Economics & PolicyEurobondsOpinion

The case for Lebanon restructuring its debt

by Mohammad al-Akkaoui
written by Mohammad al-Akkaoui

Lebanon’s economic vulnerabilities are on full display. Investors and other stakeholders have lost confidence in the Lebanese financial system, triggering an existential economic crisis. In short, Lebanon’s future is jeopardized by three intertwined crises of sustainability with regard to the public debt, the current account deficit, and the financial sector. As such, resolving Lebanon’s crisis requires a full-blown multifaceted stabilization and reform plan initiated by restructuring the stock of public debt.

Restructuring Lebanon’s stock of public debt is inevitable since it has exceeded the economy’s capacity to service it. Expected to be at around $90 billion—and assuming it can be refinanced at 7 percent over seven years—the stock of debt will demand roughly $19 billion in maturities and coupons annually, or around one third of 2018’s GDP. This high level of debt service is not a new phenomenon and governments have sustained it from borrowing from the market and building on top of the existing debt stock.

Over the years, these governments were repeatedly warned over the unsustainable nature of their stock of public debt and the need for fiscal adjustment to bring their finances back on track. These calls, however, were ignored, and repeated government deficits have led to today’s crisis. In 2016, when it was clear that kicking the can was no longer an option, there was no effort undertaken to curb down expenditure. Instead, the Ministry of Finance (MoF) started funding itself via off-market deals with Banque du Liban (BDL), Lebanon’s central bank. This process has greatly impacted BDL’s balance sheet and magnified the extent of Lebanon’s ongoing crisis. The sovereign’s debt is only half the story—BDL’s hidden debt is the other half.

As a result of the negative net foreign exchange position (the difference between the assets and liabilities held in foreign currency) at BDL, Lebanon’s financial situation has deteriorated greatly since 2016, and the long-lived tradition of debt rollover is no longer an option. Debt restructuring is needed to avoid a disorderly default. Economic literature proposes that for developing countries the stock of sovereign debt should be brought down to around 60 to 80 percent of GDP. Given that Lebanon’s institutional fragility hinders its ability to generate budget surpluses, the lower part of that range is the most advisable. To reach this target, a large restructuring effort is needed, which bondholders will only agree to if a credible medium-term expenditure framework is presented with the needed checks and balances. Given that the first eurobonds payments are due on March 9, this would necessitate a grace period to work out the plan to restructure. 

Such a plan would need to be drafted by a credible government that would rely on the assistance and support of multilateral organizations to secure its financing gap. Once the plan is accepted by bondholders they would be offered a “menu” of options such as reducing principal and/or interest payments while keeping the same maturity dates, or extending maturities. A combination of these is also an option. The leading principal should be that all creditors are asked to give the same net present value reduction, meaning a reduction in the current value of their debt after discounting its opportunity cost over time. Once the negotiations are successfully concluded, the Lebanese government would exchange the existing stock of eurobonds with the newly negotiated ones. These new bonds could also include warrants that Lebanon would only pay if it reached its growth targets.

In short, restructuring Lebanon’s public debt is not a daunting task on the face of things, but nonetheless requires a massive shift in how the government conducts itself in order to secure a good deal for the country. The 2020 budget was a missed opportunity in this regard. It is now time for the government to roll up its sleeves and proceed immediately to negotiating a debt restructuring plan as part of a credible, fair, and comprehensive macroeconomic-fiscal-financial-banking plan, one that can garner the needed international support and financing and regain the confidence of the Lebanese people.

The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the editorial views of Executive Magazine. This is the first article on the question of eurobonds payment, with the intent to share differing opinons from experts prior to the March 9 deadline.

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Lebanon UprisingPhoto blog

In pictures: Protests against the new government

by Greg Demarque
written by Greg Demarque

On Tuesday, February 11, Downtown Beirut saw clashes between security forces and hundreds of protesters who had gathered to block access to Parliament ahead of a vote of confidence on the new government.

Several rounds of clashes between protesters and police resulted in the injuries of 373 people, 45 of whom were taken to hospital for treatment according to the Red Cross.

Parliament passed the vote of confidence in Prime Minister Hassan Diab’s government later that evening.

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Lebanon UprisingPhoto blog

In pictures: Day 101 of the uprising

by Greg Demarque
written by Greg Demarque

On Saturday January 25, protesters came back out in the hundreds to mark over 100 days of the Lebanese uprising, with marches held throughout the city congregating in Downtown Beirut. As the day wore on, as had been the case in previous weekends in January, the evening was characterized by clashes between riot police and protesters and heavy use of tear gas.

Protesters gather outside the Association of Lebanese Banks building in Downtown Beirut on Saturday January 25.
On the march, demonstrators head toward Martyr’s Square in Downtown Beirut on Saturday January 25.
Day 101 of Lebanon's protests, Saturday January 25.
Protesters attack barricades in front of the Grand Serail, in central Beirut on Saturday January 25.
Riot police huddle together in central Beirut, on Saturday January 25.
Demonstrators launch fireworks toward the riot police in front of Le Gray Hotel, in Downtown Beirut on Saturday January 25.

