Special SectionYoung Arab Leaders

Salah A.H. Al-Qahtani- Q&A

by Executive Staff
written by Executive Staff

Salah A. H. al-Qahtani is the executive vice president of Al Qahtani Pipe Coating Terminal and the chairman of the Saudi Arabian chapter of Young Arab Leaders (YAL). Executive magazine recently spoke with him about YAL’s critical role.

E  There’s been a lot of talk today about finding practical solutions to the problems young Arab students face, particularly with specialized education. Is that something affecting you in Saudi Arabia?

Yes, there is a lack of education, for sure. We understand it, but we have to just fix it, we don’t have to talk about it. What we have to do as business people is we have to train our kids. You have to build a team under your company. You build a team, and you educate them.

E  So, in other words, you see filling this gap as a responsibility of the private sector?

No, it’s not the responsibility of the business sector, it’s the responsibility of the government, but the question is, what can we do to boost it? In Saudi Arabia, we are a part of the government and at the same time we are not.

The way I see it, it’s like a wagon and a horse. The government is the wagon, but you need a horse — the business community — to move it.

The wagon, there’s a value in it, but you need the two together. And without the two, the government cannot build infrastructure that the businessman can use.

I’ve worked with a lot of charities, and I like to participate in a lot of government institutions, because the government has helped us to build. Our father and mother taught us to build for tomorrow — to build up young people who can help you in the future.

E  And this, I assume, is where Young Arab Leaders (YAL) comes in. How long has YAL been in Saudi Arabia?

YAL in Saudi Arabia started in 2004. I started two years ago, and I  took the chairmanship eight months ago.

E  What sort of initiatives have you undertaken?

The best that we have done, thanks to God, is we signed a deal with a Saudi economics newspaper. This is a huge deal for us. They can train the students in a number of fields, including even PR work, like how to deal with news. Also every event that they have, anytime they have a speaker, they will bring it to our group, and invite our YAL members. In the last six months, we’ve had an event every six weeks.

Also — this is very good news, everyone is so happy about it — we just did an agreement with Cisco Systems, two weeks ago. The plan is that we get 200 students, all mature boys, class ‘A’, from university, and they get to work with Cisco for between eight and 12 weeks.

E  Like an internship program?

Right. We had a party to celebrate the deal, and the chairman of commerce in the kingdom came.

E  And young people are signing up for this?

Just last week, the board of YAL Saudi — me and my colleagues — we went to all the universities and explained that we have this system; these are the pros of it, these are the cons, and we need students. I brought in seven, one of my colleagues brought in 10, and now we have already signed up 25 students.

E  Sounds like things are taking off in Saudi.

When I started as chairman we had 84 members. Now we have 118.

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Special SectionYoung Arab Leaders

Elwy Taymour- Q&A

by Executive Staff
written by Executive Staff

Executive sat down to talk with Elwy Taymour after a press conference announcing the opening of the YAL Egypt Branch, the appointment of Taymour as its chair, and the formal launch of a program called Learning for Life, which is “designed to help Arab students bridge the gap between universities’ academic output and the marketplace requirements.”

E  So here we are, minute one.

Right. We just started, this is minute one.

E  Egypt seems like a pretty big gap in coverage.

What happened was that Young Arab Leaders realized from the very beginning that Egypt was very important, but for two or three years nothing really happened.

E  Why not?

I think it just didn’t materialize. But the Minister of Investment came in with SODIC [an Egyptian company that has been running a pilot program for the past year], and they tried to push the program and start the chapter. What’s good about Egypt is that the nucleus of the program was started before all this was organized, so there’s a structure that we can build around to hit the ground running.

E  So tell me what’s been happening

We’re doing two main things. We have the Learning for Life program, and the grants associated with it, but then we also have donated money for labs, for actual labs at the universities and that’s going to be an ongoing thing. It’s always going to be there, it’s always going to be serving as place to offer training courses.

E  It seems that students coming out of university without the necessary training for the workforce is a real problem in Egypt.

It’s always been a problem with this region. I think more and more there’s a gap between people coming out of university versus what’s out there waiting for them. Everyone wants to be an engineer and a doctor, and there’s a ton of other things out there that nobody knows how to do. So, I think one of the main things of YAL is that each chapter will try to reduce that gap. By introducing courses, by maybe getting a little bit more of a headway than what the government is doing, in terms of providing these guys with a little more of something to look forward to when they come out.

E  Do you have any specific plans, now that you’re in charge?

To continue the initiatives that have already started, that’s one. Second, I really would like to start working in places other than Cairo, so the focus is also going to be, for me, like Alexandria, and some of the poorer places in upper Egypt. That’s a priority for us and to also encourage more people to dedicate some of their own time to participating in the programs.

E  You mean adults, or kids?

Whichever. Whether they’re people who decide to join the chapter, or people who are older and would like to volunteer some of their time.

E  Big plans, it sounds like.

Well, I think these programs are quite important, but I also think that what Egypt suffers from is a lot of little problems. I think fundamentally there are things that need to change in the country, but to begin with, there are smaller things. If you were to assume the quality of education is currently at 20 percent of its potential, for it to jump to 60 percent or 70 percent I think you need very small things to change. Getting kids exposure to the arts and things like that, I think, is something much more important that we can focus on that will create a much bigger impact. I think the most important thing right now are the small things that we can change.

