Tourism

Lebanon – Hedonists hooray!

by Executive Staff
written by Executive Staff

In spite of the images of conflict and war associated with Lebanon over the last few years, the Land of the Cedars has (again) become one of the region’s party hubs, as the Lebanese paradox seems to attract many a night owl.

Hassan is a Moroccan banker working in Dubai. Ibiza, Saint Tropez and Mykonos bear no secrets for him. This summer, he spent a five-day vacation in Lebanon. “I would love to party at one of the open space bars and visit Gemmayze,” he said a week before his arrival. Gemmayze is one of Beirut’s trendy streets sought after by partygoers for bar- hopping. “I have heard so much about the Lebanese night life!” Hassan added.
According to Paul Ariss, president of the Syndicate of Restaurant and Café Owners, there are some 6,000 restaurants, cafés, pubs, night-clubs and discos in Lebanon, with the majority of restaurants, cafés and pubs targeting a clientele aged 17 to 35. A serious percentage of those enjoy a steady income and relatively low expenses, since most of the young women and men still live with their parents and clubbing and dining out is a major source of entertainment for them. Moreover, one million expatriates in the Arab world and Africa regularly visit Lebanon, and one of their favorite activities is discovering new places and menus.
Open space bars, beach parties and beautiful girls dancing against the backdrop of golden fireworks have become part of the Lebanese landscape. “Lebanon, as a party destination, can’t be compared to other countries in the region,” said Tony Habr, owner of Addmind, a company that creates, develops and manages concepts in the food, beverage and hospitality business.
For Ramzi Adada, owner of Riva, a company that manages Island at the Riviera Beach hotel and employs over 80 people, Lebanese nightlife has evolved dramatically in the last 15 years. “While Lebanon used to lag behind Europe, it recently has caught up with most international clubbing scenes. The only type of entertainment we might still miss being gigantic clubs such as the ones in Ibiza, capable of accommodating 10,000 people,” he explained.

City with a soul
Lebanon being at the vanguard of the party trade can be attributed to the relatively lax regulations compared to its regional neighbors. “In the UAE more restrictions are imposed on clubs, which are, as an example, expected to close at three in the morning, whereas in Beirut they still receive people until dawn,” Habr said. The manager also pointed to the Lebanese crowd, which is able to liven up any venue. Clubs and bars alike are well decorated and are usually built around a sophisticated concept. “Beirut is a city with a soul, unlike other cities in the region, with the exception of Cairo that has another beat to it, one definitely more oriental. In Lebanon, East meets West,” Adada pointed out.
Nazih is a Jordanian investment banker who visited Lebanon this summer. Instead of spending four days like he originally planned, he ended up staying for more than a week. “The places here are unlike anything I have ever seen and people are also extremely friendly,” he said.
For Adada, one of the industry’s main strengths resides in the permanent metamorphosis and innovative approach. The local hedonistic culture gives the sector a powerful edge.
Quality of service provided is another strength of the Lebanese party trade. “Lebanese have gotten used to a certain level of quality on which they are not ready to compromise,” said Michel Razouk, manager of Rand R. The company, which employs about 70 people, runs and operates Sushi Bar, Cactus, and Graffiti Café as well as the L2 lounge-restaurant in Saida.
The reason behind the success of Lebanese venues? A very competitive market and a savvy client base. “Lebanese tend to lose interest rapidly, which forces club owners to redesign their venues every two years, while this period is usually longer for clubs in the West,” explained Habr.
The Lebanese party scene has been revamped in the last few years. Long gone are old-fashioned dance floors, as today the young women dance on tabletops instead. The scene resembles a huge house party where most people know each other. After all, about 80% of the clients are local, while this figure is only 50% in Jordan. Adada explained that at Island, about 60% of clients are Lebanese and the rest foreigners, many of them Syrians and Jordanians.
“Gemmayze, however, caters to a different crowd than what can be seen on the club scene and this might explain the growing number of Europeans we have seen in recent months,” said Razouk who estimates they might account for about 10% of the clientele.

Partying pays
Revenues depend upon the type of venue. While Razouk said that bar tabs start at $25 per person, club owners estimate an average ticket bill to end up between $80 and $150 per head. “Profitability is much higher for clubs, bars and cafés than for restaurants as profit margins are higher when alcohol is served,” Razouk pointed out. Adada believes that clubs can generate yearly revenues of three to five million dollars and have profit margins of about 35 to 40%.
In such a thriving sector, rumors of corruption abound. Habr reckoned that in some of the capital’s largest clubs tables may be sold to the highest bidder. “Corruption exists all over the world; it is not ethical but it is a reality, especially as some managers may think that someone who’s ready to splurge $500 on a table will certainly spend more. At the end of the day it is all about the manager,” he said. Last summer around the capital Arab tourists were paying hundreds of dollars for a reservation.
Despite some drawbacks, the industry is trying to replicate its success abroad. Habr said that his company started expanding after the 2006 War. “The war certainly pushed people to expand out of Lebanon,” Razouk, who plans to expand in Qatar with four concept restaurants, agreed. “However, the fact that Lebanon has been able to export its know-how is a great achievement in itself.”

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Private Equity

Iraq – For the intrepid investor

by Executive Staff
written by Executive Staff

Is Iraq ripe for private equity investment? The idea of putting a high performing asset class in what is still considered a war zone seems anathema to many. The lengthy investment terms of private equity appear inconsistent in volatile environments, but after a read of the headlines, industry watchers need only look at the deals fund managers have already made and the willingness of investors who partner in country-dedicated funds, or on a deal-by-deal basis, to realize the possibilities of Iraq as the next destination for private equity. In early 2008, news media reported that emerging markets fund manager Mark Mobius was looking for deals for private equity investments in Iraq. Though influential, Mobius will by no means be the first, but rather follows a crew of daring investors and fund managers who have already established operations in this frontier market.

Iraq is not a monolithic conflict and since the 2008 surge, tensions have quieted down somewhat. The Kurdistan Region, in particular, offers much promise for fund managers and investors. According to Scott Ogur of Scimitar, the risks of investing are lower there, yet, “since the region is still in Iraq, most investors apply a risk premium to it that was commensurate with Baghdad.” In his view, this offers a much sought-after investment environment for those with higher appetites for risk or at least deals where “most investors have missed an important nuance, leading them to overstate risk, and therefore depress asset prices.” The perceived risk premiums investors calculate are factored into decision making when looking to generate excess returns.

A headline economy
Rising oil prices on world markets brought a windfall in revenue for Iraq’s 2008 budget, but cautious budgeting means the country will still have a surplus at the end of the year. The increased government riches are complemented by an improving security situation with fewer civilian deaths and many of Iraq’s 18 provinces relatively safe, with violence largely limited to Baghdad, Diyala, Niniveh, and Salah al-Din.
Andrew Eberhart of The Marshall Fund — the first Iraq- dedicated private equity fund and the first to do a deal in the country — believes that “Iraq’s economy needs the fundamentals — food, shelter, and electricity, but the country can also benefit from technology investment that helps meet these needs.” The Marshall Fund has matched Iraqi demand for foreign capital and the increasingly favorable regulatory structures to support capital inflows. Both the federal Iraqi and regional Kurdistan parliament passed investment laws to encourage foreign investment and protect investors through the rule of law, property ownership in certain industries, and favorable tax holidays.
According to Eberhart, “the government is willing and eager to work with outside investors and there is no need to win hearts and minds in the government.” For private equity firms weary of operating in a potentially high-risk environment, the Overseas Private Investment Corporation, an independent arm of the US government, offers insurance against potential political risks, including expropriations, acts of terrorism and war, and political strife.
Eberhart noted that there is large potential outside of the energy sector, as Iraq was and could still be “the breadbasket of the Middle East” with a large amount of arable land and agriculture employing the most Iraqis after the public sector. Snags common to other sectors are also found in agriculture, which has been victim to chronic underinvestment. Following the fall of Saddam Hussein in 2003, the industry dropped, transforming the country from a net exporter to an importer of food. According to Eberhart, “there were crops, but farmers only had access to local markets.” He explained that the vast majority of crops rot on the vine or in storage. “The ability to come in and invest in processing and distribution is enormous.”

