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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Comment

A hard right to Jerusalem

by Peter Speetjens
written by Peter Speetjens

November 4, 2008 was exactly 13 years from the day Yigal Amir killed then-Israeli Prime Minister Yitzhak Rabin, out of fear for the latter’s intention to conclude a peace with the Palestinians and give up part of what the Orthodox Jews perceive as the God-given land of greater Israel. The murder (finally) opened the eyes of the western world that Israel is to a large extent a religious state, which since its inception in 1948 has grown ever more so.

This religousity was illustrated by the country’s municipal elections on November 12, especially by those in Jerusalem. The main candidates for the Holy City’s top job were colorful, to say the least, and as such a good reflection of the complex make-up of Israeli society.
In the race were the eventual winner, Nir Barkat, a sharply-dressed former paratrooper and software tycoon, Meir Porush, an ultra-orthodox Rabbi portrayed on election posters as a Papa Smurf look-alike, and Arkadi Gaydamak, a Russian immigrant billionaire who hardly speaks a word of Hebrew and is wanted by Interpol for his role in an arms smuggling scandal between France and Angola.
Barkat won with 52% of the vote, closely followed by Porush with 43%, while Gaydamak came in as a disappointing third with 3.6%. In total, only 41% of the electorate went to the polling stations, which should not come as a surprise as Arab Jerusalemites did not bother to leave their homes. After all, who should they have voted for? Without exception, all three candidates stressed that the Jewish capital would never be divided and even the so- called “moderate” Barkat has called for an increase in settlements in occupied East Jerusalem.
Thus, Arabs and their situation in Jerusalem did not factor in as the main issue between the two main candidates.
Barkat’s campaign slogan was to “save the city,” but not from Arab hands and international good intentions, but from the rapidly growing influence of Jewish fundamentalists represented by Porush. “In another 15 years there will not be a secular mayor in any city in Israel, [except for] perhaps in some far-flung village,” claimed Porush, a 54-year-old rabbi, during an election rally.
His remark, in Yiddish, had been made to an all-Orthodox audience and was not meant for general consumption. It only became public knowledge once it was broadcast through a mobile phone news service. Porush, a father of 12, noted that the religious community’s size and influence has been growing, primarily thanks to its high birthrate.
To what extent religion has become a dominant factor in Jerusalem’s politics and daily life was felt by Rachel Azaria, head of the tiny Wake Up Jerusalemites party and the city’s fourth candidate running for mayor. Like the other candidates, she had intended to run with the help of a poster campaign portraying her and two fellow party members. The election posters were to be shown on busses, among others.
The ad agency in charge however, only agreed to run the election campaign as long as the poster did not portray any women. Even though only Azaria’s face was to be shown, the agency feared the city’s ultra-Orthodox Jews might vandalize the busses if these showed any female images. Although the agency claims that it had offered a number of alternatives, such as covering parts of Azaria’s face, the latter has now gone to court.
Meanwhile, life goes on in Jerusalem, a city that ranked last in a recent poll measuring the quality of life in 15 Israeli towns, as it suffers from congestion, a rapidly increasing population, lack of employment and a severe brain drain, as most young professionals would rather live and work in liberal Tel Aviv than in the increasingly religious climate of the Holy City.
The newly-chosen mayor, Barkat, aims to revive the capital by attracting tourism and transform the city into a high-tech hub. Yet, exactly how he intends to do that remains unclear. According to leading Israeli historian Tom Segev, many Israelis already regard Jerusalem as a lost city.
Segev also claimed that, put together, Barkat and Porush sound a lot like Avigdor Lieberman, the controversial and outspoken leader of the hardline Yisrael Beitenu party, which mainly represents Israel’s more than one million Russian immigrants, who once said that he would like to see all Israeli Arabs expelled.
If the recent municipal elections in Jerusalem are anything to go by, the national elections that are to take place in February 2009 are likely to produce a similar turn to the right. In the recently dissolved Israeli parliament, the nationalist Likud Party combined with Russian and religious votes were good for some 50 out of a total of 120 seats. With the centrist Kadima Party in disarray, as Ariel Sharon lies in a coma, Ehud Olmert faces corruption charges and current leader Tzipi Livni has yet to earn her stripes, there is a fair chance for a right-Russian-religious coalition to gain an absolute majority.

