Highlights

Economic focus

United States

• As the presidential campaign heats up, both candidates have

released broad outlines of their fiscal plans, which would

drastically reduce the federal debt during the next decade. The

question is, would either candidate blow the surplus? Probably

not. Even assuming that federal spending rises faster than

the candidates expect, their fiscal goals could still largely be

achieved because the economy will probably perform better

than they expect.

• Both Bush and Gore use the budget baseline developed by the

Congressional Budget Office (CBO) to cost out their respective

plans. On that basis, accumulated surpluses over the next

decade would total nearly $4.6 trillion, more than enough to pay

off the existing $3 .5 trillion federal debt. Roughly half of that

sum, $2.4 trillion, reflects the Social Security surplus.

• Looking at the candidates’ figures, Gore’s proposals would

pay down about $2.8 trillion of federal debt by 2010, eliminating

80% of the currently existing debt by that time. Bush’s proposals

would pay down about $1.4 trillion of debt, eliminating 40%

of the existing total, plus accumulating about $1 trillion in self

directed Social Security accounts.

• Of course, candidates are traditionally unduly optimistic

about budget effects, and both Gore and Bush have undoubtedly

underestimated the cost of their spending programs. For

example, more than half of the extra spending in both plans is for

healthcare, an area of notorious cost overruns.

• Beyond the specifics of their policy proposals, both Bush and

Gore use a CBO baseline that assumes that real discretionary

spending will be flat for the next ten years, an assumption that

we think is too optimistic. The CBO also assumes that GDP

growth will average 2.75% during the net decade; the Fed now

appears to believe that the economy’s non-inflationary growth

potential is 4% a year. We think it’s even faster.

• If growth were to average 3.5% a year-still less than the Fed’s

estimate of potential, leaving room for a recession to occur –

federal revenues would be roughly $1.5 trillion more than

assumed in the CBO baseline. That means that higher revenues

from stronger economic growth would likely offset even sizeable

cost overruns in the candidates’ spending plans. In short,

the fiscal goals of Bush and Gore may actually be achievable,

at least over the ten-year period used in their budget planning.

• In our view, the net economic stimulus of either plan would

be too small to worry the Federal Reserve very much. Indeed,

if the new President were to carry out his tax and spending plans,

fiscal policy would actually become increasingly restrictive during

the next decade because federal spending as a share of GDP

would continuously shrink. We doubt that spending would be

quite that restrictive.

Bruce Steinberg, chief economist

Global view

• It stands to reason that economic growth is the ultimate

source of profits growth. It is also logical to think that investors

will probably see stronger growth in corporate earnings and

stronger equity-market trends in countries where economic

growth potential is high rather than low.

• With that in mind, we recently conducted a study – our Global

Ranking Systems (ORS) – that ranks 35 countries by their

economic growth potential. The goal is to help investors recognize

profitable opportunities in countries that might not

look particularly attractive today.

• What method did we follow? We identified five categories of

variables that help to gauge a country’s economic growth

potential. They are capital supply (which measures savings rates

and the performances of capital markets), people (the supply

and quality of human resources), technology (scientific and technological

capacity), government policy and social structure (the

growth orientation of government policy; social cohesion) and

risks (potential sources of economic instability). Each category

has five variables; for each variable, we ranked each country

from most-favorable to least-favorable, assiging an equal

weight to all variables.

• What did we find? Sweden had the highest total score. Singapore,

Australia and the US were in a virtual tie for second

place. At the other end of the spectrum, Russia beat Indonesia

and Pakistan or last place. OECD members accounted for ten

of the top 12 spots on the list; the lowest-scoring countries represent

a di verse collection of economies in Latin America, South

Asia and Eastern Europe • Not surprisingly, we found that the technology category had

the strongest effect on a country’s ranking because it displayed

the greatest variation among the economies we examined. The

people category displayed the least variation, primarily

because high scores on some variables tended to be associated

with low scores on others (for example, countries with poorly

educated and comparatively unhealthy populations generally had

rapid labor-force growth rates and low labor costs).

• The GRS would be of no use if it did not have a strong correlation

with GDP growth and equity-price increases. Our back testing

indicates that the GRS does a good job of explaining potential

growth over time. The correlation between country total

scores and GDP growth is very strong, after controlling for initial

per-capita GDP. Looking at equity-market performance, the

situation is similar: countries with high total scores showed higher

growth in equity prices.

