Economics & Policy

Investors hold their breath

by Michael Young
written by Michael Young

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Lies disguised as security

by Yasser Akkaoui
written by Yasser Akkaoui

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

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

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

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

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

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

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

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Economics & Policy

Grace under fire

by Nicolas Photiades
written by Nicolas Photiades

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

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

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

Stemming capital flight

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

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

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

Going down

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

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

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

Saved by the dept swaps

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

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

Boosting ratings

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

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

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

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

Standard & Poors’ Outlook

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

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

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

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The Buzz

Decision making with an edge

by Tommy Weir
written by Tommy Weir

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Economics & Policy

The economic relationship

by Andrew Tabler
written by Andrew Tabler

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

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

Trading partners

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

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

Refuge for Syrian money

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

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

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

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

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

Swapping expertise

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

Syria’s manpower

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

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

A brief history of Lebanese-Syrian economic pacts

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

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

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

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

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

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The Buzz

Heading back to the books

by Thomas Schellen
written by Thomas Schellen

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Lifestyle

The Vintage Executive Wine Club

by Michael Karam
written by Michael Karam

France is the dominant theme this month with four out of five of Vintage manager Wadih Riachi’s selections coming from the world’s most famous and prolific wine producer. Our first stop is Burgundy. Last month, I reviewed a Joseph Drouhin Macon-Villages, a pert Chardonnay. This month, the eminent Beaune négociant entertains us with a Brouilly 2002, made from 100% Gamay, the grape used with great success in AC Beaujolais, where its versatility has seen it used in both nouveau and higher quality wines. Brouilly (Mont Brouilly in this case) is one of the better Beaujolais areas and the wine – I must concur with Wadih here – is an explosion of fruity aromas and licorice, one that should be drunk the moment you get home.

The Loire Valley produces arguably the greatest variety of wines – still, sparkling, dry sweet – in part due to its equally variable climate. Pascal Jolivet’s, Attitude 2003 is a Vin de Pays (a French wine system guaranteeing origin from a specific area, Vin de Pays du Jardin in the case of the Loire). That said, I was still not quite sure what to make of the packaging. The name and the label seemed a bit too cool – a case of style over substance if you will – to suggest decent wine. Did it have attitude? It surely did, producing exhilaratingly aromatic notes of citrus and peach without a hint of the flabbiness one gets with similar wines.

I discovered Château des Carmes Cantillac from Entre Deux Mers in Bordeaux about a year ago and was immediately seduced by its warm fruity nose and velvety structure. That was the 2001. The 2002 did not disappoint. A blend of roughly 70% Merlot, 15% Cabernet Sauvignon and 15% Cabernet Franc, a thick, earthy layer of rugged strawberries and other berries dominate this excellent value red from a 10 hectare vineyard in Pompignac that produces a mere 6,000 cases annually. Some might find it a bit austere for their tastes but I love it. Try it, and at this price, I bet many of you will be won over.

Moving into the Southern Rhône Valley, Wadih sent me a Parallèle 45 2001 made by Paul Jaboulet Ainé, one of the region’s oldest producers. Those curious about the name will no doubt be thrilled to learn that it refers to the 45th parallel that passes through Pont de l’Isère, 2 km south of the winery. The wine itself has been going since 1958 and the 2001 is an engaging ménage-a-trois of Roussanne and its local bedfellows, Marsanne and Grenache Blanc, conspiring to produce notes of flowers and spices. My wife and I drank it with grilled chicken with tomatoes and garlic. You should too.

Finally, we fall off the map and land down under in OZ, from where we are introduced to a Penfolds Rawson Retreat, Cabernet Sauvignon 2002. This might be a tricky proposition for those Lebanese wine snobs, whose resilience will be tested by the presence of … yes … a screw cap. But do not be put off. The Australians know what they are doing and Penfolds in particular, has been in the game for over 100 years and is responsible for the Penfolds Grange, arguably Australia’s greatest wine. This is a well-structured and honest Cabernet Sauvignon ready for immediate drinking. The simple fact of the matter is that for wines that do not need cellaring, a cork is not necessary. Plus, the screw cap has the added bonus of being able to be screwed tightly back again if, for some bizarre reason, you belong to that odd group of people who never finish a bottle!