Peter Speetjens is a freelance writer and analyst based in Beirut.

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Banking

Saudi Arabia – Kingdom holds the fort

by Executive Staff
written by Executive Staff

The ongoing global financial crisis has had limited effects on the Saudi banking sector. Fighting through recent years — with the 2006 stock market crash and a bullish year in 2007 — Saudi banks in 2008 have “performed relatively well,” noted Murad Ansari, vice president at EFG-Hermes KSA. Saudi banks are not immune to the global troubles, but they are definitely less exposed than other banks around the world, especially since “almost 86% of total assets of the banking sector are invested in domestic assets,” as described in a recent EFG-Hermes report.

Due to their low exposure to international credit, equity, and property markets, Saudi banks have been able to insulate themselves from the storm of the international crisis. And thus, according to EFG-Hermes, “Saudi banks are relatively well positioned to weather the impact of the ongoing financial turmoil.” Also sheltering Saudi banks from the global chaos is the minimal exposure they have to equities and real estate. “Over the last 12 months,” contends EFG-Hermes, “rising cash reserve requirements of the central bank coupled with strong loan growth has meant that most of the banks have reduced their exposure to international assets.”
While most of the top banks reported mixed quarterly results, “overall the listed Saudi banks (nine month profitability) recorded [a year-on-year] increase of 1.6%”, said Global Investment House. The Saudi central bank has voiced willingness to help the kingdom’s banks if necessary, by injecting a proposed $40 billion of liquidity into the financial institutions. As of now, the central bank is yet to pour funds into the banking sector but, theoretically, by pumping liquidity into the banks, the central bank could buffer the consequences created by the financial distress, whilst guaranteeing bank deposits to boost confidence levels. Nonetheless, EFG-Hermes disclosed, “the central bank has lowered the cash reserve requirements of commercial banks by 300 basis points, freeing up an estimated SAR10 billion [$2.7 billion] in liquidity that had been with the central bank in cash reserves.”

What crisis?
According to Ansari, even though the growth rates in neighboring countries, such as the UAE and Qatar, have surpassed those of the kingdom, the balance sheets of Saudi Arabia’s banks have grown at an impressive 28% thus far this year. Third quarter results for 2008 show that the crisis has only affected selected banks and not the system in its entirety. EFG-Hermes also asserted, “Banks which had relatively higher asset exposure to North America and had higher investment equities have seen the impact in their 3Q 2008 results. However, even in [those cases], the impact has not been significant enough to wipe out profits.” Thus, even with a few dips in some banks’ profitability, such occurrences were not significant enough to lower confidence levels across the sector.
EFG-Hermes indicated a couple of “medium term challenges” confronting the Saudi banking sector. First and foremost, Saudi banks will have to face “arranging required funding to finance the aggressive domestic investment plan.” Secondly, they will have to figure out “funding to smaller corporate clients/sole proprietorships where owners can potentially have exposure to international equity markets.” However, such obstacles are not believed to be strong enough to weigh down earnings in the form of credit provisions for the sector.
The pivotal drivers of banking sector growth, as outlined by Ansari, are the corporate credit demand, an increase in government spending as well as expansions by large corporations and a surge in the demand from smaller corporations. The liquidity of the Saudi banking sector has also helped it stay afloat and perform decently. Hamad Saud Al Sayari, governor of the Saudi central bank, concurred, saying that the local banks are “highly liquid” and possess “good capital adequacy.” The total deposit growth by the third quarter of this year “surged by 9% [quarter-on-quarter] compared to 1% in [the second quarter of 2008] despite the fears of an outflow of funds following reduced speculation on the de-pegging of the Saudi Riyal to the US Dollar,” EFG-Hermes observed.

