Finance

High hopes

by Executive Staff
written by Executive Staff

The adversity of the past three-year bear market in US equities has been steadily forgotten over the course of 2003, as we enjoy the present blessings of a stronger economy and a nine-month-long rally. Investors and speculators are now stressed with the question of how much longer the good times will last. The major worry is whether it is too late to join the party. The most important question on everyone’s mind is: Am I going to miss out if I do nothing, or am I going to buy at the top if I chase this market at this point? Folks have gotten quite excited. What began with such nervousness and anxiety in early March has now flourished into a full-fledged, wide-open speculation. There’s a lot of optimism that good things are about to happen next year in the economy and the stock market. We’ve seen lots of cheerleading and speculation when not much has occurred yet. This rally was predictable by many, even the bears, but no one, not even the bulls, predicted that this rally will go this far and this fast. As always, we can find compelling arguments for both the bullish and bearish perspectives. One thing that makes the market so difficult is that very logical points of view can always be made for both sides. We can easily find ourselves swayed back and forth as we listen to the arguments. The bulls will tell you that beneficial monetary and fiscal policies, a continued decrease in risk aversion, and attractive relative valuations are evidence that positives outweigh negatives at the moment. The weakness in the dollar has no historic correlation with stock market returns. In addition, unemployment, which has stayed at a pretty high level throughout this recovery, is a classic lagging economic indicator. It is common for the unemployment rate to rise after the end of a recession. This period seems to be no exception. In addition, in the short term, seasonal factors favor stocks, as November and December are typically the strongest period of the year. The bulls conclude that we have now turned the bear page and we are currently enjoying a new bull market that could last for several years to come. Bears, on the other hand, say that there are no signs of a real improvement in the economy. The Fed has greatly increased liquidity, and this has resulted in asset inflation. This has meant rising stock prices and rising home prices. Stocks and homes are now priced at treacherously high levels. Valuations, especially in the Nasdaq, are still way high. The national debt is now around $35 trillion, as compared to a $10 trillion economy (GDP for the US).

Consumers have leveraged up appreciating home values to live beyond their means. But they are so spent up that auto sales are deteriorating, despite zero-percent financing and tax rebates. There has been some good news from certain tech companies. But that’s because they are the companies that sell to other companies that may be building up inventory. After this bear market is finally over, almost no one will remember the hyper bullish psychology that existed in the summer of 2000, the spring of 2001, the spring of 2002 or the fall of 2003. All these rallies will be labeled corrections in a secular bear market.

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Finance

Q&A: Riad Salameh

by Thomas Schellen
written by Thomas Schellen

Elected as banker of the year by EUROMONEY magazine, Riad Salame, govenor of the central bank, has been a guarantor for the authenticity of Lebanon’s monetary policy of safeguarding currency stability and relying on market forces. EXECUTIVE asked Mr. Salame about the state of the banking and financial sectors at the end of the year, the impact of the Al Madina scandal, and his outlook for 2004.

E: How do you evaluate the period in terms of fulfilling the commitment and promises of Paris II, one year post the event?

RS: Paris II recreated confidence in the financial markets. Interest rates saw an important decline. In 2003, interest rates are 50% to 60 % lower than in the previous year. The confidence and positive dynamic allowed Lebanon to issue debt instruments in the local currency with three-year duration. That was the first time it was possible to do this and this was done through the CDs [Certificates of Deposit]. The other achievements in the financial sector were the different initiatives taken by the central bank to reorganize its portfolio. These various initiatives allowed savings in 2003 of more than $800 million and will create more than $1.2 billion [of savings] in the year 2004. Despite the fact that the debt has increased in 2003 to reach around $33 billion by yearend, the servicing of the debt for 2004 is going to be less by around 20% compared to what was achieved in 2003, and less than it was estimated to be before the success of Paris II, by almost 40%. On the government side, more work has to be done. The budget in 2003, according to the ministry of finance, has a deficit equal to 37% of the total budget, while predictions were for around 30%. The 2004 budget is showing a deficit of around 30%, which is good compared to what was achieved in 2003, but not in line with the decline of the deficit that was promised to bring down the dynamic of the debt. On the other side, promises of privatization and securitization were not realized this year.

