Special Report

Wheeling In The World’s Medical Tourists

by Peter Speetjens
written by Peter Speetjens

Overview

The regional health tourism market is worth an estimated $2.5 billion. The current market leader is Jordan, which receives a steady stream of patients, mainly from poorer Arab countries, such as Yemen, Sudan and Egypt. Lebanon has been working hard to position itself to attract high net worth individuals and, since 9/11, has been welcoming an increasing number of Gulf Arabs as hospitals, health and beauty clinics see the numbers of foreign admissions triple in the traditional summer season. Currently, the country attracts en estimated 25,000 foreign nationals who spend anything between $1,000 for a nose job and $25,000 for heart surgery, creating a market worth between $125 million and $250 million.

While, Lebanon’s highly developed medical sector targets mainly fellow Arab countries, there is long term objective to lure European and North America health tourists as health care and insurance costs in those in those parts of the world continue to rise. Lebanon also has the – so far largely untapped – potential of promoting its sea and mountain climate as a health, relaxation and recuperative destination.  It speaks for itself however, that attracting any kind of tourism into the country depends on a healthy political situation.

Definition

In the strictest sense, health tourism can be defined as travel abroad to obtain medical assistance, which in turn can be divided into two categories: essential and non-essential – i.e., open heart surgery or an organ transplant versus dentistry and/or plastic surgery as well as medical check-ups.

In other words, one doesn’t have to be sick to be regarded as a health tourist. Mary Tabacchi, a dietician and teacher at the Cornell’s University School for Health Management, defines health tourism as “any kind of travel to make yourself or a member of the family healthier.” In that sense, health tourism is not just about being cured, but also about preventing possible future illnesses. In fact, the lion share of the global health tourism market is made up of healthy people traveling to spas, meditation centers and fresh mountain air climates.

American websites, such as mindbodytravel.com and healthytravelnet.com, offer among other holidays an aromatherapy retreat in the French Provence, herbal health journeys to the Amazon, Ayurvedic diet trips to India and “a sacred woman’s tour” to Bali, where with lots of yoga and meditation you will be able “to connect to your inner woman.”

Brief history

Although health tourism may have a new age ring, it is by no means a new phenomenon. The ancient Egyptians would travel to the scared oasis of Siwa, just as people living along Lebanon’s coast would travel to take a bath in the temple of Eshmun near Saida. Bath in England and Baden-Baden in Germany have been famous for their thermal springs and spas since Roman times. Countries like Lebanon in the Middle East or Switzerland in Europe, both with alpine settings, have long attracted people with breathing problems.

Why Travel?

First, traveling for healthcare can be a result of a lack of professional care, equipment or expertise in the country of origin. In the Arab world, this is the case in countries such as Yemen and Sudan, both characterized by an underdeveloped medical infrastructure. In richer Gulf countries like Saudi Arabia, it is not a lack of equipment that makes people travel to the United States, France or Lebanon, but a lack of topnotch doctors.

Price is another factor that causes health tourism, which is why significant numbers of Canadians and Americans seek medical help in Cuba (see box), which offers state-of-the-art medical equipment and knowledge at a fraction of the price. The same is true for many European countries where the cost of medical care and treatment increases each year, making former communist countries like Hungary, Poland and the Czech Republic attractive destinations. Britain’s The Daily Express newspaper reported that a cataract removal costs $4,500 in Britain, $2,250 in France and $345 in India. In Lebanon, it costs $900.

Lebanon and the region

There is no doubt that Lebanon has the potential and capacity to become the region’s leading health center. The country has over 10,000 beds divided over 161 general hospitals and seven university hospitals, most of which are internationally accredited. A direct result of the civil war, in which each faction and confession built its own hospitals and clinics, the country is generally regarded as having an oversupply of beds. What’s more, most hospitals have state-of-the-art equipment with a lower patient ratio than many of the developed western countries. Lebanon has as many open heart surgery facilities, catheterization and lithotripsy centers as Germany and (perhaps even more than) the United States.

Since the oil boom in the early 1970s however, Saudi Arabia and the Gulf States have invested greatly in their own medical infrastructure, which includes top institutions with the latest equipment, such as the King Fahd Hospital in Riyadh. Jordan is currently the main recipient of Arab health tourists, with the bulk consisting of the some 80,000 Yemenis that seek medical assistance there every year. That part of the sector alone is worth an estimated some $350 million annually.

Last July, Lebanon signed an agreement with the Yemeni government to fly at least part of the health tourists to Lebanese hospitals. However, most experts agree that Lebanon’s competitive edge is not just its infrastructure and equipment, but also its wealth of human resources. The country boasts over 10,000 doctors, most of which are specialists. Some 37% of Lebanon’s doctors graduated from universities in Europe, varying from Moscow to Paris, and 11% from universities in America.

Since 9/11, Lebanon has been receiving an increasing number of Arab patients, who previously mainly traveled to top hospitals in the US. As a result of the general change in political atmosphere in the country as well as the hampering visa process, most Arab health tourists now prefer to come to Lebanon for everything from general check ups and plastic surgery to more complex procedures.

