Special Section

by Thomas Schellen
written by Thomas Schellen

In the current crisis, real estate stands out as amazingly stable asset class. While they acknowledge that developers and buyers refrain from immediate investment decisions into new projects, sector experts anticipate at least consistent demand if not increased property prices.

Circumstances, the reasoning goes, do not alter the fundamentals that make Lebanese real estate valuable, the mountains, the climate, the sea, and the country’s attractiveness. “Investing in Lebanon is becoming more than a facility, it is a necessity. Those who are investing here are happy to invest under the freest and most democratic system in the Middle East,” said Raja Makarem of RAMCO real estate advisors.

The mood is noticeably different from two years ago when the market was gloomy. Even though the primary demand drivers then and now are external, namely Arab acquisitions of high-end residential real estate in select areas, the economic recovery of 2003 and 2004 appears to have been as good for confidence in Lebanese real estate as sales of real estate have been good for the economic recovery.

This is important, because real estate development and property transactions are acknowledged as influential ingredients in the makeup of the Lebanese economy. Construction permits and cement deliveries, which both improved markedly in 2003 and continued their upward development with growth by 4.3% and 3% in 2004, rank not for nothing with the nation’s most watched economic indicators. In the hard years of 1999 – 2002, a sluggish real estate sector had gone hand in hand with the recessive trends in the economy.

A continued positive outlook for the worth of immovable assets under present circumstances by the same logic can signify resilience for the Lebanese economy.  Moreover, the durable quality of real estate allows it to function as stabilizer in this difficult period of uncertainty over political changes. To an extent, this could even help in alleviating the fears caused by last month’s vicious attempts to cause instability by planting bombs in parts of the country.

However, it must also be noted that trends in real estate transactions resemble the inertia of a supertanker. They usually accelerate or decelerate slower than many other, faster paced sectors of the economy. Thus price developments may yet quite possibly respond unfavorably if the political quest of this spring were to fade into a persistent crisis of internal security due to foreign attempts to artificially destabilize the country in a bid to keep old power constellations from tumbling down.

The brightest light for an increasingly good real estate market in Lebanon thus lies in the fact that the country’s fundamentals are indicative of long-term peaceful coexistence and leaders of all communities in Lebanon know that they have nothing to gain from organized confrontations with other communities in the nation. What is a real cause for concern in this respect is solely the strong Lebanese tendency to give in to outside influences. 

Of course in the short term, by far not every signal in the market is positive. Beginning with the March 19 and 23 bombings of properties in the two Christian areas New Jdeideh and Kaslik, security concerns have aggravated the situation for retailers. Towards the end of last month, visibly affected areas were the downtown and major shopping malls in the greater Beirut metropolitan conurbation.

The strain on their revenues can make it difficult for tenants of retail and restaurant space who are weak in their reserves to meet their high overheads and leasing obligations. As the past six weeks saw first closures of retail and restaurant outlets in the downtown, it must be remembered, however, that the area has experienced a fairly high rate of tenant turnover throughout the past four years and that individual closure decisions may well have been more related to failure of store and eatery concepts than to the downtown’s undeniable drain in cash flow since 2/14.

Similarly, delays, concept changes or investor pullout from large commercial mall projects are highly unlikely to have been caused by the independence debate of the last few weeks. With at least six major shopping mall projects ranging from recently completed to in-the-pipeline, plus an array of even larger mixed commercial and tourism developments in the planning, industry insiders contend that in case of eventual investor withdrawals announced in the present period, the projects would have already been hampered in the past. The crisis situation would thus be used as a face-saving moment to excuse bowing out of a flawed idea, agreed several experts.   

An essential entity for all assessments of Lebanese real estate is Solidere, which last month seemed to be troubled at least momentarily as far as proceeding with new projects. The souks of Beirut by now give the impression of being the stage for a perennial play of unreliable announcements, after officials of the real estate company had trumpeted in November of 2004 for the umpteenth time that the start of construction for the retail sales space of the project was imminent (in this case for January 2005). But January came and went and a Solidere spokesperson last month told Executive that the promised works on the retail floor space had not yet begun and the company preferred not to discuss this matter for the time being.

Ramco’s Makarem did not see the latest delay in implementing the souks as abnormal, however, reasoning that large commercial projects need to secure tenants before starting construction. Citing restraints created by the laws and practices of commercial representation, he said that big department stores don’t come easily to Beirut and that formulas like those of ABC or Aishti could be more successful models for this environment.

It also bears reminding that Solidere has shown itself as returning to a very decent form in terms of its share prices, which except for the first brief instant remained unfazed throughout the 40 days after the Hariri assassination and entered the Easter holidays at a value of $9 per share. Overall, the performance of Solidere in the past 15 months justified the high assessment that local brokers and financial analysts saw in the stock’s potential.

In the resurging Beirut real estate scene, the city now spots a core of impressive quality, which resonates positively with attractive residential developments in other in other parts of town, such as Ramlet al Baida, Ashrafieh in general and the trendy Gemaizeh quarter in particular. Despite of a few projects where commercial interests, insensitivity to urban context or plain conventionalism in design created buildings that one would rather not see litter the skyline, the Beirut seafront is also gaining a new coherence. Especially around Raouche, where the cityscape had been mired with construction ruins and concrete boxes, eyesores of the sixties and seventies, a different architectural flavor is improving this visual calling card of Lebanon.

If the investment readiness of the Arab clientele and the nation’s expatriates are enhanced by the emergence of an accountable system of governance and newfound political stability, the outlook for real estate in Lebanon could be a strong buy under both investment and living purposes. But one may not forget that investments and projects are literally not more than the sector’s brick and mortar. The soul of Lebanese real estate is the quality of living and it needs to be preserved and even restored by cherishing the country’s communal balance and by finding a hitherto elusive harmony between settlement and nature.   

Supply and demand, local purchasing power and regional interest, have made up only one part of the challenges for the real estate sector. Another, very large bundle of challenges consisted throughout the reconstruction period in administrative red tape, insufficient town planning, and inability to realize a residential housing structure that observes the dignity of lower and middle income groups.

The biggest headache real estate developers in Lebanon have been confessing to in recent years was the bureaucratic hassle. As Beirut developer Jamil Ibrahim once described it, waste of time and money in handling arcane procedures in applying for building permits and any sort of real estate transactions consume over 10 times more effort than necessary. This administrative inefficiency is an obstacle to both local developers and international players that take a closer look at the Lebanese market.  

Much more than the procedural troubles, the disaster of public sector town planning and shortsighted private project planning threatens to impede the future profitability of the real estate market. Scarcity is a leading determinant in the value of real estate. But instead of applying a strategy of controlling quality and supply and thus increase property values, owners and builders all too often lunge after the quick buck without considering the damage they cause their own long-term interests. This private sector orientation towards cheap instant gratification has for the past decades been facilitated by absence of state authority during the war and then (in the reconstruction years until today) by lack of proper town planning and corruption that allowed circumvention of existing laws and regulations.

 As the last two years have demonstrated more than sufficiently, tourism plays a decisive role in the country’s economic future. Superb resort projects and enhancements of the tourism culture not withstanding, better town planning and development policies are absolutely needed if Lebanon wants to draw in tourists from Europe, Japan and the US in addition to its visitors from within the Middle East. Here the national interests of nurturing both tourism and substantial real estate values converge in the need to institute modern building codes and urban planning.

Last but not least, the need for sustainable housing has yet to be answered in Lebanon. The reliance on private sector initiative may be more suited to supply lower and middle-income families with suitable apartments, rather than trying to have the state act as central provider of housing projects, which are globally best known for their tendency to produce deplorable social conditions. But for the time being, the private sector has not yet been able to satisfy that demand. Government incentives for construction of affordable housing, measures to clean up and expedite administrative processes, and radical changes in the town planning agenda are the challenges that have to be met to complete the foundation for a healthy real estate boom in Lebanon.

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Economics & Policy

The economic relationship

by Andrew Tabler
written by Andrew Tabler

In the current political furor, it must be remembered that the Lebanese and Syrian economies are and have been strongly interdependent – a situation that predates Syria’s military intervention in 1976 and will probably remain so in the short to medium term.

Prior to former Prime Minister Rafik Hariri’s assassination, the Lebanese economy was finally picking up steam, built on stronger trade with the region, including Syria. Should the opposition win the upcoming Lebanese elections, it will not necessarily mean that Lebanon will be cut off from Syria economically. The special bilateral agreements of the early to mid 1990s have been replaced with Arab-wide trade pacts that have slashed tariffs on a wide variety of goods and facilitated inter-Arab investment. They will remain binding. Restrictions on Syrians working in Lebanon are a possibility, but the fact of the matter remains that Syrian labor is not easily replaced by other foreign workers, as they require housing and residency permits to the tune of $1,800 per year. If economic reform accelerates in Syria in response to the crisis, which it has in terms of banking, Lebanon’s could lose its share of Syrian savings, and with it, a vital source of deposits that can be invested in everything from Lebanese treasury bills to credit cards – all of which keep the Lebanese dream of material progress going. But as US pressure increases on Damascus, Syrian reform is likely to grind to a halt for the foreseeable future unless a working compromise can be found.

