Finance

BLOM Bank – Saad Azhari

by Executive Staff
written by Executive Staff

E Marwan Iskandar recently said that it is not realistic to think that Lebanon has not been affected by the global financial crisis, especially considering the public debt; what’s your take on this?

Lebanon proved to be one of the least affected countries in the world because we had, after the election of the president, positive momentum coming from that election that really was more important than the international financial crisis. But definitely, if we didn’t have the global financial crisis it would have been even better. We cannot say we were not affected. We’re seeing right now that the country is witnessing good growth; all the figures on tourism, retail sales, car sales, are much better than last year. I agree with Iskandar when he says we have been affected, but at the same time maybe the statement is not complete, because it’s not saying that we were the least affected. The most important element is political stability and security.

E How will the upcoming parliamentary elections in June affect the banking sector?
There’s always a problem of uncertainty. So for people wanting to make major investments, they don’t want to do it before the period of uncertainty.
 
E Some believe that by lending the government money, Lebanese banks are perpetuating the country’s debt problem. How  much longer can the banks carry Lebanon’s debt?
The banks are important holders of the government debt. But I have to say that the size of the debt compared to the balance sheet of the banks is much smaller. The balance sheets of the banks are growing much faster than the growth of the debt. Also, the equity base of the banks has grown a lot. We always apply pressure on the government to resolve their debt problem and the size of the debt. We believe it’s a major problem, and we don’t think that there’s an imminent short-term pressure that needs to be applied because of the high liquidity that is available. But it is a problem that needs to be resolved. Hopefully the adjustment will happen sooner rather than later.

E Due to the slower pace of lending to the private sector compared to public sector lending, many feel that banks in Lebanon should increase their lending and are pressuring the central bank to lower the interest rates in order to stimulate investment in the private sector. What is your take on this?
Effectively, if you look at the lending to the private and public sector it’s about the same size; they’re equal. There’s no problem lending to the private sector because it is well diversified. There are so many banks in Lebanon that are eager and competing to give more loans. The real ratio of lending to the private sector is among the highest in relation to GDP. We are lending at more than 80 percent compared to GDP, which is a very high level even compared to western nations. It’s not a problem due to the lack of lending; it’s a problem of the lack of opportunities to lend.

E What will happen to foreign remittances into Lebanese banks this year? Will they beat last year’s record of over $6 billion?
The confidence is there and it seems to be it will be a very strong year compared to last year. Until now, it looks like growth will be higher than last year.

E Seeing how Lebanese banks are heavily exposed to government paper and thus largely dependent on government debt, is geographic expansion the solution to reduce dependency and strengthen the sector overall?
Right now Lebanese banks have 220 branches outside of Lebanon — that’s huge. We and other banks have been expanding outside of Lebanon. By next month we will be present in 12 countries.

E If you were to prepare a list of requests for the new government, what would it entail?
They already know of the reforms that are needed. We would like them to apply the reforms to the public institutions, privatization, solving the electricity problem and so on. They know what they have to do. I want them to do what this government and previous governments promised to do but haven’t done because of the [political] situation.

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Lebanon

Election – The ballots bought

by Sami Halabi
written by Sami Halabi

Lebanon’s June 7 parliamentary elections are expected to be a close affair, pitting the March 14 coalition against the opposition parties of Michel Aoun’s Free Patriotic Movement, Hezbollah and Amal. The elections are unprecedented in many respects, not least of which is the introduction of a new electoral law.
Lebanon’s new electoral law is unique in the region, addressing core issues such as media objectivity during the elections and campaign finance. The reforms are a step towards adopting legislation that would bring Lebanon’s elections in line with international standards. But the current legislation is “diluted by significant loopholes,” said Madeline Albright, the former United States Secretary of State, when she touched down in Beirut to head a delegation to monitor elections from the National Democratic Institute (NDI).
The loopholes are many, but certain reforms that did not exist prior to this year’s elections have been adopted. Not least of which is Lebanon’s newly formed Constitutional Council that can adjudicate contraventions of the electoral law. 

Spending caps skirted
In theory, the new election law stipulates that an “electoral campaign account” must be established for each candidate and “all electoral contributions and expenses shall be exclusively made through this account during the period of the electoral campaign.”
The law restricts each candidate to a campaign spending limit, including pay-in-kind expenses, of approximately $100,000, plus a variable of around $2.66 per registered voter in an electoral district, which is measured by the Ministry of Interior’s list of registered voters. But the actual number of eligible voters in a district is impossible to calculate because Lebanon has not conducted a census since 1932. 
“Candidates are required to do all their spending from their electoral account, but they can make transactions from their personal accounts or their family’s accounts and no one can know,” said Lynne Ghossein, the campaign finance project manager at the Lebanese Transparency Association (LTA). 
One possible solution to this skirting of the law would be to monitor candidate’s personal accounts or those of their families. But this provision is not included in the new electoral law. 
“I gave my opinion while discussing the draft electoral law and I said very openly that we cannot limit banking secrecy to the campaign account,” said Lebanon’s Interior Minister Ziad Baroud at a press conference for the Supervisory Commission on the Election Campaign (SCEC). Baroud is responsible for insuring the SCEC fulfills its mission of implementing the new electoral law.
Lebanon is one of the only countries in the world that maintains a policy of banking secrecy on personal accounts. Banking secrecy can only be lifted by the Special Investigation Committee (SIC) of the Lebanese Central Bank.
“We have not lifted banking secrecy on any candidate’s accounts nor received any request to do so,” said Hisham Hamzeh, director of the audit and investigation unit at the SIC.
Hamzeh explains that banking secrecy is only lifted in order to investigate suspected “terrorist” activity, as well arms and narcotics trafficking and money laundering. Even if candidates are found to have violated the campaign spending clauses of the electoral law, the public would not find out about it until after the elections, when many of the candidates will have already assumed office.
“The only thing that can happen is when the election is over someone does the inventory and campaign auditing for a candidate. [Then] they can see that there is more money spent than what was in the [electoral campaign] account,” said Nadine Farghal, legal counsel and coordinator at the Lebanese Civil Campaign for Electoral Reform (CCER). “This way they can see that [the candidate] has used another account.”  
Violations of campaign financing regulations are to be submitted to Lebanon’s Constitutional Council, whose formation has been delayed for years. On May 19, a group of 55 Lebanese civil society organizations and eight universities sent a formal letter to President Michel Sleiman demanding the creation of the Constitutional Council.
On May 26 — less than two weeks before the election — Lebanon’s cabinet finally appointed its half of the council’s membership (five out of the 10 seats). The council is Lebanon’s highest judicial body that can rule on the constitutionality of the elections and is seen as an essential judicial organ providing an alternative to violent conflict over electoral contentions.
In addition to being prevented from tracking the personal accounts of candidates, the SCEC can only begin to monitor campaign accounts from the point when candidates officially submit their eligibility, a period that ran from March 2 to April 7. Hence, supposing that candidates do follow the letter of the law and only use their campaign accounts to fund their campaigns, there is still no adequate mechanism in the law to account for the total amount spent on a campaign, which began well before the submission period.
“The monitoring time is [too] short and we didn’t get the time we wanted,” Baroud said.
Yara Nassar, executive director of the Lebanese Association for Democratic Elections, said that long before the monitoring period began, candidates used their own accounts or that of their party. She said the lack of an official commission to report violations in the run-up to the election period is another significant shortcoming of the new law.
“This is the first time the SCEC is here,” she said. “They haven’t been around for four or five years and this is part of the problem.”

