Regional outlook

Stock markets ending year down across region

by Executive Contributor
written by Executive Contributor

Instead of the post-Ramadan surge which many of the region’s financial analysts and traders had augured during the slow days of summer, important Middle Eastern stock markets converged to a measly November diet in the bear’s kitchen. Over the coming months, these markets will have to deal with the poor investor confidence of which the selling mood speaks volumes—all the more so since corporate results and macro indicators may be much friendlier than the share price performance toward the end of 2006.

Downturns across the region
The Cairo and Alexandria Exchanges retained their ground with continued sideways trading, but the Tadawul Index of the Saudi Stock Exchange moved south by about 2,000 points, or 20%, between Eid Al Fitr and November 26. The Dubai Financial Market was not far behind with a drop of 17%, the Doha Securities Market lost 15%, and the Abu Dhabi Securities Market retreated by about 12% over the period.
The Bahrain Stock Exchange shed the gains it had made between mid-August and late-September and dropped back to levels in the 2,100 points range. The Kuwait bourse similarly weakened more than 5% and receded below 10,000 points in late November.
In Amman, the market gave up over 8% and in Beirut, the BLOM Index fell 7%—but that was its closing before the country received another blow through the assassination of Industry Minister Pierre Gemayel, after which the Beirut Stock Exchange shut its doors for several days, along with most of the country’s businesses.
This means that with exception of the smallish North African bourses in Tunisia and Morocco, Arab stock markets had nothing to boast of in the period immediately following the fasting month of Ramadan, a period which many experts had assumed would lead the markets to new consolidation or signal growth impulses after the correction phase that hit GCC and Levant capital markets in the first half of 2006, with some variations in terms of exact timing and severity of the respective share price drops.
While the danger of a crash in regional stock markets was thought distant by a substantial share of market protagonists in 2005, by the spring of 2006, capital market experts had noted that the downturn could no longer be considered a brief interlude. Many still expected the second half of the year to bring new promise, however.
With the year-end in sight, that optimism seemed increasingly premature, even as analysts said that the valuations of GCC equities are reasonable and offer good new potential—also given that the burst of the bubble in 2006 was fairly predictable because the region’s capital markets rally was driven by the oil boom and toward the peak of the rally, the ratios between oil prices and GCC equity market valuations had become excessive.
“At the market peaks, a significant disconnect developed between oil and regional equity pricing,” said Dubai-based investment firm Gulf Capital Group in a recent report, while concluding nonetheless that the markets are poised for future growth.

Harvest of oil revenues will continue
The broad consensus of international and regional financial institutions and banks is that oil will be the major force behind Arab economic and capital market trends for years to come, which also means that the region’s influence in the current account triangle of Western consumers, Asian manufacturers/new consumers and Middle Eastern oil suppliers is likely to increase.
In long-term perspectives, the global thirst for oil will not relent and oil-producing economies are bound to harvest the benefits. Within this outlook, the region’s economies and sectors will have further development opportunities, and various methods of share price modeling show that there are plenty of Middle Eastern companies with attractive upsides to their current share prices.
This is true even as 2006 results of listed companies suffered on the whole, due to shortfalls in their investment-related income and because some companies incurred losses that depressed the picture. As the National Bank of Kuwait pointed out in an analysis of earnings by UAE companies in the first nine months of 2006, one group of 14 companies with sound core earnings and accounting for over 60% of market capitalization achieved 27% growth in their net profit to a total of over $5 billion.
That was a much better performance than suggested by the modest 5% profit growth for 66 listed companies with published results, due to the fact that 23 companies reported declines in earnings and 11 incurred losses.
Thus, by global and local reasoning, investors will be well-advised to review the performance of Middle Eastern equities in the first nine months of 2006 and the entire year neither in search of short-term profit nor obsessing over the year-on-year slowing of earnings growth by many companies—which already a year ago seemed hardly avoidable for the 2006 earnings season, when corporation after corporation in the third and fourth quarters of 2005 had announced stellar growth rates in profits.
However, quick and speculative gains may not be easy to come by in the coming months and analysts now tend to see the consolidation phase of Arab stock markets as bound to take more time than expected earlier in 2006, which implies that rallies and bull runs in the near term will be the exception rather than the rule. But by measuring price to earnings as well as price to earnings to growth ratios, researchers such as Gulf Capital say that Middle East equity markets—with the exception of Saudi Arabia—are priced attractively in the long run.
Another matter of importance for the development of Arab equities is the regulatory environment and market culture. In this regard, several GCC countries moved to implement strict regulations and standards in order to purge violators of corporate disclosures and transparency issues.
UAE, Kuwait and Saudi Arabia tried hard to implement these rules and presented several companies to trials for lack of transparency and insider trading.
Additionally, the GCC countries realized that trading awareness and diversification are key aspects of sound capital markets. Governments encouraged education of market participants and supported the creation of increased awareness in the minds of inexperienced investors who were following the market trends and buying stocks without conducting fundamental analysis.
IPOs
The stock market correction did not prevent GCC investors from looking for quick profits through subscription in initial public offerings by Gulf companies in 2006.
IPOs of large companies such as Emaar the Economic City in Saudi Arabia, Al Babtain Power and Telecommunications, Advanced Polypropylene Co., Saudi Research and Marketing Group, Qatar’s Al Rayyan Bank, Bahrain’s Al Baraka Banking Group, the UAE’s Emirates Integrated Telecommunications (DU) and Kingdom Hotels Investment were oversubscribed several times.
The IPO trend is expected to continue in 2007, with 65 planned or rumored IPOs currently included in the IPO Monitor of regional business information provider, Zawya.
More than half of these IPOs are scheduled for Saudi Arabia and another 20% for the UAE, clearly indicating that the GCC markets will again dominate the regional IPO scene in 2007 as they did in 2005 and 2006. In Egypt, privatization and sales of already listed but state-owned companies will continue to appeal to investors.
Some of the high profile companies planning to go public or be privatized in the GCC are Saudi Development Bank (Inmaa) with $2.8 billion IPO, Saudi Arabian Mining Company ($1.06 billion), Saudi Aramco with $1.01 billion, Bahraini United International Bank ($800 million) and the privatization of UAE’s International Petroleum Investment Co. for between $540 million and $810 million.
Syria, where plans to launch the Damascus Stock Exchange are more likely to be implemented in the latter portion of 2007 than early on, could bring a boon to local investors through public offerings of new joint venture banks even ahead of the formation of the bourse. Later on, when the bourse’s rules have been tested and the playing field is open, the country has strong potential for its own IPO wave.
In Lebanon, where a number of IPOs scheduled for 2006 have been postponed until 2007 because of the summer conflict, the new year’s IPO prospects may have become open questions as long as the country’s political struggles preclude a clear investment picture.
To secure the interest of investors in future IPOs where political risk is not the problem, observers say that markets need to free themselves from overpricing issues through excessive issue premiums. One such example was the August 2006 IPO of Red Sea Housing Services in Saudi Arabia. The company’s asking price of 58 Saudi riyals ($15.5) per share represented a premium of SAR48 added to the share’s par value of SAR10. Analysts said that the SAR48 premium was 35% above the stock’s fair value.

Quick and speculative gains
may not be easy to come by
in the coming months


On the other hand, investors are also likely to stay alert to the unfulfilled promises that marred some IPOs such as the flotation for 20% of the Hariri family’s Oger Telecom on the London Stock Exchange and the Dubai International Financial Exchange, which was called off in the last minute in November because of “adverse market conditions.”
Integration of markets or expansion of corporate networks?

Other than tunisia and morocco, Arab stock markets had nothing to boast of
following Ramadan


One aspiration of Arab capital markets is convergence into larger trading realms. As a herald of greater integration of Arab capital markets into globalized trade, the DIFX was overall off to a slower start than its promoters had announced at its launch in September 2005. Similarly, rapid integration and eventual mergers of other Middle Eastern stock markets are not to be counted on with certainty for 2007.


However, on the level of corporate expansion and investments, the region’s equity markets are set for further enhancements. Some of the strategic privatization investments in Egyptian companies are prone to originate from investment firms and other corporations in the Gulf, and there is a strong likelihood of expanded equity participation by Gulf companies in firms in Jordan, Syria, and, provided that political fundamentals improve, Lebanon.
In one example for infusing capital into regional firms, Dubai International Capital invested $272 million in the Amman-based Jordan Dubai Capital Investment Company.
Such involvements are less prominent but for regional economies no less meaningful than high profile international investments by the likes of Dubai International Capital, which in 2006 included the purchase of UK engineering firm Doncasters and assumption of a $1 billion stake in DaimlerChrysler.
A recent report by International Institute of Finance (IF) and Dubai-based Hawkama, a corporate governance institute, said that GCC companies acquired close to $26 billion worth of assets in UK, Europe and North America in the first eight months of 2006.
Despite the scrutiny of Arab investments in US-linked companies and the problems that marred Dubai Port World’s acquisition of P&O over the group’s US operations, the 2006 trend of international investments by regional corporations is bound to continue in 2007, while the importance of Arab investment firms grows in regional and global capital markets.

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Regional outlook

One bank, two bids for monetary union

by Executive Contributor
written by Executive Contributor

The race to host a central bank for the western Gulf region sees Bahrain and the UAE emerging as the top two candidate nations and, barring any more fanciers, one or the other is likely to be the location of a central financial institution for the Gulf Cooperation Council (GCC). If the organization achieves its 2010 target of monetary union, the choice will probably be either Abu Dhabi or Manama. The two cities are bidding hard.
Late entries, however, cannot be ruled out, with Saudi Arabia also tipped to enter the lists. News of this came at a routine meeting of the region’s central bankers in Abu Dhabi at the end of October 2006. During a break at this event, GCC Secretary General Abdulrahman bin Hamad al-Attiyah said that Saudi Arabia had not yet submitted a bid to host the institution, but elsewhere Hamad al-Sayari, the governor of the Saudi Arabian Monetary Agency (SAMA), said that this should not be taken as confirmation that his country would not throw its hat into the ring.

Saudis an expected entrant
Many had been expecting the Saudis to make the contest a three-horse race, with some analysts wondering if their current reluctance is tactical, as they awaited more details to emerge on the other two offers.
Others have pointed out that there is still plenty of time for the Saudis. Not only is 2010 some way off, but there are many in Gulf capitals who wonder at the likelihood of that target being reached. Skeptics argue that the GCC has not had a good track-record in working together on economic issues, as spats over Free Trade Agreements have illustrated.
Nonetheless, the “race” does give observers a chance to study the form. Abu Dhabi is certainly a strong contender, known as the economic and political powerhouse of the UAE and a key global player in energy and investment markets. This gives it a substantial financial and banking community and the resources to match.
UAE Central Bank governor Sultan bin Nasser Al-Suwaidi confirmed in late 2006 that the UAE bid was submitted well in advance of Bahrain’s recent counter-offer, an indicator of Abu Dhabi’s confidence that it will be the eventual winner.
Al-Suweidi also took the opportunity to propose that any single currency in the GCC should, in the longer term, lose its dollar-pegging. He argued that it would not make sense to have a single currency linked to a hard currency and that the currency should be free floating. He also dismissed an idea that it could be linked to a basket of currencies, arguing that within such a basket there would always be one dominant currency.
According to Steve Brice, senior economist at Standard Chartered Bank, in an ideal world, the Gulf Central Bank would be in a better position to set interest rates than the US Federal Reserve. He further said that there seems to be some acknowledgement of this within the region as long as central bank’s intentions were flagged in advance, so businesses can protect themselves against the different currency and interest rate exposures they might face.

