Economics & Policy

Is it worth the risk?

by Tony Hchaime
written by Tony Hchaime

Fluctuating performances, a harsh competitive environment, a limited market, and high threats of terrorism and war are just a few of the critical factors affecting both the current operations of foreign banks in Lebanon, and their future strategies with that regard.

Major shock waves have hit foreign banks in Lebanon over the past few years, ranging from the economic recession plaguing the country since 2000, to the threat of terrorism and heightened war activity in the region. Foreign banks in Lebanon, as in other countries in the Middle East and the Mediterranean, suffered a number of terrorist attacks or attempted attacks. A major explosion at HSBC headquarters in Turkey late in 2003 sent all European and American banks in the Middle East scrambling for additional security measures, to the extent of almost paralyzing daily operations. In the case of Lebanon, this has translated into armed guards protecting the entrances of European and American banks, in addition to those of Arab countries considered at risk of terrorism. It remains to be seen, however, how such banks have coped with years of struggle and hurdles, how they have performed, and what are their strategies for the near future.

Numerous banking professionals have addressed the presence of foreign banks, often criticizing their inability to compete with the major local institutions, and their overall risk aversion towards lending and retail banking.

While the end of the war in Lebanon saw the return of a number of foreign banks to the “lucrative” financial sector in Lebanon, the trend has been reversing over the past four years, with a number of banks abandoning their attempt to establish a significant presence in the country. At present, there are 12 foreign banks operating in the country – of which seven are Arab or Iranian – compared to 17 in 1999. The latest foreign bank to shut its operations in Lebanon was Dutch banking giant ABN Amro NV, which sold off its assets to Byblos Bank SAL and halted operations at the end of 2001.

Total assets of foreign banks in Lebanon have shrunk by more than 24% between 2000 and 2002, reaching $3.9 billion, compared to a growth of 15% for the Lebanese banking sector, and 20% for Alpha Group banks. Accordingly, total deposits at foreign banks in Lebanon have also fallen by more than 24% between 2000 and 2002, to $3.3 billion, compared to a growth of 15% for the Lebanese banking sector and 18% for Alpha Group banks. Loans and discounts have also dropped in tandem with the shrinkage in customer deposits and total assets.

Of the existing foreign banks in Lebanon, the three largest (Arab Bank, BNPI, HSBC) account for close to 80% of both total assets and total customer deposits of foreign banks in Lebanon. Arab Bank is the largest, with total assets of $1.5 billion, and customer deposits of $1.3 billion – thus making it party to the elite Alpha Group of banks. Furthermore, Arab Bank enjoys a market share of 2.9% of customer deposits domestically, compared to 1.8% for BNPI and 1.2% for HSBC. Other foreign banks in Lebanon, such as Citibank, Saudi National Commercial Bank, and National Bank of Kuwait, play a much more limited role in Lebanon, with respective market shares not exceeding 1%.

The overall performance of foreign banks in Lebanon is mostly geared towards that of Arab Bank, HSBC, and BNPI. Significant improvements in profitability, resulting mainly from better lending strategies and lower cost of funds, have contributed substantially to the bottom line of Arab Bank and HSBC, especially between the years 2001 and 2002. On an overall note, growth in the net earnings of foreign banks in Lebanon has fluctuated widely over the past few years. The year 2000 saw a 10% drop in net earnings, which was followed by a significant 51% gain in 2001, led by HSBC’s ability to turn an $11 million loss in 2000 into a $2.5 million net gain for 2001. Things improved in the year 2002, with net income for foreign banks in Lebanon jumped by a staggering 68% to reach $35.6 million. This growth was heavily influenced by the performance of Arab Bank and HSBC, which saw their bottom line increase by 206% and 167%, respectively, to $10.9 million and $6.7 million. Bearing such fluctuations in mind, the compounded average growth in net income for foreign banks in Lebanon between 1999 and 2002, remains in excess of 25% annually. This compared to a shrinkage in net income of 9% for the whole banking sector in Lebanon over the same period.

Excluding such outliers as Arab Bank and HSBC, however, the sector’s net earnings have grown by a more modest compounded average of 3% per year over the same period. While basically contributing the majority of revenues to foreign and local banks alike, interest income has played a minimal role in the increased profitability of foreign banks in Lebanon over the past few years. In fact, interest income for the sector as a whole grew by merely 6% annually on average between 1999 and 2002, compared to the 25% growth in net income. With the high number of banks operating in Lebanon creating strong competition, and foreign banks’ common policy of avoiding interest war with local banks, most opted to offer value added private banking and other specialized banking services. Backed by their international networks, foreign banks have been able to tap into a niche of banking services yet not fully supported by local banks. The foreign banking sector’s net financial income grew by an average of 10% between 1999 and 2002, while net commission income grew by an average of 8% over the same period.

As previously stated, foreign banks in Lebanon have attempted to tap into a niche market of private banking and other specialized services in which the Lebanese market is not yet saturated. In such a sense, foreign banks are dwarfed by local entities in terms of deposits and loans, while they remain highly competitive in other banking services. Such a strategy has, to a certain extent, limited their direct exposure to political and economic risks in the country, while, on the other hand, limited their ability to achieve sizeable income. While this approach may have a certain risk-control aspect to it, its restrictions on growth and gain in market share has severely misrepresented the attractiveness of Lebanon to foreign banks with, as of yet, no presence in the country. In such a sense, the highly competitive environment and the resulting slim margins put Lebanon at a competitive disadvantage to other emerging markets such as Africa, Qatar, Russia, and Eastern Europe.

These developments have been accelerated by the threat of terrorism against western interests globally, which have partially led many international banking institutions to scale down on their operations in emerging markets. As such, Europe’s leading banking institution, ABN Amro, has opted to shut down its operations in a number of countries in the region, including Lebanon. In addition, it has been recently rumored that a number of international banks are seeking to sell their equity stakes in major Lebanese banks. Although such developments may be misinterpreted initially as originating from domestic or regional factors of various natures, it is rather, a result of revisions to strategies regarding emerging markets.

Nevertheless, the activities of foreign banks in Lebanon are certainly not on a definite shrinkage route. In fact, a number of foreign banks, namely HSBC and Standard Chartered, have successfully clawed their way into a decent market share. Their strategy was aggressive and focused on services – including, credit cards, internet banking, investment products, and other special banking packages. Needless to say, the growth of foreign banks in Lebanon, or lack thereof, does have a direct impact on the Lebanese banking sector as a whole. In essence, large Arab banks or sizeable international banks grabbing a foothold in Lebanon would put pressure on the smaller Lebanese banks, thus enticing consolidation in the banking sector – a development long sought after by Riad Salemeh and the central bank.