Forecasts
For the most part, the Saudi banking sector is predicted to slow in 2009. Ansari feels there are two sides to the story in 2009, assets and liabilities. Believing banks should be “extra cautious” now on the asset side, the VP outlined that the “financial viability of projects, and hence asset quality, will once again become the prime concerns for banks.” In terms of liabilities, banks are likely to seek new options to raise funds, and thus deposit mobilization will be a chief concern for the kingdom’s banking sector next year. Although such issues were present in 2008, Ansari reckoned that their relative importance in 2009 is “likely to increase significantly.” Overall, even at a slower pace, the Saudi banking sector is predicted to perform well next year. While the kingdom’s banks are not likely to face a “total meltdown,” Ansari feels that “the overall environment requires banks to be more prudent while lending.”

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Tourism

Lebanon – Vacation of the state

by Executive Staff
written by Executive Staff

Lebanese officials are the kings of temporary fixes. For years now government employees have turned a blind eye on infrastructural problems plaguing the country’s various economic sectors. The Lebanese tourism sector is no exception.

According to Mohamad Chamsedine of Information International, before the civil war Lebanon boasted some 362 hotels with 28,000 beds. Today only 124 hotels with 8,000 beds remain. Figures vary, however, from one source to another. Pierre Achkar, head of the Lebanese Hotel Association, puts the number of rooms available in Lebanon at about 20,000 with 6,000 rooms in the Beirut region alone, of which 3,000 are in five-star hotels.
Inaccurate hotel classification is also a problem for industry players in a country where international norms are often not met by establishments, especially ones located outside Beirut. “We have requested a review of the norms and regulations adopted by the hotel industry,” Achkar said, explaining that many of the establishments that had obtained their classification before the civil war do not exist anymore, while others have not been renovated in years. As he pointed out, “This type of information is impossible to gather in the absence of proper inspections by the Ministry of Tourism, which unfortunately has neither the budget nor the technical staff necessary for such a task.” Inspectors usually develop their knowledge about international standards by training in international hotels, a process that is long and costly.

Standardized criteria
According to Norms 2000, published by the Swiss Society of Hotel Keepers and the Stanford Research Institute, norms are granted according to the infrastructure, the service and level of specialization. Among the characteristics featured for hotel infrastructure requirements are size of rooms, polyglot reception, breakfast buffet, mini-bar and room service. “The condition of the building, room equipment and décor definitely affect ratings,” said Achkar.
In luxury hotels around the world, quality of service remains the linchpin of the industry. As Achkar explained, “As an example, one can usually compare quality of service by taking a look at the number of employees a hotel has. Some hotels in Lebanon run 100 rooms with a staff of 150, while a 72-room hotel might be managed with 220 employees. The number of employees, reflecting in its turn on the quality of service rendered, makes the difference between a five-star hotel and others.”
Achkar added that over the last few years the hotel sector has evolved with the emergence of boutique hotels, which may only have 30 bedrooms and a small pool but are providing a five-star service. “The focus today is on quality instead of the actual facility,” insisted the hotelier. For Chamsedine, Lebanese hotels certainly have a competitive advantage relative to neighboring countries, despite the lower investments poured into the sector.
So how does this affect the hotel landscape in the country? There are more three and four-star hotels than five-star facilities in Beirut, but the latter have more capacity in terms of number of rooms than three and four- star hotels combined. Compared to neighboring Syria, five- star hotels are also more numerous. According to Chamsedine, over the last five years, a number of five- star hotels opened in Lebanon, while only one set up shop in Syria.
Achkar pointed out, however, that the three and four- star hotels outside the Beirut region do not generally correspond to international standards. Around the capital, the biggest concentration of hotels is in the Kesrouan and Metn regions of Mount Lebanon.
Many underlying problems related to infrastructure, electricity, social security and obtaining permits also plague the hotel industry. Often, regions far from the capital may not offer sufficient sources of entertainment for tourists who look for shopping areas, restaurants and pubs. Other problems pinpointed by Nada Sardouk, general director at the Ministry of Tourism, is the underdevelopment of certain areas in terms of road infrastructure, which she said is usually the responsibility of the local administration or municipality.
For Chamsedine, another difficulty faced by the tourism industry resides in the frequent power cuts, which reflect on hotel expenses. Soaring oil prices have weighed heavily on hotel balance sheets with establishments having to buy fuel for their electrical generators. High expenses are also tied to social security, accounting for up to 23.5% of employees’ salaries paid directly by the employer, according to Chamsedine.

