Regional trade makes up a relatively
small fraction of total
Arab trade, both in absolute
terms and in comparison to other regions
in the world. The low level of trade within
the Arab world can be attributed to policy-
induced barriers to trade as well as the
lack of product complementarity within
the region.

In 1998, total exports from the Arab
world reached $134 billion, while the
region’s non-oil exports failed to exceed
$60 billion, equal to the exports of
Finland, a country with a population of
5.5 million, compared to a total Arab
population of 275 million.

Around 54% of total Arab exports went
to the industrial countries, 29.1% to Asia,
and only 8.2% to Arab countries.

Similarly, of the total Arab imports of
$169 billion in 1998, 68% were from
industrial countries, 16% were from Asia,
while the share of Arab imports stood at a
low 7%. The limited size of intra-Arab
trade is particularly pronounced when
compared to other regional groupings.

For example, regional trade in the
Andean Pact countries (Colombia,
Ecuador, Peru, and Venezuela) as a share
of total trade stood at 11.4% in 1998,
25.5% in the Southern Core countries
(Argentina, Brazil, Chile, Paraguay, and
Uruguay), 22.2% for the East Asian
economies, and a high 51% and 57% for
NAFTA (Mexico, Canada and the USA) and
the EU (European Union) respectively.

Not only is the volume of intra-Arab
trade low, it has also recorded little
growth over the past two decades. The
share of intra-Arab trade in total trade
rose marginally from 5.2% in 1970 to
8.2% in 1998, while trade between the
Andean Pact countries increased from
1.7% of total trade in 1970 to exceed
11% in 1998. Similarly, regional trade in the
Southern Core countries rose from 11.4%
of total trade in 1970 to 25.5% in 1998, and
trade between NAFTA members rose
from 36% to 51% of total trade over the
same period. It is worth noting that over
half of Arab regional exports (56.6%) in
1998 were to GCC countries, which is
explained by their large markets (mainly
Saudi Arabia), and their relatively open
trade policies and higher per capita
income. Around 21.8% of regional
exports were to select Mashreq countries
(Egypt, Jordan, Lebanon, Syria and
Sudan), and 16.7% to Maghreb countries.

Weak regional Arab trade can be partly
explained by the prevalence of generally
restrictive trade regimes in the Arab
world, with the exception of the GCC
countries which pursue relatively open
trade policies. The average tariff for the
Arab region exceeds that of all other
regions, except Africa. The average tariff
for Arab countries is estimated at around
17%, compared to 20% for African
countries, 13% for Western Hemisphere
countries, 12% for Asia Pacific, and 9%
for Europe. Bilateral trade in the region is
also often constrained by political factors.
For instance in 1989, prior to the Gulf War
and UN sanctions, Saudi exports to Iraq
exceeded $150 million, but are now
insignificant.

Non-tariff barriers, such as licensing,
bans, state trading monopolies and restrictive
foreign exchange allocation, are also
extensive in a number of Arab economies.
However, as an increasing number of
Arab countries join the WTO (World
Trade Organization) and the transition
period normally granted to developing
countries comes to an end, non-tariff barriers
will be abolished and tariffs on
imports will be capped at a specific level
to be reduced gradually in the years
ahead. Already Kuwait, UAE, Qatar,
Bahrain, Egypt, Morocco, Tunisia, Jordan
and Algeria are WTO members. Saudi
Arabia and Oman may become members
in late 2000 or early 2001. Lebanon and
Sudan have applied to join the WTO.

While policy-related barriers to trade
could be addressed, other more fundamental
and not as easily reversible barriers
to intra-Arab trade exist, namely the lack
of product complementarity. Many Arab
countries enjoy similar natural resource
endowments (for example, oil, phosphate,
and agricultural products) and therefore the
countries’ comparative advantages lie
mainly in the same products, providing little
incentive to trade with each other. In
addition, the lack of a diversified export
base restricts the opportunities for trade
based on product differentiation.

Low intra-Arab trade strengthens the
case for further trade liberalization in the
Arab world. Greater regional integration, in
a way that is compatible with multilateral
liberalization, could contribute to growth
not only by increasing trade and allowing
regional producers to benefit from
economies of scale, but also by encouraging
foreign direct investment and the
deepening of capital markets. In 1998, 14
Arab countries established the Pan-Arab
Free Trade Agreement (PAFTA), under
which tariffs are reduced for participating
members by 10% annually, thus establishing
free trade from 2007. This is a step in the
right direction. But the world will be very
different by 2007, and this requires a more
aggressive move towards a free trade area
so that it becomes a reality sooner than the
target date.

Morocco

The bourse in Casablanca shrugged off a series of
healthy corporate results and continued to linger in negative
territories. It is estimated that overall corporate
profits for listed companies surged 12% in 1999; however,
this failed to pull the Casablanca Stock Exchange
(CSE) out of its doldrums. Since the beginning of the
year, the market has shed almost 8% as institutional investors
remained on the sidelines, waiting for firm plans on the
partial sale of state-run firms such as Maroc Telecom and
Royal Air Maroc. Although the rise in average net profits
indicates future signs of recovery, only a resumption
of institutional buying can lift the market’s spirit.

