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The real estate bubble has burst

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In the absence of hard data, anecdotes and speculation become the basis of analysis. Take, for example, the question of whether or not there is a real estate bubble in Lebanon. From the results of a Google search for the terms “Lebanon real estate bubble,” the sector seems like it is in real trouble. The alleged bubble has a Wikipedia entry, and plenty of news reports — both local and regional — over the past couple years have claimed that disaster is on the horizon. Some even drew parallels between Lebanon and the United States circa 2007 (when banks in that market were handing out housing loans like candy to unqualified borrowers, who unsurprisingly began to default en masse, decimating both the US housing market, and the global financial sector in one fell swoop).

The undeniable truth is that between 2005 and 2010, the prices of built property in Beirut — and, anecdotal evidence suggests, the rest of the country — rose significantly. Exact numbers are difficult to find, but current asking prices in Beirut have not changed much since 2010. The average Lebanese young couple looking for their first home cannot dream of raising kids in the capital. The latest price-per-square-meter for residential units in the ground floor of a Beirut apartment building ranges from $2,180 surrounding the Beirut Arab University in Tarik al-Jadideh to $8,500 along the coast in Manara, according to Ramco Real Estate Advisors, which has been releasing price and units-under-construction data since 2013. Many advocates of the bubble theory point to these exclusionary prices as proof they are correct, although this aspect of the bubble argument often rings more of ideology than economics. Developers with exposure to Beirut — such as Michel Georr, CEO of GCI — argue London and New York (or any other major global metropolis) are similarly exclusive and that the scarcity of available land in Beirut (with a surface area around 20 square kilometers) means higher prices are normal, if not natural.

Bubble-backers pivot from Beirut prices to unsold units in justifying their cries of coming calamity. Again, numbers are elusive. Developers readily admit that sales have taken a serious hit since 2011, but quantifying this is difficult. Masaad Fares, president of the Real Estate Developers Association — Lebanon (REAL), told Executive in November 2016 that, a few years ago, he thought there were around 1,000 unsold units in the capital. However, he now estimates the total value of unsold units at between $3 and $3.5 billion (or around 3,000 to 3,500 units if the average new apartment costs $1 million, as Ramco reported in 2014). Both REAL and Banque du Liban (BDL), Lebanon’s central bank, conducted in-depth market studies on the subject, Fares said at the time, adding that the research will be available publically sometime soon. BDL did not respond to an interview request for this article. The Ministry of Finance published the number of real estate transactions, however, this figure includes property sales (residential and commercial) as well as inheritances, without any breakdown in figures. Further, “sales” are registered with the ministry when the built property is delivered, meaning that units “purchased” (i.e., buyer pays project owner) off-plan in a building that takes five years to be delivered can be recorded years after the physical transaction. Those caveats aside, 2016’s 64,248 transactions are down compared to the boom years (over 75,000 transactions at the peak in 2010), but still up compared with 2005 (48,847).

What’s in a bubble?

Real estate bubbles are inflated by unsustainable demand. Typically, economists blame bubbles on speculators. Speculation seems to have played a large role in the rise and rapid decline in prices in Dubai nearly a decade ago. In the US, it was arguably a mix of speculation and the abovementioned extension of loans to the unqualified (some of whom were also paying off multiple properties). When that demand disappears, prices plummet. Looking back on real estate market developments in Beirut over the past decade, it seems clear there was at least some unsustainable demand, even if it is impossible to pinpoint where it came from — speculators, Gulf Arabs turning a cold shoulder to Lebanon, Lebanese expatriates who saw wealth erased in the Great Recession, or some combination of the three. While asking prices in Beirut have only come down 1.8 percent according to the latest Ramco figures, developers are offering 20 percent discounts, the organization wrote in Executive at the end of 2016.

 Developers readily admit that sales have taken a serious hit since 2011, but quantifying this is difficult 

Georr, of CGI, says that the Beirut upmarket is certainly hurting. CGI — a real estate investment company founded by Mario Saradar in 1998, which counts Bank Audi, the country’s largest lender, as a 20 percent owner — recently delivered one of the capital’s more troubled assets — the three-tower Abdel Wahab 618 in Ashrafieh near the ABC Mall. Georr says that CGI has a set development model: identify land and strike a deal with the owner to purchase it on-option; draw up plans for a project and secure investors; seal the land deal once investors are lined up, with the land owned by a special purpose vehicle (an sal company with shareholders reflecting the project’s’ investors). He admits investors will have to accept a decreased ROI from what they signed up for on projects that are completed but remain unsold (he doesn’t divulge the exact ROI, but uses 20 percent as a theoretical example), and says a planned mixed-use tower in Karantina is on hold (CGI will sit on the land until market conditions make moving forward with pre-sales and construction more appealing).

The increasingly loud talk of discounts in Beirut suggest the bubble has burst, with a price correction of 20 percent or more in the capital — even if the only semi-official index, Ramco’s, says asking prices have barely budged. What remains unclear and largely un-indexed is the price situation in the rest of the nation.

Will the country collapse?

Assuming the bubble has now burst in Beirut, what will be the impact to the market overall and the country’s future? The quick answer: Who knows?

Since the slump began in 2011, BDL has issued several initiatives aimed at helping the sector. Perhaps the most welcome was a recurring stimulus package launched in 2012, with an initial amount of $1 billion. Not all of the stimulus money was utilized, and the remainder rolled over for another gross $1 billion in stimulus available for 2013. That stimulus money is still available, but the total amount on offer (not to mention the total amount deployed to date) is not published on BDL’s website. What BDL officials have said publicly is that 75 percent of the stimulus money went to housing loans. There are stipulations on these loans, however. They must go to first-time home buyers and come with caps that developers interpret as meaning the middle-income market. BDL loans are largely being used on properties in the range of $250,000-$350,000 — which is what many are building outside Beirut.

Sacrificing on margins

These housing loans are clearly not meant to help developers struggling in Beirut. For real estate companies with too much luxury stock on their hands, BDL offered to let banks restructure their debt with local banks (circular 135 of 2015). The circular laid out in detail what a hat-in-hand developer needed to do in order to renegotiate “a new repayment schedule based on the client’s cash flow” if the client had loans from more than one bank. The request for clemency requires that banks must have “Identified the weaknesses that led to the deterioration of the client’s financial situation and the way to address them.” Two years on, developers say the circular is all but unutilized (despite a sweetener allowing banks to take ownership of built property that they can keep for 20 years instead of the legal two), and, with buyers getting 20 percent discounts on listed apartment prices in the capital, one guesses refusing to budge on margins that grew a reported 400 percent between x and y might have been one of the primary “weaknesses that led to the deteriorations of the client’s financial situation.”

No one knows if developers with too much exposure to Beirut are on the brink of bankruptcy. What is even less clear is how first-time home buyers who bought outside of Beirut are faring after the price correction in the capital. Without solid figures on prices, or the number of outstanding loans, it is uncertain how many people now own property worth less than they paid. What is clear is that while Beirut may be left with urban scars from the boom years (the abandoned Bab Beirut project in the heart of downtown, for example), evidence to support the notion that Lebanon is on the brink of a civil war sparked by the popping of a real estate bubble is seriously lacking.


Growing pains

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As they campaign for re-election, our politicians are trying to capitalize on the economic mess we’re in, which they created. We need growth, the leaders of various parties keep insisting. We need jobs. We need support for the youth. Seriously? Do they have a target based on a comprehensive economic policy? Have they devised key performance indicators to measure progress toward that target? Perhaps our politicians should learn about inflation and fiscal policy before making decisions and promising a better future.

The new taxes agreed in mid-July prove that policy is one item absent from the government’s overcrowded agenda. The fact that there still isn’t a detailed list of which new taxes are coming even after cabinet endorsed them, proves these new revenue streams will not flow into a long-term vision for true economic revival. They’re opportunistic grabs at cash to appease voters before an election.

Political rhetoric aside, this country needs economic growth and a long-term economic vision — or it really does risk collapse.

Back in 1966, when Intra Bank crumbled, our banking sector didn’t come down with it. In fact, by May 1975 non-resident private sector deposits in Lebanese commercial banks had not only recovered from a brief fall immediately after Intra collapsed, but had more than doubled to around $554 million compared to the month before Intra fell in October 1966. If this memory is fueling hope among our politicians that we can weather any storm, they had better think again. Money meant to support militias during war will stay during a crisis. The non-resident deposits flooding banks’ coffers since 1992, however, are hard-earned savings that will disappear as soon as real country risk begins to manifest.

So what is growth? It’s the result of a properly functioning and sufficiently supported private sector. This month we highlight yet another opportunity for kick-starting growth in the local design sector. Our deepest pool of capital in the country is our talented men and women. Our designers need support. They need an ecosystem that can help them add value, scale, attract investment, and cement Lebanon as a regional design hub. We’ve missed so many opportunities, we can’t let this one slip away too.

Companies around the world have used design to create global brands worth hundreds of billions of dollars. Meanwhile, in Lebanon, we cannot even dream of birthing such a success if we continue pushing our talent abroad. We need a realistic and achievable economic vision. And we need it fast.

The rumors were true

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In late July, the latest round of American legislation targeting Hezbollah arrived, despite Lebanese government and banking officials downplaying rumors of it just a few months ago, as Executive reported. The Hizballah International Financing Prevention Amendments Act would supplement a 2015 law curbing the group’s access to banking systems, and is the latest legislative effort to freeze Hezbollah’s finances.

The United States alleges that Hezbollah operates global terrorism networks and engages in criminal activities, including drug trafficking and money laundering. The Party of God, said President Donald Trump in remarks after a White House meeting with Lebanon’s Prime Minister Saad Hariri on July 25, “is a menace to the Lebanese state, the Lebanese people, and the entire region.[…], threatens to start yet another conflict with Israel, …[and] is also fueling the humanitarian catastrophe in Syria.”

The Americans seem to be ratcheting up the pressure on Hezbollah through law enforcement actions and vis-á-vis Iran. But it is Lebanon’s banking sector, and thus its economy, that has local government and banking officials concerned. The forced closure of the Lebanese Canadian Bank in 2011 is a not so distant memory and the question now is what will President Trump, whose behavior is viewed as erratic and impulsive, do with regard to this “menace”?

Tightening legislation

The new legislation arrived on Capitol Hill as an amendment to 2015’s Hizballah International Financing Prevention Act (HIFPA). HIFPA was aimed at curbing Hezbollah’s ability to access the international financial system and disrupt foreign financing to Hezbollah, that the Americans believe flows through Lebanese banks.

The amending legislation would further restrict Hezbollah’s ability to raise funds and recruit, increase pressure on banks to not do business with Hezbollah, and punish foreign states for supporting Hezbollah. The legislation was only introduced to House and Senate committees at the end of July, but in its current form it gives the president wide latitude to sanction any person or entity he deems supportive of Hezbollah, financially or otherwise, to deny individuals entry to the United States, revoke already-issued travel permits and visas, and to sanction key figures within Hezbollah, or anyone deemed affiliated to Hezbollah.

It is not clear when Congress will vote on this amendment and we do not yet know what sanctions might result. If the legislation is passed and signed into law by President Trump, his administration could issue sanctions against Lebanese financial institutions.

The notion stokes fear of past American actions, as one vice president of investment banking at a local bank, who spoke on condition of anonymity because he was not authorized to comment publicly, wrote to Executive in an email. “Other than the effect of lower confidence in the banking system, which would probably be external rather than internal, will we have more cases like the Lebanese Canadian Bank which was closed following similar sanctions?” A senior official at Lebanon’s central bank (Banque du Liban), who also insisted on anonymity, told Executive in June  that he feared a unilateral severing of banking relations. “What really scares me is banks and central banks chickening out. When you’re hit with sanction after sanction they begin to ask, ‘Why should we do business with Lebanese banks?’”

When it comes to Hezbollah’s finances, the United States believes the group manipulates the international financial system to move money between Lebanon and other countries. Hezbollah uses that money, the US alleges, in part to finance its military excursions in Syria, its terrorism activities globally, and to fund its political agenda and social welfare programs at home.