Problems ahead for the union
One particular concern regarding the proposed union is the differing inflation levels in the various participating countries. The UAE has a much higher rate of inflation, for example, than Saudi Arabia. Of all the convergence criteria including public debt, currency reserves and interest rates, inflation will be the most difficult to meet before the single currency. Without it, the union will not work.
However, Muhammad al-Mazrouei, assistant secretary general for economic affairs at the GCC, is not worried. At a meeting of GCC central bank governors in Abu Dhabi in October 2006, he said that inflation is transitory and limited to certain sectors such as real estate. He further dismissed concerns over frailing to meet all the criteria, recalling that even the Europeans violated the criteria, and still launched a single currency.
But what about Bahrain? The island emirate also scores highly. While the kingdom lacks Abu Dhabi’s hydrocarbon clout, it has long been known as the Gulf’s financial and banking capital, with its lack of oil and gas obliging it to specialize in such sectors such as this. It has also emerged as the hub for Islamic finance in the region, while also possessing good economic transparency and a lack of excessive bureaucratic regulation. At the same time, the central bank of Bahrain’s stringent laws governing the local financial sector have also won praise internationally.
According to a new study conducted in the region by Dubai-based Fusion Marketing and Management in conjunction with a US company, SurveyMonkey, the organizers of the Leaders in Dubai Business Forum 2006, Bahrain ranks second only to Dubai for ease of doing business.

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Regional outlook

Regional banks on the rise but challenges loom

by Executive Contributor
written by Executive Contributor

Speaking at the MENA Economic Forum in Kuwait in November 2007, Ibrahim Dabdoub, CEO of the National Bank of Kuwait, declared that the “Arab banking landscape is being transformed” by the four horsemen of globalization, liberalization, technology and staggering regional growth. He noted that from now on, banks would have to prime themselves for competition and should seriously consider consolidation. “Success,” he said, would mean creating an ideal “economic, financial and institutional environment.” His words are as good a blueprint as any for the GCC banking sector in 2007.

Historically slow growth
Historically, conditions have stifled growth for Arab banks, but this is no longer the case. At the turn of 2007, the Arab banking sector finds itself, at last, in an environment conducive to sustained investment and strong economic activity that should persist until 2010. What has prompted this about-face? Among other factors are strong growth fundamentals, high liquidity and genuine moves to diversify and reform. And while oil prices remain high, there will be demand for lending as new and ambitious real estate developments are announced—and built—at a staggering rate. Both assets and revenues are set to increase, propelled by IPOs, bullish stock and property markets.
As profits boom, the new areas are emerging with strong growth potential. These break down into two categories: those that are already gaining momentum and those that show promise. In the former, there are new opportunities for corporate banking in an “energized” private sector and the financing of real estate projects, given the thriving commercial, office and residential markets. There’s also Islamic banking and brokerage and investment services as sectors to watch. In the “promising” category are on-shore private banking and wealth management services, as well as investment banking, which should accelerate as more family-owned businesses go public, new industries expand and private equity moves across borders. Finally, look for substantial prospects for financing oil, gas and infrastructure projects.
Nonetheless there are always challenges—maintaining bullish performance—and threats—bubbles and geopolitical risks in a region known for its turbulence. As local competition intensifies, weaker banks tend to move towards speculative lending without putting the necessary risk-reward structures in place. Capital markets are increasingly being used as alternative sources of financing; likewise, investment funds have begun to overtake low-cost deposits. Meanwhile, fiscal reforms and labor policies may actually have a negative impact on a low-cost sector that is already feeling the bite. Just as worrying is the threat that the technology sector, the WTO and market liberalization will open up profitable business segments to foreign banks that can, in turn, pick off local customers already looking for higher-quality service and better performance.
Attention should be paid to the underdeveloped regional operating environment, where the combined assets of all Arab banks are less than the total assets of Barclays Bank PLC. The environment is further limited by numerous structural weaknesses. A low spending capacity for development has held back innovation. Compared to their international counterparts, GCC banks invest relatively little in tech, and the regional human resources pool lacks real and sustainable talent. There is also an excessive dependence on interest income, while risk management and corporate governance remain weak.
Banks are employing a variety of strategies as they forge ahead, however. Some have sought out mergers with larger partners, while others have exploited niches such as Islamic and private banking to diversify revenue streams; as competitors seek to differentiate themselves, some banks have integrated strong IT platforms and process control. Furthermore, the culture and concept of corporate governance is slowly beginning to work its way into the banking consciousness.

New problems arise
However, these developments have spawned a new set of structural problems. They include speculative lending by smaller banks and an excessive number of new banks emerging that are liquidity-driven, rather than predicated on a real business plan or strategy. Meanwhile, effective asset and liability matching and large dividends in an era of rising capital requirements are also a concern. Also, in banking, at least, size does matter: smaller banks quite simply cannot compete with their larger, often foreign, counterparts. These competitors are financially stronger, better-equipped to absorb and diversify risk and technologically sophisticated, with a greater ability to innovate. They can also hire better bankers, often importing professionals from abroad—and raiding the best employees from local banks. In addition, several niches may prove vulnerable, such as private banking and wealth management, areas that offer new options to businesses that previously kept their wealth onshore.
With an ever-broader array of choices and products, customer loyalties in the Arab banking sector are set to be tested. Technological advances now offer customers greater options—and flexibility—in where they bank, and foreign banks tend to provide better access to capital markets, as well as strong experience in wealth management. These factors, especially in conjunction with generational transfers of wealth, could lead many customers to abandon longstanding family ties with local banks and move their business to more competitive foreign branches.
So what must Arab banks do to compete? First of all, they must recruit and train better-quality staff—from abroad if necessary—and improve their tech infrastructure. They also must be able to offer objective, comprehensive assessment of risks and rewards while coming in line with internationally accepted standards of corporate governance.

Banks must improve in order to compete
Success will also hinge upon improving core banking business, offering broader product lines, better advising services for clients, and strengthening their brands, in addition to improvements in the three most basic determinants for customer satisfaction: lower prices, better service and a higher level of convenience (both through wider branch networks and online banking services). Local banks should also play to their strengths, and highlight the value-added they can bring to the table, such as local market and customer knowledge and offering tailored services and products.
Much like the consolidation trend among Western banks in the 1990s, which saw the formation of “mega-banks,” Arab banks must also expand geographically, buying or merging with other banks in the region. To do this, governments and regulators should play an active role in ensuring the vitality of Arab banks by supporting the consolidation process across the region. However, they must be equally vigilant in preventing mergers that would create banks with too a large market share, threatening the stability of the sector, as well as those that could give foreign banks control over domestic sectors. They should introduce supervisory methods that suit new, larger banks, update local legislation on mergers and reform labor policies regarding layoffs as merged banks seek to maximize efficiency and productivity. Banks should also change their attitudes: acquisition targets have become limited due to the undervaluing of shareholders, paired with the tendency of controlling shareholders to overvalue their independence. Misplaced national pride and even tribalism present further challenges to expansion.


In addition, more basic issues also need to be addressed as banks eye the regional market. The Arab banking sector needs a degree of homogenity, especially in terms of labor, management, corporate governance, accounting standards and tax laws.
Yes, as Dabdoub said, the future competitiveness of Arab banks ultimately depends on the achieving the optimum economic, financial and institutional environment. This must be coupled with macroeconomic stability, bringing fiscal reform, privatization and market liberalization drives. In addition, more vigorous financial regulation and supervision must be implemented, to foster the kind of enabling institutional atmosphere banks need to operate effectively: a legal framework, a culture of corporate governance, genuine transparency and disclosure as well as greater emphasis on education and labor market reform.
Time will tell … but the clock is ticking.

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Regional outlook

Economic outlook for region

by Executive Contributor
written by Executive Contributor

looks good for 2007

Simply put, the economic outlook for the Middle East in 2007 is good. Investment flows, GDP projections, and international demand forecasts for the region’s export commodities, oil and gas, point to a year of growth for the Middle East-North Africa (MENA) region.
Within the forecast-happy pages of the World Economic Outlook (WEO, a product of the International Monetary Fund) the outlook for the Middle East region “generally remains favorable, given that oil prices are expected to remain high, and regional GDP growth is projected at close to 6% in 2006. With continued prudent financial politics and little growth in oil production, GDP growth is expected to moderate slightly to about 5.5% in 2007.”
These growth forecasts position the region well ahead of global averages for GDP developments in 2006 and 2007, which the IMF projects as 5.1% and 4.9% respectively. However, this big picture view easily crumbles into divergent and contradictory country details.
A look into country-specific assessments, such as the latest country risk summaries by the Economist Intelligence Unit (EIU) issued in November 2006, reveals assessments that are far apart. Oman gets solid “A”s for sovereignty, currency, banking, and economic structure risks. Iraq, however, receives straight “D”s in all these criteria.
Kuwait scores high in the finance-related risk categories, Egypt received risk assessments in the “B” range, Jordan was given a negative outlook on currency risk because of energy cost pressures, Syria got no more than a “CC” in political risk because of “Western antipathy to the regime” and potential sanctions over the Hariri investigation.
When examining Middle Eastern economic and socioeconomic prospects, it simply must be taken into account that this is not a region with so-called natural boundaries, but instead features plenty of unnatural boundaries, political and otherwise.
In consequence of this reality, even definitions of the region vary—implying from the start a less coherent picture of the Middle East as a world region than, say, North America, Oceania or Latin America.
These divergences make it more complicated to evaluate information such as the region’s position in global flows of foreign direct investments. The UNCTAD 2006 World Investment Report (WIR) credited Western Asia with having achieved the largest increase in FDI inflows worldwide with an 85% gain to a total of $34 billion. However, when breaking down the numbers, the WIR listed Turkey as one of the region’s major destinations for inward FDI flows, ranking it second after the UAE as the region’s top country for FDI inflows with $12 billion in 2005.
In all economic views on the however-defined region, oil features as the Middle East’s economic platform, unavoidably so because of its global importance as commodity and its dominant role as revenue source for the region’s most powerful economies. This means that oil economies traditionally have received a large share of analytical attention, even as large parts of the Middle Eastern population have historically been unable to benefit significantly from the oil economy.
The WEO, which groups the western Maghreb countries with Africa but Egypt and Libya with the Middle East, allocates a little under three pages to the Middle East in its 34-page chapter on country and regional trends.
Much of that space is dedicated to discussing how growing oil revenues have impacted and are likely to further impact producer countries, from reduction of government debt and improvements of the fiscal balance to inflationary pressures and risks of overheating of property prices and financial markets.
As the cherry on top of the cake, the WEO projects that the Middle East’s current account surplus will rise further to 23% of GDP in 2006—to around $280 billion—before starting to decline in 2007.
The region is indeed well positioned to do well in achieving return on its blessings, especially as the WEO asserts that the management of the oil-generated wealth has improved and “most countries have appropriately begun to use the opportunity provided by higher revenues to increase spending to address long-standing structural problems.”
The report expects that the Levant countries and Egypt will benefit from a supportive environment on both the regional and global levels, but acknowledged that near-term economic prospects for the region’s oil exporters are “generally more propitious” than for the energy have-nots.

