Business

Q&A: Saad Al Barrak

by Thomas Schellen
written by Thomas Schellen

The operators of the currently government-controlled Lebanese mobile phone networks are officially called MIC 1 and MIC 2, for Mobile Interim Company. MIC 2 is the Mobile Telecommunications Company (MTC) Group, the rapidly growing Kuwait-based Arab telecommunications firm with operations across the Middle East. EXECUTIVE talked to MTC general manager, Saad Al Barrak, on their management of the Libancell network and on how long MTC would like to play an “interim” role.


At this early stage, how are things going with the management of the Libancell network?

Everything is going all right. We have significant achievements and although we have just started, we have the operation totally under control, with increases in subscribers, revenue, everything – which is extremely encouraging.

How many employees do you have at this point?

Today, we have 305 and I think this is the level we are going to stay at. That is more than enough to handle the entire operation.

How many new people did you have to hire?

[Of previous staff] 140 stayed and we hired 160. This is a massive change and not easy. Doing it quickly and letting people pass through orientation and training and at the same time operate as normal and even better, with improvements on productivity, was a good achievement.

Were there any glitches in the takeover phase?

Yes, the glitch was mainly on the prepaid service. It is an old technology that is susceptible to attacks. We had two major virus attacks that brought the network down and caused us some problems, including interruption of service. However, this is a heritage of the past that we have to deal with. We have already made an agreement with the government to change to a newer technology platform.

And the government will finance this?

Definitely, the government finances all the capital expenditure. This is well under way and we hope that things will soon be much more robust and reliable. In the meantime we are enhancing and protecting the current installation, in order to overcome the period until the new technology is in place.

Are you foreseeing changes in the service portfolio, dropping or adding specific services?

We have to revamp a lot of the products. This is also subject to the government’s approval, especially with new packaging and pricing. We have many ideas in that regard, which should promote the overall wellbeing of the network and the services.

How is your relationship with the government at this point?

It is excellent. I think the ministry of telecommunications, presented by the minister and his assistants are all extremely helpful and fully understanding.

Is it correct that you will not only make changes in technology and services but also in identity and marketing?

Right. Libancell belongs to the old company. We can use it only to a maximum of six months. During this time, we are agreeing on a new name and a new brand with the government. They have to endorse it because they own the company.

Did you already present a proposal?

We have been engaged in presentations and discussions for the last month, and we are arriving at the conclusion of this stage.

But the operating company will be MTC?

It will be MTC Liban. It is a separate company and a subsidiary of MTC, registered as a Lebanese company.

Does it have any Lebanese shareholders?

No, not at all. It is 100% owned by MTC.

And management of the company and network will be handled from Beirut?

Totally from Beirut, yes. We sent a management team here, which is in place. They are operating as an independent team here and supported by the group.

Will there be any synergies from your presence in other countries across the region?

Yes, of course, that’s the beauty of contracting with a group and not an individual company. All the goodies of the group will be earned at a very low cost here.

Can you give examples for synergies?

They exist in terms of promotion, branding, training, availability of resources, funding, product development, technology development, also collective bargaining with suppliers, which will give the government much better prices for their cap[ital] ex[penditure] investment.

MTC entered management bids for both networks and was the second to achieve a contract. Did you get an equivalent deal by being awarded management of the Libancell network?

I don’t think that there is better or worse in this case. These are two companies that have been operating at similar size. Cellis definitely had better technology. We knew this and that’s why our price to manage Cellis was higher than our price to manage Libancell. Libancell’s technologies are also closer to our technologies. Our knowledge and expertise in Libancell was greater than in Cellis; that was the main differentiator.

Are you having plans for the presence of MTC in the Lebanese market beyond the management function at the network?

Our plan is wherever we go to own equity as well as manage. We will definitely be working on an ownership plan, along with everybody else who will present proposals to the government. We hope to be more convincing than others, with more benefits, and that’s the challenge to us.

Would you see a step into ownership already possible during the management period or only afterwards?

There is a clear decision and strategic direction of the Lebanese government on privatization of the telecoms sector. The management contract has been widely publicized and taken as an interim period until we arrive at full privatization. So everybody agrees that there must be full privatization. The speed and the approach are where the differences are. Once these things are resolved, it is definitely better to transform the stake of the state. There is much more advantage to it in selling its stake. I think they will take that step sooner rather than later.

Your bid for the management contract was substantially below what the government paid previously and also below expectations. What gave you the confidence to be able to make a profit at this level?

Number one, we are a highly experienced company. We have the economy of scales, so our cost structure will be lower than others who would only handle Libancell on its own. These are two major factors. We have been very aggressive. The Arab world market is the prime market for the MTC Group. We want to be recognized by countries that we can come, manage their strategic assets in telecommunications business and do very well so that will extend the goodwill and, hopefully, move to the full privatization stage. This was our objective and we are extremely happy about developments so far and don’t regret it.

To what degree of market penetration do you foresee growth of the mobile market in Lebanon?

I think Lebanon should have a minimum of 40% penetration in three to four years time, given the liberalization of the market that we are free to expand as much as we can.

This means you first need a numbering plan?

Definitely. A numbering plan is being discussed now and will be amended hopefully by the end of the year, which will give everybody a big range of numbers. Lebanon has already passed the telecommunications law, which is a very good and advanced law. They need to enact this law by setting up an independent regulator, the Telecommunications Regulatory Authority. That should be very helpful in instigating development and furthering the growth of the telecommunications industry in Lebanon.

You would not disagree if I say that telecommunications is too expensive now?

It is very expensive in Lebanon and we hope to contribute to making it much more cost effective with a lot more variety and much better service for the client.

But at this point you cannot give a target number for per minute rates and such?

I cannot. If I fully owned Libancell, I would give you a plan with dates and commitments and numbers, but since the decision is lying with the state and we know the complications of the political side of the story, then definitely I cannot make any comments.

People in the industry claim that authorities were already twice close to signing the enactment laws but didn’t because of political personality problems. Would that deter you in any way?

I think it is deterring the whole country. We hope that with the new elections on presidential and parliamentary levels within a year from this time, things will be much better, like all the Lebanese hope for a much better political environment, not to hinder the development of the country.

But are you confident that in any case, Lebanon will remain stable?

That, I have no doubt about. Lebanon is volatile and highly moving, but it is stable.

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Economics & Policy

Banking on the good times

by Tony Hchaime
written by Tony Hchaime

The banking sector in Lebanon continued to witness sustained growth throughout the first half of 2004, continuing the trend adopted in 2003, which followed a short lull. Total banking sector assets grew by more than 11.8% year-on-year, reaching LL94,377 billion as of June 30, 2004. Main growth was driven by growth in deposits, with bank deposits standing at LL64,639 billion at the end of June 2004, up 11.7% from the same period last year, and 4.7% from year-end 2003.

Despite the considerable growth in assets and deposits, the loan portfolio of the Lebanese banking sector did not undergo significant growth. Total loans to the private sector (both commercial and non-commercial loans) grew by only 1.2% between June 2003 and June 2004, reaching LL23,019 billion. At first glance, a somewhat promising development is revealed in the shrinkage of lending to the government by over 6% between June 2003 and June 2004. A close inspection reveals, however, that the drop in lending to the government occurred during the second half of 2003, as banks’ portfolio of government Eurobonds, T-Bills, and other securities increased by 10%, reaching just over LL23,000 billion.

With such a modest growth in lending, banks in Lebanon managed to significantly improve their cash positions over this period. Total cash and reserve accounts in the Lebanese banking sector grew by a staggering 44.8% between June 2003 and June 2004, reaching over LL60,000 billion. The major jump in cash levels occurred during the second half of 2003, where cash and reserve accounts grew by over 36%, while adding another 6.1% during the first half of 2004.

Alpha Group of Banks

The Alpha Group of Lebanese banks, those with deposits exceeding $1 billion, far exceeded the broader sector in its performance during the first half of 2004. Total asset growth of the Alpha Group reached 17.4% year-on-year, and 6.4% during the first six months of 2004, to reach a total of LL70,969 billion. Customer deposits leaped almost 18% year-on-year and almost 6.8% since the beginning of the year to reach LL59,477 billion by the end of June 2004.

On the other hand, however, the growth in the group’s loan portfolio failed to match the growth in assets and deposits, as total loans added only 3.6% year-on-year and 3.7% since January 2004 to reach LL12,654 by the end of June of this year.

From an earnings perspective, the group’s overall performance, notwithstanding that of some of the leading banks, was somewhat subdued. Net income for the group inched up less than 1.6% year-on-year by June of 2004, reaching LL290 billion. Net interest received by the Group – prior to provisions – remained almost flat year-on-year, adding less than 0.2%. Significantly lower provisions during the first half of 2004, however, lifted the year-on-year growth of net interest received after provisions to 5.3%. The group also benefited from a year-on-year growth in net financial income by 5.8%, while overall operating expenses jumped more than 9.4% over the same period.

Banque Audi-Saradar

As the highly publicized merger of Banque Audi and Banque Saradar was concluded during the first half of 2004, the newly named Banque Audi Saradar published its first consolidated set of financial statements for the first half of 2004. Banque Audi’s unconsolidated total assets grew by a staggering 28% between June 2003 and June 2004, reaching LL11,727 billion, excluding those of Banque Saradar. Post-merger total assets exceeded LL14,704 billion by the end of June 2004, making the bank Lebanon’s largest, with more than 15.5% of total banking sector assets in the country.