EGYPT

Egyptian equities continued to lack momentum, remaining
on a downward trend accentuated in the last few weeks by
worries about the stability of the Egyptian pound. Trading
was mostly concentrated in a handful of traditional blue
chips capturing the bulk of activity. Egyptian Media Production
continued to maintain a negative correlation with
MobiNil as investors kept on shifting their positions between
the two stocks. However, investors reacted positively
to news that Egypt will be included in the Morgan Stanley
Capital International (MSCI) emerging market index in
November 2000. The inclusion is expected to reinforce the
bourse’s liquidity by attracting larger foreign inflows, especially
from US investors.

JORDAN

Fresh selling pressure and a dearth of positive market
news combined to drive the market index below the
150 psychological support level to reach its lowest
level since the end of 1996. Following the foreign
selling spree that has taken place over the past few
months, net non-Jordanian investment on the bourse
stood at a mere $3.7 million at the end of March,
compared to $18 million over the same period last
year. Market capitalization fell from $5.8 billion at the
beginning of the year to $5.4 billion at the end of
March, driven lower by losses in the industrial and
banking sectors.

Solidere

In the last week of March, peace prospects were
pushed forward after the announcement of an
American-Syrian summit in Geneva on the
26th. Investors hoped that the advancement of
the peace talks would give the locally and
internationally listed Solidere a solid boost of confidence. Nevertheless, uncertainty about the outcome of the Geneva summit pushed down Solidere’s GDR by 2.9%, from $8.575 to
$8.325. By late March, negative news from the Geneva summit shattered all
hopes of improving peace prospects anytime soon. Foreign investors quickly
reacted, sending Solidere’s GDR on its biggest slide in quite some time to
close at $7.9, down 5.11% from its previous closing of $8.325.

In the first week of April, internationally listed emerging markets equities stumbled
amid the turmoil on western markets. The largest ever intra-day drop of
the Nasdaq on April 4 brought a fall in all Lebanese GDRs, with Solidere being
the least affected by western markets’ volatility. Solidere’s GDRs closed at
$7.875, down 0.32% from $7.9.

AUDI

AUDI started the second half of March
with a positive outlook backed by an
increasing public hope of a near-term future
unraveling of the peace process. AUDI’s
GDR was up 2.3% to close at $22.25 on
March 24.

The end of March was marked by the
bank’s much-anticipated general assembly
on March 28, where a lower-than-expected
dividend payout ratio of 30% was
announced, much inferior to last year’s figure of 70%. This news sent
AUDI’s GDR down 2.7% to close at $21.65.

Early April brought more bad news to Audi in the form of increased
volatility on the western equities markets front. Joining a number of emerging
markets equities, AUDI’s GDR recorded a 1.15% fall and closed at
$21.4 on April 7.

BLOM

BLOM, still one of the most solid banks in
Lebanon, finished the third week of March
with a slight increase in its GDR. On March 24,
BLOM’s GDR gained a modest 0.09% to
close at $26.975, up from $26.950. This positive
move was an indicator of investors’ optimism about the outcome of the American-Syrian Geneva summit on March 26. But by
the end of the month, it appeared that the
peace negotiations had reached a status quo. Accordingly, BLOM’s GDR maintained its previous price and closed on
March 31 with a 0% change at $26.975. The first week of April saw increasing
volatility in the western equities markets, exhibited mainly in the Nasdaq’s
rollercoaster ride, with the majority of emerging markets equities suffering
from collateral damage. BLOM’s GDR fell 2.9% to end the week at $26.2.
But encouraging news emerged from BLOM’s general assembly which
approved a $1.52 per share dividend and declared a 14.5% increase in first-quarter
2000 profits.

BLC

BLC entered the last two weeks of March hoping
that the general assembly meeting on March 22
would renew investors’ faith in the bank.
In a period affected by stagnant peace negotiations,
BLC’s GDR cautiously maintained the
price of $9.675.

Following the bank’s recent change of management,
as a result of the aforementioned
general assembly, investors appeared much
more confident in the appointment of the new chairman. They swiftly reacted to send BLC’s GDR up 2.3% to end the month
at $9.9.

Early April was marked by large volatility in the western equities markets, coupled
with more negative news emerging from the recent American-Syrian
Geneva summit. All of this combined to send BLC’s GDR down 5.81%, from
$9.9 to $9.325.

How likely is Lebanon to default on its
loans? More than you might think,
says US magazine Institutional Investor. In
its semi-annual survey of the creditworthiness
of 145 countries, it ranked Lebanon 73rd
worldwide and 12th out of 17 countries in the
Middle East and North Africa. The survey
ranks countries on a scale of zero to 100, with
100 representing the least chance of debt
default. Lebanon scored 35, below the
regional and global averages of 42.64 and
40.9 respectively. Lebanon placed ahead of
regional countries such as Libya, Iran and
Algeria but fell behind Sri Lanka and El
Salvador on a global basis. The highest
ranking in the Middle East and North Africa
went to the UAE with 62.4. “Lebanon has
never defaulted on a loan, even during peak
war times,” says Ziad Maalouf, vice president
of Middle East Capital Group. He adds
that although rating agencies like S&P,
IBCA and Moody’s have not given
Lebanon an investment grade rating, they
also haven’t changed their three-year credit
rating stance of BB-.