Fundraising
The Marshall Fund is currently fundraising from private investors “who understand the very real investment opportunity that exists in Iraq and also feel there is some potential social benefit, an economic development from investment and a way to complement other efforts of regional stability,” according to Eberhart. Limited partners of this sort must share the fund’s vision as it scours for opportunities. Kyle Stelma of Dunia Frontier Consultants noted that fundraising for deals in Iraq is “an interesting environment with a huge upside. There are initial risks but several alternative investment funds have decided to focus solely on Iraq, despite perceived risks.” Stelma estimates the majority of limited partners to be “individuals with one or two institutional investors,” projecting that, “as we see more successful exits and investments, there will be more institutional investors. There are now a number of large Middle Eastern institutional investors getting close to partnering. It’s just a matter of time.” Eberhart believes that while it might still be a bit early for big institutional investors like pension funds, “we expect to see them as we demonstrate success.”
The climate for making deals in Iraq stems the government’s willingness to revive enterprises that have lain fallow for years. Stelma noted that “a number are interested in former state-owned enterprises and the government is privatizing some of them and really trying to make these transactions work.” Iraq dearly needs for financial institutions, construction outfits, and agriculture-related business to lead the country through its post-conflict development.
Ogur’s group, Scimitar, does not use blind pool funds, the typical structure of a private equity fund, having found that they “are not always the best way to align interests of fund managers and investors in the regions where we invest.” Rather, they work with investors on a deal-by-deal basis. With Scimitar’s group of investors, “when we have a deal that meets our investment criteria, we use our own funds to secure and structure the deal, and we then get commitments from our investors.” The group’s investments total a dozen over the past six years, of various sizes ranging between $5-50 million, and have realized about half of its investments. Its Iraqi focus remains in the Kurdish region where contacts run to the top levels, which is an important requisite when working in the region.

Partnering for exits
In terms of exiting investments, the focus remains on selling companies to a strategic buyer. Ogur noticed a number of strategic buyers looking toward Kurdistan as a place to own and operate profitable businesses. “Turkish investors and businesses are extremely interested in Northern Iraq, despite the political tensions that are commonly mentioned between Turkey and the Kurds,” he noted.
Stelma’s has noticed growing interest from Indian, Chinese, and Turkish conglomerates, with growing opportunities for strategic sales. Outside of petrochemicals, regional and international conglomerates are currently the main exit possibilities, although these options will grow as more players enter the market.

Future outlook
The demand for the basics after long periods of neglect under Hussein and over the past five years makes Iraq’s future outlook strong. In an official visit to the US in October 2008, Iraqi Finance Minister Bayan Jabr Solagh emphasized the need for basic infrastructure, particularly water, electricity and housing. The immediate demand for 2.5 million housing units in a population of 28 million means nearly 10% of Iraqis need new homes. This figure alone should make the heads of real estate giants and property developers spin. According to Eberhart, “the government has inherited a lot of businesses from the private sector and Saddam’s private ownership. It embraces capitalism and is anxious to privatize investment. Ministers promote plans for outside investment and there is low or no costs for taking on operations.”
Eberhart also highlighted the strong demand for banking and the financial services sector. Although JP Morgan and HSBC are already in Iraq, the huge room to grow is evident in the lack of free flow of capital and the economy staying cash-based. Financial services could help sustain the already-high consumer market demand, which Eberhart believes could “find opportunities to grow in Iraq after franchise operations demonstrated success.”
Improvements at the macro level mean increased opportunities for foreign investors to remodel many of Iraq’s industries. As the government moves forth with privatizations and plans to stimulate the different industries, private equity is an ideal asset class to restructure and redevelop a potentially dynamic economy.

 

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Consumer Society

Automotives – Gearing down

by Executive Staff
written by Executive Staff

The automotive industry is feeling the full force of the global financial crisis. General Motors, Ford and Chrysler are on the brink of collapse after their failed bid to get $25 billion in aid from Congress and many of the major automakers are temporarily shutting down production plants as sales drop around the world. In the Middle East, however, car sales have not been so gloomy. Positive growth has been achieved by all the major brands in the region and massive amounts of investment are being put into improving car sales and after-sales facilities. Still, there is nervousness about the financial crisis’ impact on the Middle East, given the significant amounts of investment that have been made and are being made in the region. Thus, 2009 will be a precarious year for automakers and their local partners in the Middle East.

But 2008 was a good year overall for manufacturers in the Middle East. As Phil Horton, managing director of BMW Middle East, pointed out, “Our January to October sales across the Middle East are up 12% over the same period last year.” Horton is confident that BMW will achieve its sales target for 2008. Julian Millward-Hopkins, press manager for Mercedes-Benz, also reports that 2008 was a good year. “The performance of Mercedes-Benz in the region this year has been exceptional with deliveries currently up nearly 20% over the previous year. For the first time we achieved sales of over 10,000 vehicles for the first half of the year,” he said.

The big manufacturers’ new playground
The continued growth of BMW and Mercedes in the region is significant because the big three markets — US, Europe and Japan — are increasingly saturated and competition is becoming increasingly intense in the Middle East. Infiniti and Audi are two manufacturers that have rapidly increased their presence to capture some market potential, both launching a renewed, more substantial presence in 2005. Abhijit Pandit, director of marketing for Infiniti, reported that the Japanese company has achieved rapid growth since 2005 and now the Middle East is the number two market after the US. In 2008, Infiniti achieved 50% year-on-year growth. Audi tells a similar story. Jeff Mannering, managing director of Audi Middle East, stated that Audi believes it can end 2008 on strongly, “finishing with around 7,500 deliveries to customers, which is a healthy 18% increase over 2007.”
Rapid expansion is being undertaken by manufacturers and their local partners. Horton extolled BMW’s local import partners investments in the brand and stated that, “Our importers in Dubai, Abu Dhabi and Saudi Arabia are all undergoing multi-million dollar expansion plans to accommodate their growing business.” This rapid expansion, which is being replicated by almost all manufacturers in the region, has brought the challenge of ensuring that infrastructure keeps up with this expansion. “With growing sales the biggest challenge is always to provide a strong support system. Audi has invested heavily into training, continuous improvement in after-sales service and the development of our infrastructure,” said Mannering. For brands such as Infiniti that have yet to penetrate fully the Middle East, rapid programs of expansion are being rolled out. Pandit said that new showrooms are constantly being opened for Infiniti cars and by 2012 all the market in the GCC and Mediterranean markets will have exclusive facilities.
His company, Pandit said, “pioneered the crossover SUV with the Infiniti FX,” and now all the car manufacturers are bringing out new SUV crossover models, which are set to dominate sales in 2009. The SUV is an important segment of the car market in the Middle East in particular and, according to Pandit, dominates the luxury car sector. With global warming becoming increasingly important in the minds of consumers, the desire to have an SUV with lower emissions has given birth to the crossover SUV and their popularity has been insatiable. Thus all manufacturers are racing to get their versions onto the market. BMW has brought out the X6 Sport Activity Coupe, which has sold out the year’s quota, Audi reported a strong response to its anticipated Q5 and Mercedes has released the GLK, which is expected to achieve strong sales in the region.

Currency chicane
The major challenge that automakers have faced in 2008 has been currency fluctuation. For Infiniti, which deals in yen, this was a major challenge and for BMW and Mercedes, dealing with Euros, it has also been problematic. Horton also stated that “price increases for raw materials including oil, steel and energy,” were issues for manufacturers in 2008 and this decreased the profit margin.
But the biggest snag was encountered at the end of the year: the global financial crisis. In 2009, all manufacturers will be waiting and watching to see what its full implications on the region will be before they make any big decisions. Millward-Hopkins believes that the Middle East is in a much stronger position than the rest of the world, but “we are putting in measures to ensure that our distributors across the region provide customers with a suite of offers.” Thus, even in the surplus-rich GCC, manufacturers are preparing for customers to tighten their belts. “Oil prices are continuing to stay low but I hope the government will intervene as this is a big challenge for the region,” Pandit said. Although manufacturers are aggressively pushing forward their brands in the region, due to the economic crisis they will be hard pressed to achieve a growth on sales in 2009. As Horton stated, the biggest challenge next year will be, “to increase our sales over 2008.”