On a stand-alone basis, Banque Audi continued to impress the market, yet again beating its historical half-year performances, as well as that of its peers. Banque Audi’s customer deposits jumped by almost 31% year-on-year by June 2004, reaching LL10,035 billion, or around 15% of total deposits in the Lebanese banking sector. The post-merger balance sheet reveals total customer deposits at Banque Audi-Saradar reaching in excess of LL12,365 billion, bringing the largest bank’s market share of customer deposits to more than 19%. The bank’s loan portfolio jumped by more than 57% between June 2003 and June 2004, partially due to Banque Saradar’s loan portfolio. Total loans held on Banque Audi Saradar’s balance sheet reached LL3,104 billion by the end of June 2004. The majority of the loan portfolio remains in the form of commercial loans, which account for almost 70% of total loans. The newly merged bank’s balance sheet reveals a hefty increase in liquidity levels. Cash held at the Central Bank as well as the bank itself jumped from 26% of total assets in June of 2003, to 33% in June of 2004, more than doubling in value and reaching LL4,805 billion. In parallel, deposits at other banks and financial institutions grew by 132% year-on-year, mainly due to the acquisition of Banque Saradar. Such deposits currently account for 20% of total assets at LL2,902 billion, compared to just 14% in June of 2003. Alternatively, investments in Lebanese government bills dropped from 28% of total assets in June of 2003, to just 18% in June of 2004, growing by just 1% year-on-year, reaching LL2,604 billion. Banque Audi also continues to impress in its income side, with the bank’s net income, excluding that of Banque Saradar, growing by 7.4% year-on-year to LL42.73 billion during the first half of 2004. Due to the difference in scale between Banque Audi and Banque Saradar, the additional profits from the acquisition do not reflect greatly on the combined bank’s income statement, with total consolidated profits for the first half of the year still at LL42.73 billion.

Net interest income grew by more than 35% between June 2003 and June 2004, with the majority of the growth coming from Banque Audi’s performance on a stand-alone basis. Net interest received after provisions totaled LL98.43 billion during the first half of 2004, compared to LL72.60 billion for the corresponding period in 2003.

Staff and operating charges also grew considerably, mainly due to the acquisition of Banque Saradar. Total staff and operating expenses increased by more than 37% year-on-year between June 2003 and June 2004, reaching LL98.33 billion.

BLOM Bank

After getting bumped off the top of the list of largest banks in Lebanon, BLOM Bank is not sitting idle, undertaking aggressive growth measures to regain its trademark position. The bank’s total assets grew by almost 22% year-on-year between June 2003 and June 2004, reaching LL14,490 billion. Customer deposits continue to grow, adding almost 19% between June 2003 and June 2004 to reach LL12,591 billion. The bank’s loan portfolio continues to account for around 13% of total assets. BLOM’s total loan grew by just under 7% between June 2003 and June 2004, reaching LL1,881 billion, with commercial loans again account for the vast majority of outstanding loans. Investments in government bills were reduced substantially during the first half of 2003, with all of such investments accounting for less than 24% of total assets by June 2004, from almost 30.5% in June of 2003. Total such investments dropped by almost 5% year-on-year to reach LL3,462 billion by the end of June 2004.

The higher deposits, modest growth in loans and reduction in investments in government bills ultimately resulted in increased liquidity levels at the bank, which saw its cash and reserves accounts grow by almost 48% between June 2003 and June 2004. Cash and reserve accounts reached 31% of total assets during the first half of 2004, at LL4,458 billion, from 25% of total assets during the corresponding period of 2004.

As the now second largest bank in Lebanon, BLOM Bank also registered impressive income growth between June 2003 and June 2004, with net income adding 6.1% to reach LL68.48 billion, ensuring that BLOM still holds the lead in terms of profits.

Interest income remains the main contributor the bank’s income statement, with net income received after provisions reaching LL110.53 billion during the first half of 2004, compared to LL103.31 billion during the corresponding period of 2003. This represents a healthy year-on-year growth of almost 7%.

The bank’s expense structure took a modest hit during that period, which was not unusual given the bank’s aggressive growth. Total staff and operating expenses increased by 7.6% between June 2003 and June 2004, reaching LL57.86 billion.

Byblos Bank

While the market’s focus was primarily on the battle for the position of “largest bank in Lebanon” between BLOM Bank and Banque Audi Saradar, Byblos Bank saw the opportunity to make some serious inroads in growth and market share. Byblos Bank’s total assets grew by 12.7% between June 2003 and June 2004, reaching LL9,677 billion. Customer deposits recorded a staggering growth of almost 14% over the period, reaching LL7,966 billion. On the other hand, the bank’s loan portfolio did not register any significant growth, remaining almost flat at LL1,846 billion.

Investment in government and related bills also dropped at Byblos Bank. The totality of such investments accounted for 23% of total assets at the end of June 2004, compared to almost 34% during the same period in 2003. The bank’s portfolio of such investment shrank by more than 22%, reaching LL2,248 billion at the end of June 2004.

Such growth in deposits, stable loans portfolio and reduced investments in government bills resulted in an overall improvement in the bank’s liquidity positions, with cash levels increasing by more than 53% to reach LL3,415 billion.

Along with the impressive balance sheet growth observed on Byblos Bank’s statements during the first half of the 2004, the bank managed to translate some of this growth into additional income. The bank’s net income grew by just over 1.3% during the first half of 2004, compared to the first half of 2003, reaching LL37.7 billion. Net interest received after provisions, however, receded by almost 10% over the period, reaching LL79.0 billion, despite an aggressive reduction in provisions, which dropped from LL9.35 billion during the first half of 2003 to LL3.76 billion during the first half of 2004.

Bank of Beirut

Bank of Beirut was another strong performer during the first six months of 2004, albeit to a lesser extent than the Alpha Group as a whole. Total asset growth reached 10.4% year-on-year and 2.45% since January to LL5,630 billion, pushing the bank up one notch to the 5th largest in Lebanon. Customer deposits added 9.5% year-on-year and 1.4% for the first six months of 2004 to reach LL3,864 billion. Just as with the overall banking sector, Bank of Beirut’s loan portfolio saw only modest growth during the first 6 months of 2004, with total loans standing 1.8% above June 2003 levels, growing by 2.9% during the first 6 months of 2004, to reach LL963 billion.

Bank of Beirut was one of the new top banks in Lebanon to increase its investments in government bills during the first half of 2004, with total such investments reaching 38% of total assets, at LL2,127 billion, thus registering a year-on-year growth of almost 3%.

Nevertheless, the bank managed to further improve liquidity levels by boosting cash reserves. Cash and central bank accounts jumped by over 25% between June 2003 and June 2004, reaching LL1,369 billion.

After having outperformed its peers on earnings during the second half of 2003, Bank of Beirut fell behind during the first half of 2004. The bank’s net income grew by only 3.95% since the beginning of the year, reaching LL15,886 million. Nevertheless, better management allowed the bank to improve its net interest margin before provisions, growing it by more than 39.9% since January of 2004. The growth was somewhat offset by higher expenses, however, which grew by almost 38% over the same period, largely because the bank has hired more staff.

Banque Libano-Francaise

Banque Libano-Francaise (BLF) was one of the poorest performers among its peers during the first half of 2004. Overall asset growth reached only 1.4% year-on-year and 0.9% since the end of 2003, reaching LL5,478 billion. As a result, the bank lost its 4th place on the list of largest banks in Lebanon, sinking to 6th. BLF’s customer deposit base managed to inch up 2.6% year-on-year and 0.2% during the first six months of 2004, reaching LL4,765 billion by the end of June 2004. In tandem with the trend, however, the bank’s loan portfolio remained practically unchanged year-on-year, and inched up 0.5% since the end of 2003, to reach LL1,694 billion by the end of June. BLF was one of the few banks among the Alpha Group to suffer a drastic drop in net earnings during the first six months of 2004. The bank’s net income during the first six months of 2004 sank by almost 23%, reaching LL10,995 million. While the bank’s net interest margin actually improved slightly over the period, the drop in net earnings was mainly due to a 22% shrinkage in non-interest income. Total expenses were kept in check, however, growing by just over 1.5% since the end of the year.

BBAC

BBAC’s performance during the first half of 2004 was more or less in line with its peers, even though the bank fell behind in overall balance sheet growth. BBAC’s total asset base widened by 8.2% year-on-year and remained practically flat since the end of 2003, reaching LL3,207 billion by the end of June 2004. Total customer deposits grew by 7.5% year-on-year as of June 2004, and 2.4% during the first six months of the year, to reach LL2,863 billion. Alternatively, BBAC was one of a few banks to expand its loan portfolio during this period, with total loans growing by 3.6% year-on-year and 7% during the first six months of 2004, to reach LL535 billion by the end of June 2004.

On the earnings side, while BBAC’s net income for the first half of 2004 stood only 1.4% above the levels recorded during the first half of 2003, the bank’s bottom line shot up more than 100% above that of the second half of 2003, reaching LL15,083 million. Better credit management allowed the bank to benefit from a 31.3% rise in net interest margin after provisions, compared to levels observed during the second half of 2003. In addition, net financial income jumped up 23.4% since the beginning of the year, coupled with a 7.5% drop in overall operating expenses.

