Comment

Capitalizing on defeat

by Yasser Akkaoui
written by Yasser Akkaoui

We business journalists are often invited to dinners and lunches along with many heads of private sector companies. Without fail, we are asked about the outlook for the economy, as if, in our opaque world, the press has its own special-issue, X-ray glasses.

The answer is normally a variation on a rather depressing theme: that we tend to hear what the government isn’t doing rather than what it is. Simply put, there is no national plan with which to asses the state’s vision, especially as the year to date has been characterized more by politics than economic strategy, which appears to have not been included in the so-called national dialogue.

In fact, anyone would think that the role of the government was just to manage the debt, that or offer us conflicting outlooks for the fiscal and monetary situations. At ministerial level, we have not heard much from Mr. Haddad at Economy and only the tiniest of squeaks from Mr. Gemayel and his bumper sticker campaign at Industry. Where are our plans for agriculture, industry and tourism? Don’t tell us that there are no more jobs to create or no more natural resources or assets to exploit. We just don’t buy it. Stop telling us what we can’t produce and start telling us what we can. So where is the plan?

You see without a plan there is no speculation and without speculation there is no investment and without investment there is no growth. Or are we just happy to be a good-time country living off birds, booze and beaches.

In this month’s special section, we look at the recent interest in Lebanese real estate. We can identify pockets of initiative to encourage speculation, flowering in what is still largely a wasteland. If we are so clever, why have we not taken a leaf out of the books of recent regional success stories and use property development as a vehicle for investment? The government should grasp the nettle and initiate this culture or at the very least invite those who can, to come and do so.

But sadly till now we have heard nothing. So this is why the last time I was asked about the economic outlook I turned to the gentleman and said. “You are on your own but you have succeeded nonetheless. For the time being stay that way, for it seems we can only rely on ourselves.”

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The Buzz

Me, Myself & I-Mate

by Yasser Akkaoui
written by Yasser Akkaoui

When it comes to PDAs I am a virgin user. So far, they held little attraction. I am a minimalist kind of guy I suppose. For me a cell phone is for making phone calls. I don’t use the camera neither the alarm nor reminder functions and I don’t really send text messages. My one concession to options is my subscription to Clip Plus, a service that tells me who has called when the phone is off.

So when I was offered a complimentary, all-singing-all-dancing I-mate JasJar worth around $1,200, you will forgive me for telling you I did not get into a lather of excitement. I was hesitant to take such a huge technological leap.

Essentially, I am a self-conscious kind of man. I don’t like to make an obvious statement of what I can afford or where I have reached in life, by what clothes I wear or which watch I have on my wrist. The same extends to my choice in telecom accessories. I don’t need to be seen to be speaking into a piece of NASA hardware to feel secure. So the size of the Imate was a novelty and took some getting used to. Yes, I was worried that people might think I had just stepped off the boat from Dubai with my duty-free gizmos ready to cut a dash in provincial Beirut. Still, I pride myself in my positive outlook and decided to give it a go. After all, apart from my image, what did I have to loose?

The I-mate JasJar is undeniably big, heavy and wide. It is not discreet and it is difficult, if not impossible, to pass unnoticed when talking on it in public. But it is slim and, if carried without the carrying case, can fit neatly and unobtrusively into one’s inside jacket pocket without spoiling the cut of the suit. Still, you know it’s there.

The cover is however, there for a purpose. The screen is delicate, as two friends of mine found out when their screen cracked (one had to send his Imate – along with all the stored data – to Dubai to be fixed; an inconvenience to say the least). The good news is that, in the name of research I tried to break my new toy, but was unable to. Maybe I just look after things.

Novelty value

So what about the performance? Well, first off, Configuration is quick. I was expecting to go to hell and back before I could get it to work but it took a mere 10 minutes. Then it was a case of which screen to use. Did I go with the fold-out format, not unlike that of a laptop, or did I opt for the more space-age, touch-screen method? As a child of the laptop generation I went for the latter, but given current habits it might also depend on whether or not you have a driver (my logic being that you can use the keyboard easier in the comfort of chauffeur driven luxury). That said we should never encourage people to send text messages while driving should we?

What really made my day however, was the SMS facility. As I have said I am not really text kind of guy. Even people who send me SMS messages will get a phone call in reply. However, the JasJar allows you to send SMSs on a Microsoft Outlook email platform and on a recent business trip I found I was saving a fortune in phone calls by using this very civilized and professional option that allows you to manage your messages like e-mail.

I was also able to access the internet where there is WIFI hosting. While I quite enjoyed the novelty of sitting in a lounge (T-Junction of the Emirates Tower as it happened) and logging onto to Yahoo, it is not my thing and I have never fully understood those who need to do their work in public. That said, if I had transferred my emails onto the JasJar, I might have been as busy as the proverbial bee.

For those who can’t stop themselves, the JasJar comes bundled with all the standard Microsoft software – PowerPoint, Word, Excel etc. – so they will never be caught short. Would I buy one? Honestly? I liked it, but would prefer something smaller like the I-mate JAM. But then again, I have not made that crucial lifestyle leap…yet.

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The Buzz

Handheld butler

by Executive Staff
written by Executive Staff

There has been a lot of hype surrounding the Vertu mobile phone, arguably the ultimate in personal communication. The phone also comes with what it calls a Concierge service, an equally exclusive option for those people on the go, who like things planned ahead of time wherever they are in the world. EXECUTIVE wanted to know more and went to Karen Bou Fayad, Vertu’s marketing and public relations manager in Lebanon for the lowdown on one of today’s must haves and its bespoke customer service.

