Despite a certain Lebanese tendency to believe in the uniqueness of everything Lebanese, the Unity Week festival jointly organized by Nora Jumblatt and Bahiya Hariri April 9-13, as well as the various acts of corporate giving over the past two and a half months have certainly had their predecessors around the world.
Indeed, in the months after 9/11, New York City officials teamed up with local businesses and multi-national corporations to sponsor an “Open for Business” campaign that sought to bring tourists back to the Big Apple and revitalize the beleaguered economy. In Madrid too, after the train bombings that killed 191 people, local officials solicited and received enthusiastic support from the tourist sector to show the world that their city was both safe and welcoming.
In both cases, the efforts were met by widespread public and corporate support, with public events and demonstrations that signified unity in the face of terror and a determination to take direct ownership of what had become, seemingly overnight, a fragile and deeply troubling situation for all.
Of course, Unity Week was different from these and other events because it also marked the 30th anniversary of the beginning of Lebanon’s Civil War.
However, the major reason for holding the event was the assassination of Premier Rafic Hariri and the four subsequent bombings in New Jdeideh, Kaslik, Sid el Boushrieh and Broummana – events which, according to a recent UPI report, cost the Lebanese economy more than $800 million and which, perhaps more importantly, ignited widespread fear that the country might again slip back into the abyss of violent conflict.
And yet, while other post-terror revival efforts have generally seen direct corporate giving, with concerts and promotional campaigns, in particular, sponsored by various businesses, one recent act of corporate solidarity seems unique to Lebanon – mainly, the various efforts coordinated by Lebanon’s six major trade associations that will provide millions of dollars of direct support to dozens of businesses damaged in the five bombings.
Indeed, it was shortly after the first bombing in New Jdeideh that the private sector swung into action, much as it has sporadically over the past decade and a half when vital infrastructure was destroyed by Israeli attacks.
As it became apparent that the bombings would continue, and after the Sid el Boushrieh attack which devastated several industrial buildings, the Association of Lebanese Industrialists, led by Fadi Abboud, teamed up with the other five major associations in Lebanon to establish a financial support fund.
Simultaneous to this effort, Alfa, one of Lebanon’s two cellular management companies, launched a SMS campaign that allowed people to contribute to the fund by “donating” units [as Executive went to press, Alfa was not able to provide data of the campaign’s effort].
By mid-April, Abboud told Executive that the fund had raised almost $3 million, with two separate contributions from BLOM and Bank Audi of $1 million each and an additional $1 million already raised from individual and corporate contributors.
“We have not event started yet,” said Abboud in a recent interview. “There will be a publicity campaign beginning [at the end of April] where we will launch a homepage for donations so that the Diaspora can also help.”
According to Nadim Assi, the chairman of the Beirut Traders’ Association, the fund has received 62 applications from affected businesses – a number that Abboud believes may grow to 150 by the summer. In all, it is expected that almost $10 million may be needed to compensate business for their losses from the attacks – an amount mitigated by the announcement that the Al Waleed bin Talal Foundation will fully rehabilitate buildings and compensate affected businesses in the area
Of course, the uniqueness of these acts of corporate generosity rest more on the failure of the Lebanese government to provide the kinds of loans and grants offered by many governments after such attacks. However, according to some observers, the efforts should nevertheless be viewed as a part and parcel of an emerging Corporate Social Responsibility (CSR) consciousnesses in Lebanon – one that did not just simply coalesce out of thin air on February 14 and one which dovetails with an overall feeling of social responsibility amongst the Lebanese themselves.
“There are a lot of Lebanese companies that have well established CSR programs, banks especially,” noted Lubna Forzley, Public-Private Partnership Team Leader at the UNDP in Lebanon. “But, especially since few companies produce annual reports, CSR in Lebanon is rarely a written part of a company’s strategy.”
It is this fact, perhaps, among others that often makes corporate citizenship seem more ad hoc in Lebanon than a part of an ongoing, dedicated effort.
“Over the past four years, companies are making CSR more a part of their overall strategy, Forzley added. “But, especially lately, we have seen an increase in efforts.”
Forzley was quick to sound a note of caution though in looking only at one aspect of CSR when viewing corporate actions over the past two and a half months.
“CSR includes a lot of different components. Part of it is also defined as a way the business deals with a community and this includes its human resources.” Pointing to some recently published reports of companies who have engaged in mass layoffs or wage cuts, she added that, “in addition to everything that has been done, the many positive things, we also have to think that HR includes forced vacations that may have been asked for and forced layoffs, the health and safety of their workers, and compensation. The community needs to think about these parts of CSR.”
For Farid Chehab, Chairman and CEO of Leo Burnett Middle East and North Africa, recent acts of CSR in Lebanon, while commendable, should be judged relative to the amount of work that remains for the private sector.
“I think that doing such things [are being] understood by all corporations,” said Chehab, whose company donated their expertise to the design and publicity campaign for the wildly successful 5km Beirut “marathon”. “But, we need to do more,” he added. “The private sector should be less selfish and understand and have the vision that, through promoting Brand Lebanon, he is the first to profit from it.”
Of course, contributing to promoting “Brand Lebanon” has often been easier said than done – a fact of life in the country that, unfortunately, has become even more apparent at precisely the time when Lebanon most needs a tourism campaign.
According to one source at the Ministry of Tourism, no substantial allocations for promoting Lebanon have been made over the past seven months because of both the upcoming elections (which became the focus of many in government at the end of last year) and the bombings.
“You know how many times we are on hold?” asked the official sarcastically.
Indeed, because of the recent failure to form a government, right when promotion was vital, the ministry was unable to move ahead with its forthcoming multi-million dollar tourism plan – a plan that needs the approval of the Cabinet. In the process, companies have also been put off from becoming involved because of the gridlock and the perceived inability of the ministry to get its own house in order.
While Chehab believes that a strong streak of individuality also has prevented the private sector from becoming more involved in tourism promotion and other efforts, Saad Azhari, Vice Chairman of BLOM bank and also a key leader of the Banker’s Association, strongly disagreed, saying that many CSR efforts simply don’t get publicized.
“The actual fact is that some efforts are not declared,” he said. “Some companies outside [of Lebanon] do it just for publicity, but here it is more engrained, more a normal part of operating” in the relatively unique socio-economic and political environment that is Lebanon.
Thus, although CSR efforts in Lebanon may seem opportunistic at worst and ad hoc as a norm, the truth of the matter often lies outside of both these poles, as perhaps the outpouring of donations proved during Unity Week.
As Randa Armanazi, PR manager for Solidere, noted, the outpouring of resources for the events was simply astounding by any standard. Middle East Airlines, Lebanon’s national carrier, offered discounts of 30-50% on flights during the month of April. Hotels offered deep discounts. All artists also performed for free – a not unsubstantial cost. And more than 30 leading figures from the business world, legal professions, trade unions and civil society lent a hand. When something was needed, it was asked for and usually received, free of charge.
“We want to show them that our will for life cannot be defeated,” Hariri told journalists in announcing the festival. “We want our streets and our squares to be filled with joy and people and not left abandoned for chaos.”
Armanazi pointed out that it would be impossible to put a dollar figure on the amount of donations or even the costs of the celebration because so many different sectors contributed in-kind.
Among these, she included the substantial number of merchants and restaurants who slashed prices by as much as 75% to help lure people back to shopping and entertainment districts.
While hard to quantify both Paul Ariss, head of the Restaurant Association, and Assi, used words like “a miracle” and “a tsunami” to describe the effect that Unity Week had on stores and restaurants’ bottom line. Assi said that business had been down by as much as 90% in the weeks after the bombing and that, after Unity Week, had recovered somewhat to a 50% less-than-normal level. “Everywhere people are moving again,” he said hopefully. “It is slow but life is getting back slowly and surely.”
“It was a miracle,” said Ariss. “From 14 February to April 9 it was a nightmare – for all of Lebanon. During Unity Week everything changed, sales went beyond normal in the BCD and partially for all of Beirut. Now things are moving back to normal across Lebanon, in Tripoli, Sidon, all over.”
Unfortunately though, despite published reports that banks may loosen interest rate terms and extend loans generally in order to stem the severe ripple effect of economic damage since the assassination, some companies who are not receiving direct help through the bomb fund say that they may not be able to hold on for much longer. They are, said Abdullah Bitar, president of the Nabatieh traders association, in need of some civic and corporate solidarity.
“Banks need to take it easier on us,” said Bitar. “Many do not have money to pay for inventory and are being squeezed on their loans as well… the bank’s simply won’t help us.
Although loan terms are a sticky subject, Makram Sader, the director of the Banker’s Association, noted that Lebanese Banks had indeed played a hugely unprofitable role in helping the overall economy get through these difficult times. While not thought of as CSR generally, the hit that Banks have taken in concert with the Central Bank contribute to the necessity of viewing Lebanon’s entire commercial sector, including its oft-maligned banks, as key actors in the effort to re-emerge from the destruction and provocation that broke to the surface on February 14.
“We should have increased lending rates as deposit rates rose,” said Sader, who noted that 60% of Lebanese bank loans renew their interest rates every two to three months. “We should have, but we wanted to help… we are trying to give a little bit of time for the political situation.”
Of course, even keeping interest rates momentarily low may not do the job. Nor may the CSR efforts that seem to be gathering speed. Indeed, the Economist Intelligence Unit recently reported that real gross domestic product growth would most likely come in at a lackluster 2% rather than the 4.5% estimated earlier and that the crushing public debt could explode should a global downturn occur.
Of course, one thing in particular that Lebanon demonstrated during and before Unity Week was the power of its citizens to overcome hurdles – an attribute often cited by people across the political spectrum.
“They came out not because of discounts,” said Ariss. “In fact many did not even ask. People were stuck and they wanted to go out and also to share in the national economy. The Lebanese mentality is that they want to live – and eating out is one small part of that mentality.”
For Chehab, the matter is even more at the heart of the Lebanese character – just as Beirut became the undisputed heart of Lebanon during Unity Week. “They came to display physical energy in the name of Lebanese unity, they came to offer physical contribution to their commitment. They came because they were blessed with political maturity and they came because the communication they saw and heard during two weeks of preparation persuaded them to do so.”
BLC Bank and Libano-Suisse Insurance have presented the first fruits of a new product partnership that enhances the choices of consumer loan customers in Lebanon. Along with a line of bancassurance products, the two companies on July 18 introduced a jointly developed unemployment credit insurance that protects buyers of BLC consumer loans against inability to meet payment obligations because of loss of employment.
The new insurance product is provided without extra charge to new loan applicants who satisfy requirements related to their age and duration of employment. As customers do not have to pay a premium for the credit insurance on top of the 7.75 and 9.25 percent flat interest rates which BLC currently charges for new consumer loans, the unemployment credit insurance is an alternative to life insurance policies which many banks have been requiring loan customers to purchase at additional expense to their loan costs.
