Economics & Policy

Wishing for a miracle

by Tony Hchaime
written by Tony Hchaime

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

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

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

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

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

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

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

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

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

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

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

Reforms introduced through Siniora’s draft budget

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

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

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

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

The public debt

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

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

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

Interest Rates and the Lebanese Pound

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

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

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

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

So now what?

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

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Real Estate

Student housing: A booming market or a bad investment?

by Marianne Mirabeau
written by Marianne Mirabeau

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

Taking their business elsewhere

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

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

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

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

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

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

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

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

Hard to break even

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

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

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

Supply at risk of exceeding demand

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

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

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

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

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

An ever expanding student population

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

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

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

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

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

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

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The Buzz

Emotional intelligence and the mood of your organization

by Tommy Weir
written by Tommy Weir

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

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

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

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

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

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

Sample EI test questions include:

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

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

3. Are you open to candid feedback?

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

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

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

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

Ask yourself these further questions:

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

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

Is it too late to learn? No!!

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

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

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


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

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Comment

Mutton dressed as lamb

by Yasser Akkaoui
written by Yasser Akkaoui

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

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

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

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

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

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Real Estate

Small is beautiful: Boutique hotels are in

by Anthony Mills
written by Anthony Mills

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The $7 million hotel

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

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

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

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

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Business

FNB reaches for the top

by Thomas Schellen
written by Thomas Schellen

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

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

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

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

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Economics & Policy

Go West or East young bank

by Nicolas Photiades
written by Nicolas Photiades

Banque Audi’s recent move into Jordan is much more than just a reflection of Lebanese pioneering tradition. Lebanon’s dire economic situation has affected the quality of loan portfolios and domestic placement opportunities and has forced many of Lebanon’s leading banks to look beyond their borders to diversify assets, improve the quality of profits and revenues, and rely less on a stagnant local economy.

Indeed, in the last ten years, banks such as Société Générale de Banque au Liban (SGBL), Byblos Bank, Banque Audi, BLOM, and Lebanese Canadian Bank have either purchased banks in neighboring countries, set up joint ventures with local banking groups in these countries, or established branches abroad. SGBL was the first to show interest in Jordan and purchased a small Jordanian bank in the late 1990s (Middle East Investment Bank), while Banque Audi recently followed suit by obtaining a license to open branches there. Audi has already opened three branches in Jordan, and has an objective of opening up to ten branches, while BLOM has also obtained a branch license in Jordan. Meanwhile, Byblos Bank has set up a banking subsidiary in Sudan, and Lebanese Canadian (LCB) has purchased a minority stake in a local Sudanese bank. LCB even set up a full branch in Canada to cater for the 300,000 strong Lebanese community there and ultimately aims at obtaining a full banking license from the Canadian Authorities. Finally, Fransabank has expressed a keen interest in opening a branch in Algeria.

While branches are being opened willy-nilly throughout the region, many Lebanese banks have been keeping an eye on the development of the Iraqi banking sector, where potential is significant. It is only a matter of time before Lebanese banks start sniffing around Baghdad and other main Iraqi cities for opportunities. The Iraqi banking market has around eighteen private banks, and almost as many government owned banks, with the private banks having all been set up during the embargo years by local merchant families. These are now all keen to develop their banking franchise and have expressed clear intentions to hook up with fellow Arab banks, mainly as a means to acquire expertise and banking know-how. Lebanese banks have been particularly favored by Iraqi bankers, who are said to be impressed with their technical capabilities and banking traditions. A number of Iraqi banks have made it clear to Lebanese bankers that they would be ready to give up 49% of their capital (which is the regulatory maximum for foreign stakes in Iraqi banks) to Lebanese banks, as well as the management. Although the security problem in that part of the world still hampers any efforts to establish banking operations, and the greed of some Iraqi bankers as regards to their selling prices is a major obstacle, Lebanese banks will certainly start making acquisitions there in due course.