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Special SectionYoung Arab Leaders

The first step in progress

by Executive Staff
written by Executive Staff

Dr. Omar bin Sulaiman, the chairman of Young Arab Leaders (YAL), didn’t have to pay very close attention at YAL’s annual forum in Beirut last month to pick up on the high levels of youth frustration — although it’s probably a good thing he did.

“How do you start?” a young woman, a YAL member from Egypt, asked from the audience. She was standing with a microphone in a large ballroom at the Habtoor Grand Hotel during a morning discussion on how to create more opportunities for youth. And she was expressing a recurring sentiment.

“Young people do not have enough expertise to write a correct business plan,” she said. “We end up with young people saying, ‘No one will give me a job if I don’t have the right connections.’ Meanwhile, the public sector says you need more education. The private sector says the public sector has to change first. Your parents say go find a job.”

Like so many others in the ballroom, she was feeling exasperated. For one thing, the financial crisis had severely limited job opportunities. But she had also found that gaps in higher learning left recent graduates just a little shy of what hiring companies expect from them.

This is precisely the role Sulaiman envisions YAL playing. YAL has big ideas and lofty goals — their four pioneering initiatives are education, entrepreneurship, dialogue and leadership — but Sulaiman is a practical man, and he believes in practical solutions.

He was sitting in the front row and wasn’t supposed to be part of the discussion — he’d already given some introductory remarks earlier in the day — but now he rose to respond to this young woman.

“Who here is ready to train someone on the spot?” he said, turning to face the crowd. Half the adults in the room raised their hands. “That’s 400 hands! We could start right here, with ourselves!”

It was a start

Later, during a break in the forum, Sulaiman told Executive, “frustration is a part of life… We all go through it. You know, your house, your friends, sometimes something frustrates you. It’s fine, it’s a part of life. As long as you move on from that.”

Over the past year, YAL has faced its own frustrations and challenges — the economic crisis being at the top of the list — and it has steadily worked to make itself more streamlined and structured. They moved away from the non-profit model. They elected their first CEO, Assem Kabesh. They opened a new branch in Egypt. And, as Sulaiman pointed out, they increased their reach to more that 4,000 “beneficiaries” — nearly half of them in the past four months alone.

“You want a culture of debate, but eventually you want to move on,” he told Executive. “You don’t want to debate it forever. Kill the issue, hammer the issue, but move on. That’s what I was trying to bridge. Stop saying, ‘Why aren’t you doing something about it?’ We need to say, ‘I’ll do something about it.’”

At lunchtime — over Lebanese cuisine at the hotel’s spacious pool bar — several students said they agreed with this sentiment. They wanted more solutions, and fewer debates, especially political ones.

“If we had gotten into politics this morning,” a young Lebanese YAL member said, “we never would have gotten out of the room.”

In the afternoon, Sulaiman’s practical problem-solving was put to a test. The YAL forum-goers divided up into smaller breakout sessions, with experts discussing each of YAL’s main initiatives.

At the session on entrepreneurship, Rami Makhzoumi, the moderator (also President and CEO of Future Pipe Industries,) took a cue from Sulaiman and used the opportunity to ask the members of the panel, all corporate executives, if they would be willing to pledge to consider the applications of any young men and women who went through a YAL training course. They all said “yes.”

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Executive Insights

Engaging employees for the company’s success

by Tommy Weir
written by Tommy Weir

In the midst of the financial crisis, most organizations are looking for a proven way to improve their financial performance.

The likelihood is that you are as well, and there is a proven way you can do it. Kenexa Research Institute (KRI) studies conclude that there is a relationship between employee engagement and an organization’s financial performance.

In the graph below we see that organizations with high employee engagement scores have two times the annual net income of those firms with low employee engagement scores. This data points to the fact that there is a direct linkage and correlation between engaging your employees and an improvement in your financial performance.

Global employee engagement & annual income

Source: Kenexa Research Institute (2009)

You may be wondering, “What is employee engagement?” According to Jack Wiley at KRI, employee engagement is “The extent to which employees are motivated to contribute to organizational success, and are willing to apply discretionary effort to accomplishing tasks important to the achievement of organizational goals.”

Simply stated, employee engagement = employee pride + employee satisfaction + employee advocacy + employee retention. In other words, engaged employees are proud and extremely satisfied with where they work. They’re so satisfied they tell people about it and recommend their company as a good place to work. Engaged employees rarely think about looking for a new job with another company.

Some organizational leaders are skeptical about assertions that employees can be this satisfied. If you fall in this category as a leader, you need to reflect on the research analyzing employee engagement and understand the conclusive evidence supporting this research.

The way that employee engagement relates to an organization’s financial performance is that it drives an employee’s performance in terms of conscientiousness, organizational commitment and productivity. Additionally, higher employee engagement reduces absenteeism and employee turnover. These combined factors give us the most important result of employee engagement: an improvement in an organizations’ service quality and customer satisfaction.

Since it’s most probable that your organization wants to improve its customer service and financial performance, let’s contemplate the most relevant question: “What can an organization do to improve employee engagement?”

According to Wiley, to increase employees engagement, organizations need the following. 

  • Leaders who inspire confidence in the future because employees want to know what the future is and how their work relates to it.
  • Managers who recognize employees and emphasize quality and improvement as priorities.
  • To provide employees with exciting work and the opportunity to improve their skills. Employees who enjoy their work and are encouraged (and given the opportunity) to get better, contribute the most to organizational success.
  • Most importantly, organizations must demonstrate a genuine responsibility to their employees and communities.

So, how do you think your company is doing on employee engagement? Let’s take a look in the Gulf Cooperation Council and see what employee engagement scores indicate.