Energy, money and blood
The sub-division of the Middle East into oil and non-oil based economies has been long standing and reveals sharp differences in areas such as GDP and current account surpluses.
But while it seems prudent to not entangle the regional identity issues into considerations of Middle Eastern economic growth prospects in 2007, it is necessary from an in-region perspective, to approach the outlook for the region’s diverse economies in the coming year not on a oil versus non-oil basis, but within a—perhaps somewhat provocative—triangle of the forces of energy, money and blood.
Energy is still the primary economic resource and export commodity of the region. Money reflects the productivity of the Middle Eastern economies in both their oil and non-oil segments. Blood, in a very figurative sense, represents the population development and human capital growth potential of these economies.
In another sense, however, the term blood can be used to symbolize the risks of intra-country, intra-regional and even extraneous armed conflicts targeting Middle Eastern countries—risks which have risen disturbingly in recent months.
The link between energy and money is very strong in the current period, much more so than in the final years of the last century when then Crown Prince Abdullah of Saudi Arabia urged the kingdom’s people to increase their efforts towards economic diversification. Exploitation of the energy resources oil and gas for a rather long period translated nowhere as easily into cash flow as it did in 2005 and 2006 and will, according to forecasts, in 2007.
From the economic outlook perspective, today’s renewed strong earning prospects of oil and gas exploitation and processing mean that more of the region’s countries are currently engaging in energy sector developments. In particular, the North African countries are aggressively prospecting new exploration blocks for oil and gas. At the same time, countries from one end of the region to the other are engaging in new refinery projects, expanding processing and often also transportation capacities for oil, gas or both.
These investments imply that the ratio of energy exporting to non-energy exporting countries in the region over the coming years will shift towards more producers and a wider spread of energy wealth.
Egypt has opened exploration concessions near its southern border and on its northern coast. Jordan, one of the main energy import dependent countries, has initiated exploration of its large oil shale deposits. Even Lebanon, where proven offshore gas reserves have remained untapped for non-economic reasons, has at least theoretical potentials to develop its energy resources as well as refining capacities.
In this context it has to be noted that the longer-term prospects of oil export-based economies are of course laden with their own question marks. Research by Credit Suisse recently investigated the sensitivity of oil producing countries to oil price changes.
CS found that the OPEC member countries in the EMEA region (Europe, Middle East, and Africa) derive about 77.5% of their fiscal revenues and 44% of their GDP from the oil sector.
According to the report, the nine countries—Algeria, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, and the UAE—face theoretical vulnerabilities to their fiscal and current account balances in 2007 if oil prices drop significantly, but the CS researchers considered the possibility as remote since the countries’ break-even prices for crude oil are significantly below the bank’s forecasted Brent oil price of $63 per barrel in 2007.
Excluding Iraq, Qatar would be most vulnerable to a decline in oil prices with a break-even price of about $47 per barrel in 2007, CS said, whereas Algeria, Saudi Arabia, the UAE, and Kuwait would not feel much pain before oil prices were to drop below $40, since their projected break-even prices range between $38.8 for Saudi Arabia and $22.4 for Kuwait.
In short, the energy exporters are not expected to run into any short-term danger of building new fiscal deficits. “Existing and potential fiscal reserves of the EMEA oil exporters suggest to us that the public sector’s debt-to-GDP ratio in these countries will likely continue to decline,” CS said.
On another note, however, a 10% decline in world oil prices would impact the current account balances of the regional energy exporters with some significance. In this regard, Saudi Arabia is the most sensitive, CS said, and 10% lower oil prices would impact its current account as percentage of GDP by -5.2%, followed closely by Qatar with a projected impact of -5.1%.
These pronounced potentials for direct influences of oil price fluctuations only underscore the importance of alternative money flows and investment strategies that are playing out in the region.
The annals of the developments funded with big money—new industrial cities in sectors such as petrochemicals and manufacturing, tourism-related real estate mega projects like Dubailand or the numerous new artificial islands along the Gulf, and entire new population centers such as the multi-billion dollar King Abdullah Economic City project in Saudi Arabia—are just writing in their forewords and first pages. In 2007 and the following years, these projects will start to unfold their economic performance, showing whether their strategies produce the expected returns.
In another manifestation of the liquidity impact on the entire region, intraregional flows of foreign direct investments in the sectors of real estate, tourism, finance, manufacturing, telecommunications, and services can be counted upon as development areas for channeling new or increasing flows of money, predominantly from the Gulf region to other parts of the Middle East.

Governance and structural improvements
According to the International Labor Organization, the unemployment rates for young people in the Middle East and North Africa are the highest in the world, with over one-fifth of the youth workforce having no jobs.
With so much new blood seeking to enter economic life every year, efforts to improve education, labor markets, business formation rates and social networks will have to be kept up and intensified.
The World Bank said in its Doing Business 2007 publication that 61% of countries in the MENA region implemented one or more positive reforms in 2005/06 that helped improve the business climate in the respective country.
MENA countries listed in the publication as achievers included Morocco, Egypt, Saudi Arabia, and Syria for improvements in business startup procedures; Kuwait and Morocco for registering property; Tunisia for protecting investors; Egypt, Morocco, and Yemen for paying taxes; and Jordan and Syria for improvements in cross-border trade facilitation.
However, with Saudi Arabia being the MENA country with the greatest ease of doing business—ranked 38 out of 175 in the worldwide charts—and Egypt as far down as rank 165, there is still more than enough room for Arab decisionmakers to improve productivity frameworks and business climates.
The same applies to the realm of national and corporate governance, where the September 2006 charts of the World Bank Institute show respectable performance values for GCC countries such as Qatar, Kuwait, Oman, the UAE and Bahrain, but still have many of the region’s other countries in the lower half (and Iraq in the bottom percentiles) of rankings by worldwide governance indicators such as the fight against corruption and the effectiveness of government, both of which are areas where performance improvements are proven economic growth boosters.
The final note of caution must belong to the security risk outlook. When Israel and Hizbullah entered into their open military confrontation in July of 2006, the capital markets in the Gulf region responded with substantial concern. Equally, as intraregional investments increase in size, the region’s big companies in the investment realm are becoming increasingly vulnerable to any deterioration of political stability in the MENA countries where they are investing.
The danger of new conflicts in any corner of the Middle East in the coming year is thus a major factor to consider. Whether it involves rumors of wars or civil wars, this risk, more than ever before, mandates policymakers and economic leaders in every country from Morocco to Kuwait to exert their maximum influence in working for regional stability as safeguard to realizing their countries’ economic and business growth.
If, however, the political risks are handled with efficiency, based on its GDP and investments outlook, the Middle East in 2007 will have high chances of private sector economic and business success for skilled individuals and smart companies, in areas reaching from education, tourism, hospitality and real estate to media and financial services.

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Whither Iraq?

by Christopher Allbritton
written by Christopher Allbritton

With the news from Iraq turning ever more savage, many in the Middle East were glad to see the Democrats take Congress from the GOP in November, delivering a well-placed rebuke to President George W. Bush. But make no mistake: the Democrats’ victory will not deliver any major policy shift, as the American Constitution grants Bush, for better or for worse, chief authority in matters related to foreign and military policy. So now, the discussion must turn to how the Democrats can influence or pressure Bush; they will not be making new policy on their own.
And that’s too bad, because Iraq needs a fundamental rethinking of American policy and goals. Staying the course has led to the destruction of a country, destabilization of the region and a massive human catastrophe with at least 150,000 Iraqis killed. Bush’s adventure in Iraq is a failure on an unprecedented scale.
One thing has already been rethought: Donald Rumfeld’s employment status. Robert Gates, the senior President Bush’s CIA director, is the new Secretary of Defense, but Rumfeld’s departure may be less a change of direction than an attempt to keep Rumsfeld from testifying before Congress when the Democrats take power in January.


So, what can we expect to see in the next year or so, both from Iraq and from the American presence there? It’s not pretty, because the president’s stubbornness has led the region into a cul-de-sac of bad choices that almost certainly will see either continued chaos and death or an empowered Iran and Syria. In either case, America’s grand plans for the region are finished.
The US will now leave Iraq with as much face as the Iranians and the Syrians will allow, which probably isn’t much. Indeed, the Iraq Study Group, headed by long-time Bush fixer, James Baker, and former Democratic congressman Lee Hamilton have already opened up backchannels to Damascus, as Syrian ambassador to Washington Imad Mustapha revealed in November. He told the study group “in detail what actual things we can do, and what are the things that we cannot do. We were very candid with each other.”
For the Americans, much depends on whether they are willing to meet their adversaries’ prices. For the Iranians, they will reign in the Shia militias if they can get a guarantee of supremacy in Iraq through the Shia-dominated government in Baghdad. Tehran has long sought to remove Iraq as a threat on its western flank, something allowing them dominance in the south and Baghdad will permit them to achieve. For Syria, they will halt their support for the Ba’athists financing and running the Sunni-insurgency in Iraq if they can have Lebanon back; it’s the economic ventilator for the wheezing Syrian economy.
In return, the United States gets to keep its army and take it home. Most of it, anyway.
But for the Iraqis, the future will be bloody. The Sunnis and their allies in the region will not be happy with Iraq being reduced to an Iranian client state. Indeed, in November, Adnan al-Dulaimi, head of the Iraqi Accord Front and one of the most powerful Sunni politicians in Iraq, called on the Sunni world to help their Iraqi co-religionists, “lest Baghdad become a capital for the Safavids,” he said. With such polarization, even if the US accedes to Tehran’s wishes, the sectarian civil war already raging will likely get worse when the Shia government doesn’t have US troops to attack Sunni insurgents. However, it will be brief; With Iranian support, the Iraqi Shia will show little mercy to their former tormentors.
As for Lebanon, well, the US will have its hands too full getting its army out of Iraq to support the March 14 forces in their attempts to face down Syrian machinations in the form of Hizbullah and Free Patriotic Movement putsches, although the slaying of Industry Minister Pierre Gemayel last month seems to have re-energized the movement. It may not be enough, however. Just as in 1990, the US will once again abandon Lebanon to the Syrians in exchange for the support of Damascus in Iraq, but this time Michel Aoun could be the beneficiary instead of the victim of America’s fickle affections.
And that is how Iraq likely ends, with both a bang and a gurgled whimper. Back in 2004, King Abdullah of Jordan warned of a “Shia Crescent” stretching from Tehran through Baghdad, Damascus and Beirut should the Shia win the elections in Iraq. They did, and the civil war in Iraq—along with the American public’s disgust at Bush’s handling of it—has grown so intense that in order to save the 140,000 American troops now stuck in the crossfire (and Republican electoral hopes in 2008) America now needs the help of the two countries it most hoped to pressure when it invaded in 2003. Iran will be the preeminent power in the Gulf, and the Sunni-dominated governments of Jordan, Egypt and Saudi Arabia will have to respond. Instability, regional arms races and a loss of American influence will be the order of the day.
Welcome to the New Middle East.

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Real estate

Q&A: Mounib Hamoud

by RabihIbrahim
written by RabihIbrahim

After a four-year-delay, Solidere has finally obtained the necessary permits to complete construction of the much anticipated 100,000m2 Souks retail Project in the Beirut Central District. In an exclusive interview with Executive, Mounib Hamoub (SPELLING??), Solidere’s (INSERT TITLE) outlines the details of the mammoth project as well as Solidere’s vision of how it will add a new dynamic to the heart of the new Beirut.

The Souks Project is a quite misleading name. What is exactly meant by the term?

Contrary to what many people think, the Souks Project does not refer to the souks in the traditional sense of the word. It is a high street retail area that is going to blend into the Beirut Central District and complete the retail scene. It is like the last piece of the jigsaw puzzle that had been missing so far.

When exactly did Solidere obtain the permits? And when will construction start?

The Souks project consists of a northern and southern part. We obtained permits for the southern part, which is the retail area. Works will start in January. As all underground facilities, including the parking, have already been completed, we only need to build the superstructure. Delivery time is some 16 to 18 months, so we expect the project to be completed in the summer of 2006.

How come you did not obtain permits for the project’s northern part?

The northern part consists of a cinema and department store. The design for the cinema stems from 1996 and just needs updating. The trend has changed. Today, a cinema needs to be done like an arena with at least 1.10 meters of leg space, so people can pass without stepping on each other. That’s why the initial plans had to be revised. The updated design for the department store has been handed in and we’re waiting for the final permits.

What can we expect in the retail area?

It will be a self-sustained and complete retail area with underground parking facilities for some 2,500 cars. The complex will be covered, but not like a traditional souq. It will be a pedestrian area with some 250 shops both inside the complex, as well as outside along the streets. The whole structure has a very beautiful architecture and will offer a clean and secure environment for the whole family, both day and night. As the area is constantly guarded, shops do not need any shutters, so people can even visit at night to go window shopping.