Seeing the potential of Lebanon as a health tourist destination, many projects have been underway to accommodate prospective patients. The newly established Beirut Government University Hospital includes a 50-room hotel for patients and their families, and the soon-to-open 105-bed Clemenceau Medical Center, which is affiliated with the American John Hopkins hospital, especially targets foreign nationals.

The AUH

Established in 1867, the American University Hospital is among the most respected institutions in the country. According to its director, John Rhoder, the Medical Center receives an average of 300 admissions a week, 20 to 30 of which are “foreigners,” mainly Syrians. In the summer, however, the number of genuine foreign admissions doubles, with most patients coming from the Gulf states – mainly, Saudi Arabia – constituting the majority of the health tourism market.

According to Rhoder, people do shop around while trying to find the best surgery for the best price, and even try to bargain down prices. In that sense, it’s a business like any other – not surprisingly, the price of a heart surgery varies between $6,000 in one of the less established medical facilities to some $20,000 in the country’s most well-known institutions.    

Following a well-established American trend, the AUH last year opened the Executive Health and Travel Center (EHTC), which offers a health package specially tailored for executives, top managers and family members from Lebanon and the region. The two-day-program offers a personalized head-to-toe medical examination and lifestyle assessment to prevent illnesses. The patient or client stays in a special hotel-like suite in a separate wing of the general hospital. Depending on the package, prices vary from $1,500 to $4,300. Upon request, the EHTC can also arrange for airline tickets, hotel reservations and even a leisure program.

Plastic surgery

The bulk of foreign health tourists flock to Lebanon to have plastic surgery or other corrective procedures. In the summers of 2004 and 2003, numbers doubled and even tripled, reaching an estimated total of some 4,000 patients. In the past decade alone, the country has seen the number of plastic surgeons rise from less than a dozen to over 60.

One of the main bonuses of coming to Lebanon for elective surgery is, of course, the cheaper prices. In Saudi Arabia and the other Gulf states, plastic surgery procedures on average are double the price in Lebanon. A nose job in Lebanon costs between $600 and $1,000, whereas in Riyadh it costs $2,500. Other than the price incentive, privacy is another factor that appeals to health tourists, because generally, people do not want anyone to know they have had corrective surgery.

Marketing

As is the case in Europe, Lebanon is not allowed to advertise medical services. Marketing is done by word of mouth and follows the traditional path of PR through medical conferences and publications. However, the ethical climate is slowly changing. The Clemenceau Medical Center is currently working with Saatchi & Saatchi on an advertisement campaign for the Arab world. The final slogan has not been determined yet, but its theme will be something along the lines of, ‘Why travel thousands of kilometers if you can have the best medical care in Beirut?’ Some other hospitals and plastic surgeons have produced brochures and travel packages, which include visa, hotel stay and surgery for an all-in-one price.

An important role is played by K&M International Health Tourism (KMIHT) based in Hazmieh, which, as the name suggests, promotes Lebanon as a medical care and health destination. KMI is supported by all of the country’s medical orders, as well as the Ministry of Health, which according to owner Khalil Malaeb helps in “opening doors.”

KMI regularly travels alongside ministerial and trade delegations all over the region, such as Yemen. Apart from promoting Lebanon as a health destination, KMIHT operates as a travel agency, establishing alliances with travel agencies in Dubai, Kuwait and Yemen, offering all-inclusive packages including visa, plane ticket, hotel stay and surgery.

Malaeb prides himself on good contacts throughout Lebanon’s medical sector. Who he sends where depends on what the patient can afford and on the medical expertise of the hospital. For example, a bone marrow transplant patient would be sent to Al Makased Hospital, a brain surgery patient to AUH, a hip transplant to Bhannes, AUH or Hotel Dieu, while for a heart surgery patient, there are so many choices available that the budget is the deciding factor.

Box: Maradona & Cuba

Cuba may be regarded as a poor country according to income per capita, yet surprisingly it boasts one of the most developed medical industries in the world. Education, science and health were key themes in developing the country after the revolution in 1959. Though under a strict US embargo, Cuba exported pharmaceuticals, vaccines and biotechnology worth $250 million in 2002 alone.

What’s more, it receives up to 10,000 tourists a year who want to profit from high quality medical care for a relatively low price. People travel to the Caribbean island for a core of medical treatment facilities, yet especially for eye operations, skin treatments and its Multiple Sclerosis and Parkinson’s disease centers, as well as its drug and alcohol addiction recovery programs, which most recently had Diego Maradona as its most famous client. Most patients come from Latin America, which is characterized by an underdeveloped medical infrastructure, while ever-increasing numbers come from the US, Canada and Europe to escape towering medical bills.

0 comments
0 FacebookTwitterPinterestEmail
Special Report

Lebanon’s Tobacco And Alcohol Wars

by Marianne Stigset
written by Marianne Stigset

Spirits

The Lebanese drink approximately 3.6 million bottles of spirits every year, roughly one liter per person. Dominating the $40 million market with an estimated 43% share is whisky, with 280,000 cases imported into the country in 2004. However, vodka has steadily been gaining ground, growing by an estimated 4% to 5% over the last five years. In 2004, some 33,000 cases were imported into the country, although industry insiders assess this number to be closer to 40,000.