Employee engagement in the BRIC countries (Brazil, Russia, India and China) and GCC

0 = employees are not engaged at all

80 = employees are highly engaged
Source: Kenexa Research Institute (2009)

On average, organizations in the GCC are in line with global averages when it comes to employee engagement. But they are way behind India, which has a highly engaged workforce,which is one of the reasons why Indian organizations perform well and grow. If organizations in the region want to be global leaders, there is tremendous room for improvement in employee engagement.

One of the peculiarities about the GCC is the dual workforce: homegrown (nationals) and imported (expatriate) talent. Do you think there is a difference between the engagement of nationals and ex-pats?

Employee engagement in the GCC — comparing  ex-pats to nationals

0 = employees are not engaged at all
100 = employees are completely engaged
Source: Kenexa Research Institute (2009)

The results across the GCC are scattered as to who is the most engaged: homegrown or imported. But on  the whole, organizations in the GCC and all over the world have an incredible opportunity to improve their financial performance by driving employee engagement.

In conclusion, is your workforce motivated to contribute to organizational success, and willing to apply discretionary effort to accomplishing tasks important to the achievement of organizational goals? It is important for every organization to understand its specific employee engagement score and implement a plan to improve it and, in turn, to improve the organization’s financial performance.

Tommy Weir serves as managing director of the EM Leadership Center

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Editorial

Orphans and the ghosts of martyrs past

by Yasser Akkaoui
written by Yasser Akkaoui

This month’s Lebanese elections will be dominated by orphans and the ghosts of martyrs past. On the March 14 ticket no less than five children — Saad Hariri, Walid Jumblatt, Nayla Tueni, Michel Moawad and Nadim Gemayel  — of slain politicians are all, in one way or another, forced to follow in a tragic tradition that has become the hallmark of Lebanese politics. Meanwhile, the opposition March 8 bloc has its own martyrs whose blood has helped make the soil of Lebanon so sacrosanct.

Yes indeed, we Lebanese do like honoring our dead, but the living must not be forgotten. It is of the utmost importance that our politicians, while recalling past sacrifice, do not lose sight of future obligations. Lebanon is a country dominated by its business community — its bankers, its financiers, its hoteliers, its restaurant owners, its retailers, its property developers, its traders and its small business owners.

From the mega-wealthy, who shape the Beirut skyline, to the shopkeepers on every street corner, business, more than politics, is what courses through Lebanese veins. Any future government, whatever its stripe, must provide to the electorate a robust economic blue print, a model to drag the country from its slough of despondency. Now is the time to deliver on the promises.

The good news is that regionally the markets are picking up, clawing back one third of the losses sustained since the meltdown. It is the first sign that the critically-ill patient is on the mend. More money will be pumped into the region, but this time it will be allocated prudently into those companies that have demonstrated they suitably restructured and shed the fat of corporate excess.

But this new financial nutrition will take time to filter into the region’s bloodstream, and in the meantime, new regulations must be adopted to ensure this new investment is safeguarded. Meanwhile, the price of oil is creeping upwards and this bodes well for regional economies.

For the moment, let’s hope the dead can breathe life into the living.

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Comment

The frontier of Iraqi investment

by Ranj Alaaldin
written by Ranj Alaaldin

At the Invest Iraq conference, held last month in London, a flood of investment projects and opportunities were presented by the Iraqi government to more than 250 foreign investors from British and international companies. The high-profile delegation from Iraq included Prime Minister Nouri al-Maliki, Deputy Prime Minister Barham Salih and officials from Iraq’s various ministries and provincial investment commissions.

This was going to be an all-out team effort because Iraq, quite simply, needs foreign investment and expertise. The country needs a colossal $400 billion worth of infrastructure to meet the basic needs of its population. It needs power plants to generate electricity (electricity rationing still occurs in the country); it needs water systems, new hospitals, schools, transport networks and more than 3.5 million residential units within the next 10 years at a rate of 350,000 per year. The list continues to include agricultural and food production needs.
Falling oil prices mean Iraq is unable to independently fund its reconstruction and is looking to the private sector for funds. It exports a mere 1.8 million barrels per day (bpd), far below potential for a country that has a 119 billion barrel oil reserve (the third largest in the world) and which expects to get 86 percent of its revenue from oil in the coming year. Its desperate need for funds was highlighted by its recent reversal over Kurdish oil exports, now permitted through the country’s national pipeline and into international markets. Oil from the TaqTaq and Tawke oil fields in the Kurdish north should bring in a revenue stream of $5 million per day (at $50 per barrel) from what initially will be exports of 100,00 bpd in June, but which could rise to 250,000 bpd down the line.
At the London conference, Iraq’s oil minister Hussein al Shahristani said the oil industry needs an estimated $50 billion over the next five years to repair and upgrade the oil industry, still suffering from decades of war, sanctions and financial neglect. Still yet to be passed, however, is an oil law that provides for revenue sharing from the production and exploration of Iraq’s oil. Until heated disagreements between Baghdad and Erbil are resolved and the law is passed, foreign investment and expertise will stay away.
But it is not just the oil law that keeps foreign investors away. Corruption is rampant and, as it stands, a foreign investor can take man, machine and money to Iraq only to be prohibited from purchasing land, although the government is attempting to change this. At the London conference investors expressed concern at what they feel is an ambiguous regulatory and legal framework that fails to guarantee, in clear terms, how they will be protected. Foreign investors, for example, can transfer abroad any profit incurred during the course of business, pursuant to Article 11(1) of the Investment Law 2006; however, banks do not open accounts in the name of foreigners and the Companies House does not register shares to foreigners. Of greater concern still is that government agencies and ministries do not always act in accordance with the same law that investors are required to.
The aforementioned obstacles are arguably transitional, and expected in a nascent democratic state recovering from totalitarian rule. The Iraqi government’s 500 different investment projects across the various sectors means serious opportunities exist to stake a claim in the country’s future. More than $10 billion worth of British and international investment deals are currently on the table, and investors from the region and the Gulf states have already stepped into the market.
Moreover, Iraq’s banking sector is dramatically improving. The Trade Bank of Iraq has increased its assets to $10 billion from $2.8 billion in 2006. Iraq needs a stable banking sector if the economy is to reach maximum potential: the country now has six state-owned retail banks and more than 30 private banks, including international bank HSBC. But only 2.7 million Iraqis have bank accounts and persuading Iraqis to trust the banks and part with cash will be the hard task.
It would be premature to maintain that investors should flock to Iraq without hesitation; in addition to the aforementioned issues, security, although improved, is still a matter for consideration. Baghdad has the necessary vision, as illustrated by its decision to contract Lebanese consultants Khatib & Alami to draw up a construction masterplan for the city. The next step is to place greater emphasis on a three-pronged attack that dispels uncertainty not just over Iraq’s economic and investment needs, but also its political and security needs, all interwoven and interdependent on each other.

