Finance

Banking Voices – Size still matters

by Executive Staff
written by Executive Staff

Georges Abou Jawdeh: President, Lebanese Canadian Bank

E: After encouraging developments on the interest rate front, Banque du Liban has once again adjusted the rates upwards. In such an environment, how can the banking sector develop a more efficient corporate and retail lending culture?

Following the Paris II meeting for donor countries to Lebanon and the Lebanese banks’ contribution of $4 billion at 0%, interest rates on credit accounts in Lebanon dropped. And as of January 2004, the banks started to revise their interest rates on debtor accounts, to be more competitive, particularly on the regional market, where interest rates are lower. It is imperative for us now to revise the costs of funds again: in order to encourage lending, banks must reduce the price of lending. At present, we are at a significant disadvantage, internationally speaking.

Just to give you an example, banks are paying between 2.5% to 4.5% interest rates on US dollar credit accounts. Abroad, the rates are at 0.5%, so the difference is significant. Banks need to reduce interest rates to reach between 6% and 9% on commercial loans in US dollars. For deposits in Lebanese pounds, banks are paying between 6% and 8.5%, thereby landing loans in Lebanese pounds at interest rates between 11% and 14%. This is why we need to reduce the cost of funds. If banks are paying a high credit interest, they will be forced to lend at a high interest rate.

The solution to this problem lies first and foremost in the hands of the government. The Lebanese government must decrease its debt, so as to enable it to borrow at a lower cost. As long as the public debt remains as high as it is now, and keeps on growing, the perceived risk will stay high, and the government will keep borrowing at a high interest rate. This in turn affects the cost of lending for corporations and individuals alike – it is a cycle.

By reducing the debt, interest rates will go down, the credit and the debtor interest rate will fall and the business cycle will regain momentum. Looking ahead, what we need in 2005 is political stability – in the region, but even more so in the country, so that the Lebanese central bank does not need to intervene on a daily basis to maintain the price of the Lebanese pound to the US dollar.

At present, the central bank has $12 billion in foreign reserves, which puts us in a good position, but is not enough to ensure long term stability. Political stability would help generate domestic and foreign investments, which could inject fresh capital into the economy, beyond merely the real estate sector. What the banks need to focus on in order to promote healthy lending and credit underwriting is how to encourage small and medium enterprises, so as to gain new clients. In a small country such as Lebanon, where big enterprises are few, the economy stagnating and the number of loans issued dropping, this is the only strategy to pursue.

Shadi A. Karam: Chairman and General Manager, BLC Bank

E: Is there any danger that the current trend of regional expansion by Lebanese banks could lead to overextension, thereby damaging either the bank itself, the sector or the economy?

The regional expansion that some of the leading Lebanese banks have engaged in over the past two years has primarily been motivated by the high level of competition and a quasi saturation of the local market. An insufficient national growth pattern, political uncertainties and the need to reshuffle balance sheets laden with Treasury bills have also been driving factors. Expectations are that a regional expansion would help diversify sources of revenue and smooth out potential fluctuations caused by domestic contingencies. Theoretically, this is a sound strategy.

A closer look reveals that the branching out has occurred in neighboring, relatively familiar markets – Cyprus, Syria and Jordan – which mitigates the risks of expatriation.

Banks such as BEMO, BLOM, Audi and Société Générale are on familiar territory and have established anchor points going back to decades of client networking. This represents an advantage, if only from the sheer risk assessment, “local knowledge” viewpoint.

Naturally, one may deplore that money invested abroad is money not invested in the Lebanese economy, which is in dire need of fresh capital. However, it may be similarly argued that the stronger our banks become and the wider their regional reach is, the higher their added value to our national wealth is. As for the potential dangers this move may represent for the institutions themselves, it boils down to their equity “cushioning” capacity. It so happens that, at least in some cases, there is a satisfactory capital base and financially sound shareholders.

There remains the issue of latent sectorial and systemic risks should this experience turn into a debacle. Obviously one has to acknowledge the risk of local ripple effects should a major bankruptcy in a foreign subsidiary occur. This has happened in the past, and could have far reaching implications. However, given the amounts of capital engaged as a proportion of the banks’ total equity base and assets, the reputation of all concerned institutions for prudent management and their risk-averse track records, I believe the peril to be negligible.

As in every strategic decision management has to make, weighing the alternatives intelligently is half the answer: is it better to stand still and let leaner and meaner banks gradually nibble on your market share or take a measured risk that insures cross-fertilization opportunities and a further reinforcement of your dominant position?

Last but by no means least, a new business opportunity presents itself to banks with a regional presence: the possibility to participate in sizable deals region-wide with clients much larger than what the local market can offer and that could prove to be well “worth the candle” as the French would say.

Gerard Charvet: Advisor to Credit Bank

E: Do you fear any repercussions from political wrangling on the banking sector in 2005? How could this manifest itself and can the banks do anything to limit any unfavorable impact to the sector?

The instability created by the latest changes on the domestic political scene as well as the 1559 UN Resolution have created DE FACTO some degree of volatility in the monetary market. The US dollar has therefore become very much in demand as a result of this instability. The current political environment could over the medium to long-term have a negative influence on depositor behavior during 2005.

The local banks could react to such a situation by raising interest rates on deposits in Lebanese pounds and hence support the local currency for a while. However, such a policy emanating from the banks can only have an impact if the monetary authorities provide their full support. Local banks have no longer the financial capabilities to carry out such an initiative on their own. The local banking environment has become, during the last few years, increasingly competitive and deposit margins have moved downwards from 3.5% to less than 2% in the last five years. In this context of uncertainty, decreasing profitability and preparation for the new Basel II capital regulations, 2005 and 2006 are hence expected to witness a step up in the consolidation process of the banking sector. It is, therefore, desirable that the banking merger law is revived in order to support the much needed consolidation process and, as a consequence, help tackle the social aspect that might derive from such a process.

Nadim Moujais: Chief Strategist at SGBL

E: 2004 saw a classic merger at the top of the industry. What can we expect in 2005, especially among the medium–sized and smaller banks as well as within the Alpha group?

The rule regarding the pursuing of bank mergers in Lebanon cannot be different, although the number of banks per capita is still high. Theoretically, as long as a bank is achieving profits and a return on equity and its risk is well covered, it can continue on a solo trajectory. However, several factors have put pressure on Lebanese banks, irrespective of their size, to move towards the mergers and acquisitions. They include the Basle II capital adequacy, solvency and other requirements; the impact of the new IAS (international accounting Standards) rules and the central bank’s inclination to fortify sound banking practice, counting, in addition to its normal regulatory role, on a bank’s proven capability of management and achieved track record, to enlarge such practice through mergers and acquisitions.

Finally there is the ever-present issue of size, in which size still effectively matters, particularly in terms of capital base and balance sheet size. Whether it is for global asset/liability management (both on and off balance sheet items), or for regional expansion, major Lebanese-based banks have used Lebanon as the cornerstone of their regional development, where the comparison is imposed with some of the regions’ large-scale capital-based banks with their diversified assets composition. Hence, the quest for mergers and acquisitions will still be real in 2005 for banks with vision in Lebanon, CETIRUS PARIBUS on the political level. The real encounter depends of course on the political developments in Lebanon and in the region.

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Finance

Q&A: Jean Riachi

by Executive Staff
written by Executive Staff

E: What is the core requirement for a financial company to be successful in Beirut?

In general, for a financial company to be successful, it has to be focused on its lines of business and on its friends. When you are in Beirut, you need to compete with local competition but also with foreign competition. You have to stress your advantages and the most obvious advantage that you can have is that we are closer to our clients, so it’s easier for them to reach us. But this does not mean that you don’t have to be competitive with other aspects – competitive in terms of prices. You need to have good execution and a team of professionals with a good knowledge of financial markets and high ethical standards. It is also very important to have up-to-date technology.

E: By your own scale, how successful are you at this point, and how much more successful do you think you can be?

We have worked hard on technology. We have people who know their business and are fair to their clients. So, we believe this is how we can achieve being a successful company as measured by the number of new clients that we get almost every day and the increase in the money we manage and we deal with. This is it. We don’t pretend to compete in fields where there is nothing for us to compete in. We will never be an international money manager; we will never be the place where people put very large amounts of their wealth, but we might very well be a competitive broker for people who would like to deal on stocks or futures or currencies, online or offline. I believe we compare very well with the foreign competition as well as the local competition.

E: Does this perspective hint to growth limits on the financial industry?

