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Bhamdoun fears a slow summer

by Executive Editors
written by Executive Editors

Continuing violence and political turmoil in the wake of the February 14 assassination of former Prime Minister Rafik Hariri have spurred fears that the instability could have disastrous consequences on the economy as a whole and the roughly $1.5 billion summer tourism season in particular. Nowhere is this concern more palpable than in the mountain resort town of Bhamdoun, where tourism is crucial to the local economy. A summer haven for holidaying Gulf Arabs, Bhamdoun has experienced a retail and real estate boom in recent years.

“If there are more explosions, the Gulf Arabs will be frightened and will be driven away from Lebanon, to places like Jordan, Egypt and even Syria,” warned economist Marwan Iskander. That would come as a serious blow to Bhamdoun’s business community, for whom the summer season, according to Iskander, generates about $60 million a year in revenue.

Developer Raffi M. Kaloustian, chairman of Le Baron, which designs and constructs villas and apartments in the Bhamdoun region, acknowledged that his company had put future plans on hold. But he, like many Bhamdoun residents, professionals and officials, stressed that it was too early to say what exactly would happen in the summer, especially given Gulf Arabs’ strong attachment – both personal and financial – to Bhamdoun.

He said he was currently building villas and apartments for 30 clients – all of them Gulf Arabs. “Not one of them has suggested postponing a payment,” he said, “because they believe in this place.”

Kaloustian said that most Gulf Arabs were aware the realities of Lebanese life, a philosophy that saw them visit every summer even when the rest of the world felt it was unsafe. “They expect an eventual boom,” he added, “but they all say: we’ve got to go through a few bombs before we get there.”

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Uncategorized

introducing Chateau Makse

by Executive Editors
written by Executive Editors

Akram Kassatly, owner of Kassatly Chtaura, the man who saw an opportunity for a locally produced alcopop and gave us Buzz, is now focusing on his first love. Investing $1.8 million into Chateau Makse – named after the Bekaa Village where the winery is located – Kassatly, who studied winemaking in Dijon in the late 60s, is joining the ranks of Lebanon’s $27 million wine industry. Expecting to produce 400,000 liters annually (roughly 500,000 bottles) the new winery, will be fulfilling a dream that was cut short in 1974.

“The war forced the company to abandon its winemaking ambitions and focus instead on the more stable concentrated syrups and non-alcoholic products,” explained Nayef Kassatly, Akram’s son, who added that Chateau Makse had already signed contracts with local grape suppliers until its own vines, of which 30 hectares have been planted, are ready for wine production. However, many within the industry say it will not be easy for a new winery, without its own vineyards, to establish itself. “There is huge demand this year. The Egyptians, Jordanians and even the Syrians are all coming to buy our grapes. They are demanding about 500 tons and this is around 25% of the independent grape growers’ harvest,” said one wine maker. “Good quality grapes will come at a premium.”

The winery will initially produce three wines retailing at around LL7,000 each: red, white and rose and, despite a local market dominated by Chateaux Kefraya and Ksara, Kassatly is confident that 50% of the production can compete in domestically, while France, the UK (Lebanese wine’s two biggest importers), the US, Japan and Sweden have all been earmarked as export markets, the penetration of which will be helped by Kassatly’s existing distribution networks. “With our know-how, infrastructure and marketing strategies, we believe the project is very promising in the long term,” he said.

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Uncategorized

VISA victorious

by Executive Editors
written by Executive Editors

Credit card issuers Visa International have given another thumbs up in their assessment of the Lebanese market. In 2004, usage of Visa-branded credit and debit cards increased by 32% to 11.6 million transactions in total. The company was especially jolly about the fact that Lebanese cardholders had carried out 2.3 million of these transactions in retail spending at Points of Sales (POS).

The accumulative value of transactions was $2.08 billion for 2004, of which $300 million occurred at POS, an increase of 31 % over the previous year. It has been a strategy of the credit card company to strengthen the credit card culture in Lebanon and increasing usage of cards at the from issuer perspective more profitable POS.  

According to Visa International’s general manager for the Levant, Said Shuqom, Visa estimates their share in the Lebanese payment card market at over 50%. Considering that the number of Visa cardholders here has risen to about 553,000 at year-end 2004, this would put the total number of payment cards in the country at about 1 million. However, the numbers provided by Visa also showed that the vast bulk of cards are debit cards, with Visa Electron cards accounting for nearly 437,000 of the total. Full fledged credit cards of different classes under the brand number less than 30,000 and the top-tier segment of Visa Platinum and Business entails precisely 2,812 plastic carriers.