BLC Bank

After undergoing massive restructuring following the bank’s takeover by the central bank, BLC Bank prides itself as being of the best comeback stories in recent history of the banking industry in Lebanon. The bank managed to vastly outperform its peers during the first half of 2004, with growth in total assets reaching 27.9% year-on-year and 12.6% for the 6-month period, reaching LL2,562 billion, and resulting in the bank taking over the 11th position in the list of largest banks in Lebanon. Customer deposits leaped 29.2% year-on-year and 15.3% since the end of the year, to reach LL2,152 billion by the end of June 2004. In terms of earnings performance, BLC Bank’s net income jumped 122.1% year-on-year and a staggering 218% during the first six months of 2004, peaking at LL13,235 million. An improved net interest margin and better credit management allowed the bank to raise its net interest margin after provisions by 17.7% year-on-year and 5.8% during the first six months of 2004. In parallel, the bank’s financial income shot up 13.6% during the first six months of 2004. Such developments, coupled with an almost 12% drop in operating expenses during the first half of 2004, contributed to the bank’s impressive bottom line growth.

Credit Libanais

While Credit Libanais failed to match the performance of the Alpha Group in terms of earnings during the first 6 months of 2004, the bank managed to tag along on growth side. Total assets shot up 14.1% year-on-year and 5.5% during the first half of 2004, reaching LL4,281 billion. Customer deposits jumped 12.1% since June of 2003, and 6.1% since the end of the year, to reach LL3,651 billion. Little growth was spotted in the bank’s loan portfolio, which remained almost flat year-on-year, adding 2.4% during the first six months, to reach LL776 billion.

Credit Libanais’s net income as of June 2004 stood 4.4% below the June 2003 level, but 5.4% above that of the second half of 2003, reaching LL16,262 million. Lower provisioning allowed the bank to slightly improve its net interest margin after provisions, which climbed 3.7% during the first 6 months of 2004. A modest growth in financial income during the half of the year, in the order of 2.5%, coupled with a 2.7% drop in general operating expenses, allowed the bank to slightly improve its bottom line during the period.

Fransabank

After putting in an impressive performance during the second half of 2003, Fransabank somewhat lost steam during the first half of the year. Total asset growth reaching 16.8% year-on-year, but just 1.8% since January, with total assets reaching LL6,275 billion, advancing the bank to 4th place on the list of largest banks in Lebanon. In parallel, customer deposits as of June 2004 stood 19.0% above previous year levels, but practically unchanged since the end of the year, reaching LL5,047 billion. Surprisingly, however, the bank’s loan portfolio witnessed a significant shrinkage, of 11.2% year-on-year and 3.9% during the first six months of 2004, reaching LL848 billion.

On the earnings side, Fransabank’s performance was somewhat mixed. The bank’s net income for the first six months of 2004, while standing more than 17% below that of the first half of 2003, improved by over 20% compared to the second half of the year. The bank’s net income as of June 2004 reached LL38,988 million. The bank’s net interest margin suffered a blow during the first six months of 2004, dropping by 14.6% since the beginning of the year, due to the combined effect of higher provisions and narrower interest margin. The deterioration in interest margin was offset, however, by an 11.3% improvement in financial income during the first six months of 2004, which contributed positively to the bottom line, despite the almost 10% rise in operating expenses.

Intercontinental Bank of Lebanon

Although not one of the highly publicized banks in Lebanon, Intercontinental Bank of Lebanon put in some incredible growth during the first half of 2004, albeit at a serious expense to profitability. The bank’s total assets leaped more than 32.3% year-on-year and 10.5% for the first half of the year to reach LL1,654 billion, as customer deposits shot up 39.4% year-on-year and 14.4% since the end of the year, peaking at LL1,560 billion. As a result, however, the bank did manage to gain one notch to 12th position on the list of largest banks in Lebanon. The bank’s loan portfolio grew by 8.2% year-on-year, but hardly increased compared to end-of-year levels, leveling off at LL236 billion.

Such growth came at the hard expenses of profitability, however, as the bank’s net income dropped 25.3% year-on-year and 23.8% during the first six months of 2004, leveling off at LL5,108 million. The bank suffered a drop in net interest margin after provisions of 14.1% during the first six months of 2004, which, along with a 12% drop in financial income and an 8.2% rise in operating expenses, ultimately contributed to the reduction in the bottom line.

Lebanese Canadian Bank

Lebanese Canadian Bank was undoubtedly one of the leading performers of the Alpha Group of banks during the first six months of 2004, registering strong growth across the board. The bank’s total assets leaped 38.5% year-on-year and 15.6% year-to-June 2004, reaching LL3,011 billion, pushing the bank to 10th place on the list of largest banks in Lebanon. Customer deposits increased by 37.9% year-on-year and 18.4% since the end of 2003, peaking at LL2,653 billion. The bank’s loan portfolio almost grew, adding 16.3% year-on-year and 5.5% during the first 6 months of 2004, reaching LL383 billion. In parallel, the bank’s net profits leaped 53.3% year-on-year and 39.3% compared to the second half of 2004, reaching LL14,101 million. The bank saw improvements across the board, with net interest margin after provisions improving by 52.5%, and net financial income by 29.9%, vastly offsetting the 21.4% rise in operating expenses.

Societe Generale de Banque au Liban (SGBL)

SGBL’s performance during the first half of 2004 was more or less in line with the bank’s historically modest growth trends. Total assets grew by 4.6% year-on-year and 2.4% since the end of 2003, reaching LL3,893 billion, while customer deposits grew by 18.0% year-on-year and 5.6% during the first six months of 2004, to reach LL3,121 billion. Growth in the bank’s loan portfolio was more modest, settling at 3.1% year-on-year and 2.6% year-to-June 2004, leveling off at LL1,237 billion.

NB The policies of Banque Méditerranée regarding the publishing of data precludes their inclusion in this report.

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Business

The growing pains of ICT

by Thomas Schellen
written by Thomas Schellen

It sure looks as if in the world and region, all things ICT are returning to normal. Shares in e-companies are no longer an anathema. The big market move of the season from a tech perspective, the Google IPO, clawed its way beyond obstacles to achieve figures that appear, all in all, more respectable than some headlines suggested. Earnings at multinational corporations from Cisco Systems to Dell look good – so good that a 5% quarterly drop in performance of Hewlett Packard’s enterprise server and storage division led the company last month to immediately sack three top executives, even as HP’s overall profits were up 9% for the quarter. The big names are also hiring. IBM announced in August that it has 18,000 new jobs on offer to bring its worldwide headcount to 330,000 at the end of 2004 and Microsoft said they would hire 6,000 to 7,000 persons during the coming 12 months on top of their current staffing of 57,000. The latest news from the ICT employment market in Germany, Europe’s strongest economy, is that salaries for information and communications technology specialists have accomplished a full rebound to sector income levels of early 2001. Across the MENA region, ICT growth also is again in focus. From PC and software sales to continued surging numbers of mobile phone subscribers, market watchers make enthusiastic projections and global ICT companies court Arab markets for their promising potential, even as these markets are marginal in their annual reports. With many signs to the unmitigated importance of ICT for regional economies and new good days for people in the sector, it appears paramount for a country like Lebanon to do its utmost in preparing the best possible environment for ICT companies to thrive here. International and local experts and executives for firms of all sizes and specializations in the Lebanese ICT community agree not only (despite their differences on many other things) that the country still has a good shot at being an ICT location, but are also in total unison on where crucial changes are needed first. “ICT in the Arab world is a high priority and opportunity for economic development and inclusion in the digital information age,” Microsoft’s regional manager, Charbel Fakhoury, told EXECUTIVE, and enthused, “Lebanon’s ICT potential is still to be fully realized and we are witnessing a strong momentum and support from executive leadership to expedite Lebanon’s realization of the ICT opportunity.” The right size for the Lebanese ICT industry’s production would be around $2 billion, or 10% contribution to GDP, suggested economist Louis Hobeika to EXECUTIVE, and underscored how the country has come a long way in ICT development but has lost ground within the region. “In absolute terms we are perhaps moving forward, but in relative terms we are falling behind,” he said. “One of the obstacles for companies to locate in Lebanon are the high costs in the telecommunications sector, which are three times higher than in the UAE. Our ICT sector today is of average value and average performance.” In Hobeika’s view, Lebanon has several models in the Arab world to look to as examples of who is getting things right: Dubai already, and soon probably also Bahrain, Oman, Kuwait and Qatar. For Lebanon to gain a new edge in ICT, experts and industry members agree that one urgently required improvement is the establishment of special technology parks. Co-locating numerous companies from one industry in shared environments has proven to lead to interconnections and mutually supporting industrial clusters, enabling stakeholders to advance together and become fit for international competition. Clustering boosts efficiency. Due to ICT companies’ pronounced needs for communications technology and highly trained staff, dedicated tech industry zones, as shown by multiple studies and practical examples, are especially helpful to ICT firms for optimization of their development potential.

The ICT community in Lebanon recognized these potentials earlier than their colleagues and public officials in many other Middle Eastern countries and entrepreneurs started drafting plans for ICT parks as far back as 1997. However, up until today, no large-scale plan has been implemented here. By contrast, tech zones in the UAE, Jordan and Egypt were designed after the first such Lebanese projects – and implemented years ago. Thankfully, however, Lebanon has one ICT technology park, which is demonstrating, albeit at a smaller size, how such an endeavor can be just as successful here as in the industry’s more conspicuous international locations.

