As 2014 was winding its way from present to past, the Lebanese market’s top banking buzzword was resilience. In interviews throughout the year as well as in year end conversations with Executive, bankers emphasized the resilience of the sector’s financial results in the face of a challenging environment.

The numbers for 2014, as far as they were available for this issue of Facts and Forecasts, have corroborated the sector’s ability to adapt to stress and adversity. But on operational levels, the year for the Lebanese banking industry could also be characterized by another R word: restrictions.

From new compliance issues and reporting requirements under the American tax-cheat-catch invention, FATCA, to various foreign threats of new political hunts after Lebanese financial institutions, the year forced local banks to deal with further restraints and risks that had nothing to do with their business skills and everything to do with behavioral supervision. As a visiting banker said in September, “In general, nowadays it is much less fun to be a banker than it used to be.”

Arab banks, including Lebanese, face other political and reputational risks that have recently all too often morphed into special interest-driven restraints, whether by punitive targeting of Lebanese banks under American political agendas or litigious US activism against Arab banks through civil suits motivated by resentment and greed.

Amid the webs of restraints that Lebanese banks have to deal with, some strands exist which are totally domestic and these are not the least problematic strings. First, there is the easily discernible rope of dependency on the political regime. This is perfectly normal for banking in a state context anywhere, except that under the creeping self incapacitation of the Lebanese political system, 2014 has become a year in which the banking sector’s exposure to dysfunctional political governance no longer looks like just an inconvenience that one can sit out.

The impediments caused by fiscal imbalances and growth in public debt were on the lips of every banker and bank-employed economist who Executive interviewed in 2014, whether for our annual banking report or the year end review. All these concerns tied in, as Byblos Bank chairman Dr. François Bassil put it, “with macroeconomic policies, or the lack thereof.”

The new tax strings that were proposed in spring 2014 in the context of the salary scale debate were perceived in banking circles as totally detrimental ideas. Imposing taxes such as a non deductible 7 percent levy on banks’ interest rate income from treasury bills and certificates of deposit would lead to higher interest rates for loans, Banque Libano-Française chairman Walid Raphael pointed out. This would have “an immediate impact on bank borrowers, whose monthly payments will increase as interest rates go up,” he told Executive, adding that more than 100,000 home loan clients and over 270,000 other small borrowers would be hurt.

Blom Bank chairman Saad Azhari named the fiscal deficit as an outstanding concern as increasing primary surpluses of 2007–2011 fell back into deficits in 2012 and 2013. He emphasized the “need for a fiscal policy that will increase revenues and compress expenditures in order to produce a higher primary surplus and put back the debt to GDP ratio on a sustainable track.”

Finally, in the view of a number of economists there is a macroeconomic ball and chain weighing on the Lebanese economy in the form of the dollar peg. It is a whole set of restraints when it comes to setting monetary policy. But things are not black and white here. A turn away from the peg is conceptually a no brainer, because such measures are meant to be short term, said Bank Audi Group chief financial officer Freddie Baz. “The peg policy has not been really harmful but conceptually it of course should be a transition policy of 18 to 24 months, not something that lasts 16 years,” he conceded. However, Baz argued further that historically deep seated confidence deficiencies in the Lebanese population vis à vis monetary liberalization, as well as current problems, are standing against a rash move away from the peg, especially since associated factors of fixity such as the crowding out effect have been kept under full control.

For Baz, the main frustration is the low capacity utilization rate at financial institutions and in the whole economy. Citing the rate at an estimated 72 percent, meaning full capacity utilization would translate into a GDP of $62–$64 billion instead of the $47 billion expected for 2014, he said, “We are not using our full potential and this applies to the overall economy.”

Unfortunately, the discussion on how to fundamentally improve both Lebanon’s political and economic governance through a more complete democracy, and shift growth drivers from domestic demand to foreign demand, has not happened in 2014, and from the collective sense of the banking sector, the one word answer to whether an effective discussion could be expected for 2015 was ‘no’.

The post Old problems, new restrictions appeared first on Executive Magazine.

When it comes to the question of what Lebanese commercial banks should and could do differently in 2015, the short answer is ‘almost everything’. However, as far as what one can realistically expect them to do differently, from the damaging ways they have trodden for more than two decades, the answer is ‘very little’.

As vexing as this is, our banking system’s emergence into the modern economic era would depend on an awakening and adoption of new policies by the central bank. For the past 22 years, since embarking on reconstruction in 1992, Lebanon has been relying on a simplistic currency mechanism of fixity.

In 1972, the countries of the world replaced the post World War II fixity with a system whereby the currency, as a mirror of the economy, moves under the influence of factors such as domestic interest rates, job creation and employment, balance of trade and fiscal balance.

Since then, when the previous model of fixity known as Bretton Woods was abandoned, monetary policy has incorporated flexibility, which helps any national economy to position and correct itself. Lebanon’s current currency regime, on the other hand, is still stuck in the era of fixity defined by Bretton Woods and it lacks a real monetary policy — its greatest failing.

By definition, monetary policy aims at supplying enough money to the economy to cover the needs of producers and consumers, to control inflation and to contribute efficiently to better economic growth. Lebanon’s central bank, however, has been focused on maintaining the Lebanese lira independently of the economy. Thus, what we have seen is a contractionary central monetary policy under which money supply in Lebanon since 1993 has never been sufficient to cover the real needs of companies, farmers, individuals and private households.

Underutilized capital

In August 2014, our commercial banks surpassed $150 billion in deposits. How are they utilizing these savings? Of this $150 billion, $60.9 billion was deposited in the central bank as of September 2014, according to data from the Association of Banks in Lebanon. This sum entails the required reserves, which are among the highest in the world in terms of percentages mandated, at 15 percent for deposits in foreign currency and 25 percent for lira denominated deposits.

The required reserves amount to approximately $25–$30 billion, which means that we have $30–$35 billion held at the central bank in excess of the required reserves. These amounts lie dormant, meaning they are paralyzed and inactive when it comes to economic usage.

But, even if we assume for argument’s sake that the $60 billion in the vaults of the central bank is held to support fixity and the lira’s peg to the US dollar, what about the remaining $90 billion in deposits? How is it used? Between $37 and $38 billion are committed to funding the public deficit via subscriptions in treasury bills and eurobonds. The rest amounts to a bit more than $50 billion, out of which $44.2 billion have been granted by commercial banks as loans to the whole resident private sector in Lebanon, to all companies and private households.

This fashion of managing our financial resources contradicts a basic macroeconomic equilibrium equation, which says that savings in the national economy are supposed to mainly finance domestic investments and foreign trade. Given that less than one third of our savings are dedicated to lending to the private sector, do our savings sufficiently finance our domestic investments and foreign trade? The answer is obviously no. We are thus contradicting the basic equation of macroeconomic equilibrium.

The way out of this violation of macroeconomic fundamentals will open up only if a real monetary policy is established and diligently applied, including flexibility in the management of our currency. If you allow your currency to depreciate when you have a growing deficit in the balance of trade or in your budget, this depreciation will help you export more, and by exporting more, you can correct the anomalies in your domestic economy. Rigidity of the currency regime, on the other hand, will only exacerbate any anomaly in your economic results, as you are not allowing the economy to correct itself. 

Our economy is of a very humble dimension compared to a huge quantity of debt, the result of the contractionary monetary approach of the past 22 years. Also, resulting from this approach of the central bank, our interest rate returns on deposits since 1992 have always been higher than international rates. These high returns have been linked to that approach because in the mind of the central bank, the assumption has been that the higher the return on deposits, the higher the demand for the lira will be, irrespective of the state of the Lebanese economy.

What these high interest rates have neither linkage to, nor influence on, though, is inflation. In the minds of our central bankers, the course of keeping liquidity scarce under a contractionary monetary approach may have aimed at warding off inflation — but that has not been so. Despite a very controlled money supply, inflation has not been controlled or mastered. Reasons for this inability to control inflation stem from huge structural deficiencies, such as the presence of monopolies paired with anarchy and a lack of controls in our markets.

As the high returns on deposits have been linked only to the currency peg and to nothing else, the presence of high interest rates has lowered both domestic investment and consumption, and we all know that you cannot grow an economy without sufficient domestic investments and domestic consumption. For this reason, the entire banking system in Lebanon, including the central bank and the commercial banks, is suffering from anomalies and deficiencies.

The profit trap

Yet nobody can deny that the Lebanese banking sector is flourishing, generating high profits for both owners and shareholders in our commercial banks. There are three reasons for this, despite the financial sector’s violations of a basic macroeconomic equation.

The first is that the majority of the $45 billion in domestic lending is given by the banks to the private sector’s strongest constituents. Only 5 to 10 percent of private sector participants are benefiting from 80 percent of loans, which means that our banks are not playing their role of fairly supporting all stakeholders, sectors and producers. Even with the very moderate amounts of money that are loaned to the private sector, banks are very selective in choosing their debtors.

Lebanon’s economic model is therefore an elitist growth model — only the elite in such a system are supposed to grow and progress, while in Lebanon’s case it is comprised of people from the political class and those in governmental positions, plus the financial oligarchy. Besides being restrictive against the needs of small producers and burdening consumers with excessive costs of credit, the elitist growth model allows banks to reduce their overall lending risk to very low levels — nearly nil — because their borrowers are overwhelmingly very solvent people and have enough assets to cover their loans.

Secondly, the commercial banks benefit from interest payments by the central bank on their excess deposits — those billions sitting in the central bank beyond the required reserves. Even if the banks’ margins are very low on each deposited lira or dollar, they reap these interest incomes on large deposits, risk free and without any input of labor. Apart from awarding banks with unjustifiable interest earnings, the whole practice is as if the central bank is transforming itself into a commercial bank. It accepts deposits and pays interest, which is contrary to the mission of a central bank.

The third reason is, when commercial banks subscribe to public debt instruments, they are assured that they will be paid their interest rates. I think that at least $40 billion of the $65 billion in bank funding of the public debt comes from deposits, meaning that the principal of the lent funds actually belongs to the depositors. But it’s the banks, not the owners of the principal, who obtain high profits from lending to the public sector — and these profits are assured by whom? By all tax payers because the government collects their taxes and pays the interest it owes to the banks through the treasury.

With these three sources of profit — from the wealthy and solvent, from interests paid by the central bank and from the high interest rates on public borrowing — banks are in a very comfortable position and may see no reason to push the government and central bank towards a real monetary policy. But have banks succeeded in meeting their fundamental obligation, which is to guarantee the safety of deposits to the depositors, given that they have granted all these funds to a corrupted government? Likely not.

Managing money right

What the banking sector, led by the central bank, should do in 2015 is take steps to gauge the real state of financial markets in order to at least begin moving toward a monetary approach that supports the macroeconomic equation. The way to do this would be regular weekly meetings with the three parties involved in financial market supply and demand: the central bank governor, the commercial bankers and the economic producers.

In order to invest and consume, the private sector demands money. By viewing this demand on a weekly basis, we can determine how much money the central bank is supposed to supply. The creation of money is warranted, as long as this created money is distributed equitably and fairly between investing and consuming. If all newly created money goes to consumption, it will be inflationary. If it goes to production alone, there will be an excess of supply and a decrease in prices. The money should be supplied based on an understanding of the existing demand and it must be distributed equitably. Both these measures would be within much greater reach if the three parties were to sit down at the same table and review the demand and supply of money on a weekly basis in 2015 and in all other years.

The post Dormant capital appeared first on Executive Magazine.

Gray, when not taken as the zone between black and white but as the color of unobtrusiveness and understatement — as well as secretive sway — has long been employed to characterize issues and people related to management in general and finance in particular. This type of gray is the color of power, and it suits Lebanese banking in 2014, just as it has done historically. But the gray of 2014 has been infused again, and even more so than in 2013, with an enormous caveat of politically induced paralysis.

The results of Lebanese banks in 2014 were not terribly surprising at all. Growth in total assets came in at 6.5 percent between December 2013 and September 2014, as per the performance review of the top 14 banks by deposits (the ‘Alpha Group’) which dominate the sector. Alpha banks, currently numbering 14, are defined by Bankdata as banks which hold deposits of over $2 billion.

Interaction with customers has generated growth in terms of deposits and lending. According to Bankdata Financial Services, growth in deposits at Alpha Group banks for the first three quarters of 2014 reached 6.2 percent. However, growth rates were skewed in favor of deposits in foreign units of Lebanese banks, which increased 12.3 percent versus the 5.0 percent growth in deposits in the domestic market. The latter number comprised faster growth in foreign currency deposits than in lira denominated deposits, which translated into a slight downshift of 0.4 percentage points in the dollarization rate of domestic deposits, to 63.8 percent.