“Lebanon is following a global trend, which has seen increased consumption of wine and vodka,” said Nagi Hmouda, business manager with KFF Food & Beverage, whose brand, Absolute, has witnessed a 25% increase in sales in recent years. “Like RTD [beverages] and beer, vodka is a great entry point to the alcohol category. When people reach the legal drinking age, they want to drink something that will give them the effect of alcohol without the taste. While, their palate isn’t used to the strong taste of scotch or gin, vodka on the other hand is practically tasteless and can be mixed with anything.

The current market leader is Stolichnaya, followed by Absolute, Eristoff and Smirnoff, the four of which cover 85% of the vodka market. However, premium vodka brands such as Stolichnaya Elite and Grey Goose are slowly gaining ground.

Although, whisky accounts for nearly seven times more sales, sales of “regular” whisky – the top five brands are acknowledged to be Johnny Walker Red Label, Dewars, Ballantines, Jim Beam and William Lawson – have been contracting by an estimated 5%, a result of the introduction of the VAT in 2002 and greater competition from Vodka. Deluxe whisky – luxury blends and single malts – represent 15% of the whisky market. Distributors for this highly competitive market are reluctant to reveal figures, but it is clear that Johnny Walker Black Label – almost a national icon – leads the way with an estimated 60% of the market share, followed by Dewars and a resurgent Chivas Regal.

“People are more loyal when it comes to premium brands,” said Carlo Vincenti of the Vincenti Group. 

With over 80% of regular whisky consumption occurring in people’s homes, the whisky wars have been largely focusing on off-trade sales. “The consumer has been spoiled by the sales promotions of regular whisky brands – you have promotions going on virtually 365 days a year,” says Hmouda.

The alcohol sector ranks among the top 10 Lebanese sectors in terms of ad expenditures in 2004 but has witnessed a shift towards greater below-the-line advertising, which now accounts for more than 60% of the ad budgets. “Consumers attach less value to the brand and therefore investment in brand-building is much less than it is supposed to be and promotions have taken a bigger chunk [of the budgets],”admitted Hmouda. “We go for instant gratification: gifts with purchase, goods discounts, trade deals such as volume rebates. It’s a very dynamic category,” said Hmouda. “The margins in the trade are minimal, so the focus is on volume and visibility. We’re trapped now, without these promotions sales would drop. It’s a very unhealthy situation. We are following the textbook marketing approach of not to do.”

Total advertising spending on spirits is estimated at $15 million – $5 to $6 million (all media included) for above-the-line advertising and $8 to $9 million for below-the-line. Whisky takes up the bulk of this, with Diageo spending an estimated $5 million annually to promote Johnny Walker, while Fattal spends $3.5 million on Dewars and Vincenti $1.5 million on William Lawson, one of the biggest movers in recent years.

Beer

The Lebanese drink an average of 4.5 liters per person annually – far less than the Europeans who average 75 liters per year. In a country with a distinct preference for spirits, the beer industry has traditionally played second fiddle and is seen mainly a summer thirst quencher, a trend bore out by the fact that roughly 70% of beer sales occur during this period.

“Beer is much more of refreshment in Lebanon. It is seen as a summer product, for beaches and picnics,” said Ronald Voorn, head of Heineken’s operations in Lebanon, in a recent interview.

Heineken holds over 60% of Lebanon’s $50 million beer market, following its 2002 acquisition of Almaza, the country’s only brewery. The company’s stable now has the bulk of the market’s niches covered through its array of brands, ranging from the lighter, value beer in the form of Almaza and Laziza, to more expensive up-market brands with Heineken, to the stronger beers, with newly launched and competitively-priced Rex.

Approximately 60% of the market is held by local beer, with the remaining 40% going to imports, one third of which are Heineken and Amstel beers. The overall market favorite remains Almaza, responsible for over 40% of all sales. In the imported beer segment, Heineken leads the pack.

In a bid to promote the expansion of the market, the Dutch beer giant is looking into developing new beer products, such as flavored varieties. It also envisages boosting its line of non-alcoholic beers, which currently account for 10% to 15% of the local market, and has benefited from Lebanon’s tourist boom over the last few years, comprising a number of teetotal Arab visitors.

Sadly, recent political events have dealt a blow to the industry and the market witnessed a 35% drop in its February sales. With the political crisis ongoing, Heineken has temporarily put on hold its year-old plan of building a new brewery.

Wine

Wine consumption is on the increase as local tastes dovetail with international drinking habits. Chateaux Kefraya and Ksara dominate the local consumption, forcing many Lebanese producers to seek out export markets. The $27 million local industry is virtually a cottage industry by global standards, but new wineries are opening at a rate of two a year with a new generation of producers offering affordable, eye-catching wines. Local consumption has increased in the last decade and stands at just over a bottle per person. This is not only due to the influence of snazzy new local wines but also to the returning disapora, who have brought with them a modicum of Western “sophistication” and many Lebanese, always anxious to be seen getting it right, are gradually eschewing the once obligatory bottle of luxury-blend whisky in favor of wine with their meals. That said, the day when Lebanon can be called a genuine wine drinking nation, is a long way off.

Annual monitored advertising spending for wine in 2004 was $1.7 million, the bulk of which came from Chateaux Ksara, Kefraya and Domaine Wardy.

