Comment

Mutton dressed as lamb

by Yasser Akkaoui
written by Yasser Akkaoui

And so after much political tomfoolery and sleight of hand, Hariri is out and Karami is in. His first task was the creation of a cabinet that turned out to be comprised of vehement anti-government types, many of whom had given up on ever holding public office, and the usual pro-Syrian lackeys.

And now that President Lahoud has purged all internal opposition, he has no excuse for any political and economic shortcomings that may develop over the coming seven months. We do not know what to expect in terms of the economy, given that the criteria for selecting the new team appeared to be based more on political expediency than a genuine desire to address Lebanon’s economic woes. This is underlined by Karami’s warning not to expect miracles. If this was meant to offer hope, one dreads to think what he will say when things get rougher; and they will.

What is bewildering is that all this flies in the face of basic democratic principles. The people have been absent from the equation and thus feel more like helpless spectators than a genuine electorate.

Meanwhile, opposition has grown stronger with both Hariri and Jumblat swelling the ranks of those who do not support the new administration. While Jumblat is as vocal as ever (and the shadow of his late father seems to loom larger than it has done in years), Hariri’s record in opposition is of mounting a comeback and so it remains to be seen just how clean a break his exit deal was.

So where now? There has been a massive shift in how people see the future. While there is still every chance the frog will become a prince, some still believe in the white knight who will slay the dragon? If he is out there, he will want to claim his traditional virgin. The danger is that she may have turned into a snaggle-toothed, saggy hag and the knight may no longer be interested.

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Real Estate

Small is beautiful: Boutique hotels are in

by Anthony Mills
written by Anthony Mills

The buzzword among real estate developers is boutique. As the hotel sector continues to expand with new, bigger hotels – a Hyatt, Four Seasons, and Hilton are all under construction – developers have also hit on the notion that not only is small beautiful, it is also lucrative. It has taken a while for the penny to drop. More than a billion dollars has been invested in hotels since 1995, and only one developer in Beirut, hospitality mogul Bechara Namour, has gone boutique with his 30-room Relais & Chateaux Albergo on Abdel Wahab El Inglizi (even the gilt-edged InterContinental Le Vendôme doesn’t really qualify as boutique). But this is set to change.

At least four boutique hotel projects, with a combined investment of close to $500 million, are already underway in the downtown area, a prime attraction for increasing numbers of both Gulf Arab and Western tourists. There is unconfirmed talk of a fifth boutique project on Uruguay Street, and Solidere is being inundated with inquires by developers eager to cash in on what they see as the shape of things to come. Real estate insiders and hospitality executives unanimously agree that the boutique hotel segment in Lebanon holds potential, not least because visitors to Lebanon are among the biggest-spending tourists in the world. “A visit to Lebanon is expensive. Life here is expensive. So, the quality of service must be high. Boutique hotels will appeal to them,” said Albergo general manager Michel Chardigny.

“There’s no doubt there’s a market,” concurred real estate adviser Michael Dunn, “although it is fairly seasonal. There are more and more Gulf Arabs, and if we get it right they’ll come all year round. But the boutique hotels will really have to market themselves.”

Out of town, Gulf Arabs accounted for the vast majority of guests at the recently opened Chateau Raphael boutique hotel in Maameltein – a Jounieh coastal strip notorious for its nightlife – according to one of the hotel’s employees. The “Chateau” opened for the beginning of the summer season and offers 17 suites (seven duplexes, seven junior suites, and a royal suite) ranging in rack rates from $285 to $715, as well as two restaurants (one Lebanese and one Italian/Chinese) and a swimming pool.

“We had a group from Germany and we have one coming from Cyprus, but most of the visitors in the summer were Gulf Arabs from Kuwait and Saudi Arabia,” the manager explained. Currently, only two rooms are occupied. “Dead season,” the employee explained.

The Chateau was originally earmarked as the boutique arm of the Safir Hotel group, which runs the Beirut Safir Heliopolitan Hotel, but a spokesperson for the chain said negotiations fell through. Chateau Raphael owner George Anastasiades, who also owns Anastasia Travel, was not available for comment.

Chardigny said the boutique hotel sector potential in Lebanon reflected a global shift in guest preferences towards smaller, more personable, and quieter hotels. “All around the world now people don’t like big hotels anymore. It’s a new phenomenon. Over the last five years or so, people have begun attaching much more importance to privacy, discretion and top-quality personalized service. I think the time of the big ‘palaces’ like the Savoy is over. Now, rich people want to feel as though they are at home,” said Chardigny. Some real estate insiders predict that emerging boutique hotels, particularly those associated with international brand names, will provide serious competition for the so far unchallenged Albergo. “I think they’ll knock the Albergo off its perch. It’ll be downgraded to a three-star boutique hotel,” contended one real estate insider. “If you look at the bar, it’s horrible. The reception area? It’s horrible. It doesn’t create a nice atmosphere when you walk in. The restaurant is, boudoirish, feminine and tacky. The swimming pool might as well not be there.”