Ranj Alaaldin is a Ph.D. candidate at the London School of Economics focusing on post-invasion Iraq

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Finance

Lebanon – Insulated, not impervious

by Executive Staff
written by Executive Staff

“Boring banking,” said Freddie Baz, “is why Lebanese banks have been insulated from the crisis.”

Baz, the group chief executive and strategy director at Lebanon’s biggest bank, Bank Audi, said the “lack of sophistication” in commercial banking was the key factor protecting the Lebanese banking sector from the financial turmoil plaguing the rest of the world.
Other factors have been the conservative policies set by Banque du Liban (BDL) — Lebanon’s central bank — and traditional, prudent strategies used by domestic banks. Last year the average profit for the top five banks topped 20 percent. Those record breaking profits are in the past, but early 2009 numbers seem to indicate Lebanon’s banks are doing just fine: Bank Audi, BLOM Bank and Byblos Bank — the three largest in Lebanon — posted total profits of $149 million in the first quarter of 2009, a 13 percent gain on the same quarter last year, according to a BLOM Bank report.
Still, Lebanon has not been immune to the financial crisis, said Francois-Pascale de Maricort, chief executive officer of HSBC Lebanon.
“It’s quite obvious that Lebanon has been affected by the global markets,” he said. “If you look at the growth rates, Lebanon recorded a very high rate of 8 percent last year. This year we forecast growth to be between 3 to 4 percent.”
But at least it’s still growing, unlike Lebanon’s regional brethren.  To deal with the slowdown, banks have maintained the status quo, using the same strategies to try to mimic last year’s success. But while Lebanese commercial banks have been insulated from the global turmoil and remain resilient, they are not isolated, nor immune.
As a natural repercussion from the global circumstances, profitability among banks is expected to slow year-on-year, but still achieve positive results. Foreign remittances from Lebanese expatriates working abroad may also decline. It is important to note, however, that confidence in Lebanese banks remains high.
“So far in Lebanon we have been quite protected, we haven’t seen a decrease in remittances; the real estate market is doing quite well,” said de Maricort.

Banque du conservatism
The BDL prohibited Lebanese banks from purchasing sub-prime products and derivatives in the West and built up its foreign reserves to $13 billion, which acted as a preventive measure to guarantee the Lebanese lira’s stability. The central bank ordered banks to have a minimum of 30 percent of their total assets in cash and also set rigid loan level ceilings for real estate projects.
In November 2008, central bank Governor Riad Salameh announced the combined assets of Lebanon’s banks totaled more than $100 billion — four times the country’s gross domestic product. Bankers agree that BDL and domestic banks take pride in shying away from complex investments and structured products that they do not understand. Although criticized by some bankers at first, the policy turned out to be prudent and beneficial, given the events of the last eight months.
Most recently, the central bank has been working on freeing Lebanese banks from mandatory reserves for projects financed in Lebanese lira between 2009 and mid-2010, excluding real estate projects and consumer loans. This move would cause Lebanese lira interest rates to fall by 2.25 percent, thus lowering the cost of borrowing in local currency to a favorable 7 percent.
EFG-Hermes research believes that the “central bank is seeking to lower interest rates indirectly to preserve high interest rates on deposits, which are vital in ensuring capital inflows at a time when other inflows, including remittances, are expectd to decline.”
Clearly, higher interest rates on deposits in local currency will entice and encourage depositors to place more capital in domestic banks. Dollarization of accounts dropped from 77 percent in March 2008, to 67.7 percent by March 2009, a four-year low, as mass capital inflows streamed into the local banks after the infamous fallout of Lehman Brothers in September 2008, in order to benefit from divergent interest rates between the Lebanese lira and the US dollar.
The central bank’s strategy seems to be working well, as deposits in Lebanese lira have risen nearly 10 percent from the end of 2008 and by almost 62 percent year-on-year. Deposits in foreign currencies increased by a mere 0.7 percent since the end of 2008, and only 2.9 percent year-on-year.
After the fallout of Lehman Brothers, the somewhat unexpected influx of liquidity allowed Lebanon to bask in balance of payment surpluses of $1.4 billion in the first quarter of this year, as opposed to a $200 million deficit in the first quarter of 2008. This plan is in line with other BDL steps aimed at increasing lending in Lebanese lira, hence giving the central bank an even larger role in stimulating the economy and reducing risk potentials.
The role of the central bank is a contentious subject among banking experts and executives.
Economist Marwan Iskandar said BDL has “done a good job of making banks and individuals avoid very large [losses],” but that the “central bank has become the biggest private bank in Lebanon.”
“This is not its role,” he said.
For example, Iskandar said it is atypical for a central bank to own shares of a casino — BDL currently owns 42 percent of Intra Investment Company, which owns Casino du Liban — or own a national airliner, in this case Middle East Airlines.
Yet, the argument against such statements is that the central bank saved these entities from demise when no one else could, and that privatization will eventually happen. Iskandar said he does not want to see the central bank go ahead with plans to amplify its role.
“In recent months, the central bank has received a truly inflated image and they need to settle on the basics,” he said. “With the governor, [the four new deputy governors] should concentrate on trimming the role of BDL, not expanding it further; it has expanded beyond principles of real guidance for a free economy.”
Most experts are less harsh on the central bank, as over the years it has established a very positive relationship with local banks.
Laila Sadek, associate director in the financial institutions group at Fitch Ratings in London, said the relationship between BDL and Lebanese banks is “mutually supportive.”
Saad Azhari, chairman and general manager of BLOM Bank, echoed this perspective.
“We have an excellent dialogue,” he said. “There is a lot of trust between the banks and the central bank, which has proved to be very important in critical times such as 2005 and 2006.”
Unfortunately, one thing the central bank cannot protect the sector from is political instability.

