Insurance

MENA – The underwriting tow

by Executive Staff
written by Executive Staff

The underwriting division of the regional insurance industry is expected to expand substantially over the next year, as companies reeling from the effects of the global financial crisis concentrate more on their core business of writing risks rather than on the increasingly dismal investment side of the industry, which has already given the industry quite a beating. “In 2008 the poor results are due to [losses in] investment income,” said Farid Chedid, managing director at Chedid Re. “What we are expecting is that because of poor investment income and the negative investment environment in general, insurers and reinsurers will to look to increase their underwriting profits to sustain all the damage that was created by the global financial crisis. Hence, we are expecting more profits on the insurance [underwriting] side.”

Changing direction
But even if regional companies are intent on a paradigm shift in priorities from investment to underwriting, the transition will take time and, as the saying goes, time is money. “I think the trend will be that we will go back to technical profitability and not concentrate too much on the financial income aspect of the insurance business,” averred Elie Nasnas, director general of AXA Middle East. “It’s a medium-term trend and it will not happen overnight.”
Governments in the region have been keen to push mandatory insurance requirements but are viewed by many in the industry as lacking the foresight to encourage voluntary insurance, such as life insurance, through regulatory reform and by raising individual awareness levels of their populations by offering incentives to first-time insurance buyers. But in terms of incentives, “[governments] want to do it and they are afraid to do it. We need tax incentives to enhance the potential of the life insurance sector,” said Nasnas. This job has now been left to the companies themselves who, while keen to increase awareness, can only do so much in an environment that is not yet conducive to increasing insurance awareness across the region. The notion that the long-term benefits of insurance growth and awareness will outweigh the short-term costs of providing incentives to local populations seems to evade regional governments. Thomas Schellen, publishing editor and researcher at Zawya Dow Jones, said “Understanding that providing incentives to increase insurance penetration, even though it costs money now, will be more beneficial to both the state and the individual is a major problem.”

On the business side
Traditional regional coverage areas associated with the energy sector will remain strong. “The many challenges facing the energy sector in the Middle East also constitute great opportunities for long-term, diversified and innovative (re)insurance players,” wrote Loredana Mazzoleni Neglén, director of Europe, Middle East and Africa at Swiss Re IRI’s Energy & Power Industry Practice, in Middle East Insurance Review. “The region’s massive oil and gas projects will fuel the engine of its growth, particularly in the Gulf states, and (re)insurance will be an important catalyst to support this undeniable potential and boost the Middle East’s economies in the upcoming years,” she continued. However, the recent fall in oil price is seen as a real impediment to insurance growth because of the effect that decreasing prices will have on disposable income in the region. According to Chedid, “If you have a drop in oil prices, there is a slowdown in the regional economy […] Therefore, with less disposable income there will be less demand for insurance.”
Areas such as real-estate development have also seen promising growth rates in 2008 and look to continue into 2009. “Products related to urban development, where the Middle East is now establishing itself as a world leader — from the drawing board to final implementation, city building and the Middle Eastern drive to develop new urban identity modules — come with specific insurance needs that will have a stronger role,” Schellen said. Nevertheless, this growth should be taken with a grain of salt as these areas are expected to see a contraction in 2009 due to the high leveraging of the regional real estate sector coupled with the global financial crisis, in particular in places like Dubai where the real estate industry has been one of the cornerstones of economic development in recent years.
“Prices have gone down [in the real estate sector] and projects are delayed due to the fact that the economy in Dubai is based on real estate,” said Michael Bitzer, CEO of Daman. “There will be an impact on the GDP and then indirectly on the insurance sector.” Moreover, a looming real estate crisis brought on by the global financial crisis could have dire consequences for the insurance industry as well as the regional economy.
“I think the worst thing that can happen in the region is to have a real estate crisis,” said Chedid. “For insurance companies it immediately has a negative impact. If the real estate industry is in trouble, they will be looking to save on risk management.”
Overall, the business segment of the regional insurance industry is set to decrease in line with the contraction of regional and global economies. The focus for the next few years will have to be on retail underwriting and companies will look to improve their product offerings and cut costs in order to stay competitive in the regional market.
“Companies will start to think in terms of the bottom line and concentrate on technical underwriting as well as practice further cost cutting,” Nasnas said. This is good news for retail consumers who can expect better products and services from their insurance providers in 2009 and beyond, even though companies will increasingly feel the crunch. “Clients will expect the same level of service if not more and companies will have to cut their costs accordingly,” Nasnas concluded.

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The Arab brand

by Paul Cochrane
written by Paul Cochrane

The Middle East as a region has a ‘brand image’ problem. War, terrorism and — in the words of a soon-to-be- departing US president — evil, are terms that still abound in the generalized view of the region. Although the Gulf countries are getting double digit marks for growth, tell people in Europe or the Americas that you’ve just been in Lebanon/Syria/Iran/Jordan etc. and the response is invariably, “Oh, isn’t it dangerous there?”

