Comment

Authoring Israel’s chronicle

by Peter Speetjens
written by Peter Speetjens

History is a funny thing. It is like a piece of clay that changes shape depending on the hands that hold it. After a war, it is generally first picked up by the ones who won. They like to tell tales of heroes and bravery. Those who lost will see things quite differently, yet generally do not have a voice.
In the documentary The Fog of War (2004), former US Secretary of Defense Robert McNamara claimed that had the US not won WWII, the country would have been prosecuted for war crimes, because of the massive bombing campaign on Japanese cities.
On May 15 the world commemorated 60 years of Israel and 60 years of the Palestinian Nakba (Catastrophe). These are of course twin events, intertwined like a Gordian knot, yet when speaking to the Knesset on Israel’s latest anniversary, US President George W. Bush proved hopelessly one-sided in his Bible-fuelled admiration for the Jewish state, while mentioning the Palestinians only once.
Having set the tone by calling Ariel Sharon “a man of peace, a friend,” Bush argued that Israeli independence was founded on “the natural right of the Jewish people to be masters of their own fate” and “the redemption of an ancient promise given to Abraham and Moses and David.”
Israeli MPs awarded Bush with a standing ovation, yet both friends and foes must have shivered hearing his sermon-like speech. Now, of course the Jewish people have a right to self-determination. Who could disagree with that? However, one’s right ends where the other’s begins, and who could argue that deportation and confiscating land and property are an acceptable part of a people’s path to self-determination?
Illustrating his status of a born-again Christian, Bush’s claim that Israel’s right to exist is God-given is a direct reference to the Torah and Old Testament. With it he not only delighted Israeli nationals and an estimated 90 million evangelicals within the US, but probably also Osama Bin Laden and anyone else eager to take the world back to the Crusader era.
Golda Meir, for one, would have been pleased, having herself once said: “This country exists as the accomplishment of a promise made by God Himself. It would be absurd to call its legitimacy into account.” Who would dare argue with God?
In his speech Bush went on to compare the foundation of the US to that of Jewish state. “When William Bradford stepped off the Mayflower in 1620, he quoted the words of Jeremiah: ‘Come let us declare in Zion the word of God.’ The founders of my country saw a new promised land and bestowed upon their towns names like Bethlehem and New Canaan.”
There are indeed many striking similarities between the US and Israel. Both are built by colonists, God-fearing “farmer-fighters” in search of a better future and a better life. In many ways both succeeded, yet they only did so at the expense of the native population, a reality both nations rather ignore.
Israel’s history has been largely written by the Zionist victors who were greatly inspired by the tale of David and Goliath. In short: tiny little Israel was forced into a battle with a sea of armed Arabs. Against all odds, it won. Meanwhile, the local inhabitants had fled, as they were told by their leaders, and thus Israel miraculously ended up with twice as much land as it was given in the UN partition plan.
This is still being taught in Israeli schools today. Only last year, the Israeli Ministry of Education allowed the word “Nakba” to be mentioned in schoolbooks, yet solely in Israeli Arab ones. Israel’s Jewish children continue to be fed “the miracle of 1948” even though since the 1980s the Zionist version of events has largely been destroyed by a new generation of Israeli historians, who based their conclusions on declassified Israeli sources.
Take Benny Morris, who has shown that most Palestinian did not leave because their leaders had told them so, but because they were forced at the barrel end of a Zionist gun. Avi Shlaim shattered the prevailing view that Israel always wanted peace, while the Arabs were always unwilling to negotiate.
Ilan Pappe showed that the Jews in 1948 were better armed than the Palestinians and in fact executed a strategy known as “Plan D” that aimed at surrounding villages and deporting its inhabitants. Thousands of people were executed on the spot. According to Pappe, it is a classic example of ethnic cleansing, not much different from what happened in Kosovo and Bosnia in the 1990s.
If there is one thing to celebrate about 60 years of Israel, it is the fact that the country has a relatively free intellectual climate able to give birth to academics such as Morris, Shlaim and Pappe who dare to confront Israeli society with its painful hidden past.
 

­Peter Speetjens is a Beirut-based journalist.

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Society

Real estate – Prosperity’s anticipation

by Executive Staff
written by Executive Staff

Downtown Beirut has become so desolate and empty that one almost expects to find tumbleweeds rolling in between vacant restaurant tables. But a walk through the Central Business District can feel even more surreal, because while streets look barren, construction sites are working at full steam. Hundreds of cranes, concrete structures, excavation craters and trucks careening through an empty city center can make Lebanon look slightly schizophrenic. However, while puzzling at first sight, the high activity of Lebanon’s real estate industry is not (just) rooted in the country’s notorious resilience — it makes outright economic sense.

After a war whose destructive effects that cost the country billions of dollars, five months without a president, a parliament that has not met since November 2007 and an opposition sit-in that has paralyzed part of the capital’s business center, one could expect real estate investors to be looking for greener pastures. But the political limbo and uncertainty plaguing Lebanon are part of the very reason why right now is the time to invest in the Lebanese market. According to the annual Global Property Guide report, published in a Byblos Bank newsletter in March 2008, real estate purchase and rent prices of upscale properties in Lebanon are lower than in five other countries in the MENA region: Amman, Tunis, Marrakech, Tel Aviv and Dubai. The average monthly rent in Beirut, according to the same report, is $1,154 compared to the regional average of $1,740. But Lebanon’s real estate upsurge, as much as its prices, have to be put into context.

No comparison 

Comparing the Lebanese market with that of Dubai, for example, where the average rent is $3,140 per month, does not make much sense — Dubai is a case of its own, witnessing economic activity of a speed and volume practically unprecedented in the region. Yet while Lebanon’s prices are only half of those in Dubai, the risk of a regional war and the internal political instability did not translate into a drop. Quite to the contrary. “I think we are seeing the highest prices that this country has seen in many years,” said Nabil Sawabini, CEO of Mena Capital, which focuses on real estate development and private equity fund management. In Cairo, for example, the average purchase price per square meter is $406, while in Beirut it is $1,237. Another reason for the increase in real estate activity is yet one more thing that used to cause a lot of complaints in Lebanon — the brain drain. While the Lebanese are being hired abroad, especially in the wealthy Gulf countries where there are better-paid opportunities, these expatriates are earning enough to buy a residence in the home country.

“Eighty percent of the sales we have seen over the past 18 months have come principally from Lebanese expatriates,” said Sawabini. With Mena Capital currently building three projects with a total of 90 residential units ranging from $4,000 to $8,000 per square meter, Sawabini says that probably 65% of them have been sold already. “We have more demand than supply, at least at the upper end of the market. You have many more well-off Lebanese, especially in the Gulf or overseas, who are looking to buy. We didn’t have that before. Remittances are approaching $6 billion a year, so the brain drain turned out to be positive in that sense.” And foreigners, while not coming to Lebanon for holidays, are still purchasing properties here. “As far as buyers from the Gulf are concerned, I don’t think they represent more than 20% of the market now. However, if things were to quiet down, I think that could easily be reversed and the Gulf influx would be very considerable. That is when I think we would see a tremendous boom.”

Even before this expected boom, the Lebanese real estate market has seen a surge, and if statistics are not easily available, personal experiences are revealing. “For two years until [last] December I had sold nothing,” said Karim Bassil, chairman of BREI, a real estate developer. Among other projects, he had started to build a boutique hotel in the upcoming area of Gemmayzeh. “I thought it was quite sexy to have a boutique hotel in that area, high ceilings, 40 to 50 rooms. But I just didn’t manage to sell it.” With interest rates eating up his financing, Bassil decided to transform the would-be hotel into a residential building. And it worked, as within six to seven months he sold 70% of the units. The percentage, he explains, could be still higher, but he chose not to sell the upper floors, expecting even higher prices: “I left them for later.”