The Berytech technological pole incorporates three essentials of a cluster for a growing ICT sector: hosting services, communication facilities, and an incubator where startup businesses can take their first corporate steps. The pole, a $4.5 million project established under strong involvement of Universite Saint Joseph (USJ), opened its doors in November 2002 on a site adjacent to the USJ Mar Roukos campus overlooking Beirut. Not even in its third year, Berytech is already home to some 40 enterprises and is currently researching where it can build additional facilities. “Our plan is to expand every year by 15 to 20 companies between startup and hosted companies,” Berytech president Maroun Chammas told EXECUTIVE. This growth target foresees significant incremental increases in the size of the facility, and the master plan calls for building each year 3,000 to 4,000 square meters in facilities until 50,000 square meters are added to its current 8,000 square meters in built-up area. As this expansion cannot be undertaken on Berytech’s current 3,000 square meter plot, the institution is trying to get land nearby on properties owned by a monastic order or, alternatively, seek buildings in Beirut. The latter option would also suit some resident companies, who told the Berytech management that they would like to be closer to the city, but the business incubator for startup enterprises would in any case remain at the Mar Roukos location. According to Chammas, thus far, all companies located at Berytech have been successful in their business ventures. The pole is open to companies from seven sectors, with information technology and multimedia/communications most developed in their presence. Although the shareholder base of Berytech consists of the USJ, 10 banks and seven industrial enterprises, it is one of the challenges for startups at the pole to acquire financing. “The fact that people are at Berytech makes access easier but Lebanese banks have not developed the business of lending to startups,” Chammas said, “it is one of our responsibilities to ensure that the incubator inspires banks with confidence.”

Startup entrepreneurs receive special support in the pole’s business incubator for a limited period of time. Hosted companies pay charges of $13/m2 per month in rent and $15 per month and computer terminal in connectivity fees. Although these charges may appear substantial by local standards, they have a great advantage in being fully transparent and calculable, said Ralph Bitar, manager of Soft Mind, a developer of corporate software solutions. “Here, a flat fee covers everything. Costs are not higher than in other buildings but benefits are much larger,” he said, and after trying out several locations in Beirut, his firm had found locating at Berytech a great improvement. Habib Maaz, CEO of another software firm, Unilog, concurred, saying his firm had been at Berytech since January 2003, and it had proven a good choice and location, which also impressed foreign visitors.

With Berytech’s good reception in the market, Chammas said he saw potential for having many more poles of its type all throughout the country. “I believe there is room for expansion everywhere in Lebanon.”

Enter the Beirut Emerging Technology Zone. With a projected size based on a one million square meter site, the BETZ project is of a different dimension to Berytech and incorporates a scale that would make it perform in the same league as the Dubai Internet City, the Middle East’s showcase ICT zone. But whenever the BETZ topic comes to discussion these days, opinions among the Lebanese ICT community are divided. Initially put on the table in 1997 through a grant for a feasibility study by USAID, the BETZ concept actually dates back to the bubble days of the new economy. This in itself would not be a problem as the need for a substantial ICT industry zone is as great now as it was then. The problem arises from the project’s enormously sluggish evolution. For the first few years after the proposal’s creation, the BETZ feasibility grants were stuck in various government drawers, with government experts in favor of the project having to produce contrived explanations every time they were asked why the study was experiencing yet another delay in implementation. When the study finally came to see execution around 2002, it was carried out by an American consulting company – somewhat understandably, knowing that US funding in international assistance likes to work that way. Less clear was perhaps, why research for something called BEIRUT Emerging Technology Zone would spend much time evaluating sites in far corners of the nation. As several communities were examined, ICT and development enthusiasts in some of them invested themselves considerably to present their community as location of choice for the project. Relief should have set in when in spring of 2003, IDAL chairman Samih Barbir could make a jubilant announcement that BETZ would be built in Damour in a partnership between IDAL and the municipality. For many in the ICT community, this announcement came so late that they were inclined to question the government’s intentions and validity of the project in numerous respects or were simply in disbelief that BETZ could now be put on the promised fast track of construction and welcome its first tenants by autumn 2006. As if to prove them right, the municipal elections followed and with them a change of elected officials in Damour. Since then, the situation of the project has been obfuscated by disagreements and lagging negotiations, the latest results of which apparently were that the municipality no longer wants to be a partner in owning the project but merely wants to lease the land to BETZ and receive annual rent to the tune of $4 million. Rumours circulating about the municipality’s position moreover talk of local fears to see inflows of outsiders and a tossup of the town’s sectarian balance, instead of welcoming the project’s manifold opportunities for developing the community. For supporters of growth in the Lebanese ICT industry, this is worrying news, because they are convinced that missing out on BETZ now would mean missing out on a crucial chance.

“Microsoft has been a strong supporter of BETZ,” Fakhoury confirmed to EXECUTIVE, describing the zone as “a milestone ICT project that will show Lebanon’s commitment to encourage ICT.” His company was dedicated to continue discussions with stakeholders on how local and multinational IT companies would be able to contribute and benefit from BETZ but warned, “If the project does not get real support, a real boost, it will move slowly.”

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Economics & Policy

It’s a hard road to economic health

by Tony Hchaime
written by Tony Hchaime

In a highly publicized speech at the end of July 2004, Maronite Patriarch Cardinal Nasrallah Butros Sfeir called on the government to review the minimum wage in Lebanon (which currently sits at $200 per month, 40% lower in real terms, than the minimum wage of 40 years ago) and pleaded for improved living conditions, which are pushing thousands of Lebanese to seek new lives abroad.

Sfeir’s call for economic reform came on the heels of headlines splashed across the front page of leading newspapers that almost 90% of the Lebanese population falls below the internationally recognized poverty line – a statistic, released in the wake of Mercer Consulting’s equally gloomy March 2004 survey, which ranked Beirut as the 37th most expensive city in the world, the only city in the Middle East (aside from Tel Aviv) to place in the top 50. Beirut, it said, was more expensive than San Francisco, Frankfurt, Munich, Prague, and Athens.

There is some doubt as to how the particular economist came to this figure, because by global standards the fact remains that Lebanon is a middle income country, while 20% of the world’s population earns less than $1 per day. Still, the average income per capita stands at $4,500 per year, or less than $400 a month and if the average person spends a mere $10 per day on food and drink, 75% of the monthly income is already depleted, and this is not including an allowance for gas and transportation, utility bills, schooling, housing, medical care, and other household expenditures. Apart from low income earners, there is also the crippling unemployment rate, which has reached staggering proportions in the past two years. According to recent economic publications, unemployment hit 20% by the end of 2003, which translates into one fifth of the whole labor force, or around 350,000 Lebanese citizens. The unemployment problem is aggravated by the fact that there are a high number of foreign workers filling low-paying jobs.

So, with spending needs for the average Lebanese exceeding monthly incomes by up to 75%, most people are forced to mortgage their cars, homes, or other possessions. Seeing such a high demand and necessity for borrowing, banks were not slow to respond to this demand. With interest rates at around 12%, this is tantamount to kicking a man when he is down.

Based on total non-commercial lending figures from Lebanese banks, and the latest estimates of the country’s population, the average Lebanese carries a debt burden of $1,710, which is sufficient to cover only an additional $140 of spending per month. Still, bank borrowing has not reached the magnitude expected, considering such low levels of income, mainly because of numerous credit facilities offered on most, if not all, consumer goods.

But with lackluster economic growth plaguing the country for almost seven years and little or no GDP growth, it is certainly a wonder why the cost of living has become so high. One explanation lies in the economic policy instituted by Prime Minister Rafik Hariri and Finance Minister Fouad Siniora. After years of growing public debt and recurrent large budget deficits, Hariri desperately needed to come up with new ways to improve government finances. Not much could be done on the expenditure side, at least not without stalling infrastructure works, which led to the government’s two-ply plan to increase government revenues: taxation and broad privatization and securitization.

Numerous attempts to implement a privatization and securitization plan failed over and over again and so taxation became the ultimate tool to offset part of the high interest paid on the debt in the form of municipal taxes, value added taxes, taxes on telecommunication, taxes on (often unreliable) utilities, airport taxes, taxes on deposits and interest, taxes on energy sources with sky-rocketing costs, and the list goes on. At current taxation levels, between 20% and 40% of any bill paid on any type of good or service in Lebanon goes towards government taxes. Typically, around 40% of a post-paid cellular telephone bill is taxes. However, the level of taxes is not the only problem – the way the tax system is structured forces many Lebanese to pay taxes even if they are not generating income. In that regard, the Lebanese taxation system forces business developers to pay taxes on every dime spent on establishing a company or buying a store, beginning with construction, licensing, decorating, and lasting for months, and maybe years, before they even start operating. Another expense burden for the average Lebanese has been increasing gasoline prices. With taxes and government fees constituting almost 75% of fuel costs in the country, and international fuel prices more than doubling over the past two years, it was only a matter of time before people took to the streets in outrage this past May and June. The result? The government capped the price of a 20-liter tank of gasoline at LL22,300, of which over 75% still goes to the government in the form of fees and taxes.

Such an increase in energy costs has created a domino-like effect on prices of consumables throughout the nation, as rising transportation costs have filtered down to various necessity products. Although no official inflation figures are disclosed, financial and economic experts place the annual inflation rate in Lebanon at close to 5% in 2003 and 2004.

But, as if that were not enough to daunt the majority of the Lebanese population, electricity costs are at record levels in Lebanon, matching some of the highest rates in the world, but failing to match their quality and reliability. Furthermore, high-income Gulf tourists have been flocking to the country in massive waves over the past three years, resulting in a sudden spike in demand for housing, clothing, and food and beverages, which leads to corresponding increases in prices across the board – or, in other terms, INFLATION. The ultimate victims of such developments end up being the local residents, which (a) do not contribute to the price increase, (b) do not benefit from increases in income levels, and (c) still have to purchase these, now more expensive, necessities.