Facts

or fiction
about the
Casino?

There have been conflicting
reports in the
media about troubles at the
casino. The board of directors of the Casino du
Liban reportedly asked chairman Elie
Ghorayeb, who was appointed in March
1999, to resign or face being ousted at the
upcoming general assembly. But according to
one board member, the request was not made for
Ghorayeb’s resignation. “If anything it
would have to be a political decision and not
ours,” he says.

Another mid-April report claimed that
Georges Corm, minister of finance, had
demanded $80 million in unpaid taxes and
fines from the casino. It said that the casino
must pay 30% taxes on revenues generated
from slot machines. The article also warned
that, as a result, auditors Deloitte & Touche
expected the casino to record a loss of $4 million
to $5 million in 1999 and that some
$45.2 million were owed in taxes on slot
machines since 1997. Another publication
quoted board members and auditors as saying
that the earlier article was incorrect. What’s the
truth? “The casino and the ministry of
finance have conflicting opinions on slots. The
latter wants to impose a fee similar to other
gaming fees at the casino, rather than the
fixed fee they used to impose,” says a board
member. The casino had announced preliminary
pre-tax profits of $19.5 million in 1999,
a 50% increase over 1998.

Niche player

Al-Mawarid’s strategy of investing in
retail products, IT and human
resources is starting to pay off. The bank’s
profits increased 26.9%, from $878,000 to
$1.1 million (unaudited) last year. Total
assets jumped 31.9% to $266.9 million,
and deposits grew to $213.4 million, a
27% increase.

Its focus on retail banking, the bank
moved aggressively into credit and debit
cards (it just launched MasterCard free of
charge), has created growth in fee-based
income, up 60.5%. Its interest income
increased 30%, while loans grew by
28.5%. “As a medium-sized bank, it is trying
to be a solid niche player,” says
Nicolas Photiades, senior vice president at
Thomson Financial BankWatch. “It is
working to rely more on a recurrent fee-based
income stream as a normal bank
should operate, while the majority of
medium-sized banks depend mostly on T-bills.”
At the end of last year, Thomson
Financial BankWatch gave Al-Mawarid a
B+ for senior debt rating and LC-2 for
short-term local currency debt rating. But
Al-Mawarid still has a major challenge
ahead: By moving into retail banking, it has
to compete with top-tier banks.

The Innovator

Last month Banque Audi again proved to
be the leader in innovation. It offered
$100 million worth of ten-year bonds, the
first company in the Middle East to issue a
note with this length of maturity. It coincides
with the bank’s buyback of $100 million worth of
its notes, which were scheduled to mature
next year. Audi paid slightly above the
market price. Those who held Audi’s paper
were given the chance to reinvest in the new bond before fresh investors came in.

According to Audi, its objective was to
contain its outstanding debt and lengthen the
time required to repay the entire loan.

But one question remains: When will
Audi’s aggressive approach pay off? Last
year its profits dropped 11%. The recurrent
fees and commissions generated from new
products along with the bank’s heavy
expansion will start generating results in
2000, says Fadlo Choueiri, project officer
at Arab Finance Corporation (AFC).

AFC’s recent report ranked Audi’s GDRs
“outperform”, one notch below “buy.” The
finance house predicts earnings to reach
$41 million, up 8%, and it expects its
GDRs to climb from $20.5 to $23.45 by
year-end. ABN AMRO, however, recommends
“hold,” saying the sluggish economy
will limit growth. It expects earnings to
increase 4%. According to AFC, Audi
shares, currently trading on the Beirut
Stock Exchange for $26.5, are overpriced.

The 2000

challenge

There were mixed results for
Lebanon’s banks during the first quarter
of 2000. Banque du Liban et d’ Outre-Mer
(BLOM), the largest by assets and
deposits, is still managing to shrug off
harsh economic conditions. In the first
quarter, its profits climbed 14.5% compared
to the same period last year. Last
year’s profits grew by 19.97%, above the
average of some of the 15 leading banks,
which saw a 3.7% decrease in profits.
Analysts attribute BLOM’s success to conservatism
and cost control. But the bank is
also making a move in retail banking.
According to Samer Azhari, general manager,
the bank’s non-interest income
increased 25% in the first quarter. Arab
Finance Corporation and ABN AMRO
recently gave BLOM’s GDRs a “buy”
ranking. AFC’s target price is $33.20, up
from the current trading price of $24.75,
while ABN AMRO calculates the target
price at $30. “We continue to favor BLOM as a speculative play for the short term,”
says Ghassan Medawar, financial analyst
for Middle East and North Africa at ABN
AMRO.

On the other hand, Bank of Beirut’s
(BoB) first quarter profits fell 15.8%. This
follows a 27% surge in profits for 1999.
According to BoB, the slump came partially
from non-recurrent expenditures, amortization
and goodwill related to its merger
with Transorient Bank last year, plus the
recent tax hike. It claims that without those
factors, its profits would have increased 6%.