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Last WordOpinion

Those responsible for attacks on the press must be held accountable

by Roula Mikhael
written by Roula Mikhael

Journalists were among the most active in documenting the Lebanese protests, according to our Lebanon Protests open-data platform. This role has put members of the press at risk, with attacks on media spiking in mid-January—the SKeyes Center for Media and Cultural Freedom identified over 20 violations against media between January 14 – 20, raising the total number of violations to 75 since the protests began on October 17, 2019.

This popular uprising is revolutionary because it exceeded the prevalent ceiling of freedom of expression and broke through the barrier of fear over prosecution—almost as if the streets wanted to destroy the image of politicians because they could not remove them from power.

Criticism has become a daily discourse for protesters. One achievement has been how traditional media has opened up to activists and protestors—criticism of political elites that would have been censored by default prior to the protests now regularly appears on air. This has changed the public discourse, with blame for the ongoing financial crisis and the impoverishment of the country and its people laid firmly at the door of a political elite, accused of selfishness, corruption, and inefficiency.

However, this high ceiling of criticism has come at a price. As the protests continued, the frequency of street violence increased, and the reaction of the security forces has been documented as disproportionate and oppressive. Instead of being protected while covering the protests, journalists have become a target of repression and assault.

January 15 marked a dangerous shift, with previously unseen levels of violence against both protesters and the media. Riot police were filmed as they attacked dozens of journalists and photographers in front of Helou barracks in Beirut that were there to cover protests taking place in solidarity with 59 detainees who were arrested the night before during clashes in Hamra. Journalists, clearly identified as such, were trying to protect their cameras while fighting off illegal attacks on their person. Journalists were not only beaten, some were also arrested, including journalists from Reuters, MTV, Al Jadeed TV, and Executive’s photographer, French national Greg Demarque. All were released the next day.

On January 18, several journalists and photographers were also injured while covering the confrontations between demonstrators and the security forces in Downtown Beirut. The next day, also in Downtown, journalists covering the protests were hit by rubber bullets. Al-Jazeera reporter Ihab Al-Aqdi was shot in the leg, while an Al-Jadeed cameraman, Mohammed al-Samra was shot in the hand and taken to hospital for treatment.

Violations and attacks on media by security forces have not only been extensively documented, but have taken place despite these journalists being clearly identifiable as press. Press have also been attacked by civilians while covering protests in areas or crowds that are hostile either to the presence of media in general or to certain media outlets, such as the attacks against press during clashes on the ring. Some members of the press have been subject to cyber bullying campaigns and doxxing in attempts to intimidate them; notably two female journalists were the targets of bullying campaigns via the use of abusive hashtags and verbal harassment online.

The media are doing their professional duty on the front lines of these protests, it is paramount that they receive the protection necessary to do their job. Following the attacks on journalists outside Helou barracks, then-interior minister Raya el-Hassan apologized and assured that an investigation would take place and those responsible held accountable. This needs to happen—and not behind closed doors. It is not acceptable to condemn attacks against the press while abdicating responsibility. All investigations into violations by security forces must be held transparently and perpetrators held publicly accountable.

Beyond guaranteeing freedom of the press and accountability for those who violate it, there needs to be a broader understanding of how Lebanon has changed. The barrier against freedom of expression that has been torn down by these protests must not be rebuilt. Instead, the state must address the issues surrounding Lebanon’s defamation laws, which criminalize citizens for speaking their minds and have no defense in truth. Freedoms won through these revolts must not be lost, and pressure must be maintained to ensure that Lebanon adopts and protects the highest international standards when it comes to rights to protest and freedom of expression.

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EntrepreneurshipOpinion

Going virtual to survive Lebanon’s financial crisis

by Maria Frangieh
written by Maria Frangieh

IN BRIEF

  • The virtual working model benefits employers and employees.
  • It has the potential to foster decentralized economic growth.
  • It can be a shield for businesses in times of crisis.

The political crisis in Lebanon has compounded an economic crisis that has been looming in the shadows for decades. News of business closures, salary reductions, and layoffs are added worry to Lebanese already struggling under the burden of the ongoing liquidity and financial crisis. Without urgent reforms, the economy is at risk of experiencing a deep recession.

Adapt to survive

The current—and potential—consequences of these twin crises are catastrophic, especially to Lebanese businesses. In order to survive, companies must reduce their expenditures. Unfortunately, the first instinct in these circumstances is to lay off employees—this will only further damage the economy in the long run.

Instead, companies must adapt to survive. This is where the virtual model can play a huge role. A virtual business conducts all or most of its business via the internet, eliminating the challenges faced with office costs, with geographically unattainable talent, and with scarce cash flow. There is a growing body of evidence to suggest that, if adopted correctly, the virtual model can be both productive and lucrative. Advanced digital and IT transformation strategies have led internationally to success for a diversity of companies such as Dell, Articulate, and Buffer. In Lebanon, however, companies are not yet embracing this change. With the current crisis, they may be forced to.

Adopting a remote working model has mutual benefits for employees and business owners. The latter can save on their costs—electricity, internet, rent, office supplies, and talent retention—as well as gain more flexibility in their business management, while the former can save on fuel, time spent in traffic, food, and professional wardrobe costs, and can have an economic advantage over colleagues who are reporting to the office. In Lebanon’s case, current instabilities will have a reduced impact on businesses adopting a virtual model as employees will be able to continue to work unaffected by road closures from the ongoing protests.

