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Brand Voice

Can we talk about ‘better’ alternatives to cigarettes?

by Farah Makkawi February 22, 2019
written by Farah Makkawi

According to American Cancer Society estimates, cigarette smoking accounts for nearly one in five deaths in the United States alone, whereby deaths resulting—whether directly or indirectly—from smoking has increased dramatically over the last 50 years.

Relatedly, the U.S. Centers for Disease Control and Prevention estimates that smoking increases the risk of coronary heart disease by two to four times, stroke by two to four times, and lung cancer by 25 times.

Dr. Bernard Harbieh, Cardiologist at the Kesserwan Medical Center affiliated with the American University of Beirut Medical Center (AUBMC), provides his take on this topic. He says, “One cigarette is made of thousands of chemicals, including at least 70 of them that are known to cause cancer, also referred to as ‘carcinogens.’ The most toxic out of these substances are tar, carbon monoxide, nitrogen oxides, hydrogen cyanide, metals, ammonia and radioactive compounds, among others. He adds by saying that nicotine remains the main addictive compound that produces the effect people look for when they smoke.”

In other words, as Professor Michael Russell once said, “People smoke for nicotine, but they die from the tar.”

Dr. Harbieh explains that “the most important element in smoking cessation comes from the smokers themselves. They should be convinced and understand the risks of continuing to smoke.”

Furthermore, he speaks about a variety of ways and tools to quit smoking, among which:

  1. Behavioral therapy, which involves working with a professional counselor, or therapist, in order to address the psychological and behavioral attitudes that prompt the patient to smoke.
  2. Nicotine replacement therapy (NRT), which comes in different forms, including nicotine gum, patches, inhalers, sprays, and lozenges.
  3. Medications, such as Bupropion and Varenicline, that can help with cravings and withdrawal symptoms.

He adds that “in some cases, a combination of two or more treatments can be a necessity to help the patient quit.”

When asked about alternatives to conventional cigarettes, and whether some might be considered to be less harmful than others, Dr. Harbieh states that “there are several forms of tobacco products in the market, and people often think some forms are completely safe and do not cause health problems. This is simply not true, and the best way for those concerned about their health is to quit tobacco products altogether.”

Nevertheless, he speaks about a certain type of products, also known as “heat-not-burn” alternatives, which operate by generating a nicotine flavored aerosol, out of heating tobacco sticks consisting of tobacco and other ingredients without lighting them on fire.

Dr. Harbieh says this definitely could reduce the amount of some of the harmful chemicals, given that combustion—which is known to scientists to be the primary cause of smoke-related diseases—does not take place and tobacco is heated instead of being burned.

Nonetheless, he stresses that “currently, there still isn’t sufficient data out there to support such lower risk claims when it comes to these products,” adding that “we need long-term studies to show the benefits of such products, or conversely, the potential harm they could have on the lungs and immune system.”

A potential alternative to cigarettes?

Philip Morris International (PMI), the company behind IQOS—a heat-not-burn tobacco product that is currently gaining traction across several markets worldwide—states that there are currently around 6.6 million adult smokers worldwide, who have made the switch from cigarettes to IQOS. The latter consists of a device that heats specially designed tobacco units to specific temperatures (under 350 degree Celsius), which in turn enables the release of a tobacco vapor that caters to adult smokers’ sensory experience and rituals, while eliminating the combustion factor—therefore generating significantly lower levels of harmful chemicals compared to cigarette smoke.

Furthermore, PMI states that IQOS has other ‘functional benefits,’ such as no ash, fire, or smoke, along with it having less smell given the fundamental difference between IQOS’ aerosol and cigarette smoke.

On this note, the UK Committee on Toxicity (COT) released on December 12, 2017, the results of its assessment of heated tobacco products—conducted in at the request of the UK Department of Health and Public Health England to assess the risk of heated tobacco products relative to cigarette smoking.

COT analyzed available scientific data on IQOS, among other similar products. The assessment concluded that, while still harmful to health, heated tobacco products “are likely to be less risky than smoking conventional cigarettes.” COT also stated that “there would likely be a reduction in risk for conventional smokers deciding to use heat-not-burn tobacco products instead of smoking cigarettes.”

Subsequently, in February 2018, Public Health England (PHE), an executive agency of the UK’s Department of Health and Social Care, released a new report on the evidence behind cigarette alternatives. PHE’s analysis of independent evidence on heated tobacco products, which was heavily focused on IQOS, considered eight independent studies in its review. Among the report’s findings on heated tobacco products is a likely reduction in user’s exposure to harmful chemicals compared to cigarettes, and that: “The available evidence suggests that heated tobacco products may be considerably less harmful than tobacco cigarettes.”

More recently, on May 5, the German Federal Institute for Risk Assessment (BfR) published an article on IQOS in Archives of Toxicology. Their research analyzed IQOS aerosol using the Health Canada Intense Smoking Regimen, finding significant reductions in selected toxicants (80-99 percent), which was in line with PMI’s own research. These reductions “are likely to reduce toxicant exposure.” 

 The study states that while further studies are required to address the magnitude of exposure reduction, the measured reductions “lead to the relevant questions of putatively reduced health risks.”

February 22, 2019 1 comment
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Economics & PolicyLegislation

Take initiatives to fix the state

by Jeremy Arbid February 20, 2019
written by Jeremy Arbid

Executive has collected different initiatives recommended to enhance state output and economic performance, with the primary sources being the Lebanese government, multilateral development institutions, and the McKinsey economic vision. The corresponding table reflects the state of the initiatives roughly one year after Lebanon presented its Capital Investment Plan at CEDRE in April 2018. Some progress has already been made to address some of the initiatives, namely those related to improving the business environment, shoring up public revenue through new taxes or tax increases, and by passing legislation concerning protection of groundwater resources, transparency in the oil and gas sector, and a new legal framework for solid waste management. However, the initiatives presented, whether related to legislation, regulation, digitization, capacity building, or other efficiency enhancements, may not capture all the measures out there, nor be categorized in a perfect way—Executive cannot claim that this is a comprehensive list. The initiatives that Lebanon has addressed should also be considered starting points: As with all initiatives, their adoption is just the beginning and sometimes they require implementation through additional measures or legislation, so those that have already been addressed should not be considered complete, but rather at the beginning of the process of improvement.

Click on table to enlarge.

Click on table to enlarge.

February 20, 2019 0 comments
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Economic roadmapSecond draft

Economic Roadmap

by Executive Editors February 20, 2019
written by Executive Editors

Building on the first draft of the economic roadmap published in the December 2018/January 2019 issue of Executive, this second draft includes an additional 261 measures and three entirely new national priorities that address judicial reform, labor, and how best to preserve national heritage. As was the intent from the beginning, we took a participatory approach in creating the first version of the roadmap, and that is especially true of the second draft. Over the last seven weeks, we have met with 60 individuals and civil society actors from all over Lebanon and sought their feedback on the roadmap and gathered their contributions for this revised draft.

This was done in an effort to truly understand what Lebanese sought for the future of their country. We were surprised to find that most agreed on measures to be taken in many areas including gender inequality, transportation, pollution, education, health, poverty, and corruption. Contributors added their own ideas to these measures, making them stronger, but little disagreement existed on the main challenges in these national priorities.

One of the biggest matters of debate is privatization, which is understandable given the broad spectrum of economic thought. Countries around the world have adopted systems best-suited to them, whether that includes a heavily privatized economy, or not. Ultimately, Lebanon has to decide what kind of system it wants to implement and move forward collectively. While the country is debating and deciding what kind of system it wants, Executive will be here to help facilitate the debate.

February 20, 2019 0 comments
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Last wordOpinion

Misplaced trust

by Aya Majzoub February 19, 2019
written by Aya Majzoub

Through discussions with Lebanese citizens about the space for free speech in the country, we have found that many Lebanese say they take solace in the belief that despite the government’s failure to provide even the most basic services, they at least are free to say, write, and joke about their predicaments, and criticize those they think are responsible.