Arab countries, including the Levant, are currently among the fastest growing markets for Visa International. For further growth here, the company banks on increased market segmentation and new technologies, Shuqom said. The company assumed that the turmoil of the past two months had reflected upon the usage of credit cards in Lebanon but would not be able to quantify this impact for several more weeks. In light of the situation, Visa has halted all promotion campaigns and launches of new products for the first six months of 2005, he added.  

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Uncategorized

EU backs E-commerce

by Executive Editors
written by Executive Editors

Funded by a €1.7 million EU grant, E-Commerce in Lebanon (Ecomleb) aims to promote e-commerce in Lebanon and to formulate a complete set of laws and decrees necessary to facilitate online business and banking. This legal basket containing 10 draft laws should be ready to be go to parliament by June. “When these laws are passed by parliament,” said project manager Alain Jean, “Lebanon will have the most advanced and coherent legal framework in the Middle East, which puts it years ahead of other countries, such as Egypt, Jordan and Dubai.”

According to Radwan Habli, IT advisor to the ministry of economy, “in normal circumstances,” it will take between three months and a year for parliament to pass the bill. Meanwhile, Ecomleb is promoting the use of e-commerce through conferences, press releases, its quarterly journal and website, as well as a soon to be released CD-Rom on the leading e-commerce activities in the country.

So far, the digital way of doing business has not exactly taken the country by storm. A report published last February by the Beirut-based Stanford Research Institute concluded that: “despite high levels of computer penetration and reasonable degree of adoption and use of the internet, e-commerce is yet to gain ground in Lebanon. By the summer of 2004, only 9% of all Lebanese internet users shopped online.”

However, there are exceptions to the general rule, as companies such as Tripoli’s Hallab Sweets and Khan al Saboun, as well as online travel agency skileb have demonstrated promising results. According to Jean, as Lebanon is a service industry, it is about time the country hops on the bandwagon. “Just look at the figures,” he said. “In the USA, online retail revenues increased by 25% from 2002 to reach $60 billion and is expected to grow by an annual 19% over the next five years. In the EU, companies selling and people buying online has increased dramatically as well.”

(For more information: www.ecomleb.org)

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MECG-Rymco deal

by Executive Editors
written by Executive Editors

Investment Bank Middle East Capital Group (MECG) and automotive dealers Rymco last month completed a securitization deal representing the first significant act of financial engineering in the period after the assassination of Rafik Hariri. The complex arrangement entailed offering of certificates backed by automobile receivables from Rymco worth slightly over $20 million.

Under the transaction, described by MECG as the largest of its kind in Lebanon, the certificates issued by the investment bank were purchased by eight banks and firms in the financial industry. Certificates were split into a one-year and a two-year tranche with respective annual interest of 6.5% and 7.5%, plus a residual tranche of $8 million, which remains with Rymco and acts as buffer against eventually defaulting car loans as underlying securities.

To the participating banks, the arrangement offers good returns at a low risk while Rymco benefits from improved access to finance and stable cash flow. Rymco intends to implement further securitization increments over the next three to five years for a total value of $75 million. Earlier this year, BEMO Securitization, the investment-banking arm of BEMO bank, had closed a similar offering in collaboration with car dealers Bassoul Hneine.

The transaction also illuminated the cost that the finance industry had to bear under the impact of the Hariri assassination. Walid Mousallam, CEO of MECG, said that the partners in the securitization felt a sense of pride to have successfully completed the arrangement during this difficult period but also revealed that MECG reviewed the program after the assassination. Perceiving a higher short-term risk, the investment bank revised the size of the offering downward, taking it from $30 million to $20 million while significantly increasing the size of the residual tranche as over-collateralization from about 28% of the total to 40%. “It would have been a different deal a month ago,” he said. 

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Economics & Policy

The economic relationship

by Andrew Tabler
written by Andrew Tabler

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

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

Trading partners

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

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

Refuge for Syrian money

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

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

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

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

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

Swapping expertise

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

Syria’s manpower

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

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

A brief history of Lebanese-Syrian economic pacts

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

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

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

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

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

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The Buzz

Heading back to the books

by Thomas Schellen
written by Thomas Schellen

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Business

Banking on change

by Michael Young
written by Michael Young

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

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

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

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

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

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

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Economics & Policy

Juggling debt wisely

by Faysal Badran
written by Faysal Badran

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

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

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

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

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

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

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

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

? Reform pensions.

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

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

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

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

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

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

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Economics & Policy

Q & A: Fouad Siniora – Forward thinking

by Executive Staff
written by Executive Staff

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


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

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

What role does the economy play in the moment?

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

What is the way forward?

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

Besides the risks, do you see an upside?

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

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

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

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

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

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

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

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

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

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

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

How about taxation and work permits for the foreign workers?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That is premature to discuss now.

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

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

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

Yes.

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

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

Are you optimistic?

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

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