Lebanon Outlook

Lebanon’s media has tough year but confident of turnaround

by Executive Staff
written by Executive Staff

Last year, Lebanon’s media industry went on a proverbial rollercoaster ride far more thrilling and precarious than anything America’s major theme parks could possibly dream up. Next year looks to be equally action-packed, as the sector struggles to make up for $38.7 million in losses sustained during Israel’s month-long war on Lebanon, overcome low advertising revenues and face up to increased competition domestically and regionally.

In business terms, the summer war could not have come at a worse time for the media industry—as indeed for the whole economy—with certain Lebanese TV channels planning rebranding and new print publications launching that would have helped retain Lebanon’s position as a media hub in a region where media growth is amongst the highest in the world. Competition is increasingly cut-throat among the 200-plus channels vying for limited ad spending.

City TV, formerly NBN, had planned to revamp its broadcast schedule and New TV was looking for investors prior to the war. City TV, which sustained $1.25 million in damages, is now gradually implementing changes and is expected to relaunch in January, depending on funding, and New TV, which lost $2.65 million, is still in the same boat as it was in July. Murr TV’s (MTV) planned relaunch was also scuppered by the conflict and is slated to start next year.

Investors fleeing

Production houses saw investors and clients scurrying for the door during the war, and confidence in the lucrative sector—production houses generate more revenue than TV channels—has taken a beating, particularly in regard to foreign investors that had come to Lebanon in droves in recent years to take advantage of the country’s varied geography and educated populace.

Newly-launched magazines such as entertainment guide Time Out Beirut also ceased publication as the country’s reputation as a nightlife and beach hot spot slid off the map. Talks are still underway as to whether TOB will grace newsstands again, the publication having suffered considerable losses after bringing out only four editions. Other publications were also hit and the country’s sole English-language newspaper, The Daily Star, stopped publishing The International Herald Tribune (IHT) and slashed staff salaries by 30%. The IHT is rumored to return in January.

However, although all media outlets sustained financial losses and in certain cases severe damages—Al Manar TV’s studios were leveled by Israeli warplanes—viewing figures soared when the world’s eyes were directed on the July-August conflict. Al Manar’s popularity ranking, for instance, went from 83rd in the Middle East to the tenth slot between July 15-28 according to Israel’s Market Research. Likewise, newspapers have seen increases in readership as people focus on the country’s fractious politics in the months following the ceasefire.

The snag of course is that politics don’t generate advertising revenue. According to ArabAd there was a 40% drop in ad spending during the war; with the economy limping along on half empty, advertising, like consumer spending, is still down despite a tentative peace.

“The best guy to predict the future is a tarot card dealer,” quips Dani Richa, Chief Creative Officer for Impact BBDO. “He’s probably more accurate than me in a country like Lebanon, as the future doesn’t depend on heads of industry, clients or consumers.”

In the absence of prophetic powers, the media is groping in the dark as to what next year will hold.

“The market is operating on a day-by-day basis and advertisers are acting cautiously,” confirms Roger Darouni, Executive Marketing Director for LBC.

But as Richa points out, “Everyone is so committed, over-invested and paid such dear prices that there is no choice but to continue.”

And continue the media and advertising sector must.

Crucially, major production houses have remained committed to Lebanon. Music TV powerhouse Rotana is still operating out of Lebanon and has just opened a Rotana Café in downtown Beirut, although the network moved two channels to Cairo before the war. Saudi Arabia’s MBC, however, said production had actually increased.

“We are staying here in Lebanon. Nothing has changed and we are increasing production with eight shows in Lebanon, two in Dubai and four in Cairo,” says Nadine Tarabay, Commercial PR Manager at MBC Lebanon.

Nevertheless, with foreign investors shying away from Lebanon, knock-on beneficiaries of the TV production business, like equipment rental companies, are feeling the pinch. “Rentals are down, and productions have been postponed. Maybe next year things will pick up,” says Elie Battah, General Manager of Audioland.

Going Orange

Despite a fairly gloomy outlook for the media in general and the instability caused by the political situation, one upcoming media outlet has decided to enter the fray in a rather unusual and daring way.

As can be seen on billboards throughout Beirut and the surrounding areas, Orange TV, or OTV, plans to raise funds through a joint stock company, Al Lubnaniah Lil I’lam, that is open to the public. Starting with a paid-up capital of $2 million, OTV plans to raise $40 million via four million $10 shares to establish a terrestrial and satellite channel, and a holding company that will include a production house that will be a joint venture with France’s Societe Francaise de Production (SFP) if negotiations are finalized.

To Lebanon observers, the colorful name of the channel will immediately be associated with a political party—former General Michel Aoun’s Free Patriot Movement (FPM). And true to form, Aoun came up with the idea of a channel “For the People, By the People” through collective ownership.

So will the channel be yet another addition to Lebanon’s highly politicized media landscape where every channel, radio and newspaper has a political connection of some form or another?

Roy Hachem, the CEO of OTV, says it will not be. “Aoun won’t influence the channel, and it will be independent of the party. I know it’s hard to prove, we need to start transmission and broadcast news,” he says.

What about the color though? “People may ask about the color, as orange, but it’s the only [political] link we have and a color the publicists wanted,” Hachem explains.

Media observers are not as convinced however. “I think the station is portraying a very specific political point, which is clear from the color and symbolic,” says Habib Battah, Managing Editor of Beirut-based Middle East Broadcasters Journal. “I think it will follow a pattern, of a political constituency for a station. There is no reason to believe it will be different, as when you open the first page of their brochure there is a photo of Aoun.”

Hachem assures it will be independent and objective in its delivery of news. “We want something like the BBC. I want to hear people saying—even if not good for the FPM—‘I heard it on OTV.’”

Hachem also points to the different categories of shareholders as a further example of how the channel is not being solely supported by FPM followers.

“Some are looking for a dream, others are serious investors. We have people buying $300,000 to $500,000 of shares,” he says. Supporters, on the other hand, tend to buy between 100 to 300 shares.

As money rolls in through the IPO—$10 million was raised by the end of November—the challenge for the channel will be to attract a broad array of viewers and generate advertising revenue when it launches in 2007. As Hachem points out, OTV already has a head start in terms of guaranteed viewers through shareholders and political supporters, something the advertising industry is equally aware of.

Power to the people

“Letting people own TV creates loyalty before the station even starts—a smart model,” advises Richa. “The challenge is to attract people that don’t agree politically but agree with entertainment.”

But for OTV to grab a 10% slice of the Arab advertising market, as their investment guide says the channel is aiming for, OTV will have to find a careful balance between Lebanon and regionally-orientated content.

“To live in Lebanon as a TV channel, you need half subsidized by a satellite arm, and although OTV might be successful here it’s a lot more trying to compete on a pan-Arab scene with budgets of tens of millions of dollars,” says Richa.

While Lebanese TV stations compete for just $35 million in TV ad spending, other Arab countries advertising revenues are skyrocketing, with Qatar, for example, soaring 60% in the first half of 2006 to $101.5 million for all ad spending. Lebanon only accounts for 5% of the region’s $2 billion ad market.

To remain commercially viable, OTV aims to acquire 30% of Lebanese viewers and, in the long-term, gain 20-25% of the advertising market. To do so, OTV will have to bite into the ad revenue of LBCI and Future TV, which control around 65% of the country’s advertising expenditure.