Then-Justice Minister Salim Jreissati said in a February 2018 interview, “We are proud that in this murky, desert region that surrounds us when it comes to freedoms, we are a country of freedoms par excellence.” But many Lebanese citizens would be surprised to discover that they could not only be sued, but could be sent to jail for up to three years for a Facebook comment.

Although Lebanon’s constitution guarantees freedom of expression “within the limits established by law,” the Lebanese penal code criminalizes defamation against public officials and authorizes imprisonment for up to one year in such cases. It also authorizes imprisonment for up to two years for insulting the president, flag, or national emblem. The military code of justice criminalizes insulting the flag or army, an offense punishable by up to three years in prison. Other laws outlaw speech deemed insulting to religion or speech that incites sectarianism.

In recent years, there have been alarming developments in the use of these laws, with scores of people arrested, interrogated, detained, and prosecuted for peaceful speech, particularly social media posts. SKeyes recorded more than 90 prosecutions against journalists, artists, and activists since October 2016, with 62 in 2018 alone.

According to digital rights group Social Media Exchange (SMEX), the number of cases brought over online posts more than quadrupled between 2017 and 2018. In 2018, SMEX recorded at least 38 cases, with the majority over posts critical of politicians, security agencies, or the president—an increase from 11 cases in 2017 and five in 2016. Human Rights Watch has documented several other cases over defamatory speech in traditional media forums, including television shows and conferences.

In the latest instance, on January 9, then-caretaker economy minister, Raed Khoury, filed a criminal defamation lawsuit against Bechara Asmar, head of the General Confederation of Lebanese Workers, for comments accusing the minister of corruption. Asmar was called in for interrogation by the Internal Security Forces’ Cyber Crime and Intellectual Property Bureau.

On November 21, State Security summoned and arrested Abdel Hafez al-Houlani, a correspondent for the Syrian opposition news website Zaman al-Wasl, following the publication of an article alleging 20 pregnant Syrian women living in Arsal had miscarried after drinking polluted water. Al-Houlani was held for three weeks and referred to a court on charges of “inciting sectarianism.” The court only released him after he paid a $700 fine, and the website published a clarification that his article did not accuse any Lebanese party of responsibility.

However, it is not only public figures and journalists who are vulnerable to prosecution. On June 19, Army Intelligence brought in a 15-year-old boy, Youssef Abdullah for questioning, over the dissemination of a photo on WhatsApp allegedly mocking President Michel Aoun. Abdullah was released the next day after signing a pledge promising to refrain from insulting the president.

A particularly troubling trend is that people summoned for questioning by security agencies often are not told why they are summoned. Asmar says he was not given a reason for his summons to the Cyber Crimes Bureau, and Houlani says State Security held him for several days without informing him of the charges against him.

Further, interrogating agencies are taking measures against people accused of defamation prior to them being brought before a court, violating their right to due process and their right to free speech. Several of those detained have reported that during their initial questioning they were pressured to sign pledges promising not to write defamatory content about the accuser again or to remove their offending tweets or Facebook posts.

Lebanon’s courts rarely issue prison sentences for peaceful speech (which does not incite to violence)—except in absentia. But the use of pre-trial detention and lengthy trials have had a chilling effect on freedom of speech, as many journalists and activists now say they self-censor to avoid charges.

The laws that criminalize peaceful criticism of politicians are incompatible with Lebanon’s obligations under international law. Parliament should ensure that freedom of expression is upheld, including by clearly defining what constitutes “libel,” “defamation,” and “insult,” and repealing laws that criminalize criticism of authorities or national symbols.

February 19, 2019 0 comments
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Hospitality & TourismLebanese gins

The juniper way

by Nabila Rahhal February 19, 2019
written by Nabila Rahhal

It was only a matter of time before the Lebanese got into gin production; as unexpected as that sounds, it actually makes perfect sense. The world is witnessing a “gin boom” especially in the premium and craft gin category, and, according to a report produced by just-drinks.com and the IWSR (International Wine and Spirits Registry), global gin sales rose by 7.4 percent between 2016 and 2017, to just under 35 million cases. Gin is forecast to be the second fastest-growing international category of liquor by 2021 (behind whisky), with this growth driven by the premium categories, according to the same report.

The Lebanese gin producers Executive spoke with cite several reasons for gin’s increasing popularity. One, it is thought to contain the least number of calories among the white spirits (vodka, rum, tequila, gin)—an advantage in today’s health-conscious world. Another reason cited was that the production of artisanal and craft gin meshes well with consumers’ demands for the authentic.

When it comes to spirits, Lebanese consumers tend to follow worldwide trends, and spirit distributors Executive has spoken to confirm that premium gin is indeed gaining market share in Lebanon.

The main botanical needed to produce gin—without which it cannot be classified as gin—is juniper berries (the seed of the evergreen juniper tree). A species of juniper trees, the Juniperus excelsa, known in Arabic as lezzeb, grows in abundance on the western and eastern slopes of northern Mount Lebanon, and is one of the main species of tree in Lebanese forests.

Put these two facts together and it is no surprise that four Lebanese with entrepreneurial minds decided to get into gin production. Executive profiled these local gin producers to learn more about their operations, and the responses their gins have been evoking.

Gata

Jamil Haddad, founder and brewer of Colonel Beer, says he announced his intention to produce Lebanese gin and vodka in 2016, during his acceptance speech for the BLC Brilliant Lebanese Award.

Two and a half years later, towards the end of November 2018, he released a dry gin called Gata into the Lebanese market. According to Haddad, Gata is named after the story of a queen who lived in a castle close to Batroun’s Phoenician wall, and who would escape through an underground tunnel to go swimming in the sea. “I wanted to name my gin after a woman and have a female character to go with it,” he says.

Two moments inspired the idea of gin production for Haddad. The first was identifying it as a trend while in London: “Four years ago the trend of gin distilleries boomed in London—in the UK and the US the gin industry is still booming like crazy. These days the worldwide trend for everything is in the experience—gin is the lowest calorific white spirit, and at the same time has good flavors and different tastes.”

The second moment was when, on one of his hiking trips, Haddad realized that Lebanon has an abundance of juniper trees, with berries ideal for gin production. Gin has a certain character that appealed to Haddad and, as he explains, he already had the brewery, so he decided to go into distilling.

Right from the start, Haddad was aiming to produce a gin that would stand out worldwide, so he took his time developing the project. The imported bottles, for example, took five months to arrive in Lebanon, while it took one year to just receive the still. “It is a custom made, high-end still from Germany,” he explains. “It’s a very professional machine made of European food-grade copper, since copper is very good for distilling and reduces oxidation. Even if it took a year, I waited because I wanted the best machine and the best ingredients to have a consistently good product.”

Haddad invested $460,000 into his gin and vodka production, mainly on the equipment, and says he plans to return this investment in three to four years.

While the equipment is imported, the ingredients used are locally sourced. For the juniper berries, Haddad works with the Mamlaket El Lezzab organization in the Bekaa, that plants juniper trees, harvests the berries, and sells them on to him. Other ingredients include: lavender, which he buys from the same organization, lemons, which are common to Batroun, and mint, which also grows in abundance in Lebanon.

Haddad says he has the capacity to produce 800 bottles of gin per day but has not done so yet—he plans to increase production when he begins to export. Since its launch at the end of November, 3000 bottles of Gata gin have been sold, each at a retail price of $29. It can be found in several liquor stores, including Aziz and The Malt Gallery, as well as at the Colonel brewery, and in several bars and restaurants. Haddad is still biding his time and says that come April he aims to have Gata gin available across most of Lebanon and begin his export plan.