•Fora full discussion of this topic, see our August 30 report, GRS:

Ranking the World’s Fast-Track Economies.

Michael Hartnett, senior international economist

Matthew Higgins, international economist

Strategy fOCUS

United States

• Style often equals substance, at least when it comes to investing

in stocks. That’s one of the messages that the market has

been sending during the past few years, when investment

style decisions have been among the most important influences

on performance.

• One style that investors always seem to keep in mind is small cap

investing. Right now, the small-cap sector seems to have

reached a kind of noisy equilibrium. The unusually wide performance

gaps between opposing investment styles have recently

moved closer to their normal relationships. We tend to think that

dramatic divergences in performance are probably a thing of the

past, but in the case of small-cap issues, valuations alone are unlikely

to trigger a sustained period of outperformance. In our view, a

new bull market in small-cap shares is in a state of arrested development;

whether and when it blossoms probably depends on factors

that go beyond matters of valuation or profits.

• A look at the past may provide some insight into the future.

On a long-term basis, returns on small-cap stocks showed an

enormous acceleration from 1973 to about 1983, and they have

generally underperformed since then. What accounted for the

surge? In a nutshell, investors in the 1970s and early 1980s had

only two obvious choices: watch their savings erode, or withdraw

their savings from low-return regulated accounts and participate

in the then-prevailing inflationary trends by owning

small-cap energy and mining shares. The choice was fairly clear,

and investors quickly rotated into the few areas of the economy

that prospered from the structural inflation that was building

up at the time.

• What’s going on now? If inflation were to reappear at some

point, investors have many more alternatives than they did 25

years ago. As a result, we doubt that another period of outsized

small-cap relative returns is likely now that the menu of financial

choices is much broader than it used to be.

• With the exception of the great run-up of 1973-83, small-cap

bull markets were cyclical affairs. We think that that is the kind

of revival that will eventually develop in the sector.

• History shows that most small-cap bull markets emerge in the

aftermath of a recession or painful soft economic landing.

Recessions often create the mix of factors needed to encourage

rotation back into small-company shares, including deep-discount

relative valuations (as investors rotate first into safer large cap

companies), easier monetary policy (creating upward

pressure on multiples and confidence in an earnings revival) and

easy comparison as the profits cycle finally turns.

• Monetary policy is an especially-important element in the outlook

for small-cap stocks for the rest of 200 and 200 I, in our

view, particularly because investors appear to think that profits

are peaking. An extended decline in interest rates has usually

been a prerequisite for a period of sustained outperformance

by small-cap benchmarks. For that reason, a buoyant economy

may deal a major revival in the small-cap sector of the market.

Another consideration is this: the weakness in technology

stocks has been much more pronounced in the leading small cap

indexes than in the S&P 500, and the same holds true for

financials. Those two areas must do better before small-cap

measures can outpace the S&P 500.

• Other factors may also contribute to delays in a small-cap

revival. One is that size may indeed matter, even within the

small-cap universe: a look at the Russell 2000 shows that the

fundamentally stronger companies appear to be bigger ones in

terms of market cap. In addition, the IPO market and, more

broadly, IPOs, secondaries and shares coming out of lock-up

translate into supply; that could also be a key element in the performance

of the small-cap indexes in the months ahead. As

usual, the underwriting calendar slowed down for the September

Labor Day weekend. The pipeline for the rest of the third quarter

and the fourth appears to be fairly heavy.

• On balance, our view of the small-cap sector’s prospects is this:

a major small-cap bull market will likely be delayed into next

year, but we think that the current low valuations of many stocks

offer attractive entry points for patient investors. In the climate

that we foresee, careful stock and sector selection will probably

become the main driver of returns for small-cap portfolios.

Christine A. Callies, chief US investment strategist

Technical focus

United States”

• The stocks market’s major averages rose by 4% to 8% for the

July-August period, but the advance appears to be maturing. A

fall correction may be more severe in the technology sector than

in the technology sector than in the market as a whole. We continue

to favor accumulating issues in the value areas of the market

during an expected fall setback.

• Whether the market’s recent upswing is the start of a durable

advance from the major averages’ spring lows or merely an

interim recovery from those lows that will be followed by

renewed weakness may depend on the sector of the market to

which one is referring. In the case of the technology sector, we

continue to believe that its summer performance sequence was

an interim recovery, or “B-wave,” that will likely be followed

by a second phase of weakness, or ”C-wave” decline, in coming

months before the entire correction is complete.