According to BLC Bank marketing manager Maya Margie, the bank dropped the practice of having life insurance policies for customers covering the amount of their loan three years ago, because the cost of the program was over proportional to the number of actual claims. Working with Libano-Suisse Insurance, the bank for one year had been researching the possibilities to implement the unemployment credit insurance, which is now offered by BLC as the first of its kind in Lebanon and the Middle East, Margie said, “in line with our objective of being leaders instead of followers”.
In 2004, the BLC customer base grew by 12 %, and its deposit base and portfolio of personal loans increased by 24 and 38 percent, respectively as the year saw BLC Bank continue achieving its recovery from huge past losses to profitability.
In conjunction with the launch of the unemployment credit insurance, BLC and Liban-Suisse introduced six new bancassurance products under the brand name Awlawiyati. The range entails car, home, accident, term life, retirement and child education plans that are sold over the counter at BLC branches. The bank established a new insurance broking subsidiary, BLC services, to manage its insurance activities in accordance to Lebanese law.
Byblos Investment Bank re-sizing and up-sizing
Beirut’s budding investment banking landscape is in process of new diversification as Byblos Investment Bank is embellishing its ranks while other banks are reported to be looking newly into this area of activity.
The movements in the community of specialized bankers are loosely related to changes triggered by last year’s merger and acquisition operation between Bank Audi Group and Banque Saradar. While the merging banks at the time had indicated that they would aim to avoid staff redundancies, banking analysts suggested that the investment banking operations of both sides would be likely to have some overlap, since three entities would have to be consolidated – Audi Investment Bank, Lebanon Invest, and Saradar Investment House (SIH).
The re-structuring of the Audi Saradar Group’s investment banking operations led to the formation of Audi Saradar Investment Bank under chairmanship of Lebanon Invest founder, Marwan Ghandour, and with Ramzi Saliba as general manager. Four bankers of the old SIH team, who had initially stayed on with the Audi Saradar Group, felt that they could find more room to deploy their talents if they would leave Audi Saradar and thus recently parted from the group on reportedly very amicable terms with a golden handshake and with plans, according to finance insiders, to set up their own investment funds.
The setting free of investment banking talent caught the attention of at least one bank interested in creating an investment banking subsidiary and was also welcome news at Bank Byblos Group which jumped at the opportunity to upsize the team of one-year old Byblos Invest Bank. Byblos convinced three of the migratory investment bankers to choose BIB and on July 1 appointed former SIH head Joe Issa-El-Khoury to the position of general manager at Byblos Invest Bank.
According to Bank Byblos Group’s vice chairman, Semaan Bassil, BIB is poised to develop investment banking activities out of Lebanon for Sudan, Algeria and Syria where the group is presently active, and for Abu Dhabi where a new operation of the group is to be established soon. “The group believes that the excess liquidity available in the Arab world will be seeking investment venues and we aim to play, through BIB, a leading role in channeling those funds into rewarding investments,” Bassil told Executive.
Ice cold beer and the Japan connection
Every summer, in Lebanon, beer sales increase by 30%, proof, if any were needed, that the Lebanese like to crack open a cold one at the beach. In fact, according to Almaza, we apparently like a very cold beer on the beach – served straight from a special Almaza “sub-zero cooler” at -2 degrees Centigrade and so, since the beginning of June, beach resorts across the country have been serving the famous green bottle from one of three hundred sub-zero coolers distributed gratis by the company. A genuine breakthrough in beverage enjoyment or just another weapon in the annual beer wars?
One thing is certain: as the mercury rises, beer sales competition heats up. Since the overall beer market is not growing much, despite an increasing variety of cheap, obscure, often high-alcohol-content brands, competition is especially fierce. According to Almaza Marketing Director Francois Mourad the market is growing by only 3.5% a year. A sizeable portion of that growth can be attributed to the non-alcoholic beer market, of which Almaza has a share greater than 70% according to Mourad.
Although Almaza controls around 70% of Lebanon’s beer market, it isn’t resting on its laurels, said Mourad, because it expects the Government to sooner rather than later cut the 40% duties on imported beer – possibly as part of the Euromed agreement with the EU – and open the floodgates to a wider range, and higher numbers, of imported beer.
Meanwhile other beer importers continue trying to hammer away at Almaza’s market dominance. Abiramia Bros., a company that imports Effes from Turkey, Fosters from Australia and Budweiser from the United States, says it is spending $350,000 on marketing this year, including a “massive ad campaign” which includes sponsorship of two motor races and advertising on billboards and radio. It is also increasing the sales percentage in cash money it gives to its five distribution agents as an incentive for them to boost sales.
The company’s marketing director, Abdou Younes, claimed that the company’s beer sales were growing by 25%-30% a year, which imply it is eating into Almaza’s market share. For its part, Heineken is trying to wean clubbers off ready-to-drink (RTD) beverages such as Bacardi Breezer by presenting Heineken in cooler bottles “You don’t see many people drinking beer in nightclubs,” noted Mourad. “You see them drinking RTDs. That’s why we are distributing Heineken in aluminium bottles designed by a Japanese designer.”
British Mediterranean takes Khartoum
A recent move to make doing business in Sudan more palpable for Lebanese entrepreneurs is paying off for British Mediterranean Airways (BMED). In the first two months since the carrier opened its London – Beirut – Khartoum line for service between Khartoum and the Lebanese capital in the middle of May, passenger load factors developed well, according to BMED regional sales manager, Naji Mahdi.
The new service reduces travel times between Beirut and Khartoum from at least nine to under three hours each way, because in the past, passengers had to transit through other countries to reach Sudan, Mahdi said, “but we did not take advantage of this to raise our fares.”
BMED had taken first steps towards creating the Beirut – Khartoum service about 18 months ago in changing the routing of its London – Khartoum flights from going via Amman to stopping in Beirut. The door for the new service was opened fully when the civil aviation authorities in Lebanon and Sudan readily allowed BMED to carry passengers on the route under so-called fifth freedom rights. Unless they are granted these rights, airlines are not permitted to issue tickets between an intermediate and the final destination of a flight.
In its general business between Beirut and London, the airline saw no significant slump because of the political uncertainties that Lebanon experienced in the first half of the year. Most recently, BMED received some cancellations “due to whatever happened in London and in Lebanon,” Mehdi said. “We had a slight drop over last year but things are picking up and in 2005, we should be carrying the same number of passengers as last year, or slightly more.”
L’Oreal joins forces with ESA
The international cosmetics group, L’Oreal, last month made a strong recruitment pitch and presentation of its Human Resources strategies at the Ecole Superieure des Affaires on occasion of signing a partnership agreement. Aims of the agreement include to enhance networking between ESA and leading companies and to develop the relationship between the business school and L’Oreal Lebanon.
Under the agreement, which formalizes long-standing collaboration between the two entities, ESA students will study L’Oreal marketing cases and have better opportunities to benefit from recruitment at L’Oreal, said ESA communications director Georges Najm.
For L’Oreal, international recruitment and working with leading business schools is a priority, Jean-Claude Le Grand, the director of corporate strategic recruitment at L’Oreal, told Executive. “We manage the career of the executive personality differently. We promote angry, dynamic young people,” he said. “Other companies don’t dispatch Human Resources staff to recruit on the ground at universities and only a few companies have a strategy to recruit worldwide.”
According to Le Grand, L’Oreal has collaboration agreements with numerous important business schools and spends over 1 million euro annually as direct investment into recruiting, not counting salaries in the HR department. The company, which says it takes five to ten years to build up a L’Oreal manager, seeks to recruit 70% of its managerial staff from career starters. Besides engaging in partnerships with business schools, L’Oreal employs campus business games and internships in its efforts to attract the most talented students to its ranks. “We are not chatting about to war of talent, we are acting,” Le Grand said.
Lebanon’s first cruise ship
Seemingly unfazed by the bombings, assassinations and political turmoil which are threatening to wreck Lebanon’s summer tourism season, Lebanese entrepreneur Merhi Abou Merhi chose June to launch Orient Queen, the world’s only cruise on a Lebanese-owned ship.
The ship-owning company Abou Merhi Lines SAL, which owns 17, primarily car-carrying vessels, purchased the roughly 16,000 tonne, 900-passenger “Bolero” cruise ship from Greek-owned Festival Cruises for $9.5 million, according to an annual report on the Website of the Paris-based shipbrokers Barry Rogliano Salles.
The Lebanese company has invested, “more than 10 million dollars” refurbishing the vessel, according to Abou Merhi Lines media manager Karim Gemayel. It was then renamed Orient Queen.
For just over a month now, Abou Merhi Lines has been offering a seven-day cruise aboard the five-star vessel around the Mediterranean – Egypt, Cyprus, Greece and Turkey – at a starting price of $1,050. The price climbs as high as $7,000 for passengers who go for the royal suite, five meals a day, private butler and the constant companionship of “two ladies,” Gemayel said.
As soon as Lebanon’s summer tourist season is over, the Orient Queen will begin offering cruises out of Dubai, before returning again to Beirut again the following summer.
Gemayel said that the weekly cruise had attracted “hundreds” of passengers in its first month, a figure he acknowledged was not particularly high for a ship which can accommodate around 900 people per cruise.
“Promoting the cruise has been difficult,” he admitted. Asked if launching the cruise in the midst of political turbulence and a months-long spate of violence might have been unwise, he said: “The people who conducted the feasibility and profitability studies all suggested we rent the boat out to any European country. We had some very good offers. But we are not in this for pecuniary gain. Our slogan is ‘For Lebanon.’ We are trying to rebuild tourism in Lebanon.”
Salvation, though, may lie in Dubai. “There is a lot of demand in Dubai,” said Elie Nakhal, head of Nakhal Travel, which is selling Orient Queen cruises. “Dubai will compensate for any losses in Lebanon.”
Around 60% of the passengers thus far have been Arabs – roughly half of them Lebanese, 30% have been Turks and around 6%-7% Europeans, mostly from Greece and Cyprus, Gemayel said.
Syrian Tourism fair
Following on the heels of an April conference which saw 127 applicants from around the world bidding to develop 100 of Syria’s top tourist sites, Sadallah Agha al-Qala, Syria’s Minister of Tourism, gleefully opened the “Syrian Tourist Horizons Forum” July 5 in Damascus.
Naturally enough, the two-day event was meant to highlight some of the country’s recent (and anticipated) achievements in the sector: 9,000 new hotel beds will be added each year by 2010 at which point tourist revenues are expected to reach $6 billion annually ($2.2 billion was earned in 2004 al-Qala told the conference). And despite what the minister referred to somewhat euphemistically as “bad publicity,” the first five months of 2005 saw a 55% jump in package tours of Western tourists coming from mainland Europe – a stat that was used to justify the prediction that 3.6 million tourists will have visited Syria by year’s end, or 600,000 more that 2004.