Other challenges
Major cities such as Saida and Tripoli also have an insufficient number of venues relative to their population and are not properly promoted by tour operators. Other problems reside in slow permit procedures, which may require up to a year due to red tape caused by the involvement of multiple parties whether the municipality, or the ministries of tourism and development.
How does the restaurant industry, one of the backbones of Lebanon’s tourism sector, fare in the presence of so many challenges? Paul Ariss, president of the Syndicate of Restaurant and Café Owners, believes it is very difficult to estimate the number of restaurants in Lebanon as the last serious national survey performed by the Ministry of Tourism was done in 1997 and has not been updated since. “We believe that there are more than 6,000 restaurants, cafés, pubs, night clubs, discotheques of all types, in all of the Lebanese mohafazats. This figure excludes, however, catering companies and snack vendors, which do not offer seating arrangements,” he said. Some 60- 70% of such venues are operational all year long, while the rest are run seasonally. Greater Beirut (including Antelias and Dbayeh) boasts 55% of all Lebanese restaurants, the rest being divided into 15% each for Mount Lebanon (Kesrouan, Metn, Aley and Chouf), northern and southern Lebanon, while the Bekaa has the remaining 5%.
Ratings applied to the restaurant industry are, as with hotels, quite blurry since most have not been revamped since the 1960s. “The number of stars provided to every institution traditionally depends on various criteria such as the size of the space, the operational space, the décor, the furniture and equipment, etc. This rating is purely administrative and no ‘gastronomy’ ratings, such as the Guide Michelin or Gault & Millaut, adopted in France, are available in Lebanon,” Ariss added.
The restaurant industry currently employs about 50,000 people, of which 35-40,000 are permanent staff. The percentage of Lebanese nationals employed hovers over 90%, which is much higher than in others sectors such as industry and agriculture. This should give food for thought to state officials, in order to find new ways to further develop such a vital sector.

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Private Equity

Financial crisis survival guide

by Imad Ghandour
written by Imad Ghandour

It was another sunny day as I climbed towards the base camp of the majestic Mount Everest on September 15, with a few distant clouds lingering on the horizon. I never expected that this date, when Lehmann Brothers fell in bankruptcy, would mark one of the sharpest economic turning points in history and the commencement of an economic tumble never before experienced in our lifetime.