Haddad sees a future for gin in Lebanon. “Consumption per capita of gin in Lebanon is increasing significantly year-on-year, so this local product will take the market share of medium to high international gin, since Lebanese gin is positioned as such,” he says. “Lebanese, especially the younger generation, support local production and so will support gin.”

Jun

For Maya Khattar and Chady Naccour, the couple behind Jun, it all started with their love of nature and a “cheerful spirit” (their gin’s tagline).

The duo was working in advertising in Dubai, and would spend their summers in Rechmaya, just above Aley, where Khattar is from. Khattar’s family owned a property in Rechmaya that her grandparents once used as a small silk factory. Following the civil war, Khattar’s parents partially restored this structure and used it as a storage facility for the produce from their adjacent garden. Khattar and Naccour would spend many an enjoyable summer night with friends and family in that space.

They eventually grew restless in the fast-paced and hectic corporate world and longed to reconnect with nature in Rechmaya. Khattar also wanted to help her family manage the garden, but knew that she and her husband could not live off the produce alone. So they started thinking about financially viable projects they could develop in conjunction with the garden. After crossing off several options, they decided to enter the alcohol production business.

“We thought of wine, but there are too many wineries in Lebanon nowadays—same thing for arak, which the villagers themselves produce as well,”Khattar recalls.

The couple eventually opted for gin production. “We decided on gin because it is trendy and creative as a product since you can come up with several recipes. We already have a garden in which we grow the botanicals we need for gin. That way, we are benefiting the garden and benefiting ourselves,” she explains.

The space gin allows for creative recipes suited Naccour well since he had studied in a culinary school while living in Australia and loves to work in the kitchen. Following their decision, he took a course on distillation in South Africa while the couple was still living in Dubai. At the same time, they were restoring the property to eventually become their artisanal distillery, complete with a still they named Matilda, after Khattar’s grandmother.

After several experimentations with recipes and tastings, Khattar and Naccour launched Jun online in June last year and opened the distillery to visitors that July. Jun’s name comes from its main botanical juniper berries and also from its launch date, the month in which Rechmaya comes alive with music and cheerful energy.

Jun is an aromatic gin made out of nine botanicals, which include Juniperus excelsa berries, mastic, rosemary, orange, lemon, bay leaves, and coriander—all of which are flavors reminiscent of a traditional Lebanese kitchen, Khattar says. The couple sources their juniper berries from a reserve in Hermel and handpicks the rest of the botanicals from their garden themselves. Only the corks in Jun bottles are imported—the rest of the equipment and ingredients are all from Lebanon.

Khattar describes Jun as an artisanal gin, explaining that they can produce 130 bottles per day and that they do almost everything by hand, even painting the bottom of the bottles. They have sold 4,000 bottles since their launch in June.

The couple invested $100,000 from their own funds but say they have faith that they will return their investment and more. “We were financially safe in Dubai in that we were employed and so took a big risk leaving everything behind to start our own business, which was not a guaranteed success,” Khattar says. “But we believe in it and we see a big potential for gin in Lebanon and we know how to grow it—we have our vision.” She notes that during the summer they will have special events on their premises—such as gin and tonic nights or barbecues—to promote gin consumption in Lebanon

Jun is available on the Rechmaya Distillery website, on 209 Lebanese Wine’s online platform and in 29 liquor stores, restaurants, and bars across Lebanon. It is sold for $23.30 everywhere except for the distillery itself, where it is sold for $20 to encourage visitors to Rechmaya. Khattar also notes proudly that it is available to first-class passengers on Middle East Airlines flights and in the Cedar Lounge. “We are happy with our clients who are very supportive, especially since we are newcomers to the industry,” she says. “Our story is inspiring in that we came back to the village and are using our resources.”

The couple is planning to export Jun starting in the MENA region, and has already completed the required paperwork to do so.

Junipium

The Riachi family has been in the spirits and beverages business since 1839, and lately produced mainly private label wines after their own brand distribution was hindered during the civil war. Ten years ago, Roy Riachi, a member of the family’s eighth generation, decided to revive the family brand’s name, focusing on wine and spirits production, including arak, liquor, and honey whisky.

Riachi’s experience with the beverage business through the family trade, as well as his career as a restaurateur, familiarized him with the trends in the spirits industry, so he saw the potential for gin production. “Gin is trending worldwide these days, and in my work as a restaurateur I experienced the concept of the gastropub, where gin was highly in demand, especially for cocktails, so the idea of producing gin came to me then,” Riachi recounts.

He decided on the name Junipium because of the juniper berries, and also because of the phrase mysterium tremendum, which he translates as “the great mystery.”“[Junipium’s] flavor profile is different from commercial gins, and so it is mysterious. It is very aromatic and has a potent smell and taste, but yet is not harsh,” he says.

Junipium’s main botanical is Juniperus excelsa berries, which Riachi says grow in abundance next to the distillery in Khenchara, Metn. Eleven other botanicals are used in Junipium, including woodruff, aniseed, nutmeg, rosemary, cardamom, licorice, and basil. Riachi describes its flavor as floral and unique.

Riachi’s investment was minimal since he already had the still, thanks to his plans for whisky production. He uses a gooseneck still, the same kind used to produce single malt whisky, which he plans to launch next.

Junipium was launched into the market in early October 2018. Although Riachi has produced only 500 bottles to date, he says his operation is easily scalable, as the still can produce a few thousand bottles per batch. It is available on 209 Lebanese Wine, on Riachi’s website, and in select liquor stores in Lebanon, where it can be purchased for $25 a bottle. Riachi is eying the export market for Junipium, where he believes it will be a success.

The Three Brothers

It was only natural that the Malak brothers, who tend bar and own and operate seven bars across Lebanon, would want to produce a spirit of their own. “By the nature of our job as bartenders, we drink on a daily basis, and so we thought of producing a spirit that we can drink dry and enjoy. We discounted whisky because we had been drinking it for 15 years, and thought of gin, which we had been enjoying a lot lately,” says Ralph Malak, one of the producers of The Three Brothers.

Producing gin also came to the brothers’ mind because, six years ago, they had met a producer of bathtub gin. Bathtub gin was originally an amateur method of producing gin—through a maceration (soaking) process—that was popular during Prohibition era in America, when alcohol was illegal. Ten years ago, says Malak, some distilleries revived this method of gin production but in an ultra-premium way. “They revived it because bathtub gin is full of flavor—it’s not a dry gin but a cross between liqueur and gin—and can be drunk alone. There are only 10 distilleries worldwide that produce bathtub gin, so we are filling the market for that,” Malak explains, adding that many do not know about this type of gin, and thus he makes sure to share the history of bathtub gin with the bartenders who will be using Three Brothers, and to train them on how to best serve it.

What sealed the deal for the brothers, in parallel to their discovery of bathtub gin, was their finding out about the abundance of juniper in Lebanon. They chose to source their berries from the Bekaa. “We saw it as an opportunity for the landowners in the area, since they were cutting the trees thinking there was nothing they could do with them,” Malak says.

Other than juniper, The Three Brothers has 21 botanicals, including dehydrated apples, rose, grapefruit peel, cinnamon, and jujube (ennaab in Arabic). Only the cinnamon is imported, from India, the rest of the botanicals are sourced locally. Each botanical has a different soaking time, but the maximum maceration time is 48 hours, after which the gin rests for a month before it is charcoal filtered and bottled, explains Malak. Everything is done by hand, with a team of eight people in production, making The Three Brothers a craft gin.

The brothers experimented for three years before they came up with the recipe for The Three Brothers, and Malak recalls that those experiments started at his home using a 20 liter still he typically used at the bar to create drinks. Today they have a small distillery in Smar Jbeil, Batroun, with a 100 liter still, and plans to get a 200 liter still to replace it.

