Finance

Battling debt

by Tony Hchaime
written by Tony Hchaime

The Lebanese government’s successful efforts to put on hold the almost weekly auction of Lebanese Pound Treasury Bills some nine months ago is a positive development many. Local and international economists attributed the move to the substantial increase in liquidity levels pursuant to the Paris II donor conference held during the fall of 2002. The $4 billion drawn during the Paris II conference, coupled with the $4 billion interest-free loan provided to the government by Lebanese banks, have resulted in a surge in liquidity levels, which allowed the government to stop borrowing locally through T-Bills.

As the year draws to a close, however, the treasury is opening up its auction doors once again, borrowing domestically through the issuance of new T-Bills, with maturities ranging from one year to three years. The motives behind such a move have been debated often among leading bankers and economists, in the light of the performance of the government in 2003, and the new draft budget for 2004.

Initially, the conditions set during the Paris II donor conference included radical fiscal and monetary reforms, proper initiation of the privatization of some state assets, and efforts to securitize the proceeds of others. However it seems that the funds attracted during the conference, as well as the interest-free loan by the banks, have been used to partially reduce interest on some of the public debt, and mostly to cover the steep deficit in the budget.

As such, the money was never intended to solve the problems of the government, but was rather a means to undertake economic reforms and privatization. Such efforts are ultimately used to significantly trim the deficit, spur economic growth and stop the need for additional borrowing – all of which are seemingly beyond any imminent materialization in the case of Lebanon. The money raised in 2002 was used rapidly to cover the budget deficit and has since dried up in less than a year. The direct consequence of such developments is the recently highlighted return to T-Bill auctions.

A major portion of the funds obtained during and pursuant to Paris II was used to replace existing debt obligations with new ones at lower interest rates. This has resulted in the much-lauded reduction in general interest rates in the country. As such, the new T-Bills auctioned by the ministry of finance yield between 6.85% and 8.72%, a significant drop from the 14% or higher yields common prior to Paris II, to levels unseen in over 20 years.

Moreover, it should be taken into consideration that if the government succeeds in maintaining such low interest rates while simultaneously replacing existing high yielding debt with such T-Bills, the overall cost of debt burden would be significantly reduced.

On the other hand, the government’s ability to succeed in such an endeavor should be assessed, given the sizeable deficits in the budget, and the slow pace in the implementation of reforms and privatization plans.

A comparison between borrowings through Treasury bills and the interest rates on such securities shed some light as to the government’s ability to maintain low interest rates (see chart). Historically, lower interest rates have been accompanied by lower levels of borrowing. In essence, there have been rare periods where the levels of T-Bill issues have been sustained with dropping yields.

In economic terms, the yield on any security rises with the risk associated with such a security. In this regard, the government had managed to improve its image and comfort investors following Paris II, with the central bank foreign exchange reserves reaching record highs. Such developments reduced the perception of default risk on the government, devaluation risk on the national currency, and thus justified the lower interest rates on the newly issued T-Bills. Recent developments, however, have begun to raise concerns once again, and political bickering has delayed many critical reform plans. A number of adverse factors are appearing on the horizon and are likely to render investors more risk averse. The regional arena is plagued by the situation in Iraq, increased terrorist activities in Saudi Arabia and Turkey and the slow pace of the peace process. On the domestic front, the scene does not look any better. The year 2004 is expected to witness heated presidential and municipal election campaigns, overshadowed by the Hariri-Lahoud feuds. Furthermore, much uncertainty surrounds the government’s ability to take concrete steps towards economic reforms, privatization, and securitization, and ultimately reduce the debt burden. In essence then, such increasing uncertainties are likely to push interest rates higher in the market, and consequently force the government to offer higher yields on T-Bills if it chooses to pursue this method of borrowing.

On another front, positive signs are beginning to show in the western economies, increasing the likelihood of higher interest rates globally over the next 18 months. Such increases will also have to be reflected in the yields of any securities sold on the Lebanese market, including the government’s Treasury Bills. Some argue that since the central bank will absorb a considerable portion of each issue of T-Bills – as it has done previously – interest rates may be more resilient to upward pressures. Nevertheless, although the central bank has done so occasionally, the bulk remains in the hands of banks and private investors (see chart). This renders interest rates much more sensitive to market pressures.