What will be the main retail features?

The area will have four anchors. First of all, there will be the jewelers’ corner, where most Lebanese and international jewelers have taken an option on both retail and office space. There will be no specialized streets in the area, but for security reasons, all jewelers will be based in one area. Jewelers at the souq are a major magnet. Shoppers from the region who have a personal relationship with jewelers will come to shop and then use the rest of the Souks. The second anchor will be a gourmet supermarket, which will be based in what used to be the old French souq. Thirdly, there is the cinema complex and fourthly a department store.

Is there demand for such a large development in the downtown area? What would be your immediate catchment area?

First of all, in residential terms, there is the Saifi Village, which has been a highly successful project with some 240 apartments sold. Then there are the seafront apartments, many of which have already been bought by high-end individuals. Zeitouni Street will become a residential area, geared up for both medium and upper income individuals. The same is true for the Wadi Abu Jamil area, while Zoukak al Blatt is already fully occupied. Secondly, there are some 3,500 hotel rooms on the western end of the project, which will be increased to some 5,000 in the near future. Visitors can walk from their hotel into town to go for a meal or to go shopping. Then, there is the business and public sectors. All government institutions are based in downtown. If you need to be at the finance ministry, at the prime minister’s office or at customs, you have to come to downtown. Most foreign embassies are located in downtown. Most Lebanese and foreign banks have their head office in downtown. The same is true for insurance companies. And there are all the Lebanese and foreign companies which have their offices here.

But in terms of office space, the BCD has so far not experienced the success as expected?

That’s a misconception. There is a lot of demand. Starco is full. Azariah is almost full. Atrium is full. In fact, 95% of all smart office space is occupied. This is why [Joseph] Mouawad is building a second Atrium. And, contrary to what people think, some 85% of all old buildings has been booked. The thing is that a lot of clients own office space, but haven’t moved in yet. At the moment, I have only five or six offices for rent. That’s it. And so, the situation for offices is similar to the residential one, where 95% is occupied and 5% is natural recycling.

Are you not afraid of competition with malls such as ABC in Ashrafieh and the new Admic mall in Dora?

Only time can tell what will happen, but I think the Lebanese retail market is becoming more mature. I think each has its market and critical mass.

In 2001, Admic was considering taking the department store plot and opening an outlet of the Les Galeries Lafayette? Are they still interested?

We’re currently talking to a number of international players. I can’t say more than that. 

Can you tell us about the pricing strategy.

That is also too early to tell, as we only got the permits a month ago. As soon as the tenant strategy has been determined, we can decide on prices.

A lot of people in the country have been wondering why it took so long to obtain permits. Maybe you can give us the definitive answer. Was it a political issue?

I’m not the one to ask this question. All I can say is that this is an extremely complicated project, with both private and public spaces. What’s more, we’re not just talking about constructing a building here. We’re regenerating streets and recreating the heart of the city, which not only promotes Beirut but the whole country, and which has to compete on a regional level. That’s why it received a lot of political attention from all sides.

Did you lose business because of the delay?

The Souks were always supposed to be the driving force, the engine, of the refurbishing of downtown. Today, Solidere has succeeded without. Already we have some 30,000 to 40,000 visitors a day, and these are people not living within the project. Especially when downtown Beirut will be residentially mature, the Souks will only complement what already exists and only push Beirut further into being a regional magnet.

Will Beirut be able to compete with for example Dubai?

It is not about competition. Dubai has its market and we have we ours. However, apart from things like climate, geography and history, Beirut as a retail and entertainment center offers one big difference with Dubai. I was in Dubai recently and ended up eating in the hotel restaurant for three days in a row. Not only was I tired from work, but it would take about 20 minutes to go to the restaurant of my choice. In Beirut you leave the hotel, go for a walk, and you have an overwhelming choice.

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Editorial

A year of tumultuous change and reversals

by Yasser Akkaoui
written by Yasser Akkaoui

Lebanon is still a wildcard in the Syrian deck. The Syrians know it and the Lebanese know the Syrians know it, so they will only have themselves to blame if they allow Damascus an entrée back into Beirut because of their inability to get along. Imagine the shame of being ruled—either directly or by remote control—by a regime they so successfully asked to leave in 2005. Oh, how long ago that heady spring now seems.

Destabilization in Lebanon will almost certainly give Damascus an opportunity to come in from the cold internationally and cut a deal with the US. It would see Damascus distance itself just enough from Tehran, use its influence to ease tensions in Iraq and rein-in the argumentative Lebanese, who by then will have proved they cannot handle fully-fledged independence. Such a deal would also realign Damascus with the Gulf states, who are investing heavily in Syria. The Baath has tasted the twin fruits of liberalization and FDI, and it likes them.

Politics is about pragmatism. Forget the doe-eyed girls in low-cut jeans who were the symbols of the Cedar Revolution. Those who believe the US will stand by a fractured Lebanon forever are dreaming. In 2007, it may be forced to surrender Lebanon—especially a Lebanon that has done itself no favors—to shore up Iraq.

Elsewhere in the region, the economies of the GCC continue to perform like thoroughbreds, and unlike in Lebanese politics, lessons have been learned. The conditions that led to the stock market correction—one that saw so many small investors get badly burned—have been identified. Economic growth has been so rapid that bigger institutional investors are now exposed to unprecedented risk, and measures are being adopted to stop them reoccurring. One way to do this is through wholly embracing the culture of corporate governance (currently the buzzword in regional banking). The signs are that, in the GCC at least, attitudes are changing.

But still there are storm clouds, albeit distant ones. The short and medium term future may be rosy, but the long term still needs to be addressed. Almost all the world’s enlightened nations have recognized the fact that fossil fuels are finite and already dramatically altering the planet with their emissions. For years now, they have invested in alternative sources of energy—wind, solar, water—in preparation for the day when oil becomes too expensive. By then, the GCC should have diversified into enough sectors to enjoy a seamless economic transition. When intensified conflict can send the price of fuel into the stratosphere, such diversification cannot come soon enough.

The nations of the GCC have shown they can adapt. For Lebanon, intransigence may be its undoing.

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Lebanon Outlook

Looking back – 2006

by Executive Staff
written by Executive Staff

January 2006

Beirut experiences a relatively muted new year after the killing of MP Gibran Tueni and the revelations of former Syrian Vice President Abdel-Halim Khaddam on Arabic satellite TV. Among his many accusations is the charge that Brigadier General Rustom Ghazaleh, acting as what he called Syria’s “viceroy” in Lebanon, stole $35 million from al-Madina Bank and regularly insulted and threatened Lebanese leaders. In another interview, Khaddam reveals that Syria sought Spanish mediation to prevent Security Council member-states from adopting Resolution 1559. In return, he offered to abandon his plan to extend President Lahoud’s mandate. British Foreign Secretary Jack Straw arrives in Beirut for talks with Prime Minister Fuad Siniora but does not see President Emile Lahoud. Siniora is locked in talks with Hizbullah leader Sayyed Hassan Nasrallah to resolve the Cabinet crisis. Local media reports that Belgian prosecutor Serge Brammertz will be named as successor of outgoing chief UN investigator Detlev Mehlis. Syrian President Assad announces he will not appear before the UN commission. The announcement comes as UN Secretary General Kofi Annan formally appoints Brammertz as successor to Mehlis in the UN probe into the slaying of ex-premier Rafik Hariri. Arab diplomatic efforts to find a solution to the crisis reach a deadlock as talks between Siniora and Hosni Mubarak in Egypt and Saad Hariri and Jacques Chirac in France strengthen resolve to reject any deal with Syria. The UN investigating commission questions brigadier Rustom Ghazaleh and his assistant colonel Samih al-Kasha’ami in Vienna. Israeli Chief-of-Staff Dan Halutz warns that Israel would strike at Lebanese infrastructure targets if his country felt it necessary. His words come at a time when tensions between Iran, which supports Hizbullah, and the Jewish state reach an all-time low. Riot police use tear gas and water cannon in Beirut’s Riad al-Solh square to disperse 250 pro-Syria demonstrators protesting the visit to Beirut by US Assistant Secretary of State for Near Eastern Affairs David Welch. In another anti-American demonstration, this time outside the embassy in Awkar, former legislator Zaher al-Khatib pledges allegiance to Iranian President Mahmoud Ahmadinejad, Assad and the Iraqi insurgency. The Agriculture Ministry insists all domestic birds, including poultry, be kept indoors following news of increased incidents of bird flu in Turkey. Official statistics reveal that 700 people died on Lebanon’s roads in 2005, a rise of 20%. Nasrallah calls on all Arab nations to help resolve the crisis between pro and anti-Syrian Lebanese factions that he says threatens to polarize the country and divide the government. The US Treasury freezes the assets of Syrian military intelligence chief Assef Shawkat, brother-in-law of President Assad, accusing him of being a sponsor of terror. US President George W. Bush meets MP Saad Hariri and reaffirms the United States’ support for Lebanon and its rejection of any deal that may compromise the country’s independence. Brammertz, the new head of the UN Hariri probe meets Lahoud, who calls for a swift conclusion to the investigation which he hopes will “uncover the terrorist plot that is targeting Lebanon.” Ghassan Tueni returns to Parliament to fill his son’s seat as Lebanon’s most senior MP Edmond Naim dies. He was 88. Michel Aoun’s Free Patriotic Movement announces that his party, in an alliance with Hizbullah, will contest Naim’s vacant seat in Baabda-Aley. Bosta, a musical comedy, takes top spot at the box office beating off competition from major foreign films. Malaysia-based Lebanese businessman Elie Youssef Najem tells officials in Kuala Lumpur, investigating his role in a bogus charity pledge, that he is worth $46 billion dollars and is Canadian lord and a Lebanese prince.

February 2006

Hizbullah joins Arab nations in urging Denmark and Norway to apologize for the defamation of Islam in their press through the publication of cartoons depicting the Prophet Mohammed. Norwegian diplomat Raymond Johansen meets Foreign Minister Fawzi Salloukh, calling the cartoon incident “unfortunate and regrettable.” Johansen’s apology does not appear to go far enough: the following Sunday, demonstrators from all over Lebanon descend on Beirut and set fire to the Danish consulate in Tabaris. Some 2,000 troops and police use tear gas and fire their weapons in the air in an attempt to calm the situation, but the protest quickly degenerates into mob violence. At least 30 people are injured, including policemen and firefighters. As Muslim clerics appeal for calm, protesters stone the nearby St. Maroun Church as well as attack cars and buildings in Ashrafieh. Danish embassy staff had been evacuated two days earlier, in anticipation of protests. During an emergency meeting of cabinet, the government apologizes to Denmark and Interior Minister Hassan al-Sabaa resigns. General Michel Aoun calls for the whole cabinet to step down. Over 300 people are arrested for their alleged role in the riot. The majority belong to the radical Islamist group, Osbat al-Ansar. Anti-Syria politicians launch a day of protest against Presidents Emile Lahoud and Bashar Assad as they address over 500,000 Lebanese in Martyrs’ Square to commemorate the one-year anniversary of former Prime Minister Rafik Hariri’s killing. Among the speakers are Saad Hariri, Walid Jumblat and Samir Geagea, all of whom, after paying tribute to Hariri and others killed during 2005, pledge to remove the president, whom they refer to as the “symbol of domination.” At 12:55, the exact time of the blast, the crowd observes a minute’s silence. Aoun’s Free Patriotic Movement, Hizbullah and Amal all send representatives. The next day, Telecommunications Minister Marwan Hamadeh says that members of the March 14 coalition have commissioned legal experts to prepare a constitutional text that would enable parliament to end Lahoud’s term, as US Secretary of State Condoleezza Rice hints that Lahoud should step down. Meanwhile, a statement from Baabda palace says that, “the president is determined to live up to his oath until the very last moment of his constitutional mandate.” Saad Hariri accuses Lahoud of being complicit in his father’s assassination. Lebanon plunges into further political crisis as 17 out of the 24-member cabinet refuse to attend the weekly cabinet meeting at Baabda. That same day, Hassan Nasrallah demands the crisis be solved by “broad national dialogue.” The events unfold as Condoleezza Rice visits Lebanon to hold talks with Prime Minister Fuad Siniora and meets Salloukh, Maronite Patriarch Nasrallah Sfeir, Druze leader Jumblat and Saad Hariri. She does not see Lahoud The March 14 coalition drafts two petitions to invalidate the legitimacy of the presidency and remove Lahoud from office. One is signed by 14 deputies who swear they were forced by Syria to vote in favor of the extension of Lahoud’s term. The presidency has warned that the Presidential Guard Brigade would not hesitate to use force in the event of mass protests at Baabda. Meanwhile, Nasrallah says that Hizbullah’s weapons would only be used to defend Lebanon, not the Shia community. Aoun accuses the March 14 coalition of abusing its position by calling for the ousting of Lahoud. After DNA testing, human remains found in Anjar are positively identified as those of French hostage Michel Seurat who was abducted in Lebanon in 1985. A news story in Al Anwar reports that Lahoud believes Israeli agents, masquerading as Syrian assassins, are plotting to kill him.

