Comment

The road to Damascus

by Yasser Akkaoui
written by Yasser Akkaoui

There are dark and worrying signals coming from Damascus. This month we have seen trucks stranded at the Syrian border under the pretence of security measures. We have heard of Lebanese nationals being expelled from Syria and there is even talk of Damascus issuing the order for a mass pullout of its workforce in Lebanon.

We have been bullied and shut out before, notably in the period just after independence, and in 1973 when the army tried to defend Lebanese sovereignty in the face of intolerable Palestinian guerilla activity. It is clear now that economic punishment is policy.

We have come to expect our public servants to be less than dynamic, but the sloth demonstrated in responding to the current crisis gives cause for concern. We need a leader, a genuine statesman, who will say: “Enough! We are a free nation. We can depend on ourselves and nobody or no country is indispensable.”

Any such decision would be a demonstration of commitment to our newfound autonomy. It will be expensive, but a plan to ensure that Lebanese products do not spend one more night in the open would be a priceless gesture of national solidarity. In the meantime, Lebanese industrialists are already finding ways around the blockade.

But what of Damascus’ twin threat to expel our citizens and withdraw its own nationals? The Lebanese that work in Syria are both skilled experts and investors, vital to the development of the Syrian economy. (We must remember that this is a country that has already crowded out its homegrown talent.) Crucially they are net contributors. They do not go there to earn higher salaries or milk a system.

And yet despite the border blockade, despite the expulsions, we still welcome and hire our Syrian brothers. This is the Lebanese way. To withdraw their citizens from Lebanon in a misguided attempt to bring our economy to a halt will not hurt the Lebanese. Our free movement of labor policy would soon fill any vacuum. It will however hurt the Syrian economy to which Lebanon contributes roughly one third of the Syrian salary mass.

Damascus is not shutting us out, they are locking themselves in.
 

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Real Estate

The appeal of ashrafieh

by Peter Grimsditch
written by Peter Grimsditch

Ashrafieh was never meant to be this crowded. Its six-meter wide streets gave it a village appearance as it gazed sleepily on the eastern edge of the original walled city of Beirut – roughly what is now the downtown area. Even 30 years ago land was plentiful and the roads were used to get to places rather than as temporary parking lots in the district’s nightmare traffic jams.

But the rapid influx of people during the war, especially from Spears and Zarif, began a process of transformation of the essential characteristics of the area. Where land was once available for the rapid construction of concrete blocks of flats as architecturally uneasy neighbors to the traditional villas, now the villas themselves are increasingly under threat to satisfy the seemingly insatiable demand.

The modern snob value of Ashrafieh also traces its origins back to the wartime era when it became a matter of defiant pride to repair within 24 hours as much shell damage as possible. From this developed a reputation for cleanliness and security, as well as the all-important attraction of being the innovator in the 1990s for restaurants and nightspots.

Ironically, its location on the edge of downtown increases its allure as a method of avoiding the ill-tempered morning commute along the coastal highway. Maybe traffic jams in narrow streets are quainter than those on four-lane highways.

Like the curate’s egg, it’s good in parts

Real estate consultant Michael Dunn, chairman of Michael Dunn & Co., summed it up. “Part of Ashrafieh is very much wanted and other bits less so,” he said. In the prime areas, he listed the advantages as proximity to the town center, a smart area and a good address, snob value, a new shopping center and restaurants.

“Obviously the problem on the east side of town is the appearance of the port and that is what prevents Ashrafieh from having a high-priced residential seafront area like Manara,” Dunn added.

According to the real estate agent Coldwell Banker, there are two main categories of potential buyers in the area. The first are young, local Lebanese with jobs in Beirut, the classic “dinks” – or Double Income No Kids. Their targets are medium-sized apartments, preferably with a parking space and priced at under $200,000. Never let it be said that the young lack idealism.

Coldwell Banker says demand for this tier of property has been steadily increasing in the past two years while the supply remains, at euphemistic best, “limited.” Since even idealism has its limits, dinks are increasingly turning to alternative areas that still cut down commuting time. For this reason Hazmieh is growing in popularity where homebuyers can get the same space for less or even more space for less money than in Ashrafieh. And the highway from Hazmieh speeds up most of the drive into town … until it reaches the edge of Ashrafieh.

Seeking comfort in the “Golden Triangle”

The second main category of potential buyers identified by Coldwell Banker is a mix of local wealthy Lebanese and Lebanese expatriates returning from Europe and other Western countries. These home-seekers are on the lookout for 300m2 apartments starting at around $300,000, specifically inside the “Golden Triangle” that connects Tabaris, Sodeco and Sassine, such as Lebanon Street, Furn Al Hayek, and Abdel Wahab El Inglizi.

Even that increased budget is modest when compared with some of the prices being asked. New apartments in the Park Hill project at Sassine, albeit somewhat larger at 400m2 to 600m2, are being sold for between $2,000m2 and $3,000m2.

“The top areas are very bourgeois and are considered very safe,” said Fady Malha, a lawyer who has offices in Monnot and who also lives on the edge of Ashrafieh. “The road from Sassine to Sodeco and the Sursock areas are the most expensive areas, especially on the same side of the road as the Hotel Gabriel. Apartments of 400 meters sell for more than a million dollars. Tabaris is slightly cheaper at around $2,000 a meter.”

According to Dunn, prices have increased by at least 50% over the past five years. “Before 2000, the top price for existing buildings was around $1,200 a meter,” he said. “I expect downtown to trade at a premium to Ashrafieh for the foreseeable future but there will be growth in one area when there is growth in the other. Assuming stability [will return to] the economy and the country, it would be fair to expect values to go up by five percent a year.”

Snapping up, or demolishing old villas

A growing trend is to look for old houses in Gemaizeh although they are very difficult to find, said Malha. The difficulty is enhanced by the fact that Gemaizeh has a bigger percentage of old rents than Ashrafieh. Dunn said that property ownership in Ashrafieh was less hamstrung by this problem and therefore it became more tradable, and of course more valuable.

With so little vacant land available for development, another continuing trend could be to follow the pattern of Bourj Hammoud by demolishing existing buildings to replace them with bigger ones. “I think they will continue to knock down those special old villas and the less efficient buildings,” said Dunn. “It is perfectly legal unless the buildings are listed, but any long-term strategy really ought to go with the villa.”

His arguments are based more on financial considerations than pure sentiment. “To maintain the value of the whole area, its character needs to be maintained,” said Dunn. “The villas will have an even more special value in the future. If Ashrafieh becomes over-developed, it will be just another modern suburb.”

That danger is real. With modern luxury apartments mostly being sold on plan, the temptation for developers to acquire and demolish non-listed villas is intense. “Eventually there will be no place left to build in Ashrafieh,” said Coldwell Banker.

It ain’t cheap and it ain’t easy

At the other, supposedly bottom end of the buying scale, competition among buyers is fierce and prices are high for what is being offered. “There are no bargains in Ashrafieh,” said Malha. One first-time buyer started hunting with a budget of $100,000 and found nothing. “She upped her budget to $130,000 but found only property in an appalling condition,” he added. Now she has increased her limit to $150,000. “Even at that price the choice will be very limited and if she does find a place it could easily need another $50,000 to bring it up to scratch,” said Malha.

Coldwell Banker sees buildings constructed in the 1960s and 1970s and perhaps damaged during the war as more attractive to investors and developers than to individual homebuyers. The firm optimistically puts a value averaging $250m2 to $300m2 on these buildings although most experts see even the bottom end of the market as much more expensive. Dunn said there was affordable property in Gemaizeh around the steps and among the older apartment blocks in Sioufi. He put prices in the $700-$800/m2 range.