Trading partners

Despite ebbs and flows in Lebanese-Syrian relations over the years, bilateral trade has continued unabated and has seen rapid growth in bilateral trade. In 1997, for example, the volume of bilateral trade stood at $76.81 million, for which Syrian exports to Lebanon accounted for 92.7%. As more agreements were signed, Lebanon gradually began tipping the trade balance in its direction. In 2000, for example, bilateral trade volume stood at $190.1 million, with Syrian exports making up 87.8%. By 2003, trade volume stood at $277.2 million, but Syria’s share of the pie had slipped to 74.06%. In the first half of 2004, total trade volume stood at $136.95 million, of which Syrian production accounted for only 63%. While such figures are susceptible to fluctuations in energy prices (almost half of Syrian exports to Lebanon are oil products), Lebanese exports to Syria more than doubled between 2001 and 2003, and Lebanon’s share of official trade volume continued to grow.

Official statistics on Lebanese-Syrian economic activity are deceiving, however, as they do not reflect services Lebanese enterprises provide to Syrian clients, as well as rampant black market activity. The Lebanese state’s ability to assess taxes and customs duties during the war was severely curtailed. Getting a handle on the volume of black market activity between the two countries is therefore incredibly difficult. But a brief look at some of the reasons Lebanese and Syrians took their economic activity underground sheds light on what remain important needs of both sides that are likely to quickly show through the current political posturing.

Refuge for Syrian money

First and foremost are financial activities. Following Syria’s Ba’athist Revolution of 1963 and the nationalization of the banking sector, Syrian money poured into Lebanon. Syrian financiers set up shop in Beirut and in Chtoura to service the needs of Syrians, due in large part to the inefficiencies and restrictions that accompanied state domination of Syrian finance. Syrians are not inward-looking people cut off from the rest of the world and over the last century, Syrians migrated to the West in large numbers due to extensive political instability, and carried their trade with them. Thus, unlike many other “socialist” countries, Syrian had a strong need to keep and effectively use hard currency.

Lebanon fits Syrians needs to a tee. Its famous banking secrecy laws made it easy for Syrians to hide their true income and worth from the Syrian authorities. The banks’ top-rate services, in terms of transfer facilities, suited the needs of Syrian traders all over the world. Last but not least, the banks’ ability to make smart investments and make strong returns made Lebanon Syria’s piggy bank.

When the Syrian state imposed harsh foreign currency restrictions following its forex crisis in 1985 to 1986, Lebanon became an important conduit for black market currency transactions in and out of Syria, known in the region as the HAWALA system. When Syria’s private sector began to grow in the early 1990s, and Syrian banking regulations remained high restrictive, this activity became semi-sanctioned, with Syrian authorities openly turning a blind eye to the illicit activity. Lebanese banks asked few questions, as per their banking confidentiality regulations.

Lebanese banks also became active in loans to major Syrian enterprises, charging high rate of interest and special terms in exchange for forgoing the ability to secure collateral in Syria (which is restricted to Lebanese banks). Last but not least, Lebanese banks provide, and still provide, the lions share of L/C and other import finance facilities to Syrian importers. Only in the last few weeks, following Hariri’s assassination, have Syrian regulations been eased to allow Syrian banks to provide L/Cs in foreign currency.

The second area concerns black market trade activities. Despite changes in Syria’s customs regulations over the past few years, the country remains a highly protected economy. Lebanese products skirt these restrictions through the abovementioned free trade agreements. As Syria’s private sector has grown, so has its appetite for goods either banned by Syrian customs regulations, or those forbidden by US trade restrictions on Damascus. As a result, Lebanese traders have become masters of “re-exporting”, where goods such as US computers or car parts are shipped on to Syrian suppliers in violation of US law. In response, US corporations have put heavy pressure on Lebanese import agencies to obtain “end-user” licenses for various products. Strong family business ties straddling the border, high commissions made by Lebanese re-exporters, along with no increases in the capacity of the US embassy to monitor such transactions, make such demands virtually unenforceable.

Swapping expertise

In terms of services, Syrian producers utilize Lebanese expertise in everything from production techniques and marketing. Most Syrian businessmen say Lebanon’s close proximity and the international experience of its workforce make Lebanon the best source at the best price. But perhaps more important is the willingness of Lebanese companies to receive large “off the books” payments from Syrian sources that in most other economies would be considered money laundering. This fact is not due to the Lebanese penchant for “business” but rather their understanding of, and willingness to circumvent, Syria’s foreign exchange restrictions. Along with, of course, Lebanon’s banking secrecy policy.

Syria’s manpower

The third area involves Syrian labor in Lebanon. Since independence, Syrian workers have satisfied Lebanon’s demand for skilled, cheap, and unreported labor – an important factor in the profitability of Lebanese businesses. While many Lebanese now complain that the estimated 1 million Syrian workers in Lebanon are in fact stealing jobs away from Lebanese, the simple fact of the matter is that Syrian workers, in the words of one Lebanese businessman, “will do what most Lebanese feel is beneath them.” It is easy to understand: Lebanon’s skilled and polyglot workforce invests in its education with the hope of obtaining a white-collar office job. Syrian workers, therefore, fill the blue-collar gap in Lebanon ask construction workers, garbage collectors, handymen and house cleaners. This makes Lebanon an important source of remittances to the Syrian economy, with some estimates reaching $4 billion per year.

Not all these funds leave Lebanon, of course, as most Syrians are still reluctant to repatriate their savings to Syria’s nascent private sector banks. Many Syrian workers are also married to Lebanese nationals, making estimates of the Syrian labor drain on Lebanon hard to quantify. Nevertheless, Syria continues to suffer from high unemployment, and the economic opportunities for Syrians in Lebanon are an important part of keeping food on the table among the families that straddle the anti-Lebanon range.

A brief history of Lebanese-Syrian economic pacts

In the year’s following independence, different Syrian governments tried to placate the wishes of businessmen from all over the country who historically preferred using Lebanese ports. This culminated in the signing of the Lebanese-Syrian Economic Pact of 1953 – a document designed to help integrate the two economies. The agreement allowed for quota and duty free trade in agricultural products and exempted industrial production from all or half of customs duties, depending on the product in question. In terms of labor and services, Lebanese and Syrians could obtain a six-month residency permit on the border, which allowed Syrian surplus labor to serve the Lebanese market – a situation that continues to this day.

During the civil war, Lebanese-Syrian trade continued, albeit on a much more limited basis with areas under the control of Christian militias. In the early 1980s, Lebanese President-elect Bashir Gemayal tried to uproot Syrian business ties with areas under his control and led the Azharis – a financier family of Syrian origin – to sell their controlling stake in Credit Libanais in 1984. Following Syria’s role in implementing the Ta’if Accord, both countries signed the agreement for Brotherhood and Collaboration of 1991.

While the agreement is often framed in terms of its bilateral commitments to overall cooperation, external affairs, and security, equally emphasized are economic and social affairs. Such matters are overseen by the Committee for Economic and Social Cooperation, an offshoot of the Lebanese-Syrian Higher Council, which oversees the agreement.

In 1993, Syria and Lebanon concluded yet another pact – The Agreement for Economic and Social Cooperation and Coordination. Perhaps more than any other agreement, it outlines in detail the goal of gradual economic integration between Lebanon and Syria, as well as the principles on which such goals would be met. Six clauses outline free movement of persons, labor (based on the laws of each country), services, goods, capital, and transport. In addition, a “mechanism” was established to coordinate national policies in water, energy, electricity, taxation, and finance, amongst others, with the goal of achieving a common market between the two countries.

As each state adjusted its legislation to meet such goals, bilateral trade expanded. When the Arab leaders began looking to liberalize pan-Arab trade in the mid 1990s, in part to counteract its free trade agreements with the EU and the WTO, the 1993 agreement was held up as a success story. This led in 1997 to the conclusion of the Greater Arab Free Trade Agreement (GAFTA), in which Lebanese-Syrian economic relations have been framed ever since. GAFTA established the goal of eliminating all tariffs and quotas (with some exceptions) on January 1, 2005. Ahead of that date, Arab countries were free to conclude bilateral agreements to accelerate economic liberalization – a clause Lebanon and Syria took quite seriously. Some 23 bilateral agreements were subsequently concluded, including everything from investment guarantees and industrial and agricultural production to the protection of the environment to emergency medical services.

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The Buzz

Heading back to the books

by Thomas Schellen
written by Thomas Schellen

Like all other fields of activity, the pursuit of knowledge in Lebanon has suffered under the turbulences of spring 2005. A Beirut trade show on education and professional training options had to be cancelled in February and attendance at continued education programs dropped. But providers say that interest is back and programs are running at speed.

As new challenges await job seekers, employees and companies in the Lebanese economy, the time is actually highly suited to check out current qualification options that augment the classical university education path. This spectrum was widened considerably over the past few years and extends today to a dazzling range of training choices. Locally, providers of continued education come from both the traditional university track of academia and more business-centric commercial training companies. As the field of providers is getting stronger and ever more capable, however, institutions in both these realms have adopted increasingly similar approaches as far as meeting the need for practical applicability of knowledge, delivering quality and value for money, and tailoring their programs to the scheduling and qualification requirements of companies and employees.

Programs concentrate primarily on managerial, financial, and technical qualifications where both general and highly specified skills can be acquired and certified. As the provision of continued training entails furthermore a strong international dimension, the offering increasingly includes very sophisticated programs developed by leading global education brands that address business leadership issues in short and super intensive power seminars.

Amidst the increased number of training options the paradigm of life-long learning as hallmark of leadership in business is contained in its purest form in university curricula leading to an Executive Masters in Business Administration (E-MBA). Introduced in Lebanon in the last few years, a number of local E-MBA programs at universities here aim to address the needs of business owners and managers who want to hone the skills they have already acquired in running a company or department and who have to juggle career and education at the same time. A small portion of these programs can be regarded as meeting the top worldwide standards for an E-MBA.

