuing to bankroll the government by buying up treasury bills has become a profitable option — even if it means increasing the volume of their exposure to government paper. 

“Let’s not fool ourselves, for the time being, with that much in-flow of money and growth in deposits, the Lebanese economy does not have the means to absorb or to use this money,” says George Abou Jaoude, chairman and general manger of Lebanese Canadian Bank. “And the banks do not have a choice but to go into sovereign securities. Of course, we are trying to go into some sovereign tools abroad, but the return is much lower than the Lebanese ones.”

Last year the government paid out $4.27 billion in debt servicing, while total expenditures amounted to $11.6 billion, finance ministry figures show. This means that more than $1 out of every $3 the Lebanese government spent last year went to pay the interest on money the government owes, largely to Lebanese banks.

At the end of March, the latest available figure, local commercial banks held $29.5 billion in claims on the Lebanese sovereign, according to the BDL, while the gross public debt stood at $51.5 billion.

The future amortization schedule of the debt shows that this year the government will need to roll over $11.1 billion in loans; next year it will be more than $12.8 billion.

 A crowd is gathering

As any couple knows, honeymoons don’t last forever. And the situation of late has been something of a honeymoon — one where deposits have grown, spurred by the safety and high interest rates that Lebanon’s banking sector offered during the global financial crisis, and its corresponding ability to lend to the growing public and private sectors.

There are signs that the good times may be coming to a close, however, with the International Monetary Fund predicting growth slowing to 6 percent this year and 4.5 percent in 2011. Mild troughs are not a problem in diversified economies — Lebanon’s, however, is not.  

Since banks lend to the private sector according to how large it is and slowing economic growth means the same for private sector growth, banks will be lending Lebanese businesses less. The attractiveness of the Lebanese banking sector — and the trend of high deposit growth — may be susceptible to a slowing economy, not to mention the distraction of new investment opportunities abroad being created by the abatement of the financial crisis.

The BDL has also recently eased restrictions on lending to non-residents, making it more attractive for the banks to lend outside of the economy. While Lebanese interest rates are still high compared to global standards, the trend of falling rates could eventually sour the attractiveness of placing deposits in Lebanon.

Last July, interest rates on Lebanese lira deposits stood at a weighted average of 7.02 percent; in March they had fallen to 6.11 percent. Similarly, the weighted average of dollar deposit interest rates fell from 3.19 percent to 2.86 percent. It is apparent that market sentiment still deems these rates attractive, however, as capital inflows rose 65.4 percent in the first quarter of 2010 relative to 2009, totaling some $4.3 billion.

In the 2010 budget proposal the government projects hiking the deficit by 35.5 percent to $4 billion, which, to a large extent, will have to be borrowed from domestic banks.

Furthermore, government contribution to GDP — basically government spending minus debt servicing — is set to increase by 20 percent to $9.12 billion, or 24 percent of the finance ministry’s total estimated nominal GDP for 2010. Ghobril argues that funding GDP increases through public debt is “absolutely not” sustainable and keeps the banks cautious which, in turn, stems economic stimulation through private sector lending.

Neaime says that: “When government spending goes up, interest rates rise and consumption and investment go down because there is a crowding out effect on private consumption and investment.”

“We are already in a problematic situation but we are benefiting from some short-term factors which are contributing positively to the economy,” he adds. “But these are effects that will soon vanish.”

So while things are good now, it would seem prudent for both the banks and the government to address their, and the economy’s, wider structural issues before they find themselves looking back and saying “what if?”

June 3, 2010 0 comments
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Banking & Finance

A view from the vault

by Executive Editors June 3, 2010
written by Executive Editors

Lending boom

Few heads were turned by the first quarter results of Lebanon’s banks. As expected, rankings and market shares were maintained, deposits continued to grow 2.5 percent for the quarter, and customers continued to convert their foreign currency into Lebanese lira in order to take advantage of the 325 basis point spread in favor of local currency.

“There are no surprises,” said Salim Sfeir, chairman and general manager of Bank of Beirut. “Each of the banks is maintaining its market share. It is very difficult to penetrate other banks’ share or boundaries.”

Yes indeed, all is quiet on the Lebanese banking front. Perhaps a little too quiet.

After the record deposits of 2009, Lebanese banks are dishing out credit like ice cream on a hot summer day.