Opening its doors to all-comers

Although nominally designated as a “Christian area”, Ashrafieh has become much mixed over the past decade. “Muslims see it as a safe area where there is no question of which faction will eventually take control,” said Malha. “The area is also an obvious choice for moderate Muslims, whether Lebanese or foreign, for the lack of interference in their life.” Along with Broummana and Beit Mery, Ashrafieh is more and more on the shopping list of Gulf nationals seeking an alternative home in Lebanon, especially for the higher-priced properties.

But whether expensive or comparatively cheap, few properties remain on the market for long. “If you have the right amount of money, it’s not too difficult to find a place,” said Malha. “Ashrafieh is a fairly small area and if you want to buy you have to be quick. The cheap ones sell less quickly but they still sell well. In Jal El Dib you might wait a year to sell a property. Not in Ashrafieh.”
 

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Real Estate

Bringing Palestinians back into the workforce

by Safa Jafari
written by Safa Jafari

Employment integration: a political economic threat or a deserved right?

The recent decree issued by the minister of labor, Trad Hamadeh, allowing Palestinians born in Lebanon to work in a range of private sector jobs previously restricted to Lebanese citizens is a positive development in the provision of human rights but one which needs further research, infrastructure and regulation before it is fully implemented.

After 20 years of banning over 70 jobs to Palestinian refugees, work at around 50 unspecified manual and clerical jobs in the country is now allowed. Seventeen professions – such as medicine, engineering and law – remain banned, a ruling no doubt based on the fear of permanent settlement and a subsequent sectarian imbalance. These Palestinian refugees, the majority of whom are now the descendents of the generation that fled their homes after the creation of Israel in 1948, have, as well as being denied employment, no access to property rights or citizenship. The resulting living conditions of the 399,152 registered Palestinian refugees (56% live in 12 squalid camps) are a national disgrace and decision-makers must find an alternative arrangement.

Legal framework: international refugee law

The United Nation’s 1951 Refugee Convention asserts that “contracting states shall accord to refugees lawfully staying in their territory the most favorable treatment accorded to nationals of a foreign country in the same circumstances, as regards the right to engage in wage-earning employment.” The 1967 Protocol states that every receiving state should respect and ensure to whom it chooses to accord temporary protection: “access to employment in cases of prolonged stay.” By February 1997, 134 states had ratified either the UN Refugee Convention or the 1967 Protocol, and 126 had ratified both. However, there are still more than 50 states which have ratified neither the convention nor the protocol. Lebanon is one them.

Before pointing fingers at the state for not being an eager host to floods of incoming refugees, it is essential to understand the history of displacement and internal political affairs. The subject of Palestinian integration in the Lebanese labor market is interlinked with many other issues: the debate on disarmament of Palestinians in Lebanon; the reciprocity clause; memory of the civil war in the minds of the Lebanese; image and identity of the Palestinians; sectoral divisions of faiths in Lebanon; permanent settlement versus the right of return; naturalization and citizenship; and the Arab-Israeli conflict, to name but a few. However an argument can be made that Palestinian integration into the Lebanese labor market – if properly implemented – can be beneficial to both the Palestinians and the Lebanese.

Palestinians and employment in Lebanon:

The five main sources of income of Palestinian refugees in Lebanon are: employment with the United Nations Relief and Works Agency (UNRWA); remittances from relatives working abroad; employment in Palestinian organizations; employment in agriculture and Lebanese companies; and employment in shops and enterprises within the refugee camps. Semi-official statistics indicate that for more than 50% of Palestinian refugees in Lebanon, monthly income does not exceed $90, much below Lebanon’s poverty line. UNRWA reports a rise in Palestinian unemployment reaching 85% in some camps and refugee concentrations (a statistic that does nothing to help prevent the number of youths who take up arms). A previous influx of Syrian laborers over the past three decades (estimated at 1 million workers by the Crisis Group Middle East Report during the mid-1990s boom), has been a major reason for the prohibition of full usage of Palestinian cheap labor thus far.

Lebanese labor laws stipulate that only members of Lebanese professional associations can receive licenses in order to work in any skilled profession. Associations are created freely; however, for foreigners, they are controlled by the reciprocity clause (Ministerial Decree no. 17561 of 10 July 1962), and thus Palestinians, as stateless people, cannot form associations.

How much can the Lebanese labor market take?

Despite warnings from international agencies that Lebanese economic life could be derailed by political upheaval, the consensus is that some degree of stability is on the way. The domestic political scene has been undeniably reshaped for the better: starting from the widespread local and international condemnation of the assassination of former prime minister Rafik Hariri, the unprecedented convergence of the Lebanese on key strategic issues, the speeding-up of the implementation of the Taif Accord, the formation of a new government, the organization of parliamentary elections, and the subsequent initiation of a new era in Lebanon’s contemporary political history. All such developments restore confidence in the state’s institutions and its adjustment processes are apt to rapidly bridge the gap between actual and potential output and raise capacity utilization from its current 55% to 60% range to the normal 85% to 90% range that prevails in most strong developing economies.

Just like post-war enhancement of Lebanon’s productive apparatus and the rehabilitation of the country’s basic infrastructure helped generate an increased output capacity in the private sector, raising potential output at full employment to above US$30 billion, today’s adjustment perception and growth outlook in fact is making Arab Gulf investors and recently foreign institutional portfolio investors put Lebanon on the high priority list. Lower risk premiums driven by structural adjustment makes Lebanon more attractive when compared to peer emerging countries.

It is therefore prime time to re-boost a sector such as construction which is an important growth catalyst of the economy, but one which has slowed down in the first quarter of this year (26.1% decline in permits issued) due to lower investment and the recent out-migration of Syrian laborers. Same for industry, which was hit hard and its exports retreated by a significant 15.3% over the first quarter of 2005, amounting to US$382 million, against US$451 million over the same quarter of the previous year.

Work in these sectors is now allowed for Palestinians in Lebanon and is of high importance to the economy.

Let us not forget former examples of the contribution of Palestinians to the Lebanese economy: the Farajallah Company was the first in Lebanon to distribute newspapers and printed material; the Atallah Freij chain was first in the clothing industry; George Doumani was the first to hoist the Lebanese flag after making it to the Antarctic; Edwin Abella was the first to establish chains of supermarkets together with a famous chain of restaurants; Basem Fares was a pioneer in establishing the first insurance company; Fouad Saba and Karim Khouri founded the first auditing company; and Hanna Hawwa was the first pilot to fly a jumbo jet for Middle East Airlines.

Fast growth is now needed and indeed being facilitated, and the number of workers must be brought back to the number employed during days of economic boom. Both integration and growth have to happen side by side, as integration is needed for growth, while growth provides infrastructure needed for proper integration in the labor market.

Benefit for the Lebanese and Palestinians?

The recent labor law will help appease the dire situation of the Palestinian camps. The phenomenon of child labor will decrease when other sources of income are provided to Palestinian families, while the significant violence within the camps is predicted to drop. To effectively improve their socio-economic status through employment, however, education and skill-building is needed.

But the integration discussed here is not only beneficial to the Palestinians. The director general of UNRWA in Lebanon, Richard Cook, asserted that a healthier environment in the Palestinian camps will mean less diseases and epidemics spreading to the Lebanese as well as the Palestinians. Also, while other foreign workers send their remittances to their families abroad, Palestinians refugees with families residing in Lebanon, would spend their salaries inside Lebanon, thus contributing as consumers to the economy. With the government trying to reduce public debt which amounts to more than $35 billion (a staggering 185% of Lebanon’s gross domestic product) through VAT, Lebanon needs consumers able to afford it.

