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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Real Estate

Hot property

by Executive Staff
written by Executive Staff

It is encouraging to be able to report that 2003 saw further movement and increased (mainly foreign and expatriate) demand for properties in the residential market, one which is expected to register as much as 15% annual growth in property transactions. This will come hard on the heels of the 30% growth witnessed in 2002, which saw residential property sales of $635 million. However, developers were, and will continue to be, burdened by the twin evils of political and governmental risk, given the volatile nature of the region and Lebanon’s growing, and apparently unsolvable, debt crisis.

The explanation for the increased activity in the residential sector – compared to the relatively sluggish office and retail markets – is because Lebanon is consolidating itself as the Arab world’s premier entertainment and tourist destination. There are additional contributing factors: the results of Paris II created greater confidence in the country’s finances and a post-9/11 world has made the case for Lebanon as a target for Arab investors all the more compelling. Nevertheless these are contributing factors; the big picture shows us that we have regained what we lost in 1975.

The residential market has had to claw its way back from the rampant boom of the early 90s and the subsequent catastrophic crash of 1997. Yes, we were selling everything we built at big margins but there were too many amateurs in a market that was soon flooded with bad quality apartments in unsuitable locations. Much of this useless property has been taken over by banks and liquidated, but the rows of empty apartments that overlook the Jounieh highway are a testament to the recklessness of that period.

The postwar property debacle did have a silver lining. Banks are now more cautious and want to see a proven track record from property developers seeking debt. This is good for us professionals who can also demonstrate to potential purchasers (many of whom are discerning expatriate Lebanese and Arab nationals from the GCC countries seeking a second home in Lebanon) that they – the developers that is – have the experience to deliver in terms of quality, size and location. All we would like to see from the banks is a further drop in the lending rate to maybe 6 or 6.5%. Further flexibility in mortgage lending would also spur home buying. That said, the mortgage is a recent phenomenon in the Lebanese market and the fact that we have banks willing to lend over 15 years is as good as we can expect for the time being.

What is being bought? Well, in 2002, there was much demand for new, big, luxurious apartments and by big I mean 400m2 to 600m2. These were costing anything from $1 to $3 million. Now we see equally robust demand for new 200m2 three-bedroom apartments that sell for around $500,000 in Raouche, Ramlet el Baida and Verdun in particular, but there has also been activity in the BCD and Ashrafieh.

This does not mean to say that only new apartments are selling. Those who bought, for example, in 2000 should be able to sell at a profit today if they can undercut current construction costs, which have gone up by about 20% across the board. Why? Land prices have risen by 20%, while increased development has also put a premium on labor and equipment. We are also burdened by paying VAT (which incidentally we cannot reclaim) while the strengthening Euro has seen a rise in the price of building materials – 80% of which comes from Europe. Yes, growth comes at a price.

The biggest problem facing developers today is the high cost of land, which can find its origins in the BCD where the price of the square meter has gone up from (the already high price of) $1,000 per m2 of BUA (built up area) to between $1,300 to $1,400 per m2 of BUA. Solidere should never have put up their prices on the basis of a few high profile sales and, in doing so, they have eaten into our profits by as much as 50% should we wish to develop in the BCD. The seafront, which saw sales of $50 million, now looks cheap compared to the lots further in land which are more expensive and do not have the same sea view.

My company has instead looked elsewhere, such as up and coming neighborhoods like Gemaizeh and Saifi, which are central and have character. There we can “breathe” a bit easier, selling at around $1,800 per m2 for our luxury development. Still, many landlords in Gemaizeh are being unrealistic about the value of the land, which they are valuing on the basis of its proximity to the BCD. There is no comparison. The BCD has better infrastructure and better regulations. Still it is an area that has potential.

In the commercial market we have seen a gradual pick up in the office market but this is unlikely to translate into anything spectacular, while the retail rents in the BCD continued to put pressure on landlords. Instead, the future should lie in well-built and equally well-conceived shopping malls, beach clubs, hotels, furnished apartments and, of course, private homes – all the components of a resort nation.

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Economics & Policy

In the red

by Executive Staff
written by Executive Staff

It would not be difficult to state that 2003 did not witness the fulfillment of the economic and financial objectives, which had been announced at the time of Paris II meeting in November 2002. Indeed, the gap between the stated and realized objectives is quite wide. It might be recalled that by mid-2002 the Lebanese economy was facing a three dimensional problem: a slow, not to say stagnating economy, a rapidly rising public debt (over $31 billion at the end of 2002) and worrying depletion of the foreign exchange reserves of the central bank as a result of its attempts to defend the stability of the Lebanese pound. As of June 2002, the net foreign exchange reserves of central bank were negative. Indeed, the document presented to the meeting by the Lebanese government had warned that unless external support was forthcoming, the corrective measures that the government had planned to put in place would not, on their own, be sufficient to prevent a financial, and ultimately social, crisis. The financial support pledged in Paris provided the government with a financial reprieve it was badly in need of, and the market sentiment changed, permitting the central bank to try to recoup the losses it had suffered in the previous period. Further, it was able to enter into swap arrangements with Lebanese commercial banks for the purpose of reducing the interest rates carried by the exiting stock of public debt. Briefly, the support derived from Paris II, along with domestic measures (decreasing public expenditure and raising revenues) were supposed to reduce the outstanding public debt and the level of the debt burden, (i.e. to reverse the debt dynamics) and lead to a decline in rates on domestic debt and thus give a fresh impetus to economics growth, projected at about 3% for 2003. Prior to Paris II, the government had announced that the 2003 budget deficit was to be reduced to 25% of expenditure (in comparison with over 40%for the previous year) and that privatization measures were being planned.