We have been and are still in difficult markets where for example equity trading has almost disappeared. Something that used to represent 90% of our revenue is today almost non-existent, because people don’t trade actively on stocks anymore. That doesn’t mean that you don’t have people who buy and sell stocks but they are not very active. We are also in a very difficult environment because we still don’t have a local market. We have a very good market share but in a market, which is very small. In a local market, our business would flourish very much because we would be one of the big players and a natural flow of business would come to us. The two problems we face are first that equity trading goes towards zero and second that there is no local market. We have to struggle in other areas where things are more difficult.

E: In which areas are your best competencies and success stories today?

We offer online trading and our online systems compare well to any system in the world; I mean they are the best in the world. This is something that we are going to market more aggressively. We have a client base in the areas of commodities trading and currencies trading. We also try to attract new customers by offering them interesting investment products that fit well into their investment needs. Here we are not talking active traders who take risks; we are talking conservative people who would like to improve their yields. We have been successful in offering new products to these kinds of investors. Finally, we have set up a team in the real estate area. We have done one project, Foch 94, with other projects in the pipeline. So we are trying to diversify.

E: How do you see the financial culture in Beirut today?

Generally speaking, there is no financial culture, although you find educated people who understand what investing is. We still need a broader understanding within for example the state administration, because they don’t understand what a financial company is, what financial markets are. Something needs to be done on this level, because it is very difficult for us to work something that is new, modern, in an environment that does not understand it. It leads to a lot of problems. There is a whole education to do.

E: How long have you been active as finance professional in Beirut?

Ten years, and I spent ten years before that working in Europe.

E: Can you in any way compare the financial market place here to Europe?

No, it is nothing comparable. But this was what I expected. When I started ten years ago, this was fine, because it was new. Something has failed and because of those political changes in the country, we have not modernized our system in terms of legislation, in terms of arbitration courts etc, to fit with the needs of capital markets. The best proof for that is that we have no capital markets. I would have expected that something would have happened with new rules and new ways of doing business, and nothing has happened.

E: If you were to compare the last ten years to preceding periods in Lebanon, which period would be best or worst for doing financial business here?

Before you had the war and before the war, financial markets all over the world were not so important. What happened during the 80s was a switch from commercial banking to financial markets, meaning that investment banking became much more important than commercial banking to finance the economy in mature markets. At that time, we had the war in Lebanon, so we had the excuse. Now, we don’t have an excuse. We are ten years and more after the beginning of the new era and nothing has happened. Okay, the banking system is fine and up-to-date, legislation is up-to-date, use and habits are up-to-date. But in terms of financial markets, you don’t have people who understand the importance of reengineering the whole system in Lebanon. We need something to be done and nobody takes care. Law proposals are sitting in some drawers in some ministries but nothing has come out yet.

E: What is the contribution that a financial firm such as yours can make to the national economy and life in Lebanon?

We are a company that has paid hundreds of thousands of dollars in income taxes and other kinds of taxes. We are a company that is the source of living for 30 families plus all the people who work around us, accountants, lawyers, etc. Out of our 30 employees, 25 have university degrees, which means that we contribute to keep people with university degrees in Lebanon. Believe me, that’s important. This is one side. The other side is that we contribute to attract capital to Lebanon. A big part of our clients are foreigners and we even have Lebanese expatriates who live abroad and who have accounts with us while they could have accounts with foreign firms in the countries they live in. In a way, we contribute to repatriate some of this activity to Lebanon.

E: With this, you appear to postulate a mandate for the need of financial firms?

We don’t pretend to be the savior of the Lebanese economy, but if financial institutions in general had a higher rate of growth and were bigger, you would have two advantages. First they would help develop financial markets, which are a good way to finance the economy; second they would contribute to the economy because they would generate added value. It’s important to have financial institutions.

E: Some depict a financial trader as the type of person who drives a flashy sports car, a Maserati or Ferrari. How important are such symbols of success to you?

We are not this kind of company. People here are all low-profile. They are well paid but they are not making millions and they do their job anyway despite that.

E: So is there no suitable stereotype to describe the financial trader here?

It is a stereotype that does not apply to Lebanon anyway, because in Lebanon, you don’t have the kind of income for those financial advisors and consultants that you have outside. Here, they cannot drive luxury cars.

E: What is the dream that motivates someone for a career in financial markets

It might be very simple. He might love the financial markets. A lot of people who work here as financial consultants like what they are doing. It is not specially that they want to make lots of money. Maybe they are making high average incomes but it is not a fortune that they are making.

E: What gave you personally the idea of thinking, ‘I want to be in financial markets?’

My dream was never to be a millionaire. It is only a way for me to do something I know and to live happily in my country. There is nothing else I am looking for.

E: What is your outlook for 2005 and 2006, in terms of your sector, your company, and the country?

I am not very optimistic about 2005. I’ll only be optimistic about my company. People like us do exist in Lebanon and they can exist somewhere else and we all compete all together. We can stay like we are for years but we won’t see a real boom in our business until we do have local markets. But the competition in local markets cannot come from abroad. We need local markets. Here, we have a competitive edge and we are the first in the waiting line and we know how to grab and take profit out of new IPOs, volumes, new ideas. If we don’t have local markets, we are going to be struggling to have decent revenues and profits. However, things cannot be worse than they have been in the last three years. They can only be better but I don’t see a boom before we have a real financial market in Lebanon. And I see nothing in 2005, because politically, it is a period of confusion.

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Finance

Finance Voices – Where’s the regulation?

by Executive Staff
written by Executive Staff

Ziad Maalouf: Senior Vice President of MENA Capital SAL

E: Would the Lebanese financial industry benefit from a more stringent regulatory environment? Do you see any realistic opportunities for a more advanced regulatory framework that would contribute to greater investor confidence in 2005?

The Lebanese financial sector is in a dismal state today. Investor confidence is very low and even though there are some regulations under the auspices of the central bank, in my view this is inadequate because the central bank should only take care of regulating commercial banks and setting monetary policies. There has to be an independent regulator that takes sole care of the financial markets. If we position Lebanon on the map of international investors today, I would say that we are not even a pre-emerging market. In my view it is a regressing market. In the Middle East, Lebanon is considered to have the weakest financial market because of this lack of regulation.

So we need to set an independent regulator quickly and model it after the SEC in the USA. Legislation has to be modern so as to encourage investors to invest in Lebanon. You have to also encourage the Lebanese businesses and mostly the family owned businesses to start looking at capital markets as a viable tool to raise capital. Companies are now loaning money from banks and banks are charging high interest rates. A proper regulation would start encouraging family owned business to tap capital markets for financing and this by itself is an encouraging factor for the entire economy.

Unfortunately, the political inefficiency and corruption is at the root at our failures in the financial industry overall and for this reason I don’t see any new regulatory framework being set in 2005. However, I say to the leaders of this country that they need to realize that the pace of change in the region – on the economic and political fronts – has never been so rapid, and any wrong turns at this stage have become nearly impossible to correct.

Walid Musallam: President and CEO if MECG

E: Is enough being done to woo foreign investors to Lebanon? If not, why not? What can the finance industry do improve the appeal of Lebanon as a genuine investment hub?

When one assesses the desirability of a country to investors two factors come to mind. First, investors look at the intrinsic attributes of a country like geography, culture, weather and availability of skilled labor. On all of these counts Lebanon favors very well. Investors also assess the political, legal and economic systems. In other words, does the political system function well, is the economy stable, can investor rights be protected and does the country offer the right incentives. Here Lebanon faces problems, the root cause of which is undoubtedly poor and corrupt governance.

As a matter of fact, one can argue that corruption is at the center of a public debt gone amok, weak performance of the judicial system, complicated and outdated laws and a bloated bureaucracy. Essential services like electricity and telecommunications are unreliable and among the most expensive in the world. My family and I moved recently back to Lebanon. When I refused to comply with the traditions for clearing shipment through customs, I was rewarded with delays and thorough searches that resulted in significant damage to many items. It took more than three weeks to clear our household shipment through customs and another two weeks to clear CDs and books.

Despite limitations, the financial sector has been a positive story for Lebanon. It continues to be buoyant and able to attract deposits from outside the country. More can be done. Implementation of reforms including Basel II is necessary and would allow the sector to provide long term financing and compete regionally. Lebanon has the elements to become a hub for private wealth management in the region.

Fadi Osseiran: General Manager of BLOM Invest

E: What are your expectations for the evolution of foreign and local investment flows for 2005? What do you think will be the key areas?