E: Is the delay in privatization by at least another couple of months a threat to Paris II and what has been achieved so far?

RS: The funds that were released were not conditional. Therefore, the results of Paris II have already been finalized. The importance of reforms comes from the fact that we have to keep this confidence in our markets so that the interest rates could go lower for the economy.

E: In view of some analysts, the central bank has been focusing on monetary stability, while fiscal authorities had priorities on lower interest rates that were of a different emphasis. Do you see a divergence between the two?

RS: Monetary stability is also the objective of the government and has been the objective of all governments since independence. The divergence comes from the views on which policies would result in stability. The central bank relies essentially on market sentiment in order to determine the rates of interest in the country. There are some views that you could administer interest rates and keep monetary stability. This is not our view. Therefore, and as the priority is still for monetary stability, the central bank remains with the same policies.

E: The desire to drive interest rates further down to ease further borrowing is not what you would unconditionally agree to?

RS: We look at the interest rates to be stable. We intervene in case there are upside pressures, because we do have the means to do it through all the funds we raised through the CDs. We think that the next move would be to have lower rates but this has to be market driven, so that the confidence remains in the financial sector. And for that, we need good news from reforms initiated by the government.

E: If we turn now to the banking sector: was 2003 a good year in Lebanese banking?

RS: Lebanese banks in 2003 have realized returns that are equal to 2002 despite their contribution to lend the government at zero percent, and despite the fact that interest rates have declined on the lending side, especially for borrowers with a good rating. The balance sheets of banks have increased this year, especially on the deposit side, with growth of over 13%. There was a good progression for non-resident deposits and fiduciary deposits, which means that the banking sector in Lebanon is conveying more confidence for the region and non-Lebanese. The capitalization of the banks is now over $3 billion, capital adequacy is over the required 12%, and the situation in the sector, in terms of improving management and technology, is also good. So I think that the banking sector in Lebanon is sound and is progressing in a healthy manner.

E: What would you tell someone who claims that banks are making too many profits?

RS: The return on assets, as mentioned by the IMF, is on average 1% internationally. The return on assets in Lebanon during the past two or three years was below this 1%. Therefore, the banks’ return on assets should improve. The reason why you have big nominal profit figures comes from the quick expansion in their balance sheets. When the total balance sheet of Lebanese banks was $10 billion, their profits were $100 million. Today, as balance sheets total $50 billion, their returns theoretically should be $500 million. But in fact, due to provisioning and less income from the government, their returns are less than that. The higher profit figures for the banking sector are derived from the expansion of their balance sheets and not by increases in the spreads they are charging in the cost of money.

E: Are you satisfied with the interest rate environment as it stands today?

RS: We would like to see the debit accounts – excluding consumer loans – with a ceiling of 10%. We are working for that with the banks in Lebanon and the Association of Banks in Lebanon [ABL]. A commission is to be formed in the coming two weeks to study professionally how to get this achieved across all accounts, whatever their size.

Interest rates on deposits are not a concern to the central bank. We think that the banks know how to manage their treasury and if they do sacrifice on their profits to pay their clients more or gain new market shares, the central bank doesn’t see this as harming the economic growth. Our focus is on debit interest.

E: If we look forward into 2004, what will banks have to achieve next year in regard to getting ready for Basle II requirements and working for the needs of the national economy?

RS: The central bank has issued a circular with the purpose of cleaning the balance sheets of the banks from redundant debts and provisions that were constituted for these debts. This includes all accounts up to June 30, 2003. Our priority to prepare the sector to be in a very good situation for Basle II – that we expect for around 2008 – is the success of this operation because the settlement of these loans will help the banks take them out of their provisions. On the part that is not settled, banks will have to reconstitute liquidity during five years, as to equal the amounts that there were no settlements on. This will give the economy a boost because many players will come back and will be able to refinance from banks as they have settled their loans and at the same time will clarify the banks’ balance sheets and will defuse the high percentage of provisions compared to the loan portfolio, which is effectively cosmetic because it is mainly constituted by reserved interest rates. This is the priority for the year 2004 and I think all banks are aware of the importance of this reorganization.