In fact, a different picture emerged during 2003. While the central bank was able to regain its foreign exchange reserves (it publishes its gross but not net holdings of foreign exchanges), fiscal developments have been discouraging. The fiscal deficit for 2003 is expected to be close to 40% percent of expenditure instead of the announced 25%. The outstanding public debt has continued to grow, standing at $32.8 billion at the end of October 2003 compared with $31.4 billion at the end of 2002. The debt burden has not eased, being estimated at $3.1 billion for 2003, which is roughly the same level for 2002. The hoped for a decline in interest rates on domestic debt was more limited than had been expected. The process of privatization has stalled due to differences of opinion on how best to tackle it. Finally, the projected rate of growth is expected to be less than what had been projected.

Some observers tend to think that political disagreements are the major cause behind the deteriorating situation. While such squabbles may impact negatively economic and financial developments, they are not necessarily the major cause. Let us not forget that in preceding periods that witnessed political harmony, there also occurred a deteriorating financial and economic situation. In fact, the decline in Lebanon’s rate of growth began after 1994 and the rapid growth in public debt began after 1993. I do not wish to minimize the impact of political tensions and disagreements, but I think the problem goes beyond that. To a large extent it is related (along with other factors) to poor institutional performance, which has burred the distinction between public and private interests and constrained the proper formulation and management of economic policy. Had things been different in this regard, the national economy would not have faced the crisis of 2002, which could only be resolved through substantial external support. Of course it is possible that the national economy may pick up in the absence of proper governance, due say to favorable external circumstances, but then there is no guarantee that proper policy formulation would be in place to help cope with existing macro-economic imbalances or to avert potential future crises. While it is important to understand and appreciate the technical aspects of economic policy, it behooves us to place it in the wider political economy picture. Samir Makdisi is a Professor of Economics and the Director of the Institute of Financial Economics at the American University of Beirut

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The Buzz

Need help?

by Fay Niewiadomski
written by Fay Niewiadomski

Dear President, Director-General (PDG), Do you know just how high you have soared? Could it be that you have reached an altitude with a dangerously rarefied atmosphere? Could it be that your tower has become so high and so secluded that you no longer see or hear what is happening on TERRA FIRMA?

When last did you ask yourself the kind of questions that would help you redefine your destination and adjust your inner compass? When last did you listen to anybody, let alone those who say things you don’t like to hear? Possibly there aren’t many of those around. It is definitely more convenient for subordinates and ‘friends’ to say the ‘right’ thing rather that the ‘honest’ thing. People need their jobs, after all, and even more so when the economy is in deep recession. Of course, you have major problems to cope with. After 20 years of war and stagnation, and another 10 years in intensive care, businesses have been trying to wake up from their comas, new ones have been coming to life and growing so rapidly that there is little time to adjust to practical realities, much less to the psychological changes necessary. Still, others have ‘died’ or are now on their ‘deathbeds.’

I know it is not a very flattering picture. Can it get better? It is possible, if you are prepared to take off your rose-tinted glasses, remove your earplugs, and take a walk through the ‘uncomfortable streets of reality.’ Then, after taking everything in, you make the painful decisions, which may be necessary for your corporate survival.

Let us make a rapid review of where we are and actually have been for quite some time:

1. Thinner and thinner profit margins have triggered an exodus of business from Lebanon to other countries in the region where conditions are more conducive to industrial prosperity. Unemployment and poverty is not the best recipe for the growth of any business.

2. Obsolete rules, regulations and systems are no longer applicable but are still being used to address contemporary challenges. The ‘solution’ is to ‘get around it’ rather than change it. Without change and adaptation, we are not even stagnating but going rapidly backwards.

3. Three generations of staff with very different outlooks and job expectations work in your organization. They have problems communicating with or accepting each other.

4. You have a lot of ‘deadwood’ inherited from the days when it was hard to say ‘no’; and now, although these persons cannot really make added-value contributions to you organization, you are ‘stuck.’ However, they also have nothing to fall back on, so you face a dilemma when considering your options.

5. You face a severe scarcity of the kind of skills needed to compete in today’s markets.

6. There is an absence of systems to regulate organizational growth because the old ones are obsolete and the new ones have yet to be created.

7. Do not forget the misplaced staff that got into jobs they could barely fill when the job market was extremely limited.

8. There are no places for promoting staff because either the ‘deadwood’ or the ‘senior staff’ forms a ‘low and hard’ ceiling. Many of those seniors still have 10 to 15 years before retirement and family-business owners tend not to retire until they die.

9. You also need to restructure the entire organization while keeping it profitable and growing.

10. There are a lot of things for which you don’t have the expert manpower and for which you don’t have the time yourself, and yet these are pressing needs.

11. Long-term survival and growth indicates moving towards a more corporate approach to business and away from ‘family’ business while maintaining an acceptable ‘balance of power’ and control.

12. Don’t forget that you are human too and that you need supportive and flexible management structures, along with a multidisciplinary team of advisors to support you in the increasingly complex technological and market-driven business environment.