With such dire economic conditions facing thousands of university graduates at graduation, it is of no surprise to see a rising trend in the emigration of Lebanese graduates, as it is becoming increasingly impossible to find jobs, establish careers, build families, and secure enough income to live an average life with only the most basic of necessities. So yes, Beirut is certainly an expensive city to live in. But while Lebanon is far from being the only country in the world facing economic woes, the difference remains that governments in most other countries respond to the needs of the people by either providing subsidies, easing taxes to stimulate economic growth, raising the minimum wage level, or imposing regulations for cost of living adjustments, which would allow companies to compensate workers for any significant increases in the cost of living. In Lebanon, however, the lack of economic growth should, “in the opinion of the current and recent governments,” be compensated by raising taxes.

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Business

Just like mama used to make

by Anthony Mills
written by Anthony Mills

Naji Khairallah, owner of Fattoria del Sole (Factory of the Sun), Lebanon’s only producer of Italian cheese, prefers to preface the good news by recounting the bad. The story begins in 1997, when Khairallah, who had spent 30 years in Italy as an interior designer, and an Italian business associate were having dinner in a Beirut restaurant. “We asked for fresh mozzarella and the waiter brought us the yellow, imitation kind,” Khairallah recalled. “We thought: why don’t we set up a mozzarella factory here?” And so it came to pass. In its heyday, five years ago, Fattoria del Sole used to produce 20 different kinds of FORMAGGIO including MOZZARELLA, PROVOLONE, RICOTTA, and PECORINO. Khairallah employed 36 staff and turned over $50,000 to $55,000 a month. Then came disaster. Khairallah’s Italian partner was imprisoned for conning a Lebanese bank out of $1 million in bad checks. The factory had to close down for three years – during which Khairallah was hounded by debt collectors and lawyers, and lost a sizeable portion of his $500,000 investment.

There was however, a bizarre twist. While serving his three-year sentence, Khairallah’s former partner made friends with a fellow inmate who was due for release. The ex-partner told the inmate that he was appointing him director of Fattoria and ordered him, upon his release, to go to the plant and take over control from Khairallah. “One day, a guy shows up here, and without saying good morning orders me to hand over the keys of the plant and my car. I said: ‘Who are you?’ He said: ‘I am the new director, appointed by the Italian in jail.’ They were in the same cell together. So, I hit him. He came back 11 times, and each time I hit him. And then I closed down. The police came here 11 times and took me away. From the first time, I told him: ‘Every time you set foot here, I will hit you.’ But he kept coming back.” “I lost money and customers,” acknowledged Khairallah. “When we opened again, it was very difficult to reintroduce ourselves to the market. All the customers thought we might close again. We are still making up for the three lost years. It’s very hard. They were the worst three years of my life.”

Since the factory reopened in 2002, the battle to regain lost momentum has been an uphill one. Today, Fattoria employs only around seven staff, produces only five or six kinds of Italian cheese because it no longer employs an in-house Italian cheese production specialist, and turns over less than half its pre-closure revenues. But Fattoria del Sole is back. And despite the turmoil of the past, insists the brawny Khairallah from behind a large wooden table in a makeshift kitchen inside the plant, the future is bright. “I can do the work of 10 men,” he boasted. “No one can follow my pace. People thought we would close again within two months. Now it’s been two years, and we are growing.” Today, Fattoria enjoys a 70% to 75% share of Lebanon’s mozzarella market and 40% of the country’s Italian cheese market overall.

Khairallah has drawn a line under judicial proceedings related to his former partner, who is now back in Italy (the money he conned the bank out of was never retrieved). Khairallah’s lawyer has convinced him that a court case brought against him by a bank demanding repayment of a loan taken out as part of the initial Fattoria investment will remain bureaucratically bogged down for 10 to 15 years. And he has taken out another 7- to 10-year, 5% interest, $400,000 small-to-medium-sized industry loan to finance Fattoria’s rebirth. Within the next four to five months, he predicted, the factory should break even. This year, the plant is selling twice as much mozzarella and ricotta as a year ago. Revenue for 2004 is projected to grow by 40% over 2003. “I’m not worried,” he chuckled.

However, Khairallah tempers his optimism. “In the current economic environment, our strategy is to grow slowly,” he said. Fattoria has not resumed exporting – before its temporary closure, about 10% of its products were channeled to foreign markets. “It is important for us to grow again domestically. Then we can think about exports,” Khairallah said, noting that Lebanon has one of the highest per capita dairy product consumption rates in the world. Khairallah said he expected the market for mozzarella and ricotta, at least, to grow, but admitted that they only constitute 5% of the cheese market. “A lot of people don’t know what mozzarella, ricotta or provolone is,” he said. And any attempt to increase awareness of Italian cheese in Lebanon would have to rely on substantial advertising, Khairallah said. “I just can’t afford to do that.” Asked if he thought he would ever be able to sell Italian cheeses to small groceries, Khairallah responded: “Absolutely not, even though the Italian cheeses I produce are not much more expensive than the Arab ones. They don’t understand the difference between good cheese and bad cheese.” Fattoria supplies only restaurants, resorts, hotels and supermarkets. Under the current cheese market conditions, Khairallah agreed, a factory producing only Italian cheese would not survive and so two months ago, Fattoria began producing Lebanese cheeses, such as halloum and akkaoui. “The market for Lebanese cheeses is bigger,” Khairallah conceded. But Khairallah is finding competition in the Arab cheese sector stiff, particularly in the form of cheap Syrian imports. He implied that Syrian cheese importers were benefiting from an unwillingness on the part of the Lebanese government to protect Lebanese cheese producers. “It’s a pity that here in Lebanon we promote the interests of other people ahead of those of the Lebanese. Competition is not fair,” the Fattoria boss grumbled. He pointed to his high overhead costs – electricity, fuel, and telecommunications and compared them to Syria, where they are much lower. And he observed that while Lebanon allows Syrian cheese imports, Damascus has barred cheese imports from Lebanon. “It’s politics,” Khairallah remarked resignedly. He implied, as well, that some Syrian cheese importers might be compromising on quality. “I don’t understand how they can sell halloum at LL3,500 (about $2.30) a kilo,” he said, and suggested that the situation was being aggravated by the government’s failure to enforce quality regulation.

Another problem is the lack of regulation: of the 150 to 160 dairy factories in Lebanon, only about 25 have a license, according to Khairallah. The unlicensed ones are able to produce cheaper, inferior-quality cheese. And certain dairy factories in the Bekaa Valley use cheap, imported Syrian milk to produce cheese, putting plants like Fattoria – which uses Lebanese milk – at a further disadvantage, Khairallah said.

He said his Arab cheese market share wasn’t even 1%, although he expected the figure to grow because Fattoria’s low-salt Arab cheeses were attracting ever-more buyers. Fattoria keeps the salt content of its products down in part so they can be sold as light and healthy to an increasingly health-conscious clientele, but also, because according to Khairallah, there is a general demand for low-salt Arab cheese.

For the moment, Fattoria is still the only producer of Italian cheese in Lebanon. Khairallah doesn’t expect a domestic competitor anytime soon. He argued that this was because the necessary investment in machinery was prohibitively high. But in a country in which successful schemes are quickly emulated, the absence of Italian cheese-producing copycats may be a sign that not everyone shares Khairallah’s faith in the business. Fattoria must, however, compete with Italian imports – such as imitation (processed) mozzarella, which Khairallah plans to begin producing soon. It will be sold for use on pizzas and mana’eesh, and will allow Fattoria to tap into a market that is creating demand for between 1,500 and 2,000 tons of imported imitation mozzarella cheese a year. Fattoria mozzarella sells at less than half the price of Italian imports, and is better, because it is fresher, Khairallah said. “Imported mozzarella has a shelf life of one-and-a-half to two months. It’s not fresh. It contains preservatives. Our mozzarella has a shelf life of 10 days, and our ricotta five. We don’t add anything.”

Except perhaps, a bit of Lebanese determination.

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Society

Sex and the city, Beirut style

by Anthony Mills
written by Anthony Mills

This year, record numbers of Gulf Arabs came to Lebanon. They came for our cooler temperatures, terraced cafés, chic shopping, beaches, and late nights. They came to turn heads with flashy cars with tinted windows, shiny credit cards and designer clothes. They came to drink openly (or discreetly) in bars, clubs, restaurants, and cabarets. And they also came for sex. And while they were, on the whole, satisfied with what they got, some did complain that there weren’t enough hotel rooms, that the food and service in many restaurants was substandard, that telephone calls were scandalously expensive, that Lebanese shopkeepers were charging them outrageous prices, that the country’s internet service was ineffective, that water shortages were too common, that something had to be done about the traffic jams, that the shopping was better in Dubai, and that there were too many prostitutes in the hotels. But hey, you can’t have everything.

For their part, the Lebanese publicly celebrated the record arrivals and rejoiced at the funds that would funnel into the economy. But privately, they complained that the (mainly GCC) tourists, although cash-heavy, didn’t spend that much, quibbled while shopping and taking taxis and were unpleasant and disrespectful to the Lebanese who serve them, while a significant number sullied Lebanon’s honor by chasing anything in a skirt (or trousers). “Dealing with Gulf Arabs is unlike dealing with anyone else,” said one exasperated luxury hotel employee. “We can’t check them out before four, because they don’t get up before then. Cleaning up after them is a nightmare. They spill drinks, scratch the floor, and ruin the furniture. Once, they covered one of our most beautiful suites in narguileh smoke. They even covered the smoke detectors up and had a barbecue.”

