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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A poor cull in Egypt

by Riad Al-Khouri
written by Riad Al-Khouri

Egypt has seen scores of human cases of bird flu, the largest number in any country outside Asia, since the first known appearance of the H5N1 virus in humans more than four years ago. Bird flu deaths in Egypt are now at 22 and climbing, and as if that weren’t enough the threat of the swine flu virus (H1N1) is also hanging over the country.
The livelihoods of pig breeders, and of those who raise chickens in home gardens to help feed a family or generate extra income, have been threatened by government culls of swine and fowl to combat the two forms of influenza. Most bird flu victims are those who look after chickens, typically poorer people in the countryside. Though raising pigs is not a big deal in Egypt, rearing poultry at home is important for the incomes of a significant number of people in rural areas; recent government measures to stamp out bird flu have forced families to stop keeping chickens. Though losses to bird owners may be outweighed by a lowered risk of flu, the pig cull designed to prevent the H1N1 virus from taking hold is controversially not seen as useful — and evaded by some. No cases of swine flu have been reported by the Egyptian authorities, but up to 300,000 pigs are to be slaughtered.
Needless to say, all of this is hitting the poor more than the affluent. Regarding the situation of the latter — far from infected birds or dead pigs — the glitzy developments springing up in parts of Cairo and in seaside resorts such as Sharm el-Sheikh, are mainly benefiting the country’s businesspeople and better-heeled urbanites. For the rest of the country, especially the population of rural areas or slums, the standard of living is stagnant. One fifth of Egyptians survive on less than $1 per day. Poverty, food insecurity and malnutrition remain significant. For example, in Upper Egypt alone, 36 percent of the population (close to 11 million people) consume less than the recommended minimum caloric intake, presumably including some who are eating less chicken or pork than before.
The state response has been to continue subsidizing basic necessities with an even stronger social safety net. As household expenditure on food rose by almost 50 percent in the first six months of 2008 due to inflation, the government fought back with sharply higher budgetary allocations to the social safety net, extending subsidy ration cards to a further 10 million people (hence reaching around 60 million Egyptians). The subsidy system, which covers a large portion of basic living costs — food, energy, water, housing, medical expenses etc. — contributes to a sizeable budget deficit, roughly 8 percent of gross domestic product, and is ultimately non-sustainable.A large proportion of imported food is channeled into the vast subsidy scheme of the government, which covers about half of the total Egyptian consumption of sugar, flour and rice, and three-quarters of the vegetable oil, as well as much of the meat consumed in the country.
Of course all this is now cheaper thanks to lower commodity prices. For example, from March 2007 to March 2008, the price of wheat on the international market increased by 48 percent; in the 12 months since, however, it dropped by almost the same percentage. The price falls also dampened inflationary pressure: in 2008 the government’s economic policy was mainly focused on reducing inflation, reaching a year-on-year peak of 24 percent in August 2008. Yet, prices have steadily decreased in the past few months: inflation fell to less than 12 percent at the end of March and is projected to drop to 10 percent in June, although it will remain above the government’s target rate of 6 to 8 percent.
However, inflation is not yet under control. The sharp retrenchment in international commodity prices, which had begun in the second half of 2008, has not been fully reflected in domestic price levels due to lack of competition. The government still has to beware of increasing liquidity to the point where domestic demand starts to overheat. While inflation still looms, the authorities have to tread a fine line between providing liquidity to maintain sagging growth on the one hand, and over-heating the economy on the other.
Dampened inflation and a stronger social safety net have brought limited respite to Egypt’s poor (including some of those whose pigs and chickens have been killed). Few of the less affluent in the slums and countryside have benefited from the Egyptian mid-decade boom; now, with economic expansion waning, policies such as a strengthened social safety net create a feel-good factor. In the long-term, however, the task of getting Egypt out of its slump and on the path to equitable growth that will underpin social stability may be a lot more complicated. 