Foreign influence 
In theory, Lebanon’s new electoral law specifically prohibits candidates “from accepting or receiving, whether directly or indirectly, contributions or aids from foreign states or from a non-Lebanese natural or legal person.”
But without oversight on candidates’ personal accounts, there is technically little to stop candidates from ignoring the law and accepting the support of foreign entities willing to dish out cash to support their interests.
“Candidates can receive money in other accounts then transfer it to their electoral account,” said Gaelle Kibranian, programs director at the LTA. “We cannot know where this money is coming from.”
Lebanon’s role as a battleground for regional and international players makes it a prime candidate for illegal money entering the country to support one side of the political divide more than another.
“Can you say that Hezbollah doesn’t take money from Iran or Saad Hariri doesn’t take money from Saudi or [Michel] Aoun from Qatar,” added one legal expert who spoke on condition of anonymity. “It’s all around the media and no one is investigating it.”
The practice of accepting foreign money has become so commonplace in affecting the course of Lebanese politics that many politicians have heralded it as a necessary element to achieving their political aims. Ahmad el-Assad, a candidate running for the Shiite seat in the Marjayoun electoral district and founder of the Lebanese Option Gathering (LOG), said he has “no problem” with accepting financial help from Saudi Arabia or the US “because if we don’t do that things don’t move forward.” However, he denied receiving any funding for his campaign from foreign sources.
His organization aims to provide an alternative to Hezbollah’s influence over Shiites in the south of Lebanon. Assad accused Hezbollah and its allies of intimidating the residents of Lebanon’s south and of receiving “tens of millions of dollars” from Iran. Hezbollah declined to comment on Assad’s accusations.  

Vote buying
International and local election watchdogs say the biggest obstacle to preventing vote buying is the balloting system in Lebanon. Ballots can be printed or written out on any piece of paper and parties usually hand out their pre-printed “list” before a voter enters a polling station.  
A party can hand out a variety of ballots, with candidates listed in any order and any font. This in turn allows political parties to trace the ballot back to a particular voter or bloc of voters. 
Despite repeated calls by civil society and some government figures like Minister Baroud, the proposed introduction of standardized, pre-printed and government distributed ballots at the polls was not included in the 2008 Election Law, due to opposition from parties on both sides of the political spectrum.   
“We know that the buying happens at the ballot because it is just a piece of paper and they [candidates and parties] put signs on it and pay for the votes afterwards,” the LTA’s Kibranian said. 
She said each party has representatives at the polling station during vote counting who, in turn, monitor the number of votes cast for each candidate or list of candidates.  CCER’s Farghal said the markings are usually simple alterations in the lists of candidates, such as having the “second name in italics or the third name in a different font.”
Election observers agree that most of the ballot rigging happens at the ‘family level,’ whereby large families in electoral districts agree to arrange for their family members to cast votes for a certain candidate or list of candidates. Once the ballots are counted, each family then receives cash or pay in-kind services according to the number of counted votes. 
“We have witnessed representatives of the candidates marking each name when they count the votes,” said Nassar of LADE.  “They see the ballots they need to mark and then they mark their own register.”
But it’s not just families that take part in vote buying corruption. An anonymous source working with one of the major Christian opposition parties in Lebanon said his party  recruited through an “electoral pyramid scheme,” whereby the amount of money ‘recruiters’ make increases with the number of people they ‘recruit.’ The source has agreed to vote for the party in question and act as a representative at the polling booth. 
“All they wanted was a photocopy of my ID,” the source said. “If you have a car they need your driver’s license and you can get more [money] because they ask you to transport people.”
The source said he was receiving $100 for his vote and $100 to man the polling station come June 7.
Candidates and parties are also looking to bring votes back to Lebanon from abroad, and with it the voters, because current legislation does not allow Lebanese citizens to vote outside the country.
An anonymous source in Dubai with links to a prominent Sunni party said the electoral pyramid scheme that applies to local vote buying is also being put to use abroad. The source said that parties are giving voters abroad, especially those from tightly contested districts, either airline ticket vouchers or sending them tickets directly. 
While this is not technically an illegal practice, the electoral law specifically states that transportation costs must be deducted from a candidate’s electoral campaign account.
“If you can prove that the candidates themselves are paying for people to fly in from abroad to come and vote for them, then it can be counted as campaign spending,” said Farghal.
As for the foreign staff in charge of recruiting voters, the payment of their salaries will not pose much of a problem in circumventing the law.
“If I am a candidate and I have a lawyer, even if he is not a very smart one, I will find a way to make it seem like these people [foreign staff] are volunteering to get me more votes abroad,” added Farghal.
The current law allows for volunteers to provide services for free which are not counted as campaign expenditures.

Pay-in-kind and your vote is mine
Apart from candidates merely paying people in cash to further their campaign, many parties and candidates are blatantly disregarding the illegality of pay-in-kind services to further their campaigns.
In May the March 14-affiliated Kataeb party advertised on its website that it had distributed free medicine and healthcare in a “special for the campaign.”
El-Assad’s campaign also “distributed health cards that were conditional upon voter choices,” according to a report issued by LADE. El-Assad admited to this violation but says that it pales in comparison to Hezbollah’s violations. Hezbollah declined to comment.

The media’s bark
The new electoral law aims to restrict Lebanon’s sectarian media landscape from unbalanced reporting on the elections. Given that each major media outlet in Lebanon belongs to one political party or another, this is turning out to be an uphill battle for the SCEC.
“Our media landscape is controlled by people who are running in the elections and obviously they will use their media outlets for their own purposes,” said Roula Mikhael, executive director of the Maharat Foundation, a local NGO that is monitoring the media during the elections.
The SCEC’s first report in early May identified 293 media violations of just one article of the electoral law committed over 14 days, from April 14 to April 28. The report covers several categories of contraventions across different types of media that include libel, slander, defamation and broadcasting that triggers sectarian tensions.
The first report contained no specifics as to who committed which media violation because of what head of the SCEC Ghassan Abu Alwan, called “a period of forgiveness.” Minister Baroud added that “we should not consider that it is impossible for the media to follow the law.”
The media organizations however seem to be above the law as they enjoy widespread support among large swaths of the Lebanese public because of their political and religious affiliations. Nassar of LADE explained that the issue of addressing what the media are allowed to do is “something that the authorities in Lebanon are afraid to tackle or take action against,” because “even if the court says you are right, you are well documented and you have everything you need to do this, public opinion could sway against you.”

Piles of posters
The new law also lays out the explicit terms for displaying political posters by which each municipality must assign spaces for display.
But given Lebanon’s municipal elections are scheduled to be held next year, municipalities have a lot to consider if they are to take down illegal posters of a candidate who could represent them in government after June 7.
“Municipalities are usually politicized so they will not, in most cases, forbid people from hanging posters of a certain figure,” said Tony Mikhael, lawyer and legal expert at Maharat. But since the beginning of May, reports have surfaced that the law is being applied in some areas of Lebanon, but “if you go outside of Beirut you see the chaos when it comes to hanging pictures,” said Mikhael.
This practice has greatly impeded any monitoring body’s ability to track campaign expenditures on campaign posters. The SCEC has declared that the cost of any promotional material that even alludes to a candidate or their party will be counted against their campaign account. On the ground, however, there are always ways around such rules.
“You cannot forbid people from placing posters on private property,” Tony Mikhael said. “If you put a picture on the roof or balcony of a building, the municipality can do nothing.”

Abusing public office
Public officials have been accused by various monitors and NGOs of abusing their public offices to promote their campaigns. One of these is the telecommunications Minister Gebran Bassil who recently sent out a voice recording to mobile phone subscribers advertising Lebanon’s recent deduction in phone tariffs.
The message started out by saying “This is not a lie, but the truth” mentioning the minister’s name, but not that of his ministry, which prompted a flurry of accusations. His office said that he recorded the message on April 1, before he submitted his candidacy. Gebran’s office said “technical reasons” caused some subscribers to receive the message later.
Even Parliamentary Speaker Nabih Berri, an opposition leader, has been criticized by LADE for promoting himself and his electoral list by giving speeches at the opening of public events.
Ali Hamdan, a senior adviser to Berri, said that the SCEC has approved of all of the speaker’s speeches, and in turn accused LADE of being biased.
“The US is supporting this NGO so how can they be neutral,” said Hamdan. “They are not neutral anymore and [hence] they should be phased out.” LADE declined to respond to the allegation.
The mudslinging will most likely continue well into and past the elections. But with the legal body to prosecute violations in place, the law now has some teeth. And, with some key reforms advocated by civil society already enacted, there is a sense that the ball has at least started rolling on the path to a democratic process that is in line with international standards.

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Finance

Bank Audi – Freddie C. Baz

by Executive Staff
written by Executive Staff

E Economist Marwan Iskandar recently said that it is not realistic to think that Lebanon has not been affected by the global financial crisis, especially considering the public debt; what’s your take on this?