In Lebanon, land is a prized commodity, if for nothing else but because it is scarce. When coupled with the oil boom in the region and the liquidity of the economy, Lebanon is a very good investment. Another reason for the rise in real estate is that construction materials are usually priced in euro. With the euro rising against the dollar, any delay in construction would just translate into higher costs — even if the building is a hotel that will be faced with very low occupancy rates.

The hotels under construction in downtown Beirut, for example, are about to be completed with no occupancy in sight, as tourism figures are dropping steadily. In this area, managed by Solidere, much of what is being built had been planned before the 2006 War. According to Pierre Achkar, head of the Lebanese Hotel Association, the last time the association got the request to issue a hotel license was in the first half of 2006.

Hotels sitting pretty

Nevertheless, not a single hotel has sold its project to another group. According to Achkar, this is “because until now, real estate is doing well in Lebanon. In general, part of the hotel business is the operation, and the other part is the real estate of the hotel. Let’s take Habtoor [which has closed its 5-star hotel in Beirut], for example. Maybe they are losing some money in the operation, but as far as real estate goes, they have made a great investment.” And this is not only because the price of the land has gone up, by 40% to 60% last year alone, according to Sawabini. “Take steel prices, for example. When Habtoor started the construction, steel was around $400 per ton. Now it is $1,150,” explained Achkar.
 

For real estate developers, residential buildings are at risk only while the construction is going on. Once the residential units are delivered, the risk is transferred from the developer to the final owner. But when it comes to building anything that requires future management, the prospect of a war can be discouraging, especially because insurance against war has a very high premium.

According to Jean Hleiss, general manager of ADIR Insurance, war insurance is uncommon, even in Lebanon. The reason is mainly the price. “The actual war premium is around 1% of the total value of the property, while the average insurance issued against SRCC (strike, riot and civil commotion) is between 0.18% and 0.3%.” In the case of war, the premium rises even further. “During the last war with Israel, for instance, some clients asked to be insured and the premium raised to maybe five times what is being charged now,” he pointed out. But even with the media reminding everyone of the prospect of another war, none of the people interviewed for this article seemed to believe there will be a conflict. On the contrary – the general perception is that things will get better, and real estate prices will soar.

For Elias Abou Samra, manager of a regional real estate fund at Morgan Stanley, “one has to keep in mind that all the developments in Beirut, combined, do not match the investments being thrown in one of Dubai’s new cities, or Bahrain’s reclaimed land projects.” But the small size can, in fact, be an advantage in the real estate market. “We need to put things into a regional perspective to understand how the tiny supply in Lebanon is creating a huge demand. It is a totally different game from that in the Gulf, where large scale and volume are creating the demand.” The current surge in property prices may also be due to the fact that they were low in the first place. For Lina R. Sadek, Corporate Affairs Director of Al Habtoor Leighton Group, the price increase may be just the result of the basic law of demand and supply: “When there is a slump in property prices, people will step in to buy up land and property because the prices are low, and this will in turn drive prices up.”

Monaco of the east

Lebanon, like sort of like Monaco of the Middle East, a small country coveted for its nature and lifestyle, has very limited land with unlimited appeal. Working in Saudi Arabia, Abou Samra knows the fascination Lebanon exerts over oil-rich investors. “Arab investors know the Lebanese market very well. Unlike Western investors, they are happy to take the risks of war and conflict in Lebanon. Even those who invested before the civil war in the 1960s and early 70s ended up covering their losses and making huge profits in the late 90s and until today. I’ve heard one of the biggest Kuwaiti investors say he is willing to wait a hundred years [to sell his Lebanese land] because he knows prices will catch up with the rest of the region sooner or later.”

As far as economic indicators go, Lebanon’s situation could be much worse. According to an IMF report from April 2008, Lebanon’s “economic performance in 2007 was significantly better than expected, despite the difficult political conditions. Given a very strong fourth quarter, the authorities now estimate real GDP growth at 4%.”

Considering that Lebanon’s economy had zero growth in 2006 – an initial 6% growth completely wiped out by the war, this might be a reason to celebrate. Moody’s Investors Service also had a positive outlook, and in March 2008 raised Lebanon’s rating from negative to stable.

“If you compare prices in Lebanon to prices in the region, even in the immediate vicinity, whether it be Syria, Jordan, Egypt and not to mention Dubai and Qatar, the prices here have become reasonably inexpensive, which has never been the case – Lebanon has always been more expensive than its neighbors”, said Sawabini. But would that not be a indication that Lebanon is really not in good shape? Sawabini chose to put it differently: “[That indicates] that the prices have gone up very, very rapidly in neighboring countries relative to Lebanon. So, if things were to quiet down and we have stability, then you would see the boom that we are expecting. Prices would move much, much higher than they are now”.

Mounir Doueidy, general manager of Solidere, agreed, saying “When you compare prices between Beirut and elsewhere, given the big disparity in quality, Beirut is very cheap. So it is very logical for people to come and invest here, because they believe that it is the time to buy now before prices start going up.” In the first quarter of 2006, Solidere’s sales “went through the sky,” totaling $1.1 billion. “Then came the July War, and subsequent to that the sit-in, and sales stopped, selling land completely stopped.” From mid-2007, however, sales experienced a “revival”. With around 50% of Solidere still up for sale, Doueidy believes that waiting for a political solution to the current Lebanese impasse does not make much economic sense. He argued that if investors assume that a solution will happen in the medium term, “let’s say another year, it makes sense for them to buy the land today because it takes a year or two before you can come up with the concept, preliminary design etc. If they wait a year or two, then it may be too late because prices will have gone up.” Without giving a percentage, he illustrates how much prices have increased, even during this time of uncertainty: “In 2007, for example, we were selling the built up square meter for about $1,600. This year we are not selling below $2,000.”

 

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Lebanon

Banking overview – Cedar’s deep roots

by Executive Staff
written by Executive Staff

Against all odds Lebanese banks have been weathering the current economic and political crisis. In spite of the numerous political shocks Lebanon faced in the last two years, the banking sector still managed to show healthy performance levels.

“The Central Bank of Lebanon (BDL), since the mid- 1990s, has adopted consistent strategies in the economic, monetary and banking domains. Thankfully, these strategies have proved to be successful,” said Roger Dagher, Bank of Beirut’s CFO. The BDL has been able to greatly contribute to the sector’s strength and resilience to political and economic shocks while the banking sector in Lebanon is often deemed as the most prosperous industry driving the economy.

“The central bank is mainly in charge of the monetary policy and its prudent approach has been very successful as witnessed in the recent banking sector results, more particularly in view of the current situation,” confirmed Samih Saadeh, General Manager of Banque BEMO. The manager accredits the central bank with involving commercial banks in the effort of supporting the economy in an effort to segregate it from the political arena.

The BDL has relied on three strategies in order to strengthen the banking industry. “They have controlled efficiently interests on debtor and depositor accounts, by coordinating their efforts with banks. They have also managed extremely well the foreign exchange market, intervening directly when needed. Finally they have monitored quantitatively and qualitatively the sector with the help of the banking commission,” explained Alain Hakim, Assistant General Manager at Credit Libanais. Among the other contributions of the BDL to the banking sector is its coordination with the government to efficiently manage the public debt, issuing series of regulations that tackle most of banking issues, including conforming to prudential limits and ratios in different areas such as liquidity, capital adequacy, lending limits, related parties lending, setting up the risk management culture and best practices, establishing corporate governance guidelines and introducing and implementing the Basel II Accords.

