Economics & Policy

Wishing for a miracle

by Tony Hchaime
written by Tony Hchaime

“I trust Lebanon and its beloved people to God Almighty.” While Rafik Hariri’s resignation flourish may have had more than its share of melodrama, one has to question whether the end of his 12-year “reign” – punctuated as it was with a Hoss-led INTER-REGNUM – will mark the end of an era characterized by donor conferences, a Solidere-dominated Beirut Central District, rampant construction projects and inflows of Saudi money. Certainly Omar Karami’s government is faced with a daunting task and, which he admits, “cannot do miracles.”

That may prove to be an understatement. The formation of the new cabinet was fraught with in-fighting and it remains to be seen how its final composition will bring about constructive changes, especially in light of the fact that former finance minister Fouad Siniora made it perfectly clear in his 2005 draft budget that Lebanon’s situation is desperate. The budget deficit

What Siniora’s budget achieved, (Siniora probably knew he would not be around to implement it) was to unveil the true state of the Lebanese government finances. He also reiterated that taxes have been taken to the highest level possible and custom duties can’t be raised. Few methods to increase government revenues remain available. The cost of living has reached almost unbearable levels and raising taxes to boost government revenues is not an option. The Hariri government had tried every trick in the book to reduce expenditures in previous years, such as the cost of debt, pruning MEA, and improving efficiency at state-owned assets such as the Port of Beirut, Ogero and Libanpost. With no room remaining to cut any more, Siniora came up with radical cost-cutting measures never before attempted by any government. It is through the arguably over-ambitious cost-cutting measures that Siniora aimed to reduce the deficit in the new plan. The 2005 budget foresees total expenditures of LL9,575 billion, significantly lower than then LL10,150 billion budgeted for 2004 – incidentally, total expenditures had already reached LL7 billion by August of 2004.

It is not, however, the magnitude of the cost-cuts that have labeled the new budget “overambitious,” but rather the means to achieve such targets. The unorthodox methods include the following:

– Cancellation of all perks provided to cabinet ministers and members of parliament, such as petrol allowances, discounts on utility and telephone bills, custom duties on vehicles, and other bonuses.

– Increase in the working hours of all public institutions, in addition to a 3% reduction in salaries of public sector employees.

– Cancellation of the State Security apparatus, reduction of the number of army personnel from 65,000 to 25,000, and that of the police from 30,000 to 17,000.

– Reduction of the length of the compulsory military service to 6 months, from the current 12.

– Cancellation of the ministry of the displaced, the Council of the South and its associated fund.

On the revenue side of what was labeled a “reformist bombshell,” not much has changed from the plans and strategies presented in 2004. Maintaining an opinion that the Lebanese people have suffered enough to support the budget deficit over the years, Siniora insisted that no additional taxes would be levied, nor would there be any increases in government fees and duties. Total revenues are expected to reach LL7,160 billion for 2005, compared to the LL6,850 billion budgeted for 2004.

So the focus falls back to government expenditures and how to reduce them. Government expenditures include debt servicing and other expenditures. Debt servicing has successfully been reduced in 2004, thanks to the efforts of the last Hariri government. Will the Karami government be able to maintain such achievements? It is difficult to foresee, especially since interest rates have already started heading upwards since President Emile Lahoud’s controversial extension. Should the government be able to achieve such revenue and expenditure targets, the overall deficit would be expected to fall to LL2,415 billion (25% of expenditures), significantly below the deficit of LL3,300 budgeted for 2004 (32% of expenditures).

Reforms introduced through Siniora’s draft budget

While such measures would undoubtedly significantly reduce government expenditures, they have not been well received by other cabinet ministers, the military, or members of parliament. Elsewhere, as part of an attempt to force desperate reforms, the draft also includes the establishment of two internal units within the ministry of finance, one to monitor the performance of the ministry, while the other would be solely dedicated to manage the public debt at the ministry. That in addition to radical changes in the social security, merging public schools and reducing the number of teaching staff, and other measures.

Finally, the minister intends to tackle what represents undoubtedly the greatest drain on government finances: Electricite du Liban. Currently, the government spends an estimated $300 million a year to cover the losses of EDL, which result mainly from mismanagement and poor bill collection, factors exacerbated by high fuel prices globally. Almost a third of the $33 billion public debt results from funds spent to cover EDL losses over the past decade.

While the issue of privatization and securitization of state assets was once again brought up in the draft budget as a necessary and crucial step, the minister downplayed the chances of such measures being undertaken. Siniora, perhaps rightfully, claims that serious economic reforms, namely at EDL, among others, should be implemented prior to engaging in successful privatization schemes.

Lahoud’s previous attempt at controlling government expenditures by putting forward a cost-aware government under Selim Hoss backfired, paralyzing growth by blasting foreign investments and halting infrastructure projects and construction permits.

The public debt

One of the major tangible problems awaiting the new government is the massive public debt, a burden of around $35 billion sitting on the shoulders of every single Lebanese citizen making a living in the country. Surely enough, not much can be done on reducing the absolute value of the debt as it currently stands, since the Lebanese government is nowhere near having enough surplus funds to repay any loans.

In fact, assuming Lebanon would still have to pay a total of $800 million in interest between September and December of 2004 – which is somewhat of a conservative estimate – total debt servicing for the year would not exceed $2,600 million, which is significantly below the debt servicing burden of 2003, which reached $3,233 million (See public debt and debt servicing chart).

This reduction is total cost of debt, of around 19% between 2003 and 2004 was achieved thanks to many efforts by the Hariri government, which include cheaper loans from Paris II, 0% loans obtained through agreements with the banking sector in the country, in addition to some securities market gimmicks, such as the recently completed Eurobond swap. Would a new government led by Karami be able to pull off such achievements? While it is hard to say at this stage, it may be sensible to warn that not many people possess the weight of Hariri on the international scene, or the domestic financial scene for that matter. Time will tell if a government of so-called “technocrats” will be able to maintain the trend set by the previous government this year.

Interest Rates and the Lebanese Pound

Directly related to the public debt are interest rates. They have driven the cost of the public debt up and down over the past year. However their impact is not limited to this as interest rates typically make or break an economic comeback from recession anywhere in the world, fluctuating in relation to two main parameters: government borrowing and eco-political stability. Although the Hariri government continued to borrow in 2004, an improved economic and investment climate allowed it to reduce the cost of such borrowing. The country witnessed its best-ever tourism season, and money was flooding in from across the region and beyond.

However, the sensitivity to stability proved itself once again in the past 6 weeks, as political uncertainty following the extension of Lahoud’s term in power, the resulting UN resolution 1559 and US sanctions, and the departure of Hariri have all put upward pressure on interest rates (see interest rates chart). All such developments resulted in an increase in interest rates of 1% on the domestic currency by the central bank, a major increase by economic standards. Such a move, under the pretext of “defending the national currency,” as advocated by Riad Salemeh, is the first significant hike in rates in two years.

Defending the national currency, in fact, has always been a highly debated issue in Lebanon, as it has a tendency of draining the country’s foreign reserves, with not many tangible or directly visible benefits. The Hariri government had, however, successfully increased the country’s foreign exchange reserves to more than $12 billion, and has been able to maintain it above that level for most of the 2004. Things took a drastic turn for the worse, however, between September and October, following the extension of Lahoud’s term and the announcement of Hariri that he would not lead a new government. The ultimate result was massive pressure on the domestic currency, forcing significant intervention by the Central Bank, and ultimately leading to a drastic drop of almost $1 billion in foreign exchange reserves in less than three weeks (See Foreign Currency Reserves Chart). As Karami’s government is handed the reigns, a daunting task awaits it: keeping interest rates low, and alleviating pressure on the domestic currency so as to not erode reserves. For that, political and economic stability are a must. Although it may not be fair to judge from a first impression, Karami’s efforts to form a new government do not inspire much confidence, as such efforts have done nothing but further emphasize the divisions among the Lebanese, and each and everyone’s quest for power at the expense of everyone and everything else.

Yet again, time will tell if the Karami government will be able to inspire confidence in people to stop the pressure on the Lebanese pound and the widening interest differential between the domestic currency and foreign currencies.

So now what?

The Lebanese status quo is changing. Pressure is mounting on the lira, eroding reserves, US and UN sanctions hang overhead, fuel prices are rising and electricity power shortages are more frequent as Lebanon hits an all-time low standard of living… the picture does not look so good. The last time Karami held office, the lira fell through the floor.

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Real Estate

Student housing: A booming market or a bad investment?

by Marianne Mirabeau
written by Marianne Mirabeau

With an increasing number of foreign and local students in Lebanon, real estate developers have tapped into a new market. Private student dorms, hostels, hotels and furnished apartments ranging from the five-star to the budget are opening on an almost monthly basis, ready to cater to the ever-widening range of needs and demands of the student population. Yet real estate developers are divided as to the commercial viability of such projects, saddled as they are with low returns and high wear and tear. There is also the specter of an increase in supply of on-campus accommodation. But for the time being at least, many students are opting for the off campus option.

Taking their business elsewhere

The need for privacy tops the list of requirements for many students, in addition to the desire for space and cleanliness. With some rent prices off campus comparable to those of the student dorms, several students are choosing to hit the private housing market. “I saw the dorms at LAU, and it wasn’t pretty,” Natasha Kaskas, a 20 year old graphic design student at LAU, commented. “Nor were the AUB dorms. They’re not clean, and there are too many girls for one bathroom. It’s just not sanitary.” Kaskas opted for a private student dorm – one of the many that have been flourishing around the AUB and LAU area. University Residence has been her home for the past three years. At $375 a month for a shared room – less than LAU’s student dorm rents of $400 a month – Kaskas gets a bathroom to share with her roommate, cable, internet access, hot water and electricity 24/7, free cleaning and laundry.