Other countries such as Egypt and Algeria also appear to be interesting for Lebanese bankers, who would definitely have a clear qualitative advantage over their local peers, particularly with regards to Algeria. The latter is very similar to Syria, in that local banks have little or no sophistication in a country that sticks out as one of the richest in the Arab world in terms of natural resources. Moreover, the corporate, project finance and retail banking sectors are just crying out for more sophisticated financial institutions located on-site. However, Algeria’s banking environment is still severely hampered by insufficient and antiquated regulations, and transparency and disclosure standards remain light years behind those of Lebanon. The old socialist or even Soviet-style banking sector is still in place despite almost complete decrepitude, and the Algerian authorities have a significant amount of work to carry out before transforming Algeria into a gold rush destination for Lebanese bankers. Setting up a branch there as a first step would not be a bad idea though, as it would give the bank in question time to gauge the market, establish a list of what is needed in terms of regulation, and even get opportunistic in terms of project financing and retail banking.

Egypt is a different proposition, in that it is the most populated Arab country and has a very solid industrial and corporate base, which is also characterized by a strong track record. Gaining market share, even small, in the Egyptian corporate sector would be a major revenue boost for Lebanese banks, and would allow them to diversify away from the limited and small Lebanese corporate sector. However, Lebanese banks have to bear in mind that, despite Pharaonic efforts by the Egyptian central bank to improve regulations and supervision, the banking sector remains characterized by a weak financial profile of the country’s banks – particularly with regards to public sector banks – due to a weak operating environment and to a slowdown in the economy and in structural reforms that started in 1998. A challenging economic situation and regional uncertainties, combined with weak industry fundamentals, are expected to keep the banking sector under significant pressure in the medium term, especially considering that most Egyptian banks are not well equipped to face unexpected shocks.

For the moment, the Egyptian banking sector suffers from poor underwriting skills and asset quality, low profitability and under-capitalization of the state banks (the four largest banks in the country) and of some of the private banks, a low level of automation, underdeveloped risk management systems, low level of disclosure and high reserve requirements, which hamper efforts to spend in other areas where investment is urgently needed. The experience of Jammal Trust Bank (JTB), the only Lebanese bank to have courageously ventured into Egypt in times of state dominance, should serve as a good example to other Lebanese banks with expansion thoughts in this particular market. JTB has been consistently asked by the Egyptian authorities to provide substantial amounts of capital and employ unnecessary staff (including elevator attendants and an army of makers of bad coffee).

Lebanese bankers, however, could take heart from the recent efforts in terms of regulation, as well as from the abysmal state of the local competition. A market share can be built in Egypt, provided that efforts to expand there are supported by significant financial and operational resources, and extra-competent management. Indeed, competition from the few private banks, particularly on corporate banking, should be tough.

The Syrian market has also attracted a lot of interest from Lebanese banks, since the opening up by the Syrian authorities of the local banking market to foreign banks, with Lebanese banks being particularly favored. BLOM, SGBL, BEMO, Byblos, Fransabank and Bank of Beirut have opened branches there, with Bank of Beirut even setting up a joint venture with Emirates International Bank and Qatar Islamic Bank. The Syrian market offers significant potential to Lebanese banks, which are more comfortable with this market than foreign peers. Exposure to Syrian customers has been substantial for Lebanese bankers for decades, and it is a question of the Syrian authorities developing and improving the regulatory environment before Lebanese banks start cruising in this market.

With its population of 15 to 17 million, and its growing industrial base, Syria offers interesting potential on both the retail and corporate banking sides, although there is still a lot of work to be done on the Syrian side. Indeed, not only does the country need to be rated, but banking regulations have to be significantly developed to look at least similar to those that already exist in Lebanon, while transparency, accounting standards and other important regulatory and supervisory pillars are far from being ideal.

The advantages of establishing branches or fully authorized banks abroad are multiple for Lebanese banks, with the most obvious and important being the opportunity to diversify revenues, assets, funding and capital. For the moment, Lebanese banks are constrained by the high risk offered by their economic, political and social environment. The Lebanese government’s rating is so low that it does not do justice whatsoever to the domestic banks and the banking authorities, which have worked hard in the last few years to develop a solid regulatory environment and strong internal infrastructures (risk management, treasury, banking products, etc.). This hard work is now being cancelled out by a weak and volatile environment, which is forcing banks to seek for profits and size elsewhere. The existence of large, and relatively under-developed fellow Arab countries, virtually next door, is encouraging for Lebanese bankers, who see clear expansion opportunities.

