Business

Q&A Samih Barbir

by Executive Contributor
written by Executive Contributor

Lebanon’s Investment Development Authority, IDAL, figures twofold in the task of promoting the national agriculture and agro-industry sectors. Under the 2001 investment law 360, the agency offers incentives to investments into strategic sectors of the economy, including agriculture and agro-industry. For the past three years, the IDAL mandate also extended to supporting agricultural exports through the Export Plus program offering farmers transportation subsidies and quality certification for produce. In February 2004, IDAL and the nation’s agro-industrialists signed a collaboration for an Agro Market Access Program (Agromap). EXECUTIVE talked to IDAL chairman and managing director, Samih Barbir, about the agency’s achievements and plans in relation to the agro sector.

Where does IDAL set its priorities in supporting agriculture and agro-industry?

In Lebanon, we don’t have large volumes in agricultural production. Therefore, our main priority is quality. The successful experience of Export Plus of having two international firms implementing quality control has proven to be a very important factor in marketing Lebanese agricultural products abroad.

When you discuss Export Plus as a success story, where are the highlights, and what are the areas still in need for development?

The level of success is simply the fact that we witnessed an increase in our exports. In the first year, it was a big increase of 15%, in the second year, 5%, and last year, it was stabilizing. But one has to look at it in a different way. Before the launch of Export Plus, we were on a downward slope. Exports were dropping and the whole sector was suffering a lot, due to many problems. Maintaining a stable level of approximately 360,000 tons in exports per year is a success in itself. We experienced some additional difficulties, such as some bad weather hitting Lebanon over the last two years, the devaluation of the currency in Turkey and the war in Iraq, all of which affected our export markets.

In your statistics, 99% of agricultural exports went to GCC countries, plus Syria and Jordan. What can IDAL do to improve agro exports across other markets?

The GCC are the natural market. The Iraqi market is a new one that we are trying to enter right now. But our main objective is to enter European markets. We are doing a lot of contact work with all the embassies here, especially Eastern European ones. As a first target, we are trying to enter those countries that have the least obstacles.

Your 2003 report states that about 5% of agricultural products destined for exports to Arab countries were rejected in quality inspections. Would the same quality requirements apply to produce destined for Europe?

Exports to Europe would have to meet higher and different quality requirements. They have some very strict controls on pesticide residues and other issues that are not required by Arab countries. That is why we have to inform those farmers prior to starting to control their products.

On the other side of the coin, IDAL has the mission to draw in investments. How is this progressing as far as attracting agricultural investors?

We offer the same incentives to projects in all the sectors listed in the [Investment Development] law, as are tourism, ICT, agro-industry, industry in general and agriculture. The only difference is that agricultural projects have the lowest minimum investment requirements to qualify for incentives.

How have agricultural and agro-industry projects fared in terms of attracting investors?

We have two agro-industry projects that are being processed under the one-stop-shop service. The law is still relatively new and the incentives are new. It takes some time to let people know about it. We are planning to do a campaign by the middle of this year, to promote those incentives. But definitely, compared to tourism, it is still very shy.

Can you name an amount for the value of one of those two projects, to give an idea of the magnitude?

The project that has progressed further is for $4.3 million. Don’t expect to get big figures in this industry.

How much funding for agricultural export promotion do you have at your disposal?

The Export Plus program was approved for LL100 billion spread over the four years, 2001 to 2004.

How much have you dispersed to date?

A bit less than LL30 billion each year. We can handle the program until the end of this year. We might need some more [funding] but there is no problem in that. Theoretically, it should be covered.

Under the new Agromap project, you are sponsoring participation of Lebanese exhibitors in trade shows in Beirut, Paris, and New York. How does this interlace with the promotion of agricultural exports under Export Plus, where you described the strongest markets and prospects as being in the Gulf and Eastern Europe?

With Agromap, we are targeting a different sector, agro-industry, and are promoting Lebanese agro-industry products. We are doing this as a pilot project in 2004 and I wanted to reach the Arab, European and North American markets, to see what the impact would be. We will evaluate each event right afterwards and depending on those three events, we could consider going into another round with a bigger budget in 2005.

Did you allocate equally to each fair, Horeca in Beirut, the Fancy Food Show in New York, and Sial in Paris?

Between the US and France, there will be equal space. Lebanon will be bigger. Here, much more people will come because they do not have the transportation issue. Horeca also accounts for biggest amount in the budget.

How was the response from the industry?

The first results are very good. For Horeca, we have about 35 industrialists and for the Fancy Food Show about 15. We are over-subscribed but I wouldn’t call that a problem. We will have the luxury to choose the best products to represent Lebanon abroad.

What will you provide to the companies that qualify for participation?

We will have a Lebanese pavilion, and we will cover 100% of the rent and the stand decorations. Exhibitors will have to cover their transportation and other costs.
 

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Economics & Policy

Moneyed marriage

by Tony Hchaime
written by Tony Hchaime

Following the failed merger talks between Banque Audi and Banque Libano-Francaise in 2002, few anticipated the announcement of last month’s $159 million merger acquisition of Banque Audi and Banque Saradar. Moreover, such a merger differs significantly from the type of consolidation sought by the central bank, namely a consolidation of the smaller, less efficient, banks in the country. Nevertheless, the announcement of the Audi-Saradar merger took the market by surprise at first, only to make significant sense as details of the transaction began to trickle down to the market.

The deal ($100 million in cash and $59 million in shares), will lead to the creation of the largest banking group in the country and have significant implications on a number of levels related to the banks themselves, the banking sector locally and regionally, and Lebanon’s economy.