“I looked everywhere, and there were no good places to live, except for here,” said Kaskas. “It’s cleaner and more private. You only have to share your bathroom with one roommate, but you also have the choice of living alone. There are just so many facilities here. I’m all set.”

The all women’s private dorm has experienced a steady increase in applications since it opened over three years ago, most notably from foreign students. “Our main target is foreigners – Saudis, Kuwaitis, Jordanians, Syrians,” building manager Abir Alameddine explained. “The number of applicants have more than doubled over the course of the last two years. Right now, the most represented nationalities in the dorm are Kuwaitis and Saudis.”

In addition to the free services – which appeal to the students – the dorm has successfully been able to gain the confidence of parents through its strictly enforced no males and no alcohol rule, as well as its 24-hour security service and the option of an imposed curfew on the resident. As a result, some parents are willing to pay up to $630 a month for a suite for their daughters in the dorm.

This high-end of the market is one that developer Ramzi Tarcha, owner of Koura Residence in the north of Lebanon by Balamand University, has successfully exploited.

At rates ranging from $210 to $290 a month – high by local standards – Tarcha offers luxury accommodations replete with a restaurant, gymnasium, pool room, in addition to standard services such as internet, cable, laundry and cleaning. “We studied the market for some time and gathered that there was a demand for it,” he explained. “We decided to go for a luxurious place, so as to differentiate ourselves from other student accommodations, and basically give students a five-star hotel life-style. Also, by deciding to locate up north close to Balamand University, we got rid of most of the competition – Beirut being completely overcrowded – and were able to buy land at a much cheaper price.”

Despite the steep rent, Tarcha said many residents take the double rooms for themselves, willingly paying twice the price for their rooms. “The residence can accommodate 100 people, but a lot of students take a double room for themselves and pay double the price, so right now we have 76 people who provide us with full occupancy,” he said.

Tarcha puts his success on finding an underexploited niche in the market, in an area where demand for student housing is rapidly increasing. “We have targeted different people with a different mentality, who are willing to pay a great deal of money to provide their children with a certain comfort to entice them to study,” he said. “So far, our marketing strategy has proven to be a good one. Also, the Balamand University dorms only have room for 150 students, and the university keeps on growing, so we are benefiting a lot of this.”

Hard to break even

Yet despite Tarcha’s success, some real estate experts would say his experience remains an exception to the rule. Lara Kanj of the real estate department of the Ashada Group, which specializes in the construction industry, has conducted two studies on the profitability of developing land for student housing purposes. Both times, the conclusion was that the investment would not be worthwhile. “If you want to break even, you should sell, not rent out, especially if rent is low,” Kanj explained. “If you build a building for the purpose of renting out the units, the rent is usually set at 8% of the costs. But with student housing, the rent needs to be much lower than that – it would take too long a time to break even.” Kanj recommends investing in student housing if you are already a building owner. “If you already own a building and you are breaking even with the finishing costs that you invest in it, then you could get by,” she said. “But if you are starting from scratch and need to take a loan from a bank, than you are not likely to make it.”

Ahmad Jammal, the manager of a furnished apartment residency by Verdun, who wrote a thesis on the real estate market in Beirut, concurred with Kanj. Starting off with a strategy of targeting students for his residence, Jammal rapidly reevaluated his plan and switched to the expatriate market instead.

“It does bring in profit, but it is not justifiable compared to the profit you can make in renting to non-students,” Jammal said. “Students will always reach a maximum level of rent beyond which you can’t go. To be profitable in this business you have to target those people who are willing to pay more. Students require a lot of overhead: you need to do a lot of repair after them, as they tend to break things, they get things dirty … they are a little careless. So the combination of low to medium rent, in addition to a lot of overhead, makes this a non-profitable business.”

Supply at risk of exceeding demand

Compounding the challenge is the gradual crowding out of the market. In addition to the multiplying number of private housing facilities for students, the universities themselves are stepping up to the plate to meet their students’ needs. USJ is in the process of building a student dorm, predominantly meant for its foreign students, which will be ready in 2005. AUB is following suit, and is conducting a market study to assess the competition it is up against from the outside. Considering the fact that the university is presently able to meet its entire demand for housing, an increase in its offer could well ensure it’s recovery of a larger chunk of the market. Despite the lack of privacy and restricted freedom through curfews, the AUB dorms do offer the advantage of relatively low rent – set at $1,060 per semester for a shared room – and the convenience of living on campus, with fellow students.

“The social life is very important to the students, which plays a big factor in their decision to stay here,” said Nawal Semaan, co-coordinator of student housing at AUB.

The campus dorms also guarantee greater security, which, according to Tarek Naawas, dean of students at LAU, has been a problem for some students living in private accommodations. “We do fear that parents might have issues with the level of security in these places, which are definitely not comparable to the security we can provide our students,” he said. “So when we are asked, we do inform parents of this. There have been many complaints linked to security and to theft.”

Some also question the likelihood of the number of students continuing to expand. “There isn’t a crowding out yet, but in five years there probably will be,” a real estate expert, speaking on condition of anonymity, predicted. “Both AUB and LAU fees are increasing, and if you look at the income per capita in Lebanon, you understand that it is getting harder for people to afford university fees. There were more financial resources to assist students in the past. These have now stopped because the focus is to develop technical expertise over academic expertise.”

A potential goldmine upon certain conditions, the student housing market remains one to be carefully trodden into.

An ever expanding student population

Traditionally a destination for study in the Middle East, Lebanon has seen a significant rise in the size of its student population over the course of the past decade. Between 1993 and 2001, the student population in Lebanon increased by close to 60%, reaching 119,487 students by the academic year 2000 to 2001.

The events of September 11, 2001, further boosted numbers, with an increasing number of students from the region turning to Lebanon out of frustration with lengthy US visa procedures and the threat of discrimination.

For the academic year 2003 to 2004, Nadine Naffah, an associate director of admissions at the AUB was quoted as telling the DAILY STAR that the number of students applying from the Arab world had jumped by 41%, with the largest number of applicants coming from Saudi Arabia and Kuwait. “September 11 probably affected the numbers, but we can’t be sure of that,” she said, adding that the increase could also be linked to the university intensifying its recruiting efforts in the region.

At the AUB, the number of students has been steadily increasing by 7% to 8% over the last five years, reaching close to 7,200 today, a quarter of which are foreign students. USJ has seen its student population increase by over 10% since 2000, from 7,200 to over 8,000, with its number of foreign students rising by 34%. LAU has witnessed an increase of 40%, with approximately 7,200 students today.

Many Lebanese students, especially freshman students who live far away, like to live in the dorms, as their parents prefer for them to live on campus. Both LAU and AUB are rapidly reaching their maximum capacity intake for student accommodation. The former can accommodate up to 120 students at its Beirut campus – 2% of its student body. For AUB, the figure stands at 474 places for women and 374 for men – 12% of its student body. USJ presently has no student dorms available. With the number of applicants rising, both LAU and AUB are seeing themselves forced to make students double up in rooms.

“Many students ask for private rooms, but we can’t give it to them until we have met all the demands for accommodation that we’ve received,” said AUB’s Semaan. As a result, the university is presently meeting all its demands for accommodation, but the number of students granted their own rooms are few and far between.

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The Buzz

Emotional intelligence and the mood of your organization

by Tommy Weir
written by Tommy Weir

When Manfred FR Kets de Vries, the director of Insead’s Global Leadership Center, was asked how he identified successful leaders, without hesitation he replied: “The first thing I look for is emotional intelligence.” Emotional Intelligence (EI) is a term/skill that is receiving a lot of attention these days in management and leadership circles. Much of the 360 Feedback evaluation tool is devoted to measuring, to some extent, a person’s emotional intelligence. This month we will look at EI and how it can help you become a more successful leader.

Emotional intelligence, as described by Daniel Goleman, the EI guru, “includes self-awareness, self-regulation, motivation, empathy and social skill.” • Self-awareness is the ability to recognize and understand your moods, emotions, and drives, as well as their effect on others. If you are self-confident, realistic about your personal assessment, and have a self-depreciating sense of humor, most likely you are self-aware.

• Self-regulation is the ability to control or redirect disruptive impulses and moods. It is also having the propensity to suspend judgment – to think before acting. If you have integrity and are trustworthy, feel comfortable with ambiguity, and are open to change, chances are you are able to regulate yourself.

• Motivation is a passion to work for reasons that go beyond money or status, and having a propensity to pursue goals with energy and persistence. If you have a strong drive to achieve, are optimistic (even in the face of failure), and are committed to your organization, then you are definitely motivated.

• Empathy is the ability to understand the emotional make-up of other people. It also requires a skill in treating people according to their emotional reactions. If you have an expertise in building and retaining talent, are cross-culturally sensitive, and are dedicated to servicing your clients and customers, most likely you are an empathetic person.

• Social skill is having proficiency in managing relationships and building networks. It requires an ability to find common ground and build rapport. If you are effective in leading change, are persuasive and have developed an expertise in building and leading teams, then you have social skills.