It would be foolhardy to try to assess the impact of the financial crisis on our region or on our business of private equity. Doing projections and predictions is a fruitless intellectual exercise at this point. Prophecies of yesterday are proven by tomorrow.
Private equity players are reacting to the crisis in various ways and styles. Some have sized-up the crisis incorrectly and invested in what turned to be bottomless financial companies like Washington Mutual, where a private equity house saw $2 billion wiped out in no time. But most players are being very cautious, while recognizing that good deals done in the next year or two may yield exceptionally high returns.
Yet the immediate focus is on the health of existing portfolio companies. As an active shareholder, PE teams are monitoring their portfolio companies very closely and are more focused on the health of their existing companies than on closing new deals. Liquidity in particular is monitored very closely, sometimes on a weekly basis.
The three priorities that have made the most sense to me so far are the following:
1. Increase productivity: It is the best positive reaction to survive the crisis. Corporations need to strive to make optimum use of their resources, both human and capital. Staff productivity has to be pushed even further, without necessarily meaning layoffs. If 1,000 employees are needed to carry $100 million of sales, then management should be focusing on how to sell $150 million with the same workforce. In some sectors where the pie has shrunk considerably, like construction, layoffs are necessary.
2. Preserve liquidity: Cash has proven to be one of the scarcest resources today and it is expected to remain so in the future. Preserving liquidity is a priority over growth. One company in our portfolio, for example, is only accepting projects that are cash flow positive and is turning down projects from clients that do not have acceptable credit worthiness.
3.Survival is a priority: Major corporations around the globe are focusing on survival — just witness the freefall of the world’s largest bank Citigroup — and that should be the focus of portfolio companies. Burdening the company with additional obligations needs to be avoided as much as possible.
Over the medium-term, deal valuation will decrease substantially. It may take owners of private companies some time to adjust to the new realities. But in the next few months, owners of such companies will realize that they are competing for a very limited pool of capital and as such they will have to value their companies accordingly.
More importantly, new investments and valuations have to take into account the scenario of declining earnings and revenues. The nice graphs that have all revenues and profits pointing upward will be seriously challenged by investment committees, as well as real life.
The light at the end of the tunnel is that the survivors will be stronger when the world begins doing business again. Private equity players that weather this storm and invest prudently will see their portfolio value grow substantially as the world economy emerges from its long, cold winter.

Imad Ghandour is chairman of the Information & Statistics Committee – Gulf Venture Capital Association.

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Comment

Mr. Iran sinks with oil’s prices

by Gareth Smith
written by Gareth Smith

Change in the White House looms as Washington’s political class senses that the old adversary Iran is more open to pressure. There is a tempting parallel with the collapse of the Soviet Union, when a period of high oil prices encouraged the Communist state to overextend fiscally and politically, making it vulnerable when prices fell.