LBC, however, seems unphased by the prospective competition. “OTV will certainly capture viewership from different TV stations, but LBC’s market leadership won’t be affected,” said Darouni.

He thinks TV ad spending will increase if the political situation stabilizes, a factor all channels, and OTV in particular, will be banking on for 2007.

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Lebanon Outlook

Obituary- Pierre Gemayel 1972-2006

by Executive Staff
written by Executive Staff

Pierre Gemayel, the 34-year old Minister of Industry, who was gunned down in broad daylight in Jedideh in East Beirut on November 21, was the fifth member of one of Lebanon’s most prominent Maronite dynasties to meet a violent, untimely death. Gemayel, who won a parliamentary seat in 2000 as a representative of the Phalange Party, the once dominant Christian faction established by his grandfather in the 1930s, became the youngest minister in the 2005 Siniora government. As the latest incident in a string of violent attacks targeting anti-Syrian figures in Lebanon over the past two years, the assassination will arguably have more influence on local politics than Gemayel had during his lifetime.

Nonetheless, during his short tenure as minister of industry in a country whose economy is driven by the service sector, he accomplished a great deal, and will be remembered equally for his commitment to the principles of sovereignty and freedom and Lebanon’s industrial development. In contrast to his predecessors, Gemayel believed that Lebanon could be industrially competitive at both the regional and global levels. At just 33-years old, he came to office with a clear-cut strategy to promote the local manufacturing sector. Before making any move in his new post, Gemayel drafted the “Industrial Outlook 2010 Strategy,” which included both a long-term and 100-day plan for the sector.

Strategy of increasing competitiveness

Along with an overview of the obstacles hindering Lebanon’s industrial growth and a vision for the sector in 2010, based on research and feasibility studies, the strategy focused on increasing the competitive advantage of local exports in the international market. The plan outlined a set of specific objectives involving the modernization of production techniques and the introduction of internationally recognized quality management standards, as well as the creation of strategic alliances with regional and European trading partners. Also, he included target dates for their completion.

Though the plan was endorsed by Fuad Siniora’s administration, Gemayel was not able to fully implement Industrial Outlook and its 100-day plan during his short lifetime. Under his leadership, the ministry did successfully lobby the government to introduce the first industrial safeguards since 2000, when the majority were abolished, to protect local tile manufacturers.

Gemayel was also instrumental to the growth of one of Lebanon’s most well-known exports, wine. He had signed a decree along with the Agricultural and Economy Ministers supporting the creation of a National Institute of Vines and Wines, a necessary prerequisite for six-year old legislation regulating wine production in Lebanon to be passed. The bill was finally going to be presented to cabinet ministers in November, but the resignation of the Shia ministers from Parliament and Gemayel’s subsequent assassination stalled the introduction of a modern wine law yet again.

Dogged champion of manufacturers

Though the July-August war and the ensuing political stalemate delayed many of Gemayel’s plans, he had been a dogged champion of manufacturers over the past three months. Immediately following the August 14, ceasefire, the ministry developed a three-point plan in to support the recovery of Lebanon’s industrial sector. The first step of the strategy, a comprehensive damage assessment, was completed in November, and the ministry had moved on to the second, interim solution phase, which sought to temporarily relocate production of destroyed factories to other facilities, and lobby the government to provide industrialists with tax relief.

Despite Gemayel’s assassination, the industrial sector will still push ahead with the third and potentially most controversial aspect of the strategy, loosening existing legislation governing industrial production to allow manufacturers more room to maneuver during the recovery process.

For Lebanese manufacturers, the late-minister’s most lasting legacy may be his Industrial Outlook 2010, which will hopefully outlast its author and serve as a model for the sector’s development.

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Lebanon Outlook

Lebanon in the crosshairs – Outsiders meddle in Levant

by Executive Staff
written by Executive Staff

Lebanon looks set to embark upon the new year in a state of greater unease and foreboding about the imminent future than at any time since the end of the 1975-1990 war.

The resignations in mid-November of six cabinet ministers—all five Shia and an ally of President Emile Lahoud—and the accompanying specter of street demonstrations have spurred earnest speculation whether the political impasse will lead to a revival of civil war. The slaying of industry minister Pierre Gemayel, no friend to Syria, has further increased tensions.

There appears little hope of a meaningful breakthrough in the crisis, as Lebanon’s domestic ailments cannot be separated from the Gordian knot of regional and international interests which lie beneath much of the country’s current troubles.

Historically, Lebanon has tended to play the unenviable role of battleground for competing regional and international powers struggling to subvert and dominate their rivals using local Lebanese factions as proxies. Today, the situation is no different, with an anti-Western grouping of Iran, Syria, Hizbullah, Hamas and various bit players challenging the influence of the US and its European allies, chiefly Britain and France, as well as regional allies such as Israel, Saudi Arabia, Egypt and Jordan.

An anti-Western alliance takes shape

The anti-Western alliance began to coalesce in the wake of the election in August 2005 of Mahmoud Ahmadinejad as president of Iran. It was strengthened in the first half of 2006, with Tehran and Damascus inking several economic and trade agreements in February and a mutual defense pact in May. Iran views Syria as a useful bridge to its ally Hizbullah in Lebanon and has invested much political and economic effort in shoring up the regime in Damascus. Having faced the isolation of the West since the invasion of Iraq, Syria has come to rely increasingly on its powerful Persian ally, a strategic relationship which has strengthened the domestic standing of the regime at the expense of further alienating its Arab neighbors, many of whom remain deeply suspicious of Iran’s intentions in the Middle East.

A series of national dialogues on key issues held between March and June at the suggestion of Speaker Nabih Berri did little more than to defer the inevitable confrontation. Both sides agreed to disagree on the fate of Lahoud, and talks on Hizbullah’s weapons went nowhere. Even the one topic where consensus was reached—closing down Palestinian military bases outside the refugee camps within a six-month period—went unfulfilled.

The divisions in Lebanon were exacerbated by the devastating month-long war between Hizbullah and Israel in July and August. Hizbullah’s fighters waged a remarkably effective campaign against the Israeli army, the latter having clearly underestimated the capabilities of its foe. Although Hizbullah dubbed the war a “divine victory” and claimed it emerged stronger, it is too soon to say with any certainty who was the ultimate victor. Although the Israeli military fared poorly against Hizbullah, the resistance has emerged tactically weaker: for the time being, it is unable to resurrect its military infrastructure along the Lebanon-Israel border. The post-war deployment of 15,000 Lebanese troops and an expanded United Nations peacekeeping force in the South, UNIFIL II, present both political and practical obstacles to rebuilding their underground fortifications and border observations posts or conducting armed patrols, let alone resuming periodic attacks in the Shebaa Farms or elsewhere along the Blue Line.

The presence of troops from leading European nations such as France, Spain and Italy as well as UNIFIL’s naval component led by Germany, has alarmed Hizbullah. It sees the deployment as a new attempt by its enemies to neutralize its military capabilities against Israel, thwart Iran’s efforts to project itself directly into the Arab-Israeli conflict and check Syria’s ability to regain control of Lebanon.

