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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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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Regime Change in D.C.

by Claude Salhani
written by Claude Salhani

Be careful what you wish for. President George W. Bush and his close circle of neoconservatives wanted regime change … and they got it. Okay, it was not exactly what they wished for. Bush had hoped for regime change in parts of the greater Middle East. Instead, it came to Washington, DC. As expected, the Democratic Party won both Houses of Congress in last November’s mid-term elections, sweeping out the Republicans and gaining the majority in both chambers: the House and Senate.

This time, it’s not just the economy, stupid. It was the war in Iraq that clinched the victory for the Dems, and despite the best Washington spin machines, the outcome is nothing short of a censure of the Bush government and the Republican Party.

The Republicans’ defeat was the result of a growing number of Americans concerned by a failed policy in the Iraq war with no visible end in sight, a sagging economy and the government’s abuse of power in the fight against terrorism. The political shakeup in Congress can be taken as a demand by the American people for regime change … in Washington.

Interestingly, much of the disappointment in the administration’s performance came from once-ardent Bush supporters including … wait for it … the armed services.

Days before Election Day, a number of hard-line neoconservatives, including a one-time top Pentagon adviser and one of the main architects of the Iraq war, came out publicly against the way the US was conducting the war in Iraq, calling it a “disaster,” words echoed by British Prime Minister Tony Blair while touring Pakistan towards the end of November.

Timed to appear just before the elections, in an interview with Vanity Fair magazine, Richard Perle said if he had been able to see how the war would turn out, he probably would not have pushed for the removal of Saddam Hussein.

“I think if I had been delphic, and had seen where we are today, and people had said, ‘Should we go into Iraq?,’ I think now I probably would have said, ‘No, let’s consider other strategies for dealing with the thing that concerns us most, which is Saddam supplying weapons of mass destruction to terrorists.’”

He added: “The decisions did not get made that should have been. They didn’t get made in a timely fashion, and the differences were argued out endlessly.” Responding to the magazine’s accusations, a White House spokesman said simply, “The president has a plan to succeed in Iraq.” (Interestingly enough, campaigning right up to Election Day, the president kept repeating the same line, that he had a “plan” for Iraq.)

But Bush loyalists, including Perle and other former White House insiders cited in VF, now claim they were quoted out of context and that the magazine was playing its own brand of politics in hoping to influence the elections. That may well be so, but the Army Times, the Navy Times, the Air Force Times, and the Marine Times also took up arms, firing their own withering editorial broadsides calling for the resignation of Secretary of Defense Donald Rumsfeld.

The day after the vote, they got their wish and Rumsfeld was handed his walking papers.

In the past, US military personnel have traditionally avoided criticizing their civilian leaders, regardless of how poor a job they might be doing. As these hugely influential military newspapers pointed out, finding out the truth about what was going on in Iraq had been, until recently, a mite tricky.

Despite their titles, the four military Times are not affiliated with the military but are published by Gannet, the same group that publishes USA Today. They are, however, widely read by those in uniform and likely played a part in convincing Bush to sack his secretary of Defense.

The papers accuse the White House and the Pentagon of offering a string of false statements. “One rosy reassurance after another has been handed down by President Bush, Vice President Cheney and Defense Secretary Donald Rumsfeld: ‘Mission Accomplished,’ ‘the insurgency is in its last throes,’ and ‘back off, we know what we’re doing,’ were among the optimistic images the Bush administration tried to portray from a war that was going from bad to worse.”

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The rich just keep getting richer

by Fadi Chahine
written by Fadi Chahine

The ultra rich—those who hold more than $30 million each—have increased their assets by 8.5% to $33.3 trillion in 2005 from $30.7 trillion in 2004, Merrill Lynch and Capgemini said in their 2006 World Wealth Report (WWR).

The Middle Eastern share of high net-wealth individuals (HNWI) in 2005 amounted to $1.2 trillion, representing the strongest growth rate by region with 19.7% when compared with $1.0 trillion in 2004. Africa and Latin America followed with growth rates of 14.5% and 11.8%. Compared with $800 million combined HNWI assets in 2003 in the region, the wealth of the Middle Eastern rich increased by half in just two years.