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Money Matters

by Executive Contributor
written by Executive Contributor

Arab Bank Group Records 40% Growth in 2004 Profits

Jordan-based Arab Bank Group, one of the Middle East’s leading financial institutions, reported record profits in 2004 amid better yields in capital markets and healthy growth in core deposits and loans at the bank. Its net profits rose by 40% to $319.4 million in 2004, compared to $227.7 million in 2003. Arab Bank’s assets improved by 11.4% year-on-year to $27.3 billion. The bank’s mainly Arab customer base helped push deposits up by 10.5% to $22.9 billion in 2004. It is to note that Arab Bank Group is one of the world’s largest privately owned banks, with nearly 15% owned by late Lebanese former PM Rafik Hariri.

GIC Posts 2004 Profit Growth

Kuwait-based Gulf Investment Corp. (GIC), owned by GCC countries, Saudi Arabia, Kuwait, Qatar, Oman, Bahrain and UAE, registered an 8% growth in net profits to $135.4 million in 2004, compared to $125 million in 2003. Shareholders’ equity improved to reach $1.3 billion, whereas assets increased from $6.8 billion in 2003 to $7.3 billion in 2004. GIC is benefiting from its long-term strategy, approved in 2001, focusing on business diversification, managing risks and optimizing resource allocation. Investments by GIC in the Gulf region, exceeding $2 billion in 40 projects and portfolio investments in 2004, increased in sectors such as petro-chemicals, power and telecommunications.

Country Profile: Algeria

In a recent working paper published by the IMF assessing Algeria’s macroeconomic performance in recent years, the Algerian economy seems to witness higher growth rates, lower inflation, increasing international reserves and a progressive decrease in unemployment. The primary reasons behind this economic growth are on one hand, favourable world energy prices, and on the other, fiscal stimulus. However, the main challenge the Algerian authorities will have to raise is the transition into a market economy as well as the launching of an up-to-date management program for the country’s hydrocarbon resources. The IMF directors also encouraged the low-inflation objectives of the monetary policy undertaken in Algeria while expressing their concern over the excess of liquidity, thus encouraging transaction inflows from hydrocarbon companies to be undertaken outside the money market. As a result of this favourable economic outlook towards Algeria, the directors supported the authorities’ request for IMF assistance to improve the exchange system and develop the foreign exchange market giving priority to the development of sound banking systems.

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Special Section

Assessing The Damage

by Thomas Schellen
written by Thomas Schellen

In the wake of the assassination of former Prime Minister Rafik Hariri, global analysts, think tanks and ratings agencies were not slow to reassess the future of a Lebanon that until then had been bullish in its projections for future growth. One week after the killing, EXECUTIVE spoke to Simon Williams, senior economist for Middle East and North Africa, at the Economist Intelligence Unit (EIU), arguably the world’s leading provider of country analysis and risk assessment, for his thoughts on Lebanon’s prospects.

How did the assassination of former Prime Minister Hariri affect the perception of Lebanon in the eyes of Europe?

Economically, it is fairly self-apparent. Investors, who had looked at Lebanon and at what Lebanon had developed in terms of the last seven years in particular and had been quite excited about the things that Lebanon might be beginning to put forward, will now be very cautious. It brought back a lot of memories of a time when you couldn’t say Beirut without the word war-torn before it. My concern is that in the minds of a number of people, these images will be back. People who know the region well will be sitting back and waiting to see what happens next. Those who don’t know the region I think will put Lebanon on the backburner for some time. I am talking about both direct investors and those interested in making finance available to Lebanon, those working in the banking sector.

Does that indicate repercussions for economic relations between Lebanon and European countries in specific areas, or will the effect be felt mostly in politics?

We have to see what happens in tourism, which appears to be the other area people are talking about. My assumption is that people will be quite nervous, certainly the European and American travelers – those who aren’t Lebanese expatriates. They are, however, not such an important sector for Lebanon. The Gulf region travelers will be far more resilient but certainly in the eyes of your standard European traveler, Lebanon has been set back as a tourism destination.

In the political perception, I think Lebanon has been brought very much into focus. It has pushed the issue of Syria’s dominance of Lebanon way up the agenda. In the past, there had always been the willingness to work with the status quo and not press that issue. That’s gone at least for now not only because of the assassination but also what is happening elsewhere – the Americans with the Syrians and Iraq. However, the assassination has outraged so many people around Europe and in the US and has brought the issue very much into focus in a way that it wasn’t before.