Ready-To-Drink

Ready-To-Drink (RTD) beverages made their first entry into the Lebanese market in 2001 with the launch of Bacardi Breezer. Bacardi Breezer and Smirnoff Ice control some 80% to 90% of the total market, with local brands such as Basally Chtaura’s Buzz in third. Following the worldwide craze for the affordable beverages, sales have rocketed, reaching their peak in 2002 with 105,000 cases imported into the country. “It was a category and a brand which was perceived as cool among the younger crowd,” remembered Vincenti. “Kids would drink it at beach parties, at clubs. It hit the market in a big way.”

The craze subsequently stabilized and the market has been declining over the course of the last three years by over 25%, reaching 75,000 cases imported in 2004. Today RTDs hold approximately 11% of the spirits market share in Lebanon, at an estimated value of $255,000. “It’s a high maintenance category, which requires constant product development and innovation, a lot of investment,” said Hmouda. “That being said, it’s also a highly profitable, if you consider the price you pay for the little amount of alcohol that is in it.”

RTDs introduced competition to both the beer and the spirits market, although for the latter, it has also provided a boost. “If RTDs do well, the motherbrand will eventually do well,” Vincenti explains. “Bacardi Breezer has contributed to the promotion of Bacardi rum, which has witnessed a 50% to 60% cumulative increase over the last few years.”

Cigarettes

British and American Tobacco (BAT) estimates the Lebanese cigarette market at roughly $400 million or some 7.5 billion sticks a year. By international standards, Lebanon remains an attractive market for the tobacco industry, combining few anti-tobacco regulations and a lax legislative environment, with high smoking prevalence rates.

Some 56% of the Lebanese smoke, 43% of whom are between 13 and 18, thereby in all likelihood ensuring the tobacco industry a sizeable market for at least another generation. Spurred by the low price of cigarettes (LL1,000 to  LL2,000), the average Lebanese smoker consumes around 3,300 cigarettes a year, or 165 packs.

Market shares between premium – Marlboro, Kent, Gitanes, Viceroy, Gauloises – mid-market – Fine, Rothmans, Craven, Pall Mall, L&M, Royale and budget brands – Brilliant, Winchester, Business Club, Sovereign – are distributed evenly, with each category holding respectively 38%, 25% and 36% of the market, according to a 2003 report by the Altadis tobacco group. 

Imports into the country are dominated by four of the world’s leading transnational tobacco companies, with Philip Morris in the lead at 45%, followed by BAT (29%), Japan Tobacco International (10%) and Altadis (9%). They collectively generate 90% of total tariff revenues reaped by the Regie Libanaise des Tabacs et Tombacs, which has a monopoly on all tobacco imports into the country. Lebanese taxes on cigarette imports reached an all time high in 1999 at 120%, but subsequently dropped to average 60 to 70%. Yet despite apparent favorable market conditions, the Lebanese market may have reached saturation as growth has slowed to around 1.5% since 2001.

“The market is essentially stagnant,” said Naushad Ramoly, head of Corporate and Regulatory Affairs at BAT’s Levant and Yemen operations. There has also been a shift in tastes as more competitively priced local brands – especially Cedars – have increased their market share by 18% since 2000. Others have not fared as well. In the late 90s, 93% of the market was dominated by international brands. By 2003, this share had dropped to 79%. Philip Morris and BAT, who controlled over 85% of the market in 1998. Five years later, they made up less than 50%.

Cedars’ impressive growth places it second in terms of current market share at 19%, behind by Marlboro, with 24%. Battling it out in third place are Winston and Viceroy, with around 13%, followed by Gauloises and Gitanes. Adding to the pressure is a proposed ban on all above- and below-the-line tobacco advertising issued by a group of MPs in May 2004. The ban has yet to be ratified by Parliament and the current political crisis leaves little reason to believe that it will be made effective this year. However, the proposal does indicate that Lebanon’s days as a liberal haven for tobacco advertising could be numbered.

Still, the tobacco sector’s $8 million annual advertising spending is in freefall and has, like alcohol, seen a staggering shift to promotional advertising, with BAT, slaughtering its above-the-line expenditure, once at 75% of its ad budget, to 5% last year.

“Tobacco advertisers have been affected by the economic situation and they don’t care about the reputation of the brand,” Mounir Torbay of the World Federation of Advertisers’ Lebanon Chapter said in a 2004 interview. “That is why media advertising has dropped so drastically. They need the ‘push’ and not the ‘pull’. They want people to buy more, to switch from one brand to another.”

Cigars

Despite its small size, Lebanon ranks as the 5th highest Cuban cigar consumer in the world today. The driving force behind the promotion of this culture has been cigar superemo Mohamed Zeidan, Chairman of the Phoenicia Aer Rianta company, who enjoys a close friendship with Cuba’s President Fidel Castro and has the sole distribution and retail rights for Cuban cigars in Lebanon.

“From being the prerogative of businessmen and politicians, cigar smoking has expanded across the population, now also reaching the younger segments of society,” said Walid Saleh, managing director of the Phoenicia Group. “We engaged in major promotional activities in 1998 to 99, targeting the 22 to 25 age group, so as to educate them and prepare them for when they entered the job market and could afford more upscale brands. Cigars are now enjoyed by a wider age group and have become a product for every occasion.”