The factors behind the Lebanese economic growth in 2004 were mainly led by the tourism and real estate sectors. This latter, which is mostly driven by investments from Arabs and the Lebanese diaspora, is expected to continue to be beneficial. Actually, the Lebanese real estate market benefited from low international interest rates on cash, the international war on terrorism and soaring oil prices in 2004. Should similar conditions persist in 2005, resulting in increased income levels and high liquidity in the GCC countries, then the prospects for continued growth in these sectors are high. Such investments will mostly locate in vicinities like the Solidere area in Beirut, Aley, Bhamdoun and other attractive neighborhoods in Mount Lebanon as they are the most appealing destinations for shopping malls, housing projects and hospitality and tourist ventures. Local investment flows will expectedly follow in a similar path while additionally providing a boost to the construction sector catering to the appetite of incoming flows. This type of investment traditionally endows local and foreign investors with hedge against risks arising from macroeconomic instabilities like unexpected inflation or currency devaluation. In view of that, Lebanon’s tourism sector will also adhere to the historical trend it has experienced over the past few years.

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Society

Insurers reassured by more visibility

by Thomas Schellen
written by Thomas Schellen

For the Lebanese insurance industry, 2004 was a year of measured improvement accentuated by several highpoints. Visibility and transparency, regional interaction and regional opportunities, the legislative framework, and a healthier solution for social security constituted the portfolio of notable developments or prospects for the nation’s insurance companies.

These matters of domestic importance were embedded in an environment of calming international trends where the recovery from the shocks of 2001 and 2002 continued in 2004 and experts expressed a positive mood also for 2005. Sector concerns in the international insurance scene shifted from the tremors of financial markets and the dangers of terrorism back towards the vast disruptions originating from natural or less evidently man-induced disasters, such as hurricanes and floods. Announcing their global insurance outlook in early December 2004, leading international reinsurance firm Swiss Re expected the sector to operate with profits for 2005 and 2006.

As a small industry with a pronounced dependence on their contracts with international reinsurers, the rate and profitability developments in global markets are very important for the welfare of Lebanese insurers whose rate policies are greatly influenced by interaction with their partners abroad. But independently from those global trends, the local market has to deal with a range of internal issues and homegrown afflictions. One among numerous undisputed truths for the Lebanese insurance sector is that growth hinges on the ability of providers to gain the trust of consumers to larger degrees. The sector is still haunted by image problems stemming from shady practices during the conflict years, and from unsound pricing and bankruptcies occurring up into the second half of the nineties.

Much of those harmful practices have been halted, but even today, insurance managers are concerned that the growth sector motor insurance could again be hit by insolvencies of companies. The low minimum rate that insurers are allowed to sell motor liability insurance for increases the risk of defaults. This danger applies even more so to firms that sell policies below the minimum rates without considering the growing compensation amounts, which courts have begun awarding to accident victims since the introduction of compulsory motor insurance in mid 2003.

An important avenue for credibility growth of Lebanese insurers is increased scrutiny of sector players. Major steps towards a better transparency of insurance companies came in spring 2004 with the arrival of the results of the sector’s first field audits, carried out by independent audit firms on behalf of the Insurance Control Commission (ICC) at the ministry of economy and trade. The field audits allowed the supervisory authority for the first time to assess the operational financial soundness of insurers in reasonable time nearness, instead of gaining access to company results only several years after the end of the financial year. This improvement in supervisory oversight of the sector came in continuation of the measures of the 1999 revised insurance law, which over the past five years gradually increased the soundness of insurance operators and pushed the least solid firms to withdraw from the market. Based on the audits, the ICC could affirm that the remaining sector companies meet the capital and solvency requirements under the law, although consolidation of the over 50-company strong sector remains a need.

For their visibility, 2004 was a much better than average year for Lebanese insurance companies, who generally have few tools for interaction with consumers and experts available – apart from commercial advertisements and the sector’s scarce press coverage through a few specialized supplements and a small range of business magazines. After being aided early in the year through the publication of a first sector profile by a reputed financial firm, the insurance industry could bask in the light of national and regional attention in May when Lebanon hosted the 25th conference of the General Arab Insurance Federation (GAIF).

The bi-annual event’s convening in Beirut was extraordinary in that it attracted insurance managers and experts from the Arab world and beyond in larger-than-usual numbers. Representatives of the Lebanese insurance sector also noted with satisfaction that Beirut and the Lebanese insurance association ACAL was the first host to have been given the privilege of staging the event twice within 12 years.

In its presentations and discussions, the GAIF conference illustrated amply how large a gap still separates the populations of Arab countries from the ratio of “insuredness” accomplished in developed economies. The per capita expenditure on insurance premiums (insurance density) and percentage of GDP invested in insurance (insurance penetration) are only a fraction of the values reached in the highly industrialized countries where global insurance power is concentrated to over 80%.

Although Lebanon regionally ranks in the leading group for both insurance density and penetration, it achieved in recent years not more than 33% of the global average for insurance penetration and 28% for insurance density. The Arab world gap in insurance coverage is especially pronounced in the area of life insurance. Due to the interest gain component in the wealth creation model of conventional life insurance and because of other conceptual differences in regarding life coverage, the acceptance of this insurance in Muslim societies had traditionally been very low. In a development to remedy the lack of financial protection for emergencies and old age, the emergence of TAKAFUL, or Islamic life insurance models, has drawn attention from international providers and was discussed at the GAIF conference.

The 25th GAIF conference drew some criticism for what observers perceived as an intellectually anemic line-up of presentations in some of its sessions. Questions also linger over the lasting potency of the anniversary event for reshaping and focusing the Arab insurance providers towards much needed further improvements in professionalism and performance. However, besides granting opportunities to meet with international partners and the region’s insurance elite, or gain knowledge in a consecutive conference on priorities in engineering an insurance merger or acquisition, the GAIF conference also highlighted many new opportunities that are surfacing across Arab countries due to opening of markets such as Saudi Arabia and Bahrain to regional players.

Starting with market leaders MedGulf, a good number of Lebanese insurance companies are increasingly active in regional markets, especially in Gulf countries. Local insurance experts see the skill level and skill reservoir in the Lebanese market as advanced in comparison to most of the region. Lebanese insurance providers in 2004 increased their efforts to leverage this advantage in expanding their reach in the Gulf as well as in Levant countries where the emerging Syrian market is regarded as most promising.

Although disadvantageous taxes levied on premiums and life insurance payouts remained obstacles to insurance growth related to public sector fiscal policy, Lebanese authorities in 2004 took new steps towards improvement of the national insurance regime. In April, under the leadership of then minister of economy and trade, Marwan Hamadeh, an entire new draft law for regulating the insurance sector was presented to stakeholders in the sector.

The new law had been drawn up by international experts. Its protagonists, with Insurance Control Commission head Walid Genadry in the forefront, hailed the draft as an epochal chance for Lebanon to pass insurance legislation that could serve as a model for many developing economies. Even as insurance legislation here had undergone significant progress in the 1999 revision of the national insurance laws, experts and members of the industry generally agree that the revised law is not enough to address all issues important for modern insurance administration. However, Lebanon is not known for high speed processing of insurance legislation and in the second half of the year, industry leaders, including ACAL president Abraham Matossian, commented on aspects of the draft law in ways that increased doubts over the prospects of it being adopted very quickly.

Another legislative initiative of very high relevance for insurance came in the third quarter of 2004 through introduction of a national pension scheme proposal. After having kept the proposal under wraps for several months, representatives of the Hariri cabinet and president Lahoud confessed public agreement over the need to revamp the system of retirement payments, currently managed by the National Social Security Funds.

With its restrictions to one-time payments and limits on funds management, the NSSF is widely understood to be in need of substitution with a new system, which would partly involve private sector operators. Although implementation of a pension scheme also is contingent on – habitually complex – political decision making processes and rapid legislative adoption of the project thus seems overoptimistic, being able to enter the realm of compulsory pension plans for individuals and groups could open many opportunities for commercial insurers. Through life plans, local insurance companies have been active in the area of retirement provisions for years, affirming life insurance as the leading prospect for sector growth.

With annual premium volume in the range of $500 million, the Lebanese insurance sector is looking for growth in every respect. While estimated numbers for the development of insurance premiums in Lebanon in 2004 are not available before late in the first quarter of 2005, industry managers said that growth in 2004 was good by the market’s standards and prospects for insurance sales through agents, brokers and banks (bancassurance) are up for 2005.

The new draft law

Developed between September 2003 and April 2004, the new draft for a Lebanese insurance law was prepared under leadership of Canadian insurance experts and with funding support from the World Bank. The proposal stipulates a further increase of capital requirements over several stages, from today’s $1.5 million to $3.5 million. Among other regulatory innovations, it provides for a strict separation of life and general insurance business and specific audit standards. The draft also foresees an insurance control commission that is run by a board of directors and an insurance commissioner with more direct authority and accountability, making the oversight body more autonomous from potentially political decisions at the ministry of economy and trade.