At first, says Malak, they planned to produce small quantities to use in their bars, but the response was so favorable that they decided to increase production. “People would taste it and ask for a bottle, so did our bartender friends, and then two companies,” he says. “We realized that we are going big even though we did not have enough production for that, and so we decided to increase production, although we will remain craft.” Each batch of The Three Brother produces 2,200 bottles, and Malak says the second batch is almost depleted, meaning they have sold almost 4,500 bottles since its launch on May 5, 2018—international brothers’ day.

Because of their connections in the spirits industry, distribution has been fairly easy. The Three Brothers is available at almost 100 points of sales, between liquor stores, restaurants, and bars, and costs $34 a bottle. Once they have bottles available across all of Lebanon, the plan is to export.

February 19, 2019 1 comment
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Hospitality & TourismSpirit Industry

(Not) drowning their sorrows

by Nabila Rahhal February 19, 2019
written by Nabila Rahhal

Although it is commonly believed that in hard times people turn to alcohol to ease or forget their problems, this does not seem to have been the case this past year in Lebanon. Despite all the issues the country has faced, 2018 did not translate into greatly increased sales for the country’s spirit distributors.

In fact, Lebanese spirit distributors mainly complained about the same challenges that were affecting many industries in 2018, namely low purchasing power among local consumers and a decrease in high-spending tourists.

Growth in spite of everything

While all distributors Executive spoke to reported some growth in revenues from their spirits portfolio, this gain was not achieved without struggle. For Ziad Nacouzi, head of the spirits distribution division at Neo Comet KFF Food and Beverage, 2018 was a difficult year. “We invested a lot [in marketing the brands] to reach only a slight increase from 2017—a 2 to 5 percent increase, depending on the spirit brand,” he says.

Some distributors acquired brands or portfolios in 2018, and so were able to achieve growth through new avenues. Carlo Vincenti, the owner of G. Vincenti & Sons, explains that his company acquired the distribution of several brands of premium mixers (non-alcoholic drinks that are added to spirits) and of Mancino, a premium artisanal brand of vermouth (a type of aged dry wine, typically mixed with gin). He explains that these beverages strengthened his company’s premium spirit brands, as consumers wanted to enjoy their high-quality spirits with a mixer of the same caliber, rather than ruin the taste with low-quality mixers.

The business manager ofEtablissements Antoine Massoud (EAM), Joe Atik, says the company acquired the Monin portfolio of beverages in August 2018. The portfolio’s products are used as flavor enhancers in many cocktails, which helped increase EAM’s margins for the year. Atik adds that since Aperol, which is distributed by EAM, was both a global and local trend in 2018, the company benefited in terms of growth in its spirits division.

Mountain expansions

EAM’s The Malt Gallery, a specialized liquor shop, opened a branch in Fakra in August 2018. Atik says the new Malt Gallery has been a successful experience that they plan to expand further. “We have a very good relationship with specialists, such as cigar or liquor sellers, and we didn’t come as competition, but to widen the consumer base. Clients of The Malt Gallery are limited in number, but they are regular customers, and they drive value,” he explains.

Meanwhile, Vincenti’s Cask and Barrel, a showcase store for the company’s spirits brands with an extensive portfolio of single malt whisky, opened in Kfardebian in August. “It is a great alternative because a lot of the chalet owners or people who spend time there struggle to source premium spirits, whether for their consumption or for gifting at the many dinners and house parties that happen there,” Vincenti says. These expansions helped both distributors’ growth despite the difficult year.

Empty stools at the bar

As Vincenti explains, the spirits industry is dependent on the on-trade (consumption of spirits in bars, restaurants, and clubs) and the off-trade (purchasing of spirits from retailers), both of which suffered in 2018.

In the on-trade, Vincenti says they are witnessing an unprecedented level of payment defaults. “We’ve had some accounts that we’ve been working with for 20 years who have never defaulted on a payment the way they are now. This is really a big problem, and it will be a bigger problem in 2019 if we don’t get back the tourists with high purchasing power and those who go out and spend,” he explains.

In fact, all spirit distributors told Executive that they have been suffering from defaulted payments, which has made them much more cautious in choosing which hospitality operators to work with. “Because of the many defaults, we have limited distribution by choice. You need to know where and who to sell to, so you know if you will be able to collect your money or not,” Atik says.

Nacouzi, citing feedback from pub and club owners, says that there was a 20 to 22 percent decrease in sales in the on-trade in 2018, as compared to 2017, which makes the struggle to keep up with payments less surprising.

According to Samer Nassar, head of marketing at beverage company Diageo, high-spending tourists are no longer coming to Lebanon in the same numbers as before, which is negatively affecting the on-trade. “You see that the expensive Monaco style clubs with the big formats are fading away because of the decrease in the number of high-spending tourists—the Lebanese cannot alone keep such clubs operational year round,” he says, referencing, for example, $1000 bottles of champagne that came with fireworks and a team of waiters when ordered.

Nassar also explains that the nature of clubbing in Lebanon is changing. “Millennials prefer clubs with DJs as the main focus. These clubs [often] have no minimum charge, so you only pay for what you consume, which may be one glass at the bar,” he says. Both types of clubs generate profit, but in different ways, he says. The luxurious clubs have more turnover on premium brands and spirits like champagne, which bring more value, while the DJ style clubs have a higher turnover in terms of volume, where the more accessible items, such as beer or straight drinks are in demand.

Nacouzi says consumption in bars and clubs among locals has decreased, which also contributed to the downward spiral of the on-trade in 2018. “The number of new clubs that opened in the last few months of 2018 is not an indicator, because the consumption per person in clubs and bars has decreased from say, three years ago. These days a group consumes one bottle per table at a club, and then opts for an additional individual drink before they leave the party,” he says.

“What we hear from our on-trade clients is complaints about less turnover of their spirits, meaning that while it seems people are still going out, they are consuming less in bars and restaurants,” Jeanine Ghosn, managing director of Gabriel Bocti says, echoing the views of other distributors.

When less is more

Meanwhile, the closure of major supermarket chains (such as TSC and several outlets of BouKhalil) in the past 18 months shook up the off-trade spirits distribution. “We are still waiting to see how we can get our money. Collecting receivables is what is most difficult for us in this situation,” Ghosn explains.

The tough economic situation led to what distributors called “price-cutting wars” in the spirits sector, driven by the country’s top supermarket chains during the holiday period. Atik explains that traditionally during December spirit distributors develop gift boxes with added-value items, such as free glasses or carafes, to encourage sales of their bottles. However, in the past two years, as purchasing power has been low, consumers have been opting for tactical promotions—discounts—to save money. Price cuts are most attractive when applied to premium spirits brands and Vincenti says some brands of premium Scotch whiskies were discounted up to 40 percent this past December.

Nacouzi says supermarkets still benefit despite the price cuts. “If you visited supermarkets during December, you would have seen 30 to 40 percent price reductions on major spirits brands,” he says. For supermarkets, it attracts traffic because people come to buy the discounted premium brands of alcohol and end up buying other products; the higher the traffic in a supermarket, the higher the probability that people will buy other items, thereby benefiting the supermarket.”

Although distributors say such price reductions negatively impact a premium brand’s image, consumers are unwilling to fork out big bucks for their liquor anymore. “Price cutting is harmful to our brands, but this is a reality forced upon us by the consumer that we have to deal with. People don’t have money anymore, and they are choosing accessible brands. Distributors and supermarkets also have their bills to pay, and so they are forced to do those price cuts,” Nassar explains.

No money for booze

Some spirit distributors say that as on-trade consumption decreases, off-trade consumption is increasing, as more people are now drinking at home. “Home consumption in the form of house parties is growing, and we can feel that in our figures. Bar catering at private functions and weddings is becoming a trend and that helps grow off-trade consumption,” Ghosn explains.