A timely IMF Regional Economic Outlook, released in October, calculated Iran needs an average annual oil price above $90 per barrel (on the fund’s own benchmark) to avoid a budget deficit in 2008. Ramin Pashaifam, an Iranian central bank vice governor, said last month the economy faced “big problems” if Iranian oil — typically selling 10% under the main benchmarks — remained below $60 per barrel for the rest of the Iranian year.
The falling price of oil — remember it was near $150 in July — is a serious challenge for President Mahmoud Ahmadinejad, who faces re-election in June 2009. Critics charge that Ahmadinejad has squandered oil revenue during the good years and left the state coffers bare.
Quite how bare is hard to tell. Iran still has a cushion, with foreign reserves held at the central bank estimated at just under $82 billion in March 2008.
But the Oil Stabilization Fund (OSF), designed to collect and store windfall oil revenues for difficult times, looks threadbare. Even before Ahmadinejad, it was customary for the president or parliament to raid the OSF for pet projects, but Ahmadinejad has used the fund to finance a welter of commitments made largely on his high- profile tours around the country.
The president is hardly the man to lead Iran towards belt-tightening. From his election in 2005, Ahmadinejad encouraged popular expectation with his slogan of putting “oil money on the people’s sofreh [dining cloth].”
But what remains in the OSF has become a mystery, with the president warning that speculation equals treason. Shamseddin Hosseini, the economy minister, claimed in early November that the fund contained $25 billion, a figure doubted by economists both in Iran and internationally who put the OSF as low as $5 billion. In any case, the lines between the OSF and the budget have become very blurred.
Declining oil revenue is also reducing banking liquidity. Facing a government-imposed lending rate well below inflation of 30%, the country’s 17 state and private banks are struggling to raise capital, and the largest — Melli, Saderat and Sepah – have been hit by UN sanctions over their alleged links with Iran’s nuclear and missile programs.
Ahmadinejad has admitted there has been abuse of loans and promised a crackdown. But banks simply lack the capacity to assess or monitor subsidized lending, while their resources are drained by lending rates of 12% — only 2% of which is covered by the government.
Not only the bankers are restive. A strike by bazaar merchants had led the government to postpone introducing VAT, and an increasingly assertive parliament in October impeached the interior minister for falsely claiming a degree from Oxford University.
As far as re-election goes, Ahmadinejad has history on his side. Every president of the Islamic Republic with the exception of the first, Abolhassan Banisadr, has won a second term.
With six months left to go, he is the only clear candidate. Former president Mohammad Khatami is pondering standing just four years after he left office with his reputation in tatters. Many of Khatami’s allies believe he is the reformist best placed to defeat Ahmadinejad, which in itself betrays the reformists’ weakness. Mehdi Karrubi, leader of the reformist National Trust party, has said he will not run against Khatami.
Moderate conservatives also await Khatami’s decision. Akbar Hashemi Rafsanjani, former president and current head of the Experts Assembly, is privately encouraging Khatami to run — which means Hassan Rouhani, the former top security official close to Rafsanjani, is delaying his own decision.
Another contender may be Mohammad Bagher Ghalibaf, the mayor of Tehran, who attracted over 4 million votes in the 2005 election running as a conservative modernizer.
While the economy will dominate the election, the international situation is a secondary factor. Ahmadinejad has helped elevate Iran’s nuclear program into a matter of national pride, and there is widespread hope in the country that Barack Obama may be open to reconciliation.
Ahmadinejad wrote to Obama on his victory, but a warmer reaction has come from the reformists, with Khatami saying, days before the US poll, that it might open the way for “new efforts to establish relations.”
Controlling any dialogue with the US, and gaining credit for any success in improving relations, is as much a matter for factional conflict as the economy. Ayatollah Ali Khamenei has already signaled his fear of infighting, warning that “some candidates have launched their [presidential] campaigns hastily, distracting … attention from the country’s main issues.”
For Ayatollah Ali Khamenei, custodian-in-chief of the 1979 Islamic Revolution, things may be moving just a little too fast.

Gareth Smyth recently returned to London after seven years in Lebanon and four in Iran. He has worked mainly for the Financial Times in 15 years reporting on the Middle East.

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Banking

Kuwait – A sinking ship in the fleet

by Executive Staff
written by Executive Staff

The Kuwaiti banking sector has learned a great lesson in the immediate aftermath of the global crisis. Financial challenges began in the third quarter, when the central bank decided to increase banks’ reserve requirements. This stipulation limited liquidity and curbed inflation, which had reached an approximate 10.7% by July 2008 — almost 100% higher than 12 months before, when it stood at 5.6%. Global Investment House (GIH) reported that in the first nine months of 2008 profitability of the listed banking sector grew by 14% year-on-year. This was somewhat lower than GIH’s expectations of 16% but, with limited exposure to the infectious subprime crisis, Kuwaiti banks have stayed “relatively immune to the worst that the sub-prime mortgage crisis and what the ensuing debacle had to offer,” GIH said. Aftershocks of the sinking global markets took quite a toll on the Kuwaiti bourse, “which has lost substantial ground as yet,” noted GIH, “with little hope for any sudden respite.” Unfortunately, local banks that procure significant amounts of their bottom- lines from capital gains on investment securities are the ones who have been most affected by the circumstances.