Not power for its own sake

Thus, Hizbullah’s post-war political gambit to boost the opposition’s presence in the government at the expense of the March 14 block is borne of exigency rather than ambition. Rather than a naked grab for power to better the lot of its Shia constituents, the party’s actions are dictated by the broader strategic interests it shares with Syria and Iran. Overturning the Siniora government in favor of pro-Syrian Lebanese will weaken Washington’s influence over Lebanon and strengthen the roles of Iran and Syria. A national unity government would allow Hizbullah to block any legislation that is deemed to threaten it and its Iranian and Syrian allies. That could include holding up the investigation into the murder of Rafik Hariri and the future judicial proceedings, which remain Syria’s principal concern. Achieving a veto-wielding status in the cabinet would allow Hizbullah to block any move to increase UNIFIL II’s powers, such as granting the force the right to search and confiscate weapons or deployment along the Lebanon-Syria border.

Hizbullah’s allies in Lebanon, on the other hand, have their own generally parochial reasons for hitching their horses to the Shia bandwagon. For some traditional pro-Syrians, it is an opportunity to return to the center of power, having spent the past 18 months in the political wilderness. For Michel Aoun, aligning with Hizbullah is a tactical move to bring him closer to the presidency, although it is a relationship that some of the General’s Christian supporters are finding increasingly hard to stomach.

The opposition’s assertiveness comes at a time when the March 14 group is beginning to question the extent of Washington’s commitment to the Siniora government. The rapidity with which the Bush administration dumped the government in July to give whole-hearted endorsement for Israel’s onslaught against Lebanon demonstrated that Washington’s support for Siniora is tactical, rather than strategic, and finite.

The concerns of the March 14 group were heightened by expectations that the Iraq Study Group, headed by former US Secretary of State James Baker and former Democratic Congressman Lee Hamilton, would recommend that the Bush administration begin talks with Syria and Iran as a way of resolving the impasse in Iraq. At the time of writing, the findings of the Baker-Hamilton commission have yet to be released, although it been revealed that members of the commission have held talks with Iranian and Syrian officials.

Druze leader Walid Jumblatt’s trip to Washington in early November was partly to seek reassurances that the Bush administration will not abandon its Lebanese allies as part of a Mephistophelean bargain with Syria to ease US troubles in Iraq, a far more pressing concern for the White House than ensuring the continuity of the March 14-led government in Lebanon. After all, it was the current president’s father who sanctioned Syria’s dominion over Lebanon in 1990 as a reward for joining the US-led coalition to drive Iraqi forces from Kuwait.

Still, despite the Americans sending out feelers to Damascus, there is no indication yet that Bush will agree to re-engage with Syria and Iran. The rhetoric from Washington remains unchanged with the onus for resumed dialogue dependent on the “good behavior” of both countries.

Whither Lebanon?

The struggle between the government and opposition peaked as the cabinet was about to discuss and vote on draft statutes delivered by the UN on the formation of an international tribunal to try the killers of Rafik Hariri. The draft resolution was endorsed by a depleted government, but its credibility was weakened by the absence of the Shia ministers.

The formation of the international tribunal and the anticipated flurry of indictments could seriously complicate any effort by the West to re-engage with Syria. Damascus will have its own list of demands in exchange for cooperation in stabilizing Iraq, among them likely to be neutralizing the Hariri murder probe (or at least deflecting it away from Syria), the return of the Golan Heights from Israel and an increased role in Lebanese affairs. All three, for different reasons, would be hard for the US to accept.

Any long-lasting resolution to Lebanon’s political travails is unlikely to emerge from Lebanon’s leaders themselves, but will be a result of shifting fortunes of the main players—the US, Iran and Syria—in the regional powerplay. But as the second anniversary of Hariri’s death and the subsequent “independence intifada” draw near, Syria and its Lebanese allies appear better positioned today than at any time before to restore Lebanon to the anti-Western fold in the Middle East.

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No Room for Openness

by Michael Young
written by Michael Young

If 2003 was a year when, realistically or not, there was hope for liberalism in the Middle East, this past year was most certainly one in which that hope collapsed. Initial optimism that a capitalist culture of free markets and free minds might emerge from the fall of the despotic regime of Saddam Hussein has been replaced by deep pessimism. The region is retreating toward its extremes, leaving little room for open societies.

Perhaps the most disturbing aspect of this phenomenon is the performance of supposed Arab liberals. That the United States approached its invasion of Iraq in the most unconvincing of ways, that it never quite understood what it needed to do to stabilize the country after its triumph, is undeniable; however, the moment that Saddam’s savage regime fell, it was a rare occasion that liberals should have used in their own struggle against the dictators repressing them. Instead, they seemed moved primarily by anti-Americanism, so that many of the region’s liberals stood side by side with their oppressors, but also Islamists, in condemning the US, oblivious to the fact that this was unlikely to buy them a reprieve.

Following the Republican defeat in the American midterm elections in November, it became clear to the Bush administration that things had to change in Iraq. President George W. Bush’s idea of a democratic project in the Middle East was already on life support thanks to the Iraqi conflict, and the elections may have pulled the plug. With Americans inclined to fall back on a default foreign policy imposing more caution overseas, the idea of advancing democracy in a region where even liberals can’t seem to like America has become a low priority.

That’s why the key question today is not just whether the US and Western democracies in general should readily abandon democratization in the Arab world and even Iran, but also whether they should jettison all thought of using force or coercion in trying to promote open societies.

The answer to the first question would seem obvious. The US has always put democracy at the center of its public rhetoric in the Middle East, but that didn’t mean it was necessarily transformed into policy. On the contrary, successive administrations, adopting a “realist” policy of advancing interests instead of values, accepted dictatorial regimes as allies, as long as they were “our dictators.” Talk of democracy was there as a convenient fig leaf to camouflage such cynicism. So, what is needed today is to take the rhetoric and place it at the forefront of policy, but in tandem with a more hardnosed assessment of how to advance democracy.

Democracy will not bloom like a hundred flowers in the Middle East, but it may, in its own many imperfect forms, bloom, or be sown, in specific locations in the region, as it was in Lebanon in 2005. Based on such successes, the US, but also the European democracies, can use these countries as wedges or stepping stones toward greater change elsewhere. Interests are fine, but the most enduring interest the Western democracies have in the Middle East—and also the most enduring interest of the peoples of the region—is pluralistic democracy and free markets.

Whether this agenda should be advanced by coercion or force is more controversial. The European Union has often been derided as “speaking softly and carrying a big carrot.” Indeed, the EU has often imagined that grand political change could be brought about solely through dialogue and economic inducements. That method has failed, as the Barcelona process has shown: virtually none of Europe’s southern Mediterranean partners have become more politically liberal in the 11 years since the process was initiated, and even their economies have remained largely under the control of state institutions, regimes, or both.

The limitations of a big carrot hardly mean the US and the EU should resort to force at the turn of a hat. However, nothing but arms were ever going to remove Saddam, and nothing but coercion was going to get Syria out of Lebanon and keep it that way. Force may not be a pleasant word to describe advancing one of the more enlightened human traits—the search for liberty—but sometimes force works. And as 2006 comes to a close, as illiberal groups and states in the region reaffirm their authority in the face of US setbacks, that lesson may be one the people of the region think of more often in the not-too-distant future.