E: Is the Al Madina case closed from the perspective of the central bank?

RS: For us, the matter is closed, banking wise, because we have secured enough funds to pay the true depositors, including interest rates. We have changed the management of the bank, we have nominated a manager by the high banking commission and, therefore, ousted the previous management that brought the bank into the situation. On the legal side, all the necessary has been done. Whatever happens between the players and their disputes is not the concern of the central bank.

E: From your perspective, has the whole Al Madina affair been resolved without damage to the image of Lebanon or its banking sector?

RS: The banking sector did not suffer, on the contrary. This year we have increases in deposits by 15% and a record positive balance of payments – around $3.4 billion until the end of October. The banking system is safe. No other bank was linked to this bank and there is no echo on other banks. We do think that the way the situation was handled was quick and the results were good. Nobody lost money, neither the government nor the central bank nor the depositors.

E: Lebanon’s financial sector has been lagging behind the banking sector in the attention it has been getting. Are there any realistic prospects for establishing an oversight institution of the type of a Securities and Exchange Commission, or legislation that would enable the sector to be stronger next year?

RS: It is necessary to have such an organization. There are projected laws that were presented by the central bank to the government. We don’t know of any immediate follow-up but this is an important initiative that will help raise more equity for the private sector and increase their performance.

E: Next year is an election year in Lebanon, per chance in parallel to the US. In that country, an election year usually means a 1% better than economic growth. Would you foresee anything similar for Lebanon?

RS: Our estimates for next year are still in line with what was achieved in the economy for 2003, with some improvement. Due to the seasonality and volatility of the economy, the central bank has been reserved on putting out estimates. After the first quarter of 2004, we will follow with a better estimate.

E: Would the run up to the election here impact the economy, either positively or negatively?

RS: We hope that the debates will be in line with the interest of the country and its economy. And anyway, if things get harder, we have taken all the necessary measures so that they do not affect the stability of the economy or the financial sector. Already, the results have shown that despite the political internal tensions of the last two or three months, these were not felt by the financial markets. And this is a big improvement in the financial history of the country, where these financial markets were very sensitive to political developments.

E: Is being central bank governor a good preparation for being president of Lebanon?

RS: The time for our interview is up.

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Society

Treading water

by Thomas Schellen
written by Thomas Schellen

By all signs and measures, insurance in Lebanon remains on the slow burner. Business developments and preliminary expected results for 2003 – even a somewhat conclusive performance evaluation based on unaudited results is not possible before next April because far too few members of this sector provide half-year or third-quarter reports – indicate no significant changes or additional sector growth in comparison to 2002, when the volume of insurance premiums increased by about 6%.

Aside from stronger hopes and aspirations harbored by individual companies and for specific products, insurance managers widely expect that also in 2004, their industry will see more of the same – treading water. This is not to say that the sector doesn’t breathe easier today than it did two years ago, when operators were looking at a mountain of bad news based fundamentally on increasing reinsurance costs and faltering investment portfolios. And the industry certainly appears far healthier and more promising than in the late 90s, when it was battling to emerge from a long credibility crisis and struggling to gain firm financial and operational grounds on the platform of the gradual implementation of a revised national insurance law. This period lies now behind Lebanon’s insurers, even though some of the goals for downsizing of operator numbers and consolidation have yet to be achieved. What that leaves the sector, at this point, is a mixed lot. Firms on their protracted way out and those that in best-case scenarios are broker-sized candidates for acquisition by a viable insurer, stand vis-à-vis operators investing into their growth and increasing professionalism. The latter group comprises first of all the companies with international corporate affiliation, bank-owned firms, including life and bancassurance specialists, and Beirut-based companies with regional scope, but it also includes a share of independent local companies eager for growth. Most of the straits that plagued insurers in 2003 stemmed clearly from the prevailing of adverse economic conditions; others were related to matters of public policy and the state of government affairs. The economic environment made for few interesting projects that firms could go after. “The financial and economic crisis is continuing to take its toll by keeping the number of projects for general insurance low,” said Lucien Letayf, general manager of Libano-Suisse Insurance. The company, which has growing regional activities, could secure contracts to provide coverage for three major construction projects in 2003, he added, “but there are not many of them.” On the health insurance front, persistent problems in the public sector coverage, created through non-payment of government dues to the National Social Security Fund, derailed expectations that pressures on the sector would be relieved by stronger NSSF involvement and new public health care provisions. The much-touted introduction of mandatory third-party liability (TPL) insurance for motorists turned out to be less than companies anticipated, with a plethora of organizational and regulatory difficulties slowing the implementation process. But on the bright side, as far as the government’s work is concerned, insurers widely credited the ministry of economy and trade and its insurance control commission for doing a good job in implementing the first-ever series of complete field audits of sector companies, a task that had been outsourced to two professional auditing firms. Companies across the board furthermore confirmed that essentially, the government took an excellent step in beginning to enforce that motorists obtain compulsory TPL insurance against bodily injury.