13. You may not be able to get high calibre staff due to the steady exodus of qualified young men and women looking for opportunities to fulfil their professional ambitions, because such opportunities seem to be ‘an impossible dream’ for them in purely Lebanese organizations.

The list could be much longer and more detailed, but let’s be practical and stick to essentials.

Tell me, when was the last time you visited the offices next door, or sat down and had a discussion for longer than five minutes with some of your key officers? Have you recently visited any of your widely distributed offices and outlets? Could you be in danger of working to realize a futuristic organization for which you neither have the infrastructure nor the manpower? Strategists, tend to hate details, but they do need to do one of two things to secure the proper growth of their organizations:

1. Take the time to personally look at and listen to what is happening ‘on the ground,’ or

2. Work with a team of experts that complement their capabilities by providing a ‘wide-angle’ and multi-disciplinary view of the situation, so that plans get built on a solid foundation of realities.

When the pressure gets to be too much, we all tend to insulate ourselves by not listening to anybody and by persuading ourselves that we have an intuitive capability or ‘flair’ to tell right from wrong without facts or figures to support our claims. This is a very fragile position from which the PDG plays the role of ‘god’. Remember Oedipus the King? His unrelenting investigations to find his father’s murderer led to the most horrible discovery: he, himself, was the unwitting perpetrator of that crime and of other sins so ugly, he wilfully put out his own eyes, so that he would never again be able to see the light or day or have to look at the embodiment of his own sins. One of the key themes of this classic drama is: “those who climb highest, fall hardest.”

Dear PDG, first of all, get rid of that title. Either keep the ‘P’ and get another competent person to take the ‘DG’ or vice versa, depending on which role you do best. This title is good for small, 50-person organizations, but not for 500-person organizations. The bottleneck you are creating when executives have to wait six months to two years to see you is costing you hundreds of thousands of dollars in wasted production time and opportunity losses in the same denomination. Your decision-making procedure is so cumbersome that it might as well not exist. Can you really afford to keep on ignoring all this? Do you have to have a fire at your door to realize that “all is not well” in your ‘kingdom.’ It would be so much more profitable if you opened your door and took a reality-check before the fire breaks out in earnest.

What are you afraid of? If you prefer a three-lettered title, why don’t you try CEO, chief executive officer, at least that title suggests that you have a support team and that you are still the chief, but you are all doing different things to manage the organization and keep it profitable. Dear PDG, the organization will always be yours. If you distribute your power more wisely, so that the people who are worth keeping stay around to help you make it bigger and better, you will enlarge the ‘cake’ so there will be plenty to go round for everybody. I close with kind regards and best wishes for a speedy awakening. Hopefully, you will wake up before your competitors do in 2004.

Fay Niewiadomski, founder and managing director of ICTN, has over 30 years of experience in management, consulting, researching, and training. She is currently a consultant to some of the largest Lebanese and regional blue-chip companies.

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Finance

Beating the odds

by Thomas Schellen
written by Thomas Schellen

Optimism has for years been a prominent feature of Lebanese banking, a central nerve embedded into the firm spine of conservatism that upholds the Lebanese banking and finance industries. The country’s banks all have reasons to ooze optimism, given the sector’s overwhelming importance in the national economy and their performance record of deposit security over decades while the country was drenched in deeply flawed politics, violent internal strife, regional warfare, and occupation.

Even if their business had been stagnant last year, Lebanese banks would have enough reasons to feel emboldened by 2003 for two facts. Namely, that they contributed an important onus to the year’s fiscal stabilization through their profitless subscription to special T-Bills and that the sector emerged unscathed from a fraud and mismanagement crisis centering on Bank Al Madina and its opaque business dealings. But far beyond staying afloat and managing the impact of their sacrifice on the altars of fiscal recovery, banking did not at all see a standstill or slacking of growth in 2003.

Nonetheless, banking representatives exhibited one curious change of perspective. Lebanon’s big commercial banks in earlier years had often harbored concerns over basic size limitations they had in comparison to the region’s big banking corporations or the possibility of international competitors intruding onto their markets. At the end of this year, they came to say that Lebanon is too small a market for the deposits under their management. Prominent members of the finance industry viewed 2003 with satisfaction for sector and companies. “The performance of the Lebanese banking sector was generally good in 2003. Annual profits will maintain their 2002 level, even though third-quarter profits were lower than those of the first quarter,” said Saad Azhari, general manager of the country’s largest bank, BLOM. With year-on-year growth of about 23 % in assets and deposits by the end of September, BLOM Bank performed above the sector’s good overall deposit growth, which is expected to reach 15 % for 2003. “As such, our market share in deposits increased to over 15 %,” Azhari said. “The bank’s profitability remained high, given that the first nine months net profits of 2003 reached $66 million.”

The runners up were equally upbeat. Banque Audi announced its third quarter results, claiming an increase in market share to nearly 12% and having captured over 30% of the sector’s total deposit growth. At Byblos Bank, where year-on-year growth of assets and deposits was reported at 39% and 31% at the end of the third quarter, assistant general manager Semaan Bassil told EXECUTIVE, “Relative to what is going on in the market, our profits are more than adequate.”