Banks in Lebanon have been facing a growingly competitive domestic environment over the past few years, not to mention the significant difficulties such banks are facing when attempting to venture into Arab markets. Lebanese banks lack the scale, efficiencies, and branding to establish a strong presence on the turf of banks like Saudi American Bank, National Bank of Kuwait and Arab Bank, among others. In that regard, the sheer scale of the combined Audi-Saradar entity provides the group with the cornerstone upon which to build a regional platform. With total combined assets in excess of $9 billion ($12 billion including fiduciary deposits, security accounts, and assets under management), the group begins to close the gap with the likes of Arab Bank, whose assets at year-end 2003 reached almost $24 billion.

There are also a number of financial, human, and commercial synergies that underline the drivers of the transaction. Both banks achieved significant growth rates over the past few years, with Banque Audi’s total asset and deposit growth reaching 38% and 42% respectively in 2003. In parallel, Banque Saradar’s total assets and deposits increased by 11% and 13% respectively over the same period. With such growth rates achieved individually, the now combined entity is likely to generate additional growth, and further widen the gap with other leading banks in the country.

Prior to the merger, Banque Audi benefited from a strong grip on the retail commercial banking market in Lebanon, gaining significant ground on retail-oriented competitors, including large banks, such as Byblos and Bank of Beirut, in addition to medium-sized retail banks, such as Al Mawarid. Saradar, on the other hand, benefited from a strong grip on the private banking and investment banking market in Lebanon, while lacking the retail aspect of commercial banking. With the consolidation of both banks into one entity, they have successfully created one banking corporation that can provide the full range of services, targeting both retail consumers and those seeking personalized private banking services. In that regard, the new entity might introduce a new competitive spirit to a sector in which few banks can efficiently provide a full range of financial services. However, customers of smaller banks in Lebanon typically favor such small-sized institutions because they offer a more personalized banking approach. As such, they would be less at risk than larger institutions – with the latter perhaps seeking to engage in M&A activities – seeking complimenting banks to merge with, in an effort to ward off any erosion of their market shares.

On the commercial front, both banks’ commercial strategies highly compliment each other. Banque Audi is highly aggressive on retail banking, dishing out new products for end consumers almost on a monthly basis, coupled with a range of insurance services through its Libano-Arabe subsidiary. Banque Saradar is more private banking oriented, with efforts to target the high-income high-net-worth individuals and groups in Lebanon and abroad. In that regard, the banks compliment each other in such a way as to target the totality of the market, from the low-income retail customer to the high-net-worth Lebanese and Arab individuals.

Moreover, both banks’ organization and personnel structures are highly synergistic, sharing many similarities in their overall culture and management approach. Such synergies were emphasized by Raymond Audi’s statement that “[the] two banks share the same values within an overall corporate culture based on integrity, transparency, innovation and quality.”

As per the terms of the merger, the Saradar shareholders will receive shares amounting to about 9% of the combined entity. As such, the new merged bank will benefit from a strong shareholder base, combining prominent Lebanese shareholders with well-connected high profile Gulf-based shareholders. In that regard, Banque Audi has historically sought to acquire certain institutions to benefit from their well-established regional shareholders, as was the case with the acquisition of Lebanon Invest.


It should be clearly outlined, however, that the Audi-Saradar merger is not limited to the banks themselves, as it has significant implications on the banking sector in Lebanon, the region, and the Lebanese economy.

The primary implications are certainly on Banks Audi and Saradar themselves. However, such implications are likely to coincide with the factors that drove the banks to merge in the first place. As such, the implications are likely to be mostly of a positive nature, capitalizing on the synergies between the banks. The combined efforts of Audi and Saradar are likely to further boost growth in deposits, loans, and overall assets, and are thus likely to further reinforce their position as the largest banking group in Lebanon.

Now we should see other big banks such as BLOM look at alternative routes to preserve its position in the Lebanese and regional market. Industry experts indicate that a drastic strategic change, although perhaps necessary, may not fit as well within BLOM’s culture. In fact, despite its scale, BLOM remains a “family-business,” much less institutionalized than Audi and Saradar. At Audi, the bank’s management consists of a team of professionals from various backgrounds, which have no major shareholdings in the bank. At BLOM, the bank’s management is tightly in the hands of Saad Azhari, vice chairman, and son of the bank’s founder and major shareholders. In this regard, BLOM may be less willing to open up its capital to other institutions or investors. Nevertheless, certain market developments that may endanger the bank’s position in the market may finally drive the Azharis to succumb to pressures and engage in the M&A route.

The word on the street is that the Audi-Saradar merger is the necessary trigger to the much-awaited wave of consolidation in the Lebanese banking sector. Essentially, this would be true if the proper drivers behind the transaction are clearly communicated to the market as incentives for others to follow suit. Moreover, the synergies between Audi and Saradar may not be so evident to other banking institutions in the country. Nevertheless, many banks in Lebanon realize the eventual necessity of consolidation, as they face the competitive risks brought forward by local and regional large-scale banks. In that regard, they are also heavily supported by the central bank, which is favoring consolidation in an effort to reduce the fragmentation in the sector and improve efficiencies. It is likely, however, that other banks will closely watch Audi’s ability to successfully consolidate its operations with Saradar as a precedent to taking any such actions themselves.

It was clearly articulated by the chairmen of both Audi and Saradar that combining the two entities significantly enhances their chances of successfully expanding regionally. This would certainly make sense given the necessities required to establish a presence in Arab markets. The GCC banking environment is highly competitive, requiring aggressive marketing, scale, advanced IT systems, a full range of banking and financial services, professionalism and efficiencies. While some Lebanese banks may achieve some of these characteristics, none actually benefit from the combination of such parameters, certainly not to the scale required by sophisticated Arab investors. Eventually, however, Lebanese banks will have to make some defensive move to defend even their local market shares, as the large-scale Arab banks have been somewhat successful in venturing in the Lebanese market, and many have been able to carve themselves a significant market share locally.