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Lebanon Outlook

Lebanon’s real estate sector in the air – Rebuilding Beirut on hold

by Executive Staff
written by Executive Staff

At the end of 2006, both good and bad news is emerging from Beirut’s real estate sector. On the positive front, none of Lebanon’s prime properties was directly hit in the summer war between Israel and Hizbullah. No major sell-offs took place, and prices across the board have held steady. Furthermore, there was no widespread freeze on construction: most projects that had broken ground before the war continued shortly after it ended. But if the good news is that most existing projects are moving ahead on schedule, the bad news is that few developers are willing to embark on new ventures under currently unstable conditions in Lebanon: no major deals were concluded in the final months of 2006. There is still interest—and there have been inquiries—but no sales.

This wait-and-see attitude is, of course, a reaction to the end-of-year stalemate in Lebanon’s political arena. Real estate only flourishes in a stable environment; with almost every Lebanese party at each others’ throats and a high potential for mass upheaval, Lebanon at the end of 2006 fails to inspire investor confidence. The lackluster attitude among project developers—and their clients—is likely to prevail as long as no political agreement is reached.

Political compromise will restart market

Most players are convinced, however, that as soon as the political leadership comes to some kind of compromise, the market will pick up where it left off when the war started on July 12. “The market will skyrocket immediately,” insists Raja Makarem of Ramco. “There is still a lot of trust and goodwill among Arab investors. I still remember, just days after the assassination of Hariri, someone signed a deal for 30,000 meters BUA [built-up area].”

Apart from goodwill, there is also plenty of cash looking for a destination. Ever since the crash of the Arab bourses, investors increasingly perceive real estate as a relatively safe investment, with likely returns of 15% to 25%. All over the region, from Marrakech to Muscat, construction giants like Emaar and Dubai Property Holdings and property developers such as Damac have set up shop, building luxury apartments, office towers, malls, hotels and holiday resorts. However, this doesn’t mean Lebanon should fear increased competition: for most Gulf Arabs, the country remains the preferred choice for holidays and second homes. Still, their patience may eventually run out if there is no upturn.

Walking through downtown and other parts of the capital, one would hardly know there has been a lull in Beirut’s real-estate market during the second half of 2006. Construction is underway everywhere, especially in the area around the Souqs and along the seafront. Work on the mixed-use Seramis building, the Berytus Parks office building and Hilton Hotel are nearly completed, while excavation has started for the Grand Hyatt Hotel and Capital Plaza, which will have 32 apartments with a total BUA of 13,235 m2.

Following the success of the Beirut Tower, which is due to be completed in the second half of 2007, its owners have started to lay the foundations for a second residential high rise, the 29-story Bay Tower. According to Sales Director Samir Diab, 75% of apartments in the Beirut Tower have been sold, spurring the initiative to build a second property. Facing the Beirut marina, the Bay Tower will offer luxury apartments varying in size from 250 m2 to 750 m2, and a top-floor penthouse of 1,500 m2. Ranging from $3,000 to $5,800 per m2, the prices are in tune with surrounding developments.

“We had started construction just before the war and never had any intention of stopping, as 30% of the apartments have already been sold,” says Diab. Interestingly, while 80% of apartments in the Beirut Tower were sold to Gulf Arabs and 20% to Lebanese, sales for the Bay Tower are thus far a 50/50 affair. Diab confirms that the market is weak today, yet insists that it remains strong on the long-term, which, according to him, is especially true for the relatively scarce seafront properties.

The Bay Tower is not the only new development facing the marina. In between the Marina and Beirut Towers, the $100 million, 8-story Dana Building is set to appear. One of the most significant “confidence boosters” has been the Abu Dhabi Finance House’s $600 million dollar Beirut Gate project, in heart of the capital. With its territory already demarcated with logo flags downtown and final plans pending approval from Solidere, the massive project is on track to break ground in early 2007. The “gate” will consist of eight separate buildings with a total built-up area of 178,500 m2, some two-thirds of which will be residential, with the remainder reserved for commercial and retail space.

In terms of changes to Beirut’s urban landscape, the launch of the Landmark Project, a $250 million mixed-use development at Riad al-Solh Square, may be seen as equally significant. With its 168-meter-high tower, characterized by an asymmetrical design of balconies, terraces and gardens, this is a “love it or hate it” development and will undoubtedly be one of the most eye-catching structures within the Beirut Central District.

A Landmark landmark

Designed by French architect Jean Nouvel, the Landmark Building has a total BUA of 149,000 m2. The tower will host a 5-star hotel and, on the top floors, 16,300 m2 of luxury apartments. The two adjacent buildings, of 10 and 15 stories respectively, offer service apartments, retail and office space. The nine floors underground will house 37,500 m2 of parking and an 11-screen cinema complex.

However, not every developer is charging ahead. On a more negative note, Levant Holdings’ Phoenicia Village development has been temporarily halted. With a reported value of $1 billion, Phoenicia Village will be one of the largest real estate developments in the history of Lebanon. The project’s four buildings have a total BUA of 207,000 m2, some 60% of which will be residential, with the remainder consisting of office (20%) and retail (15%) space. The Kuwaiti-registered Levant Holdings issued shares for the project last June and had planned to start building as soon as it had collected $410 million in start-up capital. In light of recent developments, however, that scenario proved too optimistic.

The development climate in downtown may be illustrated by the price of Solidere shares that, after a yearly high of over $26 in January, decreased to some $18 during the war and hovered at that level for the rest of the year. However, the current lull in land and real estate transactions will likely result in a (temporary) decrease in construction in the near future, which will no doubt have consequences for the price of a Solidere share. These consequences may be mitigated by Solidere’s recently-announced plans to expand its operations outside Beirut.

Beirut is, of course, more than just downtown. In Clemenceau, Verdun, Ashrafieh and along the Corniche—to name but a few locations—construction of prime residential projects continues as well. Yet downtown is the capital’s barometer, the heart upon which everything else depends and around which everything else evolves. In that sense, it is interesting to note that there are a number of formerly inhabited, now vacant buildings in areas adjacent to downtown, such as Zokat al Blatt, Rue Spears and Qantari. As the political situation improves, no doubt they will soon make way for new developments.

Another kind of barometer

However, downtown Beirut is also a barometer in another sense. “We were about to sign contracts with five major multinationals to lease office space when the war broke out,” says Wael Makarem of the Berytus Parks, which is now in the final stages of construction. “Until now, no one has signed. They do not trust the political situation and would rather go to Dubai, even though it is much more expensive and a less pleasant place to live.”

Situated next to the nearly-completed Hilton Hotel, Berytus Parks offers 10 floors with a total of 12,200 m2 of office space. Annual rental prices conform with the average downtown: $275/m2. In Dubai, equivalent rentals are around $400/m2, and operational costs are significantly higher as well. Nonetheless, that may seem like a price worth paying when the alternative comes with political instability.

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Lebanon Outlook

Lebanon’s rosy 2006 shattered by war and political killing

by Executive Staff
written by Executive Staff

As recently as early November 2006, local and regional economic experts were projecting exponential growth across all sectors of Lebanon’s economy, including rapid recovery from the damages caused by the 34-day war between Hizbullah and Israel this summer. But given the assassination of Lebanon’s Minister of Industry, Pierre Gemayel, on the eve of National Day and threats for further eliminations of other high profile political figures, the country’s outlook was put in jeopardy. However, Lebanon is known above all else for its resiliency, and this, experts predict, will pull Lebanon through its political instability into 5% to 8% growth in 2007.