The same skew in favor of overseas activities, applied to the lending side. Here, the overall nine months growth of Alpha Group portfolios was 8.3 percent. This corresponded to an increase in value to $58.5 billion by September 30, 2014, from $54 billion at the end of December 2013. According to Bankdata, growth in domestic lending was moderate at 5.5 percent, compared to 15.1 percent growth in lending at units abroad. Domestically, foreign currency loans constituted 52 percent of the Alpha Group’s combined portfolio at the end of September.

The profitability picture was less friendly and decidedly grayish in its domestic coloration. In consolidated terms, Alpha Group banks achieved 4.4 percent growth in net profits relative to the first nine months of 2013, Bankdata said. The Lebanese arena awarded 2.7 percent growth in domestic net profits. 

As profit growth lagged behind increases in overall activities, the 14 banks experienced further net contraction in return ratios. The return on average assets fell slightly from 1.06 percent in the first nine months of 2013 to 1.0 percent in the first nine months of 2014, and the return on average equity declined from 11.89 percent to 11.35 percent, according to Bankdata’s analysts, who concluded that “return ratios of Lebanese banks remain weak when compared to their average weighted cost of capital, although justified by the persistent tough operating conditions in their main markets of presence.”

Verbal highlights in Bankdata’s descriptions of the Alpha Group’s outcomes of the first nine months were terms such as “fair growth in major banking aggregates” and a performance “persistently characterized by high liquidity and financial flexibility.” Other analysts and the decisionmakers at leading banks employed similar euphemisms to describe a gray year in the best possible terms. 

Evaluation selfies

At a time when the selfie is perceived as the present and future habit of social communication, Lebanese banks are looking increasingly prolific in their self evaluations. No bank contacted by Executive expressed concern in their ability to meet their own targets in 2014. Banks confirmed, however, that they had aligned domestic targets with the subdued expectations at which they had arrived one year earlier after being exposed to a low growth environment in 2013. 

BLOM Bank pointed to outperformance against the banking sector, comparing its 9.8 percent increase in claims on the private sector in the first three quarters against a 6.6 percent increase for the whole banking sector. The bank achieved 5.17 percent year to date growth in total assets to $27.5 billion at the end of September 2014, and net profits increased by 2.5 percent year on year by the end of September, said BLOM Chairman Saad Azhari. 

“Our return on equity was at 15.3 percent, one of the highest in the sector, and compares well with the 11 percent of the banking sector. This was mainly due to the vision the bank has of its own operations focused on a balanced growth in net profit and all balance sheet items, with priority to control banking risks,” Azhari told Executive.

He clarified that foreign subsidiaries were the star performers in 2014. “In particular, the Egyptian market seems to be recovering well as our profits in our entity there jumped by 60 percent year on year at the end of September 2014. Our other foreign subsidiaries’ performances exceeded expectations too. So the increase in our net profit for the first nine months of 2014 came mainly from the increase in activity of our entities abroad, mainly Egypt, Jordan and the Gulf countries, as our domestic profits stagnated.”

Bank Audi focused with Argus eyes on the group’s expansionary markets in Turkey and Egypt, and cast a third eye on its private banking development. Defending their position as domestic market dominator was the fourth goal, one which the bank claims it has met. However, Audi Group chief financial officer Freddie Baz conceded that domestic performance was “in line with what banks have been publishing in terms of domestic assets and earnings growth at about 6 percent nominal growth. We have probably 2 percent real growth in context with a deflator of 3 to 4 percent.”

Bank Audi continues to expand into Turkey under the Odeabank brand

The group outperformed its budgets in Egypt and Turkey, he said. “We achieved targeted growth in Egypt and also additional efficiency gains, which translated into bottom line improvements beyond what was expected for the full year of 2014. In Turkey we had another interesting development whereby the outperformance is far more material because we had budgeted another year of negative bottom line as is normal for any greenfield operation.” While the 2014 negative bottom line assumption for the 2012 established subsidiary Odeabank was much lower than the 2013 assumption, the startup turned out to be a welcome surprise reporting a positive bottom line after provisions and taxes as of May 2014, far ahead of expected timeframes. Another growth highlight at Audi Group was the performance of the private banking activity which covers three European and three Gulf countries as well as Lebanon.

Read “The success of Odeabank” on how Bank Audi’s Turkish venture is performing beyond expectations

For Byblos Bank, the main highlights were its healthy ratios despite local and regional political uncertainties and the persistent domestic economic stagnation. The bank’s “conservative approach has been validated once again in 2014,” said Byblos Bank Chairman Dr. François Bassil. He added, “The bank’s results reaffirmed the confidence of our depositors, borrowers and shareholders, with customer deposits rising by 5.7 percent to reach $15.6 billion, and total assets growing by 2.6 percent to reach $19 billion at the end of September 2014. The results also reflected the bank’s firm support for the private sector, with net customer loans increasing by 5 percent to $4.73 billion at the end of the same period.”

While conceding that net income did contract in the first nine months when compared to the same period in 2013, Bassil qualified the drop as “small”, at 0.7 percent for a net $112.8 million in the first three quarters. “The results of the first 9 months of 2014 show that Byblos Bank has continued to maintain a high level of financial cushions in order to mitigate unexpected risks and to counter economic volatility.” He also pointed out that Byblos Bank’s capital adequacy ratio reached 16.5 percent, one of the highest in Lebanon’s banking sector and that primary liquidity placed with banks and central banks totaled $9.2 billion at the end of the third quarter, representing 48.7 percent of total assets. 

In terms of assets at the end of Q3, BLOM Bank, Bank Audi and Byblos Bank were placed first, second and third respectively in the list of Alpha Banks prepared by Bankdata.

Banque Libano-Française, positioned in the mid tier of the Alpha Group, “expects to finish 2014 with a profitability level that is close to last year’s, noting that 2013 was a record year for our bank, with net profits of $101 million, 15 percent higher than 2012,” said chairman Walid Raphael. “Our loan portfolio has so far grown by more than 9 percent, while our customer deposits have increased by 5 percent,” he added. 

Raphael, who was elected as BLF’s chairman of the board in September 2014 after the passing of his father Farid, who was the bank’s founder, told Executive that the bank’s leadership team remained “effectively the same team that has been managing the bank alongside our founding chairman for the past 10 years” and added that the bank “will continue pursuing its conservative and prudent growth strategy and to maintain high levels of liquidity and equity, while providing an excellent service to its clients.”

With $11 billion in assets at the end of September 2014, Bankdata ranked BLF in eighth position in the Alpha Group. 

Representing a growing institution outside the Alpha Group, BML (rebranded from Bank Misr Liban) confirmed that performance at the bank was in line with targets set for the past year. “BML has performed well in 2014 compared to 2013, and this is noted in our dramatic increase in interest income as a result of our efforts to double our corporate portfolio which we were able to achieve,” said Executive General Manager Hadi Naffi.

According to Naffi, BML accomplished all its objectives for 2014 by implementing a consistent strategy. He expressed caution regarding Lebanon’s retail banking environment due to a combination of shrinking purchasing power and increasing costs of living for private households. Under these conditions “it’s very risky if we reach a level where retail lending is financing the consumer’s basic lifestyle or other consumer loans. Banks need to make sure that the consumers have the ability to repay their loans and are requiring loans for the right purpose.”

Attributing the difficult situation of private householders to “the current economic and political situation,” Naffi said the absence of economic growth is hindering the capabilities of the private sector. When asked if the main concerns of the banking sector over the national situation had been in any way solved in 2014, Naffi responded with an emphatic “no”. 

“As for 2015, our main objective is to keep our corporate portfolio growing at the same pace, and to benefit from cross selling opportunities between the corporate and retail portfolio,” he said, adding that BML is working on upgrading its core banking system and will launch several new deposit and loan products during the year. 

Pointing to two BLF achievements in 2014: receiving several awards for its card programs and recording a 100 percent expansion in assets under management, and five percent return in the year’s first 10 months at the LF Total Return Bond Fund, Raphael said of the bank’s plans for 2015, “we will continue to pursue our policy of managed growth in an environment that we expect to continue to be challenging.” This will include further diversification of product offerings and expansion of the domestic branch and ATM networks, but also entail an endeavor to continue to expand internationally in countries where BLF’s Lebanese clients have a presence.

Hunger for opportunities amid waiting games 

Generally, banks’ plans for domestic activity in 2015 appear to be subdued under a prevailing view in the sector that the Lebanese economic slowdown “continues to be broad based, with consumption, trade, tourism, capital flows and investment indicators all pointing to continuing anemic economic activity”, in the words of Byblos Bank’s Bassil. Without a “comprehensive political agreement on all sides” this anemia is not likely to change in the near future, he cautioned.

New impulses for activity are thus concentrated outside of the domestic market, at least for the two largest banking groups. Given that the group’s positive results development in 2014 was driven by its overseas units, and that these units’ contribution to group profits increased year on year by three percentage points to about 24 percent in the first nine months of 2014, BLOM Bank’s Azhari said he expected the same trend for 2015, “meaning that our growth will be brought by our subsidiaries abroad, especially in Egypt, Jordan, and the Gulf.”

Likewise, Bank Audi is not betting on local horses to pull its profits wagon. According to the bank’s Dr. Baz, the group is confident that it will retain its leadership in the domestic market. In line with its strategic concept of four pillars, Audi will keep an eye on maintaining the advantages it has established over its immediate peers in terms of assets and other metrics, Baz said, “but we don’t have a very big [domestic] appetite under the current circumstances.”

When compared with his views on the Lebanese market, Baz was tangibly more enthusiastic about private banking activity, where the group aims to double the size of its franchise over the next three years, and the commercial banking units in Turkey and Egypt. These three business segments, together with preservation of the home advantage, constitute the group’s four strategic pillars.

In other foreign markets, Audi’s chief strategist expects that expansion in Iraq will remain on course as the group is seeking conversion of the seven branch licenses it obtained in the country, before the licenses lose validity in early 2016. Farther away, “we will probably start looking closer at sub-Saharan Africa ahead of preset timing as one single addition to the four pillars,” Baz told Executive. 

Audi had already made known its intent to enter sub-Saharan Africa on the strength of having booked $2 billion on the group’s balance sheets from deposits, assets under management, corporate loans and trade finance facilities via its banking units in Beirut, France and Switzerland. But due to the recent strength of its growth in Turkey and Egypt, Baz said that the board decided to start exploring options for setting up in sub-Saharan Africa in 2015 instead of, as previously intended, after completely fulfilling key growth targets in Turkey and Egypt.

Meanwhile at home, all Lebanese banks are like every economic stakeholder in the position of waiting for that comprehensive political agreement, and a clear economic vision that would provide investors with incentives to take risks in the economy. That wait can’t be called a game anymore.

The post Banking in subdued colors appeared first on Executive Magazine.

Executive met with Nicolas Boukather to discuss the newly formed Lebanese Association of Motorcycle Agents (LAMA), of which he is the secretary general, and what is needed to bolster sales. Boukather is also chairman of A.N. Boukather — dealer for Mazda and motorbike brands Piaggio, Aprilia, Motor Guzzi, Vespa, Gilera, Derby, KTM and Bajaj.

LAMA was only established in 2014. Why was there a need for such an association? 

LAMA’s role is to regulate the sector and to propagate a culture of bikers who respect the rules, as well as for drivers to respect bikers, and, of course, to organize motorcycle shows. Bikers are like a family, it is really cool to see people be united independent of religion and social class, as one group of bikers. 

Will you also lobby the government? 

In case they need consultants to talk to, they now have a reference. In Beirut, and Lebanon in general, there’s a need for motorbikes and scooters as a means of transport, as the city is getting congested and there is no real public transport. The commuting part is half of the story, the other half is the search for freedom, to drive on weekends and visit the country.

Are you pushing for the implementation of the new traffic law? 

My main message is that it is criminal to not implement the traffic law immediately. One of LAMA’s objectives is to really push for enforcement as it will save lives, solve traffic problems, reduce the fuel bill of consumers and open the doors for motorbike tourism. There are tons of advantages and no disadvantages. I don’t think anybody in the country who is keen to preserve the safety of their children would oppose this law. 

The law prohibits used bikes under 125cc, right? 