By developing and expanding into other countries, Lebanese banks would gradually cancel out the low rating tag of the Lebanese government, and would be less reliant on a unique source of income and funding (deposits). They would slowly develop into regional financial institutions, and if European and North American activities are also developed (like they should), some Lebanese banks could gain international status as well as start to be considered as universal banks. In other words, getting to become another Arab Bank would most probably be the key objective for a Lebanese bank. Jordanian based Arab Bank is one of the largest banks in the Arab world, and is one of few banks world-wide to benefit from a rating that far exceeds that of Jordan (Arab Bank has a rating that goes beyond the investment grade level as compared to the Hashemite Kingdom of Jordan’s current rating of B+). This is due to Arab Bank’s significant presence in France, the UK and Switzerland (all AAA rated countries), which dwarfs the bank’s total asset levels in Jordan, and consequently produces substantial and permanent Euro and US dollar revenues that flood into the bank’s coffers from stable and strong economies.

Finally, it is worth noting that the development of French, Swiss, US and other activities located in developed economies is not an impossible task for Lebanese banks. These institutions have the possibility, similarly to other Turkish and Middle Eastern banks, to bring their operations in the West up a level or two, by gradually entering parts of the local markets (e.g. syndicated loans, government securities trading, etc.), where they can reap some benefits. Acquiring local expertise would be one way to develop their presence in Western countries, which would be key in placing Lebanon in the map of countries with innovative and pioneering banking expertise.

The Phoenician spirit

During the civil war period, several Lebanese banks made the strategic decision to establish sister banks to the ones already established in Lebanon in countries such as France, Switzerland and Belgium and even the US. These sister banks had more or less the same shareholders as the Lebanon-domiciled banks, and were fully authorized by the French, Swiss, Belgian and US central banking authorities. The aim of these foreign entities was to channel Lebanese savings out of Lebanon in times of war and to cater in terms of banking services to the Lebanese communities, who had sought refuge in these countries.

Most Lebanese banks, which had set up sister companies overseas, still keep their foreign operations in place today. Indeed, BLOM has a successful sister bank of appreciable size in France and Switzerland (Banorabe), while Banque Audi has a fully authorized banking institution in Switzerland, which has succeeded in twenty five years to carve itself an interesting little niche in private banking. Audi also has a solid presence in New York, and even had at one stage an outfit in Los Angeles, that was sold in the mid 1990s. Other Banks, such as Byblos Bank and Banque Libanaise pour le Commerce (BLC) also saw, at an early stage, the importance of establishing domestically authorised banks on foreign soil. While Byblos chose Belgium, BLC chose to open four branches in the United Arab Emirates. A certain number of Lebanese banks also followed suit in the 1970s by establishing branches or fully authorised banks in other countries, such as Banque Saradar and Fransabank in France, or Jammal Trust Bank in Egypt.

Today, the reason for setting up shop elsewhere is aimed principally at following a new breed of Lebanese economic immigrants. While the objective to escape from Lebanon is still present, this time it is more to flee from an inhospitable economic environment rather than a war. The reasons, for overseas expansion are now dominated by different parameters, of which the most important remains the diversification of revenues away from a very risky domestic economic situation.

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Special Section

Convergence and synergies happy hour

by Thomas Schellen
written by Thomas Schellen

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Money Matters

by Executive Contributor
written by Executive Contributor

Capital Intelligence Raises Shamil Bank’s Rating to BBB-

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

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

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

Country Profile: Jordan

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

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by Executive Contributor
written by Executive Contributor

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

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

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

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

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

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

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

Cool heads (if they stay on) prevail

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

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

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

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

A tough financial run

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

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

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

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

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

Growing mini cards

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

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

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

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

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

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

Banking on Lebanese films

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

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

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

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

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

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

Competing over Martyrs Square

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

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

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

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

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

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

A diplomatic advertiser

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

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

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

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

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

We can use more education

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

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

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

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

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

The perils of cheaper gas

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

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

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

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