Ciments Blancs in

the red … again

Ciments Blancs, reeling from the slump
in the construction sector, registered
losses of some $564,000 last year, down further
from $372,000 in 1998. The quantity sold
declined slightly from 74,800 tons to 72,000
tons, and losses increased by 35%. “During
the last 15 days of 1998, there was fierce competition
between us and Cimenterie du
Moyent Orient (CMO), and we had to reduce our prices by some $30, which caused a
devaluation of our stock of some $240,000,”
says Georges Ghosn, general manager. If you
take that devaluation out of the $564,000, you
end up with losses of about $324,000, similar
to 1998 figures. A subsidiary of Seament
Group, CMO has been refurbishing its factory
at a cost of $25 million to be able to produce
up to 400,000 tons.

Foreigners

welcome

National Bank of Canada has taken a
15% stake in one of Lebanon’s top-tier
financial institutions, Banque Saradar. The
$22 million purchase will raise Saradar’s
capital from $70 million to $90 million.
“Banque Saradar is set for expansion,” says
Elie Saliba, NBC’s general manager in
Beirut. NBC, the sixth largest bank in
Canada with $70 billion in assets, hopes to
expand its presence in Lebanon. “Foreign
banks cannot compete with well-established
local banks,” says Saliba. And foreign banks
face limits when it comes to expanding their
branch networks. Buying into Lebanese
banks can also be a launching point into the
region. In 1998, the International Finance
Corporation paid $11 million for a 10%
stake in Saradar. It is strong in corporate and
private banking and wants to acquire or
merge with another bank to boost retail
activities. Still in the top ten for profits, its
earnings dropped over 13%, from $15.8 million
in 1998 to $13.6 million last year.

Al-Mashrek has its sights set on
becoming the top insurer in
Lebanon – and not just in terms of
premiums. Already ranked sixth in the country
last year with non-life premiums of
$14.5 million, Al-Mashrek’s global business
was about $29 million in 1999. That’s an
increase of more than 100% from $14 million
in 1996 (see graph). Al-Mashrek is now getting
ready to tackle the 21st century. The company
is aiming to expand both locally and
abroad, where already 50% of its business is
generated. But that won’t be so simple.

The insurance market is no longer the
carefree, anything-goes sector it once was
(see “Premium Pressure,” March 2000).
The players are faced with many new
obstacles, such as consolidation and new
government solvency requirements. Then
there are the foreign big hitters who have
moved in: Assurance Generale de France
(AGF) now owns 51% of Societe Nationale d’ Assurance (SNA), the third
largest insurer with non-life premiums of
about $20 million, while Axa bought 51%
of Societe Libano Française (SLF), the
fifth largest at $18.5 million. There are also
local subsidiaries of international firms,
such as Arab Lebanese Insurance Group
(ALIG), which is majority owned by its
parent company, Arab Insurance and
Reinsurance Group (ARIG). These firms
have the financial strength to compete
aggressively in the Lebanese market, solid
international experience in insurance and the
advantage of having names that carry a lot
of weight. Banks are also joining in the
insurance game, posing a new threat.

That aside, insurers have to find a way of
satisfying market demand, despite the relatively
low purchasing power of the population.
This has forced some to quote rates
lower than they would like, despite liquidity
considerations, and offer extended
credit facilities. If companies don’t walk a
fine line, they could easily follow Mesir,
Income and Phoenix.

All this and Al-Mashrek
doesn’t appear
overly concerned. Why
so smug? Al-Mashrek
thinks it has what it
takes. Part of its strength
comes from its reinsurers.
These help determine
to a large degree an
insurance firm’s credibility.
The reinsurers
behind Al-Mashrek are … and Swiss Re of Switzerland. All are rated
triple A. Al-Mashrek’s pricing strategies
are just as sound. The firm sets tariffs for
each branch of insurance based on statistics
gathered from the markets in which it operates.
Based on volume of expected claims
and rates offered by competitors, Al-Mashrek
works to maintain a balance
between safe underwriting and a competitive
spirit. Some, like American
Underwriters Group (AUG), sell just
below the market norm, while ALIG seriously
undercuts prices (see “New kid on the
block,” July/August 1999).

But with their financial strength (ALIG
has $7 million in capital and AUG has $4
million) and strong reinsurers (ARIG has
$1.7 billion in total assets and $460 million
in shareholders’ funds), both should be
able to cover losses in the event of unexpected
claims. Bankers, Societe Nationale
d’ Assurance and Libano Suisse are much more conservative when it comes to pricing,
with some of the more expensive rates in the
market. Al-Mashrek’s prices fall between
the two extremes.