On a more general note, the Lebanese economy stands to be greatly affected by such a consolidation in the sector. In the short-term, the economy may be ill-affected by the higher degree of unemployment that typically results from consolidations. On a longer term basis, larger, stronger and more efficient financial institutions offering a full range of financial services, up to international standards, may allow the country to regain its role as a regional financial hub – a role taken away by Bahrain and Dubai.
Tony Hchaime is an investment banker at the Middle-East Capital group (MECG).

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Business

Sphere of influence

by Michael Young
written by Michael Young

In mid-February, the London-based daily Al-Hayat published an Arabic version of a US working paper that was to be presented to the G-8 summit at Sea Island, Georgia, from June 8 to 10. The paper, which was prepared “for G-8 Sherpas,” or senior advisors, outlined what the Americans have called the Greater Middle East Partnership (GME). The aim of the US is to see the GME project adopted by the wider G8, so that it can act as a basis to help “forge a long-term partnership with the Greater Middle East’s reform leaders and launch a coordinated response to promote political, economic, and social reform in the region.” In mid-March,New York Times reported that the document would not be presented the Sea Island summit after all. However, a senior US official privately noted this was incorrect, and that what may change is the way the document’s ideas are proposed: rather than be submitted unilaterally as G8 policy, it may be presented, more diplomatically, as a response to Arab requests. The three broad guidelines of future G8 action, according to the document, are the promotion of democracy and good governance, the building of a knowledge society, and the expansion of economic opportunities.

In early March, in the run-up to Arab League summit in Tunis at the end of the month, there was considerable criticism directed against GME in the Arab world. Arab states were divided into three groups on how to respond to the initiative, with one group supporting a dialogue on it, a second advocating caution, and a third calling for outright rejection for what was deemed meddling in Arab affairs. Egyptian President Hosni Mubarak, for example, declared: “We should not give others the opportunity to map out our future, define our course, or work on reforming us. We must take the initiative ourselves.” Sheikh Khalifa Bin Salman Al Khalifa of Bahrain noted that “imposition of any foreign view point separately is not in the interests of countries of the region.”

In a commentary in the English-language Al-Ahram Weekly, Egyptian commentator Mohamed Sid-Ahmad spoke for many Arabs when he noted that affirmation of a “greater Middle East,” by expanding the geographical boundaries of the region, “dilutes the importance of the Palestinian problem and demotes it from its central position on the political stage of the Middle East to a marginal position as just one of several ‘hot’ issues plaguing a much wider region.”

However, even a cursory reading of the US working paper shows it to be a remarkably satisfying wish list of reform for the region, with many of its principles already being applied through bilateral programs. Nor were the framers intimidated by the unilateralist preferences dominating in some quarters in Washington. Aside from relying heavily on the UNDP’s Arab Human Development Report of 2002, which was written exclusively by Arabs, the document emphasized that “genuine reform in the GME must be driven internally” through the civil societies of the region. In other words, the G-8, if the GME project is agreed, has the potential to be a hybrid Marshall Plan and Helsinki process for the Middle East. So, why is there such animosity toward it in the Arab world and Iran? The easy answer is that no leader wants the West to advance social, political and economic processes that will undeniably erode their own power. As the halting reform efforts in Saudi Arabia, Egypt and Syria have proven, change is only acceptable when it can ensure, or enhance, the authority of existing regimes. From the perspective of most Arab populations, however, bona fide reform must imply a possible change of leadership. Another fear in the region, as Sid-Ahmad suggested, is that GME would simply detract from the centrality of the Palestinian problem. While no one would quibble with the necessity to end the Palestinian-Israeli conflict, the insistence on using it as a benchmark to judge GME carries with it a high price tag. For one thing, Middle East reform must not be held hostage to a conflict most states in the region cannot control; for another, true regional reform would, one assumes, positively affect the behavior of Israelis and Palestinians as much as it would that of surrounding states.

However, there is a more fundamental reason for the regional animosity to GME, and it comes from the two very different philosophies defining state-to-state relations – one prevailing in the Middle East, the other in the West. In the past decade or so, the concept of state sovereignty has been recast in the West, so that states can no longer hide behind it to shield their more harmful policies. Whether due to humanitarian intervention, international efforts to curtail war crimes, regional cooperation projects, or the expanded role of the UN, state boundaries are eroding at breakneck speed. Even American neo-conservatives are, above all else, enemies of sovereignty as a barrier to the dissemination of Western, or indeed American, values.

This is alien to the Middle East, where brutish regimes have always received a free ride (including from the US) on the grounds that outsiders had no right to interfere in their affairs. What emerged was a conspiracy of silence, as all were complicit in the nasty order of things. However, GME – much like the Euro-Med partnership agreements or the US Middle East Partnership Initiative – is a reaffirmation that what is bad for the Middle East can also, ultimately, be bad for the rest of the world. That was the message of September 11, and the inability of the region to fully gauge the importance of that day is why so many have trouble understanding the importance of GME, as well as the West’s commitment to regional reform.

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Economics & Policy

Q&A: Freddie Baz

by Executive Staff
written by Executive Staff

How long were the two banks involved in negotiations before signing the agreement to form a single group?

The two banks have had a long proactive relationship. Every now and then we sat together on the managerial level and assessed the situation of the banking industry in Lebanon and the consolidation process. In this favorable environment, more direct talks started two to three months ago but as one issue among several in our meetings. After negotiations started in serious, the whole process didn’t take more than one month.