Our customer deposits represented almost 90 percent of our funding base. Boring banking, boring banks. Lack of sophistication based in commercial banking is why Lebanese banks have been insulated from the crisis.
What Iskandar is saying is true in marginal terms, not absolute terms. The International Monetary Fund has forecasted real gross domestic product growth for 2009 between 3 and 4 percent. Global GDP will witness a negative growth of negative 1.5 percent. This drop in our growth rates translates into some of the burdens felt by the global financial crisis, but it’s a mix of positive and negative contributions, with a net contribution still positive, but at 3 percent, not at 8.5 percent. At this point of the year, it is too early to confirm what Iskandar is saying or not.

E Some believe that by lending the government money, Lebanese banks are perpetuating the country’s debt problem. How much longer can the banks carry Lebanon’s debt?
It’s a political statement, it’s not an objective or professional statement. Nobody imposed the subscription to any public paper on the banks. At the end of the day, the government has to pay salaries to the public servants, so if there is no income, you either borrow or you sell assets. This easy borrowing has made the politicians’ lives easier in not feeling the need to reach a consensus on financial reforms. Easy borrowing has provided an exit.
If you evaluate all pubic assets, and you allocate a very conservative value to each of those assets, you will reach a bottom line which is much bigger than the outstanding debt. So the Lebanese government is not in a situation of technical bankruptcy, whereby their asset value is lower than their outstanding debt. Their asset value is still higher than their debt. The issue is more one of cash flows than of net asset value.

E Due to the slower pace of lending to the private sector compared to public sector lending, many feel that banks in Lebanon should increase their lending and are pressuring the central bank to lower the interest rates in order to stimulate investment in the private sector. What is your take on this?
At the end of the day, figures talk. The consolidated exposure of Lebanese banks to the domestic private sector in terms of lending is almost 100 percent of GDP. The benchmark worldwide is 60 percent. It’s a false problem that has been created by politicians. We are at 85 or 90 percent lending to the private sector. When you have such a high level of exposure in Lebanese banking, you shouldn’t even dare to mention that we are under-lending to the private sector.
If you go into the breakdown of the overall portfolio by size of companies and how much we are lending to big corporates, with respect to middle size corporations and small to medium [sized] enterprises (SMEs), there is a [higher] concentration in the bigger corporations. That is because of the contribution of those important borrowers to the GDP of Lebanon. If 80 percent of my portfolio is concentrated on tier 1 companies, it’s because the top 100 companies in Lebanon contribute up to 80 percent of the GDP formation in Lebanon.
I agree that we should give more loans to SMEs in order to increase their contribution to the economy of Lebanon, but it’s a matter of governance much more than one of size. SMEs are mostly family profiled or not legally organized. The responsibility is not at the level of the banks, because those companies have not developed into well organized companies eligible for bank loans.

E Do you expect to see mergers and acquisitions in the Lebanese banking sector?
On the regional scene, there is a place for one or two mega Lebanese institutions [to merge]. This is something that frustrates me a little bit because this should have been encouraged by the central bank. It will definitely happen. Among the top 10 banks in Lebanon we have to see two or three mega-mergers. What we have witnessed so far are lobsters eating shrimps; what we need in Lebanon is lobsters marrying each other.

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Banking

The bishops of banking

by Executive Staff
written by Executive Staff

Unlike the alpha banks, Lebanon’s smaller banks in the beta (ranked 11th to 20th) and gamma categories (ranked 21st to 30th) are not wholly concerned about growth. Of course, it is an aspiration for them, but not central to their operational strategy. Instead, the more modest banks of Lebanon focus on customizing their bouquet of financial products to target certain client niches.

Jihad Bassil, general manager of Middle East and Africa Bank (MEAB) — ranked 23rd in total assets — is revamping the bank’s strategy to focus on a particular niche market.

“This niche is what we call small and medium clients,” he said, with deposits between $50,000 to $500,000. “We wouldn’t mind having high level or prime clients, but this will not be our main target. We believe [the small and medium] niche is more stable [and] more reliable… than the big names, because the [latter] are subject to competition.”

However, Tarek Khalife, chairman of CreditBank — 19th in total assets — said smaller banks in the country should adopt a more comprehensive strategy. He said not many of the beta banks have succeeded in adopting a “universal approach” to banking, which is necessary since the size of the Lebanese market cannot cater to a niche market strategy.

“You cannot only do private banking or only retail banking; it’s not large enough. You have to have all services [so you can] cater to the needs of your client, because your client requires cross-selling,” said Khalife. “He’s a corporate [client] but needs a car loan or he’s a small to middle market [individual], but he needs a housing loan… You need retail services, commercial lending capabilities and a wide network; you cannot have half of a solution.”

Confidently, the smaller players in this financial game don’t see much of a difference between themselves and the alpha group. In fact, the only difference, they say, is size.

Size doesn’t matter

“The differences between the various groups of banks — alpha, beta and gamma — is only size. We offer practically the same services and products as the alpha banks and they offer the same services and products that we do,” explained Yasser Mortada, general manager and board member at the Federal Bank of Lebanon (FBL).

It seems that none of the smaller banks have a burning desire to be in the top 10. As a member of the gamma group, MEAB’s Bassil said his main target is to join the beta club. He says that being an alpha bank necessitates a consistent strategy to remain focused on staying on top and nothing else. “One day [you] lose control of what you’re doing, just because you want to be an alpha bank and stay at the top.”

He has no desire to be in the alpha group, as the “criteria for alpha banks is not interesting; total assets, total deposits, etc… To make a return on your investment, this is what adds up for me.”

Khalife added that reaching alpha bank status should be the consequence of a clever action plan and nothing else. “Becoming an alpha bank is a result and not an objective in itself. Being big should be the natural result of being successful, and not the other way around.”

He added that naturally, size was a concern for CreditBank. But, after a certain critical mass, one’s attention should shift towards the customer. “After a certain point, size no longer becomes the main parameter that you focus on. You try to focus on customer service, added value to the client, personalized services, etc.”

Lebanese beta and gamma banks take pride in their personalized approach to banking. Mortada outlined FBL’s strategy of being a “private universal bank.”

“This is a contradiction of terms in a sense… The way we look at it at [FBL] is that a regular customer will receive the same kind of services as a high net worth individual,” he said. “You can serve a coke in a can or a nice glass. But obviously, the person receiving the Coke in a nice glass will feel much more appreciated than someone who just receives the can of Coke. The bottom line is they’re both drinking Coke.”

Too much of a good thing

Right now, the Lebanese banking sector is among only a handful in the world with an excess amount of liquidity. At a time when financial markets around the world are pulling all their resources together to create liquid funds, Lebanon has too much and little idea what to do with it.

With no diversity for potential investments, Lebanese banks — of all sizes — struggle to place their liquidity in worthwhile ventures.

“There is too much liquidity, and this is the danger!” warned Bassil.

Similarly, Mortada saw the liquidity surplus as a hurdle.

“To find a place to invest the liquidity, you need medium and long-term projects,” he said. “To have [these] projects you must have political stability. It’s a circle.”

The general manager of Banque BEMO, Samih Saadeh, agreed with his colleagues.

“We are very liquid, it’s a blessing but it’s a very large liability. Placing that liquidity is difficult.” Pondering what banks should do with this overabundance of cash, Saadeh said, “the government does not need it [and] the economy of Lebanon is not capable of absorbing such a huge amount of liquidity. We need to find venues to invest the liquidity in and assets that give us enough return to at least cover costs.”

Mortada added that “liquidity is buying us time to fix our problems [and] time is endless as long as the liquidity keeps coming in.”

Some bankers were worried that as the ripple effects of the global financial crisis begin to make their way to Lebanon, capital inflows to Lebanese banks would slow this year.

Thankfully, this did not happen. “[Remittances] were expected to decrease, and people were saying that 50,000 unemployed Lebanese would come back,” said Bassil. “But incoming money from outside grew this year.”

By the end of 2008, foreign remittances by expatriates totaled $7.7 billion and proved to be a confirmation of the fact that Lebanese expatriates view the country’s banks as safe havens. And as the sector enters into the fourth quarter of 2009, there is little sense that this has changed.

GDP — not debt — is the problem?

