Society

BSE snapshots

by Thomas Schellen
written by Thomas Schellen

Solidere

Listing date: September 30, 1996

Number of listed shares

Class A 100,000,000

Class B 65,000,000

Opening price

Solidere A (Ten to one stock split on 06/01/1997) $113.5

Solidere B (Ten to one stock split on 06/01/1997) $116

Market capitalization (as of 31/12/05, source BSE)

Solidere A $1.8 billion

Solidere B $1.2 billion

Solidere was incorporated in 1994 as company for the development and reconstruction of the Beirut Central District (BCD). The firm’s capital was formed land and cash. Property owners in the downtown received share allocations based on judicial appraisals, the A Shares. Investors subscribing to the Solidere Initial Public Offering received B Shares. Initial restrictions differentiating the share types were later removed and A and B shares have traded in very similar ranges in recent years. Solidere shares are listed on the Beirut Stock Exchange and, since March 2005, on the Kuwait Stock Exchange.

Work on the BCD progressed at a rapid pace between 1994 and 1998, but slowed down significantly in a period that lasted until around 2003. In 2004 and 2005, the company started to pursue a revised strategy that stretched much of the original 10 to 12-year development plan into a 20-year plan. Solidere is in many ways synonymous with the economic fortunes of Lebanon and the share set the trends and dominated the volume of trading on the Beirut Stock Exchange since its reopening in 1996. The company, and its shares, saw an early period of good demand and active trading that lasted about two years. With heightened regional security worries and a domestic recession, the shares retreated in a following period and slumped to below 50% of their $10 (after share split) issue value. In early 2004, share prices embarked on a solid recovery, aided by an ingenious incentive program for shareholder-developers of real estate in the BCD. By mid 2005, and supported by the oil-driven liquidity surge of regional investors and by strong upsides of both Lebanese shares and properties, Solidere shares were serious buy recommendations for local, regional, and international investors, and traded above $24 at time of this writing in late January of 2006.

Lebanon’s late Prime Minister Rafik Hariri was the leading force behind the establishment of Solidere and his family controls over 7% in Solidere shares, while the total number of shareholders approaches 35,000. Hariri was associated widely with the ups and downs of Solidere and when he was assassinated in February 2005, share prices dropped abruptly but recovered again quickly. In 2005, the company posted net profits of $51.06 million for the first nine months of the year, more than double its profits a year earlier. In January 2006, the company announced a property deal with an Abu Dhabi-based investment firm, which intends to develop a project with a total foot-print area of 229,871 square feet and a built-up area of almost 1.9 million square feet.

Banque Audi Saradar Group

Listing date December 29, 2004 GDR

Number of listed shares

6,198,823 (GDR)

Opening price $23.50 (GDR)

Market capitalization (as of 31/12/05, source BSE)

$371 million (GDR)

Audi Saradar was formed in June 2004, through a merger-acquisition agreement between Banque Audi and Banque Saradar. Joining in the largest banking sector consolidation event in Lebanon’s history, the group combined the retail and general market position of Banque Audi with the private banking and investment banking capacities of Banque Saradar and confirmed the group’s position as one of the top Lebanese banks with regional capacities.

The corporate envelope of Audi Saradar Group in Lebanon entails Bank Audi, Audi Saradar Private Bank (ASPB), Audi Saradar Investment Bank (ASIB), Libano-Arabe Insurance (90.75% stake via ASIB), and other entities. Internationally, the group includes three fully owned subsidiaries, Bank Audi (Suisse), Bank Audi (Jordan), and Bank Audi Saradar (France), along with a (direct and indirect) 47% stake in Bank Audi Syria, a joint venture with Syrian investors and a 2% stakeholding by Saudi investor Abdullah Abdulaziz Al Rajhi. Major shareholders in Audi Saradar Group include the Deutsche Bank Group, the Audi family, the Saradar Holding, Kuwaiti and UAE-based investors. In January of 2006, Audi Saradar announced a capital increase from $900 million to $1.5 billion. As part of the increase, Egyptian investment firm EFG-Hermes Holding acquired a 20% stake in Audi Saradar by obtaining 75% of 10 million new shares issued at $60 per share, for $450 million.

With total assets of $10.9 billion at the end of September 2005, Audi-Saradar reported a net profit of $74 million for the first nine months of 2005, compared to $48.08 million in the same period of 2004. In 2004, the bank closed another $100 million preferred share issue, in addition to a $60 million capital increase, related to the issuance of new common shares dedicated to the shareholders of Banque Saradar sal, following the merger acquisition with the bank in June 2004 Audi’s GDRs, which had traded below $25 in January of 2005, gained strongly throughout last year and surged amazingly with the start of 2006 from $59.85 at the end of 2005 to more than $90 in late January of 2006. Audi Saradar has initiated processes to acquire a bank in Egypt and open an operation in Saudi Arabia and is also reported to have plans to enter the Iraqi market.

BLOM Bank

Listing date November 2, 2001

Number of listed shares

4,389,601 (GDR)

Opening price $20

Market capitalization (as of 31/12/05, source BSE)

$292 million (GDR)

BLOM Bank has been the leader in the Lebanese banking sector for many years in terms of assets and profits. The group’s domestic network includes the investment banking subsidiary Blominvest Bank and insurance firm Arope. Internationally, BLOM operates subsidiaries Banque Banorient in Switzerland, Banque Banoarabe in France, and Banque du Syrie et d’Outre-Mer in Syria, incorporated in 2004.

BLOM Bank holds a 39% stake in the Syrian joint venture bank, in addition to which the International Finance Corporation holds 10% and Syrian investors own 51%. After receiving approval by Egyptian regulatory authorities in late 2005, BLOM Bank acquired 96.77% of the shares in Misr Romanian Bank, a bank with a small network in Egypt and an operation in Romania.

In January of 2006, BLOM Bank announced that it had changed the name of Misr Romanian Bank to BLOM Bank Egypt and intended to buy the bank’s remaining shares circulating in the market. Major shareholders in BLOM Bank include the Bank of New York and several Lebanese and Syrian families. Trading below $30 at the start of 2005, the price of BLOM GDR appreciated to $66.50 at the end of 2005 and climbed to the high $90s in late January of 2006, under predictions that further gains are likely. The acquisition of Misr Romanian Bank, along with a planned capital increase and further expansion projects made BLOM Bank increasingly attractive to investors. Unconfirmed reports from late last year said that BLOM Bank intends to also list shares on the Dubai International Financial Exchange (DIFX).

With assets standing at $11.3 billion at the end of September 2005 and customer deposits of $9.4 billion, BLOM Bank reported a net profit of $90.2 million for the first three quarters of last year, an increase of 28.5% compared to the same period of 2004. BLOM also increased its capital fund to $811.66 million, up 12.42%, in addition to which it undertook a $100 million preferred shares issue on October 25.

Byblos Bank

Listing date

May 14, 1998 Common listed shares

September 15, 2003 preferred callable shares

December 23, 2005 Priority listed shares

Number of listed shares

Common listed shares 68,354,909

Preferred callable shares 333,400

Priority listed shares 68,688,309

Opening price

Common listed shares $3.14

Preferred callable shares $100

Priority listed shares $2.50

Market capitalization (as of 31/12/05, source BSE)

Common shares $161 million

Preferred shares $37 million

Priority listed shares $158 million

Byblos Bank Group is the third largest bank in Lebanon where the bank succeeded over the past ten years to achieve growth through a combination of acquisitions of smaller Lebanese banks and local operations of existing international banks ABN Amro and ING Barings. The bank pioneered numerous retail products and is a leader in several consumer lending products.

The group’s portfolio of domestic subsidiaries includes Byblos Invest Bank and insurance sector firms Adonis Insurance and Reinsurance Company (ADIR) and Adonis Brokerage House. In ADIR, Byblos controls 64% and collaborates with French Group, Natexis Assurances Banque Populaire, which holds a 34% stake. The international presence of the group is rooted in Belgium-based Byblos Bank Europe, a 99.95% subsidiary. Since 2003, the Byblos Group has actively pursued regional expansion, establishing new subsidiary banks in Sudan and Syria and initiating the acquisition of Al Rayan Bank in Algeria. Khartoum-based Byblos Bank Africa, in which Byblos holds 65%, is a joint venture with the OPEC Fund for International Development and the Saudi Arabian Islamic Corporation for the Development of the Private Sector, which hold 20% and 10%, respectively. The group’s stake in Byblos Bank Syria amounts to 41.5%, in addition to which the OPEC Fund holds 7.5% and Syrian investors own the remaining 51%. Byblos Bank Syria assumed full operations in December of 2005. Byblos Bank announced in late January that its net profits for 2005 increased by 28.5% over 2004 and reached $69 million on strong growth of its international business and its fee-based income. Total assets for 2005 reached $7.6 billion with an increase of 8.5% when compared to the bank’s $7 billion in assets at the end of 2004. Customer deposits grew by 2.8%, to $5.6 billion and customer loans advanced by 10.8%, to $1.5 billion. In a step to boost liquidity of its shares, Byblos Bank announced, after an extraordinary general assembly in January 2006, that it would list all its shares on the exchange by mid February. The bank also plans a capital increase in the range of $300 million to $450 million. Byblos common listed shares, which had traded below $1.50 in early 2005, closed at $2.36 at the end of December 2005. On the last Friday of January, the share closed at $3.85. In late January, Byblos preferred callable share and priority share were trading at $103 and $3.42, respectively.

Bank of Beirut

Listing date

April 11, 1997 Common shares

April 08, 2004 Preferred callable class B

December 30, 2005 Preferred shares class C

Number of listed shares

Common listed shares 13,535,945

Preferred callable shares B 3,000,000

Preferred callable shares C 2,920,000

Opening price

Common listed shares $3

Preferred callable shares B $11.56

Preferred callable shares C $11.56

Market capitalization (as of 31/12/05, source BSE)

Common shares $134 million

Preferred B $36 million

Preferred C $73 million

Bank of Beirut was one of Lebanon’s fastest growing banks in the period from 1990 until 2005. The bank pursued an active expansion strategy and was a leader in development of funds products listed on the bourse. Its network of subsidiaries includes an insurance brokerage in Lebanon, a unit in Cyprus, and a UK subsidiary. Shareholders in Bank of Beirut include UAE-based Emirates Bank International, with an 8.73% stake. The bank has a representative office in Nigeria and has plans for expansion. Bank of Beirut recorded a net profit of $16.31 million in the first nine months of 2005, an increase of 11% compared to the same period of 2004. Bank of Beirut’s investment funds in Lebanese and US dollar denominated currencies recorded impressive growth in the past two years. For the first six months of 2005, Bank of Beirut announced consolidated net income of $11.2 million, up 6.1% when compared with the same period in 2004. Net interest income increased by 2.1% to $33.3 million and net commission earnings rose by 33.1% to $10.1 million. Net profits on financial operations grew by 4.4% to $44.6 million. Total assets reached $3.95 billion, and customer deposits totaled $2.7 billion. Bank of Beirut common shares, which had traded below $8 in the first half of 2005, closed at $9.90 at the end of December 2005. On the last Friday of January, the share closed at $10.95. Preferred B and C shares traded at $12.10 and $25, respectively, in late January.