Banks in Lebanon are known to have profited substantially from T-Bill investments in the past, and are not likely to appreciate the sharply lower returns on similar investments offered currently. Nevertheless, the currently low rates of return on alternative uses of funds may encourage banks to invest in T-Bills. The credit situation in the country has been severely damaged by the economic recession of the past three years, while global interest rates remain at record low levels. In such a sense, the yields of 7% and 8% offered on the new T-Bills do appear attractive. On the other hand, rising global interest rates and improvements in the economic situation in the country could spawn various alternative investment opportunities. A direct correlation exists between the T-Bill yield spread over LIBOR and banks’ portfolios of such securities. As such, it is expected that as global interest rates rise and the spread between Lebanese T-Bill yields and LIBOR narrows, Lebanese banks are likely to trim their T-Bill portfolios in favor of other investments (see chart). Therefore, the government will be forced to raise interest rates to maintain or increase the spread over LIBOR in order to entice banks to keep purchasing T-Bills.

On the income side, recent figures released by banks in Lebanon reveal a marked improvement in the bottom line, despite the lack of T-Bills over the past nine months. Such a development indicates that perhaps banks are no longer as dependent on T-Bill returns as they were in previous years, and that they have successfully sought alternative sources of income.

Pressures on the Lebanese Pound have always been a major topic debated in government circles over the past years and have often put a strain on the central bank’s foreign reserves during its efforts to stabilize the currency.

As the government attempts to lower interest rates across the board through the issuance of T-Bills at markedly lower interest rates, concerns arise as to the impact of such a move on the Lebanese pound. Basic economics stipulate that as interest rates drop in one country relative to others, demand on the domestic currency also drops. In the case of Lebanon, this would theoretically reignite pressures on the Lebanese pound, forcing the central bank to tap into its foreign reserves to offset the pressure.

On the other hand, even the sharply lower interest rates on the Lebanese Pound remain at a significant premium to interest rates on international currencies. As such, the drop in demand on the currency resulting from lower interest rates is likely to be limited in the near term. Conversely though, if global interest rates were to rise, reducing the premium offered on Lebanese pound investments, demand on the currency would begin to drop, and pressures would begin to mount. Nevertheless, such a concern is somewhat distant and of little concern, especially since the central bank has recently accumulated record levels of foreign currency reserves, enough to defend the national currency if need be.

However, while the significantly lower interest rates on the securities would be a welcomed move in terms of reducing the cost of debt burden on the budget, a number of concerns arise based on historical developments and expected future ones.

The ability of the government to maintain the low interest rates is questionable. The use of the funds obtained through such auctions should be closely assessed. Debt levels are continuing to rise, and efforts to trim the budget deficit have yet to meet reasonable success. In such a sense, will the funds obtained through T-Bills be used to facilitate the implementation of economic reforms, privatization and securitization… or will they be used to just cover the deficit and contribute to the growth in our public debt levels?

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Business

Turning a page

by Godfrey Blakeley
written by Godfrey Blakeley

Saqi Books, an independent publishing company run by two Lebanese, is making waves in international markets and, perhaps even more importantly, helping to counter misunderstandings between the Arab and Western worlds.

The ethos of the company is radical, progressive and international. “We believe in a cultural dialogue between the Arab and Western worlds, never more needed since the events of September 11,” said managing director Andre Gaspard, who, with his partner Mai Ghoussoub, founded the company as a bookshop in 1979 and now runs the company from offices in a cosmopolitan area of West London. Today, the company has an annual turnover of $3 million and publishes 27 English and 39 Arabic titles a year.

“We don’t think in terms of Arab or Western blocs and we don’t see all Arabs as fanatics and all Americans as imperialists – that’s crude and simplistic. We try to provide an outlet for a variety of individual voices.”

Gaspard cites the example of ADAMA, an autobiographical novel by Saudi writer Turki al-Hamad, which is about a young man growing up in Riyadh in the 1960s, and THE CRUSADES THROUGH ARAB EYES, by Amin Maalouf, which went a long way towards setting the crusades, one of the most distorted episodes in history, in a true light. “This is the sort of book we like to publish,” he said. The book still sells over 5,000 copies annually and is a standard text in schools and colleges.

A major coup was the publication in November 2001 of the first study of 9/11 called, TWO HOURS THAT SHOOK THE WORLD, by Fred Halliday, a Middle East specialist at the London School of Economics. The company began with the bookshop. Gaspard, who studied law at the University of St Joseph, and his friend Ghoussoub who studied math at the American University of Beirut, left the civil war in Lebanon in 1976 and moved to Paris. They found temporary jobs – Gaspard in a bank and Ghoussoub as a journalist with an Arab language weekly newspaper. They were both great book lovers and avid readers. One weekend Ghoussoub, on a visit to London, noticed that the city had no Arab language bookshops although there were three in Paris.