In 2015, Hassan Nasrallah, Hezbollah’s leader, vehemently denied American allegations that the organization was awash with drug money and dared the United States to “show me the evidence.” In another speech in June 2016, Nasrallah said the organization was financed purely through the aid of its patron, Iran. “Hezbollah’s budget, its income, its expenses, everything it eats and drinks, its weapons and rockets, come from the Islamic Republic of Iran,”  he said, according to remarks published by Al Arabiya English.

Building pressure

Despite Hezbollah’s denials, American law enforcement have tied the group to illicit activities. In February 2016, the US Drug Enforcement Administration (DEA), alongside European counterparts, dismantled a global drug trafficking and money laundering network that it alleged was responsible for washing hundreds of millions of dollars in drug proceeds overseen by Hezbollah, as Executive reported. And this past June, it was Hezbollah’s External Security Organization (the Islamic Jihad Organization, a named entity in the proposed legislation) that the US Justice Department accused of backing two naturalized American citizens plotting terrorist attacks on US soil.

The US might also be attempting to pressure Iran and build international support for action against Hezbollah. On July 19, US Ambassador to the United Nations Nikki Haley accused Hezbollah of a weapons buildup on the border with Israel, according to an AFP story cited in Al-Monitor. The ambassador’s remarks followed a resolution by Congress in late June urging the European Union to designate Hezbollah, in its entirity, as a terrorist organization. In 2013 the EU designated Hezbollah’s military wing a terrorist entity, but not the organization as a whole.

Also in June, the US House of Representatives introduced the Iran and Hizballah Western Hemisphere Prevention Act of 2017. The bill is a continuation of the policy set in 2015’s HIFPA law, and builds on a 2012 law limiting Iran’s ability to penetrate into the Western Hemisphere. In late July, congress voted for new sanctions that would rollback the financial relief Iran received as part of the nuclear deal it agreed to during the Obama Administration. With billions of dollars from sanctions relief, a late-July statement from the House’s Foreign Affairs Committee read, “Iran is strengthening the terrorist group Hezbollah.”

These developments came as Hariri arrived in Washington for his meeting with Trump. Following their meeting, Hariri said Lebanon and its central bank had always cooperated with American sanctions imposed on the country’s banks, and always would. The US president, for his part, said he would be deciding on his anti-Hezbollah strategy very soon. And so we wait for the law and for the President’s answer.

Moving parts

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Beirut Mayor Jamal Itani offers two words when asked about his vision for city spending: “investment projects.” During a brief interview in late July, Itani explained a variety of the city council’s plans, from making Beirut more pedestrian-friendly to balancing private and public interests along the city’s contentious coast.

E   What is the city’s financial situation?

When we took over [on June 1, 2016], we got a statement from the central bank [Banque du Liban] saying that, in the account, there’s in the range of $495 million.

E    Most will be spent on…?

Investment projects, [for example the council recently decided to redevelop a plot of land in Medawr] plot 385 is a big plot owned by the municipality. Part of the land is occupied by the municipality, part leased to different entities, and the purpose is to redevelop this piece of property. It’s approximately 80,000 square meters of property that is [in a] very important location at the entrance to Beirut; we believe that this property needs to be developed and can have a great return for the municipality. Financial return.

E   Will it be developed as a residential or mixed use project?

Mixed use.

E   What is the size of the city’s land bank?

[Exhales and smiles] We have good land. Some of it is misused. Some of it is used by other entities. We’re trying to get it all back and use it and invest in it.

E   Speaking of land, the council decided to cancel the purchase of privately-owned plots along Ramlet al Baida, that the past council was rumored to be set to buy for $130 million. Why?

We believed that the price that was agreed on was unfair to the municipality. This is why we cancelled it. It should be much lower. And before we move on, we have the coastal line of Ramlet al Baida [where we have] identified sites that we want to protect and prevent any construction on. So, we took two decisions; one decision is to put all those properties, all the area [from the Movenpick Hotel to the Summerland Hotel], under study. And this is a long process.

E   It will take two years, correct?

It takes a year just to put a lien on the property. That’s why we took another decision that those properties will be publicly used, so the owners can’t make any application even for a construction, or put [up] any other structure.

E   So, it will be strictly public use from now.

Well, they are publicly used now, and this will prevent the owners from starting any development during the course of the study. They won’t even be able to apply for building permits.

E   What is the purpose of the study?

Two parts, the legal part and the engineering part. We want to make sure that the coastal line will continue to be for the people and no construction will happen there. That’s the main purpose. In order to do that, we want to identify each property and see how much of the coastal line is part of this property, what can we do to make this coastal line free of any construction.

E   The coastal line is defined in the law as the furthest point onshore that the waves reach in winter. On the sea-facing side of the coastal line, no ownership of land or construction is permitted. Some of the privately-owned Ramlet al-Baida plots are completely within the coastal line, while others are large and the coastal line might cut through the plots, correct?

Yes.

E    Cutting the sand in two. What does this mean for the beach resort, once branded Eden Rock ,near the southern limits of the city?

This is a special case. The President of the Republic has requested an investigation into the project, it’s in the hands of the Shura Council. We have to wait until their decision.

E   Why not include Dalieh? Your predecessor told Executive that he was in contact with the owners and would “soon” announce a development project in that area.

We’re not in talks with the owners. We’re going to take a decision after we make sure we identify all of the properties … The whole coastline of Beirut will be under study. That’s the next step.

E   The city has been doing a lot of tendering in the past year since the new council took power (and now officially has a working website that contains information on council decisions and open tenders). Recently, the city approved tenders for reflectors in the streets, what’s the plan there?

We want to identify all the pedestrian crossings in Beirut and install proper lighting, street marking, and signage, [including reflectors called cat eyes, which help drivers identify pedestrian crossings at night]. We also want to do signage for pedestrian crossings, and this is part of the tender already issued for street names and directional signs.

E   There are new green signs around the city reminding people to clean up after their dogs. Does the city have a large enough workforce to enforce things like responsible pet walking and the non-vehicular blockade of pedestrian crossings?

No.

E   What’s your enforcement strategy?

We currently have the municipal guards. We’re involving them.

E   How many?

We have approximately 600 people. But we have also requested our own police department. The Minister of Interior is studying it to make sure that there’s no conflict between us and the [national] police of Beirut. Once it’s done, we’ll have police patroling around the city and enforcing the laws of the municipality.

E   Will you be sticking to former council’s plan for rehabilitating the city’s parks?

Because of the specificity of the characteristics of each area, we’re discussing with each community in each area, the possibilities we have. For some parks, we have the possibility to create parking underneath. Some people disagree with this idea.

E   I’ve covered this, and many residents were opposed to the idea. It sounded like lack of trust was the biggest problem; people I spoke to didn’t trust the park would ever come back.

Exactly. Some of them. It’s the same thing with the [waste-to-energy] plant, it’s the same thing with a lot of things. We’re working hard to gain the trust of the people.

E   Speaking of waste, does the city still plan to do it’s own waste collection and treatment?

We have some options, but I don’t wish to declare them now. We’re still studying them. We need to do a feasibility study and environmental impact assessments for the locations before we announce the locations.

E   But the city is decided on waste-to-energy?

Yes, yes, yes. We have nothing to hide.

E   Do you have a timeframe for when studies will be done?

Hopefully before the end of the year.

E    That will only be treatment. What’s the plan for collection and street sweeping?

We requested from the Council of Ministers that we manage the tender ourselves, [as opposed to letting the Council for Development and Reconstruction handle tenders, as they did for other former Sukleen service areas]. We had an issue with the tender [launched last June], we retendered, and the opening date will be August 14.

E   Can you update us on the status of Beit Beirut, the city’s long-awaited museum in the Sodeco area?

It will open end of August, early September. We have events all year round.

E   And you’ve found a curator?

We have several options we’re working on. We’ll assign someone soon.

E    They’ll be ready by end of August?

Yes.

E   And the artifacts and everything already in the museum?

There won’t be a set collection.

E   Finally, one campaign promise was to appoint an auditor to look at city’s books going back to 2015. I noticed the council recently approved appointing an auditor, when will we see the results?

We took the decision, and everything takes a long time to get done. The process is: we make the decision, it goes to the Governor, the Governor checks it, makes sure the money is available, and then it goes to Ministry of Interior, which has to approve. After the ministry, we sign the contract, then the Court of Audit (Diwan Al Muhasabi) must approve. Once they approve, then we can start to work

E    So it will be a bit of time.

Yes, but we insisted we wanted an auditor to do a gap analysis, due diligence, and the closing of accounts.

The power of tourism

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Prior to 2012, it was a common sight to see wealthy tourists — mainly from the Gulf — and even some Lebanese shopping in Beirut’s luxury brand stores that dot the expansive streets of Downtown Beirut and the high-end sections of Lebanon’s malls.

During the past five years however footfall in many of these international luxury brand stores has been languishing due to the political instability and regional insecurity that have affected Lebanon. The decrease in tourists from the Gulf, as well as the dwindling purchasing power among local Lebanese, has had a large negative impact on these agents.

With Lebanon enjoying more stability now — following the election of President Aoun in late 2016 — it is hoped that the luxury retail market will also pick up. Executive Life spoke to importers of luxury brands to get their perspective on the market in summer 2017 and their expectations for the upcoming few years.

Touring luxury

Although no exact figures were provided, the importers of luxury brands that Executive Life spoke to say that tourism has always been a key driver for luxury retail in Lebanon. This is especially true during the summer or winter holidays seasons, according to Ziad Annan, owner of A&S Chronora, the exclusive retailer of Rolex and Tudor watches in Lebanon.

Khalil Noujaim, the chairman of Level 5 Holding, which is the exclusive agent of French luxury brand Eden Park in Lebanon, also believes tourism impacts retail. “There has always been a positive correlation between tourism and businesses in general, and this year is no different. However, the size of the impact differs from one industry to another. For instance, normally tourism affects the hospitality sector most, with retail coming in second place,” he explains.

Simone Tamer, chief commercial officer of Tamer Freres sal, believes that tourists favor shopping in the luxury brand stores owned by the group because of the customer service provided. “Tourists compare our first class service with all the flagship stores they visit around the world. We follow the guidelines and offer a modern Eastern touch to our selling approach, as our culture is known for high standards of service and hospitality,” she explains, but adds that a missed opportunity associated with Beirut as a luxury shopping destination is that Chinese and other Asian tourists are still not interested in visiting Lebanon.

Brighter horizons?

With tourism having such a strong impact on the luxury market, it was no wonder the luxury retail industry in Lebanon generally suffered over the past six years when the number of visitors to the country was low.

Today, tourism is on the rise again in Lebanon, with Beirut’s five star hotels reporting up to 80 percent occupancy, the best it has been in the past six years, although not up to the level of 2010. However, it seems that this has not yet translated into more tourists from the Gulf coming to shop in Lebanon as they used to in the past.

The luxury brands Executive Life spoke to say Lebanese, whether expats or residing in Lebanon, continue to be their main clientele. “Our performance is mainly driven by local Lebanese residents who highly appreciate our designs and their French quality, especially since the brand has been in the market for almost 16 years now. Lebanese expats and Arab tourists started appreciating our brand more a few years back following the international expansion of Eden Park, mainly across the GCC markets,” explains Noujaim.

Annan also says the majority of their clients are Lebanese. “The majority of Rolex enthusiasts in Lebanon are Lebanese living inside and outside the country. Complementing our local faithful clientele, the brand in Lebanon attracts an interest from many enthusiasts living in the region,” he says.

Tamer says expats make it a point to shop in the luxury brands store in Lebanon when available, as opposed to the same brand internationally, as they believe they are helping the economy that way. “Expat visits are increasing, thanks to the airline packages and services provided to them. Our loyal expat clients refuse to buy from abroad, mentioning to us that they want to purchase from the Beirut stores as they believe that they are helping the economy of their country,” she says.

Meanwhile Maher Atamian, managing director at Est. Hagop Atamian (a distributor of luxury and medium-end watches in Lebanon) says their imported luxury watch brands continue to rely on local Lebanese and expats, and have not yet felt an impact from the increase in Gulf tourists to Lebanon. “We are still relying on the Lebanese expats who visit Lebanon during the summer and holiday periods,” he says. 