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Business

Overvalued aid deals

by Michael Young
written by Michael Young

In early December 2003, a Pentagon decision outraged a number of American allies. US Deputy Defense Secretary Paul Wolfowitz issued a memo stating that several countries that had opposed America’s war in Iraq, including France, Germany, Canada, Russia and Mexico, would be barred from bidding for $18.6 billion in US-financed Iraqi reconstruction contracts. By January, the Bush administration’s mood had changed. It became clear that the stated rationale for the decision, namely that it would protect “the essential security interests of the United States”, somehow implied that countries historically close to the US, somehow threatened its national security. This was a bit too much even for noteworthy Bush administration unilateralists. At the Summit of the America’s in January, President George W. Bush rescinded the ban on Canadian companies, amid signs from the Defense Department that three or four states in all might be removed from the list of proscribed nations. If that’s the case, then it’s good news, because aside from the fact that the move was no more than petty payback, it undermined one of the key things that Bush and his acolytes claim to be trying to spread in Iraq: the benefits of the free market.

Writing in the New York Times, Nancy Birdsall and Todd Moss of the Center for Global Development in Washington noted: “All the fuss must seem rather strange to the more than four billion people in the developing world. After all, restricting overseas development contracts to domestic bidders – so called ‘tied aid’ – has been standard practice in the aid world for the past 40 years.” However, the authors didn’t defend the habit; they argued it led to one of the main problems in current aid spending practice -and in the Bush administration’s decision to bar non-American competitors: restricting bidders increases costs by limiting competition.

As Birdsall and Moss observed: “Advocates of improving aid effectiveness have long argued to eliminate the practice of tied aid – which, according to one economic study, reduces its value by 15% to 30%. Untying aid would allow poor countries to purchase the most efficient and cost-effective goods and services necessary for their development projects. That makes sense because the real point of aid is to help people escape from poverty. But old habits die hard.”

That may not matter much if American companies, particularly ones financing presidential election campaigns, benefit. However, as the post-war situation in Iraq has dragged on, and as American taxpayers have been compelled to pay tens of billions of dollars for Iraqi reconstruction, the matter of financial transparency has become highly sensitive politically. Very simply, voters are not keen to fatten the accounts of American multinationals like Halliburton, which recently overcharged the Pentagon by $61 million through a competition-free contract, even if the prevailing, and fallacious, wisdom in the administration is that what is good for American companies is good for America.

As writer Matt Welch observed in Beirut’s Daily Star, conflating companies with countries is “a marriage which the trade liberalization project has long been trying to de-couple.” The problem is that “where large companies are so intertwined with the identity of their countries […] their governments won’t allow them to fail.” This means that the pathologies of private firms instead of being filtered out by market forces are enhanced by them, so that mismanaged or corrupt companies survive.

A second problem is that it makes no sense to peddle the advantages of free minds and free markets to the Iraqis, if half of that equation (or indeed all of it) is ignored. From the outset, the American-led reconstruction process in Iraq has been dipped in controversy, some of it unjustified. And in a country like Iraq, where animosity to the U.S. presence is rising and where unemployment may be as high as 50 percent, according to a UN-World Bank report (including an estimated 400,000 soldiers), even the semblance of financial impropriety can be politically disastrous.

It is to avoid this that, for example, George Soros’ Open Society Institute instituted the Iraq Revenue Watch (IRW) project, to “monitor Iraq’s oil industry to ensure that it is managed with the highest standards of transparency and that the benefits of national oil wealth flow to the people of Iraq.” As IRW remarked on its website, implicitly linking transparency and political stability: “In many parts of the world, the lack of proper stewardship over oil resources has resulted in corruption, the continued impoverishment of populations, and abuses of political power… If Iraq is to become an open, democratic society it will need to develop transparent accountable institutions for ensuring honest management of oil revenues.”

Economic policies born of pique are rarely profitable, and the Pentagon’s intervention in limiting participants in Iraqi reconstruction was surely an example. The Bush administration has backtracked, and might console itself by recognizing that there are two beneficiaries: American taxpayers, who will get more aid for their money; and Iraqi citizens, who will get more money for their aid.

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

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Economics & Policy

Yet another bad year

by Faysal Badran
written by Faysal Badran

It has become customary, in the first few weeks of January, to lay out forecasts for the rest of the year. Analysts from the London-based Economist Intelligence Unit (EIU) to the World Bank get the chance to wipe clean their slate and begin a new framework, maybe with a little carried over optimism from the holiday season. Not so for Lebanon, where the omens from the international financial community do not augur well as, contemplating the undelivered promises of Paris 2, we are left to ponder the immediate future with few signals of any improvement, and frankly, not much momentum except hope, as most of the body politic focuses on the presidential possibilities and the never ending “regional circumstances”.

The EIU report makes sober reading as it predicts Lebanon’s fiscal drama to continue unabated. The 2004 budget contained nothing that would change this trajectory, with the government set to overshoot its 2003 targets by a whopping 30%. With the poor state of the economy, which is growing only in a statistical sense, the fiscal drag is worse than ever. Debt servicing is at a staggering 42% of total public expenditures, and 15% of forecast GDP. This makes it is hard to imagine a worse situation especially in the context of the continuous bipolarity between president and prime minister, which seems to have all but paralyzed the political process. At a time when one would expect political debate to be the engine of reform and the budget a pivotal point of discussion for the future, the bickering continues to “crowd out” real economic imperatives, and the media, and public appear mesmerized by the nonsense of elections. At a time when we need the troika machine to be well lubricated, the divisions intensify and credibility, especially on Paris 2 pledges goes by the wayside.

While it is true that the $3.5 odd billion from the banks will provide some relief to public finances, the whole economic and fiscal architecture seems more fragile than ever, with debt making any stimulus from government impossible.

The tourism sector, which fared well in 2003, with approximately 850,000 visitors (a shade under the 1 million trumpeted by the government), is possibly the only bright spot. Mind you, none of the improvements are due to any policies or plans by the snoozing leadership and the packed hotels, restaurants, and beaches are pleasing, but are not sufficient to revive an economy. With many Arabs preferring the proximity of Lebanon, in the current state of the world, their influx has brought some deposits to the banking sector, and emptied some hotel mini bars, is but a drop in the ocean. It simply isn’t something that can trickle down enough to affect economic growth. Though many politicians point to tourism as a potential savior, the figures suggest otherwise. What has kept the economy from completely imploding is a phenomenon that is totally beyond the government’s reach. It is primarily the inflow of expatriate money. This underground economy, if you will, has maintained many households’ purchasing power, and has served to offset the contractionary effect of fiscal tightening and high youth unemployment. The end game is really the ability to attract investment, and in this category, the signals into 2004 are not encouraging. The EIU tells us that commercial bank credit to the private sector, a gauge of investment activity as well as the pace of domestic spending, had fallen in the last quarter of 2003, and that despite a huge drop in interest rates. This is alarming, frankly, as one would think that a 7% across the board fall in borrowing rates. Even more eye popping, was the 90% fall in net credit to the industrial sector in the first three quarters, and of course, more deterioration in the agricultural credit numbers. So much for policy. Construction, more a testament to continued private investment in real estate than any government initiatives, continued to fare better, and may carry on into 2004. On the trade front, a falling Euro may bring some relief, but overall, the situation is fairly benign and does not presage any significant improvement in spending.