E When did Vertu decide to establish the Concierge service and what was the corporate philosophy behind it?

The idea of establishing the Concierge service came in the earliest phases of the development of Vertu. The whole philosophy of the brand was to create an unforgettable experience to his clients. What makes Vertu so special is the obsessive attention to details and the craftsmanship that is behind each product. Each component was selected in order to make the use of a Vertu phone an unparalleled experience: The scratchproof sapphire crystal screen, the jeweled ruby bearings under each key, the exceptional sound quality, and the hours of work spent in the assembly of a phone, the level of performance, etc. To compliment this experience, Vertu decided to offer his clients the unique Concierge service, an integrated customer experience, where the service is accessed directly from the phone simply and easily by way of a dedicated button on the side of every phone. This is unique to Vertu and is not available on other phones. Neither are other services so instantly and easily accessible.

E Fair enough. How many Concierge users are there in Lebanon? What percentage of Vertu users, both in Lebanon and abroad, have signed up for Concierge?

Concierge is complementary for the first year, but a lot of our clients are so satisfied with the service and find it so useful that they subscribe to it at the end of the first year.

The frequency of usage of the Vertu Concierge can be very different from one client to another. The most frequent requests the lifestyle managers get are information about hotels, restaurants, theaters, concerts, musicals, sports events and so on. Unfortunately, we can’t disclose detailed figures on the percentage and the number of Concierge users.

E How much does Concierge cost and what services are on offer? What is the most used Concierge service?

As mentioned earlier. Concierge is a service that comes with every Vertu phone. The Vertu clients gain access to a dedicated team of lifestyle managers, capable of helping them get the most out of their valuable free time. The service is available 24/7 in English, French, Italian, Russian, Mandarin, Cantonese and German. There are three kinds of service: Support on issues related to Vertu and Vertu products, questions regarding the phones, the distribution, the company, etc. Secondly there is an emergency service in which we can put the client in touch with doctors and organize car repairs and services and lastly there is the Lifestyle service through trips can be organized and restaurants recommended and booked. Concierge can also give shopping advice. All three services are widely used by our clients. The lifestyle service is highly appreciated for the quality of the work and the recommendations of the Concierge managers.

At the end of the first year, clients will continue to be supported on issues relating to Vertu products. Those clients wishing to subscribe to ongoing lifestyle support can do so. There are two levels of service. The standard service, similar to the level of service received during the first year, is available for £650 ($1,140) per annum. Those who wish a more bespoke and personal service can subscribe to VIP service at £3,600 ($6,300) per annum. This includes a personal lifestyle manager who oversees all requests relating to a small group of specific clients

E Can you give us some real life examples of how Concierge is used?

Certainly. A woman recently wanted to arrange a small 21st birthday gathering with friends in Switzerland. Vertu Concierge recommended the perfect location, managed all contact with the venue and even organized drinks, food and a cake for the event. A regular business traveller used Vertu Concierge to arrange a last-minute trip including all flights, car hire, accommodation and a gift to thank his hosts at the end of the trip. The client particularly liked dealing with one person, who had responsibility for all of the arrangements. One Vertu client was head over heels in love with the red pair of shoes of her dreams and had tried in vain to bribe the sales team of a very famous luxury brand store to strike a name from the waiting list and replace it with hers. Even the brand’s customer service couldn’t help. The shopping specialists of the Vertu Concierge knew that those shoes could only be bought at the firm’s own stores, so the selection was limited. They telephoned the entire brand’s stores in the world, negotiated with the sales managers, had the staff of the headquarters rummage through the stock room and finally met with success. A few days later, a courier brought the client’s house the pair of shoes of her dreams.

E Phew! Ok so what is the profile of the Concierge user?

Vertu’s customers are lovers of the most beautiful things in life such as watches, clothes and cars. They want to be surrounded by accessories that fit their personality and lifestyle. Most of our clientele is male. However, some models of Signature and the last Pink and White special editions have shown a very strong response among women. I would say that the profile of the Concierge user is the same than the general profile of Vertu’s clients. They are lovers of the most interesting experiences in life and expect Concierge to answer their needs and compliment their lifestyle. The requests the Concierge will receive are based on the clients tastes and hobbies. The Concierge will be asked to recommend the most select restaurant to the best pub to watch a football match!

E What do you say to those who counter that if you can afford Vertu you don’t need it?

Vertu Concierge is a personal service consisting of a team of specialists dedicated to developing a global database of international suppliers and testing these to ensure they will deliver the best service exclusively to Vertu clients. Their expertise is not limited to a country or a domain.

When a request comes through the team of experts combines his or her expertise with services held within the knowledge bank to deliver solutions in response to the client requests. They have extensive international experience, and an undeniably international outlook. For clients this means the service can be extremely useful, not only at home, but also when they travel. The lifestyle managers try to get to know each of the clients better in order to deliver to them customized personalized recommendations and suggestions that will answer the best their personal needs and tastes. The Concierge users are therefore sure they can receive the best assistance at any time and in any part of the world they are living in or traveling to.

E How many establishments have signed up to be part of the Concierge infrastructure? What does it cost them? In Lebanon which is the sector – hotels, restaurants, car hire etc – that has responded the most to Concierge? How can we measure how much business Concierge has brought to those businesses that have signed up?