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Banking

Overview – Banks temper the tempest

by Executive Staff
written by Executive Staff

Before the fateful weekend of September 13-14, 2008, the hot topic on all bankers’ minds in the GCC was how to tackle inflation. Every country in the Gulf was battling ubiquitous, long-lasting and soaring inflation rates and deciding if they should de-peg their local currencies from the dollar. By mid-September, the picture was no longer so black and white — banks in the Gulf, like everyone else in the world, were scrambling to come up with emergency funds to mitigate lending restrictions and to guarantee bank deposits in order to ease the credit crunch they were facing. While the economies of the GCC were hoping the international crisis would blow right by them, Standard & Poor’s noted that, “recent events have shown that as these economies have opened up to the rest of the world in recent years, so too have their vulnerabilities to global economic conditions.” Merrill Lynch expects non-oil GDP growth in the GCC to decline to 7.5% in 2008 and to a mere 5% in 2009. Budget surpluses are also predicted to drop sharply, with Merrill Lynch’s forecasts reporting the current account surplus to plummet from 22% of GDP in 2008 to 15% in 2009. As for Lebanon, the IMF forecasts GDP growth in 2008 to have reached 6% and to drop to 5% in 2009. The Cedar Republic, on the other hand, was not affected in the same way by the global financial crisis. To cushion the effects on local banking sectors, governments around the Gulf have been injecting sizable amounts of liquidity into their banks. Paradoxically, the Lebanese banking sector continues to loan to its government and not vice versa. In the UAE, for example, the central bank plans to feed an estimated $19 billion into domestic banks across the Emirates. Other members of the GCC have announced similar plans, with Saudi Arabia’s central bank voicing a capability and willingness to inject cash into its local banks if and when necessary. David Gibson-Moore, president of BMB Group, believes that the banking sectors of the Gulf have “held up well in 2008” and that even though direct exposure to the subprime crisis has been limited until now, “further exposure is likely to surface.” Lebanon had also not been exposed to the subprime crisis, because the Lebanese central bank has — for quite a few years — imposed tight regulations on the banking sector, prohibiting its banks from investment in structured financial products. Seeing as the Gulf’s state finances are quite robust, the banking sectors of the GCC will surely be able to stay comfortably afloat despite the turbulences. Without such buffering support from their governments, banks in the Gulf would undoubtedly be feeling the effects of the international financial crisis much more.

Most experts hold that banks in the Gulf have been almost entirely unaffected by the global crisis. Such statements are expected — no one wants to hear the grim truth that if it weren’t for the local governments having the ability to provide large amounts of cash to the banks, many of them would have collapsed or would have been forced to merge with other banks. Analysts are dismissing the need for mergers and acquisitions, while some banks are revealing their inclinations towards ‘possible’ mergers in the future. Obscurity is rampant in these uncertain times and it seems neither mergers nor acquisitions will surface until mid to late 2009.
There are many lessons to be learned from the global crisis and the failures of major regulatory frameworks (such as Basel II). Seeing as Lebanon has been able to successfully insulate its banking sector from regulation failure, maybe regional banks could learn a lesson or two from the Banque du Liban. Regional banks need to make sure their money supply is properly supervised, especially since past controls were rather lax and thus “fed the asset price bubble,” said Gibson-Moore. Also, in order to maintain stable levels of liquidity, regulatory systems must be firm and sustained to make sure banks are lending sensibly. To ensure banks do not continue with their bad habits, Gibson-Moore noted that, “compensation systems need to be properly aligned with the successful long-term performance of banks.” Another lesson to be learned from global chaos is that banks and financial sectors altogether need good governance, with board members “that understand what is happening,” stated Gibson-Moore.
In general, the true effects of the crisis will be felt by banks across the MENA region early next year. Gibson-Moore believes that, “the effect of the financial crisis on the banks in the GCC countries is [to] be far from negligible and it will not be confined to the financial sector but it will [also] affect the real economy as well.” Banks in the Gulf are all facing challenges of how to maintain liquidity and the regulators in the GCC “are going to play it safe and be [more] cautious” in 2009, and rightly so, said Gibson-Moore. Lebanese banks, in stark contrast to their Gulf counterparts, have had no problem stabilizing liquidity, as theirs is one of the most liquid sectors in the world. Gibson-Moore feels there is an “urgency for tougher controls,” especially in Qatar and Dubai. Seeing as banking assets per capita are “still relatively low in most GCC countries,” Gibson-Moore contended that, “this leaves sufficient room for growth for all participants [in the Gulf].” Much is to be learned from the mistakes of 2008 and even more from those that began well before the 2008 fiscal year (in terms of investments and lenient policies). Still, Pik Yee Foong, CEO of Standard Chartered Bank Lebanon, expects the Gulf economies “to remain strong.” Most bankers and financial powerhouses are optimistic that although 2009 will present many challenges and growth will slow, banks are expected to perform reasonably well.

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Tourism

Lebanon – Back on the map

by Executive Staff
written by Executive Staff

Since the assassination of Prime Minister Rafiq Hariri in 2005, the Lebanese tourism industry has fallen victim to one crisis after the other. This year, as feuding political factions struck a fragile peace in Doha, Qatar, the industry recovered some of its former luster, with Arab tourists and expats flocking equally from East and West.

As the summer approached, market players in the tourism industry kept their fingers crossed, hoping for a good summer season to beef up their fragile balance sheets in a country where Arabs visitors usually represent about half of hotel reservations. Tourist figures have drastically changed since 1974, the last year before the Lebanese Civil War. That year, 500,000 Europeans and 900,000 Arabs visited Lebanon and the tourism industry accounted for 19.4 % of the national GDP.
“Ever since the end of the war in 1990, Lebanon has not been able to reclaim its former status as one of the region’s prime tourist destinations. The structure of Lebanese tourists has changed as well with many of the incoming flows of foreigners actually being Lebanese nationals holding dual citizenship. Other factors that have also affected Lebanon’s performance in terms of tourism figures can be attributed to the emergence of new destinations such as Jordan, Syria and Turkey, while Arabs have also started venturing into new countries, such as in Asia,” explained Mohammad Chamsedine of Information International.