The first entrenched Lebanese institution to offer an Executive MBA of international standing was the Lebanese American University (LAU), which launched its initial E-MBA class in 2000. The university designed the program to be taught year-round in courses each comprising two Saturdays of class attendance. Skills and management specialties taught in the program include accounting, banking and finance, economics and statistics, management, and marketing.

The E-MBA program at LAU graduates 25 participants per year, with a majority of the enrolled being Lebanese, Elias Raad, director of the program, told EXECUTIVE. For the time being, the university does not aim to expand the program but LAU is actively seeking an increase of corporate partners who would send participating executives.

A very ambitious E-MBA program was inaugurated one year ago at the Olayan School of Business at the American University of Beirut. Its first class will graduate this summer. From the outset, the program was structured into modules that make attendance for out-of-town participants as easy as possible and enrollment by regional business executives is above 50%, according to program coordinator, Imad Zbib.

AUB relies on a mix of own faculty and visiting international experts to teach at the program. Describing the first year of experience with the new E-MBA as winning model with room for further improvement, Zbib reported that recognition of the program throughout the region was already astonishingly high. “Getting more and more applications is a sign of success,” he said.

The Ecole Superieure des Affaires (ESA) offers an E-MBA program taught largely by professors from the leading French business schools it stands in affiliation with. Launched with the start of ESA operations in 1998, the E-MBA leads to a double diploma from ESA and the ESCP-EAP European School of Management.

In the creation of the ESA E-MBA, the objective was to give Lebanese individuals the chance to obtain high-level European business qualification in Beirut, according to ESA director of communications, Georges Najm. At a cost of just under $10,000 for the 18-month program, the degree can be obtained here for a fraction of the 30,000 euros that participants pay in France, he said.

Along with the entire ESA portfolio of MBA and specialized Masters programs (most recent addition: a Masters in Hospital and Health Management), the framework for the E-MBA program underwent changes in 2004 when the institution adapted its entry requirements to the new European structure of tertiary education. The modification links ESA with the European transfer credit system, which harmonizes graduation standards at three (license/degree), five (Masters) and eight (doctorate) years of required study.

At $500 and $645 per credit hour, the E-MBA programs at LAU and AUB are situated at the pinnacle of the education cost pyramid in Lebanon. But given the intensity of the program and the variety of expertise that the participants at the AUB program are exposed to – each class of 20 E-MBA students receives lectures from at least 30 different top instructors, meaning the teacher to student ratio is 1.5 to 1 – Zbib sees no problem in justifying the program fees. “We had no complaints about tuition,” he said. “In fact I often hear students say that costs are reasonable.”

In addition to the E-MBA offerings, the leading universities are launching new programs this year. LAU has adopted a course that prepares its participants to acquire certification as Information Systems Auditor. According to the university, the Certified Information Systems Auditor (CISA) qualification is the best internationally recognized sign of excellence in information technology assurance services (auditing), security and governance. Coming from either information technology or auditing backgrounds, IT auditors are generally in demand in the financial industry, ICT companies, universities, and in the public sector. In Lebanon, to date only 33 persons hold the certification.

The new CISA preparation course at LAU comprises 60 hours, inclusive of mock exams, and the university expects as participants young professionals who are looking to enhance their career prospects and who want to be among the privileged CISAs in the country. Standard cost of the course is $1,250.

Specialization in Islamic finance is the focus of a new project at ESA that was announced in the second half of last month. Created by the CRED Research and Doctoral Studies Center at ESA, Al Multaqa is a foundation with the mission to develop and improve the understanding of Islamic finance. Activities at the foundation are scheduled to commence later this spring and will entail the organization of training seminars and lectures on the increasingly important realm of Islamic finance as well as creation of an important database related to this issue. According to ESA, the activities of Al Mutaqa will be carried out in close collaboration with companies and banks specialized in Islamic finance.

Financial skills are the focus of several courses of professional training by specialized commercial institutions. Among the best-established programs are the Chartered Financial Analyst (CFA) and Certified Public Accountant (CPA) courses offered by a small number of providers in Lebanon.

According to training company Becker Conviser, CFAs in Lebanon work in the pure side of finance, namely banking and investment companies, in portfolio management and to a small extent in insurance companies. The attrition rate at the three-level courses is high and out of a starting batch of about 120, some 10% of CFA students typically accomplish the final level.

After achieving the internationally recognized CFA degree, the financial analysts find a much larger job market and higher salaries in the Gulf region where, depending on the degree of experience, starting salaries of $6,000 to $10,000 per month are realistic. In the small Lebanese market for the profession, salaries of $2,000 to $4,000 are the norm.

The market for certified public accountants is more developed in Lebanon and there is a consistent high demand for auditors. A typical career path of a university graduate in this field entails working for a few years with a major audit firm and then move up by achieving the CPA degree. A CPA in Lebanon commands a monthly salary of up to $2,500 in an audit firm and up to $3,500 in the private sector, according to estimates by Becker Conviser. A recent program offered since July 2004 by the firm in Lebanon is the Certified Management Accountant, CMA, which equips graduates with skills in managerial accounting and has good demand in Lebanese companies. Managers, accountants or financial managers are the target group for this six-month program, which requires participants to budget about $3,000 in their education investment. A CPA costs about $5,000 and a CFA about $6,000 in course fees and materials. CPA graduates have to sit for their exams in the United States.

Corporate sponsorship of continued education for individual managers appears to still account for a smaller share of the professional training activities in Lebanon when compared to individual enrollment by people seeking to enhance their career chances. However, according to Fay Niewiadomski, managing director and senior consultant at training firm ICTN, the awareness of training is growing in the corporate sector. “Businesses are realizing that training and consulting services are adding value and profits to their operation; however these need to be identified and customized to their needs. Companies are beginning to create human resources (HR) departments instead of relying on a personnel manager to deal with the ever-increasing complexities of talent and proper job placement,” she said.

ICTN is one of several firms that are expanding their portfolio of training programs, next to offering consulting and in-house training services to companies in areas such as quality management. Examples for new courses by ICTN this year are a seminar introducing the Balanced ScoreCard method (a performance management system) developed by Robert Kaplan and David Norton, which was held last month, and an upcoming Project Management workshop, which guides participants through all stages of managing a project from its definition and initiation to its completion.

According to ICTN, the Balanced ScoreCard framework helps organizations translate strategy into operational objectives that drive both behavior and performance. The project management workshop aims to equip managers and members in a project team with the tools to accomplish projects on time and reduce the worry and effort involved in each project. With target audiences of present and future managers, such localized courses of no more than five days in duration offer education value at a low risk of investing about $250 per day.

But for those seeking to ascend to the Olympus of continued education these days, power seminars in executive training by the world’s leading business schools are the ticket. Whether assimilating new insights about breakthrough performance across the value chain in a seminar titled “Driving Strategic Innovation” organized by MIT-Sloan and the IMD in Lausanne this month or gearing up to conquer new business victories by attending “Women Leading Business: Innovation and Success” next month at Harvard Business School, the latest trend in learning for senior executives is the intensive, short-time course with top educators and fellow business leaders.

The promise of these programs to business leaders is to change the way they think, act and shape corporate culture in their organization. Under this general header, business executives can chose from a multitude of topics from highly reputed business schools, if they are willing to invest typically between $5,000 and about $8,000 for a week or less of training, plus travel and accommodation expenses.

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Business

Banking on change

by Michael Young
written by Michael Young

As demonstrations succeeded one another in the aftermath of former Prime Minister Rafik Hariri’s death, one contradiction became increasingly apparent: while the events were doing little good for the economy, the general feeling of euphoria prevailing seemed to overcome the prospect of an economic collapse, at least in the minds of those opposing the government.

This paradoxical confidence, which should have been undermined by the death of the only man with a chance of taking Lebanon out of what many consider inevitable bankruptcy, has endured. And yet the indicators are hardly reassuring. The tourism industry and real estate sales, both of which bolstered the relative recovery in the economy after 2001, have been on unprofitable standby. According to finance ministry officials, the state is losing some $15 million a day in lost VAT revenues. Every week that politics delay the smooth run of policy is one lost to introducing vital economic reform.

And yet the public mood, for the first time in many years, is positive, even if this is accompanied by concern. The complex ways of economic confidence have been difficult to gauge in postwar Lebanon. In the second half of the 1990s, the expanding debt prompted the World Bank to prepare for a catastrophe scenario in the event the pound collapsed. That didn’t happen, and Bank economists would come to Beirut shaking their heads, ensuring one and all that the financial edifice should have already fallen. Then Hariri pulled another rabbit out of his hat and managed to organize a Paris II conference. This was to his merit, but the funds were soon wasted thanks to government bickering. While there has been some pressure on the pound since Hariri’s death, as well as the removal of funds by Syrian investors, Lebanon for the moment remains within the range of acceptable economic uncertainty. A primary reason is that there is a widespread hope for tomorrow, one resting on the familiar myths long bolstering the Lebanese economy: that once the Syrians depart corruption will end and that large amounts of expatriate money will return, as will young Lebanese in search of new opportunities in their homeland. Like most myths, these have some truth in them, and much wishful thinking. Corruption may decline somewhat, but the Syrians were always part of a chain of larger corruption in Lebanon, as opposed to its main sponsors. Will Lebanese emigrants be tempted to invest more in the economy now that Syrian soldiers have gone? Perhaps, but that shouldn’t detract from the fact that there are relatively few profitable financial ventures existing today to draw the “massive” sums of money the optimists anticipate: the Beirut stock exchange is on life support; labor is relatively expensive when compared to surrounding states; and serious obstacles remain in manufacturing and agriculture.