There is always a short or long answer to this. But based on the past year, outside of Iraq and the Palestinian Territories, there has been remarkably little to brand the Middle East as any more of a hot spot for war, terrorism or evil than most other parts of the world.
The region has arguably been the victim of its own craven desire for publicity — at once complaining of skewered coverage, yet getting proportionally more coverage than other places. The region’s geostrategic importance, energy and the role of Israel all play their part in this, but this over exposure of the ‘dangerous’ images of the Middle East has taken its toll on brand perception.
Compare this image to that of say Brazil, where people associate the country with samba, football and sunshine, yet in terms of street crime and robbery Brazil is far more dangerous than the majority of Arab streets, whether in the day or after dark. Equally Europe, the strongest of regional brands, has had its share of terrorism, and the chances of being mugged in Barcelona or pick-pocketed in London are exponentially higher than in Beirut or Aleppo.
Or take India, riding high on a brand image of an ascendant power in the region and the world, destined to take on China. While this may happen with India expanding its nuclear capabilities, a still-strong economy despite the global financial turbulence, and a gigantic domestic market, what has hardly dented brand India over the past year, at least internationally, is the spate of bomb blasts and attacks that have rocked the country.
This includes last month’s battles in Mumbai and the 63 bomb blasts in seven states over the previous eight months. As Executive went to print there were more than 100 dead in Mumbai, with security forces still skirmishing with pockets of armed extremists in the city. Between 2004 and 2008, there have been at least 25 major bomb attacks and hundreds of smaller incidents. Such violence has been carried out by Islamist groups, separatists and, in what has recently come to light, also by right-wing Hindu groups.
India ranks in the top three globally outside of war zones for terrorist attacks, yet if you tell people you’ve been to India, they respond with a type of concern typical of India’s brand, “Oh, isn’t it so dirty and poor?” — a far cry from the concern voiced when people hear you’ve been to the Middle East.
This is India’s challenge, as many recognize, yet it has not overly affected its global image. And while many countries in the Middle East face the same issues, there is also the impression of the petrodollars and glitz of the Gulf. The Middle East clearly has a mixed brand image, given the economic discrepancies between the GCC and the Levant.
Although tourism, a major part of a country or region’s brand image, is relatively strong, the association or a one-off terror attack alone is enough to make non-Arab tourists cancel their trips. When I visited Luxor in Egypt a year after the attacks on tourists in 1997, there was hardly a visitor; good for me but not the local economy. Egypt and Jordan saw a massive drop in tourists following September 11, 2001. Lebanon has also been quiet following the July War. And while Syria’s numbers have surged in recent years, the tourists are 75% Gulf Arabs.
But although India might not be doing that well in the foreign tourism stakes, only getting 3.5 million visitors a year — paltry in relation to its population and the 6 million Dubai gets, the 11 million that visit Egypt or Syria’s 4 million – people don’t call off their vacation because of a bomb blast.
It is time for the Middle East to start putting another image of itself across to the world to disassociate itself from the terrorism that does happen and portray all the positives that make the region such a wonderful place to visit and live in. There is no easy solution to this in the face of media portrayals, but that can also be used to the region’s advantage too, for there is a great deal of interest in the Middle East. There is also the talent and brains to achieve this. Above all it will take belief in the region, at the micro, country level as well as at the macro for this to happen. Brand India appears to have a strong belief in its future, and so should the Middle East.

PAUL COCHRANE is a freelance journalist. He is currently in the Indian subcontinent.

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Banking

Charles P.S. Hall – Q&A

by Executive Staff
written by Executive Staff

Executive sat down for an exclusive interview with Charles P.S. Hall, CEO of HSBC Lebanon, to discuss the current prosperity of the Lebanese banking sector, the regional sector’s performance in 2008 and prospects for 2009.

E Looking back at 2008, how did the Lebanese banking sector perform?
The Lebanese banking sector has actually been very resilient. I think the central bank can take a huge amount of comfort from that.
The most drastic accounts are what has happened recently, with the global credit market drying up and the fact that Lebanese banks have been very prudent in managing to escape the worst of it. As you know, they benefit substantially from inflows of money. I think there is the perception that the Lebanese banking system has weathered the storm and is therefore continuing to attract deposits, which have been flowing in. I understand in many cases that some of the private bankers have switched into Lebanese pounds, which yield a much higher rate than US- dollars. So as long as that premium exists in terms of the Lebanese pound, you’re probably going to see continued inflows of money, which benefits the economy and that benefits the government when it comes to capital raising exercises such as issuing more Eurobonds that have financed the country’s economic side of things.

E Why do you think the Lebanese banking sector is doing so well even after the global financial crisis?
Well, in fact the Lebanese banking sector is doing nothing new. It’s just continuing the prudent approach it has taken in the past. It’s just that the model has worked and nothing has really changed. The Lebanese banks have not had the same problems that the foreign banks have had, the business models are very, very different. You look at some of the UK banks; for every $100 they were taking in, they were lending out $1,200 — something’s going to have to give. The Lebanese banks are very well capitalized and they don’t have that type of liquidity problem.

E Would you say that the Lebanese banks have benefited from the global financial crisis, or is to too early to tell?
Oh, they have clearly benefited, especially in terms of the inflow of funds.

E Do you think the Lebanese banking sector’s current prosperity will continue into 2009?
I see no indication why it shouldn’t. I suppose there are a couple of issues that might arise. If you look at a number of other countries that are in real difficulty, they’ve actually had to price their sovereign debt, their government debt, well above 9%. You look at somewhere like Iceland, they’ve had to actually price their debt at over 20% to attract inflows of funds. There is no indication at the moment that the government here is going to have to compete with those markets and they’ve got a large enough Lebanese diaspora that feels that Lebanon is very much a part of their own and will continue to support it. So, I don’t see any problems in the short-term. In the longer term, the government is going to have to address the debt level… but at the moment I don’t see any problems with that, as there are such large inflows of funds to support it. As long as the political stability remains here — or some sort of political status quo — then I think Lebanon is probably as well placed, or better placed, then many countries.

E Credit Suisse predicts Lebanon’s GDP to rise a mere 3% this year and 4% in 2009 – whereas the IMF forecasts a 6% GDP rise for 2009. Which forecast do you think is more accurate, and why?
Well, I think all bets are off at the moment, because we just don’t know what’s going to happen. Lebanon is part of the global economy anyway, whether we like it or not, and is not going to be immune from the flow of trade in either direction. Lebanese are descendants of the Phoenicians, the world’s greatest traders, so without actually knowing how the trade flows are going to evolve, we can get some sort of idea at the moment from our trade finance business… we’re finding, actually, still that the flows of trade are very healthy, but at some point it is bound to be affected. So I just don’t have a feel as to how the GDP will look, but I would err on probably the more conservative side now. When the Credit Suisse report was written, things were very different.

E Do you think Lebanese banks will continue expanding regionally to help them grow?
Audi, BLOM, all the major banks have. I think the [recently broken deal between EFG-Hermes and Bank Audi] was a sensible move, because they couldn’t agree on a price and in the current markets you just don’t know what’s happening. Audi is a very well run bank and I think it was very prudent, because you just don’t know what the exposure of the other bank was going to be. They’ve probably done their due diligence and I can’t really comment on that. But, I know the central bank has actively encouraged the major Lebanese banks to diversify outside Lebanon to make sure their eggs were not all in one basket. You’ve seen Audi expand dramatically into Egypt and into a number of other countries too. Syria has been a major one for them. I think it’s been very prudent for them to do that.