Sample EI test questions include:

1. Do you recognize how your feelings affect your performance, the quality of experience at work and your relationships?

2. Are you aware of your strengths and weaknesses to the degree that others familiar with you would agree with you?

3. Are you open to candid feedback?

4. Can you celebrate diversity in personal and professional life?

5. Are you able to remain collected, positive and unflustered even in stressful situations?

6. Are you able to build trust by displaying congruent behavior through your words and actions being in alignment? 7. Do you keep promises?

8. Do you take responsibility for your actions and inaction where appropriate?

Ask yourself these further questions:

Do people feel comfortable with you? Do they want to be around you? Are you able to give praise to the right people at the right time? Do you know how to build teams, and what kind of people make good team players? Are you an effective motivator?

The idea that leaders must be self-reflective in order to be successful has been met with the quick response. “In order to make it in business, you have to be a doer!” We don’t disagree with this. But long-term successful leaders must be able to act and reflect. All leaders (all people) have blind spots, and developing the ability to self-reflect and accept critical feedback is crucial for overcoming them. In short, successful leaders are highly motivated to work on themselves.

Is it too late to learn? No!!

In fact emotional intelligence increases with age, some like to call it wisdom or maturity. That being said, even mature leaders need training in EI. The problem, however, with most training programs designed to teach EI is that they don’t deliver real change. EI training cannot be taught in a workshop or training seminar, it requires an individualized approach where behavioral traits can be examined honestly and modified. This requires time, persistence and practice, which is where coaches come in really handy. Having a coach shadow you throughout the day is an excellent way to become aware of behavioral traits that might not be working for you. In this way you will be consistently reminded of where, when and with whom you get off track.

Most leaders who are truly dedicated to improving their emotional intelligence demand a candid assessment of their strengths and weaknesses from trusted people who know them well. This may seem straight forward enough, but the sad truth is that it rarely happens. Most leaders may say that they are interested in honest feedback, but the fact is many lack the courage and inner fortitude to accept receiving information that may crack their persona of “I’ve got it all under control.” This is unfortunate.

Rapidly changing realities (political, economic, social and technological) require flexibility and a new breed of leader. Emotionally intelligent leaders have the ability to manage themselves in the face of unpredictable change. They are able to remain focused and clear under pressure. They understand that anxiety destroys their ability to assimilate information quickly and respond, and that fear closes down their creative thinking and decision-making skills. Emotional Intelligence is a skill that aspiring successful leaders cannot ignore. It can be learned and it provides lasting personal and professional rewards. All it takes is a sincere desire to improve, persistence, the courage to receive candid feedback, and a good coach wouldn’t hurt.
 


Tommy Weir and Christine Crumrine are from the Beirut-based CrumrineWeir, the global leadership experts.

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Special Section

Convergence and synergies happy hour

by Thomas Schellen
written by Thomas Schellen

Take a hint from Solidere: Lebanon’s flagship share appreciated nicely over the first eight months of the year, settling on a much friendlier market valuation platform close to where analysts had already placed its fair share value. Besides Solidere’s smart restructuring initiative and buyback offer not to mention allegations of a few inelegant machinations – both reported on by Executive – the surge in the share price was also influenced by reliable market whispers that it would take a step beyond the Beirut Stock Exchange and co-list its shares on the bourse of Kuwait (KSE). 

This move and the effectiveness of its mere rumor in helping Solidere shares grow, say analysts in Beirut, would a) result in a much improved demand and trading potential for Solidere at the potent KSE and b) demonstrated that the BSE had failed in giving its largest stock the investor exposure it needed. As much as we had been aware of the BSE’s infirmity, the valuable pointer provided by Solidere’s likely KSE listing is that a look at regional stock markets could be well placed in discussing the development options for Lebanese companies and the nation’s financial markets. 

Latest estimates of privately held Arab wealth coming to $1.5 trillion and public coffers overflowing with petrol bounty, new all-time highs in share prices at neighboring stock markets are lately being reported more often than one has time to keep track of. Combined market capitalization by the top 150 listed companies in the GCC was $359 billion at the end of July, $121 billion higher than a year ago and more than three times of what it was in 1999, said for instance a report by Shuaa Capital, drooling with excited descriptors such as “engines of growth” and “robustness.”

While some experts recently warned of the potential for Gulf markets to overheat, analysts optimistic about the continuation of the boom point to the fact that the ratios of market capitalization to GDP in the GCC countries are, with exception of Kuwait, still substantially below the ratios in developed economies. Faithful collectors of Executive can easily verify that vigor of Gulf stock markets for themselves by comparing this month’s regional stock market indices (page xx) to those in an issue from January 2003 or June 2001. 

Outside of the indices, the evolutionary thrust of Arab stock markets was highlighted last month by a host of news, of which the linkage of the UAE national stock markets in Abu Dhabi and Dubai and the announcement of a new investment conference in Bahrain in October were about the smallest.

The undoubtedly hottest financial infrastructure news of the month was the opening of the Dubai International Financial Centre, DIFC. With its main Gate Building visually quoting the La Grand Arche in Paris in a sort of 21st century Arc d’Arabia way, the center professes that it wants to be the new link between Western and Eastern financial market places – and it has the scope to match these ambitions.

To understand this scope, one needs only look at the DIFC parking “lot.” Upon completion, this facility is designed to accommodate in excess of 34,000 cars. A while back, the DIFC project had temporarily looked a less certain development bet than usual for Dubai, because of fears analysts attributed to the US over what a money hub in the region could do for the likes of al-Qaeda. The DIFC had also experienced a few recent personnel ruckus over Western top executives who were said to have stepped down because of conflict-of-interest situations they witnessed.

But now, not only has the DIFC opened for business and granted its two first operating licenses (to banks Standard Chartered and Julius Baer), the center has also its very own regulatory authority – the DFSA or DIFC Financial Services Authority, touted as fully compliant with the toughest supervisory demands of our age – and its own “international exchange for wealth creation,” the DIFX.

The DIFC International Financial Exchange is billed by its creators as a high-tech stock market for the Arab countries, equipped for trading of all types of securities from equities and funds to derivatives and Islamic structured products. This will presumably take it out of the restrictions applying to national bourses in GCC countries. Gulf-based analysts already speculated early last month that the UAE government might privatize one of its attractive assets, to give the DIFX a birthday present and startup boost.

Curiously enough, just as the DIFC announced its presence, officials from Arab stock markets meeting in Cairo announced that a new pan-Arab bourse under the name of “United Arab Stock Exchange” would be created by early or mid 2005. Located in Egypt, the bourse would enjoy participation from six Arab stock exchanges (including Lebanon, but not mentioning the UAE), and it would be the largest in the region.

Given that full-mouthed announcements for great joint projects in this region come with an inbuilt disbelief factor and cooperation agreements such as the 1996 one between the CASE and KSE acceded to by the BSE have been unnoticeable in practical terms, what to make of these plans for a Unified Arab Stock Exchange?

“I am skeptical, simply because there has been much talk for many, many years about creating a pan-Arab bourse and it hasn’t been done,” said Ziad Maalouf, senior vice-president at newly formed Mena Capital, a Beirut-based private equity and merchant banking firm.

With investor confidence in the BSE thoroughly lacking and performance of the Amman Stock Exchange dismal over many years, Maalouf questioned the viability of a regional stock exchange involving Levant and North African bourses. International investors approached the Cairo and Alexandria Stock Exchange with great enthusiasm about a decade ago, he explained, but proved disappointed as most companies listed on the Egyptian exchange today are so solely because it brings them tax breaks.

Only the stock markets in Tunisia and Morocco are reasonably structured and operate satisfactorily, said Maalouf, who helped as a market analyst with the International Finance Corporation in the mid 1990s to put North African bourses on international investor maps by introducing them to the IFC’s Emerging Markets Group. As competent naysayers long to be proved wrong, individual bourses could yet defeat their ghosts and the pan-Arab bourse could still see the light next year. But a new, Nasdaq-like regional stock market at the DIFC looks far better programmed to become a success.

“It is a good idea. Dubai is at the center of capital in the Gulf. This is where the money is,” Maalouf said. “If companies in the region take this new proposition seriously and dual list at DIFX and the market becomes liquid, it has the potential of becoming a pan-Arab stock exchange and trading desk.” For BSE-listed Lebanese banks for instance, the possibility to dual list on an Arab market would mean exposure to a much wider investor base and the chance to substantially increase trading of their shares.

In summa, the developments of autumn 2004 confirm a triangle of locations vying for prominence in Arab finance. Next to Dubai and Cairo, this includes Bahrain. The emirate underscored its aspiration to the role of regional player by signing a free trade agreement with the United States in the third week of September, albeit ratification of the agreement in the US is not expected before the end of the year.

And Beirut? One point that all experts here seem to be in agreement on is that a convergence of Arab stock markets is in principle a good thing and that it will be beneficial to the country to be involved in such developments. But one cannot ignore a bitter flair to their statements. Regularly, many feel that Lebanon should have risen to the role of natural financial market place for the region. Instead, as the rest of the Arab world noted, the Lebanese were playing politics.

The morale of the story: The nation’s financial sector is being boosted with new blood and ingenuity of personalities willing to go to great length to appear smart (even in what cars they drive) and act congenial, rather than falling for the slowly vanishing styles of the brothers Pompous and Patronizing. Regulations still require improvements and with the insurmountably small domestic market, some obstacles we will never be able to remove. But the financial sector’s real problem is the political superstructure, which dominates the nation’s reality.  