One of the main speaker’s at the conference, however, Intercontinental Hotels Group CEO Chris Moloney, signaled at least one problem the sector faces mostly unrelated to politics or economics – an aspect that may ultimately harm the sector’s long-term prospects for growth far more than any immediate questions about the current regime’s stability or lack of stability.
“I urge you to carefully consider the unique experiences which Syria can offer compared to other destinations….. Pay attention to that aspect because it is extremely valuable and fragile,” said Moloney.
Of course, hewing to such advice may not be that easy: Outside the conference hall large, glossy displays for future developments in Palmyra, Tartus and Latakia looked more like the sorts of hotel and recreational developments found in Dubai or Las Vegas. Already, in fact, 19 of the April projects that were approved have broken ground, with some promising to bring the first real taste of the five star life to points across the country.
According to Nashaat Sanadiki, Chairman of the recently formed Federation of Syrian Chambers of Commerce, the danger of “overscale development” – development which overwhelms the natural beauty and charm of an area rather than adding to it – is both real and, he hopes, manageable.
“My view is that I would like to see Syria takes it’s share in tourism, but without harming our texture and social life,” he said. “We can do that without resembling Dubai… [but] that means we cannot sacrifice our desert area, for example, to convert it all in to 5 stars resorts.
“Where will the average Syrian go after all?”
Bordeaux alliances
It was a busy month for Lebanon’s wine producers, six of whom – Chateaux Musar, Kefraya, Ksara, Clos St Thomas, Massaya and Cave Kouroum exhibited at the biannual Vin Expo in Bordeaux, arguably the world’s premier wine fair. Back in Lebanon, July 27 saw the committee of the Union Vinicole du Liban (UVL) elect a new committee, one that for the first time represents all producers. Elsewhere, the advent of new EU export regulations is expected fast track the establishment of the much-needed and long-awaited National Wine Institute. The implications for the sector are significant. “Export is the future,” said Charles Ghostine, Managing Director of Chateau Ksara. “If we want to achieve better prices, we need a regulatory framework to underpin confidence.”
At Vin Expo, Chateau Kefraya, which took the opportunity to show the greater wine world its new premium white Casta Diva also, according to marketing manager Emile Majdalani, made exciting in roads in penetrating the non-Lebanese on trade in France as well as stirring up interest among buyers from the Russian and Scandinavian markets. “These contacts were more concrete than during the past exhibitions and offered the possibility to finally initiate an extension of our distribution to the entire French market,” he said
Massaya, which for the time being at least is not part of the UVL, exhibited with its French partners the Brunier brothers from Chateau Vieux-Telegraph and Californian maverick wine producer Boony Doon.
The three-nation alliance reportedly caused much interest, being as it was a departure from the usual generic national or regional stand. “We got all the interest,” said Massaya’s Ramzi Ghosn. “The others were all know producers. and more importantly our quality was endorsed by being on the same stand as the French and Californians. The wine industry is very conservative and such alliances are not common.”
Elsewhere, Cave Kouroum seems to have emerged from its legal battle with neighboring Chateau Kefraya and established itself as one of Lebanon’s most adventurous producers. At Vin Expo, the winery in the heart of the village of Kefraya, won seven awards including, two golds.
Mobile phones (optional)
Just in the nick of time for the summer tourist season when demand for new mobile lines customarily peaks, Alfa announced last month that, on top of adding a new series of 70 mobile numbers, refills for pre-paid lines can now be purchased through 193 ATMs operated by 14 different banking instructions in Lebanon (see www.alfa.com.lb for the list of participating banks).
Unique to the ATMs: Alfa subscribers can now also purchase 72 unit cards with a 12 day validity period for $20 as well as a new 300 unit card for $80.
For downtown vendors hawking units “the old fashioned way,” the greater ease and new options offered by the ATMs doesn’t appear to be causing concern.
“I heard about this but you know the bank charges you each time you buy units from them,” explained one Hamra street vendor.
Well, not exactly. According to Alfa, if units are purchased via an ATM at one’s own bank then no commission is taken. However, if you purchase from a bank other than your own, the same fee that banks take for non-member ATM withdrawals will apply.
The February 14th attack, followed by the bombings in New Jdeideh, Kaslik, Sad al-Boushrieh and Broumana have seen in increased demand for private security services among banks, shops, hotels, malls and large institutions as well as ongoing real estate projects.
Demand has mainly focused on electronic surveillance, monitoring systems, and security guards. Youssef Mohamed Beydoun, vice-president of the Syndicate of Security and Safety Professionals in Lebanon and general manager of Beydoun Fire and Security, estimates that business has spurted by 30-35%.
“Banks are our main source of increased demand,” said Beydoun. “It has now become a priority for everyone to increase their security coverage, but banks in general are especially afraid thefts and hold-ups might occur due to the current political and economic climate.”
Demand for security guards has equally been boosted, most notably due to the fact that they are the most rapidly deployable form of security service, yet they still trail behind electronic surveillance systems in terms of what the market wants. Security firm, Protectron, has estimated the hike in demand at 25%, although, tight budgets force many companies to employ their won staff in a security role. The increase in human security has been deployed to check all cars entering premises or parking in the vicinity of the building, as well as inspect all clients entering the locales.
And maybe this is why the industry sees the employment of extra security guards as a stopgap measure. At around $500 per security guard per shift, the service is not cheap. “We can already see a drop in demand,” says Lotfallah Yazigi, president of Securitas in the Middle East. “It was a reaction to panic. People in residences would get together and chip-in for a guard to watch the premises for two weeks to a month, but contracts wouldn’t go much longer than that. It was a quick-fix for peace of mind but most people can’t afford this type of service in the long-run.”
Many banks, hotels, institutions and large companies, such as the Phoenicia InterContinental, which has incurred minimal costs in upgrading security, already have adequate security systems in place as part of their commitment to comply with international standards and regulations issued by headquarters. They have consultants come in to do regular check ups to ensure compliance with corporate norms.
“We haven’t hired more people,” says Jana Sleen of the Safir Heliopolitan hotel. “What we have done is increase the number of security guard shifts and tightened security measures, especially with regards to all cars coming in. Half of our staff is from Protectron and the other half is our own staff. But otherwise, we already had cameras in place everywhere.”
The Beryte Hotel reported to have increased security staff by four, at an additional cost of $3,000 per month, to which will be added the installation of surveillance cameras, at $2,000-3,000.
“It’s an additional cost, but one that everybody has to incur right now,” says Jihad Shoughari, operations manager for the hotel. “After the attack, the army and the police went around to all the hotels in the surrounding area and asked for the films of the surveillance cameras. We have now in the process of ordering 3 or 4.”
Banks and large retailers have also reported an increase in security guards for the most part. Byblos bank is now also switching to the international security company Group 4 Total Security.
“We used to have four different local companies, but now we are switching to Group 4, because it’s a more professional, English company,” says Antoine Keldany, head of administration at Byblos bank. “Our security budget has increased, although not by much.”
ABC Mall in Achrafieh has hired 20 new security guards, at an estimated $7,000 a month, and is reportedly in the process of installing a camera surveillance system.
Universities, embassies and international organizations have for their part made few requests for additional security services. Virtually all embassies have their security equipment sent to them from their respective countries and are prohibited from purchasing any local products.
The UN, whose offices in central Beirut were reinforced with cement blocks and sandbags following the attacks, claims this was a measure that had long been in the pipeline.
“We asked the government two years ago to make this arrangement around the building, because the UN building in Beirut was non-compliant with international regulations that have been established for the institution – it had nothing to do with the attacks,” says Elias Daoud, head of security for the UN building. “Otherwise, nothing has changed.”
Despite the recent hike in demand for security services, some industry insiders are not convinced that it will necessarily entail an overall increase in the quality and profitability of the sector. According to Khlaed Jaber, general manager for Security Engineering, there are no rules in Lebanon governing security services. “We tried to push for this through the creation of a syndicate, but it turned into a forum for social events. Every company now has its own standards. We now have a lot of security providers in Lebanon, probably some 100-150, but out of these, I would say there are only 10 which are really professional, offering high quality services and products.”
“Right now the market is booming, but it’s not really profitable,” says a manager of a security company offering human guarding. “Salaries remain low, contracts are offered on a short-term basis. A lot of people working as guards view it as temporary employment, it’s not one they invest in to make a career out of.”
Despite relatively few additional security measures being added over the course of the past two months, industry insiders believe there might be a gradual shift towards a more preventive-oriented approach to security.
“The measures we are taking are not temporary, they are permanent,” says Shoughari. “It’s a trend happening throughout the Middle East – just look at the last bomb attack which hit Cairo. We are now faced with a new environment, locally, as well as internationally. The enhanced security measures are here to stay.”
Yazigi believes it is too early to tell whether the panic attack which hit the Lebanese will result in any long-term changes, but does detect a trend in the region towards greater security awareness.
Partly in response to this, Securitas will be opening the Swiss Academy for Security in Lebanon in May – a first in the region – to train professional security guards at every level.
Background
With a few notable exceptions, getting elected to Parliament in Lebanon is, and always has been, an expensive business. The half dozen or so families who between them provided most of the successful candidates in the early years of independence were not only well established and powerful. They were also immensely wealthy. However, their influence declined, especially over the period of the 75-90 war and new faces and new elites emerged as the financial balance of power shifted.
Yet the methods adopted to win – or buy votes – have remained remarkably similar. The dollar figures have risen, of course, to take account of inflation, more sophisticated and more expensive means of communication, and most significantly because of the Syrians’ locally-imposed ‘tax’ to be allowed to stand for election at all.
Composition of electoral lists
Irrespective of the size of any list, which is itself determined by the drawing of the constituency electoral boundaries, the primary elements are twofold. The vote-getter is determined by reason of traditional, local, confessional and political following, such as the leader of the mainly Druze Progressive Socialist Party, Walid Jumblatt, and the principal financier or financiers. Former Prime Minister, the late Rafic Hariri, was exceptional in that he embodied both functions. In his case, the base of voter support, Sunni or otherwise, was built up by the judicious use of his wealth over decades. Hariri had no natural grassroots support built up by his family over generations.
The two other ingredients to a list are those who bring some money, a degree of popular following and marketability potential, or any combination of these, plus the candidates on any list imposed by the Lebanese-based representatives of the Syrian government.
List financing
Since the size of lists varies just as the number of potential voters in a constituency can range from around 60,000 to as many as 300,000-400,000, there is no headline figure attributable to the cost of running a list. One yardstick used is to have a visible (i.e. for wholly legal use) $100 available for every vote that is needed to win the election. Experienced campaign insiders add, with a wry smile, that victory is virtually guaranteed with the presence of another $200 per voter for spending in a variety of “suitable’ ways (see below).