E What role would you say regulation plays in protecting banks? Do you think Lebanese banks are less affected by the current crisis than GCC banks due to tighter regulations set by the Lebanese central bank?
Yes, I think that is absolutely right. Lebanon has actually exported bankers for many, many years within the levels of HSBC — the person that runs HSBC in the Middle East is Lebanese, the head of global banking markets in the whole of HSBC Group, is Lebanese… So I think the Lebanese are probably some of the smartest people when it comes to running banks, and the central bank here, well, as you know Riad Salameh was voted Governor of the Year in 2006. Some people have said to me that some of the regulations have been draconian, but that has actually paid off. The exposure by banks to these credit default swaps is negligible. Now that’s not to say that these instruments are not useful, they have their use, but they’ve been abused. I was talking to one Lebanese banker and he said that the treasury department of this major bank didn’t understand these particular instruments… and because they didn’t understand it, they didn’t actually buy them. That says something of the management of those banks. So yes, the central bank has a very clear role with regard to regulation and has been central towards making sure that the economy has benefited because the government and the banks are essential and they need each other and they have been a success for Lebanon.

E How would you explain the $7.7 billion — up from $6.6 billion in 2007 — inflow of bank deposits into Lebanese banks in just the first nine months of 2008?
Well, a lot of it has to do with the booming property market as people are actually shifting money into Lebanon. We’ve seen it, we’ve had a 250% increase in our home lending. If you take that across the whole banking sector, and I know it wouldn’t have been as much in terms of percentage increase, but if you take that kind of thing into account then you can see fairly quickly that the lending side for property has attracted a lot of funds, mainly from the Gulf and the Lebanese diaspora. I’d say that is the main factor, certainly for the first nine months. But also, people are repatriating money. A lot of people have emigrated out of Lebanon into the Gulf and are bringing their money back.

E Was the Lebanese banking sector affected by the May events?
It was interesting actually, I was here at the time and I met a few customers. In fact, as the problems were happening I was down in our trade finance area and there was a customer bringing in a letter of credit. When I was talking to him about it he said, “These things happen, life goes on!” We detected, obviously, a slowing down for a couple of days, but then there was a pent-up demand and business was back to normal. In fact, actually, there was a sort of sense of euphoria after the events and people went into a sort of a holiday mode thinking all their troubles had been sorted out — it was really quite bizarre.

 

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Real estate

Kuwait – Fuel to build

by Executive Staff
written by Executive Staff

Kuwait accounts for about 10% of the world’s oil reserves and has benefitted from recent high oil prices, as well as political stability and economic growth. Yet the country plans to diversify its economy away from the oil sector to include infrastructure, tourism and construction. Still, the construction sector contributes only 6% to the nation’s economy, while the oil sector accounts for 55% of GDP, 95% of expatriate revenues and 80% of government income, according to the Oxford Business Group (OBG). The country is far behind its neighboring economies in terms of growth in the property market, mainly due to the lack of transparency on real estate information, lack of trading savy among investors, lack of regulations, restriction of foreign ownership and scarcity of lending facilities.

According to the National Bank of Kuwait (NBK), 2008 has not been very prosperous as the first nine months of the year witnessed a 28% drop in real estate sales compared to the same period in 2007. The number of transactions also fell by 32%. The decline in sales occurred mostly in residential property — which accounts for around 80% of market activity — with value and unit sales declining by 36% and 38%, respectively.
Poor government regulations and a massive bureaucracy have caused local investors to focus on foreign investment rather than expanding domestic supply. Moreover, according to the Kuwaiti Financial Center (Markaz), high land prices are restraining growth in the real estate sector by decreasing demand and making new developments less affordable.
Expatriates, who account for 68% of the total population, are still not allowed to own real estate, thus holding back the flow of investment and inducing expatriates to search for better opportunities in other Gulf countries. In October, the cabinet announced it plans to allow GCC nationals to own land and property in an effort to open up the sector and encourage foreign investment.
According to OBG, in the next five years around $8 billion of private investment and $3 billion of government investment is expected to come into the sector. Some of the major projects include Gailakha Island, Bubiyan Island, Project Kuwait, Khairan and Arifijian residential projects. Overall, new construction is expected to reach $129 billion in 2010.

 

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Insurance

Overview – Paltry protection

by Executive Staff
written by Executive Staff

One might think that the region that invented insurance would lead the world in mitigating risk and act as a model for others to follow. But almost 4,000 years after Mediterranean merchants first insured their cargo from the risk of piracy, the region suffers from a lack of insurance awareness and coverage across the board. Although information for all of 2008 and even for the third quarter has yet to be released by many insurers, what is available for analysis points to low penetration rates coupled with an increasingly caliginous financial sector. For example, the UAE registers a meager 1.7% penetration rate as a percent of GDP, trailed by Egypt (0.9%) and Saudi Arabia (0.6%), according to Business Monitor International’s (BMI) Q3 reports for the industry. That said, low penetration rates also constitute ample room for growth. With the industry expecting double digit growth (estimates vary between 12% and 15% annually) and a CAGR of up to 25% in some countries in the region over the next five years, the industry looks set to make its mark on the regional economic framework.