Then it was a smooth procedure?

It was a very smooth procedure. The two parties are really open minded and not driven by any subjective considerations, which normally present an important obstacle for merger operations. There was never any ego dimension. Issues came up in a healthy way and never generated emotional attitudes or structural obstacles.

Will you form a group of banks or a single bank?

When Banque Audi becomes the sole shareholder of Saradar, Saradar shareholders will change part of their shares into Audi shares, and therefore will become shareholders of Banque Audi. We call the new entity that is emerging, the Audi-Saradar group, which, however, is not a legal concept. From an accounting standpoint, Banque Audi is the holding company where all the accounts of all the subsidiaries will be consolidated.

Under perspective of management culture and operational environment, would you describe the deal more as a merger or more as an acquisition?

In a merger, one institution absorbs another institution, which is not the case here. Both banks are keeping their legal status. As Banque Audi is paying partly in cash and partly in new Audi shares to be issued exclusively to Saradar shareholders, you can consider the cash configuration as an acquisition and the share configuration as a merger. But the spirit of the negotiations was the most important element, and the spirit was the spirit of a rapprochement of two banking groups into one mega group, which is Audi-Saradar. It is really a rapprochement between two banks, creating huge synergies at different levels: human, managerial, franchises, commercial, financial and so forth.

Is the absence of the merger law going to affect the process?

The scheme that I was describing by definition does not get any benefits from the merger law. Even if the law were in place, we would not have been granted any soft loan, because both entities are still operating and no license will be given back to the central bank.

Was size ever a consideration in the discussions?

Size has never been a target for us. Banque Audi’s target has always been to be among the best banks in Lebanon, not the biggest bank of Lebanon. However, when you reach the high quality level, which we believe we have reached over the last three years, your customer base obviously expands, and size follows.

Is your key strategic aim domestic or regional?

Both are related. You cannot expand beyond your national boundaries if you haven’t reached a mass in the domestic market. It is surprising that a country like Lebanon, which has developed its banking industry to 3.5 times the level of GDP, couldn’t build private entities with a size that would allow them to compete with regional banks. If two, three or four major banking groups in Lebanon materialize, and if each of those banks have a size similar to the top two or three in some countries in the region, we have a lot of chances to gain market shares in those markets.

Will financial firm Lebanon Invest be taken out of the market?

Who said that? By definition, if a merger or acquisition results in having three of four insurance companies or investment companies, the healthiest solution is to consolidate internally. But for the time being I cannot say that we have decided to liquidate this or merge that. Without going more into specifics, I can say we are in the process of reassessing all subsidiaries in order to generate the highest financial synergies.

But is it correct to say that Saradar Investment House will be absorbed into Audi Investment Bank?

If you believe in internal consolidation, by definition you have to consider it internally. For the time being there are no schemes at all for any of those entities. Starting with the signatures under the merger-acquisition agreement, we are becoming one entity. In each single entity, the best people have to manage the business, and in each subsidiary, the best people will get the responsibilities warranted by their expertise. I do not comment on these issues now because the steering committee has been assigned. It will assess the real values in each business. There are no preset positions.

How long do you estimate the steering committee to have to work on these assessments?

The committee’s role is to ensure the rapprochement’s best and optimal conditions to assure the interests of the new shareholders, which represent the old shareholders of both entities. It is a matter of not just assessing material things. In view of our size, it should take a minimum of two months or perhaps three.

In any merger, people in the involved companies have concerns over their jobs. Did you discuss any redundancies?

No. Since these entities will operate under their actual status, there is definitely room for all the people working for the group. The business synergies resulting from the rapprochement will probably create need for further jobs in the group.

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Economics & Policy

Revitalizing banking

by Tony Hchaime
written by Tony Hchaime

Despite its proud regional reputation, Lebanon’s banking sector has faced a number of hurdles in the past few years. Strong regional competition, stemming from the spawning of a number of large-scale Arab banks – mainly in the Gulf – have created obstacles for a sector seeking expansion, while a high level of liquidity, a large number of small-scale, inefficient banks, and an overcapacity of banking institutions for a country of Lebanon’s size have not helped the sector.

The central bank, in close conjunction with the Association of Lebanese Banks, has been working hard to overhaul the banking sector and allow it to regain its regional competitive advantages. One initiative was the unprecedented move in late February by the central bank to amend two laws – 1998’s law number 7055 and 1999’s law number 7274 – allowing Lebanese banks to lend to non-residents and invest in foreign debt securities respectively.

The amendments to law number 7055 would allow any Lebanese bank to extend loans to non-residents up to an amount of 5% of its equity per borrower. The total loans to non-residents, however, may not exceed an aggregate amount of 25% of the bank’s equity. This compares to a ceiling of 20% per resident borrower.

Prior the amendment to law number 7274, banks were restricted to securities issued by the governments of no more than 10 nations, including the US, Japan, and certain European countries. The new changes allow Lebanese banks to invest in any foreign debt security, be it sovereign or corporate, as long as the security is rated BBB or higher by any of the internationally recognized rating agencies, such as Standards and Poor’s, Fitch, and Moody’s.

The moves are being highly debated in Lebanese financial circles, as they constitute a major turnaround in the policies of central bank governor Riad Salameh, who was traditionally set on maintaining a high level of liquidity in the banking sector in Lebanon, and ensuring that such liquidity remains within the country’s borders (a policy that was underpinned by the two original laws). As such the central bank’s change in direction raises questions as to the motives behind the amendments to the laws.