Health in question
In October 2008, Moody’s credit rating agency registered doubt about the health of the Kuwaiti banking sector, due to fears of exposure to dwindling house prices as well as local equity markets. But the surpluses generated by record high oil prices earlier this year have kept the sector going. Kuwait’s economy is undiversified as more than half of its GDP hails from oil-related activities. This high dependency on oil and Kuwaiti banks’ high exposure to a shrinking property market are the main reasons why Moody’s gave the Kuwaiti banking sector a “stable to negative rating” in the fall. However, the credit rating agency’s recent report underlined that the overall operating climate within the banking system was “strong” because oil prices with net interest margins were also vigorous. Lending opportunities, however, are poor, leaving banks subject to real estate and construction sectors. For 2008, most of Kuwait’s top banks performed quite well, with the exception of Gulf Bank.
National Bank of Kuwait made up the highest contribution to the banking sector’s profitability, reporting a rise of 11% year-on-year by the end of the third quarter. Having the second largest contribution to the sector’s profitability, Kuwait Financial House exhibited results of 25% year-on-year growth. The Commercial Bank of Kuwait, the last of the three contributing musketeers, reported an earnings growth of 14% year-on-year in the first nine months of 2008. Gulf Bank regrettably reported negative earnings of 18% year-on-year for the same period, being the only bank in the country to do so. While most of the sector’s banks have not incurred unsustainable losses, they all witnessed one of its largest lenders, Gulf Bank, lose $1.4 billion as of October 2008.

That sinking feeling
Initially, the bank insisted it had only lost a few million dollars, but after an in-depth investigation by auditors and the central bank, the truth came out. This momentous loss has practically eliminated the bank’s Tier 1 capital. The worst development in this episode occurred on October 26 when the central bank was forced to step in and indefinitely suspend the bank’s trading on the Kuwait Stock Exchange (KSE). The lender explained that the losses were made up of “financial derivatives for its customers’ account, trading in financial instruments, as well as the provisions of loan and investment portfolios.” The money will now be recovered via an emergency capital subscription — the bank will issue 1,250 shares at a premium value of 200 fils ($0.73), permitting current shareholders first pick. The remaining unsold shares will be bought by the country’s sovereign wealth fund, the Kuwait Investment Authority. The bank’s old board has resigned and a new board will be elected on December 2, 2008. After the bailout of the bank, the Kuwaiti government ensured all deposits, while cautioning that concerns prevail over the well-being of the country’s banking sector. Such comments have not boosted customers’ confidence levels, as many have panicked and withdrawn large amounts of cash from their Gulf Bank accounts. While the bank’s operations have continued, its shares on the KSE have remained suspended until its restructuring is stabilized. However, Saleem Abdelaziz Al-Sabah, governor of the central bank, believes the Gulf Bank chaos is “under control.” But such obscurity has done next to nothing to restore investor confidence levels in the bourse. Around one quarter of the 200 listed companies on the KSE have dropped below 100 fils ($0.37) per share, driving confidence levels down across all sectors, including the country’s banking sector. Many feel that a lack of confidence — backed by a lack of transparency — is at the root of the crisis. Kuwait’s banks will need to tighten regulations and know when and where to invest better. While the Kuwaiti economy gets back on track in the next few months, banks are hoping to continue to perform relatively well, given the insipid financial conditions.

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Real estate

GCC – Building green kingdoms

by Executive Staff
written by Executive Staff

Even though the ‘green building’ trend is still embryonic in the GCC, a growing number of property developers as well as governments are realizing the environmental, social and economic benefits associated with the initiative. Green buildings are designed to reduce the overall impact of buildings on human health and the environment by efficiently using energy, water and other resources. They also aim to protect tenants’ health, improving employee productivity and reducing waste, pollution and environmental degradation. The lack of knowledge about sustainable technology awareness in developing countries, as well as the low cost of gas and oil, had previously made them reluctant to adopt these measures. In the last couple of years, with the high level of liquidity and the booming construction industry, this has changed. Increasing awareness has resulted in many projects across the GCC, as well as new laws that oblige developers to adopt more environmentally friendly measures in their developments.