Riad Al Khouri is a senior associate consultant at the William Davidson Institute of the University of Michigan

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The outdoors’ beauty and scars

by Norbert Schiller
written by Norbert Schiller

For hundreds of years, travelers have criss-crossed Lebanon’s mountains and valleys in search of ancient mysteries and hidden treasures, or just to marvel at their majestic splendor. From Alexander Kinglake and Lady Hester in the mid-19th century, to H. V. Morton and Colin Thubron a century later, the mountains of Lebanon have held an allure for many intrepid travelers.
It was Thubron’s book, The Hills of Adonis, that first led me to discover the Lebanese mountains. His four-month journey, which began just prior to the 1967 Arab-Israeli war, is no typical travel journal. Rather, he weaves an intricate story which looks at the terrain, the people, the myths and legends that once dominated this land. His ultimate mission was to discover the cult of Adonis.
The first time I read Thubron’s book I wanted to retrace his exact footsteps and see for myself the country he describes. Unfortunately, I read Adonis 30 years too late and much of the landscape he depicted had already been altered beyond recognition, a casualty of 15 years of civil war and the Israeli occupation of the south. However, that did not stop me from pursuing my quest to explore the country. Fearful of walking over an unsuspecting mine field or stumbling onto a restricted military area, I joined Libantrek, a local hiking group founded by one of Lebanon’s ecotourism pioneers, Michel Moufarrij. Moufarrij showed me a side of Lebanon I thought did not exist anymore and he introduced me to the Lebanon Mountain Trail (LMT), the first long distance trekking trail in the Arab world.
The LMT is more than just a long distance path; it is a journey through the heart and soul of Lebanon. Beginning in Al Qbaiyat in the north, the trail makes its way through the interior of the country until it reaches Marjaayoun in the south. The total length of Lebanon is only 225 kilometers, but the trail is almost twice as long, climbing its way over mountains and descending into deep valleys. The trail, conceived by a group of non-partisan Lebanese, provides a rare view of the heartland rarely visited by outsiders. This group, which includes Moufarrij, broke down sectarian barriers and called themselves environmentalists. Now, their sole purpose is to develop ecotourism in economically depressed rural areas of Lebanon. Lebanese and foreign tourists who walk the trail are encouraged to use local guides and stay in local rest houses and designated family homes, as well as buy and eat local products along the way. As the villagers view the LMT as a source of income, they are expected to look after the trail and protect the natural environment in their area.
In April, I was invited to be part of a six-person team which was to be the first to walk the entire 440 kilometer trail. On April 2, the group set out on what can best be described as a journey of a lifetime. For the entire month we traversed the length of Lebanon, eating and sleeping in local homes and guest houses. As a way to promote the trail the LMT Association, the organization behind the trail, encouraged others who wanted to enjoy part of the experience to join us during weekends and holidays. Overall, the journey was a magical experience for all those involved. We walked through parts of the country that we didn’t imagine existed in Lebanon.
There was also a downside to this experience. It was impossible for us to overlook the garbage dumps, illegal rock and sand quarries and ugly unfinished cement structures that dotted the breathtaking landscape, leaving irreversible scars. No matter how hard we tried to ignore these eyesores, it was difficult because of the extent of the damage.
Lebanon is a tiny country that has so much to offer for the outdoor enthusiast. The old cliché that Lebanon is a country where you can ski in the morning and swim in the afternoon still holds true today as it did a generation ago. However, Lebanon’s size may one day prove to be its demise. Since it is so small, the harm done to the environment has a far greater impact and thus a longer lasting effect. It is imperative now for the Lebanese government to take the lead and implement laws to protect the environment. In order to do so, authorities will need to establish and train special teams in charge of environmental protection. Of course, public awareness campaigns should be launched to educate the public. However, as long as no punitive action is taken, these campaigns will land on deaf ears.
Since independence in 1943, Lebanon, its people and the land have been through a great deal of turmoil and suffering. It is one thing to have stopped the fighting, but it is a whole other issue to repair the damage. On the human level, there are still raw scars that need healing, but there are some efforts to avoid provoking new ones. On the environmental front, however, it is as if the civil war has never stopped.

Norbert schiller is a Dubai-based photo-journalist and writer

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Society

IWC – Georges Kern (Q&A)

by Executive Staff
written by Executive Staff

Georges Kern, 37, has been chief executive officer of the International Watch Company (IWC) since January 2002. He has worked in the watch industry since 1992, when he was responsible for TAG Heuer’s global distribution network. Kern recently sat down with Executive for a one-on-one interview to offer up a CEO’s view of how IWC and the watch industry are weathering the current global recession.