With the prospect of increasingly thorough enforcement of vehicle inspections and insurance requirements and ongoing deliberations over the expansion of the compulsory insurance to property damage liability, the motor segment stands to be the main event in occupying the sector’s attention also in 2004. However, some insurers would rather the government not rush into making motor TPL coverage for property damage mandatory. Companies have yet to review the claims ratios and evaluations of the sector’s first experiences with the new motor liability cover. “We should initiate a dialogue with the ministry of economy and trade in order to amend the law on personal injury TPL in motor before moving to implementation of property damage TPL,” said Elie Nasnas, general manager of insurer Axa Middle East.

While the motor cover is a welcome development, “it could also be very risky,” warned Letayf, who also considered the end of 2003 too early for introduction of a compulsory TPL property damage cover. “Companies are not sufficiently capitalized to pay a multitude of claims,” he said, “especially since reinsurers mandate them to retain a large share of risk.”

Numerous managers offered anecdotal evidence for massive increases in claims amounts, in cases where the courts had issued judgments reaching multiples of what plaintiffs had been customarily awarded. One judgment this year reportedly ordered payment of $100,000 to the family of the victim in a deadly car accident, significantly exceeding a long-established practice of awards in the range of $10,000 to $17,000.

With an explosion of bodily injury claim judgments, even the most conservative insurance providers would face challenges to maintain a sustainable level of profits from mandatory motor insurance, given the low minimum premiums set by the regulators. And indeed, the reputable insurers have either discouraged clients from obtaining only the TPL cover or priced their packages considerably above the minimum. As a consequence, these companies did not see their motor portfolios grow by major percentages in 2003.

In sharp contrast to that are the practices of a handful of insurance operators that have been selling TPL motor policies not only at the $43 minimum annual premium rate but seem to have cut their effective prices even below that threshold. These unsound practices could well escalate to become the Lebanese insurance industry’s main problem in 2004. Akin to several companies that amassed unsound medical insurance portfolios in the nineties and crashed toward the end of the decade, shaky providers that are running up risk from signing cut-rate TPL coverage commitments could rapidly be facing bankruptcy, many insiders fear. “This possibility could be verified sooner than some expect,” said Max Zaccar, chairman of Commercial Insurance. If confronted with these concerns, managers of the companies in question did not respond, said Nasnas. “They don’t care.” Some in the industry observe their lesser colleagues’ game of accident roulette with a touch of social Darwinist attitude, claiming that a few insolvencies would simply purge the ranks from unfit operators. But in the opinions of outspoken insurance managers like Nasnas and Zaccar, such stoicism would be ill placed. A crash of insurance companies with big motor portfolios would lead to a loss in consumer trust, especially among the most-likely first-time clients who went for the offers of these firms, Nasnas advised. “It would shake the market.” Another weighty concern for the industry could arise from fairly widespread disparities between high increases of costs – which local insurers had to carry due to massive hikes in reinsurance rates since 2001 – and much less pronounced premium increases (in some cases, even lowered rates) they charged their clients. This could force some providers to make painful adjustments to their rate structure at moments when such sudden moves would come both late and be hard to explain. The problems that the industry could encounter in 2004 are juxtaposed by a notable share of potential growth and opportunities, some of which is outside of Lebanon. Domestically, life insurance and products optimized for the bancassurance distribution channel are the best growth candidates. “With all we hear about 2004, I don’t foresee any potential growth outside the life market,” Nasnas said. “The life business is getting better, due to bancassurance,” said Letayf.