Yes, and it prohibits the importation of used bikes over three years old.

There were demonstrations against that part of the law.

Yes, by importers that use bikes as a form of forgery, telling customs that new bikes are used ones to pay less tax. If the law was applied, each bike would be $200 more in terms of registration costs. It is unacceptable to use forgery to pay less tax. The state needs more revenues, and this is unhealthy competition and a state of non-law. You know what is needed to implement the used bike law? One letter from the Ministry of Finance regarding customs duty.

The law would also better regulate the sector, as the number of bikes doing the annual test must be even less than the car sector, which is just 58 percent. 

I don’t have a figure, but I estimate it at 80 percent.

Are attitudes to bikers changing compared to a few years ago? 

They are, big time. You have people riding Vespas to go to the law courts. We have a lot of customers doing that. Things are changing and it is a lifestyle. We are pushing a lot of accessories — helmets, jackets and gloves — for safety reasons. Do you know about the inflatable protection jacket?

Yes but it is expensive, at around $500. 

It is, but people are spending hundreds of dollars on helmets and when I came off my bike, it saved my life.

What do you estimate sales of new bikes to be in 2014?

Around 1,400 to 1,500 new bikes is reasonable and growing around 20 percent yearly. You could multiply this number by 10 if the traffic law was implemented, as the import of used bikes would stop and people would feel safer on the roads. 

So you envision 10,000 new bike sales a year?

Our vision is to get to 30,000 units a year. Next to every car in the garage, a Lebanese needs a motorbike. In the second stage, people will get rid of the car. Imagine the traffic on Sunday everyday — that would be the result of more motorbikes. To develop the road infrastructure costs a lot, but to develop a motorbike culture is less expensive, and it should be an aim of the government. If you aligned the vision of LAMA with the government, you can imagine the impact it would have on economic growth, on pollution. It would be a game changer.

The post Two wheels forward appeared first on Executive Magazine.

It was business as usual for the first nine months of 2014 in the automotive and transportation sectors. Car sales were similar to 2013, and used car sales continued to drop, with low priced and new models coupled with access to easy financing keeping the sector in gear. In short, it was another good year for consumers to buy a car and another bad year in the inglorious history of Lebanese public transport.

A new traffic law based on global best practices was passed that could alter the organized anarchy that is the current ‘rule of the road’ today. All that is missing is implementation, which dealers are keen to see happen. What the sector was not as happy about was an unexpected circular from the Banque du Liban (BDL) to raise down payment requirements to 25 percent as of October 1, 2014, which could cause a drop in sales of new cars by as much as 30 percent.

The continued failure this year of the Ministry of Public Works and Transportation to issue a tender for 250 public buses launched in January 2013 came as no surprise, with the $70 million needed diverted for other means, supposedly security. This has helped drive the rise in car sales for another year running, with no public buses acquired since 1998, while sales of new cars have correspondingly surged, from 19,100 in 2004, to about 35,000 per annum for the past few years. Trips by public transport on the other hand have dwindled to 19 percent of all trips in Beirut, of which 1.7 percent are by public bus.

The number of cars nationwide, at 1.42 million, is among the highest per capita in the world. While the BDL circular may press the breaks on sales, which can be viewed as a boon, there is a strong need for new cars to replace the old, less efficient gas guzzlers that are often not road-safe, with a staggering 41 percent of cars over 21 years old, and collectively 74 percent of cars over 10 years old.

The means to change this have in part been scuttled. The government was never going to be able to implement a cash-for-clunkers deal to induce people to buy a new car, but accessible loans were pushing consumers away from used car lots and into showrooms. The BDL circular will have an impact on that, leaving the public with difficult choices on how to get around.

Motorbikes offer one solution to the traffic conundrum, and sales have been rising in recent years. As people have become so tired of sitting in congestion, they have got over their hang-ups about bikes. Yet while new bike sales are rising, they are minimal at 1,500 a year, compared to the import of 50,000 used bikes. The new traffic law is supposed to ban such imports and better regulate the sector, which would be a clear boon for motorbike dealerships. 

The private transportation sector is now faced on the one hand with a state requirement on down payments that will negatively affect sales, while on the other, the government is not implementing a law that will bolster not just safety but also vehicle sales, particularly for motorbikes. In fact, implementation of the law would result in major changes on the roads, with points for speeding and reckless driving, while there are plans for driving tests to be re-sat, new driving license cards to be issued, and new license plates with tracking devices to be tendered.

Implementation of the traffic law could also raise funds for public transport. The 593,000 cars, or 41.5 percent, that do not undergo an annual maintenance check lose the government $60 million a year, while driving fines would further add to the state’s coffers.

If 2014 goes down as the last year of more achievable car ownership with the end of low interest rates, 2015 might see demands for changes on the roads, be it through safer roads to encourage more motorcyclists, or by acquiring public buses for those that can no longer get a loan.

The post Auto boom appeared first on Executive Magazine.

The Investment Development Authority of Lebanon (IDAL) has “a team of people who mean well, but look at the top. Look at the board,” says Nassib Ghobril, head of the economic research and analysis department at Byblos Bank Group. Twenty years after it was formed, IDAL has failed to live up to the high hopes set up for it. The beleaguered institution has suffered from many of the political problems common across public agencies, but has also witnessed severe governance problems internally.

IDAL was established as part of Lebanon’s economic rebuilding program following the Civil War, at a time when the enthusiasm for reconstruction and development of the country was much greater than today. Since 1994, the institution has had a mandate to market Lebanon abroad as an investment destination for foreign capital. However, interest in the economy among the upper echelons of the government began to wane almost immediately, and the resulting disinterest has since become a major impediment to reform. “The economy is usually the top priority of any government, of any political discussion and of any political candidate for [the] presidency [or] for government. But here, in Lebanon, it’s sad to say it is not,” says Nizar Atrissi, professor of banking and finance at Saint Joseph University and former vice president of IDAL.

Some of the impediments to a properly functioning IDAL were addressed in 2001 with investment law number 360 and the introduction of a highly touted ‘one stop shop’ concept. But despite this brief reinvigoration, a potent cocktail of incompetent management, poor staffing, structural inefficiencies and political paralysis has since unquestionably kept IDAL from living up to its mandate of attracting foreign investment to the country.

The numbers speak for themselves

IDAL is undoubtedly conceptually a very good idea. But if the authority’s role is to promote investment in Lebanon, it is not delivering. Even if IDAL were responsible for all of the foreign direct investment (FDI) in Lebanon over the past couple of years, the numbers paint a bleak picture.

FDI fell to $2.83 billion in 2013, down from $3.67 billion in 2012, and from $4.28 billion in 2010, according to the United Nations Conference on Trade and Development (UNCTAD) via IDAL. Out of this $2.83 billion in 2013, IDAL processed eight projects with a combined value of $222 million, according to IDAL’s annual report. However, only three of these have been approved by the Council of Ministers, bringing the amount down to as low as $137 million, or 21 percent of FDI for that year. This is compared to previous years where IDAL processed $248 million in total investment size for approved projects in 2012, $88 million in 2011 and $178 million in 2010.

But according to Byblos Bank’s Ghobril, when examining foreign investment, greenfield figures serve as a better qualifier for new investment projects, job creation and capital investment.

Greenfield investment in Lebanon stood at $104 million in 2013, a decline of 49 percent from $201.4 million in 2012 and a decline of 91 percent from $1.77 billion in 2009, according to Ghobril. “Greenfield investment is equivalent to 0.2 percent of GDP. That’s down from 5 percent of GDP in 2009, which itself is low,” he says.

“Not only [are these numbers] tiny, they’re declining,” he says. Indeed, a Byblos Bank report on selected economies puts Lebanon ahead of Sudan, Mauritania and Palestine in terms of greenfield investment, behind Djibouti, Yemen and Libya. “And Libya … a failed state essentially,” says Ghobril. “Basically, these figures tell you the performance of IDAL. Even if these $104 [million in greenfield investment] figures were channeled through IDAL, this is dismal.”

It is not that these inputs are not needed or welcomed. The projects that an investment development authority would attract would not only bring capital to the country in the form of dollar signs, but would have wider economic benefits such as creating jobs and bringing in outside expertise. In 2013, the World Bank estimated that Lebanon’s unemployment rate was at 11 percent, with the youth unemployment rate (ages 15–24) as high as 34 percent. The report estimated Lebanon would need to create six times the number of jobs it is currently creating over the next 10 years in order to absorb the new labor market entrants.

Shifting the blame

Nabil Itani, the chairman and general manager at IDAL, attributes the year on year decrease in FDI to the usual suspect: the present political and security situation, which has not only affected the willingness of investors to invest but has further hindered the ability of Parliament to pass laws. “The priorities are security, financial problems, what is happening in the budget and what is happening on the borders. All of these things are priorities and have been for all governments from 2005 till now,” he claims. “IDAL, respectively, with these circumstances, achieved a lot in promoting Lebanon, in putting Lebanon into focus,” he says.

IDAL’s ability to maneuver is certainly blocked in several important ways as the economy takes a side seat on the political agenda. “They have a lot of big, pressing issues. I don’t think IDAL is on their radar screen,” says Salam Yamout, the national ICT strategy coordinator at the prime minister’s office. And while in most countries economic development is one of the pillars of policy, Lebanon’s policy is apparently stuck somewhere else. Samir el Daher, economic advisor to former prime minister Najib Mikati, mirrors Atrissi’s complaint over the government’s economic neglect when he says, “This is a country where the political system is able to deal with only one issue, a single issue. It’s a single lane highway.”

One of the side effects of this situation is that several proposals that IDAL has made to amend the investment law, as well as recommendations to target new sub-sectors, have not been passed by the Cabinet. Instead, they sit idle, most likely alongside countless other proposals deemed secondary priorities. This certainly hinders the institution from achieving more desirable results. “An active agency is an agency that is able to continuously review its laws and improve them, implement them, do implementing decrees — which did not happen,” emphasizes Yamout.

IDAL is also one of the many institutions experiencing a public sector staff freeze. “We’re supposed to have 86 employees in IDAL. We now have 21. We have a huge shortage. That’s why we are depending on the UNDP project in accomplishing some missions,” says Itani, referring to the staff dispatched by UNDP to fill gaps in the workforce and offer technical support across public institutions in Lebanon.

But although the degradation of the political and security situation hinders FDI, it is not an excuse that everyone is willing to accept. “Oh, don’t make me cry,” says Ghobril, pointing to another problem in IDAL: “There is no vision, and there is no credible or concrete strategy to attract greenfield FDI to Lebanon. Irrespective of whether Parliament passes laws or not. You cannot sit and wait for Parliament to pass laws.”

Ghobril argues that IDAL should have been prepared to weather the storm in such an environment. “We had stability [throughout] 2008, 2009, 2010 and part of 2011. They should have been prepared for uncertainties, because we don’t exactly live in a Scandinavian environment. We had to expect some sort of shock, political [or] military,” he says.

Trickle down obstruction

While being prepared for the worst absolutely requires an action plan, IDAL’s mission alone suggests that a strategy is needed for the institution to have any weight — regardless of the situation. To position Lebanon realistically when marketing to investors requires a global vision of the economy and an understanding of where Lebanon’s competitive advantages lie to promote the appropriate sectors.

At the upper echelons of IDAL sits a board of directors, which sets the strategy for the institution. The board of IDAL should consist of the chairman and six board members, three of whom, including the chairman, are full time. However, according to IDAL’s 2013 annual report, one of the full time positions is vacant. The board meets on average a couple of times per month, according to IDAL project manager Leila Sawaya el Khoury, though she could not specify if all the members showed up to each meeting. While IDAL’s website outlines the biographies of each board member, largely in engineering and business, there are no board meeting minutes posted online nor information on the decisions taken at these meetings.

When Executive spoke to Itani about IDAL’s strategy in recent years, he stated an increased focus on Lebanese diaspora as key potential investors, since interest from other investor types was waning. “Every three years we set a plan with a set of priorities,” he says. “In 2012 we looked at what is happening in the area. We realized that we cannot encourage investment from the Gulf area or from foreign investors for the time being.”

But appealing to Lebanese diaspora investors and carrying on with activities as usual until everything gets better is not, in itself, a comprehensive strategy. The method of tapping into any diaspora sentiment for Lebanon is not necessarily a sure solution. “You have a diaspora that wants to invest here, but they will invest rationally. They will go where the proper incentives exist, where the proper investment climate exists, and where somebody tells them, ‘come look at why you should invest in our country,’” says Ghobril. “They’re not going to come to Lebanon simply because they are Lebanese.”