• The non-technology/growth “rest of the market” consists primarily

of a wide array of mid-to-small cap value stocks,

although many large-cap basic-industry/capital-goods issues

could also be included. Those stocks, in general, have been out

of favor or correcting for the past two to three years, but now

appear to be stabilizing or recovering on a gradual or nation- al basis.

 The improvement in that wide array of stocks has lifted

the NYSE’s 25-week advance-decline ratio to its highest

level (1.27) since April 1998 and raised the percentage of NYSE

common stocks trading above their 200-day moving averages

to 63%, also the highest level since early 1998. A key difference

between now and then: in 1998, those figures were

declining from higher preceding levels; now they are rising from

lower levels and showing improving momentum. Although a

market reaction during the next couple of months would certainly

have some effect on those stocks, it would be part of an

emerging major uptrend rather than a reversal of it.

• Meanwhile, the recent catch-up in the previously laggard technology

sector may be the latest indication that the market’s

spring-summer recovery trend is in a mature stage. Moreover, if

that were to be followed by signs of a faltering in the recent leaders

(financial, energy, utility stocks), it would increase the evidence

that a fall pullback or corrective phase was unfolding.

• Against that background, we continue to recommend that trading

accounts raise cash reserves in coming weeks and that

longer-term investors buy on a price scale-down basis.

MOROCCO

The Moroccan equity market rallied strongly in

September, drawing strength from reports of oil and gas

discoveries in the kingdom. The findings, which are

expected to dramatically change the face of the

Moroccan economy, would help to lessen the country’s

heavy dependence on the agricultural sector and make of

Morocco a net exporter of oil in a few years. Blue chip

stocks across the board reacted positively to the news and

investors’ enthusiasm was apparent in the substantial

increase in trading volumes.

Egypt

Sentiment was mostly positive in Egypt; however, the stock

exchange failed to uphold some gains realized in the month

of August with most blue chips witnessing consolidation.

Among the most demanded stocks were CIB, MobiNil and

OT, which together captured the bulk of trading activity.

Despite signs of improving domestic conditions, particularly

on the macro level, the market remains clouded by

uncertainty and tight liquidity condition. Nevertheless, investors

are bracing for the partial privatization of Telecom Egypt,

which is anticipated by the end of the year. The offering,

which will also include a GDR, is expected to rejuvenate

activity on the local bourse

JORDAN

Mixed semi-annual results for most listed concerns on the

Amman Stock Exchange kept sentiment subdued, with

the index hovering below the 140-psychological level.

Losses remain concentrated in the industrial and the

banking sectors, and to some extent, in the services sector.

Foreign investors continued to shun the market with

their sell orders outnumbering buy orders by JD5.9 million

in the first eight months of 2000. Accordingly, the

share of non-Jordanians in the listed companies stood at

41. 9% of market capitalization at the end of August, out

of which 36% is held by Arab investors and 5.9% by

non-Arab investors.

External debt under control in the Arab region

Successful debt management policies

have enabled several Arab countries

to reduce their external debt over the

past few years, most notably Egypt,

Morocco and Algeria. On the other hand,

other Arab countries, such as Lebanon,

Tunisia, Qatar and Oman, have been

accumulating higher levels of external

indebtedness. Among the indebted Arab

countries, Qatar and Jordan exhibited the

highest levels of external debt as a percentage

of GDP. at around 98% in 1999 for

both countries, while Oman and Egypt

enjoy the lowest levels, at 29% and 32%

respectively. Total external debt for the

eight Arab countries surveyed declined

from$118 billion in 1996to$113.8 billion

in 1997, but rose again in the following

two years toreach$117.9billion in 1999.

Those Arab countries that have a history

of debt rescheduling and those with a

high external debt burden will find it difficult

to attract foreign investment.

Capital always goes to those countries

who live up to their commitments and

where the risk of non-payment is low.

Besides, servicing large external debt eats

up a good portion of a country’s export

revenues, adds to its external imbalances

and puts pressure on the country’s foreign

reserves and its monetary stability.