In a perfect world, such figures would have been heralded as early signs of the next regional industry boom. Assumptions of this nature, however, do not hold much water when the world is drowning in a global recession ushered in by a colossal financial crisis. Despite the anticipated fallout from the global financial crisis, the prognosis for the region in general remains more promising than that of many advanced economies expected to grow at an average of just 2%, according to adjusted IMF figures. Nevertheless, a widespread slowdown as a result of lower oil prices will undoubtedly have a sobering effect on the insurance industry as a whole. According to Michael Bitzer, CEO of Daman, “In general, on a regional level the global financial crisis, and now the global recession, as well as the decrease in oil prices will have a negative impact on the overall growth rate of economies and insurance in particular.”
The phenomenon of low penetration rates prevalent across the region is, however, regarded as more of an opportunity than a sign of a general unwillingness to embrace the concept of insurance. Yet the idea that double digit growth and the room for expansion provided by low penetration rates can compensate for many of the industry pitfalls in 2009 and beyond is rather simplistic. “There are great opportunities, but to say that everything is golden because we have double digit growth is just not the right picture,” said Thomas Schellen, publishing editor at Zawya Dow Jones. This sentiment is echoed by many in the industry who enjoyed the recent boom but will now have to weather the storm of the regional slowdown, even in territories like the UAE that are at the forefront of the regional insurance industry. This year “was characterized by extremely high growth for the whole of the UAE, but for next year I am expecting that growth rates will go more or less to 0%,” Bitzer averred.
The main reason for most analysts skepticism is that the industry is heavily dependent on the global and regional financial environment, which is currently in a state of disarray. “In 2008, the poor results are due to [losses in] investment income,” said Farid Chedid, managing director at Chedid Re. Moreover, the institutional framework and regulatory environment that operates on a regional scale has yet to be put in place as of 2008. “Standards that customers and insurers can rely on are not yet uniformly developed,” Schellen pointed out. However, there is a sense that regional governments have acknowledged that the region is relatively underinsured and have started to take some of the necessary steps required to begin to support the regional insurance environment in 2008 and into 2009. “Governments should continue what most of them have started [in 2008] and improve regulations as well strengthen the regulators”, said Bitzer.

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Region cues for Obama’s list

by Claude Salhani
written by Claude Salhani

For a change, the news from Washington was positive and well received around the world, including the Middle East. Upon his victory on November 4, Barack Obama received messages of congratulations from a number of leaders in the region, among them Iranian president Mahmoud Ahmadinejad. Obama’s election raised hopes in the Middle East that under his administration, America would resume her role of peacemaker in the region.

Obama’s election was a reminder that democracy, despite its many imperfections, works. It was, unquestionably, the best example America could offer and should encourage the spread of democracy around the world far more so than the menace of any military threat.
Realistically, however, what does Barack Obama’s election mean for the Middle East? Are too much hope and too high expectations being placed on the new president? The answer to both questions is an unequivocal “yes”.
While Obama will take the US in a very different direction than his predecessor, all his good intentions to try and resolve the Middle East’s crises will be hampered by the president’s biggest hurdle: time. There is only so much any president can handle in the space of 24 hours and Obama will have every hour of his days filled, working to untangle the mess caused after eight years of disastrous policies adopted by the neoconservatives who have managed to take a vibrant economy and drive it into the ground, start two wars in the Middle East and alienate the US from much of the world.
Obama inherits a long list of urgent domestic dossiers from the Bush administration: an economy in shambles; the housing market in disarray; unemployment hitting a 14-year high at 6.5%; the American car industry on the brink of bankruptcy with Ford, Chrysler and General Motors laying off workers by the thousands and plants in the Detroit area risking closure.
In foreign affairs, the Obama administration will have to deal with the war in Iraq, which appears to be winding down, but where the US is now engaged in a political battle with the Iraqi government over the SOFA (Status of Forces Agreement).
If the violence is abating in Iraq, it is gaining momentum in Afghanistan. Obama will have to decide what to do there and see if he can convince NATO and other allies to commit more troops in a concentrated effort to finally defeat the Taliban. Additionally, Obama will have to make a landmark decision about whether US forces should pursue Taliban and al-Qaeda fighters into neighboring Pakistan, seeing that as long as Pakistan continues to provide shelter — either willingly or unwillingly — to insurgents fighting the international force in Afghanistan, the problem is unlikely to end.
One of the topics likely to require urgent attention by the president will be Iran’s pursuit of nuclear technology. Just days after his nomination President-elect Obama reiterated that Iran should not be allowed to develop nuclear weapons.
In view of the priorities that will be granted to other more pressing issues, the Israeli-Palestinian conflict is likely to take a backseat — once again — until the president can find time to devote to getting the peace process moving. The good news here is that the Washington rumor mill reports that Obama will appoint a high profile envoy to represent him in the Middle East and push ahead for a comprehensive peace deal.
Obama will have to mend soured relations with Syria, which continues to hold the keys to any lasting peace treaty in the region. As long as Israel occupies the Golan Heights, Syria will remain opposed to the peace process, whereas a peace treaty with Damascus will pave the way for a comprehensive peace in the region. There is one important caveat, however: Lebanon.
Any peace treaty between Israel and Syria that does not include Lebanon will not be worth the paper it is written on. Why? Because a continued state of belligerency between Israel and Lebanon (read: Hizbullah), leaves a dangerous escape clause in the Syrian-Israeli peace process. Lebanon on its own would never sit down with Israel to discuss peace, but Lebanon as part of a joint delegation with Syria would place those parties opposed to a peace treaty with Israel in front of a fait accompli.
Finalizing the peace between Syria and Lebanon on one side and Israel on the other would resolve the issue of the Shebaa Farms and — in principle — remove Hizbullah’s reasons to maintain an armed militia.
Obama would then need to mend fences with much of the Arab and Muslim world with whom relations have been strained by the Bush neoconservative policy.
Of course, all this will take a backseat to the most urgent problem facing the US today, the financial crisis. Yet, Obama’s victory on November 4 over his rival, Republican contender John McCain, is a clear indication of the American people’s want for the change which Obama has promised.
As pollster John Zogby wrote in an editorial just days before the election, “change is coming.” And on November 4, change came.

Claude Salhani is editor of the Middle East Times and a political analyst in Washington.

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Banking

Lebanon’s banks invested in rebuilding the country‘s economy

by Fadlo Choueiri
written by Fadlo Choueiri

The Lebanese banking sector has shown strong resilience to economic and political shocks and has demonstrated a commitment to continuously support the Lebanese government in its arduous rehabilitation journey.