The trend to buying more life insurance indeed seems to be on the rise in Lebanon. While the absence of tax incentives for life policy owners is still an obstacle, the country’s socioeconomic troubles have alerted larger numbers of people to the increasing unlikelihood that they will be able to rely on their families for a retirement income, thereby tempting many to buy into retirement plans and capital life policies. Companies that in 2003 overhauled their life business and stepped up their marketing, like regional player Arabia Insurance, and firms that devised new life and capitalization plans for distribution in bank branches, such as Adir (a company owned jointly by Bank Byblos and French insurer ADP), have been bullish about their prospects. Also many companies with a license to write life insurance but presently have less than extensive life portfolios, see the need to increase their relevant activities. Axa and Libano-Suisse are both firms that intend to address the market with new life products. For firms with regional ambitions, however, some of the most appealing expansion opportunities are in Arab countries, from Damascus to Doha. The Saudi market for medical insurance alone carries potential for new business worth billions of dollars, Letayf said. The parent company of Libano-Suisse insurance is engaged in a 50/50 joint venture with the El-Seif Group for an insurance company in the kingdom at a total capitalization of $27 million (SR100 million). Other Beirut-based insurance companies have equally staked their claims in the Saudi market, which is in the process of opening to greater international participation. Iraq’s insurance needs are massive and Lebanese firms aspire to play a big role in Baghdad, but most see the evolution of that market as likely to take shape at some later time. The opportunity closest to home and in time is the Syrian market, rife with high potential for insurance partnerships from both sides of the border. “What we hope to see in 2004 is opening of the Syrian market,” Nasnas said. “Lebanese insurers could offer added value here. ” As a member of the European Axa Group, the focus of Axa Middle East covers the Levant and Cyprus. If their aspirations and activities are regional or local, there are few doubts among Lebanese insurers that greater institutionalization of sector companies and consolidation of their numbers are prerequisites for their long-term developments. “We believe that even if we are a profitable and strong regional player,” Letayf said, “a partnership with a strong bank would be good news for Libano-Suisse.”

“Consolidation will happen at all levels; even the largest players in Lebanon write very little in premiums in international comparison.” said Zaccar, and Commercial Insurance, although confident of its capacities and proud of its independence, would be interested to look at merger prospects. “Our partners could be one or more banks, one or more local insurance companies, or one or more international ones,” he continued, emphasizing, “we are open but we are in no rush.” Financial standards and auditing supervision for Lebanese insurance companies will further tighten in 2004, supporting the thrust for consolidation. However, industry managers expect the process to need two to three years to gather speed and reduce provider numbers by a substantial margin from today’s some 60 companies.

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Society

Vital cover

by Executive Staff
written by Executive Staff

April 2003 saw ACAL succeed in reaching a viable framework for the implementation of the 1972 law governing compulsory third party car insurance covering bodily damage. Although some may argue that the early period of implementation may not have been as smooth as one may have hoped for, it did not take long to appreciate that the scenario whereby uninsured bodily injuries and/or deaths arising out of motor accidents have been eliminated. Most importantly, the “hit-and-run” culture has also been significantly reduced as those involved in accidents are less likely to flee the scene of an accident and more likely to help those injured.