Downtown luxury

Downtown Beirut has all the makings of a luxury retail area and indeed it was almost overflowing with visitors prior to 2012. “Downtown Beirut is the destination in Lebanon that offers the biggest choice of monobrand luxury boutiques, a wide array of high-end restaurants, and a marina to complete the shopping experience. The presence of five star hotels also helps in the positioning of the city as the luxury retail destination in Lebanon and creates organic traffic to luxury shops based in Downtown,” explains Annan.

In agreement, Tamer says, “Tourists are interested in visiting this area as a luxury shopping destination in Lebanon.  All services are easily provided to them, and the access to the city is convenient, valet parking service is available at every corner, streets are equipped with park-meters for those who rent cars, cab services are all over the city, and most of the shops provide them with tax free refund slips upon purchase or free delivery to hotels for heavy or expensive items. Other areas, such as Dbayeh with ABC and Le Mall, also experience tourist footfall, but the only issue is that big brand names are not available in these destinations for high-end luxury clients, so as a brand mix today, Downtown remains the only destination in Lebanon providing the best service for high-end luxury brands.”

But most say the activity in the Downtown area has decreased with the drop in number of tourists, and this has affected the luxury retail sector in the area. “Downtown is the only true luxury destination in Beirut. All major cities have their luxury in their ‘downtown’ areas, and Lebanon is no exception. It’s very important to have it, since tourists target the center of the city when they visit. However, again, Downtown today is suffering because of lack of tourists,” explains Atamian.

Noujaim also speaks of the decreased activity in Downtown Beirut, saying that this is because the area attracts mainly tourists when it comes to shopping, while the Lebanese seek out luxury brands in malls. “Today tourist numbers are not enough alone to sustain a business in Downtown Beirut. This area should be revived to attract more locals and become the main destination for shopping in Lebanon,” says Noujaim.

Taking action

2017 is not over yet. Summer is still on full blast mode, and the potential profits from the end of year holiday period are still unknown, so a lot might change for luxury retail in Lebanon before the year ends.

In the meantime, luxury brand importers, such as Atamian are asking for continued political stability so things can get back on track and luxury brands can enjoy growth in Lebanon.

Noujaim asks for a reconsideration of rental fees, which would help retailers overcome this tough period. “The main support should be in adjusting the rents in line with the overall economic situation the country and the region is going through. This will benefit both the real estate sector, as well as the retail industry, and will provide a boost until the situation normalizes,” says Noujaim.

Questions of design

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Design is like Lebanese politics. These days, both are somehow involved in everything. And like good policy making, a dose of good design is needed in every nook and cranny of the Lebanese economy.

As opposed to most things political, however, stakeholders in design since 2010 have made valiant efforts to nurture an ecosystem of “design made in Lebanon.” Dedicated tertiary education programs have been developed on both the undergraduate and graduate levels, with recent additions being a Masters in Global Design at Balamand University’s Académie Libanaise Des Beaux-Arts (ALBA) and a Bachelors in Fashion Design at the Lebanese American University.

With the creation some six years ago of the non-profit duopoly of the MENA Design Research Center (MDRC) and the annual Beirut Design Week (BDW) — brainchildren of designer Doreen Toutikian and her collaborators — design found a non-profit institutional base. Also in the last few years, international support for creative industries in Lebanon has helped pour some European aid money into the design sector’s growth, with the European Union, notably Italy, sponsoring programs, projects, and exhibitions such as design training for jewelers in Beirut and furniture makers in Tripoli, or the Medneta program with an overall $200 million budget aimed at supporting creativity in the arts, crafts, and design in urban communities around the Mediterranean Basin. But how, and how much, does design contribute to the Lebanese economy in measurable form, i.e. in dollars and cents?

The appreciation of local design has improved by leaps and bounds, and today, is very different from 15 to 20 years ago, says BDW founder-director Toutikian. As evidence, she cites how sophisticated young people flock to local designs, as opposed to how in the 1990s, Lebanese fashion-conscious consumers did not want to wear local products, to the point that Hamra boutiques would pass domestically made ready-wear as Italian imports to be able to sell them.  When it comes to economic quantification, however, the picture is neither clear nor compelling. Based on research that MDRC undertook in recent years, Toutikian says that the advertising and hospitality sectors — both with players that created winning stories on national and regional terms — show the largest integration of design in their industries. Hard numbers that would measure the value of design content in these two sectors have not been compiled, she concedes. Moreover, she says that awareness of design in the industrial and business community is practically nonexistent, and that the overall contribution of design to GDP is in the low single digits. “When it comes to fashion design industry or furniture or product design industry, [the contribution to GDP] is minute.”

Other sources are also not of much help. A “MENA Design Outlook” report published in 2015 by an international consultancy under apparent commission of the UAE-based state-affiliated company that hosts the Dubai Design District (d3) puts the total value of MENA design markets at about $100 billion in 2014, with a projection that this will rise to just under $148 billion by 2019. Lebanon’s share of the $100 billion 2014 market is given in the report as $1.7 billion, which would indicate that imported and domestic design together account for just under 4 percent of the Lebanese GDP. 

The overall contribution of design to GDP is in the low single digits 

However, the report characterizes the majority of the design markets in MENA — in cases like fashion design in the Gulf up to 80 percent of market volume — as being fed by “imported design.” Under the report’s assumption that “locally produced design goods and services account for approximately 35 percent of the total market size” for design, “design made in Lebanon” would contribute about 1.4 percent to GDP.

Design standards

While saying that the United Arab Emirates and Saudi Arabia account for around 50 percent of regional design market volume, the report actually covers only three countries — Qatar, Egypt, and Lebanon — besides the UAE and Saudi Arabia. The report, which is also limited by its focus on sectors that may not play equal roles across the entire MENA, appears indeed to be the first of its kind in the region, but it leaves readers not only with an impression of much guesswork on the economic numbers in the various national design markets, it also admits that its criteria for consideration of design sectors in the Middle East and North Africa cannot be seen as conclusive. “While there is a growing consensus globally on the need to define, and classify the design sector, so it can be standardized, there is minimal coordination on an international scale as to what segments are included in the sector and how to account for their economic value. At present, there is no common framework or classification for the design sector across the MENA region,” it says. 

New definitions

As the economic numbers for design markets and industries in the Middle East remain foggy, local stakeholders widely agree that Lebanon and other Arab countries are still in early phases of economically measurable design appreciation — a sort of pre-economic stage. This notwithstanding, they are painting the future with general brightness, albeit in a palette of varying colors.  Toutikian perceives great potential for the Lebanese economy from design, if it is considered in a more global and holistic sense of design in technology and service. “I think there is no such thing as an economy without design. Everything is based on design, whether a space, a product, a service of any kind, or a business model. Design is something that no one in economy can live without, even if it is invisible,” she says.

“I don’t think we have a design identity now. Without discussing for the moment if we need a design identity in Lebanon, we are in the [process of] making one. I don’t know what the effect will be on the economy,” says Yasmine Nachabe Taan, chair of the Department of Design at LAU’s School of Architecture and Design.

Lee Frederix, an American designer who established himself in Lebanon several years ago and has recently been appointed as interim chair of the Department of Arts and Design (as Taan is slated for a sabbatical), sees Lebanon as a regional design hub — even if this is in the sense that a one-eyed person is king among the blind. In his opinion, Lebanon can be some sort of incubator for design thinking and education in the Middle East, but the path he describes does not necessarily sound quick or simple.  Lebanon’s historically fragmented culture is the substance of “what Lebanese design is, because that is what the whole country is,” Frederix tells Executive. In this context, he favors organic development in which a “Lebanese design” direction would be the outcome, if design departments, like the one in LAU, do their job to produce “educated, creative thinkers, who go into design fields.” Noting that art from the region was rewarded with a ballooning of interest (and prices) in the past few years, Frederix regards a similar potential for Lebanese design because of “the trendiness of all things from this region in the West.” While a fleeting phenomenon, he says that fashion writers in Paris and bloggers in New York “are obsessed with anything that is coming out of the Middle East.”

 Lebanon and other Arab countries are still in early phases of economically measurable design appreciation 

Taan similarly sees many Lebanese designers’ most promising path to success in proving themselves in international markets before tackling domestic performance. “The Lebanese designer has to go abroad, prove himself in New York and Paris, and come back for the local people to say ‘we want their fashion.’ We can export, and that is what we do. We export designers and creativity,” she says when talking to Executive about the latest developments in regard to fashion design (see introduction page 22).    

The widening of older definitions of design to a newer concept of social design is where Marc Baroud, director of the design department at ALBA, sees the real growth potential for design made in Lebanon. “If you take social design, we think that this is a field where Lebanon is very prone for playing a greater role and contribute way more to than to product design,” he says. Like others in the Lebanese design community, he points to the lack of a strong manufacturing industry, and the small size of the domestic market as factors that put the country at a disadvantage when compared with industrial or product design cultures that other countries or design capitals from Denmark to Tokyo and Singapore have developed over the course of decades.

In the area of social design, however, he sees untapped global markets for design made in Lebanon. “I think that great things can come out [of this country] in terms of social design, and because the problem-solving experience of the Lebanese can be of [global] value. Today, everything is connected, whether it is service design or product design and social design, and we don’t need to produce things locally. This is why we [at the ALBA design department] think that design from Lebanon — to avoid the term Lebanese design — has great opportunities,” says Baroud who also has experience as a designer working in Lebanon. 

The latest horse in the stable of design-centered Lebanon is being saddled and prepared to debut next month [September 2017] through Beirut Design Fair (BDF), an exhibition that will present both contemporary local, and vintage international items, and thus presumably contribute to the creation of a market for collectibles.

Guillaume Taslé d’Héliand, the fair’s founder and director, explains that BDF will focus on exhibiting furniture and product design. Making regular visits to Beirut throughout recent years, he found that the local market did not provide the space that designers wished for. “Many designers told me that they were not satisfied with the commercial side of product design in Lebanon,” he tells Executive.

According to Taslé d’Héliand, BDF is a for-profit venture, but he does not expect to incur a positive bottom line for up to three years. He expects, however, that business in Lebanon will enter a phase of rapid growth “as soon as the Syrian question will cease to be a problem,” as he puts it. In his expectation, this explosive growth will apply to the economy in general, and therefore be beneficial to the design market. As for his specific interest in developing this market, he refers to numerous factors that make the country a candidate for playing a greater role in design, such as its “culture and Lebanese creativity, critical sense, and available training and schooling in design,” as well as well-developed craftsmanship, sense of hospitality, and other advantages.

Concepts that consideration of design in manufacturing or services can create better outcomes from the start of a manufacturing or services process have not yet been fully integrated in Lebanon, but it would be beneficial to do so as countries with an integrated design dimension are dynamic economies, he argues. To help advance Lebanon, he and his local collaborators, therefore, think it will be prudent to “push design in this country more to the forefront,” to which end they plan beyond the creation of BDF to make partnerships with local organizations — examples include the Business School ESA and the Association of Lebanese Industrialists — as well as linking Beirut to international networks of “design capitals” and regional design councils.

“I think it’s legitimate to say for Beirut that we want this city to become the design capital of the entire region. That is our vision and what we want. You need money to move things, but the vision is not a business vision. The fair is one means among other means in reaching the vision [of having Lebanese design established as something that is recognized around the world],” he emphasizes. Beirut by his consideration is already today the de-facto only viable design capital of the Middle East and should be internationally recognized as such. “If you’re a real designer, you can change the world,” he adds.

The question over the value of design is not made any easier by the fact that definitions of design have been, are, and probably will remain, fluid. For Toutikian, “People tend to formulate design as just design which one sees in magazines, and thus, often perceive it as fashion, furniture, or product design. When we talk of design, we talk of the process of design that creates all of these things.”

Creative counterweight

The descriptions that are offered as wholesale explanation for design today see designers as driven by a general state of presumed dismay at our world’s imperfection. Positively phrased, contemporary design definitions gyrate around terms like “mindset,” “problem-solving,” “human-centric,” and “making the world a better place.”

As such, it appears that the current ideology of design thinking is positioning itself as the creative counterweight to the harshly analytical and profit-driven parts of social sciences that go under the label of economic science.