By the numbers
In 2004, just four years ago, 1,278,500 people visited Lebanon, 457,000 of whom stayed in hotels for a total of 1,018,000 tourist per night. Over the next three years, the number of visitors steadily dropped, from 1,140,00 tourists in 2005, to 1,063,00 in 2006, and then just 1,017,000 in 2007. Information International estimates average expenditure of tourists visiting Lebanon at about $1,000. According to figures provided by the Ministry of Tourism, about 984,000 tourists came to Lebanon this year excluding the months of October, November and December, which will most likely witness growing numbers with the Adha and Christmas holidays, thus possibly reversing the trend of the past years and restarting a growth in visitor numbers.
Chamsedine estimates that one of the main obstacles to the development of the tourism sector resides in the weakness of its budget, estimated at $7.8 million in 2008. “The contribution of the tourism sector to GDP varies between 8% and 11% but it is difficult to assess if one takes all other sectors involved, such as the retail industry, that without a doubt contribute indirectly to it,” said Pierre Achkar, head of the Lebanese Hotel Association.
Independent economist Ghazi Wazni adopted a more conservative estimate, bringing the figure down to about 6%, comparing it to the Gulf countries’ 15% level. “In 2007, the sector’s growth was at 9% in various Arab countries, while it was nearly negative in Lebanon. Lebanon also lags behind in terms of investment in the sector,” he explained.
In the last few years, hotel industry growth plummeted due to the 2006 War, as well as to the multiple political crises that shook Lebanon. “The situation was a real disaster until the month of May, when the Doha Accord was struck. Occupancy in hotels located outside of Beirut did not exceed 5-7% and only reached 20% or 30% for hotels in the capital. After Doha, the situation improved dramatically, with hotel occupancy reaching 44% in June, 65% in July and 90% in August. This also reached hotels outside Beirut where reservations were rerouted when the capital’s hotels were overbooked,” said Achkar.
The head of the hotel syndicate explained that Lebanon remains a very attractive destination for tourists because of the country’s natural beauty, the hospitality of its people and the lifestyle they lead, the affordability of prices relative to the region as well as the quality of the service provided by industry players.
As hotels, travel agencies and restaurants slowly emerged from their 2006-08 slumber and came back to life, they were accompanied by a flurry of cultural activities such as festivals, estimated this year at about 60 by Nada Sardouk, general director at the Ministry of Tourism. “The number of incoming tourists also grew due to the facilitation of visa procedures for over 36 countries, a process which was jump-started by the late Prime Minister Hariri. During his recent trip to Egypt, Prime Minister Fouad Saniora discussed easing up visa formalities for Egyptian tourists. A distinction was established, however, between working and tourist visas,” Sardouk added. Despite these optimistic developments, some nationalities were scared away by their countries’ negative travel advisories, like in the case of Saudi Arabia, after threats were voiced against their governments.
The director said that the number of restaurants grew by about 325 venues, while some 20 new hotels and residences opened their doors. “Investments in the sector are increasing significantly, which in the case of hotels are usually a mix of Arab and Lebanese capital, while the restaurant business is essentially funded by locals,” Sardouk said.
The restaurant business has been booming as well. During the last two years more than 300 new restaurants have been launched, mainly in the Greater Beirut and Kaslik areas, according to Paul Ariss, president of the Syndicate of Restaurant and Café Owners. Ariss estimated that about 70 venues opened in Gemmayzeh and Saifi, 10 in Ashrafieh, 50 in Hamra and Verdun, 40 in Antélias and Dbayeh, 30 in Kaslik and Jounieh and 10 in Batroun.
Sardouk explained that most restaurants setting up shop in Lebanon are not snack venues but rather high quality gourmet restaurants. “Some investments that poured in are massive, as an example we have witnessed that the cost of the land alone for one project was $4.5 million. Smaller projects usually vary, however, between $200,000 to $500,000,” she added.
However, not all is rosy. Ariss pointed out that in Beirut’s downtown, not all restaurants have reopened their doors, with only 40-50 restaurants, out of 104, resuming operation. “Despite the dramatic events in 2006 and 2007, restaurants located in the North, the South, the Bekaa and Mount Lebanon did succeed in keeping up, since they mostly are owned and run by families with very low operational costs,” he added.
One of the main setbacks for the tourism sector is the brain drain that occurred in Lebanon in the wake of the 2006 and 2007 events, forcing thousands of skilled laborers to look for jobs abroad. “This happened at a time when the economies of Dubai, Abu Dhabi, Qatar, Kuwait and Saudi Arabia were booming and investments in hotels and restaurants were skyrocketing. Although most universities have high-level hospitality schools and there are a few recommended technical schools, the graduating staff does not comply with the local and regional demand, leaving a gap on the level of the local market in term of recruitment,” explained Ariss. Moreover, the increase in local restaurants and the high number of franchises of Lebanese concepts — not only Lebanese food — have created a very sharp demand for skilled labor.
Lebanon has also been unable to recover regional levels in terms of business conferencing. “Hundreds of conferences take place every year in the region, of which Lebanon is unable to attract more than 20,” said Chamsedine.

The Lebanese forté
However, Ariss was keen to emphasize that “the strengths of the industry in Lebanon remain in the dedication, innovation and professionalism of market players. As an example, during the last four years more than 30 restaurant companies, such as Casper & Gambini, Waterlemon, Burj Al-Hamam, Kabab-ji, Crepeaway, Zaatar w Zeit, Roadster Diner, Lina’s Sandwiches, etc. have been signing more than 400 franchise contracts in the Arab countries. This is living proof to the strength of the industry, whether nationally, regionally and someday internationally. Most of these companies are ISO-certified since they have been trained with Qualeb and ELCIM.”
As long as political stability remains, Lebanese emigrants, Lebanese expatriates and foreign visitors will arrive steadily. “The tourism industry will keep on expanding and pulling up its share of the GDP from 10% to more than 15% in 2012,” Ariss claimed. According to Sardouk, VAT figures from tourist activities improved by 40% last year and some 1.2 million tourists will have visited Lebanon by the end of 2008, in addition to the one million Lebanese expats who flock annually to their home country.
Achkar concurred, saying that most hotels around the country are fully booked, while he added that he doubts the global financial crisis will directly affect Lebanon. Achkar explained that although the crisis may impact investment levels, it will not hurt actual tourism figures. “Lebanon has an excellent year, ahead provided stability reigns over the country in the coming months,” Achkar concluded.

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Private Equity

Maghreb‘s frontier feel evolves to emerging market

by William Fellows
written by William Fellows

Although marked by the escalation of a global financial crisis, the close of 2008 is also showing the results of a healthy fund-raising season for a third generation of venture and private equity funds in the core Maghreb countries, with Morocco leading in domestic funds raised, followed by Tunisia.

Interest in Maghreb markets has followed a boom in global emerging markets’ private equity that began in 2005. As the model has proven itself, venture capital and private equity industry investment in the region have grown. Local Moroccan fund managers raised at least $1 billion in the 2006-2008 fund-raising season, an unprecedented sum that more than doubled funds under management, with a third generation of local fund managers gaining the confidence of core local and foreign fund investors for second or third funds.
In Tunisia, the Maghreb and Africa regional manager Tuninvest stood out, raising $161 million for its second Maghreb Private Equity Fund (MPEF II) covering the entire Maghreb region. This amount was more than double its first MPEF fund and Tuninvest also closed a second pan-African fund, a $25 million fund for investment in the African financial sector. The only Maghreb-based and Maghreb- focused PE fund, MPEF II is expected to emphasize Morocco and Tunisia, due to their greater attractiveness in terms of market depth and eventual exit opportunities. With reasonably successful private investment track records, attractive investment and business environments, and maturing and reforming financial markets, both countries are on the path to successfully leveraging their proximity to the wealthy Western European markets.
Venture or PE investors are drawn to the two countries’ domestic market growth and improving export capacity, as well as the emergence of a real exit market. These investors have achieved attractive trade sale valuations in deals with regional and European players, who are looking for the kind of quality firms that venture and private equity investors have nurtured. In the case of Morocco, the bourse has proven to be an attractive liquidity option for outstanding firms, and remains by far the leader of Maghreb region bourses in terms of liquidity.
Tunisia and Morocco now stand out as the leaders in venture and private equity investment in the southern Mediterranean basin and African continent. Other members of the Arab Maghreb Union (AMU) like Algeria, Libya and Mauritania, remained frontier markets for venture and private equity investors in 2008. And even though these countries are undertaking reforms to render private investment more attractive, they will remain frontier markets in a more cautious 2009. Challenging private investment climates with high uncertainty, cumbersome foreign investment and trade regimes, and limited exit possibilities will continue to limit classic venture or private equity investment. However, they will continue to attract discrete investments (versus dedicated funds), as market reforms take hold to enable better private investment and exit opportunities. As financial and investment infrastructure matures, the natural attractiveness of these markets will render classic private equity and venture investing more consistently profitable and secure, and thus attractive