Chardigny, however, does not seem concerned. “Everyone is a competitor. For the moment Relais & Chateaux are the best quality chain. But the others are very good too. We are worried. We will wait and see.”

While developers are busy as the proverbial bees, real estate experts doubt that all will be genuine boutique hotels. So what’s the magic formula? According to Dunn, a guest must feel that they are unique, that they couldn’t possibly get a better hotel. A car should be waiting for them at the airport. And from then on, they must be continuously coddled, in a luxurious environment of discrete but unmistakable exclusivity. “It’s service, service, service,” he said. “You’ve forgotten your toothbrush? Don’t worry. Your trousers are pressed at three in the morning. You have a bottle of champagne in bed. These hotels are for spoiled people who want to be pampered. Most hotel rooms are so unmemorable.”

The developers of the Abchee Group boutique hotel next to the Virgin Megastore declined to talk to EXECUTIVE about the project, saying it was too early to do so. But Solidere, the company responsible for most of the revitalization of downtown, said the building had been designed by world-renowned architect Kevin Dash and constituted an overall investment of roughly $70 million. The building will offer private parking and will boast several high-end retail outlets – the marketing of which is to be overseen by RAMCO Real Estate Advisors. But the project has its critics: one real estate consultant, who asked not to be named, said: “It’s too noisy for a boutique hotel, probably too busy. A traffic intersection like that is going to be busy all through the night, and for the next number of years dirty, dusty and noisy. I’m very surprised, unless their objective is to make money out of the shops.” Construction of the boutique hotel close to the Banque Audi headquarters downtown represents an $85 million investment by Al-Mawarid Bank, owned by the Kheireddine family. The project – to be completed by the end of 2007 – is the brainchild of Al-Mawarid Chairman Salim Kheireddine. Tranquility will be ensured by the hotel’s location on a roughly 8,000 square meter plot of land in a peaceful corner of the downtown district known as Wadi Abou Jamil. The hotel will be composed of 10 inter-connected buildings arranged around a sizeable garden courtyard. It will incorporate an above-ground built-up area of 15,000 square meters – including three restaurants – and a below-ground area of around 45,000 meters servicing the hotel. Al-Mawarid is hoping to engage in a partnership with the “W” chain luxury boutique hotel arm of Sheraton’s Starwood Group, but is also involved in talks with two other leading hotel chains.

The all-suites hotel will count a hundred “keys”– almost too many for a boutique hotel. The smallest suite will cover about 55 square meters and the largest around 300. Rates will range from about $350 to several thousand. Naturally keen to emphasize one of the key attributes of any successful boutique hotel, Marwan Kheireddine, Al-Mawarid general manager, said: “The service will be by far superior to existing levels of service in Beirut hotels. Our clients will be high net worth individuals – either tourists or business people – demanding, and willing to pay for, exclusive, personalized services.”

As part of a third boutique hotel development project – owned by Solidere – a building roughly opposite the upper end of Maarad Street, and called “Le Grand Theatre,” or “Grand Theater,” a reference to its previous incarnation, is also being refurbished. It will adjoin two constructed buildings, which will house a boutique hotel and restaurants. The premises will be leased to a tenant, who would manage the entire complex. Meanwhile, development of an old salmon-colored building abutting the Riyadh El-Solh Square car park, is being overseen by sole owner Mousbah Bakri, who has already spent tens of millions of dollars buying the building from former shareholders – both family members and previous tenants – and refurbishing. Interestingly, Bakri said he would have preferred to develop office space in the building. But according to the terms of the contract under which he repossessed the building from Solidere, he is obliged to ensure that it retains its original function – that of hotel. Nonetheless, he is equally confident that his boutique hotel will perform, especially among Western tourists enamored with the idea of staying in a quaint heritage-laden building at the heart of the renascent downtown district.

Although some real estate observers suggested Bakri’s hotel would actually do better than the grander boutique hotels under construction, others questioned the building’s suitability for a hotel project, saying the rooms would be too small, and the building was too old. “You would have to spend more money than it was worth,” said one developer. Solidere is confident the boutique hotels will enhance the appeal of the capital’s Central District. “The developers are doing a wonderful job,” stated Solidere executive Monib Hammoud. “The boutique hotels will complement the other hotels in Lebanon. They will reposition Beirut on the international architecture and design level and will help upgrade the tourist industry to international standards.”

However, as the boutique hotel craze takes hold, it is also attracting profit-hungry investors who don’t know what it takes to establish a successful boutique hotel. And the last thing Solidere wants sullying the Central District is a string of failed boutique hotels. “Many people are approaching us with plans to develop a boutique hotel,” observed Hammoud. “Many don’t have the right conception of what a boutique hotel is. We monitor the supply. We don’t want oversupply. We make sure the mix and the balance are respected.”

“Most prospective developers don’t bother to spend the money on acquiring the necessary expertise for a feasibility study or market research,” said Kheireddine. “There is room for a couple of boutique hotels downtown. That’s all.”

