Executive Magazine

Who’s Who at Lebanon’s Investcom

by Executive Staff May 1, 2006

written by Executive Staff

Azmi Mikati holds a bachelor’s degree from Columbia

Taha Mikati, chairman

Taha Mikati is the founder of Investcom. He began building businesses in 1979 after founding a successful construction business called ACC in Abu Dhabi. His knowledge of the construction industry was based on his experience as a civil engineer. According to a spokesperson at his PR company in London, Taha Mikati decided to sell his share in ACC in 1992 “to focus his energies elsewhere.” Taha Mikati then “identified the opportunity to develop a high quality telephone service provider in developing, under-penetrated high growth mobile telecom markets. He founded Investcom for this purpose and remains today closely involved in the company’s strategy and operational performance.” His PR agency admitted that they had “no photograph of Mr. Mikati,” hence the image above.

Najib Mikati, vice chairman

Najib Mikati is the brother of Taha Mikati and a former Lebanese prime minister, an office he held in the interim period after the murder of former premier Rafik Hariri and the downfall of the government of Omar Karami. He has also held ministerial posts and is a former member of parliament. He was a member of the executive committee of the National US-Arab Chamber of Commerce in Washington DC, and a member of the board of directors and chairman of the economic committee at the chamber of commerce, industry and agriculture in Beirut and Mount Lebanon. He has close ties with Syria’s ruling Assad family Najib Mikati holds a master’s degree in business administration from the American University of Beirut, and according to Investcom’s PR company, “has also attended several executive programs which include the Owner/President Management Program at Harvard, Boston in 1990, the Avira Program at INSEAD, Fontainebleau France in 1994, and the Innovations in Governance Executive Program at Harvard, Boston in 2004.

Azmi Mikati, chief executive officer

Azmi Mikati is the son of Taha Mikati. He was appointed CEO of Investcom Holding in 1998. He is responsible for the global strategy of the company and its implementation. Prior to this role, he was the director of T-One Corporation (international carrier) and a board member of FTML, the France Telecom subsidiary and the previous operator of one of two mobile networks in Lebanon. Azmi Mikati was educated in the United States, where he earned a bachelor’s degree in science from Columbia University.

May 1, 2006 0 comments

Economics & Policy

Not so precious Metal

by Faysal Badran May 1, 2006

written by Faysal Badran

There is almost unanimity on the precious metals among market participants. Almost every analyst, every brokerage house, and all speculative type players have their eyes glued to gold and silver. There has also been a drag effect from other markets, such as oil and copper, and since historically, they tend to move in tandem, the commodity boom has been eye-popping. The backdrop for the rise in metals has been near perfect in terms of rationale. The fans of precious metals base most of their argumentation on the global financial excesses, the looseness of central bank policies which weaken currencies and their gloomy outlook on the world in general, from a geopolitical perspective. More recently, the advent of China on to the scene as a large buyer of metals, especially copper, has added yet another compelling layer of positivism on to the view. Precious metals are seen by many as a unique store of value in a turbulent world, and given the performance of gold and silver in the last four years, it is a tempting argument.

Since 2001, silver is up nearly three fold, (300%) and gold about 250%, since the beginning of 2006, they have risen nearly 20%, dwarfing all other asset classes. So the purchasing power of silver and gold has gone up significantly faster than inflation and paper assets. So it is understandable that some are getting excited, especially that some of the fundamental arguments in favor of investment in precious metals are compelling. So is it time to take the plunge, or at least to consider precious metals in your overall asset allocation decision? The excess excitement, media hype and the technical backdrop, paint, for the contrarian investor, a different picture though, one of caution ahead.

Need to diversify

Although precious metals have attracted a lot of attention on their own merits, namely that they are perceived as a hedge against inflation and protected in case of outbreak of war and terror, perhaps the super spike in oil has played a part in their rise. Central banks, having spent most of the 1990s selling their inventory of gold are now scurrying to buy back as they look to diversify their assets away from the monolithic US Dollar. The reasons or pretexts behind the comeback of precious metals vary from one country to another, but on a global basis, most central banks have spent the last decade injecting liquidity into the system. So this rise in money supply across the globe, averaging nearly 8%, certainly helped, and with interest rates unusually low from a historic perspective, there was little to hinder the move up, and demand for physical gold in Asia added fuel to the nascent fire. There are even some sound and well formulated arguments that given the irresponsibility of central banks and the FIAT system of currencies, gold (and to a lesser extend silver) will end up replacing paper currencies completely.

They argue, somewhat correctly, that the fragility of the global financial system and the trend toward competitive currency devaluation, i.e. countries loosening their monetary reigns in order to compete in trade, will lead to a systemic breakdown and gold’s function as a store of value will take on a new dimension. It is true that central banks have been on a reckless money printing binge, and the money supply figures worldwide paint a picture of a mad rush to maintain liquidity high and avert a global recession. While we may agree that in the medium to long term, there are many imbalances in the global financial system, some large overvaluation in equity markets, and an excessive debt and real estate bubble, and that gold will be possible many times more expensive in a few years, it is unlikely to continue rising from current levels due to a multitude of reasons, the main ones being the overstretched technical condition.

The decline on the dollar, the rise in demand for commodities from China, and the concern over geopolitical risks (Iraq, Iran, and risk of terrorism) may have all constituted facilitating factors for precious metals revival and most portfolio managers and fund players are now looking at precious metals as an integral portion of their assets. The managers that had included metals in their portfolios have seen a positive impact from the rise on their overall returns, and the presence of gold (and oil) is a must in any portfolio, but the timing of such inclusion is crucial. While these asset classes serve to cushion the portfolio in times of crises, as gold and silver tend to be negatively correlated with traditional asset classes, they are not always safe to own. Currently, the technical analysis of metals, and to a lesser extent oil, points to lower prices ahead.

Bubble?

Analyzing the technical position of any commodity is a two step approach: first we look at the chart patterns, and next we look at the level of commitment of traders report. As can be seen in the charts here, the charts are painting a picture of excess. The pattern of the rise is almost vertical in its latest rise and this, coupled with a high degree of excitement on the part of the media and the public is a warning sign. This kind of action reveals a bubble-type environment, where the attitude seems to be, “get in before it’s too late”, a notion often associated with major tops, not healthy trends. This may seem like anecdotal evidence, but this type of enthusiasm for any market belies a simple fact: everyone involved is expecting a similar outcome: a rise in prices.

Another key factor in looking at commodities is the distribution of contracts in the futures market, is the Commitment of Traders Report, which shows which type of trader is holding and selling. There are two broad categories of traders: the commercials, i.e. traders involved in the commodity on a production level, and the speculators, which are mainly punters of the stuff. For a market to rise in healthy and balanced manner, demand must stem mainly from the commercials that use the futures market to hedge their production, and the speculators must on aggregate be selling. This is where you have a healthy balance between “genuine” and speculative demand.