Aid collected from world monetary organizations such as the World Bank and the European Investment Bank plus lending countries and humanitarian organizations will be boosted when Lebanon is an obvious supporter of the Palestinian refugee situation. Lebanon’s treatment of Palestinian refugees is currently viewed as amounting to the abuse of human rights, by organizations such as Human Rights Watch and Amnesty International.

In addition, as tourism is a priority for the Lebanese economy, the view of the slums remains a bruise in the marvels that Lebanon has to show visitors.

Issues pending consideration:

Jobs now allowed for the Palestinians are ones that were often already performed by them illegally. What jobs will be included in the new law? How can other professions be gradually included? Dr. Mario Aoun, head of the Medical Association, stated that 200 to 300 Lebanese doctors graduate annually; there is an overload of medics and a high unemployment rate amongst them. In any case, to work in Lebanon, foreign doctors have only to pay LL500 million once. And yet, according to this law, no Palestinian doctor is able to practice in Lebanon.

A regulation of jobs will surely guarantee rights of the employee and the employer. It is unclear however, whether social security and other benefits will be provided to Palestinian laborers. If they are provided, this entails a cost to the employing sector; if they are not provided, this is a sure loss to the Lebanese employees (assuming they would agree to laborious work) who could face discrimination when a company prefers to employ other laborers without benefits.

It is easier to note the limitations of the new law from the Palestinian perspective: in addition to hoping that laws facilitating land and real-estate ownership follow, interviewees have already expressed frustration that there are professionals amongst them still unable to practice in Lebanon. Some fear they will still be looked upon as manual laborers only. One interviewee noted that “Syrian workers could accept low-paying jobs as they had no family in Lebanon to support and no rent to pay. They lived in buildings with other workers.” Other interviewees expect they will be seen as competition and work permits – if granted at all – will be granted upon several strict conditions. The question of benefits and social security arose repeatedly. And everyone hoped for a permanent and secure income.

So far, Hamadeh has not said how many of the 390,000 Palestinian registered refugees would benefit from the new rules. Ninety percent of these refugees were born in Lebanon and anyone aged 57 and below should benefit from the work permit. If an accurate estimate of the resulting expenses facing the government can be made, only then can the government assess whether such a change is possible. The Rassemblement Canadien Pour le Liban (RCPL), for example, ran an intensive study on the skills and capabilities of incoming Lebanese migrants in Quebec. This helped the Canadian government assess where and how their contributions to the economy can best be utilized. Conditions for issuing work permits must be fair, consistent and accessible. For example, suitable examinations can be facilitated to assess and choose qualified employees.

The question of competition feared by some (due to an overall unemployment rate at over 18%), was challenged by Palestinian writer Fatthi Kleib who argued that there were one million foreign workers, in addition to the 2.6 million Lebanese workforce, and the issue of competition never arose until the Palestinians were to be integrated. Kleib also asks why a rise in competition is not feared when discussing manual labor such as construction; agriculture; cleaning services; and work in gas stations or bakeries; although most existing foreign workers already work in those fields. Additionally, the Lebanese Ministry of Labor recently commissioned a study on Syrian workers in Lebanon with a sectoral breakdown suggesting that only 7% of Syrian workers were employed in the industrial sector, which includes construction.

So long as the larger picture of the Arab-Israeli conflict is not solved – or an agreement is reached regarding the right of return of Palestinian refugees, the Palestinian refugee situation remains a Pandora’s box. The Palestinians insist on their desire to return to their homes, the Lebanese fear a due settlement in Lebanon instead, and any procedure such as the relaxation of employment laws, is seen as a threat to all parties concerned (except for the Israelis). While many articles following the recent labor law tackled the issue of permanent settlement versus the right of return, rarely was the subject of the rights of the individuals concerned put forward.

Further work must be done if the recent labor law is indeed to be implemented. Regulation, infrastructure and accessibility are key words for the protection of employers, employees and consumers. What do all individuals want after all? If a sustainable access to a decent and dignified life is not what we all strive for, then what is it?


 

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Economics & Policy

New trade in magazines

by Anthony Mills
written by Anthony Mills

The Middle East is witnessing a rise in the number of Arab-published English-language trade magazines, geared specifically towards professionals operating in the region. The surge is being propelled by healthy annual growth in the Middle East’s $2.3 billion advertising sector but the lack of maturity in the market suggests that specialist titles may have to work just that much harder to survive on the newsstands.

Last month in Dubai, saw the launch of a Middle East version of Campaign, the 30-year-old British advertising magazine. It has since been joined in Beirut by Middle East Broadcasters, a bi-monthly subscription magazine covering the Arab world’s broadcast industry. Finally five months ago, Lebanon’s first recruitment periodical, Job, was distributed for free in Beirut with plans to eventually cover Jordan and Syria. All three join Arab Ad and Hospitality News which have been around for 20 and five years respectively, covering the media and the hospitality sectors.

“It’s a healthy sign,” said Walid Azzi, publisher of Arab Ad, the 20-year-old advertising and marketing magazine. “Trade magazines are mushrooming today in the Middle East because of the region’s prosperous advertising and marketing industry.” However, Azzi warned that there would never be a boom in English-language readership. “It’s a specific-content market limited to educated English-speaking people,” he said.

Industry insiders admit that while the Middle East market for serious, professional English-language trade magazines is unexploited, their concern is that financial rewards will not appear overnight. Be that as it may, according to Toni Eid – the publisher of the Beirut-based auto magazine Arab Wheels, which was launched three years ago – his publication sells close to 40,000 copies across the region. Eid claims that as long as you enter the market strong and flash the cash, advertisers will take heart.

Trumping the competition

At his Beirut office, Ramez Malouf, the editor-in-chief of Middle East Broadcaster, defended his media venture. “We see no serious trade magazine in the region,” he said. “There are others but either they don’t really have a Middle East focus – they are Middle Eastern only in the sense that they are a Middle East edition and sell ads for the Middle East but the articles are not focused on the Middle East – or they are promotional magazines through which companies can publish press releases.”

Although Middle East advertising expenditure has been growing by roughly 10% annually, only a fraction goes into print and only a fraction of that is slated for English-language magazines, while the trade titles come last in this small category. Many advertisers are put off by the limited readership – a consequence of their specialization. Even the veteran title Arab Ad has only 12,000 to 13,000 subscribers, according to Azzi. Following the distribution of the first issue of Middle East Broadcasters, Malouf said he had initially received around 4,000 subscription requests.

The trouble may lie in the abundance of titles that start up and die quickly. “The problem is that anyone with $10,000 or $15,000 can launch a magazine,” said Eid. “Around 40 titles in the region have folded within the first year.” Advertising revenues will only come, analysts say, if a publication endures for more than a year. Only then will advertisers regard the title as established. “Many papers start up and then close down, so that advertisers have no faith in new faces,” said Job publisher Ziad Jbara. Eid agreed, saying that publishers should be ready to spend, initially, at least $400,000 to convince advertisers that they are serious and are going to be around for a while. Middle East Broadcasters’ costs for the first year, according to Malouf, will run at more than $200,000, excluding the purchase price of offices in downtown Beirut.

One of the few genuine trade magazines that has lasted the course is Hospitality News. Managing director, Joumana Dammous-Salame, claimed that the magazine had benefited from her family’s experience in the catering and hospitality sector. The family owns Hospitality Services, a company that has been organizing exhibitions such as HORECA, offering marketing and consultancy services and managing events since 1993. “We didn’t start this magazine from nowhere,” Salameh said. “We’ve been in this industry for 15 years. One of the partners has been in the industry for 45 years. We know everyone.”

Image problems

Some publishers say that in the image-conscious Arab world the format of a trade publication is of paramount importance. In the region they say trade magazines are often treated as fashion accessories. “It’s on the CEO’s desk or under his arm,” said Azzi. Commenting on the new tabloid-style Middle East version of Campaign, he said: “It’s designed for the underground. But in this part of the world that won’t work. The readers it is geared towards want something luxurious, thick and glossy.”