Structuring the creative process into a teachable discipline might well amount to the squaring of circles, but equally the exercise seems inevitable, given that human behavior, and the straightjacket of economic priorities, need to be reconciled through some process. Design appears to be the current thought on this process, mirrored in the shift that over the past 30 or 40 years gradually moved design from an afterthought of the production process — make a product look good to make it easier to sell — to a concern at the beginning of the process. This concern presumably is focused on the compatibility of the things, services, and even social processes, with the human need and consumption that Adam Smith denoted as “the purpose of all production.”

In the opinion of ALBA’s Baroud, the design ecosystem in Lebanon is set to grow on the strength of the intangible, but real social heritage of problem-solving and conviviality that exists in this country, and also because there are increasing numbers of like-minded people in the design community that are pushing the ecosystem forward. In this regard, he also expects that the new BDF project will promulgate greater understanding and appreciation of design, and help in clearing up confusion over different subspecialties in designing, such as the relationship between producing gallery pieces that will be prototypes and collectibles, and creating designs for production on a larger scale “in the hope that they can one day be produced in meaningful numbers to have an impact or improve things in society.”

Confessing to having initially been skeptical about the project of a fair, he accepted an invitation to be on the BDF’s screening committee for entries, and says that the fair might deliver aspects of a design market that people might expect, but not find at the differently purposed Beirut Design Week, “I guess that collectible design has a real market, and that this market can grow.” 

Appealing to some ever-hungry members of the monied crowd who are looking for passion investment opportunities might help gradually build the design market in Lebanon, but even in the best case, will not instantaneously embed appreciation and viability of design in the local business sphere.

However, there are additional indications for what were called green shoots after the global financial crisis. One such green shoot in Lebanese entrepreneurship with tech and design connotations could emerge just now in form of MAD, a catchy (but historically over-occupied) abbreviation for Music.Arts.Design.

Looking forward

MAD, as founder Rima Yacoub tells Executive, is a digital marketplace incorporated in Beirut and in Paris. More specifically, Yacoub describes it as “the marketplace to meet, discover, and launch artists in the music, arts, and design scene.” The startup has recently completed its first round of funding, with $360,000 that was provided by private investors and by the Seeders network of business angels in Lebanon, with matching funds added by IM Capital and Kafalat’s iSME program.

Yacoub, who is Lebanese with experience of working in Paris, says she and two partners — one French and one other Lebanese, her sister — created MAD in Lebanon because of their existing network that they had built by operating a marketing agency, and because the country is an “important location for artists and designers in the Middle East.” In attempting to remove traditional walls that hinder collaboration of artists, musicians, designers, and also ease their communication with corporations seeking them for projects related to their products or brands, MAD aims to grow out of its Lebanese-French base into an international platform, with offices in several countries within a few years, and is already planning to conduct a next funding round 18 months from today.   Besides such examples for synergies between the knowledge economy pushed by Lebanon’s central bank and the country’s creative industries, signs of promise for the growing viability of design made in Lebanon exist in local collaborations, such as new partnerships of the Association of Lebanese Industrialists with design stakeholders that have been struck on one level with BDF and on another level with ALBA (for internships).

 There are increasing numbers of like-minded people in the design community that are pushing the ecosystem forward

A third and final note of promise might be in taking Lebanese design to local markets. In recent years, design could be found in small workshops and boutiques either operated by the designers themselves or sponsored under EU or UNIDO programs like the Creative Lebanon sales rooms that were in Gemmayze a year ago. But now, design presence is growing also in posh places, such as the new urban shopping hub of ABC Mall Verdun.

Frank Kuntermann, deputy CEO of ABC, tells Executive on the sidelines of the mall’s lavish opening party on July 27 that the new ABC department store will feature Lebanese designers including established names like Nada Debs and Sarah’s Bag, but also newcomers in perfume design and rising stars in jewelry design. “With all these people, we have basically 20 percent of our offer in the department store as Lebanese design,” he explains and continues, “This is not enough. I would like to have a big space dedicated to [Lebanese] fashion design, where we could welcome young designers and present [their creations]. I would like [Lebanese design] to be [given] more [room] because there is talent in Lebanon, and ABC has to also be the face of Lebanese talent and design.”     

Beirut a fashion capital

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“It’s an exciting time to launch a fashion design program in Lebanon because of what is happening in design. Whether it’s Mar Mikhael’s little boutiques, or the designers who are just starting out with unpredictable, yet exciting futures ahead of them, or the young Lebanese designers whose names are shining abroad, there’s an energy and talent that is motivated,” enthuses Yasmine Taan, chair of the Department of Art & Design at the Lebanese American University (LAU).

Indeed, success stories of Lebanese designers have become more common over the past decade, and it seems the design industry is finally getting some of the recognition it deserves — although there is still a long way to go.

Carving a path

When it comes to fashion design, names like Elie Saab, Zuhair Murad, and Georges Chakra are role models for a younger generation, who through their international fame, saw fashion design as a viable and prestigious career path.

As such, interest in fashion design education rose with more universities introducing degree programs. “I would say that the ready-to-wear community in Lebanon is definitely growing. There are more fashion design programs being built: LAU just graduated their first class, you have ESMOD, you have ALBA (Académie Libanaise des Beaux-arts) starting its program, you have us … There is definitely a new generation of graduating fashion design students that are about to enter the design market in Lebanon, and its very interesting to see where it will go,” muses Sarah Hermez, co-founder of Creative Space Beirut, a free fashion design school.

Size matters

Starting out in the fashion design industry in a small country like Lebanon has an advantage in that one can quickly build a brand. “The positive thing about building a brand here is that if you have the right network, it’s an easier start because when you are in a small community and everybody knows everybody, you can work together to build your brands. You can reach out quickly to the market because it’s so small,” says Hermez, explaining that this culture of collaboration is rapidly growing amongst Lebanese designers.

But the downside of such a market is that it is limiting, especially in a highly competitive industry, such as fashion design, where one needs to be present in the world’s fashion capitals to succeed. “In the fashion world, a lot depends on who you know, and on being in the right boutiques, and reaching out to the right buyers; it requires a lot of international networking and PR. In order to do that, you have to be present there, which means you need to have a really big budget to travel; young designers mostly can’t afford it unless they find an investor,” explains Hermez.

Although Hermez feels there is an emerging interest among financial backers and investors to finance fashion designers, she says there is not enough yet to meet demand.

When budgets are tight

The majority of Lebanese fashion designers say their largest market is the Gulf, which is not surprising given the traditional wealth of those countries and their affinity for the Lebanese touch.

However, with the decrease in oil prices and political turmoil the Gulf has been witnessing, this purchasing power has decreased significantly, and most fashion designers Executive spoke with have noticed. Only two of the six designers interviewed continue to have a steady demand from the Gulf. The others say that instead of the usual 10 to 12 couture dresses per season, clients from the Gulf have downsized to just two or three.

Yet, with the current omnipresence of social media, names of Lebanese fashion designers continue to flourish, regionally and internationally.

Executive spoke to six fashion designers (two via email) to learn about their unique successes and challenges. From those who overcame the obstacles of a war to become international success stories, to those who have recently entered the market but have already made a name for themselves; their stories show what it means to be a fashion designer out of Lebanon.

Georges Chakra

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Georges Chakra initially began his studies in interior design during the Lebanese Civil War, but decided to switch to fashion design because, he says, he wanted to do something “out of the ordinary.” Studying fashion design was uncommon at the time, and Chakra says even his parents were not very accepting of his choice. It was so uncommon that there were no fashion design programs in the country back then, and Chakra moved to Toronto to continue his education, returning to Lebanon in 1985 to begin working on his brand.

Chakra says that operating during that period  stretched the limits of his creativity. “You had to make do with what was present in Lebanon in terms of material and equipment because the airport was closed. But this led to designers being more innovative in their work. They had to figure out how to use the found materials in a way to make it appealing enough to sell. But we succeeded,” he recalls.

And succeed he did. In a time when social media did not exist, and traditional broadcast media (TV/radio) was unreliable due to power cuts, word of mouth was king. Chakra’s creative designs swiftly made their mark, eliciting a positive reception. “Because I studied abroad, I acquired a European style of design that appealed to the Lebanese, who also have a bit of European taste,” he says. “There was an almost instant appreciation for my work.”

While at first most of his clients were Lebanese, Chakra says he also acquired many clients from the Gulf through word of mouth from Lebanese women who would be wearing his designs while traveling through the region.

Following the war, Chakra’s business continued to grow, and he held multiple fashion shows in Lebanon. His international fame began when he participated in Paris Couture Week for the first time with his 2001-2002 collection after encouragement from his clients.

Chakra has been showcasing his collections at Paris Couture Week twice a year ever since, and made his first appearance at the Mercedes Benz Pret a Porter Week in New York in 2009 (continuing for five seasons until 2011). “Being present in such platforms benefits everything from sales to marketing because of the exposure we get from them. You’re among colleagues. You can’t be a competitor on the international scene if you’re not in these shows,” explains Chakra.

Chakra’s main atelier is in Beirut, in addition to a showroom for appointments and fittings in Paris. While he worked in Toronto as a fashion designer for two and a half years, he prefers working out of Lebanon for several reasons.

“We have convenience of services here that we don’t have abroad. It’s the little things,” he says, such as the building’s concierge carrying bags up or postal services being accommodating of the unpredictable delivery hours his atelier keeps. Chakra also enjoys the stable and mild weather in Lebanon, as well as its proximity to Europe, which makes commuting between his two work spaces easier.

While Chakra experiences some difficulties working out of Lebanon, he says he has largely learned to work around these issues. “I created my own world and [chose] the people I work with, so there aren’t too many challenges. But, for example, customs at the airport is always a hassle. They stop the crates of material we want to bring into the country and take time to process their entry, which delays our work. It’s chaotic and there are no set procedures to follow, which is a challenge as well,” he laments.

Chakra has a team of a 100 employees, around 80 of whom are tailors, and many have been with him for 20 years, that includes skilled seamstresses and embroiderers, though Chakra is saddened by the fact that nothing is being done to preserve their skills. “We have employees who have been with us for 20 years and have a lot of experience. But the challenge we and many designers are facing is that those people — who largely gained their experience through training and have no formal education — haven’t passed their skills onto their children or the younger generation,” he says.

This is because being a seamstress is not viewed as a prestigious job in Lebanon, and those who do work in this domain today envision a better future for their children, and so do not pass their skills on to them, Chakra says.   

This poses a real challenge for Lebanese designers who today are hiring foreign workers to keep their work running. Chakra believes more should be done to raise awareness among underprivileged youth about this career option. “This industry should be promoted by training unemployed workers to do these jobs and make a living. There should be more awareness raised on the different jobs in an atelier and more incentives for people to take them up, but I don’t know if this should be the work of NGOs or the government,” concludes Chakra.


Abed Mahfouz

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In 1982, Abed Mahfouz starting working with his sister designing evening gowns and got his first taste of creating his own designs that way. In 1995, he decided to branch out with his own brand.

While Mahfouz initially showcased his collections locally through fashions shows at venues such as the Al Bustan Hotel in Broummana, or the Phoenicia Hotel Beirut, his first international appearance was in Milan in 2000.

Following the fashion show in Milan, Mahfouz approached the then president of AltaRoma, Fashion Week Rome, to display his collection with them. “I went alone with no appointment or support from anyone, but I convinced him with my passion and promise of commitment to AltaRoma,” recalls Mahfouz, explaining that before him it was not very common for Lebanese fashion designers to participate in AltaRoma, so the then president was reluctant at first.

However, Mahfouz quickly proved himself in Rome and developed a strong presence in the eternal city. “I chose Rome because I felt valued there, and I built a name for myself. I did the best fashion shows of my career there,” he says.

After 15 years of shows in Rome, and two years in Paris afterwards, Mahfouz pulled out of AltaRoma and decided to concentrate his efforts on Lebanon and the region, returning to Beirut in 2015.

Even while showcasing his work in Rome, Mahfouz’s atelier has always been in Lebanon, which he says is perceived as a prestigious location for fashion production by the Gulf, where the majority of his clients hail from. “Our clients brag among their friends when they have their dresses done in Lebanon. Lebanese designers are dressing celebrities and influencers, and this has a big effect on the way they are perceived regionally and internationally,” Mahfouz says.