On the collection front, Al-Mashrek also
tries to maintain a balance between liquidity
and convenient terms for its clients. For medical
insurance, the riskiest branch, it will not
deliver a policy before receiving a deposit
equal to 25% of the premium. The firm
allows no longer than 45 days for full payment. Sixty days is allowed for other types of insurance,
except in cases where large amounts are
owed. “We have to be realistic,” says Naji
Habiss, Al-Mashrek’s new deputy general
manager. “Someone who buys $4,000 to
$5,000 worth of coverage
may not be
able to pay all at
once.” In such
cases, the limit is
set at three months.
“But we have to
make sure that the first thing we collect
is what we have
to put as reserves
with the government,”
he continues.
Lebanese United Insurance,
for example, demands 35% up front and a
maximum of two months to close the
account, well within the market average
of four months (see “Getting tough,”
January 2000). Middle East Assurance and
Reinsurance Co (MEARCO) leaves no
room for maneuvering, requiring all payments
up front (see “A sure thing,”
February 2000). Some, like Libano Suisse,
play it too dangerously, allowing clients
as long as five months to complete their payments
(see “The $8 million millstone,”
November 1999).

Although initially Al-Mashrek’s activities
were geared towards marine insurance, it
gradually realigned its business by extending
operations to all branches. Now, 35% of its portfolio is in medical and 5% in life. The rest is in general insurance. Of that 40%, or about
25% of Al-Mashrek’s
portfolio, is in motor
insurance. Dealing in
all branches of insurance
assures that the
firm won’t have to turn
away potential clients.
“Often we lose clients
for the branches we do
have,” says Rached
Rached, chairman of
MEARCO, “because we
don’t deal in other branches that the
client needs.”

With 35% of its business in medical, Al-Mashrek
will start working with an international
third party administrator (TPA)
which is in the process of registering to
operate in Lebanon. Though Al-Mashrek
doesn’t work with one, TPAs like Medical
Express and Mednet already handle the
medical portfolios of many Lebanese
insurers. A TPA manages its clients’ healthcare
portfolios and is responsible for ensuring
that the branch is efficiently run, that the
guarantees are in place and a sound level of
liquidity is maintained (see “Doctoring
insurance,” December 1999). With physicians
working full-time on their payroll, the
TPA will screen clients for pre-existing
medical conditions and make sure that hospitals
don’t overcharge the insurer or prescribe
unnecessary expensive treatments.
This way Al-Mashrek can avoid worrying
about the high-risk branch and focus on
the others.

A major advantage for Al-Mashrek is
chairman Abraham Matossian’s wealth of
know-how. With decades of experience in
the insurance field, Matossian is the current
chairman of the Association of Lebanese
Insurance Companies (ACAL) and was
heavily involved in the implementation of
the new law. He was also instrumental in
getting diplomas from Centre d’Etude
d’ Assurance accredited. This qualification
is essential for those who wish to work in the
insurance industry according to the new
government requirements (see “Corporate
medicine,” September 1999).

Al-Mashrek is also in the process of
restructuring its management, reshuffling
personnel to positions where they’re most
qualified. The firm is bringing in new blood
from other insurance companies, including
SNA, !’Union
Nationale and
Libano Suisse. One
example is Habiss,
who ran Libano
Suisse for more than
22 years, which
ranked fourth in
1999 with non-life
premiums of about
$19 million.

As far as the bank
threat is concerned,
Al-Mashrek is loading
its guns. It is
ready to do business
with all financial
institutions, unlike
insurance firms that
are owned by banks.
One example is
ADIR, which does 90% of its business through Byblos Bank. Banks look for securities against loans. Clients are generally required to buy insurance, ranging from car and cargo insurance to house and life insurance, depending on the type of credit. “Banks won’t give credit to someone if he doesn’t get insured,” says Habiss. “We’re creating all kinds of products for the banks’ needs.” This way Al-Mashrek can sell motor policies to those buying cars on credit and cover the dealer if the client defaults on payments.

Another advantage Al-Mashrek has over
local rivals is its business abroad. Through
affiliates and subsidiaries in Cyprus, Saudi
Arabia, Egypt, and France, the firm generated
$14.5 million
or 50% of its business
in 1999. Not
only does Al-Mashrek
bring
home the experience
derived from
those markets, giving
itself the tools
to face the new foreign
threat, but it
takes the battle to
the foreign firms’
home turf. Others
that have offices
abroad include
SNA and Libano
Suisse.

Al-Mashrek is
also seriously looking
at consolidation.
It is currently in negotiations for an acquisition with two insurance companies, though Matossian declined to disclose which ones. The move would increase the firm’s client base and assets as well as provide greater coverage of the market with an increased branch network.
“But nothing has been finalized,” says Matossian. “We aren’t even ready to apply for ministerial approval.” If it is finalized, the firm will have taken a solid step towards achieving its ambitions for growth.

But growth will also come from within. In
this sense, Habiss plans to put a greater
emphasis on life insurance, which now
accounts for about 5% of Al-Mashrek’s total
premiums. “It’s the most profitable of all the
branches,” says Habiss, “unlike medical,
which is like a running faucet with funds
flowing out continuously.” Many others
agree. “It’s the safest and most profitable
branch of insurance,” says Aline Kamakian,
general manager of Insurance Investment
Consultant (IIC). For this reason, MEARCO
hopes to acquire a company for its life
license within a few years.