In terms of individuals, the HNWI count for the Middle East increased by 9.8%—more than the global increase rate of 6.5% in 2004-2005—but remained in the range of 300,000 to 400,000 individuals.

Rising oil prices a factor

The WWR attributed the Middle East’s strong HNWI growth generically to the world market’s rising oil prices as well as heightened investor confidence and large trade-driven surpluses in the region. Observing that combined HNWI assets increased significantly faster than HNWI numbers, the report said the region’s wealth “not surprisingly … continues to experience an inequitable distribution.”

Counting 1.1 ultra-HNWIs for each 100 HNWI, the Middle East was very close to the global average as far as proportion between rich and super-rich is concerned. Out of 8.7 million HNWIs worldwide, 85,400 hold assets of $30 million or more.

A table of HNWI population changes in select economies showed the year’s strongest growth for South Korea, with 21.3%, followed by India and Russia. Saudi Arabia achieved 13.5%, and the United Arab Emirates 11.8%.

Globally, the very rich have doubled their combined wealth to $33.3 trillion in 2005 from $16.6 trillion in 1996 when the World Wealth Report was first published. However, as HNWIs grew in numbers to 8.7 million last year from 4.5 million a decade earlier: assuming increasingly sophistication survey mechanisms over the years have filled gaps in the initial counts, growth in the numbers of individuals and their total assets are closely correlated and moreover intertwined with global economic growth over the period.

This is also visible in the fact that the evolution of combined wealth and that of individual wealth holders has followed a very similar pattern, of increasing 62% and 56% from 1996 to 2000, undergoing a contraction in 2001, and resuming steady expansion from 2002.

On the cost-of-being-filthy-rich side, the report noted a narrowing of the gap between the “Cost of Living Extremely Well Index” growth and average Joe’s consumer price index inflation. In 2005, the CLEWI grew 4%, only 0.4 percentage points more than the CPI with 3.6% growth. Two years earlier, the gap had still amounted to 5.5 percentage points, according to the WWR.

How did they do it?

In Europe, where HNWI growth rates have been subdued compared with other world regions, the rich additionally bear the cross of having to spend more on staying in style. According to Capgemini/Merrill Lynch, heavily moneyed individuals in Europe have to allocate around 1.6% of their average wealth for sustaining lifestyle aspects such as lodging in five-star auberges, maintaining that body and tan in spa visits and securing their children’s education in private schools.

As to the big question—how did they get that wealthy?—

the 2006 WWR observed an increase in earned wealth vis-à-vis inherited riches, diagnosing that over the past five years, “earned wealth has grown faster than wealth passed down from an earlier generation.” Inheritance last year was the main origin of wealth only for Middle Eastern individuals, where a WWR survey among relationship managers described it as source of 32% in HNWI wealth, 14 percentage points above the global figure.

On global level, the survey attributed HNWI fortunes firstly to ownership or sale of a business (37%), followed by what the report quite loosely described as “income” with 24%.

This income excluded items such as investment returns and stock options, which in their combination accounted for a share of wealth ranging between 25% in North America and a mere 10% in Latin America. Investment performance, the direct bailiwick of Merrill Lynch and Capgemini, contributed less than one might have expected to the total, namely 12% in Asia-Pacific and 10% in each Europe and North America, but only 5% in the Middle East and 3% in Latin America.

Looking to the future, the WWR estimates that HNWI assets will increase to $44.6 trillion in 2010, of which the Middle East will claim $1.8 trillion, reflecting an annual regional growth rate of 8% versus the estimated global annual growth rate of 6%.

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Contemporary art in the Gulf: time for a renaissance?

by Sunny Rahbar
written by Sunny Rahbar

In May 2006, Christie’s held its first-ever auction in the Middle East, a sale of international contemporary art with an emphasis on Arab and Iranian works. All expectations were shattered: more than $8.5 million worth of art was sold, and a second auction is now planned for January 2007. Despite the absence of a strong artistic tradition, the Gulf is increasingly emerging as a new artistic hub in the Middle East. The Sharjah Museum held its 7th biennial in 2005, an event now widely regarded as the Gulf’s premier modern art showcase; the 8th biennial will open in April 2007, and is expected to be even bigger. The first major art fair in the Middle East, the Gulf Art Fair, will take place in March 2007, and will see some of the world’s most exclusive galleries taking part, rubbing shoulders with their new local counterparts. The Guggenheim has announced its biggest-ever museum to be built in Abu Dhabi, expected to open in 2011.