Rasamny-Younis Motor Company (RYMCO)

Listing date February 6, 1998

Number of listed shares

10,000,000

Opening price $3.75

Market capitalization (as of 31/12/05, source BSE)

$11 million

Founded in 1957, RYMCO is the first and only car dealing company listed on the BSE. The company, which is the distributor of Nissan, Infiniti and GMC vehicles in Lebanon, claims to control 17% of the Lebanese market share.

According to reports, the Kuwait-based Kharafi Group owns a stake of 12.80% in RYMCO and Lebanese investment bank Middle East Capital Group (MECG) owns 4.17%. In the first quarter of 2005, RYMCO’s showed a 70 to 60% year-on-year drop in net profits to $120,343. In spring 2005, MECG successfully closed a $20 million offering of automobile-backed receivable securities for RYMCO, the largest such transaction in Lebanon and one of the largest in the region. The shares in RYMCO traded at $1.10 on the last Friday of January.

BEMO

Listing date January 11, 1999

Number of listed shares

5,333,334

Opening price $3.25

Market capitalization (as of 31/12/05, source BSE)

$19million (Listed shares)

BEMO ( Banque Européenne pour le Moyen-Orient) is a niche bank with strong capacities in corporate and private banking.

Although its asset volume of less than $1 billion places it outside of the Lebanese banking sector’s top segment by size, BEMO is considered one the country’s more innovative banks. The bank’s profit curve has been very positive in recent years, moving from net profits of $650,000 in 2003 to over $1 million in 2004 and surging even stronger in 2005, with net profits reported at $2.1 million in the first half of the year. BEMO has an investment banking subsidiary, BESC Investment Bank.

In 2003, BEMO entered a partnership with Saudi Arabia’s Banque Saudi Fransi, which took a 10% stake in the Lebanese bank. The two banks collaborated in setting up a new private sector bank in Syria, Banque BEMO Saudi Fransi, in which BEMO holds a stake of 22% while Banque Saudi Fransi holds 25%.

Due to the small number of circulating shares, the volume of trading on BEMO stock on the BSE is relatively small. BEMO’s shares surged to the $6 trading range in late January 2006 after closing 2005 at $3.50. As in the case of other shares on the BSE, BEMO benefited from the rush on Lebanese equities and stocks from Gulf investors.

Societe Libanaise Des Ciments Blancs

Listing date January 22, 1996

Number of listed shares

Bearer shares 6,000,000

Nominal shares 3,000,000

Opening price

Bearer $6.875

Nominal $6.875

Market capitalization (as of 31/12/05, source BSE)

Bearer $7.5 million

Nominal $4.5 million

Société Libanaise des Ciments Blancs saw its business drop as a result of the recession. The company did manage to post a $2.73 million in net profits for the first-six months of 2004, up from a net loss of $1.2 million in the same period the previous year. In 2004 sales were up by 55% to $43 million, while cost of goods sold (including distribution fees) increased significantly by 76% year-on-year to $21 million. In turn, total assets stood at $316 million, growing 4% on a yearly basis. The company did not publicly disclose its revenues or profits in 2005. At the time of writing, Ciments Blancs Bearer and Nominal shares are currently traded at $1.64 and $1.50 respectively.
 

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Finance

Jihad Azour – Minister of Finance

by Executive Staff
written by Executive Staff

Lebanon’s finance minister assesses the impact of this year’s political turbulence on the economy and maps out his plan to balance public finances as the country gears up for another donor conference.

E How badly were the country’s public finances affected by this year’s political upheaval?

It had a negative impact on public finances, although the political upheaval had already started making itself felt on the economy before the assassination of [former premier] Rafik Hariri. His death and the ensuing events exacerbated them. The impact manifested itself in a reduction in revenues due to the reduction in economic activity. The various governments at the time did not take the necessary measures to keep the level of the budget deficit stable, i.e. they did not correct the reduction in revenues with a reduction in expenditures. What I did after I became minister of finance was to stabilize the public finances in a bid to improve the primary balance of the budget, that is to say all the government’s operations outside debt. I improved the collection of revenues and I programmed the expenditures, with an objective of improving the primary surplus. In three months, we were able to improve the primary surplus by 300 billion Lebanese pounds, which represents 1.1% of GDP. The other problem which emerged after the assassination of Hariri was a financing problem. Severe pressure was exerted on our currency and the treasury has problems financing itself, so it had to turn to the central bank. Therefore, interest rates went up and an abnormal situation was created by the fact that the treasury was financing itself through the central bank. I took the decision to pre-fund all the treasury’s needs in order to avoid an increase in interest rates. This created greater confidence in the market as the treasury was again perceived as being liquid enough. It also reduced any pressure on interest rates and the Lebanese pound.

E Which sectors of the economy suffered the most from it and what do you think their chances are of a rapid recovery?

Expectations for tourism were very high this year and this sector was badly hit. Still, we have witnessed a recovery of the sector during the last three months. In fact, economic activity in the last three months has compensated for the first half of the year, which was very difficult for all sectors, mainly tourism, but also other sectors linked to internal consumption. For instance, the balance of payments, which was showing a deficit of $1 billion, recovered substantially during the last few months – we will be almost in a balance by the end of the year. Exports also went up in the third quarter, as did certain other activities. So we have started recovering progressively most of our lost economic opportunities and we are expecting a slight growth of less than 1% for the year. The Lebanese economy demonstrated a tremendous level of resilience this year.

E Did the events of 2005 ultimately serve as a political shock more than an economic shock to the country?

It was a severe political shock that had an economic impact. However, because of the improvements we had in 2003 and 2004, where we witnessed strong improvements in growth, in public finances and in the monetary indicators, we were able in 2005, to overcome one of the strongest earthquakes we have had on the political level in the last 15 years. Had those events not happened, we would have had an excellent 2005, in terms of growth, investments, a reduction in the budget deficit – in all the economic indicators basically.

E Looking forward to 2006, what are the three biggest challenges the ministry intends to face down?

The first one is to seize this window of opportunity that is the donor conference and to transform it into a program of reform, which will stabilize the economy by reducing the level of deficits. This will be achieved by making the economy grow faster. It is a challenge that requires that we convince the Lebanese of the necessity of undergoing a major transformation program, which will aim at meeting the objectives I just mentioned, as well as strengthening social stability in this country. The second challenge is to finalize a new vision for the ministry, which will articulate all of our reform plans, ranging from completing the modernization of the process for customs, to land registry, public finances and debt. We aim at not only completing the reforms but also improving the management practices of the ministry and to increase its level of accountability and good governance. The third challenge is to strengthen partnerships with the private sector, the NGOs and other parts of the community, most notably youth. We have created a joint commission with the private sector to go over all the problems it faces and to address them with clear targets. For instance with regards to exports, our new motto is: “Multiply by two, divide by two.” We want to multiply our exports by two over the next two years, and divide the costs and clearance time by two. We are also working with youth to develop an economic agenda for them, so as to give them the incentive to stay in Lebanon.

E To what extent is this program influenced by Prime Minister Fouad Seniora’s plan from last year, which proposed large spending cuts? Will any of this be exhumed for future use?

Of course it is influenced by it. But you can’t ask people to make additional efforts if you are not doing your homework yourself. We have to make the government more efficient and effective. We have to increase productivity. We have to reduce the waste in spending. And for that purpose, we at the ministry of finance have launched a new initiative with NGOs that are experts in fighting corruption. We are also working with the World Bank on an agenda for good governance. We have to reform the expenditure system in this country, we have to modernize the way the government functions and reduce unnecessary spending, before we can ask people for any additional contributions.

E Does this include promoting e-governance to slim down the bloated bureaucracy and make it more efficient?

Absolutely. For instance this ministry launched three months ago a new service for the taxation process, whereby you can download declarations and send in your declaration electronically. We have also automated all our payments, using modern payment techniques. With regards to customs, we are introducing a new system that will enable all clearance procedures to be done electronically. Additional services, especially e-services, will help people save time and money.

E E-governance also has the added benefit of eliminating the middleman between the citizen and the state, thereby reducing the risks of corruption. Does fighting corruption figure prominently on your agenda or do you view it as a necessary evil for now?

No, I don’t view it as a necessary evil at all. As I mentioned, we started this commission with experts on corruption to figure out how we can reduce it, how we can improve the level of accountability, as well as governance. In addition to this we are taking immediate measures at the ministry. We have issued circulars internally to remind the civil servants of their duties and to not accept any corruption. If there is any act of corruption, we will take immediate action. However one also needs to take into consideration the fact that fighting corruption requires long-term motivation. It is by changing processes, by automating transactions, by strengthening the control over your employees, by changing laws, that you will make a difference.

E At the end of the day though, the biggest drainage on public finances does not come from small-scale corruption at the level of civil servants, but from the large money swindling operations that politicians engage in, such as what we have seen with Casino du Liban. Do you believe that the passing of a new election law that would change the political map of the country and make politicians more directly accountable to their electorate, could be an efficient measure to reduce corruption at the political level?

Corruption takes place at various levels and comes in many forms. Some are related to small transactions, others are more organized. Therefore, the way to fight corruption is to focus on the types of risks you have. You need to be serious about it, which is why we set up this commission of corruption experts. In principle, any improvements of our institutions are favorable. This reform is very important, as is changing other laws as well, in order to improve the level of accountability. But changing laws is not enough, it’s also a matter of culture. It goes beyond the regulatory framework. People have to put more weight on economic issues when evaluating an MP. They also have to ask their MPs for more accountability. And thirdly, the government needs to provide them with basic services, to prevent people from going to their MPs to ask for personal favors. So it’s a comprehensive change that is required, and the government is working on it.

E We’ve talked about cutting down on public expenditures and waste, let’s look at potential revenues for the government. Will the gas price cap be done away with? And if not, how can the ministry justify letting a potentially major source of state revenue slip away due to political calculations?

Firstly, it is very important for people to know that the government is presently providing approximately $1 billion in subsidies, especially to the energy sector, to compensate for the weak management of EDL and to make up for rising oil prices. The government subsidized gas prices to maintain them at a certain level and lost a lot of revenue due to this. Taxpayers are paying for these subsidies, because at the end of the day, the government has no other resources but fees and taxes. Secondly, we should not look at any one element of these subsidies on its own – it’s all part of a package. The program the government is working on has various pillars. The first pillar is to improve the macro-economic situation by reducing the debt over GDP. For that you have to reduce interest rates and the stock of debt over the reserves and you have to improve your primary balance. There are two ways of going about this: either you reduce your expenditures or you increase your revenues. We are focusing on cutting down expenditures and on increasing revenues by improving the management of the tax system. But the bottom line is that this is a social choice. If we are not able to achieve our objectives only by reducing expenditures, we will be forced to increase taxes. And if we have to do this, our objective is to have a balanced tax burden, not to focus on one type of taxpayer or one type of services. It will broaden in order to reduce the burden on the individual citizen. The second pillar is to liberalize the economy. However, economic privatization is going to be done differently this time. We will not transfer any monopoly from the public to the private sector. It will be done in a participatory manner, giving people the opportunity to invest. And we want these sectors to create jobs. The third pillar is a growth agenda: we need to improve the business environment by modernizing the laws, streamlining the procedures and supporting fast growing sectors, such as IT and tourism where you have value-added.