As they described the draft law as complying with advanced insurance developments in international markets while being comprehensive and adapted to the needs of an emerging insurance market in a small nation, supporters of the draft pointed to the need for its quick acceptance into law. More discussion and eventual modification of the draft was urged by industry representatives who pointed to the need for making the draft more compatible to the local insurance culture and legal tradition.

The pension scheme

An actuarial plan for a scheme of continuous pension payments for Lebanese retirees was drawn up by pension and insurance advisors, Muhanna Group. The plan envisions a mandatory membership in the national pension scheme for all employees newly entering work life as well as employees born after 1969 who are currently registered with the NSSF. Optional membership is available to employees born until 1969 on condition that they did not already withdraw their end-of-service indemnities and will have at least 20 years of insured employment at their retirement.

For all members in the scheme, the minimum period of employment to qualify for a pension would be 20 years, according to the plan. Salary contributions would be collected from both employer (7.25%) and employee (5%), for a total pension contribution of 12.25% of an insured’s salary, up to a ceiling of LL 5 million ($3,340). Additionally, employers would be mandated to pay a contribution equivalent to 5% of the salary into an employee’s retirement health insurance. Under the plan, the minimum monthly pension for a retiree would be set at $120, or 60% of the salary based on steadily earning a minimum salary of $200 over 20 years of service. After 40 years of employment, the pension would reach 80% of the minimum salary. Exemplary calculations of pensions reached under the scheme allow future members to see projections of replacement rates – i.e., the share of the final salary that a pension would amount to – under a number of possible salary growth scenarios.

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Society

Q&A: Fateh Bekdache

by Executive Staff
written by Executive Staff

E: Is insurance awareness growing in Lebanon?

Definitely; for several reasons. The first boost was the introduction of compulsory insurance for expatriates working in Lebanon. Before, there had been many stories about foreign workers having problems. The introduction of this insurance requirement helped not only the ministry and eliminated problems with embassies, but it also helped the consumer in seeing the benefits. Then there was the introduction of motor insurance, which has become more and more accepted over the past one-and-a-half years. Lately, we hear a lot that people do not only want bodily injury coverage but also say it is time to have liability cover for property damage. The most important factor in increasing insurance awareness has come from the banks. In giving retail loans, banks required the proper insurance, such as life, motor or home insurance, from their clients whether it was for a $1,000 consumer loan or a $100,000 loan to buy a house. We experience today that when the loan is paid off, people keep the insurance. We can really feel that awareness has grown and also that people have become sophisticated when it comes to insurance. We noted for example at the Beirut Motor Show that people have become very picky and want to know the terms of a policy. If one bank gives better terms on insurance, they choose this bank instead of going with one that has lower rates on the loan.

E: How do you explain the importance of insurance to Lebanon?

If you look at the whole activity of economy, the insurance sector is not contributing what it is contributing in developed countries. It may be better than most of the countries in the Arab world but it should constitute much more than that. One important role that our sector can play is that once we have started getting involved in the pension program we can give the Lebanese people the incentive to secure their future. We can also give people the incentive to buy Lebanese, if all the extra taxes can be removed for instance on the marine business. It makes no sense that you have to pay nine percent on marine cargo insurance here in Lebanon while you can go next door and don’t pay any taxes. Instead of making people go and buy from offshore companies, I think it is better to remove these barriers. These are major factors that will make the insurance sector a major player in the economy.

E: Arope is affiliated with leading bank, BLOM. Does that translate into a role of leader in the sector?

Definitely. When BLOM started Arope back in 1974, they had bancassurance in mind. Bancassurance, or selling insurance through the banking channel, started to move in Europe in the 80s. I believe it was the first time that a major reinsurance firm – the largest French reinsurer, SCOR, which still is today shareholders with us – a major bank and at that time, a British insurance company entered a partnership. It was a real blend of banking with insurance and reinsurance. I think these partners had really a vision but because of the war, we had to put the brakes. The British then left but the French stayed with us and you can see today what we did and that it is paying off for a lot of people. We are helping many in getting their loans. In the retail loan business, thousands of people are buying their cars and getting loans for their house, all these are done together between Arope and BLOM. We secure that the customer has the best deal in banking as well as insurance. So we always try to accommodate the bank’s customer and get him the best deal possible. If he is not satisfied, he can ask for an upgrade and most of the time he can get better conditions. Indirectly, we are really improving the economy.

E: How is bancassurance going?

It is going very well.

E: Do you mean for Arope alone or sector wide?

I believe it is good sector wide. However, the problem with our insurance sector is that it is not transparent. We don’t have any ways of getting any figures. We suffer a lot from that just as you press people also suffer because you cannot really get any figures on the sector. It is certain that the companies working in bancassurance have shown the strongest growth rates in 2003 and the trend may continue in 2004 because bancassurance is going well. I don’t think any of the providers is complaining. It is a good marriage, a win-win situation.

E: How do you assess 2004 overall in terms of your performance?

For Arope, figures show that 2004 was a good year. With a lot of hard work from our team and the support from our mother company and board and the trust that our customers gave us, we were able to finish the year better than the last. It was our 30th anniversary; we celebrated these 30 years of growth and hard work and are very confident about the future of Arope and are here to stay.

E: What was the most encouraging and what the most challenging experience in the 30 years of Arope?

The most rewarding thing was that we were able to benchmark ourselves as one of the leaders. As you know, we are not one of the leaders in terms of premium income, because we are not after size but after solidity and profit and being well run. We were able to do that.

In terms of challenges over 30 years, we went through a lot. There was the war and changing the head office from one place to the. After the years of war, it was chaos in the insurance sector. The insurance control commission and the insurance department at the ministry of economy and trade were not functioning. The laws were obsolete and almost inexistent. In the last six, seven years, we saw a lot of progress. The 1999 insurance law was a turnaround, even though this revised law was not modern enough. It didn’t cover all aspects of insurance and doesn’t go with the pace of our insurance companies and worldwide trends in the industry but at least we know that there is a law that we can count on.

E: In 2004 a different, entirely new draft for a Lebanese insurance law was introduced to the sector stakeholders. What do you think about the new proposal?

The new proposal is a very modern, very interesting project. I personally found many positive aspects in it, but at the same time, this draft will not go with the laws that we use every day. The old and new cannot synchronize, because all our laws are founded on the French legal code and this new law would not mesh with this. I say this not from the perspective of an insurance man but from the legal perspective. The legal advisors whose point of view we heard, including the vice-president of the National Insurance Council, Dr. Albert Serhal, and our own legal counsel all found that we have to define a lot of things to make this law function.

E: How do you motivate your team of agents and employees to keep a long-term outlook of customer relations and follow your vision and ethics?

All our agents are employees. We don’t have freelance people that come for a quick dollar and go. In Europe it often is seen as better that people move around and corporations think that it is bad for executives and employees stay in a company for a long time, we were keen to create a nice family ambience. For us, it is a plus that we have people who have been with Arope since inception of the company. We try to think globally and see what is happening abroad but when we want to implement here, we act locally.

E: How important are employee incentives in making the company grow?

Bonus is a major part of our structure. Everyone is rewarded at the end of the year based on many criteria. And every job well done is rewarded; sometimes we don’t wait till the end of the year to award employees. If an employee shows something good, he is rewarded on the spot. We give very good incentives and we like to give the encouraging pat on the shoulder. This is something that people appreciate. We emphasize teamwork. We don’t like lone rangers.

E: What was the greatest crisis that you ever had to manage as an insurance executive?

It was back eight years ago in a sector-related crisis. Two companies were established at that time and started by taking a lot of employees and portfolios from brokers and insurers, including us. One of these firms closed down in the meantime and the other went through a restructuring and reshuffling of shareholders. This mass migration of employees and portfolios hit us overnight as a major crisis but it was a good challenge, a very good lesson to learn from. It was not nice to go through a storm like this and it would be nice not to repeat it, but we learned a lot from it.

E: What makes working in insurance exciting for you personally?

Everyday is a different day, every case is different, every claim, every policy is different from the other, so it is really exciting. I think it is the only industry where you work with clients and third parties. We don’t work only with the customers, so you can expect any time to have a claim for a third party coming to you, maybe somebody you know, and maybe somebody you don’t know. We have no two claims that are alike. You meet all kinds of people every day, that’s nice, and the work is diversified in its legal aspect and the technical aspect. The technical aspect is very wide and complex, so everyday I learn something new. I love the interaction.