Is it worth it? AUG seems to think so. It
acquired ELKA insurance, solely for its
life license. Al-Mashrek is also in the midst
of creating services that are so far unavailable
in the market. For example, those who
buy all-risk car insurance will receive a
loaner car for a few days should they have an
accident. For those with house insurance
that get snowed in, Al-Mashrek will have
the snow cleared, saving you the trouble
and saving money for them by avoiding
water damage claims. The firm also plans on
introducing a 24-hour hotline service for
emergency assistance. “I want to reach the
point where the name Al-Mashrek is as
well known as Pepsi-Cola,” says Habiss.

But in order to grow, Al-Mashrek believes
it has to go back a step first. It’s sacrificing
premiums by brushing off some bad and
high-risk clients in favor of a clean portfolio.
Though premiums generated locally have
increased from about $13.9 million in 1998
to $14.5 million in 1999, the non-renewal of
bad business contributed to a drop of $1.5
million in total revenues from $30.4 million
in 1998. With that, Al-Mashrek is seriously
screening all new business.

Talks are now ongoing with potential
new investors. “Al-Mashrek doesn’t need
big names to attract business,” says Habiss,
“but more liquidity can facilitate growth in
new ventures.”

Al-Mashrek is aggressive, but it does
not take the unwise risks that have brought
the downfall of others. It has also found a
balance to counter most of the sector’s pitfalls.
Al-Mashrek is confident that it is
taking the right steps. The question is
whether this will be enough to take the
business further.

Picture this. Mohammed and Mahmoud are good friends. The former is married to the latter’s maternal cousin, and most evenings after work are spent together around the dinner table followed by a session of backgammon and nargileh sipping. Jokes, exaggerated
tales and laughs are mixed with political
chit-chat and complaints about the state of
the Lebanese economy. Shop talk doesn’t
enter into the conversation much, but when
it does, Mahmoud’s $75,000 in outstanding
debts to his friend never does. Even in a
work environment, Mohammed finds it
difficult to press the matter for fear of
upsetting their close relationship.

Though these characters are fictitious and
any resemblance to real persons is purely
coincidental, it’s not a difficult scenario to
imagine in Lebanon, where it can be difficult
to separate personal from business relations.
While some may consider that to be a hindrance,
factoring firm Ipso Facto sees it as an
open invitation for its line of business. “A
client [of Ipso Facto] doesn’t have to jeopardize
his relationship with his buyers, pushing
them to pay, because it’s not his worry anymore,”
says Bassem Yammine, head of corporate
finance at Lebanon Invest.

But there are other advantages to using the services of Ipso Facto on top of safeguarding relationships. Factoring involves a
number of services that revolve around the
management of receivables, including collection,
credit insurance against bad debt
and financing. Ipso Facto receives a fee of
0.5% to 1.5% for its services as well as interest
on the financing it provides to clients
against their receivables. Ipso Facto has so
far concentrated largely on recourse factoring; if a client’s buyer doesn’t pay up,
Ipso Facto has recourse to the client.

Since its inception in 1997, Ipso Facto has
broken even, with losses last year canceling
out the previous year’s profits. But earnings
should be just around the corner as the
company expects profits of about
$250,000 this year. With about 35 clients last
year, Ipso Facto managed about $22 million
in receivables, about the same as it did in
1998. The company needed to increase its
capital and lay the groundwork before
being able to factor more, says Nagi
Schoucair, chairman and CEO, explaining
why business was flat in 1999.

As the first factoring firm in Lebanon,
Ipso Facto has doubled its human resources
since it began and invested about $500,000 in information technology last year. The
investment includes FactoLine, the firm’s
online service for clients to check up on their
accounts. The company has been given a
helping hand through its alliance with
Societe Française de Factoring (SFF),
France’s second largest factoring firm,
which has provided know-how and served
as a partner in international factoring for
trade between Lebanon and other countries.
“The last two-and-a-half years Ipso
Facto has basically been running like a lab:
testing, modifying, improving, testing,
modifying, improving,” says Yammine.
“Definitely, it has a two- to three-year lead
over any potential competitor; it would be
very difficult for someone to duplicate
what they have in a very short time.”

The next big push will come with the
planned capital increase from $2 million to
$8.75 million in May through Lebanon
Invest. This will bring a new shareholder
base into the company, which is 90%
owned by Schoucair and 10% by Rami
Nimr. At that level, Schoucair expects to be
able to handle about $70 million to $80
million in receivables in a full year of operations.
“This is a year of transition,” he
says. “For us, the first full year of going full
blast will be 2001.” The cash injection will
also give Ipso Facto the opportunity to dip
its toes into the regional pool of factoring,
where competition is scarce. Oman,
Tunisia and Morocco are the only countries
in the Middle East and North Africa that
have factoring firms.

SFF sees good potential in the region,
especially in Egypt. “The idea is for Ipso
Facto to be a partner that we’ll go with
into the region,” says Jean Gartner, international
director for SFF. “Now is the time
to go down to these regions, not when
everyone else is already set up there.” And
go they will, starting with Egypt and
Jordan. While SFF already holds a 5%
stake in Morocco Factoring and 10% in
Tunis Factoring, there are no plans to do the
same with Ipso Facto for the moment.