And, according to some observers, investors have not been given many reasons to invest in Lebanon. “They’re going on a tour to show what they offer: Law [number] 360 with its incentives,” says Daher. “In my view, it is not the incentives that are going to bring [investors].”

Without a concrete strategy based on an understanding of Lebanon’s assets, potential investment may fall to other countries that have done a better job at marketing themselves. An economic vision needs to be implemented countrywide, and research and diagnosis for it can still be done without passing laws or dealing with the Cabinet. But at the helm of decisionmaking of the institution, the board, it appears as though such a strategy is an afterthought.

Past the expiration date

Although Lebanon has a storied history of trade, any vision for the future must keep up with a rapidly evolving economy, according to Atrissi. “We cannot promote the same structure, the same sectors … The world is changing, the region is changing, so we have to adapt and find our strength and our niche and build on it,” he says.

Incidentally, the current plan comes from a board that was appointed in 2005 and whose mandate expired in 2009. Having held their positions for nearly 10 years when a term is only supposed to last four, the board has remained in place as the Cabinet has failed to pass a decision to either officially renew their term or to appoint new members.

The current board was appointed before the 2005 protests that drove Syrian forces from the country, and before there was a mechanism for such high level appointments — a process introduced not long after the present board was selected. To renew the board now would mean having an independent committee choose three potential candidates for each seat, whose names would then be presented to the Cabinet.

Ideally, this new structure would help mitigate people being appointed for their connections. “It’s a reality; it’s not ideal, but at least in one specific [sect] let’s say this procedure can bring the best candidates to the Council of Ministers instead of letting the ministers decide on [whomever] has the best [leverage],” says Atrissi.

Revolution from within?

IDAL is a case study of a system broken on many levels, from the failure of the state to conceptualize an economic vision of the country and adopt needed legislation, to the failure of governance within the board, to the difficulties IDAL has in achieving its mandate and hiring staff. But not everyone at the institution is playing the waiting game.

In 2011, the UNDP program at IDAL went through a restructuring and a new team came on board under the auspices of Sawaya el Khoury. She explains that a “new team, new strategy, new functions, new staff were recruited.” The new focus was on “policy planning and research because we’re trying to develop the infrastructure of the institution, and provide information to investors,” she says.

The UNDP program is somewhat of a bone of contention, operating as a parallel structure within many public institutions in order to address so called deficiencies. UNDP is involved with many Lebanese institutions across the spectrum of political entities, in both agencies and ministries. In IDAL, the UNDP staff works side by side with IDAL’s regular staff to fill some of the manpower gaps. But this strategy itself seems to operate in parallel with the board’s — sometimes complementing it and sometimes contradicting it.

Sawaya el Khoury explains that in the three years since 2011, the UNDP team examined the mandate of IDAL in investment law, and worked on all the elements needed for the investment agency to be more effective. Much of this period was spent doing research and providing information for investors. In the next three years, she claims that they will be looking into more sector specific promotion, and are diagnosing subsectors that Lebanon can work on to be competitive. The sectors they are focusing on are IT and outsourcing, media, agrofoods and pharmaceuticals.

Though Sawaya el Khoury admits that many of the amendments they proposed are still pending, she claims that this doesn’t prevent IDAL from promoting Lebanon to foreign investors. And while it is perhaps too early to see results, this initiative is an example of how IDAL could play a greater role in the economy, irrespective of the political situation.

But activism from below — or outside — may have a limited impact as long as it and the board are not aligned in a clear vision of what they are promoting. When asked whether IDAL’s board ever posed a barrier to the new strategy, Sawaya el Khoury said that this had at times been the case. Clearly the board is not charmed in every instance by the UNDP’s new initiatives. And any tension between the two could even further limit the impact of the new strategy and pose a further constraint on the capacity of IDAL to deliver.

The post Shattered dreams appeared first on Executive Magazine.

When the Investment Development Authority of Lebanon was first created in 1994, hope for the economy to flourish was not such a wild concept. Lebanon was being rebuilt after the war. Times were changing. There was enthusiasm for a reconstructed Lebanon with shining new infrastructure. IDAL was to be one of the institutions spearheading the project of rebuilding the economy by marketing Lebanon abroad and attracting foreign investment.

Twenty years later, it has become obvious that the hope couldn’t have been more misplaced. As our investigation reveals, IDAL has abjectly failed to deliver (see “Shattered dreams“). Foreign direct investment has been middling at best; at some $2.8 billion in 2013, inflows were roughly the same as a decade earlier, and that’s without adjusting for inflation.

This failure can be attributed to a number of reasons. Economic decisions, decreasingly a priority for the cabinet, were ultimately relegated to the back burner. Institutionally, IDAL began to deteriorate. With a wage freeze that made it impossible to make new hires, the number of staff waned over the years, cutting IDAL’s manpower which resulted in the UNDP stepping in and appointing staff to give the authority technical assistance. The situation also hindered IDAL’s ability to update its laws and get new decisions passed through the cabinet. The same factors resulted in a board of directors that expired in 2009. Moreover, Lebanon’s government failed to come up with a global vision of the economy.

But it is only too easy to blame the deteriorating situation for the lack of foreign direct investment. Yes, the entire Lebanese political establishment needs to change. But this is a utopian hope — are we really going to wait around for a notoriously indecisive government before we start building our country? Much more can be done at IDAL, and its leadership needs to stop using the political situation as an excuse to fail.

Currently, IDAL’s board has no strategy that would enable the authority to fulfill its legal mandate, nor is there any sign they are drafting one. This is dereliction of their responsibilities. And since the people that were put on the board have shown that they are not up to the challenge, there is no reason to keep them there.

Looking at their accomplishments, even those achieved in good times, it is clear that they have not lived up to their mandate — what is required of them by law. The role of an investment development authority is to promote investment into a country by marketing it abroad. Mandated in IDAL’s case by investment law 360, this includes conducting economic research to provide investors with information, diagnosing and promoting competitive sectors, and understanding Lebanon’s competitive advantages when marketing the country abroad. Just as they didn’t have a strategy in good times, IDAL did not brace for bad times, and the Lebanese economy suffered the consequences. It is dangerous to leave our economy at the mercy of such incompetence.

The incompetence begins with the fact that the board is expired and should have been replaced. Appointed in 2005, while Lebanon was still under Syrian hegemony, the current board has overstayed its term since 2009. Since then, the cabinet has failed to pass a decision to either change it or renew its mandate.

Moreover, the board was also appointed before there was a proper mechanism to make high level appointments in the Lebanese public sector. Before this mechanism existed, appointments were made by the cabinet, a system that failed to provide checks to make sure that qualified people — rather than friends and vassals of ministers — were appointed to important positions.

It’s time for new blood at the board level. IDAL could have achieved much more if it had been guided by competent, visionary people with a real strategy and plan. If they are not delivering, they need to go — and there should be no excuses for promptly dumping them. All it takes is a decision from the cabinet. This is the smallest change that could make the greatest impact.

There is too much at stake for our economy to be put on the backburner, and the relatively simple task of turning IDAL into a functioning institution should be a no brainer. Lebanon is in dire need of jobs and economic stimulus. The capital a competent investment development authority should attract is not only in the form of cold hard cash, but should be focused on greenfield projects that create jobs and bring in foreign expertise. This is badly needed, and a properly functioning investment development authority guided by a serious strategy could make it happen, having an important impact on the economy and the livelihoods of the Lebanese.

The cabinet must stop neglecting the economy. The very simplest way to start is to replace IDAL’s board, and ensure that this is done through the proper committee-led process that will give us qualified leaders.

The post Just go appeared first on Executive Magazine.

The Investment Development Authority of Lebanon is in a unique position. It has autonomy to make many decisions on its own and is more or less immune from having its work disrupted by a political class that cannot make decisions. IDAL does not sit for years with its hands tied, awaiting a government decree to move forward with its plans. Nor does IDAL have its strategy reworked every time a new minister comes to power. It ought to be the most successful and properly functioning state institution this poorly governed country has. That it is not is outrageous.

In October of last year, IDAL turned 20. We should be celebrating 20 years of steady job creation and increasing foreign direct investment. This magazine should have an investigative report detailing years of IDAL’s direct contributions to GDP growth by slashing through red tape to help investors boost the economy. Instead, we have an account of how political influence and incompetent leadership have made IDAL an embarrassment.

We need more jobs. We need more investment. But attracting them requires a well thought out strategy, a strategy that navigates our weaknesses and the threats to our economy in order to draw on the extraordinary human capital this country has. Beyond baskets of incentives, IDAL requires a basket of skilled, hardworking and incorruptible leaders to serve on its board of directors.

In the corporate world, board members who don’t deliver and CEOs who fail repeatedly either step down or get thrown out by angry stakeholders. Looking at IDAL’s performance since 1994, one cannot help but conclude its leadership is, and has been, incompetent. It is hard to imagine that someone leading such an organization for over 10 years — as Nabil Itani has — can have any pride in himself or his work given how little he has done in that time.

There is no shame in admitting you are not the right person for a job. But there is shame in collecting a paycheck you didn’t earn and squandering opportunities the country so desperately needs to exploit. Itani and the board behind him are embarrassing themselves and this country. It is beyond time they all resign.

The post Resigned to failure appeared first on Executive Magazine.

Every month the Automobile Importers Association of Lebanon (AIA) sends out its Registration Report, showing the year-to-date breakdown of new car sales per brand. Over the course of 2014, the attached president’s letter has ended with: “We hope that Lebanon soon finds peace, stability and prosperity.”

Such a repeated aspiration is indicative of what is missing in the country for the automotive sector to thrive. Not that car sales are in the gutter though, despite the lack of peace, stability and prosperity. 

As of the end of October 2014, 34,002 new cars had been sold compared to 31,092 units in the same period in 2013, although the month’s sales were down 5.2 percent compared to September, and year-on-year sales of new and used models had dropped by 7 percent and 12 percent respectively, compared to 2012 and 2011. 

Overall sales are projected to surpass 35,000 units, similar to previous years and over one-third above the figures from a decade ago. What is keeping sales buoyant are smaller cars priced at less than $15,000, which account for 90 percent of sales, according to the AIA. 

However, cars in the smaller segment range have lower profit margins for dealers, and sales of medium to larger models are being hit by lower purchasing power and weak consumer confidence; those that can spend are sitting on their wallets, awaiting some good news before parting with $30,000 plus for a new set of wheels. As Michel Trad, general manager of Saad & Trad, dealer of Fiat, Jaguar, Bentley, Lamborghini and Abarth, puts it: “People may buy a $20,000 watch instead of a car as it would be easier to move [it out of the country if the security situation deteriorates].”

That said, to dealers, the market in 2014 was not overly different compared to previous years, with the country experiencing the same struggles, albeit this year the political-security situation was worse than before. “I’d say it’s been a couple of years that we’ve been facing the same challenges, and this year with the escalation in the [political] situation, it doesn’t allow you to have a clear plan, to set your forecast and targets,” says Farid Homsi, General Manager of IMPEX, distributor for Chevrolet, Cadillac and Isuzu. “Small cars are still the best sellers, and that is what’s allowing the industry to have some small portion of increases.”

Across the board, dealerships have had to market heavily to draw customers in, offering zero percent interest, five year warranties and even the chance to win trips abroad. “It was the automotive year for consumers. They were getting the best deals since all dealers lowered their prices and were fighting a price war,” says Rachid Rasamny, general manager at Century Motor Company, distributor of Hyundai and Genesis. “At one point there were so many offers we were close to doing a campaign joking about free giveaways, but decided against it.”

Such deals have kept sales moving, and are what have driven people away from the used car market in favor of new cars instead. “The overall sector trend is continuing compared to 2013. People are still shifting to the new from the old car market, and all distributors are being aggressive in offering services, warranties and good financing. This has driven sales,” says Cesar Aoun, general manager of Mercedes at T. Gargour & Fils, which also sells Smart, Jeep, and Chrysler. 

However, to some, low prices and easy bank financing have artificially stimulated sales over the past few years, masking the underlying malaise in the economy and the fact that the worst may be yet to come. “Everyone is switching to survival mode, which is to only spend on what is a necessity,” says Marwan Naffi, general manager at Gabriel Abou Adal & Partners, distributor of Volvo. “We thought 2013 was a difficult year, but 2014 proved to be even more difficult, so we don’t want to think too long term, as when you think you’ve seen the worst, there is often worse to come.”