More promising, perhaps, is the would-be return of young Lebanese, since that comes with an element of idealism that markets often fail to affect, at least in the short term. However, in the long term that idealism will fade if opportunities are short. Lest we forget, when Hariri came to power in late 1992 his presence and the prospect of regional peace encouraged many expatriates to fly home. By the end of the decade, however, many of the prodigal sons and daughters, armed with foreign nationalities from their time overseas, again departed from Lebanon because of the ambient stagnation. That could happen again if the society fails to seize the economic moment in the coming months.

Perhaps the most enduring promise held by the optimists is that, somehow, the Lebanese will benefit from outside help, particularly from the United States. There may be something there. Certainly, the Bush administration has shown an interest in using Lebanon as a showcase for peaceful democratic transition in the Middle East, to contrast with Iraq. While the focus on this appears to have been pressure on Syria to pull its soldiers out, there may be a second ingredient: ensuring that a newly-democratic Lebanon won’t collapse into a devastating pit of debt. And there, the Lebanese may have just found an ally.

The decision of President George W. Bush to name the number-two man at the Pentagon, Paul Wolfowitz, as his candidate for World Bank president was, perhaps, a lucky straw for the numbers crunchers in Beirut. Inasmuch as Wolfowitz is the administration official most wedded to reform in the Arab world, those seeking the Bank’s help in rescheduling Lebanon’s debt may find a willing partner – someone aware that economic resurrection must accompany political independence to make the latter more credible. That said, Wolfowitz’s reported affinity for the anti-corruption drive of his predecessor, James Wolfensohn, may put a damper on things for Lebanese bankers insisting on a sturdy defense of banking secrecy laws. Confidence may prevail in the coming months, delaying bankruptcy. But how much of that difficult-to-measure variable do the Lebanese really have after having expended an inordinate amount in the past decade?

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Economics & Policy

Juggling debt wisely

by Faysal Badran
written by Faysal Badran

The key to Lebanon’s short term economic future rests with its ability to get on a trajectory of reform and debt management. With the real economy bleeding and GDP expected to shrink this year, the importance of Lebanon’s debt management takes on a primary role, especially since gross public sector debt amounted to the equivalent of 170% of GDP in 2004, a more than three-fold increase over the past decade. Net public debt amounted to the equivalent of just over 160% of GDP in 2004 or around 120% netting out central bank foreign exchange reserves. This represents close to double that of Turkey, and is among the highest of rated credits. Understandably servicing this debt represents a huge drain on the public coffers, and will be a main obstacle to growth.

A bit of history Lebanon has a track record of always meeting its obligations, even in difficult circumstances. The fact that the banking and financial sector has remained at the core of the economy has instilled a strong “willingness to pay”. Paris II did also bring a marked improvement in both the stock and structure of debt: To recap, $2.4 billion in donor funding was provided in the form of 15-year Eurobonds with a 5% coupon and a 5 year grace period; Domestic commercial banks agreed to tender around $3.6 billion in cash and securities in exchange for new longer dated zero-coupon Eurobonds; Banque du Liban (BDL) agreed to cancel debts equivalent to around 10% of GDP, with obligations equivalent to a further 10% of GDP restructured into 15 year Eurobonds with a 4% coupon and a five year grace period; A further $400m in T-bills was restructured into new 5-year instruments, with a 4% coupon. The total value of the debt restructured under the Paris II agreement was some $9.5 billion, with the absolute stock of debt cut, the maturity significantly extended, and the share of market debt also cut.

The problem is that the government has failed to fulfill many of the commitments it made under the Paris-II agreement, particularly with respect to privatization and structural reform. Actual revenues from state asset sales in 2003 amounted to less than one-tenth of the official target, as bickering between the country’s business and political elites stalled key privatizations (e.g. telecoms). Arguably, Lebanon has managed, despite the absence of these privatization revenues, but it has been fortunate in facing a favorable global financing backdrop. International capital markets may no be as forgiving beyond next elections, and hence it is vitally important that state asset sales accelerate. Failure would likely leave the government reliant on rapid real GDP growth, and the maintenance of very high primary surpluses

(which they have thus far failed to achieve). Necessary action

In terms of broader budgetary reform, the government will need to do the following next:

? Streamline the civil service, to reduce the wage drain on the budget. Some progress in this regard has already made, and the wage freeze adopted in 2003 has helped reduce wage cost on the budget.

? Reform, overhaul and streamline the whole taxation system. VAT rates may need to rise and a general system of income tax needs to be introduced.

? Reform the social security system/healthcare system, which remains under-funded and represents a huge drain on the Treasury.

? Reform pensions.

? Reform the energy sector. In particular, the state owned electricity company (EDL), continues to exert a drain on the public purse, equivalent to around 2.5% of GDP. The company has huge debts (over $800 million) and has been heavily impacted by hikes in world fuel prices, which it has been unable to fully pass on to end-users. It has also been a favored target of political fighting and outright theft.

Although the BDL has spent some reserves on defending the currency, and local banks have pushed up interest rates on Lira deposits as incentives for holders to be patient, the BDL and the commercial banks are relatively liquid and could ride out a significant period of low level political instability, albeit a more marked deterioration in the security situation, encouraging significant capital flight from the domestic banking sector, would cause significant stress on the entire system.

From the external debt perspective, Paris II shifted a large part of the public sector debt burden from the domestic to the external sector. As a result the ratio of external debt GDP has continued to rise. Indeed, the ratio of external debt/GDP has more or less doubled since 2000 to stand at around 114% by 2004 and over 300% of exports and good and services. Both ratios are high by international standards, and indeed above levels deemed sustainable; generally a ratio of external debt of 180% is regarded as being at the threshold of sustainability. Paris II did, however, significantly lengthen the maturity of external debt albeit the external debt service ratio still stands at a relatively high level of 20%. A particular problem exists in 2005, with over $3 billion in Eurobond obligations maturing. The government is known to be in discussions with local banks and institutions (holders of 80% of the stock of Eurobonds) and an exchange offer is likely to be agreed.

The chart shows that the banks remain key holders of debt and given their high level of liquidity, and thus ability to take on more debt stock, it is unlikely that the banks will be the factor to pull the rug from underneath the country’s fiscal situation. Again, all this assumes no catastrophic shift in the security situation. The critical situation remains one of confidence. The holding of elections, supervised internationally, and leading the way to a balanced and committed government are pivotal in restoring economic order. As it stands, the country is hostage to unrealistic GDP growth needs. As is seen in the chart, what has added to the fiscal strain has been the weak growth of the real economy.

The ability of the next government to orchestrate a smooth roll over, swap, and rescheduling of debt remains the most vital element to watch for, which is why this government must be credible not only from a popular perspective, but also must have the manpower and vision to convince debt holders that the trajectory of reform and growth initiatives is unshakable. The current environment in global emerging market debt, having turned recently toward slightly more risk aversion and higher yields, will prove challenging for anything other than a strong and representative government. What is clear is that the economic imperative, so dear to Hariri, will need to be the clear focus. This is a tall order, considering another key priority is political reform.

The banking sector is probably the only bright spot in this whole panorama. The banking and financial sector presents both a strength and a weakness for the economy. The sector is huge relative to the size of the economy, with the ratio of banking assets/GDP amounting to over 300%, comparable to service sector/banking hubs such as Hong Kong. The banking sector has traditionally attracted huge inflows from the Middle East region, which, in turn, have been channeled by the banks to fund the government’s huge public debt burden. Officially, non-resident claims on the sector amount to around 20% of assets. However, with a large transitory population it is difficult to draw a clear distinction between residents and non-residents. Actual foreign claims on the banking sector may thus be much larger. Around one-quarter of banks’ portfolio’s comprise public sector debt (over $7bn in Eurobond holdings, and a similar amount in domestic T-bills). The sovereign exposure of the banks is thus high (helped by zero risk weighting attached to sovereign Eurobonds and T-bills), creating a symbiotic relationship between the banks and the Treasury; the banks face a strong incentive to rollover public sector debt or face serious capital losses (as reflected in the Paris-II agreement). Arguably the high ratio of assets/GDP also make the sector much better able to fund a higher nominal level of public sector debt. Generally the sector is better capitalized than its peers in other similarly rated EM credits (capital adequacy is around 20%). The NPL ratio is though high at around 30%, albeit these are relatively well provisioned (NPLs net of provisions stand at around 12%) while the sector is relatively liquid (the ratio of net liquid assets/total assets stands at around 50%). The sector is also currently benefiting from rapid asset growth, with deposits currently rising by around 11% YOY (20% growth in deposits by non-residents). Nevertheless, the sector does present a potentially large contingent liability on the state (equivalent to around 15% of GDP, albeit this is small relative to the existing huge burden of public sector debt). The sector is highly dollarized, with around 70% of deposits and over 80% of loans denominated in foreign currencies. Unlike in Argentina, foreign ownership in the sector is small (less than 10%), although the fact that the sector is highly dependent on deposits made by foreign investors, it is still being propped up by foreign capital. The banks hold the key. Yes, it is crucial for the next elections to be fair, with all the ramifications this will have on confidence, but most crucially, the economy must stabilize. As it stands, if the current international focus continues, and political tensions ease, the economy will need to generate outsized gains in the remainder of the year to avoid a massive crunch on banks and thus the country’s ability to manage and restructure debt obligations. With the spectacular popular protests, what seems clear is that future reforms will have to be built on consensus, and that the political stability will in effect dictate our ability to restructure our obligations, and more importantly, keep funds flowing into the banking system. The loss of Hariri as a point man in pleading the cause for investing in Lebanon will be felt for years to come, but the confidence boost from renewed sovereignty and a vibrant internal debate will play a positive role in avoiding fiscal disasters.