At the time of writing, both silver and gold are in a position where speculators are aggressively buying and the commercials are selling, this is very frequently the nail in the coffin of the bull market. Silver will hit major resistance near $15 and gold will find it difficult to move much above the $650 area. In all likelihood, investors looking to add these assets to their portfolios must wait for lower prices and a more balanced set-up of players in the futures market. Due to the advent of Exchange Traded Funds, small investors no longer need to buy futures or physical commodities to participate, they can use the Barclays GLD and soon SLV actively traded on Amex to buy and sell. Again, this timeframe will probably mark the highest point in the precious metals and technically the charts point to at least a 25% drop before they are safe to own again.

May 1, 2006 0 comments

Business

Policy crossroads

by Michael Young May 1, 2006

written by Michael Young

American intellectuals and foreign policy wonks have been engaged in a spirited exchange of late, not for the first time prompted by one of their own: the intellectual and former foreign policy wonk Francis Fukuyama. In the dying days of the Cold War, Fukuyama wrote an illustrious essay in the neoconservative journal The National Interest, which he later turned into a book. He made the case that the defeat of communism signaled an ideological “end of history.” As he described it, this “end point of mankind’s ideological evolution” saw “the universalization of Western liberal democracy as the final form of human government.”

Debate

Now Fukuyama is back, having published America at the Crossroads: Democracy, Power, and the Neoconservative Legacy, an essay in which he no less illustriously, judging from the reaction, took to task American neoconservatives and the Bush administration for leading the country into a calamity in Iraq. Initially among friends when it came to the neocons, he used his essay to loudly broadcast his divorce. Like any messy separation, the results are bracing: Fukuyama’s newfound skepticism has provoked a no-less spirited response from critics, not all of them neocons.

Fukuyama proceeded dialectically: the neocon approach, embodied in the so-called Bush doctrine, outlined a policy of preemptive war to block looming threats to the United States from rogue states and terrorists; but it also held that the way to dry the terrorist “swamp” in the Middle East was to advance democracy there. For all intents and purposes, he wrote, this failed in Iraq. But Fukuyama also argued that a US withdrawal from global responsibility due to the Iraqi fiasco would be a “tragedy”, since “American power and influence have been critical to the maintenance of an open and increasingly democratic order around the world.”

What did Fukuyama propose as a synthesis of these two impulses – modesty imposed by the difficulties in Iraq, but also recognition of the beneficial uses of American power? Something he calls “realistic Wilsonianism”, by which he means the US must continue to support democracy and good governance around the world, but avoid imposing it. “Democracy promotion,” he writes, “must be a long-term and opportunistic process that has to await the gradual ripening of political and economic conditions to be effective.” And where should the US put its money? In government- or congressional-funded organizations such as the US Agency for International Development, the National Endowment for Democracy, and the like, which have experience in the matter.

Fukuyama’s critique is worth considering, and his proposals include at least one good idea, namely that the US create flexible new institutions with international partners to confer legitimacy on collective action. However, his conclusion wilts hopelessly when recommending operating through USAID, NED, or the many nongovernmental organizations devoted to democratic issues. All of these institutions have mostly failed to enhance broad Middle Eastern democracy, and we have decades of disappointment with which to judge them.

Power politics

The shape of the future Middle East will, unfortunately, not be determined by intellectual debates in the US. Given the situation in Iraq, the looming crisis over Iran’s nuclear program, a new Palestinian government that endorses suicide attacks as legitimate resistance, and more, there is little room for a sober, academic, discussion of free Arab minds and markets. But Fukuyama’s musings, because they are effectively directed at the administration from a critical sympathizer, in other words from within the same camp, are revealing in that they expose deep divisions in the American political-intellectual elite over how to spread democracy and capitalist culture in a region which has taken on vital interest.

The US stands at a crossroads. In a recent interview, the prominent Iraqi intellectual Kanan Makiya argued that he didn’t anticipate a return to deep-seated US support for Arab autocrats. In this sense, he echoed Fukuyama’s “realistic Wilsonianism.” But if stalemate persists in the Middle East, or if a broader conflict breaks out in the coming year, could the present and future administrations resist relying on those despots whom they are used to dealing with? Would they resist the familiar pull of traditional “realism”, with its respect for national sovereignty, and look the other way on random abuses of human rights?

Fukuyama is right in arguing that the US needs a new approach that highlights advancing freedom. But his preferred solution for the Middle East is fanciful, and would be as sterile as previous attempts to effect change. Without factoring in the use of force, somewhere, in advancing democracy, realistic Wilsonianism may end up being unrealistic claptrap.

May 1, 2006 0 comments

Business

Pipe Dream

by Thomas Schellen April 1, 2006

written by Thomas Schellen

In the Lebanese economy, trade houses and regional distribution ventures have long resided at the nexus of business success. And while at first it may look unassuming, the import and distribution of plumbing supplies, sanitary wares, heating equipment and tools is a fascinating part of this crucial but underreported economic activity. Georges Khoury & Co is one of the leading players in this particular industry.

Based in Beirut, the enterprise, which employs around 100 staff, supplies locally manufactured as well as imported tiles, pipes, bathroom fixtures and related materials to commercial and individual customers. Founded in 1937, the company’s operation in Lebanon looks back on almost 70 years of action in its sector. For the past three years, the firm has also been running branch operations in Syria and Iraq.

Business in this subsector of the building industry currently is, “slow in distribution and good in projects, and this is symptomatic,” business development manager George Khoury told EXECUTIVE. This situation is symptomatic for the country’s economic mood, he elaborated, in that individual clients of the middle to lower middle income groups hesitate to invest in building new homes or undertaking major renovations whereas larger investors, such as hotel and up-market property developers, show more optimism about Lebanon’s potential.

With warehousing space of some 20,000 square meters between all its locations, Georges Khoury & Co manages an inventory of some 10,000 stock keeping units (SKUs) ranging from items of less than a dollar to luxurious shower cubicles running at $20,000 per unit.

According to Khoury, the company is large in its sector on the Lebanese enterprise scale and a medium to large player in the highly segmented regional building supplies sector. Due to company policy, however, he would not disclose turnover figures or the amounts which the company invested into building its operations in Iraq and Syria.

Politics don’t much impact the business of Georges Khoury & Co but the fortunes of the local economy are likely to reflect directly upon the performance of the company, which achieved good business with major project developments and can show a contract to supply the Four Seasons Hotel on the Beirut waterfront as a recent example.

Being able to win such contracts has a lot to do with having a track record of experience and knowing contractors, consultants and developers in Lebanon and beyond. Having this track record gives Khoury confidence that the firm will be able to tap into the lucrative market for large real estate developments and outright mega-projects that are emerging in Syria.