Before it was thrown into another period of turmoil, Lebanon’s economy had made impressive gains in the first half of 2006, and in some sectors, even afterwards. The banking sector—the strongest and most resilient sector in the country—registered strong profits and assets growth, with BLOM Bank leading the pack in terms of profits with LL199.65 billion ($132.2 million) at the end of September, and Audi Saradar coming out on top in assets with LL20.08 trillion at the end of September, up from LL16.42 trillion a year earlier.

The tourism sector, which accounts for approximately 10% of total government annual revenues—saw a first ray of hope for recovery in September with an increase of 153% in the number of incoming tourists compared with August. The real estate sector continues to witness exponential growth despite the political upheaval. Gulf investors’ appetite for Lebanon’s real estate market seemed insatiable as new mega-projects worth billions of dollars were announced in 2006. Property taxes recorded a 51% increase in the first half of the year. The banking sector—which sustained Lebanon’s economy for many years during the civil war, and now continues to do the same after the assassination of former Prime Minister Rafik Hariri—has positioned Lebanon as a regional leader in banking and financial services.

Macroeconomic Check

According to the Lebanese Ministry of Finance, Lebanon’s budget deficit expanded by 54.95% during the first nine months of 2006, standing at LL2,989 billion at end of September, up from LL1,929 billion over the same period in 2005. Today, the country’s total debt to gross domestic product ratio is almost 190%, while the internal debt to GDP exceeds 120%.

According to figures issued by the central bank, Lebanon’s balance of payments (BoP) registered a surplus of $2.2 billion in the first nine months of 2006, compared to a deficit of $191 million a year earlier. In September 2006, the BoP registered a surplus of $640 million, compared to $235 billion in August 2006 and $152 billion a year earlier. September’s BoP came as a result of a $325 million rise in the net foreign assets of the central bank, coupled with a rise of $315 million in private banks’ net foreign assets.

Figures released by the Association of Banks in Lebanon shows the country’s gross public debt reached $39.4 billion in August 2006, up 1.6% from last July, and up 6.9% year-on-year. In turn, external debt rose by 2.4% from last July to $20.4 billion, while gross domestic debt increased by 0.7% to $18.9 billion. Year-on-year, external debt increased by 11% from $18.4 billion in August 2005, while domestic debt went up 2.8% in the same period.

Better late than never

After several tries and many delays, the 2006 Proposed Budget Law was sent to the Council of Ministers for approval in early November. (The 2005 budget was not approved until the start of this year due to political bickering). Although Minister of Finance Jihad Azour said that the 2007 draft budget wuld be ready by December 2006, analysts predict further delays and don’t expect the 2007 budget to be approved until mid-year.

The 2006 budget calls for a total spending of $7.4 billion, up $793 million from the 2006 budget. The Ministry of Finance had predicted a decline in deficit to 20% for 2006. However, the ministry’s plan went out the window when the devastating July-August war increased the projected deficit to 40%, compared with 30.83% in 2005. Azour said that Lebanon’s public debt would reach $41 billion by the end of this year, with the increase mainly due to material damage to the country estimated at $3.6 billion.

Revenues reached $4.4 billion, down from $4.6 billion in the 2005 budget. The drop in revenues and rise in spending is mainly attributed to the rise in military and defense expenditures after the Israeli war, and the decline in tax revenues after the ministry implemented tax exemptions due to the hostilities. The 2006 budget, which has yet to be approved, is expected to terminate the duties of the Council of the South and the Fund for the Displaced by the end of 2008. The 2006 budget deficit of $3 billion will be financed through the issuance of treasury bills.

Reforms? What Reforms?

Economic reforms and privatization of the state-owned companies was supposed to get started in early 2006. And sure enough, news about the good performance and planned privatization of the country’s flag air carrier, Middle East Airlines (MEA) and the rescue and successful sale of BLC Bank was encouraging to many local business leaders and analysts alike. Officials also re-started talks about the country’s power firm, Electricité du Liban (EDL), with plans to sell it to private investors or possibly float it on the stock market. But experts say that if the government is to be successful in its efforts to privatize state-owned enterprises, it must first strengthen the equity market, and make it efficient so that an average citizen—not just the elite—can participate in the privatization process.

Furthermore, reforms and privatization require a united will by all the parties involved in the governing of the country. Given the current tense political atmosphere, analysts say privatization plans will not see the light in early 2007. Possibly, if the Siniora government manages to create a united cabinet in the next three months, the privatization process and other economic reforms may start to move forward towards the end of 2007.

To Paris III or not to Paris III?

Lebanon is expected to receive major financial aid from the Paris III conference, scheduled for January 25, 2007. According to some analysts, the country needs about at least $8 billion for the reconstruction process and to repay its $2.4 billion Paris II loan that is maturing in December 2006. The Paris III meeting will mark the third time the French capital has hosted an aid conference to help Lebanon since 2001, when the Paris I conference raised 500 million euros.

However, realistic expectations for Paris III are estimated around $4 to $5 billion. Economy and Trade Minister Sami Haddad pointed out in early November that Lebanon would need to raise a minimum of $4 billion at Paris III in order to avert a financial crisis. "We expect to get double the amount of Paris II and we expect to get soft loans and grants,” he said. Haddad also hinted that Lebanon is “seriously” considering an IMF program and officials are working out the details before an announcement can be made.

Paris III was due to convene last year, but the conference has been repeatedly postponed amid political bickering over an economic reform program, including IMF requirements. The government is pressing the opposition to accept an IMF program to help the country—not simply to finance reconstruction, but also to restructure the economy. Prime Minister Fuad Siniora and his team have put together a comprehensive five-year economic strategy that includes plans to reduce the fiscal deficit, bring down state debt and spur economic growth. Other top items on the Paris III agenda include serious commitments by the Lebanese government on privatization, specifically the country’s two mobile telephone providers and EDL, increasing tax revenues and implementing measures designed to improve and increase private investment.

Discussions in business halls say that Paris III may not happen this year if a comprehensive solution for the country’s internal political disputes is not found soon. The opposition—made up of Hizbullah and other pro-Syrian groups—has made it clear that if they do not get the concessions they are looking for, they will derail any economic programs and obstruct the government from carrying out its duties. Almost 1/3 of all government expenditure is in interest payments on existing debt, and if Paris III and other forms of assistance could reduce this debt, Lebanon’s troubles could be quickly reduced. And should Siniora’s five-year plan play out, the country’s debt-to-GDP ratio would stabilize, raising GDP growth to an average of at least 3% over the life of the plan.

2007 projections

Central Bank Governor Riad Salameh has emphasized that prospects for growth in 2007 depend on a positive political environment, which in turn would provide a favorable investment climate. He also pointed out that a successful outcome to the Paris III conference would buttress projected growth.

Although it wasn’t an easy feat, Lebanon was able to maintain financial stability during the war with Israel and this has raised confidence in the country’s ability to protect its currency in the short term. With the assistance of $1.5 billion transferred to the central bank by Saudi Arabia and Kuwait, the Lebanese pound’s peg to the US dollar was sustained throughout the conflict. Nevertheless, a prolonged political crisis, adding pressure on reserves to meet demand for foreign currency, could still place the pound under serious strains.