The total number of Cuban cigars sold annually on the domestic market and at Beirut Duty Free combined is estimated at four million, of which 35% are sold domestically and 65% at the airport. A major tax hike from 45% to 152% between 1998 and 2000 witnessed an intervention by the Cuban government to appeal for a reduction, and Lebanese authorities subsequently lowered the rates to 60%, where they remain today. The economic recession has had little effect on the market, according to Waleh. “Consumers might go down a notch in brand, buy a Montecristo rather than a Cohiba, but they will continue smoking cigars,” the manager explains. “The idea that the Cuban cigar is a luxury item is an erroneous one – you find cigars for as little as $1, so people can afford to enjoy them.”

The sturdiness of the market’s growth has undoubtedly been assisted by Phoenicia’s successful two-pronged marketing strategy. At Beirut Duty Free, the company opened the largest cigar store in the world. La Casa del Habano offers every brand of Cuban cigars, cigarillos, accessories, a VIP cigar lounge and a walk-in humidor. The unique retail concept paid off, becoming the largest point of sale for Cuban cigars worldwide. While cigars generally account for 1% of an airport duty free outlet’s sales, at Beirut Duty Free, this figure stands at 22-25%, reaching $15 million in annual sales.

On the domestic front, Phoenicia invests $700,000 on predominantly below-the-line marketing. “Our focus is essentially on the on-trade business, to bring direct added value to our clientele,” Waleh explains. “People already know our brands, so there is no need for brand building. What we seek is to increase penetration rate and spending rate.”

Gifts with purchases, promotions teaming up with products such as Cadillac, Ferrari and Glenfiddich, and monthly events held at Lebanon’s leading hotels are but a few of the array of promotional activities the company has engaged in. Its two latest innovations include a Montecristo platinum VISA card, which circumvents strict international anti-tobacco advertising regulations, and a Partagas calling card for travelers at Beirut Airport.

For the record, all 34 Cuban brands are sold in the country today and dominate the market by 98%. The top five most popular cigar brands are Cohiba, Partagas, Romeo y Julieta, Montecristo and Hoyo de Monterrey, all come from the small Caribbean island. Popular cigar sizes were initially Double Coronas and Churchills, but for the last five years, Torpedos, regular Coronas and Robustos have been gaining ground.

0 comments
0 FacebookTwitterPinterestEmail
Uncategorized

Real Estate Retrospective

by Anthony Mills
written by Anthony Mills

Fuelled by the continued influx of Arab nationals and capital, Lebanon’s real estate sector continued to grow in 2004 by an estimated 20%. Solidere had an outstanding year, as the Beirut Central District experienced increased demand for property, while on the retail side, big is beautiful seemed to be the theme as ADMIC braced for the end-of-year launch of its Dora shopping mall, the biggest so far in Lebanon.

Overview 

Key indicators, such as cement sales and the number of construction permits, showed a healthy growth in the construction sector, while the number and value of property transactions increased significantly compared to 2003. Despite a rise in price, cement deliveries amounted to 1.23 million tons during the first half of 2004, an increase of 6.2% compared to the same period in 2003. It should be noted though that part of the increase was due to increased exports to Iraq. The Order of Architects and Engineers reports that construction permits grew from 4 million m2 during the first half of 2003 to 4.3 million m2 in the six months of 2004, which is similar to the tail end of the 90s reconstruction boom.

The geographical distribution of permits shows that Mount Lebanon maintained its 2003 lead as it accounted for 46.4% of the total, followed by the north of Lebanon with 20.2%, South Lebanon with 14.8% and Beirut which witnessed an increase of 4.5% to reach 12.8% of the total. According to Banque Audi data the number of property transaction during the first half of 2004 rose by 7.2% to 51,899 compared to the first half of 2003, while the value of property transactions grew by 27% over the same period to reach LL 1.7 billion. In the third quarter it slowed down to 22%, well above the 15% annual growth recorded in 2003, yet still a far cry from the 30% growth figure of 2002. Beirut maintained the lead in terms of value of properties sold, accounting for 35% of the total, followed by Baabda with 22%, Metn and Mount Lebanon with 15.8% and Kesrwan with 9.8%. The figures confirm that the market was dominated by high-end construction and property transaction, as the increase in the real estate market was largely driven by the Arab investors, who since the events of 9/11, continue to see Lebanon as an alternative home, holiday destination and place to invest.

Most players in the sector observed a relative slowdown by the end of 2004, which they attributed to the events surrounding the presidential elections and the attempted assassination of Marwan Hamade. The departure of Rafik Hariri as prime minister and the loss of his international clout were seen as less of a blow as many Lebanese are still optimistic that he will stage a comeback.

A 2004 report issued by Ramco Real Estate Advisers concluded that Gulf investors bought land worth some $680 million between 2000 and March 2004, noting: “taking into account the additional investment on project development the amount could easily more than double.