The banking sector in Lebanon has grown substantially over the past few years, with growth in assets and deposits witnessing a compounded average annual growth of 15% each between 2000 and 2004. Following the events of September 11, and the subsequent so-called US-led war on terror, Arab funds have been flowing into Lebanese banks, increasing liquidity. Salameh has estimated the excess liquidity in the Lebanese banking sector at the beginning of 2004 at almost $5 billion.

On the other hand, Lebanon’s investment environment, although witnessing significant growth in certain sectors is relatively small, compared to the level of funds available for investments. Despite the lower interest rate environment, deposit rates on foreign currency deposits remain in excess of 4% among the large Lebanese banks, and may be even higher for long-term, large deposits. With such developments occurring rapidly, Lebanese banks faced problems in securing high-yielding uses of funds. A globally low interest rate environment, a limited investment climate in Lebanon, and a high risk surrounding Lebanese government bonds, might have made it difficult for Lebanese banks to achieve enough returns on all the excess liquidity to justify paying such interest rates on deposits.

In a pre-emptive move, the central bank allowed Lebanese banks to seek alternative investments for their funds, albeit in a highly selective and restricted manner, aimed at maintaining the sector’s image of safety and high liquidity. The market for such investments may be lucrative. However, the rapid growth of infrastructure-related projects in the region requires a massive amount of debt financing by regional banks. Infrastructure projects are spawning in the Gulf and Africa, in such sectors as power-generation, water desalination, and others. To this day, the long-term financing required by such projects has been restricted to international banks and major Arab (non-Lebanese) banks. Such projects present attractive lending opportunities for Lebanese banks enjoying high levels of liquidity. In fact, such projects typically enjoy a high level of safety and cash flow predictability, as they are often guaranteed by government organizations or international insurance coverage policies offered by such institutions as the World Bank affiliated Multilateral Investment Guarantee Agency (MIGA).

In such a sense, the Lebanese banking sector stands to greatly benefit from such opportunities. On the profitability front, Lebanese banks may substantially widen their interest margins, achieving higher returns on loans to non-resident companies in the region. Such returns would compare favorably to the low-yield deposits by Lebanese banks at foreign financial institutions. Moreover, such moves by Lebanese banks would significantly improve their efforts to expand regionally and compete with major Arab banks. While Lebanese banks have been historically successful in attracting Arab funds, their abilities to invest funds outside Lebanon have been highly restricted by the central bank’s regulations. The recent amendments would certainly allow Lebanese banks to aggressively expand geographically.

It remains to be seen, however, if such changes by the central bank are a precursor to more liberalization in the sector in the near future. Banking experts fail to see any other major changes in the near-term, unless drastic changes in market conditions necessitate it. After all, changes in market conditions such as the sudden increase in excess liquidity, and the lack of investment opportunities in Lebanon were potentially the main drive behind the central bank’s move to liberalize foreign lending and investment.

On the other hand, the central bank’s attention is likely to turn to a consolidation of the sector in the near term. The recently announced merger between Banque Audi and Banque Saradar has triggered much speculation as to the possibility of the merger becoming the first of a series of such activities, aimed at consolidating the highly fragmented banking sector. While the central bank governor has yet to approve the Audi-Saradar alliance, such moves have been historically encouraged by the central bank. This latest development may be used by the governor as a launching pad to entice other players in the sector to follow suit, or face the risk of being dwarfed by the scale of local and regional market leaders.

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Economics & Policy

Trouble with stocks

by Nicolas Photiades
written by Nicolas Photiades

The re-opening of the Beirut Stock Exchange (BSE) in 1996 offered local businesses the means to raise equity funding to finance restructuring and development plans, as well as expansion strategies. It also coincided nicely with the rise in emerging market equities, and the initial listings of Lebanese companies and banks, such as Solidere, Banque Audi and Bank of Beirut, met with immediate and substantial rises in stock prices.

However, for the past six years, the BSE has been a thorough disappointment – a condition partly explained by global factors affecting emerging and other Arab markets. Last year, while many Arab stock markets experienced growth of between 20% and 70% in 2003, the Beirut Stock Exchange (BSE) experienced none. It has been plagued by illiquidity and tiny total market capitalization, which by mid-February 2004 amounted to around $1.7 billion (including over-the-counter stocks, such as Société des Grands Hotels du Liban [SGHL], the Casino du Liban and the ABC). Some stocks can now spend an entire week without any trading, while it is not unusual to see that one or two stocks can account for 100% of daily trading. In the “boom” years Solidere’s market capitalization alone used to reach $1.7 billion.

Lebanon’s depressed economic environment and the consequently low credit rating of the country (B- by Standard & Poor’s) are no doubt the overriding reasons behind the BSE’s stagnation. A stable economic and, more importantly, political environment is key and has been the key driver behind the relative success of the Amman Stock Exchange, which now boasts more than 100 listed companies.

There are, however, other factors. While an uncertain geopolitical situation has constantly driven away local and international investors, the absence of a domestic Capital Markets Authority, an equivalent of the US’ Securities and Exchange Commission (SEC), has had a greater effect on dampening the enthusiasm and appetite of local, regional and international investors. Were the government to have set up a local Capital Markets Authority simultaneously with the re-opening of the BSE, a significantly larger number of quality investors, with a greater focus on transparency and proper regulation, would have been attracted by Lebanese listed stocks.

The government’s “generous” fiscal policy of the mid-1990s, which meant that interest rates on Lebanese pound deposits and Treasury bills were significantly high – at one point, T-bills paid interest rates reaching the 45% mark – turned domestic investors’ funds and savings towards bank deposits and debt instruments, and away from domestic shares. The Solidere shares suffered particularly as a result. The high interest rate structure on deposits and debt securities contributed significantly in the premature end of an equity investing culture in Lebanon.