The virtual model also has the potential to influence on the country-wide economic level, as towns outside of Beirut could benefit from flows of income and investment. Virtual working allows employees to stay in their hometowns rather than migrate to the capital, and their spending and investments in these towns, if at a large enough scale, could help foster a decentralized boost that would contribute to Lebanon’s economic growth.

Can it work?

Going virtual is a big change that requires time and effort. If implemented correctly, this model can help businesses survive during difficult times.

Not all businesses can operate remotely, however, and for those that can, there are varying levels of difficulty making the shift to a virtual operation. If a business has a clear organizational structure and tasks lists, the shift can be smoother. On the other hand, businesses with complex organizational structures that are not able to remotely access their files will have a hard time.

The virtual model also requires the use of web tools to manage virtual teams. These tools are already available on the majority of laptops. Companies can also purchase more sophisticated tools as part of their fixed costs.

Successfully virtualizing a company’s infrastructure and operations is also heavily reliant on the team. As businesses strive for a complete reform, one of the biggest impediments is finding employees with the right skillsets.

A final, and key, factor is trust. Managers should earn their team’s trust by providing them with the right tools, training, and space to thrive.

Employees should also demonstrate their commitment through an organized and timely workflow. It is only by combining all these elements that a business can become a virtual success.

As Lebanon races against time to avoid an economic crash, companies should take measures to protect themselves and their employees. The virtual model could be the armor that shields a business from financial catastrophe. It can also play a part in revitalizing the economy outside of Beirut.

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EntrepreneurshipOpinion

How Lebanese entrepreneurs can survive the liquidity crisis

by Roxana Mohammadian-Molina
written by Roxana Mohammadian-Molina

IN BRIEF

  • The liquidity crisis requires immediate attention and will likely result in an IMF program, with consequences for poorer Lebanese.
  • In the short term, an IMF-backed loan program would need to create a specialized fund to promote the local private sector and entrepreneurship.
  • In the long term, the government needs to foster relationships between itself, the education sector, and businesses to help promote entrepreneurial growth.

Right now, the challenge every Lebanese entrepreneur is facing is the liquidity crisis. A two-speed approach is required: 1) a set of short-term policy measures to tackle the urgency of the funding gap left by the liquidity crisis, and 2) more medium- to long-term policy measures that are focused on building and strengthening the Lebanese entrepreneurship ecosystem.

Emergency crisis management

As the outlook continues to deteriorate for Lebanon, the newly appointed finance minister Ghazi Wazni said late January that Lebanon needed foreign aid to save it from an “unprecedented” situation that had forced people to “beg for dollars” at the banks and fear for their deposits. The scene looks set for an International Monetary Fund (IMF)-backed program for Lebanon, bringing to mind the example of Egypt. Analysts, observers, and international financial institutions alike have hailed Egypt for tough economic reforms tied to a three-year, $12 billion loan program with the IMF, agreed to in late 2016. The reforms included devaluing the Egyptian pound by about half, relaxing the exchange rate regime to let the currency float freely, cutting energy subsidies, and introducing a value-added tax (VAT). Those changes have reduced the country’s current account deficit, inflation, and unemployment—thus strengthening the national currency. In its fifth and final review of Egypt’s economic reform program completed in July 2019, the Executive Board of the IMF said that “the macroeconomic situation has improved markedly since 2016, supported by the authorities’ strong ownership of their reform program and decisive upfront policy actions. Critical macroeconomic reforms have been successful in correcting large external and domestic imbalances, achieving macroeconomic stabilization and a recovery in growth and employment, and putting public debt on a clearly declining trajectory.” The IMF further noted that the outlook for Egypt’s economy remains favorable.

In Lebanon’s case, given the urgency of the liquidity crisis, any reform that comes along with an IMF-backed loan program would need to address the liquidity requirements of entrepreneurs and SMEs

Yet, Egypt’s robust IMF-backed structural reform program that has helped steady the economy has also been accompanied by an increase in inequality and poverty. Indeed, while macroeconomic indicators have drastically improved, measures such as price increase of basic foods like bread, milk, and lentils, as well as slashing fuel subsidies, which meant an increase in the price to consumers of gasoline, diesel, kerosene, and fuel oil, have left many of Egypt’s nearly 100 million citizens under increased economic strain and struggling to make ends meet. According to Egypt’s Central Agency for Public Mobilization and Statistics, 32.5 percent of Egyptians lived below the poverty line in 2018—up from 27.8 percent in 2015. This darker side of the IMF’s help programs was also visible in a 2019 loan agreement with Ecuador that called for an enormous tightening of the country’s national budget—about 6 percent of GDP over the next three years. It does not bode well for the more than 25 percent of the Lebanese citizens who live in poverty that an IMF-backed program will most likely include raising taxes that fall disproportionately on Lebanon’s poorest citizens while making cuts to the already thin public investment.

In Lebanon’s case, given the urgency of the liquidity crisis, any reform that comes along with an IMF-backed loan program would need to address the liquidity requirements of entrepreneurs and SMEs—95 percent of companies in the country are SMEs, which account for 50 percent of employment. One such short-term emergency crisis management solution is the creation of an entrepreneurship fund or loan to promote the local private sector and entrepreneurship. The IMF has been very vocal about the importance of private sector investment in creating jobs and achieving strong growth, particularly in the MENA region. Once again, Egypt’s example comes to mind. In 2015, Egypt received a $1 billion loan from the World Bank in order to support the country’s small businesses and entrepreneurial sector and pave the way for new job opportunities. That was followed by annual loans worth $3.15 billion from the bank between 2015 and 2017 to help Egypt’s economic reform program and local business development.