E Is there no social aspect to the government’s program?

There is. The fourth pillar of our program is strengthening the social safety net. The government is spending more and more money on social services every year. On the other hand, social services are deteriorating and social indicators are going down. To correct this, we have to reform social spending, improve its efficiency and create social safety nets. This will require mapping out where we have vulnerable groups and see how we can help them. We have high levels of leakages. For instance, the government is spending a lot of money on wheat subsidies, but when studying the system more closely, you find that only 15% goes to the farmers. The problem is if you stop giving subsidies, you create social problems. That is why an improvement of social management needs to be undertaken. So to go back to the initial question about gas subsidies, it all falls under the deal that various parts of society need to make. If we agree that we want to improve the stability of our macro-economic situation, to improve growth, to seize the opportunity to get international support, then we all need to share the burden of reform.

E By postponing the donor conference, Seniora suggested that the world is not ready for another round of lending to Lebanon. The list of possible demands is long, but what absolutely must be done before any such conference can be held?

First of all, we need to [engage in] dialogue more over the vision we have in the cabinet, in order to transform it from a vision into a program. We also need to consult with the various stakeholders to develop a national agenda, so that the majority of the Lebanese and the political groups will back the political reforms. The reforms will take at least five years, so this requires commitment. On the other hand, the dialogue with the international community needs to continue. We’ve had a series of meetings with government representatives, we are coordinating regularly with international institutions such as the World Bank and the IMF, and we may have a gathering of experts in Beirut in January to prepare for the February donor conference.

E What lessons will you take from the Paris II round so as to avoid falling into the same pitfalls?

Firstly, we are taking several technical lessons on how to use all this money and conduct the operations in themselves. The second lesson is the great reaction of the market and the economy. After Paris II, even before any payment had arrived in Lebanon, we witnessed a major shift in the economic outlook: interest rates went down, capital inflows became substantial – very important changes were brought about. This is why we must view this opportunity as a turning point in Lebanese political history. It is remarkable how quickly people react to positive news in this country. Thirdly, this must not be viewed as a government program. It must be perceived as an economic agenda for the whole nation, from which everybody will benefit. That is why everybody should fight for making it happen. And last but not least, is the issue of credibility. We have to show that we are credible, as much to ourselves, as to the investors and to the international community. We must show that if we commit to something, we will deliver.

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Economy

Time is ripe for tough reform

by Nicolas Photiades
written by Nicolas Photiades

The assassination of former prime minister Rafik Hariri on Valentine’s Day 2005, highlighted Lebanon’s economic vulnerability to sudden political and security events, as reflected in the significant slow down in economic activity; the massive decrease in GDP growth; and the rise of the proportion of public debt to government revenues. In the last quarter of 2005, after Syria’s withdrawal of its troops, relatively successful legislative elections and the naming of a “national unity” government – the country’s economy was still characterized by an extremely high level of public debt, wide fiscal and external current account deficits, a narrow economic base, and a fragile, arguably explosive, political environment.

At the end of 2004, the international community, as well as all the Lebanese were hopeful that a steady increase in government revenues and a substantial growth in the GDP would gradually reduce the debt burden and help the country outgrow its debt problem with new- found tourism revenues and foreign investment mainly from the Gulf. However, and perhaps with a degree of hindsight, those reading the runes should have predicted the unfolding of a different scenario, one based on the fallout of UN Resolution 1559, the extension of President Emile Lahoud’s mandate and a tightening of Syrian authority in the country.

Growth figures disappoint

Real GDP growth fell from a very positive 5% in 2004, a level unseen since the early 1990s, to an expected 1% at best for 2005 as the country’s GDP of the last few years (an average of 2% to 3% for 2001, 2002 and 2003, and 5% in 2004), was almost wiped out. This yo-yoing of growth figures should constitute a message to the Lebanese government that it is now time to genuinely tackle the debt and the economy. For the moment, the debt burden is still one of the largest among rated countries, with the debt to GDP ratio being estimated to exceed 170% by the end of 2005, and interest payments consuming around 55% of fiscal revenues (in both 2004 and 2005). The country’s overall fiscal deficit has remained very high at almost 10% at the end of 2004, and 11.7% estimated at the end of 2005, despite significant efforts to improve the primary fiscal balance of the last decade.

Moreover, the country’s economic base is still narrow and government revenues undiversified. The country still lacks primary resources and its export base is limited, with economic activity concentrated in services, namely banking, trade and tourism. The activities in the service sector account for around 60% of GDP, reflecting a high level of concentration on a handful of economic activities. This concentration coupled with a high dollarization of the economy and bank deposits increase Lebanon’s vulnerability to political and regional shocks. The current account deficit (or the current account balance to GDP ratio), after a period of decline between 2001 and 2004 (especially after Paris II), moved up again to an estimated 19.7% for 2005, compared to 13.1% in 2002, 12.4% in 2003 and 15.0% in 2004, approaching 2001 levels of 20.4%, which were then considered disastrous and a first sign of a country collapse.

More pressure from politics

The political environment remains precarious, with tension with Syria growing as the days pass by. The encouraging “free” elections of June 2005 produced a government of national unity, which is still unproven as regards to urgent economic reforms, although the resilience of this government is proving solid so far, as disputes and tensions between pro and anti-Syrian political factions take place on a daily basis. The government is keen to carry out long-overdue economic and administrative reforms, including privatization, as well as start planning for a debt restructuring program, which will be based on a successful donor conference planned in Beirut towards the end of 2005. However, it is clear that the deterioration of Lebanese/Syrian relations, which have been further exacerbated by the recent UN resolutions forcing Syria to cooperate in the investigation of Hariri’s assassination, should hamper the government’s efforts to initiate such reforms for the time being.

There is also the more delicate internal problem of Hizbullah, which still refuses to give up its arsenal of weapons and integrate into the Lebanese domestic political set up, in line with both the Taif Accord and UN Resolution 1559. This multiplies Lebanon’s political problems and opens two fronts, one external with both Syria and Israel and one domestic with the Hizbollah-Amal coalition. Although it is clear that such problems emanate from decades of civil conflict and its consequences, the country is still facing significant political problems that have been affecting the economy substantially during 2005. It would therefore be worth noting that the longer these problems persist, the more likely economic recovery will become unreachable.

Tempering risk

All these risks remain more or less mitigated by a high level of external liquidity, a large and relatively sophisticated banking sector, and resilient confidence among the Lebanese, which has been reflected in a continuously strong and stable deposit base within the country’s banking sector. Another positive factor is the return of Gulf Arab tourism towards the end of the summer and the resumption of Gulf investment in the country, despite the turbulent political scene.

The high liquidity, estimated to stand at around $9 billion in terms of official foreign currency reserves and $11.4 billion in terms of commercial bank foreign assets reflected the country’s prudent approach within an unstable domestic and regional political context. The foreign currency reserves approached $15 billion prior to Hariri’s assassination, and were instrumental in restoring confidence among depositors of the banking sector and in preventing a devaluation of the Lebanese pound. The current official foreign currency reserves cover more that eight months of imports and exclude around $1.8 billion in Lebanese government eurobonds held by the central bank, which are not considered to be liquid. Although foreign currency reserves declined in the aftermath of Hariri’s death, they partially recovered due to the issuance of several government eurobonds, an easing in the dollarization rate due to regained confidence, and to a resurgence of non-resident deposits in Lebanese commercial banks.

Strong deposits

Another strong sign of liquidity is the strength and stability of commercial bank deposits, which amounted to a little less than $60 billion in October 2005. The country’s banking sector has been capable of solidly financing itself through customer deposits and has not had to rely on market funds, which are more costly. Such customer deposits have been mainly used in the past decade by the banks to subscribe to government debt securities (including Treasury Bills in Lebanese pounds) and have provided the government with a source of steady financing. These customer deposits have historically shown a high degree of resilience to external political shocks and have been supported by a committed Lebanese Diaspora. On that note, Lebanon is traditionally regarded as one of the most important countries in the world in terms of remittances, which is a mitigating factor against potential risks.

Although the economic situation appears to be at risk in the short term due to internal and external political problems, the economic upside in the long term could be significant. Indeed, were the government to succeed in sorting out the political mess and resuming an efficient economic reform program that would include serious privatization and a long-term debt restructuring program, then economic prosperity would be regarded as a real possibility. For the moment, the country’s rating is still one of the lowest in the world at B- (S&P) and B3 (Moody’s), with the government required to undertake a massive effort in reducing debt and improving government finances, as well as for the political environment to ease considerably, if this rating is to reach more acceptable levels.

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Looking Back

Winning ground in the middle east

by Lee Smith
written by Lee Smith

It is perhaps an index of globalization’s totalizing embrace that foreign policy communities around the world have been chuckling over the same one-liner all year long: The war in Iraq is over and Iran has won. Well, there’s no doubt that the Islamic Republic of Iran’s (IRI) long and assiduous cultivation of Shiite networks in Iraq reaped dividends once Iraq’s former president Saddam Hussein, the IRI’s most serious threat, was deposed from power. But in truth, nearly everyone with an interest in the region has a lot to be thankful for this New Year’s Eve. But given the disappointments, betrayals and miseries that have befallen the Middle East over the last century, it’s not clear that even younger Arabs are capable of seeing events except as a variation on catastrophe. Or, to put it another way, if the Israelis are still around, we must still be living in the shadow of the nakba.

The fact is that this really was one of the most momentous years in the history of the modern Middle East and most of the news for residents of the region was good, very good. The only clear losers were the Syrian and Iraqi Baath parties, the US taxpayer and the liberal interventionist wing of the Republican Party, otherwise known as the “neo-cons.” Iraq itself, which is in many ways now Ground Zero of the Middle East, is too tough to call. Obviously, ordinary Iraqi citizens are paying with their lives because, one, the US cannot provide security in regions that are not already secure; and two, some Iraqis and their jihadi cohorts take great pleasure in killing other Iraqis and will keep trying to do so come hell or high water. And yet, there are elections, there is the struggle to build democratic institutions, like a constitution, and there are the Iraqi people themselves, many of whom disagree with their neighbors that Iraq was better off under Saddam Hussein. So, it’s going to be many years before anyone knows whether Iraq was a winner or loser this year, and it’s going to be Iraqis who make the call.

As for the rest of the region’s major players, Executive braved the ever-capricious winds of Middle Eastern politics to bring you our year-end round up in the hope that things won’t change too much before we go to press.

Lebanon: a winner (triple plus)

In a region where the word “martyr” is perhaps a little worse for wear, the assassination of former prime minister Rafik Hariri set off a chain of events that effectively liberated his country, and set Lebanon back on the democratic course it was derailed from for thirty years of war and occupation. But the undisputed heroes of the revolution are the Lebanese people, all of them, including those who never took to the streets and those who some believe stood on the wrong side of the street. Pluralism is no doubt a harder ideal than national unity, but it is also sterner building material. As for all the post-March 14 disenchantment, much of it is legitimate – for instance, is there no room in Lebanese politics for the youth who led the uprising outside of the student cadres of General Michel Aoun’s Free Patriotic Movement? Still, it’s important to put this remarkable year into context.