No establishment will need to sign up to Concierge to be part of its database and recommendations. As the Concierge service is dedicated to offer the best service to his clients, the lifestyle managers will only recommend the best response to their clients needs. They have an international database and strong relations with key locations and suppliers. Not only will the Concierge service will always try to update his database with the newest and the best locations and services on an international level, he will also take in consideration the clients’ experience and feedback about places or services he recommended to answer other users requests. However, the Concierge may also contact some establishments to organize special offers to his clients. The best example would be the themed offers for the owners of the Pink and White Special Editions phones, such as priority personal and Christmas shopping at Barney’s and Harrods, complementary pink champagne at the Raffles Grill in Singapore, priority booking in the Spas of the Mandarin Oriental in New York and Singapore and the Georges V in Paris and special upgrades in the Ice Hotel in Canada to name a few.

E What is the level of growth in Concierge both in terms of subscribers and those companies signing up to be listed in the service?

Since the creation of the company in 2002, Vertu has witnessed an exceptional level of growth. The Middle East region is very dynamic and I would say that, as a result of this, the number of the Concierge users is also growing in an exponential way.

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Finance

Mena- GCC securitisation General Issues

by Executive Staff
written by Executive Staff

Over the last couple of years the MENA and GCC markets have started to push for more diversity in their financial activities. Securitisation has emerged as a catalyst and is experiencing notable growth that has already materialised in markets like Egypt, Lebanon, Saudi Arabia and the GCC countries. Some specificities related to these markets and major hurdles that have slowed progress, are examined thereafter.

Securitisation has already demonstrated its ability to structure transactions in markets where no specific regulations exist. Most of the countries in the MENA – GCC regions have yet to enact such regulations. Some countries have or are on the verge of enacting regulations. Others have yet to envisage such reforms and remain a challenge for securitisation transactions. Several countries have addressed the securitisation issue in a formal way, like Turkey, Tunisia and Lebanon for instance (which has recently enacted a new securitisation law). It is interesting to mention that the absence of such a precise and predetermined setting has not been a hurdle for securitisation transactions, a number of which has already close in some MENA – GCC countries.

In looking at Saudi Arabia and all other sharia based systems, it can be determined that there are stringent restrictions and uncertainties at many levels. Although transfer of assets or receivables is allowed, some restrictions apply as to the nature of the purchaser. Also, courts apply Shariah law in their decision-making process. Shariah is itself divided into different schools of thought. Although the Hanbali school is dominant in Saudi Arabia, a sitting judge can decide to choose another school of thought and focus exclusively on substance, ignoring what was created in form (a necessity in structured finance). This brings great uncertainty and instability to the cornerstone of a securitisation transaction: the concept of true sale. The possibility of re-qualifying a true sale and of piercing the legal and corporate veil makes any investor very weary of such a risk. Another problem faced in Saudi Arabia and in some other countries in the area are the very strict laws on foreign ownership. These hurdles imply that for transactions in such countries, the best ways to structure a securitisation transaction would be by using a two tier structure with both an SPV in the country of origination (the “Owner SPV”), and one in a foreign country, (“Issuer SPV”), with adaptable legislation (Jersey, Luxembourg…). It is necessary to mention that it is not an option to create an SPV as a subsidiary of the Originator, since it would expose the “Owner SPV” (the “local” one) to consolidation risk and would remain under the control of the originating entity.

In addition to the above mentioned factors there are a number of factors to be considered in any market for securitisation. In the MENA – GCC region these factors are also hurdles at this very early stage of the evolution of regional structured finance. The absence of fixed income capital markets which efficiency is measured by their ability to accurately and transparently reflect a true measurement of risk and return. Simply stated and in a market ignored by the Rating agencies, there is a real problem with information gathering, processing, disseminating and analysing.

In the rare cases where the mentioned handicaps can be overcome, some additional factors come into play. From the investors’ perspective, there is real hesitation to engage in what still seems to be an exotic financial instrument. This is a result of the lack of experience and exposure but also in case of banks, it is the result of fear of competition. Additionally, the stagnation of financial activities has affected the private sector. Companies that otherwise would be viewed as potential clients for a securitisation transaction, are so dependent on traditional banking and on their relation with those banks and would hesitate to jeopardize these relationships for a financing alternative. The choice of securitisation often comes at a moment where a company would have exhausted other alternatives. Beyond the absence of harmonisation of the standards used throughout the region which already makes the data eventually available hard to understand, the implementation of the International Accounting Standards (IAS) raises another problem. These standards (IAS or other) are the result of a lengthy nurture process stemming from back and forth “trial and error” actions on very sophisticated markets. Standards have been put to the test and improved on numerous occasions. They grew in sophistication along with the markets. This is a major difference with MENA – GCC where these standards have been imported in their most refined/sophisticated version. Thus, instead of starting to evolve in a rather flexible market, regional markets have to evolve with complicated accounting standards that developed markets did not experience while growing their business. This puts an additional hurdle for innovative financial instruments.

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Finance

We’ve said it before and we’ll say it again

by Nicolas Photiades
written by Nicolas Photiades

Back in September 2005, this magazine published an article about the possibility of holding a donors’ conference in Beirut in December 2005. In the same article, the magazine expressed serious doubts as to the conference taking place in the medium-term, let alone in 2005. The main reasons for these doubts were built on the fact that as long as there were paramilitary organizations in Lebanon, and as long as the various UN resolutions (particularly 1559) were not implemented, a donors conference would remain a vivid fantasy.

Indeed, it is becoming increasingly apparent that potential donors, led by the United States, are insisting that not a single penny will be disbursed to Lebanon as long as weapons are still held by organisations other than the Lebanese army, UN resolutions are not fully implemented, and economic reforms, particularly privatisation, are not put into practice.