Does the upheaval over the assassination and related increased political awareness stand to have direct economic effects on Lebanon?

I think in the immediate term, probably not. It is not as severe as some people feared. The central bank has tried a very good game of the period since the assassination. I think they have been very successful in creating an air of calm to the degree that this has been possible on the financial market. They talked to the banks and to the main players outside Lebanon as well to reassure them that no crisis is imminent. I think they could do this because of their reputation but also because of the reserves that they currently have access to. I don’t see pressure on the currency emerging particularly at the moment. And it has also been a relatively good time for Lebanon in terms of public finances.

Would you elaborate on this?

The immediate debt issues were eased last year with the refinancing of the bonds that were coming due in 2005 and the selling of that additional debt late last year. I would be far more concerned if there were large numbers of substantial eurobonds set to mature over the next three to six months.

There are two things that worry us immediately: the first would be pressure on the pound resulting from a switch out of pound into dollar assets. I haven’t seen that occurring. What would worry me even much more would be signs of a movement of funds out of Lebanese banks. The liquidity of the banking system is what the economy’s current dynamic rests on. The situation is still very much on its early days but I haven’t yet seen such withdrawals taking place either. The central bank’s management of the situation and its liquidity has bought Lebanon time, which I think is being absolutely vital.

Do you foresee any longer-term increased reluctance on the part of European investors to buy Lebanese eurobonds?

It will be interesting to see. Obviously, the Europeans were never the main purchasers of the Eurobonds. They were purchased overwhelmingly by the local commercial banks. Those Europeans and others who were looking at Lebanese debt instruments represented a fairly small area of the market. Having said that, I think that any prospects for a substantial increase of Western interest in Lebanese debt instruments over the rest of this year have certainly vanished. The political risks surrounding Lebanese debt are now too high for most major European institutions to consider looking at. They weren’t that interested before, partly because of political concerns but also because of the how precarious Lebanon’s debt dynamic is and how fragile government finances are.

From impressions here, the first concern of local business leaders seems political in the short term and to keep a positive outlook in the longer term. Do you see ground for optimism and economic possibility?

I am an economist and economists are never optimistic. We always worry and look for things that could be going the wrong way. In Lebanon’s case, it really depends on what happens next. It’s all really down to the politics. This entails the uncertainties surrounding the election and the formation of a new government and broadly the way in which the dynamic with Syria develops. I really am unsure as to how that process is going to move forward and it necessarily causes me concern. That kind of uncertainty is very damaging for investor sentiment. Investors need to know where they stand and to be reassured of the stability of the political and economic institutions that act as a framework for their investment. While that is not there, confidence is going to be far poorer than it need to be.

How do you see the Syrian situation under these circumstances? Is Syria economically threatened by this whole scenario?

To an extent. Certainly, the interests of some Syrians and some significant Syrian businesses are tied up with their stake in Lebanon. You also got the importance of the remittances of Syrian workers in Lebanon as well as access for Syrians to the Lebanese banking sector. But I think to suggest that the withdrawal of Syrian troops from Lebanon would somehow be a major blow to the Syrian economy is overstating the matter. I still expect the Lebanese to want to work with the Syrians. The Lebanese are business people and the Syrians can provide good business.

How does UN Resolution 1559 come in? Is there any power in this resolution that could be a threat to the Syrian economy by way of sanctions?

This depends on how far the French and the US decide to push the issue in the Security Council and if they commit themselves and formalize the thing they have been saying over the last few days in absolute consistence – that all Syrian troops must be withdrawn if not immediately then in time for the elections. If they formalize that through the UN, it will be very difficult for them to back away and not enforce punitive measures on Syria. I think these measures would have to be quite significant. I don’t know what they’d do and it is difficult to judge, though, especially as there are other international issues that Syria is involved with and that overlap and possibly might have priority over the Lebanon file, the obvious one being the situation in Iraq.

Would an implementation of 1559 not also have economic repercussions on Lebanon?

Indirectly. I wouldn’t expect Lebanon to be directly targeted by sanctions under 1559. There might be some secondary impact from economic restrictions placed upon Syrian activity but I would be very surprised if in the first instance or at all the UN would choose to target Lebanon.

Would you risk naming a figure on the size of the economic impact of sanctions on Syria and Lebanon?    