Currently, Lebanon’s outstanding debt is expected to stand at nearly $50 billion by the end of the year, according to official estimates. This has always been a major problem for the banking sector as banks forgo the opportunity to invest liquidity in profitable ventures because their balance sheets are weighed down by treasury bills, Eurobonds and certificates of deposit (CDs).

As of March 2009, commercial banks accounted for 56.4 percent of the total debt, while BDL reportedly held 21 percent of the deficit. With interest rates ranging between 8 and 11 percent (depending on the maturity date of the bonds), it is quite favorable for the government to continue borrowing from the domestic banking sector rather than foreign entities.

The smaller banks seem to agree that the alpha banks are the major providers and beneficiaries of government paper.

“Typically, the alpha banks have been benefitting from supporting the public debt. It’s the first five or six banks that are taking part [in lending to the government], not even the whole group of alpha banks,” said Khalife. “When you find banks that have 60 to 80 percent of their balance sheets in treasury bills and CDs — these are banks that have supported the public debt and the currency. They have grown the most and they have benefitted the most.”

Mortada said the reason the size of the national debt is so astounding is because Lebanon’s GDP is stunted.

“The debt level is not high; it’s the GDP that is low,” said Mortada. “The GDP could easily be doubled or tripled in Lebanon and then the level of debt to be serviced would become reasonable.”

Either way, he said the debt in Lebanon is not a problem. “Debt is only bad for you if you cannot service it. If you can service your debt level, then why should you pay it off? You don’t want to be debt free.”

MEAB’s Bassil wholly disagrees. “You don’t give someone money because they need it, you give someone money if they can pay it back; the Lebanese government cannot pay it back,” he argued. “This is not an explanation. The banks are making money out of the debt! It’s a nuclear bomb that will one day explode and it’s a very big problem,” Bassil added.

Khalife explained that if it weren’t for the alpha banks’ capability to support the Lebanese pound and finance the public debt, no one else could have.

“When the central bank and the alpha banks started this long-term relationship, there was no alternative. You had to support the currency; you had to support public spending. Now, if you have other cornerstones of stability — like political stability — then you can focus on [reducing the public debt].”

The arrangement seems to have benefitted both the alpha and the beta banks to some extent.

“You have to say that it’s a whole equation; the alpha banks played a role in supporting the currency and the public debt, [while] we played a better role in catering to the private sector and this has been the driving force behind our growth, our raison d’être,” added Khalife.

However, Saadeh stressed that the national debt should be the last thing on banks’ agendas.

“If we spent the same time we do talking about the debt on increasing productivity, the GDP of the country would soar. Recently, Lebanon’s GDP increased to $33 billion. It could be $50 billion! Debt is not a problem as long as you generate productivity.”

The real problem

Lebanon’s endless political infighting discernably limits investment opportunities for individuals and banks alike. Mortada said that while the central bank has done a great job, the government needs to play its part.

“Now it’s up to the politicians to provide the second half of stability. If they gave us the stability we needed, then I’m sure that our GDP would grow very quickly and the level of debt would not be as heavy as we think it is,” he said.

But as long as political squabbling creates an atmosphere of uncertainty, the liquid state of Lebanese banks is put at risk.

“[People] will always have their assets in liquid form so in the event of a crisis they can transfer all of their assets outside of Lebanon,” said Mortada. “This isn’t bringing any added value to our GDP.”

Khalife concurred, reiterating the need for political calm.

“If you have political security, plus economic stability, you’re going to get more competition and more FDI [Foreign Direct Investment] and this is something we should be hoping for.”

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Society

Natural, not neutral

by Nathanael Massey
written by Nathanael Massey

Nabil Habayeb

President and CEO,  General Electric Middle East

Nabil Habayeb - President and CEO, General Electric Middle East

The environmental problems in the Middle East are huge, and as of yet we still don’t have a common approach to resolve them. As a technology provider, we at GE are doing everything we can to address these issues, but the key thing is implementation of policies and solutions.

This will require a good understanding of the problem by the leadership, a commitment to resolve the problems, and a partnership with all stakeholders — public, private, non-governmental organizations, governmental and financiers — to act accordingly. The main thing is to make sure that we bring awareness and solutions, and have a debate, and come up with reports that focus on the region’s specific issues, in which the different sectors can take an interest.

Five years ago our chairman started the “Ecomagination” initiative, which takes the products that we have and invests in solutions that are environmentally friendly. These products have to go through several kinds of certification to ensure that we reduce gasses, purify water, have more efficient power generation equipment and produce sustainable energy…so, from a company point of view, we’re doing what we think is our responsibility, not just from a corporate social responsibility perspective — of course we have shareholders who will be looking for their return since we are not an NGO. A company like ours can now develop products that are environmentally safe and at the same time profitable. That is why we dub the initiative “Green is Green.”

Ziad Abichaker

President, Cedar Environmental

Since 1992 our country has been under an emergency plan for solid waste collection and disposal — an emergency plan that lasts 17 years?  Something is amiss here. First, the plan has 50 percent of Lebanon’s waste centralized in one landfill site; it was Bourj Hammoud until 1997 and since then it has been Naameh. Soon, space will no longer be available to keep on this environmentally destructive path in Naameh and an alternative would be in order.

There are two alternatives.  Either we keep extending the current “emergency” plan and keep centralizing waste disposal in a mega landfill or we decide to reverse the road and start doing what most other countries are doing, which is sorting, recycling and composting.  Some would argue that we are doing this now under the current plan, but what they don’t know is that we are barely doing this for 6 percent of our total daily waste load.

Soon, it will be a nearly impossible task to convince another region to accommodate the waste of Beirut and Mount Lebanon in their valleys and open spaces, which makes the alternative of continuing with the current plan practically impossible to pursue.

Every region will have to select a technology that will have the least destructive footprint geographically and environmentally. The problem is it might already be too late. Such an endeavor would require at least a two year planning and execution period.  Are the people in charge of the solid waste file doing any thinking about this eventuality?

Garabed Kazanjian

Oceans campaigner, Greenpeace, Lebanon Branch

Garabed Kazanjian - Oceans campaigner, Greenpeace, Lebanon Branch

It is astounding to see a country like Lebanon, which relies greatly on tourism to rebuild its economy, gradually and consistently obliterating its ecotourism assets. Two-thirds of the Lebanese population reside on the coast, a fact that naturally exerts great pressure on coastal resources. Twenty years on after the end of the civil war, solid waste dumps still exist in the form of coastal mountains, constituting a health hazard to the public and a source of toxic discharge to the marine life in their vicinity. Some sites, such as the Saida dump, continue to grow to this date like a cancerous tumor in the absence of waste treatment plans. Moreover, more than 50 pipes continue to discharge untreated sewage on a daily basis into the sea. Chaotic urban development contributes to the destruction of vital marine habitat, primarily the nursery areas of numerous commercially important fish species.

Fragile as our marine ecosystem is, due in great part to the pollution and destruction it is subjected to daily, not to mention the intensely destructive and unsustainable fishing practices throughout the whole Lebanese coast, it will not have the resilience to combat the effects of global catastrophes, primarily climate change and ocean acidification.

That is precisely why Greenpeace is campaigning for the establishment of fully protected marine reserves covering 40 percent of the Mediterranean. These no take/no dump areas (areas protected from both fishing and pollution) aim at protecting vital habitats, such as spawning grounds and nursery areas of threatened marine species, and aid in the recovery of depleted stocks.

Furthermore, the new Lebanese government should impose stricter regulations on coastal industries in regards to their waste disposal, update and implement fishing regulations, and put into practice the zero waste program.

Rima Habib

Associate professor, Faculty of Health Sciences, American University of Beirut

We know that pollutants are responsible for a number of public health problems in Lebanon and beyond… In Akkar in North Lebanon, for example, we performed studies that found evidence of heavy microbiological contamination in water sources, usually as a result of infrastructural problems. In these areas, outbreaks of diarrhea and other symptoms are common… In some communities as much as 80 percent of household water sources can be contaminated, and close to 30 percent of households report sicknesses as a result of contaminated water. Children, of course, are particularly susceptible. This problem is more endemic to rural areas where there is a lack of proper infrastructure to treat and transport water. Another health risk is air pollution. Lebanon is not a highly industrialized country, so the largest contributors to air pollution are traffic emissions, which are usually concentrated in and around urban centers where there is a lot of traffic – Beirut, Tripoli, etc. Air pollution leads to respiratory ailments and to a lesser extent cardiovascular disease as well. Another problem with air pollution is CO2 emissions, of course. To deal with these dangers, it is necessary to apply environmental and public health standards and involve major branches of government…it would be truly excellent if Lebanon could establish a multi-disciplinary agency that involved all the ministries, something like the Environmental Protection Agency in the United States, that has “teeth” to enforce standards and make real changes to address human health from the preventive angle first, meeting possible threats before they result in illness.