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Economics & Policy

Q & A: Fouad Siniora – Forward thinking

by Executive Staff
written by Executive Staff

Former finance minister Fouad Siniora has been involved in the shaping of the country’s economic policies for the past 12 years as cabinet member and key right hand man of assassinated former Prime Minister Rafik Hariri. Although he moved to the top post at Hariri-affiliated Banque Méditerranée at the beginning of 2005, from the day of the assassination Siniora strongly lent his voice to the cause of change. EXECUTIVE asked him about the priorities of the current period, the challenges and opportunities of the future, and the succession of Hariri’s leadership in economic policy making.


Lebanon is situated at a crossroads and the atmosphere in the country is seen as tense. How do you perceive the situation?

First of all, one has to resolve the urgent political issues. This is something very important and I think the opposition made a good deal of progress over the last two weeks of March in terms of achieving the objectives that they have set. This refers [for one thing] to appointing an independent commission, where the decision is being taken by the [UN] Security Council. The government should have taken the initiative – they did not. The decision for ousting the heads of intelligence is also something that the government should have taken. Asking people to oversee the election process, this is something that is also going to happen. The government, in its behavior, has been always late. They are not taking initiative and already they are discredited. What matters now is to hold elections. This is in the interest of all concerned. It is so important to have it done and the opposition is making every effort [to do so]. The most important is to hold the elections and that is something to regenerate the democratic process and the democratic institutions.

What role does the economy play in the moment?

Political events have been shadowing the economic, financial and fiscal issues that are very important. The tragic loss of Mr. Hariri is something so important and with such deep consequences on the economy. That is in no doubt. But on the other hand, with Hariri, as a martyr from his grave, is achieving some of the objectives. Definitely, nobody wished that it would be that way but we have achieved this in terms of a Syrian withdrawal. And I think this by itself will open new windows to the Lebanese economy.

What is the way forward?

What I strongly believe is that the Lebanese economy has great potential and yet is also at great risk. The risks lie in two things. The first is that the economy is lagging behind in the process of adapting to new developments in the region and in the world. When I speak about adapting, this is on all fronts, political, economic, labor, regulations, laws, and the mindset of the people, although Lebanon used to be always a country with a high affinity for change and adaptation. The other risk is the fiscal situation and the debt, which nobody can claim is not a problem. What really matters in this regard is putting the economy on the right track. If you are putting the economy on the right track, you are putting the financial situation on the right track. Repaying the debt – no country repays the debt. What matters is being able to service the debt. This is what I believe.

Besides the risks, do you see an upside?

The opportunity is that Lebanon is a modern democracy and we must regenerate our democratic process. At the same time, the area has great growth potential. Lebanon can really benefit a great deal from that. To do that, we have to go back to a set of reforms. This is not a matter of these reforms having to be complying with ideas coming from outside, not at all. These are locally born ideas. And I think what we have already put into the budget proposal for 2005 for these reforms, is very important. These are not the only ones, they are on the economic scene, but there are political reforms that have to be done to improve accountability, have the democratic process really perform properly and ultimately, proper implementation of the Taif Agreement.

After elections, what are the priorities in economic policy that need to be addressed?

We have to address growth, employment and the fiscal situation. Fiscal stabilization has been a big responsibility of the Hariri years. Under your leadership and direction, the ministry of finance has been successful in pursuing reform, implementing VAT since 2002 and lately increasing fiscal revenue. Does the current situation endanger this progress? What really counts now is to proceed in expediting the process and moving to the next phase, which must first begin with the [Syrian] withdrawal. Mind you, my point of view personally and one I believe shared by many reasonable Lebanese in this is that we have to really be on good terms with Syria. Syria is our neighbor and no matter what happens, nobody can change geography. It is our interest to be on good terms with Syria, because Syria is our gateway to the Arab world. We also have no interest in signing any agreement like the May 17th or anything of that sort because it is not in the interest of Lebanon to do so. On the other hand, we have to really work out with Syria something that we can abide by – a very simple formula, as Hariri once said, set by Bcharra Khoury in the old days, [which held] that Lebanon is not supposed to be a place or a passage for colonialism against Syria. As Hariri said, Lebanon cannot be ruled against Syria but it also cannot be ruled from Syria. This is the arrangement that we have to respect. I think this will lead us to great potential for the development of Syria and of Lebanon.

You mentioned that the Lebanese government has been very slow to implement measures. Would disentanglement of the political processes, meaning reduction of Syrian political involvement in Lebanon and reduction or removal of MOUKHABARAT structures, help to improve public sector governance decisively in the short term?

I think this is going to be very helpful, because it means that each organization will have to concentrate on what it is supposed to do. The MOUKHABARAT, according to the Taif Agreement, should really have worked for military objectives, not against the people, taping their phone calls. They are wasting their time. It would have been a very strong message if the Syrian withdrawal from Lebanon had happened without the Hariri assassination. We would have seen the country going places.

How about the impact on Syria? Would it also bring a strong positive effect on Syria?

If I were in the Syrian shoes, yes, I think this is going to be. How are they going to take it; how they are going to deal with it? This is for the Syrians to decide. I am not going to interfere in their business, but I think this is something that can be converted into a new opening, a new opportunity.

What do you think of comparisons and calculations where people come up with numbers, how much we gave, how much they gave, how much they profited, and so forth? Do you have any view on the net balance of the Syrian-Lebanese relationship in those terms?

I think it is very difficult for anybody to say today but I can really tell you that there really is a synergy and it definitely is in the interest of Lebanon and in the interest of Syria to work together and have closer economic relations, not one overriding the other and taking advantage of the other. Syrian labor is very important to Lebanon and people are mistaken when they talk about Syrian labor. I personally have not heard of any situation under which somebody had Syrian labor imposed on him. In the agricultural sector, the basic labor force is Syrian, in the construction sector, the same thing. Lebanon imports cheap labor and Lebanon exports expensive labor.

From a fiscal perspective, does Syrian labor bring about damage to Lebanon?

They are creating value, my friend. I am not in favor of something that is the manipulation of certain things or the interference in many affairs in the country, this is definitely not productive at all; this is destructive. But when you talk about Syrian labor, why don’t you talk about the 100,000 Sri Lankan housemaids? Are you against 300,000 Syrians but not against the 100,000 from Sri Lanka?

How about taxation and work permits for the foreign workers?

If you go to Switzerland, they get labor from France, from Italy, from Spain, or from Portugal and all of them are illegal. Why would you impose taxes on Syrian labor? We can impose taxes, but who is going to eventually pay the taxes – the Lebanese will.

So from the fiscal perspective, would you impose taxation and collecting fees for work permits or would you personally favor a totally open labor environment?

If you want to organize it in terms of simple paperwork, then fine, why not. Nobody is questioning that. But why don’t you ask the same thing between Mexico and the United States? Let’s not concentrate on the side issues instead of the main issues. What we are really complaining about is the interference in political affairs and administrative affairs and everything pertaining to the functioning of the operations in the country. Here, the [Syrian] intelligence is interfering and this is counterproductive and damaging to the economy. Would this be a good time for devaluation of the Lebanese pound, given that the rate of dollarization is high?

It would be counterproductive. You are not gaining anything in terms of reducing your liabilities. You could reduce the debt by a trickle. The benefits, however, are very limited and the costs are very high. I don’t think this is helpful.

Could there be a Paris III and who would be the person to bring the international institutions and donors to the table, now that Mr. Hariri is gone?

I don’t know. It depends on who is going to be the prime minister then. If we wanted to really have a Paris III, we would have to prove to the world that we are serious and are ready to do what is really required so that we can carry on the reforms. We have committed ourselves with the world that we are going to do the reforms and what happened to the contrary was that we did nothing to carry out these reforms. It is high time to realize that the world is not going to do anything for us if we cannot do anything for ourselves. God helps those who help themselves. [Paris II] was an opportunity that was given to us and we abused it and did not take advantage of it.

How do you assess the level of confidence into Lebanon in the last six weeks, in terms of foreign direct investment and other investor sentiments?

There is a feeling of discomfort in the market but everybody is anticipating what really is going to happen in the coming period.

How far did the events of the past six weeks set the country back, one year, two years?

It depends on whether we are going to make a fresh start tomorrow from where we have reached or whether we still continue a process of declining.

Could you put a number on the losses to Lebanon’s GDP?

I don’t think anybody has done that yet. That is something we have to start working on.

You moved into banking after the Hariri government resigned last autumn. Was that an indication that you wanted to leave politics and return into the private sector? If so, are you now reversing that? Would you run for parliament or be aiming for a cabinet post after the elections?

I am not running in the elections; that’s clear.

Would you be willing to follow the call to cabinet, if there is the need for you?

That is premature to discuss now.

Is Mr. Hariri as a visionary and leader totally irreplaceable or can a concerted effort by the Lebanese make up for his loss?