If there was a lull in terms of artistic innovation, production or sales of Middle Eastern art during the later decades of the 20th century, it was because the Middle East itself was in a state of unrest: most local artists either had to go to the West to pursue their careers, or stay and make art under adverse, often repressive condistions. Only rarely was their art shown to local audiences.

The popular resurgence of Arab art began in earnest in the late 1990s. One catalyst was the the surprise triumph of Iranian director Abbas Kiarostami’s “Taste of Cherry” at the Cannes Film Festival in 1997, which raised both awareness and interest in regional cinema. Iranian cinema may be the regional star, but Arab filmmakers caught the wave as well. For foreign audiences, Middle Eastern cinema was new and innovative; people were curious to see and, perhaps through these films, better understand the region. The fact that much of this emerged despite tight government regulations and censorship, and often under politically or physically dangerous conditions, only heightened Western interest and curiosity.

Around the same time, galleries throughout Europe began to recognize the level of emerging talent among Middle Eastern artists and a Western appetite for regional culture. In 2001, the Barbican in London organized an exhibition of contemporary Iranian art from 1970s to present day. Other prominent shows included Disorientation in Berlin in 2003, a multimedia group show for young Arab artists; Contemporary Arab Representations in Rotterdam in 2002; and Harem Fantasies and the New Sheherazades, showcasing the works of contemporary Middle Eastern female artists in Barcelona in 2003.

Meanwhile, there was a feeling within the nascent Gulf art community that things were changing. A discourse emerged, as artists reflected on their situations, the region and its nuances, identity and exile, politics and life. Among the younger artists being showcased, there were also many older, established artists showing new work or work that not been seen in years. There were also artists, such as Mona Hatoum and Shirin Neshat, who had already made their careers in the West but suddenly found themselves the subjects of much greater attention as more curiousity surrounded Middle Eastern art and artists.

At the beginning of the decade, Dubai had only a few art galleries, which mainly displayed European and other Western artists. The cinemas showed Hollywood films, few of the exciting new Iranian and Arab films and filmmakers were recognized, let alone screened in the Gulf. There were pockets of production and promotion in other parts of the the Middle East, especially in the cultural capitals of Beirut, Cairo and Tehran. But most of the action was in the West.

Five years ago, there were no contemporary art galleries that specialized in art from the Middle East in Dubai. There were no magazines that wrote specifically about local artists, and there was no secondary market for art in the emirate. In short, there were no real platforms for local artists to be promoted to their home audiences.

At the time, some naysayers speculated that people in the Gulf were simply not interested in Middle Eastern artists, and perhaps there was no real market for such work. Five years on, however, there are now two magazines solely devoted to Middle Eastern art and culture, Bidoun and Canvas. Art-based forums, nonprofit groups and new galleries are springing up. The Dubai film festival today, for example, has an entire section devoted to films by Arab filmmakers.

There is a market for Middle Eastern art in the Gulf: as shown in Dubai, the kind of work that people once dimissed as not having a “market” here is exactly what the collectors are buying. And the best news is that in this boom, some of the most exciting work to come from the artists of this region for a long time is emerging: Middle Easterners are making art that is thought-provoking and conceptually strong. The Gulf and its artists are waking up, and it’s about time.

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Editorial

A year of tumultuous change and reversals

by Yasser Akkaoui
written by Yasser Akkaoui

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

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

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

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

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

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

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Lebanon Outlook

Looking back – 2006

by Executive Staff
written by Executive Staff

January 2006

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

February 2006

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

March 2006

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

April 2006

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

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

June 2006

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

July 2006

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

August 2006

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

September 2006

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

October 2006

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

November 2006

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

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Lebanon Outlook

Beirut’s banking sector healthy but challenges lie ahead

by Executive Staff
written by Executive Staff

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

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

Balance sheets maintained

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

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

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

Deposits staying put

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

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

Interested in profits

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

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

Dangerous times ahead

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

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