However, Vincenti notes that from his experience, people are opting for cheaper spirit brands for their home consumption. “Domestic consumers were very affected by a lowered purchasing power—[in 2018] it was felt more because the economic crisis continued and so purchasing power was even lower. We see that across all FMCG divisions, not only spirits. They are shopping more toward promotions and are less loyal to brands. If we take the whisky category, for example, there was a big shift back toward the value-for-money brands, which are the lower-end brands, and their market share increased,” he explains.

The way 2019 has been going so far, it seems the problems of low domestic purchasing power and the decrease in the numbers of high spending tourists visiting Lebanon will continue to plague the country’s spirits distributors. They will have to adapt and innovate to keep growing their businesses.

February 19, 2019 0 comments
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Climate changeCommentEconomics & Policy

Seeking climate consensus

by Mary Awad Menassa February 19, 2019
written by Mary Awad Menassa

The Paris Agreement, adopted in early 2016, aims to reduce the global man-made emissions that are trapping heat in the atmosphere, causing a cascade of extreme weather events due to variations in temperature. The agreement sought to keep the increase in global average temperature well below 2 degrees Celsius, while attempting to limit it to 1.5 degrees Celsius.

Global temperature increase will alter climatic conditions differently in every part of the globe. In Lebanon, climate change will mean less snow, more droughts, desertification, reduced agricultural productivity, less precipitation, and the re-emergence of certain infectious diseases. Some of these climatic events are already being witnessed: flash floods interrupting commutes, and hail as large as golf balls breaking windows like a scene from The Day After Tomorrow. To ensure preparedness for these extreme events, the Paris Agreement also mandates fast adaptation in order to increase the resilience of communities. For Lebanon, this translates into cultivating resilient crops and improving infrastructure to absorb high levels of precipitation and increase protection in the event of sea-level rise.

What does the fight against climate change look like today, three years after the Paris Agreement was adopted? The global system to lower emissions is composed of bottom-up national targets, called nationally determined contributions (NDCs), submitted by every country around the world. The aggregate effort of these targets is supposed to achieve the Paris Agreement temperature goal. The legal-bindingness of the NDC kicks in with the ratification of the Paris Agreement; 184 out of 197 countries have ratified, which shows a strong global movement. However, 13 countries are still behind, and Lebanon is one of them.

More commitment needed

For now, however, the NDCs, which were submitted in 2015, will not—if met—achieve the goal of the agreement. Instead, the sum of all NDCs fails to meet the temperature goal, keeping the world on track toward dangerous climate change. The  solution to this gap is an ambitious update of the targets by 2020, a notion very much present at the 24th Conference of Parties (COP 24), which included representatives from each involved country and took place in Katowice, Poland in December 2018. Political dialogues revolved around a call for action to step up and contribute to the solution more seriously, which is likely to remain the main topic of discussion until 2020.

The two snowy weeks in Poland also involved the conclusion of a three year-long mandate to deliver the Paris Rulebook. If the Paris Agreement was a machine, the rulebook would constitute its operating instructions. Consensus was reached for all countries to periodically and transparently communicate NDCs, report on their progress using the same set of guidelines, provide information on support, and establish a mechanism for review. This is designed to improve the accuracy and understanding of the NDCs’ cumulative impact, which will give the clear signal for countries to further reduce their emissions.

Where does Lebanon stand in all this? For now, it is on track. Lebanon submitted its NDC in September 2015 after a group effort from line ministries. The government pledged to unconditionally reduce its emissions by 15 percent by 2030, as well as generating 15 percent of the power and heat demand via renewable energy sources, and reducing the power demand by 3 percent through energy efficiency measures. Regarding adaptation actions, Lebanon aims to increase the resilience of forests and crops by preventing forest fires and establishing an early-warning system for pests and climatic conditions. Moreover, as a water-stressed country, Lebanon’s NDC prioritizes water management. An inter-ministerial committee responsible for the follow-up of the NDC’s implementation, linkages, and needs has been formed and will start its work in 2019. When it comes to reporting information related to climate efforts and impacts, Lebanon has regularly submitted the required information. One part of the rulebook adopted in Katowice updated the reporting guidelines by which countries must abide, and will come into effect in 2024. The Ministry of Environment is preparing itself for the new guidelines with upcoming projects that are heavily focused on data, and its role in improving decision and policy making. Moreover, the government signaled its NDC update by 2020 in then-Prime Minister-designate Saad Hariri’s speech to the Virtual Summit of the Climate Vulnerable Forum, of which Lebanon is a member, in November 2018. The work toward making Lebanon’s NDC more ambitious has been initiated and will conclude by 2020. Taking this process one step further, the Ministry of Environment is drafting Lebanon’s 2050 low emission development strategy, to direct institutions and the private sector toward low carbon solutions in the long-term.

Lebanon will heavily depend upon international finance to implement its NDC and build sustainable and resilient infrastructure, institutions, and economy. Climate change solutions are day-to-day solutions: clean electrification, efficient transport, readiness to disasters, and resilient agriculture. Strong financial support promises from donors are not quite there, but even so, Lebanon still has a long way to go to absorb the upcoming support in order to implement its NDC by 2030. Since Parliament received the Paris Agreement ratification file in August 2016, it took two years to get the approval of three committees, and it is still not on the general assembly’s agenda to this day. The failure to ratify swiftly will get in the way of receiving support and could halt climate coordination and planning. 

A concentrated effort

Fighting climate change in Lebanon requires the prioritization of climate issues, and for the links to sustainable development to be visible to the country’s  leadership. Only once it is realized  at a high level that climate change is a multiplier of Lebanon’s challenges—be it geopolitical, economic, or environmental—will it be successfully mainstreamed in decision making. Lebanese institutions are requesting international finance, but climate support is becoming contingent on capacity retention in the Lebanese administration, swift implementation, and willingness to legally and institutionally reform. Moreover, the investment risk for renewable energies is still too high for the private sector to engage with on its own. The bottom line is that Lebanon needs to be ready to absorb the received support in an efficient and transparent way.

The implementation issue holds true for many countries; abiding by the Paris Agreement and its rulebook can only succeed with real, tangible emissions reduction and adaptation to the inevitable impacts. There are some promising signs, for example, the price drop for renewable energy technologies has facilitated market penetration, and the clean energy share is growing. Unfortunately, the solutions are still developing disproportionately to the increase in the global level of emissions—which in 2018 was at an all time high. 

We face a deadline before climate change becomes irreversible, and with each scientific report published, that deadline is getting closer. The infrastructure is there: a multilateral agreement, country pledges, and a deadline. However, the climate change problem can only be truly solved with strong political will from every signatory state.

February 19, 2019 0 comments
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CommentEconomics & Policy

The Eastern Mediterranean Gas Forum

by Mona Sukkarieh February 19, 2019
written by Mona Sukkarieh

Energy ministers from Egypt, Cyprus, Greece, Israel, Italy, Jordan, and the Palestinian Authority took an important step toward establishing an Eastern Mediterranean Gas Forum (EMGF) on January 14, in Cairo. According to the declaration that followed the meeting, the EMGF will, among other things, assist in the creation of a regional gas market, ensure the security of supply and demand, optimize resource development, facilitate the use of existing infrastructure, and build new infrastructure, if necessary.

The forum’s raison d’être is regional energy cooperation. Almost ten years to the day after the announcement of the discovery of the Tamar field in Israel (January 17, 2009)—the first major gas discovery in the Levant Basin—it has become increasingly clear that regional cooperation is needed to make the most of the region’s resources.