In trying to explain this allure of Lebanese designers, especially in the region, Mahfouz starts with what he calls their good taste and creativity. “In the region, and because of this boom in Lebanese fashion designers, they are now the trendsetters, and we can see their influence on the fashion industry in general. This is because of their good taste, but also because of the quality of their work and their creativity in developing modern designs, which the region appreciates,” he says.

The region is indeed appreciative of Lebanese designers, while European designers have only recently woke up to the lucrative potential of clients from the Gulf and begun catering their designs to their tastes, according to Mahfouz. “Previously, Europeans were not very strong in embroidery and the style of design preferred by the Gulf. But if you look at the world today those that buy the most luxury products are from the Gulf, China, or Russia. So the European designers are now catering to the Gulf market; for example Dolce & Gabbana is making abayas and Valentino is designing higher necklines to serve this part of the world which has a high purchasing power. Meanwhile, the Lebanese designers already have a touch of that style in their designs,” he elaborates.

Another aspect which differentiates Lebanese fashion designers from their European counterparts, according to Mahfouz, is the quality of service they provide to couture clients. “When you go to an atelier of a fashion designer in Lebanon, it’s unlike the service you get anywhere else in the world. When a woman pays a large amount for a couture dress, she’s also buying the service of dressmaking, and she wants to feel pampered and catered to as an individual,” elaborates Mahfouz.

Despite the advantages Mahfouz cites for working in Lebanon, and the level of comfort and familiarity he enjoys in his home country, he believes the political instabilities of the past five years have negatively impacted his business.

Since his workshop is in Downtown Beirut, it was in close proximity to the 2013 Starco bombing, in addition to numerous demonstrations and sit-ins. This not only hindered Mahfouz’s access to his work; his atelier also suffered from material damage when the 2013 assassination of ex-finance minister Mohamad Chatah occurred directly below it.

Lebanese fashion designers, they are now the trendsetters, and we can see their influence on the fashion industry in general

The decrease in touristic activity during the last six years also put a strain on Mahfouz’s availability to his clients from the Gulf. “When the Arabs used to come here it was much easier and faster to design for them. Instead of the three days it takes to finish a dress when they are here, it takes me three weeks when I go visit them as there is a lot of back and forth, not to mention additional expenses,” says Mahfouz, explaining that demand for couture dresses decreased by 80 percent because of this.

As a result, Mahfouz has downsized his team of 120 employees to 45 and says he is taking over a large number of tasks himself. He continues to focus on his couture and bridal lines, but says that his ready-to-wear line is more financially accessible and widespread (being available in points of sale in the United States and Europe), and therefore brings in more revenues and helps him stay afloat during this period.

Sandra Mansour

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Sandra Mansour says she has always been drawn to art and creation. So after completing her BA in business, she decided to go for a master’s degree in fashion design in Paris, and she has not looked back since.

After completing her master’s degree, Mansour worked for Elie Saab before launching her own brand. She believes that both her education and her experience with Saab shaped the process of her becoming a designer. “It gave me the platform and ability to create pieces stemming from an artistic background — that brings together my love for drawing with my love for creating and designing,” says Mansour, explaining that she now takes on summer interns, as she believes this hands-on experience gained at an atelier is essential for budding designers.

Mansour had her first international appearance in 2010 at Paris Fashion Week. She explains that such a high visibility platform gave her brand more exposure and created brand awareness.

Mansour designs a ready-to-wear line of evening dresses and makes made-to-order wedding gowns. While she says the bridal gowns are more financially viable than ready-to-wear, she explains that having the ability to provide both services allows clients the flexibility to purchase dresses for any occasion, therefore developing a loyal clientele.

Today, Mansour works from an atelier in Lebanon with a team of 20, including 12 tailors whom she describes as “highly skilled.”

Mansour sees the quality of craftsmanship in Lebanon as an advantage to working in the country. “Our atelier and workshop are located in Beirut with a Lebanese workforce of highly qualified craftsmen, which is a vital selling point for our international affiliates. Lebanese tailors are some of the best in the world, they have a skill passed down from generation to generation, and therefore they excel in the craft,” she states.

While Mansour says that she might consider expanding her presence, depending on their growth and strategy, she would not relocate from Lebanon. “Beirut is my hometown, and at this point I don’t see any reason to relocate,” she says.

Mansour says her biggest markets are the US, Middle East, and GCC. “These markets respond very well toward our designs, and most of our recurrent clientele come from them,” explains Mansour. She believes that designers like Elie Saab and others have paved the way for the industry in Lebanon, giving credibility to the potential and craftsmanship of Lebanese designers. 

Jean Louis Sabaji

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Jean Louis’s father, Jean Sabaji, was a fashion designer who was most known for being the personal designer of the Saudi royal family.

As such, Sabaji’s earliest memories were of being in his father’s atelier (which is his now that his father has passed) surrounded by fabrics and mannequins. “From when I was a child, it was as if I was on a mission to be a designer. This was my destiny, and I’m very happy I took this path because it’s in my blood,” recounts Sabaji.

After finishing his high school education, Sabaji enrolled at Lebanese American University to study graphic design, graduating in 2009. He then attended the Milan Domus Academy for his master’s degree in fashion design. Recalling his experience in Milan, Sabaji says that his childhood background in fashion design gave him an advantage over his peers,  since he was already familiar with many technical aspects and terms in fashion design.

However, Sabaji does not overlook the value of his education in shaping him as a designer. “I could’ve learned here in my father’s atelier [through training alone], but what a formal education adds to your experience is a way of thinking,” he says.

Sabaji explains that his education also helped him develop his own style, which was purely Eastern before he went to Milan. “When I went there, they helped me refine that [Eastern] direction and add a European touch to it, so now my direction is more a fusion of both,” says Sabaji, wondering if it is that mix of European and Eastern tastes that many Lebanese designers have, which makes them such successful designers internationally.

After completing his degree, Sabaji came back to Lebanon to start his own couture label. He set up camp in his father’s atelier with his team of 40 employees, this was the main reason he chose to work out of Lebanon. “What’s nice about couture is that it’s based on the old school seamstresses that bead the dresses by hand. For me, that is the advantage of being in Lebanon because I already have this team/family which I inherited from my father and continued with,” he says.

Yet, Sabaji’s skilled team is reaching retirement age and replacing them will be challenging. “During my father’s generation, almost everybody was a seamstress, while today there are a lot fewer [of them]. If you look for them, you can find them, but it’s like searching for precious stones,” says Sabaji. To ensure the continuity of his business, he is having his current team train younger hires, who he says do not need to be skilled in atelier work, but must have the desire to learn.

Despite the advantage of having a good team, Sabaji says that there are challenges to operating in Lebanon, including having to import almost all of the raw material he needs.

The economic situation is also a challenge in that many Lebanese cannot afford Sabaji’s designs. “The economic situation in Lebanon has affected the purchasing power of Lebanese women. I would love to have more Lebanese women as clients, but the majority of my couture clients are from the Gulf,” he says.

Sabaji’s first international fashion show was Fashion Forward Dubai four years ago, an experience he says opened up the Gulf market to him. “Before my participation in FFD, my market was basically in Saudi Arabia because of my father, but afterwards I got many clients from Qatar, UAE, and Kuwait,” says Sabaji.

Internationally, Sabaji also has clients from Russia and Greece, garnered following the social media recognition he received after dressing celebrities for the red carpet.

Thus far, Sabaji’s focus has been on couture and bridal lines, but he says that he will be launching his ready-to-wear line in December and opening his own boutique. “I didn’t start ready-to-wear earlier because we were taught that fashion is top bottom so you start with couture and build your name that way. So when you do the ready-to-wear line, you already have a name for yourself, and those that couldn’t afford your couture line now find you accessible,” explains Sabaji, adding that financially he finds ready-to-wear more viable than couture since he can sell more of the former due to its affordability.

Sabaji believes that internationally famous Lebanese designers have made it easier for young designers like himself to penetrate the international markets owing to the strong reputation they have built for themselves and the country.

Yet, Sabaji warns his fellow young designers against becoming “copy/paste” versions of those famous designers. “As young designers, and to keep the good name of the country which was built by the likes of Elie and Zuhair, we should revolutionize and modernize the fashion industry. We have to carve our own path,” he says, explaining that in his own designs he is daring and unique, and has thereby established a niche market for himself — which will hopefully continue for years to come. 

Rami Kadi

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From as far back as he can remember, Rami Kadi has been passionate about the art of embroidery and other traditional craft skills. This passion ultimately led him to choose fashion design as a career path and so he enrolled at ESMOD Beirut, graduating in 2008.

Following his graduation, Kadi worked with Rabih Kayrouz and was soon after selected to showcase his first collection at Starch Foundation. He recalls the experience as being extremely successful, resulting in lots of appreciative clientele.

Speaking of the value of his education in ESMOD versus his experience with Kayrouz and Starch, Kadi evokes the talent versus education debate and says: “It’s obviously very important and crucial to have an education and learn all the appropriate techniques when you’re planning to practice any job. When it comes to fashion, learning all the techniques is even more important and amounts to 50 percent of your experience: How can you design, choose the fabrics, and oversee the sewing if you haven’t learnt the basics? However, I also think that you’re born with a passion for fashion, a natural skill that engulfs your whole creativity, mind, and life. It’s called ‘mawhabe’ [talent] in Arabic,” he says.

Kadi, who launched his own brand in 2011 at the age of 25, says he has chosen to focus only on his couture or made-to-wear line for now. As with the other designers Executive interviewed, his main clients come from the Gulf. “Currently the Gulf is my biggest market, I guess it’s the case for all couture designers generally speaking. Women of the Gulf are very much ahead in terms of fashion; they know exactly what they want, they have a strong expertise in this field, and they love to dress up. Weddings in the Gulf are like red carpet events, you can see all the latest trends and couture dresses!” enthuses Kadi.

Since his focus is on couture alone, the only international platform available to him is Paris Couture Week. The young designer held his first fashion show there in 2014 and says the most important part of the experience was getting to meet the international fashion press and experts in the field. “It definitely gives more credibility to my brand,” says Kadi.

Kadi today has an atelier of 40 tailors and ten other employees across three main departments, from operations to marketing to sales. According to him, Lebanon has highly skilled tailors and craftspeople. “We definitely have a high level of craftspeople, they’re qualified and have a strong savoir-faire. I’m always impressed by what they can achieve in every collection, and the amount of hours they spend on each dress. Each dress takes about 1,200 hours of craftsmanship, and this really needs experts in the field,” he explains.

Kadi says he does not feel he will relocate out of Lebanon, but would consider opening a showroom in Paris, as it would make him more accessible to the international influencers and the celebrities that he dresses. “The hardest part [about working out of Lebanon] is getting to reach the international influencers and fitting them for special events,” says Kadi, explaining that celebrity endorsements are a must for brand awareness and adds “glamour to their image.”

The advantage of having an atelier in Lebanon, other than the talent, is having the freedom to experiment. “Lebanon is my hometown, what is better than operating from your own country and speaking the same language of your co-workers? Lebanon is also a laboratoire in fashion, you have so many different types of women; it’s stimulating!” concludes Kadi.

Hussain Bazaza

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Hussein Bazaza did not grow up wanting to be a fashion designer, although he has loved sketching dresses since he was a child. “Everyone who knew me thought I would be a great fashion designer, but I never wanted to be one,” he recalls, noting instead his interest in interior design or filmmaking.

After finishing high school, however, and with his mother’s encouragement, he joined ESMOD Beirut. Although the first year was a struggle for Bazaza — he felt out of place because he was not as well versed in the fashion world as his peers — he ended up learning a lot and loving fashion design.

Upon graduating at the top of his class in 2011, he won internships with both Rabih Keyrouz in Paris, and Elie Saab in Beirut (both of whom are well-known Lebanese designers and creators of internationally acclaimed fashion houses). Three days into his internship with Elie Saab, he was offered a full time job at the company, which helped him learn the practical aspects of fashion design.

Eight months into that job, Bazaza left to join Starch, a non-profit organization that helps launch Lebanese emerging designers. According to its site, “ Starch is an annual program and a rotation of debut collections where four to six young designers are selected each year.” It was there that he started working on developing himself as a brand. “I had already planned on starting my own label when Starch was over and was saving the money I was making from selling my collection in Starch toward opening my own showroom and atelier,” explains Bazaza.