No, I wouldn’t. That’s almost impossible to quantify, given that we don’t know what restrictions are going to be put in place, how they are going to be implemented and how much support for these measures there is from others in the region and around the world.

You described France and the US as the prime movers in this affair. Do you have any sense how the UK is leaning in regard to action vis-à-vis Syria?

 The UK is not in the lead but my sense is that it is broadly on board. It motioned for 1559 when it was passed and the comments that [foreign secretary] Jack Straw made have highlighted concerns over the Hariri assassination and Syria’s possible involvement. I think the willingness of the foreign secretary to say this is a good indication of how they are likely to react to 1559.

Bashar Assad made overtures to the UK when he visited London and talked about banking. Could the UK mediate?

Possibly, but it takes two sides to mediate. I think there is a lot of confusion in political circles not only in the UK but also elsewhere as to exactly what game Syria is trying to pursue. There were people who looked at Bashar and were eager to offer the support they could, seeing him as new generation man who had the potential to be a reformer and somebody who was saying that he intended doing the right things in terms of economic reform and taking some steps over Iraq and over Lebanon as well. I think that in looking at what happened over the last six months, these people are now wondering whether they misjudged the situation and misjudged Bashar or whether his leadership is weaker than they previously assumed. I think those doubts would need to be addressed before there could be mediation of any kind.

Let’s say one were to envision something like normal bilateral economic relations between Syria and Lebanon – which of course implies that we assume these relations to be not totally normal today. How do you see the Syrian-Lebanese relations today and how could they be?

It is very hard to envision. It has been such a long time since [normal relations] took place. There are obvious things that Lebanon can offer to Syria, particularly in terms of the excellence of much of its services sector and the financial services sector in particular. Syria needs access to a proper functioning banking sector, which is doesn’t have access to and Lebanon clearly can provide. The Lebanese market is small but of some value as a place and means of getting access to the rest of the world – that gateway function. For Lebanon, Syria is a large market with a young and growing population and it is a relatively untapped market in a lot of ways.

But really the most important determinant of the kind of relationship that might emerge between the two countries would be the scope and speed of economic reform in Syria. As things stand at the moment, given the economic structure that is in place in Syria, it is very difficult for Lebanese interests to take advantages of these opportunities. Syria is not a good place for anyone trying to do business, whether they are Syrian, Lebanese, or anyone else.

I would also like to ask you about how the Hariri assassination affected you as an individual dealing with Lebanon. Did you know Mr. Hariri? What was your personal reaction when hearing the news of the assassination?

Like everyone else, I just felt an overwhelming sense of shock. It’s extremely difficult to believe that such a dominant figure for certainly all the years that I have been traveling to Lebanon and working on Lebanon has gone. I find it difficult to believe that it happened. It is that sense of shock.

How do you see the way forward from this point?

I would stress that the next three months are absolutely crucial. There is such a lot of uncertainty and so many unresolved issues in terms of how the political situation is going to develop. I don’t think that anyone in the foreign business community – and probably people in Lebanon either – is able to think very far past the middle of this year. There is a strong sentiment that things are on hold and that people have drawn in a sharp breath and are waiting to see what happens. I think Lebanon has the capacity to weather that period of uncertainty, provided nothing else happens and there are no further incidents of the kind we saw last Monday. If the outcome of this four-month period isn’t a clear one and if by the second half of this year, we don’t have a sense of where Lebanon is going, then my concern is that the situation starts to deteriorate. There is only so much that even a central bank like BDL can actually achieve.

Would the elections then be a pivotal point for the Lebanese economy?

The elections are certainly a big part of it both in terms of the results and the way in which they are contested and by the way in which the results are dealt with. Among those who I talked to in London and elsewhere about Lebanon there is a general hope that what happened on February 14 will have focused a lot of minds in Lebanon and given people a reminder of how high the stakes are in terms of the management of the political pressures over these next few months. The hope is that this will be used to ensure that that period is managed well and smoothly; otherwise the consequences could be significant. 

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Special Section

Francisco Acosta First Secretary for the EU Commission’s Delegation in Lebanon

by Thomas Schellen
written by Thomas Schellen

What effect do you expect Rafik Hariri’s assassination to have on EU-Lebanese relations, and indeed on Lebanon’s ties to Europe? What measure would the EU like to see taken so as to stabilize the present fragile situation?