Basel II

According to Walid Raphael, Deputy General Manager at the Banque Libano-Française (BLF), BDL Governor Ghassan Salameh has actively supported the Lebanese pound and helped boosting confidence levels in the banking sector. “All Lebanese banks have complied with Basel II while other emerging markets are still struggling with the implementation of such international standards, including the United States. The adoption of best practices is facilitating the entry of Lebanese banks into new markets as well as promoting the reputation of the central bank with regulators elsewhere,” he added.

Nonetheless, the banking sector is plagued by the political volatility that has become Lebanon’s reality. The Lebanese commercial sector is still recovering from the aftermath of the July 2006 War. “The 2006 events were undoubtedly a major blow to Lebanon, but the general repercussions had no real impact on banks, whose activities continued to grow significantly. The banking sector has been able to attain similar levels of activity a few months ago, compared to the ones prevailing before the July War,” underlined Anthony Usher, Chief Executive Officer at Standard Chartered in Lebanon.

Despite the dire economic situation in Lebanon during 2007 deposits, whether based in dollars or Lebanese pounds, still managed to rise. Credit Libanais’ manager underscored that while the first segment’s incremental difference may be partly attributed to high interest rates accounting for the country’s risk, the second category remains constant essentially due to the profile of account holders. “Accounts in Lebanese pounds are essentially held by retirees or individuals belonging to the lower income bracket who are extremely loyal to the local currency, making this particular currency denomination segment very viable,” said Hakim who does not perceive interest accumulation as the only engine to growth in deposits when daily consumption figures are taken into consideration.

An important factor accounting for the banking sector’s relatively healthy growth levels are remittances, of which Lebanon receives some $6 billion every year. “The bulk of this amount flows directly into the banking system, which retains a fair sum of it,” said Usher. The CEO also estimates about 50% of the banks’ deposit growth to be stemming from the Lebanese diaspora living overseas. “The economy largely functions on these inward remittances and on the banking sector,” he added.

Evidently, Lebanese banks have shown resilience to political and economic shocks and even to security tribulations due to certain factors. As Dagher declared: “There is no secret; this resilience is due to the constant inflow of funds from the sizable and affluent Lebanese diaspora and the adoption of a regional expansion strategy that provides means of diversification, both in terms of income and risk.”

Real estate dynamism

In terms of loans, growth has also been significant in recent years. According to Saadeh, loans to deposits have increased by 15% in the last two years, and banks are diversifying risk by looking into new forms of personal retail and corporate lending. The largest economic sector currently profiting from institutional lending is real estate because of the sector’s dynamism and the sheer size of projects underway.

Hakim does not believe, however, that the banks’ staunch support for the Lebanese government, through financing the public debt, may hinder the private sector. “Lebanese banks are investing and financing local consumption whether in terms of white or black goods,” he said. Lebanese commercial banks also grease the economic wheels through loans destined to SMEs or others done in conjunction with the government such as kafalat, targeting particular economic sectors namely agriculture, IT or tourism.

Some institutions, such as Bank of Beirut, reckon they are continuously gaining additional market share in all areas, and more particularly in lending activities. “The strategy adopted few years ago focusing on the retail business segment strengthening the already well- established commercial lending activity has paid off. We are hence witnessing a remarkable growth in our retail franchise. In fact, we are almost doubling the figures every year and on the commercial lending front, we are the leading bank in trade finance activity, and we continue to gain new markets every day,” said Dagher.

Hakim also attributed the growth of the banking sector to expansion in consumer and SME products. According to BOB, the bank has been able to enhance its asset base which has soared from $40 million at end of year 1992 to $5.3 billion at end of year 2007. Dagher believes the bank’s outlook for 2008 to be very positive in all areas. Raphael agrees, saying “all sectors are actually experiencing strong growth whether in terms of retail, trade finance, private banking, or brokerage services.” The deputy general manager explained that due to the emergence of new product categories, there is still room to grow in certain specific segments. Banking secrecy also seems to provide Lebanese banks with another competitive advantage, as opening accounts in Lebanon is relatively easier than in the US or Europe where KYC requirements are much more stringent.

Calculating risk

In a country where political instability as become inherent to the country’s landscape risk is an essential element shaping bank strategy. “On the local level, the country risk has translated into higher interest rates on depositor accounts,” Hakim pointed out. He emphasized that he default risk is, however, well controlled by banks that have closely followed requirements imposed by Basel I and II. “Naturally, risk is also shaped by the banks’ strategies and exposure levels,” he added.

How does Moody’s low rating of Lebanon affect the banking sector? Standard Chartered’s CEO admitted that lower ratings have deterred his bank from purchasing any new government paper. Nonetheless, he added, “in our view a default, while possible, is unlikely in the absence of catastrophic political developments. In spite of the extraordinary difficulties it has faced in the past, the Lebanese government has never defaulted, which is quite extraordinary for an economy that has been through so much.”

This surprising state of affairs can be also partly attributed to the BDL’s ability to bolster its currency reserves due to inflows of remittances. The central bank’s gold holdings have more than doubled in value over the last few years, observed the Standard Chartered CEO who believes that the government reserves are in a better position now than they were during the 2006 War.

“The government’s finances have also progressed mainly due to healthier revenues from taxes and the reduction in the cost of borrowing with the use of financial engineering mechanisms as well as rewriting Eurobonds,” he added.
So how does the sovereign debt weigh on the Lebanese banking sector? Like all international banks, financial institutions in Lebanon are exposed to various risks, whether liquidity, credit, market, operational, and other risks. “As we cannot eliminate those risks, the challenge is to effectively manage them. The key is to promote the risk management culture within all the bank’s sections, starting from the board of directors to all employees in each department,” Dagher pointed out. Hakim also underlined that the sovereign debt remains under control when compared to banks massive assets. As Hakim averred, “Under BDL’s management Lebanon will never face a crisis comparable to the one that hit Argentina.”

In order to mitigate risk, Lebanese banks have decided to expand abroad. For many financial institutions around the country, beefed up by a large staff and high level of expertise, the Lebanese market has become too limited, a reality that has initiated a wave of regional expansion. “Countries in the region are in need of expertise in the field of banking, especially in light of the unprecedented wealth witnessed by the Gulf nations. Lebanese financial institutions have such know-how, in addition to the similarity of language and culture, which is thus promoting joint ventures between Lebanese and Arab banks,” said Saadeh.

In order to adapt to the market needs and to shape their expansion abroad, banks have opted for various strategies. Credit Libanais’ approach focuses on Lebanon and the Lebanese population, whether living in the Land of the Cedars or dispersed around the world. “This specific targeting of Lebanese has prompted our expansion abroad as we tend to follow our customer base. Our Canadian branch caters for Lebanese Canadians, while our Bahrain office targets Gulf countries’ Lebanese residents. Finally, our Cyprus operations reach towards the Lebanese immigrants established in Europe,” Hakim said. Banks are actively seeking a larger piece of the pie within the segment targeting the Lebanese diaspora. “Lebanese clients residing abroad want different products in relation with their home country such as real estate loan as well as deposit related products with many preferring to invest in Lebanon due to higher interests on deposits,” Hakim added.