While the retail banking leaders may have been fortifying their positions, players in specialized banking and finance houses also could spread word of good tidings. “The main point in 2003 for us was a 17% increase in deposits and 20% growth in profitability, as values BEMO is expecting to close the year with” said Ronald Yazbek, assistant general manager at Banque Europeenne pour le Moyen Orient (BEMO). The bank had been strengthening its specialization on private and corporate banking and already harvested the first fruits of measures such as expanding its private banking team and entering into a partnership with Riyadh-based Banque Saudi Fransi. At another specialized bank, an executive did unhesitatingly express his pleasure over the mid-sized institution’s performance, even as asset growth would be below the sector average. “We are pursuing the opposite strategy, emphasizing profit growth and not asset growth,” he said, “2003 was an excellent year. But 2004 will be challenging.”

Cautious notes dominate the melodies, which many in the choir of banking leaders intone regarding the coming year. “As for 2004, we expect a squeeze in banks’ profitability,” Azhari said, giving as the first main reasons for the lowered outlook that banks’ stock of high-interest T-Bills acquired pre-Paris II would mature in the course of the year, along with high-interest, two-year deposits with the central bank. As a second reason, the BLOM executive named “higher decrease in interest rates on loans and advances as compared to the decrease in interest rates on deposits, thus leading to further drops in banks’ interest margins.”

His bank expects continuous asset growth, he added, “and we will have to redouble our efforts to maintain the same level of profits as in 2003, due to the reasons that apply to the banking sector as a whole.”

Current profit margins cannot be sustained in 2004, concurred Bassil. “Banks will have to be more stringent in provisioning,” he said, “this will result in lower net profits.” Lower growth in the economy and lower profitability would lead Byblos and other banks to rationalize, restructure and consolidate their business. “It will push banks to rationalize faster, more systematically, and assure that every dollar spent will bring a certain level of return.”

“We don’t see any problems, to the contrary, we see very good prospects for the coming year. For us, 2004 is very positive,” Yazbek opined in a vote of fundamental optimism. BEMO is less exposed than others to certain risks, and expects further benefits from the base it created in 2003. More detailed, BEMO anticipates a boost for the business at its Cyprus branch after Cyprus becomes full EU member next May, and also foretold “good synergies” that would arise for the Beirut operation from BEMO’s participation with Saudi-Fransi in the new Syrian banking venture, scheduled to assume operations still before end of 2003. As far as upward expectations for the coming year at BLOM, Azhari pointed out expansion plans in the local and regional markets, including opening two new branches here, a third in Amman, and the launch of the “Bank of Syria and Overseas” in Damascus in early 2004. Bassil similarly emphasized that Lebanese banks would need to utilize growth opportunities in other countries. Bank Byblos’ venture in Sudan signified a pioneering achievement for the entire sector here by marking the first instance in which a Lebanese bank addressed a local market abroad. “Sudan is an important step for us, a test and learning curve,” he said. “We will be putting all our efforts and energy into it over the coming period, and after one or two years, will see the outcome.”

Compared to the banking sector, Lebanon’s financial firms still have large uncharted territories to explore at home. For financial institutions, brokers and trading houses, 2003 was a year of regaining much needed momentum. At independent finance house Financial Funds Advisors (FFA), chairman Jean Riachi sounded exceedingly satisfied in comparison to the past few years. “2003 was a good year for us in terms of increasing our customer account base,” he said. “We have also seen an increase in terms of revenue, knowing that we are coming from a low base because 2001 and 2002 were bad years.” FFA received good responses to funds it was marketing in collaboration with a European issuer, GLG, and could embolden the volume of its money management business. Similar moods prevailed at the Arab Finance Corporation (AFC). “The company is doing much better than last year at this point in time,” said general manager Tarek Ahdab. “AFC is positioned to profit from any upturn in the market. In the past six months, we saw a nice upturn.” Both finance houses implemented new internet-based trading facilities in 2003. FFA launched online currency trading at the end of the summer and AFC introduced two platforms in autumn, AFC Futures and AFC Securities. Even as they expect 2004 to continue the positive trends of the last six months, brokers and finance houses restrain these hopes to their activities on international markets where the outlooks are great. “In my opinion, we are at the beginning of a long-term bull market,” Riachi said, adding as general note of caution “but I could be wrong.”

By contrast, Riachi’s view on domestic financial markets resembles a sheer outpouring of positive will power. “We have not surrendered to the idea that the Lebanese market is dead,” he said. “We desperately believe that it can be revived. It is our raison d’etre.” AFC similarly would see their true edge in the local and regional markets while relying on trading in international markets on behalf of its clients for their bread and butter business. ”We are reasonably optimistic about the country,” Ahdab said, but the firm’s strategy would remain focused on electronic trading platforms and foreign markets, plus continuing to build the client base and increasing advisory business in steady and slow growth. “We are in a tough business in a tough environment, competitor wise, local market wise, and in relation to political and geopolitical risks. Any progress is going to be a slow one.”

With important measures for the regulation of Lebanon’s financial markets still outside of visibility, advocating Beirut as base of a financial firm is still a tough challenge, but the FFA chairman insisted that it would be viable. “Disposable wealth exists and the rate of new account openings [at FFA] is accelerating,” he said. “We believe our model – a small finance house in Beirut serving people for their investments – is working for us. We could even increase it. But unfortunately, we don’t see a great deal of interest in the Lebanese market.”

Where Lebanese bankers and finance house managers echo each other in agreement is their views on the impact of fateful national decisions (or indecisions) on their business. End-of-service reforms and public sector productivity increases are a must for Lebanon, along with privatization and securitization of state assets, Azhari said. “The implications of further delays will negatively affect the level of the public debt and the budget deficit. Consequently, the national and international confidence in the recovery of the Lebanese economy and in finding a permanent solution to the budget deficit’s problem will quickly vanish.” “The last few years were tough. However, it could still get worse,” said Ahdab. “Anything that stops or slows reforms is not going to have a good impact. If debt continues to grow and they never privatize, things could get worse.”