But Abbas Mohamed, a 42-year-old UAE banker in Lebanon for a month with his wife and two daughters, said he and other Gulf Arabs were not always being treated decently either. “In Bhamdoun and Aley, 70% of restaurants are below standard. They place greater emphasis on the number of customers than on quality,” he said. “The shops increase prices to ridiculous levels for Gulf Arabs,” charged another disgruntled Gulf tourist, sitting on a bench in the new Ashrafieh ABC shopping mall (where curiously enough many of the outlets were on sale). Lebanon’s shopkeepers claim that over the last few years, the Gulf Arabs have become even more reluctant to spend like they used to. “They aren’t spending blindly, like in the eighties,” said Ziad Annan, director of the new Rolex showroom in the downtown. “Nowadays, they are a lot more careful.” Others disagreed. “It’s ridiculous. They sleep on money,” mocked a taxi driver. “They don’t respect us,” complained another. “They spend a thousand dollars on a hooker and won’t give us a dollar.”

He has a point. One 22-year-old “businessman” from the UAE, who had just emerged with two friends from a custom-made reflective silver Audi glinting in the afternoon sun, said his nine-day shopping bill would run at around $50,000. He and his friends are staying in a four-storey palace, complete with its own chefs, and have had another three vehicles flown over for their visit – a Mercedes MacLaren SLR, an SL55, and a Bentley. Some hotels reported bills of $500,000, settled directly by the guests’ banks. A prince staying at one luxury hotel was spending in excess of $100,000 a day, said a hotel employee. Jewelry has been the big-ticket item this summer. When EXECUTIVE visited Chatila jewelers to ask about summer business, one customer was inquiring about stones worth millions of dollars. Other Beirut jewelers confirmed that over 90% of buyers were Gulf Arab women, who when alone might spend a paltry few thousand dollars, but when accompanied with their husbands would shell tens, even hundreds, of thousands. “After all, the husbands are the bank,” quipped one jeweler. Another popular outlet is Abdul Samed Al Qurashi’s House of Aoud, Amber and Perfumes in the downtown, where vials of rare scents can fetch thousands of dollars, and a kilo of Indian amber retails for $35,000. Also fashionable are the $31,500, VERTU diamond-encrusted cell phone and the ever-popular Rolex watches – although gophers, sent to buy the prestigious Swiss time pieces for clients sleeping off the excesses of the previous night are politely sent away. “We don’t sell to pimps,” said the director of the Rolex showroom. But the pimps sell to others; and it is the world’s oldest profession that has stolen the show this summer. The big money has, and always will, go on the hookers.

“Our hotel has changed. All we need is a red light above our door,” complained an employee at one of Beirut’s most luxurious hotels. It was now impossible, she said, to control the flow of prostitutes in and out of the hotel. She claimed that the staff, such as housekeepers and valet parking employees, were providing prostitutes, pimps and drivers with the room numbers of single, male Gulf Arabs, who are then solicited by phone. Security guards, in turn, were being paid to let the prostitutes into the hotel. A taxi driver outside the hotel said drivers regularly arranged prostitutes for guests. “They say: ‘I can arrange anything for you’,” he said.

“I have seen this hotel change,” said a 29-year-old Kuwaiti tourist sitting in the lobby. “Over the last two years, it has gotten much worse.” He said prostitutes now roamed the hotel corridors, loitered in lifts, and knocked on the doors of single male guests, ostensibly by mistake, to make contact. “You can see them in the lifts. They are wearing tight clothes. They look at you in a certain way, eye you in certain places. They move from room to room, knocking on doors. Then they pretend they have made a mistake, but get talking to you. They say: Are you Ali? I say: I can be Ali, or whoever you want me to be.”

“Sometimes I have a massage,” he conceded. “And I take the ‘extra’ massage. After all, the massage must be perfect. You don’t cut something off half way through. But no sex,” he added quickly. He said he did frequent Super Nightclubs – cabarets at which meetings with prostitutes can be set up for the following day – every night, but only to relax and drink screwdrivers.

Two years ago, security wouldn’t let prostitutes into the hotel, he added. Now, he confirmed, they were doing so, in return for a cut of the prostitute’s earnings. Sometimes, he claimed, security would also solicit money from the prostitute’s client. They had done so to him. An employee of the hotel acknowledged that prostitutes operated in the hotel. “The reputation of the whole area is suffering. It is happening in all the hotels. But at the end of the day, it is a source of revenue for the country.”

An 18-year-old Saudi tourist standing next to his bright red Chevrolet Lumina in a downtown side street said he will spend around 20 nights in Super Nightclubs, and routinely meets prostitutes the following day – feeding a roughly $17,000-a-month holiday bill. Along with beaches, high-end nightclubs like Cassino, Crystal and Tempo, and the free flow of his favorite alcoholic drink, Black Label, Jounieh’s Super Nightclubs are the prime attraction in Lebanon, he admitted. The Super Nightclubs he frequents are packed with Gulf Arabs of all ages, many of them drinking, he said. Behind the wheel of a giant jeep he’d been hired to drive by Saudi tourists, a Lebanese driver spoke angrily of the shame brought upon Lebanese women who cater to the sex tourists. He claimed there was particular demand for virgins.

“Every night, the guys I drive around spend until six in the morning in the Super Night Clubs, drinking,” he continued. “They’ve been doing it for five weeks. They go to Jounieh, Kaslik, or Maameltein and spend thousands of dollars on prostitutes. It’s a shame Beirut has become a whorehouse.” He said that minibuses full of prostitutes pass by the Ain Mreysseh hotel strip, stopping just up the road. “Scouts” for wealthy clients then peruse the occupants, choosing those deemed satisfactory. “They cost $600 to $800,” he said.

A tourism ministry official, who asked not to be named, shrugged off the complaints: “Yes, [some] people, especially from the Gulf, come here especially for [sex]. But this kind of tourism is everywhere. And we have other things as well, like eco-tourism.”

For some Gulf Arabs, a trip to Lebanon also means enjoying a few drinks, but although they are emboldened by Lebanon’s more liberal mores, most drinkers prefer to be discreet. “They drink beer out of teapots, or whisky out of glasses wrapped in cloth. Sometimes, they leave their families at the table, come to the bar for a couple of beers, and then go back to the table,” the downtown restaurant employee noted. “It’s not the Lebanese they’re concerned about. It’s the other Gulf Arabs.”

Plus ça change.

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Bhamdoun’s mayor, Osta Abou Rejeili, likes to see himself as something of an enforcer. And while Lebanon’ sex trade may be booming elsewhere, he insists the mountain resort of Bhamdoun is strictly family oriented. “They know what will happen if they set foot here,” says Abou Rejeili, sitting a restaurant from which he surveys the town’s main shopping street, two-way radio in hand. “We have made it clear through action in the past. The road to Bhamdoun is blocked for people seeking prostitutes. There is not a single bar or Super Nightclub in Bhamdoun.” While he became uncharacteristically coy about what action had been taken in the past against suspected prostitutes, Abou Rejeili is nonetheless determined to maintain the secure family environment he says is the secret of Bhamdoun’s success in attracting ever-increasing numbers of Gulf tourists. He has employed a host of undercover security officers to safeguard an atmosphere, which allows women and children to stay out safely late at night. A few weeks ago, an undercover squad observed a man verbally harassing a female tourist. “He got what he deserved,” declares Abou Rejeili. “They didn’t break his neck, but they roughed him up real good – not a little bit – real good, in front of everyone, to set an example. Then he was handed over to the police, and deported. We mean it. We will never allow anything to disturb our way of life here. We are on full alert. Our eyes and ears are everywhere.” Abou Rejeili acknowledges that his undercover forces had no written mandate to act as law enforcement officials and detain, let alone “rough up” troublemakers. But he says he had a verbal understanding with all the security services allowing his forces to act in such a manner.

Other forms of “unacceptable behavior” are also not tolerated. “One guy was walking along with his elbows out. He nudged a girl. I stopped him. I said: ‘Keep your arms down. This is a public street.’ If someone is walking along in a tank top, we ask him to change. If he’s carrying a beer we ask him to go and drink in a café.”

On the street, the effect of Abou Rejeili’s security regimen is palpable. A 46-year-old Saudi tourist, in Bhamdoun with his family for the 6th or 7th year running, said: “Saudi Arabia is very safe. But it is even safer here. I feel as though everyone is a policeman.”

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Economics & Policy

Beware of stockbrokers bearing gifts

by Faysal Badran
written by Faysal Badran

In November 2003, EXECUTIVE predicted that the revival in stocks would prove ephemeral (‘Happy Days?’, November 2003), stressing that technical and even fundamental factors would prevent a genuine new bull market from developing out of the ruins of the old. Furthermore, the dizzying move up from October 2002 appeared to be mostly a corrective move up within a secular bear market. After a sharp speculative blip in 2004, the stock indices have rolled over showing negative returns for the year, and leaving many Wall Street analysts and most economists quizzical. The reality is hope of recovery does not a recovery make. In fact hope, in matters of money, is a fatal ingredient.