Lebanon must now resolve its political disputes and allow the country to enter a new era of rebuilding its infrastructure, economy, social core—and its status on the world stage. All involved know that changes of such magnitude usually come with a heavy price, but alas, Lebanon has already paid a great price many times over. The time has come to move forward with all reform plans aimed at stimulating growth, creating employment and improving social indicators. For Lebanon, 2006 was a dramatic year. The economy ended the year almost unchanged in size from the beginning, with widespread forecasts of zero GDP growth or possibly a 5% contraction. Now, Lebanon must reduce the large public debt and its heavy burden, and foster a stable business environment conducive to investment and job creation.

Furthermore, it is time to pass a law promoting fiscal accountability limiting the government’s borrowing and reducing the risk of inflating the deficits. The capital market must be further developed and promoted among the country’s citizens, many of whom hold substantial savings that could be used in the privatization process, thus creating liquidity and encouraging internal investments. This will also encourage additional cash-flow from the GCC and other foreign investors.

Lebanon’s friends have already proven their willingness to assist Lebanon on all levels. Lebanon must now seize this opportunity to meet the people’s desire to live in dignity and prosperity, to live in peace, building a future based on consensus and coexistence. For citizens and foreigners alike, Lebanon’s diversity, multi-confessionalism, freedom of expression, democracy, tolerance and liberty is equal to none. Simply said, this must be preserved.

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Lebanon Outlook

Calling all tourists – Picking up the pieces

by Executive Staff
written by Executive Staff

After an outstanding first half of 2006 and a catastrophic second, any recovery for the tourist industry is once again at the mercy of political stability.

The last two years have hardly been a smooth ride for those working in Lebanon’s beleaguered tourist industry. Beset by high-profile assassinations, troop withdrawals, car bombs, an under-funded government ministry and now a devastating war, they can largely be forgiven for being gloomy about the prospects for the coming year.

As is always the case in Lebanon, the health of the tourist industry depends on the country’s stability: something which is consistently impossible to guarantee. But the continued importance of the sector to the national economy is vital: it accounts for a double-digit percentage of GDP, provides hundreds of thousands of direct and indirect jobs, and has significant knock-on effects across some of Lebanon’s other core industries like construction, real estate and retail.

If anything, though, the war of 2006 reinforced an already apparent conviction that no one in the tourism industry should make any long-term plans. Lebanon’s image to most of the outside world has suffered incalculably thanks to the events of this summer, and repairing it will take a sustained period of stability, government promotion and a plentiful supply of loyal visitors. Unfortunately for a private sector whose total losses reach into billions of dollars, none of those things can be counted on in 2007.

Looking back

By all accounts, the first half of 2006 was rather good—at least compared to the first half of 2005, which was largely ruined by the Hariri assassination and the Syrian withdrawal. This time around, year-on-year arrivals were up by 47% and 39% in April and May, with hotels recording significantly improved occupancy rates and looking forward to a bumper summer of visits from GCC nationals, who were thronging restaurants and malls by the time the first bomb hit Beirut’s airport.

They were also spending lots of money. Global Refund’s index on tax-free tourist receipts, often a good benchmark of how much cash visitors have been pumping into the local economy, showed that spending rose by 45% in the first half of 2006 compared to the equivalent period in 2005. As in previous years, the biggest spenders were Saudis, who accounted for 27% of tax-free receipts, followed by Kuwaitis in second place with 14%.

Predictions were duly made for a record year. The Ministry of Tourism announced that an all-time high of 1.6 million tourists were expected over the course of 2006, whilst in June, the World Travel and Tourism Council (WTTC) released its annual research report. In it, experts optimistically predicted that the Lebanese tourism sector would cough up some $4.4 billion in economic activity over the year, generating 175,000 jobs and accounting for almost 11% of Lebanon’s GDP.

The damage done

All that turned out to be wishful thinking, rudely interrupted by a war which ground the tourist industry to a halt for several months and has doubtless put some serious brakes on next year’s prospects too. The mass exodus by land in the week after Beirut’s airport was bombed, coupled with the incessant television footage of Lebanese infrastructure being destroyed and western nationals waiting to be evacuated by warship, was more than enough to render the tourist industry defunct for the next few months.

Tourist arrivals in August dropped by 85.4% compared to 2005—not surprising considering the airport was closed for the entire month—and most hotels could do little but watch on as occupancy plummeted. Many even decided to shut down operations completely until the hostilities came to an end. One exception was the Rest House in Tyre, whose rooms were in great demand this summer and autumn from the hoard of journalists, camera crews and aid agencies based in the South.

But overall, Pierre Achkar, the president of Lebanon’s Hotel Owners’ Association, has estimated losses to hoteliers at around $2 billion, with overall occupancy down by half. No one knows exactly how long those losses will take to recoup, but layoffs have been made, and the worry is that unless things get better soon, qualified staff will simply pack their bags and head to the Gulf, where both demand and salaries are higher.

A silver lining or two

Hard though it may be to believe, there are some positives to be drawn from 2006 for those looking ahead to 2007. The first is the continued presence of the additional UNIFIL troops, assorted NGOs and the numerous other organizations involved in the post-war clean-up. According to a number of hotels, these sources are bringing in good business in Beirut, especially through block bookings.

Another is that the Ministry’s new website, Destination Lebanon (www.destinationlebanon.gov.lb), was finally launched in mid-June 2006, just before hostilities began. The five year-long project was funded partly by a $150,000 grant from USAID, and offers online booking, maps, virtual tours and all manner of listings and brochures.

More importantly, many operators report that Gulf tourists, if not their European counterparts, are becoming increasingly less sensitive to Lebanon’s perennial instability. It took only a few weeks after the ceasefire was signed for the gradual trickling-back of GCC visitors to begin, particularly for the Eid al-Fitr festival at the end of Ramadan.

This bodes well for the future: such greater resilience and speedier returns will be necessary, given that more sporadic crises are fairly predictable. Indeed, a trend that many in the industry foresee for 2007 is more last-minute bookings, with few tourists—perhaps understandably—having the confidence to lay down deposits on advance holidays.

Mending the image

Although very little physical damage was done either to Lebanon’s hotel infrastructure or the main tourist sites in the country, the biggest challenge in 2007 will perhaps be one of confidence-building among clientele.

For many tourists, especially Europeans and Americans, Beirut’s image has reverted back to that of the civil war days. Despite the fact that the vast majority of the capital remained untouched by conflict, the television images and photo montages from the southern suburbs suggested total apocalypse—and that impression will take some time to erase.

Thomas Cook, for instance, says that Lebanon is still not appearing in its European brochures after being on hold for more than a year and a half. The travel agency told Executive that it would prolong its “watch and wait” approach for 2007, even though Lebanon does appear in the company’s Egypt-based brochures.

Similarly, some of the country’s most prized cultural assets such as Baalbek and Tyre lie in zones which were amongst the worst-hit by Israeli air strikes. For these attractions, which even before the war were still trying to shrug off respective images as a 1980s kidnapping hotspot and an Israeli-bombarded town, it will be another step backwards in their efforts to tempt visitors out of the capital.

Also affecting Lebanon’s image for the 2007 season are environmental concerns. According to Tourism Minister Joseph Sarkis, some 50-60% of Lebanon’s tourist industry is based around the Mediterranean, which received an unwelcome gift of thousands of tons of oil after Israeli missiles struck a depot in Jiyyeh, south of Beirut.