The total bill for a large list can easily run to several million dollars. The expenses include handing over up to $1 million to Syrian political intelligence officials for authorizing, in practice though not officially, the list’s participation.
The Syrian list-existence tax has also prompted the need for raising the entry fee to be able to get onto a particular list. Local market forces sometimes determine that the price of joining an electoral ticket can be heavily influenced the buyer’s ability to pay. Thus the price for a rich newcomer with little previous history of helping the alliance he is trying to join may reach the million-dollar mark. Elsewhere, the figure might be much more ‘reasonable’ although it is still frequently prohibitive for all but the wealthy.
In the 2000 parliamentary elections, one potential candidate in his early 30s is said to have been asked for $100,000 to join up with Omar Karami in Tripoli, the same figure being sought in Beirut from a lawyer who sought entry into an electoral list favored by the President, General Emile Lahoud.
Though neither was eventually elected, their routes to failure took different paths. The northern potential candidate bowed out entering the race alongside Karami because he didn’t have the money. The lawyer secured an understanding that arrangements could be made to make such a contribution, possibly in stages, provided that he were elected. Even with the implicit backing of Baabda Palace, he attracted only a fraction of the 28,000 votes needed to secure a seat in the 128-seat exclusive Nijmeh Square Club.
What the law says
- Campaign contributions
Although proposals have been made to limit campaign spending – the latest is to put a $100,000 ceiling on the permissible amount – there is, and never has been, a maximum figure set by law. In any case there is no mechanism for checking on candidates’ spending. The notion of filing returns on campaign expenses as required by democracies in Western Europe, for example, is unknown.
There is also no regulation on campaign contributions. In practice fund-raising is a rarity. The midterm election of Ghassan Moukhaiber in 2002 was an exception. His campaign in the Metn, which cost a modest $45,000, was largely financed through small contributions made by friends and supporters.
The bulk of the money spent comes from a relatively small number of mega-wealthy people. Of those, some may seek to use the status of MP as a stepping-stone toward a seat in the Cabinet where they would have the opportunity to recoup their outlay from under-the-table commissions on government contracts. In other cases, campaign expenses are seen simply as the cost for attaining the status conferred by becoming a Deputy. Satisfying the ego has its price.
- Media spending
Direct advertisements of the kind that swallows up hundreds of millions of dollars in United States elections are prohibited by law. Yet the existence of privately owned TV stations, newspapers and magazines, owned or heavily influenced by leading political figures, helps to circumvent this rule. NBN television, nicknamed Nabih Berri News, is seen as an asset to the Speaker of Parliament’s candidates every bit as valuable as Mostaqbal TV and newspaper were to Hariri. State-owned television and radio is supposed to be neutral and allow equal and fair coverage to all candidates. In 2000, it campaigned heavily and virulently against the Hariri camp.
If political adverts were allowed in TV they would quickly eat up millions of dollars. The average rate card cost of a 30 second spot at prime time (including the associated freebies of very early morning repeats etc) is around $3,000, to which has to be added production expenses of anything from $5,000 to $50,000+.
While the cost of straightforward television advertising is not a current issue, coverage by the audiovisual media is not always determined by balanced and fair editorial decisions. The growing habit of being able to buy an appearance on TV, either through money or influence, adds a dimension to campaign costs that is impossible to measure.
In fairness, the idea of ‘placing’ favorable articles in the print media and arranging friendly interviews on television is not solely a Lebanese disease, nor is it confined to election time. Faced with a world of low-salaried journalists, one enterprising public relations company in Beirut drew up a price list for getting major articles in papers. Most prized and therefore most expensive was An Nahar at $500, with As Safir following at $300 and The Daily Star coming in at $200.
- Bribery
Given the overtly blatant and wholesale bribery that besets elections, it almost seems fatuous to point out that it is a felony. Details of common practices that constitute a reasonable person’s definition of bribery are given below.
- Misuse of public funds
It is also a felony to misuse public money and assets in pursuit of private gain. In a country where the police are as guilty as anyone of committing the relatively minor offense of driving down one-way streets in the wrong direction, sanctions against the misuse of public funds have rarely been a threat.
The real contributions to campaigns in this area come not from stealing the state’s money directly and handing it out but in other, scarcely less blatant, ways. Public works projects, especially small local ones, increase substantially just before an election; favors, such as having a prosecution dropped, also go up; and underemployed employees in various ministries suddenly find themselves working flat out on campaign organization at the behest of their master’s voice.
Another way in which votes are assured by state institutions was the practice by the Ministry of the Interior in sending its agents to tell 11,000 recently naturalized citizens living in the Metn that their citizenship would be taken away if they failed to vote in the way they were told. To make sure, most were collected in cars, driven to polling stations and accompanied into the booths to make sure they did as they were told. The value of this exercise was not only that it delivered the votes but also that carrying it out didn’t bite into the campaign treasure chest.
Yet one more tactic in the Ministry of Interior’s highly efficient vote-getting repertoire has been to dispatch agents to businesses to remind the owners of the value of permits they need to operate. Vote for our men and you keep the permit. If not…
Where it goes
a. Posters
The printing industry receives a considerable boost at election time, not only from candidates and entire lists but also from some publicity-seekers who spend a few hundred dollars having posters of their faces stuck up alongside those of genuine candidates. Most of the cost of the poster blitz on Beirut of candidates on the Hariri lists in 2000 was borne internally and directly by the campaign itself. According to election insiders, only around $150,000 was spent outside at Saatchi & Saatchi on design work and printing.
The advantage of using direct labor to put up the posters, rather than outside contractors, is that it encourages those paid to do the work also to vote for the candidates whose posters they are sticking up. The costs are further inflated by hiring other labor to remove posters of rivals and replacing a campaign’s own posters that have suffered the same fate.
Extensive use of billboards is in vogue and Metn has the highest density in the country. Several hundred of them are controlled by a close relative of President Lahoud, a factor that has clearly influenced who may use them and how much is paid.
b. Other campaign literature
Leaflets and flyers are printed mainly to be distributed through the local election offices opened throughout a constituency although one aspect of promotional literature that always figures in European elections – a detailed manifesto of the political program promised – is missing. This document is superfluous because none of the candidates is inclined to reveal what they will do if returned to power.
The amount of the printing bills belongs firmly in that widespread category of “the higher the better” and usually they are settled on delivery of the order since losing candidates might be less inclined to pay.
Caps, t-shirts, badges, car bumper stickers also boost local industry – and potential electoral support.
c. Local offices
The renting of local campaign offices serves not only to generate extra publicity for the candidates but also provides an opportunity to encourage more support by carefully picking and overpaying for temporary premises from owners who can deliver votes.
Renting chairs, tables, telephones and, in some cases, computer equipment is a relatively small proportion of the expense. Even bigger than the rent is the bill for paying supporters to spend their days making it appear there is a hive of activity. In practice, the biggest use of local offices is on polling day when they become useful as administrative centers for making sure that known supporters have actually voted.
They also function as checks on whether supporters are included on the electoral lists and whether they have the correct documentation to be able to vote.
- Meals
A part of the reward for spending entire days in local offices – and often for other campaign workers too – is to have meals provided. The choice of culinary fare is influenced more by currying favor with the suppliers than by the taste buds of the campaign workers. Even at a level of only a few dollars a day, when multiplied by the number of workers and the weeks of campaigning the total bill for food for a well-funded list runs into several thousand dollars.
- Transport
Supplementing the allowances for gas given to supporters who use their own vehicles for campaign work is a new practice of hiring the vehicles of entire taxi companies, whether they are used or not. Monopolizing the available transport has the added advantage of depriving rivals off those facilities.
- Keys
So called because they open the door to bringing in votes, the role of local ‘key’ people is to distribute the largesse on offer to families well-known to them. The lump sums of cash, goods or allowances for services are allocated according to the number of voters they can persuade.
The ballpark figure of $100 per voter can rise to as much as three times that amount in tight races. Just as those Syrian construction workers who stayed in Lebanon after the murderous bombing of February 14 found themselves in a sellers’ market where they were able to negotiate their daily rates upwards, so voters, as for example in Achrafieh in 2000, were able to bump up the price of their support.
Other inducements included the mass distribution of fridges and cookers in Beirut in the 2000 elections and the offer of paying school fees and medical expenses, as well as the provision of musical instruments for a band.
Some electoral lists, especially in the Metn, still contain the names of significant numbers of dead people. Though ‘bribing the dead’ is somewhat cheaper than the amount needed for the living the use of their votes depends upon whether old-style identity cards will be considered valid for voting.
Where do the candidates come from
According to a study of all the elections up to 1972, the vast majority of the 359 total number of Deputies up to that point had inherited their seats from family members. Since the end of the war the make-up has changed. Despite the apparent majority allegiance to Syria, informed sources say that without the local presence of Syrian intelligence, the outgoing Parliament splits into three roughly equal parts – the opposition, pro-Syrians, and those who did support Syria but who will change once the Damascus security network is known to have disappeared.
With money such a deciding factor in standing to become a Deputy, no wholesale changes are seen for this year. However, more supporters of former Prime Minister Michel Aoun are likely to become candidates in Baabda and Aley, Batroun and Jbeil will see faces from the ranks of Lebanese Forces.
Hizbullah
Almost uniquely among candidates and parties the Party of God does not directly bribe its voters. Critics say that the permanent provision of social services, health and education facilities, road and house repair amount to the same thing.
As the political organization also noted for having the tightest control of its supports, the party sees its discipline paying off. Hizbullah supporters are noted for following their instructions exactly. If told to vote for an entire list, that is precisely what happens. Amal partisans are said to act more independently.
Conclusion
The absence of Syrian influence and the requirement to pay commission to its intelligence services could cut the cost of fielding a list by anything up to 50 percent, thus either saving money or freeing more funds for other purposes. It would also mean that those current deputies who gained their seats after being imposed on a likely-to-be successful list will have to find another way – and other funds – to stay in Nijmeh Square.
The absence of laws regulating expenditure and, more particularly, the absence of enforcement of the laws on bribery and misuse of power will ensure the absence of real change.
Although abuses of the process in the United States and the European Union are frequently – and sometimes justifiably – alleged, they are less blatant than those seen locally. The 2005 parliamentary elections in Lebanon are likely to produce another example of ‘local democracy’ and that’s without even considering the artificial equal allocation of seats to two confessional groups.
Peter Grimsditch is a former editor of The Daily Star and Middle East correspondent for the London Daily Express
The March 26 bomb blast that ripped through the Sid el Bouchrieh industrial district destroyed at least six furniture manufacturers and reduced an already struggling business zone to a row of burnt out shells and rubble. By mid-April, one of the main thoroughfares was still blocked, as soldiers in yellow plastic helmets erected scaffolding to begin the rebuilding of the area.
