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 Executive Editors
written by Executive Editors

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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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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Lebanon Outlook

Lebanon’s industry leaders call for help but pleas fall on deaf ears

by Executive Staff
written by Executive Staff

While the Lebanese industrialists’ chorus of demands going into 2007 has certainly grown louder following the July-August war, their wish-list has changed only marginally. As 2006 approached, local manufacturers were lamenting the country’s perennial instability and pleading for the government to compensate the sector for lost income following the assassination of former Prime Minister Rafik Hariri. Industrialists bemoaned high energy prices and the inability of local exports to compete at the regional level with low-priced goods from Egypt and Syria, where both power and labor is far cheaper. They asked for the state to prioritize industrial development—which has traditionally taken a back seat to the hospitality and real-estate sectors—and decrease Lebanon’s reliance on imported raw materials and commodities.

Though the grievances are familiar, the fortunes of Lebanon’s vulnerable industrial sector have deteriorated precipitously. In the first half of 2006, exports of manufactured goods rose 51% to a value of $1.3 billion—only slightly more than the estimated $1.1 billion worth of cumulative losses suffered by the entire sector as a result of the war. According to figures compiled by the Lebanese Ministry of Industry, a total of 142 factories sustained material damage during the 34 days of fighting: in the end, the Lebanese economy was as much a target of Israeli aggression as Hizbullah.

In the fall, the Association of Lebanese Industrialists (ALI) presented a proposal to Lebanese and Arab governments to support the sector’s recovery. Alongside compensation, ALI requested that the governments lift customs duties on primary and raw materials, and exempt manufacturers from VAT payments and tariffs. It also asked that debts be rescheduled for industrialists who suffered serious losses during the third quarter of 2006, and that the banking sector extend loan facilities to finance the reconstruction of damaged factories.

Few industrialists were holding out for the government to reimburse them immediately for direct material damages from the war, but they expected the ALI plan to be circulated at the November Reconstruction summit of Arab League finance ministers in Beirut.

Deal on fuel requested

ALI asked GCC countries to sell fuel to Lebanese manufacturers at the same rates they charged domestically for a period of one year. In Saudi Arabia, for example, the domestic cost of diesel is 10% of the global market value. The association also proposed that Arab League members buy Lebanese products to prop up the ailing industrial sector, as opposed to giving direct financial aid in the form of grants and soft loans. ALI reported that of all Lebanon’s trading partners, GCC countries were the quickest to abandon the Lebanese market at the onset of hostilities. Finally, ALI requested that a portion of pledged reconstruction money be earmarked for a fund to make interest payments on outstanding loans.

According to ALI President Fadi Abboud, however, the government did not present any of the association’s suggestions at the conference.

“The government told me to my face, ‘you can’t be a begger and impose conditions,’” he says. “So basically what they are saying is that ‘we are ready to sacrifice Lebanese industry as long as the rest of the Arab world is happy with us.’”

Material losses notwithstanding, ALI is urging Fuad Siniora’s administration to adopt a principled policy on industrialization, and put incentives in place to encourage both local and foreign investment in Lebanon, where manufacturing has long been overshadowed by the more cost-effective environments of its neighbors.

“The war certainly did not make life for us any easier, but at the same time this country is not very friendly towards industrialists,” says Abboud. “We are finding it very difficult to convince this administration to adopt safeguards to protect various industrial sectors, even though we are only asking for measures that are approved by the WTO and the Greater Arab Free Trade Agreement.”

Aside from levying a 20% duty on imported ceramics in September—which only benefits Lebanon’s two tile manufacturers—the government has not imposed any new safeguard measures since most tariffs were abolished in 2000. The other industrial sectors that still receive government protection, including cement, electric cables and wine, do so not for economic reasons, says Abboud, but because “their owners have friends in the administration.”

Gemayel’s plan allowed to lapse

Siniora formally endorsed the “Lebanese Industry 2010” plan presented by late Minister of Industry Pierre Gemayel at the beginning of his term in 2005. The plan included a short-term “100 day” strategy to boost the manufacturing sector. But the 100 days lapsed 10 months ago, and the government has yet to adopt one of the proposed support measures, save what Abboud calls the “Uniceramic” safeguard, in reference to the company with a near monopoly on the tile trade.

ALI is in favor of the safeguard for ceramic manufacturers—whose local market share has been progressively eclipsed by cheaper Egyptian imports over the past three years—but it is demanding similar protection for other industries in 2007, particularly those that are energy-intensive.