In order to tap into the Lebanese diaspora market, some banks have opted for a network of representative offices or individual branches. “In such a framework, investments are minimal while profitability levels are maximized” said the Credit Libanais manager who underscored, however, that many Lebanese banks have also been engaged in building a complete network abroad. “Regardless, the goal of banks who have expanded by opening a limited number of branches or rep offices is not to compete with local financial institutions but target the Lebanese niche market, by providing complementary products,” he said.

Targeting customer groups

As members of the Lebanese diaspora feel a strong connection with their home country and as many are convinced they will be coming back to Lebanon at some point, they tend to invest some of their fortunes in local property. “For Arab investors Lebanon is also affordable in terms of real estate value, which explains that in terms of banking this sector is the strongest sector we have by a long way,” highlighted Usher.

Among the other strategies favored by some banks is market specialization. BEMO’s approach relies on targeting successful entrepreneurs and high net worth individuals. “We concentrate on a relationship approach with most of our clients who can seek the advice of our specialist any time any place. On the level of corporate banking, we feature in our books most of the largest corporate clients in Lebanon,” said Saadeh.

On a micro-strategic level, Standard Chartered is also developing products targeting SMEs. “The SME segment is an area we have wanted to penetrate for some time now; the timing is just right for us to become more active in this sector. We have an excellent cash management account and we will shortly be launching a loan product to be followed by trade finance later on, which will enable us to offer our clients a full line of products,” explained Usher. In terms of Islamic finance, Standard Chartered is still looking into this particular segment but it does not rank high on its priority list as the bank is currently aiming at building market share by means of organic growth.

Market trends defining the banking industry have been mainly divided between a further specialization of institutions and the adoption of a universal approach. In terms of strategy, the largest banks have favored a universal banking strategy, by providing as many banking services to the customers as possible. “Banks can either specialize or try appealing to the mass. This approach will, however, vary from one country to the other and is ultimately defined by the market,” reckons Saadeh. BEMO’s strategy in Lebanon has been quite specialized, while in Syria, where the bank made an early entry, it favored a more universal approach to banking.

Retail banking has become a leading trend while private banking is evolving gradually on the Lebanese arena. “I would say that the professional service is until now offered mainly by the international banks and not the Lebanese ones. I think that this business needs more time to mature,” added Dagher.

Forecast

Hakim holds that in the long run the market is bound to naturally re-segment itself. Although the largest banks have a universal approach, the activity is segmented within the institution. “In Lebanon, the market’s limited size can account for the lower levels of segmentation,” the Credit Libanais manager said.

Surprisingly, one of the less prevalent trends is the consolidation of the banking industry, although consolidation processes allow for a more efficient banking system. Lebanon is also still waiting for a new merger law, yet to be approved by the parliament, which might be postponed to the next parliamentary sessions in October 2008.

Regardless of the context, mergers and acquisitions are a natural evolution of the sector. This might be facilitated as the banks’ founding families come into their second and third generations, progressively becoming more open to the idea of consolidation. “Economies of scale and implementation of Basel II will also pressure banks into seeking consolidation,” added Saadeh. Usher agreed and underlined that Basel II requirements will force small banks to merge rather than to attempt to raise new capital. “There should be definitely more consolidation but the current instable environment does not promote mergers which ultimately require higher confidence levels,” added Semaa Bassil, Vice Chairman of Byblos Bank.

Some bankers also believe that the structure of small bank in Lebanon do not offer attractive opportunities because of, on the one hand, the relatively high price and, on the other, the lack of proper synergies. “If the Audi merger actually comes to term, it might push the industry into seeking favorable synergies,” Dagher hopes.

Many challenges remain. Other than the usual financial risks, the country is confronted by a fragile political environment, a considerable public debt and an overleveraged private sector. The large Lebanese banks have been able to cope with these challenges with the cooperation of the BDL, hoping that the new positive political events will shortly contribute to speed up the reconstitution of the public confidence, re-launching of the economic and fiscal reforms and achieving real growth.

As Dagher summed it up: “The role will be intensified and we will see more penetration in many regional markets. However, I would stress the issue of bank licensing in the region and especially in the Gulf area. Lebanese banks are still facing many regulatory obstacles for entering some markets in the region. I truly believe the markets should be open, of course within the highest standards of banking regulations, and competition will judge which bank will succeed and which will not.”

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Banking & Finance

IPO Watch – Sizzling summer

by Executive Staff
written by Executive Staff

The story of the summer doldrums in the IPO market in the MENA region has now become an old wives’ tale. Most analysts say the IPO market is set to sizzle this summer as some big-name companies trying to capitalize on the bull market to go public. A surge in domestic liquidity and market reforms has sharply boosted IPO activity in the region this year and economists in the GCC expect the region to achieve new IPO benchmarks in 2008.
These favorable predictions come despite continued doubts over the attractiveness of one GCC exchange for stock market debutants, namely the Dubai International Financial Exchange (DIFX). In the latest IPO cancellation case on DIFX, Lebanese-owned Future Pipe Industries Group said at the end of May it now favors listing in Europe, on either the London Stock Exchange or on Euronext N.V. Future Pipes cancelled its $487 million IPO on DIFX in early May for reasons which analysts linked to the poor liquidity of DIFX and the downtrodden performance of April DIFX entrant, Depa, immediately after the start of trading.
As good news for the DIFX, Depa share prices picked up in the course of last month and on May 27 the stock closed one cent above its opening day quotation of $1.55.

Gulf markets
Although on the weaker side in share price trends so far in 2008, Saudi Arabia’s Tadawul Exchange is one of the Arab stars in primary market action this year. In April, two new Saudi IPOs have successfully raised a combined total of $3.28 billion.
One of the two newly listed firms, construction firm Mohammad Al Mojil Group, closed its first day of trading May 27 with a 17.14% share price gain, according to the Zawya IPO Monitor. The second firm, Al Inmaa Bank was scheduled to start trading at the beginning of June. Al Inmaa was 1.74 times oversubscribed and Mohammad Al Mojil Group was 3.14 times oversubscribed.
The equity market in Saudi Arabia is set to be the recipient of further announcements of new IPOs in the third quarter of 2008. Astra Industrial Group said it will offer 30% equity, Chemanol with 50% and Maaden will float 50% to raise $2.47 billion. Also in the kingdom, Halwani Brothers, part of Saudi-based Dallah Albaraka Group, will offer 30% of its capital in an IPO that will start on June 21 and run until June 30. Another new entrant, Abdullah Al Othaim Markets Co. said it will float about 30% of equity in an IPO scheduled to start from June 21 to June 30. The company is seeking to raise around $6.13 million
In Bahrain, the IPO of Voltamp Energy, which was launched on May 5 has received very encouraging response from GCC investors. The company is raising $35.8 million and the IPO will close on June 3. Voltamp said the money raised will be used “for funding the ongoing capital expenditure and for meeting the long-term working capital requirements.”
A development in an already announced IPO on the BSE is that of Mobile operator Zain Bahrain, a unit of Kuwait’s Zain Group, which has set the second half of 2008 as the time frame to launch its initial public offering for part of its shares. Zain’s chief operating officer, Ahmad Al Shatti, said the board will decide by mid-June on the stake it will offer to the public and the value it seeks to raise.
The stable markets of the GCC continue to drive IPO activities to new levels especially since the majority of the IPOs this year have performed well against the backdrop of the subprime and credit market crises. Analysts agree that larger deals tend to encourage and pull other companies onto the IPO bandwagon. Companies large and small are now taking advantage of the spectacular growth the region is currently experiencing and going public has officially become a trend.