The Eastern Mediterranean’s gas potential is promising. Besides Egypt, the countries in the region face challenges to exploit their resources. First, these resources are mostly offshore, in deep and ultra-deep waters. When found in commercial quantities, their extraction is expensive. Second, the relevant infrastructure to monetize these resources barely exists (outside Egypt). And if this were not enough, the geopolitical risk is high due to a number of factors: conflict in Syria; terrorism; the Cyprus problem; sour relations between Cyprus and Turkey; a constant state of tension between Lebanon and Israel; and deteriorating relations between Turkey and Egypt, and between Turkey and Israel. In 2018, we saw that heightened political tension in this part of the world could quickly evolve into a confrontation, when Turkish warships prevented a drillship from reaching its drilling target in Block 3 of Cyprus’ Exclusive Economic Zone (EEZ).

These challenges largely explain why a number of gas fields in the region have not been developed yet. One way to overcome these difficulties is through regional cooperation, and this is why the announcement of an East Mediterranean Gas Forum is a significant development.

The EMGF will be based in Cairo and will be open for other Eastern Mediterranean countries to join, provided they share the forum’s interests and objectives, and the founders of the forum accept their membership.

Besides Syria, which is still struggling with its civil war, there are two notable absences: Turkey and Lebanon. The presence of Israel in the EMGF is seen as a barrier to Lebanon’s involvement, while poor relations between some of the EMGF founding members and Turkey was another rationale for the forum, beyond energy cooperation. Each of these countries has perceived reasons to complain about Turkish behavior recently:

Cyprus

In addition to the longstanding and unresolved Cyprus dispute, Ankara and Nicosia have been at loggerheads over exploration for hydrocarbon resources in the Cypriot EEZ. Since 2003, Turkey has denounced all the maritime border agreements signed by Cyprus with its neighbors and lobbied these countries to reject them on the grounds that: (1) the current Republic of Cyprus (RoC) does not represent Cyprus as a whole, and thus cannot sign international agreements on its behalf; and (2) that islands should not have the same capacity to generate maritime zones as other states. (Turkey does not recognize that islands should have equal rights in generating maritime zones and claiming full-fledged EEZs.) Turkey, therefore, claims that certain parts of the Cypriot EEZ fall within its continental shelf or under the jurisdiction of the Turkish Republic of Northern Cyprus.

All this explains why Ankara rejects exploratory activity in the Cypriot EEZ. Since 2008, it has made a point to monitor, and sometimes harass, surveyors and drillships conducting operations in Cypriot waters. On at least two occasions, it went as far as blocking their work. Turkey is also threatening to conduct exploratory activity off Cypriot coasts. In addition, there are renewed calls in Turkey for the establishment of a Turkish naval base in Northern Cyprus to protect Turkey’s rights and interests in the Eastern Mediterranean.

Greece

Turkey’s relationship with Greece is similarly tense. Ankara has always pursued a policy of provocation in the Aegean, but President Recep Tayyip Erdogan has taken it to another level, with frequent confrontations at sea, repeated violations of Greek airspace (an incident in April 2018 claimed the life of a Greek pilot), and renewed claims to Greek islands. In his first visit to Greece as Turkish president in 2017, Erdogan declared that the 1923 Treaty of Lausanne must be reconsidered—in effect calling for a redrawing of the borders with Greece—and raised concerns about the Turkish minority in Greece.

Turkey also objects to Greece’s rights to exploit energy resources in certain parts of its waters far from the Greek mainland. Once again using the argument that islands’ capacity to generate maritime zones should be limited, Ankara reportedly tried to undermine Greece’s relations with Libya by claiming that Athens was encroaching on Libya’s continental shelf. According to Turkish media reports, the Turkish defense minister, Hulusi Akar, presented maps supposedly demonstrating this point to the Libyan government that ignored the influence of islands such as Crete (or Cyprus) on marine territory.

Egypt

The ousting of President Mohamed Morsi in 2013 severely strained relations between Egypt and Turkey. Erdogan in effect denies the legitimacy of the current Egyptian regime, arguing that it was established after a coup against a democratically elected president. In August 2013, Turkey called on the UN Security Council to impose sanctions on Egypt. Erdogan continues to express support for the Muslim Brotherhood, sometimes by making the Rabia sign (a hand gesture used to protest the violently suppressed sit-in at Rabia Square in Cairo) and never misses an occasion to call for the release of Morsi and all political prisoners in Egypt. Cairo views such statements and positions as a provocation.

Israel

The once strategic relationship between Israel and Turkey has gradually deteriorated over time, particularly since Israel launched Operation Cast Lead against Hamas in Gaza, in 2008-2009, which was followed by the Mavi Marmara aid flotilla incident in 2010. Relations between the two countries never fully recovered, even after the US-brokered Israeli apology to Turkey in 2013 and the normalization of relations in 2016 (partly motivated by energy cooperation).

The situation deteriorated again in 2018. Last Spring, Israeli forces used live fire and killed over 100 Palestinians in Gaza who were protesting the US decision to move the American embassy to Jerusalem. Erdogan accused Israel of carrying out genocide and expelled the Israeli ambassador from Turkey, withdrawing the Turkish ambassador from Tel Aviv. He later accused Israel of apartheid. This series of statements and actions were viewed as deeply hostile by the Israelis.

It is in this regional context that the East Mediterranean Gas Forum was established. On the one hand, there are offshore resources that—until now, at least—require cooperation to facilitate their exploitation, and on the other, we see renewed geopolitical rivalries in the Eastern Mediterranean.

If we take the second of these considerations, the geopolitical context, it is clear that this alignment is primarily in reaction to what many of the founding members perceive as aggressive Turkish behavior over the last few years. Many Lebanese are ignoring this dimension and feel that this forum, and this alignment, is directed against them.

This Lebanese misreading of the situation would not be an issue if it did not threaten to influence policy making. The first reaction, expressed by certain media and public officials was seemingly knee-jerk, dismissing the forum and its member states, and suggesting we pursue a parallel track with those countries that were not present—Turkey and Syria—in addition to other countries in the region, such as Iraq. For some, this was an impulsive reaction to being left out, leaving little room for rationality. But for others, this was seen as an opportunity to push forward an “isolationist” tendency that advocates that Lebanon should look east for friends and partners, limiting their options elsewhere. The announcement of the EMGF provided them with additional arguments to support their case.

A more thought out approach would be to strengthen relations even further with all regional players, whether in or outside the EMGF (with the exception of Israel, for obvious reasons). A small country like Lebanon does not have the luxury of picking and choosing its friends, with an enemy state to the south, and a Syria mired in conflict along the rest of its border. Membership of the EMGF and good relationships with those outside the forum are not mutually exclusive. Cyprus, Egypt, and Turkey are all very relevant to, and potential partners in, Lebanon’s future gas ambitions, if commercial quantities are found.

For those tempted by an isolationist approach, it is also good to keep in mind that the EMGF is not a closed club either. It is open for other countries in the region to join. It is conceivable that a country that is not a member today, like Turkey, could join it in the future, particularly if a solution is found for the Cyprus dispute (negotiations are expected to resume this year) or if it adopts a less antagonistic approach toward other member states. In this case, would the “non-EMGF club” that some are calling for in Lebanon not look very feeble? In 2013, then-energy minister Gebran Bassil told Middle East Strategic Perspectives (which this writer cofounded) that: “Unlike Israel for example, Lebanon does not face a regional boycott, and we’re not isolated from supply routes to Europe.” Six years later, Israel appears to be less isolated than the minister thought. The challenge is to avoid finding ourselves as isolated as Israel once was; keeping our options open is our best route forward.

Troublesome logistics

Another reaction to the EMGF announcement, expressed last month by then-caretaker energy minister, Cesar Abi Khalil, was to brush off the forum, which has the potential to facilitate the development and monetization of the region’s resources. “Lebanon is not worried about exporting its gas … We have many options to monetize our resources,” Abi Khalil said in an interview on LBCI on January 15, citing the local market, the state’s share of produced hydrocarbons, and possible export routes. Lebanon, he said, could be linked from the north to Turkey and on to Europe through the Arab Gas Pipeline (though the pipeline extension to Turkey through Syria is yet to be built), and from the south to Egypt and its LNG plants, via the Arab Gas Pipeline as well. He also cited a third export option, involving a possible offshore pipeline to Turkey.