The year ahead
Looking to 2009, the current global economic uncertainty and a global financial freeze that has touched most if not all major investors, suggest that 2008 marks the close of the current Maghreb fundraising boom. Nevertheless, the roughly 18 country or regional (Maghreb) funds, raised by Maghreb region fund managers in the 2006-2008 season, face an encouraging opportunity to invest well and counter- cyclically at attractive valuations in growth firms for an attractive exit in 3-5 years time. If local Maghreb firms can follow this investment cycle and intelligently overcome the near term market challenges, they will be well positioned to realize important returns after investing counter-cyclically. International funds, whether global or Middle Eastern, will likely continue to invest opportunistically but will be limited by investment focus and size.
The leading Maghreb region countries benefit from having launched small-and-medium-sized (SME) focused private equity and venture capital sector initiatives relatively early. Despite early disappointments, sustained public support as well as active investor interest driven by market liberalization helped overcome early disappointments and deliver real returns to patient investors.
The launch of first generation funds in 1991-1994 disappointed, returning more in terms of learning for local teams than financial returns to investors. The second generation of local Maghreb funds, mostly bank affiliates of 1999-2001 vintage, focused on later stage, largely growth and buyout investments of around $1-5 million in medium sized local or regional firms, as well as minority partnering in major investments by European firms in key growth areas like telecoms and tourism services. This strategy, in keeping with the investment teams’ more financially oriented profiles as well as market maturity and needs, seems to have paid off. While early stage venture investing has presented attractive opportunities for venture oriented funds with appropriate teams, a conservative business culture with a heavy orientation to founder and family control has limited opportunities. Similar challenges have limited the scope of later stage venture or ‘small’ private equity investments. Nevertheless, thanks to domestic market modernization and an emerging back flow of experienced Maghrebi managers from Europe and North America, venture and private equity firms have been increasingly successful in two arenas: one, investing in startups launched by ‘reverse brain drain’ managers with European or North American experience and two, attracting management talent to support buyouts or ‘transition financing’ as the post- colonial generation of managers near retirement and look to professionalizing their firms.
High-quality, objective benchmarking data is unfortunately not yet available, although reliable anecdotal data indicate that best second performers (with an unsurprising overrepresentation of independent fund managers) matched or beat their investors’ benchmark return expectations. Although a majority of exits realized from this generation were private trade sales (i.e. acquisition by another firm), some notable IPOs have been possible in Morocco, most notably High Tech Payment Systems (HPS).
Looking forward, investment focus for the third generation of funds remains relatively stable, with Maghreb region funds looking at growth and management buyout opportunities in a range of sectors. There is an accent foremost on opportunities in industrial investment in off-shoring, particularly the outsourcing of parts and components to lower-value finished products in the electronics and automotive areas. This is followed by interest in the telecom and IT sector, including investment in off-shoring oriented IT services like call centers. Other areas that are attracting investment include agribusiness and transport, both areas in which emerging modernization trends are expected to create real growth and innovation opportunities.
In the Middle East, mega private equity funds are the trend, at the upper end of hundreds of millions of dollars, with minimum to average investments in the upper
double-digit millions. In the Maghreb, locally-managed funds still remain modest in size, with most in the $15-50 million range, focusing on SMEs (mostly medium sized firms in industry and services). Initial investments fall largely in a $1-5 million range, with a few deals reaching $15 million. In contrast with the Middle East, core Maghreb region business expansion and growth seems to be driven by north-south opportunities, with Maghrebi firms and financers looking north to Europe and south to sub- Saharan African neighbors for export opportunities. Current linguistic affinities and ancient commercial connections help drive this orientation, assisted by an advantageous competitiveness and market familiarities.
The leading local venture capital and private equity firms have followed leading Maghrebi industrial and service sector firms in taking a north-south orientation, as evidenced by the only Maghreb regional fund manager, Tuninvest Group, managing both Maghreb and sub-Saharan venture and private equity funds. At the same time, for a variety of practical reasons, Maghreb-Mashreq investment has lagged. Anemic cross investment is an ongoing challenge. While Middle Eastern private equity and venture capital funds do often include the Maghreb in their prospectuses, actual investment has not followed. Subtle intraregional differences have impeded a comprehensive MENA strategy for private equity and venture capital.

The bottom line
Historical venture and private equity investment experience in the Maghreb has confirmed the classic observation, that all good venture investment is local. Regional differences in business style, a lack of Maghrebi integration and the relatively small size of PE investments continue to limit regional corporate strategies, in spite of a real potential for complementarities. These factors hinder a more dynamic Mashreq-Maghreb investment business and investment connections.
But overall, Maghreb region funds are well positioned to invest during this difficult economic cycle. An expanding investor base, with significant private local capital in partnership with international investors (increasingly private and European), should support the development of a well-institutionalized sector. The emergence of a pool of experienced local venture or private equity firms with clear local mandates matching market needs is encouraging for future growth.
Overall, 2009’s key opportunities in the core Maghreb countries (excluding the oil sector), will continue to be in industrial and services off-shoring, with a focus on leveraging the region’s proximity to Western Europe. Opportunities will emerge in the domain of modernizing lower value added agricultural products to export high- value added processed products to Europe. In the tourism sector, investment in the management and services sector of underdeveloped areas is also anticipated. The energy sector, outside of Algeria’s hydrocarbons, has attracted a potential interest, particularly in renewable energy. Algeria remains a country with high potential but considerable complexity on the frontier of private equity and venture capital investors. Although Algeria is attractive to PE investors, especially those looking for “chunky” investments, the absence of near-term exit strategies and ongoing delays in structural reforms are still deterring investment.
Maghreb-based funds will remain the most effective vehicles for investment in Maghrebi markets, where successful equity investment windows remain small in terms of initial equity sizes and ill-fitted to global or MENA fund investment needs. But in spite of logistic hurdles, the Maghreb region remains well positioned to capitalize on its connections with Western Europe.

WILLIAM C. FELLOWS is country director – Maghreb, Financial Sector Reform Program with FSVC

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Consumer Society

ICT – A slower connection

by Executive Staff
written by Executive Staff

Seven hundred billion dollars is a lot of money, no matter who you are. Just to put things into perspective, besides $700 billion being the amount that the US government is dishing out to its corporations in the hopes of saving them from economic peril, it is also the size that the global consumer electronics industry is said to be worth at the onset of 2009, according to the Consumer Electronic Association (CEA). A big chunk of that consists of the ICT market that governments in the region have been keen to remove from their bookkeeping.

Middle Eastern spending on ICT is expected to rise to more than $95 billion dollars in the next three years in a global marketplace that will top $4 trillion by 2011, according to the World Information Technology Services Alliance (WITSA) and Global Insight. Naturally, much of that $95 billion comes from retail expenditure on ICT products. For example, according to the International Data Corporation (IDC), the UAE spending on retail ICT currently stands at $5.3 billion and is expected to increase to $6.8 billion in the next three years.
Subsequently, the demand for ICT products continues to look promising to first-time buyers as well as existing gadget owners. “What is happening with these [ICT] products is that they are having a higher penetration rate across the population and consumers who already own these products tend to be highly technology oriented people, so the upgrade rate for these products is quite high as well,” said Adib Cherfan, CEO of Samsung’s exclusive agent in Lebanon.
Most of the substantial growth in the regional retail ICT demand can be attributed to the effects of the regional super-cycle characterized by the exponential advances in technology, a multitude of suppliers and mass adoption rates in the MENA region. “I think it is the nature of the technology as well as the suppliers lobbying to fulfill market needs and demand that is driving the [ICT] market,” said Cesar Chalhoub, vice president of ITG Holdings. Furthermore, the most pertinent effect that is driving demand in retail ICT markets is the perpetual price cuts that the industry is experiencing, with the knock-on effect on profit margins seemingly the worrying many people. “We don’t have any product that is not growing in 2008,” touted Cherfan. “Mainly, prices are the driving factor behind [ICT] industry growth.”
Since first-time buyers ultimately return to quench their thirst for technology, repeat customers and upgrade rates are proving to be the essential elements that are invigorating regional retail markets in 2009. “We see that existing customers will be the ones carrying the market in 2009 because they are the ones who will be acquiring new products and following new product trends,” explained George Khoury, CEO of Khoury Home, Lebanon’s largest consumer electronics retailer. Also, with the increase in competition resulting from the regional super-cycle and the subsequent oversupply of ICT gadgets to regional markets, customers are becoming more demanding when it comes to product availability. “Customers know what they want and if you don’t have it as a retailer they are going to get it from somewhere else,” said Chalhoub.
Above all, it is purchasing power that drives retail markets and within the ICT market the most significant trend taking hold in 2008 is the increased importance of retail financing. Even with a global credit crunch, regional banks (who are comparatively much better off than their western counterparts) are eager to provide funding to facilitate the ICT purchases of lower income bracket populations across the region. “At the end of the day, cash flow worldwide has increased in banks that did not go subprime or invest in derivatives,” Cherfan explained. “[Banks] need to use that liquidity to be profitable.” Moreover, customers are all too eager to embrace the attitude taken by regional banks. “Retail financing makes up almost 80% of our sales in ICT products in 2008,” said Khoury. The expansion and increased awareness of retail financing in local markets has brought lower income bracket consumers into the fray of ICT consumers and allowed them to purchase products that were previously inaccessible to them. According to Cherfan, “Now, even if you are in a lower income bracket, you will be able to get a credit rating and buy your ICT product.”