Manufacturers of products such as plastic, glass, and paper—all of which require huge fuel expenditures—were already in an unstable position before the summer war. Now they are in dire straits, says Waji al-Bizri, the vice president of ALI. The Ministry of Industry figures show that local food and furniture manufacturers and construction companies bore the bulk of direct material damage.

“All sectors are in need of help right now,” Bizri explains, “the market has shrunk and customers are not willing to spend money, and the exporters are suffering because many of them lost trading partners during the war.”

Raja Habre, director of the EU-funded Euro-Lebanese Center for Industrial Modernization (ELCIM), agrees that restoring broken chains of production, both at the local and regional levels, will be one of the most significant hurdles for businesses in the new year. In addition to reestablishing regional trade with lost partners, industrialists have to remedy disruptions in local trade from a decline in production levels, damaged transport routes, and failure to collect and repay existing debts.

The destruction of the Maliban Glass Factory in the Bekaa valley, says Habre, is an example of collateral damage that has reverberated across the entire economy, since the company supplied bottles to manufacturers of goods ranging from food to pharmaceuticals.

“I think they are recovering,” Habre says, “but remember since the blockade was lifted there has been a foul mood amongst business leaders, and neither consumers nor manufacturers are feeling confident in the current political situation.”

Indeed, a lack of confidence was identified as one of the most damaging immediate consequences of the conflict, according to a study released in November by Infopro in cooperation with the Lebanese Finance Ministry. Some luxury retailers relocated their offices to the Gulf region or opened up branches elsewhere in the Arab world in anticipation of heightened political tensions. The report also expects a rise in unemployment levels since many factories have been forced to lay off workers due to a dip in consumer spending.

Before the resignation of six cabinet members, ALI had threatened to take legal action against the current administration at Majlis al-Shura if it failed to respond to its demands by Nov. 20, 2006. The association had planned to then hold a general assembly meeting and vote on how to proceed. Abboud said they would debate a series of options, including shutting down factories and “taking to the streets.”

Now that similar threats from Lebanon’s largest opposition party are paralyzing the government, the ultimatum is off the table and local industrialists are pleading once again for an end to political instability, which Bizri claims is the main deterrent to foreign investment, and the biggest obstacle facing the sector in 2007.

“The negative attitude from all political parties is bringing the entire business environment down.” Bizri says of ALI’s current demands on the government, “We are asking political leaders to reach an agreement, otherwise many institutions may be forced to shut.”

All is not negative, however

Habre paints a rosier picture of the mood among local manufacturers. He says many of ELCIM’s clients are continuing the projects they began before the war. So Lebanese exports can claim a larger share of global trade, industrialists are upgrading production methods and accounting procedures to meet internationally-recognized standards.

But the rising costs of moving goods in and out of the country, due to damaged transport routes and high energy prices—compounded by more electricity rationing—will continue to put pressure on Lebanon’s manufacturing sector, reports Infopro. A lack of available labor will also hinder recovery, since most foreign workers fled the country this summer. Though “replacement of foreign labor with local labor is a medium-to-long-term possibility,” according to Infopro, it is not a viable short-term solution.

Industry not a priority

“There are plenty of liberal economies led by governments that understand the importance of industrial development, but this is clearly not a priority of the current government,” Abboud says. “We are the people that can create enough jobs to stop this crazy immigration where we are losing the best we have.”

Abboud’s claims are supported by industry’s performance: despite the lack of government support, the industrial sector has become a linchpin of the Lebanese market: in the first half of the year, manufactured products accounted for 68% of total exports and 21% of GDP. The consequences of a poor second half of 2006 for the manufacturing sector—and, in the current situation, likely underperformance in 2007—will have a significant negative impact on the Lebanese economy.

As Executive went to print, Lebanese industry was struck another blow through the assassination of Minister of Industry Pierre Gemayel. Although Abboud (and indeed, the industrial sector at large) has been consistently critical of the Lebanese government’s policies towards industry, Gemayel was the one minister he identified as a real advocate in conversations with Executive over the past year. Industrialists felt Gemayel took his portfolio seriously, and recognized his tireless efforts in support of their embattled sector. The loss of such a vital ally on the eve of 2007 puts the future of Lebanese industry on ever more uncertain ground.