But a member of the Campaign Middle East management team who asked not to be identified, said Azzi’s comment was applicable only to consumer titles. Campaign, he said, was a business publication. It was not pretending to be a consumer title. Instead, it was more akin to the IT Weekly Middle East, a technology title also distributed free of charge. And while some publications, he added, might seek only CEOs as readers, Campaign was striving for a broader professional readership, including, but certainly not limited to, CEOs.

Image has proved problematic for Job, said Jbara. He is having difficulty convincing advertisers that a journal can be both free and upmarket at the same time. In fact he finds himself in something of a catch-22 situation: Job is geared towards middle to upper management professionals – hardly a working class bunch. But because the paper is free he’s finding it difficult to interest the high-end advertisers he wants and indeed the kind who advertise in the glossier, more luxurious trade magazines. They’re all convinced that a free paper isn’t something that will be picked up by the so-called refined readers – their primary target. This preconception is compounded by the paper’s tabloid design. The only people who will advertise are cheap cigarette brands and sketchy breast enlargement companies for example, who are under the mistaken impression that the paper will be picked up by their primary target – the masses.

“I don’t want a reader interested in career advancement to find advertisements about enlarging breasts,” he said. “But the high-end advertisers prefer to go for the image and pay twice as much to advertise in a highly-priced magazine with a lower readership,” Jbara complained.

Azzi doesn’t have to worry about his image, he said. Twenty years of gloss and subscription fees for Arab Ad have taken care of that. “Free distribution has not been accepted socially in the Arab world yet,” he observed. “There is a certain exclusivity associated with paying $150 to get your magazine delivered to your desk by DHL.”

Like Job, Campaign is currently distributed free of charge and its management disputes the suggestion that this is bad for business. He argued instead that the paid model of a ‘business-to-business,’ specialist-audience magazine didn’t work. There was general agreement among specialist magazine publishers in more mature markets, like in the United States, that a publisher distributing free-of-charge would attract far more advertisers – and at higher rates – than someone selling a publication to a reduced readership. The gain in advertising revenue from clients enticed by a wider readership would far outweigh the cost of free distribution, he said.

Taking it regional

Most industry insiders advocate a regional readership. Local markets like Lebanon (where ad spending for these titles does not exceed $3 million) only have room for a handful of trade magazines at most. “Lebanon is a small market. Investing in a trade magazine only distributed here is not a wise decision,” said Eid.

Any Arab trade mag publisher who does go for the Lebanese market alone, and is prepared to invest heavily, although not necessarily doomed from the start may have to wait as long as five years, according to University of Kaslik marketing professor Mounir Torbay, before their reputation – provided they can establish one – pulls in serious advertising money. That’s because Lebanon’s economy and advertising market in particular, are depressed. Every year Lebanon’s current $35 million to $40 million annual ad expenditure – in painful contrast to that of the Middle East as a whole – is falling by as much as 20%, Torbay said, and advertisers are spending more and more on quick-fix below-the-line, in-store promotions to prop up unsatisfactory sales figures. So for a trade magazine to win a substantial share of leftover ad spend here in Lebanon, its undisputed impact must be all the more established.

Middle East Broadcasters is avoiding local Lebanese advertisers altogether. It is dealing only with regional advertising agencies. This is reflected in the magazine’s rates which are roughly three times higher than local ones. According to its rate card, a single A4 page ad can cost up to $6,200. A single page ad in Arab Ad costs $2,500, according Azzi. He said his magazine makes more than a million dollars a year from ad sales. Arab Wheels generated more than $600,000 a year, claimed Eid.

So the message it seems is to go regional. “Our economies are not that complex,” said Malouf. “They’re not large. [Trade magazines work well] in countries with thriving, large, well-off industries. Here, the money’s just not there for it. In the United States for example, not only do you have agriculture trade magazines, you have a potato-growers magazine. Alfafa growers will get the alfafa version and so on. An agriculture magazine may sell hundreds of covers. You’re not going to see that here.”

But still this is Lebanon and publishers are acutely aware of where their magazines will be seen. Trade or no trade, they don’t want their titles in dentists’ waiting rooms. “Never, never, never,” stated Azzi unequivocally. “The only waiting room table we will share is that of a CEO. On airlines, we are distributed only in first class, never in economy. In airports, we are in the VIP lounge, not the general waiting area. In hotels, we are in executive suites. Our readers are the elite.”

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Business

Building a fashion empire

by Anthony Mills
written by Anthony Mills

Wassim Daher would have never imagined when he opened a small multi-brand clothing retail outlet in Hamra in 1978 that over the next 27 years it would grow into a holding group, controlling more than 60 companies spanning the retail, leisure and food and beverage sectors, active in seven different countries on two continents, employing 1,800 people, and turning over more than $250 million a year. Among the franchises held by the azal GROUP are those for the globally ubiquitous retail brands Zara, Massimo Dutti and Mango, as well as the Virgin Megastore franchise in Kuwait, the UAE and Egypt.

Expanding its reach

Not content to sit on its laurels, today the azal GROUP has its sights squarely set on expansion, both locally and internationally. It intends to breach the billion dollar sales mark in four to five years by increasing outlet numbers from 67 to more than 270 over the next two years. In Lebanon, the group is opening another 16 outlets, 11 of them in Beirut. It plans to open a further 20 stores in the UAE by the end of the year, including another Virgin Megastore. It intends to establish its fashion retail business in Egypt by October or November as well as a Virgin Megastore in September. In Qatar it aims to open another 18 stores by 2006, while in Jordan a further 12 or 13 outlets are set to open by the end of 2006. As if that were not enough, more shops will open in Bahrain by 2007, while in Romania, the group envisages 18 more outlets by 2007, and is considering further branching into Eastern Europe. It also plans to enter markets in Saudi Arabia and Turkey by the end of 2006. Meanwhile, it is also on the lookout for new brands. In its sights are the US-based Gap, Old Navy, Banana Republic and Victoria’s Secret. Overall, the azal GROUP’s fashion retail portfolio now comprises over 30 brands.

The azal GROUP broke into the Dubai market in 1990 and into Kuwait in 1994, but the real milestone was reached in 1998. That was the year DGroup, as it was then known, acquired the Zara and Massimo Dutti franchises – owned by the Spain-based Inditex fashion retail clothing giant, as well as the franchise for fashion retail group Mango, also from Spain. Today, Zara is the azal GROUP’s top seller.

“That was when we moved from the traditional retail concept involving high-end fashion brands, to the new, fast-moving retail concepts in the market,” said azal GROUP CEO Said Daher. “What distinguishes these brands from others is that stock replenishment is very quick. It’s the ‘just-in-time’ inventory model. You can order and receive merchandise within a week. This way you can react to market conditions much faster than many [other] retailers. If the market is favorable you can replenish your inventory in no time. If the conditions are not favorable you can limit your exposure to inventory. With the traditional retail concepts, you’re buying way ahead of time, your replenishment time is about four to six months, and you can’t react as fast as you need to.”

But the azal GROUP has headaches too. “If you compare Lebanon to the Gulf, there are many challenges,” said Daher. In Lebanon, his group has to contend with excessive bureaucracy, high electricity and IT infrastructure costs, a host of high direct and indirect taxes, low spending power, restrictive labor laws and general economic malaise. “You have to bear a huge burden to be able to compete with neighboring markets,” complained Daher. “Beirut was recently rated as the second most expensive city in the Middle East. Combine that with low GDP and you get very low discretional spending power. That affects the fashion and luxury retail business.”