In and around Beirut, three other blasts occurred, that, while small by comparison to the explosion that killed former prime minister Rafic Hariri, hit both small businesses and individuals hard, causing damage worth an estimated $10 million.
The explosions highlighted not only the fact that war and terrorism related damage generally fall outside insurance coverage, but also shows that while Lebanese business owners generally have health and accident insurances, many are reluctant to buy fire and property packages. According to expert estimates some 50% of Lebanese businesses, especially those small and medium-sized, are insured.
Part of the municipality of New Jdeideh, the Sid el Bouchrieh industrial zone covers some 8 km2 and is home to dozens of car mechanics, garages, metal and wood workers. Most companies are small family businesses that employ three to ten people, yet there are a few larger companies, most notably the Gemayel and Arab Printing Presses, each employing more than 25 staff.
Sami Debs, owner of Sim Kitchens, situated on the top floor of the building adjacent to the explosion in Sid el Bouchrieh held up a clock. “Look,” he said, pointing to the hands frozen at 9.20. “This is the time the bomb exploded. The fire didn’t reach the third floor. Most of my damage is from the shock of the blast, smoke and flooding.”
Sim Kitchens has no windows, the iron door has been blown off its hinges and his machines are warped by the blast. Debs estimates his damage to be around $50,000.
On the first and second floors of the building the situation is worse. Arguably hardest hit was Massoud Furniture. It is a world painted pitch black. Material, furniture and machines have been burnt to the ground. To make matters worse, George Massoud had just finished an order awaiting shipment. It was all burnt and Massoud estimates total damages to be at least $300,000. On the second floor, Sauma Furniture lost a significant quantity of material as well as most of the machines, with damage totaling some $250,000.
Both Massoud and Sauma were insured against fire but were ineligible for compensation as the damage fell under the war and terrorism category. In fact, the Phoenicia InterContinental Hotel was probably the only Lebanese business to have an insurance policy that covered a terror attack.
Debs was only able to afford personal accident insurance for his business but is aware that even if he could have afforded the extra cover, it would not have saved him. “I have two types of insurance against accidents, for which I pay some $900 a year. I don’t have theft insurance, because there’s simply nothing to steal and I don’t have a fire insurance, because it’s too expensive as I would have to pay an annual 2% of total value of my assets.”
Debs and his brother, who founded the company in 1982, are no strangers to violence. By the end 1980s it had already been bombed in the Aoun-Geagea war. Today, despite a bullish period in the 90s, the business is struggling once again. “If I make as a chair for $40, the Syrians do it for $20. Their labor is cheaper and they use Russian instead of Italian wood.”
The total cost to the area has been estimated at roughly $3 million. Saudi Prince Waleed bin Talal has already pledged $2.5 million while Blom Bank has donated $1 million. (see page ?) Even though this should cover the damage with some to spare, many remain unconvinced about the transparency of any disbursement. “We’ll see what we get and if no one fills his pockets,” said one owner.
A week earlier, on March 19, New Jdeideh, located a few kilometers north from Sid el Bouchrieh, suffered the first in the spate of bomb attacks. Hidden under a parked car, the bomb ripped through the area’s main shopping street, damaging an apartment block and dozens of cars. Eleven people were injured.
Owner, civil engineer Joseph Najm, is currently restoring the apartment block. He too was insured but not covered for terror outrages. “The municipality promised to pay $25,000 to help repair the concrete structure,” he said. “However, the total damage is will come to $150,000, which I will have to pay, as the people in the building are my tenants.”
Maroun Latouf, owner of a car rental company situated on the parking lot where the bomb was planted, is also out of pocket, also to the tune of $150,000. As in the case of Sid el Bouchrieh, it was the army that estimated damages and collected claims, and, according to Najm, the government has promised to reimburse part of the losses, based on the data collected. In an attempt to unravel the bureaucratic paper trail and ascertain why the army was handling claims, EXECUTIVE contact the Ministry of Defense but no one was available for comment
While Najm and Latouf suffered the biggest losses in the area, a large number of inhabitants and shopkeepers were hit with smaller bills. “We had to pay some $600 just to replace the window,” said the Tony G, owner of a men’s fashion store, who recalled the night of the blast
“We live above the shop,” he said. “Me and my wife woke up under kilos of glass, as the bed was in front of the window. Fortunately we suffered only minor injuries, but of course the windows had to be replaced, the bed was broken and we have a huge crack in the wall. All in all I paid some $4,000 and neither municipality nor the insurance is paying for that.”
Again, Tony G’s “regular” insurance did not cover these extraordinary attacks but a week after the attack however, an insurance broker went from door to door in New Jdeideh’s high street asking if retailers would be interested in an insurance covering bomb attacks in future.
“But that was very expensive,” Tony G said. “You had too insure everything separately. So, if you have the glass insured, the glass would be covered, but nothing that got damaged by falling glass. Only for the clothes we had to pay 2% a year over the total value of the collection. So, if you’d insure everything you end up paying some $10,000 a year, just in case a bomb may explode. We cannot pay that kind of money.”
The situation is similar in Kaslik and Broumana. On March 23, a bomb explosion hit the up market Altavista shopping center in the heart of Kaslik killing 3 immigrant workers, damaging shops, a bank and insurance company. The center itself is currently being refurbished. Total damages in and around the center amount to an estimated $1,5 million. The municipality has promised to pay for the clear-up operation, while the army once again moved in to estimate damages and collect claims.
One of the most severely damaged shops is Ets Nahkle fashion for men. “I had just expanded by taking over the shop next door,” said storeowner Hani Dagher. “I invested some $300,000 in the new interior, an estimated 70% of which is gone.” Dagher also lost a storage room inside the center. “I was insured,” said Dagher who also has stores in Hamra, downtown Beirut and Broumana, “but I didn’t even bother to hand in a claim. I know they wouldn’t pay this time.”
Providing safe mooring for the growing number of floating toys is almost a by-product of Lebanese marinas. More important, even for the showpiece Beirut marina, is the added value they give to the surrounding area. In Dbayeh, the Joseph Khoury Marina cost $70 million to build and provides a much smaller return on the investment than stashing the money in a bank, even at today’s low interest rates. The 700 berths are less than one third occupied. Downtown, the numbers look better – Beirut marina is 60 percent taken up – but the project is seen less as a commercial venture in its own right than as a mega magnet for the rich and the not-so-rich to spend their money in the immediate surrounding areas.
Just as the establishment of the Jbeil campus of the Lebanese American University had the subsidiary purpose of seeking to increase the attractiveness and value of the adjacent hilltop land, so in their own slightly different ways marina operators are trying to follow the same principle.
The Khoury marina is the sexy starlet to attract interest and massive investment in the construction of what virtually amounts to a mini city, immediately to the east and south of the site. Plans include the almost inevitable five-star hotel, three major shopping malls, restaurants and a mass of apartment and bungalow complexes that can be marketed as “overlooking the marina”.
If strolling along the seafront and eating in the waterside restaurants of Cannes or Nice brings with it the bonus of viewing with envy the sleek millions of dollars worth of floating luxury, so Lebanon has adopted the principle with enthusiasm.
Added value
Even the smaller marinas are seen as being commercially more important for enticing customers to the adjoining beach resorts than for generating significant income of their own. If all 35 berths are occupied for the season, the slots at the marina at the Riviera Hotel on the Corniche bring in gross revenue of $75,000 a year. Since the entire coastline is owned by the state, nearly half of this goes straight to the government for leasing the requisites amount of seafront. When another $20,000-$25,000 is deducted for staff and maintenance costs, the bottom line comes in only marginally above break even.
Yet it is viewed as contributing as much to filling the restaurants, bars, pool and sunbathing area as that other prized Riviera asset, its reputation for having more examples of bikini-clad beauty per square meter than most other places in the country.
First down the slipway
Among the first people to appreciate the sex appeal of boats were the operators of Holiday Beach nearly 20 years ago. As part of its progression and conversion from a hotel to a chalet and beach resort complex, the owners, Dog River Holiday and Tourist Center, decided to plow back part of the proceeds from selling chalets and apartments to constructing the marina. It cost LL15 million but that was in the days when the value of all those zeros added up to around $5 million. Some 75% of its capacity of 150 boats is taken up with mainly Lebanese-owned and domestically registered craft. Even so, it attracts some foreign vessels and last month (for lack of space) diverted to Aquamarina a few miles higher up the coast at Tabarja a dozen visiting sailboats that had crossed to the Eastern Mediterranean from Canada, the US, England and Belgium.
Part of the deal for boat owners is the option for an extra $350 a year of five passes into the resort. Although Holiday Beach marina charges are much lower than those further south, this sum is still a relatively insignificant item on the total bill. A ten-meter boat costs around $2,500 a year, just over half what it would cost in Joseph Khoury, Beirut or the Riviera. The rule of thumb is that moorings north of the Nahr El Kalb tunnel are much cheaper than those nearer to the capital.
Follow my leader
A decade later the Riviera followed suit and spent the same amount as Holiday Beach. Cost increases over the years ensured that the Riviera received only 25 percent as much marina for their $5 million. Its more easily accessible location – for Beirutis anyway – allows it to charge $400 a meter, almost the same rates as the much larger Beirut and Joseph Khoury marinas.
In common with most other operators, the Riviera offers free daytime mooring for visitors. In any case, whatever few dollars might be charged pale into insignificance compared with the potential spending power of a boatload of people intent on eating, drinking and enjoying themselves in the resort.
The marina, like the hotel, is owned by developer George Zakhem and his brothers and Nizar Alouf. Although there is potential for some expansion, there are no plans to do so. A bigger space may slightly increase the number of boats but the investment wouldn’t add anything extra to the current glamour quotient.
Aquamarina, another product of the post-war era, cheerfully admits that it doesn’t make a penny out of parking boats. The two-phase chalet and cabina complex was a product of wartime and was built as shells rained down in 1978 and 1984. Construction of the marina brought its own problems too, especially as the choice of following the line of a natural sheltered site incorporated sea depths of up to 15 meters, several times the figure actually needed. Dealing with such deep water increased the costs of developing the adjacent jetties. And in the realm of ‘it’s a small world’ whatever the depth, Aquamarina was built by Joseph Khoury, the contractor who owns the marina that bears his name in Dbayeh.
In at the launch
Seeing the established examples and success as a marketing tool for their companion resorts, the Mővenpick Hotel and Resort in Raouche had the complex designed to include a marina from the outset. When it opened in July 2002, it did, however, reintroduce a different concept of how it gets an income from the moorings. They are sold on 99-year leases rather than being made subject to yearly rental charges. The smallest, 2.5 meters wide by nine meters costs $32,000. The largest is five meters by 20 meters with a price tag of $105,000. In addition, maintenance charges starting at $800 a year for smaller boats cover electricity and water charges, as well as security and assistance from the marina staff in mooring. Before that, Aquamarina had been marketing “berths for life” and succeeded in ensuring that around 60 percent of the marina occupants also have either a chalet or a cabina in the complex.