Lebanese don’t have confidence in their own designers, which is ironic because they are highly valued internationally

At Starch, Bazaza learned a lot about how clients think and what they were looking for in their clothing, which helped him in his designs. During his time at Starch, he and the other designers were invited to participate in Fashion Forward Dubai for the first time through a free fashion show with Rabih Keyrouz (co-founder of Starch). 

“There was a lot of exposure in terms of press and buyers, and that helped us a lot especially in expanding our client base in the Gulf and making sales,” says Bazaza.

After completing the fashion incubator’s yearlong program in 2014, Bazaza set out to achieve his goal of establishing his own space and atelier, having already launched his own label and garnered clients through Starch.

As a young designer just starting out, Bazaza says he ran into some challenges. To begin with, he did not have any experience running a business (while today fashion design schools do offer classes in business, ESMOD Beirut did not when he was a student there).

He also started out alone and was basically a one-man team, largely because of his limited budget. “I had no employees at the beginning, so I had to do everything by myself. Later on, I hired one employee, and the rest of the team developed six months later (today Bazaza has six employees). This was determined by the brand’s growth, but also by how much I was able to afford to pay salaries,” he explains.

This was overwhelming for Bazaza, especially since the brand’s reputation, through unsolicited media coverage, was growing at a fast rate. “I had to be everything myself, and I felt pressured because people thought the brand was much bigger than it was. I had more requests than I could cope with,” he recounts.

Limited startup funds posed another challenge for Bazaza because, as a fashion designer, he had to produce a new collection for every season. “I didn’t have any investors, and there are very few investors in fashion in Lebanon anyway, so I had to pay for everything related to a new collection from my profits,” he says, explaining that his revenues had to be divided between salaries, rents, expenses, materials, and photoshoots for the collection.

Three years into his business, and as the Hussein Bazaza brand grows, Bazaza says things have become a lot easier. “With time, this got better because my number of clients increased. I also started doing bridal wear and this brings in significant revenue. Before, we also didn’t have a lot of boutiques ordering [the ready to wear line], while today we have boutique orders from Kuwait, Saudi Arabia, and Qatar, which also helps in revenue increase,” he explains.

Bazaza says that his focus is on developing his brand as a product and not his name as a designer. “I want to be a brand found in major department stores more than I want to be a fashion designer who does couture for clients,” he says, explaining that he does couture because it rakes in revenue, but he prefers working on his ready-to-wear line, which is available in his showroom in Lebanon and in boutiques in the Gulf.

Bazaza sees some advantages to being a designer working out of Lebanon, the most important being the positive image of Lebanese designers in the region and internationally. However, he has not forgotten the difficulties he faced at the beginning and believes more could be done at the governmental level to encourage and facilitate the work of fashion design startups like his own. “One of the simple things the government can support this sector with is making the official procedures and bureaucratic paperwork related to establishing a company simpler or clearer for young designers like me,” he says. 

He also wishes that the Lebanese exhibited more pride in their country’s local designers, recounting how many local boutiques refuse to carry clothes made by young Lebanese designers. “Lebanese don’t have confidence in their own designers, which is ironic because they are highly valued internationally,” he muses.

When two passions merge

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While it is often said that design talent in Lebanon is plentiful, a substantial percentage of this talent could be going to waste because of the lack of free design education in Lebanon. Enter Sarah Hermez, a Parsons School of Design graduate, and her former Parsons professor Caroline Simonelli, who together founded Creative Space Beirut (CSB). CSB describes itself on its website as “a free school in fashion design providing quality creative design education to talented individuals who lack the resources to pursue a degree at increasingly costly institutions of higher learning.”

An idea is born

Hermez says that she has always been passionate about both creativity and social justice. This led her to move to New York (after growing up mainly in Kuwait) to pursue a double major in fashion design at Parsons and Arts in Context at Eugene Lang College. When she came to live in Lebanon, she hoped to find a way to combine the two passions into one career. “I decided to move to Lebanon because I’m Lebanese and had never lived here before. I wanted to understand what it was to be Lebanese, and also there’s so much work to be done here in Lebanon,” she explains. 

Hermez finally found a way to merge her interests after a conversation she was having with Simonelli, who suggested that she start a free school for fashion design, an idea which made perfect sense to Hermez. “What happens when you go to a tuition based school, like Parsons, is that the tuition is so expensive, it stops becoming about how talented you are and starts becoming about how much you can pay. Most of the talented people can’t afford such universities, and the people that graduate don’t necessarily have to be that talented,” says Hermez.

The beginnings

In 2011 at the age of 24, Hermez set out to establish Creative Space Beirut. She visited refugee camps, community centers, and NGOs in order to convince people to join the free design school. “People were intrigued because I wasn’t attached to an organization. I was just a girl with an idea, although I had Caroline to give me credibility,” she recounts, adding that despite the interest, many parents didn’t want their children to leave their area to come to Beirut, so it took her a while to find five people — which is the average number of students CSB takes per class in order to provide an intimate learning experience — who could commit to the school.

What happens when you go to a tuition based school, like Parsons, is that the tuition is so expensive, it stops becoming about how talented you are and starts becoming about how much you can pay

How it works

Although the program is fluid in that it is not tied down to a curriculum, it is still very rigorous, with students attending daily classes on weekdays for three years. “It’s a very intense program, but it really gives them an idea of how the fashion industry works and shows them how difficult it is and how hardworking you have to be. It’s a very realistic education in that they are working but also learning at the same time. When you’re not limited to curriculums and bureaucracy, you have more leeway to experiment,” she says.

To give first hand experience and to help sustain costs, the school started a brand called CSB Ready-to-Wear. “The idea with this brand is we produce things, and then we sell them, and the money goes to the school so that we can sustain the program,” explains Hermez, adding that as the label grows they will be hiring more of their graduates to work for it.

Other means through which funds are raised for CSB, which is a non-profit, are donations, individual sponsors who give scholarships to students, fundraising parties, and exhibitions at the end of the year, in which students’ designs are sold. “We’re in survival mode all the time. Having a non-profit is the hardest thing you can do because you are constantly trying to raise funds,” says Hermez.

After graduation

Six years since its creation, CSB has already graduated one class and will graduate another in November 2017.

Aside from an education, CSB also helps ensure their graduates have access to the network needed to develop a good career. “What we offer our students is not only education, we also provide them with the networks that we have to be able to get job interviews because these are students that otherwise wouldn’t have the connections. Our job also is to provide them with the right network to enter the fashion industry, which is very exclusive,” says Hermez, explaining that graduates can work for a CSB brand, start their own label, or work for a designer. 

Looking ahead, and once the fashion design program is comfortably sustained, CSB hopes to be able to build other programs within the design industry, also for free. “This should be offered for free by the government, but we don’t have a functional government,” concludes Hermez. 

Missed opportunities in Lebanon’s industrial sector

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Lebanon’s productive sectors have been undermined since the end of the civil war in 1990. Like other marginalized sectors, the industrial sector has weakened, becoming a smaller proportion of the economy due in no small part to a history of missed development opportunities. To put this in perspective, the share of the industrial sector out of total GDP has decreased steadily from 24 percent  in 1997 to 14 percent in 2016.

Not unrelated to this, Lebanon continues to register the worst trade deficit in the region, primarily due to its dependency on imports and weak export channels. The trade deficit, $15.65 billion by December 2016, has recorded a 3.56 percent yearly increase (according to BLOMINVEST Bank figures). Exports have also fluctuated in recent years from $4.49 billion in 2008, up to $5.11 billion in 2012, and then down to $2.44 billion in 2015. Development in the industrial sector has been restricted by limited development in industrial policy, limited electricity coverage, and the high cost of production, as well as the effects stemming from the conflict in Syria. The latter has had a clear effect, reducing investments in the country and making exports more expensive by curtailing Lebanon’s sole land export route to the region.

Lebanon’s Product
Space 2000

Potential for sophistication

Despite this seemingly pessimistic picture, looking at microdata through product space mapping suggests that the situation has not been so dismal. Between 2000 and 2008, the Lebanese industrial sector managed to recover, with exports increasing of industrial products from $742 million in 2000 to $2.58 billion in 2008. This steady increase has been accompanied with an increased level of export sophistication, made clear by observing Lebanon’s improved position on the product space. The total number of exported products increased from 898 in 2000 to 978 in 2008. Equally importantly, comparing the distribution of these products, the number of core products increased by 21 percent (from 307 in 2000 to 370 in 2008), while the number of periphery products increased by only 3 percent (from 591 products in 2000 to 608 in 2008), reflecting an increase in the sophistication of Lebanese exports.

Lebanon’s Product
Space 2008

Most stark, however, is that 40 out of the 52 newly produced products in 2008 were a result of “long jumps.” Among these are ceramics, glass pigments, opacifiers, colors, and enamels (HS: 3207), shavers and hair clippers (HS: 8510), and base metal fittings for furniture, doors, and cars (HS: 8302). A long jump suggests that new items were produced despite the lack of prerequisite knowledge or capabilities, given data gathered from the existing export basket. Literature suggests that such phenomena are observed in countries that have undergone structural economic changes. In this respect, Lebanon presents an anomaly to the theory. Despite the absence of a government-led strategy to support industrial growth, the sector managed to improve its industrial standing by producing highly sophisticated products between 2000 and 2008.

Lebanon’s favorable demand shocks

To better understand export diversification in Lebanon, while taking into account highly sophisticated domains of production and an absence of a policy-driven structural change, the literature has attributed changes in sophistication levels in different countries to two key causes: A productivity shock or a demand shock. As Lebanese firms continue to suffer burdensome costs of production and a lack of adequate skills, the increase in Lebanese export sophistication has been largely driven by demand shocks, i.e. the discovery of new markets. The fact that local market capacity is small and saturated impels producers who are aspiring to expand and diversify their production to be outward looking. Lebanese firms, therefore, benefit from their experience, entrepreneurial skills, and connections with foreign markets to overcome demand uncertainties. From 2000 to 2008, for example, several free trade agreements were signed between Lebanon and foreign countries or trade associations such as GAFTA (Greater Arab Free Trade Area). This agreement has instigated a spike in the volume of exports, as exporters were responsive to increased demand opportunities in Arab States. 

Sustaining a positive sophistication surge?

Despite the optimistic period from 2000 to 2008 that signaled a positive wave of industrialization in Lebanon, the lack of government support and the absence of a productivity shock to supplement the demand shock made it difficult for industrialists to sustain a comparative advantage. Additionally, Lebanon’s position on the product space worsened with a drop in total products exported from 978 in 2008 to 896 in 2015. From 2008 to 2015, Lebanon discontinued the production of 82 products previously conquered in 2008. These are interpreted as missed opportunities that warrant special attention, as they might hint to the presence of market failures.

The surge in sophistication from 2000 to 2008 is comparable to the status of the sector pre-war period. In the 1960s and 1970s, the industry faced a similar boom, but had also failed to further develop, namely due to a lack of adequate supportive policies. For example, in 1975, the Lebanese industrial sector had conquered five out of the ten densest products. Accordingly, the level of capabilities in the economy, measured by the Economic Complexity Index (ECI), was highest in 1968. Lebanon’s rank peaked in 1975, when it was ranked 21st in the world. After that, the country’s economic complexity followed an overall declining trend, where it reached a low level of 44th in the world in 1998. By 2008, the country’s rank again improved to 31st worldwide.

Sector-specific industrial strategy

With a history of missed development opportunities, Lebanon needs a supportive industrial policy that is capable of optimizing on industrialization opportunities. This strategy is key to the development of the country in order to produce highly sophisticated jobs and avoid brain drain. Using the product space as a compass, policy makers should tailor specific initiatives that usher in the production of sophisticated products where Lebanon has a clear comparative advantage. One avenue to formulate and implement such policies is through a sustainable mechanism of public-private dialogue (PPD) that increases accountability and transparency of those efforts and processes aimed at enhancing Lebanese industry.

To this end, the Lebanese Center for Policy Studies (LCPS) is convening roundtables to facilitate public-private dialogue between the Ministry of Industry and the Association of Lebanese Industrialists (ALI). LCPS uses evidence-based research to encourage industrialists and policy makers to move beyond narrow transactional concerns to broader issues and opportunities for policy change, export-oriented growth, and institutional reform. This has and continues to allow dialogue participants to better understand which and what mix of specific legal frameworks, regulatory rules, labor training services, market access rules, and infrastructure can significantly promote economic diversification within highly sophistication domains of production.