This IMF-backed entrepreneurship fund should also go hand in hand with reform policies to make it easier to start and manage a business, policies that tackle the complex and burdensome regulations in Lebanon that have historically held back investment and, hence, job creation and growth. Both the IMF and the World Bank have traditionally been very vocal about the fact that enhancing accessibility to finances, and promoting entrepreneurship and transparency in tax filings and government procurement would allow independent small businesses to thrive and establish new opportunities.

Build and strengthen the ecosystem

Once the short-term crisis is over, and the country is hopefully on the right track to recovery and growth, there are long-term challenges to building a strong entrepreneurship ecosystem that need to be targeted. Within that, government interventions need to be carefully crafted to be limited to improving the environment that surrounds startups. In short, the government’s role is to optimize conditions for entrepreneurs. It is difficult to point to any entrepreneurial ecosystem that has risen through direct government intervention, yet many successful entrepreneurial ecosystems and innovation districts, such as the UK’s Silicon Corridor or Spain’s 22@Barcelona project, have been assisted by governments that are entrepreneurial at the level of policy, legislation, permit authorization, purchasing, infrastructure investments, education, and coaching.

In some regions, such as the GCC, public policy to enhance access to finance has included the creation of regional VC funds, usually taking a hybrid form in which both public and private sector money is combined under private sector management. Yet, this approach has come under criticism for mixed results, with some observers noting the impact on the ability of purely private sector VC funds to raise money in those countries. Furthermore, the focus on risk capital neglects the fact that only a small minority of startups use this financing channel, at least in the early stages. Instead, encouraging the creation of a well-regulated peer-to-peer lending system is more effective as it provides seed and start-up capital and its trust-based nature means that investors typically invest in businesses that are close to home (see article in Executive’s September edition). It is also important to point out that ultimately, it was the liquidity crisis of 2008 that led the way to the creation of the alternative lending sector, peer-to-peer lending, and crowdfunding in the US and Europe.

Ultimately, however, a well-organized interaction between education, business, and government is an important key to success.

As part of the medium- to long-term strategies to build on and strengthen the Lebanese entrepreneurship ecosystem, special attention needs to be paid to policies by stakeholders such as the government, the central bank, and the Banking Control Commission of Lebanon that can foster connections between the different players within entrepreneurial ecosystems. For example, professional networking organizations, such as the Lebanese International Finance Executives (LIFE), entrepreneurship clubs, VC-backed groups, professional associations, and diaspora associations. Lebanon has already seen the emergence of organizations that have sought to build bridges between different entrepreneurial actors through the creation of communities of practice or entrepreneurial networks, such as Berytech, SPEED@BDD, the UK Lebanon Tech Hub, and AltCity—all of which have provided mechanisms for entrepreneurs in the knowledge economy to experiment, improve, and scale up.

Ultimately, however, a well-organized interaction between education, business, and government is an important key to success. This can be done through the effective provision of support to entrepreneurs during the pre-startup, startup, and early post-startup stages. In particular, public sector and university-led business accelerators and incubators have the opportunity to provide startups with advice, networking opportunities, and finance in order to help foster these fledgling ventures.

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InvestmentReal estate

Recent investments in property benefits Lebanese real estate developers and buyers

by Nabila Rahhal
written by Nabila Rahhal

IN BRIEF

  • Prior to October 17, 2019, the real estate market was suffering from high developer debt and low interest rates on deposits.
  • Lack of trust in banks has since then lead to an uptick in real estate investments, which in turn has allowed developers to pay back their bank loans.
  • Long-term implications on the sector are dependent on the performance of the new government.

The 1st century Arab poet Al-Mutanabbi could be describing a current scenario in Lebanon when he wrote “masa’eb kawm ‘and kawm fawa’id,” that what is seen as a catastrophe by some is an opportunity for others.

The real estate sector in Lebanon has been suffering from a slowdown since 2014, although hard data is largely unreliable and anecdotal (see Executive’s December 2018 article). Reasons behind the sector’s woes include increased interest rates on the bank loans of real estate developers—which reached up to 13.5 percent—and the market slowdown, largely brought on by the high interest rates on deposits that made people reluctant to invest in real estate (see article in Executive’s September 2019 issue).

“The hike in our interest rates when the market was slowing down at first, and then became stagnant for several years, made it impossible for developers to pay their loans,” says Mireille Korab, head of business development and communication at FFA Real Estate. Korab estimates the debt owed to banks at around $20 billion. Massaad Fares, chairman of investment management firm Legacy Central, told Executive the same figure, breaking it down into $11 billion owed by developers and $9 billion by homeowners.

Adding to difficulties faced by indebted real estate developers looking to lessen the burden of their loans, according to Fares, was the high interest rates on deposits over the past two and a half years. He tells Executive that the majority of Lebanese were tempted by these interest rates—reaching up to 12 percent—and so kept their money in the banks rather than diversifying their investments.