Banks issued $2.3 billion in additional loans to the private sector in the first quarter of 2010, according to Marwan Barakat, head of economic research at Bank Audi, who called the growth “unprecedented.”

According to data from Banque du Liban (BDL), Lebanon’s central bank, as of February 2010 retail lending constituted 22.3 percent of total lending in the financial sector. Lending to consumers has been on an upward trajectory since February of 2009, when retail lending constituted 18.7 percent of total lending.

Loan to deposit ratios have also ticked up in the last year, with the alpha bank average rising from 28.84 percent at the end of 2009 to 30.6 percent in the first quarter of 2010. These figures are still quite low by any standards, with many UAE banks’ ratios straining to drop below 100 percent from a sector-wide average of 122.8 percent at the beginning of 2009, according to Credit Suisse.

Still, if Lebanon’s banking sector is to tout its resilience throughout the financial crisis as it does, it should not compare its solvency ratios to a market clearly working from a different playbook.

These increases are due to falling interest rates, especially in local currency, which made up 77 percent of first quarter loan growth, according to Bank Audi.

Lending rates in Lebanese lira have been falling steadily since January of 2009, with the average rate decreasing by 138 basis points since that time, falling from 10.07 percent at the beginning of 2009 to 8.69 percent in March 2010.

On top of the declining rates, the central bank circulars of last summer — which lifted reserve requirements on certain loan categories — sent some LL loans  down to rates of around 5 percent, making them much more appetizing for borrowers.

Players in the banking sector are pleased with the lending growth, as they should be. Consumer lending is good for the economy at large, enabling consumption and spending. Those players further state that Lebanese banks have the skills to mitigate the risk associated with strong retail lending.

“Its manageable. I believe the central bank has regulated this industry, following and controlling the expansion, and I think that the banks have strong risk management,” said Walid Raphael, general manger at Banque Libano-Francaise. “What we have seen is absolutely healthy.”

But if banks are moving into a new era of robust retail lending, the safeguards in place will need to be revisited to ensure that the accompanying risk is mitigated.

“Banks do have to be careful, of course, because there is a lot of liquidity in the market, and you don’t have a lot of investment opportunities. Then there is the high cost of maintaining strong liquidity,” said Alain Tohme, deputy general manager at Byblos Bank. “There is probably sometimes a tendency, when you have a lot of liquidity, to over-lend. But so far it has not happened. The loan to deposit ratios in the sector are still very healthy.”

 However, one sector receiving significantly more loans than the rest could well be cause for concern. And according to central bank data, that sector may be real estate.

“We should be worried about any kind of concentration,” said George Abou Jaoude, chairman and general manger of Lebanese Canadian Bank. “The problem is that the medial activity in Lebanon is real estate.”

Real estate is Lebanon’s bread and butter. Sfeir said that the real estate industry is to Lebanon what the stock market is to the United States; everyone has their hands in it in some way. In fact, according to the central bank, the combination of lending to construction, real estate renting and mortgages represented 37 percent of financial institutions’ lending as of February 2010.

“Its not a question of aggression,” said Sfeir, “It’s a question of whether the market is becoming real estate oriented. The banks are serving a demand more than creating a demand.”

But whether abundant credit is creating or reacting to demand, growth in real estate-related financing must be monitored closely after it crashed and burned financial institutions in other global markets.

“I don’t want to be the bad guy, but of course we have to encourage many other activities,” said Abou Jaoude. “But this is not the job of the banks. It is the job of the government to give incentives and to help other activities like small industry and a little bit of agriculture and software production.”

Still, bankers say that the market is yet to show all the hallmarks of a real estate bubble.“We don’t have real estate trading in apartments, so all of the apartments sold are to be lived in,” said Abou Jaoude. “There cannot be a bubble unless we have a lot of apartments unsold or sold to traders.”

High levels of leverage in the real estate sector are, of course, the biggest indicator of potential fallout; an issue which bankers insist is not a concern, despite the central bank’s lending figures.

Banks are restricted in their lending to developers, with the maximum credit issued to a development project capped at 60 percent by the central bank. However, there are no caps on the loan-to-value ratio when it comes to mortgages, though bankers say that full credit is a rarity.