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Money Matters

by Executive Contributor
written by Executive Contributor

Capital Intelligence Raises Shamil Bank’s Rating to BBB-

Capital Intelligence (CI) rating agency has raised SBB’s (Shamil Bank of Bahrain) long-term foreign currency rating and financial strength rating from BB+ to BBB-. The bank’s short-term foreign currency rating and support rating were kept at A3 and 2 respectively whereas a stable outlook was assigned to all the ratings. The agency noted that this upgrade is attributable to the strong growth in profitability and continuing reduction in non-performing financing. CI added that its ratings were based on SBB’s strong corporate-only balance sheet, full coverage from financing-loss reserve, its solid capital position in addition to the fact that investment account holders in Islamic banking share their own risk.

NBK Awarded “Bank of the Year” in the Middle East

In its annual Bank of the Year Awards given to banks in 133 different countries, The Banker magazine, an affiliate of the Financial Times Group, has named National Bank of Kuwait (NBK) as the best bank in Kuwait and the Middle East for the third time in a row. The Banker attributed this achievement to the bank’s excellent performance, innovation and regional expansion. The magazine added that NBK continued to post strong results in 2004 as its profits in the first half of the year reached record levels following a 27.7% return-on-equity registered at the end of 2003.

Country Profile: Jordan

An IMF report published in September 2004 demonstrates the recovery of Jordan’s economy from the disturbance caused by the war in Iraq. It shows that real GDP grew by 6.9% in the first quarter of 2004 amid a 29% yearly increase in exports. This upsurge in exports is attributable to the growing demand from the Iraqi market in addition to the continued rise in textile exports especially from the Qualified Industrial Zones (QIZ) to the United States. On the other hand, inflation was restrained at an average rate of 2.8% in the 12 months through March 2004 while the unemployment rate remained relatively high at 14.5% compared to a 5% growth in the Amman Stock Exchange index during the same period. On the fiscal side, the government’s better budgetary management, tighter government spending in addition to higher foreign grants led to the achievement of a 137 million Jordanian dinars ($194 million) budget surplus in the first quarter of 2004, equivalent to 1.8% of expected GDP. This fiscal surplus reduced net government debt by 8 percentage points to 93.5% of expected GDP.

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Welcome back

by Executive Contributor
written by Executive Contributor

Since September 1, the Lebanese authorities have again been allowing South Koreans to obtain visas upon arrival in Lebanon. The practice had been discontinued in November 2003, when the Lebanese government imposed visa restrictions on a number of countries.

South Korean embassy officials declined to offer an explanation for their country’s inclusion on the list, although one official suggested Lebanon felt that South Korea had not been doing all it could to facilitate visits to the country by Lebanese. They did suggest that the move would boost South Korean-Lebanese business ties. In fact, since the decision was implemented, a South Korean trade delegation has already paid a visit to Lebanon, which imports roughly $64 million in South Korean products a year, for only $8 million in exports.

“Business people have very busy schedules,” asserted the head of the delegation, Youn-Hwan Chung. “We were having to wait up to three weeks for a visa. And even then we weren’t sure of getting it.”

But although the visa hurdle has been dismantled, other obstacles to increased South Korean-Lebanese business remain.

“There are differences in business culture,” noted Chung. “And South Korea is geographically far removed from Lebanon. The Lebanese are more familiar with, and prefer, European brands. And Lebanon’s IT industry is not well developed. The Internet is very slow.”

“Most South Koreans still think Lebanon is very dangerous,” observed the South Korean embassy’s commercial attaché, Kihyoung Choe. “Members of the trade delegation were asking me if it was safe.”

The South Korean ambassador to Lebanon, Young-Sun Kim, however, remained upbeat: “I want to talk only about the positive aspects,” he said. “There is no doubt that the move will greatly contribute to the promotion of business between the two countries.”

Cool heads (if they stay on) prevail

The killing in Iraq of three Lebanese businesspeople, including a married couple, and the wounding of another, as well as further kidnappings of Lebanese since then, have dealt more serious blows to already faltering Lebanon-Iraq trade.

Initial business optimism generated by the quick fall of the former Iraqi regime has been replaced by uncertainty as the security situation in Iraq fails to improve. In recent months, a number of Lebanese businessmen and truck drivers have been kidnapped. According to the satellite television station Al-Jazeera, a statement on the Internet signed by a militant Iraqi group threatened to “slaughter any Lebanese working with the US Army and drag their bodies through the streets of Iraq.” Hundreds of Lebanese have flocked to Iraq over the last 15-16 months, in a quest to cash in on the massive postwar reconstruction effort.

“If there wasn’t so much money to be made in Iraq, we would already have stopped sending people there,” acknowledged Elie Shamsy, a manager of Beirut Cargo Center, which transports goods to Iraq. However, the company has stopped using Lebanese drivers. “We only use Syrians and Iraqis,” said Shamsy, “because they appear to be targeted less.”

But it is in Iraq, asserted Lebanese Industrialists’ Association head Fadi Abboud, that the time-honored determination of Lebanese industrialists has become again apparent. Despite the dangers, he noted, scores of Lebanese businesspeople remain in the country, and others continue heading there. “Iraqi importers who ask for half a million dollars of cement from Lebanese firms can’t provide security. People don’t want to send employees to Iraq. We’re finding it difficult to insure. But the Lebanese will not stop doing business with Iraq. Lebanese businesspeople have historically overcome hardship. They embody the SAS (British commandos) motto: ‘Who dares, wins.’”

A tough financial run

The organizers of the Beirut Marathon–in its second edition this year–say they have learned from last year’s mistakes. In their haste to stage an impressive debut event in 2003, they failed to pay enough attention to spending. The result was a whopping $1.5 million bill–of which only about $150,000 was covered by sponsors. (Close to a million was covered by the marathon’s patroness, May Khalil).

This year, the event organizers have been careful to shop around for the best deals, and have also been able to attract an additional 6,000 contestants. As a result, this year’s bill will run at roughly $800,000–a welcome diminution of last year’s cost, but significant nonetheless.

Despite this, cajoling potential sponsors into forking out cash is not proving much easier this year. The organizers expect only $50,000 more than last year’s $150,000. “It is very, very tough to get hard cash out of companies,” observed Event Coordinator Nadine Moawad. “There is a recession. Everyone says they don’t have the cash to spend on events.”

The race organizers hope that in a few years they will be self-sufficient, but acknowledge that a long road lies ahead. “We will have to show potential sponsors the added value,” noted Moawad. “But it is difficult to get that message through. For the moment, sponsors are not getting a feel of how important this event really is.”

“And even when we do break even, we will have to cover the losses of previous years,” remarked Beirut Marathon General Manager Ara Artine.

Growing mini cards

Lebanese banks Fransabank and Banque Audi recently introduced a new debit card format marketed as “mini cards” due to their 43 percent smaller size over standard plastic.

Issued in collaboration with Visa, the new cards offer advantages for participating banks through the prospect of increased point-of-sales (POS) purchases by consumers. In their functionality, mini cards are engineered to POS usage because they cannot be used in standard Automated Teller Machines (ATMs). A value added is that users carry a fashionable accessory characterized by “greater portability”, thanks to a hole in the plastic allowing it to be attached to a key chain or a mobile phone.

For banks, debit card POS purchases are more profitable than withdrawal of cash from ATMs, which still accounts for most instances of debit card usage. Debit or cash cards, such as the Visa Electron card popular in Lebanon, do not carry credit features.

“The purpose is to migrate people from using ATMs to more POS spending and change customer habits away from withdrawing cash,” a representative of Banque Audi’s payment cards department told Executive. He confirmed that the cards were targeted at “all Visa Electron holders in general but especially young, outdoorsy type of people.” Until the beginning of 2005, Banque Audi is offering their Visa mini card for free.

Fransabank is going after youths by stating in a flyer that its mini account and card are targeted at “cool and trendy people,” with offers of free benefits, including movie tickets.

Perhaps confounding consumers is a new prepaid card by BLOM Bank, introduced about two weeks after Banque Audi publicized its card. BLOM’s standard-size card was advertised as “mini”, but that referred to its ceiling of $500. Apparently targeting similar audiences as the Audi and Fransabank products, the bank crafted an extensive promotional program of discounts at places favored by young consumers (Virgin, Quicksilver, Chili’s, Waves, and on Cyberia).

Banking on Lebanese films

On September 19, Lebanese director Philippe Aractingi started the shooting of Autobus, a full-length musical that he hopes will receive international play. It is Lebanon’s first feature film fully financed by private investors.

“To make the film,” said Walid Hayek, investment manager at the Arab Finance Corporation (AFC), “we had to come up with a new financial structure called investment certificates. Unlike shares, they offer a right on future revenues, but no right to vote. We had to avoid the situation that the investor on paper was able to interfere with the director.”

Asked to help in putting together a finance structure by the film’s producer Fantascope, AFC set up a proper business plan based on estimated cost and revenues to attract investors, and issued 140 investment certificates of $10,000 each, producing a total budget of $1.4 million. “So far, we’ve managed to raise $840,000,” said Hayek, “which is enough to make the film. The remainder of the proposed budget, $560,000, is mainly meant for marketing and promotion. Now that shooting has started, however, I’m sure we will be able to attract further funding.”