The full consequences of Mr. Hariri’s death remain to be seen, but it is beyond doubt that the European Union has lost a fundamental mediator between Lebanon and the EU, and a tremendously valuable one at that. Mr. Hariri believed in the importance of these relations. At present, we find ourselves devoid of any mediator.

Mr. Hariri was a pillar of the free market economy and he gave investors confidence. Investors and the international markets in general will now be paying close attention to what type of an economy emerges following his death. The European investors in Lebanon are not many – we are only talking about a few companies – but they are closely following the evolution of the Lebanese market and the exchange rate of the Lebanese lira. They are awaiting to see what the central bank will do so as to ensure the country’s monetary stability. So far, the statements issued by the bank have mostly calmed down any jittery investors.

On the political front, EU Commissioner Benita Ferrero-Waldner issued a statement requesting that free and transparent legislative elections be held in Lebanon, as a tribute to the memory of Mr. Hariri and his legacy. Javier Solana, the EU high representative for common foreign and security policy, has backed the request made by the international community that an international investigation take place on Mr. Hariri’s murder, and has taken the necessary steps to make sure the Lebanese authorities are aware that the EU supports Resolution 1559.

Marwan Iskandar

Economist and Managing Director of MI Associates

How do you expect the recent events to impact the main components of the Lebanese economy and the country’s GDP growth?

The short term impact will be demonstrated in a surge for dollar or euro holdings against Lebanese pounds. This trend will be short lived however, and will eventually peter out.  The signs of it are already there: on February 18, the demand for dollars absorbed over $400 million. By February 21, this figure dropped to $200 million, and by February 22, to $50 million. During the three-day national morning period following Mr. Hariri’s assassination and one day of Ashoura, transfers to Lebanon exceeded $100 million.

The political atmosphere is tending towards a degree of openness on debate and this will contribute to lesser speculation against the Lebanese pound.

In addition to this, central bank reserves are substantial, and it has at its disposal measures for attracting depositors and Treasury bond purchases in Lebanese pounds.

The negative impact will be felt in the balance of payments. Earnings from tourism estimated at $1.5 billion in 2004 could fall to $1.1 to $1.2 billion in 2005. Also, direct foreign (mostly Arab) investment could decline from its billion dollar level in 2004 to half as much. The balance of payments in 2004 achieved a relatively small surplus in spite of high revenues from tourism and direct investment. This was due to a much higher imports bill that came about in consequence of increased consumption, a much higher oil import bill and the appreciation of the euro.

Unless Lebanon receives aid from Arab oil producers and the OPEC Fund to absorb higher costs of energy imports, the balance of payments deficit could be substantial, and thereby create in early 2006 strong moves away from Lebanese pound holdings. Although it’s worth noting that the gas line from Syria might become operational during the course of this year, which could contribute to savings being made on the national fuel bill.

There is no doubt that the rhythm of economic activity will be slower. It is hard to conceive of growth beyond 1-2 percent as opposed to 4-5 percent achieved in 2004.

Much will depend on the progress towards free elections and on the electoral debate. If progress were smooth, results will be better. And if elections result in a more representative parliament and Syria’s influence becomes less oppressive, there could be a strong second half for Lebanon economically.

It should be noted that the Lebanese economy by its nature functions at a higher rhythm in the second half of the year. 

Nasser Saidi

Former First Vice Governor of the Central Bank of Lebanon and Chairman of Lebanon Corporate Governance Task Force (LCGTF)

What now for the future of the lira? Will the central bank continue its policy of intervention to maintain the exchange rate? Is this a sustainable policy in the long run?

The central bank will continue its policy of intervention so as to maintain the current exchange rate parity. However, this will come at a large cost for the bank. The situation is very different now that Mr. Hariri is gone. A deep structural change has occurred, a Lebanese tsunami if you will.

The former premier provided the credibility in terms of the sustainability of the government’s economic policy, as well as to the financial and political commitments made during the Paris II rounds. Now the country is faced with financial uncertainty.

The 3 days of business closure during the national morning period limited the possible fluctuations we otherwise would have seen on the markets, an effect which was compounded by the fact that the first day of re-opening was a Friday, when most other Arab countries don’t work.