“She came back to Paris and suggested we open a bookshop in London and, being young and crazy, I agreed straight away. After we had opened, I met a prominent Arab bookseller who told me he had been thinking of opening a bookshop in London at the same time. He had a feasibility study done which predicted he would lose £80,000 a year and he decided to drop the idea. Thank heavens I never carried out a feasibility study!”

Before opening in 1979, Gaspard and Ghoussoub drew up a catalogue of 1,600 titles. “We printed 1,000 catalogues and ran out of them within a few months. We didn’t plan it but it proved to be the best way to launch a company specializing in mail order and library supply.” They also built up an address list of universities and colleges with Arabic departments in Europe and America. This mailing list, which began with 80 names and now has over 10,000, is the basis of the core business – mail order and worldwide library supply. This now accounts for some 70% of the shop’s annual sales of about $1 million. Mail order is increasingly overtaking “off the street” sales, as fewer Arabs visit London and more bookshops sell books about the Middle East.

He runs a tight ship. The bookshop employs seven people and is managed by Ghoussoub and Gaspard’s wife Salwa. At any given time the shop stocks some 40,000 titles evenly divided between Arabic and English books and specializes in titles with a long shelf life which often become standard academic texts.

“For a bookshop turnover in time is the key to profitability. If your allocated capital for buying books is, for example, $100,000, then the secret to financial success is how many times you can recoup and reinvest that $100,000 during the year. The average is three times, we achieve three and a half times, and the big chain bookshops aim for five times,” said Gaspard.

“Because of this huge push for profitability by the new supermarket bookshops there is a constant demand for new books, and huge numbers are being produced, the traditional bookshop atmosphere is disappearing, and it’s becoming difficult for the independent bookshop to survive.” But Saqi survives and prospers. The bookshop is “the mother” of the other two departments. The English language publishing department opened in London in 1984 and after “bumpy” progress over the years, picked up dramatically. It has increased sales by $200,000 for each of the last two years and now achieves annual sales of $1 million. All three departments now contribute more or less equally to the company’s present overall annual sales.

“I’m sorry to say that the tragedy of September 11 helped our English language publishing business. Sales increased threefold because many of our books were relevant to the crisis. Our Arabic publishing suffered at first but recovered, and the bookshop, which is a steady, ongoing business, was not affected.”

The English department is a lean and fit operation with an in-house staff of four people. Much of the nitty gritty pre-production work in London is handled by a team of some twelve freelance copy editors, proofreaders, indexers and designers. This system of outsourcing is especially effective in the production of a wide variety of specialized books. Pre-printing work accounts for about one-third, and printing and binding for about two-thirds of costs.

A publisher’s key partner is the representative who sells his books to bookshops, and the distributor who stocks his books in a warehouse, delivers orders to bookshops, collects sales revenues and, after deducting fees and expenses, sends the publisher his money.

“If my representative goes bust I don’t lose much, but if my distributor goes bust, we can suffer badly. The distributor is your money source, and if he runs into trouble, the publisher is the first to suffer – especially in England where in a case of bankruptcy other creditors take precedence over publishers,” explained Gaspard. “Over the last 16 years, four of our distributors have gone into receivership. The last time we lost six month’s sales and suffered a severe disruption of business. With nine books going through the printers we had to rent a temporary warehouse for two months until we found a new distributor and it took us two years to recover from the crisis. But each time we were able to recover because we do not borrow money from banks – that is our golden rule. Publishing and distributing books is unpredictable and risky.” When the company opened an office in Hamra Beirut in 1992, it was initially managed from London and everybody told Gaspard it would fail within a year. “We started slowly and cautiously but we picked up better than most of our competitors after the first Gulf war and our growth has been the fastest ever achieved by a Middle Eastern publisher.”

The office now employs a fulltime staff of 10 and a team of eight freelancers, has its own editorial board, and is becoming increasingly independent of London. It publishes over 50 new titles a year as well as reprints, achieves annual sales of about $1 million, and is the leading independent publisher in the region. It may also generate the company’s strongest growth in the future.

“Our list consists of some 300 writers from Morocco to Iran and everywhere in between. We try to find writers from a broader social spectrum, including women exploring new cultural and social issues, and as always we are keen on ‘new voices.’ We always treat writers fairly and this makes a huge difference in the Middle East. They recommend you to other writers and you are on a roll.”