Surpassing the energy boom
Much of the growth in the region’s markets can be traced to the energy boom, but listings in the GCC this year have extended well beyond the high oil prices. Real estate and property firms, as well as telecom companies and financial firms have made their market debut. Investors, Arabs and foreigners alike, are finding what they are looking for in the region’s market. Strong deal flow will continue to entice institutional and private equity investors. Market observers agree that deals on track in 2008 will outpace last year’s numbers. They say the stock market will set the climate for public offerings. As long as the market does relatively well, companies will be able to raise money.

 

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Lebanon

Dr. Freddie Baz (Q&A)

by Executive Staff
written by Executive Staff

Dr Freddie Baz, Bank Audi’s CFO and Chief Strategist talked to Executive about the current situation for banks in Lebanon and future prospects for the sector.

E How do you view the expansion of Lebanese banks in the region. Do you believe they can compete with foreign players?

When we started expanding in the region, we tended to favor acquiring local financial institutions well established in each country. This approach has been particularly helpful in closed markets where Central Bank authorities have decided to stop granting new licenses. In such markets, which usually encourage consolidation through mergers and acquisitions, we have and continue to look for an inorganic growth. As an illustration, we are considering consolidation in Jordan, a market where many opportunities are available as middle size banks show good profitability ratios. However, our initial strategy has been to grow organically. In Syria, we were able to build close to $700 million in deposits during our first year of operation. This year, deposits would reach to $1.5 billion. In Jordan, we have been able to build a customer franchise deposit base of $600 million in less than two and half years. Our bank’s 2007 consolidated balance sheet boasts $17.5 billion in assets, of which $3.5 billion stem from three foreign markets — Syria, Egypt and Jordan.
This example illustrates the reality of a few Lebanese banks, which have been able to build customer and account portfolio franchises. In parallel, Arab banks have enough liquidity to acquire other financial institutions but they do not have the necessary expertise to build institutions organically, which is a know-how proper to Lebanese banks.

E Is the Lebanese banking sector considered as attractive for other regional financial institutions?

A few years ago, stocks of Lebanese banks were considered quite affordable. Prices have, however, improved in recent months, although they still remain very attractive. The large banks, mainly Audi and BLOM, used to be traded at ten or twelve times their earning, a figure that has increased to 15 or 17 times. This figure is quite high against the backdrop of the current situation. In spite of the improvement of trading multiples, Lebanese banks still feature the cheapest assets in the region. If one takes the example of the NBK acquisition of Al Watani, which was bought at 50% of asset value, current trading multiples of Lebanese banks are still estimated at only 18% of their assets. Cheap prices and large assets inherent to the Lebanese banking sector will certainly stimulate the appetite of foreign banks. Another enticing factor is that large Lebanese financial institutions have billions in assets and are extremely well established in terms of footprint. In addition to their know-how, Lebanese banks are operating both in emerging and frontier markets. The latter category, which includes countries such as Sudan, offers massive profit potentials. With price to assets at less than 20% and a wide network of branches in more than ten countries, Lebanese banks are certainly exposed to takeovers. The management is thus faced with two choices, either to acquire or be acquired.

E So are you saying that Lebanese banks are still undervalued?

What determines the real value of a bank is its operating environment, namely the political and economic framework. Political stability tends to boost confidence. This in turn affects aggregate demand, consumption and investment levels, which reflect on GDP growth rates. This process takes a chain form. In my opinion, there is a very strong correlation between commercial bank transactions and GDP growth rate. If one takes a quick glance at the Lebanese economy, one notices that there is a wide gap between actual GDP and potential GDP, which is estimated at around $34 billion — $10-11 billion of yearly additional income compared with actual levels. If the economy is allowed to thrive, banks will grow and their trading multiples will be within the region’s prices to assets and prices to equity. For investors to eye a particular market, they need to have a clear vision for a limited period of three to five years.

E How risky has the sovereign debt become for Lebanese banks?

The sovereign debt has been diluted due to the large bank assets. When Prime Minister Hariri was assassinated, Lebanon was faced with a $2.2 billion outflow in deposits. Since then, deposits of Lebanese banks have grown by $16.6 billion. The war with Israel generated an immediate outflow of $3.1 billion dollars in deposits. Nonetheless, since July 2006 Lebanese bank deposits have witnessed an increase of $12 billion. In the meantime, subscription to public debt has remained constant, meaning that exposure of Lebanese banks is plummeting with time. Only a few years ago bonds in foreign currency reached a percentage of 30% in terms of deposits in foreign currency; this figure has dropped to 12 % for the sector and to 9% at Audi in recent years.

E Do you believe that growth in deposits can be partly attributed to an accumulation of interest?

Last year’s growth can be attributed to the convergence of two main elements — soaring oil prices and the repercussions of the subprime crisis. Rising oil prices have impacted on the money transfers made by the Lebanese diaspora residing in the Gulf. In 2001, the Arab region’s GDP amounted to about $600 billion; it doubled in 2007 reaching $1.2 trillion with an oil price at $88. In years to come, the growing oil price will certainly reflect on banking sector assets. On the other hand, the subprime crisis has also encouraged Lebanese who lost confidence in foreign banks to divert some of their funds to Lebanon. The outlook for Lebanon seems to be quite positive for now, as witnessed in the growth of $1.8 billion in deposits in the first two months of 2008.

E Lebanese banks are very reliant on Lebanese living abroad. How does this market particularity shape your strategies and products?

Bank Audi’s main objective is to be among the top five banks in the region. We do not especially target the Lebanese diaspora, which seeks us naturally. On the contrary, we want to create and develop a sound customer base in all of our locations and hence focus our attention on the local population, namely Egyptians in Egypt or Syrians in Syria. We are a universal bank at the service of Arab citizens.

E Do you foresee a specialization in the banking scene, with each bank focusing on a particular market segment?

All banks pretend to adopt a universal bank approach, given they have the proper expertise. We are a universal bank: we boast 400,000 retail accounts, one third of our deposit base is constituted by accounts with balances in excess of $1 million each, some of the top fifty companies in the region are featured among our clients. Our Capital Markets department manages $5-6 billion in yearly turnover on Lebanese stocks and bonds. As you can see, we have been able to reconcile between two market dimensions, mass and elite. A universal bank is built on expertise, which in turn generates market share. Nonetheless, our approach also differs from one market to the other. While we may opt for the universal bank approach in certain markets, we may choose a more specialized one in another.

E Do you think the Lebanese banking scene has become overcrowded?

Not really. Lebanon may have become overcrowded in terms of numbers of banks. But when one takes a close look at banking coverage ratios, such as number of accounts per household or residents per branch, they still lag behind. In my opinion, the Lebanese retail market is still in its infancy. There are huge potentials in terms of organic growth for banks in the retail market. For Lebanon to close the gap between actual and potential GDP, billions of dollars of loans will be required. The Lebanese banking sector has always been very concentrated. Years ago, the first 20 Lebanese banks represented 80% of the market. This figure has dropped to about 70% to 75% today. Among the alpha banks, size varies greatly from one institution to the other, the top two banks weighing as much as the last five.

E Many economists have criticized Lebanese banks on the premise that they tend to finance the government instead of the private sector. Do you agree?

In Lebanon, the proportion of consolidated loans to GDP is almost one-to-one, an extremely high ratio beyond any acceptable ceiling. However, due to the importance of the consolidated deposits of banks to GDP, among the highest worldwide, the contribution of banks to the private sector seems to be dwarfed in comparison. In reality there is no crowding-out effect. When it comes to loan segmentation, the banking sector is only reflecting the reality of the market. In addition, Lebanese SMEs need to be managed more like companies and less like mom-and-pop-shops, by developing proper audits and processes in order to be able to secure larger amounts of loans.