Since then, we’ve seen more fluctuations on the markets, be it the stock exchange, the foreign exchange and the financial markets, however the value of this indicator is limited due to the heavy intervention of the central bank. The central bank will continue to maintain the rate of the Lira by digging into its foreign reserves, but the sustainability and value of such a policy is questionable. Any decision to change this policy will have to come from the government though.

Georges Corm

Economist and Former Minister of Finance

How will Rafik Hariri’s death and the ensuing stand-off between the government and the opposition affect the country’s financial situation? Is the economy at risk of crashing?

Mr. Hariri’s death was not only profoundly tragic, it also destabilized the country in its entirety, and took on a geopolitical dimension, with Resolution 1559 and the persisting international intervention into Lebanon’s affairs. That being said, the economy will get through this. Arab investors will continue to come. The flow of investments from the Gulf have remained steady since the 1950s and they will continue to do so, unless the country falls back into a civil war. I do not see this happening – the conditions which triggered the war in 1975 are no longer present.

The country is going through a rough patch, but our public finances are robust enough to wither the shock from it. For the past three years, the VAT, the revenues from the telecom sector and the drop in interest rates have boosted the public coffers and provided the state with finances healthier than they have been for a long time. Both 2003 and 2004 were very good years. In 2004, the state’s revenues amounted to $5 billion, which is exceptional.

Lebanon has a very resilient economy. Our banking sector emerged intact from 15 years of civil war and succeeded in recapitalizing itself. Following Mr. Hariri’s death, the banks reacted wisely and chose not to increase the interest rates.

The Lebanese expatriate community continues to send remittances and invest back into the country, which is reflected in our balance of payments.

The growth in the tourism industry will stagnate as a consequence of the events, but it remains only one factor among several that drives the Lebanese economy. Industry has been experiencing positive growth, and that could in part make up for it.

The present political atmosphere is not very productive. What we need now is for free elections to go ahead, and for the international community to ease the pressure it is exerting on Lebanon – foreign interventions have never brought anything but catastrophes to this country.

Shadi A. Karam

Chairman and General Manager, BLC Bank

His ownership of Banque Mediterranee aside, what was Rafik Hariri’s influence on the banking sector? What consequences could his death have on the sector?

Mr. Hariri’s impact on the banking sector was significant. Obviously, he was a large depositor, both as an individual, as well as through all the institutions that he owned.

He was also a large shareholder in several banking institutions, not simply Banque Méditerranée – he had shares in Bank Audi abroad, in the Swiss subsidiary of the now defunct BFO, and others.

The impact of his death remains to be seen. The man played a key role on the economic scene, he was one of the main engines in shoring up confidence in this country. Whether this confidence will now be lost depends on how the present crisis is handled. So far, it looks like the country will be able to absorb the shock.

Personally, I don’t believe it will have a direct impact on the banking sector. There will no major currency crisis. If there are no major transfers made out of the country, and this hasn’t happened yet, we will be OK. The impact has been mitigated so far by the central bank.

For a period of time, outside investors will ask themselves whether or not they should invest in Lebanon. In the short-term, people will adopt a wait-and-see attitude. Those who already have invested in the country will wait before they add to their investments. Thos who haven’t yet will hold off on it a while longer. But the political actors are showing signs of moderation and adopting a more responsible attitude that what we are used to seeing, and this will help restore trust.

At the end of the day, Arab investors have little other options available to them, should they turn their back on Lebanon. Arab money is under scrutiny both in Europe and in the United States, they would get the same services as they are offered here. They really don’t have many viable alternative options. Lebanon has been through tough times before and gotten through it. Despite what has happened, nothing much has changed with regards to the economic fundamentals of the country.

Rafik Hariri will be missed. He was a major resource to this country, a man capable of intervening in the highest economic, financial and political spheres. I don’t see anyone right now with the same kind of potential. From that perspective, he is not just a major loss to the banking sector, but to the economy as a whole.

Jean Abboud

President of the Association of Travel and Tourist Agents in Lebanon (ATTAL)

What effect do you expect the attack to have on the hitherto booming tourism industry? What will it take for it to recover?

What happened will definitely have a very negative impact on the sector. We are already experiencing it: there has been a tremendous decline in both airline and hotel bookings.

European and other tour operators are calling in, canceling reservation upon reservation. I had organized a three day seminar at the beginning of March on Arab judges, which 300-350 people were expected to attend, and that has now been cancelled. The occupation rate of the hotels has dropped as well. The sector had been benefiting from a major growth since 2002. In 2004, tourism grew by 27% compared to the previous year.