The subject of extending this policy to include third party material damage is under review and may be implemented in the near future. No more will we hear stories from friends and acquaintances about how they have had accidents with cars that could not afford to offer indemnification. Statistics have proven that many accidents happen in the work place, especially construction sites. Another observation was that the low-income labor bracket has the highest exposure not only to minor injuries, but also to disabilities that can jeopardize their and their dependents welfare. Following fruitful discussions with the relevant authorities, providing proper insurance for workers has now become a prerequisite to obtaining a construction permit. Such insurance provides compensation for medical treatment (including hospitalization) and compensation following work related disabilities or deaths.

We all remember the tragic scenes of collapsed buildings and the consequences to the tenants. The government has now felt the need to promote safety standards for new buildings starting with early in the design phase. ACAL was actively involved in working with the official committee that took charge of studying this issue and the result included a recommendation to have various insurance policies for the different stages, including a 10 year insurance plan following the completion of the construction to compensate for inherent structural defects. A parliamentary committee is now reviewing these recommendations and we feel that it will not be long before building safety standards are significantly improved.

From our perspective, our work is not only contributing to the improvement of the quality of life in our society but also gradually creating new opportunities for our sector and increasing the size of the Lebanese workforce. ACAL has also been working to improve the difficult working conditions of insurance companies, including the slow recovery and development of the Lebanese economy following the years of war and the high increase in the cost of reinsurance following 9/11 with no possibility of increasing the price of insurance in our market. The latter has led to a drop in profit margins, the relatively small size of the Lebanese market and structural features not facilitating the expansion of Lebanese insurance operations in other countries Faced with these challenges, the insurance sector has worked individually and collectively through ACAL towards maximizing the potential of their development. We have seen remarkable progress in the quality of insurance contracts made available to the customers and I believe that this has been the natural result of our free market economy. In this sense, traditional single cover policies are being replaced by a variety of covers with competitive premiums.

Although debatable, there was surely extensive innovation in the distribution channels of insurance policies and here we have to acknowledge the introduction of Bancassurance and e-business. These reduce administrative costs of insurance sales transactions and the cost of premium collection, as well as the time dedicated to complete the sales operation

In conjunction with the above, the challenge will always be to provide the client with professional consultancy on his risk transfer requirements and the adequacy of the insurance contracts that he is buying, aspects that still seem to be better served through the traditional insurance intermediaries.

Regionally, Lebanese insurance companies have a proud tradition of regional expansion, especially in the Gulf. However, their role may be gradually diminishing due to the development of Arab insurance sectors with large financial capitalization and national interests. At present, there seem to be good prospects in Syria. There are high expectations that Damascus may be granting licenses to Lebanese insurance companies. ACAL is working closely with the Syrian insurance representatives and we have already established an excellent level of cross border co-operation.

Elsewhere, we have been witnessing serious efforts to optimize the potential of the Lebanese insurance companies to grow and compete. These efforts are the result of the joint commitments of the legislators, regulators and ACAL. Capital adequacy and regulatory control have formed the essential elements of our efforts. From the legal side, the law governing the insurance operations in Lebanon was subject to serious review, resulting in the promulgation of the amended 1999 law. The outcome was surely a step in the right direction but ACAL is aiming at further improvements and is currently working on further law amendments, which we shall reveal in due time.

ACAL has initiated the framework for the continuous evaluations of the sector, and we shall continue to issue the necessary recommendations within a context of active co-operation with all concerned. We do however hope to change our role to become binding with all licensed insurance companies.

To elaborate, we have created what we call CENTRALE DE RISQUES, where we will collect risk related data from all insurance companies to be made available to all member companies with the aim of improving the quality of insurance underwriting and minimizing the risk of fraud. We have also established a joint committee with the regulatory bodies that will be concerned in building up market statistics to promote transparency. Our agenda for the future will be to increase communication with the authorities on the taxation imposed on insurance clients and beneficiaries. The readers may well be aware that clients acquiring all non-life insurance contracts have to bear tax and stamp duties ranging between 9% and 11% of insurance premiums. Also, compensations received from life contracts are also subject to 5% tax deductions. Although these would appear to contribute in the public income, they do not promote growth in the insurance market, a growth that may well compensate for any loss of tax and stamp duty. Other economies have been long promoted the acquisition of insurance by making it tax deductible. Our system has instead contributed to lost local insurance opportunities, mainly in the marine and life sectors, where internationally rates are attractive and easily available and the loss of potential foreign direct investment.