It appears, however, that the damage is not as bad as previously thought. When the spill first happened, some environmental experts had claimed that the summer seasons for the beach resorts around Beirut would be “ruined for years”, with 150 kilometers of Lebanese coastline affected and the oil even spreading north to Syrian waters. According to more recent reports, though, most of the oil has dispersed from the areas further away from Jiyyeh, although some serious PR efforts will be required to repair outside conceptions.

Some of these might come from the government. In late August, the tourism ministry announced that it was launching an aid plan to help struggling the industry out of the quagmire: tourist-related businesses were being told to fill in forms detailing their war-related losses, tax breaks and other aid was being discussed, whilst a special account at the central bank was set up to receive donations.

But whatever government aid does come out of this over the coming year will almost certainly make only minor inroads into overall losses, given that the ministry has traditionally struggled even to maintain its modest annual budget of around $8 million. A delegation did, however, make a brave appearance at the World Travel Market (WTM) in London in November, along with the biggest private-sector players in the industry.

Peace and quiet, please

Despite all the woes, recovery may come quicker than expected if some stability can prevail. An important litmus test will be the Christmas/New Year period, which in 2006/7 will coincide with the Eid al-Adha, and which many tourist professionals hope will enjoy high arrivals from GCC visitors.

Some signs are good—one five-star hotel in Beirut told Executive that they were already almost fully booked for the holiday period—though others are less encouraging. The ski booking site www.skileb.com, for instance, says that its advance bookings are down by 40-50% for the coming winter season, whilst its sister hotel booking site has seen business fall by the same percentage.

Another vote of confidence will be the construction of the clutch of new luxury hotels in downtown Beirut. According to the companies’ original timetables, the next year should see the completion of Four Seasons, Grand Hyatt and Rotana Suites hotels in Solidere, with a Hilton and a newly-renovated Saint-Georges in the pipeline before 2010.

The extent to which building has been delayed by this year’s events should prove instructive, as should the progress of what is by far the biggest blueprinted project in Lebanon, the $1.2 billion Sannine Zenith. This giant ski resort, which when finished will reportedly cover almost 1% of the country’s territory, had already been delayed due to planning issues.

There’s no doubt that if peace and quiet do somehow ensue next year, then tourist business will be good. But trying to convince most of the outside world that Lebanon is a safe place to visit will be an uphill struggle. Instead, hotels, retailers and restaurants dependent on tourism revenues may have to rely even more on a high-spending Gulf Arab clientele, for whom Lebanon’s charms remain popular.

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Capitalist Culture

Political uncertainly, economic suicide

by Michael Young
written by Michael Young

As Lebanon ended the year 2006 in a spell of indecision and instability, alarmingly little attention was given to what arguably may be, short of war, the most debilitating result of the country’s political deadlock: economic collapse. The giant bubble of confidence that has, miraculously, kept Lebanon afloat financially in the last decade will not last forever.

Reportedly, that stark message was transmitted by Central Bank Governor Riad Salameh to political leaders involved in the national dialogue last November. Salameh warned that the country’s finances could not withstand much more political bickering. As Hizbullah and the anti-Syrian parliamentary majority went at each other over expanding the government, the main economic representative institutions began sounding the alarm bells—and it’s easy to see why.

Heavy losses from the summer’s war

According to some United Nations estimates, Lebanon may have endured losses of over $10 billion during the summer war. Economists have calculated that GDP, previously around $20 billion, had contracted by 2% due to the conflict. With Lebanon facing a public debt of over $40 billion, the GDP-to-debt ratio stands at around 200%, one of the highest rates in the world. Economic confidence is declining because of the ambient uncertainty, and whatever force is buttressing the pound is certainly less hardy than ever before.

Given all this, why do neither Lebanon’s politicians nor much of the public quite realize what an economic collapse could mean?

That economics are invariably politics is a truism, but in Lebanon that interplay has been taken to dangerous extremes, with economic policy usually a hostage to political power plays. Take the long-awaited Paris III meeting, scheduled for early next year to help Lebanon face its economic tribulations. In recent weeks, as the parliamentary majority and a coalition of March 8 groups and the Aounist movement confronted one another, President Emile Lahoud was repeatedly heard condemning French President Jacques Chirac. Why Chirac, as if Lahoud didn’t have enough enemies as it is? Few doubted that his target was less Chirac than the Paris economic conference, which could only boost the credibility of the cabinet and parliamentary majority at a time when its adversaries, Lahoud among them, is trying to bring the cabinet down.

One can deplore Lahoud’s methods, but the Lebanese system has always invited such behavior, if not necessarily so egregiously. Capitalist culture in Lebanon is political culture, and nothing would so worryingly emphasize that point as a financial collapse, the result mainly of Lebanese banks being unable to roll over the public debt one more time.

Disaster looms

One needn’t try hard to predict the results: social unrest, the government forced to resign, inflation, financial controls to avoid, if possible, the meltdown of the banking system, which holds the bulk of the debt, etc. However, since money is also politics, the political repercussions of an economic breakdown would be ominous. Lebanon has been floating on an impossible wave of self-confidence since 1992, when Rafik Hariri became prime minister, despite many signs in recent years that the state has simply been unable to take control of its debt. But between the war last summer and increasing political polarization, confidence has been shaken.

The harsh reality is that no one would be spared. Any presumption that one side would come out of the maelstrom stronger than the other is foolish. When economies collapse, the initial reaction of most people is to turn against their politicians. The real danger is the second phase, when demagogues take over. But demagogues thrive on conflict, and if Lebanon were to dissolve into a new generalized conflict (against the premises of class solidarity), everyone would pay a high price.

That’s precisely why, whatever happens in the coming months, the political class must impose a consensus that Lebanon’s financial policies remain outside their mutual struggle; but also that general principles be agreed at the soonest in order to move toward a necessary and successful Paris economic conference to provide funding for the state. This means agreeing to advance privatization, streamline the bureaucracy, and cut spending where possible. Why not start by setting up a national economic dialogue with major economic actors, presided over by Salameh, to parallel the stalled political dialogue? The different political parties would be allowed to have their say, but ultimately the major economic representatives and the relevant government ministries would be the ones drafting a final document, to be presented to the broader cabinet and parliament for endorsement.

Too idealistic? Perhaps, but it’s one idea among many possible ones, at a time when new ideas are scarce. In our obsession with politics, we should understand that an economic breakdown would sweep everything else away—the political class first among them.

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Levant

Turkey’s CA woes Reform needed

by Thomas Schellen
written by Thomas Schellen

With the release of the International Monetary Fund’s (IMF)’s report on the fourth and fifth review for Turkey’s standby agreement, the state of the country’s finances has come under fresh scrutiny from market observers, with ongoing concern over the size of the current account (CA) deficit.

Strong economic growth coupled with high oil prices has helped account for growing debt over recent months, according to the report, but alarmism would be misplaced following closer inspection of the CA issue and overall resilience of the economy, say local analysts.

Current account deficit causing concern

The size of the current account deficit is nonetheless causing concern, with analysts expecting a whopping $31 billion in early 2007. Yet, Turkey’s success at enduring the global run on emerging market economies in May and June 2006 was notable, thanks to such macroeconomic buffers as the floating exchange rate, the independence of the central bank, a gradual shift away from hot money to an increased FDI-weighted portfolio, a disciplined banking regulatory agency and the closely-associated strength of the banking system and the independent budget process. True, the economy was among the hardest hit by tightening global liquidity conditions in the middle of the year, but the situation could have been much worse—a reflection of the economy’s increased ability to absorb external shocks. Accumulating external reserves has also been key in protecting the Turkish economy from external hiccups and storms.