Reining in lending

What may be worse for the sector’s health is not the political situation, the lack of a president, the neighboring Syrian conflict, or the threat of the Islamic State. While all of the aforementioned are major concerns that have a deleterious effect on car sales, what is slated to have the biggest impact — unless things get really out of hand — is a new Banque du Liban (BDL) circular, number 369, inked in August 2014, that requires down payments for loans to be a minimum of 25 percent.

“In 2015 I don’t think the market will grow. It will at best be stable. Why? BDL wants to control consumer credit. Until October you could have 85 percent, sometimes even 100 percent credit,” says Pierre Heneine, financial manager at Bassoul-Heneine, dealer for BMW, Mini, Renault, Dacia and Rolls Royce.

The BDL circular certainly came out of left field for dealerships, who have generally opposed the measure and believe it will lead to a drop in sales, particularly for cheaper cars, with the president of the AIA telling Executive in the November edition that sales could drop by up to 30 percent. The move is considered a preventative measure, prompted by what a Bank Byblos reported noted was “a relatively high ratio of household debt to disposable personal income,” and that according to the BDL, “An average of 50 percent of household income is going towards debt servicing.”

“I am surprised at this resolution, as even during the Civil War, BDL was never so cautious about lending. I see it as a preventative action, because when meeting with banks, the rate of default is almost zero. In our case, at Mercedes, we used to [require] a minimum 25 percent down payment, so for us we don’t see a negative. But for smaller cars, maybe [it is],” says Aoun.

With small cars dominating overall sales, it is the sales of volume cars that are slated to be the most hit. This is expected to be a particular concern for Korean brands Kia and Hyundai, currently number one and two respectively, with 42 percent of the market. The circular will certainly take out one of the three advantages of buying a new car that enabled people to go beyond their budget. 

“In our marketing we were saying to customers they can buy a premium car and pay approximately the same price as a volume car because of three things: low interest, good after-sales and thirdly, fuel consumption,” says Anthony Boukather, CEO of A.N. Boukather Group Holding, dealer for Mazda.

Such an approach led to a 25 percent spike in sales at Mazda as of the end of September. Nonetheless, Boukather thinks that despite low interest being taken out of the equation, the BDL diktat will have less impact on the premium sector. “It is going to impact volume but not the premium brands. Banks will become pickier, and only lend to those that can afford it,” he says. Other dealers think the requirement will have a broader impact as there is also an economic correlation between income and luxury brands. For instance, consumers buying the cheaper models of a luxury brand often require financing, and will consequently have to down-shift to a more affordable vehicle instead. Furthermore, more affluent consumers may hold off buying to better balance cash flow. 

“The BDL circular can have a negative impact on the upper luxury segment, as there are buyers that don’t have a trade-in, yet want to buy a third or a fourth car for their household, so an extra say 5 percent on payments can have a nasty impact. While they can afford it, they don’t necessarily want to pay a lot of cash upfront in the current situation,” says Homsi.

Time will tell the impact of the BDL circular on all levels of the market, as ultra luxury cars, at above $100,000, did remarkably well in 2014, albeit representing only 3.5 percent of the overall sector with two Rolls-Royce, two Lamborghinis, three Ferraris and 10 Bentleys sold, while in the luxury segment, 54 Maserati, 411 Land Rover, 243 Porsche, 678 Mercedes, 461 BMW, 96 Cadillac and 607 Audi cars were sold by the end of October. Indeed, in many ways the sector has muddled through the year despite the challenges, and will continue to do so, driven by the lack of public transport. 

“I am not surprised the market has done so well, as the Lebanese have always found solutions to difficult conditions. On the other side, don’t forget that we need cars because there’s no public transportation, so a car is not a luxury but a need,” says Nabil Bazerji, managing director of G.A Bazerji & Sons, distributor of Suzuki, Lancia and Maserati.

Staying visible

Despite such a constrained market, dealerships continued to invest in 2014. A new Volvo showroom was launched in September, and in October, Bassoul-Heneine opened a new Renault showroom, both pioneer facilities for the Middle East. However, one dealership intending to expand by introducing a new Chinese brand to the market recently changed its mind, despite signing a memorandum of understanding, due to national and regional instability. With it taking at least two years for a return on investment on the showroom, inventory, marketing costs and the like, concentrating on core business seems a prudent move. 

Dealerships are also continuing to market heavily, evidenced by the plethora of billboard and TV adverts for cars. “In general the industry is struggling. So to keep on doing the same volume as before, you have to invest even though you don’t want to spend too many marketing dollars as you’re not doing well on profits. But you still have to fight for market share and remain present in the market, otherwise consumers forget about you; it is harder to restart if you are out [of the public eye] for some time,” says Homsi.

Downward consolidation

The BDL circular and the constrained economic environment is making for even more competition among dealers. There is also growing pressure to offer a wide segment of vehicles that cater to all demands, with Lebanon reflecting the global move towards smaller vehicles in the A, B and C segments, instead of larger cars. What has really heated up the competition is the Japanese brands which have become more cost competitive due to the devaluation of the yen. 

“The Japanese brands are recapturing some market share, [and] reducing the gap with the Koreans with new models and better prices, but the Koreans are quite competitive and have new models, which helps them,” says Homsi. 

In the past, the high value of the yen had been advantageous for the Korean brands and gave the nascent Chinese brands a boost. In 2014, the Korean brands have felt the competition — with their market share down 4 percent compared to 2013 — while Chinese brands have not continued to make the inroads they were making in 2013, when sales jumped by 60 percent on 2012. In 2014 they grew by less than 5 percent. 

“Basically the Koreans are being downgraded to the A and B segments, with low margins and a lot of competition, whereas the C segment and upwards have healthy margins, and that is the shift in the market going forward,” says Fayez Rasamny, CEO of Rymco, dealer of Nissan and Infiniti. 

While dealers are clearly keen to push C segment and above sales, outside of the cheaper brands, it is higher end small models that are also doing well, such as the Mini and the Fiat 500. 

“People are looking at cars differently, as people are now talking more about safety and fuel consumption. So for example, the top of the range smaller models are selling well and are a way to differentiate from cheap smaller cars,” says Trad.

Given such market trends, dealerships are banking on strong offerings in the smaller sized segments to carry sales forward. “Suzuki only exists in the A, B and C segments. This is to our advantage, as our sales increased this year. And we are looking to double in 2015, because there is demand in the market for these segments and the yen depreciated,” says Bazerji.

The post Hit the road appeared first on Executive Magazine.

At the end of every year, automotive dealers typically begin massive liquidation campaigns to get rid of their older stock and make way for newer models. The 2014 campaigns are set to be more drastic than usual, as distributors face tremendous challenges that are curtailing their sales and piling up the amount of inventory sitting in their stockyards.

Despite the ongoing civil strife in Syria and its spillover into Lebanon, as well as the presidential impasse — now in its sixth month — Lebanon’s shaky economy has still managed to grow slightly. Meanwhile, the automotive industry posted an 8 percent growth in sales in the first nine months of 2014 relative to the same period in 2013.

This growth is partly attributed to the resurgence of Japanese manufacturers, who have introduced competitively priced new models into the Lebanese market, supported by a 40 percent depreciation of the yen in the last two years. The growth is also led by the continued shift towards smaller cars, known as A and B segment vehicles. In fact, in the last five years there has been a paradigm shift by Lebanese consumers towards economically priced, more fuel efficient smaller cars, which has led to a large sales growth in this segment.

But in late August, Banque du Liban (BDL), Lebanon’s central bank, unexpectedly issued Circular 369, requiring a more stringent down payment on retail loans. This announcement came as a shock to most as the default rates in 2014 remained relatively low and unchanged versus the previous year at just below 3 percent. The new rules, which went into effect October 1, require a minimum down payment of 25 percent on all future retail loans, including automotive and housing loans from Lebanon’s banks and financial institutions. While this move may make sense on a macroeconomic level, it has hindered most low to medium income families, many of whom will struggle to afford such down payments and face a lack of alternative means of transportation. These families — with monthly incomes ranging from $2,000 to $4,000 — usually purchase cars that cost $10,000 to $20,000, which means that they will now have to deposit a minimum of $2,500 to $5,000, respectively.

A short sighted move

With the lack of an efficient public transportation system in the country and given Lebanon’s economic situation, this stringent circular is premature at best and will leave many Lebanese consumers struggling to commute. The last acquisition of public buses by the Lebanese government was over 16 years ago and only about a dozen are left on the streets today. The government’s plan to purchase 250 buses and have them on the roads by the end of summer 2014 unsurprisingly never took place. That is not to mention the still nonexistent train system. 

From a car dealer’s perspective, at a time when the growth in the market is derived mainly through fierce competition, including price cutting by new automotive distributors, BDL’s circular has effectively curtailed sales in the most volume making — and low margin — segments. With their stocks now expected to pile up given the shock circular, distributors are now faced with two options: either contend with an increase in inventory or undertake large scale liquidation sales to deplete stock. Most will choose the latter, as huge working capital requirements, which is the minimum amount of resources dealers need to cover their operating costs, oblige automotive distributors to generate sales. To entice customers to purchase vehicles, car dealers are expected to begin lucrative campaigns, including offers ranging from lower interest rates to free registration, insurance and maintenance. Some dealers may even begin to internally finance customers who are unable to meet bank requirements, an unregulated and extremely risky financial undertaking.

Whatever method distributors adopt to enhance sales, the circular is bound to eventually provide customers with more rewarding offers in the short term as dealers will be scrambling for sales and coming up with more and more creative ways to adapt to customers’ limited payment means. 

In the next year, however, dealers will most likely have to cut down on the inventory ordered to avoid such margin crushing campaigns and instead cope with lower sales volume. Customers will be faced with a stringent down payment, given the lack of other options for their daily commutes. 

The BDL circular, an initiative that aims to support the economy by preventing a potential increase in consumer defaults, would have been better introduced in more economically friendly times or, even better, when the country would have finally adopted a more efficient public transport system. 

The post It came out of nowhere appeared first on Executive Magazine.

Two wheelers have never been an overly popular mode of transport in Lebanon. There are, at one end of the spectrum, the cheap runaround bikes favored for day to day use and by delivery men, and at the other end, motorbike enthusiasts who prefer the saddle to a car seat. But the middle ground of motorbikes, as a convenient yet socially acceptable mode of transport, is somehow missing.

The anarchic driving on the roads in Lebanon has certainly been a major factor in the low sales of new motorbikes, but it is the perception of riders — be it as dangerous, criminal or economically disadvantaged — that has been a big drawback to developing the sector. Only over the past few years, and 2014 in particular, have motorbikes become more popular, encouraged by the worsening traffic congestion and lack of parking in the capital. 

“Before we were selling very few bikes, but it is becoming a business and we now have dedicated sales people,” says Pierre Heneine, financial manager at Bassoul-Heneine, a dealer for BMW motorbikes.

Increased sales of premium bikes like BMW and Harley-Davidson, which expects sales up 18 percent on 2013, are indicative of the growing demand for bikes. But the low and middle range models are selling well too, with A.N. Boukather — which has 45 percent of the market through brands Piaggio, Aprilia, Moto Guzzi, Vespa, Gilera, Derby, KTM and Bajaj — reporting strong sales across its portfolio ranging from $800 to $25,000. 

RYMCO, dealer for Kawasaki and, as of 2013, Peugeot scooters, has also seen sales increase. The biggest seller is the Kawasaki Ninja 250cc model, due to its engine size and price. Like the car sector, the bike sector has been affected by Lebanon’s sluggish economy. “It is not as easy to get a client to buy since purchasing power is down, as $10,000 for a bike is more for leisure use — a big engine bike is not something you go to work on. Around 90 percent of clients buy because a bike is essential,” says RYMCO’s Makram Rasamny.

According to the newly formed Lebanese Association of Motorcycle Agents (LAMA), about 1,500 new motorbikes will be sold this year, up 20 percent on 2013. This pales both in comparison to the 35,000 new cars sold per year, but especially to the estimated 50,000 used motorbikes and scooters imported annually.

The need for regulation

A new traffic law, which has been passed but not yet implemented, would ban the importation of bikes over three years old and those with engines under 125cc. Dealers are keen to get the law implemented, as it would better regulate the sector — concerning issues such as registration, new driving tests, fines — and improve safety on the roads, thereby driving up motorbike sales (see Q&A page 144). 