In London, the company acts as a publisher but in Beirut it not only publishes books, it also does its own representation, distribution and wholesaling. Operations cannot be streamlined by giving exclusivity to one distributor as in Europe and America, and although the company has 40 distributors in the Arab world, some of them are unreliable and it does some distribution itself. The company stores its books in its own warehouse, employs two fulltime representatives constantly visiting bookshops throughout the region, and attends all the main book fairs. It has built its own distribution network and delivers directly to bookshops in all the major Arab cities. So where do Saqi Books go from here?

“We’ll do more of the same. We’ve always worked within our means and invested only from profits and never from borrowing. That makes it difficult to dream up master plans or long term goals,” Gaspard said. “We could open bookshop branches but we’re not going to jump into things. We don’t take easily to the idea of expanding with somebody else’s money and on their terms. We started small, we’ve grown gradually, and we like it that way.”

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Finance

Falling flat

by Faysal Badran
written by Faysal Badran

Attempting to put together a commentary on the state of the Arab capital markets has become increasingly difficult for fear of being too biased, or worse, too skeptical. But as the parades of often-eloquent speakers continue to elaborate on the development of stock and credit markets in the Arab world, it is safe to say that yes, there is the proverbial “money to be made” in some Arab markets. But the question remains, are they heading in the right direction as far as growing the investor base and attracting fresh capital? The debate rages on, but recent events suggest that the notion of liquid and integrated markets is almost as far off as good governance and openness. Some recent bubbles came through newly privatized sectors, or even a real estate development here and there. But in essence, and despite some heart stopping cycles, the markets remained illiquid, and public participation weak. The main worries as they relate to the dynamics of the Arab market include, slow dealings, a somewhat opaque information and data system and the fragile economic and social structures – which the markets ought to reflect over time. These are linked to economic size and macro issues, as well as regulatory inexperience and lack of transparency and standard corporate governance. We could be cheeky and pull out a report from the UNDP on human development in the Arab countries – or a more recent obvious yet chilling diatribe on the poor state of governance in the area – to build the case that Arab capital markets are destined to remain disparate, shallow, speculative arenas, unlikely to take a path of growth and global relevance. It is unthinkable that the capital markets can develop meaningfully before there is a trajectory of openness, sensible economic planning, transparency and people empowerment. It is not a political angle it is the only angle. If we are to have capital markets that act as a faucet of growth and development of the Arab generations to come, it would be useful to link it, inextricably to political reform and a process of de-corrupting the political systems – a tall order for sure. Can we have open and deep markets for paper assets if trust in the economic, social and political future is not partly secured? Can we attract capital and develop the right environment for savings to be directed at the markets if, for the most part, we have no plan for tackling unemployment besides rhetoric and flamboyant use of “emergency” and “security” as a means of stratifying the status quo? There is ample room for Arab capital markets to exist and prosper. But without the corollaries of human development, economic depth and a prosperous and trusting population, all efforts to perpetuate the dream of capital markets are as doomed as a Road Map, which does not take into account the map itself.

Nothing would be better than for Arab markets to truly enter the realm of “emerging markets” and get more visibility and respect. But realistically, without seismic changes in political governance, and policies that promote prosperity over policing, it’s a non-starter. It is a good sign that the professionals in the Arab area do hold conferences – the exchange of ideas is refreshing and does help the local hotel industry when the show comes to Beirut. However, better usage of resources would be for those sharp pros to exert pressure for change.

In this era of Texan “crusades,” the Arab capital markets will most likely be restrained on one hand by weak economies suffering structural problems and political neglect, and on the other by the stark reality of decaying political and social systems. Totalitarian regimes and equity and business cultures rarely coexist. They are stuck between local economic despair and shrinking relevance of their impact and role in the more global world. There is sincere denial from many places in the Arab world about many things, but what is striking is how many players in the region still expect to have a financial center in the region. At the latest count, two Gulf cities are sort of competing for the role of financial center. Chances are, most of the financial centers in the world have already been established. This is independent of the fact that entire daily turnover of stocks and bonds in the region is probably less than that of Intel, L’Oreal, or Nokia in a few hours.