Having looked, briefly, at the key data points, it is worth pointing out that the most relevant issue for the Lebanese economy going forward is not so much the actual economy but confidence. This is where there has been the most clear devastation. Confidence in the ability of the current caretakers to come up with workable plans, and in the notion of political and institutional reform is far more important for Lebanon. Without credibility, that somewhere in the future, change is on the way, direct investment, the lifeline of any emerging economy, will lag. The political bickering, and the accompanying economic reform paralysis are likely to converge with deteriorating debt conditions, and impose a serious speed limit to real economic growth. Attracting investment without at least creating an impression of political movement is a futile endeavor. Investment requires, most importantly, delivering on promises, and creating the right environment. The telecom fiasco, the lost opportunity on privatizations in general, and the continued tribalism of the political system are, for 2004, the natural obstacles to any real improvement in the economic fortunes of the country. Meanwhile, the drain of young Lebanese talent continues, and the banking system, stuck with the debt addiction of the public sector is unlikely to provide the necessary catalyst to private enterprise and capital spending.

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Economics & Policy

Year of the bull

by Executive Staff
written by Executive Staff

The year 2003 is history and, in the US, the market battle is now beginning again. For the month of January, we will have to struggle with summaries of what happened during the last year and predictions of how the major indices will perform in 2004. Neither times gone by nor anticipation will make us a great deal of money, but they make for great marketing tools for journalists and investment bankers. There are two things to watch out for as 2004 unfolds: the folks most likely to predict are those that have been singing the same market song for the past five or even 10 years. The extreme bears will predict the end of the world, while the extreme bulls will continue to predict major gains with nothing that could impact the short-term and long-term positive sentiment.

In addition, if you listened to the business news during the first week of January, the common theme seemed to be continued economic growth and a new bull market. The charming sound of agreement among the analysts and journalists is a warning sign that things might not be that easy going forward. The crowd is rarely correct. It hasn’t been effortless to understand the price action in the past 12 months, and with the macro crosscurrents unfolding daily, there has never been a time when so many balls are in the air.

Rather than look at everything at once, and rather than trying to choose whether to be a bull or a bear, let’s break the market into two important trading metrics and see where we stand:

Fundamentals: if we buy stocks at these levels, we are buying stocks at a time when the S&P is selling at around 30 times earnings while yielding dividends of around 1.7% before taxes. Historically speaking, we have lofty valuations particularly in the technology area. It’s noteworthy that analyst estimates on the earnings of individual companies were continually lowered to levels that would eventually be met. The degradation in the market fundamentals could not continue forever. That we already knew. Currently, we have continued layoffs, most recently at Eastman Kodak and Kraft. Companies with a nice tie-in to the consumer (thanks to the tax cuts) did better than most companies in the third quarter. Companies that benefited from the inventory build showed better numbers. In addition, cyclical companies benefited greatly from the rally in commodities. So yes, the tax cut helped; the rise in the stock market helped; lower rates and the refinancing boom helped; and the dollar decline helped. But there are no real signs of an improvement in end demand, excess capacity is still at high levels, and big companies like Microsoft and General Electric are struggling to grow. It’s hard to imagine a new bull market taking off with these levels of fundamentals.

Technicalities: short term traders will tell you that rather than become paralyzed by the bulls’ and bears’ sophisticated macro arguments, the easiest thing to do is to simply pay close attention to the price action that is in front of us. Rather than try to forecast what might happen next year or next month, enjoy the blessings of the current trend but be prepared to act quickly if it bends. The only problem from a technical perspective is that the indices are far above their 200-day moving averages. This means that a lot of the good news emerging (GDP up 8.2% for the third quarter) has already been discounted by the rallying indices. In other words, the stock market has simply gone very far and very fast on the upside, therefore, it may need a rest. But we are still in a major and clearly defined upward trend, and upside momentum is running high.

The business of rectifying the damage from the mania is unfinished and the excesses could take years to unwind. But this does not mean that the rally will be over soon. I’m aware that the market can do anything. John Maynard Keynes wrote: “The market can stay irrational longer than you can stay solvent.” We are in this irrational type of market. Billions and billions of dollars, euros, and yen are being tossed out in this global attempt by the central banks to keep the good times rolling. Due to these central bank actions, the dollar has seen one of its biggest drops in the last 20 years. Debt levels are the highest they have ever been, with the debt-to-GDP ratio now about 350% (in the US). One of the largest collapses in the history of the bond market recently occurred. The US budget and trade deficits are just astounding. But equities are still rallying. When you put a summation sign in front of all the above, the risk/reward equation in equities is still completely out of whack (especially for long term investors). On the other hand, if you are a nimble trader, you probably can enjoy the current positive technicals of the market and stay with the trend for now.

Ziad Abou Jamra is the head of the trading desk at FIDUS GROUP SG

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Economics & Policy

Industry woes

by Executive Staff
written by Executive Staff

In 2003, the manufacturing sector witnessed some improvements, mainly related to healthier exports. By and large, though, 2003 has not been much different from previous years. The fact remains that Lebanese manufacturers are still operating in a moribund economy. Furthermore, mixing politics and economics is adding to our woes. Lebanon doesn’t know in which direction it is heading. The Lebanese Government has run out of ideas on how to promote growth, as was clear most grievously in the tariff-lowering decisions of the year 2000, when the death sentence was passed on the Lebanese manufacturing sector. However, the last wish of the condemned was not even granted, when, upon lowering tariffs, the government reneged on a promise to create a ministerial committee to assess and bring down the costs of production, to offset the damage resulting from lower tariffs. In fact, instead of bringing down costs of production, the government burdened the private sector with additional costs, namely transport and education allowances. Moreover, the government maintains relatively high tariffs on goods that are NOT made in Lebanon, rather than the other way round, such as cars, petrol, alcohol and tobacco, which represent more than 85% of custom duties. Even raw materials, which are not made in Lebanon such as iron roads, and spare parts for generators, still pay high duties. This is an anomaly that is probably unique to our country.

Some of the consequences of the government’s decisions in 2000 have begun to appear in 2003, with the tariffs coming down by 60% from already historic lows in 2003, as a result of the Arab Free Trade Area. The damage will continue in 2004 and 2005, when tariffs come down by 80% and 100%, respectively. This will bring down tariffs to zero among the Arab nations with whom we trade, except that, these Arab countries have a huge advantage over us, as their costs of production are much lower that ours.

The political fabric of Lebanon unfortunately encourages negative behavior (witness the government’s speedy reaction to farmers spilling apples in the streets). Now tariffs (recently imposed to protect local apple growers) are part of the government’s dictionary again. But for three years, the government refused to consider similar tariff increases for the industrial sector, even though such tariffs provide a safety net for manufacturers trying to compete with subsidy-laden Arab and Asian goods.

How can businesses and manufacturers grow in such a fluid environment? Lebanese businesses are required to defy logic by working in a burdensome and costly operating environment. If the government is concerned with, or even a little embarrassed by, closing businesses, emigration and unemployment, among others, it must change its priorities, policies and habits. It must become obsessed by promoting growth and job creation all over Lebanon. If the government cannot bring down production costs, which are the result of inefficient monopolies, then it should seriously consider imposing higher tariffs on imported goods, just as in the case of apple growers.