When, in early September 2019, Lebanese began to fear for those deposits—with the first warning signs of the current financial crisis manifesting through gas strikes and difficulties obtaining dollars at ATMs—Fares says this sparked renewed interest in real estate investments. “Our phone started ringing after a couple of years of not ringing once,” he says. “I had people from all walks of life calling me to ask for my opinion about investing in real estate as a means of saving their life’s earnings from the banks.” He adds that following the 15 days of bank closures that started on October 18—the second day of the still ongoing thawra (revolution)—this initial interest turned into panic as consumers’ distrust of banks grew.

This created what those in the real estate sector Executive spoke with characterize as a mutually beneficial cycle. Lebanese wanting to withdraw their money from a banking system they no longer trusted opted to invest in real estate, which benefited real estate developers seeking to lessen their debt burden, which, in turn, benefited banks as these developers began repaying their loans. “It’s a healthy situation where the investor is taking his money out of the bank and is happy; the developer is taking the investor’s money and transferring it—maybe in the same day—to the bank while making sales from his unsold stock of property, and so is very happy; and the bank is also happy because money is coming into [borrower] accounts,” says Walid Moussa, president of the Real Estate Syndicate of Lebanon. Executive reached out to several banks for this article but received no response to interview requests.

The need to buy

Lebanon’s current financial crisis has arguably been exacerbated by the lack of unified banking policies and clarity over capital control measures, leading many Lebanese to continue a slow drip run on the banks. Increasingly restrictive withdraw limits, however, have made those wishing to remove their deposits from the banking system more creative.

Some Lebanese are using bankers’ checks to invest in high-value items as a means of converting deposits into tangible assets that they hope they can eventually resell. In this scenario, the real estate sector is one of their only options, Moussa says. “Even investing in gold, jewelry, or art is no longer feasible since those sellers are asking to be paid in cash and not check,” he explains. “The real estate sector is one of the few value investment channels that is still accepting checks.”

According to Korab, there are precedents to investing in real estate during times of crisis, which could explain why Lebanese are turning to the sector now. She says that investor profiles range from high-net-worth-individuals looking to buy buildings in Downtown valued at millions of dollars to those who have worked all their life and want to protect their retirement finance through a medium-sized investment in real estate (in the range of $100,000 to $150,000).

Paying the price of real estate

Speaking from his perspective as a real estate investment manager, Fares tells Executive that some buyers are playing hardball, holding out for very large—and to his mind not feasible—discounts, as they assume that indebted developers will make concessions to close the sale. He says that potential investors are also benefiting from this situation and should take advantage quickly, lest the tide change. “Eventually your purchasing power may decrease even further,” he warns. “You can afford the apartment that is $250,000 now, but maybe in a while, you cannot buy it at this price anymore because there might be a haircut or your money may be exchanged to Lebanese lira at LL1,500 [to the dollar], and lose its value. If you want to invest in real estate, waiting is losing.”

However, developers are also guilty of milking the situation, according to Fares, lowering discounts on properties from pre-thawra rates because demand has increased­­—and they know potential investors have an added incentive to move quickly. Prior to the October 17 protests, he says that properties were being sold at a 30 to 40 percent discount—now they are being sold at an average discount of 25 percent in prime areas like Solidere. The more that developers repay their debts, the less the urgency they have to sell, and so they become greedy, he explains. It is worth mentioning that investment shares in Solidere have gone up from $6.6 at closing in January 2019 to $7.9 at closing in January 2020. It is notable that the only real estate related stock on the Beirut Stock Exchange (BSE) improved in December 2019/January 2020, even as overall BSE market cap dropped.

Moussa advises developers not to play with prices nor be overconfident of demand. “Developers have to be careful not to lose this opportunity to sell—if they increase their prices, this will halt the trend,” he says. “People will not evade a potential 20 percent haircut in the banks to go invest in the retail sector at a high price because at the end the result will be the same for them.”

All those interviewed told Executive that only developers indebted to the banks are selling property in today’s market; non-indebted developers do not want money from sales to be trapped behind the ongoing capital controls at the banks and so are holding off for more favorable conditions.

What lies beneath

This uptick in demand for real estate investment, however, has not directly translated into actual sales. “Demand is crazy,” Moussa says. “People want to buy, but they don’t know what to buy—they know they want to get their money out of the bank and are acting more out of panic than conviction.

“So what happens is that we are receiving hundreds of demands per week, but the transactions are not in the hundreds [but in medium double digits].” He explains that the uncertainty about a financial solution is causing cold feet—from both buyers and sellers—before many deals are closed.

Both Fares and Moussa agree that the number of transactions in the last quarter of 2019 have increased in comparison with the fourth quarters of both 2018 and 2017. “From all that we are hearing, 30 percent of that has materialized in transactions,” Fares says. “Out of every 10 people who walk through our door, three are buying, but it is better than before the thawra when only one was buying.”

And then what?

As long as mistrust in the banking system continues, Fares believes that this increased interest in real estate investment will remain. Although it is still too soon to assess the impact Lebanon’s newly formed government will have on the banking system, speaking before its formation, Fares tells Executive that its credibility will have a strong impact on the recent real estate trend. “If a worthy government is formed, then the mistrust will decrease, and this enthusiasm [for investment] will decrease,” he says. “But if we get an unworthy government, this enthusiasm will continue. And this is when I ask both developers and buyers to not be greedy to save their money and their property.”