Abu Dhabi
As part of Plan Abu Dhabi 2030, the Emirates’ capital is intending to enact the world’s toughest green building standards, the Estidama Program (, Arabic for “sustainability”). Every building in the emirate has to abide by these standards and sanctions will be imposed on developers who flaunt the law. Additionally, Abu Dhabi’s planning council has the right to refuse building permits to any developments that fall short. The aim of the program is to cut the use of water by 30% and energy by 20%, in turn earning Abu Dhabi the title of the Middle East’s green capital within 15 to 20 years.
Abu Dhabi is also planning to deliver the world’s greenest city — Masdar City. The six square kilometer development — capable of housing around 50,000 residents and 1,500 businesses — will be the world’s first zero- pollution, zero-waste city. Construction is expected to start in 2009 and take 10 years. Some of the numerous sustainability features in the city are that all energy will be renewable — solar, power, wind, waste to energy — and that it will be car-free, as people will go around in electric light rail systems that will be linked to the center of Abu Dhabi.
Other green projects are being initiated as well, such as a mixed-use environmentally friendly project launched by Connection Real Estate in the Abu Dhabi Towers that comprises luxury apartments and commercial property.

Dubai
In July 2006, the Emirates Green Building Council (Emirates GBC) was formed with the goal of advancing green building principles for protecting the environment and ensuring sustainability in the UAE. Currently, a new regulation concerning green building practices will be implemented in Dubai by January 2009. Under the new law, all owners of residential and commercial buildings in Dubai must abide by the internationally recognized environmentally friendly specifications. This new regulation aims to make all property developments to be environmentally friendly in five to 10 years.
Many developers have already started implementing green building standards. For example, Dubai Properties is promoting these strategies in both Jumeirah Beach Residence and Business Bay, where energy sufficient measures are employed as well as water saving methods, district cooling systems, double cavity walls and centralized garbage collection.
Moreover, the new headquarters of Dubiotech, scheduled for completion in 2009, is set to be one of the world’s largest green buildings. The Leadership in Energy and Environmental Design (LEED) certified 22-story headquarters and laboratory buildings will include a center for biotechnology education and research. It will comprise two connected buildings oriented to maximize day- lighting and views, while minimizing solar gain. Additionally, it will also incorporate a 46,500 square meter animal reserve for indigenous conservation and wildlife protection.

Qatar
By the middle of 2010, Doha is set to get its first ‘green building’ designed to achieve the LEED certification. The Dubai Towers – Doha, developed by Sama Duba, will adopt the latest technologies such as the state- of-art green techniques to help reduce water and energy needs, as well as to minimize waste and pollution.
The new Energy City Qatar (ECQ), in which the construction of buildings should begin towards late 2009 and early 2010, is planning to host only green buildings within its boundaries. ECQ plans to obtain the LEED rating from the US Green Building Council by 2010. All buildings in ECQ are to be powered only by alternative energy sources, such as wind or solar energy. Additionally, the construction materials used will be environment-friendly, ensuring minimal consumption of oil and gas with minimal carbon emission. Moreover, the buildings are to be designed to ensure that sufficient natural light would be available. ECQ also hosted a campaign on November 19, including a seminar on green building design and emphasizing the importance of green properties.

Bahrain
Bahrain is also moving towards sustainable developments and has started to build eco-friendly buildings like the Bahrain World Trade Center in Manama, a 50-story complex containing two identical towers that rise over 240 meters in height. It features three giant wind turbines connecting the two towers, officially making it the first building in the world to feature this kind of technology at this scale. The turbines provide 11-15% of the power for the two towers.
RealCAPITA, the Bahrain-based real estate investment company founded the concept of green buildings by establishing an exclusive sponsorship to the Green Building Council of Bahrain. It is also developing the Amwaj Gateway, which is the first project in Bahrain to obtain a ‘green building certificate’ through adopting the LEED criteria for new constructions.
As the green building trend continues to develop, it is expected that more of these projects will be introduced over the next number of years. Although this enthusiasm is gaining steam in the Gulf countries, others in the region are still far behind, either due to the lack of awareness or shortage of liquidity. Hopefully these countries will also consider adopting eco-friendly standards soon enough to reduce environmental damage in their communities and to ensure long-term sustainability.

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