Following the Gulf War in 1990, all of

Egypt’s debt to Arab creditors was cancelled,

as well as military debt owed to the

US, in recognition of the country’s support

to the UN coalition formed to liberate

Kuwait. This was followed by the cancellation

of half of the net present value of

the debt owed to the Paris Club ($22 billion)

and the rescheduling of the remaining

balance. As a result, foreign debt

declined from more than $46 billion in

1986 to about $28.2 billion in 1998/99,

representing 32% of GDP. Debt structure

is favorable and debt service/ exports

at less that 10% in 1999.

Lebanon’s external debt is expected to

rise in the foreseeable future as the government

gradually replaces part of the

expensive domestic debt, which stood at

a high of 126% of GDP at the end of

1999, with relatively cheaper dollar dominated

borrowing. Lebanon

tapped international markets in

September 1994 with the launch of its first

Eurobond, providing the government

with access to non-resident Lebanese,

Arab and foreign capital. Following a

series of Eurobonds, external debt rose

from a low of $772 million in 1994 to

$5,538 million in December 1999, representing

only 35% of the GDP and 25% of

the total debt outstanding. At the end of

June this year, the Lebanese Government

successfully issued a five-year Eurobond

for $500 million and is planning to issue

$500 million worth of 20-year

Eurobonds in the coming few months.

Total outstanding external debt of

Jordan at the end of 1999 stood at

JD5,186 million (US$7,312 million), or

98% of GDP, down from JD 6,052.5 million

(US$9,121 million) in 1990. By July

2000, total external debt dropped to

JD4,874 million (US$6,872 million).

Jordan• s largest creditors are the industrial

countries with whom the government is

negotiating debt rescheduling and debt forgiveness

agreements, and swapping some debt into local investment.

This should help reduce the country’s

debt burden, and with higher

growth in GDP this year, debt to

GDP ratio should drop below 90%.

Qatar’s LNG investment program,

financed by a huge stock of

external debt, led to the reversal of …_

the country’s position from a net

creditor up until 1994, to a net

debtor starting from 1995. The

country’s external debt (including

government guaranteed debt and

QGPC debt) reached $11.2 billion in

1999, accounting for 98% of GDP.

 A new $500 million sovereign loan will be

launched this month, coming at the heels

of Qatar’s second Eurobond issue, which

in mid-June raised $1.4 billion. Debt

ratios are expected to improve beyond

the year 2000 on the back of sustainable

economic growth driven by growing natural

gas exports and higher oil revenues.

Total external debt in Tunisia stood at an

estimated $13 billion last year, equivalent

to 62% of GDP. The country’s external

indebtedness is manageable in light of

Tunisia’s easy access to external borrowing

and international bond markets. In

Morocco, prudent external borrowing

and active debt management policy has

substantially reduced the country’s external

debt from a peak of 130% of GDP in

1985 to $19.2 billion or 54% of GDP in

1999. The stock of external debt in

Algeria has declined from a peak of

$34.4 billion in 1996 to an estimated

$29.7 billion in 1999, equivalent to

62.1 % of GDP, and is further expected to

fall to $28. 7 billion by the end of the year.

It is imperative for the indebted Arab

countries to take all possible measures to

reduce their debt burden. Buying one’s

debt from the world’s secondary market at

a fraction of the nominal value and using

privatization proceeds to retire existing

debt are well-known measures for the countries of the region to follow

After months of warnings, Standard &

Poor’s downgraded Lebanon’s sovereign

credit rating saying that the government

had failed to take measures to

stem the ballooning public debt, expected y

to reach 140% of GDP by year-end. The

credit rating was pushed down one notch,

from BB- to B+, making it more expensive

to borrow on international markets.

S&P said it was also unlikely that the

government would reach its deficit target of

15.5% of GDP. Also listed was the government’s

failure to capitalize on the $2.7

billion offer made by the two cellular companies

to buy GSM licenses. As well parliament’s

failure to approve a draft value added

tax (VAT) law before the elections

would likely lead to a delay in the implementation

of VAT, originally scheduled for

next year. S&P also expressed doubts that

the new government, expected to take

office in November, would be able to make

much headway in tackling the deteriorating

financial situation this year. Both

Lebanon’s current and previous credit ratings

are considered below the minimum

investment grade level of BBB-.

A second jolt came from Moody’s, which

last month put Lebanon’s BI domestic currency

debt rating on credit watch. It also cited

the growing public debt as reason for alarm.