He is definitely irreplaceable, because Hariri is a group of things that developed over the years. It is not something where Hariri goes and you can get somebody [else]. There is no more Hariri, which means a major loss to Lebanon and the Arab world. As a man of his stature, of his qualities and capabilities, he is definitely irreplaceable. Does this mean that we have to stay all day and night in grief? Yes, we have to really express our grief; on the other hand, life has to go on. We have to work and go on. If we can’t achieve everything that Hariri was doing, we have to do everything in our hands and expand on this day-by-day so that we can really deal with the issues in question.

So you see his vision as the basic formula for the future development of Lebanon?

Yes.

You were very close to him and often traveled with him. Do you sometimes sit and think, what if I had been in his car that moment?

Honestly, I wish I had been in his place. In all honesty, I wish I was the man who was killed.

Are you optimistic?

I don’t answer this question as such. I answer it saying we have to work harder. We can achieve but we have to work harder.

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Investors hold their breath

by Michael Young
written by Michael Young

If the political confusion reigning at the end of March sent any kind of message as to what the agenda of a Lebanese government, or governments, would be in the next six months, it was that now is gambling season when it comes to predictions. The challenge to the Syrian-dominated order in Lebanon, which began after the assassination of former Prime Minister Rafik Hariri, has pushed most policy issues, particularly those related to the economy, to the backburner.

Investors, at least those interested in Lebanon’s future, are understandably worried. Any sensible agenda they would define for the coming months would have to address several certified headaches. Amid plausible delight in seeing the onset of a new era in Lebanon, those with the money must keep a wary eye on the political and economic challenges, not to mention security threats, gathering like a storm cloud. What might their imagined list of preferred policy options be?

In the first week of April, according to an agreement reached last month by the Syrian-Lebanese Higher Council, the Lebanese and Syrian governments must sign off on a final withdrawal timetable for Syrian forces. While there was much talk in March that Syrian President Bashar Assad had agreed to both a full withdrawal and one that would occur before scheduled Lebanese parliamentary elections in late May, he personally had made no public statements to that effect. The April meeting should clarify the situation, assuming that governmental gridlock does not encourage Syria and its Lebanese allies to indefinitely delay discussions on a withdrawal timetable.

Investors are most worried about delay. While some believe that a solution requires creating a government of national unity, others are less certain that that would do more than just divide the political class further. That’s why, arguably, the options most favored to break out of the deadlock are either the formation of a government similar to the last one, which could rapidly move ahead with elections (under the assumption that the Syrian withdrawal and the public mood would allow a fairly free voting process); or the formation of a neutral government. Anything preventing either option will only alarm investors further.

One potential problem, perhaps not obvious today, is what will constitute a full Syrian withdrawal? The Lebanese-Syrian border has never been demarcated, so, if there is Syrian bad faith on the border issue, there is also the potential for disagreement over Syria’s fulfillment of Resolution 1559, which calls on Damascus to pull its troops out of Lebanon. This situation would replicate that of May-June 2000, when Israel pulled out of south Lebanon. The business community would weather the tension, but also pop many Maalox tablets.

While some opposition figures, particularly Walid Jumblatt, focused on ousting President Emile Lahoud in mid-March, by the end of the month the mood had decisively changed in favor of carrying out parliamentary elections on schedule. Investors probably agreed, since the downfall of Lahoud might create a political void that could have negative repercussions on the economy. Indeed, this was one reason why Maronite Patriarch Nasrallah Sfeir urged delaying focusing on removing the president.

For the present or future government, the question is: Which election law? Parliament is sitting on a draft law that calls for elections at the level of the small circumscription, the qada. If all goes well, parliament must approve the law by the end of this month. But if for some reason there is further political stalemate, it might decide to go back to the election law of 2000, which is more advantageous to pro-government candidates.

Any government, whether the caretaker Karami government or a successor, will have to ensure that the election law is not divisive. Elections today would probably reflect widespread, though not complete, support for candidates critical of Syria; for the government to avoid this through gerrymandering would fail and do more harm than good in terms of political stability. In that context, the government’s first priority for investors must be to force elections on schedule and not allow a democratic vacuum. Despite its imperfections, the past government’s draft law is acceptable to all, a rare consensus that a new government must highlight in encouraging parliament to approve the legislation.

The United Nations report in late March cast serious doubt on the behavior of the Lebanese security services in the aftermath of the assassination of the former prime minister. From the outset, the official investigation of the crime has been intolerably mismanaged, with investigators not even able, or willing, to find the bodies of two individuals who died on the scene. This has greatly undermined public confidence in the Lebanese state

Any future government, to be trustworthy to investors, will have to hold senior security officials accountable. This must not only mean confirming the bona fides of officials accused of responsibility for the Hariri murder, but also those conducting the investigation afterwards. This goes to the heart of the rule of law, and will be a test case for those new investors wishing to enter the Lebanese market after a Syrian departure. A priority of any credible new government must be to clarify such questions and present a report on the killing of the former prime minister that is internationally relaible; or request an international investigation that will determine responsibilities.

With Rafik Hariri gone and the transitional period leading to a Syrian withdrawal over, a new government will have to navigate through the backlash of a business sector that no longer can rely on the former prime minister. Already, the Hariri camp is trying to play the continuity card, with Bahia Hariri perhaps angling to be a future prime minister, which could imply a return of the former finance minister, Fouad Sanioura. This should help stabilize the markets in the short term, particularly on the revenue front, as serious preparations take place for deeper economic reform.

The first priority in terms of finances will be to stabilize the pound. The currency has remained steady in the month since Hariri was assassinated, but in the first two weeks of March there were reports of a $667 million drop in foreign currency reserves at the central bank. Private demand for foreign currency has risen, but there are no signs of panic in terms of capital flight. While this trend is sustainable in the short term, in the medium and long term it is not, particularly if the security situation deteriorates with more bombs going off. In order to help reverse growing pessimism, a new government must urgently present a new budget (a process the political crisis has delayed) that sets stringent spending limits.

Even with Hariri alive, it was always doubtful that Lebanon would escape its debt trap unscathed. With him dead, a new government must initiate steps to ensure that a domestic and international safety net is prepared for what is likely to be very severe, if not uncontrollable, pressure on the pound. Cutting budgetary spending is a first step, but so too is seeing whether this can be leveraged to attract international loans allowing Lebanese banks to reschedule their domestic debt. Lebanon’s integrity is in tatters when it comes to implementing economic reforms justifying such assistance. However, France and the United States may try to help guarantee a smooth economic transition after a Syrian withdrawal, to buttress the view that peaceful democratic changeovers are possible in the Middle East. If the US Deputy Defense Secretary Paul Wolfowitz is appointed to head the World Bank, Beirut might have in him a helpful ally on debt relief.

Any serious Lebanese effort to reassure investors and earn international assistance must be accompanied by a reform package that includes hefty budget cuts, privatization, and reductions in the bloated and inefficient bureaucracy. It may also require advancing rapidly on a new tax law that can expand the revenue base of the government beyond the income it receives from customs duties, state services and the value-added tax. Economic reform is largely political, so this is all easier said than done.

Precisely where the government should start on privatization is not entirely clear. The fixed telephone network could be a start, but it is not easy to see who would want to pick up the black hole that is the heavily indebted Electricité du Liban before the government props it up. A little-discussed initiative in recent years may make a comeback if the opposition wins a majority in parliament: eliminating superfluous parallel security agencies and cutting back on the high defense bill. A Syrian departure may also ensure that less money from governmental or government-licensed institutions is distributed to Syrian officials. In the short to medium term, however, there could be an economic price to pay if Syrian depositors continue withdrawing their money from Lebanese accounts. The question is whether that is sustainable: Lebanon offers more advantages than Jordan to Syrians, and the Syrian banking sector is still embryonic.

A government will also have to adapt to a new financial climate worldwide, where accounts will be more closely scrutinized by foreign governments and international financial overseers. Times are changing and Lebanese banking secrecy will almost certainly become more of a target of the United States. Shaping a valid response to such pressures will be necessary, and investors will be keeping a close eye on how this reaction affects their business overseas.

Beyond the political implications of the future of Hizbullah specifically, economic stability will be closely linked to the party’s disarmament. Resolution 1559 specifically calls for such a measure, opening the door to retaliation if the party retains its weapons. And while the international community has shown willingness to allow the Lebanese to resolve the issue internally, this margin of maneuver will not be unlimited

Hizbullah’s disarmament puts investors in a dilemma. While the markets would react positively to the party’s decision to give up its weapons (since that would alleviate fear of Israeli retaliatory strikes against Lebanese infrastructure in the event of cross-border violence), investors are aware that the process leading up to that stage may be particularly divisive domestically. Hizbullah has repeatedly indicated that it has no intention of disarming, and not a few observers see in the party an entity that considers itself above the Lebanese consensus. This sends out vibes that make the business community uneasy.

Investors, like many Lebanese, would welcome closing the curtain on the war years by putting an end to an era when guns do the talking. Any future government will have to emphasize that with vigor. One thing money will not follow in a new era without the Syrian army is any reminder of that time.

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Lies disguised as security

by Yasser Akkaoui
written by Yasser Akkaoui

Dr. Best, Himmler’s right hand man in the Gestapo, once said, “As long as the police carries out the will of the leadership, it is acting legally.” That mindset allowed for 400 political murders in the Weimar Republic between 1923 and 1932.