With a rating equivalent to that of the Lebanese government (“B-” and a stable outlook), total assets in excess of $91.7 billion as of end of September 2008, customer deposits nearing $76 billion for the same period and a branch network exceeding 825 branches, the Lebanese banking sector has responded rapidly and efficiently to the financing needs of the domestic economy and continues to provide a wide range of conventional as well as high quality modern financial services for resident and non- resident clients.
The Lebanese banking sector continues to be the backbone of the economy, characterized by an efficient banking secrecy law, a free exchange system and free movement and repatriation of capital. In the past couple of years, the banking sector witnessed a significant improvement in investing in human capital, the latest information and communication technologies, internal auditing, risk management and control systems, and money laundering compliance units.
It has and will continue to play a pivotal role in smoothing government public finances and alleviating internal public debt service through its sustained investments in Republic of Lebanon Eurobonds and other government instruments instigated during the many reform phases engineered by the Lebanese Ministry of
Finance. This includes, among other things, the banking sector’s full support to roll over maturing government securities at lower yields and its participation in the exchange (swap) transactions of Republic of Lebanon Eurobonds that emerged in 2005.
One cannot forget the role of the Lebanese banking sector in fueling Banque du Liban’s (BdL) foreign currency reserves to record highs, thanks to the banks’ historical investments in BdL’s financial instruments that helped mitigate the risk of any imminent currency devaluation and added an influx of foreign capital from Lebanese expatriates, who continue to prosper on the back of a more relaxed political and investment environment. It is also worth highlighting the role of foreign donors’ support for Lebanon during the Paris II and Paris III meetings, raising some $4.4 billion and $7.6 billion, respectively, in foreign currency denominated funds. In this perspective, gross foreign currency reserves soared to an astounding $18.96 billion in the first half of November 2008, registering an unprecedented 51.33% annual appreciation.
Concurrently, in 2008 the Lebanese banking sector has witnessed a unique inflow of foreign remittances from Lebanese expatriates, especially those living in the Gulf, with some 43.1% reported annual expansion in foreign inflows to $5.65 billion through July 2008, up from $3.95 billion in the same period in 2007. In the second half of 2008, notwithstanding the global financial turmoil that struck financial institutions worldwide, the Lebanese banking sector preserved its solid standing with a reported $500 million influx during the one-week period that followed the bankruptcy filing of Lehman Brothers.
Renowned international credit rating agencies continue to praise the role of the banking sector in stabilizing the economy, to a certain extent, by being the primary source of public financing in both foreign and domestic currencies. In addition, recent reports by international rating agencies (e.g. Moody’s Credit Opinion report November 2008) hailed the resilience of the Lebanese banking sector to the prevailing global financial chaos and went further to indicate that the Lebanese banking sector actually benefited from the crisis. The immunity to the global economic and financial crisis can be attributed to the sound regulatory framework set forth by the BdL coupled with close supervision by the Banking Control Commission
Nevertheless, today the Lebanese banking sector is unquestionably experiencing a transitional stage into a new era characterized by a reduced exposure to government securities, narrowing interest spreads, harsh cut-throat competition, political tensions and economic instability.
I am confident the Lebanese banking sector has and will always be a major contributor to Lebanon’s economic resurrection. This owes to the banking sector’s eagerness to provide continuous financial support to the government if and when needed, its proven ability to create job opportunities both domestically and regionally as banks expand abroad, its credibility in the eyes of international donors and rating agencies that increase foreign and domestic investors’ level of confidence in the economy, that attract foreign direct investment and that add to its thrust to provide continuous financing to the various economic sectors upon which economic growth depends.

Fadlo I. Choueiri, CFA, is the head of corporate finance & economic research at Credit Libanais Investment Bank

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Real estate

Lebanon – A boom where others bust

by Executive Staff
written by Executive Staff

If one thinks about how political unrest might damage the real estate sector in a country and then looks at the demand and price figures in Lebanon, there is a sense of awe, if not confusion. “You cannot follow your textbook in real estate in Lebanon,” said Elie Harb, president of Coldwell Banker. “Comparing Lebanon to my knowledge in different markets … here the opposite always happens. What drives markets? Why does the real estate market go up? What is the trend and what do you follow? It does not apply in Lebanon.” Harb also explained that whenever there is political instability in Lebanon, prices do not go down, but only stabilize. Whenever people start to buy again, prices soar. With that in mind, all the political turmoil that the country has faced did not lower prices, but will a world financial crisis also fail to do so?

Prices
Two to three years ago, prices were increasing by around 30% per year on average, said Karim Makarem, director at RAMCO. He added that this year, prices in the first seven to eight months have increased by around 40% and it is expected that the average growth in prices will be from 40- 50% by the end of 2008. “There was a type of craziness and rush for increasing prices that did not follow a logical pattern … Potentially, it is dangerous for the economy,” he asserted.
Although property prices escalated in all Lebanese areas, some prime locations in Beirut witnessed a hefty increase reaching $3,500 and $4,500 per square meter in Gemmayze and Verdun, respectively, compared to $1,000 and $2,000 back in 2004. Prices even increased in Tripoli where in some places a square meter of land is now sold for $2,000.
There are several reasons for this increase, but what all experts agree on is that the main driver is the ongoing demand of Lebanese expatriates for real estate, while supply was finding a hard time keeping pace. During the first half of 2008, people thought that the price boom surpassed rational boundaries and this subject became an important part of people’s daily discussions. The price explosion is ascribed to many factors, the most important being the Doha Accord and construction costs.