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Industry

Industry retrospective

by Tarek Zein
written by Tarek Zein

The year 2004 was one of mixed feelings for Lebanese industrialists. The global energy crisis sent crude prices rocketing to a record $55.17 on the New York Mercantile Exchange, battering a local industry already groaning under prohibitive production costs – considered the highest in the region – making them even less competitive. Lebanese industrialists were forced to pay $400 for the ton of diesel, while their regional counterparts were paying a shade under $200 for the ton.

Nonetheless, despite all this, 2004 was the year in which Lebanese industrialists were still able to increase exports by 43.5% during the first nine months of 2004 compared to the same period in 2003 – marking a new export era for the sector. 

However, the government has, yet again this year, persisted in believing that the service and tourism sectors were the only engines of economic recovery and has once more refused to set a clear an effective industrial policy, reduce infrastructure costs and ease labor laws.

A prime example was its inefficient handling of Electricité du Liban (EDL), forcing local industry to pay a hefty 13 cents per kilowatt hour, compared to 3 cents in Egypt, 3.2 cents in Saudi Arabia, 3.7 cents in Syria, 5 cents in the UAE, 6.4 cents in Jordan, and 6.5 cents in Turkey. Add this to the high costs of labor, land, industrial components and energy, and the reasons why Lebanon’s industrial sector is still the most uncompetitive in the region are clear. This is reinforced when statistics from the Lebanese Industrialists Association (LIA) point that the cost of production, including the cost of energy, has increased by more than 37% since 2000. And to make matters worse, because of the continuously spiraling debt, local banks’ high interest rates on loans has once again made it difficult this year for industrialists to access much needed money to invest in productivity.

To help relieve the pressure caused by the energy crisis, in the second quarter of 2004 the government promised industrialists to lower their electricity bill by reducing the utility’s price from 13 cents per kilowatt hour to 6.6 cents. As of today, this promise has still not been kept.

Export growth         

According to figures from the ministry of industry, industrial exports totaled $1.087 billion for the first nine months of the year compared to $757 million and $624.4 million for the same periods in 2003 and 2002, respectively – a 43.5% increase over 2003 and a 74% increase over 2002 (see box). The main reasons for this substantial increase in industrial exports, which represents approximately 95% of total national exports, can be attributed to the ever-strengthening euro versus the dollar – making Lebanese products more attractive to Europe – and the opening of the American fueled Iraqi market.

But these reasons are not solid enough to anchor a future success of the country’s industrial sector since they are neither orchestrated by the Lebanese government nor controlled by the Lebanese industrialists. However, these events have opened a narrow window of opportunity for the industrial sector in 2004. 

Raising quality

Industry in Lebanon, which represents approximately 20% of the gross domestic product, can never produce in large quantities, due to the restricted manpower and the high costs of production, and thus can never compete with regional and Asian countries. However, the potential behind Lebanon’s industry lies within its ability to produce quality products, with a high added value such as agro-food, wine, software, jewelry, furniture or high-end garment, in order to target regional and international niche markets. And if there is one main element to be remembered for 2004, it would be the industrialists’ sudden awareness to raise the quality of its products through quality control mechanisms.

Economists agree that the competitive advantage of an industry comprises two-thirds of macro-economic reasons and one-third on the ability of industrialists to adapt to its environment. And since the government of Lebanon has not yet shown signs of its willingness to counter-balance the disadvantageous macro-economic factors, 2004 was the year in which industrialists started to talk about the cost of not having quality controls or conformity assessment.

Conformity assessment is a tool that has been used by many industrial nations worldwide not only to cut the hidden costs of industrial rejects and increase efficiency through vocational training of employees, but also to penetrate markets with high product regulations and standards. And with the emergence of regional free trade agreements, such as the Euro-Med Agreement and the Greater Arab Free Trade Agreement (GAFTA), as well as Lebanon’s expected accession to the World Trade Organization, it has become essential for local industrialists to demonstrate the conformity of their products if they want to sell worldwide, or even keep a decent local market share.

The EU Association agreement with Lebanon, signed in June 2002, calls for the gradual reduction in Lebanese tariffs on EU industrial products over a twelve-year period. This period started following the entry into force of the agreement trade provisions with a five-year grace period. Thus, tariffs will be reduced from six years to twelve, when they will all be zero. On the other hand, EU markets have been duty and quota free to Lebanese industrial products since the 1977 Cooperation Agreement.

Regarding agricultural processed products (agro-industry), Lebanon received a special treatment that no other EU-Mediterranean partner enjoyed: a total exemption on the industrial element of all exported agricultural processed products in addition to a total exemption on the agricultural element of 77 similar products as well as a quota free system. In return, Lebanon will benefit of a five-year grace period after which it will progressively reduce its custom tariffs on the European processed agricultural products imported over a twelve-year period. This dismantling will be complete as regards the products that are subject to a 5% tariff and will be reduced to 30% for the other products. Such an agreement would, in normal cases, be very beneficial for Lebanon since the 500 million strong European markets is completely open to Lebanese produce.

However, one problem emerges: very few Lebanese producers can export towards Europe since an overwhelming majority cannot meet the European standards. And this brings along another problem: if Lebanese producers cannot secure new markets, and tariffs on similar imported products from EU or Middle Eastern countries are to be decreased, then industrialists will soon be facing one of the fiercest competition on their home turf, and many will lose. However, if the quality of products is raised and international standards are met, then not only would Lebanese products be able to enter into the European market, but they will also be more attractive regionally and locally.

This concept has been known by local industrialists for some time now, but very few have undertaken the difficult task of raising the quality of products.

Financing and investments

Nevertheless, when the statistics for imported industrial machinery and equipment are analyzed, one can see that a new trend is taking place. Up to September 2004, some $106.8 million worth of industrial machinery and equipment was imported into Lebanon – a 36.5% increase compared to the same period last year when only $78.2 million was imported. Out of the total industrial machinery and equipment imports, 27.3% came from Italy, 25.8% from Germany, 6.4% from China, 4.8% from the USA, 4.1% from Taiwan, 3.8% from France and 3.4% from Switzerland.

The relative improvement in industrial investments has contributed to the value added creation over the first nine months and fits within the context of the significant needs for enhancing the output and quality of the productive sector.

But when other statistics show that Lebanese banks have granted just a trivial $34 million in loans to the industrial sector in the first six months of 2004 because industrialists are afraid to borrow money at the current high interest rates, then how can the industry sector modernize to survive? How can the comparative advantage of the Lebanese brainpower put its thoughts into action without having quick access to liquidity? 

A survey conducted in early 2003 by the Chamber of Commerce, Industry and Agriculture of Beirut and Mount Lebanon (CCIAB) to reveal industrialists’ perception of problems and hurdles that impair their activity shows that a striking 54% of respondents ranked expensive bank credit at the top of the list of financing problems industrialists have to contend with. 29% of the respondents believed that limited access to subsidized financing was the main financing problem, while 15% believed the main financing problem to be that bank credit requires excessive collateral. 

It is true that industrialists have been very creative in finding new sources of financing and that there are many new financing programs that banks have implemented with the help of the European Union Commission in Lebanon and the European Investment Bank, but one of the biggest problems that exists today is the fact that there are very few investors which are willing to risk investing in a sector that is not on the top of the government’s agenda and in a country without an independent judicial system that fosters investments.

Over the last 10 years, local manufacturers have invested just over $1 billion to improve output – a figure which is inconsequential when the sector’s potential is put in perspective.

At the same time, statistics from the Investment Development Authority of Lebanon (IDAL) also show how the government’s view of a Lebanon that caters only to services and tourism has hurt the industrial sector: out of the $1 billion investments that went through IDAL between the 2003-2004 period, only 0.3% was invested in industry, 0.4% in the agro-industry and 1% in the technology industry.

Prospects

The potential behind Lebanon’s industrial sector lies within its ability to create high added value products fit for export. For this reason, industrialists’ quest to raise the quality of products will speed up throughout 2005 due to targeted programs initiated by the EU Commission (see box). However, the productive sector will not be able to maximize its returns to the national economy without a long-term industrial plan set by the government. The government has to realize that controlling Lebanon’s spiraling national debt doesn’t only depend on cutting expenditure costs, but also by boosting productivity. According to the latest industrial figures from the Central Administration of Statistics, there were 824 newly registered establishments in 2003, with a working capital of LL178,902 million, creating 6,721 new jobs. It is anticipated that some 10,000 new jobs will be created by the industry sector in 2004. The Lebanese Industrial Association is confident that if the government sets up an equipped industrial park, where infrastructure and natural gas is available and where one can obtain a building permit in adequate time, then industrialists can easily create some 15,000 to 20,000 jobs per annum and increase exports to $3 billion within three years.