Things are changing so quickly; most local skeptics haven’t had the time to figure out what’s going on. Last year the parliament wasted its time ruminating over Arabism and other ideological niceties; this year the country’s elected officials took up real matters, including the economy, election laws and security. It is the latter that has been on the minds of most Lebanese, especially since the wave of violence left many dead in its wake and did serious damage to the vital leisure and tourism sector. But insofar as the purpose of that terrorism was to set the nation at arms again against itself again, it failed and the Lebanese succeeded. The UN Mehlis report has delayed action on several important issues – especially national security and international investment, both of them tied to disarming the Palestinians and Hizbullah. Hizbullah had a middling year. It became part of the government – except apparently for those uncomfortable moments when Damascus insulted the government’s prime minister – and may indeed be transitioning from armed gang to political party. Premier Fouad Seniora has the attention of a concerned international community but lacks the support of a strong Maronite partner. If that sectarian power struggle sounds to many like politics as usual in Lebanon, it’s not, or at least it hasn’t been for thirty years. This is the real thing, and it was earned.

Saudi Arabia and the Gulf: winners
(double plus)

One of the Bush administration’s more reasonable, and less noted goals in invading Iraq was to boost that country’s oil-production, a potential capacity, it was hoped, that would give the United States some leverage with which to pressure their long-time allies in Saudi Arabia. You see, over the last many years, the American taxpayer has dished out many billions of dollars to float the US Navy’s Fifth Fleet, which protects the free flow of Gulf oil, which in turn ensures that the Saud family stays rich, fat and happy – and in power. But in the aftermath of 9/11 it became apparent that many in the Saudi elite believed those same US citizens were infidel scum who deserved to die. So, the White House wondered how it could get their nice friends to stop saying such bad things in Saudi schools, mosques and the media. They hit upon the idea that if only they could get more oil to market maybe that would help bring the Saudis to heel. But of course, that would’ve meant that the US actually had to protect Iraqi pipelines, and in Iraq the US is mostly only capable of defending Baghdad’s Green Zone.

Thus, the Saudis’ position as keystone of the global economy went unchallenged, and the Kingdom had a bumper year as oil surged to a whopping $70 a barrel. The Bush administration effectively declared major operations against Saudi Arabia over when US Vice President Dick Cheney rolled out the red carpet for the royal family’s brand new Lebanon hand. Saad Hariri may turn out to be a very good leader of his country someday, but it was his Gulf friends who got a young businessman with no political credentials or experience an audience in Texas. This is how a superpower tells a petro-monarchy: “We are not worthy, we are not worthy … ” And now all Washington can do is hope that with King Abdullah finally and firmly in charge, he’s serious about taking on his own domestic terrorists and that he won’t do it by letting them blow off steam in Iraq or Manhattan.

Other Gulf states are investing in a future where oil is not king. Construction, leisure and tourism projects have made Qatar the fastest-growing state in the Gulf, or the new Dubai, but that’s just until Sheikh Muhammad bin Rashid al Maktoum finishes Dubailand, or Dubai’s new Dubai, an enormous theme park that once completed will double the size of the existing Emirate. Look for the Gulf to keep thriving.

France: winner (double plus)

What a bonne annee for La France, the year it became relevant again in the Middle East! Without a large economy or formidable military, Paris has had trouble projecting power in the region since it was flushed out of Algeria. Two years ago, the Chirac government made a lot of noise about the US war on Iraq, which may have won it accolades throughout the region but distanced Paris too much from the US to have any impact in it. Then came Syria and Lebanon. For a host of reasons, French President Jacques Chirac was furious with the young Syrian president he’d effectively taken under his wing, and intimated to US President George W. Bush in the summer of 2004, that he had a project they might both profit from. France led the way with UN Resolution 1559 and the US, with troops in neighboring Iraq, served as a goonish enforcer and voila! France was back in the game.

Egypt: winner

A lot of people did well this year in umm ad-dunya: The Muslim Brotherhood surprised even themselves with the large number of seats they gained in parliament, and the ordinary Egyptian voter got a sense of what real political choice might look like, both in the country’s first contested presidential race and then the parliamentary elections. And since it is a law of nature that anytime the people fare ok, the regime loses big, Egyptian President Hosni Mubarak had something of an off-year, which might be expected after 24 other untouchable seasons. Oh sure, the president managed to keep Washington off his back by sending mukhabarat chief Omar Suleiman to consult with the PA on security issues, but at home 88 people died in an attack in Sharm el-Sheikh, and the regime showed little in the way of intelligence by rounding up thousands of Bedouins in response. (Self-help hint to Hosni Bey: It only gets better if you are honest about your issues. Now, say “Al-Qaeda.”) Still, many people, probably the majority of registered voters, really did re-elect Mubarak for a fifth term and would have done so even without his aggressive TV commercials. But all those slickly produced music videos were meant for Western audiences anyway, and the campaign wasn’t really about the Pharaoh but his son Gamal, a Western-educated, reform-minded man of the future. Sound familiar?

Jordan: winner

The Hashemites have enjoyed a tremendous financial boom since the onset of the US occupation of Iraq as real estate prices alone have surged some 30% over the last year. Most of that financing has come from money that left Iraq after the fall of Saddam, a trail that will be more closely watched now after 57 people, mostly Jordanians and Palestinians, died in an attack on three hotels engineered by Iraqi colleagues of Abu Musab al-Zarqawi. King Abdullah II replaced his reform-minded prime minister with a former security chief and the diwan’s new mantra is, “political reform plus security,” which means no reform and no matter how much money you bring to town, you’re going to pay dearly if you mess with Jordanian security.

Iran: winner

Compared to the other players in the region, Iran didn’t do as well as many observers suggest. Yes, it consolidated its influence in Iraq, and like the Gulf states it profited greatly from high oil costs. Also, it has managed so far to run circles around the EU 3 (England, France and Germany) that has been “negotiating” with the IRI over its nuclear program. But those talks have taken a few strange turns over the last year, especially after the election of Iran’s tone-deaf new president. Until President Mahmoud Ahmadinejad advocated the destruction of the US and Israel, even the hawks at the Pentagon had no real military option for Iran. Presumably, that is no longer the case, since American officials started to take “death to America” sloganeering pretty seriously after 9/11. And Ahmadinejad’s re-structuring of his foreign service to better suit Iran’s apparent new policy direction has also put a number of Western officials on edge. So the Iranian issue, relegated to the backstage for the last three years, has now moved to front and center and the curtain is rising. In the next few years look for Iran well south of here on the scorecard.

Israel: Winner

It goes without saying that Israel always stands to gain when Arabs lose – but what about when Arabs lose their illusions? If you’ve missed the news from Iraq, Mr. Zarqawi has put paid to the notion of one glorious Arab nation ranged against the outsider. He’s killing Arabs, mostly from a rather largish Muslim sect known as Shiites. As it turns out then, the Middle East is made up of lots of groups, many of whom, especially the smaller communities, will make alliances with others to advance and protect their interests and their lives. In this context, the Zionist imperialist warmongers to the south look less like outsiders and more like a regional minority that’s done well for itself – like Iraq’s Shiites and Kurds. Wow, those Jews win even when Arabs do too!

Ariel Sharon: winner

The Gaza withdrawal earned him international acclaim, including thawing relations with a number of Muslim and Arab states, like Pakistan, Qatar and the UAE. Now Sharon has left Likud to start his own party, Kadima, or Forward. In the last two elections, it was Arabs who elected the prime minister, but it’s unlikely the PA, Hamas, Islamic Jihad or Hizbullah, will have a very large say this time. Sharon has provided Israelis with plenty of security and even if he wanted to withdraw from the West Bank, and he doesn’t, there is no political will in any of the country to do so.

Palestinians: winner

The Gaza Strip isn’t much, but it’s a place to start – and more to the point, it’s a place where more than half a century’s worth of previous Palestinian leadership has been managed. And now President Mahmoud Abbas is busy trying to cobble together meaningful political institutions while tackling corruption and crime, noble and daunting tasks for any democratically elected leader. He’s got a lot of help from the international community and everyone’s rooting for him – except for his political rival, Hamas. Understandably, Abu Mazen doesn’t want to touch off a civil war, especially one he might not win, but without monopolizing legitimate violence, there will never be a sovereign Palestinian state, not because the US, Israel or the EU won’t allow it, but simply because it won’t be a state. Maybe he is waiting to see how the Seniora government takes away Hizbullah’s arms and gets them fully into the political process.

Syria: loser

Insofar as the goal of any regime is to ensure its continued existence, Syria didn’t do all that bad for an international pariah state. And just when we thought we’d seen the last of Baath party comedy as former Iraqi minister of information Muhammad Said al-Sahaf ran for the hills when US tanks he said didn’t exist were closing in, the Syrians roll out their own investigation into the Hariri assassination. What’s really a gas is that Damascus’ Westernized leader evidently thinks that a German judge goes about his business like a Syrian one. “Yeah, that’s the ticket – Mehlis built his whole case on Hosam Hosam and now he’s got nothing, nothing I tell you! Ha!” It would be really funny if there weren’t so many lives at stake, not that Syria cares as it’s been throwing its insults at its neighbors for several decades now just to keep its own hindquarters dry. Everyone else in the region is furious with the regime, but few wish its demise. Cairo, Riyadh, Amman cannot bear the idea of the Bush administration feeling its oats – What, us next? So, who knows if the family in Damascus will survive, but in the future, God-willing, Syrian high-school students will be hard pressed to believe that at one time their country was run by vicious, buffoonish adolescents.

The US taxpayer: loser

It is a tribute to Middle Eastern hospitality that so many in the region are eager to distinguish between the American people and the policies of their government. Nonetheless, it is useful to remember that government by and for the people means that Americans are their government and are thus endowed with the right to hire and fire their leaders. It’s actually a really good thing, even when voters re-elect a president for a second term, as they did the current inhabitant of the White House. Of course, the many billion dollars the US has spent to give Iraqis a chance to elect their own leaders, is a much smaller percentage of what WW II took out of the US economy, and the military casualties aren’t even as high as civilian deaths on 9/11. But as domestic support for Iraq is waning, the Bush administration has yet to disclose any real new strategy except: Stay the course! Ok, but for how long and what’s the price, in lives and dollars? The real problem is that the one workable solution that doesn’t entail vacating Iraq would demand not less but more from American taxpayers, like higher tariffs, especially on fossil fuels, and most likely a draft to fill the ranks of a military that was not trained for a mission it nonetheless mostly believes in: bringing democracy to Iraq.