An unstable market

Azal’s biggest headache in Lebanon, though, is the market instability caused by continuing political and economic turmoil combined with a sustained spate of assassinations and bombings. “Expanding the operation in Lebanon is much more challenging than in other markets,” Daher said. “The unfortunate incidents of the last few months crippled the market here.” His outlets closed for a total of six or seven days in February and March, causing a loss in revenue of 15%. “We are now more conservative regarding our expansion strategy in Lebanon than before,” Daher said. Since the February 14 assassination of former prime minister Rafik Hariri, the azal GROUP has not committed itself to any new stores in Lebanon.

The group’s frustrations in Lebanon, where it employs 500 staff, are compounded by the country’s brain drain problem: Many of Lebanon’s brightest young professionals are fleeing the country’s stifling labor climate to seek success elsewhere. As a consequence, the azal GROUP has had to headhunt many of its star employees from outside Lebanon, from the Gulf and the United States.

Despite the willingness of fashion-conscious Lebanese to spend on affordably chic clothing brands, the difficulties associated with operating in Lebanon translate into reduced profit margins. In Lebanon, azal’s profits run at 7% to 8% of net sales, compared to 12% to 13% in other markets. “In the UAE, Kuwait or Qatar, you’re looking at almost zero taxes, favorable conditions, and extremely high spending power,” noted Daher.

The group also anticipates challenges in Saudi Arabia, where a restrictive legal environment makes investing by foreign companies perplexing. And in Turkey, a mature market, the scarcity of prime real estate locations and the fact that the azal GROUP’s flagship franchisers, the Inditex Group and Mango, are already operating their own branches, are further obstacles that will have to be overcome. Daher insisted, though, that Turkey was a “promising” market.

Going East

Romania, too, had immense potential, he went on. “We were positively surprised by Romania,” he said. “The market is extremely similar to Lebanon but competition is not as fierce.” The move into Romania was in part prompted by the country’s planned accession to the EU within the next few years, a development that will facilitate trade and boost the country’s economy.

Daher claimed it was difficult to say what share of Lebanon’s fashion retail market the azal GROUP accounted for. “But we are definitely the leading franchise retailer in the market,” he said. “Although anyone who sells clothes is a competitor, and there are many, none of the other groups have as many outlets, or our presence, or the size of our outlets and there is no distinct competitor who can compete on all levels.”

The azal GROUP’s success – revenues are growing by 25% a year according to Daher – highlights the quick rewards offered by well-run franchises, he said. “You can grow much faster as a franchise than if you’re operating your own brand,” he explained. “With a franchise, you’re implementing already-successful business models. It’s very hard to grow when you’re operating your own brand. Why bother establishing a vertically-integrated business model which will take you years and years to perfect when you can get involved at the end of the supply chain and start opening outlets in promising markets in a matter of months?” Of course, he noted, you have to make sure that you’re always observing the rules laid down by the franchise owner.

This year, the Daher family holding company changed its name from DGroup [D for Daher] to azal GROUP, in a move designed to reflect its evolution from a “mom-and-pop operation” into a corporation and to unify its international holdings under one umbrella. “We don’t think of ourselves as a family business anymore,” Daher said. “Most family businesses barely survive the second generation. We want to expand the business and ensure continuity. That’s why most of our senior managers are from outside the family. We see ourselves as a new business, which really got off the ground when we acquired the key franchises in 1998.” The company, though, is still wholly owned by the five Daher brothers, of whom Said is the youngest and founder Wassim the eldest. In some of its ventures, though, the azal GROUP has taken on partners to mitigate risk. Azal Management, a management company run by the azal GROUP, helps manage the group’s different companies.

Diversified business

Over the years, the azal GROUP has branched out into the leisure and food and beverage industries. It runs four Virgin Megastores in the UAE and two in Kuwait. Asked why the Beirut-based azal GROUP had not acquired the Lebanon Virgin Megastore franchise, Daher said that the possibility had been examined but the group had decided that Lebanese copyright law offered insufficient protection.

The azal GROUP also represents French coffee shop chain Columbus Coffee and bakery chain Paul in the UAE. And it is in the process of opening its first outlet in Bahrain for Australian juice company Pulp Juice. However, 85% of the azal GROUP’s business interests remain anchored in fashion retail. Although Daher sees the azal GROUP as a general retail franchisee, he plans to continue focusing on fashion. “We would like to expand all lines of business,” he said, “but no matter what we do, our core line of business is fashion retail.”

How did the azal GROUP acquire its position of market pre-eminence? “I think number one we were very lucky,” acknowledged Daher. “And plus we have a great team.”

Getting locations right

The group also appears to have an eye for prime real estate. A number of its stores are located in the upscale Verdun district of Beirut, an area Daher said is Lebanon’s prime retail location. “Sales in Verdun are up to par with those in the UAE, Qatar and even Europe,” he stated.

The azal GROUP has no stores in the downtown area because the kind of surface area it needs for its stores isn’t available. “Our requirements are greater than anyone can accommodate. We’re talking 2,000 square meters,” said Daher.

But when the recently kick-started Souks project is completed – possibly by 2006 or 2007 –the azal Group will have its fingers in the pie. It intends to open a number of stores in the Souks unveiling new brands.

“Real estate is the driving force of our business,” said Daher. “Today, in Verdun, you can’t find an empty slot. There are plenty of real estate projects, such as malls, throughout the area. They will help us expand.”
 

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Business

freeing up the media

by Michael Young
written by Michael Young

Following the assassination attempt against Defense Minister Elias Murr last month, Lebanese newspapers placed on their front pages a photograph of the “reconciliation” between Michel Murr and his brother Gabriel. Beyond what that meant politically, or filially, the episode prompted reflection about what it would mean for MTV, the television station closed down by a government writ after a 2002 by-election in the Metn, for having allegedly broken the law on political campaigning.

With so many priorities on the agenda of a new Lebanese government, little attention has been paid to media matters, though in many respects that is one of the paramount issues that will define Lebanon in the future. In a Middle East where media are becoming increasingly competitive, will the country become a leading regional media hub? Can Lebanon compete with the likes of Dubai, and if so what are the political implications of an otherwise sensible strategy?

In all likelihood, and presuming the Murr brothers can agree, the MTV issue will be resolved in the foreseeable future, since the politics leading to the station’s closure were made superfluous by recent transformations in Lebanon. However, there is as yet no sense of the wider media role Lebanon can play; or how the local media market must change to accommodate the new realities of a post-Syria Lebanon.

The most fundamental problem is one of entry into the marketplace. Both the audio-visual and print media are walled in fields where outsiders, except those with considerable money and influence, are unwelcome. When the airwaves were organized in the mid-1990s, station licenses were conveniently distributed to the major political actors and their allies. This was financially advantageous to the owners, because it created a cartel. But it also had political advantages by imposing conformity on how news would be covered, especially on news related to Syria.

Few licenses

The same exclusivism governs the issuing of political licenses to newspapers (which, simply, authorizes them to cover politics). However, under the Syrians, the newspaper market was less controlled politically than the audio-visual media, partly because it is much smaller. Though the newspaper licensing law authorizes any investor to buy a new license, in reality the government will not issue any, obligating budding press barons to purchase an existing idle license from an owner. This inflates prices tremendously, so that a license may cost hundreds of thousands of dollars, providing a major disincentive to those seeking to enter an already saturated press market facing declining advertising revenues.

Making matters worse, this filtering process is quietly backed by newspaper publishers. While such duplicity makes self-interested economic sense, it does taint the principled protests of those owners who lament limits on press freedoms, since opening a newspaper is as significant a freedom issue as is what publications are allowed to say.

Lebanon’s media market must open up to more competition. In post-Syrian Lebanon, there is also no reason for the market to be artificially divided between political grandees, many of whom don’t have the clout they once did. If that means some outlets close down, then so be it; several papers, for example, survive because of cash payments to influence certain news coverage, and that practice would be curbed.