The oil & gas waiting game

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On June 22, Israel’s energy ministry announced that the deadline to place bids in the country’s first offshore licensing round would be pushed back until November 2017. This is the second time the bid round, which opened in November 2016, saw its end date postponed.

With the second extension, it became harder to believe the Israeli energy ministry’s repeated claims that the decision was motivated by an outpouring of interest from international companies and the need to provide them with more time to prepare their bids. A few companies appear to be interested, notably Italy’s Edison and Greece’s Energean, in addition, it seems, to Indian companies, as reported by the Israeli media after a meeting between Yuval Steinitz, Israel’s energy minister and India’s Minister of State for Petroleum and Natural Gas Dharmendra Pradhan, on the sidelines of the 22nd World Petroleum Congress in Istanbul on July 12.

This is in stark contrast with Cyprus’ most recent licensing round, which closed in July 2016 and attracted interest from some of the largest international oil and gas companies, including bids from Italy’s Eni, France’s Total, Norway’s Statoil, and America’s ExxonMobil with partner Qatar Petroleum. This interest is no doubt owed to the “Zohr effect.” The 2015 discovery in Egyptian waters of the largest gas field yet found in the Eastern Mediterranean, dubbed “Zohr” by Eni, has revived interest for exploration in the region. A combination of factors, including location, stability, and regulatory certainty, put Cyprus at the forefront of East Med countries that could benefit from this renewed interest.

Choppy waters

Israeli authorities were hoping that the discovery of Zohr, in addition to the resolution of local anti-trust issues that had hobbled the sector for more than a year, would encourage companies to take part in the first offshore licensing round. But it looks like companies’ interest in the tender was below expectations, prompting a second extension of the deadline to place bids. They hope that this latest four-month extension will change that. We will know more in November, provided the tender is not postponed again.

Lebanon is also currently holding its first offshore licensing round. Over 50 companies qualified for the tender, which will close on September 15. Authorities here are also banking on the “Zohr effect” but might end up attracting an interest that is, in this case as well, below their declared expectations.

That is because companies have not entirely recovered their appetite for offshore exploration yet. Although some of the factors that have contributed to temper international companies’ interest in Israel’s bid round are country specific (regulatory hurdles, a certain apprehension to invest in a country that could impact their activities elsewhere in the region, etc.), others are common to both Israel and Lebanon (global market conditions and difficulties monetizing discoveries).

In a previous article, published in February 2017 after Lebanon announced a new roadmap for the first licensing round, Executive signaled that future interest will depend on two things: global market conditions, and what we offer investors. There isn’t much we can do to affect the first, but there are some things we can do to attract investors — finalize our legal and regulatory framework, offer a competitive fiscal regime, and actively and aggressively promote our energy potential where it matters.

We have yet to finalize our legal framework and adopt the petroleum tax law. And, although the Parliament might adopt it before the bids are due, we are already several months late. It is true we can proceed with the tender through the legislation already in place, but authorities have insisted for years that a new tax law applicable to petroleum activities is in the works; failing to follow through sends the wrong signal. Besides the inadequacy of launching a tender under one set of legislation and completing it with another set, it confirms high-level decision making vis-a-vis Lebanon’s oil and gas sector moves at a slow and erratic pace. This is a risk companies are aware of, but which authorities have yet to fully consider and attempt to mitigate.

Hopeful horizons

On the marketing front, the strategy to promote the tender appears to be more confident than aggressive, relying on the availability of an extensive set of seismic data, which is hoped to de-risk investments. The focus on seismic data, while reasonable, ignores that there are a multitude of other types of risks that may discourage foreign companies.

Furthermore, we took a risk by modifying the blocks on offer, which might affect some companies’ interest in the bid round. Lebanon launched the tender back in 2013 with blocks 1, 4, 5, 6, and 9 open for bid, yet will be completing the round (hopefully on time) with another set of blocks (1, 4, 8, 9, and 10) on offer, mirroring the uncertainties we have seen with the legal framework governing the tender. Not only did this change confuse companies in their preparations (some allegedly gave up after the alteration), but, in a surprising move, four out of the five blocks picked for the auction include areas, of various sizes, that are disputed by neighboring countries (one in the north and three in the south).

Still, authorities appear to be confident that at least two or three operators, out of the 13 operators that pre-qualified for the tender, will be placing bids, including, it seems, India’s ONGC, according to a tweet posted by Minister Pradhan, on July 10, following his meeting with Energy and Water Minister Cesar Abou Khalil at the same conference in Istanbul. If their hunch is confirmed, the tender will indeed be a success, especially as this is Lebanon’s first licensing round, and even more so if we take into consideration the unpredictability, repeated delays, and political deadlock the entire process has experienced. If interest is below expectations, Lebanese authorities and decision-makers must more seriously devise and implement a strategy for the second licensing round.

Outside of the Silicon Valley bubble

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In the sweltering July heat, entrepreneurs from around the world were in Beirut pitching to join the Endeavor network. Founded in 1997 as a non-profit support network for entrepreneurs (focused on Argentina and Chile), Endeavor is now assisting founders of young companies in 27 countries around the world (including Lebanon since 2011). In 2012, the non-profit adjusted its model by raising investment funds to co-invest in its entrepreneurs alongside lead investors. Executive sat down with Endeavor CEO and Co-founder Linda Rottenberg to discuss the state of global entrepreneurship.

E   Earlier this year, Amazon bought the Saudi-based e-commerce platform Souq.com. Souq had previously raised a finance round, pushing its valuation past the $1 billion mark, and earning it the moniker “unicorn.” The woman who first used this term found 39 unicorns born between 2003 and 2013. In the four years since, there are more than 200, depending on which lists you look at. Are you worried there’s a bubble inflating here?

The problems in Silicon Valley are different than what we see around the world. In Silicon Valley, the valuations got too high. You have [venture capitalists] getting lazy and all fighting for the same deals, and you have people trying to build unicorn companies. And if you’re trying to build a unicorn company, you’re not building a unicorn company. What I see outside the US is amazing talent; still actually low valuations. If anything the entrepreneurs need more equity. We see the capitalization tables are a real problem, where investors are taking way too much equity. The more competition from funds the better, because it will be more entrepreneur-friendly. [Also, outside the US], we’re now seeing serial entrepreneurs who’ve had experience, we’re seeing this c-suite level talent that we didn’t have, and we’re seeing access to markets where you can actually create a multi-country company that is global in nature from the get-go. I believe that going forward, that’s going to become a huge advantage. So I’m really bullish on entrepreneurship outside of the US. So they’re the ones at risk of a bubble [in Silicon Valley], whereas I don’t think we’ve even been able to scratch the surface of the talent-to-capital efficiency here.

E   In the markets you’re involved in around the world, to what extent do you see people simply trying to adapt a successful model to a local/regional market?

First, I do think that these adaptations, the tropicalization of US models, make sense to some extent. Where you don’t have the capital market efficiencies, one potential exit down the road is to have these US companies [buy their local versions].

E   True, but that isn’t a very sustainable model.

Exactly, you have to start somewhere, but we’re seeing two other things. The second thing we’re seeing is some local innovation starting outside the US. I think this is going to happen more and more. I have long had a theory, outside the US, mobile technology is used for everything. Inside the US, it’s still a nice add-on, but people don’t use it for everything. So I actually believe mobile applications are going to be first-generation innovations outside the US and carry over. We’ll see.

Third, what we’re seeing [outside the US], is the opposite of ‘I want to build a unicorn.’ I see, ‘I’m solving a pain point, and I’m using technology to do something that used to be more traditional or family-based, and actually create something that’s more innovative and more scalable.’ So we’re seeing a lot of tech-enabled, rather than tech-centric, businesses in [agricultural technology] in health-tech, [education technology], food-tech. So taking what used to be more traditional industries, and modernizing, creating a layer of innovation. But it’s not just an app, it creates better lives for people at the base of the pyramid or the middle of the pyramid, because they’re closing gaps.

E   You talk about impact a lot on Endeavor’s website. What do you mean by that?

We’re not impact investors, but we’re about high-impact, which for us is also about this growth and the ecosystem multiplier effect [where entrepreneurs give back to the ecosystem by supporting, mentoring, or even investing in younger ecosystem companies]. What I’ve seen around the world is sometimes what people call “impact” investing; they mean there’s trade-offs between growth and the social impact. We at Endeavor don’t believe that. We believe that if you want to achieve high-quality jobs and improve things, you have to scale. What we’re looking at is the entrepreneurs who – rather than seeing everything as a trade-off between investing in the business and achieving the social mission – have to achieve the growth first if they want to improve things. [One of the companies in our network] is training more engineers than any university in Latin America. So even the companies you wouldn’t define as “impact” understand that you can’t build world-class companies in failed societies, and they have a responsibility in their communities to create the best employment.

E   Do you have a set criteria to define what impact companies in your network must demonstrate?

[We don’t have rigid criteria], but what we say to high-growth entrepreneurs and high-impact entrepreneurs is that you can’t check your values at the door. It’s not good enough to create a profitable business that’s good for your investors. If you’re not creating a culture that’s good for employees, if you’re not caring about your customers, if you’re not caring about the people in your communities, eventually it is going to come home to roost, so it all starts with the DNA and the values you instill in your company.

E   Do you see sexism, sexual harassment, and sexual assault as a problem in the global entrepreneurship scene?

We’re seeing marked improvement. About 20 percent [of companies in the Endeavor network are] run or co-run by women, compared to the US, where only around 8 percent of venture-backed companies are run by women. The women in our network are running companies that are incredibly high-impact. We need to tell stories of women that are not micro-credit, but are these high-impact, high-growth companies to inspire others. You need the role-model effect, which is what Endeavor is after.

Absent leadership

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The new taxes that were finally codified into law late last month have me seriously worried. Not only about the taxes themselves, but the way the issue was handled, and what it suggests. Only upon publication in the Official Gazette was the detailed list of new tax measures made public. It was too late for any well-informed input from journalists, economic analysts, citizens, and businesses. This is absurd. And no sooner did the tax measures officially come to light, when a last minute freeze by the Constitutional Council left us in the dark once again.

This can’t continue. The taxation mess only overshadows in how things can go wrong or be made to go wrong in our country. We’re approaching parliamentary elections that many hope will bring about transformational change. However, for that to actually happen, the reformist groups in this country must find leaders who can rally followers around a coherent, and well-defined vision for saving Lebanon. Today, such a leader remains elusive.

Revolutions tend to come about in forbidden ways, rather than through orderly manners by dedicated reformists that plan and convert followers publicly. Revolutionaries often endure prison and abuse. They stick their necks out, no matter how likely they are to lose their heads in the process. Meeting publicly in luxury hotels to plot the overthrow of the establishment, or quitting at the first sign of pressure, suggests our chances of winning are slim.

Even though members of civil society, journalists, and intellectuals have been assassinated, threatened, beaten, and jailed, the inconsistent push for change makes it absurdly easy for the establishment to ignore. Civil society has indeed seen some sizeable wins; producing a Member of Parliament, pricking the conscience of another parliamentarian into quitting, and even appointing a minister, albeit with too short a term. It also produced two movements; one that shook the streets, while the other convinced us all that change just might be possible. Yet, we haven’t been able to build on these wins and turn them into something bigger. Instead the establishment manipulated them to its advantage each time.

What we need is a full-time, competent hero. Someone honestly willing to live, and die for the cause.

We don’t have that today.

And we are running out of time.

Private returns

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International reports suggest that the Middle East is currently the world’s second fastest growing region in private wealth, trailing only Asia. According to a Global Wealth 2017 report published in June by Boston Consulting Group (BCG), an international management consulting firm, the private wealth segment picked up momentum globally in 2016, but with visible regional variations. This means that tailwinds are gathering for private bankers in Beirut. As Toufic Awad, general manager of Audi Private Bank, tells Executive, “This region has a very robust growing pool that promotes the need for wealth management and wealth management services.”