The neo-cons: losers

Misunderstood and largely unloved by both those who do and do not understand them, the neo-conservatives are a boutique school of American policymakers, politicians, journalists and intellectuals who have very little in common except their shared belief that US policy in the Middle East over the last 60 years was in error. Given that the attacks on the World Trade Center left thousands of civilians dead in a major US city, they have a point. Once the administration found no WMD in Iraq, the neo-cons were pressed into service – now, the US was in the Middle East to import democracy. As farfetched as that thesis may sound to some, and as mendacious as it may sound to others, without it much of what transpired in the region this year wouldn’t have happened without that idea. For instance, there is a very powerful current in US policymaking circles that still argues that the US needs Syrian help and if that means giving Bashar al-Assad a free hand in Lebanon so be it. The neo-cons won that fight and some others, too. Still, it’s sheer fantasy to imagine that a group of academics and journalists ran the government of the United States while CEO millionaires like George W. Bush, Dick Cheney and Donald Rumsfeld looked on helplessly. No, the neo-cons deserve some credit and as they are not that powerful they’ll take a lot of blame, some if it in Iraq perhaps.

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Finance

Building up the financial markets

by Executive Staff
written by Executive Staff

Jean Riachi

Chairman, Financial
Funds Advisers



E How could UN sanctions on Syria affect Lebanon’s finance sector? What can we expect from Syria in the long term, after possible regime change or crisis resolution?

I don’t think UN sanctions on Syria would affect Lebanon’s finance sector. I don’t see how they could affect it. They might affect the transportation sector, the industrial sector but I don’t see what effect they could have on financial markets or banks in Lebanon, other than maybe the freezing of some Syrian accounts in Lebanon, which cannot be negative. So, I don’t think sanctions would have a significant effect on this country’s finance sector. On the contrary, if there are any sanctions which affect Syrian institutions, that might affect the level of activity of Syrian nationals through Lebanon. They’re mainly commercial banking issues.

So far, although the assassination of former prime minister [Rafik Hariri] has created some fears, it has also created some optimism. Capital markets, fixed income and equity, have shown positive trends this year. Fear has been balanced by hope. The trigger was economic rather than political, which means that for the equity market the performances of the companies themselves justified the upward trend of stock prices and for the fixed income Eurobond market I believe that the better tenure of the budget deficit and the liquidity that we have had in the country have sustained the bond market. So I don’t believe they went up because of the assassination of Hariri or its results, such as the withdrawal of the Syrians, as people say. I think the reasons were here.

As for a financial sector in Syria, you have state commercial banks administrated by the state under a socialist system. The few private banks that have opened are too young to have any significant impact on the economy so you can’t even talk about a financial sector in Syria.

There are two scenarios. Either they comply with international requests and everything is okay with them and I think that then they will initiate a lot of reforms, or they maintain a situation of confrontation, which makes them into a sort of fortress, and they find ways of getting around the sanctions. They’ll find ways to finance their economy through neighboring countries. But that would have a retarding effect on any efforts to reform the banking sector. They would go backwards. I can’t imagine anyone willing to promote reforms in a state of siege.

Marwan Abou Khalil


 Head trader, Gulf Finance


E How will the opening of regional exchanges in Dubai and Cairo affect the performance of the Beirut Stock Exchange (BSE)? Can we expect the BSE to respond positively to the regional competition, especially in light of the expected privatization initiatives, or has it missed the boat?

The BSE is a different case from Dubai or Cairo. We need political and economic stability first. Dubai and Egypt have them. When we have them here, we can have expansion. We hope, nonetheless, that the opening of the exchanges in Dubai and Cairo will have a positive effect on the BSE. However, I expect some capital to go from here to there. We have seen a Lebanese company go public and it wasn’t traded on the BSE. It was traded on the Dubai stock exchange. That was a negative thing for Lebanon. In the short-term, the opening of these two exchanges may have this kind of negative effect on the BSE. But in the long run I hope it will help the Lebanese markets. Maybe in the short run Lebanese companies will be listed on the exchanges in Cairo and Dubai. But maybe as hope returns to this country, new foreign funds will be invested here, through these exchanges. In the long run, maybe we will become like them. We hope so.

We are afraid that the BSE will miss the chance to reap the benefits from any privatization. But if there is a good political climate and renewed faith in our country we will be able to attract foreign capital investment in the privatization process. But we hope that the privatization process is reflected on the BSE, and not on foreign ones. Privatization of big companies here would result in market capitalization and in a greater volume on the BSE. For the moment, we have Solidere and two or three other big companies. That’s all. The other companies are small companies. They never give dividends. They don’t care about the stockholders. The privatization of government companies here will help the BSE, provided it occurs with the right timing. I don’t think the timing is right now. The BSE is not moving. Since March we have had about the same price for Solidere shares, between $12 and $13. We’re waiting for a boom. It’s a fundamentally excellent company. But we need political stability. That’s why I think we should wait for the right timing for privatization, when we have foreign investment. It’s pointless privatizing a company, if when it is launched, no one wants it. The amounts generated will be small. It will bring a low volume to the BSE and it will become a black mark on the record of the BSE.

Faysal Barbir

Investment adviser,
Arab Finance Corp



E What will the impact of privatization and administrative reform within the public sector be on Lebanon’s financial markets?

We are on the verge of some very important structural reforms. Privatization is something that Lebanon needs in order to go forwards. Financial markets, in particular, need such reform. We’ve been seeing lots of demand from regional and even local investors, as well as from European and American financial investors, whether they were high net worth individuals, companies, investment banks, or huge brokers who now regard Lebanon as a very interesting emerging market and are now willing to diversify into our country given that we have a more stable political scene now. In terms of the Lebanese markets, we need privatization in order to increase our tools of investment and the opportunities that we can present to those investors who are willing to take this risk and invest here. If you look at our equities market, it’s really very small and limited, even though Lebanon benefits from a pioneer banking sector and the best banking and finance people in the whole region. It’s really contradictory that we have such a small equities market. I believe that now with all the money that’s present in the neighboring countries, in the Gulf region, mainly due to high oil prices, the whole region has boomed so much that people really are interested in moving money here. But it will come here if there are the opportunities and tools I mentioned. If we privatized some of the public companies, we would have these tools. We need more listings.

We also really need administrative reform, because there’s lots of corruption. We need a more efficient system and a more effective team. For the moment, everyone is working individually. This way of thinking needs to be gotten rid of. The problem is that the system is too politicized. You can’t really create something if you’re putting the wrong people in the wrong places. Unfortunately the whole country is like that. But I think we’ll get there.

We already have the willingness. And there have been sneak previews of possible success with demand for sovereign or corporate Eurobond listings, and hopefully by the summer MEA will be listed. Another is EDL, and another the telecoms industry. So we’re getting there. We are on the right track. The only problem is the short-term political pressure.

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Insurance

The hopes of insurers go up in smoke

by Thomas Schellen
written by Thomas Schellen

Insurance industry representatives in Lebanon recently acknowledged that they expect 2005 to end pretty much as a lost year for business, in line with the “no-growth” environment for GDP and overall economic performance. However, the detailed impacts on sector profits this year cannot be tallied for several more months – with the additional caveat that credible assessments of cumulative performance by all the 50 registered insurance and reinsurance companies still remain elusive in a sector which continues to keep even experts guessing on the real positioning of many companies.

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

Sclerotic growth

Rates of insured-ness have undoubtedly progressed over the half-decade since antiquated Lebanese insurance laws of the mid-20th century were revised in 1999. But as the practices of local insurers stand, public disclosures of financial results are not a given and the numbers that are available are often inconclusive as to the industry’s health, profitability and growth.

The large estimate range on Lebanon’s macroeconomic parameters – beginning with population size and GDP – does not help much either, as demonstrated by the variance between the Swiss Re assessment of Lebanon’s insurance density and penetration and that of other authoritative sources. Swiss Re gave figures of a per capita expenditure on insurance of $163.8 (density) and a 2.82% share in GDP (penetration) for last year, while the 2005 DAIR handbook by i.e. Muhanna ratings services, quoted a lower density of $144.25 but a higher penetration of 3.04% – not insignificant variations of 13% in one and 8% in the other direction.

However, such variations in evaluating insurance results are actually common for many developing countries and more than exposing information gaps on a market like Lebanon, they may say something about the need to improve research methodologies and form global institutions for this financial sector, which shows less worldwide independent monitoring than banking. But by the undisputed baseline understanding that Lebanon has about a 0.02% share in global insurance premiums, it clearly remains weak in many insurance areas, although according to Swiss Re’s numbers, Lebanon’s life insurance market improved significantly more than the non-life sector in 2004, increasing by 27.4% versus 2.6% for general insurance. But if measured by expectations voiced by important insurance minds four years ago, life insurance growth is still a disappointment. Where managers had hopes of achieving a premium portfolio of $1 billion in the second half of the decade, the real growth of the past three years falls significantly short of this.

Insurers that are owned by banks or affiliated with international sector firms are often viewed as the companies best positioned to survive in the Lebanese market, yet not all perform equally. In 2004, some bank-affiliated firms were presenting outstanding results in comparison to their peers while some players in the same segment saw their claims’ ratios grow much more than their premiums.

In this context, it is worth noting that the banking industry’s performance split is by and large top-down. Large banks essentially set the pace for the industry for both quality and compliance with international standards, while a handful of the smaller banks may be withering on both counts. But although the concentration of market shares at the top of the insurance sector is similar to that in banking (a few banks and insurers account for over 80% of activities in the respective realms), experts frequently caution that mere size of a Lebanese insurance firm does not provide a high certainty of across-the-board quality.

Neither premium volume nor data currently available on capitalization, reserves and total assets offer enough information to determine the sector’s leaders and losers as long as asset quality or loss ratios can be obfuscated in resistance to public scrutiny.

An unsettling reality in this regard is that the Lebanese insurance sector is still as far away from effective consolidation as it was five years ago and that transparency is largely amiss. Questions over advancing regulations and the monitoring of firms loom as large as ever and there is much room for improvement in promoting insurance awareness and governance quality gains within private and public protection providers.

Much-needed initiatives for the advancement of insurance did not progress in the political arena in 2005. The issues of pension planning and reforming the national social security network received no legislative attention, nor did tax benefits for life insurance or the 2004 draft for a new insurance law.

No sign of leadership

The latter issue is not of little concern – and it is also an indicator that the insurance industry itself is not just a victim of political foot dragging. The new law, said its advocates in the spring of 2004, would make Lebanon a role model for insurance legislation in the region, and allow the country’s insurers to reap the benefits.

The private sector insurance stakeholders, who have tried for years to repair the sector’s image, thus are still some distance away from projecting a cohesive front. This inertia could have consequences for the perception of Lebanon as a regional insurance power, based on the fact that insurance reforms and regulatory improvements in other markets appear to be taking effect.

The sector’s outlook is not without question either. By the track record of industrial and consumer behavior in Lebanon over the past five to ten years, corporate and retail customers have been inclined to treat insurance as expenditure during hard economic times. This dampens expectations that the industry will achieve strong improvement until the general economy shows some real gains.

The friendliest short-term prospect for local insurers could be profitability from their secure underwriting business. This is in the context of increases in global reinsurance rates. Although a cost factor for insurance companies, the last major incline in reinsurance rates at the end of 2001, allowed local companies to even out rate structure imbalances by hiking rates up under reference to the hardening of the international insurance market. This, say local analysts, has resulted in stronger underwriting profits in the past four years than companies were able to realize before 2001.