The film’s projected revenues have been estimated at $2.1 million, which include theater admissions in Lebanon and the Middle East, as well as from television, video and DVD sales. What’s more, Fantascope and Hayek hope to cash in on the sales of CDs and cassettes with the film’s music.

So far, all the investors are Lebanese, among whom the LBCI chairman Pierre Daher. “Daher is a strategic investor,” said Hayek, “who is not just interested in making money, but who wants to test the market and see what the possibilities are. If this film works, he may be interested in making more.”

This seems to be the motto for all involved in the making of Autobus: including AFC, which has traditionally been focused on investment banking, brokering and portfolio management. “We are interested in targeting other sectors,” said Hayek, “among them audiovisuals, which have so been disregarded by bankers.”

Competing over Martyrs Square

To introduce a new face for Martyrs Square and the central axis of Beirut’s central district, Solidere has launched an international Urban Design and Ideas Competition open to both professional architects and students of architecture, urban design, urban planning and landscaping. In past plans, the axis along the square was meant to be Beirut’s main business and office area, but that seems to have changed.

“There are no limitations or requirements concerning the way participants can envision the new center of Beirut,” said Fadi Jamali, manager of Solidere’s Town Planning Department “It’s a mixed use area, so the square’s direct surroundings can be destined for shops, offices, or any other activities.”

However, Solidere does have a preference that the new heart of the city should reflect the reemergence of the center as a meeting point for people of all confessions and backgrounds. The notions of connection and communication play a major role and in that sense Solidere hopes the new center may become something of a media city.

“Martyrs Square symbolizes the link between past and future, East and West, old and new,” said Jamali. “In that sense not only the media, but also Internet companies and ad agencies could play a role.”

Solidere will award six cash prizes for student participants in the first stage with a ranking of the first three selected urban ideas and three honorary mentions. In addition, 5-7 professional architects will be asked to further develop their ideas and will be paid a fee for their work.

The second phase requires professional accreditation. Three cash prizes will be awarded after the second stage, while the winner will cooperate with Solidere in executing the design. Mid October the jury will decide upon student winners and the architects who will go through to the second round, the deadline of which is mid April. Winners will be announced on Martyrs Day, May 6, 2005.

A diplomatic advertiser

Bigger is not always better, at least that is what the newly founded advertisement and marketing company Adbox is out to prove. With a personalized market approach and a touch of feminine charm, the Gemazieh-based company has quickly found its niche in Lebanon’s highly competitive market.

“Adbox is aspires to be a boutique agency offering tailor-made marketing and advertisement services for small and medium sized companies,” said its owner Ghida al-Solh. “Not everyone can afford or wants to work with the big agencies, as they will never be treated as premium clients. Adbox offers a premium, personalized treatment and the same international standard.”

The company offers anything from public relations, media strategies and brochures to ads, packaging, corporate identity development and direct mailing. Having opened only this summer, Adbox’ clients include the jeweler Tufenkjian Freres, the Rest House in Tyre, Al-Baba Al-Mumtaza Sweets and Bear Real Estate. “For the next two years,” said Solh, a Lebanese American University graduate who worked for 7 years in a PR and marketing company, “I want to work with no more than six clients, after that we’ll see.”

To keep the costs down and remain flexible, Adbox is largely a one-person show. “Apart from my secretary,” Solh said, “I have no staff. I work only with freelancers on a project basis. I know most people in the business. While one may be excellent in layout, another’s specialty may be packaging. So, not only do I keep my operating cost down, I also work with only the best in the market.”

The young entrepreneur thinks she has one more asset allowing her to compete in Lebanon’s advertisement and marketing market, which she defines as “male dominated and rather aggressive.” She claims to “work with a much smoother, yet no less determined approach. I guess I’m just a bit more diplomatic. Perhaps that’s the family genes at work.”

We can use more education

Returns on university investments are highly beneficial to both individuals and national economies, reports the Organization for Economic Cooperation and Development (OECD) in its latest report on global education levels. According to the September 2004 report, individuals investing in their tertiary education on average achieved substantially higher returns than the potential rate of return from investing in financial markets. As for the benefits to a country’s overall prosperity, across OECD countries one additional year of education was estimated to boost economic output by between 3-6 percent

In light of such findings, Lebanon’s unabated fascination with higher education should simply spell good national economic prospects. Today, with an excess of 40 licensed institutions of higher education, the Lebanese university and college sector is continuing to see high demand from education seekers.

When it comes to matching supply and demand, the main surge in student numbers seems to be occurring at institutions with low- to medium-range tuition fees, which were licensed four to five years ago and, since, undertook massive expansion of their facilities. Admission officers at the American University College for Science and Technology (AUST) last month were working overtime to process student applications, anticipating a total enrolment of 4,500 or more, a 50 percent increase over 2002. At C&E American University, administrators told Executive they expected enrolment to reach 2,000 on their three campuses. The institution’s first two graduation classes of 2003 and 2004 numbered 300 in total. Another provider with massive ambitions is Global University, which wants to grow from a student body of 300 students today to “become one of the largest campuses in the area,” says an official,

All three of these education providers have tuition fees in the range of $115-130 for undergraduate courses. 

Top-ranked institutions have managed steady but controlled increases of student numbers. In the fall 2004 enrolment season, AUB’s Olayan school of business was keeping its student numbers stable while new facilities are under development. At AUB overall, where the tuition fee per credit hour costs up to $500, total enrolment of undergraduate and graduate students increased from 6,200 in 2001 to nearly 7,000 in spring 2004, with admittance rates for freshmen above 75 percent over the last three years. The shared vision of Lebanese education providers is to function as a regional center for excellence in training. But the rapid growth in institutions and students must, first, prove that it can provide quality across the board. 

The perils of cheaper gas

After a summer of high-flying energy costs, oil prices rose above $46 as autumn knocked, minimizing prospects in the foreseeable future that a barrel of crude would be available for $30 or less in international markets. Earlier this year, oil exporting countries and analysts had still claimed that a target range of $28-35 was attainable. Today, however, some analysts contend that the recently feared $50 threshold could soon turn out to be a price platform rather than a ceiling–the high price levels making Western consumers pay at the pump for the cost of the Iraq war.

In this context, Lebanese motorists ought to dismiss any hopes for a near-term reduction in gasoline costs to $10 per 20-liter tank filling. However, the political decision to not let gasoline prices rise above $15 per tank has thus far shielded local drivers from possible further increases. “We used to raise prices immediately after they increased on international markets, but this is no longer done,” confirmed an analyst at the ministry of finance.

So at least for the time being, Lebanon’s system of government-mandated gasoline prices, with fixed trade margins for gasoline importers and gas stations, works to the benefit of the consumer, while the Lebanese state is bearing the burden of international oil price increases. It is impossible today to predict the exact impact of international oil market developments on Lebanon’s fiscal situation, however upward price movements will inescapably cut deeper into the state’s revenue from excise taxes on imported oil derivatives. Over the past years, these taxes had increased dramatically in their importance, reaching almost $500 million in 2002. In the context of the dismal state finances, it appears only a matter of time until the government could see itself forced to look at re-adjusting those revenue flows and lift the price cap on gasoline, even if this risks another price shock to the economy.  

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Money Matters

by Executive Contributor
written by Executive Contributor

Capital Intelligence raises ARABIC’s rating to A-

Capital Intelligence rating agency has raised Saudi Al-Rajhi Banking & Investment Corporation’s (ARABIC) long-term credit rating from BBB+ to A-, thus placing it at the same level as the long-term sovereign rating of Saudi Arabia. The bank’s short-term foreign currency rating and financial strength was kept at A2 and A- respectively. The agency noted that this upgrade is attributable to the significant improvement in the bank’s liquidity profile due to its success in developing an acceptable means of investing in Saudi government securities. It is to note that ARABIC retained in 2003 its traditional ranking as Saudi Arabia’s most profitable bank with total assets standing at $17.3 billion (about 12% of the Kingdom’s banking assets).

Bank Muscat issues $64 million bond

Bank Muscat, Oman’s largest bank, launched a 25 million rial ($65 million) 10-year bond with a 6.25% fixed rate. The deadline for the issuance, which will be listed on Muscat Securities Market, is set at June 30th and was assigned a BBB rating by the international rating agency “Fitch.” This issuance came a month after the bank introduced a 96.25 million rial ($250 million) bond, which closed oversubscribed at 134.75 million rial ($350 million). It is to note that Bank Muscat recorded in its first-quarter a net profit of 7 million rial ($18 million), up form 6.4 million rial ($17 million) in the same quarter last year.

Country Profile: Palestine

The World Bank approved an emergency structural adjustment grant of $20 million as an immediate budgetary support for the Palestinian Authority (PA), which after three years of crisis, is facing severe economic and fiscal challenges with a financing gap estimated at $650 million for this year. Contributions to the bank-administered multi-donor instrument reform fund amounted to a current $25 million. In addition, the World Bank launched a Social Safety Reform Project with an initial financing of $10 million aimed at providing regular cash assistance, food donations and health insurance provisions to nearly 36,000 beneficiary families. The bank has been active in the West Bank & Gaza for the past 10 years, adopting to the prevailing political climate from reconstruction to institution building, and since September 2000 to emergency assistance. The fiscal situation in the West Bank & Gaza remained difficult in 2003 and 2004. PA’s budget deficit for 2003 amounted to $558 million and to $329 million after including external budgetary support of $230m (compared to $467 million in 2002 and $530 million in 2001). In addition, the stock of indebtness to the banking sector reached $176 million at year-end 2003, or 5.4% of GDP.   