In addition to Lebanon’s unusually high production costs, including labor, energy and transport, Lebanese manufacturers have to remain nimble and competitive against an onslaught of non-traditional expenses, deriving mainly from bureaucratic red-tape, inefficiency, poor postal services, prohibitive communication costs and restrictive labor markets,

If these practices continue, Lebanese factories will vanish at an accelerated rate. Unfortunately, this would not be the result of “Creative Destruction,” where industries disappear today and new ones are born tomorrow. Far from it – if factories go bust under the prevailing conditions, it is difficult to foresee the birth of new enterprises and the new jobs that go with them.

It is, therefore, imperative today to tackle the causes that keep our factories shackled and unable to compete. Most of the detrimental costs that were mentioned above are relatively easy to deal with since they need no more than a bold government decision. But labor issues need a change of mentality.

So let us concentrate on restrictive labor practices and ask why, for example, Petrol Station owners, according to an informal survey, prefer to hire non-Lebanese workers, even though the wages being paid to those foreign guest workers are $350 per month on average. This is almost double the minimum wage in Lebanon, and therefore a respectable enough salary for Lebanese workers to be seeking. It is no secret that some Lebanese employers shy away from hiring Lebanese workers because they are desperately trying to avoid getting mired in the maze of Lebanon’s restrictive labor laws, including expensive and time-consuming Social Security procedures. The outcome of this state of affairs is almost unique to Lebanon, whereby Labor Laws hinder employment creation, specially for Lebanese citizens. This is the only country in the world which punishes, from a tax point of view, he who employs a Lebanese citizen, and gives tax breaks if you employ foreign workers such as transport and education allowances, while affording the employed worker very few benefits and no safety net in the case of redundancy.

It is a true tragedy that our archaic labor laws have done so much damage to employment levels, not to mention to productivity, as the currently employed have little incentive to work hard while they feel secure in the job that the law protects, not the worker’s performance.

We agree with the government and all concerned parties that our workers are a major resource. Manufacturers should know because they spend years and make large investments in training their workers.

But it is futile to promote growth, employment generation and social development if the restrictive labor practices remain unchanged. We must possess the vision and the courage to change laws, practices and even mentalities. The priority now, as far as we are concerned, is for the country to move forward. Frankly, quibbling is a luxury that the economy cannot afford at this time. But this does not absolve the government of responsibility towards the industrial sector, as many promises have been made and few delivered, particularly concerning promoting exports.

Are manufacturers making unreasonable demands on a government with few resources to spare? Not at all, especially if one considers fast-paced developments in the world. Actually, Lebanon is far behind other countries in recognizing that sustainable industrial development is a prerequisite to fighting marginalization in a global economy. Our government does not even speak the same language as our international partners.

There is a vacuum in strategic thinking on industrial development that needs to be filled. Lebanon must show more commitment to the competitive capabilities of its industrial sector. We are not alone in having identified some of the major hindrances to growth. Independent European consultants have also found that Lebanon’s operating environment suffers from weak interactivity between state and industry, no public or international-standard industrial zones, costly public services and heavy and expensive administrative procedures. If the government does not solve these problems, how then are businesses supposed to survive, grow and thrive? How can we create enough jobs to keep people, especially the young, in Lebanon? Right now, Lebanon produces only one-third of the jobs it needs.

We know for a fact, and we have seen it all over the world, dynamic growth is a product of vision, policy, incentives and support Institutions. In 2004, as in years before and beyond, the manufacturing sector and the economy will continue to trudge along at best, if the Lebanese government does not become obsessed with promoting growth, before it is too late.

Fadi Abboud is the President of the Association of Lebanese Industrialists

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Society

Battling the ad wars

by Anthony Mills
written by Anthony Mills

An uphill battle awaits the advertising sector in 2004 as it struggles to reverse a plunge in revenues – which have dropped roughly 30% since January 2003 – played out against a backdrop of allegations of unfair competition and mafia-like cartels. As another desperate year draws to a close, many in the sector predict financial disaster in 2004.

“I hope that 2004 will not be worse than 2003 because if the annual drop in advertising revenues continues at this rate for another three years, there will be no advertising industry anymore,” warned Dani Richa, managing director of Impact/BBDO Lebanon.

“Next year will be no different from 2003,” predicted Wassim Rizk, regional director of media group CSS & Grey. “There will be a continuing decline in revenues because of the downturn in the economy – which we in advertising are a reflection of.”

However, Talal El Makdessi, chairman and CEO of the THG/Group media conglomerate believes that the economic travails should not be used to shroud the real problems plaguing the sector, “There is a lot of money in Lebanon in the advertising industry,” he said. Expenditures, by rate card, are increasing by 15% to 20% every year.”

Red Cell media group CEO Joe Ayoub concurred: “We’re suffering from marketing myopia now, where we think, ‘Ah, this is due to the economic crisis. This is wrong. Something is fundamentally sick in our industry.” In a sector dogged by domestic political instability and post-Iraq war fallout, local, independent Lebanese agencies are continuously falling victim to unfair competition and losing out to multinational affiliates that are causing many to pack up and leave the country. The situation is not helped, argued Richa, by regional and international advertisers’ misapprehension that they can reach Lebanese consumers through satellite television. “As a consequence, they are not investing in local media,” he complained. This misconception runs counter to efforts by terrestrial channels LBC and Future Television to increase viewer numbers with programs like STAR ACADEMY and SUPERSTAR.

In addition, belt-tightening across the board has led to a shift from above-the-line to below-the-line investment. The focus now is on the point of sale, rather than on brand building. As a result, the ‘special offer’ strategy has proliferated – with unwelcome effects. “There are so many ‘special offers’ now,” observed Richa, “that they, in general, are not attractive anymore. It’s a very short-term policy.” In the long term, profit margins and consumer loyalty wane.

Agencies, for their part, must discard a preference for discount strategies. “They might work for the day, but down the line profit margins shrink and your ability to attract talent is affected,” cautioned Rizk.

Industry experts are in agreement that if the sector is to recover, advertising agencies and media buying firms will have to work on regaining the trust of their clients. Something that is easier said than done considering that in Lebanon today, it is impossible to determine the correct price of services bought from media or advertising agencies – figures that are easily available in any healthy media sector. Agencies are continuously accused of over billing.