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Lebanon Outlook

Lebanon’s insurance industry survives war intact

by Executive Staff
written by Executive Staff

Lebanon’s insurance companies passed through the 2006 war between Israel and Hizbullah without having to pay crippling amounts for war-related claims, because this type of coverage is not a usual purchase option. (In any country, a house caving in beneath the impact of a force majeure is not calculable, and ineligible for cover under a standard home owner’s policy.)

In fact, the latest global insurance industry research by reinsurance giant Swiss Re positions Lebanon at a total premium volume of $664 million, up from $580 million in 2004, and an insurance density—the amount per capita invested in premiums—of $185.6, distributed at a ratio of 70:30 between general insurance and life insurance.

This compares favorably with insurance density of $54.2 in Jordan, $57.1 in Saudi Arabia and $113.7 in Oman. Lebanon is on equal footing with Kuwait ($185.5) in terms of overall insurance density, however the distribution between general and life insurance in Kuwait leans significantly more towards general insurance. With $414.2 and $442.3, the UAE and Qatar showed far higher insurance density than Lebanon but in terms of life coverage, Lebanon is still stronger than Qatar, whose citizens spent just $22.2 last year on life products, most of which are shunned under Islamic religious law.

Insurance growing globally

On global scale, insurance premiums last year amounted to $3.426 trillion, an increase of 3.9% in real terms from the previous year. Industry profitability in the life segment improved compared with 2004 and general insurance remained very profitable, according to Swiss Re. The reinsurance company added that non-life premium growth in 2005 was slow and ranged below GDP growth in most countries.

Swiss Re computed an overall premium volume of $16.3 billion for the Middle East and Central Asia in 2005, up 5.8% on the previous year. The realm accounted for a measly half percent of the world insurance market, even though Swiss Re conjoined the two geographic areas in its statistics. With 1.45% insurance premiums as percentage of GDP, it was the tail runner of all regions listed in the report in terms of insurance penetration. Lebanon’s 2005 insurance penetration was quoted as 3.15%.

On the national level, the November 2005 research figures by Swiss Re assess Lebanon’s premium production at $577 million in 2004, comprised of $180 million in life and $397 million in non-life insurance. With an average of 15.5 % annual growth over the five years 1999 to 2004, the 9.3% inflation-adjusted increase between 2003 and 2004 represented a decent result for the year 2004, and expectations for 2005 had initially been for good continued development.

This performance is not bad by regional standards, but it means that the country’s insurance industry is still not on a growth trajectory that would put it in reach of an adequate net for protecting society and individuals against calculable risks.

It should be added here that Saudi Arabia has (albeit with a delay of about 30 months since the presentation of its advanced insurance law) recently issued several licenses for insurance companies to operate in the kingdom and can expect some real sector growth. Syria is another country where authorities moved ahead with licensing new insurance companies and three Sharia-compliant insurance firms are scheduled to go operational there early next year. All three have been established as joint venture companies between Gulf-based companies and Syrian shareholders.

As for the inactive side of the Lebanese insurance industry in 2006, it suffices to say that insurance industry association ACAL is still advertising Beirut Rendez-Vous, a regional gathering of industry members, as “upcoming” on its website: the event actually took place—and flopped badly—in the spring of 2005.

Sector survives political tumoil

But under Lebanon’s current political climate, it is admirable enough that a sector such as insurance can sustain its position, given the suppressed purchasing power of individuals and the cash flow situation of many businesses, whose cash reserves have been depleted by the summer war and the economic repercussions of the fourth-quarter political crisis, which many predict will lead to serious debt rescheduling issues and a wave of bankruptcies in the first quarter of 2007.

From a GCC vantage point, the Lebanese insurance industry appears advanced, well-regulated and overall more open and private sector-driven than insurance sectors in other Arab economies. However, not terribly much is known about the Lebanese insurance sector outside a narrow group of local and regional specialists. Information circulating regionally and internationally about the sector relies predictably on reports produced by these specialists and often contains dated and vague performance numbers, with unaudited 2004 results being cited. The sector also still requires internal development, in order to march forward into alignment with global best insurance practices.

Thus, when Kuwait-based Global Investment House issued a report on the Lebanese economy in November, it said, “We expect the insurance sector [in Lebanon] to grow in the future, provided we see political stability in the country and thriving economy; because we see a great scope in terms of market for the life insurance and until we have stability in country and generally well going economy, it’s hard to expect to have higher sales of insurance policies.”

It carries a very limited risk indeed to say that these issues will be as valid in 2007 as they were in 2006.

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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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