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Financial Indicators

Regional equity markets

by Executive Staff
written by Executive Staff

Beirut SE  (one month)

Current Year High: 1,629.74  Current Year Low: 705.56

The Beirut Stock Exchange (BSE), like the country, is being marinated in election oil and masses of political spices. Global markets add their bits to support the notion of wait and see, which has been valid for such a long time and reported on so often that it almost appears to be part of the BSE’s DNA by now. In monthly figures, the Blom Stock Index (BSI) read 1084.9 points at market close on April 24, representing a gain of 29 points versus the last close in March. Market cap leader Solidere traded sideways in the $15 range throughout April. Banks Audi and BoB announced that they will disburse cash dividends for 2008, reflecting the solid earnings positions of the Lebanese banking sector. 

Amman SE  (one month)

Current Year High: 5,043.72  Current Year Low: 2,550.70

The Amman Stock Exchange (ASE) Index closed at 2,803.33 points on April 26, up 3.51 percent on the month and continuing a steady upward trend that began at the end of February. Aided by gains in the banking sector (6.5 percent up on the month), the ASE index traversed into positive territory for 2009 — first on April 5 and then again on April 19, keeping its nose above water in the subsequent sessions through April 26. Despite the good showing of banking stocks this month, the services and insurance sub-indices are still the outperformers for the year to date. Market cap leader Arab Bank, trading ex-dividend, zig-zagged in the $16.20–$17.65 range throughout the review period. Arab Potash Company, number two by market cap, traded down towards the end of April after announcing 70 percent cash dividend effective Apr 19. The company announced a 22 percent year-on-year increase in its Q1 2009 profits, to $50 million.

Abu Dhabi SM  (one month)

Current Year High: 5,148.49  Current Year Low: 2,136.64

Closing at 2543.41 points on April 26, the Abu Dhabi Securities Exchange had to take second place to its peer in Dubai for monthly increases — but the 2.2 percent gains in April by the ADX and relatively small lag behind the DFM is less something to report on than the fact that the ADX came in sixth out of seven GCC exchanges in our review period. Telecoms and insurance sector indices ended the period in the red. Banking, construction, consumer, and industry all recorded gains but all were outdone by the real estate sector, whose sector index ended the review period 30.3 percent higher. Aldar, RAK Properties, and Sorouh appreciated by 37.2, 28.6, and 22.1 percent, respectively. Whereas energy firm Taqa weakened 3.5 percent, the Dana Gas stock emerged as the period’s strongest performer, increasing 44.9 percent over the period. However, on the year to date, for which the ADX Index barely was positive by April 26, Taqa is still Abu Dhabi’s strongest gainer whereas Aldar and Sorouh still need to regain a lot of ground in order to turn green.  

Dubai FM  (one month)

Current Year High: 5,859.57  Current Year Low: 1,433.14

The Dubai Financial Market (DFM) closed at 1,638.15 points on April 26, a friendly 4.44 percent higher than it stood at the end of March. Stocks in the utilities, real estate, and telecom sectors led the market up. The index was as much as 11.2 percent up intra-month but investors harvested cash gains in the latter part of the month. For an attention grabber, shareholders in Shuaa Capital had to confirm that they wanted to keep the company open after loss figures triggered a clause in the DSM rules. They unsurprisingly did so. Equity augurs are meanwhile haranguing about the likelihood of further equity downturns, adding as latest fodder for worries the swine flu panic which could be a viral contagion negatively affecting global markets in general and trade and vacation hubs in particular. The fact that consumption of pork is not the cause of the disease cannot be a comfort, because a problem related to pork consumption would be the easiest to remedy in the GCC. So concerns loom about what impact the human-spread virus will have on the stocks of airlines, hotels and tourism-related developers.

Kuwait SE  (one month)

Current Year High: 15,654.80            Current Year Low: 6,391.50

The Kuwait Stock Exchange (KSE) reported an index reading of 7,479.30 on April 26, representing a gain of 10.9 percent on the month. The best sectors were real estate and industrial, which outperformed the general index by 6 and 3.5 percentage points, respectively. IFA Kuwait, an investment company, and developer, Munshaat Real Estate Project Co, were the top gainers on the KSE in the review period. The former saw its share price more than double and the latter achieved a price gain of 83.3 percent. The KSE has been able to lift the downtrend that had it under its thumb in the first two months in 2009 but the market is still faced with a lot of uncertainty, partly home-spun. The country is waiting for elections on May 16, but one party has already announced a boycott and it is not at all sure that the elections will restore political decision making powers to what is needed for improving the economy in a sustainable way. Market discipline is also still to be improved, as the KSE underscored by suspending three dozen companies for failure to meet disclosure deadlines.  

Saudi Arabia SE  (one month)

Current Year High: 10,089.52            Current Year Low: 4,130.01

Including a three-day dip of profit booking, the Saudi Stock Exchange’s TASI experienced a 15.7 percent gain over the review period to close at 5,440.30 points on April 26. Energy and utilities were the sole sub-index that stayed in the red; most sectors didn’t stray far from the seasonal formula of optimism. However, insurance did stray into exuberance with a sector index gain of over 39 percent in merely 19 trading days. No wonder that insurance stocks occupied all the top spots in the gainers’ list: Sanad, Arabia, Saudi ACIG, Salama, and SABB Takaful were the leaders with gains ranging from 51 percent (SABB Takaful and Salama) to a phenomenal 142.7 percent for Sanad. Biggest underperformer was Al Ahsa Development Company which reported a $1.68 million loss for the first quarter and whose share price slumped 14.7 percent. The ratio of gainers to losers was very positive as only 11 stocks moved lower in April. SABIC, avidly watched by analysts in this period, reported a 50 percent drop in gross revenues and its first quarterly net loss since 2001 for Q1, 2009, but the stock gained 14.6 percent during the review period.

Muscat SM  (one month)

Current Year High: 12,109.10            Current Year Low: 4,223.63

The Muscat Securities Market (MSM) may have the prettiest acronym of all GCC stock exchanges, but its performance in April was nonetheless a marvel in its own right. Closing at 5,252.47 points on April 26, the MSM advanced 13.5 percent when compared with the last close in March and leapt a big step towards recouping its losses from early in 2009. Industry led the market up as services and banking came along nicely. Al Hassan Engineering and Oman Flour Mills were the top performers in the review period, each gaining more than 80 percent. Gulf Stone Compay and Salalah Mills Co — a food sector co like Oman Flour Mills — inversely were situated at the other extreme of the market and saw their share prices melt down by 92.3 and 88.9 percent, respectively. Market cap heavyweight Omantel was notably weaker, ending the period 18.2 percent down.

Bahrain SE  (one month)

Current Year High: 2,902.68  Current Year Low: 1,572.19

The Bahraini bourse (BSE) went through a bulge of gains in the middle of April but the risk appetite of investors quickly proved subservient to their desire to book profits, and the BSE general index closed at 1,580.22 points on April 26, a shade under one percent down when compared with the start of the month. Banking stocks were the drivers of the upward movement in the middle of the month and outperformed the general index with a six percent gain in the review period. The industrial and insurance sectors were rather inactive in April while the investment sub-index underperformed the market. Esterad Investment was the best gainer on the BSE in the review period – the company, which affirmed 15 percent cash dividend at the end of March, moved up 34.6 percent in a phase of trading ex-dividend. Gulf Finance House, which had slumped to historic lows in January and February, was the BSE’s second-best gainer, adding 32.3 percent. In a merger and acquisition deal, Salam Bank-Bahrain formally submitted an offer for Bahrain Saudi Bank. The merged entity would have eight retail branches in Bahrain.