Red, white and green
Infamously known for its volatile social and political environment, Lebanon made a comeback after the Doha Accords in May 2008. With the scheduled June 7 parliamentary elections, the question of confidence in the Lebanese economy arises.
Salim G. Sfeir, chairman and general manager of Bank of Beirut, said the biggest threat to the banking sector is “any disruption in the country’s political stability.”
“There is no financial soundness in the presence of political shakiness,” Sfeir said.
“There is always a problem of uncertainty,” said Azhari. “So for people wanting to make major investments in Lebanon, they won’t want to do so before the period of uncertainty passes.”
HSBC’s de Maricort said that so long as the situation remained relatively peaceful, the country’s economy and banks wouldn’t take any major hits.
“So far things are going well, we haven’t seen specific tensions,” de Maricort said. “Investors may delay some projects or investors wait until after the elections.”
Even with the regular political instability, it seems Lebanese confidence both inside and outside Lebanon has not waned.
Foreign remittances by expatriates were the best confirmation that Lebanese abroad viewed local banks as safe havens, totaling $6 billion by the end of 2008. The Economist Intelligence Unit (EIU) believes that the elections will bring political uncertainty, which could have a negative impact on the flow of foreign remittances.
As the country remains highly dependent on remittances, Salameh and others have forecasted a worst case scenario of a 10 to 30 percent drop in remittances by the end of the year. Bankers in the country claim otherwise, though the second quarter is yet to be closed and no numbers can validate such forecasts just yet.
“It’s just speculation,” said Walid Raphaël, deputy general manager of Banque Libano-Française (BLF). “A reduction in remittances has not materialized, but we have not seen any figures.”
With the undeniable regional and global recession, it seems inevitable — and a natural consequence from the ripple effect of the crisis — that remittances will decline to some extent. This is not to say that the Lebanese diaspora will not continue to send money back home, just that their capital will not be as plentiful as before.

The perils of public debt
One of the chief problems the Lebanese economy faces is the size of its national debt. Currently, the net public debt stands at $47.8 billion, constituting an increase of 1.8 percent from the end of 2008 and a 10.7 percent rise from the end of March 2008. As of March 2009, commercial banks account for 56 percent of the total debt, while BDL holds 21 percent of the debt.
The government borrows from the local banks in the form of treasury bills and Eurobonds. Bank of Beirut’s Sfeir explained that domestic banks’ “aggregate subscription in Lebanese treasury bills and Eurobonds exceeds 30 percent of their deposits base.”
With interest rates ranging between 8 and 11 percent (depending on the maturity date), it is favorable for the government to continue borrowing from the domestic banking sector rather than foreign entities.
According to Sadek of Fitch Ratings, the loan relationship between the government and local banks is beneficial for both sides.
“It’s a very lucrative business, but on the whole banks would be happy to reduce their exposure to the sovereign if that were possible.”
With the government’s worrisome finances negatively affecting Lebanese banks’ international credit ratings, domestic banks would, unquestionably, like to see the debt reduced.
Nassib Ghobril, head of economic research and analysis at Byblos Bank, agreed, saying the “last thing” banks want is for public debt to increase. The government’s debt is already estimated to increase by $4 billion this year. Ghobril said banks would prefer to redeploy their liquidity elsewhere.
“[The] bloated public sector is an obstacle to economic growth in the country overall,” he said. “The government has to reduce its structural, fiscal deficit and the public debt by doing reforms, improving the investment climate and the business environment, which would help raise the rating of the country.”
Georges Abou Jaoude, chairman and general manager of the Lebanese Canadian Bank, said banks are treating the Lebanese government with kid gloves.
“We are making life easier for the politicians. We should put many more conditions when we lend [to] the government,” Abou Jaoude said.
On top of properly addressing the public debt, there are many benefits to the government conducting financial reforms.
“The Lebanese economy has a huge potential and we need politicians to help raise this potential, but this will only happen through new reforms,” said Raphaël of BLF.
Similarly, Ghobril urged politicians to get their house in order.
“Whoever wins [the election] and whatever the formation of the cabinet, they need to realize the urgency of putting financial and economic issues as top priorities, and letting political decisions be taken to serve these priorities,” Ghobril said. “This is long overdue, because politics trump economy and finance.”
BLOM Bank’s Azhari would like to see the new government accomplish what the present administration and its predecessors have been unable to do. He said privatizing Electricité du Liban, the mobile networks and MEA would be a good start. Also, the structure of the public debt should be improved, in order to boost the economy’s potential and increase bank capitalization. The good news is that even with the turbulent circumstances in the global markets, Lebanese banks continue to enjoy high levels of liquidity.
According to Sfeir, the Lebanese banks’ robust balance sheet liquidity is one of the highest in the world.