In that period a total of no less than 2.3 million m2 of land were sold in 109 major deals. The Arabs’ preferred destinations are the mountains, not too far from Beirut. With this in mind, 38% was bought in Baabda, 27% in Metn and 18% in Aley. Only 1% of all land deals concerned Beirut, which still represented the largest value for the Lebanese economy. Apart from the  controversial Sanine Zenith project, the $1.4 billion, 100 million m2 tourism extravaganza on Mount Sanine, boasting several tourist villages and 5 hotels, as well as 18 ski slopes and a golf course, the two largest purchases of land, 368,723 m2 and 123,492 m2 respectively, were concluded by Kuwaiti investment groups in the region of Qornayel.

Residential: Manhattan on the Mediterranean

Even though most construction permits and land sales centered around Baabda and Metn, the most eye-catching and valuable developments were taking place in Beirut, especially the ongoing seafront development facing the Beirut marina in the BCD. The $200 million Marina residential tower, which will be some 150 meters high, has been half built, while the foundations of the Beirut and Platinum Towers have been laid. Next to the trio, the slightly lower tower of the Four Seasons Hotel is being built. The four high rise buildings represent a total investment of some $600 million and will significantly change Beirut’s façade in the course of 2005 and 2006. With a price tag of $4,000 to $6,000 m/2 the towers’ highly luxurious apartments are arguably the most expensive property currently available in Lebanon. Some 80% of the apartments has already been sold and this seems to be trend for most of the high end residential developments in BCD, including the  Capital Gardens and Saifi II projects, which are due to be built in 2005.

Not surprisingly, Solidere had an excellent year in terms of land sales, helped by an initiative, which encouraged shareholders to sell their stock for a 15% discount on the land. More residential projects and two hotels are slated for the sea front, while the Abu Jamil area is to become a purely residential district. In spring 2004 it was also announced that the $200 million and 155-meter-high Landmark Building Riad el Solh would go ahead, adding to the BCD’s ever changing skyline. As a consequence demand for the price of land has increased, varying between $1,200 m2 inland to some $1,700 m2 on the seafront. Last but not least, after four years of delay and for a reportedly inflated price of some $12 million, Solidere announced that they are about to obtain the necessary permits needed to complete construction of the 100,000 m2 Souqs retail project by 2006.

Downtown Beirut, however, was not the only area to witness significant developments. Contrary to downtown, where 80% of investors and buyers are Gulf Arabs, Ashrafieh remains popular among the Lebanese. New, high-spec apartments are smaller, on average between 250 to 350 m2, and more reasonably priced, on average between $1,700 to $2,500 m2. The same is true for developments in areas such as Ain Mnreiseh, Hamra and Ramlet al Baida.

One of the fastest changing areas in Beirut is no doubt Gemaizeh (see box), while large areas behind the Phoenicia hotel, west of the Damascus road and along at Rue Spears have been cleared. No doubt, these current ghost towns are next in line to see some major developments throughout 2005 and 2006.

Retail: The rise of the mall

2004 was the year of the mall and 2005 will continue to be so. The $120 million ABC Ashrafieh, Lebanon’s first genuine mall opened in November 2003 and went into full gear last year. Apart from its size, the difference between ABC and existing malls, such as Verdun 730 and Dunes, is that the first truly offers a world of shopping, entertainment, food and beverages all under one roof.

Critics had doubted there would be sufficient demand for such a major development, but ABC has proved them wrong. Its 40,000m2 of retail space are fully occupied and shops, restaurants and cinema attract a constant flow of customers. In 2005 however, ABC will have to compete with BHV at Dora. About twice the size of ABC Ashrafieh, BHV is Lebanon’s first mega-mall with under its roof the country’s first Casino hypermarket, a grand department store, shops, boutiques, restaurants, café’s and a cinema. Most experts expect it to do well, seeing its excellent location between the two highways that form Beirut’s northern exit.

With rents of as much as $1,000 per m2 per year, ABC and BHV are among the hottest properties around as far as retail space is concerned. The downtown follows with rental prices varying between $800 and $1,200per m2 per year. Verdun has an average price of some $800 per m2 per year and, as a shopping district, continues to perform steadily. Prices in Hamra vary between $300 m/2 per year at both ends to some $600 for top locations in at the heart of Beirut’s only genuine high street. Following the completion of the restoration works in summer 2004, hopes remain high for Hamra to regain its leading position as shopping district. With its hotels, hospitals, banks, and universities, its history and character, the area has every potential.

In Chiah, the 50,000m2 Beirut Mall should open for business next year. In Sin el Fil, the 14,000m2 Metropolitan Mall is currently being constructed, while at Concorde square the 50,000m2 V5 Mall is planned. In comparison, the V5 will be no less than 20 times bigger than its Dunes counterpart on the other end of Verdun.

The future will tell if there is a demand in Lebanon for such a large quantity of added retail space and if there is still space for the traditional high street such as Hamra and to a lesser extent Verdun. Experts predict that shoppers may tire, after the initial excitement, of indoor shopping. One thing is certain, the increased supply of retail spaces will no doubt lead to a decrease in retail rents, which is an advantage for shopkeepers, and in the end for consumers as well.