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Architecture & Design: Spoils of war

by Peter Speetjens
written by Peter Speetjens

Market in Brief

Lebanon’s architecture and interior design sector is in today’s market, worth an estimated $40 to $45 million. It is an industry driven by fierce competition, where projects are scarce and registered architects – some 6,000 – in abundance. In fact, the value of construction in Lebanon is accounted for by only a handful of, often eye-catching, projects in and around Beirut. The narrow and high-end construction market is served by some twenty architectural firms, which employ a total of some 200 to 400 architects to design and execute most of the projects.

There are three firms that employ about 50 architects and boast a turnover of $5 million or more, followed by a dozen companies employing between 10 and 20 architects with an estimated turnover of $1 to $2 million. Hopes that there would be a boom in the construction and architecture market were resuscitated by the establishment of Solidere in 1995, but by the turn of the century, the market slowed down. Since the infamous events of 9/11, however, both sectors are picking up, as more and more Gulf Arabs have returned to Lebanon, both as tourists and investors, buying land and developing property. Most large hotels and residential projects are in fact developed partly or fully by Arab investors.

The law

To work as an architect in Lebanon, one needs to register with the Lebanese Order of Architects and Engineers and a number of qualifications must be met. Most importantly, one has to be a graduate from an accredited Lebanese or foreign university and must be a holder of the Lebanese nationality for at least 10 years. Interestingly, one also needs to have a clean criminal record. Once registered, one pays an annual fee of some $400 for medical insurance and pension rights. After being registered in the order, an architect needs to obtain a license from the ministry of public works to perform to work in the profession.

A special committee, consisting of members of the Lebanese Order of Architects and Engineers, the university and the ministry of public works and higher education, examines and decides upon the request. There are currently over 5,000 architects who are members of the Lebanese order, as well as some 15,000 civil engineers, 5,000 electric engineers and 5,000 mechanical engineers. But because Tripoli has its own order and not all architects are registered, it is estimated that the number of architects is probably double that number.

Education

There are currently eight accredited Lebanese universities that offer architecture as a major and each year, some 350 to 400 graduates enter the market. Most of them will stay in Lebanon, while others opt for a career in the Gulf and Saudi Arabia. Several of Lebanon’s topnotch universities, most notably ALBA and AUB, offer an education that is also valued abroad. Considering the figures listed above, it is no wonder that many students leave to work in the Gulf, Saudi Arabia or the United States, as soon as they have the chance.

Salaries & Fees

A fresh architect graduate will earn an average salary of some $500 the first year of employment, which will then increase by some 10% a year. Naturally, a top student being drafted by a top bureau will be able to ask for more. The standard fee for an architectural and engineering office is 7% of the project’s construction cost, excluding indirect costs such as permits. The 7% is broken down as follows: 2% for site supervision, 2% is for the work of civil, electrical and mechanical engineers, which leaves 3% for the architect’s fee.

Surprisingly, the bigger the project, the smaller the architect’s fee, relatively. In case of a $200 million project, for example, no developer will accept a percentage based fee and so a lump sum will be agreed upon, which on average amounts to half of the 7%. For a small project, however, the architect will refuse to work for a percentage, as the design of $300,000 villa can be as much work as that of a $30 million office block or hotel.

Residential

The lion share of Lebanon’s residential market is represented by the handful of high rise buildings that are set to appear in the BCD. Facing the marina, the Marine, Platinum and Beirut Towers are being built, while at Riad el Solh Square, the multi-use Landmark Building is set for construction. The combined overall value, including the price of land, is some $700 million.

The towers combine state of the art design, overwhelming luxury and a magnificent view of the sea and mountains and carry a price tag starting at $4,000m2. Still, most of the apartments have been sold mostly to Gulf Arabs. Together with a dozen of other, smaller apartment blocks and luxury hotels, up to $1.5 billion is being poured into the heart of Beirut, making it Lebanon’s hottest property by far.

Most of the buildings in downtown Beirut have been designed by foreign architects, with Spanish architect Ricardo Bofil signed on for the Platinum Tower and French architect Jean Nouvel responsible for the Landmark Building. With an eye on distinctive designs and future value, Solidere prefers so-called signature buildings by famous foreign architects. As a foreign architect is not allowed to work independently in Lebanon, after the initial design is submitted, all executable drawings and details will be taken care of by a local partner. It is for this reason that Bofil is working with Nabil Gholam on the Platinum Tower project, and ERGA group is executing the original French designs of Saifi Village.

Seeing the value of the projects in downtown, most architectural and engineering firms will receive a fixed amount of money, roughly amounting to 3% of construction costs. Other than in downtown Beirut, several high-end residential projects are being built in Verdun, Ramlet al Baida, Ashrafieh and Ras Beirut.

Generally, the further you move out of Beirut’s inner circle and its direct surroundings, the smaller and less valuable the projects being executed. The lower-end of the market for affordable middle class apartments with a price of $250 to $500m2 is virtually stagnant, which is partly due to the fact that the price of sand, cement and steel has doubled over the last few years, while government subsidies for social housing projects are non existent.

The result is a dozen of very expensive residential apartment projects that represent the main value of the overall market and that are generally being executed by a dozen or two high profile companies. The near future of lucrative residential buildings lies in the mountains, said one architect, where more and more new villas of Arab investors will appear. The real money however, he added, is to be made in Dubai and Qatar, not in Lebanon.

Hotels

The market for design and construction of hotels in Lebanon is similar to that of the residential sector. The $140 million Mövenpick hotel and $100 million Four Seasons Hotel are both Saudi investments, the new $70 million Summerland Hotel and the proposed $125 million effort to rebuild the Hilton Hotel are combined Saudi-Lebanese investments, while the Metropolitan Hotel was built by the Dubai-based Habtoor Group. Most of the newly built hotels in the Aley-Bhamdoun area are also partly or fully foreign investments.

Responsible for hotel designs and execution of those designs are both local and foreign architects. For example, the “white waves” design of the Mövenpick Hotel, which was built over an already existing concrete structure, was largely designed by the ERGA group. The project’s overall price was $140 million, including the price of land. Construction costs roughly amounted to some $70 million, including the pools and a marina. The hotel itself, excluding interior design, cost some $20 million, for which the combined fee for architects, engineers and site supervision amounted to an estimated $600,000.

Offices

The market for the construction of office buildings is largely non-existent. With up to 60% of the offices in downtown Beirut remaining empty, there is just too little demand. The AN NAHAR building was one of the last major office blocks to appear in Beirut. It cost only $12 million to construct, as the design was kept extremely simple and functional, using only the most basic materials and leaving the interior design for the client to handle, which is why, on the third floor, pipes and cables are seen sticking out of the walls.

The building was designed by Pierre Khoury – who also signed on the ESCWA building and BLOM headquarters facing Commodore Square – for a lump fee of an estimated $100,000. Concerning the state of the market, it is significant to note that Khoury’s firm, which employs 15 architects, is also responsible for the design of Park View in the BCD. Originally, Park View was to become an office building, but it now will serve as a residential tower, with high-end luxury apartments, most of which have been already sold. Individual office buildings are being built, especially for banks, but as far as the overall market is concerned, most architects agree that it is absolutely essential for the downtown SOUQS projects to be completed, as it is hoped that the area will serve as a major catalyst to developing the surrounding office space.

Architecture and economics

Unfortunately, Lebanon generally does not have a lot of good architecture, which presents not just a problem from an aesthetic, but economics point of view as well. Bad architecture costs money, certainly in the long run. Take, for example, the overwhelming majority of apartment blocks that are just concrete boxes put on top of each other. They pop up everywhere in the country, spoiling the view and natural beauty, which – increasingly scarce – represent an increasing economic value. What’s more, many of the buildings are badly constructed, not able to withstand the withering effects of time let alone an earthquake, as contractors aim to save money by using less steel.

Then there are the office buildings that have been erected to emulate the predominantly glass structures in Dubai. Most architects agree that this is very suitable building style for colder countries, as the glass helps heat up buildings and thus saves money. In the Middle East however, the opposite is true. With the sun blasting over 10 hours a day, the building becomes a glass house, causing electricity bills to skyrocket because of the constantly running ACs.

Another major problem is the absolute lack of urban planning in the country. Basically, anyone can build anything anywhere: today, you have a view over the Mediterranean Sea, tomorrow it’s blocked by another building, while parks are virtually non existent. The only town in Lebanon that does have a policy of urban planning is Deir al Qamar, where Fadi Chiniara has formulated for free a set of basic rules that every new building needs to meet to get a construction permit – including requirements for height, roof and façade – to keep the town’s traditional character intact. With an eye on tourism, it will be no doubt a policy that pays off, certainly in the long run, which is part of the reason why Walid Jumblatt has approached Chiniara to do something similar for the Chouf.

INTERIOR DESIGN

It is impossible to indicate the value of the interior design market, as there is no regulatory body and basically anyone can work as an interior designer. As a general rule, the client indicates how much they want to spend on the interior of their home, hotel, shop or restaurant. Depending on the choice of material and luxury, the average price to execute a design varies between $500 and $1,200m2, which includes all accessories, such as furniture, tiles and carpets.

The initial design will cost some 10% of the interior’s overall cost, while the designer or architect responsible for the execution of the design will charge another 8% to 12%. Rumor has it that the future 3,000m2 interior of a Saudi official will cost no less than $500,000. The market leader of interior design in Lebanon is Cercle Hitti.