Green light

The Central Bank has approved the

merger of Banque Libanaise pour le

Commerce (BLC) and the United Bank of

Lebanon (UBL) four months after a major

scandal threatened to derail the deal. The

approval came after Safi Harb, former

UBL chairman, and Jean Felix

Aboujaoude, BLC’s former general manager,

agreed to pay back nearly $40 million

of questionable loans to themselves and

close family members.

The new bank, named BLC, elected

Chafic Moharram as its chairman and general

manager and now ranks among the

country’s ten largest banks with assets of

$1.5 billion. Harb and Aboujaoude were

forced to relinquish their shares before the

deal could go through, leaving

Mohammad Safadi, a wealthy Lebanese

businessman, the majority shareholder in

the new bank with a 56% stake. Moharram

has said that the bank plans to boost efficiency

and cut costs, including layoffs of

10% to 12% of its 750 employees.

The merger closes a tumultuous chapter

in Lebanon’s banking history. In mid-

1999, an attempted merger between BLC

and Byblos Bank fell through over what

Byblos said were bad debts held by BLC.

Since 1997, BLC’s Beirut listed shares

have more than halved to around $10. Its latest

available results show a loss of $5.4 million

in 1998, after registering profits of

$13.7 million in 1997. “I think things are

stabilizing,” says Jean Riachi, chairman

and general manager of Financial Funds

Advisors. ” Things look good.”

The up-market pays

Societe des Grands Hotels du Liban

(SOHL), owner of Vendome and

Phoenicia hotels, came out with 1999 earnings

of $1.43 million, an 84% increase

from 1998 at $776,833. It is expecting bigger

profit gains this year, as high as $10 million.

The catalyst is Phoenicia, which

opened last March. With a focus on quality

and having the largest conference room in

Lebanon, Inter-Continental targets corporate

clients. Along with Vendome still maintaining

a high occupancy rate, averaging

77% through August, according to Noha

Saliba, Phoenicia’s PR manager, bookings

in the new hotel have exceeded expectations,

averaging 50% between April and August.

She also believes that the coming months

will bring on a surge. “Our conference

room is fully booked and in October and

November our occupancy will reach 80%,”

says Saliba. SGHL’s shares have settled

around $5.

No looking back

Credit Libanais is still showing an

impressive profit performance. Since

the central bank cut it loose in 1997, its earnings

growth has been on a tear. After earnings

jumped 52.5% last year, its pre-tax profits

climbed 29.5% to $12.4 million in the first half

of 2<XX> compared to the same period last year.

Net interest income increased 18.8% and fee based

income rose 15.4%. According to Elie

Abimrad, the bank’s financial controller,

although one major contributor to the rise in

profits came from maintaining healthy yields

in liquid assets, Credit Libanais benefited

from its focus on expanding on retail banking.

Retail lending has grown, pulling in higher

yields, and more products and services have

been launched so far this year.

Credit Libanais may be catching up with

the big banks. Although Banque du Liban

et d’Outre-Mer (BLOM), Byblos Bank

and Banque Audi have much higher profits,

Credit Libanais’s profit growth surpassed

them. BLOM’s growth increased

14.6%, while Byblos and Audi’s dropped

-0.1 % and -11 %. Though Credit

Libanais’s figures are based on pre-tax

data, net profit growth is still expected to

come in higher than the top banks.

Bond bombshell

A dollar-denominated eurobond issue

aimed largely at US institutional

investors has been put on hold indefinitely

until a new government is named. “It was

ill-conceived to think you could sell a 20-

year bond to Americans without the new

government in place and its policies clear,”

says an analyst about die timing of

the initial announcement for the issue just

before the elections.

Part of the aim of such an issue would be

to lengthen the maturity of the debt. It

would come at a higher premium compared

to previous issues, though still

below what it would cost Lebanon’s

peers, according to the analyst: “It still

would have ended up being mostly in the

hands of Lebanese banks, if not on the

primary market then eventually on the

secondary market.”

Morgan Stanley Dean Witter and Credit

Suisse First Boston, who were supposed to

lead manage the issue, subsequently handled

$450 million in three-year eurobonds.

Of these, 80% were taken up by Lebanese

banks, 15% by European investors and 5%

by Gulf investors.