“If the law was implemented it would drastically reduce sales of imported second hand bikes and you would start seeing a lot of people buy new motorbikes,” says Anthony Boukather, General Manager of AN Boukather.

Outside of LAMA and the used bike sector, it is Akkad bikes that are the big sellers, much to the association’s chagrin. The 125cc bike is Chinese made, but with a local twist. Despite being newly manufactured, Tripoli-based dealer Wassim Akkad imports the motorbikes second hand to pay lower taxes, and has created an eponymous brand by sticking his surname on the bike’s fuel tank. Akkad opposed the new traffic law, and it is such importers that LAMA wants to curtail in order to defend the legitimate sector.

As Marwan Tarraf, Owner of Bikers Inc., the agent for Harley-Davidson, puts it, a motive for setting up LAMA was to “introduce a new way of owning, selling and riding bikes.” The motivation was not just to bolster new bike sales, but to have a united voice for the sector’s very survival. “If the sector is not controlled ASAP, it could lead to a situation where the authorities have a reason to place restrictions or ban the most efficient [mode of] transport in Lebanon. Motorbikes are the future, but it needs the implementation of the traffic law,” says Tarraf.

With such regulation unlikely to be enforced soon, Harley-Davidson organized the first Beirut Bike Festival to promote motorbiking in the country, attracting 1,434 bikers one Sunday in September 2014. “It was massive, I didn’t expect that many people,” says Tarraf. “There were two reasons for it, one it was official, in support of the traffic police and the law, and two, to counter the recent attempts to ban motorbikes, so we made it clear that there is a huge number of people who ride bikes and respect laws.”

The post Two wheels a go-go appeared first on Executive Magazine.

Can any trade sector survive without governing laws? In Lebanon yes, it is possible, yet some business owners struggle to keep their companies as legitimate as needed. It does sound ironic, but at all times in this country you have to fight your way into legality. Legal and governmental institutions have been formatted to accept and contain illegitimate businesses and offer them the same privileges — or perhaps even more — as those offered to business owners who took the choice of investing in an institution that naturally contributes to the growth of the local economy.

Over the past few years, motorcycle trade in Lebanon has grown beyond expectations, following global growth in this specific automotive sector. International brand names like Harley-Davidson, Piaggio, Kawasaki, KTM, Suzuki, BMW and many others have partnered with local franchisees and worked on introducing a new trend of responsible motorcycling in Lebanon. On the other hand, however, a number of individuals sniffed out opportunities to manipulate the import and trade laws in order to practice the worst form of unlawful competition. Small motorcycle vendors have made their way into the city, and container loads of cheap products that are banned from importation into most countries have flooded the market. The lack of homologation standards and the incompetence of border authorities have served to facilitate the process for any individual trader who sees an opportunity for an easy buck in this particular sector.

Lebanon welcomes everything, from expired foods to counterfeit medicine, and just like the motorcycle import process, their sales process will follow suit. Most gray importers use fake documentation and invoicing to reduce their import taxes and duties, and they don’t like keeping import records, so why would they want to keep sales records? The bottom line is that those motorcycles end up on the streets without registration, legalization or even proof of ownership in the hands of unknown owners, some of whom are pickpockets, thieves and even terrorists.

Curbing the gray dealers

A recent statistic released by the ISF counted 609 robberies in Lebanon throughout 2014. Some 226 were carried out on motorcycles, of which, none were purchased through an authorized brand dealer. Subsequently, the governor of Mount Lebanon ordered a night curfew on motorcycles, a decision taken in an attempt to limit the crime rate, although it mainly affected legitimate dealers. Customers of legal traders make up the majority of lawful citizens who own motorcycles, for either commuting to work or as a hobby. Meanwhile, gray dealers are still importing junk and providing for law-abusing motorcyclists.

Last September, representatives of all recognized brands rallied their groups and headed to the departure point at the Beirut Waterfront, where the Beirut Bike Festival organizers and the ISF called for a thunder parade in an effort to raise their collective voice against the negative stereotypes of motorcyclists. Over 1,400 lawful bikers hit the streets of Beirut, led by 50 police motorcycles under the banner “In recognition of the Lebanese Traffic Police’s efforts”.

The local bikers’ community has also matured in the past five years. Groups have become larger and more organized, although only a few have obtained legal licenses from the Ministry of Interior, such as the Harley-Davidson Owners Group, operating as MTCL, and A.N. Boukather for the Vespa and Piaggio group. Recently, an association for importers was founded under the banner of the Lebanese Association for Motorcycle Agents (LAMA) and is acting as the governing body for all brand name motorcycle importers. LAMA has taken the initiative of raising awareness towards enforcing laws governing imports and traffic safety. The association has sided with NGOs who are lobbying for the new traffic law to be implemented immediately, after it was unconstitutionally put on hold for political reasons despite passing the parliament vote and being published in the Official Gazette two years ago. This sets another example of how governing laws are dismissed and, while trade gremlins flourish, the national trade industry suffers; limiting the possibilities of growth for any legitimate business.

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The chances of Lebanon signing offshore exploration and production sharing contracts with oil and gas companies in 2015 are slim, but that does not mean that all work in developing the emerging sector will grind to a halt. New legislation is in the works on tax rates for oil and gas companies as well as onshore exploration and production, and the Lebanese Petroleum Administration (LPA) — a body with some regulatory powers that makes policy recommendations for the sector — seems determined to do as much work as it can despite the fact that decisionmakers are in no rush to pass the two decrees necessary to close the licensing round.

Momentum was building in early 2013, and it seemed like Lebanon was on the cusp of answering an important economic question: what, if any, hydrocarbon resources does the country have? Parliament passed an offshore oil and gas law in 2010, opening the door to exploring for resources that seismic surveying suggests could be significant. However, for two years following the approval of the law, not much more happened. Then in late 2012 the government appointed the six member board of the LPA and developments began anew. The LPA drafted recommendations for a prequalification process for oil and gas companies interested in bidding in the first licensing round, and the Ministry of Energy — to which the LPA reports — approved the suggestions, as did the cabinet — which, according to the 2010 law, has final say on setting oil and gas policy in Lebanon. With all of the requirements approved, the LPA held a prequalification round for potential bidders between February and April 2013. A total of 52 companies applied, and 46 prequalified, including big international players such as Shell, Total, Chevron and ExxonMobil. 

The plan — approved by the cabinet in December 2012 — was to open the first licensing round in May 2013, less than one month after the prequalified companies were announced. The LPA and the Ministry of Energy wanted the licensing round to close in November 2013 and envisioned contracts being signed in February 2014. While the ministry and the LPA held a day long event to celebrate the May 1, 2013, opening of the bid round, the reality is that companies still cannot actually submit bids as the offshore blocks have not been officially delineated, nor have model exploration and production sharing agreements been approved. The Ministry of Energy wrote decrees concerning these two issues in early 2013, based on a recommendation from the LPA, but the cabinet has still not approved them. Without the decrees, the licensing round is frozen. Former Energy Minister Gebran Bassil delayed the close of the licensing round three times, each time choosing a specific new date in the future. His successor and political ally, Arthur Nazarian, shifted tack when facing an August 14 deadline he set in April, and delayed the close of the round “to a maximum period of six months from the date of the adoption of the two decrees.”

On its website, the LPA estimates that, once the decrees are passed, companies will need “up to” six months to bid. After bids are submitted, the LPA estimates it will need “up to” two months to review the bids and “up to” another four months to negotiate and sign final contracts. At the longest, therefore, it will take a year between passing the decrees and signing contracts. 

The impact of inaction

Oil and gas companies are notoriously media shy when it comes to discussing strategy and future investment plans. Executive contacted the 12 international companies prequalified to act as operators in Lebanon’s offshore, but not a single one agreed to an interview. While some local news outlets have cited unnamed sources claiming that international players are losing interest in Lebanon, none have said anything publicly about their intentions to bid or not. That said, Wissam Chbat — head of geophysics and geology at the LPA — told Executive in August that “the delay in the bid round will affect competitiveness, resulting in less favorable commercial conditions for the state and diminishing Lebanon’s regional presence and position in the regional gas market.”

Delays have had an impact on the local commercial conference market. The Lebanon International Petroleum Exhibition and Conference and the Lebanon International Oil and Gas Conference — both sponsored by the Ministry of Energy and the LPA — as well as the Lebanon Oil and Gas Summit — an event first held in 2013 without the input of the Ministry or the LPA — were cancelled in 2014. Instead, the LPA organized “Lebanon Petroleum Day” in October, which Middle East Strategic Perspectives, a local consultancy focused on oil and gas in Lebanon, described as having “[drawn] a large crowd, but few companies.”

New sector, new laws

In January 2014, LPA president Nasser Hoteit announced via Twitter that the body had written a new tax law for the sector and “transmitted [it] to competent authorities for review.” That was the year’s only news on the tax law, but existing Lebanese legislation says the Ministry of Finance must propose new taxation rules. It is unclear how closely the two are working together on the issue, but amending the tax law is an LPA priority. Taxes will be a component of state revenues from the sector, and as the corporate income tax is today capped at 15 percent, the LPA is pushing to have that rate raised for the oil and gas sector, as is common around the world. Whether a new tax law for the sector will see the light of day in 2015, however, is an open question.

Also on the LPA’s legislative agenda is an onshore exploration and production law as the 2010 law deals only with offshore. Again, the LPA wrote a draft law and began sharing it with relevant ministries in 2014, but it is unclear when parliament will begin discussing the draft. At the Lebanon Petroleum Day in October, LPA board member Gaby Daaboul briefed attendees on the LPA’s draft of the law. The onshore draft law, he said, would allow single companies to bid for licenses, unlike the offshore law, which requires at least three companies to bid together in a consortium for each license. Daaboul said the draft onshore law would also create a special committee to compensate landowners whose property would need to be expropriated if commercially recoverable hydrocarbon discoveries are made.

Focus on education

While 2013 saw new oil and gas engineering programs launch at some of Lebanon’s major universities, the LPA in 2014 turned its attention to vocational training. The LPA told Executive in October that the Lebanese University, the country’s public institution of higher education, would soon sign an agreement with an unnamed European institution to “train technicians in several upstream trades and to deliver degrees and certificates internationally recognized” by the industry. LPA President Nasser Hoteit reiterated that commitment at Lebanon Petroleum Day, and while he told Executive the initiative “will be announced officially before the end of the year,” no such announcement had been made by the time Executive went to press. When oil and gas activities do actually start in Lebanon, the country will need a large pool of skilled and semi-skilled laborers since the exploration and production sharing agreements as currently drafted call for international companies operating in Lebanon to have a workforce that is 80 percent local. 

Protecting the environment

The LPA made a strategic environmental assessment for the oil and gas sector public in 2014, nearly two years after it was written. The assessment found, among other things, that Lebanon lacks baseline data on its offshore environment, meaning that if the data is not collected before drilling begins, it will be difficult for Lebanon to track the environmental impact oil and gas activities have. In response to this, the LPA announced at a media forum in early September that international companies that win rights to drill in any of the country’s offshore blocks will first have to carry out detailed environmental assessments to establish a solid baseline before beginning any work, thus putting the work of data collection into the hands of the oil and gas companies.

Uncertainty continues

While the LPA is working to do what it can behind the scenes to prepare for an oil and gas industry, most progress is still subject to political approval. Despite the fact that Bank Audi, one of Lebanon’s largest banks, declared in early 2014 that Lebanon has upward of $600 billion in gas wealth, the truth is that no one will know for sure until wells are drilled and resources discovered in commercially recoverable amounts. If 2013 was a year for hope in the emerging oil and gas sector, 2014 was the year Lebanese reality set in. As the year ends with a parliament again having extended its mandate and a void in the presidential palace, there may well be more important issues to address in 2015 than the search for hydrocarbons and the wealth they promise.

The post Reality sets in appeared first on Executive Magazine.

A political decision is needed in 2015 for Lebanon to begin exploring for offshore oil and gas reserves. Until the government passes decrees delineating the offshore blocks and approving model exploration and production sharing agreements — which have been drafted and ready for debate and approval since early 2013 — we simply will not know what lies beneath Lebanon’s share of the eastern Mediterranean. Despite suggestions to the contrary — most notably Bank Audi’s prediction in early 2014 that Lebanon has $600 billion worth of gas — it is impossible to know what, if any, hydrocarbon resources the country has. Knowledge comes from drilling, and drilling only happens once contracts with international oil and gas companies are signed.