Its interior design department, led by Dory Hitti, employs some 15 interior architects and designers. It signs for both design and execution, yet not necessarily in the same package. The lion share of Cercle Hitti’s designs concern residential buildings, but the company does the interior of offices, showrooms, restaurants and hotels as well. Some of its notable clients are the Sheraton Coral Beach and Heliopolis Hotel.

The big advantage of Cercle Hitti is that the company also sells furniture, beds and lamps, which allows it to offer the client a package deal. Some of the other well-known designers operating in the market are Jean Luc Mengi and Dada, who do more classical interiors for mainly wealthy Lebanese and Arab clients, while Rony Fatte and Galal Mahmoud specialize in more modern designs.

Unlike the Lebanese Order of Architects and Engineers, there is no official regulating and protective body for interior designers. Working with an unreliable designer, qualified or not, can be costly; there are known cases of designers selling clients fake art works and antiques, or selling them for highly inflated prices.

 

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Business

Asking the experts for advice

by Thomas Schellen
written by Thomas Schellen

Volatile times bring out the best virtues of proper financial planning. That’s why to ensure that an investment pays off, one must get smart advice on products that meet an investor’s needs, paired with sound guidance in overall portfolio allocation and backed by thorough contextual research. But before committing to a relationship with a top finance house in volatile times – which appears a permanent condition in Lebanon for now – the investor is increasingly asking for information on what the experts are thinking. Around the world, brokerage firms and asset management experts indulge those requests by producing – carefully non-committal, of course – investment advice columns, market outlooks, and research highlights. So that being the case, why would the larger share of capable investment counselors in Beirut respond to an inquiry into the general direction of their advice over the coming six to 12 months with “I refuse to answer that question”?

Tailoring advice

Well, first because there is no one-size-fits-all piece of investment advice. To draw up a real portfolio one needs to tailor it to the situation of the client, the experts contend.

Not only the income situation but also personal need, age, gender, family situation, occupation, market knowledge, risk aversion and perception of local risk all must be taken into the equation, said the chairman of Financial Funds Advisors, Jean Riachi. “It is a very complex analysis that needs to be done on every person.”

This would explain why good investment advice can contribute as much to a person’s financial peace of mind as a bespoke suit can do for his appearance. It also reveals how client psychology is at least as important to financial services as economic occurrences are. Two individuals with the exact same profile on income and personal situation, in theory, should have the same portfolio. But, if one is experienced in investing in mutual funds while the other isn’t, “in reality, they should not have the same portfolio because their risk perception is not the same. If someone has never invested, he is likely to panic at the first drop and people get out of mutual funds if they are disappointed during a very short period – even though we tell them at the beginning that they should have a long-term approach,” Riachi said.

That speaks volumes about how young the relationship between the Lebanese and modern investment tools really is. In the past decade of a newly materialized post-war investor landscape in the country, financial institutions had to juggle the universal expectations and disappointments of their clients in context of a situation where these, often inexperienced, clients had to deal with either distant markets or very immature local investment environments.


Maturing investor confidence

For the financial firms, this evolution thus involved their share of conflict experiences, where disgruntled clients showed their mastery in the rituals of blaming others. But while it appears still common practice among local financial firms to guide overenthusiastic or excessively self-confident clients discreetly into the direction they should move without letting them feel that they are being nudged along, the brokers and traders also agree that the maturity of Lebanese investors has increased substantially.

It is refreshing then, that a few experts would volunteer some general advice for investor directional thinking over the coming six to 12 months. Arab Finance Investment House general manager Jamil Jaroudi, taking the perspective of SHARI’A-compliant advice, suggested that a good portfolio for investments in Lebanon could allocate 20% to 30% to productive real estate, 20% to 30% to liquid assets, 20% to Mourabaha trade finance paper and 20% to industry or agro-industry. In line with the assessments by international ratings agencies, one could not advise clients to keep all their money in Lebanon, offered the head of capital markets at Fidus, Nicolas Sawan. “A conservative client could keep 20% of his bonds in Lebanon and the remainder in investment-grade bonds,” he said.

In geographic allocation, a conservative investor today should not keep more than 50% of his total wealth in Lebanon, whereas an aggressive one could go up to 80%, Sawan suggested, and in asset allocation, fixed income and funds could account for 40% to 50% of a sound portfolio, equity markets 40% and the rest in cash. US markets, still appearing bullish in the longer term, could open some opportunities for traders, with some volatility towards the end of the year. Capital-guaranteed funds should benefit from the rising interest rate environment allowing fund managers to achieve higher returns in coming months, and for gold, the Fidus manager sees a bullish cycle operating, with an upward outlook in the longer term. His highest bet is on oil prices. The price of $70 per barrel is, he predicts, meaning investors favoring the taking of risks in the futures market could buy oil futures. According to Sawan, the best performing fund at Fidus was the Societé Générale International SICAW Fund. Managed by SoGen asset management, it achieved increases of 42% in 2003 and 6% this year. The broadest consensus the Beirut financial experts share in their outlook on the local market seems to be that tourism related and other productive real estate investments are a definite buy recommendation in Lebanon either through funds or direct project participation, while the equity and securities market at the Beirut Stock Exchange for many is a ‘not yet’ – which is actually better than the essential doubts some traders voiced on the BSE’s role two or three years ago. In this context, one important hopeful sign for greater public sector readiness to support the growth of the BSE is last month’s decision to list two of the eurobonds. Experts hailed the first-time listing of sovereign bonds on the exchange as a move towards making the BSE a more interesting place.

Nonetheless, the trading of securities still may have a ways to go before it can attract all potential issuers of funds on the local market. The Middle East Capital Group, which was a strong driver in listing banks on the BSE in the 90s, today would not in principle reject the idea of listing funds on the BSE. “Why not?” the firm’s new CEO, Walid Mousallam, told EXECUTIVE in his first interview with a Lebanese publication. But for the time being, he is not considering it, as MECG is currently able to structure their funds in the way they want and which makes sense for the firm. “We don’t see the need and we don’t see the benefits,” he said. “It would help the BSE but you don’t do these things unless you see the benefits of doing them. Taking such steps needs more market rationale.”

Controlled optimism

For Bank of Beirut, the sole private sector issuer to list funds on the BSE in the past two years, the rationale exists and has already worked, said Najib Semaan, Bank of Beirut assistant general manager in charge of treasury. “The BSE should be activated for listing more funds, bonds, and securities markets instruments. We have several funds listed on the BSE,” he explained. “In the past, we priced them by ourselves but there is always a bias if you price your own products, even as we always had the net asset value under control of an external auditor. For this reason, we took most of our fixed-income funds to the BSE.”

Lebanese investors hungry to be active participants in financial markets will continue to think and access in international terms. As controlled optimism about the local market potential is an increasing note of consensus among Beirut’s financial experts, local investors may, however, also benefit surprisingly from thinking domestic openings in the coming six to 12 months.

SUCCESS OF FUND RESULTS IN REPLICATIONBank of Beirut is so satisfied with the performance of its funds that it will issue another fund before the end of the year. The bank revealed to Executive that it is in the final stages of preparing the launch of Beirut Income Fund II, which will succeed the dollar-denominated Beirut Income Fund. “This is the first time that we replicate a fund due to success,” said Michel Chikhani, head of the BoB asset management department. After diagnosing a market need for better-managed local investment products, Bank of Beirut started in 1997 to work on developing their asset management and devoted two years of effort to preparing for client activities. When the bank introduced their first Beirut Income Fund in December 2000, initial investor appetite came from some 200 persons. As BoB developed their funds portfolio, which today spans four listed and three unlisted funds, this participation increased over the last four years to over 3,000 investors, 70% of which are resident or expatriate Lebanese.

The funds are based on a range of securities including Lebanese eurobonds and Treasury Bills, Certificate of Deposits, income securities by domestic banks, time deposits and fixed income instruments. Four out of the seven investment funds managed by Bank of Beirut are listed on the BSE, namely the Beirut Lira Fund, Beirut Interbank Fund, Beirut Golden Income Fund, and Beirut Global Income Fund. BoB collaborated with First National Bank in the creation of two of its funds.

According to Chikhani, Bank of Beirut approaches the subject of investment funds under the maxim of working to diminish risk associated with underlying assets while allowing for increased liquidity and securing improved returns for investors. Since most investors are oriented heavily toward the short term, the bank sees no obstacle to its funds business in the fact that current legislation limits funds to five years in duration.

“On average, our dollar and Lebanese Lira denominated funds have outperformed deposit rates by 3% to 4% and outperformed underlying assets by 1.5% to 2% on an annual basis from their launch,” Chikani said.
 

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Business

Venture capital in Lebanon stays hidden

by Nicolas Photiades
written by Nicolas Photiades

If only every great idea could guarantee a swarm of investors knocking at your door. But the harsh reality is that, even after going through all the right motions (from hammering the fantastic idea into a solid business plan and assembling a capable team), entrepreneurs and growth-minded companies customarily face their greatest difficulties in attracting capital. And although nobody doubts that there is a shortage of liquidity in the country, most would-be business tycoons find that start-up money is even scarcer in Lebanon. Simply put, venture capital, for all those who are still asking themselves, refers to any investment in private and unlisted companies. Real venture capital is the investing in start-up and early stage companies. In Europe and North America, venture capital has long reached middle age, with the number of transactions being now levelled out. Once the domain of both little and big players, venture capital has become increasingly dominated by the mega financial institutions, such as global banks, insurance companies and giant pension funds, which all work through specialist business units or subsidiaries. Even in places like Western Europe, it is rare to see successful independent firms, which have been able to raise large amounts of money for venture capital purposes. Although the technology bubble of the late 1990s saw a resurgence of independent venture capital firms, most have now died a violent death or are dominated by the mega financial groups.