Getting dragged down …

Standard & Poor’ s recent downgrade of

Lebanon’s sovereign rating has also

pulled down the credit ratings of three of the

country’s largest banks. Banque Audi,

Banque de la Mediterranee and Banque du

Liban et d Outre-Mer (BLOM) saw their ratings

go from BB- down to B+, the same as

Lebanon. S&P cited the banks’ heavy

holdings of government T-bills as the primary

reason for the downgrade. “Banks

are a major source of government financing,

holding 75% of outstanding treasury bills in

1999,” said S&P. But, according to one

analyst, “Unless the banks are going to

issue new debt, it won’t have any effect.”

… again and again

A s a consequence of the further deterioration

of the operating environment

in Lebanon, Moody’s Investors Service

changed its outlook on Banque Audi’s

financial strength rating from positive to

stable. This put the financial institution on

par with Byblos Bank and Banque du Liban

et d’Outre Mer. “This does not directly

reflect a drop in Banque Audi’s rating,”

says Nabil Chaya, head of capital markets at

Audi. “As the sovereign ceiling is lowered,

Banque Audi’s rating is adjusted accordingly

due to the increased vulnerability of the

bank’s financial strength in the face of a

weakened operating environment.”

Trading places

The Arab Stock Exchange Union has

been transferred to Beirut from Cairo

after a 19-year exile due to the civil war.

‘This will send a signal to the rest of the

world of the reliability of the Lebanese capital

markets,” says Fadi Khalaf, chairman of the

Beirut Stock Exchange. He says that despite

the incentives offered, including tax exemptions

and the cooperation of the BSE, the

decision to transfer the headquarters was

based on the federation’s recognition of the

great potential of Lebanon’s capital markets.

“The trust the federation has shown in making

this move isn’t to be taken lightly,” he says.

The Arab Clearing House, responsible for

clearing stock trades in the region, is next in

line to settle in Lebanon once its members provide

the $5 million in capital. “Within six

months, we expect Arab stock exchanges to be

linked together through one website,” continues

Khalaf. “And eventually the site will

allow online trading.”

Confusion reigns

There has been some confusion over the

price of Casino du Liban’s shares

recently. Though frequently quoted at

$200, the actual price fluctuated around

$150, which Fidus rated as a good buy. AlMustaqbal

newspaper put the price as low

as $100, based on one investor selling

1,400 shares, just over 0.1 % of the casino’s

720,000 shares.

“If anything has caused a drop in share

price, the more likely culprit is the ongoing

attempt by board members to oust chairman

Elie Ghorayeb,” says a casino official.

Ghorayeb has been at odds with the

board’s 11 members, mostly over the $23

million in outstanding taxes, which

finance minister Georges Conn is claiming

on slot machines from 1997 up to 1999.

Ghorayeb claims that these have always

been tax exempt and has appealed to the

Shura council.

Ghorayeb’s restructuring program is also

causing conflict: The staff was reduced by

100 and contracts with service providers

were renegotiated. “Renegotiating alone

cut down expenses by $5.4 million,” says

Joseph Araiji, responsible for press relations

for the casino. The gambling house has

settled its $23 million debt in record time.

In the first half of 2000, pre-tax profits

were $10.3 million compared to $7.3 million

for the same period last year.

Barely holding on

The market value of Lebanon

Holdings, the only closed-end fund

listed on the Beirut Stock Exchange,

dropped 9.2% during the first six months of

2000, from $39.9 million to $36.3 million.

“If you look at the holdings, you see that it’s

mainly due to a drop in all shares on the

BSE,” says one analyst. The fund’s shares

last traded at $5.33 three months ago.

Earlier, Lebanon Holdings bought back

300,000 shares in an attempt to boost the

market value.

I t seems Nasser Saidi means business after all. Back in May 1999,

when the new insurance law was finally passed in parliament,

many wondered if it would be enforced. Meeting the new minimum

capital requirement of $1 .5 million, up from $200,000, and

depositing $3.3 million in order to sell premiums for all lines of insurance

wouldn’t be easy. But then again that was the intention all along.

By demanding a high capital, the ministry of trade and economy

would force financially weaker firms to merge to meet the requirements.

Otherwise, they would have to shut down and leave the sector

to those with the financial backbone to remain solvent.

Since then a wave of reform has washed through the sector, with

the number of companies unable to stay afloat gradually rising.

Insurers that didn’t already have these funds in place were given

until last June to come up with the first half of the difference needed

in order to meet the new requirements and June 2001 to come

up with the remainder. But even the first installment proved too

much for many. When the law was first issued, many expected that

the number of insurers would be reduced by at least a third. Now

that prediction is being realized.