Up to last month, 85 of Movenpick’s 140 berths have been sold, with the vast majority being bought by clients who similarly have also taken a chalet or a cabina in the resort. Ownership of berths adds to the place’s exclusivity but it also puts restrictions on allowing external boats to visit the marina. They are allowed in only by invitation of an existing owner and do not gain access to the resorts facilities. At Aquamarina, visitors are welcome to moor during the daytime and gain access to dining facilities but like Movenpick the pool and the other facilities are off limits.
Unusually the marina entrance faces south, which makes a part of the anchorage more vulnerable to the ravages of winter weather from the prevailing southwesterly winds. It does, however, have the advantage of keeping the approaching boats well away from the beach area on the opposite side of the complex. Even so, the operators say the innermost sheltered areas are suitable for boats to be left there in the winter.
Although most marinas of all sizes advertise themselves as all-year-round, the unpredictability of winter storms, especially in the past two years, has reduced the only winter moorages confidently deemed safe to Beirut Marina, where $150 million was spent on sea defenses, and Joseph Khoury at Dbayeh.
License to spend money
Winter or summer, the bottom line for the owners is that buying a boat is the same as acquiring a license to spend money. Calculating the first expense – the cost of a berth – does not depend solely on the boat’s length. There has been a military debate for years about the respective merits of having short, fat warships or long thin ones, with each having staunch defenders. In leisure boating that doesn’t apply. Although it doesn’t take a technical expert to figure out that as boat get longer they also get wider, marinas have their own methods of calculating how much space in total a boat occupies. At Aquamarina, it’s the beam, or width of a vessel, that determines the cost of moorage, not the length.
At the downtown marina, every boat over 10 meters long is charged on the number of square meters the vessel occupies. This is calculated by multiplying the length by the width at its widest point. Thus everything afloat is assumed to be a rectangle.
Joseph Khoury operates a slightly different system. Its price range for mooring runs from $350 per meter of length for small boats all the way up to $750 for the super-yachts. In round terms that translates into around $4,000 (including VAT) per annum for a ten meter boat and just under $50,000 for a 65-meter ocean going vessel.
Getting big and bigger
It is those big, big boats that are increasingly concentrating the mind at both Beirut and Joseph Khoury, the only two marinas in the country capable of handling them. Beirut has completely recast its internal mooring layout to cater for these big boats and the guys at Dbayeh, while already capable of receiving vessels up to 90 meters, also have contingency plans for redesigning their interior. Removal of some of the wooden pontoons currently dedicated for smaller craft would increase the capacity for vessels of 25m-30m. Beirut’s capacity was more than halved as far as the number of vessels was concerned, although the surface area covered by boat remained the same.
Still, many mariners take convincing. At Beirut, the Greek captain of a Saudi-owned 65-meter boat was lying outside the marina entrance, determined not to enter because he said there was not enough room. No amount of persuasion from marina officials could convince him. Eventually the owner ordered him to dock the boat despite his reservations. It has since returned more than a dozen times and on one remarkable occasion Beirut hosted four boats of this size at the same time.
The millions flow in
The principle of allying a land home to a mooring spot is operated at Beirut, Holiday Beach and Movenpick and, when the land is developed, will also underpin the Joseph Khoury strategy. Downtown many of the berths have been leased by Gulf Arabs who are awaiting delivery of a luxury apartment in one of the blocks currently under construction facing the marina. Some of them do not even have boats yet but want to make sure they have somewhere to put it.
Joseph Khoury denies access to the public because it wants to maintain the exclusivity of the place for the day when it, too, will be able to offer luxury homes overlooking a guaranteed berth. The management in Dbayeh sees the market for marina use expanding by around 70 percent in the next five years but also reckon that there is neither need nor room for further expansion to accommodate the increased numbers. Current slack will absorb foreseeable demand.
The same view comes from Beirut. A second marina, around half the size of the current 65,000 square meters, is scheduled to be built irrespective of demand. It is part of the overall Master Plan. However, the current operators foresee a demand anyway.
Both marina operators base this optimism on the premise of stability in both Lebanon and the region, as well as the continued switch in spending of Arab wealth from the West. The aftermath of Arab unpopularity in the West following the attacks of September 11, 2001, continues to bring their money back to the region.
Conclusion
The big money that comes along with the big boats is well on course for Lebanon – provided, as ever, there are no major political or security problems. The current slack represented by Joseph Khoury’s 30 percent occupancy and Solidere’s impending new marina will meet foreseeable demand at the high end. Lesser mortals with lesser boats are also well catered for on the northern half of the coast. The South has no marinas and, with ever-possible interference in all forms of shipping by the Israeli Navy, is unlikely to have any time soon. The South also, because of occupation among other things, is still underdeveloped. The emergence of beach resorts in the past few years may well be followed by adjoining hotels and other facilities, such as ‘glamour’ small marinas along the lines of the one that contributes to the success of the Riviera in Beirut. But like every other idea for enhancing the country’s resources and prosperity, it depends on the ‘situation’ being as calm as the sea.
Formality footnote
There may be a good reason why some sizeable floating gin palaces around these shores carry exotic ports of registration far away from Lebanon. If, as Shakespeare maintained, the evil that men do lives after them, the Lebanese have retained a wartime reputation for using boats to smuggle weapons, drugs and people. According to experts in Beirut, this almost guarantees extra checks and time-consuming searches in foreign ports.
However, entering Lebanon with a boat registered abroad is not without its problems. Having completed the formalities to enter, say, Beirut, a vessel must undergo the whole process of leaving the country and re-entering, even if its passengers wants only to go off for lunch in Batroun.
Sizing up an economic sector where few reliable statistics are available is never an easy task. When it comes to real estate though, it can be an even more frustrating endeavour given that the force of rumour and speculation often drowns out the relative paucity of regularly reported, objective indicators.
“Booming Properties,” “Lebanese Real Estate on the Verge of a Boom” … “Boom Time Underway” – these are the headlines that crown the public consciousness, even after the “operational pause” of the post-February 14 period.
Indeed, over the past year, the local press has seen so much “Boom,” that one could easily get the impression that the real estate market as a whole is, well, booming across the entire country.
While this may be true for luxury residential and tourism projects, when it comes to office space in Beirut, the reality on the ground is far removed from the over-generalized, over-hyped headlines: Office space has been, and still is, the soft underbelly, the (literally) half-empty core of Beirut’s so-called real estate revival.
And it is this fact, above several other competing indicators, which provides yet another powerful indicator of Lebanon’s deeply rooted economic woes.
“The residential market bottomed out two years ago and is in a phase of expansion while the retail sector is at the latter end of bottoming out,” explained Karim Salameh, who heads up Lebanon’s Eagle One real estate investment fund that was the first, and still only such fund to invest in performing (i.e. already tenanted) office space.
“But the commercial real estate market in Lebanon, from the office market perspective, is still bottoming out due to an oversupply and the lack of vibrant economic activity that would fill that supply fast enough.”
According to Raja Makarem, managing partner for the real estate advisor group RAMCO, Salameh’s overall estimation is right on target.
“There is a great demand for residential projects but we do not see the same demand for office space…Really there is very little demand at the time being.”
According to Makarem, even as prices have dropped precipitously since Solidere began offering its large stock of centrally located, modern office space, demand has failed to pick up mainly because of that all too familiar Lebanese bogeyman: Politics.
“You did have a large amount of office space that came onto the market in Solidere, so prices dropped…from $450 per meter squared to sometimes as low as $150 in some of the top locations. But it is the political climate of the country that has prevented international companies from coming here and taking up the office space that does exists. That’s the big problem”
Of course, as with many aspects of Lebanon’s political-economy, such is not the case in other competing environs of the Middle East.
In fact, in mid-June, Reem Al Mahmood, the general manager of the Dubai International Financial Center (DIFC), told the El Etihad newspaper that the Center had already inked tenancy deals with 41 multi-national financial firms, including heavyweights like Bear Sterns, Merrill Lynch, Standard Chartered Bank, Credit Suisse and Barclays Capital.
More to the point: Fifty companies were awaiting licenses to take up space in the 4 million square feet development, (of which 65% is greenery)
While there are the obvious bright spots in Lebanon mainly centered around Solidere – more than 35 banks, 500 firms and a number of notable multinational companies are already located in the BCD – oft-quoted surveys that suggest Beirut is at the head of the high-end office market in the region fail to really capture the underlying dynamic that characterizes the sector as whole in the city.
“In absolute terms,” explained Michael Dunn of Michael Dunn & Co, “We do not have expensive office space. In London, [office] rents cost approximately $1,200 per meter squared per annum compared to Beirut which is at $250.
“Dubai,” he continued, “is almost double the cost of Beirut and I know that Kuwait has recently seen some big growth.”
Of course, even the $250 figure, which does not include the overall occupancy costs of taxes etc, is deceiving since that figure mostly applies to the best Solidere buildings like An Nahar and Atrium and the few other high-end office developments, like Gefinor in Hamra, that have relatively modern infrastructure (mainly parking, a large floor plate, fire control and telecommunications) to attract and retain major anchor tenants.
“In the old commercial centers of Beirut, in Sin e Fil and Hamra for example,” said Makarem, “where you saw quite a bit of migration when Solidere came with its new stock, most of this old stock is now rented as it was before the War.
“This means,” he added pointedly, “that rents are sometimes as low as $20-30 dollars per meter squared per year.
Not surprisingly under the circumstances, few owners see fit to refurbish their old office stock.
And because pre-1992 leases are set in depreciated Lebanese Pounds, many tenants of office space, even if their company is no longer operational, decide to hold onto their leases, paying, in effect, peanuts each year for tenancy rights.
The vicious cycle means that although occupancy rates may be high in Beirut, the true occupancy rate, as measured by tenanted space and not just rented space, is exerting a significant, market-distorting drag on the economy.
“I can assure you that nothing in Lebanon is 90 percent occupied… An [occupancy] figure more like 55 or 60 percent may, may seem appropriate,” said Salahme.
“Some owners of empty buildings are non-Lebanese who are ill advised,” he explained. “But the main problem is that some tenants, in Hamra for example, date back to the 1960s. Because of the structure of the contracts, these buildings are not attractive investments – the yield is low and it is not possible to evict current tenants.”
On top of all this, some building owners also intentionally keep buildings unoccupied in the hopes of holding out for better rents down the line.
Although, on its face, such a strategy might seem ill-advised, according to Salameh there is generally little rush to enter an already depressed marketplace because many owners are free from the pressures of debt financing arrangements
“Ownership of real estate was not traditionally debt financed so there is little pressure by banks and others to rent out a building.