“The client doesn’t trust his agency. The agency doesn’t believe the media is giving it the right price. The media doesn’t believe that the agency is giving the client the right thing, and the agency doesn’t trust the client because he says: ‘I will spend $1 million’ but ends up spending $50,000,” Ayoub said. The lack of objective, professional consultancy on the part of media buyers is another serious issue facing the sector. Clients complain that agencies only recommend certain newspapers and TV stations because they are the most financially beneficial to the agencies, not because they represent the best strategic choice for the client. Although many problems exist within the industry itself, the government, say experts, also bears responsibility and confidence in the government must be restored. “We have no leadership, no responsibility. The only thing that our government cares about is how to collect tax. It’s about time that new talent, new politicians, who are ‘clean,’ educated, unaffected by the Lebanese civil war and are not remotely related to any war leader, take over the government. We have enough corrupt politicians who have drained the country and amassed billions of dollars,” declared Makdessi. A reversal of the decline is only possible if players combat their woes in unison, possibly through mergers and acquisitions, Ayoub said. This is likely, though, to prove difficult since many of Lebanon’s small advertising agencies are family, one-man-shows. “They have to let go of their patriarchal mentality. To survive, they will have to open up, share decisions and not only give but also receive orders.” But the senior industry executives, who hold the strings of power, will be loath to change. The industry’s powerful egos are indeed a formidable hurdle, acknowledged Makdessi. “Everyone wants to be first,” he said. “If the industry’s four or five major players were to sit around a table, leave their egos aside, and talk logic and sense, the solution would be there immediately.”

Unfair competition, if left to flourish, will continue to compound the industry’s woes, say many. They contend that a handful of powerful players have the market in a chokehold and smaller players are being squeezed out. “In the absence of regulation, everything is possible,” noted Ayoub. “It becomes jungle law.” Rizk conceded that agencies are guilty of favoritism with respect to certain media outlets because of juicy incentives – which he said should be revisited and toned down. Makdessi, though, vigorously denied the existence of any form of advertising mafia. “The claims are not true. There is no monopoly of the industry. Those who claim there is a mafia are those who do not know what advertising is. They don’t know how advertising functions.” He said that only small advertising agencies might opt for a particular media outlet to serve private interests. “International agencies go by figures, statistics and research and are accountable for whatever they do.” His denials were echoed by Richa: “This mafia story has been circulated by weak media outlets, which, naturally, do not get a high share of advertising. The only excuse they can offer, to shroud their shortcomings, is: ‘so-and-so is in bed with so-and-so.’ But clients are not stupid, and advertisers can‎’t just do whatever they want.”

More regulation of the industry would help, say some insiders. Most regulation proponents, however, favor auto-regulation and there is widespread aversion to government interference. “They don’t really understand the ins and outs of this business,” said Ayoub. “They could impose really damaging decisions.” But unless the industry gets its act together, government intervention may be just around the corner, Ayoub warned, complete with unfair regulation and harsh decisions that would batter business even more and further damage investor confidence. “We don’t want this to be a government-led industry,” he said.

The term ‘regulation’ is, in any case, meaningless, Makdessi argued. “Why are we afraid of regulations if ministers do not respect them, politicians do not respect them, the government does not respect them. No one respects them,” he said, adding that the best form of regulation would be amending VAT charges so that they are exacted according to rate card, not invoice, value. A number of industry insiders have suggested that the source of the sector’s ills be pinpointed in a process overseen by global advertising bodies, such as the International Advertisers’ Association. An essential first step would be the mutual concession by principal actors that they all bear a portion of the blame. Makdessi, for his part, argued that a crucial ingredient of any remedy must be clean research that subsequently forms the basis for a new rate card sporting fair rates. The media must then respect those rates. “The day the media respects the rates, you will see an increase in the advertising spend in Lebanon by 15% to 20% gradually every year for the next five to six years,” said Makdessi, adding that a recent press conference, he offered to contribute $100,000 dollars as a first payment towards research. His gesture did not prompt others to open their checkbooks. Pessimism fuelled by the ongoing exodus of industry flair from Lebanon currently clouds the sector. The Gulf is packed with Lebanese talent and now, of the seven leading ad agencies in North Africa, five, Makdessi said, are owned and run by Lebanese who have fled the dearth of career opportunities in their own country. For those left behind it will take a long time to rebuild the trust necessary for smooth sailing. “I don’t see any light at the end of the tunnel 2004,” concluded Makdessi.

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Society

No season

by Anthony Mills
written by Anthony Mills

Ever-optimistic tourist industry insiders contend that 2003 has been a satisfactory year overall and that Lebanon will continue to replace Europe and America as the destination of choice for high-end Gulf Arab tourists in 2004. In reality, however, some major prodding is necessary in the coming year for an underdeveloped sector that needs to overcome serious obstacles imposed by the government, extend a paltry two-month summer peak season and bolster the number of arrivals to the country by attracting a fresh brood of tourists from non-Arab countries.

Working with a government that critics say is doing little, if anything, to help buttress the sector will continue to be a main hurdle for the tourism industry throughout 2004. The ministry currently operates with a hopelessly low budget, an aversion to new blood, no marketing plan to counter media that portray Lebanon as a violence-prone country, fractious domestic politics that unnerve prospective visitors – even in the Gulf – and simmering regional instability.

“The government must understand that tourism is not only selling hotel rooms and restaurant meals,” said Paul Ariss, president of the union of restaurant, café, nightclub and pastry shop owners.

Also hindering the development of the tourism sector is a flawed infrastructure, which the government has yet to seriously tackle. Not only do the poor roads restrict tourists from visiting major tourist destinations in various regions of the country, water and electricity shortages occur at the height of the summer season. Power cuts in Bhamdoun and Aley in August 2003 prompted 20% to 30% of the Arab tourists staying in the region’s mountain resorts to pack up and head for Syria, or home.

Government policies adopted in 2003 will also harm tourism in the coming year. The recent decision to stop granting British citizens visas upon their arrival at Beirut airport, for example, will undoubtedly cause a decrease in British visitor numbers and reflect negatively on Lebanon as a tourist destination. Although understandable as a diplomatic tit-for-tat measure – Britain now requires transit visas for Lebanese with layovers in the UK – the move, critics say, is a case of cutting off your nose to spite your face.

“Unfortunately, politics in Lebanon very rarely takes into consideration the benefits of tourism,” declared Ariss.

Another threat to the tourism sector is the levy of burdensome government imposed taxes that is driving 50% to 60% of the some 3,000 or so restaurants to consider shutting down and moving to Dubai, Abu Dhabi and other Gulf cities, despite the fact that each have already spent an average of $500,000 in start up costs to open in Lebanon. “There is no logic to the way the authorities deal with the general economy, and with tourism. The tourism sector should not be overburdened with taxes and charges,” Ariss complained. A realistic view of Lebanon’s tourist sector shows that the country no longer enjoys the unassailable position it held before the civil war. It must now work to compete with rival destinations, such as Egypt, Jordan, Syria and Dubai. According to Pierre Achkar, president of the Lebanese Hotels Association, Lebanon will have to fight to compete with the tourism industries of these countries. “We are not competitive because our prices are high, due mostly to the taxes and charges,” he said. For the moment, however, critics say the government is seemingly under the mistaken assumption that because Lebanon is blessed with natural tourist assets, it will somehow blossom unaided as a tourism destination. “We need a real political decision at a high level to make this country a real tourist destination,” said Achkar. “The government has to understand that you have to do a lot of things – even if you have a nice country, nice people, a nice nightlife – to be on the international map of tourism.” But detractors allege the ministry of tourism is either unwilling or unable to do its job. “We really have a problem in the ministry. They need human resources and they need a budget,” stated Ariss. “The current budget is at a minimum and it’s forbidden to have new employees in the ministry, even though they don’t have professional people.”