March 2006

Along-awaited national dialogue begins at the parliament building, bringing together political parties and leaders, many of whom have not met for years. They include Hassan Nasrallah, Walid Jumblat, Saad Hariri, Michel Aoun and Samir Geagea as well as Prime Minister Fuad Siniora and Speaker Nabih Berri. Shops and businesses in the BCD are shut for the duration. Ghassan Tueni and Michel Murr are chosen to represent the heavily contested Greek Orthodox representation. Three pro-Syrians are excluded at the request of the March 14 leaders. In an opening speech, Berri announces that the three main topics for the dialogue include uncovering the truth about Rafik Hariri’s assassination, UN Resolution 1559 and Lebanese-Syrian relations. He says that the issue of President Emile Lahoud’s resignation will also be discussed as it falls under Resolution 1559. Lahoud is not invited to the conference. As the talks enter their fourth day, there are reports that participants have already agreed on the ending President Lahoud’s term. Geagea announces “The current presidency is over. We are in the process of searching for a new president.” Meanwhile, Finance Minister Jihad Azour calls on leaders at the national dialogue to add economic issues to their already-packed agenda, declaring that “the constructive and positive dialogue will not be comprehensive if it does not address economic problems and social concerns raised by the citizens.” The national dialogue stalls following a dispute between Druze leader Walid Jumblat and Hizbullah’s Hassan Nasrallah. It resumes six days later, after Jumblat holds talks in Washington with Secretary of State Condoleezza Rice and other high-ranking US officials. In New York, he meets UN Secretary-General Kofi Annan and ambassadors for the five permanent members of the Security Council. He calls on the US to intensify pressure on Syria to free Lebanon from Damascus’ influence and calls on Hizbullah to behave like other militias and surrender their arms. Meanwhile, after much lobbying from restaurant and bar owners, downtown opens for business as the national dialogue resumes. However, owners remain pessimistic as parking restrictions and road closures remain in force. Lebanese Forces leader Samir Geagea has said that the anti-Syria coalition may have to return to its original plan to oust Lahoud through street protests if national dialogue talks fail to resolve the issue. Syrian President Bashar Assad calls the March 14 leaders “useless instruments” in the hands of foreign powers that use them to undermine Syria and Hizbullah. The body of Frenchman, Michel Seurat kidnapped more than 20 years ago in southern Beirut, is flown to Paris with full military honors. The UN commission investigating Hariri’s assassination publishes a new 25-page report in which it says it is closer to understanding the circumstances surrounding the killing. 10 Lebanese soldiers killed during the 1975-90 civil are buried with full military honors after an official ceremony at a military hospital. They are awarded the Badge of War and the Wounded. Assad agrees to meet the UN Hariri commission but stresses it is a “meeting” not an “interrogation.” Annan says that a mixed Lebanese and international court should be convened to prosecute those charged in the Hariri assassination. Interior Minister Ahmed Fatfat announces that Pierre Dakkash has won an uncontested parliamentary seat in the Baabda-Aley by-election. Forbes lists Hind Hariri, the daughter of the late Rafik Hariri, as the world’s youngest billionaire with a fortune of $1.4 billion. The Free Patriotic Movement announces it will create an independent TV station. Bekaa poultry farmers stage protest at recent losses incurred by the bird flu scare, dumping eggs and live chickens.

April 2006

President Emile Lahoud and Prime Minister Fuad Siniora argue over a draft resolution pledging support for Hizbullah during a session of the Arab summit in Khartoum. Siniora demands the removal of the clause that pledges support for the armed “Lebanese resistance.” Earlier, Syrian President Bashar Assad and Lebanese Siniora shake hands on the sidelines of the Arab summit in Khartoum, despite heightened tensions between the two neighbors. Later in the week, a cabinet meeting ends in pandemonium after ministers from the March 14 coalition, in particular Telecom minister Marwan Hamadeh and Interior Minister Ahmed Fatfat, hurl abuse at Lahoud before walking out. The incident, captured live by local news cameras, threatens a political crisis, coming just two days after the spat in Khartoum. Things get worse for the president as Patriarch Nasrallah Boutros Sfeir, talking to the French magazine Le Point, says Lahoud is no longer fit to fill the country’s top executive post. Finance Minister Jihad Azour announces the successful closing of a five-year, LL400 billion ($265 million) bond with a yield of 9.4% to further finance the public debt. The tourism ministry also has good news, proclaiming that nearly 70,000 tourists visited Lebanon during February, a 40% year-on-year increase. The Lebanese poultry market claims a 50% contraction since January due to the nationwide fear of avian flu. The news comes as poultry farms in southern Lebanon are hit by a less dangerous H7 form of the virus. US Ambassador Jeffrey Feltman says that Lebanon‘s economy is living on “borrowed time,” as the European Union urges Lebanon to speed up the launch of its long-awaited economic reforms. Meanwhile, Solidere announces net profits of $108.5 million for 2005. The figure is double the $54.1 million achieved in 2004. US Secretary of State Condoleezza Rice, speaking in Washington, says that the biggest problem faced by Lebanon is Hizbullah and its relationship with Iran and Syria. Siniora meets US President George Bush and and urges an Israeli withdraw from the disputed Shebaa Farms as Saad Hariri holds talks with French President Jacques Chirac, who urges Lebanon to adopt economic reforms and calls on the international community to boost economic support for Lebanon. Meanwhile, Michel Aoun asks the parliamentary majority to apologize to Lahoud for insulting him and invites him to participate in national dialogue talks. The General also predicts the disintegration of the March 14 anti-Damascus alliance when the national dialogue resumes. The finance ministry announces that the government has abandoned plans to issue $850 million worth of Eurobonds after former mobile phone operator, LibanCell, seeks court action to freeze assets of the Lebanese government abroad, claiming it is owed $266 million by the state. Siniora says he believes that Lahoud is “not free” to resign, hinting that Syria may harm him if he steps down. A delegation from Hizbullah visits Tehran where it meets Iranian President Mahmoud Ahmadinejad to congratulate him on his country’s success in uranium enrichment. March 14 politician Walid Jumblat says he expects more security alerts in the run-up to the next report by the United Nations team investigating the murder of ex-Prime Minister Rafik Hariri. Australian-Lebanese crime boss “Fat” Tony Mokbel flees Lebanon after being convicted of drug trafficking and suspected of involvement in gang killings in Australia. Three lucky ticket holders win almost $5 million in prize money as the Lotto numbers are drawn. A Roman burial cave containing a human skeleton, gold leaves, glass rings and other artifacts is discovered by laborers in Baalbek. They are left unattended and later stolen.
May 2006

Lebanon’s leaders once again fail to agree on the fate of President Emile Lahoud and the issue of Hizbullah’s weapons. Speaker Nabih Berri refuses to confirm reports that four presidential candidates—Michel Aoun, Nayla Mouawad, Boutros Harb and Nassib Lahoud—were proposed during the session. The talks are adjourned until May 16, but that dialogue also ends in stalemate and is further adjourned until June 8. Lebanon gives a one-year extension to the mandate of chief UN investigator, Serge Brammertz, who is leading the probe into former Prime Minister Rafik Hariri’s assassination. Solidere announces that a Kuwaiti investment group intends to build a $1.3 billion, 206,000m2 (BUA) mixed-use development in the BCD as Solidere chairman Nasser Chamaa says he expects the company’s net profits in 2006 to exceed the $108.5 million earned in 2005. Berri receives a summons, instructing MPs Walid Jumblat, Saad Hariri, Marwan Hamadeh and journalist Fares Khashan to appear before a Syrian military court to answer charges of inciting regime change. More than 5,000 demonstrators, march through Beirut to mark Labor Day. Prime Minister Fuad Siniora discusses financial reform with British Chancellor of the Exchequer Gordon Brown on the first day of an official two-day visit to London. He later meets British Prime Minister Tony Blair, whom he asks for support in solving the Shebaa Farms dispute. Speaking to supporters during a rally to mark the anniversary of his return to Lebanon from exile, Aoun launches his strongest attack on the anti-Syrian parliamentary majority and calls for the resignation of the Siniora government. Later that week, 200,000 teachers, students and workers, backed by Hizbullah and the Free Patriotic Movement, march peacefully through the streets of Beirut to demonstrate against the government’s economic policy. Tourism Minister Joe Sarkis says he expects 1.5 million tourists to visit Lebanon this year. Speaking at the Arab Economic Forum in Beirut, Siniora vows to move ahead with economic reforms aimed at cutting budget deficits and public debt, despite the public demonstrations against his government’s policies. Later Siniora, assures concerned investors that the government is tackling the issue of corruption, acknowledging that poor management in public sector was behind the problem. Meanwhile, Nabil Itani, the head of the investment Development Authority of Lebanon (IDAL) predicts that foreign direct investment will reach more than $2 billion by the end of the year. Patriarch Nasrallah Boutros Sfeir says that Lahoud may resign if there is proof of his involvement in the spate of political killings that dominated 2005. The statement comes after MP Saad Hariri says he would support any candidate for the presidency if he were backed by the Patriarch. Meanwhile, Siniora welcomes a UN Security Council resolution calling on Syria to establish formal diplomatic ties with Lebanon and to demarcate the common border. Clashes between the army and Syrian-backed Palestinian gunmen near the border with Syria leave one soldier dead and one guerrilla seriously wounded. Facing a strike by the nation’s bakers, Economy and Trade Minister Sami Haddad decides to maintain the price of bread at LL1,500 but to reduce its weight by 100 grams to 1,300 grams—in effect, removing one slice of bread from the loaf. Saad Hariri visits Russia where he holds talks with President Vladimir Putin. Rana Koleilat, a major suspect in the Al-Madina Bank scandal, says she is ready to talk to the UN team investigating the killing of Hariri. Nazik Hariri, the former prime minister’s widow, denies television reports that she offered jewelry to Bernadette Chirac, wife of the French President. Maxim Chaya becomes the first Lebanese to climb Mount Everest. Six Israeli warplanes fly over Tyre, Naqoura, Bint Jbeil and the Shebaa Farms, drawing fire from Lebanese anti-aircraft batteries.