Not everyone is convinced that Gulf Arabs will, in fact, flock to the new boutique hotels. Albergo Manager Chardigny said that although some Gulf Arabs do stay at his hotel, most visitors hail instead from Europe and America. “It’s not really Gulf Arabs’ style,” he said. Other observers agreed that Gulf Arabs may prove hard to lure away from glamorous hotels like the Phoenicia and those that have mushroomed across the Gulf.

Dunn disagreed: “Gulf Arabs love places like boutique hotels,” he said. “And they’ve got the money to pay.”

“The vast majority of our clients are going to be from the Gulf,” echoed Kheireddine. “It is wrong to stereotype Gulf Arabs. I have a lot of Gulf Arab friends who are as sophisticated in their taste for wine and French art as anyone else in the world.”

The $7 million hotel

Lina Mroueh, owner of up-market “Lina’s” sandwich chain owner, intends to develop a $7 million boutique hotel in a 1930s building “close” to downtown Beirut. Mroueh declined to disclose the exact location of her development but revealed that the property purchase would account for about 60% of the investment. Echoing Albergo manager Chardigny, Mroueh said she was tapping into potential offered by a new breed of hotel clientele – one that increasingly eschews big hotels – and by the increase in visitors to Lebanon as a whole.

Buoyed by the success of her sandwich chain, Mroueh is confident her instincts will again deliver a quality product. “All you need is entrepreneurship, the right operator, the right concept, and a lot of Lebanese-style hospitality and warmth,” she explained. “And you need happy, dedicated staff. I will go the whole nine yards. Quality is everything.”

Would her hotel would fit the classic boutique profile? “It’s not about luxury. My hotel will be chic. Simplicity is more luxurious. Boutique is an attitude. You can wear things from Marks & Spencers, even if you didn’t pay much for them, and look good if you have the right attitude.”

Mroueh plans to ensure that, once built, her hotel will achieve an international cult status. “I have a network of people, internationally, who will be happy to come and stay at the hotel. They will build brand awareness,” she said. “They’ll be an international crowd, Europeans, Gulf Arabs, Korean and Japanese businesspeople.”

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Business

FNB reaches for the top

by Thomas Schellen
written by Thomas Schellen

Provided that their development of assets and deposits continues along the lines of the first nine months, Lebanon’s First National Bank is set to achieve growth in the magnitude of 20% to 25% this year – strengthening its claim to be one of the fastest advancers in Lebanon’s banking industry at the beginning of the millennium. In their half-year results on June 30, FNB reported total assets breaching the $1 billion mark at LL1.506 trillion, and by August 31, the bank’s books showed further growth to LL1.536 trillion. On December 31, 2003, assets clocked in at LL1.308 trillion. Customer deposits reached LL1.196 trillion at the end of August, up from LL1.112 trillion at the close of last year.

These figures mark 2004 as a year of moderation in the development of FNB, knowing how the bank has advanced in less than five years from assets of merely $80 to $100 million, to its current position in the upper middle field of Lebanese banking. Beginning in 2000, the numerical stepping-stones of this growth journey comprised annual increases averaging in the magnitude of 40%. In 2002, FNB recorded profit growth of 130% at an increase of 50.5% in deposits (the sector average then was: 7.52%) through a combination of new business and the acquisition of smaller bank, Societé Bancaire du Liban. The bank last year achieved another jump in profits, from $720,000 net income in 2002 to $2.07 million in 2003, but still lagged behind its peer group. For 2003, FNB was ranked 17th in the sector in terms of assets.

Under the current categorization of Lebanese banks, its recent performance advanced FNB into the realm of the sector-leading Alpha Group of banks, whose assets exceed $1 billion. But just as his bank could claim the cherished qualifier, FNB chairman and general manager, Rami Nimer, would raise the bar. “I think the Alpha Group should be over $2 billion,” he told EXECUTIVE. He certainly has a point. The compounding of assets in the sector today is such that more and more banks cross into ten-figure territory. While the $1 billion barrier seemed high enough just a few years ago to delineate the sector hierarchy, a bank today needs to be safely over $2 billion in assets to claim a market share of 3%. As trends have been moving, the gap between the top ten banks – which dominate the market to over 70% and would constitute the Alpha Group at over $2 billion in assets – and the tiers of capable mid-sized or smaller banks, is becoming even more pronounced. By this rationale, establishment of a new Alpha Group marking makes sense to set the lead group apart from the pursuers. So in Nimer’s reckoning, FNB should be regarded as an institution in the high Beta Group. In his view, banks should turn their attention more to off-balance sheet activities, such as private banking and fiduciary operations and Nimer made it clear that it can be better for a bank to not be craving after size for size’s sake. “There are so many changes in the world of banking and being a good mid-sized institution is beneficial. Banks should think different to the classic game of size,” he said. “It is an important issue and volume makes the difference. But with Basel II, size is not the issue. Size without utilization can be more of a burden than a plus.” He is not the only top bank executive to deliver it but this message bears repeating in light of the risk pressures weighing on the Lebanese banking sector.