Criticism has also been leveled at the ministry over its handling of this year’s Arab World Trade and Tourism Exchange (AWTTE), held in September 2003 at BIEL. The ministry awarded the management contract for the fair to a certain Lebanese travel agency, invoking the anger of its competitors, which then boycotted the gathering. This contributed strongly to weak participation at the event and its failure to impress.

“The tourism ministry sometimes helps very big industry investors and ignoring the small investors,” protested Achkar. He added that the hundreds of smaller players, who actually put Lebanon on the international tourism map and constitute a social fabric upon which countless families depend for a living, are being swept aside to make way for powerful companies. According to Achkar, one reason why no tourism-bolstering governmental decisions have been taken is because the government has been resting on its laurels since the 9/11 attacks and the impression that Gulf Arabs wary of travel to the US and Europe will continue to turn to Lebanon. But accurate tourism-related data would help smash the false sense of security. Information is needed on where visitors are staying. For example, when Lebanon registers a million tourists, the implication is they all stay in hotels. But in fact, observers estimate that as many as 50% of Gulf Arabs own property and houses and do not pay for hotels, and spend much less on restaurants and other outings. To ensure a successful 2004 season, industry experts agree that Lebanon’s constricted two-month summer tourism season should be extended. In other countries, Achkar noted, the summer season runs from the beginning of May until the end of October. “Turkey, Cyprus, Egypt, are all fully booked from the first of May until the end of October. For us, the summer season is July and August and we are losing a lot of money [as a result].”

Furthermore, in a joint campaign with the tourism ministry, the Hotels Association is to start aggressively targeting potential tourists from Eastern Europe, in particular Russia and Ukraine (for Eastern Europeans, the cancellation rates in Egypt during the Iraq war were far lower than for Western Europeans and it appears the are less susceptible to the regionally-generated jitters). However, marketing studies will prove imperative to determine which prospective tourist types and what countries should be targeted, and how they should be lured in. “The figures that are published by the government should be analyzed more accurately in order to decide where to invest and who are the targets,” said Ariss, adding that Lebanon should start to steer away from relying heavily on the Gulf Arabs that constitute the lion’s share of the country’s tourists. “We cannot say that we have tourism in Lebanon just because we have some Arab tourists who come here during very defined periods.”

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Society

Q&A: Ali Abdallah

by Executive Staff
written by Executive Staff

E: What was the ministry’s strategy in 2003?

AA: This year should see a robust and energetic campaign to promote the Lebanese tourist industry, especially in light of the encouraging figures that were recorded in 2003. Not since 1974, 20 years ago, have we seen over one million visitors and the business that was generated was in the region of $1.6 billion or 10% of GDP. This growth, which realistically began in earnest in 2000, should translate into the end of 2003 seeing 1.1 million visitors, mainly from Arab countries, compared to 936,000 for 2002.

E: How do you explain the fact that 2003 was an unstable year for the region, while the local tourism industry saw a considerable improvement?

 

AA: Well, we still have regional instability and some foreign countries still associate us in their media with terrorism, but the reality is that tourists are amazed when they come to Lebanon and see the level of security and quality of services provided.

E: Who is coming?

AA: In 2002, 44% of visitors were Arabs. This August nearly 200,000 Arabs visited Lebanon. Currently, information is being collected at the airport to get a clearer picture of all the different types of tourists coming to Lebanon.

E: Are those that visit Lebanon big spenders?

AA: Although we have a relatively small number of tourists, their daily spend is high. Tunisia needs five million visitors to reach our income. There, the average daily spend is around $60 per day, while in Lebanon the average expenditure per tourist per day is $250. Many Gulf Arabs spend as much as $500 per day. There are untapped countries like Japan and South Korea, whose tourists spend up to $400 per day. Lebanon has no tourism office in Japan. Today, there are talks to take exhibits from the national museum to Japan in an effort to help promote the country there.

E: What type of tourism is the ministry keen to focus on? Religious, shopping, archeological or conference tourism?

AA: We will have a clearer picture once the results of our research are finalized.

E: What about the more niche activities?

AA: We are trying to develop Lebanon as an upmarket destination, stressing on quality and luxury, but we are also promoting Lebanon as a destination for what I am going to call “medical tourism,” where we can offer packages to people looking for medical treatment and the ensuing recuperation period. Hospitals would be classified according to specialization and we would imagine a lot of Arabs would opt for this, as they respect our doctors and facilities. Cultural, eco and archaeological are other sectors we need to develop.

E: What do you anticipate will be the sectoral obstacles for 2004 and how do you intend to overcome them?

AA: Well, we need to improve the state of the roads. This is crucial if we wish to woo western tourists to Lebanon. We need to be seen as a safe country. We also need to work on our service skills, especially how we receive, talk to and help tourists, and this is especially needed in the public sector. We also need to develop modern laws for the sector and this will help hotels and restaurants overcome the problems that are limiting the inflow of foreign investment. The ministry has established a mechanism to reduce red tape. IDAL used to handle this but it was not doing a good job and that is why we decided to bring tourism-related investment development back to the ministry.

E: What is your strategy for 2004, assuming you are still in office?

AA: We are in the process of analyzing the tourism sector in every region in order to know what will be needed in terms of investment and then develop that region’s tourism potential. We will be promoting the country with an international marketing campaign, but domestically we are working on the TELEPHERIQUE project that aims to link all ski resorts. This will benefit a lot of derivative activities and companies such as MEA, car rental firms and tourism fairs. We will increase the number of tourism police; work closely with the private sector and others in the tourism community to improve the environment – an important factor for the modern tourist.
 

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Real Estate

Dirty deals

by Anthony Mills
written by Anthony Mills

Despite cautious optimism in some areas of the residential market, development anywhere in Lebanon is and will continue to be fraught with problems, especially corruption and suffocating and over complicated bureaucracy. Developers are at their wits end

“You try to be very legal but they always find a way to tell you it’s not legal so that they get what they want. They want money,” said Karim Bassil of La Constructa, who said that bribery was costing him 1% on every project.

This was a sentiment echoed by Karim Ibrahim, managing partner of Contract s.a.r.l. “We want less corruption,” he said. “When we do a budget for a new project, we must allocate at least three percent for bribes. I’m talking about projects of $50 million, of $40 million. If not, you will never get a permit.” Ibrahim has three projects on hold because he is missing one, seemingly unobtainable signature. “I think we may have to wait for two years, because one guy is not good friends with another. Meanwhile, we are paying 10% interest at the bank, and they don’t give a sh*t.” The situation is unlikely to change soon, predicted Ibrahim. “It has to be changed from top to bottom. I don’t feel that’s going to be the case soon … when you bribe in Lebanon today, it’s like paying tax. There is an unwritten quota: this guy has to get $20, and this guy has to get $1,000 and this guy has to get some gold pieces.” Unchecked, corruption will continue to exact a heavy toll on foreign investment: “We’ve noticed that many foreign investors either let go or are not interested because of corruption and the bureaucratic procedures they have to go through,” he said.