Office: smart space sells

No major developments regarding office space took place in 2004. With an average rent of $300 per m2 per year, the BCD remains among the 30 most expensive business districts in the world, which is part of the reason that some 40% of office space in the downtown remains empty. The problem however is not only price-related. Most office space in the BCD does not meet modern international standards, but those that do, such as Atrium and the An Nahar buildings, are performing remarkably well, which is why the construction of Atrium II will begin in 2005.

Tourism: 

Last year, also saw the long awaited opening of the imposing Le Royale in Dbayeh and, following the success of the $10 million Eddé Sands beach resort in Byblos, business tycoon Roger Eddé has big plans for the ancient harbor city. Aiming to attract investment of nearly $5 billion over the next 10 years, Eddé envisions turning Byblos into the Cannes of the Middle East, with a luxury marina, hotels, restaurants spas and health clubs. Most importantly however, was the government’s official approval of the controversial Sanine Zenith project. The $1.4 billion project measures some 100 million m2 of BUA on which it is planned to build several tourist villages and hotels, as well as 18 ski slopes and a golf course.

Box: Gemaizeh

The area changing most rapidly is no doubt Gemaizeh. The old quarter bordering the downtown, which still has a flavor of old Beirut, threatens to become the next Monot, as a string of small cafés, bars, restaurants, boutiques and galleries have recently opened. The revolution began in 2001 with the renovation of the Ahwat Azaz (Glass Café) and French bakery/café Paul, which “made” the corner. In 2004, a dozen more commercial establishments opened and more are expected follow, transforming what used to be a shabby if charming, quarter into arguably the hippest quarter in town.

A handful of residential projects are also in the pipeline, especially on the strip of land bordering the downtown, but also well into the quarter. Following the success of Convivium I and II, developer Kareem Bassil is building a third halfway down the main street towards Electricité du Liban. Apart from its character, one of the main attractions of Gemaizeh was the relatively low prices. That is rapidly changing. The price of land has in some locations risen from less than $400 up to $800 per m2. The rent of retail space has in top locations tripled since the beginning of the year, while asking prices for residential property has increased by 50%, though it remains to be seen if these will be realized.

0 comments
0 FacebookTwitterPinterestEmail
Uncategorized

Economy and Finance

by Nicholas Photiades
written by Nicholas Photiades

Riyadh Bank Posts 26% Growth in 2004 Profits

Riyadh Bank, the second largest Saudi bank, released its 2004 figures featuring a growth of 26% in net income to $533.3 million compared to $424.5 million in 2003. The bank attributed this rise in profits primarily to its increase in capital reaching $1.3 billion through distributing one free share for every four shares owned and $4.8 of annual profits per share. It is to note that Riyadh bank, 29%-owned by the government, has witnessed since 1997 a fast growth in profits due to the strategies and plans undertaken by the bank to develop its services and adapt to all the economic developments on both national and international scales.

NBK Records Net Profits of $515m in 2004

The National Bank of Kuwait (NBK), the country’s largest bank and the top-rated Arab bank, posted net profits of $515 million during 2004, compared to $412 million in 2003. NBK’s CEO explained that the growth in profits was achieved amid a strategy of diversification in the sources of income and prudent risk management besides taking advantage of growth opportunities presented by an improving operating environment. The bank’s total assets reached $19 billion at end 2004, while shareholders’ equity amounted to $2 billion. In turn, NBK’s return on equity (RoE) and return on assets (RoA) stood at 29.9% and 2.73% respectively, among the highest worldwide.

Country Profile: UAE

International rating agency, Moody’s Investors Service, upgraded the United Arab Emirates’ sovereign long-term foreign currency debt ratings to A1. The agency also raised the sovereign’s short-term foreign currency ceiling one grade to Prime-1 and currency issuer rating to A1 from A2. The outlook on these revised ratings was given as stable. The agency cited that the main reason behind this upgrade was UAE’s stellar economic performance in recent years in addition to the continued domestic political stability. Moody’s mentioned in its positive commentary that nominal GDP growth has averaged 11% since 1999 and consumer price inflation has remained very low. To a large extent, economic expansion has been driven by the oil sector, which generates about one third of GDP. However, the non-oil sector has also registered strong growth. The agency concluded that both the fiscal and current account positions remain in significant surplus.

0 comments
0 FacebookTwitterPinterestEmail
Special Section

by Thomas Schellen
written by Thomas Schellen

In general, the real estate market has not witnessed any changes in prices. It seems on the contrary that many people are now thinking to increase their prices. People believe that prices might shoot up. This is something we are sensing, as we are hearing of more and more commitments of Lebanese living abroad who are willing to come back if the situation improves. This will increase demand for everything. From inquiries we have been receiving after February 14, we noticed that prices are still being maintained by demand. It doesn’t seem that anybody sees this as an opportunity to bargain down prices, which is a very healthy situation.

The retail sector has suffered the most from the upheaval. Whether it is leisure or selling clothes, it is a luxury and people are sticking to their cash in times of hardship. This affects especially the downtown. In a climate of unhappiness people will wait with making new investments into retail space, as will the ones who are buying apartments. It’s normal but I don’t think that this short-term effect will influence the market. All depends on how long the crisis lasts. 40 days can be absorbed. If this crisis lasts one, two, three months, it can easily be absorbed by existing retail tenants. Especially in Lebanon, businesses have to be ready for surprises and a wise business man takes precautions for a temporary difficulty.