The lack of diverse BSE stocks also contributed significantly towards its demise. The listing of real estate, cement companies and banks was not enough in terms of diversification, with domestic and international investors requiring a wider choice of sector stocks in order to efficiently diversify their investment portfolio. A stock exchange must reflect the diversification of its local economy, and clearly this was not the case for the BSE. Foreign investors assumed that the Lebanese economy had very little scope for diversification and decided to reduce their exposure to Lebanon. In comparison, the Amman Stock Exchange is much more diversified and includes a large number of stocks emanating from different sectors. Banks there account for a significant portion of the exchange’s market capitalization, particularly the Arab Bank, which is regarded as one of the few international pan-Arab institutions. In contrast, Solidere, the BSE’s largest stock, is domestically focused and carries less importance in relation to the economy than a bank.

Company managers in Lebanon never really realized that the basis for efficient financial and operating management consists of diversifying funding and financing expansion mainly with equity. Today, companies are stuck in a situation where their cash flow is completely or significantly absorbed by debt servicing, and capital stock cannot be increased, as their creditworthiness and capitalization levels are negatively affected. Strong financial fundamentals and an apparently solid creditworthiness are essential for a successful public share offering as credit risk forms an essential part of the equity investment decision.

The limited number of investment banks and specialized finance companies in Lebanon, acting as intermediaries between the stock exchange and companies, was also a reason behind the current lack of development of the BSE. The lack of market makers has led to a secondary market illiquidity and the immediate loss of value of initial public offerings. The Gulf countries, on the other hand, have more developed brokerage and finance company sectors, which make markets on a much larger panoply of stocks and other securities.

The capital structure of the majority of Lebanese institutions, which is based on family ownership and control, has been a major factor behind the under-development of the BSE. Family owners find it very difficult to concede part of their controlling stake to new shareholders, which are generally regarded as an outside threat to their total management control. Moreover, the local mentality has always focused on long-term banking relations rather than stock exchange listings, as the latter means a more stringent reporting discipline that family owners are generally unwilling to comply with. This state of play compares unfavorably with both Cairo and Amman, where transparency is a must and companies are more institutionalized.

This lack of desire to obtain a listing could be solved partly with governmental fiscal incentives that might encourage companies to list. Even though the government has already reduced the dividend tax from 10% to 5% for listed companies, this measure is still insufficient and should be compounded with other fiscal incentives. What would the treasury gain from an active BSE? Well, more income from taxes on trading and capital gains, as well as the development of local capital markets, which is crucial in providing local institutions with greater financial flexibility or with an ability to tap diversified funding sources.

A lackluster privatization program, which under any circumstances should have boosted the BSE exponentially, is regarded as another major reason for the loss of interest for Lebanese listed stocks. Although there is a current will to put privatization back on track, it comes way too late for the BSE, which could have benefited significantly from a few privatizations back in 1996-1997, when emerging market shares were in very high demand by international investors (eg, the success of the Banque Audi and BLOM GDRs during that period). Were one or two public companies to have been privatized in 1996, the BSE would have reached a strong momentum, which would have been more difficult to break in times of crisis, such as during the 1998 Russian/Asian crises. The collapse of Asian and Russian stocks in 1998 sent all emerging markets into a tailspin plunge. All Arab stock markets, which were just re-emerging after years of deep sleep (mainly in Lebanon, Egypt, and other North African countries), were significantly affected by this shock. The more recent Nasdaq debacle and corporate scandals in the US have also virtually killed off any remaining interest for stock exchange activities among Lebanese investors, who are buying stocks but to a much lesser extent than pre-2001. A significant number got burned very seriously after being badly advised by Lebanese brokers and private bankers.

The recession experienced by the Lebanese economy since 1998, and the political volatility of the last few years, contributed significantly towards the disappearance of international investor interest in Lebanese equities and the lack of faith and disheartening of local investors.

What is currently needed is above all an efficient and transparent government policy towards the domestic stock market and the development of domestic capital markets (including debt capital markets). The recent implementation of a sophisticated quotation system is a step in the right direction, but remains insufficient. Lebanon still has an inadequate regulatory framework as compared to Amman or Cairo, and has no capital markets authority to regulate capital markets as a whole. The establishment of such an authority has never been more necessary.

The acceleration and greater transparency of the privatization program and process, as well as the decrease in interest rates on the Lebanese pound, are also regarded as key factors towards the development of the BSE. The latter is a vital channel towards equity funding, and will be needed at one stage in the future, particularly by local banks, as some of them will have to increase their capital following the implementation of Basel II guidelines.

The Lebanese government’s role is crucial in the sense that it should make clear to the international investor community, through a series of continuous road shows in major cities, of its commitment to reforms and economic recovery. Investors need constant reassurance about a country’s future economic plans and have to feel comfortable with the level of transparency. The slightest doubt about the disclosure of economic plans would generally drive down any market in the world.

Finally, Lebanese banks, which claim to have developed investment banking activities, could have a major role to play in the future development of the BSE. These banks could offer advisory services to their corporate borrowers, encouraging them to follow a better and healthier financial and operational strategy. Equity financing, particularly as regards to new projects and expansion, forms the basis of corporate creditworthiness for any institution, and the revival of the BSE can only facilitate a move towards better credit quality and more efficient management.

Nicolas Photiades is managing director of Orion Financial Solutions. He is advisor to the Lebanese banking sector on securitization and structured financing.