And it goes on – Chahe Yerevanian, managing director of real estate firm SAYFCO finds himself allocating bribes under “miscellaneous costs.” “The developer has to give left and right, even though he is getting his permit on the dot legally, according to every single law. It’s not called corruption. It’s a way of life,” he said. Elsewhere, a sluggish market will have to be aided by lower interest rates. Ibrahim branded the 12% rate developers must pay on construction loans “humongous.” The financial burden is rendered all the heavier by the government corruption-induced delays. Meanwhile, “the banks are just making money, more profits,” he noted wryly. For his part, Yerevanian believes the government should, over the next two years, lower the apartment registration tax from 6% to 2%, or even a symbolic 1%. For other real estate areas in Lebanon, the news is not much brighter. Office space is in slow demand and prices have tumbled by as much as 60% in the last eight years. Demand will continue to lag behind supply “for some time to come,” industry insiders agree. According to Raja Makarem, managing partner of RAMCO Real Estate Advisers, only new buildings in the BCD will fare better because they boast modern facilities, parking, and plenty of open plan floor space. Thus, the new downtown Atrium building is fully occupied, he said, and the An Nahar building is 50% to 60% full. “In the short- and mid-term, there are big question marks,” conceded Yerevanian. Demand in the BCD, say many professionals, is being created primarily by domestic companies that want to open offices there to bolster their image, not by international newcomers. “There is now quite a bit of stock that can be obtained for between $80 and $250 per square meter, depending on the quality, amenities and location,” observed Makarem.

Despite the take up of new stock, older offices in the BCD continue to perform poorly and the excessive supply phenomenon has hampered Solidere’s efforts to fill the space available. “If you look up at the offices [in the Solidere area], the majority are empty,” said Ibrahim. He said clients are opting to rent elsewhere – for example in the Sodeco Square building, which he manages and where 150 offices are all full. “Why? Because I rent for at least 25% less than downtown, I am only two minutes away from the area and I have secure parking,” said Ibrahim, adding that the paucity of parking space downtown is one of Solidere’s biggest problems. According to Yerevanian, the retail market has proved far more vigorous over the last two years, advancing at a tremendous pace. Noticeably, the mall is in. Testimony to this is borne by the numerous shopping center projects recently completed, on the verge of completion, underway, or in the pipeline. “They all seem to be attractive for major retailers,” said Makarem, “but the traditional retail market is going to suffer.” Yerevanian agreed, saying, “The future is for these kinds of malls to flourish.” “This is going to change the way retailing happens in this country. We’re going to have enormous, acclimatized centers with lots and lots of parking,” said Michael Dunn of Michael Dunn & Co. “Where you go shopping today isn’t where you’re going to go shopping in five years.” Although prices at the ABC Achrafieh mall can exceed the $1,500 per square meter mark, demand for retail space has been high. The center is reportedly fully booked, but its hoped-for success may be offset by potential traffic problems – it is slap bang in the middle of a somewhat constrictive residential neighborhood. “I think they got the position wrong,” remarked Dunn. “I think they’re going to struggle.”

As a retail project, Solidere is flourishing relative to other retail areas and will do very well in the long-term, industry executives said. Most available retail space in the area has been taken, with Maarad Street forming a principal artery. And the downtown “Souks” project is eagerly awaited. “The downtown city center may possibly take over from Dubai in terms of quality shopping,” Dunn remarked. “Architecturally, Solidere is gorgeous … and big names are going down there like Virgin, Nike and so on,” noted Ibrahim. “It has become an attraction. Today, if you do not have a branch – whether you are a bank or a shop – in Solidere, you’re out, you’re not among the top players.”

Consequently, since Solidere’s inception, retail prices have risen from about $400 a square meter in 1998 to, in some instances, over $1,000. “It has become a fact that Solidere’s commercial stock is a success. It’s become irreversible,” Makarem stated. In fact, according to a survey executed by real estate consultants Cushman & Wakefield, the BCD ranks 34th on a list of the most expensive retail locations, behind areas in Turkey, Israel and Kuwait. Solidere’s commercial triumph has not, however, affected the trendy Verdun shopping area much because the latter has proven a strong, up-market retail street, with retail costs surpassing $1,000 per square meter in some areas. “In the future, though, Solidere will affect everyone with its shopping,” predicted Dunn. As for Hamra Street, although it is no longer as resplendent as before the war, it remains an established market. “It’s still the most successful retail street in Beirut because it offers what a real retail street requires – a straight line continuity of shops,” he said, adding that the face-lift Hamra is undergoing should further buttress its evolved position as a caterer to the mid- and low-end market. Real estate prices dropped in Hamra during the war but have since regained the $500 to $700 per square meter range. However, east of Beirut, Kaslik has been squeezed by the emergence of Solidere and the migration back to town, with the architecturally ailing main shopping street of Furn al-Chubbak likely to be hit hard. “But the Jal al-Dib, Las Vegas-style strip, complete with its MacDonald’s, Burger King, Roadster Diner and B-to-B will prove resilient,” predicted Yerevanian. “It’s got a niche, as it has its own market. It will never suffer because of the success of Solidere.” Finally, a tip: Gemaizeh is the buzzword in the real estate sector. Industry insiders are tipping the area as an up-and-coming residential neighborhood that will mix modern with relatively untarnished traditional Lebanese architecture. The area’s assets are self-evident: it is close to the commercially thriving BCD, but has retained an almost bohemian identity – setting it apart from the artificiality that critics say typifies much of the reconstructed, post-war capital. “Gemaizeh is my tip for the future,” said Dunn. “It’s adjacent to the BCD, it’s dirt cheap, it’s got some beautiful architecture. What an investment for the future.”

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Economics & Policy

Doom and gloom

by Thomas Schellen
written by Thomas Schellen

Views on Lebanon’s economic perspectives have tended throughout the post-war period to concentrate on macroeconomic and fiscal issues. As a result of the worsening fiscal situation, socioeconomic needs in the last few years became overshadowed to a worrying degree by concerns over the national debt and its servicing. The state’s ongoing and exasperating procrastination in settling long outstanding dues with the National Social Security Funds for medical treatment of civil servants and other obligations in 2003, in itself an inexcusable inaction on behalf of any government, can by no stretch of imagination be explained in any other way.