At the same time, freer political licensing would allow for a much wider variety of publications – cheaper-priced political tabloids, satire publications, mixed political-cultural publications, etc. At the moment, the market is dominated by expensive political broadsheets, and the laws in place are inflexible when it comes to pricing.

There is also the question of Lebanon’s media destiny. The country is better placed than most to be a regional media center. The political climate is relatively free, the media sector is well developed and professional, and Lebanon needs to economically diversify. While no legislative, financial or logistical framework yet exists to allow Beirut to compete with Dubai’s Media City, now is the time to remedy this. A prerequisite, however, is domestic reform. One thing that means is appointing visionary information ministers who are more than mere government spokesmen.

The real question, though, is political. Is Lebanon willing to accept the political price of hosting free media? This is a tough question – one highlighted recently by Syrian efforts to ensure that Lebanon not purvey anything that might weaken the Syrian regime. Absolute freedom may be a pipe dream, but any media capital, to be successful, must defend its independence.
 

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Economics & Policy

Theories from the fringe

by Faysal Badran
written by Faysal Badran

Even the most strident hawks in Washington could not have anticipated the stunning costs of the wars in Iraq and Afghanistan. They have cost American taxpayers more than $314 billion so far, to the extent that the Bush administration’s open-ended commitment has raised concerns, even among war supporters.

At the rate the United States is spending, the military campaigns could become the most expensive operations in the past 60 years, far exceeding the costs of the Korean and Vietnam conflicts. One nonpartisan Washington think-tank estimates that the cost of the war in Iraq could exceed $700 billion – a remarkable sum considering that polls show that a majority of Americans believe that the war wasn’t worth starting and feel that they are no safer today than they were before September 11, 2001. Such mind-numbing spending on a scenario with no discernible exit strategy is all the more troublesome because it has occurred outside the normal budget process, with a series of pay-as-you-go supplementary appropriations. The stealth-funding approach has come without comparable reductions in other government programs, thus saddling the country with an enormous debt burden that exceeded more than $400 billion last year. President George W. Bush’s recent efforts to sell the war to the American people have never been accompanied by solid fiscal policy. The Congressional Budget Office estimated three years ago that the wars would cost between $1.5 billion to $4 billion per month, when in fact the campaigns are costing up to $8 billion per month. Given that the astonishing spending levels have done little to curb the insurgency that has claimed the lives of 1,763 US soldiers and wounded more than 13,000, it’s no wonder that many lawmakers in Washington are questioning whether the cost of these wars has grown too high. Republican Senator Chuck Hagel of Nebraska has termed the military spending priorities as “dangerously irresponsible.” That’s the only reasonable response to a war policy that lacks a coherent plan for bringing stability to Iraq.

At least the Bush administration should be forthright enough to include the cost of the Iraq mission in the budget. What is disturbing about the overreach of the US, aside from its unilateral and destructive policies, is that it may be a symptom of a nation, which no longer has the means to accomplish its objectives, however noble they may be deemed.

Problems ahead

Empires collapse usually due to a combination of military overreach and economic weakness, and judged by these criteria, many believe the US to be heading for a fall. Washington’s occupation of Iraq has been a disaster. Even after two years, the US Military has failed to subdue the Iraqi resistance. The war, more and more, seems “unwinnable.”

Developments on the economic front are even more dangerous for the US. Its power rests on two main pillars: firstly, military superiority, and secondly, the role of the dollar as the world’s reserve currency. Iraq is making a mockery out of the first, and the second is in jeopardy. America’s massive trade and budget deficits ($630 billion and $500 billion respectively) are driving down the dollar to such an extent that its status as the global reserve currency is imperiled. Since world trade is largely conducted in US currency, most countries have to export goods and services in order to earn these dollars, but all the US has to do is print more dollars. As economist James K. Galbraith has explained: “[The US gets] real goods and services, the product of hard labor by people much poorer than ourselves, in return for chits that require no effort to produce.”

The purchase of massive amounts of dollars by the rest of the world allows Washington to borrow cheaply, keep interest rates low, and run up a trade deficit that no other country could get away with. The world thus pays for US over-consumption and underproduction, as well as its wars. This arrangement, as economist Andre Gunder Frank has put it, is “a global confidence racket,” or a racket that can continue as long as other countries keep on buying dollar assets such as US Treasury Bills, thus financing Washington’s enormous deficits.

The global move away from the dollar portends economic devastation for the US. Stephen Roach, chief economist at Morgan Stanley, one of the world’s leading investor firms, has told clients that the US does not have more than a 10% chance of avoiding “economic Armageddon.” He points out that the $2.6 billion the US has to import every day to finance its trade deficit constitutes an incredible 80% of the world’s net savings. Obviously it’s an unsustainable situation. According to Roach, the dollar will keep falling due to America’s record trade deficit. To attract foreign capital and check inflation, the Federal Reserve Board’s chairman, Alan Greenspan, will be forced “to raise interest rates further and faster than he wants.” US consumers, already deep in debt, “will get pounded.” The record US household debt is now equal to 85% of the economy [the US national debt is $7.7 trillion, while total US debt is an unfathomable $43 trillion]. Americans already spend a record proportion of their income on interest payments, and interest rates have not even substantially increased yet. Thus the stage appears set for massive national bankruptcy.

Former Federal Reserve Chairman Paul Volcker has put the likelihood of a financial disaster at 75%, while the US comptroller-general (head auditor), David Walker, “makes no bones about the fact that the situation is dire.” For Martin Wolf, associate editor of the Financial Times, “the US is now on the comfortable path to ruin. It is being driven along a road of ever-rising deficits and debt … that risk destroying the country’s credit and the global role of its currency.” Paul Krugman, economics professor at Princeton University who writes a column for The New York Times, said: “We’ve become a banana republic … If you ask the question, ‘do we look like Argentina?’ The answer is: ‘a whole lot more than anyone is willing to admit at this point.’” Argentina defaulted on $100 billion of debt in 2001, with catastrophic effects: its currency plunged and the economy collapsed, bankrupting thousands of businesses within weeks. National income plummeted by 67%, pushing half the population below the poverty line.

The weakness of the dollar and the huge deficits are symptoms of the decline of US manufacturing. “Americans don’t produce enough and don’t save enough,” said Schiff. US manufacturing is only 13% of GDP and, according to Roach, “manufacturing employment currently stands at only about 13% of the US’ private non-farm workforce – down sharply from 23% … in the mid-1980s.” Since 2000, the US has lost close to three million manufacturing jobs. Between 1989 and 2004, the US savings rate fell from 6% to 1%. Foreigners now produce most of the goods Americans are consuming and lend Washington the money to buy these goods, leading to skyrocketing deficits.

American companies clear out

An important factor behind the manufacturing decline is the abandonment of the US by its own corporations, many of which have relocated operations to Asia from where they export to the US. John Chambers, chairman of Cisco, said recently: “What we’re trying to do is outline an entire strategy of becoming a Chinese company.” Cisco is the leading US supplier of networking equipment for the internet. The company manufactures $5 billion worth of products in China, where it employs 10,000 people.

In fact, the US economy has been in decline for more than three decades, accounting for a plummeting share of world economic output. The first dollar crisis occurred at the end of the 1960s when then US President Lyndon Johnson’s escalation of the Vietnam War led to increasing public deficits. This coincided with the rise of Western Europe and Asia as strong exporters, to whom Washington lost its manufacturing lead. To retain its global domination, the US then depended on its military superiority and the dollar’s role as the world’s reserve currency.