Moussa believes this phase of investment in real estate is transient as uncertainty over haircuts on deposits and the long-term solvency of banks remains. He advises that developers keep prices reasonable or risk negative long-term implications on the sector. “We have to see what will happen to the real estate sector in terms of prices,” he says. “If prices go up now and the bank situation deteriorates further, prices might go down again and we will have to wait for a decade to be able to resell at good prices and recover investments.”

Korab says this trend of investment in real estate will continue until developers pay off their debts. Once free of debt, developers will be able to wait until the situation stabilizes before selling. This is when, according to Fares, prices will start to increase. “When the debt is entirely repaid and developers enter the capital making phase, they will no longer make discounts and prices will eventually go up by percentage increments—although this will take many months to happen,” he says.

In the long term, given the volatile financial situation Lebanon is in, those Executive interviewed say that it is impossible to make predictions with any degree of accuracy. They foresee that a lot of property will be up for sale or rent, but, whether there will be a market for them is unclear. Investment in real estate is one option to withdraw money from the banks—and may be the answer to an indebted developer’s prayers—but it remains a risky proposition for the investor, as no one can predict if they will be stuck with a non-liquid asset down the line.

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Lebanon UprisingNeuroscienceOpinion

The resilient brain

by Natali Farran & Maya Bassil
written by Natali Farran & Maya Bassil

IN BRIEF

  • Resilience can be learned and developed.
  • The brain adopts different strategies to cope with stress.
  • There are ways to improve individual resilience during political violence.

Resilience, or the capacity to recover quickly from difficult situations is not a trait that is unique only to some. In fact, resilience—defined by Professor of Developmental Psychopathology Michael Rutter as “lower vulnerability to experiences of environmental risk, and the ability to overcome adversity and stress or to achieve a relatively good outcome despite risk experiences”—includes thoughts and behaviors that can be learned and developed. Put simply, at the physical level of the brain, resilience is a process associated with neuroplasticity—the brain’s ability to reorganize itself by forming new neural connections—and a response to stress. This means that resilience is a trait that can be fostered through certain behaviors.

Resilience is a process associated with neuroplasticity—the brain’s ability to reorganize itself by forming new neural connections

The resilient brain

The building blocks of a resilient brain can be found with tools of neuroscience. In particular, the development of the resilient brain is closely tied to positive individual traits, such as positive coping mechanisms, high self-esteem, and optimism, as well as the emergence of intact social networks. The brain relies on different strategies to operate more efficiently in the face of adversity. What might additionally underpin resilience is a range of sensitive reactivity and adaptability within certain brain regions. Specifically, evidence suggests that the prefrontal cortex and the ventral striatal are larger in resilient individuals. The former is related to various complex behaviors such as planning; the latter to personality development, playing a role in mood, addiction, and learning. Other factors that underpin resilience include the brain’s sensitive reactivity in reward-related regions, and the capacity to modulate the amygdala—a key area for emotion regulation. Lastly, overlapping brain circuits are also affected by “happy” hormones—serotonin and dopamine—and stress-regulatory genetic variations that interact with the environment to predict social behavior and psychopathology.

In studying resilience, however, social and environmental factors also play a key role. In a November 2019 briefing paper, the British Psychological Society noted: “Policies need to consider not just resilient people but also resilient places and resilient communities.” The resilient brain can be examined through a social lens, with impacts on individual and
community resilience.

In an expert review published in 2019, neuroscientist Nathalie E. Holz and colleagues synthesized the results of 121 studies on resilience. Their findings noted that social risk and resilience factors include genetic makeup, social environment, and personal characteristics. These factors, taken together, shape specific neural components that may underlie acute stress reactivity, adaptation, and active coping. As such, resilience is implicated on a system-level in the brain, rather than through one area or
one mechanism.

Taken together, vulnerability and resilience to stress-related negative sequelae converge in part on shared neural mechanisms in the brain. These phenomena also relate to the brain’s ability to change within particular areas. Such information highlights the capacity of the human brain to adapt to or buffer adverse environmental influences. It also encourages efforts that foster resilience.

Resilience in politically uncertain times

A 2014 study found that 71 percent of those surveyed (in a nationally representative sample of 2,857 individuals) reported at least one lifetime traumatic event related to war.

Since October 17, 2019, Lebanon has been in the grasp of anti-government protests, which have, in the latter half of January, witnessed increasing violence. Political violence, unfortunately, is not a new phenomenon in Lebanon. A 2014 study found that 71 percent of those surveyed (in a nationally representative sample of 2,857 individuals) reported at least one lifetime traumatic event related to war. Despite this adversity, many individuals are able to overcome challenges through resilience. Below is advice based on principles of psychology and nutrition that can be applied in these politically uncertain times.

Know your limits

Political uncertainty and violent times can place a significant burden on individuals, communities, and governments. The American Psychological Association offers the following tips:

Stay informed, but know your limits: Consider how much news you take in, how that information is affecting you, and what limits should be placed.

Find commonalities with others: Try to identify commonalities within different views, or disengage if none are present.

Find meaningful ways to get involved in your community: Identify issues that are important to you, and be active in them.