Rising demand
The property boom that Lebanon has witnessed in the last couple of years is attributed to the Lebanese expatriates who represent around 85% of the real estate market. Makarem called them “the new middle class of Lebanon.” He explained that Lebanon had lost its old middle class during the civil war, and that people who are going to the Gulf, while leaving their families here, still have strong ties with the country. As a result, this new middle class that is working hard to make money would prefer buying property in their home country rather than anywhere else.
Moreover, “we do not have a lot of availability,” according to Abdallah Hayek, chairman of the Hayek Group. “The country is too small. The area of Beirut is around 18 million square meters, while in Riyadh it is 450 million square meters and in Cairo 312 million square meters.” Thus, low supply coupled with rising demand had a major effect on prices.
One turning point that led to this rush was the Doha Accord signed in May 2008. The market witnessed a minor slowdown during May because of the internal military conflicts and regained its propulsion after the accord was signed. Christian Baz, the owner of Baz Real Estate, explained that before the agreement, many people were on stand-by, waiting to see what will happen. When the agreement was signed, they rushed to buy property since the political situation had stabilized. Consequently, sellers started to increase their prices even before buyers came. “After Doha, the word was also spread among foreign companies, so now the demand started to increase for offices,” he added. Bank Audi’s economic report stated that around 15% of the increase in price took place in June, immediately after the Doha Accord.
Additionally, Antoine El Khoury, general manager at Byblos Real Estate Investment Office, believes that expatriates were holding on to their money since 2006, waiting for political turbulence to calm, thus post-Doha demand to acquire real estate surged. “We believe that the demand witnessed at the end of 2007 and beginning of 2008 was the pent-up demand since the 2006 July War,” he said.
The increase in construction costs created a buzz in the market and most sellers used it as an excuse for boosting property prices. However, opposed to what people might think, the effect of construction material cost on this year’s end product price rise is minor. “The rise in construction cost contributed to the rise in prices. But, if we were in 2000 or 2001 and we had this sudden increase in construction costs while demand was lower, we would not have seen this rise in prices, so it is mainly about the demand,” explained Chahe Yerevian, chairman and general manager of SAYFCO. He added that had the prices risen mainly because of the construction costs, it would not have happened so fast.
During the first half of this year, the rush in demand drove the number of property sales transactions to increase by 23.7% year-on-year, according to an economic report by Bank Audi. Moreover, the number of sales operations to foreigners rose by 8% in the first half compared to the same period in 2007 and totaled 721 operations out of 34,995. Construction permits, which are a main indicator of the real estate activity, also rose by 25.4% from the same period of the previous year. Cement deliveries also saw a month-on-month increase in accordance to the construction activity. In the first four months of this year, they grew by 8.3% and then witnessed a drop by more than 38% in May due the political unrest. Consequently, the first five months of 2008 recorded a 3% lower cement delivery than the same period in 2007.

During crisis
Since the beginning of the global financial crisis there has been a slowdown in demand as a large portion of Lebanese expatriates living in the US are likely to be impacted by recession. “We have seen a slowdown in the number of requests for new properties or flats in the last two months,” said Makarem, adding that “expatriates are uncertain of their own future, they do not know if they are going to be in a job in two, four, or six months, [and] until end buyers feel safe about their future, they won’t start buying again.”
“My Dubai phone has stopped ringing and no one is buying now,” said Baz. A number of expatriates who had been planning to purchase property in Lebanon, have now postponed their investments waiting to see what will happen abroad. He also explained that some of these expatriates might even sell their property in Lebanon depending on how severely they have been hit by the crisis. Although this outlook is rather gloomy, it cannot be denied that this global crisis has been going on for quite a while and the final effect on foreign markets, especially in the US and the Gulf, is yet to be discovered.

Banks
The fact that the Lebanese banking system is one of the most solid in the world largely contributes to the benign effect of the crisis on the country. A large proportion of Lebanese buying real estate rely on bank loans. Contrary to the UAE, where banks are tightening credit causing demand to decrease, “it seems that there is no risk that a liquidity crisis will occur in Lebanon and so we will still see banks providing buyers with housing loans,” said El Khoury. Although the Lebanese central bank issued a new directive on July 21, 2008, stating that banks should not extend real estate loans whose values exceed 60% of the desired property or real estate projects under construction, there is no concern that it might affect demand. It mainly targets speculators since it exempts housing loans intended for the acquisition of a first home, those extended by the housing bank, as well as loans extended by the Public Housing Institute and those allocated to army volunteers. The directive also states that any bank who fails to abide by these stipulations will be reported by the Banking Control Council to the central bank and will then be subject to penalties.

Expectations
Since a slowdown in demand has already started to take place, real estate experts said that prices started to stabilize rather than decrease. This is good for the market since it will slow down the excessive inflation and ultimately avoid the burst of a real estate bubble. “Perhaps what is happening in the world economy worked in our favor slightly, since it made everyone realize that there needs to be a logic in everything we do,” said Makarem.
El Khoury thinks that the Lebanese market will soon cope with the situation and regain its original strength. “I believe that the prices will now become more stable for a few months as I do expect the market to regain its activity once the global crisis and the new market conditions are stable again,” he said.
Hayek expects prices to remain stable until March 2009. “There will be dramatic changes in the global market but the flow of funds and capital to Lebanon will carry on. More money in banks will lead to higher lending [and] real estate prices will begin to rise again next spring,” he said. He also explained that the next parliamentary elections will be accompanied by an increased confidence in democratic rule and therefore a rise in foreign direct investment as well.
Another way to look at the effects of the crisis is to predict that investors who still have some money would rather invest in the Lebanese real estate than in other financial instruments that might be risky. “The real estate sector always maintained its robustness [and] I believe that maybe this crisis will let a lot of Gulf investors and Lebanese expatriates inject their equity into the Lebanese real estate sector which they see now as a safe haven. If security prevails … it will be another opportunity to let investors invest in a more secure and stable industry, which is Lebanese real estate,” said Yerevian.
Harb agrees that Gulf investors who invested already in Lebanon will not retreat even if they are significantly affected by the financial crisis and therefore this market segment, even if small, will not be disturbed. “If an Arab investor invests $1 million in Lebanon, it means that he has billions abroad. If he invests $1 billion, it means he has trillions back home,” he asserted.
Thus, while some might direct their funds to a ‘safer’ Lebanon, others might not have funds to direct at all. Expatriates and investors are sitting tight and waiting for the global recession to slow down. Moreover, while buyers are waiting for the Lebanese real estate prices to drop, sellers refuse to lower their prices either because of greed or other psychological boundaries. So what will prevail? Will Lebanese real estate prices experience their first dramatic fall or will we be benefitting from a market correction? “We have faith in the Lebanese real estate sector that has proven its resiliency to the very severe crises we have faced during previous years,” said El Khoury. While experts hold optimistic expectations, these answers are yet to be discovered since it all depends on the length of the current global crisis and the ability of the Lebanese real estate sector to cope with its consequences.