Gulf boom

Khoury said that working in the reconstruction of Lebanon primed the company to be a strong contender for projects in the Levant that range from hundreds of residential units to entire communities designed from scratch, mostly by Gulf–based developers and financiers. What gives Georges Khoury & Co and other Lebanese firms an additional edge in this new market is the fact that the building materials suppliers and contracting firms in the GCC countries are already highly stretched in handling the construction boom in their home markets, he added.

Besides strong industry contacts, the manager referred to technical knowledge and consistent development of human resources as key factors for success in the sanitary wares and plumbing supplies business, as much as for any modern business today. While they may not always look the part, the humble drain and the average faucet are more than just off-the-shelf components. Selection of appropriate systems even in the budget end of the market influences the long-term performance of a building project, whether individual home or apartment complex, and produces substantial consequences for long-term operating costs and replacement needs.

Regional expansion

On the top end of the market, technical expertise is also a crucial factor in representing manufacturers who measure their products by performance improvements of shower thermostats that respond to water pressure changes three-tenths-of-a-second faster than rival products, and seek to distinguish bathroom technology with names such as “dreamspray” and “silkmove”. The space at the top of the global faucet and bathroom systems manufacture is a hotly contested realm where players seek to woo the competition with innovations such as household water recycling systems that allow for discarded water from your kitchen sink to be re-used in flushing the toilet.

Georges Khoury & Co carries products of around 25 manufacturers, among them three Lebanese brand producers, Lecico, Uniceramic, and Future Pipes. For other suppliers, the company relies on manufacturers from all price ranges and many countries. China, for instance, is not the only good source for low-cost products, Khoury said, pointing to Turkey and Egypt as very competitive regional producers and referring to the latter country comparable to China in terms of labor cost as well as productivity.

Representing such a wide range of suppliers, means that a distributor plays different roles for different corporate partners. High-end manufacturers in Europe run strong marketing and presales departments on their home turf but in a market like the Eastern Mediterranean, the distributor acts as more than a wholesaler, Khoury said, and is a partner in promotion and brand building of the products he carries.

The same may not apply in relations with local manufacturers, which make their own investments into acquiring market share and may view distributors merely as one in a number of equal channels to market. This creates interesting questions on the role of intermediary companies and the value they add in representing international vis-à-vis local brands.

Sitting in a first floor office in the Beirut suburb of Sid al Bouchrieh, George Khoury is a third generation family member in the management of Georges Khoury & Co. He just returned from scouting market and industry developments at a sector trade show in Egypt. His desk is lined with neat miniatures of Dutch houses in a testimony to his admiration for this European country.

Role models

His admiration for the Dutch relates in part to the similarities between Lebanon and the Netherlands, he said, as far as the widespread abilities of both peoples to converse in several languages and their success in trade.

Among business role models, Khoury expressed high esteem for the management of Kuwait’s PWC Logistics company, which transformed itself within a few years from a local to a global enterprise and logistics provider to such picky clients as the Pentagon.

While the business development plans for Georges Khoury & Co are not quite as high-flying, the company appears to be working on reinventing itself, although Khoury would not reveal details. But he is adamant in describing the strengths he sees in the Lebanese, praising the country as a series of micro-economies. “I call the Lebanese market dynamic. It is constantly changing,” he said.

Georges Khoury & Co. still derives the bulk of its turnover from the local market but Khoury anticipates many changes for the sector at large and for the company. “The future is outside [of the country],” he said, but “Lebanon is our strong base for the region, it provides us with our strength, the people that work for the company.”

April 1, 2006 0 comments

Business

Black gold black ops

by Michael Young April 1, 2006

written by Michael Young

Why is it that in Hollywood movies, the Middle East is always best understood by characters that are jaded? Watching George Clooney in Stephen Gaghan’s film Syriana, that obligation is again respected. Clooney, who portrays a CIA agent and won an Oscar for his role, shuffles through the scenes comatose with cynicism, burdened by his past manipulations, buffeted, too, by the perfidy of the American government.

It’s fun, but Syriana, like its misleading title (Syria plays no role in the story), is a misleading film. It’s often an inaccurate, anachronistic compilation of tendentious postulations about oil politics in the Middle East, thrown out as complex truth to an unsuspecting audience.

In a nutshell, the main plot involves an American oil company trying to regain oil drilling rights in an unidentified Arab emirate that has just awarded those rights to a higher-bidding Chinese company. The person behind the China deal is the reformist son of the emir, who feels it only natural, given his country’s interests, to hand the contract to the higher bidder. The emir’s other son, however, a lightweight, is used by the American company to invalidate the Chinese contract in its own favor. His reward is to succeed his father. It’s not giving much away to say that the CIA helps ensure this succession, thus benefiting American oil.

Syriana is supposedly based on Robert Baer’s book See No Evil, an account of his days in the CIA. Baer was stationed in Beirut in the mid-1980s, and, since leaving the agency, has made a career as pundit on the Middle East and the intelligence community. In fact, Syriana has very little to do with See No Evil, and far more with Baer’s second book, Sleeping With the Devil, describing how the US, because of oil, has looked the other way on Saudi Arabia’s troubling relationships with militant Islamic groups.

Hypocritical

That theme has nourished a bevy of post-9/11 films and non-specialist books about the Middle East, most prominently Michael Moore’s documentary Fahrenheit 9/11. Most of these efforts are paper thin when it comes to understanding regional realities. But that’s hardly news: popular culture has always depicted the Arab world ineptly-not necessarily degradingly, but usually shallowly. To an extent that’s understandable, since few cultures display subtlety in portraying very different ones in their popular media. The thing is, Syriana is utterly frivolous in depicting something the director and producers should have known something about: the United States.

Like Moore, Gaghan falls back on an old theme in the film-making repertoire: the malevolence of large corporations manipulating vile governments. No beef there, but given that Hollywood is an invention of large corporations, the criticism is a trifle hypocritical. And as Peter Nolan and Sacha Kumaria have written about Syriana, the idea that multinationals control oil markets is laughable. “The reality is that the heart of the oil industry, the vast fields in the Persian Gulf, Russia and elsewhere, are already the private preserve of governments, who own 80 percent of the world’s oil reserves, shutting out foreigners and the private sector.”

No less laughable, they note, is expecting that the CIA will readily murder those obstructing the welfare of US oil. The relationship between big oil and government is undeniably cooperative at times, just look at the current Bush administration; but it’s not invariably so: during the Clinton years, the administration was not pleased that American oil was cutting deals with an Iraq under sanctions. But Gaghan’s point is different; his aim is less to be accurate than to offer a cautionary tale about American politics; and here, too, his intentional ambiguity is disturbing.

Myth

Baer’s memoirs cover the Clinton years, and Syriana seems to take place before 9/11. However, it is not Bill Clinton’s legacy that the film-makers are going after (Gaghan and Clooney are voluble Democrats). Rather, if the release date of a film says anything about its message, then it is the current Bush administration that Syriana is warning against. And while no one would deny Bush has been an aficionado of big oil, he has also been far more willing to address democracy issues in the Middle East, despite American oil politics, than Clinton ever was.