Finally, it is an honor for me to announce that the 25th General Arab Insurance Conference will be held in Lebanon in May 2004 with the participation of a large number of participants from both the Arab and international insurance companies. The event will be presided by ACAL and the theme will be “Arab Insurance: An Outlook to the Future.” In brief, our work will concentrate on setting recommendations of a proactive nature that will allow Arab insurers to meet the challenges of the future with a high level of readiness.

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Economics & Policy

Road ahead

by Eleanor Blanch
written by Eleanor Blanch

“I’ll be glad if my watch could stop today,” said Jacque Sarraf, chairman of Malia Holding and former head of the Association of Lebanese Industrialists (ALI). “The year 2004 offers a vision of turmoil regionally and locally.”

Lebanon in 2004 will have to elect a new president or renew the mandate of President Emile Lahoud and hold municipal elections, two big political events that could shake the economy, said Sarraf.

“If you look in the region, there is no war but there is also no peace in Iraq. New problems are emerging in Saudi Arabia and the Gulf, with increased threats to Syria and Iran,” he added.

For the record, official government figures show that 418 new industrial units were created up to September 2003, while industrial exports in the first three quarters of the same year increased by 20% from the same period 2002. However, industrialists are not celebrating.

The US-led war on Iraq may have been shorter than previously expected, but it paralyzed a segment of industrialists who relied on an Iraqi market that catered to 24 million people. Many of the Iraqi officials Lebanese industrialists had dealt with were no longer around and some industrialists spent the latter part of the year trying to get money owed to them by the ousted Baathist regime. Major hostilities in Iraq were declared over in May, but oil prices continued to rise and industrialists had to endure higher fuel oil and electricity bills, which were will already steep in the run-up to the war.

The impact of the war on the economy as a whole was cushioned by last year’s Paris II donor conference, which gave Lebanon a breathing space and $4.4 billion in soft loans to reschedule its high public debt over a longer period and at a cheaper cost. The conference banished talks of a financial meltdown that would have hit industries hard. The Paris II loans worked on significantly lowering interest rates on government treasury-bills and deposits at banks, but most industrialists and merchants who were expecting a similar drop on loans were asked to wait.

Industrialists in 2003 also entered into a virtual free trade zone with Syria, which had signed with Lebanon an agreement that phases tariffs on industrial products traded between the two countries by the beginning of this year. The agreement has not rectified the trade imbalance with Syria, which has low labor costs, a vast range of raw materials and large swathes of industrial land.

Lebanese industrialists also entered into a semi free trade zone with the European Union when an interim free trade agreement with Lebanon’s number one import market came into force in March 2003. The interim Association Agreement, signed in the middle of 2002, gave many of Lebanon’s industrial, agro-industrial and agricultural exports nearly tariff-free access to the EU before the actual agreement was ratified. The Arab world remains the number one export market for Lebanese goods, but they are importing less and less products from Lebanon as production costs increase. The agro-industry sector is one victim of such high productions costs. “We were exporting $600 million of agro-industrial goods in 1996,” said Ateff Idriss, head of the Syndicate of Agro-Industries in Lebanon. “We lost in the last ten years more than 50% of agro exports, which stand today at $250 million a year.”

Industrialists are increasing exports because they cannot afford not to. Reducing production costs was top priority for industrialists in 2003 and will be their obsession in 2004. “In Lebanon the cost of land, financing and energy are more expensive than regional countries,” said Fadi Samaha, director general of the industry ministry. “Fuel costs alone represent 20% to 30% of general production costs,” he continued, adding that the ministry is working with the central bank to help cut the cost of financing for industrialists. Currently, the central bank subsidizes interest payments on loans extended to productive sectors.

“The Central bank subsidies are for a short period of seven years, but industrialists need loans for seven to 20 years,” said Samaha. “The loans subsidized by the central bank only cover investing costs, but not operating cost such as the financing of raw materials imported by industrialists.”