The plan is for Ipso Facto to form joint ventures
with local companies, which will bring
the knowledge of the market and put up the
capital. In its turn Ipso Facto will provide the
know-how and tools, using SFF again as its
partner in international factoring, which they plan to begin this year. Domestic factoring
will come at a later date in Egypt and
Jordan. With margins as slim as 2%, going
regional will help increase volume.
“Lebanon is a small market, so you can only
think of it as a lab to test concepts and see
how you can take it further,” says Yammine.

But what’s the benefit of paying money for
a third party to collect payments, when it can
be done in-house? Outsourcing the management of receivables allows a company to
eliminate related expenses and concentrate
on its core business. According to
Schoucair, factoring firms generally have
a collection rate that is 10% to 15% better
than when the clients do it themselves.
More importantly, financing allows a firm to
turn outstanding receivables into working
capital. Interest rates are 12% to 14%.
Clients include Sony, Megacom, Nike and
Playtime. “One of the major reasons we
decided to go to Ipso Facto is that it’s the only
company willing to offer this service on the
market,” says Mohit Parasher, branch manager
of Sony Lebanon.

Ipso Facto has been creating a sort of credit
bureau, called Ipso Credit Watch (ICW), in
the absence of such information on the market.
ICW has created a system of standardization
for industries similar to those codes
that operate in the US and EU. There are some
170,000 companies in the ICW database,
albeit with varying levels of financial information.
Based on balance sheets representing
about 15% of the companies in a given
industry, ICW can assess others with limited
information by using ratios such as turnover
per employee. “Based on this, we can
rebuild a balance sheet, figure out the assets
and so on,” says Schoucair. “But the condition
to do this is to have a proper sector study.”

Schoucair admits the method is not 100%
foolproof. In fact, the results are only accurate
to within a 20% to 25% variable by his
estimates. Come again. A 20% to 25% variable?
While that may be good for the prevailing
conditions in Lebanon, it still leaves
a huge margin for error. Schoucair has a few
other uphill battles to face, not the least of
which are the lack of transparency and culture
on the Lebanese market. “Take for
example securitization. It’s very simple, but
nobody understands it, nobody accepts it,”
says Nicholas Photiades, senior vice president
of Thomson Financial Bank Watch in
Beirut. “The legal structure is not there to
facilitate it. It’s still early, early days.”

Another analyst points to the inefficient
judicial system in Lebanon: “The banks
take the good debtors, so you’re left with bad
debtors and no courts.” While Schoucair
acknowledges the problem of the slow
legal system, he says the more important
legal issue is the invoice’s weak status in
comparison with the promissory note.

Another factor that the company will
have to prepare for is the inevitability of a
tougher market. Ipso Facto may soon find
that it doesn’t have the run of the place.
Commercial banks could become direct
competitors in the factoring business following
the recent central bank circular that
laid the ground rules. Schoucair, however,
has a plan to cut them off at the pass: Facto
Bank. “We’ll operate the factoring completely
from A to Z, and the bank just puts
its logo on it,” he says. “Or we can train
them, give them the tools and procedures to
enable them to do this.” Knowing the Alfa
banks will be tough to convince, Schoucair
plans to target the medium-sized banks.

Ipso Facto expects 2000 to be a very difficult
year. “1999 was a tough year, but most
companies had reserves,” says Schoucair.
“They’ve used them, so now a lot of companies
are on the edge.” He believes that this
year will bring a surge of bankruptcies. All
that and Ipso Facto is in the process of
switching its clients to non-recourse, meaning
if debts can’t be collected, Ipso Facto
swallows the loss. In the face of so many
obstacles, Schoucair has his work cut out
for him. The next couple of years will reveal
whether he can manage to pull it off. Either
way, at least he has the guts to try.

Coming home has paid off so far
for Societe de Grands Hotels du
Liban (SGHL). After opening
Vendome Hotel in 1996, its profits jumped
from $42,101 in 1997 to $3 million, unaudited,
last year. SGHL believes that this
was just a small step towards a real profit
surge. Last March it reopened what was
once one of the most prestigious hotels in
the Middle East before the war: Phoenicia
Hotel. Earnings are forecast at $15 million
for 2000, according to Mazen Salha, chairman.
That’s an increase of 400% – far above
what other companies on the
Lebanese stock market anticipate.

SGHL has a good chance to meet its target.
“Vendome is a yacht and Phoenicia is a
cruise liner,” says Francois Chopinet, InterContinental’s
general manager at Phoenicia
(InterContinental runs both SGHL’s hotels).
Unlike Vendome**,** which is a medium-sized
boutique hotel, Phoenicia will function on a
much grander scale. It has the largest conference
room and, once fully operational, will
have more rooms than any competitor in the
local hotel industry. Size matters. Existing
hotels, such as the Marriott, Savoy, Le
Bristol, Al-Bustan, Summerland and
Commodore, can house 300 to 1200 people in
a conference hall and have around 85 to 210
rooms. Phoenicia’s conference hall can hold
2000 guests and will have 450 rooms when
completed this month. According to Ghassan
Matar, previously an independent consultant
for the ministry of tourism, Phoenicia’s competitors
often can’t accommodate all their
guests when hosting events. “At Phoenicia,
with accommodation available in the same
hotel, convenience for the participants, organizers
and tourist agencies will attract many clients away from its competitors,” he says.