The notebook is king
On a sector level, the one that carries the most weight is the LCD sector of ICT gadgets, which is synonymous with growth patterns prevalent on the consumer electronics level. “Anything really related to LCD technology has been doing extremely well in 2008 and has replaced the desktop computer as the driving force behind the ICT boom in 2008,” Khoury stated. “We certainly expect this to continue into 2009.”
Furthermore, notebook computers are the big winners in the retail ICT game in terms of volume and revenue on every level of the business. In the Gulf, year-on-year third quarter laptop shipments grew by more than 95% to 982,000 units, compared to 268,000 desktops according to IDC data. The UAE led the pack with 530,000 units, followed by Saudi Arabia (323,000), Kuwait (65,800), Qatar (34,800), Bahrain (14,600) and then Oman (13,800). Moreover, other countries in the region, like Lebanon, are experiencing similar growth patterns. “In 2008 we have seen more than 100% growth in sales of notebook computers,” Khoury said.
Having moved out of the luxury item category, notebooks are now emerging in the region as the next big product that will carry the retail market. “The portable computer is still the major item of consumption in our markets,” Chalhoub pointed out. “Notebooks are the most important product for 2008… and this is expected to continue in 2009,” added Cherfan. The most important element affecting the sales of notebook computers in the region is price. The super-cycle effect has taken a stranglehold on the notebook industry that has seen prices plummet in recent years spurring on mass market demand. “Price is the main impetus for this growth in notebook computers in 2008,” says Khoury. “In the recent past, the price range for laptops used to start at $1,200. Today laptop computers start at $400 or $500.”

Printing getting pressed
Despite all the rosy signs of growth amid lower prices, not all ICT products are doing well. Different explanations apply to different products but the overriding theme of products that are suffering is that they are doing so as a result of the ICT super-cycle. In particular, printers have been hardest hit as the need for printed materials on the consumer end of the sector has decreased dramatically with the increase in data transmission capabilities across the region. “Output devices such as printers are suffering more because materials are more focused on transmission. Internet and communications have taken away the need to print,” Chalhoub said.
Another area that is feeling the weight of the super-cycle is the mobile phone sector. Even though turnover has increased

Q&A: Anssi Vanjoki
Executive vice president & general manager, Multimedia Nokia Corporation

E Where, would you say, are we in terms of technology?
Today, anything that is about emotions and feelings, like words or pictures, can be digitized. And if it can be digitized, it will be digitized. Then it can be put on the Internet and as technology progresses, everything, all feelings, all emotions, all literature and entertainment, all music, everything will be put in this cloud called the Internet. With devices that are able to use all that digital information, this can become as real to me as the physical environment or the analogue information around me wherever I am. The unnecessary use of analogue methods for creating and sharing the concepts of the abstract that the human being can understand is going to change, and we will be living, instead of just in physical reality, in an augmented reality, a virtuality as real to us as the world.

E Isn’t music a bit different? It’s not exactly always around us.
Music has universality everywhere. But it is also a business with rights holders, who are monetizing this feeling that I get when I listen to music. That has been broken. Much of it has been stolen. We aim to get it back to its owners and creators, and to ensure that this business and ecosystem is going to continue.

E How do you do that?
The Middle East is no exception to the world. There is the question of lawfulness and morals. Do you want to be a criminal? If you became a criminal by accident, because you did not know better, but then end up paying, you are not a criminal anymore. Given that, then, all the music you consume is going to become legal.

E But why develop a new music platform instead of using or linking to existing ones?
Because the platforms we have seen so far are inadequate, they are not offering what we believe the consumers are willing to have, but I want to emphasize that our strategies are not exclusive. The whole software is open source. We are inviting other people to join in rather than trying to sort of cut them out. Nokia is about connecting people. Nokia is not only offering commercial content to people but enabling people to create their own content and to share it in interesting ways with their friends.

to an average of 18 months, according to Cherfan, the outlook for the mobile phone sector does not look propitious. Having done well in previous years, mobile phone sales are now looking flat. Net income for Sony Ericsson fell 48% during the first quarter of 2008 and the company later stated that growth in 2009 would be “flattish”. Regionally, other companies, like LG, are falling short in 2008. “We’re not meeting our target this year,” stated K.W. Kim, CEO of LG Electronics Middle East and Africa, in an interview with Gulf News.
Cherfan explained that companies that concentrated on volume models had been growing until the market became saturated in 2008, at which point only the companies that invested in higher-end models continued to do well. “We expect 2009 and 2010 to become more and more difficult in the telecom sector with only one or two major players emerging,” he said.

Slowing down
It is not a presumptuous claim to state that everything in the retail ICT market will continue to be fine. However, the industry is by no means immune to the wider effects of a global recession. According to IDC data, in 2009 the IT markets in the Middle East and Africa will experience a growth of 8.5%. That figure is down from 14% in 2008 and the 12% prediction before the onset of the latest phase of the international financial crisis. Although the retail market is somewhat shielded from the IT market as a whole, since most of the spending cuts will be on the commercial side of the industry, retail sales and growth are bound to be affected as well. “Things will really reposition themselves back to a real environment and get out of a virtual growth cycle,” said Chalhoub. Cherfan added that, “The super-growth across the board in our region will definitely slow down.”
Comparatively speaking, the ICT sector (and in particular the retail side of the business) are better off than many other industries, which are still reeling from the effects of the global financial crisis. The need and the desire for ICT products look to remain strong as the region continues to regard technological advance as a necessity that cannot be forgone. The clicking will continue.

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Banking

Lebanon – Cedar‘s solid assets

by Executive Staff
written by Executive Staff

In recent years, the Lebanese banking sector has been breaking records time and time again. Within the first nine months of 2008, Lebanese banks saw an astounding $7.8 billion increase in deposits — smashing the already record-high $6.6 billion in deposits for the entire year of 2007. Bankers unanimously agree that 2008 has been an unparalleled year in Lebanese banking. With a relatively stable political environment, confidence levels are soaring due to increased foreign remittances, FDI, sound liquidity, strict regulations set by the central bank, a stable currency, a prosperous real estate market and an improved tourism sector. It is fair to say that the Lebanese banking sector is doing exceptionally well. In light of the global financial crisis, Lebanese banks are surely insulated but not isolated, resilient but not immune, and have been heralded in the international press as “a beacon of stability and growth,” as was stated by the New York Times.

The Lebanese central bank is performing extraordinarily, as the regulations and monetary policies it has set for local banks have created great insulation and success across the board. Because the central bank has been able to maintain the stability of the Lebanese Lira, Nassib Ghobril, head of the economic research and analysis department at Byblos Bank, strongly believes that, “the stability of the currency is the cornerstone of the resilience of the economy and of the banking sector […] It has also helped the inflow of deposits, remittances and capital inflows overall.” With a stable currency due to diligent efforts by the central bank, confidence levels continue to rise. Also, conservative policies — such as preventing domestic banks from purchasing structured financial products and subprime products — are chiefly responsible for the continuous sound performance of Lebanese banks. Ghobril is proud to say that being “conservative is cool,” especially since mishandled risk management elsewhere — i.e. in the Gulf, US, and Europe — has proven to be unbeneficial. Confidence in the Lebanese banking system is directly related to “the very strict regulatory frameworks on behalf of the central bank of Lebanon and the banking control commission, [as well as] the conservative practices of Lebanese banks,” said Dr. Marwan Barakat, head of the research department at Bank Audi-Audi Saradar Group.