More than ever, the Middle East has become Rashomon-like in its capacity to serve as a vehicle for very personal interpretations of the US government, not necessarily substantiated by facts. That may be fine for American film-makers and actors, but it doesn’t help anyone learn more about the region, oil markets, or about US politics for that matter.

April 1, 2006 0 comments

Business

Growing brand

by Executive Staff April 1, 2006

written by Executive Staff

In October 11, 1990, as the Lebanese civil war entered its final phase, Charles Ghostine received a phone call that would change his life. However, the Former National Liberal Party politician, who had anticipated returning to practicing law, did not expect much to come of the invitation to meet the Chateau Ksara board members.

In fact the meeting was seen as an inconvenience more than anything. “At the time, I lived in Beit Merri. I had to drive down to Beirut, park some distance away and then negotiate the various checkpoints on foot to get to Ksara’s offices on Avenue Charles Malek,” recalls Ghostine. “During the meeting, Albert Sara suggested I take over running the company. The last managing director was Jean-Pierre Sara, who had left the company 1987. Since then, Chateau Ksara had drifted.”

Ghostine knew nothing about wine, but had earned a reputation as a wartime leader and an organizer with a sharp mind. He had served for a period on the Executive Committee of the Lebanese Forces and in the early years of the war had been responsible for the defense and day-to-day running of Sodeco. These skills, and his reputation for hard work and honesty, were what the board wanted to exploit. “They recognized the need for crisis management,” says Ghostine. “Maybe in a normal situation I would not have been the man for the job but it was a crisis.”

Ghostine promised to think about it, but not longer after the war reached its bloody denouement and he thought that perhaps the offer had been superceded by national events. “I thought that was that and went back to practicing law. There was a lot of work at the time, disputes to be settled quickly out of court and so on.”

But call back they did, on January 17, 1991. By this time Ghostine was up to his ears in legal work, but admits it was difficult to say no. “I arrived at work on January 21 and immediately began looking at the files. I then went to Zahleh, a town I had not been able to visit for some time. I went to Ksara’s caves (underground cellars) and immediately felt something magical. Even though Syrian soldiers were still there, I was convinced there was something to be done with this company. I knew I could restructure it even though at the time I knew nothing about wine. By the time I reached Beirut I knew it could be done but it would take at least five years.”

According to Ghostine, everything that could go wrong with the company had gone wrong. There had been no investment since 1984 and very little since 1973. Before that, the previous owners, the Jesuits, had not really ploughed much money into what was an aging infrastructure. Ghostine also discovered that, although Ksara had a 12-year agreement with Jesuit brothers at the Tanail convent to provide 1,000 tons of grapes a year, this amount had had decreased to 200 tons and the winery was forced to buy grapes – at that time the traditional Cinsault, Grenache, Carignan and Ugni Blanc – from individual farmers in the village of Kefraya.

Today, 15 years after joining the company Ghostine pulls out his personal notes from his early days and reads out aloud. “1991: The winery is in bad shape. Staff moral is low, equipment is aging and there is a reliance on the local wine producers.”

One of the first things he had to do was sort out the grape situation. It would be a path that would lead to one of the most visionary moves in the history of modern Lebanese wine.

After the 1991 harvest, he went to meet the local farmers. “They all wanted to meet with me, as Ksara was, even then, the biggest producer and therefore it was up to us to set the price,” he explains. “It was a strange experience for me and a huge responsibility. I had to negotiate with 30 farmers after just six months in the business. I needed all my previous skills to hide my ignorance. In the end, I agreed to an increase in the cost of the kilo of grapes from 27 cents to 29 cents. They had wanted to double it but I think in the end they were satisfied.”

Noble grapes

Then came the biggest challenge, the bid to plant noble grapes – Cabernet Sauvignon, Syrah, Chardonnay Merlot and the like – essential to any step up in terms of overall product quality but which no one, not least the local farmers, believed would thrive in the Bekaa’s relatively untested terroir. There was a little Sauvignon Blanc and a bit of Cabernet Sauvignon, but nothing on a huge scale. In any case, the farmers made their calculations in terms of yield and these “new” grapes would take three years to mature and even then would give fewer grapes. “They all told me I was mad,” recalls Ghostine. “They told me that I was a lawyer and knew nothing about grapes. They said, don’t you think if we could plant these grapes we would have planted them years ago.”

Nonetheless, Ghostine was determined. The problem was he also had to find more land to plant. The company only owned 25 hectares in Ksara and he needed more autonomy. “I didn’t want to have to deal with the farmers every year to buy 1,500 tons. I wanted to control the quality of what we were producing.”

Ksara planted their first new vines in Mansoura. The farmers were reluctant to pull out their old grapes as they did not want land left fallow. They took some convincing, but Ghostine paid them double. In 1993, Ksara made a new agreement with the convent at Tanail to plant and buy Cabernet Sauvignon and Syrah, and, on land owned by the Schneller Institute in Kherbet Kanafar, the winery planted a further 40 hectares. “We told them we would finance everything during the lease period. We planted all the land in one year. I remember Elie Maamari (see page 56) was digging in the snow to finish in time. By the time we had finished we had planted Sauvignon Blanc, more Cabernet Sauvignon, Merlot, Chardonnay, Semillon, and Clairette.”

Still there was resistance to the idea of noble grapes. “There was no understanding of the concept. We had to work hard to instill the culture that started the concept of long-term agreements. Still in 1994, we were able to plant more grapes in Tallet Noub (45 hectares) and in the Itani property (40 hectares). The message eventually got through, Says Ghostine. “We were paying more for better quality grapes. Now they all do it.”

Rehabilitation

Ksara wanted to show the market that it was in control of its own grapes and its own vines so that no one could say that it didn’t have its own vineyards. “Today we control all our grapes and we are ISO Certified.”

Then came a revamping of Ksara’s range of wines. Ksara’s most visible wine had until that point been the Clos St Alphonse, but the new management felt it needed to lose its old fashioned image. However, as Ghostine points out, they couldn’t change image without changing the product. The winery had to wait three years until the new grapes were ready before it could change the labels and packaging. “We waited, even if it meant losing out to Chateau Kefraya.”

Ghostine insists that the support he had from the board was crucial to the company’s rehabilitation. “They believed in the brand’s potential although back then the extent of the dream was to be the market leader. We had no idea that we would be where we are today in terms of selling our wines in so many countries, although Mr. Chaoui had made it very clear from day one that one of my key missions would be to take the name of Ksara abroad. So from early on we looked at France, Germany, Finland, Sweden and Canada, where we were the first Lebanese wine to be sold, as well as the US, Syria, Egypt and Jordan.”