While thus espousing an esteem of unpretentious banking and maintaining an approach that FNB is a young and growing bank, Nimer nonetheless affirmed the wide consensus among local sector players that banks here need to reach certain size or would be faced with oblivion. And there is no doubt which side of the game FNB wants to be on. In the bank’s annual report for 2002, the chairman’s letter described the rise to then 19th rank in the sector as paving the way to become one of the top 15 banks “in the near future” and, in the longer term, ascend to be one of the top ten banks. The undercarriage of FNB’s growth capabilities was established with its founding by a group of Kuwaiti and Gulf Arab businessmen in 1994, who initiated marginal expansion of the bank’s activities over the first years of its operations. According to Nimer, these newcomers to Lebanon’s surging financial market couldn’t take FNB’s evolution to its potential but they established a capable organization that provided a good platform for the growth instigated following Nimer’s entry into the bank and a change in management between 2000 and 2001. This allowed FNB to prove that it had the foundations to be more than a delta group player and the bank quickly advanced through the ranks of the sector, defying any concept that the Lebanese banking field today couldn’t any longer offer the opportunities of rapid expansion that had abounded a decade earlier. “We are still building the bank but the results until now are quite encouraging. Although the big banks were there, we grew drastically,” summarized Nimer the experience of the past four years. Attributing the ability of FNB to succeed to the bank’s greater flexibility in comparison to larger players, he named as other factors the trust of their shareholding base in the team’s professionalism and performance and the new management’s experience in the local market. Giving proofs for the bank’s confidence and accomplishments, Nimer cited how FNB won out in arranging financing for the Four Seasons Hotel project in Damascus and shares many cross clients with its peer group and leading banks in Lebanon. Judging from Nimer’s engaged personal style, another component in the bank’s recipe appears to be a substantial dose of dynamism. In a business where the art of success lies in defining and applying an institution’s strengths out of a limited arrear of choices well known to all players, key instruments with which FNB wants to build its continued growth are further expansion of the retail operation, private banking, and venturing cross border. In the retail arena, FNB planted their stakes by developing the branch network from 6 in 2000 to 16 by end 2004, with a Jounieh branch scheduled to open this month. The bank enhanced its market reach with a catchy new logo and expanded retail products and in the summer of this year, it heightened its profile by moving its headquarters from Hamra to a new prestigious downtown address. As far as niche creation, Nimer is looking strongly to private banking. Having not long ago commenced working in this business line, the bank this year already achieved $80 to $90 million in off-balance sheet volume, he said. FNB made footprints in the local financial markets also through developing funds traded on the BSE, collaborating on them with Bank of Beirut. True to the Lebanese banking mantra of regional growth, FNB has two concrete ambitions for cross border activities: Syria and Iraq. In Syria, the bank is a partner in a project with Kuwaiti and Jordanian institutions and the prerequisite domestic investors, working to start a joint venture bank that plans to be operational in 2005. FNB shareholding participation in that venture is projected at 10% to 11%. For Iraq, FNB secured the license to establish a representative office from the country’s central bank and hopes to establish this office before the end of the year as first step into that market. While he described organic growth in the Lebanese market as his first choice for the development of First National Bank, Nimer named a further acquisition or merger as a viable option for FNB. In this field, the banker had accumulated experience through his role in the assimilation of Banque Beyrouth pour le Commerce into Byblos Bank, which at the time (1997) was the largest merger in the history of the sector here. Although that experience was not smooth, it gave Nimer very useful expertise for managing the acquisition of Societe Bancaire du Liban, which he called very successful. In terms of mergers, Nimer saw the bonding between the Banque Audi Group and Banque Saradar as an ideal situation and encouraging example to the industry although for the time being, FNB would be thinking on a different scale for its eventual merger projects. “We haven’t reached our potential yet, so my preference is a merger with an equal or smaller size institution, not a larger one,” Nimer said.

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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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For your information

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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Business

Taking retail to the next level

by Thomas Schellen
written by Thomas Schellen

ADMIC, operator of the Monoprix and BHV stores in Lebanon, are adding to their retail stable. The company has begun its PR and marketing campaign for the 200,000 square meter City Mall, due to open at the northern gateway to metropolitan Beirut in three stages between December 2005 and the end of 2006.

ADMIC chairman and CEO, Michel Abchee, told EXECUTIVE the mall will open on the ground floor with specialty shops and one new ADMIC-operated anchor store, the 11,000 square meter hypermarket Casino Geant. In the second phase, the food court and shops on the upper level will open in early spring; followed by a 18,000 square meter BHV outlet as a second anchor and a nine-cinema multiplex at an unspecified date in 2005. The company is in negotiations with a sporting goods store that would function as the mall’s third anchor. The $70 million project is running slightly above budget, due to euro-related increases in construction costs and because of adding areas onto the initial blueprint. The financing of City Mall is based on retained earnings from ADMIC operations, capitalized at $50 million, and bank loans under leadership of the retail company’s house bank, Banque Méditerranée. “We were able to get an investor base that was interested in what we are doing and in our market. Our shareholders have pushed for the development of ADMIC by reinvesting profits instead of paying out dividends,” Abchee said. “This really helped in our development of growing from 50 employees [in 1998] to over 1,000 employees today and 1,500 by the end of the year 2004.” That the retailer stepped outside of its core business competencies by taking on a real estate developer function, was explained by a desire to meet international standards and customer demand. He admitted that the country has an oversupply retail space in real terms, but when it came to quality and specifications required for a project of an international standard, most locations and developments did not measure up. Thus, when ADMIC investigated the possibilities for establishing a hypermarket they opted to build an entire mall from scratch on their preferred site. The site, on the north side of the Dora Highway, satisfied the company’s preferences for easy accessibility, significant traffic flows and a good catchment area in Beirut and the Metn region. With new tenants coming onboard daily, Abchee is confident that the City Mall will stand out in Lebanon’s convoluted retail landscape and attract sufficient consumer spending despite the nation’s reduced purchasing power. “We have received positive reactions from the representatives of international brands,” he said. “We really built a mall suited for Lebanon and suited to international clients. The mall will be the first of its kind.”