(Box) The question of the EU

To help fill a gap and speed up banks’ loaning activity to the industrial sector’s thirst to raise quality, the EU Commission in Lebanon began a new 15 million euro program in October 2004 called Quality Project and will re-activate another one – the European Lebanese Center for Industrial Modernization (ELCIM) – in the first quarter of 2005.

The four-year quality project will seek to start the development of the conformity assessment institutional chain in Lebanon and aims to improve competitiveness and access to Lebanese products to international markets and ensure an improvement of consumer protection. The project includes three main components: to support the government in the definition of a legislative and regulatory framework; support the development of institutions which have an essential role in analyzing the quality and conformity of products; raise the awareness of enterprises to make them adopt better practices for improving product quality.

The ELCIM project, which will be known as ELCIM II, is a program initiated for the support of small and medium sized industrial enterprises and hotels in order to develop their performances and promote their products to achieve international standards. Their services involve Technical Assistance and Financial Assistance. The Technical Assistance begins with a free diagnosis and could go as far as the action plan and the implementation phase. 

As for the Financial Assistance, ELCIM provides advice on long-term financing and capital investment, and facilitates the financing process through its prominent contacts with the relevant bodies. The European Investment Bank has set up a 60 million euro investment fund with ELCIM, which will be distributed, under certain terms, via 11 local banks. 

(Box) A good year for the export 2004

The industrial sectors that gained the most ground during the first nine months of 2004:

Prepared foodstuffs producers with a 3.8% increase to $108 million.

Mineral products producers with a 107.5% increase in export to $83 million.

Optical instruments and apparatus producers with a 100% increase to $10 million.

Base metals and articles of base metal producers with an 89% increase to $163 million.

Machinery and mechanical appliances producers with a 76% increase to $214 million.

Fats and edible fats and oil producers with a 71.4% increase to $12 million.

Stone, plaster and cement goods with a 66.6% increase to $40 million.

Plastic producers with a 55.55% increase to $42 million.

Wood and articles of wood producers with a 54.54% increase to $17 million.

Miscellaneous and manufactured articles with a 44.8% increase to $42 million.

Footwear, headgear and prepared feather producers with a 42.85% increase to $10 million.

Chemical products producers with a 26.5% increase to $105 million.

Textile and textile articles producers with a 24.4% increase to $56 million.

Transport equipment producers with a 23% increase to $16 million.

Paper and paperboard producers with a 21.6% increase to $73 million.

Raw hides and skins, leather and fur skins producers with a 10% increase to $11 million.

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Region

Region VOX

by Executive Contributor
written by Executive Contributor

Samir Kassir: Author, university professor and columnist for the Lebanese daily An Nahar.

What can Palestine after Arafat realistically expect in terms of domestic changes, particularly the emergence of a legitimate new leadership, internal unity and a stable domestic political order? How will this affect the ongoing fight against Israel? What can Palestinians expect in terms of international support in their claim for statehood and in terms of concessions, if any, from Israel?

The problem in Palestine is occupation, not the lack of democracy as George W. Bush has argued. True, there are some shortcomings in terms of transparency, but there is no problem of legitimacy, at least until Yasser Arafat’s death. That is why, and contrary to what is commonly said in the Western media, Arafat’s death does not provide an opportunity, but is rather a genuine loss that the Palestinians will only overcome with tremendous effort.

The Palestinian leadership has shown great maturity in managing a smooth transition, but that shouldn’t mislead anyone to assume that everything will be easy. Problems could well appear after the January 9, 2005 presidential election; despite the formal legitimacy the poll is likely to give to the favorite, Mahmoud Abbas. The real problem could be, once again, Israel’s refusal to give Abbas anything in exchange for his commitment to the peace process.

It is clear that Israeli Prime Minister Ariel Sharon is not ready to concede anything to the Palestinians. His plan for a withdrawal from Gaza is not linked to the Middle East “road map.” He is offering “Gaza only,” not “Gaza first.” And it is not likely that the Bush administration will stand by its commitment to the “road map.” The diplomatic efforts that followed Arafat’s death seemed to be more form than content, or rather it was a post mortem effort to prop up the lie that Arafat had been an obstacle to peace. In the end, I don’t think 2005 will be a crucial year unless there is fundamental change in Israel.

*          *          *

Chibli Mallat: Author, lawyer and law professor at St. Joseph University, Beirut.

How realistic is it to hope that Iraq will make, however tortuously, a successful transition to democracy and stability in 2005? What more needs to be done to win the confidence of all Iraqis that this mission is for the national good?

Beyond the elections of January 2005, the transition in Iraq will be defined by a new parliament, a new government and eventually a new constitution. What happens next year will depend on these three institutional pillars working out. The January elections are key: the configuration that emerges will face a number of constraints, some of them with deep roots in Iraqi history, others more recent. 

The major problem in Iraq arises from its tripartite sociological division between Arab Shiites, who make up an absolute majority seeking power commensurate to their numbers, Arab Sunnis, who represent 15% to 20% of the population, and Kurds, mostly Sunnis, who represent about 20% and feel distinct from the Arab majority. Unless all groups are represented in government, Iraq will remain fragile. The secessionist trend amongst Kurds is real, and their accommodation will depend on their effective role in government and the resolution of potential conflicts in areas of Arab and Kurdish settlement, especially Kirkuk.

More difficult to solve is the issue of majority power in Baghdad among the Arabs, as the legacy of Sunni dominance is not easily jettisoned. For stability to be restored, a difficult combination is needed: reducing through force the armed resistance and politically co-opting Sunni leaders under a scheme where they no longer play a dominant role in national politics.

Ammar Abdulhamid: Coordinator of the Damascus-based Tharwa Project on minorities and currently a visiting fellow at the Saban Center for Middle Eastern Studies at the Brookings Institution in Washington DC.

What role can Syria expect to play in 2005? Do you consider the current leadership capable of seriously moving forward on domestic reform, particularly political and economic reform; and if not, what alternatives does the future hold?

The year 2005 will be critical for the Syrian regime. Pressures on it from the US are likely to continue now that President George W. Bush has been reelected. Meanwhile, Syria’s presence in Lebanon will bring pressure from Europe as well, especially France. If Syria signs its association agreement with the European Union, this puts the regime under nonstop scrutiny and will test its ability to develop a serious program of economic and political reform. If it fails to do so, the regime will likely be seriously isolated internationally by year’s end.

Do the reform elements in the regime appreciate the seriousness of the situation?

Their previous record betrays a propensity for halfhearted steps and for backing down at crucial junctures. Meanwhile, Syria’s political opposition has so far proven unequal to the task of providing alternative visions that can allow it to negotiate a role in the decision-making process.

Independent civil society actors and organizations, therefore, seem to represent the only hope for change. But unless laws governing media and associational activities are liberalized, the ability of these players to have influence and to compensate for the regime’s and the opposition’s shortcomings will remain limited.

Michael Scott Doran: Author and assistant professor of Near Eastern Studies at Princeton University.

Will Saudi Arabia seek to take advantage of the general letup in American displeasure (paralleled by an apparent cutback in terrorist actions) and seek to implement reforms and improve its political and economic transparency? If so, why? If not, why not?

The Saudi family will muddle through, avoiding all serious reforms. It is internally divided and incapable of reaching a consensus. The huge spike in oil revenue and the weakening of Al-Qaeda has taken the heat off, giving Riyadh non-reform policy options that few Arab regimes enjoy.

Politics is a contest between clerics and liberals, who are deadlocked. Traditionally, however, the clerics hold the advantage. In addition, they have helped to strengthen the government against Al-Qaeda. Riyadh, therefore, will appease them by refraining from enacting the liberals’ reform agenda.

Washington will do little to strengthen the liberals’ hand. With Iraq in turmoil, a nuclear Iran looming, and oil prices at record levels, the Americans will, as usual, opt for stability. Riyadh will throw them a bone by enacting meaningless reforms (the municipal elections), which it will trumpet as the bright dawn of democracy.

While the Islamists sometimes talk about transparency, they will be satisfied if the government merely places the liberal reformers on ice while continuing to direct resources to the clerics. Having said as much, the desire for significant reform is palpable. The belief that the status quo is untenable pervades many significant Saudi groups. Such a climate can generate unpredictable outcomes.

Michael Young: Opinion page editor at the Daily Star newspaper, Beirut

If we assume that the second Bush administration is in a position to seamlessly pursue it regional objectives, what changes do you expect to see in the region over the next four years?