E Are Swiss watch manufacturers and the IWC focusing more on the Middle East and the Levant region? What’s your strategy?
The Middle East is a strong buying region for all brands and luxury goods, specifically the Gulf region. Dubai has been booming for years, they have a slowdown now, but the fundamentals are there and the region will continue to grow. Concerning the Levant, let’s face it, it’s Lebanon. In Lebanon you have a much more developed luxury culture than any other country [in the region] and the education towards luxury goods is much more developed. What we try to do is to develop local markets. We don’t need your purchases in only Paris, London or Dubai. We want to have business at a local level because it creates a much more sustainable business model. This is why everybody is coming to Lebanon and is looking for opportunities to do a drive.
The second question is always: ‘Yes, but Lebanon is smaller than France or whatever.’ That is not the point. The point is that we are a global brand; we are not a local brand. The customer in Lebanon is the same as in Paris, New York or Tokyo. He has a certain level of income, a certain level of knowledge and he is part of a certain club. He wants to see the brand with the same quality worldwide, in Avenue Montange as well as in Solidere. That is why we have to offer the same service, the same boutiques and the same environment because otherwise it’s not a real successful global brand.

E How has the financial crisis affected IWC and the luxury watch industry as a whole?
I think we have to be realistic and pragmatic. We cannot hide. I don’t think any brand in the world can hide from this crisis. The question is: How badly are you affected? I like the quote by Warren Buffet who said ‘when the tide goes down you see who was swimming naked.’ This really depends on how resilient you are in terms of your prices and what you offer in terms of real value, because consumers today don’t want ‘show value.’ The days when bankers who made a good bonus walked into a store and bought a watch for $50,000 are over. That customer base is done. Today it’s really back to the roots and you need preparation. The easy money is gone. You need to really build on your values, your history, your roots and have the confidence of the consumer. Thank God we have [that confidence] because of everything we have done over the last 140 years.

E Have you turned your focus away from the luxury watch sector as a result of recession? Are there plans to market more mid-range products?
You might see this in the exports; that some segments and cross segments have been hit harder than others. I think that in any price segment you can be successful or you can have major problems. The point is how strong your brand is, not which price segment you are [in]. You can be successful in any segment. The question really is how good your products are, how good your image is, how solid your values are and then you are fine. I can give you examples of total flops in any price segment and I can give you examples of very good brands in any price segment. We stick to where we are. There might be some technical adaptation but nothing fundamental.

E So there is no paradigm shift in your strategy to focus less on high-end segments?
I mean this would be a drama because then it would mean that our strategy was really wrong. But we had our bathing suits on.

E Swiss watch exports dropped 26 percent this year from last year, according to the Swiss Watch Federation. Are you experiencing a similar decline in exports?
As I said, you cannot hide. You cannot seriously say that such a crisis is not affecting you. The two fundamental questions are, in such a situation, what is your business model, and number two: how strong is your brand. Your business model, in terms of your cost structure to ensure strong profitability and cash flow, how ‘verticalized’ you are in terms of production and how many boutiques you have. What is your cost basis? That is the first question. The second question is how strong is your brand? I think we have those aspects under control.

E Watches and luxury goods in the Americas have been hit hard. Is this why you are focusing on other regions like the Middle East?
Of course we are looking for opportunities. Fundamentally, I think the United States will get out of the crisis. I think it’s a very reactive region. Most probably Europe will suffer longer than the US. In such a situation you optimize everywhere and we know that we have a lot of potential in the Middle East, including Lebanon. You have the [Lebanese] elections that will see 100,000 people travelling to Lebanon to vote, all paid for by political parties. Well, thank you very much. Go to our stores and buy some watches before flying back.

E There have been signs that a global economic recovery could be approaching, especially in this region. Have these signs translated into increased activity?
I don’t have a crystal ball but indeed we should all hope and pray that the financial system will be consolidated by the end of the year. You have to consider the real economy. The real economy is coming [back] one year or two years later [than the financial economy]. We are just starting to see the real economy in the US and Europe be affected. Unemployment rates in the States in April were announced at 8.9 percent. It’s a historical high and the impact is being felt now. If everything falls back into place we can hope that the real economy will be affected [positively] by, say next year. I explained the financial crisis to my 12-year old son by saying ‘finance in a body is like a heart and the money is the blood. If the heart doesn’t beat there is no money flow and the body is dying.’ If you cut off a hand like General Motors, you will still survive but if the financial system does not work, it’s over.