While all this may contain a degree of hyperbole, the ADMIC project appears to indeed fit well into the evolutionary pattern of mall developments in Lebanon over the past decade. The profound changes in the nation’s shopping patterns began as malls made their entry onto the local retail scene when the resurging post-war economy saw developers carve shopping centers like the Concorde Galleria in Verdun out of existing real estate as well as purpose-build a number of projects from the Freeway Mall in Sin El Fil to the Sodeco Square in Ashrafieh. But although a good number of these retail sites came to the market in the mid 90s bearing labels of malls, they represented more of an intermediary link in the advance of shopping from traditional high street and small store environments to new retail destinations. A few of the early projects initially flourished as urban shopping centers offering specialized retail (mostly fashion), entertainment facilities (cinemas and unsophisticated arcades) and small food courts, but many soon struggled, floundering in the recession. In this evolution, in which Lebanon today pursues modern retail concentration trends ahead of Syria and Jordan but substantially behind the Gulf economies, the current period marks a further stage of retail refinement through construction of larger, efficient malls. What makes ADMIC’s entry into the mall operating business interesting is that the company is consolidating an already entrenched position in the re-shaping of Lebanon’s shopping culture. The company’s new position in mall management converges with its role as multi-brand retail store operator and leading supplier serving Lebanese consumers in less than six years.

The larger businesses in Lebanon’s fast moving consumer goods (FMCG) retail sector can be broadly divided into traditional and entrepreneurial retailers. While the former constitute a host of family-centric companies with decades of entrenchment in relations with local manufacturers, traders and old-style exclusive agents, the entrepreneurial side of FMCG retail is really made up of two firms: ADMIC and Spinneys. Entering and immediately shaking up the highly contested market in the late 90s, both companies struggled with the sector’s entrenched business patterns, consumers’ shrinking purchasing power and the political and legislative environment.

Nonetheless, the two companies have risen to preeminent positions in the local market, expressed in combined 2003 turnover figures of roughly 1% of GDP – tendency pointing strongly upwards. According to Abchee, from already achieving slightly over $100 million in annual turnover, ADMIC looks to reaching $150 million by the end of 2004 and, including the new stores, aims to double 2003 turnover by the end of 2005.

In addition to the growth in volume, the company targets a wider customer spectrum through rolling out the Geant hypermarket brand, which aims to attract all income segments. Understanding itself as a firm that promotes the Lebanese middle class, ADMIC hitherto tended towards an image of addressing middle to upper income audiences with the BHV non-food product segmentation of clothing, perfume, electronics, household, sporting goods and do-it-yourself items. The Monoprix stores initially catered to medium to high earners, but now expanded their approach to appeal to cost-conscious shoppers with Monoprix-branded food items and their own-brand clothing labels. Last year, ADMIC began to strengthen Monoprix by adding three new stores to their portfolio. Another area where Abchee presents the company as having a different approach is in financing. “What we tried to do is separate the expansion from the day-to-day business,” he said. Under dependable participation by board members and banking partners, ADMIC made their investment calculations without thinking to involve operational resources. This resulted in keeping relations with suppliers free from financial hiccups, he claimed. “We are paying our suppliers on time and intend to continue to do so. We can take credit for respecting our engagements with suppliers.” As for concerns on possible internal cannibalization of revenue streams between stores, he said that the addition of stores did not produce significant cuts in turnover at the company’s stores in Jnah and Ashrafieh, calling a 6% to 7% contraction in turnover in Jnah “a big success for us” in light of the increased competition from the largest Spinneys outlet, which opened late last year two blocks down the street from the BHV/Monoprix complex. As a clear bonus on the operational side, ADMIC anticipates the expansion of retail floor space, first through opening the three new stores and then through the Geant and BHV stores in City Mall. As this reduces costs, the retailer’s improved bargaining position in sourcing products from local suppliers could mean some welcome reductions in retail prices.