The first matter at hand will be for the Bush administration to reaffirm what its regional objectives are. I continue to believe that Iraqi democracy, as a keystone of regional democracy, was a leading US ambition in the run-up to war in 2003, although the administration was too convinced that that justification wouldn’t hold water with the public to over-emphasize it. As the situation in Iraq has gotten worse, democracy is still on the priorities list, but has been kicked down several rungs in favor of Iraqi security. Yet for the US-led war to be meaningful, the administration must reassert the primacy of its democracy objective, on the sound grounds that Iraqi democracy is vital to spurring regional pluralistic impulses, which in turn would make the US safer by providing Arab populations an alternative to militant Islam of the sort that led to September 11.

That, of course, requires success in Iraq, which is still possible if there is patience and far less of the blundering that took place once the war ended in April 2003; it will also mean putting the Palestinian-Israeli negotiations back on track. Given the Palestinian leadership vacuum and Israel’s reluctance, I’m not optimistic, but the U.S. can no longer be seen to advocate democracy and liberty for some Arabs, but not for others. Four years is enough for substantial success in Iraq and progress on the Palestinian issue, but the administration will have to hit all the right buttons, which will depend on the bureaucratic give and take in Washington.

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Region

Mervat Tallawy

by Executive Contributor
written by Executive Contributor

The Secretary General of the United Nations’ regional agency – ESCWA – speaks up on the factors destabilizing the Middle East and the challenges facing her organization in promoting economic development in the region

Four years into her mandate, Egyptian-born Mervat Tallawy finds herself at the helm of an organization attempting to promote economic development in a region bogged down with conflict, stunted economies and rising trends of religious fundamentalism. Yet despite the overwhelming challenges, the secretary general of the Economic and Social Commission for Western Asia (ESCWA) sees strides being made, through regional cooperation and the gradual prioritizing of socio-economic issues.

It’s been a challenging year for the ESCWA region, not simply in political terms, but also economic terms. Despite record-level oil prices, most Arab countries saw their GDP growth decline, and the region as a whole suffered from a 16% unemployment level and a fall in investment. What do you feel are the dynamics behind this?

The main factor behind this is the political instability in the region. The continuing Israeli-Palestinian conflict, as well as the war in Iraq is affecting the region as a whole. It makes for an environment that is not conducive to investments, raises interest rates, and generally hurts the overall economy. As long as these conflicts persist, the region will continue to suffer, politically, as well as socially and economically.

What are the key economic issues that the region’s governments need to tackle, in order to promote economic and social development?

There are several problems, both on the economic and social front. The region is facing a population growth more rapid than in any other region in the world, which needs to be addressed imperatively. Unemployment is another major challenge, most notably among the youth, and educated youth at that. Furthermore, the afore-mentioned political instability has served as an impediment for regional economic integration. Thus, you find yourself with a fragmented area, composed of several small markets, which limits the movement of goods, people and services. It deprives these countries of opportunities for trade and investment.

Another consequence of the political instability is the rise of Islamic fundamentalism, out of frustration and disillusionment with the perceived incapacity of these governments to solve the ongoing conflicts. The result is the formation of groups that work against the governments, and the propagation of a culture of fanaticism, conservatism and rigidity. What is particularly worrisome is that this trend is spreading among the youth, and you find yourself with a younger generation that is even more rigid that the older one. This is not conducive to change, and it slows down progress in a number of areas, such as women’s rights.

How likely it is that the elections in Iraq will go ahead as scheduled? Is holding imperfect elections on time preferable to postponing the elections until the climate of violence and insecurity has calmed down?

This is a very difficult question to answer. We are hoping the situation on the ground will calm down over the course of the next two months, so as to enable us to go ahead with the elections as scheduled. The two options put forth in your question each have their advantages and disadvantages. The preferred solution is to go ahead and finish with these elections as soon as possible, so as to enable the country to quiet down, become more secure, and have a legitimate government that can start working on getting life back to normal again. But of course we are facing many risks here, notably that of a boycott of the elections by various factions, the possibility of attacks, and this is all very worrisome.

So you expect a stabilization of the country to follow these elections?

I believe this is what will happen. It has to become normal again. The destabilization of Iraq has had disastrous consequences for the local population, as well as for the region as a whole. This is a small region, where the ripple effect of such a conflict is considerable. In the 19th century, the entire region was integrated, and people could move around freely. So talking about regional integration is not just words, it has happened before and it should happen again.

What can the rest of the Arab countries do to improve the situation in Iraq? Is there a genuine political will to assist the country?

There is a will to do so, and it has been demonstrated on several occasions, most recently with the meeting of the interior ministers of Iraq and its neighboring countries held in Tehran to discuss how the region could assist the country. Concrete action is being taken. There is cooperation to monitor the borders, so as to stop foreign fighters from infiltrating the country – a very difficult task considering the length of the Iraqi border. Arab countries have agreed to reschedule or forgive Iraqi debt, they have contributed to Iraqi capacity building by offering training, they are partaking in the development of a coherent and comprehensive international strategy for Iraq by organizing conferences such as the one held in Sharm el-Sheikh in November. Thus, action is taken both at the operational level and at the policy level. It is in their interest to do so.

ESCWA has not yet been able to go into Iraq to assist with the reconstruction of the country on the ground. When is your agency planning on doing so and in the meantime, what are you doing to help the country?

Due to the serious security concerns, ESCWA cannot work in Iraq for the time being. But the agency has actively been assisting the country through a series of training courses held abroad. We held a course on election training for women here in Beirut in July in collaboration with the Woodrow Wilson Center. We had another one for university professors, who toured the universities of Lebanon. We’ve organized ICT (Information and Communication Technology) training for universities. We have also been assisting the Iraqi Ministry of Planning elaborate reconstruction policies for the country, and provided it with statistics. We are submitting a number of projects through the Iraq Trust Fund, which focus on rebuilding basic infrastructure, capacity building and human resources development. With regards to infrastructure, we will be working on alleviating the shortcuts of power and water through mobile units. On the capacity building front, we are strengthening civil society and federal unions so they in turn can assist the government institutions while they are in the process of being rebuilt, and provide services to the population. It is worth noting that ESCWA has always had strong ties with Iraq, which hosted the agency for eight years during the Lebanese civil war.

How good is the UN’s cooperation with Arab organizations and nations in comparison to that in other regions of the world?

Overall the cooperation is satisfactory. It is stipulated in a resolution that the UN should cooperate and coordinate with the intergovernmental organizations of the region in which it is operating. We have regular, bi-annual meetings – the next one is being held in Beirut in May 2005 – where we gather with regional organizations to discuss our collaboration and how to improve it. We need to strengthen it in certain areas, but in many domains, ESCWA is successfully collaborating with organizations such as the Arab League, the Gulf Cooperation Council and the Islamic League. Areas where our collaboration has been particularly successful have been with regards to the environment and sustainable development, social issues such as gender work, help for senior citizens and disabled people. Through our cooperation we have been able to present a unified Arab position at major international conferences such as the Johannesburg World Summit on Sustainable Development, the Madrid Conference on ageing citizens, the Doha trade talks, the Monterrey International Conference on Financing for Development, the 10 Years After Beijing Conference…. On the other hand, we need to further strengthen our cooperation in areas such ICT and transportation – be it ground, maritime or aerial – so as to further integrate the region economically.

Are there any systemic constraints making ESCWA’s progress slower than it should be?

The majority of our member states give primary emphasis to political issues – the occupation of Palestine especially. Seeing how our mandate is to promote economic and social development, this has posed a challenge to us. It will take some time for the Arab countries to give these issues the attention and priority they deserve. However, I do believe things are starting to change. There has been a gradual shift toward paying more attention to economic issues. Hopefully, this trend will persist and come to encompass social issues as well.

How much can ESCWA do to help promote a fairer picture of the Arab region internationally?

There is a very fine line to tread here. The UN is obligated to accurately portray what is happening on the ground, including the negative aspects and the lack of progress in certain areas. However you are right to say that generally, the Arab countries are portrayed as being worse than they are. Yes, this region is fraught with problems, but there has been some progress, and this is not being reflected in the portrayal of the region. Take the progress that has taken place with regards to women’s issues for instance. Morocco now has a revolutionary new Family Law that grants women equal rights in a number of areas, and has introduced a 30 seat quota for women in parliament. Sudan has the largest number of women in parliament in the region, and the highest number of women judges. Oman now has two or three women ministers. In Saudi Arabia, a successful businesswoman – Lubna al Olayan – was elected to the board of a major bank. Nobody ever talks about this.

From your own personal perspective, what have been the challenges in running this organization, especially considering the fact that the beginning of your mandate was shortly followed by September 11?