June 2006

The judicial team charged with discussing the international tribunal to try suspects in the assassination of ex-premier Rafik Hariri leaves for New York for talks on the nature and scope of any future court established to try the crime. Meanwhile, UN Secretary-General Kofi Annan expresses concern at the cross border clashes between Hizbullah and the Israeli army and calls on all parties to exercise maximum restraint. Later, the Israeli Army claims to have killed three Hizbullah fighters who crossed into Israel during clashes with its troops. In a letter to the UN explaining the details of the clashes, Fuad Siniora says that as long as Israel continues to occupy Lebanese territory, Hizbullah will keep up its operations against the Jewish state. Several thousand Hizbullah supporters take to the streets in Beirut’s southern suburbs, burning tires and blocking roads, including the airport highway, in protest against Bas Mat Watan, a TV comedy show that satirized the group’s leader Hassan Nasrallah. Political leaders resume the National dialogue amid rows over the disarmament of Hizbullah. Lebanese leaders once again put off any decision on the issue but agree on a “pact of honor” aimed at defusing tensions between pro and anti-Syrian factions. US Assistant Secretary of State for Near Eastern Affairs David Welch says that “there is a strong presumption” that Syria is responsible for the assassination of Hariri and urges Damascus to cooperate with the investigation. Former Prime Minister Omar Karami announces the formation of the Lebanese National Gathering, a new political front, and sets its first priority as the toppling of the Siniora government. Allied with him are at least 25 pro-Syrian officials. Authorities announce that a burial site in the east Lebanon town of Anjar, originally believed to be a mass grave for victims of Syria’s military presence, is actually a graveyard dating to the 17th century. Speaking at the end of a three-day Maronite synod, Cardinal Nasrallah Boutros Sfeir calls for Lebanon’s Christians to close ranks and urges them to seek better relations with themselves and other Lebanese. Former Lebanese Cabinet Minister Suleiman Franjieh officially launches his new Al-Marada party in his hometown of Zghorta with representatives of Hizbullah, Amal and the Free Patriotic Movement in attendance. Druze leader Walid Jumblat, renews his anti-Syrian vitriol, saying “there will be no settlement, no pact of honor and no peace with the tyrants of Damascus, with those who have violated Lebanon’s independence and killed its free men.” Meanwhile, Abdel-Halim Khaddam, the former Syrian vice president, says he has evidence that the Syrian president Bashar Assad was responsible for Hariri’s killing, telling a Saudi newspaper that he has all the documents that incriminate the illegal policy of the Syrian regime. Solidere approves $100 million in cash dividends ($0.60 per share) to its shareholders after recording a net profit of $108.5 million in 2005. Israeli Prime Minister Ehud Olmert tells French President Jacques Chirac that Israel would pull out of the Shebaa Farms border region if the area officially comes under Lebanese sovereignty. Romania invites Siniora to represent Lebanon at a Francophone summit in Bucharest but does not extend invitation to Lahoud. Ain Mreisseh is shaken by a Saturday night gun battle between bodyguards of President Lahoud’s younger son, Ralph, and those of Walid Jumblat’s stepson following a row over who should go first on a traffic light. Meanwhile, Interior Minister Ahmed Fatfat denies charges by Muslim clerics that the government has approved a gay rights group and two nudist beaches. After much anxious waiting, Lebanese viewers learn they will be able to watch the World Cup on local TV.

July 2006

Just as what promises to be a bumper tourist season gets into its stride, Israel launches a massive air, ground and sea bombardment on south Lebanon, Beirut and other areas of the country. The attacks come after Hizbullah fighters capture two Israeli soldiers and kill eight others along Lebanon’s border with the Jewish state. In the first major strike against infrastructure targets, Beirut airport’s three main runways are bombed sending panic-stricken tourists fleeing via Syria and Jordan. Hassan Nasrallah declares “open war” as he emerges unscathed after air strikes on his home and office in Beirut. As Lebanon is increasingly cut off from the outside world and systematically dismantled by Israeli air strikes, the foreign embassies evacuate their citizens, which include many Lebanese with dual nationalities. Shop shelves empty as people scramble to stock up on basic necessities and many Beirut residents seek safety in the mountains. Prime Minister Fuad Siniora declares Lebanon a “disaster zone,” as Nasrallah vows to wage an unrestrained campaign against Israel. For his part, Israeli Prime Minister Ehud Olmert announces “nothing will deter us.” At their summit in St. Petersburg, the G8 group of nations calls on both sides to end the fighting. Thousands of villagers flee the South of the country, seeking refuge in the southern port city of Tyre after Israel orders residents to evacuate the border area, warning of more attacks. Despite urgent appeals for restraint, international diplomatic efforts to halt the fighting fail. US President George Bush blames Hizbullah for the escalating violence and calls on Syria to rein in the group. Middle East Airlines (MEA) announces it is transfering operations to Damascus after the closure of Beirut airport. Siniora tells the international community, “I hope you will not let us down. We, the Lebanese want life. We have chosen life. We refuse to die.” The UN says 500,000 people are displaced in Lebanon. “Our situation is tragic,” declares Lebanese Health Minister Jawad Khalife. “Hospitals across Lebanon are suffering medicine and fuel shortages.” The central bank announces that Lebanon’s currency is stable and its reserves remain liquid. Meanwhile, fierce fighting continues as Israeli ground forces push into Lebanon, heading towards Bint Jbeil. They momentarily capture the town but lose nine soldiers in the fighting. Israeli warplanes also continue raids across Lebanon. In an interview, Nasrallah vows that deeper Israeli incursions will not stop his group from firing rockets into Israel. Asked about diplomatic moves to end hostilities, Nasrallah says: “We do not feel that we are currently interested in discussing ideas or initiatives.” Later in the week however, he announces that “the priority is to stop the Israeli aggression, and when things reach the phase of serious discussions over ideas and initiatives we will be ready to propose our ideas.” US Secretary of State Condoleezza Rice makes a surprise visit to Lebanon to launch further diplomatic efforts to resolve the conflict. After meeting with Siniora, she heads to Israel. More than 20 people are killed, the majority of them children, when Israeli warplanes bomb the village of Qana. There is global outrage and, across the region, angry crowds take to the street demanding revenge. Rice, whose Middle East mission is thrown into turmoil by the attack, once again calls for a ceasefire. Olmert, tells his country there will be no ceasefire. Ex-president Elias Hrawi, who oversaw the implementation of the Taef peace accord and who steered the country through reconstruction between 1989 and 1998, dies at the American University of Beirut hospital. He was 80.

August 2006

Belief organizations declare the suspension of activities in South Lebanon following Israel’s warning that all moving vehicles will be considered targets. The government announces it will deploy 15,000 soldiers in the south when Israel withdraws. In Jerusalem, the Israeli military announces it wants to broaden its ground offensive then appears to put such a move on hold to allow diplomatic efforts to continue. A ceasefire between Israel and Hizbullah comes into effect at 08:00AM local time on Monday August 14, but not before 42 Lebanese and five Israelis soldiers are killed in the hours leading up the cessation. Israeli Army Radio says the naval and air blockade will remain in effect for the present. Just before the ceasefire, Israeli warplanes drop leaflets over Beirut blaming Hizbullah and its Iranian and Syrian “masters” for the destruction in Lebanon. The timing for the cessation of hostilities was announced by UN Secretary General Kofi Annan two days earlier, following the adoption of Security Council resolution 1701, which had called for the deployment of an international peacekeeping force in South Lebanon. Both the Israeli and Lebanese governments endorse the resolution, but Hizbullah leader Hassan Nasrallah says that while his fighters would abide by any ceasefire, they will continue to fight as long as Israel still has soldiers on Lebanese soil. Israel’s army chief of staff Dan Halutz says that Israeli troops may remain in south Lebanon for months, in response to an assessment by his own intelligence chiefs who say it may take that long for the UN troops to deploy. Still, as Israeli troops pull back to their border, for the first time in nearly 30 years 15,000 Lebanese soldiers take up positions in South Lebanon in line with Resolution 1701. Hizbullah claims a stunning victory despite the losses. Fuad Siniora says the operation will impose the government’s authority on the region south of the strategic Litani river. “There will be a single state with the sole decision-making power,” he says. “There will be no dual authority and there will be no off-limit regions for the army.” Meanwhile, the issue of the legitimacy of Hizbullah’s arms persists. President Emile Lahoud announces it is “shameful” to ask Hizbullah to disarm as it is “the only force in the Arab world that was able to stand up to Israel.” Cars jam roads to the South as thousands of refugees stream back to towns and villages. Sweden says it will host an international aid conference for Lebanon on August 31 with representatives of 60 governments and organizations taking part. CDR boss Fadl Shalak announces that war damage totals $2 billion for buildings and $1.5 billion for infrastructure. Later, talking to New TV, Nasrallah announces that if he had known the capture of the two Israeli soldiers would lead to war, he wouldn’t have ordered it. UN Secretary-General Kofi Annan arrives in Beirut as part of an 11-day tour of the Middle East. He demands that Hizbullah release two captured Israeli soldiers and Israel lift its blockade of Lebanon. Italy agrees to send 2,500 troops to take part in the expanded UN peacekeeping mission in southern Lebanon and approves a $38.4 million aid package. The US also says it is pledging an additional $230 million to help the Lebanese rebuild their homes and return to their towns and communities. Syria’s President Bashar Assad says that he would consider the deployment of international troops along the Lebanese-Syrian border as hostile towards his country. The war leaves at least 1,287 people, nearly all civilians, dead and 4,054 wounded. At least 1,140 civilians—30% of them children under 12—have been killed along with 43 Lebanese soldiers and police.

September 2006

Israel’s blockade of Lebanon continues. France prepares to play a more robust role within UNIFIL by rolling out heavy tanks, artillery and radar systems. US civil rights leader Jesse Jackson meets Hizbullah officials in Lebanon and calls for proof that the two captured Israel soldiers are alive, while Lebanese MPs, led by speaker Nabih Berri, embark upon on a round-the-clock sit-in to protest Israel’s blockade. The Jordanian government initiates a three-month taxes and tariff exemption for Lebanese trucks entering and exiting Jordan. Canada pledges $1.8 million to clean up oil spills off the Lebanese coast and help boost the fishing sector. British Prime Minister Tony Blair arrives in Lebanon for talks with Premier Fuad Siniora. He is met by angry demonstrators gathered in the center of Beirut to protest the UK’s stance on the war. Finance Minister Jihad Azour announces that the war and the blockade have increased Lebanon’s public debt to $41 billion. Hoever, the ratings agency Standard & Poor’s announces that the Lebanese economy and public finances have weathered the impact of the conflict and removes Lebanon from its Credit Watch list. Hizbullah says it would accept UN peacekeepers as long as they stick to defending Lebanon against Israel. However, French commander General Alain Pellegrini hints that his soldiers would disarm the group if the Lebanese army does not. The mayor of Baraasheet, a Hizbullah town 10 kilometers from the Israeli border, issues a warning to the UN soldiers if they try to disarm Hizbullah: “We will inflict even greater losses on them than we did on the Israelis.” Riad Salameh wins the Euromoney award for world’s best central bank governor in recognition for his fiscal management during the war. UNESCO confirms that three of its Lebanese World Heritage sites—Byblos, Baalbek and Tyre—are in urgent need of repair. Hizbullah leader Hassan Nasrallah makes a rare public appearance to address a huge rally in Beirut’s southern suburbs. He rejects calls for Hizbullah to disarm and boasts it has over 20,000 rockets still at its disposal. Nasrallah, hitting out at March 14 alliance, also claims that the resistance is “stronger than ever.” Interviewed on the Orbit satellite channel, Siniora hits back, claiming that Hizbullah caused the “re-occupation” of Lebanon. He also insists that the army will never allow any armed presence along Lebanon’s southern border. Meanwhile, speaking at a rally to remember Lebanese Forces members killed during the 1975-1990 civil war, Samir Geagea challenges Hizbullah and its followers to prove fealty to Lebanon and accept national unity before demanding a new government. In his most recent report, Chief UN investigator Serge Brammertz corroborates the theory that ex-Premier Rafik Hariri was killed by a suicide truck bomb but does not say who ordered it. Mohammed Zuhair Siddiq, a Syrian national suspected of involvement in the assassination of Hariri, claims that both Syrian President Bashar Assad and his Lebanese counterpart Emile Lahoud ordered the killing. Speaking to French newspaper Le Monde, Defense Minister Elias Murr says the government is ready to integrate Hizbullah fighters into a regular army brigade that would patrol villages in the South. At the joint World Bank/IMF annual meeting in Singapore, the World Bank approves a grant of $70 million for a Trust Fund for Lebanon to support the government’s reconstruction efforts. The funds will come from the Bank’s surplus and will not add to the national debt. Turkey says it will provide up to 1.4 billion kilowatt-hours of electricity to Lebanon to make up any shortfall created by the war. Fishermen in the southern port city of Tyre complain that their nets are filled with bombs and missile parts.