“You know the American adage,” he added, “that time is money? Well that’s not true here. Its an inefficient marketplace that is also not transparent insofar as sharing information about rentals or having mechanisms for trading properties.”
For Diab Chidiac, fund manager at Middle East Capital Group, all of these complications amount to a clear strategic imperative: Steer clear of investing in office space.
“We are staying out of the office market for now… We just don’t see that there is a real demand because of the slowdown in the economy over the last ten years really.
“There is demand in Solidere,” he added, noting the estimated 350,000 plus square meters of office space already built by the company and the 1.58 million square meters of total office space that will eventually be built out across the BCD. “But it is for a limited amount of modern office space; the demand is just not big enough to allow you to do a fund.”
And indeed, even as bank BEMO announces an HQ projects downtown, and prime buildings like Atrium and Starco near 100 percent capacity, the reality is that across the whole of Solidere, the office occupancy rate stands at just 65 percent.
Although, according to Makarem, that figure has risen by about five percent since the last time his company conducted a survey almost a year and a half ago, the old list of major unoccupied sites hasn’t changed significantly in the intervening months. In fact, of the top 25 largest unoccupied buildings in the BCD, at least 18 still remain unoccupied, representing almost 43,000 square meters of space.
So even though many observers were pleasantly surprised when the initial occupancy rate of almost 60 percent in Solidere was first published, looking back now the figure seems to stand as a sobering reminder of just how far the sector, and Lebanon as whole, must go in order to rebuild the country’s economy.
“Multinationals are just not rushing to Beirut,” said one prominent local economist who asked to remain anonymous.
“And, as we all know, we don’t have a modern set of laws and practices governing the sector… we don’t even have a modern set of indicators which are vital for a functioning market. Add to that the significant economic problems that exist here and you can understand why the office market is underperforming.”
A most fundamental characteristic of speculative gain is that it goes away as smoothly as it comes. So whenever it’s very easy to make money, one must be reconciled to the possibility that it can be lost without much effort or notice. Nowhere is this truer today than in the Gulf stock markets. For just over two years, while most global markets have been mired in single digit action and the tensions in Iraq continued, very few would have bet on a massive rise in the fairly underdeveloped markets of the Gulf. Yet, this is exactly what has occurred. The stock markets of the region have witnessed staggering rises, bringing with them a whole slew of new issues. What fueled the rise and what lies ahead?
The simple truth about Gulf stock markets is that oil has gone from below $10 per barrel in the last couple of years of the 20th century to near $60 per barrel today. This has created a tidal wave of petrodollar-driven liquidity in the coffers of Gulf governments. A recent study by Saudi Arabian Monetary Agency (SAMA) reinforces this notion. The premise of the report shows how domestic spending of “high-powered money” (net domestic expenditure from oil revenues) can create liquidity several times its size (the multiplier effect), demonstrating that, in Saudi Arabia, each new oil riyal of government spending has the power to create up to SAR 16.6, or over sixteen times in additional liquidity. Between 2002 and 2004, net government spending totaled approximately SAR 575 billion, which have had the potential to generate new liquidity up to SAR 10 trillion.
When analyzing this precept, it becomes more comprehendible why GCC markets have spearheaded the world in terms of market growth. Liquidity injected into value creating businesses will raise values in the long term but in the short term inflates and accentuates stock prices.
This scenario has been replayed in the UAE, Saudi, and Qatar. But what stands to be the determinant of how market value will adjust lies in the sustainability of earnings growth, which is set to be put to test in the third and forth quarters of 2005.
As the post 9/11 environment dictated less investments abroad and more cash staying in the region, investors, both sophisticates and neophytes, rushed into stocks. Institutions were only happy to oblige by floating a staggering number of companies. It would be too complex to review the suitability of all Initial Public Offerings (IPOs), suffice it to say that not all the companies that went public would have passed the scrutiny in a more mature market, such as Europe.
The move up in the Gulf IPOs started to resemble, in many aspects the Nasdaq mania of the year 2000, prior to the crash. Shares would double and even triple in the days following the float, and soon, everyone wanted in on the action, so much so that central banks in the region have had to step up oversight, as many financial institutions began lending to speculators, often with reckless abandon. During the float of a large telecom company for instance, it is said that a couple of mega banks lent billions to its most exclusive clients so they could “play”. This environment has led to overvalued markets, trading at well above their acceptable valuation parameters, and pricing themselves in what will eventually prove to be unrealistically ambitious expectations.
These expectations were further boosted by solid earnings growth by listed companies of over 40% in 2004 with even more robust figures for the first quarter of 2005. Still, a few shady outfits which have found their way on to the public market are trading at 500 times actual earnings. The UAE market, for instance, has gained 86 per cent so far this year. There are, however, question marks over its sustainability and it has been particularly exacerbated by violations in the primary market. Market observers have described the extent of over subscriptions in the local IPOs as “obscene,” prompting the Central Bank to act with unprecedented toughness.
In the case of the record-breaking Aabar petroleum IPO, the total cost per share was Dh5, out of which only one dirham went to the issuing company while Dh4 each was pocketed by the banks that financed the stock applications. This is quite unnatural by any standards. Although markets are generally irrational, they do have checks and balances that ultimately correct blatantly unnatural tendencies. It seems the time has come for these resistance mechanisms to come into play. There are already signs that the party in the stock market may be winding up. A four-day correction on the UAE stock exchange last month wiped off 13 per cent of the market value in one stretch.
There is almost too much public excitement and participation, and this creates a bubble environment. Many newcomers to the “game” will still crow that there is easy money to be made in the area. This attitude is a sure sign that at least some Gulf stock markets are entering bubble zone. There simply isn’t enough institutional money in the form of pension funds and the like, as is the case in developed markets, to sustain them in the medium-to-long term.
The Gulf markets have two major problems in my opinion. One is that they are too dependent on one commodity: oil. The other is that the fundamentals, especially in Saudi, are well behind the market euphoria. Whereas disposable incomes, on aggregate, are rising in the UAE, they are near $25,000/capita, they are stagnant in other countries. Saudi, in part due to Saddam, has seen its per capita income drop to $10,000. So there is not, as in Europe and Asia a well-developed Equity Culture, it is mainly, for now a speculative arena.
The growth in the Gulf is also too closely tied to oil, and while Saudi Arabia has made great progress in solidifying its non-oil activity, it is still mainly a one horse race. This poses great risks if the global economy, especially China decelerates, and oil crashes back into the $25-30 per barrel range, as stock markets will suffer greatly. The two most obvious factors in play in Gulf markets today, and the two most regularly cited as being the main driving forces behind the three-year rally in stock prices, are high oil prices, and low interest rates. The prolonged incidence of both factors has had a magnified effect on equity markets of the region, and is currently most pronounced in the markets of the UAE and Saudi Arabia.
The two seem to have priced in the permanence of both factors. A marked reversal of either one or both those factors would almost definitely have an adverse effect on the markets. In fact, interest rates today are no longer abnormally low, as they have tripled from their all time lows, and are higher today than their pre-9/11 levels. They are generally expected to gain a further percentage point by current year-end. This fact has yet to be reflected in the two markets. Oil prices on the other remain buoyant, although they have recently come down from their peak in April. The direction that oil prices may take from here is harder to predict, and analysts are mixed in their expectations. If the more pessimistic of them are proven right, then a steep correction may prove inevitable. The medium-term direction of interest rates is a foregone conclusion. Keep your eyes on oil.
All in all, the easy money has been made, as one can see in thee accompanying tables. Although the gradual development of capital markets will bring great benefits to the entire GCC area, they are currently in boogie-wonderland in terms of both valuation and excess public enthusiasm with a recent issue – are you sitting down? – 800 times over subscribed. There is too much money flowing into too few shares. With Kuwait’s infamous Souk Al Manakh crash and its consequences still not wiped off memory, investors can hardly be at ease with the current exuberance in the market. Watch out.
Returns: Year to Date, and April 2005 alone.
Saudi Arabia alone looks like mania waiting to deflate…
With Lebanon’s parliamentary elections having recently provoked so much controversy for reasons of sectarian representation, little attention has been devoted to how the new Parliament might address urgent economic issues, security, corruption, as well as long-dormant issues directly or indirectly related to development, such as administrative decentralization and a new election law. A preliminary assessment suggests that what might ensue is a mixed bag in terms of economic confidence.
There is a general consensus that the 2000 electoral law will recreate the large parliamentary blocs that existed in the previous Parliament, and will in fact go beyond that in favor, specifically, of the blocs headed by Saadeddine Hariri and Hizbullah, which are bound to expand . Indeed, pro-Hariri parliamentarians will very likely form the largest single group in the legislature, and estimates are that once combined with its allies in the Jumblatt bloc, both will control around 80-90 seats. If nothing else, this will, right from the start, give Hariri and his allies considerable control over the formulation and passage by Parliament of economic policy.
The kingdom comes
There will also be expectations that the Saadeddine Hariri “project”, which Saudi Arabia’s Crown Prince Abdullah was so keen to set afloat in May, will be, indeed must be, accompanied by financial aid, perhaps most spectacularly in the form of cash placements at the Lebanese central bank, as the Saudis previously did. Indeed, beyond politics, Abdullah’s support for Hariri has a pragmatic rationale: to protect the substantial Saudi investments in Lebanon.
However, there are two potential unknowns in such a scenario: the choice of the future prime minister and the fate of President Emile Lahoud. According to people in the Hariri camp, Saadeddine Hariri will sit out the next term as prime minister. One would be entitled to believe this when actually seeing it, since it would look odd indeed for Hariri to be a mere MP while one of his functionaries is the third-highest official in the land, but it does suggest that Najib Mikati may return to office. Mikati may be willing to toe the Hariri line on economic policy. However, the power of office changes people, and how Mikati would behave, if he remains at his post, once the legitimacy of a second term is bestowed on him is uncertain.
A more ominous obstacle will be Lahoud. While the removal of the president is high on the agenda of Saadeddine Hariri and Walid Jumblatt, and perhaps looks increasingly certain by the day, the constitutional procedure allowing this, according to lawyer Chibli Mallat, “is complicated and gives the president the means to delay implementation.” Moreover, with Maronite Patriarch Nasrallah Sfeir uneager, for the moment at least, to sanction Lahoud’s removal, one could conceivably see a variation on the theme existing last year as Lahoud and Rafik Hariri sparred: that of a president who, thanks to his partial control of the Cabinet, turns economic considerations into implements to help him fight for political survival.
Making matters particularly worrisome, this tension between Lahoud on the one hand, and his parliamentary opponents on the other, has the potential to become sectarian, so that Lebanon’s obvious economic priorities vanish into a giant vat of communal disgruntlement. While this is a worst-case scenario, and may well be avoided if some kind of consensus is reached on the president’s future, Lahoud will fight tooth and nail, and that includes using sectarian tensions in his favor, to ensure that he’s not ousted from Baabda.