While the 2001 to 2002 reinsurance rate hikes were triggered by 9/11, the possibility of newly softening rates this year was voided by the natural catastrophes of the past 12 months. For the Lebanese market, analysts said that while it is too early to tell if local providers would notch up their rates once again by pointing to international conditions, the hard global market would be helpful in maintaining profitable underwriting rates.

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Looking Back

The unlikely quartet

by Michael Young
written by Michael Young

In November, during the French book fair in Beirut, the magazine L’Orient-Express – previously the monthly supplement of the daily L’Orient-Le Jour – was published as a special 10-year anniversary issue. The idea was the brainchild of the former editor, Samir Kassir, but when he was assassinated last June, it was up to the onetime staff members to prepare the content without the guidance of the irrepressible man who had been the magazine’s vital force.

The regret one felt in knowing Kassir never saw the issue was nothing compared to the disappointing reality of the aftermath of his death. The far-too-constrained national reaction showed how cheaply he had gone, so unacceptable coming from a Lebanese society that had, by the time Kassir was killed by a bomb placed under his car, regained its sovereignty. At the essential moment of newfound emancipation, an avatar of that effort, a writer who had risked his personal safety for years to condemn the order the Lebanese had lately demonstrated against, was virtually forgotten. That’s why the anniversary issue of L’Orient-Express was a bittersweet experience; it pleased the insiders, those who knew Kassir, but it also proved a mere sideshow for the society as a whole. Through that indifference, the Lebanese effectively forgot a part of their post-war self, and not by a long shot the least attractive one.

Four different lives, one Lebanon

It says much about the contradictory nature of Lebanon that four of the prominent deaths recorded in 2005 – those of former premier Rafik Hariri, the providential businessman who rode into the country on a white checkbook; Basil Fuleihan, his protÊgÊ and among the best and brightest of the returning wartime generation; Ghazi Kanaan, long the tough cornerstone and cynical broker of Syrian power in Lebanon; and Kassir, the prodigal son, who alighted from Paris and used his talents of writer and polemicist as an antidote to the worst of the new order – offered up a striking image of post-war equilibrium. Each complemented the other in some way, even when they were antagonistic. What ensued was a Levantine compromise, but one, also, destined to shatter amid the false expectation of indefinite steadiness. The greatest irony of all was that the four died as their ambitions were either about to be fulfilled, or had been.

The face of post-war Lebanon

To describe what Rafik Hariri meant for Lebanon after 1990 has been done ad nauseam. In all respects he embodied the energy of reconstruction after the conflict, was the indispensable agent of economic confidence, and, through his death, showed he had the power to play a post-mortem trick on a Syrian regime that had for years used him to advance its interests, while also mistrusting his every move. What made Hariri dangerous was that unlike his foes, he had a striking vision for Lebanon. It was flawed, hubristic, narrow, elitist, unaccountable, and, for all of those reasons, helped generate the crippling debt Lebanon faces today. But a vision there was, and it had a place in the modern world, so unlike the cheerless substitute offered by Syria and Hariri’s foes, where the choice roles were left to intelligence officers, and where the ambient philosophy was essentially the same as practiced by organized crime rings.

Orbiting Hariri

Hariri was the axis of the system in which Fuleihan, Kanaan and Kassir navigated. While Fuleihan was so closely tied to the late prime minister that drawing a boundary between the two seems almost absurd, he was also something distinct: an embodiment of the best that Hariri had managed to attract in the early 1990s: the 30-something university graduate, preferably with a degree from a foreign institution, devoted to the art of making money, and crafted in the best ateliers of urban mobility in London, Paris, or New York. Beirut was awash with such figures in the immediate post-war period (it still is), and while they were naturally drawn to a prime minister who offered them status, they were also often the antithesis of what Hariri himself had been.

Like many a returning Lebanese in those years, Fuleihan was a man of theory, hungering for action, and to achieve that objective he needed to hitch his fortunes to a man of action like Hariri. Fuleihan’s intelligence ensured he would succeed, but countless others, fighting for the limited number of stools in the Hariri set, were either denied entry, or found themselves banished to a mediocre anteroom, far from the inner circle, moving among the sycophants the prime minister was so good at turning to his advantage, but who were otherwise eminently forgettable.

Samir Kassir’s most memorable encounter with Hariri showed another side of post-war Lebanon, and of Hariri himself. In 2000, Kassir had written a now-famous article criticizing, without naming him, the then-head of the General Security service, Jamil Sayyed, and more generally the role played by the army in Lebanese life. Sayyed responded by threatening Kassir and ordering carloads of agents to pursue him for weeks, relentlessly, at times aggressively. One evening, Hariri asked Kassir and the editor of As-Safir, Joseph Samaha, to join him at a swanky Beirut restaurant. The point was not to feed the pair, however, but to have them follow him home in their car, enclosed within the confines of his motorcade. When the General Security agents tried to follow, Hariri’s guards blocked their path, earning Kassir a momentary reprieve.
Hariri was not the first or last politician who shielded Kassir against arguably the most powerful man in Lebanon. But the incident showed something about both men: for Kassir, free expression and provocation were oxygen, and he was willing to go to the line in defending it, though his pen had often been directed against Hariri. For Hariri, Kassir was more than just an enemy of the security services and men he loathed, he was also an expression of what Hariri, sometimes reluctantly, imagined Lebanon to be. The late prime minister did not like criticism, but he was willing to argue with his critics without dispatching goons to exact retribution; and he anyway preferred co-opting others to threatening them. Kassir was never co-opted, but Hariri never held that against him. Indeed, why should he have?

Free men

Kassir, much like Fuleihan, was part of that exiled Lebanese war-time generation that came home after the fighting stopped. Yet where Kassir was a man boisterously of the left, Fuleihan always seemed more the solid burgher, levitating above ideology. That was the façade: anyone who knew both men could recall how Fuleihan was readily a militant in his days at the American University of Beirut, while Kassir, while never abandoning his leftist roots, steadily became more bourgeois as he kicked into his mid-40s. Sometimes opposites, toward the end objective allies, Fuleihan and Kassir distilled the post-war cosmopolitanism of Beirut, the very same that was overpowered by, and somehow coexisted with, the hard, rural stewardship of the fourth man who died in the past year, Ghazi Kanaan.

In the same way he could acknowledge the importance of a freethinker like Kassir, Hariri could just as pragmatically accept the reality of Syrian hegemony over Lebanon, and work with its top administrators. Of all the strange relationships in post-war Lebanon, the bond that existed between Hariri and Kanaan was surely the oddest. Whatever brought together the businessman and the intelligence agent, the visionary and the anti-visionary, the natural co-opter and the unambiguous enforcer?

Many things, in fact: their shared appetite for power, their instinctive grasp of how best to achieve their mutual interests, their successes as men of action, and their dislike of abstraction. At play between Hariri and Kanaan were near perfect market forces, as both regularly resolved their differences by finding an equilibrium between what both were after. Kanaan ran Lebanon like a country estate, and Hariri, technically the lord of the manor, accepted him as the foreman he could not fire. The prime minister’s critics pointed to this as proof that he was an essential prop in the Syrian order; Hariri’s defenders argued that, under the circumstances, smooth collaboration with Kanaan was far better than a confrontation the Lebanese could not win. Perhaps, though one must measure the implications of Hariri’s policy: it did at times let him do what he wanted, but by allowing Syrian interference in every aspect of decision-making, it also institutionalized Lebanon’s sense of dependency. Paradoxically, as many a journalist would admit, Kanaan was little concerned with the excesses of a free Lebanese media. It was revealing that Kassir’s problems were primarily with the post-1998 order set up by President Emile Lahoud. Kanaan rarely directed threats against journalists; Kassir’s difficulties were provoked by the Lebanese over whom Kanaan presided. It was his misfortune to pay the price for the desire of Lebanese security officials to prove themselves to their Syrian superiors. Yet how ironic that before Hariri’s murder, it was much easier to mock the Syrians than it was to attack Lahoud. Syrian rule allowed this latitude to the Lebanese media, and those like Kassir took advantage of this. What he did not realize – his own killing being the warning – was that once the Syrians withdrew, the margin for such expression would disappear.

Staying on good terms with Syria

In understanding Hariri’s relations with Syria, it is important to grasp that he was no revolutionary. A conservative businessman, he preferred stability to the potentially destructive unpredictability that a break with Syria could have led to. Hariri’s ambition at the end was not, as the hagiographists have written, to take Lebanon out of Syria’s orbit; it was to widen his own margin of maneuver inside that orbit. In the weeks before his death, Hariri had made clear to the Syrians he would not take on his electoral lists the more egregious of their supporters, as he had in the past – in effect announcing that he planned to make the parliamentary elections a real contest. But at best, he and other opposition candidates hoped to win around 50 or so seats. This was no coup against Syria; it was an effort to re-impose the equilibrium that Hariri had put to good use in the days before Lahoud and Rustom Ghazali replaced Elias Hrawi and Ghazi Kanaan.

What Hariri didn’t grasp was that, for his enemies, this would anyway be misunderstood as a bid to overturn the Syrian order. They feared Hariri’s triumph because he would have easily won the round. Instead, he got too close to the sun, and paid the ultimate price. Yet it was not so much the game that was too big for Hariri; it was Hariri who unwittingly proved too big for the game. For a supremely self-assured man, this descent into momentary modesty proofed fatal, as it did for Fuleihan.

If we are to believe what we hear about Kanaan, in his final days he was unhappy that everything he had built up in Lebanon had collapsed. It’s difficult to imagine a hardy survivor of the Baathist order devoting any time to nostalgia. It’s equally difficult to lend credence to official Syrian reports that Kanaan killed himself in response to a hostile campaign in the Lebanese media. No such campaign was waged, and Kanaan was not someone to let words get him down. In fact, if anything was likely to have killed him, or caused him to kill himself, it was that he posed a mortal threat to the worried Syrian regime he served. His adeptness highlighted its incompetence. At the threshold of his crowning moment, when he could have for the first time imagined exercising absolute power, Kanaan may have fallen victim to his prospective success.

As for Kassir, he was on a cloud after the Syrian withdrawal in April. On the eve of his death he was described as being his usual confident self when discussing political changes. He was very far away from imagining that his murder was already in the final stages of preparation. Kassir had won and his years of effort had paid off. Afterwards, it was clear that his was the accomplishment not of money or power, but of ideas. In being the first to die after Syria’s pullout, Kassir proved how essential his weapon was in destabilizing the enemies of free expression.

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Real Estate

BCD property prices stay on the rise

by Peter Grimsditch
written by Peter Grimsditch

Despite the political turmoil of 2005, Lebanon’s real estate sector saw activity and prices remain relatively stable. Solidere sold more land than ever before and both Gulf Arabs and Lebanese nationals continued to invest in hot properties. The Beirut Central District remained (and still remains) the axis around which everything else revolves, and experts predict the short term can only get better.

According to the Lebanese Order of Architects and Engineers, the number of construction permits and overall construction experienced a dip compared to 2004 levels. By November 1, 2005, 9482 permits had been granted for a total construction area of 5,839,354m2, while for the whole of 2004, 11,258 permits were granted for a total area of 7,719,348m2.