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Business

Toy story

by Anissa Rafeh
written by Anissa Rafeh

Providing established brands at an affordable price has helped Toy Market Trading sell an estimated $14 million worth of toys in 2003. This represents 35% of the $40 million local toy market and it has China to thank. Cheaper operating costs have allowed the major international toy manufacturers to be more competitive and Toy Market Trading today imports 90% of its toys from the growing industrial superpower. “You get what you pay for in China,” said Wael Sinno, toy division manager at Toy Market Trading and son of Kamal Sinno, who founded the company in 1973. “All the main US toy brands like Chicco and Mattel have factories there.” The China factor, coupled with a slashing of import tariffs from 25% to 5%, has seen Toy Market Trading experience an 8% year-on-year growth for 2003, despite a wintry economic climate. Toy Market Trading – which distributes its products to 750 retailers, including BHV, Spinneys and Fahd Supermarket – employs a staff of 52 as well eight salesmen covering the Lebanese market and three drivers employed to distribute the goods.

Understandably, 40% to 45% of annual revenues come from Christmas and other holiday sales, but the summer season, from April to August, are also crucial selling months because of the sales of outdoor sports items, including bikes, skateboards and pool accessories, among others.

According to Sinno, an average parent or child will spend approximately $300 to $350 on toys per year, with an average of $10 to $15 doled out per toy. During Christmas, however, the average spent per toy increases to about $25 to $35. Toy Market Trading, however, aims to offer clients a wide variety of affordable toys of good quality by providing two to three brands of similar products in different price ranges. “We cater to all types of budgets, even if that means we compete against our own products,” explained Sinno.

Affordable playthings, like balls and water pistols, and high-end toys, like remote control cars and lifelike dolls, comprise a ratio of 60:40 of cheaper to more expensive toys. Some of Toy Market’s main brands, for example, like Blue Box and Playgo offer products that are as much as 30% cheaper than Fisher-Price toys, even though all three produce similar products for pre-schoolers. Some of the hot selling items this season are “everything funky and trendy,” said Sinno, like the Brats (not distributed by Toy Market Trading), which are the anti-Barbie doll. Toy trends usually last up to a maximum of one to two years, except for classic mainstays like Barbie and Disney toys, which have been successful for years. But coming up with a top seller in toys is becoming increasingly difficult in the computer and internet age, especially with eight- to 10-year olds. As a result, Toy Market Trading has shifted focus on pre-school items, targeting six-month- to five-year-olds. “We now have to be very selective,” said Sinno.

Some of their past successes included the pottery wheel, which sold 12,000 units at about $25 each. Other toy hits imported by the company included an ice-cream maker, and a talking pen made by educational toy brand Clementoni. In addition to their successes, Toy Market Trading has also suffered some misses.

“The pregnant doll was not very well received,” admitted Sinno, who explained that the doll, imported in 1993, came with another plastic baby inside the belly of the main ‘mother’ doll. “It was mainly opposed by religious people.”

Surprisingly, film merchandizing has also not done very well in Lebanon. “HARRY POTTER was a failure and HULK was a disaster,” said Sinno. Only very few films have succeeded in merchandizing in the country. “THE LION KING was a great success – we were selling lions for about three years [when the film was released]. ALADDIN was also a hit.”

Other than dealing with toys that flop, Toy Market Trading and the other importers also have to contend with illegal importers. Sinno admitted that his company loses up to $600,000 a year from smugglers who purchase cheap toys from Dubai – where there are no tariffs – and import them into the country through Syria. In fact, illegal traders are what Sinno consider the greatest competition to his company, and not the three other main importers (Middle East Market, Tamer Freres and Boch).

“Retailers are not going to buy from me at prices 10% higher than smuggled toys. They want the best price they can get and this is understandable,” said Sinno. Sinno explained that the lax laws concerning the toy industry extend further than implementing controls over smuggling. “Lebanon is an open chaotic market that is still underdeveloped with no safety regulations,” he said. As a result of Lebanon’s complete lack of regulations, said Sinno, the Syndicate of Toy Importers and Dealers – which was founded by his father – takes the initiative to not import toys that are unsafe. Most recently, the Syndicate decided to stop importing pellet guns and worked with the ministry of the interior to have them banned. “These guns are made China, but even the Chinese government has banned them,” said Sinno, adding that despite the Lebanese ban, illegal importers have made these dangerous toys available in the country.

Although the smuggling business is indeed lucrative, Sinno has no intention to stray from the straight and narrow. “We go by the book 100%,” he said. It is a policy that has kept them on top of their game, together with a new strategy they have adopted over the past five years to shift the focus on brand loyalty as opposed to just importing Chinese items. “We are now focusing on the brands,” said Sinno, who explained that such an approach, is one way to escape competition and to build loyalty among customers. The strategy seems to be working for the company, which currently enjoys its status as the leading toy importer in the country. As to the secret of their success, Sinno put it simply: “A class products for the most competitive prices.”