This year’s social debates were ostensibly fueled by self-serving political agendas, a primary example for the latter trend shown by complaints over the “hijacking” of the October 23 national strike. Power players and interest groups allegedly converted these demonstrations over a variety of popular financial demands into stages for promoting themselves. Nonetheless, 2003 was universally recorded as a year of relative relief and macroeconomic calm for Lebanon. This is owing to the debt reprieve under the Paris II agreements with donor and lender nations and institutions, as well as to financial engineering measures taken under leadership of the central bank and realized under strong participation of the banking sector. For 2004, however, a year in which the presidency of the republic is to be decided upon and overdue commitments in fiscal debt reduction urgently await fulfillment, there seems to be little hope for major improvements in the fitful macroeconomic situation. Expecting less than 3% in growth, international analysts project next year’s development of Lebanese GDP at little variance to 2003. While modest growth is vastly preferable over recession, the country would need to see a stronger economic and productivity gain to rack up hopes for breaking the debt cycle. Additionally, it is unsettling that 2004 elsewhere looks to be much brighter than 2003. The OECD has upbeat expectations, sensing “ample evidence of the renewed strength of the world economy” and a “palpable recovery” not only for the US and Japan. “Global activity is picking up,” stated the organization’s freshly released outlook for 2004/05, “with financial market conditions improving and business investment in the process of taking over the baton from consumption.” In the Arab region, many countries had grown more than Lebanon in 2003. Also for 2004, the Economist Intelligence Unit’s GDP development expectations for countries such as Bahrain (5.4%), Jordan (5.2%), Qatar (5%) and the UAE (4.1%) are way ahead of Lebanon’s 2.5% EIU projection. For the petro-economies of Kuwait and Saudi Arabia, expectations of a major oil price decrease push GDP growth predictions below 1.5%. Iraq, where a 19% leap is forecast, is in a development-need category of its own, but relative to other countries in the Gulf and Levant, Lebanon’s chances for increasing its role in the regional economy do not appear impressive. To impel better growth, Lebanon for one thing will require vast improvements in the quality of governance. At least that is what World Bank assertions of the importance of good public governance for economic development suggested in autumn 2003, in combination with the institution’s assessments of governance deficiencies in MENA countries. Advancing Lebanon beyond meandering steps of sluggish development seems more difficult to conceive without socioeconomic impulses that ease the widespread sentiment of suffering from consistently tougher living conditions. In one recent survey, over two thirds of respondents deemed social spending on health care and education as the budget items the government should prioritize.

While preoccupation with socially less relevant general spending and neglect of reform needs are often associated with the escalation of Lebanon’s public debt and the downturn of socioeconomic living quality, the irony of the present situation is that insistence on keeping social spending accounts low and macroeconomic prudence high are the best course forward. Both Yves de San, the UNDP resident representative, and Selim Hoss, former Lebanese prime minister and economist, espoused this view when asked by EXECUTIVE what they judged to be key economic issues for 2004.

In light of several years without adjustments, demands for wage increases are fair, “but the big question is if the economy can afford it,” Hoss said. “We have an army of employees in public administration. If the minimum wage is increased now, it will have a tremendous negative effect on the budget.”

Both government and employers would offer strong resistance to wage increases, which neither public nor private sector could afford, he cautioned. “Should this increase be accepted, it would have repercussions on the general price level and a possible weakening of the monetary situation. This might prompt the central bank to even increase interest rates to higher than they are now, to safeguard the monetary situation.”

Regardless of how the fiscal debt problem had built up to its present magnitude, the macroeconomic situation needs to be the focal concern, said de San. “I don’t think that we have a choice,” he said. “One cannot let the country go belly up because then, the social impact would just be impossible to manage. I think that is the priority.”

As long as the country steered clear of fiscal meltdown, the UNDP official did not anticipate a social explosion, except for improbable scenarios such as “if suddenly the banking sector were to crash or the country itself would go bankrupt. As a result of that, the shock would be too great for the poorest third of the population and very heavy on the middle income group.”

Also according to Hoss, a social explosion is not likely. People had found an escape route from the economic pressures through emigration, he maintained, and this outflow of labor (and the inflow of remittances) should not be taken lightly.

The government’s economic objective for 2004 should be to overcome the cycle of debt and deficit. “This vicious circle can be broken only at the point where the rate of increase in GDP is higher than the rate of increase in public debt. When we reach that point, we reach a virtuous cycle,” he said. “The clue is encouraging foreign investment and encouraging Lebanese domestic capital to be invested inside the country. Investment is the clue to the whole issue.”

For de San, efforts for economic improvements ought to put the human being back at the center of development decisions although this was not always easy to achieve conceptually. “The country is not doing too bad when compared to others, especially when seen against peer group of economies of similar size,” he said. “Where it is not doing so well is in comparison to itself. Segments of the population suffer and are less well off than before. Poverty and disparities, they are so obvious.”

However, when seen against a baseline from the mid-90s, the country had been advancing in certain socioeconomic issues and was not too far from achieving some results, he added. Improvements in fields such as securing equitable class sizes and teacher ratios in rural and urban schools were not primarily an issue of cost, and awareness had grown that funds could be used more productively. A recent country report on Lebanon’s situation in relation to the targets of the UN Millennium Development (MD) Goals showed a reasonably high probability for achieving those goals, which are built around the key target of halving by 2015 the proportion of people living in extreme poverty. While all available statistics and figures had been put to use in drawing up the report, the task now at hand would be to examine how much it would cost to realize those goals. “What we need to do now, is to see what reaching the MD goals in 2015 means in real cash needs. That job is still to be done,” de San said. “But I don’t have the answer yet. Once we have it, we will be probably able to see whether the country can afford it. Whether it can afford it with the current situation is one thing. Whether it can afford it three years from now depends very much on decisions that have to be taken on a number of issues.”

It bears repeating: these urgent decisions begin and end with macroeconomic matters. The World Bank (WB) in the course of 2003 left no doubt over its growing concerns at delays in privatization commitments and fiscal promises by the government in Beirut. The WB quarterly assessment of Lebanon’s latest developments was still impending in early December 2003, but the institution’s senior country economist, Sebastien Dessus, made it clear enough. “If there is one issue in this country, it is the fiscal issue and debt sustainability,” he told EXECUTIVE.

With presidential and parliamentary elections on the agenda within the next year-and-a-half, inertia is much likelier in 2004 than any enlightened decision-making where it is most critical – namely, the political arena and public sector administration. Some countries in the region are looking at better economic prospects. At the end of 2003, the Middle East is a changed but not necessarily better place than 12 months ago. However, this moment’s most positive difference is that people have no impending invasion of Iraq to dread. Hopes for a better future are always abound when a new, however untried or out-of-the-ordinary, attempt is launched towards solving the region’s real essential problem: the Palestinian-Israeli conflict. For Lebanon, however, both local and international experts confirm that the region’s stability or instability will not be the key influence on the economy in 2004, and certainly won’t do as an excuse for not making progress in solving homespun problems. At least for one more year, socioeconomic concerns again will not be receiving the attention and support they deserve. Before aspiring for regional roles and addressing any other issues, the country may have to demonstrate that it can handle its own decision needs. As one local influential in the younger generation of business executives suggested, perhaps national decision-making should try a time-tested recipe to encourage agreement: put all involved into one big hall, lock the doors and misplace the keys until unity has been reached and a comprehensive course of action signed. The question is if events in 2004 would suffice to reach that desirable victory.

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