What we are witnessing now is the return of the bear market in full force. Pundits and most commentators, especially ones that want to take your money away, seem focused on many issues to highlight that in their view, stocks are a decent investment at these levels. They go through a litany of reasons, and the talking heads of CNBC attempt to reinforce these views on a daily basis. Once again, do not believe the hype and look at some current themes, which seem dear to the hearts of those who advocate investing in stocks with reckless abandon and focus on the technical aspect of the market – ie, looking at the internal dynamics of price, volume, and sentiment. In that area, it’s quite simple: price has broken down, volume is abysmal, and sentiment is still way too hopeful that help is on the way. All three major indices are below their key 40 week moving averages. The recent Google IPO goes a long way to show that, despite the reduced pricing range, people are still keen on bubblenomics. As has been written AD NAUSEUM, for stocks to be truly making a long term bottom, the speculative juices need to be all but gone, investors should not be afraid to buy, valuations need to be at historical bargains, and there should be technical support. None of these factors exist, not by a long shot. With regard to arguments of valuation, a picture is worth a thousand words. The four charts depict various measures of valuation of stocks versus historical norms, going back in some cases to the early 1930s. As you can clearly see, we are nowhere near a level, which can be considered a bargain; in fact, we seem to be in a “Bubbble II” phase. Many things seem to be missing from the argument that the US economy is improving. It has long been held that the economic recovery was unsustainable and would begin to fade once the massive stimulus from fiscal and monetary policy receded. That appears to be what is happening now as evidence of widespread economic weakness continues to accumulate. While the vast majority seems so certain that we are merely going through a “soft spot,” the recovery may be faltering more seriously than expected. While the rising price of oil is being singled out as the major villain, it is more likely just a catalyst that is exposing an economy that was already beset with major structural imbalances that made a normal recovery cycle untenable.

The evidence of softening is no longer anecdotal, but is now widespread. Consumer spending was down 0.7% in June and up only 1% in the second quarter. June retail sales were down 1.1% and down 0.2% ex-autos. Year-over-year chain store sales in July were up only 3.1%, the lowest in a year. Mortgage refinancing that resulted in hundreds of billions of dollars of cash-outs are more than 80% off last year’s peak. July employment was up only 32,000 while the June number was revised down to 78,000 from 112,000. More importantly, in 32 months of recovery since the official recession bottom employment gains have exceeded 200,000 in only three of these months. If this were an average recovery, the monthly average increase should have been about 322,000 per month for the 32-month period. In addition, wages and salaries have made up an unusually low percentage of disposable income, meaning that consumer spending was heavily dependent on non-wage sources of income such as capital gains, rising home prices and tax refunds.

The list goes on and on. GDP was up 3.0% annualized in the second quarter, the lowest of the last five quarters. Construction spending was down 0.3% in June after rising 0.1% in May. Non-defense capital goods orders, excluding aircraft, were down 2.8% in the three months ending June 30. The Conference Board leading indicators were down 0.2% in June, while the smoothed annualized growth rate of the ECRI weekly leading index was up only 0.1, down 9 percentage points since April. M2 growth on a year-to-year basis was up only 3.5%, the slowest in nearly a decade. June industrial production was down 0.3% in the US, 0.7% in Italy, 1.3% in Japan, 0.3% in the UK, and 1.9% in Germany. These nations account for 60% of world GDP. The fragility of the economy is a result of the structural imbalances left over from the late 1990s bubble. These include the twin trade and budget deficits, the extremely low consumer savings rate and record consumer debt. These imbalances were not only uncorrected, but were actually exacerbated by extremely aggressive monetary and fiscal action since that time. With the stimulation winding down, the fragile economy is sensitive to any outside negative catalysts that come along. One cannot deny the importance of oil prices to the economy – considered the straw that broke the camel’s back – and that the current economic malaise is due to the underlying structural imbalances, which need to be resolved before a truly sustained recovery can get underway. While oil is obviously important, and short-term market movements have mirrored oil prices, any substantial decline in energy prices will not produce anything more than a brief rally. The irony of the current stock market situation is that with the market completely focused on oil prices, the possibility that such prices could peak and decline may have actually discouraged further selling, and may have kept stocks from collapsing. After all, if the Street believes that oil prices are close to a peak and the economy is in fine shape, why sell stocks? In this sense, it is a lot easier to blame the depressed market situation on a temporary oil price rise than to face the fact the economy has serious secular problems that are not subject to easy solution.

One of the most dangerous arguments, or advice, being put forward to encourage people to buy or stay in stocks is that there are no alternatives, and that cash is trash. The best way to address this point is by pointing out that most meltdowns in stocks (most recently the Japanese Nikkei collapse from 1989) occurred during a period of falling interest rates, and when the perception was that cash is not rewarding. Cash is not trash, it is the most relevant asset class in the current environment, especially that bonds are not too safe from a real, inflation adjusted, rate of return point of view. As for all you Nasdaq lovers, comments by tech managements are so numerous and so much alike in their analysis of conditions that the disappointments have to be industry-wide rather than company specific. From a technical perspective, see the chart below. Individual investors should play it safe, as stocks are highly vulnerable and the downside shock could occur at any time.

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Business

Vex, lie and videotape

by Michael Young
written by Michael Young

Arguably the best-publicized political-cultural phenomenon of recent months has been the release of Michael Moore’s Fahrenheit 9/11, a pseudo-documentary whose purpose, the director, has affirmed, is to remove President George W. Bush from office. While there is much to dislike in the film, from its tendentiousness to its glaring non-sequiturs, it is one of those works that raises a host of disturbing questions about the boundaries of free expression.

The first is whether a film openly touted as a political bludgeon can be a reliable statement on the Bush administration’s policies toward the war on terrorism and Iraq? While documentaries need not be impartial toward their subject matter, they do enjoy an atypical veneer of objectivity by virtue of their supposedly filming reality. Fahrenheit 9/11 was provided the added advantage of being awarded the Palme D’Or at Cannes, effectively endorsing the film’s artistic credibility. But is this credibility merited? Partisans on either side of the Moore divide will not convince each other of the worth or worthlessness of so divisive a film. However, there is one benchmark that both sides must be sensitive to: the internal consistency of the film. And by that yardstick, Moore has failed: in the first half of his film he posits that the Bushes have been in the Saudis’ pocket for years (an allegation initially made by journalist Craig Unger in his House of Bush, House of Saud, while in the second he traces the administration’s entry into the Iraq war. The two are implicitly linked in Fahrenheit 9/11, yet Moore never examines whether the relationship is legitimate. In fact, he cannot overcome a flagrant contradiction: if Bush is a Saudi stooge, why did he go into Iraq, a move the Saudis found deeply alarming, and that was to a large extent designed to wean the US off the Saudi oil teat?

Moore provides no explanation, and the absence of one has led critics to pan the film as “propaganda.” But the marketplace does allow propaganda (after all what is advertising?), though it also encourages an informed public to differentiate between the truth and lies. Has the American public been discerning? According to a recent poll by McLaughlin and Associates, a conservative polling firm in the US, a majority of likely voters didn’t have to be, since 87% of them (from a sample of 1,000 respondents) had not even seen Moore’s film. Nor was that just because Bush supporters boycotted Fahrenheit 9/11 in droves. Of likely John Kerry voters, a very high 78% had also not seen the film, while 81% of Nader voters had not either. In other words, even among the electorate that embraces Moore’s message, Fahrenheit 9/11 had a limited impact. A second aspect of Moore’s film that has raised alarm bells is his often-manipulative depiction of individuals he doesn’t like, or of the implied villains of his tale. At the start of the film, for example, Moore shows Bush and various other administration officials in embarrassing situations, usually while grooming themselves for a television appearance. Most famously, Deputy Defense Secretary Paul Wolfowitz is shown sucking a comb so that he can plaster down his hair. While the shots are amusing, they are also cheap, since no one ever looks good in the hands of a political foe. However, that’s fair game in a propaganda film. Far more disturbing is the way Moore depicts the Saudis. He plainly pushes negative cultural buttons in his American audiences with regard to Arabs. In a commentary on the film, Turi Munthe, the Daily Star’s book editor wrote: “A long sequence in the central section of the film is intended symbolically to show how the Bushes and their men have metaphorically made a pact with the ‘Saudi devil,’ as Moore runs in succession two-dozen clips of George W. Bush, his father and their advisors shaking hands with brown men in Keffiyehs.”

For Munthe, there “is not a single ‘good’ Arab in the film, barring the charred bodies of Iraqi women and children who serve only as anti-Bush scarecrows.” For him the Arabs in Fahrenheit 9/11 are victims of friendly fire, “the kind that essentially kills the very people it is intended to cover.” There is truth there, as anyone who has seen the film can confirm, though Moore would deny it. Yet in his anti-Bush crusade he is single-minded in his destructive ambition, where all weapons, even the manipulation of cultural hostility, is acceptable. But is it acceptable? Even admitting it is, and many would disagree, the 12% of voters who have seen the film would do well to do what any market imposes: learn more about the product to see what part of it is counterfeit.

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Economics & Policy

On the edge of oblivion

by Nicolas Photiades
written by Nicolas Photiades

Fitch, the powerful international rating agency, warned in July that Lebanon risked being downgraded if the government failed to act on its much promised monetary reforms and privatization, the two conditions that determined the Paris II donor conference. While the first condition has been more or less met, the second has been postponed ad vitam eternam, while politically, a consensus of complete stagnation has been reached, and will remain, until after the presidential elections.

So, while the Lebanese party through the summer, the bottom line is that the country is still teetering at the edge of the abyss and remains the laughing stock of the international capital markets and investors. Its B- rating is shorthand for the fact that we are one step away from default and collapse.