Donors have been burnt before in Lebanon with both the Paris I and II conferences, where much had been promised by Lebanon. These promises were not delivered, mainly due to political squabbles between the late former Prime Minister Rafik Hariri and President Emile Lahoud. At Paris II, there was no insistence on the part of the donors (which included France and the European Union), and supranational entities (such as the IMF and the World Bank) for arms held by Hizbullah and Palestinian groups to be surrendered to the army.

Missed the boat

It is clear then that Lebanon, by failing to deliver on privatisation, has missed the boat and burnt its bridges with international donors. Conditions for lending or donating much needed funds are now tougher, and require serious political commitments from the current Lebanese government. The political situation is also less straightforward than what it was back in November 2002, with brinkmanship being the name of the game today among the various political and religious groups. While the Seniora government is hoping it can kick start privatisation as soon as possible, other groups are blocking the way by using their seats in Parliament. In other words, the Lebanese economy is tied in a Gordian knot, whose disentanglement will be key to future economic prosperity.

The Lebanese government now has to show significant good faith by announcing with convincing commitment the resumption of the privatisation program. It has to take the bull by the horns and start with its privatisation program even if there is no clear sign that a donors’ conference is going to be held. This time, the Lebanese government has to take the first step and deliver before getting any funding from international donors and lenders. The government will have to convince the various political protagonists that privatisation is an urgent necessity and that its resumption is the first sign that Lebanon is in the right step to sort out its political and economic mess.

What the various quarrelling factions will have to understand is that the country won’t be able to get much needed cheap funding without a minimum effort from their part, which is summed up in the resumption of privatisation. Surrendering arms and implementing UN resolutions are also key conditions, but they can be smoothed up over time if the government shows a strong will to privatise inefficient public institutions.

Talking about inefficiency, Lebanese public utilities and other companies are high on the world’s shame list of badly managed government organisations. Their transfer to competent private hands, who would come in the form of strategic institutional investors and a demanding retail investor base, would transform the Lebanese economy beyond any current politician’s wildest imagination.

It is unacceptable that a company such as EDL remains in the hands of Lebanese politicians. It is indeed, mind-boggling that a majority of the population is still going through electricity rationing for the greater part of the day while paying outrageous bills. Other public companies are equally inefficient and need to finally deliver decent service to a long-suffering population. Enough said. Privatisation is long overdue.

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Business

Democracy Dilemma

by Michael Young
written by Michael Young

As the United States has turned spreading Middle Eastern democracy into a top foreign policy priority, it has also seen the broad boulevard of simple ideas on the matter turn into a warren of blind alleys. While the complexity of the problem must not mean discontinuing efforts to push the region’s states and societies toward openness, those interested in such an endeavor have to be aware of the headaches involved.

The most obvious initial question is what kind of democracy should the Middle East be asked to endorse? If it’s traditional liberal democracy, where people are allowed to vote regularly in transparent and unmanipulated elections, where there is a transfer of authority from leaders and representatives to elected successors, where there is freedom of expression and association, and where markets and exchanges are free, then that would be grand. But how realistic is this?

Take the case of Arab minorities. If liberal democracy is interpreted as one person one vote, or majority rule, then minorities, religious or ethnic, will feel far more threatened than reassured by democracy. By the same token, while many Arabs probably favor a regular, democratic transfer of power to new leaders, they would not necessarily see this as part and parcel of a smaller role for the state, particularly in economic affairs. And in some countries democracy may lead to instability, perhaps through the arrival to power of hitherto marginalized groups, for example Islamists, so that secular voters may fear the consequences of free elections.

A second question is what happens when Arabs, including Arab liberals, consider liberal democracy merely as an extension of American power? The fact is that instead of using American support to buttress indigenous democratic efforts and then afterwards shaping the consequences to serve their own national interests, Arab democrats often, simply, get hung up on America. As Barry Rubin has written in a book on the Arab struggle for democracy, liberals have not only argued that American assistance undermines Arab democratic efforts, some have insisted “that indigenous Arab reform [is] the best way to avoid US domination and intervention.”

Foreign help needed

What this liberal attitude leaves unsaid is that American or broader Western intrusion is often indispensable to protect Arab liberals against autocratic leaders, but also against another enemy they must increasingly address these days: Islamists. It also fails to mention that the myriad problems of the Arab world are not primarily related to “US domination and intervention,” but entail essentially domestic issues such as abuse of power, economic underdevelopment, mediocre education levels, stifled civil space, and much more. In other words, setting reform up as a barrier against the United States is a very narrow, indeed downright dishonest, justification. However, it is also so widespread that any outside effort to advance open Arab societies can be quickly labeled “neo-colonialist.”

A third question – one with consequences for secular Arab liberals – is whether Arab societies are that keen to embrace the whole package of liberal democracy? Societies in the region are often deeply conservative, so that while they may reject the violence used by Islamists, they do not see his as a compelling reason to play down the pivotal role of Islam. Similarly, this conservatism is easily manipulated by nationalist regimes as a means of enhancing their own power while aborting outside calls for change, which are swiftly tagged as efforts to weaken Muslim values.

All these obstacles, to which one might add the inhibiting insistence that nothing can truly advance in the Middle East before the Palestinian problem is resolved, mean that democracy promotion is destined to be a bumpy ride for its advocates, especially the US. And the Bush administration’s belief that things will improve thanks to more aggressive public diplomacy is bound to be disappointed, since the image of the US is so deeply, often preposterously, stilted in its disfavor.