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Business

Q&A V5 Project

by RabihIbrahim
written by RabihIbrahim

The latest mall to emerge on the Beirut scene is V5, to be constructed in Verdun and completed in early 2007. The joint venture between United Real Estate Company of Kuwait and Horizon Development Company of Lebanon will cost about $180 million and consist of a total built-up area (BUA) of approximately 148,000 m2 on an 18,000m2 plot of land. As well as an international department store, retail outlets, and a supermarket, other features will include various eateries, a cinema complex, a parking lot for 2,000 cars and furnished apartments with an estimated BUA of 7,600 m2. Future hopes for the center are already optimistic: total retail sales are expected to reach around $200 million by 2010. EXECUTIVE spoke to Afeef Makkawi, Horizon

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The Buzz

Objects of Desire

by Michael Karam
written by Michael Karam

Bentley makes its move


Saad and Trad have been blowing their trumpet about the new Bentley Continental GT. And why not? There are few names in motoring that match the romance, elegance and sheer brute force served up by Bentley. Today, Bentley is owned by those nice people at VW, who have been selling Bentley since January 2003. The Germans are at pains to point out that the car is still a wholesome bastion of all things British and admittedly the Bentley Continental GT is all car. Forget the walnut and leather (although it’s difficult), it’s the mechanics that will really blow your mind. The 6-liter, yes 6-liter, engine can do 0-60 mph in 4.7 seconds, with a top speed of 198 mph (that’s 318 km/h to you foreign chaps). Fast enough? If you want one, it will set you back £145,000 (plus VAT and registration) but there is a two-year waiting list. “We expect it to do well,” said Michel Trad. “Rather like what the S-Type did for Jaguar.”

When Bentley and Rolls Royce were made by the same people, there was a saying that Bentleys were meant to be driven, while Rolls Royces were meant to be driven in. They knew what they were talking about back then.

A Kind of Blue

Staying with objects of desire, those of you who ever wondered why Johnny Walker Blue Label was so ridiculously expensive, should have gone along to the Phoenicia Intercontinental last month to hear Ian Williams wax lyrical about the Cardow distillery’s finest. Created in the 1990s, on the back of demand for super luxury blends and malt whiskies with unpronounceable names – especially from wealthy Japanese executives who have a habit of getting excited about Western luxury goods – it has become synonymous with extravagance, luxury and mystique and, in some cases, international intrigue (it was allegedly Saddam Hussein’s whisky of choice). However, Williams, a distiller by profession, was in Lebanon to dispel some of the myths surrounding what is essentially nothing more than a magnificent whisky. “When we created Blue Label back in 1993 we wanted a blend that would hark back to the days when whiskies had that unique heavy Victorian style,” he said. He went on to explain that unlike Black Label, which is a blend of 40 whiskies, Blue Label is made of 15, but, according to Williams, they are chosen with care. “We have 7 million casks of maturing whiskies at the Johnny walker distillery and every now and then we get one that achieves something special. These, as well as our stock of rare whiskies, often from distilleries that no longer exist, are put aside for Blue Label.”

But does it taste any good? Williams suggests a mouth of iced water before every glug of “Blue” to clean the palate, but in all honesty this can become a bit of a performance after a while. Price aside there is no doubting Blue Label’s pedigree; it really is an outstanding whisky, but like the great malts, it is so potent and rich in flavor – nose, palate and length are all rampant with peat, oak, fruits and spices – that it has moved beyond the normal confines of whisky and into the realm of the great brandies. As such, it is probably best drunk after a meal – Williams even suggests drinking it from a brandy glass. To add ice is to miss the point and so the only real debate is whether or not to add water. There is no doubt, Blue Label is a fabulous whisky, but at $150/bottle, you had better start saving.

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Business

Falling on Deaf Ears?

by Michael Young
written by Michael Young

In mid-February, the United States government began its latest endeavor to change hearts and minds in the Arab world, as its new Arab-language satellite news station, Al-Hurra, began broadcasting to a mostly dubious Middle East audience.

Al-Hurra, or the “free one,” is a $62 million project funded by American taxpayers that will fall under the authority of the US Broadcasting Board of Governors, a public body. It currently employs some 200 staff and will be headed by Lebanese journalist Muaffaq Harb, formerly a correspondent in Washington. Almost immediately, critics in the Middle East dismissed the station as a propaganda tool of the United States. Some observers pointed out that the station merely repeated a pattern of American public diplomacy efforts that had already been shown to fail. Indeed, the State Department last year launched a radio station, Radio Sawa, and an Arabic-language lifestyle magazine titled Hi, to offer Arabs a friendlier image of America. The magazine in particular was met with crushing indifference. In an interview last year, the US ambassador to Lebanon, Vincent Battle, fended off a skeptical interviewer: “Hi and Sawa are part of a public diplomacy campaign that is growing. There is a perceived need to increase our communications with the Arab world, and for the Arab world to increase its communications with the United States as well. We’re making efforts to do that.” He did add, however, in an implicit admission of problems with such attempts, that: “Some of those efforts are more successful than others.”

In condemnation fairly typical of that in the region, Jordanian columnist Rami Khouri thumped the chairman of a US Advisory Commission on Public Diplomacy, who had said that “creating a credible communication channel from the United States to the Arab world is the greatest diplomacy challenge since the end of the Cold War.” Khouri responded: “Wrong again. People in Washington who think like this are offering counterproductive projects, reflecting inappropriate policies, based on inaccurate analyses, stemming from faulty diagnoses. Perhaps not since the Emperor Nero blamed the fledgling Christians for Rome’s domestic troubles … has a world power so flagrantly engaged in misguided policies that scapegoat others, instead of rationally analyzing the collective mistakes…of all concerned.”

Meanwhile, a serene Norma Pattiz of the Broadcasting Board of Governors waved all the criticism away. “People can sit there and say whatever they want before [Al-Hurra] launches … I think they may be interested in the fact that we may bring a different perspective,” she said.