Seek solace: Engage in relaxing activities such as meditation, and get support from community organizations.

Take care of yourself: Prioritize healthy habits such as getting enough sleep and doing activities that you enjoy—avoid ineffective coping mechanisms, such as alcohol or drug abuse.

The ongoing protests in Lebanon have taken over the media and social media platforms. Escaping this 24-hour coverage is important for psychological well-being. Schedule short blocks of time during the day to catch up on the news, instead of being constantly in sync. Take “digital breaks” to de-stress through hobbies. In discussions, stay open and approach issues in a calm and constructive manner. There are many community initiatives to become involved with, such as soup kitchen Matbakh el-Balad, Lebanon Needs (an expat led initiative that’s gathering essential medical survival equipment), and the Lebanese Food Bank. Similar community organizations can provide vital emotional support during these stressful times. For instance, mental health NGO Embrace offers emotional support; they also run a suicide prevention hotline on 1564. Lastly, find and maintain activities that help reduce stress, such as exercising.

Fighting stress through food

Nurturing a resilient brain also requires adopting and maintaining a healthy lifestyle through diet, physical activity, and other daily habits. This can be challenging during political and economic crises due to the emotional and material costs. Stress-induced hormones include cortisol, ghrelin, and leptin, all of which increase our cravings for unhealthy fats and refined carbohydrates and sugars. While the latter foods offer a short-term relief by increasing serotonin, their increased consumption leads to harmful health outcomes in the long run. Chronic intake of high fat and high refined carbohydrates has been linked to inflammation, obesity, and the associated diabetes and cardiovascular diseases. A link has also been found between poor socioeconomic status and the intake of cheaper energy-dense carbohydrates and fats like white bread, rice, potato, ghee, and fried foods, rather than the healthy, often more expensive alternatives available.

Nevertheless, affordable healthy alternatives do exist. Foods that have been shown to fight stress, inflammation, and obesity comorbidities include nuts, olive oil, and fatty fish rich in unsaturated fats —as opposed to trans and saturated fats—as well as whole grains, fruits, and vegetables rich in vitamins, minerals, and fibers. A resilience-nurturing diet in economically stressful times could incorporate whole/brown bread and grain products, burghul as replacement of white rice, pulses like beans, chickpeas, and lentils, baked potatoes with skin, and seasonal fruits and vegetables. Cheaper canned options, such as sardines and tuna, are also rich in depression-fighting omega-3 fats.

Other healthy habits that can complement a healthy diet for a more effective stress-fighting and resilient lifestyle include drinking a minimum of 1.5 liters of water per day, increasing physical activity to at least 30 minutes daily, sleeping for seven to eight hours daily, and reducing or preferably quitting smoking.

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Economics & PolicyOil and gasOpinion

An investigation into the revenues from Lebanon’s seismic data

by Diana Kaissy
written by Diana Kaissy

One of the major obstacles that post-war Lebanon has faced is the absence of adequate transparency tools that, if there, would have lead to greater public accountability. Access to information has been limited, and mandatory disclosure mechanisms are verging on nonexistent. Such limitations have encouraged many forms of corruption.

Despite the fact that the past five years have seen efforts to provide the public with greater transparency tools—Law 28 (2017) on access to information, Law 83 (2018) on whistle-blower protection, and Law 84 (2018) on enhancing transparency in the petroleum sector—post law scrutiny has shown that the state had little intention of using such tools to promote public accountability and incubate trust amongst the different stakeholders. The October 17th revolution was in part fueled by years of bottled up outrage and frustration over the corrupt and self-serving practices of politicians—Lebanese citizens are demanding more accountability.

Our aim at the Lebanese Oil and Gas Initiative (LOGI) is to ensure that Lebanese citizens benefit economically from their natural resources. In that vein, in December 2019, and in partnership with the Heinrich Böll Stiftung Middle East, we collaborated with investigative journalist Jad Ghosn to study the sales revenues of seismic data. Since 2003, Lebanon has been receiving a percentage of the revenues from the sales of its offshore seismic data packages. Clarity around how these revenues are managed is needed if we are to ensure that proper governance over the petroleum sector is maintained and public accountability is enhanced. In particular, we were interested in understanding how these revenues were accumulated—the legal framework—and how they are managed. The ultimate goal was to recommend concrete action steps that would ensure proper public oversight leading to accountability around this public money.

A series of interviews and literature reviews were undertaken. Different stakeholders—three MPs and three experts in the field—were consulted on the issue. After all the data was compiled and analyzed, LOGI released a study this past December which detailed the following:

  1. Two companies, Petroleum GeoServices (PGS) and Spectrum, signed separate contracts with the Lebanese government that granted the latter a percentage from the revenues earned by each of the companies upon the sales of the seismic data packages to interested parties. The seismic surveys were completed in 2014 but began in 2000 (Spectrum) and 2006 (PGS).
  2. Our research indicated that the government received 80 percent of the revenues from the sale of seismic data; the companies 20 percent. However, LOGI was unable to confirm this as the contracts are currently not publicly available. (Public release would require a determination on commercial sensitivity by the National Anti-Corruption Agency, which has yet to be established.)
  3. The accumulated revenues are deposited in a bank account run by the Minister of Energy and Water and the Director of the Oil Installations
    of Lebanon.
  4. As per the Lebanese Petroleum Administration, the accumulated revenues until October 2019 stood at $43.03 million.