The party isn’t over
In parallel, economic confidence will be linked to what happens to Hizbullah. The new election law virtually ensures that the party will expand its bloc in Parliament, perhaps to 15 members, giving it substantial leverage over key legislative issues. This and the legitimacy of an electoral victory will steel Hizbullah for an anticipated confrontation with the United Nations.
However, if Hizbullah continues to pursue military operations in the south, investor confidence that previously anticipated a change in what had been the old Syrian order, will take a hit. In order to counter this, Hizbullah will almost certainly seek to maintain contacts with all political groups in Lebanon, to protect itself behind a wall of national consensus. Among the key electoral alliances the party formed was that with the Hariri bloc, and one thing to watch for is whether this will have an impact on how legislation related to economic reform will pass through Parliament. This might prove tough for a party that, in last month’s Executive, went on record as saying it had no serious economic vision.
There are potentially serious contradictions between the economic reform package favored by Rafik Hariri (and presumably by his son) and advocated by international financial institutions – the privatization of public utilities, the layoff of redundant civil servants, cuts in government spending, and the rationalization of revenue collection – and the interests of Hizbullah’s relatively poor electorate, as well as that of its allied Amal movement. How both sides address this in the context of a new government, not to mention a new Parliament, over which it is probable a new speaker will preside (pro-Hariri parliamentarians Mohsen Dalloul and Bassem al-Sabaa are touted as favorites), can only be guessed at this stage. But Hizbullah will have to juggle its desire to build a national consensus around the party with defense of its supporters in the face of far-reaching economic change.
If Lebanon’s poor are anxious about the tightening of economic policy, most Lebanese, poor and rich, are no less disturbed by what the 2000 law will mean for corruption in the future. The clear tendency is to assume that much as certain members of the political elite – whom Michel Aoun has called the “conservatives”, seeking to conserve the system of spoils existing under Syrian tutelage – made a deal on passing the election law, so too will they divvy up the national pie once the voting is over.
Certainly, there is reason to believe that Parliament will prove as ineffective an oversight body as it was during the past 13 years since the 1992 elections. After all, the large blocs, perhaps with the arguable exception of Hizbullah, have been too involved in financial deal-making in the last decade and more to arouse much public confidence. However, three things may change this ambient mood: first, with Syria gone, the previous levels of corruption will almost certainly go down, though whether this means to vaguely “desirable” levels is another question altogether. Second, the Lebanese public, particularly youths, are increasingly impatient with what they perceive as the pervasive dishonesty of the political class. This will have political repercussions in the future, as new political organizations form and new elections loom.
Third, and perhaps most significant today, international financial organizations, particularly the World Bank, have Lebanon squarely on their radar screens, so that abuse, or certain levels of abuse, will necessarily be more difficult to conceal. Much the same goes for the United States, which has promised aid to Lebanon and considers the country a showpiece for peaceful transformation in the Middle East, but which will also be very keen to see how political and economic changes affect such ambitions. If corruption destabilizes the political system, Washington, but also the European Union, will make their displeasure known.
So what can we expect? A Hariri victory should not harm investor confidence in the immediate term.However, this optimism could be fleeting if the new government fails to rapidly introduce needed reform, and if the divisions created by the 2000 law are not bridged very quickly. The probable harmony in Parliament could be used to advance a reform program urgently, but the potential contradictions inside the leading parliamentary blocs, not to mention the fact that Parliament will very likely turn its attention to deciding what happens to Emile Lahoud, means that there will almost surely be obstacles, and a delay, in taking far-reaching economic measures.
For the past three years, especially since the collapse of US tech mania, the world has benefited from a massive credit boom, brought about by the central banks’ easy money policy. While the US Fed has raised interest rates to double what they were a couple of years ago, it is still maintaining low (inflation-adjusted) real interest rates. So low, that in fact, rates on the US Dollar are now at zero.
This environment, coupled with ten years of easy money policy in Japan, has allowed for a new kind of bubble to develop, one which has enabled low-quality corporate and sovereign issuers to have unprecedented access to the credit markets. This liquidity orgy has, among other things, allowed the equity markets to stay afloat, although they appeared to peak in early May, when two major issuers, Ford and GM were downgraded to Junk.
In the two previous years, the spread had been generously dubbed “risk free” and low-quality issuers, such as Lebanon or Turkey, had narrowed to unsustainable levels. As US long rates bottom out and begin to head higher, the implications, especially for emerging economies, will be devastating.
Trouble starts with bonds
The trouble will begin (if it has not done so already) where the good times began: in the US corporate bond market, which until recently had, on the surface, appeared calm. Profits had reached near-record levels, economic growth was strong, implied default rates were low and global demand for corporate bonds seemed insatiable. Over the past several years, corporate investors could hardly go wrong, and spreads have tightened virtually across the board. But risks lurked just under the surface. Today’s more turbulent waters have altered the opportunity and risk in the corporate bond market, making it, according to PIMCO, the worlds largest bond manager, an “adult swim only” zone.
In the past five years, there has been massive growth in credit derivatives, collateralized debt obligations (CDO) and collateralized loan obligations (CLO). The global market of credit default swaps (CDS) has grown nearly five-fold in four years and is expected to be up another 50% by the end of 2006.
All this has allowed corporate investors to gain significant exposure to the credit markets. The use of credit derivatives index (CDX) products, such as CDX IG (125 names) and CDX HVOL (30 names), has given investors greater exposure to credit risk in the corporate bond market through a simple, liquid vehicle, while the diversification of the CDX index products has allowed certain investors to feel more comfortable with credit risk.
The increased use of the CDO market has been driven by the unappetizing low, short-term global interest rates. CDOs could carve out tailored risk exposures, giving corporate investors the ability to take leveraged exposure to the credit markets through junior tranches. As spreads tightened, CDO investors took increasingly more risk in these structured products, comforted by credit ratings based on historical default rates and diversity scores. This trend in leveraged loans followed a similar trend to credit derivatives and CDOs. CLOs and loan issuance have risen due to strong demand for credit risk. This demand was especially robust from European and U.S. banks as well as hedge funds due to low, real short-term interest rates with few alternatives. The tightening in LIBOR spreads for bank paper and the decrease of protective covenants attested to this demand. However the result of the increased use of CDX index products, CDOs and CLOs, means more investors with limited knowledge of the bottom-up analysis needed for picking companies, bonds and structures, find themselves out of their depth. How big is this risk? The $131 billion of structured credit risk in CDO deals done in 2004 actually translates into $350 billion of credit risk on a delta-adjusted basis. As such, structured credit investors in junior tranches of CDOs have significant leveraged exposure to spread widening. In the corporate bond market, single-name issuer CDS spreads tend to widen dramatically as investors and dealers attempt to delta-hedge their credit risk exposure, amplifying the volatility of the market. The problem is that many of these leveraged instruments and structures are also new to the market and as such, large waves could materialize in the future as the underlying models investors use to hedge and dealers use to construct these leveraged credit products have yet to be properly tested in a storm. Of course, these waves and the resulting turbulence could result in opportunities for investors to pick up cheap credit exposure, via the CDS market, in storm-battered solid credits.
The significant change in both the growth and composition of the credit markets has caught the attention of policy makers. Chairman Greenspan, in a May 5, 2005, speech titled Risk Transfer and Financial Stability, noted, “The rapid proliferation of derivatives products inevitably means that some will not have been adequately tested by market stress.” He further commented that “a sudden widening of credit spreads could result in unanticipated losses to investors in some of the newer, more complex structured credit products, and those investors could include some leveraged hedge funds.”
Buired in the hedges
Hedge funds, while not new, have created new conditions in the corporate bond market due to their massive size and frequent trading. They attracted a record $27.4 billion in the first quarter of 2005. In 1990, there were 790 hedge funds with $39 billion in assets under management. Today, there are 7,900 funds with over $1 trillion in assets under management.
Interestingly, hedge funds are the largest users of credit derivatives and CDS. Several of the largest Wall Street firms estimate that 50-60% of their current trading volume in CDS is with hedge funds. These leveraged funds use CDX index products to gain a diversified exposure to credit, thus earning positive carry.
Hedge funds are amplifying the volatility in both the equity and CDX index options and corporate bond market, as these investors rush into and out of the water. In addition, low barriers to entry for the CDX index products have resulted in indiscriminate buying with little relative value thought or bottom-up credit research. As the markets turn, indiscriminate buyers turn quickly to sellers, creating choppy seas but relative value opportunities for those investors anchored by longer-term, top-down macro and bottom-up credit skills. While there are risks under the surface of the ocean, experienced sailors can navigate these waters and find selective treasure. In addition to hedge funds and other investors searching for credit exposure, Wall Street dealers have increased their presence in the market by using CDX index and single-name CDS products to hedge their large inventory of corporate bonds. Over the past several years, Wall Street has been in a “risk taking” mode as credit spread tightening has led to strong profits. As such, dealer inventories have risen sharply.
So far, Wall Street hasn’t been hit with many losses because credit spreads and interest rates have remained relatively low. However, this past month’s widening in credit spreads likely caught some dealers off guard and with too much inventory. As such, corporate bond traders have been told by their bosses and risk managers to reduce credit risk. As traders buy protection to hedge large inventories, credit spreads should widen and CDX index products and CDS on single-name issuers may begin to trade cheap versus intrinsic value. The dealers and hedge funds prefer to use CDX index products to hedge credit exposure due to their liquidity. Due to the large size of current dealer corporate bond inventories, credit spreads will likely be volatile over the next few months as more repositioning takes place. In addition, high yield investors are starting to sell high yield bonds to make room for any potential investment grade “fallen angels” which may be coming their way. This has likely left Wall Street with too many swimmers in the ocean.
So yes, leveraged credit investors and credit derivatives have made waters choppier and potentially more dangerous. However, it is not only what lurks in the water that makes the seas risky for swimming. Changing conditions above the surface can make the seas difficult to maneuver in too. Corporate America has had the wind at its back, in the form of low borrowing rates and a consumer-driven economic expansion, but those tailwinds are turning steadily into headwinds and corporate bond sailors should be prepared to chart a new course.
The recent good health of the corporate sector has been largely influenced by low-interest rates, rising consumer leverage and mortgage equity withdrawals, and a steep yield curve. For the last several years, tax cuts and low short-term rates have provided a huge tailwind for Corporate America. As a result of this record stimulus, profit margins are at 35-year highs.
The fragility of the corporate bond market will no doubt begin to seriously damage Emerging Market bond environment, including the Middle East. Favorable conditions in risky emerging market bonds may have already ended making managing excess deficits an even more precarious exercise. Central bankers and policy makers in the region should take heed. The easy money in bonds is off the table.