So what can be done? Very little. At best, outside powers, mainly the US, must continue insisting that democracy is of vital concern to them, but also accept that the region’s contradictions allow only for ad hoc progress, where democratic principles are robustly advanced wherever possible, to be used later as building blocks elsewhere. Sometimes force, or the threat of force, may have to be employed, as in Iraq. For democracy to truly spread is up to the peoples of the region to resolve their incongruities. They are the ones living under oppressive dictatorships. Obsessing about America is convenient, but will not improve their condition one bit.

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Economics & Policy

The shrinking factor

by Nicolas Photiades
written by Nicolas Photiades

For a long time, there was a widespread belief in Lebanon that the Lebanese sector was highly diversified given the large number of banks (at one stage, the sector had more than 80 institutions). The fact remains that this diversification of the banking system was nothing more than an old myth that had turned into an inefficient sector concentration by the mid 1990s. By this time, Lebanon did indeed have a large number of banks, all of which offered the same services and the same products, in varying degrees of quality. At the same time, a limited number of banks, through their better relationship skills and greater vision and understanding of the local and regional environment, succeeded in carving out a top twenty position for themselves, as Lebanon’s largest banks in terms of assets and deposits.

These 20 largest banks have slowly attracted the best quality customers in Lebanon, leaving to most banks below the top 20 the lesser quality customers and the more complicated dossiers. A significant number of unwanted depositors were also pushed out to the lower part of the Lebanese banks league table. While the larger banks have been busy capitalizing on their position, the smaller banks were mostly left cogitating about their future. Should they sell to or merge with a larger bank? Should they sell to a foreign investor who is interested in establishing a banking franchise in Lebanon? Should they update and modernize their infrastructure, invest in financial and human resources and start competing with the top twenty? Should they think hard about building a niche or specialization that would create value for their shareholders?

Strength in size

Most of the smaller banks have not stopped growing along with the larger ones since the end of the civil war, due to the significant government debt securities and Treasury bill market created by the government and the central bank. Smaller banks were needed to the same extent as the larger ones, as they too constituted a domestic investor base for government securities and made up the numbers in a increasingly liquid secondary market. However, the central bank today is keen that these small banks merge with their larger brothers, as they are believed not to have evolved sufficiently in parallel to the environment, and consequently not to have the capacity to compete in the long-term within an increasingly sophisticated global operating environment. It is clear that the forthcoming Basel II capital regulations, which are due to be implemented in Lebanon by 2008, and which focus on efficient risk management and corporate governance, are going to constitute a mammoth task for the smaller banks, which are still struggling to understand these regulations, let alone implement them.

The smaller banks are mostly family owned and, with a few exceptions, are unlikely to be able to attract strategic investors that would help these families develop expansion and build an efficient internal infrastructure. Their lack of corporate governance, managerial vision, risk management capabilities and insufficient capital, are all factors that will keep any strategic and sophisticated institutional investor away. Moreover, the constant absence of a clear cut, detailed and efficient operational and financial strategy is not only a reason for the lack of attractiveness, but also for their initial positioning below the top 20.

It is worth noting that not all the smaller banks (the 30 or so banks that constitute the smaller tier of the Lebanese banking sector) have the same reasons for being there in the first place. Some are foreign banks, which do not wish to expand their franchise in Lebanon further, as exceeding an optimum size would start affecting the risk profile of their group on a worldwide basis. Others are banks which are moving in the right direction and have sufficient financial means to buy their way up in the upper tier of the bank league table. However, the majority have been stuck in the lower divisions due to an initial lack of vision and preparation to meet a constantly evolving environment.

For those smaller banks with no financial means, the best advice would be to sell their franchise (at a realistic price) to a larger local competitor and hope to keep jobs and, for board members, seats on the board of the larger entity. For small banks that have been rising in the last decade and which have the means and financial resources to keep up the pace with the larger peers, advice would be to specialize and become a niche player. With Lebanon entering the WTO and the Basel II regulations due to be implemented soon, these banks have little choice anyway.

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Economics & Policy

Alan Greenspan: Genius or Liability?

by Faysal Badran
written by Faysal Badran

Alan Greenspan became something of a cult figure in the financial markets during his reign as Chairman of the Federal Reserve, both in the financial markets and in the media. As central banker of the largest economic powerhouse, his every move and utterance were scrutinized as markets boomed and reeled, often based on his speeches and long winded assessments. There was even a jargon attributed to him, “Greenspeak” which was a blend of seldom understood nuances and signals. Most bond traders, glued to their screens during his prose, would simply be baffled by the amount of cross currents in his statements. Financial media, obsessed with Fed action over monetary policy, went as far as trying to gauge his upcoming decisions, based solely on the perceived size of his briefcase, or the tempo of his walk into the Federal Reserve building. The man wielded great power, and maintained, despite his friendships across the political spectrum, an aura of independence from political wrangling and calm from the storm of the financial markets.

While Alan Greenspan will surely be associated with an era of great prosperity for the US, one where the housing boom seemed eternal and where shares blew out all other asset classes (at least until 2001), his main qualities were mostly in his character. He seemed to ooze confidence and serenity, and at many times, such as during the many wars, 9/11 and its aftermath, and the Y2K scare, his mere presence comforted market participants. His pragmatic approach to monetary policy, and his fondness for the most subtle signs of inflationary pressure made him a Wall Street icon. It is debatable, however, whether, in a few years time, he will be remembered so fondly. His personal traits will endure, but his financial legacy is one of excesses. He presided over a period of excess debt both on an individual and country level, and more importantly, over the final demise of the US Dollar as a safe store of value. Greenspan, despite orthodox policy views, allowed the liquidity orgy to go on, amplified by booming and unregulated lending and hedge funds, and this will not go down as an achievement when the chips eventually tumble.

