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.

0 comments
0 FacebookTwitterPinterestEmail
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.

0 comments
0 FacebookTwitterPinterestEmail
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.

0 comments
0 FacebookTwitterPinterestEmail
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

0 comments
0 FacebookTwitterPinterestEmail
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.

0 comments
0 FacebookTwitterPinterestEmail
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.”

0 comments
0 FacebookTwitterPinterestEmail
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.
 

0 comments
0 FacebookTwitterPinterestEmail
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.”

0 comments
0 FacebookTwitterPinterestEmail
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.

0 comments
0 FacebookTwitterPinterestEmail
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.

0 comments
0 FacebookTwitterPinterestEmail