The recent launch of CNBC Arabic seems astounding. Here is a region with little free press, harsh living conditions, autocratic “family business” type regimes, often with spectacularly high unemployment levels, and rampant corruption, and now it has its own financial news channel? Not surprising though, given that CNBC in its short life has become a sort of ATM of hyper-capitalist propaganda. It is short sighted to think that because CNBC Arabic has been launched, something good must be happening in Arab capital markets. It seems optimistic to think that 24/7 Arab financial news is needed or even justified. The clear focus for Arab capital markets in the coming year will be events outside the realm of economics and finance. In a period where the existence of some if not all current systems is on the table, and where human suffering is excruciating, where illiteracy is still an issue, and justice and representation are not the currency of choice, the Arab capital markets will remain in a rut. Developing an equity culture so crucial for markets to take form takes generations and, most importantly, requires prosperous and vibrant youthful enterprise. But to draw skill and money to the regional markets will require that the inevitable reassessment result in the triumph of the economic/human development priority. Not a sure bet, but hope springs eternal.

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Business

Gold rush

by Sarah Smiles
written by Sarah Smiles

The violence still plaguing Baghdad has done little to deter a brave band of entrepreneurs – many of whom are Lebanese – to march into the capital and snap up lucrative post-war contracts with the coalition forces. Free trade and privatization, forbidden under Saddam Hussein, has plenty of opportunists biting.

“Before the war there was no chance for foreigners to invest. It was a scary regime. Who would have dared come here and try?” said Lebanese businessman George Chahine, who has a contract to maintain three US military bases with Kellogg Brown & Root (KBR), a subsidiary of Halliburton.

With $18.6 billion pledged by the American government for post-war reconstruction next year, alongside over $13 billion in loans and donations from donor countries secured recently in Madrid, the contracts – worth anywhere between $100,000 to $30 million – have overwhelming appeal. “As long as I’m happy with the contract, I don’t mind doing business in Angola or Afghanistan,” said Michel, who comes from Beirut and has a contract with KBR to supply mobile homes to the American camp at Baghdad International Airport.

Yet he was not so blasé about the dangers involved. American military convoys are often targeted by explosive devices on the road to the airport, which also comes under regular mortar attack. “The biggest risk is getting to the camp and back on the road. Also being at the airport, if the camp is shelled who knows what’s going to happen?” he said.

Despite these risks, Michel considers the contract “worth it,” although he, like most of the other contractors in Iraq has no insurance. “What insurance?” he said incredulously.

“You can get insurance but I don’t think it’s worth much because this is war. Who’s going to cover FORCE MAJEURE?”

While one upside to this is no taxes, the lack of insurance for consignments in a war zone can be costly. Chahine is constantly losing freight on the road from Kuwait to Baghdad, where his goods, accompanied by military vehicles, are inevitably targeted by looters. When a truck comes under fire, the driver detaches his load and keeps on driving.

“If I have a valuable consignment in transit, I’m always worried about it until it reaches its location because it’s my money after all,” he said.

While the security situation across Iraq is far from ideal, Yousif Abdul-Rahman, the senior advisor to the Iraqi trade minister is naturally bullish, predicting that business opportunities will abound when the situation stabilizes.

“When security prevails we expect there will be big opportunities in business in Iraq, whether in construction or in supplying commodities. The sooner companies get here, the better,” he said.

This optimism is underpinned by a burgeoning form of economic liberalization that has taken hold under the neo-liberal policies of the Coalition Provisional Authority (CPA).

“A new investment law will be issued to encourage foreigners to come and invest in Iraq,” said Abdul-Rahman of the new law currently being drafted and soon to be issued by the Iraqi Ruling Council.

Previously, state-owned businesses, from factories to the infamous Al-Rashid hotel in Baghdad – are also under review for privatization. “Each ministry is negotiating which projects need to be privatized and which need to be controlled by the government,” said Abdul-Rahman, touting the example of previously state-owned shopping malls. “We plan that in the future, these shopping centers will be rented to the private sector, renovated and redeveloped [to resemble] major chains, such as Safeways. The private sector can deal better than the government in certain areas.”

Nonetheless Abdul-Rahman acknowledged that privatization must happen slowly to ease the social fallout likely to occur if more Iraqi workers lose their jobs. This is nowhere more sensitive than in the manufacturing sector, where some 200 state-owned companies formed the largest employers outside central government – with more than 500,000 workers on their payrolls. “The unemployment rate exceeds 60%. If we speed up privatization this will have a negative impact,” he said.

With privatization is a key economic goal for the new Iraqi government, and the main focus of the trade ministry is free trade, said Abdul-Rahman. This is a sharp shift for a ministry whose former function was to control the rationing system of the UN oil-for-food-program.