The ghost of our late prime minister confronts us with political murder at the heart of our national dream. He forces on us the appalling questions: Of what is our constitution made? What is our citizenship, and more, our lives, worth? What is the future of a democracy where leaders can be assassinated under conspicuously suspicious circumstances while the machinery of legal action scarcely trembles? How many politically disguised murders will occur before they are exposed for what they are?

On repression, Huey Long once said, “It will come in the name of your security – they call it ‘National Security,’ it will come with the mass media manipulating a clever concentration camp of the mind. The superstate will provide you tranquility above the truth, the superstate will make you believe you are living in the best of all possible worlds, and in order to do so will rewrite history as it sees fit.” George Orwell’s Ministry of Truth warned us, “Who controls the past, controls the future.”

What took place on February 14 was a coup d’etat. Its most direct and tragic result – and the subsequent terror bombings aimed at our retail outlets and industrial zones –was a reversal of Hariri’s commitment to economic prosperity and a declaration of war, because war is big business, worth billions a year. Our prime minister was murdered by a conspiracy to protect a state of war and all the conveniences and excesses that come with it. It was a public execution of the free entrepreneurial spirit that was slowly achieving supremacy over the business of war.

In reality, however, it is the business of peace that is keeping us afloat. Riad Salameh arguably the last of Hariri’s economic musketeers to still hold public office, watched as the coffers filled with the rewards of prosperity. Today, he is using these hard-earned savings – won on the field of economic recovery – to fight the forces of aggression.

But the worst of all crimes is when a government murders truth. If it can murder truth, it can murder freedom. If it can murder freedom, it can murder our own sons if they should dare to fight for freedom. There are still enough Lebanese left in this country to make it continue to be Lebanon. We can still fight authoritarianism, and when we do that we are not being un-Lebanese; we are being Lebanese. We are sticking our necks out and that has to be done, because truth does not come into being automatically. Individual men and women have to work and fight to make it happen. As long as our government continues to be like that, as long as such forces can get away with these actions, then this is no longer the country in which we were born.

Inspired by the closing statement of public prosecutor, Jim Garrison’s investigation into the assassination of President John F. Kennedy, 1967 to 1969.

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Grace under fire

by Nicolas Photiades
written by Nicolas Photiades

The Central Bank (BDL) has coped with great professionalism and efficiency with the resulting monetary and financial crisis, sparked by the Hariri assassination. Not only has it kept a low profile and worked diligently towards supporting the Lebanese pound, but it has also provided significant liquidity in support of local banks, while its significant foreign currency reserves of almost $14 billion, amassed up to combat such liquidity scares have allowed the Lebanese pound/US dollar exchange to remain unchanged since 14/2 and the subsequent panic that gripped Lebanese and foreign depositors at Lebanese-domiciled banks.

BDL has also recently put in place a mechanism that improves the Lebanese pound liquidity of commercial banks, and prevents deposit or capital flight for the banking system. Such a structure implies the sale by the commercial banks of their Lebanese pound three-year Treasury bills to the BDL in exchange for Lebanese pound liquidity. With this liquidity in local currency, the banks can therefore buy US dollars or convert Lebanese pound deposits into US dollar deposits in a more comfortable manner, but they must place these dollar deposits in three–year US dollar bonds issued by the Lebanese government.

Such a mechanism allows local banks to remain liquid in Lebanese pounds and avoid any potential crisis on the local currency, and improves dollar margins for the bank, as lower yielding dollar deposits are placed in high yielding Lebanese government dollar debt securities (e.g. with an average of 4.25% on dollar deposits and a coupon or interest of 8.5% on government dollar bonds, banks would be making a hefty 4.25% margin).

Stemming capital flight

The mechanism also allows banks to be slightly more generous in terms of interest rates on US dollar deposits, defusing as a result any potential flight of deposits to banks abroad. This is most crucial for the banking system and the BDL, as deposits are almost the sole source of funds for banks. Their flight would destroy the credibility that was built with great difficulty over the last five years. It is very important, therefore, that foreign and Lebanese expatriate investors/depositors maintain their faith in the Lebanese banking system and the economy, as the injection of deposits into the banking sector is one of the rare investments into the Lebanese economy. The last thing local banks want to see is a contraction in their balance sheet, and a significant slow-down in their activities, as such outcomes would create financial and social crises.

This is a solid temporary solution and gives some breathing space to the banks, allowing them and the BDL to sustain the crisis for a longer period. However, the BDL has not stopped using its foreign currency reserves since 14/2. The rush on Lebanese pound deposits and the willingness of depositors to convert into US dollars or other foreign currency has not slowed and the fact remains that around $5 to $6 billion dollars have been already been spent.

The BDL’s foreign currency reserves are not inexhaustible and at some stage it will seek to stop the haemorrhaging to preserve what would be left of the foreign currency reserves, needed to finance ongoing business (e.g. trade finance), as there will come a point when preserving the good running of the domestic economy becomes a greater priority than sustaining the pound. Lebanon’s imports amount to around $7 billion per year, and the BDL would be keen to preserve reserves amounting to at least three months of exports. Of course, such a scenario would only occur if the political quagmire is prolonged for weeks and months, with no real solution in sight.

Going down

The Lebanese pound would then depreciate significantly as it became exposed to market forces. This is not as bad as it would at first seem. Deposits in the banking system would be expected to be more than 80% dollarized, and a depreciation in a few months’ time would have much less impact than a voluntary devaluation during more stable times, such as in 2002, 2003 or 2004. A depreciation now (or in a few months) would have an immediate impact of knocking out an important chunk of the country’s public debt in Lebanese pounds, which currently stands at around $20 billion in US dollar equivalent. If the currency is depreciated by 100% to LL3,000 to the dollar, around $10 billion of debt will be erased in one stroke. Banks would witness a re-balancing of their balance sheet, while the cost living would decrease in the long-term, as a depreciation usually reduces prices in the medium and long-run and creates a more competitive job market. Of course, a currency depreciation would be disastrous if it is not accompanied by a minimum of 30% to 50% adjustment in salaries both in the public and private sectors, as well as a strict control on prices of goods and services.

A depreciation would definitely affect the deposits, which would not have been converted into a refuge foreign currency, companies and individuals who borrow in US dollars and have revenues in Lebanese pounds, and the capital of those banks and companies that would not have taken their dispositions to protect their capital. However, with time, such negative effects are generally absorbed, as productivity rises and local goods and services become more competitive. In summary, currency depreciation has only short-term negative effects, and is considered a springboard for growth to the domestic economy. For example, Turkey’s currency depreciation in 2001 was regarded as a major catastrophe back then, but has allowed the country to become more competitive and growth-oriented.

In this context, it is important to note the effectiveness of BDL policies. Indeed, it has shown tremendous ingenuity in coping with crisis and has explored all avenues to help banks withstand a liquidity crisis and even maintain and improve profitability during difficult times. With limited hedging instruments available (Lebanon does not have a derivatives or other similar instruments market to use as hedging tools) the BDL has proven that it ranks amongst the most professional and able regulatory bodies in the region, and is comfortably coping with a situation that few other regulators in other countries would have been able to withstand.

Saved by the dept swaps

It is also worth noting that the government’s and BDL’s active debt management, which included debt swaps in the last quarter of 2004, have lowered the 2005 foreign currency debt maturities by around $1.2 billion, and as a result reduced the country’s financing requirement in 2005. Were such preventive action not to have been taken, the BDL would have found itself in a very constraining and difficult position, and the support of the Lebanese pound and the banks’ liquidity would have been seriously jeopardized. The current crisis is also postponing to a later date further debt swaps planned for this year, which would have the effect of lengthening maturities and reducing the interest cost. For the moment, foreign currency debt maturities ahead of the May elections amount to only $650 million and should be easily met.

In addition to being endowed with a solid regulator, there are more reasons to look on the bright side. Syrian troops and military intelligence have started their pull-out and are expected to leave Lebanon by the end of April, while the massive popular demonstration of March 14 has shown the very strong impetus for change. Other issues remain, but are minor when gauged against the massive drive for positive change, expressed by the majority of people in Lebanon. Such a drive or impetus can only lead the country towards economic prosperity in the medium-term. If political changes occur relatively quickly and smoothly, as it has more or less been the case so far, then the Lebanese pound would be expected to hold comfortably and fiscal and monetary imbalances would be erased.

Boosting ratings

The country’s credit rating of B- (see box) would then improve dramatically over a short-period of time. The significant improvements in the budget deficit, government revenues, and GDP growth, mainly as a result of the eradication of the financial corruption and racketeering, and of the significant increase in tourism activities, would make the international rating agencies change their views on Lebanon and upgrade the rating. A real sovereignty would also finally allow Lebanon to resume its paralyzed administrative reforms and privatization program, and allocate newly-found investments more efficiently and fairly.

The monetary authorities have succeeded in creating a sufficient cushion and an economic condition favorable enough to withstand crises of such magnitude. Most of the domestic commercial banks have also improved their liquidity and profitability during 2004 in such a way to be impacted as little as possible by a political crisis. Their capitalization has improved as a result of the strong internal profit injections of previous years, while their funding flexibility in terms of deposits and liquidity position have also strengthened considerably. The local banks have already raised the interest rates on both US dollar and Lebanese pound deposits (some banks have offered rates of 15% on Lebanese pound deposits for just one month) in order to simultaneously slow-down the rush on the dollar, through the conversion of Lebanese pound deposits into dollar deposits, and to discourage the flight of dollar deposits outside the Lebanese banking system. This higher interest rates method is likely to slightly affect the banks’ profitability in the short-term, but would be regarded as a low price to pay for the preservation of the banking system’s deposit base.