October 2006

Speaking at an iftar in Beirut, Lebanese Parliamentary majority leader Saad Hariri rejects any change in the make-up of Premier Fuad Siniora’s cabinet following Hizbullah calls for a government of national unity. Lebanese army helicopters begin patrolling the Lebanon-Syria border for the first time in an attempt to prevent smuggling operations, as the UN announces that there are up to 1 million unexploded Israeli cluster bombs in south Lebanon. They kill, on average, three civilians each week. US Secretary of State Condoleezza Rice warns of possible assassination attempts on Lebanese politicians allied to the March 14 alliance. During a brief visit to the Arab state, Siniora thanks the people of Kuwait for their financial assistance after the emirate agrees to deposit $500 million with Lebanon’s central bank and grants Beirut $300 million in post-war reconstruction aid. Malaysia Airlines announces it is resuming flights to Beirut. Israel is accused of stealing water from the Wazzani River. Speaker Nabih Berri visits Saudi Arabia in a bid defuse political and sectarian tensions affecting Lebanon. Speaking to an-Nahar, the leader of the Lebanese Free Patriotic Movement MP Michel Aoun says that he will wear out Siniora and will not let him rest until he leaves office. Six civilians are slightly hurt when a rocket hits a building next to the UN’s Beirut headquarters and Siniora’s offices. Speaking at a news conference to mark the anniversary of the Syrian-led military offensive that ousted him from power on October 13, 1990, Michel Aoun accuses the government of corruption and once again calls for a government of national unity and normal relations with Syria. Later, the government announces it has put together an $80 million package to compensate families whose homes were destroyed in Beirut’s southern suburbs during the war and begins distributing the first state aid for rebuilding the South in a program that will eventually cost $600 million. Meanwhile, Arab finance ministers approve a series of recommendations and measures to support the Lebanese economy and call for strong Arab participation in next year’s international donor conference on rebuilding the war-battered country. Former Syrian Vice President Abdul-Halim Khaddam once again predicts that President Bashar Assad’s regime will collapse and calls on Syrians to prepare for the day when he will be overthrown. As Oman and the EU pledge a total of $88 million to Lebanon’s reconstruction fund, the Central Bank Governor Riad Salameh says he hopes for at least $500 million or more in soft loans from international sources to revitalize the private sector. The Beirut port begins upgrading its cargo-inspection system with the installation of a new mobile X-ray scanner that will speed up the clearance of goods in and out of the country and limit smuggling. Carlos Ghosn, the Lebanese-Brazilian CEO of the Nissan Motor Co. is appointed Honorary Knight Commander of the British Empire for his contribution to the economic development of Japan and Britain. A small bomb is tossed from a speeding car in the Beirut district of Ramlet el-Baida starting a small fire. There are no reports of injuries. Albanian Prime Minister Sali Berisha says his government is willing contribute peacekeeping troops to Lebanon. Sixteen Lebanese women and children who were injured in the war leave Beirut for Italy, where they undergo treatment for their wounds. Beirut MP Ghassan Tueni is shortlisted for the EU Human Rights Prize. The Dutch media circulate reports that Lebanon is among a handful of countries importing Dutch sheep, despite an outbreak of bluetongue disease.

November 2006

Lebanon’s political leaders meet for the first time in nearly five months with Hizbullah leader Hassan Nasrallah threatening street demonstrations if the round table dialogue fails to produce a national unity government. He accuses the parliamentary ruling majority of seeking to use UNIFIL to disarm Hizbullah, calling the alleged plan “an American-Israeli demand.” MP Ghassan Tueni proposes a parliamentary petition calling for the resignation of President Emile Lahoud as Defense Minister Elias Murr deploys 20,000 troops across Beirut to deal with any civil disturbances and Iran says it is ready to equip the Lebanese army with anti-aircraft weaponry. The central bank predicts that inflation will rise to 7% by the end of 2006. Fransabank becomes the first Lebanese bank to operate in Algeria and the world’s first qualification covering all aspects of Islamic finance is launched in Britain in a joint British-Lebanese initiative. Lebanon signs a $71 million grant agreement with the World Bank for post-war reconstruction. Transparency International announces that Lebanon has witnessed a considerable improvement in perceived levels of corruption, ranking 83rd out of 163 countries. The Lebanese government and the UN release a joint report on the quality-of-life indicators in Lebanon. One of the findings is that the proportion of “poor” families in Lebanon has dropped from 31% in 1995 to 25% in 2004. Five Hizbullah and Amal ministers resign from the cabinet, igniting a constitutional dispute between Lahoud and Prime Minister Fuad Siniora. Environment Minister Yaacoub Sarraf, who is close to Lahoud, also resigns, becoming the 6th cabinet minister to quit. Lahoud claims that the cabinet cannot vote to endorse a UN draft text calling for an international tribunal in the assassination of former Premier Rafik Hariri without a Shia presence. Nasrallah boycotts the government and vows to establish a “clean government.” In talks with speaker Nabih Berri, Iran’s supreme leader Ayatollah Ali Khamenei says the US and Israel will be defeated in Lebanon. Trade unions and syndicate heads urge the country’s politicians to stop bickering and work towards economic recovery. Meanwhile, the hotel owners syndicate warns that street protests will completely ruin the end of year tourism after heavy losses in the summer war. Nasrallah, in a televised speech, urges his supporters and anti-Syrian factions to be psychologically ready for street protests to demand a national unity government. Druze leader Walid Jumblat warns that Lebanon is on the verge of a coup d’état. One day later, Industry Minister Pierre Gemayel and his bodyguard are gunned down in his car in Beirut. He is the sixth outspoken opponent of Syria to be assassinated in two years. At his funeral, attended by hundreds of thousands of mourners, his father, former president Amine Gemayel, announces that the “countdown for the election of a new president has started.” French Foreign Minister Philippe Douste-Blazy and Arab League chief Amr Moussa are among the dignitaries who attend the downtown service. In a message read at the funeral, Pope Benedict XVI condemns the killing, calling it “unspeakable.” Gemayel’s casket, wrapped in flags of the Phalange party and Lebanon, is taken to his home in Bikfaya for burial. Supporters demand that only the army bear weapons and call for the removal of “Caesar of Baabda.” Days later, the government defies its Syrian-backed opponents and approves a Special International Court for Lebanon to try suspects in the assassination of ex-Premier Hariri. The cabinet also refers Gemayel’s murder to the judicial council, the highest trial court in Lebanon. Meanwhile, the opposition says it will wait till the end of the mourning period before going ahead with its threatened campaign of street protests. Aounist and Lebanese Forces supporters clash in Sassine Square in Beirut after Aounists attempt to replace a poster of their leader that had been burned days earlier.

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Lebanon Outlook

Beirut’s banking sector healthy but challenges lie ahead

by Executive Staff
written by Executive Staff

The Lebanese banking sector has survived and thrived through not one but two major shocks in two years: the assassination of Rafik Hariri in 2005 and the Israeli-Hizbullah war in the summer of 2006. A younger or less experienced banking sector would have collapsed under shocks like these, but the shrewdness of Lebanese bankers and banking regulators, the implicit and sometimes explicit support of friendly Arab neighbors and the extraordinary recurrence and solidity of Lebanese deposits and remittances from a very wealthy and influential Lebanese diaspora once again allowed the banking sector to remain solid.

This impressive resilience and the continuous financial performance and growth in assets, despite the setbacks, was reflected in Riad Salameh being named best central bank governor in the world for 2006 by the renowned Euromoney magazine. This is not the first time a Lebanese has been honored this way: In 1990, Mr. Edmond Naim also got the nod for his work in preserving the banking sector during 17 years of civil strife.

Balance sheets maintained

The balance sheet of Lebanese banks had been structured in more or less in the same way for the last 15 years, albeit in different proportions. At the end of August 2006, treasury bills (government debt securities) accounted for 27.2% of total assets of LL108,603 billion (or $72.04 billion), compared to 25.13% at the end of December 2005. The trend of Lebanese government treasury bills holdings has been decreasing for the last few years, particularly after the Paris II donors’ conference, when the government, through the BDL, underwent a series of monetary reforms. These mainly consisted of increasing liquidity levels on the banks’ balance sheet, reducing interest rates on both US dollar and Lebanese pound deposits, and, last but not least, reducing the exposure on the state, which remains to this day poorly rated by the international rating agencies (B- and B3 by Standard & Poor’s and Moody’s, respectively. These groups are the world’s largest and most respected rating agencies, particularly by international capital markets).

The exposure to the Lebanese sovereign bonds has shown its weaknesses in the aftermath of the Israeli war on Lebanon in 2006, as T-bill values went down as a result of a lack of liquidity on these securities in the secondary market and reduced investor confidence. This decrease in the value of T-bills has affected the banks’ liquidity, in the sense that they could only be disposed of at a loss, and hence would have brought less cash to the banks were they to have been liquidated. Although values are beginning to rise, banks are now aware that T-bill holdings have to be reduced over time. The disposal of T-bills by banks can only be carried out gradually, with individual investors (e.g. expatriates, non-residents) and foreign institutional investors replacing the banks. It should be clear by now that the capacity of Lebanese banks to fund the state through the subscription of T-bills is fast reaching its limits, with most banks, particularly the larger ones, growing unwilling to buy government securities within the scope of swap deals (exchanging current government securities with newly issued ones, holding a longer maturity).

Lebanese banks have retained their very strong capacity to gather deposit funding throughout 2006, and are unlikely to feel any weakness on that front in the foreseeable future. Customer deposits accounted for 81.15% of total assets at the end of August 2006, compared to 82.64% at the end of 2005, and amounted to LL88,128 billion ($58.46 billion). The rising levels of customer deposits with Lebanese banks reflect the high standards of banking penetration and financial intermediation, with banking assets to GDP amounting to around 350%. The banks’ solid and recurrent deposit base improves financial flexibility (or the ability to raise funding) significantly, and even reduces the risk of maturity mismatching between assets and liabilities. Although deposits are short-term in nature, they are highly recurrent and have funded longer-term maturity assets for more than a decade.

Deposits staying put

Customer deposits have traditionally been denominated in foreign currency (mainly the dollar), given that confidence in the Lebanese pound has never been substantial. However, the Lebanese pound has shown a strong resilience to the successive crises of 2005 and 2006, while the monetary authority has proven its strong commitment to maintaining the local currency at its post 1975-1991 civil war value. The injection of $1.5 billion in the form of deposits at the BDL by the Saudi and Kuwaiti governments at the height of the war this summer is a further reflection of the desire by regional powers’ desire to support Lebanon in maintaining a stable value for its local currency. The dollarization rate of customer deposits during the 2006 crisis was less significant than in the aftermath of the Hariri assassination, reaching 75% compared to more than 80% in 2005. The dollarization rate had dropped to 73% by the end of December 2005, and therefore did not increase substantially even as Israeli warplanes were thrashing Lebanon’s infrastructure. There was insignificant fleeing of deposits during the summer of 2006 (believed to be less than 4% of total sector deposits), with those deposits leaving the country transferred out to foreign branches or subsidiaries of local banks in any case. A major proportion of transferred-out deposits are now believed to have returned to their original accounts in Lebanon.