However, it is not certain at all that the local market alone would justify developing future resources. This means that export routes are likely needed. Second, the export ideas Abi Khalil listed are only possible options at this point. And they all come with a host of challenges: from prices and commercial viability of some of the projects he mentioned, to political and security risks which might hamper the development of some other projects, and—if we are able to overcome that—there may be issues with the capacity of the infrastructure we are eyeing. These are, in fact, the same challenges that are present in almost every country in the Eastern Mediterranean (save for Egypt), and which largely motivated the institutionalization of regional cooperation, under the EMGF, in an effort to overcome these challenges.

Clearly, the announcement of the East Mediterranean Gas Forum has caused some confusion in Lebanon as to how to deal with being left out of this new regional configuration. It is important to keep in mind that, if there is an alignment, it is not directed against Lebanon. More than any other member state, Egypt has the possibility to reach out to Lebanon. Egypt is the key player in this new configuration, and, as an Arab country that maintains close ties with Lebanon, it can play an important role in reassuring the Lebanese about the project while also seeking to strengthen prospects for energy cooperation between the two countries.

February 19, 2019 0 comments
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CommentEconomics & Policy

Currency conundrum

by Talal F. Salman February 19, 2019
written by Talal F. Salman

Two major topics are keeping economists, politicians, academicians, journalists, and others busy nowadays. The first topic is the real value of the Lebanese lira and if the nominal rate must be de-pegged or moved to a lesser pegged value in order to relieve us from our current monetary, economic, and financial misery. The other topic is how Lebanon should protect its currency and economy in the future should petroleum profits start flowing, since any petroleum related legislation we draft today will need to protect us from the famous Dutch disease. The issue that most do not realize is that those two topics are very much intertwined, because Lebanon is already suffering from Dutch disease. What we need to do is to escape a worsening of the disease. The solution is definitely not devaluation; we should rather use the lira to build the proper platform for economic growth.

The Dutch disease

The discovery of the elephant natural gas field in Groningen north of Holland in 1959, changed the lives of Dutch citizens forever—massive amount of revenues started flowing into the coffers of the government as well as into the economy. However, in return, the Dutch witnessed a collapse in investments, an unemployment hike, a drop in industrial exports, and a drop in purchasing power, despite the appreciation of the Gilder, its currency at the time. What happened?

The sudden increase in riches caused a sudden increase in spending by both the private sector and the public sector, whose expenditures reached 50 percent of its GDP at the peak, one of the highest in the world. This increase in consumption led to an increased demand for tradable goods and services, as well as non-tradable goods and services.

Tradable goods and services are those that can be purchased and transferred between countries without barriers such as transport costs or trade restrictions, and as a result their prices become global and not easily influenced by the demand or supply of one country. This means any society with sudden increase in wealth would consume more tradables regardless if they are produced locally or internationally. Most tradables are food products, manufactured goods, metals, stones, petroleum products, and some global services, such as commercial travel and corporate financial services.

Nontradables are not economically feasible to consume across borders, are usually retail and wholesale sectors, restaurants, hotels, local transport, warehousing, communications, public utilities, real estate, retail banking, and most personal and commercial services. This means that even if the price of a haircut, an apartment’s rent, a meal, a phone bill, or ATM fees are cheaper in Budapest, it is not economically feasible for a resident in Amsterdam to travel to Budapest every time she needs to get a haircut, eat, make a phone call, withdraw cash, or sleep.

This also means that the increase in demand on those goods raises their prices locally in Holland, while the price of tradables (local and foreign made) remain the same, since their global nature will not be impacted by the increase in demand by the Dutch.

The resulting relative difference in price between tradables and nontradables means two things:

First, the increase in the price of nontradables will lead to more profits in those sectors, and to an increase in the wages of the workers, which will attract capital and labor on the expense of manufacturing and agriculture (the major tradables).

Second, this relative difference in price leads to an appreciation of the real value of the currency, which leads to an increase in the price of exports for the country’s trading partners.

This is what happened to the Netherlands, colloquially known as Holland, as demand increased locally due to petroleum revenues, leading to an appreciation of the Gilder and the collapse of its pride sector, which was manufacturing. Holland realized the challenge, which became known as the Dutch disease, and learned a lot from it. Its experience set the stage for a new pedagogy in economics and revenue management of natural resources. Today, the Netherlands is one of the most successful economies in the world, while petroleum income represents less than 1 percent of the total government revenues.

Dutch disease, therefore, is a disease that is suffered by any economy that relies on foreign currency inflows into the economy, and which is directed toward consumption rather than investment, resulting in an overpriced services sector (electricity, water, restaurants, communication, transportation, real estate), a drop in its exports, and its industries and farmers suffer the most … welcome to Lebanon. The foreign currency inflows can result from the sale of natural resources, but also from remittances or foreign aid—the result is the same.

The Lebanese lira

The Lebanese economy is always characterized as a rentier economy that ignores productive sectors and revolves around real estate and banks. This is true, but it is not only the result of corruption, wrong economic policies, and accumulation of debt over three decades, but is also a disease that has been around for more than half a century, and which has a cure, and that cure is not devaluation.

When Lebanon decided to peg its currency in the early- to mid-1990s, it was a wise choice economically for a small open economy with free movement of capital. The confidence that the peg provides attracts investments and foreign deposits, however, to avoid the curse of those flows, they should have been directed toward investment in industry, agriculture, and infrastructure, and not consumption and real estate. The lira becomes subject to massive pressures such as the ones we are witnessing today, when those accumulated flows start losing confidence in the financial and economic model of Lebanon, and start exiting. It is true that Banque du Liban (BDL), Lebanon’s central bank, has ample ammunition to defend the lira but we need to ask ourselves: How good is our lira if no one wants to exchange goods and services with us? Turning those flows into 20 billion dollars of imports yearly is the problem, not the exchange ratio; instead they need to be directed to become a powerful force in creating economic growth, employment, and reducing poverty.

Restructuring the Lebanese model

The necessary steps to restructure the Lebanese economic and financial model is to restructure the way we handle those large deposits in the banking sector so they can be a blessing and not a curse:

1) Reduce the deficit of the government immediately through the known solutions of reducing corruption and wasteful spending, reforming the electricity sector, and collecting taxes better. The objective is not only to reverse the debt dynamics and create fiscal space to improve public services, but also to reduce credit risk and consequently reduce the cost of borrowing, so the private sector is incentivized to increase the size of its operations, and as a result its exports and the taxes it pays to the government.

2) Urgently invest in infrastructure to support economic growth and with the least amount of borrowing possible. Off-balance sheet concessionary project financing should be available through CEDRE under PPP structures, and increased borrowing by the government should be avoided. Additionally, mutual funds could be structured, so all Lebanese depositors can participate in infrastructure investing and benefit from the resulting returns.

3) Urgent simplification of government procedures with Lebanon ranked at a pathetic 142 in the world in ease of doing business.

4) Master plan to seriously grow the agriculture and industry sectors and hence their exports.

Petroleum Lebanon

Lebanon is not facing the risk of catching the Dutch disease  should its petroleum exports begin, but it risks the deterioration of its Dutch disease into something worse. Today the country is characterized by a large financial sector full with lazy deposits, and a public sector filled with corruption that leads to poor government services, which in return leads to low investments, low economic growth, small economy, high unemployment, and high income inequality.

The steps above are necessary to get out of our current failed economic and financial model and to get ready for a petroleum Lebanon or else we will fall into the resource curse where things will get much worse and we will suffer like Nigeria, Angola, Iraq, and Venezuela. Avoiding the resource curse lies in the governance and revenue management of the petroleum sector, where countries such as Botswana, Chile, and Norway turned their diamonds, copper, and oil into an accumulation of wealth.