If Lebanon does indeed have oil or natural gas reserves large enough to be commercially viable, there is still much work that needs to be done on the policy level. For example, the 2010 law on offshore exploration says that any revenues earned from hydrocarbon resources must be placed in a sovereign wealth fund. A new law is needed to define how the fund works, as well as if and when money can be taken out of it, to name just a few things policymakers need to consider when drafting it. Like many other countries around the world, Lebanon may also want to write a new tax law specifically for the oil and gas sector. The Lebanese Petroleum Administration (LPA), in fact, is pushing for this. However, a sovereign wealth fund and a new tax law will not be necessary if there are no hydrocarbons to bring in revenues.

Since being formed in 2012, the LPA has spent most of its time putting the cart before the horse by drafting recommendations on issues that will need to be dealt with once resources are found. Such forward thinking is laudable, but again, most of what the LPA is trying to do ends up getting stonewalled by a parliament and government that barely function. The LPA will no doubt continue to do as much preparation as they can, but without the decrees that make signing contracts possible, 2015 will be another year of waiting.

Read Executive’s oil and gas special report published in October 2014

The post Unexplored potential appeared first on Executive Magazine.

The Eastern Mediterranean is a complex environment for gas producers and countries aspiring to become gas exporters in the next few years. Not only do they have to deal with the usual industry challenges, but also with an even tougher factor: geopolitics.

A recent report commissioned by the Norwegian government highlights such difficulties by indicating, among other things, that Israel faces a high risk for exporting gas. The report anticipates that the country — which boasts the most developed oil and gas sector and the largest proven reserves among newcomers in the Eastern Mediterranean — will have more difficulty exporting its excess gas than, say, Brazil, Angola or Mozambique. Cyprus faces similar difficulties. Its plans to build a liquefied natural gas (LNG) plant in Vasilikos are in doubt since such a plant would require more gas than has been discovered so far in the Aphrodite field to justify the construction of this multibillion dollar facility, although ongoing exploration in the island’s exclusive economic zone could result in the discovery of new gas fields.

On paper, the most reasonable way to monetize gas from Aphrodite (and parts of Israel’s much larger Leviathan field) is through a pipeline to Turkey, a large market seeking to diversify its gas supplies. But this option is not feasible unless significant progress is made in the negotiations between Greek and Turkish Cypriots. A pipeline to Greece is not an easy feat and carries an exorbitant price tag. Egypt, with its large market and two underused LNG plants in Damietta and Idku, could be an option, either to supply the local market or to liquefy the gas and export it to world markets. Both Israelis and Cypriots are negotiating potential deals with Egypt, sugges-ting there will be little capacity left for others to use if these deals are confirmed.

A choice of options

In addition, and besides the network of regional pipelines connecting countries in the Eastern Mediterranean, two other options deserve to be highlighted.

Floating LNG (FLNG) is rapidly becoming a viable solution for offshore gas development, with four projects already in the construction phase and 10 more in the design phase. The first examples — Petronas’ PFLNG1, off the coast of Malaysia, and Shell’s Prelude, off the coast of western Australia — are expected to be operational by 2015 and 2017 respectively. Construction costs have not been disclosed but industry experts put the price of Prelude between $10 and $12 billion, more costly than a land based facility. However, costs are expected to be slashed with experience, and subsequent models are expected to require significantly less investment than an onshore LNG plant. When Australia’s Woodside Petroleum attempted to acquire a stake in Leviathan, it did not hide its preference for a floating LNG facility. Negotiations collapsed in part because the Leviathan partners have changed their plans for the development of the field, focusing on supplying regional markets via pipelines during the first phase of the development. Studies are being conducted for the second phase of development which, according to operator Noble Energy, is anticipated to be a floating LNG system.

New horizons

Whereas the main advantage of LNG, floating or otherwise, is the flexibility it offers producers in terms of markets — allowing exports to further, sometimes more lucrative destinations — a new technology currently being tested restricts exports to regional markets but offers producers a major benefit: the ability to develop offshore gas fields, which would have otherwise remained stranded for economic, geographic or geopolitical reasons.

Floating compressed natural gas (FCNG), or marine transport of CNG, can be up to 40 percent less expensive than FLNG, compression being much simpler than liquefaction and thus much less costly. In 2006, the American Bureau of Shipping approved construction of the first Coselle ship, a proprietary CNG transport technology developed by Canada’s Sea NG. But as with every new technology, the main challenge was to find a first client willing to make use of it. In July 2014, the Indonesian state owned electricity company PT PLN ordered the first ever CNG carrier, which will be built in China, to transport gas produced in East Java to the island of Lombok. In August, Reuters reported that Morgan Stanley is looking to build and operate a compression and container loading facility, which will have the capacity to ship 60 billion cubic feet a year of compressed natural gas and export it to countries in Central America and the Caribbean. The project is in doubt, due to increased hostility towards banks’ involvement in physical commodities, but the idea of marine transport of CNG seems to be making headway. 

For Eastern Mediterranean countries, FCNG could be viewed as an economical option to monetize offshore gas fields that are too small to justify costly investments and where pipelines are difficult to implement. The compressed gas can be transported to markets within a 2,500 kilometer distance. From the Eastern Mediterranean, this puts markets in southern Europe within range.

The post Floating an idea appeared first on Executive Magazine.

The dictum ‘the Stone Age did not come to an end because the world ran out of stone’ still rings true. The transition to forms of energy other than oil, gas and coal will happen — and is happening — and therefore will continue to happen in 2015.

In fact, 2015 will serve to remind us that the world will not come off fossil fuels for many decades. Globally, we get a miniscule 0.3 percent of our energy from solar and wind power, and will only get 3.5 percent from them in 2035, according to the International Energy Agency. In 2015, the world will get a full 82 percent of its energy from fossil fuels.

Therefore, in 2015, Norway will continue to offer assistance to 15 developing countries in their efforts to manage petroleum resources in a sustainable manner. Oil and gas play an important role in an increasing number of developing countries, and have the potential to generate economic and social development in several cases. However, it has proven difficult to translate resource riches into improved well being for ordinary citizens. In over four decades of managing oil and gas resources, Norway has learned the importance of: strategic government stakeholdership; strong and competent institutions; a steady build-up of technical knowledge; an advanced regulatory system with high respect for the environment and safety; and perhaps above all, society’s determination to secure national control over petroleum resources.

Norway thus launched the ‘Oil for Development’ program to share this knowledge in 2005, and has been providing petroleum related development assistance to Lebanon since 2006 — with major achievements made in the development of a legal framework for the petroleum sector, as well as capacity enhancement in government institutions, such as the successful Lebanese Petroleum Administration (LPA).

Support through the ministries

In 2015 support will be flowing to the fields of resources, safety, environment, and revenue management through the relevant ministries. The main approach will be to support capacity development through institutional collaboration. Program activities will be targeting the LPA, the Ministry of Energy and Water, the Ministry of Finance, and the Ministry of Environment. Other relevant ministries and stakeholders may also be involved. The activities will be assisted by petroleum management experts in Norwegian public institutions, including the Norwegian Petroleum Directorate, the Norwegian Environment Authority, the Petroleum Safety Authority in Norway, the Norwegian Oil Taxation Office and the Norwegian Coastal Administration. The International Monetary Fund will provide support with revenue management.

Furthermore, strengthening accountability and transparency, including providing support to civil society actors, can be foreseen in 2015. The program is expected to target the main transparency actors, such as decisionmakers, civil society organizations, the media, as well as public control institutions, including parliament. The LPA and related government institutions will benefit from a more informed and fact-based public discussion, enhanced from customized training courses, joint conferences and delegation visits to Norway. Accountability and transparency are important factors to ensure the success of the first offshore licensing round and the development of the petroleum sector in Lebanon. Transparency would allow national actors in the accountability chain to be able to hold the government to account for the management of national resources. Transparency is also an important factor in preventing corruption.

In 2015, we will see Lebanese stakeholders come together to launch the process of exploration that could speed up the petroleum era in Lebanon, as has already happened in neighboring countries.

In 2015, the quest for energy independence or diversity will once more come to the fore. This has been highlighted by the unwise use of the oil and gas ‘weapon’ by some exporting countries. New technologies, new petroleum provinces and new forms of energy will all play a role in increasing energy autonomy and reducing vulnerability. Norway will continue to play a constructive role in 2015 in this regard. Lately, Norwegian companies played a crucial role in helping Lithuania break the stranglehold of foreign control of its energy supply. Liquified natural gas and the required transport capacity were both provided. For Lebanon, the financial and energy independence that could result from the export of petroleum could reduce political influence from abroad — and 2015 could be the start of such a process.

The post Towards energy independence appeared first on Executive Magazine.

As Lebanon’s banking sector continues to be as solid as a rock the financial sector is perhaps its deprived younger cousin. However, many financial firms and boutiques do stake it out from their headquarters in the heart of glossy downtown, adding to a space already crowded by investment units of commercial banks and financial advisory firms.

Crowded, that is, because there is not too much action in Lebanon on the financial services front, despite an estimated untapped offshore Lebanese wealth of $120 billion in assets, according to Philippe Sednaoui, chief executive officer of Audi Private Bank, in addition to our $150 billion in commercial banks deposits as of mid-Q3. In other words there seems to be a lot of Lebanese money lying around, which, at least concerning the money sitting in Lebanon, is not being propelled into investment ventures, but is merely gathering dust alongside its dues of roughly 3 percent annual interest, which it has a claim to by virtue of being a bank deposit.

Though the offerings in the financial service sector delve into wealth management, brokerage, advisory services, private placements, and even long and medium term deposits and lending to name a few, there is not much traffic in any of these financial lanes, and by all accounts, deals in this line of work in Lebanon frequently remain on the small and personal side.

Small and personal, however, is not something which even the brokers and wealth managers, so keen to see a pickup in deals for the financial sector, are able to quantify. Little data is available on the profits and turnovers of the financial sectors industries, which, unlike some of the big commercial banks listed on the Beirut Stock Exchange (BSE), are forced to be transparent.

Raed Khoury, General Manager of Cedrus Invest Bank, reflecting the general attitude of those working in Lebanese financial markets, says that he has “no idea” regarding the size of the market for financial services in Lebanon, as no statistics are made available, but that it certainly is “not a mature market.”

Missing in action

The fact that no financial firms are listed on the stock exchange is not only detrimental for our data collection purposes. In a life sized economy, not being listed on the stock exchange correlates to being small in size, whether in terms of revenue or turnover. Although in Lebanon the financial service business is unquantifiable but small from a macroeconomic perspective, the lack of listed companies in this sphere is due to a wider and more general trend among companies to not list. That is to say that in Lebanon there is little incentive for companies to list, making for rather inactive capital markets.

To get into details there are a grand total of 11 companies listed on the BSE, with a market cap of $11.3 billion as of October 31, 2014, up from $10.6 billion from the start of the year, according to EconoMena. The BSE’s average daily traded volume in the first 10 months of 2014 stood at 393,000 shares, up 80 percent from 218,000 shares in the full 12 months of 2013, according to calculations based on data provided by EconoMena on the Beirut Stock Exchange. The average value of traded shares was $2.7 million in the first 10 months of 2014, up 70 percent from $1.6 million in 2013, extrapolated from EconoMena’s data on the BSE.

Though these may seem like impressive increases, the amounts under consideration are small compared to their regional stock exchange equivalents, and therefore likely to greatly fluctuate as far as year on year percentage increases go. Lebanon is far from having truly functional capital markets, something which is of great detriment to the financial industry. Capital markets, naturally the go-to place to buy and sell financial products, are an obviously necessary component of any healthy and booming financial services sector. As long as there are no serious capital markets, there will be little room for a financial services industry in Lebanon.

While the Capital Markets Authority (CMA), whose mandate is to regulate and oversee financial markets, has recently started to step up its game now that it has taken over regulation activities from Banque du Liban (BDL), it is not what you might call omnipresent and omnipotent. The Capital Markets law, passed in 2011, brought capital market activities under the control of an independent overseeing body, which was an upgrade from their former status as a peripheral activity of the BDL. But they are still facing enforcement and regulation issues as they have not yet established a sanctions committee.

Besides some enforcement issues, the problem with capital markets is still one of supply and demand. Investors and companies alike remain unconvinced of the stock exchange as a vehicle to list and to invest. Unsurprisingly, investors are largely unimpressed with Lebanon’s stagnant growth, whereas Lebanese businesses, for the most part family owned, largely rely on money from relatives, friends and bank loans, rather than capital increases for a percent of ownership.