The central bank began this year to help the private sector lower the cost of its financing needs by urging banks in Lebanon to lower interest rates on loans, and one bank obliged. It also brokered an agreement between banks and the private sector to reschedule bad loans that banks wanted off their balance sheets and clients, such as industrialists, wanted to reschedule over a longer period of time.

Fadi Abboud, head of the ALI, estimates that 18% to 20% of the $4 billion in bad loans in question belong to the industrial sector. “Yes, the agreement will settle problems, but it does not address how a company is going to refinance itself,” said Abboud.

The industrial sector requires vast investments to help it modernize and compete with a influx of cheap and competitive goods that are finding their way into the Lebanese market. Meanwhile, many industrialists argue they will not be able to export much to European Union under the Association Agreement because they do not have the means to upgrade their industries to meet European standards.

“The EuroMed partnership allows us to have access to markets, but it has its own price because we have to have standards,” said Samaha. “It is not a given for everybody and we have to work on quality to reach European standards.”

Compliance with standards is another issue that is dogging the Lebanese industry, particularly the agro-industrial sector, which got a bad rap this year with rumors of contanimated dairy products finding their way onto the shelves.

“We need a food safety law, a sound legal framework, accreditation and research centers to modernize the agro-industry,” said Idriss. “Research is important for increasing exports because we cannot export unsafe packages to the European Union.”

For the meantime, many Lebanese industrialists are concentrating on a less demanding market, such as Iraq, Lebanon’s former number one export market. But insecurity and US control of government decisions in Iraq is not helping. Nonetheless, Lebanese industrialists returned to Iraq as soon as the war was over, trying to revive contacts and make new ones.

“The war on Iraq paralyzed industries for four to five months and we lost the work of seven years,” said Ahmad Kabbara, head of the export committee at the ALI. “But the Iraqi private sector has started to import from us goods such as cement and electronics.”

There are no accurate figures about the amount of goods Iraqi traders are currently importing from Lebanon, particularly as no proper Iraqi government is yet in charge.

“If the war did not take place, we were expecting to sign contracts worth $1 billion a year,” said Kabbara. “If the Iraqi private sector is revitalized, I think we can export $300 million a year to Iraq.”

Before the war started in March, Lebanese industrialists and businessmen signed over $1.1 billion in contracts with the Iraqi government under the United Nations brokered oil-for-food program. Some $450 million of these contracts were unpaid when the Iraqi government lost power in March. “The United Nations has rescheduled all contracts signed under the oil for food program,” said Kabarra. “We were paid $250 million and some $200 million have yet to be paid.”

For Kabarra and many other industrialists, Iraq still remains a market worth venturing in, despite security concerns and current competition from Americans, Europeans and other countries that were shunned by Saddam. “Lebanon, Iraq and Syria is the most important economic triangle that is capable of solving our problems and making us self-sufficient,” said Kabbara. “We will not need to rely on any other country as this triangle has sufficient raw material and human resources.”

Achieving this triangle requires a broader vision from Arab countries, which are usually more adept at erecting trade barriers, as is the case with the much-feared Greater Arab Free Trade Area that will come into force in the beginning of 2005. Most of the signatories to the agreement have not honored their commitments, leaving Lebanon’s open markets prey to their goods without reciprocal treatment.

“We are not prepared for the Arab invasion because Arabs are implementing the agreements in an Arabic way,” said Kabbara. “We face problems in transportation and transit taxes.”

Many industrialists lament the government is quick to sign trade agreements without studying their effects on the Lebanese industry, particularly as the broad cuts in import duties in 2000 reduced tariffs on industrial imports to an average of 5%.

Most industrialists expect exports to increase by 15% to 20% next year, but they do not think much of the increase. Lebanon will be preparing itself in 2004 for GAFTA and entering into serious talks with the World Trade Organization, which will leave Lebanon’s open markets without protection barricades. “We are seriously planning to address the WTO and EU that at this moment we can’t afford to have customs duties abolished due to high production costs,” said Abboud.

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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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