The first thing that comes to mind is, why so much animosity in the Arab world against the station? After all, $62 million is fairly modest in the satellite news world, so Arab viewers won’t risk being unfairly enticed by sparkling production quality. And if viewers do find Al-Hurra objectionable, all they will have to do is switch to another channel. Surely the fact that the US government is keen to “reach out” to the Middle East, no matter how mawkish that may sound, hardly invites such annoyance.

What Al-Hurra’s critics miss is that Arabs suffer not at all from an additional station — whether it is a propaganda outlet or not. The only ones who do are US taxpayers. The real difficulty with Al-Hurra is that it is solely an American public policy liability.

There are two reasons for this, one general, the other specific. In general, there seems little reason for Americans to put money into a station over which they have no influence, which they will probably never see, or little understand if they do, and all in an enterprise that seems doomed from the start. However, making things even more absurd is that the station’s overseers, in the hope of attracting viewers, have promised to follow a balanced approach to regional politics. Al-Hurra is to be a propaganda station without propaganda. Somehow, that misses the point, doesn’t it? Not only does “being balanced” not explain why Americans should foot the bill — if the goal is to distance the station from official proselytism, why not just turn the whole thing over to the private sector? It also doesn’t explain what will make Al-Hurra different from countless other Arab satellite news stations, or those non-Arab stations freely available to viewers in the region. In other words, if the US government insists on going into the news business, it might as well use its outlet to disseminate official policy. However, to set up a station and then shy away from turning it into a mouthpiece seems a contradiction in terms.

In the end, what the US government has not considered is the market. In starting up Radio Sawa, Hi and Al-Hurra, it failed to ask whether public funding was truly necessary. Had the projects been potentially successful (and Al-Hurra may yet work), the ideas could have been sold to private-sector investors from the start. When it became clear they were not likely to be a hit, the government got involved anyway. Is that smart? Not especially. It showed the US government failed to understand the market it was supposed to appeal to. Worse, it ignored it, and now Americans are paying.

Michael Young is a contributing editor at Reason Magazine in the US.

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Business

Backing industry

by Executive Contributor
written by Executive Contributor

Albert Nasr heads the center for economic research at the Federation of the Chambers of Commerce in Lebanon, a key institution charged with collecting data and conducting studies of benefit to Lebanese industry. He discussed the role of the center with Executive, and issues of importance in the development of industrial exports.

On the Center of Economic Research

The Center of Economic Research at the Federation of the Chambers of Commerce is designed to supply the federation with support for its duties with regard to business and economic policies and regulations that the government is or isn’t taking. Our main aim is to be advisors to the government insofar as business legislation in general is concerned, in order to be able to protect the interests of the private sector. The bulk of our work is the preparation of position papers.

On the numbers of Lebanese industry

When we speak about Lebanese industry, we are not talking about 22,000 industrial units. The Association of Lebanese Industrialists has a constituency of about 2,000 registered industrial companies. The Federation of the Chambers of Commerce has a constituency of about 7,000 industrial companies. As for the 15,000 remaining firms that make up the number of over 22,000 industrial units reported in the surveys of the ministry of industry, the question here is over the definition of manufacturing. By one definition, a bakery is an industrial unit because they use machinery and transform raw materials into a product. But we in Lebanon are not used to considering bakeries as manufacturing entities. It is a matter of definition. Once we adopt a new definition, we will stick by it.

On industrial production and its share of GDP

Industrial production has grown in Lebanon over the past few years but in relative terms, other sectors have grown by larger proportions. Therefore I would not consider it a problem that the industrial share in GDP has gone down slightly, to about 17%. For one thing, you have to set a question mark behind the reliability of the GDP estimates. If you do not know the size of your pie, you cannot exactly know the size of your slice, that purports to be 20%. Another problem in industry is parallel production. This does not get tallied in any survey. There is a large amount of parallel production from enterprises, producing not only for the local market, but also for exports. These are enterprises that are not officially recognized because they have not registered, mostly due to some outdated administrative requirement that prevents them from registering. It is as if they are non-existent.

On export development and statistics

The export data does show an overall increase, but we deplore the fact that data gathered at customs sometimes includes re-exports. There is a special category for re-exports in the data sheets. But a product that enters Lebanon with its customs duties paid, that is then re-exported would enter the statistics under exports. It is not sufficient to have a single criterion of whether customs duties have been paid, to distinguish between exports and re-exports. A product may have paid customs duties but still be re-exported. An example is, if I were to import a Mercedes from Germany and pay customs duties on it, this car would enter the statistics under Lebanese exports – if I sell it to someone in the region without seeking reimbursement for my earlier import duties. This is an aberration, because exports ought to reflect our capacity to produce and export – rather than our capacity to import and re-export. Importing and re-exporting is a major activity, and we excel in it. This does indicate that we still have a role to play in triangular trade and that our regional status allows us to do this. But it doesn’t say anything about our manufacturing capacity. We need exports to reflect our manufacturing capacity. The only way to solve this issue is in my opinion to have a certificate of origin accompany all exports, regardless of whether the country of destination requires the certificate or not. The way things are now, exports do not get accompanied by a certificate of origin where a destination country does not require that form.

On the Euro-Mediterranean Agreement

With regard to Europe, exporters have to complete the EUR-1 form, which can basically be described as a certificate of origin. Our export data to the EU is reliable. The EU agreement opens up new markets to industrial products, without customs duties. As you know, an earlier agreement from 1979 had nearly the same clauses. I fail to see how we would benefit just on that point. However, the Euro-Med agreement has been launched within a larger framework, and we are going to benefit from that larger framework. Previously we were on our own. Now, support programs from the EU are designed to make us benefit more from this openness of the EU markets.
 

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