 

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By Invitation

Branch managers are vital investments for sales effectiveness

by Peter Jenkins & Peter Vayanos
written by Peter Jenkins & Peter Vayanos

A recent study by Booz Allen Hamilton Striving for growth: Best practices in retail banking sales and service channels revealed that the majority of banks are failing to fully meet customer needs and maximize sales channel performance. This comprehensive study, which used customer research and mystery shopping assessed 100 banks across 17 countries including 12 banks in the GCC, looked at what customers want from their banks, how banks are performing and best practices to drive profitable growth.

The study revealed that, globally, customers still prefer banking in branches despite the trend towards online — 63% choose to use a branch for purchasing current and savings account products and 54% choose their branch to purchase mortgages. The situation in the GCC is very close to that of the global average. However, despite the importance of the branch channel to customers, many banks in the region under-perform and have yet to get the basics right. GCC banks scored on average 20% less than the global average. As the competitive intensity increases in the region and banks have to deal with a more heterogeneous customer base in terms of age, wealth levels and cultural background, addressing shortfalls in sales effectiveness in the branch will become a crucial source of differentiation.

So how can sales effectiveness be improved? Our work with domestic champions that continue to win year in year out shows that success can be attributed to the mastery of the five following levers:

• Customer information and insight: Branches need to leverage customer insights more and provide tailored service to target customer segments.

• Sales management: Sales staff should be supported by a sales pipeline and have access to the right level of MIS to measure performance.

• Processes and tools: Sales processes should be simplified and staff should have access to systems that support a single customer view.

• Capacity and deployment: Staffing levels need to reflect the customer mix and sufficient time should be allowed for sales related activities. Capacity planning needs to be proactive to cope with peaks in demand.

• Roles and capability: Branch staff require clear roles and responsibilities backed up by effective HR processes and appropriate performance management systems.

In the Middle East there is still a way a go. For starters, many banks lack accurate and complete data on their customers to support the development of customer insights. Often the most fundamental data is missing. Sales management activities also tend to be more reactive in nature and driven around promotions as opposed to being approached in a systematic fashion. Furthermore, few banks have managed to deploy the systems and processes to enable a single customer view across multiple channels. Finally, many customer sales representatives viewed themselves primarily as providers of service and not responsible for sales. For example, in one of our clients, the customer sales representatives spent 41% of their time on service-related activities and only 9% of their time on sales-related activities.

On top of the above capabilities, many banks continue to overlook the performance impact of successful branch managers. That’s a big oversight because exceptional branch managers can have a disproportionate impact on a branch’s performance. In a recent Booz Allen Hamilton analysis of more than 4,000 bank branches, just 5 to 10 percent of branch managers demonstrated consistent top quartile performance over a sustained period. But those branch managers delivered three times the growth of their local competitors. On a three-year net present value basis, an exceptional branch manager is worth between $500,000 and $1 million to his or her bank.

All the signs are that the same picture holds true for for the Middle Eastern banking sector.

Why has this situation arisen? The results of our study suggests the following:

• Management often does not know or agree on who their top branch managers are.

• Sources of exceptional performance are not often adequately explained and thus rarely replicated. Training is often focused on developing basic skills, rather than competencies required to generate top performance.

• The symmetry between branch manager competencies and branch requirements is not always explicitly understood and managed.

• One size does not fit all — top performers harbor different aspirations and need to be cultivated differently

What are the traits shared by top performing branch managers? They are proud of their bank, their branch and their employees. They are creative in coming up with new ways to drive business. They are driven to succeed and motivated by their branch’s success, not just their salary and bonus packages. They are confident in their ability to meet their goals and they typically hold an integrated view of all the aspects of their business — sales, service, people and the core operations.

Just as important, however, are the differences among successful branch managers. Interviews conducted in conjunction with the Booz Allen Hamilton study found that they perceive themselves, accurately or not, to be variants around two themes: “town mayors,” who identify more strongly with their branches and their communities than with the overall organization, strive to maximize their branch’s performance and their communities’ ability to prosper and have few ambitions to move beyond their current position, or as “find the next challenge” types, competitive about their role within the bank as a whole and desirous of moving to larger branches as a way to take on positions of greater importance within the organization.

Understanding these differences in both ambition and talent offers banks the opportunity to manage the career paths of their top performing branch managers more effectively, getting the most out of those high performers and make sure they put the right manger in the right branch. Given that the attrition rate among branch mangers industry-wide is between 20 and 30 percent every year, rigorous, thoughtful career planning is essential to the retention and continued success of the best branch managers. But that must be coordinated with new approaches to every aspect of human resources processes relating to the branch manger, including recruitment, training and performance assessment. This will be a particularly tough challenge in the Middle East given the shortage of skilled resources and the relatively low standards that prevail in many human resources departments.

Taking an objective approach to managing sales managers will work in any retail sector, or any business for that matter. For banks, it will produce a significantly better return on the investment they make on their branch managers — but it will work only if high performers are given the tools, the goals, and the incentives to maintain their pace. On that note it is worth it for retail bankers to ponder the following five questions:

• What is the state of the key levers required to enable successful sales activities?

• Do you know how to find and assess your best people?

• Do you have the right people in the right branches?

• Can you successfully attract the best from your competition and retain them?

• Do you have the infrastructure to support and develop great branch managers?

Peter Vayanos is a Vice President and Partner with the Financial Services Practice of Booz Allen Hamilton, based in the Beirut office.

Peter Jenkins is a Vice President and Partner with the Financial Services Practice of Booz Allen Hamilton, based in the Dubai office.

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Lebanon

SGBL – A new horizon

by Executive Staff
written by Executive Staff

Antoun Sehnaoui, who became Chairman and of leading Lebanese bank Société Générale de Banque au Liban (SGBL), in October 2007, believes in organic growth over radical change. “It is about evolution rather than revolution,” explained the youthful chairman, who succeeded his uncle Maurice Sehnaoui as head of what many regard as Lebanon’s most innovative bank.

One of the most recognizable on the Lebanese banking landscape with its familiar red white and blue logo, SGBL’s activities are organized into a three-core business: retail banking, corporate and investment banking, and private banking. It also has a presence in Jordan, where as SGBJ it operates 18 branches, Cyprus with six branches and in Syria, where it offers specialized financial services through its affiliated companies, Fidus and Sogecap.

But it is the future that has injected a new buzz – not to mention new capital – into the bank which is embarking on an ambitious expansion plan. The monies will finance local and international acquisitions, the opening of more local branches with a new look and what Sehnaoui calls “more maneuverability” to SGBL’s banking operations. This with no doubt means that SGBL will continue to plow new retail banking furrows by rolling out new products, while consolidating other core activities such as private banking and asset management, investment and corporate banking.

Furthermore, in line with meeting the standards set by its committed French partner Société Générale, SGBL will be aiming to scale new heights in terms of human resources and deliver a level of professionalism commensurate for a bank with an international profile. “It’s not that we lacked any of these previously,” says Sehnaoui, once again keen to stress that the changes are part of a process to improve SGBL’s position in a “competitive global environment.”

Reassurance has long been the bank’s watchword. SGBL ranks first in terms of loans to deposits of all the Lebanese banks, and is probably the most risk averse, an important strength in a financial world blighted by the ongoing subprime mortgage crisis. “Our shareholders insist on this,” explains Sehnaoui, who is arguably the first in what promise to be a new generation of young and dynamic chairmen in Lebanese banking. “The ambition now is to increase profits and make Lebanon a regional platform for our international activities.”