As America’s deficits rose due to the Vietnam War, France demanded gold in exchange for the dollars it held, since at the time the greenback was backed by Washington’s gold reserves. Other countries followed suit and, as US gold reserves were drained, President Richard Nixon de-linked the dollar from gold and floated it against other currencies. This coincided with the oil crisis of the 1970s, when crude prices shot up 400%. Suddenly, oil became the most important traded resource, and Nixon linked the dollar to it. In June of 1974, US Secretary of State Henry Kissinger made a deal with Saudi Arabia (the biggest OPEC oil producer) stipulating that oil could only be bought in dollars. In return, the US agreed to militarily protect the Saudi regime. In 1975, OPEC (following the Saudi lead) officially agreed to sell oil only in dollars. The age of the petrodollar was thus born. As long as oil was traded in dollars, so would other goods, and the dollar would remain the world’s reserve currency. This arrangement allowed the US to continue its dominant imperial role despite its crucial economic weakness: the inability to compete with the European and Asian countries in manufacturing and export capacity. But now America’s position became highly vulnerable to the whims of the oil-producing countries and to the fate of the resource itself. The first challenge to the petrodollar system came with the Third World debt crisis.

Awash in petrodollars, Western banks loaned hundreds of billions of these to developing countries, which could not repay the loans when Washington raised interest rates to nearly 20% in 1979 to save the falling dollar. It was crucial for the future of the petrodollar system that this money be recycled back to the West, and so the US used the World Bank and IMF to ensure this would happen. The loans were repaid several times over (the payments continue), and the petrodollar system was saved, but at the cost of decimating Third World economies with structural adjustment programs that devastated their industry, employment, and health and education sectors.

America’s petrodollar hegemony “was based on ever-worsening economic decline in living standards across the world as IMF policies destroyed national economic growth.”

Downward spiral

The collapse of the dollar and that of the US economy could end America’s superpower status as Washington becomes incapable of financing a colossal military machine that currently occupies 725 bases around the world with 446,000 troops. Economic power will center on the European Union, China and India, which are already creating new global structures that exclude the US. These endeavors show that the U.S. is already, to some extent, a “has-been” global power whose desperate military aggression only makes it weaker on the world stage. As the Financial Times has explained: “A new world order is indeed emerging – but its architecture is being drafted in Asia and Europe at meetings to which the Americans have not been invited.” In contrast to Washington’s endless military ventures, Europe and China emphasize economic might as the main instrument of foreign policy. As Newsweek pointed out, “the strongest tool for both is access to huge markets.”

No single country has posed more of a challenge to Washington than China, which recently replaced the US as the leading consumer market in the world. Beijing has economically displaced the US all over Asia and is now doing so in the latter’s so-called back yard, Latin America. China is now Chile’s largest export market and Brazil’s second biggest trading partner.

In November 2004, Chinese President Hu Jintao went on a tour of Latin America and agreed to invest $30 billion in the region. Most importantly, China and Venezuela signed a bilateral energy pact in December 2004, under which the latter agreed to supply Beijing with 120,000 barrels of fuel oil a month. China pledged to invest in 15 Venezuelan oil fields. China has become the world’s second largest importer of oil after the US. Venezuela is America’s fourth largest oil supplier, and the deal with China cuts into one of Washington’s “few remaining relatively stable sources of crude.” China intends to make a similar move towards Canada, America’s biggest oil supplier. What can Washington do about such incursions into its “vital interests?” Not much, since Beijing could cripple the US economy simply by stopping its purchase of American Treasury Bills. If Bush continues on Napoleon’s imperial path, so the theory goes, America will follow the fate of Napoleon’s empire. Regardless of the Bush administration’s vainglory, the US cannot afford hundred-billion-dollar-a-year and protect itself as well. Eventually, financial reality will set in, and the US would have to withdraw from the Middle East or risk running into serious trouble.

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Finance

Hedging your bets

by Faysal Badran
written by Faysal Badran

with many businesses across all sectors suffering from the fluctuation in the euro and watching their profitability erode, it is important to recap on hedging, the process via which businesses can lessen the impact of unexpected currency moves on their bottom line. Without delving into the complex types of hedging, simply put, here is how it works.

Lebanese companies that engage in overseas trade, such as car and food importers, regularly face a problem that stems from importing products or services in a currency different than the base currency. Lebanese companies that import from countries using the euro face currency risks. The fluctuations in the euro can cause profit margins on the final items to fluctuate. If the company is hit with a sudden rise in the euro, it must absorb the change, and if it is unable to pass on the change to the consumer, it may end up with a net loss.

For companies that trade in large amounts annually, the changes can cause serious strains if not neutralized. We have all heard the anecdotal pretexts given by everyone down to the vegetable seller, that things are pricier, “because of the euro.” Simply put, unlike other Arab countries like Saudi Arabia, where the Toyota/Lexus agent carries out very complex hedging procedures to offset any sudden fluctuations in the yen, most Lebanese companies remain unhedged and pass on any increases to the consumer.

Taking precautions

Companies who want to neutralize the effect of currency variations will typically sell an equivalent amount of foreign currency forward in order to lock in a specific rate and have clarity as to their upcoming results. They will for instance, if they are worried about a rise in the euro, buy euros forward to a specific date which covers the duration of their liabilities. This way, they have in a sense, taken care of their needs without having to worry about paying up more for their euros later on. Or if they have merchandise coming in, which was priced in euros to start with, they can do the same so that when they receive their goods, they can price them appropriately.

The raison d’etre of hedging came about with the assumption that the pricing of the final product ought not to be dictated by wide swings in exchange rates. Hence the process of hedging, the key to which is offsetting future risks by using the foreign exchange markets. When a company decides to tackle the currency element in its operations, it will typically look at its forecasted cash flows in currencies outside its base, and use tools to blunt, or lessen the effects of future movements. If the company has liabilities in euros for instance, or if it imports products in euros, it will look for ways to match those flows in a way that gives it visibility going forward. Of course, a company may decide to leave foreign exchange risks un-hedged, but then it would be taking a speculative view on currencies, an exercise that involves risk and risks can make or break its fortunes. More importantly, it would be over stepping its core operations, for it is not in the speculation business.

Recently, with the advent of very complex instruments, many multinationals have in fact engaged in speculations under the umbrella of hedging. Some have ended disastrously; such was the case of a large European conglomerate based in Germany, which had decided to go un-hedged on large contracts. So any business no matter how small can, in effect manage its currency exposure. A shop importing clothes from Milan as well as a large corporation face in essence, the same issues, but with varying degrees of scale and complexity.

But it is not just importers that face a currency dilemma. Companies that have overseas operations also face a currency decision which relates to the translation of its profit/loss accounts from overseas back into the base currency. The bottom line is that a proactive approach, with the assistance of a bank treasurer can help reduce the effect of currency swings on the operations of a company. While hedging techniques have developed, it is crucial for businesses to have a clear view of their upcoming liabilities to optimize the hedging process. The tools available range from straightforward contracts to complex options that are most often used by multinationals to offset complex transactions.

Hedging is a tool which enables companies to protect against changes in their base currencies, but it is also useable in a variety of other investment forms such as interest rate risks, equity crash risks as well as a range of commodities. It’s a smart move.
 

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Economics & Policy

Coming up with the funds

by Nicolas Photiades
written by Nicolas Photiades

The Lebanese financial sector has long been dominated by commercial banks, which have grown significantly in the post-war period. Indeed, customer deposits have increased threefold since 1995 to reach the $60 billion mark by the end of the first quarter of 2005. However, this phenomenal growth was more or less cancelled out by the banks and other financial institutions, struggling to allocate their deposit funding efficiently. They have scarcely invested their deposits into the domestic economy, opting instead to support the government’s financing plans by subscribing to government Treasury Bills and other types of fixed income securities. These have given high yields, but also contributed to killing off the domestic capital markets and the creation of alternative investment vehicles such as funds, that would allow investors to achieve substantially greater returns on their savings than they could individually.