Doha SM  (one month)

Current Year High: 12,627.32            Current Year Low: 4,230.19

A close at 5,424.23 points on April 26 gave the Doha Securities Market (DSM) a promising gain of 10.9 percent for the period since the start of the month but the DSM is still down 21 percent from the last trading session in 2008. This means the DSM is still the year’s biggest underperformer in regional terms, trailing the Saudi bourse at the top by 35 percentage points and lagging behind the second-worst loser, the Bahrain Stock Exchange, by more than eight percentage points. Services were the DSM’s best gaining sector in April, advancing 16.8 percent and followed by banking, up 10.21 percent. All four sector indices on the DSM were higher in April and all but three stocks ended the month unchanged or higher. The strongest loser was Ahli Bank whose 26.5 percent drop wiped out sudden gains made by the stock during a short period in March. The insurance sector visibly underperformed the general index but insurance companies released surprisingly positive results for the first quarter of 2009. Intermittent profit taking influenced the market during the review period.

Tunis SE  (one month)

Current Year High: 3,418.13  Current Year Low: 2,836.64

The Tunindex closed at 3,321.58 points on Apr 24. This represents a gain of 7.42 percent since the start of April, which constitutes a significant upturn in the market’s ascending trajectory that has persisted for four months and certifies the Tunisian Stock Exchange as a veritable maverick, or young bull, in international comparison for the year-to-date. Share price developments since the beginning of 2009 are in the green for all sectors on the TSE, with the sole exception of the building and construction materials sector which is down a fraction of one percent ytd. Insurer STAR was the best performer in April with a 31.7 percent gain. Adding 21.4 percent, Banque de Tunisie had a notably strong price performance and ended the review period in top position for market capital, passing the Poulina Group whose shares also rose but at a lower rate (6.8 percent). 

Casablanca SE  (one month)

Current Year High: 14,631.53            Current Year Low: 9,405.86

The Casablanca Stock Exchange (CSE) again changed direction, this time back north. After losses in March, the Casa All Shares Index close at 10,967.65 on April 24 represented a gain of 5.44 percent since the start of April. The CSE is still marginally down on the year to date but is the region’s most expensive exchange in terms of price to earnings, ending the review period at a P/E of 17.37x according to Zawya. Silver miner SMI topped the list of gainers with 26.8 percent and is now quite an outlier in terms of P/E with 41.13x. Runner up in the gainers was real estate firm, Groupe Addoha, with 20.5 percent. The weakest performers on the CSE in April were car distributor, Auto Nejma, and agro-industry firm, LGMC, losing 11.3 and 11 percent, respectively. Market cap heavyweight, Maroc Telecom, had a positive month, gaining 5.3 percent.

Egypt CASE (one month)

Current Year High: 11,935.67            Current Year Low: 3,389.31

The Egyptian Exchange (EGX) was an example for the elusive green shoots that the tillers of the global economy have so emphatically been discussing in recent weeks. Gaining 21 percent since the start of April, the EGX benchmark index is now up 10.4 percent on the year to date and seems to have distanced itself from the sentiment of total gloom that permeated the opinions of EGX market watchers in the first two months of 2009. Best price performers were two mid-sized stocks, conglomerate Lakah Group (96.8 percent) and real estate developers EHDR (87.7 percent). Numerous large cap companies could add handsomely to market valuations of their shares, including financial, telecoms and real estate sector companies. The Orascom cousins, OTH and OCI, in the middle field of ascenders this month, gained 16 and 11.1 percent, respectively. A new index tool, the EGX 70, is now in its second month of operation. The index, which tracks the bourse’s second tier of 70 most active stocks (after the volume leaders in the EGX 30) increased slightly over 9 percent in April.

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Consumer Society

A slower tick

by Executive Staff
written by Executive Staff

Watch Industry

Time is money? Yes, but what if money’s gone? As the economic slump affecting the world today has caused consumers to worry about wealth, spending and even their future, spoiling oneself with luxurious timepieces is no longer a priority. And the watch industry has been especially hard hit by the worldwide decrease in demand.

“This crisis is not specific to a region, a client, a brand or an industry. It is everywhere; it is killing everybody,” says Georges Bechara, brand manager of Zenith in the MENA region.

Some regions are more affected than others. America — including North and Latin — is heading the list; then comes Europe, and then Asia. Still, the slump in overall demand has been significant in the first two months of the year, leaving watchmakers and retailers on the lookout for any and all business that might come their ways.

According to the Federation of the Swiss Watch Industry, the export of Swiss watches and movements has dropped 35 percent in units and 22 percent in value in the first two months of the year compared to the same period in 2008. In the Middle East during the same period, the drop in units and value was 36 and 22 percent, respectively. In the USA alone, the drop was 47 and 39 percent.

Slower Growth

“The only thing we can say is yes, there is a global crisis. Our sales are down worldwide definitely…  but the thing is that we view it more as a correction,” says Eric Vergnes, Middle East’s general manager of Tag Heuer.

The double-digit growth that was sweeping the watch industry in the last couple years was mainly fueled by ever-increasing demand and very short supply. Retailers and customers had to sometimes wait for months on long waiting lists for their purchase to be delivered.

“A double-digit growth is not normal economically speaking,” says Jean Tamer, president of Tamer Frères, the official distributor of some luxurious watch brands in Lebanon. Watchmakers are rather secretive about their growth and sales numbers, but currently it seems that some might worry about negative growth if sales continue to fall and the overall economic situation deteriorates   further. All the market players agree that the market has not yet hit bottom, making near-term planning difficult.

“Definitely one of the main issues will be for us to continue to grow the way that we have been growing regardless of the crisis,” says Raynald Aeschlimann, vice-president of Omega.

Aeschlimann adds that buying a watch is not like acquiring any ordinary product, as it “appeals to your sense of lifestyle and aesthetics.” He says there’s still demand for palatial and captivating timepieces. However, the fact that consumers are more cautious about their spending is affecting sales, and thereafter growth of the overall industry.

Smaller portfolio and investment

The watch market does not operate under the basic economic law of supply and demand which states that when demand is less than supply, a price decrease will result — and vice-versa. When demand falls in the watch market, watchmakers deal with it differently. They decrease their production, and thus their portfolios, in order not to overstock. This practice leaves the market at a certain level of equilibrium.

“They (the watchmakers) are all concerned; they want to make sure not to over-produce. Instead of producing 10 complications and 10,000 watches for example, they will make maybe 50 complications and 5,000 watches,” says Zeina Khawaji, general manager of Cadrans in Lebanon, distributors of watch brands like Dior, Piaget, Vacheron Constantin and others.

Watchmakers are currently picking the most successful models, producing fewer quantities, and being cautious with new launches since the product might not answer today’s consumer demand.

“Now we are studying what worked for the last two to three years in terms of sell-out, and we are focusing on these products. We are adding some novelties which complement each collection apart, but mainly trimming the collection to [include] the most important collections and models,” says Bechara from Zenith.

Still, as prestigious watchmakers have their own identities, positions and ranks in the market, none have found it necessary to alter their models, production tactic or any other related strategies. The watchmakers say they are only playing with quantity, and not quality, staying loyal to their unique characteristics and historical image.

Moreover, watchmakers are now being more cautious with new investments. They have not entirely stopped their expansion plans, but they are certainly studying the feasibility of these developments and only investing in what is necessary. For example, although Zenith will soon open two boutiques in Dubai, it seems that some other investment have been halted, Bechara says.

“When you look at 2008, of course [brands] prepared for 2009 with big offers, but they stopped because it is not the right moment, and we did the same,” he says. “We will launch it in due time.”

In addition to the smaller portfolio, watchmakers have to find ways to cut down their costs. But they say they try to avoid laying employees off, because they’ll need the talent when the market starts to pick up again.

“[We are] checking all our costs and trying to reduce [them] by postponing certain investments… unless it is necessary, we are keeping the money for the right moment,” says Paulo Marai, managing director of Versace Watches. “But of course we are very conscious of reducing the number of employees and not really touching positions which are key to the future of the company.”

Who will suffer the most?

As regions are not equally affected, the same applies for brands. Market players say that during good times, some brands increased prices without adding value to their products. “A lot of our competitors were tempted to become luxury brands and they moved upscale,” says Matthias Berschan, president of Hamilton International. “There is now a big gap between the price they are asking for versus the substance of the products, and I think those brands will have huge difficulties.”