A new vision

Sehnaoui believes that by as early as 2010, the bank’s new vision will have yielded fruit “I expect us to be operating more robustly locally and internationally, across all our activities, while at the same time boosting inter-business revenue synergies, operating efficiency and ultimately operating income.” It is a vision predicated on the firm belief that the Lebanese banking sector will continue to be the pillar of the country’s economy. It currently contributes a big share of the nation’s GDP but, more importantly, it is suitably diversified so as to withstand most shocks.

The banking sector is underpinned with decades of Lebanese conservatism but it also recognizes that it must embrace global banking methods; no one is capturing the essence of this zeitgeist better than SGBL, which understands the needs of both its retail and private banking clients and further understands that both are equally important in a competitive and diverse global banking industry.

The bank itself is hardly a newcomer to the sector. Capitalizing on over 50 years of experience, SGBL’s retail banking operations will pursue a strategy of ambitious organic growth in countries where the group is already present. SGBL has always been a leader in retail banking, a reputation based on its ability to introduce new products onto the market and invest in technology.
SGBL will therefore be expanding its client base and giving wider geographic coverage. Meanwhile, the exploitation of revenue synergies between businesses will continue, with priority given, amongst others, to cooperation with the regional network of Syria, Jordan and Cyprus and cross-selling between SGBL divisions.

For its Lebanese networks, SGBL will also adopt a strategy of deliberately targeting high-net worth individuals and work at closer cooperation with corporate and investment banking arms, both of which should promote dynamic growth. The investment banking division is gearing itself up to play what it hopes will be a key role in helping rehabilitate Lebanon’s private sector much of which was mauled after years of conflict and political instability by actively getting involved in forthcoming M&As and privatization.

Sehnaoui is acutely aware of the needs, issues and concerns of the Lebanese private sector, an arena in which close understanding play a key role in oiling the finely calibrated cogs of Lebanese economic activity. “The private sector is the lifeblood of our very small but dynamic country,” he says. “The private sector is our partner in growth.”

Elsewhere, the Private Banking and Asset Management divisions, backed by the expertise of Fidus and its team of specialists, not to mention the support from Groupe Société Générale, will consolidate its position as a leading purveyor of wealth management products and services. With the demand for innovative private banking services in the region – and the demand for Lebanese private bankers – SGBL will aim to deliver innovative financial products and diversified and tailor made investment solutions to a lucrative niche in this growing sector.

“Thanks to Fidus, our brokerage and portfolio management arm, SGBL was able to develop its activities in wealth management locally and internationally, answering the growing needs of its clients around the world and the increasingly active nations of the GCC, buoyed as they are by the recent windfall from the hike in oil prices,” says Sehnaoui with pride. “The region is booming and we need to seize the day.”

Meanwhile, in the area of specialized financial services, the SGBL Group will continue its expansion in countries with strong potential (in particular the GCC) by drawing on its years of experience and standing in the Lebanese market. “Regional investors appreciate the skill sets that Lebanese bankers bring to the table. We are international in outlook but we understand their needs.”
The Group is also currently stepping up its international expansion and this will offer new opportunities to Société Générale Group’s through its wide and diversified businesses lines across the region. “Today, SGBL is evolving gradually in an unstable and uncertain environment in which we can nonetheless find solutions,” declares Sehnaoui. “In this environment only banks that can offer their clients innovative products, high quality service and the best price can follow a risk-free development strategy.”

Sehnaoui believes that SGBL can look to the future with genuine confidence. The bank has built up a huge reserve of goodwill; it has the know-how, the infrastructure, the client base, the right level of affiliated services and most importantly, an international presence of which only a few Lebanese banks can boast. “With all these, SGBL has all the tools at hand to reposition itself as an important actor on the local and regional banking market.”

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By Invitation

The economics of three digits

by John Defterios
written by John Defterios

World Economic Forum meetings are, as one former Prime Minister put it over a nightcap, part private high-level talks, part networking and a fair portion of theatre. “Theatre is good, just not in large doses” he rightly declared.

That is a succinct description of what transpired in the Red Sea resort of Sharm el-Sheikh this week at the World Economic Forum meeting.

There was plenty to digest and discuss, but as usual the many of the more memorable thoughts came in the networking lounge over an espresso. I spoke to the CEO of a Gulf investment authority who, during our conversation said they really want to get it right this time, since they are blessed with the “three digits.”

The conversation continues, as I try to bluff my way through what “three digits” means. After another minute my curiosity gets the better of me and I confess my ignorance. “Three digits,” he tells me with a broad smile, “is oil — anything over $100 and we are in three digit territory,” he said, adding that: “We can do a lot with three digits.”

There is no doubt about that and I confirm that after 20 years of covering OPEC meetings and visiting production facilities from the Gulf of Mexico to the Arabian Gulf, I know it costs about $4 to $6 per barrel for the major Middle Eastern producers to get their crude to market. To put it crudely, that is a profit of about $120 a barrel at today’s prices.

Spend it wisely

While the Gulf producers are happy to watch the savings roll in, they are very aware that the world is watching to see how they plan to use it. It was, no doubt, the number one issue on the agenda at this regional meeting. Somewhat boldly some members of the Arab community, which are not blessed with the same huge natural resources, spoke up in Sharm el-Sheikh.

Egyptian Prime Minister Ahmed Nazif, the tall, silver haired reformist, noted that one cannot force money where it does not want to go, but, “I believe that real opportunities exist today in the region, whether it’s in infrastructure, whether it’s in capacity building, education and other aspects of it.” Egypt is attempting to be the back office to the Middle East — why set up in Bangalore if you can capture the diversity of language speakers and low cost in your own backyard?

A former government official from Jordan, now running a private equity group, was more direct. Reem Badran is CEO of Kuwaiti Jordanian Holding Company — a firm funded with Gulf money. She says, “There is room for the oil producing countries to give a hand to the non oil producing countries to make these types of imbalances and gaps less and everybody would flourish at the end of the day.”

There is a great deal of money from the six Gulf countries flowing into real estate development projects throughout North Africa. The key now is to expand that brief to include factories and even schools. The second most talked about issue had to be development of human capital. During the final plenary panel of the meeting which I chaired, all four leading businessmen (and woman) talked about the sense of urgency to do more. Money is being deployed into education in every market, but these business people admitted they need to be more involved to insure that the skills needed are being taught in universities and vocational schools. If not, the over reliance on expatriate workers will remain. The most pressing concern, and it was reinforced on my panel, is that 100 million more people will need jobs over the next ten years.

If that is not an incentive to use the “three digits” wisely, I am not sure what is.

John Defterios is the presenter of CNN’s Market Place Middle East.

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Beirut’s irrepressible optimism for property investors

by Priyan P. Khakhar
written by Priyan P. Khakhar

From a distance, one observes the birth of a new skyline — sprouting towers of elegant bricks, mortar and concrete that will house an eclectic range of people who choose to live in Beirut, a city with a raw database of stories with even more plots and twists than the latest Hollywood movie. These flawlessly finished apartments, kaleidoscope designs and stainless kitchens do, however, also come with a somewhat jaw-dropping price tag for a non-utopian city. Apartments in the tower blocks facing the marina, for example, are $1 million plus, this being considered a modest figure by the many that have already sold “off-plan.” A recent report by Bank Audi on Lebanese real estate records over 35,000 property transactions in the third quarter of 2007 alone.