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Finance

Efficiency not mediocrity

by Executive Staff
written by Executive Staff

In the first nine months of 2003, four main developments were observed: the unexpected rate of growth in bank’s deposits or in monetary aggregate M3, the sector’s participation in easing the state’s debt burden; the reduction of interest rates; the creation of a mechanism to review and settle non-performing loans.

(I) Growth of M3

We were surprised by the extent of the commercial banks’ balance sheet growth, mainly in the deposit base growth. This is reflected by the growth of the monetary aggregate (M3: amount of money in circulation plus deposits at banks), which increased by 14% from September 2002 to September 2003. Usually, M3 grows by real and nominal growth, credit to the private economy plus credit to the public economy and by the changes in net foreign assets (balance of payments) if the balance is positive. M3 decreases if there is flight of money from Lebanon to abroad.

The 14% increase of M3 far outpaced the growth of the economy overall, which reached only 2%. The growth of M3 under normal circumstances should not be larger than the growth of the economy plus a value slightly exceeding inflation. Inflation in Lebanon is around 4%. When added to the 2% real growth, it means that a 7% increase in M3 is justifiable by nominal growth of GDP. But what about the remaining 7%? A notable factor in the development of money supply in 2003 was the inflow of capital to Lebanon. Many sources contributed to this inflow, including:

• $2.4 billion entered the country under commitments from Paris II.

• $1.2 billion was contributed in deposits from non-residents. • $400 million came from the repatriation of foreign deposits.

• $1.0 Billion or more from other capital accounts (i.e. real estate investments etc.).

(II) The Public Debt Service burden

The banking sector’s engagement was instrumental in the facilitation of the drop in public sector debt service through the Paris II mechanism, which acted directly through the acquisition by the banking sector of zero-percent T-Bills contributing to reduce the debt service by $383 million per year. The sector will be indirectly contributing to another LL400 billion in debt service reduction through the subscription to new issues of T-Bills to replace those maturing in 2004.

The interest rate reduction from 14% to 8% is considered “unusual business” and the IMF doubted the banking sector’s ability to decrease the public debt and reduce interest rates.

While the banking community delivered what we promised, the government did not. Primary expenditures – i.e., public expenditures without the debt service – increased instead of decreasing, allowing the fiscal deficit to reach 38% to 39% while the initial budgeted figure was 27%.

(III) The decrease in interest rates

Claims that falls in the interest rate decreases affected only deposits and not lending rates, is wrong. In truth, while the income of banks from deposits with the central bank decreased, double shifting mutation in rates and volumes caused a decrease in the profitability of the banking industry’s credit portfolio.

If we take into consideration not only changes in interest rate but also changes in the structure of invested funds, we can clearly see that the returns on bank placements decreased during the period from September 2002 to September 2003 at a rate wider than the decrease of the cost of the bank’s deposits. This shrunk the margins by 14% for the mentioned period. As the portion in total assets that consists of loans to the private sector decreased, the share of the sovereign risk (central bank and treasury) increased just as dramatically as the public sector lending rates decreased, doubly affecting the profits of banks.

It is thus more accurate to say that the drop in interest rates did not equally reflect on lending to the private sector, which became 12% cheaper, while the sovereign borrower benefited from an interest rate reduction averaging 21%.

(IV) A framework to settle problematic bank loans

After one year of negotiation, a framework to settle non-performing loans (NPLs) on banks’ books was achieved in cooperation with the central bank. This framework applies to both (1) the relation between the banks and its clients and (2) the relation between the banks and the supervisory authorities.

1. In the dealings between banks and clients (debtors), three main pillars govern the relations:

a. Unrealized interest rates are partly written off by applying reduced interest rates on the initial debt stock.

b. The debt stock is reduced by way of acquiring the real estate that served as collateral. Banks acquire these properties at good evaluation agreed upon with the Banking Control Commission. c. The remaining debt balance is rescheduled over a long-term period of five to 10 years, reduced interest rates agreed upon between client and bank.

2) The relation between the bank and supervisory authority is managed through a three-tiered scheme: a. Defining of the accounting methodology in provisions on settled and unsettled problem loans. b. Allowing a long period, up to 20 years, of provisioning of real estate, which banks have acquired from debtors under their loan-rescheduling scheme. c. Granting banks the possibility to rediscount, totally or partially, the securitized debt of the clients with BDL if the bank needs liquid assets to clear its balance sheets. In its entirety, this instrumentation provided for rescheduling of non-performing loans, if well and adequately used by bankers, will support the process of revitalizing the economy and resume new activities through restructuring the corporate sector.

What strategy for the coming years?

Looking towards the future, it is prudent to go beyond analyzing the main developments of 2003, as mentioned above, and review the larger situation of the banking industry and its strategic needs.

For this task, it is helpful to take stock of the numbers as they stand after a decade of strong banking growth. The most telling figure in this context is the ratio between total assets/liabilities held by banks and Lebanon’s GDP. This ratio stands today at 315% by the end of September 2003. It is the highest worldwide among “normal” countries.

How much of these liabilities are invested domestically is key to understanding the Lebanese economy from a banking perspective. Most of these resources are invested locally, therefore, the economy is enduring the cost of these bank’s liabilities. By the end of September 2003, 16% of bank assets were invested abroad, and the remaining 84% in the country (domestic placements). Of these domestic placements, 26% were in the private sector, 54% with the sovereign (23% at the central bank and 31% at the Lebanese treasury) and 4% in fixed and unclassified assets.