Cash is king
Although liquidity is abundant in the banking sector, the structure of this cash has changed since May 2008. This modification is due to the large conversion of US dollars to Lebanese lira after the Doha Accords, when depositors gained confidence in the Lebanese currency.
And while the structure of the liquidity has changed, it has undoubtedly been altered to the benefit of the Lebanese economy as confidence in the local currency continues to rise. HSBC’s de Maricort said no matter what its form, liquidity is a key ingredient to a successful banking sector and economy.
“For all banks one of the top issues is to make sure we keep a high level of liquidity, because we’re in a very volatile global environment,” he said.

Rule of many, by the few
The number of banks in Lebanon has left top bankers anticipating a serious consolidation in the near future. Lebanon boasts 52 commercial banks and could easily cut this figure in half, while still being able to cater well to its population at home and abroad. Byblos Bank’s Ghobril said Lebanon must get down to 20 banks. Iskandar describes the banking sector as “oligopolistic,” as the top 10 banks account for 90 percent of the total balance sheet of all domestic banks in Lebanon.
De Maricort said he would not be surprised if mergers and acquisitions take place in the near future.
“It would make a lot of sense to consolidate, due to the over-banked nature of the banking sector.”
Frustrated with the central bank for not encouraging consolidation in the sector, Bank Audi’s Baz said he would like to see two or three mega-mergers within the top 10 banks. Although a number of mergers have taken place, they’ve been anything but momentous.
“What we have witnessed so far is lobsters eating shrimps,” Baz said. “What we need in Lebanon is lobsters marrying each other.”
According to Baz, the big banks “swallowing” medium and small banks are “not real consolidation.”
Raphaël, of BLF, highlighted the fierce competition that exists between local banks.
“The Lebanese are getting the benefits of this competition through unbelievable rates for their deposits and their credits,” said Raphaël. “Mergers and acquisitions are something that banks need to be larger, stronger and play a major role in the regional and global scene.”
Even with the current international circumstances, regional expansion is seen as a key for Lebanese banks to widen their presence and capitalization. Abou Jaoude of Lebanese Canadian Bank considered expansion as “a necessity” for domestic banks.

Conclusion
Lebanese banks will soon begin to see the inevitable slow down in economic growth in the coming months. Economic growth is set to slow in 2009, while consumer spending looks set to dip, with the volume of imports declining by 9.1 percent in just the first quarter of 2009, perhaps marking the beginning of a slowdown in domestic consumption.
Georges Saghbini, deputy general manager of SGBL, said that due to the anticipated slowdown in the real economy, banks will feel “a slower dynamic and a shortfall in transfers, thus a slowdown in consumption as well.”
The factors effecting the country’s growth are mainly political uncertainty, economic contraction of Western markets and the sluggish growth rates in the Gulf. These elements are also likely to have an implicit impact on foreign remittances and Lebanon’s tourism, real estate, construction and financial sectors, according to the EIU.
But the potential for damage is cushioned by the Lebanese banks conservative management and the central bank’s policies. With the high levels of liquidity, little exposure to real estate lending, robust deposit bases and strong support from the central bank, Lebanese banks are well positioned to weather the global economic storm.

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Kuwait the unforgiving

by Paul Cochrane
written by Paul Cochrane

It’s been 19 years since Saddam Hussein’s army invaded Kuwait, and six years since the United States led the invasion that overthrew the dictator, but Kuwait is still demanding reparations from the Iraqi people.