The political climate of the country is no secret, with the World Bank and International Monetary Fund rating the investment risk of the nation on par with states such as Chad and Sudan. In mid-May the country was on the brink of civil war when Hizbullah’s heavily armed fighting machine attacked and seized large parts of West Beirut and nearby Beirut suburbs. For six months Lebanon had remained without a president and the specter of confrontation and violence had loomed over the entire nation for the past three years. After the fighting in May, most business people in Lebanon’s hospitality and tourism sectors were convinced this would be another summer of dread, a third year with an abysmal tourism season and a degree of security risk that would scare even a speculators of George Soros’ ilk.

How then does one explain these property prices? Take for instance the prices in towns such as Marbella on the Mediterranean coast of Spain, a naturally luxurious and hedonistic playground of the rich and famous that can potentially be Beirut, once the “Paris of the Middle East.” Apartments and villas, in gated compounds, boast similar million dollar and above price tags, with a relative saving grace of EU membership, security, a stable and functioning government, absence of political bickering, lower investment risk rating and of course the Spanish siesta. From a stability point of view, comparing Marbella and Beirut can be like comparing chalk and cheese, and yet the latter demonstrates great resilience within the real estate sector.

Analysts could attempt to explain this, citing the strong Lebanese banking sector with its impressive levels of liquidity and credit availability, investment from the Middle East region in general, former Lebanese residents re-investing in their motherland and a social transformation of the younger generation irrespective of the political divisions and diversions that frustratingly prevail. The prices must therefore exist due to supply and demand side factors that have assimilated the political factor, combined with changing perceptions of the nation to both investors and home buyers. The supply-side factors may be explained two-dimensionally by the fact that key locations in the city, such as Hamra, are crowded with developments in a relatively small space; this is compounded with the needs of the local and growing student population at prestigious institutions such as the American University of Beirut delivering medium-term tenants for investors, all scrambling for limited good space locations.

Prices in Marbella, however, have long reached their peak, and the number of British residents and investors living in this southern gem of Spain is a known fact. In similar fashion, Beirut has lured investors from a variety of locations in the Middle East. The country boasted FDI stocks of $18.3 billion and inflows of $2.7 billion in 2006, this in a year Lebanon was at war with Israel. There is speculation further investments are yet to come, providing the political tensions dilute or at least don’t escalate to the previous historical levels. It is a question of risk taking, risk adverse or a laissez-faire attitude to risk in terms of investment, though it has to be noted that both Lebanese economics and politics exist in varying shades of grey. 2008 growth in 2008 is projected to be positive, with estimates from 4-8% depending on which local source is consulted. According to local research companies such as Infopro, “the prices have risen, though some are just gearing up for the boom that is to come in 2008.”

After several days of intense negotiations in Qatar, Lebanon’s opposing leaders elected a president and a new “united” government was expected to be formed by end of May. The Doha agreement has created hope for many Lebanese to lift the nation out of a state of violence and confrontation into peace and stability.
Within hours of the political sea of change on May 25, 2008, the Beirut city center was preparing for an abundant summer of returning visitors and countless festivities. This ability to return to form and celebrate life is what makes the place. Beirut offers that ‘something extra’ — an intangible and unquantifiable element — that is mainly driven by an unprecedented cosmopolitanism that refuses to exclude anyone or anything, an “x-factor” which other cities in the region lack.

A drive down the city center would awe the most critical of architects at the restoration of a once destroyed French style quarter. Retail spaces are plenty, with rents in the popular malls ranging from $2,000-$3,000 per square meter. One would expect the political factor to suppress prices, yet it appears that some defiance amongst buyers and sellers remains. Given that the political crisis subsides, in terms of real estate at least, the city seems set to become a Marbella of the Middle East.

Dr Priyan P. Khakhar is an assistant professor at the American University of Beirut’s Olayan School of Business.

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Arab sovereign wealth funds

by Sven Vehrendt
written by Sven Vehrendt

The past months have witnessed an intensive debate about the relevance of SWFs in the global economic system and their role in global financial markets. Global Insight, the research firm, states that SWFs have grown a remarkable 24% annually in the past five years. Morgan Stanley, the investment bank, argued that the total size of the SWFs could increase from $3 trillion to $12 trillion by 2015.

Commentators have tried to put these stunning figures into perspective. Robert Kimmitt, Deputy Secretary of the U.S. Treasury, argues that if one wants SWFs to appear large then one would argue that hedge funds manage an estimated $1.5 trillion and that the current market capitalization of the S&P 500 is roughly $12 trillion. On the other hand $12 trillion is only a fraction of the estimated $190 trillion in total global financial assets. Assets managed by mature-market institutional investors (such as pension funds and endowments) are about $53 trillion. Pension funds manage over $15 trillion, insurance companies $16 trillion, investment companies $21 trillion. This is a small fraction of the global debt and equity securities, exceeding $100 trillion.

But an important element is missing in this assessment. First and foremost, Gulf Arab SWFs shall be of benefit to the citizens of their countries. How relevant are they then with regards to their own economies? An analysis arrives at some interesting findings.

The size of the assets managed by the Abu Dhabi Investment Authority is estimated at $875 billion. This is equivalent to 675% of the GDP of the United Arab Emirates. The Reserve Fund for Future Generations managed by the Kuwait Investment Authority is estimated to manage assets valued at over $170 billion. This represents twice the GDP of Kuwait. The Qatar Investment Authority’s assets stand at over $60 billion or 141% of Qatar’s GDP. Only Saudi Arabia’s assets managed by the Saudi Arabian Monetary Agency are somewhat smaller at just below 100% of Saudi Arabia’s GDP.

Based on these numbers one arrives at the conclusion that although large, Arab Sovereign Wealth Funds might be not that overwhelming in size if one compares them against the assets of other players in global financial markets. But our numbers show that they are extremely important in the context of their own national economies.

Here some more examples: An optimistic 8% return that ADIA might manage to realize amounts to roughly $44,300 per UAE citizen (excluding expatriates), or roughly 63% of GDP per capita. This is substantial. The same is true for Kuwait. At 8% growth, the revenues realized by the KIA amount to $17,160 per every Kuwaiti citizen or 44% of Kuwait´s GDP per capita. Again, this is not trivial and illustrates the importance of SWFs’ role in maintaining the wealth of oil exporting Gulf countries.

A fundamental question is then if the SWFs will be able to maintain or even grow this wealth for future generations. The idea of SWFs is to enable governments to diversify away from their own national economies and searching for interesting return perspectives elsewhere. But if SWFs do not identify very attractive investment opportunities outside their economies, their purpose is challenged.

The economies of the Gulf are currently growing at a rapid speed, much stronger than most of economies elsewhere. It will therefore be quite difficult to identify investment opportunities that are on par with opportunities at home. If we see GDP per capita growth rates increase in the Gulf region as rapidly as in the past years and we assume that SWFs will invest elsewhere, that is in regions which are growing at a more slower pace, then the SWFs contributions to safeguarding the welfare of the citizens of Gulf states is negative. Only in case the economies in the Gulf region would calm down and other economies grow more rapidly will SWFs be able to meet their task to secure their standard of living for future generations beyond oil.

The importance of SWFs within their national economies and their exposure to global economic trends illustrates how important a broader debate about purpose and investment strategies of Arab SWFs has become. Not only have SWFs become a contentious issue for Western policy makers, but their risk/return profile should also be of major concern for the Arab public, since the future economic well-being of Arab societies is at stake.

Sven Vehrendt is an Associate Scholar at the Carnegie Middle East Center, Beirut

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