Now, consumers are pickier, harder to please, and very selective, and therefore pay more attention to details and to getting value for what they are paying.

“With this crisis, [the customer] is taking into consideration the equity of the brand, the history, the DNA. So he is not going to newly established brands,” says Barkev Ataminan, business manager at Ets. Hagop Atamian.

Tamer echoes Atamian by saying customers want “more for the same.”

Experts say the brands that do not offer value for money, and new brands, are considered weak and might not survive the downturn.

“I think we will also hear of some small brands which will disappear because there is no room,” says Bechara.

In boom times, the high returns in the watch industry enabled many to become watchmakers, but without solid communication or a structural base.

“The mistake of the watch industry is that anybody could really have it very easy to start up. So many have decided to enter the market [and] I think today these companies that do not have solid bases will suffer the most,” says Marai from Versace.

The Middle East

“The Middle East is at the forefront of the evolution of luxury goods,” says Aeschlimann from Omega. As a new and growing market, the region has been an attractive destination for many brands looking for new investments and aiming to position themselves as leading market players.

Luckily, Middle Eastern economies are still better positioned to cope with the current downturn, and the watch market in these countries will follow suit. The demand has decreased, but certainly not as sharply as in other parts of the world.

“The Arabs have very substantial fortunes, and if they lose some money it will be a small percentage of it; it is still a small drop in their fortune,” says Tamer from Tamer Frères.

Even in the region, some countries are more affected than others. Dubai has been the worst hit, since a large amount of demand depends on tourists and the many expatriate workers, who are now fleeing the Emirate after they lost their jobs.

“One way we will [face] this is by focusing on forging relationships with the people from this region and not just tourists,” says Aeschlimann.

Other GCC countries are more stable, since their market mostly depends on local demand. The Levant is still considered by watchmakers to be a good opportunity for growth.

“We are actually growing in Lebanon and Syria, and suffering more in markets which are more dependent on international tourists,” says Vergnes from TAG Heuer.

TAG Heuer is even planning to open a new boutique at the Beirut Central District this fall.

“Lebanon is for us a key market. A big part of growth is coming from the Levant area,” says Vergnes.

Although the Lebanese economy has been less affected by the global downturn, Khawaji says the decreased demand is felt in the country.

“We are affected because most of our clients are people who are investors outside Lebanon. They haven’t stopped spending, but they have decreased their spending,” she says. “There is a kind of panic.”

Barkev Atamian says the decreased demand for luxury watches is expected to be temporary, and will not severely impact the market.

“Countries like Lebanon and Syria have room to grow. These will come back to the 2008 situation much quicker than other countries.” Barkev Atamian says. “We are investing much in Lebanon and Syria by opening boutiques in downtown and boutiques in several cities in Syria.”

The gray market

Manufacturers are concerned about the increasing activity in the gray market. As demand dries up, some authorized dealers might sell off their supply at a huge discount, just to get rid of the stock and ensure they survive.

“I know somebody yesterday who dropped a big bulk of some other brand at 40 percent less than the cost just to get rid of them,” says Bechara from Zenith.

Retailers may have many reasons to do so.

“With the huge currency fluctuations in some countries… in the short term [they] can make such big deals,” says Berschan from Hamilton.

This might severally hurt the reputation of the watchmaker, which will be very hard to reverse.

 “It brings in a big mess. It can jeopardize the whole work in establishing the brands in terms of brand image and distribution image; it can blow a whole long-term strategy because of a very short-term opportunity,” says Berschan.

If such things happen, manufacturers immediately halt their relationships with retailers, who will have a hard time regaining their credibility — if ever.

“If they do something like this with only one of the Swatch group brands, the Swatch group closes them down,” says Berschan.

New incentives

Watchmakers are not only working on their development strategies and portfolio, but they are also trying to pamper their customers, to give them more incentive to buy their products.

“If customers want to spend, they need to be reassured. And the best way to reassure a potential buyer is to assure them a top-notch experience, and it means the best possible environment for a boutique or products that are properly displayed, and the team has fantastic knowledge of the product,” says Vergnes from Tag Heuer.

Brands are also emphasizing the need to keep on improving their products, and adding novelties, in order to keep-up with their customers’ expectations.

“It is about sticking to the roots by continuing to surprise people,” says Aeshclimann from Omega. “If you have the right product, clients will come.”

Marai from Versace agrees.

“We have decided, despite the downturn, not to stop our process of developing new products,” Marai says. “We can come up with some novelties that are interesting if we just stay in our existing lines.”

Future expectations

The watch industry, as with every industry these days, is facing difficulties. And like other sectors, watch companies have to rethink their business strategies, expansion plans and other long-term goals. In the end, when demand returns to its excessive levels and people start adorning themselves with plush watches and bravado pieces again, those who showed their solid base and ability to adapt will be the ones benefiting.

“A crisis like this will clearly show who had a long-term strategy and speaks to the substance of the product, versus the price and who did not, and I think there will be a huge difference between those who will suffer a lot, and those who will still perform well in this difficult environment,” says Berschan from Hamilton.

Tamer seems downbeat regarding the length of the current downturn.

“Surely we entered a crisis that will take over three if not five years to recover,” he says. “We still have not reached half the way, and it has still not reached the bottom.”

As some try to predict the future, others find it impossible to expect what the turnout of the current situation will be. “It is totally impossible to tell. I just hope that we keep on doing well,” says Vergnes.

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North Africa

Private power

by Executive Staff
written by Executive Staff

Tunisia is one of the few countries in North Africa that is not a major energy producer, but a series of new projects is set to recharge the electricity sector.

The plans include a variety of strategies, such as natural gas production facilities, the traditional suppliers of electricity, being supplemented by renewable ones. Although the state’s electricity company maintains strong control over distribution, private companies are increasingly able to participate in the development and production phases.

The Abu Dhabi National Energy Company (TAQA) recently joined the ranks of the Tunisian Electricity and Gas Company’s(STEG) as new private competitors. National production of electricity in 2008 was just under 14 billion kilowatts per hour, of which STEG produced 10.25 billion kilowatts per hour and the local private power generator, Carthage Power Company (CPC), was responsible for most of the rest. With demand for electricity rising at around six percent annually, there is potential for other private sector contributors.

“If foreign investors are allowed to invest, they have a guaranteed sale for the electricity,” said Constantin Haddad, general manager of Carthage Power Company. “Demand is rising impressively in Tunisia, thanks to rapid population growth and the increase in industrial activities.”

In early April, TAQA announced it will allocate part of a $2.5 billion investment in Maghreb energy infrastructure to a combined gas power plant in Bizeerte. The plant will generate between 350 and 500 megawatts. Construction is expected to begin this year under the build-own-operate-transfer model, whereby TAQA will design, finance, construct and maintain the property. Commercial operations will begin in 2012 or 2013, with production sold exclusively to STEG.

The TAQA project is only the most recent of a number of new plants. Work is set to begin on a 400 megawatt combined-cycle plant at Ghannouch, near Gabes, at an estimated cost of around $600 million. The development is due to start operations in 2011. France’s Alstom group will build, operate and maintain the installation for 12 years. Ghannouch will be the third power plant constructed by Alstom for STEG in Tunisia, after the combined-cycle power plants of Sousse and Rades, which went online in 1994 and 2001, respectively.

STEG also has a list of projects it is developing independently, such as an extension to the Fernana plant due to be ready by end-2009, and an extension to the Thyna plant at Sfax, scheduled to be in production by 2010.

Even more ambitious programs are already in the works for the country’s 12th development plan, which will last from 2012 to 2016. According to the head of administrative affairs at STEG, Mohamed Ben Ftima, two combined-cycle plants are to be built at Sousse and Bizeerte, in addition to a plant at El Haouaria, which will deliver power to the Tunisian grid.

A joint company set up between STEG and the Italian grid operator, Terna, will carry out this project. Interconnection with Italy will be via a cable between Cap Bon and Sicily.

Many of these projects are natural gas-based plants but the government is also leading the charge on renewable energy production, especially wind power. Efforts so far have allowed Tunisia to cut its energy bill by 10 per cent annually for the past three years and launch an international tender to sell unused carbon credits — and there is potential for more growth.