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Insurance

Overview – The health of insurance

by Executive Staff
written by Executive Staff

The introduction of mandatory insurance legislation by regional governments is seen by many in the industry as the major driver of the regional insurance industry, especially in the GCC. “When you have mandatory insurance in a line of business coupled with first time buyers, they become accustomed to the idea of purchasing insurance and therefore this enhances insurance awareness and increases demand,” said Farid Chedid, managing director at Chedid Re.

Elie Nasnas, director general of AXA Middle East, agreed: “Mandatory insurance expands insurance awareness and this is a positive factor attributed to the growth of insurance penetration … I think the trend is here and insurance is becoming more and more a priority in people’s lives, especially in personal lines.”
Traditionally, the most prevalent forms of personal insurance in the region have been health and motor insurance and this is expected to continue. “The priorities in 2009 will definitely be medical and motor insurance,” said Nasnas.
Thomas Schellen, publishing editor at Zawya Dow Jones, concurred with this idea, saying “The major driver of the regional insurance growth is the phasing in of legal requirements for mandatory insurance in terms of health and motor.”

Health runs ahead
While mandatory motor insurance has been a staple of the regional insurance industry for some time, it is the introduction of mandatory health insurance schemes for expatriates in the GCC that have driven regional growth in 2008, a trend that looks set to continue in 2009.
In line with its role as the regional insurance leader in terms of insurance volume, the UAE began to impose mandatory health insurance legislation for expatriate workers — approximately 70% of the UAE population — in Abu Dhabi in 2006-2007. In June 2008, Dubai announced its plans for mandatory health insurance to be phased in, beginning on January 1, 2009.
“It will be compulsory for everyone and will be largely employer or sponsor funded,” said Qadhi Saeed al Murooshid, director general of the Dubai Health Authority (DHA), who announced the plan. In 2006 Saudi Arabia had already enacted legislation that imposed mandatory health insurance coverage for expatriate workers in companies employing over 500 people. The scope of this legislation was expanded in 2008 to include expatriate workers in companies that have less than 50 employees. Bahrain also looks set to enact similar legislation to that of Saudi Arabia in 2009 but is still working at streamlining the process. Moreover, the nature of expatriate immigration in itself is helping to increase awareness and penetration in the region.
“When there is an expatriate population in the region, they bring with them certain insurance awareness and expectations,” said Chedid. “Those that come from advanced economies have certain standards that they are used to, and will not really work without the satisfactions of those standards,” Schellen added.
The concept of mandatory insurance has also had a direct effect on the management and direction of regional companies in 2008. Companies in the region are increasingly positioning their resources and product models towards meeting the increased demands that come part and parcel with mandatory insurance. As Chedid pointed out, “When you have regulation that makes insurance compulsory, this automatically creates demand and makes it easier for insurance companies to sell and distribute their products.”
Yet, “[mandatory insurance] is moving in slower than expected because companies have had a certain resistance to it because of higher costs,” Schellen said. Add a global financial crisis that has had a direct effect on the leveraging of many core industries in the region such as real estate, and one is left with a situation where money is tighter and companies are less able to spend money on new expenses, such as insurance — a restriction that governments may take into consideration when the time comes to enact mandatory insurance requirements.
“Governments might postpone mandatory insurance due to the overall economic crisis but it will continue,” said Michael Bitzer, CEO of Daman. However, others disagree and say that, as the need for health insurance becomes greater, regional governments and companies are compelled to address the problem of low health insurance coverage in the region — even if it costs their economies during a global economic slowdown. “I think that mandatory insurance for healthcare is a must for regional governments to provide security for their populations, so I think they will not postpone it,” Nasnas claimed, “I think they will go ahead with it.”

Oil and insurance, not a natural mix
While mandatory health insurance is being enacted in the oil-rich countries of the Gulf, it is still not the case that these countries are most insured in terms of penetration rates and number of insurance operators. The correlation between oil revenues, higher disposable income, and penetration rates that applies to almost every industry in the region does not necessarily carry over into the insurance industry.
“The overall business growth will develop not necessarily as close to the oil price as some of the other economic indicators,” Schellen said. The best example of this scenario is Lebanon, a country with no direct oil revenues that touts over four dozen on-shore insurance providers, while Qatar had only six at the onset of 2008, according to Swiss Re and Zawya.
Furthermore, the highest regional penetration rates occur in countries located in the Levant and North Africa rather than the oil-rich Gulf, with Lebanon (3.4%), Morocco (3.4%) and Jordan (2.6%) leading the pack in insurance coverage in 2008. This phenomenon can be explained by the nature of oil and non-oil-rich economies in the region. To begin with, the economies of Lebanon, Jordan, and Morocco are much smaller than those of oil-rich nations and are not able to provide the same level of social security to their citizens that oil-rich nations do. This, in turn, creates a greater need for private insurance. “You cannot rely on the government. People have to take care of themselves,” Bitzer said. Moreover, due to the demographic nature of the Levantine and North African countries, there is a larger percentage of middle class citizens who are essential to retail insurance growth. “To have higher penetration, you have to have a larger middle-class society,” Nasnas explained. Indeed, higher disposable income in GCC countries has in many ways had an adverse effect on regional insurance penetration. “The level of wealth in these [oil-rich] countries is so high that many people don’t need insurance,” said Bitzer. This, however, looks set to change in the long run as a consequence of the natural growth of larger middle-class populations, which go hand-in-hand with the composition of emerging markets.