Asset quality was slightly affected by the summer 2006 war, with loan losses believed to have reached around $80 million for the entire sector, which at the end of August 2006 had total consolidated loans of around LL28,052 billion ($18.61 billion). Loans to the private sector accounted for 25.8% of total assets, and are not expected to change significantly, as banks remain cautious in a very difficult operating environment. Retail lending, on the other hand, is showing signs of tremendous potential, with most banks developing an expertise in products such as credit cards, car loans, housing loans and personal loans. Retail loans usually carry lower risk weightings and should be less onerous on bank capital come 2008, when Basel II capital regulations start to be implemented in Lebanon.

Interested in profits

On the earning side, Lebanese banks have continued to rely on interest income for their profitability. As at the end of 2005, net interest income accounted for slightly less than 70% (around 67%) for the entire consolidated banking sector. Although this figure appears high, it has been decreasing since 2002 when the proportion of net interest income to total operating income accounted for close to 80% (77%). Banks have been trying to diversify their earning base by increasing non-interest income and decreasing the proportion of interest income derived from treasury bills. Non-interest income has essentially been emanating from treasury and capital markets activities, with the Audi-Saradar group being the most active in that field. Interest income has been slightly diversified in favor of interest income from inter-bank deposits and retail loans. However, the main hope for earnings diversification comes principally from the geographical expansion of a number of banks, particularly the larger ones, into regional “captive” markets. By setting up branches or joint ventures in markets such as the GCC or parts of North Africa, including countries such as the Sudan, Lebanese banks have laid the foundations for future earnings to be equivalent or even outweigh domestic earnings. Geographical expansion is the key to solving the problem of operating in a small and troubled domestic environment, and would diversify income and funding.

At the end of August 2006, the consolidated shareholders’ equity of Lebanese banks amounted to LL8,412 billion ($5.58 billion), or 7.75% of total assets and almost 30% of total loans to the private sector. The sector’s equity to assets ratio at the end of 2005 stood at 6.04%, which is significantly lower than the figure at the end of the summer 2006 crisis. Banks have been increasing their capital either externally, by issuing shares to new investors (a lot of them coming from the GCC region) and issuing products such as preferred shares, or internally, through the re-injection of profits into equity. The effort to increase capital is due to the forthcoming Basel II capital regulations, which the BDL intends to start implementing in Lebanon in 2008. From 2008 until 2011, Lebanese banks will have to follow the standardized approach of Basel II, which virtually means risk weighing all assets, including T-bills at 100%, risk weighing non-performing loans at 150% and applying a 15% charge on the three year average operating income to account for operating risk. Market risk is also to be accounted for, as part of Basel II regulations.

Dangerous times ahead

Although some banks have enough fire power to raise capital relatively easily and meet Basel II standards, a number of smaller banks are likely to struggle to meet the new regulations, given their weak capacity to fund themselves in terms of capital. However, with the current dangerous and unstable political environment, the entire banking sector, including the big guns, runs a serious risk of seeing its profitability—and hence its internal/organic capital raising capacity—dwindle, as well as seeing the last and most determined investors turn their shrugging shoulders on them. Let us hope Lebanese politicians recognize the potentially explosive economic situation and start acting accordingly.

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Lebanon Outlook

Beirut Stock Exchange under pressure to meet regional standards

by Executive Staff
written by Executive Staff

The vision line of Lebanon’s capital markets on new horizons for 2007 is about as unrestricted as a peek across a Scottish Highland moor in a foggy night. The sights are potentially spectacular, but highly elusive.

And that although things had been looking exceedingly good early on in 2006—with a Beirut Stock Exchange that finally sparkled. As Solidere stock and banking values had acquired momentum and were pulling the market forward in the second half of 2005, banks, financial firms, pro-privatization politicians and fast thinkers in the country’s family-owned companies all started looking at the great new idea of the stock market and contemplated new concepts that included listings and private placements.

Gulf investors also paid attention and in January of 2006, the BSE was raging. Share prices shot upwards to reach the $100 range (BLOM Bank) and more than $25 for Solidere. The Audi Saradar Group and BLOM undertook successful capital increases. By early March, investment advisors at a regional financial firm were talking of a lineup of 50 Lebanese companies that could be candidates for flotation on the BSE.

Corrections set in

As Arab stock markets in the first quarter of 2006 woke up to the unrealistic valuation levels that the bull market sentiments of 2004 and 2005 had pushed them to, correction mood set in with a vengeance that affected the BSE along with the GCC bourses. However, the slowing of the BSE was far less painful than that of the GCC exchanges; for example, during the March 14 crash (which was the “Black Tuesday” of regional capital markets but in hindsight proved to be only one day of pronounced losses in a long chain), the BSE lost only 2%, less than any GCC index.

In promising news on the regulatory front, BSE officials proudly announced in early March that the Lebanese cabinet had forwarded to parliament a draft law for the establishment of an independent Securities and Exchange Commission as oversight authority for the Lebanese financial markets. Law and SEC were hoped to contribute significantly to the further vitalization of the country’s stock market.

During the 2005 full-year results season a little later, Solidere surprised with a new income record and announcements of spectacular new land sales. Banking sector results and a strong outlook for summer tourism added their parts to the buoyant prospects.

Thus, while regional market sentiments impacted Lebanon and led some IPO candidates such as Lebanese Canadian Bank reconsider the timing of listing plans, the perspectives of the BSE throughout the first half of 2006 remained substantially better than in many years before.

But war ensued and then, three months after its end—although Lebanese shares recovered better and more quickly from the shock than many had feared—the vagaries of Lebanon’s situation increased rather than decreased in November.

Especially thrown into doubt by this latest crisis were all prospects for new corporate listings on the BSE concerning both private sector companies and privatization candidates.

Already at the end of October, the secretary general of Lebanon’s Higher Council for Privatization, Ziad Hayek, said that a sale of mobile network operator licenses was planned for no earlier than mid-2007 and privatization in the landline telecommunications sector was expected to come as late as end 2008.

With the country stuck in political disputes between pro-Syrian and pro-sovereignty forces, experience of the past eight years in futile privatization debates makes it doubtful that telecommunications and other privatization projects with hypothetically positive capital markets implications—such as the flotation of flag air carrier MEA—will be possible in the first half of 2007.

One also must doubt that known or rumored private sector listing candidates, such as BankMed, Credit Libanais and Lebanese-Canadian Bank in banking, the confectioner Patchi, or some of the major trading companies in the country will find an environment in the first months of next year where they can be confident that initial public offerings would fully deploy their potential.

In this scenario, what flummoxes the future of Lebanon’s capital markets is—of course—the state of affairs brought about by external military pressures, confused world policy strategists and regional power plays, with added doses of local inefficiencies and political obfuscation.

As it is by now a sad and proven local tradition, the regional security and political tensions must be counted on to depress the prices of Lebanese stocks. The BSE may be strongly positioned to enter a new bloom with the return of political stability in this part of the Middle East, but the unanswerable question is at what time this return will occur, making it a matter of extremely chancy political fortune-telling to project stock market trends for the new year.

Another point adding to the forecasting uncertainty is that the Lebanese financial markets culture has had very little interaction with a growing regional financial analytical trend of stock market research and recommendations.

More financial research, please

Over the past year or two, investment advisory firms and finance houses as well as investment banking units in major banks—mostly located in the Gulf region—have greatly increased their production of financial research on listed companies, providing their client base and the interested public with corporate and sectoral analyses ranging from one to sometimes well over 30 pages in size, mostly including fair value assessments and buy, hold, or sell recommendations for the respective stocks.

This trend, in which firms like Dubai’s Shuaa Capital and Gulf Capital, Oman’s BankMuscat and Fincorp, Bahrain’s Taib Securities, Kuwait’s Global Investment House, Jordan’s Amwal, Atlasinvest and Capital Bank, Egypt’s EFG Hermes, Prime Securities, and HC Brokerage are among established or rising stars, has not yet caught on in Lebanon either on the side of research providers or on the side of research targets.

Research departments at institutions such as Audi Saradar, Blominvest, Byblos Bank, Credit Libanais, Arab Finance Corporation and others, have—with a recently increasing tendency—been generating regular economic and stock market reviews covering Lebanon and other countries, but have not published much in terms of local company research.

Thus, Lebanese firms in recent years could only rarely expect to receive coverage from local financial firms. Research by regional companies into individual Lebanese corporations in this small market has also been scarce.

It is hard to find any research by the region’s financial advisory firms that offers fair value analyses and stock recommendations for listed banks such as Audi Saradar, Bank of Beirut, Byblos or BEMO. Even Solidere, one of the region’s most interesting ideas in urban development and real estate corporations, has received only very limited coverage from financial firms outside of Lebanon.

However, a few recent reports with stock analysis and forecasts are in circulation.

Issuing a first company report on BLOM Bank and its operating environment in April of this year—including a few quaint statements such as saying that Lebanon’s banking sector includes “126 banks recognized by the central bank”—Shuaa Capital made an important step in covering Lebanese equities from the Gulf.

The initiation of coverage report identified BLOM Bank as an entity set to grow in size and profitability, with prospects of outperforming the markets in which it operates. Using discounted equity cash flow and relative valuation methodologies, Shuaa at the time arrived at an $89.42 target price for BLOM. This report was followed by an update in mid-November, in which the analysts said that the impact of the July war on the bank “was not that severe, given the magnitude of the crisis.”

Based on the conflict’s limited financial impact on BLOM’s nine-month figures, Shuaa lowered their target price for the stock slightly, to $83.05. However, due to the drop in BLOM share prices since spring of 2006, Shuaa saw the stock as having an upside potential of 22.5% and upgraded its recommendation to “Buy” from “Hold.”

One fairly solitary and bright recent opinion on the share price potential of Solidere originated with EFG Hermes, the Egyptian financial firm that become a stakeholder in Audi Saradar in early 2006.

In what it called “a contrarian play,” EFG Hermes in September issued a valuation opinion that put the long-term fair value of Solidere stock at $22.54. “We go against the conventional wisdom that Solidere will be greatly harmed by the war,” EFG Hermes said, and projected a scenario under which the company would feel a mild war impact and achieve a continuation of land sales, although at a lag.

Based on its valuation of Solidere, EFG Hermes issued short-term “Accumulate” and long-term “Buy” recommendations for the stock.

Politics affects ratings

It has to be added here that the recently strengthened research team at Blominvest Bank, the investment banking arm of BLOM, in September produced a report on Holcim Liban, the leading industrial stock traded on the BSE.

Noting that the share was valued on the high end with a price-to-earning ratio of 25.78, the analysts reasoned that the valuation was comparable to that of cement companies in Egypt and Saudi Arabia and was moreover related to the lack of Holcim Liban shares available to the public. Blominvest issued a buy recommendation on the stock, based on its rising profitability, strong market share and substantial demand forecast for cement in Lebanon over the coming years.

While the BSE outlook for 2007 must prudently be considered uncertain in terms of political developments and the resultant prospects for private sector IPOs and public sector privatization measures, and while political uncertainties weigh on any stock market projections, the available analyst research on three Lebanese listed companies out of the country’s very small pool of traded firms thus provides a uniform view in recommendation of buying these stocks, even at price levels above those which the stocks reached at the end of November.

But the caveats remain. The banking implications of the country’s vulnerable state were expressed by downgrades of financial strength ratings for three Lebanese banks at the end of the year following the despicable assassination of Lebanese industry minister Pierre Gemayel. In its view on Solidere, EFG Hermes acknowledged that by the inclusion of divergent scenarios in their projections, the scenario analysis on the company resulted in high volatility in valuation. And Shuaa Capital said in its positive November research on BLOM, “we assume relative stability on the political front in Lebanon. Any future deterioration to Lebanon’s stability, however, may result in a downgrade to both our forecasts and our recommendation.”

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