Rafik Hariri was the guarantor of all the sectors of the economy. His death is a huge loss. And the current political instability is making matters worse. The tourism minister, Farid Khazen, resigned within days of the attack, putting all ongoing collaboration between ATTAL and the ministry temporarily on hold.

The fate of our sector will depend on the political situation – we are praying for a rapid improvement. Should the current crisis resolve itself soon, we may still be able to recover to a certain extent from what happened. But we need a stable political environment.

I believe the sector will need at least six months before we will start seeing any sign of recovery. Tourists will wait and see what the outcome of the elections in May will be.

That being said, elections alone will not be sufficient to put Lebanon back on the tourist map. European and American tourists are waiting for the Mideast peace process to happen, which is why we essentially only get Arab tourists coming to Lebanon. Before the war, we received more European than Arab visitors. For now, the situation is not promising, neither from a domestic, nor a regional perspective.

Ghazi Yussuf

Former Head of the Higher Privatization Council

Privatization was the cornerstone of Hariri’s debt repayment plan. What will happen to the stalled process now that he is gone?

The privatization process has been at a standstill for over a year now. It reached a deadlock in January 2004 when the bidding process for the sale of the telecom licenses was hampered by the political process. This subsequently spilled over to the privatization process of Electricite du Liban (EDL). This is why Rafik Hariri decided to put the whole process on hold until the autumn, by which time he expected a new president and a new parliament to be in place. As we all know, this didn’t happen and he resigned.

The new government that came in does not see any of the positive aspects in privatization. I met with the new prime minister to discuss the process, and he made me understand that there would be no privatizations undertaken in any sectors of economy. The furthest he was willing to go, was to look into a management contract for EDL, which is not privatization. This is why I presented by resignation in October 2004.

I do not see the process being re-launched any time soon, and this will have very serious ramifications for the economy.

The government can no longer claim that it is following a path of restructuring the various sectors of the economy and as a result, the public finances will suffer from great losses, most notably due to the unresolved issue of the electricity. With Mr. Hariri’s tragic passing, Lebanon has lost its champion of the privatization process and at present I don’t see any other potential candidate who could pursue his work.

Samih Barbir

Former Chairman of IDAL

Rafik Hariri – both the billionaire businessman and the prime minister – was a central component in Lebanon’s ability to attract Foreign Direct Investment (FDI). Was this not a dangerous strategy? What now for a Lebanon without its money man? How can the government rekindle with his investment spirit?

It wasn’t a strategy, it was a fact. He never planned for it to be this way, but he was what provided investors with confidence based on his experience, his background, the whole aura around him – this is what attracted FDI. That being said, with the exception of the real estate sector, FDI was already decreasing in Lebanon, even prior to his assassination. It started dropping from September 2004 on. The extension of President Emile Lahoud’s term, the lack of transparency, the lack of confidence in Lebanon, the unstable political environment basically, served as a disincentive to foreign investors, except again, for those investing in real estate.

It’s a question of stabilization of the political scene – both domestically and regionally. At present, you have too many problems: Iraq, the Israeli-Palestinian conflict, Resolution 1559, Rafik Hariri’s death and the ensuing political confrontations… There are so many other places and opportunities to invest in all over the world that nobody will be rushing in to take a risk on Lebanon.

But for now, I expect the situation to stabilize itself with regards to FDI. The bulk of FDI goes into real estate, which will not be affected by what is happening. The need for Arab investors to have a pied-a-terre in Lebanon will persist, even with a deteriorating political situation. As long as there are no military problems, they will continue to come.

With regards to the productive sectors, FDI was falling anyways, and that is a trend that will continue, unless there is a major effort from both the government and the main economic associations to focus on specific sectors.

The IT sector – and I have always argued this – would be a prime sector to focus on. It has a huge potential. And this is not a slogan, it’s real, especially considering the quality of the work you get for the price you pay.

What IDAL can do is to work hard at rebuilding the confidence of the investors and make them understand that the present crisis will only be a short-term one – it is not going to affect the economy in the long-term. We’ve lost an amazing person, but he had enough disciples who can carry on the work for him. And we should carry it on. We can’t wait for another Rafik Hariri to come back to Lebanon. We’ve were given this gift once, we won’t get it again.

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