Lebanon’s credit rating (which determines the country’s ability to repay the principal on its debt and service interest) has stabilized to B- (by Standard and Poor’s) and B2 (by Moody’s) since 2002. When the country was rated by these international rating agencies for the first time in the mid 1990s, the rating was not significantly higher and was below investment grade anyway, at BB- (S&P) and B1 (Moody’s). As of 1994, when Lebanon became a successful and frequent bond issuer, the necessity for a credit rating was imperative. International investment banks and the global capital markets needed a rating in order to accurately price the bond issues that were sold to institutional investors world-wide, and benchmark them against issues made by other countries.

Lebanon’s sovereign credit rating is one of the lowest of the world. Indeed, only Bolivia, Suriname, Uruguay and Venezuela have a similar rating on S&P’s scale, while Argentina, the Dominican Republic, Ecuador and Paraguay are rated below B- at CCC and selective default (SD) levels. The remaining 106 rated countries all have credit ratings above B-, including Mongolia (B), Pakistan (B), the Philippines (BB), Ukraine (B), Benin (B+), and the Cook Islands (B+). With a higher credit rating, these countries can borrow slightly more cheaply than Lebanon, which is at the top end of the table in terms of credit risk. Lebanon’s B- rating signifies that the country “generally lacks characteristics of the desirable investment” or is a country where “significant credit risk is present, but a limited margin of safety remains.”

As we all know, the reason for Lebanon’s low rating stems principally from its large fiscal deficit and public debt burden, which accounts for more than 180% of GDP and is the highest amongst rated countries. The fiscal deficit, at above 10%, is also regarded as high and has not shown signs of going below the 10% mark for some time. Furthermore, the country’s external financing or liquidity remains heavily strained, despite the Paris II. Lebanon has not delivered on its promises and therefore cannot expect aid from foreign governments and institutions such as the World Bank or the European Investment Bank. Moreover, the central bank is believed to have little if not negative net foreign exchange reserves, which can only be replenished with external, non-debt, capital inflows.

Another reason for the country’s low rating is the uncertainty surrounding the government’s ability to generate additional revenues (despite the introduction of the VAT) and diversify the economy. But the most serious reason, which triggers a negative reaction from rating agencies, is the political infighting that has been plaguing the country’s economic reform efforts for more than six years and which has brought about a substantial drop in confidence from international investors. In other words, the outside world sees Lebanon as having too much debt, insufficient revenues and lacking political will. The rating agencies see Lebanon’s strategy to raise funds to finance its fiscal deficit as backfiring. By raising public debt to unsustainable levels, the government has become highly reliant on attracting investor funding to Lebanon, and has also become extremely vulnerable to external conditions. Indeed, if the world’s capital markets experienced a downturn and the flavor for emerging market debt once again disappeared, the government would not easily be able to turn to local banks, saturated with Lebanese government debt securities. This financial flexibility will then be substantially weakened, and the credit rating may then go below the single B bracket. The most immediate and obvious consequence of a low credit rating is the high cost of borrowing for Lebanon. International capital markets determine the price of indebtedness (or the level of interest) according to how risky the borrower is, and the credit rating assigned by internationally recognized and accredited rating agencies, such as Standard and Poor’s (S&P), Moody’s and Fitch, is used by these markets as the symbol that distils all credit information into a single letter and as a benchmark, according to which pricing is determined. Lebanon’s B- rating means that the cost of borrowing is extremely high, not only for the government, but also for the whole economy, which has to align by the benchmark set up by the government’s rating. If Lebanon is downgraded further, the cost of borrowing for the state would increase by 200 basis points (2%). Therefore, Lebanese Eurobonds would carry a coupon of around 520 basis points (5.2%) over US Treasuries, compared to the current spread of 340 basis points. If on the other hand, Lebanon were to reach the holy grail of investment grade (probably not in our life time) and get upgraded to BBB level, it would pay 200 basis points less than it currently pays, or a spread of around 140 basis points over US Treasuries (similar to Mexico, which is rated BBB- by S&P). Simply put, the government would have more money to channel into growth projects. At the moment, the high cost of borrowing, coupled with the high level of indebtedness has forced Lebanon to direct most of the country’s revenues into debt servicing, leaving virtually nothing to fund badly needed growth projects. The low credit rating firmly embeds Lebanon amongst the world’s third world countries, and puts the country on an equal footing with some pretty mediocre nations.

An even worse case scenario would be the discontinuing of the country’s rating, which would cause the cost of borrowing to shoot up to astronomical levels. Raising funds at whatever the cost would be extremely difficult, and the global capital markets would completely marginalize Lebanon. We would be the Phnom Penh, rather than the Hong Kong, of the Middle East.

So what to do? First and foremost, the country needs to establish political stability. Rating agencies loathe politically unstable sovereigns and have frequently stated that Lebanon needs to establish a consensus within its fragile political coalition. The public and investors alike need to know that there are no more political conflicts within the ruling coalition and that there is a clear and firm intention to carry out an efficient recovery program. Second, social stability must be solidified. The strengthening of democracy and transparent governmental efforts to create jobs and slow down the country’s brain and youth drain are vital. The government today is ignoring this issue and is focusing instead on fiscal and monetary economics. Ignoring social economics has been a major error.

Third, Lebanon must navigate skillfully in very rough regional and international diplomatic waters. The regional environment has never been worse, and the country cannot afford a faux pas if it wants to carry out an efficient fiscal, monetary, and social economic adjustment program. Fourth, the Lebanese government must finally carry through on its promises to revive a moribund privatization and reform program. Until now, Lebanon has been sluggish at best in its attempts to carry out privatization. As regards to the latter, the timing is awkward: emerging market initial public offerings (IPOs), an essential method through which a successful privatization is made, are virtually dead, whilst strategic institutional investors are either not attracted by the Lebanese market or simply have too many problems of their own to contemplate investments overseas. In addition, factors such as divisive domestic politics, the unclear and most often deteriorated financial situation of companies to be privatized, labor union staunch resistance and endemic disputes between the government and the rare foreign bidders, make privatization an insurmountable task.

It is therefore vital for the government to start using securitization tools to restructure public entities that are candidates for privatization, in order to make them more attractive to increasingly choosy foreign bidders, and carry out successfully a couple of privatization transactions. This would kick start the privatization program in a serious manner, show a clear political will, and bring in much needed cash into the coffers (the partial privatization of the telecommunications and the electricity sectors could very well bring in revenues in the range of $2 billion to $3 billion).

Last but not least, the Lebanese government should actively explore the growth route. A clear option for the Lebanese government is to grow itself out of a debt trap. The rating agencies always preach for the diversification of revenues and for the protection of cash flow. Lebanon has lost sight of its growth-orientation and has focused more on fiscal and monetary economics. The introduction of the VAT and attempts to boost the tourism sector are moves in the right direction, but remain insufficient. The government should seriously tackle the strengthening and the restructuring of existing inefficient sectors to further boost government revenues.

The communication of a clear political will and commitment as regards to privatization and securitization to the world financial community, the execution of a large, immediate and transparent privatization, and more importantly the immediate halt in the political infighting and the announcement to the world’s diplomatic community that all is well within the triumvirate, are merely quick ingredients for a small upgrade. However, the BDL’s monetary tools have bought the country some time, but are insufficient and cannot be sustained without parallel reforms and privatization. However, the BDL could also crack down on inefficient banks and restructure and “specialize” the financial sector, and get permission to use the idle $4 billion worth of gold reserve (either sell it partially or obtain cheap funding with it as collateral). These are only the immediate steps that need to be taken by the Lebanese government, in order to stabilize the current rating situation. If carried out efficiently, together with the provision of much needed financial aid, Lebanon would probably move up a few notches on the rating scale. But it would take much more efforts by the country in the long-term to attain the elusive investment grade rating (BBB).

You have been warned.

Nicolas Photiades is an independent financial adviser on financial, capital optimization and strategy.

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The bigger picture

by Yasser Akkaoui
written by Yasser Akkaoui

No matter how much it hurts to see the constitution tinkered with, the extension of the presidential mandate should not be our main problem. At the end of day, these minor maneuverings (and they are very minor) are inconsequential in the region’s grand scheme, one that is driven by the heady whiff of economic rewards for those who fall into line. Lebanon is small country with a big debt, a Middle East backwater, driven by self-interest. We are missing the bigger picture.

Whatever they might think, our politicians are not real players. There is not one who bestrides the regional, let alone world, stage, so let’s drop the posturing and get on with the job at hand: getting the country out of its economic misery by creating an environment of political cooperation and consensus and setting an example of hard work and selflessness.

Instead of arguing over whose people get what jobs, we should argue over how to draft the national economic recovery program. National unity should replace personal greed and a ministerial portfolio should be a privilege, rather than an opportunity to build a pension plan.

This is the only way to regain the confidence of the international community. They know our leaders are high-profile, low-caliber operators. They will not be impressed with the imposition of a new presidential term however competent the incumbent and they will want to see results –privatization, transparency and civil service accountability to name a few – before they grant further soft loans.

Lebanon went to the last donor conference in Paris, took the money and left. Paris III is now mission impossible. The international community, now bitten will be more than shy; it will be downright obstinate before Lebanon’s whiny supplications. If we were to stand any chance of getting help, it was going to take a wholesale shake-up of our political landscape and this does not look likely given the perpetuity inferred by the presidential extension, hence the need for a genuine demonstration of willing to correct our economic woes.

And let us not forget the likes of Fitch and Moody’s, which will be carefully scrutinizing their rating of Lebanon. Political infighting was always seen as an entry in the negative column. If it gets any worse in the light of this recent edict, they will no doubt be swift to act.

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