Foundations of stability
Apart from playing it cool, there are various reasons as to why Lebanese banks have been largely protected from the international crisis. Firstly, seeing as they are so conservative, banks in Lebanon do not lend much — Barakat claims that “the total loans to the private sector as a percentage of their deposits is equivalent to 33%.”
Thus, with a low amount of lending exposure and high amounts of liquidity — Barakat asserts that “primary liquidity amounts to 48% of total deposits, which is very high by all standards” — hence, banks are less at risk than their regional counterparts. Secondly, since Lebanese banks are strong net creditors abroad, “the foreign assets of the banking sector are more important than the foreign liabilities in value — the difference is around $4 billion, to the benefit of [Lebanese] foreign assets.”
Only four years ago, Lebanon faced a great challenge as to how to disperse its high liquidity levels to OECD countries, because at the time, countries abroad did not need cash injections. Now, with the looming financial crisis, Lebanon has been able to successfully lend liquidity to foreign financial entities and thus make them liable to domestic banks in Lebanon. Ghobril finds it “very funny” that OECD countries “are coming to Lebanon to place money in their banks to support their liquidity. Can you believe this? It’s very ironic.” Ironic indeed, but it is surely a good thing for the Lebanese banking sector.
Another factor which is shielding Lebanon from international vulnerability is the fact that the country has contained housing loan exposure. Even though real estate prices have declined since their skyrocketing performance following the Doha agreement, they are stable enough to leave the banking sector comfortable and at present housing loans “are equivalent to less than 2% of balance sheets,” Barakat underlined. Another shield has been the Lebanese banks’ high collateralization. “The amount of loans against collateral is equivalent to 76% to those outstanding in the banking sector, which is a very high level,” Barakat said.
Currently, deposits into the Lebanese banking sector account for around 83% of total assets, “making them among the most liquid in the world,” according to the New York Times. Most experts agree that these deposits are coming from foreign remittances — i.e. Lebanese expatriates living abroad and depositing money into banks at home. Like his local counterparts, Ghobril contended that, “the expatriate remittances are a major source of capital inflow.” Fadlo Choueiri, head of corporate finance and economic research at Credit Libanais Investment Bank, explained that, “the Lebanese banking sector has witnessed in 2008 a unique inflow of foreign remittances from Lebanese expatriates living mainly in the Gulf region, with some 43.1% reported annual expansion in foreign inflows to $5.5 billion though July 2008, up from $3.95 billion in the same period of 2007.” Indubitably, Lebanese banks are increasingly dependent on expatriates. But, Barakat expects in the worst cast scenario that “remittances will be equivalent to 20% of the GDP in Lebanon, which is [still] a very high level.” Total remittances are predicted to exceed 2007’s high of $5.5 billion, which is one of the world’s highest per capita rates.

Pillars of the state
With remittances so high, Lebanon’s banks have been able to outgrow the national economy, with assets having reached a staggering $100 billion, while Lebanon’s GDP is valued at only $25 billion. On a side note, while governments across the world are stepping in to help their local banking sectors, the opposite is happening in Lebanon. Because the banking sector is so large, it has always been supporting the government. Ghobril illustrated this paradox, saying, “We were criticized in the past that the government depends [heavily] on the banks in Lebanon. But now, if you look at the global financial crisis, you have governments, finance ministries and central banks stepping in to rescue entire banking sectors in the US and in Europe. While in Lebanon it is the opposite, as the banking sector has been supporting the government for many years, and not at the expense of the private sector, this is a myth.”
Such remarkable growth has helped Lebanese banks to expand abroad, creating a larger client base and allowing domestic banks to cater to the Lebanese diaspora around the world. Most major players in the Lebanese banking sector — mainly from the alpha and beta groups — have been expanding regionally since 2002 and will continue to do so in the near future. Regional expansion illustrates the robust capabilities of Lebanese banks, thus boosting the image of the Lebanese economy altogether.
Tourism is also playing a major role in empowering the Lebanese economy, as well as the banking sector as a whole. In 2008 alone, Lebanon witnessed a 30% year-on-year increase, and Barakat holds that “it has been an important driver to the recovery that we are witnessing now.” All of these factors — tourism, remittances, high liquidity, real estate and stable currency — are sure to sustain, healthy, robust, and sound growth.

Forecasts
Analysts’ opinions regarding figures of the Lebanese GDP growth seem to vary. The majority of experts tend to agree with IMF forecasts, which prognosticate GDP growth for 2008 at 6% and 5% in 2009. Barakat believes that, “What supports growth in Lebanon in 2008 and 2009 is the fact that our economic recovery is tied to domestic factors much more than regional and international factors.” Given that Lebanon is not an exporting economy — Lebanese exports amount to only 10% of GDP — domestic growth cannot be predominately affected by any international or regional economic slowdowns. But, added Pik Yee Foong, CEO of Standard Chartered Bank in Lebanon, while the “Lebanese banking sector is unaffected by the global financial crisis so far … the market reality is that there will be an impact, it is inevitable.” Still, she believes that “we will remain resilient in the face of this [global] recession.”
Global challenges may thus create opportunities for the Lebanese banking sector, as “the leveling of playing fields offers Lebanese companies [the ability] to penetrate new markets,” said Foong. On another note, Choueiri expects Lebanon “to remain a safe haven for Arab and foreign investors along with Lebanese expatriates, thanks to its sound banking system coupled with an effective monetary policy that infuses an atmosphere of confidence among investors.”
Others are also quite optimistic, albeit with the possibility of political instability in mind. Even with parliamentary elections on the horizon in 2009, some experts think that the political environment will continue to stabilize and hence the banking sector is not likely to incur any negative impacts. Yasser Mortada, general manager at the Federal Bank of Lebanon, finds that “if nothing negative happens politically, 2009 will be another good year for the Lebanese banking sector.”
Barakat remarks that, “what the banking sector has to do is to continue in the same direction that it has been following over the past few years — which is a continuous upgrading of regulatory frameworks, taking lessons from the global financial crisis, while keeping in mind that the Lebanese banking sector has adopted a long term of circulars that have helped the sector avoid the crisis.”
Seeing as the banking sector of Lebanon has not been subsumed by the crisis so far, Choueiri holds that “the Lebanese banking sector remains immune from any imminent breakdown and is thus expected to preserve sustainable growth and prosperity in the coming period.”
While the chief of the IMF’s Middle East and Central Asia department, Domenico Fanizza, applauded the Lebanese central bank for protecting domestic banks from the financial chaos in October 2008, he cautioned that the worldwide turmoil may have incidental, negative backlashes on Lebanon’s economy. Such repercussions could be comprised of a slowdown in economic growth, fluctuation of tourist inflows, and decreased remittances from Lebanese expatriates. However, most analysts are confident that Lebanon’s banks will remain sound regardless of the economy slowing down slightly. With so many reasons for continued success, there are simply not enough significant factors in the banking sector’s way to sway it from further prosperity in 2009.

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Tourism

Lebanon – Natural potential

by Executive Staff
written by Executive Staff

For most people, Lebanon is synonymous with shopping and partying galore. However, its Mediterranean atmosphere offers a wide variety of handsome landscapes — unusual when compared to neighboring countries where sandy dunes and rocky deserts abound. Many Lebanese would be amazed by the variety of nature reserves Lebanon boasts. The Chouf Cedar Nature Reserve, nestled between Dahr al Baidar and Niha in the South, is covered with oak forests. There lay the oldest Lebanese forests of Maasar Chouf, Barouk and Ain Zhalta, where cedar trees, Lebanon’s national symbol, grow on the western slopes of the mountain. The reserve is also a prime destination for bird watchers. In the north, the Horsh Ehden Nature Reserve, situated on the upper northwestern slopes of Mount Lebanon, is home to cedar trees bordered by a mixed forest, including acorn, pine, wild plum and pear. The Palm Islands Nature Reserve lies off northern Lebanon’s shore, consisting of three islands where birds and turtles come to lay their eggs.

These are only a few examples of Lebanon’s many ecotourism sites, to which most Lebanese remain oblivious. “There is not enough awareness in the local community about the benefits of ecotourism,” said Sawsan Abou Fakhredine, director of the Association for Forests, Development and Conservation (AFDC). The organization, which was established in 1993, aims at community-based conservation for sustainable livelihood of people through rural and ecotourism. The association first identifies an area and then trains a group who will be responsible for it. By the end of 2009 it will have established as many as four eco- lodges in the north, the Chouf and the Metn. For Michel Moufarej, owner of LibanTrek, a tour operator which specializes in ecotourism, the business is more of a passion than a job. “Awareness towards ecotourism activities is slowly improving but very much behind its full potential,” he said.