In simple terms, the banking sector has outgrown the Lebanese economy and domestic economic growth. It grew eight to 10 times in the last 10 years – while the Lebanese economy did not grow as fast.

Even if interest rates – i.e., the price – decrease further, the quantity of credits and loans to the economy (public and private) will still constitute a heavy weight and therefore a heavy cost on the economy. Capital funds have become very big also compared to domestic needs. Our international capital adequacy ratio exceeds 18% while Basel I Committee has set it at 8%.

Why does the Lebanese banking industry have to turn over a new leaf? The current model of banking growth was sustainable until today because of two factors: 1. The Lebanese community and some Arab funds repatriated part of its wealth to Lebanon, enabling our deposit base to widen without any relation with domestic economic growth. 2. The state, central bank and treasury became our main client (54% of our assets in September 2003) and both of them accepted to extend to a maximum their foreign currency debt. This policy helped a lot by providing fresh blood to this dollarized model in one hand and by providing the banking industry with good placement opportunity in another hand.

This pattern of attracting more funds from abroad can only continue if we keep interest rates at high levels, which are unsustainable by our domestic economy. This is a paradox situation.

When public and private sectors have difficulties to service their debt it is a clear signal that this model is no longer sustainable and should be revisited sooner better than later. This leaves us with the need to export our services abroad as only way to remedy the situation. Two recent signs confirm that the banking industry became too big for the Lebanese economy. The 0% coupon T-Bills to the public sector and the framework to settle the NPLs applying reduced interest rates.

If we want the banking sector to continue to grow and if we want the banking industry to continue to realize profits and good return on equities and assets (ROE, ROA), it has become necessary to diversify our placements to other countries and markets.

That means we have to export our banking services to countries like Syria, Iraq, Armenia, Algeria, Sudan, Libya, and other countries where the banking industry is not developed. We also need to enhance and strengthen our financing services to Lebanese communities abroad, and to look seriously for cross-border mergers and acquisitions with active Arab banking industries.

In summary, international and regional expansion is the only strategy to guarantee sound and further growth of the Lebanese banking industry, entailing three options for development that will not place an undue burden on the national economy of having to carry the weight of the enormous deposits base:

1. Expand into neighboring countries and optimize physical presence there.

2. Supply services in foreign markets, especially to the Lebanese expatriate business community.

3. Penetrate new markets through cross border and regional mergers and acquisitions.

Fortunately, based on the sector’s many strong points, and because over the past ten years we undertook a multi-dimensional restructuring and reorganization of our industry from within the prospects for exporting Lebanese banking services are good.

This reorganization has been characterized by achievements in following areas:

1. We refurbished and improved our human resources. This is a main factor needed to compete regionally and internationally.

2. We introduced very adequate management systems and technologies, including good manuals of policies and procedures.

3. We are complying with international standards in many important areas. Lebanese banks fulfill the current Basle requirements for capital adequacy ratio and the standards set for lending to related parties and lending to a single large borrower. We are also up to global standards in accounting and auditing, and rules on disclosure, transparency and combating money laundering etc. Lebanon has good supervision authorities that operate according to BIS principles of supervision.

4. We acquired during the last 15 years a lot of know-how in dealing with the dollarization of economies and in operating under very aggressive and risky environments.

Lebanon’s banking industry appears to be very well positioned regionally because it fully achieved these improvements and it is very well equipped to more important cross–border activity.

A further avenue for banking sector growth in Lebanon should be mentioned here. This would be to finance industrial activities, which are destined fully for export. To implement this strategy could require collaboration with international organizations to promote our exports. But even more essential for mobilization of Lebanon’s export capacities is a very good vision on behalf of the regulator. This is the role of the government. It should elaborate a new approach, new vision, and new model to induce the growth of our economy.

Fulfilling this role would imply many steps and taking strong measures, examples for which would be interventions with the Arab countries as well as the EU in support of Lebanese exports. It is up to the state as regulatory force in the economy to work towards better conditions for production by providing incentives, decreasing costs and preparing a reliable framework and consistent operating conditions. At the current stage, and in all these matters, one question must be asked: Where is the state? We have a heavy state with limited efficiency and productivity. We urgently need in Lebanon to redefine the role of the state in the economy, to rediscover where is the adequate dosage to be set between the state and the market. This hydride economic model of ultra-liberalism and ultra interventionism in the same time is no more appropriate for our country. We need a much more equilibrated liberal socio-economic model. We need a smaller and more efficient public sector and a state with a real vision for the future. The reason for this culture of NPLs is our non-performing and mediocre state.

The banking community and the banking authority are a necessary part of the problems and solutions of the economy. Whenever we have had a good program we have always been able to deliver our part of it.

Dr. Makram Sader is the secretary general of the Association of Banks in Lebanon

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Business

Capturing Ramadan

by Anissa Rafeh
written by Anissa Rafeh

It started as the $40,000 pet project of a young entrepreneur in 1995 and ended up a trend that today seems to have been with us forever. The Ramadan tent, originally an Egyptian invention, was stunningly simple in that it offered a venue for people to meet and socialize after breaking the fast. Today, such is their popularity that practically every major hotel has jumped on the bandwagon, raking in as much as $550,000 for the month.

“I came to Lebanon in 1992 after living in Egypt and realized there was nothing to do in the evening for SOHOOR during Ramadan – there was only Barbar,” said Wassim Tabbara, who started the first Ramadan tent eight years ago at the age of 26.