Renewable energy

Studies indicate that Tunisia could eventually generate 1,000 megawatts from wind. By end-2010, 120 megawatts of wind energy will come online from the Sidi Daoud site, at a cost of around $80 million. Together with the three new wind plants at Metline and Kchabta in the Bizeerte region, this source will eventually supply up to five percent of the nation’s energy requirements.

Renewable energy projects have become an important target of foreign direct investment, particularly from Spanish firms. Gamesa, the wind turbine manufacturer, is supplying STEG with 91 turbines for Bizeerte. The Spanish Development Aid Fund will finance the project, which is set to become Tunisia’s largest wind-power facility. Spain, it should be noted, is one of the global leaders in wind technology.

Tunisian legislators are also encouraging the use of alternative energy at the most basic level, with legal provisions for companies and individuals to produce electricity from renewable sources for their own consumption. Any excess electricity can be sold to STEG and used in the national grid. With this entrepreneurial approach, it seems likely that the government will be able to meet its goal of a 20 percent reduction in consumption, while also sustaining Tunisia’s steady growth.

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North Africa

Building momentum

by Executive Staff
written by Executive Staff

Morocco’s industrial ambitions received a boost in January 2009 when King Mohammed VI launched the construction of Tanger-Med industrial park. Already the site of a significant port project, the new venture will boost output and increase exports to Europe. With strong trade ties to a diverse group of nations, including free trade agreements (FTAs) with the United States (US) and Europe, Morocco hopes to ride out the current recession by building infrastructure to support renewed trade levels in the future and by relying on consistent revenue streams, such as phosphates and derivatives.

When complete in 2012, Tanger-Med will be among Africa’s largest ports, with a container handling capacity of 8.5 million, twenty-foot equivalent units (TEUs). The port, just 14 kilometers from the Spanish coast, will greatly increase Morocco’s profile as an industrial destination and serve as a logistics center for the whole Mediterranean.

The purchase of 30 square kilometers of public land by the Tangiers Mediterranean Special Agency (TMSA) will bolster the free trade zones that have sprung up near the port facility. A second agreement schedules the development of a 50 square kilometer offshore zone near Tetuan. The zones that were established in 2002 have proved successful. The Tangier Free Zone is home to some 400 businesses and 40,000 jobs, while the Melloussa Free Zone, where the Renault-Nissan alliance plans to develop an automobile industrial complex by 2010, is attracting private investment worth $1.9 billion and generating 36,000 jobs.

France has been a strong supporter of Moroccan industry and is its largest trading partner, accounting for 17.8 percent of trade. In addition to successfully advocating for Morocco to be awarded “advanced status” for European Union trading, France signed several bilateral accords that will provide infrastructure financing.

A new tram system will be constructed in Rabat, financed by a $260 million loan from France. The task of developing and implementing the new light rail network has been assigned to France-based engineering firm Alstom and the French infrastructure group Colas. France has also approved $125 million in grants to study the feasibility of a high-speed rail link between the port of Tangiers and Casablanca.

Foreign investment

While a large portion of Morocco’s foreign direct investment comes from France — much of it invested in infrastructure — North African and Asian countries are playing an increasingly important role in the industrial sector. Industry contributes 25 to 35 percent of gross domestic product (GDP), depending on agricultural performance, and investors have found a number of opportunities, particularly in fertilizer and phosphates production.

Sales of phosphates and derivates reached $6.4 billion in 2008, an increase of more than 50 percent from $2.7 billion in 2007. The segment accounts for 33.4 percent of all exports.

As prices have increased for phosphates and derivatives on the international market, foreign companies have expressed interest in Morocco’s holdings. In May 2008, Moroccan state-owned phosphate company Office Cherifien des Phosphates (OCP) signed a billion dollar deal with Libya Africa Investment Portfolio (LAIP) for the construction of three phosphate derivative plants. One is to be built in Libya, another in the phosphate-rich Jorf Lafsar region of Morocco. The third — a fertilizer plant — will be located in one of the two countries after negotiations are complete.

Just days before the LAIP deal, OCP signed a half billion dollar agreement with Hanoi-based PetroVietnam Fertiliser and Chemical Joint Stock Company to build a diammonium phosphate (DAP) fertilizer plant, expected to open in 2011, with an output of between 660,000 and one million tons. Despite volatile prices, global demand is high and chemicals will continue to be a major revenue earner.

Morocco’s expanding list of investors and trade partners should help foster broader market access for its industrial exports. In addition to the agreement with the EU, Morocco has forged other partnerships, such as the 2004 Agadir Agreement and the 2006 US FTA. The agreements have only recently gone into effect and their benefits will remain elusive until the financial situation stabilizes. While Morocco will feel the effects of the global financial crisis, with GDP expected to grow 5.7 percent in 2009, down from 6.5 percent the previous year, the rate is impressive given that Morocco’s major export markets in Western Europe have been hit hard by the downturn.

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North Africa

An economy less fueled

by Executive Staff
written by Executive Staff

Though the global recession will eat into Algeria’s energy revenues and potentially slow new projects, hydrocarbons will continue to drive the country’s growth this year.

Energy, and natural gas production in particular, dominates the economy, accounting for around 45 percent of gross domestic product and some 95 percent of export revenues. The extent of the industry’s influence on the economy becomes even more pronounced when the role of the state is taken into account, given that most of the funding for state services, infrastructure projects and subsidies comes directly from energy earnings.

The sector is one of the few off limits to the privatization program. Industry and Investment promotion Minister Hamid Temmar told parliament in mid-January the only state enterprises that would not be sold off were the energy sector and the national railway.

Earnings from hydrocarbons in 2009 are expected to drop to less than half their 2008 levels, due in large part to the decline in commodity prices.

Speaking on state radio on February 24, Minister of Energy and Mines Chakib Khelil said if prices remained at their present levels, Algeria would generate around $30 billion from gas and oil sales this year. This is a far cry from the $76 billion earned in 2008, when crude prices hit record levels of $147 per barrel. The reduced income stream means Algeria will have to dip into its fiscal reserves to fund state programs to improve infrastructure, health care, housing and education.

Demand dips for oil exploration

The global slowdown in the activities of international oil companies has also had an impact on some of Algeria’s more recent tenders. An auction for exploration rights in 16 plots held in mid-December generated little interest, with only nine bids received from the 80 firms cleared by the government to take part. After the bids were assessed, just four exploration licenses were granted for the 16 tracts available.

According to Khelil, the poor response to the auction was a result of the global economic downturn. “With conditions in the market, you would expect this kind of result,” he told the international media in early January.

While the minister may not be disappointed by the lack of interest, some analysts are suggesting that other factors could be causing potential investors to hesitate.

According to Susan Mance, an analyst at Edinburgh-based consultants Wood Mackenzie, complicated contractual requirements in Algeria can limit a foreign investor’s profits to less than 10 percent. The situation has lead many international companies to steer clear.

“Concession terms are among the most challenging fiscal regimes for international oil companies,” Mance said regarding doing business in the Algerian energy sector.

But at the same time, Algeria has demonstrated a keen interest in expanding its role in the international energy industry, as it seeks to become a transit route for exports from other countries, in addition to being a supplier itself. In late February, Algeria and Nigeria held talks aimed at finalizing a memorandum of understanding on the proposed Trans-Saharan Gas Pipeline (TSGP) project.

The $12 billion scheme foresees construction of a 4,400 kilometer gas pipeline from Nigeria through Niger to Algeria, where it will link into the Algerian export grid to Europe. According to Mohamed Meziane, the chief executive officer of Algerian energy monopoly Sonatrach, the TSGP could be operational by 2015.

“There is the need to speed up the process and ratify it fast,” Meziane said after a round of talks in the Nigerian capital. “This would give the two countries the opportunity to fully benefit from the investment.”

It is still unclear if Algeria will contribute to the construction cost of the pipeline, or merely be a conduit for Nigerian gas on its way to Europe. Either way, the country will be in a position to turn a profit.

While 2009 may prove a more modest year for the country’s hydrocarbon coffers, the country has identified gas reserves of around 4.4 trillion cubic meters and vast areas of the country are yet to be surveyed for further reserves.

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