“It is true that over the last year the ratio [of real estate loans to total lending] has increased compared to before, but I think it is manageable,” said Byblos Bank’s Tohme.

And with prices rising as they have been, the value of mortgages is growing too. Abou Jaoude said that today’s land prices are the “highest that Lebanon has ever seen.”

“In some areas here, the prices are as much as in Manhattan,” said Tohme, though he doesn’t think prices will increase further.

Industry players seem unanimous in their belief that the market will soon correct itself and that prices will not continue to rise.

“I think we should have reached the top in terms of prices. I don’t see them continuing to increase,” said Raphael. But if this correction doesn’t materialize, Lebanese banks need to prepare for both the spoils and perils of a new era of lending.

After the record deposits of 2009, Lebanese banks are dishing out credit like ice cream on a hot summer day

A snapshot of 2010’s first quarter

“It’s manageable. I believe the central bank has regulated this industry, following and controlling the expansion, and I think the banks have strong risk management”
— Walid Raphael

Government paper

Call it a love affair, called a symbiotic relationship, call it Stockholm syndrome: whatever you call it, Lebanese banks are irrefutably tethered to the finances of the country’s debt-laden government.

Bankers are never shy to say that they support Lebanon; that in effect the banks are Lebanon. But they make a point of carefully tiptoeing around their real sentiments toward the sovereign entanglement in which they find themselves.

Lebanese banks held $29.5 billion in claims on the public sector as of March 2010, with $18.3 billion of this in treasury bills from the Ministry of Finance.

It is no secret that the banks need government paper as a way of soaking up their excess liquidity, a motivation made even stronger in the recent years by record deposit conversions and a dollarization on the funding side of the balance sheet that decreased from 69.6 percent in March 2008 to 63.3 percent in March 2010, the lowest in 10 years.

Bank Audi estimated that for the first quarter of 2010, foreign currency to Lebanese lira conversions totaled $3 billion. At the same time, overall deposits increased by $2.4 billion or 2.5 percent in the first quarter of 2010, growing from $95.8 billion to $98.1 billion: nearly three times the country’s gross domestic product.

Without the local currency lending demand, bankers say that they have no better option but to put these funds to work in the form of treasury bills.

“What are the options that we have? We are giving loans but not everybody wants to take loans in Lebanese pounds,” said Saad Azhari, chairman and general manager of BLOM Bank.

The thirst of Lebanese banks for treasury bills was never more evident than earlier this year when they suddenly became unavailable. In March 2010, Finance Minister Raya Hassan decided to temporarily suspend T-bill auctions, as she noted that her ministry’s account at the central bank was sufficiently funded.

“It’s good to have reserve, obviously, and the approach I am adopting is to have in my treasury account, three months worth of future maturities, whether in Eurobonds or T-bills,” Hassan said to Executive in March.

The decision caused outrage from the banks, leading one banker to express their “anger and confusion.” According to Hassan, part of this reaction was due to an erroneous statement from central bank Governor Riad Salameh, stating that auctions would be suspended indefinitely. Salameh then began to issue short-term certificates of deposit, but this did not quell the banks’ ire. The banks’ addiction to government paper was clear.

Meanwhile, the credit ratings of Lebanese banks are effectively capped and can only rise with the sovereign ratings due to their massive exposure to the public sector. Bank Audi, BLOM Bank, Byblos Bank and Bank of Beirut all received ratings upgrades from Moody’s Investor Service in April, in conjunction with a sovereign upgrade. All four banks saw their long-term foreign currency deposit ratings increase from B2 to B1, still defined as “speculative,” “subject to high credit risk” and not investment grade, according to Moody’s.

But many bankers dismiss the ratings agencies’ low opinion of Lebanese banks.

“This is a consequence and not a force. This penalty has no [effect] on our market,” said Salim Sfeir, chairman and general manager of Bank of Beirut.

Some go further, rejecting not only the weight of such ratings, but also their valuation of Lebanon’s sovereign risk.

Lebanese banks continue to invest in their own sovereign, as opposed to participating in sovereign bond issues abroad. According to the Ministry of Finance, the government paid out $4 billion in interest on the public debt in 2009 and, according to the finance ministry’s proposed budget for 2010, that figure will increase to $4.34 by the end of this year.