The best way to manage petroleum revenues is to separate them from current spending, especially in countries with weak governance such as Lebanon, and to turn this newly generated financial wealth into three types of capital: human capital through investment in education and healthcare; infrastructure capital, which serves an economy for decades of economic transformation; and financial capital through diversified savings. This method of investing petroleum wealth benefits both the living and future generations, directly and indirectly. The future generation will have a reservoir of education, health, infrastructure, and cash.

The Lebanese Sovereign Wealth Fund has been designed as such to protect the future income generated from petroleum activities by separating this income from current spending, and instead channel it into human capital and productive sectors, in a conditional and forethought way.

We are now left with the duty of real reform and restructuring of our economy and public sector, before a new disease is named after Lebanon.

February 19, 2019 1 comment
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CommentEconomics & Policy

Advocating true wisdom

by Thomas Schellen February 19, 2019
written by Thomas Schellen

In Executive’s view of things that happened locally in January 2019, three incidents testified to the presence—and the perils of—irrational expectations. Such expectations actually work in two directions, with different attendant risks: The first direction is that of excessive enthusiasm, very well-known to the economically literate from the last global exposure to “irrational exuberance,” in the build-up to the Great Recession of 2007 —2009. The second, and even greater, danger of irrational expectations comes from the negative: the numbness of despair, the rage induced by fear, and, worst of all, the animalistic blindness of mindless panic.

No one should and nobody—unless working with an ulterior motive—would pretend that there is any serious chance of irrational exuberance when contemplating the future of the Lebanese economy at the start of 2019. Neither does the country today harbor grand messianic expectations of another national political savior, as a conflict-fatigued people did in Lebanon some 27 years ago, when the national perspective shifted from the immense exhaustion of internal conflicts to the enthusiasm of Rafik Hariri’s reconstruction drive and Horizon 2000 plans. The swing from desperation to confidence at the time was memorably reflected in the successful rescue of the Lebanese lira and its shift from radical depreciation before December 1992 to controlled stability ever since the mid-nineties.

While it would be a waste of time to warn of irrational exuberance in Lebanon at the threshold of what could be a new horizon for the 2020s and beyond, it seems most appropriate and prudent to regard the risks of irrationally negative expectations. Gloomy sentiments are ever-present in the country today, as demonstrated and exacerbated last month by the Arab League Economic and Social Development Summit (AESD Summit), the continuing lack of government and national vision, and the downgrade of the sovereign risk. Containing the spread of irrational negative expectations is a worthy cause, and one that might entail an immunity-building exercise in rational uncertainty.

As a mental approach, rational uncertainty proposes using the toolset of rational evaluation rather than succumbing to ideological gloom, willful propaganda or, God forbid, blind panic, when contemplating the radical uncertainty of Lebanese existence.

The rational uncertainty approach contains two elements: First, the acknowledgement that uncertainty is the only certainty we can ever truly have. Uncertainty cannot be eliminated; it is what remains once we strip off the mental assumptions that one might predict the future from the past or extrapolate unknown pasts from the present. Uncertainty rules universal, and this means that no one can reasonably argue that nothing about the Lebanese state could ever get worse, or that nothing in Lebanon could ever improve.

Second, we should remind ourselves that there is always more than one possibility ahead. It is our rationality that allows and maintains our determination toward building a better future, rather than falling into depression over the possibility of a worse one.

The first and, theoretically, most monumental agenda item for Lebanon last month was the hosting of the AESD Summit. This event was an operational and organizational victory but, in Executive’s analysis, not a significant win.

The not inexpensive gathering produced nothing glorious and report-worthy in terms of either Arab regional progress to a new and better performance of national economies or decisive strengthening of under-designed and overextended social safety networks in Arab League member states. Nor did the assembled dignitaries leave most Lebanese with increased hopes for more regional economic growth through better trade and customs agreements, or for Arab-owned solutions to the Syrian refugee situation and the reconstruction challenges posed by devastation in certain Arab countries.

It is no surprise then that this AESD Summit was barely mentioned in the international press, nor that the only local benefits noted by Executive editors were temporary relief from Beirut’s insane traffic and joy to those children who were given time off from school.

From a local vantage point, it can also be noted that some of the desired elements of the summit—like the presence of Arab heads of states—were not the decisive missing factors that prevented this summit from being successful. In fact, when examined with the toolkit of rational uncertainty, the summit was not hopeless. Uncertainty should allow for the possibility that future efforts for economic and social development in this region still may succeed, just as rational evaluation (based on speeches and closing communiques) finds that the meaningful elements missing from the AESD Summit were analysis, cohesion, debate, compromise, transparency, and a will to change.

The second report-worthy event, in the perception of Executive editors, was the loss of a bet. The substance of this bet, made on the first workday of 2019, was whether government formation would happen before or after January 19. The wager was modest, a stein of draft beer at a local resto pub, which by its diminutive size reflected the sad fact that no serious bet on Lebanese political sanity appeared viable to any of us at Executive. Needless to say, the bet that cabinet would be formed in time for Beirut to host its first regional political summit on Arab League level in almost 17 years was lost.

However, it must be noted here that both bettors felt like winners, because they enjoyed the settling of the bet in the affable company of friends—Lebanon was the real losing party. Executive’s reluctant conclusion was that making any bet and wagering any hope on a moment when strategic political insights would be delivered to political players is not within rational reach.

This suggests for the medium term (even after the surprise cabinet formation on January 31), it is not advisable to have exuberant expectations of an efficient government or reform process. Yet again, the agenda of proposed reforms (see story 20) and the—ever so fanciful and outsourced—national economic vision for Lebanon 2025 and 2035 deserve the benefit of the doubt. Executive is certainly determined to stay on the reform and development ball—including taking our own advocacy and economic plan forward through inclusive discussion and rational passion—in 2019. We will be relentlessly expanding our efforts to support and augment whatever vision we find credible, regardless of its author’s name or affiliation (currently at 230 measures). 

A third event of note on the Lebanese stage of puerile politics reminded Executive editors of the dramatic power of ill-spoken words. Anyone in a stable relationship is—or at least should be—aware that the effort to repair the impact of a carelessly uttered affront to a loved one can be a hundred times as arduous as the effort of uttering the stupid and damaging phrase.

In this regard, modern finance appears to be just as sensitive and vulnerable as the—infinitely more valuable—relationship of stable trust and love in a married couple or between a good leader and the people. Case in point: the ominous two words—“debt restructuring”—that reminded Lebanon and its international partners last month of the importance of sticking to a careful approach of rational uncertainty. At least that was the translation of a comment by Lebanon’s then-caretaker finance minister Ali Hassan Khalil that appeared in English-language media, causing frenzied trading for a period that was short but still far too long. It even appears to have caused panicked comments by normally cool financial observers, seen, for example, in the atypical quick formulation and issuance of a downgrade in Lebanon’s sovereign rating by respected international agency Moody’s.

This serves to emphasize how the power of a bad word in such vulnerable times could generate very bad outcomes, if the country’s internal and external markets and investors succumb to irrational fears instead of maintaining a cool, rational assessment of uncertainty.

An approach of rational uncertainty may even be prudent when looking at the state of the world. It certainly seems appropriate in considering our Lebanese state—which, nota bene, at 99 years of age still has some charms, and not a little potential.

February 19, 2019 3 comments
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Since its first edition emerged on the newsstands in 1999, Executive Magazine has been dedicated to providing its readers with the most up-to-date local and regional business news. Executive is a monthly business magazine that offers readers in-depth analyses on the Lebanese world of commerce, covering all the major sectors – from banking, finance, and insurance to technology, tourism, hospitality, media, and retail.

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