Rural benefits
For the past 12 years Cyclamen, a division of TLB Destinations focusing on sustainable tourism in Lebanon’s rural regions, has invited travelers from all over the world to experience and discover Lebanon’s diversity, unique culture, history and natural beauty. It has developed trips emphasizing the local community by organizing home stays or sharing simple meals with villagers. TLB’s concept is known today as ‘sustainable tourism’, meaning daily operations should be responsible and contribute positively to the sustainable development of Lebanon. For example, TLB Destinations offers financial resources to initiatives, such as rural women’s cooperatives, and promotes tours to support projects to avoid emigration from rural regions.
“Travelers are always encouraged to purchase food locally rather than bringing a picnic with them. We make sure that our visit has benefited the rural communities. What is the point of just arriving by bus, hiking and then going back home again? How will we have benefited the rural communities?” said Nassim Yaacoub, program manager at Cyclamen.
“In order to develop ecotourism activities, one needs a physical infrastructure. This type of activity generates resources for rural areas, while preserving nature,” Abou Fakhredine added. The director explained that the sector suffers from the limited marketing it receives when this activity strongly needs to be reinforced. The Lebanon Mountain Trail (LMT) was financed by USAID and falls in the ecotourism segment of activity. The LMT is a 440 kilometer path that leads from the northern tip of Lebanon to the southern part of the country and goes through more than 75 towns and villages. It promotes environmentally and socially responsible tourism and is the first long distance hiking trail in Lebanon.

Fostering awareness
“Unfortunately, tourists who visit Lebanon are rarely familiar or interested in the concept of ecotourism, as they prefer to shop or go out to cafés and restaurants,” Abou Fakhredine said.
The director said the best year AFDC witnessed at their first lodge, situated in the village of Ramlieh in the Chouf, was 2004 when it received 4,000 visitors of which about 20% were foreigners. At Cyclamen, most clients are equally divided between Lebanese and foreign nationals.
“In this type of business, companies can adopt one of two approaches: either focusing on Europeans or Americans, who are usually interested in ecotourism activities, or creating awareness among the local population. We have decided to try promoting both market segments,” Abou Fakhredine said. He added that the association organizes ecotourism festivals every year.
LibanTrek targets schools, institutions and individuals. “We have about a third of our client base who are foreign,” said Moufarege.
Yaacoub pointed out that his company’s travelers “are made aware of local concerns regarding conservation of natural areas, as well as endangered and threatened heritage. TLB has also founded national days and respects international days with events to raise awareness, such as World Wetland Day, International Women’s Day and International Mountain Day.”
But industry players are not the only ones taking an interest in ecotourism, as they are joined by other Lebanese entrepreneurs. The Saadé brothers, Sandro and Karim, who recently introduced a new wine project to the market, included a boutique hotel in their Bekaa premises. “We need to preserve our heritage and work as well on promoting it actively,” Sandro Saadé said.

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Money Matters

IPO Watch – Third quarter chill

by Executive Staff
written by Executive Staff

Unprecedented turmoil in global markets at large, and in local markets specifically, over the past few weeks caused several firms to call off public offerings scheduled for the fourth quarter of 2008. Analysts agree that although the initial public offerings (IPO) market hasn’t been running at full throttle for the past five months, it has not been stuck in first gear either. The region’s IPO market fared better than its global counterparts, data shows. According to a report by Renaissance Capital, a UK- based financial firm, IPO activities in third quarter slowed in every region except the Middle East. However, the start of the fourth quarter shows substantial delays, rescheduling and reduction in the number of firms going public. The main culprit behind the slowdown of activity is the financial crisis that started in the United States and later spread across the globe.

The region’s markets have witnessed an unprecedented wave of selling leading to a 22% loss in the broad MSCI Arabian Market index for October, representing a loss of more than $255 billion in market capitalization. A report released by Rasmala Investments said panic selling was prevalent across all markets causing a loss of between 25 and 35% (with the exception of Lebanon, Tunisia, Morocco and Bahrain). And as of this writing, uncertainty over the extent of the region’s exposure to the global financial crisis and concerns over the state of the property sector continue to agonize investors.

Against the grain
So how is the IPO market holding up with all of the other plummeting markets and doom and gloom surrounding financial circles? Economics 101 teaches that a strong stock market is necessary to encourage companies to go public. However, going against the grain, the IPO market in the MENA region appears to have developed a stronger immune system than its global counterparts, and family businesses continue to jump on the IPO bandwagon.
Looking back at the region’s 9-months IPO market offerings, one will find that it was up by 90% when compared to the same period of 2007. According to figures from Zawya, so far the region has boasted 50 new IPOs with a total value of $13.12 billion compared to 54 IPOs with a total value of $6.88 billion for the same period in 2007. Renaissance said the number of global IPOs in the third quarter fell 82% year-over-year and the amount of proceeds raised declined 89% to $9.3 billion. The region raised $3.61 billion in the third quarter of 2008 from 12 IPOs, compared to $4.72 billion from 13 IPOs in the second quarter of 2008.
Renaissance Capital pointed out that 10 of the largest global deals during the third quarter, “four made public debuts in the Middle East, and another four did so in Asia.” Saudi Arabia was the biggest IPO player in the region accounting for 26% of the total number of deals and 74% of the total capital raised. The kingdom raised around $9.5 billion year-to-date. The most noteworthy is Saudi Arabia Mining Company which raised over $2.4 billion in proceeds.

Cooling sentiment
However, despite all the success in last nine months, data suggests that IPO market activity in the fourth quarter of 2008 is certain to slowdown as investors observe the global markets from the sidelines. The mood in the IPO market has significantly worsened against the second quarter of 2008. The primary markets, due to panic selling, negative psychology and speculation are showing signs of the financial crisis. But market experts say that the cooling of sentiment is noticeable only with regard to issuers and issuing companies, while the mood among investors has remained almost unchanged. Although the short-term outlook appears lackluster, companies in some of the market’s hottest sectors, such as oil, agriculture and telecoms, could keep the IPO market chugging along in the near term. Nevertheless, a few large deals are set to brave the tough IPO market in the coming weeks.

Braving the markets
But despite the current climate, plenty of companies are still looking to go public. November witnessed the announcement of five new IPOs all scheduled to be launched in the first quarter of 2009. Saudi Arabia, with the largest economy in the region, announced three IPOs. The agriculture and food firm, Al Akhawain, said that it will offer 30% of its shares to the public seeking to raise around $27 million. Herfy Food Services, a fast food unit of Savola Group, said that it will go public in the first quarter of 2009 by offering 30% of its shares. The company did not disclose the amount it wants to raise, but it’s offering around 3 million shares. Herfy has a paid-up capital of $27 million. The Dammam-based conglomerate, Aujan Industries, said it will also go public offering 30% of its shares. The offer size will range between $775 million and $1.04 billion.
Meanwhile, in Bahrain, mobile operator Zain Bahrain, a unit of Kuwait’s Zain Group, had announced in April of 2008 that it will go public, both on the Bahrain and the London Stock Exchange, but the IPO was delayed and rescheduled. However, Zain Bahrain has now confirmed that it will offer portions of its shares in the first quarter of 2009. Although it is not clear how much the company is looking to raise, media reports say that Zain Bahrain share offer on the LSE will be worth around $4 billion.
In Qatar, Al-Mazaya Holding Company said it will launch its IPO in November despite turmoil in financial markets, and will launch a $9.5 billion worth of projects in Dubai as it mitigates slow growth in Kuwait. Mazaya is seeking to raise around $137 million by offering 50%, or 50 million shares, priced at $2.75 to the public. Mazaya’s current capital stands at $138 million.

The bottom line
Without a consensus opinion among local analysts and business leaders, what will happen in the fourth quarter is not clear. But the good news for investors is that most great returns will be realized when the markets return to their pre-July days, because the quality of companies attempting to go public will be better and prices will be favorable as IPOs will need to be priced relatively low to attract investors. But one thing that has been clear in today’s turbulent MENA markets, the direct impact of the financial market upheaval on developing countries has been limited and global economic growth remains strong, the World Bank said in a report released in October. The bank pointed out that the region’s governments continue to implement “policies supporting economic resilience” and urged business leaders to be prudent in the way they deal with the volatility and uncertainty prevalent in today’s markets.
Furthermore, the appetite of local companies to raise capital will not stop; governments remain committed to distributing wealth through the public markets and the decline in the markets of developed countries will only help the region make it through these volatile financial times intact. Add on top of that the fact that almost 300 companies have shown or are now preparing to go public in 2009, the bottom line is the IPO market will remain “seriously” active for quite some time.

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