While successfully participating in the organization of an Egyptian week in Lebanon with the Lebanese-Egyptian Association, of which he was a member, Tabbara had the idea of bringing an Egyptian-themed tent to Beirut. Patching together several boy scout tents provided by the Makassid Foundation, and spending about $20,000 on accessories from Egypt – including tablecloths, Egyptian NARGILEHS and an old Egyptian FURN – Tabbara set up shop in a family-owned plot of land by the LAU. With seating for 130 people, the tent was an instant success and packed to capacity every night. The menu offered the traditional SAHOOR fair, including MANAKESH and SAHLAB, and entertainment consisted of NARGILEHS, a TV set and music playing from a cassette deck. There was no cover charge and the average customer spent about $8 to $10. “I had a lot of costs, so I did not make huge profits,” admitted Tabbara, “it was my first experience in the food business.”

It was an experiment, however, that proved successful despite the paltry returns. “Everyone called for reservations, but I did not take any to be fair. So, by 7pm, people would send their drivers to wait in line till we opened at 8pm to reserve tables,” said Tabbara. “When we would tell people they couldn’t come in because we ran out of chairs, they would go home, bring a chair and come back. It was really funny.”

With such popularity, Tabbara had discovered an untapped market, but by the next year, in true Lebanese fashion, others wanted a piece of the action. The Coral Beach and the Escape club both opened tents in 1996. Both provided serious competition to Tabbara’s second tent, which by now had moved to the newly renovated BCD. The second tent saw profits increase fivefold, but by 1997, a sponsorship dispute and government red tape forced Tabbara to abandon his project. By now, Khaymat al Hanna had opened its doors and Tabbara’s previous alliance with Future TV was abruptly severed to solely advertise Bcharra Namour’s venture. After nine days of tough negotiating, Future reinstated its agreement with Tabbara, but as it was nearly two weeks into the month, and much of the financial momentum was already lost. “I was shocked [by Future’s actions],” said Tabbara. “And then the ministry of tourism said they would not give me a permit to open a tent [the next year] because all the hotels complained about the competition. In the end, I just gave up.”

Although Tabbara is no longer in the business for now –

“maybe I’ll come back with a KHAYMI next year” – he certainly paved the way for Ramadan tents today. There is no clearer legacy to his innovation than the splendid tents operated by Lebanon’s finest hotels.

“There is a good market for Ramadan tents, but unfortunately in Beirut, there is no high quality in terms of décor, entertainment and food. That’s why we focus on those parts,” said Simon Saade, food and beverage manager at the InterContinental Phoenicia. “We wanted to have a tent for the people to enjoy the luxury and ambiance of Ramadan.” Part of that luxurious ambiance includes extravagant decorations á la 1001 Nights, which one insider estimated at costing $200,000. Still, with a seating capacity of 640, a relatively full house every night of the month, and the average customer doling out $28 a night on a set menu (not including a NARGILEH), the expense seems worth it. Just across the street, however, is the more rustic Fishawi tent, run by the St. Georges Yacht Motor Club, which does not have a set menu. According to Michel Farhat, the operations manager at the St. Georges, the average client spent about $20 a night at the Egyptian-themed tent, which included a LL10,000 cover charge for the live entertainment.

“The Fishawi tent offered people something simple, an affordable way of capturing the idea of Ramadan,” Farhat explained. “The Phoenicia tent was more upscale.”

Operation costs for running a Ramadan tent vary according to type. At the Phoenicia, for example, about 80% of the tent staff consisted of fulltime employees in the food and beverage department at the hotel, which kept overhead down. “We used our own people to construct everything [in the tent] and we saved money by using our own people. It has proven a successful business experience,” said Saade. For establishments that do not have a hotel’s business to rely on, they are faced with a different situation. For the St. Georges, the Fishawi tent was an effective way of keeping its summertime staff (from it’s beach club) employed during the winter, which would otherwise be a dead season. Farhat estimated overhead costs at $50,000 to $60,000, with $30,000 spent on advertising and live entertainment. At the end of Ramadan, Farhat estimated the revenues of Fishawi at $133,000.

Although hotel and resort ventures have proven successful –Saade admitted that the Phoenicia tent has been packed since it’s opening in 2001 and Farhat said that 2003 profits from Fishawi increased by 10% from 2002 – independents like Tabbara were not so lucky. “I spent $300,000 on my third tent,” said Tabbara, “and I lost 33% of my profits [because of the Future TV deal fallout].” For the first nine days of the holy month, out of the 1,500 seats available, only about 200 to 300 were filled each night – which was catastrophic considering the $80,000 monthly rental fee of the BCD lot. Tabbara also faced backlash from religious clerics, who associated him with tents that featured dancing, although he did not permit such activity at his establishment. “I was very strict about dancing because I knew people would talk about it. But the Mufti sent a representative to talk to me because they [the clergy] did not know any other tent owners.”

Respecting religious customs is very important to most established tents. Almost none serve alcohol or feature racy entertainers like belly dancers. “This is something we can’t joke about; we respect tradition,” said Farhat. It is a notion firmly upheld by the Phoenicia, said Saade. “We respect this month and keep it in high value.”

As for the man who started it all, what is his opinion about the Ramadan tents of today? “I liked the Phoenicia tent; it was very nice,” said Tabbara. “But the problem with tents today is the loud music – you can’t talk to anybody. It would be better if they just lowered the volume.”

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