According to Kuwaiti officials, Iraq still owes $25 billion in war reparations, in addition to some $16 billion in loans that funded Iraq’s eight year war with Iran. At the same time, Iraq is considering a request for $7 billion in loans from the International Monetary Fund as it struggles to pay for reconstruction. Oil revenues have plunged from $7 billion in June 2008, to just over $2 billion in May.
Given the beleaguered state of Iraq, and all it has been through, it is high time that these reparations and debts are confined to the dustbin of history, finally closing the chapter on the Saddam Hussein era.
It is outrageous that a country that is among the richest in the world, with a per capita income of $41,000, is forcing Iraqis, with a capita income of just under $4,000, to pay for Saddam Hussein’s actions.
Kuwait was, after all, no innocent bystander in the Iran-Iraq war, or a hapless victim of the 1990 invasion. It helped fund the war and was happy to have Iraq do all the dirty work to contain and weaken the fledgling Islamic Republic. Kuwait had goaded Iraq from the outset of the end of the war, allegedly violating OPEC agreements by increasing oil production pumped from the disputed Rumaila oilfield, which is partly in Kuwait but mostly in Iraq.
The increased production caused oil prices to tumble. Iraq accused Kuwait of waging “economic warfare” and violating Iraqi sovereignty. Baghdad estimated the loss in revenue cost Iraq’s treasury an estimated $4 billion per year, which the regime said it needed for reconstruction. After a 16-month standoff, Saddam made his fateful mistake and invaded his southern neighbor. The Iraqis have been paying economically ever since.
After the end of US-led war to expel the Iraqis from Kuwait, the United Nations Compensation Commission (UNCC) was created to assess and payout claims, with Kuwait claiming $386 billion in damages. Individuals and businesses from 100 countries also filed claims. Multinational corporations have received vast sums, not for war damage, but for “profit loss” and “lost potential earnings.” As of April, according to the UNCC website, Iraq has paid out $27 billion to the commission.
But as Kuwait reminded Baghdad, there is still a further $25.5 billion to pay. And then there are the other debts Hussein accrued with numerous nations around the world. However, following lobbying from the US after its occupation of Iraq, and pressure from organizations such as Jubilee Iraq, many countries have waived Iraq’s debts, most recently the United Arab Emirates writing off $7 billion.
Kuwait should follow suit. The 1990 invasion was a decision of a dictator, not the Iraqi people. Furthermore, history has numerous precedents of debts being written off that were made by an individual — the leader — not the country itself. And most famously, of course, reparations have been shown to have negative consequences, particularly if one recalls the outcome of the Versailles Treaty in 1919 that forced Germany to pay out billions, yet resulted in hyperinflation and acted as a catalyst for the rise of National Socialism. We all know where that led.
But while such an outcome is exceedingly improbable in Iraq, paying out reparations means there is less money for reconstruction. It is also disingenuous on Kuwait’s part to divert such funds away from Iraq, as an unstable and poor neighbor is not to Kuwait’s benefit, or anyone else for that matter.
To date, Iraq has received $125 billion in reconstruction aid, according to the US Government’s Special Inspector General for Iraq Reconstruction. Hundreds of billions of dollars more are needed. Oil revenues are expected to help in this regard, but with low oil prices and billions needed to upgrade energy infrastructure, Iraq is still years away from being able to allocate oil revenues to pay off debts when it needs money for reconstruction. Either debts are frozen until Iraq has ample revenues, or written off completely by Kuwait. This is what Iraq has asked for.
Equally, the whole reparations deal reeks. There have been innumerable wars and invasions since World War II and the victorious Allies rightly realized that reparations from Germany and Japan were a bad idea. Few, if any countries, have received compensation since then for being on the receiving end of aggression. The US has certainly never paid out reparations for the numerous wars and conflicts it has been involved in, while Israel has never paid a cent for the damage it has caused to the Arab economies, left to foot the bill from decades of Israeli aggression.
While Kuwait has not acted militarily, the Gulf state’s demands are not healthy for Iraq, for its border with its neighbor, or for the region. Kuwait’s requests should end and allow a more prosperous Iraq to develop.

PAUL COCHRANE is the  Middle East correspondent for International News Services

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Finance

Banking Analysis – A look at the books

by Executive Staff
written by Executive Staff
  • In the first quarter of 2008, the five listed banks on the Beirut Stock Exchange (Bank Audi, BLOM Bank, Byblos Bank, Bank of Beirut and Bank BEMO) recorded a year-on-year average percentage change in aggregate profits of 24.1 percent.
  • Notably, Bank of Beirut (BoB) witnessed a 50.5 percent increase in profits in the first quarter of 2008, reaching $13.53 million.
  • From the first quarter of 2007 to that of 2008, the five banks’ average increase in total assets was 19.4 percent, illustrating healthy growth in each of the banks throughout the year.
  • Bank Audi reported the highest climb in total assets in the first quarter of 2008, totaling $17.55 billion, a 27.3 percent increase from the first quarter of 2007.
  • Customer loans amongst the listed banks increased, on average, 44 percent. Bank Audi and BLOM witnessed the most significant climbs in loans, with 60.8 and 50.7 percent respectively.
  • Deposits enjoyed a healthy year-on-year growth in the first quarter of 2008, averaging an 18.7 percent increase.

Results of listed banks for first quarter of 2008

* Year on Year

(1) Customer loans and deposits

Source: Byblos Bank Economic Research and Analysis Department

  • By the end of 2008, the net profits of the five listed banks on the Beirut Stock Exchange totaled $823 million, meaning earnings rose by 23 percent from the end of 2007, when total profits were $667 million. This increase is due to an overall growth in deposits, as Lebanese banks were seen as safe havens for depositors from both residents and non-residents of Lebanon.
  • According to Byblos Bank’s Economic Research & Analysis Department, the “average net profits of the five banks increased by 22.6 percent in 2008, constituting a slowdown from the average net profit growth of 34.5 percent in the first three quarters of 2008 and from the average net profit growth of 43 percent posted in the first half of 2008.”
  • Bank Audi witnessed the largest surge in deposits of 21.9 percent year-on-year, totaling $17.1 billion by the end of 2008.

Results of listed banks for 2008

* Year on Year

(1) Customer loans and deposits

Source: Byblos Bank Economic Research and Analysis Department

  • From the end of 2008 to the first quarter of 2009, customer deposits increased in all five listed banks, averaging a 4.44 percent increase. This shows the healthy capital inflow continuing to pour into domestic banks.
  • Growth in lending has slowed down in the first quarter of 2009. According to analysts, the global slowdown is affecting demand for credit this year; there is an especially marked decrease in demand for loans to non-resident Lebanese abroad whose projects were financed by Lebanese banks.  Of the top three banks, Bank Audi witnessed a 2 percent decrease from the end of 2008 in customer loans, whilst Byblos reported a decrease of 1.2 percent in customer loans. BLOM was the only bank to see a slight increase in loans, reaching 0.6 percent growth.