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Executive Insights

The need for renewable energy in an oil-rich region

by Tarek El Sayed
written by Tarek El Sayed

Since 2000, many political and business leaders have shifted their focus from lowering energy costs to diversifying their energy supply, in part through the introduction of renewable energy. This change was triggered by concerns over security of supply, fuel cost volatility, climate change and fast-growing demand from emerging countries. Gulf Cooperation Council (GCC) countries were able to defer this discussion by several years, thanks to their domestic oil and gas resources, but have recently undertaken a number of initiatives to introduce new energy sources.

In the process, they have generated some skepticism: Why should a region that contains almost half of the world’s remaining oil and gas reserves adopt renewable energy? 
Actually, in many respects, the case for renewable energy is stronger in the GCC than in many other places in the world. Cost is one driver in developing the rationale for renewables. Some technologies, such as wind, already reaching grid parity, and others, such as solar, are projected to become cost competitive with power generation from conventional fuels in the coming years. But beyond renewables’ overall cost competitiveness, the GCC region in particular is uniquely suited to some types of renewable energy: the region has very high levels of solar irradiance, coupled with limited cloud cover; these factors place the GCC among the top regions in the world in terms of technological potential for solar power generation.
Renewables will also become increasingly necessary as a complement to fossil fuels in the region, despite some critics’ alarm over renewables’ competition with the oil and gas industry. Even under the most optimistic forecasts for renewables, fossil fuels will remain the dominant source of global energy for the foreseeable future. In addition, according to the Organization of Petroleum Exporting Countries (OPEC) World Oil Outlook 2008, OPEC’s share of world oil supply is expected to grow from 42 percent in 2006 to 52 percent by 2030. The burden of this

The Masdar Initiative
    The Abu Dhabi Future Energy Company (ADFEC) launched the Masdar Initiative in April 2006 to establish an entirely new economic sector dedicated to alternative and sustainable energy. There are five key components to this entity:
 

  • The property development unit is responsible for developing Masdar City, the first zero-emissions city in the world.
  • The utilities and asset-management unit is building a portfolio of operating assets and strategic investments in renewable energy.
  • The industries unit will invest in production assets and develop Masdar’s high-tech solar cluster.
  • The carbon management unit is developing a portfolio of clean development mechanism projects and a carbon capture and storage network in Abu Dhabi.
  • The Masdar Institute is a graduate level scientific and engineering institution focused on education and research in renewable energy and sustainable technology.