About half of all permits were issued in Mount Lebanon (4,657), followed by south Lebanon (1888), Nabatiyeh (930), Beirut (913), the Bekaa (799), and the north (295). In terms of space in square meters, Mount Lebanon led the way (3,116,845m2), followed by Beirut (968,601m2), south Lebanon (648,742m2), the north (422,876m2), the Bekaa (375,687m2) and Nabatiyeh (297,603m2).

All things considered, Solidere performed remarkably well in 2005. While much of Beirut and Lebanon appeared to adopt a wait-and-see attitude, Solidere sold some 300,000m2 of land in the downtown, more than ever before. The price per square meter of built up area (BUA) in the Beirut Central District (BCD) increased from some $1,000 in 2000 to $1,200 last year and some $1,400 today. The price is even higher along the seafront, where hardly a vacant plot of land remains. An equally luxurious fourth complex, as well as a handful of luxury hotels (including the Hyatt and Hilton) will, next year join the high-end residential Platinum, Beirut and Marina Towers. Worth some $1.5 billion in investments, the area overlooking the marina has already been dubbed Beirut’s “Goldern Strip.” Investors who wish to develop along the downtown seafront will have to wait until 2007, for the completion of the land reclamation project known as Solidere II. However, assuming that the political and economic situation in Lebanon remains stable, they will have to reckon with m2 of BUA.

Solidere cleans up

Solidere declared over the first nine months of 2005, a profit of $51.1 million, while its increased liquidity allowed the company to reduce debts from $234 million by the end of 2004, to $130 million by the end of 2005. Shareholders were able to cash a 32% profit per share, compared to a 2% profit over the same period last year. The share price rose to $14 at the end of 2005, while experts, some say rather optimistically, predict shares to hit $20 in the near future.

According to a study by Ramco Real Estate Advisers, some 4.5 million square meters have been bought by Gulf Arabs since 2001, which represents a total of 270 transactions at an average of 17,000m2 each. About 900,000m2 were sold in 2005, which illustrates the fact that Arab investors so far remain positive about the future of Lebanon. For the first time ever, Kuwaiti nationals bought more land than Saudis.

The sale of land is not only meant for the construction of towering residential projects and hotels, but also smaller luxury villas, roughly within the geographical triangle of Beirut, Bhamdoun and Faqra. Due to the increasing anti-Muslim climate in Europe, Lebanon’s winter capitals of Faraya and Faqra witnessed an increased construction of chalets, villas and even a palace, as Arab nationals rather ski there, than in Gstaad.

Arab nationals remain among the main buyers of high-end real estate in Lebanon, yet it seems Lebanese expatriates increasingly buy and invest, especially since the retreat of the Syrian army last April. The high-end seafront residential properties are predominantly bought by Gulf Arabs, (60% to 70%), while more inland, in areas such as Saifi and Wadi Abou Jamil, about 70% of clients are Lebanese. And sales are booming. Many apartments are sold even before the foundations are laid. Marina Towers and Park View claim to have sold all their apartments, while Beirut Tower claims to have 80% sold and Garden View, 60%.

Looking elsewhere

While the BCD area remains the natural center of gravity for Lebanese real estate, other major investments continued to take place along the coast, in Ain Mreisseh, Raouche, Ramlet el Baida and at the Corniche. Also, several major developments saw the light in the narrow strip between downtown Beirut and Ashrafieh, most notably the Sursock Towers, the landmark high-rise building with 500m2 of luxury apartments at Tabaris, designed by Pierre Khoury Architects.
The ongoing gentrification of Beirut with the downtown area as its center continues in other areas beyond Ashrafieh, such as Zoqat al Blatt, Kantari and the upper end of Zoqat al Blatt, where investors have bought large apartment blocks. Outside Beirut, no major developments have taken place, with the exception of Yarzeh, Baabda and to a lesser extent Hazmieh and Naccache.

Following the success of the 37,000m2 ABC mall in Ashrafieh in 2004, 2005 saw the opening of the giant City Mall at Dora and the smaller Metropolitan Mall in Sin el Fil. The City Mall measures no less than 200,000m2, of which 75,000m2 are meant for retail, including a hypermarket and department store. The Metropolitan Mall, part of the Habtoor group, offers another 14,000m2 of retail space on the market. It remains to be seen how both will perform, especially the latter in the largely untested Sin el Fil.

After a six-year delay due to political bickering, 2005 also witnessed the go ahead for the $120 million Souqs project in the BCD. Due to be completed by 2007, the Souqs will offer another 60,000m2 of retail space on the market. While the rent in ABC and City Mall lies at around $800m2, the price per square meter in the Souqs is expected to be around $1,000.

Verdun will soon witness another retail development with the announcement that the V5 shopping mall will be open for business in 2008, adding a further 50,000m2 of retail and leisure space when it is completed (see interview with Horizon CEO Abdul Hafiz Mansour on page 180). While there is a widespread consensus among project developers and real estate experts that Lebanon does not yet offer enough retail space per capita, it remains to be seen if malls are the answer and if all available retail space can be made profitable. One thing is certain, with the increased competition, especially after 2007 to 2008, rents in certain areas and malls will come down.

Office works

The market for office space remains Lebanon’s least significant. Following the success of office buildings such as the Nahar building and Atrium, a few new state-of-the-art office buildings have been nearly completed in the BCD, including Two Park Avenue. Prices are hitting $300m2 per year and there is demand for modern buildings. The same cannot be said about first generation offices built by Solidere in the heart of the city. Occupancy rates are at about 65%, due to a combination of factors, most notably their small size and limited parking space. Rents there are much lower at some $150m2 to $250m2. Rents in Hamra or Ras Beirut too are much lower starting at $50m2 going up to $175m2. Popular among business and embassies is also Rue Charles Malek between Tabaris and the improving Sin el Fil.

The new Monot?

While six years ago you could barely get a coffee in Gemaizeh, today people jam the streets especially on the weekend to visit the dozens of café’s, clubs and restaurants offering anything from Cuban cocktails to sushi. While Gemaizeh has seen rents triple – hitting $500m2 per year – Rue Monot, which held sway for much of the previous eight years has seen prices tumble from $500m2 per year to some $250m2 to $300m2 per year. With the increased popularity of the area however, problems with noise and parking have increased and the character of the area has changed from slightly alternative to more and more mainstream. Some say the first generation bar owners and clientele are already looking elsewhere. The next cool area? The word on the street is that the savvy operators will move to Hamra with its flat, pedestrian sidewalks. Watch this space.

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Real Estate

A positive wrap up for real estate in 2005

by Executive Staff
written by Executive Staff

Vincent Najarian

General manager of C.A.R.E. real estate consultants

E The real estate market, especially the high-end residential market, has appeared to ride out the crisis of 2005. Can you explain this and what is your forecast for 2006?

“We remained positive throughout 2005, and are very upbeat about 2006. The signs are good. Only one week after the death of [former premier Rafik] Hariri we bought two major plots of land for some of our clients, which brings the total number of projects we manage and promote in downtown Beirut to 17. What’s more, Solidere booked record sales this year and saw its price per share increase to $14. I think there are several reasons why Beirut remained attractive for investors. First of all, the risk factor these days is equal in a lot of places. Just look at what happened in London and more recently in Amman. Or take Riyadh, which with its many checkpoints almost looks like Beirut in the 1970s. Secondly, ever since 9/11, our Arab clientele feels less and less at ease in the USA and Europe, a sentiment which has only grown worse with the increasingly anti-Arab, anti-Muslim climate in Europe. Look at the Paris riots recently. People are just not comfortable wearing a scarf or going to the mosque, which in Beirut is of course no problem whatsoever. Thirdly, with the high oil price there is a lot of cash in the region, which is increasingly invested in Arab countries, rather than in the USA or Europe. Finally, other than Europe, Lebanon has always been a service oriented industry, in which Arabic is the language. One should note however, that the money flowing into Lebanon is but peanuts compared to what is currently invested in the Gulf, especially in Dubai. The recently signed contract to construct Palm Island, which is one out of many, is worth about $4 billion. Yet, in my opinion, Dubai is not really a competitor to Beirut. Apart from the high-end seafront developments, such as the islands that are sold to a highly affluent international clientele, 70% of the towers being constructed on the coast are actually meant for a Pakistani/ Indian clientele. Believe me, it is mainly an Indian dream to own a house in Dubai. Most Arabs see Dubai as a weekend destination, a stopover, not as a place to settle down. For that, they would rather come to Beirut.”

Rachad Dernaika

CEO of RED for property development

E How do you see the difference between the high-end real estate developments in Dubai and Beirut? Is Beirut the next Dubai?

“Dubai has experienced an unprecedented volume of towers being built in the last several years and it’s anticipated that it will continue to do so at the same pace for the foreseeable future. As long as demand surpasses supply, Dubai knows theoretically no limit in the number of towers it can build, due to the simple fact that Dubai has ample land. Beirut on the other hand has limited land space and as such will never be able to supply an abundant number of high rise buildings.

Therefore, once the political situation in Lebanon stabilizes, this limited availability of land should drive all real estate related prices quite high up, especially seeing the increased demand and limited supply. Even during the past turbulent year, we have continued to see an aggressive interest in real estate, both in plots of land and high-end finished products. This, we believe, is due to the long term confidence in the future of the country. What’s more, the rare readily available high-end apartments coupled with the fact that such products take five or six years to materialize, will be another contributing factor to driving prices higher up in the near future. From a price point of view, we see Beirut real estate booming like in Singapore or Tokyo, rather than Beirut.”

 

Raja Makarem

General manager of Ramco Real Estate Advisers

E What was your overall impression of 2005?

“Following the death of Hariri, it was as if people held their breath for a moment and waited for things to come. Consequently, the sector experienced a brief lull. However, the situation went back to normal remarkably quickly, while prices never collapsed. Certainly after the withdrawal of Syria, the mood was extremely upbeat. Not only did Arab nationals continue to invest, but also, and increasingly so, members from the Lebanese Diaspora. More or less the same developments took place after that awful speech by [Syrian President] Bashar al-Assad last November. For a moment, I was shocked and I thought this is going to be a big blow to the sector, but the very next day I signed two major contracts for my clients. The bulk of the business, both in terms of numbers of transactions and value, was situated in and around Beirut. I’d say about 90%. In fact, areas outside Beirut, such as Aley, and Bhamdoun, experienced a slight stagnation. So far, Saudi and Emirati nationals were always the most active on the Lebanese market, but this year for the first time Kuwaitis bought more, some 225,000m2 out of a total of 900,000 m2 in 2005. The general consensus in Lebanon and abroad seems to be that things will only get better in 2006 and in the near future.”

Bernard Khoury

Architect

E Seeing the construction frenzy in Beirut in recent years, what is your opinion about the state of architecture in Lebanon today?

“Beirut is of course a very ugly city, however interesting it may be in its complexity. One interesting aspect is that it’s an almost entirely privately developed city. There is hardly any state intervention. We have a very thick and complex building code, yet one which only restricts you not to construct more than you are allowed and which lacks any vision of how the city should look like. In that sense, Lebanese developers and architects bear a great responsibility and it is about time they take it, for we have examples of great architecture from the 1920s until the 1980s, but the last 25 years have been catastrophic.