Also outside of price benefits to Lebanese consumers, which were helped visibly by the competition between the Monoprix stores, the Spinneys chain and the traditional supermarkets over the past five years, ADMIC operations changed the retail sector in several other aspects. This impact extended from opening a small do-it-yourself niche in the Lebanese market and introducing new concepts on perfume sales – when launching the BHV cosmetics department, the company encountered “huge resistance against our presentation” from suppliers – to leading the sector in marketing and advertising campaigns, which were later followed by competitors and resulted in sector wide increased advertising spending, the manager claimed. The company also contributed in two ways to greater transparency, one by centering billboard advertising campaigns on aggressively priced sales items and two by declaring their policies and charges in allocating shelf space to suppliers. In the push and shove negotiations with manufacturers and brand representatives desperate to secure optimal positioning and maximum space for their products, supermarkets had commonly placed certain demands on suppliers – which smaller importers often found excessive – but these positioning conditions were usually not transparent. Industry insiders maintained that these arrangements were open to corruption. By laying open their policies on this matter and telling suppliers that their shelf space depended on their market share and their practices with ADMIC, Abchee said his firm could take credit for bringing much needed clarity to the process. In Abchee’s view, all these moves have successfully challenged conventional practices by established retailers and the major companies acting as FMCG suppliers. “All the big groups were traditional in their thinking. It took us a long time to change the way how these people are thinking,” he said. “We are helping in the evolution of consumer behavior and in the evolution of relationships between customers and suppliers.” On charting and analyzing consumer behavior, the company claimed to have no figures on the number of tourists frequenting the stores in the summer season and the contribution of their purchases to the turnover at BHV and Monoprix. Abchee explained the absence of detailed figures with ADMIC’s reluctance to undertake polls and surveys that customers might perceive as hurting their sensitivities. However, he confirmed that VAT reimbursement claims and credit card-related data were indicators for the high significance of purchases by tourists and summer guests for the company’s revenue stream, and the company made it a point to advertise at Beirut Airport. In fact, tourism was also an important consideration in ADMIC’s corporate strategy behind developing the City Mall project – and one where the manager became vocal on the absence of government support. If one looks at the reality of Lebanon as a tourism destination, retail shopping is one major way in which the country attracts visitors but the government has not given priority to supporting retail projects as tourism magnets, ignoring the issue “for all the wrong reasons,” Abchee said. “It is a major strategy in our marketing plan that we place special budgets to attract tourists. The only problem is that we are doing it alone. The government is counting a lot on the private sector for tourism development but not giving breaks in return. We would recommend closer communication between the government and the private sector.”

A second matter where public-private sector interactions are relevant to ADMIC’s devlopement concern the company’s plan to bring a store of French fashion retailer Galeries Lafayette to the SOUQS of Beirut. The plan, hatched several years ago between the Groupe Galeries Lafayette (which is also the parent company of the BHV and Monoprix chains) and ADMIC, has not been abandoned but has been deeply packed in ice by the quarrels and delays surrounding the downtown SOUQS project. Considering ADMIC’s evolution has involved a degree of learning by adapting the BHV and Monoprix formulas to local customer preferences, success has not been as easy as the smooth growth figures and available financial results of the privately held company suggest. “We listen to our customers. From five years ago until now, our stores have evolved and adaptation to the local market is our main issue,” he mused. “Some people say we like too much to take risks. We are taking more risks than others but calculated risks can be good.”

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Economics & Policy

Uncertain times ahead

by Tony Hchaime
written by Tony Hchaime

There has been much speculation surrounding the implications of the presidential extension, especially given the reservations articulated by international leaders, the UN, and prominent members of the Arab League, including the GCC and Jordan.

Lebanon’s economy is highly fragile and vulnerable to local and regional political developments. Historically, times of uncertainty led to economic downturns, with slowdown in production, exports, and tourism, with only local consumption supporting the economy. Today, however, local consumption has been hit by a drastic deterioration in the standard of living in the country, flaring concerns about the economic implications of the Lahoud extension, the potential departure of Hariri, changes in the relationships with Syria and the incumbent developments in foreign relations, especially with the US and Europe. While no crystal ball is available to foresee the new Lahoud era, and no logical reasoning can prove Lahoud’s claims that his new term will be “different,” Lebanon’s economy continues to shoulder a massive public debt, recurring budget deficit, and delays in reforms. Public spending and budget deficit

Government spending on infrastructure and other public expenditures has historically been a main driver for economic growth in Lebanon, at least under the various Hariri governments. The market clearly recalls an economy on the verge of collapse during the Selim el Hoss government in 2000, when the government at the time put a lid on expenditures by blocking many infrastructure projects. Over the past years, the Hariri and Lahoud camps have been balancing each other out on the issue. Hariri’s camp, much more inclined towards spending, has been pushing for more and more infrastructure projects, while the Lahoud camp’s more conservative approach managed to keep the resulting budget deficit from blowing through the roof. Hariri seems sincere about his intention to quit the government if Lahoud stays in power. Should this be the case, the country may witness a serious shift in policy on government expenditures on construction and infrastructure. With no clear sign of who the incoming new prime minister would be, it is anyone’s guess as to what the budget would look like one year from now, and what the economic impact of a major change would reveal.