In light of the above, LOGI recommends the following to enhance public ability for oversight:

  1. Audit the account in which these returns are deposited through an independent auditing company—selected through a transparent procurement process—to vet the incomes deposited, their sources, and the expenditures. The objective of this audit is to follow transparency measures still absent in the management of public funds, notwithstanding the size of the account.
  2. Publish the agreements by virtue of which the Lebanese state collects a share of the sale of seismic data, while withholding information that could jeopardize the interests of the state vis-à-vis the companies—this falls within the maintenance of competitiveness. (According to the stakeholders, publishing the agreements could be detrimental to the public interest, as disclosing such information could negatively affect the competitiveness required for the companies interested in the licensing rounds, and so weaken the state’s capacity to negotiate with other companies that could be contracted in the future to perform additional surveys.)

These recommendations, along with the full investigation, can be found on LOGI’s website. Despite the fact that the oil and gas sector is not a magic remedy that will help Lebanon overcome current economic, fiscal, and political difficulties, it does represent hope for the Lebanese. This is why it is vital to safeguard this hope by ensuring that moving forward, the petroleum sector will be held to the highest standards of public oversight and accountability.

A previous version of this article referenced a member of the Lebanese Petroleum Administration (LPA) as one of the consulted stakeholders. This was removed on the request of the LPA as their involvement was a brief telephone conversation and not a full consultation.

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Economics & PolicyForeign PerspectiveOpinion

The US approach to Hezbollah and the new Lebanese government

by Mohanad Hage Ali
written by Mohanad Hage Ali

The United States’ approach to Lebanon seeks to reconcile two often conflicting policies: supporting the Lebanese state, army, and government, while pursuing a maximum pressure campaign on Hezbollah. During the past months, the “Iran lens” defining US policy has overshadowed the commitment to supporting stability and building state institutions in Lebanon. This was clear in the sanctions against Jammal Trust Bank in August, leading to its closure, and in the deliberate delays in releasing military aid until December 2019.

This binary approach, and Hezbollah’s response to it, climaxed during the government formation process this January. Hezbollah and its allies, who face looming sanctions, managed to produce a government that is acceptable to the US and the international community, and so could receive a green light for external assistance—if and when it succeeds in passing necessary reforms.

Many observers had anticipated an escalatory response following the early January assassination of Iranian major general Qassem Soleimani, a personal friend of Hezbollah secretary general, Hassan Nasrallah. Instead, there was a conscious effort on the part of Hezbollah to avoid confrontation through this government lineup. For the first time since the party entered government in 2005, Hezbollah lacks direct representation in cabinet. And, for the first time since the Syrian era in the 1990s, a foreign minister has been appointed who has no known bias in favor of the Syrian regime or Hezbollah. That the majority of ministers are also US citizens could also be seen as a sign of appeasement.

Given the inflexible and authoritarian nature of Lebanon’s political class, Hezbollah included, this is a rather exceptional effort and compromise in government formation. The timing of the new government, announced just over two weeks after Soleimani’s assassination, says volumes about the level of Hezbollah’s fear of the repercussions of a Lebanese financial meltdown and the desire for a bailout.

This policy also reflects the changes in the organization’s nature; Hezbollah has been playing an active role in managing other battlefields. The group has become a hybrid between a political party and a “consultancy” with an elite fighting force. In a nutshell, Hezbollah no longer wants Lebanon to be a proxy battleground, as it has been since the 2000 Israeli withdrawal, and would like the US and Israel to meet it half-way. The response to the Soleimani killing will be restricted to expelling US forces from Iraq. Hezbollah has and most certainly will play a role, at least politically, in uniting Iraqi Shia factions against the US presence. Whether the US will confine this confrontation to Iraq, rather than escalating in Lebanon, remains to be seen.

Erratic policy-making

Although the US administration seems keen on de-escalating, unilateral, erratic policy decision-making could suddenly shift gear. With two secretaries of state, two defense secretaries, and four national security advisors in three years of this presidency to date, one should not expect coherent or consistent foreign policy in the region. The exception is only when this foreign policy is a factor in local elections, such as the “Deal of the Century,” and the maximum pressure campaign on Iran, given its significance to the Trump pro-Israel evangelical electorate. The Soleimani assassination, months before the US elections, is case in point. Such unpredictability might impact what seems to be a consistent US policy in Lebanon.

Trump’s administration is reportedly considering expanding its sanctions, likely through the Global Magnitsky Act, to include corrupt politicians and their known business cronies. Such an escalation might devastate what little trust the Hassan Diab government has. If, however, the sanctions are designed to target high-ranking members of the corrupt elite—though not at the level of senior political figures—they could go further than any cabinet in meeting the protestors’ demands. Given the current composition of Parliament, it is highly unlikely that the new cabinet will effectively take on corruption. This is why some DC pundits believe that sanctions against the corrupt elite could empower the current cabinet, and create space for more daring reforms. Regardless, this new batch of sanctions is overdue and could impact US policy in Lebanon. For now, external assistance awaits reforms, and the US could act as a facilitator if and when these changes take place. The first sign of this conditional engagement will be when the US Ambassador Elizabeth Richards visits the prime minister, once his government wins the vote of confidence.

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