In residential real estate and in general, projects that have started are continuing and will not be stopped. Most projects that started in the last years have been pre-sold to 50%, 60%, and 70% prior to completion. These projects will continue, they made their sales, they made their profits. Also in commercial, the rules of the game require pre-lease before starting construction. From practical experience we know that it takes sometimes six months from inquiry until realization of a project.

I don’t think that enough time has passed to see any trend on the real estate market accelerate but we are receiving more inquiries than we had before the current developments. We have gone up from three to four inquiries per week to five or six and sometimes seven, and these are serious inquiries. It is still too early, however, to say what will last, what will continue. If there is demand it will be everywhere and if there is a reduction, it will be everywhere.

One year ago, the biggest buzz in Beirut was over the 100 million square mile Sannine Zenith resort project aiming to transform the barren backside of Mount Sannine into a wonderful world of recreation above the clouds. The project’s sheer dimension, ecological implications and foreign flair of investments stirred up ruckus in public opinion, but even more, it portrayed a golden tourism future for the country. Executive asked Habib Ziadeh, the administrative and financial consultant to Sannine Zenith if the current crisis changed the project’s outlook and where things stand today. 

Habib Ziadeh

Because of the political issues of the day, we are still in a time where nobody is free to talk business. The impact on Sannine Zenith is not yet tangible and we haven’t had enough time to see the consequences on the project. So while views are very subjective now and it is too early to say if the future will be either gloomy or rosy, nobody is panicking. The fundamentals remain in place and are still right. The mountain is still there, the weather is still there, and these are the pillars of the project.

As far as the development of the project, we are in Phase One. We had presented the public with a preliminary master plan [a year ago]. Now we are completing the final master plan, which will take about another month to finalize. This will be followed by another month of working on feasibility and placement issues. In May, we should have some figures.

Lebanon has high flying ambitions for attracting international tenants to base their regional presence in Beirut. Executive asked real estate consultant and broker Michael Dunn, chairman of Michael Dunn & Co, how the market for office space looks today and what scenario could make the country most interesting for foreign companies to locate here.

Michael Dunn

For the moment, there is zero demand. The only area where demand would be strong is for high security compounds with space. In the Beirut area, an isolated building surrounded by a high wall would immediately find a tenant from the diplomatic or corporate side.

In matters of international presence, a lot of companies have been leaving or stopped producing in Lebanon because of the high cost of electricity and similar factors. At the moment, we are losing companies. To attract international firms, I think we need for the whole country to become almost like a free zone. The opportunities are there and Lebanon could boom in a similar way like Hong Kong did in the 1970s. The question is whether the country could implode again. Certain groups want more power. If we can move away from that, all will be happy. We are not there yet, but I am extremely optimistic for the future. 

To assess the level of trust and activity in the real estate sector at the present juncture, Executive inquired about the perspective of a bank on the sector. Elie Azar, marketing manager at Lebanese Canadian Bank, told how the bank is dealing with the issue of housing loans and its own corporate real estate plans.

Elie Azar

We are granting housing loans at a slow pace to evaluate the situation of our customers. A person who wants to invest by buying a house should be relaxed in their decision. envisioning plays a big role in such a decision and at present, this is not the case. For the time being people are focusing on day-to-day problems and no one is pursuing long-term loans such as housing loans. All our own projects are now frozen. We bought nine branches from Al Madina Bank and United Credit Bank, of which we opened three. On the others, we are now waiting for the situation to improve but we are sure and ready to restart all our efforts at the proper time. The bank reflects the genuine impact on the market. All people were shocked by what happened and I think we need the time to restart again. In the US, after 9/11 it took them more than a year to restart. 

I think Lebanon will overcome this current and sad situation of political instability. It will come with free elections and a coherent government. Lebanese, Arab and foreign investors will again be interested in investing in Lebanon. It is true that major projects for residential high rises are concentrated in an area, the hotel district, that is suffering under the current situation too much these days but I am confident that all Lebanese are aware that we must all together be united as our late prime minister, Rafik Hariri, wanted. He was the architect of Lebanon and especially his beloved Beirut. This is why I think that we need time to forgive and forget those who directly or indirectly affected the stability and prosperity of the economic situation in Lebanon by killing the symbol of stability and development.

The Lebanese are now preoccupied with wanting to know the truth about the tragedy. They want stability of the Lebanese Pound and it is very important to have a solution to the current situation by forming a trustworthy government that will lead Lebanon out of this cloudy situation. I think things will soon change, by agreeing on confidence in Lebanon. Syria doesn’t have an alternative to banking in Lebanon and we don’t have any problems with Syrian people. The Syrian customer knows that he is most welcome in Lebanon, we don’t have any problem.

0 comments
0 FacebookTwitterPinterestEmail
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.

0 comments
0 FacebookTwitterPinterestEmail
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.

0 comments
0 FacebookTwitterPinterestEmail
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.

0 comments
0 FacebookTwitterPinterestEmail
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?

0 comments
0 FacebookTwitterPinterestEmail
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.

0 comments
0 FacebookTwitterPinterestEmail