Some observers say that Turkey’s market will be unlikely to experience a serious crisis under the present administration, due to the government’s disciplined monetary and fiscal policies. Raising savings, be it through reform of insurance law or mortgages, is one way that the government would be able to address the current account deficit. The all-important inflow of foreign direct investment (FDI) into the economy remains essential too.

Turkey’s restructured banking sector has been credited in helping stabilize the economy, with consolidations and mergers and acquisitions ensuring increased competition between constituent players, not to mention much-needed revenue for state coffers. Many are following preparations for the privatization of Halkbank, Turkey’s second-largest public bank, the terms of which were announced at the end of 2006. Meanwhile, Ankara has indicated that Ziraat Bank, Turkey’s market leader, will also be sold off. This follows on the back of a string of mergers and acquisitions in the banking sector, with Citibank recently acquiring a 20% stake in Turkey’s private giant Akbank. In 2005, Fortis and General Electric Consumer Finance (GECF) also moved into the country, with the former taking over Disbank and the latter taking a 50% stake in Garanti Bank. BNP Paribas’ acquisition of a 50% stake of TEB Financial Investments also seized headlines last year. Thanks partly to the introduction of the Banking Regulation and Supervision Authority (BRSA), Turkey’s banking sector has undergone a dramatic change since the 2000-2001 recession. Balance sheets are now much stronger than before, with high capital adequacy ratios and the seemingly-manageable open foreign exchange positions of banks, according to a July IMF report.

Although important, acquisitions and privatizations on their own are not enough to fill the CA gap in a sustained manner, with long-term income perpetuating investments key to balancing the budget, according to former World Bank Turkey representative Andrew Vorkink. Though not expecting a further economic crisis, Vorkink underlined the risk of failing to balance Turkey’s books. If an international disruption occurs, people will wonder how Turkey can finance the gap and will get nervous, Vorkink said during an interview with the local press. But if Turkey continues to attract funds, not only internationally but also through domestic savings, then the ability to finance the gap is OK because the alternative is to cut the deficit, which will cut growth.

Meanwhile, Ankara is more than aware of the political considerations that are likely to impact investor confidence. It was not only the widening current account deficit that made Turkey vulnerable in May and June, but also some delays in implementing structural reforms, in pensions and tax, for example, and some delay in the privatization of state banks – all flagged by the IMF report. The delay in appointing a new governor of the central bank following the departure of Sureyya Serdengecti, the president’s veto of the government’s pension reform law and the assassination of a high court judge in May did investor confidence little good either.

Now, political and economic analysts are closely following developments on Cyprus—with Brussels demanding that Ankara lift trade restrictions against Nicosia—a demand that Ankara currently rejects. Turkey’s commitment to EU membership and the ongoing accession process is, after all, considered as a form of insurance that Ankara will continue to push ahead with economic, political and social reform even if the pace may fluctuate.

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Comment

Dealing with Iran

by Gareth Smith
written by Gareth Smith

Iran’s influence in the region and the Islamic world will likely continue to increase in 2007, as the United States fails to come up with credible strategies for managing Iraq or for reaching international consensus on Tehran’s nuclear program. If Washington is serious about talks, however, Iran may gradually return to the less confrontational style that characterized its 2003-2005 negotiations with the European Union.

Nonetheless, such talks cannot bring tangible fruit as long as the US and EU continue to demand concessions—in particular, the complete cessation of uranium enrichment—that Iran’s political class is unwilling to make. As Iranian UN envoy Mohammad-Javad Zarif recently told James Baker, the ex-diplomat trying to produce a new Middle East policy for President George W. Bush, any deal comes with a hefty price tag.

Lebanon will remain a point of contention between the US and Iran (and Syria), as Tehran has neither reason nor desire to weaken long-term alliances with Hizbullah and militant Palestinian groups. American and Israeli pressure on Lebanon—diplomatic or military—will keep the Levant a dangerous flashpoint in a volatile region.

Tehran will continue to foster relationships within the Muslim world and with Russia and China, using its vast energy resources as a prize and always seeking to extract some political benefits. A deal over the proposed $7 billion pipeline to take natural gas to India via Pakistan would be both a major step towards closer links with the sub-continent and a blow to American diplomacy. If the US and EU impose sanctions on Iran over the nuclear program, European oil majors will see their interest in Iranian oil and gas slipping away both to China and to domestic Iranian companies, including those affiliated to the Revolutionary Guards.

Tehran’s close relationship with the Shia parties and the Kurds in Iraq will ensure its influence with its troubled neighbor remains strong. America’s disastrous management of Iraqi affairs has served as an example to Iranians of the woes of “regime change,” and no amount of US or British-funded Farsi broadcasting to Iran is likely to overcome their skepticism about the West.

Domestically, President Mahmoud Ahmadinejad will lose some popularity as he fails to deliver on egalitarian election promises of “social justice.” With no meaningful market reforms of an economy shot through with restricted practices, protected interests and a bloated state sector, inflation and unemployment will creep upwards to 17.5% and 15% respectively, and growth will remain sluggish at around 4% despite high oil prices. Record oil revenues, however, will bolster the economy and the government.

Growing numbers of cars and the government’s failure to develop refineries mean petrol imports will increase from the current 30 million liters a day unless the government is prepared to take the unpopular steps of rationing or ending generous subsidies. At the equivalent of nine cents a litre, Iranian petrol is among the cheapest in the world.

But President Ahmadinejad’s government will continue to draw support from most Iranians’ backing for the nuclear program, as long as the stand-off with the US and EU produces no tangible costs. The popular reaction of Iranians to any military strikes by Israel or the US is uncertain, but might easily be an upsurge of nationalist defiance.

In the run-up to parliamentary elections in 2008 and presidential elections in 2009, domestic political competition will intensify, but Supreme Leader Ayatollah Ali Khamenei will continue to work for consensus on important issues (including the nuclear program) to prevent any single faction—including the fundamentalists—becoming too powerful.

Iran’s reformists have spent 2006 licking their wounds and regrouping after defeats in the 2003 municipal, 2004 parliamentary and 2006 presidential elections. The next 12 months will show whether they are prepared to roll up their sleeves for political battle, across the country and beyond their settled constituency of the educated and upper classes.

While some reformists have advocated steps to restore “international confidence” over the nuclear program, it is unlikely they would be beneficiaries of any swing away from Ahmadinejad. The coming year will be crucial for Mohammad Bagher Ghalibaf, who ran as a conservative modernizer in the 2005 presidential elections and then replaced the victorious Ahmadinejad as mayor of Tehran. Ghalibaf could end 2007 looking the most credible challenger in the 2009 presidential election.

Akbar Hashemi Rafsanjani, the influential former president, will remain a formidable player. Having survived the attempt by Ahmadinejad to remove him and his allies from important positions, Rafsanjani has stabilized his relations with Ayatollah Khamenei and will continue to work for greater pragmatism at home and abroad.

Meanwhile, Iranian exiles in the US and American “Iran experts” will continue to offer faulty assessments from a distance of 7,000 miles. Who knows? There may well be more “student leaders” like Manouchehr Mohammadi, or “journalists” like Amir Taheri, turning up in America to proffer easy solutions for “regime change.”

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