Debt spree

While Greenspan was fixated in avoiding systemic risk, i.e. risk of a financial system breakdown, and often cushioned great potential disasters such as the Mexican, Asian and Internet collapses, he appears to have done little to push for healthier fiscal priorities for the US. During his era, the US went on a debt spree going from the largest creditor nation in the late 60s to the largest debtor nation, literally living off China and other emerging country reserves. Today, the US is completely dependent on foreign capital to sustain itself, and while this may not be his doing alone, his lax policy with regard to the currency and his soft approach to the twin deficit will come back to haunt his successor. The loose policies which Greenspan adopted, favoring calm on Wall Street over healthy and sound targeting is in part responsible for the heavy debt among of US households, and the excessively easy entry for weak companies into the capital markets. These two factors will be doubtless sources of strain on the US economy going forward in the future.

Poor communication

The degree of US economic supremacy over the last three decades has more to do with the global changes which occurred, and while Greenspan seems to be credited with a lot of the gains made by the US, some purists, such as previous Fed Chairman Paul Volcker cast a doubt over the sustainability of those gains, given that the US has become such an intensely service-oriented economy. It is often said that Greenspan will be better remembered by financial conglomerates than by say, auto giants where the US’s position has eroded.

In a previous piece in EXECUTIVE, we spoke of the relevance of Fed policy in general. We believe that the role of central banks and that of Greenspan and his ilk, had been reduced by the mushrooming size of the credit markets. During the Greenspan years, especially since the mid-1990s, the bond market became the spearhead in defining monetary policy, giving birth to the notion of Bond market vigilantes. In fact, Greenspan’s policy on interest rates seemed to follow the bond market’s perceptions, not the other way around. As an inflation fighter, Greenspan is credited with a long period of low inflation, and while even that is debatable, since incomes have been stagnant in the US on an inflation adjusted basis for nearly half a century, the main impetus behind the well-behaved Consumer Price Inflation was a by-product of many factors outside his area of remit. The inflow of cheap imports from abroad, as well as the absence of collective wage bargaining, was the main reason, not the Greenspan magic.

It can be argued that one of the main flaws of the Greenspan era was the poor communication from the Federal Reserve. Often cryptic and incomprehensible to most market watchers, the Fed statements became an exercise in semantics and seldom sent the real message which often added volatility to the markets. The last legacy of disaster left by Greenspan, one which is most likely to come to the forefront, is his lax approach to the advent of large rogue unregulated hedge funds, which allowed the over the counter derivatives market to reach unfathomable levels. In fact, this is where system risk is likely to emerge. If one looks at the numbers of large money center banks closely, they have become more like casinos, with outstanding derivative commitments frequently a multiple of the size of their core banking operations. Structural changes made Greenspan associated with long periods of economic expansions and relatively short recessions, but one feels that those were not his own doing, but rather trends stemming from globalization and the dynamism of US corporations.

Years of excess

The successor of Alan Greenspan, Ben Bernanke is certainly qualified from an academic perspective. He completed his graduate work at MIT and taught at Princeton since the early 1980s. He is however known for his laissez faire, often blase, attitude toward inflation and currency stability, a trait that could constitute a handicap in the markets. He is also famous for having mentioned, in private, that the US could “print its way out of recessions”. This reliance on money creation is not comforting, as it will have its impact on the perceived value of the dollar, but Bernanke will most likely face a straight jacket from the massive twin deficits and the slowing consumer spending, and most certainly will reap the headache from the years of excess nurtured by the Greenspan Fed.

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Real Estate

Lebanon Abiding

by Safa Jafari
written by Safa Jafari

Yet another Arab struggle

To date, the Arab world’s battle with its Millennium Development Goals (MDGs) has seen sharp regional and intra-country discrepancies, mainly brought about by inequality in wealth, service and resource distribution. There are also questions surrounding entrenched gender inequality, the questionable will of governments, no-target policies and weak governance. According to a September 2005 UN report, the Arab region contains urban – rural disparities and continues to suffer setbacks such as poor income performance and inadequate financing, not to mention the ongoing political tensions and conflicts.

The Arab region also had one of the lowest per capita GDP growth rates in the 1990s and early 2000s. This poor performance has been reflected in slow human development in comparison with the average for developing countries. It faces several obstacles to achieving the MDGs, including unemployment, the gender gap, illiteracy, war and conflict. In January, The Middle East Economic Survey, suggested that the way forward for the Arab region is through pro-poor development policies, strategies and legislation, stronger regional partnerships and integration, improved productivity and institutional capacity-building.

Achievements made

The scenario for Lebanon is less drastic. Lebanon is close to achieving many MDGs already. Extreme poverty is rare, literacy rates are high, as is life expectancy – around 70. Lebanon has also made huge progress in rebuilding its national economy after the civil war.

However, gaps remain. High regional disparities in wealth lead to an unequal accessibility to services, particularly education as well as maternal and child health. South Lebanon and North of Akkar, for example, are areas with an unequal share.