Takaful
Another aspect of the regional insurance industry that is increasing penetration rates is the evolution of takaful as a viable option for many consumers in the region. The concept of takaful and family takaful as an alternative to conventional insurance models emerged about a decade ago and has allowed regional populations who previously shunned insurance — in particular life insurance — to enter the market without worrying about the ethical constraints associated with Islam.
“There is a concept that life insurance is against Islam and now with takaful there is a huge niche market and a lot of potential, which will re-enhance life insurance in the region,” Nasnas pointed out. “In some places in the region we have an extremely low penetration in life insurance, so there is a lot to be done in terms of takaful. If [takaful providers] concentrate on the virgin market, there is a huge amount of potential.”
This year, 2008 saw a huge increase in the number of takaful operators, as the industry of Islamic finance continues to become embedded in its natural environment. “The increase in the number of insurers in general and most specifically in takaful and Islamic insurance companies is really driving the demand for insurance — at least on the personal insurance level,” said Chedid. “Takaful companies are playing a major role in developing insurance penetration and improving insurance density throughout the region. It is increasing market awareness and improving the acceptance of insurance by local individuals.
Others are more reserved in their expectations for takaful as a real threat to conventional insurers or even a significant factor for increasing insurance penetration in the region. “People have not bought takaful as the big new thing that would make them buy insurance,” said Schellen. According to the analyst, many takaful consumers are already sold on the idea of insurance and are switch- over consumers as opposed to consumers who came around to the idea of insurance once takaful made it religiously acceptable for them to do so.
In the end, however, penetration rates will need to increase naturally due to the budding demographic nature of the region as a whole and the real needs that will eventually become the mainstay of the regional insurance industry. The need to maintain a long-term perspective is nothing new to many of the developing economies in the region. The Gulf states in particular have been keen to implement infrastructure projects across business sectors in order to ensure long term growth and sustainability.

Needs to address
The nature of the insurance industry in the region predicates a pressing and natural need to begin to address the low penetration rates before it is too late. According to the United Nations, the population of individuals in the MENA region who are over 60 years old will increase dramatically, reaching one-third of the population in some countries compared to single-digit percentages prevalent today. This shift in regional demographics logically necessitates life insurance penetration rates increase in countries such as Saudi Arabia, where they were as low as 0.0% as a percentage of GDP in the third quarter of 2008, according to BMI’s research.
“Right now we are the region of the world with the highest formation of families and one of the highest shares of youth as a percentage of total population. Thirty years down the road we won’t have that, so by 2040 or 2050 we will have significant portions of populations that are over 65 and now is the time to start preparing for this,” said Schellen. Indeed the ‘growing up’ of the region has already begun to take place and the feeling is that this will naturally cause an increase in demand for services like insurance. “We are not at the stage yet where the industry is booming, but we should expect a boom in coming years because of the demographics of the region,” Chedid predicted. Hopefully that boom will occur before it is too late to care for the increasing number of senior citizens who could become an economic burden, rather than a well-cared-for blessing.

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A stitch of an industry

by Riad Al-Khouri
written by Riad Al-Khouri

In the 21st century, the problems of Arab industrial exports have been aggravated by more open markets. In particular, the region’s textile and clothing (T&C) industry is in flux, with strength and consolidation of the market position of some producers — notably Egypt and Jordan — and the decline of others, including Lebanon.
As a result of the Middle East peace process, Jordanian and Egyptian manufacturers have obtained a favorable status in the lucrative American market through the Qualifying Industrial Zone (QIZ) agreements, which have been instrumental in boosting their exports of clothing to the US. Jordan in particular has seen its garment sector expand rapidly over the past decade under QIZ agreements.
Since the mid-1990s Jordan began a more open trade and investment policy, negotiating a QIZ trade accord with Israel and the United States — among other agreements made with individual countries or trade blocs, not to mention accession to the World Trade Organization. This has resulted in expansion of Jordanian exports, especially garment sales to the US, which have soared under QIZ. However, this overlooks the issue of backward linkages fostered between assembly operations and the domestic economy and the extent of technology transfer. QIZ is a boost to exports and new jobs, but the zones still rely on foreign workers and on importing a large share of intermediate inputs. QIZs have offered little by way of the industrial transformation they are designed to promote. Clustering is also something that has yet to occur in Jordanian QIZs. The key notion here is that a company’s productivity is higher if it belongs to a geographic cluster of interconnected companies and institutions in a particular field (e.g. California’s Silicon Valley in the information technology sector).
Can Jordan’s QIZs facilitate industrial transformation? QIZs have to be conceived and implemented in the context of an overall export and investment promotion strategy of the government. QIZs were not introduced as a coherent part of Jordan’s trade policy, though QIZ privileges being later granted to Egypt have pressed Jordanian policymakers to take a closer look. Had the whole approach to QIZs been better planned and implemented from the beginning, it is possible that better backward linkages and technology transfer could have taken place.
Lebanon provides a sharp contrast. Whatever else may be going on in the Lebanese economy, industry has been faced with major challenges in the past decade or so and these are likely to grow. The country’s T&C sector in particular is suffering from regional and international competition. As late as 1995, new T&C factories were being licensed in respectable numbers. In that year, the sector saw 28 new plants being set up, creating close to 300 new jobs, but the trend soon reversed. In the mid-90s, the Lebanese T&C sector included over 3,600 factories. Today the figure is under 600. The total T&C workforce in 1994 was over 22,000, but has now fallen to less than 7,000, while output in that year was $428 million compared to a figure now of less than $177 million. Exports have also stagnated. In 1996, they stood at $92 million or close to 13% of the country’s industrial sales abroad. By 2006, the comparable figures had fallen to $87 million and about 4%. By contrast, in that year Jordan’s QIZ exports to the US were around a whopping $1 billion.
Until the civil war started in 1975, Lebanese industrial products, including T&C, competed relatively well in foreign markets, especially in regional Arab economies. However, the immense destruction suffered during the war badly affected the manufacturing sector, with many factories (including T&C) damaged or destroyed and with production capacity reduced to an estimated quarter of the pre-war level.
In late 1990, when Lebanon began to emerge from the civil war, the impact of the Gulf crisis, which broke out in summer of that year, produced another setback for Lebanese industrial exports. Before the crisis, the Gulf had alone accounted for about half the total merchandise exports of Lebanon, including much of T&C sales, with the major markets then being Saudi Arabia and Kuwait. The civil war and the Gulf crisis had the effect of exposing the weakness of Lebanese business practices based on mere ‘selling’ of products to quasi-captive Arab markets, rather than marketing on the basis of quality, product differentiation and competitiveness. Can the Lebanese get out of this mentality and genuinely compete? The example of Jordan is not encouraging. Faced with competition from Egypt, QIZ exports have gone down in the past couple of years. Confronted with a different set of problems, both countries’ T&C sectors have to compete to survive, a message that is only slowly getting through to them.

Riad al Khouri is co-founder and principal of KryosAdvisors and senior fellow at the William Davidson Institute at the University of Michigan, Ann Arbor.

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