Results of listed banks for first quarter of 2009

* Year-on-year

**Change from end-2008

(1) Customers loans and deposits

Source: Byblos Bank Economic Research and Analysis Department

  • By the end of 2008, total commercial bank deposits reached $78.7 billion, a near 16 percent increase from the $68 billion total recorded in 2007.
  • Deposits in commercial banks and the central bank are — so far — growing faster this year than last, mainly because banks are investing less liquidity abroad where interest rates are lower. Thus, domestic banks prefer to place their funds internally at higher return rates.
  • Total deposit growth amongst the five listed banks on the Beirut Stock Exchange grew by 15 percent in the first quarter of 2009.
  • Due to global economic circumstances, swelling unemployment rates and, in particular, the considerable slowdown in the Gulf Cooperation Council economies, deposits are expected to slow by the end of 2009, yet still achieve positive, robust figures.

     

Commercial banks deposits ($ billions)

Source: Banque du Liban

  • At the end of 2008, the consolidated assets to liabilities of commercial banks operating in Lebanon totaled $94.3 billion (142 billion Lebanese lira). This is an increase of 14.6 percent from the end of 2007, when the aggregate assets/liabilities of commercial banks in Lebanon was $82.6 billion (nearly 124 billion Lebanese lira), a 10.7 percent year-on-year increase at the time. 
  • Due to the large size of the banking sector compared to the size of the Lebanese economy — with 52 commercial bank (including four Islamic banks) and abundant liquidity, local banks have the capability to expand beyond local borders. Many domestic banks continued regional expansion schemes throughout 2008, and plan to do the same for the whole of 2009.

Total assets/liabilities of commercial banks operating in Lebanon (End of period – Billion LBP)

Source: Banque du Liban

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New tracks for the peace train

by Claude Salhani
written by Claude Salhani

There has been a sudden change of pace in the Middle East peace-making process. After almost eight years of stagnation, of summit meetings that led to absolutely nothing other than photo-ops for the resident of the White House, the pace is suddenly picking up. For the moment only tidbits of information that are filtering through. Yet what seems certain is that the Obama administration has a new idea that will take the process forward.

The basis for all negotiations remains the Arab peace initiative, first introduced at the Beirut 2002 Arab League meeting. Almost every analyst inside the Washington Beltway is of the opinion that we are on the verge of witnessing something major.
Let’s back up: towards the end of April, King Abdullah II of Jordan was in Washington predicting doom and gloom, saying that unless there was a surge in the negotiations there would be violence on a large scale.
The people have had enough, the king told a select few over lunch in Washington, where he had met earlier with President Obama and major political and religious leaders. He delivered a message to the US leadership that Washington had better get involved in the peace process, and in a serious way. Only Washington’s clout, the prestige of the White House and the kind of pressure that only a US president can exert on Israel could save the day.
Jordan’s Abdullah came to the White House speaking for himself, as well as for King Abdullah of Saudi Arabia and President Hosni Mubarak of Egypt in advocating a sense of urgency for talks to resume.
The king is the first to agree that peace between Israel and the Arabs will not solve all the region’s ills. But, said the monarch, it will go a long way in appeasing anti-US sentiments and it will take away one leitmotif of terrorism in the Middle East.
But just a few days later the king is in Berlin talking about new opportunities and of a new conference involving Lebanon, Syria, Israel, Egypt, the Palestinians and many more countries and parties.
So what happened? And what is happening?
No one is talking officially, most noticeably Obama’s chief Middle East negotiator, George Mitchell. Partially, what happened is that the new White House plan realizes that all the Middle East issues tied to the question of Palestine must to be solved at the same time. And that is what makes this all the more difficult.
As the “mind map” illustration shows, all the pieces need to fall into place at the same time, otherwise they leave the door wide open for “spoilers,” those who remain opposed to the peace process.
This new idea, several specialists believe, would be based largely on the Arab peace initiative, a comprehensive plan to settle the Middle East conflict. It offers Israel recognition by all 23 members of the Arab League (22 states plus Palestine) in exchange for Israel’s withdrawal to pre-1967 borders.
Of late there has been talk of revisiting the Arab peace agreement and amending it, primarily so that Israeli Prime Minister Benyamin Netanyahu does not look, at least in the eyes of his constituents, to have given in too easily to US pressures. And although many see Netanyahu as a super conservative, it is worth remembering that it was the Likud party that returned the Sinai and yielded Gaza, and they may just finalize the peace with the Palestinians.
“Netanyahu is going to surprise us all,” Benjamin Ben-Eliezer, an Israeli Labor minister, told the Israeli daily newspaper Haaretz. “He understands that there is a new administration in the United States… and that if we don’t come up with a peace plan, someone else will call the shots for us,” Ben-Eliezer said.
Yet there remains one more hurdle to jump, one matter which makes the rest of the issues appear weak by comparison: the issue of inter-Palestinian reconciliation, bringing Fatah and Hamas together. Ironically, in the end it may turn out to be that the final stumbling block holding up the creation of a Palestinian state may well be the Palestinians themselves. Unless they can place their differences behind them, they risk prolonging the conflict for another 60 years.

Claude Salhani is editor of the Middle East Times in Washington, DC

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