Exchange controls (whereby the withdrawal of deposits in foreign currency is controlled by the State) is highly unlikely, as such an action would hurt the credibility of the country’s banking system and would put an end to the flood of deposits from non-residents, which has been rising substantially since the 9/11 terrorist act in America. For example, around $200 billion in Saudi investments have been withdrawn from the US and are being re-injected in the Arab world, including Lebanon.

For the moment, the BDL and the banks are solidly sustaining the political crisis, thanks mainly to their foresight, which allowed them to build a favorable economic framework prior to the assassination of Hariri. With the rapid positive evolution of the political situation, one can only hope that the current pressure on the Lebanese pound is only temporary. A political solution linked to a full Syrian withdrawal, the election of a parliament made up of independent political figures, and the consequent appointment of a technocratic and efficient government, would then be the perfect platform for a long-term economic prosperity.

Standard & Poors’ Outlook

S&P the world’s largest rating agency, which currently rates Lebanon at B-, issued an update on Lebanon on February 21, seven days after the assassination. In its update, the agency shows clear signs of confidence in the Lebanese economy by confirming the ratings of B- and the “stable” outlook. The agency believes that the country should be able to weather the storm in the short-term, due to a favorable economic conjuncture “underpinned by replenished reserves, accelerating economic growth, robust financial sector liquidity and active debt management that mitigate the risk of an immediate financial crisis”. In other words, the agency is confident in the monetary authorities’ ability to face a political crisis and to sustain its currency over a short-period of time.

For the agency, the strong capital flows from the Gulf (averaging 11% annually since 2001) and the strong 5% growth in GDP during 2004, coupled with the improvements in external liquidity, provide the BDL with significant liquidity to weather the political storm created by the assassination. The agency also believes that an active debt management, which included debt swaps during 2004, which have lowered foreign currency maturities by $1.2 billion, has reduced in a significant way the government’s gross financing requirement for 2005. In hindsight, such a debt swap in 2004, which was then heavily criticized, has been very important for the country, as it has allowed the BDL to concentrate its efforts on supporting the pound and the local banks’ liquidity. Were the country not to have carried out the debt swap a few months before the assassination of February 14, chances of keeping the Lebanese pound at its current level would have been remote. The country, according to S&P, still has a $650 million maturity to reimburse before May 2005, but should be able to cope with it comfortably. For the agency, the financial sector continues to enjoy a comfortable level of liquidity, and should be able to continue the financing of the government’s short-term needs.

The agency has stressed on the need for a sustained period of fiscal consolidation that would include reforms and privatization, as these are essential to maintain recent improvements in the country’s debt dynamics. In the words of S&P, “failure to step up the implementation of reforms after the elections of 2005 would undermine growth and investment inflows, and would erode confidence and increase the risk of a financial crisis, bringing the rating under downward pressure”. If we are to interpret what the rating agency is telling us, we could make our own conclusion by saying that a positive political outcome to the current crisis that would go beyond everybody’s dreams, coupled with the necessary economic reforms advised by the rating agencies, would definitely put the country on the right track, and, in time, lead to a succession of rating upgrades. An upgrade would place Lebanon firmly amongst emerging market countries, and would allow for the gradual reduction in the cost of borrowing and an improvement in the ability of the country to service its debt, and even for the repayment of the principal on its debt with its cash flow alone. Dizzy prospects indeed.

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The Buzz

Decision making with an edge

by Tommy Weir
written by Tommy Weir

“Those who have deep smarts can see the whole picture and yet zoom in on a specific problem others haven’t been able to diagnose. Almost intuitively, they can make the right decision, at the right level, with the right people.” Dorothy Leonard and Walter Swap

People who have the ability to consistently say the right thing at the right moment understand the bigger picture and the ramifications of change in a system without having to explain the logical conclusion that brought them to the decision have what organizations want, a deeper understanding, something close to wisdom.

Wisdom in this sense comes from experience, good judgment and an understanding that most important decisions contain no certainty. Add large amounts of financial responsibility and time constraints and we move to what is called “rapid cognition” or the ability to conceptualize the details and the big picture in seconds.

The brain operates from a conscious strategy, which is logical and definitive, unfortunately it is slow and needs a lot of information. It also operates from an unconscious or intuitive strategy, what Malcom Gladwell terms the “adaptive unconscious,” which is fast and frugal. This massive unconscious computer is constantly at work and usually has the right answer. The problem is that it’s difficult to explain or teach and most call it experience.

In 1997, the “Iowa Experiment” demonstrated how we intuitively may have the right answer, but ignore it in favor of more information/data. The Iowa scientists hooked gamblers up to stress detection apparatus and placed four decks of cards in front of them, two blue and two red. Each card in the decks either wins you money or costs you money. The gamblers were told to choose cards in a way that maximizes their winnings. What they didn’t know when they started was that the red decks were loaded with cards that win you a lot but also lose you a lot, while the blue cards had a steady payout of $50 and modest penalties. The main question for the Iowa scientists was to see how long it would take them to figure it out.

What they found was that after about fifty cards most people begin to figure out the pattern, but continue on until about the eightieth card before they can actually explain why the red decks are dangerous. The interesting part of the experiment however, is that the gamblers started generating stress responses to the red decks after only choosing ten cards, forty cards before they were even able to say they had some vague idea about what was going on. And what’s more interesting is that at about that time, they began to display behavior changes and started to choose more blue cards. “In other words, the gamblers figured the game out before they realized they had figured the game out: they began making the necessary adjustments long before they were consciously aware of what adjustments they were supposed to be making.” They knew but they didn’t know that they knew.

Research into developing our unconscious computer is a fascinating vast field where organizations from various fields come together in order to boost the decision-making power of men and women, especially those in positions of power. What we know is that this amazing computer is not infallible and shuts down under specific and consistent circumstances. They include:

1. Gathering a lot of data, so much that we are no longer able to think outside of the data
2. Bias, especially stereotypes
3. Lack of experience
4. Life and death situations combined with a lack of experience
5. Wanting a particular outcome desperately
6. Not being aware of how you make decisions
7. Fear of making a mistake

Add time and other pressures to all of these and you get a recipe for bungled business and life choices. The good news is that we can all overcome this and have access to a better decision-making strategy. Let’s begin with a brief self-assessment: Answer the questions (Yes or No) then include with a follow-up statement on how you intend to incorporate self-assessment and constant learning in your life for each item.

• I keep a journal or notebook to record my insights, creative ideas and questions
• I take time daily for contemplation and reflection
• I am always learning something new
• I read constantly
• I love identifying and solving problems
• My friends would describe me as open-minded and curious
• When I hear or read a new word or phrase, I look it up and make a note of it
• I know a lot about other cultures and am always learning more
• I solicit personal feedback from my friends, relations and colleagues
• I love learning
• I am willing to acknowledge my mistakes
• My closest friends would agree that I am willing to acknowledge my mistakes
• I learn from my mistakes and rarely make the same one twice
• I question “conventional wisdom” and authority
• When a celebrity I admire endorses a product, I am more likely to buy it
• I can articulate my most fundamental belief and the reasons I hold them
• I have changed a deeply held belief because of practical experience
• I am calm and positive in the face of obstacles
• I view adversity as an opportunity for growth
• I am sometimes susceptible to superstition

In many cases we lose access to the unconscious computer because we have been programmed with beliefs that restrict our decision-making options. In many cases, we are unaware of the sources we utilize to obtain and verify information. We know, for instance, that we have opinions, assumptions, and beliefs about a wide variety of topics: human nature, ethics, politics, ethnic groups, scientific truth, sexuality, religion, medicine, the meaning of life, art, marriage, parenting, history, other cultures, etc. But are we aware of how we found these beliefs? Or where we got the information on which they’re based?

In one study of using hypnosis to help children who suffered from extreme phobias, psychologists discovered cartoons and in particular disturbing cartoons buried deep in the recesses of these young minds.

Start by choosing any three of the areas mentioned above; for example, you might choose marriage, politics, and art. Then, in your notebook, write down at least three ideas, opinions, assumptions, or beliefs that you hold in the areas you have chosen to consider. For example: Art

1. “I believe that art is an important part of any developed society”
2. “I believe that being an artist is predominantly determined by talent”
3. “What is considered Art is up for debate”

After you have listed at least three beliefs about each of your chosen areas, ask yourself:

1. How did I form this idea?
2. How firmly do I believe it?
3. Why do I maintain it?
4. What would make me change my belief?
5. Which of my beliefs inspire the strongest emotions?

Then look at each of your beliefs in the three areas you have chosen to examine and consider the role of the following sources in its formation:

1. Media; books, the Internet, television, radio, newspapers, and magazines.
2. People: family, teachers, physicians, religious leaders, bosses, friends, and associates
3. Your own experience

What criteria do you use for assessing the validity of information you receive? Do most of your ideas come from books? or are you primarily influenced by family? How much of what you read in the newspaper or see on television do you believe? Aim to determine, through reflection and contemplation, the dominant source of your information and the underpinnings of your beliefs and opinions. See if you hold any beliefs for which you have no experiential verification. Is there a way you could test your convictions in experience? (adapted from Michael J. Gelb’s “How to Think like Leonardo da Vinci”)

What we find is that many of us are operating on second-hand, second-rate information. Developing your own data-base, having the ability to access this information and understanding how your brain works will be the topic of our next article, Look for it in April!

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