In percentage terms, the average annual rate of change in private wealth between 2014 and 2015 was 4.4 percent,  increasing to 5.3 in the following year. For the period between 2016 and 2021, the rate is projected, in BCG research, to reach 6 percent. In Asia Pacific, the respective rates are 12.8, 9.5, and 9.9 percent, while in the Middle East and Africa, change rates leapt from 1.2 percent in 2015 to 8.5 percent in 2016, and are projected to stay, on average, above 8 percent through 2021.

That may not sound overwhelming in a world prone to believing that double-digit growth is the only truly impressive kind. However, given the large volumes of wealth involved, these projections translate into sizeable figures and substantial increases. Global private wealth increased from $151.4 trillion in 2014 to $166.5 trillion in 2016. From that immense base, the projection assumes that global private wealth, in 2021, will have grown by a nominal $56.6 trillion to $223.1 trillion. For the Middle East and Africa, they project that private wealth will expand by almost half — from $8.1 trillion in 2016 to $12 trillion in 2021.

In other words, while some show optimism about the global economy — last month, European Central Bank (ECB) head Mario Draghi opened his Jackson Hole speech to his central banking peers by saying “the global recovery is firming up” — the gains in global private wealth, by comparison, appear to be inordinately healthy, and more so in the Middle East and Africa than in other world regions.

While the apparent faster growth of private wealth, when compared to overall improvements in the global economy, might seem disturbing to equality advocates in Lebanon, just as anywhere, private bankers will not be complaining. Even if increased accumulation of wealth from domestic business activities in the past six or seven years is questionable (see interview with FFA Private Bank Chairman Jean Riachi on page 34), and even if the economy in Lebanon were to remain locked in the state of “timid improvement” observed in the first half of 2017, these numbers imply that private bankers in this country could still book a growing share of handouts from the goddess Fortuna.

This is a benefit of the diaspora, says Charles Salem, global head of private banking and wealth management at Banque Libano-Francaise (BLF). Citing regional developments in 2009 and 2010 (the years directly after the great recession) and then in 2015, his view is that strong oil prices — as well as the issuance of new equities and infrastructure investment projects in the Gulf and MENA markets — all created new wealth there. This in turn, had an impact on wealth creation in Lebanon.

“The diaspora is active in all these countries and contributed to the global wealth creation in the GCC, MENA, and some African countries. Wealth thus also flowed to Lebanon, but the local infrastructure was not there to manage all this money. Today, the banking industry in Lebanon, and I think this is also due to international regulations, is putting in place all the teams and expertise to manage this money. I think that we can have world class services here — as one can find traditionally in Switzerland, Europe, and the US in private banking — that can be delivered locally today. This is what we are doing here in BLF [Banque Libano-Francaise],” explains Salem, who joined the Lebanese bank earlier this year in continuation of an international career in private banking.

Audi Private Bank’s Awad has a similar perspective. He says, “The Lebanese diaspora is very active in regions like Africa and South America and are still looking to diversify their wealth away from their domestic markets. We have active desks for those markets, for Latin America, Africa, and also the Gulf and the GCC. Most of our Lebanese expat clients are trying to repatriate money from their country of business to Lebanon, because they are not very secured by their political and security environment [in their countries of residence]. Therefore, we are still seeing flows to Lebanese private banks and to Audi Private Bank.”

As Awad acknowledges, the situation, from the private banking perspective, is nonetheless not entirely a bed of roses. “The wealth management industry, as we all know, is in a transition mode in order to accommodate all the increasing regulatory requirements and related costs,” he tells Executive, explaining that private banks have to undertake heavy investments into compliance, management information systems, and other information technology upgrades. “This is why we believe market share is important. Small players in this market will have a difficult time coping with increased requirements,” he adds. 

Private banking may be situated in a sweet spot, when seen from the current macro environment and outlook for wealth, but when seen from a client relations, regulatory, competitive, and technical perspective, players in this industry have no laurels to rest on. In the years of and after the great recession, from 2007 to about 2012, client confidence did not look good. In Europe and the United States, the recent past was filled with an enforced departure from bankers’ notorious secrecy and willful assistance in hiding client assets from tax collectors.

Further, while today’s global economic conditions are regarded as calm and upbeat in comparison to 2016, as illustrated by the Draghi speech, no central bankers’ symposium today is complete without an ominous warning that memories of the 2007 recession are fading.  “We can never be sure that new crises will not occur,” Fed Chair Janet Yellen cautioned in her — politically loaded — Jackson Hole remarks. Unsaid note to private bankers and wealth managers: never expect an easy time. Additionally, new technology — specifically artificial intelligence — is a fourth element that is emerging as both capable and likely to disturb the peace of private banking in the near future. 

Digital advisors?

The primary threat from cyberspace, in the case of private banking, are not viruses but AI-driven robo-advisors, capable not only of storing a client’s risk profile and all relevant market data — and analyzing a client’s whole history of investment choices, but also of giving investment advice that is more objective and immune to human biases, as well as more cognizant of the investor’s preferences. In its report, BCG warns wealth managers  about this new digitization, with the position that wealth managers who wait out such developments and continue with business as usual “are unlikely to prosper as transformation of the industry gains momentum.”

For several years, bankers have been inundated with prophecies about business disruptions from Fintech startups who might hit large banks, like Uber and Airbnb hit the transport and accommodation sectors. Contrary to such hype, research today speaks more of banks which assimilate or outright absorb Fintechs.

The human factor

Asked if he considers statements such as BCG’s to be pertinent analysis or more of a consultancy sales pitch, Awad says he expects the reality to be a bit of both, with changes that might happen faster than many would think possible. “If one reads into what is happening in the area of artificial intelligence and related technology, one can predict that the concept of private banking will be totally different in 10 or perhaps 15 years,” he says, before adding that personal relationships, trust, and friendship play important roles in private banking, and that banks in the Middle East are unlikely to lead the global shift to robo-advisors, if one takes into account the region’s predominantly conservative client mentality. “It’s a major mentality shift and also a generational issue. Perhaps the next generation, with the evolution of what is happening in the world, will be more prone to go for this new sort of private bank,” he says.

BLF’s Salem likewise does not fully buy into predictions of a complete shift to digital in private banking. “Whatever will develop in the wealth management industry, the human factor will stay — discussions, eye contact, personal interactions, etc. But digital is very important because you have to differentiate yourself, meet client expectations, and enhance client experience, but you also have to enhance your value proposition, your advisory proposition, and staff skills,” he says, further noting that digital transformation is also made inevitable by compliance-related practicalities and for the alignment of internal processes.

Coming back to more immediate issues, some paradigms of the wealth management industry in 2017 do not sound different from the recipes of earlier years. Portfolio diversification is advice that has been recited by private bankers in every interview over the last ten or fifteen years; another mantra is to tailor investment offerings according to client needs and risk appetite. In such basics, the industry appears to have its identity and continuity, whether the times and global market conditions are smooth or rough.

Lebanese hopes

As to current hopes for private banking in Lebanon, there is palpably greater enthusiasm in the corner offices of private banks around the city of Beirut. In comparison, a few years ago development of the domestic market investment opportunities fit for private banking was, at best, talked about in tentative terms, as something that would be nice to have.

Now BLF’s Salem is enthusiastic in delivering his view that foreign operators of private banks will tend to move out of the Lebanese market more than come into it, with local private banks being on the rise. “I think the Lebanese market in [the] future will be more for local players who have everything needed to deliver the service locally,” he says. Albeit refusing to disclose the ratios for assets under management  (AUM) in the bank’s two private banking operations in Beirut and Geneva, he continues, “We are developing the private banking activity at BLF and today we are focusing on Beirut and Geneva in developing our advisory skills and all our product capabilities with asset management, continuing along the trend established in recent years to develop solutions and create new products for clients, streamlining their journey.”

Awad is, in part, more forthcoming, as he states the respective AUM sizes of Audi Private Bank in Beirut and Geneva, when he announces that the bank somewhat extraordinarily saw more AUM growth in Beirut than Geneva last year, reaching AUM dimensions of about $4 billion in the former and $6 billion in the latter city. He concedes that this trend of faster AUM growth in Beirut versus Geneva was not repeated in the year to date — without referring to the reasons for the atypical development in 2016, however, which of course gives room for the assumption that this inflow was related to the central bank’s “financial engineering.”

Overall, Awad is also upbeat about Beirut, saying, “As far as restructuring of private banks here in Lebanon, we have been working in the past few years at Bank Audi to set up private banking as a business line. Today we have the operation in Switzerland, the operation here, in Saudi Arabia, and in Qatar. Those are the four main booking centers. One way to go is to create offerings where clients can bank with one bank, Audi Private, and you [as a client] can go into different geographies and according to the risk profile, chose different booking centers. The investment proposition needs to be unified and it is; we have a central investment team. At the same time we cater to clients in different markets and offer them different booking centers. This is the model that we have put in place, and it’s working very nicely for us.”

It’s about our purses

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As Lebanon celebrates its recent military victory over Islamic State fighters on this side of the Lebanese-Syrian border and mourns over the recovered bodies of nine army soldiers, local politicians are again embroiled in another battle of sorts: one over taxation.

After many months vacillating over whether or not to issue new taxes, lawmakers agreed in July to the measures. The legislation then sat on the desk of the president for nearly a month before the required signature was inked. But on the last day of August, in a surprising move, the Constitutional Council issued an injunction temporarily freezing the tax hike while it studied an appeal challenging the law, effectively delaying the tax implementation – at least until Lebanon’s highest court issues its final decision in September.

The court’s ruling was just the latest twist in what has been a long and winding road of confusion, where along the way, details were obscured on which new taxes would be introduced or increased, how much more money people and businesses would have to pay, when the new measures would enter into force, and what the revenues would actually be used for. The opacity of the tax adoption process allowed for manipulation of the public conversation from many different sides. Citizens should be informed about proposed taxes, and public and elected officials should explain their necessity in good faith, instead of welding the issue to their political or electoral cause. 

For several years, the International Monetary Fund in its annual Article IV paper has argued that tax measures should be passed and that fiscal measures were needed to put the public debt on a sustainable path — irrespective of the salary scale. But the new taxes have been framed to the general public as necessary to pay for a salary increase for public workers — public and elected officials said they needed $1.2 billion for the salary scale, while simultaneously new revenue was being created via increased taxation; it was easy and expedient to link the two. However, tax legislation was not designed to pay the wage scale increase — despite the public narrative and the argument presented to the court — but instead was aimed at shoring up public revenue to close the deficit, which, of course, is being made bigger by the wage increase.

 At the highest levels of the Ministry of Finance there is significant awareness of the need for a coherent, and more equal taxation system 

Fix the right problems

Citizens are in the right to complain about the new measures, Director General of the Ministry of Finance Alain Bifani tells Executive in an interview (see Q&A page 44). But Bifani argues the new taxes are necessary for the government to continue treading water financially, that Lebanon’s tax burden is reasonable — though the system could be fairer — and that it is public services that are too expensive. Now that the revenue side has been adjusted, it is time to turn the focus to fixing expenditures and developing a growth environment for the private sector.

The law’s challengers are claiming that the poor will be most affected, when the reality is that much of the new tax burden will hit idle wealth — a capital gains tax on real estate, and a tax on interest. In effect, those who are blocking the tax measures are defending the rich by sticking up for the poor. Whether they genuinely are trying to stick up for the poor cannot be answered, and what the tax blockage will do for the poor in the long run also has no answer. But it is a shame that this is where the battle lines have been drawn rather than focusing effort and political capital on the issue of public finance that matters most: expenditures. And that is a measure of old politics — an initiative that gets shut down by paralysis because buy-in is needed from everyone involved, locking in a situation where there is no progress and all other options are sacrificed by waiting on the first.

Herein lies the crux of the matter. What Lebanon has not had for a long time are clear spending targets and ceilings. The government and Parliament must be transparent in how it plans to and how it spends public money. They must develop and communicate to the general public a strategic perspective on taxes — not moment by moment dealings — and they must set clear spending targets and stick to them. On an institutional level, as much as can be said with due caution, at the highest levels of the Ministry of Finance there is significant awareness of the need for a coherent, and more equal taxation system, and for the situational remedies that are not easy to impose in the short-run. It is not about having bad solutions — those being offered and implemented might actually be relatively close to the best available.

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