Money managed

All in all, the financial services industry remains small. When Executive sat down with bankers for our wealth management special report at the end of Q3, none of them registered assets under management in Lebanon of over a few billion dollars, mere crumbs compared to global Lebanese wealth. And the total number remains an unknown quantity, even to those who would benefit from such knowledge. But though estimates of total Lebanese wealth are not clear, one thing that is clear is that wealth managers in Lebanon have not been able to capture a large slice of Lebanese wealth. Assets Under Managements (AuM) booked in Lebanon at Audi Private Bank, the largest Lebanese wealth management operation according to BankData’s Dany Baz, stand at around $3 million says Philippe Sednaoui, chief executive officer of Audi Private Bank, which has offices in several Middle Eastern and European cities.

Reeling more money in is a challenge that, beyond Q3 of 2014, continues to be an issue for your typical money manager with any concern for seeing turnover increase in the coming years. High net worth individuals (HNWIs) have yet to be wooed en masse to throw their money into wealth management. Bank deposit interests in Lebanon have been historically higher but still hover around 3 to 4 percent, and seem to be the preferred location for loose money.

But wealth managers interviewed in Q3 stated an increasing appetite among investors to diversify their placements, as well as an increasing general awareness of finances. According to Roula Habis, managing partner at Optimum Invest, HNWIs are beginning to better understand the advantages of riskier, long term investments with the potential of greater returns as an advantageous vehicle through which to store their wealth.

Investment ideas

Private equity is another vehicle for HNWIs to make higher returns on their cash. But without counting venture capital funds which fall into a different value and risk range, private equity firms in Lebanon, according to both Zawya’s private equity department and other sources consulted by Executive, can be counted by the loneliest number, one.

That is not to say that the one known firm managing private equity funds in Lebanon is lonely in the sense that its fund managers wish for friendly competition. On the contrary, the EuroMena funds belonging to Capital Trust Group, which are managed from Lebanon’s very own Starco, are benefitting from little competition at least at the local level by having a large deal flow at their disposal, according to Romen Mathieu, fund manager of the EuroMena funds.

Regionally, there have been about a dozen or so funds raised each year since 2009, according to data provided by Zawya, with 2011 and 2012 seeing the largest increase in the number of funds raised, with 20 in both years. Amounts of money raised, however, have stagnated close to $1 billion each year, with the exception of 2014, in which by October the eight funds had raised $1.9 billion, more than double 2013’s $859 million, according to Zawya.

Concerning EuroMena, their funds keep getting bigger and bigger. Their first EuroMena fund raised $63 million in 2006. In 2009 they launched EuroMena II which received $91 million of committed capital. Their EuroMena III fund had its first closing of $100 million in June, and is preparing for a second closing in Q1 of 2015 according to Mathieu.

EuroMena III will invest in six to eight investments if they close between $100–$150 million, and seven to nine investments if they close at $200 million, according to Mathieu, focusing on companies in the MENA but excluding the Gulf Cooperation Council (GCC), as well as a new regional addition that wasn’t covered in the previous funds: Africa. While the fund managers concede that the bigger reason for them operating in Lebanon is that they are Lebanese, they also noted advantages to being in a region that is central to their investors and ripe for their investments.

Beyond private equity, a more ordinary channel to funnel money for the future — and in this case not only reserved for the uber rich — is the investment component from life insurance policies. Here, life policy buyers at insurance firms can choose between a savings component to their life insurance policies, with rates above 4 percent as a standard in Lebanon for the initial years, or they can opt for unit linked products managed by the investment managers, which would have a higher return.

According to ACAL (Association des Compagnies d’Assurances au Liban), life insurance premiums with a saving component made up 65 percent of a total of $228.4 million worth of life premiums for the first six months of 2014, with the remaining 35 percent being premium-only policies. Out of these 65 percent, $59.5 million were in policies with a unit-linked saving component, and $89 million in protection with savings contracts.

If you are an institutional investor, a HNWI, or a regular middle class person with an appetite to save, Lebanon’s fine wealth managers, brokers, and insurance fund managers are more than happy to sell products catering to the needs of your category. However, the country’s talent in the global financial industry far surpasses local Lebanese demands for financial products — and despite the fact that there are many Lebanese working in finance around the world, the financial service sector in many ways has yet to fully take off in Lebanon.

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While naturally there are incremental increases to any reputable Lebanese financial service business, 2014 did not see any developments out of the ordinary. The lack of real activity on the capital market front in Lebanon remains a barrier for the financial service industry to properly flourish, though the efforts of the Capital Markets Authority since 2011 to establish better regulatory oversight over markets in Lebanon brings a small degree of hope, despite the infamous slow pace of developments of the country.

A wish list for 2015 would definitely include flourishing capital markets at the very top. In our report, Chadia El Meouchi and Carine Farran from Badri and Salim el Meouchi Law Firm explain the steps a company would have to take if it were to undertake an initial public offering (IPO) — a rare instance in Lebanon, but certainly something that the Lebanese financial professional crowd hopes to see more frequently.

Another wish list item, as posited by Camille Moussa, director of Executive Education at École Supérieure des Affaires, is having a greater choice of financial products for small investors. In his comment piece, he argues that while many products exist for the high-net worth population, average people with a hankering to save are hindered when it comes to investing due to the lack of offerings to meet their investment appetite.

Lebanon still has a long way to go in terms of developing its financial services industry, and the picture only gets slightly better from a regional perspective. While Dubai may have a comparatively thriving stock exchange, Daniel Diemers, Abdulkader Lamaa and Jihad K. Khalil, respectively partner, principal, and senior associate at Strategy& (formerly Booz & Company), argue that the Middle East still has a lot of work to do in terms of getting its wealth management businesses up to scratch when it comes to technological savvyness.

Despite the usual suspects in terms of barriers, it is very much possible to run a serious business in the financial sector in Lebanon. In a Q&A with Romen Mathieu, managing director of the EuroMena Funds at Capital Trust Group and Gilles de Clerck, executive director of the EuroMena Funds at Capital Trust Group, the pair talk about their experience in running successive private equity funds out of Lebanon.

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Whether it is mutual funds, hedge funds, private equity funds, managed accounts, individual securities or any other alternative investment, one can safely assume that the needs of high net worth individuals are catered for by both local and international banks and financial institutions. There is a plethora of financial products and services to address the needs of these individuals, and for banks and financial institutions, it makes empirical sense to target them since they possess the largest sums of money.

But what about the individual with a couple thousand dollars who does not even qualify to buy a mutual fund at a bank because the required minimum investment is anywhere from $5,000 to $100,000? How about the individual who has zero cash saved up, but would like to start an investment plan on an ongoing basis? What saving or investment options are they left with?

Common challenges

There are two factors that impair the ability of the average person to participate in the capital markets locally. The first is a lack of education about the financial markets, and the second is the lack of products designed to meet the needs of that person. This leaves the common individual with three choices: deposit money in a bank where it waits to earn an interest rate that inflation will slowly but surely eat away at; open a leveraged trading account with the hopes of multiplying that small capital, only to see it evaporate into thin air; or buy some insurance and savings products that promise something, but only if something else happens, while never being sure of what these ‘somethings’ even are.

Today, banks and financial institutions are aggressively pursuing the creation of investment funds as they are aware of the importance of presenting their clients with an array of ways to save and invest. Since banks impose a minimum amount to be invested, certain questions arise: What happens to the person that does not have that required minimum? What if I am a person with no capital that can be invested, yet I am able to allocate a couple of hundred dollars a month? What are my choices?

At this stage, the only alternative is some sort of an insurance savings product that allows me to contribute a small amount of money on a regular basis. Not that there is anything wrong with these products, but shouldn’t there be another alternative for investors in deciding how to save? In the US, investors can buy mutual funds with as little as $100 per month — far lower than in Lebanon. This gives them the discipline to save money on a regular basis. It provides them with diversification, risk reduction and regulatory protection.

Moreover, such ‘dollar cost averaging’ allows people to invest at all levels of the markets, forces them to contribute to a mutual fund on an ongoing basis and reduces the risks of both timing the markets and of investing lump sums. It shapes the individual to adopt the mentality of a long term investor, not a short term trader, as it does not make any sense to think of dollar cost averaging for the short term. This, in turn, will hopefully reduce the gambling attitude towards the markets. People will know what they are buying as funds are regulated and transparent, and it will allow them to potentially earn higher returns than with bank deposits and insurance products.

Dollar cost averaging is vital, but more important is its implementation through mutual funds. It is an efficient method that allows people to grow their small capital into a decent amount in the future. The higher potential returns from investing in the capital markets are definitely more attractive than bank deposits or insurance products. The average rate of return on deposits is about 3–3.5 percent, compared to the historical return of roughly about 9–10 percent for equity capital markets. Thus a $250 monthly contribution will yield about $55,000 in 15 years, compared to an approximate $100,000 return generated from the capital markets.

This method of investing is ideal for those who plan to save for their retirement and their children’s education. The capital markets should not only be accessible to larger investors; smaller investors with limited funds must also be able to invest in these markets and benefit from higher returns and regulatory protection.

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An initial public offering, or IPO, is a company’s first offering of its equity to public investors; its main objective is for the company to raise capital. It is generally an intensive process that requires a number of regulatory authorizations and processes that may be quite burdensome, as well as the necessity of obtaining professional advice and support in many areas, including legal, technical, financial and marketing.

Lebanon has one securities market, the Beirut Stock Exchange (BSE), currently the only stock exchange in the country. There are relatively few Lebanese and foreign companies currently listed on the BSE compared to other stock exchanges in the region. This situation is due to a number of reasons, ranging from political instability, the economy and a lack of incentive for companies to seek new sources of financing through IPOs.

The Lebanese Capital Markets Authority (CMA) was formed by virtue of Law 161 of August 17, 2011. Its board of directors was appointed in July 2012, but the CMA officially became active in the beginning of 2014. The CMA alone is authorized to regulate the listing and trading of securities and financial instruments on the BSE and on any other stock exchange that may eventually operate in Lebanon.

The laws and regulations applicable to public offerings are still under development by the CMA. The general requirements, however, are unlikely to change.

The basic rundown

A subscription is considered public when a company issues, sells, offers to issue or offers to sell financial instruments, including shares, to the public in Lebanon and abroad, whether directly or indirectly, within a specific time limit. The time limit, the value of the financial instruments and the definition of public are to be determined in special regulations that have not yet been issued.

To offer its shares up to public subscription, a company must obtain the prior approval of the CMA through an application process. No invitation may be addressed to potential investors for a public subscription without the CMA’s approval. The CMA has four weeks from the date of the application’s submission to give its decision. If it does not reply back as to whether the authorization is granted or not by the end of the four week window, the authorization is considered granted.

Before offering its shares up to public subscription, the issuing company must put a free prospectus at the public’s disposal. The prospectus should explicitly include the offer’s start date and its duration, the detailed contact information of the company and all information required by specialized investors and consultants so that they can undertake a serious assessment of the assets and liabilities of the company, its financial status, its profits and losses, the rights pertaining to the financial instruments offered for subscription and any other important information. A copy of the prospectus must be sent to the CMA at least 15 days before the proposed offer start date, and the CMA must approve the prospectus prior to its publication.

The issuing company, its chair and board members, may be held liable in case of missing or misleading information in the prospectus that could cause losses to any person. In addition to the prospectus, the issuing company must also submit a feasibility study of its project, endorsed by economic and financial consultants, that is preapproved by the board of the CMA.

Every company that opens its share capital for public subscription has continuing obligations of disclosure before the CMA, its shareholders and its partners, regarding information about itself and its subsidiaries, its financial status and any other facts that might affect its status. 

Furthermore, many investors take into consideration whether the company wishing to go public has good corporate governance practices, particularly regarding the composition and functioning of its board of directors, and its policies regarding disclosure of information and transparency. While this is important to consider in any company, it is even more so in the case of a company wishing to go public.

The fees associated with an IPO vary, but can become quite significant depending on the number of actors intervening in the process. Such costs include the cost of the BSE listing for the subscription application, the broker, the legal consultants, the accountants and auditors, the investment banks and so forth.

The CMA may elect to issue special implementation regulations. It will be interesting to witness the evolution of the Lebanese capital market and its regulations in the upcoming years, and the ways in which these will compare to capital markets in the region.

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