“The outlook for the government is free trade, so there will be a very big support for the private sector to participate in the economy of Iraq,” said Abdul-Rahman, highlighting the ease of registration for foreign companies.

Free trade is nowhere more evident than in Iraq today. When the war ended, the CPA froze customs duties on goods entering Iraq, heralding an unprecedented opportunity for trade with neighboring countries. The streets of once-sanctions ravaged Baghdad are flooded with cheap electrical products from Turkey and food from Iran, distributed through Kurdistan. A fleet of used-cars has also made its way into Iraq through the Jordanian port of Aqaba.

This will change on January 1, 2004, when a reconstruction levy of 5% will be imposed on the total taxable customs value of all goods imported into Iraq, besides medicines, food, clothing and humanitarian goods.

While Jordanians have profited from trade with Iraq, Chahine sees the Kurds as the “biggest winners” of the post-war free market.

“The private sector is being controlled mainly by the Kurds, due to the fact that Northern Iraq wasn’t under any embargo and the Kurds, because of their territorial location on the Turkish and Iranian border, have experience with trading transactions and have already established their contracts with manufacturers abroad,” he said. “They were the first to flood the market with satellite dishes, a day after the liberation.” While most trade is coming through the ports of Aqaba, Tartoos and Um Qasr, some businessmen are choosing to ship their consignments through Beirut to avoid delays. “We have to depend on Beirut, because Aqaba is congested and there is a delay in delivering the consignments in Kuwait,” said Chahine who has a consignment soon to be delivered through Beirut.

While years of sanctions would suggest that Iraqis have poor purchasing power to take advantage of new products, Chahine believes otherwise. “Iraqis are buying. They were thirsty for everything,” he said of the country with a population of over 24 million.

Khalid Al-Helou, an Iraqi businessman agreed: “Under sanctions there was nothing to spend your money on. We couldn’t travel or buy new things, so we just saved it.”

Landlords are also cashing in. Since the end of the war, property prices have risen by 300%. “They are asking $2,000 per square meter for prime locations along the Tigris River,” said Chahine, obviously unimpressed at having to pay $20,000 to rent a home. “The price of land is grossly exaggerated. Why? The Iraqis believe that the price they set now is the one they will realize in the future.”

While trade and real estate present long-term opportunities in Iraq, the best money to be made right now is through American contracts, said Chahine. He said Lebanese businessmen have a clear advantage in doing business in Iraq. “The advantage the Lebanese have is that they are multi-lingual. It makes it easier for them to communicate with the locals and the internationals, and coordinate with the local market and abroad,” he said.

“I also feel at home here,” said Michel, of his experience of doing business in a war zone.

Yet despite the many business opportunities, the dangers of doing business in Iraq cannot be underestimated. Chahine drives a beat-up, dirty Toyota Corolla through the streets of Baghdad to avoid standing out, employs an armed gunman to guard his house – and admits he feels anything but secure. “But no risk, no money,” he smiled, noting the importance of gaining a foothold in Iraq now.

“To be here at this time, to become familiar with the market is very important,” he said. “This is just the beginning.”

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Finance

High hopes

by Executive Staff
written by Executive Staff

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

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

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Business

Without credit

by Toby Stevens
written by Toby Stevens

The use of electronic payment cards in Lebanon and the region has grown rapidly in the past four years, according to statistics by Visa Card International. But with few exceptions, Middle Eastern markets remain debit card markets. Data provided by Visa International for the region in the period from March 1999 until March 2003 show a doubling and even a tripling in the number of payment cards issued, transaction volume and transaction value. Lebanon, which showed increases in total transaction volume of 832% over the four years (and 58% for the year ending March 31, 2003), was the second highest gainer. In terms of cards issued, the numbers quintupled in Lebanon during the past four years to about 331,000, an increase far exceeding the region-wide average growth rate of 134 percent for the same period. Only Jordan and Oman led Lebanon in the growth rates of numbers of cards issued and transaction value.

Although the network of outlets accepting cards grew by under 25% in terms of a regional average over the four years, expenditures of cardholders in Middle Eastern transactions developed healthily. In Lebanon, where the number of outlets accepting Visa cards grew from 7,700 in 1999 to 10,700 in 2003, retail card expenditures more than tripled from $62 million to reach $194 million in retail sales value, suggesting that participating merchants benefited well from their card facilities.

While electronic payment cards are advancing, the Visa International data does not show significant progress in the region

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