From a management perspective, the challenge has been to change the bureaucratic mentality as ESCWA, adapting the organization to the global changes taking place and getting it to work as a collective team, rather than as separate, compartmentalized units. But these are standard management challenges. In terms of the agency’s mandate, the challenge has been to show the governments of this region the value of having a locally-based, mini-UN here to help them, and to promote regional cooperation so as to achieve a more integrated Arab market.

What have been the highlights of the four years of your mandate so far?

There have been many: the fact that we have succeeded in gaining respect, recognition and credibility with the governments of this region; the fact that our reports are as widely read as they are; the fact that we have contributed to establishing a unified Arab position in the context of international negotiations, such as the forum of the WTO. I am also proud to have been able to show to Arab leaders that an Arab woman can successfully run a big international organization.

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Real estate

Real Estate Retrospective

by Peter Speetjens
written by Peter Speetjens

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

Overview 

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

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

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

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

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

Residential: Manhattan on the Mediterranean

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

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

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

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

Retail: The rise of the mall

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

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

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

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

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

Office: smart space sells

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

Tourism: 

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

Box: Gemaizeh

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

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

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Economics & Policy

Economy Voices – Reform Horoscope

by Executive Staff
written by Executive Staff

Joey Ghaleb: Economist at the ministry of economy and trade

E: How could the Lebanese Government give new impulses to the economy through public spending in 2005?

Although “Paris II” may be long forgotten, the Lebanese must keep reminding themselves that soothing political sound bites do not pay the bill. Major structural reforms do and they are only a way for us to face the macroeconomic imbalances facing the country. An international organization recently hinted that Lebanon has approached its tax ceiling capacity under the prevailing economic situation, thereby arguing that the only effective way to reduce the crippling public deficit is by slashing unnecessary spending. This statement contradicts the premise of the question raised by Executive. However, there is another answer.

Without disregarding the necessity for structural reforms such as privatization, legislative modernization and the like, a reduction in unnecessary spending will free up much-needed resources that can be invested in projects or ventures with a long-term impact. Such cutbacks might hurt a small group of beneficiaries in the short-term, but it will send a positive signal to all the stakeholders and contribute to rebuilding confidence in the future of the Lebanese economy. This confidence-building measure will have a bigger and wider impact on the economy than an increase in public spending, which only targets a small group of Lebanese who benefit from it for a limited period of time. In order to place Lebanon back on a sustainable growth path at this juncture, the impulse the country needs is to hear more Middle East Airline-like stories and display a strong political will to implement the necessary restructuring of the public spending.

Kamal Hamdan: Head of the economic division of the Consultation & Research Institute (CRI)

E: Do you expect that the new government either now or after the parliamentary elections will be able to alleviate the socio-economic crisis and unemployment problem? What public measures could be adopted to improve the situation?

This government is merely a short-term one – by the time the parliamentary elections come along, it will change. Therefore, I am not convinced that it can introduce measures that will significantly improve the situation, especially with regards to unemployment. What it can and should do however, is start taking first steps that will send signals to the market that there is a will to make interventions and restructure current policies.

Combating unemployment cannot be done in the short-term – it requires long-term intervention in both supply and demand. I would recommend introducing three measures, which can subsequently be fully implemented after the parliamentary elections. Firstly, set up a fund for unemployment; secondly, improve education; and thirdly, introduce much-needed public sector reforms.

Most industrialized countries have unemployment benefits. It’s a way of providing the fragile segment of the population with the means to maintain adequate purchasing power, thereby preventing poverty from gaining further ground in the country. This will contribute to maintaining social stability and, in turn, political stability. Fifteen percent of Lebanon’s working population is currently unemployed – a very high figure. Although emigration provides some relief, it also carries noteworthy negative consequences, such as the loss of valuable human capital. Unemployment benefits could act as an incentive for them to stay.

Secondly, we need to introduce reforms to the education system, both at university level, as well as technical education. This will ensure that the youth entering the labor market are better equipped, more productive, can provide a greater value-added and hence earn a higher salary. The latter is a crucial, seeing how expensive the cost of living is in Lebanon.

Finally, we need to reform the public sector so as to reduce the red tape, the corruption, the lack of transparency and the clientalism that serve as a disincentive both to domestic investment and FDI. This government can start the process now, so as to open new horizons and give the Lebanese people hope that things can change for the better.

Sébastien Dessus: Senior economist at the World Bank

E: How is Lebanon’s debt expected to evolve over the course of 2005 and what measures would the international community like to see the Lebanese government take so as to manage it?

Arithmetically, the new debt is the sum of the past debt plus the deficit. The latter is itself equal to the primary surplus (i.e., public revenue minus expenditures, excluding debt service) plus the debt service. While the primary surplus depends principally on fiscal policy and the debt service on interest rates, the two are not independent. The Lebanese government has little control on interest rates, but could lower its borrowing costs by convincing investors of its capacity and will to tighten its fiscal policy, with a view to put the debt on a steep declining slope – this is the key issue.

But how could the government possibly meet this challenge, once acknowledged that tight fiscal policy can depress growth in the short run (to eventually generate higher growth in the longer run) and will face strong opposition from the main beneficiaries of fiscal largesse? There is no miracle: reforms will need to be anchored in credible commitments and supported by a broad-based consensus. Enhancing the credibility of the adjustment requires tackling governance issues – the overall use of public funds – at their roots. Only when policy measures are viewed as long term and credible will borrowing costs decline. In this regard, a good communication strategy and some key institutional reforms can pay off rapidly. Gaining broad-based political support for the adjustment process will require the even distribution of the burden and the reinforcement of social protection.

Mohamed Samir: General Manager at Procter and Gamble Levant

E: How would you characterize Lebanese spending habits and consumer trends in the current economic situation? What do you expect in terms of the household spending in 2005?

There is a clear trend in terms of Lebanese consumers moving from premium brands to lower priced brands, although it is worth noting that this is a trend which is happening throughout the world. This reasons behind this are multiple – technological advancements, which are enabling companies to offer cheaper alternatives; local stores launching their own look-alike versions of premium brands at a lower price; and also consumers operating on reduced budgets. For 2005, we expect a continuation of this trend. People’s purchasing power has been going down, although not dramatically so. The shift is happening more at the psychological level: people are concerned about the future and are therefore less willing to spend, so they can save for the years ahead. They look around them – at the economic situation of the country, as well as what is going on in the region – and they start thinking more carefully about what to spend their money on. But in real terms, the loss of purchasing power is negligible.

A few years ago, there was a significant difference in prices between brands, but this gap has been reduced over the years, so it’s become a matter of the strength of the brand’s performance. And the Lebanese consumer is very well-informed about this – one of the characteristics that distinguishes them, is notably that there isn’t much brand loyalty. They are willing to try a greater variety of brands, so as to chose the best one. Thus, what this trend means for the producers of consumer goods, is that it is tougher to stay in the lead, because you have to be much more alert about what the consumer wants, and how to offer them products that perform better without costing them much more.

Jawad Adra: Managing Partner at Information International

E: How in your opinion does Resolution 1559 pose a threat to the Lebanese economy and how can Lebanon secure international investor confidence under such circumstances?

Resolution 1559 is a Damocles sword hanging over the Lebanese economy, and therefore, it will inevitably have an impact. It creates a situation of uncertainty, which the government has not been able to deal with successfully hitherto. There has been no analysis conducted as to what legal response could be made to the resolution, no successful attempts at gaining international support for our cause. The government has simply chosen to look the other way.

I am less concerned with the effect it will have on investment – the investment climate in Lebanon is poor anyway, be it for domestic investment or FDI. What Resolution 1559 can do, is bring about an economic collapse, by affecting some of the foundations this frail economy has been based upon. We’ve had a series of irresponsible governments that have persisted in maintaining the same policies over the past 20 years at a very high cost to society. The only way they have been able to do so, has been by relying on remittances from abroad and cheap labor, and borrowing at a high cost, among other things. The minute measures will be taken against Syria and Lebanon – such as the freezing of foreign assets for instance – remittances could drop or people could choose to transfer their money abroad. The system does not have the resilience to cope with this. However, it is important to bear in mind that Resolution 1559 is an exogenous force over which the Lebanese government has minimal control. What the government can influence are the inherent problems that mar our economy: high interest rates, wasteful public spending, corruption, the unsolved crisis of the power sector. Resolution 1559 should not be used as a scapegoat for the country’s persisting economic ailments. Its impact has so far been minimal, but it has the potential of having disastrous consequences, because our economy is weak following years of government mismanagement of it.
 

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