growth will be concentrated on a handful of suppliers, who will be responsible for providing significant additional capacity every year.
If the oil and gas currently used to generate electricity can be partially replaced by renewable sources, then new volumes of fossil fuels become available for export (or more profitable downstream applications, such as petrochemicals). By supplementing — rather than replacing — oil and gas, renewable energy could help maintain the GCC’s position as a major energy exporter for the world if the technology is developed early and competitively.
There are a host of other benefits to be realized if the GCC is an early adopter of renewable energy. For instance, its use would help the region manage its rapidly rising pollution levels and associated costs. Countries in the region have some of the highest per-capita carbon footprints in the world. In 2007, Qatar emitted — on a per capita basis — three times more CO2 than the US.
Renewable energy would not only improve the region’s own environment, but create opportunities for revenue. Under the Kyoto Protocol, developing countries can realize financial benefits from reducing their CO2 emissions and selling carbon credits to developed countries that need these credits to fulfill their emission reduction obligations.
Renewable energy also offers advantages that directly address the specific energy needs of the GCC. For instance, countries could use certain renewable technologies, such as solar photovoltaic and small-scale wind power, to provide energy to sparsely populated areas. Because such technologies function in distributed mode, they can replace expensive fuel-fired generators and eliminate the need for governments to make costly investments in extending grid infrastructure.
To take another example, about two-thirds of the electricity consumption in the GCC is used for cooling purposes; the use of solar energy for cooling could offer significant opportunities to address the large excess capacity required to meet electricity demand driven by cooling loads. This energy could be either converted into electricity to be used in traditional cooling systems, or used in direct thermal cooling applications, potentially offering higher conversion efficiencies and cheaper means of storage.
Finally, a local renewables sector and a substantial global presence in this industry would foster the development of a sustainable knowledge-based economy and create employment opportunities. The creation of such a sector would leverage the wealth generated by hydrocarbons and use it to diversify GCC economies and reduce their dependence on oil.
But in developing renewable energy, GCC countries will face many challenges. First, these countries will have to master a wider array of complex, cutting-edge technologies. They will have to develop their workforce to harness the capabilities required by investors. They should also create a regulatory framework that will attract investors and developers with the technological know-how, capital and project-development expertise to build the sector.
In the short term, GCC countries need to build the requisite financial systems to support the sector. Implementing technology specific feed-in tariffs is widely considered to be the most effective way to do so, especially when they are accompanied by efficient planning and registration procedures. Under the terms of these tariffs, utility companies are required to support the development of new technologies by purchasing electricity from renewable generators at a fixed price defined by public authorities. However, tariffs are not the only option; other regulatory models and incentive schemes include capital expenditure subsidies, grants for research and develoment, mandatory grid connection, tax incentives and renewable energy portfolio standards. Each country should review all of its options before selecting a model that meets its unique needs.
Competitive positions in the renewables sector are not yet set, and there is substantial opportunity for first movers to become global leaders by adopting the requisite policies and launching bold initiatives. Countries that move quickly, such as the United Arab Emirates, with its unique Masdar Initiative and its bid to host the International Renewable Energy Agency headquarters, could build a sizable and sustainable competitive advantage.

Tarek El Sayed is a senior associate and Walid Fayad a principal at Booz & Company

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Executive Insights

Private equity at the gates of public markets

by Imad Ghandour
written by Imad Ghandour

Private equity investment in a public company is always a headline-capturing affair. The epic tale Barbarians at the Gate — The Fall of RJR Nabisco, chronicles how Kohlberg Krabis and Roberts, a large American private equity house, took over RJR Nabisco for almost $26 billion in 1987. The book has memorialized the thrill and excitement surrounding such an affair.

There has usually been a clear distinction between private and public equity investments. The style, objective, structure and active involvement are distinctive between these two classes of investment. But in many instances, the “barbarians” like to cross over and hunt for deals in public markets. The appeal is clear: public companies are prized targets by the way they naturally graduate to become public, and most shareholders of public companies are more or less willing sellers at the share price plus some premium.
Private equity investments in public markets come in two main flavors. The more opportunistic flavor is PIPEs, or Private Investments in Public Equities. A PIPE is basically a privately held company owned by a group of investors that purchases a substantial and influential equity stake in a public company, but keeps the target company listed.
On the other hand, the “take-private” flavor has become a well established strategy in the past few years, and is by definition the complete takeover and delisting of a target company. A private equity fund offers shareholders in the target company a price (usually above the listed price) and, if the fund’s offer is accepted by the vast majority, the fund will squeeze out (subject to the availability of such rules) the remaining dissenting shareholders and take over 100 percent of the company. Ambitious mega buyout funds have repeatedly adopted this strategy in the past three years.
Private equity financiers in the region have been inspired, and have successfully tried to hunt for deals in regional public market. Aramex is the best known example. It was taken private in 2002 from NASDAQ, and then taken public again in 2005 on the Dubai Stock Exchange, resulting in 197 percent gross capital gains for the investors. Egypt seems to be a fertile ground for such an investment strategy, as we can see from the table below, mainly because of its deep public markets, its semi-developed takeover laws and its laissez-faire regulators. The Gulf Cooperation Council, on the other hand, has not witnessed substantial take-private activity, as both the laws and the regulators deter such activities.
With valuations of regional markets rock bottom, the coffers of private equity funds full and the number of private deals limited, funds are figuring out how to take advantage of this once-in-a-lifetime opportunity. The arbitrage potential is crystal clear, and willing (or distressed) sellers are available.
There are private hints and public announcements that private equity funds are actively working on public deals. They better hurry. Markets have risen by 20 to 40 percent since they hit bottom in March, and valuations have increased by 20 to 50 percent over the past few months.

Imad Ghandour is the executive director at Gulf Capital

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