When EXECUTIVE went to print – some firms are still under study –

29 insurers were involved in the initial shakeout. Of these, 13 had

Their licenses revoked, five merged with other firms, three transferred

their portfolios to other companies, two stopped operating, while six

more requested that their own licenses be revoked. Still others are in

the process of merging and several have been referred to the public prosecutor’s

office for not complying with current laws.

But is the new insurance law a good one? “I consider this law better

than the old one,” says Abraham Matossian, chairman of AlMashrek

and the Lebanese Insurance Companies’ Association

(ACAL). “But I believe we can do better.” Strict requirements on solvency

are essential. More than once we’ve seen companies that fell in

the maw of insolvency, like Income, Mesir, and Phoenix, and left trusting

clients stranded. The number of insurers is also too high for

Lebanon’s small market-around 75 for a population of3.5 million.

With a population of 60 million, Egypt has about ten insurance firm

Nonetheless, the stricter regulations are considered extreme by

some. “If a company has a good solvency ratio and is adequately supported

by credible reinsurers, the blocked capital wouldn’t be necessary,”

says Zareh Basmadjian, chairman of Oriental Insurance, whose

portfolio of $ l.2 million in 1999 was transferred to Al-Mashrek.

And he’s not alone. Chehade Raad, chairman of Kafra Insurance and

Reinsurance, believes that problems arise not from a comparatively

Low capital but from not reinsuring properly. According to Matossian,

“If an insurer is adequately reinsured, he will not need to liquidate his

assets. This happens with large companies in Europe, which were forced

to liquidate stock they’d been holding for a century to meet liabilities.

The risk in Lebanon is much less if things are done properly.”

Critics of the new law also suggest that capital requirements

should actually be based on the size of a company’s portfolio with

adjustments made as business grows. Basmadjian believes a capital

of $1.5 million might be necessary for insurers with large portfolios,

but not for small companies. “Each firm should have been

studied and a raise in their capital should have been required

based on its solvency and the size of its portfolios,” he says.

If a company could comply with the required capital, does it

make more sense to do so or to pull out? Companies with several

shareholders might consider injecting additional funds or bringing

in new shareholders as a good idea. Considering the relatively

small amount each shareholder has invested and how profits are divided,

boosting the capital may be the easiest and best option. Middle

East Assurance and Reinsurance Co (MEARCO), which had a capital

of $400,000, has done just that. With over a dozen shareholders,

many of them brokers, the company found it more convenient to comply

with the law’s requirements. “We paid up $550,000, the first half

 on the due date, and will cover the rest by June 200 I,” says Rached

Rached, MEARCO’s chairman.

But what of those who have a majority stake in their own company,

in the case of Basmadjian 75%?

“The $1.5 million in capital I’m

required to put up could be better

invested in other ventures,” he

says. With returns of just 12% a

year, he would make $135,000:

“I’m not making that much in the

insurance business,” he says. All

this without yet considering the

necessary deposits, a total of $3 .3

million to operate in all lines of

insurance. For an individual, letting

that kind of money sit idle

isn’t too appealing.

But in the end, the insurance

sector is moving toward greater

discipline – even if some are

being dragged, kicking and

screaming. The law itself is an

improvement, providing more

security for the consumer and

even for the insurer. It’s true

many of the smaller firms are

being hit hard, but adhering to a

strict regulation policy is the

ministry’s only recourse to keep

insurers in line.

Rallies at the Beirut Stock Exchange (BSE) are rare. There has

been little interest In Lebanese stocks for the last two and a half

years. Trading volume dropped from $640 million in 1997 to $90

million last year. In the first eight months of 2000, it dropped

another 30% compared to the same period in 1999. One of many

complaints among stockbrokers has been the market’s antiquated

fixing system. Even though the BSE Is ready to bring In

continuous trading – a two-hour session after price fixing – the

government has been slow giving a green light. According to Fadi

Khalaf, BSE chairman, the council of ministers gave approval in

May but passed it on to the Shura council.

Is the government offering another example of taking forever

to approve a change that brings positive results? “The delay

is due to the Shura council who has sat on the decree for several

months,” says Georges Corm, minister of finance. “Now its

opinion has been given, and we hope the decision will be published

in the official gazette [in the beginning of October]. The

changes are all made, no more steps, except the signature of the

prime minister and the president.”