Alternatively, government public revenues would also be seriously affected by a change in policy. The Hariri government’s policy has typically been in favor of raising taxes and custom duties as a means to improve government revenues, especially as no serious plans for privatization or securitization are in the pipeline. The reason why such plans have not yet been implemented is because of differences of opinion between Hariri and Lahoud, differences of opinion that would no longer exist should one of them depart. Does this mean privatization and securitization are to take place if Lahoud stays and Hairi leaves? Why it may be the case, no one can really predict the outcome of such a development, and if it would obtain the optimal valuations.

Interest Rates

Changes in government policies regarding revenues and expenditures would surely affect the government ability to borrow funds, and ultimately interest rates. Recent efforts by the Hariri government to lower interest rates in an effort to boost economic growth and reduce the debt-servicing burden on the budget have been haled as somewhat successfully. On the other hand, however, interest rates are mainly a function of two parameters in Lebanon: the demand for money, mainly resulting from government borrowing, and the market’s assessment of the risk associated with lending.

Over the past 18 months, the government has managed to keep a tighter lid on borrowing, and has successfully swapped some long-term debt into another at cheaper rates. With Lahoud’s typically conservative view on spending, the upcoming government might just be successful at keeping a tab on borrowing. The problem, however, may fall on the other side of the equation. Basic economics stipulate that nominal interest rates in any economy are a function of the market’s risk assessment of lending, among other things. Uncertainly yields higher risk, and the uncertainty surrounding Lahoud, a new government, the UN resolution, the US stance on Syria, and the Syrian military presence in Lebanon create an unmatched recipe for uncertainty. Let alone international lenders to the Lebanese government, local lenders – large Lebanese banks – have recently showed reluctance to lend to the government, as illustrated by the significant shrinkages in the government securities portfolios of the banking sector in Lebanon. As such, interest rates are likely to raise, providing a more attractive risk premium to attract potential local and international lenders. Would this adversely affect economic growth and to what extent remains unclear, but a sudden rise in interest rates just as the Lebanese economy may be clawing itself out of recession would probably shove it back into it rapidly.

The banking sector

So how would the famed Lebanese banking sector be affected by such political developments, and how would it respond their various financial and economic implications? As mentioned earlier, banks in Lebanon have been recently reluctant to lend money to the government, thereby reducing their exposure to government securities and the Lebanese pound. While the latter may not be at risk due to the more than sufficient foreign exchange reserves of the central bank, a continued support for the domestic currency, inevitable during times of uncertainty and ill confidence, would seriously strain such resources.

Therefore, the first bank to be affected by such developments would be the central bank, which is likely to struggle to keep the Lebanese pound afloat.

Commercial banks, on the other hand, face a much higher risk. Political instability is often associated with capital flight from the country host to the instability. The extension to Lahoud’s term and the ensuing international upheaval are again casting a blanket of uncertainty over the country, and would, if sustained, drive away funds belonging to Lebanese as well as other Arabs. It is no secret that money follows safety, and a deep rift among the Lebanese people, Syria, the US, the UN, and the rest of the Arab world is far from being a good prescription for financial safety and stability. Aside from potential capital flight, another risk, relating to banks and associated with recent political developments is the cost of sources of funds. Banks in Lebanon have been reluctant to extend corporate loans, and as they are now reducing investments in government securities, they are struggling to find optimal uses of funds for their excess liquidity. Lower interest rates over the past year have failed to create a significant jump in corporate loans and credit facilities, making the task of finding optimal uses of funds even more difficult.

Making things worse, a rise in interest rates would increase the banks’ cost of funds, as rates in deposits would no doubt increase substantially. As such, higher cost of funds coupled with more scarce investment opportunities are likely to adversely impact the sector’s profitability and liquidity. That is, unless, we fall back into the vicious circle where the banks are forced to swallow government debts, the latter is forced to raise interest rates to keep borrowing, and ultimately reach a point where banks are overexposed to country risk and the Lebanese Pound, and the private sector is completely crowded out or unable to function at such high interest rates.

Time, along with Mr. Lahoud, Mr. Assad, Mr. Annan, and Mr. Bush, will tell.

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The Buzz

Handling conflict in the workplace

by Tommy Weir
written by Tommy Weir

The textbook definition of conflict is “a situation where two or more people experience an incompatibility of perceptions, feelings and actions regarding interests, values and goals.” The reality behind office conflict involves a host of fears, behavior patterns and financial pressures, which can complicate a simple misunderstanding.

For several reasons, the workplace can be a hotspot for tension and conflict, including when:

•Cooperation is needed among people from different cultures (e.g. different working styles, communication patterns, expectations, attitudes, and different values).

•Implementation of exclusionary values in systems and interpersonal interactions occurs. •More resources are needed.

•Status/ranking is evident.

•People collaborate to produce a product or service but have own specialties and conflict responsibilities.

•You may not choose people you work with.

•Working conditions include long hours and/or close quarters.

•Strong allegiances to subgroups intensify/complicate conflicts (e.g. department, work functions, sect, professional, identity, management).