In Lebanon, we are light years from achieving what Europe and North America achieved. While the West has used the venture capital tool to grow itself out of recession and debt traps, we in the land of the cedar are still cogitating about the true meaning of venture capital. True, there were some speeches by senior bankers towards the late 1990s to early 2000s, which preached the necessity to establish venture capital funds in Lebanon, but nothing came out of it. Just talk, while our young entrepreneurs are still facing the limited choice of either emigrating to greener pastures or, worse, facing the local banks and their deadly corporate loans. Indeed, at the moment, most private sector firms, whether they are start-ups or established institutions are suffering from expensive over leverage, which is draining most (sometimes more) of their cash flow.

The current situation

Some attempts were made in the mid to latter part of the 1990s to provide the Lebanese economy with a financing alternative to classical banking. The European Union, the European Investment Bank, the World Bank, etc, all provided the local banks with funding to be directed specifically to emerging and start-up companies. These supranational loans were however, always small in size and did not really benefit the end-users (start-ups, etc.) as the banks often misused these funds and allocated them to other sectors. Moreover, the banks never really concentrated their efforts on asking the above mentioned supranational entities for funding to support venture capital, and rather concentrated on asking for funds in order to develop retail and consumer banking.
 

At one stage, some Lebanese financiers and bankers did decide to take the bull by the horn and established independent and proprietary venture capital/private equity funds, such as the Lebanon Fund, launched by Lebanon Invest, which got listed on the Beirut Stock Exchange. Banque Audi also followed the venture capital and private equity path by using its own money to invest in start ups and private equity. These investments were made via a holding company that is still wholly owned by the bank. Middle East Capital Group, another local investment bank also used its capital to carry out some venture capital and private equity investments in Lebanon and the rest of the region. However, these funds never really got 100% engaged in venture capital and rather concentrated on private equity, which is more investments in existing companies that needed to be turned around, restructured or have their operational and strategic direction changed, rather than seed money investments for start-up and early stage companies. Moreover, the cost structure of these funds was always high since the start and significantly affected their performance. Such a lackluster profitability from the part of the venture capital pioneers was a major discouraging factor to other banks and investors, which did not see venture capital as an interesting revenue diversification or investment option.

All these attempts to go into venture capital have been commendable for a small market such as Lebanon, which was just coming out from a twenty years glitch in terms of financial innovation, but is still largely insufficient. For new companies and entire sectors to emerge, boosting as a result the economy, a strong and diversified venture capital industry must be developed and set up. This can only be done with the goodwill and commitment of private Lebanese and Arab investors, which would see a developed venture capital financial sector as one of the ways of boosting the legendary entrepreneurial spirit of the Lebanese, whilst growing the local economy out of a debt and stagnation trap.

Where to go for funding

For the moment, the best way for young entrepreneurs to finance their new venture is to visit their local bank and ask for a Kafalat guaranteed loan. Kafalat is a government-owned sort of insurance company that guarantees bank loans for venture capital purposes. The cost varies from loan to loan, but is generally lower than the cost on a straight loan from the bank to the entrepreneur. It is worth noting however, that few banks would directly lend money to the entrepreneur without a Kafalat guarantee anyway, and given the relatively small size of Kafalat, the number of loans such an institution is ready to guarantee is generally small. Kafalat-guaranteed loans have a ceiling of around $200,000 and automatically exclude new ventures or start-ups needing more than this amount, such as technology oriented ventures, which are capital intensive and need more than $200,000 to build up a solid starting base.

The Islamic Angle

Another funding source for young Lebanese entrepreneurs is Islamic finance. Islamic banks are mostly engaged in financing products such as MUDARABA (trust financing) and MUSHARAKA, (venture capital financing), which are equivalent to participation transactions. MUDARABA is a form of partnership where one side provides only capital and the other only labor and entrepreneurial skills, while MUSHARAKA is a partnership contract where both parties provide capital towards the financing of a project or a venture. Most small and medium size enterprises (SMEs) in the Arab world, more particularly in the Gulf region, are actively seeking to finance their business through capital participation and profit and loss sharing, making Islamic finance in the form of MUSHARAKA or MUDARABA quite attractive.

Most SMEs and start ups in Lebanon and the Middle East can only rely on their weak cash flow to grow organically and cannot have access to outside capital. Their only chance for external capital growth would come in the forms of independent private investments, Islamic banking, or venture capital and private equity funds. While private investors are very selective and only look for investments with established track records (in other words, venture capital is not an option) and venture capital funds do not really exceed the number of fingers on two hands throughout the Arab region, Islamic banking, through its business nature and the SHARI’A rules governing it, is the only serious funding source for start ups and emerging companies.

Basle II compliance

Islamic banks are not yet covered by the new Basel II banking regulations and are subject to a less stringent regulatory regime. Very often, Islamic banks are established under laws specifically designed for them and their regulatory requirements are less detailed and constraining than those with which conventional banks must comply. Such a regulatory environment allows Islamic banks to have a competitive edge over conventional banks, which will soon have to comply with Basel II regulations. The latter make venture capital investments very costly and onerous for conventional banks, which will have to apply a risk weighting of 150% from 2007, the date the new Basel II capital regulations are applied throughout the world. In other words, if a conventional bank invested $1 million worth of assets in venture capital, it would have to set aside at least $120,000 of capital.

With the advent of Basel II, the slim hope of seeing conventional banks getting involved in venture capital is slowly dimming away. However, a whole new market is opening up for Islamic banks, which will be able to diversify and expand their MUSHARAKA and MUDARABA activities, with little competition. For the moment, Islamic banks concentrate mostly on MURABAHA, which is the largest category of development-related financing and the most common form of SHARI’A-compliant short-term financing employed by Islamic financial institutions. It is undertaken by the bank purchasing specific goods at the order of the ultimate buyer and simultaneously selling them to that buyer on a cost-plus basis.

With the venture capital market freeing up from conventional competition, Islamic banks will have the possibility of diversifying their assets and of getting rid of their concentration problem. The latter has been the main characteristic of Islamic banks over the last ten years, and can only be solved with the creation of new markets, such as Lebanon, and the hiring of venture capital experts, whose job will be to boost the MUSHARAKA and MUDARABA parts of the business.

Lebanon is going in the right direction with the establishment of the first Islamic institutions in recent months. What is now needed is for the opening of branches or subsidiaries of large Islamic financial institutions such as Kuwait Finance House, Al Rajhi of Saudi Arabia, Dubai Islamic Bank, etc, in Beirut. Such power houses would have a major positive effect on the local economy and would fill an important gap left by the local conventional banks, which is that of venture capital financing.

Venture capital has worked wonders in the West and has boosted moribund economies to prosperity in less than a decade. The US and Western Europe have rightly relied on the patriotic feelings and national commitment of their institutional and individual investors to fund a nascent venture capital sector. The outcome of such an investment gamble has paid off, as the beneficiaries of venture capital funding have repaid their faith in a major way, as the value of transactions in the buy-out, start-up and early stage markets more than quadrupled in less than ten years in Europe (between 1986 and 1995). What is urgently needed in Lebanon is for our individual investors to emulate their Western peers and place some more faith into the capabilities of their young entrepreneurs. The massive arrival in Lebanon of Islamic banking would provide the institutional investor base for both venture capital and private equity.

(BOX) How do banks finance their own expansion?

The capital needs of banks in Lebanon vary significantly from one bank to another. The twenty largest banks in the country are generally able to attract external capital more easily than their smaller peers, which are struggling to look more attractive to potential capital suitors. The larger banks’ better financial performance, more solid track record and qualitative aspects make it more attractive for a regional individual investor to provide them with fresh capital injections. In recent months, a few large local banks have been able to lure Arab and Lebanese individual investors into their capital, with the most recent example being Banque Libano-Française (BLF), which had to replace its majority shareholder, Crédit Agricole of France, with a regional investor. Replacing a Western financial group with another is virtually impossible at the moment, as the Lebanese market is too small and risky to attract any strategic institutional investor from Europe or North America.

For the smaller banks, which fall below the largest twenty in terms of total assets, raising capital externally is a tall order. Although, some, such as Banque BEMO, have succeeded in recent years, this was only due to a healthy qualitative and quantitative performance, as well as to a clear strategy of maintaining a certain optimum size. Such attributes are always likely to attract external regional investors, who have become increasingly picky in recent years, and who have steered away from the majority of the thirty smaller banks in the country. The latter have not really reached the level of attractiveness required for external capital financing.

However, banks in Lebanon have shown significant resourcefulness as regards to capital raising. Most have relied on the good years in the last decade to grow organically (internally), whilst some have taken advantage of favorable market conditions to carry out Initial Public Offerings (IPOs) and list on the Beirut Stock Exchange (BSE). The current stagnation of local and international equity capital markets for emerging market banks has led some Lebanese banks to resort to issuing preferred shares (a hybrid of debt and equity), in US dollars and carrying a high dividend/interest rate. These issues have been mostly placed with the banks’ customers.

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