Funds are essential for any national economy as they can:

* Achieve superior rates of return to investors through capital gain and profits.

* Help Lebanese companies in their growth and development plans.

* Trigger much needed privatization in Lebanon.

* Facilitate the numerous family succession issues (which are numerous in a country dominated by family ownership).

* Attract qualified individuals and entrepreneurs by providing them with the necessary seed capital, financial expertise and know-how.

* Create new jobs.

* Help the development of the capital and financial markets in Lebanon.
 

* Facilitate the repatriation of part of the Arab wealth that is being withdrawn from major markets such as the US and Europe after 9-11.

* Encourage wealthy Arab and Lebanese individuals and investors to invest in high value-added projects in the country and the region.

The creation of funds has been very slow in Lebanon, despite some early attempts in the mid- to late-1990s with Lebanon Holdings, the abortive private equity fund established in the mid-1990s by Lebanon Invest, and the Middle East Capital Group. Banks and other financial institutions did not encourage the placement of savings in places other than deposits or real estate and only a few Lebanese understood the efficiency of funds in channeling savings towards the economy, including the real estate sector. What is ironic is that today only banks are capable of raising the required amounts of money that can build up one or more funds. Lebanese banks have developed significant relationship networks throughout the Arab region, as well as domestically, in order to boost the fund management industry significantly, and there is no reason why Beirut cannot be transformed into a regional center for funds.

For the moment there is no real Arab center for fund management, with the slight exception of Dubai and Bahrain, which have just started to look into this activity, given the return home of significant Gulf investments in the US and Europe, rumored to be in the region of $300 billion. But none of these Gulf centers such as Bahrain and Dubai have focused solely on fund management, seeking instead to become global financial and commercial centers.

Becoming a hub for funds

Beirut can become the Edinburgh of the Middle East (Edinburgh, together with the main Swiss cities, Paris and London, has long been regarded as one of the main centers for European fund management). It has all the ingredients: its banks and their impressive fund-raising capabilities, the know-how of its expatriates and local specialists (some of the best fund managers in Europe and the US of Arab origin are Lebanese), and its unique East-West culture. The local infrastructure in Beirut, particularly in the Solidere area, and the proximity to Europe are also propitious factors for the development of the fund management industry in Lebanon (although the rapid introduction of broadband internet has now become a dire necessity).

Funds would also be considered to be the key for the development and diversification of revenues for local banks. Indeed, most banks in Lebanon are working hard to diversify revenues by opening branches or going into joint ventures with local partners in other Arab countries, as well as by developing particular banking products and activities such as retail and treasury management. By focusing on the development of fund management activities, Lebanese banks would be emulating the Swiss private banks model, which consists of having relatively small balance sheets but very large off-balance sheet assets, which come in the form of funds. A Swiss-model-type banking sector would facilitate the diversification of revenues and, more importantly, would strengthen the recurrence of the income stream over a long period of time. With the Basel II capital regulations to be applied in Lebanon starting in 2008, and which require banks to have healthy and recurrent revenues in order to increase capital organically (through the injection of profits into capital), the timing of the development of the fund management industry cannot be more appropriate.

In addition to contributing to a greater diversification of commercial banking activities and revenues, funds are regarded to be instrumental in the development of investment banking activities. Indeed, investment banks have not developed in a similar vein to commercial banks since the establishment of the first Lebanese investment bank more than a decade ago. The Lebanese market is too small and overwhelmingly dominated by a restricted number of business families, which make investment banking deals very difficult to come by, while encouragement from the government to develop the investment banking industry has not been efficient or loud enough. By launching funds of appreciable sizes (a fund would make sense starting from US$40 million to $50 million), the Lebanese commercial banks would be developing their own investment banking divisions (or subsidiaries) in the most efficient way, as the funds would inevitably feed in a continuous manner into the investment banking division with a diversified panoply of deals.

Importance of good management

Private equity and venture capital funds cannot be managed passively. They need full involvement on the part of fund managers. Active involvement is the only way of ensuring that value is created, corporate governance is improved, and investment banking deals are created, to the ultimate benefit of both the fund’s parallel investment banking division and the invested-in firm. For example, some companies may need an increase in capital in order to be healthier and more valuable in the medium to long-term, and would hence need the investment banking division of their banker to carry out a share issue for them. Another example would be a company needing, as part of its value creation strategy, to carry out a management buy-out, which can only be arranged and executed, via the fund, by an experienced investment banking division.

Weighing up the benefits

Funds should be regarded as a valuable tool in the development of an economy. The fund industry must be developed and diversified to include funds that are profit-oriented, developmental, social, or even a mixture of all. The domestic market could also benefit from a large number of funds, launched by many banks almost simultaneously. A market full of funds would accelerate the development of capital markets, create liquidity for securities (as there would be more than a handful of buyers and sellers of company shares) and quicken economic growth.

Of course, no matter what the specificities and investment policies of the funds are, it is crucial that those funds be managed with rigor and diligence. Some essential ingredients for good fund management include having high standards of integrity, acting with “due skill, care and diligence,” having high standards of market conduct, knowing one’s customer and his requirements, being transparent at all times and avoiding conflicts of interest with and amongst clients. Failure to meet such basic requirements could ultimately turn the many positive advantages of funds into a national nightmare.
 

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Economy & Finance

by Executive Contributor
written by Executive Contributor

Capital Intelligence Raises First Gulf Bank’s Rating to A-

Capital Intelligence (CI) rating agency has raised FGB’s (First Gulf Bank) long-term foreign currency rating and financial strength rating from BBB to A-. The bank’s short-term foreign currency rating was increased from A3 to A2, the support rating was raised from 3 to 2, whereas a stable outlook was assigned to all the ratings. The agency noted that this upgrade is attributable to the bank’s ability to raise a substantial amount of new capital amid the strength of its ownership by the ruling family of Abu Dhabi and the family’s confidence in its management team and board. FGB was last trading at around AED25 ($6.8) per share on the Abu Dhabi Stock Market.

IFA Announces a 46% Rise in H1-2005 Profits

Kuwaiti-based International Financial Advisors (IFA) announced a 45.8% year-on-year rise in first-half profits to KD33.3m ($114m). The six months profits included around KD30m ($103m) in unrealised profits on investments, the result of a sell-off of some of the company’s assets. Earnings per share rose to  KD0.109 ($0.37), up from KD0.077 ($0.26) in first-half 2004. IFA is the parent company of IFA Hotels and Resorts which launched a $150m residential project in Abadiyah, Lebanon. IFA’s listed shares, amounting to 239,813,827, were last trading at around KD1.5 ($5.14) per share on the Kuwait Stock E

Country Profile: Qatar

Capital Intelligence (CI) rating agency has raised Qatar’s long and short-term foreign currency ratings from A- to A+, and from A2 to A1 respectively. CI also assigned a long-term local currency rating of A+ and a short-term local currency rating of A1 to the sovereign, whereas a stable outlook was assigned to all the ratings. The agency noted that this upgrade reflects the investment in the gas sector and other export-oriented industries which will carry budget and current account surpluses over the medium term, hence further improving already strong debt-servicing ability. Qatar is expected to become the world’s largest producer and exporter of Liquefied Natural Gas (LNG) in the next five years. CI assumes that earnings from LNG and related products will exceed those from oil by the year 2008. High oil prices, increasing output in oil and gas industries, and advances in fiscal management have resulted in an average budget surplus of 6% of GDP in each of the past five years. Government debt decreased progressively to stand at 30% of GDP in the fiscal year ending in March 2005.

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