Conflicts that are not resolved to meet everybody’s demands can often wreak havoc. Small misunderstandings fester, tension builds up, and before you know it you’re caught in a self-perpetuating whirlpool. The good news is that conflict can be a terrific catalyst for growth and improvement in the office and at home if handled properly. It’s not the disagreement that matters as much as how we chose to respond. Most people do not respond; they react. They rely on regularly used behaviors for defending and proving that they are right. Their hot buttons are turned on the defense mode, which means that many people are ready to take a stand by remaining stuck in their position. The bottom line is that most people when confronted with a conflict just want to be in control of the process.

To get a positive outcome from an office conflict, first you must not see it as a failure. It’s better to look at it as a communication glitch. The key then is to discover the gap in perception and understanding. If you are one of the parties involved, then a good starting point is to look at yourself and your communication style. Are you communicating effectively? This also means asking questions when you don’t understand something.

A unique and essential cross-cultural method to identifying one’s conflict personality type is by using the natural elements: earth, water, fire, air. Each personality element behaves differently when faced with conflict. Earth people are stubborn and grounded to details, perfection, and loyalty, but are also strong and unmoved in crisis. Water people are driven by their deep emotions, allowing them to flow through situations. They are gentle, highly sensitive, have the gift of changing form according to which personality they deal with and, in general, hate conflict. Fire people are unpredictable creative, dynamic, and very passionate, taking great pleasure in exciting battles and attacking when others don’t agree with them. Air people are objective and rational thinkers, who attempt to understand the world and resolve disputes quickly by using laws, mathematics, philosophy, and psychology.

We recently worked with an organization, which had major problems in its training department. The problem mainly involved two people, but affected the entire department’s environment. By using the four elements to identify their personality type, we were able to distinguish between their conflict handling styles. The scenario went something like this:

Mira – overachiever, hard working and dependable – and Suzy – accommodating to everyone’s needs, also hard working, optimistic, and sensitive – had both been assigned to create a project proposal. They were working in an undersized office environment, had different working styles, clashing personalities and came from different backgrounds. From the beginning, there were antagonisms due to miscommunication.

Mira perceived Suzy as not carrying out her share of the work. She felt that she didn’t understand or have the tools to write a proper proposal and that Suzy was more committed to her personal life. Suzy saw Mira as a control freak, trying to run the show. Mira presented her part of the work as a done deal; the way it “should be” done, and not as a team effort. She perceived her as intimidating and a perfectionist, not trusting anyone but herself to get the job done. The conflict further escalated when they started gossiping about each other to their co-workers. Mira attempted to exchange chitchat about Suzy with her boss, even involving her in a manipulation trap and convincing her boss that she was a victim.

As it turns out, productive work time became thwarted and the rest of the employees in the department were affected. Something had to be done, not only for the sake of easing the tensions, but also to save the department. We scheduled a consulting session with the head of the department, Suzy, Mira and their co-workers, and conducted a comprehensive feedback evaluation. Receiving critical feedback is not always a pleasurable thing, but it is an important part of business today.

Mira and Suzy set an example for other co-workers by accepting difficult messages from each other and committing themselves to the evaluation and improvement process. The feedback helped Mira realize that her image as possessive and domineering was hindering her ability to inspire the department. Suzy, for her part, came to realize that she was perceived as a slacker and “floater” in the department, not taking her role serious enough.

We also held a mediation session in order for both parties to confront each other with the underlying issues and misperceptions that led up to the conflict. During this session, all boundaries and barriers were broken down in order for a circle of truth to be formed. Each person shared their anger, frustration and any other emotions they felt towards their relationship with each other over the past couple of months. By communicating effectively, openly and honestly, they reached a mutual understanding with one another.

It is evident that we were working with two clashing personality types. Mira, an earth bound person, was stubborn and unwilling to perceive Suzy’s entry to the department as an opportunity to learn and exchange creative ideas. However, her loyalty to her job was a supportive measure, which allowed her to remain grounded to the department. Suzy, water by nature, tried to swim her way out of the conflict, but she cared deeply for the emotional health of the department and participated willingly with the outside intervention. Her flexibility and accommodating style helped speed up the reconciliation.

We may not always have the privilege of choosing whom we work with, but the challenge in every conflicting relationship is to focus on the problem NOT the person. The problem in this case was that neither party took responsibility for their own actions, words or thoughts. They held the other person accountable for their own perceptions and failed communication.

There are several ways to take responsibility without losing face. An apology, for instance, is often one of the most difficult, but it can be done without even using the words “I’m sorry.”

Even the most difficult people can undergo positive transformation in behavior after engaging in the process of conflict transformation. It requires honesty and a commitment to growth and excellence. It demands that we re-imagine who we are and who we could be. It asks that we stretch ourselves past outgrown patterns and behaviors. We must not only be able to accept negative feedback, but actually seek it out. We must constantly be aware of our blind spots, and of areas where we can improve our understanding of our impact on others we work with.


When a conflict arises and you feel helpless, here are some general principles to ease your mind and emotions:

•Stay calm – don’t lose your temper

•Don’t fall into a trap and become defensive

•Deal with the task at hand, not on whose fault the conflict was

•State the issues as differences, not as who was right or who was wrong

•Be persistent in stating your case

•Be constructive and focus on a solution.
 


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

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