But allowing continuous trading in October is still an ‘if.’ A government

heading for the exit may be reluctant to make any decision.

“It’s difficult to predict,” says Khalaf. “Hopefully It will

happen soon.”

Stock of Politics

Investing in stocks is pure speculation. But for Solidere, the most

active company on the Beirut Stock Exchange (BSE), taking

up over 70% of the total market cap at around $1.26 billion,

speculation zeroes in on what happens in the world of politics.

Whenever peace negotiations in the region have picked up,

investors have pounced on Solidere shares. During elections its

shares traded on the BSE and GDRs had an impressive rally

based on anticipation of Rafic Hariri becoming the next prime minister

(see graph). “We saw something we haven’t seen in two and

a half years,” says Jean Riachi, chairman and general manager at

Financial Funds Advisors. “Lebanese people were calling to buy.

People we didn’t know came and placed orders. It reminded us of

the good old times in 1997.”

What got investors excited is clear. When Hariri ‘s stint as premier

from 1992 to 1998 ended, Solidere’s business was stopped dead.

Hariri, the founder of the real estate company responsible for

rebuilding the Beirut Central District (BCD) and believed to be the

largest shareholder, is seen as the one who can get the company back

on track. “I believe Solidere will benefit from Hariri’s return,” says

Ziad Maalouf, vice president at Middle East Capital Group.

“When he was in office, it never faced similar problems. Hariri will

grease the wheels and make things move.”

The stranglehold on Solidere has been a permit problem. Since the

current government took charge, it has been nearly impossible for the

company or developers to finish projects (see “Can’t get no satisfaction,”

June 2000). Decrees have been brought forward to solve the

slowdown. The most important one is to settle the discrepancies

between Lebanon’s old construction code and Solidere’s building

decree 4830. According to Oussama Kabbani, department manager

of urban management at Solidere, with the speed that the decree passes

from one government institution to another, it would take up to three

years for it to pass. The high council of urbanism was established early

this year to help work out discrepancies. Not only did it provide little

help, but the council expired in the first week of August.

“We can no longer get permits through that have discrepancies,” says

Kabbani. When EXECUTIVE went to print, there were 27 occupancy

permits idling and 23 construction permits collecting dust.

Also important is the decree to let Solidere develop the souks. It’s

well known that once the area is running, business in the BCD will

pick up dramatically. No surprise: The decree, in need of only a signature,

has been with the council of ministers for five months.

Most believe that if Hariri becomes prime minister he will be able

to act fast. “He’s pragmatic and he has business sense,” says

Kabbani. “If someone like him is in power, give it three months and

all decrees will be passed and all can be resolved.” Although the municipality

of Beirut is where the permits are stopped and is under the

thumb of the minister of interior – Michel Murr who has a beef with

Solidere over Murr Tower – many believe that if Hariri is in power

and there’s a council of

ministers that he can

work with, the situation

will be fixed.

According to Hani

Shammah, senior

regional analyst at

Societe Generale, the

recession, which has

the real estate sector

in a vice, will not be a

major obstacle.

“Solidere is a bit insulated from the recession. It’s the only place where there’s hope

of economic activity during recession,” says Shammah. “Plus, it’s

been on hold. It will only grow.” If Hariri is appointed prime minister,

Shammah will increase his latest projected sales and earnings

from 2001 and onward (see graph).

But Shammah argues that for the long haul, stock investors will have

to bet on another political variable: regional peace. “Today, Hariri is

a good bet. If appointed, shares will shoot up. When decrees are signed,

the permit problem is cleared up, prices will continue to move,” predicts

Shammah. “But after that they will probably level off or drift lower

until the next catalyst: a peace agreement.” He argues that Solidere’s

growth cannot be sustained on local businesses moving into BCD.

“Solidere’s upscale properties will be wonderful for a regional headquarters,

but it needs those regional factors that will beef up demand.”

But the first indicator will come this fall when the prime minister

is supposed to be appointed. The chances are good that Hariri will

take office, but it’s not certain: There are still power plays involved

(see pp. 22-25). But most stock jockeys agree: If you believe that

Hariri will soon be back at the helm and want to see your

stocks rise quickly, now is the time to bank on Solidere.

“Solidere is a stock that is very politicized,”says Maalouf,

“if  Hariri returns, investors will buy into Solidere and it

will rally.”