With the banks holding approximately 57 percent of the public debt, the earning potential is clear. 

“We don’t look at those asset classes as being bad. We don’t share rating agencies’ views,” said Freddie Baz, chief financial officer at Bank Audi. “We don’t look at the sovereign risk as being a real risk. We don’t have any concern about the final outcome. The risk-reward is very enticing and we are getting nice returns on these securities.”

But treasury bill yields have been decreasing since the summer of 2006 and could soon lose their status as the gainful placement for lira liquidity.

The average yield on the 5-year paper dropped 36 basis points from 7.74 percent at end-2009 to 7.38 percent at end-February. And with rampant international expansion dominating the strategy of Lebanon’s banks, it may soon be time to reconsider the agencies’ proclamations as credit ratings may become more prized.

“What are the options that we have? We are giving loans but not everybody wants to
take loans in Lebanese pounds”
—Saad Azhari

Expansion and consolidation

Put on the back burner by political instability, Lebanese banks’ international expansion plans are now back in full force. But for most banks, ‘manifest destiny’ banking is more of a necessity than a mark of ambition, begging the question: would the sector benefit from consolidation?

With $95.8 billion in private sector deposits by the end of 2009, record high funds have exhausted the capability of Lebanon’s economy to absorb the plentiful liquidity in Lebanese banks, causing them to look to international markets for new growth opportunities.

“It is indeed difficult to find use for all the funds we are receiving so the only way to continue this expansion and to continue to grow our balance sheet is to continue to fund clients outside of the country,” said Walid Raphael, general manger of Banque Libano-Francaise.

Lebanese Banks are currently present in 27 countries throughout Europe, Africa and, of course, the Middle East, generally following their existing clients to other countries in which they do business.

Though central banks the world over are strengthening restrictions on foreign banks entering the market, due to the hit their domestic banks took during the financial crisis, Alain Tohme, deputy general manger at Byblos Bank, said that the Middle East’s banking markets are still quite open and welcoming to banks with expertise and good relationships with international organizations.

“Central banks are usually receptive to Lebanese banks entering because they know we [will be] investing in those countries,” said Tohme. “We are creating jobs in those countries. We are taking young people from universities, training and educating them and giving them jobs in the sector. And we are also participating in the development of their economies by financing trading and industrial activities.”

Lebanon’s Central Bank Governor Riad Salameh, a long-time advocate of international expansion, told Executive that Lebanese banks are now earning 20 percent of their profits from foreign operations and that he would like to see that rise to 50 percent in coming years.

This move should raise the credit ratings of Lebanese banks, which are currently hog-tied to the sovereign rating of Lebanon.

“Our market is small and it’s to nobody’s advantage to see one bank having a very big share of the
market, because then it will be a real monopoly”
— Salim Sfeir

Crowded at home

But global domination will not solve the oversaturation of Lebanon’s home market, where the more than big enough banking sector has locked each bank into its market share ranking so tightly that some say they will never change without consolidation.

Salameh said he will accept no mergers within Lebanon’s 11 alpha banks, but would support mergers between alpha and beta banks. His edict is a controversial one, garnering both fervent support and aggravated opposition from banks’ management.

Salim Sfeir, chairman and general manager of Bank of Beirut agrees with Salameh’s fear that a mega-merger would snuff out competition in the market.

“Our market is small and it’s to nobody’s advantage to see one bank having a very big share of the market, because then it will be a real monopoly,” said Sfeir.

Tohme agreed that large banks coming together could be to the detriment of the market, but said that this logic should be restricted to the top five or six banks. He also said market saturation could be improved if the central bank raised minimum capital levels for banks, which he says stands at approximately $7 million, a number out of line with regional standards. According to Tohme, banks opening in Syria are required to have minimum capital of $40 million, with the minimum increasing after a certain number of years of operation.

But along with those who are protective of Lebanon’s natural market, comes those who are dissatisfied with relying on only organic growth.

Bank Audi CFO Freddie Baz says that Lebanese banks will never be able to reach the level of regional status they deserve without such mega-mergers, dismissing mergers between tiers as inconsequential.