But what of the staff, whose morale had been eroded by a lack of leadership and focus. Ghostine had to rally the troops. “I gathered the staff and I told them we are here for what is inside this bottle before all else. I told them I wanted the wine to be delicious and we would exert all our efforts to make good wine. I told them I didn’t care about packaging. If the wine was good, the label was not important.”

But Ghostine also admits he had to find out how to reach this high standard. He looked at the existing equipment. “I asked if we had stainless steel vats and if not, why not and why were we still fermenting in cement?” He went to the wine fairs and sourced the equipment needed by a modern winery but he needed the money. Once again the board made the funds available. “Whatever I asked for I got. Since the first year we started investing intensively heavy. Close to $1 million a year. Today we have no debts.”

Same brand new image

Marketing was also key to rebuilding the winery’s image. Ksara’s television ad for Ksarak is widely held up as one of the best Lebanese clips in modern times. Filmed in the Bekaa it captures all that is good about rural Lebanon and, with its young-couple-in-love motif, breathed new life into the brand and the company. “The ad had an impact,” explains Ghostine. “It positioned the company as a Lebanese brand, a young product that hinted at a better past.”

In 1991, the company released what new wines it could, starting with the hugely popular Gris de Gris. The wine made an immediate impact abroad. “I went to a contest in Holland with the Gris de Gris, our arak, an excellent Reserve du Couvent and a Sunset rose and came back with five gold awards,” beams Ghostine. “We came back with a video and when we aired it on TV, we were accused of staging it. He grins. “Can you imagine?”

New wine maker

In 1993, the Syrians vacated the premises and it was also time to hire a new winemaker. Noel Rabaud, the French winemaker who was first hired in 1975, was still on the payroll. He visited Ksara five times a year to oversee the viticultural and vinicultural processes. But he was also working as a consultant in France for nearly 70 wineries. Ghostine knew that if Ksara were to forge ahead with its new program it needed someone full-time. In 1994, he hired James Palge, who is still with the company to this day.

“Palge was nearly disowned by his parents, who were worried about him going to work in a war zone,” recalls Ghostine, who had received than a dozen CVs for the job including interest from a Monsieur Bouat, a former Ksara winemaker who had worked for the Jesuits. “We nearly hired him but in the end we wanted a younger man. He was very disappointed.”

In June 1994, Ksara unveiled the Cuvee de Printemps, while the Gris de Gris was by now consistently selling out. Ksara then began to produce new labels and revise its pricing strategy. By the end of the year, the three year plan was complete. Ksara had planted new grapes, hired a new wine maker, developed the range, landscaped the winery, and bought new equipment.

Today, Chateau Ksara’s reputation as Lebanon’s biggest and oldest winery is secure. In producing 2 million bottles the winery harvests nearly 2,000 tons of grapes from its 300 hectares, an average of nearly 7 tons of grapes per hectare. “Some wine countries will obtain yields of as much as 14 tons per hectare,” says Ghostine. “We will not do this.” And even the farmers have stopped complaining.

April 1, 2006 0 comments

Business

Story of survival

by Executive Staff April 1, 2006

written by Executive Staff

Château Ksara began life in 1857, when Jesuit brothers inherited and began farming a 25 hectare plot of land situated between Tanail and Zahleh. The brothers recognized the potential of Ksara’s terroir and convinced their superiors that it should be used to grow grapes for viniculture. They had no formal training in either viniculture or viticulture, but they were solidly educated in agriculture and the sciences and in those days that was enough. Applying what they knew, they produced Lebanon’s first “dry” red wine and in doing so, laid the foundations of Lebanon’s modern wine industry.

At the end of World War I, France was mandated to govern Lebanon and before long, its military and administrative machine moved in, bringing with it thousands of French soldiers and civil servants, for whom wine was an integral part of their diet. Ksara was in a position to supply Lebanon’s new landlords.

Pre-war years

By now, the winery had become a commercial concern. The monks had expanded their range of grapes and planted Carignan, Muscat and Ugni Blanc. The period was one of unprecedented growth for Lebanon’s little band of newly-established wine makers that included Château Musar, Vin Nakad and Domaine Des Tourelles.

By the time the French left, Lebanon had embraced the French experience with a passion that can still be felt today. Wine may still have lagged behind Arak, but its embodiment of all that that was France was enough to sustain demand. During the next 30 years, Ksara maintained its position as Lebanon’s most popular wine and as Lebanon grew into a cosmopolitan and convivial hub, where western tastes were adopted.

In 1972, the Vatican encouraged its monasteries and missions around the world to sell off any commercial activities. By then, Ksara was a profitable entity, producing over 1 million bottles annually and representing 85% of Lebanese production. When then order to sell came through, the winery was optioned to a local businessman, Jean-Pierre Sara, who, one year later, assembled a consortium of 15 investors, all of whom were convinced that the winery represented a sound investment. On August 15, 1973 the winery was sold for LL 10 million, (then $3.2 million).

Until that point Ksara had been making eight wines and liqueurs – the Vieux Millenisme, Clos St Alphonse, Ksara Rose, a Blanc de Blanc, a Vin Mousseaux (a sparkling wine), Karine and Kina and Vin D’Or. The new owners introduced the Sunset and the Reserve du Couvent. The Château wine was not introduced until the 90s.

Even though war broke out in 1975, the forward thinking Jean-Pierre Sara appointed a full time oenologist, Noel Rabaud, a Frenchman, who moved to the Bekaa with his family. Rabaud lasted a year before having to flee in 1976, when it became apparent that foreigners were at risk of being kidnapped. He would however come back three to four times a year to help with the harvest and offer technical assistance till 1993.

Growth and recovery

During the war, not one harvest was missed, even in 1982, the year of the Israeli invasion. Still, the conflict was a moveable feast, flaring up at random across the country at sporadic intervals. Not knowing where the next round of fighting would occur, meant that Ksara, like many of the other wineries, was forced to rethink its entire distribution strategy. Understandably, exporting was also difficult, but the company was able to send between 15-20% of its production abroad, mainly to France.

But the longer the war dragged on, the more the company began to feel the strain. The years 1987 to 1991 were a bleak period. When the guns fell silent, Ksara had fallen behind Château Kefraya in terms of market share and morale was at an all time low.

At the end of 1990, the board decided to appoint Charles Ghostine a lawyer and former National Liberal Party politician with formidable organizational skills. It was to prove to be an inspired move. Ghostine, with the backing of an aggressive board of directors, set about one of the most remarkable corporate turnarounds in recent times.

April 1, 2006 0 comments

Business

Putting Ksara on the map

by Executive Staff April 1, 2006

written by Executive Staff

In the March issue of EXECUTIVE, we reported that, Lebanese wine producers exported around 2.2 million bottles of wine in 2005, a year-on-year increase of 13%.

