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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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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