“For lobsters, acquiring shrimps? We are not talking about consolidation anymore. Real consolidation is lobsters getting together because this is what generates significant cost synergies,” said Baz. “Just imagine a merger between two of the top five in Lebanon, which are today executing similar regional expansion strategies, which exist almost in the same countries, which have almost the same profile of domestic networks — huge overlaps which could generate significant cost savings.”

So it seems that the need for consolidation is in the eye of the beholder, and as long as that beholder is Riad Salameh, Baz’s dream may never come true.

“I can understand, but I feel very frustrated,” said Baz.

“For lobsters, acquiring shrimps?
We are not talking about consolidation anymore. Real consolidation is lobsters getting together
because this is what generates significant cost synergies, ”
— Freddie Baz

A new romance

The notorious risk aversion of Lebanese banks and the drastic need for infrastructure development in the country they champion is making for something of an awkward time as they move on from a casual dalliance to meeting the parents of government securities.

Since the presentation of the finance ministry’s budget for 2010, chatter about private sector cooperation in infrastructure projects has been increasing, marked by high level meetings between government officials and bank executives. And while all parties agree that there is a definite need for public projects to begin without adding to the country’s mounting public debt, details have yet to materialize and the bankers are hesitant to jump into what could be a costly date.

Public-private partnership (PPP) projects have been heralded as a fail-safe way for the banks to make billions in revenues, but the expense of building a road or bridge and the time associated with such large projects present somewhat of an asset-liability mismatch that they would want to see mitigated before projects begin.

Saad Azhari, chairman and general manager of BLOM Bank, told Executive that most bank funding is short-term, which limits their ability to lend large amounts in the medium and long terms.

“There is a difference between buying a treasury bill that you can sell on any day and giving a loan for 20 years where it takes five to seven years to build something,” said Azhari, adding that politicians may see PPP deals as more straightforward and appealing than they really are.

The name of the game, therefore, in convincing banks to fund such projects, is cash-flow.

“At the end of the day what drives my decision in granting a loan is the capacity of any project to generate enough cash-flow to reimburse itself. So we will deal on a case by case basis,” said Freddie Baz, chief financial officer at Bank Audi.

While acknowledging the good PPP will do for Lebanon, he said that the decision to participate would ultimately be based solely on the financial merits of such deals.

“If they want to promote projects which by definition are not profitable and are not capable of generating enough cash-flow to reimburse themselves, we won’t finance them,” said Baz.

Along with good planning and well-structured deals, help from outside entities for both financing and advice will play a large part of the future of PPPs according to Alain Tohme, deputy general manger at Byblos Bank. “Lebanese banks cannot do it on their own,” he said.

BOT – or build, operate, transfer – is the deal structure most discussed, as it offers the highest profit for the private sector and therefore the best opportunities for the banks. But these plans require an amount of delegation from the public sector, which bankers seem unconvinced that the government will be willing to grant.

“Since I came into this business, I always said that the public sector should shrink: this is the key to reform,” said Chairman and General Manager of Lebanese Canadian Bank George Abou Jaoude. “This is the way to get a better Lebanon – through the shrinking of the public sector politicians would have less say, then the culture of Lebanese society would go back to the right path.”

Tohme said that PPP should only go forward, “provided that the government gives a clear role for the private sector… and there are clear regulations, clear directives and accountability.”

Of course, even if lucrative and sound plans are devised, the question of realization is always an issue in a country with a bureaucracy as intractable as Lebanon’s.

Baz likened PPP projects to the Loch Ness monster: everyone has heard about them, but no one has seen them.

Still, despite hesitation and a hint of pessimism, the banking sector seems to agree that PPP is the only solution to Lebanon’s stalled infrastructure development.

“At the end of the day you have to take a tough political decision to say we have to go down this road. If we don’t go down this road, nothing will go forward,” said Tohme.

“It’s manageable. I believe the central bank has regulated this industry, following and controlling the expansion, and I think the banks have strong risk management”

“Since I came into this business, I always said that the public sector should shrink: this is the key to reform”
— George Abou Jaoude
June 3, 2010 0 comments
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Since its first edition emerged on the newsstands in 1999, Executive Magazine has been dedicated to providing its readers with the most up-to-date local and regional business news. Executive is a monthly business magazine that offers readers in-depth analyses on the Lebanese world of commerce, covering all the major sectors – from banking, finance, and insurance to technology, tourism, hospitality, media, and retail.

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