Over the same period imports of foreign wines dropped from 977 tons in 2004 to 874 tons in 2005, a drop of 11%. The UK is once again the biggest importer of Lebanese wines, followed by France, the US and Syria. Château Ksara, Lebanon’s oldest and biggest wine producer took the lion’s share of Lebanese wine exports in 2005 with an impressive 40.5% market share of all Lebanese wines sold abroad and in doing so recorded a 16% year-on-year increase of its foreign sales. “Basically we sold 1 million bottles abroad,” said managing director Charles Ghostine, who cited Syria and the UK as the main growth markets with year-on-year growth 50% and 30% respectively. The winery’s mid priced red, Reserve de Couvent, again proved to be the motor behind the export surge making up 38% of all Ksara’s international sales.

And it is all down to one man.

Dreams

Export manager Elie Maamari is enjoying a rare moment in his Beirut office. On the wall is his winemaking degree from the University of Toulouse and his Chevalier D’Ordre du Merite Agricole from the French government for services rendered. Across from his desk is a map of the world on which Maamari has placed pins in every country where Château Ksara has a presence. “My dream is too fill as much of that map as I can. We are in 23 countries, but we should be looking to China, Taiwan and Hong Kong. Did you know that in China they planted 50,000 hectares in one year? This is out of this world!” When you stop to consider that Lebanon has at most 1,700 hectares under wine vine, it is easy to see why Maamari is in awe.

It is mid-January and he has just returned from the two-day Decanter Fine Wines show in London. “Most of the people who come to the stand they have only heard of [Château] Musar,” says the man who began his career at Ksara in the accounting department in Beirut in 1978. “They come looking for something else and they are pleasantly surprised. I tell them it’s a different process of vinification, fermentation; it’s a different wine altogether. I tell them if they are looking for Musar, they won’t find it here.” He pauses. “Don’t get me wrong, Musar is a unique wine. You won’t find a wine like it anywhere in the world.”

Maamari enjoys seeing the reaction on people’s faces when they first taste Ksara. He is supremely confident in his wines that he knows it is just a matter of spreading the word. “Mostly they were pleasantly surprised by the quality to price ratio of the Reserve du Couvent, but they were also impressed with the Château Ksara 2001 and 2002, the Cuvée Troisième Millénaire and the Chardonnay. They come to taste one or two wines and end up staying for the whole range.” He laughs. “When people stay, it’s a good sign."

In the UK, Château Ksara has proved that, like Massaya and more recently Château Kefraya, joining forces with an established distributor, in this case the House of Halgarten, is crucial to breaking into the $14 billion UK market, one that could finally establish Lebanon as the ultimate boutique producer.

And Maamari is bullish. “This year exports are beginning to show,” he beams. “Halgarten agreed to our marketing plan. I asked for 10% growth and they promised 25% and I am sure they will do it. Now we are in more than 90 English restaurants and wine bars. We are moving beyond the Lebanese restaurant sector. That said, we are present in every Lebanese restaurant in London, Oxford and Brighton. The important thing is that are they re-order and they are. We are really very optimistic.”

Restaurant trade

And he should be. Lebanese food has proved to be the best ambassador for Lebanese wine. It is the third most popular ethnic food in the UK, a position it has reached through offering vegetarian dishes in an age of healthy eating and national paranoia over the dangers of eating beef. Château Ksara is the house wine at Noura and Marroush, which has 17 restaurants in London. “Marroush takes 6,000 cases (72,000 bottles) from me each year. On each table he has a special wine list with the history of Ksara on one side and the history of Marroush on the other. All 11 of our wines are on it. Sure there is another, separate wine list, but who wants it when you have all the Ksara range.”

Maamari admits that it is slightly more difficult to break into the off-trade, although there are signs that a Lebanese wine might eventually make it onto the coveted supermarket shelves. “We are focusing on [leading UK supermarket chain] Waitrose. They like the Reserve, but it takes time, as much as two years, to get a decision. What we have on our side is that, unlike many new world countries, Lebanon does not have thousands of producers and we can offer value for money, if we can sell in the £5.99 ($10.50) range.”

Ksara’s announcement that it will increase production to 2.7 million bottles over the next four years will not have come soon enough for Maamari’s customers. “Demand is already exceeding supply and I am notifying my suppliers that I am already out of Chardonnay 2004, while this has been the case with the Reserve du Couvent for two months now.”

Currently Ksara’s fourth biggest market, Maamari believes the UK will eventually take the top slot, overtaking Syria, France and the US. “The French market is defined by the Lebanese on-trade,” he explains. “There are 122 restaurants in France and not more than 50 in the UK, but there are fewer opportunities in the off-trade. Of the other markets, Sweden is a loyal customer. “My agent orders like clockwork. He takes a container every 40 days.”

Sentimental attachment

Maamari was appointed sales manager after he spent three years in France studying wine making. He admits that he was reluctant to leave his beloved wine making (a job he had fallen into during the war when Ksara’s French wine maker was absent for long periods). “It was like changing careers, but there are choices to be made and decisions to be taken. However, one thing was certain: I was convinced by the quality of the wines and I knew we would make progress when European consumption increased. My first job was to hit the Lebanese restaurants and convince them to move away from selling cheap Bordeaux just because it came from Bordeaux.”

Spreading the gospel to those who can influence wine drinking is another challenge. Château Musar still looms large in the consciousness of many a wine critic. “It is not easy to convince the big names such as Tom Stevenson, Jancis Robinson and Oz Clarke that there are other wines than Musar, but we are getting there slowly. They have the power to sell wines. They are celebrities they have newspaper columns.”

Still the good news is that Lebanon’s strength lies in its relative rarity. Maamari admits that he had no idea how much wine the rest of the world produced until he went abroad. “It’s strength is its rarity. Halgarten finds it easier to sell Lebanese wine than Australian because there is so much competition. They consider us a jewel in their crown.”

Sitting in his office, Maamari can look back with pride on a remarkable journey in wine. “It has changed my life. And wine is a great communicator. When wine people are gathered you can sit down with someone and talk for hours about wine and then you realize you don’t even know his name. When I joined Château Ksara I could have been joining any company. Wine meant nothing to me. In fact I nearly joined Sohat. Now I am a trained oenologist and a member of the French oenologist committee and the French association of oenologists. I am also a permanent member of the OIV wine tasting board. Winemaking remains my first love. Whenever, I go to Ksara I feel sentimental. Remember, I worked there for 11 years.”

April 1, 2006 0 comments

Real Estate

Still not enough

by Safa Jafari April 1, 2006

written by Safa Jafari

Last month marked Women’s Day on 8 March. It was time to revise what Lebanon had achieved in its promotion of women’s rights and what it yet had to work on; particularly since it ratified the Convention on the Elimination of All Forms of Discrimination against Women (CEDAW) in 1996.