Moreover, the rather progressive image of the Lebanese woman we see today conceals within it significant gender inequality. The National Report about the Situation of Women in Lebanon demonstrates women’s limited participation in decision-making at different levels:

Members of Parliament: Three women out of 128 MPs

Ambassadors: Two out of 53 Ambassadors

Director General: Three out of 22 Directors Generals

Dean in the Lebanese University: One out of 13 Deans

Members of the Municipal Council: 139 out of 1022 members

Mayors: Two

The Teachers’ Union: One woman out of 12 board members

The Secondary Teachers’ Union: Two women out of 18 board members

The Engineers Union: No women on the union’s board

The Physicians Order: No women in the union’s board

The Pharmacists Order: One woman has been twice elected as President

The Dentists Order: One woman was once elected as its President

The Bar Association: Two women in the board

Judge in the State Consultative Council: Six out of 365 judges

Judge in the Judicial Court: 66 out of the 365 judges

The Lebanese Report on MDGs, issued in September 2003, and reports from the UNDP and other UN organizations, indicate that while high primary school enrollment rates were noted, they were mitigated by “concerns regarding the quality of education.” Only 65% of children in grade 4 and 66% of those in grade 8 possess “the basic set of skills accredited at the national level.” There is also a low correlation between the quality of education and the high teacher-student ratio estimated at 1:9, compared to the global ration of 1:15-20.

Lebanon witnessed a rise in the percentage of students completing primary education from 91.1% in 1997 to 95.3% in 2000 (the MDG is 100% enrollment in primary school by 2015) and an increase in government expenditure on education from 56% in 1993 to 65% in 1998 (although resource reallocation and rationalization of expenditures is still needed). Challenges still exist. There are still early drop out rates, particularly due to economic needs, illiteracy (5-6% rate among males 18-25 years of age), the need to extend compulsory primary education years, and the lack of accurate and reliable data and methodology.

Health services lacking

Health related MDGs are also riddled with challenges. Maternal health, child mortality and disease control are all affected by poor access. Furthermore, according to doctors, the health care system is fragmented with little or no referral schemes. Other concerns include mediocre medical facilities, low post partum care, restricted choices, insufficient medical insurance, and few community awareness campaigns, particularly in rural and low income areas.

A workshop organized by the Arab NGO Network for Development (ANND) will be held in early March 2006 in Beirut to examine the country’s performance on its MDGs and the role of civil society, as well as the role of Information, Communication and Technology (ICT) in this respect. While all sectors related to the eight MDGs (such as UNDP, UNICEF, WHO, UNESCO, ANND, Greenpeace, different ministries, and NGOs) must be involved, two issues stand out: awareness and indicators. Recent research shows that very few people around the world are aware of the international agenda to achieve the MDGs and this must surely also apply to Lebanon. How aware are the Lebanese people of the country’s commitment and efforts to meet the MDGs and what can our students, volunteers, NGOs, politicians, entrepreneurs and general public do to further promote such efforts in their daily activities? Awareness campaigns and space for grassroots participation must be created.

Lastly, unless data is updated and professional studies are carried out through advanced methodologies and techniques, Lebanon can neither properly assess the current situation nor monitor any progress. Even the National Millennium Development Goals Report for Lebanon declares in its introduction that “poor availability of statistics has seriously constrained monitoring and review.” Several blanks are in most if not all Lebanese surveys and tables. Policy makers will continue to fail to recognize the sectors and geographical areas and communities most in need of attention. Many reports cite 1990 as the latest date for indicators related to poverty and services such as water and electricity, suggesting that any post-war progress has not been recorded. The first major post-war sample survey was conducted in 1996 and so, the ‘baseline year’ against which progress is compared is 1996 in most cases!

Lack of indicators

The UN resident coordinator in Lebanon, Yves de San, and the President of the Council for Development and Reconstruction, Jamal Itani, have announced that the Ministry of Social Affairs and the Central Administration of Statistics, with support from the World Bank, UNDP, and UNFPA, have initiated the implementation of a Multi-Purpose Household Survey, while UNICEF will update the CHILD-INFO database on a regular basis. Until then, and in the current Lebanese scenario, political and other factors remain responsible for the lack of accurate indicators, particularly those showing discrepancies and inadequacy among regions and communities.

Before we can safely and clearly indicate where Lebanon stands in its progress towards meeting its MDGs by the year 2015, we must have the mechanisms needed to do so.

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Business

Stiff Competition

by Anthony Mills
written by Anthony Mills

Women aren’t allowed to drive there. When they leave the house, they must be accompanied by a male relative. And in public they must wear the all-enveloping abaya at all times. But beneath Saudi Arabia’s socially conservative exterior flourishes one of the hottest lingerie markets in the Arab world – at least according to sales figures from Nai, Lebanon’s biggest lingerie manufacturer.

“Saudi Arabia accounts for between 12% and 15% of all our exports,” chuckles Roger Jammal, Nai’s owner and general manager. “After Lebanon, it’s the leading country in the region. It’s the richest country. It’s the biggest country. It has a lot of large cities.”

The sole owner, Jammal established the company with an initial investment $400,000 in 1998, after moving back to Lebanon from the United States. He knew lingerie, having represented many US brands in Span and the Middle East. Nai came into being as a wholesale exporter, but in the last few years has opened its own stores and franchises in the Middle East and Gulf. Today, the company is recording annual growth of 40% with revenues of $2.5 million dollars expected for 2006. In 2005, Nai recorded a net profit of around $170,000. The company employs around 65 staff and sells roughly 90,000 units a year.

The change from wholesale – he had been exporting to 13 countries – happened in 2001, when, due to what he saw were changing consumer habits, he opened mono-brand stores and franchises. “The consumer prefers mono-brands, rather than multi-brand mom-and-pop stores,” he explains. “Those are gradually disappearing and so if you are doing wholesale business you are dying with those stores.”