Big brand names in the hotel industry
have been scrambling to get in and set up
shop or manage local establishments. Many
believe that international chains, such as Le
Meridien, Starwood, Marriott, Holiday Inn
and InterContinental, will soon dominate the
Lebanese market. Others like Movenpick and
Four Seasons are on the way. “Lebanon is
opening up to the world, and local hotels need
international chains to market worldwide,”
says Tanios Kassis, development manager at
Choice Hotel International, which encompasses
Clarion, Quality, Comfort and Econo
Lodge. “To attract people from other countries,
a hotel needs a brand name,” says
Kassis. “And to market abroad, it takes
expertise and the ability to absorb costs.
Local owners are unable to do it.”

SGHL teaming up with InterContinental to
manage Phoenicia should pay off. InterContinental,
which belongs to Bass Hotels and Resorts, was the driving force that enabled
Vendome to become a moneymaker in a
short period of time. Bass Hotels and Resorts,
which includes Holiday Inn, Crowne Plaza,
Holiday Inn Express and Staybridge, is one of
the leaders in the global hotel business**,** generating
revenues of about $7.43 billion. In the
last three years, the average occupancy rate for
the hotel sector was 40.5% compared to 90%
for Vendome.

SGHL allocated InterContinental an initial
marketing budget of $500,000, to be followed
by 5% to 7% of revenues.
Marketing regionally and internationally,
InterContinental focuses exclusively on
corporate clients. “The hotel has been built
around targeting corporate clients. This is a
businessman’s hotel,” says Salha.

Phoenicia’s location in the Beirut Central
District will also be beneficial as businesses
are expected to migrate to the city center.
And according to Chopinet, corporate
clients are eager to find a new destination in
this region. “On our conference business, we
have 30,000 room nights booked between
March and the end of September,” he says.
“Two thirds of these clients had plans to go
to other destinations, but we stole them
from places like Dubai, Cairo and
Istanbul.” InterContinental, which has a $2-
million stake in Phoenicia, calculated a
conservative 50% occupancy rate for the
first six months. It has already been running
above expectations at 62%.

SGHL has one advantage that its competitors
do not: the name. “Phoenicia is one of the
oldest brand names in Lebanon,” says Pierre
Achkar, the president of the Lebanese Hotel
Association. “It was the first InterContinental
in the Middle East and was the
biggest. Everyone knows Phoenicia.”

SGHL doesn’t plan to stop there. “We
want to develop more hotels in Lebanon
and in neighboring countries,” says Salha.
Following a peace agreement, SGHL plans
to open a hotel in Damascus. Cairo will
probably come next year, while other spots
in North Africa and Iran are being considered.

But can SGHL attract investors? Its shares
have had a bumpy ride on the over-the-counter
market (OTC). Between early 1997
and late last year, its prices bounced
between $3.85 and $5.75. A positive sign: a
23% increase in the last few months, settling
in around $5.38. The recent jump came
from Vendome’s higher-than-expected
results last year and anticipation of
Phoenicia’s opening, according to Nicolas
Sawan, head of trading at Lebanon Invest,
which handled SGHL’s private placement in
1996. Sawan believes there could be more
movement to come, but it may take time.
“This year’s results should affect the share
price,” he says. “What drives share price
movement is psychological. If SGHL meets
its profit target, prices should move.”

But there are forces in Lebanon working
against the traditional rule of thumb of
stock prices moving upward as earnings
improve. “With all the bookings at the hotel
this year, it will be a successful beginning,”
says Nabil Aoun, general manager at Fidus.
“I’m very optimistic about SGHL, but its
shares won’t follow. The market is dead.”

Lebanon’s economic and political uncertainties
have killed investor interest. A good
example is BLOM’s GDRs, which are traded
on a more liquid market than the Beirut
Stock Exchange (BSE) or the OTC. The
largest bank in Lebanon, BLOM increased
earnings by 20%, from $58.7 million to $70.4
million, in 1999, and in the first quarter of
2000 profits jumped 14.5% over the same
period last year**,** despite recessionary pressure
taking its toll on the banking sector.
Even though international investment firms
recommend a buy and target its share price
as high as $44, its GDRs have dropped 9%,
down to $24.68, so far this year.

SGHL has received approval to move its
shares onto the BSE. “We are waiting for the
market to be more active,” says Salha. But
when that will happen is anyone’s guess.
Total trading volume dropped from $640
million in 1997 to $90 million in 1999. It has
sunk even further this year, down 19% in the
first quarter. There is a question of interest
being generated in SGHL itself. Several
analysts at local investment firms claim that
they tried to study the company and report on
its progress for investors, but were rejected.
“We tried to get information from SGHL, like
income statements, but no luck,” says one
analyst. “It’s not transparent at all.”

There is also concern about SGHL’s debt. To
rebuild Phoenicia, the company had to borrow
a total of $80 million. There is a chance that
SGHL will sell off Vendome to help reduce its