But even before ratifying the convention in 1996, Lebanon had achieved several important milestones towards gender equality, including:

n The granting of political rights to women (1953)

n The granting of equal inheritance rights unless opposed by a particular religion (1959)

n The right of married women to choose their citizenship (1960)

n The right to elect and be elected to local councils (1963)

n The abolition of the requirement of a husband’s permission for travel (1974)

n The abolition of the prohibition on the use of contraceptives (1983)

n The establishment of equal retirement ages and social security benefits for men and women (1987)

n The recognition of women’s signatures in real-estate procedures (1993)

n The ability of married women to pursue trade without husbands’ approval as well as women diplomats, married to foreigners, to pursue their diplomatic careers (1994)

n The recognition of married women’s rights in life-insurance policy procedures (1995)

It is noteworthy that in addition to granting political rights to women in 1953 and being party to conventions adopted by UNESCO in 1964 to enhance the recognition of women’s rights in education, Lebanon has, since 1972, ratified the two international covenant: on civil and political rights and on economic, social and cultural rights. Lebanon was also party to several other agreements such as those signed with the ILO on equal salary and equal employment opportunities for both sexes. In 2002, Lebanon also acceded to an agreement within the framework of the League of Arab States on the establishment of the Arab Women’s Organization, of which it is an active member.

Eliminating all Discrimination

By mid 1979, the Convention on the Elimination of All Forms of Discrimination against Women (CEDAW) was adopted in 1979 by the UN General Assembly as an international bill of rights. Consisting of a preamble and 30 articles, CEDAW came to define what constitutes discrimination against women and to set up an agenda for national action to end such discrimination. Countries that have ratified or acceded to the convention are legally bound to put its provisions into practice and are committed to submit national reports, at least every four years, on measures they have taken to comply with their treaty obligations.

In 1996, Lebanon ratified the convention and made a commitment to include in its policies all mechanisms that promote women’s rights. And so, the state and national organizations went on to double their efforts in raising awareness on women’s rights and promoting ways that these rights can be respected. Examples of discrimination and violence against women were made public and action began to combat such violations through various penal measures. In fact, Lebanon ranked highest in its region with its 1995 score in the “Gender Empowerment Measure,” developed in the Arab Human Development Report 2002.

In addition, the number of female members of parliament has doubled in the last five years from 3 in 2000 to 6 in 2005 and the rate of female participation in elections processes has also noticeably increased. Another relatively recent arrangement is that signatures of both mother and father are now required when under-age children travel – not solely a father’s signature. These are examples of efforts to include women in the family decision making process.

It can also be safely said that within the country’s efforts to abolish illiteracy and provide affordable health services, women are indeed being targeted. Lebanon is witnessing an increase in the enrollment rates at all levels of education: primary, secondary and post-secondary – with an almost equal enrollment rate for women and men, and a shift is being noticed of women’s labor into new and less traditional sectors. The proportion of women working in the major professions – lawyers, engineers, physicians, pharmacists, judges, bank managers, media figures, university teachers, and researchers in the areas of literature, art and science – has increased considerably.

Shortcomings

Unfortunately, reality still shows that the process of amending the Lebanese legislation to bring it into line with the principles of CEDAW is still far from complete. Lebanon’s legislation does not contain provisions guaranteeing equality on the basis of sex as required by the convention.

Upon reviewing the national report, CEDAW expressed concern at the mention of honor crimes receiving mitigated punishment (especially the fact that criminal law states that a rapist is exempt from punishment if he “agrees” to marry his victim) and that women are faced with traditional obstacles when attempting to report incidents of violence.

Elsewhere women still only occupy 6.1% of public offices and engage in only 14.7- 20% of economic activity. The labor law still allows discontinuation of service to pregnant employees, while single mothers (12.5% of families) remain within the low income bracket. The national HIV/AIDS programs does not target women, there are regular reports of several cases of domestic abuse and sexual harassment in the workplace. Finally, to date 4.9% of women nationwide are married between the ages of 15-19 (the percentage is more than double in areas such as Bint Jbeil and Akkar).

Most importantly, much of this discrimination is official! To this day the Lebanese government is adamant about reservations it had since ratifying CEDAW in 1996. In particular the equal rights of women to pass on nationality to their children, equal marriage rights, equal rights in matters relating to their children, equal rights and responsibilities in matters relating to guardianship, wardship, trusteeship and adoption, the right to choose a family name and finally the right to fair arbitration in disputes.

The first item, concerning the right to pass on one’s citizenship to one’s children, has caused uproar and was a dominant theme during the celebration of Women’s Day last month. Before 1946, a Lebanese woman who married a foreigner would lose her Lebanese nationality, and, just three years ago, working women were unable to receive fringe benefits like health care. But until today, the children of Lebanese women married to non-Lebanese men still cannot claim Lebanese citizenship or rights.

Nationality law

This issue was raised during the assessment of the National Lebanese Report to the UN Committee on the Elimination of Discrimination against women, and, according to the Lebanese representative presenting the report, this anomaly is due to the fact that each Lebanese is subject to the personal status laws (and courts) of the 18 recognized religious communities that regulate matters such as marriage, parenthood and inheritance. According to MP Ghinwa Jalloul, politicians are afraid that allowing women to pass their nationality on to their husbands and children would disturb the delicate balance of the confessional system and open the door to Palestinian assimilation. In any case, work is being done to push this case forward and make the state abide by the CEDAW.

One such commission is the National Commission for Lebanese Women which, as a monitoring and advisory body, presented the UN committee with Lebanon’s National Report and briefed EXECUTIVE on where Lebanon stands in obliging and failing to oblige.

During the past month, the commission organized two workshops in Lebanon in collaboration with ESCWA, the first was held for the media to explore ways in which awareness of CEDAW could be raised in the public and the steps that the media should take to allow for better absorption of the policies of different governmental and non-governmental organizations in the country. A recommendation was made to highlight the convention and distribute the key points of its manifesto on Women’s Day. And indeed, there was wide media coverage of the CEDAW on March 8.

The second workshop lasted three days and saw representatives from several ministries and government directorates discuss “the role of ministries and government offices in the preparation of the CEDAW report,” exploring the need for better monitoring and reporting mechanisms and raised awareness amongst officials from the council of ministers as well as the general state security and internal security services, on how different policies can affect women’s rights. Each participating department proposed concrete steps to better monitor such policies and report them, in collaboration with the National Commission, to the UN.

Moving forward

Director of the National Commission for Lebanese Women, Mrs. Joumana Moufarige, told EXECUTIVE that, although Lebanon currently falls short in abiding by its CEDAW commitment, it is witnessing progress. Women as ministers and members of parliament, although not proof that they are equal decision makers in official administrations and different sectors in Lebanon, is still a sign that the application of the Beijing work plan that calls for 30% female representation in parliamentary councils by the year 2005 is moving forward.