That said, Nai’s European business – in France, Spain, Italy and Greece – remains wholesale. Jammal admits that it takes longer to establish mono-brand stores in Europe and may explain why today Nai has its sights firmly set on further expansion in the Gulf and Middle East.

Regional focus

Nai inked its first franchise in Jordan and there are plans for two more as well as another in lingerie nirvana Saudi Arabia. It has also signed franchise agreements in Qatar and Bahrain, plans to establish a presence in the UAE and in Kuwait. It is also considering breaking into the Syrian market.

“Then, when in around two years we have the Middle East covered, in terms of franchises, we will move on Europe,” Jammal says. He acknowledges that the initial plan was to divide exports 50-50 between the Middle East and Europe, but says that the unexpectedly high growth of the Middle East lingerie market prompted a reshuffle of priorities. Asked if he maybe underestimated competition in Europe, Jammal responds: “Not really. We’re very competitive in Europe. But in Europe you need a different strategy. You need a greater financial investment. When I’m ready I know that I can easily break into Europe, especially the Nordic countries.”

In fact Jammal says he plans to open his first European Nai store in Madrid, his home for many years, this summer. He then wants to open another four before moving on to the rest of Europe.

“For the moment we are focusing on the Middle East because it’s a growing market, because of the disposable income generated by rising oil prices. It’s an incredibly big market. It’s growing by around 30% to 40% a year. And it’s easier to break into. I have a strong base here and a lot of connections, from the years when I was representing US brands.”

Jammal acknowledges, however, that even in the Middle East and Gulf the growing lingerie market is creating “stiff competition.” He says Nai represents around 15% of the Jordanian lingerie market, 5% of the Saudi and Kuwaiti markets, and 4% to 5% of the markets in other Arab countries. Nai’s Saudi retail lingerie market share will rise to at least 10%, he adds. His goal is a 10% market share in each of the Arab countries in which he has a presence.

Loyalty

In Lebanon, Nai, designs and manufactures its lingerie locally, plans to open another two stores in March, making a total of 11. Nai began selling its products in Lebanon in 2000 and opened its first store in 2001, following the decision to move away from wholesaling. Jammal’s domestic strategy is to open as many stores as the market can accommodate, accompanied by a heavy dose of marketing, and paying strong attention to product-to-price ratio and product diversification.

He expects competition in the Lebanese market to grow. “The lingerie market is growing worldwide,” he observes. “We’re going to have more companies coming in to Lebanon.”

However, he is not concerned with competition from the lower end of the market, like that from China. “We can’t compete with the high-production, low-price system. We have better quality, at a good price. In Lebanon, we can’t produce a million pieces and sell them at a 2% profit. We compete above that line of business, with something creative and special.” A pair of Nai pyjamas costs around $30.

If Nai is going to retain, let alone increase, the number of customers, it’s going to have to ensure loyalty. “We have fidelity cards,” said Jammal. “We have promotional items. We offer a lot of gifts.”

Bad business environment

By 2010, Jammal plans to have 50 stores across the Middle East. “Our Middle East strategy is open, open, open more and more stores,” he says. But he stresses that he will judge growth by sales at each store, not just the number of stores opened.

For the moment, 70% of Nai’s revenue is generated by domestic sales. Of the 30% that make up exports, only 5% are sent to Europe. “I think the Lebanon market has reached the point of saturation,” he says. “Our percentage of exports will be much higher in the next five years.”

Domestic market saturation notwithstanding, sales at each of Nai’s Lebanon stores are growing by 40%-45% a year, Jammal claims. He estimates Nai’s Lebanon market share at 15%-20%, and is aiming for 25%. For Nai, competition in Lebanon comes from household brands like LaSenza, Etam, and K-Lynn. “I can’t tell you who our main competitor is,” he admits. “We don’t have a lot of transparency in this country so I can’t tell you what’s going on.”

Not surprisingly Jammal admits to finding doing business in Lebanon very frustrating. “To begin with, the syndicates here aren’t very good at promoting our products outside Lebanon,” he complains, alleging that some of his competitors are “exempted” from paying tax. “Some companies are transparent and pay taxes. With others, the tax inspector won’t even step through their doorways, and they probably sell more than us. Let’s not get into the political issues, but that’s the way it is. You pay a price here for being transparent. It would be nice if all companies here were transparent and we could compete.”

It’s an attitude that has bred a degree of cynicism. When the issue of paying facilitation fees at the Port of Beirut, he has firm views. “I say to my forwarders, ‘Tell me how much it’s going to cost, but don’t ever then come back and ask me for a dime because some guy wants a bribe. If you have to pay it you pay it from your own pocket. I hired you to take care of my container. If you can’t clear my container, that’s your problem. You’re incompetent’.”

And competence is something that Jammal values. “It’s not easy to find competent labour in Lebanon. They say people don’t have jobs. When we look for employees, all kinds of employees, we can’t find them – and we pay well. Other manufacturers in other fields are having the same problem.

“The reason is we’re concentrating everything in Beirut. We’re not creating industrial areas outside Beirut. We’re bringing people into Beirut instead of keeping them in their own villages. We should be creating industrial areas in the South, in the Bekaa, in Akkar. The salaries would be lower. The industrial cities would cost less than in Beirut, and we’d be more competitive. I would love to move my factory to the Bekaa. Give us a tax incentive to move there. There’s so many things you can do.”

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