“Architecture should be an intelligent response to a certain urban complexity and it should be attractive, attractive, attractive. It seems however, most architects prefer not to think, but just apply the recipe. They seem stuck in postmodernism, which was thrown overboard all over the world except here, and so all we see is the typical straight-lined high rise. I’m convinced that the conventional construction concepts most developers use will not last. The future belongs to those who develop concepts more adequate to the times we live in. If someone buys a house, you have to give him a dream, as it’s the investment of a lifetime. And I want to stress that this is not incompatible with financial success, on the contrary. Great designs sell. It is a challenge for developers and architects to come up with daring solutions, within technical, financial and legal limitations. Take balconies. The law allows you to spend 20% of the total space on balconies and yet all we see are these tiny extensions, which are essentially just there to collect dust. But this is not Alaska or Dubai. This is the Mediterranean. We can live outside nine months a year, so why not work with large open staircases and balconies?

“In downtown, Solidere has set its own standards, which in itself is a good thing. However, to me, the result is rather disappointing. It’s all beige and yellow, with one red disaster in the middle called “Caracalla.” Now, Solidere claims to only work with internationally renowned architects, but that’s only partly true. Firstly, they are hardly renowned and secondly, they only sign for the concept, after which local people take over. So, the result is hardly their signature. Take Ricardo Bofil. Pronounce his name anywhere in Europe and you get slapped in the face. He is the Richard Kleiderman of modern architecture. Unfortunately people here think that’s the same as being Amadeus Mozart.”

Michael Dunn

Chairman, Michael Dunn & Co.

E “Seeing the many shopping malls that have been built in recent years, do you think we have reached the limit or is there still room for growth? And what will be the consequence for a traditional high street such as Hamra?

“Given political and economic stability, and a further increase from 2004 tourist arrivals, I think there is still room for more well constructed and well situated shopping malls. Compared to international standards, Lebanon still does not have enough available retail space per square meter, per inhabitant. I particularly have a lot of respect for the ABC mall, and I think the Souqs will do well. Even though so far only the south wing will be constructed, it will definitely be the finishing touch to downtown Beirut as a shopping destination. A shopping area such as Hamra or Verdun for that matter, can compete and complement the newly constructed shopping malls. They will just have to make themselves more attractive for visitors. In Hamra, that means first and foremost that the municipality gets its act together and does something about the horrendous traffic and parking problems. As long as those are not solved, Hamra will never pick up. It seems to me however, that no one cares and that they think that everything will get back to the good old glory days by itself. I truly do not understand that.”

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Society

Karim Fadel- Director, ABC Group

by Executive Staff
written by Executive Staff

Since opening its first store on Martyrs’ Square in 1936, ABC has grown to become a reference point in the Lebanese retail industry. Boasting over 60,000 square meters of shopping space distributed across eight outlets, the group’s malls secure some 7.5 million visits annually, giving ABC an estimated 13% market share of Beirut’s retail industry revenues. Executive spoke to ABC’s director, Karim Fadel, on how the group weathered the storm of 2005, and on lessons learned by the company whilst expanding and evolving to meet the changing needs of customers.

E It’s been two years since ABC Ashrafieh opened. What lessons have been learnt over the course of this period and how, if at all, has the mall been a model for modern Lebanese retail culture?

We’ve learnt a couple of lessons along the way on what constitutes key success factors for a mall. Firstly, a good location is essential. You need to establish yourself in a well-populated and wealthy area in order to create a “catchment zone” of potential. Secondly, the concept of the mall is a key factor: it needs to be well designed. In the case of ABC Ashrafieh, we launched an international design competition and chose a British group, Business Design Partnership, which is specialized in commercial centers to come up with the planning and the design of the mall. Between the design studies and the feasibility studies, this component came up to 7% of the total cost of the project, which was of $120 million. A lot of developers don’t spend enough time and money on the design study, despite the fact that it largely determines the success of the commercial center. ABC Ashrafieh is an innovative mall in many ways. It’s a city mall, which is very much integrated into the neighborhood and respects the surrounding urbanism. It has become an extension of Sassine square: people come to the mall to meet. Furthermore, it takes advantage of the beautiful weather we have in Lebanon by being partly open-air and partly closed. Finally, another important element is to achieve the right balance in the retail mix.

E ABC’s retail mix is one of its noteworthy features: stores range from the exclusive luxury brands to the more mainstream franchise stores. What is the right formula in terms of mixing tenants in malls?

You need to get the performing, competitive retailers, not the ailing ones. We rarely take low-end stores; we go for the most performing, middle to high-end ones, with a good franchise. We are very cautious with our retail mix and consequentially, we might end up turning people down. Also, you need a certain focus: in our case, it is fashion. That’s what we are known for. You won’t find many sports or appliances stores in ABC. Clients come here to buy fashion items and gifts.

E But isn’t the trend in retail the one-stop shop? Don’t customers come to malls to find all that they need under one roof?

I believe that trend is reversing. Today, shops are getting increasingly specialized and the same goes for malls. They are engaging in both horizontal and vertical specialization, that is to say they are offering fewer lines of products and a narrower range of prices. Another trend that is taking place is that of “retailtainment:” mixing retail and entertainment. This is a very important concept for the success of the mall: by adding entertainment services, customers come in more frequently, spend more time on the premises, and thereby more money. At ABC Ashrafieh, we have dedicated 30% of the surface area for entertainment, with some outlets in prime locations and others not.

E What is the occupancy rate of the mall at present?

We have an 85% occupancy rate in terms of surface area. That being said, all our units of 500m2 and less have been rented out. At this point, we only have two large units left. Therefore in terms of units, we have a 99% occupancy rate. We remain a sought-out location for retailers: we’re a niche mall that is well located, with a certain type of clientele and a specialized range of products.

E What is your future strategy? Do you have any new projects in the pipeline?

We’re planning on opening up several cosmetic specialty stores. We also just completed the renovation of our Zahle outlet and our big project for 2006, is the renovation of our mall in Dbayeh.

E What happened to your Dbayeh mall, which used to be your flagship department store? Has it experienced a significant fall in trade due to the numerous shopping centers springing up in Beirut?

It has experienced a drop in activity, by some 10%. That is why we will be investing in renovating it, at an estimated cost of $5 million. The renovation work starts next year and is expected to take two years.

E It has been a challenging year for the retail sector, marred by the political instability, the precarious security situation and the subsequent drop in tourism. How badly was business affected in the end?

It wasn’t as bad of a year as what we expected, taking the political situation into account. Sales were pretty steady. Bear in mind that tourism only dropped by 14%, so the impact of the shock was mitigated. We didn’t feel much of a difference. What was noteworthy this year is that the tourists came later, but then they stayed a bit longer. August and September ended up being good months for retail. During Ramadan, our sales went up by 13% from last year in Ashrafieh and Dbayeh. Essentially, the events that affected the country constituted more of a political shock than an economic shock.

E How many days were you forced to close this year and what loss in revenue did this represent? To what extent have ABC’s sales and revenues been affected by the unstable situation?

We only closed for seven to 10 days in the end, which didn’t represent a significant loss in revenue. We had budgeted for a 15% increase at the beginning of this year, as we were expecting more tourists, and at this point, it looks like growth will be flat. By the end of this year, we expect our sales figures to be the same as last years.

E Are a greater chunk of your profits now being lost to increasing security costs?

We are indeed dedicating a larger budget for security purposes. We have increased our security team, with guards now searching people and cars coming into the mall. But this hasn’t represented a major hike in our security spending. We were the first to purchase an advanced mechanism that detects explosives, which was brought in from England, and we also set up a CCTV system. What was the most expensive was the terrorism insurance we got, which is costing us more than $100,000 a year.

E How was the retail industry as a whole affected? Were any sectors hit harder than others?

Retailers working with limited capital and in more of an old-fashioned manner are the ones who are suffering most from this year’s turbulence. You need significant financial strengths to go through these types of shocks. Much of the retail sector is highly indebted, most of which are small “Mom and Pop” shops located in areas with no proper infrastructure for retail. They are the ones who were the worst hit.

E What are your expectations for next year? What is the Lebanese retail industry estimated to be worth presently and what do you believe its potential to be?

Our expectations are that we should not have any expectations, or if we were to have any, to expect the worse. Essentially, we are bullish on trade and conservative on finance. We need to be prepared to go through any storm. As for the Lebanese retail industry as a whole, our studies estimate it to represent approximately 30% of domestic GDP. In comparison to other industrial countries, this is a very high percentage of the economy. Therefore, if Lebanon is to develop economically in the same way as other industrial countries, the weight of the retail sector in the economy might diminish in the long run. But in the short run, if tourism goes up, then the retail sector ought to grow as well. The Lebanese government is working on bringing the country into the WTO. Should they succeed, it will open up the economy and in turn open up the retail market, which could have far-reaching consequences. At present, the Lebanese economy is not that free. Joining the WTO will force the authorities to abolish all distribution laws and exclusivity laws. It will create a greater level playing field, in which the retail sector can develop its potential more freely.

E ABC gets a lot of foreign customers during the holiday seasons. How realistic a claim can Lebanon make to be a regional retail hub? What elements are in place to lend itself as a retail destination?

Everything is in place for us to be a retail hub, the only thing lacking is the vision. Our tourism sector should be booming: the weather is nice, we have beautiful mountains … people from the Gulf like coming here – they can notably buy products from brands here that aren’t available in their country, such as sexy clothes for example. What is lacking is a vision that will stabilize this country and promote investment. But for that, you need to combat the ineffective administrative and judicial systems. All these issues discourage investors from coming here.

E How do you see the retail landscape of the greater Beirut area developing over the next couple of years, especially if the souks open up downtown?

The souks will become Lebanon’s retail hub, both for the tourists as well as for the Lebanese people. It’s a huge project, which is very well designed. It’s what is going to make Solidere live. The souks are destined to be shopping streets which will bring more mainstream people back to the city center.

E Does your group have any plans of taking up space in the souks or in the BCD?

We are studying the possibility of taking the 15,000m2 department store area that has been included in the souks. It would be a perfect place for ABC, not to mention the fact that it would be legitimate for us to be there, as the oldest department store in Lebanon.

E Do you fear that current ABC tenants will desert you for the souks?

No, I don’t. We already have tenants that are also present downtown, and who are planning on taking up space in the souks, and so far there hasn’t been any decrease in sales. We don’t view Solidere as competition at all. At present there is an undersupply in retail space in Beirut, so they are not taking away potential tenants from us.

E What gives ABC a competitive edge in terms of attracting the type of tenants you wish to have? Which retail areas will become less sought after and subsequently have to lower their rents?

As long as you have a good location with a modern infrastructure, tenants will seek you out and rents will continue to go up. It is the areas with old infrastructure that will experience a loss in tenants and falling rent prices. The Dunes center, which is very well located, will continue to do well, as will the city center, which remains one of the most lucrative areas. As for ABC, we will continue to be competitive. We charge $800m2 per year, which is less than downtown, where the rents average at $1000. For what we are offering and considering all the costs we are bearing, this is a very cheap price.

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