Finally, March 21 was Mother’s Day – and on this occasion a tribute must be paid to mothers of Lebanon who played a big role in movements for peace throughout history. Today, many of them remain stranded by their grief as they await their “disappeared” sons, kidnapped and imprisoned during decades of civil strife. Mother’s Day this year coincided with news that missing sons had been found, offering a respite from suffering to many mothers who have grieved too long.

Freedom of women in Lebanon is not measured by the commercialization of “openness” or “Westernization.” It is a matter of who decides the way people live, and whether everyone has equal right of access to development services. Issues of accountability, awareness of rights, monitoring of abuses, NGO involvement in constant reporting of women’s status, and action for equal opportunity to produce and consume, are key.

April 1, 2006 0 comments

Economics & Policy

Bursting bubbles in the gulf

by Faysal Badran April 1, 2006

written by Faysal Badran

We have mentioned over the last six months, that the Gulf markets, and in particular the Saudi stock market had gotten ahead of itself. The metrics we used were always simple to understand: the market capitalization had surpassed the national productive economy by a measurable distance. In fact, at its peak in February of this year, the market capitalization of Saudi Arabia at its peak had reached nearly four times the value of the GDP. To put this speculative fervor in perspective, at its manic NASDAQ-driven peak, the US market capitalization had hit 1.75 times the GDP. We use the Saudi market for analysis since it is the largest of Gulf markets, and actually has become one of the largest emerging markets in the world.

The flood of IPOs in a fairly arcane and unregulated market led to an unhealthy, almost parabolic trajectory. This, coupled with excess small public participation as well as an over zealous margin trading (day trading on borrowed money) has led to the inevitable and dramatic fall. So far, at the time of writing, the Saudi market has lost 30% of its value from the top, or nearly $200 billion, yes billion.

Though we did point to the high risks embedded in the Gulf markets in two articles, the devastation is truly awesome. Even the most pessimistic of analysts did not except the decline to come so swiftly, and what is more eye-popping, is that rather than allowing the market to adjust to more reasonable valuations, the authorities, asleep at the wheel when it came to reigning in speculation and lending, suddenly, panicked and stepped in to attempt to cushion the fall.

As we all know, perhaps the most damaging type of government intervention is when political leaders try to swing markets. There are many historical examples of failed attempts, the most spectacular that come to mind are the US attempts to stop the crash of 1929, and the twelve years the Japanese spent trying to stop the Nikkei’s collapse from 39,000 to nearly 8,000. Needless to say, I truly believe that not only is government intervention futile, but it can actually accelerate the fall, creating a larger frenzy on the downside. The purist in me might ask why would any government even want to prop up speculation? It seems absurd, but many governments do it.

Jawboning

Recent attempts at reversing markets were characterized by jawboning, i.e. talking up the market, much like the internet analysts did in 2000 prior, during and after the meltdown. The talking heads go on television claiming that the fall is “exaggerated” and the economy is fine. It may very well be, in fact the Saudi economy is more than just fine, it is growing faster than most emerging markets and government and capital spending is up sharply, but even the strong growth does not legitimize the outlandish market valuations with less than stellar companies going public.

As the authorities showed, accentuated laxness in allowing shady companies to list and an amateur public to speculate they, in effect, fanned the flames of the inevitable boom-bust cycle. In most Gulf markets, authorities are also attempting to make what they deem as “structural” moves to stop the falls. For instance, Saudi is allowing non-Saudi residents to invest as of the end of March. But at this stage, who wants to catch the proverbial falling knife? A 30% fall is not simply a garden variety “pull back” or healthy correction as some pundits like to call it, it’s a calamity, and it indicates some serious technical damage. Once this process begins, and especially at such a high level of excess valuation, little can and should be attempted to stop it. It is simply a market adjustment phenomenon tied closely to human behavior, which is summed up in two extreme modes of conduct: greed and fear. Once the greed is replaced by fear, the process is a long one, and in some cases, Exhibit A Japan, may take decades.

Foreign participation

Propping up the market not only doesn’t make sense and is not a clear mandate for governments; it also means that governments, in any attempt to buy the market is wasting precious cash, which will be unavailable for other ventures. My guess is, a broader participation of foreign players from the get go, would have perhaps provided the market with a healthier backdrop.

Here are some numbers for Gulf markets. The Abu Dhabi Securities Market has so far lost 23.4% on the end-2005 close of 5,202.95 points and 37.7% on its all-time high. The Kuwait Stock Market dropped 1.1% to close below the 10,000-point mark at 9,939.30 points, 13.2% below its 2005 close of 11,445.10 points. The Doha Securities Market dropped below the 9,000-points mark to close down 4.4% at 8,873.08 points. It is 19.7% below last year’s close of 11,053.24 points.

In this context, one wonders, can the Beirut bourse withstand any gravitational pull? So far the answer is no. Since the fall in the Gulf markets, Solidere and the main “money center” banks are off by nearly 20%. Many will have you believe that the reason for the Beirut fall is the political situation, but while the shenanigans of the decaying political system may not be helping, the true culprit for the most part is the fall in the Gulf markets. First, the mood of Arab investors and therefore their appetite for risk declines as they get hit. Secondly, as they get margin calls and they need to cut risk in their portfolios they will liquidate their assets abroad, once they have made some decent gains. Of course, had the political situation been better, the fall in Beirut may have been smaller, but there still would have been a sizeable pullback. As oil and stocks have fallen in tandem, the rationale for risking some cash in illiquid markets such as Beirut fades.

It is certain that the attempts at stopping the market fall in the Gulf will ultimately fail, as every single government intervention historically has, but in the interim, there will be sharp upswings. And while it is true that the Lebanese market does not suffer from the same overvaluation as the Gulf, at their peak, banks in Lebanon were trading at multiples associated with global banking powerhouses, an unreasonable state of affairs, despite their strong results and the astute banking culture of Lebanon. In sum, as long as the Gulf markets are hit by selling, it is tough to envisage a very rosey outcome for Beirut stocks, and even the most perfect political denouement may not be enough, as stocks in Lebanon are already up massively from their lows anticipating better times ahead. Some foreign funds may be tempted to jump in should the political situation improve, for a tactical play, but too many fiscal and economic bumps are straight ahead to look for anything more than speculative spasms.

In the long term, I do believe that there is room for improvement in Beirut equities, and for the bourse to attract foreigners and Arabs. For now, the main focus has been on debt securities (bonds) as the government has had to borrow excessively to finance reconstruction, but eventually, as more family businesses are incentivized to list, and a proper equity culture develops, Beirut can place itself on the regional market map. This is a tall order, though, as this will require a better environment, both political and economic and frankly, more credible leadership and clearer policy. Ideally, most emerging markets must undergo genuine reform in order to attract the larger players, i.e. the US and European funds.

April 1, 2006 0 comments